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EXHIBIT 10.7
SUBSCRIPTION AGREEMENT
Dear Subscriber:
You (the "Subscriber") hereby agree to purchase, and Aethlon Medical,
Inc., a Nevada corporation (the "Company") hereby agrees to issue and to sell to
the Subscriber, 8% Convertible Notes (the "Notes") convertible in accordance
with the terms thereof into shares of the Company's $.001 par value common stock
(the "Company Shares") for the aggregate consideration as set forth on the
signature page hereof ("Purchase Price"). The form of Convertible Note is
annexed hereto as Exhibit A. (The Company Shares included in the Securities (as
hereinafter defined) are sometimes referred to herein as the "Shares" or "Common
Stock"). (The Notes, the Company Shares, Common Stock Purchase Warrants
("Warrants") issuable to the recipients identified on Schedule B hereto, the
Common Stock issuable upon exercise of the Warrants, and the Put Securities (as
herein defined) are collectively referred to herein as, the "Securities"). Upon
acceptance of this Agreement by the Subscriber, the Company shall issue and
deliver to the Subscriber the Note against payment, by federal funds (U.S.) wire
transfer of the Purchase Price.
The following terms and conditions shall apply to this
subscription.
1. SUBSCRIBER'S REPRESENTATIONS AND WARRANTIES. The Subscriber
hereby represents and warrants to and agrees with the Company that:
(a) INFORMATION ON COMPANY. The Subscriber has been
furnished with the Company's Form 10-KSB for the year ended March 31, 2000 as
filed with the Securities and Exchange Commission (the "Commission") together
with all subsequently filed forms 10-QSB (hereinafter referred to as the
"Reports"). In addition, the Subscriber has received from the Company such other
information concerning its operations, financial condition and other matters as
the Subscriber has requested, and considered all factors the Subscriber deems
material in deciding on the advisability of investing in the Securities (such
information in writing is collectively, the "Other Written Information").
(b) INFORMATION ON SUBSCRIBER. The Subscriber is an
"accredited investor", as such term is defined in Regulation D promulgated by
the Commission under the Securities Act of 1933, as amended (the "1933 Act"), is
experienced in investments and business matters, has made investments of a
speculative nature and has purchased securities of United States publicly-owned
companies in private placements in the past and, with its representatives, has
such knowledge and experience in financial, tax and other business matters as to
enable the Subscriber to utilize the information made available by the Company
to evaluate the merits and risks of and to make an informed investment decision
with respect to the proposed purchase, which represents a speculative
investment. The Subscriber has the authority and is duly and legally qualified
to purchase and own the Securities. The Subscriber is able to bear the risk of
such investment for an indefinite period and to afford a complete loss thereof.
The information set forth on the signature page hereto regarding the Subscriber
is accurate.
(c) PURCHASE OF NOTE. On the Closing Date, the
Subscriber will purchase the Note for its own account and not with a view to any
distribution thereof.
(d) COMPLIANCE WITH SECURITIES ACT. The Subscriber
understands and agrees that the Securities have not been registered under the
1933 Act, by reason of their issuance in a transaction that does not require
registration under the 1933 Act (based in part on the accuracy of the
representations and
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warranties of Subscriber contained herein), and that such Securities must be
held unless a subsequent disposition is registered under the 1933 Act or is
exempt from such registration.
(e) COMPANY SHARES LEGEND. The Company Shares, and
the shares of Common Stock issuable upon the exercise of the Warrants, shall
bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE
SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH SECURITIES ACT OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO AETHLON MEDICAL, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED."
(f) WARRANTS LEGEND. The Warrants shall bear the
following legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED. THIS WARRANT AND THE COMMON SHARES
ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID
ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
AETHLON MEDICAL, INC. THAT SUCH REGISTRATION IS NOT REQUIRED."
(g) NOTE LEGEND. The Note shall bear the following
legend:
"THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF
THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED. THIS NOTE AND THE COMMON SHARES ISSUABLE
UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO AETHLON MEDICAL,
INC. THAT SUCH REGISTRATION IS NOT REQUIRED."
(h) COMMUNICATION OF OFFER. The offer to sell the
Securities was directly communicated to the Subscriber. At no time was the
Subscriber presented with or solicited by any leaflet, newspaper or magazine
article, radio or television advertisement, or any other form of general
advertising or solicited or invited to attend a promotional meeting otherwise
than in connection and concurrently with such communicated offer.
(i) CORRECTNESS OF REPRESENTATIONS. The Subscriber
represents that the foregoing representations and warranties are true and
correct as of the date hereof and, unless the Subscriber otherwise
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notifies the Company prior to the Closing Date (as hereinafter defined), shall
be true and correct as of the Closing Date. The foregoing representations and
warranties shall survive the Closing Date.
2. COMPANY REPRESENTATIONS AND WARRANTIES. The Company
represents and warrants to and agrees with the Subscriber that:
(a) DUE INCORPORATION. The Company and each of its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the respective jurisdictions of their incorporation
and have the requisite corporate power to own their properties and to carry on
their business as now being conducted. The Company and each of its subsidiaries
is duly qualified as a foreign corporation to do business and is in good
standing in each jurisdiction where the nature of the business conducted or
property owned by it makes such qualification necessary, other than those
jurisdictions in which the failure to so qualify would not have a material
adverse effect on the business, operations or prospects or condition (financial
or otherwise) of the Company.
(b) OUTSTANDING STOCK. All issued and outstanding
shares of capital stock of the Company and each of its subsidiaries has been
duly authorized and validly issued and are fully paid and non-assessable.
(c) AUTHORITY; ENFORCEABILITY. This Agreement has
been duly authorized, executed and delivered by the Company and is a valid and
binding agreement enforceable in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
generally and to general principles of equity; and the Company has full
corporate power and authority necessary to enter into this Agreement and to
perform its obligations hereunder and all other agreements entered into by the
Company relating hereto.
(d) ADDITIONAL ISSUANCES. There are no outstanding
agreements or preemptive or similar rights affecting the Company's common stock
or equity and no outstanding rights, warrants or options to acquire, or
instruments convertible into or exchangeable for, or agreements or
understandings with respect to the sale or issuance of any shares of common
stock or equity of the Company or other equity interest in any of the
subsidiaries of the Company, except as described in the Reports or Other Written
Information.
(e) CONSENTS. No consent, approval, authorization or
order of any court, governmental agency or body or arbitrator having
jurisdiction over the Company, or any of its affiliates, the NASD, NASDAQ or the
Company's Shareholders is required for execution of this Agreement, and all
other agreements entered into by the Company relating thereto, including,
without limitation issuance and sale of the Securities, and the performance of
the Company's obligations hereunder.
(f) NO VIOLATION OR CONFLICT. Assuming the
representations and warranties of the Subscriber in Paragraph 1 are true and
correct and the Subscriber complies with its obligations under this Agreement,
neither the issuance and sale of the Securities nor the performance of its
obligations under this Agreement and all other agreements entered into by the
Company relating thereto by the Company will:
(i) violate, conflict with, result in a
breach of, or constitute a default (or an event which with the giving of notice
or the lapse of time or both would be reasonably likely to constitute a default)
under (A) the articles of incorporation, charter or bylaws of the Company or any
of its affiliates, (B) to the Company's knowledge, any decree, judgment, order,
law, treaty, rule, regulation or determination applicable to the Company or any
of its affiliates of any court, governmental agency or body, or arbitrator
having jurisdiction over the Company or any of its affiliates or over the
properties or assets of the Company or any of its affiliates, (C) the terms of
any bond, debenture, note or any other evidence of indebtedness, or any
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agreement, stock option or other similar plan, indenture, lease, mortgage, deed
of trust or other instrument to which the Company or any of its affiliates is a
party, by which the Company or any of its affiliates is bound, or to which any
of the properties of the Company or any of its affiliates is subject, or (D) the
terms of any "lock-up" or similar provision of any underwriting or similar
agreement to which the Company, or any of its affiliates is a party; or
(ii) result in the creation or imposition of
any lien, charge or encumbrance upon the Securities or any of the assets of the
Company, or any of its affiliates.
(g) THE SECURITIES. The Securities upon issuance:
(i) are, or will be, free and clear of any
security interests, liens, claims or other encumbrances, subject to restrictions
upon transfer under the 1933 Act and State laws;
(ii) have been, or will be, duly and validly
authorized and on the date of issuance and on the Closing Date, as hereinafter
defined, and the date the Note is converted, and the Warrants are exercised, the
Securities will be duly and validly issued, fully paid and nonassessable (and if
registered pursuant to the 1933 Act, and resold pursuant to an effective
registration statement will be free trading and unrestricted, provided that the
Subscriber complies with the Prospectus delivery requirements);
(iii) will not have been issued or sold in
violation of any preemptive or other similar rights of the holders of any
securities of the Company; and
(iv) will not subject the holders thereof to
personal liability by reason of being such holders.
(h) LITIGATION. There is no pending or, to the best
knowledge of the Company, threatened action, suit, proceeding or investigation
before any court, governmental agency or body, or arbitrator having jurisdiction
over the Company, or any of its affiliates that would affect the execution by
the Company or the performance by the Company of its obligations under this
Agreement, and all other agreements entered into by the Company relating hereto.
(i) REPORTING COMPANY. The Company is a publicly-held
company whose common stock is registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"). The Company's
common stock is trading on the NASD OTC Bulletin Board ("Bulletin Board").
Pursuant to the provisions of the 1934 Act, the Company has timely filed all
reports and other materials required to be filed thereunder with the Securities
and Exchange Commission during the preceding twelve months.
(j) NO MARKET MANIPULATION. The Company has not
taken, and will not take, directly or indirectly, any action designed to, or
that might reasonably be expected to, cause or result in stabilization or
manipulation of the price of the common stock of the Company to facilitate the
sale or resale of the Securities or affect the price at which the Securities may
be issued.
(k) INFORMATION CONCERNING COMPANY. The Reports and
Other Written Information contain all material information relating to the
Company and its operations and financial condition as of their respective dates
which information is required to be disclosed therein. Since the date of the
financial statements included in the Reports, and except as modified in the
Other Written Information, there has been no material adverse change in the
Company's business, financial condition or affairs not disclosed in the Reports.
The Reports and Other Written Information do not contain any untrue statement of
a material
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fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading. The Subscriber acknowledges that
the Company announced a modification of its developmental priorities in a press
release dated October 2, 2000, and that a copy of this press release is included
in Other Written Information.
(l) DILUTION. The number of Shares issuable upon
conversion of the Note may increase substantially in certain circumstances,
including, but not necessarily limited to, the circumstance wherein the trading
price of the Common Stock declines prior to conversion of the Note. The
Company's executive officers and directors have studied and fully understand the
nature of the Securities being sold hereby 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 its obligation to
issue the Shares upon conversion of the Note and exercise of the Warrants is
binding upon the Company and enforceable, except as otherwise described in this
Subscription Agreement or the Note, regardless of the dilution such issuance may
have on the ownership interests of other shareholders of the Company.
(m) STOP TRANSFER. The Securities are restricted
securities as of the date of this Agreement. The Company will not issue any stop
transfer order or other order impeding the sale and delivery of the Securities,
except as may be required by federal securities laws.
(n) DEFAULTS. Neither the Company nor any of its
subsidiaries is in violation of its Articles of Incorporation or ByLaws. Neither
the Company nor any of its subsidiaries is (i) in default under or in violation
of any other material agreement or instrument to which it is a party or by which
it or any of its properties are bound or affected, which default or violation
would have a material adverse effect on the Company, (ii) in default with
respect to any order of any court, arbitrator or governmental body or subject to
or party to any order of any court or governmental authority arising out of any
action, suit or proceeding under any statute or other law respecting antitrust,
monopoly, restraint of trade, unfair competition or similar matters, or (iii) to
its knowledge in violation of any statute, rule or regulation of any
governmental authority which violation would have a material adverse effect on
the Company.
(o) 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 security or solicited any
offers to buy any security under circumstances that would cause the offering of
the Securities pursuant to this Agreement to be integrated with prior offerings
by the Company for purposes of the 1933 Act or any applicable stockholder
approval provisions, including, without limitation, under the rules and
regulations of the Bulletin Board, as applicable, nor will the Company or any of
its affiliates or subsidiaries take any action or steps that would cause the
offering of the Securities to be integrated with other offerings.
(p) NO GENERAL SOLICITATION. Neither the Company, nor
any of its affiliates, nor to its knowledge, any person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D under the Act) in connection with the offer
or sale of the Securities.
(q) LISTING. The Company's Common Stock is listed for
trading on the Bulletin Board and satisfies all requirements for the
continuation of such listing. The Company has not received any notice that its
common stock will be delisted from the Bulletin Board or that the Common Stock
does not meet all requirements for the continuation of such listing.
(r) NO UNDISCLOSED LIABILITIES. The Company has no
liabilities or obligations which are material, individually or in the aggregate,
which are not disclosed in the Reports and Other Written
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Information, other than those incurred in the ordinary course of the Company's
businesses since June 30, 2000 and which, individually or in the aggregate,
would not reasonably be expected to have a material adverse effect on the
Company's financial condition.
(s) NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. Since
June 30, 2000, no event or circumstance has occurred or exists with respect to
the Company or its businesses, properties, prospects, operations or financial
condition, that, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which has
not been so publicly announced or disclosed in the Reports.
(t) CORRECTNESS OF REPRESENTATIONS. The Company
represents that the foregoing representations and warranties are true and
correct as of the date hereof in all material respects, will be true and correct
as of the Closing Date, and, unless the Company otherwise notifies the
Subscriber prior to the Closing Date, shall be true and correct in all material
respects as of the Closing Date. The foregoing representations and warranties
shall survive the Closing Date.
3. REGULATION D OFFERING. This Offering is being made pursuant
to the exemption from the registration provisions of the Securities Act of 1933,
as amended, afforded by Rule 506 of Regulation D promulgated thereunder. On the
Closing Date, the Company will provide an opinion acceptable to Subscriber from
the Company's legal counsel opining on the availability of the Regulation D
exemption as it relates to the offer and issuance of the Securities. A form of
the legal opinion is annexed hereto as Exhibit C. The Company will provide, at
the Company's expense, such other legal opinions in the future as are reasonably
necessary for the conversion of the Note and exercise of the Warrants.
4. REISSUANCE OF SECURITIES. The Company agrees to reissue
certificates representing the Securities without the legends set forth in
Sections 1(e) and 1(f) above at such time as (a) the holder thereof is permitted
to and disposes of such Securities pursuant to Rule 144(d) and/or Rule 144(k)
under the 1933 Act in the opinion of counsel reasonably satisfactory to the
Company, or (b) upon resale subject to an effective registration statement after
the Securities are registered under the 1933 Act. The Company agrees to
cooperate with the Subscriber in connection with all resales pursuant to Rule
144(d) and Rule 144(k) and provide legal opinions necessary to allow such
resales provided the Company and its counsel receive all reasonably requested
representations from the Subscriber and selling broker, if any. If the Company
fails to remove any legend as required by this Section 4 (a "Legend Removal
Failure"), then beginning on the tenth (10th) day following such failure, the
Company continues to fail to remove such legend, the Company shall pay to each
Subscriber or assignee holding shares subject to a Legend Removal Failure an
amount equal to one percent (1%) of the Purchase Price of the shares subject to
a Legend Removal Failure per day that such failure continues. If during any
twelve (12) month period, the Company fails to remove any legend as required by
this Section 4 for an aggregate of thirty (30) days, each Subscriber or assignee
holding Securities subject to a Legend Removal Failure may, at its option,
require the Company to purchase all or any portion of the Securities subject to
a Legend Removal Failure held by such Subscriber or assignee at a price per
share equal to 120% of the applicable Purchase Price.
5. REDEMPTION. The Company may not redeem the Securities
without the consent of the holder of the Securities except as otherwise
described herein.
6. FEES/WARRANTS.
(a) The Company shall pay to counsel to the
Subscriber its fees, up to a maximum of $22,500 for services rendered to
Subscribers in connection with this Agreement and the other Subscription
Agreements for aggregate subscription amounts of up to $375,000 (the "Initial
Offering"), and
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acting as escrow agent for the Initial Offering. The Company will pay to the
Finders identified on Schedule B hereto a cash fee in the amount of: ten percent
(10%) of the initial $375,000 of Purchase Price and aggregate Put Purchase Price
(defined in Section 11.1(a) hereto), and set forth on the signature page hereto
("Finder's Fee"); and 4% of gross cash proceeds thereafter. The Finder's Fee
must be paid each Closing Date and Put Closing Date with respect to the Notes
issued on such date. The Finder's Fee and legal fees will be payable out of
funds held pursuant to a Funds Escrow Agreement to be entered into by the
Company, Subscriber and an Escrow Agent.
(b) The Company will also issue and deliver to the
Warrant Recipients identified on Schedule B hereto, Warrants in the amounts
designated on Schedule B hereto in connection with the Initial Offering and
exercise of the Put. A form of Warrant is annexed hereto as Exhibit D. The per
share "Purchase Price" of Common Stock as defined in the Warrant shall be equal
to one hundred and ten percent (110%) of the closing price of the Common Stock
for the trading day preceding but not including the Closing Date or Put Closing
Date, as the case may be, as reported on the NASD OTC Bulletin Board, NASDAQ
SmallCap Market, NASDAQ National Market System, American Stock Exchange, or New
York Stock Exchange (whichever of the foregoing is at the time the principal
trading exchange or market for the Common Stock, the "Principal Market"), or
such other principal market or exchange where the Common Stock is listed or
traded. The aggregate number of Common Shares purchasable upon exercise of the
Warrants is equal to the number of Common Shares that would be issued on a
Closing Date or Put Closing Date if the Notes or Put Notes issued on such
closing dates were converted on such closing date at the Conversion Price set
forth in Section 2.1(b)(i) of the Note. Failure to timely deliver the Warrants
or Finder's Fee shall be deemed an Event of Default as defined in Article III of
the Note and Put Note.
(c) The Finder's Fee and legal fees will be paid to
the Finders and attorneys only when, as, and if a corresponding subscription
amount is released from escrow to the Company and out of the escrow proceeds.
All the representations, covenants, warranties, undertakings, and
indemnification, other rights including but not limited to registration rights,
and rights in Section 9 hereof, made or granted to or for the benefit of the
Subscriber are hereby also made and granted to the Warrant Recipients in respect
of the Warrants and Company Shares issuable upon exercise of the Warrants.
(d) The holders of the Warrants are granted all the
rights, undertakings, remedies, liquidated damages and indemnification granted
to the Subscriber in connection with the Note, including but not limited to, the
rights and procedures set forth in Section 9 hereof and the registration rights
described in Section 10 hereof.
7. COVENANTS OF THE COMPANY. The Company covenants and agrees
with the Subscriber as follows:
(a) The Company will advise the Subscriber, promptly
after it receives notice of issuance by the Securities and Exchange Commission,
any state securities commission or any other regulatory authority of any stop
order or of any order preventing or suspending any offering of any securities of
the Company, or of the suspension of the qualification of the Common Stock of
the Company for offering or sale in any jurisdiction, or the initiation of any
proceeding for any such purpose.
(b) The Company shall promptly secure the listing of
the Company Shares, and Common Stock issuable upon the exercise of the Warrants
upon each national securities exchange, or automated quotation system, if any,
upon which shares of Common Stock are then listed (subject to official notice of
issuance) and shall maintain such listing so long as any other shares of Common
Stock shall be so listed. The Company will maintain the listing of its Common
Stock on a Principal Market, and will comply in all respects with the Company's
reporting, filing and other obligations under the bylaws or rules of the
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National Association of Securities Dealers ("NASD") and such exchanges, as
applicable. The Company will provide the Subscriber copies of all notices it
receives notifying the Company of the threatened and actual delisting of the
Common Stock from any Principal Market.
(c) The Company shall notify the SEC, NASD and
applicable state authorities, in accordance with their requirements, of the
transactions contemplated by this Agreement, and shall take all other necessary
action and proceedings as may be required and permitted by applicable law, rule
and regulation, for the legal and valid issuance of the Securities to the
Subscriber and promptly provide copies thereof to Subscriber.
(d) Until at least two (2) years after the
effectiveness of the Registration Statement on Form SB-2 or such other
Registration Statement described in Section 10.1(iv) hereof, the Company will
(i) cause its Common Stock to continue to be registered under Sections 12(b) or
12(g) of the Exchange Act, (ii) comply in all respects with its reporting and
filing obligations under the Exchange Act, (iii) comply with all reporting
requirements that is applicable to an issuer with a class of Shares registered
pursuant to Section 12(g) of the Exchange Act, and (iv) comply with all
requirements related to any registration statement filed pursuant to this
Agreement. The Company will not take any action or file any document (whether or
not permitted by the Act or the Exchange Act or the rules thereunder) to
terminate or suspend such registration or to terminate or suspend its reporting
and filing obligations under said Acts until the later of (y) two (2) years
after the effective date of the Registration Statement on Form SB-2 or such
other Registration Statement described in Section 10.1(iv) hereof, or (z) the
sale by the Subscribers and Warrant Recipients of all the Company Shares,
Securities and Put Securities issuable by the Company pursuant to this
Agreement. Until at least two (2) years after the Warrants have been exercised,
the Company will use its commercial best efforts to continue the listing of the
Common Stock on the Bulletin Board and will comply in all respects with the
Company's reporting, filing and other obligations under the bylaws or rules of
the NASD and NASDAQ.
(e) The Company undertakes to use the proceeds of the
Subscriber's funds for the purposes set forth on Schedule 7(e) hereto. Except as
set forth on Schedule 7(e) hereto, Note Purchase Price and Put Note Purchase
Price may not and will not be used to pay debt or non-trade obligations
outstanding on the Closing Date or Put Closing Date.
(f) The Company undertakes to acquire within three
months of the Closing Date a standard officers and directors errors and
omissions liability insurance policy covering the transactions contemplated in
this Agreement.
(g) The Company undertakes to reserve pro rata on
behalf of each holder of a Note, Put Note or Warrant, from its authorized but
unissued Common Stock, at all times that Notes, Put Notes or Warrants remain
outstanding, a number of Common Shares equal to not less than 200% of the amount
of Common Shares necessary to allow each such holder to be able to convert all
such outstanding Notes and Put Notes, at the then applicable Conversion Price
and one Common Share for each Common Share issuable upon exercise of the
Warrants.
8. COVENANTS OF THE COMPANY AND SUBSCRIBER REGARDING
IDEMNIFICATION.
(a) The Company agrees to indemnify, hold harmless,
reimburse and defend Subscriber, Subscriber's officers, directors, agents,
affiliates, control persons, and principal shareholders, against any claim,
cost, expense, liability, obligation, loss or damage (including reasonable legal
fees) of any nature, incurred by or imposed upon Subscriber or any such person
which results, arises out of or is based upon (i) any misrepresentation by
Company or breach of any warranty by Company in this Agreement or in any
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Exhibits or Schedules attached hereto; or (ii) after any applicable notice
and/or cure periods, any breach or default in performance by the Company of any
covenant or undertaking to be performed by the Company hereunder, or any other
agreement entered into by the Company and Subscribers relating hereto.
(b) Subscriber agrees to indemnify, hold harmless,
reimburse and defend the Company and each of the Company's officers and
directors at all times against any claim, cost, expense, liability, obligation,
loss or damage (including reasonable legal fees) of any nature, incurred by or
imposed upon the Company or any such person which results, arises out of or is
based upon (i) any misrepresentation by Subscriber in this Agreement or in any
Exhibits or Schedules attached hereto; or (ii) after any applicable notice
and/or cure periods, any breach or default in performance by Subscriber of any
covenant or undertaking to be performed by Subscriber hereunder, or any other
agreement entered into by the Company and Subscribers relating hereto.
(c) The procedures set forth in Section 10.6 shall
apply to the indemnifications set forth in Sections 8(a) and 8(b) above.
9.1. CONVERSION OF NOTE.
(a) Upon the conversion of the Note or part thereof,
the Company shall, at its own cost and expense, take all necessary action
(including the issuance of an opinion of counsel) to assure that the Company's
transfer agent shall issue stock certificates in the name of Subscriber (or its
nominee) or such other persons as designated by Subscriber and in such
denominations to be specified at conversion representing the number of shares of
common stock issuable upon such conversion. The Company warrants that no
instructions other than these instructions have been or will be given to the
transfer agent of the Company's Common Stock and that the Shares will be
unlegended, free-trading, and freely transferable, and will not contain a legend
restricting the resale or transferability of the Company Shares provided the
Shares are being sold pursuant to an effective registration statement covering
the Shares to be sold or are otherwise exempt from registration when sold.
(b) Subscriber will give notice of its decision to
exercise its right to convert the Note or part thereof by telecopying an
executed and completed Notice of Conversion (as defined in the Note) to the
Company. The Subscriber will not be required to surrender the Note until the
Note has been fully converted or satisfied. Each date on which a Notice of
Conversion is telecopied to the Company in accordance with the provisions hereof
shall be deemed a Conversion Date. The Company will or cause the transfer agent
to transmit the Company's Common Stock certificates representing the Shares
issuable upon conversion of the Note (and a Note representing the balance of the
Note not so converted, if requested by Subscriber) to the Subscriber via express
courier for receipt by such Subscriber within five (5) business days after
receipt by the Company of the Notice of Conversion (the "Delivery Date"). To the
extent that a Subscriber elects not to surrender a Note for reissuance upon
partial payment or conversion, the Subscriber hereby indemnifies the Company
against any and all loss or damage attributable to a third-party claim in an
amount in excess of the actual amount then due under the Note.
(c) The Company understands that a delay in the
delivery of the Shares in the form required pursuant to Section 9 hereof, or the
Mandatory Redemption Amount described in Section 9.2 hereof, beyond the Delivery
Date or Mandatory Redemption Payment Date (as hereinafter defined) could result
in economic loss to the Subscriber. As compensation to the Subscriber for such
loss, the Company agrees to pay late payments to the Subscriber for late
issuance of Shares in the form required pursuant to Section 9 hereof upon
Conversion of the Note or late payment of the Mandatory Redemption Amount, in
the amount of $100 per business day after the Delivery Date or Mandatory
Redemption Payment Date, as the case may be, for each $10,000 of Note principal
amount being converted or redeemed. The Company shall pay any
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payments incurred under this Section in immediately available funds upon demand.
Furthermore, in addition to any other remedies which may be available to the
Subscriber, in the event that the Company fails for any reason to effect
delivery of the Shares by the Delivery Date or make payment by the Mandatory
Redemption Payment Date, the Subscriber will be entitled to revoke all or part
of the relevant Notice of Conversion or rescind all or part of the notice of
Mandatory Redemption by delivery of a notice to such effect to the Company
whereupon the Company and the Subscriber shall each be restored to their
respective positions immediately prior to the delivery of such notice, except
that late payment charges described above shall be payable through the date
notice of revocation or rescission is given to the Company.
(d) Nothing contained herein or in any document
referred to herein or delivered in connection herewith shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest or dividends required to be paid or other charges hereunder exceed the
maximum permitted by such law, any payments in excess of such maximum shall be
credited against amounts owed by the Company to the Subscriber and thus refunded
to the Company.
9.2. MANDATORY REDEMPTION. In the event the Company is
prohibited from issuing Shares or fails to timely deliver Shares on a Delivery
Date or during the pendency of an Approval Default for any reason other than
pursuant to the limitations set forth in Section 9.3 hereof, then at the
Subscriber's election, the Company must pay to the Subscriber five (5) business
days after request by the Subscriber or on the Delivery Date (if requested by
the Subscriber) a sum of money determined by multiplying the principal amount of
the Note designated by the Subscriber by 130%, together with accrued but unpaid
interest thereon ("Mandatory Redemption Payment"). The Mandatory Redemption
Payment must be received by the Subscriber on the same date as the Company
Shares otherwise deliverable or within five (5) business days after request,
whichever is sooner ("Mandatory Redemption Payment Date"). Upon receipt of the
Mandatory Redemption Payment, the corresponding Note principal and interest will
be deemed paid and no longer outstanding.
9.3. MAXIMUM CONVERSION. The Subscriber shall not be entitled
to convert on a Conversion Date that amount of the Note in connection with that
number of shares of Common Stock which would be in excess of the sum of (i) the
number of shares of Common Stock beneficially owned by the Subscriber and its
affiliates on a Conversion Date, and (ii) the number of shares of Common Stock
issuable upon the conversion of the Note with respect to which the determination
of this proviso is being made on a Conversion Date, which would result in
beneficial ownership by the Subscriber and its affiliates of more than 9.99% of
the outstanding shares of Common Stock of the Company on such Conversion Date.
For the purposes of the proviso to the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder.
Subject to the foregoing, the Subscriber shall not be limited to aggregate
conversions of only 9.99%. The Subscriber may void the conversion limitation
described in this Section 9.3 upon 75 days prior notice to the Company. The
Subscriber may allocate which of the equity of the Company deemed beneficially
owned by the Subscriber shall be included in the 9.99% amount described above
and which shall be allocated to the excess above 9.99%.
9.4. INJUNCTION - POSTING OF BOND. The Company may not refuse
conversion of a Note based on any claim that such Subscriber or any one
associated or affiliated with such Subscriber has been engaged in any violation
of law, or for any other reason, unless, an injunction from a court, on notice,
restraining and or enjoining conversion of all or part of said Note shall have
been sought and obtained and the Company posts a surety bond for the benefit of
such Subscriber in the amount of 130% of the amount of the Note, which is
subject to the injunction, which bond shall remain in effect until the
completion of
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arbitration/litigation of the dispute and the proceeds of which shall be payable
to such Subscriber to the extent it obtains judgment.
9.5. BUY-IN. In addition to any other rights available to the
Subscriber, if the Company fails to deliver to the Subscriber such shares
issuable upon conversion of a Note by the Delivery Date and if after the
Delivery Date the Subscriber purchases (in an open market transaction or
otherwise) shares of Common Stock to deliver in satisfaction of a sale by such
Subscriber of the Common Stock which the Subscriber anticipated receiving upon
such conversion (a "Buy-In"), then the Company shall pay in cash to the
Subscriber (in addition to any remedies available to or elected by the
Subscriber) the amount by which (A) the Subscriber's total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased exceeds (B) the aggregate principal and/or interest amount of the Note
for which such conversion was not timely honored, together with interest thereon
at a rate of 15% per annum, accruing until such amount and any accrued interest
thereon is paid in full (which amount shall be paid as liquidated damages and
not as a penalty). For example, if the Subscriber purchases shares of Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect to
an attempted conversion of $10,000 of note principal and/or interest, the
Company shall be required to pay the Subscriber $1,000, plus interest. The
Subscriber shall provide the Company written notice indicating the amounts
payable to the Subscriber in respect of the Buy-In.
9.6. OPTIONAL REDEMPTION. The Company will have the option of
redeeming any outstanding Notes and outstanding Put Notes ("Optional
Redemption") by paying to the Subscriber a sum of money equal to the principal
amount of the Note or Put Note together with accrued but unpaid interest thereon
("Redemption Amount") outstanding on the day notice of redemption ("Notice of
Redemption) is given to a Subscriber ("Redemption Date"). A Notice of Redemption
may not be given in connection with any portion of Note or Put Note for which
notice of conversion has been given by the Subscriber at any time before receipt
of a Notice of Redemption. The Subscriber may elect within seven (7) business
days after receipt of a Notice of Redemption to give the Company Notice of
Conversion in connection with some or all of the Note and Put Note principal and
interest which was the subject of the Notice of Redemption provided the
Conversion Price elected by the Subscriber is the Maximum Base Price set forth
in Section 2.1(b)(i) of the Note or Put Note. A Notice of Redemption must be
accompanied by a certificate signed by the chief executive officer or chief
financial officer of the Company stating that the Company has on deposit and
segregated ready funds equal to the Redemption Amount. The Redemption Amount
must be paid in good funds to the Subscriber no later than the fifth (5th)
business day after the Redemption Date. In the event the Company fails to pay
the Redemption Amount by such date, then the Redemption Notice will be null and
void and the Company will thereafter have no further right to effect an Optional
Redemption. Such failure will also be deemed an Event of Default under the Note
and Put Note. Any Notice of Redemption must be given to all holders of Notes and
Put Notes issued in connection with the Initial Offering, in proportion to their
holdings of Note and Put Note principal on a Redemption Date. A Notice of
Redemption may be given by the Company, provided (i) no Event of Default, as
described in the Note shall have occurred or be continuing; (ii) the Company
Shares issuable upon conversion of the full outstanding Note and Put Note
principal are included in a registration statement effective as of the
Redemption Date; and (iii) the Maximum Base Price is less than the Conversion
Price calculated on the Redemption Date pursuant to Section 2.1(b)(i) of the
Note or Put Note. Put Note proceeds may not be used to effect an Optional
Redemption.
10.1. REGISTRATION RIGHTS. The Company hereby grants the
following registration rights to holders of the Securities.
(i) On one occasion, for a period commencing
121 days after the Closing Date, but not later than four years after the Closing
Date ("Request Date"), the Company, upon a written request therefor from any
record holder or holders of more than 50% of the aggregate of the Company's
Shares issued
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and issuable upon Conversion of the Note and the Put Notes which are actually
issued (the Common Stock issued or issuable upon conversion or exercise of the
Securities, Put Securities and securities issued or issuable by virtue of
ownership of the Securities, and Put Securities, being, the "Registrable
Securities"), shall prepare and file with the SEC a registration statement under
the Act covering the Registrable Securities which are the subject of such
request, unless such Registrable Securities are the subject of an effective
registration statement. In addition, upon the receipt of such request, the
Company shall promptly give written notice to all other record holders of the
Registrable Securities that such registration statement is to be filed and shall
include in such registration statement Registrable Securities for which it has
received written requests within 10 days after the Company gives such written
notice. Such other requesting record holders shall be deemed to have exercised
their demand registration right under this Section 10.1(i). As a condition
precedent to the inclusion of Registrable Securities, the holder thereof shall
provide the Company with such information as the Company reasonably requests.
The obligation of the Company under this Section 10.1(i) shall be limited to one
registration statement.
(ii) If the Company at any time proposes to
register any of its securities under the Act for sale to the public, whether for
its own account or for the account of other security holders or both, except
with respect to registration statements on Forms S-4, S-8 or another form not
available for registering the Registrable Securities for sale to the public,
provided the Registrable Securities are not otherwise registered for resale by
the Subscriber or Holder pursuant to an effective registration statement, each
such time it will give at least 30 days' prior written notice to the record
holder of the Registrable Securities of its intention so to do. Upon the written
request of the holder, received by the Company within 30 days after the giving
of any such notice by the Company, to register any of the Registrable
Securities, the Company will cause such Registrable Securities as to which
registration shall have been so requested to be included with the securities to
be covered by the registration statement proposed to be filed by the Company,
all to the extent required to permit the sale or other disposition of the
Registrable Securities so registered by the holder of such Registrable
Securities (the "Seller"). In the event that any registration pursuant to this
Section 10.1(ii) shall be, in whole or in part, an underwritten public offering
of common stock of the Company, the number of shares of Registrable Securities
to be included in such an underwriting may be reduced by the managing
underwriter if and to the extent that the Company and the underwriter shall
reasonably be of the opinion that such inclusion would adversely affect the
marketing of the securities to be sold by the Company therein; provided,
however, that the Company shall notify the Seller in writing of any such
reduction. Notwithstanding the forgoing provisions, or Section 10.4 hereof, the
Company may withdraw or delay or suffer a delay of any registration statement
referred to in this Section 10.1(ii) without thereby incurring any liability to
the Seller.
(iii) If, at the time any written request
for registration is received by the Company pursuant to Section 10.1(i), the
Company has determined to proceed with the actual preparation and filing of a
registration statement under the 1933 Act in connection with the proposed offer
and sale for cash of any of its securities for the Company's own account, such
written request shall be deemed to have been given pursuant to Section 10.1(ii)
rather than Section 10.1(i), and the rights of the holders of Registrable
Securities covered by such written request shall be governed by Section
10.1(ii).
(iv) The Company shall file with the
Commission within 45 days of the Closing Date (the "Filing Date"), and use its
reasonable commercial efforts to cause to be declared effective a Form SB-2
registration statement (or such other form that it is eligible to use) within 90
days of the Closing Date in order to register the Registrable Securities for
resale and distribution under the Act. The registration statement described in
this paragraph must be declared effective by the Commission within 90 days of
the Closing Date (as defined herein) ("Effective Date"). The Company will
register not less than a number of shares of Common Stock in the aforedescribed
registration statement that is equal to 200% of the Company Shares issuable at
the Conversion Price that would be in effect on the Closing Date or the date of
filing of such registration statement (employing the Conversion Price which
would result in the greater number of Shares),
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assuming the conversion of 100% of the Notes and the Put Notes which are
issuable, and one share of common stock for each common share issuable upon
exercise of the Initial Warrants and Put Warrants which are issuable in
connection with the Put, employing the Conversion Price that would result in the
greater number of Shares. The Registrable Securities shall be reserved and set
aside exclusively for the benefit of the Subscriber and Warrant Recipients, as
the case may be, and not issued, employed or reserved for anyone other than the
Subscriber and Warrant Recipients. Such registration statement will be promptly
amended or additional registration statements will be promptly filed by the
Company as necessary to register additional Company Shares to allow the public
resale of all Common Stock included in and issuable by virtue of the Registrable
Securities. No securities of the Company other than the Registrable Securities
will be included in the registration statement described in this Section
10.1(iv).
10.2. REGISTRATION PROCEDURES. If and whenever the Company is
required by the provisions hereof to effect the registration of any shares of
Registrable Securities under the Act, the Company will, as expeditiously as
possible:
(a) prepare and file with the Commission a
registration statement with respect to such securities and use its best efforts
to cause such registration statement to become and remain effective for the
period of the distribution contemplated thereby (determined as herein provided),
and promptly provide to the holders of Registrable Securities copies of all
filings and Commission letters of comment;
(b) prepare and file with the Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective until the latest of: (i) six months after the latest
exercise period of the Warrants; (ii) twelve months after the Maturity Date of
the Note or Put Note; or (iii) two years after the Closing Date, or Put Closing
Date and comply with the provisions of the Act with respect to the disposition
of all of the Registrable Securities covered by such registration statement in
accordance with the Seller's intended method of disposition set forth in such
registration statement for such period;
(c) furnish to the Seller, and to each underwriter if
any, such number of copies of the registration statement and the prospectus
included therein (including each preliminary prospectus) as such persons
reasonably may request in order to facilitate the public sale or their
disposition of the securities covered by such registration statement;
(d) use its best efforts to register or qualify the
Seller's Registrable Securities covered by such registration statement under the
securities or "blue sky" laws of such jurisdictions as the Seller and in the
case of an underwritten public offering, the managing underwriter shall
reasonably request, provided, however, that the Company shall not for any such
purpose be required to qualify generally to transact business as a foreign
corporation in any jurisdiction where it is not so qualified or to consent to
general service of process in any such jurisdiction;
(e) list the Registrable Securities covered by such
registration statement with any securities exchange on which the Common Stock of
the Company is then listed;
(f) immediately notify the Seller and each
underwriter under such registration statement at any time when a prospectus
relating thereto is required to be delivered under the Act, of the happening of
any event of which the Company has knowledge as a result of which the prospectus
contained in such 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 not misleading in
light of the circumstances then existing;
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(g) make available for inspection by the Seller, any
underwriter participating in any distribution pursuant to such registration
statement, and any attorney, accountant or other agent retained by the Seller or
underwriter, all publicly available, non-confidential financial and other
records, pertinent corporate documents and properties of the Company, and cause
the Company's officers, directors and employees to supply all publicly
available, non-confidential information reasonably requested by the seller,
underwriter, attorney, accountant or agent in connection with such registration
statement.
10.3. PROVISION OF DOCUMENTS.
(a) At the request of the Seller, provided a demand
for registration has been made pursuant to Section 10.1(i) or a request for
registration has been made pursuant to Section 10.1(ii), the Registrable
Securities will be included in a registration statement filed pursuant to this
Section 10.
(b) In connection with each registration hereunder,
the Seller will furnish to the Company in writing such information and
representation letters with respect to itself and the proposed distribution by
it as reasonably shall be necessary in order to assure compliance with federal
and applicable state securities laws. In connection with each registration
pursuant to Section 10.1(i) or 10.1(ii) covering an underwritten public
offering, the Company and the Seller agree to enter into a written agreement
with the managing underwriter in such form and containing such provisions as are
customary in the securities business for such an arrangement between such
underwriter and companies of the Company's size and investment stature.
10.4. NON-REGISTRATION EVENTS. The Company and the Subscriber
agree that the Seller will suffer damages if any registration statement required
under Section 10.1(i) or 10.1(ii) above is not filed within 60 days after
written request by the Holder and not declared effective by the Commission
within 120 days after such request [or the Filing Date and Effective Date,
respectively, in reference to the Registration Statement on Form SB-2 or such
other form described in Section 10.1(iv)], and maintained in the manner and
within the time periods contemplated by Section 10 hereof, and it would not be
feasible to ascertain the extent of such damages with precision. Accordingly, if
(i) the Registration Statement described in Sections 10.1(i) or 10.1(ii) is not
filed within 60 days of such written request, or is not declared effective by
the Commission on or prior to the date that is 120 days after such request, or
(ii) the registration statement on Form SB-2 or such other form described in
Section 10.1(iv) is not filed on or before the Filing Date or not declared
effective on or before the sooner of the Effective Date, or within five days of
receipt by the Company of a communication from the Commission that the
registration statement described in Section 10.1(iv) will not be reviewed, or
(iii) any registration statement described in Sections 10.1(i), 10.1(ii) or
10.1(iv) is filed and declared effective but shall thereafter cease to be
effective (without being succeeded immediately by an additional registration
statement filed and declared effective) for a period of time which shall exceed
30 days in the aggregate per year but not more than 20 consecutive calendar days
(defined as a period of 365 days commencing on the date the Registration
Statement is declared effective) (each such event referred to in clauses (i),
(ii) and (iii) of this Section 10.4 is referred to herein as a "Non-Registration
Event"), then, for so long as such Non-Registration Event shall continue, the
Company shall pay in cash as Liquidated Damages to each holder of any
Registrable Securities an amount equal to two (2%) percent per month for the
first sixty (60) days or part thereof and three (3%) percent per month for each
thirty days or part thereof, thereafter during the pendency of such
Non-Registration Event, of (i) the principal of the Notes issued in connection
with the Initial Offering, whether or not converted; (ii) the principal amount
of Put Notes actually issued, whether or not converted, then owned of record by
such holder or issuable as of or subsequent to the occurrence of such
Non-Registration Event. Payments to be made pursuant to this Section 10.4 shall
be due and payable immediately upon demand in immediately available funds. In
the event a Mandatory Redemption Payment is demanded from the Company by the
Holder pursuant to Section 9.2 of this Subscription Agreement, then the
Liquidated Damages described in this Section 10.4 shall no longer accrue on the
portion of the Purchase Price underlying the Mandatory
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Redemption Payment, from and after the date the Holder receives the Mandatory
Redemption Payment. It shall be deemed a Non-Registration Event to the extent
that all the Common Stock underlying the Registrable Securities is not included
in an effective registration statement as of and after the Effective Date at the
Conversion Prices in effect from and after the Effective Date.
10.5. EXPENSES. All expenses incurred by the Company in
complying with Section 10, including, without limitation, all registration and
filing fees, printing expenses, fees and disbursements of counsel and
independent public accountants for the Company, fees and expenses (including
reasonable counsel fees) incurred in connection with complying with state
securities or "blue sky" laws, fees of the National Association of Securities
Dealers, Inc., transfer taxes, fees of transfer agents and registrars, and costs
of insurance are called "Registration Expenses". All underwriting discounts and
selling commissions applicable to the sale of Registrable Securities, including
any fees and disbursements of any special counsel to the Seller, are called
"Selling Expenses". The Seller shall pay the fees of its own additional counsel,
if any. The Company will pay all Registration Expenses in connection with the
registration statement under Section 10. All Selling Expenses in connection with
each registration statement under Section 10 shall be borne by the Seller and
may be apportioned among the Sellers in proportion to the number of shares sold
by the Seller relative to the number of shares sold under such registration
statement or as all Sellers thereunder may agree.
10.6. INDEMNIFICATION AND CONTRIBUTION.
(a) In the event of a registration of any Registrable
Securities under the Act pursuant to Section 10, the Company will indemnify and
hold harmless the Seller, each officer of the Seller, each director of the
Seller, each underwriter of such Registrable Securities thereunder and each
other person, if any, who controls such Seller or underwriter within the meaning
of the 1933 Act, against any losses, claims, damages or liabilities, joint or
several, to which the Seller, or such underwriter or controlling person may
become subject under the 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 any material fact
contained in any registration statement under which such Registrable Securities
was registered under the Act pursuant to Section 10, any preliminary prospectus
or final prospectus contained therein, or any amendment or supplement thereof,
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 not misleading, and will reimburse the Seller, each such
underwriter and each such 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
Company shall not be liable to the Seller to the extent that any such damages
arise out of or are based upon an untrue statement or omission made in any
preliminary prospectus if (i) the Seller failed to send or deliver a copy of the
final prospectus delivered by the Company to the Seller with or prior to the
delivery of written confirmation of the sale by the Seller to the person
asserting the claim from which such damages arise, (ii) the final prospectus
would have corrected such untrue statement or alleged untrue statement or such
omission or alleged omission, or (iii) 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 so made in conformity
with information furnished by any such Seller, or any such controlling person in
writing specifically for use in such registration statement or prospectus.
(b) In the event of a registration of any of the
Registrable Securities under the Act pursuant to Section 10, the Seller will
indemnify and hold harmless the Company, and each person, if any, who controls
the Company within the meaning of the Act, each officer of the Company who signs
the registration statement, each director of the Company, each underwriter and
each person who controls any underwriter within the meaning of the Act, against
all losses, claims, damages or liabilities, joint or several, to which the
Company or such officer, director, underwriter or controlling person may become
subject under the 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 any material fact contained in
the
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registration statement under which such Registrable Securities were registered
under the Act pursuant to Section 10, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereof, 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 not misleading, and will reimburse the Company and each such officer,
director, underwriter and 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
Seller will be liable hereunder in any such case if and only 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 reliance upon and in conformity with information pertaining to such
Seller, as such, furnished in writing to the Company by such Seller specifically
for use in such registration statement or prospectus, and provided, further,
however, that the liability of the Seller hereunder shall be limited to the
gross proceeds received by the Seller from the sale of Registrable Securities
covered by such registration statement.
(c) Promptly after receipt by an indemnified party
hereunder 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 hereunder, notify the indemnifying party in writing thereof, but the
omission so to notify the indemnifying party shall not relieve it from any
liability which it may have to such indemnified party other than under this
Section 10.6(c) and shall only relieve it from any liability which it may have
to such indemnified party under this Section 10.6(c), except and only if and to
the extent the indemnifying party is prejudiced by such omission. 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 in and, to the extent it shall wish, to assume and
undertake the defense thereof with counsel satisfactory to such indemnified
party, and, after notice from the indemnifying party to such indemnified party
of its election so to assume and undertake the defense thereof, the indemnifying
party shall not be liable to such indemnified party under this Section 10.6(c)
for any legal expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of investigation
and of liaison with counsel so selected, provided, however, that, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be reasonable defenses available to it which are different from
or additional to those available to the indemnifying party or if the interests
of the indemnified party reasonably may be deemed to conflict with the interests
of the indemnifying party, the indemnified parties shall have the right to
select one separate counsel and to assume such legal defenses and otherwise to
participate in the defense of such action, with the reasonable expenses and fees
of such separate counsel and other expenses related to such participation to be
reimbursed by the indemnifying party as incurred.
(d) In order to provide for just and equitable
contribution in the event of joint liability under the Act in any case in which
either (i) the Seller, or any controlling person of the Seller, makes a claim
for indemnification pursuant to this Section 10.6 but it is 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 last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 10.6 provides for indemnification in
such case, or (ii) contribution under the Act may be required on the part of the
Seller or controlling person of the Seller in circumstances for which
indemnification is provided under this Section 10.6; then, and in each such
case, the Company and the Seller will contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportion so that the Seller is responsible only for the
portion represented by the percentage that the public offering price of its
securities offered by the registration statement bears to the public offering
price of all securities offered by such registration statement, provided,
however, that, in any such case, (y) the Seller will not be required to
contribute any amount in excess of the public offering price of all such
securities offered by it pursuant to such registration statement; and (z) no
person or entity guilty of fraudulent misrepresentation (within the meaning of
Section 10(f) of the Act) will be entitled to contribution from any
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person or entity who was not guilty of such fraudulent misrepresentation.
11.1. OBLIGATION TO PURCHASE.
(a) The Subscriber agrees to purchase from the
Company convertible notes ("Put Notes") in up to the principal amount set forth
on the signature page hereto for up to the aggregate amount of Put Note
principal ("Put Purchase Price") designated on the signature page hereto (the
"Put"). Collectively the Put Notes, Warrants issuable in connection with the
Put, and Common Stock issuable upon conversion of the Put Notes and exercise of
the Warrants are referred to as the "Put Securities".) The Warrants issuable in
connection with the Put Notes are referred to herein as Warrants or Put
Warrants. Except as described in Section 11.1(c) hereof, each Put Note will be
identical to the Note except that the Maturity Date will be two years from each
Put Closing Date (as hereinafter defined). The Holders of the Put Securities are
granted all the rights, undertakings, remedies, liquidated damages and
indemnification granted to the Subscriber in connection with the Note, including
but not limited to, the rights and procedures set forth in Section 9 hereof and
the registration rights described in Section 10 hereof.
(b) The agreement to purchase the Put Notes is
contingent on the following any, some or all of which may be waived by the
Subscriber:
(i) As of a Put Date and Put Closing Date
(as hereinafter defined), the Common Shares issuable upon conversion of a Put
Note and exercise of Put Warrants must be included in an effective registration
statement described in Section 10 hereof.
(ii) As of a Put Date and Put Closing Date,
the Company will be a reporting company with the class of Shares registered
pursuant to Section 12(g) of the Securities Exchange Act of 1934.
(iii) No material adverse change in the
Company's business or business prospects shall have occurred after the date of
the most recent financial statements included in the Reports. Material adverse
change is defined as any effect on the business, operations, properties,
prospects, or financial condition of the Company that is material and adverse to
the Company and its subsidiaries and affiliates, taken as a whole, and/or any
condition, circumstance, or situation that would prohibit or otherwise interfere
with the ability of the Company to enter into and perform any of its obligations
under this Agreement, or any other agreement entered into or to be entered into
in connection herewith, in any material respect. There shall not have been a
material negative restatement of the Company's financial statements included in
the Reports.
(iv) An Event of Default as described in
Article III of the Note shall not have occurred.
(v) The execution and delivery to the
Subscriber of a certificate signed by its chief executive officer representing
the truth and accuracy of all the Company's representations and warranties
contained in this Subscription Agreement as of the Put Date, and Put Closing
Date and confirming the undertakings contained herein, and representing the
satisfaction of all contingencies and conditions required for the exercise of
the Put.
(vi) The Company's listing on, and
compliance with the listing requirements of the Principal Market.
17
<PAGE>
(vii) The Company's not having received
notice from the Bulletin Board, or any Principal Market that the Company is not
in compliance with the requirements for continued listing.
(viii) The execution by the Company and
delivery to the Subscriber of all required documents in relation to the Put set
forth in Section 11.2 below and such other documents which may be reasonably
requested by the Subscriber.
(ix) No issuance of an SEC stop trade order.
(x) The Company shall have no knowledge that
any of the foregoing conditions shall not be true and accurate as of a date
fifteen days after a Put Closing Date.
(c) Subject to the adjustments set forth in the Note,
the Conversion Price of the Put Note shall be the lesser of (i) the Maximum Base
Price (as defined in the Note) of the Note issued in connection with the Initial
Offering, or (ii) 82.5% of the average of the three lowest closing bid prices of
the Common Stock on the Principal Market for the ten (10) trading days prior to
the Conversion Date, as defined in the Note.
11.2. EXERCISE OF PUT.
(a) The Company's right to exercise the Put commences
thirty days after the actual effective date of the registration statement
described in Section 10.1(iv) hereof and expires two (2) years after the
Effective Date ("Put Exercise Period").
(b) The Put may be exercised by the Company by giving
the Subscriber written notice of exercise ("Put Notice") not more often than one
time each calendar month during the Put Exercise Period in relation to up to the
maximum principal amount of Put Note that the Subscriber has agreed to purchase
subject to the limits described in this Agreement. The date a Put Notice is
given is a Put Date. Each Put Notice must be accompanied by (i) the officer's
certificate described in Section 11.1(b)(v) above; (ii) a legal opinion relating
to the Put Securities in form reasonably acceptable to Subscriber substantially
similar to the opinion annexed hereto as Exhibit C; (iii) proof of effectiveness
of the registration statement described in Section 10 above, together with five
copies of the prospectus portion thereof; and (iv) such other documents and
certificates reasonably requested by the Subscriber.
(c) Unless otherwise agreed to by the Subscribers,
Put Notices must be given to all Subscribers in proportion to the amounts agreed
to be purchased by all Subscribers undertaking to purchase Put Notes in the
Initial Offering.
(d) Payment by the Subscriber in relation to a Put
Notice relating to a Put must be made within ten (10) business days after
receipt of a Put Notice and the items set forth in Section 11.2(b) above.
Payment will be made against delivery to the Subscriber or an escrow agent to be
agreed upon by the Company and Subscriber, of the Put Securities, and delivery
to the Finders of the Finder's Fee and Warrants relating to the Put being
exercised which the Company may elect to be paid out of funds deposited with the
escrow agent.
(e) The Company may exercise the Put subject to the
following limitations:
18
<PAGE>
(i) The Company may not give the Subscriber
a Put Notice in connection with that amount of Put Note which could be converted
as of the Put Date into a number of shares of Common Stock which would be in
excess of the sum of (y) the number of shares of Common Stock beneficially owned
by the Subscriber and its affiliates on such Put Date, and (z) the number of
shares of Common Stock issuable upon the conversion of the Put Note with respect
to which the determination of this proviso is being made on a Put Date, which
would result in beneficial ownership by the Subscriber and its affiliates of
more than 9.99% of the outstanding shares of Common Stock of the Company on such
Put Date. For the purposes of the proviso to the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder.
Subject to the foregoing, the Subscriber shall not be limited to aggregate
conversions of only 9.99%. The Subscriber may revoke the restriction described
in this paragraph upon 75 days prior notice to the Company. The Subscriber shall
have the right to determine which of the equity of the Company deemed
beneficially owned by the Subscriber shall be included in the 9.99% described
above and which shall be allocated to the excess above 9.99%.
(ii) The aggregate amount of all Put Notices
to all Subscribers of the Initial Offering may not exceed $4,625,000. The
aggregate maximum principal amount of Put Notes for which Put Notices may be
given during any calendar month to all Subscribers in the Initial Offering may
not exceed ten (10%) of the daily weighted average price of the Common Stock on
the Principal Market as reported by Bloomberg Financial using the AQR function
for the thirty calendar days prior to but not including the Put Date, multiplied
by the reported daily trading volume of the Common Stock for each such day
("Trading Volume Limitation").
(iii) Anything to the contrary herein
notwithstanding, the Company may not exercise the Put for aggregate Put amounts
from Investors to the Initial Offering in excess of $375,000 nor less than
$100,000 during any calendar month.
(f) In the event the Company does not exercise the
Put during any calendar month during the Put Exercise Period for the entire
permitted Put amount, then the Subscriber may exercise the Put in relation only
to such Subscriber, by giving notice to the Company of such exercise during the
first seven (7) business days of each following month.
11.3. PUT FINDERS FEES. The Finders identified on Schedule B
hereto shall receive on each Put Closing Date aggregate Finder's Fees as
described in Section 6 hereof in connection with the closing of each Put as set
forth on Schedule B hereto. Put Finder's Fees shall be payable only in
connection with the Put Purchase Price actually paid by a Subscriber. The Put
Finder's Fees and reasonable legal fees for counsel to the Subscriber shall be
paid at each Put Closing. The legal fee to be paid by the Company to one counsel
for the Subscribers to the Initial Offering shall be not less than $2,500 nor
more than $4,000 per Put Closing with an aggregate legal fee not to exceed
$10,000.
11.4. WARRANTS.
(a) The Company shall issue Warrants to the Warrant
Recipients in the amounts designated on Schedule B hereto and as described in
Section 6 of this Agreement. The Warrants will be in the form of Exhibit D
hereto. The Warrants will be exercisable immediately upon issuance and for five
years thereafter.
19
<PAGE>
(b) Failure to timely pay Finder's Fees, legal fees
or deliver any Warrants issuable in connection with the Initial Offering and Put
shall be deemed an Event of Default under the Note and a material breach of the
Company's obligations hereunder, for which no notice to cure is required.
11.5 ASSIGNMENT OF PUT. Anything to the contrary herein
notwithstanding, the Subscriber may assign to another party, reasonably
acceptable to the Company, either before or after exercise of the Put by the
Company, the Subscriber's obligations and right to pay all or some of the Put
Purchase Price and receive the corresponding Put Securities. Such assignment
must be in writing. The assignment will be effective only if the assignee
consents in writing to be bound by all of the Subscriber's obligations to the
Company in connection with such assignment. Upon an effective assignment, the
assignee will succeed to all of the Subscriber's rights under this Subscription
Agreement, and all other agreements relating to the assigned portion of the Put.
11.6 ADJUSTMENTS. The Conversion Price and amount of Shares
issuable upon conversion of the Notes and Put Notes shall be adjusted consistent
with customary anti-dilution adjustments.
12. (a) RIGHT OF FIRST REFUSAL. Until the latest of (i)
180 days after the actual effective date of the Registration Statement described
in Section 10.1(iv) hereof, (ii) one year after the Closing Date, or (iii) 180
days after the most recent Put Closing Date (the "Exclusion Period"), the
Subscriber shall be given not less than ten (10) business days prior written
notice of any proposed sale by the Company of its common stock or other
securities or debt obligations except as disclosed in the Reports or Other
Written Information (these exceptions hereinafter referred to as the "Excepted
Issuances"). The Subscriber shall have the right during the ten (10) business
days following the notice to agree to purchase an amount of Company Shares in
the same proportion as being purchased in the Initial Offering of those
securities proposed to be issued and sold, in accordance with the terms and
conditions set forth in the notice of sale. In the event such terms and
conditions are modified during the notice period, the Subscriber shall be given
prompt notice of such modification and shall have the right during the original
notice period or for a period of ten (10) business days following the notice of
modification, whichever is longer, to exercise such right. In the event the
right of first refusal described in this Section is exercised by the Subscriber
and the Company thereby receives net proceeds from such exercise, then
commissions and fees will be paid by the Company to the Finders in the same
amounts as would be payable in connection with the offering described in the
notice of sale. Payment for the securities may be made by the Subscriber by
tender to the Company of all or part of the Note or Put Note and application
towards the purchase price of the securities of any sums due or owing from the
Company to the Subscriber.
(b) OFFERING RESTRICTIONS. Except with respect to the
Excepted Issuances, the Company will not issue any equity, convertible debt or
other securities prior to the expiration of the Exclusion Period at a price
below the lowest Conversion Price in effect on the date of issuance and/or
conversion without the consent of the Subscriber. Until four months after the
Closing Date, the Company may issue to an investor acceptable to the Subscriber
herein, up to the same amount of Convertible Notes and Put Notes as issuable
pursuant to this Agreement on the same terms and conditions as set forth herein.
Any deviation from the terms and conditions described herein must be approved by
the Subscriber.
13. MISCELLANEOUS.
(a) NOTICES. All notices or other communications
given or made hereunder shall be in writing and shall be personally delivered or
deemed delivered the first business day after being telecopied
20
<PAGE>
(provided that a copy is delivered by first class mail) to the party to receive
the same at its address set forth below or to such other address as either party
shall hereafter give to the other by notice duly made under this Section: (i) if
to the Company, to Aethlon Medical, Inc., 7825 Fay Avenue, Suite 200, La Jolla,
CA 92037, telecopier number: (858) 456-4690, with a copy by telecopier only to:
Gibson, Haglund & Paulsen, Jamboree Center, 2 Park Plaza, Suite 450, Irvine, CA
92614, Attn: Bruce H. Haglund, Esq., telecopier number: (949) 752-1144, and (ii)
if to the Subscriber, to the name, address and telecopy number set forth on the
signature page hereto, with a copy by telecopier only to Grushko & Mittman,
P.C., 551 Fifth Avenue, Suite 1601, New York, New York 10176, telecopier number:
(212) 697-3575. Any notice that may be given pursuant to this Agreement, or any
document delivered in connection with the foregoing may be given by the
Subscriber on the first business day after the observance dates in the United
States of America by Orthodox Jewry of Rosh Hashanah, Yom Kippur, the first two
days of the Feast of Tabernacles, Shemini Atzeret, Simchat Torah, the first two
and final two days of Passover and Pentecost, with such notice to be deemed
given and effective, at the election of the Subscriber on a holiday date that
precedes such notice. Any notice received by the Subscriber on any of the
aforedescribed holidays may be deemed by the Subscriber to be received and
effective as if such notice had been received on the first business day after
the holiday.
(b) CLOSING. The consummation of the transactions
contemplated herein shall take place at the offices of Grushko & Mittman, P.C.,
551 Fifth Avenue, Suite 1601, New York, New York 10176, upon the satisfaction of
all conditions to Closing set forth in this Agreement. The closing date shall be
the date that subscriber funds representing the net amount due the Company from
the Purchase Price are transmitted by wire transfer to the Company (the "Closing
Date"). The closing date for the Put shall be the date on which Subscriber funds
representing the net amount due the Company from the Put Purchase Price is
transmitted to or on behalf of the Company ("Put Closing Date").
(c) ENTIRE AGREEMENT; ASSIGNMENT. This Agreement
represents the entire agreement between the parties hereto with respect to the
subject matter hereof and may be amended only by a writing executed by both
parties. No right or obligation of either party shall be assigned by that party
without prior notice to and the written consent of the other party.
(d) EXECUTION. This Agreement may be executed by
facsimile transmission, and in counterparts, each of which will be deemed an
original.
(e) LAW GOVERNING THIS AGREEMENT. This Agreement
shall be governed by and construed in accordance with the laws of the State of
New York without regard to principles of conflicts of laws. Any action brought
by either party against the other concerning the transactions contemplated by
this Agreement shall be brought only in the state courts of New York or in the
federal courts located in the state of New York. Both parties and the
individuals executing this Agreement and other agreements on behalf of the
Company agree to submit to the jurisdiction of such courts and waive trial by
jury. The prevailing party shall be entitled to recover from the other party its
reasonable attorney's fees and costs. In the event that any provision of this
Agreement or any other agreement delivered in connection herewith is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law. Any such
provision which may prove invalid or unenforceable under any law shall not
affect the validity or enforceability of any other provision of any agreement.
(f) SPECIFIC ENFORCEMENT, CONSENT TO JURISDICTION.
The Company and Subscriber acknowledge and agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent or cure
21
<PAGE>
breaches of the provisions of this Agreement and to enforce specifically the
terms and provisions hereof or thereof, this being in addition to any other
remedy to which any of them may be entitled by law or equity. Subject to Section
13(e) hereof, each of the Company and Subscriber hereby waives, and agrees not
to assert in any such suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of such court, that the suit, action or
proceeding is brought in an inconvenient forum or that the venue of the suit,
action or proceeding is improper. Nothing in this Section shall affect or limit
any right to serve process in any other manner permitted by law.
(g) CONFIDENTIALITY. The Company agrees that it will
not disclose publicly or privately the identity of the Subscriber unless
expressly agreed to in writing by the Subscriber or only to the extent required
by law.
(h) AUTOMATIC TERMINATION. This Agreement shall
automatically terminate without any further action of either party hereto if the
Closing shall not have occurred by the tenth (10th) business day following the
date this Agreement is accepted by the Subscriber.
[THIS SPACE INTENTIONALLY LEFT BLANK]
22
<PAGE>
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it shall
become a binding agreement between us.
AETHLON MEDICAL, INC.
A Nevada Corporation
By:
--------------------------------
James A. Joyce
Chairman of the Board
Dated: November _____, 2000
Purchase Price: $375,000.00
-----------
PUT
Put Note Purchase Price: $4,625,000.00
-------------
ACCEPTED: Dated as of November ____, 2000
ESQUIRE TRADE & FINANCE, INC. - Subscriber
Trident Chamber
P.O. Box 146
Road Town, Tortola, B.V.I.
Fax: 011-41-41-760-1031
By:
------------------------------
23
<PAGE>
SCHEDULE B TO SUBSCRIPTION AGREEMENT
<TABLE>
<CAPTION>
---------------------------------------------------- ----------------------------------------- ------------------------------
FINDERS INITIAL OFFERING - CASH FINDER'S FEES PUT CASH FINDER'S FEES
---------------------------------------------------- ----------------------------------------- ------------------------------
<S> <C> <C>
LIBRA FINANCE, S.A. $37,500 100%
P.O. Box 4603
Zurich, Switzerland
Fax: 011-411-201-6262
---------------------------------------------------- ----------------------------------------- ------------------------------
TOTAL $37,500 (100%) UP TO $185,000 (100%)
---------------------------------------------------- ----------------------------------------- ------------------------------
</TABLE>
PROPORTIONATE SHARE OF AGGREGATE WARRANTS ISSUABLE
<TABLE>
<CAPTION>
-------------------------------------------------------------------- --------------------------------------------------------
WARRANT RECIPIENTS PROPORTIONATE SHARE
-------------------------------------------------------------------- --------------------------------------------------------
<S> <C>
LIBRA FINANCE, S.A. 100%
P.O. Box 4603
Zurich, Switzerland
Fax: 011-411-201-6262
-------------------------------------------------------------------- --------------------------------------------------------
TOTAL (100%)
-------------------------------------------------------------------- --------------------------------------------------------
</TABLE>
24
<PAGE>
SCHEDULE 7(e) - PERMITTED USES OF PROCEEDS
1. Product Development Activities, with principal focus on
HIV/AIDS device.
2. FDA Clinical Trials, with focus on devices for iron and lead
removal.
3. Business Development Activities, including corporate
communications, SEC registration of common stock, and other corporate
activities.
4. Debt Service, including interest on outstanding notes, but
excluding repayment of principal in the maximum amount of $35,000.
25
