-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V5ga5TMibF+7kLZLVyh2Hna3i4atYD7wWrdgrv6XGy3nlJPC7LpuSJzrjQHOuDGD dQ9Xd4Y1rsZj1+pW7o/99g== 0000950130-99-003623.txt : 19990615 0000950130-99-003623.hdr.sgml : 19990615 ACCESSION NUMBER: 0000950130-99-003623 CONFORMED SUBMISSION TYPE: 10-12G PUBLIC DOCUMENT COUNT: 25 FILED AS OF DATE: 19990614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EUNIVERSE INC CENTRAL INDEX KEY: 0001088244 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-12G SEC ACT: SEC FILE NUMBER: 000-26355 FILM NUMBER: 99645360 BUSINESS ADDRESS: STREET 1: 101 NORTH PLAINS INDUSTRIAL ROAD CITY: WALLINGFORD STATE: CT ZIP: 06492 BUSINESS PHONE: 2032941648 MAIL ADDRESS: STREET 1: 101 NORTH PLAINS INDUSTRIAL ROAD CITY: WALLINGFORD STATE: CT ZIP: 06492 10-12G 1 FORM 10 Registration No. 0- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 FILED JUNE 11, 1999 GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 eUNIVERSE, INC. (Exact Name of Registrant as Specified in Its Charter) NEVADA (Applied for) (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 101 NORTH PLAINS INDUSTRIAL ROAD WALLINGFORD, CONNECTICUT 06492 (Address of Principal Executive Offices) (Zip Code) 203-265-6412 (Registrant's Telephone Number, Including Area Code) Securities to be registered pursuant to Section 12(b) of the Act: None Securities to be registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value (Title of Class) TABLE OF CONTENTS
Item 1 Business...........................................................................................1 General Development of Business.........................................................................1 Description of the Business..............................................................................1 Sales and Marketing......................................................................................5 Order Fulfillment and Source of Supply...................................................................5 Competition..............................................................................................6 Employees................................................................................................7 Facilities...............................................................................................7 Domain Names, Patents and Trademarks.....................................................................7 The Company's Strategy and Plans.........................................................................7 Acquisition of Case's Ladder, Inc........................................................................9 Proposed Acquisition of Gamer's Alliance, Inc...........................................................10 Item 2 Financial Information............................................................................10 Item 3 Properties.......................................................................................14 Item 4 Security Ownership of Certain Beneficial Owners and Management...................................14 Item 5 Directors and Executive Officers.................................................................15 Agreement Concerning Election of Director...............................................................16 Compensation of Directors and Term of Office............................................................16 Item 6 Executive Compensation...........................................................................16 Item 7 Certain Relationships and Related Transactions...................................................16 Item 8 Legal Proceedings................................................................................17 Item 9 Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters..17 Item 10 Recent Sales of Unregistered Securities..........................................................18 Acquisition of CD Universe, Inc.........................................................................18 Sale of Convertible Preferred Stock.....................................................................18 Purchase of Common Stock by GKM Investors...............................................................19 Merger with MCA.........................................................................................19 Acquisition of Case's Ladder............................................................................20 Item 11 Description of Securities........................................................................20 Item 12 Indemnification of Directors and Officers........................................................20 Nevada Corporation Law..................................................................................20 Articles of Incorporation...............................................................................21 Bylaws..................................................................................................21 Item 13 Financial Statements.............................................................................22 Item 14 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............22 Item 15 Financial Statements and Exhibits................................................................22 Financial Statements....................................................................................22
Item 1 Business The registrant, eUniverse, Inc., is a Nevada corporation engaged in developing, acquiring and operating a network of web sites which provide entertainment-oriented products and services. At the present time, the registrant is engaged in the retail sale of audio CDs, videotapes, digital video disks ("DVDs") and related services. The registrant intends to expand its ---- offerings into the areas of online gaming and other forms of web-based entertainment programming. As used herein, the term "Company" refers to ------- eUniverse, Inc. and all of its subsidiaries, unless the context requires otherwise. General Development of Business. The Company was founded in February 1999 by Brad D. Greenspan when he incorporated Entertainment Universe, Inc. ("EUI"). On April 14, 1999, EUI sold --- 1,832,812 shares of Series A Convertible Preferred Stock in a private offering under Regulation D of the Securities Act of 1933 (the "Securities Act") (See -------------- "Item 10, Recent Sales of Unregistered Securities") and used a portion of the proceeds to acquire CD Universe, Inc. ("CD Universe"). CD Universe is a ----------- Connecticut corporation engaged in the business of selling audio CDs and videotapes over the internet. Also on April 14, 1999, EUI merged with and into a public company, Motorcycle Centers of America, Inc. ("MCA"), a Nevada corporation with limited --- business transactions and deriving no current revenue, whose shares were traded on the OTC Bulletin Board, which then changed its name to eUniverse, Inc. The Company is the surviving entity of that merger. In connection with that merger, the holders of the EUI Series A Convertible Preferred Stock exchanged their shares, on a one-to-one basis, for shares of MCA convertible preferred stock which has equivalent rights and preferences. Likewise, in connection with the merger, the holders of EUI common stock exchanged their shares, on a one-to-one basis, for shares of MCA common stock. As used herein, the term "Reorganization" refers to the merger between EUI and MCA. -------------- Description of the Business. The Company is a media driven enterprise that is in the process of acquiring and developing a portfolio of internet-based businesses. Its current emphasis is on acquiring businesses in the field of entertainment, primarily games, music and movies. The Company's strategy is based on the acquisition and/or development of web-based businesses in several sectors of the entertainment industry, and utilizing their synergies to generate cross traffic and increased revenues. This strategy includes the integration of a worldwide distribution of web-based entertainment programming. The Company is presently exploring expansion into internet-based entertainment in a form that is similar to television and radio programming. Its long-term strategic plans are intended to take advantage of a world-wide distribution network comprised of the installed base of personal computers and televisions, making use of existing and emerging technologies to deliver this targeted programming. At the present time, the Company is primarily engaged in the retail sale of music and video products and accessories, including audio CDs, videotapes and DVDs via the internet. The Company offers customers a selection of over 240,000 audio CD titles and 40,000 movie titles in VHS, DVD and LVD formats, as well as proprietary content and features. The Company's CD Universe web site currently attracts over 1,000,000 visitors per month and receives over 20,000 orders each month. The Company plans to capitalize on its experience in online retailing to enter other e-commerce areas by acquiring community-based web sites with significant traffic, selling advertising space on their web pages, and enhancing the retail capabilities of these sites in order to diversify its product offerings. 1 In May 1999, the Company acquired MegaDVD.com, a web site devoted to the retail sale of DVDs. The Company has entered into an agreement to purchase all of the outstanding stock of Case's Ladder, Inc. ("Case's Ladder"), and a letter ------------- of intent with respect to the purchase of all of the outstanding stock of Gamer's Alliance, Inc. ("Gamer's Alliance"). Both Case's Ladder and Gamer's ---------------- Alliance own and operate online gaming sites. The Company's planned acquisition of those companies represents an early step toward its goal of using strategic acquisitions as well as internal growth to develop a diverse but synergistic portfolio of internet-based entertainment offerings for a world-wide customer base. To date, the Company has only a limited operating history in its music and video entertainment business upon which an evaluation of the Company and its prospects can be based. The Company's prospects for financial success must be considered in light of the risks, expenses and difficulties frequently encountered by companies in new, unproven and rapidly evolving markets. To address these risks, the Company must, among other things, expand its customer base, respond effectively to competitive developments, continue to attract, retain and motivate qualified employees and continue to upgrade its technologies. There can be no assurance that the Company will be successful in addressing such risks. If the Company is not successful in developing and expanding its music and video business, including sales of advertising on its web sites and development of related business opportunities, its ability to achieve profitability will be materially adversely affected. Prior to becoming part of the Company, CD Universe only generated revenue from merchandise sales. In contemplation of the Company's plans to use its site traffic to generate advertising revenues, the Company has recently implemented a program to enable it to accept paid third-party advertising. This program began generating revenues in the quarter ending June 30, 1999. Although the Company has begun to sell advertising on its web sites, it has not realized material advertising revenues to date. In order for the Company to generate significant advertising revenues, advertisers and advertising agencies must be willing to direct a portion of their budgets to the internet and, specifically, to the Company's web sites. There can be no assurance that advertisers and advertising agencies will accept the internet as a medium for advertising. If internet advertising is not widely accepted by advertisers and advertising agencies, or if the Company is not successful in generating significant advertising revenues from such sources, the Company's business, results of operations and financial condition could be materially adversely affected. The Company intends to diversify its retail offerings to include additional products such as t-shirts, memorabilia and accessories. The Company also plans to eventually offer exclusive music content for sale through online downloads and believes this form of music distribution will benefit from higher margins relative to its current business. Due to the fact that material may be downloaded from web sites and may be subsequently distributed to others, there is a potential that claims will be made against the Company pursuant to such legal theories as defamation, negligence, copyright or trademark infringement or other theories based on the nature and content of such material. Such claims have been brought, and sometimes successfully pressed, against on-line services in the past. In addition, the Company could be exposed to liability with respect to the material that may be accessible through its products and web sites. Although the Company carries general liability insurance, such insurance may not cover potential claims of this type, or the level of coverage may not be adequate to fully protect the Company against all liability that may be imposed. Any costs or imposition of liability that is not covered by insurance or in excess of insurance coverage could have a material adverse effect on the Company's business, results of operations and financial condition. The Company is currently not aware of any claims that can be expected to have a material adverse impact on its financial condition or its ability to conduct business as described herein. 2 The Company makes use of strategic partnerships and proprietary content to attract and retain traffic on its Web site. It has built a network of over 7,000 affiliate Web sites through its "Partners Program." These affiliate Web sites increase the Company's market presence by offering its music products to their audience in exchange for a commission on sales. The Company also creates proprietary content such as the Big Bang newsletter, a personalized newsletter for customers, and CD University, a content-driven area that provides information about specific musical genres. The Company intends to continue to modify existing web site features, add new features and sites, and create, license and acquire new content in order to differentiate itself from other internet retailers. In that fashion, the Company believes that it will be able to increase traffic to its sites, and thereby increase revenue and profit, without having to match the large sums spent by competitors on advertising and brand recognition. (However, see the discussion of risks associated with reliance on strategic partnerships in the subsection below entitled "The Company's Strategy and Plans.") In partnership with Custom Revolutions, a provider of custom compilations of music over the internet, the Company recently announced the launch of the CD Universe CustomDisc store located on CD Universe's Web site. The store offers customers the ability to create their own personalized CDs carrying the CD Universe brand from a selection of over 175,000 songs. In addition, Custom Revolutions and the Company develop a weekly series of compilations of music that are offered through the CD Universe web site. The CD Universe online store is designed to be informative, and to allow customers to discover, learn about and purchase CDs, videos and other music and video-related products. The store is designed to be intuitive and easy to use and to enable customers to complete the ordering process with a minimum amount of effort. Customers enter the CD Universe store through its Web site, cduniverse.com, and in addition to ordering music and video products, can conduct searches, browse among top sellers and other featured titles, read reviews, listen to music samples, register for a personalized newsletter, participate in promotions and check order status. The CD Universe web site provides a search engine that enables customers to navigate the store to find CDs or other products of interest. Customers can search for CDs based on artist, album title, song title, record label or musical genre. Upon clicking on an album title, the site visitor is provided with information about the artist and the specific album, a list of tracks on the album, sound samples and a list of reviews. The Company believes that effective use of content encourages purchases by customers who may be browsing the site without a specific title in mind. The CD Universe web site provides sound samples, information about specific artists, albums and types of music, ratings, articles on music topics and other information. To help customers browse and discover CDs, the web site has eight music spaces organized by genre. These include rock, jazz, R & B, classical, country, Christian, world music and miscellaneous. The main page of each space features links to more specific genre pages which have a list of new releases as well as alphabetical listings of the artists and albums available within that genre. In addition to these regular online store content features, CD Universe's Web site offers several other features to encourage customers to learn about and discover CDs that might be of interest to the customer. The web site's CD University feature provides links to genre-specific areas where customers are provided with information about specific musical offerings and biographies of featured musicians in that genre. CD University currently offers links for classical, jazz and blues and is in the process of adding more musical genres to this area. In addition, the CD Universe web site has a feature called RockOnTV, provided by RockOnTV.com, where customers can read a listing of music and musician-related programs available on TV during that week. Once a CD has been selected, customers are prompted to click on the price to add products to their virtual shopping carts. Customers can add and remove products from their shopping carts as they 3 browse, prior to finalizing their purchase. The shopping cart page displays each item that has been placed in the cart, including title, price and availability. To execute orders, customers can choose from a secure or standard purchasing mode depending on the capabilities of the customer's Web browser. After choosing a purchasing mode, the customer is prompted to enter his or her name and password or to create an account on CD Universe's Web site that can be used to make repeat purchases. The Company accepts credit cards, personal checks or money orders as payment for customer orders. The CD Universe web site enables customers to store their credit card information in a personal account, thereby avoiding the need to re- enter this information when making future purchases. Customers are offered several shipping options, including overnight delivery. The Company confirms each order by e-mail communication to the customer promptly after the order is placed, and subsequently confirms shipment of the order by e-mail. In addition, the CD Universe web site includes a feature which enables customers to check on the status of their order. Use of the internet by consumers is at an early stage of development, and market acceptance of the internet as a medium for commerce is still by no means certain. The Company's future success will depend on its ability to significantly increase revenues, which will require the development and widespread acceptance of the internet as a medium for commerce, particularly as a channel of retail distribution. The internet may not prove to be a viable commercial marketplace because of inadequate development of the necessary infrastructure, such as reliable network backbones, or complementary services, such as high-speed modems and security procedures for financial transactions. The viability of the internet may prove uncertain due to delays in the development and adoption of new standards and protocols to handle increased levels of internet activity or due to increased government regulation. If use of the internet for the purposes envisioned by the Company does not continue to grow, or if the necessary internet infrastructure is not further developed and maintained, the Company's business, results of operations and financial condition could be materially adversely affected. Despite the Company's implementation of network security measures, its infrastructure is potentially vulnerable to computer break-ins and similar disruptive problems caused by individuals with a variety of objectives. Consumer concern over internet security has been, and could continue to be, an impediment to the expansion of commercial activities that require consumers to transmit their credit card information and other personal information over the internet. In addition, computer viruses, break-ins or other security problems could lead to misappropriation of proprietary information and interruptions, delays or cessation in service to the Company's customers. Until more comprehensive and reliable security technologies are developed and implemented, the security and privacy concerns of existing and potential customers may inhibit the growth of the internet as a merchandising medium. The Company plans to acquire content-oriented web sites with significant web traffic and attractive demographics that cater to specific communities of interests. By adding retail sales features to newly acquired sites and taking advantage of cross marketing opportunities, the Company plans to sell music and video products as well as other products to these sites' visitors. The Company is currently in the process of acquiring web sites which will provide growth opportunities in such retail markets such as video games and PC and interactive entertainment software. The Company also plans to expand internationally through the acquisition of Web content sites and electronic retailers in foreign countries in order to provide it with local fulfillment capabilities for its foreign customers. Set forth below in the subsection entitled "Pending and Proposed Acquisitions" is a description of the current status of ongoing transactions in which the Company intends to acquire Case's Ladder, Inc. and the web sites operated by Gamer's Alliance, Inc., both of which are online gaming companies. The Company believes that its strategic assets include customer loyalty, proprietary content and user-friendly technology, and that such assets will enable it to grow web site traffic, retain customers, expand revenue opportunities and execute strategic acquisitions. The Company also plans to develop 4 strategic relationships with traditional media partners which will enable it to build awareness of its sites and e-commerce services and increase traffic to its sites. Sales and Marketing. Since its inception in 1996, traffic on CD Universe's web site has grown to an average of over 1,000,000 visitors per month in 1998. At the present time, the Company receives and processes over 20,000 orders in a typical month, with an average order size of about $35 exclusive of shipping charges. To date, the Company has been able to increase site traffic and sales without having to match the large sums spent by competitors on advertising and brand recognition. The Company makes use of strategic partnerships and proprietary content to attract and retain traffic on its web sites. CD Universe's "Partner Program" increases its market presence by allowing affiliated web sites to offer CDs to their audience for which CD Universe provides fulfillment. The affiliated site provides a hyperlink to the CD Universe web site that leads the consumer to more information about a specific artist or title. This hyperlink automatically connects the customer to the CD Universe online store where the affiliate's customer may place an order to purchase a CD. In this manner, the affiliate can offer enhanced services and product recommendations, while avoiding ordering and fulfillment costs. Affiliates receive a commission of 5% to 7% on sales of the Company's products that originate from the affiliate's web site. The Company expects to experience significant fluctuations in future quarterly operating results that may be caused by a variety of factors, many of which are outside the Company's control. Factors that may affect the Company's quarterly operating results include, without limitation, (i) the Company's ability to retain existing customers, attract new customers at a steady rate and maintain customer satisfaction, (ii) the announcement or introduction of new or enhanced web sites, products and strategic alliances by the Company and its competitors, (iii) the mix of products sold by the Company, (iv) seasonality of the recorded music industry (namely, the fact that sales of recorded music traditionally peak during the Christmas season, (v) seasonality of advertising sales, (vi) Company promotions and sales programs, (vii) price competition or higher recorded music prices in the industry, (viii) the level of use of the Internet and increasing consumer acceptance of the Internet for the purchase of consumer products such as those offered by the Company, (ix) the Company's ability to upgrade and develop its systems and infrastructure in a timely and effective manner, (x) the level of traffic on the Company's Web sites, (xi) technical difficulties, system downtime or Internet brownouts, (xii) the amount and timing of operating costs and capital expenditures relating to expansion of the Company's business, operations and infrastructure and the implementation of marketing programs, key agreements and strategic alliances, (xiii) the number of recorded music releases introduced during the period, (xiv) the level of merchandise returns experienced by the Company and (xv) general economic conditions and economic conditions specific to the Internet, on-line commerce, and the recorded music and prerecorded videocassette industries. Order Fulfillment and Source of Supply. The Company currently accepts orders only over the Internet. Product orders received by the Company are accepted, verified, batched and electronically sent on a daily basis to Valley Media, Inc., of Woodland Hills, California ("Valley Media"), the Company's primary supplier. Shipments from ------------ Valley Media and other suppliers are received at the Company's fulfillment center in Wallingford, Connecticut. Employees break down bulk shipments into the individual orders to be sent to customers. This arrangement allows the Company to offer customers a large number of CD and video titles while maintaining virtually no inventory. It also reduces product returns by allowing the Company to only order products for which it has received orders. In addition, this method of operation allows the Company to grow from internal cash flow since it receives credit terms from its distributors. The Company typically fills over 80% of its orders by the next business day, and approximately 90% of its 5 orders within one week. The Company believes that the speed of order fulfillment is an important factor to its customers, and accordingly has a significant impact on its ability to increase revenues from retail sales. At the present time, Valley Media supplies approximately 90% of the music and video products and accessories sold by the Company. There can be no assurance that the Company will maintain that relationship or that it will be able to find an alternative supplier which will provide products and services on terms satisfactory to the Company should its relationship with Valley Media terminate. Therefore, an unanticipated termination of the Company's relationship with Valley Media, particularly during the fourth quarter of the calendar year in which a high percentage of recorded music and video product sales are made, could materially adversely affect the Company's results of operations for the quarter in which such termination occurred even if the Company was able to establish a relationship with an alternative supplier. To date, Valley Media has satisfied the Company's requirements on a timely basis. However, to the extent that Valley Media is unable to continue to satisfy the Company's increasing product requirements, such constraints may have a material adverse effect on the Company's business, results of operations and financial condition. Competition. The online commerce market is new, rapidly evolving and intensely competitive, and the Company expects that competition will further intensify in the future. Barriers to entry are minimal, and current and new competitors can launch new sites at a relatively low cost. With respect to recorded music sales, the Company currently competes with numerous internet retailers, including music retail chains, record labels, independent retailers with web sites on the internet and online stores retailing music and video titles such as CDnow and Amazon.com. In addition, the Company competes with traditional music retailers, as well as megastores, mass merchandisers, consumer electronics stores and music clubs. It is the Company's objective to compete with both online and traditional music retailers through a combination of larger selections, discounted prices, the convenience of being open 24 hours, 7 days a week, proprietary content, customer service, fulfillment expertise and web site ease of use. The Company believes that its strategy of continually upgrading and enhancing its systems and focus on enhancing customers' overall satisfaction will enable the Company to compete effectively in the online music retailing market. the Company believes that the nature of the Internet environment allows consumers to easily change vendors with the click of a mouse and, therefore, CD Universe's ease of use and proprietary content can successfully lure customers away from larger online retailers. The primary competitive factors in providing music, video and other entertainment products and services via the internet are name recognition, variety of value-added services, ease of use, price, quality of service, availability of customer support and technical expertise. The Company's prospects for achieving its business objectives will depend heavily upon its ability to provide high quality, entertaining content, along with user-friendly web site features and value-added internet services. Other factors that will affect the Company's prospects for success include its ability to attract experienced and qualified personnel, particularly in the areas of management, sales and marketing, and web site design. If the Company is unable to compete successfully in the music and video retailing business, there will be a material adverse impact on its business, results of operations and financial condition. In addition, the competition for advertising revenues, both on internet web sites and in more traditional media, is intense. If the Company fails to attract and retain significant sources of revenue from paid advertisements and sponsorships on its web sites, the Company's business, results of operations and financial condition will be materially adversely affected. Many of the Company's current and potential competitors in the area of online music and video retailing have longer operating histories, significantly greater financial, technical and marketing resources, greater name recognition and larger existing customer bases than the Company. These 6 competitors may be able to respond more quickly than the Company to new or emerging technologies and changes in the economy or the marketplace affecting the products and services that the Company offers. In addition, some of the Company's competitors can be expected to devote greater resources, both human and financial, to the development, promotion and sale of music, video and other entertainment products and services. Accordingly, there can be no assurance that the Company will be able to compete successfully and achieve its objectives with respect to growth in revenue and profit. Employees. In addition to the officers who are referred to in Item 5 of this document, the Company currently employs 22 full-time associates and up to 16 part-time staffers. Of the Company's 22 full-time associates, six are in marketing, six are in programming and operations, six are in product fulfillment, and four are in administration. The part-time staffers work in the packing and customer service areas. The Company's success depends to a significant extent on the continued contributions of its senior management team and technical and marketing personnel. In particular, the Company's business is highly dependent upon the services of Brad Greenspan, Leland Silvas and Charles Beilman. The Company has employment agreements with Messrs. Silvas and Beilman. However, such employment agreements do not assure the services of such employees. Despite employment agreements and non-competition arrangements with certain members of management, the Company's employees may voluntarily terminate their employment with the Company at any time. The Company's success also depends on its ability to attract and retain additional qualified employees. Competition for qualified personnel is intense and there are a limited number of persons with knowledge of and experience in commercial application of the internet and music retailing industries. There can be no assurance that the Company will be able to attract and retain highly qualified personnel to fill critical managerial and operational positions. The loss of one or more key employees could have a material adverse effect on the Company. Facilities. The Company currently leases a 19,500 sq. ft. office, warehouse and order fulfillment center in Wallingford, Connecticut (the "Wallingford Facility"). -------------------- The Company's lease with respect to this facility expires in March 2002 and the Company has the right and option to extend it for an additional five year term. The Company believes that the Wallingford Facility will be adequate to meet its needs for the foreseeable future. Domain Names, Patents and Trademarks The Domain names of the Company's web sites constitute the Company's most important intellectual property. Domain names registered to the Company include the following: euniverse.com, cduniverse.com, videouniverse.com and megadvd.com. In connection with planned acquisitions of Case's Ladder, Inc. and Gamer's Alliance, Inc., the Company will acquire the domain names associated with those businesses. (See "Acquisition of Case's Ladder, Inc." and "Proposed Acquisition of Gamer's Alliance, Inc.") At the present time, the Company does not own any patents and is in the process of filing applications for appropriate trademark registrations. The Company believes that it presently has, or is capable of acquiring, ownership and/or control of the intellectual property rights which are necessary to conduct its operations and to carry out its strategic plans. The Company's Strategy and Plans. The Company plans to implement the following strategies in its efforts to increase revenue and profit through the internet-based sale of products, services and advertising: 7 Provide Innovative and Easy-to-Use Web Sites. The Company plans to make -------------------------------------------- its customer experience informative, efficient and intuitive by improving its store format and features. For example, the CD Universe store incorporates "point and click" options, supported by technical enhancements including user- friendly search capabilities (by artist, album, title, song title or record label), personalized music suggestions, order tracking and confirmation. The CD Universe store also promotes music learning and discovery by enabling visitors to create customized versions of CDs and its Big Bang newsletter. Site visitors are prompted to register and choose from a checklist of options and musical preferences that allow the registrant to select the genre or genres he or she is interested in as well as the content he or she desires to receive (e.g., press releases, charts, reviews, concert tour information and CD Universe news). These features are designed to make use of the web site entertaining and informative, and to encourage purchases and repeat visits. Increase Market Penetration Through Strategic Partnerships. The Company ---------------------------------------------------------- intends to increase market penetration through strategic partnerships that expand awareness of its product and service offerings. The Company offers internet-based partners the opportunity to establish links from titles and artists on their Web site to their corresponding area within the CD Universe site. The Company believes that the combination of its capability in order fulfillment, visitor-tracking technology, flexible software and customer preference information makes a partnership with the Company attractive for other internet-based businesses. Although the Company's ability to generate additional revenue from internet commerce may depend on increased site traffic, purchases and advertising that the Company expects to generate through such strategic alliances, there can be no assurance that its infrastructure of hardware and software will be sufficient to handle the potential increased traffic and sales volume from such alliances. There can also be no assurance that these relationships will be maintained through their initial terms or that additional third-party alliances will be available to the Company on acceptable commercial terms or at all. The inability to enter into new, and to maintain any one or more of its existing, strategic alliances could have a material adverse effect on the Company's business, results of operations and financial condition. Expand Web Presence. CD Universe has been able to increase site traffic, ------------------- and thereby increase sales, without having to match the large sums spent on advertising by some of its online competitors. The Company has entered into linkage arrangements with other web sites. It will continue to seek cost- effective ways to increase traffic at its web sites and has discussions underway with potential strategic partners which may increase traffic at the CD Universe web site. The Company plans to expand its international presence and has recently introduced a localized version of the CD Universe site for the Japanese market, to be marketed directly to Japanese consumers on Yahoo! Japan. In addition, the Company intends to develop content as well as offering new products and services with the objective of attracting and retaining site traffic, and increasing sales and profit margins. Although the Company's growth strategy includes plans for expansion into international markets, there can be no assurance that the Company will be able to successfully market, sell and distribute its products in international markets due to a variety of legal, contractual and practical considerations. In addition, there are certain risks inherent in doing business on a global level, such as unexpected changes in regulatory requirements, export restrictions, tariffs and other trade barriers, difficulties in staffing and managing foreign operations, difficulties in protecting intellectual property rights, longer payment cycles, problems in collecting accounts receivable, political instability, fluctuations in currency exchange rates and potentially adverse tax consequences which could adversely impact the Company's prospects for successful international operations. If such factors have a material adverse impact on the Company's ability to develop international operations, its business, results of operations and financial condition may likewise be adversely affected. Acquire Other Existing Web Sites. A key element to the Company's growth -------------------------------- strategy will be to acquire existing sites to complement the products and features of the CD Universe web site. The 8 Company's strategy is to acquire entertainment-oriented sites that have several key characteristics such as: (i) substantial existing traffic, (ii) strategic content, management or technology, (iii) product offerings that are compatible with the demographics of the Company's customer base, and (iv) the potential to utilize the Company's capability in the areas of retail sales, order fulfillment, hardware capacity and web site design. The Company is also contemplating the acquisition of e-commerce web sites in higher margin business such as the retail sale of PC and interactive entertainment software. Information obtained through customer tracking technology and customized services on CD Universe's web site enable the Company to target its customer base and provide other complementary e-commerce offerings. The Company's growth and future profitability may depend in part upon its ability to identify companies that are suitable acquisition candidates, to acquire those companies upon appropriate terms and to effectively integrate and expand their operations within its own infrastructure. There can be no assurance that the Company will be able to identify additional candidates that it deems suitable for acquisition or that the Company will be able to consummate desired acquisitions on favorable terms. Acquisitions involve a number of special risks, including the diversion of management's attention to the assimilation of the operations and personnel of the acquired companies, adverse short-term effects on the Company's operating results and the potential inability to integrate financial and management reporting systems. A significant portion of the Company's capital resources could be used for these acquisitions. Accordingly, the Company may require additional debt or equity financing for future acquisitions, which may not be available on terms favorable to the Company, if at all. Moreover, the Company may not be able to successfully integrate an acquired business into the Company's business or to operate an acquired business profitably. There can be no assurance that the Company will be able to integrate and expand the operations of acquired companies, without excessive costs, delays or other adverse developments. Advertising. Historically, the Company has only generated revenue from ----------- merchandise sales through the CD Universe online store. However, it has recently implemented a program to enable it to accept paid third-party advertising. The Company intends to use in-house and third party representatives to sell advertising space and other promotional opportunities on its web sites. This program began generating revenues in the quarter ending June 30, 1999. Acquisition of Case's Ladder, Inc. The Company entered into a Stock Purchase Agreement dated April 21, 1999 for the purchase of all of the outstanding shares of the common stock of Case's Ladder, Inc. (the "Case's Ladder Agreement"). The other parties to the ----------------------- agreement are Case's Ladder, Inc. and its shareholders--Frank Westall (Chief Executive Officer and Chairman of Case's Ladder) and Chip Hilts (Chief Operating Officer and Chief Financial Officer of Case's Ladder). The purchase price for the Case's Ladder shares is a total of 700,000 shares of restricted common stock of the Company that will be issued to the shareholders of Case's Ladder. The Case's Ladder Agreement provides that the selling shareholders will have the right to participate in any registered offering of the Company's common stock and to sell their Company shares in the Company's offering of its shares to the public to the extent that any of the Company's directors and/or officers have such registration rights and sale privileges. The Case's Ladder Agreement also provides that Frank Westall, Chip Hilts and Jeremy Rusnak will be employed by the Company subsequent to the closing, that they will be granted options to purchase 600,000 shares of the Company's common stock, in the aggregate, at a price of $10 per share, and that the stock options will vest in quarterly installments over a period of 36 months. The Case's Ladder web site serves primarily as an online game portal, providing competitive rankings for online gamers in a number of online games and allowing gamers to compete against one another in a variety of tournaments and leagues. The Case's Ladder web site currently has over one 9 million registered users and receives over 1.1 million unique visitors each month. Approximately 75% of registered users on the Case's Ladder web site are between the ages of 18 and 50 with the majority of those visitors having an annual income over $50,000. Case's Ladder currently derives revenue only from membership fees and advertising. The Company believes that this acquisition of new users with favorable demographics will allow it to expand the customer base for its existing products, and to diversify its product offerings into areas such as computer games. Proposed Acquisition of Gamer's Alliance, Inc. On May 4, 1999, the Company announced that it had entered into a letter of intent to acquire all of the outstanding shares of Gamer's Alliance, Inc., a Missouri corporation based in Chesterfield, Missouri. Gamer's Alliance has been online since January 1997, and is one of the largest networks of gaming-related sites on the internet. On a monthly basis, Gamer's Alliance has over 750,000 unique visitors and over 10 million banner impressions. It maintains a network of more than 50 web sites, including GA-games, GA-Source (a gaming news site which provides game previews, product reviews and interviews), and GA-Sports (a network of news on computer sports gaming). The letter of intent with Gamer's Alliance proposes a closing date for the transaction in June, 1999, and provides that the Company will pay the purchase price for the Gamer's Alliance stock partly in cash and partly in the Company's common stock. The letter of intent provides for a contingent payment to the sellers of additional shares of the Company's common stock over a period of five calendar quarters, contingent upon Gamer's Alliance achieving specified milestones with respect to revenue, the number of unique site visitors, and other matters. The letter of intent with Gamer's Alliance also provides that subsequent to the closing, certain members of management of Gamer's Alliance will work for the Company pursuant to employment agreements. Item 2 Financial Information Selected Financial Information The following selected financial data are derived from the audited financial statements of the Company presented as of March 31, 1999. As indicated in Item 1, the Company completed a merger with Entertainment Universe subsequent to March 31, 1999. The effect of the merger along with other acquisitions is presented separately in pro forma statements. The data below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes thereto included in Item 15.
eUniverse, Inc. f/k/a/ MOTORCYCLE CENTERS OF AMERICA, INC. - ---------------------------------------------------------------------------------------------------------------------------- Statements of Operations Three Months Ended March 31, Years ended December 31, ------------------------------------------ 1999 1998 1997 --------------------- ------------------- ------------------- Costs and expenses................................. $ 80,473 $ 45,603 $ 27,039 OPERATING LOSS (80,473) (45,603) (27,039) --------------------- ------------------- ------------------- Non-operating income/ (expense).................... 84,603 (57,290) 19,313 --------------------- ------------------- -------------------
10
INCOME (LOSS) BEFORE INCOME TAXES 4,130 (102,893) (7,726) INCOME TAXES....................................... - - - --------------------- ------------------- ------------------- NET INCOME (LOSS) $ 4,130 $(102,893) $ (7,726) ======== ========= ========
eUniverse, Inc. f/k/a/ MOTORCYCLE CENTERS OF AMERICA, INC. - ---------------------------------------------------------------------------------------------------------------------------- Balance Sheet Data March 31, December 31, 1999 1998 ------------------- ------------------------ ASSETS CURRENT ASSETS Cash and cash equivalents......................................... $101,568 $ 887 Working capital (deficit)......................................... 28,268 (46,047) Total assets...................................................... 102,276 9,720 Total shareholders equity......................................... 28,976 (45,214)
Management's Discussion and Analysis of Financial Condition and Results of Operations For the periods ended December 31, 1998 and 1997 Motorcycle Centers of America had no substantial operations. During these periods the company was engaged in merger negotiations with several companies who had significant operations and who desired the company's legal status to have freely traded shares on the OTC Electronic Bulletin Board. On January 26, 1998, the Company entered into an Agreement and Plan of Reorganization with Sandale Holdings, Limited, to acquire a motorcycle manufacturing company in China. The Plan of Reorganization was terminated on August 14, 1998. In connection with the Plan of Reorganization, the Company redomiciled in Nevada. On October 4, 1998, the Company entered into an Agreement and Plan of Reorganization with DDA America, LLC to acquire all of the issued and outstanding stock of DDA America, LLC. The Plan of Reorganization was terminated on March 1, 1999. The operating losses for the year ended December 31, 1998 are largely attributable to expenses associated with these merger negotiations. For the three month period ended March 31, 1999, the company's operating loss was attributable to costs associated with the merger with EUI which was completed on April 14, 1999. Investment gains and interest income more than fully offset the operating losses resulting in net income for the period of $4,130. Pro Forma Financial Information Subsequent to March 31, 1999, the last balance sheet date presented in this registration statement, the registrant completed a number of transactions involving business combinations and the sale and other issuance of common stock and preferred stock. The pro forma financial statements reflect the following transactions: . The acquisition of CD Universe, Inc. ("CD Universe") by Entertainment Universe, Inc.("EUI"). . The sale of 1,832,812 preferred shares by EUI . The sale of 885,835 common shares by Motorcycle Centers of America, Inc.("MCA"). . The payment of offering costs and other expenses through cash and common stock. . The merger of MCA and EUI through an exchange of shares. 11 . The acquisition of Cases Ladder, Inc. ("CLI"). . The purchase of the MegaDVD web-site through the issuance of shares. . The repurchase and retirement of common stock by MCA. The pro forma balance sheets presented reflect the historical balance sheets of MCA, CD Universe, and EUI as of March 31, 1999 and CLI as of December 31, 1998. Pro forma adjustments have been made to give effect to the above transactions as if they had occurred as of March 31, 1999. The pro forma income statements presented reflect the historical income statements for MCA and CLI for the year ended December 31, 1998 and for CD Universe for the year ended March 31, 1999. There is no significant activity for EUI, as it came into existence in February 1999. Pro forma adjustments have been made to reflect activity attributable to the above transactions, as if they had occurred at the beginning of the year. These unaudited pro forma combined financial statements should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Registration Statement. The pro forma information is not necessarily indicative of the results that would have been reported had such events actually occurred on the dates specified, nor is it indicative of the Company's future results. eUNIVERSE PROFORMA FINANCIAL STATEMENTS MARCH 31, 1999
Motorcycle Centers of Case's Entertainment America CD Universe Ladder Universe Combined -------------- --------------- ------------ --------------- ------------- ASSETS Cash $ 101,568 $ 11,335 $ $ 90 $ 112,993 3 6 9 Receivables 92,938 65,262 158,200 Due from officer 157,569 157,569 Other current assets 32,276 2,172 34,448 -------------- --------------- ------------ --------------- ------------- -------------- --------------- ------------ --------------- ------------- Total current assets 101,568 294,118 67,434 90 463,210 -------------- --------------- ------------ --------------- ------------- Property and equipment, net 708 225,718 21,752 248,178 Investment in subsidiaries CD Universe 505,000 505,000 4 12 Case's Ladder 12 Acquisition costs - CD Universe 54,840 54,840 Amortization of acquisiton costs Goodwill 38,000 38,000 2 7 Amortization of goodwill Other intangibles 60,000 60,000 1 Other assets 510 510 -------------- --------------- ------------ --------------- ------------- Total other assets 708 264,228 21,752 619,840 906,528 -------------- --------------- ------------ --------------- ------------- Total assets $ 102,276 $ 558,346 $ 89,186 $ 619,930 $ 1,369,738 Pro Forma adjustments to reflect acquisitions and stock issuances as of March 31, 1999 DR CR Pro Forma --------------- ---------------- ---------------- ASSETS Cash 6,598,122 4 1,975,000 $ 5,561,360 7,900 5 48,490 885,835 10 20,000 Receivables 158,200 Due from officer - 157,569 Other current assets 34,448 ---------------- Total current assets 5,911,577 ---------------- Property and equipment, net 248,178 Investment in subsidiaries CD Universe 1,345,000 7 2,368,976 - 518,976 Case's Ladder 11,674 2 11,674 - Acquisition costs - CD Universe 54,840 Amortization of acquisiton costs 13 5,484 (5,484) Goodwill 7,011,674 - 16,758,650 9,708,976 - - Amortization of goodwill 13 1,675,865 (1,675,865) Other intangibles 52,500 112,500 Other assets 510 ---------------- Total other assets 15,493,329 ---------------- Total assets $ $ 21,404,906
Motorcycle Centers of Case's Entertainment America CD Universe Ladder Universe Combined -------------- --------------- ------------ --------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expense$ 7,000 $ 942,322 $ 20,165 $ $ 969,487 Customer deposits 16,667 16,667 Due to officers 66,300 105,000 55,000 226,300 7 Due to affiliates 30,000 9,028 39,028 -------------- --------------- ------------ --------------- ------------- Total liabilities 73,300 1,077,322 100,860 1,251,482 -------------- --------------- ------------ --------------- ------------- Preferred stock Common stock 2,148 1,000 2,750 620,020 625,918 10 11 12 12 Additional paid in capital 171,796 171,796 3 5 8 10 Deferred offering costs (5,734) (5,734) Accumulated deficit (139,234) (519,976) (14,424) (90) (673,724) 5 13 14 -------------- --------------- ------------ --------------- ------------- Total stockholders equity 28,976 (518,976) (11,674) 619,930 118,256 -------------- --------------- ------------ --------------- ------------- Total liabilities and equity $ 102,276 $ 558,346 $ 89,186 $ 619,930 $ 1,369,738 Pro Forma adjustments to reflect acquisitions and stock issuances as of March 31, 1999 DR CR Pro Forma ---------------- ---------------- ---------------- LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expense $ $ 969,487 Customer deposits 16,667 Notes payable - officers 85,000 141,300 Due to affiliates 39,028 ---------------- Total liabilities 1,166,482 ---------------- Preferred stock 3 183,281 183,281 Common stock 1,845 1 5 14,723 609,955 2 700 1,000 7 2,425 2,750 8 319 9 886 14 20 Additional paid in capital 480,000 1 52,495 21,891,683 20,000 2 6,999,300 159,500 7 7,272,575 18,155 3 6,414,841 8 159,181 9 879,215 11 609,955 14 9,980 Deferred offering costs 9 5,734 - Accumulated deficit 28,490 6 7,900 (1,851,263) 1,681,349 12 519,976 10,000 12 14,424 ---------------- Total stockholders equity 20,238,424 ---------------- Total liabilities and equity $ $ 21,404,906
Motorcycle Centers of Case's Entertainment America CD Universe Ladder Universe Combined -------------- --------------- ------------ --------------- ------------- - Revenue $ - $ 8,851,713 $ 378,345 $ - $ 9,230,058 Cost of revenues - 8,264,306 33,660 - 8,297,966 -------------- --------------- ------------ --------------- ------------- Gross profit - 587,407 344,685 - 932,092 -------------- --------------- ------------ --------------- ------------- General and administrative expense 45,603 995,584 360,019 90 1,401,296 5 14 Amortization - 13 -------------- --------------- ------------ --------------- ------------- Total 45,603 995,584 360,019 90 1,401,296 -------------- --------------- ------------ --------------- ------------- Loss from operations (45,603) (408,177) (15,334) (90) (469,204) Other income (expense) (57,290) 1,013 - - (56,277) -------------- --------------- ------------ --------------- ------------- Loss before income taxes (102,893) (407,164) (15,334) (90) (525,481) Income tax expense (benefit) - - (1,372) - (1,372) -------------- --------------- ------------ --------------- ------------- Net loss $ (102,893)$ (407,164) $ (13,962) $ (90) $ (524,109) Pro Forma adjustments to reflect acquisitions and stock issuances as of March 31, 1999 DR CR Pro Forma --------------- ---------------- ---------------- Revenue $ 9,230,058 Cost of revenues 8,297,966 ---------------- Gross profit 932,092 ---------------- General and administrative expense 28,490 1,439,786 10,000 Amortization 1,681,349 1,681,349 ---------------- Total 3,121,135 ---------------- Loss from operations (2,189,043) Other income (expense) 6 7,900 (48,377) ---------------- Loss before income taxes (2,237,420) Income tax expense (benefit) (1,372) ---------------- Net loss $ (2,236,048)
Notes to Pro Forma Financial Statements - March 31, 1999 Pro forma adjustments have been made to reflect the following transactions, corresponding to the respective journal entry numbers on the pro forma financial statements: 1) To record issuance of 4,605 shares of common stock to acquire web site. 2) To record issuance of 700,000 shares of common stock to acquire Cases Ladder, Inc. 3) To record sale of 1,832,812 shares of preferred stock at $3.60 per share. 4) To record payment of cash balance of CD Universe acquisition, the payment of costs incurred in connection with the preferred offering and repayment of an advance from the former shareholder. 5) To record payments of costs and expenses incurred in connection with the preferred offering. 6) To record earnings on escrowed funds. 7) To record issuance of 2,425,000 shares of common stock, valued at $3.00 per share, in completion of the acquisition of CD Universe. 8) To record the issuance of 319,000 shares of common stock, valued at $0.50 per share, for services provided in connection with the preferred offering. 9) To record the sale of 885,835 shares of common stock at $1.00 per share. 10) To record the acquisition and retirement of 1,845,000 shares of common stock for a purchase price of $20,000. 11) To adjust common stock to par value. 12) To record elimination of intercompany accounts and balances. 13) To record the amortization of goodwill and acquisition costs, based on a ten year amortization period, as if the transaction had occurred at the beginning of the year. 12 14) To record the issuance of 20,000 shares of common stock, valued at $0.50 per share, for services. Management's Discussion and Analysis of Pro Forma Financial Condition and Results of Operations For the pro forma period presented herein, eUniverse would have reported $9.2 million in revenues. CD Universe revenues for the period ended March 31, 1999 totaled $8.9 million, derived principally from sales of music to its online customers. Case's Ladder revenues for the period ended December 31, 1999 totaled $0.4 million, split approximately equally between advertising revenues and membership fees. On the combined basis, cost of revenues were $8.3 million, or 89.9% of revenues, resulting in a gross profit of $0.9 million for the period. CD Universe cost of revenues which include cost of the products purchased along with shipping and fulfillment expenses amounted to 93.4% of revenues. Case's Ladder costs of revenues totaling $0.03 million, or 8.7%, consist principally of fees related to processing and collection of the revenues for membership and advertising. General and administrative expenses include costs of advertising and marketing, web-site development and maintenance along with general costs for office administration. These costs totaled $1.4 million, or 15.6% of revenues. On a pro forma basis the loss from operations prior to amortization of goodwill would be ($0.5) million. As a result of the acquisitions of CD Universe and Case's Ladder, goodwill will be recorded in the amounts of $9.9 and 7.0 million, respectively. The pro forma full year's amortization of this goodwill using a 10 year amortization period amounts to $1.7 million, resulting in a loss from operations after amortization of ($2.3) million. The net loss on a pro forma basis for a full 12 month period would have been ($2.2) million after other income items totaling $36,000 and an income tax benefit of $1,300. Liquidity And Capital Resources In April 1999, MCA completed a sale of common stock pursuant Rule 504 of Regulation D totaling $0.9 million, and EUI completed a sale of its Series A 6% Convertible Preferred Stock to accredited investors totaling $6.6 million including Lehman Brothers, Eisenberg Partners and principals of Gerard Klauer Mattison & Co., Inc. Funds received from this preferred offering were used to complete the acquisition of CD Unverse and the merger with MCA requiring funds of $2.0 million. Following the transactions as presented in the pro forma balance sheets, the company has cash resources of $5.6 million. Prior to the acquisition by EUI, CD Universe primarily financed its operations through internally-generated cash flow and advances from related parties. Prior to the acquisition by eUniverse, Case's Ladder primarily financed its operations through internally-generated cash flow and advances from related parties. eUniverse expects to fund its 1999 and 2000 cash flow from cash on hand and through internally-generated cash flow. Risks Associated With The Year 2000 Issue The Year 2000 issue (Y2K) is the result of computer programs written using two digits rather than four to define the applicable year. Any of the Company's computer and telecommunications programs that have date sensitive software may recognize a date using "00" as the year 1900 instead of 2000. This could result in system failure or miscalculations causing disruptions in operations, including the ability to process transactions, send invoices, or engage in similar normal business activities. The Company has determined that its equipment is Y2K compliant. eUniverse is currently conducting an analysis to determine the extent to which others have Year 2000 issues. These include CD Universe's major suppliers' systems, including the systems of credit card processors, telecommunications providers, product distributors and companies with whom CD Universe has marketing agreements. CD Universe's primary distributor for music products, Valley Media, has indicated that it has begun its remediation efforts and expects to be in compliance before the year 2000. CD Universe is currently unable to predict the extent to which the Year 2000 issue will affect Valley's suppliers, to the extent to which Valley would be vulnerable to its suppliers' failure to resolve any Year 2000 issues on a timely basis. The failure of a major supplier subject to the Year 2000 issue to convert its systems on a timely basis or a conversion that is incompatible with CD Universe's systems could have a material adverse effect on CD Universe. In addition, most of the purchases from CD Universe's online store are made with credit cards, and our operations may be materially adversely affected to the extent customers are unable to use their credit cards due to Year 2000 issues that are not rectified by their credit card providers. CD Unverse and eUniverse intend to actively work with and encourage their suppliers to minimize the risks of business disruptions resulting from Year 2000 issues and develop contingency 13 plans where necessary. Such plans may include using alternative suppliers and establishing contingent supply arrangements. CD Universe and eUniverse expect to have such plans in place by September 30, 1999. Item 3 Properties The Company leases a 19,500 square foot office and warehouse facility in Wallingford, Connecticut. The lease expires in March, 2002 and can be extended for an additional five years at the Company's option. The Company owns or leases no other facilities that are material to the operation of its business. Item 4 Security Ownership of Certain Beneficial Owners and Management The following tables set forth certain information regarding beneficial ownership of the Company's common stock and preferred stock as of May 11, 1999 by (i) each person known by the Company to own beneficially more than 5% of the Company's common stock, (ii) each of the Company's executive officers and directors and (iii) all directors and executive officers as a group: Common Stock: Name of Beneficial Owner Shares Beneficially Percentage Beneficially Owned(1) Owned(2) Brad D. Greenspan 8,061,000 57.2% Charles Beilman 2,425,000 17.2% Joseph Abrams(3) 1,539,000 10.9% Leland N. Silvas 358,334(4) 2.5% William R. Wagner 8,333(5) nm Directors and Executive 10,852,667 77.0% Officers as a Group _________________ (1) Unless otherwise noted, all of the shares shown are held by individuals or entities possessing sole voting and investment power with respect to such shares. Shares not outstanding but deemed beneficially owned by virtue of the right of a person to acquire them within 60 days, whether by the exercise of options or warrants or the conversion of shares of Preferred Stock into shares of Common Stock, are deemed outstanding in determining the number of shares beneficially owned by such person or group. (2) The "Percentage Beneficially Owned" is calculated by dividing the "Number of Shares Beneficially Owned" by the total outstanding shares of Common Stock including shares beneficially owned by the person with respect to whom the percentage is calculated.. _________________ (1) (2) (3) (4) (5) 14 (3) Includes shares beneficially owned by Mr. Abrams as Trustee under the following trusts: (i) 839,000 shares held by the Joseph W. & Patricia G. Abrams Living Trust Under Trust Agreement dated March 16, 1994, (ii) 350,000 shares held by Matthew R. Abrams Irrevocable Trust Under Trust Agreement dated December 19, 1991, and (iii) 350,000 shares held by Sarah E. Abrams Irrevocable Trust Under Trust Agreement dated December 19, 1991. (4) Includes 158,334 shares represented by options exercisable within 60 days. (5) Consists entirely of shares represented by options exercisable within 60 days. Item 5 Directors and Executive Officers The following are the Directors and Executive Officers of the Company: Name Age Position Brad D. Greenspan 26 Chairman of the Board of Directors Leland N. Silvas 44 President, Chief Executive Officer and Director Charles Beilman 39 Chief Operating Officer, Chief Technical Officer and Director William R. Wagner 52 Vice President, Chief Financial Officer and Secretary Brad D. Greenspan, Chairman of the Board of Directors of the Company since April 1999. Mr. Greenspan founded and has served as the President of Palisades Capital, Inc., a private Beverly Hills merchant bank, since 1996. In addition, Mr. Greenspan manages a small fund that provides growth capital to technology related companies. Mr. Greenspan received a BA degree in political science/business from UCLA in 1996. Leland N. Silvas, President and Chief Executive Officer of the company since April 1999. Mr. Silvas is a major shareholder of Label-add, Inc. a Connecticut- based advertising and direct marketing company and was employed there until being recruited to eUniverse, Inc. in 1999. Mr. Silvas was President and Chief Operating Officer of McPhersons global housewares division, from 1994-1998. From 1992 to 1994 Mr. Silvas was a board member for Partners In Computing, a New York City-based software solutions company. He currently sits on the advisory board to the Adept Group, a computer consulting company based in New York City and is a board member of ADV MARKETING and 1-800-adagency. Charles Beilman, Chief Operating Officer and Chief Technical Officer of the Company since April 1999. Mr. Beilman founded CD Universe in November 1995 and was its sole shareholder and Chief Executive Officer until the sale of CD Universe to the Company in April 1999. Since 1985, Mr. Beilman has served as President and Director of Trak Systems, which supplies proprietary inventory control computer systems to retail music stores throughout the United States and Canada. William R. Wagner, Vice President, Chief Financial Officer and Secretary of the Company since April 1999. Prior to joining the Company, Mr. Wagner was Chief Financial Officer of Heritage Marketing and Incentives, Inc., a Massachusetts-based marketing incentives company. From 1995 to 1997, he was Chief Financial Officer of ServiceSoft Corporation, a Massachusetts internet software company, and from 1990 to 1994, he was Chief Financial Officer of General Scanning, Inc., a pioneer in laser technology and systems. 15 Agreement Concerning Election of Director In connection with the purchase by E. P. Opportunity Fund, LLC ("E. P.") of preferred stock issued by EUI, an agreement dated April 6, 1999 was entered into between E. P., EUI and Brad D. Greenspan (the "E. P. Letter Agreement") which, in effect, gave E. P. the right to select one of the Directors of EUI during such period as it owns shares of EUI preferred stock. On April 16, 1999, in connection with the Reorganization, the E. P. Letter Agreement was assigned by EUI to the Company, which assumed the obligations of EUI thereunder. As a result, as long as it owns Preferred Stock, E. P. has the right to appoint a member of the Board of Directors of the Company. E. P. has not exercised that right as of the date hereof. Compensation of Directors and Term of Office Directors of the Company do not currently receive compensation from the Company for their services as members of the Board of Directors, but are reimbursed for out-of-pocket travel expenses associated with attending Board of Directors meetings. Directors of the Company serve until the next succeeding annual meeting of shareholders and until their successors are elected and qualified, subject to resignation or removal by the shareholders. Item 6 Executive Compensation At the end of its most recent fiscal year, the Company's President and Chief Executive Officer and other officers had not yet been employed and compensation had not yet been paid. On April 6, 1999, the Company entered into employment agreements with Leland Silvas, Chief Executive Officer and President, and William R. Wagner, Vice President, Chief Financial Officer and Secretary. The contract with Mr. Silvas is for an initial term expiring April 30, 2000 and automatically renews for additional one-year periods unless terminated on three months notice. The Silvas contract stipulates an annual base salary of $200,000 to be reviewed annuallly with a bonus opportunity of up to 50% of base salary opon achievement of goals as determined by the Compensation Committee of the Board of Directors. Mr. Silvas is entitled to options to purchase 825,000 shares of common stock of the Company at an exercise of $3.00 per share, which options become exercisable at various times as set forth in the contract. The contract with Mr. Wagner is for an indefinite term, subject to termination on three months notice, and stipulates an annual salary of $125,000 and options to purchase 100,000 shares of common stock of the Company at an exercise price of $3.00 per share. The Company entered into an employment contract with Mr. Beilman which became effective April 14, 1999 for an initial period of three years, subject to termination on ten days notice, and stipulates an annual compensation of $135,000. Item 7 Certain Relationships and Related Transactions On April 14, 1999, the Company acquired all of the capital stock of CD Universe, Inc. for a total consideration of $1,915,000 in cash plus 2,425,000 shares of common stock of the Company. The rights to acquire CD Universe, Inc. were originally held by Palisades Capital, Inc. ("Palisades"), a private merchant bank owned and operated by Brad D. Greenspan. On February 11, 1999 Palisades assigned its rights to acquire CD Universe, Inc. to EUI for consideration of 8,061,000 shares of common stock of EUI which were issued to Mr. Greenspan. (See Item 4 "Security Ownership of Certain Beneficial Owners and Management"). In connection with the Reorganization, those shares of EUI common stock were exchanged for an equivalent number of shares of the Company's common stock. 16 Item 8 Legal Proceedings The Company is not a party to any pending legal proceedings that in the opinion of management of the Company would have a material adverse effect on the Company's results of operations or consolidated financial condition. Item 9 Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters Shareholders and Dividends As of May 31, 1999, there were 14,092,933 shares of common stock of the Company outstanding, which were held by approximately 111 shareholders of record. To date, the Company has paid no cash dividends and has no intention to pay cash dividends on its common stock in the foreseeable future. Market Information The common stock of the Company is traded on the OTC Electronic Bulletin Board under the symbol EUNI. Prior to April 22, 1999, when the Company changed its name to eUniverse, Inc., the common stock of the Company was traded under the symbol MCAM. Between April 14, 1999 and April 22, 1999 the common stock of the Company was traded under the symbol MCAMD. The chart below sets forth the range of reported high and low bid quotations for the common stock of the Company for each full quarterly period from April 1, 1998 and for the months of April and May 1999. The source of the quotations is Bloomberg Financial Services. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The closing price for the common stock of the Company on May 29, 1999 was $9.25. MONTHLY PERIOD ENDING RANGE OF HIGH AND LOW BID QUOTATIONS May 29, 1999 $ 9.00 - 12.25 April 30, 1999 $ 1.875 - 14.00 QUARTERLY PERIOD ENDING RANGE OF HIGH AND LOW BID QUOTATIONS March 31, 1999 $ 0.25 - 0.90 December 31, 1998 $ 0.03125 - 1.25 September 30, 1998 $ 0.25 - 0.225 June 30, 1998 $ 0.225 - 0.40 Shares Available for Resale Approximately 12,984,000 shares of the Company's common stock (approximately 92% of the shares outstanding) are restricted shares that may be sold only in the event such shares are registered 17 pursuant to the Securities Act or are sold pursuant to an exemption thereunder, including Rule 144, which permits the resale of certain limited amounts of restricted securities after a 12-month initial holding period. Subject to the volume limitations of Rule 144, approximately 10,050,000 of such restricted shares will become available for resale on March 3, 2000, an additional 509,000 shares will become available on April 1, 2000, and an additional 2,425,000 shares will become available on April 14, 2000. (See "Item 4 Securities Ownership of Certain Beneficial Owners and Management".) There are 1,832,812 shares of the Company's Series A 6% Convertible Preferred Stock outstanding, which were sold to accredited investors including Lehman Brothers, Eisenberg Partners and principals of Gerard Klauer Mattison & Co., Inc. Commencing on October 14, 1999, such shares are convertible into shares of common stock of the Company at a one-to-one ratio unless the market price of the common stock is less than $3.60 during certain periods prior to conversion (See "Item 10 Sale of Convertible Preferred Stock"). The Company has granted the holders of Preferred Stock certain registration rights so that they may sell their shares of common stock received upon conversion under a registration pursuant to the Securities Act. Such rights are set forth in the Registration Rights Agreement of Entertainment Universe Inc. dated April 1999 which was assigned to and assumed by the Company pursuant to the Assignment and Assumption Agreement by and between Entertainment Universe, Inc. and Motorcycle Centers of America, Inc., dated as of April 14, 1999. The shares of common stock received upon conversion may be sold on the market pursuant to Rule 144 without registration under the Securities Act commencing 12 months after conversion and subject to the volume limitations of Rule 144. The Company has granted options to various employees and advisors to purchase an aggregate of up to 1,560,000 shares of common stock of the Company at exercise prices ranging from $3.00 to $11.40. Options representing 68,750 of such shares are vested and exercisable. Warrants and options to purchase an additional 704,990 shares of common stock at exercise prices ranging from $2.76 to $11.00 have been issued to various entities in exchange for financing and public relations services. Warrants and options representing 400,000 of such shares are vested and exercisable. In addition, the Company has previously announced plans to issue up to 700,000 shares of its common stock in connection with acquisition of Case's Ladder. (See "Item 1 Business") Item 10 Recent Sales of Unregistered Securities Acquisition of CD Universe, Inc. On April 14, 1999 EUI acquired from Charles Beilman, the sole shareholder of CD Universe, one hundred percent of the capital stock of CD Universe, Inc. for a total consideration of $1,915,000 in cash plus 2,425,000 shares of common stock of the Company. Charles Beilman is the Chief Operating Officer, Chief Technical Officer and a Director of the Company. (See Item 7, Certain Relationships and Related Transactions.) Leland N. Silvas was issued 200,000 shares of common stock of the Company on March 3, 1999 in consideration of his acceptance of employment by the Company as President and Chief Executive Officer. (See Item 4 "Security Ownership of Certain Beneficial Owners and Management.") Sale of Convertible Preferred Stock On April 14, 1999, EUI sold 1,832,812 shares of its Series A 6% Convertible Preferred Stock in a private offering pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D adopted under the Securities Act. The EUI Preferred Stock was sold to a group of approximately 40 purchasers, including Lehman Brothers, Eisenberg Partners and principals of Gerard Klauer Mattison & Co., Inc., all of whom were accredited investors as defined in Rule 501 of Regulation D. The aggregate offering price for the Preferred Stock was $6,598,122. In connection with the Reorganization, the holders of the EUI Preferred Stock exchanged their shares, on a one-to-one basis, for shares of the Company's 18 Preferred Stock having equivalent rights and preferences, as set forth in the Designation of Preferred Stock of Motorcycle Centers of America, Inc. dated April 7, 1999 (the "Designation of Preferred Stock"). Holders of the Company's Preferred Stock have the right to convert all or any portion of such stock into shares of the Company's common stock at any time after October 15, 1999 at a one-to-one ratio, unless the market price of the Company's common stock is below $3.60 during various periods prior to the date of conversion, as set forth in the Designation of Preferred Stock, in which case the conversion ratio would be greater than one-to-one. The Company's Preferred Stock does not bear dividends, and the holders of such stock are not entitled to receive any dividends thereon. In the event of the liquidation or dissolution of the Company, the holders of the Preferred Stock will be entitled to receive, prior in preference to any distribution to the holders of the Company's common stock and any other class of stock which has been designated as junior in rank to the Preferred Stock, an amount per share equal to the original issue price of the Preferred Stock ($3.60) plus interest thereon at a rate of 6% per annum from the date of issuance. The holders of Preferred Stock are entitled to cast the number of votes per share on each matter submitted to the Company's holders of common stock that equals the number of votes that could be cast on the shares of common stock that could have been converted immediately prior to the taking of the vote. Votes of the Preferred Stock holders shall be cast together with those cast by the holders of common stock and not as a separate class except as otherwise provided in the Designation of Preferred Stock on matters directly affecting the rights of the holders of Preferred Stock. Gerard Klauer Mattison & Co., Inc. ("GKM") acted as exclusive placement agent --- in connection with the sale of the EUI Preferred Stock. As part of its compensation, GKM received warrants to purchase 300,000 shares of common stock of the Company at an exercise price of $3.00 per share, which became exercisable on April 14, 1999 and expire April 14, 2004. GKM also received warrants to purchase an additional 269,990 shares of common stock of the Company at an exercise price of $2.76 per share, which become exercisable on April 14, 2000 and expire April 14, 2004. Purchase of Common Stock by GKM Investors On March 3, 1999, the Company issued 250,000 shares of common stock of the Company for consideration of $1.00 per share to GKM and certain of its affiliates in a private offering pursuant to Rule 506 of Regulation D. The proceeds of the offering were used to pay part of the cash consideration for the acquisition of CD Universe, Inc. Merger with MCA On April 14, 1999, EUI merged with and into MCA pursuant to an Agreement and Plan of Reorganization dated April 9, 1999 (the "Merger Agreement"). As ---------------- contemplated in the Merger Agreement, all of the outstanding shares of EUI were acquired by MCA, and the shareholders of EUI were issued shares of MCA equal to approximately 92% of the shares of MCA outstanding after the transaction. In connection with the merger into MCA, each share of EUI Preferred Stock was exchanged for a share of preferred stock of MCA having identical rights and preferences, and MCA changed its name to eUniverse, Inc. Rule 504 Sale of Common Stock On April 6, 1999, MCA sold 885,835 shares of MCA common stock pursuant to Rule 504 of Regulation D under the Securities Act at a price of $1.00 per share to purchasers of the EUI Preferred 19 Stock described above. These shares were exchanged for shares of freely tradable common stock of the Company as the result of the merger with MCA and name change to eUniverse, Inc. described above. Issuance of Common Stock to Various Service Providers On April 1, 1999, EUI issued 354,000 shares to approximately 10 persons in consideration of public relations, legal and related services provided to the Company in connection with various activities, including the Preferred Stock Offering and Merger with MCA. Acquisition of Case's Ladder The Company entered into a Stock Purchase Agreement dated April 21, 1999 (the "Case's Ladder Agreement") with Case's Ladder and its shareholders for the ----------------------- purchase of all of the outstanding shares of the common stock of Case's Ladder. The purchase price for the Case's Ladder shares is a total of 700,000 shares of restricted common stock of the Company that will be issued to the shareholders of Case's Ladder. The Case's Ladder Agreement provides that the selling shareholders will have the right to participate in any registered offering of the Company's common stock and to sell their Company shares in the Company's offering of its shares to the public to the extent that any of the Company's directors and/or officers have such registration rights and sale privileges. The Case's Ladder Agreement also provides that certain principals of Case's Ladder will be employed by the Company subsequent to the closing and that they will be granted options to purchase 600,000 shares of the Company's common stock, in the aggregate, at a price of $10 per share. Item 11 Description of Securities The following description of the common stock of the Company is a summary only and is qualified in its entirety by the provisions of the Articles of Incorporation of the Company. The Company is authorized to issue 250,000,000 shares of common stock, $.001 par value per share (the "Common Stock"). As of May 31,1999 there were ------------ outstanding 14,092,933 shares of Common Stock held of record by 111 shareholders. Holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to the holders of outstanding shares of Preferred Stock, if any, the holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor. In the event of liquidation, dissolution or winding up of the Company, and subject to the prior distribution rights of the holders of outstanding shares of Preferred Stock, if any, the holders of shares of Common Stock shall be entitled to receive pro rata all of the remaining assets of the Company available for distribution to its stockholders. The Common Stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Common Stock. Item 12 Indemnification of Directors and Officers Nevada Corporation Law 20 Sections 78.751 et seq. of the Nevada Revised Statutes allow a company to indemnify its officers, directors, employees, and agents from any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, except under certain circumstances. Indemnification may only occur if a determination has been made that the officer, director, employee, or agent acted in good faith and in a manner which such person believed to be in the best interests of the company. A determination may be made by the shareholders, by a majority of the directors who were not parties to the action, suit, or proceeding confirmed by opinion of independent legal counsel; or by opinion of independent legal counsel in the event a quorum of directors who were not a party to such action, suit, or proceeding does not exist. Articles of Incorporation Article Twelfth of the Articles of Incorporation of the Company provide as follows with respect to indemnification of Directors and Officers: "TWELFTH. INDEMNIFICATION: The corporation shall indemnify and hold harmless ------------------------ the Officers and Directors of the Corporation from any and all liabilities or claims to the fullest extent now, or hereafter from time to time, permitted pursuant to the general corporation Law of the state of Nevada." Bylaws Article XII of the Bylaws of the Company provide as follows with respect to indemnification of Officers and Directors: "Section 1. Exculpation. No Director or Officer of the Corporation shall be ----------- liable for the acts, defaults, or omissions of any other Director or Officer, or for any loss sustained by the Corporation, unless the same has resulted from his own willful misconduct, willful neglect, or gross negligence. "Section 2. Indemnification. Each Director and Officer of the Corporation --------------- and each person who shall serve at the Corporation's request as a director or officer of another corporation in which the Corporation owns shares of capital stock or of which it is a creditor shall be indemnified by the Corporation to the fullest extent permitted from time to time by the Nevada Revised Statutes against all reasonable costs, expenses and liabilities (including reasonable attorneys' fees) actually and necessarily incurred by or imposed upon him in connection with, or resulting from any claim, action, suit, proceeding, investigation, or inquiry of whatever nature in which he may be involved as a party or otherwise by reason of his being or having been a Director or Officer of the Corporation or such director or officer of such other corporation, whether or not he continues to be a Director or Officer of the Corporation or a director or officer of such other corporation, at the time of the incurring or imposition of such costs, expenses or liabilities, except in relation to matters as to which he shall be finally adjudged in such action, suit, proceeding, investigation, or inquiry to be liable for willful misconduct, willful neglect, or gross negligence toward or on behalf of the Corporation in the performance of his duties as such Director or Officer of the Corporation or as such director or officer of such other corporation. As to whether or not a Director or Officer was liable by reason of willful misconduct, willful neglect, or gross negligence toward or on behalf of the Corporation in the performance of his duties as such Director or Officer of the Corporation or as such director or officer of such other corporation, in the absence of such final adjudication of the existence of such liability, the Board of Directors and each Director and Officer may conclusively rely upon an opinion of independent legal counsel selected by or in the manner designated by the Board of Directors. The foregoing right to indemnification shall be in addition to and not in limitation of all other rights which such person may be entitled as a matter of law, and shall inure to his legal representatives' benefit. 21 "Section 3. Liability Insurance. The Corporation may purchase and maintain ------------------- insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation or who is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, association, or other enterprise against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not he is indemnified against such liability by this article XII." Provided the terms and conditions of the applicable provisions under Nevada law, the Company's Articles of Incorporation and Bylaws are met, officers, directors, employees, and agents of the Company may be indemnified against any cost, loss, or expense arising out of any liability under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company, the Company has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy and is, therefore, unenforceable. Item 13 Financial Statements The financial statements of the Company are filed under Item 15, beginning on page F-1. Item 14 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 15 Financial Statements and Exhibits Financial Statements The financial statements of the Company and the financial statements of the businesses acquired or to be acquired presented in the pro forma financial information disclosed in Item 2 are included below as follows: Motorcycle Centers of America, Inc. for the three months ended March 31, 1999 and the years ended December 31, 1998 and 1997. CD Universe, Inc. for the year ended March 31, 1999. Case's Ladder, Inc. for the two months ended February 28, 1999 and year ended December 31, 1998. 22
MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- Index to Financial Statements Page ----------- Independent auditors' report................................................................................. F-2 Balance sheets, March 31, 1999 and December 31, 1998......................................................... F-3 Statements of operations, for the three months ended March 31, 1999 and the years ended December 31, 1998 and 1997............................................................... F-4 Statement of shareholders' equity (deficit), for the period from January 1, 1997 through March 31, 1999................................................................................... F-5 Statements of cash flows, for the three months ended March 31, 1999 and the years ended December 31, 1998 and 1997............................................................... F-7 Summary of significant accounting policies.................................................................. F-9 Notes to financial statements............................................................................... F-11
F-1 Cordovano and Harvey, P.C. Certified Public Accountants - -------------------------------------------------------------------------------- 201 Steele Street Suite 300 Denver, Colorado 80206 (303) 329-0220 Phone (303) 316-7493 Fax - -------------------------------------------------------------------------------- To the Board of Directors and Shareholders Motorcycle Centers of America, Inc. INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- We have audited the balance sheets of Motorcycle Centers of America, Inc. as of March 31, 1999 and December 31, 1998, and the related statements of operations, shareholders' equity (deficit) and cash flows for the three months ended March 31, 1999 and for the years ended December 31, 1998 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Motorcycle Centers of America, Inc. as of March 31, 1999 and December 31, 1998, and the results of its operations and its cash flows for the three months ended March 31, 1999 and for the years ended December 31, 1998 and 1997, in conformity with generally accepted accounting principles. As discussed to Note J to the financial statements, on April 9, 1999, the Company entered into an Agreement and Plan of Reorganization with Entertainment Universe, Inc. (EUI). As a result of the reorganization, EUI became a wholly owned subsidiary of the Company and the former shareholders of EUI own approximately 91.6 percent of the Company. Cordovano and Harvey, P.C. June 3, 1999 F-2 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- Balance Sheets
March 31, December 31, 1999 1998 --------------------------- ------------------------ ASSETS CURRENT ASSETS Cash............................................................ $ 101,568 $ 887 Marketable securities (Note C).................................. - 8,000 --------------------------- ------------------------ TOTAL CURRENT ASSETS 101,568 8,887 FURNITURE AND EQUIPMENT, less accumulated depreciation of $2,792 and $2,667, respectively (Note D)....... 708 833 INVESTMENTS, less allowance of $40,220 and $40,220, respectively.......................................... - - --------------------------- ------------------------ $ 102,276 $ 9,720 =========================== ======================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable............................................... $ - $ 1,497 Accrued liabilities............................................ 7,000 7,000 Due to officer (Note B)........................................ 66,300 46,437 --------------------------- ------------------------ TOTAL CURRENT LIABILITIES 73,300 54,934 --------------------------- ------------------------ COMMITMENT AND CONTINGENCY (Note H)............................... - - SHAREHOLDERS' EQUITY (DEFICIT) (Note F) Preferred stock, $.10 par value; 40,000,000 shares authorized; -0- and -0- shares issued and outstanding, respectively....... - - Common stock, $.001 par value; 250,000,000 shares authorized; 2,148,098 and 70,098 shares issued and outstanding, respectively 2,148 70 Additional paid-in capital..................................... 171,796 103,814 Deferred offering costs........................................ (5,734) (5,734) Retained deficit............................................... (139,234) (143,364) --------------------------- ------------------------ TOTAL SHAREHOLDERS EQUITY (DEFICIT) 28,976 (45,214) --------------------------- ------------------------ $ 102,276 $ 9,720 =========================== ========================
See accompanying summary of significant accounting policies and Notes to the financial statements. F-3 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- Statements of Operations
Three Months Years ended December 31, Ended -------------------------- March 31, 1999 1998 1997 ------------ ----------- ----------- COSTS AND EXPENSES Occupancy.................................................. $ 1,398 $ 5,256 $ 7,542 Consulting, related parties (Note B)....................... 70,060 - - Consulting................................................. 2,936 - 9,000 Legal and accounting....................................... - 16,495 5,350 Stock transfer fees........................................ 50 2,180 1,593 Brokerage charges.......................................... 3,721 - 1,213 Office..................................................... 2,158 6,991 1,419 Depreciation............................................... 125 722 833 Earnest money paid in failed merger (Note H)............... - 10,000 - Other...................................................... 25 3,959 89 ------------ ----------- ----------- OPERATING LOSS (80,473) (45,603) (27,039) NONOPERATING INCOME (EXPENSE) Interest and dividend income............................... 530 150 63 Interest - - (87) expense.................................................... Loss on write-off of investments........................... - (40,220) - Trading gains and (losses), net (Note C)................... 84,073 (17,220) 19,337 ------------ ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES 4,130 (102,893) (7,726) INCOME TAXES (Note E)...................................... - - - ------------ ----------- ----------- NET INCOME (LOSS) $ 4,130 $(102,893) $ (7,726) ============ =========== =========== Basic income (loss) per common share $0.06 $(1.47) $(0.53) ============ =========== =========== Basic weighted average common shares outstanding 70,098 69,833 14,607 ============ =========== ===========
See accompanying summary of significant accounting policies and notes to the financial statements. F-4 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- Statement of Shareholders' Equity (Deficit) January 1, 1997 through March 31, 1999
Preferred Stock Common Stock Treasury Stock ------------------------------ ------------------------- ------------------------ Shares Par Value Shares Par Value Shares Amount -------------- ----------- ---------- ----------- --------- ----------- Balance, January 1, 1997............... - $ - 5,405 * $ 5 50 * $(1,125) Treasury stock contributed by officer (Notes B & F)......................... - - - - 65 * (2,600) Sale of treasury stock (Note F)........ - - - - (115)* 3,725 Sale of common stock................... - - 47,500 * 48 - - Net loss............................... - - - - - - -------------- ----------- ---------- ----------- --------- ----------- BALANCE, DECEMBER 31, 1997 - - 52,905 * 53 - - Sale of common stock................... - - 18,750 * 19 - - Repurchase common stock, subsequently cancelled............... - - (1,557)* (2) - - Deferred offering costs................ - - - - - - Net loss............................... - - - - - - -------------- ----------- ---------- ----------- --------- ----------- BALANCE, DECEMBER 31, 1998 - - 70,098 * 70 - - Common stock issued for services, at cost of services................... - - 78,000 * 78 - - Common stock issued to former officer for services, at cost of services (Note B).................... - - 2,000,000 * 2,000 - - Net income for the three months ended March 31, 1999................. - - - - - - -------------- ----------- ---------- ----------- --------- ----------- BALANCE, MARCH 31, 1999 - $ - 2,148,098 $2,148 - $ - ============== =========== ========== =========== ========= =========== Additional Deferred Paid-in Offering Retained Capital Costs Deficit Total ------------ --------- ---------- ---------- Balance, January 1, 1997............... $104,037 $ - $ (32,745) $ 70,172 Treasury stock contributed by officer (Notes B & F)......................... - - - (2,600) Sale of treasury stock (Note F)........ (2,362) - - 1,363 Sale of common stock................... 9,452 - - 9,500 Net loss............................... - - (7,726) (7,726) ------------ --------- ---------- ---------- BALANCE, DECEMBER 31, 1997 111,127 - (40,471) 70,709 Sale of common stock................... 3,731 - - 3,750 Repurchase common stock, subsequently cancelled............... (11,044) - - (11,046) Deferred offering costs................ - (5,734) - (5,734) Net loss.............................. - - (102,893) (102,893) ------------ --------- ---------- ---------- BALANCE, DECEMBER 31, 1998 103,814 (5,734) (143,364) (45,214) Common stock issued for services, at cost of services................... 29,982 - - 30,060 Common stock issued to former officer for services, at cost of services (Note B).................... 38,000 - - 40,000 Net income for the three months ended March 31, 1999................. - - 4,130 4,130 ------------ --------- ---------- ---------- BALANCE, MARCH 31, 1999 $171,796 $ (5,734) $ (139,234) $ 28,976 ============ ========= ========== ==========
* Restated for 1 for 20 reverse splits (Note F) See accompanying summary of significant accounting policies and notes to the financial statements. F-5 MOTORCYCLE CENTERS OF AMERICA, INC. ---------------------------------- Statement of Shareholders' Equity (Deficit) January 1, 1997 through March 31, 1999
Preferred Stock Common Stock Treasury Stock Shares Par Value Shares Par Value Shares Amount BALANCE PER AUDIT MARCH 31, 1999 - $ - 2,148,098 $ 2,148 - $ - ============ ========== ============ =========== ======== ========= PRO FORMA (Unaudited) (Note K) Repurchase common stock, subsequently cancelled............. - - (1,845,000) (1,845) - - Common stock subscribed less offering costs of 5,734 - - 885,835 886 - - Shares issued in acquisition of Entertainment Universe 1,832,812 183,281 12,904,000 12,904 - - ------------ ---------- ------------ ----------- -------- --------- PRO FORMA BALANCE, MARCH 31, 1999 (Unaudited) 1,832,812 $ 183,281 14,092,933 $ 14,093 - $ - ============ ========== ============ =========== ======== ========= Additional Deferred Paid-in Offering Retained Capital Costs Deficit Total BALANCE PER AUDIT MARCH 31, 1999 $ 171,796 $ (5,734) $ (139,234) $ 28,976 =========== ======== =========== ======== PRO FORMA (Unaudited) (Note K) Repurchase common stock, subsequently cancelled............. (18,155) - - (20,000) Common stock subscribed less offering costs of 5,734 879,215 5,734 - 885,835 Shares issued in acquisition of Entertainment Universe (196,185) - - - ----------- -------- ----------- -------- PRO FORMA BALANCE, MARCH 31, 1999 (Unaudited) $ 836,671 $ - $ (139,234) $894,811 =========== ======== =========== ========
See accompanying summary of significant accounting policies and notes to the financial statements. F-6 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- Statements of Cash flows
Three Months Ended March 31, Years ended December 31, ----------------------------------- 1999 1998 1997 ---------------- --------------- ---------------- OPERATING ACTIVITIES Net income (loss)................................................... $ 4,131 $(102,893) $ (7,726) Transactions not requiring cash: Depreciation........................................................ 125 723 833 Common stock issued for services.................................... 70,060 - - Unrealized (gains) losses on marketable securities, net..................................................... (84,073) 17,220 (5,775) Loss on write-off of investments.................................... - 40,220 - Changes in current liabilities: Accounts payable and accrued expenses............................... (1,497) 7,579 (4,910) ---------------- --------------- ---------------- NET CASH (USED IN) OPERATING ACTIVITIES (11,254) (37,151) (17,578) ---------------- --------------- ---------------- INVESTING ACTIVITIES Purchases of marketable securities.................................. - (8,000) (31,188) Proceeds from sale of marketable securities......................... 92,073 561 32,313 Repayment of advances to former officer (Note B).................... (5,137) (68,563) (23,150) Advances from former officer (Note B)............................... 25,000 115,000 48,080 ---------------- --------------- ---------------- NET CASH PROVIDED BY INVESTING ACTIVITIES 111,936 38,998 26,055 ---------------- --------------- ---------------- FINANCING ACTIVITIES Purchases of treasury stock......................................... - (11,046) (2,600) Proceeds from sale of treasury stock................................ - - 1,363 Payments for deferred offering costs................................ - (5,734) - Proceeds from issuance of common stock.............................. - 3,750 9,500 Principal payments on notes payable................................. - - (5,000) ---------------- --------------- ---------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES - (13,030) 3,263 ---------------- --------------- ----------------
See accompanying summary of significant accounting policies and notes to the financial statements. F-7 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- Statements of Cash flows
Three Months Ended March 31, Years ended December 31, ------------------------------------------- 1999 1998 1997 --------------------- --------------------- ------------------ CHANGE IN CASH AND CASH EQUIVALENTS... 100,681 (11,184) 11,740 Cash and cash equivalents, beginning of period 887 12,071 331 --------------------- --------------------- ------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $101,567 $ 887 $12,071 ===================== ===================== ================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for: Interest........................................ $ - $ - $ 874 Income $ - $ - $ - taxes........................................... ===================== ===================== ================== Noncash investing and financing transactions: Receipt of investments as payment for advances (Note $ - $ - $46,600 B)................................................... ===================== ===================== ================== Treasury stock subsequently cancelled........................ $ 11,046 $ - $ - ===================== ===================== ==================
See accompanying summary of significant accounting policies and notes to the financial statements. F-8 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES March 31, 1999 Use of estimates - -------------------------------------------------------------------- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash equivalents - -------------------------------------------------------------------- For the purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Marketable securities Marketable securities consist of various equity securities and are stated at current market value. All equity securities are considered "trading" securities under the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Accordingly, unrealized gains and losses on equity securities are reflected in the accompanying statements of operations. Investments Investments are recorded at cost. The Company's investments consist of less than a twenty-percent ownership in a company whose stock is thinly traded. The investments were written down to net realizable value at December 31, 1998 and March 31, 1999. Furniture and equipment Furniture and equipment are recorded at cost and are depreciated using the straight-line method over the useful lives of the assets, beginning at the time the assets are placed into operation. Upon retirement or disposition of the furniture and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations. Repairs and maintenance are charged to expense as incurred and expenditures for additions and improvements are capitalized. Income taxes - --------------------------------------------------------------------------- Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the recorded book basis and tax basis of assets and liabilities for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future federal income taxes. F-9 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES March 31, 1999 Treasury stock - ------------------------------------------------------------------- The Company accounts for purchases and reissuances of treasury stock using the cost method. Under the cost method, each acquisition of treasury stock is accounted for at cost. Upon the sale or disposition, the treasury stock account is reduced for an amount equal to the number of shares sold, multiplied by the cost per share. The difference is treated as paid-in capital. Fair value of financial instruments SFAS 107, "Disclosure About Fair Value of Financial Instruments," requires certain disclosures regarding the fair value of financial instruments. The Company has determined, based on available market information and appropriate valuation methodologies, the fair value of its financial instruments approximates carrying value. The carrying amounts of cash, accounts payable, and other accrued liabilities approximate fair value due to the short-term maturity of the instruments. Earnings per common share Effective December 31, 1997, SFAS 128 "Earnings per Share" requires a dual presentation of earnings per share-basic and diluted. Basic earnings per common share has been computed based on the weighted average number of common shares outstanding. Diluted earnings per share reflects the increase in weighted average common shares outstanding that would result from the assumed exercise of outstanding stock options. Basic and diluted earnings per share were the same for all prior periods presented due to the Company's simple capital structure. Earnings per share calculations are reported on a post-split basis for all periods presented. New accounting pronouncements - ----------------------------------------------------------------- The Company has adopted the following new accounting pronouncements for the year ended December 31, 1998. There was no effect on the financial statements presented from the adoption of the new pronouncements. SFAS No. 130, "Reporting Comprehensive Income," requires the reporting and display of total comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," is based on the "management" approach for reporting segments. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosure about the Company's products, the geographic areas in which it earns revenue and holds long-lived assets, and its major customers. SFAS No. 132, "Employers' Disclosures about Pensions and Other Post-retirement Benefits," which requires additional disclosures about pension and other post-retirement benefit plans, but does not change the measurement or recognition of those plans. F-10 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- NOTES TO FINANCIAL STATEMENTS March 31, 1999 Note A: Nature of operations - ----------------------------- Effective December 19, 1994, Motorcycle Centers of America, Inc. (MCAI) (formerly NABCO, Inc.) merged with Humanus Corporation (Humanus), which was incorporated under the laws of Colorado on February 23, 1988. Subsequent to the merger, Humanus changed its name to NABCO, Inc. NABCO was originally incorporated for the purpose of manufacturing bagels and selling them to its subfranchisor and franchisees. In August 1995, NABCO sold its bagel manufacturing operations, and on August 28, 1995, it officially terminated operations and became an inactive shell company. On January 26, 1998, the Company entered into an Agreement and Plan of Reorganization with Sandale Holdings, Limited, to acquire a motorcycle manufacturing company in China. The Plan of Reorganization was terminated on August 14, 1998 (see Note I). In connection with the Plan of Reorganization, the Company redomiciled in Nevada. On April 15, 1998, NABCO entered into a merger with MCAI whereby all of the outstanding shares of common stock in NABCO, amounting to 1,458,807 shares, were issued to MCAI in exchange for 1,458,807 shares of the $.001 par value common stock of MCAI. MCAI was the sole surviving corporation. The shares of NABCO were cancelled following the merger. As a result of the merger, the Company previously known as NABCO, Inc. became Motorcycle Centers of America, Inc. On October 4, 1998, the Company entered into an Agreement and Plan of Reorganization with DDA America, LLC to acquire all of the issued and outstanding stock of DDA America, LLC. The Plan of Reorganization was terminated on March 1, 1999 (see Note I). On April 9, 1999, the Company entered into an Agreement and Plan of Reorganization with Entertainment Universe, Inc. to acquire all of the issued and outstanding stock of Entertainment Universe, Inc. (see Note J). Note B: Related party transactions - ----------------------------------- Three months ended March 31, 1999 - --------------------------------- During the three months ended March 31, 1999, an officer advanced the Company $25,000 for working capital. The Company repaid the officer $5,137 during 1999. The remaining balance of $66,300 is included in the accompanying financial statements as due to former officer. During the three months ended March 31, 1999, the Company issued 2,000,000 shares of its $.001 par value common stock to an officer in exchange for services. The transaction was valued at the cost of the services rendered of $40,000 (see Note J). During the three months ended March 31, 1999, the Company issued 78,000 shares of its $.001 par value common stock to various shareholders in exchange for services. The transaction was valued at the cost of the services rendered of $30,060. F-11 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- NOTES TO FINANCIAL STATEMENTS March 31, 1999 Note B: Related party transactions, continued - ---------------------------------------------- 1998 - ---- During the year ended December 31, 1998, an officer advanced the Company $115,000 for working capital. The Company repaid the officer $68,563 during 1998. The remaining balance of $46,437 is included in the accompanying financial statements as due to former officer. 1997 - ---- At January 1, 1997, an officer owed the Company $71,530 in advances. During 1997, the Company advanced the officer an additional $23,150, and the officer repaid the total $94,680. The advances were repaid in cash totaling $48,080 and marketable securities totaling $46,600. The Company recognized $12,938 in realized gains and $15,000 in unrealized gains from marketable securities received from the officer in 1997. Note C: Marketable securities - ------------------------------ Marketable securities consisted of the following at March 31, 1999 and December 31, 1998:
March 31, December 31, 1999 1998 -------------------------------------- ------------------------------------- Estimated Estimated Market Market Cost Value Cost Value -------------------------------------- ------------------------------------- Equity securities ......................... $ - $ - $8,000 $8,000 ====================================== =====================================
Following is a summary of investment earnings recognized in income during the three months ended March 31, 1999 and the years ended December 31, 1998 and 1997:
March 31, December 31, ------------------------------------------------ 1999 1998 1997 --------------------- --------------------- --------------------- Trading securities: Realized gains................................... $84,073 $ - $13,562 Realized losses.................................. - (6,440) - --------------------- --------------------- --------------------- Realized gains (losses), net 84,073 (6,440) 13,562 --------------------- --------------------- --------------------- Unrealized gains................................. - - 15,000 Unrealized losses................................ - (10,780) (9,225) --------------------- --------------------- --------------------- Unrealized gains (losses), net - (10,780) 5,775 --------------------- --------------------- --------------------- GAIN (LOSS) ON TRADING SECURITIES, NET $84,073 $(17,220) $19,337 ===================== ===================== =====================
F-12 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- NOTES TO FINANCIAL STATEMENTS March 31, 1999 Note D: Furniture and equipment - -------------------------------- Furniture and equipment consisted of the following at March 31, 1999 and December 31, 1998:
March 31, December 31, 1999 1998 -------------------- --------------------- Office furniture ........................................... $ 2,500 $ 2,500 Computer equipment ......................................... 1,000 1,000 -------------------- --------------------- 3,500 3,500 Less: accumulated depreciation ........................................ (2,792) (2,667) -------------------- --------------------- $ 708 $ 833 ==================== =====================
Note E: Income taxes A reconciliation of the U.S. statutory federal income tax rate to the effective tax rate follows for the three months ended March 31, 1999 and the years ended December 31, 1998 and 1997:
March 31, December 31, ------------------------------------------------- 1999 1998 1997 --------------------- --------------------- --------------------- U.S. statutory federal rate ........................ 15.00% 20.57% 15.00% State income tax rate, Net of federal benefit .......................... 4.25% 4.15% 4.25 % Unrealized gains and losses on marketable securities, net ...................... (0.00%) (2.75%) (8.21%) Net operating loss for which no tax benefit Is currently available .......................... (19.25%) (21.97%) (11.04%) --------------------- --------------------- --------------------- ......................... -% -% -% ===================== ===================== =====================
The current tax benefit (expense) for the three months ended March 31, 1999 and the years ended December 31, 1998 and 1997 totaled $(795), $22,608 and $853, respectively, which have been offset by the valuation allowance. The valuation allowance offsets the net deferred tax asset for which there is no assurance of recovery. The change in the valuation allowance for the three months ended March 31, 1999 and the years ended December 31, 1998 and 1997 totaled $(795), $22,608 and $853, respectively. The net operating loss carryforward expires through the year 2019. The valuation allowance will be evaluated at the end of each year, considering positive and negative evidence about whether the deferred tax asset will be realized. At that time, the allowance will either be increased or reduced; reduction could result in the complete elimination of the allowance if positive evidence indicates that the value of the deferred tax assets is no longer impaired and the allowance is no longer required. F-13 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- NOTES TO FINANCIAL STATEMENTS March 31, 1999 Note F: Shareholders' equity - ----------------------------- Preferred stock - --------------- The Company is authorized to issue 40,000,000 preferred shares with a $.10 par value. The Board of Directors has authority to determine the relative rights and preferences of the preferred shares. Common stock - ------------ The Company is authorized to issue 250,000,000 common shares with a $.001 par value. Shareholders do not have preemptive rights to purchase additional shares and cumulative voting of common shares is not permitted. Treasury stock - -------------- As of January 1, 1996, the Company held 6,000 shares of treasury stock at a cost of $9,750. During 1996, the Company purchased an additional 3,000 shares at a cost of $3,375 and sold 8,000 shares for proceeds of $9,625. As a result, the Company recorded a $2,375 charge against additional paid-in capital for the excess of cost over proceeds from the sale. As of January 1, 1997, the Company held 1,000 shares of treasury stock at a cost of $1,125. During the year ended December 31, 1997, an officer repaid an advance to the Company with 1,300 shares of NABCO stock with a value of $2,600; and the Company sold 2,300 shares of treasury stock for proceeds of $1,363. As a result, the Company recorded a $2,362 charge against additional paid-in capital for the excess of cost over proceeds from the sale. As of December 31, 1997, the Company held no shares of treasury stock. Reverse common stock splits - --------------------------- On April 1, 1999, the Board of Directors approved a 20 for one reverse split of the Company's common stock for all shares outstanding as of March 31, 1999. Every 20 shares held by a shareholder prior to the split was replaced by one share as of April 28, 1999. On August 1, 1997, the Board of Directors approved a 20 for one reverse split of the Company's common stock for all shares outstanding as of August 1, 1997. Every 20 shares held by a shareholder prior to the split was replaced by one share as of August 11, 1997. The accompanying financial statements have been restated to give effect to these reverse splits for all periods presented. F-14 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- NOTES TO FINANCIAL STATEMENTS March 31, 1999 Note G: Commitment and contingency - ----------------------------------- Commitment - ---------- The Company entered into an operating lease for office space during 1997, which commenced December 1, 1997 and terminated on November 30, 1998. The Company renewed the lease through December 31, 1999. Monthly rent payments during 1998 were $438 and the future minimum lease payments total $5,593 due in 1999. Contingency - ----------- As part of the sale of the Company's bagel manufacturing operations in 1995, the Company sold a building with a mortgage payable totaling $91,349. Although the building was sold, the Company remains contingently liable until the note is satisfied. Note H: Terminated plans of reorganization - ------------------------------------------- Sandale Holdings, Limited (Sandale) - ----------------------------------- On January 26, 1998, NABCO (subsequently Motorcycle Centers of America, Inc.) entered into an Agreement and Plan of Reorganization with Sandale, a Bahamian corporation. As part of the reorganization, Sandale agreed to exchange all 10,000,000 of its Ordinary A shares and common shares; for 5,000,000 (pre-split) shares of NABCO's $.001 par value restricted common stock. As a result of the reorganization, Sandale would have become a wholly owned subsidiary of NABCO and the former shareholders of Sandale would have owned approximately 77 percent of NABCO. The Agreement and Plan of Reorganization was terminated on August 14, 1998. DDA America, LLC (DDA) - ---------------------- On October 4, 1998, the Company entered into an Agreement and Plan of Reorganization with DDA, a Delaware corporation. As part of the reorganization, DDA agreed to exchange all of its common shares for 2,700,000 shares of the Company's $.001 par value restricted common stock. As a result of the reorganization, DDA would have become a wholly owned subsidiary of the Company and the former shareholders of DDA would have owned approximately 67.5 percent of the Company. The Agreement and Plan of Reorganization was terminated on March 1, 1999. Earnest money lost in the failed agreement of $10,000 was charged to expense in during the year ended December 31, 1998. Note I: Year 2000 compliance - ----------------------------- The Year 2000 issue (Y2K) is the result of computer programs written using two digits rather than four to define the applicable year. Any of the Company's computer and telecommunications programs that have date sensitive software may recognize a date using "00" as the year 1900 instead of 2000. This could result in system failure or miscalculations causing disruptions in operations, including the ability to process transactions, send invoices, or engage in similar normal business activities. The Company has determined that its equipment is Y2K compliant. F-15 MOTORCYCLE CENTERS OF AMERICA, INC. ----------------------------------- NOTES TO FINANCIAL STATEMENTS March 31, 1999 Note I: Year 2000 compliance, continued - ---------------------------------------- The Company cannot determine the extent to which the Company is vulnerable to third parties' failure to remediate their own Y2K problems. As a result, there can be no guarantee that the systems of other companies on which the Company's business relies will be timely converted, or that failure to convert by another company, or a conversion that is incompatible with the Company's systems, would have a material adverse affect on the Company. In view of the foregoing, there can be no assurance that the Y2K issue will not have a material adverse effect on the Company's business. Note J: Subsequent events - -------------------------- Agreement and Plan of Reorganization - ------------------------------------ On April 9, 1999, the Company entered into an Agreement and Plan of Reorganization with the shareholders of Entertainment Universe, Inc. (EUI), a California corporation. EUI agreed to exchange all of its common shares for 12,904,000 shares of the Company's $.001 par value restricted common stock, and all of its preferred shares for 1,832,812 shares of its Series A six percent convertible preferred stock. As part of the reorganization, the Company agreed to a 20 for 1 reverse split of its restricted common stock prior to the exchange (see Note F). This acquisition will be accounted for as a recapitalization of EUI, with the Company the legal surviving entity. Since the Company had, prior to the recapitalization, no operations, the recapitalization has been accounted for as the sale of 12,904,000 shares of the Company's restricted common stock and 1,832,812 shares of its Series A six percent convertible preferred stock for the net assets of EUI. As a result of the reorganization, EUI became a wholly owned subsidiary of the Company and the former shareholders of EUI own approximately 91.6 percent of the Company. Subscription Agreement Securities Offering - ------------------------------------------ The Company conducted an offering of its $.001 par value common stock from April 1, 1999 through April 6, 1999 pursuant to Rule 504 of Regulation D under the Securities Act of 1933, as amended. A maximum of 900,000 shares was offered pursuant to a Regulation D Subscription Agreement at a price of $1.00 per share. Following the offering termination on April 6, 1999, the Company had received subscriptions for 885,835 shares for a gross amount of $885,835. Purchase of treasury stock - -------------------------- On April 20, 1999, the Company purchased 1,845,000 shares of its outstanding common stock from its former officer for $20,000. The shares were cancelled following the purchase. Note K: Unaudited pro forma information - ---------------------------------------- The unaudited pro forma statement of shareholders' equity (deficit) has been derived from the books and records of the Company to give effect to certain events that occurred subsequent to March 31, 1999 as if they had occurred on March 31, 1999. The unaudited pro forma statement is presented for informational purposes only. The unaudited pro forma statement of shareholders' equity (deficit) should be read in conjunction with Note J of the financial statements. F-16 CD UNIVERSE, INC. FINANCIAL STATEMENTS MARCH 31, 1999 CD UNIVERSE, INC. FINANCIAL STATEMENTS MARCH 31, 1999 INDEX ----- Independent Auditor's Report 1 Balance Sheet 2 Statement of Operations 3 Statement of Stockholder's Deficit 4 Statement of Cash Flows 5 Notes to Financial Statement 6 - 11 INDEPENDENT AUDITOR'S REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF CD UNIVERSE, INC. We have audited the accompanying balance sheet of CD UNIVERSE, INC. as of March 31, 1999 and the related statements of operations, stockholder's deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CD UNIVERSE, INC. as of March 31, 1999, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. MERDINGER, FRUCHTER, ROSEN & CORSO, P.C. Certified Public Accountants New York, New York May 14, 1999 CD UNIVERSE, INC. BALANCE SHEET MARCH 31, 1999 ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 11,335 Accounts Receivable, net of allowance for doubtful accounts of $0 92,938 Inventory 22,647 Due from Officer 157,569 Prepaid Expenses and Other Current Assets 9,629 ---------- Total Current Assets 294,118 Property and Equipment, net of accumulated depreciation of $83,052 225,718 Organization Costs, net of accumulated amortization of $340 510 Goodwill, net of accumulated amortization of $2,000 38,000 ---------- TOTAL ASSETS $ 558,346 ========== LIABILITIES AND STOCKHOLDER'S DEFICIT CURRENT LIABILITIES Accounts Payable and Accrued Expenses $ 942,322 Notes Payable - Officer 105,000 Due to Affiliates (Note 5) 30,000 ---------- Total Current Liabilities 1,077,322 Commitments and Contingencies (Note 7) - STOCKHOLDER'S DEFICIT Common Stock - no par value; authorized 1,000 shares; 1,000 issued and outstanding 1,000 Accumulated Deficit ( 519,976) ---------- Total Stockholder's Deficit ( 518,976) ---------- TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT $ 558,346 ========== The accompanying notes are an integral part of the financial statements. - 2 - CD UNIVERSE, INC. STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1999 REVENUE $8,851,713 COST OF GOODS SOLD 8,264,306 ---------- GROSS PROFIT 587,407 GENERAL AND ADMINISTRATIVE EXPENSES 995,584 ---------- LOSS FROM OPERATIONS ( 408,177) OTHER INCOME 1,013 ---------- NET LOSS $( 407,164) ========== NET LOSS PER COMMON SHARE Basic $( 407.16) ========== Diluted $( 407.16) ========== The accompanying notes are an integral part of the financial statements. - 3 - CD UNIVERSE, INC. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED MARCH 31, 1999 CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $( 407,164) Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities Depreciation and Amortization 47,322 Changes in Certain Assets and Liabilities: (Increase) in Accounts Receivable ( 92,938) Decrease in Inventory 1,230 Decrease in Prepaid Expenses and Other Current Assets 33,402 Increase in Accounts Payable and Accrued Expenses 407,741 ---------- Total Cash Used in Operating Activities ( 10,407) ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase in Property and Equipment ( 113,508) ---------- Total Cash Used in Investing Activities ( 113,508) ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in Notes Payable - Officer 150,000 Repayment of Notes Payable - Officer ( 45,000) Loans from Affiliates 30,000 Repayment of Loans from Affiliates ( 110,395) Loan to Officer ( 156,569) ---------- Total Cash Used By Financing Activities ( 131,964) ---------- NET DECREASE IN CASH AND CASH EQUIVALENTS ( 255,879) CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 267,214 --------- CASH AND CASH EQUIVALENTS - END OF YEAR $ 11,335 ========= CASH PAID DURING THE YEAR FOR: Interest Expense $ 286 ========= Income Taxes $ - ========= The accompanying notes are an integral part of the financial statements. - 5 - CD UNIVERSE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Organization and Line of Business --------------------------------- CD Universe, Inc. was incorporated under the laws of the State of Connecticut on April 7, 1997. The Company was sold to new management in April 1999. The Company sells and distributes compact discs and other video equipment to retail purchasers over the internet. b) Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. c) Concentration of Credit Risk ---------------------------- The Company places its cash in what it believes to be credit-worthy financial institutions. However, cash balances exceeded FDIC insured levels at various times during the year. d) Cash and Cash Equivalents ------------------------- The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents e) Accounts Receivable ------------------- Accounts receivable consist primarily of credit card charges by customers. f) Inventory --------- Inventory consists of compact discs, videos and packaging materials. Inventory is valued at the lower of cost or market using the first- in, first-out method. g) Property and Equipment ---------------------- Property and equipment is stated at cost. Depreciation is computed using the straight-line method based upon the estimated useful lives of the assets. Maintenance and repairs are charged to expense as incurred. h) Goodwill -------- Goodwill resulting from the acquisition of assets accounted for as a purchase is being amortized over 40 years using the straight-line method. i) Organization Costs ------------------ Organization costs are being amortized over 5 years using the straight-line method. - 6 - CD UNIVERSE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) j) Income Taxes ------------ Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed by Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. k) Fair Value of Financial Instruments ----------------------------------- The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value due to the relatively short maturity of these instruments. l) Long-Lived Assets ----------------- Long-lived assets and certain identifiable intangibles to he held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the assets and long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. m) Stock-Based Compensation ------------------------ The Company uses the intrinsic value method of accounting for stock- based compensation in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related interpretations. n) Earnings Per Share ------------------ During 1997, the Company adopted SFAS No. 128, "Earnings Per Share", which requires presentation of basic earnings per share ("Basic EPS") and diluted earnings per share ("Diluted EPS"). - 7 - CD UNIVERSE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) n) Earnings Per Share (continued) ------------------ The computation of basic EPS is computed by dividing income available to common stockholders by the weighted average number of outstanding common shares during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. The computation of diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect. The shares used in the computation for the year ended March 31, 1999 was as follows: Basic 1,000 ===== Diluted 1,000 ===== o) Comprehensive Income -------------------- In June 1997, SFAS No. 130, "Reporting Comprehensive Income", was issued. This statement establishes standards for the reporting and display of comprehensive income and its components in the financial statements. As of March 31, 1999, the Company has no items that represent other comprehensive income and, therefore, has not included a schedule of comprehensive income in the financial statements. p) Impact of Year 2000 Issue ------------------------- During the year ended March 31, 1999, the Company conducted an assessment of issues related to the Year 2000 and determined that it was necessary to modify or replace portions of its software in order to ensure that its computer systems will properly utilize dates beyond December 31, 1999. The Company expects to complete any Year 2000 systems modifications and conversions by the middle of 1999. Currently, the Company does not expect that costs associated with becoming Year 2000 compliant to be material. At this time, the Company cannot determine the impact the Year 2000 will have on its key customers or suppliers. If the Company's customers or suppliers do not convert their systems to become Year 2000 compliant, the Company may be adversely impacted. The Company is addressing these risks in order to reduce the impact on the Company. q) Recent Accounting Pronouncements -------------------------------- During 1998, the FASB issued SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information", which changes the way public companies report information about segments. SFAS No. 131, which is based on the selected segment information quarterly and entity-wide disclosures about products and services, major customers and the material countries in which the entity holds assets and reports revenue. This statement is effective for the Company's fiscal year. The Company is in the process of evaluating the disclosure requirements under this standard. - 8 - CD UNIVERSE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) q) Recent Accounting Pronouncements (continued) -------------------------------- Additionally, during 1998, the America Institute of Certified Accountants' Executive Committee issued Statement of Position Number 98-1 (SOP 98-1), "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use". SOP 98-1 is effective for fiscal years beginning after December 15, 1998. Management believes that the Company is substantially in compliance with this pronouncement and that its implementation will not have a material effect on the Company's financial position, results of operations or cash flows. NOTE 2 - PROPERTY AND EQUIPMENT Property and equipment is summarized as follows at March 31, 1999: Leasehold Improvements $ 40,000 Computer and Other Equipment 268,770 -------- 308,770 Less: Accumulated Depreciation 83,052 -------- Property and Equipment, net $225,718 ======== Depreciation expense for the year ended March 31, 1999 was $46,152. NOTE 3 - INCOME TAXES The components of the provision for income taxes for the year ended March 31, 1999 are as follows: Current Tax Expense U.S. Federal $ - State and Local - ------------ Total Current - ------------ Deferred Tax Expense U.S. Federal $ - State and Local - ------------ Total Deferred - ------------ Total Tax Provision from Continuing Operations $ - ============ - 9 - CD UNIVERSE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 3 - INCOME TAXES (continued) The reconciliation of the effective income tax rate to the Federal statutory rate is as follows: Federal Income Tax Rate ( 34.0)% Deferred Tax Charge (Credit) - Effect on Valuation Allowance 34.0% State Income Tax, Net of Federal Benefit - --------- Effective Income Tax Rate 0.0% ========= At March 31, 1999, the Company had net carryforward losses of approximately $520,000 that can be utilized to offset future taxable income through 2014. Utilization of these net carryforward losses is subject to the limitations of Internal Revenue Code Section 382. The full realization of the tax benefit associated with the carryforward depends predominantly upon the Company's ability to generate taxable income during the carryforward period. A valuation allowance equal to the tax benefit for deferred taxes has been established due to the uncertainty of realizing the benefit of the tax carryforward. Deferred tax assets and liabilities reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of the Company's deferred tax assets (liabilities) are as follows: Loss Carryfowards $ 176,800 Less: Valuation Allowance ( 176,800) ----------- Net Deferred Tax Assets (Liabilities) $ - =========== NOTE 4 - NOTE PAYABLE - OFFICER The Company is indebted to an officer at March 31, 1999 for $105,000. The terms indicate interest is payable at 8% with loan principal and interest payable upon demand. Subsequent to March 31, 1999, the Note was paid down to $85,000. This amount will be settled through a purchase price adjustment upon the acquisition of the Company by Entertainment Universe, Inc. NOTE 5 - RELATED PARTY TRANSACTIONS In prior years, certain of the Company's fixed asset acquisitions and certain expenses were paid for through advances by an entity controlled by the Company's president. These advances, totaling $110,395, were repaid during the year ended March 31, 1999. During the current fiscal year, the Company received advances from an entity controlled by the Company's chairman. These advances totaled $30,000 and remain outstanding at March 31, 1999. Terms of repayment and interest are being negotiated. - 10 - CD UNIVERSE, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 6 - MAJOR VENDOR The Company purchased approximately 90% of its merchandise from one vendor. At March 31, 1999, the balance due to that vendor was approximately $600,000 which was paid in April 1999. The company does not believe that the loss of this vendor would have a material adverse effect on the Company. NOTE 7 - COMMITMENTS AND CONTINGENCIES The Company leases office space under non-cancelable operating lease agreements that expire within the next three years. Future minimum lease payments under these non-cancelable operating leases are as follows: March 31, --------- 2000 $117,000 2001 117,000 2002 107,250 -------- Total $341,250 ======== Rent expense under the office lease for the year ending March 31, 1999 was $82,000. On October 1, 1998, the Company entered into an agreement with Charles Beilman. The agreement stipulates that Charles Beilman will serve as Chief Operating Officer and Chief Technical Officer for an annual compensation of $135,000 and the reimbursement of certain expenditures, as defined in the related agreement. This agreement becomes effective when the Company is acquired and its shares are publicly traded. Mr. Beilman's employment will continue for at least three years from the date the Company goes public. NOTE 8 - SUBSEQUENT EVENTS The Company was acquired by Entertainment Universe, Inc. in April, 1999 as a wholly owned subsidiary. - 11 - CD UNIVERSE, INC. STATEMENT OF STOCKHOLDER'S DEFICIT FOR THE YEAR ENDED MARCH 31, 1999
Total Common Stock Accumulated Stockholder's ------------------------- Shares Amount Deficit Deficit ------------ ----------- -------------- -------------- Balance at March 31, 1998 1,000 $ 1,000 $( 112,812) $( 111,812) Net Loss for the Year Ended March 31, 1999 - - ( 407,164) ( 407,164) ------------ ----------- -------------- -------------- Balance at March 31, 1999 1,000 $ 1,000 $( 519,976) $( 518,976) ------------ ----------- -------------- --------------
The accompanying notes are an integral part of the financial statements. - 4 - CASES LADDER, INC. FINANCIAL STATEMENTS CONTENTS -------- PAGE ---- Independent Auditors' Report 1 Balance Sheets 2 - 3 Statements of Operations 4 Statement of Stockholders' Equity 5 Statements of Cash Flows 6 Notes to Financial Statements 7 - 11 JONATHON P. REUBEN, CPA An Accountancy Corporation [LOGO]-------------------------------------------------------------------------- 23440 Hawthorne Blvd. Suite 270 Torrance CA 90505 (310) 378-3609 . FAX (310) 378-3709 Independent Auditors' Report Board of Directors Cases Ladder, Inc. Newbury Park, California We have audited the accompanying balance sheets of Cases Ladder, Inc. (A California corporation), as of February 28, 1999 and December 31, 1998, and the related statements of operations, stockholders' equity (deficit), and cash flows, for the two months ended February 28, 1999, and for the year ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cases Ladder, Inc. as of February 28, 1999 and December 31, 1998, and the results of its operations and its cash flows for the two months ended February 28, 1999 and for the year ended December 31, 1998, in conformity with generally accepted accounting principles. s/s Jonathon P. Reuben CPA Jonathon P. Reuben, Certified Public Accountant April 9, 1999 CASES LADDER, INC. BALANCE SHEETS - --------------------------------------------------------------------------------
February December 28, 31, 1999 1998 -------------- --------------- ASSETS Current Assets Cash $ 18,135 $ - Accounts Receivable (Net of Allowance for Bad Debts of $6,754 and $5,675) 77,674 65,262 Prepaid Expenses 3,130 - Deferred Tax Asset 698 2,172 Deposits 685 - -------------- -------------- Total Current Assets 100,322 67,434 Computer Equipment and Software 32,268 21,752 ------------ -------------- Total Assets $ 132,590 $ 89,186 ============ ==============
See accompanying notes 2 CASES LADDER, INC. BALANCE SHEETS - --------------------------------------------------------------------------------
February December 28, 31, 1999 1998 --------------- ------------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Bank Overdraft $ - $ 551 Accounts Payable 15,517 18,814 Accrued Payroll and Payroll Taxes 16,961 - Accrued Interest 917 - Income Tax Payable 1,679 800 Customer Deposits - 16,667 Notes Payable - Affiliate 8,349 9,028 Notes Payable - Shareholders 82,620 55,000 --------------- ------------------ Total Current Liabilities 126,043 100,860 Stockholders' Equity (Deficit) Common Stock, No Par Value, authorized 40,000,000 shares, issued and outstanding 7,575,000 shares 2,750 2,750 Retained Earnings (Deficit) 3,797 (14,424) --------------- ------------------ Total Stockholders' Equity (Deficit) 6,547 (11,674) --------------- ------------------ Total Liabilities and Stockholders' Equity (Deficit) $ 132,590 $ 89,186 =============== ==================
See accompanying notes 3 CASES LADDER, INC. STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
Two Months Ended Year Ended February, 28 December 31, 1999 1998 ---------------- ----------------- Net Sales $ 184,556 $ 378,345 Cost of Sales (19,167) (33,660) ---------------- ----------------- Gross Profit 165,389 344,685 General and Administrative Expenses (144,815) (360,019) ---------------- ----------------- Net Income (Loss) Before Provision for Corporate Income Tax 20,574 (15,334) Benefit (Provision) for Corporate Income Tax (2,353) 1,372 ---------------- ----------------- Net Income (Loss) $ 18,221 $ (13,962) ================ =================
See accompanying notes 4 CASES LADDER, INC. STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) - --------------------------------------------------------------------------------
Total Common Stock Retained Stockholders' -------------------------------- Shares Amounts Earnings Equity ---------------- ------------- --------------- ------------------- Balances at January 1, 1998 - $ - $ (462) $ - Original Issuance of Common Stock 7,500,000 2,000 - 2,000 Sale of Common Stock 75,000 750 - 750 Net Loss - - (13,962) (13,962) ---------------- ------------- --------------- ------------------- Balances at December 31, 1998 7,575,000 2,750 (14,424) (11,674) Net Income - - 18,221 18,221 ---------------- ------------- --------------- ------------------- Balances at February 28, 1999 7,575,000 $ 2,750 $ 3,797 $ 6,547 ================ ============= =============== ===================
See accompanying notes 5 CASES LADDER, INC. STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
Two Months Ended Year Ended February 28, December 31, 1999 1998 --------------- ----------------- Cash Flows From Operating Activities: Net Income (Loss) $ 18,221 $ (13,962) Adjustments to Reconcile Net Income (Loss) to Net Cash Provided (Used) by Operations: Depreciation 1,141 280 Allowance for Bad Debts 1,079 5,675 Changes in Operating Assets and Liabilities: Decrease (Increase) in Assets: Accounts Receivable (13,492) (70,936) Prepaid Items and Deposits (3,815) - Deferred Taxes 1,474 (2,172) Increase (Decrease) in Liabilities: Accounts Payable and Accrued Expenses 14,032 19,363 Customer Deposits (16,667) 16,667 Income Tax Payable 879 800 --------------- ----------------- Net Cash Provided (Used) by Operating Activities 2,852 (44,285) --------------- ----------------- Cash Flows from Investing Activities: Equipment Acquisitions (11,658) (22,031) --------------- ----------------- Net Cash Used by Investing Activities (11,658) (22,031) --------------- ----------------- Cash Flows from Financing Activities: Issuance of Common Stock - 2,750 Advances from Shareholders 27,620 55,000 Payments to Affiliates (679) (71,766) Advances from Affiliates - 80,332 --------------- ----------------- Net Cash Provided by Financing Activities 26,941 66,316 --------------- ----------------- Net Increase (Decrease) in Cash and Cash Equivalents 18,135 - Cash and Cash Equivalents - Beginning of Period - --------------- ----------------- Cash and Cash Equivalents - End of Period $ 18,135 $ - =============== =================
See accompanying notes 6 CASES LADDER, INC. NOTES TO FINANCIAL STATEMENTS Note 1 - Nature of Business Cases Ladder, Inc. (the "Company") was incorporated under California State law on August 19, 1998. The Company conducts business in the Internet software and services industry. Prior to incorporation, the Company operated through a bank account under the name of Strategic Alliance Partners, Inc. d.b.a. Cases Ladder. Strategic Alliance is an affiliate of the Company. The fictitious business name statement (the "statement") was filed in Los Angeles County on March 2, 1998. Management maintains that this bank account was opened by the Bank in the wrong name. Management does not know the individual who signed and filed the fictitious business name statement. This individual was not authorized to perform such an act. Further, Management maintains that the Company is not a continuation of Strategic, and that each company is a separate and distinct entity. Note 2 - Summary of Significant Accounting Policies a) Cash The Company maintains all of its cash deposits at one bank. The Company's balance with this bank is insured up to $100,000 as provided by the FDIC. b) Computer Equipment and Software The cost of Computer Equipment and Software is depreciated over the estimated useful lives of the related assets. Depreciation is computed on the straight-line method for both financial and tax reporting purposes. c) Pervasiveness of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. 7 CASES LADDER, INC. NOTES TO FINANCIAL STATEMENTS Note 3 - Computer Equipment and Software The following is a summary of computer equipment and software as of: February 28, December 31, 1999 1998 ------------ ------------ Computer Equipment $ 32,893 $ 21,236 Software 795 795 ------------ ------------ 33,688 22,031 (1,420) (280) ------------ ------------ Less: Accumulated Depreciation $ 32,268 $ 21,751 ============ ============ Depreciation expense charged to operations for the two months ended February 28, 1999 and the year ended December 31, 1998 was $1,140 and $280, respectively. Note 4 - Income Taxes Income taxes are provided based on earnings reported for financial statement purposes pursuant to the provisions of Statement of Financial Accounting Standards No. 109 ("FASB 109"). FASB 109 uses the asset and liability method to account for income taxes which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax basis and financial reporting basis of assets and liabilities. Provision for income taxes for the two months and year ended, February 28, 1999 and December 31, 1998, respectively, consists of the following: February 28, December 31, 1999 1998 ------------ ------------ Taxes currently payable - Federal $ 79 - State 800 800 ------------ ------------ 879 800 8 CASES LADDER, INC. NOTES TO FINANCIAL STATEMENTS Note 4 - Income Taxes (continued)
February 28, December 31, 1999 1998 ----------------- -------------------- Deferred Taxes Federal 214 (315) State 1260 (1,857) ----------------- -------------------- 1,474 (2,172) ----------------- -------------------- Income Tax Expense (Benefit) $ 2,353 $ (1,372) ================= ====================
The deferred tax asset results primarily from a net operating loss carryforward of $11,538 that is available for carryforward to offset federal and state taxable income. It expires in 2018. Note 5 - Notes Payable Notes payable consist of the following at: February 28, December 31, 1999 1998 ------------ ------------ Affiliate $ 8,349 $ 9,028 Officers 82,620 55,000 ------------ ------------ $ 90,969 $ 64,028 ============ ============ Notes payable to affiliates and officers bear interest at 12% and 10% per annum, respectively. All notes payable are unsecured, and are due upon demand. Note 6 - Stock Option Plan The Company has a performance-based stock option plan. Under the plan, the Company may grant options for up to 1.5 million shares of common stock for which no vesting contingencies exist, other than being an employee. The exercise price of each option is set at the discretion of the Board of Directors at the time of each issuance. Management believes that the exercise price of each option is equal to or greater then the market value of the respective shares granted. 9 CASES LADDER, INC. NOTES TO FINANCIAL STATEMENTS Note 6 - Stock Option Plan (Continued) The Company applies APB Opinion 25 in accounting for its performance-based stock option plan. Following is a summary of the status of the plan during the two months ended February 28, 1999 and the year ended December 31, 1998, respectively: Weighted Average Number of Exercise Shares Price ------------------------------ Outstanding at 1-1-98 - $ - Granted 160,000 0.20 Exercised - - Forfeited - - ------------ ------------ Outstanding at 12-31-98 160,000 $ 0.20 ============ ============ Options exercisable at 12-31-98 - $ - ============ ============ Weighted Average Number of Exercise Shares Price ------------------------------ Outstanding at 1-1-99 160,000 $ 0.20 Granted 165,000 0.15 Exercised - - Forfeited - - ------------ ------------ Outstanding at 2-28-99 325,000 $ 0.15 ============ ============ Options exercisable at 2-28-99 - $ - ============ ============ 10 Note 7 - Supplemental Cash Flow Information For the purpose of the statements of cash flows, all highly liquid investments with a maturity of three months or less are considered to be cash equivalents. During the two months ended February 28, 1999 and the year ended December 31, 1998, the Company paid approximately $4,828 and $181 in interest respectively. The Company did not pay any income taxes during the two periods presented. Note 8 - Sales to Major Customers Sales to three major customers amounted to 29.6%, 25.6% and 15.0% of total sales for the two months ended February 28, 1999. Sales to the same three customers amounted to 38.9%, 16.1% and 14.5% of total sales for the year ended December 31, 1998 Note 9 - Concentrations of Credit Risk The Company extends credit to its customers, all of which are companies in the internet software and services industry. Note 10 - Related Parties The Company sales a portion of its products and services to an affiliate. Sales amounted to $466.15 and $7,345.90 for the two months ended February 28, 1999 and December 31, 1998, respectively. Note 11 - Subsequent Events On April 1, 1999, the Board of Directors authorized a 5 for 4 stock split of common stock to stockholders of record on March 14, 1999. The Company is currently negotiating with an unrelated third party for the purpose of selling its assets or a possible merger. Discussions are at an early stage and no definitive plans have been formalized. 11 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. eUniverse, Inc. Date: June 11, 1999 By: /s/ Brad Greenspan ---------------------------- Chairman of the Board Exhibits Exhibit No. Description - ----------- ----------- 3.01 Articles of Incorporation of the Company. 3.02 Amended Articles of Incorporation of the Company regarding change of name. 3.03 Certificate of Amendment of Articles of Incorporation regarding issuance of Preferred Stock. 3.04 Bylaws of the Company. 3.05 Designation of Preferred Stock of Motorcycle Centers of America, Inc. dated April 7, 1999, as filed with the Secretary of the State of Nevada, which defines the rights and preferences of the Preferred Stock of the Company. 10.01 Stock Purchase Agreement by and between Palisades Capital, Inc. and Charles Beilman, dated as of October 1, 1998 (the "Stock Purchase Agreement"). 10.02 Amendment to Stock Purchase Agreement, dated December 29, 1998. 10.03 Amendment No. 2 to Stock Purchase Agreement, dated February 11, 1999. 10.04 Amendment No. 3 to Stock Purchase Agreement, dated as of March ___, 1999. 10.05 Amendment Number 4 to Stock Purchase Agreement, dated as of June 9, 1999. 10.06 Agreement and Plan of Reorganization by and among Motorcycle Centers of America, Inc., Entertainment Universe, Inc. and the principal officers of Entertainment Universe, Inc., dated April 9, 1999. 10.07 Entertainment Universe, Inc. Regulation D Subscription Agreement, dated as of April ___, 1999. 10.08 Entertainment Universe, Inc. Registration Rights Agreement, dated as of April 1999. 10.09 Assignment and Assumption Agreement by and between Entertainment Universe, Inc. and Motorcycle Centers of America, Inc., dated as of April 14, 1999. 10.10 Stock Purchase Agreement by and among Motorcycle Centers of America, Inc. and the shareholders of Case's Ladder, Inc., dated as of April 21, 1999. 10.11 Employment Agreement by and between CD Universe, Inc. and Charles Beilman, dated as of October 1, 1998. 10.12 Contract of Employment by and between Entertainment Universe, Inc. and William R. Wagner, dated March 25, 1999. 10.13 Employment Agreement by and between eUniverse, Inc. and Leland N. Silvas, dated as of April 14, 1999. 10.14 Letter agreement between Entertainment Universe, Inc. and E.P. Opportunity Fund, L.L.C. regarding appointment of a director of Entertainment Universe, Inc., dated April 6, 1999. 10.15 Modification and Restatement of Lease by and between Vincenzo Verna Trustee d/b/a Harvest Assoc-iates and CD Universe, Inc. for the Company's office space in Wallingford, Connecticut, dated as of February 1, 1999. 23.01 Consent of Jonathan P. Reuben, CPA 23.02 Consent of Cordovano & Harvey, PC 23.03 Consent of Merdinger, Fruchter, Rosen & Corso, PC 27.01 Financial Data Schedule EX-3.01 2 ARTICLES OF INCORPORATION OF THE COMPANY EXHIBIT 3.01 FILED IN THE OFFICE OF THE SECRETARY OF STATE OF THE STATE OF NEVADA APR 09 1998 No C7977.98 /s/ Dean Heller DEAN HELLER, SECRETARY OF STATE ARTICLES OF INCORPORATION OF Motorcycle Centers of America, Inc. Pursuant to the provisions of the Nevada Private Corporations Act (Ch. 78, NRS, as amended), the undersigned Corporation hereby adopts the following Articles of Incorporation: FIRST. The name of the Corporation is Motorcycle Centers of America, Inc. SECOND. OFFICE: Its principal office in the State of Nevada is located at Suite 3, 251 Jeanell Drive, Carson City, Nevada 89703. The name and address of its resident agent is Corporate Advisory Services, Inc., Suite 3, 251 Jeanell Drive, Carson City, Nevada 89703. THIRD. PURPOSE: The nature of the business, or objects or purposes proposed to be transacted, promoted or carried on are: To engage in any lawful activity and to manufacture, purchase or otherwise acquire, invest in, own, mortgage, pledge, sell, assign and transfer or otherwise dispose of, trade, deal in and deal with minerals, goods, wares and merchandise and personal property of every class and description. To hold, purchase and convey real and personal estate and mortgage or lease any such real and personal estate with its franchises and to take the same by devise or bequest. To acquire, and pay for in cash, stock or bonds of this corporation or otherwise, the good will, rights, assets and property, and to undertake or assume the whole or any part of the obligations or liabilities of any person, firm, association or corporation. To acquire, hold, use, sell, assign, lease, grant licenses in respect of, mortgage, or otherwise dispose of letters patent of the United States or any foreign country, patent rights, licenses and privileges, inventions, improvements and processes, copyrights, trademarks and trade names, relating to, or useful in connection with, works of art or any other business of this Corporation. To guarantee, purchase, hold, sell, assign, transfer, mortgage, pledge or otherwise dispose of the shares of the capital stock of, or any bonds, securities or evidences of the indebtedness created by any other corporation or corporations of this state, or any other state or government, and while owner of such stock, bonds, securities or evidences of indebtedness, to exercise all the rights, powers and privileges of ownership, including the right to vote, if any. 1 To borrow money and contract debts when necessary for the transaction of its business, or for the exercise of its corporate rights, privileges or franchises, or for any other lawful purpose of its incorporation; to issue bonds, promissory notes, bills of exchange, debentures, and other obligations and evidences of indebtedness, payable at specified time or times, or payable upon the happening of a specified event or events, whether secured by mortgage, pledge, or otherwise, or unsecured, for money borrowed, or in payment for property purchased, or acquired, or for any other lawful objects. To purchase, hold, sell and transfer shares of its own capital stock, and use therefor its capital, capital surplus, surplus, or other property or funds; provided it shall not use its funds or property for the purchase of its own shares of capital stock when such use would cause any impairment of its capital; and provided further, that shares of its own capital stock belonging to it shall not be voted upon, directly or indirectly, nor counted as outstanding, for the purpose of computing any stockholders' quorum or vote. To conduct business, have one or more offices, and hold, purchase, mortgage and convey real and personal property in this state, and in any of the several states, territories, possessions and dependencies of the United States, the District of Columbia, and in any foreign countries. To do all and everything necessary and proper for the accomplishment of the objects hereinbefore enumerated or necessary or incidental to the protection and benefit of the corporation, and, in general, to carry on any lawful business necessary or incidental to the attainment of the objects of the corporation, whether or not such business is similar in nature to the objects hereinbefore set forth. The objects and purposes specified in the foregoing clauses shall, except where otherwise expressed, be in no way limited or restricted by reference to or inference from the terms of any other clause in these articles of incorporation but shall be regarded as independent objects and purposes. FOURTH. CAPITAL STOCK: The amount of the total authorized capital stock of the corporation is Four Million Two Hundred Fifty Thousand Dollars ($4,250,000) consisting of Two Hundred and Fifty Million (250,000,000) shares of one class of common stock of the par value of One Mill ($.001) each; and Forty Million (40,000,000) shares of preferred stock of the par value of Ten Cents ($.10) each, to have such classes, series and preferences as the Board of Directors may determine from time to time. Any and all capital stock issued by the Corporation will be issued in either registered or bearer form, as may be directed by the Board of Directors from time to time, and the fixed consideration for which has been paid and delivered shall be deemed fully paid and not liable for any further call or assessment thereon, and the holders of such stock shall not be liable for any further assessments. 2 There shall be no preemptive rights in connection with the acquisition any capital stock of the Corporation. FIFTH DIRECTORS: The governing board of this Corporation shall be known ----- --------- as directors, and the number of directors may from time to time be increased or decreased in such manner as shall be provided by the by- laws of this Corporation, provided that the number of directors shall not be reduced to less than one (1). The name and post office address of the first board of directors, which shall be one (1) in number, is as follows: NAME POST OFFICE ADDRESSES ---- --------------------- Jay Boisdrenghein 6909 South Holly Circle Suite 235 Englewood, CO 80112 SIXTH. INCORPORATORS: The name and post office address of the ------ ------------- incorporator signing the articles of incorporation is as follows: David J. Wagner 8400 E. Prentice Ave. Penthouse Suite Englewood, Colorado 80111 SEVENTH. TERM: The Corporation is to have perpetual existence. -------- ---- EIGHTH. AUTHORIZATIONS: In furtherance and not in limitation of the ------ -------------- powers conferred by statute, the board of directors is expressly authorized: Subject to the by-laws, to make, alter or amend the by-laws of the Corporation. To fix the amount to be reserved as working capital over and above its capital stock paid in, to authorize and cause to be executed mortgages and liens upon the real and personal property of this Corporation. By resolution passed by a majority of the whole board, to designate one (1) or more committees, each committee to consist of one (1) or more of the directors of the Corporation, which, to the extent provided in the resolution or in the by-laws of the Corporation, shall have and may exercise the powers of the board of directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be stated in the by-laws of the Corporation or as may be determined from time to time by resolution adopted by the board of directors. When and as authorized by the affirmative vote of stockholders holding stock entitling them to exercise at least a majority of the voting power given at a stockholders' meeting called for that purpose, or when authorized by the written consent of the holders of at least a majority of the voting stock issued and outstanding, the board of directors shall have power and authority at any meeting to sell, lease or exchange all of the property and assets of the Corporation, including its good will and its corporate franchises, upon such terms and conditions as its board of directors deems expedient, and for the best interest of the Corporation. NINTH. MEETINGS: Meetings of stockholders may be held outside the State ----- -------- of Nevada, if the by-laws provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Nevada at such place or places as may be designated from time to time by the board of directors or in the by-laws of the Corporation. TENTH. AMENDMENTS: This Corporation reserves the right to amend, alter, ----- ---------- change or repeal any provision contained in the articles of incorporation by majority vote of the shareholders and in the manner now or hereafter prescribed by statute, or by the articles of incorporation, and all rights conferred upon stockholders herein are granted subject to this reservation. ELEVENTH. VOTING: There shall be no cumulative voting permitted in any -------- ------ shareholder election of the Corporation. TWELFTH. INDEMNIFICATION: The Corporation shall indemnify and hold ------- --------------- harmless the officers and directors of the Corporation from any and all liabilities or claims to the fullest extent now, or hereafter from time to time, permitted pursuant to the General Corporation Law of the State of Nevada. I, THE UNDERSIGNED, being the incorporator hereinbefore named for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Nevada, do make and file these 4 articles of incorporation, hereby declaring and certifying that the facts herein stated are true, and accordingly have hereunto set my hand this 17th day of March, 1998. /s/ David J. Wagner ------------------- DAVID J. WAGNER STATE OF COLORADO ) ) SS: COUNTY OF ARAPAHOE ) On this 17th day of March, 1998, before me, a Notary Public, personally appeared DAVID J. WAGNER, who acknowledged that he executed the above instrument. /s/ Veronica Brownell --------------------- NOTARY PUBLIC My Commission Expires: 7-15-2000 5 [LETTERHEAD OF STATE OF NEVADA OFFICE OF THE SECRETARY OF STATE] FILED IN THE OFFICE OF THE SECRETARY OF STATE OF THE STATE OF NEVADA APR 09 1998 No C7977.98 /s/ Dean Heller DEAN HELLER, SECRETARY OF STATE CERTIFICATE OF ACCEPTANCE OF APPOINTMENT BY RESIDENT AGENT In the matter of Motorcycle Centers of America, Inc., ------------------------------------ Name of Corporation I, Corporate Advisory Service, Inc. with address at Suite #3, -------------------------------- Name of Resident Agent Street 251 Jeanell Drive, City of Carson City, State of Nevada, Zip Code 89703, hereby accept appointment as resident agent of the above-named corporation in accordance with NRS 78.090. (mailing address if different: Same as Above) April 6, 1998 /s/ [ILLEGIBLE] President ------------------------------- Signature of Resident Agent NRS 78.090. Except during any period of vacancy described in NRS 78.097, every corporation must have a resident agent, who may be either a natural person or a corporation, resident, or located in this state. Every resident agent must have a street address, where he maintains an office for the service of process, and may have a separate mailing address such as a Post Office Box, which may be different from the street address. The address of the resident agent is the registered office of the corporation in this state. The resident agent may be any bank or banking corporation or other corporation located and doing business in this state. The Certificate of Acceptance must be filed at the time of the initial filing of the corporate papers. SECRETARY OF STATE [SEAL] CORPORATE CHARTER I, DEAN HELLER, the duly elected and qualified Nevada Secretary of State, do hereby certify that MOTORCYCLE CENTERS OF AMERICA, INC. did on April 9, 1998 file in this office the original Articles of Incorporation; that said Articles are now on file and of record in the office of the Secretary of State of the State of Nevada, and further, that said Articles contain all the provisions required by the law of said State of Nevada. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Great Seal of State, at my office, in Carson City, Nevada, on April 10, 1998. [SEAL] /s/ Dean Heller Secretary of State By: /s/ [ILLEGIBLE] Certification Clerk EX-3.02 3 AMENDED ARTICLES OF INCORPORATION OF THE COMPANY EXHIBIT 3.02 AMENDED ARTICLES OF INCORPORATION OF Motorcycle Centers of America, Inc. Pursuant to the provisions of Section 78.320 of the Nevada Revised Statutes, the undersigned Corporation hereby adopts the following Amended Articles of Incorporation as of this date: FIRST. The name of the Corporation is Motorcycle Centers of America, Inc. SECOND. The Articles of Incorporation were filed with the Secretary of State on the 9th day at April, 1998. THIRD. The name and address of the original incorporator is as follows: David J. Wagner Penthouse Suite 8400 East Prentice Ave. Englewood, Colorado 80111 FOURTH. A majority of the Shareholders of the Corporation, by written consent dated April 22, 1999, adopted a resolution to amend the original Articles as follows: Article FIRST is hereby amended to read as follows: FIRST. The name of the Corporation is eUniverse , Inc. Leland Silvas is the President & CEO of the Corporation, and Charles Boilman is the Secretary of the Corporation; and that they 1 have been authorized to execute the foregoing certificate by resolution of the Shareholders, adopted by written resolution dated April 22, 1999, and that the foregoing certificate sets forth the text of the Articles of Incorporation as amended to the date of this certificate. Date April 22, 1999 Motorcycle Centers of America, Inc. By /s/ Leland Silvas -------------------------------- President and /s/ Charles Boilman ------------------------------- Secretary STATE OF CT ) ) SS: Wallingford COUNTY OF New Haven ) On this 23rd day April, 1999, before me, a Notary Public, personally appeared Leland Silvas, the President of Motorcycle Centers of America, Inc., who acknowledged that he had executed the above instrument. /s/ Cecile P. Clavet ----------------------------------- NOTARY PUBLIC My Commission Expires: CECILE P. CLAVET NOTARY PUBLIC MY COMMISSION EXPIRES MAY 31, 1999 2 STATE OF Connecticut ) ) SS: Wallingford COUNTY OF New Haven ) On this 23rd day of April, 1999, before me, a Notary Public, personally appeared Charles Boilman, the Secretary of Motorcycle Centers of America, Inc., who acknowledged that he had executed the above instrument. /s/ Cecile P. Clavet ----------------------------------- NOTARY PUBLIC My Commission Expires: CECILE P. CLAVET NOTARY PUBLIC MY COMMISSION EXPIRES MAY 31, 1999 3 EX-3.03 4 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORTION EXHIBIT 3.03 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION (After issuance of Stock) OF Motorcycle Centers of America, Inc. We the undersigned, Jay Boisdrenghein, President, and David Wollins, Assistant Secretary of Motorcycle Centers of America, Inc. (The Corporation) do hereby certify: That the Board of Directors of the Corporation, by resolution dated March 29, 1999, adopted a resolution to amend the original articles as follows: Article FOURTH is hereby amended to add the following at the end of the first paragraph thereof: Section 1. Designation. The Corporation hereby establishes a new class of shares of the Corporation's $0.10 per share Preferred Stock, which shall be designated as Series A 6% Convertible Preferred Stock (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be ten million (10,000,000). The Series A Preferred Stock shall be offered at a purchase price of Three Dollars and Sixty Cents ($3.60) per share (the "Original Series A Issue Price"), with a six percent (6%) per annum accretion rate as set forth herein. Section 2. Rank. The Series A Preferred Stock shall rank: (a) junior to any other class or series of capital stock of the Company other than Common Stock (defined below) hereafter created specifically ranking by its terms senior to the Series A Preferred Stock (collectively, the "Senior Securities"); (b) senior and prior to all of the Company's Common Stock $.001 par value per share ("Common Stock"); (c) senior and prior to any class or series of capital stock of the Company hereafter created not specifically ranking by its terms senior to or on parity with any Series A Preferred Stock of whatever subdivision (collectively, with the Common Stock, "Junior Securities"); and (d) on parity with any class or series of capital stock of the Company hereafter created specifically ranking by its terms on parity with the Series A Preferred Stock ("Parity 1 Securities") in each case as to distributions of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary (all such distributions being referred to collectively as "Distributions"). Section 3. Dividends. The Series A Preferred Stock will bear no dividends, and the holders of the Series A Preferred Stock ("Holders") shall not be entitled to receive dividends on the Series A Preferred Stock. Section 4. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Company ("Liquidation Event"), either voluntary of involuntary, the then Holders of shares of Series A Preferred Stock shall be entitled to receive, immediately after any distributions to Senior Securities required by the Company's Certificate of Incorporation or any certificate of designation, and prior in preference to any distribution to Junior Securities but in parity with any distribution to Parity Securities, an amount per share equal to the sum of (i) the Original Series A Issue Price for each outstanding share of Series A Preferred Stock and (ii) an amount equal to six percent (6%) of the Original Series A Issue Price, per annum, accruing daily, for the period that has passed since the date that, in connection with the consummation of the purchase by Holder of shares of Series A Preferred Stock from the Company, the escrow agent first received in its possession funds representing full payment for the shares of Series A Preferred Stock (such amount being referred to herein as the "Premium"). If upon the occurrence of such event, and after payment in full of the preferential amounts with respect to the Senior Securities, the assets and funds available to be distributed among the Holders of the Series A Preferred Stock and Parity Securities shall be insufficient to permit the payment to such Holders of the full preferential amounts due to the Holders of the Series A Preferred Stock and the Parity Securities, respectively, then the entire assets and funds of the Company legally available for distribution shall be distributed among the Holders of the Series A Preferred Stock and the Parity Securities, pro rata, based on the respective liquidation amounts to which each such series of stock is entitled by the Company's Certificate of Incorporation and any certificate(s) of designation relating thereto. (b) Upon the completion of the distribution required by Subsection 2 4(a), if assets remain in this Company, they shall be distributed to holders of Junior Securities in accordance with the Company's Certificate of Incorporation including any duly adopted certificate(s) of designation. (c) At each Holder's option, a sale, conveyance or disposition of all or substantially all of the assets of the Company or the effectuation by the Company of a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of shall be deemed to be a Liquidation Event as defined in Section 4(a) hereof; provided, further that (i) a consolidation, merger, acquisition, or other business combination of the Company with or into any other publicly traded company or companies, including those trading on the OTC Bulletin Board, shall not be treated as a Liquidation Event as defined in Section 4(a) but instead shall be treated pursuant to Section 5(d) hereof, and (ii) a consolidation, merger, acquisition, reorganization or other business combination of the Company with or into any other non-publicly traded company or companies shall be treated as a Liquidation Event as defined in Section 4(a). The Company shall not effect any transaction described in Subsection 4(c)(ii) unless it first gives thirty (30) business days prior written notice of such transaction during which time the Holder shall be entitled to immediately convert any or all of its shares of Series A Preferred Stock into Common Stock at the Conversion Price, as defined below, then in effect. (d) In the event that, immediately prior to the closing of a transaction described in Section 4(c) hereof which would constitute a Liquidation Event, the cash distributions required by Section 4(a) or otherwise hereunder, have not been made, the Company shall either: (i) cause such closing to be reasonably postponed until such cash distributions have been made, (ii) cancel such transaction, in which event the fights of the Holders of Series A Preferred Stock shall be the same as existing immediately prior to such proposed transaction, or (iii) agree, and shall require that any successor company remitting from a Liquidation Event agrees, to make such distributions as quickly after the closing of such Liquidation Event as reasonably practicable, upon the same terms and in the same amounts as the Company would have made if such distribution was made immediately prior to the closing of such transaction. 3 Section 5. Conversion. Subject to Section 4(c) herein, the record Holder(s) of the Series A Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): Right to Convert. At any time following six months after the Initial Issuance Date, the record Holder of the Series A Preferred Stock shall be entitled to convert any or all of the aggregate principal amount of the Series A Preferred Stock at the office of the Company or its designated transfer agent (the "Transfer Agent"), into that number of fully-paid and non-assessable shares of Common Stock calculated in accordance with the following formula (the "Conversion Rate"): Number of shares of Common Stock issued upon conversion of one (1) share of Series A Preferred Stock = (.06) (N/365) ($3.60) + $3.60 Conversion Price where, N = the number of days between (i) the date that, in connection with the consummation of the initial purchase by Holder of shares of Series A Preferred Stock from the Company, the escrow agent first received in its possession funds representing full payment for the shares of Series A Preferred Stock for which conversion is being elected, and (ii) the applicable Date of Conversion (as defined in Section 5(b)(iv) below) for the shares of Series A Preferred Stock for which conversion is being elected, and Conversion Price (i) For the period commencing on the Initial Issuance Date, as defined below, and ending seven (7) months thereafter, the Conversion Price is the lesser of (a) $3.60; or (b) the Adjusted Conversion Price; (ii) For the period commencing seven (7) months and one (1) day after the Initial Issuance Date and ending nine months thereafter, the Conversion Price is the lesser of (a) $3.60; (b) the Adjusted Conversion Price; or (c) 100% of the average Closing Bid Price, as defined below, of the Company's Common Stock for the thirty (30) trading days immediately preceding the date which is 4 seven months after the Initial Issuance Date, but in no event shall the Conversion Price be less than $2.00; (iii) After the period which is nine (9) months and one (1) day after the Initial Issuance Date, the Conversion Price is the lesser of (a) $3.60, or (b) the Conversion Price set forth in Section 5(a)(ii), or (c) 100% of the average of the lowest three consecutive Closing Bid price of the Company's Common Stock for the twenty (20) trading days immediately preceding the Date of Conversion. As used herein, "Fixed Conversion Price" shall be $3.60. "Variable Conversion Price" shall be any Conversion price set forth in Section 5(a) other than $3.60. As used herein, "Adjusted Conversion Price" shall mean the Adjusted Conversion Price in the table set forth on Exhibit 1 hereto. As used herein, "Initial Issuance Date" shall mean the date of the first closing of a purchase and sale of the Series A Preferred Stock that occurs pursuant to the offering of the Series A Preferred Stock by the Company. For purposes hereof, any Holder which acquires shares of Series A Preferred Stock from another Holder (the "Transferor") and not upon original issuance from the Company shall be entitled to exercise such Holder's conversion right as to the percentages of such shares specified under Section 5(a) in such amounts and at such times such that the number of shares eligible for conversion by such Holder at any time shall be in the same proportion that the number of shares of Series A Preferred Stock acquired by such Holder from its Transferor bears to the total number of shares of Series A Preferred Stock originally issued by the Company to such Transferor (or its predecessor Transferor). For purposes hereof, the term "Closing Bid Price" shall mean the closing bid price of the Company's Common Stock on the NASDAQ SmallCap Market, or if no longer traded on the NASDAQ SmallCap Market, the closing bid price on the principal national securities exchange or the 5 over-the-counter system on which the Common Stock is so traded and if not available, the mean of the high and low prices on the principal national securities exchange or the over-the-counter system on which the Common Stock is so traded. (b) Mechanics of Conversion. In order to convert Series A Preferred Stock into full shares of Common Stock, the Holder shall send via facsimile, or otherwise deliver, on or prior to 11:59 p.m., New York City time (the "Conversion Notice Deadline") on the Date of Conversion, a copy of the fully executed notice of conversion ("Notice of Conversion") to the Company at the office of the Company and to its designated transfer agent (the "Transfer Agent") for the Series A Preferred Stock stating that the Holder elects to convert, which notice shall specify the Date of Conversion, the number of shares of Series A Preferred Stock to be converted, the applicable Conversion Price and a calculation of the number of shares of Common Stock issuable upon such conversion (together with a copy of the front page of each certificate to be converted). Upon receipt by the Company of a facsimile copy of a Notice of Conversion, the Company shall immediately send, via facsimile, a confirmation of receipt of the Notice of Conversion to the Holder which shall specify that the Notice of Conversion has been received and the name and telephone number of a contact person at the Company whom the Holder should contact regarding information related to the Conversion. No later than one (1) business day after receipt of such confirmation of receipt of Notice of Conversion, the Holder shall surrender to a common courier for delivery to the office of the Company or the Transfer Agent, the original certificates representing the Series A Preferred Stock being converted (the "Preferred Stock Certificates"), duly endorsed for transfer; provided, however, that the Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless either the Preferred Stock Certificates are delivered to the Company or its Transfer Agent as provided above, or the Holder notifies the Company or its Transfer Agent that such certificates have been lost, stolen or destroyed (subject to the requirements of subparagraph (i) below). In the case of a dispute as to the calculation of the Conversion Rate, the Company shall promptly issue to the Holder the number of Shares that are not disputed and shall submit the disputed calculations to its outside accountant via facsimile within three (3) days of receipt of Holder's Notice of Conversion. The Company shall cause the accountant to perform the calculations and notify the 6 Company and Holder of the results no later than two (2) business days from the time it receives the disputed calculations. The accountant's calculation shall be deemed conclusive absent manifest error. (i) Lost or Stolen Certificates. Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of any Preferred Stock Certificates representing shares of Series A Preferred Stock, and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Company, and upon surrender and cancellation of the Preferred Stock Certificate(s), if mutilated, the Company shall execute and deliver new Preferred Stock Certificate(s) of like tenor and date. However, the Company shall not be obligated to re-issue such lost or stolen Preferred Stock Certificates if Holder contemporaneously requests the Company to convert such Series A Preferred Stock into Common Stock. (ii) Delivery of Common Stock Upon Conversion. The Company shall, or shall cause the Transfer Agent, no later than the close of business on the third (3rd) business day (the "Deadline") after receipt by the Company or the Transfer Agent of a facsimile copy of a Notice of Conversion and receipt by Company or the Transfer Agent of all necessary documentation duly executed and in proper form required for conversion, including the original Preferred Stock Certificates to be converted (or after provision for security or indemnification in the case of lost or destroyed certificates, if required), to issue and surrender to a common courier for either overnight or (if delivery is outside the United States) two (2) day delivery to the Holder at the address of the Holder as shown on the stock records of the Company (A) a certificate for the number of shares of Common Stock to which the Holder shall be entitled as aforesaid, and (B) certificate(s) representing the number of shares of Series A Preferred Stock not being exchanged, if necessary. (iii) No Fractional Shares. If any conversion of the Series A Preferred Stock would create a fractional share of Common Stock or a fight to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon conversion, in the aggregate, shall be the next higher number of shares. 7 (iv) Date of Conversion. The date on which conversion occurs (the "Date of Conversion") shall be deemed to be the date set forth in such Notice of Conversion, provided (i) that the advance copy of the Notice of Conversion is sent via facsimile to the Company before 11:59 p.m., New York City time, on the Date of Conversion, and (ii) that the original Preferred Stock Certificates representing the shares of Series A Preferred Stock to be converted are surrendered by depositing such certificates with a common courier, for delivery to the Company or the Transfer Agent as provided above, as soon as practicable after the Date of Conversion, provided that the Date of Conversion shall not occur less than six (6) months after the Initial Issuance Date. The person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record Holder or Holders of such shares of Common Stock on the Date of Conversion. (v) Taxes. The Company shall pay any and all taxes (other than transfer taxes) which may be imposed with respect to the issuance and delivery of the shares of Common Stock pursuant to conversion of the Series A Preferred Stock. (c) Automatic Conversion or Redemption. If at any time after 12 months following the initial effectiveness of the required registration of the Company's Common Stock (under Section 2 of the Company's Registration Rights Agreement relating to its Series A Preferred Stock) the Closing Bid Price of the Company's Common Stock is $16.00 or more for twenty (20) consecutive trading days ("Automatic Conversion Event"), then at any time following the Automatic Conversion Event (regardless of whether the Closing Bid Price of the Company's Common Stock shall at any time following the Automatic Conversion Event be less than $16.00), each share of Series A Preferred Stock outstanding on the date of the Automatic Conversion Event or, if not a business day, the first business day thereafter ("Termination Date") automatically, at the option of the Company, shall either (i) be converted ("Automatic Conversion") into Common Stock on such date at the Conversion Rate then in effect (calculated in accordance with the formula in Section 5(a) above), and the Termination Date shall be deemed the Date of Conversion with respect to such conversion for purposes of this Certificate of Designation, or (ii) be redeemed ("Automatic Redemption") by the Company for cash 8 in an amount equal to the Stated Value (as defined below) of the shares of Series A Preferred Stock being redeemed. If the Company elects to redeem, on the Termination Date, the Company shall send to the Holders of outstanding Series A Preferred Stock notice (the "Automatic Redemption Notice") via facsimile of its intent to effect an Automatic Redemption of the outstanding Series A Preferred Stock. If the Company does not send such notice to Holder on such date, an Automatic Conversion shall be deemed to have occurred. If an Automatic Conversion occurs, the Company and the Holders shall follow the applicable conversion procedures set forth in this Certificate of Designation; provided, however, that the Holders are not required to send the Notice of Conversion contemplated by Section 5(b) hereof. If the Company elects t redeem, each Holder of outstanding Series A Preferred Stock shall send their certificates representing the Series A Preferred Stock to the Company within five (5) days of the date of receipt of the Automatic Redemption Notice from the Company, and the Company shall pay the applicable redemption price to each respective Holder within five (5) days of the receipt of such certificates. The Company shall not be obligated to deliver the redemption price unless the certificates representing the Series A Preferred Stock are delivered to the Company, or, in the event one or more certificates have been lost, stolen, mutilated or destroyed, unless the Holder has complied with Section 5(b)(i). If the Company elects to redeem under this Section 5(c) and the Company fails to pay the Holders the redemption price within five (5) days of its receipt of the certificates representing the shares of Series A Preferred Stock to be redeemed as required by this Section 5(c), then an Automatic Conversion shall be deemed to have occurred and, upon receipt of the Preferred Stock certificates, the Company shall immediately deliver to the Holders the certificates representing the number of shares of Common Stock to which the Holders would have been entitled upon Automatic Conversion. As used herein, "Last Closing Date" shall mean the date of the last closing of a purchase and sale of the Series A Preferred Stock that occurs pursuant to the offering of the Series A Preferred Stock by the Company, and "Stated Value" shall mean the Original Series A Issue Price (as defined in Section 1 hereof) together with the accreted but unpaid Premium as defined in Section 4(a). 9 (d) Adjustment to Conversion Rate. (i) Adjustment to Fixed Conversion Price Due to Stock Split, Stock Dividend, Etc. If, prior to the conversion of all of the Series A Preferred Stock, the number of outstanding shares of Common Stock is increased by a stock split, stock dividend, or other similar event, the Fixed Conversion Price shall be proportionately reduced, or if the number of outstanding shares of Common Stock is decreased by a combination or reclassification of shares, or other similar event, the Fixed Conversion Price shall be proportionately increased. (ii) Adjustment to Variable Conversion Price. If, at any time when any shares of the Series A Preferred Stock are issued and outstanding, the number of outstanding shares of Common Stock is increased or decreased by a stock split, stock dividend or other similar event, which event shall have taken place during the reference period for determination of the Conversion Price for any conversion of the Series A Preferred Stock, then the Variable Conversion Price shall be calculated giving appropriate effect to the stock split, stock dividend, combination, reclassification or other similar event for all relevant trading days immediately preceding the Date of Conversion. (iii) Adjustment Due to Merger, Consolidation, Etc. If, prior to the conversion of all Series A Preferred Stock, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Company shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Company or another entity or there is a sale of all or substantially all of the Company's assets or there is a change of control transaction not deemed to be a Liquidation Event pursuant to Section 4(c), then the Holders of Series A Preferred Stock shall thereafter have the right to receive upon conversion of Series A Preferred Stock, upon the basis and upon the terms and conditions specified herein in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such stock, securities and/or other assets which the Holder would have been entitled to receive in such transaction had the Series A Preferred Stock been converted immediately prior to such transaction, and in any such case appropriate provisions shall be made with respect to the rights 10 and interests of the Holders of the Series A Preferred Stock to the end that the provisions hereof (including, without limitation, provisions for the adjustment of the Conversion Price and of the number of shares issuable upon conversion of the Series A Preferred Stock) shall thereafter be applicable, as nearly as may be practicable in relation to any securities thereafter deliverable upon the exercise hereof. The Company shall not effect any transaction described in this Subsection 5(d)(iii) unless (A) it first gives at least thirty (30) days prior written notice of such merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event (during which time the Holder shall be entitled to convert its shares of Series A Preferred Stock into Common Stock) and (B) the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligations of the Company under this Certificate of Designation including this Subsection 5(d)(iii). (iv) No Fractional Shares. If any adjustment under this Section 5(d) would create a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon conversion shall be the next higher number of shares. Section 6. Voting Rights. Except as otherwise provided herein or by law, the Holder(s) of Series A Preferred Stock, by virtue of their ownership thereof, shall be entitled to cast the number of votes per share thereof on each matter submitted to the Company's holders of Common Stock for voting as equals the number of votes which could be cast by the Holders of the number of shares of Common Stock into which such shares of Series A Preferred Stock could be converted pursuant hereto immediately prior to the taking of such vote (including, without limitation, any shares of Common Stock which would be issuable in payment of accrued and unpaid interest thereon if such shares were converted on the record date and the Company elected to pay such interest in Common Stock). Such vote shall be cast together with those cast by the Holders of Common Stock and not as a separate class except as otherwise provided herein. Section 7. Protective Provision. So long as shares of Series A Preferred Stock are outstanding, the Company shall not without first obtaining the approval (by vote or written consent, 11 as provided by Nevada Law) of the Holders of at least seventy-five percent (75%) of the then outstanding shares of Series A Preferred Stock, and at least seventy-five percent (75%) of the then outstanding Holders: (a) alter or change the rights, preferences or privileges of the Series A Preferred Stock or any securities so as to affect adversely the Series A Preferred Stock; (b) create any new class or series of stock having a preference over or on parity with the Series A Preferred Stock with respect to Distributions (as defined in Section 2 above) or increase the size of the authorized number of Series A Preferred Stock; or (c) do any act or thing not authorized or contemplated by this Certificate of Designation which would result in taxation or the holders of shares of the Series A Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as mended (or any comparable provision of the Internal Revenue Code as hereafter from time to time mended). In the event Holders of at least seventy-five percent (75%) of the then outstanding shares of Series A Preferred Stock and at least seventy-five percent (75%) of the then outstanding Holders agree to allow the Company to alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock, pursuant to Subsection (a) above, so as to affect the Series A Preferred Stock, then the Company will deliver notice of such approved change to the Holders of the Series A Preferred Stock that did not agree to such alteration or change (the "Dissenting Holders") and Dissenting Holders shall have the right for a period of thirty (30) business days to convert pursuant to the terms of this Certificate of Designation as they exist prior to such alteration or change (notwithstanding any other provision herein to the contrary) or continue to hold their shares of Series A Preferred Stock, as amended. Section 8. Status of Converted Stock In the event any shares of Series A Preferred Stock shall be converted pursuant to Section 5 hereof, the shares of Preferred Stock so converted shall be 12 canceled, shall return to the status of authorized but unissued Preferred Stock of no designated series, and shall not be re-issuable by the Company as Series A Preferred Stock. Section 9. Preference Rights. Nothing contained herein shall be construed to prevent the Board of Directors of the Company from issuing one (1) or more series of Preferred Stock with dividend and/or liquidation preferences junior to the dividend and liquidation preferences of the Series A Preferred Stock. Section 10. Authorization and Reservation of Shares of Common Stock. (a) Authorized and Reserved Amount. The Company shall have authorized and reserved and keep available for issuance not less than three million nine hundred thousand (3,900,000) shares of Common Stock (subject to adjustment for stock splits, stock dividends, reclassifications and similar types of events) issuable upon conversion of all outstanding Series A Preferred Stock for the purpose of effecting the conversion of the Series A Preferred Stock (including any shares of Common Stock as a Conversion Failure Payment under Section 11 hereof or issuable upon the failure of the Company to pay a Redemption Amount in accordance with Section 5(c) hereof) issued or to be issued to the Holders (the "Reserved Amount"). The Reserved Amount shall be at least two hundred percent (200%) of the number of shares of Common Stock issuable upon conversion of the Series A Preferred Stock. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to provide for the full conversion of all outstanding Series A Preferred Stock, and issuance of the shares of Common Stock in connection therewith. During any period in which the Reserved Amount is less than two hundred percent (200%) of the number of shares of Common Stock issuable on three (3) consecutive trading days upon conversion of the outstanding Series A Preferred Stock (without giving effect to any limitation on conversion or exercise thereof), the Company shall not reserve or issue shares of Common Stock for any purposes other than the conversion of the Series A Preferred Stock. 13 (b) Increases to Reserved Amount. Without limiting any other provision of this Section 10, if the Reserved Amount for any three (3) consecutive trading days (the last of such three (3) trading days being the "Reservation Trigger Date") is less than two hundred percent (200%) of the number of shares of Common Stock issuable upon conversion of Series A Preferred Stock on such trading days (a "Share Authorization Failure"), the Company shall immediately notify all Holders of such occurrence and shall take all necessary action to increase the Reserved Amount to two hundred percent (200%) of the number of shares of Common Stock then issuable upon conversion of the Series A Preferred Stock within (i) fifteen (15) days following a Reservation Trigger Date if such increase requires solely approval of the Company's Board of Directors and (ii) sixty (60) days following a Reservation Trigger Date if such increase requires approval of the Company's shareholders. (c) Reduction of Reserved Amount Under Certain Circumstances. Prior to complete conversion of all Series A Preferred Stock, the Company shall not reduce the number of shares required to be reserved for issuance under this Section 10 without the written consent of all Holders except for a reduction proportionate to a reverse stock split effected for a business purpose other than affecting the obligations of Holder under this Section 10, which reverse stock split affects all shares of Common Stock equally. (d) Allocation of Reserved Amount. Each increase to the Reserved Amount shall be allocated pro rata among the Holders based on the number of Series A Preferred Stock held by each Holder at the time of the establishment of or increase in the Reserved Amount. In the event a Holder shall sell or otherwise transfer any of such Holder's Series A Preferred Stock, each transferee shall be allocated a pro rata portion of such transferor's Reserved Amount. Any portion of the Reserved Amount which remains allocated to any person or entity which does not hold any Series A Preferred Stock shall be allocated to the remaining Holders, pro rata based on the number of Series A Preferred Stock then held by such Holders. 14 Section 11. Failure To Satisfy Conversions. (a) Conversion Failure Payments. If, at any time, (x) a Holder submits a Notice of Conversion (or is deemed to submit such notice pursuant to Section 5(d) hereof), and the Company fails for any reason to deliver, on or prior to the expiration of the Deadline ("Period") for such conversion, such number of shares of Common Stock (including, but not limited to, any published announcement) to any Holder at any time of its conversion not to issue shares of Common Stock to which such converting Holder is entitled upon such conversion, or (y) the Company provides notice upon exercise by any Holder of its conversion rights in accordance with the terms of this Certificate of Designation (each of (x) and (y) being a "Conversion Failure"), then the Company shall pay to such Holder, in the case of a Conversion Failure described in clause (x) above, and to all Holders, in the case of a Conversion Failure described in clause (y) above, damages in an amount equal to the lower of: (i) "Damages Amount" x "D" x .005; and (ii) the highest interest rate permitted by applicable law, where: "D" means the number of days beginning the date of the Conversion Failure through and including the Cure Date with respect to such Conversion Failure; "Damages Amount" means the Original Series A Issue Price for each share of Series A Preferred Stock subject to conversion plus all accrued and unpaid interest thereon as of the first day of the Conversion Failure; "Cure Date" means (i) with respect to a Conversion Failure described in clause (x) of its definition, the date the Company effects the conversion of the shares of Series A Preferred Stock submitted for conversion and (ii) with respect to a Conversion Failure described in clause (y) of its definition, the date the Company undertakes in writing to issue Common Stock in satisfaction of all 15 conversions of Series A Preferred Stock in accordance with the terms of this Certificate of Designation. The payments to which a Holder shall be entitled pursuant to this Section are referred to herein as "Conversion Failure Payments." The parties agree that the damages caused by a breach hereof would be difficult or impossible to estimate accurately. A Holder may elect to receive accrued Conversion Failure Payments in cash or to convert all or any portion of such accrued Conversion Failure Payments, at any time, into Common Stock at the lowest Conversion Price in effect during the period beginning on the date of the Conversion Failure through the Cure Date for such Conversion Failure. In the event a Holder elects to receive any Conversion Failure Payments in cash, it shall notify the Company in writing no later than three (3) business days after the Deadline and failure to so notify the Company shall entitle the Company, in its sole discretion, to elect to make such Conversion Failure Payments in cash, Common Stock or some combination of the two. In the event a Holder elects to convert all or any portion of the Conversion Failure Payments, such Holder shall indicate on a Notice of Conversion such portion of the Conversion Failure Payments which such Holder elects to so convert in accordance with this Section 11(a) and such conversion shall otherwise be effected in accordance with provisions of Section 5. (b) Buy-In Cure. Unless a Conversion Failure described in clause (y) of Section 11(a) hereof has occurred with respect to such a Holder, if (i) the Company fails for any reason to deliver during the Delivery Period shares of Common Stock to a Holder upon a conversion of the Series A Preferred Stock and (ii) after the applicable Delivery Period with respect to such conversion, a Holder purchases (in an open market transaction or otherwise) shares of Common Stock to make delivery upon a sale by a Holder of the shares of Common Stock (the "Sold Shares") which such Holder anticipated receiving upon such conversion (a "Buy-In"), the Company shall pay such Holder (in addition to any other remedies available to Holder) the amount by which (x) such Holder's total purchase price (including brokerage commission, if any) for the shares of Common Stock so purchased exceeds (y) the net proceeds received by such Holder from the sale of the Sold Shares. For example, if a Holder purchases shares of Common Stock having a total purchase price of $11,000 16 to cover a Buy-In with respect to shares of Common Stock sold for $10,000, the Company will be required to pay such Holder $1,000. A Holder shall provide the Company written notification indicating any amounts payable to Holder pursuant to this Section 11. (c) Adjustment to Conversion Price. If a Holder has not received certificates for all shares of Common Stock within five (5) business days following the expiration of the Delivery Period with respect to a conversion of any portion or any such Holder's Series A Preferred Stock for any reason, then the Conversion Price for the affected Series A Preferred Stock shall thereafter be the lesser of (i) the Fixed Conversion Price on the Conversion Date specified in the Notice of Conversion which resulted in the Conversion Failure and (ii) the lowest Conversion Price in effect during the period beginning on, and including, such Conversion Date through and including the Cure Date. If there shall occur a Conversion Failure of the type described in clause (y) of Section 11(a), then the Fixed Conversion Price with respect to any conversion thereafter shall be the lowest Conversion Price in effect at any time during the period beginning on, and including, the date of the occurrence of such Conversion Failure through and including the Cure Date. The Conversion Price shall thereafter be subject to further adjustment for any events described in Section 5(d). Section 12. Event of Default. (a) Holder's Option to Demand Prepayment. Upon the occurrence of an Event of Default (as herein defined), each Holder shall have the right to elect at any time and from time to time prior to the cure by Company of such Event of Default to have all or any portion of such Holder's then outstanding Series A Preferred Stock prepaid by the Company for an amount equal to the Holder Demand Prepayment Amount (as herein defined). (i) The right of a Holder to elect prepayment shall be exercisable upon the occurrence of an Event of Default by such Holder in its sole discretion by delivery of a Demand Prepayment 17 Notice (as herein defined) in accordance with the procedures set forth in this Section 12. Notwithstanding the exercise of such right, the Holder shall be entitled to exercise all other rights and remedies available under the provisions of this Certificate of Designation and at law or in equity. (ii) A Holder shall effect each demand for prepayment under this Section 12 by giving at least two (2) business days prior written notice (the "Demand Prepayment Notice") of the date which such prepayment is to become effective (the "Effective Date of Demand of Prepayment"), the Series A Preferred Stock selected for prepayment and the Holder Demand Prepayment Amount to the Company at the address and facsimile number provided in the stock records of the Company, which Demand Prepayment Notice shall be deemed to have been delivered on the business day after the date of transmission of Holder's facsimile (with a copy sent by overnight courier to the Company) of such notice. (iii) The Holder Demand Prepayment Amount shall be paid to a Holder whose Series A Preferred Stock are being prepaid within one (1) business day following the Effective Date of Demand of Prepayment; provided, however, that the Company shall not be obligated to deliver any portion of the Holder Demand Prepayment Amount until one (1) business day following either the date on which the Series A Preferred Stock being prepaid are delivered to the office of the Company or its transfer agent, or the date on which the Holder notifies the Company or the Transfer Agent that such Series A Preferred Stock have been lost, stolen or destroyed and delivers the documentation required in accordance with Section 5(b)(i) hereof. (b) Holder Demand Prepayment Amount. The "Holder Demand Prepayment Amount" means the greater off (a) 1.3 times the Stated Value of the Series A Preferred Stock for which demand is being made, plus all accrued and unpaid interest thereon and accrued and unpaid Conversion Failure Payments (if any) through the date of prepayment and (b) the product of (1) the highest price at which the Common Stock is traded on the date of the Event of Default (or the most recent highest closing bid price if the Common Stock is not traded on such date) divided by the Conversion Price in effect as of the date of the Event of Default, and (2) the sum of the Stated Value 18 and all accrued and unpaid Conversion Failure Payments (if any) through the date of prepayment. (c) Events of Default. An "Event of Default" means any one of the following: (i) a Conversion Failure described in Section 11(a) hereof; (ii) a Share Authorization Failure described in Section 10(b) hereof, if such Share Authorization Failure continues uncured for (x) fifteen (15) days following a Reservation Trigger Date if such increase requires solely the approval of the Company's Board of Directors and (y) sixty (60) days after the Reservation Trigger Date if such increase requires approval of the Company's shareholders; (iii) the Company fails, and such failure continues uncured for three (3) business days after the Company has been notified thereof in writing by a Holder, to satisfy the share reservation requirements of Section 10 hereof; (iv) the Company fails to maintain an effective registration statement as required by Section 2, Section 3 or Section 6 of the Registration Rights Agreement between the Company and the Holder(s) (the "Registration Rights Agreement") except where such failure lasts no longer than three (3) consecutive trading days and is caused solely by failure of the Securities and Exchange Commission to timely review the customary submission of or respond to the customary requests of the Company; (v) for three (3) consecutive trading days or for an aggregate of ten (10) trading days in any nine (9) month period, the Common Stock (including any of the shares of Common Stock issuable upon conversion of the Series a Preferred Stock and exercise of the Common Warrants) is (i) suspended from trading on any of the NASDAQ SmallCap, NMS, NYSE, AMEX or the OTC Bulletin Board, or (ii) is not qualified for trading on at least one of NASDAQ SmallCap, NMS, NYSE, AMEX or the OTC Bulletin Board; 19 (vi) the Company fails, and such failure continues uncured for three (3) business days after the Company has been notified thereof in writing by a Holder, to remove any restrictive legend on any certificate for any shares of Common Stock issued to a Holder upon conversion of any Series A Preferred Stock as and when required by this Certificate of Designation and the Subscription Agreement, between the Company and the Holder(s) (the "Subscription Agreement") or the Resignation Rights Agreement; (vii) the Company breaches, and such breach continues uncured for three (3) business days after the Company has been notified thereof in writing by a Holder, any significant covenant or other material term or condition of this Certificate of Designation, the Subscription Agreement or the Registration Rights Agreement; (viii) any representation or warranty of the Company made herein or in any agreement, statement or certificate given in writing pursuant hereto or in connection herewith (including, without limitation, the Subscription Agreement and Registration Rights Agreement), shall be false or misleading in any material respect when made; (ix) the Company or any subsidiary of the Company shall make an assignment for the benefit of its creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such receiver or trustee shall otherwise be appointed; (x) bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Company or any subsidiary of the Company (and such proceedings shall continue unstayed for thirty (30) days); or (xi) the Company fails to file a registration statement on Form 10 (to register securities pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934) within sixty (60) days of the Initial Issuance Date (as defined in Section 5 of the Company's Certificate of Designation of 20 Preferred Stock), or such registration statement is not declared effective within one hundred fifty (150) days of the Initial Issuance Date. (d) Failure to Pay Damages Amount. If the Company fails to pay the Holder Demand Prepayment Amount within five (5) business days of its receipt of a Demand Prepayment Notice, then such Holder shall have the right, at any time and from time to time prior to the payment of the Holder Demand Prepayment Amount, to require the Company, upon written notice, to immediately convert (in accordance with the terms of Section 5) all or any portion of the Holder Demand Prepayment Amount, into shares of Common Stock at the then current Conversion Price, provided that if the Company has not delivered the full number of shares of Common Stock issuable upon such conversion within five (5) business days after the Company receives written notice of such conversion, the Conversion Price with respect to such Holder Demand Prepayment Amount shall thereafter be deemed to be at the lowest Conversion Price in effect during the period beginning on the date of the Event of Default through the date on which the Company delivers to the Holder the full number of freely tradable shares of Common Stock issuable upon such conversion. In the event the Company is not able to pay all amounts due and payable with respect to all Series A Preferred Stock subject to Holder Demand Prepayment Notices, the Company shall pay the Holders such amounts pro rata, based on the total amounts payable to such Holder relative to the total amounts payable to all Holders. This Amendment was duly adopted by the Board of Directors of the Corporation as permitted under the authority of Section 78.1955 of the Nevada Revised Statutes, as amended and the Corporation's Articles of Incorporation. Date: April 7, 1999. Motorcycle Centers of America, Inc. By --------------------------------- President and ------------------------------- Secretary 21 STATE OF COLORADO ) ) SS: COUNTY OF ARAPAHOE ) On this __ day of _________, 1999, before me, a Notary Public, personally appeared Jay Boisdrenghein, the President of Motorcycle Centers of America, Inc., who acknowledged that he executed the above instrument. -------------------------- NOTARY PUBLIC My Commission Expires: STATE OF COLORADO ) ) SS: COUNTY OF ARAPAHOE ) On this __ day of _________, 1999, before me, a Notary Public, personally appeared David Wollins, the Assistant Secretary of Motorcycle Centers of America, Inc., who acknowledged that he executed the above instrument. -------------------------- NOTARY PUBLIC My Commission Expires: 22 EX-3.04 5 BYLAWS OF THE COMPANY EXHIBIT 3.04 BYLAWS OF MOTORCYCLE CENTERS OF AMERICA, INC. as of April 10, 1998 ARTICLE I Offices ------- The principal office of the Corporation shall initially be located at 6909 South Holly Street, Englewood, Colorado 80112 and other offices at such places within or without the State of Nevada and as the Board of Directors may from time to time establish. ARTICLE II Registered Office and Agent --------------------------- The registered office of the Corporation shall be located at 251 Jeanell Drive, Suite 3, Carson City, Nevada 89703, and the registered agent shall be Corporate Advisory Service, Inc. The Board of Directors may, by appropriate resolution from time to time, change the registered office and/or agent. ARTICLE III Meetings of Stockholders ------------------------ Section 1. Annual Meetings. The annual meeting of the Stockholders for --------------- the election of Directors and for the transaction of such other business as may properly come before such meeting shall be held at such time and date as the Board of Directors shall designate from time to time by resolution duly adopted. Section 2. Special Meetings. A special meeting of the Stockholders may ---------------- be called at any time by the President, the Chairman of the Board of Directors, or the Board of Directors, and shall be called by the President or the Chairman of the Board of Directors upon the written request of Stockholders of record holding in the aggregate fifty-one percent (51%) or more of the outstanding shares of stock of the Corporation entitled to vote, such written request to state the purpose or purposes of the meeting and to be delivered to the President or the Chairman of the Board of Directors. Section 3. Place of Meetings. All meetings of the Stockholders shall be ----------------- held at the principal office of the Corporation or at such other place, within or without the State of Nevada, as shall be determined from time to time by the Board of Directors or the Stockholders of the Corporation. Section 4. Change in Time or Place of Meetings. The time and place ----------------------------------- specified in this Article III for annual meetings shall not be changed within thirty (30) days next before the day on which such meeting is to be held. A notice of any such change shall be given to each Stockholder at least twenty (20) days before the meeting, in person or by letter mailed to his last known post office address. Section 5. Notice of Meetings. Written notice, stating the place, day ------------------ and hour of the meeting, and in the case of a special meeting, the purposes for which the meeting is called, shall be given by or under the direction of either the President, the Chairman of the Board of Directors, or Secretary at least ten (10) days but not more than fifty (50) days before the date fixed for such meeting. Notice shall be given to each Stockholder entitled to vote at such meeting, of record at the close of business on the day fixed by the Board of Directors as a record date for the determination of the Stockholders entitled to vote at such meeting, or if no such date has been fixed, of record at the close of business on the day next preceding the day on which notice is given. Notice shall be in writing and shall be delivered to each Stockholder in person or sent by United States Mail, postage prepaid, addressed as set forth on the books of the Corporation. A waiver of such notice, in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to such notice. Except as otherwise required by statute, notice of any adjourned meeting of the Stockholders shall not be required. Section 6. Quorum. Except as may otherwise be required by statute, the ------ presence at any meeting, in person or by proxy, of the holders of record of one- third of the shares then issued and outstanding and entitled to vote shall be necessary and sufficient to constitute a quorum for the transaction of business. In the absence of a quorum, a majority in interest of the Stockholders entitled to vote, present in person or by proxy, or, if no Stockholder entitled to vote is present in person or by proxy, any Officer entitled to preside or act as secretary of such meeting, may adjourn the meeting from time to time for a period not exceeding sixty (60) days in any one case. At any such adjourned meeting at which a quorum may be present, any business may be transacted which might have been transacted at the meeting as originally called. The Stockholders present at a duly organized meeting may continue to do business until adjournment, notwithstanding the withdrawal of enough Stockholders to leave less than a quorum. Section 7. Voting. Except as may otherwise be provided by statute or ------ these Bylaws, including the provisions of Section 4 of Article VIII hereof, each Stockholder shall at every meeting of the Stockholders be entitled to one (1) vote, in person or by proxy, for each share of the voting capital stock held by such Stockholder. However, no proxy shall be voted on after eleven (11) months from its date, unless the proxy provides for a longer period. At all meetings of the Stockholders, except as may otherwise be required by statute, the Articles of Incorporation of this Corporation, or these Bylaws, if a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the Stockholders. Persons holding stock in a fiduciary capacity shall be entitled to vote the shares so held, and persons whose stock is pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the Corporation he shall have expressly empowered the pledgee to vote thereon, in which case only the pledgee or his proxy may represent said stock and vote thereon. Shares of the capital stock of the Corporation belonging to the Corporation shall not be voted directly or indirectly. Section 8. Consent of Stockholders in Lieu of Meeting. Whenever the vote ------------------------------------------ of Stockholders at a meeting thereof is required or permitted to be taken in connection with any corporate action, by any provision of statute, these Bylaws, or the Articles of Incorporation, the meeting and vote of Stockholders may be dispensed with if all the Stockholders who would have been entitled to vote upon the action if such meeting were held shall consent in writing to such corporate action being taken. 3 Section 9. Telephonic Meeting. Any meeting held under this Article III ------------------ may be held by telephone, in accordance with the provisions of the Nevada Private Corporations Act. Section 10. List of Stockholders Entitled to Vote. The Officer who has ------------------------------------- charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every annual meeting, a complete list of the Stockholders entitled to vote at such meeting, arranged in alphabetical order, and showing the address of each Stockholder and the number of shares registered in the name of each Stockholder. Such list shall be open to the examination of any Stockholder during ordinary business hours, for a period of at least ten (10) days prior to election, either at a place within the city, town or village where the election is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where said meeting is to be held. The list shall be produced and kept at the time and place of election during the whole time thereof and be subject to the inspection of any Stockholder who may be present. ARTICLE IV Board of Directors ------------------ Section 1. General Powers. The business and affairs of the Corporation -------------- shall be managed by the Board of Directors, except as otherwise provided by statute, the Articles of Incorporation of the Corporation, or these Bylaws. Section 2. Number and Qualifications. The Board of Directors shall ------------------------- consist of at least one (1) member, and not more than nine (9) members, as shall be designated by the Board of Directors from time to time, and in the absence of such designation, the Board of Directors shall consist of one (1) member. This number may be changed from time to time by resolution of the Board of Directors. Directors need not be residents of the State of Nevada or Stockholders of the Corporation. Directors shall be natural persons of the age of eighteen (18) years or older. Section 3. Election and Term of Office. Members of the initial Board of --------------------------- Directors of the Corporation shall hold office until the first annual meeting of Stockholders. At the first annual 4 meeting of Stockholders, and at each annual meeting thereafter, the Stockholders shall elect Directors to hold office until the next succeeding annual meeting. Each Director shall hold office until his successor is duly elected and qualified, unless sooner displaced. Election of Directors need not be by ballot. Section 4. Compensation. The Board of Directors may provide by ------------ resolution that the Corporation shall allow a fixed sum and reimbursement of expenses for attendance at meetings of the Board of Directors and for other services rendered on behalf of the Corporation. Any Director of the Corporation may also serve the Corporation in any other capacity, and receive compensation therefor in any form, as the same may be determined by the Board in accordance with these Bylaws. Section 5. Removals and Resignations. Except as may otherwise be ------------------------- provided by statute, the Stockholders may, at any special meeting called for the purpose, by a vote of the holders of the majority of the shares then entitled to vote at an election of Directors, remove any or all Directors from office, with or without cause. A Director may resign at any time by giving written notice to either the Board of Directors, the President, the Chairman of the Board of Directors, or the Secretary of the Corporation. The resignation shall take effect immediately upon the receipt of the notice, or at any later period of time specified therein. The acceptance of such resignation shall not be necessary to make it effective, unless the resignation requires acceptance for it to be effective. Section 6. Vacancies. Any vacancy occurring in the office of a --------- Director, whether by reason of an increase in the number of directorships or otherwise, may be filled by a majority of the Directors then in office, though less than a quorum. A Director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office, unless sooner displaced. When one or more Directors resign from the Board, effective at a future date, a majority of the Directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective. Each Director so chosen shall hold office as herein provided in the filling of 5 other vacancies. Section 7. Committees. By resolution adopted by a majority of the Board ---------- of Directors, the Board may designate one or more committees, including an Executive Committee, each consisting of one (1) or more Directors. The Board of Directors may designate one (1) or more Directors as alternate members of any such committee, who may replace any absent or disqualified member at any meeting of such committee. Any such committee, to the extent provided in the resolution and except as may otherwise be provided by statute, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require the same. The designation of such committee and the delegation thereto of authority shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed upon it or him by law. If there be more than two (2) members on such committee, a majority of any such committee may determine its action and may fix the time and place of its meetings, unless provided otherwise by the Board. If there be only two (2) members, unanimity of action shall be required. Committee action may be by way of a written consent signed by all committee members. The Board shall have the power at any time to fill vacancies on committees, to discharge or abolish any such committee, and to change the size of any such committee. Except as otherwise prescribed by the Board of Directors, each committee may adopt such rules and regulations governing its proceedings, quorum, and manner of acting as it shall deem proper and desirable. Each such committee shall keep a written record of its acts and proceedings and shall submit such record to the Board of Directors. Failure to submit such record, or failure of the Board to approve any action indicated therein will not, however, invalidate such action to the extent it has been carried out by the Corporation prior to the time the record of such action was, or should have been, submitted to the Board of Directors as herein provided. ARTICLE V Meetings of Board of Directors ------------------------------ 6 Section 1. Annual Meetings. The Board of Directors shall meet each year --------------- immediately after the annual meeting of the Stockholders for the purpose of organization, election of Officers, and consideration of any other business that may properly be brought before the meeting. No notice of any kind to either old or new members of the Board of Directors for such annual meeting shall be necessary. Section 2. Regular Meetings. The Board of Directors from time to time ---------------- may provide by resolution for the holding of regular meetings and fix the time and place of such meetings. Regular meetings may be held within or without the State of Nevada. The Board need not give notice of regular meetings provided that the Board promptly sends notice of any change in the time or place of such meetings to each Director not present at the meeting at which such change was made. Section 3. Special Meetings. The Board may hold special meetings of the ---------------- Board of Directors at any place, either within or without the State of Nevada, at any time when called by the President, the Chairman of the Board of Directors, or two or more Directors. Notice of the time and place thereof shall be given to and received by each Director at least three (3) days before the meeting. A waiver of such notice in writing, signed by the person or persons entitled to said notice, either before or after the time stated therein, shall be deemed equivalent to such notice. Notice of any adjourned special meeting of the Board of Directors need not given. Section 4. Quorum. The presence, at any meeting, of a majority of the ------ total number of Directors shall be necessary and sufficient to constitute a quorum for the transaction of business. Except as otherwise required by statute, the act of a majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors; however, if only two (2) Directors are present, unanimity of action shall be required. In the absence of a quorum, a majority of the Directors present at the time and place of any meeting may adjourn such meeting from time to time until a quorum is present. Section 5. Consent of Directors in Lieu of Meeting. Unless otherwise --------------------------------------- restricted by statute, the Board may take any action required or permitted to be taken at any meeting of the Board of Directors without a meeting, if a written consent thereto is signed 7 by all members of the Board, and such written consent is filed with the minutes of proceedings of the Board. Section 6. Telephonic Meeting. Any meeting held under this Article V ------------------ may be held by telephone, in accordance with the provisions of the Nevada Private Corporations Act. Section 7. Attendance Constitutes Waiver. Attendance of a Director at a ----------------------------- meeting constitutes a waiver of any notice to which the Director may otherwise have been entitled, except where a Director attends a meeting for the express purpose of objecting the transaction of any business because the meeting is not lawfully called or convened. ARTICLE VI Officers -------- Section 1. Number. The Corporation shall have a Chairman of the Board, ------ a President, one or more Vice Presidents as the Board may from time to time elect, a Secretary and a Treasurer, and such other Officers and Agents as may be deemed necessary. One person may hold any two offices. Section 2. Election, Term of Office, and Qualifications. The Board shall -------------------------------------------- choose the Officers specifically designated in Section 1 of this Article VI at the annual meeting of the Board of Directors and such Officers shall hold office until their successors are chosen and qualified, unless sooner displaced. Officers need not be Directors of the Corporation. Section 3. Subordinate Officers. The Board of Directors, from time to -------------------- time, may appoint other Officers and Agents, including one or more Assistant Secretaries and one or more Assistant Treasurers, each of whom shall hold office for such period, and each of whom shall have such authority and perform such duties as are provided in these Bylaws or as the Board of Directors from time to time may determine. The Board of Directors may delegate to any Officer or the Chairman of the Board of Directors the power to appoint any such subordinate Officers and Agents and to prescribe their respective authorities and duties. Section 4. Removals and Resignations. The Board of ------------------------- 8 Directors may, by vote of a majority of their entire number, remove from office any Officer or Agent of the Corporation, appointed by the Board of Directors. Any Officer may resign at any time by giving written notice to the Board of Directors. The resignation shall take effect immediately upon the receipt of the notice, or any later period of time specified therein. The acceptance of such resignation shall not be necessary to make it effective, unless the resignation requires acceptance for it to be effective. Section 5. Vacancies. Whenever any vacancy shall occur in any office by --------- death, resignation, removal, or otherwise, it shall be filled for the unexpired portion of the term in the manner prescribed by these Bylaws for the regular election or appointment to such office, at any meeting of Directors. Section 6. The Chairman of the Board. The Chairman of the Board shall be ------------------------- the Chief Executive Officer of the Corporation and, subject to the direction and under the supervision of the Board of Directors, shall have general charge of all of the affairs of the Corporation. The Chairman shall preside at all meetings of the Stockholders and of the Board of Directors at which he is present. Section 7. The President. The President shall be the chief operating ------------- officer of the Corporation and, subject to the direction and under the supervision of the Board of Directors, shall have general charge of the day-to- day operations and of the property of the Corporation, and shall have control over its Officers, Agents and Employees. The President shall preside at all meetings of the Stockholders and of the Board of Directors at which the Chairman is not present. The President shall do and perform such other duties and may exercise such other powers as these Bylaws or the Board of Directors from time to time may assign to him. Section 8. The Vice President. At the request of the President or in ------------------ the event of his absence or disability, the Vice President, or in case there shall be more than one Vice President, the Vice President designated by the President, or in the absence of such designation, the Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting, shall have all the powers of, and be subject to all the restrictions upon, the President. Any Vice President shall perform such other duties and may exercise such her powers as from time to 9 time these Bylaws or by the Board of Directors or the President be assign to him. Section 9. The Secretary. The Secretary shall: ------------- a. record all the proceedings of the meetings of the Corporation and Directors in a book to be kept for that purpose; b. have charge of the stock ledger (which may, however, be kept by any transfer agent or agents of the Corporation under the direction of the Secretary), an original or duplicate of which shall be kept at the principal office or place of business of the Corporation; c. see that all notices are duly and properly given; d. be custodian of the records of the Corporation and the Board of Directors, and the and of the seal of the Corporation, and see that the seal is affixed to all stock certificates prior to their issuance and to all documents for which the Corporation has authorized execution on its behalf under its seal; e. see that all books, reports, statements, certificates, and other documents and records required by law to be kept or filed are properly kept or filed; f. in general, perform all duties and have all powers incident to the office of Secretary, and perform such other duties and have such other powers as these Bylaws, the Board of Directors, the Chairman of the Board of Directors, or the President from time to time may assign to him; and g. prepare and make, at least ten (10) days before every election of Directors, a complete list of the Stockholders entitled to vote at said election, arranged in alphabetical order. Section 10. The Treasurer. The Treasurer shall: ------------- 10 a. have supervision over the funds, securities, receipts and disbursements of the Corporation; b. cause all moneys and other valuable effects of the Corporation to be deposited in its name and to its credit, in such depositories as the Board of Directors or, pursuant to authority conferred by the Board of Directors, its designee shall select; c. cause the funds of the Corporation to be disbursed by checks or drafts upon the authorized depositaries of the Corporation, when such disbursements shall have been duly authorized; d. cause proper vouchers for all moneys disbursed to be taken and preserved; e. cause correct books of accounts of all its business and transactions to be kept at the principal office of the Corporation; f. render an account of the financial condition of the Corporation and of his transactions as Treasurer to the President, the Chairman of the Board of Directors, or the Board of Directors, whenever requested; g. be empowered to require from the Officers or Agents of the Corporation reports or statements giving such information as he may desire with respect to any and all financial transactions of the Corporation; and h. in general, perform all duties and have all powers incident to the office of Treasurer and perform such other duties and have such other powers as from time to time may be assigned to him by these Bylaws or by the Chairman of the Board of Directors, the Board of Directors or the President. Section 11. Salaries. The Board of Directors shall from time to time fix -------- the salaries of the Officers of the Corporation. The Board of Directors may delegate to any person the power to fix the salaries or other compensation of any Officers or Agents appointed, in accordance with the provisions of Section 3 of this 11 Article VI. No Officer shall be prevented from receiving such salary by reason of the fact that he is also a Director of the Corporation. Nothing contained in this Bylaw shall be construed so as to obligate the Corporation to pay any Officer a salary, which is within the sole discretion of the Board of Directors. Section 12. Surety Bond. The Board of Directors may in its discretion ----------- secure the fidelity of any or all of the Officers of the Corporation by bond or otherwise. ARTICLE VII Execution of Instruments ------------------------ Section 1. Checks, Drafts, Etc. The President or the Chairman of the --------------------------------- Board of Directors and the Secretary or Treasurer shall sign all checks, drafts, notes, bonds, bills of exchange, and orders for the payment of money of the Corporation, and all assignments or endorsements of stock certificates, registered bonds, or other securities, owned by the Corporation, unless otherwise directed by the Board of Directors, or unless otherwise required by law.. The Board of Directors or the Chairman of the Board of Directors may, however, authorize any Officer or the Chairman of the Board to sign any of such instruments for and on behalf of the Corporation without necessity of countersignature, and may designate Officers, or Employees of the Corporation other than those named above who may, in the name of the Corporation, sign such instruments. Section 2. Execution of Instruments Generally. Subject always to the ---------------------------------- specific direction of the Board of Directors, the President or the Chairman of the Board of Directors shall execute all deeds and instruments of indebtedness made by the Corporation and all other written contracts and agreements to which the Corporation shall be a party, in its name, attested by the Secretary. The Secretary, when necessary required, shall affix the corporate seal thereto. Section 3. Proxies. The President, the Chairman of the Board and the ------- Secretary or an Assistant Secretary of the Corporation or by any other person or persons duly authorized by the Board of Directors may execute and deliver proxies to vote with respect to shares of stock of other corporations owned by or 12 standing in the name of the Corporation from time to time on behalf of the Corporation. ARTICLE VIII Capital Stock ------------- Section 1. Certificates of Stock. Every holder of stock in the --------------------- Corporation shall be entitled to have a certificate, signed in the name of the Corporation by either the Chairman of the Board of Directors or the President and by the Secretary of the Corporation, certifying the number of shares owned by that person in the Corporation. Certificates of stock shall be in such form as shall, in conformity to law, be prescribed from time to time by the Board of Directors. Section 2. Transfer of Stock. Shares of stock of the Corporation shall ----------------- only be transferred on the books of the Corporation by the holder of record thereof or by his attorney duly authorized in writing, upon surrender to the Corporation of the certificates for such shares endorsed by the appropriate person or persons, with such evidence of the authenticity of such endorsement, transfer, authorization and other matters as the Corporation may reasonably require. Surrendered certificates shall be canceled and shall be attached to their proper stubs in the stock certificate book. Section 3. Rights of Corporation with Respect to Registered Owners. ------------------------------------------------------- Prior to the surrender to the Corporation of the certificates for shares of stock with a request to record the transfer of such shares, the Corporation may treat the registered owner as the person entitled to receive dividends, to vote, to receive notifications, and otherwise to exercise all the rights and powers of an owner. Section 4. Closing Stock Transfer Book. The Board of Directors may --------------------------- close the Stock Transfer Book of the Corporation for a period not exceeding fifty (50) days preceding the date of any meeting of Stockholders, the date for payment of any dividend, the date for the allotment of rights, the date when any change, conversion or exchange of capital stock shall go into effect, or 13 for a period of not exceeding fifty (50) days in connection with obtaining the consent of Stockholders for any purpose. However, in lieu of closing the Stock Transfer Book, the Board of Directors may in advance fix a date, not exceeding fifty (50) days preceding the date of any meeting of Stockholders, the date for the payment of any dividend, the date for the allotment of rights, the date when any change or conversion or exchange of capital stock shall go into effect, or a date in connection with obtaining such consent, as a record date for the determination of the Stockholders entitled to notice of, and to vote at, any such meeting and any adjournment thereof, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of capital stock, or to give such consent. In such case such Stockholders of record on the date so fixed, and only such Stockholders shall be entitled to such notice of, and to vote at, such meeting and any adjournment thereof, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, or to give such consent, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid. Section 5. Lost, Destroyed and Stolen Certificates. The Corporation may --------------------------------------- issue a new certificate of shares of stock in the place of any certificate theretofore issued and alleged to have been lost, destroyed or stolen. However, the Board of Directors may require the owner of such lost, destroyed or stolen certificate or his legal representative, to: (a) request a new certificate before the Corporation has notice that the shares have been acquired by a bona fide purchaser; (b) furnish an affidavit as to such loss, theft or destruction; (c) file with the Corporation a sufficient indemnity bond; or (d) satisfy such other reasonable requirements, including evidence of such loss, destruction, or theft as may be imposed by the Corporation. ARTICLE IX Dividends --------- Section 1. Sources of Dividends. The Directors of the Corporation, -------------------- subject to the Nevada Revised Statutes, as amended, may declare and pay dividends upon the shares of the capital stock of the Corporation. 14 Section 2. Reserves. Before the payment of any dividend, the Directors -------- of the Corporation may set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose, and the Directors may abolish any such reserve in the manner in which it was created. Section 3. Reliance on Corporate Records. A Director in relying in good ----------------------------- faith upon the books of account of the Corporation or statements prepared by any of its officials as to the value and amount of the assets, liabilities, and net profits of the Corporation, or any other facts pertinent to the existence and amount of surplus or other funds from which dividends might properly be declared and paid shall be fully protected. Section 4. Manner of Payment. Dividends may be paid in cash, in ----------------- property, or in shares of the capital stock of the Corporation. ARTICLE X Seal and Fiscal Year -------------------- Section 1. Seal. The corporate seal, subject to alteration by the Board ---- of Directors, shall be in the form of a circle, shall bear the name of the Corporation, and shall indicate its formation under the laws of the State of Nevada and the year of incorporation. Such seal may be used by causing it or a facsimile thereof to be impressed, affixed, or otherwise re- produced. Section 2. Fiscal Year. The Board of Directors shall, in its sole ----------- discretion, designate a fiscal year for the Corporation. ARTICLE XI Amendments ---------- Except as may otherwise be provided herein, a majority vote of the whole Board of Directors at any meeting of the Board, is required to amend or repeal any provision of these Bylaws. ARTICLE XII 15 Indemnification of Officers and Directors ----------------------------------------- Section 1. Exculpation. No Director or Officer of the Corporation shall ----------- be liable for the acts, defaults, or omissions of any other Director or Officer, or for any loss sustained by the Corporation, unless the same has resulted from his own willful misconduct, willful neglect, or gross negligence. Section 2. Indemnification. Each Director and Officer of the --------------- Corporation and each person who shall serve at the Corporation's request as a director or officer of another corporation in which the Corporation owns shares of capital stock or of which it is a creditor shall be indemnified by the Corporation to the fullest extent permitted from time to time by the Nevada Revised Statutes against all reasonable costs, expenses and liabilities (including reasonable attorneys' fees) actually and necessarily incurred by or imposed upon him in connection with, or resulting from any claim, action, suit, proceeding, investigation, or inquiry of whatever nature in which he may be involved as a party or otherwise by reason of his being or having been a Director or Officer of the Corporation or such director or officer of such other corporation, whether or not he continues to be a Director or Officer of the Corporation or a director or officer of such other corporation, at the time of the incurring or imposition of such costs, expenses or liabilities, except in relation to matters as to which he shall be finally adjudged in such action, suit, proceeding, investigation, or inquiry to be liable for willful misconduct, willful neglect, or gross negligence toward or on behalf of the Corporation in the performance of his duties as such Director or Officer of the Corporation or as such director or officer of such other corporation. As to whether or not a Director or Officer was liable by reason of willful misconduct, willful neglect, or gross negligence toward or on behalf of the Corporation in the performance of his duties as such Director or Officer of the Corporation or as such director or officer of such other corporation, in the absence of such final adjudication of the existence of such liability, the Board of Directors and each Director and Officer may conclusively rely upon an opinion of independent legal counsel selected by or in the manner designated by the Board of Directors. The foregoing right to indemnification shall be in addition to and not in limitation of all other rights which such person may be entitled as a matter of law, and shall inure to his legal representatives' benefit. 16 Section 3. Liability Insurance. The Corporation may purchase and ------------------- maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation or who is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, association, or other enterprise against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not he is indemnified against such liability by this Article XII. 17 EX-3.05 6 DESIGNATION OF STOCK OF THE COMPANY EXHIBIT 3.05 FILED IN THE OFFICE OF THE SECRETARY OF STATE OF THE STATE OF NEVADA APR 13 1998 No. C7977-98 --------------- /s/ Dean Heller DEAN HELLER, SECRETARY OF STATE DESIGNATION OF STOCK OF Motorcycle Centers of America, Inc. We the undersigned, Jay Boisdrenghein, President, and David Wollins, Assistant Secretary of Motorcycle Centers of America, Inc. (The Corporation) do hereby certify: That the Board of Directors of the Corporation, by resolution dated March 29, 1999, adopted a resolution to amend the original articles as follows: Section 1. Designation. The Corporation hereby establishes a new class of shares of the Corporation's $0.10 per share Preferred Stock, which shall be designated as Series A 6% Convertible Preferred Stock (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be ten million (10,000,000). The Series A Preferred Stock shall be offered at a purchase price of Three Dollars and Sixty Cents ($3.60) per share (the "Original Series A Issue Price"), with a six percent (6%) per annum accretion rate as set forth herein. Section 2. Rank. The Series A Preferred Stock shall rank: (a) junior to any other class or series of capital stock of the Company other than Common Stock (defined below) hereafter created specifically ranking by its terms senior to the Series A Preferred Stock (collectively, the "Senior Securities"); (b) senior and prior to all of the Company's Common Stock, $.001 par value per share ("Common Stock"); (c) senior and prior to any class or series of capital stock of the Company hereafter created not specifically ranking by its terms senior to or on parity with any Series A Preferred Stock of whatever subdivision (collectively, with the Common Stock, "Junior Securities"); and (d) on parity with any class or series of capital stock of the Company hereafter created specifically ranking by its terms on parity with the Series A Preferred Stock ("Parity 1 Securities") in each case as to distributions of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary (all such distributions being referred to collectively as "Distributions"). Section 3. Dividends. The Series A Preferred Stock will bear no dividends, and the holders of the Series A Preferred Stock ("Holders") shall not be entitled to receive dividends on the Series A Preferred Stock. Section 4. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Company ("Liquidation Event"), either voluntary of involuntary, the then Holders of shares of Series A Preferred Stock shall be entitled to receive, immediately after any distributions to Senior Securities required by the Company's Certificate of Incorporation or any certificate of designation, and prior in preference to any distribution to Junior Securities but in parity with any distribution to Parity Securities, an amount per share equal to the sum of (i) the Original Series A Issue Price for each outstanding share of Series A Preferred Stock and (ii) an amount equal to six percent (6%) of the Original Series A Issue Price, per annum, accruing daily, for the period that has passed since the date that, in connection with the consummation of the purchase by Holder of shares of Series A Preferred Stock from the Company, the escrow agent first received in its possession funds representing full payment for the shares of Series A Preferred Stock (such amount being referred to herein as the "Premium"). If upon the occurrence of such event, and after payment in full of the preferential amounts with respect to the Senior Securities, the assets and funds available to be distributed among the Holders of the Series A Preferred Stock and Parity Securities shall be insufficient to permit the payment to such Holders of the full preferential amounts due to the Holders of the Series A Preferred Stock and the Parity Securities, respectively, then the entire assets and funds of the Company legally available for distribution shall be distributed among the Holders of the Series A Preferred Stock and the Parity Securities, pro rata, based on the respective liquidation amounts to which each such series of stock is entitled by the Company's Certificate of Incorporation and any certificate(s) of designation relating thereto. (b) Upon the completion of the distribution required by Subsection 2 4(a), if assets remain in this Company, they shall be distributed to holders of Junior Securities in accordance with the Company's Certificate of Incorporation including any duly adopted certificate(s) of designation. (c) At each Holder's option, a sale, conveyance or disposition of all or substantially all of the assets of the Company or the effectuation by the Company of a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of shall be deemed to be a Liquidation Event as defined in Section 4(a) hereof; provided, further that (i) a consolidation, merger, acquisition, or other business combination of the Company with or into any other publicly traded company or companies, including those trading on the OTC Bulletin Board, shall not be treated as a Liquidation Event as defined in Section 4(a) but instead shall be treated pursuant to Section 5(d) hereof, and (ii) a consolidation, merger, acquisition, reorganization or other business combination of the Company with or into any other non-publicly traded company or companies shall be treated as a Liquidation Event as defined in Section 4(a). The Company shall not effect any transaction described in Subsection 4(c)(ii) unless it first gives thirty (30) business days prior written notice of such transaction during which time the Holder shall be entitled to immediately convert any or all of its shares of Series A Preferred Stock into Common Stock at the Conversion Price, as defined below, then in effect. (d) In the event that, immediately prior to the closing of a transaction described in Section 4(c) hereof which would constitute a Liquidation Event, the cash distributions required by Section 4(a) or otherwise hereunder, have not been made, the Company shall either: (i) cause such closing to be reasonably postponed until such cash distributions have been made, (ii) cancel such transaction, in which event the fights of the Holders of Series A Preferred Stock shall be the same as existing immediately prior to such proposed transaction, or (iii) agree, and shall require that any successor company resulting from a Liquidation Event agrees, to make such distributions as quickly after the closing of such Liquidation Event as reasonably practicable, upon the same terms and in the same amounts as the Company would have made if such distribution was made immediately prior to the closing of such transaction. 3 Section 5. Conversion. Subject to Section 4(c) herein, the record Holder(s) of the Series A Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): Right to Convert. At any time following six months after the Initial Issuance Date, the record Holder of the Series A Preferred Stock shall be entitled to convert any or all of the aggregate principal amount of the Series A Preferred Stock at the office of the Company or its designated transfer agent (the "Transfer Agent"), into that number of fully-paid and non-assessable shares of Common Stock calculated in accordance with the following formula (the "Conversion Rate"): Number of shares of Common Stock issued upon conversion of one (1) share of Series A Preferred Stock = (.06) (N/365) ($3.60) + $3.60 Conversion Price ----------------------------- where, N = the number of days between (i) the date that, in connection with the consummation of the initial purchase by Holder of shares of Series A Preferred Stock from the Company, the escrow agent first received in its possession funds representing full payment for the shares of Series A Preferred Stock for which conversion is being elected, and (ii) the applicable Date of Conversion (as defined in Section 5(b)(iv) below) for the shares of Series A Preferred Stock for which conversion is being elected, and Conversion Price (i) For the period commencing on the Initial Issuance Date, as defined below, and ending seven (7) months thereafter, the Conversion Price is the lesser of (a) $3.60; or (b) the Adjusted Conversion Price; (ii) For the period commencing seven (7) months and one (1) day after the Initial Issuance Date and ending nine months thereafter, the Conversion Price is the lesser of (a) $3.60; (b) the Adjusted Conversion Price; or (c) 100% of the average Closing Bid Price, as defined below, of the Company's Common Stock for the thirty (30) trading days immediately preceding the date which is 4 seven months after the Initial Issuance Date, but in no event shall the Conversion Price be less than $2.00; (iii) After the period which is nine (9) months and one (1) day after the Initial Issuance Date, the Conversion Price is the lesser of (a) $3.60, or (b) the Conversion Price set forth in Section 5(a)(ii), or (c) 100% of the average of the lowest three consecutive Closing Bid price of the Company's Common Stock for the twenty (20) trading days immediately preceding the Date of Conversion. As used herein, "Fixed Conversion Price" shall be $3.60. "Variable Conversion Price" shall be any Conversion price set forth in Section 5(a) other than $3.60. As used herein, "Adjusted Conversion Price" shall mean the Adjusted Conversion Price in the table set forth on Exhibit 1 hereto. As used herein, "Initial Issuance Date" shall mean the date of the first closing of a purchase and sale of the Series A Preferred Stock that occurs pursuant to the offering of the Series A Preferred Stock by the Company. For purposes hereof, any Holder which acquires shares of Series A Preferred Stock from another Holder (the "Transferor") and not upon original issuance from the Company shall be entitled to exercise such Holder's conversion right as to the percentages of such shares specified under Section 5(a) in such amounts and at such times such that the number of shares eligible for conversion by such Holder at any time shall be in the same proportion that the number of shares of Series A Preferred Stock acquired by such Holder from its Transferor bears to the total number of shares of Series A Preferred Stock originally issued by the Company to such Transferor (or its predecessor Transferor). For purposes hereof, the term "Closing Bid Price" shall mean the closing bid price of the Company's Common Stock on the NASDAQ SmallCap Market, or if no longer traded on the NASDAQ SmallCap Market, the closing bid price on the principal national securities exchange or the 5 over-the-counter system on which the Common Stock is so traded and if not available, the mean of the high and low prices on the principal national securities exchange or the over-the-counter system on which the Common Stock is so traded. (b) Mechanics of Conversion. In order to convert Series A Preferred Stock into full shares of Common Stock, the Holder shall send via facsimile, or otherwise deliver, on or prior to 11:59 p.m., New York City time (the "Conversion Notice Deadline") on the Date of Conversion, a copy of the fully executed notice of conversion ("Notice of Conversion") to the Company at the office of the Company and to its designated transfer agent (the "Transfer Agent") for the Series A Preferred Stock stating that the Holder elects to convert, which notice shall specify the Date of Conversion, the number of shares of Series A Preferred Stock to be converted, the applicable Conversion Price and a calculation of the number of shares of Common Stock issuable upon such conversion (together with a copy of the front page of each certificate to be converted). Upon receipt by the Company of a facsimile copy of a Notice of Conversion, the Company shall immediately send, via facsimile, a confirmation of receipt of the Notice of Conversion to the Holder which shall specify that the Notice of Conversion has been received and the name and telephone number of a contact person at the Company whom the Holder should contact regarding information related to the Conversion. No later than one (1) business day after receipt of such confirmation of receipt of Notice of Conversion, the Holder shall surrender to a common courier for delivery to the office of the Company or the Transfer Agent, the original certificates representing the Series A Preferred Stock being converted (the "Preferred Stock Certificates"), duly endorsed for transfer; provided, however, that the Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless either the Preferred Stock Certificates are delivered to the Company or its Transfer Agent as provided above, or the Holder notifies the Company or its Transfer Agent that such certificates have been lost, stolen or destroyed (subject to the requirements of subparagraph (i) below). In the case of a dispute as to the calculation of the Conversion Rate, the Company shall promptly issue to the Holder the number of Shares that are not disputed and shall submit the disputed calculations to its outside accountant via facsimile within three (3) days of receipt of Holder's Notice of Conversion. The Company shall cause the accountant to perform the calculations and notify the 6 Company and Holder of the results no later than two (2) business days from the time it receives the disputed calculations. The accountant's calculation shall be deemed conclusive absent manifest error. (i) Lost or Stolen Certificates. Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of any Preferred Stock Certificates representing shares of Series A Preferred Stock, and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Company, and upon surrender and cancellation of the Preferred Stock Certificate(s), if mutilated, the Company shall execute and deliver new Preferred Stock Certificate(s) of like tenor and date. However, the Company shall not be obligated to re-issue such lost or stolen Preferred Stock Certificates if Holder contemporaneously requests the Company to convert such Series A Preferred Stock into Common Stock. (ii) Delivery of Common Stock Upon Conversion. The Company shall, or shall cause the Transfer Agent, no later than the close of business on the third (3rd) business day (the "Deadline") after receipt by the Company or the Transfer Agent of a facsimile copy of a Notice of Conversion and receipt by Company or the Transfer Agent of all necessary documentation duly executed and in proper form required for conversion, including the original Preferred Stock Certificates to be converted (or after provision for security or indemnification in the case of lost or destroyed certificates, if required), to issue and surrender to a common courier for either overnight or (if delivery is outside the United States) two (2) day delivery to the Holder at the address of the Holder as shown on the stock records of the Company (A) a certificate for the number of shares of Common Stock to which the Holder shall be entitled as aforesaid, and (B) certificate(s) representing the number of shares of Series A Preferred Stock not being exchanged, if necessary. (iii) No Fractional Shares. If any conversion of the Series A Preferred Stock would create a fractional share of Common Stock or a fight to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon conversion, in the aggregate, shall be the next higher number of shares. 7 (iv) Date of Conversion. The date on which conversion occurs (the "Date of Conversion") shall be deemed to be the date set forth in such Notice of Conversion, provided (i) that the advance copy of the Notice of Conversion is sent via facsimile to the Company before 11:59 p.m., New York City time, on the Date of Conversion, and (ii) that the original Preferred Stock Certificates representing the shares of Series A Preferred Stock to be converted are surrendered by depositing such certificates with a common courier, for delivery to the Company or the Transfer Agent as provided above, as soon as practicable after the Date of Conversion, provided that the Date of Conversion shall not occur less than six (6) months after the Initial Issuance Date. The person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record Holder or Holders of such shares of Common Stock on the Date of Conversion. (v) Taxes. The Company shall pay any and all taxes (other than transfer taxes) which may be imposed with respect to the issuance and delivery of the shares of Common Stock pursuant to conversion of the Series A Preferred Stock. (c) Automatic Conversion or Redemption. If at any time after 12 months following the initial effectiveness of the required registration of the Company's Common Stock (under Section 2 of the Company's Registration Rights Agreement relating to its Series A Preferred Stock) the Closing Bid Price of the Company's Common Stock is $16.00 or more for twenty (20) consecutive trading days ("Automatic Conversion Event"), then at any time following the Automatic Conversion Event (regardless of whether the Closing Bid Price of the Company's Common Stock shall at any time following the Automatic Conversion Event be less than $16.00), each share of Series A Preferred Stock outstanding on the date of the Automatic Conversion Event or, if not a business day, the first business day thereafter ("Termination Date") automatically, at the option of the Company, shall either (i) be converted ("Automatic Conversion") into Common Stock on such date at the Conversion Rate then in effect (calculated in accordance with the formula in Section 5(a) above), and the Termination Date shall be deemed the Date of Conversion with respect to such conversion for purposes of this Certificate of Designation, or (ii) be redeemed ("Automatic Redemption") by the Company for cash 8 in an amount equal to the Stated Value (as defined below) of the shares of Series A Preferred Stock being redeemed. If the Company elects to redeem, on the Termination Date, the Company shall send to the Holders of outstanding Series A Preferred Stock notice (the "Automatic Redemption Notice") via facsimile of its intent to effect an Automatic Redemption of the outstanding Series A Preferred Stock. If the Company does not send such notice to Holder on such date, an Automatic Conversion shall be deemed to have occurred. If an Automatic Conversion occurs, the Company and the Holders shall follow the applicable conversion procedures set forth in this Certificate of Designation; provided, however, that the Holders are not required to send the Notice of Conversion contemplated by Section 5(b) hereof. If the Company elects to redeem, each Holder of outstanding Series A Preferred Stock shall send their certificates representing the Series A Preferred Stock to the Company within five (5) days of the date of receipt of the Automatic Redemption Notice from the Company, and the Company shall pay the applicable redemption price to each respective Holder within five (5) days of the receipt of such certificates. The Company shall not be obligated to deliver the redemption price unless the certificates representing the Series A Preferred Stock are delivered to the Company, or, in the event one or more certificates have been lost, stolen, mutilated or destroyed, unless the Holder has complied with Section 5(b)(i). If the Company elects to redeem under this Section 5(c) and the Company fails to pay the Holders the redemption price within five (5) days of its receipt of the certificates representing the shares of Series A Preferred Stock to be redeemed as required by this Section 5(c), then an Automatic Conversion shall be deemed to have occurred and, upon receipt of the Preferred Stock certificates, the Company shall immediately deliver to the Holders the certificates representing the number of shares of Common Stock to which the Holders would have been entitled upon Automatic Conversion. As used herein, "Last Closing Date" shall mean the date of the last closing of a purchase and sale of the Series A Preferred Stock that occurs pursuant to the offering of the Series A Preferred Stock by the Company, and "Stated Value" shall mean the Original Series A Issue Price (as defined in Section 1 hereof) together with the accreted but unpaid Premium as defined in Section 4(a). 9 (d) Adjustment to Conversion Rate. (i) Adjustment to Fixed Conversion Price Due to Stock Split, Stock Dividend, Etc. If, prior to the conversion of all of the Series A Preferred Stock, the number of outstanding shares of Common Stock is increased by a stock split, stock dividend, or other similar event, the Fixed Conversion Price shall be proportionately reduced, or if the number of outstanding shares of Common Stock is decreased by a combination or reclassification of shares, or other similar event, the Fixed Conversion Price shall be proportionately increased. (ii) Adjustment to Variable Conversion Price. If, at any time when any shares of the Series A Preferred Stock are issued and outstanding, the number of outstanding shares of Common Stock is increased or decreased by a stock split, stock dividend or other similar event, which event shall have taken place during the reference period for determination of the Conversion Price for any conversion of the Series A Preferred Stock, then the Variable Conversion Price shall be calculated giving appropriate effect to the stock split, stock dividend, combination, reclassification or other similar event for all relevant trading days immediately preceding the Date of Conversion. (iii) Adjustment Due to Merger, Consolidation, Etc. If, prior to the conversion of all Series A Preferred Stock, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Company shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Company or another entity or there is a sale of all or substantially all of the Company's assets or there is a change of control transaction not deemed to be a Liquidation Event pursuant to Section 4(c), then the Holders of Series A Preferred Stock shall thereafter have the right to receive upon conversion of Series A Preferred Stock, upon the basis and upon the terms and conditions specified herein in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such stock, securities and/or other assets which the Holder would have been entitled to receive in such transaction had the Series A Preferred Stock been converted immediately prior to such transaction, and in any such case appropriate provisions shall be made with respect to the rights 10 and interests of the Holders of the Series A Preferred Stock to the end that the provisions hereof (including, without limitation, provisions for the adjustment of the Conversion Price and of the number of shares issuable upon conversion of the Series A Preferred Stock) shall thereafter be applicable, as nearly as may be practicable in relation to any securities thereafter deliverable upon the exercise hereof. The Company shall not effect any transaction described in this Subsection 5(d)(iii) unless (A) it first gives at least thirty (30) days prior written notice of such merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event (during which time the Holder shall be entitled to convert its shares of Series A Preferred Stock into Common Stock) and (B) the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligations of the Company under this Certificate of Designation including this Subsection 5(d)(iii). (iv) No Fractional Shares. If any adjustment under this Section 5(d) would create a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon conversion shall be the next higher number of shares. Section 6. Voting Rights. Except as otherwise provided herein or by law, the Holder(s) of Series A Preferred Stock, by virtue of their ownership thereof, shall be entitled to cast the number of votes per share thereof on each matter submitted to the Company's holders of Common Stock for voting as equals the number of votes which could be cast by the Holders of the number of shares of Common Stock into which such shares of Series A Preferred Stock could be converted pursuant hereto immediately prior to the taking of such vote (including, without limitation, any shares of Common Stock which would be issuable in payment of accrued and unpaid interest thereon if such shares were convened on the record date and the Company elected to pay such interest in Common Stock). Such vote shall be cast together with those cast by the Holders of Common Stock and not as a separate class except as otherwise provided herein. Section 7. Protective Provision. So long as shares of Series A Preferred Stock are outstanding, the Company shall not without first obtaining the approval (by vote or written consent, 11 as provided by Nevada Law) of the Holders of at least seventy-five percent (75%) of the then outstanding shares of Series A Preferred Stock, and at least seventy-five percent (75%) of the then outstanding Holders: (a) alter or change the rights, preferences or privileges of the Series A Preferred Stock or any securities so as to affect adversely the Series A Preferred Stock; (b) create any new class or series of stock having a preference over or on parity with the Series A Preferred Stock with respect to Distributions (as defined in Section 2 above) or increase the size of the authorized number of Series A Preferred Stock; or (c) do any act or thing not authorized or contemplated by this Certificate of Designation which would result in taxation of the holders of shares of the Series A Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as mended (or any comparable provision of the Internal Revenue Code as hereafter from time to time mended). In the event Holders of at least seventy-five percent (75%) of the then outstanding shares of Series A Preferred Stock and at least seventy-five percent (75%) of the then outstanding Holders agree to allow the Company to alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock, pursuant to Subsection (a) above, so as to affect the Series A Preferred Stock, then the Company will deliver notice of such approved change to the Holders of the Series A Preferred Stock that did not agree to such alteration or change (the "Dissenting Holders") and Dissenting Holders shall have the right for a period of thirty (30) business days to convert pursuant to the terms of this Certificate of Designation as they exist prior to such alteration or change (notwithstanding any other provision herein to the contrary) or continue to hold their shares of Series A Preferred Stock, as amended. Section 8. Status of Converted Stock In the event any shares of Series A Preferred Stock shall be converted pursuant to Section 5 hereof, the shares of Preferred Stock so converted shall be 12 canceled, shall return to the status of authorized but unissued Preferred Stock of no designated series, and shall not be re-issuable by the Company as Series A Preferred Stock. Section 9. Preference Rights. Nothing contained herein shall be construed to prevent the Board of Directors of the Company from issuing one (1) or more series of Preferred Stock with dividend and/or liquidation preferences junior to the dividend and liquidation preferences of the Series A Preferred Stock. Section 10. Authorization and Reservation of Shares of Common Stock (a) Authorized and Reserved Amount. The Company shall have authorized and reserved and keep available for issuance not less than three million nine hundred thousand (3,900,000) shares of Common Stock (subject to adjustment for stock splits, stock dividends, reclassifications and similar types of events) issuable upon conversion of all outstanding Series A Preferred Stock for the purpose of effecting the conversion of the Series A Preferred Stock (including any shares of Common Stock as a Conversion Failure Payment under Section 11 hereof or issuable upon the failure of the Company to pay a Redemption Amount in accordance with Section 5(c) hereof) issued or to be issued to the Holders (the "Reserved Amount"). The Reserved Amount shall be at least two hundred percent (200%) of the number of shares of Common Stock issuable upon conversion of the Series A Preferred Stock. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to provide for the full conversion of all outstanding Series A Preferred Stock, and issuance of the shares of Common Stock in connection therewith. During any period in which the Reserved Amount is less than two hundred percent (200%) of the number of shares of Common Stock issuable on three (3) consecutive trading days upon conversion of the outstanding Series A Preferred Stock (without giving effect to any limitation on conversion or exercise thereof), the Company shall not reserve or issue shares of Common Stock for any purposes other than the conversion of the Series A Preferred Stock. 13 (b) Increases to Reserved Amount. Without limiting any other provision of this Section 10, if the Reserved Amount for any three (3) consecutive trading days (the last of such three (3) trading days being the "Reservation Trigger Date") is less than two hundred percent (200%) of the number of shares of Common Stock issuable upon conversion of Series A Preferred Stock on such trading days (a "Share Authorization Failure"), the Company shall immediately notify all Holders of such occurrence and shall take all necessary action to increase the Reserved Amount to two hundred percent (200%) of the number of shares of Common Stock then issuable upon conversion of the Series A Preferred Stock within (i) fifteen (15) days following a Reservation Trigger Date if such increase requires solely approval of the Company's Board of Directors and (ii) sixty (60) days following a Reservation Trigger Date if such increase requires approval of the Company's shareholders. (c) Reduction of Reserved Amount Under Certain Circumstances. Prior to complete conversion of all Series A Preferred Stock, the Company shall not reduce the number of shares required to be reserved for issuance under this Section 10 without the written consent of all Holders except for a reduction proportionate to a reverse stock split effected for a business purpose other than affecting the obligations of Holder under this Section 10, which reverse stock split affects all shares of Common Stock equally. (d) Allocation of Reserved Amount. Each increase to the Reserved Amount shall be allocated pro rata among the Holders based on the number of Series A Preferred Stock held by each Holder at the time of the establishment of or increase in the Reserved Amount. In the event a Holder shall sell or otherwise transfer any of such Holder's Series A Preferred Stock, each transferee shall be allocated a pro rata portion of such transferor's Reserved Amount. Any portion of the Reserved Amount which remains allocated to any person or entity which does not hold any Series A Preferred Stock shall be allocated to the remaining Holders, pro rata based on the number of Series A Preferred Stock then held by such Holders. 14 Section 11. Failure To Satisfy Conversions. (a) Conversion Failure Payments. If, at any time, (x) a Holder submits a Notice of Conversion (or is deemed to submit such notice pursuant to Section 5(d) hereof), and the Company fails for any reason to deliver, on or prior to the expiration of the Deadline ("Period") for such conversion, such number of shares of Common Stock (including, but not limited to, any published announcement) to any Holder at any time of its conversion not to issue shares of Common Stock to which such converting Holder is entitled upon such conversion, or (y) the Company provides notice upon exercise by any Holder of its conversion rights in accordance with the terms of this Certificate of Designation (each of (x) and (y) being a "Conversion Failure"), then the Company shall pay to such Holder, in the case of a Conversion Failure described in clause (x) above, and to all Holders, in the case of a Conversion Failure described in clause (y) above, damages in an amount equal to the lower of: (i) "Damages Amount" x "D" x .005; and (ii) the highest interest rate permitted by applicable law, where: "D" means the number of days beginning the date of the Conversion Failure through and including the Cure Date with respect to such Conversion Failure; "Damages Amount" means the Original Series A Issue Price for each share of Series A Preferred Stock subject to conversion plus all accrued and unpaid interest thereon as of the first day of the Conversion Failure; "Cure Date" means (i) with respect to a Conversion Failure described in clause (x) of its definition, the date the Company effects the conversion of the shares of Series A Preferred Stock submitted for conversion and (ii) with respect to a Conversion Failure described in clause (y) of its definition, the date the Company undertakes in writing to issue Common Stock in satisfaction of all 15 conversions of Series A Preferred Stock in accordance with the terms of this Certificate of Designation. The payments to which a Holder shall be entitled pursuant to this Section are referred to herein as "Conversion Failure Payments." The parties agree that the damages caused by a breach hereof would be difficult or impossible to estimate accurately. A Holder may elect to receive accrued Conversion Failure Payments in cash or to convert all or any portion of such accrued Conversion Failure Payments, at any time, into Common Stock at the lowest Conversion Price in effect during the period beginning on the date of the Conversion Failure through the Cure Date for such Conversion Failure. In the event a Holder elects to receive any Conversion Failure Payments in cash, it shall notify the Company in writing no later than three (3) business days after the Deadline and failure to so notify the Company shall entitle the Company, in its sole discretion, to elect to make such Conversion Failure Payments in cash, Common Stock or some combination of the two. In the event a Holder elects to convert all or any portion of the Conversion Failure Payments, such Holder shall indicate on a Notice of Conversion such portion of the Conversion Failure Payments which such Holder elects to so convert in accordance with this Section 11(a) and such conversion shall otherwise be effected in accordance with provisions of Section 5. (b) Buy-In Cure. Unless a Conversion Failure described in clause (y) of Section 11(a) hereof has occurred with respect to such a Holder, if (i) the Company fails for any reason to deliver during the Delivery Period shares of Common Stock to a Holder upon a conversion of the Series A Preferred Stock and (ii) after the applicable Delivery Period with respect to such conversion, a Holder purchases (in an open market transaction or otherwise) shares of Common Stock to make delivery upon a sale by a Holder of the shares of Common Stock (the "Sold Shares") which such Holder anticipated receiving upon such conversion (a "Buy-In"), the Company shall pay such Holder (in addition to any other remedies available to Holder) the amount by which (x) such Holder's total purchase price (including brokerage commission, if any) for the shares of Common Stock so purchased exceeds (y) the net proceeds received by such Holder from the sale of the Sold Shares. For example, if a Holder purchases shares of Common Stock having a total purchase price of $11,000 16 to cover a Buy-In with respect to shares of Common Stock sold for $10,000, the Company will be required to pay such Holder $1,000. A Holder shall provide the Company written notification indicating any amounts payable to Holder pursuant to this Section 11. (c) Adjustment to Conversion Price. If a Holder has not received certificates for all shares of Common Stock within five (5) business days following the expiration of the Delivery Period with respect to a conversion of any portion of any such Holder's Series A Preferred Stock for any reason, then the Conversion Price for the affected Series A Preferred Stock shall thereafter be the lesser of (i) the Fixed Conversion Price on the Conversion Date specified in the Notice of Conversion which resulted in the Conversion Failure and (ii) the lowest Conversion Price in effect during the period beginning on, and including, such Conversion Date through and including the Cure Date. If there shall occur a Conversion Failure of the type described in clause (y) of Section 11(a), then the Fixed Conversion Price with respect to any conversion thereafter shall be the lowest Conversion Price in effect at any time during the period beginning on, and including, the date of the occurrence of such Conversion Failure through and including the Cure Date. The Conversion Price shall thereafter be subject to further adjustment for any events described in Section 5(d). Section 12. Event of Default. (a) Holder's Option to Demand Prepayment. Upon the occurrence of an Event of Default (as herein defined), each Holder shall have the right to elect at any time and from time to time prior to the cure by Company of such Event of Default to have all or any portion of such Holder's then outstanding Series A Preferred Stock prepaid by the Company for an amount equal to the Holder Demand Prepayment Amount (as herein defined). (i) The right of a Holder to elect prepayment shall be exercisable upon the occurrence of an Event of Default by such Holder in its sole discretion by delivery of a Demand Prepayment 17 Notice (as herein defined) in accordance with the procedures set forth in this Section 12. Notwithstanding the exercise of such right, the Holder shall be entitled to exercise all other rights and remedies available under the provisions of this Certificate of Designation and at law or in equity. (ii) A Holder shall effect each demand for prepayment under this Section 12 by giving at least two (2) business days prior written notice (the "Demand Prepayment Notice") of the date which such prepayment is to become effective (the "Effective Date of Demand of Prepayment"), the Series A Preferred Stock selected for prepayment and the Holder Demand Prepayment Amount to the Company at the address and facsimile number provided in the stock records of the Company, which Demand Prepayment Notice shall be deemed to have been delivered on the business day after the date of transmission of Holder's facsimile (with a copy sent by overnight courier to the Company) of such notice. (iii) The Holder Demand Prepayment Amount shall be paid to a Holder whose Series A Preferred Stock are being prepaid within one (1) business day following the Effective Date of Demand of Prepayment; provided, however, that the Company shall not be obligated to deliver any portion of the Holder Demand Prepayment Amount until one (1) business day following either the date on which the Series A Preferred Stock being prepaid are delivered to the office of the Company or its transfer agent, or the date on which the Holder notifies the Company or the Transfer Agent that such Series A Preferred Stock have been lost, stolen or destroyed and delivers the documentation required in accordance with Section 5(b)(i) hereof (b) Holder Demand Prepayment Amount. The "Holder Demand Prepayment Amount" means the greater off (a) 1.3 times the Stated Value of the Series A Preferred Stock for which demand is being made, plus all accrued and unpaid interest thereon and accrued and unpaid Conversion Failure Payments (if any) through the date of prepayment and (b) the product of (1) the highest price at which the Common Stock is traded on the date of the Event of Default (or the most recent highest closing bid price if the Common Stock is not traded on such date) divided by the Conversion Price in effect as of the date of the Event of Default, and (2) the sum of the Stated Value 18 and all accrued and unpaid Conversion Failure Payments (if any) through the date of prepayment. (c) Events of Default. An "Event of Default" means any one of the following: (i) a Conversion Failure described in Section 11(a) hereof; (ii) a Share Authorization Failure described in Section 10(b) hereof, if such Share Authorization Failure continues uncured for (x) fifteen (15) days following a Reservation Trigger Date if such increase requires solely the approval of the Company's Board of Directors and (y) sixty (60) days alter the Reservation Trigger Date if such increase requires approval of the Company's shareholders; (iii) the Company fails, and such failure continues uncured for three (3) business days after the Company has been notified thereof in writing by a Holder, to satisfy the share reservation requirements of Section 10 hereof; (iv) the Company fails to maintain an effective registration statement as required by Section 2, Section 3 or Section 6 of the Registration Rights Agreement between the Company and the Holder(s) (the "Registration Rights Agreement") except where such failure lasts no longer than three (3) consecutive trading days and is caused solely by failure of the Securities and Exchange Commission to timely review the customary submission of or respond to the customary requests of the Company; (v) for three (3) consecutive trading days or for an aggregate often (10) trading days in any nine (9) month period, the Common Stock (including any of the shares of Common Stock issuable upon conversion of the Series a Preferred Stock, and exercise of the Common Warrants) is (i) suspended from trading on any of the NASDAQ SmallCap, NMS, NYSE, AMEX or the OTC Bulletin Board, or (ii) is not qualified for trading on at least one of NASDAQ SmallCap, NMS, NYSE, AMEX or the OTC Bulletin Board; 19 (vi) the Company fails, and such failure continues uncured for three (3) business days after the Company has been notified thereof in writing by a Holder, to remove any restrictive legend on any certificate for any shares of Common Stock issued to a Holder upon conversion of any Series A Preferred Stock as and when required by this Certificate of Designation and the Subscription Agreement, between the Company and the Holder(s) (the "Subscription Agreement") or the Resignation Rights Agreement; (vii) the Company breaches, and such breach continues uncured for three (3) business days after the Company has been notified thereof in writing by a Holder, any significant covenant or other material term or condition of this Certificate of Designation, the Subscription Agreement or the Registration Rights Agreement; (viii) any representation or warranty of the Company made herein or in any agreement, statement or certificate given in writing pursuant hereto or in connection herewith (including, without limitation, the Subscription Agreement and Registration Rights Agreement), shall be false or misleading in any material respect when made; (ix) the Company or any subsidiary of the Company shall make an assignment for the benefit of its creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such receiver or trustee shall otherwise be appointed; (x) bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Company or any subsidiary of the Company (and such proceedings shall continue unstayed for thirty (30) days); or (xi) the Company fails to file a registration statement on Form 10 (to register securities pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934) within sixty (60) days of the Initial Issuance Date (as defined in Section 5 of the Company's Certificate of Designation of 20 Preferred Stock), or such registration statement is not declared effective within one hundred fifty (150) days of the Initial Issuance Date. (d) Failure to Pay Damages Amount. If the Company fails to pay the Holder Demand Prepayment Amount within five (5) business days of its receipt of a Demand Prepayment Notice, then such Holder shall have the right, at any time and from time to time prior to the payment of the Holder Demand Prepayment Amount, to require the Company, upon written notice, to immediately convert (in accordance with the terms of Section 5) all or any portion of the Holder Demand Prepayment Amount, into shares of Common Stock at the then current Conversion Price, provided that if the Company has not delivered the full number of shares of Common Stock issuable upon such conversion within five (5) business days after the Company receives written notice of such conversion, the Conversion Price with respect to such Holder Demand Prepayment Amount shall thereafter be deemed to be at the lowest Conversion Price in effect during the period beginning on the date of the Event of Default through the date on which the Company delivers to the Holder the full number of freely tradable shares of Common Stock issuable upon such conversion. In the event the Company is not able to pay all amounts due and payable with respect to all Series A Preferred Stock subject to Holder Demand Prepayment Notices, the Company shall pay the Holders such amounts pro rata, based on the total amounts payable to such Holder relative to the total amounts payable to all Holders. This Amendment was duly adopted by the Board of Directors of the Corporation as permitted under the authority of Section 78.1955 of the Nevada Revised Statutes, as amended and the Corporation's Articles of Incorporation. Date: April 7, 1999. Motorcycle Centers of America, Inc. By [ILLEGIBLE] ------------------------------------- President and /s/ David Wollins ------------------------------------- Asst. Secretary 21 STATE OF COLORADO ) ) SS: COUNTY OF ARAPAHOE ) On this 7th day of April, 1999, before me, a Notary Public, personally appeared Jay Boisdrenghein, the President of Motorcycle Centers of America, Inc., who acknowledged that he executed the above instrument. MY COMMISSION EXPIRES 2/28/2001 /s/ [ILLEGIBLE] ------------------------------------- My Commission Expires: NOTARY PUBLIC STATE OF COLORADO ) ) SS: COUNTY OF ARAPAHOE ) On this 8th day of April, 1999, before me, a Notary Public, personally appeared David Wollins, the Assistant Secretary of Motorcycle Centers of America, Inc., who acknowledged that he executed the above instrument. /s/ Jennifer A. Demori ------------------------------------- NOTARY PUBLIC [SEAL] My Commission Expires: 12-30-02 22 EX-10.01 7 STOCK PURCHASE AGREEMENT OCTOBER 1, 1998 EXHIBIT 10.01 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement ("Agreement") is dated as of 01 October, 1998 by and between Palisades Capital, Inc., a California corporation ("Buyer") and Charles Beilman, an individual ("Seller"), the sole shareholder of CD Universe, Inc., a Connecticut corporation ("CD"). This Agreement sets forth the terms and conditions upon which Seller has agreed to sell and Buyer has agreed to purchase from Seller 85% of all outstanding shares of the common stock of CD (the "Shares"). Seller represents and warrants that he owns the remaining 15% of the outstanding shares of the common stock of CD, and that no class of shares exists other than as set forth herein. In consideration of the mutual agreements contained herein and for other good and valuable consideration, the receipt and sufficiency or which are hereby acknowledged, the parties hereto agree as follows: 1. SALE OF THE SHARES 1.01 Shares Being Sold Subject to the terms and conditions of this Agreement, Seller is selling, assigning and delivering the Shares to Buyer at the closing provided for in Section 1.03 hereof (the "Closing"), free and clear of all liens, charges, claims or encumbrances of any kind or nature whatsoever. 1.02 Consideration Subject to the terms and conditions of this Agreement, and in reliance upon the representations, warranties and agreements of Seller contained herein and in consideration for the sale, assignment and delivery of the Shares and in full payment therefor: 1.02(a) Buyer shall pay to Seller the sum of Four Million Dollars ($4,000,000) as follows: (i) Twenty Five Thousand Dollars ($25,000) upon Buyer's signature hereon. (ii) On or before (A) three calendar weeks after the date of the signature or Buyer hereon, or (B) the completion and approval by Buyer of the audit as set forth in Section 1.02(c), whichever is 1 later, Buyer shall pay Seller an additional One Hundred Thousand Dollars ($100,000). (iii) On or before (A) sixty one (61) calendar days after the date of the signature of Buyer hereon, or (B) forty (40) days after the completion and approval by Buyer of the audit set forth in section A, whichever is later, Buyer shall pay Seller an additional One Hundred Thousand Dollars ($100,000). (iv) on or before (A) one hundred one (101) calendar days after the date of the signature of Buyer hereon, or (B) eighty (80) days after the completion and approval by Buyer of the audit set forth in Section 1.02(c), whichever is later, Buyer shall pay Seller the remainder of the purchase price ($3,775,000). 1.02(b) The parties agree that time is of the essence with respect to all payments to be made hereunder. 1.02(c) On or before October 16, 1998, Seller shall perform, at Seller's own expense, an audit of all of the business of CD, including but not limited to any and all financial records, inventories, accounts receivable and payable, and lists of equipment. Seller shall then transmit to Buyer a copy of said audit not more than five calendar days later. Buyer shall then have five additional business days to approve or reject the audit. 1.02(d) In the event that Buyer disapproves of any part of the audit, any document submitted by Seller in the course of this transaction, any representation made by Seller in the course thereof, or for any other reason, Buyer does not proceed with this transaction, Buyer and Seller agree that the amount of damages Seller would suffer thereby would be difficult to ascertain and would be incapable of being proven with any certainty. As a result, Buyer and Seller agree that any amounts previously paid by Buyer at the time Buyer notifies Seller that it will not complete the transaction will constitute liquidated damages for such failure by Buyer, and shall constitute Seller's only remedy and compensation therefor. 2 1.02(e) (i) As additional consideration hereunder, Seller shall have a seat on the Board of Directors of CD after this transaction is completed, and shall be president thereof. Seller shall also have a seat on the Board of Directors of any public company into which CD may be merged. (ii) Seller's compensation for services as a Director as set forth in the preceding subparagraph shall be commensurate with the compensation paid to other Board members for acting in such capacity. (iii) After this transaction is completed, Seller shall serve as an Employee of CD or any company into which CD is thereafter merged, on the terms and conditions set forth in that certain Employment Agreement attached hereto as Exhibit A. (iv) Seller represents that he has undertaken no transaction or transfer of any asset of CD in the calendar year preceding the date of his signature hereon, except in the ordinary course of business. Seller further represents that he will not make any transfer of any asset of CD during the pendency of this transaction, other than in the ordinary course of business. 1.02(f) On the Closing Date, Buyer will terminate Seller's authority to write checks against, or have outstanding checks honored from the funds in CD's bank account. Seller shall continue to have the authority to issue checks from CD's checking account (1) not in excess of $2,000 each, (2) not to Seller or any entity owned or controlled by Seller, and (3) not to Trak Systems, Inc. without, in each case, the prior written approval (as a co-signer on such checks or otherwise) of Brad Greenspan or his designee. Notwithstanding the foregoing, Beilman may issue the following checks without the approval of Brad Greenspan: to Valley Media and MSI of Miami several times per week; to Muze, Inc., Enso and Harvest Park Associates monthly; and to the United States Postal Service several times per month. On the Closing Date, Seller shall also deliver to Buyer a schedule setting forth those checks of CD that remain outstanding (the "Outstanding CD Checks"). To provide funds for the Outstanding CD Checks, Buyer shall, on the Closing Date, deposit into a conventional checking account, in the name of CD, funds sufficient to pay all Outstanding CD Checks, and shall cooperate with Seller to enable such funds to be used in fully satisfying all 3 Outstanding CD checks. Buyer shall thereafter indemnify Seller from and against all claims and liabilities attributable to Outstanding CD Checks. 1.02(g) (i) Although Seller will retain 15% of all outstanding shares in said company, as well as a seat on the Board of Directors of CD Universe after this transaction closes, Buyer and Seller are aware that disagreements may occur with respect to the running of the company after Buyer's purchase is completed. As a result thereof, should such disagreements arise, Buyer and Seller agree that their sole remedy hereunder with respect to Seller's ownership of stock, participation on the Board of Directors of CD Universe, and any rights acquired thereunder, shall be as follows. (ii) In the event that Seller and Buyer disagree as to the running of the company at any time after this transaction is completed, Buyer or Seller may notify the other party, or any successor thereto in writing that they wish to invoke the provisions of this paragraph. Upon such notice, seller shall sell any shares he then owns in either CD or any company into which CD is merged, to Buyer on the terms and conditions set forth herein. In addition, if such notice is given, Seller shall resign from all relevant Boards of Directors as set forth hereinbelow. (iii) If Seller gives such notice, Seller shall concurrently tender his resignation, in writing, from the Board of Directors of both CD and any company into which CD is merged. If Buyer gives such notice, then Seller shall tender his resignation within five business days thereafter. (iv) If at the time Buyer or Seller give notice pursuant to subparagraph (ii) hereinabove, CD or any company into which CD was merged is publicly traded on any national or international exchange, NASDAQ or any over-the-counter market the value of Buyer's shares shall be determined by the average share closing price over the five trading days preceding the date of the notice. (v) If, at the time Buyer or Seller give notice, neither CD nor any company into which CD was merged is publicly traded on any national or international exchange, NASDAQ or any over-the-counter market 4 then Buyer and Seller shall independently retain objective qualified third party evaluators to value the shares then owned by Seller. Said valuations shall be completed not later than 45 calendar days from the date Seller or Buyer have given notice pursuant to subparagraph (ii) hereinabove. (vi) The valuations of Seller's valuator and Buyer's valuator shall then be averaged, and the result thereof shall be deemed the value of Seller's shares for all purposes hereunder. (vii) Buyer shall then tender said sum to Seller not more than 45 calendar days after the date of the latest valuation report. 1.03 The Closing The Closing of the transactions provided for in Sections 1.04 and 1.05 shall take place at the offices of Buyer's counsel, 1801 Century Park East, Suite 2500, Los Angeles, California, 90067, simultaneously with the execution and delivery of this Agreement. 1.04 Delivery by Seller At the Closing, Seller shall transfer custody or deliver to Buyer at such place as Buyer shall designate: (i) a certificate or certificates representing the Shares endorsed in blank and otherwise in form acceptable for transfer on the books of CD or a Lost Stock Certificate Declaration and Agreement in the form annexed hereto as Exhibit 4.1; (ii) all contracts, books and records of CD not previously delivered to Buyer; (iii) the certificates of the officers of Seller in the form annexed hereto as Exhibit 4.2; (iv) the resignations of the officers and directors of CD, with the exception of Charles Beilman as set forth herein; and (v) the opinion of Neistat & Mason, counsel to Seller, in the form annexed hereto as Exhibit B. 1.05 Delivery by Buyer Buyer shall make to Seller the payments provided in Section 5 1.02(a) hereof. 2. ASSUMPTION OF CERTAIN LIABILITIES BY SELLER Seller hereby assumes all liability claims by employees of CD, except for accrued payroll and benefits as of the Closing Date for which Seller shall have no responsibility, attributable to occurrences prior to the Closing Date and agrees to indemnify and hold Buyer harmless from and against any and all liabilities, claims, costs and expenses, including attorney's fees, expended or incurred by Buyer with respect thereto. All such claims made or, after diligent inquiry are known to Seller, are set forth on Exhibit 5 hereto. 3. REPRESENTATIONS AND WARRANTIES BY SELLER Seller hereby represents, warrants and covenants to Buyer as follows: 3.01(a) CD is a corporation duly organized, validly existing, and in good standing under the laws of the state of Connecticut and is duly qualified to do business in all states in which such qualification is necessary. 3.01(b) (i) The authorized capital stock of CD consists of 1,000 shares of common stock, no par value, all of which are validly issued and outstanding, fully paid and nonassessable. Seller owns all of such shares and shall deliver on the Closing Date 850 (85%) of such Shares, free and clear of any liens, claims, options, charges or encumbrances of any kind or nature whatsoever. (ii) Seller has the unqualified right to sell, assign and deliver the Shares to Buyer and upon consummation of the transactions contemplated by this Agreement, Buyer will acquire good and valid title to the Shares free and clear of all liens, claims, options, charges and encumbrances of any nature whatsoever, except restrictions on resale imposed by applicable federal and/or state laws and regulations. (iii) There are no outstanding options, warrants or rights or other agreements of any nature requiring or relating to the issuance by CD of any shares of its capital stock. 6 3.01(c) CD has the corporate power and authority to carry on its business as presently conducted. 3.01(d) All obligations of Seller and CD under any Lease (as defined in Section 5.03 below) are current as of the Closing Date. 3.02 No Violation Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will constitute a violation or default under any term or provision of the articles of incorporation or bylaws of CD or of any material contract, commitment, indenture or other agreement or restriction of any kind or character to which CD or Seller is a party or by which CD or Seller is or may be bound. 3.03 Financial Statement Seller has delivered to Buyer the unaudited Financial Statement of CD (the "Financial Statement") as June 30, 1998 (the "Valuation Date"), a copy of which is attached hereto as Exhibit 3. The Financial Statement is true and correct in all material respects and a fair and accurate representation of the financial condition and assets and liabilities (whether accrued, absolute, contingent or otherwise) of CD as of such date, stated on a basis consistent with that of previous periods. 3.04 Tax Returns CD has duly filed all tax reports and returns required to be filed by it and has duly paid or accrued (except as set forth below) all taxes and other charges claimed to be due from it by federal, state or local taxing authorities (including, without limitation, those due in respect of its properties, income, franchises, licenses, sales and payrolls); there are no tax liens upon any of CD's property or assets except for liens for current taxes not yet due and payable or as set forth on Exhibit 6 hereto; and except as may be noted on the Financial Statement, there are not now nor does Seller have knowledge, after reasonable inquiry, of any pending matters relating to or claims asserted for taxes or assessments against CD or any of its assets except as disclosed herein. Buyer agrees to make CD's books and records available to Seller at reasonable times in CD's or Buyer's facility for review and copying during the pendency of this transaction. 7 3.05 Title to Properties; Encumbrances CD has good and marketable title to all of its properties and assets, real and personal, tangible and intangible, including without limitation the property and assets reflected on the Financial Statement (except for inventory and other properties and assets that have been sold or otherwise disposed of in the ordinary course of the business of CD since the Valuation Date). No such properties are subject to mortgage, pledge, lien, conditional sale agreement, encumbrance or charge of any nature whatsoever except: (a) liens shown on Exhibit 6 as securing specified liabilities (with respect to which no default exists); (b) liens for current taxes not yet due; and (c) minor imperfections of title and encumbrances, if any, that are not substantial in amount, do not materially detract from the value of the property subject thereto or materially impair the operations of CD and have arisen only in the ordinary course of business consistent with past practice. 3.06 Patents, Trademarks, Trade Names, Etc. All patents, trademarks, trade names and assumed names, copyrights or licenses therefor held by CD, all of which are set forth on Exhibit 12, are valid and in good standing and free and clear of all liens and encumbrances of any and every nature and are not involved in any pending or threatened interference proceeding; to the best knowledge of Seller, after reasonable inquiry, none of the products manufactured or sold by CD and none of the formulae, processes, know-how or designations used in the business of CD infringes on any patent, trade secret, trademark, trade name or copyright of any other person. 3.07 Accounts Receivable All accounts receivable of CD, as reflected in the Financial Statement, as adjusted for ordinary business transactions between the Valuation Date and the Closing Date, represent sales actually made in the ordinary course of business and the reserve for collectibility of receivables as reflected in the Financial Statement is adequate and was calculated in a way consistent with past practice. Except to the extent set forth in Exhibit 7 hereto, or for which adequate reserves have been established as reflected on the Financial Statement, there are not now any questions, controversies or disputes relating to any accounts receivable of CD. 3.08 Inventory, Equipment and All Other Assets Inventory, equipment, and all other assets of CD reflected on the Financial Statement, as adjusted for normal business transactions between the Valuation Date and the Closing Date, 8 except for any positive or negative cash balance which is excluded from the transaction contemplated herein, are stated on the basis of actual cost (less depreciation in the case of equipment) (the "Accounting Value"). Immediately after the Closing Date, Buyer may engage an independent public accountant, at Buyer's sole cost and expense, to audit the inventory, equipment and other asset amounts for the purpose of verifying the Accounting Value, i.e., the accounting methodology used to determine the Accounting Value as opposed to fair market or net realizable value. Such audit shall be completed within 30 days of the Closing Date or Buyer shall be deemed to have waived its right to challenge, and shall be deemed to have accepted, the Accounting Value. If the Accounting Value as determined by such audit is more than five per cent (5%) less than that represented by Seller, Seller and Buyer shall mutually select another independent accountant to determine the Accounting Value, with such determination being final. In such event, Seller and Buyer shall evenly divide the cost and expense of the independent accountant. Buyer shall be credited, dollar for dollar, with the amount by which the Accounting Value as determined by the independent accountant is less than the Accounting Value represented by Seller. 3.09 Undisclosed Liabilities Except to the extent reflected or reserved against in the Financial Statement, as of the Valuation Date CD had no liabilities or obligations of any nature, whether absolute, accrued, contingent or otherwise and whether due or to become due, except those that are not required by generally accepted accounting principles to be included in the Financial Statements. Further, Seller, following reasonable inquiry, does not know or have any reasonable ground to know of any basis for the assertion against CD as of the Valuation Date, of any liability or obligation of any nature or in any amount not fully reflected or reserved against in the Financial statement. 3.10 Absence of Certain Changes CD has not, since the Valuation Date; 3.10(a) Suffered any material adverse change in its financial condition, assets, liabilities, business or prospects, except those set forth in Exhibit 20 hereto; 3.10(b) Incurred any obligation or liability (whether absolute, 9 accrued, contingent or otherwise) other than in the ordinary course of business and consistent with past practice or with respect to the Lease; 3.10(c) Paid any claim or discharged or satisfied any lien or encumbrance or paid or satisfied any liability (whether absolute, accrued, contingent or otherwise) other than liabilities shown or reflected in the Financial Statement or liabilities incurred since the Valuation Date in the ordinary course of business and consistent with past practice; 3.10(d) Permitted or allowed any of its assets, tangible or intangible, to be mortgaged, pledged or subjected to any liens or encumbrances; 3.10(e) Written down the value of any inventory or written off as uncollectible any notes or accounts receivable or any portion thereof except for write offs of such items in the ordinary course of business; 3.10(f) Cancelled any other debts or claims or waived any rights of substantial value or sold or transferred any of its assets or properties, tangible or intangible, other than in the ordinary course of business and consistent with past practice; 3.10(g) Disposed of or permitted to lapse any material patent, trademark or copyright or any application for any material patent, trademark or copyright; 3.10(h) Disposed of or disclosed to any person any trade secret, formula, process or other know-how except pursuant to inquiries to purchase CD or its assets for which Confidentiality Agreements were obtained by Seller, all of which agreements are annexed hereto as Exhibit 8; 3.10(i) Granted any general uniform increase in the compensation of employees (including any increase pursuant to any bonus, pension, profit-sharing or plan or commitment) or any 10 substantial increase in any compensation payable or to become payable to any officer or employee, and no such increase (whether general or otherwise) is required pursuant to any existing employment agreements or otherwise; 3.10(j) Made any capital expenditures or commitments in excess of $10,000 for additions to property, plant or equipment; 3.10(k) Declared, paid or set aside for payment to its stockholders, any dividend or other distribution in respect of its capital stock or redeemed or purchased or otherwise acquired any of its capital stock or any options relating thereto or agree to take any such action; or 3.10(l) Made any material change in any method of accounting or accounting practice. 3.11 Litigation Except to the extent set forth in Exhibit 9 hereto there are no actions, proceedings or investigations pending or, after reasonable inquiry to the knowledge of Seller, threatened against CD and Seller does not know or have any reason to know of any basis for any such action, proceeding or investigation. 3.12 Disclosure Seller has disclosed to Buyer all facts material to the assets, prospects and business of CD known to Seller. No representation or warranty by Seller contained in this Agreement and no statement contained in any exhibit, list, certificate or writing furnished to Buyer pursuant to the provisions hereof or in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading or necessary in order to provide a prospective purchaser of the business of CD with accurate and complete information which any reasonable purchaser of CD would desire as to CD and its affairs. 3.13 Exhibits Each of the Exhibits to this Agreement is incorporated into this Agreement and made a part hereof, and is true, accurate and complete. 11 3.15 Material Events or Conditions After reasonable inquiry, to the best knowledge of Seller, there is no event or condition of any kind or character pertaining to the business, assets or prospects of CD that may materially or adversely affect such business, assets or prospects. 4. REPRESENTATIONS AND WARRANTIES BY BUYER Buyer hereby represents, warrants and covenants to Seller as follows: 4.01 Organization, Etc. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the state of California. 4.02 Authority The execution and delivery of this Agreement by Buyer and the consummation by Buyer of the transactions contemplated hereby have been duly authorized by the board of directors of Buyer. The officers of Buyer acting on behalf of Buyer with respect to these transactions and executing this Agreement on behalf of Buyer have been duly authorized by all necessary and appropriate corporate action to take such actions and to execute this Agreement. 4.03 No Violation Neither the execution nor the delivery of this Agreement, nor the consummation of the transactions contemplated hereby will constitute any violation or default under any term or provision of the articles of incorporation or bylaws of Buyer or of any material contract, commitment, indenture or other agreement or restriction of any kind or character to which Buyer is a party or by which Buyer is bound. 4.04 Investment Experience Buyer has significant knowledge and experience in financial and business matters enabling it to evaluate the significant risks associated with its acquisition of the Shares. 4.05 Insurance Seller hereby assigns to Buyer the benefits under and proceeds of each and all existing policies of insurance coverage relating to products or services provided by CD of which policies Seller or CD is a beneficiary. Copies of all such policies shall be delivered to Buyer at the Closing. Seller 12 further agrees to cause CD to be named the sole insured under such policies and to deliver evidence thereof satisfactory to Buyer within 30 days of the Closing Date. Such benefits and proceeds shall be utilized in satisfaction of claims, liabilities, costs and expenses of CD, if any, related to occurrences prior to the Closing Date. Following the payment of such benefits and proceeds, the indemnification provisions of Section 5.02 of this Agreement shall apply. 5. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION 5.01 Survival of Representations All representations, warranties and agreements made by any party in this Agreement or pursuant hereto shall survive the execution and delivery hereof for a period of three years. 5.02 Indemnification (a) Seller shall indemnify Buyer in respect of all claims, demands, losses and damages (collectively, "Damages") that Buyer or CD shall incur or suffer which arise from or are attributable to any inaccuracy or breach of Seller's representations and warranties relating to occurrences which may have taken place prior to the Closing Date. The indemnification provided for under this Section shall include but not be limited to all costs, claims, damages, liabilities and expenses of any nature arising out of or based upon the operations of CD and product warranty claims against CD including reasonable costs of investigation, attorneys' fees and expenses. (b) Assertion by Buyer of its right to indemnification under this Section 5.02 shall not preclude the assertion by Buyer of any other rights or the seeking of any other remedies against Seller. (c) In case any claim, investigation or action shall arise against CD for which Seller shall be liable to indemnify Buyer hereunder (referred to herein as a "claim") the defense of any such claim shall be undertaken by Seller utilizing counsel of Seller's choice who shall be reasonably satisfactory to Buyer. In the event that Buyer shall seek to employ separate counsel to defend its interests with respect to any claim, it shall do so at its own cost and expense and Buyer shall not be entitled to indemnification from Seller with respect thereto. Promptly after receipt by either Buyer or Seller of notice of a claim, the party receiving such notice shall notify the other party. Buyer shall cooperate in all respects with Seller and counsel selected by Seller in 13 connection with the investigation and defense of any claim. 5.03 Existing Lease Exhibit 10 contains a true and complete copy of the Lease Agreement dated February 12, 1997 between Harvest Associates as landlord and Prime Software, Inc., dba Trak Systems as tenants on Seller's business premises, commonly described as 101 North Plains Ind. Road, Harvest Park Building #5, Wallingford, Connecticut (the "Premises"). As further consideration for the purchase hereunder, Buyer agrees to assume and fulfill Seller's obligations to pay all rent under the Lease after the Closing Date for so long as CD may continue to occupy the Premises, and to indemnify and hold the Seller harmless from any claims by, or demands from, the Landlord under the Lease related to, or arising from any failure to make such payments. Buyer will indemnify Seller from any liabilities and expenses resulting from its and/or CD's occupancy of the Premises and termination of the Lease following the Closing Date. 6. MISCELLANEOUS 6.01 Expenses All fees and expenses incurred by Seller in connection with the transactions contemplated by this Agreement shall be borne by Seller and all fees and expenses incurred by Buyer in connection with the transactions contemplated by this Agreement shall be borne by the Buyer. 6.02 Further Assurances From time to time, at Buyer's request and without further consideration, Seller at its own expense will execute and transfer such documents and will take such other action as Buyer may reasonably request in order to more effectively consummate the transactions contemplated hereby. 6.03 Parties and Interests All the terms and provisions of this Agreement shall be binding upon, shall inure to the benefit of and shall be enforceable by the respective heirs, beneficiaries, representatives, successors and permitted assigns of the parties hereto. 6.04 Prior Agreements; Amendments This Agreement supersedes all prior agreements and 14 understandings between the parties with respect to the subject matter hereof. This Agreement may be amended only by a written instrument duly executed by the parties hereto or their respective successors or assigns. 6.05 Headings The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretations of this Agreement. 6.06 Governing Law and Judicial Proceedings This Agreement shall be governed by and construed and enforced in accordance with the laws of the state of California without regard to its conflict of laws rules. Any judicial proceedings brought by Buyer against Seller with respect to this Agreement must be brought in a court of competent jurisdiction in the County of Los Angeles, State of California. 6.07 Notices All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered or mailed (registered or certified mail, postage prepaid, return receipt requested) as follows: If to Buyer: Palisades Capital, Inc. 264 South La Cienega, Suite 305 Beverly Hills, California 90211 Attn: President Telephone: (310) 546 - 5437 Facsimile: (310) 546 - 2807 With a copy to: David L. Kagel, Esq. 1801 Century Park East, 25th Floor Los Angeles, California 90067-2327 Telephone: (310) 553 - 9009 Facsimile: (310) 553 - 9693 and 15 Klint James McKay, Esq. McKay, Meyer and Herbert 1801 Century Park East, 25th Floor Los Angeles, California 90067-2327 Telephone: (310) 772 - 0836 Facsimile: (310) 772 - 0239 If to Seller: Charles Beilman CD Universe 101 North Plains Industrial Road Wallingford, Connecticut 06492 Telephone: (203) 265 - 3440 Facsimile: (203) 269 - 3930 With a copy to: Kevin Mason, Esq. Neistat & Mason 47 East Cedar Street Newington, Connecticut 06111 Telephone: (860) 666 - 6022 Facsimile: (860) 666 - 6710 7.08 Counterparts This Agreement may be executed simultaneously in several Counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 7.09 No Third Party Beneficiaries This Agreement is for the benefit of Buyer and Seller only and is not intended to nor shall it operate to create any third party beneficiary or other rights in any other person or entity. 7.10 Assignment Neither party may assign its rights under this Agreement or delegate its duties or obligations hereunder absent the prior written consent of the other party. 16 7.11 Brokers If either party has retained, or is claimed to have retained, a broker or finder in connection with this transaction, the party which so retained, or is claimed to have retained, the broker or finder shall indemnify and hold the other party harmless from any and all claims, fees and/or compensation sought by such actual or alleged broker or finder. IN WITNESS WHEREOF this Agreement has been duly executed by the parties hereto on the date first above written. PALISADES CAPITAL, INC. By: /s/ Brad Greenspan --------------------------------- Brad Greenspan, President CD UNIVERSE, INC. By: /s/ Charles Beilman, President --------------------------------- Charles Beilman, President /s/ Charles Beilman - ------------------------------------- Charles Beilman, an individual 17 EX-10.02 8 AMENDMENT TO STOCK PURCHASE AGREEMENT EXHIBIT 10.2 AMENDMENT TO STOCK PURCHASE AGREEMENT This amendment ("Amendment") to the Stock Purchase Agreement dated as of 01 October, 1998 by and between Palisades Capital, Inc. and Charles Beilman (the "Agreement") is dated as of __ December, 1998. Each and all of the defined terms in the Agreement are adopted and incorporated into the Amendment. The Agreement is hereby amended as follows: 1) Section 1.02(a) of the Agreement as presently existing is hereby deleted and the following substituted therefor: "Buyer shall pay to Seller the sum of two million dollars ($2,000,000) as follows: (i) two hundred twenty five thousand dollars ($225,000) receipt of which is hereby acknowledged by Seller; (ii) thirty thousand dollars ($30,000) on or before January 16, 1998; and (iii) the balance of one million seven hundred forty five thousand dollars ($1,745,000) on February 26, 1998." 2) Section 1.02(e)(i) of the Agreement as presently existing is hereby deleted and the following is substituted therefor: "As additional consideration hereunder, Seller shall have a seat on the Board of Directors of CD after this transaction is completed and shall be Chief Operating Officer of CD. Seller shall also have a seat on the Board of Directors of any public company into which CD may be merged. Seller shall enter into an employment agreement as set forth in Exhibit A. Seller shall serve as the Chief Operating Officer and the Chief Technical Officer of CD or any company into which it shall be merged." 3) The following Section 1.02(h) is hereby added to the Agreement: "(i) Buyer contemplates the acquisition of control of a public company ("Public Company") whose shares are trading on the Electronic Bulletin Board operated by the National Association of Securities Dealers, Inc. Seller has agreed to reduce the balance of the cash purchase price of CD Universe as previously set forth in Section 1.02(a) from $3,745,000 to $1,745,000. In consideration therefor, Seller shall be issued, in addition to shares of common stock to which he would be entitled upon exchange of his shares in CD Universe, shares of common stock of the Public Company having a value of $3,000,000. The number of shares to be issued shall be valued based upon the average of the closing bid prices of the shares of Public Company, as reported on the Electronic Bulletin Board for the first twenty trading days after CD Universe has been merged with or acquired by the Shell." "(ii) As "downside protection" Seller will receive no less than 1,000,000 shares of common stock of the Public Company pursuant to Paragraph (i) of this Section 1.02(h). Such shares will be issued as soon as possible following the acquisition of control of the Public Company." 4) In all other respects the Agreement remains unchanged and in full force and effect as of the date hereof. IN WITNESS WHEREOF this Amendment has been duly executed by the parties hereto on the date first above written. PALISADES CAPITAL, INC. CD UNIVERSE, INC. By:__________________________ By:___________________________ Brad Greenspan, President Charles Beilman, President _________________________________ Charles Beilman, an individual EX-10.03 9 AMENDMENT NO. 2 TO STOCK PURCHASE AGREEMENT EXHIBIT 10.03 AMENDMENT NO. 2 TO STOCK PURCHASE AGREEMENT This Amendment No. 2 ("Amendment") to Stock Purchase Agreement is dated February 11, 1999 and is entered into by and between Palisades Capital Inc. a California corporation ("Buyer"), Charles Beilman, an individual ("Seller") and the Entertainment Universe, Inc. a California corporation ("Entertainment Universe"). This Amendment to Stock Purchase Agreement ("Agreement") amends the original Stock Purchase Agreement between the parties dated October 1, 1998 as amended by Amendment to Stock Purchase Agreement dated as of December, 1998. The Agreement is hereby amended as follows: 1. Section 1.02(a) of the Agreement, as presently existing, is hereby deleted and the following substituted therefor: "Buyer shall pay to Seller the sum of $2,000,000 as follows: (i) $255,000, receipt of which is hereby acknowledged by Seller; and either (ii) or (iii) below at the discretion of Buyer; (ii) $250,000 on or before February 19, 1999, and the balance of $1,495,000 on or before April 30, 1999; or (iii) $1,745,000 on or before February 26, 1999. 2. Section 1.02(b) of the Agreement as presently existing is hereby deleted and the following substituted therefor: "Buyer contemplates the acquisition of control of a public company ("Public Company") whose shares are traded on the Electronic Bulletin Board operated by the National Association of Securities Dealers, Inc. Seller has agreed to reduce the balance of the cash purchase price for the shares of CD Universe as previously set forth in Section 1.02(a) from $4,000.000 to $2,000,000. In consideration, therefore, and in consideration of the other terms of this Amendment, Seller shall be issued shares in the Public Company equal to (i) 1,500,000 shares plus (ii) the greater of 1,000,000 shares or shares of the Public Company having a value of $3,000,000. The number of shares to be issued shall be valued based upon the average of the closing bid prices of the shares of the Public Company, as reported on the Electronic Bulletin Board for the first 20 trading days after CD Universe has been merged with or acquired by the public shell. Such shares will be issued as soon as possible following the acquisition of control of the Public Company, in accordance with applicable securities laws. 3. Section 1.02(g)(i) shall provide that Seller shall sell 100% of the outstanding shares in CD Universe pursuant to the Amendment. In addition, the second paragraph of the Agreement on Page 1 shall reflect that this Agreement is for 100% of all outstanding shares of the common stock of CD Universe. 4. Section 7.10 to the Agreement, as presently existing is deleted and the following substituted therefor: "Palisades Capital, Inc. as of the date of this Amendment, hereby assigns for rights under this Agreement and delegates its duties and obligations under this Agreement to the Entertainment Universe, Inc. a California corporation. 5. In all other respects the Agreement remains unchanged and in full force and effect as of the date hereof. IN WITNESS WHEREOF, this Amendment has been duly executed by the parties hereby on the date first written above. PALISADES CAPITAL INC. By: ------------------------------ Brad Greenspan, President CD UNIVERSE, INC. By: /s/ Charles Beilman ------------------------------ Charles Beilman, President and Charles Beilman an individual THE ENTERTAINMENT UNIVERSE, INC. By: ------------------------------ Brad Greenspan, Chairman EX-10.04 10 AMENDMENT NO. 3 TO STOCK PURCHASE AGREEMENT EXHIBIT 10.04 AMENDMENT NO. 3 TO STOCK PURCHASE AGREEMENT This Amendment No. 3 ("Amendment") to Stock Purchase Agreement is dated as of March __, 1999 and is entered into by and between Palisades Capital Inc. a California corporation ("Buyer"), Charles Beilman, an individual ("Seller") and the Entertainment Universe, Inc. a California corporation ("Entertainment Universe"). This Amendment to Stock Purchase Agreement ("Agreement") amends the original Stock Purchase Agreement between the parties dated October 1, 1998, as amended by Amendment to Stock Purchase Agreement dated as of December, 1998 and Amendment No. 2 to Stock Purchase Agreement dated as of February 11, 1999. The Agreement is hereby amended as follows: 1. Section 1.02(a) of the Agreement, as presently existing, is hereby deleted and the following substituted therefor: "Buyer shall pay to Seller the sum of $2,000,000 as follows: (i) $255,000, receipt of which is hereby acknowledged by Seller; and either (ii) or (iii) below at the discretion of Buyer; (ii) $250,000 on or before March 5, 1999, and the balance of $1,495,000 on or before May 5, 1999; or (iii) $1,745,000 on or before March 5, 1999. [Remainder of page intentionally left blank.] 2. In all other respects the Agreement remains unchanged and in full force and effect as of the date hereof. IN WITNESS WHEREOF, this Amendment has been duly executed by the parties hereby on the date first written above. PALISADES CAPITAL INC. By: /s/ Brad Greenspan ------------------------------ Brad Greenspan, President CD UNIVERSE, INC. By: /s/ Charles Beilman ------------------------------ Charles Beilman, President and Charles Beilman an individual THE ENTERTAINMENT UNIVERSE, INC. By: /s/ Brad Greenspan ------------------------------ Brad Greenspan, Chairman EX-10.05 11 AMENDMENT NO. 4 TO STOCK PURCHASE AGREEMENT EXHIBIT 10.05 Amendment Number 4 to Stock Purchase Agreement This agreement dated as of June 9, 1999 between eUniverse, Inc. f/k/a Entertainment Universe, Inc., a Nevada Corporation ("eUniverse") and Charles Beilman, an individual (the "Seller"). RECITALS: 1. A predecessor in interest of eUniverse, Palisades Capital, Inc., a California corporation ("Palisades"), and the Seller entered to a certain Stock Purchase Agreement dated October 1, 1998 ("Original Purchase Agreement"), whereby Palisades would purchase all of the outstanding shares of capital stock of CD Universe, Inc., a Connecticut corporation ("CD Universe"), from the Seller. The Original Purchase Agreement was amended by an Amendment to Stock Purchase Agreement dated as of December, 1998 and an Amendment No. 2 to Stock Purchase Agreement dated February 11, 1999 (the Original Purchase Agreement and the amendments are collectively referred to as the "Purchase Agreement"). 2. The transactions contemplated by the Purchase Agreement were closed on April 14, 1999 (the "Closing"). 3. Following the closing, an audit was performed for the fiscal year ended March 31, 1999 and the parties have agreed to certain adjustments to the Purchase Agreement and financial statements of CD Universe as a result of such audit. AGREEMENT: 1. Audit Items. The audit of CD Universe identified the following items (the "Audit Items"): (a) $110,395 of expenses paid by Trak Systems, Inc., an affiliate of CD Universe ("Trak"), on behalf of CD Universe were not included in the CD Universe financial information provided to eUniverse prior to the Closing. As a result, the original projected earnings for the period ending March 31, 1999 was not correct, and the financial statements resulted in the recognition of an additional $110,000 loss for that period; (b) The compensation of the Seller as an officer of CD Universe for the fiscal year 1999 exceeded the projected compensation by $100,000; and (c) The accounts payable of CD Universe at the Closing exceeded the projected accounts payable by approximately $400,000 which required a $400,000 advance by eUniverse immediately following the Closing in order to reduce the excess accounts payable balance. 2. Purchase Price and Other Adjustments. (a) In order to resolve the Audit Adjustments, the Seller and eUniverse hereby agree as follows: (i) the CD Universe accounts payable of $110,395 due to Trak, is hereby eliminated and CD Universe is released from any liability to Trak up to and including the date of this Agreement; (ii) the net amount due by CD Universe to the Seller prior to the adjustments indicated in (iii) - (v) below equals $85,000 ($150,000 due by CD Universe to the Seller pursuant to a promissory note dated February 15, 1999 less repayments of $65,000); (iii) the Seller owes to CD Universe the amount of $57,568, representing advances received by Seller up to March 31, 1999; (iv) the compensation of the Seller for fiscal year ended March 31, 1999 shall be reduced by $100,000 resulting in an additional $100,000 due by Seller to CD Universe; (v) the total cash portion of the purchase price as provided in Section 1.02(a) of the Purchase Agreement shall be reduced by $85,000. Seller and eUniverse acknowledge that this is in full settlement of any adjustments previously agreed between the Seller and eUniverse; and (vi) the total number of eUniverse shares received by the Seller under the Purchase Agreement shall be reduced by 75,000 shares to 2,425,000 shares of common stock of eUniverse. (b) The items identified in Sections 2(a)(ii)through (iv) above in the total amount of $157,568 (i.e., $57,568 in Subsection (iii) plus $100,000 in Subsection (iv) plus $85,000 in Subsection (v) less $85,000 in Subsection (ii)) shall be paid in cash upon execution of this Agreement. The adjustment to the share portion of the Purchase Price as indicated in Section 2(a)(iv) above, shall be accomplished as of date of this agreement and the total shares of eUniverse in the name of the Seller shall be reissued to the Seller. 3. Full Settlement of Audit Items. eUniverse hereby agrees to release and forever discharge, the Seller and his heirs, executors and administrators, from any and all manner of action and actions, cause and causes of action, claims and demands whatsoever, in law or in equity, including any claims under the Purchase Agreement, which eUniverse has ever had, now has or which eUniverse hereafter can, shall or may have against the Seller for, upon or by reason of any matter, cause or thing whatsoever relating to the Audit Items. Specifically, but not in any way limiting the generality of the foregoing, the Purchase Price and other adjustments provided in Section 2 above shall be in complete settlement of any potential claims of eUniverse relating to the valuation of CD Universe in determining the purchase price under the Purchase Agreement; provided that nothing herein shall be construed to release the Seller from any third party claims for which the Seller continues to be responsible under the Purchase Agreement. 4. Governing Law. This Agreement is governed by, and shall be construed in accordance with, the laws of the State of Connecticut without regard to conflicts of laws principles thereof. 5. Binding Effect. This Agreement is binding upon, and shall inure to the benefit of and be enforceable by, each of the parties and their respective successors and assigns, or his heirs, executors and administrators, as the case may be. 6. Headings. The headings contained in this Agreement are for convenience only and are not a part of this Agreement and shall not be used in construing or interpreting the provisions hereof. IN WITNESS WHEREOF, the undersigned have executed this Agreement on the date first above written. eUniverse, Inc. By_______________________ Its: Chief Financial Officer "Seller" Charles Beilman __________________________ EX-10.06 12 AGREEMENT AND PLAN OF REORGANIZATION APRIL 9 ,1999 EXHIBIT 10.06 AGREEMENT AND PLAN OF REORGANIZATION April 9, 1999 MOTORCYCLE CENTERS OF AMERICA, INC. ACQUISITION OF ENTERTAINMENT UNIVERSE, INC. TABLE OF CONTENTS Page Recitals................................................................... 1 Agreement.................................................................. 1 1. Plan of Reorganization........................................ 1 2. Exchange of Shares............................................ 1 3. Delivery of Shares............................................ 2 4. Representations of Principal Officers and Acquiree............ 2 5. Representations of Acquiring Corporation...................... 4 6. Closing Date.................................................. 6 7. Conditions Precedent to the Obligations of Acquiree........... 6 8. Conditions Precedent to the Obligations of Acquiror........... 8 9. Indemnification............................................... 9 10. Nature and Survival of Representations........................ 10 11. Documents at Closing.......................................... 10 12. Miscellaneous................................................. 11 Signature Page................................................ 12 -ii- AGREEMENT AND PLAN OF REORGANIZATION ------------------------------------ This Agreement and Plan of Reorganization is entered into this 9th day of April, 1999, by and between MOTORCYCLE CENTERS OF AMERICA, INC., a Nevada corporation, (hereinafter "Acquiror"); and ENTERTAINMENT UNIVERSE, INC., a California corporation; (hereinafter referred to as "Acquiree"); and the undersigned Principal Officers of Acquiree, (hereinafter collectively referred to as "Principal Officers"). RECITALS -------- Acquiror desires to acquire all of the issued and outstanding stock of Acquiree, making Acquiree a wholly-owned subsidiary of Acquiror, and Stockholders of Acquiree (defined to include both holders of common and preferred stock) desire to make a tax-free exchange solely of their shares in Acquiree for shares of Acquiror's capital stock to be exchanged as set out herein with the Stockholders of Acquiree. NOW, THEREFORE, for the mutual consideration set out herein, the parties agree as follows: AGREEMENT --------- 1. Plan of Reorganization. Stockholders of Acquiree are the owners of all ---------------------- the issued and outstanding capital stock of said Acquiree. It is the intention of the parties hereto that all of the issued and outstanding common stock of Acquiree shall be acquired by Acquiror in exchange solely for newly issued Acquiror voting stock. Further, all preferred stock of Acquiree shall be acquired by Acquiror in exchange solely for newly issued Acquiror preferred stock of the same rights and preferences. It is the intention, but not a requirement, of the parties hereto that this transaction qualify as a tax-free reorganization under Section 368 of the Internal Revenue Code of 1986, as amended. 2. Exchange of Shares. Acquiror and Acquiree agree that all of the issued ------------------ and outstanding securities of Acquiree shall be exchanged with Acquiror for a total of 12,600,000 shares, in the aggregate, of restricted common stock of Acquiror, after giving effect to a one-for-twenty reverse split of the Acquiror's common stock and a total of 1,937,500 shares of Series A 6% Convertible Preferred Shares of Acquiror. The Acquiror shares will, on the date of delivery to the Stockholders of Acquiree, (which is defined as the date in Paragraph 6 herein), be delivered to the Stockhold ers of Acquiree in exchange for its shares in Acquiree.Stockholders of Acquiree will represent and warrant under their individual investment letters that each will hold such securities of Acquiror for investment purposes and not for further public distribution and agree that the securities shall be appropriately restricted. As of the Delivery Date, Acquiror shall have no more than 1,205,000 post-split common shares issued and outstanding (such amount shall include approximately 900,000 common shares which will have been issued pursuant to Rule 504 prior to the Delivery Date at a price not to exceed $1.00 per share and the cancelation of 1,845,000 restricted shares). 3. Delivery of Shares. On the Delivery Date (which is defined as the date ------------------- in Paragraph 6 herein),Stockholders of Acquiree will deliver certificates or other evidence of ownership of Acquiree duly endorsed so as to make Acquiror the sole holder thereof free and clear of all claims and encumbrances. On the Delivery Date, delivery of the Acquiror shares, which 1 will be appropriately restricted as to transfer, will be made to the Stockholders of Acquiree as set forth herein. A list of the shares of Acquiree, the owner thereof, and shares of Acquiror to be received by said Stockholders of Acquiree is attached hereto as Exhibit "A" and by this reference is incorporated herein. 4. Representations of Principal Officers and Acquiree. The Principal -------------------------------------------------- Officers and Acquiree, hereby represent and warrant that, with respect to shares of the Stockholders of Acquiree and as to the Acquiree, effective this date, the Closing Date (which is defined as the date in Paragraph 6 herein), and the Delivery Date, the representations listed below are true and correct to the best of their knowledge, information, and belief. Said representations are meant and intended by all parties to apply to the Acquiree: (a) The listed Stockholders of Acquiree on Exhibit "A" are the sole owners of all of the issued and outstanding securities of Acquiree; such shares are free from claims, liens, or other encumbrances; and Stockholders of Acquiree hasve the unqualified right to transfer and dispose of such shares. (b) The issued shares of Acquiree constitute validly issued shares of Acquiree, fully-paid and nonassessable. (c) The audited year-end financial statements of CD Universe, Inc., the wholly- owned subsidiary of Acquiree, for the fiscal years ended March 31, 1997 and 1998, as well as the interim unaudited financial statements for the period ended December 31, 1998, which have been delivered to Acquiror, are complete, accurate and fairly present the financial condition as of the dates thereof and the results of its operations for the periods covered. There are no liabilities, either fixed or contingent, not reflected in such financial statements other than contracts or obligations in the ordinary and usual course of business; and no such contracts or obligations in the usual course of business constitute liens or other liabilities which, if disclosed, would alter substantially the financial condition of CD Universe, Inc. as reflected in such financial statements. (d) Prior to and as of the Closing Date and the Delivery Date, there will not be any negative material changes in the financial position of Acquiree, except changes arising in the ordinary course of business, which changes will in no event adversely affect the financial position of said Acquiree. (e) Except as previously disclosed in the financial statements, to the best of Acquiree's knowledge, information and belief, it is not involved in, and has not received judicial notice of any pending litigation or governmental investigation or proceeding not reflected in such financial statement, or otherwise disclosed in writing to Acquiror and, to the best knowledge of Acquiree and Principal Officers, no material litigation, claims, or assess ments, or governmental investigation or proceeding is threatened against Acquiree, its principal shareholders or properties. (f) As of the Closing Date and the Delivery Date, Acquiree will be in good standing in its jurisdiction of incorporation, and will be in good standing and in the process of becoming duly qualified to do business in each jurisdiction where required to be so qualified. 2 (g) Acquiree has complied with all applicable laws in connection with its formation, issuance of securities, organization, capitalization and opera tions, and to the best of Acquiree's knowledge, information and belief, no contingent liabilities have been threatened or claims made, and no basis for the same exists with respect to said operations, formation or capitalization, including claims for violation of any US state or federal securities laws. (h) Acquiree has filed all governmental, tax or related returns and reports due or required to be filed and has paid all taxes or assessments which have or which shall become due as of the Closing Date and the Delivery Date. (i) Except as disclosed in this Agreement or on any Exhibit, Acquiree has not breached any material agreement to which it individually or collectively may be a party. (j) Acquiree has one subsidiary, CD Universe, Inc. (k) The corporate financial records, minute books, and other documents and records of Acquiree are to be available to present management of Acquiror prior to the Closing Date and turned over to new management of Acquiror in their entirety on the Delivery Date. (l) The execution of this Agreement will not violate or breach any agreement, contract, or commitment to which Acquiree or Stockholders of Acquiree are a party and has been duly authorized by all appropriate and necessary action. (m) All outstanding shares have been duly authorized, validly issued and are fully paid and nonassessable with no personal liability attaching to the ownership thereof. There are no outstanding convertible securities, war rants, options or commitments of any nature which may cause authorized but unissued shares to be issued to any person. (n) To the best knowledge of the Principal Officers and Acquiree, Acquiree is not subject to any material labor disputes or disagreements, either actual or contingent. (o) To the best knowledge of Principal Officers and Acquiree, Acquiree's products, materials and brochures do not infringe the patent or copyright rights of any other person or entity. (p) At the date of this Agreement, the Principal Officers have, and at the Closing Date and the Delivery Date, they will have to the best of its knowledge, disclosed all events, conditions and facts materially affecting the business and prospects of Acquiree and its assets.Principal Officers have not now and will not have, at the Closing Date or the Delivery Date, withheld knowledge of any such events, conditions, and facts which it knows, or has reasonable grounds to know, may materially affect the business and prospects of Acquiree or its assets. 5. Representations of Acquiring Corporation. Acquiror hereby represents ---------------------------------------- and warrants as follows, effective this date, the Closing Date, and the Delivery Date, the 3 representations listed below are true and correct to the best of its knowledge, information, and belief: (a) As of the Delivery Date, the Acquiror shares to be delivered to the Stockholders of Acquiree will constitute valid and legally issued shares of Acquiror, fully-paid and nonassessable, and will be legally equivalent in all respects to the capital stock of Acquiror issued and outstanding as of the date thereof. (b) The officers of Acquiror are duly authorized to execute this Agreement and have taken all actions required by law and agreements, charters, and bylaws, to properly and legally execute this Agreement. (c) Acquiror has made available to Acquiree combined audited financial statements for the fiscal year ended December 31, 1997, which shall be true, complete and accurate; there are and shall be no substantial liabilities, either fixed or contingent, not reflected in such financial statements and records or to which the Acquiree has not been made aware. Said financial statements fairly and accurately reflect the financial condition of the Acquiror as of the date thereof and the results of operations for the period reflected therein. Such statements shall have been prepared in accordance with US Generally Accepted Accounting Principles, consistently applied. (d) Prior to and as of the Closing Date and the Delivery Date, there will not be any material changes in the financial position of Acquiror, except changes arising in the ordinary course of business, which changes will in no event adversely affect the financial condition of the Acquiror; provided, however, that Acquiror will have sold or transferred all of its operations as of the Delivery Date. (e) Except as previously disclosed, Acquiror is not involved in any pending litigation, claims, or governmental investigation or proceeding not reflected in such financial statements or otherwise disclosed in writing to the Principal Officers, and there are otherwise no lawsuits, claims, assessments, investigations, or similar matters, to the best knowledge of management, threatened or contemplated against Acquiror, its management or properties. (f) As of the Closing Date and the Delivery Date, Acquiror is duly organized, validly existing and in good standing under the laws of the State of Nevada; it has the corporate power to own its property and to carry on its business as now being conducted and is duly qualified to do business in any jurisdic tion where so required. (g) Except as previously disclosed, Acquiror has not breached, nor is there any pending or threatened claims or any legal basis for a claim that Acquiror has breached, any of the terms or conditions of any agreements, contracts or commitments to which it is a party or is bound and the execution and performance hereof will not violate any provisions of applicable law of any agreement to which Acquiror is subject. (h) All outstanding shares have been duly authorized, validly issued, and fully paid. There are not outstanding or presently authorized securities, warrants, options or related commitments of any nature. 4 (i) Acquiror has no subsidiary corporations. (j) The shares of restricted securities of Acquiror to be issued to Stockholders of Acquiree as of the Delivery Date, will be validly issued, nonassessable and fully-paid under Nevada corporation law and will be issued in a non-public offering and exempted transaction under federal and state securities laws. (k) At the date of this Agreement, Acquiror has, and at the Closing Date, and as of the Delivery Date it will have, disclosed all events, conditions and facts materially affecting the business and prospects of Acquiror. Acquiror has not now and will not have, at the Closing Date, or at the Delivery Date, withheld disclosure of any such events, conditions, and facts which it, through management has knowledge of, or has reasonable grounds to know, may materially affect the business and prospects of Acquiror. (l) Acquiror is a public company and represents that, except as previously disclosed, it has no existing or threatened liabilities, claims, lawsuits, or basis for the same with respect to its shareholders, the public, brokers, the U.S. Securities and Exchange Commission, state agencies or other persons. This includes matters relating to state or federal securities laws as well as general common law or state corporation law principles. 6. Closing and Delivery Date. The Closing Date herein referred to shall be ------------------------- upon such date as the parties hereto may mutually agree for the execution of this Agreement but is expected to be on or about April 9, 1999. This Agreement is executed by the parties as of the Closing Date and effective as of the Deliver Date hereof. The date of delivery of all of the documentation shall be known as the Delivery Date. Certain exhibits, etc. may be delivered subsequent to the Delivery Date upon the mutual agreement of the parties hereto. The Principal Officers will be deemed to have accepted, as of the Delivery Date, delivery of the certificates of stock to be issued in its name, and in connection therewith will make delivery of its stock in Acquiree to Acquiror. 7. Conditions Precedent to the Obligations of Acquiree. All obligations of --------------------------------------------------- Acquiree and Principal Officers under this Agreement are subject to the fulfillment, prior to, as of the Closing Date, or at the Delivery Date, of each of the following conditions: (a) The representations and warranties by or on behalf of Acquiror contained in this Agreement or in any certificate or document delivered to Acquiree pursuant to the provisions hereof shall be true in all material respects at and as of the Closing Date and the Delivery Date as though such representations and warranties were made at and as of such time. (b) Acquiror shall have performed and complied with all covenants, agreements, and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing Date, subject only to the conditions required on the Delivery Date. (c) The Directors of Acquiror shall have approved and ratified this transaction, shall have approved a change of the name of the Acquiror to such name as may be 5 reasonably selected by Principal Officers, and such other reasonable matters as requested by Acquiree as pertaining to this transaction. (d) The management of Acquiror shall have resigned and shall have been replaced by management selected by the Principal Officers of Acquiree. (e) Acquiree shall have received an opinion from the counsel to Acquiror, dated the Delivery Date, in form and substance satisfactory to counsel for the Acquiree, to the effect that: (1) The Acquiror is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada and has full corporate power and authority to carry on its business as it now is being conducted; (2) The outstanding shares of capital stock of the Acquiror as shown on the attached shareholder list are fully paid and are duly and validly issued and non-assessable; (3) All legal and corporate proceedings necessary to be taken by and on the part of the Acquiror in connection with the transactions contemplated by this Agreement and necessary to make the same effective have been duly and validly taken, this Agreement has been duly and validly authorized, executed and delivered by the Acquiror and constitutes the valid and binding agreement of the Acquiror as limited by applicable bankruptcy, insolvency, reorganization or similar laws at the time in effect; (4) Neither the execution and delivery of this Agreement nor the consum mation of the transactions contemplated hereby is an event which, of itself or with the giving of notice or the passage of time or both, could: (i) consti tute a violation of or conflict with or result in any breach of the Articles of Incorporation or Bylaws of the Acquiror or, to the knowledge of such counsel, any material agreement or instrument to which the Acquiror is bound or any judgment, decree, or order to which it is subject; or (ii) to the knowledge of such counsel result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever on the property or assets of the Acquiror, and no such event of itself or with the giving of notice or the passage of time or both will result in the acceleration of the due date of any obligation of the Acquiror ; and (5) To the knowledge of such counsel, there is no action or proceeding pending or threatened against the Acquiror or any of its properties or assets before any court or governmental department, agency or commission to restrain or prohibit, or to obtain substantial damages in respect of, this Agreement or the consummation of the transactions contemplated hereby. 8. Conditions Precedent to the Obligations of Acquiror. All obligations of --------------------------------------------------- the Acquiror under this Agreement are subject to the fulfillment, prior to, as of the Closing Date, or at the Delivery Date, of each of the following conditions: (a) The representations and warranties contained in this Agreement or in any certificate or document delivered to Acquiror pursuant to the provisions hereof 6 shall be true at and as of the Closing Date and the Delivery Date as though such representations and warranties were made at and as of such time. (b) Acquiree, Stockholders of Acquiree, and Principal Officers, as applicable, shall have performed and complied with all covenants, agreements, and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing Date, subject only to the conditions on the Delivery Date. (c) Stockholders of Acquiree shall deliver to Acquiror a letter commonly known as an "investment letter" agreeing that the shares of stock in Acquiror are being acquired for investment purposes, and not with a view to resale. (d) Stockholders of Acquiree shall state, and reaffirm as of the Delivery Date, that the materials, including, current financial statements, prepared and delivered by Acquiror to Stockholders of Acquiree, have been read and understood by Stockholders of Acquiree, that they are familiar with the business of Acquiror, that they are acquiring the Acquiror shares under Section 4(2), commonly known as the private offering exemption of the Securities Act of 1933, and that the shares are restricted and may not be resold, except in reliance on an exemption under the Act. (e) The Directors shall have approved and ratified this transaction, respectively, and such other reasonable matters as requested by Acquiree as pertaining to this transaction. (f) The management of Acquiror shall have resigned and shall have been replaced by management selected by the Principal Officers. (g) Acquiror shall have received an opinion from the counsel to Acquiree, dated the Delivery Date, in form and substance satisfactory to counsel for the Acquiror, to the effect that: (1) The Acquiree is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has full corporate power and authority to carry on its business as it now is being conducted; (2) The outstanding shares of capital stock of the Acquiree as shown on the attached shareholder list are fully paid and are duly and validly issued and non-assessable; (3) All legal and corporate proceedings necessary to be taken by and on the part of the Acquiree in connection with the transactions contemplated by this Agreement and necessary to make the same effective have been duly and validly taken, this Agreement has been duly and validly authorized, executed and delivered by the Acquiree and constitutes the valid and binding agreement of the Acquiree as limited by applicable bankruptcy, insolvency, reorganization or similar laws at the time in effect; (4) Neither the execution and delivery of this Agreement nor the consum mation of the transactions contemplated hereby is an event which, of itself or with the giving of notice or the passage of time or both, could: (i) constitute a violation 7 of or conflict with or result in any breach of the Articles of Incorporation or Bylaws of the Acquiree or its subsidiary, or, to the knowledge of such counsel, any material agreement or instrument to which the Acquiree or its subsidiary is bound or any judgment, decree, or order to which it is subject; or (ii) to the knowledge of such counsel result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever on the property or assets of the Acquiree or its subsidiary, and no such event of itself or with the giving of notice or the passage of time or both will result in the acceleration of the due date of any obligation of the Acquiror or its subsidiary ; and (5) To the knowledge of such counsel, there is no action or proceeding pending or threatened against the Acquiror or any of its properties or assets before any court or governmental department, agency or commission to restrain or prohibit, or to obtain substantial damages in respect of, this Agreement or the consummation of the transactions contemplated hereby. 9. Indemnification. Within the period provided in paragraph 10 herein and --------------- in accordance with the terms of that paragraph, each party to this Agreement, shall indemnify and hold harmless each other party at all times after the date of this Agreement against and in respect of any liability, damage or deficiency, all actions, suits, proceedings, demands, assessments, judgments, costs and expenses including attorney's fees incident to any of the foregoing, resulting from any misrepresen tations, breach of covenant or warranty or non-fulfillment of any agreement on the part of such party under this Agreement or from any misrepresentation in or omission from any certificate furnished or to be furnished to a party hereunder. Subject to the terms of this Agreement, the defaulting party shall reimburse the other party or parties on demand, for any reasonable payment made by said parties at any time after the Closing, in respect of any liability or claim to which the foregoing indemnity relates, if such payment is made after reasonable notice to the other party to defend or satisfy the same and such party failed to defend or satisfy the same. 10. Nature and Survival of Representations. All representations, warranties -------------------------------------- and covenants made by any party in this Agreement shall survive the Closing hereunder and the consummation of the transactions contemplated hereby for two years from the date hereof. All of the parties hereto are executing and carrying out the provisions of this Agreement in reliance solely on the representations, warranties and covenants and agreements contained in this Agreement and not upon any investigation upon which it might have made or any representations, warranty, agreement, promise or information, written or oral, made by the other party or any other person other than as specifically set forth herein. 11. Documents at Closing. Between the date hereof and the Delivery Date, -------------------- the following transactions shall occur, all of such transactions being deemed to occur simultaneously: (a) Principal Officers will deliver, or cause to be delivered, to Acquiror the following: (1) stock certificates for the stock of Acquiree being tendered hereunder, duly endorsed in blank, 8 (2) all corporate records of Acquiree, including without limitation corporate minute books (which shall contain copies of the Articles of Incorporation and Bylaws, as amended to the Delivery Date), stock books, stock transfer books, corporate seals, and such other corporate books and records as may reasonably requested for review by Acquiror and its counsel; (3) a certificate of the President of Acquiree to the effect that all representations and warranties of Acquiree made under this Agreement are reaffirmed on the Closing Date and the Delivery Date, the same as though originally given on said date; (4) such other instruments, documents and certificates, if any, as are required to be delivered pursuant to the provisions of this Agreement or which may be reasonably requested in furtherance of the provisions of this Agreement; (b) Acquiror will deliver or cause to be delivered to Stockholders of Acquiree, Principal Officers and Acquiree: (1) stock certificates for Common and Preferred Stock to be issued as a part of the exchange as listed on Exhibit "A" after the date of approval of this transaction by the Acquiror shareholders; (2) a certificate of the President of Acquiror to the effect that all representations and warranties of Acquiror made under this Agreement are reaffirmed on the Closing Date and the Delivery Date, the same as though originally given on said date; (3) certified copies of resolutions by Acquiror's Board of Directors authorizing this transaction; (4) such other instruments and documents as are required to be delivered pursuant to the provisions of this Agreement. 12. Miscellaneous. ------------- (a) Further Assurances. At any time, and from time to time, after the ------------------ effective date, each party will execute such additional instruments and take such action as may be reasonably requested by the other party to confirm or perfect title to any property transferred hereunder or otherwise to carry out the intent and purposes of this Agreement. (b) Waiver. Any failure on the part of any party hereto to comply ------ with any of its obligations, agreements or conditions hereunder may be waived in writing by the party to whom such compliance is owed. (c) Notices. All notices and other communications hereunder shall be ------- in writing and shall be deemed to have been given if delivered in person or sent by prepaid first class registered or certified mail, return receipt requested. 9 (d) Headings. The section and subsection headings in this Agreement -------- are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. (e) Counterparts. This Agreement may be executed simultaneously in ------------ two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (f) Governing Law. This Agreement was negotiated and is being ------------- contracted for in the State of Nevada, and shall be governed by the laws of the State of Nevada, and the securities being issued herein are being issued and delivered in accordance with the isolated transaction and non- public offering exemption of the Act. (g) Binding Effect. This Agreement shall be binding upon the parties -------------- hereto and inure to the benefit of the parties, their respective heirs, administrators, executors, successors and assigns. (h) Entire Agreement. This Agreement is the entire agreement of the ---------------- parties covering everything agreed upon or understood in the transaction. There are no oral promises, conditions, representations, understandings, interpreta tions or terms of any kind of condition or inducements to the execution hereof. (i) Time. Time is of the essence. ---- (j) Severability. If any part of this Agreement is deemed to be ------------ unenforceable the balance of the Agreement shall remain in full force and effect. (k) Default Costs. In the event any party hereto has to resort to ------------- legal action to enforce any of the terms hereof, such party shall be entitled to collect attorneys fees and other costs from the party in default. IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written. MOTORCYCLE CENTERS OF AMERICA, INC. a Nevada Corporation By: ________________________ President ENTERTAINMENT UNIVERSE, INC. a California Corporation By: _________________________ President PRINCIPAL OFFICERS: 10 ------------------------------ Brad D. Greenspan - ------------------------------ Leland Silvas MOTORCYCLE CENTERS OF AMERICA, INC. OFFICER'S CERTIFICATE --------------------- The undersigned, President of MOTORCYCLE CENTERS OF AMERICA, INC. ("Acquiror"), does hereby certify that he is a duly elected, qualified and acting officer of Acquiror, a Nevada corporation, and as such is familiar with the business affairs of said corporation, and is familiar with and has read that certain Agreement and Plan of Reorganization between Acquiror and Acquiree, dated April 9, 1999. The undersigned does hereby state that the representations and warranties made by Acquiror contained in said Agreement, to the best of his knowledge, are true and correct at and as of the time of closing and the date of delivery of Acquiror's shares. In addition, the undersigned hereby states that to the best of his knowledge, Acquiror has performed and complied with all covenants, agreements and conditions required by the Agreement to be performed or complied with by Acquiror prior to or at the Closing Date or the Delivery Date. IN WITNESS WHEREOF, the undersigned, has hereunto duly executed this Certificate this 9th day of April, 1999. MOTORCYCLE CENTERS OF AMERICA, INC. By: _________________________________ President ENTERTAINMENT UNIVERSE, INC. OFFICER'S CERTIFICATE --------------------- The undersigned, President of ENTERTAINMENT UNIVERSE, INC. ("Acquiree"), does hereby certify that he is a duly elected, qualified and acting officer of Acquiree, a California corporation, and as such is familiar with the business affairs of said corporation, and is familiar with and has read that certain Agreement and Plan of Reorganization between Acquiror and Acquiree, dated April 9, 1999. The undersigned does hereby state that the representations and warranties made by Acquiree contained in said Agreement, to the best of his knowledge, are true and correct at and as of the time of closing and the date of delivery of the Acquiror's shares. In addition, the undersigned hereby states that to the best of his knowledge, Acquiree has performed and complied with all covenants, agreements and conditions required by the Agreement to be performed or complied with by Acquiree prior to or at the Closing Date or the Delivery Date. IN WITNESS WHEREOF, the undersigned, has hereunto duly executed this Certificate this 9th day of April, 1999. ENTERTAINMENT UNIVERSE, INC. By: ______________________________ President EXHIBIT A Common Shares Name Number of Shares - ---- ---------------- Brad Greenspan 8,061,000 Chuck Beilman 2,500,000 Joseph W. & Patricia G. Abrams Living Trust 839,000 Matthew R. Abrams Irrevocable Trust 350,000 Sarah E. Abrams Irrevocable Trust 350,000 Lee Silvas 200,000 Emanuel Gerard IRA Rollover #2 100,000 Gerard Klauer Mattison & Mattison Co., Inc.401(k) Plan 50,000 Gerard Klauer Mattison & Mattison Co. 50,000 Dominic Petito 30,000 Michael P. O'Hare 10,000 Hamed Hoghaddam 10,000 Total 12,550,000 Preferred Shares Name Number of Shares - ---- ---------------- Joan Vogelsang 6,000 Gordon Landies 6,000 Paul Jakab 6,000 James Haiduck 6,000 George Gitschel 12,200 Ed Roffman 6000 Jeffrey S. Cooper and Patricia G. Cobb 6250 David R. Fulton 5,000 Frank Michalik 5,000 Wayne C. Johnson 7,500 Baer Family Charitable Remainder Trust 12,500 Edward L. Bernstein 2,500 Bernice Brauser 41,667 KB Electronics, Inc. 12,500 John A. Friedmann 12,500 Stanford Miller 25,000 Cory Bihr and Mary Bihr 6,000 LBI Group, Inc. 555,556 EIK Investors, Inc. 25,000 Jeffrey Benton 12,500 James A. Carruthers 5,000 Paul S. Freyer 7,500 Eric Singer 5,000 Name Number of Shares - ---- ---------------- Robert Brooks 12,500 Robert Murphy 25,000 Michael Nichols 12,500 James N. Oliphant 12,500 RPM Asset Management 50,000 Patrick E. Murphy 25,000 Joseph Creen, Jr. 12,500 Nottinghill Resources, Ltd. 50,000 The Cooper Family Trust 11,250 Mark Mitola 15,000 Side Cape Holdings, Ltd. 365,740 Gregory F. Whitten and Ruth Ann Whitten 75,000 JRA Enterprises 12,500 EP Opportunity Fund International, Ltd. 15,000 EP Opportunity Fund, LLC 235,000 Lawrence Equity Group, LLC 56,250 person any compensation for soliciting another to purchase any other securities of the Company. 4.27 No Other Registration Arrangements. There are no contracts, ---------------------------------- agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company or to require the Company to include such securities with the Conversion Shares registered pursuant to any registration statement, which are not disclosed in the Disclosure Documents. 4.28 Adequacy of Disclosures. The Memorandum and the other Disclosure ----------------------- Documents contain all material statements which are required to be stated therein in accordance with the Act and the rules and regulations of the SEC promulgated thereunder, and in all material respects conform to the requirements of the Act and the rules and regulations promulgated thereunder; the offering documents, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that the representations and warranties contained in this Paragraph 4.28 shall not apply to statements in or omissions from the Memorandum (or any supplement or amendment thereto) based upon information relating to a Placement Agent furnished to the Company on behalf of a Placement Agent expressly for use therein or inaccurate statements in or omissions from the Memorandum or the other Disclosure Documents as a result of arms-length negotiations between the Company and the Subscriber. 4.29 Representations Correct. The foregoing representations, warranties ----------------------- and agreements are true, correct and complete in all material respects, and shall survive the Closing and the issuance of the shares of Preferred Stock. 5. Covenants of the Company. ------------------------- 5.1 Independent Auditors. The Company shall, until at least three (3) -------------------- years after the date of the Last Closing, maintain as its independent auditors an accounting firm authorized to practice before the SEC. 5.2 Corporate Existence and Taxes. The Company shall, until at least the ----------------------------- later of (a) the date that is three (3) years after the date of the Last Closing or (b) the conversion or redemption of all of the Preferred Stock purchased pursuant to this Agreement maintain its corporate existence in good standing (provided, however, that the foregoing covenant shall not prevent the Company from entering into any merger or corporate reorganization as long as the surviving entity in such transaction, if not the Company, assumes the Company's obligations with respect to the Preferred Stock and has Common Stock listed for trading on 16 a stock exchange or on Nasdaq and is a "Reporting Issuer") and shall pay all its taxes when due except for taxes which the Company disputes. 5.3 Registration Rights. The Company will enter into a registration ------------------- rights agreement covering the resale of the Conversion Shares and the registration of the Company's Securities substantially in the form of the Registration Rights Agreement attached as Exhibit C. 5.4 Notification of Last Closing Date by Company. Within five (5) -------------------------------------------- business days after the Last Closing, the Company shall notify Subscriber in writing that the Last Closing has occurred, the date of the Last Closing, the date of Subscriber's Closing, the dates that Subscriber is entitled to convert Subscriber's Preferred Stock, the value of the Fixed Conversion Price, as that term is defined in the Certificate of Designation, and the name and telephone number of an administrative contact person at the Company whom Subscriber may contact regarding information related to conversion of the Preferred Stock as contemplated by the Certificate of Designation. 5.5 Filing of SB-2 Registration Statement. The Company shall, no later ------------------------------------- than one hundred fifty (150) days after the date of the Initial Issuance Date, as defined in the Certificate of Designation, file a registration statement or a post-effective amendment to an effective registration statement (collectively, the "Registration Statement") on Form SB-2 (or other suitable form, at the Company's discretion but subject to the reasonable approval of Subscribers) with the SEC, covering the resale of the Conversion Shares issuable to all Subscribers in this Offering. The Company shall, within ten (10) days of the filing of the Registration Statement, send a copy of the Registration Statement to Subscribers. Such Registration Statement, and the rights and obligations of the Company and the Subscribers in connection therewith, shall be in conformance with and subject to Section 2 of the Registration Rights Agreement attached hereto as Exhibit C. The Company shall use its best efforts to have the Registration Statement declared effective as soon as possible. The Company covenants to use its best efforts to remain eligible to use Form SB-2 for the registration required by this Section 5.5 (and Sections 2 and 3 of the Registration Rights Agreement) during all applicable times contemplated by this Agreement. 5.6 Capital Raising Limitations; Rights of First Refusal. ----------------------------------------------------- 5.6.1 Capital Raising Limitations. Except as hereinafter set forth, for a --------------------------- period of one hundred eighty (180) days following the date of Last Closing, the Company shall not issue or agree to issue, except (a) as contemplated hereunder, (b) pursuant to any employee stock purchase plan or employee stock option plan of the Company in effect on the date of the Closing, and disclosed in the Disclosure Documents, (c) pursuant to any security, option, warrant, scrip, call or commitment or right disclosed in the Memorandum, any equity securities of the Company (or any security convertible into or exercisable or exchangeable, directly or indirectly, for equity securities of the 17 Company) if such securities are issued at a price (or in the case of securities which are convertible into or exercisable or exchangeable, directly or indirectly, for Common Stock, if such securities are convertible, exercisable or exchangeable, as appropriate, at a conversion price, exercise price or exchange price) less than the Fixed Conversion Price (as defined in the Certificate of Designation), (d) pursuant to any acquisition by the Company provided that the purchase price of such acquisition is paid solely with shares of Common Stock and the price per share of the Common Stock is the greater of $3.60 or the then closing bid price of the Common Stock on the date the purchase price is determined, or (e) pursuant to a private placement if the closing bid price of the Common Stock is $5.00 or greater, provided that the sale price of the Common Stock to be issued in connection with the private placement is at the market price or above. In addition, during such period, the Company shall not issue, or agree to issue, any debt securities which are issued at a discount to the principal amount thereof. 5.6.2 Right of First Offer. The Company agrees that, during the period -------------------- beginning on the date hereof and terminating on the first anniversary of the date of the Last Closing, the Company will not, without the prior written consent of each Subscriber (which shall be deemed given for any warrants to purchase Common Stock issued or to be issued to the Placement Agent in consideration of its services in connection with this Agreement and the transactions contemplated hereby) issue or sell, or agree to issue or sell any equity or debt securities of the Company or any of its subsidiaries (or any security convertible into exercisable or exchangeable, directly or indirectly, for equity or debt securities of the Company or any of its subsidiaries) ("Future Offering") unless the Company shall have first delivered to each Subscriber at least thirty (30) days prior to the closing of such Future Offering, written notice describing the proposed Future Offering, including, the terms and conditions thereof, and providing each Subscriber and its affiliates an option during the twenty (20) day period following delivery of such notice to purchase up to the full amount of the securities being offered in the Future Offering on the same terms as contemplated by such Future Offering (the limitations referred to in this sentence are collectively referred to as the "Capital Raising Limitations"). Notwithstanding the foregoing, if any Subscriber chooses not to participate in any Future Offering, then any debt or equity security issued as a result of said Future Offering will be ineligible for resale and/or conversion, as the case may be, until the date which is nine (9) months after the Last Closing. The Capital Raising Limitations shall not apply to any transaction involving issuances of securities in connection with a merger, consolidation, acquisition or sale of assets, or in connection with any strategic partnership or joint venture (the primary purpose of which is not to raise equity capital), or in connection with the disposition or acquisition of a business, product or license by the Company or exercise of options by employees, consultants or directors. The Capital Raising Limitations also shall not apply to (a) the issuance of securities pursuant to an underwritten public offering, (b) the issuance of securities upon exercise or conversion of (including issuances as a result 18 of the anti-dilution provisions, if any, applicable to such options, warrants or convertible securities) the Company's options, warrants or other convertible securities outstanding as of the date hereof or (c) the grant of additional options or warrants, or the issuance of additional securities, under any Company stock option or restricted stock plan for the benefit of the Company's employees, directors or consultants. 5.6.3 Entitlement to Participate in Rule 504 Offering. As a condition ----------------------------------------------- precedent to any business combination or reorganization with or into the Public Entity, the Public Entity shall offer to each Subscriber that purchases Preferred Stock the option to purchase shares of common stock of the Public Entity (the "P.E. Common Stock") under Securities and Exchange Commission Rule 504 at the rate of $100,000 of P.E. Common Stock for each purchase of $900,000 of Preferred Stock in this placement; but in no event shall no more than $1,000,000 of P.E. Common Stock be issued. The purchase price for each share of Common Stock hereunder shall be the "adjusted pricing point" as set forth in Exhibit 1 to the Certificate of Designation of Preferred Stock, a copy of which is attached hereto as Exhibit A. Any of such shares of P.E. Common Stock purchased as aforesaid shall be freely tradeable by the holder without restriction or limitation under any agreement, arrangement, law or regulation. 5.7 Annual and Quarterly Reports on Form 10-K(SB) and Form 10-Q(SB) and ------------------------------------------------------------------- Current Reports on Form 8-K. The Company shall make available to the Subscriber - --------------------------- copies of its annual reports on Form 10-K(SB), quarterly reports on Form 10- Q(SB) and current reports on Form 8-K for as long as the Preferred Stock may remain outstanding. 5.8.1 Opinion of Counsel. Subscribers shall, upon purchase of the ------------------ Preferred Stock pursuant to this Agreement, receive an opinion letter from Jeffer, Mangels, Butler & Mamaro, LLP ("Counsel"), counsel to the Company, to the effect that (a) the Company is duly incorporated and validly existing; (b) this Agreement, the issuance of the Preferred Stock at Closing and the issuance of the Conversion Shares upon conversion of the Preferred Stock have been duly approved by all required corporate action, and that all such securities, upon due issuance, shall be validly issued, fully paid and non-assessable; (c) this Agreement, the Registration Rights Agreement, the Irrevocable Instructions to Transfer Agent and the Escrow Agreement are valid and binding obligations of the Company, enforceable in accordance with their terms, except as enforceability of the indemnification provisions may be limited by principles of public policy, and subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of laws governing specific performance and other equitable remedies; (d) based upon the representations and acknowledgments of Subscribers contained in Sections 2 and 3 hereof, the Preferred Stock has been, and the Conversion Shares will be, issued in a transaction that is exempt from the registration requirements of the Act and applicable state securities laws; (e) the Conversion Shares are authorized for listing on the Nasdaq market, 19 including OTC Bulletin Board, where the Company's Common Stock is then trading, subject to notice of issuance; and (f) the Certificate of Designation has been duly authorized and adopted by the Company and has been or forthwith will be duly filed and/or recorded under applicable law. 5.8.2 Opinion of Special Counsel. Subscriber shall, upon purchase of -------------------------- the P.E. Common Stock, receive an opinion letter from David L. Kagel, Esq. ("Special Counsel"), Special Counsel to the Company and the Public Entity, to the effect that (a) any P.E. Common Stock subscribed for on or prior to April 7, 1999 is, or when actually issued will be, freely tradable without registration or further action by the holder(s) thereof under Rule 504 promulgated by the Securities and Exchange Commission and in effect on or prior to said date, and (b) that the offering of the Preferred Stock and the separate offering of the P.E. Common Stock are not subject to the "integration doctrine" as originally promulgated in Securities Act Release 4552, as such "integration doctrine" has been amended or applied since such promulgation. 5.9 Removal of Legend Upon Conversion. As contemplated by the --------------------------------- Certificate of Designation, upon conversion of the Preferred Stock, Subscriber shall submit a Notice of Conversion. The Legend shall be removed and the Company shall issue a certificate without such Legend to the holder of any Security upon which it is stamped, and a certificate for a security shall be originally issued without the Legend, if, unless otherwise required by state securities laws, (a) the sale of such Security is registered under the Act, or (b) such holder provides the Company with an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions (the reasonable cost of which shall be borne by the Company), to the effect that a public sale or transfer of such Security may be made without registration under the Act, or (c) such holder provides the Company with reasonable assurances that such Security may be sold pursuant to Rule 144. Each Subscriber agrees to sell all Securities, including those represented by a certificate(s) from which the Legend has been removed, or which were originally issued without the Legend, pursuant to an effective registration statement relating thereto and to deliver a prospectus in connection with such sale or in compliance with an exemption from the registration requirements of the Act. If the Legend is removed from any Security or any Security is issued without the Legend and thereafter the effectiveness of a registration statement covering the resale of such Security is suspended or the Company determines that a supplement or amendment thereto is required by applicable securities laws, then upon reasonable advance notice to Subscriber holding such Security, the Company may require that the Legend be placed on any such Security that cannot then be sold pursuant to an effective registration statement or Rule 144 or with respect to which the opinion referred to in clause (b) next above has not been rendered, which Legend shall be removed when such Security may be sold pursuant to an effective registration statement or Rule 144 or such holder provides the opinion with respect thereto described in clause (b) next above. 20 5.10 Listing. Subject to the remainder of this Section 5.10, the Company ------- shall use its best efforts to ensure that its shares of Common Stock (including all Conversion Shares) are approved and included for quotation on the Nasdaq Small Cap Market ("NASDAQ"). Thereafter, the Company shall (a) use its best efforts to continue the quotation of its Common Stock on the NASDAQ, or on the Nasdaq National Market System ("NMS"), the New York Stock Exchange ("NYSE"), or the American Stock Exchange ("AMEX") or any other national exchange or over-the- counter market system; (b) take all action necessary to cause and maintain the quotation of its Common Stock on the OTC Bulletin Board at any time the Common Stock is not included for quotation on NASDAQ, NMS, NYSE or AMEX; and (c) comply in all respects with the Company's reporting. filing, and other obligations under the by-laws or rules of the National Association of Securities Dealers ("NASD") and such exchanges, as applicable. 5.11 The Company's Instructions to Transfer Agent. The Company will -------------------------------------------- issue to its Transfer Agent the Irrevocable Instructions to Transfer Agent substantially in the form of Exhibit E instructing the Transfer Agent to issue certificates, registered in the name of each Subscriber or its nominee, for the Conversion Shares in such amounts as specified from time to time by such Subscriber to the Company upon conversion of the Preferred Stock. Such certificates shall bear a Legend only to the extent permitted by Section 5.9 hereof. The Company warrants that no instruction, other than such instructions referred to in Section 5.9 hereof or in this Section 5.11 and stop transfer instructions to give effect to Section 3.7 hereof in the case of Conversion Shares prior to registration of the Conversion Shares under the Act, will be given by the Company to its Transfer Agent and that the Securities shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and the Registration Rights Agreement. Nothing in this Section shall affect in any way each Subscriber's obligations and agreement set forth in Sections 2.3.3 or 2.3.4 hereof to resell the Securities pursuant to an effective registration statement and to deliver a prospectus in connection with such sale or in compliance with an exemption from the registration requirements of applicable securities laws. If (a) a Subscriber provides the Company with an opinion of counsel, which opinion of counsel shall be in form, substance and scope customary for opinions of counsel in comparable transactions and acceptable to counsel for the Company (the reasonable cost of which shall be borne by the Company), to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from registration or (b) a Subscriber transfers Securities to an affiliate which is an accredited investor as defined under the Act, the Company shall permit the transfer, and, in the case of Conversion Shares, promptly instruct its transfer agent to issue one or more certificates in such name and in such denomination as specified by such Subscriber. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to a Subscriber by violating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Section 5.11 will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Section 5.11, that a Subscriber 21 shall be entitled, in addition to all other available remedies, to an injunction restraining any breach and requiring immediate issuance and transfer, without the necessity of showing economic loss and without any bond or other security being required. The Company hereby agrees that it will not unilaterally terminate its relationship with the Transfer Agent for any reason prior to the date which is three (3) years after the Last Closing or one (1) month after the first date that no Preferred Stock is outstanding, whichever is earlier (the "Ending Date"). In the event the Company's agency relationship with the Transfer Agent should be terminated for any other reason prior to the date which is three (3) years after the Last Closing, the Company's Transfer Agent shall continue acting as transfer agent pursuant to the terms of the Irrevocable Instructions to Transfer Agent until such time that a successor transfer agent (i) is appointed by the Company; (ii) is approved by seventy-five percent (75%) of the Subscribers of outstanding Preferred Stock; and (iii) executes and agrees to be bound by the terms of the Irrevocable Instructions to Transfer Agent. 5.12 Filing of Form 10-SB to Register Under Section 12(b) or 12(g) of the -------------------------------------------------------------------- Exchange Act. The Company shall, no later than sixty (60) days after the - ------------ Initial Issuance Date (as defined in Section 5 of the Company's Certificate of Designation of Preferred Stock), file a registration statement on Form 10-SB with the SEC registering the Securities under Section 12(b) or 12(g) of the Exchange Act. The Company shall, within ten (10) days of the filing of such registration statement on Form 10-SB, send a copy to Subscribers. The Company shall use its best efforts to have such registration statement declared effective within one hundred fifty (150) days after the Initial Issuance Date. 6. Subscriber Covenant/Miscellaneous. ---------------------------------- 6.1 Representations and Warranties Survive the Closing; Severability. ---------------------------------------------------------------- Subscriber's and the Company's representations and warranties, including but not limited to the Public Entity, shall survive the Closing of the transactions contemplated by this Agreement notwithstanding any due diligence investigation made by or on behalf of the party seeking to rely thereon. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 6.2 Successors and Assigns. The terms and conditions of this Agreement ---------------------- shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. Subscriber may assign Subscriber's rights hereunder, in connection with any private sale of the Preferred Stock of such Subscriber, so long as, as a condition precedent to 22 such transfer, the transferee executes an acknowledgment agreeing to be bound by the applicable provisions of this Agreement. 6.3 Governing Law. This Agreement shall be governed by and construed under ------------- the laws of the State of Delaware without regard to its conflict of laws rules or principles. 6.4 Execution in Counterparts Permitted. This Agreement may be executed in ------------------------------------ any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one (1) instrument. 6.5 Titles and Subtitles; Gender. The titles and subtitles used in this ---------------------------- Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. The use in this Agreement of a masculine, feminine or neither pronoun shall be deemed to include a reference to the others. 6.6 Written Notices, Etc. Any notice, demand or request required or --------------------- permitted to be given by the Company or Subscriber pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally, or by facsimile (with a hard copy to follow by two (2) day courier), addressed to the parties at the addresses and/or facsimile telephone number of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing. 6.7 Expenses. Each of the Company and Subscriber shall pay all costs and -------- expenses that it respectively incurs, with respect to the negotiation, execution, delivery and performance of this Agreement. 6.8 Entire Agreement; Written Amendments Required. This Agreement, --------------------------------------------- including the Exhibits attached hereto, the Certificate of Designation, the Preferred Stock certificates, the Registration Rights Agreement, the Escrow Agreement, the Irrevocable Instructions to Transfer Agent and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. Except as expressly as provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought. 6.9 Arbitration. Any controversy or claim arising out of or related to ----------- this Agreement or the breach thereof, shall be settled by binding arbitration in Chicago, Illinois in accordance with the Expedited Procedures (Rules 53-57) of the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). A proceeding shall be commenced 23 upon written demand by Company or any Subscriber to the other. The arbitrator(s) shall enter a judgment by default against any party which fails or refuses to appear in any properly noticed arbitration proceeding. The proceeding shall be conducted by one (1) arbitrator, unless the amount alleged to be in dispute exceeds two hundred fifty thousand dollars ($250,000), in which case three (3) arbitrators shall preside. The arbitrator(s) will be chosen by the parties from a list provided by the AAA, and if they are unable to agree within ten (10) days, the AAA shall select the arbitrator(s). The arbitrators must be experts in securities law and financial transactions. The arbitrators shall assess costs and expenses of the arbitration, including all attorneys' and experts' fees, as the arbitrators believe is appropriate in light of the merits of the parties' respective positions in the issues in dispute. Each party submits irrevocably to the jurisdiction of any state court sitting in Chicago, Illinois or to the United States District Court sitting in Chicago for purposes of enforcement of any discovery order, judgment or award in connection with such arbitration. The award of the arbitrator(s) shall be final and binding upon the parties and may be enforced in any court having jurisdiction. The arbitration shall be held in such place as set by the arbitrator(s) in accordance with Rule 55. 7. Subscription and Wiring Instructions; Irrevocabilitv. ----------------------------------------------------- 7.1 Subscription ------------ (a) Wire Transfer of Subscription Funds. Subscriber shall send this ----------------------------------- signed Agreement by facsimile to Company at 310-546-2870, and send the subscription funds by wire transfer, to the Escrow Agent as follows: American National Bank and Trust Company of Chicago ABA 071000770 Account Number 4326350 - Corporate Trust Clearing Account Attention: Brian Terwilliger "Entertainment" (b) Irrevocable Subscription. Subscriber hereby acknowledges and agrees, ------------------------ subject to the provisions of any applicable laws providing for the refund of subscription amounts submitted by Subscriber, that this Agreement is irrevocable and that Subscriber is not entitled to cancel, terminate or revoke this Agreement or any other agreements executed by such Subscriber and delivered pursuant hereto, and that this Agreement and such other agreements shall survive the death or disability of such Subscriber and shall be binding upon and inure to the benefit of the parties and their heirs, executors, administrators, successors, legal representatives and assigns. If the Securities subscribed for are to be owned by more than one person, the obligations of all such owners under this Agreement shall be joint and several, and the agreements, representations, warranties and acknowledgments herein contained shall be deemed to be made by and be binding upon each such person and his heirs, executors, 24 administrators, successors, legal representatives and assigns. Notwithstanding the foregoing, (i) if any material condition to Closing required to be satisfied by a party other than Subscriber is not satisfied or (ii) if the Disclosure Documents are discovered prior to Closing to contain statements which are materially inaccurate, or omit statements of material fact, Subscriber may revoke or cancel this Agreement. (c) Company's Right to Reject Subscription. Subscriber understands -------------------------------------- that this Agreement is not binding on the Company until the Company accepts it. This Agreement shall be accepted by the Company when the Company countersigns this Agreement. Subscriber hereby confirms that the Company has full right in its sole and absolute discretion, for any reason or no reason, to accept or reject the subscription of Subscriber, in whole or in part, provided that, if the Company decides to reject such subscription, the Company must do so promptly and in writing. In the case of rejection, the Company will promptly return any rejected payments and (if rejected in whole) copies of all executed subscription documents (including without limitation this Agreement) to Subscriber. In the event of rejection, no interest will be payable by the Company to Subscriber on any return of payment, provided however, that any such interest accrued on such funds in the Escrow Account shall be returned to the Subscriber by the Escrow Agent. 7.2 Acceptance of Subscription. In the case of acceptance of -------------------------- Subscriber's subscription, ownership of the number of securities being purchased hereby will pass to Subscriber upon the Closing. 7.3 Subscriber to Forward Original Signed Subscription Agreement to --------------------------------------------------------------- Company. Subscriber agrees to courier to Company his, her or its original inked - ------- signed Subscription Agreement within two (2) days after faxing said signed agreement to Placement Agent. 8. Indemnification. ---------------- The Company and Brad Greenspan agree, jointly and severally, to indemnify and hold harmless Subscriber and the Escrow Agent and each of their respective officers, directors, employees and agents, and each person who controls Subscriber or the Escrow Agent within the meaning of the Act or the Exchange Act (each, a "Subscriber Indemnified Party") against any losses, claims, damages or liabilities, joint or several, to which it, they or any of them, may become subject and not otherwise reimbursed arising from any material breach of any representation or warranty made by the Company or the Public Entity contained in this Agreement, in writing to the Subscriber, in any statements contained in the Disclosure Documents or otherwise disclosed. 25 Subscriber agrees to indemnify and hold harmless the Company and the Escrow Agent and each of their respective officers, directors, employees and agents, and each person who controls Company or the Escrow Agent within the meaning of the Act or the Exchange Act (each, a "Company Indemnified Party") (a Subscriber Indemnified Party or a Company Indemnified Party may be hereinafter referred to singularly as "Indemnified Party") against any losses, claims, damages or liabilities, joint or several, to which it, they or any of them, may become subject and not otherwise reimbursed arising from any material breach of any representation or warranty made by Subscriber contained in this Agreement. Promptly after receipt by an Indemnified Party of notice of the commencement of any action pursuant to which indemnification may be sought, such Indemnified Party will, if a claim in respect thereof is to be made against the other party (hereinafter "Indemnitor") under this Section 8, deliver to the Indemnitor a written notice of the commencement thereof and the Indemnitor shall have the right to participate in and to assume the defense thereof with counsel reasonably selected by the Indemnitor, provided, however, that an Indemnified Party shall have the right to retain its own counsel, with the reasonably incurred fees and expenses of such counsel to be paid by the Indemnitor, if representation of such Indemnified Party by the counsel retained by the Indemnitor would be inappropriate due to actual or potential conflicts of interest between such Indemnified Party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the Indemnitor within a reasonable time of the commencement of any such action, if prejudicial to the Indemnitor's ability to defend such action, shall relieve the Indemnitor of any liability to the Indemnified Party under this Section 8, but the omission to so deliver written notice to the Indemnitor will not relieve it of any liability that it may have to any Indemnified Party other than under this Section 8 to the extent it is prejudicial. 9. Number of Shares and Purchase Price. Subscriber subscribes for shares ----------------------------------- of Preferred Stock against payment by wire transfer in the amount of ("Purchase Price") as set forth on the last page of this Agreement. 10. Accredited Investor. Subscriber is an "accredited investor" because ------------------- (check all applicable boxes): (a) [ ] it is an organization described in Section 501(c)(3) of the Internal Revenue Code, or a corporation, business trust, or partnership not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000. (b) [ ] any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person who has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment. 26 (c) [ ] a natural person, who: [ ] is a director, executive officer or general partner of the issuer of the securities being offered or sold or a director, executive officer or general partner of a general partner of that issuer. [ ] has an individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeding $1,000,000. [ ] had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year. (d) [ ] an entity each equity owner of which is an entity described in a - b above or is an individual who could check one (1) of the last three (3) boxes under subparagraph (c) above. (e) [ ] other [specify] 11. If Subscriber is using the services of a Purchaser Representative, such Purchaser Representative is _________________________. The undersigned acknowledges that this Agreement and the subscription represented hereby shall not be effective unless accepted by the Company as indicated below. 27 IN WITNESS WHEREOF, the undersigned Subscriber does represent and certify under penalty of perjury that the foregoing statements are true and correct and that Subscriber by the following signature(s) executed this Agreement. Dated this _____ day of April, 1999. ______________________________ ________________________________________ Your Signature PRINT EXACT NAME IN WHICH YOU WANT THE SECURITIES TO BE REGISTERED ______________________________ DELIVERY INSTRUCTIONS: ---------------------- Name: Please Print Please type or print address where your security is to be delivered ______________________________ ATTN:__________________________________ Title/Representative Capacity (if applicable) ______________________________ _______________________________________ Name of Company You Represent (if applicable) Street Address ___________________________________ _______________________________________ Place of Execution of this Agreement City, State or Province, Country, Offshore Postal Code Aggregate number of shares of Preferred _______________________________________ Stock subscribed for: ________________________ Phone number (for Federal Express) and Fax Number (re: Notice) Amount Subscribed for: $_____________________ (number of shares subscribed for x $_______ per share) THIS AGREEMENT IS ACCEPTED BY THE COMPANY IN THE AMOUNT OF $___________ ON THE ____ DAY OF APRIL, 1999. _________________________________ By:______________________________ Name:____________________________ Title:_____________________________ Agreed To and Accepted By: __________________________________ Brad Greenspan 28 EX-10.07 13 REGULATION D SUBSCRIPTION AGREEMENT APRIL 1999 EXHIBIT 10.07 ENTERTAINMENT UNIVERSE, INC. ________________________________________ Regulation D Subscription Agreement ENTERTAINMENT UNIVERSE, INC. REGULATION D SUBSCRIPTION AGREEMENT THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF OR EXERCISED UNLESS (i) A REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER. THIS SUBSCRIPTION AGREEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES DESCRIBED HEREIN BY OR TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES AUTHORITIES, NOR HAVE SUCH AUTHORITIES REVIEWED OR DETERMINED THE ACCURACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. SUBSCRIBERS MUST RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND ASSESSMENT OF THE RISKS INVOLVED. SEE ADDITIONAL LEGENDS AT SECTION 3.7 AND ATTACHED AS EXHIBIT B. THIS REGULATION D SUBSCRIPTION AGREEMENT (the "Agreement") is made as of the ____ day of April, 1999, by and among Entertainment Universe, Inc., a corporation duly organized and existing under the laws of the State of California ("EUI" or the "Company"), Brad Greenspan, and the undersigned subscriber executing this Agreement ("Subscriber"). The Company shall assign this Agreement, on or prior to the closing date of this Offering, to a publicly traded shell corporation (the "Public Entity") of which EUI intends to be the wholly-owned subsidiary by the closing of this Offering. Upon such assignment, references to the Company shall mean the Public Entity. THE PARTIES HEREBY AGREE AS FOLLOWS: This Agreement is executed by Subscriber in connection with the offer by the Company and the purchase by Subscriber of Series A Preferred Stock, $.001 par value (the "Preferred Stock"), of the Company. The Preferred Stock is being offered at a purchase price of Three Dollars and Sixty Cents ($3.60), U.S., per share, in minimum subscription amounts of at least Twenty-Seven Thousand, Seven Hundred Seventy Eight (27,778) shares ($100,000.80), with a minimum aggregate offering amount, placed on a "best efforts" basis, of Six Hundred Eighty Seven Thousand Five Hundred (687,500) shares of Preferred Stock, or Two Million Four Hundred Seventy-Five Thousand Dollars ($2,475,000) (the "Minimum Amount"), and up to a maximum aggregate amount, placed on a "best efforts" basis, of One Million Nine Hundred Thirty-Seven Thousand Five Hundred (1,937,500) shares of Preferred Stock, or Six Million Nine Hundred Seventy-Five Thousand Dollars ($6,975,000) (the "Maximum Amount") (collectively, the "Offering"). The terms of the Preferred Stock, including the terms on which the Preferred Stock may be converted into common stock, $.001 par value, of the Company (the "Common Stock"), are set forth in the Certificate of Designation of Preferred Stock (the "Certificate of Designation"), substantially in the form attached hereto as Exhibit A. The solicitation of this subscription and, if accepted by the Company, the offer and sale of the Preferred Stock are being made in reliance upon the provisions of Section 4(2) of and Regulation D ("Regulation D") promulgated under the Securities Act of 1933, as amended ("the Act"). The Preferred Stock and the Common Stock issuable upon conversion thereof (the "Conversion Shares"), are sometimes referred to herein singularly as "Security" and collectively as the "Securities." It is agreed as follows: 1. Offering -------- 1.1 Offer to Subscribe; Purchase Price and Closing; and Placement Fees. ------------------------------------------------------------------ Subject to satisfaction of the conditions to Subscriber's obligations set forth in Section 1.2 below, Subscriber hereby offers to subscribe for and purchase Preferred Stock for the aggregate purchase price in the amount set forth on the last page of this Agreement, in accordance with the terms and conditions of this Agreement. Assuming that the Minimum Amount and corresponding subscription agreements accepted by the Company are received into the Company's designated escrow account for this Offering established pursuant to the Escrow Agreement (the "Escrow Agreement") by and between the Company and American National Bank and Trust Company of Chicago (the "Escrow Agent") (the "Escrow Account"), the closing of a sale and purchase of Preferred Stock and the P.E. Common Stock (as hereinafter defined) as to each Subscriber (the "Closing") shall be deemed to occur when this Agreement has been executed by both Subscriber and the Company and full payment shall have been made by Subscriber, by wire transfer to the Escrow Account as set forth in Section 7.1(a) for payment in consideration for the Company's delivery of certificates representing the Preferred Stock subscribed for. 2 1.2 Conditions to Subscriber's Obligations. Subscriber's obligations -------------------------------------- hereunder are conditioned upon all of the following: (a) the following documents shall have been deposited with the Escrow Agent: the Registration Rights Agreement, substantially in the form attached hereto as Exhibit C (the "Registration Rights Agreement") executed by the Company, an opinion of counsel, substantially in the form attached hereto as Exhibit D (the "Opinion of Counsel") signed by the Company's counsel, the Irrevocable Instructions to Transfer Agent, substantially in the form attached hereto as Exhibit E (the "Irrevocable Instructions to Transfer Agent") executed by the Company and the Company's transfer agent (the "Transfer Agent"), and the Certificate of Designation, substantially in the form attached hereto as Exhibit A, together with evidence showing that it has been filed with the Secretary of State of California; certificates representing the Preferred Stock and the P.E. Common Stock issued in the name of the Subscriber; (b) the Company's Common Stock shall be included for quotation on the Nasdaq Stock Market (including the OTC Bulletin Board); (c) there shall have been no material adverse changes in the Company's business prospects or financial condition since the date of the last balance sheet included in the Disclosure Documents (defined below in Section 2.2.4), including but not limited to incurring material liabilities; (d) the representations and warranties of the Company and Brad Greenspan shall be true and correct in material respects at the Closing as if made on such date, and the Company and Brad Greenspan shall deliver a certificate, signed by an officer of the Company, to such effect to the Escrow Agent; (e) the Minimum Amount and corresponding subscription agreements accepted by the Company shall have been received by the Escrow Agent; (f) the Company shall have reserved for issuance a sufficient number of shares of Common Stock to effect conversions of the Preferred Stock, which number of shares shall initially be equal to or greater than two hundred percent (200%) of the number of shares of Common Stock issuable upon conversion of the Preferred Stock on the date the Preferred Stock is issued to the Subscriber; and (g) the Subscriber shall have received an opinion of counsel to the Company satisfactory to Subscriber's counsel to the effect that any shares of P.E. Common Stock purchased by Subscriber under Section 5.6.3 hereof are freely tradeable without restriction or limitation under any arrangement, agreement, law or regulation to which such shares or the Company are subject. 3 2. Representations and Warranties of Subscriber. Subscriber hereby -------------------------------------------- represents and warrants to the Company as follows: 2.1 Accredited Investor. Subscriber is an accredited investor, as defined ------------------- in Rule 501 of Regulation D, and has checked the applicable box set forth in Section 10 of this Agreement. Subscriber shall notify the Company immediately of any material change in any of such information occurring prior to and after the Closing of the purchase of any Preferred Stock and Additional Common Stock. 2.2 Investment Experience; Access to Information; Independent --------------------------------------------------------- Investigation. - -------------- 2.2.1 Access to Information. Subscriber or Subscriber's professional --------------------- advisor has been granted the opportunity to ask questions of and receive answers from representatives of the Company, its officers, directors, employees and agents concerning the terms and conditions of this Offering, the Company and its business and prospects, and to obtain any additional information which Subscriber or Subscriber's professional advisor deems necessary to verify the accuracy and completeness of the information received. 2.2.2 Reliance on Own Advisors. Subscriber has relied completely on ------------------------ the advice of, or has consulted with, Subscriber's own personal tax, investment, legal or other advisors and has not relied on the Company or any of its affiliates, officers, directors, attorneys, accountants or any affiliates of any thereof and each other person, if any, who controls any thereof, within the meaning of Section 15 of the Act for any tax or legal advice (other than reliance on information in the Disclosure Documents as defined in Section 2.2.4 below and on the Opinion of Counsel). The foregoing, however, does not limit or modify Subscriber's right to rely upon representations and warranties of the Company in Section 4 of this Agreement. 2.2.3 Capability to Evaluate. Subscriber has such knowledge and ---------------------- experience in financial and business matters so as to enable such Subscriber to utilize the information made available to it in connection with the Offering in order to evaluate the merits and risks of the prospective investment, which are substantial, including without limitation those set forth in the Disclosure Documents (as defined in Section 2.2.4 below). 2.2.4 Disclosure Documents. Subscriber, in making Subscriber's investment decision to subscribe for the Securities hereunder, represents that (a) Subscriber has received and had an opportunity to review the Company's Confidential Private Placement Memorandum, dated March 12, 1999 (the "Memorandum") and Subscriber has read, reviewed, and relied solely on the Memorandum, the Company's 4 representations and warranties and other information in this Agreement, including the exhibits, any other written information prepared by the Company which has been specifically provided to Subscriber in connection with this Offering (the documents described in this Section 2.2.4 (a) are collectively referred to as the "Disclosure Documents"), and an independent investigation made by Subscriber and Subscriber's representatives, if any; and (b) Subscriber is not relying on any oral representation of the Company or any other person, nor any written representation or assurance from the Company other than those referred to in Section 4 or otherwise contained in the Disclosure Documents or incorporated herein or therein. The foregoing, however, does not limit or modify Subscriber's right to rely upon representations and warranties of the Company in Section 4 of this Agreement. 2.2.5 Investment Experience; Fend for Self. Subscriber has substantial ------------------------------------ experience in investing in securities and he, she or it has made investments in securities other than those of the Company. Subscriber acknowledges that Subscriber is able to fend for Subscriber's self in the transaction contemplated by this Agreement, that Subscriber has the ability to bear the economic risk of Subscriber's investment pursuant to this Agreement and that Subscriber is an "Accredited Investor" by virtue of the fact that Subscriber meets the investor qualification standards set forth in Section 2.1 above. Subscriber has not been organized for the purpose of investing in securities of the Company, although such investment is consistent with Subscriber's purposes. 2.2.6 Purchaser Representative. The Subscriber understands if he, she ------------------------ or it uses the services of a Purchaser Representative(s), as such term is defined in Rule 501 of Regulation D and applicable state securities laws ("Purchaser Representative"), acceptable to the Company in connection herewith, either by the Subscriber's choice or pursuant to the Company's request, that: (a) the Subscriber must acknowledge, in writing by so indicating in Section 11 of this Agreement prior to his, her or its purchase of Securities, that such Purchaser Representative(s) is the Subscriber's Purchaser Representative(s) in connection with evaluating the merits and risks of the Subscriber's prospective investment in the Company; (b) such Purchaser Representative(s) must disclose to the Subscriber, in writing, prior to the acknowledgment referred to above, any material relationship between such Purchaser Representative(s) or its affiliates and you or your affiliates which now exists or is mutually understood to be contemplated or which has existed at any time during the previous two years, and any compensation received or to be received in connection with the offering of the Securities; and 5 (c) the Subscriber must furnish true and complete copies of the foregoing instruments to the Company promptly upon their execution. 2.3 Exempt Offering Under Regulation D. ----------------------------------- 2.3.1 Investment; No Distribution. Subscriber is acquiring the --------------------------- Securities to be issued and sold hereunder for his, her or its own account (or a trust account if such Subscriber is a trustee) for investment and not as a nominee and not with a present view to the re-distribution thereof. Subscriber is aware that there are legal and practical limits on Subscriber's ability to sell or dispose of the Securities and, therefore, that Subscriber must bear the economic risk of the investment for an indefinite period of time and has adequate means of providing for Subscriber's current needs and possible personal contingencies and has need for only limited liquidity of this investment. Subscriber's commitment to illiquid investments is reasonable in relation to Subscriber's net worth. By making the representations in this Section 2.3.1, the Subscriber does not agree to hold the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption from registration under the Act, except as otherwise required in this Agreement or in the Registration Rights Agreement. 2.3.2 No General Solicitation. The Securities were not offered ----------------------- to Subscriber through, and Subscriber is not aware of, any form of general solicitation or general advertising, including, without limitation, (a) any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, and (b) any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. 2.3.3 Restricted Securities. Subscriber understands that the --------------------- Preferred Stock issued at Closing is, and the Conversion Shares will be, characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving any public offering and that under such laws and applicable regulations such securities may not be transferred or resold without registration under the Act or pursuant to an exemption therefrom. In this connection, Subscriber represents that Subscriber is familiar with Rule 144 under the Act, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 2.3.4 Disposition. Without in any way limiting the ----------- representations set forth above, Subscriber further agrees not to make any disposition of all or any portion of the Securities unless and until: 6 (a) There is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) (i) Subscriber shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) if reasonably requested by the Company, Subscriber shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition is made in accordance with the rules and regulations of the Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 unless required by its Transfer Agent or as otherwise reasonably requested by the Company. 2.4 Due Authorization. ------------------ 2.4.1 Authority. Subscriber, if executing this Agreement in a --------- representative or fiduciary capacity, has full power and authority to execute and deliver this Agreement and each other document included herein for which a signature is required in such capacity and on behalf of the subscribing individual, partnership, limited liability company, trust, estate, corporation or other entity for whom or which Subscriber is executing this Agreement. Subscriber has reached the age of majority (if an individual) according to the laws of the state in which he or she resides, has adequate means for providing for his or her current needs and personal contingencies, is able to bear the economic risk of his or her investment in the Securities for an indefinite period of time and can afford a complete loss of such investment. Subscriber's commitment to illiquid investments is reasonable in relation to Subscriber's net worth. 2.4.2 Due Authorization. If Subscriber is a corporation, Subscriber ----------------- is duly and validly organized, validly existing and in good tax and corporate standing as a corporation under the laws of the jurisdiction of its incorporation with full power and authority to purchase the Securities to be purchased by Subscriber and to execute and deliver this Agreement. 2.4.3 Partnership; Limited Liability Company. If Subscriber is a -------------------------------------- partnership or a limited liability company, the representations, warranties, agreements and understandings set forth above are true with respect to all partners or members of Subscriber (and if any such partner or member is itself a partnership or limited liability company, all persons holding an interest in such partnership or limited liability company, directly or indirectly, including through one or more partnerships or limited liability companies), and the person executing this Agreement has made due inquiry to determine the truthfulness of the representations and warranties made hereby. 7 2.4.4 Representatives. If Subscriber is purchasing in a --------------- representative or fiduciary capacity, the representations and warranties shall be deemed to have been made on behalf of the person or persons for whom Subscriber is so purchasing. 3. Acknowledgments. Subscriber is aware that: --------------- 3.1 Risks of Investment. Subscriber recognizes that an ------------------- investment in the Company involves substantial risks, including the potential loss of Subscriber's entire investment herein. Subscriber recognizes that this Agreement and the exhibits hereto do not purport to contain all the information which would be contained in a registration statement under the Act. 3.2 No Government Approval. No federal or state agency has passed ---------------------- upon the Securities, recommended or endorsed the Offering, or made any finding or determination as to the fairness of this transaction. 3.3 No Registration. The Securities and any component thereof --------------- have not been registered under the Act or any applicable state securities laws by reason of exemptions from the registration requirements of the Act and such laws, and may not be sold, pledged, assigned or otherwise disposed of in the absence of an effective registration of the Securities and any component thereof under the Act or unless an exemption from such registration is available. 3.4 Restrictions on Transfer. Subscriber may not attempt to ------------------------ sell, transfer, assign, pledge or otherwise dispose of all or any portion of the Securities or any component thereof in the absence of either an effective registration statement or an exemption from the registration requirements of the Act and applicable state securities laws. 3.5 No Assurances of Registration. There can be no assurance ----------------------------- that any registration statement will become effective at the scheduled time. Therefore, Subscriber may bear the economic risk of Subscriber's investment for an indefinite period of time. 3.6 Exempt Transaction. Subscriber understands that the ------------------ Securities are being offered and sold in reliance on specific exemptions from the registration requirements of federal and state law and that the representations, warranties, agreements, acknowledgments and understandings set forth herein are being relied upon by the Company in determining the applicability of such exemptions and the suitability of Subscriber to acquire such Securities. 3.7 Legends. It is understood that the certificates evidencing ------- the Preferred Stock and the Conversion Shares shall bear substantially the following legend (the "Legend"), prior to registration as provided in Section 5.3: 8 "The securities represented hereby have not been registered under the Securities Act of 1933, as amended, or applicable state securities laws, nor the securities laws of any other jurisdiction. They may not be sold or transferred in the absence of an effective registration statement under those securities laws or pursuant to an exemption therefrom." 4. Representations and Warranties of the Company. The Company and Brad --------------------------------------------- Greenspan, jointly and severally, hereby make the following representations and warranties to Subscriber (which shall be true at the signing of this Agreement, as of Closing, and as of any such later date as contemplated hereunder) and agree with Subscriber that: 4.1 Organization, Good Standing, and Qualification. The Company is a ---------------------------------------------- corporation duly organized, validly existing, and in good standing under the laws of the State of California and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a material adverse effect on the business or properties of the Company and its subsidiaries taken as a whole. The Company is not the subject of any pending, threatened or, to its knowledge, contemplated investigation or administrative or legal proceeding by the Internal Revenue Service, the taxing authorities of any state or local jurisdiction, or the Securities and Exchange Commission ("SEC"), or any state securities commission, or any other governmental entity, which have not been disclosed in the Disclosure Documents. 4.2 Corporate Condition. The Company's condition is, in all material ------------------- respects, as described in the Disclosure Documents, except for changes in the ordinary course of business. Since the date as of which information is given in the Memorandum (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement other than as set forth in the Memorandum), (a) there has been no material adverse change or any development involving a prospective material adverse change to the Company's business, condition, financial or otherwise, or the earnings, business management, operations or prospects since the date of such Memorandum; (b) there has not been any material adverse change in the capital stock or in the long term debt of the Company; and (c) the Company has not incurred any liability or obligation, direct or contingent, not in the ordinary course of business and not consistent with past practices. The financial statements contained in the Disclosure Documents have been prepared in accordance with generally accepted accounting principles, consistently applied (except as otherwise permitted by Regulation S-X under the Securities Exchange Act of 1934, as amended, ("Exchange Act"), and fairly present the consolidated financial condition of the Company as of the dates of the balance sheets included therein and the consolidated results of its operations and cash flows for the periods then ended; and all the other financial and statistical information and data set forth in the Memorandum (and any amendment or supplement thereto) are, in all material respects, 9 accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company. Without limiting the foregoing, there are no material liabilities, contingent or actual, that are not disclosed in the Disclosure Documents (other than liabilities incurred by the Company in the ordinary course of its business, consistent with its past practice, after the period covered by the Disclosure Documents). The Company has paid all material taxes which are due, except for taxes which it reasonably disputes and which have been disclosed to Subscriber. There is no material claim, litigation, or administrative proceeding pending, or, to the best of the Company's knowledge, threatened against the Company, except as disclosed in the Disclosure Documents. This Agreement and the Disclosure Documents do not contain any untrue statement of a material fact and do not omit to state any material fact required to be stated therein or herein necessary to make the statements contained therein or herein not misleading in the light of the circumstances under which they were made. The Company is not prompted to sell the Preferred Stock by any material information that is not contained in the Disclosure Documents. 4.3 Authorization. Except for the filing of the Certificate of ------------- Designation, all corporate action on the part of the Company by its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the performance of all obligations of the Company hereunder and the authorization, issuance and delivery of the Preferred Stock being sold hereunder and the issuance (and/or the reservation for issuance) of the Conversion Shares have been taken, and this Agreement, the Certificate of Designation, the Irrevocable Instructions to Transfer Agent, the Escrow Agreement and the Registration Rights Agreement constitute valid and legally binding obligations of the Company, enforceable in accordance with the terms, except insofar as the enforceability may be limited by applicable bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally or by principles governing the availability of equitable remedies. The Company has obtained all consents and approvals required for it to execute, deliver and perform each agreement referenced in the previous sentence. 4.4 Valid Issuance of Preferred Stock and Common Stock. The Preferred -------------------------------------------------- Stock, when issued, sold and delivered in accordance with the terms hereof, for the consideration expressed herein, will be validly issued, fully paid and nonassessable and, based in part upon the representations of Subscriber in this Agreement, will be issued in compliance with all applicable U.S. federal and state securities laws. The Conversion Shares when issued in accordance with the terms of the Certificate of Designation shall be duly and validly issued and outstanding, fully paid and nonassessable, and based in part on the representations and warranties of Subscriber of the Preferred Stock, will be issued in compliance with all applicable U.S. federal and state securities laws. The Preferred Stock and the Conversion Shares will be issued free of any preemptive rights. The Company currently has that number of shares of its Common Stock required by the Registration Rights Agreement reserved for issuance upon conversion of the Preferred Stock. 10 4.5 Compliance with Other Instruments. The Company is not in violation or --------------------------------- default of any provisions of its Certificate of Incorporation or Bylaws each as it may be amended and in effect on and as of the date of the Agreement or of any provision of any instrument or contract to which it is a party or by which it is bound or, to its knowledge, of any provision of any federal or state judgment, writ, decree, order, statute, rule or governmental regulation applicable to the Company, which would have a material adverse effect on the Company's business or prospects, except as described in the Disclosure Documents. There exists no condition that, with notice, the passage of time or otherwise, would constitute a default under any such instrument or contract, except where such a default would not have a material adverse effect. The execution, delivery and performance of this Agreement and the other agreements entered into in conjunction with the Offering and the consummation of the transactions contemplated hereby will not result in any such violation or be in conflict with or constitute, with of without the passage of time and giving of notice, either a default under any such provision, instrument or contract or an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company. 4.6 Reporting Company. No later than sixty (60) days following the ----------------- Initial Issuance Date (as defined in Section 5 of the Certificate of Designation of Preferred Stock), the Company will file a registration statement on Form 10 to register its Securities under Section 12(b) or 12(g) of the Exchange. At all times following the effective date of such registration statement, the Company will be in material compliance with the reporting requirements of the Exchange Act and will file all reports required by the Exchange Act. The Company undertakes to furnish Subscriber with copies of such reports as may be reasonably requested by Subscriber after consummation of this Offering and to make such reports available, as long as Subscriber holds the Securities. The Company is not in violation of the listing requirements of the Nasdaq SmallCap Market and does not reasonably anticipate that the Common Stock will be delisted by the Nasdaq SmallCap Market, if listed thereon, for the foreseeable future. 4.7 Capitalization. The capitalization of the Company as set forth in the -------------- Company's Private Placement Memorandum dated March 12, 1999, is, and the capitalization as of the Closing, after taking into account the offering of the Securities contemplated by this Agreement and all other share issuances occurring prior to this Offering, will be, as set forth in the Memorandum. Except as disclosed in the Memorandum, as of the date of this Agreement, (a) there are no outstanding options, warrants, scrip, rights to subscribe for, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exercisable or exchangeable for, any shares of capital stock of the Company or any of its subsidiaries, or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries, and (b) other than the Registration Rights Agreement there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of its or their securities under the Act. 11 4.8 Intellectual Property. Except as described in the Memorandum, the --------------------- Company has valid, unrestricted and exclusive ownership or possession of all patents, trademarks, trademark registrations, trade names, copyrights, know-how, technology and other intellectual property necessary to the conduct of its business. To the best of the Company's knowledge, the Company is not infringing on the intellectual property rights of any third party, nor is any third party infringing on the Company's intellectual property rights. There are no restrictions in any material agreements, licenses, franchises, or other instruments which preclude the Company from engaging in its business as presently conducted. 4.9 Use of Proceeds. As of the date hereof, the Company expects to use --------------- the proceeds from this Offering (less fees and expenses) for the purposes and in the approximate amounts set forth in the Memorandum. These purposes and amounts are estimates and are subject to change without notice to any Subscriber. 4.10 No Rights of Participation. No person or entity, including, but not -------------------------- limited to, current or former shareholders of the Company, underwriters, brokers, agents or other third parties, has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the financing contemplated by this Agreement which has not been waived. 4.11 Company Acknowledgment. The Company hereby acknowledges that ---------------------- Subscriber may elect to hold the Securities for various periods of time, as permitted by the terms of this Agreement, the Certificate of Designation, and other agreements contemplated hereby, and the Company further acknowledges that Subscriber and the Placement Agent, if any, have made no representations or warranties, either written or oral, as to how long the Securities will be held by Subscriber or regarding Subscriber's trading history or investment strategies. 4.12 Termination Date of Offering. In no event shall the last closing ---------------------------- ("Last Closing") of a sale and purchase of the Preferred Stock occur later than April 9, 1999, which date can be extended by up to ten (10) days upon written approval by the Company and the Placement Agent, if any. 4.13 Underwriter's Fees and Rights of First Refusal. The Company is not ---------------------------------------------- obligated to pay any compensation or other fees, costs or related expenditures in cash or securities to any underwriter, broker, agent or other representative other than the Placement Agent in connection with this Offering. 4.14 Current Public Information. The Company is currently eligible to -------------------------- register the resale of its Common Stock on a registration statement on Form SB-2 under the Act. 12 4.15 No Integrated Offering. Neither the Company, nor any of its ---------------------- affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any of the Company's securities or solicited any offers to buy any security under circumstances that would prevent the parties hereto from consummating the transactions contemplated hereby pursuant to an exemption from registration under the Act pursuant to the provisions of Regulation D. 4.16 Acknowledgment of Dilution. The number of Conversion Shares issuable -------------------------- upon conversion of the Preferred Stock may increase substantially in certain circumstances, including the circumstance wherein the trading price of the Common Stock declines. The Company's executive officers and directors have studied and fully understand the nature of the Securities being sold hereunder and recognize that they have a potential dilutive effect. The board of directors of the Company has concluded in its good faith business judgment that such issuance is in the best interests of the Company. The Company acknowledges that its obligation to issue Conversion Shares upon conversion of the Preferred Stock is binding upon it and enforceable regardless of the dilution that such issuance may have on the ownership interests of the other stockholders. 4.17 Foreign Corrupt Practices. Neither the Company, nor, to the best of ------------------------- its knowledge, any of its subsidiaries, nor any director, officer, agent, employee or other person acting on behalf of the Company or any subsidiary has, in the course of its actions for, or on behalf of, the Company, used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee. 4.18 Key Employees. No Key Employee (as defined below), to the best ------------- knowledge of the Company and its subsidiaries, is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement, non-competition agreement, or any other contract or agreement or any restrictive covenant, and the continued employment of each Key Employee does not subject the Company or any of its subsidiaries to any liability with respect to any of the foregoing matters. No Key Employee has, to the best knowledge of the Company and its subsidiaries, any intention to terminate his employment with, or services to, the Company or any of its subsidiaries. "Key Employee" means each of Brad Greenspan, Chairman; Leland Silvas, Chief Executive Officer; and Charles Beilman, Chief Operating and Chief Technical Officer. 13 4.19 No Proceedings. Except as disclosed in the Memorandum, there are no -------------- legal or governmental proceedings pending or, to the knowledge of the Company, threatened to which the Company is a party or to which any of their respective property is subject (a) that would be required to be set forth in a registration statement on Form SB-2, (b) that could reasonably be expected to result, singly or in the aggregate, in a material adverse effect, or (c) that could reasonably be expected to adversely effect the issuance or validity of the Securities to be issued and sold by the Company hereunder or the issuance of the Conversion Shares. No contract or document of a character that would be required to be described in the Memorandum if the Memorandum were a prospectus included in a registration statement on Form SB-2 filed with the SEC is not so described. 4.20 Environmental, ERISA Compliance. The Company has not violated any ------------------------------- foreign, federal, state or local law or regulation relating to the protection of human health and safety, the environmental or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws") or any provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the rules and regulations promulgated thereunder, except for such violations which , singly or in the aggregate, would not have a material adverse effect. 4.21 Approvals. The Company has such permits, licenses, consents, --------- exemptions, franchises, authorizations and other approvals (each, an "Authorization") of, and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, including without limitation, under any applicable environmental laws, as are necessary to own, lease, license and operate its respective properties and to conduct its business, except where the failure to have any such Authorization or to make any such filing or notice would not, singly or in the aggregate, have a material adverse effect. Each such authorization is valid and in full force and effect. The Company is in compliance with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto; and no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such Authorization or results or, after notice or lapse of time or both, would result in any other impairment of the rights of the holder of any such Authorization; and such Authorizations contain no restrictions that are burdensome to the Company; except where such failure to be valid and in full force and effect or to be in compliance, the occurrence of any such event or the presence of any such restriction would not, singly or in the aggregate, have a material adverse effect. 4.22 Title to Properties. The Company has good and marketable title in ------------------- fee simple to all real property and good and marketable title to all personal property owned by it which is material to the business of the Company, in each case free and clear of all liens and defects, except such as are described in the Memorandum or such as do not materially affect 14 the value of such property and do not interfere with the use made and proposed to be made of such property by the Company; and any real property and buildings held under lease by the Company are held by the Company under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company, in each case except as described in the Memorandum. All leases to which the Company is a party are valid and binding and no default by the Company has occurred and is continuing thereunder, which could reasonably be expected to have a material adverse effect. 4.23 Insurance. The Company is insured by insurers of recognized --------- financial responsibility against such losses and risks and in such amounts as are adequate in accordance with customary industry practice; and the Company (a) has not received notice from any insurer or agent of such insurer that substantial capital improvements or other material expenditures will have to be made in order to continue such insurance or (b) has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers at a cost that would not have a material adverse effect. All such insurance is outstanding and duly in force on the date hereof and will be outstanding and fully in force on the Last Closing. 4.24 Conflicts. Except as disclosed in the Memorandum, no relationship, --------- direct or indirect, exists between or among the Company on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company on the other hand, which would be required by the Act to be described in the Memorandum if the Memorandum were a prospectus included in a registration statement filed with the SEC. 4.25 Internal Controls. The Company maintains a system of internal ----------------- accounting controls sufficient to provide reasonable assurance that (a) transactions are executed in accordance with management's general or specific authorizations; (b) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (c) access to assets is permitted only in accordance with management's general or specific authorization; and (d) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 4.26 Regulation M Compliance. The Company (a) has not taken, directly or ----------------------- indirectly (provided that no representation or warranty is made as to the Placement Agent or any persons acting on its behalf), any action designed to, or that might reasonably be expected to, cause or result in stabilization or manipulation of the price of any securities of the Company to facilitate the sale of the Securities or the resale of the Conversion Shares or (b) since the date of the Memorandum, has not (i) sold, bid for, purchased or paid any person any compensation for soliciting purchases of the Securities or (ii) paid or agreed to pay to any 15 person any compensation for soliciting another to purchase any other securities of the Company. 4.27 No Other Registration Arrangements. There are no contracts, ---------------------------------- agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company or to require the Company to include such securities with the Conversion Shares registered pursuant to any registration statement, which are not disclosed in the Disclosure Documents. 4.28 Adequacy of Disclosures. The Memorandum and the other Disclosure ----------------------- Documents contain all material statements which are required to be stated therein in accordance with the Act and the rules and regulations of the SEC promulgated thereunder, and in all material respects conform to the requirements of the Act and the rules and regulations promulgated thereunder; the offering documents, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that the representations and warranties contained in this Paragraph 4.28 shall not apply to statements in or omissions from the Memorandum (or any supplement or amendment thereto) based upon information relating to a Placement Agent furnished to the Company on behalf of a Placement Agent expressly for use therein or inaccurate statements in or omissions from the Memorandum or the other Disclosure Documents as a result of arms-length negotiations between the Company and the Subscriber. 4.29 Representations Correct. The foregoing representations, warranties ----------------------- and agreements are true, correct and complete in all material respects, and shall survive the Closing and the issuance of the shares of Preferred Stock. 5. Covenants of the Company. ------------------------- 5.1 Independent Auditors. The Company shall, until at least three (3) -------------------- years after the date of the Last Closing, maintain as its independent auditors an accounting firm authorized to practice before the SEC. 5.2 Corporate Existence and Taxes. The Company shall, until at least the ----------------------------- later of (a) the date that is three (3) years after the date of the Last Closing or (b) the conversion or redemption of all of the Preferred Stock purchased pursuant to this Agreement maintain its corporate existence in good standing (provided, however, that the foregoing covenant shall not prevent the Company from entering into any merger or corporate reorganization as long as the surviving entity in such transaction, if not the Company, assumes the Company's obligations with respect to the Preferred Stock and has Common Stock listed for trading on 16 a stock exchange or on Nasdaq and is a "Reporting Issuer") and shall pay all its taxes when due except for taxes which the Company disputes. 5.3 Registration Rights. The Company will enter into a registration ------------------- rights agreement covering the resale of the Conversion Shares and the registration of the Company's Securities substantially in the form of the Registration Rights Agreement attached as Exhibit C. 5.4 Notification of Last Closing Date by Company. Within five (5) -------------------------------------------- business days after the Last Closing, the Company shall notify Subscriber in writing that the Last Closing has occurred, the date of the Last Closing, the date of Subscriber's Closing, the dates that Subscriber is entitled to convert Subscriber's Preferred Stock, the value of the Fixed Conversion Price, as that term is defined in the Certificate of Designation, and the name and telephone number of an administrative contact person at the Company whom Subscriber may contact regarding information related to conversion of the Preferred Stock as contemplated by the Certificate of Designation. 5.5 Filing of SB-2 Registration Statement. The Company shall, no later ------------------------------------- than one hundred fifty (150) days after the date of the Initial Issuance Date, as defined in the Certificate of Designation, file a registration statement or a post-effective amendment to an effective registration statement (collectively, the "Registration Statement") on Form SB-2 (or other suitable form, at the Company's discretion but subject to the reasonable approval of Subscribers) with the SEC, covering the resale of the Conversion Shares issuable to all Subscribers in this Offering. The Company shall, within ten (10) days of the filing of the Registration Statement, send a copy of the Registration Statement to Subscribers. Such Registration Statement, and the rights and obligations of the Company and the Subscribers in connection therewith, shall be in conformance with and subject to Section 2 of the Registration Rights Agreement attached hereto as Exhibit C. The Company shall use its best efforts to have the Registration Statement declared effective as soon as possible. The Company covenants to use its best efforts to remain eligible to use Form SB-2 for the registration required by this Section 5.5 (and Sections 2 and 3 of the Registration Rights Agreement) during all applicable times contemplated by this Agreement. 5.6 Capital Raising Limitations; Rights of First Refusal. ----------------------------------------------------- 5.6.1 Capital Raising Limitations. Except as hereinafter set forth, for a --------------------------- period of one hundred eighty (180) days following the date of Last Closing, the Company shall not issue or agree to issue, except (a) as contemplated hereunder, (b) pursuant to any employee stock purchase plan or employee stock option plan of the Company in effect on the date of the Closing, and disclosed in the Disclosure Documents, (c) pursuant to any security, option, warrant, scrip, call or commitment or right disclosed in the Memorandum, any equity securities of the Company (or any security convertible into or exercisable or exchangeable, directly or indirectly, for equity securities of the 17 Company) if such securities are issued at a price (or in the case of securities which are convertible into or exercisable or exchangeable, directly or indirectly, for Common Stock, if such securities are convertible, exercisable or exchangeable, as appropriate, at a conversion price, exercise price or exchange price) less than the Fixed Conversion Price (as defined in the Certificate of Designation), (d) pursuant to any acquisition by the Company provided that the purchase price of such acquisition is paid solely with shares of Common Stock and the price per share of the Common Stock is the greater of $3.60 or the then closing bid price of the Common Stock on the date the purchase price is determined, or (e) pursuant to a private placement if the closing bid price of the Common Stock is $5.00 or greater, provided that the sale price of the Common Stock to be issued in connection with the private placement is at the market price or above. In addition, during such period, the Company shall not issue, or agree to issue, any debt securities which are issued at a discount to the principal amount thereof. 5.6.2 Right of First Offer. The Company agrees that, during the period -------------------- beginning on the date hereof and terminating on the first anniversary of the date of the Last Closing, the Company will not, without the prior written consent of each Subscriber (which shall be deemed given for any warrants to purchase Common Stock issued or to be issued to the Placement Agent in consideration of its services in connection with this Agreement and the transactions contemplated hereby) issue or sell, or agree to issue or sell any equity or debt securities of the Company or any of its subsidiaries (or any security convertible into exercisable or exchangeable, directly or indirectly, for equity or debt securities of the Company or any of its subsidiaries) ("Future Offering") unless the Company shall have first delivered to each Subscriber at least thirty (30) days prior to the closing of such Future Offering, written notice describing the proposed Future Offering, including, the terms and conditions thereof, and providing each Subscriber and its affiliates an option during the twenty (20) day period following delivery of such notice to purchase up to the full amount of the securities being offered in the Future Offering on the same terms as contemplated by such Future Offering (the limitations referred to in this sentence are collectively referred to as the "Capital Raising Limitations"). Notwithstanding the foregoing, if any Subscriber chooses not to participate in any Future Offering, then any debt or equity security issued as a result of said Future Offering will be ineligible for resale and/or conversion, as the case may be, until the date which is nine (9) months after the Last Closing. The Capital Raising Limitations shall not apply to any transaction involving issuances of securities in connection with a merger, consolidation, acquisition or sale of assets, or in connection with any strategic partnership or joint venture (the primary purpose of which is not to raise equity capital), or in connection with the disposition or acquisition of a business, product or license by the Company or exercise of options by employees, consultants or directors. The Capital Raising Limitations also shall not apply to (a) the issuance of securities pursuant to an underwritten public offering, (b) the issuance of securities upon exercise or conversion of (including issuances as a result 18 of the anti-dilution provisions, if any, applicable to such options, warrants or convertible securities) the Company's options, warrants or other convertible securities outstanding as of the date hereof or (c) the grant of additional options or warrants, or the issuance of additional securities, under any Company stock option or restricted stock plan for the benefit of the Company's employees, directors or consultants. 5.6.3 Entitlement to Participate in Rule 504 Offering. As a condition ----------------------------------------------- precedent to any business combination or reorganization with or into the Public Entity, the Public Entity shall offer to each Subscriber that purchases Preferred Stock the option to purchase shares of common stock of the Public Entity (the "P.E. Common Stock") under Securities and Exchange Commission Rule 504 at the rate of $100,000 of P.E. Common Stock for each purchase of $900,000 of Preferred Stock in this placement; but in no event shall no more than $1,000,000 of P.E. Common Stock be issued. The purchase price for each share of Common Stock hereunder shall be the "adjusted pricing point" as set forth in Exhibit 1 to the Certificate of Designation of Preferred Stock, a copy of which is attached hereto as Exhibit A. Any of such shares of P.E. Common Stock purchased as aforesaid shall be freely tradeable by the holder without restriction or limitation under any agreement, arrangement, law or regulation. 5.7 Annual and Quarterly Reports on Form 10-K(SB) and Form 10-Q(SB) and ------------------------------------------------------------------- Current Reports on Form 8-K. The Company shall make available to the Subscriber - --------------------------- copies of its annual reports on Form 10-K(SB), quarterly reports on Form 10- Q(SB) and current reports on Form 8-K for as long as the Preferred Stock may remain outstanding. 5.8.1 Opinion of Counsel. Subscribers shall, upon purchase of the ------------------ Preferred Stock pursuant to this Agreement, receive an opinion letter from Jeffer, Mangels, Butler & Mamaro, LLP ("Counsel"), counsel to the Company, to the effect that (a) the Company is duly incorporated and validly existing; (b) this Agreement, the issuance of the Preferred Stock at Closing and the issuance of the Conversion Shares upon conversion of the Preferred Stock have been duly approved by all required corporate action, and that all such securities, upon due issuance, shall be validly issued, fully paid and non-assessable; (c) this Agreement, the Registration Rights Agreement, the Irrevocable Instructions to Transfer Agent and the Escrow Agreement are valid and binding obligations of the Company, enforceable in accordance with their terms, except as enforceability of the indemnification provisions may be limited by principles of public policy, and subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of laws governing specific performance and other equitable remedies; (d) based upon the representations and acknowledgments of Subscribers contained in Sections 2 and 3 hereof, the Preferred Stock has been, and the Conversion Shares will be, issued in a transaction that is exempt from the registration requirements of the Act and applicable state securities laws; (e) the Conversion Shares are authorized for listing on the Nasdaq market, 19 including OTC Bulletin Board, where the Company's Common Stock is then trading, subject to notice of issuance; and (f) the Certificate of Designation has been duly authorized and adopted by the Company and has been or forthwith will be duly filed and/or recorded under applicable law. 5.8.2 Opinion of Special Counsel. Subscriber shall, upon purchase of -------------------------- the P.E. Common Stock, receive an opinion letter from David L. Kagel, Esq. ("Special Counsel"), Special Counsel to the Company and the Public Entity, to the effect that (a) any P.E. Common Stock subscribed for on or prior to April 7, 1999 is, or when actually issued will be, freely tradable without registration or further action by the holder(s) thereof under Rule 504 promulgated by the Securities and Exchange Commission and in effect on or prior to said date, and (b) that the offering of the Preferred Stock and the separate offering of the P.E. Common Stock are not subject to the "integration doctrine" as originally promulgated in Securities Act Release 4552, as such "integration doctrine" has been amended or applied since such promulgation. 5.9 Removal of Legend Upon Conversion. As contemplated by the --------------------------------- Certificate of Designation, upon conversion of the Preferred Stock, Subscriber shall submit a Notice of Conversion. The Legend shall be removed and the Company shall issue a certificate without such Legend to the holder of any Security upon which it is stamped, and a certificate for a security shall be originally issued without the Legend, if, unless otherwise required by state securities laws, (a) the sale of such Security is registered under the Act, or (b) such holder provides the Company with an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions (the reasonable cost of which shall be borne by the Company), to the effect that a public sale or transfer of such Security may be made without registration under the Act, or (c) such holder provides the Company with reasonable assurances that such Security may be sold pursuant to Rule 144. Each Subscriber agrees to sell all Securities, including those represented by a certificate(s) from which the Legend has been removed, or which were originally issued without the Legend, pursuant to an effective registration statement relating thereto and to deliver a prospectus in connection with such sale or in compliance with an exemption from the registration requirements of the Act. If the Legend is removed from any Security or any Security is issued without the Legend and thereafter the effectiveness of a registration statement covering the resale of such Security is suspended or the Company determines that a supplement or amendment thereto is required by applicable securities laws, then upon reasonable advance notice to Subscriber holding such Security, the Company may require that the Legend be placed on any such Security that cannot then be sold pursuant to an effective registration statement or Rule 144 or with respect to which the opinion referred to in clause (b) next above has not been rendered, which Legend shall be removed when such Security may be sold pursuant to an effective registration statement or Rule 144 or such holder provides the opinion with respect thereto described in clause (b) next above. 20 5.10 Listing. Subject to the remainder of this Section 5.10, the Company ------- shall use its best efforts to ensure that its shares of Common Stock (including all Conversion Shares) are approved and included for quotation on the Nasdaq Small Cap Market ("NASDAQ"). Thereafter, the Company shall (a) use its best efforts to continue the quotation of its Common Stock on the NASDAQ, or on the Nasdaq National Market System ("NMS"), the New York Stock Exchange ("NYSE"), or the American Stock Exchange ("AMEX") or any other national exchange or over-the- counter market system; (b) take all action necessary to cause and maintain the quotation of its Common Stock on the OTC Bulletin Board at any time the Common Stock is not included for quotation on NASDAQ, NMS, NYSE or AMEX; and (c) comply in all respects with the Company's reporting. filing, and other obligations under the by-laws or rules of the National Association of Securities Dealers ("NASD") and such exchanges, as applicable. 5.11 The Company's Instructions to Transfer Agent. The Company will -------------------------------------------- issue to its Transfer Agent the Irrevocable Instructions to Transfer Agent substantially in the form of Exhibit E instructing the Transfer Agent to issue certificates, registered in the name of each Subscriber or its nominee, for the Conversion Shares in such amounts as specified from time to time by such Subscriber to the Company upon conversion of the Preferred Stock. Such certificates shall bear a Legend only to the extent permitted by Section 5.9 hereof. The Company warrants that no instruction, other than such instructions referred to in Section 5.9 hereof or in this Section 5.11 and stop transfer instructions to give effect to Section 3.7 hereof in the case of Conversion Shares prior to registration of the Conversion Shares under the Act, will be given by the Company to its Transfer Agent and that the Securities shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and the Registration Rights Agreement. Nothing in this Section shall affect in any way each Subscriber's obligations and agreement set forth in Sections 2.3.3 or 2.3.4 hereof to resell the Securities pursuant to an effective registration statement and to deliver a prospectus in connection with such sale or in compliance with an exemption from the registration requirements of applicable securities laws. If (a) a Subscriber provides the Company with an opinion of counsel, which opinion of counsel shall be in form, substance and scope customary for opinions of counsel in comparable transactions and acceptable to counsel for the Company (the reasonable cost of which shall be borne by the Company), to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from registration or (b) a Subscriber transfers Securities to an affiliate which is an accredited investor as defined under the Act, the Company shall permit the transfer, and, in the case of Conversion Shares, promptly instruct its transfer agent to issue one or more certificates in such name and in such denomination as specified by such Subscriber. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to a Subscriber by violating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Section 5.11 will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Section 5.11, that a Subscriber 21 shall be entitled, in addition to all other available remedies, to an injunction restraining any breach and requiring immediate issuance and transfer, without the necessity of showing economic loss and without any bond or other security being required. The Company hereby agrees that it will not unilaterally terminate its relationship with the Transfer Agent for any reason prior to the date which is three (3) years after the Last Closing or one (1) month after the first date that no Preferred Stock is outstanding, whichever is earlier (the "Ending Date"). In the event the Company's agency relationship with the Transfer Agent should be terminated for any other reason prior to the date which is three (3) years after the Last Closing, the Company's Transfer Agent shall continue acting as transfer agent pursuant to the terms of the Irrevocable Instructions to Transfer Agent until such time that a successor transfer agent (i) is appointed by the Company; (ii) is approved by seventy-five percent (75%) of the Subscribers of outstanding Preferred Stock; and (iii) executes and agrees to be bound by the terms of the Irrevocable Instructions to Transfer Agent. 5.12 Filing of Form 10-SB to Register Under Section 12(b) or 12(g) of the -------------------------------------------------------------------- Exchange Act. The Company shall, no later than sixty (60) days after the - ------------ Initial Issuance Date (as defined in Section 5 of the Company's Certificate of Designation of Preferred Stock), file a registration statement on Form 10-SB with the SEC registering the Securities under Section 12(b) or 12(g) of the Exchange Act. The Company shall, within ten (10) days of the filing of such registration statement on Form 10-SB, send a copy to Subscribers. The Company shall use its best efforts to have such registration statement declared effective within one hundred fifty (150) days after the Initial Issuance Date. 6. Subscriber Covenant/Miscellaneous. ---------------------------------- 6.1 Representations and Warranties Survive the Closing; Severability. ---------------------------------------------------------------- Subscriber's and the Company's representations and warranties, including but not limited to the Public Entity, shall survive the Closing of the transactions contemplated by this Agreement notwithstanding any due diligence investigation made by or on behalf of the party seeking to rely thereon. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 6.2 Successors and Assigns. The terms and conditions of this Agreement ---------------------- shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. Subscriber may assign Subscriber's rights hereunder, in connection with any private sale of the Preferred Stock of such Subscriber, so long as, as a condition precedent to 22 such transfer, the transferee executes an acknowledgment agreeing to be bound by the applicable provisions of this Agreement. 6.3 Governing Law. This Agreement shall be governed by and construed under ------------- the laws of the State of Delaware without regard to its conflict of laws rules or principles. 6.4 Execution in Counterparts Permitted. This Agreement may be executed in ------------------------------------ any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one (1) instrument. 6.5 Titles and Subtitles; Gender. The titles and subtitles used in this ---------------------------- Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. The use in this Agreement of a masculine, feminine or neither pronoun shall be deemed to include a reference to the others. 6.6 Written Notices, Etc. Any notice, demand or request required or --------------------- permitted to be given by the Company or Subscriber pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally, or by facsimile (with a hard copy to follow by two (2) day courier), addressed to the parties at the addresses and/or facsimile telephone number of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing. 6.7 Expenses. Each of the Company and Subscriber shall pay all costs and -------- expenses that it respectively incurs, with respect to the negotiation, execution, delivery and performance of this Agreement. 6.8 Entire Agreement; Written Amendments Required. This Agreement, --------------------------------------------- including the Exhibits attached hereto, the Certificate of Designation, the Preferred Stock certificates, the Registration Rights Agreement, the Escrow Agreement, the Irrevocable Instructions to Transfer Agent and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. Except as expressly as provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought. 6.9 Arbitration. Any controversy or claim arising out of or related to ----------- this Agreement or the breach thereof, shall be settled by binding arbitration in Chicago, Illinois in accordance with the Expedited Procedures (Rules 53-57) of the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). A proceeding shall be commenced 23 upon written demand by Company or any Subscriber to the other. The arbitrator(s) shall enter a judgment by default against any party which fails or refuses to appear in any properly noticed arbitration proceeding. The proceeding shall be conducted by one (1) arbitrator, unless the amount alleged to be in dispute exceeds two hundred fifty thousand dollars ($250,000), in which case three (3) arbitrators shall preside. The arbitrator(s) will be chosen by the parties from a list provided by the AAA, and if they are unable to agree within ten (10) days, the AAA shall select the arbitrator(s). The arbitrators must be experts in securities law and financial transactions. The arbitrators shall assess costs and expenses of the arbitration, including all attorneys' and experts' fees, as the arbitrators believe is appropriate in light of the merits of the parties' respective positions in the issues in dispute. Each party submits irrevocably to the jurisdiction of any state court sitting in Chicago, Illinois or to the United States District Court sitting in Chicago for purposes of enforcement of any discovery order, judgment or award in connection with such arbitration. The award of the arbitrator(s) shall be final and binding upon the parties and may be enforced in any court having jurisdiction. The arbitration shall be held in such place as set by the arbitrator(s) in accordance with Rule 55. 7. Subscription and Wiring Instructions; Irrevocabilitv. ----------------------------------------------------- 7.1 Subscription ------------ (a) Wire Transfer of Subscription Funds. Subscriber shall send this ----------------------------------- signed Agreement by facsimile to Company at 310-546-2870, and send the subscription funds by wire transfer, to the Escrow Agent as follows: American National Bank and Trust Company of Chicago ABA 071000770 Account Number 4326350 - Corporate Trust Clearing Account Attention: Brian Terwilliger "Entertainment" (b) Irrevocable Subscription. Subscriber hereby acknowledges and agrees, ------------------------ subject to the provisions of any applicable laws providing for the refund of subscription amounts submitted by Subscriber, that this Agreement is irrevocable and that Subscriber is not entitled to cancel, terminate or revoke this Agreement or any other agreements executed by such Subscriber and delivered pursuant hereto, and that this Agreement and such other agreements shall survive the death or disability of such Subscriber and shall be binding upon and inure to the benefit of the parties and their heirs, executors, administrators, successors, legal representatives and assigns. If the Securities subscribed for are to be owned by more than one person, the obligations of all such owners under this Agreement shall be joint and several, and the agreements, representations, warranties and acknowledgments herein contained shall be deemed to be made by and be binding upon each such person and his heirs, executors, 24 administrators, successors, legal representatives and assigns. Notwithstanding the foregoing, (i) if any material condition to Closing required to be satisfied by a party other than Subscriber is not satisfied or (ii) if the Disclosure Documents are discovered prior to Closing to contain statements which are materially inaccurate, or omit statements of material fact, Subscriber may revoke or cancel this Agreement. (c) Company's Right to Reject Subscription. Subscriber understands -------------------------------------- that this Agreement is not binding on the Company until the Company accepts it. This Agreement shall be accepted by the Company when the Company countersigns this Agreement. Subscriber hereby confirms that the Company has full right in its sole and absolute discretion, for any reason or no reason, to accept or reject the subscription of Subscriber, in whole or in part, provided that, if the Company decides to reject such subscription, the Company must do so promptly and in writing. In the case of rejection, the Company will promptly return any rejected payments and (if rejected in whole) copies of all executed subscription documents (including without limitation this Agreement) to Subscriber. In the event of rejection, no interest will be payable by the Company to Subscriber on any return of payment, provided however, that any such interest accrued on such funds in the Escrow Account shall be returned to the Subscriber by the Escrow Agent. 7.2 Acceptance of Subscription. In the case of acceptance of -------------------------- Subscriber's subscription, ownership of the number of securities being purchased hereby will pass to Subscriber upon the Closing. 7.3 Subscriber to Forward Original Signed Subscription Agreement to --------------------------------------------------------------- Company. Subscriber agrees to courier to Company his, her or its original inked - ------- signed Subscription Agreement within two (2) days after faxing said signed agreement to Placement Agent. 8. Indemnification. ---------------- The Company and Brad Greenspan agree, jointly and severally, to indemnify and hold harmless Subscriber and the Escrow Agent and each of their respective officers, directors, employees and agents, and each person who controls Subscriber or the Escrow Agent within the meaning of the Act or the Exchange Act (each, a "Subscriber Indemnified Party") against any losses, claims, damages or liabilities, joint or several, to which it, they or any of them, may become subject and not otherwise reimbursed arising from any material breach of any representation or warranty made by the Company or the Public Entity contained in this Agreement, in writing to the Subscriber, in any statements contained in the Disclosure Documents or otherwise disclosed. 25 Subscriber agrees to indemnify and hold harmless the Company and the Escrow Agent and each of their respective officers, directors, employees and agents, and each person who controls Company or the Escrow Agent within the meaning of the Act or the Exchange Act (each, a "Company Indemnified Party") (a Subscriber Indemnified Party or a Company Indemnified Party may be hereinafter referred to singularly as "Indemnified Party") against any losses, claims, damages or liabilities, joint or several, to which it, they or any of them, may become subject and not otherwise reimbursed arising from any material breach of any representation or warranty made by Subscriber contained in this Agreement. Promptly after receipt by an Indemnified Party of notice of the commencement of any action pursuant to which indemnification may be sought, such Indemnified Party will, if a claim in respect thereof is to be made against the other party (hereinafter "Indemnitor") under this Section 8, deliver to the Indemnitor a written notice of the commencement thereof and the Indemnitor shall have the right to participate in and to assume the defense thereof with counsel reasonably selected by the Indemnitor, provided, however, that an Indemnified Party shall have the right to retain its own counsel, with the reasonably incurred fees and expenses of such counsel to be paid by the Indemnitor, if representation of such Indemnified Party by the counsel retained by the Indemnitor would be inappropriate due to actual or potential conflicts of interest between such Indemnified Party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the Indemnitor within a reasonable time of the commencement of any such action, if prejudicial to the Indemnitor's ability to defend such action, shall relieve the Indemnitor of any liability to the Indemnified Party under this Section 8, but the omission to so deliver written notice to the Indemnitor will not relieve it of any liability that it may have to any Indemnified Party other than under this Section 8 to the extent it is prejudicial. 9. Number of Shares and Purchase Price. Subscriber subscribes for shares ----------------------------------- of Preferred Stock against payment by wire transfer in the amount of ("Purchase Price") as set forth on the last page of this Agreement. 10. Accredited Investor. Subscriber is an "accredited investor" because ------------------- (check all applicable boxes): (a) [ ] it is an organization described in Section 501(c)(3) of the Internal Revenue Code, or a corporation, business trust, or partnership not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000. (b) [ ] any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person who has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment. 26 (c) [ ] a natural person, who: [ ] is a director, executive officer or general partner of the issuer of the securities being offered or sold or a director, executive officer or general partner of a general partner of that issuer. [ ] has an individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeding $1,000,000. [ ] had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year. (d) [ ] an entity each equity owner of which is an entity described in a - b above or is an individual who could check one (1) of the last three (3) boxes under subparagraph (c) above. (e) [ ] other [specify] 11. If Subscriber is using the services of a Purchaser Representative, such Purchaser Representative is _________________________. The undersigned acknowledges that this Agreement and the subscription represented hereby shall not be effective unless accepted by the Company as indicated below. 27 IN WITNESS WHEREOF, the undersigned Subscriber does represent and certify under penalty of perjury that the foregoing statements are true and correct and that Subscriber by the following signature(s) executed this Agreement. Dated this _____ day of April, 1999. ______________________________ ________________________________________ Your Signature PRINT EXACT NAME IN WHICH YOU WANT THE SECURITIES TO BE REGISTERED ______________________________ DELIVERY INSTRUCTIONS: ---------------------- Name: Please Print Please type or print address where your security is to be delivered ______________________________ ATTN:__________________________________ Title/Representative Capacity (if applicable) ______________________________ _______________________________________ Name of Company You Represent (if applicable) Street Address ___________________________________ _______________________________________ Place of Execution of this Agreement City, State or Province, Country, Offshore Postal Code Aggregate number of shares of Preferred _______________________________________ Stock subscribed for: ________________________ Phone number (for Federal Express) and Fax Number (re: Notice) Amount Subscribed for: $_____________________ (number of shares subscribed for x $_______ per share) THIS AGREEMENT IS ACCEPTED BY THE COMPANY IN THE AMOUNT OF $___________ ON THE ____ DAY OF APRIL, 1999. _________________________________ By:______________________________ Name:____________________________ Title:_____________________________ Agreed To and Accepted By: __________________________________ Brad Greenspan 28 EX-10.08 14 REGISTRATION RIGHTS AGREEMENT APRIL 1999 ENTERTAINMENT UNIVERSE, INC. _______________________________________ Registration Rights Agreement EXHIBIT 10.08 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is entered into as of April, 1999, by and among Entertainment Universe, Inc., a corporation duly incorporated and existing under the laws of the State of California ("EUI" or the "Company"), and the Subscribers (hereinafter collectively referred to as "Subscribers") to the Company's offering, ("Offering") of up to Six Million Nine Hundred Seventy-Five Thousand Dollars ($6,975,000) of Series A 6% Convertible Preferred Stock (the "Preferred Stock") pursuant to the Regulation D Subscription Agreement between the Company and each of the Subscribers (the "Subscription Agreement"). This Agreement is between the Company and Subscriber. The Company shall assign this Agreement, on or prior to the closing date of this Offering, to a publicly traded shell corporation (the "Public Entity") of which EUI intends to be the wholly-owned subsidiary by the closing of this Offering. Upon such assignment, references to the Company shall mean the Public Entity. 1. Definitions. For purposes of this Agreement: ----------- (a) The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "Act"), and pursuant to Rule 415 under the Act or any successor rule, and the declaration or ordering of effectiveness of such registration statement or document; provided, however, notwithstanding the foregoing, when referring to a registration on Form 10-SB (relating to the registration of securities pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934 ("Exchange Act"), the foregoing terms "register", "registered" and "registration" refers to the registration effected on Form 10-SB and not one effected under the Act. (b) For purposes hereof, the term "Registrable Securities" means the shares of the Company's Common Stock together with any capital stock issued in replacement of, in exchange for or otherwise in respect of such Common Stock (the "Common Stock"), issuable or issued upon conversion of the Preferred Stock. Notwithstanding the above, any Registrable Securities resold in a public transaction shall cease to constitute Registrable Securities. (c) The number of shares of "Registrable Securities then outstanding" shall be determined by the number of shares of Common Stock which have been issued or are issuable upon conversion of the Preferred Stock. (d) The term "Holder" means any person owning or having the right to acquire Registrable Securities or any permitted assignee thereof. (e) The term "Due Date" means the date which is seven (7) months after the date of the first closing of a sale and purchase of Preferred Stock that occurs pursuant to the Offering. 2. Required Registration. --------------------- (a) The Company shall, within one hundred fifty (150) days after the Initial Issuance Date (as defined in Section 5 of the Company's Certificate of Designation of Preferred Stock) of the Offering (such one hundred fiftieth day hereinafter the "Filing Date"), file a registration statement on Form SB-2 (or other suitable form), or a post-effective amendment to an effective registration statement (collectively, a "Registration Statement") at the Company's discretion, but subject to the reasonable approval of Subscribers, covering the resale of all shares of Registrable Securities then outstanding or issuable upon conversion of all the outstanding Preferred Stock. Such Registration Statement shall initially cover at least two hundred percent (200%) of the number of shares of Common Stock issuable upon conversion of each share of Preferred Stock then outstanding, including without limitation, any accrued and unpaid interest on such date and shall cover, to the extent allowed by applicable law, such additional indeterminate number of shares of Common Stock as are required to effect conversion of the Preferred Stock due to fluctuations in the price of the Company's Common Stock. The Company shall use its best efforts to have the Registration Statement declared effective by the Due Date. If for any three (3) consecutive trading days after the Due Date (the last of such three (3) trading days being the "Registration Shortfall Date") the Registration Statement does not cover a sufficient number of shares of Common Stock to effect the resales of a number of shares of Common Stock equal to two hundred percent (200%) of the number of shares of Common Stock issuable to each Subscriber upon conversion of all outstanding Preferred Stock then eligible for conversion, at the Conversion Rate (as defined in the Certificate of Designation of the Series A Preferred Stock) (the "Assumed Conversion Rate"), (a "Registration Shortfall"), the Company shall, within five (5) business days of the Registration Shortfall Date, amend the Registration Statement or file a new Registration Statement (an "Amended" or "New" Registration Statement, respectively), as appropriate, to add such number of additional shares as would be necessary to effect the resales of a number of shares of Common Stock equal to two hundred percent (200%) of the number of shares of Common Stock issuable to each Subscriber upon conversion of all outstanding Preferred Stock then eligible for conversion, at the Assumed Conversion Price then in effect. In addition, the Company shall, within sixty (60) days of the Initial Issuance Date, file a registration statement on Form 10 registering the Company's securities pursuant to Section 12(b) or 12(g) of the Exchange Act. (b) The Company agrees that the holders of Registrable Securities will suffer damages if the Company fails to fulfill its obligations pursuant to Section 2(a) hereof and that it would not be possible to ascertain the extent of such damages. Accordingly, in the event of -2- such failure by the Company to fulfill such obligations, the Company hereby agrees to pay liquidated damages ("Liquidated Damages") to each holder of shares then convertible into Registrable Securities ("Restricted Preferred Shares") who has complied with such holder's obligations under this Agreement under the circumstances and to the extent set forth below (clauses (i) through (vi) individually, a "Registration Default"): (i) if the Registration Statement has not been filed on or prior to the Filing Date; or (ii) if the Registration Statement is not declared effective on or prior to the Due Date; or (iii) if the New Registration Statement or Amended Registration Statement is not declared effective within seven business days of the Registration Shortfall Date; or (iv) if the number of Registrable Securities registered pursuant to the Registration Statement is a Registration Shortfall on the effective date or thereafter in accordance with Section 2(a) hereof; (v) if the Registration Statement has been declared effective and thereafter ceases to be effective or usable for any reason including, but not limited to, a Black Out (under Section 6 hereof) in excess of sixty (60) days, provided that any such failure of the use of the Registration Statement which is a result of (A) a required disclosure by the Company in the form of a Registration Statement amendment relating solely to an acquisition or disposition of assets by the Company, an acquisition of a business by the Company, a merger, consolidation or reorganization of the Company or a tender offer by or for the Company and which does not exceed a period of sixty (60) calendar days or (B) a performance of its obligations pursuant to Section 5 hereof and does not exceed a period of seven (7) calendar days shall not be deemed a Registration Default; or (vi) if a registration on Form 10-SB registering the Company's Securities pursuant to Section 12(b) or 12(g) of the Exchange Act has not been filed within sixty (60) days, or declared effective within one hundred twenty (120) days, after the Initial Issuance Date; then the Company shall pay Liquidated Damages to each holder of Restricted Preferred Shares during the first 30-day period immediately following the occurrence of such Registration Default in the form of a special payment on each share of Restricted Preferred Shares and each share of Additional Common Stock as to which the underlying Registrable Securities are not so registered in an amount equal to 1% of the initial purchase price paid per share under the Subscription Agreement for the first -3- 30-day period, or part thereof, and in an amount equal to 2% of the initial purchase price paid per share for each subsequent 30-day period, or part thereof, in cash, or at the Holder's option, in the number of shares of Common Stock equal to the quotient of (x) the dollar amount of the Liquidated Damages on the Payment Date (as defined below) by (y) the Conversion Rate on the date of the Registration Default, accruing daily, until all Registration Defaults have been cured. The Liquidated Damages payable pursuant hereto shall be payable within five (5) business days from the end of the calendar month commencing on the first calendar month in which the Registration Default occurs (each, a "Payment Date"). In the event the Holder elects to receive the Liquidated Damages amount in shares of Common Stock, such shares shall also be considered Registrable Securities. A Registration Default under clause (i) above shall be deemed cured on the date that the Registration Statement is filed; a Registration Default under clause (ii) above or clause (iii) above shall be cured on the date that the Registration Statement or the New Registration Statement or Amended Registration Statement, as the case may be, is declared effective; a Registration Default under clause (iv) above shall be cured on the date on which the Registration Statement covers the Registration Shortfall and is declared effective; a Registration Default under clause (v) above shall be deemed cured on the date the Registration Statement is again declared effective or the Prospectus contained therein again becomes usable, or the expiration of twenty four (24) months after the Initial Issuance Date; and (vi) a Registration Default under clause (vi) above shall be deemed cured on the date the registration on Form 10 is filed (if the Registration Default is the failure to file the registration within sixty (60) days from the Initial Issuance Date) or on the date the registration on Form 10 is declared effective (if the Registration Default is the failure to be declared effective within the hundred twenty (120) days from the Initial Issuance Date). Upon conversion of each share of Preferred Stock, the Company shall issue to the Subscriber the number of shares of Common Stock determined as set forth in Section 5(a) of the Certificate of Designation, plus an additional number of shares of Common Stock attributable to such share of Preferred Stock (the "Additional Shares") determined as set forth below: Additional Shares = Liquidated Damages ------------------ Conversion Rate With respect to the Preferred Stock, "Conversion Rate" has the definition ascribed to it in the Certificate of Designation. Such Additional Shares shall also be deemed "Registrable Securities" as defined herein. The Company covenants to use its best efforts to use Form SB-2 for the registration required by this Section during all applicable times contemplated by this Agreement. -4- (c) The Registration Statement shall be prepared as a "shelf" registration statement under Rule 415, and shall be maintained effective until all Registrable Securities cease to exist. (d) The Company represents that it is presently eligible to effect the registration contemplated hereby on Form SB-2 for secondary offerings and will use its best efforts to continue to take such actions as are necessary to maintain such eligibility. (e) Notwithstanding anything to the contrary contained in this Agreement, the Registration Statement shall include only the Registrable Securities, except that the Registration Statement may include securities underlying stock options issued to officers, directors and employees of the Company. (f) Notwithstanding anything to the contrary contained in this Agreement, the Company shall not pay any Liquidated Damages if the failure of the Company to fulfill its obligations pursuant to Section 2(a) hereof arises from (i) the failure of any Holder materially to comply with such holder's obligation under this Agreement or (ii) failure of any Holder materially to comply with the applicable SEC rules and regulations. 3. Piggyback Registration. If the Registration Statement described ----------------------- in Section 2 is not effective by the Due Date, and if (but without any obligation to do so) the Company proposes to register (including for this purpose a registration to be effected by the Company for shareholders other than the Holders) any of its Common Stock under the Act in connection with the public offering of such securities solely for cash (other than a registration relating solely for the sale of securities to participants in a Company stock plan or a registration on Form S-4 promulgated under the Act or any successor or similar form registering stock issuable upon a reclassification, upon a business combination involving an exchange of securities or upon an exchange offer for securities of the issuer or another entity), the Company shall, at such time, promptly give each Holder written notice of such registration (a "Piggyback Registration Statement"). Upon the written request of each Holder given by fax within ten (10) days after mailing of such notice by the Company, the Company shall cause to be included in such registration statement under the Act all of the Registrable Securities that each such Holder has requested to be registered ("Piggyback Registration") to the extent such inclusion does not violate the registration rights of any other securityholder of the Company granted prior to the date hereof; nothing herein shall prevent the Company from withdrawing or abandoning the registration statement prior to its effectiveness. The election of initiating Holders to participate in a Piggyback Registration Statement shall not impact the amount payable to investors pursuant to Section 2(a) or 2(b) herein except that the Liquidated Damages shall cease to accrue as of the date of effectiveness of the Piggyback Registration Statement. 4. Limitation on Obligations to Register. ------------------------------------- -5- (a) In the case of a Piggyback Registration on an underwritten public offering by the Company, if the managing underwriter determines and advises in writing that the inclusion in the registration statement of all Registrable Securities proposed to be included would interfere with the successful marketing of the securities proposed to be registered by the Company, then the number of such Registrable Securities to be included in the registration statement, to the extent such Registrable Securities may be included in such Piggyback Registration Statement, shall be allocated among all Holders who had requested Piggyback Registration pursuant to the terms hereof, in the proportion that the number of Registrable Securities which each such Holder seeks to register bears to the total number of Registrable Securities sought to be included by all Holders. If required by the managing underwriter of such an underwritten public offering, the Holders shall enter into a reasonable agreement limiting the number of Registrable Securities to be included in such Piggyback Registration Statement and the terms, if any, regarding the future sale of such Registrable Securities. (b) In the event the Company believes that shares sought to be registered under Section 2 or Section 3 by Holders do not constitute "Registrable Securities" by virtue of Section 1(b) of this Agreement, and the status of those shares as Registrable Securities is disputed, the Company shall provide, at its expense, an opinion of counsel reasonably acceptable to the Holders of the purported Registrable Securities at issue and their counsel (and satisfactory to the Company's transfer agent to permit the sale and transfer) that those securities may be sold immediately, without volume limitation, without registration under the Act, by virtue of Rule 144 or other exemptive provisions as may be applicable thereto. 5. Obligations of the Company. Whenever required under this Agreement, -------------------------- or under a post-effective amendment to an effective registration statement, to effect the registration or continued registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the Securities and Exchange Commission ("SEC") a registration statement, or such a post-effective amendment, with respect to such Registrable Securities and use its best efforts to cause such registration statement to become and remain effective; (b) Prepare and file with the SEC such amendments and supplements to such registration statement, or such a post-effective amendment, and the prospectus used in connection with such registration statement, as may be necessary to comply with the provisions of the Act and the rules and regulations promulgated thereunder with respect to the disposition of all securities covered by such registration statement; (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such -6- other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them; (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other state securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders of the Registrable Securities covered by such Registration Statement, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement; (f) As promptly as practicable after becoming aware of such event, notify each Holder of Registrable Securities of the happening of any event of which the Company has knowledge, as a result of which the prospectus included in the registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and subject to Section 6 hereof use its best efforts promptly to prepare a supplement or amendment to the registration statement to correct such untrue statement or omission, and deliver a number of copies of such supplement or amendment to each Holder as such Holder may reasonably request; (g) Provide Holders with written notice of the date that a registration statement registering the resale of the Registrable Securities is declared effective by the SEC, and the date or dates when the Registration Statement is no longer effective; (h) Provide Holders and their representatives the opportunity to conduct a reasonable due diligence inquiry of Company's pertinent financial and other records and make available its officers, directors and employees for questions regarding such information as it relates to information contained in the registration statement; (i) Provide Holders and their representatives the opportunity to review the registration statement and all amendments thereto a reasonable period of time prior to their filing with the SEC if so requested by Holder in writing. 6. Black Out. If, during the time that the Registration Statement is --------- effective, the Company reasonably determines, based upon advice of counsel, that due to the existence of material non-public information, disclosure of such material non-public information would be required to make the statements contained in the Registration Statement -7- not misleading, and the Company has a bona fide business purpose for preserving as confidential such material non-public information, the Company shall have the right to suspend the effectiveness of the Registration Statement, and no Holder shall be permitted to sell any Registrable Securities pursuant thereto, until such time as such suspension is no longer advisable; provided, however, that such time shall not exceed a period of sixty (60) days. As soon as such suspension is no longer advisable, the Company shall, if required, promptly, but in no event later than the date the Company files any documents with the SEC referencing such material information, file with the SEC an amendment to the Registration Statement disclosing such information and use its best efforts to have such amendment declared effective as soon as possible. In the event the effectiveness of the Registration Statement is suspended by the Company pursuant hereto, the Company shall promptly notify all Holders whose securities are covered by the Registration Statement of such suspension, and shall promptly notify each such Holder as soon as the effectiveness of the Registration Statement has been resumed. The Company shall be entitled to effect no more than one such suspension for one (1) year following the Last Closing (as defined in the Subscription Agreement). 7. Furnish Information. It shall be a condition precedent to the ------------------- obligations of the Company to take any action pursuant to this Agreement with regard to each selling Holder that such selling Holder shall furnish to the Company such information regarding Holder, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of its Registrable Securities or to determine that registration is not required pursuant to Rule 144 or other applicable exemptive provision under the Act. 8. Registration Expenses. --------------------- (a) All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by it whether or not any Registration Statement (or registration on Form 10-SB) is filed or becomes effective and whether or not any securities are issued or sold pursuant to any Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with the National Association of Securities Dealers, Inc., (B) in compliance with state securities or Blue sky laws (including, without limitation and in addition to that provided for in (b) below, reasonable fees and disbursements of counsel for the underwriters or Special Counsel for the Holders in connection with Blue Sky qualifications of the Registrable Securities, and determination of the eligibility of the Registrable Securities for investment under the laws of such jurisdictions as the managing underwriters, if any, or Holders of a majority (on a fully converted basis) may designate) and (C) the fees payable in connection with the printing of prospectuses if the printing of prospectuses is requested by the managing underwriters, if any), -8- (ii) messenger, telephone and delivery expenses, (iii) fees and disbursements of counsel for the Company and Special Counsel for the Holders (plus any local counsel, in accordance with the provisions of Section 8(b) hereof), (iv) fees and disbursements of all independent certified special audit and "cold comfort" letters required by or incident to such performance, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other persons retained by the Company. In addition, the Company shall pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, and the fees and expenses incurred in connection with the listing of the securities to be registered on any securities exchange. (b) In connection with any registration hereunder, the Company shall reimburse the Holders of Registrable Securities being registered in such registration for the reasonable fees and disbursements, not to exceed $25,000 in the aggregate, of not more than one firm of attorneys representing the selling Holders (in addition to any local counsel for which reimbursement shall be separate), which firm, if any, shall be chosen by the majority number of shares of Registrable Securities of Holders (on a fully diluted basis). 9. Indemnification. In the event any Registrable Securities are included --------------- in a Registration Statement or a post-effective amendment to an effective Registration Statement or a Piggyback Registration Statement or in a registration on Form 10-SB under the Exchange Act under this Agreement: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the officers, directors, members, partners, attorneys, agents and employees of each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), against any losses, claims, damages, liabilities, judgments, actions and expenses (including without limitation and as incurred, reimbursement of all reasonable costs of investigating, preparing, pursuing or defending any claim or action, or any investigation or proceeding by any governmental agency or body, commenced or threatened, including the reasonable fees and expenses of counsel), joint or several, to which they may become subject under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or in any registration statement on Form 10- SB or (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any other material violation of the Federal or state securities laws, and the Company will reimburse each such Holder, officer, director, member, partner, attorney, agent, employee, underwriter or controlling person for any legal or other expenses reasonably -9- incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, the Company shall not be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it is caused by a violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, officer, director, member, partner, attorney, agent, employee, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder, severally and not jointly, will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter and any other Holder selling securities in such registration statement or any of its directors or officers or any person who controls such Holder, against any losses, claims, damages, liabilities, judgments, actions and expenses (including without limitation and as incurred, reimbursement of all reasonable costs of investigating, preparing, pursuing or defending any claim or action, or any investigation or proceedings by any governmental agency or body, commenced or threatened, including the reasonable fees and expenses of counsel), joint or several, to which the Company or any such director, officer, controlling person, or underwriter or controlling person, or other such Holder or director, officer or controlling person may become subject, under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any statement or omission in each case to the extent (and only to the extent) that such statement or omission is made in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with the Registration Statement or in any registration statement on Form 10-SB; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company and any such director, officer, controlling person, underwriter or controlling person, other Holder, officer, director, or controlling person in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 9(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld. (c) Promptly after receipt by an indemnified party under this Section 9 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 9, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the reasonably incurred fees and expenses of one such counsel to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the -10- indemnifying party would be inappropriate due to actual or potential conflicting interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 9, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 9. (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 9 is unavailable to or insufficient to hold harmless an indemnified party for any reason, the Company and each Holder agree to contribute to the aggregate claims, losses, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively "Losses") to which the Company and one or more of the Holder may be subject in such proportion as is appropriate to reflect the relative fault of the Company and the Holders in connection with the statements or omissions which resulted in such Losses. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the Company or by the Holders. The Company and the Holders agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of engaging in fraudulent transactions or the use of any manipulative or deceptive device or contrivance (within the meaning of Section 17 of the Act or Section 10(b) of the 1934 Act) shall be entitled to contribution from any person who was not guilty thereof. For purposes of this Section 9, each person who controls a Holder of Registrable Securities within the meaning of either the Act or the 1934 Act and each director, officer, member, partner, employee and agent of a Holder shall have the same rights to contribution as such Holder, and each person who controls the Company within the meaning of either the Act or the 1934 Act and each director of the Company, and each officer of the Company who has signed the Registration Statement, shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph (d). (e) The obligations of the Company and Holders under this Section 9 shall survive the redemption, exercise or conversion, if any, of the Preferred Stock, the completion of any offering of Registrable Securities in a Registration Statement under this Agreement, and otherwise. 10. Reports Under Securities Exchange Act of 1934. With a view to -------------------------------------------------- making available to the Holders the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration, the Company agrees to: -11- (a) make and keep public information available, as those terms are understood and defined in Rule 144; (b) use its best efforts to file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act. 11. Amendment of Registration Rights. Any provision of this Agreement -------------------------------- may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Holders of a majority of the Registrable Securities provided that the amendment treats all Holders equally. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each Holder, each future Holder, and the Company. 12. Notices. All notices required or permitted under this Agreement ------- shall be made in writing signed by the party making the same, shall specify the section under this Agreement pursuant to which it is given, and shall be addressed if to (a) the Company at: 264 South LaCienega, Suite 305, Beverly Hills, California 90211; and (b) the Holders at their respective last address of the party as shown on the records of the Company. Any notice, except as otherwise provided in this Agreement, shall be made by fax and shall be deemed given at the time of transmission of the fax. 13. Termination. This Agreement shall terminate on the date all ----------- Registrable Securities cease to exist; but without prejudice to (a) the parties' rights and obligations arising from breaches of this Agreement occurring prior to such termination (b) other indemnification obligations under this Agreement. 14. Assignment. No assignment, transfer or delegation, whether by ---------- operation of law or otherwise, of any rights or obligations under this Agreement by the Company or any Holder, respectively, shall be made without the prior written consent of the majority in interest of the Holders or the Company, respectively; provided that the rights of a Holder may be transferred to a subsequent holder of the Holder's Registrable Securities (provided such transferee shall provide to the Company, together with or prior to such transferee's request to have such Registrable Securities included in a Required or Piggyback Registration, a writing executed by such transferee agreeing to be bound as a Holder by the terms of this Agreement); and provided further that the Company may transfer its rights and obligations under this Agreement to a purchaser of all or a substantial portion of its business if the obligations of the Company under this Agreement are assumed in connection with such transfer, either by merger or other operation of law (which may include without limitation a transaction whereby the Registrable Securities are converted into securities of the successor in interest) or by specific assumption executed by the transferee. 15. Miscellaneous. ------------- -12- (a) Remedies. Each Holder of Registrable Securities or the Company, -------- in addition to being entitled to exercise all rights provided herein, or granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder of Registrable Securities agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by the Company of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company shall not enter into any -------------------------- agreement with respect to its securities that is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. (c) No Piggyback on Registrations. The Company shall not include and ----------------------------- shall not grant to any of its securities holders, including, without limitation, any Placement Agents (other than the Holders of Registrable Securities in such capacity) the right to include any of its securities in any Registration Statement other than Registrable Securities, except any such rights that exist as of the date hereof. Notwithstanding the foregoing, nothing shall prevent the Company from filing a registration statement simultaneously with the Registration Statement so long as the Holders of Registrable Securities have full priority with respect to the removal of any restrictive legend upon the resale by such Holder of the Registrable Securities. 16. Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the laws of the State of Delaware applicable to agreements made in and wholly to be performed in that jurisdiction, except for matters arising under the Act or the 1934 Act, which matters shall be construed and interpreted in accordance with such laws. 17. Execution in Counterparts Permitted. This Agreement may be -------------------------------------- executed in any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one (1) instrument. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of this _______ day of April, 1999. COMPANY: ENTERTAINMENT UNIVERSE, INC. By:________________________________ Brad D. Greenspan, President Address: 264 South LaCienega -13- Suite 305 Beverly Hills, CA 90211 SUBSCRIBER(S): ___________________________________ Investor's Name By:________________________________ (Signature) Address: _________________________________ _________________________________ _________________________________ -14- EX-10.09 15 ASSIGNMENT AND ASSUMPTION AGREEMENT APRIL 14, 2999 EXHIBIT 10.09 ASSIGNMENT AND ASSUMPTION AGREEMENT THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (this "Assignment") is made as of the 14th day of April, 1999, by and between Entertainment Universe, Inc., a California corporation (the "Assignor"), and Motorcycle Centers of America, Inc., a Nevada corporation (the "Assignee"). WHEREAS, in connection with an offering of the Series A 6% Convertible Preferred Stock of Assignor to certain investors (the "Investors"), the Assignor entered into those certain Registration Rights Agreements, by and between Assignor and each Investor (collectively, the "Registration Right Agreements"), and those certain Irrevocable Instructions to Transfer Agent among Assignor, each Investor and Corporate Stock Transfer, Inc. (collectively, the "Irrevocable Instructions"); and WHEREAS, Assignor and Assignee entered into that certain Agreement and Plan of Reorganization pursuant to which Assignor exchanged all of its capital stock for the capital stock of Assignee (the "Exchange"); WHEREAS, in connection with the Exchange, Assignor desires to assign and transfer all of its rights, title, and interest in and to the Registration Rights Agreements and the Irrevocable Instructions to Assignee, and Assignee desires to accept said assignment and transfer upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the covenants and conditions contained herein, the receipt and sufficiency of which are hereby acknowledged, Assignor and Assignee hereby agree as follows: 1. Assignment. Assignor hereby assigns and transfers to Assignee any and all of Assignor's right, title and interest in and to the Registration Rights Agreements and the Irrevocable Instructions. 2. Acceptance and Assumption. Assignee hereby accepts the foregoing assignment and transfer, and assumes and agrees to keep, perform and be bound by all of the terms, covenants, conditions and obligations which are required to be performed by Assignee under or in connection with the Registration Rights Agreements and the Irrevocable Instructions. 3. Successors and Assigns. This Assignment shall be binding upon, inure to the benefit of and be enforceable by the parties hereto, their successors in interest, administrators, legal representatives and permitted assigns. 4. Governing Law. This Assignment has been negotiated in, and shall be governed by, and construed and enforced in accordance with, the laws of the State of California, without regard to its conflicts of law principals. IN WITNESS WHEREOF, the parties hereto have executed this Assignment as of the date first above written. ASSIGNOR: ENTERTAINMENT UNIVERSE, INC., a California corporation By: /s/ Brad Greenspan ---------------------------------- Brad Greenspan, President ASSIGNEE: MOTORCYCLE CENTERS OF AMERICA, INC., a Nevada corporation By: /s/ Brad Greenspan ---------------------------------- Brad Greenspan, President EX-10.10 16 STOCK PURCHASE AGREEMENT APRIL 21. 1999 EXHIBIT 10.10 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement ("Agreement") is dated as of April 21, 1999 by and between Motorcycle Centers of America, Inc., a Nevada corporation ("Buyer") and the persons whose names are set forth on the signature page of this Agreement or on Schedule A hereto (collectively referred to herein as "Seller"), and Management which includes Hilts, Westall and Rusnak, the holders of all of the outstanding shares of Case's Ladder, Inc., a California corporation ("CL"). This Agreement sets forth the terms and conditions upon which Seller has agreed to sell and Buyer has agreed to purchase from Seller all of the outstanding shares of the common stock of CL (the "CL Shares"). Seller represents and warrants that Seller owns all of the outstanding shares of the common stock of CL, and that no class of shares or securities requiring the issuance of common or preferred stock of CL exists other than as set forth herein. In consideration of the mutual agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. SALE OF THE SHARES 1.01 Shares Being Sold Subject to the terms and conditions of this Agreement, Seller is selling, assigning and delivering the CL Shares to Buyer at the closing provided for in Section 1.03 hereof (the "Closing"), free and clear of all liens, charges, claims or encumbrances of any kind or nature whatsoever. 1.02 Consideration Subject to the terms and conditions of this Agreement, and in reliance upon the representations, warranties and agreements of Seller contained herein and in consideration for the sale, assignment and delivery of the CL Shares and in full payment therefor: 1.02(a) Buyer shall issue to Seller at the Closing an aggregate of 700,000 shares of common stock of Buyer (the "Buyer Shares") in the form of certificates registered in the names and amounts as listed in Schedule A hereto. The Buyer Shares shall be "restricted securities" as that term is defined in Rule 144 ("Rule 144") under the Securities Act of 1933, as amended (the "Act"). 1 1.02(b) For one (1) year from the Closing, Seller and each of them, shall have the right and privilege, at their option, to have their Buyer Shares registered for sale at Buyers expense (except for commissions to brokers or underwriters, which shall be paid by Buyer) as part of any registration the Company files and to sell their shares in the Company's offering of its shares to the public to the extent, and only to the extent, that the Company's directors and/or officers, or any of them have such registration rights and sale privileges. If Rule 144 shall be available to any Buyer, Buyer shall utilize Rule 144 to effect the sale of Buyer's Shares to the greatest extent possible. 1.02(c) On or before April 17, 1999, Seller shall perform, at Seller's own expense, an audit of all of the business of CL, including but not limited to any and all financial records, inventories, accounts receivable and payable, and lists of equipment. Seller shall promptly transmit to Buyer a copy of said audit. Buyer shall then have ten business days after receipt thereof to approve or reject the audit. 1.02(d) In the event that Buyer disapproves of any part of the audit, any document submitted by Management in the course of this transaction, any representation made by Management in the course thereof, or for any other reason, Buyer does not proceed with this transaction, Buyer and Management agree that the amount of damages Management would suffer thereby would be difficult to ascertain and would be incapable of being proven with any certainty. As a result, Buyer and Management agree that any amounts previously paid by Buyer at the time Buyer notifies Management that it will not complete the transaction will constitute liquidated damages for such failure by Buyer, and shall constitute Management's only remedy and compensation therefor. 1.02(e) (i) After this transaction is completed, Frank Westall, Chip Hilts and Jeremy Rusnak shall each serve as Employees of CL on the terms and conditions set forth in the Employment Agreements attached hereto as Exhibit 1.02(d). (ii) Management represents that neither Seller nor CL has undertaken any transaction or transfer of any asset of CL in the calendar year preceding the date hereof, except in the ordinary course of business. Management further represents that Seller will make no transfer of any asset of CL prior to the Closing, other than in the ordinary course of business. 2 1.02(f) On the Closing Date, except as set forth herein, Buyer will terminate Management's authority to write checks against, or have outstanding checks honored from the funds in CL's bank account. The persons set forth on Exhibit 1.02(f) shall have the authority to issue checks from CL's checking account not in excess of $2,000 each; but not to any of Seller or Seller's affiliates. Any checks so issued shall only be pursuant to internal account procedures established by Buyer. On the Closing Date, Management shall also deliver to Buyer a schedule setting forth those checks of CL that remain outstanding (the "Outstanding CL Checks"). To provide funds for the Outstanding CL Checks, Buyer shall, on the Closing Date, deposit into a conventional checking account, in the name of CL, funds sufficient to pay all Outstanding CL Checks, and shall cooperate with Management to enable such funds to be used in fully satisfying all Outstanding CL Checks. Buyer shall thereafter indemnify Management from and against all claims and liabilities attributable to Outstanding CL Checks. 1.03 The Closing The Closing of the transactions provided for in Sections 1.04 and 1.05 shall take place at the offices of Buyer's counsel, David L. Kagel, Esq., 1801 Century Park East, Suite 2500, Los Angeles, California 90067, within 21 days of the date of this Agreement or at such time and place as shall be mutually agreed upon by Buyer and Seller. The date of the Closing is referred to herein as the "Closing Date". 1.04 Delivery by Seller At the Closing, Management shall deliver to Buyer: (i) a certificate or certificates representing the CL Shares endorsed in blank and otherwise in form acceptable to Buyer for transfer on the books of CL; (ii) all contracts, books and records of CL not previously delivered to Buyer; (iii) the certificates of the officers of Seller in the form annexed hereto as Exhibit 1.04(iii); and (iv) the opinion of C. Timothy Smoot, Esq., counsel to Seller, in the form annexed hereto as Exhibit 1.04(iv). 1.05 Delivery by Buyer Buyer shall make to Seller the payments provided in Section 1.02(a) hereof. 3 2. ASSUMPTION OF CERTAIN LIABILITIES BY SELLER For a period of four months, Management hereby assumes, jointly and severally, all liability claims by employees of CL as of the Closing Date attributable to occurrences prior to the Closing Date and agrees to indemnify and hold Buyer harmless from and against any and all liabilities, claims, costs and expenses, including attorney's fees, expended or incurred by Buyer with respect thereto. All such claims made or, after diligent inquiry are known to Management, are set forth on Exhibit 2 hereto. 3. REPRESENTATIONS AND WARRANTIES BY SELLER Management, jointly and severally, hereby represents, warrants and covenants to Buyer as follows: 3.01(a) CL is a corporation duly organized, validly existing, and in good standing under the laws of the state of California and is duly qualified to do business in all states in which such qualification is necessary. 3.01(b) (i) The authorized capital stock of CL consists of 30,000,000 million shares of common stock, no par value, of which 10,585,061, shares are validly issued and outstanding, fully paid and nonassessable. Seller owns and shall deliver on the Closing Date all of such CL Shares, free and clear of any liens, claims, options, charges or encumbrances of any kind or nature whatsoever. (ii) Seller has the unqualified right to sell, assign and deliver the CL Shares to Buyer, has given no other person or entity any right in or to such CL Shares and upon consummation of the transactions contemplated by this Agreement, Buyer will acquire good and valid title to the CL Shares free and clear of all liens, claims, options, charges and encumbrances of any nature whatsoever, except restrictions on resale imposed by applicable federal and/or state laws and regulations. (iii) There are no outstanding options, warrants or rights or other agreements of any nature requiring or relating to the issuance by CL of any shares of its capital stock. 4 3.01(c) CL has the corporate power and authority to carry on its business as presently conducted except as set forth on Exhibit 3.01(c). 3.01(d) All obligations of Seller and CL under any Lease (as defined in Section 5.03 below) are current as of the Closing Date. 3.02 No Violation Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will constitute a violation or default under any term or provision of the articles of incorporation or bylaws of CL or of any material contract, commitment, indenture or other agreement or restriction of any kind or character to which CL or Seller is a party or by which CL or Seller is or may be bound. 3.03 Financial Statements Seller has delivered to Buyer the audited Financial Statements of CL (the "Financial Statements") as of December 31, 1998 and February 28, 1999 (the "Valuation Date"), copies of which are attached hereto as Exhibit 3.03. The Financial Statements are true and correct in all material respects and a fair and accurate representation of the financial condition and assets and liabilities (whether accrued, absolute, contingent or otherwise) of CL as of such dates, stated on a basis consistent with that of previous periods. 3.04 Tax Returns CL has duly filed all tax reports and returns required to be filed by it and has duly paid or accrued (except as set forth below) all taxes and other charges claimed to be due from it by federal, state or local taxing authorities (including, without limitation, those due in respect of its properties, income, franchises, licenses, sales and payrolls); there are no tax liens upon any of CL's property or assets except for liens for current taxes not yet due and payable or as set forth on Exhibit 3.04 hereto; and except as may be noted on the Financial Statement, there are not now nor does Seller have knowledge, after reasonable inquiry, of any pending matters relating to or claims asserted for taxes or assessments against CL or any of its assets except as disclosed herein. Buyer agrees to make CL's books and records available to Seller at reasonable times in CL's or Buyer's facility for review and copying during the pendency of this transaction. 5 3.05 Title to Properties; Encumbrances CL has good and marketable title to all of its properties and assets, real and personal, tangible and intangible, including without limitation the property and assets reflected on the Financial Statement (except for inventory and other properties and assets that have been sold or otherwise disposed of in the ordinary course of the business of CL since the Valuation Date). No such properties are subject to mortgage, pledge, lien, conditional sale agreement, encumbrance or charge of any nature whatsoever except: (a) liens shown on Exhibit 3.05 as securing specified liabilities (with respect to which no default exists); (b) liens for current taxes not yet due; and (c) minor imperfections of title and encumbrances, if any, that are not substantial in amount, do not materially detract from the value of the property subject thereto or materially impair the operations of CL and have arisen only in the ordinary course of business consistent with past practice. 3.06 Patents, Trademarks, Trade Names, Etc. All patents, trademarks, trade names and assumed names, copyrights or licenses therefor held by CL, all of which are set forth on Exhibit 3.06, are valid and in good standing and free and clear of all liens and encumbrances of any and every nature and are not involved in any pending or threatened interference proceeding; to the best knowledge of Seller, after reasonable inquiry, none of the products manufactured or sold by CL and none of the formulae, processes, know-how or designations used in the business of CL infringe on any patent, trade secret, trademark, trade name or copyright of any other person. 3.07 Accounts Receivable All accounts receivable of CL, as reflected in the Financial Statements, as adjusted for ordinary business transactions between the Valuation Date and the Closing Date, represent sales actually made in the ordinary course of business and the reserve for collectibility of receivables as reflected in the Financial Statements is adequate and was calculated in a way consistent with past practice. Except to the extent set forth in Exhibit 3.07 hereto, or for which adequate reserves have been established as reflected on the Financial Statements, there are not now any questions, controversies or disputes relating to any accounts receivable of CL. 3.08 Undisclosed Liabilities Except to the extent reflected or reserved against in the Financial Statements, as of the Valuation Date CL had no liabilities or obligations of any nature, whether absolute, accrued, contingent or 6 otherwise and whether due or to become due, except those that are not required by generally accepted accounting principles to be included in the Financial Statements. Further, Seller, following reasonable inquiry, does not know or have any reasonable ground to know of any basis for the assertion against CL as of the Valuation Date, of any liability or obligation of any nature or in any amount not fully reflected or reserved against in the Financial Statements. 3.09 Financial Statement Errors If subsequent to closing, Buyer discovers that there is a material variance between the assets and/or liabilities as disclosed in CL's audited Financial Statements and actual assets and/or liabilities, the Parties agree to negotiate any differences in good faith and if differences are agreed to, to adjust the amount of stock issued to Seller paid for CL's Shares. Such adjustment shall be based upon the closing bid price of Buyer's Shares at the time of signing this Agreement. Any dispute not settled by good faith negotiations shall be submitted to mediation in accordance with the dispute resolution paragraph of this Agreement. 3.10 Absence of Certain Changes CL has not, since the Valuation Date and will not have from the Valuation Date to the Closing Date: 3.10(a) Suffered any material adverse change in its financial condition, assets, liabilities, business or prospects, except those set forth in Exhibit 3.10(a) hereto; 3.10(b) Incurred any obligation or liability (whether absolute, accrued, contingent or otherwise) other than in the ordinary course of business and consistent with past practice or with respect to any agreement to which CL is subject or bound by; 3.10(c) Paid any claim or discharged or satisfied any lien or encumbrance or paid or satisfied any liability (whether absolute, accrued, contingent or otherwise) other than liabilities shown or reflected in the Financial Statements or liabilities incurred since the Valuation Date in the ordinary course of business and consistent with past practice; 7 3.10(d) Permitted or allowed any of its assets, tangible or intangible, to be mortgaged, pledged or subjected to any liens or encumbrances; 3.10(e) Written down the value of any inventory or written off as uncollectible any notes or accounts receivable or any portion thereof except for write offs of such items in the ordinary course of business; 3.10(f) Canceled any other debts or claims or waived any rights of substantial value or sold or transferred any of its assets or properties, tangible or intangible, other than in the ordinary course of business and consistent with past practice; 3.10(g) Disposed of or permitted to lapse any material patent, trademark or copyright or any application for any material patent, trademark or copyright; 3.10(h) Disposed of or disclosed to any person any trade secret, formula, process or other know-how except pursuant to inquiries to purchase CL or its assets for which Confidentiality Agreements were obtained by Seller, all of which agreements are annexed hereto as Exhibit 3.10(h); 3.10(i) Granted any general uniform increase in the compensation of employees (including any increase pursuant to any bonus, pension, profit-sharing or plan or commitment) or any substantial increase in any compensation payable or to become payable to any officer or employee, and no such increase (whether general or otherwise) is required pursuant to any existing employment agreements or otherwise; 3.10(j) Made any capital expenditures or commitments in excess of $20,000 for additions to its property, plant or equipment; 3.10(k) 8 Declared, paid or set aside for payment to its stockholders, any dividend or other distribution in respect of its capital stock or redeemed or purchased or otherwise acquired any of its capital stock or any options relating thereto or agreed to take any such action; or 3.10(1) Made any material change in any method of accounting or accounting practice. 3.11 Litigation Except to the extent set forth in Exhibit 3.11 hereto there are no actions, proceedings or investigations pending or, after reasonable inquiry and to the knowledge of Seller, threatened against CL and Management does not know or have any reason to know of any basis for any such action, proceeding or investigation. 3.12 Disclosure Management has disclosed to Buyer all facts material to the assets, prospects and business of CL known to Management. No representation or warranty by Management contained in this Agreement and no statement contained in any exhibit, list, certificate or writing furnished to Buyer pursuant to the provisions hereof or in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading or necessary in order to provide a prospective purchaser of the business of CL with accurate and complete information which any reasonable purchaser of CL would desire as to CL and its affairs. 3.13 Exhibits Each of the Exhibits to this Agreement is incorporated into this Agreement and made a part hereof, and is true, accurate and complete. 3.14 Material Events or Conditions After reasonable inquiry, to the best knowledge of Management, there is no event or condition of any kind or character pertaining to the business, assets or prospects of CL that may materially or adversely affect such business, assets or prospects. 4. REPRESENTATIONS AND WARRANTIES BY BUYER 9 Buyer hereby represents, warrants and covenants to Seller as follows: 4.01 Organization, Etc. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the state of Nevada. 4.02 Authority The execution and delivery of this Agreement by Buyer and the consummation by Buyer of the transactions contemplated hereby have been duly authorized by the board of directors of Buyer. The officers of Buyer acting on behalf of Buyer with respect to these transactions and executing this Agreement on behalf of Buyer have been duly authorized by all necessary and appropriate corporate action to take such actions and to execute this Agreement. 4.03 No Violation Neither the execution nor the delivery of this Agreement, nor the consummation of the transactions contemplated hereby will constitute any violation or default under any term or provision of the articles of incorporation or bylaws of Buyer or of any material contract, commitment, indenture or other agreement or restriction of any kind or character to which Buyer is a party or by which Buyer is bound. 4.04 Investment Experience Buyer has significant knowledge and experience in financial and business matters enabling it to evaluate the significant risks associated with its acquisition of the CL Shares. 5. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION 5.01 Survival of Representations All representations, warranties and agreements made by any party in this Agreement or pursuant hereto shall survive the execution and delivery hereof for a period of one year. 5.02 Existing Lease Exhibit 5.02 contains a true and complete copy of the Lease Agreement dated January 4, 1999 (the "Lease") on Seller's business premises located at 11372 Trask Avenue, Garden Grove, CA 92643 (the "Premises"). 10 As further consideration for the purchase hereunder, Buyer agrees to assume and fulfill CL's obligations to pay all rent under the Lease after the Closing Date for so long as CL may continue to occupy the Premises, and to indemnify and hold the Seller harmless from any claims by, or demands from, the Landlord under the Lease related to, or arising from any failure to make such payments. Buyer will indemnify Seller from any liabilities and expenses resulting from its and/or CL's occupancy of the Premises and termination of the Lease following the Closing Date. 6. MISCELLANEOUS 6.01 Expenses All fees and expenses incurred by CL in connection with the transactions contemplated by this Agreement shall be borne by CL and all fees and expenses incurred by Buyer in connection with the transactions contemplated by this Agreement shall be borne by Buyer. 6.02 Insurance Seller hereby assigns to Buyer the benefits under and proceeds of each and all existing policies of insurance coverage relating to products or services provided by CL of which policies Seller or CL is a beneficiary. Copies of all such policies shall be delivered to Buyer at the Closing. Seller further agrees to cause CL to be named the sole insured under such policies and to deliver evidence thereof satisfactory to Buyer within 30 days of the Closing Date. Such benefits and proceeds shall be utilized in satisfaction of claims, liabilities, costs and expenses of CL, if any, related to occurrences prior to the Closing Date. Following the payment of such benefits and proceeds, the indemnification provisions of Section 5.02 of this Agreement shall apply. 6.03 Further Assurances From time to time, at Buyer's request and without further consideration, CL at its own expense will execute and transfer such documents and will take such other action as Buyer may reasonably request in order to more effectively consummate the transactions contemplated hereby. 6.04 Parties and Interests All the terms and provisions of this Agreement shall be binding upon, shall inure to the benefit of and shall be enforceable by the respective heirs, beneficiaries, representatives, successors and permitted assigns of the parties hereto. 11 6.05 Employment Agreements At the Closing Buyer will enter into employment agreements in the form set forth in Exhibit 6.05 with Jeremy Case, Frank Westall and Chip Hilts. 6.06 Prior Agreements; Amendments This Agreement supersedes all prior agreements and understandings between the parties with respect to the subject matter hereof. This Agreement may be amended only by a written instrument duly executed by the parties hereto or their respective successors or assigns. 6.07 Representation Each of the representations and warranties contained herein shall be true and accurate as of the date of this Agreement and as of the Closing Date. 6.08 Counsel Buyer and CL confirm that they have each been represented by counsel of their choice in the negotiation of this Agreement and the transactions contemplated hereby. 6.09 Headings The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretations of this Agreement. 6.10 Governing Law and Judicial Proceedings This Agreement shall be governed by and construed and enforced in accordance with the laws of the state of California without regard to its conflict of laws rules. Any judicial proceedings brought by Buyer against Seller with respect to this Agreement must be brought in a court of competent jurisdiction in the County of Los Angeles, State of California. 6.11 Dispute Resolution The Parties agree to submit any and all disputes between them arising under or in relation to this Agreement to mediation with a mediator approved by both parties. If the Parties resolve their disputes through mediation, the Parties shall share the costs of mediation evenly but pay their own attorneys' fees and other 12 expenses related to mediation. If mediation fails to resolve all disputes within thirty (30) days after submission to the mediator, then either Party may file a law suit or request arbitration. The Parties agree that a good faith attempt at mediation is a precondition to filing a law suit. The prevailing Party in any law suit or arbitration relating to the transactions contemplated by this contract shall be entitled to costs and expenses including reasonable attorneys fees and attorneys fees and expenses incurred in connection with mediation that failed to resolve the dispute(s). 6.12 Notices All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered or mailed (registered or certified mail, postage prepaid, return receipt requested) as follows: If to Buyer: eUniverse, Inc. 264 South La Cienega Blvd., Suite 305 Beverly Hills, California 90211 Attn: President Telephone: (310) 546 - 5437 Facsimile: (310) 546 - 2807 With a copy to: David L. Kagel, Esq. 1801 Century Park East, 25th Floor Los Angeles, California 90067-2327 Telephone: (310) 553 - 9009 Facsimile: (310) 553 - 9693 If to Seller: Frank Westall 3863 Calle Loma Vista Newberry Park, CA 91320 Telephone: (805) 375-0196 Fax: (805) 375-1126 With a copy to: C. Timothy Smoot, Esq. Suite 174 13 23505 Crenshaw Blvd. Torrance, CA 90505-5221 Telephone: (310) 530-3366 Fax: (310) 530-2211 6.13 Counterparts This Agreement may be executed simultaneously in several Counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 6.14 No Third Party Beneficiaries This Agreement is for the benefit of Buyer and Seller only and is not intended to nor shall it operate to create any third party beneficiary or other rights in any other person or entity. 6.15 Assignment Neither party may assign its rights under this Agreement or delegate its duties or obligations hereunder absent the prior written consent of the other party. 6.16 Brokers If either party has retained, or is claimed to have retained, a broker or finder in connection with this transaction, the party which so retained, or is claimed to have retained, the broker or finder shall indemnify and hold the other party harmless from any and all claims, fees and/or compensation sought by such actual or alleged broker or finder. 6.17 Investment Intent; No Distribution CL and each of the Seller is acquiring the Buyer Shares to be issued pursuant to this Agreement for his, her or its own account, for investment and not as a nominee and not with a present view to the redistribution thereof. Seller is aware that there are legal and practical limits on Seller's ability to dispose of the Buyer Shares and therefore that Seller must bear the economic risk of holding the Buyer's Shares for an indefinite period of time and has adequate means of providing for his, her or its current needs and possible personal contingencies and has adequate other means for providing for Seller's financial needs. By making the representations in this Section 6.16 Seller does not agree to hold the Buyer's Shares for any minimum or other specific term and reserves the right to dispose of the Buyer Shares at any time in accordance with or pursuant to a registration statement under the Act or an exemption from registration under the Act. 14 6.18 No General Solicitation The Buyer Shares were not offered to Seller and Seller is not aware of any form of general solicitation or general advertising, including without limitation (a) any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, and (b) any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. 6.19 Restricted Securities Seller understands that the Buyer Shares to be issued at the Closing are "restricted securities" under Federal Securities Laws in as much as they are being acquired from Buyer in a transaction not involving any public offering and that under such laws and applicable regulations such securities may not be transferred or resold without registration under the Act or pursuant to an exemption from such registration. In this connection Seller and each of them represents that Seller is familiar with or has been addressed by counsel concerning Rule 144 under the Act, as presently in effect and understands the resale limitations imposed thereby and by the Act. 6.20 Disposition Without in any way limiting the representations set forth above, for one (1) years from the Closing Date, except for transfers to holders of options to purchase CL Shares as reflected in Schedule A, Seller further agrees not to make any disposition of all or any portion of the Buyer's Shares unless and until (a) there is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) (i) Seller shall have notified Buyer of the proposed disposition and shall have furnished Buyer with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) if reasonably requested by Buyer Company Seller shall have furnished Buyer with an opinion of counsel, reasonably satisfactory to Buyer that such disposition is being made in accordance with the rules and regulations under the Act. 6.21 Exempt Transaction Seller understands that Buyer Shares are being issued and sold in reliance on specific exemptions from the registration requirements of the Act and state securities laws and the representations, warranties and covenants set forth herein are being relied upon by Buyer in determining that applicability of such exemptions and the suitability of Seller to acquire such Shares. 15 6.22 Legend It is understood that any and all certificates representing Buyer Shares shall bear substantially the following legend: "The securities represented hereby have not been registered under the Securities Act of 1933, as amended, or applicable state securities laws or the securities laws of any other jurisdiction. They may not be sold or transferred in the absence of an effective registration statement under those securities laws or pursuant to an exemption therefrom." IN WITNESS WHEREOF this Agreement has been duly executed by the parties hereto on the date first above written. MOTORCYCLE CENTERS OF AMERICA, INC. By:__________________________________ Brad Greenspan, President CASE'S LADDER, INC. By:__________________________________ FRANK WESTALL, CEO, for SELLER _____________________________________ FRANK WESTALL, CEO and Chairman _____________________________________ CHIP HILTS, COO and CFO 16 They may not be sold or transferred in the absence of an effective registration statement under those securities laws or pursuant to an exemption therefrom." IN WITNESS WHEREOF this Agreement has been duly executed by the parties hereto on the date first above written. MOTORCYCLE CENTERS OF AMERICA, INC. By: /s/ Brad Greenspan ----------------------------------- Brad Greenspan, President CASE'S LADDER, INC. By: /s/ Frank Westall ----------------------------------- FRANK WESTALL, CEO, for SELLER /s/ Frank Westall - --------------------------------------- FRANK WESTALL, CEO and Chairman /s/ Chip Hilts 4/21/99 - --------------------------------------- CHIP HILTS, COO and CFO 16 SCHEDULE A CASE'S LADDER INC. Name of Shareholder No. of Shares of No. of Shares of Motorcycle ("Seller") Case's Ladder, Inc. Centers of America, Inc. - ---------- ------------------- ------------------------ 17 MANAGEMENT AGREEMENT This agreement dated April 19, 1999, is made by and between Entertainment Universe, referred to as the "Company", and Edward L. Hilts 1. Services. The Company hereby employs Edward Hilts to perform the following services in accordance with the terms and conditions set forth in this agreement: Mr Hilts will consult with the officers and employees of the Company concerning matters relating to the management and organization of the Company, their financial policies, the terms and conditions of employment, and generally any matter arising out of the business affairs of the Company. 2. Terms of Agreement. This agreement will begin upon the Company's acquisition of Cases Ladder, Inc., and will run for a period of no less than 12 months from the acquisition. Either party may cancel this agreement on sixty (60) days notice to the other party in writing, by certified mail or personal delivery. Upon termination of employment by the Company for any reason, Edward Hilts shall be paid 1 years pay, including options and bonus, by the Company. 3. Place Where Services Will Be Rendered and Responsibilities. Mr. Hilts shall perform most services in accordance with this contract in his own offices and/or home. In addition, Mr. Hilts will perform services on the telephone and at such other places as designated by the Company to perform these services in accordance with this agreement. The responsibilities will be as follows but will not be limited to: (a) Management of the Cases Ladder Internet site and all activities associated with it; (b) Involvement in the growth and management of all activities related to On-line entertainment and community; (c) Activities related to software sales and Company acquisitions. 4. Payment to Edward Hilts. Mr. Hilts will be paid at the rate of $9166.67 per month on a biweekly basis for work performed in accordance with this agreement. All taxes and appropriate deductions will be administrated by the Company. 5. Additional Consideration to Edward Hilts. Mr. Hilts will be entitled to a bonus no less than once per year, payable every six months from the date of the acquisition of Cases Ladder. The bonus for Edward Hilts shall be based on performance criteria set by the compensation committee. 6. Expenses incurred by Edward Hilts. Mr. Hilts will receive reimbursement for all Company-mandated travel, mileage, entertainment and other reasonable out-of-pocket expenses. Mr. Hilts will submit a statement setting forth the expenses, and the Company will pay the amounts due within ten (10) days of receipt. 7. Stock Options to Edward Hilts. Mr. Hilts will be granted stock options at the quantity of 60K shares at a price of $10 per share option. These options will vest quarterly equally over a 36 month period under the terms and conditions of eUniverse's Stock Option Plan. The first option for 5,000 shares shall be granted no later than 45 days after the purchase of such acquisition. The exercise price of the options will be at $10 per share and in accordance with the stock option plan. 8. Additional Benefits. The Company will offer Mr. Hilts, the opportunity to participate in its medical, dental, life insurance, and other benefit programs such as a car allowance and monthly expenses at a minimum equal to his current medical/insurance/dental plan, but at terms no less favorable than those offered to its officer of the Company. 9. Loans and deferred pay to the Company. Upon completion of the sale of Case's Ladder to Entertainment Universe all loans as well as deferred pay that Cases Ladder owes to Mr. Hilts shall be paid. The amount is not to exceed $10,000.00. This obligation shall remain in force despite any termination of this agreement, with or without cause. In addition, the Company shall provide Mr. Hilts with a 3 year $28,000 Page 2 Management Agreement loan in the form of a Note Payable. Such Note shall carry no interest for 12 months, and after 12 months interest shall be charged at 7%. The 3 year note shall be secured by an Mr. Hilt's stock in the Company. In addition, 50% of any money received from bonuses and 50% of any profits Mr. Hilts receives from either exercise of his options and sale of the stock received or from the Company repurchasing such options, shall go towards repayment of the Note. A check for the full amount of deferred pay as well as the loan shall be made to Mr. Hilts no later than two weeks after the signing of the employment agreement. 10. Confidential Information. Mr. Hilts agrees that any information received by the him during any furtherance of the employee's obligations in accordance with this contract, which concerns the personnel, financial or other affairs of the Company will be treated by the employee in full confidence and will not be revealed to any other persons, firms or organizations except as necessary and appropriate for Mr. Hilts to perform his duties under this Agreement or in response to legal process. 11. Registration Rights. The Company agrees to register all option shares issued to Edward Hilts so that they are tradable in the public market upon issuance. 12. Governing Law - This Agreement shall be construed and its performance enforced in accordance with the laws of the State of California, excluding its choice of law provisions. 13. Modifications - Any and all modifications, amendments or additions to this Agreement shall be in writing. Similarly, any and all waivers of any terms of this Agreement shall be in writing. Any and all oral modifications, amendments, additions, and/or waivers shall be unenforceable. 14. Dispute Resolution - The Parties agree to submit any disputes arising under or in relation to this Agreement to mediation with a mediator approved by the Parties. If the Parties resolve their disputes through mediation, they shall share the costs of mediation evenly but pay their own attorneys' fees and other expenses related to mediation. If mediation fails to resolve all disputes within thirty (30) days after submission to the mediator, then either Party may file a law suit or request arbitration. The Parties agree that mediation is a pre-condition to filing a law suit. The prevailing Party in any law suit or arbitration relating to the transactions contemplated by this Agreement shall be entitled to costs and expenses including reasonable attorneys fees and the attorneys fees and expenses incurred in connection with mediation that failed to resolve the dispute. 15. Severability - If a court of competent jurisdiction or arbitrator finds that one or more provisions of this Agreement is or are illegal or unenforceable, the remaining provisions of this Agreement shall remain in full force and effect as if such provision or provisions never existed. 16. Waiver - No Party's right to require performance of another Party's obligations under this Agreement shall be affected by any previous delay in enforcing such right, express waiver of prior similar right to require performance, or course of dealing. 17. Integration Clause. This Agreement constitutes the entire understanding between the Parties and supersedes all prior proposals and agreements, oral or written, and all prior or contemporaneous communications between the Parties relating to the subject of this Agreement. This Agreement may only be amended or modified by a writing signed by the Party against whom such amendment or modification is sought to be enforced. 18. Notices. Notices under this Agreement shall be sufficient only if sent (a) by overnight courier, or (b) by facsimile or other electronic means and by U. S. Mail, or (c) personally delivered to the other Party. Notices shall be addressed as follows: To the Company: To Consultant Page 3 Management Agreement Edward Hilts 4404 Beaconsfield Ct. Westlake Village, CA 91361 Telephone: Telephone: (818)706-2214 Fax: Fax: (818) 735-4937 Any Party may change the above information by giving written notice as set forth above. 19. Counterparts. This Agreement may executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same Agreement. IN WITNESS WHEREOF, the Parties execute this Agreement as of the last date written below. Date: April 21, 1999 ENTERTAINMENT UNIVERSE, INC. By: -------------------------------------- ------------------------------------------ Print Name and Title Date: April 21, 1999 /s/ Edward Hilts ------------------------------------------ Edward Hilts
- ----------------------------------------------------------------------------------------------------------------------------- Data - ----------------------------------------------------------------------------------------------------------------------------- Nominee Name Phone SSN CL Shrs eUniverse Shrs - ----------------------------------------------------------------------------------------------------------------------------- Edward Hilts David Gelhoff 818-706-2214 (blank) 5,000 331 ------------------------------------------------------------------------------------------------ Diana Bingham 818-706-2214 (blank) 5,000 331 ------------------------------------------------------------------------------------------------ Edward Hilts 818-706-2214 ###-##-#### 627,500 41,497 ------------------------------------------------------------------------------------------------ Mark Hilts 818-706-2214 (blank) 7,500 496 ------------------------------------------------------------------------------------------------ Randall Hayes 818-706-2214 (blank) 100,000 6,613 ------------------------------------------------------------------------------------------------ Robert Egan 818-706-2214 (blank) 6,250 413 - ----------------------------------------------------------------------------------------------------------------------------- Edward Hilts Total 751,250 49,681 - ----------------------------------------------------------------------------------------------------------------------------- Frank Westall Datiana Westall 805-375-1330 ###-##-#### 250,000 16,533 ------------------------------------------------------------------------------------------------ Frank Westall 805-375-1330 ###-##-#### 3,437,500 227,322 ------------------------------------------------------------------------------------------------ Frankie Jean Westall 805-375-1330 ###-##-#### 125,000 8,266 ------------------------------------------------------------------------------------------------ Gabriel Westall 805-375-1330 na 125,000 8,266 ------------------------------------------------------------------------------------------------ Leilani Westall 805-375-1330 ###-##-#### 125,000 8,266 ------------------------------------------------------------------------------------------------ Noelani Westall 805-375-1330 ###-##-#### 125,000 8,266 - ----------------------------------------------------------------------------------------------------------------------------- Frank Westall Total 4,187,500 276,919 - ----------------------------------------------------------------------------------------------------------------------------- Gordon Landies Abigail Landies 415-298-8786 ###-##-#### 50,000 3,307 ------------------------------------------------------------------------------------------------ Barbara Landies 415-298-8786 ###-##-#### 300,000 19,839 ------------------------------------------------------------------------------------------------ Gordon Landies 415-298-8786 (blank) 1,250,000 82,664 ------------------------------------------------------------------------------------------------ Graham Landies 415-298-8786 ###-##-#### 50,000 3,307 ------------------------------------------------------------------------------------------------ Hannah Landies 415-298-8786 ###-##-#### 50,000 3,307 ------------------------------------------------------------------------------------------------ Ian Landies 415-298-8786 (blank) 71,250 4,712 ------------------------------------------------------------------------------------------------ Meghan Landies 415-298-8786 ###-##-#### 50,000 3,307 ------------------------------------------------------------------------------------------------ Richard Bruner 415-298-8786 ###-##-#### 31,250 2,067 - ----------------------------------------------------------------------------------------------------------------------------- Gordon Landies Total 1,852,500 122,510 - ----------------------------------------------------------------------------------------------------------------------------- Jarom Severson Calvin Shueh 408-396-0572 (blank) 24,375 1,612 ------------------------------------------------------------------------------------------------ Jarom Severson 408-396-0572 ###-##-#### 36,563 2,418 - ----------------------------------------------------------------------------------------------------------------------------- Jarom Severson Total 60,938 4,030 - ----------------------------------------------------------------------------------------------------------------------------- Jeremy Rusnak Jason Oldenski 360-757-6479 (blank) 18,750 1,240 ------------------------------------------------------------------------------------------------ Jeremy Rusnak 360-757-6479 ###-##-#### 2,093,750 138,462 ------------------------------------------------------------------------------------------------ Joe Rusnak 360-757-6479 (blank) 12,500 827 ------------------------------------------------------------------------------------------------ John Rusnak 360-757-6479 (blank) 62,500 4,133 ------------------------------------------------------------------------------------------------ Kim Rusnak 360-757-6479 (blank) 31,250 2,067 ------------------------------------------------------------------------------------------------ Sharon Rusnak 360-757-6479 (blank) 62,500 4,133 - ----------------------------------------------------------------------------------------------------------------------------- Jeremy Rusnak Total 2,281,250 150,862 - ----------------------------------------------------------------------------------------------------------------------------- (blank) Allen Bonaguro 714-539-9209 ###-##-#### 65,000 4,299 ------------------------------------------------------------------------------------------------ Ann Aynes 360-855-0792 ###-##-#### 205,000 13,557 ------------------------------------------------------------------------------------------------ C. Timothy Smoot 310-530-3366 (blank) 20,313 1,343 ------------------------------------------------------------------------------------------------ Colm Gallagher 310-318-9469 ###-##-#### 33,750 2,232 ------------------------------------------------------------------------------------------------ David Perez 805-376-3013 ###-##-#### 20,313 1,343 ------------------------------------------------------------------------------------------------ Greg Strelzoff 310-796-4944 (blank) 79,688 5,270 ------------------------------------------------------------------------------------------------ Joe Abrams 415-258-9117 ###-##-#### 645,996 42,720 ------------------------------------------------------------------------------------------------ Jon Phillips 714-207-7170 ###-##-#### 31,250 2,067 ------------------------------------------------------------------------------------------------ Kenneth Jamieson 415-298-8786 (blank) 71,250 4,712 ------------------------------------------------------------------------------------------------ Randall Darling 415-298-8786 (blank) 71,250 4,712 ------------------------------------------------------------------------------------------------ Ron Holt 805-644-2960 ###-##-#### 20,313 1,343 ------------------------------------------------------------------------------------------------ William Macaitis 630-910-0365 ###-##-#### 187,500 12,400 - ----------------------------------------------------------------------------------------------------------------------------- (blank) Total 1,451,623 95,998 - ----------------------------------------------------------------------------------------------------------------------------- Grand Total 10,585,061 700,000 - -----------------------------------------------------------------------------------------------------------------------------
EX-10.11 17 EMPLOYMENT AGREEMENT OCTOBER 1, 1999 EXHIBIT 10.11 EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered into as of 01 October, 1998, by and between CD UNIVERSE, INC., a Connecticut corporation with principal offices located at 101 North Plains Industrial Road, Wallingford, CT 06492 ("CD" or "Employer"), and CHARLES BEILMAN, an individual residing in the State of Connecticut and having a mailing and principal office address of 101 North Plains Industrial Road, Wallingford, CT 06492 ("Employee"). WHEREAS, Employer desires to employ Employee as set forth herein with respect to the operations of Employer and/or its affiliates, and such other operations of Employer as Employer may, in its sole discretion, see fit, ("Beilman Employment"); and WHEREAS, Employee desires to become employed by Employer in such Beilman Employment; WHEREAS, the parties hereto desire to express the terms and conditions of such employment; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, the parties hereto agree as follows: Section 1 Employment. Employer hereby employs Employee in the Beilman Employment, and Employee hereby accepts the employment upon the terms and conditions of this Agreement. Section 2 Term. The term of this Agreement shall commence as of the first day of the month in which CD shall be acquired by a company where shares are traded in the public market or in which CD's shares shall be publicly traded and shall continue until at least three years thereafter unless earlier terminated prior thereto in accordance with the provisions hereinafter stated. This Agreement may be extended by mutual written agreement at the end of the period herein set forth on the same or modified terms. Section 3 Duties and Responsibilities. Employee shall serve as the Chief Operating Officer and Chief Technical Officer of CD in such Beilman Employment and shall render and perform services in such capacity to Employer under the direction of Brad Greenspan. Employee will report to Brad Greenspan, and shall, to the best of his ability and experience, competently, loyally, diligently and conscientiously perform all of the duties and obligations expressly or implicitly required under this Agreement. Employee further agrees that he will not in the course of conducting business in the interest of Employer engage in, or knowingly permit others to carry on or induce others to engage in any practice or commit acts in violation of any federal, state or local law or ordinance. Section 4 Compensation and Benefits. 4.1 Employer shall pay Employee $135,000 per year, payable no less often than monthly, in arrears, as gross pay for all services rendered hereunder. Employee shall be entitled to four weeks of paid vacation time in each year of employment hereunder. Employee shall be entitled to health insurance selected and paid for by Employer. 4.2 Employee shall be an employee of Employer for all purposes. Employer shall withhold amounts from Employee's compensation in accordance with the requirements of applicable law for federal and state income tax, FICA and other employment or payroll tax. Section 5 Expenses. Employee will be reimbursed for travel and other expenses related to the performance of his duties under this Agreement in accordance with Employer's policies. Section 6 Paid Leave Time. Employee shall be entitled to a reasonable number of days paid time off for personal matters and sick time. Section 7 Non-Competition. 7.1 As part of the consideration Employee has received and will receive pursuant to both this Agreement and the Purchase Agreement to which this document is attached, Employee agrees that for a period of three calendar years, he will not engage in any business or activity, or directly assist others in such endeavors, which competes directly with any business in which CD participates at the time of the execution of this document, or thereafter so long as Employee remains an Employee or a Director on the Board of Directors of CD or any company into which CD has been merged. Section 8 Termination of Employment. 8.1 Termination Without Cause. This Agreement may be terminated by either party without cause by providing the other party with ten (10) days' advance notice of such intention to terminate. If such termination occurs, any obligations of Employer hereunder shall cease on the effective date of termination. 8.2 Termination for Cause. This Agreement may be terminated by Employer for cause immediately upon notice to Employee. No severance benefits are due to Employee in the event he is terminated for cause. Employer shall have cause for termination in the event of: 8.2.1 A default by Employee in the performance of any material provision of this Agreement, and such default continues for a period of thirty (30) days after written notice to Employee from Employer stating the specific default, unless such default is cured to the satisfaction of Employer within such thirty (30) day period, in which case the notice of termination shall not be effective, and this Agreement shall not be terminated. 8.2.2 Employee's death or legal incapacity. 8.2.3 The conviction of Employee of any criminal offense involving dishonesty or breach of trust or any felony or any crime involving moral turpitude. 8.2.4 The arrest or indictment of Employee for any crime which, whether convicted thereof or not, causes Employer embarrassment, negative press coverage or harm to its reputation. 8.2.5 The disability of Employee during his employment under this Agreement through any illness, injury, accident or condition of either a physical or psychological nature and, as a result in the opinion of a physician mutually agreeable to the parties is expected to be unable to perform substantially all of his duties and responsibilities hereunder for ninety (90) calendar days during the year following the physician's examination of Employee. Section 9 Non-Disclosure of Confidential Information. 9.1 Employee acknowledges that during the term of employment with Employer, he will have access to and become acquainted with Confidential Information of Employer. Confidential Information means all information related to the present or planned business of CD or any of CD's current or future affiliates that has not been released publicly by authorized representatives of CD or such affiliate(s), and shall include but not be limited to, trade secrets and know- how, inventions, marketing and sales programs, employee, customer, patient and supplier information, information from patient medical records, financial data, pricing information, regulatory approval and reimbursement strategies, data, operations and clinical manuals. 9.2 Employee agrees not to use or disclose, directly or indirectly, any Confidential Information of CD or any such affiliates at any time and in any manner, except as required in the course of his employment with CD or such affiliate(s) or with the express written authority of CD. 9.3 Employee understands that his non-disclosure obligations are continuing and survive the termination of Employee's employment with CD. 9.4 All documents and equipment relating to the business of CD or its affiliates, whether prepared by Employee or otherwise coming into Employee's possession, are the exclusive property of CD, and must not be removed from the premises of CD except as required in the course of employment. Any such documents and equipment must be returned to CD when Employee leaves the employment of CD and its affiliates. Section 10 Entire Agreement and Amendments. This Agreement shall constitute the entire agreement between the parties and supersedes all existing agreements between them, whether oral or written, with respect to the subject matter hereof (other than the Purchase Agreement). Any waiver, alteration, or modification of any of the provisions of this Agreement, or cancellation or replacement of any part of this Agreement shall be in writing and signed by the party to be charged therewith. Section 11 Notices. All notices hereunder shall be in writing and shall be deemed to be given when sent by certified mail to either party at the address of such party set forth above or at such other address as shall have been designated by written notice by such party to the other party. Section 12 Severability. If any provision of this Agreement is declared invalid or illegal for any reason whatsoever, then notwithstanding such invalidity or illegality, the remaining terms and provisions of this Agreement shall remain in full force and effect in the same manner as if the invalid or illegal provision had not been contained herein. Section 13 Governing Law. This Agreement shall be construed in accordance with, and the rights of the parties shall be governed by, the laws of the State of California applicable to contracts made and to be performed within the State of California. It shall be deemed executed in Los Angeles, California, and any action between the parties hereto based in whole or in part on this Agreement shall be brought in the Los Angeles County Superior Court. Section 14 Assignment. No party may assign this Agreement without written consent of the other, except that Employer may assign this Agreement to a successor or affiliated corporation or other organization. Section 15 Counterparts. This Agreement may be executed in more than one counterpart, and each executed counterpart shall be considered as the original. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by the undersigned duly authorized person as of the day and year first stated above. _____________________________ Dated:____________________ Brad Greenspan, on behalf of CD Universe, Inc., a Connecticut corporation _____________________________ Dated:____________________ Charles Beilman, an Individual 3.10(d) Permitted or allowed any of its assets, tangible or intangible, to be mortgaged, pledged or subjected to any liens or encumbrances; 3.10(e) Written down the value of any inventory or written off as uncollectible any notes or accounts receivable or any portion thereof except for write offs of such items in the ordinary course of business; 3.10(f) Canceled any other debts or claims or waived any rights of substantial value or sold or transferred any of its assets or properties, tangible or intangible, other than in the ordinary course of business and consistent with past practice; 3.10(g) Disposed of or permitted to lapse any material patent, trademark or copyright or any application for any material patent, trademark or copyright; 3.10(h) Disposed of or disclosed to any person any trade secret, formula, process or other know-how except pursuant to inquiries to purchase CL or its assets for which Confidentiality Agreements were obtained by Seller, all of which agreements are annexed hereto as Exhibit 3.10(h); 3.10(i) Granted any general uniform increase in the compensation of employees (including any increase pursuant to any bonus, pension, profit-sharing or plan or commitment) or any substantial increase in any compensation payable or to become payable to any officer or employee, and no such increase (whether general or otherwise) is required pursuant to any existing employment agreements or otherwise; 3.10(j) Made any capital expenditures or commitments in excess of $20,000 for additions to its property, plant or equipment; 3.10(k) 8 Declared, paid or set aside for payment to its stockholders, any dividend or other distribution in respect of its capital stock or redeemed or purchased or otherwise acquired any of its capital stock or any options relating thereto or agreed to take any such action; or 3.10(1) Made any material change in any method of accounting or accounting practice. 3.11 Litigation Except to the extent set forth in Exhibit 3.11 hereto there are no actions, proceedings or investigations pending or, after reasonable inquiry and to the knowledge of Seller, threatened against CL and Management does not know or have any reason to know of any basis for any such action, proceeding or investigation. 3.12 Disclosure Management has disclosed to Buyer all facts material to the assets, prospects and business of CL known to Management. No representation or warranty by Management contained in this Agreement and no statement contained in any exhibit, list, certificate or writing furnished to Buyer pursuant to the provisions hereof or in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading or necessary in order to provide a prospective purchaser of the business of CL with accurate and complete information which any reasonable purchaser of CL would desire as to CL and its affairs. 3.13 Exhibits Each of the Exhibits to this Agreement is incorporated into this Agreement and made a part hereof, and is true, accurate and complete. 3.14 Material Events or Conditions After reasonable inquiry, to the best knowledge of Management, there is no event or condition of any kind or character pertaining to the business, assets or prospects of CL that may materially or adversely affect such business, assets or prospects. 4. REPRESENTATIONS AND WARRANTIES BY BUYER 9 Buyer hereby represents, warrants and covenants to Seller as follows: 4.01 Organization, Etc. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the state of Nevada. 4.02 Authority The execution and delivery of this Agreement by Buyer and the consummation by Buyer of the transactions contemplated hereby have been duly authorized by the board of directors of Buyer. The officers of Buyer acting on behalf of Buyer with respect to these transactions and executing this Agreement on behalf of Buyer have been duly authorized by all necessary and appropriate corporate action to take such actions and to execute this Agreement. 4.03 No Violation Neither the execution nor the delivery of this Agreement, nor the consummation of the transactions contemplated hereby will constitute any violation or default under any term or provision of the articles of incorporation or bylaws of Buyer or of any material contract, commitment, indenture or other agreement or restriction of any kind or character to which Buyer is a party or by which Buyer is bound. 4.04 Investment Experience Buyer has significant knowledge and experience in financial and business matters enabling it to evaluate the significant risks associated with its acquisition of the CL Shares. 5. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION 5.01 Survival of Representations All representations, warranties and agreements made by any party in this Agreement or pursuant hereto shall survive the execution and delivery hereof for a period of one year. 5.02 Existing Lease Exhibit 5.02 contains a true and complete copy of the Lease Agreement dated January 4, 1999 (the "Lease") on Seller's business premises located at 11372 Trask Avenue, Garden Grove, CA 92643 (the "Premises"). 10 As further consideration for the purchase hereunder, Buyer agrees to assume and fulfill CL's obligations to pay all rent under the Lease after the Closing Date for so long as CL may continue to occupy the Premises, and to indemnify and hold the Seller harmless from any claims by, or demands from, the Landlord under the Lease related to, or arising from any failure to make such payments. Buyer will indemnify Seller from any liabilities and expenses resulting from its and/or CL's occupancy of the Premises and termination of the Lease following the Closing Date. 6. MISCELLANEOUS 6.01 Expenses All fees and expenses incurred by CL in connection with the transactions contemplated by this Agreement shall be borne by CL and all fees and expenses incurred by Buyer in connection with the transactions contemplated by this Agreement shall be borne by Buyer. 6.02 Insurance Seller hereby assigns to Buyer the benefits under and proceeds of each and all existing policies of insurance coverage relating to products or services provided by CL of which policies Seller or CL is a beneficiary. Copies of all such policies shall be delivered to Buyer at the Closing. Seller further agrees to cause CL to be named the sole insured under such policies and to deliver evidence thereof satisfactory to Buyer within 30 days of the Closing Date. Such benefits and proceeds shall be utilized in satisfaction of claims, liabilities, costs and expenses of CL, if any, related to occurrences prior to the Closing Date. Following the payment of such benefits and proceeds, the indemnification provisions of Section 5.02 of this Agreement shall apply. 6.03 Further Assurances From time to time, at Buyer's request and without further consideration, CL at its own expense will execute and transfer such documents and will take such other action as Buyer may reasonably request in order to more effectively consummate the transactions contemplated hereby. 6.04 Parties and Interests All the terms and provisions of this Agreement shall be binding upon, shall inure to the benefit of and shall be enforceable by the respective heirs, beneficiaries, representatives, successors and permitted assigns of the parties hereto. 11 6.05 Employment Agreements At the Closing Buyer will enter into employment agreements in the form set forth in Exhibit 6.05 with Jeremy Case, Frank Westall and Chip Hilts. 6.06 Prior Agreements; Amendments This Agreement supersedes all prior agreements and understandings between the parties with respect to the subject matter hereof. This Agreement may be amended only by a written instrument duly executed by the parties hereto or their respective successors or assigns. 6.07 Representation Each of the representations and warranties contained herein shall be true and accurate as of the date of this Agreement and as of the Closing Date. 6.08 Counsel Buyer and CL confirm that they have each been represented by counsel of their choice in the negotiation of this Agreement and the transactions contemplated hereby. 6.09 Headings The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretations of this Agreement. 6.10 Governing Law and Judicial Proceedings This Agreement shall be governed by and construed and enforced in accordance with the laws of the state of California without regard to its conflict of laws rules. Any judicial proceedings brought by Buyer against Seller with respect to this Agreement must be brought in a court of competent jurisdiction in the County of Los Angeles, State of California. 6.11 Dispute Resolution The Parties agree to submit any and all disputes between them arising under or in relation to this Agreement to mediation with a mediator approved by both parties. If the Parties resolve their disputes through mediation, the Parties shall share the costs of mediation evenly but pay their own attorneys' fees and other 12 expenses related to mediation. If mediation fails to resolve all disputes within thirty (30) days after submission to the mediator, then either Party may file a law suit or request arbitration. The Parties agree that a good faith attempt at mediation is a precondition to filing a law suit. The prevailing Party in any law suit or arbitration relating to the transactions contemplated by this contract shall be entitled to costs and expenses including reasonable attorneys fees and attorneys fees and expenses incurred in connection with mediation that failed to resolve the dispute(s). 6.12 Notices All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered or mailed (registered or certified mail, postage prepaid, return receipt requested) as follows: If to Buyer: eUniverse, Inc. 264 South La Cienega Blvd., Suite 305 Beverly Hills, California 90211 Attn: President Telephone: (310) 546 - 5437 Facsimile: (310) 546 - 2807 With a copy to: David L. Kagel, Esq. 1801 Century Park East, 25th Floor Los Angeles, California 90067-2327 Telephone: (310) 553 - 9009 Facsimile: (310) 553 - 9693 If to Seller: Frank Westall 3863 Calle Loma Vista Newberry Park, CA 91320 Telephone: (805) 375-0196 Fax: (805) 375-1126 With a copy to: C. Timothy Smoot, Esq. Suite 174 13 23505 Crenshaw Blvd. Torrance, CA 90505-5221 Telephone: (310) 530-3366 Fax: (310) 530-2211 6.13 Counterparts This Agreement may be executed simultaneously in several Counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 6.14 No Third Party Beneficiaries This Agreement is for the benefit of Buyer and Seller only and is not intended to nor shall it operate to create any third party beneficiary or other rights in any other person or entity. 6.15 Assignment Neither party may assign its rights under this Agreement or delegate its duties or obligations hereunder absent the prior written consent of the other party. 6.16 Brokers If either party has retained, or is claimed to have retained, a broker or finder in connection with this transaction, the party which so retained, or is claimed to have retained, the broker or finder shall indemnify and hold the other party harmless from any and all claims, fees and/or compensation sought by such actual or alleged broker or finder. 6.17 Investment Intent; No Distribution CL and each of the Seller is acquiring the Buyer Shares to be issued pursuant to this Agreement for his, her or its own account, for investment and not as a nominee and not with a present view to the redistribution thereof. Seller is aware that there are legal and practical limits on Seller's ability to dispose of the Buyer Shares and therefore that Seller must bear the economic risk of holding the Buyer's Shares for an indefinite period of time and has adequate means of providing for his, her or its current needs and possible personal contingencies and has adequate other means for providing for Seller's financial needs. By making the representations in this Section 6.16 Seller does not agree to hold the Buyer's Shares for any minimum or other specific term and reserves the right to dispose of the Buyer Shares at any time in accordance with or pursuant to a registration statement under the Act or an exemption from registration under the Act. 14 6.18 No General Solicitation The Buyer Shares were not offered to Seller and Seller is not aware of any form of general solicitation or general advertising, including without limitation (a) any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, and (b) any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. 6.19 Restricted Securities Seller understands that the Buyer Shares to be issued at the Closing are "restricted securities" under Federal Securities Laws in as much as they are being acquired from Buyer in a transaction not involving any public offering and that under such laws and applicable regulations such securities may not be transferred or resold without registration under the Act or pursuant to an exemption from such registration. In this connection Seller and each of them represents that Seller is familiar with or has been addressed by counsel concerning Rule 144 under the Act, as presently in effect and understands the resale limitations imposed thereby and by the Act. 6.20 Disposition Without in any way limiting the representations set forth above, for one (1) years from the Closing Date, except for transfers to holders of options to purchase CL Shares as reflected in Schedule A, Seller further agrees not to make any disposition of all or any portion of the Buyer's Shares unless and until (a) there is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) (i) Seller shall have notified Buyer of the proposed disposition and shall have furnished Buyer with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) if reasonably requested by Buyer Company Seller shall have furnished Buyer with an opinion of counsel, reasonably satisfactory to Buyer that such disposition is being made in accordance with the rules and regulations under the Act. 6.21 Exempt Transaction Seller understands that Buyer Shares are being issued and sold in reliance on specific exemptions from the registration requirements of the Act and state securities laws and the representations, warranties and covenants set forth herein are being relied upon by Buyer in determining that applicability of such exemptions and the suitability of Seller to acquire such Shares. 15 6.22 Legend It is understood that any and all certificates representing Buyer Shares shall bear substantially the following legend: "The securities represented hereby have not been registered under the Securities Act of 1933, as amended, or applicable state securities laws or the securities laws of any other jurisdiction. They may not be sold or transferred in the absence of an effective registration statement under those securities laws or pursuant to an exemption therefrom." IN WITNESS WHEREOF this Agreement has been duly executed by the parties hereto on the date first above written. MOTORCYCLE CENTERS OF AMERICA, INC. By:__________________________________ Brad Greenspan, President CASE'S LADDER, INC. By:__________________________________ FRANK WESTALL, CEO, for SELLER _____________________________________ FRANK WESTALL, CEO and Chairman _____________________________________ CHIP HILTS, COO and CFO 16 They may not be sold or transferred in the absence of an effective registration statement under those securities laws or pursuant to an exemption therefrom." IN WITNESS WHEREOF this Agreement has been duly executed by the parties hereto on the date first above written. MOTORCYCLE CENTERS OF AMERICA, INC. By: /s/ Brad Greenspan ----------------------------------- Brad Greenspan, President CASE'S LADDER, INC. By: /s/ Frank Westall ----------------------------------- FRANK WESTALL, CEO, for SELLER /s/ Frank Westall - --------------------------------------- FRANK WESTALL, CEO and Chairman /s/ Chip Hilts 4/21/99 - --------------------------------------- CHIP HILTS, COO and CFO 16 SCHEDULE A CASE'S LADDER INC. Name of Shareholder No. of Shares of No. of Shares of Motorcycle ("Seller") Case's Ladder, Inc. Centers of America, Inc. - ---------- ------------------- ------------------------ 17 MANAGEMENT AGREEMENT This agreement dated April 19, 1999, is made by and between Entertainment Universe, referred to as the "Company", and Edward L. Hilts 1. Services. The Company hereby employs Edward Hilts to perform the following services in accordance with the terms and conditions set forth in this agreement: Mr Hilts will consult with the officers and employees of the Company concerning matters relating to the management and organization of the Company, their financial policies, the terms and conditions of employment, and generally any matter arising out of the business affairs of the Company. 2. Terms of Agreement. This agreement will begin upon the Company's acquisition of Cases Ladder, Inc., and will run for a period of no less than 12 months from the acquisition. Either party may cancel this agreement on sixty (60) days notice to the other party in writing, by certified mail or personal delivery. Upon termination of employment by the Company for any reason, Edward Hilts shall be paid 1 years pay, including options and bonus, by the Company. 3. Place Where Services Will Be Rendered and Responsibilities. Mr. Hilts shall perform most services in accordance with this contract in his own offices and/or home. In addition, Mr. Hilts will perform services on the telephone and at such other places as designated by the Company to perform these services in accordance with this agreement. The responsibilities will be as follows but will not be limited to: (a) Management of the Cases Ladder Internet site and all activities associated with it; (b) Involvement in the growth and management of all activities related to On-line entertainment and community; (c) Activities related to software sales and Company acquisitions. 4. Payment to Edward Hilts. Mr. Hilts will be paid at the rate of $9166.67 per month on a biweekly basis for work performed in accordance with this agreement. All taxes and appropriate deductions will be administrated by the Company. 5. Additional Consideration to Edward Hilts. Mr. Hilts will be entitled to a bonus no less than once per year, payable every six months from the date of the acquisition of Cases Ladder. The bonus for Edward Hilts shall be based on performance criteria set by the compensation committee. 6. Expenses incurred by Edward Hilts. Mr. Hilts will receive reimbursement for all Company-mandated travel, mileage, entertainment and other reasonable out-of-pocket expenses. Mr. Hilts will submit a statement setting forth the expenses, and the Company will pay the amounts due within ten (10) days of receipt. 7. Stock Options to Edward Hilts. Mr. Hilts will be granted stock options at the quantity of 60K shares at a price of $10 per share option. These options will vest quarterly equally over a 36 month period under the terms and conditions of eUniverse's Stock Option Plan. The first option for 5,000 shares shall be granted no later than 45 days after the purchase of such acquisition. The exercise price of the options will be at $10 per share and in accordance with the stock option plan. 8. Additional Benefits. The Company will offer Mr. Hilts, the opportunity to participate in its medical, dental, life insurance, and other benefit programs such as a car allowance and monthly expenses at a minimum equal to his current medical/insurance/dental plan, but at terms no less favorable than those offered to its officer of the Company. 9. Loans and deferred pay to the Company. Upon completion of the sale of Case's Ladder to Entertainment Universe all loans as well as deferred pay that Cases Ladder owes to Mr. Hilts shall be paid. The amount is not to exceed $10,000.00. This obligation shall remain in force despite any termination of this agreement, with or without cause. In addition, the Company shall provide Mr. Hilts with a 3 year $28,000 Page 2 Management Agreement loan in the form of a Note Payable. Such Note shall carry no interest for 12 months, and after 12 months interest shall be charged at 7%. The 3 year note shall be secured by an Mr. Hilt's stock in the Company. In addition, 50% of any money received from bonuses and 50% of any profits Mr. Hilts receives from either exercise of his options and sale of the stock received or from the Company repurchasing such options, shall go towards repayment of the Note. A check for the full amount of deferred pay as well as the loan shall be made to Mr. Hilts no later than two weeks after the signing of the employment agreement. 10. Confidential Information. Mr. Hilts agrees that any information received by the him during any furtherance of the employee's obligations in accordance with this contract, which concerns the personnel, financial or other affairs of the Company will be treated by the employee in full confidence and will not be revealed to any other persons, firms or organizations except as necessary and appropriate for Mr. Hilts to perform his duties under this Agreement or in response to legal process. 11. Registration Rights. The Company agrees to register all option shares issued to Edward Hilts so that they are tradable in the public market upon issuance. 12. Governing Law - This Agreement shall be construed and its performance enforced in accordance with the laws of the State of California, excluding its choice of law provisions. 13. Modifications - Any and all modifications, amendments or additions to this Agreement shall be in writing. Similarly, any and all waivers of any terms of this Agreement shall be in writing. Any and all oral modifications, amendments, additions, and/or waivers shall be unenforceable. 14. Dispute Resolution - The Parties agree to submit any disputes arising under or in relation to this Agreement to mediation with a mediator approved by the Parties. If the Parties resolve their disputes through mediation, they shall share the costs of mediation evenly but pay their own attorneys' fees and other expenses related to mediation. If mediation fails to resolve all disputes within thirty (30) days after submission to the mediator, then either Party may file a law suit or request arbitration. The Parties agree that mediation is a pre-condition to filing a law suit. The prevailing Party in any law suit or arbitration relating to the transactions contemplated by this Agreement shall be entitled to costs and expenses including reasonable attorneys fees and the attorneys fees and expenses incurred in connection with mediation that failed to resolve the dispute. 15. Severability - If a court of competent jurisdiction or arbitrator finds that one or more provisions of this Agreement is or are illegal or unenforceable, the remaining provisions of this Agreement shall remain in full force and effect as if such provision or provisions never existed. 16. Waiver - No Party's right to require performance of another Party's obligations under this Agreement shall be affected by any previous delay in enforcing such right, express waiver of prior similar right to require performance, or course of dealing. 17. Integration Clause. This Agreement constitutes the entire understanding between the Parties and supersedes all prior proposals and agreements, oral or written, and all prior or contemporaneous communications between the Parties relating to the subject of this Agreement. This Agreement may only be amended or modified by a writing signed by the Party against whom such amendment or modification is sought to be enforced. 18. Notices. Notices under this Agreement shall be sufficient only if sent (a) by overnight courier, or (b) by facsimile or other electronic means and by U. S. Mail, or (c) personally delivered to the other Party. Notices shall be addressed as follows: To the Company: To Consultant Page 3 Management Agreement Edward Hilts 4404 Beaconsfield Ct. Westlake Village, CA 91361 Telephone: Telephone: (818)706-2214 Fax: Fax: (818) 735-4937 Any Party may change the above information by giving written notice as set forth above. 19. Counterparts. This Agreement may executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same Agreement. IN WITNESS WHEREOF, the Parties execute this Agreement as of the last date written below. Date: April 21, 1999 ENTERTAINMENT UNIVERSE, INC. By: -------------------------------------- ------------------------------------------ Print Name and Title Date: April 21, 1999 /s/ Edward Hilts ------------------------------------------ Edward Hilts
- ----------------------------------------------------------------------------------------------------------------------------- Data - ----------------------------------------------------------------------------------------------------------------------------- Nominee Name Phone SSN CL Shrs eUniverse Shrs - ----------------------------------------------------------------------------------------------------------------------------- Edward Hilts David Gelhoff 818-706-2214 (blank) 5,000 331 ------------------------------------------------------------------------------------------------ Diana Bingham 818-706-2214 (blank) 5,000 331 ------------------------------------------------------------------------------------------------ Edward Hilts 818-706-2214 ###-##-#### 627,500 41,497 ------------------------------------------------------------------------------------------------ Mark Hilts 818-706-2214 (blank) 7,500 496 ------------------------------------------------------------------------------------------------ Randall Hayes 818-706-2214 (blank) 100,000 6,613 ------------------------------------------------------------------------------------------------ Robert Egan 818-706-2214 (blank) 6,250 413 - ----------------------------------------------------------------------------------------------------------------------------- Edward Hilts Total 751,250 49,681 - ----------------------------------------------------------------------------------------------------------------------------- Frank Westall Datiana Westall 805-375-1330 ###-##-#### 250,000 16,533 ------------------------------------------------------------------------------------------------ Frank Westall 805-375-1330 ###-##-#### 3,437,500 227,322 ------------------------------------------------------------------------------------------------ Frankie Jean Westall 805-375-1330 ###-##-#### 125,000 8,266 ------------------------------------------------------------------------------------------------ Gabriel Westall 805-375-1330 na 125,000 8,266 ------------------------------------------------------------------------------------------------ Leilani Westall 805-375-1330 ###-##-#### 125,000 8,266 ------------------------------------------------------------------------------------------------ Noelani Westall 805-375-1330 ###-##-#### 125,000 8,266 - ----------------------------------------------------------------------------------------------------------------------------- Frank Westall Total 4,187,500 276,919 - ----------------------------------------------------------------------------------------------------------------------------- Gordon Landies Abigail Landies 415-298-8786 ###-##-#### 50,000 3,307 ------------------------------------------------------------------------------------------------ Barbara Landies 415-298-8786 ###-##-#### 300,000 19,839 ------------------------------------------------------------------------------------------------ Gordon Landies 415-298-8786 (blank) 1,250,000 82,664 ------------------------------------------------------------------------------------------------ Graham Landies 415-298-8786 ###-##-#### 50,000 3,307 ------------------------------------------------------------------------------------------------ Hannah Landies 415-298-8786 ###-##-#### 50,000 3,307 ------------------------------------------------------------------------------------------------ Ian Landies 415-298-8786 (blank) 71,250 4,712 ------------------------------------------------------------------------------------------------ Meghan Landies 415-298-8786 ###-##-#### 50,000 3,307 ------------------------------------------------------------------------------------------------ Richard Bruner 415-298-8786 ###-##-#### 31,250 2,067 - ----------------------------------------------------------------------------------------------------------------------------- Gordon Landies Total 1,852,500 122,510 - ----------------------------------------------------------------------------------------------------------------------------- Jarom Severson Calvin Shueh 408-396-0572 (blank) 24,375 1,612 ------------------------------------------------------------------------------------------------ Jarom Severson 408-396-0572 ###-##-#### 36,563 2,418 - ----------------------------------------------------------------------------------------------------------------------------- Jarom Severson Total 60,938 4,030 - ----------------------------------------------------------------------------------------------------------------------------- Jeremy Rusnak Jason Oldenski 360-757-6479 (blank) 18,750 1,240 ------------------------------------------------------------------------------------------------ Jeremy Rusnak 360-757-6479 ###-##-#### 2,093,750 138,462 ------------------------------------------------------------------------------------------------ Joe Rusnak 360-757-6479 (blank) 12,500 827 ------------------------------------------------------------------------------------------------ John Rusnak 360-757-6479 (blank) 62,500 4,133 ------------------------------------------------------------------------------------------------ Kim Rusnak 360-757-6479 (blank) 31,250 2,067 ------------------------------------------------------------------------------------------------ Sharon Rusnak 360-757-6479 (blank) 62,500 4,133 - ----------------------------------------------------------------------------------------------------------------------------- Jeremy Rusnak Total 2,281,250 150,862 - ----------------------------------------------------------------------------------------------------------------------------- (blank) Allen Bonaguro 714-539-9209 ###-##-#### 65,000 4,299 ------------------------------------------------------------------------------------------------ Ann Aynes 360-855-0792 ###-##-#### 205,000 13,557 ------------------------------------------------------------------------------------------------ C. Timothy Smoot 310-530-3366 (blank) 20,313 1,343 ------------------------------------------------------------------------------------------------ Colm Gallagher 310-318-9469 ###-##-#### 33,750 2,232 ------------------------------------------------------------------------------------------------ David Perez 805-376-3013 ###-##-#### 20,313 1,343 ------------------------------------------------------------------------------------------------ Greg Strelzoff 310-796-4944 (blank) 79,688 5,270 ------------------------------------------------------------------------------------------------ Joe Abrams 415-258-9117 ###-##-#### 645,996 42,720 ------------------------------------------------------------------------------------------------ Jon Phillips 714-207-7170 ###-##-#### 31,250 2,067 ------------------------------------------------------------------------------------------------ Kenneth Jamieson 415-298-8786 (blank) 71,250 4,712 ------------------------------------------------------------------------------------------------ Randall Darling 415-298-8786 (blank) 71,250 4,712 ------------------------------------------------------------------------------------------------ Ron Holt 805-644-2960 ###-##-#### 20,313 1,343 ------------------------------------------------------------------------------------------------ William Macaitis 630-910-0365 ###-##-#### 187,500 12,400 - ----------------------------------------------------------------------------------------------------------------------------- (blank) Total 1,451,623 95,998 - ----------------------------------------------------------------------------------------------------------------------------- Grand Total 10,585,061 700,000 - -----------------------------------------------------------------------------------------------------------------------------
EX-10.12 18 EMPLOYMENT AGREEMENT MARCH 25, 1999 EXHIBIT 10.12 ENTERTAINMENT UNIVERSE CONTRACT OF EMPLOYMENT This memo confirms the terms and conditions of your employment with Entertainment Universe. Please review each section and sign your name at the bottom of each page - indicating your agreement with everything on the page - and again at the end of the document. You are also required to indicate your current address. NOTE: The company reserves the right to alter this contract every year. Role In your position of Chief Financial Officer (CFO), you will be reporting to the President and COO and serve as an integral member of the Entertainment Universe Management Team. Your annual salary is $125,000 and will be reviewed every twelve months. You will begin your job as CFO on Monday, April 5, 1999. Stock Options Your position entitles you to participate in an associate stock option plan (see Attachment). Stock options will be issued by the Chairman and are discretionary. Your first option issue will be 100,000 at a strike price of $3.00. These options will exercise in equal portions by quarter over three years. Future option issuing will be decided by the compensation committee and is also discretionary. Benefit package will include all benefits normally offered to an Entertainment Universe salaried employee. These are summarized as follows: o Medical insurance for you and your dependents. Anthem Blue Cross/Blue Shield of CT offers a POS plan with specific provisions for optional out-of-network services (see attached plan description). This plan requires employee contribution and is effective 30 days after employment. o FORTIS Dental Insurance for you and your dependents (see attached plan description). o Benefits are subject to change without notice as company plans evolve. William R. Wagner --------------------- Employee Name (Print) /s/ William R. Wagner 3-25-99 --------------------- ------- Employee Signature Date 92 Compo Road North ------------------------------------- Street Address Apt. # Floor Westport CT 06880 ------------------------------------- City State Zip Code Entertainment Universe - CONFIDENTIAL Termination The Company may terminate your employment with or without cause during your first year of employment and 3 months written notice thereafter. At the Company's election, the Company may terminate you for cause with no notice period or in lieu of notice. For this paragraph, "cause" is defined as inadequate performance. You may terminate your employment with the Company upon three months written notice. The Company may decide, at its discretion, to waive the notice period required of you. In that case, no severance will be due to you. Your notice to the Company must be either delivered in hand to an authorized agent of the Company, or sent to the Company by certified mail. Non-Competition/Non-Solicitation In consideration of your employment, the benefits which you are receiving hereunder, and in consideration of the notice/severance provision contained herein, you agree that you will not accept employment or act as a consultant with any person, company, or entity which competes with the Company directly or indirectly, for a period of 12 months after date of departure. Furthermore, you agree that, in consideration of the same items discussed herein, you will not solicit any other employee who is or who was employed by the Company at any time during the 12-month period preceding your departure date to leave the employ of the company for purposes of employment, consulting, or entering into a joint venture agreement, with you or with any other person, company, or entity. You expressly agree that monetary damages could not make the Company whole in the event that you violate any aspect of this provision and that injunctive relief should be issued by a Court of competent jurisdiction in the event that you do so. The parties further agree that, should any Court conclude that any aspect of this provision is unreasonable in any respect, the provision as a whole would not fail but would rather be limited to such extent as the Court deems reasonable. Moonlighting As defined is having more than one job. This is not permitted. Non-Disclosure and Confidentiality You shall not, at any time during the term of this Agreement following your termination of employment, publish, reveal, divulge or make known to any person, firm, corporation or any other business organization, any proprietary or confidential information, including but not limited to customer's lists, trade secrets, processes, business practices, technology, know-how, research, and programs. Also, you shall not use for yourself or others, or divulge to others, any proprietary or confidential information, knowledge of data of the Company obtained by you as a result of your employment, unless authorized by an executive officer of the Company in writing. As a guide, in general but without limitation, any unpublished information is proprietary and confidential, including any information set for the in pending patent content, software or technology applications for the Company. William R. Wagner --------------------- Employee Name (Print) /s/ William R. Wagner 3-25-99 --------------------- ------- Employee Signature Date 92 Compo Road North ------------------------------------- Street Address Apt. # Floor Westport CT 06880 ------------------------------------- City State Zip Code Entertainment Universe - CONFIDENTIAL OWNERSHIP OF TRADE SECRETS You agree that any trade secret, invention, improvement, patent applications, copyrightable material, program, system, or novel technique or the like conceived, devised, developed, or otherwise obtained by you or other Company employees during the term of this Agreement shall be and become the sole property of the Company. OWNERSHIP OF RECORDS AND DOCUMENTS You agree all written materials, records, documents, and other materials either prepared by you or which came into your possession during the term of the Agreement concerning any services, products or processes used, developed, investigated or considered by the Company, otherwise concerning the business affairs of the Company, shall be the sole and exclusive property of the Company, and upon termination of employment, or upon request of the Company during employment, you shall promptly deliver all such materials to the Company. The above terms and conditions have been established to reflect the importance of your position within the Company. This offer will expire on Thursday, March 25, 1999 at 1:30pm and is subject to a reference check (i.e. education, employment history, and your submitted references). Please countersign the attached copy of this letter, signifying your acceptance of the terms and conditions of the contract, and return it to Kim Shaw via the enclosed Fed-Ex AFTER faxing the signed or unsigned sheets to Kim @ (203) 294-0391. Please call her at (203) 294-1648 ext. 509 prior to faxing the sheets. Accepted and Agreed By, William R. Wagner --------------------- Employee Name (Print) /s/ William R. Wagner 3-25-99 --------------------- ------- Employee Signature Date 92 Compo Road North ------------------------------------- Street Address Apt. # Floor Westport CT 06880 ------------------------------------- City State Zip Code Entertainment Universe - CONFIDENTIAL ENTERTAINMENT UNIVERSE CONTRACT OF EMPLOYMENT "ADDENDUM" Vacation In your role, you will be entitled to four weeks vacation. William R. Wagner --------------------- Employee Name (Print) /s/ William R. Wagner 3-31-99 --------------------- ------- Employee Signature Date 92 Compo Road North ------------------------------------- Street Address Apt. # Floor Westport CT 06880 ------------------------------------- City State Zip Code Entertainment Universe - CONFIDENTIAL 8.2 GOOD STANDING. Purchaser is a corporation duly organized and existing in good standing under the laws of the State of Nevada. 8.3 DUE AUTHORIZATION; NO CONFLICT. Except as otherwise provided herein, no consent, waiver or approval of any party or governmental authority is required in connection with Purchaser's execution, delivery and performance of this Agreement. This Agreement constitutes a legal, valid and binding obligation of the Purchaser enforceable in accordance with its terms. 9.0 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The covenants, representations and warranties of the parties made herein or in any other certificate, instrument or document delivered at the Closing shall survive the Closing, notwithstanding any investigation at any time made by or on behalf of the other party. 10.0 INDEMNIFICATION. 10.1 OBLIGATION OF THE SELLER, STEVE MARTIN AND KORRI KOLESA TO INDEMNIFY. The Seller, Steve Martin and Korri Kolesa, jointly and severally, shall indemnify, defend and hold harmless the Purchaser and its affiliated entities from and against any and all losses, judgments, claims, awards, damages, settlements, costs and expenses, including, without limitation, attorneys fees, sustained or incurred by the Purchaser as a result or arising out of any the following: (i) the breach by Seller, Steve Martin or Korri Kolesa of any representation, warranty or covenant contained herein or in any document executed and delivered in connection with the transactions contemplated herein; (ii) the business of Seller prior to the Closing; (iii) any act, omission, debt, obligation or liability of the Seller, its agents, contractors, employees, officers, directors or any claim by present or former employees of Seller's business, whether or not such employees become employees of the Purchaser pursuant to the transaction contemplated hereby, of any nature whatsoever arising in any way out of their employment relationship with Seller, provided any such claim arises solely from events relating to employment with the Seller prior to the Closing; or (iv) Any debt, liability, tax, obligation, trade payable, non reimbursed customer warranty claims, contract or commitment of Seller relating to the Assets, the Seller's business and/or the consummation of the purchase and sale under the terms of this Agreement. 10.2 OBLIGATION OF THE PURCHASER TO INDEMNIFY. The Purchaser shall indemnify, defend and hold harmless Seller from and against any and all losses, judgments, claims, awards, damages, settlements, costs and expenses, including, without limitation, attorneys Page 6 of 10 Headings in this agreement are for convenience only and shall not be used to interpret or construe its provisions. 19.0 GOVERNING LAW This agreement shall be governed by and construed in accordance with the laws of the State of Connecticut. 20.0 COUNTERPARTS This agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 21.0 DEFAULT Upon either party's default or breach hereunder, either party may before or after the Date of Closing enforce any provision this Agreement or any document or instrument executed and delivered in connection herewith according to law and/or equity in any court of competent jurisdiction within the State of Connecticut, including specific performance of either party's obligations, indemnities, covenants, warranties and/or representations hereunder or therein and may seek injunctive relief. The prevailing party shall be entitled to recover any and all damages, costs, expense and reasonable attorney's fees due or sustained as a result of any such default or breach or incurred in the successful enforcement of any provision of this Agreement or any document executed and delivered in connection herewith or in the pursuit or collection of any remedy provided hereunder or in law. 22.0 SEVERABILITY It is the desire and intent of the parties hereto that the provisions of this Agreement be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Agreement shall be adjudicated by a court of competent jurisdiction to be invalid, prohibited or unenforceable for any reason, such provision, as to such jurisdiction, shall be ineffective, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. Notwithstanding the foregoing, if such provision could be more narrowly drawn so as not to be invalid, prohibited or enforceable in such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. In witness thereof the parties have caused this agreement to be executed as of the day and year first above written. Page 9 of 10 For SELLER: /s/ Steve E. Martin Date 5-17-99 - --------------------- ------- Name: Steve E. Martin Title: CEO, GWIC For PURCHASER: /s/ [ILLEGIBLE] Date 5-17-99 - --------------------- ------- Name: Title: COO STEVE MARTIN: /s/ Steve E. Martin Date 5-17-99 - --------------------- ------- KORRI KOLESA: /s/ Korri M. Kolesa Date 5-17-99 - --------------------- ------- Page 10 of 10 EX-10.13 19 EMPLOYMENT AGREEMENT APRIL 14, 1999 Exhibit 10.13 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of April --------- 14, 1999, by and between eUniverse, Inc., formerly known as Motorcycle Centers of America, Inc., a corporation organized under the laws of the State of Nevada, (the "Company") and Leland N. Silvas of Norwalk, Connecticut (the "Executive"). ------- RECITAL: The Company desires to employ the Executive, and the Executive desires to accept such employment, on the terms and subject to the conditions hereinafter set fort h. AGREEMENT: In consideration of the premises and mutual covenants herein contained, the parties hereby agree as follows: 1. Term of Employment. Subject to the terms and conditions of this Agreement, the Company agrees to employ the Executive and the Executive hereby accepts employment with the Company pursuant to this Agreement for the period commencing on April 14, 1999 (the "Commencement Date"), and ending on April 30, 2000. The period from the ----------------- Commencement Date through April 30, 2000 is hereinafter referred to as the "Initial Term". The Initial Term shall be automatically extended for successive ------------ periods of one year ("Extension Terms") unless one of the parties provides --------------- written notice to the other party, at least three (3) months prior to the last day of the Initial Term or any Extension Term, as the case may be, of its election not to so extend the then-scheduled expiration of the Employment Period. The Initial Term, together with all extensions thereof (if any) is referred to in this Agreement as the "Employment Period." -------------------- 2. Position and Duties of Executive. The Company hereby employs the Executive as President and Chief Executive Officer. The Executive shall report directly to the Chairman of the Board and shall be responsible for the day-to-day operations of the Company as a publicly traded company. The Executive shall render to the Company such services as are typically associated with the position of Chief Executive Officer, and any other services that may be reasonably required of him pursuant to the directions of the Chairman of the Board and/or the Board of Directors. The Chief Financial Officer and other officers, employees and advisors of the Company shall report to the Executive. 3. Place of Performance. The place of employment of the Executive shall be at Wallingford, Connecticut, the Company's principal place of business. However, at any time deemed necessary or advisable by the Company, the Executive shall temporarily work at such other place or places as may be determined by the Company. 4. Compensation. (a) Base Salary. During the period from the first year of the Initial Term, ----------- the Company shall to pay to the Executive, as base compensation for the services to be rendered by the Executive 1 pursuant to this Agreement on an annualized basis (the "Base Salary"), of ----------- $200,000.00. The Base Salary shall be payable in periodic installments in accordance with the Company's regular payroll practices. (b) Review and Adjustment of Salary. On an annual basis, the Company shall ------------------------------- review the Executive's performance and other relevant factors relating to salary, and at the time of such review, the Base Salary may be increased as determined in the reasonable discretion of the Company. (c) Bonuses. In addition to the Base Salary, the Executive shall be ------- eligible to receive bonuses of up to 50% of the Base Salary if certain performance milestones are achieved as determined by the Compensation Committee of the Board. (d) Total Compensation. Notwithstanding anything to the contrary contained -------------------- herein, the Executive's Total Compensation (as hereinafter defined) during each year of his employment by the Company shall not be less than the Total Compensation of any other officer of the Company other than the Chairman. As used herein, the term "Total Compensation" is defined as salary, bonus, stock ------------------ grants, and the value of stock options, employee fringe benefits and other forms of remuneration. Total Compensation shall be determined in accordance with United States generally accepted accounting principles consistently applied. 5. Stock Grants and Options. (a) Stock Previously Granted. The parties acknowledge that the Company -------------------------- has granted to the Executive 200,000 shares of the Company's common stock $0.001 par value ("Shares") as partial consideration for entering into this Agreement ----------- and in consideration of consulting services performed on behalf of the company. (b) Stock Options. The Company hereby grants the Executive options (the --------------- "Stock Options") to purchase 825,000 Shares at an exercise price of $3.00 per ------------- share. 91,667 of the Stock Options are immediately vested and fully exercisable, and 733,333 of the Stock Options shall vest and become exercisable ("Vest") over ---- the period from the date of this Agreement through January 22, 2002 as follows: 66,667 of said Stock Options shall Vest on the 22nd day of each January, April, July and October, commencing on July 22, 1999 and continuing until the first to occur of (i) all 733,333 of said Stock Options have Vested, or (ii) the Executive is no longer employed by the Company; provided however, this subsection 5(b) is subject to certain provisions with respect to vesting of Stock Options which are set forth in Section 9 hereof. The number of Shares exercisable pursuant to the Stock Options shall be adjusted for any stock-splits or stock dividends by the Company after the date hereof. (c) Accelerated Vesting of Stock Options Upon a Change of Control. In the --------------------------------------------------------------- event of a "Change of Control" of the Company during the Employment Period, all of the remaining Stock Options granted in Section 5(b) above, shall immediately Vest as of the date of the Change of Control. "Change of Control" shall occur: (i) upon the acquisition by any person, including a group (as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended), other than the Company or any of its Subsidiaries or any employee benefit plan maintained by the Company or any of its Subsidiaries, of beneficial ownership of 50% or more of the outstanding stock of the Company entitled to vote; (ii) upon the approval by the shareholders of the Company of a definitive agreement for the merger, consolidation, liquidation, recapitalization or sale of substantially all of the assets of the Company; or 2 (iii) Upon a sale or other transfer of all or substantially all of the assets of the Company in one or a series of transactions. 6. Reimbursement of Expenses. The Company shall reimburse the Executive for normal and reasonable business expenses incurred by him in the course of his employment, including the reasonable costs for transportation and accommodations when the Executive is required to travel away from the location in which he is employed. Such reimbursement shall be subject to the Company's standard procedures with respect to reimbursement, including such matters as pre-approval requirements, lodging and meal allowances, and reimbursement rates for automobile travel. 7. Benefits. The Company represents and agrees that it shall provide a 401(k) Plan in which the Executive shall be eligible to participate. The Company shall provide the Executive with health insurance coverage which pays in full for all medical and dental services for the Executive and his family. The Company shall also reimburse the Executive for car expenses on a monthly basis. The Executive shall also be entitled to participate in all other benefit plans that the Company provides to the other officers. 8. Vacation. The Executive shall be entitled to four weeks of vacation per year. 9. Termination of Employment. (a) Termination by the Company for Cause. Notwithstanding anything to the ------------------------------------ contrary contained herein, the Company may terminate the employment of the Executive for Cause (as defined below) upon written notice to the Executive. As used herein, the term for "Cause" shall be defined as (i) the Executive shall ----- have committed a material breach of any of the provisions set forth herein and failed to cure such breach within 15 days after being given written notice of same by the Company; provided however, in the case of a breach which cannot reasonably be cured within 15 days, Cause shall be deemed not to exist if the Executive commences to cure the breach and is diligently continuing to cure same within 15 days after being given written notice of same by the Company; or (ii) the Executive shall have committed any material act of fraud, gross negligence or gross misconduct in connection with the performance of his duties or obligations hereunder, or shall have been convicted of any felony under the laws of the United States or any of its subdivisions (or pleaded guilty or nolo contendre to any such crime) or any other crime that relates to the Executive's services to, or employment by, the Company. (b) Termination Due To Disability. Notwithstanding anything to the contrary ----------------------------- contained herein, but subject to the terms and provisions of applicable law, the Company shall have the right to terminate this Agreement if the Executive becomes Disabled (as hereinafter defined) during the Employment Period, provided however, if the Company does so, all Stock Options that would have otherwise vested during the remainder of the Employment Period, shall immediately Vest and become fully exercisable.. As used herein, "Disabled" shall mean that the -------- Executive has a physical or mental condition which prevents him from performing the essential functions required of him pursuant to this Agreement, which condition has continued for a period of 90 consecutive business days or existed for a total of at least 120 business days in any twelve month period as determined in good faith by the Board of Directors of the Company. 3 (c) Termination Due To Death. Notwithstanding anything to the contrary ------------------------ contained herein, this Agreement shall terminate if the Executive dies during the Employment Period, provided however, in such event, all Stock Options that would have otherwise vested during the remainder of the Employment Period, shall immediately Vest and become fully exercisable.. (d) Termination for Good Reason. The Executive may terminate this Agreement --------------------------- for Good Reason (as hereinafter defined) upon giving 45 days written notice to the Company. Any such notice of termination for Good Reason shall specify the acts or omissions of the Company in sufficient detail so as to enable the Company to determine the provision of this Section relied upon by the Executive in terminating this Agreement. In the event of a Termination for Good Reason, the Company shall pay to the Executive all Base Salary and bonus as provided for in this Agreement through the remainder of the Initial Term or the current Extension Term, as the case may be. For purposes of this Agreement, "Good ---- Reason" shall mean: - ------ (i) the assignment to the Executive of any duties inconsistent with the Executive's position (including titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 2 of this Agreement, or any other such position, authority, duties or responsibilities and such assignment shall continue for a ten (10) day cure period, if curable, following the Company's receipt of written notice of such inappropriate assignment, which notice shall specify in detail the nature of the Company's breach, and which shall not be in lieu of the notice of termination referenced above; (ii) any failure by the Company to comply with any of the provisions of this Agreement pertaining to compensation of the Executive, and such failure shall continue for a ten (10) day cure period, if curable, following the Company's receipt of written notice of such failure, which notice shall specify in detail the nature of the Company's failure, and which shall not be in lieu of the notice of termination referenced above; or (iii) any purported termination by the Company of the Executive's employment except as expressly permitted by this Agreement (i.e., a termination by the Company other than for "Cause"). --------- (e) Payments Through Last Day of Employment. In the event of a termination ----------------------------------------- of the Executive's employment during the Employment Period for any reason other than as provided in 9(d) above, the Company shall pay the Executive the Base Salary pro rated through the Last Day of Employment, and any reimbursable expenses which he incurred through the Last Day of Employment. If this Agreement is terminated due to the Executive's disability or death, the Company shall pay to him or his estate, as the case may be, any bonus to which he would have otherwise been entitled, which shall be pro rated from the beginning of the then current calendar year, through the Last Day of Employment (it being understood and agreed that any such bonus payable to the Executive shall be paid to the Executive or his estate, as the case may be, if and when any corresponding bonus is paid to the other officers of the Company). (f) Survival of Obligations. Except as otherwise set forth herein, all ------------------------- rights, duties and obligations of the Company and the Executive shall terminate as of the Last Day Employment except that the Executive's duties and obligations under the Sections hereof pertaining to confidentiality, ownership of intellectual property, covenant to deliver business materials, and any provisions hereof specifying obligations of the parties after termination shall survive the termination of the Executive's employment and shall remain in full force and effect. 4 (g) Accelerated Vesting of Stock Options. In the event the Executive's ------------------------------------ employment is terminated because (i) the Company did not agree to extend this Agreement for any Extension Term, (ii) the Company terminates the Executive during the Initial Term or any Extension Term other than for Cause, or (iii) the Executive terminates his employment for Good Reason, then the Accelerated Vesting Portion (as hereinafter defined) of the Stock Options shall immediately Vest as of the date of termination of the Executive's employment. For purposes of this Agreement, the "Accelerated Vesting Portion" shall mean the aggregate ----------------------------- number of Stock Options which (if the Executive's employment with the. Company had continued), would have Vested pursuant to Section 5(b) hereof during (x) the remainder of the then-current term of this Agreement (i.e.: the Initial Term or Extension Term, as the case may be), and (y) the one-year period following the end of the then-current term of this Agreement. 10. Confidentiality. --------------- The Executive acknowledges that in connection with his employment by the Company, he will have access to trade secrets of the Company and other information and materials which the Company desires to keep confidential, including customer lists, supplier lists, financial statements, business records and data, marketing and business plans, and information and materials relating to the Company's services, products, methods of operation, key personnel, proprietary software and other proprietary intellectual property (collectively, the "Confidential Information"); provided however, that Confidential Information ------------------------ does not include information which (i) is or becomes publicly known through the lawful action of any party other than the Executive; (ii) has been made available by the Company, directly or indirectly, to a nonaffiliated third party without obligation of confidentiality; or (iii) the Executive is obligated to produce as a result of a court order or pursuant to governmental action or proceeding. The Executive covenants and agrees that, both during and after the Employment Period, he will keep secret all Confidential Information and will not disclose, reveal, divulge or otherwise make known any Confidential Information to any person (other than the Company or its employees or agents in the course of performing his duties hereunder) or use any Confidential Information for his own account or for the benefit of any other individual or entity, except with the prior written consent of the Company. 11. Ownership of Intellectual Property. The Executive agrees that all inventions, copyrightable material, software, formulas, trademarks, trade secrets and the like which are developed or conceived by the Executive in the course of his employment by the Company (collectively, the "Intellectual Property"), shall be disclosed promptly to the --------------------- Company and the Company shall own all right, title and interest in and to the Intellectual Property. All of the Intellectual Property shall be considered works made-for-hire pursuant to the United States Copyright Act of 1976, as amended from time to time. In order to ensure that the Company shall own all right, title and interest in and to the Intellectual Property in the event that any of the Intellectual Property is not deemed a work made-for-hire and in any other event, the Executive hereby assigns all such Intellectual Property to the Company, and the Executive agrees to affix to the Intellectual Property appropriate legends and copyright notices indicating the Company's ownership of all Intellectual Property and all underlying documentation to the extent reasonably appropriate, and will execute such instruments of transfer, assignment, conveyance or confirmation as the Company considers necessary to transfer, confirm, vest, perfect, maintain or defend the Company's right, title and interest in and to the Intellectual Property. 5 12. Successors and Assigns. This Agreement is binding upon, and shall inure to the benefit of, the Company and its successors and assigns. With respect to the Executive, this is an agreement for the performance of personal services. Absent the prior written consent of the Company, and subject to the terms of the Executive's Will and the laws of descent and distribution, the Executive shall have no right to assign any of his duties or obligations pursuant to this Agreement, and likewise, he shall have no right to assign, transfer, convey, encumber or otherwise dispose of any of his rights pursuant to this Agreement. 13. Entire Agreement. This Agreement contains all of the representations, covenants and agreements between the parties hereto with respect to the subject matter hereof, and constitute the entire agreement of the parties with respect to said subject matter. This Agreement supersedes any and all other prior or contemporaneous agreements, whether oral or in writing, between the parties with respect to the subject matter thereof. 14. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut without giving effect to the conflicts of law principles thereof. 15. Amendment and Waiver. This Agreement may not be amended or modified except by an instrument in writing signed by the parties hereto. No delay by either party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any right, power or privilege hereunder. Any failure by either party hereto to require strict performance by the other party or any waiver by any party hereto of any term, covenant or agreement herein shall not be construed as a waiver of any other breach of the same or any other term, covenant or agreement herein. 16. Severability. If any term or provision of this Agreement is held or deemed to be invalid or unenforceable, in whole or in part, by a court of competent jurisdiction, this Agreement shall not thereby be rendered invalid or unenforceable as a whole. In such event, this Agreement shall continue in full force and effect- and shall be interpreted and enforced as if such invalid or unenforceable term or provision had not been a part hereof. 17. Indemnification of Executive. ---------------------------- The Company agrees to indemnify and hold the Executive harmless from and against any loss, cost or expense, including reasonable attorneys' fees, incurred by the Employee at any time in connection with any claim, demand, suit, action or proceeding, whether pending or threatened, arising out of, or related to any act or omission of the Executive for the Company, including, but not limited to any act or omission, within the scope of his employment by the Company, or in connection with his capacity as an officer or director of the Company. Notwithstanding the foregoing, the indemnification 6 obligation of the Company set forth in the preceding sentence shall not apply with respect to any claim, demand, suit, action or proceeding which arises out of any act or omission of the Executive which constitutes gross negligence or willful misconduct by the Executive. IN WITNESS WHEREOF, this Agreement was executed by the undersigned as of the date first above written. eUniverse, Inc. By:____________________ Brad Greenspan Its Chairman ____________________ Leland N. Silvas 7 EX-10.14 20 APPOINTMENT OF A DIRECTOR OF ENTERTAINMENT UNIVERSE EXHIBIT 10.14 ENTERTAINMENT UNIVERSE, INC. 264 South LaCienega, Suite 305 Beverly Hills, CA 90211 April 6, 1999 E. P. Opportunity Fund, L.L.C. 77 West Wacker Drive Suite 4600 Chicago, Illinois 60601 Ladies and Gentlemen: This letter confirms, and reduces to writing, our agreements that, commencing on the date hereof and until such time that EP Opportunity Fund, L.L.C. ("EP") no longer owns any shares of Series A 6% Convertible Preferred Stock ("Preferred Stock") of Entertainment Universe, Inc. (the "Company") (such period hereinafter being referred to as the "Preferred Stock Period"), EP shall have the right to have one person of its choosing serve as a director of the Company. Accordingly, to effectuate the forgoing, the following shall be applicable during the Preferred Stock Period: 1. EP shall be entitled to nominate one person to the board of directors of the Company; 2. Brad Greenspan agrees to vote all shares of stock of the Company owned by him for the election of the person nominated by EP to the board of directors of the Company; 3. To the extent required, the by-laws and Articles (or Certificate) of Incorporation of the Company will be amended to increase the number of directors on the Board so that the person nominated by EP can serve; and 4. Any director nominated by EP shall finish his or her term regardless whether the Preferred Stock Period ends during such person's term as a director. In addition, for a period of two (2) years, commencing on the date of EP's purchase of the Preferred Stock, in any public offering of securities made by the Company during such period, EP shall have the right to purchase One Million Dollars ($1,000,000) of such securities; provided, however, it is agreed and understood that EP may, in its sole discretion, elect to purchase less than such amount. Any election by EP to purchase less than the entire E. P. Opportunity Fund, L.L.C. April 6, 1999 Page 2 One Million Dollars ($1,000,000) of such securities that it has the right to purchase shall not be, or be deemed to be, a waiver of its right to purchase One Million Dollars ($1,000,000) of securities in any subsequent offering by the Company. The Company understands that this agreement was a material inducement to EP to purchase shares of the Company's Preferred Stock and, without it, EP would not have made such purchase. The Company shall assign this Letter Agreement to Motorcycle Centers of America, Inc. ("MC"), or such other company that it engages in a stock for stock exchange, on or prior to the date that EP purchases shares of Preferred Stock of the Company. From and after the date of assignment, reference herein to "Company" shall mean and refer to MC or such other company with which the Company engages in a stock for stock exchange. Very Truly yours, ENTERTAINMENT UNIVERSE, INC. By: /s/ Brad Greenspan ------------------------ Its: Chairman ----------------------- I hereby agree to the foregoing provisions of this Letter Agreement. /s/ Brad Greenspan ---------------------------- Brad D. Greenspan Date: April 6, 1999 The undersigned hereby assigns this Letter Agreement to Motorcycle Centers of America, Inc., effective on the 16 day of April, 1999 and agrees to all of its provisions. ENTERTAINMENT UNIVERSE, INC. By: /s/ Brad Greenspan ------------------------ Its: Chairman ----------------------- E. P. Opportunity Fund, L.L.C. April 6, 1999 Page 3 The undersigned hereby accepts the assignment of this Letter Agreement from Entertainment Universe, Inc. on the 16 day of April, 1999 MOTORCYCLE CENTERS OF AMERICA, INC. By: /s/ Brad Greenspan ------------------------ Its: Chairman ----------------------- Date: April 16, 1999 ENTERTAINMENT UNIVERSE CONTRACT OF EMPLOYMENT "ADDENDUM" Vacation In your role, you will be entitled to four weeks vacation. William R. Wagner --------------------- Employee Name (Print) /s/ William R. Wagner 3-31-99 --------------------- ------- Employee Signature Date 92 Compo Road North ------------------------------------- Street Address Apt. # Floor Westport CT 06880 ------------------------------------- City State Zip Code Entertainment Universe - CONFIDENTIAL EX-10.15 21 LEASE AGREEMENT EXHIBIT 10.15 MODIFICATION AND RESTATEMENT OF LEASE THIS AGREEMENT made as of this 1 day of February 1999, 1999, by and between VINCENZO VERNA TRUSTEE d/b/a HARVEST ASSOCIATES with a mailing address at P.O. Box 176, Wallingford, Connecticut, hereinafter called "Landlord", and CD UNIVERSE, INC., of 101 North Plains Industrial Road, Building 5 Harvest Park, Wallingford, Connecticut, hereinafter called "Tenant". W I T N E S S E T H : WHEREAS, Landlord and Tenant had entered into a Lease for the use or occupancy of premises containing 12,500 sq feet in Building Five Harvest Park, 101 North Plains Industrial Road, Wallingford, Connecticut; and WHEREAS, Tenant is desirous of occupying additional space in said Building 5 (for a total of 19,500 sq. ft.); WHEREAS, Landlord is desirous of leasing said additional space in said Building 5 provided Landlord is compensated for the cost of fitting up said space; and WHEREAS, the parties are desirous of amending and reforming the aforementioned lease between Landlord and Tenant to reflect the additional space and how the cost of fitting up shall be paid. NOW THEREFORE, in consideration of One ($1.00) Dollar and other valuable consideration, and the mutual benefits to the parties hereto, the undersigned hereby covenant and agree as follows: ARTICLE I Premises 1.1 Landlord, in consideration of the rents, covenants and agreements hereinafter reserved and contained on the part of the Tenant to be paid and performed, hereby demises and lets to the Tenant those certain premises more particularly described as 19,500 square feet in Building Five of HARVEST PARK located at 101 North Plains Industrial Road, Wallingford, hereinafter referred to as "premises" or "demised premises". 1.2 Tenant shall have parking privileges for its employees, associates and customers in common with other tenants. ARTICLE II Term Section 2.1 The commencement date of this lease shall be February 1, 1999. The term of this lease shall be for a term of three (3) years and one (1) month commencing on February 1, 1999 and terminating on March 1, 2002. Section 2.2 Tenant shall have an option to extend the term of this lease for two extension periods ("Extension Period") commencing upon the day after the expiration date of the original term. The first extension period shall be for two (2) years and the second extension period shall be for three (3) lease years. Tenant shall be deemed to have exercised its option to extend the period of this Lease unless Tenant gives notice of its intent not to extend the lease to the Landlord. Said notice must be given on or before the date which is six (6) months prior to the commencement of the extension period. Such extension period shall be upon the same terms and conditions as are in effect hereunder immediately preceding the commencement of such extension period except for rental payments as otherwise provided in this lease. ARTICLE III Base Rent and Additional Rent Section 3.1 Tenant agrees to pay to Landlord, at such place or places as Landlord may, by notice to Tenant from time to time direct, rent at the following rates and times: A. The base rent for the first three years and one and one-half months of the demised term shall be $6.00 per square foot per annum or $117,000 per year or $9,750 per month; In addition to the foregoing, Tenant agrees to pay $40,000.00 towards the cost of fitting up the additional space. Landlord shall bill Tenant for said fitup expenses in 2 phases. Phase One shall be in the amount of $20,000 and shall be due and payable on February 1, 1999. Phase Two shall be in the amount of $20,000 and shall be due and payable on February 15, 1999. All bills shall be paid no later than ten (10) days after billing date. In the event that Tenant does not exercise its right to extend this lease for the first Option Period, Tenant agrees to pay the Landlord an additional $20,000.00 by December 31, 2001. B. First Option Period - Rent shall be $6.00 per square foot or $117,000 per year or $9,750 per month; C. Second Option Period - Rent shall be negotiated by the parties at the time Tenant exercises its right to renew this lease. Section 3.2 The said rent is to be payable in advance on the first day of each calendar month. If rent is not received by the tenth (10th) day of the calendar month, a monthly charge of one and one half (1.5%) percent of the monthly payment will be assessed commencing with the first day of the calendar month. Section 3.3 Tenant shall pay to the Landlord a security deposit in the amount of NO ($0.00) DOLLARS. ARTICLE IV Repairs and Alterations Section 4.1 Landlord shall maintain and make all necessary repairs and replacements to the foundation, floor, exterior walls, marquees, structural columns and structural beams, roof, driveways and parking areas of the building and the premises. Landlord shall maintain all landscaping. Tenant shall make all necessary repairs to the heating, air conditioning, electrical, plumbing and drainage systems (collectively "Systems"). Landlord shall pay for the replacement in whole or in part of any of the systems necessitated by normal wear and tear except that if any repair or replacement is the result of the Tenant's negligence, misuse or conditions caused by any manufacturing process or related activity performed by Tenant, same shall be paid for by the Tenant. Section 4.2 Tenant may make any interior, nonstructural installations, alterations, additions, or improvements to or within the demised premises. No changes or alterations may be made without the consent of the Landlord, which consent not to be unreasonably withheld. Said Tenant improvements shall be made in a first class manner. All such Tenant improvements made to or within the demised premises (except, movable trade fixtures and all equipment of any kind and nature used in tenant's operations, installed in the premises prior to or during the term of this lease at the cost of Tenant or any other person claiming under Tenant), upon expiration or other termination of the term of this lease shall be surrendered with the premises as a part thereof without disturbance, molestation or injury. Said movable trade fixtures shall not be deemed part of the premises and may be removed by Tenant at any time or times during the term of this lease, provided that upon any such removal, Tenant shall restore the premises to their condition prior to such installation. Section 4.3 Tenant will procure all necessary permits before making any repairs, removals or Tenant improvements. Landlord will cooperate with Tenant in obtaining such permits. All repairs, removals and Tenant improvements done by Tenant or anyone claiming under Tenant, shall be done in good and workmanlike manner and shall be done in conformity with all laws, ordinances and regulations of all public authorities and all insurance inspection or rating bureaus having jurisdiction; and the structure of the premises will not be endangered or impaired and Tenant will repair any and all damage caused by or resulting from any such repairs, removals or Tenant improvements, including, but without limitation, the filling of holes. Tenant agrees to pay, promptly when due, all charges for labor and materials in connection with any work done by Tenant upon the premises so that the premises shall at all times be free of liens. Tenant agrees to save Landlord harmless from and indemnify Landlord against any and all claims for injury, loss or damage to persons or property caused by or resulting from the doing of any such work, and Tenant shall carry all necessary builder's risk, liability and worker's compensation insurance required to be carried during the course of any construction hereunder. Section 4.4 No sign shall be placed on the exterior of the demised premises without the express consent of the Landlord, and further, such sign shall conform to all applicable rules and regulations issued by the Town of Wallingford. It is agreed by the parties that an exterior sign on all of the premises owned by the Landlord shall be substantially similar in shape, size, color and content. ARTICLE V Tenant's Covenants Tenant covenants and agrees as follows: Section 5.1 To pay when due the said base rent, additional rent, and any and all other charges required to be paid by Tenant hereunder at the times and in the manner provided in this lease. Section 5.2 To use the premises for office space. No business activity shall be conducted outside of the building. Section 5.3 To procure any licenses and permits required for any use made of the premises by Tenant; and upon the expiration or termination of this lease, to remove its good and effects and those of all persons claiming under it and to yield up peaceably to Landlord the premises in good order, repair, and condition in all respects, damage by fire, taking, casualty, structural and other defects required to be repaired by Landlord and reasonable wear and tear excepted. Section 5.4 The Tenant shall promptly comply with all laws, ordinance, and lawful orders and regulations affecting the premises (other than condemnation) and the cleanliness, safety, occupation, and use of the same, and shall also promptly comply with and execute all rules, orders and regulations of the Board of Fire Underwriters, Rating Bureaus, and Fire Insurance Companies, organizations and associations for the prevention of fires, at the Tenant's own cost and expense. Landlord warrants that the premises shall conform to all the foregoing laws, ordinances, orders and regulations upon the delivery of possession. The Tenant shall not permit or commit any waste. Section 5.5 That it will not use, or permit to be used, the premises for any illegal or unlawful purpose. Section 5.6 To pay for the cost of all heat, water and electricity, utilities, materials and services which may be furnished to it or used by it in or about the premises. Section 5.7 To maintain, repair, replace and generally keep in first class working order and condition all of the nonstructural components of the premises, except those items which are the responsibility of the Landlord at its own cost and expense. Section 5.8 The Tenant agrees not to use the exterior of the premises for storage of materials, unless authorized by Landlord in a designated area. Section 5.9 Tenant shall not accumulate or store any materials deemed hazardous, injurious or a pollutant by the Department of Environmental Protection. All said hazardous waste shall be disposed of in such a manner that it conforms with federal and state law. Tenant agrees to hold Landlord harmless for any claim arising from a violation of this Section or a violation of any applicable federal, state or local regulation related to hazardous materials. ARTICLE VI Landlord's Covenants Section 6.1 Landlord covenants and agrees as follows: That Tenant, upon payment of the rent above reserved, and upon the due performance of the covenants and agreements herein contained, shall and may at all times peaceably and quietly have, hold and enjoy the premises for the term of this lease without any manner of hindrance or molestation from Landlord or anyone claiming under Landlord. Section 6.2 To perform all obligations of Landlord in regard to all construction, maintenance and repair of the premises at the time and in the manner provided in this lease; and to perform all other obligations required to be performed by Landlord as elsewhere provided in this lease, provided however, the named Landlord shall be responsible as above set forth only for the period of time it owned the premises, provided that any successor Landlord specifically assumes all obligations of the Landlord hereunder. ARTICLE VII Indemnity and Public Liability The Tenant from and after the commencement date will hold the Landlord harmless against any and all claims, suits, damages or causes of action for damages and against any orders of decrees or judgments which will be entered herein, brought from damages or alleged damages resulting from any injury to persons and/or property or loss of life sustained in and about the premises resulting from the Tenant's negligence or that of its agents, servants and business invitees; and the Tenant shall, during the term hereof, maintain general liability policies insuring the Tenant, and shall present to the Landlord, prior to taking occupancy, a liability policy on the premises, naming the landlord as an additional assured. Such policies shall be issued by insurance companies authorized and licensed to issue such policies in the State of Connecticut and shall provide for notice to Landlord prior to cancellation. Such liability policy or policies shall initially afford protection to limits of not less than $1,000,000.00 in respect to bodily injury and to the limit of $500,000.00 property damage, which limits shall be reviewed from time to time, but not more than annually, and adjusted to the standard amounts normally carried by similar operations. Upon failure, at any time, on the part of the Tenant to pay the premiums for the insurance required herein, the Landlord shall be at liberty, from time to time, as often as such failure shall occur, to pay the premiums therefore, and any and all sums so paid shall be and become and are hereby declared to be rent under this lease due and payable on the next rent day. Tenant agrees that it will, at its own cost and expense, keep its own fixtures, merchandise and equipment adequately insured during the term hereof against loss or damage. ARTICLE VIII Eminent Domain, Fire or Other Casualty Section 8.1 In the event that the whole of the premises shall be taken under the power of eminent domain then this lease will terminate. Section 8.2 In the event that the premises or any substantial part thereof shall be destroyed or damaged by fire or unavoidable casualty so as to render the premises wholly untenable or unfit for occupancy, or should the demised premises be so badly injured that same cannot be repaired within ninety days from the happening of such injury, then in such case, the term created shall, at the option of the Landlord, cease and become null and void from the date of said damage or destruction, and the Tenant shall immediately surrender said premises and all of the Tenant's interest therein to the Landlord, and shall pay rent only to the time of surrender, in which event the Landlord may re-enter and re-possess the premises thus discharged from this lease and remove all parties therefrom. Should the demised premises by rendered untenable and unfit for occupancy, but yet repairable within ninety days from the happening of said injury, the Landlord may enter and repair the same with reasonable speed, and the rent shall not accrue after said injury or while repairs are being made, but shall recommence immediately after said repairs shall be completed. But if the premises shall be so slightly injured as not to be rendered untenable and unfit for occupancy, then the Landlord agrees to repair same with reasonable promptness and in that case the rent accrued and accruing shall not cease. The Tenant shall immediately notify Landlord in case of fire or other damage to the premises. ARTICLE IX Assignment The Tenant may transfer, sell, assign, sublet or otherwise convey its interest in the premises with the written consent of Landlord, which consent will not be unreasonably withheld, provided nothing herein shall operate to relieve Tenant from any liability hereunder in the event of said transfer, sale, assignment or subletting. ARTICLE X End of Term/Holding Over Section 10.1 At the expiration of this lease, the Tenant shall surrender the premises in good order, repair and condition in all respects, reasonable wear and tear, damage by fire, taking, casualty, structural and other defects required to be repaired by Landlord excepted, and shall deliver all keys to Landlord. Before surrendering said premises, Tenant shall remove all its personal property including all trade fixtures and equipment, and shall repair any damage caused thereby. Tenant's obligations to perform this provision shall survive the end of this lease. If Tenant fails to remove its property upon the expiration of this lease, the said property shall be deemed abandoned and shall become the property of the Landlord. Landlord may at said time remove said abandoned property and charge Tenant for said removal. Section 10.2 Any holding over after the expiration of the term of this lease shall be construed to be a tenancy at will and shall otherwise be on the terms herein specified. ARTICLE XI Default Section 11.1 A. If Tenant shall default in the payment of rent herein or any item of rent herein mentioned or any part thereof, and such default shall continue for more than ten (10) days after the day that such payment is past due; or B. If Tenant shall default in the observance of any of the other terms, covenants and conditions of this lease and such default shall continue for more than thirty (30) days after notice given to Tenant by Landlord specifying such default; provided, however, that the Landlord shall waive such thirty day requirement so long as the Tenant is making a diligent effort to remedy same and such default is not of the kind or nature which can be reasonably remedied in such thirty (30) days period; or C. If Tenant shall make any assignment for the benefit of creditors or file a voluntary petition in bankruptcy or be by any court adjudicated a bankrupt or take the benefit of any insolvency act or be dissolved pursuant thereof, voluntarily or involuntarily, or if a receiver or trustee of Tenant and/or its property shall be appointed in any proceedings other than bankruptcy proceedings and such appointment, petition for an arrangement or reorganization, if made in proceedings instituted by Tenant shall not be vacated within thirty (30) days after it has been made, or if made in proceedings instituted by Tenant shall not be vacated within one hundred twenty (120) days after it has been made (provided further that during said respective period of thirty and one hundred twenty days, all the covenants of this lease to be performed by Tenant, including payment of rent, shall continue to be performed): then, upon the happening of any one or more of the defaults or events above mentioned in this Section 11.1 the Landlord may, at its option, on ten (10) days notice in writing, terminate this lease, and this lease and the term hereof shall automatically cease and determine at the expiration of said ten day period, and it shall be lawful for the Landlord at his option to enter the premises or any part thereof, and to have, hold and repossess said premises and to remove all persons therefrom by summary proceedings or by other action or proceedings, or by force or otherwise, any notice required by the laws of the State of Connecticut being hereby waived. D. The failure of Tenant to observe any term, covenant, or condition of the lease other than the payment of rent shall not be deemed a default within the meaning of this Section 11.1 so long as Tenant, after receiving any notice as specified herein, proceeds to cure the default as soon as reasonably possible and continues to take all steps necessary to complete the curing of such default within a period of time which, under all prevailing circumstances, shall be reasonable. Section 12.1 In the event any action is brought under the provisions of this Article, the Landlord shall be entitled to reasonable attorneys' fees and costs provided he shall prevail. ARTICLE XII Miscellaneous Provisions Section 11.2 Tenant agrees at the request of Landlord to subordinate this lease to any mortgage placed upon the premises by Landlord, provided that the mortgagee thereof will agree to recognize all the rights of the Tenant under this lease in the event of acquisition of title by such mortgagee through foreclosure proceedings or otherwise, specifically including the right of Tenant to purchase the premises in accordance with the terms hereof, and Tenant will agree to recognize the holder of such mortgage as Landlord in such event, which agreement shall be expressly binding upon the successors and assigns of Tenant and of the mortgagee and upon anyone purchasing said premises at any foreclosure sale. Tenant and Landlord agree to execute and deliver appropriate instruments necessary to effect the provision of this Section. Section 12.2 Failure of either party to complain of any act or omission on the part of the other party, no matter how long the same may continue, shall not be deemed to be a waiver by said party of any of its rights hereunder. No waiver by either party at any time, expressed or implied, of any breach or any provision of this lease shall be deemed a waiver of a breach of any other provisions of this lease or a consent to any subsequent breach of the same or any other provision. If any action by either party shall require the consent or approval of such action, such consent or approval on any one occasion shall not be deemed a consent to or approval of said action on any subsequent occasion or a consent to or approval of any other action on the same or any subsequent occasion. Any and all rights and remedies which either party may have under this lease or by operation of law, either at law or in equity, upon any breach, shall be distinct, separate, and cumulative and shall not be deemed inconsistent with each other; and no one of them, whether exercised by said party or not, shall be deemed to be in exclusion of any other; and any two or more or all of such rights and remedies may be exercised at the same time. Section 12.3 All notices required to be sent to the Landlord shall be mailed at its address noted above, or hand delivered, or to such other addresses or entity as Landlord shall notify Tenant. All notice required to be sent to the Tenant shall be mailed at its address noted above, or to such other address or entity as Tenant shall notify Landlord. Section 12.4 If any term or provision of this lease or application hereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this lease, or the application of such term or provision to the persons or circumstances other than those as to which it is held invalid, or unenforceable, shall not be affected thereby, and each term and provision of this lease shall be valid and be enforced to the fullest extent permitted by law. Section l2.5 The captions in this lease are for convenience only and are not a part of this lease and do not in any way limit or amplify the terms and provisions of this lease. Section 12.6 Notwithstanding any of the terms and provisions herein contained to the contrary, Landlord and Tenant shall each have the duty and obligation to mitigate, in every reasonable manner, any and all damages that may or shall be caused or suffered by virtue of defaults under or violation of any of the terms and provisions of this lease agreement committed by the other. Section 12.7 All the covenants, agreements, terms, conditions, provisions and undertakings in this lease contained, shall extend to and be binding upon the heirs, executors, administrators, successors and assigns of the parties hereto. Section 12.8 This instrument contains the entire and only agreement between the parties, and no oral statements or representations or prior written matter not contained in this instrument shall have any force and effect. This lease shall not be modified in any way except by a writing executed by both parties. Section 12.9 This lease shall be governed exclusively by the provisions hereof and by the laws of the State of Connecticut, as the same may, from time to time, exist. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals the day and year first above written. Signed, Sealed and Delivered in the presence of: /s/ Vincenzo Verna - ------------------------------ ----------------------------- VINCENZO VERNA, TRUSTEE d/b/a HARVEST ASSOCIATES - ------------------------------ CD UNIVERSE, INC. BY: /s/ [ILLEGIBLE] - ------------------------------ ----------------------------- Its President duly authorized - ------------------------------ EX-23.01 22 CONSENT OF JOHNATHAN P. REUBEN, CPA JONATHON P. REUBEN, CPA An Accountancy Corporation - -------------------------------------------------------------------------------- 23440 Hawthorne Blvd. Suite 270 Torrance CA 90505 (310) 378-3609 . FAX (310) 378-3709 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS eUNIVERSE, INC. 101 North Plains Industrial Road Wallingford, Connecticut 06492 The undersigned consents to the use of its opinion dated April 9, 1999, relating to the financial statements of Cases Ladder, Inc. and to the reference to the firm under "Experts," all as included in the Registration Statement on Form 10. Date: June 11, 1999 s/s Jonathon P.Reuben CPA ------------------------- Jonathon P. Reuben, C.P.A. EX-23.02 23 CONSENT OF CORDOVANO & HARVEY, PC INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of eUniverse, Inc. on Form 10 of our report dated June 3, 1999 (relating to the financial statements of Motorcycle Centers of America, Inc. presented separately herein), appearing in Item 15, which is part of this Registration Statement. We also consent to references to us under the headings "Selected Financial Data" and "Experts" in such Registration Statement. Cordovano and Harvey, P.C. Denver, Colorado June 11, 1999 EX-23.03 24 CONSENT OF MERDINGER, FRUCHTER, ROSEN & CORSO, PC INDEPENDENT AUDITOR'S CONSENT We hereby consent to the use in this Registration Statement of eUniverse, Inc. on Form 10 of our report dated May 14, 1999 relating to the financial statements of CD Universe, Inc., and to the reference to our Firm under caption "Experts" in such Registration Statement. MERDINGER, FRUCHTER, ROSEN & CORSO, P.C. Certified Public Accountants New York, New York June 11, 1999 EX-27 25 FINANCIAL DATA SCHEDULE
5 YEAR 3-MOS DEC-31-1998 DEC-31-1999 JAN-01-1998 JAN-01-1999 DEC-31-1998 MAR-31-1999 887 101568 8000 0 0 0 0 0 0 0 0 0 3500 3500 2667 2792 9720 102276 54934 73300 0 0 0 0 0 0 70 2148 (45284) 26828 9720 102276 0 0 0 0 0 0 0 0 45603 80473 0 0 0 0 (102893) 4130 0 0 (102893) 4130 0 0 0 0 0 00 (102893) 4130 (1.47) .06 (1.47) .06
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