2,500,000 SHARES
CYBER MERCHANTS EXCHANGE, INC. d.b.a. C-ME.com
Common Stock
BEST EFFORTS COMPENSATION AGREEMENT
Alhambra, California
April 13, 1999
Jason Adelman
Drake & Co.
7 Hanover Square, 2FL
New York, NY 10004
Dear Mr. Adelman:
CYBER MERCHANTS EXCHANGE, INC.d.b.a. C-ME.Com, a California corporation (the
"Company"), proposes to issue and sell an aggregate of two million five hundred
thousand (2,500,000) shares of the Company's Common Stock, no par value per
share (the "Common Stock" or "Shares").
The Shares will be offered to the public by the Company at a price of
$6.00-$9.00 per share (the "Offering"). The purpose of this Agreement is to set
forth the understanding of the parties relating to the right of Drake & Co., a
New York Corporation ("Broker-Dealer") to participate in the sale of the Shares
as a broker-dealer exercising its best efforts to sell the Shares.
Section 1. Representations and Warranties of the Company . The Company
represents and warrants to and agrees with Broker-Dealer that:
(a) A registration statement on Form SB-2 (File No. 333-41411) with
respect to the Shares has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "1933 Act"), and the
applicable rules and regulations (the "1933 Act Regulations") of the Securities
and Exchange Commission (the "Commission"), and has been filed with the
Commission; and such amendments to such registration statement as may have been
required prior to the date hereof have been filed with the Commission, and such
amendments have been similarly prepared. Such registration statement went
effective with the Commission on _________________, 199__ (the "Date of
Registration"). Copies of such registration statement and amendment or
amendments of each related preliminary prospectus, and the exhibits, financial
statements and schedules, as finally amended and revised, have been delivered to
you.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement became
effective and, in the event any post-effective amendment thereto becomes
effective prior to the closing of the Offering, shall also mean such
registration statement as so amended. The term "Prospectus" as used in this
Agreement shall mean the prospectus relating to the Shares in the form in which
it is first filed with the Commission pursuant to Rule 424(b) of the 1933 Act
Regulations or, if no filing pursuant to Rule 424(b) of the 1933 Act Regulations
is required, shall mean the form of final prospectus included in the
Registration Statement at the time such Registration Statement becomes
effective.
(b) When the Registration Statement became effective, when the
Prospectus was first filed pursuant to Rule 424(b) of the 1933 Act Regulations,
when any amendment to the Registration Statement becomes effective,
and when any supplement to the Prospectus is filed with the Commission, (i) the
Registration Statement, the Prospectus and any amendments thereof and
supplements thereto will conform in all material respects with the applicable
requirements of the 1933 Act and the 1933 Act Regulations, and (ii) neither the
Registration Statement, the Prospectus nor any amendment or supplement thereto
will contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by Broker-Dealer
expressly for use in the Registration Statement.
(c) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the state of California with all
requisite corporate power and authority to own, lease and operate its properties
and the properties it proposes to own, lease and operate as described in the
Registration Statement and the Prospectus and to conduct its business as now
conducted and as proposed to be conducted as described in the Registration
Statement and the Prospectus. The Company has been duly qualified to do business
and is in good standing as a foreign corporation in each other jurisdiction in
which the ownership or leasing of its properties or the nature or conduct of its
business as now conducted or proposed to be conducted as described in the
Registration Statement and the Prospectus requires such qualification, except
where the failure to do so would not have a material adverse effect on the
Company.
(d) The Company has full legal right, power and authority to enter into
this Agreement, to issue, sell and deliver the Shares as provided herein and to
consummate the transactions contemplated herein. This Agreement has been duly
authorized, executed and delivered by the Company and constitutes a valid and
binding agreement of the Company, enforceable in accordance with its terms,
except to the extent that enforceability may be limited by bankruptcy,
insolvency, reorganization or other laws of general applicability relating to or
affecting creditors, rights, or by general equity principles and except to the
extent the indemnification provisions set forth in Section 5 of this Agreement
may be limited by federal or state securities laws or the public policy
underlying such laws.
(e) Each consent, approval, authorization, order, license, certificate,
permit, registration, designation or filing by or with any governmental agency
or body necessary for the valid authorization, issuance, sale and delivery of
the Shares, the execution, delivery and performance of this Agreement and the
consummation by the Company of the transactions contemplated hereby, has been
made or obtained and is in full force and effect.
(f) Neither the issuance, sale and delivery by the Company of the
Shares, nor the execution, delivery and performance of this Agreement nor the
consummation of the transactions contemplated hereby by the Company will
conflict with or result in a breach or violation of any of the terms and
provisions of, or (with or without the giving of notice or the passage of time
or both) constitute a default under, the Articles of Incorporation, by-laws of
the Company; any indenture, mortgage, deed of trust, loan agreement, note, bond
or other agreement or instrument to which the Company, is a party or to which
it, any of its properties or other assets; or any applicable statute, law,
judgment, decree, order, rule or regulation of any court or governmental agency
or body applicable to the Company or its property; or result in the creation or
imposition of any lien, charge, claim or encumbrance upon any property or asset
of the Company.
(g) The Shares to be issued and sold hereunder have been validly
authorized by the Company. When issued and delivered against payment therefor,
the Shares will be duly and validly issued, fully paid and non-assessable. No
preemptive rights of shareholders exist with respect to any of the Shares. No
person or entity holds a right to require or participate in the registration
under the 1933 Act of the Shares pursuant to the Registration Statement; and,
except as set forth in the Prospectus, no person holds a right to require
registration under the 1933 Act of any shares of Common Stock of the Company at
any other time. No person or entity has a right of participation or first
refusal with respect to the sale of the Shares by the Company. The form of
certificates evidencing the Shares complies with all applicable requirements of
California law.
(h) The Common Stock to be issued upon exercise of the common stock
purchase warrants to be issued to Broker-Dealer (the "Warrants") are duly
authorized, and when issued and delivered pursuant to this Agreement, will be
duly authorized, validly issued, fully paid and non-assessable and free of
pre-emptive rights of any security holder of the Company. Neither the filing of
the Registration Statement nor the offering or sale of the Shares gives rise to
any rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock, except as described
in the Registration Statement.
(i) This Agreement has been duly and validly authorized, executed and
delivered by the Company. The Company has full power and lawful authority to
issue and sell the shares of Common Stock to be sold by it upon exercise of the
Warrants (the "Warrant Shares") on the terms and conditions set forth herein,
and no consent, approval, authorization or other order of any governmental
authority is required in connection with such authorization, execution and
delivery or with the authorization, issue and sale of the Warrant Shares or the
Warrants, except as may be required under the 1933 Act or state securities laws.
(j) The Company has 5,750,000 shares (and 250,000 shares of Common
Stock reserved for issuance upon exercise of currently exercisable stock
options) of issued and outstanding shares of Common Stock, after effecting a
1-for-2 reverse stock split. The Company has no other issued and outstanding
capital stock. The Company's authorized capitalization is as set forth in the
Prospectus under the caption "Capitalization." Except as disclosed in the
Prospectus, there is no outstanding option, warrant or other right calling for
the issuance of, and no commitment, plan or arrangement to issue any shares of
capital stock of the Company or any security convertible into or exchangeable
for capital stock of the Company.
(k) The financial statements of the Company in the Registration
Statement and the Prospectus present fairly the financial position of the
Company as of the dates indicated and the results of operations and cash flows
for the periods specified, all in conformity with generally accepted accounting
principles applied on a consistent basis throughout the periods specified. The
financial statement schedule included in the Registration Statement and the
amounts in the Prospectus under the captions "Selected Financial Data" fairly
present the information shown therein and have been compiled on a basis
consistent with the financial statements included in the Registration Statement
and the Prospectus. No other financial statements or schedules are required by
Form SB-2 or otherwise to be included in the Registration Statement or the
Prospectus. The unaudited pro forma combined financial information (including
the related notes) included in the Prospectus complies as to form in all
material respects to the applicable accounting requirements of the 1933 Act and
the 1933 Act Regulations and management of the Company believes that the
assumptions underlying the pro forma adjustments are reasonable. Such pro forma
adjustments have been properly applied to the historical amounts in the
compilation of the information and such information fairly presents with respect
to the Company the pro forma financial position, results of operations and other
information purported to be shown therein at the respective dates and for the
respective periods specified.
(l) KPMG, LLP, who have examined and are reporting upon the audited
financial statements and schedules included in the Registration Statement, are,
and were during the periods covered by their Reports included in the
Registration Statement and the Prospectus, independent public accountants, as
required by the 1933 Act and the 1933 Act Regulations.
(m) The Company has not sustained, since inception, any material loss
or interference with its business from fire, explosion, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from any
labor dispute or arbitrators' or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus; and, since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, and except as otherwise stated in the Registration Statement
and Prospectus, there has not been (i) any material change in the capital stock
or partnership interests, as applicable, long-term debt, obligations under
capital leases or short-term borrowings of the Company, (ii) any material
adverse change, or any development which could reasonably be seen as involving a
prospective material adverse change, in or affecting the business prospects,
properties, assets, results of operations or condition (financial or other) of
the Company, (iii) any liability or obligation, direct or contingent, incurred
or undertaken by the Company, which is material to the business or condition
(financial or other) of the Company, except for liabilities or obligations
incurred in the ordinary course of business, (iv) any declaration or payment of
any dividend or distribution of any kind on or with respect to the capital stock
of the Company, or (v) any transaction that is material to the Company except
transactions in the ordinary course of business or as otherwise disclosed in the
Registration Statement and the Prospectus.
(n) The Company is not in violation of its Articles of Incorporation or
by-laws, and no default exists, and no event has occurred, nor state of facts
exists, which, with notice or after the lapse of time to cure or both, would
constitute a default in the due performance and observance of any obligation,
agreement, term, covenant, consideration or condition contained in any
indenture, mortgage, deed of trust, loan agreement, note, lease or other
agreement or instrument to which the Company is a party or by which it or any of
its properties is subject. The Company is not in violation of, or in default
with respect to, any statute, law, rule, regulation, order, judgment or decree,
except as may be properly described in the Prospectus or such as is in the
aggregate does not now have and will not in the future have a material adverse
effect on the financial position, results of operations or business of the
Company.
(o) Except as described in the Prospectus, there is not pending or, to
the knowledge of the Company, threatened any action, suit, proceeding, inquiry
or investigation against the Company, its officers and directors or to which the
properties, assets or rights of the Company are subject, before or brought by
any court or governmental agency or body or board of arbitrators, which could
result in any material adverse change in the business, prospects, properties,
assets, results of operations or condition (financial or otherwise) of the
Company.
(p) The descriptions in the Registration Statement and the Prospectus
of the contracts, leases and other legal documents therein described present
fairly the information required to be shown, and there are no contracts, leases,
or other documents of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement which are not described or filed as required. To the best knowledge of
the Company, there are no statutes or regulations applicable to the Company or
certificates, permits or other authorizations from governmental regulatory
officials or bodies required to be obtained or maintained by the Company of a
character required to be disclosed in the Registration Statement or the
Prospectus which have not been so disclosed and properly described therein. All
agreements between the Company and third parties expressly referenced in the
Prospectus are legal, valid and binding obligations of the Company enforceable
in accordance with their respective terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization or other laws of
general applicability relating to or affecting creditors' rights and by general
equitable principles.
(q) The Company owns, possesses or has obtained all material permits,
licenses, franchises, certificates, consents, orders, approvals and other
authorizations of governmental or regulatory authorities as are necessary to own
or lease, as the case may be, and to operate its properties and to carry on its
business as presently conducted, or as contemplated in the Prospectus to be
conducted, and the Company has not received any notice of proceedings relating
to revocation or modification of any such licenses, permits, certificates,
consents, orders, approvals or authorizations.
(r) The Company owns or possesses adequate license or other rights to
use all patents, trademarks, service marks, trade names, copyrights, software
and design licenses, trade secrets, manufacturing processes, other intangible
property rights and know-how (collectively "Intangibles") necessary to entitle
it to conduct its business now, and as proposed to be conducted or operated as
described in the Prospectus, and the Company has not received notice of
infringement or of conflict with (and knows of no such infringement of or
conflict with) asserted rights of others with respect to any Intangibles which
could materially and adversely affect its business, prospects, properties,
assets, results of operation or condition (financial or otherwise).
(s) The Company has not directly or indirectly, at any time (i) made
any contribution to any candidate for political office, or failed to disclose
fully any such contribution, in violation of law or (ii) made any payment to any
state, federal or foreign, governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments or
contributions required or allowed by applicable law. To the best knowledge of
the Company, the Company's internal accounting controls and procedures are
sufficient to cause such entities to comply in all material respects with the
Foreign Corrupt Practices Act of 1977, as amended.
(t) To the best of the Company's knowledge, the Company's systems of
internal accounting controls taken as a whole are sufficient to meet the broad
objectives of internal accounting control insofar as those objectives pertain to
the prevention or detection of errors or irregularities in amounts that would be
material in relation to the Company's financial statements; and, to the best of
the Company's knowledge, neither the Company, nor any employee or agent thereof,
has made any payment of funds of the Company or received or retained any funds
and no funds of the Company have been set aside to be used for any payment, in
each case in violation of any law, rule or regulation.
(u) The Company has filed on a timely basis all necessary federal,
state, local and foreign income and franchise tax returns required to be filed
through the date hereof and have paid all taxes shown as due thereon; and no tax
deficiency has been asserted against the Company, nor does the Company know of
any tax deficiency which is likely to be asserted against the Company which if
determined adversely to the Company, could materially adversely affect the
business, prospects, properties, assets, results of operations or condition
(financial or otherwise) of any such entity, respectively. All tax liabilities
are adequately provided for on the respective books of such entities.
(v) The Company maintains insurance (issued by insurers of recognized
financial responsibility) of the types and in the amounts generally deemed
adequate for their respective businesses and, to the best of the Company's
knowledge, consistent with insurance coverage maintained by similar companies in
similar businesses, including, but not limited to, insurance covering real and
personal property owned or leased by the Company against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect.
(w) To the best of the Company's knowledge, no general labor problem
exists or is imminent with the employees of the Company which would have a
material adverse effect on the financial position, results of operations or
business of the Company.
(x) The Company and its officers, directors or affiliates have not
taken and will not take, directly or indirectly, any action designed to, or that
might reasonably be expected to, cause or result in or constitute the
stabilization or manipulation of any security of the Company or to facilitate
the sale or resale of the Shares in violation of any law, rule or regulation.
(y) The Company has not incurred any liability for a fee, commission or
other compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by this Agreement other than as
contemplated hereby.
(z) Except as otherwise disclosed in the Prospectus, the Company has
not authorized or conducted nor has knowledge of the generation, transportation,
storage, presence, use, treatment, disposal, release, or other handling of any
hazardous substance, hazardous waste, hazardous material, hazardous constituent,
toxic substance, pollutant, contaminant, asbestos, radon, polychlorinated
biphenyls ("PCBs"), petroleum product or waste (including crude oil or any
fraction thereof), natural gas, liquefied gas, synthetic gas or other material
defined, regulated, controlled or potentially subject to any remediation
requirement under any environmental law (collectively, "Hazardous Materials"),
on, in, under or affecting any real property currently leased or owned or by any
means controlled by the Company (the "Real Property") except as in material
compliance with applicable laws; to the knowledge of the Company, the Real
Property and the Company's operations with respect to the Real Property are in
compliance with all federal, state and local laws, ordinances, rules,
regulations and other governmental requirements relating to pollution, control
of chemicals, management of waste, discharges of materials into the environment,
health, safety, natural resources, and the environment (collectively,
"Environmental Laws"), and the Company has, and is in compliance with, all
licenses, permits, registrations and government authorizations necessary to
operate under all applicable Environmental Laws. Except as otherwise disclosed
in the Prospectus, the Company has not received any written or oral notice from
any governmental entity or any other person and there is no pending or
threatened claim, litigation or any administrative agency proceeding that:
alleges a violation of any Environmental Laws by the Company; alleges that the
Company is a liable party or a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
S 9601, et seq., or any state superfund law; has resulted in or could result in
the attachment of an environmental lien on any of the Real Property; or, alleges
that the Company is liable for any contamination of the environment,
contamination of the Real Property, damage to natural resources, property
damage, or personal injury based on their activities or the activities of their
predecessors or third parties (whether at the Real Property or elsewhere)
involving Hazardous Materials whether arising under the Environmental Laws,
common law principles or other legal standards.
(aa) The Company will not become as a result of the transactions
contemplated hereby, or will not conduct its business in a manner in which it
would become, "an investment company," or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended (the "Investment Company Act").
(bb) No relationship, direct or indirect, exists between or among any
of the Company or any affiliate of the Company, on the one hand, and any
director, officer, stockholder, customer or supplier of the Company or any
affiliate of the Company, on the other hand, that is required by the 1933 Act or
by the 1933 Act Regulations to be described in the Registration Statement or the
Prospectus which is not so described or is not adequately described.
(cc) All offers and sales by the Company of the Company's securities
prior to the date hereof were at all relevant times duly registered under or
exempt from the registration requirements of the 1933 Act and were duly
registered in accordance with or the subject of an available exemption from
registration under the applicable blue sky laws. The Company has not effected
any sales of securities that would be required to be disclosed in response to
Item 701 of Regulation S-K that are not disclosed in the Registration Statement.
Any certificate signed by any officer of the Company on behalf of the
Company and delivered to you or to counsel for the Representative shall be
deemed a representation and warranty of the Company to the Representative as to
the matters covered thereby.
Section 2. Certain Covenants of the Company. The Company covenants and
agrees with Broker-Dealer, to use its best efforts to cause the Company to
perform as follows:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective (if not yet effective at the date and time that
this Agreement is executed and delivered by the parties hereto). The Company
will notify you immediately, and confirm the notice in writing, (i) when the
Registration Statement, or any post-effective amendment to the Registration
Statement, shall have become effective, or any supplement to the Prospectus or
any amended Prospectus shall have been filed, (ii) of the receipt of any
comments from the Commission, (iii) of any request by the Commission to amend
the Registration Statement or amend or supplement the Prospectus or for
additional information, and (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, or of the institution or threatening of any proceeding for any
such purposes. The Company will use every reasonable effort to prevent the
issuance of any such stop order or of any order preventing or suspending such
use and, if any such order is issued, to obtain the withdrawal thereof at the
earliest possible moment.
(b) The Company will not at any time file or make any amendment to the
Registration Statement, or any amendment or supplement to the Prospectus if you
shall not have previously been advised and furnished a copy thereof a reasonable
time prior to the proposed filing, or if you or your counsel reasonably object
to such amendment or supplement.
(c) The Company will deliver to you, at the Company's expense, from
time to time as requested, such number of copies of the Prospectus (as
supplemented or amended) as you may reasonably request. If the delivery of a
Prospectus is required at any time prior to the expiration of nine months after
the time of issue of the Prospectus in connection with the offering or sale of
the Shares and if at such time any events shall have occurred as result of which
the Prospectus as then amended or supplemented would include an untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were made
when such Prospectus is delivered not misleading, or, if for any reason it shall
be necessary during such same period to amend or supplement the Prospectus in
order to comply with the 1933 Act, the Company will notify you and upon your
request prepare and furnish without charge to you and to any dealer in
securities as many copies, as you may from time to time reasonably request, of
an amended Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance.
(d) The Company will use its best efforts to qualify the Shares for
offering and sale under the applicable securities laws of such states and other
jurisdictions as you may designate and to maintain such qualifications in effect
for as long as may be necessary to complete the distribution of the Shares;
provided, however, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation in any
jurisdiction in which it is not so qualified or to make any undertakings in
respect of doing business in any jurisdiction in which it is not otherwise so
subject. The Company will file such statements and reports as may be required by
the laws of each jurisdiction in which the Shares have been qualified as above
provided.
(e) The Company will make generally available to its security holders
as soon as practicable, but in any event not later than the end of the fiscal
quarter first occurring after the first anniversary of the "effective date of
the Registration Statement" (as defined in Rule 158(c) of the 1933 Act
Regulations), an earnings statement (in reasonable detail but which need not be
audited) complying with the provisions of Section 11(a) of the 1933 Act and
Rule 158 thereunder and covering a period of at least 12 months beginning after
the effective date of the Registration Statement.
(f) The Company will use the net proceeds received by it from the sale
of the Shares substantially in the manner specified in the Prospectus under the
caption "Use of Proceeds."
(g) The Company will furnish to its security holders of record, as soon
as practicable after the end of each respective period, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year. During a period of five years after the date hereof, the
Company will furnish to you: (i) concurrently with furnishing such reports to
its security holders, statements of operations of the Company for each of the
first three quarters in the form furnished to the Company's security holders;
(ii) concurrently with furnishing to its security holders, a balance sheet of
the Company as of the end of such fiscal year, together with statements of
operations, of cash flows and of security holders, equity of the Company for
such fiscal year, accompanied by a copy of the certificate or report thereon of
independent public accountants; (iii) as soon as they are available, copies of
all reports (financial or otherwise) mailed to security holders; (iv) as soon as
they are available, copies of all reports and financial statements furnished to
or filed with the Commission, any securities exchange or the NASD; (v) every
material press release in respect of the Company or its affairs which is
released or prepared by the Company, and (vi) any additional information of a
public nature concerning the Company or its business that you may reasonably
request. During such five-year period, the foregoing financial statements shall
be on a consolidated basis to the extent that the accounts of the Company are
consolidated with any subsidiaries, and shall be accompanied by similar
financial statements for any significant subsidiary that is not so consolidated.
(h) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock.
(i) The Company will use its best efforts to acquire the inclusion of
its shares of Common Stock on the National Association of Securities Dealers
Automated Quotation system ("NASDAQ") and the American Stock Exchange ("AMEX")
within six months from the date hereof.
(j) The Company is familiar with the Investment Company Act and the
rules and regulations thereunder, and has in the past conducted its affairs, and
will in the future conduct its affairs, in such a manner so as to ensure that
the Company was not and will not be an "investment company" or an entity
"controlled" by an "investment company" within the meaning of the Investment
Company Act.
(k) The Company will not, and will use its best efforts to cause its
officers, directors and affiliates not to, (i) take, directly or indirectly
prior to termination of the distribution of the Shares contemplated by this
Agreement, any action designed to stabilize or manipulate the price of any
security of the Company, or which may cause or result in, or which might in the
future reasonably be expected to cause or result in, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of any of the Shares, (ii) sell, bid for, purchase or pay anyone any
compensation for soliciting purchases of the Shares or (iii) pay or agree to pay
to any person any compensation for soliciting any order to purchase any other
securities of the Company which, in any such case, is in violation of any law,
rule or regulation.
(l) The Company will file timely and accurate reports on Form SR with
the Commission in accordance with Rule 463 of the 1933 Act Regulations or any
successor provision.
(m) Prior to the closing of the Offering, the Company will not, and
will use its best efforts to cause any affiliate of the Company not to issue a
press release or other official communication directly or indirectly, nor hold a
press conference with respect to the Company or with respect to the financial
condition, results of operations, business, properties, assets or liabilities of
the Company, or the offering of the Shares, without your prior written input
within 72 hours which consent shall not be unreasonably withheld.
(n) The Company will notify you promptly of any material adverse change
affecting any of its representations, warranties, agreements and indemnities
herein at any time prior to the closing of the Offering and take such steps as
may be reasonably requested by you either to remedy or publicize the same, or
both.
(o) The Company will reserve and keep available that maximum number of
its authorized but unissued shares of Common Stock which are issuable upon
exercise of the Warrants outstanding from time to time.
(p) On the last day that this Agreement is in full force and effect
after the execution hereof, the Company shall execute and deliver to you the
Warrants you have earned. The Warrants will be substantially in the form of the
Stock Purchase Warrant filed as an exhibit to the Registration Statement, a copy
of which is attached hereto as Exhibit "A".
(q) For a period of five years from the Effective Date, the Company, at
its expense, shall cause its regularly engaged independent certified public
accountants to review (but not audit and without issuing any opinion thereon)
the Company's financial statements for each of the first three (3) fiscal
quarters prior to the announcement of quarterly financial information, the
filing of the Company's 10-Q quarterly report and the mailing of quarterly
financial information to Stockholders.
(r) As promptly as practicable after the closing of the Offering, the
Company will prepare, at its own expense, hard cover "bound volumes" relating to
the offering, and will distribute such volumes to the individuals designated by
you.
Section 3. Engagement & Allotment, Term, Reporting, Compensation and
Payment of Expenses.
(a) Engagement & Allotment.
(i) Subject to the terms and conditions of this Agreement, the
Company hereby engages Broker-Dealer, on a "best efforts" basis, as the
Company's nonexclusive agent in connection with the sale of up to 100,000 Shares
(the "Allotted Shares"). The number of Allotted Shares may be increased or
decreased at the sole discretion of the Company upon three (3) days written
notice to Broker-Dealer. Broker-Dealer will keep precise records of all
purchases of stock, including the amount of the purchase, the exact title in
which the Shares are to be issued and the address of the purchaser. The Shares
will be issued promptly by the Company and, in no event, later than fifteen (15)
days after notification by Broker-Dealer of the purchase with the information
set forth above. The maximum amount of each sale shall be 8,800 shares. The
minimum amount of each sale shall be 300 shares.
(ii) As to residents of the State of California who wish to
purchase in excess of $2,500 worth of the Shares, Broker-Dealer will take
appropriate measures to assure that the purchaser is "suitable" by having a
minimum net worth (excluding home equity, home furnishings and automobiles) of
at least $250,000 and a minimum gross income of $65,000 during the current tax
year; or, in the alternative, a minimum net worth of $500,000. In either case,
the amount of a purchaser's investment may not exceed ten percent (10%) of the
purchaser's net worth.
(iii) Broker-Dealer shall use its best efforts to assist the
Company in making sales of the shares pursuant to the Offering. Broker-Dealer
makes no representations as to the amount of Shares it will be able to sell.
There is no firm commitment to sell any certain amount of the Shares by
Broker-Dealer.
(vi) Broker-Dealer will only offer the Company's stock in
those states in which Broker-Dealer and its brokers are registered.
(vii) Broker-Dealer agrees to become a market maker for the
Company when legally permitted by its restrictive agreement with the NASD and
the SEC and when approved by the Broker-Dealer's Board of Directors. At such
time, Broker-Dealer agrees to assist with any filing requirements. Broker-Dealer
does not currently act as a market maker and has no immediate plans to act as a
market maker.
(b) Term. The term of this Agreement shall commence as of the effective
date hereof (the "Effective Date") and shall continue in full force and effect
for a period of up to thirty (30) days from the Date of Registration as set
forth in Section 1(a), above. This Agreement may be extended for additional
period of 30 days upon the mutual written consent of both parties.
(c) Reporting. Broker-Dealer shall offer the Shares pursuant to the
Prospectus. Payment for the Shares shall be made by the Purchaser directly to
the Escrow Agent as set forth in the Prospectus. The commission, as set forth in
Section 3(d), will be paid by the Company or deducted from the proceeds of the
sale when subscriptions have been accepted for at least the Minimum amount as
set forth in the Prospectus and such Minimum subscriptions
are fully paid. Said commission and any other amounts due to Broker-Dealer
hereunder shall be paid every Friday once the Minimum is reached. All amounts
due shall be calculated as of the close of business on the immediately prior
Thursday. If the Company or any other entity makes sales without Broker-Dealer,
no commission will be due to Broker-Dealer on such sales.
(e) Compensation.
The Company shall pay Broker-Dealer as follows:
(i) A commission of 7% based on the total offering amount of
the Allotted Shares as set forth in Section 3(a)(i). The commission will be paid
by the Company or deducted from the proceeds of the sale when subscriptions have
been accepted for at least the Minimum amount as set forth in the Prospectus and
such Minimum subscriptions are fully paid. If more than the Minimum is sold
during the offering then commissions relating to such additional Shares will be
paid out of escrow when monies for the Shares subscribed to are distributed to
the Issuer.
(ii) The Company reserves the right to review all
subscriptions for securities law compliance and to make the final determination
whether to accept or reject subscriptions. No selling commissions will be
payable with respect to subscriptions which are rejected by the Company.
(iii) As an additional incentive for Broker-Dealer to perform
its services in a timely manner, Warrants in the form attached hereto as Exhibit
"A" shall be issued to Broker-Dealer or its designees as follows:
1. A warrant to purchase up to five percent (5%) of the
Allotted Shares, equal to 5,000 shares of stock with
an exercise price of $9.90 - 14.85 per share, which
shall not be less than one-hundred sixty-five percent
(165%) of the Offering Price of the Shares. The
warrant shall be in standard form (see Exhibit A) and
shall be assignable, shall contain a net exercise
provision, and shall expire no sooner than three (3)
years after the listing of the Common Stock of the
Company on the American Stock Exchange, or the NASDAQ
System.
2. In both instances, as set forth above, the Warrants
will be granted pro rata to the sale of the Shares by
Broker-Dealer. Assuming all 100,000 Shares available
for sale are sold by Broker-Dealer, 5,000 Warrants
will be issued. If less than 100,000 Shares are sold
by Broker-Dealer, Warrants will be issued on a pro
rata basis in accordance with the actual number of
Shares sold. For example, should 50,000 Shares be
sold, Broker-Dealer will be entitled to 2,500
Warrants at a price of $9.90 - 14.85 per Share, which
shall not be less than one-hundred sixty-five percent
(165%) of the Offering Price of the Shares. The
warrant shall be in standard form (see Exhibit A) and
shall be assignable, shall contain a net exercise
provision, and shall expire no sooner than three (3)
years after the listing of the Common Stock of the
Company on the American Stock Exchange, or the NASDAQ
System. The Shares obtained upon exercise of the
Warrants will be "restricted" stock subject to the
trading provisions of Rule 144 promulgated by the
Commission.
(e) Payment of Expenses. The Company will pay and bear all costs, fees
and expenses incident to the performance of its obligations under this Agreement
(excluding fees and expenses of your counsel), including (a) the preparation,
printing and filing of the Registration Statement (including financial
statements and exhibits), as originally filed and as amended, the Prospectus and
any amendments or supplements thereto, and the cost of furnishing copies thereof
to you, (b) the preparation of any Selected Dealers Agreement, the certificates
representing the Shares, the Blue Sky Memoranda and any instruments relating to
any of the foregoing, (c) the issuance and delivery of the Shares to the
purchasers, including any transfer taxes payable upon the sale of the Shares,
(d) the fees and disbursements of the Company's counsel and accountants, (e) the
qualification of the Shares under the applicable securities laws in accordance
with Section 2(e) of this Agreement and any filing for review of the Offering
with the NASD, including filing fees and fees and disbursements in connection
therewith and in connection with the Blue Sky Memoranda, (f) all costs, fees and
expenses in connection with the application for inclusion of the Shares on
NASDAQ, (g) costs related to travel and lodging incurred by the Company and its
representatives relating to meetings with and presentations to prospective
purchasers of the Shares reasonably determined by you to be necessary or
desirable to effect the sale of the Shares to the public and (i) all other costs
and expenses incident to the performance of the Company's obligations hereunder
that are not otherwise specifically provided for in this section.
Section 4. Opinion of Counsel and Accountants and other Conditions.
(a) As a condition to the performance of your duties and obligations
hereunder, you shall have received a favorable opinion of Evers & Hendrickson,
LLP ("Evers & Hendrickson") counsel for the Company in form and substance
satisfactory to counsel for you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
California with all requisite corporate power and authority to own, lease and
operate its properties and the properties it proposes to own, lease and operate
as described in the Registration Statement and the Prospectus and to conduct its
business as now conducted and as proposed to be conducted as described in the
Registration Statement and the Prospectus. To the best of such counsel's
knowledge, there are no other jurisdictions in which the ownership or leasing of
the Company's properties or the nature or conduct of its business as now
conducted or proposed to be conducted as described in the Registration Statement
and the Prospectus requires such qualification, except where the failure to do
so would not have a material adverse effect on the Company. To such counsel's
knowledge, the Company does not own or control, directly or indirectly, any
corporation, association or other entity (other than any indirect control that
may be implied by virtue of Mr. Yuan and certain other officers of the Company
serving as officers and/or directors of other companies).
(ii) The Company has full legal right, power and authority to
enter into, deliver and perform this Agreement, to issue, sell and deliver the
Shares as provided herein and to consummate the transactions contemplated
herein. This Agreement has been duly authorized, executed and delivered by the
Company and, assuming due authorization, execution and delivery by the other
parties hereto, constitutes a valid and binding agreement of the Company,
enforceable in accordance with its terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization or other laws of
general applicability relating to or affecting creditors' rights and by general
equity principles and except to the extent that enforcement of the
indemnification provisions set forth in Section 5 of this Agreement may be
limited by federal or state securities laws or the public policy underlying such
laws.
(iii) Each consent, approval, authorization, order, license,
certificate, permit, registration, designation or filing by or with any
governmental agency or body necessary for the valid authorization, issuance,
sale and delivery of the Shares and the execution, delivery and performance of
this Agreement has been made or obtained and is in full force and effect.
(iv) Neither the issuance, sale and delivery by the Company of
the Shares to purchasers thereof, nor the execution, delivery and performance of
this Agreement, nor the consummation of the transactions contemplated hereby or
thereby by the Company will violate any of the terms and provisions of, or
constitute a default under, any of the Articles of Incorporation or by-laws of
the Company, or, to such counsel's knowledge, under any material indenture,
mortgage, trust, deed of trust, loan agreement, note, lease or other agreement
or instrument to which the Company is a party or to which any of its properties
or other assets is subject; or, to such counsel's knowledge, violate any
applicable statute, judgment, decree, order, rule or regulation of any court or
governmental agency or body; or, to such counsel's knowledge, result in the
creation or imposition of any lien, charge, claim or encumbrance upon any
property or asset of any of the foregoing.
(v) The description of the Company's authorized capital stock
contained in the Registration Statement and the Prospectus under the caption
"Capital Stock" meets the requirements of Item 12 of Form SB-2 under the 1933
Act, and the Common Stock conforms in all material respects as to legal matters
to the description thereof contained in the Registration Statement and the
Prospectus.
(vi) The Shares to be issued pursuant to the Offering have
been validly authorized by the Company. When issued and delivered, the Shares
will be validly issued, fully paid and nonassessable. No preemptive rights of
shareholders exist with respect to any of the Shares. To such counsel's
knowledge, no person or entity holds a right to require or participate in the
registration under the 1933 Act of the Shares pursuant to the Registration
Statement; and, except as set forth in the Prospectus, no person holds a right
to require registration under the 1933 Act of any shares of Common Stock of the
Company at any other time. To such counsel's knowledge, no person or entity has
a right of participation or first refusal with respect to the sale of the Shares
by the Company. The form of certificates evidencing the Shares comply with all
applicable requirements of California law.
(vii) The Company has an authorized capitalization as set
forth in the Prospectus under the caption "Capital Stock" as of the date
therein. At the date of this Agreement, after effecting a 1-for-2 reverse stock
split, the Company has 5,750,000 shares of issued and outstanding stock (and
250,000 shares of Common Stock reserved for issuance upon exercise of currently
exercisable stock options), all of which is Common Stock. The Common Stock
conforms in all material respects to the description of the Common Stock
contained in the Prospectus. To the knowledge of such counsel, except as
disclosed in the Prospectus, there is no outstanding option, warrant or other
right calling for the issuance of, and no commitment, plan or arrangement to
issue, any shares of capital stock of the Company or any security convertible
into or exchangeable for capital stock of the Company.
(viii) To the knowledge of such counsel, the Company is not in
violation of its Articles of Incorporation or by-laws, and no material default
exists and no event has occurred which, with notice or after the lapse of time
to cure or both, would constitute a material default in the due performance and
observance of any obligation, agreement, term, covenant or condition contained
in any indenture, mortgage, deed of trust, loan agreement, note, lease or other
agreement or instrument known to such counsel to which any such entity is a
party or by which any such entity or any of its properties is subject. To the
knowledge of such counsel, the Company is not in violation of, or in default
with respect to, any statute, rule, regulation, order, judgment or decree,
except as may be properly described in the Prospectus or such as in the
aggregate does not now have and will not in the future have a material adverse
effect on the financial position, results of operations or business of each such
entity, respectively.
(ix) To such counsel's knowledge and except as described in
the Prospectus, there is not pending or threatened, any action, suit,
proceeding, inquiry or investigation against the Company or any of its officers
and directors or to which the properties, assets or rights of the Company or
such persons are subject, which, if determined adversely to the Company or any
such persons, would individually or in the aggregate have a material adverse
effect on the financial position, results of operations or business of any such
entity, respectively.
(x) The descriptions in the Registration Statement and the
Prospectus of the contracts, leases and other legal documents therein described
present fairly the information required to be shown and there are no contracts,
leases or other documents known to such counsel of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement which are not described or filed as
required. There are no statutes or regulations applicable to the Company or
certificates, permits or other authorizations from governmental regulatory
officials or bodies required to be obtained or maintained by the Company, known
to such counsel, of a character required to be disclosed in the Registration
Statement or the Prospectus which have not been so disclosed and properly
described therein. To such counsel's knowledge, all agreements between the
Company, and third parties expressly referenced in the Prospectus are legal,
valid and binding obligations of the Company, enforceable in accordance with
their respective terms, except to the extent enforceability may be limited by
bankruptcy, insolvency, reorganization or other laws of general applicability
relating to or affecting creditors' rights and to general equitable principles.
(xi) The Registration Statement has become effective under the
1933 Act and, to the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceeding
for that purpose has been instituted or is pending or contemplated under the
1933 Act. Other than financial statements and other financial and operating data
and schedules contained therein, as to which counsel need express no opinion,
the Registration Statement, the Prospectus and any amendment or supplement
thereto, appear on their face to conform as to form in all material respects
with the requirements of Form SB-2 under the 1933 Act Regulations.
(xii) The Registration Statement, or any further amendment
thereto made prior to the date hereof, on its effective date, contained or
contains no untrue statement of a material fact and did not omit or does not
omit to state any material fact required to be stated therein or necessary to
make the statements therein in light of the circumstances under which they were
made not misleading, or neither the Prospectus nor any amendment or supplement
thereto, as of its issue date, contained or contains any untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading (provided that such counsel need express no belief regarding the
financial statements and related schedules and other financial data contained in
the Registration Statement, any amendment thereto, or the Prospectus, or any
amendment or supplement thereto).
(xiii) The Company is not an "investment company," or a
company "controlled" by an "investment company," within the meaning of the
Investment Company Act.
(xiv) The descriptions in the Prospectus of statutes,
regulations, legal or governmental proceedings are accurate and present fairly a
summary of the information required to be shown under the 1933 Act and the 1933
Act Regulations. The information in the Prospectus under the caption
"Capitalization," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel, is correct and presents fairly
the information required to be disclosed therein under the 1933 Act and the 1933
Act Regulations.
(xv) To such counsel's knowledge, no relationship, direct or
indirect, exists between or among any of the Company or any affiliate of the
Company, on the one hand, and any director, officer, stockholder, customer or
supplier of the Company or any affiliate of the Company, on the other hand, that
is required by the 1933 Act or by the 1933 Act Regulations to be described in
the Registration Statement or the Prospectus which is not so described or is not
adequately described.
(xvi) All sales by the Company of the Company's securities
prior to the date hereof were at all relevant times duly registered under or, to
the knowledge of such counsel, effected in a manner which was exempt from the
registration requirements of the 1933 Act and were duly registered in accordance
with or the subject of an available exemption from the registration requirements
of the applicable blue sky laws. To the knowledge of such counsel, the Company
has not effected any sales of securities that would be required to be disclosed
in response to Item 701 of Regulation S-K that are not disclosed in the
Registration Statement.
In rendering the foregoing opinion, such counsel may rely on the following:
(A) as to matters involving the application of laws other than
the laws of the United States and jurisdictions in which they are
admitted, to the extent such counsel deems proper and to the extent
specified in such opinion, upon an opinion or opinions (in form and
substance reasonably satisfactory to Underwriters' counsel) of other
counsel familiar with the applicable laws,
(B) as to matters of fact, to the extent they deem
appropriate, on certificates of responsible officers of the Company and
certificates or other written statements of officers or departments of
various jurisdictions having custody of documents respecting the
existence or good standing of the Company provided that copies of all
such opinions, statements or certificates shall be delivered to your
counsel. The opinion of counsel for the Company shall state that the
opinion of any other counsel, or certificate or written statement, on
which such counsel is relying is in form satisfactory to such counsel
and that you and they are justified in relying thereon.
(b) At the time that this Agreement is executed by the Company, you
shall have received from KPMG, LLP a letter, dated the date hereof, in form and
substance satisfactory to you, confirming that they are independent public
accountants with respect to the Company within the meanings of the 1933 Act and
1933 Act Regulations, and stating in effect that:
(i) in their opinion, the financial statements and any
supplementary financial information and schedule included in the Registration
Statement and covered by their opinion therein comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and the
1933 Act Regulations;
(ii) on the basis of limited procedures (set forth in detail
in such letter and made in accordance with such procedures as may be specified
by you) not constituting an audit in accordance with generally accepted auditing
standards, consisting of (but not limited to) a reading of the latest available
internal unaudited financial statements of the Company, a reading of the minute
books of the Company, inquiries of officials of the Company responsible for
financial and accounting matters, and such other inquiries and procedures as may
be specified in such letter, nothing came to their attention that caused them to
believe that:
(A) the unaudited financial statements and supporting schedule
and other unaudited financial data of the Company included in the
Registration Statement do not comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act
and the 1933 Act Regulations or are not presented in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements
included in the Registration Statement;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited financial statements from which
such data and items were derived, and any such unaudited data and items
were not determined on a basis
substantially consistent with the basis for the corresponding amounts
in the audited financial statements included in the Prospectus;
(C) any unaudited pro forma financial information included in
the Prospectus does not comply as to form in all material respects with
the applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations or the pro forma adjustments have not been properly applied
to historical amounts in the compilation of that information; and
(D) at a specified date not more than five days prior to the
date of delivery of such letter, there was any change in the capital
stock or long-term debt or obligations under capital leases of the
Company, or there were any decreases in net current assets or net
assets, or shareholders' equity, from that set forth in the Company's
balance sheet at December 31, 1998, except as described in such letter;
and
(iii) in addition to the procedures referred to in clause (ii)
above and the examination referred to in their Reports included in the
Registration Statement, they have carried out certain specified procedures, not
constituting an audit in accordance with generally accepted auditing standards,
with respect to certain amounts, percentages and financial information specified
by you which are derived from the general accounting records of the Company,
which appear in the Registration Statement or the exhibits or schedules thereto
and are specified by you, and have compared such amounts, percentages and
financial information with the accounting records of the Company and with
material derived from such records and have found them to be in agreement.
(c) At the time of the closing of the Offering, you shall have received
from KPMG, LLP, a letter, in form and substance satisfactory to you and dated as
of the date of the closing of the Offering, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (b) above, except
that the specified date referred to shall be a date not more than five days
prior to the date of closing of the Offering.
(d) The NASD, upon review of the terms of the public offering of the
Shares, shall not have objected to such offering, such terms or your
participation in the same.
Section 5. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless Broker-Dealer and each
person, if any, who controls Broker-Dealer within the meaning of the 1933 Act or
the 1934 Act against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include, but not be
limited to, all reasonable costs of defense and investigation and all attorneys'
fees), to which it or such controlling person may become subject under the 1933
Act, the 1934 Act or insofar as such losses, claims, damages or liabilities in
respect thereof arise out of or are based upon any breach of any warranty or
covenant of the Company herein contained or by reason of any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and will reimburse Broker-Dealer for any legal or other expenses
reasonably incurred by it in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement or the Prospectus, or any such amendment or supplement,
in reliance upon and in conformity with written information furnished to the
Company by Broker-Dealer expressly for use therein. In addition to its other
obligations under this Section 5 (a), the Company agrees that, as an interim
measure during the pendency of any such claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 5 (a), it will
reimburse Broker-Dealer on a monthly basis for all reasonable legal and other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Company's obligation to reimburse Broker-Dealer for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. Any such interim reimbursement payments that
are not made to Broker-Dealer within 30 days of a request for reimbursement
shall bear interest at the prime rate (or reference rate or other commercial
lending rate for borrowers of the highest credit standing) published from time
to time by The Wall Street Journal (the "Prime Rate") from the date of such
request.
The Company will not, without the prior written consent of Broker-Dealer, settle
or compromise or consent to the entry of any judgment in any pending or
threatened action or claim or related cause of action or portion of such cause
of action in respect of which indemnification may be sought hereunder (whether
or not Broker-Dealer is a party to such action or claim), unless such
settlement, compromise or consent includes an unconditional release of
Broker-Dealer from all liability arising out of such action or claim (or related
cause of action or portion thereof).
The indemnity agreement in this Section 5(a) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each person, if any,
who controls Broker-Dealer within the meaning of the 1933 Act or the 1934 Act to
the same extent as such agreement applies to Broker-Dealer.
(b) Broker-Dealer will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or the Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein 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, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement or the Prospectus or
any such amendment or supplement thereto in reliance upon and in conformity with
written information furnished to the Company by Broker-Dealer expressly for use
therein; and will reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or defending
any such loss, claim, damage, liability or action. In addition to its other
obligations under this Section 5(b), Broker-Dealer agrees that, as an interim
measure during the pendency of any such claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 5(b), it will reimburse
the Company on a monthly basis for all reasonable legal and other expenses
incurred in connection with investigating or defending any such claim, action
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of its obligation
to reimburse the Company for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. Any such interim reimbursement payments that are not made to the
Company within 30 days of a request for reimbursement shall bear interest at the
Prime Rate from the date of such request. This indemnity agreement shall be in
addition to any liabilities that Broker-Dealer may otherwise have.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; no indemnification provided for in Section 5(a) or 5(b)
shall be available to any party who shall fail to give notice as provided in
this Section 5(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was prejudiced by the
failure to give such notice, but the omission so to notify the indemnifying
party will not relieve the indemnifying party from any liability that it may
have to any indemnified party otherwise than under Section 5. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation, except
that if the indemnified party has been advised by counsel in writing that there
are one or more defenses available to the indemnified party which are different
from or additional to those available to the indemnifying party, then the
indemnified party shall have the right to employ separate counsel and in that
event the reasonable fees and expenses of such separate counsel for the
indemnified party shall be paid by the indemnifying party; provided, however,
that if the indemnifying party is the Company, the Company shall only be
obligated to pay the reasonable fees and expenses of a single law firm (and any
reasonably necessary local counsel) employed by all of the indemnified parties
and the persons referred to in Section 5(a) hereof. The indemnifying party shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
(d) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Section 5(a) and 5(b)
hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the indemnifying parties, shall be settled by arbitration
conducted pursuant to the Code of Arbitration Procedure of the National
Association of Securities Dealers, Inc. Any such arbitration must be commenced
by service of a written demand for arbitration or a written notice of intention
to arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a) and 5(b) hereof
and will not resolve the ultimate propriety or enforceability of the obligation
to indemnify for expenses that is created by the provisions of Sections 5(a) and
5(b).
(e) In order to provide for just and equitable contribution in
circumstances under which the indemnity provided for in this Section 5 is for
any reason judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the right of appeal) to be unenforceable by the indemnified parties
although applicable in accordance with its terms, the Company on the one hand,
and Broker-Dealer on the other shall contribute to the aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by such
indemnity incurred by the Company and Broker-Dealer, as incurred, in such
proportions that (a) Broker-Dealer is responsible pro rata for that portion
represented by the commission percentage appearing on the cover page of the
Prospectus bears to the initial public offering price (before deducting
expenses) appearing thereon, and (b) the Company is responsible for the balance,
provided, however, that no person guilty of fraudulent misrepresentations
(within the meaning of Section 12(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation; provided, further, that if the allocation provided above is
not permitted by applicable law, the Company, on the one hand and Broker-Dealer
on the other shall contribute to the aggregate losses in such proportion as is
appropriate to reflect not only the relative benefits referred to above but also
the relative fault of the Company on the one hand, and Broker-Dealer on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the Company
on the one hand, or by Broker-Dealer on the other hand, and the parties,
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and Broker-Dealer agree that it
would not be just and equitable if contributions pursuant to this Section 5(e)
were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this Section 5(e). The amount paid or payable by a party as a result of the
losses, claims, damages or liabilities referred to above shall be deemed to
include any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending such action or claim.
Section 6. Representations, Warranties and Agreements to Survive
Delivery. The representations, warranties, indemnities, agreements and other
statements of the Company or their respective officers set forth in or made
pursuant to this Agreement will remain operative and in full force and effect
will survive the termination of this Agreement.
Section 7. Notices.
All notices or communications required or permitted hereunder shall be
in writing and shall be mailed or delivered as follows:
If to the Company: CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
320 S. Garfield Avenue, Suite 318
Alhambra, CA 91801
Attention: Frank Yuan
If to Broker-Dealer: (a) Drake & Co.
7 Hanover Square, 2FL
New York, NY 10004
Attention: Jason Adelman
Section 8. Miscellaneous. This Agreement contains and constitutes the
entire agreement between the parties hereto and supersedes all prior written or
oral and all contemporaneous agreements or negotiations with respect to the
subject matter hereof. The Agreement may only be amended, modified or waived in
writing signed by both parties hereto. This Agreement shall be governed in
accordance with the laws of the State of California; without reference to the
conflict of law provisions thereof. This Agreement may be executed in
counterparts.
Section 9. Governing Law and Time. This Agreement shall be governed by
the laws of the State of California. Specified time of the day refers to United
States Pacific Time. Time shall be of the essence of this Agreement.
Section 10. Counterparts. This Agreement may be executed in one or more
counterparts and when a counterpart has been executed by each party, all such
counterparts taken together shall constitute one and the same agreement.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a counterpart hereof, whereupon this
instrument will become a binding agreement among the Company and Broker-Dealer
in accordance with its terms.
Very truly yours,
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
By: ____________________________________________
Name: Frank Yuan
Title: President
Confirmed and accepted as of the date first above written:
Drake & Co.
By: ______________________________
Name: Jason Adelman
Title: