Exhibit 10.2
SUBSCRIPTION AGREEMENT
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Family Room Entertainment Corporation, a New Mexico
corporation (the "Company") hereby agrees to sell to Alpha Capital
Aktiengesellschaft (the "Subscriber"), and the Subscriber agrees to purchase
from the Company, the following:
(i) A convertible note in the principal amount of $500,000
(the "Note") convertible in accordance with its terms into shares of the
Company's $.01 par value per share common stock, a form of which is annexed
hereto as EXHIBIT A;
(ii) 2,000,000 shares of the Company's $.01 par value per
share common stock;
(iii) 2,500,000 warrants, each representing the right to
purchase one share of the Company's $.01 par value common stock for $3.00 per
share of common stock; and
(iv) 750,000 warrants, each representing the right to purchase
one share of the Company's $.01 par value common stock for $.35 per share of
common stock.
The common stock issuable upon conversion of the Note, the
2,000,000 shares of common stock described above and the common stock issuable
upon exercise of the above-described warrants are referred to herein as "Company
Shares", "Shares", "Common Shares" and "Common Stock". The Company Shares
issuable upon exercise of the Warrants are sometimes referred to as "Warrant
Shares". The 3,250,000 warrants described above are referred to herein as
"Warrants". A form of Warrant is annexed hereto as EXHIBIT B. Collectively, the
Note, Company Shares, and Warrants are referred to herein as the "Securities."
Upon acceptance hereof by the Subscriber and the satisfaction
of all conditions to closing herein described, the Company will deliver to the
Subscriber the Note and Warrants against payment of $500,000 in U.S. funds and
deliver 2,000,000 Shares against delivery of the Subscriber's non-recourse
promissory note in the principal amount of $300,000 ("Non-Recourse Promissory
Note"), a form of which is annexed hereto as EXHIBIT C. Collectively, the
$500,000 funds payment and $300,000 Non-Recourse Promissory Note are referred to
as "Purchase Price."
The following terms and conditions shall apply to this
subscription.
1. Subscriber's Representations and Warranties. The Subscriber
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hereby represents and warrants to and agrees with the Company that:
(a) Information on Company. The Subscriber has been
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furnished or has obtained from the ▇▇▇▇▇ Website of the Securities and Exchange
Commission (the "Commission") the Company's Form 10-KSB for the year ended June
30, 2002 as filed with the Commission on October 15, 2002, together with all
subsequently filed Forms 10-Q, 8-K, and filings made with the Commission
available at the ▇▇▇▇▇ website (hereinafter referred to collectively 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 in writing (such information in writing is
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collectively, the "Other Written Information"), and considered all factors the
Subscriber deems material in deciding on the advisability of investing in the
Securities.
(b) Information on Subscriber. The Subscriber is an
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"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 Company Shares and Warrants. On the
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Closing Date, the Subscriber will purchase the Company Shares and Warrants for
its own account and not with a view to any distribution thereof.
(d) Compliance with Securities Act. The Subscriber
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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 warranties of Subscriber contained herein), and that such
Securities must be held indefinitely unless a subsequent disposition is
registered under the 1933 Act or is exempt from such registration. In any event,
the Subscriber may enter into hedging transactions with third parties, which may
in turn engage in short sales of the Securities in the course of hedging the
position they assume and the Subscriber may also enter into short positions or
other derivative transactions relating to the Securities, or interests in the
Securities, and deliver the Securities, or interests in the Securities, to close
out their short or other positions or otherwise settle short sales or other
transactions, or loan or pledge the Securities, or interests in the Securities,
to third parties that in turn may dispose of these Securities.
(e) Company Shares Legend. The 2,000,000 Company
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Shares, and the Warrant Shares, shall bear the following or similar 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 ANY APPLICABLE STATE
SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO FAMILY ROOM ENTERTAINMENT CORPORATION THAT
SUCH REGISTRATION IS NOT REQUIRED."
(f) Warrants Legend. The Warrants shall bear the
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following OR SIMILAR 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
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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 ANY APPLICABLE STATE SECURITIES LAW OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO FAMILY ROOM ENTERTAINMENT
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED."
(g) Note Legend. The Note shall bear the following
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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 FAMILY ROOM
ENTERTAINMENT CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED."
(h) Communication of Offer. The offer to sell the
----------------------
Securities was directly communicated to the Subscriber by the Company. 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
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represents that the foregoing representations and warranties are true and
correct as of the date hereof and, unless the Subscriber otherwise 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 for a period of three years.
2. Company Representations and Warranties. The Company
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represents and warrants to and agrees with the Subscriber that:
(a) Due Incorporation. The Company and each of its
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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 financial condition of the
Company.
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(b) Outstanding Stock. All issued and outstanding
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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, the
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Warrant and other agreements delivered together with this Agreement or in
connection herewith have been duly authorized, executed and delivered by the
Company and are valid and binding agreements enforceable in accordance with
their 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, Warrant and such other agreements and to perform its obligations
hereunder and under 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 on Schedule
2(d).
(e) Consents. No consent, approval, authorization or
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order of any court, governmental agency or body or arbitrator having
jurisdiction over the Company, or any of its affiliates, the American Stock
Exchange ("Amex"), the National Association of Securities Dealers, Inc.
("NASD"), Nasdaq, the OTC Bulletin Board ("Bulletin Board") 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, the issuance and sale of the Securities, and the performance of the
Company's obligations hereunder and under all such other agreements.
(f) No Violation or Conflict. Assuming the
-------------------------
representations and warranties of the Subscriber in Section 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 the
Company's 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, (B)
to the Company's knowledge, any decree, judgment, order, law, treaty, rule,
regulation or determination applicable to the Company 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 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 except the violation, conflict, breach, or default of which would not
have a material adverse effect on the Company; or
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(ii) result in the creation or imposition of
any lien, charge or encumbrance upon the Securities or any of the assets of the
Company, its subsidiaries or any of its affiliates.
(g) The Securities. The Securities upon issuance:
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(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, 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
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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.
Except as disclosed in the Reports or Other Written Information, 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 which
litigation if adversely determined could have a material adverse effect on the
Company.
(i) Reporting Company. The Company is a publicly-held
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company subject to reporting obligations pursuant to Sections 15(d) and 13 of
the Securities Exchange Act of 1934, as amended (the "1934 Act") and has a class
of common shares registered pursuant to Section 12(g) of the 1934 Act. The
Company's common stock is listed for trading on the Bulletin Board. Pursuant to
the provisions of the 1934 Act, the Company has 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
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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 or resold.
(k) Information Concerning Company. The Reports
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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 or in the
Schedule hereto, there has been no material adverse change in the Company's
business, financial condition or affairs not disclosed in the Reports. The
Reports do not contain any untrue statement of a material fact or omit to state
40
a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances when made.
(l) Stop Transfer. The Securities are restricted
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securities as of the date of this Agreement. The Company will not issue any stop
transfer order or other order impeding the sale, resale or delivery of the
Securities, except as may be required by federal securities laws.
(m)Defaults. The Company is not in violation of its
---------
Articles of Incorporation or ByLaws. The Company is (i) not 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)
not 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.
(n) No Integrated Offering. Neither the Company, nor
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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 offer 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, nor will the Company or any of its affiliates or
subsidiaries take any action or steps that would cause the offer of the
Securities to be integrated with other offerings. The Company will not conduct
any offering other than the transactions contemplated hereby that will be
integrated with the offer or issuance of the Securities.
(o) No General Solicitation. Neither the Company, nor
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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 ▇▇▇▇ ▇▇▇) in connection with the
offer or sale of the Securities.
(p) Listing. The Company's common stock is quoted on,
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and listed for trading on the Bulletin Board. The Company has not received any
oral or written notice that its Common Stock will be delisted from the Bulletin
Board nor that its common stock does not meet all requirements for the
continuation of such listing. The Company satisfies the requirements for the
continued listing of the Common Stock on the Bulletin Board.
(q) No Undisclosed Liabilities. The Company has no
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liabilities or obligations which are material, individually or in the aggregate,
which are not disclosed in the Reports and Other Written Information, other than
those incurred in the ordinary course of the Company's businesses since June 30,
2002 and which, individually or in the aggregate, would reasonably be expected
to have a material adverse effect on the Company's financial condition, other
than as set forth in Schedule 2(q).
(r) No Undisclosed Events or Circumstances. Since
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June 30, 2002, no event or circumstance has occurred or exists with respect to
the Company or its businesses, properties, 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.
41
(s) Capitalization. The authorized and outstanding
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capital stock of the Company as of the date of this Agreement and the Closing
Date are set forth on Schedule 2(s). Except as set forth in the Reports and
Other Written Information and Schedule 2(s), there are no options, warrants, or
rights to subscribe to, securities, rights or obligations convertible into or
exchangeable for or giving any right to subscribe for any shares of capital
stock of the Company. All of the outstanding shares of Common Stock of the
Company have been duly and validly authorized and issued and are fully paid and
nonassessable.
(t) Dilution. The Company's executive officers and
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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.
(u) Correctness of Representations. The Company
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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 in all material respects, 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 for a period of
three years.
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 reasonably 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 D. 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, exercise of
the Warrants and issuance and reissuance of the Common Stock.
4. Reissuance of Securities. The Company agrees to reissue
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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 ▇▇▇▇ ▇▇▇. 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 at the Company's expense
necessary to allow such resales provided the Company and its counsel receive
reasonably requested written representations from the Subscriber and selling
broker, if any. Provided the Subscriber provides required certifications and
representation letters, 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 the date that the Subscriber has requested the
removal of the legend and delivered all items reasonably required by the Company
to be delivered by the Subscriber, that 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, as liquidated damages and not a
penalty an amount equal to ten percent (10%) of the Purchase Price attributable
to the shares subject to a Legend Removal Failure for each 15-day period or part
thereof that such failure continues. For purposes of this Section, $500,000 of
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the Purchase Price is deemed allocated to the Common Stock issuable upon
conversion of the Notes, and $300,000 is deemed allocated to the 2,000,000
Company Shares issuable at the Closing (as hereinafter defined). 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 130% of the applicable Purchase Price.
5. Finder's Fee/Legal Fee.
-----------------------
(a) Legal Fee. The Company shall pay to Grushko &
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▇▇▇▇▇▇▇, P.C., counsel to the Subscriber a fee of $12,500 ("Legal Fees") as
reimbursement for services rendered to Subscriber in connection with this
Agreement and the purchase and sale of the Company Shares (the "Offering") and
acting as escrow agent for the Offering. The Legal Fees will be payable out of
funds held pursuant to a funds escrow agreement ("Escrow Agreement") to be
entered into by the Company, Subscriber and Escrow Agent in connection with the
Offering.
(b) Finder. The Company on the one hand, and the
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Subscriber on the other hand, agree to indemnify the other against and hold the
other harmless from any and all liabilities to any persons claiming brokerage
commissions or finder's fees on account of services purported to have been
rendered on behalf of the indemnifying party in connection with this Agreement
or the transactions contemplated hereby and arising out of such party's actions.
The Company represents that there are no parties entitled to receive fees,
commissions, or similar payments in connection with the offering described in
this Agreement.
6. Covenants of the Company. The Company covenants and agrees
------------------------
with the Subscriber as follows:
(a) Stop Orders. 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) Listing. The Company shall promptly secure the
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listing of the Company Shares upon each national securities exchange, or
automated quotation system, if any, upon which shares of the Company's common
stock are then listed (subject to official notice of issuance) and shall
maintain such listing so long as any Securities are outstanding. The Company
will maintain the listing of its Common Stock on the American Stock Exchange,
Nasdaq SmallCap Market, Nasdaq National Market System, NASD OTC Bulletin Board
(or any successor entity or the proposed "Bulletin Board 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")), and will
comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the Bulletin Board 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) Market Regulations. The Company shall notify
-------------------
the Commission, the Bulletin Board, the Principal Market and applicable state
authorities, in accordance with their requirements, if any, of the transactions
43
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) Reporting Requirements. From the Closing Date
-----------------------
and until at least two (2) years after the actual effective date of the
Registration Statement on Form SB-2 or such other Registration Statement
described in Section 8.1(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 are applicable
to an issuer with a class of Shares registered pursuant to Section 12(b) or
12(g) of the Exchange Act, as applicable, and (iv) comply with all requirements
related to any registration statement filed pursuant to this Agreement. The
Company will use its best efforts not to 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 two (2)
years after the actual effective date of the Registration Statement on Form SB-2
or such other Registration Statement described in Section 8.1(iv) hereof. Until
the earlier of the resale of the Company Shares by the Subscriber or at least
two (2) years after the Warrants have been exercised, the Company will use its
best efforts to continue the listing of the Common Stock on the Principal Market
and will comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of Principal Market.
(e) Use of Proceeds. The Purchase Price will be
----------------
used by the Company for general working capital, and may not and will not be
used for accrued and unpaid officer and director salaries, future officer and
director salaries, payment of financing related debt, redemption of outstanding
redeemable notes or equity instruments of the Company nor non-trade obligations
outstanding on the Closing Date.
(f) Reservation of Common Stock. The Company
---------------------------
undertakes to reserve, pro rata on behalf of each holder of a Note or Warrant,
from its authorized but unissued common stock, at all times that 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 one common share for each common
share issuable upon exercise of the Warrants.
(g) Taxes. For a period of two years after the
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date hereof, the Company will promptly pay and discharge, or cause to be paid
and discharged, when due and payable, all lawful taxes, assessments and
governmental charges or levies imposed upon the income, profits, property or
business of the Company; provided, however, that any such tax, assessment,
charge or levy need not be paid if the validity thereof shall currently be
contested in good faith by appropriate proceedings and if the Company shall have
set aside on its books adequate reserves with respect thereto, and provided,
further, that the Company will pay all such taxes, assessments, charges or
levies forthwith upon the commencement of proceedings to foreclose any lien
which may have attached as security therefore.
(h) Insurance. For a period of two years after the
---------
date hereof, the Company will keep its assets which are of an insurable
character insured by financially sound and reputable insurers against loss or
damage by fire, explosion and other risks customarily insured against by
companies in the Company's line of business, in amounts sufficient to prevent
the Company from becoming a co-insurer and not in any event less than 100% of
the insurable value of the property insured; and the Company will maintain, with
financially sound and reputable insurers, insurance against other hazards and
risks and liability to persons and property to the extent and in the manner
customary for companies in similar businesses similarly situated and to the
extent available on commercially reasonable terms.
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(i) Books and Records. For a period of two years
------------------
after the date hereof, the Company will keep true records and books of account
in which full, true and correct entries will be made of all dealings or
transactions in relation to its business and affairs in accordance with
generally accepted accounting principles applied on a consistent basis.
(j) Governmental Authorities. For a period of two
-------------------------
years after the date hereof, the Company shall duly observe and conform in all
material respects to all valid requirements of governmental authorities relating
to the conduct of its business or to its properties or assets.
(k) Intellectual Property. For a period of two
----------------------
years after the date hereof, the Company shall maintain in full force and effect
its corporate existence, rights and franchises and all licenses and other rights
to use intellectual property owned or possessed by it and reasonably deemed to
be necessary to the conduct of its business.
(l) Properties. For a period of two years after the
-----------
date hereof, the Company will keep its properties in good repair, working order
and condition, reasonable wear and tear excepted, and from time to time make all
needful and proper repairs, renewals, replacements, additions and improvements
thereto; and the Company will at all times comply with each provision of all
leases to which it is a party or under which it occupies property if the breach
of such provision could reasonably be expected to have a material adverse
effect.
(m) Blackout. The Company undertakes and covenants that until
---------
the first to occur of (i) the registration statement described in Section
8.1(iv) being effective for one hundred and eighty (180) business days, (ii)
until all the Company Shares have been resold pursuant to said registration
statement, or (iii) two years after the Closing Date, the Company will not enter
into any acquisition, merger, exchange or sale or other transaction that could
have the effect of delaying the effectiveness of any pending registration
statement, causing an already effective registration statement to no longer be
effective or current, or require the filing of an amendment to an already
effective registration statement.
(n) Confidentiality. For a period of two years
----------------
after the date hereof, 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.
7. Covenants of the Company and Subscriber Regarding
-------------------------------------------------
Indemnification.
----------------
(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 material
misrepresentation by Company or breach of any warranty by Company in this
Agreement or in any Exhibits or Schedules attached hereto, or other agreement
delivered pursuant 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 Subscriber relating hereto.
(b) Subscriber agrees to indemnify, hold
harmless, reimburse and defend the Company and each of the Company's
officers, directors, agents, affiliates, control persons 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 material misrepresentation by Subscriber in this Agreement
or in any Exhibits or Schedules attached hereto, or other agreement
delivered pursuant 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 Subscriber relating
hereto.
45
(c) The procedures set forth in Section 8.6 shall
apply to the indemnifications set forth in Sections 7(a) and 7(b) above.
8.1. Registration Rights. The Company hereby grants the
--------------------
following registration rights to holders of the Securities.
(i) On one occasion, for a period commencing 91 days
after the Closing Date, but not later than three 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 Company Shares issued on the Closing
Date and issuable upon conversion of the Note (the Company Shares issued
hereunder on the Closing Date, the Company Shares actually issued and issuable
upon conversion of the Note, and one share of common stock issued or issuable
upon exercise of the Warrants are referred to collectively as the "Registrable
Securities"), shall prepare and file with the Commission a registration
statement under the 1933 Act covering the Registrable Securities which are the
subject of such request, unless such Registrable Securities are the subject of
an effective registration statement or included for registration in a pending
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 8.1(i).
(ii) If the Company at any time proposes to register
any of its securities under the 1933 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 ▇-▇, ▇-▇ 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 15 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 10 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 8.1(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 foregoing provisions, or Section 8.4 hereof, the
Company may withdraw or delay or suffer a delay of any registration statement
referred to in this Section 8.1(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 8.1(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 and the
Company actually does file such other registration statement, such written
request shall be deemed to have been given pursuant to Section 8.1(ii) rather
46
than Section 8.1(i), and the rights of the holders of Registrable Securities
covered by such written request shall be governed by Section 8.1(ii).
(iv) The Company shall file with the Commission not
later than February 1, 2003 (the "Filing Date"), and use its reasonable
commercial efforts to cause to be declared effective within ninety (90) days
after the Closing Date, a Form SB-2 registration statement (or such other form
that it is eligible to use) in order to register the Registrable Securities for
issuance to the Subscriber and distribution under the Act. The registration
statement described in this paragraph must be declared effective by the
Commission no later than ninety (90) days after the Closing Date ("Effective
Date"). The Company will register a number of shares of Common Stock in the
aforedescribed registration statement that is equal to 200% of the number of
Company Shares issuable at the Conversion Price in effect at the Closing Date,
or actual filing date of the registration statement or any amendment thereto
assuming conversion of 100% of the Notes (whichever results in the greatest
number of Company shares) and one share of common stock for each of the Company
Shares issued on the Closing Date and one share of common stock for each Warrant
Share. Such registration statement will immediately be amended or additional
registration statements will be immediately filed by the Company as necessary in
order to register additional Company Shares to allow the unlegended reissuance
of all Common Stock included and issuable by virtue of the Registrable
Securities. The Registrable Securities shall be reserved and set aside
exclusively for the benefit of each Subscriber in proportion to each
Subscriber's interest in the Registrable Securities, and not issued, employed or
reserved for anyone other than the Subscriber. No securities of the Company
other than the Registrable Securities will be included in the registration
statement described in this Section 8.1(iv) except as described on SCHEDULE 8.1.
8.2. 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 1933 Act, the Company will, as expeditiously as
possible:
(a) prepare and file with the Commission a
registration statement required by Section 8.1, 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 ("Sellers") 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 later of: (i) until twelve months after all the
Company Shares are eligible for resale pursuant to Rule 144(k) of the 1933 Act;
or (ii) until such registration statement has been effective for a period of not
less than 365 days, and comply with the provisions of the 1933 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, at the Company's expense,
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, provided,
however, that the Company shall not for any such purpose be required to qualify
47
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 when a prospectus
relating thereto is required to be delivered under the 1933 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;
(g) provided same would not be in violation of the
provision of Regulation FD under the 1934 Act, make available for inspection by
the Seller, 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,
attorney, accountant or agent in connection with such registration statement.
8.3. Provision of Documents. In connection with each
-----------------------
registration described in this Section 8, 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 8.1(i) or 8.1(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.
8.4. Non-Registration Events. The Company and the Subscriber
------------------------
agree that the Seller will suffer damages if any registration statement required
under Section 8.1(i) or 8.1(ii) above is not filed within 30 days after written
request by the Holder and not declared effective by the Commission within 90
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 8.1(iv)], and maintained in the manner and within the time
periods contemplated by Section 8 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 8.1(i) or 8.1(ii) is not filed
within 30 days of such written request, or is not declared effective by the
Commission on or prior to the date that is 90 days after such request, or (ii)
the registration statement on Form SB-2 or such other form described in Section
8.1(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 ten business days of
receipt by the Company of a written or oral communication from the Commission
that the registration statement described in Section 8.1(iv) will not be
reviewed, or (iii) any registration statement described in Sections 8.1(i),
8.1(ii) or 8.1(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 or 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 8.4 is referred to herein as a "Non-Registration
Event"), then, for so long as such Non-Registration Event shall continue, the
Company shall pay, at the Subscriber's option, in cash or stock at the
applicable Conversion Price, as Liquidated Damages to each holder of any
Registrable Securities for each thirty (30) days or part thereof during the
pendency of such Non-Registration Event an amount equal to two percent (2%), of
48
the principal of the Notes issued in the Offering, and principal amount of the
Notes converted into Company Shares, owned of record by such holder or issuable
as of or subsequent to the occurrence of such Non-Registration Event and two
percent (2%) of the Purchase Price of $300,000 allocated to the purchase of
2,000,000 Common Shares on the Closing Date, which are subject to such
Non-Registration Event. Payments to be made pursuant to this Section 8.4 shall
be due and payable within ten (10) business days after demand in immediately
available funds. In the event a Mandatory Redemption Payment is demanded from
the Company by the Holder pursuant to Section 8.2 of this Subscription
Agreement, then the Liquidated Damages described in this Section 8.4 shall no
longer accrue on the portion of the Purchase Price underlying the Mandatory
Redemption Payment, from and after the date the Holder receives the Mandatory
Redemption Payment. It shall also be deemed a Non-Registration Event if at any
time a Note is outstanding, there is less than 125% of the amount of Common
Shares necessary to allow full conversion of such Note at the then applicable
Conversion Price, registered for unrestricted resale in an effective
registration statement.
8.5. Expenses. All expenses incurred by the Company in
---------
complying with Section 8, 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 8. Selling Expenses in connection with each
registration statement under Section 8 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.
8.6. Indemnification and Contribution.
---------------------------------
(a) In the event of a registration of any Registrable
Securities under the 1933 Act pursuant to Section 8, the Company will, to the
extent permitted by law, 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 1933 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 1933 Act
pursuant to Section 8, 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
in light of the circumstances when made, and will subject to the provisions of
Section 8.6(c) 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
49
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 1933 Act pursuant to Section 8, the Seller
will, to the extent permitted by law, indemnify and hold harmless the Company,
and each person, if any, who controls the Company within the meaning of the 1933
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 1933 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 1933
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 registration
statement under which such Registrable Securities were registered under the 1933
Act pursuant to Section 8, 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 8.6(c) and shall only relieve it from any liability which it may have to
such indemnified party under this Section 8.6(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 8.6(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, as a group, shall have the
right to select one separate counsel and to assume such legal defenses and
50
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 1933 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 8.6 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 8.6 provides for indemnification in
such case, or (ii) contribution under the 1933 Act may be required on the part
of the Seller or controlling person of the Seller in circumstances for which
indemnification is not[?] provided under this Section 8.6; 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 ▇▇▇▇ ▇▇▇) will be entitled to contribution from any person
or entity who was not guilty of such fraudulent misrepresentation.
8.7. Delivery of Unlegended Shares.
------------------------------
(a) In connection with Registrable Securities that
have been issued to the Subscriber with the legend set forth in Section 1(e)
above, within three (3) business days (such third business day, the "Unlegended
Delivery Date") after the business day on which the Company has received a
notice that (i) such Registrable Securities have been sold, (ii) a
representation that the prospectus delivery requirements, if applicable, have
been satisfied, and (iii) and the original Company Share certificate, the
Company at its expense, (i) shall deliver, and shall cause legal counsel
selected by the Company to deliver, to its transfer agent (with copies to
Subscriber) an appropriate instruction and opinion of such counsel, for the
delivery of unlegended Company Shares issuable pursuant to any effective and
current registration statement described in Section 8 of this Agreement (the
"Unlegended Shares"); and (ii) transmit the certificates representing the
Unlegended Shares, with a legended certificate representing the balance of the
unsold Company Shares to the Subscriber at the address specified in the notice
of sale, via express courier, by electronic transfer or otherwise on or before
the Unlegended Delivery Date.
(b) In lieu of delivering physical certificates
representing the Unlegended Shares, if the Company's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer program, upon request of the Subscriber and its compliance with the
provisions contained in this paragraph, so long as the certificates therefore do
not bear a legend and the Subscriber is not obligated to return such certificate
for the placement of a legend thereon, the Company shall use its best efforts to
cause its transfer agent to electronically transmit the Unlegended Shares by
crediting the account of Subscriber's prime Broker with DTC through its Deposit
Withdrawal Agent Commission system.
(c) The Company understands that a delay in the
delivery of the Unlegended Shares pursuant to Section 8 hereof beyond the
Unlegended Delivery Date could result in economic loss to the Subscriber. As
compensation to the Subscriber for such loss, the Company agrees to pay late
payment fees (as liquidated damages and not as a penalty) to the Subscriber for
late delivery of Unlegended Shares in the amount of $100 per business day after
51
the Unlegended Delivery Date for each $10,000 of Purchase Price of the Company
Shares delivered to the Company for reissuance as Unlegended Shares. The Company
shall pay any payments incurred under this Section in immediately available
funds upon demand.
(d) In addition to any other rights available to the
Subscriber, if the Company fails to deliver to the Subscriber Unlegended Shares
within ten (10) calendar days after the Unlegended Delivery Date and 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
Company Shares which the Subscriber anticipated receiving from the Company (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 Purchase
Price of the Company Shares delivered to the Company for reissuance as
Unlegended Shares, 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 $10,000 of Purchase
Price of Company Shares delivered to the Company for reissuance as Unlegended
Shares, 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.
9.1. 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, unless waived by the
Subscriber, the Shares will be 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 or are otherwise exempt from registration.
(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 (a form of which is annexed to EXHIBIT A hereto) to the
Company via confirmed telecopier transmission or otherwise pursuant to Section
11(a) of this Agreement. 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 to the Subscriber
via express courier for receipt by such Subscriber within three (3) business
days after receipt by the Company of the Notice of Conversion (the "Delivery
Date"). In the event the Shares are electronically transferable, then delivery
of the Shares must be made by electronic transfer provided request for such
electronic transfer has been made by the Subscriber. A Note representing the
balance of the Note not so converted will be provided by the Company to the
Subscriber, if requested by Subscriber provided an original Note is delivered to
the Company. 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.
52
(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 liquidated damages 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 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 at Subscriber's Election. In the
----------------------------------------------
event the Company fails to timely deliver Shares on a Delivery Date, or upon the
occurrence of any other Event of Default (as defined in the Note) or 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 ten
(10) business days after request by the Subscriber or on the Delivery Date (if
requested by the Subscriber) a sum of money determined by (i) multiplying an
amount of outstanding principal of the Note designated by the Subscriber by
130%, or (ii) multiplying the number of Shares otherwise deliverable upon
conversion of an amount of Note principal and/or interest designated by the
Subscriber (with the date of giving of such designation being a Deemed
Conversion Date) at the Conversion Price by the highest closing price of the
Common Stock on the principal market from the Deemed Conversion Date until the
day prior to the receipt of the Mandatory Redemption Payment, whichever is
greater ("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 ten (10) business days after request, whichever is sooner
("Mandatory Redemption Payment Date"). Upon receipt of the Mandatory Redemption
Payment, the corresponding Note principal 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 provision 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 provision 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.
53
Subject to the foregoing, the Subscriber shall not be limited to aggregate
conversions of only 9.99% and aggregate conversion by the Subscriber may exceed
9.99%. The Subscriber may void the conversion limitation described in this
Section 9.3 upon 75 days prior written 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. In the event a Subscriber
-----------------------------
shall elect to convert a Note or part thereof, the Company may not refuse
conversion 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 by the Company and the Company shall have posted 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 arbitration/litigation of the dispute and the proceeds of which
shall be payable to such Subscriber to the extent Subscriber 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 ten (10) days
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. The delivery date by which
Common Stock must be delivered pursuant to this Section 9.5 shall be tolled for
the amount of days that the Subscriber does not deliver information reasonably
requested by the Company's transfer agent.
9.6 Adjustments. The Conversion Price and amount of Shares
------------
issuable upon conversion of the Notes shall be adjusted to offset the effect of
stock splits, stock dividends and pro rata distributions of property or equity
interests to the Company's shareholders.
10. Right of First Refusal. Until 180 days after the Closing
-----------------------
Date, the occurrence of a Non-Registration Event, or until a majority of the
Company Shares have been resold pursuant to an effective registration statement,
whichever is latest (the "Exclusion Period"), the Subscriber shall be given not
less than seven (7) business days prior written notice of any proposed sale by
the Company of its common stock or other securities or debt obligations, except
in connection with (i) employee stock options or compensation plans, (ii) as
full or partial consideration in connection with any merger, consolidation or
purchase of substantially all of the securities or assets of any corporation or
other entity, or (iii) as may have been described in the Reports or Other
Written Information prior to the Closing Date (collectively "Excepted
Issuances"). The Subscriber shall have the right during the seven (7) business
days following the notice to agree to purchase such offered common stock, debt
or other securities in accordance with the terms and conditions set forth in the
54
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
seven (7) business days following the notice of modification, whichever is
longer, to exercise such right.
11. Offering Restrictions. Except as disclosed in the reports
----------------------
or Other Written Information filed with the Commission or made available to the
Subscriber prior to the Closing Date, or in connection with Excepted Issuances,
the Company will not issue any equity, convertible debt or other securities
convertible into common stock on any terms more favorable to such other investor
than any of the terms of the Offering, until after the Exclusion Period without
the written consent of the Subscriber.
12. Favored Nations Provision. Until after the Exclusion
--------------------------
Period, the Company shall not offer, issue or agree to issue any common stock of
the Company or securities convertible into or exercisable for shares of common
stock of the Company to any person, firm or corporation at a price per share or
conversion or exercise price per share which shall be less than the Conversion
Price then in effect without the consent of the Subscriber still holding
Securities during the Exclusion Period, except for (i) employee stock options,
(ii) as full or partial consideration in connection with any merger,
consolidation or purchase of substantially all of the securities or assets of
any corporation or other entity, or (iii) any sale in connection with the
exercise of warrants or options or the conversion of a convertible security or
other right to acquire stock disclosed in the Reports or Other Written
Information filed or delivered prior to the Closing Date (collectively "Excepted
Issuances"), then the Company shall issue for each such occasion additional
Company Shares to the Subscriber so that the average per share purchase price of
the Company Shares issued and held by the Subscriber is equal to such other
lower price per share. The Warrant "Purchase Price" (as defined in the Warrant)
shall be reduced to equal such other lower purchase price. The delivery to the
Subscriber of the additional Company Shares and the effective date of the
reduction of the Warrant "Purchase Price" shall be not later than the closing
date of the transaction giving rise to the requirement to issue additional
Company Shares or Warrant "Purchase Price" reduction. The Subscriber is granted
the registration rights described in Section 8 hereof in relation to such
additional Company Shares and Warrants except that the Filing Date and Effective
Date vis-a-vis such additional common shares and common shares issuable upon
exercise of the Warrant shall be respectively the sixtieth (60th) and one
hundred and twentieth (120th) date after the closing date giving rise to the
requirement to issue the additional Company Shares and Warrant "Purchase Price"
reduction. For purposes of the issuance and adjustment described in this
paragraph, the issuance of any security of the Company carrying the right to
convert such security into shares of common stock or of any warrant, right or
option to purchase common stock shall result in the issuance of the additional
Company Shares and an adjustment to the Warrant "Purchase Price" upon the
issuance of such convertible security, warrant, right or option and again upon
any subsequent issuances of shares of common stock upon exercise of such
conversion or purchase rights if such issuance is at a price lower than the then
purchase price per share of the Company Shares or Warrant "Purchase Price."
13. Miscellaneous.
--------------
(a) Notices. All notices, demands, requests,
-------
consents, approvals, and other communications required or permitted hereunder
shall be in writing and, unless otherwise specified herein, shall be (i)
personally served, (ii) deposited in the mail, registered or certified, return
receipt requested, postage prepaid, (iii) delivered by reputable air courier
service with charges prepaid, or (iv) transmitted by hand delivery, telegram, or
facsimile, addressed as set forth below or to such other address as such party
shall have specified most recently by written notice. Any notice or other
communication required or permitted to be given hereunder shall be deemed
effective (a) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address or
55
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the second business day
following the date of mailing by express courier service, fully prepaid,
addressed to such address, or upon actual receipt of such mailing, whichever
shall first occur. The addresses for such communications shall be: (i) if to the
Company, to Family Room Entertainment Corporation, ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇,
▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇, telecopier: (323)
850-2831, with a copy by telecopier only to: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇, Esq., ▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇, telecopier: (▇▇▇) ▇▇▇-▇▇▇▇, 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 & ▇▇▇▇▇▇▇,
P.C., ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇, telecopier number:
(▇▇▇) ▇▇▇-▇▇▇▇.
(b) Closing. The consummation of the transactions
--------
contemplated herein shall take place at the offices of Grushko & ▇▇▇▇▇▇▇, P.C.,
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇, 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 of the Offering is transmitted by wire transfer or otherwise
to the Company (the "Closing Date"). The Subscriber agrees that the Closing must
take place not later than one business day after the Subscriber has been
notified by the Company of the Filing Date.
(c) Entire Agreement; Assignment. This Agreement and
-----------------------------
other documents delivered in connection herewith represent 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. Neither the Company nor the
Subscriber has relied on any representations not contained or referred to in
this Agreement and the documents delivered herewith. 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 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
56
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.
[THIS SPACE INTENTIONALLY LEFT BLANK]
57
59
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.
FAMILY ROOM ENTERTAINMENT CORPORATION
A New Mexico Corporation
By: /s/ ▇▇▇▇▇▇ ▇▇▇▇▇
---------------------------------
Name:
Title:
Dated: January 10, 2003
Dated as of January 10, 2003
/s/ ▇▇. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
----------------------------------------
(Signature)
ALPHA CAPITAL AKTIENGESELLSCHAFT - Subscriber
▇▇▇▇▇▇▇▇▇ ▇
▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇
Vaduz, Lichtenstein
Fax: ▇▇▇-▇▇-▇▇▇▇▇▇▇▇
58
LIST OF EXHIBITS AND SCHEDULES
------------------------------
Exhibit A Form of Note
Exhibit B Form of Warrant
Exhibit C Subscriber's Non-Recourse Note
Exhibit D Form of Legal Opinion
Schedule 2(d) Additional Issuances
Schedule 2(q) Undisclosed Liabilities
Schedule 2(s) Capitalization
Schedule 8.1 Other Securities to be Registered
59