0000891554-01-505105.txt : 20011009
0000891554-01-505105.hdr.sgml : 20011009
ACCESSION NUMBER: 0000891554-01-505105
CONFORMED SUBMISSION TYPE: SB-2
PUBLIC DOCUMENT COUNT: 10
FILED AS OF DATE: 20010926
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: E TREND NETWORKS INC /DE
CENTRAL INDEX KEY: 0001081823
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389]
IRS NUMBER: 980348508
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: SB-2
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-70184
FILM NUMBER: 1744935
BUSINESS ADDRESS:
STREET 1: 5919 3RD STREET SE
STREET 2: CALGARY, ALBERTA CANADA T2H 1KE
CITY: BELLEVUE
STATE: WA
ZIP: 98004
BUSINESS PHONE: 4032527766
MAIL ADDRESS:
STREET 1: 10900 N E 8TH STREET
STREET 2: #900
CITY: BELLEVUE
STATE: WA
ZIP: 98004
FORMER COMPANY:
FORMER CONFORMED NAME: COOL ENTERTAINMENT INC
DATE OF NAME CHANGE: 20000112
SB-2
1
fsb2.txt
REGISTRATION STATEMENT
As filed September 26, 2001 File No. 333-
--------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
E-TREND NETWORKS, INC.
(Name of small business issuer in its charter)
DELAWARE 5735 98-0348508
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
5919 - 3RD STREET, S.E., CALGARY, ALBERTA, CANADA T2H 1K3
(403) 252-7766
(Address and telephone number of principal executive offices)
5919 - 3RD STREET, S.E., CALGARY, ALBERTA, CANADA T2H 1K3
(Address of principal place of business or intended principal place of business)
TIMOTHY J. SEBASTIAN, GENERAL COUNSEL
E-TREND NETWORKS, INC.
5919 - 3RD STREET, S.E., CALGARY, ALBERTA, CANADA T2H 1K3
(403) 252-7766
(Name, address and telephone number of agent for service)
Copies of all communications to:
Fay M. Matsukage, Esq.
Dill Dill Carr Stonbraker & Hutchings, P.C.
455 Sherman Street, Suite 300, Denver, Colorado 80203
(303) 777-3737; (303) 777-3823 fax
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of the Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]______________
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]___________________
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]_________________
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
----------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED PROPOSED MAX-
SECURITIES TO BE AMOUNT TO BE MAXIMUM OFFERING IMUM AGGREGATE AMOUNT OF
REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE REGISTRATION FEE
----------------------------------------------------------------------------------------------------------------------
Common stock issuable to 5,000,000 shares $1.20 $6,000,000 $1,500.00
Swartz Private Equity, LLC
----------------------------------------------------------------------------------------------------------------------
Common stock issuable to 500,000 shares $1.20 $600,000 $150.00
Swartz Private Equity, LLC
upon exercise of warrants
----------------------------------------------------------------------------------------------------------------------
Total 5,500,000 shares $6,600,000 $1,650.00
----------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) and based upon the average of the high and low
prices for the Common Stock on September 19, 2001, as reported by the
Over-the-Counter Bulletin Board. We expect that in the event the
registered shares are sold, such shares will be sold at the
then-current market price.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
Subject to Completion, Dated September 26, 2001
E-TREND NETWORKS, INC.
SHARES OF COMMON STOCK
Unless the context otherwise requires, the terms "we", "our" and "us"
refers to E-Trend Networks, Inc.
This prospectus relates to the resale by Swartz Private Equity, LLC, as
a selling stockholder and warrant holder, of up to 5,500,000 shares of our
common stock. Swartz Private Equity, LLC may sell the common stock at any time
at any price. We will not receive any proceeds from the resale of these shares.
We have agreed to pay for all expenses of this offering. Of the 5,500,000 shares
being offered, up to 5,000,000 shares are issuable to Swartz Private Equity, LLC
as put shares under an investment agreement and up to 500,000 shares are
issuable upon the exercise of commitment warrants issued to Swartz.
Our common stock is traded on the NASD OTC Bulletin Board under the
symbol "ETDN". On September 17, 2001, the closing price of our common stock was
$1.06 per share.
INVESTING IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. A
DETAILED EXPLANATION OF THESE RISKS IS INCLUDED IN ANOTHER SECTION OF THIS
PROSPECTUS, BEGINNING ON PAGE 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
____________, 2001
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY.............................................................3
RISK FACTORS...................................................................5
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.............................14
USE OF PROCEEDS...............................................................14
MARKET FOR COMMON EQUITY......................................................15
DIVIDEND POLICY...............................................................15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...............................................................16
BUSINESS......................................................................19
MANAGEMENT....................................................................26
EXECUTIVE COMPENSATION........................................................28
PRINCIPAL STOCKHOLDERS........................................................31
CERTAIN TRANSACTIONS..........................................................32
DESCRIPTION OF CAPITAL STOCK..................................................33
INVESTMENT AGREEMENT..........................................................33
SELLING STOCKHOLDER...........................................................36
PLAN OF DISTRIBUTION..........................................................37
LEGAL MATTERS.................................................................38
EXPERTS.......................................................................38
ADDITIONAL INFORMATION........................................................38
REPORTS TO STOCKHOLDERS.......................................................39
INDEX TO FINANCIAL STATEMENTS.................................................39
2
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should carefully read this entire prospectus and the financial
statements contained in this prospectus before purchasing our securities.
E-TREND NETWORKS, INC.
Founded in April 1999 as a Nevada corporation by VHQ Entertainment Inc.
(formerly Video Headquarters Inc.), a Toronto Stock Exchange ("TSE")-listed
company ("VHQ"), E-Trend is a distributor of packaged entertainment media, with
distribution channels to both online retail e-commerce and traditional bricks
and mortar retail outlets.
We have developed an Internet website, www.EntertainMe.com, our online
"entertainment super-eStore" that offers a variety of products including music,
movies on DVD and VHS, video games, PC gaming software, and other entertainment
related products.
Our wholly-owned subsidiary, Langara Distribution, Inc. offers
fulfillment services to our e-tail sites and third party e-commerce businesses.
Langara Distribution also provides wholesale services to brick and mortar
retailers.
Our principal executive offices are located at 5919 - 3rd Street,
Calgary, Alberta T2H 1K3 Canada. Our telephone number is (403) 252-7766. We also
have offices at 515 Seabreeze Boulevard, Fort Lauderdale, Florida 33316.
THE OFFERING
Securities offered......... Up to 5,000,000 shares of common stock that may
be reoffered by Swartz Private Equity, LLC. We
may issue up to 5,000,000 shares pursuant to an
investment agreement with Swartz. Using the
pricing mechanism and the current market price
and trading volume of our common stock, we
estimate that we will put to Swartz a total of up
to 5,000,000 shares of our common stock over the
next three years.
500,000 shares of common stock that may be
reoffered by Swartz. Swartz may purchase these
shares through the exercise of warrants held by
Swartz as a commitment for entering into the
investment agreement.
Use of proceeds............ We will not receive any of the proceeds from the
selling stockholders of shares of our common
stock. However, upon exercising a put right under
our investment agreement with Swartz, we will
receive cash in consideration for issuing our
common stock. We intend to use these proceeds for
working capital and general corporate purposes.
Securities outstanding..... 5,212,702 shares of common stock as of July 17,
2001
3
SUMMARY SELECTED FINANCIAL INFORMATION
The balance sheet and income statement data shown below were derived
from our audited and unaudited consolidated financial statements. Our results of
operations for any interim period do not necessarily indicate our results of
operations for the full year. You should read this summary financial data in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business," and our financial statements.
BALANCE SHEET DATA:
JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000(1) 1999
Current assets................................................ $ 835,964 $ 2,109,759 $ 687,069
Total assets.................................................. $ 1,900,529 $ 3,015,660 $ 743,556
Current liabilities........................................... $ 566,854 $ 201,585 $ 17,820
Long-term liabilities......................................... $ -- $ -- $ --
Stockholders' equity.......................................... $ 1,333,675 $ 2,814,075 $ 725,736
Working capital .............................................. $ 269,110 $ 1,908,174 $ 669,249
INCOME STATEMENT DATA:
APRIL 29, 1999
(INCEPTION)
NINE MONTHS NINE MONTHS YEAR ENDED THROUGH
ENDED JUNE 30, ENDED JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2000 1999
Revenue..................................... $ 1,637,598 $ 448,211 $ 665,075 $ --
Net loss ................................... $ (1,561,656) $ (546,964) $ (811,156) $ (55,339)
Basic and diluted loss per share............ $ (0.35) $ (0.12) $ (0.10) $ (0.02)
(1) The September 30, 2000 balance sheet shown together with the unaudited
June 30, 2001 balance sheet (page F-2) includes as part of the cash and cash
equivalents $74,816, which is the amount of an overdraft balance on our line of
credit. This amount is also reflected as a current liability. The September 30,
2000 balance sheet included as part of the audited financial statements (page
F-12) reflected cash and cash equivalents net of the $74,816 overdraft.
4
RISK FACTORS
Before deciding to invest in us or to maintain or increase your
investment, you should carefully consider the risk factors described below,
together with all other information in this prospectus and in our other filings
with the SEC before making an investment decision. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also impair our business operations. If any of the following risks actually
occurs, our business, financial conditions or operating results could be
materially adversely affected. In such case, the trading price of our common
stock could decline, and you may lose all or part of your investment.
WE HAVE A LIMITED OPERATING HISTORY AND HAVE INCURRED SIGNIFICANT LOSSES. WE MAY
CONTINUE TO INCUR LOSSES FOR THE FORESEEABLE FUTURE.
We were incorporated in April 1999 and began development of our online
operations in November 1999. To date, our costs have greatly exceeded the
revenues we have generated. As of June 30, 2001, our accumulated deficit was
$2,728,351. If we continue our present business, we expect that our operating
expenses will continue to exceed our revenues for the foreseeable future. As a
result, we will need to generate significantly more revenues to achieve
profitability. We may not be able to do so. We will also require additional
financing. We may not be able to obtain the financing or obtain it on terms
acceptable to us. If revenues grow slower than we anticipate, or if operating
expenses exceed our expectations or cannot be reduced accordingly, or if we
cannot obtain additional financing, our business, operating results, and
financial condition may be materially harmed.
Although we recently initiated a restructuring of our business
designed, in part, to reduce costs in a number of areas, we expect to continue
to incur substantial costs and expenses related to:
o the implementation of our business model and our pricing strategies;
o brand development, marketing and promotional activities;
o the expansion of our existing product and service offerings;
o the continued development of our web site, transaction processing
systems, and network infrastructure;
o the development of strategic relationships; and
o our ability to effectively merchandise and manage our product mix.
Further, because we sell a substantial portion of our products at very
competitive prices, we have low gross margins on our product sales. Our ability
to become profitable depends on, among other things:
o our ability to generate and sustain net sales, consistent with the
assumptions underlying our new operating plan with improved gross
margins;
o our ability to maintain reasonable operating expense levels; and
o our ability to provide other higher margin products and services.
If we are unable to manage and reduce our operating expenses and costs,
while at the same time increasing our gross margins, and without experiencing a
significant deterioration in our sales volumes, we will be unable to achieve
positive operating cash flow. If we do not achieve positive operating cash flow
in a timely manner that is consistent with our operating plan, our business
could fail.
WE HAVE ONLY BEEN OPERATING OUR ONLINE BUSINESS SINCE NOVEMBER 1999 AND FACE
CHALLENGES RELATED TO EARLY STAGE COMPANIES IN RAPIDLY EVOLVING MARKETS.
We were founded in April 1999 and began development of our online
operations in November 1999. You should consider our prospects in light of the
risks and difficulties frequently encountered by early stage companies in the
rapidly evolving online commerce market. These risk include, but are not limited
to, an unpredictable business environment, the difficulty of raising working
capital, the difficulty of attracting and retaining qualified management
personnel , and the use of our business model. To address these risks, we must,
among other things:
o access sufficient capital to fund the implementation of our business
model;
o increase our sales volumes and gross margins while limiting our
operating expenses;
5
o expand our customer base;
o enhance our brand recognition;
o expand our product and service offerings;
o access sufficient product inventory to fulfill our customers' orders;
o successfully implement our business and marketing strategy;
o provide high quality customer service and order processing;
o respond effectively to competitive and technological developments; and
o attract and retain qualified personnel.
We cannot assure or guarantee you that we will be successful in achieving any of
the items identified above.
IF WE DO NOT OBTAIN ADEQUATE FINANCING TO FUND OUR FUTURE OPERATIONS, WE MAY NOT
BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS PLAN.
Our projections of future cash needs and cash flows are subject to
substantial uncertainty, and if our current cash balances are insufficient to
meet our anticipated operating cash needs, our business will fail. Further, if
we are unable to operate our business and manage our cash resources in
accordance with the assumptions underlying our new operating plan, we may need
to raise additional working capital sooner than we would otherwise have
expected. The factors that may impair our ability to effectively operate our
business and manage our operating cash include, but are not limited to:
o our ability to retain the support of our distributor and vendor
partners;
o our ability to maintain other key corporate relationships; and
o our ability to maintain sales volumes and gross margins consistent with
our operating plan.
We may also seek to sell additional equity securities, obtain a line of
credit or seek other ways to fund our operations in the event we require
additional working capital to operate our business. We currently do not have any
firm commitments for additional financing other than the investment agreement
with Swartz Private Equity, LLC. We cannot be certain that any other additional
financing will be available when and to the extent required, or that, if
available, it will be on acceptable terms. If adequate funds are not available
on acceptable terms, we may not be able to fund our operations, and our business
will fail. Further, if we raise additional funds by issuing equity or
convertible debt securities, the percentage ownership of our stockholders will
be diluted. Also, any new securities could have rights, preferences and
privileges senior to those of our common stock.
WE ARE DEPENDENT UPON OUR AFFILIATE, VHQ ENTERTAINMENT INC.
VHQ Entertainment Inc. is our major stockholder, owning approximately
38.4% of the issued and outstanding shares at July 31, 2001. At June 30, 2001,
VHQ owed us $ 376,731 for an advance which bears interest at 8%, is unsecured
and has no fixed terms of repayment, and $ 256,030 for the purchase of products
and the purchase of our stock. During the three and nine months ended June 30,
2001, we sold $315,068 and $779,794, respectively, of our products to VHQ,
representing 44% and 48% of total sales. These transactions are considered to be
in the normal course of business and are measured at the exchange amount which
is the amount of consideration established and agreed to by the related parties.
INTENSE COMPETITION FROM EXISTING AND NEW ENTITIES MAY ADVERSELY AFFECT OUR
REVENUES AND PROFITABILITY.
We face significant competition in the area of Internet retailing of
entertainment products. We expect competition to intensify given the relative
ease with which new web sites can be developed. There are a large number of web
sites that sell videos and other entertainment products through the Internet. We
also compete with traditional and nontraditional "bricks and mortar" retailers
and mass merchandisers in the United States and Canada. Due to our small size,
it can be assumed that most if not all of our competitors have significantly
greater financial, technical, and other resources.
These competitors may be able to respond more quickly to new or
emerging marketing strategies and Internet technologies than we can. Also, our
competitors and potential competitors have greater name recognition
6
and ability to enter into strategic partnerships to engage in marketing efforts.
To compete, we may be forced to narrow our marketing focus, thereby reducing our
likelihood for success.
Price competition in our industry is also intense, and price of one of
the principal factors on which consumers base their purchasing decisions. Price
competition may reduce our gross margins, which could materially harm our
business, operating results, and financial condition. Some of our competitors
use aggressive pricing policies to build market share. Some have also adopted
business models that include selling filmed entertainment, music, and games
products for less than their product cost and not charging customers for
shipping and handling. Software applications are also available that can
determine which online site has the lowest price for a particular title which
could direct customers to our competitors' web sites.
WE RELY ON A RELATIVELY NEW MANAGEMENT TEAM AND NEED TO RETAIN OUR EXISTING
PERSONNEL TO EFFECTIVELY OPERATE OUR BUSINESS.
In March 2001, we appointed Caroline Armstrong as our new chief
executive officer, and in April 2001, we appointed Lorne Cogswell as our new
interim chief financial officer. Our success depends, in part, upon their
ability to transition successfully their new management team and to retain
existing staff and management. Further our business is largely dependent on
assistance from our directors, Gregg Johnson and Trevor Hillman. Any of our
officers or employees can terminate their employment relationship at any time.
We presently do not maintain key man life insurance on any member of our
management team. The loss of any key employee or our inability to attract or
retain other qualified employees could harm our business and results of
operations.
THE SUCCESS OF LANGARA DISTRIBUTION DEPENDS UPON ITS ABILITY TO MAINTAIN AND
ESTABLISH KEY RELATIONSHIPS WITH MUSIC LABELS.
Langara Distribution maintains relationships with music labels in the
entertainment industry. These relationships reside exclusively with Mike
Duszynski and Bob Duszynski, who are the principal managers of Langara
Distribution. Any of our officers or employees, including Mike and Bob
Duszynski, can terminate their employment relationship at any time. We presently
do not maintain key man life insurance on any member of our management team. The
loss of any key employee or our inability to attract or retain other qualified
employees could harm our business and results of operations.
OUR SUCCESS DEPENDS ON THE CONTINUED GROWTH OF ONLINE COMMERCE.
If online commerce does not continue to grow or be accepted or grows or
is accepted more slowly than expected, our business will be materially harmed. A
number of factors could slow the growth of online commerce, including the
following:
o the network infrastructure required to support a substantially larger
volume of transactions may not be developed;
o government regulation may increase;
o telecommunications capacity problems may result in slower response
times; and
o consumers may have concerns about the security of online commerce
transactions.
LEGISLATION MAY BE ENACTED WHICH COULD LIMIT THE USE OF E-MAIL MARKETING AND
AWARENESS CAMPAIGNS.
To date, Congress has not enacted any legislation regulating commercial
e-mail, but a number of bills are pending. One proposed law would prohibit
online operators from sending most unsolicited commercial e-mail where the
operators have no existing or personal relationship with the recipient and the
e-mail is not sent at the request of or with the express consent of the
recipient. Another proposed law would require operators of websites and online
services to disclose to users the personal information the operators have
collected and the personal information that it may share with other firms. It
would further require operators to provide simple processes for users to provide
or withhold consent to the operators' dissemination of the information.
7
In the absence of federal legislation, many states, including
California, Connecticut, Delaware, Iowa, Nevada, North Carolina, Oklahoma, Rhode
Island, Tennessee, Virginia, Washington and West Virginia, have passed laws
limiting the use of e-mail marketing. Because these laws have focused primarily
on unsolicited e-mail marketing, E-Trend's business has yet to be affected by
current legislation. Other states have begun to consider placing restrictions on
e-mail marketing. If Congress or additional states pass legislation restricting
commercial uses of e-mail, it could harm our ability to communicate with
existing customers and attract new customers. Our sales growth could be
affected, which could materially harm our business, operating results and
financial condition.
In Canada, there is currently no federal or provincial legislation
regulating e-commerce or commercial e-mail. However, there is no guarantee that
such legislation will not be enacted in the future, which could materially harm
our business and/or restrict our ability to grow.
WE MUST MAINTAIN SATISFACTORY VENDOR RELATIONSHIPS TO COMPETE SUCCESSFULLY.
We rely on wholesalers to fill our customers' orders. We are dependent
upon maintaining these relationships for filling our customers' orders because
there are only a limited number of wholesalers who sell filmed entertainment,
music and games products. If we are unable to maintain suitable relationships
with vendors, we will be materially harmed.
Our wholesalers will need to satisfy our increasing product
requirements on a timely basis. They also must continue to provide adequate
selections of filmed entertainment, music and games titles at competitive
prices. If our wholesalers are unable or unwilling to do so, it would materially
harm our ability to compete, which would in turn materially harm our business,
operating results and financial condition.
WE DO NOT PUBLISH OUR OWN EDITORIAL CONTENT, WHICH MEANS WE MUST RELY ON
LICENSED THIRD-PARTY CONTENT ON OUR WEBSITES.
We license third-party content, including filmed entertainment, music
and games reviews, news reports and features, in order to attract and retain
website visitors. If we are unable to obtain desirable content from our content
licensors or from existing licensors, it could reduce visits to our websites,
which could materially harm our business. In addition, if we are unable to
obtain content at an acceptable cost, it could materially harm our ability to
compete and our operating results and financial condition.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS.
We regard our trademarks, trade secrets and similar intellectual
property as important to our success. We have applied for the registration of
some of our trademarks and service marks in the United States and Canada.
However, our efforts to establish and protect our intellectual property rights
may be inadequate to prevent misappropriation or infringement of our
intellectual property rights. If we are unable to safeguard our intellectual
property rights, it could materially harm our business, operating results and
financial condition.
WE MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
We have established a network of links with numerous small online
sites. Many of the sites may not have licenses for the use of the intellectual
property that they display. The copyright holders of this intellectual property
or their licensees may assert infringement claims against us because of our
relationships with these sites.
Although we believe that our use of third-party material on our
websites is permitted under current provisions of copyright law, some aspects of
Internet content and commerce law are not clearly settled. We may therefore be
the subject of alleged infringement claims of the trademarks and other
intellectual property rights of third parties. If we become subject to these
types of claims, our business could be materially harmed even if we successfully
defend against the claims. It also is possible that future legal developments
would prohibit us from having rights to downloadable information, sound or
video.
8
THE PROTECTION OF OUR DOMAIN NAMES IS UNCERTAIN BECAUSE THE REGULATION OF DOMAIN
NAMES IS SUBJECT TO CHANGE.
We currently hold various web domain names relating to our brand,
including, among others EntertainMe.com, VHQMusic.com, MovieSource.com,
VHQGames.com, as well as domain names registered in foreign countries.
Governmental agencies and their designees generally regulate the acquisition and
maintenance of domain names. The regulation of domain names in the United States
and in foreign countries is expected to change in the near future. As a result,
we may be unable to acquire or maintain relevant domain names in all countries
in which we may conduct business. If our ability to acquire or maintain domain
names is limited, it could materially harm our business, operating results and
financial condition.
WE ARE SUBJECT TO GOVERNMENT REGULATION AND LEGAL LIABILITIES THAT MAY BE COSTLY
AND MAY INTERFERE WITH OUR ABILITY TO CONDUCT BUSINESS.
Laws and regulations directly applicable to online commerce or Internet
communications are becoming more prevalent. These laws and regulations could
expose us to compliance costs and substantial liability, which could materially
harm our business, operating results and financial condition. In addition, the
growth of the Internet, coupled with publicity regarding Internet fraud, may
lead to the enactment of more stringent consumer protection laws. These laws
would also be likely to impose additional burdens on our business.
The adoption of any additional laws or regulations may decrease the
popularity or impede the expansion of the Internet and could seriously harm our
business. A decline in the popularity or growth of the Internet could decrease
demand for our products and services, reduce our advertising revenues and
margins and increase our cost of doing business. Moreover, the applicability of
existing laws to the Internet is uncertain with regard to many important issues,
including property ownership, intellectual property, export of encryption
technology, libel and personal privacy. The application of laws and regulations
from jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services, could also harm our business.
WE MAY BE SUBJECT TO LIABILITY FOR SALES AND OTHER TAXES.
Except in Canada, we do not collect sales or other similar taxes in
most states. Our business could be materially harmed if additional sales and
similar taxes are imposed on us, or if penalties are assessed on us for past
nonpayment of these taxes. Recently adopted legislation provides that, prior to
October 2001, a state cannot impose sales taxes on products sold on the Internet
unless these taxes could be charged on non-Internet transactions involving the
products. During this moratorium, it is possible that taxing mechanisms may be
developed that would, following the moratorium, impose increasing sales and
similar tax burdens on us. If these burdens are placed on us, our business could
be materially harmed and there could be a material adverse effect on our
operating results and financial condition.
EVEN IF WE SUCCESSFULLY EXECUTE OUR NEW OPERATING PLAN, WE CANNOT ASSURE YOU
THAT WE WILL ACHIEVE PROFITABILITY.
In mid 2001, we initiated a restructuring of our business and
implemented a new operating plan designed to accelerate our ability to achieve
positive cash flow by, among other things, significantly reducing our overhead
expenses. As part of the new plan we have reduced the size of our workforce and
made reductions in the areas of marketing and software development. To
successfully execute against our operating plan, we must adhere to our expense
reductions and work to achieve the revenue and gross margin targets incorporated
as underlying assumptions to our operating plan. If we are unable to manage our
operating expenses and increase our gross margins, without experiencing
significant deterioration in our projected sales volumes, we may be unable to
achieve positive operating cash flow. Further, we cannot guarantee that we will
be able to maintain the visitor traffic levels, visitor conversion rates,
customer purchase activity and general brand awareness that we have had in the
past with our current marketing budget. Our ability to achieve our annual and
quarterly revenue and gross margin goals could also be negatively impacted by
the softening consumer demand for entertainment products, as well as the
weakening general economic conditions and decreasing consumer confidence.
9
Our new operating plan reflects management's expectations as of the
date of this prospectus, and is based on currently available information, as
well as significant assumptions made by management regarding various revenue,
gross margin and operating expense items. We cannot guarantee that the
assumptions that we have relied upon in developing our operating plan will be
accurate, or that future events or results will conform to our expectations or
assumptions. If our assumptions are inaccurate, or our expectations prove to be
erroneous in light of future events, or if we are unable to maintain the support
of our vendors, distributors, third party advertisers and other key corporate
relationships regardless of the success of our new operating plan, we will need
to raise additional working capital before we achieve positive operating cash
flow. We currently do not have any commitments for additional financing other
than our agreement with Swartz, and we cannot be certain that the Swartz
financing or any other additional financing will be available when and to the
extent required, or that, if available, it will be on acceptable terms. If
adequate funds are not available on acceptable terms, we may not be able to fund
our operations and our business could fail.
WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO MANAGE GROWTH OF OUR BUSINESS.
Our growth strategy includes growing our customer base both through our
own marketing efforts, as well as through the acquisition of other e-commerce
businesses. If we are unable to manage growth effectively, it could have
material adverse effects on our results of operations, financial condition, or
business. We cannot guarantee that we will successfully expand our customer base
or that any expansion will enhance our profitability. We expect our planned
growth will place a significant strain on our system, management, and
operations. Our future growth will depend in part on the ability of our officers
and other key employees to implement and expand financial control systems and to
expand, train, and manage our employee base and provide support to an expanded
customer base. Also, our future growth will depend on whether our system can
handle increased volumes of customer traffic to our sites. We cannot at this
time guarantee that our system will perform in a manner that will allow our
business to grow and expand.
IN LIGHT OF CERTAIN PERCEPTIONS REGARDING OUR FINANCIAL CONDITION, OUR
CUSTOMERS, DISTRIBUTORS AND VENDOR PARTNERS MAY DECIDE NOT TO DO BUSINESS WITH
US.
Due to concerns regarding our financial condition and our perceived
ability to fulfill our financial and other obligations, our customers,
distributors, vendor partners and other corporate partners and service providers
may decide not to conduct business with us, or may conduct business with us on
terms that are less favorable than those customarily extended by them. For
example, our distributors could seek to limit our credit terms or otherwise
reduce their support of our business, forcing us to leverage our operating cash
by increasing the security required for our secured credit lines. Also, if our
customers and vendor partners choose to do less business with us, our net sales
would decrease and our gross profits would be significantly impacted by reduced
sales volumes, including a corresponding decrease in co-op advertising revenue
WE ARE DEPENDENT ON SEVERAL THIRD PARTY PROVIDERS TO FULFILL A NUMBER OF OUR
RETAIL FUNCTIONS. IF THESE PARTIES ARE UNWILLING OR UNABLE TO CONTINUE PROVIDING
SERVICES TO US, OUR BUSINESS COULD BE SERIOUSLY HARMED.
We are currently dependent on our distribution providers to manage
inventory, process orders and distribute products to our customers in a timely
manner. If we do not maintain our existing relationships with these providers on
acceptable commercial terms, we may not be able to continue to offer a broad
selection of merchandise at low prices, and customers may refuse to shop at our
online store. In addition, manufacturers may decide, for reasons outside our
control, not to offer particular products for sale on the Internet. Other
manufacturers have chosen not to authorize any Internet resellers or Internet
resellers without a traditional "brick and mortar" retail store. If we are
unable to supply products to our customers, or if other product manufacturers
refuse to allow their products to be sold via the Internet, our business will
suffer severely.
We rely on our distributors to fulfill a number of traditional retail
functions, including maintaining inventory. In the future, our vendors may not
be willing to provide these services at competitive rates. We also have no
effective means to ensure that our providers will continue to perform these
services to our satisfaction. Our customers could become dissatisfied and cancel
their orders or decline to make future purchases if our providers or we are
unable to deliver products on a timely basis. If our customers become
dissatisfied with our distributors and third party service providers, our
reputation and the EntertainMe.com brand could suffer.
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Our operations are also heavily dependent upon a number of other third
parties for credit card processing, and hosting our system infrastructure and
database servers. In addition, our distributors and fulfillment providers use
TNT Canada Inc. and. the Canada and United States Postal Services to deliver
substantially all of our products. If the services of any of these third parties
become unsatisfactory, our customers may experience lengthy delays in receiving
their orders, and we may not be able to find a suitable replacement on a timely
basis or on commercially reasonable terms.
SYSTEM FAILURES COULD PREVENT ACCESS TO OUR ONLINE STORE AND HARM OUR BUSINESS
AND RESULTS OF OPERATIONS.
Our sales would decline and we could lose existing or potential
customers if they are not able to access our online store or if our online
store, transaction processing systems or network infrastructure do not perform
to our customers' satisfaction. Any network interruptions or problems with our
web site could:
o prevent customers from accessing our online stores;
o reduce our ability to fulfill orders;
o reduce the number of products that we sell;
o cause customer dissatisfaction; or
o damage our reputation.
We have experienced brief computer system interruptions in the past,
and these interruptions may recur. If the number of customers visiting our web
site continues to increase, we will need to expand and upgrade our technology,
transaction processing systems and network infrastructure significantly. We may
not be able to make timely upgrades to our systems and infrastructure to
accommodate increases in the number of customers.
Our systems and operations are also vulnerable to damage or
interruption from a number of sources, including fire, flood, power loss,
telecommunications failure, physical and electronic break-ins, earthquakes and
other similar events. Our servers are also vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. Any substantial
disruption of this sort could completely impair our ability to generate revenues
from our web site. We do not presently have a formal disaster recovery plan in
effect and do not carry sufficient business interruption insurance to compensate
us for losses that could occur.
OUR BUSINESS MODEL IS NEW AND UNPROVEN, AND WE MAY NOT BE ABLE TO ACHIEVE
PROFITABILITY.
We are subject to risks due to the unproven and evolving nature of our
business model and aggressive pricing strategy. The success of our business
model depends on the volume of customers that visit our web site and purchase
our products. To this end, we have worked hard to build our brand name and
enhance our customer loyalty by selling our products at extremely low prices and
maintaining very low, gross margins on our product sales. We intend to implement
various strategies to improve our gross margins going forward, which may include
raising prices on products and product categories from time to time. To the
extent we raise the prices on our merchandise, our product sales may decline. We
may also have to increase our prices if distributors receive pressure from
manufacturers to discontinue sales to us as a result of our low price strategy.
ONLINE SECURITY RISKS COULD SERIOUSLY HARM OUR BUSINESS.
A significant barrier to e-commerce and online communications is the
secure transmission of confidential information over public networks. Anyone who
is able to circumvent our security measures could misappropriate proprietary
information or cause interruptions in our operations. We may be required to
expend significant capital and other resources to protect against potential
security breaches or to alleviate problems caused by any breach. We rely on
licensed encryption and authentication technology to provide the security and
authentication necessary for secure transmission of confidential information,
including credit card numbers. Advances in computer capabilities, new
discoveries in the field of cryptography, or other events or developments may
result in a compromise or breach of the algorithms that we use to protect
customer transaction data. In the event someone circumvents our security
measures, it could seriously harm our business and reputation, and we could lose
customers. Security breaches
11
could also expose us to a risk of loss or litigation and possible liability for
failing to secure confidential customer information.
IF WE DO NOT RESPOND TO TECHNOLOGICAL CHANGE, OUR STORES COULD BECOME OBSOLETE,
AND WE COULD LOSE CUSTOMERS.
The development of our web site entails significant technical and
business risks. To remain competitive, we must continue to enhance and improve
the responsiveness, functionality and features of our online stores. The
Internet and the e-commerce industry are characterized by:
o rapid technological change;
o changes in customer requirements and preferences;
o frequent new product and service introductions embodying new
technologies; and
o the emergence of new industry standards and practices.
However, we have significantly reduced the resources dedicated to the
enhancement of our network infrastructure and operating systems. If we are
unable to maintain our existing systems and create a positive customer
experience, our revenues may decline and our business will suffer.
The evolving nature of the Internet could also render our existing
online stores and systems obsolete. Our success will depend, in part, on our
ability to:
o license or acquire leading technologies useful in our business;
o enhance our existing online stores;
o enhance our network infrastructure and transaction processing systems;
o develop new services and technology that address the increasingly
sophisticated and varied needs of our current and prospective
customers; and
o adapt to technological advances and emerging industry and regulatory
standards and practices in a cost-effective and timely manner.
Future advances in technology may not be beneficial to, or compatible
with our business. Furthermore, we may not use new technologies effectively or
adapt our web site and transaction processing systems to customer requirements
or emerging industry standards on a timely basis, or at all, depending on our
financial condition. If we are unable to adapt to changing market conditions or
user requirements in a timely manner, our stores may become obsolete and we will
lose customers.
VHQ ENTERTAINMENT INC. AND ITS AFFILIATES CONTROL A MAJORITY OF OUR OUTSTANDING
COMMON STOCK WHICH WILL ENABLE THEM TO CONTROL MANY SIGNIFICANT CORPORATE
ACTIONS AND MAY PREVENT A CHANGE IN CONTROL THAT WOULD OTHERWISE BE BENEFICIAL
TO OUR STOCKHOLDERS.
VHQ Entertainment Inc and its affiliates own approximately 38.4% of our
outstanding stock as of July 31, 2001. This control by VHQ Entertainment Inc.
and its affiliates could have a substantial impact on matters requiring the vote
of the stockholders, including the election of our directors and most of our
corporate actions. This control could delay, defer or prevent others from
initiating a potential merger, takeover or other change in our control, even if
these actions would benefit our stockholders and us. This control could
adversely affect the voting and other rights of our other stockholders and could
depress the market price of our common stock.
OUR FUTURE OPERATING RESULTS MAY FLUCTUATE AND CAUSE THE PRICE OF OUR COMMON
STOCK TO DECLINE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS.
Our limited operating history and the emerging nature of the markets in
which we operate make it difficult to accurately predict our future revenues. We
expect that our revenues and operating results will fluctuate significantly from
quarter to quarter, due to a variety of factors, many of which are beyond our
control. If our quarterly revenues or operating results fall below the
expectations of investors or securities analysts, the price of our common stock
could decline significantly. The factors that could cause our operating results
to fluctuate include, but are not limited to:
12
o fluctuations in the amount of customer spending on the Internet;
o our ability to maintain the operation of all of our specialty stores;
o our ability to build and maintain customer loyalty;
o the introduction of new or enhanced web pages, services, products, and
strategic alliances by us and our competitors;
o price competition on the Internet or higher wholesale prices in
general;
o the success of our brand building and marketing campaigns;
o our ability to effectively merchandise and manage our product mix;
o our ability to maintain our distributor, vendor, and other key
corporate relationships;
o increases in the cost of online or offline advertising;
o unexpected increases in shipping costs or delivery times;
o government regulations related to use of the Internet for commerce;
o our ability to maintain, upgrade and develop our web site, transaction
processing systems, and network infrastructure;
o technical difficulties, system downtime, or Internet brownouts;
o the amount and timing of operating costs and capital expenditures
relating to maintaining our business, operations, and infrastructure;
and
o general economic conditions and economic conditions specific to the
Internet and online commerce.
These and other external factors have caused and may continue to cause
the market price and demand for our common stock to fluctuate substantially,
which may limit or prevent investors from readily selling their shares of common
stock and may otherwise negatively affect the liquidity of our common stock.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. If securities class action litigation is brought against us it could
result in substantial costs and a diversion of our management's attention and
resources, which could hurt our business.
OUR COMMON STOCK IS SUBJECT TO PENNY STOCK REGULATION THAT MAY AFFECT THE
LIQUIDITY FOR OUR COMMON STOCK.
Our common stock is subject to regulations of the Securities and
Exchange Commission relating to the market for penny stocks. These regulations
generally require that a disclosure schedule explaining the penny stock market
and the risks associated therewith be delivered to purchasers of penny stocks
and impose various sales practice requirements on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors. The
regulations applicable to penny stocks may severely affect the market liquidity
for our common stock and could limit your ability to sell your securities in the
secondary market.
TRADING IN OUR COMMON STOCK ON THE OTC BULLETIN BOARD MAY BE LIMITED THEREBY
MAKING IT MORE DIFFICULT FOR INVESTORS TO RESELL THEIR SHARES OF OUR COMMON
STOCK.
Our common stock trades on the OTC Bulletin Board. The OTC Bulletin
Board is not an exchange and, because trading of securities on the OTC Bulletin
Board is often more sporadic than the trading of securities listed on an
exchange or NASDAQ, you may have difficulty reselling any of the shares that you
purchase from the selling shareholders.
YOU MAY SUFFER DILUTION IN YOUR OWNERSHIP OF OUR SHARES FROM THE EXERCISE OR
CONVERSION OF OPTIONS, WARRANTS, AND CONVERTIBLE SECURITIES ISSUED TO OTHER
PERSONS.
There are outstanding options, warrants, or convertible securities to
acquire shares of our common stock and we may grant additional rights in the
future. If any of the outstanding options, warrants, or convertible securities
are exercised or converted, your percentage ownership in will be reduced. So
long as these options, warrants, or convertible securities are exercisable, the
holders will have the opportunity to profit from a rise in the price of our
common stock. The existence of such options, warrants, or convertible securities
may adversely affect the terms on which we can obtain additional financing. The
holders of such options, warrants, or convertible securities can be expected to
exercise them at a time when we would probably be able to obtain additional
capital by
13
an offering of our common stock at a price higher than the exercise price of
these outstanding options, warrants, or convertible securities.
THE EXERCISE OF OUR PUT RIGHTS MAY LOWER THE MARKET PRICE OF OUR COMMON STOCK
AND SUBSTANTIALLY DILUTE THE INTERESTS OF OTHER HOLDERS OF OUR COMMON STOCK.
As we exercise our put rights under our investment agreement with
Swartz Private Equity, LLC, we will be required to issue shares of our common
stock to Swartz at a price below the prevailing market price of our common
stock. The shares issuable to Swartz upon exercise of put rights will be issued
at a price equal to the lesser of (a) the market price for our common stock
minus $0.15 or (b) 92% of the market price for our common stock. Accordingly, we
will issue the shares issuable to Swartz upon exercise of our put rights at a
rate that will be below the market price of our common stock. This, in turn, may
decrease the price of our common stock and entitle Swartz to receive a greater
number of shares of our common stock upon exercise of our put rights.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This reoffer prospectus contains forward-looking statements that
involve risks and uncertainties. These statements relate to future events or our
future financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "except," "plan,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue," as
well as the negative of such terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
In evaluating these statements, you should specifically consider various
factors, including the risks described above and in other parts of this
prospectus. These factors may cause our actual results to differ materially from
any forward-looking statement. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale by Swartz Private
Equity, LLC of the shares offered under this prospectus. We will, however,
receive the sale price of any common stock we sell to Swartz Private Equity, LLC
under our investment agreement with Swartz. We have the ability to sell to
Swartz, subject to an effective registration statement and applicable volume and
other limitations, up to $10,000,000 of our common stock. Additional amounts may
be received if the warrants to purchase common stock are exercised. We intend to
use the net proceeds received from Swartz in the following order of priority:
DESCRIPTION: US $:
Expenses of Swartz Investment Agreement:
Legal, accounting, issuance and distribution..........................$ 900,000
Inventory:
DVD, CD and VHS cassettes............................................. 700,000
Software development:
Development and new software.......................................... 300,000
Marketing:................................................................. 1,000,000
Wages, salaries and additional employees:
Customer service, sales, and vendor relations......................... 300,000
-------------
Subtotal:..................................................................$ 3,200,000
Other working capital:..................................................... 6,800,000
-------------
TOTAL:.....................................................................$ 10,000,000
=============
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The amount and timing of our actual expenditures for each of these
purposes will vary significantly depending upon a number of factors, including
Web site development efforts, competition, marketing and sales activity, and
market acceptance of our Web sites. While we have prepared internal forecasts,
we believe that these forecasts, as they apply to periods extending beyond the
next few months, are inherently unreliable and that our actual cash requirements
will differ materially from those we presently forecast. Our directors have
discretion in the allocation and use of the net proceeds. Pending such uses, we
intend to invest the proceeds in short term, investment-grade, and interest
bearing securities.
A portion of the net proceeds may also be used for possible future
strategic alliances and acquisitions. This would reduce the use of the net
proceeds for one or more of the uses indicated in the preceding table. We
presently do not have any understandings, commitments, or agreements concerning
these types of transactions.
MARKET FOR COMMON EQUITY
Our common stock has been trading on the over-the-counter bulletin
board ("OTCBB") under the symbol "ETDN" since February 22, 2001. The common
stock was first listed on June 9, 1998 under the symbol "MNGD." From March 1,
1999 to February 22, 2001, the stock traded under the symbol "CULE." The
following table sets forth the range of high and low bid quotations for each
fiscal quarter for the last two fiscal years. These quotations reflect
inter-dealer prices without retail mark-up, mark-down, or commissions and may
not necessarily represent actual transactions.
FISCAL QUARTER ENDING HIGH BID LOW BID
December 31, 1998...................... $ 150.00 $ 100.00
March 31, 1999......................... $ 156.30 $ 29.00
June 30, 1999.......................... $ 156.30 $ 81.00
September 30, 1999..................... $ 100.00 $ 44.00
December 31, 1999...................... $ 70.00 $ 23.00
March 31, 2000......................... $ 100.00 $ 29.00
June 30, 2000.......................... $ 62.50 $ 15.62
September 30, 2000..................... $ 23.44 $ 7.81
December 31, 2000...................... $ 9.38 $ 1.56
March 31, 2001......................... $ 4.69 $ 1.02
June 30, 2001.......................... $ 2.25 $ 0.65
On September 17, 2001, the closing price for the common stock was
$1.06.
As of July 17, 2001, there were 213 record holders of our common stock.
Since our inception, no cash dividends have been declared on our common stock.
DIVIDEND POLICY
We do not anticipate paying dividends on our common stock at any time
in the foreseeable future. Our board of directors plans to retain earnings for
the development and expansion of our business. Our directors also plan to
regularly review our dividend policy. Any future determination as to the payment
of dividends will be at the discretion of our directors and will depend on a
number of factors, including future earnings, capital requirements, financial
condition and other factors as the board may deem relevant. We are not
restricted by any contractual agreement by paying dividends.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Effective February 21, 2001 an arrangement was completed between the
company, then known as Cool Entertainment, Inc. and E-Trend Networks, Inc., a
Nevada corporation, whereby the shareholders of E-Trend Networks, Inc. exchanged
all of their common shares for 4,439,371 shares of Cool common stock.
Following the acquisition the former shareholders of E-Trend Networks,
Inc. held a majority of Cool's total issued and outstanding common shares;
E-Trend Networks, Inc. was thereby deemed to be the acquiror. Accordingly, the
transaction has been accounted for as a reverse takeover using the purchase
method whereby the assets and liabilities of Cool have been recorded at their
fair market values and operating results have been included in the company's
financial statements from the effective date of purchase. The fair value of the
net assets acquired is equal to their book values. The excess of $300,200 of the
consideration given over the net assets acquired has been recognized as a
capital transaction and charged directly to the deficit.
RESULTS OF OPERATIONS
PERIODS ENDED JUNE 30, 2001. We are considered to be in the early
stages of implementing our business plan, since we have not generated
significant revenues and are continuing to develop our business, particularly
the Web-based site that is currently in its initial customer acquisition phase.
The site (EntertainMe.com) and traditional distribution via Langara Distribution
Inc., our wholly owned subsidiary, will be the engine that drives future growth.
Sales for the three months ended June 30, 2001 increased approximately
$226,671 over the previous quarter and $453,300 over the comparable quarter of
the previous fiscal year. Similarly, sales of the nine months ended June 30,
2001 increased 265% from the previous fiscal year, since commercial launch of
our retail web sites did not take place until March 2000. We note increased
traffic on the website, as we increase our marketing initiatives and
affiliations with other sites.
Gross margins were 17% for the three months ended June, 2001 and 14%
overall for the nine-month period, compared to 32% and 30% respectively for
fiscal 2000 periods because of a price increase from our suppliers in the
previous quarter that was not passed on to customers until close to the end of
the previous quarter and unrecovered shipping expenses from a promotional event.
Operating and development costs continued to rise because of the need
to retain the services of an external contractor to complete the website design
and testing. These costs, of approximately $32,000 per month, ceased at the end
of June.
Net loss for the quarter was $748,247, compared to $397,967 for the
previous quarter and $239,995 for the same quarter of the previous fiscal year.
The net loss for the nine-month period increased to $1,561,656 from $546,964
from fiscal 2000.
FISCAL YEARS ENDED SEPTEMBER 30, 2000 AND 1999. We experienced a
substantial increase in revenues for the year ended September 30, 2000 compared
to the same period in the previous fiscal year. Revenues increased to $665,075,
compared to the fiscal 1999 results of $nil. The increase is primarily as a
result of the acquisition of Langara Distribution Inc. effective January 1,
2000, as well as the commercial launch of our retail web sites in March 2000.
Cost of sales was $503,938 for the year ended September 30, 2000.
Management expects that such costs will continue to increase as we increase our
revenues through our planned growth. Our operating margins were 24% of sales for
the year ended September 30, 2000.
Operating and development costs were $436,764 for year ended September
30, 2000, compared to no costs in the prior fiscal year. These costs consist of
leased computer equipment, computer and data content services, and salaries of
staff in the site development and technology groups. General and administrative
expenses increased to
16
$435,745 for the year ended September 30, 2000 compared to $59,564 in same
period in the previous fiscal year. Expenses rose in connection with additional
administrative personnel that were brought on to accommodate our growth, head
office rent and utilities, professional fees and telephone charges. Advertising
costs were $108,703 for year ended September 30, 2000, compared to no costs in
the prior fiscal year. These costs reflect test market campaigns done in Calgary
and Ottawa as well as online web-based advertising. Sales and marketing costs
were $28,921 for year ended September 30, 2000, compared to no costs in the
prior fiscal year. These costs consist of consulting fees and salaries paid to
staff in our marketing group.
Amortization of capital assets was $31,756 for year ended September 30,
2000, compared to no costs in the prior fiscal year. The increase is due to
amortization of computer hardware and software, furniture and leasehold
improvements. Amortization of goodwill was $20,329 for year ended September 30,
2000, compared to no costs in the prior fiscal year. The amortization relates to
the goodwill allocated to the acquisition of Langara Distribution Inc. effective
January 1, 2000.
Other income was $89,925 for year ended September 30, 2000, compared to
$4,225 in the prior fiscal year. The increase is due to interest earned on
excess cash invested in money market funds and funds advanced to a major
shareholder, VHQ Entertainment Inc., during the fiscal year.
Net loss for the year increased to $811,156 for the year ended
September 30, 2000 compared to $55,339 for the period ended fiscal 1999. The
increase is due to increased expenses associated with development, maintenance
and marketing of our e-commerce sites offset by income from our distribution
subsidiary.
The unrealized gain from the investment of $89,102 relates to the
difference between the market value and cost of our investment in shares of VHQ
Entertainment Inc. The foreign currency translation of $18,792 adjustment
relates to unrealized losses on the translation of the financial statements to
$U.S. for financial reporting purposes.
LIQUIDITY AND CAPITAL RESOURCES
JUNE 30, 2001. At June 30, 2001, we had a working capital surplus of
$269,110 compared to a surplus of $1,908,174 at September 30, 2000. To date,
virtually all of our resources have been provided from the sale of common stock.
At the current rate of expenditure, additional funds from the sale of common
stock or debt will have to be secured to enable us to continue to operate.
SEPTEMBER 30, 2000 AND 1999. Our operations used cash of $770,549 for
the year ended September 30, 2000 versus $85,876 for the previous fiscal period.
The increase was due to additional expenses associated with development,
maintenance and marketing of our e-commerce site. During the twelve months ended
September 30, 2000, we received net proceeds of $2,394,185 from the issuance of
share capital. We advanced $200,222 to our major shareholder VHQ Entertainment
Inc. during the fiscal year. During the twelve months ended September 30, 2000,
we expended $195,967 on the purchase of capital assets, which included computer
hardware and software, leasehold improvements and office furniture.
At September 30, 2000, we had positive working capital of $1,908,174.
This compares to September 30, 1999, when we had positive working capital
$669,249.
PLAN OF OPERATION
The e-commerce sales and distribution of filmed entertainment, video
games and music is very competitive. We face a number of competitors, with
competition existing on a global basis. The main competitive factors are
availability, price and service. Management continues to review and assess our
competitors, and is continually vigilant for industry trends.
To be successful, we must increase sales. To do this, we must rely on
working capital and outside sources of capital to finance current operations and
new marketing initiatives designed to drive additional traffic. Our board of
directors and management are confident that we are on the right track for
significant gains in the future. The news media has been rife with reports of
e-commerce failures, among them many of our competitors. However, overall
Internet sales continue to increase as consumers become more comfortable with
the security of the systems.
17
We continue to believe that our strategy of being a `second wave' online company
will allow us to take advantage of the tremendous number of online purchasers in
our product categories - especially as our first-wave competition continues to
experience financial trouble.
We will continue to seek strategic alliances and acquisitions that will
complement our existing business and overall corporate strategy as expressed in
our business plan. We believe we are poised to implement key strategic
initiatives that will include:
o increasing the number of music titles carried in Langara's
inventory,
o adding DVD and key VHS titles to the Langara product mix,
o amending movie purchasing agreements to reduce product cost,
o improving the data model and overall scalability of the
e-commerce engine,
o improving site capacity to seamlessly manage the planned
increase in site traffic and sales volumes,
o merging our three internet sites (MovieSource.com, VHQMusic.com
and EntertainMe.com) into one brandable entertainment-focused
supersite {EntertainMe.com (and EntertainMe.ca in Canada)},
o initiating new online marketing campaigns,
o implementing new software to enable seamless B2B2C (Business to
Business to Consumer) applications,
o obtaining new equity capital, and
o adding strategic alliances to expand the reach of entertainment
products.
As of June 30, 2001, we had a working capital surplus of only $269,110.
As a result, we will need external financing to implement our plan of
operations. On July 3, 2001, we entered into an investment agreement with Swartz
Private Equity, LLC. The investment agreement entitles us to issue and sell our
common stock from time to time for up to an aggregate of $10 million. This
financing allows us to issue common stock at our discretion as often as monthly
as funds are needed in amounts based upon certain market conditions, and subject
to an effective registration statement. The pricing of each common stock sale is
based upon 92% of the current market prices at the time of each drawdown, or
current market prices minus $0.15, whichever is lesser, and we may set a floor
price for the shares at our discretion.
There is no assurance that this financing arrangement will enable us to
implement our long-term growth strategy. Accordingly, our sources of financing
are uncertain if the desired proceeds from the investment agreement with Swartz
are not obtained. Our failure to obtain additional financing when needed could
result in delay or the indefinite postponement of attaining profitability, and
the possible loss of your entire investment.
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BUSINESS
BACKGROUND
We were incorporated in the State of Colorado on June 17, 1996, under
the name Minas Novas Gold Corp., to engage in mining operations. From inception
to January 1999, we obtained options to acquire various mining properties. On
January 29, 1999, we abandoned all mining operations and proceeded to acquire
all of the issued and outstanding capital stock of Cool Entertainment, Inc., a
Washington corporation, in exchange solely for 65% of our outstanding common
stock. The acquisition of the Washington corporation was completed March 1,
1999, and effective February 22, 1999, we changed our name to Cool
Entertainment, Inc.
From February 2000 to November 2000, we offered a variety of
entertainment products on the Internet through our website,
WWW.COOLENTERTAINMENT.COM. We also offered value-added services such as
celebrity interviews, book reviews, online chat rooms, online games, and free
e-mail accounts on its website to attract users to the website.
Realizing that we were undercapitalized and unable to market our
services properly, we searched for another business opportunity. On February 21,
2001, we acquired all of the issued and outstanding capital stock of E-Trend
Networks, Inc., a Nevada corporation, in exchange solely for approximately 92%
of our common stock. We changed our name to E-Trend Networks, Inc., changed our
domicile to Delaware, and effected a 1-for-100 reverse split of our issued and
outstanding shares of common stock.
All of our operations are conducted through our wholly-owned
subsidiary, E-Trend Networks, Inc., a Nevada corporation, which we refer to as
"E-Trend", and its wholly-owned subsidiary, Langara Distribution Inc., an
Alberta corporation.
E-TREND NETWORKS
E-Trend was founded as a Nevada corporation in April 1999 by VHQ
Entertainment Inc., formerly Video Headquarters Inc. The stock of VHQ trades on
the Toronto Stock Exchange under the symbol "VHQ." VHQ founded E-Trend to
mitigate the effects of technology on "bricks and mortar" retail operations and
to expand its geographic reach by taking advantage of the continuing growth in
the online market for home entertainment sales. E-Trend seeks to increase the
depth of its entertainment marketing presence through the development of
entertainment-related websites and through the acquisition of or distribution to
both online and bricks and mortar retailers.
We distribute packaged entertainment media, with distribution channels
to both online retail e-commerce and traditional bricks and mortar retail
outlets. We operate an online retail website and, through Langara Distribution,
we offer fulfillment services to other Internet retailers and wholesale services
to traditional retailers. By generating sales from both bricks and mortar and
online organizations, we believe we are mitigating our risks and maximizing our
chances for success, especially during our managed growth phase.
Despite the failures of many Internet "dot com" companies in 2000,
industry analysts still predict growth in the online retail market. We will seek
to grow our online operations by:
o maintaining a focus on marketing through a network of affiliates;
o considering prudent mergers, acquisitions, and/or partnerships;
o increasing our depth of product offering;
o assessing technology, such as broadband streaming and wireless, with
the goal of enhancing the online experience and broadening the reach of
our site if the addition of such technology is economically feasible;
o capitalizing on our relationship with VHQ Entertainment by pursuing
sales from within its growing customer base.
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We also seek to expand the operations of Langara Distribution in the
following ways:
o add movies to its inventory and expand the number of music titles it
inventories;
o capitalize on the growth of VHQ Entertainment by selling music into new
stores and by increasing the inventory within existing locations;
o increase inventory levels and SKU's in order to increase fill rates and
reduce shipping times, thus offering a more attractive distribution
package to customers;
o expand strategic alliances with insurance companies to fulfill claims
for replacement movies and music CDs;
o pursue additional e-commerce and bricks and mortar accounts;
o offer movies and games to accounts that currently only stock music;
o further automate the distribution process in order to increase the
volume of business that it can efficiently manage;
o investigate the ability to expand its reach into additional retail
outlets by installing Internet-enabled kiosks to enable sales of our
full range of product.
ENTERTAINME.COM
We developed EntertainMe.com as an Internet entertainment superstore.
Through this website, we offer movies on DVD and VHS, music on CDs and cassette,
and video games, with convenience of shopping 24 hours a day, seven days a week.
Our goal is to combine the advantages of online commerce with superior customer
focus in order to be the preferred online retailer for filmed entertainment,
music and video games. We have designed our online storefront to offer a broad
selection of products in each category, informative content, easy-to-use
navigation and search capabilities, a high level of customer service,
competitive pricing and personalized retail store-style merchandising and
recommendations. We offer a virtual inventory that provides a selection of
products that is five to ten times that of a typical "brick and mortar" retailer
operating out of a traditional physical location. The site features live
customer service NetReps, who are able to interact with customers in a
chat-based format to offer assistance and product recommendations.
As part of our strategic repositioning in mid-2001, we have moved our
movie inventory in-house. Langara Distribution now arranges for the distribution
of music, movie and game titles to our customers. These are steps toward our
plan to provide the customer with one-stop shopping. The customer can now
combine their orders for all of our entertainment media in one shopping cart.
The customer's credit card is charged only once an order is shipped.
LANGARA DISTRIBUTION
Early in calendar 2000, we purchased Langara Distribution from a
non-affiliated third party for E-Trend common stock and warrants. Langara
Distribution has direct buying relationships with all the major music labels and
currently handles music supply and fulfillment for E-Trend and other Internet
retailers, as well as for a number of other traditional brick and mortar
companies' wholesale accounts. Further, in July 2001, Langara Distribution
assumed responsibility for the supply and fulfillment of all our movies, music
and video games, although Langara does not inventory any games at this time.
In December 2000, we entered into an agreement with Video One Canada
Ltd. ("Video One"), a wholesaler of pre-recorded movies and games. Video One is
one of the largest distributors of pre-recorded movies in Canada. However, since
Langara assumed the responsibility for the supply and fulfillment for our
movies, music and video games, Langara Distribution purchases the product from
Video One to fulfill all orders for our customers. We cannot assure anyone that
either E-Trend or Langara will maintain our relationships with Video One, or any
other supplier capable of meeting our order fulfillment requirements beyond the
term of our existing strategic marketing agreements. Langara has not yet entered
into an agreement directly with Video One, but is currently negotiating
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with Video One to finalize a distribution agreement. Currently, Video One
charges Langara cost plus 11% for catalog titles and cost plus 16% for new
release titles.
We believe that Langara Distribution is able to compete within its
market because:
o it maintains relationships and alliances with a substantial number of
manufacturers of entertainment products, which in turn eliminates the
middleman;
o it carries key titles in both movie and music categories;
o it has developed a comprehensive business-to-business system;
o it has developed an extensive product database which currently has
approximately 115,000 music products and 39,000 video products;
o it is able take advantage of favorable currency exchange rate in
Canada; and
o it offers both imported and domestic entertainment products.
The primary competitors of Langara Distribution are:
o PINDOFF MUSIC SALES, which owns and operates the Music World stores
throughout Canada and is a wholesaler and distributor of music
products.
o TOTAL SOUND, based in Edmonton, Canada, is a distributor and wholesaler
of music products mainly to independent retailers located in western
Canada.
o HANDELMAN, which provides wholesale product for racking in department
stores such as Wal-Mart and Zeller's.
o RECORDS ON WHEELS, based in Ontario, Canada, is a distributor and
wholesaler of music products mainly to independent retailers located in
eastern and central Canada.
o VALLEY MEDIA INC., is a U.S. based company with warehouses in
California and Kentucky. Valley Media focuses its wholesale
distribution of music, video, related products and data in the U.S.
Valley Media is also one of the leaders in Internet fulfillment
distribution.
COMPETITION
Our competitive marketplace can be broken into two main camps: online
and traditional retailers. In both cases, there are two sub-categories of
retailers: those who are in the entertainment business exclusively, and those
who sell multiple products, usually extending beyond the entertainment category,
such as department stores.
The online commerce market is new and rapidly evolving. We expect that
our online competition will further intensify. In addition, the broader retail
filmed entertainment, prerecorded music and video game industries are intensely
competitive. Our competitors include, among others:
o online retailers, such as Amazon.com, CDNow.com, DVDEmpire.com,
Buy.com, and 800.com;
o publishers and wholesalers, such as Time Life Video and Sony;
o traditional retailers, such as Blockbuster, Hollywood Entertainment,
Tower Records, Music World, Sam Goody, Sam the Record Man, and VHQ
Entertainment;
o mail order clubs, such as Columbia House;
o specialty retailers;
o electronic consumer stores; and
o mass merchandisers and department stores, such as K-mart; Target;
Wal-Mart; Sears; Costco.
Many of our competitors have longer operating histories, larger
customer bases, greater brand recognition and significantly greater financial,
marketing and other resources than us. Some of our competitors, like Hollywood
Entertainment, Blockbuster, VHQ Entertainment, Wal-Mart, Costco and Amazon.com,
also may be able to secure merchandise from vendors on more favorable terms,
devote greater resources to marketing and promotional campaigns, adopt more
aggressive pricing or inventory availability policies, and devote substantially
more resources to web site and systems development than we can. We believe that
the principal competitive factors in our market are:
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o price;
o merchandising and appeal of site;
o delivery;
o live customer service;
o positive shopping experience;
o ease of use, content quality and web site convenience;
o brand recognition; and
o selection.
We believe we can position our business to meet the challenges facing
on-line filmed entertainment, music and video game retailers because of the
following key strengths:
o FOCUSED PRODUCT OFFERING - We believe that being entirely focused on
home entertainment media gives a distinct advantage over the
competition. We are not trying to be everything to everyone and we
believe this allows our merchandising to be more dynamic and exciting
for the shopper.
o EXPERIENCED DISTRIBUTION - Through Langara Distribution, we believe
that we have the talent, experience and direct purchasing arrangements
to not only fulfill efficiently for EntertainMe.com, but also for other
online and traditional retail companies.
o SATISFYING SHOPPING EXPERIENCE - With aggressive merchandising,
seamless eCommerce engine and live customer service representatives, we
believe that we make the total shopping experience satisfying and
relevant and as close to the in-store experience as possible.
o PERSONAL CUSTOMER SERVICE - We bring personal service to the web with
our online, real-time, live customer service representatives. Our
representatives answer questions about the products, offer advice, and
deliver the help that the customer needs. When answering a question for
a customer, our representatives have the ability to "push" a page right
to the customer's browser, bringing us one step closer to the sale. For
customers who prefer the more traditional methods of communication, our
customers are encouraged to reach us via email.
o RESPONSIBLY AGGRESSIVE PRICING - We believe that we are able to offer
pricing that is more aggressive than the category leaders, while
maintaining industry-leading margins on all product lines.
MARKETING STRATEGY
We have adopted a strategy of capturing market share by focusing on
marketing to very targeted consumers on sites that contain relevant content. We
believe that this strategy allows us to dramatically reduce new customer
acquisition costs.
We utilize several online marketing opportunities to reach our market
and drive targeted traffic to our sites:
o CONTENT SITES - Content sites offer entertainment and news features to
visitors, but do not sell product directly themselves. Examples are
BigStar.com, Reel.com, DVDReview.com, and DVDTalk.com. We attempt to
reach visitors to these sites through a variety of affiliate
arrangements, sponsored links, and placement of dynamic banners.
o PRICE COMPARISON SEARCH ENGINES - These allow surfers to compare the
prices offered by vendors on a single site. Examples are MySimon.com,
BizRate.com, CoolSavings.com, and PriceGrabber.com. Inclusion on such
sites involves uploading the database, which is then called up by a
surfer's search for a specific title. When a surfer clicks through to
our listing, we pay a minimal charge to the price comparison site.
Buy-rates are extremely high from this type of traffic, since the
customer has already selected the product and vendor, and knows the
price.
o PAY FOR POSITION SEARCH ENGINES - This type of search engine allows
firms to "sponsor" results, by bidding on key words - the higher the
bid, the higher the result appears in the ranking. We have been able to
drive significant traffic to our site by using this strategy on sites
such as GoTo.com. Rankings on GoTo.com are also syndicated to over 75%
of all search engine sites, including AOL.com and AskJeeves.com.
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o AFFILIATE SITES - Affiliates provide links directly to our site and are
paid a commission on all sales that result from a visit that originates
from their sites.
Subject to the availability of capital resources, we also plan to
utilize broader marketing strategies that are designed to drive traffic to our
site that is pre-qualified by interest in the product lines. These strategies
include:
o OPT-IN EMAIL CAMPAIGNS - Lists will be utilized from customers on third
party sites who have requested notification of information on either
movies (especially DVD) or CDs. Lists from About.com, AOL and Yahoo.com
will be accessed and aggressively targeted with motivating content.
o AFFILIATE NETWORKS - Agencies have created networks of sites in which
they place virtual shopping malls within existing sites, such as
iVillage.com and ABC.com, on a commission basis, similar to the
affiliate model described above. We believe that alliance such networks
allows us to extend the reach of both EntertainMe.com's products and
branding, with payment only required upon sale of products.
o ENTERTAINMENT NETWORK SITES - Several media companies have assembled
networks by joining many sites that are contextually relevant and
accept third party advertising such as ours. We believe that
advertising in this manner allows us to cast a broad net, while still
staying within the framework of entertainment, specifically movies or
music.
o THIRD PARTY CO-REGISTRATION - Tremendous volume is being generated
through lottery and gaming sites. This traffic can be efficiently
harvested by messaging that requires the viewer to agree that he wishes
to sign up to a new site or take advantage of an offer for a specific
site. Viewers are then encouraged to "sign up" on the spot and a
minimal charge is generated to the originating site. Although these
viewers are not on an entertainment site, they have "agreed" to see the
message about DVDs or CDs, which gives the offer a more targeted
audience.
o PUBLICITY - We try to ensure that all relevant publications, such as
Yahoo's Internet Life, Sympatico's NetLife,and eCompany, have
EntertainMe.com prominently displayed in editorial coverage, especially
in their fall/Christmas 2001 online shopping guides.
Lastly, we will employ several different loyalty strategies to not only
retain the customers who come to our site, but encourage them to purchase more
frequently. This strategy includes opt-in email messages and offers, frequency
discounts, coupons, and other benefits that we believe will differentiate us
from the competition.
TECHNOLOGY
Through our consultants and technical staff, we have developed
technologies and implemented systems to support distributed, reliable and
scalable online retailing in a secure and easy-to-use format. Using a
combination of proprietary solutions and commercially available licensed
technologies, we intend to deploy systems for online content dissemination,
online transaction processing, customer service, market analysis and electronic
data interchange.
HARDWARE. Our web delivery system runs on IBM NetFinity Servers. As our
computing requirements grow, we intend to evaluate other platforms for
additional reliability and scalability over the current Intel-based
architecture.
Our hardware is rack-mounted in "server farms" and is designed so that
as business volume grows it can be duplicated in various hosting facilities to
provide full redundancy in case of an Internet outage. Since outages mean
downtime and an inability to do business, the system has been configured to
insure that more than one piece of hardware is available to perform each
business function. If any one component is out of service, traffic will be
rerouted without impacting the performance of our e-commerce system.
Graphics and basic static HTML text and graphics are served from a web
server. The web server is not responsible for connectivity to the database, and
is under relatively light load, as the application servers actually do all the
intensive computing.
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Application servers run the catalog system. These machines are
responsible for retrieving information from the database and generating
personalized pages to be sent to the individual browser sessions. The servers
run on the Linux platform to ensure speed.
SOFTWARE. We believe that flexible, adaptable, and robust software is
the key to our success. We must be able to adapt our site to maximize ease of
use, consumer appeal, and competitive advantage. Software must also be robust
enough to handle rush hour and peak season business volumes. Our web delivery
system is composed of several software packages working together to comprise the
entire system. The major software packages are configured as follows:
o DATABASE - The current system runs on Oracle. The database holds all
the system information such as products, pricing, contents of
customer's carts, and actual orders.
o FIREWALL - We currently run a commercial firewall product but are
considering implementing a customized Linux solution in the future. The
firewall software secures our information, yet is fast enough to handle
the load of peak traffic times.
o WEB SERVER - The web server that runs our website is Apache, the de
facto industry standard. This server was selected for its scalability
and performance, plus its ability to run on several platforms.
o APPLICATION SERVER SOFTWARE - The current application server
configuration runs on a Tom Cat, chosen for its scalability and
performance.
CONNECTIVITY. We use WorldCom, Inc. in its Calgary, Canada location for
our Internet access and web hosting.
SECURITY. Lynk Systems handles credit card payments for us. Lynk is a
secure Internet payment system that the customer accesses directly from our
website. To assure maximum privacy and customer security, we never see the
customer's credit card number. Instead, Lynk provides a purchase authorization
that can be used for future reference to the customer's order.
ENTERTAINME.COM IS A VERISIGN SECURE SITE. The VeriSign Secure Site
Program allows surfers to verify that a site offers security measures before
they submit any confidential information. The logo and valid digital
certificates appearing on our site assure customers that all information sent to
this site, is in a secure socket layer session, is encrypted and protected
against disclosure to third parties. Inclusion of the VeriSign logo encourages
purchases on our site, so it is prominently displayed, especially in the final
check out pages. To become a VeriSign Secure Site, we have to purchase an annual
digital certificate from VeriSign.
DATA TRANSFER. Our distribution efforts are supported by two-way data
transfer applications which allow us to transmit orders to Langara Distribution
and in return receive order status information, which is capable of being
downloaded onto our web site.
INTELLECTUAL PROPERTY
We use technology that we have developed internally, as well as
technologies that are readily available from third party commercial packages. We
enter into confidentiality and assignment agreements with all of our consultants
and vendors who have access to our proprietary information.
We currently own and use the unregistered trademark "entertainme".
There is an existing Intended Use Trade Mark Application filed in the United
States by Metro One Telecommunications, Inc. ("Metro One"), serial # 76189444,
for the trademark "ENTERTAINME". It is our intention to oppose the trademark
application of Metro One based on the fact that we have used the "entertainme"
trademark since at least June 2000. We are in the process of filing our own
application in the United States and Canada for the "entertainme" trademark. We
cannot predict at this time if we will obtain a registration for this mark in
either the United States or Canada.
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GOVERNMENT REGULATION
There are currently few laws or regulations that apply directly to the
Internet. Due to the increasing popularity of the Internet, it is possible that
a number of local, state, national or international laws and regulations may be
adopted with respect to issues such as the pricing of services and products,
advertising, user privacy, intellectual property, information security, or
anti-competitive practices over the Internet. In addition, tax authorities in a
number of states are currently reviewing the appropriate tax treatment of
companies engaged in Internet commerce. New state tax regulations may subject us
to additional state sales, use, and income taxes. Because our business is
dependent on the Internet, the adoption of any such laws or regulations may
decrease the growth of Internet usage or the acceptance of Internet commerce
that could, in turn, decrease the demand for our services and increase costs or
otherwise have a material adverse effect on our business, results of operations,
and financial condition. To date, we have not spent significant resources on
lobbying or related government affairs issues, but we may need to do so in the
future.
EMPLOYEES
As of June 30, 2001, E-Trend and Langara Distribution had a total of 23
full time employees and contractors, including 5 in technology positions, 2 in
marketing, 2 in site development, 3 in customer service, 7 in administrative
positions, and 4 in operations. None of our employees is covered by a collective
bargaining agreement. As part of our initiative to reduce overhead expenses, we
will be reducing our workforce by seven positions effective October 12, 2001.
PRINCIPAL OFFICES
Our principal executive offices are located at 5919-3rd St. S.E.,
Calgary, Alberta, Canada, T2H 1K3 where we lease approximately 46,008 square
feet of space on a lease expiring November 2004. VHQ Entertainment Inc., our
majority shareholder, and we entered into the lease with a non-affiliated third
party. We also have offices in the United States located at Suite 530, 515
Seabreeze Boulevard, Fort Lauderdale, Florida 33316.
LEGAL PROCEEDINGS
There are no legal proceedings pending against us.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are:
NAME AGE POSITION
Caroline G. Armstrong 39 President and Chief Executive Officer
Michael McKelvie 49 Senior Vice President, Marketing and Communications
Mike Duszynski 39 President, Langara Distribution
Lorne Cogswell 50 Chief Financial Officer
Timothy J. Sebastian 36 General Counsel and Secretary
Gregg C. Johnson 36 Director
Trevor M. Hillman 32 Director
Len Voth 54 Director
Effective October 12, 2001, Mr. McKelvie will be leaving E-Trend. Our
directors are elected by our shareholders and our officers are appointed
annually by our board of directors. Vacancies in our board are filled by the
board itself. Set forth below are brief descriptions of the recent employment
and business experience of our executive officers and directors.
CAROLINE G. ARMSTRONG, PRESIDENT AND CHIEF EXECUTIVE OFFICER. Ms.
Armstrong has been our president and chief executive officer since March 2001.
She served as our chief operating officer and executive vice president from
December 1999 to March 2001. In the fall of 1999, she founded Infinite
Possibilities, a management consulting firm based in Calgary, Alberta. From
August 1998 to December 1999, Ms. Armstrong served as vice president of Westech
Industrial Ltd., a private company located in Calgary, Alberta, a company in the
business of industrial manufacturing and sales. Ms. Armstrong's duties at
Westech Industrial Ltd. included finance, management relations, operations and
strategic planning. From June 1997 to August 1998, she held the position of
technical sales manager for the Calgary office of Onward Canada, a Canadian
technology solution provider based in Toronto, Ontario. From August 1993 to
February 1997, Ms. Armstrong served as acting general manager of BMS Ltd., a
private company headquartered in Bermuda that engaged in the business of
corporate computer consulting and sales. She served as an administrative
director of ECS Ltd. from 1989 to 1991, an Ontario-based company, where she
focused on strategic realignment and ownership consolidation. Ms. Armstrong
received an honors business degree from the University of Guelph in 1984.
MICHAEL MCKELVIE, SENIOR VICE PRESIDENT, MARKETING AND COMMUNICATIONS.
Mr. McKelvie joined E-Trend from Blockbuster Canada & Universal Studios Home
Video in May 2000. Mr. McKelvie helped pioneer the home video business in Canada
and has held senior level marketing, sales and communications positions in the
industry since it started in 1979. After serving as director, sales and
marketing for Universal Studios Home Entertainment Canada in Toronto, Ontario,
for 13 years from August 1977 to July 1989, he was the founding partner of EMG
Media Inc., where he created and launched HOLLYWOOD@home(TM), a popular home
video trade magazine. Mr. McKelvie served as president of EMG Media Inc.,
Oshawa, Ontario, from July 1989 to November 1997. EMG also created consumer
promotions with such clients as Coca-Cola, Pepsi-Cola, Spalding, Alliance Home
Entertainment and Petro-Canada. From November 1997 to April 2000, Mr. McKelvie
served as senior marketing and communications manager for Blockbuster Canada Co.
in Toronto, Ontario, where he managed marketing television campaigns and the
creation and launch of WWW.BLOCKBUSTER.CA.
MIKE DUSZYNSKI, PRESIDENT, LANGARA DISTRIBUTION. Mr. Duszynski is a
founder of Langara Distribution Inc., our subsidiary. E-Trend purchased Langara
from Mr. Duszynski and his brother in January 2000. In addition to his
responsibilities with Langara, he has owned and operated a music retail store in
Calgary since September 1984. His store was named Canadian retail store of the
year by the Canadian Country Music Association for eight years out of the past
nine as a result of excellent customer service and the best music selection in
Calgary. Mr. Duszynski is a voting member of the Canadian Academy of Recording
Arts and Sciences and the Canadian Country Music Association.
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LORNE COGSWELL, CHIEF FINANCIAL OFFICER. Mr. Cogswell joined E-Trend in
April 2001. Since September 1998, he has been the president of LRC Strategies
Inc., a company focused on assisting small and medium-sized businesses in
developing business, financial, and human resource management plans. He served
as the chief financial officer for Century Services Inc., a firm located in
Calgary, Alberta, engaged in liquidations, auctions, and asset-based lending,
from January 1998 to September 1998. From September 1996 to January 1998, Mr.
Cogswell was a controller for Maritime Hydraulics (Canada) Ltd., an oilfield
equipment manufacturer in Calgary, Alberta. He obtained his professional
accounting designation as a Certified Management Accountant in 1994.
TIMOTHY J. SEBASTIAN, GENERAL COUNSEL AND SECRETARY. Mr. Sebastian was
appointed general counsel and secretary of VHQ Entertainment Inc. (TSE: VHQ) and
E-Trend effective October 1, 2000. Mr. Sebastian graduated from the University
of Alberta Law School in 1990. Mr. Sebastian articled, was an associate and then
a partner with, the law firm of Bryan & Company in Edmonton and Calgary,
Alberta, from July 1990 until October 2000. During his law career, Mr. Sebastian
specialized in the areas of general corporate law, corporate finance, securities
and intellectual property. Mr. Sebastian is also senior vice president, general
counsel and corporate secretary for IROC Systems Corp. (CDNX: IRC) and corporate
secretary for Chinook Testing Inc. (CDNX: NDT).
GREGG C. JOHNSON, DIRECTOR. Mr. Johnson was the president and chief
executive officer of E-Trend from July 1999 to March 2001. He has been a
director since E-Trend's inception. He has been the executive vice president and
a director of VHQ Entertainment since December 1997. A graduate of Osgoode Hall
Law School of York University in Toronto, Canada, Mr. Johnson brings
international experience to E-Trend. In his law career, he specialized in the
areas of international corporate finance, banking, and commercial and securities
law. Mr. Johnson was called to the Alberta bar in 1989, entering private
practice in Calgary, Alberta. He then moved to Japan and joined the Japanese law
firm Aoki, Christensen & Nomoto in November 1989, and focused his practice on
corporate finance, concentrating on Japanese equities and the Eurobond markets.
In March 1991, Mr. Johnson joined the law office of Dr. Mujahid
Al-Sawwaf in Jeddah, Saudi Arabia, and focused his practice on international
banking, joint venture, construction, and commercial law matters. In November
1993, he joined The Tracker Corporation of Toronto, Ontario, a public company
trading on the NASDAQ OTC market, where he was primarily responsible for legal,
financing and public reporting matters.
Since August 1995, Mr. Johnson has provided investment banking services
with Summit Capital Corporation, and has been instrumental in securing seed
capital for several start-up ventures. He was a past director of a number of
public companies, including Merch Performance Inc. (CDNX: MRCH), Sat-Tel
Corporation (CDNX: SAJ) and IROC Systems, Corp. (CDNX: IRC), and he currently is
an officer of and holds directorships with several companies, including VHQ
Entertainment Inc. (TSE: VHQ), Cervus Corporation (CDNX: CVC), and Chinook
Testing Inc. (CDNX: NDT).
TREVOR M. HILLMAN, DIRECTOR. Mr. Hillman has served as a director of
E-Trend since July 1999. Mr. Hillman was the operations manager of Video View
Ltd., a video rental business operating in Red Deer, Alberta, Canada, from 1983
to 1994. Mr. Hillman then provided consulting services to entertainment-based
retail clients through TMH Holdings Ltd. from 1994 to 1997. Since mid-1997, he
has been the president of Integrated Retail Corp., a home entertainment
retailer, and in late 1997, became president, chief executive officer and
director of VHQ Entertainment Inc. (formerly Video Headquarters Inc.) (TSE:
VHQ). Video Headquarters Inc. acquired Integrated Retail Corp. in 1998 and now
operates 45 home entertainment retail stores in western Canada under the name
VHQ Entertainment. Mr. Hillman is also a director of IROC Systems Corp. (CDNX:
IRC) and Chinook Testing Inc. (CDNX: NDT).
LEN VOTH, DIRECTOR. Mr. Voth has been a director since March 1999. Mr.
Voth has held numerous computer and information systems technical and management
positions at Chevron Standard Limited and British Columbia Hydro Authority
throughout his career. . When BC Hydro sold off its computer systems division to
Westech Information Systems Ltd. in 1988, Mr. Voth assumed the position of
marketing director for the new spin-off firm, holding this position for six
years before the company was reacquired by BC Hydro. He has been Managing
Consultant at Westech since January 1996, providing project management,
consulting and advisory services for technology selection, contract services,
marketing, and operations. Mr. Voth received a bachelor's degree in mathematics
in 1970 from the University of British Columbia and a diploma in computer
programming from McKay Technical Institute in 1968. He is a former director and
active member of the Canadian Information
27
Processing Society and has professional certifications as a Certified Data
Processor (CDP), Information Systems Professional (ISP), and Computer Systems
Professional (CSP). He has held board positions with the Better Business Bureau,
mining companies, and provincial political constituencies.
CONFLICTS OF INTEREST
Members of our management are associated with other firms involved in a
range of business activities. Consequently, there are potential inherent
conflicts of interest in their acting as officers and directors of our company.
Insofar as the officers and directors are engaged in other business activities,
we anticipate they will devote only a minor amount of time to our affairs.
Our officers and directors are now and may in the future become
shareholders, officers or directors of other companies which may be formed for
the purpose of engaging in business activities similar to us. Accordingly,
additional direct conflicts of interest may arise in the future with respect to
such individuals acting on behalf of us or other entities. Moreover, additional
conflicts of interest may arise with respect to opportunities which come to the
attention of such individuals in the performance of their duties or otherwise.
Currently, we do not have a right of first refusal pertaining to opportunities
that come to their attention and may relate to our business operations.
Our officers and directors are, so long as they are our officers or
directors, subject to the restriction that all opportunities contemplated by our
plan of operation which come to their attention, either in the performance of
their duties or in any other manner, will be considered opportunities of, and be
made available to us and the companies that they are affiliated with on an equal
basis. A breach of this requirement will be a breach of the fiduciary duties of
the officer or director. If we or the companies with which the officers and
directors are affiliated both desire to take advantage of an opportunity, then
said officers and directors would abstain from negotiating and voting upon the
opportunity. However, all directors may still individually take advantage of
opportunities if we should decline to do so. Except as set forth above, we have
not adopted any other conflict of interest policy with respect to such
transactions.
We do not have any standing audit, nominating, or compensation
committees of our board of directors.
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth information the remuneration of our
chief executive officers for the last three completed fiscal years.
SUMMARY COMPENSATION TABLE
--------------------------------------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
--------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------------------------------------------------------------------------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL COMPENSA- AWARD(S) OPTIONS/ PAYOUTS COMPENSA-
POSITION YEAR SALARY ($) BONUS ($) TION ($) ($) SARS (#) ($) TION ($)
--------------------------------------------------------------------------------------------------------------------------
Caroline G. 2000 Cdn$79,182 -0- -0- -0- 75,000 -0- -0-
Armstrong -0- -0- -0- -0- -0- -0-
President &
CEO(1)
--------------------------------------------------------------------------------------------------------------------------
Gregg C. 2000 US$16,000 -0- US$8,400(3) -0- -0- -0- -0-
Johnson Cdn$99,420
President 1999 Cdn$32,000 -0- US$946(3) -0- -0- -0- -0-
--------------------------------------------------------------------------------------------------------------------------
-------------------
(1) Ms. Armstrong has been the President and Chief Executive Officer since March 2001.
(2) Mr. Johnson was the President and Chief Executive Officer from July 1999 through February 2001.
(3) At the time, we paid Mr. Johnson a car allowance as part of his compensation. We no longer pay this allowance.
28
OPTION/SAR GRANTS IN LAST FISCAL YEAR
------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS
------------------------------------------------------------------------------------------------------------------------
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS/SARS GRANTED TO
UNDERLYING OPTIONS/SARS EMPLOYEES IN FISCAL YEAR
NAME GRANTED (#) EXERCISE OR BASE
PRICE ($/SH) EXPIRATION DATE
------------------------------------------------------------------------------------------------------------------------
Caroline G. Armstrong 75,000(1) 11.0% $4.00 06/15/2010
------------------------------------------------------------------------------------------------------------------------
Gregg C. Johnson -0- -- -- --
------------------------------------------------------------------------------------------------------------------------
-------------------
(1) One-third of the options vested June 15, 2001, one-third vests June 15, 2002, and one-third vest June
15, 2003
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
----------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES ACQUIRED ON UNEXERCISED IN-THE-MONEY
NAME EXERCISE (#) VALUE REALIZED ($) OPTIONS/SARS AT OPTIONS/SARS AT
FISCAL YEAR END (#) FISCAL YEAR END ($)
----------------------------------------------------------------------------------------------------------------------
EXERCISABLE/ EXERCISABLE/
UNEXERCISABLE UNEXERCISABLE
----------------------------------------------------------------------------------------------------------------------
Caroline G. Armstrong -0- -0- -0-/75,000 -0-/-0-
----------------------------------------------------------------------------------------------------------------------
Gregg C. Johnson -0- -0- -0-/-0- -0-/-0-
----------------------------------------------------------------------------------------------------------------------
In May 2001, we issued 30,000 shares each to Gregg Johnson, Trevor
Hillman, and Len Voth for directors' fees for the remainder of fiscal 2001, and
issued 30,000 shares each to Gregg Johnson and Trevor Hillman for management
fees for the remainder of fiscal 2001. Also in May 2001, we granted options to
purchase 100,000 shares of our common stock to each of Gregg Johnson, Trevor
Hillman, and Len Voth. The options are exercisable through May 11, 2011 at $1.00
per share.
We reimburse our officers and directors for reasonable expenses
incurred during the course of their performance. Directors are issued shares of
common stock on an annual basis for their attendance at meetings. Although we
offer a standard medical plan, we have no longer-term incentive or compensation
plans. We anticipate offering some form of incentive-based monetary compensation
in the future.
STOCK OPTION PLANS
On January 26, 2001, our shareholders adopted a new stock option plan,
under which an aggregate of 4,000,000 shares of common stock are reserved for
issuance pursuant to the exercise of stock options. These options may be granted
to our employees, officers, directors, and consultants. We may also make awards
of restricted stock under this plan. Shares issued under this plan are
"restricted" in the sense that they are subject to repurchase by us at cost
during the vesting period. The options issued under our previous 2001 option
plan were assumed under our new stock option plan.
The plan is designed to (i) induce qualified persons to become
employees, officers, or directors of us; (ii) reward such persons for past
services to us; (iii) encourage such persons to remain in our employ or
associated with us; and (iv) provide additional incentive for such persons to
put forth maximum efforts for the success of our business. Transactions under
the plan are intended to comply with all applicable provisions under the
Securities Exchange Act of 1934. This plan will remain in effect until December
22, 2010, unless soon terminated by the Board of Directors.
Our board of directors administers the plan and determines:
o who will be granted options or awards;
o when options or awards will be granted;
o the number of options or shares to be granted;
o which options may be intended to qualify as incentive stock options
under the Internal Revenue Code of 1986, versus non-qualified options
which are not intended to so qualify;
o the time or times when each option becomes exercisable;
o the duration of the exercise period for options;
29
o the form or forms of the instruments evidencing options or awards
granted under the plan;
o the purchase price of the shares issued under the plan;
o the period or periods of time during which we will have a right to
repurchase the shares; and
o the terms and conditions of such repurchase.
The board may adopt, amend, and rescind such rules and regulations as
in its opinion may be advisable for the administration of the plan. It may amend
the plan without shareholder approval where such approval is not required to
satisfy any statutory or regulatory requirements. The board also may construe
the plan and the provisions in the instruments evidencing options granted under
the plan to employee and officer participants. The board has the power to make
all other determinations deemed necessary or advisable for the administration of
the plan. The board may not adversely affect the rights of any participant
without the consent of such participant.
The plan contains provisions for proportionate adjustment of the number
of shares for outstanding options and the option price per share in the event of
stock dividends, recapitalizations resulting in stock splits or combinations or
exchanges of shares.
The board may select participants in the plan from employees and
officers of us and our subsidiaries and consultants to us and our subsidiaries.
In determining the persons to whom options and awards will be granted and the
number of shares to be covered by each option, the board will take into account
the duties of the respective persons, their present and potential contributions
to our success, and such other factors as the board deems relevant to accomplish
the purposes of the plan.
STOCK OPTIONS. Only employees of us and our subsidiaries, as the term
"employee" is defined for the purposes of the Internal Revenue Code will be
entitled to receive incentive stock options. The option price of any incentive
stock option may be not less than 100% of the fair market value per share on the
date of grant of the option; provided, however, that any incentive stock option
granted under the plan to a person owning more than ten percent of the total
combined voting power of the common stock will have an option price of not less
than 110% of the fair market value per share on the date of grant of the
incentive stock option. The exercise period of options granted under the plan
may not exceed ten years from the date of grant thereof. Incentive stock options
granted to a person owning more than ten percent of the total combined voting
power of our common stock will be for no more than five years. Except in the
case of options granted to disinterested directors who administer the plan, the
board will have the authority to accelerate or extend the exercisability of any
outstanding option at such time and under such circumstances as it, in its sole
discretion, deems appropriate. However, no exercise period may be extended to
increase the term of the option beyond ten years from the date of the grant.
An option may not be exercised unless the optionee then is an employee,
officer, or consultant of us or our subsidiaries, and unless the optionee has
remained continuously as an employee, officer, or consultant since the date of
grant of the option. If the optionee ceases to be an employee, officer, or
consultant other than by reason of death, disability, or for cause, all options
granted to such optionee, fully vested to such optionee but not yet exercised,
will terminate three months after the date the optionee ceases to be an
employee, officer or consultant. All options which are not vested to an
optionee, under the conditions stated in this paragraph for which employment
ceases, will immediately terminate on the date the optionee ceases employment or
association.
If an optionee dies while an employee, officer or consultant, or if the
optionee's employment, officer, or consultant status terminates by reason of
disability, all options theretofore granted to such optionee, whether or not
otherwise exercisable, unless earlier terminated in accordance with their terms,
may be exercised at any time within one year after the date of death or
disability of said optionee, by the optionee or by the optionee's estate or by a
person who acquired the right to exercise such options by bequest or inheritance
or otherwise by reason of the death or disability of the optionee.
Options granted under the plan are not transferable other than by will
or by the laws of descent and distribution or pursuant to a qualified domestic
relations order. Options may be exercised, during the lifetime of the optionee,
only by the optionee and thereafter only by his legal representative. An
optionee has no rights as a shareholder with respect to any shares covered by an
option until the option has been exercised.
30
Unless otherwise specified in an optionee's agreement, options granted
under the plan will become vested with the optionee over the course of four
years from date of grant under the following schedule: 25% upon the first
anniversary of the option grant and the remaining 75% monthly over the following
36 months.
RESTRICTED STOCK AWARDS. Shares issued under the plan will be evidenced
by a written restricted stock purchase agreement between us and the participant.
Shares issued under the plan are transferable only if the transferee agrees to
be bound by all of the terms of the plan, including our right to repurchase the
shares, and only if such transfer is permissible under federal and state
securities laws. To facilitate the enforcement of the restrictions on transfer,
the board may require the holder of the shares to deliver the certificate(s) for
such shares to be held in escrow during the period of restriction.
Unless otherwise specified in a participant's agreement, awards of
shares issued under the plan will become vested with the participant over the
course of four years from date of grant under the following schedule: 25% upon
the first anniversary of the grant and the remaining 75% monthly over the
following 36 months.
OUTSTANDING OPTIONS. Upon our acquisition of E-Trend, we assumed
E-Trend's outstanding stock options. As of June 30, 2001, there were 966,500
stock options outstanding under the plan
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to us with
respect to the beneficial ownership of our common stock on July 17, 2001, by
each officer and director, and all officers and directors as a group, as well as
all persons who own greater than 5% of our outstanding shares, and as adjusted
to reflect the issuance of the shares covered by this prospectus:
PERCENTAGE OF SHARES
BENEFICIALLY OWNED (2)
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED ISSUANCE ISSUANCE
VHQ Entertainment 2,000,000 38.4% 18.7%
6201 - 46th Avenue
Red Deer, AB T4N 6Z1 Canada
Sara Hallitex Corporation 500,000 9.6% 4.7%
4344 Promenade Way No. 102P
Marina del Rey, CA 90292-6281
Gregg C. Johnson 415,905 (3) 7.8% 3.8%
6201 - 46th Avenue
Red Deer, AB T4N 6Z1 Canada
Trevor M. Hillman 410,000 (3) 7.7% 3.8%
46 Kirkwood Crescent
Red Deer, AB T4P 3F3 Canada
Len Voth 194,660 (3) 3.7% 1.8%
Mike Duszynski 57,500 (4) 1.1% 0.5%
Caroline G. Armstrong 25,000 (5) 0.5% 0.2%
Timothy J. Sebastian 9,333 (6) 0.2% 0.1%
31
PERCENTAGE OF SHARES
BENEFICIALLY OWNED (2)
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED ISSUANCE ISSUANCE
Michael McKelvie 8,333 (6) 0.2% 0.1%
Lorne Cogswell -0- -- --
All executive officers and directors as a 1,120,731 (7) 20.0% 10.1%
group (8 persons)
---------------
(1) To our knowledge, except as set forth in the footnotes to this table and
subject to applicable community property laws, each person named in the
table has sole voting and investment power with respect to the shares set
forth opposite such person's name.
(2) Percentages before issuance are based on 5,212,702 shares of common stock
outstanding as of July 17, 2001. Where the persons listed on this table
have the right to obtain additional shares of common stock within 60 days
from July 17, 2001, these additional shares are deemed to be outstanding
for the purpose of computing the percentage of class owned by such persons,
but are not deemed to be outstanding for the purpose of computing the
percentage of any other person. Percentages after issuance also include
(solely for purposes of this prospectus) up to an aggregate of 5,000,000
shares of our common stock that we may sell to Swartz pursuant to our
investment agreement with Swartz and 500,000 shares of common stock
underlying warrants to purchase shares of our common stock issuable in
connection with the investment agreement.
(3) Includes 100,000 shares issuable upon exercise of stock options.
(4) Includes 55,000 shares issuable upon exercise of common share purchase
warrants held of record by Mr. Duszynski's wife.
(5) Includes 25,000 shares issuable upon exercise of stock options.
(6) Includes 8,333 shares issuable upon exercise of stock options.
(7) Includes 396,666 shares issuable upon exercise of stock options.
CERTAIN TRANSACTIONS
Other than as disclosed below, none of our present directors, officers
or principal shareholders, nor any family member of the foregoing, nor, to the
best of our information and belief, any of our former directors, senior officers
or principal shareholders, nor any family member of such former directors,
officers or principal shareholders, has or had any material interest, direct or
indirect, in any transaction, or in any proposed transaction which has
materially affected or will materially affect us.
VHQ ENTERTAINMENT. We have advanced Cdn.$515,000 to VHQ. The loan bears
interest at 8%, is unsecured, and has no fixed terms of repayment. At June 30,
2001, $376,731 was due.
During the nine months ended June 30, 2001, we sold $779,794 of our
products to VHQ, representing 48% of our total sales. These transactions were
made in the normal course of business. At June 30, 2001, $256,030 was due from
VHQ for product purchases.
DIZ INVESTMENTS LTD. Mike Duszynski, the president of Langara
Distribution, owns Diz Investments Ltd, which retails primarily music and video
products. During the nine months ended June 30, 2001, we sold $57,744 of our
products to Diz Investments in the normal course of business. At June 30, 2001,
$5,704 was due from Diz Investments for product purchases.
32
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
We are authorized to issue up to 20,000,000 shares of common stock,
$0.0001 par value per share. As of July 17, 2001, there were 5,212,702 shares of
common stock outstanding, which were held of record by 213 stockholders. The
holders of the common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. We do not have
cumulative voting rights in the election of directors, and accordingly, holders
of a majority of the shares voting are able to elect all of the directors.
Subject to preferences that may be granted to any then outstanding preferred
stock, holders of common stock are entitled to receive ratably such dividends as
may be declared by the board of directors out of funds legally available
therefor as well as any distributions to the stockholders. In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled to
share ratably in all of our assets remaining after payment of liabilities and
the liquidation preference of any then outstanding preferred stock. Holders of
common stock have no preemptive or other subscription of conversion rights.
There are no redemption or sinking fund provisions applicable to the common
stock.
PREFERRED STOCK
We are authorized to issue up to 1,000,000 shares of preferred stock,
$0.0001 par value per share. There are no shares of preferred stock issued or
outstanding.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Computershare
Trust Company, Inc. Its address is 12039 West Alameda Parkway, Suite Z-2,
Lakewood, Colorado 80228, and its telephone number is (303) 986-5400.
INVESTMENT AGREEMENT
OVERVIEW
On July 3, 2001, we entered into an investment agreement with Swartz
Private Equity, LLC. The investment agreement entitles us to issue and sell our
common stock from time to time for up to an aggregate of $10 million during a
maximum of three years following the effective date of the registration
statement of which this prospectus forms a part, so long as we meet certain
listing and pricing requirements described in the investment agreement. For each
common share put to Swartz, we will receive the lesser of 92% of the market
price or the market price less $0.15. This right is referred to as a "put
right." As of the date of this prospectus, Swartz does not have, nor has ever
had, a short position in our stock.
PUT RIGHTS
In order to invoke a put right, we must have an effective registration
statement on file with the SEC registering the resale of the shares of our
common stock that we issue as a consequence of our invoking the put right.
Additionally, we must give at least 10 but not more than 20 business days
advance notice to Swartz of the date on which we intend to exercise a particular
put right and we must indicate the number of shares of common stock we intend to
sell to Swartz. At our option, we may also designate a maximum dollar amount of
common stock (not to exceed $2 million) that we will sell to Swartz during the
put and/or a minimum purchase price per common share at which Swartz may
purchase shares during the put. The designated minimum put purchase price per
share can be no more than the lesser of: (a) 80% of the closing bid price on the
business day before our advance notice or (b) the closing bid price on the
business day before the advance put notice minus $0.225. This could affect
Swartz's potential return on investment in that Swartz's purchase price may not
be less than the minimum price designated by us. The number of shares of our
common stock we sell to Swartz may not exceed the lesser of:
(1) 1,500,000 shares;
(2) 20% of the sum of the aggregate daily reported trading volumes
of our common shares, excluding certain block trades of our
common stock, during the 20 business days after the put date,
excluding any trading days in which our common stock trades
below a price based upon a minimum price, if any, that we
specify in our put notice;
33
(3) a number of shares which, when multiplied by their respective
put share prices, equals the maximum put dollar amount; and
(4) a number of shares that, when added to the number of shares
acquired by Swartz under the investment agreement during the
61 days preceding the put date, would exceed 9.99% of our
total number of shares of common stock outstanding (as
calculated under Section 13(d) of the Securities Exchange Act
of 1934).
However, in no event shall Swartz be required to purchase an amount
greater than 20% of the sum of the aggregate daily reported trading volume of
our common stock, excluding certain block trades, during the 20 business days
before the advance notice we give to Swartz.
The market price of shares of our common stock during the 20 business
days immediately following the put date is used to determine the purchase price
Swartz will pay and the number of shares we will issue in return. For each share
of our common stock, Swartz will pay us the lesser of (1) the market price for
each share, minus $0.15, or (2) 92% of the market price for each share, except
that Swartz must pay at least the designated minimum per share price, if any, we
specify in our notice. However, if we specify a minimum price, the volume
limitations discussed above may reduce the number of shares which Swartz is
required to purchase. Market price is defined as the lowest closing bid price
for our common stock during the 20 business day pricing period immediately
following the put date.
The following is an example of the calculation of a put we would issue
to Swartz in connection with that put based on hypothetical assumptions:
For purposes of this example, suppose we provide a put notice
to Swartz, and that we set the threshold price at $1.25 per share,
below which we will not sell any shares to Swartz during this purchase
period. For the first trading day in the example in the table below, we
multiply 20% times the total shares traded (1,200) to get 240 shares
and perform this calculation for each of the 20 trading days during the
purchase period, excluding any days on which the daily trading price
was below the trigger price. The trigger price is defined as the
greater of the threshold price ($1.25 in this example) plus $0.15 or
the threshold price divided by .92. In this example, the trigger price
is $1.40 and trading day 18 must be excluded.
-------------------------------------------------------------------------------------------------------------
CLOSING BID TOTAL SHARES NUMBER OF
TRADING DAY PRICE ($) (1) TRADED SHARES SOLD
-------------------------------------------------------------------------------------------------------------
1 2.25 1,200 240
2 2.15 1,500 300
3 2.00 1,200 240
4 2.05 2,800 560
5 2.10 1,800 360
6 2.10 1,500 300
7 1.75 2,500 500
8 1.75 7,000 1,400
9 2.00 4,000 800
10 1.65 100 20
11 1.65 100 20
12 1.80 12,600 2,520
13 1.60 2,300 460
14 1.60 1,000 200
15 1.50 3,600 720
16 1.45 2,700 540
17 1.55 1,600 320
18 1.25 300 *
19 1.65 600 120
20 1.60 500 100
-------------------------------------------------------------------------------------------------------------
Totals 48,900 9,720
-------------------------------------------------------------------------------------------------------------
---------------------
34
(1) The share prices are illustrative only and should not be
interpreted as a forecast of share prices or the expected or
historical volatility of the share prices of our common stock.
The total number of shares that we would issue to Swartz for this
put would be 9,720 shares. Swartz will purchase the shares at a
purchase price equal to the lesser of: (a) the market price for the
applicable pricing period (market price is defined as the average of
the three lowest volume weighted average prices during the pricing
period) minus $0.15 Or (b) 92% of the market price. In this case,
Swartz would pay $1.32 Per share for 9,720 shares equaling $12,830.
There is no placement agent involved in this transaction to receive any
other fees.
We are registering 5,000,000 shares to be sold to swartz in puts.
Therefore, in order for us to receive $10,000,000 the average sale price of
these shares would need to be $2.00. Unless our share price increases
substantially, we will need to register additional shares in order to access the
$10,000,000 maximum.
Our average closing price for the 30-day trading period beginning on
June 18, 2001 on the OTC Bulletin Board was $1.89. The maximum allowable number
of shares per put under the Investment Agreement is 1,500,000 shares. Assuming
our trading price remained at its current level, even if we put the maximum
allowable shares per put to swartz under the Investment Agreement, each put
would yield only $2,608,200 in proceeds to us. The restrictions discussed, such
as the restriction limiting the put amount to a percentage of our aggregate
trading volume, may operate to prevent us from putting the maximum allowable
number of shares. The average trading volume for the 30-day trading period
beginning on June 18, 2001, was 2,860 shares per day. Therefore, we would have
been restricted to putting 572 (20% of 2,860 shares) per day yielding
approximately $19,900 in the 20-day put period. The 5,000,000 shares that Swartz
may sell under this prospectus would represent almost 49% of our outstanding
shares if they were all issued, and assuming that we do not issue any other
shares in the future.
LIMITATIONS AND CONDITIONS PRECEDENT TO OUR PUT RIGHTS
We may not initiate a put if, as of the proposed date of such put:
o we have issued shares of our common stock that have been paid for
by Swartz and is equal to the maximum offering amount;
o the registration statement covering the resale of the shares
becomes ineffective or unavailable for use; or
o our common stock is not actively trading on the OTC Bulleting
Board, the Nasdaq Small Cap Market, the Nasdaq National Market,
the American Stock Exchange, or the New York Stock Exchange, or is
suspended or delisted with respect to the trading of the common
stock on such market or exchange.
If any of the following events occur during the pricing period for a
put, the volume accrual shall cease. For the put, the pricing period shall be
adjusted to end 10 business days after the date that we notify Swartz of the
event, and any minimum price per share we specified shall not apply to the put:
o we have announced or implemented a stock split or combination of
our common stock between the advanced put notice date and the end
of the pricing period;
o we have paid a common stock dividend or made any other
distribution of our common stock between the advanced put notice
date and the end of the pricing period;
o we have made a distribution to the holders of our common stock of
all or any portion of our assets or evidences of indebtedness
between the put notice date and the end of the pricing period;
o we have consummated a major transaction (including a transaction,
which constitutes a change of control) between the advance put
notice date and the end of the pricing period, the registration
statement covering the resale of the shares becomes ineffective or
unavailable for use, or our stock becomes delisted for trading on
our then primary exchange; or
35
o we discover the existence of facts that cause us to believe that
the registration statement of which this prospectus is a part
contains an untrue statement or omits to state a material fact.
SHORT SALES
Swartz and its affiliates are prohibited from engaging in short sales
of our common stock or other hedging or similar arrangements unless they have
received a put notice and the amount of shares involved in a short sale does not
exceed the number of shares specified in the put notice. All short sales
completed by Swartz will be conducted in compliance with Regulation M.
STOCKHOLDER APPROVAL
If we become listed on the Nasdaq Small Cap Market or the Nasdaq
National Market, then we must get stockholder approval to issue more than 19.99%
of our outstanding shares. Since we are currently quoted on the OTC Bulletin
Board, we do not need this stockholder approval at this time.
TERMINATION OF INVESTMENT AGREEMENT
We may terminate our right to initiate further puts or terminate the
investment agreement by providing Swartz with notice of such intention to
terminate; however, any such termination will not affect any other rights or
obligations we have concerning the investment agreement or any related
agreement, except that non-usage fees will cease to accrue thereafter. In the
event of a termination, we are required to pay Swartz a fee equal to $200,000
minus 10% of the aggregate dollar amount of stock put to Swartz until the
termination date.
RESTRICTIVE COVENANTS
During the term of the investment agreement and for a period of 60 days
thereafter, we are prohibited from certain transactions. These include the
issuance of any convertible debt or equity securities in a private transaction.
We are also prohibited from entering into any private equity line type
agreements similar to the investment agreement.
RIGHT OF FIRST REFUSAL
Swartz has a right of first refusal to purchase any shares of our
common stock or any other equity securities we may issue, including debt that is
convertible, exercisable, exchangeable for, or carries the right to receive,
additional shares offered by us in any private capital raising transaction of
equity securities that closes on or prior to 60 days after the termination of
the investment agreement.
INDEMNIFICATION
We are obligated to indemnify Swartz (including its members, officers,
directors, employees, investors and agents) from all liability and losses
resulting from any misrepresentations or breaches we made in connection with the
investment agreement, our registration rights agreement, other related
agreements, or the registration statement, including liability for violations of
the Securities Act relating to integration of the private sale of stock to
Swartz and the public resale of stock by Swartz.
SELLING STOCKHOLDER
SWARTZ PRIVATE EQUITY, LLC
The following table sets forth information regarding beneficial
ownership of shares which could be issued to Swartz Private Equity, LLC. We are
registering 5,000,000 of the shares of common stock that can be sold to Swartz
under the investment agreement. The shares are being registered to permit public
secondary trading of such shares, and Swartz may offer the common stock for
resale as it wishes. Swartz has not had any position, office, or material
relationship with us within the past three years.
36
PERCENTAGE OF SHARES BENEFICIALLY OWNED (1)
BENEFICIAL MAXIMUM NUMBER OF
OWNERSHIP OF SHARES OF COMMON
COMMON STOCK STOCK OFFERED FOR
(2) SALE (2)
NAME OF BENEFICIAL OWNER BEFORE OFFERING AFTER OFFERING
Swartz Private Equity, LLC 5,500,000 5,500,000 51.3% 0%
--------
(1) Based on 5,212,702 shares of common stock outstanding as of July 17,
2001, and includes (solely for purposes of this prospectus) up to an
aggregate of 5,000,000 shares of common stock that we may sell to
Swartz pursuant to our investment agreement with Swartz and 500,000
shares of common stock underlying warrants to purchase shares of our
common stock issuable in connection with the investment agreement.
(2) Assumes that Swartz will sell all 5,000,000 of its shares purchasable
under the investment agreement and 500,000 shares of common stock
issuable upon exercise of outstanding warrants issued to Swartz as a
commitment fee for entering in the investment agreement. We cannot
assure you that Swartz will sell all or any of its shares. The 500,000
shares purchasable under the commitment warrant would not be deemed
beneficially owned within the meaning of Sections 13(d) and 13(g) of
the Exchange Act before their acquisition by Swartz.
PLAN OF DISTRIBUTION
We are registering the resale of our common stock on behalf of Swartz
Private Equity, LLC, the selling stockholder. A selling stockholder includes
donees, transferees and pledgees selling shares of common stock received from
Swartz after the date of this prospectus. This prospectus may also be used by
transferees of the selling stockholder or by other persons acquiring shares,
including brokers who borrow the shares to settle short sales of our common
stock. If the selling stockholder transfers any of its shares, each transferee
must be bound to the same restrictions and limitations that apply to the selling
stockholder described in this prospectus. We will bear all costs, expenses and
fees in connection with the registration of the shares offered in this
prospectus. The selling stockholder will bear all brokerage commissions and
similar selling expenses associated with the sale of the shares.
The selling stockholder may offer its shares of our common stock at
various times in one or more of the following transactions:
o on any stock exchange, market or trading facility on which the shares
are traded;
o in privately negotiated transactions or otherwise, including an
underwritten offering;
o in connection with short sales of the shares of our common stock;
o in ordinary brokerage transactions and transactions in which a broker
solicits purchasers;
o in connection with the writing of non-traded and exchange-traded call
or put options, in hedge transactions and in settlement of other
transactions in standardized or over-the-counter options;
o in a block trade in which a broker-dealer, as agent, may resell a
portion of the block, as principal, in order to facilitate the
transaction;
o in a purchase by a broker-dealer, as principal, and resale by the
broker-dealer for its account;
o in a combination of any of the above transactions; or any other method
permitted pursuant to applicable law.
37
The selling stockholder may sell its shares at market prices prevailing
at the time of sale, at prices related to the prevailing market prices, at
negotiated prices or at fixed prices. The selling stockholder reserves the right
to accept, and together with its agents from time to time, to reject, in whole
or in part, any proposed purchase of the common stock to be made directly or
through agents.
The selling stockholder may use broker-dealers to sell its shares in
which case broker-dealers will either receive discounts, commissions or
concessions from purchasers of shares for whom they act as agents.
Broker-dealers engaged by the selling stockholder may allow other broker-dealers
to participate in resales.
Swartz Private Equity, LLC is an underwriter within the meaning of
Section 2(11) of the Securities Act of 1933 with respect to any shares of common
stock that it sells. Any broker-dealers or agents that act in connection with
the sale of shares might be deemed to be underwriters and any commissions
received by such broker-dealers and any profit on the resale of the shares sold
by them while acting as principals might be deemed to be underwriting discounts
or commissions under the Securities Act.
Because Swartz Private Equity, LLC is an underwriter within the meaning
of Section 2(11) of the Securities Act, it will be subject to the prospectus
delivery requirements of the Securities Act. We have informed Swartz that the
anti-manipulative provisions of Regulation M promulgated under the Securities
Exchange Act of 1934 may apply to its sales of our common stock in the market.
We have provided Swartz with a copy of such rules and regulations.
The anti-manipulation rules may apply to the sales activities of the
selling stockholder and its affiliates. Regulation M may also restrict the
ability of any person engaged in the distribution of our common stock to engage
in market-making activities for a period of up to five business days prior to
the commencement of such distribution. Furthermore, Regulation M generally
prohibits certain participants in a distribution from bidding or purchasing for
an account in which the participant has a beneficial interest. Regulation M also
governs bids and purchases made to stabilize the price of a security in
connection with a distribution of that security. For these reasons, Regulation M
may affect the overall marketability of our common stock.
Swartz will pay all commissions, transfer taxes and other expenses
associated with its sales.
LEGAL MATTERS
Dill Dill Carr Stonbraker & Hutchings, P.C., Denver, Colorado, has
given an opinion on the validity of the securities.
EXPERTS
We have included the financial statements of the company as of
September 30, 2000 and 1999 and for the year ended September 30, 2000 and the
period from incorporation on April 29, 1999 to September 30, 1999, in reliance
upon the report of Ernst & Young LLP, independent chartered accountants, whose
report has been included in this prospectus given upon the authority of that
firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have been subject to the reporting requirements under federal
securities laws since February 2000. We have filed with the SEC a registration
statement on Form SB-2 and amendments to the registration statement with respect
to the securities offered through this prospectus. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedules that are part of the registration statement. For further
information about the securities and us, you should review the registration
statement and the exhibits and schedules. Statements made in this prospectus
regarding the contents of any contract or document filed as an exhibit to the
registration statement are not necessarily complete. You should review the copy
of such contract or document so filed.
38
You can inspect the registration statement, as well as the exhibits and
the schedules, filed with the SEC without charge, at the SEC's office at
Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549. You can also
obtain copies of these materials from the SEC's Public Reference Section at 450
Fifth Street, NW, Washington, D.C. 20549, at prescribed rates. The SEC maintains
a web site on the Internet that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC at http://www.sec.gov.
REPORTS TO STOCKHOLDERS
We are subject to the reporting requirements of the federal securities
laws, and are required to file periodic reports, proxy statements, and other
information with the SEC. We will furnish our shareholders with annual reports
containing audited financial statements certified by independent public
accountants following the end of each fiscal year, proxy statements, and
quarterly reports containing unaudited financial information for the first three
quarters of each fiscal year following the end of such fiscal quarter.
INDEX TO FINANCIAL STATEMENTS
Unaudited Interim Consolidated Financial Statements - Nine Months Ended
June 30, 2001 and 2000....................................................................................F-1
Consolidated Balance Sheets as of June 30, 2001 (Unaudited) and September 30, 2000...................F-2
Consolidated Statements of Operations and Deficit for the Three and Nine Months Ended
June 30, 2001 and 2000 (Unaudited)...............................................................F-3
Consolidated Statement of Stockholders' Equity for the Nine Months Ended
June 30, 2001 (Unaudited)........................................................................F-4
Consolidated Statements of Cash Flows for the Three and Nine Months Ended
June 30, 2001 and 2000 (Unaudited)...............................................................F-5
Notes to Interim Consolidated Financial Statements for the Nine Months Ended
June 30, 2001 and 2000 (Unaudited)...............................................................F-6
Financial Statements - September 30, 2000.................................................................F-10
Independent Auditors' Report ........................................................................F-11
Consolidated Balance Sheets as at September 30, 2000 and 1999........................................F-12
Consolidated Statements of Operations and Deficit for the Twelve Months Ended September 30, 2000
and for the Period from Incorporation on April 29, 1999 to September 30, 1999....................F-13
Consolidated Statement of Stockholders' Equity as at September 30, 2000..............................F-14
Consolidated Statements of Cash Flows for the Twelve Months Ended September 30, 2000
and for the Period from Incorporation on April 29, 1999 to September 30, 1999....................F-15
Notes to Consolidated Financial Statement - September 30, 2000.......................................F-16
39
Unaudited Interim Consolidated Financial Statements of
E-TREND NETWORKS, INC.
Nine months ended June 30, 2001 and 2000
(Expressed in U.S. Dollars)
F-1
E-TREND NETWORKS, INC.
Consolidated Balance Sheets
(Expressed in U.S. Dollars)
===============================================================================================================
June 30, September 30,
2001 2000
---------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (note 3) $ 213,279 $ 1,866,159
Accounts receivable 60,053 63,290
Due from related parties (note 4):
VHQ Entertainment Inc. 256,030 207,716
Diz Investments Ltd. 5,704 6,293
Summerhill Investment Corp., note receivable 5,686 -
Inventory 246,012 40,344
Prepaid expenses 49,200 773
----------------------------------------------------------------------------------------------------------
835,964 2,184,575
Advances to VHQ Entertainment Inc. (note 4) 376,731 231,709
Investment in VHQ Entertainment Inc. (note 5) 141,522 232,382
Property and equipment 380,098 266,641
Goodwill 166,214 175,169
---------------------------------------------------------------------------------------------------------------
$ 1,900,529 $ 3,090,476
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (note 3) $ - $ 74,816
Accounts payable and accrued liabilities 566,854 201,585
----------------------------------------------------------------------------------------------------------
566,854 276,401
Stockholders' equity:
Common shares (note 6) 842,643 8,854
Deferred stock-based compensation (361,000) -
Advance due from stockholder (note 4) (23,720) -
Additional paid-in capital 3,601,406 3,601,406
Deficit (2,728,351) (866,495)
Accumulated other comprehensive income (losses):
Unrealized gain from investment (note 5) 1,382 89,102
Cumulative translation adjustment 1,315 (18,792)
----------------------------------------------------------------------------------------------------------
1,333,675 2,814,075
Subsequent event (note 7)
---------------------------------------------------------------------------------------------------------------
$ 1,900,529 $ 3,090,476
===============================================================================================================
See accompanying notes to interim consolidated financial statements.
F-2
E-TREND NETWORKS, INC.
Consolidated Statements of Operations and Deficit
(Expressed in U.S. Dollars)
(Unaudited)
===============================================================================================================
Three months ended Nine months ended
June 30, June 30,
--------------------------------- ----------------------------------
2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------------
Sales $ 713,376 $ 260,076 $ 1,637,598 $ 448,211
Cost of sales 590,208 176,804 1,410,527 314,532
---------------------------------------------------------------------------------------------------------------
123,168 83,272 227,071 133,679
Expenses 863,680 301,175 1,821,672 641,425
Depreciation 22,188 11,841 55,861 27,294
Amortization of goodwill 4,970 10,251 15,004 15,251
Interest and other income (19,423) - (103,810) (3,327)
---------------------------------------------------------------------------------------------------------------
Net loss for the period (748,247) (239,995) (1,561,656) (546,964)
Other comprehensive income (loss):
Unrealized loss on investment (7,310) - (87,720) -
Foreign currency translation
adjustment (31,214) - 20,108 -
----------------------------------------------------------------------------------------------------------
(38,524) - (67,612) -
---------------------------------------------------------------------------------------------------------------
Comprehensive loss $ (786,771) $ (239,995) $ (1,629,268) $ (546,964)
===============================================================================================================
Deficit, beginning of period $ (1,980,104) $ (362,308) $ (866,495) $ (55,339)
Charge for excess of
consideration given over net book
value of assets acquired (note 2) - - (300,200) -
Net loss for the period (748,247) (239,995) (1,561,656) (546,964)
---------------------------------------------------------------------------------------------------------------
Deficit, end of period $ (2,728,351) $ (602,303) $ (2,728,351) $ (602,303)
===============================================================================================================
Net loss per common share,
basic and diluted $ (0.17) $ (0.05) $ (0.35) $ (0.12)
===============================================================================================================
Weighted average common
shares outstanding, basic 4,472,228 4,439,371 4,472,228 4,439,371
===============================================================================================================
See accompanying notes to interim consolidated financial statements.
F-3
E-TREND NETWORKS, INC.
Consolidated Statement of Stockholders' Equity
Nine months ended June 30, 2001
(Expressed in U.S. Dollars)
(Unaudited)
===================================================================================================================
Issued Common Shares Additional
------------------------------------ Paid-In
Number Amount Capital
-------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 8,853,734 $ 8,854 $ 3,601,406
Issued in exchange for property and equipment 30,000 30,000 -
---------------------------------------------------------
8,883,734 38,854 3,601,406
=====================================================================
Common shares of Cool Entertainment, Inc.
at time of acquisition (note 2) 38,340,636 13,488,710 -
Effect of 1:100 reverse stock split (37,957,305) - -
---------------------------------------------------------------------
383,331
Issued in exchange for common shares of Cool
Entertainment, Inc. (note 2) 4,439,371 - -
Elimination of Cool Entertainment, Inc. share capital
under reverse-take-over accounting - (13,488,710) -
Issued for settlement of notes payable (note 2) 25,000 93,789 -
Issued for settlement of notes payable (note 2) 15,000 45,000 -
Issued in exchange for fees and services provided 160,000 304,000 -
Issued for deferred stock-based compensation 190,000 361,000 -
-------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 5,212,702 $ 842,643 $ 3,601,406
===================================================================================================================
See accompanying notes to interim consolidated financial statements.
F-4
E-TREND NETWORKS, INC.
Consolidated Statements of Cash Flows
(Expressed in U.S. Dollars)
(Unaudited)
==============================================================================================================
Three months ended Nine months ended
June 30, June 30,
--------------------------------- ----------------------------------
2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net loss for the period $ (748,247) $ (239,995) $ (1,561,656) $ (546,964)
Add items not involving cash:
Shares issued in exchange
for services 304,000 - 304,000 -
Unrealized foreign exchange
loss (46,512) (8,327) (67,037) (14,814)
Depreciation 22,188 11,841 55,861 27,294
Amortization of goodwill 4,970 10,251 15,004 15,251
------------------------------------------------------------------------------------------------------
Funds used in operations (463,601) (226,230) (1,253,828) (519,233)
Net change in non-cash
working capital 240,714 (304,051) 61,000 (391,353)
----------------------------------------------------------------------------------------------------------
(222,887) (530,281) (1,192,828) (910,586)
Financing activities:
Decrease in bank indebtedness (316,977) - (74,816) -
Advances from (to) related party (24,235) 259 (145,022) (178,695)
Proceeds from capital
contributions - - - 2,542,351
---------------------------------------------------------------------------------------------------------
(341,212) 259 (219,838) 2,363,656
Investing activities:
Purchase of property and
equipment (14,170) (59,794) (72,214) (352,133)
Acquisition - - (168,000) -
----------------------------------------------------------------------------------------------------------
(14,170) (59,794) (240,214) (352,133)
---------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents (578,269) (589,816) (1,652,880) 1,100,937
Cash and cash equivalents,
beginning of period 791,548 2,329,465 1,866,159 638,712
---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 213,279 $ 1,739,649 $ 213,279 $ 1,739,649
===============================================================================================================
See accompanying notes to interim consolidated financial statements.
F-5
E-TREND NETWORKS, INC.
Notes to Interim Consolidated Financial Statements
Nine months ended June 30, 2001 and 2000
(Expressed in U.S. Dollars)
(Unaudited)
================================================================================
1. BASIS OF PRESENTATION:
These unaudited interim consolidated financial statements of E-Trend
Networks, Inc. ("E-Trend" or the "Company") have been prepared in
accordance with United States generally accepted accounting principles for
interim financial information, including all normal recurring adjustments
that are, in the opinion of management, necessary for the fair presentation
of the consolidated balance sheet and the consolidated statements of
operations and deficit, stockholders' equity and cash flows for the interim
periods. There have been no changes to the accounting policies as detailed
in the Company's audited financial statements for the year ended September
30, 2000 during the interim periods presented. These interim financial
statements should be read in conjunction with the Company's audited
financial statements for the year ended September 30, 2000. The financial
information included herein is unaudited.
2. ACQUISITION:
Effective February 21, 2001 an arrangement was completed between E-Trend
and Cool Entertainment, Inc. ("Cool") whereby the shareholders of E-Trend
exchanged all of their common shares for 4,439,371 common shares of Cool.
Following the acquisition, the former shareholders of E-Trend held a
majority of the total issued and outstanding common shares of Cool; E-Trend
was thereby deemed to be the acquiror. Accordingly, the transaction has
been accounted for as a reverse-take-over using the purchase method whereby
the assets and liabilities of Cool have been recorded at their fair market
values and the operating results of Cool have been included in the
Company's financial statements from the effective date of the purchase. The
fair values of the net assets acquired is equal to their book values.
As Cool was a non-operating public shell prior to the combination, no
goodwill has been recognized and the excess of the consideration paid over
the fair value of the identifiable assets acquired has been charged to
stockholders' equity.
F-6
E-TREND NETWORKS, INC.
Notes to Interim Consolidated Financial Statements
Nine months ended June 30, 2001 and 2000
(Expressed in U.S. Dollars)
(Unaudited)
================================================================================
2. ACQUISITION (CONTINUED):
===========================================================================
Net book value of assets acquired:
Property and equipment of Cool, at book value $ 10,940
Assets acquired in associated transactions 68,000
Less working capital deficiency (72,351)
---------------------------------------------------------------------------
$ 6,589
===========================================================================
Assigned value of 4,441,867 shares issued in exchange
for shares of Cool $ -
Settlement of liability assumed by the issue of 25,000
common shares 93,789
Issue of 15,000 on acquisition of assets in associated
transaction 45,000
Cash paid on acquisition of assets in associated transaction 23,000
Cash paid for transaction costs 145,000
---------------------------------------------------------------------------
306,789
Less excess of consideration given over net book value of
assets acquired (300,200)
--------------------------------------------------------------------------
$ 6,589
===========================================================================
Other transactions relating to the arrangement were as follows:
(a) Change of the Company's name from Cool Entertainment, Inc. to E-Trend
Networks, Inc.;
(b) Re-domestication of the Company to the State of Delaware from the State
of Nevada;
(c) Reverse stock split of 1-for-100 common shares;
(d) Continuance, on an equivalent basis, of all of the unexpired and
unexercised outstanding stock options and warrants of the former
E-Trend under the same terms and conditions;
(e) Cancellation of all of the outstanding warrants of Cool;
(f) Settlement of a note payable of $93,789 to Fictional Media Inc., a
company controlled by stockholders of Cool, by way of the issuance of
25,000 common shares; and
(g) Cash payment of $23,000 and the issuance of a promissory note of
$45,000 by E-Trend to Fictional Media Inc. in exchange for property and
equipment, subsequently settled by way of the issuance of 15,000 common
shares.
3. BANK INDEBTEDNESS:
The Company has a line of credit of $150,000 Canadian. Drawings bear
interest at prime plus 1/2% and are secured by a $150,000 U.S. deposit
included in cash and cash equivalents.
F-7
E-TREND NETWORKS, INC.
Notes to Interim Consolidated Financial Statements
Nine months ended June 30, 2001 and 2000
(Expressed in U.S. Dollars)
(Unaudited)
================================================================================
4. RELATED PARTY TRANSACTIONS:
(a) VHQ Entertainment Inc.:
VHQ Entertainment Inc. ("VHQ") represents the Company's major
stockholder. The advances to VHQ, totaling $571,757 Canadian, bear
interest at 8%, are unsecured and have no fixed terms of repayment. For
the three and nine months ended June 30, 2001, the Company accrued
interest income of $6,925 and $20,985, respectively (2000 - $4,832 and
$12,596, respectively).
During the three and nine months ended June 30, 2001 the Company sold
$315,068 and $779,794, respectively, (2000 - $217,781 and $357,258,
respectively) of its products to VHQ, representing 44% and 48% of total
sales (2000 - 84% and 80%). These transactions are considered to be in
the normal course of business and are measured at the exchange amount,
which is the amount of consideration established and agreed to by the
related parties. The current amount due from VHQ relates to such sales.
(b) Diz Investments Ltd.:
During the three and nine months ended June 30, 2001 the Company sold
$3,764 and $57,744, respectively, (2000 - $488 and $1,282,
respectively) of its products to Diz Investments Ltd., a company owned
by two of the Company's stockholders. These transactions are considered
to be in the normal course of business and are measured at the exchange
amount, which is the amount of consideration established and agreed to
by the related parties.
(c) Summerhill Investment Corp.:
Summerhill Investment Corp. is a shareholder of the Company. The
receivable of $5,686 is for unpaid interest on a fully-paid loan.
(d) Stockholder:
The advance due from a stockholder relates to the purchase of common
shares of the Company. The subject shares serve as security for the
advance.
F-8
E-TREND NETWORKS, INC.
Notes to Interim Consolidated Financial Statements
Nine months ended June 30, 2001 and 2000
(Expressed in U.S. Dollars)
(Unaudited)
================================================================================
5. INVESTMENT:
On January 21, 2000 the Company purchased 99,900 common shares of VHQ, a
publicly-traded Canadian company, in exchange for 100,000 shares of the
Company at an assigned value of $150,000.
=========================================================================================================
June 30, 2001
------------------------------------------------------
Translated Unrealized Recorded
cost basis gain basis
---------------------------------------------------------------------------------------------------------
Video Headquarters Inc. common shares $ 140,140 $ 1,382 $ 141,522
=========================================================================================================
6. SHARE CAPITAL:
There were 1,067,160 stock options outstanding at June 30, 2001 having a
weighted average exercise price of $4.59 and expiring on various dates to
December 2004.
There were 100,000 common share purchase warrants outstanding at June 30,
2001. Each warrant entitles the holder to purchase one common share of the
Company for $4.00 and expires on April 20, 2002. These warrants were issued
in connection with the acquisition of Langara Distribution Inc.
Effective April 20, 2001 the shareholders approved a change to the
Company's authorized share capital from 20,000,000 preferred shares with a
par value of $0.0001 per share and 80,000,000 common shares with a par
value of $0.0001 per share to 1,000,000 preferred shares with a par value
of $0.0001 per share and 20,000,000 common shares with a par value of
$0.0001 per share.
7. SUBSEQUENT EVENT:
On July 3, 2001 the Company executed an equity financing agreement with a
U.S.-based corporation. The agreement is subject to the completion and
filing of the required regulatory documentation. Under the agreement the
Company can, under certain conditions, put common shares to the investor to
a maximum of $10 million over a three-year period.
F-9
Financial Statements
E-TREND NETWORKS, INC.
(formerly The Moviesource.com Corp.)
September 30, 2000
F-10
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
E-Trend Networks, Inc.
We have audited the accompanying consolidated balance sheets of E-Trend
Networks, Inc. and subsidiary (formerly The Moviesource.com Corp.) as at
September 30, 2000 and 1999 and the related statements of operations and
deficit, stockholders' equity and cash flows for the year ended September 30,
2000 and for the period from incorporation on April 29, 1999 to September 30,
1999. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with United States 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 consolidated
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, these consolidated financial statements referred to above
present fairly, in all material respects, the financial position of E-Trend
Networks, Inc. (and subsidiary) as at September 30, 2000 and the results of its
operations and its cash flows for the year ended September 30, 2000 and for the
period from incorporation on April 29, 1999 to September 30, 1999 in conformity
with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Calgary, Canada
November 21, 2000 Chartered Accountants
F-11
E-TREND NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
As at September 30
2000 1999
(U.S. $) (U.S. $)
----------------------------
ASSETS
CURRENT
Cash and cash equivalents [NOTE 6] 1,791,343 638,712
Accounts receivable 69,583 3,297
Due from related company [NOTE 9] 207,716 --
Inventory 40,344 --
Prepaid expenses 773 45,060
----------------------------
2,109,759 687,069
INVESTMENT [NOTE 4] 232,382 --
DUE FROM RELATED COMPANY [NOTE 9] 231,709 31,487
CAPITAL ASSETS [NOTE 5] 266,641 25,000
GOODWILL [NOTE 3] 175,169 --
----------------------------
3,015,660 743,556
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities 201,585 17,820
----------------------------
COMMITMENTS [NOTE 11]
STOCKHOLDERS' EQUITY
Authorized
25,000,000 preferred shares, par value $0.001
25,000,000 common shares, par value $0.001
Issued
Common shares [NOTE 7] 8,854 6,850
Additional paid in capital [NOTE 7] 3,601,406 774,225
Accumulated deficit (866,495) (55,339)
Unrealized gain from investment 89,102 --
Cumulative translation adjustment (18,792) --
----------------------------
2,814,075 725,736
----------------------------
3,015,660 743,556
============================
SEE ACCOMPANYING NOTES
On behalf of the Board:
Director Director
F-12
E-TREND NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE TWELVE FOR THE PERIOD FROM
MONTHS ENDED INCORPORATION ON
SEPTEMBER 30, APRIL 29, 1999 TO
2000 SEPTEMBER 30, 1999
(U.S. $) (U.S. $)
---------------------------------------
REVENUE 665,075 --
COST OF SALES 503,938 --
---------------------------------------
161,137 --
---------------------------------------
EXPENSES
Operating and development 436,764 --
General and administrative 435,745 59,564
Advertising costs 108,703 --
Sales and marketing 28,921 --
Amortization of capital assets 31,756 --
Amortization of goodwill 20,329 --
---------------------------------------
1,062,218 59,564
---------------------------------------
LOSS BEFORE THE FOLLOWING (901,081) (59,564)
INTEREST INCOME 89,925 4,225
---------------------------------------
NET LOSS FOR THE PERIOD [NOTE 10] (811,156) (55,339)
---------------------------------------
OTHER COMPREHENSIVE INCOME
Unrealized gain from investment 89,102 --
Foreign currency translation adjustment (18,792) --
---------------------------------------
70,310 --
---------------------------------------
COMPREHENSIVE LOSS (740,846) (55,339)
=======================================
DEFICIT, BEGINNING OF PERIOD (55,339) --
NET LOSS FOR THE PERIOD (811,156) (55,339)
---------------------------------------
DEFICIT, END OF PERIOD (866,495) (55,339)
=======================================
BASIC AND DILUTED LOSS PER SHARE [NOTE 8] (0.10) (0.02)
=======================================
SEE ACCOMPANYING NOTES
F-13
E-TREND NETWORKS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
As at September 30, 2000
COMMON STOCK
-----------------------------
PAID IN
NUMBER OF AMOUNT CAPITAL
SHARES (U.S. $) (U.S. $)
-----------------------------------------
Issuance of common stock [NOTE 7] 6,850,000 6,850 774,225
-----------------------------------------
Balance, September 31, 1999 6,850,000 6,850 774,225
Issuance of common shares for cash [NOTE 7] 1,618,734 1,619 2,395,732
Issuance of common shares for services [NOTE 7] 85,000 85 84,915
Issuance of common shares on acquisition of
subsidiary [NOTES 3 AND 7] 200,000 200 199,800
Issuance of common shares for shares in investment
[NOTES 4 AND 7] 100,000 100 149,900
Share issue costs -- -- (3,166)
-----------------------------------------
Balance, September 30, 2000 8,853,734 8,854 3,601,406
=========================================
SEE ACCOMPANYING NOTES
F-14
E-TREND NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWELVE FOR THE PERIOD FROM
MONTHS ENDED INCORPORATION ON
SEPTEMBER 30, APRIL 29, 1999 TO
2000 SEPTEMBER 30, 1999
(U.S. $) (U.S. $)
---------------------------------------
CASH WAS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES
Net loss for the period (811,156) (55,339)
Amortization 52,085 --
Add (deduct) following item:
Net change in non-cash working capital (11,478) (30,537)
---------------------------------------
(770,549) (85,876)
---------------------------------------
FINANCING ACTIVITIES
Proceeds from capital contributions 2,394,185 781,075
Due from related company (200,222) (31,487)
---------------------------------------
2,193,963 749,588
---------------------------------------
INVESTING ACTIVITY
Purchase of capital assets (195,967) (25,000)
---------------------------------------
INCREASE IN CASH 1,227,447 638,712
CASH, BEGINNING OF PERIOD 638,712 --
---------------------------------------
CASH, END OF PERIOD 1,866,159 638,712
=======================================
SEE ACCOMPANYING NOTES
F-15
E-TREND NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
September 30, 2000 (expressed in U.S. dollars)
1. BASIS OF PRESENTATION
The Corporation was incorporated as The Moviesource.com Corp. under the Business
Corporations Act (Nevada) on April 29, 1999. The Corporation changed its name
effective February 10, 2000 to E-Trend Networks, Inc. The Corporation is
committed to the business of e-commerce sales and distribution of filmed
entertainment, video games and music.
The consolidated financial statements include the accounts of the Corporation
and its wholly owned subsidiary, Langara Distribution Inc., an Alberta, Canada
corporation.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial statements of the Corporation have been prepared in accordance
with accounting principles generally accepted in the United States. The
presentation of financial statements in conformity with United States generally
accepted accounting principles requires management to make estimates and
assumptions that affect 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 revenues and expenses during the
reporting period. Actual results could differ from these estimates.
CASH EQUIVALENTS
The Corporation considers cash invested in money market funds with a maturity of
90 days or less, amounting to $1,812,301 (1999 - $617,328), to be cash
equivalents.
CAPITAL ASSETS
Capital assets are recorded at cost. Amortization is provided on the bases and
at rates designed to amortize the cost of assets over their estimated useful
lives. Amortization is recorded using the declining balance method at the
following annual rates:
Furniture and fixtures - 10%
Computer hardware - 30%
Computer software - 20%
Leasehold improvements Over term of lease
CONCENTRATION OF CREDIT RISK
The financial instruments of the Corporation that are exposed to concentration
of credit risk consist primarily of cash and short term deposits. The
Corporation's cash and cash equivalents are placed with high quality major
Canadian chartered banking institutions, limiting its exposure of credit risk.
GOODWILL
Goodwill is recorded at cost and is being amortized on a straight-line basis
over 10 years. The recoverability of goodwill is assessed periodically based on
management estimates of undiscounted future operating income from each of the
acquired businesses to which the goodwill relates.
F-16
E-TREND NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
September 30, 2000 (expressed in U.S. dollars)
FINANCIAL INSTRUMENTS
Financial instruments of the Corporation consist mainly of cash and cash
equivalents, accounts receivable, due from related company and accounts payable
and accrued liabilities. At September 30, 2000, there are no significant
differences between the carrying values of these amounts and their estimated
market values.
REVENUE RECOGNITION
Gross revenue from product sales is recognized as the product is delivered.
Sales returns are limited to 15% of the total sales to each unrelated customer
and are credited against future sales.
INCOME TAXES
Income taxes are computed using the liability method. Under the liability
method, deferred income tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse.
Recognition of deferred tax assets is limited to amounts considered by
management to be more likely than not of realization in future periods.
INVESTMENT
Investment is publicly traded equity securities classified as available for sale
and are recorded at market. Unrealized gains and losses are reflected in other
comprehensive income.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
STOCK BASED COMPENSATION
The Corporation applies the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its stock option plans. Accordingly,
no compensation cost is recognized in the accounts as options are granted with
an exercise price that approximates the prevailing market price.
COMPUTATION OF LOSS PER SHARE
Basic loss per stock is computed by dividing the net loss attributable to common
stockholders by the weighted average number of common stock outstanding for that
period. Diluted loss per stock is computed giving effect to all dilutive
potential common stock that were outstanding during the period. Dilutive
potential common stock consist of incremental common stock issuable upon
exercise of convertible securities. At September 30, 2000, there were no
dilutive potential common stock and therefore the dilutive loss per stock is
equivalent to the basic loss per stock.
F-17
E-TREND NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
September 30, 2000 (expressed in U.S. dollars)
FOREIGN CURRENCY TRANSLATION
The functional currency of the Corporation and its subsidiary is the Canadian
dollar. Accordingly, all assets and liabilities are translated at the year end
exchange rate and revenues and expenses are translated at average exchange
rates. Gains and losses arising from the translation of the financial statements
of the Corporation are recorded in a "Cumulative Translation Adjustment" account
in stockholders' equity.
Transactions denominated in foreign currencies are translated at the exchange
rate on the transaction date. Foreign currency denominated monetary assets and
liabilities are translated at the exchange rate in effect of the balance sheet
date. The resulting exchange gains and losses on these items are included in net
earnings.
3. ACQUISITION
The Corporation acquired all of the issued and outstanding shares of Langara
Distribution Inc. ("Langara") effective January 1, 2000 for consideration of
200,000 common shares valued at $1.00 per share and 200,000 share purchase
warrants exercisable at $2.00 per warrant from the date of issuance. The
ascribed value of this transaction was $200,000 and no value has been ascribed
to the warrants. This acquisition was accounted for by the purchase method
allocating all of the purchase price to goodwill. The operating results of
Langara are included in the consolidated statements of operations and deficit
from the date of acquisition. The pro-forma loss and pro-forma loss per share
for the year ended September 30, 1999 giving effect to the acquisition of
Langara as though it had occurred as at October 1, 1998 do not differ materially
from that recorded.
4. INVESTMENT
On January 21, 2000, the Corporation swapped 99,900 common shares of Video
Headquarters Inc., ("Video Headquarters") a publicly traded Canadian company,
for 100,000 shares of the Corporation at a value of $150,000.
SEPTEMBER 30, 2000
-----------------------------------------
TRANSLATED UNREALIZED RECORDED
COST BASIS GAIN BASIS
$ $ $
-----------------------------------------
Video Headquarters common shares 143,280 89,102 232,382
=========================================
F-18
E-TREND NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
September 30, 2000 (expressed in U.S. dollars)
5. CAPITAL ASSETS
SEPTEMBER 30, 2000
----------------------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
$ $ $
----------------------------------------------------
Furniture and fixtures 8,196 404 7,792
Leasehold improvements 25,545 1,277 24,268
Computer hardware 31,718 4,468 27,250
Computer software 232,938 25,607 207,331
----------------------------------------------------
298,397 31,756 266,641
====================================================
SEPTEMBER 30, 1999
----------------------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
$ $ $
----------------------------------------------------
Computer software 25,000 -- 25,000
====================================================
6. LINE OF CREDIT
The Corporation has a line of credit with a limit of $150,000 which accrues
interest at prime plus 0.5% per annum. As at September 30, 2000, this line of
credit had an overdraft balance of $74,816.
7. SHARE CAPITAL
AUTHORIZED
25,000,000 common shares at $0.001 per value
25,000,000 preferred shares at $0.001 per value
COMMON STOCK ISSUED
As of September 30, 1999, 6,075,000 and 775,000 common shares had been issued at
$0.001 and $1.00 per share.
On October 1, 1999, 85,000 common shares were issued for services provided by
three consultants in relation to the development of the Corporation's website
for $1.00 per share.
On March 22, 2000, 1,618,734 common shares were issued for cash consideration at
prices of $1.00 and $1.50 per share.
On January 21, 2000, 100,000 common shares were issued at $1.50 in exchange for
common shares in Video Headquarters.
On January 1, 2000, 200,000 shares were issued to acquire Langara with an
ascribed value of $1.00 per share.
F-19
E-TREND NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
September 30, 2000 (expressed in U.S. dollars)
OPTIONS
The Company is authorized to grant employees, directors and officers options to
purchase up to 2,000,000 common shares. The following table details the options
outstanding at September 30, 2000:
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
# $
---------------------------------------
Outstanding at September 30, 1999 -- --
Granted 1,438,000 1.99
---------------------------------------
Outstanding at September 30, 2000 1,438,000 1.99
=======================================
Exercisable at September 30, 2000 9,700 1.26
=======================================
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions.
2000
$
---------------
Risk free interest rate 7.50%
Dividend yield 0%
Volatility factors of expected market price 100%
Weighted average expected life of the options 2 years
The Black-Scholes options valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, the valuation model calculates the expected
stock price volatility based on highly subjective assumptions. Because the
Corporation's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Pro forma disclosures of loss and loss per common share are presented below as
if the Corporation had adopted the cost recognition requirements under FAS 123.
The compensation cost for the stock-based compensation was approximately
$1,048,300.
2000
$
------------
Loss As reported 811,156
Pro forma 1,859,456
Basic and diluted loss per common share As reported ($/share) (0.10)
Pro forma ($/share) (0.23)
WARRANTS
On September 30, 2000, there were 200,000 common share purchase warrants issued
and outstanding. Each warrant entitles the holder to purchase one common share
of the Corporation for $2.00 per share expiring April 20, 2002.
F-20
E-TREND NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
September 30, 2000 (expressed in U.S. dollars)
8. LOSS PER SHARE
SEPTEMBER SEPTEMBER
30, 2000 30, 1999
$ $
-------------------------------
Net loss 811,156 55,339
Weighted average number of common shares outstanding 7,946,310 2,857,943
-------------------------------
Loss per common share - basic and diluted (0.10) (0.02)
===============================
9. RELATED PARTY TRANSACTIONS AND ECONOMIC DEPENDENCE
The due from related company of $231,709 represents an advance to the
Corporation's major shareholder, Video Headquarters. The advance bears interest
at 8% per annum, is unsecured and has no fixed terms of repayment. At September
30, 2000, the Corporation received interest income of $17,056 from Video
Headquarters.
The Corporation sold $608,305 of its products to Video Headquarters and at
September 30, 2000, owes the Corporation $207,716 in trade receivables. The
Corporation does not limit sales returns from Video Headquarters and receives
91.5% of its sales from Video Headquarters.
10. INCOME TAXES
The income tax benefit differs from the amount computed by applying the Canadian
federal statutory tax rates to the loss before income taxes for the following
reasons:
SEPTEMBER SEPTEMBER
30, 2000 30, 1999
$ $
-------------------------------
Income tax benefit at Canadian statutory rates (44.62%) (373,714) (24,692)
Increase (decrease) in taxes resulting from:
Change in deferred tax asset valuation allowance 373,714 24,692
-------------------------------
Income tax benefit -- --
===============================
Future income taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The components of the
Corporation's future income tax assets are as follows:
SEPTEMBER SEPTEMBER
30, 2000 30, 1999
$ $
-------------------------------
Non-capital loss carryforwards 371,374 24,692
Undepreciated capital costs in excess of book value of capital
assets 17,961 --
-------------------------------
Net future tax assets 389,335 24,692
Valuation allowance (389,335) (24,692)
-------------------------------
-- --
===============================
F-21
E-TREND NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
September 30, 2000 (expressed in U.S. dollars)
11. COMMITMENTS
The Corporation is committed to the following rental payments under various
equipment leases:
$
-------------
2001 82,820
2002 53,958
2003 55,812
2004 21,404
2005 5,351
-------------
219,345
=============
12. SUBSEQUENT EVENT
On November 3, 2000, the Corporation entered into a letter of intent to be
acquired, by way of a share exchange and reorganization, by Cool Entertainment
Inc. The Corporation will be the successor company after conclusion of the
proposed transaction.
F-22
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the General Corporate Law of the State of
Delaware, the Registrant has broad powers to indemnify its directors and
officers against liabilities they may incur in such capacities, including
liabilities under the Securities Act of 1933, as amended (the "Securities Act").
The Registrant's Bylaws (Exhibit 3.2 hereto) also provide for mandatory
indemnification of its directors and executive officers, and permissive
indemnification of its employees and agents, to the fullest extent permissible
under Delaware law.
The Registrant's Certificate of Incorporation (Exhibit 3.1 hereto)
provides that the liability of its directors for monetary damages shall be
eliminated to the fullest extent permissible under Delaware law. Pursuant to
Delaware law, this includes elimination of liability for monetary damages for
breach of the directors' fiduciary duty of care to the Registrant and its
Stockholders. These provisions do not eliminate the directors' duty of care and,
in appropriate circumstances, equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for any transaction from which the director derived an improper personal
benefit, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by the registrant in connection with the
securities being registered are as follows:
Securities and Exchange Commission filing fee........$ 1,457.50
Accounting fees and expenses......................... 5,000.00
Blue sky fees and expenses........................... 1,000.00
Legal fees and expenses.............................. 20,000.00
Transfer agent fees and expenses..................... 2,000.00
Printing expenses.................................... 2,000.00
Miscellaneous expenses............................... 8,542.50
--------------
Total................................................$ 40,000.00
==============
All amounts are estimates except the SEC filing fee. The Selling
Stockholder will be bearing the cost of its own brokerage fees and commissions
and its own legal and accounting fees.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since July 1998, the Registrant has issued and sold the unregistered
securities set forth in the tables below. The information has been adjusted to
reflect the reorganization of the Common Stock.
COMMON STOCK:
----------------------------------------------------------------------------------------------------------------------
DATE PERSONS OR CLASS OF PERSONS NUMBER OF SHARES CONSIDERATION
----------------------------------------------------------------------------------------------------------------------
01/29/99 Advantage Investment Holdings, Ltd. 2,498 cash of $99,927
and Andrew Robinson
----------------------------------------------------------------------------------------------------------------------
01/29/99 Clement Lau, William Hadcock, Len 231,840 Shares of Cool Entertainment, Inc.
Voth, and Marc Belcourt
----------------------------------------------------------------------------------------------------------------------
II-1
------------------------------------------------------------------------------------------------------------------------
DATE PERSONS OR CLASS OF PERSONS NUMBER OF SHARES CONSIDERATION
------------------------------------------------------------------------------------------------------------------------
04/26/99 - Advantage Investment Holdings Ltd., 19,242 cash of $776,000
11/22/00 Cerris Finance Limited, Worgan
Corporation and Merrow International
------------------------------------------------------------------------------------------------------------------------
02/01/00 Orienstar Finance Limited 4,778 cash of $224,000
------------------------------------------------------------------------------------------------------------------------
03/01/00 - Charterbridge Financial 2,660 consulting services valued at $151,480
08/24/00
------------------------------------------------------------------------------------------------------------------------
03/01/00 Bulletin Board Times 50 services rendered valued at $3,125
------------------------------------------------------------------------------------------------------------------------
02/21/01 Shareholders of E-Trend Networks, Inc. 4,441,867 Shares of E-Trend Networks, Inc. (a
Nevada corporation)
------------------------------------------------------------------------------------------------------------------------
05/23/01 Clement Lau, William Hadcock, Len Voth 40,000 payment of notes in the amount of
and Marc Belcourt $137,789
------------------------------------------------------------------------------------------------------------------------
05/23/01 Garrett K. Krause 200,000 consulting services valued at $380,000
------------------------------------------------------------------------------------------------------------------------
05/23/01 Gregg Johnson, Len Voth, and Trevor 90,000 directors' fees for fiscal year 2001
Hillman valued at $90,000
------------------------------------------------------------------------------------------------------------------------
05/23/01 Gregg Johnson and Trevor Hillman 60,000 management fees for fiscal year 2001
valued at $114,000
------------------------------------------------------------------------------------------------------------------------
No underwriters were used in the above transactions. The registrant
relied upon the exemption from registration contained in Section 4(2) as to all
of the transactions except for the sales of shares in January 1999, the sale of
shares to Orienstar Finance Limited, and the exchange of shares with the
shareholders of E-Trend Networks, Inc. The registrant relied upon Rule 504 for
the sales of shares in January 1999 and the sale of shares to Orienstar Finance
Limited, and upon Rule 506 for the exchange transaction. With regard to the
transactions made in reliance on the exemption contained in Section 4(2), the
purchasers were deemed to be sophisticated with respect to the investment in the
securities due to their financial condition and involvement in the registrant's
business. Restrictive legends were placed on the stock certificates evidencing
the shares issued in the Section 4(2) transactions.
ITEM 27. EXHIBITS
--------------------------------------------------------------------------------
EXHIBIT
NO. DOCUMENT
--------------------------------------------------------------------------------
2.1 Agreement and Plan of Share Exchange (1)
--------------------------------------------------------------------------------
3.1 Certificate of Incorporation, as amended
--------------------------------------------------------------------------------
3.2 Bylaws
--------------------------------------------------------------------------------
5.1 Opinion of Dill Dill Carr Stonbraker & Hutchings, P.C.
--------------------------------------------------------------------------------
10.1 Amended and Restated Investment Agreement with Swartz Private
Equity, LLC
--------------------------------------------------------------------------------
10.2 Amended and Restated Registration Rights Agreement with Swartz
Private Equity, LLC
--------------------------------------------------------------------------------
10.3 Amended Warrant to Purchase Common Stock issued to Swartz Private
Equity, LLC
--------------------------------------------------------------------------------
10.4 Proposed Form of Video One Canada Ltd. Business Agreement
with Langara Distribution (2)
--------------------------------------------------------------------------------
II-2
EXHIBIT
NO. DOCUMENT
--------------------------------------------------------------------------------
10.5 2001 Stock Plan (1)
--------------------------------------------------------------------------------
21 Subsidiaries of the Registrant
--------------------------------------------------------------------------------
23.1 Consent of Dill Dill Carr Stonbraker & Hutchings, P.C.
Reference is made to Exhibit 5.1
--------------------------------------------------------------------------------
23.2 Consent of Ernst & Young, LLP
--------------------------------------------------------------------------------
-----------------
(1) Incorporated by reference to the exhibits to the registrant's definitive
proxy statement filed January 2, 2001
(2) Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the issuer pursuant to the foregoing provisions, or
otherwise, the issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the issuer in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The Registrant hereby undertakes that:
(1) For determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the issuer pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this Registration Statement as
of the time the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial BONA FIDE
offering of those securities.
The Registrant hereby undertakes to:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of
the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement.
II-3
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Calgary,
Province of Alberta, Canada on September 24, 2001.
E-TREND NETWORKS, INC.
By: /s/ CAROLINE G. ARMSTRONG
--------------------------------------------
Caroline G. Armstrong
PRESIDENT AND CHIEF EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
SIGNATURE TITLE DATE
President and Chief Executive Officer
/s/ CAROLINE G. ARMSTRONG (Principal Executive Officer) September 24, 2001
------------------------------------ ------------------------
Caroline G. Armstrong
Interim Chief Financial Officer
(Principal Financial and Accounting
/s/ LORNE COGSWELL Officer) September 24, 2001
------------------------------------ ------------------------
Lorne Cogswell
/s/ GREG C. JOHNSON Director September 24, 2001
------------------------------------ ------------------------
Gregg C. Johnson
Director
------------------------------------ ------------------------
Trevor M. Hillman
/s/ LEN VOTH Director September 24, 2001
------------------------------------ ------------------------
Len Voth
II-5
EX-3.1
3
ex3-1.txt
CERTIFICATE OF INCORPORATION
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION, AS AMENDED
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
E-TREND NETWORKS, INC.
E-Trend Networks, Inc., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware, does hereby certify:
FIRST: That at a meeting of the Board of Directors of the
Corporation, resolutions were duly adopted setting forth a
proposed amendment of the Certificate of incorporation of said
corporation, declaring said amendment to be advisable and
submitting it to the stockholders of the Corporation for
adoption. The resolution setting forth the proposed amendment
is as follows:
RESOLVED, that the Certificate of Incorporation of this
corporation be amended by changing Article IV thereof so that,
as amended, said Article shall be and read as follows:
ARTICLE IV
Authorized Capital Stock
(a) The total number of shares of stock
which the Corporation shall have authority to issue
is 21,000,000 shares of capital stock, consisting of
(i) 20,000,000 shares of common stock, par value
$0.0001 per share (the "Common Stock") and (ii)
1,000,000 shares of preferred stock, par value
$0.0001 per share (the "Preferred Stock").
(b) Common Stock. The powers, preferences
and rights, and the qualifications, limitations and
restrictions, of each class of the Common Stock are
as follows:
(1) No Cumulative Voting. The
holders of shares of Common Stock shall not have
cumulative voting rights.
(2) Dividends; Stock Splits. Subject
to the rights of the holders of Preferred Stock, and
subject to any other provisions of this Certificate
of Incorporation, as it may be amended from time to
time, holders of shares of Common Stock shall be
entitled to receive such dividends and other
distributions in cash, stock or property of the
Corporation when, as and if declared thereon by the
Board of Directors from time to time out of assets or
funds of the Corporation legally available therefore.
(3) Liquidation, Dissolution,
Winding Up. In the event of any liquidation,
dissolution or winding up (either voluntary or
involuntary) of the Corporation, the holders of
shares of Common Stock shall be entitled to receive
the assets and funds of the Corporation available for
distribution after payments to creditors and to the
holders of any Preferred Stock of the Corporation
that may at the time be outstanding, in proportion to
the number of shares held by them, respectively.
(4) No Preemptive or Subscription
Rights. No holder of shares of Common Stock shall be
entitled to preemptive or subscription rights.
(c) Preferred Stock. The Board of Directors
is hereby expressly authorized, subject to
limitations prescribed by law, to provide for the
issuance of all or any shares of the Preferred Stock
in one or more classes or series, and to fix for each
such class or series such voting powers, full or
limited, or no voting powers, and such designations,
preferences and relative, participating, optional or
other special rights and such qualifications,
limitations or restrictions thereof, as shall be
stated and expressed in the resolution or resolutions
adopted by the Board of Directors providing for the
issuance of such class or series.
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, stockholders holding the necessary number of shares
as required by statute signed a written consent approving and
adopting the amendment in accordance with Section 228 of the
General Corporation Law of the State of Delaware.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of
the State of Delaware.
FOURTH: That said amendment shall be effective as of April 20, 2001.
IN WITNESS WHEREOF, said Corporation has caused this certificate to be signed by
Caroline G. Armstrong, its President, and Timothy J. Sebastian, its Secretary,
on April 19, 2001.
ATTEST:
/S/ TIMOTHY J. SEBASTIAN /S/ CAROLINE G. ARMSTRONG
-------------------------------- --------------------------------------
Timothy J. Sebastian Caroline G. Armstrong
CERTIFICATE OF INCORPORATION
OF
E-TREND NETWORKS, INC.
ARTICLE I
NAME
The name of the Corporation is E-Trend Networks, Inc. (the
"Corporation").
ARTICLE II
REGISTERED OFFICE AND REGISTERED AGENT
The address of the registered office of the Corporation is National
Corporate Research, Ltd., 615 South DuPont Highway, in the City of Dover, County
of Kent, State of Delaware 19901. The name of its registered agent at that
address is National Corporate Research, Ltd.
ARTICLE III
PURPOSE AND TERM
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware. The Corporation is to have perpetual existence.
ARTICLE IV
AUTHORIZED CAPITAL STOCK
(a) The total number of shares of stock which the Corporation shall
have authority to issue is 100,000,000 shares of capital stock, consisting of
(i) 80,000,000 shares of common stock, par value $0.0001 per share (the "Common
Stock") and (ii) 20,000,000 shares of preferred stock, par value $0.0001 per
share (the "Preferred Stock").
(b) Common Stock. The powers, preferences and rights, and the
qualifications, limitations and restrictions, of each class of the Common Stock
are as follows:
(1) No Cumulative Voting. The holders of shares of Common
Stock shall not have cumulative voting rights.
Certificate of Incorporation
of
E-Trend Networks, Inc.
Page 1 of 5
(2) Dividends; Stock Splits. Subject to the rights of the
holders of Preferred Stock, and subject to any other provisions of this
Certificate of Incorporation, as it may be amended from time to time, holders of
shares of Common Stock shall be entitled to receive such dividends and other
distributions in cash, stock or property of the Corporation when, as and if
declared thereon by the Board of Directors from time to time out of assets or
funds of the Corporation legally available therefor.
(3) Liquidation, Dissolution, Winding Up. In the event of
any liquidation, dissolution or winding up (either voluntary or involuntary) of
the Corporation, the holders of shares of Common Stock shall be entitled to
receive the assets and funds of the Corporation available for distribution after
payments to creditors and to the holders of any Preferred Stock of the
Corporation that may at the time be outstanding, in proportion to the number of
shares held by them, respectively.
(4) No Preemptive or Subscription Rights. No holder of
shares of Common Stock shall be entitled to preemptive or subscription rights.
(c) Preferred Stock. The Board of Directors is hereby expressly
authorized, subject to limitations prescribed by law, to provide for the
issuance of all or any shares of the Preferred Stock in one or more classes or
series, and to fix for each such class or series such voting powers, full or
limited, or no voting powers, and such designations, preferences and relative,
participating, optional or other special rights and such qualifications,
limitations or restrictions thereof, as shall be stated and expressed in the
resolution or resolutions adopted by the Board of Directors providing for the
issuance of such class or series.
ARTICLE V
BOARD OF DIRECTORS
(a) The business and affairs of the Corporation shall be managed
by a Board of Directors which shall exercise all the powers of the Corporation
except as otherwise provided in the Bylaws, this Certificate of Incorporation or
by the laws of the State of Delaware.
(b) The number of members of the Board of Directors shall be set
in accordance with the Corporation's Bylaws; however, the initial Board of
Directors shall consist of one member. The name and address of the person who
shall serve as the director until the first annual meeting of stockholders and
until his successor is duly elected and qualified are as follows:
NAME ADDRESS
Leonard N. Voth 4422 Stone Crescent
West Vancouver, British Columbia
V7V 1B7 Canada
Certificate of Incorporation
of
E-Trend Networks, Inc.
Page 2 of 5
(c) Election of directors need not be by written ballot unless the
Bylaws so provide.
(d) Subject to the terms of any one or more classes or series of
Preferred Stock, any vacancy on the Board of Directors that results from an
increase in the number of directors may be filled by a majority of the Board of
Directors then in office, provided that a quorum is present, and any other
vacancy occurring on the Board of Directors may be filled by a majority of the
Board of Directors then in office, even if less than a quorum, or by a sole
remaining director. Any director of any class elected to fill a vacancy
resulting from an increase in the number of directors of such class shall hold
office for a term that shall coincide with the remaining term of that class. Any
director elected to fill a vacancy not resulting from an increase in the number
of directors shall have the same remaining term as that of his predecessor.
ARTICLE VI
LIMITATION OF LIABILITY
No director shall be personally liable to the Corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent such exemption from liability or limitation thereof is not
permitted under the General Corporation Law of the State of Delaware as the same
exists or may hereafter be amended. If the General Corporation Law of the State
of Delaware is amended hereafter to authorize the further elimination or
limitation of the liability of directors, then the liability of a director of
the Corporation shall be eliminated or limited to the fullest extent authorized
by the General Corporation Law of the State of Delaware, as so amended. Any
repeal or modification of this Article VI by the stockholders of the Corporation
shall not adversely affect any right or protection of a director of the
Corporation existing at the time of such repeal or modification with respect to
acts or omissions occurring prior to such repeal or modification.
ARTICLE VII
INDEMNIFICATION
The Corporation shall indemnify its directors and officers to the
fullest extent authorized or permitted by law, as now or hereafter in effect,
and such right to indemnification shall continue as to a person who has ceased
to be a director or officer of the Corporation and shall inure to the benefit of
his or her heirs, executors and personal and legal representatives; provided,
however, that, except for proceedings to enforce rights to indemnification, the
Corporation shall not be obligated to indemnify any director or officer (or his
or her heirs, executors or personal or legal representatives) in connection with
a proceeding (or part thereof) initiated by such person unless such proceeding
(or part
Certificate of Incorporation
of
E-Trend Networks, Inc.
Page 3 of 5
thereof) was authorized or consented to by the Board of Directors. The right to
indemnification conferred by this Article VII shall include the right to be paid
by the Corporation the expenses incurred in defending or otherwise participating
in any proceeding in advance of its final disposition.
The Corporation may, to the extent authorized from time to time by the
Board of Directors, provide rights to indemnification and to the advancement of
expenses to employees and agents of the Corporation similar to those conferred
in this Article VII to directors and officers of the Corporation.
The rights to indemnification and to the advance of expenses conferred
in this Article VII shall not be exclusive of any other right which any person
may have or hereafter acquire under this Certificate of Incorporation, the
Bylaws of the Corporation, any statute, agreement, vote of stockholders or
disinterested directors or otherwise.
Any repeal or modification of this Article VII by the stockholders of
the Corporation shall not adversely affect any rights to indemnification and to
the advancement of expenses of a director or officer of the Corporation existing
at the time of such repeal or modification with respect to any acts or omissions
occurring prior to such repeal or modification.
ARTICLE VIII
AMENDMENT OF BYLAWS
In furtherance and not in limitation of the powers conferred upon it by
the laws of the State of Delaware, the Board of Directors shall have the power
to adopt, amend, alter or repeal the Corporation's Bylaws. The affirmative vote
of at least a majority of the entire Board of Directors shall be required to
adopt, amend, alter or repeal the Corporation's Bylaws.
ARTICLE IX
INCORPORATOR
The name and address of the incorporator is Fay M. Matsukage, Esq., c/o
Dill Dill Carr Stonbraker & Hutchings, P.C., 455 Sherman Street, Suite 300,
Denver, Colorado 80203.
Certificate of Incorporation
of
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Page 4 of 5
I, the undersigned, for the purpose of forming a corporation under the
laws of the State of Delaware, do make, file and record this Certificate, and do
certify that the facts stated herein are true, and I have accordingly hereunto
set my hand this 20th day of December, A.D. 2000.
/S/ FAY M. MATSUKAGE
------------------------------
Fay M. Matsukage, Esq.
Incorporator
Certificate of Incorporation
of
E-Trend Networks, Inc.
Page 5 of 5
EX-3.2
4
ex3-2.txt
BYLAWS
EXHIBIT 3.2
BYLAWS
BYLAWS
OF
E-TREND NETWORKS, INC.
TABLE OF CONTENTS
ARTICLE I...................................................................................1
CORPORATE OFFICES........................................................................1
1.1REGISTERED OFFICE..................................................................1
1.2OTHER OFFICES......................................................................1
ARTICLE II..................................................................................1
MEETINGS OF STOCKHOLDERS.................................................................1
2.1PLACE OF MEETINGS..................................................................1
2.2ANNUAL MEETING.....................................................................1
2.3SPECIAL MEETING....................................................................2
2.4NOTICE OF STOCKHOLDERS' MEETINGS...................................................2
2.5MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.......................................2
2.6QUORUM.............................................................................2
2.7ADJOURNED MEETING; NOTICE..........................................................3
2.8VOTING.............................................................................3
2.9WAIVER OF NOTICE...................................................................3
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING..........................4
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS......................4
2.12 PROXIES..........................................................................5
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE............................................5
ARTICLE III.................................................................................6
DIRECTORS................................................................................6
3.1POWERS.............................................................................6
3.2NUMBER OF DIRECTORS................................................................6
3.3ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS............................6
3.4RESIGNATION AND VACANCIES..........................................................6
3.5PLACE OF MEETINGS; MEETINGS BY TELEPHONE...........................................7
3.6FIRST MEETINGS.....................................................................7
3.7REGULAR MEETINGS...................................................................8
3.8SPECIAL MEETINGS; NOTICE...........................................................8
3.9QUORUM.............................................................................8
3.10 WAIVER OF NOTICE.................................................................9
3.11 ADJOURNED MEETING; NOTICE........................................................9
3.12 ACTION BY WRITTEN CONSENT WITHOUT A MEETING......................................9
3.13 FEES AND COMPENSATION OF DIRECTORS...............................................9
3.14 APPROVAL OF LOANS TO OFFICERS....................................................9
3.15 REMOVAL OF DIRECTORS............................................................10
ARTICLE IV.................................................................................10
COMMITTEES..............................................................................10
4.1COMMITTEES OF DIRECTORS...........................................................10
4.2COMMITTEE MINUTES.................................................................11
4.3MEETINGS AND ACTION OF COMMITTEES.................................................11
ARTICLE V..................................................................................11
OFFICERS................................................................................11
5.1OFFICERS..........................................................................11
5.2ELECTION OF OFFICERS..............................................................11
5.3SUBORDINATE OFFICERS..............................................................12
5.4REMOVAL AND RESIGNATION OF OFFICERS...............................................12
5.5VACANCIES IN OFFICES..............................................................12
5.6CHAIRMAN OF THE BOARD.............................................................12
5.7PRESIDENT.........................................................................12
5.8VICE PRESIDENT....................................................................13
5.9SECRETARY.........................................................................13
5.10 TREASURER.......................................................................13
5.11 ASSISTANT SECRETARY.............................................................14
5.12 ASSISTANT TREASURER.............................................................16
5.13 AUTHORITY AND DUTIES OF OFFICERS................................................14
ARTICLE VI.................................................................................14
INDEMNITY...............................................................................14
6.1INDEMNIFICATION OF DIRECTORS AND OFFICERS.........................................14
6.2INDEMNIFICATION OF OTHERS.........................................................15
6.3INSURANCE.........................................................................15
ARTICLE VII................................................................................15
RECORDS AND REPORTS.....................................................................15
7.1MAINTENANCE AND INSPECTION OF RECORDS.............................................15
7.2INSPECTION BY DIRECTORS...........................................................16
7.3ANNUAL STATEMENT TO STOCKHOLDERS..................................................16
7.4REPRESENTATION OF SHARES OF OTHER CORPORATIONS....................................16
ARTICLE VIII...............................................................................17
GENERAL MATTERS.........................................................................17
8.1CHECKS............................................................................17
8.2EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS..................................17
8.3STOCK CERTIFICATES; PARTLY PAID SHARES............................................17
8.4SPECIAL DESIGNATION ON CERTIFICATES...............................................18
8.5LOST CERTIFICATES.................................................................18
8.6CONSTRUCTION; DEFINITIONS.........................................................18
8.7DIVIDENDS.........................................................................19
8.8FISCAL YEAR.......................................................................19
8.9SEAL..............................................................................19
8.10TRANSFER OF STOCK................................................................19
8.11STOCK TRANSFER AGREEMENTS........................................................19
8.12REGISTERED STOCKHOLDERS..........................................................20
ARTICLE IX.................................................................................20
AMENDMENTS..............................................................................20
ARTICLE X..................................................................................20
DISSOLUTION.............................................................................20
ARTICLE XI.................................................................................21
CUSTODIAN...............................................................................21
11.1APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES......................................21
11.2DUTIES OF CUSTODIAN..............................................................21
BYLAWS
OF
E-TREND NETWORKS, INC.
--------------------------------------------------------------
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the Corporation in the State of Delaware shall be
located at 9 East Loockerman Street, Suite 214, Dover, Delaware 19901, and the
name of its registered agent at that address is National Corporate Research,
Ltd.
1.2 OTHER OFFICES
The Board of Directors may at any time establish other offices at any place or
places where the Corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of Stockholders shall be held at any place, within or outside the State
of Delaware, and such time as designated by the Board of Directors. In the
absence of any such designation, Stockholders' meetings shall be held at the
registered office of the Corporation.
2.2 ANNUAL MEETING
The annual meeting of Stockholders shall be held each year on a date and at a
time designated by the Board of Directors. In the absence of such designation,
the annual meeting of Stockholders shall be held on the first Tuesday of May in
each year at the Corporation's principal business office. However, if such day
falls on a legal holiday, then the meeting shall be held at the same time and
place on the next succeeding full business day. At the annual meeting, Directors
shall be elected and any other business may be transacted, whether stated in the
notice of meeting or not, except as otherwise expressly provided by statute or
the Certificate of Incorporation.
Bylaws of E-Trend Networks, Inc. - Page 1
2.3 SPECIAL MEETING
A special meeting of the Stockholders may be called at any time by the Board of
Directors, or by the Chairman of the Board, or by the President, or by one or
more Stockholders holding shares in the aggregate entitled to cast not less than
a majority of the votes at that meeting.
If a special meeting is called by any person or persons other than the Board of
Directors or the President or the Chairman of the Board, then the request shall
be in writing, specifying the time of such meeting and the general nature of the
business proposed to be transacted, and shall be delivered personally or sent by
registered mail or by telegraphic or other facsimile transmission to the
Chairman of the Board, the President, any Vice President or the Secretary of the
Corporation. The Officer receiving the request shall cause notice to be promptly
given to the Stockholders entitled to vote, in accordance with the provisions of
Sections 2.4 and 2.5 of these Bylaws, that a meeting will be held at the time
requested by the person or persons calling the meeting, so long as that time is
not less than thirty-five (35) nor more than sixty (60) days after the receipt
of the request. If the notice is not given within twenty (20) days after receipt
of the request, then the person or persons requesting the meeting may give the
notice. Nothing contained in this paragraph of this Section 2.3 shall be
construed as limiting, fixing or affecting the time when a meeting of
Stockholders called by action of the Board of Directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of Stockholders' meetings shall be in writing and shall be sent or
otherwise given in accordance with Section 2.5 of these Bylaws not less than ten
(10) nor more than sixty (60) days before the date of the meeting to each
Stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of Stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
Stockholder at his address as it appears on the records of the Corporation. An
affidavit of the Secretary or an assistant Secretary or of the transfer agent of
the Corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 QUORUM
The holders of a one-third of the stock issued and outstanding and entitled to
vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the Stockholders for the transaction of business,
except as otherwise provided by statute or by the Certificate of Incorporation.
If, however, such quorum is not present or represented at any meeting of the
Stockholders, then the Stockholders entitled to vote thereat, present in person
or
Bylaws of E-Trend Networks, Inc. - Page 2
represented by proxy, shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum is present
or represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.7 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time or place, unless these Bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the Corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each Stockholder of record entitled to vote at the meeting.
2.8 VOTING
The Stockholders entitled to vote at any meeting of Stockholders shall be
determined in accordance with the provisions of Section 2.11 of these Bylaws,
subject to the provisions of Sections 217 and 218 of the Delaware General
Corporation Law (relating to voting rights of fiduciaries, pledgors and joint
owners of stock and to voting trusts and other voting agreements).At all
meetings of Stockholders all matters, except as otherwise provided by statute,
shall be determined by the affirmative vote of the majority of shares present in
person or by proxy and entitled to vote on the subject matter. Voting at
meetings of Stockholders need not be by written ballot.
2.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the Delaware
General Corporation Law or of the Certificate of Incorporation or these Bylaws,
a written waiver thereof, signed by the person entitled to notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
Stockholders need be specified in any written waiver of notice unless so
required by the Certificate of Incorporation or these Bylaws.
Bylaws of E-Trend Networks, Inc. - Page 3
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken at any annual or special meeting of
Stockholders may be taken without a meeting, without prior notice and without
vote, if a consent or consents in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and voted
and shall be delivered to the Corporation by delivery to its registered office
in the State of Delaware, its principal place of business, or an Officer or
agent of the Corporation having custody of the book in which proceedings of
meetings of Stockholders are recorded. Delivery made to the Corporation's
registered office shall be by hand or by certified or registered mail, return
receipt requested.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall be given to those Stockholders who have not
consented in writing. If the action which is consented to is such as would have
required the filing of a certificate under any section of the Delaware General
Corporation Law if such action had been voted on by Stockholders at a meeting
thereof, then the certificate filed under such section shall state, in lieu of
any statement required by such section concerning any vote of Stockholders, that
written notice and written consent have been given as provided in Section 228 of
the Delaware General Corporation Law.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
In order that the Corporation may determine the Stockholders entitled to notice
of or to vote at any meeting of Stockholders or any adjournment thereof, or
entitled to express consent to corporate action in writing without a meeting, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix, in advance, a record date, which shall not be
more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the Board of Directors does not so fix a record date:
(i) The record date for determining Stockholders entitled to
notice of or to vote at a meeting of Stockholders shall be at
the close of business on the day next preceding the day on
which notice is given, or, if notice is waived, at the close
of business on the day next preceding the day on which the
meeting is held.
(ii) The record date for determining Stockholders entitled to
express consent to corporate action in writing without a
meeting, when no prior action by the Board
Bylaws of E-Trend Networks, Inc. - Page 4
of Directors is necessary, shall be the day on which the first
written consent is expressed.
(iii) The record date for determining Stockholders for any other
purpose shall be at the close of business on the day on which
the Board of Directors adopts the resolution relating thereto.
A determination of Stockholders of record entitled to notice of or to vote at a
meeting of Stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
2.12 PROXIES
Each Stockholder entitled to vote at a meeting of Stockholders or to express
consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the Stockholder and filed with the Secretary of the Corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
Stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the Stockholder or the
Stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(e) of the Delaware General Corporation Law.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The Officer who has charge of the stock ledger of a Corporation shall prepare
and make, at least ten (10) days before every meeting of Stockholders, a
complete list of the Stockholders entitled to vote at the 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, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any Stockholder who is present.
Bylaws of E-Trend Networks, Inc. - Page 5
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the Delaware General Corporation Law and any
limitations in the Certificate of Incorporation or these Bylaws relating to
action required to be approved by the Stockholders or by the outstanding shares,
the business and affairs of the Corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the Board of Directors.
3.2 NUMBER OF DIRECTORS
The Board of Directors shall consist initially of one (1) Director, and
thereafter shall consist of such number as may be fixed from time to time by
resolution of the Board.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these Bylaws, Directors shall be elected at
each annual meeting of Stockholders to hold office until the next annual
meeting. Directors need not be Stockholders unless so required by the
Certificate of Incorporation or these Bylaws, wherein other qualifications for
Directors may be prescribed. Each Director, including a Director elected to fill
a vacancy, shall hold office until his successor is elected and qualified or
until his earlier resignation or removal.
Elections of Directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
Any Director may resign at any time upon written notice to the Corporation. When
one or more Directors so resigns and the resignation is 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, and
each Director so chosen shall hold office as provided in this section in the
filling of other vacancies.
Unless otherwise provided in the Certificate of Incorporation or these Bylaws:
Bylaws of E-Trend Networks, Inc. - Page 6
(i) Vacancies and newly created Directorships resulting from any
increase in the authorized number of Directors may be filled
by a majority of the Directors then in office, although less
than a quorum, or by a sole remaining Director.
(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more Directors by
the provisions of the Certificate of Incorporation, vacancies
and newly created Directorships of such class or classes or
series may be filled by a majority of the Directors elected by
such class or classes or series thereof then in office, or by
a sole remaining Director so elected.
If at any time, by reason of death or resignation or other cause, the
Corporation should have no Directors in office, then any Officer or any
Stockholder or an executor, administrator, trustee or guardian of a Stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a Stockholder, may call a special meeting of Stockholders in accordance with
the provisions of the Certificate of Incorporation or these Bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the Delaware General Corporation Law.
If, at the time of filling any vacancy or any newly created Directorship, the
Directors then in office constitute less than a majority of the whole Board (as
constituted immediately prior to any such increase), then the Court of Chancery
may, upon application of any Stockholder or Stockholders holding at least ten
(10) percent of the total number of the shares at the time outstanding having
the right to vote for such Directors, summarily order an election to be held to
fill any such vacancies or newly created Directorships, or to replace the
Directors chosen by the Directors then in office as aforesaid, which election
shall be governed by the provisions of Section 211 of the Delaware General
Corporation Law as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The Board of Directors of the Corporation may hold meetings, both regular and
special, either within or outside the State of Delaware.
Unless otherwise restricted by the Certificate of Incorporation or these Bylaws,
members of the Board of Directors, or any Committee designated by the Board of
Directors, may participate in a meeting of the Board of Directors, or any
Committee, by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and such participation in a meeting shall constitute presence in person at the
meeting.
3.6 FIRST MEETINGS
The first meeting of each newly elected Board of Directors shall be held at such
time and place as shall be fixed by the vote of the Stockholders at the annual
meeting and no notice of such meeting shall be necessary to the newly elected
Directors in order legally to constitute the
Bylaws of E-Trend Networks, Inc. - Page 7
meeting, provided a quorum shall be present. In the event of the failure of the
Stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the Stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the Directors.
3.7 REGULAR MEETINGS
Regular meetings of the Board of Directors may be held without notice at such
time and at such place as shall from time to time be determined by the Board.
3.8 SPECIAL MEETINGS; NOTICE
Special meetings of the Board of Directors for any purpose or purposes may be
called at any time by the Chairman of the Board, the President, any Vice
President, the Secretary or any two (2) Directors.
Notice of the time and place of special meetings shall be delivered personally
or by telephone to each Director or sent by first-class mail or telegram,
charges prepaid, addressed to each Director at that Director's address as it is
shown on the records of the Corporation. If the notice is mailed, it shall be
deposited in the United States mail at least four (4) days before the time of
the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the Director or to a person at the office of the Director
who the person giving the notice has reason to believe will promptly communicate
it to the Director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
Corporation.
3.9 QUORUM
At all meetings of the Board of Directors, a majority of the authorized number
of Directors shall constitute a quorum for the transaction of business and the
act of a majority of the Directors present at any meeting at which there is a
quorum shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the Certificate of Incorporation. If a
quorum is not present at any meeting of the Board of Directors, then the
Directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
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3.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the Delaware
General Corporation Law or of the Certificate of Incorporation or these Bylaws,
a written waiver thereof, signed by the person entitled to notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
Directors, or members of a Committee of Directors, need be specified in any
written waiver of notice unless so required by the Certificate of Incorporation
or these Bylaws.
3.11 ADJOURNED MEETING; NOTICE
If a quorum is not present at any meeting of the Board of Directors, then the
Directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
3.12 ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the Certificate of Incorporation or these Bylaws,
any action required or permitted to be taken at any meeting of the Board of
Directors, or of any Committee thereof, may be taken without a meeting if all
members of the Board or Committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the Board or Committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the Certificate of Incorporation or these Bylaws,
the Board of Directors shall have the authority to fix the compensation of
Directors.
3.14 APPROVAL OF LOANS TO OFFICERS
The Corporation may lend money to, or guarantee any obligation of, or otherwise
assist any Officer or other employee of the Corporation or of its subsidiary,
including any Officer or employee who is a Director of the Corporation or its
subsidiary, whenever, in the judgment of the Directors, such loan, guaranty or
assistance may reasonably be expected to benefit the Corporation. The loan,
guaranty or other assistance may be with or without interest and may be
unsecured, or secured in such manner as the Board of Directors shall approve,
including, without limitation, a pledge of shares of stock of the Corporation.
Nothing in this section contained shall
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be deemed to deny, limit or restrict the powers of guaranty or warranty of the
Corporation at common law or under any statute.
3.15 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute, by the Certificate of Incorporation or
by these Bylaws, any Director or the entire Board of Directors may be removed,
with or without cause, by the holders of a majority of the shares then entitled
to vote at an election of Directors.
No reduction of the authorized number of Directors shall have the effect of
removing any Director prior to the expiration of such Director's term of office.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The Board of Directors may, by resolution passed by a majority of the whole
Board, designate one or more Committees, with each Committee to consist of one
or more of the Directors of the Corporation. The Board may designate one or more
Directors as alternate members of any Committee, who may replace any absent or
disqualified member at any meeting of the Committee. In the absence or
disqualification of a member of a Committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member. Any such Committee, to the extent provided in the resolution of the
Board of Directors or in the Bylaws of the Corporation, shall have and may
exercise all the powers and authority 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 that may require it; but no
such Committee shall have the power or authority to (i) amend the Certificate of
Incorporation (except that a Committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the Board of Directors as provided in Section 151(a) of the Delaware General
Corporation Law, fix any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
Corporation or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other class
or classes of stock of the Corporation), (ii) adopt an agreement of merger or
consolidation under Sections 251 or 252 of the Delaware General Corporation Law,
(iii) recommend to the Stockholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, (iv) recommend to
the Stockholders a dissolution of the Corporation or a revocation of a
dissolution, or (v) amend the Bylaws of the Corporation; and, unless the Board
resolution establishing the Committee, the Bylaws or the Certificate of
Incorporation expressly so provide, no such Committee shall have the power or
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authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the Delaware
General Corporation Law.
4.2 COMMITTEE MINUTES
Each Committee shall keep regular minutes of its meetings and report the same to
the Board of Directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of Committees shall be governed by, and held and taken in
accordance with, the provisions of Article III of these Bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.7 (regular meetings),
Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10
(waiver of notice), Section 3.11 (adjournment and notice of adjournment), and
Section 3.12 (action without a meeting), with such changes in the context of
those Bylaws as are necessary to substitute the Committee and its members for
the Board of Directors and its members; provided, however, that the time of
regular meetings of Committees may also be called by resolution of the Board of
Directors and that notice of special meetings of Committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
Committee. The Board of Directors may adopt rules for the government of any
Committee not inconsistent with the provisions of these Bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The Officers of the Corporation shall be a President and a Secretary. The
Corporation may also have, at the discretion of the Board of Directors, a
Chairman of the Board, one or more Vice Presidents, one or more assistant Vice
Presidents, assistant secretaries, a Treasurer, assistant Treasurers, and any
such other Officers as may be appointed in accordance with the provisions of
Section 5.3 of these Bylaws. Any number of offices may be held by the same
person.
5.2 ELECTION OF OFFICERS
The Officers of the Corporation, except such Officers as may be appointed in
accordance with the provisions of Sections 5.3 or 5.5 of these Bylaws, shall be
chosen by the Board of Directors, subject to the rights, if any, of an Officer
under any contract of employment.
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5.3 SUBORDINATE OFFICERS
The Board of Directors may appoint, or empower the President to appoint, such
other Officers and agents as the business of the Corporation may require, each
of whom shall hold office for such period, have such authority, and perform such
duties as are provided in these Bylaws or as the Board of Directors may from
time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an Officer under any contract of employment,
any Officer may be removed, either with or without cause, by an affirmative vote
of the majority of the Board of Directors at any regular or special meeting of
the Board or, except in the case of an Officer chosen by the Board of Directors,
by any Officer upon whom such power of removal may be conferred by the Board of
Directors.
Any Officer may resign at any time by giving written notice to the Corporation.
Any resignation shall take effect at the date of the receipt of that notice or
at any later time specified in that notice; and, unless otherwise specified in
that notice, the acceptance of the resignation shall not be necessary to make it
effective. Any resignation is without prejudice to the rights, if any, of the
Corporation under any contract to which the Officer is a party.
5.5 VACANCIES IN OFFICES
Any vacancy occurring in any office of the Corporation shall be filled by the
Board of Directors.
5.6 CHAIRMAN OF THE BOARD
The Chairman of the Board, if such an Officer be elected, shall, if present,
preside at meetings of the Board of Directors and exercise and perform such
other powers and duties as may from time to time be assigned to him by the Board
of Directors or as may be prescribed by these Bylaws. If there is no President,
then the Chairman of the Board shall also be the chief executive Officer of the
Corporation and shall have the powers and duties prescribed in Section 5.7 of
these Bylaws.
5.7 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the Board of
Directors to the Chairman of the Board, if there be such an Officer, the
President shall be the chief executive Officer of the Corporation and shall,
subject to the control of the Board of Directors, have general supervision,
direction, and control of the business and the Officers of the Corporation. He
shall preside at all meetings of the Stockholders and, in the absence or
nonexistence of a Chairman of the Board, at all meetings of the Board of
Directors. He shall have the general
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powers and duties of management usually
vested in the office of President of a Corporation and shall have such other
powers and duties as may be prescribed by the Board of Directors or these
Bylaws.
5.8 VICE PRESIDENT
In the absence or disability of the President, the Vice Presidents, if any, in
order of their rank as fixed by the Board of Directors or, if not ranked, a 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. The Vice Presidents shall have such
other powers and perform such other duties as from time to time may be
prescribed for them respectively by the Board of Directors, these Bylaws, the
President or the Chairman of the Board.
5.9 SECRETARY
The Secretary shall keep or cause to be kept, at the principal executive office
of the Corporation or such other place as the Board of Directors may direct, a
book of minutes of all meetings and actions of Directors, Committees of
Directors, and Stockholders. The minutes shall show the time and place of each
meeting, whether regular or special (and, if special, how authorized and the
notice given), the names of those present at Directors' meetings or Committee
meetings, the number of shares present or represented at Stockholders' meetings,
and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal executive office
of the Corporation or at the office of the Corporation's transfer agent or
registrar, as determined by resolution of the Board of Directors, a share
register, or a duplicate share register, showing the names of all Stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings of the
Stockholders and of the Board of Directors required to be given by law or by
these Bylaws. He shall keep the seal of the Corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the Board of Directors or by these Bylaws.
5.10 TREASURER
The Treasurer, if any, shall keep and maintain, or cause to be kept and
maintained, adequate and correct books and records of accounts of the properties
and business transactions of the Corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, retained earnings,
and shares. The books of account shall at all reasonable times be open to
inspection by any Director.
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The Treasurer, if any, shall deposit all money and other valuables in the name
and to the credit of the Corporation with such depositaries as may be designated
by the Board of Directors. He shall disburse the funds of the Corporation as may
be ordered by the Board of Directors, shall render to the President and
Directors, whenever they request it, an account of all of his transactions as
Treasurer and of the financial condition of the Corporation, and shall have such
other powers and perform such other duties as may be prescribed by the Board of
Directors or these Bylaws.
5.11 ASSISTANT SECRETARY
The assistant Secretary, or, if there is more than one, the assistant
secretaries in the order determined by the Stockholders or Board of Directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the Secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the Secretary
and shall perform such other duties and have such other powers as the Board of
Directors or the Stockholders may from time to time prescribe.
5.12 ASSISTANT TREASURER
The assistant Treasurer, or, if there is more than one, the assistant
Treasurers, in the order determined by the Stockholders or Board of Directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the Treasurer or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the Treasurer
and shall perform such other duties and have such other powers as the Board of
Directors or the Stockholders may from time to time prescribe.
5.13 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all Officers of the
Corporation shall respectively have such authority and perform such duties in
the management of the business of the Corporation as may be designated from time
to time by the Board of Directors or the Stockholders.
ARTICLE VI
INDEMNITY
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Corporation shall, to the maximum extent and in the manner permitted by the
Delaware General Corporation Law, indemnify each of its Directors and Officers
against expenses (including attorneys' fees), judgments, fines, settlements, and
other amounts actually and reasonably incurred in connection with any
proceeding, arising by reason of the fact that such person is or was an agent of
the Corporation. For purposes of this Section 6.1, a "Director" or
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"Officer" of the Corporation includes any person (i) who is or was a Director or
Officer of the Corporation, (ii) who is or was serving at the request of the
Corporation as a Director or Officer of another Corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a Director or Officer of a
Corporation which was a predecessor Corporation of the Corporation or of another
enterprise at the request of such predecessor Corporation.
6.2 INDEMNIFICATION OF OTHERS
The Corporation shall have the power, to the extent and in the manner permitted
by the Delaware General Corporation Law, to indemnify each of its employees and
agents (other than Directors and Officers) against expenses (including
attorneys' fees), judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding, arising by reason of the
fact that such person is or was an agent of the Corporation. For purposes of
this Section 6.2, an "employee" or "agent" of the Corporation (other than a
Director or Officer) includes any person (i) who is or was an employee or agent
of the Corporation, (ii) who is or was serving at the request of the Corporation
as an employee or agent of another Corporation, partnership, joint venture,
trust or other enterprise, or (iii) who was an employee or agent of a
Corporation which was a predecessor Corporation of the Corporation or of another
enterprise at the request of such predecessor Corporation.
6.3 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 is or
was serving at the request of the Corporation as a Director, Officer, employee
or agent of another Corporation, partnership, joint venture, trust 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 the
Corporation would have the power to indemnify him against such liability under
the provisions of the Delaware General Corporation Law.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The Corporation shall, either at its principal executive office or at such place
or places as designated by the Board of Directors, keep a record of its
Stockholders listing their names and addresses and the number and class of
shares held by each Stockholder, a copy of these Bylaws as amended to date,
accounting books, and other records.
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Any Stockholder of record, in person or by attorney or other agent, shall, upon
written demand under oath stating the purpose thereof, have the right during the
usual hours for business to inspect for any proper purpose the Corporation's
stock ledger, a list of its Stockholders, and its other books and records and to
make copies or extracts therefrom. A proper purpose shall mean a purpose
reasonably related to such person's interest as a Stockholder. In every instance
where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the Stockholder. The demand under oath shall be directed to the
Corporation at its registered office in Delaware or at its principal place of
business.
The Officer who has charge of the stock ledger of a Corporation shall prepare
and make, at least ten (10) days before every meeting of Stockholders, a
complete list of the Stockholders entitled to vote at the 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, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any Stockholder who is present.
7.2 INSPECTION BY DIRECTORS
Any Director shall have the right to examine the Corporation's stock ledger, a
list of its Stockholders, and its other books and records for a purpose
reasonably related to his position as a Director. The Court of Chancery is
hereby vested with the exclusive jurisdiction to determine whether a Director is
entitled to the inspection sought. The Court may summarily order the Corporation
to permit the Director to inspect any and all books and records, the stock
ledger, and the stock list and to make copies or extracts therefrom. The Court
may, in its discretion, prescribe any limitations or conditions with reference
to the inspection, or award such other and further relief as the Court may deem
just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The Board of Directors shall present at each annual meeting, and at any special
meeting of the Stockholders when called for by vote of the Stockholders, a full
and clear statement of the business and condition of the Corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The Chairman of the Board, the President, any Vice President, the Treasurer, the
Secretary or assistant Secretary of this Corporation, or any other person
authorized by the Board of Directors or the President or a Vice President, is
authorized to vote, represent, and exercise on behalf of
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this Corporation all rights incident to any and all shares of any other
Corporation or Corporations standing in the name of this Corporation. The
authority granted herein may be exercised either by such person directly or by
any other person authorized to do so by proxy or power of attorney duly executed
by such person having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the Board of Directors shall determine by resolution which
person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the Corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The Board of Directors, except as otherwise provided in these Bylaws, may
authorize any Officer or Officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
Corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an Officer, no Officer, agent or employee shall have any power or
authority to bind the Corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a Corporation shall be represented by certificates, provided that
the Board of Directors of the Corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
Corporation. Notwithstanding the adoption of such a resolution by the Board of
Directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the Corporation by the chairman or vice-Chairman of
the Board of Directors, or the President or vice-President, and by the Treasurer
or an assistant Treasurer, or the Secretary or an assistant Secretary of such
Corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
Officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has ceased to be such Officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such Officer, transfer agent or
registrar at the date of issue.
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The Corporation may issue the whole or any part of its shares as partly paid and
subject to call for the remainder of the consideration to be paid therefor. Upon
the face or back of each stock certificate issued to represent any such partly
paid shares, upon the books and records of the Corporation in the case of
uncertificated partly paid shares, the total amount of the consideration to be
paid therefor and the amount paid thereon shall be stated. Upon the declaration
of any dividend on fully paid shares, the Corporation shall declare a dividend
upon partly paid shares of the same class, but only upon the basis of the
percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
If the Corporation is authorized to issue more than one class of stock or more
than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the Corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the Delaware General Corporation
Law, in lieu of the foregoing requirements there may be set forth on the face or
back of the certificate that the Corporation shall issue to represent such class
or series of stock a statement that the Corporation will furnish without charge
to each Stockholder who so requests the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares shall be
issued to replace a previously issued certificate unless the latter is
surrendered to the Corporation and cancelled at the same time. The Corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the Corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these Bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a Corporation and a natural
person.
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8.7 DIVIDENDS
The Directors of the Corporation, subject to any restrictions contained in the
Certificate of Incorporation, may declare and pay dividends upon the shares of
its capital stock pursuant to the Delaware General Corporation Law. Dividends
may be paid in cash, in property, or in shares of the Corporation's capital
stock.
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 may abolish any such reserve. Such purposes shall include but not be limited
to equalizing dividends, repairing or maintaining any property of the
Corporation, and meeting contingencies.
8.8 FISCAL YEAR
The fiscal year of the Corporation shall be fixed by resolution of the Board of
Directors and may be changed by the Board of Directors.
8.9 SEAL
This Corporation may have a corporate seal, which may be adopted or altered at
the pleasure of the Board of Directors, and may use the same by causing it or a
facsimile thereof, to be impressed or affixed or in any other manner reproduced.
8.10 TRANSFER OF STOCK
Upon surrender to the Corporation or the transfer agent of the Corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
The Corporation shall have power to enter into and perform any agreement with
any number of Stockholders of any one or more classes of stock of the
Corporation to restrict the transfer of shares of stock of the Corporation of
any one or more classes owned by such Stockholders in any manner not prohibited
by the Delaware General Corporation Law.
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8.12 REGISTERED STOCKHOLDERS
The Corporation shall be entitled to recognize the exclusive right of a person
registered on its books as the owner of shares to receive dividends and to vote
as such owner, shall be entitled to hold liable for calls and assessments the
person registered on its books as the owner of shares, and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of another person, whether or not it shall have express or other notice
thereof, except as otherwise provided by the laws of Delaware.
ARTICLE IX
AMENDMENTS
The original or other Bylaws of the Corporation may be adopted, amended or
repealed by the Stockholders entitled to vote; provided, however, that the
Corporation may, in its Certificate of Incorporation, confer the power to adopt,
amend or repeal Bylaws upon the Directors. The fact that such power has been so
conferred upon the Directors shall not divest the Stockholders of the power, nor
limit their power to adopt, amend or repeal Bylaws.
ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the Board of Directors of
the Corporation that the Corporation should be dissolved, the Board, after the
adoption of a resolution to that effect by a majority of the whole Board at any
meeting called for that purpose, shall cause notice to be mailed to each
Stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of Stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed dissolution.
If a majority of the outstanding stock of the Corporation entitled to vote
thereon votes for the proposed dissolution, then a certificate stating that the
dissolution has been authorized in accordance with the provisions of Section 275
of the Delaware General Corporation Law and setting forth the names and
residences of the Directors and Officers shall be executed, acknowledged, and
filed and shall become effective in accordance with Section 103 of the Delaware
General Corporation Law. Upon such certificate's becoming effective in
accordance with Section 103 of the Delaware General Corporation Law, the
Corporation shall be dissolved.
Whenever all the Stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of Directors or Stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the Delaware
General Corporation Law. Upon such consent's becoming effective in accordance
with Section 103 of the Delaware General Corporation Law, the Corporation shall
be dissolved. If the consent is signed by an attorney, then the original power
of attorney or a photocopy thereof shall be attached to and filed with the
consent. The consent filed with the Secretary of State shall have attached to it
the affidavit of the Secretary or some other Officer of the Corporation stating
that the consent has been signed by or on behalf of all the Stockholders
entitled to vote on a dissolution; in addition, there shall be attached to the
consent a certification by the Secretary or some other Officer of
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the Corporation setting forth the names and residences of the Directors and
Officers of the Corporation.
ARTICLE XI
CUSTODIAN
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
The Court of Chancery, upon application of any Stockholder, may appoint one or
more persons to be custodians and, if the Corporation is insolvent, to be
receivers, of and for the Corporation when:
(i) at any meeting held for the election of Directors the
Stockholders are so divided that they have failed to elect
successors to Directors whose terms have expired or would have
expired upon qualification of their successors; or
(ii) the business of the Corporation is suffering or is threatened
with irreparable injury because the Directors are so divided
respecting the management of the affairs of the Corporation
that the required vote for action by the Board of Directors
cannot be obtained and the Stockholders are unable to
terminate this division; or
(iii) the Corporation has abandoned its business and has failed
within a reasonable time to take steps to dissolve, liquidate
or distribute its assets.
11.2 DUTIES OF CUSTODIAN
The custodian shall have all the powers and title of a receiver appointed under
Section 291 of the Delaware General Corporation Law, but the authority of the
custodian shall be to continue the business of the Corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the Delaware General Corporation Law.
Bylaws of E-Trend Networks, Inc. - Page 21
On April 5, 2001, Section 3.2 of the Bylaws of E-Trend Networks, Inc., a
Delaware corporation, was amended to state as follows:
3.2 NUMBER OF DIRECTORS
The Board of Directors shall consist of at least three (3) directors, and
thereafter shall consist of such number as may be fixed from time to time by
resoltion of the Board or the stockholders.
EX-5.1
5
ex5-1.txt
OPINION
EXHIBIT 5.1
OPINION OF DILL DILL CARR STONBRAKER & HUTCHINGS, P.C.
DILL DILL CARR STONBRAKER & HUTCHINGS
A PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
--------------------------------------------------------------------------------
Daniel W. Carr Fay M. Matsukage**
John J. Coates Felicity Rossi
Kevin M. Coates Adam P. Stapen
H. Alan Dill Jon Stonbraker
Robert A. Dill Craig A. Stoner
Thomas M. Dunn Patrick D. Tooley
John A. Hutchings --------
Stephen M. Lee Leslie Block Kaye*
of counsel
* Also licensed in
Arizona and New
York
**Also licensed in
Nevada
September 25, 2001
E-Trend Networks, Inc.
5919 - 3rd Street, S.E.
Calgary, Alberta T2H 1K3
Canada
Gentlemen:
As counsel for your company, we have reviewed your Certificate of Incorporation
and Bylaws, and such other corporate records, documents, and proceedings and
such questions of law as we have deemed relevant for the purpose of this
opinion.
We have also examined the Registration Statement of your company on Form SB-2
which will be transmitted for filing with the Securities and Exchange Commission
(the "Commission") on or about September 26, 2001, covering the registration
under the Securities Act of 1933, as amended, of the following:
(a) Up to 5,000,000 shares of common stock which are issuable to Swartz
Private Equity, LLC as put shares under an investment agreement; and
(b) Up to 500,000 shares of common stock which are issuable upon the
exercise of commitment warrants issued to Swartz,
including the exhibits and form of prospectus (the "Prospectus") filed
therewith.
On the basis of such examination, we are of the opinion that:
1. The Company is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Delaware, with all
requisite corporate power and authority to own, lease, license, and use
its properties and assets and to carry on the businesses in which it is
now engaged.
2. The Company has an authorized capitalization as set forth in the
Prospectus.
3. The shares of Common Stock of the Company to be issued to Swartz
Private Equity, LLC are validly authorized and, when the pertinent
provisions of the Securities Act of 1933
--------------------------------------------------------------------------------
455 Sherman Street, Suite 300 / Denver, Colorado 80203 / Fax (303) 777-3823 /
(303) 777-3737
E-mail: dillndill@aol.com
E-Trend Networks, Inc.
September 25, 2001
Page 2
and such "blue sky" and securities laws as may be applicable have been
complied with, such shares will be validly issued, fully paid, and
nonassessable.
4. The shares of Common Stock of the Company to be issued to Swartz
Private Equity, LLC upon the exercise of the commitment warrants are
validly authorized and when the warrants are exercised in accordance
with their terms, the shares of Common Stock so issuable upon exercise
will be validly issued as fully paid and nonassessable shares of Common
Stock of the Company.
We hereby consent to the use of our name in the Registration Statement and
Prospectus in the section captioned "Legal Matters," and we also consent to the
filing of this opinion as an exhibit thereto. In giving this consent, we do not
thereby admit that we are within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933 or the rules and
regulations of the Commission thereunder.
Very truly yours,
/s/ Dill Dill Carr Stonbraker & Hutchings, P.C.
DILL DILL CARR STONBRAKER
& HUTCHINGS, P.C.
EX-10.1
6
ex10-1.txt
INVESTMENT AGREEMENT
EXHIBIT 10.1
AMENDED AND RESTATED
INVESTMENT AGREEMENT WITH SWARTZ PRIVATE EQUITY, LLC
E-TREND NETWORKS, INC.
AMENDED AND RESTATED INVESTMENT AGREEMENT
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE OR OTHER
SECURITIES AUTHORITIES. THEY MAY NOT BE SOLD OR TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE FEDERAL
AND STATE SECURITIES LAWS.
THIS INVESTMENT 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 CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY
OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF
RISK. THE INVESTOR MUST RELY ON ITS OWN ANALYSIS OF THE
INVESTMENT AND ASSESSMENT OF THE RISKS INVOLVED. SEE THE RISK
FACTORS SET FORTH IN THE ATTACHED DISCLOSURE DOCUMENTS AS
EXHIBIT I.
SEE ADDITIONAL LEGENDS AT SECTIONS 4.7.
THIS AMENDED AND RESTATED INVESTMENT AGREEMENT (this "Agreement" or
"Investment Agreement") is made as of the 18TH day of September, 2001, by and
between E-Trend Networks, Inc. a corporation duly organized and existing under
the laws of the State of Delaware (the "Company"), and the undersigned Investor
executing this Agreement ("Investor"), and amends and restates the Investment
Agreement between the parties dated on or about July 3, 2001.
RECITALS:
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue to the Investor, and the
Investor shall purchase from the Company, from time to time as provided herein,
shares of the Company's Common Stock, as part of an offering of Common Stock by
the Company to Investor, for a maximum aggregate offering amount of Ten Million
Dollars ($10,000,000) (the "Maximum Offering Amount"); and
WHEREAS, the solicitation of this Investment Agreement and, if accepted
by the Company, the offer and sale of the Common Stock are being made in
reliance upon the provisions of Regulation D ("Regulation D") promulgated under
the Act, Section 4(2) of the Act, and/or upon such other exemption from the
registration requirements of the Act as may be available with respect to any or
all of the purchases of Common Stock to be made hereunder.
TERMS:
NOW, THEREFORE, the parties hereto agree as follows:
E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc
1. CERTAIN DEFINITIONS. As used in this Agreement (including the
recitals above), the following terms shall have the following meanings (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined):
"20% Approval" shall have the meaning set forth in Section 5.25.
"9.9% Limitation" shall have the meaning set forth in Section 2.3.1(f).
"Accredited Investor" shall have the meaning set forth in Section 3.1.
"Act" shall mean the Securities Act of 1933, as amended.
"Advance Put Notice" shall have the meaning set forth in Section
2.3.1(a), the form of which is attached hereto as EXHIBIT D.
"Advance Put Notice Date" shall have the meaning set forth in Section
2.3.1(a).
"Affiliate" shall have the meaning as set forth Section 6.4.
"Aggregate Issued Shares" equals the aggregate number of shares of
Common Stock issued to Investor pursuant to the terms of this Agreement or the
Registration Rights Agreement as of a given date, including Put Shares and
Warrant Shares.
"Agreed Upon Procedures Report" shall have the meaning set forth in
Section 2.5.3(b).
"Agreement" shall mean this Investment Agreement.
"Automatic Termination" shall have the meaning set forth in Section
2.3.2.
"Bring Down Cold Comfort Letters" shall have the meaning set forth in
Section 2.3.7(b).
"Business Day" shall mean any day during which the Principal Market is
open for trading.
"Calendar Month" shall mean the period of time beginning on the numeric
day in question in a calendar month and for Calendar Months thereafter,
beginning on the earlier of (i) the same numeric day of the next calendar month
or (ii) the last day of the next calendar month. Each Calendar Month shall end
on the day immediately preceding the beginning of the next succeeding Calendar
Month.
"Cap Amount" shall have the meaning set forth in Section 2.3.11.
"Capital Raising Limitations" shall have the meaning set forth in
Section 6.5.1.
"Capitalization Schedule" shall have the meaning set forth in Section
3.2.4, attached hereto as EXHIBIT J.
"Change in Control" shall have the meaning set forth within the
definition of Major Transaction, below.
"Closing" shall mean one of (i) the Investment Commitment Closing and
(ii) each closing of a purchase and sale of Common Stock pursuant to Section 2.
E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc
2
"Closing Bid Price" means, for any security as of any date, the last
closing bid price for such security during Normal Trading on the O.T.C. Bulletin
Board, or, if the O.T.C. Bulletin Board is not the principal securities exchange
or trading market for such security, the last closing bid price during Normal
Trading of such security on the principal securities exchange or trading market
where such security is listed or traded as reported by such principal securities
exchange or trading market, or if the foregoing do not apply, the last closing
bid price during Normal Trading of such security in the over-the-counter market
on the electronic bulletin board for such security, or, if no closing bid price
is reported for such security, the average of the bid prices of any market
makers for such security as reported in the "pink sheets" by the National
Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such
security on such date on any of the foregoing bases, the Closing Bid Price of
such security on such date shall be the fair market value as mutually determined
by the Company and the Investor in this Offering. If the Company and the
Investor in this Offering are unable to agree upon the fair market value of the
Common Stock, then such dispute shall be resolved by an investment banking firm
mutually acceptable to the Company and the Investor in this offering and any
fees and costs associated therewith shall be paid by the Company.
"Commitment Evaluation Period" shall have the meaning set forth in
Section 2.6.
"Commitment Period" shall have the meaning set forth in Section
2.3.2(d).
"Commitment Warrants" shall have the meaning set forth in Section
2.4.1, the form of which is attached hereto as EXHIBIT P.
"Common Shares" shall mean the shares of Common Stock of the Company.
"Common Stock" shall mean the common stock of the Company.
"Company" shall mean E-Trend Networks, Inc., a corporation duly
organized and existing under the laws of the State of Delaware.
"Company Designated Maximum Put Dollar Amount" shall have the meaning
set forth in Section 2.3.1(a).
"Company Designated Minimum Put Share Price" shall have the meaning set
forth in Section 2.3.1(a).
"Company Termination" shall have the meaning set forth in Section
2.3.12.
"Conditions to Investment Commitment Closing" shall have the meaning as
set forth in Section 2.2.2.
"Delisting Event" shall mean any time during the term of this
Investment Agreement, that the Company's Common Stock is not listed for and
actively trading on the O.T.C. Bulletin Board, the Nasdaq Small Cap Market, the
Nasdaq National Market, the American Stock Exchange, or the New York Stock
Exchange or is suspended or delisted with respect to the trading of the shares
of Common Stock on such market or exchange.
"Disclosure Documents" shall have the meaning as set forth in Section
3.2.4.
"Due Diligence Review" shall have the meaning as set forth in Section
2.5.
E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc
3
"DWAC Put Shares" shall mean Put Shares, in electronic form, without
restriction on resale, that are delivered to the Depository Trust Company DWAC
account specified by the Investor for the Put Shares.
"Effective Date" shall have the meaning set forth in Section 2.3.1.
"Equity Securities" shall have the meaning set forth in Section 6.5.1.
"Evaluation Day" shall have the meaning set forth in Section 2.3.1(b).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Excluded Day" shall have the meaning set forth in Section 2.3.1(b).
"Extended Put Period" shall mean the period of time between the Advance
Put Notice Date until the Pricing Period End Date.
"Impermissible Put Cancellation" shall have the meaning set forth in
Section 2.3.1(e).
"Indemnified Liabilities" shall have the meaning set forth in Section
9.
"Indemnities" shall have the meaning set forth in Section 9.
"Indemnitor" shall have the meaning set forth in Section 9.
"Individual Put Limit" shall have the meaning set forth in Section
2.3.1 (b).
"Ineffective Period" shall have the meaning given to it in the
Registration Rights Agreement.
"Ineffective Period Payment" shall have the meaning given to it in the
Registration Rights Agreement.
"Intended Put Share Amount" shall have the meaning set forth in Section
2.3.1(a).
"Investment Commitment Closing" shall have the meaning set forth in
Section 2.2.1.
"Investment Agreement" shall mean this Investment Agreement.
"Investment Commitment Opinion of Counsel" shall mean an opinion from
Company's independent counsel, substantially in the form attached as EXHIBIT B,
or such other form as agreed upon by the parties, as to the Investment
Commitment Closing.
"Investment Date" shall mean the date of the Investment Commitment
Closing.
"Investor" shall have the meaning set forth in the preamble hereto.
"Key Employee" shall have the meaning set forth in Section 5.17, as set
forth in EXHIBIT M.
"Late Payment Amount" shall have the meaning set forth in Section
2.3.9.
"Legend" shall have the meaning set forth in Section 4.7.
E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc
4
"Major Transaction" shall mean and shall be deemed to have occurred at
such time upon any of the following events:
(i) a consolidation, merger or other business combination or
event or transaction following which the holders of Common Stock of the Company
immediately preceding such consolidation, merger, combination or event either
(i) no longer hold a majority of the shares of Common Stock of the Company or
(ii) no longer have the ability to elect the board of directors of the Company
(a "Change of Control");
(ii) the sale or transfer of a portion of the Company's assets
not in the ordinary course of business;
(iii) the purchase of assets by the Company not in the
ordinary course of business; or (iv) a purchase, tender or exchange offer made
to the holders of outstanding shares of Common Stock.
"Market Price" shall equal the average of the three (3) lowest Volume
Weighted Average Prices (VWAP), published daily by Bloomberg, Inc. of the Common
Stock during the Pricing Period for the applicable Put.
"Material Facts" shall have the meaning set forth in Section 2.3.7(a).
"Maximum Put Dollar Amount" shall mean the lesser of (i) the Company
Designated Maximum Put Dollar Amount, if any, specified by the Company in a Put
Notice, and (ii) $2 million.
"Maximum Offering Amount" shall mean have the meaning set forth in the
recitals hereto.
"NASD" shall have the meaning set forth in Section 6.9.
"Nasdaq 20% Rule" shall have the meaning set forth in Section 2.3.11.
"Normal Trading" shall mean trading that occurs between 9:30 AM and
4:00 PM, New York City Time, on any Business Day, and shall expressly exclude
"after hours" trading.
"Numeric Day" shall mean the numerical day of the month of the
Investment Date or the last day of the calendar month in question, whichever is
less.
"NYSE" shall have the meaning set forth in Section 6.9.
"Offering" shall mean the Company's offering of Common Stock and
Warrants issued under this Investment Agreement.
"Officer's Closing Certificate" shall mean a certificate in the form of
Exhibit Q1 attached hereto, signed by an officer of the Company.
"Officer's Put Certificate" shall mean a certificate in the form of
Exhibit Q2 attached hereto, signed by an officer of the Company.
"Opinion of Counsel" shall mean, as applicable, the Investment
Commitment Opinion of Counsel, the Put Opinion of Counsel, and the Registration
Opinion.
E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc
5
"Payment Due Date" shall have the meaning set forth in Section 2.3.9.
"Pricing Period" shall mean, unless otherwise shortened under the terms
of this Agreement, the period beginning on the Business Day immediately
following the Put Date and ending on and including the date which is 20 Business
Days after such Put Date.
"Pricing Period End Date" shall mean the last Business Day of any
Pricing Period.
"Principal Market" shall mean the O.T.C. Bulletin Board, the Nasdaq
Small Cap Market, the Nasdaq National Market, the American Stock Exchange or the
New York Stock Exchange, whichever is at the time the principal trading exchange
or market for the Common Stock.
"Proceeding" shall have the meaning as set forth Section 5.1.
"Purchase" shall have the meaning set forth in Section 2.3.8.
"Put" shall have the meaning set forth in Section 2.3.1(d).
"Put Closing" shall have the meaning set forth in Section 2.3.9.
"Put Closing Date" shall have the meaning set forth in Section 2.3.9.
"Put Date" shall mean the date that is specified by the Company in any
Put Notice for which the Company intends to exercise a Put under Section 2.3.1,
unless the Put Date is postponed pursuant to the terms hereof, in which case the
"Put Date" is such postponed date.
"Put Dollar Amount" shall be determined by multiplying the Put Share
Amount by the respective Put Share Prices with respect to such Put Shares,
subject to the limitations herein.
"Put Interruption Date" shall have the meaning set forth in Section
2.3.4.
"Put Interruption Event" shall have the meaning set forth in Section
2.3.4.
"Put Interruption Notice" shall have the meaning set forth in Section
2.3.4.
"Put Notice" shall have the meaning set forth in Section 2.3.1(d), the
form of which is attached hereto as EXHIBIT F.
"Put Opinion of Counsel" shall mean an opinion from Company's
independent counsel, in the form attached as EXHIBIT H, or such other form as
agreed upon by the parties, as to any Put Closing.
"Put Share Amount" shall have the meaning as set forth Section
2.3.1(b).
"Put Share Price" shall have the meaning set forth in Section 2.3.1(c).
"Put Shares" shall mean shares of Common Stock that are purchased by
the Investor pursuant to a Put.
"Registrable Securities" shall have the meaning as set forth in the
Registration Rights Agreement.
"Registration Opinion" shall have the meaning set forth in Section
2.3.7(a), the form of which is attached hereto as EXHIBIT N.
E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc
6
"Registration Opinion Deadline" shall have the meaning set forth in
Section 2.3.7(a).
"Registration Rights Agreement" shall mean that certain registration
rights agreement entered into by the Company and Investor on even date herewith,
in the form attached hereto as EXHIBIT A, or such other form as agreed upon by
the parties.
"Registration Statement" shall have the meaning as set forth in the
Registration Rights Agreement.
"Regulation D" shall have the meaning set forth in the recitals hereto.
"Reporting Issuer" shall have the meaning set forth in Section 6.2.
"Restrictive Legend" shall have the meaning set forth in Section 4.7.
"Required Put Documents" shall have the meaning set forth in Section
2.3.6.
"Risk Factors" shall have the meaning set forth in Section 3.2.4,
attached hereto as EXHIBIT I.
"Schedule of Exceptions" shall have the meaning set forth in Section 5,
and is attached hereto as Exhibit C.
"SEC" shall mean the Securities and Exchange Commission.
"Securities" shall mean this Investment Agreement, together with the
Common Stock of the Company, the Warrants and the Warrant Shares issuable
pursuant to this Investment Agreement.
"Share Authorization Increase Approval" shall have the meaning set
forth in Section 5.25.
"Stockholder 20% Approval" shall have the meaning set forth in Section
6.11.
"Supplemental Registration Statement" shall have the meaning set forth
in the Registration Rights Agreement.
"Term" shall have the meaning set forth in Section 6.19.
"Termination Date" shall mean the earlier of (i) the date that is three
(3) years after the Effective Date, or (ii) the date that is thirty (30)
Business Days after the earlier of (a) the Put Closing Date on which the sum of
the aggregate Put Share Price for all Put Shares equal the Maximum Offering
Amount, (b) the date that the Company has both delivered a Termination Notice to
the Investor and paid the applicable Termination Fee in full, and (c) the date
that both an Automatic Termination has occurred and the Company has paid the
applicable Termination Fee in full.
"Termination Fee" shall have the meaning as set forth in Section 2.6.
"Termination Notice" shall have the meaning as set forth in Section
2.3.12.
"Third Party Report" shall have the meaning set forth in Section 3.2.4.
E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc
7
"Trading Volume " shall mean the volume of shares of the Company's
Common Stock that trade between 9:30 AM and 4:00 PM, New York City Time, on any
Business Day, and shall expressly exclude any shares trading during "after
hours" trading.
"Transaction Documents" shall have the meaning set forth in Section 9.
"Transfer Agent" shall have the meaning set forth in Section 6.10.
"Transfer Agent Instructions" shall mean the Company's instructions to
its transfer agent, substantially in the form attached as EXHIBIT O, or such
other form as agreed upon by the parties.
"Trigger Price" shall have the meaning set forth in Section 2.3.1(b).
"Unlegended Share Certificates" shall mean a certificate or
certificates (or electronically delivered shares, as appropriate) (in
denominations as instructed by Investor) representing the shares of Common Stock
to which the Investor is then entitled to receive, registered in the name of
Investor or its nominee (as instructed by Investor) and not containing a
restrictive legend or stop transfer order, including but not limited to the Put
Shares for the applicable Put and Warrant Shares.
"Use of Proceeds Schedule" shall have the meaning as set forth in
Section 3.2.4, attached hereto as EXHIBIT K.
"Volume Limitations" shall have the meaning set forth in Section
2.3.1(b).
"Warrant Shares" shall mean the Common Stock issued or issuable upon
exercise of the Warrants.
"Warrants" shall mean the Commitment Warrants.
2. PURCHASE AND SALE OF COMMON STOCK.
2.1 OFFER TO SUBSCRIBE.
Subject to the terms and conditions herein and the
satisfaction of the conditions to closing set forth in Sections 2.2 and 2.3
below, Investor hereby agrees to purchase such amounts of Common Stock as the
Company may, in its sole and absolute discretion, from time to time elect to
issue and sell to Investor according to one or more Puts pursuant to Section 2.3
below.
2.2 INVESTMENT COMMITMENT.
2.2.1 INVESTMENT COMMITMENT CLOSING. The closing of
this Agreement (the "Investment Commitment Closing") shall be deemed to occur
when this Agreement, the Registration Rights Agreement and the Commitment
Warrant have been duly executed by both Investor and the Company, and the other
Conditions to Investment Commitment Closing set forth in Section 2.2.2 below
have been met.
2.2.2 CONDITIONS TO INVESTMENT COMMITMENT CLOSING. As
a prerequisite to the Investment Commitment Closing, all of the following (the
"Conditions to Investment Commitment Closing") shall have been satisfied prior
to or concurrently with the Company's execution and delivery of this Agreement:
E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc
8
(a) the following documents shall have been delivered to
the Investor: (i) the Registration Rights Agreement
(executed by the Company and Investor), (ii) the
Commitment Warrant, (iii) the Investment Commitment
Opinion of Counsel (signed by the Company's counsel),
and (iv) a certificate signed by the Company's
secretary (the "Secretary's Certificate") as to (A)
the resolutions of the Company's board of directors
authorizing this transaction, (B) the Company's
Certificate of Incorporation, and (C) the Company's
Bylaws;
(b) this Investment Agreement, accepted by the Company,
shall have been received by the Investor;
(c) the Company's Common Stock shall be listed for
trading and actually trading on the O.T.C. Bulletin
Board, the Nasdaq Small Cap Market, the Nasdaq
National Market, the American Stock Exchange or the
New York Stock Exchange;
(d) other than continuing losses described in the Risk
Factors set forth in the Disclosure Documents
(provided for in Section 3.2.4), up through the
Investment Commitment CLOSING there 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, including but not limited to incurring
material liabilities; and
(e) the representations and warranties of the Company in
this Agreement shall be true and correct in all
material respects and the Conditions to Investment
Commitment Closing set forth in this Section 2.2.2
shall have been satisfied on the date of such
Investment Commitment Closing; and the Company shall
deliver an Officer's Closing Certificate, signed by
an officer of the Company, to such effect to the
Investor.
2.3 PUTS OF COMMON SHARES TO THE INVESTOR.
2.3.1 PROCEDURE TO EXERCISE A PUT. Subject to the
Individual Put Limit, the Maximum Offering Amount and the Cap Amount (if
applicable), and the other conditions and limitations set forth in this
Agreement, at any time beginning on the date on which the Registration Statement
is declared effective by the SEC (the "Effective Date"), the Company may, in its
sole and absolute discretion, elect to exercise one or more Puts according to
the following procedure, provided that each subsequent Put Date after the first
Put Date shall be no sooner than five (5) Business Days following the preceding
Pricing Period End Date:
(a) DELIVERY OF ADVANCE PUT NOTICE.At least
ten (10) Business Days but not more than twenty (20) Business Days prior to any
intended Put Date, the Company shall deliver advance written notice (the
"Advance Put Notice," the form of which is attached hereto as EXHIBIT D, the
date of such Advance Put Notice being the "Advance Put Notice Date") to Investor
stating the Put Date for which the Company shall, subject to the limitations and
restrictions contained herein, exercise a Put and stating the number of shares
of Common Stock (subject to the Individual Put Limit and the Maximum Put Dollar
Amount) which the Company intends to sell to the Investor for the Put (the
"Intended Put Share Amount").
The Company may, at its option, also designate in any Advance
Put Notice (i) a maximum dollar amount of Common Stock, not to exceed
$2,000,000, which it shall sell to Investor during the Put (the "Company
Designated Maximum Put Dollar Amount") and/or (ii) a minimum purchase price per
Put Share at which the Investor may purchase shares of Common
E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc
9
Stock pursuant to such Put Notice (a "Company Designated Minimum Put Share
Price"). The Company Designated Minimum Put Share Price, if applicable, shall be
no greater than the lesser of (i) 80% of the Closing Bid Price of the Company's
common stock on the Business Day immediately preceding the Advance Put Notice
Date, or (ii) the Closing Bid Price of the Company's common stock on the
Business Day immediately preceding the Advance Put Notice Date minus $0.225. The
Company may decrease (but not increase) the Company Designated Minimum Put Share
Price for a Put at any time by giving the Investor written notice of such
decrease not later than 12:00 Noon, New York City time, on the Business Day
immediately preceding the Business Day that such decrease is to take effect. A
decrease in the Company Designated Minimum Put Share Price shall have no
retroactive effect on the determination of Trigger Prices and Excluded Days for
days preceding the Business Day that such decrease takes effect, provided that
the Put Share Price for all shares in a Put shall be calculated using the lowest
Company Designated Minimum Put Share Price, as decreased.
Notwithstanding the above, if, at the time of delivery of an
Advance Put Notice, more than two (2) Calendar Months have passed since the date
of the previous Put Closing, such Advance Put Notice shall provide at least
twenty (20) Business Days notice of the intended Put Date, unless waived in
writing by the Investor. In order to effect delivery of the Advance Put Notice,
the Company shall (i) send the Advance Put Notice by facsimile on such date so
that such notice is received by the Investor by 6:00 p.m., New York, NY time,
and (ii) surrender such notice on such date to a courier for overnight delivery
to the Investor (or two (2) day delivery in the case of an Investor residing
outside of the U.S.).
(b) PUT SHARE AMOUNT. The "Put Share Amount"
is the number of shares of Common Stock that the Investor shall be obligated to
purchase in a given Put, and shall equal the lesser of (i) the Intended Put
Share Amount, and (ii) the Individual Put Limit. The "Individual Put Limit"
shall equal the lesser of (A) 1,500,000 shares, (B) 20% of the sum of the
aggregate daily reported Trading Volumes in the outstanding Common Stock on the
Company's Principal Market, excluding any block trades of 20,000 or more shares
of Common Stock, for all Evaluation Days (as defined below) in the Pricing
Period, (C) the number of Put Shares which, when multiplied by their respective
Put Share Prices, equals the Maximum Put Dollar Amount, and (D) the 9.9%
Limitation, but in no event shall the Individual Put Limit exceed 20% of the sum
of the aggregate daily reported Trading Volumes in the outstanding Common Stock
on the Company's Principal Market, excluding any block trades of 20,000 or more
shares of Common Stock, for the twenty (20) Business Days immediately preceding
the Advance Put Notice Date (this limitation, together with the limitations in
(A) and (B) immediately above are collectively referred to herein as the "Volume
Limitations"). Company agrees not to trade Common Stock or arrange for Common
Stock to be traded for the purpose of artificially increasing the Volume
Limitations.
For purposes of this Agreement:
"Trigger Price" for any Pricing Period shall mean the greater
of (i) the Company Designated Minimum Put Share Price, plus $.15, or (ii) the
Company Designated Minimum Put Share Price divided by .92.
An "Excluded Day" shall mean each Business Day during a
Pricing Period where the lowest intra-day trading price of the Common Stock is
less than the Trigger Price and each Business Day defined in Section 2.3.4 as an
"Excluded Day".
An "Evaluation Day" shall mean each Business Day during a
Pricing Period that is not an Excluded Day.
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(c) PUT SHARE PRICE. The purchase price for
the Put Shares (the "Put Share Price") shall equal the lesser of (i) the Market
Price for such Put, minus $.15, or (ii) 92% of the Market Price for such Put,
but shall in no event be less than the Company Designated Minimum Put Share
Price for such Put, if applicable.
(d) DELIVERY OF PUT NOTICE. After delivery
of an Advance Put Notice, on the Put Date specified in the Advance Put Notice
the Company shall deliver written notice (the "Put Notice," the form of which is
attached hereto as EXHIBIT F) to Investor stating (i) the Put Date, (ii) the
Intended Put Share Amount as specified in the Advance Put Notice (such exercise
a "Put"), (iii) the Company Designated Maximum Put Dollar Amount (if
applicable), and (iv) the Company Designated Minimum Put Share Price (if
applicable). In order to effect delivery of the Put Notice, the Company shall
(i) send the Put Notice by facsimile on the Put Date so that such notice is
received by the Investor by 6:00 p.m., New York, NY time, and (ii) surrender
such notice on the Put Date to a courier for overnight delivery to the Investor
(or two (2) day delivery in the case of an Investor residing outside of the
U.S.).
(e) DELIVERY OF REQUIRED PUT DOCUMENTS. On
or before the Put Date for such Put, the Company shall deliver the Required Put
Documents (as defined in Section 2.3.6 below) to the Investor (or to an agent of
Investor, if Investor so directs). Unless otherwise specifically requested by
the Investor, the Put Shares shall be transmitted electronically pursuant to the
Depository Trust Company DWAC system or such other electronic delivery system as
the Investor shall request. If the Company has not delivered all of the Required
Put Documents to the Investor on or before the Put Date, the Put shall be
automatically cancelled (an "Impermissible Put Cancellation") and the Company
shall pay the Investor $5,000 for its reasonable due diligence expenses incurred
in preparation for the cancelled Put and the Company may deliver an Advance Put
Notice for the subsequent Put no sooner than ten (10) Business Days after the
date that such Put was cancelled. Also, in the event of a Put Interruption
Notice that occurs prior to the Put Date, the Company shall pay the Investor
$5,000 for its reasonable due diligence expenses incurred in preparation for the
interrupted Put.
(f) LIMITATION ON INVESTOR'S OBLIGATION TO
PURCHASE SHARES. Notwithstanding anything to the contrary in this Agreement, in
no event shall the Investor be required to purchase, and an Intended Put Share
Amount may not include, an amount of Put Shares, which when added to the number
of Put Shares acquired by the Investor pursuant to this Agreement during the 61
days preceding the Put Date with respect to which this determination of the
permitted Intended Put Share Amount is being made, would exceed 9.9% of the
number of shares of Common Stock outstanding (on a fully diluted basis, to the
extent that inclusion of unissued shares is mandated by Section 13(d) of the
Exchange Act) on the Put Date for such Pricing Period, as determined in
accordance with Section 13(d) of the Exchange Act (the "Section 13(d)
Outstanding Share Amount"). Each Put Notice shall include a representation of
the Company as to the Section 13(d) Outstanding Share Amount on the related Put
Date. In the event that the Section 13(d) Outstanding Share Amount is different
on any date during a Pricing Period than on the Put Date associated with such
Pricing Period, then the number of shares of Common Stock outstanding on such
date during such Pricing Period shall govern for purposes of determining whether
the Investor, when aggregating all purchases of Shares made pursuant to this
Agreement in the 61 calendar days preceding such date, would have acquired more
than 9.9% of the Section 13(d) Outstanding Share Amount. The limitation set
forth in this Section 2.3.1(f) is referred to as the "9.9% Limitation."
2.3.2 TERMINATION OF RIGHT TO PUT. The Company's
right to initiate subsequent Puts to the Investor shall terminate permanently
(each, an "Automatic Termination") upon the occurrence of any of the following:
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(a) if, at any time, either the Company or
any director or executive officer of the Company has engaged in a transaction or
conduct related to the Company that has resulted in (i) a Securities and
Exchange Commission enforcement action, or (ii) a civil judgment or criminal
conviction for fraud or misrepresentation, or for any other offense that, if
prosecuted criminally, would constitute a felony under applicable law;
(b) on any date after a cumulative time
period or series of time periods, consisting only of Ineffective Periods and
Delisting Events, that lasts for an aggregate of four (4) months;
(c) if at any time the Company has filed for
and/or is subject to any bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors instituted by or against the Company or any subsidiary
of the Company;
(d) after the sooner of (i) the date that is
three (3) years after the Effective Date, or (ii) the Put Closing Date on which
the aggregate of the Put Dollar Amounts for all Puts equal the Maximum Offering
Amount (the "Commitment Period");
(e) the Company has breached any covenant in
Section 6 or Section 9 hereof; or
(f) if no Registration Statement has been
declared effective by the date that is one (1) year after the date of this
Agreement, the Automatic Termination shall occur on the date that is one (1)
year after the date of this Agreement.
2.3.3 MAXIMUM OFFERING AMOUNT. The Investor shall not
be obligated to purchase any additional Put Shares once the aggregate Put Dollar
Amount paid by Investor equals the Maximum Offering Amount.
2.3.4 PUT INTERRUPTION. Once the Company delivers an
Advance Put Notice to the Investor, the Company may not cancel the Put. In the
event of a "Put Interruption Event" (as defined below) during any Pricing
Period, then (A) the Company shall notify the Investor in writing (a "Put
Interruption Notice") as soon as possible by facsimile and overnight courier,
but no later than the end of the Business Day in which the Company becomes aware
of such facts, (B) the Pricing Period shall be extended or shortened, as
applicable, such that the Pricing Period End Date is the tenth (10th) Business
Day after the date of such Put Interruption Notice from the Company (the "Put
Interruption Date"), (C) each Business Day from and including the Put
Interruption Date through and including the Pricing Period End Date for the
applicable Put (as extended or shortened, if applicable), shall be considered to
be an "Excluded Day," as that term is used in this Agreement, and (D) the
Company Designated Minimum Put Share Price, if any, shall not apply to the
affected Put. In the event that a Put Interruption Event occurs after an Advance
Put Notice Date, but before the applicable Put Date, that Put shall be deemed to
be terminated, and the Company may deliver an Advance Put Notice for a new Put
anytime beginning on the following Business Day, if otherwise allowed under this
Agreement. A "Put Interruption Event" shall mean any of the following: (i) an
Automatic Termination, (ii) the failure of one of the items specified in Section
2.3.5 below to be true and correct on any day during and Extended Pricing
Period, or (iii) the occurrence of one of the following events:
(a) the Company has announced a subdivision
or combination, including a reverse split, of its Common Stock or has subdivided
or combined its Common Stock;
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(b) the Company has paid a dividend of its
Common Stock or has made any other distribution of its Common Stock;
(c) the Company has made a distribution of
all or any portion of its assets or evidences of indebtedness to the holders of
its Common Stock;
(d) a Major Transaction has occurred; or
(e) the Company discovers the existence of
Material Facts or any Ineffective Period or Delisting Event occurs.
2.3.5 CONDITIONS PRECEDENT TO THE RIGHT OF THE
COMPANY TO DELIVER AN ADVANCE PUT NOTICE OR A PUT NOTICE. The right of the
Company to deliver an Advance Put Notice or a Put Notice is subject to the
satisfaction, on the date of delivery of such Advance Put Notice or Put Notice,
of each of the following conditions:
(a) the Company's Common Stock shall be listed for and
actively trading on the O.T.C. Bulletin Board, the
Nasdaq Small Cap Market, the Nasdaq National Market,
the American Stock Exchange or the New York Stock
Exchange and the Put Shares shall be so listed, and
to the Company's knowledge there is no notice of any
suspension or delisting with respect to the trading
of the shares of Common Stock on such market or
exchange;
(b) the Company shall have satisfied any and all
obligations pursuant to the Registration Rights
Agreement, including, but not limited to, the filing
of the Registration Statement with the SEC with
respect to the resale of all Registrable Securities
and the requirement that the Registration Statement
shall have been declared effective by the SEC for the
resale of all Registrable Securities and the Company
shall have satisfied and shall be in compliance with
any and all obligations pursuant to this Agreement
and the Warrants;
(c) the representations and warranties of the Company in
Sections 5.1, 5.3, 5.4, 5.5, 5.6, 5.10, 5.13, 5.14,
5.15, 5.16, 5.18, 5.19, 5.21, and 5.25 hereof are
true and correct in all material respects as if made
on such date, the Company has satisfied its
obligations under Section 2.6 hereof and the
conditions to Investor's obligations set forth in
this Section 2.3.5 are satisfied as of such Closing,
and the Company shall deliver an Officer's Put
Certificate, signed by an officer of the Company, to
such effect to the Investor;
(d) the Company shall have authorized and reserved for
issuance a sufficient number of Common Shares for the
purpose of enabling the Company to satisfy any
obligation to issue Common Shares pursuant to any Put
and to effect exercise of the Warrants;
(e) the Registration Statement is not subject to an
Ineffective Period as defined in the Registration
Rights Agreement, the prospectus included therein is
current and deliverable, and to the Company's
knowledge there is no notice of any investigation or
inquiry concerning any stop order with respect to the
Registration Statement;
(f) if the Aggregate Issued Shares after the Closing of
the Put would exceed the Cap Amount, the Company
shall have obtained the Stockholder 20%
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Approval as specified in Section 6.11, if the
Company's Common Stock is listed on the NASDAQ Small
Cap Market or the NASDAQ National Market System (the
"NMS"), and such approval is required by the rules of
the NASDAQ;
(g) the Company shall have no knowledge of any event
that, in the Company's opinion, is more likely than
not to have the effect of causing any Registration
Statement to be suspended or otherwise ineffective
(which event is more likely than not to occur within
the thirty Business Days following the date on which
such Advance Put Notice and Put Notice is deemed
delivered);
(h) there is not then in effect any law, rule or
regulation prohibiting or restricting the
transactions contemplated hereby, or requiring any
consent or approval which shall not have been
obtained, nor is there any pending or threatened
proceeding or investigation which may have the effect
of prohibiting or adversely affecting any of the
transactions contemplated by this Agreement;
(i) no statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted,
entered, promulgated or adopted by any court or
governmental authority of competent jurisdiction that
prohibits the transactions contemplated by this
Agreement, and no actions, suits or proceedings shall
be in progress, pending or threatened by any person
(other than the Investor or any affiliate of the
Investor), that seek to enjoin or prohibit the
transactions contemplated by this Agreement. For
purposes of this paragraph (i), no proceeding shall
be deemed pending or threatened unless one of the
parties has received written or oral notification
thereof prior to the applicable Closing Date;
(j) the Put Shares delivered to the Investor are DTC
eligible and can be immediately converted into
electronic form;
(k) the Company shall have obtained all permits and
qualifications (if any) required by any state
securities laws or Blue Sky laws for the offer and
sale of the Common Stock to the Investor and by the
Investor or shall have the availability of exemptions
therefrom; and
(l) the Put Shares shall have been delivered to the
Depository Trust Company DWAC account specified by
the Investor for the Put Shares.
(m) the Transfer Agent Instructions have been duly
executed by both the Company and the Transfer Agent.
2.3.6 DOCUMENTS REQUIRED TO BE DELIVERED ON THE PUT
DATE AS CONDITIONS TO CLOSING OF ANY PUT. The Closing of any Put and Investor's
obligations hereunder shall additionally be conditioned upon the delivery to the
Investor of each of the following (the "Required Put Documents") on or before
the applicable Put Date:
(a) a number of DWAC Put Shares equal to the
Intended Put Share Amount shall have been delivered to the Depository Trust
Company DWAC account specified by the Investor for the Put Shares (unless the
Investor has requested physical stock certificates, in writing, in which case
the Company shall have delivered to the Investor a number of physical
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Unlegended Share Certificates equal to the Intended Put Share Amount, in
denominations of not more than 50,000 shares per certificate);
(b) the following documents: Put Opinion of
Counsel, Officer's Certificate, Put Notice, Registration Opinion, and any report
or disclosure required under Section 2.3.7 or Section 2.5; and
(c) all documents, instruments and other
writings required to be delivered on or before the Put Date pursuant to any
provision of this Agreement in order to implement and effect the transactions
contemplated herein.
2.3.7 ACCOUNTANT'S LETTER AND REGISTRATION OPINION.
(a) The Company shall have caused to be
delivered to the Investor, (i) whenever required by Section 2.3.7(b) or by
Section 2.5.3, and (ii) on the date that is three (3) Business Days prior to
each Put Date (the "Registration Opinion Deadline"), an opinion of the Company's
independent counsel, in substantially the form of EXHIBIT N (the "Registration
Opinion"), addressed to the Investor stating, inter alia, that no facts
("Material Facts") have come to such counsel's attention that have caused it to
believe that the Registration Statement is subject to an Ineffective Period or
to believe that the Registration Statement, any Supplemental Registration
Statement (as each may be amended, if applicable), and any related prospectuses,
contain an untrue statement of material fact or omits a material fact required
to make the statements contained therein, in light of the circumstances under
which they were made, not misleading. If a Registration Opinion cannot be
delivered by the Company's independent counsel to the Investor on the
Registration Opinion Deadline due to the existence of Material Facts or an
Ineffective Period, the Company shall promptly notify the Investor and as
promptly as possible amend each of the Registration Statement and any
Supplemental Registration Statements, as applicable, and any related prospectus
or cause such Ineffective Period to terminate, as the case may be, and deliver
such Registration Opinion and updated prospectus as soon as possible thereafter.
If at any time after a Put Notice shall have been delivered to Investor but
before the related Pricing Period End Date, the Company acquires knowledge of
such Material Facts or any Ineffective Period occurs, the Company shall promptly
notify the Investor and shall deliver a Put Interruption Notice to the Investor
pursuant to Section 2.3.4 by facsimile and overnight courier by the end of that
Business Day.
(b) (i) the Company shall engage its
independent auditors to perform the procedures in accordance with the provisions
of Statement on Auditing Standards No. 71, as amended, and reports thereon (the
"Bring Down Cold Comfort Letters") as shall have been reasonably requested by
the Investor with respect to certain financial information contained in the
Registration Statement and shall have delivered to the Investor such a report
addressed to the Investor, on the date that is three (3) Business Days prior to
each Put Date.
(ii) in the event that the Investor
shall have requested delivery of an Agreed Upon Procedures Report pursuant to
Section 2.5.3, the Company shall engage its independent auditors to perform
certain agreed upon procedures and report thereon as shall have been reasonably
requested by the Investor with respect to certain financial information of the
Company and the Company shall deliver to the Investor a copy of such report
addressed to the Investor. In the event that the report required by this Section
2.3.7(b) cannot be delivered by the Company's independent auditors, the Company
shall, if necessary, promptly revise the Registration Statement and the Company
shall not deliver a Put Notice until such report is delivered.
2.3.8 INVESTOR'S OBLIGATION AND RIGHT TO PURCHASE
SHARES. Subject to the conditions set forth in this Agreement, following the
Investor's receipt of a validly delivered
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Put Notice, the Investor shall be required to purchase (each a "Purchase") from
the Company a number of Put Shares equal to the Put Share Amount, in the manner
described below.
2.3.9 MECHANICS OF PUT CLOSING. Each of the Company
and the Investor shall deliver all documents, instruments and writings required
to be delivered by either of them pursuant to this Agreement at or prior to each
Closing. Subject to such delivery and the satisfaction of the conditions set
forth in this Section 2, the closing of the purchase by the Investor of Shares
shall occur by 5:00 PM, New York City Time, on the date which is five (5)
Business Days following the applicable Pricing Period End Date (the "Payment Due
Date") at the offices of Investor. On each or before each Payment Due Date, the
Investor shall deliver to the Company, in the manner specified in Section 8
below, the Put Dollar Amount to be paid for such Put Shares, determined as
aforesaid, less any Termination Fees that are due and unpaid by the Company. The
closing (each a "Put Closing") for each Put shall occur on the date that both
(i) the Company has delivered to the Investor all Required Put Documents, and
(ii) the Investor has delivered to the Company such Put Dollar Amount and any
Late Payment Amount, if applicable (each a "Put Closing Date").
If the Investor does not deliver to the Company the Put Dollar
Amount for such Put Closing on or before the Payment Due Date, then the Investor
shall pay to the Company, in addition to the Put Dollar Amount, an amount (the
"Late Payment Amount") at a rate of X% per month, accruing daily, multiplied by
such Put Dollar Amount, where "X" equals one percent (1%) for the first month
following the date in question, and increases by an additional one percent (1%)
for each month that passes after the date in question, up to a maximum of five
percent (5%) per month; provided, however, that in no event shall the amount of
interest that shall become due and payable hereunder exceed the maximum amount
permissible under applicable law.
2.3.10 LIMITATION ON SHORT SALES. The Investor and
its affiliates shall not engage in short sales of the Company's Common Stock;
provided, however, that the Investor may enter into any short exempt sale or any
short sale or other hedging or similar arrangement it deems appropriate with
respect to Put Shares after it receives a Put Notice with respect to such Put
Shares so long as such sales or arrangements do not involve more than the number
of such Put Shares specified in the Put Notice.
2.3.11 CAP AMOUNT. If the Company becomes listed on
the Nasdaq Small Cap Market or the Nasdaq National Market, then, unless the
Company has obtained Stockholder 20% Approval as set forth in Section 6.11 or
unless otherwise permitted by Nasdaq, in no event shall the Aggregate Issued
Shares exceed the maximum number of shares of Common Stock (the "Cap Amount")
that the Company can, without stockholder approval, so issue pursuant to Nasdaq
Rule 4460(i)(1)(d)(ii) (or any other applicable Nasdaq Rules or any successor
rule) (the "Nasdaq 20% Rule").
2.3.12 INVESTMENT AGREEMENT TERMINATION. The Company
may terminate (a "Company Termination") its right to initiate future Puts by
providing written notice ("Termination Notice") to the Investor, by facsimile
and overnight courier, at any time other than during an Extended Put Period.
Following either a Company Termination or an Automatic Termination: (i) the
Termination Fee shall become due and payable as further described in Section 2.6
below, and (ii) such termination shall have no effect on the parties' other
rights and obligations under this Agreement or any of the agreements referenced
in this Agreement, including but not limited to the Registration Rights
Agreement, the Warrants, and the Transfer Agent Instructions (collectively, the
"Related Agreements"). Notwithstanding a Termination or Automatic Termination,
the Related Agreements between the parties shall not terminate and shall remain
in full force and effect in accordance with their respective terms.
Notwithstanding the
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above, any Put Interruption Notice occurring during an Extended Put Period is
governed by Section 2.3.4.
2.3.13 RETURN OF EXCESS COMMON SHARES. In the event
that the number of Shares purchased by the Investor pursuant to its obligations
hereunder is less than the Intended Put Share Amount, the Investor shall
promptly return to the Company any shares of Common Stock in the Investor's
possession that are not being purchased by the Investor.
2.4 WARRANTS.
2.4.1 COMMITMENT WARRANTS. In partial consideration
hereof, following the execution of the Letter of Agreement dated on or about
June 1, 2001 between the Company and the Investor, the Company issued and
delivered to Investor warrants (the "Commitment Warrants") in the form attached
hereto as EXHIBIT P, or such other form as agreed upon by the parties, to
purchase 500,000 shares of Common Stock. Each Commitment Warrant shall be
immediately exercisable in accordance with its terms, and shall have a term
beginning on the date of issuance and ending on date that is five (5) years
thereafter. The Warrant Shares shall be registered for resale pursuant to the
Registration Rights Agreement. The Investment Commitment Opinion of Counsel
shall cover the issuance of the Commitment Warrant and the issuance of the
common stock upon exercise of the Commitment Warrant.
Notwithstanding any Termination or Automatic Termination of
this Agreement, the Investor shall retain full ownership of the Commitment
Warrant, regardless of whether or not the Registration Statement is or is not
filed, and regardless of whether or not the Registration Statement is or is not
declared effective by the SEC, as partial consideration for its commitment
hereunder.
2.4.2 [Intentionally Left Blank].
2.5 DUE DILIGENCE REVIEW. The Company shall make available for
inspection and review by the Investor (the "Due Diligence Review"), advisors to
and representatives of the Investor (who may or may not be affiliated with the
Investor and who are reasonably acceptable to the Company), any underwriter
participating in any disposition of Common Stock on behalf of the Investor
pursuant to the Registration Statement, any Supplemental Registration Statement,
or amendments or supplements thereto or any blue sky, NASD or other filing, all
financial and other records, all filings with the SEC, and all other corporate
documents and properties of the Company as may be reasonably necessary for the
purpose of such review, and cause the Company's officers, directors and
employees to supply all such information reasonably requested by the Investor or
any such representative, advisor or underwriter in connection with such
Registration Statement (including, without limitation, in response to all
questions and other inquiries reasonably made or submitted by any of them),
prior to and from time to time after the filing and effectiveness of the
Registration Statement for the sole purpose of enabling the Investor and such
representatives, advisors and underwriters and their respective accountants and
attorneys to conduct initial and ongoing due diligence with respect to the
Company and the accuracy of the Registration Statement.
2.5.1 TREATMENT OF NONPUBLIC INFORMATION. The Company
shall not disclose nonpublic information to the Investor or to its advisors or
representatives unless prior to disclosure of such information the Company
identifies such information as being nonpublic information and provides the
Investor and such advisors and representatives with the opportunity to accept or
refuse to accept such nonpublic information for review. The Company may, as a
condition to disclosing any nonpublic information hereunder, require the
Investor and its advisors and representatives to enter into a confidentiality
agreement (including an agreement with such advisors and representatives
prohibiting them from trading in Common Stock during
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such period of time as they are in possession of nonpublic information) in form
reasonably satisfactory to the Company and the Investor.
Nothing herein shall require the Company to disclose nonpublic
information to the Investor or its advisors or representatives, and the Company
represents that it does not disseminate nonpublic information to any investors
who purchase stock in the Company in a public offering, to money managers or to
securities analysts, provided, however, that notwithstanding anything herein to
the contrary, the Company will, as hereinabove provided, immediately notify the
advisors and representatives of the Investor and, if any, underwriters, of any
event or the existence of any circumstance (without any obligation to disclose
the specific event or circumstance) of which it becomes aware, constituting
nonpublic information (whether or not requested of the Company specifically or
generally during the course of due diligence by and such persons or entities),
which, if not disclosed in the Prospectus included in the Registration
Statement, would cause such Prospectus to include a material misstatement or to
omit a material fact required to be stated therein in order to make the
statements therein, in light of the circumstances in which they were made, not
misleading. Nothing contained in this Section 2.5 shall be construed to mean
that such persons or entities other than the Investor (without the written
consent of the Investor prior to disclosure of such information) may not obtain
nonpublic information in the course of conducting due diligence in accordance
with the terms of this Agreement; provided, however, that in no event shall the
Investor's advisors or representatives disclose to the Investor the nature of
the specific event or circumstances constituting any nonpublic information
discovered by such advisors or representatives in the course of their due
diligence without the written consent of the Investor prior to disclosure of
such information.
2.5.2 DISCLOSURE OF MISSTATEMENTS AND OMISSIONS. The
Investor's advisors or representatives shall make complete disclosure to the
Investor's counsel of all events or circumstances constituting nonpublic
information discovered by such advisors or representatives in the course of
their due diligence upon which such advisors or representatives form the opinion
that the Registration Statement contains an untrue statement of a material fact
or omits a material fact required to be stated in the Registration Statement or
necessary to make the statements contained therein, in the light of the
circumstances in which they were made, not misleading. Upon receipt of such
disclosure, the Investor's counsel shall consult with the Company's independent
counsel in order to address the concern raised as to the existence of a material
misstatement or omission and to discuss appropriate disclosure with respect
thereto; provided, however, that such consultation shall not constitute the
advice of the Company's independent counsel to the Investor as to the accuracy
of the Registration Statement and related Prospectus.
2.5.3 PROCEDURE IF MATERIAL FACTS ARE REASONABLY
BELIEVED TO BE UNTRUE OR ARE Omitted. In the event after such consultation the
Investor or the Investor's counsel reasonably believes that the Registration
Statement contains an untrue statement of a material fact or omits a material
fact required to be stated in the Registration Statement or necessary to make
the statements contained therein, in light of the circumstances in which they
were made, not misleading,
(a) the Company shall file with the
SEC an amendment to the Registration Statement responsive to such alleged untrue
statement or omission and provide the Investor, as promptly as practicable, with
copies of the Registration Statement and related Prospectus, as so amended, or
(b) if the Company disputes the
existence of any such material misstatement or omission, (i) the Company's
independent counsel shall provide the Investor's counsel with a Registration
Opinion and (ii) in the event the dispute relates to the adequacy of financial
disclosure and the Investor shall reasonably request, the Company's
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independent auditors shall provide to the Company a letter ("Agreed Upon
Procedures Report") outlining the performance of such "agreed upon procedures"
as shall be reasonably requested by the Investor and the Company shall provide
the Investor with a copy of such letter.
2.6 COMMITMENT PAYMENTS AND TERMINATION FEE.
In the event that the Company delivers a Termination Notice to
the Investor or an Automatic Termination occurs, the Company shall pay to the
Investor (the "Termination Fee") the difference of (x) $200,000, minus (y) 10%
of the aggregate Put Dollar Amount of the Put Shares purchased by the Investor
during all Puts to date.
The Termination Fee is payable, in cash or Common Stock (in
the manner described below), at the Company's option, within five (5) business
days of the date it accrued. If such payment is made in restricted and
unregistered Common Stock, the Company shall deliver to the Investor a number of
shares of Common Stock equal to 150% of the amount of the Termination Fee that
is then payable, divided by the lowest closing price of the Company's Common
Stock for the five (5) Business Days immediately preceding the date of delivery
of such shares to the Investor. The Company shall not be required to deliver any
payments to Investor under this subsection until Investor has paid all Put
Dollar Amounts that are then due.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF INVESTOR.
Investor hereby represents and warrants to and agrees with the Company as
follows:
3.1 ACCREDITED INVESTOR. Investor is an accredited investor
("Accredited Investor"), as defined in Rule 501 of Regulation D, and has checked
the applicable box set forth in Section 10 of this Agreement.
3.2 INVESTMENT EXPERIENCE; ACCESS TO INFORMATION; INDEPENDENT
INVESTIGATION.
3.2.1 ACCESS TO INFORMATION. Investor or Investor'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 Investor or Investor's professional advisor deems necessary to verify the
accuracy and completeness of the information received.
3.2.2 RELIANCE ON OWN ADVISORS. Investor has relied
completely on the advice of, or has consulted with, Investor'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 of the foregoing,
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
3.2.4 below and on the Opinion of Counsel). The foregoing, however, does not
limit or modify Investor's right to rely upon covenants, representations and
warranties of the Company in this Agreement.
3.2.3 CAPABILITY TO EVALUATE. Investor has such
knowledge and experience in financial and business matters so as to enable such
Investor 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 3.2.4 below).
3.2.4 DISCLOSURE DOCUMENTS. Investor, in making
Investor's investment decision to subscribe for the Investment Agreement
hereunder, represents that (a) Investor has received and had an opportunity to
review (i) the Company's Annual Report on Form 10-KSB for the year ended June
30, 2000, (ii) the Company's quarterly report on Form 10-QSB for the
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quarters ended December 31, 2000, and March 31, 2001, (iii) the Risk Factors,
attached as EXHIBIT I, (iv) Information Statement of Cool Entertainment, Inc.,
dated January 5, 2001, (v) Information Statement of E-Trend Networks, Inc.,
(Nevada) dated January 4, 2001, (vi) Form 8K of the Company dated February 21,
2001, (vii) Amended Form 8K of the Company dated May 7, 2001, (viii) Amended
Form 8K dated May 20, 2001, (ix) Amended Form 8K dated May 23, 2001, (x)
Information Statement dated March 30, 2001, (xi) Information Statement dated
April 17, 2001, (xii) Form S-8 dated June 8, 2001 (the "Risk Factors") (xiii)
the Capitalization Schedule, attached as EXHIBIT J, (the "Capitalization
Schedule") and (xiv) the Use of Proceeds Schedule, attached as EXHIBIT K, (the
"Use of Proceeds Schedule"); (b) Investor has read, reviewed, and relied solely
on the documents described in (a) above, the Company's representations and
warranties and other information in this Agreement, including the exhibits,
documents prepared by the Company which have been specifically provided to
Investor in connection with this Offering (the documents described in this
Section 3.2.4 (a) and (b) are collectively referred to as the "Disclosure
Documents"), and an independent investigation made by Investor and Investor's
representatives, if any; (c) Investor has, prior to the date of this Agreement,
been given an opportunity to review material contracts and documents of the
Company which have been filed as exhibits to the Company's filings under the Act
and the Exchange Act and has had an opportunity to ask questions of and receive
answers from the Company's officers and directors; and (d) 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 contained in the
Disclosure Documents or incorporated herein or therein. The foregoing, however,
does not limit or modify Investor's right to rely upon covenants,
representations and warranties of the Company in Sections 5 and 6 of this
Agreement. Investor acknowledges and agrees that the Company has no
responsibility for, does not ratify, and is under no responsibility whatsoever
to comment upon or correct any reports, analyses or other comments made about
the Company by any third parties, including, but not limited to, analysts'
research reports or comments (collectively, "Third Party Reports"), and Investor
has not relied upon any Third Party Reports in making the decision to invest.
3.2.5 INVESTMENT EXPERIENCE; FEND FOR SELF. Investor
has substantial experience in investing in securities and it has made
investments in securities other than those of the Company. Investor acknowledges
that Investor is able to fend for Investor's self in the transaction
contemplated by this Agreement, that Investor has the ability to bear the
economic risk of Investor's investment pursuant to this Agreement and that
Investor is an "Accredited Investor" by virtue of the fact that Investor meets
the investor qualification standards set forth in Section 3.1 above. Investor
has not been organized for the purpose of investing in securities of the
Company, although such investment is consistent with Investor's purposes.
3.3 EXEMPT OFFERING UNDER REGULATION D.
3.3.1 NO GENERAL SOLICITATION. The Investment
Agreement was not offered to Investor through, and Investor is not aware of, any
form of general solicitation or general advertising, including, without
limitation, (i) any advertisement, article, notice or other communication
published in any newspaper, magazine or similar media or broadcast over
television or radio, and (ii) any seminar or meeting whose attendees have been
invited by any general solicitation or general advertising.
3.3.2 RESTRICTED SECURITIES. Investor understands
that the Investment Agreement is, the Common Stock issued at each Put Closing
will be, and the Warrant Shares will be, characterized as "restricted
securities" under the federal securities laws inasmuch as they are being
acquired from the Company in a transaction exempt from the registration
requirements of the federal securities laws 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, Investor represents that Investor is familiar with Rule 144 under
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the Act, as presently in effect, and understands the resale limitations imposed
thereby and by the Act.
3.3.3 DISPOSITION. Without in any way limiting the
representations set forth above, Investor agrees that until the Securities are
sold pursuant to an effective Registration Statement or an exemption from
registration, they will remain in the name of Investor and will not be
transferred to or assigned to any broker, dealer or depositary. Investor further
agrees not to sell, transfer, assign, or pledge the Securities (except for any
bona fide pledge arrangement to the extent that such pledge does not require
registration under the Act or unless an exemption from such registration is
available and provided further that if such pledge is realized upon, any
transfer to the pledgee shall comply with the requirements set forth herein), or
to otherwise dispose of all or any portion of the Securities unless and until:
(a) There is then in effect a registration
statement under the Act and any applicable state securities laws covering such
proposed disposition and such disposition is made in accordance with such
registration statement and in compliance with applicable prospectus delivery
requirements; or
(b) (i) Investor shall have notified the
Company of the proposed disposition and shall have furnished the Company with a
statement of the circumstances surrounding the proposed disposition to the
extent relevant for determination of the availability of an exemption from
registration, and (ii) if reasonably requested by the Company, Investor shall
have furnished the Company with an opinion of counsel, reasonably satisfactory
to the Company, that such disposition will not require registration of the
Securities under the Act or state securities laws. It is agreed that the Company
will not require the Investor to provide opinions of counsel for transactions
made pursuant to Rule 144 provided that Investor and Investor's broker, if
necessary, provide the Company with the necessary representations for counsel to
the Company to issue an opinion with respect to such transaction.
The Investor is entering into this Agreement for its own
account and the Investor has no present arrangement (whether or not legally
binding) at any time to sell the Common Stock to or through any person or
entity; provided, however, that by making the representations herein, the
Investor does not agree to hold the Common Stock for any minimum or other
specific term and reserves the right to dispose of the Common Stock at any time
in accordance with federal and state securities laws applicable to such
disposition.
3.4 DUE AUTHORIZATION.
3.4.1 AUTHORITY. The person executing this Investment
Agreement, 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, trust,
estate, corporation or other entity for whom or which Investor is executing this
Agreement. Investor has reached the age of majority (if an individual) according
to the laws of the state in which he or she resides.
3.4.2 DUE AUTHORIZATION. Investor is duly and validly
organized, validly existing and in good standing as a limited liability company
under the laws of Georgia with full power and authority to purchase the
Securities to be purchased by Investor and to execute and deliver this
Agreement.
3.4.3 PARTNERSHIPS. If Investor is a partnership, the
representations, warranties, agreements and understandings set forth above are
true with respect to all partners of Investor (and if any such partner is itself
a partnership, all persons holding an interest in such
E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc
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partnership, directly or indirectly, including through one or more
partnerships), and the person executing this Agreement has made due inquiry to
determine the truthfulness of the representations and warranties made hereby.
3.4.4 AUTHORIZATION. All action on the part of the
Investor by its manager necessary for the authorization, execution and delivery
of this Agreement, and the performance of all obligations of the Investor
hereunder have been taken, and this Agreement and the Registration Rights
Agreement constitute valid and legally binding obligations of the Company,
enforceable in accordance with their 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 Investor has obtained all consents
and approvals required for it to execute, deliver and perform each agreement
referenced in the previous sentence.
4. ACKNOWLEDGMENTS. Investor is aware that:
4.1 RISKS OF INVESTMENT. Investor recognizes that an
investment in the Company involves substantial risks, including the potential
loss of Investor's entire investment herein. Investor recognizes that the
Disclosure Documents, 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;
4.2 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;
4.3 NO REGISTRATION, RESTRICTIONS ON TRANSFER. As of the date
of this Agreement, 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 (except for any limited pledge in connection with a margin
account of Investor to the extent that such pledge does not require registration
under the Act or unless an exemption from such registration is available and
provided further that if such pledge is realized upon, any transfer to the
pledgee shall comply with the requirements set forth herein), 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;
4.4 RESTRICTIONS ON TRANSFER. Investor 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;
4.5 NO ASSURANCES OF REGISTRATION. There can be no assurance
that any registration statement will become effective at the scheduled time, or
ever, or remain effective when required, and Investor acknowledges that it may
be required to bear the economic risk of Investor's investment for an indefinite
period of time;
4.6 EXEMPT TRANSACTION. Investor 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 Investor to acquire such
Securities.
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4.7 LEGENDS. The certificates representing the Put Shares
shall not bear a legend restricting the sale or transfer thereof ("Restrictive
Legend"). The certificates representing the Warrant Shares shall not bear a
Restrictive Legend unless they are issued at a time when the Registration
Statement is not effective for resale. It is understood that the certificates
evidencing any Warrant Shares issued at a time when the Registration Statement
is not effective for resale, subject to legend removal under the terms of
Section 6.8 below, shall bear the following legend (the "Legend"):
"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."
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
makes the following representations and warranties to Investor (which shall be
true at the signing of this Agreement, and as of any such later date as
specified hereunder) and agrees with Investor that, except as set forth in the
"Schedule of Exceptions" attached hereto as EXHIBIT C:
5.1 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 Delaware, USA 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, in the
Company's opinion, 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 (a "Proceeding") by the
Internal Revenue Service, the taxing authorities of any state or local
jurisdiction, or the Securities and Exchange Commission, the National
Association of Securities Dealers, Inc., the Nasdaq Stock Market, Inc. or any
state securities commission, or any other governmental entity, which have not
been disclosed in the Disclosure Documents. None of the disclosed Proceedings,
if any, will, in the Company's opinion, have a material adverse effect upon the
Company. The Company has the subsidiaries set forth on Schedule C attached
hereto.
5.2 CORPORATE CONDITION. The Company's condition is, in all
material respects, as described in the Disclosure Documents (as further set
forth in any subsequently filed Disclosure Documents, if applicable), except for
changes in the ordinary course of business and normal year-end adjustments that
are not, in the aggregate, materially adverse to the Company. Except for
continuing losses, there have been no material adverse changes to the Company's
business, financial condition, or prospects from the dates of such Disclosure
Documents through the date of the Investment Commitment Closing. The financial
statements as contained in the 10-KSB and 10-QSB have been prepared in
accordance with generally accepted accounting principles, consistently applied
(except as otherwise permitted by Regulation S-X of the Exchange Act, or
Generally Accepted Accounting Principles, as applicable), subject, in the case
of unaudited interim financial statements, to customary year end adjustments and
the absence of certain footnotes, and fairly present the 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. 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 that are due, except for
taxes that it reasonably disputes. 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
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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. No event or
circumstance exists relating to the Company which, under applicable law,
requires public disclosure but which has not been so publicly announced or
disclosed.
5.3 AUTHORIZATION. All corporate action on the part of the
Company by its officers, directors and stockholders 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 Common Stock being sold hereunder and the issuance (and/or the
reservation for issuance) of the Warrants and the Warrant Shares have been
taken, and this Agreement and the Registration Rights Agreement constitute valid
and legally binding obligations of the Company, enforceable in accordance with
their 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.
5.4 VALID ISSUANCE OF COMMON STOCK. The Common Stock and the
Warrants, 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 Investor in this
Agreement, will be issued in compliance with all applicable U.S. federal and
state securities laws. The Warrant Shares, when issued in accordance with the
terms of the Warrants, shall be duly and validly issued and outstanding, fully
paid and nonassessable, and based in part on the representations and warranties
of Investor, will be issued in compliance with all applicable U.S. federal and
state securities laws. The Put Shares, the Warrants and the Warrant Shares will
be issued free of any preemptive rights.
5.5 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation or default of any provisions of its Certificate of Incorporation or
Bylaws, each as amended and in effect on and as of the date of the Agreement, or
of any material provision of any material instrument or material contract to
which it is a party or by which it is bound or of any provision of any federal
or state judgment, writ, decree, order, statute, rule or governmental regulation
applicable to the Company, which would, in the Company's opinion, have a
material adverse effect on the Company's business or prospects, or on the
performance of its obligations under this Agreement or the Registration Rights
Agreement. 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 and thereby will not (a)
result in any such violation or be in conflict with or constitute, with or
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, which would,
in the Company's opinion, have a material adverse effect on the Company's
business or prospects, or on the performance of its obligations under this
Agreement, the Registration Rights Agreement, or (b) violate the Company's
Certificate of Incorporation or By-Laws or (c) violate any statute, rule or
governmental regulation applicable to the Company which violation would, in the
Company's opinion, have a material adverse effect on the Company's business or
prospects.
5.6 REPORTING COMPANY. The Company is subject to the reporting
requirements of the Exchange Act, has a class of securities registered under
Section 12 of the Exchange Act, and has filed all reports required by the
Exchange Act since the date the Company first became subject to such reporting
obligations. The Company undertakes to furnish Investor with copies of such
reports as may be reasonably requested by Investor prior to consummation of this
Offering and thereafter, to make such reports available, for the full term of
this Agreement, including any extensions thereof, and for as long as Investor
holds the Securities. The Common Stock is duly
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listed or approved for quotation on the O.T.C. Bulletin Board. The Company is
not in violation of the listing requirements of the O.T.C. Bulletin Board and
does not reasonably anticipate that the Common Stock will be delisted by the
O.T.C. Bulletin Board for the foreseeable future. The Company has filed all
reports required under the Exchange Act. The Company has not furnished to the
Investor any material nonpublic information concerning the Company.
5.7 CAPITALIZATION. The capitalization of the Company as of
the date hereof subject to exercise of any outstanding warrants and/or exercise
of any outstanding stock options, and after taking into account the offering of
the Securities contemplated by this Agreement and all other share issuances
occurring prior to this Offering, is as set forth in the Capitalization Schedule
as set forth in EXHIBIT J. There are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities. Except as disclosed in the Capitalization Schedule, as of the
date of this Agreement, (i) 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 (ii) 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 (except the Registration
Rights Agreement).
5.8 INTELLECTUAL PROPERTY. The Company has valid, unrestricted
and exclusive ownership of or rights to use the patents, trademarks, trademark
registrations, trade names, copyrights, know-how, technology and other
intellectual property necessary to the conduct of its business. EXHIBIT L lists
all patents, trademarks, trademark registrations, trade names and copyrights of
the Company. The Company has granted such licenses or has assigned or otherwise
transferred a portion of (or all of) such valid, unrestricted and exclusive
patents, trademarks, trademark registrations, trade names, copyrights, know-how,
technology and other intellectual property necessary to the conduct of its
business as set forth in EXHIBIT L. The Company has been granted licenses,
know-how, technology and/or other intellectual property necessary to the conduct
of its business as set forth in EXHIBIT L. To the best of the Company's
knowledge after due inquiry, 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
agreements, licenses, franchises, or other instruments that preclude the Company
from engaging in its business as presently conducted.
5.9 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 on the Use of Proceeds
Schedule set forth as EXHIBIT K hereto. These purposes and amounts are estimates
and are subject to change without notice to any Investor.
5.10 NO RIGHTS OF PARTICIPATION. No person or entity,
including, but not limited to, current or former stockholders 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.
5.11 COMPANY ACKNOWLEDGMENT. The Company hereby acknowledges
that Investor may elect to hold the Securities for various periods of time, as
permitted by the terms of this Agreement, the Warrants, and other agreements
contemplated hereby, and the Company further acknowledges that Investor has made
no representations or warranties, either written or oral, as to how long the
Securities will be held by Investor or regarding Investor's trading history or
investment strategies.
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5.12 NO ADVANCE REGULATORY APPROVAL. The Company acknowledges
that this Investment Agreement, the transaction contemplated hereby and the
Registration Statement contemplated hereby have not been approved by the SEC, or
any other regulatory body and there is no guarantee that this Investment
Agreement, the transaction contemplated hereby and the Registration Statement
contemplated hereby will ever be approved by the SEC or any other regulatory
body. The Company is relying on its own analysis and is not relying on any
representation by Investor that either this Investment Agreement, the
transaction contemplated hereby or the Registration Statement contemplated
hereby has been or will be approved by the SEC or other appropriate regulatory
body.
5.13 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 in connection with this Offering.
5.14 AVAILABILITY OF SUITABLE FORM FOR REGISTRATION. The
Company is currently eligible and agrees to maintain its eligibility to register
the resale of its Common Stock on a registration statement on a suitable form
under the Act.
5.15 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 Regulation D of the Act or
would require the issuance of any other securities to be integrated with this
Offering under the Rules of the SEC. The Company has not engaged in any form of
general solicitation or advertising in connection with the offering of the
Common Stock or the Warrants.
5.16 FOREIGN CORRUPT PRACTICES. Neither the Company, nor any
of its subsidiaries, nor any director, officer, agent, employee or other person
acting on behalf of the Company or any 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.
5.17 KEY EMPLOYEES. As of the date of this Agreement, each
"Key Employee" (as defined in EXHIBIT M) is currently serving the Company in the
capacity disclosed in EXHIBIT M. No Key Employee, 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.
5.18 REPRESENTATIONS CORRECT. The foregoing representations,
warranties and agreements are true, correct and complete in all material
respects, and shall survive any Put Closing and the issuance of the shares of
Common Stock thereby.
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5.19 TAX STATUS. The Company has made or filed all federal and
state income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject (unless and only to the extent that the
Company has set aside on its books provisions reasonably adequate for the
payment of all unpaid and unreported taxes) and has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and has set aside on its books provision
reasonably adequate for the payment of all taxes for periods subsequent to the
periods to which such returns, reports or declarations apply. There are no
unpaid taxes in any material amount claimed to be due by the taxing authority of
any jurisdiction, and the officers of the Company know of no basis for any such
claim.
5.20 TRANSACTIONS WITH AFFILIATES. Except as set forth in the
Disclosure Documents, none of the officers, directors, or employees of the
Company is presently a party to any transaction with the Company (other than for
services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Company, any corporation, partnership, trust or other entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.
5.21 [INTENTIONALLY LEFT BLANK].
5.22 [INTENTIONALLY LEFT BLANK].
5.23 MAJOR TRANSACTIONS. As of the date of this Agreement,
there are no other Major Transactions currently pending or contemplated by the
Company.
5.24 FINANCINGS. As of the date of this Agreement, there are
no other financings currently pending or contemplated by the Company.
5.25 SHAREHOLDER AUTHORIZATION. The Company shall, at its next
annual shareholder meeting following its listing on either the Nasdaq Small Cap
Market or the Nasdaq National Market, or at a special meeting to be held as soon
as practicable thereafter, use its best efforts to obtain approval of its
shareholders to (i) authorize the issuance of the full number of shares of
Common Stock which would be issuable under this Agreement and eliminate any
prohibitions under applicable law or the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory organization
with jurisdiction over the Company or any of its securities with respect to the
Company's ability to issue shares of Common Stock in excess of the Cap Amount
(such approvals being the "20% Approval") and (ii) increase the number of
authorized shares of Common Stock of the Company (the "Share Authorization
Increase Approval") such that at least 5,000,000 shares can be reserved for this
Offering. In connection with such shareholder vote, the Company shall use its
best efforts to cause all officers and directors of the Company to promptly
enter into irrevocable agreements to vote all of their shares in favor of
eliminating such prohibitions. As soon as practicable after the 20% Approval and
the Share Authorization Increase Approval, the Company agrees to use its best
efforts to reserve 5,000,000 shares of Common Stock for issuance under this
Agreement.
5.26 ACKNOWLEDGMENT OF LIMITATIONS ON PUT AMOUNTS. The Company
understands and acknowledges that the amounts available under this Investment
Agreement are limited, among other things, based upon the liquidity of the
Company's Common Stock traded on its Principal Market.
5.27 DILUTION. The number of shares of Common Stock issuable
as Put Shares may increase substantially in certain circumstances, including,
but not necessarily limited to, the
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circumstance wherein the trading price of the Common Stock declines during the
period between the Effective Date and the end of the Commitment Period. The
Company's executive officers and directors fully understand the nature of the
transactions contemplated by this Agreement 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 specifically acknowledges that, whenever the Company
elects to initiate a Put, its obligation to issue the Put Shares is binding upon
the Company and enforceable regardless of the dilution such issuance may have on
the ownership interests of other shareholders of the Company.
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6. COVENANTS OF THE COMPANY.
6.1 INDEPENDENT AUDITORS. The Company shall, until at least
the Termination Date, maintain as its independent auditors an accounting firm
authorized to practice before the SEC.
6.2 CORPORATE EXISTENCE AND TAXES; CHANGE IN CORPORATE ENTITY.
The Company shall, until at least the Termination Date, maintain its corporate
existence in good standing and, once it becomes a "Reporting Issuer" (defined as
a Company which files periodic reports under the Exchange Act), remain a
Reporting Issuer and shall pay all its taxes when due except for taxes which the
Company disputes. The Company shall not, at any time after the date hereof,
enter into any merger, consolidation or corporate reorganization of the Company
with or into, or transfer all or substantially all of the assets of the Company
to, another entity unless the resulting successor or acquiring entity in such
transaction, if not the Company (the "Surviving Entity"), (i) has Common Stock
listed for trading on Nasdaq or on another national stock exchange and is a
Reporting Issuer, (ii) assumes by written instrument the Company's obligations
with respect to this Investment Agreement, the Registration Rights Agreement,
the Transfer Agent Instructions, the Warrants and the other agreements referred
to herein, including but not limited to the obligations to deliver to the
Investor shares of Common Stock and/or securities that Investor is entitled to
receive pursuant to this Investment Agreement and upon exercise of the Warrants
and agrees by written instrument to reissue, in the name of the Surviving
Entity, any Warrants (each in the same terms, including but not limited to the
same reset provisions, as the applicable Warrant originally issued or required
to be issued by the Company) that are outstanding immediately prior to such
transaction, making appropriate proportional adjustments to the number of shares
represented by such Warrants and the exercise prices of such Warrants to
accurately reflect the exchange represented by the transaction.
6.3 REGISTRATION RIGHTS. Concurrently herewith, the Company
will enter into a registration rights agreement covering the resale of the
Common Shares and the Warrant Shares substantially in the form of the
Registration Rights Agreement attached as EXHIBIT A.
6.4 ASSET TRANSFERS. The Company shall not (i) transfer, sell,
convey or otherwise dispose of any of its material assets to any subsidiary
except for a cash or cash equivalent consideration and for a proper business
purpose or (ii) transfer, sell, convey or otherwise dispose of any of its
material assets to any Affiliate, as defined below, during the Term of this
Agreement. For purposes hereof, "Affiliate" shall mean any officer of the
Company, director of the Company or owner of twenty percent (20%) or more of the
Common Stock or other securities of the Company.
6.5 CAPITAL RAISING LIMITATIONS.
6.5.1 CAPITAL RAISING LIMITATIONS. During the period
from the date of this Agreement until the date that is sixty (60) days after the
Termination Date, the Company shall not issue or sell, or agree to issue or sell
Equity Securities (as defined below), for cash in private capital raising
transactions without obtaining the prior written approval of the Investor of the
Offering (the limitations referred to in this subsection 6.5.1 are collectively
referred to as the "Capital Raising Limitations"). For purposes hereof, the
following shall be collectively referred to herein as, the "Equity Securities":
(i) Common Stock or any other equity securities, (ii) any debt or equity
securities which are convertible into, exercisable or exchangeable for, or carry
the right to receive additional shares of Common Stock or other equity
securities, or (iii) any securities of the Company pursuant to an equity line
structure or format similar in nature to this Offering.
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6.5.2 INVESTOR'S RIGHT OF FIRST REFUSAL. For any
private capital raising transactions of Equity Securities which close after the
date hereof and on or prior to the date that is sixty (60) days after the
Termination Date of this Agreement, not including any warrants issued in
conjunction with this Investment Agreement, the Company agrees to deliver to
Investor, at least ten (10) days prior to the closing of such transaction,
written notice describing the proposed transaction, including the terms and
conditions thereof, and providing the Investor and its affiliates an option (the
"Right of First Refusal") during the ten (10) day period following delivery of
such notice to purchase the securities being offered in such transaction on the
same terms as contemplated by such transaction.
6.5.3 EXCEPTIONS TO CAPITAL RAISING LIMITATIONS AND
RIGHTS OF FIRST REFUSAL. Notwithstanding the above, neither the Capital Raising
Limitations nor the Rights of First Refusal shall apply to (a) any transaction
involving issuances of securities by the Company to a company being acquired by
the Company, as payment to such company for such acquisition, or in connection
with the exercise of options by employees or directors of the Company, or a
primary underwritten offering of the Company's Common Stock, (b) the issuance of
securities upon exercise or conversion of the Company's options, warrants or
other convertible securities outstanding as of the date hereof, (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 or directors, or (d) the issuance of debt securities, with
no equity feature, incurred solely for working capital purposes.
6.6 FINANCIAL 10-KSB STATEMENTS, ETC. AND CURRENT REPORTS ON
FORM 8-K. The Company shall deliver to the Investor copies of its annual reports
on Form 10-KSB, and quarterly reports on Form 10-QSB and shall deliver to the
Investor current reports on Form 8-K within two (2) days of filing for the Term
of this Agreement.
6.7 OPINION OF COUNSEL. Investor shall, concurrent with the
Investment Commitment Closing, receive an opinion letter from the Company's
legal counsel, in the form attached as EXHIBIT B, or in such form as agreed upon
by the parties, and shall, concurrent with each Put Date, receive an opinion
letter from the Company's legal counsel, in the form attached as EXHIBIT H or in
such form as agreed upon by the parties.
6.8 REMOVAL OF LEGEND. If the certificates representing any
Securities are issued with a restrictive Legend in accordance with the terms of
this Agreement, 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 (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 Investor), 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 can be sold pursuant to Rule 144. Each Investor 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 and to deliver a prospectus in
connection with such sale or in compliance with an exemption from the
registration requirements of the Act.
6.9 LISTING. Subject to the remainder of this Section 6.9, the
Company shall ensure that its shares of Common Stock (including all Warrant
Shares and Put Shares) are listed and available for trading on the O.T.C.
Bulletin Board. Thereafter, the Company shall (i) use its best efforts to
continue the listing and trading of its Common Stock on the O.T.C. Bulletin
Board or to become eligible for and listed and available for trading on the
Nasdaq Small Cap Market, the NMS, the American Stock Exchange or the New York
Stock Exchange ("NYSE"); and (ii)
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comply in all material 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.
6.10 THE COMPANY'S INSTRUCTIONS TO TRANSFER AGENT. The Company
will instruct the Transfer Agent of the Common Stock (the "Transfer Agent"), by
delivering instructions in the form of EXHIBIT O hereto, to issue certificates,
registered in the name of each Investor or its nominee, for the Put Shares and
Warrant Shares in such amounts as specified from time to time by the Company
upon any exercise by the Company of a Put and/or exercise of the Warrants by the
holder thereof. Such certificates shall not bear a Legend unless issuance with a
Legend is permitted by the terms of this Agreement and Legend removal is not
permitted by Section 6.8 hereof and the Company shall cause the Transfer Agent
to issue such certificates without a Legend. Nothing in this Section shall
affect in any way Investor's obligations and agreement set forth in Sections
3.3.2 or 3.3.3 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) an Investor 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, to the
effect that the Securities to be sold or transferred may be sold or transferred
pursuant to an exemption from registration or (b) an Investor transfers
Securities, pursuant to Rule 144, to a transferee which is an accredited
investor, the Company shall permit the transfer, and, in the case of Put Shares
and Warrant Shares, promptly instruct its transfer agent to issue one or more
certificates in such name and in such denomination as specified by such
Investor. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to an Investor by vitiating the intent and
purpose of the transaction contemplated hereby. Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations under this
Section 6.10 will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Section 6.10, that an
Investor 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.
6.11 STOCKHOLDER 20% APPROVAL. Prior to the closing of any Put
that would cause the Aggregate Issued Shares to exceed the Cap Amount, if
required by the rules of NASDAQ because the Company's Common Stock is listed on
NASDAQ, the Company shall obtain approval of its stockholders to authorize the
issuance of the full number of shares of Common Stock which would be issuable
pursuant to this Agreement but for the Cap Amount and eliminate any prohibitions
under applicable law or the rules or regulations of any stock exchange,
interdealer quotation system or other self-regulatory organization with
jurisdiction over the Company or any of its securities with respect to the
Company's ability to issue shares of Common Stock in excess of the Cap Amount
(such approvals being the "Stockholder 20% Approval").
6.12 PRESS RELEASE. Any public announcement relating to this
financing (a "Press Release") shall be submitted to the Investor for review at
least two (2) business days prior to the planned release. The Company shall not
disclose the Investor's name in any press release or other public announcement
without the Investor's prior written approval. The Company shall obtain the
Investor's written approval of the Press Release prior to issuance by the
Company.
6.13 CHANGE IN LAW OR POLICY. In the event of a change in law,
or policy of the SEC, as evidenced by a No-Action letter or other written
statements of the SEC or the NASD which causes the Investor to be unable to
perform its obligations hereunder, this Agreement shall be automatically
terminated and no Termination Fee shall be due, provided that notwithstanding
any termination under this section 6.13, the Investor shall retain full
ownership of the
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Commitment Warrant as partial consideration for its commitment hereunder, and
provided that such termination shall have no effect on the parties' other rights
and obligations under this Agreement, the Registration Rights Agreement, except
that no cash Termination Fee shall be due.
6.14. NOTICE OF CERTAIN EVENTS AFFECTING REGISTRATION;
SUSPENSION OF RIGHT TO MAKE A PUT. The Company shall immediately notify the
Investor, but in no event later than two (2) business days by facsimile and by
overnight courier, upon the occurrence of any of the following events in respect
of a Registration Statement or related prospectus in respect of an offering of
Registrable Securities: (i) receipt of any request for additional information by
the SEC or any other federal or state governmental authority during the period
of effectiveness of the Registration Statement for amendments or supplements to
the Registration Statement or related prospectus; (ii) the issuance by the SEC
or any other federal or state governmental authority of any stop order
suspending the effectiveness of a Registration Statement or the initiation of
any proceedings for that purpose; (iii) receipt of any notification with respect
to the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (iv) the happening of any event
that makes any statement made in such Registration Statement or related
prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any
changes in the Registration Statement, related prospectus or documents so that,
in the case of a Registration Statement, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
that in the case of the related prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; (v) the declaration by
the SEC of the effectiveness of a Registration Statement; and (vi) the Company's
reasonable determination that a post-effective amendment to the Registration
Statement would be appropriate, and the Company shall promptly make available to
the Investor any such supplement or amendment to the related prospectus. The
Company shall not deliver to the Investor any Put Notice during the continuation
of any of the foregoing events.
6.15 ACKNOWLEDGMENT REGARDING INVESTOR'S PURCHASE OF THE
SECURITIES. The Company acknowledges and agrees that the Investor is acting
solely in the capacity of arm's length purchaser with respect to the Transaction
Documents and the transactions contemplated hereby and thereby. The Company
further acknowledges that the Investor is not acting as a financial advisor or
fiduciary of the Company (or in any similar capacity) with respect to the
Transaction Documents and the transactions contemplated hereby and thereby and
any advice given by the Investor or any of its representatives or agents in
connection with the Transaction Documents and the transactions contemplated
hereby and thereby is merely incidental to the Investor's purchase of the
Securities. The Company further represents to the Investor that the Company's
decision to enter into the Transaction Documents has been based solely on the
independent evaluation by the Company and its representatives and advisors.
6.16. LIQUIDATED DAMAGES. The parties hereto acknowledge and
agree that the sums payable as Termination Fees and Ineffective Period Payments
shall each give rise to liquidated damages and not penalties. The parties
further acknowledge that (a) the amount of loss or damages likely to be incurred
by the Investor is incapable or is difficult to precisely estimate, (b) the
amounts specified bear a reasonable proportion and are not plainly or grossly
disproportionate to the probable loss likely to be incurred by the Investor, and
(c) the parties are sophisticated business parties and have been represented by
sophisticated and able legal and financial counsel and negotiated this Agreement
at arm's length.
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6.17. COPIES OF FINANCIAL STATEMENTS, REPORTS AND PROXY
STATEMENTS. Promptly upon the mailing thereof to the shareholders of the Company
generally, the Company shall deliver to the Investor copies of all financial
statements, reports and proxy statements so mailed and any other document
generally distributed to shareholders.
6.18. NOTICE OF CERTAIN LITIGATION. Promptly following the
commencement thereof, the Company shall provide the Investor written notice and
a description in reasonable detail of any litigation or proceeding to which the
Company or any subsidiary of the Company is a party, in which the amount
involved is $250,000 or more and which is not covered by insurance or in which
injunctive or similar relief is sought.
6.19. TERM. The term ("Term") of this Agreement shall be a
period of time beginning on the date of this Agreement and ending on the
Termination Date, provided that notwithstanding the expiration of the Term and
notwithstanding any Termination or Automatic Termination, (A) the Company's
covenants in Sections 4.7, 5.1, 5.4, 6.1, 6.2, 6.3, 6.4, 6.8, 6.9,6.10, 6.13 and
7.9 hereof shall survive and remain in full force and effect until sixty (60)
days following the later of (i) the Termination Date or (ii) the date that all
of the Warrants have been exercised, (B) the Company's covenants under Section
7.8 and Section 9 hereof shall survive and remain in full force and effect for
the full period of time that a suit could be brought against the Investor with
respect to this Agreement, the Related Agreements or with respect to the
Registration Statement and related prospectus under any applicable statutes of
limitations, and (C) notwithstanding a Termination or Automatic Termination, the
Related Agreements between the parties shall not terminate and shall remain in
full force and effect in accordance with their respective terms.
7. MISCELLANEOUS.
7.1 REPRESENTATIONS AND WARRANTIES SURVIVE THE CLOSING;
SEVERABILITY. Investor's and the Company's representations and warranties shall
survive the Investment Date and any Put Closing 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, or is altered by a term required by the Securities
Exchange Commission to be included in the Registration Statement, this Agreement
shall continue in full force and effect without said provision; provided that if
the removal of such provision materially changes the economic benefit of this
Agreement to the Investor, this Agreement shall terminate.
7.2 SUCCESSORS AND ASSIGNS. This Agreement shall not be
assignable by either party.
7.3 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.
7.4 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 neuter pronoun shall be deemed to include
a reference to the others.
7.5 WRITTEN NOTICES, ETC. Any notice, demand or request
required or permitted to be given by the Company or Investor pursuant to the
terms of this Agreement shall be in writing and shall be deemed given when
delivered personally, or by facsimile or upon receipt if by overnight or 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
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party may request by notifying the other in writing; provided, however, that in
order for any notice to be effective as to the Investor such notice shall be
delivered and sent, as specified herein, to all the addresses and facsimile
telephone numbers of the Investor set forth at the end of this Agreement or such
other address and/or facsimile telephone number as Investor may request in
writing.
7.6 EXPENSES. Except as set forth in the Registration Rights
Agreement, each of the Company and Investor shall pay all costs and expenses
that it respectively incurs, with respect to the negotiation, execution,
delivery and performance of this Agreement.
7.7 ENTIRE AGREEMENT; WRITTEN AMENDMENTS REQUIRED. This
Agreement, including the Exhibits attached hereto, the Common Stock
certificates, the Warrants, the Registration Rights Agreement, 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, whether oral, written, or
otherwise except as specifically set forth herein or therein. Except as
expressly 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.
7.8 ARBITRATION. This Agreement shall be governed by and
construed in accordance with the laws of the State of Georgia applicable to
agreements made in and wholly to be performed in that jurisdiction, except for
matters arising under the Act or the Securities Exchange Act of 1934, which
matters shall be construed and interpreted in accordance with such laws. Any
controversy or claim arising out of or related to the Transaction Documents or
the breach thereof, shall be settled by binding arbitration in Atlanta, Georgia
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 upon written demand by Company or any Investor 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 Atlanta,
Georgia or to the United States District Court sitting in Georgia 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.
Although the parties, as expressed above, agree that all
claims, including claims that are equitable in nature, for example specific
performance, shall initially be prosecuted in the binding arbitration procedure
outlined above, if the arbitration panel dismisses or otherwise fails to
entertain any or all of the equitable claims asserted by reason of the fact that
it lacks jurisdiction, power and/or authority to consider such claims and/or
direct the remedy requested, then, in only that event, will the parties have the
right to initiate litigation respecting such equitable claims or remedies. The
forum for such equitable relief shall be in either a state or federal court
sitting in Atlanta, Georgia. Each party waives any right to a trial by jury,
assuming such right exists in an equitable proceeding, and irrevocably submits
to the jurisdiction of said
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Georgia court. Georgia law shall govern both the proceeding as well as the
interpretation and construction of the Transaction Documents and the transaction
as a whole.
7.9 REPORTING ENTITY FOR THE COMMON STOCK. The reporting
entity relied upon for the determination of the trading price or trading volume
of the Common Stock on the Principal Market on any given Trading Day for the
purposes of this Agreement shall be the Bloomberg L.P. The written mutual
consent of the Investor and the Company shall be required to employ any other
reporting entity.
8. SUBSCRIPTION AND WIRING INSTRUCTIONS; IRREVOCABILITY.
(a) WIRE TRANSFER OF SUBSCRIPTION FUNDS. Investor shall
deliver Put Dollar Amounts (as payment towards any
Put Share Price) by wire transfer, to the Company
pursuant to a wire instruction letter to be provided
by the Company, and signed by the Company.
(b) IRREVOCABLE SUBSCRIPTION. Investor hereby
acknowledges and agrees, subject to the provisions of
any applicable laws providing for the refund of
subscription amounts submitted by Investor, that this
Agreement is irrevocable and that Investor is not
entitled to cancel, terminate or revoke this
Agreement or any other agreements executed by such
Investor and delivered pursuant hereto, and that this
Agreement and such other agreements shall survive the
death or disability of such Investor 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, administrators, successors,
legal representatives and assigns.
9. INDEMNIFICATION AND REIMBURSEMENT.
(a) INDEMNIFICATION. In consideration of the
Investor's execution and delivery of the Investment Agreement, the Registration
Rights Agreement and the Warrants (the "Transaction Documents") and acquiring
the Securities thereunder and in addition to all of the Company's other
obligations under the Transaction Documents, the Company shall defend, protect,
indemnify and hold harmless Investor and all of its stockholders, officers,
directors, employees and direct or indirect investors and any of the foregoing
person's agents, members, partners or other representatives (including, without
limitation, those retained in connection with the transactions contemplated by
this Agreement) (collectively, the "Indemnitees") from and against any and all
actions, causes of action, suits, claims, losses, costs, penalties, fees,
liabilities and damages, and expenses in connection therewith (irrespective of
whether any such Indemnitee is a party to the action for which indemnification
hereunder is sought), and including reasonable attorney's fees and disbursements
(the "Indemnified Liabilities"), incurred by any Indemnitee as a result of, or
arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in the Transaction Documents or
any other certificate, instrument or documents contemplated hereby or thereby,
(b) any breach of any covenant, agreement or obligation of the Company contained
in the Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby, (c) any cause of action, suit or claim,
derivative or otherwise, by any stockholder of the Company based on a breach or
alleged breach by the Company or any of its officers or directors of their
fiduciary or other obligations to the stockholders of the Company, or (d) claims
made by third parties against
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any of the Indemnitees based on a violation of Section 5 of the Securities Act
caused by the integration of the private sale of common stock to the Investor
and the public offering pursuant to the Registration Statement.
To the extent that the foregoing undertaking by the Company
may be unenforceable for any reason, the Company shall make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities which it would be required to make if such foregoing undertaking was
enforceable which is permissible under applicable law.
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 9, 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 9, 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 9 to the extent it is prejudicial.
(b) REIMBURSEMENT. If (i) the Investor, other than by reason
of its gross negligence or willful misconduct or by reason of its trading of the
Common Stock in a manner that is illegal under applicable securities laws,
becomes involved in any capacity in any action, proceeding or investigation
brought by any stockholder of the Company, in connection with or as a result of
the consummation of the transactions contemplated by the Transaction Documents,
or if the Investor is impleaded in any such action, proceeding or investigation
by any person or entity, or (ii) the Investor, other than by reason of its gross
negligence or willful misconduct, becomes involved in any capacity in any
action, proceeding or investigation brought by the SEC against or involving the
Company or in connection with or as a result of the consummation of the
transactions contemplated by the Transaction Documents, or if the Investor is
impleaded in any such action, proceeding or investigation by any person or
entity, then in any such case, the Company will reimburse the Investor for its
reasonable legal and other expenses (including the cost of any investigation and
preparation ) incurred in connection therewith, as such expenses are incurred.
In addition, other than with respect to any matter in which the Investor is a
named party, the Company will pay the Investor the charges, as reasonably
determined by the Investor, for the time of any officers or employees of the
Investor devoted to appearing and preparing to appear as witnesses, assisting in
preparation for hearing, trials or pretrial matters, or otherwise with respect
to inquiries, hearing, trials, and other proceedings relating to the subject
matter of this Agreement. The reimbursement obligations of the Company under
this paragraph shall be in addition to any liability which the Company may
otherwise have, shall extend upon the same terms and conditions to any
Affiliates of the Investor who are actually named in such action, proceeding or
investigation, and partners, directors, agents, employees and controlling
persons (if any), as the case may be, of the Investor and any such Affiliate,
and shall be binding upon and inure to the benefit of any successors, assigns,
heirs and personal representatives of the Company, the Investor and any such
Affiliate and any such person or entity. The Company also agrees that neither
the Investor nor any such Affiliate, partners, directors, agents, employees or
controlling persons shall have any liability to the Company or any person
asserting claims on behalf of or in right of the Company in connection with or
as a result of the consummation of the
E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc
36
Transaction Documents except to the extent that any losses, claims, damages,
liabilities or expenses incurred by the Company result from the gross negligence
or willful misconduct of the Investor or any inaccuracy in any representation
or warranty of the Investor contained herein or any breach by the Investor of
any of the provisions hereof.
[INTENTIONALLY LEFT BLANK]
E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc
37
10. ACCREDITED INVESTOR. Investor 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,
limited duration company, limited liability company,
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.
(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] ____________________________________.
E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc
38
The undersigned hereby subscribes the Maximum Offering Amount and
acknowledges that this Agreement and the subscription represented hereby shall
not be effective unless accepted by the Company as indicated below.
IN WITNESS WHEREOF, the undersigned Investor does represent and certify
under penalty of perjury that the foregoing statements are true and correct and
that Investor by the following signature(s) executed this Agreement.
Dated this 18TH day of September, 2001.
SWARTZ PRIVATE EQUITY, LLC
By: /s/ Eric S. Swartz
---------------------------------------
Eric S. Swartz, Manager
SECURITY DELIVERY INSTRUCTIONS:
Swartz Private Equity, LLC
c/o Eric S. Swartz
300 Colonial Center Parkway
Suite 300
Roswell, GA 30076
Telephone: (770) 640-8130
THIS AGREEMENT IS ACCEPTED BY THE COMPANY IN THE AMOUNT OF THE MAXIMUM OFFERING
AMOUNT ON THE 18TH DAY OF SEPTEMBER, 2001.
E-TREND NETWORKS, INC.
By: /s/ Timothy J. Sebastian
----------------------------------------
Timothy J. Sebastian, General Counsel
Address:
Attn: Timothy J. Sebastian
5919-3rd Street S.E.
Calgary, Alberta
Canada, T2H 1K3
Telephone (403) 252-7766
Facsimile (403) 252-7752
E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc
39
ADVANCE PUT NOTICE
E-Trend Networks, Inc. (the "Company") hereby intends, subject to the Individual
Put Limit (as defined in the Investment Agreement), to elect to exercise a Put
to sell the number of shares of Common Stock of the Company specified below, to
_____________________________, the Investor, as of the Intended Put Date written
below, all pursuant to that certain Amended and Restated Investment Agreement
(the "Investment Agreement") by and between the Company and Swartz Private
Equity, LLC originally dated on or about July 3, 2001 and amended on or about
September 18, 2001.
Date of Advance Put Notice: ___________________
Intended Put Date: ____________________________
Intended Put Share Amount: ____________________
Company Designation Maximum Put Dollar Amount (Optional):
_______________________________________________.
Company Designation Minimum Put Share Price (Optional):
_______________________________________________.
E-TREND NETWORKS, INC.
By:
----------------------------------------
Timothy J. Sebastian, General Counsel
Address:
Attn: Timothy J. Sebastian
5919-3rd Street S.E.
Calgary, Alberta
Canada, T2H 1K3
Telephone (403) 252-7766
Facsimile (403) 252-7752
E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc
EXHIBIT E
PUT NOTICE
E-Trend Networks, Inc. (the "Company") hereby elects to exercise a Put to sell
shares of common stock ("Common Stock") of the Company to _____________________,
the Investor, as of the Put Date, at the Put Share Price and for the number of
Put Shares written below, all pursuant to that certain Amended and Restated
Investment Agreement (the "Investment Agreement") by and between the Company and
Swartz Private Equity, LLC originally dated on or about July 3, 2001 and amended
on or about September 18, 2001.
Put Date: _________________
Intended Put Share Amount (from Advance Put Notice):
_________________ Common Shares
Company Designation Maximum Put Dollar Amount (Optional):
______________________________.
Company Designation Minimum Put Share Price (Optional):
______________________________.
Current Issued and Outstanding Share Amount
______________________________.
Note: Capitalized terms shall have the meanings ascribed to them in this
Investment Agreement.
E-TREND NETWORKS, INC.
By:
----------------------------------------
Timothy J. Sebastian, General Counsel
Address:
Attn: Timothy J. Sebastian
5919-3rd Street S.E.
Calgary, Alberta
Canada, T2H 1K3
Telephone (403) 252-7766
Facsimile (403) 252-7752
E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc
EXHIBIT F
COMPANY NAME
A STATE CORPORATION
OFFICER'S CLOSING CERTIFICATE
I, OFFICER'S NAME, TITLE of COMPANY NAME, a STATE corporation (the
"Company"), in accordance with Section 2.2.2 of the Investment Agreement dated
MONTH DAY, 2001 ("Investment Agreement"), by and between the Company and Swartz
Private Equity, LLC,
DO HEREBY CERTIFY:
1. Each of the representations and warranties made by the Company
in the Investment Agreement, as modified by the Schedules attached
to the Investment Agreement, is true and correct in all material
respects as of the date hereof.
2. Each of the conditions required to be satisfied by the Company
pursuant to Section 2.2 of the Investment Agreement have been
satisfied as of the date hereof.
IN WITNESS WHEREOF, I have hereunto set my hand as of the NTH day of
MONTH, 2001.
COMPANY NAME
By: SIGNATURE OF COMPANY OFFICER
PRINTED NAME OF COMPANY OFFICER BELOW LINE
E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc
EXHIBIT Q1
COMPANY NAME
A STATE CORPORATION
OFFICER'S PUT CERTIFICATE
I, OFFICER'S NAME, TITLE of COMPANY NAME, a STATE corporation (the
"Company"), in accordance with Section 2.3.5(c) of the Investment Agreement
dated MONTH DAY, 2001 ("Investment Agreement"), by and between the Company and
Swartz Private Equity, LLC,
DO HEREBY CERTIFY:
1. Each of the representations and warranties made by the Company in
the Investment Agreement, as modified by the Schedules attached to the
Investment Agreement, is true and correct in all material respects as
of the date hereof.
2. Each of the conditions required to be satisfied by the Company
pursuant to Section 2.3 of the Investment Agreement have been satisfied
as of the date hereof.
3. The Registration Statement has become effective under the
Securities Act, and to the best of our knowledge, no stop order suspending the
effectiveness of the Registration Statement is in effect, and no proceedings for
that purpose have been instituted or are pending before, or are threatened by
the Securities and Exchange Commission.
4. I have participated in the preparation of the Registration
Statement and related Prospectus and after due inquiry nothing has come to my
attention to cause me to have reason to believe that the Registration Statement,
the related Prospectus, or any Amendment or Supplement thereto, at the time it
became effective or as of the date hereof, contained any untrue statement of a
material fact required to be stated therein or omitted to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, or that the Prospectus or any Supplement thereto contained any
untrue statement of a material fact or omitted to state a material fact
necessary in order to make statements therein, in light of the circumstances
under which they were made, not misleading.
IN WITNESS WHEREOF, I have hereunto set my hand as of the NTH day of
MONTH, 2001.
COMPANY NAME
By: SIGNATURE OF COMPANY OFFICER
PRINTED NAME OF COMPANY OFFICER BELOW LINE
E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc
EXHIBIT Q2
EX-10.2
7
ex10-2.txt
REG. RIGHTS AGREEMENT
EXHIBIT 10.2
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
THIS AMENDED AND RESTATEDREGISTRATION RIGHTS AGREEMENT (this
"Agreement") is entered into as of September 18, 2001, by and among E-Trend
Networks, Inc., a corporation duly incorporated and existing under the laws of
the State of Delaware (the "Company"), and the investor as named on the
signature page hereto (hereinafter referred to as "Investor") and amends and
restates that Registration Rights Agreement between the parties dated on or
about July 3, 2001.
RECITALS:
WHEREAS, pursuant to the Company's offering ("Offering") of up to Ten
Million Dollars ($10,000,000) of Common Stock of the Company, pursuant to that
certain Amended and Restated Investment Agreement of even date herewith (the
"Investment Agreement") between the Company and the Investor, the Company has
agreed to sell and the Investor has agreed to purchase, from time to time as
provided in the Investment Agreement, shares of the Company's Common Stock for a
maximum aggregate offering amount as described above;
WHEREAS, pursuant to the terms of the Investment Agreement, the Company
has agreed to issue to the Investor the Commitment Warrants to purchase a number
of shares of Common Stock, exercisable for five (5) years from their respective
dates of issuance (, the "Commitment Warrants" or the "Warrants"); and
WHEREAS, pursuant to the terms of the Investment Agreement, the Company
has agreed to provide the Investor with certain registration rights with respect
to the Common Stock to be issued in the Offering and the Common Stock issuable
upon exercise of the Warrants as set forth in this Agreement.
TERMS:
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in this
Agreement and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. CERTAIN DEFINITIONS. As used in this Agreement (including
the Recitals above), the following terms shall have the following meanings (such
meanings to be equally applicable to both singular and plural forms of the terms
defined):
"Additional Registration Statement" shall have the meaning set
forth in Section 3(b).
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E-Trend Networks (Final 9-18-01) Amended and Restated Reg. Rights.doc
"Amended Registration Statement" shall have the meaning set
forth in Section 3(b).
"Business Day" shall have the meaning set forth in the
Investment Agreement.
"Closing Bid Price" shall have the meaning set forth in the
Investment Agreement.
"Commitment Warrant" shall have the meaning as set forth in
the Investment Agreement.
"Common Stock" shall mean the common stock, par value $0.01,
of the Company.
"Due Date" shall mean the date that is one hundred twenty
(120) days after the date of this Agreement.
"Effective Date" shall have the meaning set forth in Section
2.3.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, together with the rules and regulations promulgated thereunder.
"Filing Deadline" shall mean the date that is forty-five
(45) days after the date of this Agreement.
"Ineffective Period" shall mean any period of time after the
Effective Date during the term hereof that the Registration Statement or any
Supplemental Registration Statement (each as defined herein) becomes ineffective
or unavailable for use for the sale or resale, as applicable, of any or all of
the Registrable Securities (as defined herein) for any reason (or in the event
the prospectus under either of the above is not current and deliverable).
"Ineffective Period Payments" shall have the meaning set forth
in Section 4.
"Investment Agreement" shall have the meaning set forth in the
Recitals hereto.
"Investor" shall have the meaning set forth in the preamble to
this Agreement.
"Holder" shall mean Investor, and any other person or entity
owning or having the right to acquire Registrable Securities or any permitted
assignee.
"Piggyback Registration" and "Piggyback Registration
Statement" shall have the meaning set forth in Section 4.
"Put" shall have the meaning as set forth in the Investment
Agreement.
"Register," "Registered," and "Registration" shall mean and
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with
2
E-Trend Networks (Final 9-18-01) Amended and Restated Reg. Rights.doc
the Securities Act and pursuant to Rule 415 under the Securities Act or any
successor rule, and the declaration or ordering of effectiveness of such
registration statement or document.
"Registrable Securities" shall have the meaning set forth in
Section 2.1.
"Registration Statement" shall have the meaning set forth in
Section 2.2.
"Rule 144" shall mean Rule 144, as amended, promulgated under
the Securities Act.
"Securities Act" shall mean the Securities Act of 1933, as
amended, together with the rules and regulations promulgated thereunder.
"Supplemental Registration Statement" shall have the meaning
set forth in Section 3(b).
"Warrants" shall have the meaning set forth in the above
Recitals.
"Warrant Shares" shall mean shares of Common Stock issuable
upon exercise of any Warrant.
2. REQUIRED REGISTRATION.
2.1 REGISTRABLE SECURITIES. "Registrable Securities" shall
mean those shares of the Common Stock of the Company together with any capital
stock issued in replacement of, in exchange for or otherwise in respect of such
Common Stock, that are: (i) issuable or issued to the Investor pursuant to the
Investment Agreement, or (ii) issuable or issued upon exercise of the Commitment
Warrants; provided, however, that notwithstanding the above, the following shall
not be considered Registrable Securities:
(a) any Common Stock which would otherwise be deemed
to be Registrable Securities, if and to the extent that those shares of Common
Stock may be resold in a public transaction without volume limitations or other
material restrictions without registration under the Securities Act, including
without limitation, pursuant to Rule 144 under the Securities Act; and
(b) any shares of Common Stock which have been sold
in a private transaction in which the transferor's rights under this Agreement
are not assigned.
2.2 FILING OF INITIAL REGISTRATION STATEMENT. The Company
shall, by the Filing Deadline, file a registration statement ("Registration
Statement") on Form SB-2 (or other suitable form, at the Company's discretion,
but subject to the reasonable approval of Investor), covering the resale of a
number of shares of Common Stock as Registrable Securities equal to at least
Five Million (5,000,000) shares of Common Stock and shall cover, to the extent
allowed by applicable law, such indeterminate number of additional shares of
Common Stock that may be issued or become issuable as Registrable Securities by
the Company pursuant to Rule 416 of the Securities Act. In the event that the
Company has not filed the Registration Statement by the Filing Deadline, then
the Company shall pay to Investor an amount equal to $500, in cash, for each
Business Day after the Filing Deadline until such Registration Statement is
filed, payable
3
E-Trend Networks (Final 9-18-01) Amended and Restated Reg. Rights.doc
within ten (10) BUSINESS DAYS following the end of each calendar month in which
such payments accrue.
2.3 RESPONSE TO SEC COMMENTS; REGISTRATION EFFECTIVE DATE. The
Company shall use its best efforts to have the Registration Statement declared
effective by the SEC (the date of such effectiveness is referred to herein as
the "Effective Date") by the Due Date. In the event that the SEC has comments to
the Registration Statement, the Company shall file a written response to any
such comments within thirty (30) days of the Company's receipt of such comments
(the "Comment Response Deadline"). In the event that the Company has not filed a
written response to any such SEC comments by the applicable Comment Response
Deadline, then the Company shall pay to Investor an amount equal to $500, in
cash, for each Business Day after the Comment Response Deadline until such
responses are provided to the SEC in writing, payable within ten (10) Business
Days following the end of each calendar month in which such payments accrue.
2.4 SHELF REGISTRATION. The Registration Statement shall be
prepared as a "shelf" registration statement under Rule 415, and shall be
maintained effective until all Registrable Securities are resold pursuant to the
Registration Statement.
2.5 SUPPLEMENTAL REGISTRATION STATEMENT. Anytime the
Registration Statement does not cover a sufficient number of shares of Common
Stock to cover all outstanding Registrable Securities, the Company shall
promptly prepare and file with the SEC such Supplemental Registration Statement
and the prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the Securities Act with respect to
the disposition of all such Registrable Securities and shall use its best
efforts to cause such Supplemental Registration Statement to be declared
effective as soon as possible.
3. OBLIGATIONS OF THE COMPANY. Whenever required under this Agreement
to effect the 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 with respect to such Registrable
Securities and use its best efforts to cause such Registration Statement to
become effective and to remain effective until the date that all Registrable
Securities are resold pursuant to such Registration Statement.
(b) Prepare and file with the SEC such amendments and
supplements to such Registration Statement and the prospectus used in connection
with such Registration Statement ("Amended Registration Statement") or prepare
and file any additional registration statement ("Additional Registration
Statement," together with the Amended Registration Statement, "Supplemental
Registration Statements") as may be necessary to comply with the provisions of
the Securities Act with respect to the disposition of all securities covered by
such Supplemental Registration Statements or such prior registration statement
and to cover the resale of all Registrable Securities.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus (if applicable), in conformity
with the requirements of the Securities Act,
4
E-Trend Networks (Final 9-18-01) Amended and Restated Reg. Rights.doc
and such 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 securities or
Blue Sky laws of the jurisdictions in which the Holders are located, or such
other jurisdictions as shall be reasonably requested by the Holders of the
Registrable Securities covered by such Registration Statement and of all other
jurisdictions where legally required, 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) [Intentionally Left Blank].
(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, 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 notice of the date that a
Registration Statement or any Supplemental 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
and a reasonable amount of time, based upon reasonable notice delivered by the
Company, to conduct a reasonable due diligence inquiry of Company's pertinent
financial and other records and make available its officers and directors 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 or supplements thereto
prior to their filing with the SEC by giving the Holder at least five (5)
business days advance written notice prior to such filing.
(j) Provide each Holder with prompt notice of the issuance by
the SEC or any state securities commission or agency of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceeding for such purpose. The Company shall use its best efforts to
prevent the issuance of any stop order and, if any is issued, to obtain the
removal thereof at the earliest possible date.
(k) Use its best efforts to list the Registrable Securities
covered by the Registration Statement with all securities exchanges or markets
on which the Common Stock is then listed and prepare and file any required
filing with the NASD, American Stock Exchange, NYSE and any other exchange or
market on which the Common Stock is listed.
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E-Trend Networks (Final 9-18-01) Amended and Restated Reg. Rights.doc
4. INEFFECTIVE PERIOD.
(a) INEFFECTIVE PERIOD PAYMENT. Within five (5) Business Days
after the last day of any Ineffective Period, the Company will pay to the
Investor in cash ("Ineffective Period Payments"), as liquidated damages for such
suspension and not as a penalty, an amount equal to the number of shares of
Common Stock issued to the Investor in any Put with a Pricing Period End Date
(as defined in the Investment Agreement) that is thirty (30) business days or
less prior to the date that the Ineffective Period commences, multiplied by the
difference of:
(i) the highest closing price of the Company's
Common Stock for any trading day during the Ineffective
Period,
minus
(ii) the lowest closing price of the Company's
Common Stock for the five (5) trading days including and
immediately following the last trading day of such Ineffective
Period.
(b) LIQUIDATED DAMAGES. The parties hereto acknowledge and
agree that the sums payable as Ineffective Period Payments shall give rise to
liquidated damages and not penalties. The parties further acknowledge that (i)
the amount of loss or damages likely to be incurred by the Holder is incapable
or is difficult to precisely estimate, (ii) the amounts specified bear a
reasonable proportion and are not plainly or grossly disproportionate to the
probable loss likely to be incurred by the Investor, and (iii) the parties are
sophisticated business parties and have been represented by sophisticated and
able legal and financial counsel and negotiated this Agreement at arm's length.
5. PIGGYBACK REGISTRATION. If anytime prior to the date that the
Registration Statement is declared effective or during any Ineffective Period
(as defined in the Investment Agreement) the Company proposes to register
(including for this purpose a registration effected by the Company for
shareholders other than the Holders) any of its Common Stock under the
Securities 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 Securities 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 Securities 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 security holder of the company granted prior to
the date hereof; provided, however, that nothing herein shall prevent the
Company from withdrawing or abandoning such registration statement prior to its
effectiveness.
6. LIMITATION ON OBLIGATIONS TO REGISTER UNDER A PIGGYBACK
REGISTRATION. In the case of a Piggyback Registration pursuant to an
underwritten public offering by the Company, if the managing underwriter
determines and advises in writing that the inclusion in the related
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E-Trend Networks (Final 9-18-01) Amended and Restated Reg. Rights.doc
Piggyback 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 such Piggyback Registration Statement, to the
extent any 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 an 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.
7. DISPUTE AS TO REGISTRABLE SECURITIES. In the event the Company
believes that shares sought to be registered under Section 2 or Section 5 by
Holders do not constitute "Registrable Securities" by virtue of Section 2.1 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 Securities at issue (and
satisfactory to the Company's transfer agent to permit the sale and transfer),
that those securities may be sold immediately, without volume limitation or
other material restrictions, without registration under the Securities Act, by
virtue of Rule 144 or similar provisions.
8. FURNISH INFORMATION. At the Company's request, each 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
to the extent required to effect the registration of its Registrable Securities
or to determine that registration is not required pursuant to Rule 144 or other
applicable provision of the Securities Act. The Company shall include all
information provided by such Holder pursuant hereto in the Registration
Statement, substantially in the form supplied, except to the extent such
information is not permitted by law.
9. EXPENSES. All expenses, other than commissions and fees and expenses
of counsel to the selling Holders, incurred in connection with registrations,
filings or qualifications pursuant hereto, including (without limitation) all
registration, filing and qualification fees, printers' and accounting fees, fees
and disbursements of counsel for the Company, shall be borne by the Company.
10. INDEMNIFICATION. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, the officers, directors, partners, legal counsel,
and accountants of each Holder, any underwriter (as defined in the Securities
Act, or as deemed by the Securities Exchange Commission, or as indicated in a
registration statement) for such Holder and each person, if any, who controls
such Holder or underwriter within the meaning of Section 15 of the Securities
Act or the Exchange Act, against any losses, claims, damages, or liabilities
(joint or several) to which they may become subject under the Securities Act,
the Exchange 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 any of the following statements or omissions: (i) any untrue
statement or alleged untrue statement of a material fact contained in such
registration statement, including any preliminary prospectus or final prospectus
contained therein or any
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E-Trend Networks (Final 9-18-01) Amended and Restated Reg. Rights.doc
amendments or supplements thereto, 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, and the Company will reimburse each
such Holder, officer or director, underwriter or controlling person for any
legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this subsection
10(a) 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 Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability,
or action to the extent that it arises out of or is based upon 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, underwriter or controlling person; provided however, that the
above shall not relieve the Company from any other liabilities which it might
otherwise have.
(b) Promptly after receipt by an indemnified party under this
Section 10 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 10, 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
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 materially prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 10, 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 10.
(c) To the extent that the foregoing undertaking by the
Company may be unenforceable for any reason, the Company shall make the maximum
contribution to the payment and satisfaction of each of the indemnified
liabilities which it would be required to make if such foregoing undertaking was
enforceable which is permissible under applicable law.
(d) The obligations of the Company and Holders under this
Section 10 shall survive the resale, if any, of the Common Stock, the completion
of any offering of Registrable Securities in a Registration Statement under this
Agreement, and otherwise.
11. REPORTS UNDER EXCHANGE ACT. With a view to making available to the
Holders the benefits of Rule 144 promulgated under the Securities 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:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144; and
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E-Trend Networks (Final 9-18-01) Amended and Restated Reg. Rights.doc
(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
Securities Act and the Exchange Act.
12. AMENDMENTS TO 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 written consent of each Holder affected
thereby. Any amendment or waiver effected in accordance with this paragraph
shall be binding upon each Holder, each future Holder, and the Company. The
Company will provide the Investor five (5) business days notice prior to filing
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus and shall give the Investor the opportunity to review and comment
on any such amendment or supplement. Failure of the Investor to comment within
five (5) business days shall not preclude the Company from filing such amendment
or supplement after such notice period has expired.
13. 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 (i) the Company at: E-Trend Networks, Inc., Timothy J.
Sebastian, General Counsel, 5919-3rd Street S.E., Calgary, Alberta Canada, T2H
1K3; Telephone:(403) 252-7766, Facsimile: (403) 252-7752 (or at such other
location as directed by the Company in writing) and (ii) the Holders at their
respective last address as 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.
14. TERMINATION. This Agreement shall terminate on the date all
Registrable Securities cease to exist (as that term is defined in Section 2.1
hereof); but without prejudice to (i) the parties' rights and obligations
arising from breaches of this Agreement occurring prior to such termination (ii)
other indemnification obligations under this Agreement, and provided that the
Company's obligations under Section 10 hereof shall survive such termination.
15. 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
Registration, a writing executed by such transferee agreeing to be bound as a
Holder by the terms of this Agreement), and the Company hereby agrees to file an
amended registration statement including such transferee as a selling security
holder thereunder; 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.
16. ARBITRATION; GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Georgia applicable to
agreements made in
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E-Trend Networks (Final 9-18-01) Amended and Restated Reg. Rights.doc
and wholly to be performed in that jurisdiction, except for matters arising
under the Act or the Securities Exchange Act of 1934, which matters shall be
construed and interpreted in accordance with such laws. Any controversy or claim
arising out of or related to the Transaction Documents or the breach thereof,
shall be settled by binding arbitration in Atlanta, Georgia 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
upon written demand by Company or any Investor 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 Atlanta, Georgia or to the United
States District Court sitting in Georgia 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.
Although the parties, as expressed above, agree that all
claims, including claims that are equitable in nature, for example specific
performance, shall initially be prosecuted in the binding arbitration procedure
outlined above, if the arbitration panel dismisses or otherwise fails to
entertain any or all of the equitable claims asserted by reason of the fact that
it lacks jurisdiction, power and/or authority to consider such claims and/or
direct the remedy requested, then, in only that event, will the parties have the
right to initiate litigation respecting such equitable claims or remedies. The
forum for such equitable relief shall be in either a state or federal court
sitting in Atlanta, Georgia. Each party waives any right to a trial by jury,
assuming such right exists in an equitable proceeding, and irrevocably submits
to the jurisdiction of said Georgia court. Georgia law shall govern both the
proceeding as well as the interpretation and construction of this Agreement and
the transaction as a whole.
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.
18. SPECIFIC PERFORMANCE. The Holder shall be entitled to the remedy of
specific performance in the event of the Company's breach of this Agreement, the
parties agreeing that a remedy at law would be inadequate.
19. INDEMNITY. Each party shall indemnify each other party against any
and all claims, damages (including reasonable attorney's fees), and expenses
arising out of the first party's breach of any of the terms of this Agreement.
20. ENTIRE AGREEMENT; WRITTEN AMENDMENTS REQUIRED. This Agreement,
including the Exhibits attached hereto, the Investment Agreement, the Common
Stock certificates, and the other documents delivered pursuant hereto constitute
the full and entire understanding and
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E-Trend Networks (Final 9-18-01) Amended and Restated Reg. Rights.doc
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 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.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
this 18TH day of September, 2001.
E-TREND NETWORKS, INC.
By: /s/ Timothy J. Sebastian
-----------------------------------------
Timothy J. Sebastian, General Counsel
Address: 5919-3rd Street S.E.
Calgary, Alberta
Canada, T2H 1K3
Telephone: (403) 252-7766
Facsimile: (403) 252-7752
INVESTOR:
SWARTZ PRIVATE EQUITY, LLC.
By: /s/ Eric S. Swartz
-----------------------------------------
Eric S. Swartz, Manager
Address: 300 Colonial Center Parkway
Suite 300
Roswell, GA 30076
Telephone: (770) 640-8130
Facsimile: (770) 640-7150
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E-Trend Networks (Final 9-18-01) Amended and Restated Reg. Rights.doc
EX-10.3
8
ex10-3.txt
WARRANT
EXHIBIT 10.3
AMENDED WARRANT TO PURCHASE COMMON STOCK
ISSUED TO SWARTZ PRIVATE EQUITY
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES 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 SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL
HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS
AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. HOLDERS MUST
RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND ASSESSMENT OF THE RISKS
INVOLVED.
Warrant to Purchase
500,000 shares
AMENDED WARRANT TO PURCHASE COMMON STOCK
OF
E-TREND NETWORKS, INC.
THIS CERTIFIES that SWARTZ PRIVATE EQUITY, LLC, or any subsequent
holder hereof pursuant to Section 8 hereof ("Holder") has the right to purchase
from E-Trend Networks, Inc., a Delaware corporation (the "Company"), up to
500,000 fully paid and nonassessable shares of the Company's common stock,
$.0001 par value per share ("Common Stock"), subject to adjustment as provided
herein, at a price equal to the Exercise Price as defined in Section 3 below, at
any time beginning on the Date of Issuance (defined below) and ending at 5:00
p.m., New York, New York time on the date that is five (5) years after the Date
of Issuance (the "Exercise Period"), subject to the provisions set forth in
Section 1 below.
Holder agrees with the Company that this Warrant to Purchase Common
Stock of the Company (this "Warrant") is issued and all rights hereunder shall
be held subject to all of the conditions, limitations and provisions set forth
herein. This Warrant amends and replaces that certain warrant to purchase
400,000 shares of the Company's Common Stock originally issued to Swartz Private
Equity, LLC on or about June 1, 2001.
1. DATE OF ISSUANCE AND TERM.
This Warrant shall be deemed to be issued on September 18, 2001 ("Date
of Issuance"). The term of this Warrant is five (5) years from the Date of
Issuance. Of this Warrant to purchase five hundred thousand (500,000) shares of
common stock of the company, the first 350,000 Warrant Shares (as defined below)
shall be exercisable, in whole or in part, anytime after the Date of Issuance
through September 18, 2006 and the remaining 150,000 Warrant Shares shall be
exercisable, in whole or in part, anytime after the date that a Registration
Statement (as defined below) is filed, through September 18, 2006. For purposes
hereof, "Registration Statement shall mean the Company's registration statement
to be filed pursuant to the Amended and Restated Investment Agreement between
the Company and Swartz Private Equity, LLC dated on or about September 18, 2001
and related documents.
Notwithstanding anything to the contrary herein, the applicable portion
of this Warrant shall not be exercisable during any time that, and only to the
extent that, the number of shares of Common Stock to be issued to Holder upon
such exercise, when
E-Trend Networks (Final 9-18-01) Amended Commitment Warrant.doc
added to the number of shares of Common Stock, if any, that the Holder otherwise
beneficially owns (outside of this Warrant) at the time of such exercise, would
equal or exceed 4.99% of the number of shares of Common Stock then outstanding,
as determined in accordance with Section 13(d) of the Exchange Act (the "4.99%
Limitation"). The 4.99% Limitation shall be conclusively satisfied if the
applicable Exercise Notice includes a signed representation by the Holder that
the issuance of the shares in such Exercise Notice will not violate the 4.99%
Limitation, and the Company shall not be entitled to require additional
documentation of such satisfaction.
2. EXERCISE.
(A) MANNER OF EXERCISE. Subject to the restrictions on exercise in
Section 1 above, during the Exercise Period, this Warrant may be exercised as to
all or any lesser number of full shares of Common Stock covered hereby (the
"Warrant Shares") upon surrender of this Warrant, with the Exercise Form
attached hereto as EXHIBIT A (the "Exercise Form") duly completed and executed,
together with the full Exercise Price (as defined below) for each share of
Common Stock as to which this Warrant is exercised, at the office of the
Company, Attention: Timothy J. Sebastian, General Counsel, 5919 - 3rd Street SE,
Calgary, Alberta, Canada, T2H 1K3; Telephone (403) 252-7766, Facsimile: (403)
252-7752, or at such other office or agency as the Company may designate in
writing, by overnight mail, with an advance copy of the Exercise Form sent to
the Company and its Transfer Agent by facsimile (such surrender and payment of
the Exercise Price hereinafter called the "Exercise of this Warrant").
(B) DATE OF EXERCISE. The "Date of Exercise" of the Warrant shall be
defined as the date that the advance copy of the completed and executed Exercise
Form is sent by facsimile to the Company, provided that the original Warrant and
Exercise Form are received by the Company as soon as practicable thereafter.
Alternatively, the Date of Exercise shall be defined as the date the original
Exercise Form is received by the Company, if Holder has not sent advance notice
by facsimile.
(C) DELIVERY OF SHARES OF COMMON STOCK UPON EXERCISE. Upon any exercise
of this Warrant, the Company shall use its reasonable best efforts to deliver,
or shall cause its transfer agent to deliver, a stock certificate or
certificates representing the number of shares of Common Stock into which this
Warrant was exercised, within five (5) trading days (the "Share Delivery
Deadline") of the date that all of the following have been received by the
Company: (i) the original completed and executed Exercise Form, (ii) the
original Warrant and (iii) the Exercise Price (if applicable)(collectively, the
"Receipt Date"). Such stock certificates shall not contain a legend restricting
transfer if a registration statement covering the resale of such shares of
Common Stock is in effect at the time of such exercise or if such shares of
Common Stock may be resold pursuant to an exemption from registration, including
but not limited to Rule 144 under the Securities Act of 1933.
(D) BUY-IN CURE. If (i) the Company fails for any reason to deliver the
requisite number of shares of Common Stock (unlegended, if so required by the
terms of this Warrant)(the "Warrant Shares") to a Holder upon an exercise of
this Warrant by the Share Delivery Deadline, (ii) the Holder has sold some or
all of the Warrant Shares (the "Sold Shares") which such Holder anticipated
receiving upon such Exercise, and (iii) after the applicable Share Delivery
Deadline with respect to such Exercise, the broker that sold the Sold Shares for
Holder purchases (in an open market transaction or otherwise) shares of Common
Stock to make delivery upon the sale by a Holder of the Sold Shares (a
"Buy-In"), the Company shall pay such Holder within two (2) business days
following receipt of written notice of a claim pursuant to this Section 2(d) (in
addition to any other remedies available to Holder) the amount (a "Buy-In
Payment") by which (x) such
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E-Trend Networks (Final 9-18-01) Amended Commitment Warrant.doc
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 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 2(d).
(E) LIQUIDATED DAMAGES. The parties hereto acknowledge and agree that
the sums payable as Buy-In Payments shall give rise to liquidated damages and
not penalties. The parties further acknowledge that (i) the amount of loss or
damages likely to be incurred by the Holder is incapable or is difficult to
precisely estimate, (ii) the amounts specified bear a reasonable proportion and
are not plainly or grossly disproportionate to the probable loss likely to be
incurred by the Investor, and (iii) the parties are sophisticated business
parties and have been represented by sophisticated and able legal and financial
counsel and negotiated this Agreement at arm's length.
(F) CANCELLATION OF WARRANT. This Warrant shall be canceled upon the
Exercise of this Warrant, and, as soon as practical after the Date of Exercise,
Holder shall be entitled to receive Common Stock for the number of shares
purchased upon such Exercise of this Warrant, and if this Warrant is not
exercised in full, Holder shall be entitled to receive a new Warrant (containing
terms identical to this Warrant) representing any unexercised portion of this
Warrant in addition to such Common Stock.
(G) HOLDER OF RECORD. Each person in whose name any Warrant for shares
of Common Stock is issued shall, for all purposes, be deemed to be the Holder of
record of such shares on the Date of Exercise of this Warrant, irrespective of
the date of delivery of the Common Stock purchased upon the Exercise of this
Warrant. Nothing in this Warrant shall be construed as conferring upon Holder
any rights as a stockholder of the Company.
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E-Trend Networks (Final 9-18-01) Amended Commitment Warrant.doc
3. PAYMENT OF WARRANT EXERCISE PRICE.
The Exercise Price per share (the "Exercise Price") shall initially
equal (the "Initial Exercise Price") the lowest Closing Price for the five (5)
trading days immediately preceding September 18, 2001, which is $1.60.
Furthermore, if the Date of Exercise is on or after December 18, 2001,
the Exercise Price shall be reset to equal the lesser of (i) the applicable
Exercise Price then in effect, or (ii) the "Lowest Six Month Reset Price," as
that term is defined below. The Company shall calculate a "Six Month Reset
Price" on December 18, 2001 and on each six-month anniversary date of December
18, 2001 (in each case, if not a trading day, then on the next trading day)
which shall equal the lowest Closing Price of the Company's Common Stock for the
five (5) trading days ending on such six-month anniversary date. The "Lowest Six
Month Reset Price" shall equal the lowest Six Month Reset Price determined on
any six-month anniversary date of December 18, 2001 up through the applicable
Date of Exercise, taking into account, as appropriate, any adjustments made
pursuant to Section 5 hereof. Notwithstanding the above, the Six Month Reset
Price is subject to a floor of $1.25 ("Floor Price"), which Floor Price shall be
adjusted downward in the event of a Forward Stock Split (as defined below).
However, in the case of a Reverse Stock Split (as defined below), the Floor
Price shall not be adjusted upward to account for such Reverse Stock Split, but
shall remain at $1.25.
If, anytime prior to September 18, 2006 (regardless of whether or not
the Company executes an Investment Agreement and regardless of whether or not
the Company later terminates such Investment Agreement), the Company issues
shares of Common Stock, warrants, or options to any party (including but not
limited to officers, directors, employees or consultants of the Company and
including shares issued to Swartz Private Equity, LLC pursuant to the Investment
Agreement) at a price which is less than the applicable Exercise Price then in
effect, the Exercise Price shall automatically reset to equal the lowest price
at which such Common Stock, warrants, or options were issued (the "MFN Reset
Price"). The MFN Reset Price shall not be subject to the Floor Price and may be
less than $1.25.
For purposes hereof, the term "Closing Price" shall mean the closing
price on the Nasdaq Small Cap Market, the National Market System ("NMS"), the
New York Stock Exchange, or the O.T.C. Bulletin Board, or if no longer traded on
the Nasdaq Small Cap Market, the National Market System ("NMS"), the New York
Stock Exchange, or the O.T.C. Bulletin Board, the "Closing Price" shall equal
the closing price on the principal national securities exchange or the
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 on which the Common Stock is so traded.
Payment of the Exercise Price may be made by either of the following,
or a combination thereof, at the election of Holder:
(i) CASH EXERCISE: cash, bank or cashiers check or wire transfer; or
(ii) CASHLESS EXERCISE: The Holder, at its option, may exercise this
Warrant in a cashless exercise transaction under this subsection (ii) if and
only if, on the Date of Exercise, there is not then in effect a current
registration statement that covers the resale of the shares of Common Stock to
be issued upon exercise of this Warrant. In order to effect a Cashless Exercise,
the Holder shall surrender this Warrant at the principal office of the Company
together with notice of cashless election, in which event the Company
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E-Trend Networks (Final 9-18-01) Amended Commitment Warrant.doc
shall issue Holder a number of shares of Common Stock computed using the
following formula:
X = Y (A-B)/A
where: X = the number of shares of Common Stock to be issued to Holder.
Y = the number of shares of Common Stock for which this Warrant is
being exercised.
A = the Market Price of one (1) share of Common Stock (for
purposes of this Section 3(ii), the "Market Price" shall be
defined as the average Closing Price of the Common Stock for
the five (5) trading days prior to the Date of Exercise of
this Warrant (the "Average Closing Price"), as reported by the
O.T.C. Bulletin Board, National Association of Securities
Dealers Automated Quotation System ("Nasdaq") Small Cap
Market, or if the Common Stock is not traded on the Nasdaq
Small Cap Market, the Average Closing Price in any other
over-the-counter market; provided, however, that if the Common
Stock is listed on a stock exchange, the Market Price shall be
the Average Closing Price on such exchange for the five (5)
trading days prior to the date of exercise of the Warrants. If
the Common Stock is/was not traded during the five (5) trading
days prior to the Date of Exercise, then the closing price for
the last publicly traded day shall be deemed to be the closing
price for any and all (if applicable) days during such five
(5) trading day period.
B = the Exercise Price.
For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is
intended, understood and acknowledged that the Common Stock issuable upon
exercise of this Warrant in a cashless exercise transaction shall be deemed to
have been acquired at the time this Warrant was issued. Moreover, it is
intended, understood and acknowledged that the holding period for the Common
Stock issuable upon exercise of this Warrant in a cashless exercise transaction
shall be deemed to have commenced on the date this Warrant was issued.
4. TRANSFER AND REGISTRATION.
(a) TRANSFER RIGHTS. Subject to the provisions of Section 8 of this
Warrant, this Warrant may be transferred on the books of the Company, in whole
or in part, in person or by attorney, upon surrender of this Warrant properly
completed and endorsed. This Warrant shall be canceled upon such surrender and,
as soon as practicable thereafter, the person to whom such transfer is made
shall be entitled to receive a new Warrant or Warrants as to the portion of this
Warrant transferred, and Holder shall be entitled to receive a new Warrant as to
the portion hereof retained.
(b) REGISTRABLE SECURITIES. In addition to any other registration
rights of the Holder, if the Common Stock issuable upon exercise of this Warrant
is not registered for resale at the time the Company proposes to register
(including for this purpose a registration effected by the Company for
stockholders other than the Holders) any of its Common Stock under the Act
(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)(a "Piggyback
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E-Trend Networks (Final 9-18-01) Amended Commitment Warrant.doc
Registration Statement"), the Company shall cause to be included in such
Piggyback Registration Statement ("Piggyback Registration") all of the Common
Stock issuable upon the exercise of this Warrant ("Registrable Securities") 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 Piggyback
Registration Statement prior to its effectiveness.
(c) LIMITATION ON OBLIGATIONS TO REGISTER UNDER A PIGGYBACK
REGISTRATION. In the case of a Piggyback Registration pursuant to 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
Piggyback 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.
5. ANTI-DILUTION ADJUSTMENTS.
(a) STOCK DIVIDEND. If the Company shall at any time declare a dividend
payable in shares of Common Stock, then Holder, upon Exercise of this Warrant
after the record date for the determination of holders of Common Stock entitled
to receive such dividend, shall be entitled to receive upon Exercise of this
Warrant, in addition to the number of shares of Common Stock as to which this
Warrant is exercised, such additional shares of Common Stock as such Holder
would have received had this Warrant been exercised immediately prior to such
record date and the Exercise Price will be proportionately adjusted.
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E-Trend Networks (Final 9-18-01) Amended Commitment Warrant.doc
(b) RECAPITALIZATION OR RECLASSIFICATION.
(i) STOCK SPLIT. If the Company shall at any time effect a
recapitalization, reclassification or other similar transaction of such
character that the shares of Common Stock shall be changed into or become
exchangeable for a LARGER number of shares (a "Stock Split" or a "Forward Stock
Split"), then upon the effective date thereof, the number of shares of Common
Stock which Holder shall be entitled to purchase upon Exercise of this Warrant
shall be increased in direct proportion to the increase in the number of shares
of Common Stock by reason of such recapitalization, reclassification or similar
transaction, and the Exercise Price shall be proportionally decreased.
(ii) REVERSE STOCK SPLIT. If the Company shall at any time
effect a recapitalization, reclassification or other similar transaction of such
character that the shares of Common Stock shall be changed into or become
exchangeable for a SMALLER number of shares (a "Reverse Stock Split"), then upon
the effective date thereof, the number of shares of Common Stock which Holder
shall be entitled to purchase upon Exercise of this Warrant shall be
proportionately decreased and the Exercise Price shall be proportionally
increased. The Company shall give Holder the same notice it provides to holders
of Common Stock of any transaction described in this Section 5(b).
(c) DISTRIBUTIONS. If the Company shall at any time distribute for no
consideration to holders of Common Stock cash, evidences of indebtedness or
other securities or assets (other than cash dividends or distributions payable
out of earned surplus or net profits for the current or preceding years) then,
in any such case, Holder shall be entitled to receive, upon Exercise of this
Warrant, with respect to each share of Common Stock issuable upon such exercise,
the amount of cash or evidences of indebtedness or other securities or assets
which Holder would have been entitled to receive with respect to each such share
of Common Stock as a result of the happening of such event had this Warrant been
exercised immediately prior to the record date or other date fixing shareholders
to be affected by such event (the "Determination Date") or, in lieu thereof, if
the Board of Directors of the Company should so determine at the time of such
distribution, a reduced Exercise Price determined by multiplying the Exercise
Price on the Determination Date by a fraction, the numerator of which is the
result of such Exercise Price reduced by the value of such distribution
applicable to one share of Common Stock (such value to be determined by the
Board of Directors of the Company in its discretion) and the denominator of
which is such Exercise Price.
(d) NOTICE OF CONSOLIDATION OR MERGER AND WARRANT EXCHANGE. The Company
shall not, at any time after the date hereof, effect a merger, consolidation,
exchange of shares, recapitalization, reorganization, or other similar event, as
a result of which shares of Common Stock shall be changed into the same or a
different number of shares of the same or another class or classes of stock or
securities or other assets of the Company or another entity or there is a sale
of all or substantially all the Company's assets (a "Corporate Change"), unless
the resulting successor or acquiring entity (the "Resulting Entity") assumes by
written instrument the Company's obligations under this Warrant, including but
not limited to the Exercise Price reset provisions as provided herein during the
term of the resultant warrants, and agrees in such written instrument that this
Warrant shall be exerciseable into such class and type of securities or other
assets of the Resulting Entity as Holder would have received had Holder
exercised this Warrant immediately prior to such Corporate Change, and the
Exercise Price of this Warrant shall be proportionately increased (if this
Warrant shall be changed into or become exchangeable for a warrant to purchase a
smaller number of shares of Common Stock of the Resulting Entity) or shall be
proportionately decreased (if this Warrant shall be changed or become
exchangeable for a warrant to purchase a larger number of shares of Common Stock
of
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E-Trend Networks (Final 9-18-01) Amended Commitment Warrant.doc
the Resulting Entity); provided, however, that Company may not affect any
Corporate Change unless it first shall have given thirty (30) days notice to
Holder hereof of any Corporate Change.
(e) EXERCISE PRICE ADJUSTED. As used in this Warrant, the term
"Exercise Price" shall mean the purchase price per share specified in Section 3
of this Warrant, until the occurrence of an event stated in subsection (a), (b),
(c) or (d) of this Section 5, and thereafter shall mean said price as adjusted
from time to time in accordance with the provisions of this Warrant. No such
adjustment under this Section 5 shall be made unless such adjustment would
change the Exercise Price at the time by $0.01 or more; provided, however, that
all adjustments not so made shall be deferred and made when the aggregate
thereof would change the Exercise Price at the time by $0.01 or more.
(f) ADJUSTMENTS: ADDITIONAL SHARES, SECURITIES OR ASSETS. In the event
that at any time, as a result of an adjustment made pursuant to this Section 5,
Holder shall, upon Exercise of this Warrant, become entitled to receive shares
and/or other securities or assets (other than Common Stock) then, wherever
appropriate, all references herein to shares of Common Stock shall be deemed to
refer to and include such shares and/or other securities or assets; and
thereafter the number of such shares and/or other securities or assets shall be
subject to adjustment from time to time in a manner and upon terms as nearly
equivalent as practicable to the provisions of this Section 5.
6. FRACTIONAL INTERESTS.
No fractional shares or scrip representing fractional shares shall be
issuable upon the Exercise of this Warrant, but on Exercise of this Warrant,
Holder may purchase only a whole number of shares of Common Stock. If, on
Exercise of this Warrant, Holder would be entitled to 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 exercise shall be the next higher number of shares.
7. RESERVATION OF SHARES.
The Company shall at all times reserve for issuance such number of
authorized and unissued shares of Common Stock (or other securities substituted
therefor as herein above provided) as shall be sufficient for the Exercise of
this Warrant and payment of the Exercise Price. The Company covenants and agrees
that upon the Exercise of this Warrant, all shares of Common Stock issuable upon
such exercise shall be duly and validly issued, fully paid, nonassessable and
not subject to preemptive rights, rights of first refusal or similar rights of
any person or entity.
8. RESTRICTIONS ON TRANSFER.
(a) REGISTRATION OR EXEMPTION REQUIRED. This Warrant has been issued in
a transaction exempt from the registration requirements of the Act by virtue of
Regulation D and exempt from state registration under applicable state laws. The
Warrant and the Common Stock issuable upon the Exercise of this Warrant may not
be pledged, transferred, sold or assigned except pursuant to an effective
registration statement or unless the Company has received an opinion from the
Company's counsel to the effect that such registration is not required, or the
Holder has furnished to the Company an opinion of the Holder's counsel, which
counsel shall be reasonably satisfactory to the Company, to the effect that such
registration is not required; the transfer complies with any applicable state
securities laws; and, if no registration covering the resale of the Warrant
Shares is effective at the time the Warrant Shares are issued, the Holder
consents
8
E-Trend Networks (Final 9-18-01) Amended Commitment Warrant.doc
to a legend being placed on certificates for the Warrant Shares stating that the
securities have not been registered under the Securities Act and referring
to such restrictions on transferability and sale.
(b) ASSIGNMENT. If Holder can provide the Company with reasonably
satisfactory evidence that the conditions of (a) above regarding registration or
exemption have been satisfied, Holder may sell, transfer, assign, pledge or
otherwise dispose of this Warrant, in whole or in part. Holder shall deliver a
written notice to Company, substantially in the form of the Assignment attached
hereto as EXHIBIT B, indicating the person or persons to whom the Warrant shall
be assigned and the respective number of warrants to be assigned to each
assignee. The Company shall effect the assignment within ten (10) days, and
shall deliver to the assignee(s) designated by Holder a Warrant or Warrants of
like tenor and terms for the appropriate number of shares.
9. BENEFITS OF THIS WARRANT.
Nothing in this Warrant shall be construed to confer upon any person
other than the Company and Holder any legal or equitable right, remedy or claim
under this Warrant and this Warrant shall be for the sole and exclusive benefit
of the Company and Holder.
10. APPLICABLE LAW; ARBITRATION.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Georgia applicable to agreements made in and wholly to
be performed in that jurisdiction, except for matters arising under the Act or
the Securities Exchange Act of 1934, which matters shall be construed and
interpreted in accordance with such laws. Any controversy or claim arising out
of or related to this Warrant or the breach thereof, shall be settled by binding
arbitration in Atlanta, Georgia 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 upon written demand by
Company or any Investor 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 Atlanta, Georgia or to the United
States District Court sitting in Georgia 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.
Although the parties, as expressed above, agree that all claims,
including claims that are equitable in nature, for example specific performance,
shall initially be prosecuted in the binding arbitration procedure outlined
above, if the arbitration panel dismisses or otherwise fails to entertain any or
all of the equitable claims asserted by reason of the fact that it lacks
jurisdiction, power and/or authority to consider such claims and/or direct the
remedy requested, then, in only that event, will the parties have the right to
initiate litigation respecting such equitable claims or remedies. The forum for
such equitable relief shall be in either a state or federal court sitting in
Atlanta, Georgia. Each
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E-Trend Networks (Final 9-18-01) Amended Commitment Warrant.doc
party waives any right to a trial by jury, assuming such right exists in an
equitable proceeding, and irrevocably submits to the jurisdiction of said
Georgia court.
11. LOSS OF WARRANT.
Upon receipt by the Company of evidence of the loss, theft, destruction
or mutilation of this Warrant, and (in the case of loss, theft or destruction)
of indemnity or security reasonably satisfactory to the Company, and upon
surrender and cancellation of this Warrant, if mutilated, the Company shall
execute and deliver a new Warrant of like tenor and date.
12. NOTICE OR DEMANDS.
Notices or demands pursuant to this Warrant to be given or made by
Holder to or on the Company shall be sufficiently given or made if sent by
certified or registered mail, return receipt requested, postage prepaid, and
addressed, until another address is designated in writing by the Company, to the
address set forth in Section 2(a) above. Notices or demands pursuant to this
Warrant to be given or made by the Company to or on Holder
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E-Trend Networks (Final 9-18-01) Amended Commitment Warrant.doc
shall be sufficiently given or made if sent by certified or registered mail,
return receipt requested, postage prepaid, and addressed, to the address of
Holder set forth in the Company's records, until another address is designated
in writing by Holder.
IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the
18TH day of September, 2001.
E-TREND NETWORKS, INC.
By: /s/ Timothy J. Sebastian
-------------------------------------------
Timothy J. Sebastian, General Counsel
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E-Trend Networks (Final 9-18-01) Amended Commitment Warrant.doc
EXHIBIT A
EXERCISE FORM FOR WARRANT
TO: E-TREND NETWORKS, INC.
The undersigned hereby irrevocably exercises the right to purchase
____________ of the shares of Common Stock (the "Common Stock") of E-Trend
Networks, Inc. a Delaware corporation (the "Company"), evidenced by the attached
warrant (the "Warrant"), and herewith makes payment of the exercise price with
respect to such shares in full, all in accordance with the conditions and
provisions of said Warrant.
1. The undersigned agrees not to offer, sell, transfer or otherwise dispose of
any of the Common Stock obtained on exercise of the Warrant, except in
accordance with the provisions of Section 8(a) of the Warrant.
2. The undersigned requests that stock certificates for such shares be issued
free of any restrictive legend, if appropriate, and a warrant representing any
unexercised portion hereof be issued, pursuant to the Warrant in the name of the
undersigned and delivered to the undersigned at the address set forth below:
Dated: __________________
--------------------------------------------------------------------------------
Signature
--------------------------------------------------------------------------------
Print Name
--------------------------------------------------------------------------------
Address
--------------------------------------------------------------------------------
NOTICE
The signature to the foregoing Exercise Form must correspond to the name as
written upon the face of the attached Warrant in every particular, without
alteration or enlargement or any change whatsoever.
--------------------------------------------------------------------------------
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E-Trend Networks (Final 9-18-01) Amended Commitment Warrant.doc
EXHIBIT B
ASSIGNMENT
(To be executed by the registered holder
desiring to transfer the Warrant)
FOR VALUE RECEIVED, the undersigned holder of the attached warrant (the
"Warrant") hereby sells, assigns and transfers unto the person or persons below
named the right to purchase ______________ shares of the Common Stock of E-Trend
Networks, Inc., evidenced by the attached Warrant and does hereby irrevocably
constitute and appoint ___________________________ attorney to transfer the said
Warrant on the books of the Company, with full power of substitution in the
premises.
Dated:
------------------------------------
Signature
Fill in for new registration of Warrant:
-----------------------------------------
Name
-----------------------------------------
Address
-----------------------------------------
Please print name and address of assignee
(including zip code number)
--------------------------------------------------------------------------------
NOTICE
The signature to the foregoing Assignment must correspond to the name as written
upon the face of the attached Warrant in every particular, without alteration or
enlargement or any change whatsoever.
--------------------------------------------------------------------------------
E-Trend Networks (Final 9-18-01) Amended Commitment Warrant.doc
EX-10.4
9
ex10-4.txt
PROPOSED FORM OF VIDEO ONE AGREEMENT
EXHIBIT 10.4
PROPOSED FORM OF VIDEO ONE CANADA LTD. BUSINESS AGREEMENT
WITH LANGARA DISTRIBUTION
VIDEO ONE CANADA LTD.
BUSINESS AGREEMENT WITH LANGARA DISTRIBUTION
The purpose of this agreement is to document the terms and conditions of sale of
prerecorded videocassettes, DVD and accessories between Video One Canada Ltd.
(Video One) and Langara Distribution (Langara). Both parties indicate their
acceptance of these terms by signing where indicated. This agreement is
effective June 26, 2001 to June 26, 2002. This agreement will be renewed
automatically for another year upon expiry unless either party with written
notification terminates it 60 days prior to expiration date. Either Video One or
Langara Distribution can terminate this agreement at any time, during the
initial and/or renewal period, with 90 days written notification.
This agreement constitutes the entire agreement between Video One and Langara
Distribution with respect to the matters provided herein. The parties hereto
acknowledge that there is no representation, warranty, undertaking, agreement or
understanding between them other than as expressed herein. The terms and
conditions of this agreement supersede all previous proposals, quotations,
negotiations and other communications between the parties whether written or
oral.
PAYMENT TERMS
o Payments are due * for all purchases. No unauthorized deductions are
allowed. Any unauthorized deductions not resolved or explained within 30
days may cause the account to be put on hold.
o A credit limit of * has been established.
PRICING
o New Release VHS/DVD - *
o Catalogue VHS/DVD - *
o Games - *
o Langara Distribution will be entitled to the benefit of CLOSEST PACK PRICING
on orders placed by pre-order date. Pack pricing will not be extended to
"Mixed" pack configurations however. Mixed packs are defined as packs
containing more than one title. Cancellations of pack items after pre-order
date are not allowed.
o Video One can provide Langara with competitive pricing on accessories.
o A consolidated invoice will be generated for all catalogue products daily to
minimize the number of invoices.
COOP/MDF
o Coop / MDF funds will be accrued title specifically and will be handled on a
program-by-program basis. Coop is paid based on proof of advertising
performance being provided to Video One by Langara Distribution no later
than 30 days from ad date.
o Coop monies offered to Langara are the property of our supplying studios and
as such, are subject to their published Terms and Conditions. Failure to
abide by studio coop guidelines will result in the rejection of our coop
submission. This, in turn, will result in a rejection of payment to Langara
Distribution of that coop. To ensure ad compliance, Video One must obtain
studio approval of all ads prior to ad date on Langara's behalf.
*Confidential information omitted and filed separately with the Securities and
Exchange Commission
o Coop/MDF monies will be paid to Langara when Video One receives the proof of
performance, provided all advertisements/promotions were pre-approved by
Video One.
PRODUCT DELIVERY
o New Release product - Will be available for pick up on Wednesday afternoon.
o Catalogue product - in stock product from Calgary branch where orders are
received by 10:00 am will be ready for pick-up by 4:00pm daily. We request
that you provide and identify a separate P.O. for customer orders, and one
for stock replenishment.
o Freight charges for products sourced from branches other than Calgary will
be the responsibility of Langara Distribution.
INVENTORY
o Video One Calgary will set a min/max inventory value on Langara's
requirements based on information they provide. Titles on this list will
remain on min/max for a period of 6 months. At that time, the purchasing
system will review and reconfigure these requirements based on actual
purchase history.
o Langara will assist in creating New Release forecasts by pre-order date in
order to minimize out of stock situations due to late orders.
DEFECTIVES
o RA's for defective product will be issued up to 30 days from street date.
Credits will be issued only if the product is not in stock; otherwise the
product will be replaced. Replacement copies of VHS, DVD and Accessories
will be supplied by the best economical means. Freight charges for defective
returns to Video One are the responsibility of Langara and should be
returned by the best economical means.
RETURNS
o All catalogue products are 100% guaranteed within 6 months of date of
purchase. Return privileges on Major New Release titles will be determined
by the studio published return policy and/or any product defined as
non-returnable by the studios. Credits will be issued at the current value
of the product being returned. Only product purchased from Video One is
eligible for return.
o Cancellations/returns of new release product after pre-order date may be
subject to a 20% restocking fee.
o Discontinued or Moratorium titles will not be accepted for return after the
return date. Video One will forward discontinued and moratorium notices
upon notification from the studios.
RETURNS PROCESSING
To ensure that Langara receives credits for returns on a timely basis, the
following process will apply:
o Returns will be delivered prepaid by Langara to Video One. Langara retains
ownership of returns in transit to Video One.
o If product is returned after 90 days of Langara 's original invoice date,
the product may be subject to a reduced credit price of original purchase
per title based on studio product revaluation policy.
o Langara must request a return authorization number (R.A.#) for each box
prior to returning product.
o An R.A.# must be clearly marked on each box.
o All R.A.#'s must be written on the waybill for tracking and proof of
delivery purpose.
o Return quantity and pricing is subject to verification by Video One.
o Damaged / Defective returns must be requested separately from other product
and clearly identified as damaged / defective.
GENERAL
o Langara Distribution is deemed to have accepted the invoices at face value
unless a written objection is submitted to Video One's credit department
within 30 days of invoice date.
o Langara Distribution agrees to pay in accordance with the terms of this
agreement and that Langara Distribution shall not be entitled to defer any
payment by reason of any claim for set off.
--------------------------------- --------------------------------
Michael Glossop Mike Duszynski
Director, Alberta Region President
Video One Canada Ltd. Langara Distribution
------------------------ --------------------------
Date Date
*Confidential information omitted and filed separately with the Securities and
Exchange Commission
EX-21
10
ex21.txt
LIST OF SUBSIDIARIES
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARIES OF THE REGISTRANT
E-Trend Networks, Inc., a Delaware corporation, has the following subsidiaries:
1. E-Trend Networks, Inc., a Nevada corporation which does business under
that name.
2. Langara Distribution Inc., an Alberta corporation which does business
under that name.
3. Cool Entertainment, Inc., a Washington corporation.
EX-23.2
11
ex23-2.txt
CONSENT OF ERNST & YOUNG LLP
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP
ERNST & YOUNG Ernst & Young LLP Phone: 403-290-4100
Chartered Accountants Fax: 403-290-4265
Ernst & Young Tower
1000 440 2 Avenue SW
Calgary AB Canada T2P 5E9
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated November 21, 2000 in the Registration Statement (Form
SB-2) and related Prospectus of E-Trend Networks, Inc. for the registration of
5,500,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
Calgary, Alberta
September 24, 2001 Chartered Accountants