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. 10 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 =============
14 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. 18 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. 19 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 20 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: 21 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. 22 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. 23 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. 24 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. 25 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. 26 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 E-Trend Networks, Inc. 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. Bylaws of E-Trend Networks, Inc. - Page 8 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 Bylaws of E-Trend Networks, Inc. - Page 9 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 Bylaws of E-Trend Networks, Inc. - Page 10 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. Bylaws of E-Trend Networks, Inc. - Page 11 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 Bylaws of E-Trend Networks, Inc. - Page 12 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. Bylaws of E-Trend Networks, Inc. - Page 13 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 Bylaws of E-Trend Networks, Inc. - Page 14 "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. Bylaws of E-Trend Networks, Inc. - Page 15 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 Bylaws of E-Trend Networks, Inc. - Page 16 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. Bylaws of E-Trend Networks, Inc. - Page 17 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. Bylaws of E-Trend Networks, Inc. - Page 18 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. Bylaws of E-Trend Networks, Inc. - Page 19 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 Bylaws of E-Trend Networks, Inc. - Page 20 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. E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 10 (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: E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 11 (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; E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 12 (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% E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 13 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 E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 14 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 E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 15 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 E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 16 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 E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 17 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 E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 18 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 E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 19 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 E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 20 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 21 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. E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 22 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 E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 23 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 E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 24 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. E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 25 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. E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 26 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 E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 27 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. E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 28 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. E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 29 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) E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 30 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 E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 31 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. E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 32 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 E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 33 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 E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 34 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 E-Trend Networks (Final 9-18-01) Amended and Restated Investment Agre.doc 35 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). 1 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. 5 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 6 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 7 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 8 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 9 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 10 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 11 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 2 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. 3 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 4 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 5 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. 6 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 7 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 9 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 10 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 11 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. -------------------------------------------------------------------------------- 12 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