EXHIBIT 10.1
SUBSCRIPTION AGREEMENT
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THIS SUBSCRIPTION AGREEMENT (this "AGREEMENT"), dated as of November
23, 2004, by and among American Oriental Bioengineering Inc., a Nevada
corporation (the "COMPANY"), and the subscribers identified on the signature
page hereto (each a "SUBSCRIBER" and collectively "SUBSCRIBERS").
WHEREAS, the Company and the Subscribers are executing and delivering
this Agreement in reliance upon an exemption from securities registration
afforded by the provisions of Section 4(2), Section 4(6) and/or Regulation D
("REGULATION D") as promulgated by the United States Securities and Exchange
Commission (the "COMMISSION") under the Securities Act of 1933, as amended (the
"1933 ACT").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the
Subscribers, as provided herein, and the Subscribers shall purchase, in the
aggregate, up to $4,000,000.00 (the "PURCHASE PRICE") of the Company's common
stock, $.001 par value (the "COMMON STOCK" or "SHARES"), and share purchase
warrants in the form attached hereto as EXHIBITS A1 AND A2 (the "WARRANTS"), to
purchase shares of Common Stock (the "WARRANT SHARES"). The per Share Purchase
Price shall be $1.00, subject to adjustment as described in this Agreement. The
Purchase Price shall be payable to the Company on the date hereof (the "CLOSING
DATE"). The Common Stock, the Warrants and the Warrant Shares are collectively
referred to herein as the "SECURITIES"; and
WHEREAS, the aggregate proceeds of the sale of the Common Stock and the
Warrants contemplated hereby may be held in escrow pursuant to the terms of a
Funds Escrow Agreement which may be executed by the parties substantially in the
form attached hereto as EXHIBIT B (the "ESCROW AGREEMENT").
NOW, THEREFORE, in consideration of the mutual covenants and other
agreements contained in this Agreement, the Company and the Subscribers hereby
agree as follows:
1. PURCHASE AND SALE OF SHARES AND WARRANTS. Subject to the
satisfaction (or waiver) of the conditions to Closing set forth in this
Agreement and the Escrow Agreement, each Subscriber shall purchase the Shares
and Warrants for the portion of the Purchase Price indicated on the signature
page hereto, and the Company shall sell such Shares and Warrants to the
Subscriber. The Purchase Price for the Shares and Warrants shall be paid in
cash. The entire Purchase Price shall be allocated to the Shares.
2. ESCROW ARRANGEMENTS; FORM OF PAYMENT. Upon execution hereof
by the parties and pursuant to the terms of the Escrow Agreement, each
Subscriber agrees to make the deliveries required of such Subscriber as set
forth in the Escrow Agreement and the Company agrees to make the deliveries
required of the Company as set forth in the Escrow Agreement.
3. WARRANTS. On the Closing Date the Company will issue
Warrants to the Subscribers. Ten (10) Class A Warrants, and five (5) Class B
Warrants will be issued for each ten (10) Shares issued on the Closing Date. The
per Warrant Share exercise price to acquire a Warrant Share upon exercise of a
Class A Warrant shall be $0.85. The per Warrant Share exercise price to acquire
a Warrant Share upon exercise of a Class B Warrant shall be $1.60. Collectively,
the Class A Warrants and Class B Warrants are referred to herein as Warrants.
The Class A and Class B Warrants shall be exercisable until three (3) years
after the actual effective date of the registration statement described in
Section 11.1(iv) of this Agreement ("ACTUAL EFFECTIVE DATE").
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4. SUBSCRIBER'S REPRESENTATIONS AND WARRANTIES. Each
Subscriber hereby represents and warrants to and agrees with the Company only as
to such Subscriber that:
(a) INFORMATION ON COMPANY. The Subscriber has been
furnished with or has had access at the ▇▇▇▇▇ Website of the Commission
to the Company's Form 10-KSB for the year ended December 31, 2003 as filed with
the Commission, together with all subsequently filed Forms 10-QSB, 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 in writing from the Company such other information concerning its
operations, financial condition and other matters as the Subscriber has
requested in writing (such other information is collectively, the "OTHER WRITTEN
INFORMATION"), and considered all factors the Subscriber deems material in
deciding on the advisability of investing in the Securities. The Subscriber has
had full opportunity to conduct, and has conducted, a complete and thorough due
diligence investigation of the Company, and such opportunity has been made
available to the Subscriber's professional representative(s) to ask questions of
and receive answers from representatives of the Company concerning the Company
and its financial condition and prospects, as well as request additional
information necessary to verify the accuracy of the Reports and Other Written
Information provided to Subscriber.
(b) INFORMATION ON SUBSCRIBER. The Subscriber is
organized and validly existing under the laws of its formation. The
Subscriber is, and will be at the time of the issuance of the Common Stock and
exercise of any of the Warrants, an "ACCREDITED INVESTOR", as such term is
defined in Regulation D promulgated by the Commission under 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 COMMON STOCK AND WARRANTS. On the
Closing Date, the Subscriber will purchase the Common Stock and Warrants as
principal 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 or any applicable state securities laws, 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 any
applicable state securities laws or is exempt from such registration. In any
event, and subject to compliance with applicable securities laws, 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.
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(e) SHARES LEGEND. The 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 OR
APPLICABLE STATE SECURITIES LAWS. 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 AMERICAN ORIENTAL
BIOENGINEERING INC. THAT SUCH REGISTRATION IS NOT REQUIRED."
(f) WARRANTS LEGEND. The Warrants shall bear the
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 OR APPLICABLE STATE SECURITIES LAWS. 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 ANY APPLICABLE
STATE SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO AMERICAN ORIENTAL BIOENGINEERING INC. THAT
SUCH REGISTRATION IS NOT REQUIRED."
(g) STOP TRANSFER ORDER. The Securities, when issued
prior to the effectiveness of the "REGISTRATION STATEMENT" (as defined
in Section 10 of this Agreement), will be restricted securities. Subscriber
agrees that, in order to ensure compliance with the restrictions referenced at
Section 4(e) & (f) herein, the Company may issue "stop transfer" instructions to
its transfer agent consistent with the legends. However, under no circumstances
may any other instructions be given to the transfer agent inconsistent with this
Section 4(g) or Section 10.1(a) of this Agreement.
(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) AUTHORITY; ENFORCEABILITY. This Agreement and
other agreements delivered together with this Agreement or in connection
herewith have been duly authorized, executed and delivered by the Subscriber 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 Subscriber
has full corporate power and authority necessary to enter into this Agreement
and such other agreements and to perform its obligations hereunder and under all
other agreements entered into by the Subscriber relating hereto.
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(j) RESTRICTED SECURITIES. Subscriber understands
that the Securities have not been registered under the 1933 Act and such
Subscriber will not sell, offer to sell, assign, pledge, hypothecate or
otherwise transfer any of the Securities unless (i) pursuant to an effective
registration statement under the 1933 Act, (ii) such Subscriber provides the
Company with an opinion of counsel, in a form reasonably acceptable to the
Company, to the effect that a sale, assignment, pledge or transfer of the
Securities may be made without registration under the 1933 Act, or (iii)
Subscriber provides the Company with reasonable assurances (in the form of
seller and broker representation letters) that the Shares or the Warrant Shares,
as the case may be, can be sold pursuant to (A) Rule 144 promulgated under the
1933 Act, or (B) Rule 144(k) promulgated under the 1933 Act, in each case
following the applicable holding period set forth therein. Notwithstanding
anything to the contrary contained in this Agreement, such Subscriber may
transfer (without restriction and without the need for an opinion of counsel)
the Securities to its Affiliates (as defined below) provided that each such
Affiliate is an "accredited investor" under Regulation D and such Affiliate
agrees to be bound by the terms and conditions of this Agreement. Any assignee
of Subscriber agrees to be bound by the terms of the Subscription Agreement and
shall have all rights of the Subscriber herein.
For the purposes of this Agreement, an "AFFILIATE" of
any specified Subscriber means any other person or entity directly or indirectly
controlling, controlled by or under direct or indirect common control with such
specified Subscriber. For purposes of this definition, "control" means the power
to direct the management and policies of such person or firm, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise.
(k) NO GOVERNMENTAL REVIEW. Each Subscriber
understands that no United States federal or state agency or any other
governmental or state agency has passed on or made recommendations or
endorsement of the Securities or the suitability of the investment in the
Securities nor have such authorities passed upon or endorsed the merits of the
offering of the Securities.
(l) CORRECTNESS OF REPRESENTATIONS. Each Subscriber
represents as to such Subscriber that the foregoing representations and
warranties are true and correct as of the date hereof and, unless a Subscriber
otherwise notifies the Company prior to the Closing Date (as hereinafter
defined), shall be true and correct as of the Closing Date.
(m) PLEDGE. The Company acknowledges and agrees that
a Subscriber may from time to time pledge pursuant to a bona fide
margin agreement with a registered broker-dealer or grant a security interest in
some or all of the Securities to a financial institution that is an "accredited
investor" as defined in Rule 501(a) under the Act and who agrees to be bound by
the provisions of the Subscription Agreement and, if required under the terms of
such arrangement, such Subscriber may transfer pledged or secured Securities to
the pledgees or secured parties. Such a pledge or transfer would not be subject
to approval of the Company and no legal opinion of legal counsel of the pledgee,
secured party or pledgor shall be required in connection therewith. Further, no
notice shall be required of such pledge. At the appropriate Subscriber's
expense, the Company will execute and deliver such reasonable documentation as a
pledgee or secured party of Securities may reasonably request in connection with
a pledge or transfer of the Securities, including but not limited to the
preparation and filing of any required prospectus supplement under Rule
424(b)(3) under the Act or other applicable provision of the Act to
appropriately amend the list of selling stockholders thereunder.
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(n) SURVIVAL. The foregoing representations and
warranties shall survive the Closing Date for a period of five years.
5. COMPANY REPRESENTATIONS AND WARRANTIES. The Company
represents and warrants to and agrees with each 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. For purposes of this Agreement, a "material adverse effect"
shall mean a material adverse effect on the financial condition, results of
operations, properties or business of the Company taken as a whole.
(b) OUTSTANDING STOCK. All issued and outstanding
shares of capital stock of the Company and each of its subsidiaries have
been duly authorized and validly issued and are fully paid and nonassessable.
(c) AUTHORITY; ENFORCEABILITY. This Agreement, the
Common Stock, the Warrants, the Escrow Agreement and any other agreements
delivered together with this Agreement or in connection herewith (collectively
"TRANSACTION DOCUMENTS") 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.
The Company has full corporate power and authority necessary to enter into and
deliver the Transaction Documents and to perform its obligations thereunder.
(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 on SCHEDULE 5(d) hereto.
(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 American Stock
Exchange, the National Association of Securities Dealers, Inc., Nasdaq, SmallCap
Market, the Bulletin Board nor the Company's shareholders is required for the
execution by the Company of the Transaction Documents and compliance and
performance by the Company of its obligations under the Transaction Documents,
including, without limitation, the issuance and sale of the Securities.
(f) NO VIOLATION OR CONFLICT. Assuming the
representations and warranties of the Subscribers in Section 4 are true and
correct, neither the issuance and sale of the Securities nor the performance of
the Company's obligations under the Transaction Documents by the Company will:
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(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 or certificate 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 subsidiaries 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 or subsidiaries is a party, by which
the Company or any of its affiliates or subsidiaries is bound, or to which any
of the properties of the Company or any of its affiliates or subsidiaries 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
or subsidiaries is a party except the violation, conflict, breach, or default of
which would not have a material adverse effect on the Company; 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, its subsidiaries or any of its affiliates; or
(iii) except as disclosed on SCHEDULE 5(d),
result in the activation of any anti-dilution rights or a reset or
repricing of any debt or security instrument of any other creditor or equity
holder of the Company, nor result in the acceleration of the due date of any
obligation of the Company; or
(iv) except as disclosed on SCHEDULE 10.1,
result in the activation of any piggy-back registration rights of any
person or entity holding securities of the Company or having the right to
receive securities of the Company.
(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 any applicable state securities laws;
(ii) have been, or will be, duly and validly
authorized and on the date of issuance of the Shares and upon exercise of
the Warrants, the Shares and Warrant Shares 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 each Subscriber complies with the prospectus
delivery requirements of the 1933 Act);
(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
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obligations under the Transaction Documents. Except as disclosed in the Reports,
there is no pending or, to the best knowledge of the Company, basis for or
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 would have a
material adverse effect on the Company.
(i) REPORTING COMPANY. The Company is a publicly-held
company subject to reporting obligations pursuant to Section 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. 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 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 or resold.
(k) INFORMATION CONCERNING COMPANY. The Reports
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 Schedules 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 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) 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 not in violation of
any statute, rule or regulation of any governmental authority which violation
would have a material adverse effect on the Company.
(m) 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 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 which if so integrated would eliminate the
exemption as described in Section 6 of this Agreement for the Offering (as
defined in Section 7(b) of this Agreement). 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 which if so integrated would impair
the exemption for the Offering.
(n) 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 ▇▇▇▇ ▇▇▇) in
connection with the offer or sale of the Securities.
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(o) LISTING. The Company's common stock is quoted on
the Bulletin Board. The Company has not received any oral or written
notice that its common stock is not eligible nor will become ineligible for
quotation on the Bulletin Board nor that its common stock does not meet all
requirements for the continuation of such quotation and the Company satisfies
and as of the Closing Date, the Company will satisfy all the requirements for
the continued quotation of its common stock on the Bulletin Board.
(p) 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 Information,
other than those incurred in the ordinary course of the Company's businesses
since December 31, 2003 and which, individually or in the aggregate, would
reasonably be expected to have a material adverse effect on the Company's
financial condition.
(q) NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. Since
December 31, 2003, no material 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.
(s) CAPITALIZATION. The authorized and outstanding
capital stock of the Company as of the date of this Agreement and the Closing
Date is set forth on SCHEDULE 5(s) hereto. 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 except as set forth on Schedule 5(s). 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
directors understand the nature of the Securities being sold hereby and
recognize that the issuance of the Securities may have a dilutive effect on the
equity holdings of other holders of the Company's equity or rights to receive
equity of the Company. The board of directors of the Company has concluded, in
its good faith business judgment, that the issuance of the Securities is in the
best interests of the Company. The Company specifically acknowledges that its
obligation to issue the Warrant Shares upon exercise of the Warrants is binding
upon the Company and enforceable regardless of the dilution such issuance may
have on the ownership interests of other shareholders of the Company or parties
entitled to receive equity of the Company.
(u) NO DISAGREEMENTS WITH ACCOUNTANTS AND LAWYERS.
There are no material disagreements of any kind which require public disclosure
or filing presently existing, or reasonably anticipated by the Company to arise,
between the Company and the accountants and lawyers formerly or presently
employed by the Company, including but not limited to disputes or conflicts over
payment owed to such accountants and lawyers.
(v) INVESTMENT COMPANY. The Company is not an
Affiliate of an "INVESTMENT COMPANY" within the meaning of the Investment
Company Act of 1940, as amended.
(w) 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, and, unless the Company
otherwise notifies the Subscribers prior to the Closing Date, shall be true and
correct in all material respects as of the Closing Date.
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(x) SURVIVAL. The foregoing representations and
warranties shall survive the Closing Date for a period of two years.
6. REGULATION D OFFERING. The offer and issuance of the
Securities to the Subscribers is being made pursuant to the exemption from the
registration provisions of the 1933 Act afforded by Section 4(2) or Section 4(6)
of the 1933 Act and/or 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 an
exemption from registration under the 1933 Act as it relates to the offer and
issuance of the Securities and other matters reasonably requested by
Subscribers. 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 resale of the Common Stock and
exercise of the Warrants and resale of the Warrant Shares.
7. DUE DILIGENCE FEE/LEGAL FEES. A combined total of $62,000
will be paid to (i) the parties identified on Schedule 7(a) in the amounts
therein described, as compensation for due diligence services rendered in
connection with the Offering, and (ii) Grushko & ▇▇▇▇▇▇▇, P.C., a fee of $32,000
("LEGAL FEES") as reimbursement for legal services rendered to the Subscribers
in connection with this Agreement and the purchase and sale of the Shares and
Warrants (the "Offering") and acting as Escrow Agent for the Offering. Payment
for legal services will be payable on the Closing Date out of funds held
pursuant to the Escrow Agreement.
8.1 COVENANTS OF THE COMPANY. The Company covenants and agrees
with the Subscribers as follows:
(a) STOP ORDERS. The Company will advise the
Subscribers, promptly after it receives notice of issuance by the 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
listing of the shares of Common Stock and the Warrant Shares upon each
national securities exchange, or automated quotation system upon which they are
or become eligible for listing (subject to official notice of issuance) and
shall maintain such listing so long as any Shares or Warrants are outstanding.
The Company will maintain the listing of its Common Stock on the American Stock
Exchange, Nasdaq SmallCap Market, Nasdaq National Market System, Bulletin Board,
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 other market with the reasonable consent of Subscribers holding a
majority of the Shares and Warrant Shares, and will comply in all respects with
the Company's reporting, filing and other obligations under the bylaws or rules
of the Principal Market, as applicable. The Company will provide the Subscribers
copies of all notices it receives notifying the Company of the threatened and
actual delisting of the Common Stock from any Principal Market. As of the date
of this Agreement and the Closing Date, the Bulletin Board is and will be the
Principal Market.
(c) MARKET REGULATIONS. The Company shall notify the
Commission, the Principal Market 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 Subscribers and promptly provide copies
thereof to Subscriber.
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(d) REPORTING REQUIREMENTS. From the date of this
Agreement and until the sooner of (i) two (2) years after the Closing Date, or
(ii) until all the Shares and Warrant Shares have been resold or transferred by
all the Subscribers pursuant to the Registration Statement or pursuant to Rule
144, without regard to volume limitation, the Company will (v) cause its Common
Stock to continue to be registered under Section 12(b) or 12(g) of the 1934 Act,
(x) comply in all respects with its reporting and filing obligations under the
1934 Act, (y) 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 1934 Act, as applicable, and (z) 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 1933 Act
or the 1934 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 two (2) years after the Closing Date. Until the earlier of
the resale of the Common Stock and the Warrant Shares by each Subscriber or at
least two (2) years after the Warrants have been exercised, the Company will use
its best efforts to continue the listing or quotation of the Common Stock on the
Principal Market or other market or exchange identified in Section 5(e) above,
and will comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the Principal Market. The Company
agrees to timely file a Form D with respect to the Securities if required under
Regulation D and to provide a copy thereof to each Subscriber promptly after
such filing.
(e) USE OF PROCEEDS. The Company undertakes to use
the proceeds of the Subscribers' funds for the purposes set forth on
SCHEDULE 8(E) hereto. Except as set forth on SCHEDULE 8(E), the Purchase Price
may not and will not be used for accrued and unpaid officer and director
salaries, payment of financing related debt, redemption of outstanding notes or
equity instruments of the Company nor non-trade obligations outstanding on the
Closing Date.
(f) RESERVATION. Prior to the Closing Date, the
Company undertakes to reserve, PRO RATA, on behalf of each Subscriber and
holder of a Warrant, from its authorized but unissued common stock, a number of
common shares equal to the amount of Warrant Shares issuable upon exercise of
the Warrants.
(g) TAXES. From the date of this Agreement and until
the sooner of (i) two (2) years after the Closing Date, or (ii) until all the
Shares and Warrant Shares have been resold or transferred by all the Subscribers
pursuant to the Registration Statement or pursuant to Rule 144, without regard
to volume limitations, 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. From the date of this Agreement and
until the sooner of (i) two (2) years after the Closing Date, or (ii) until all
the Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, 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
one hundred percent (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.
10
(i) BOOKS AND RECORDS. From the date of this
Agreement and until the sooner of (i) two (2) years after the Closing Date, or
(ii) until all the Shares and Warrant Shares have been resold or transferred by
all the Subscribers pursuant to the Registration Statement or pursuant to Rule
144, without regard to volume limitations, 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. From the date of this
Agreement and until the sooner of (i) two (2) years after the Closing Date, or
(ii) until all the Shares and Warrant Shares have been resold or transferred by
all the Subscribers pursuant to the Registration Statement or pursuant to Rule
144, without regard to volume limitations, 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. From the date of this
Agreement and until the sooner of (i) two (2) years after the Closing Date, or
(ii) until all the Shares and Warrant Shares have been resold or transferred by
all the Subscribers pursuant to the Registration Statement or pursuant to Rule
144, without regard to volume limitations, 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. From the date of this Agreement and
until the sooner of (i) two (2) years after the Closing Date, or (ii) until all
the Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement (as defined in Section
10.1(iv) hereof) or pursuant to Rule 144, without regard to volume limitations,
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
necessary 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) CONFIDENTIALITY/PUBLIC ANNOUNCEMENT. From the
date of this Agreement and until the sooner of (i) two (2) years after the
Closing Date, or (ii) until all the Shares and Warrant Shares have been resold
or transferred by all the Subscribers pursuant to the Registration Statement or
pursuant to Rule 144, without regard to volume limitations, the Company agrees
that except in connection with a Form 8-K or the Registration Statement, it will
not disclose publicly or privately the identity of the Subscribers unless
expressly agreed to in writing by a Subscriber or only to the extent required by
law and then only upon five days prior notice to Subscriber. In any event and
subject to the foregoing, the Company undertakes to file a Form 8-K or make a
public announcement describing the Offering not later than the first business
day after the Closing Date. In the Form 8-K or public announcement, the Company
will specifically disclose the amount of common stock outstanding immediately
after each Closing.
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(n) FURTHER REGISTRATION STATEMENTS. Except for a
registration statement filed on behalf of the Subscribers pursuant to
Section 10 of this Agreement or in connection with the securities identified on
SCHEDULE 10.1 hereto, the Company will not file any registration statements,
including but not limited to Form S-8, with the Commission or with state
regulatory authorities, without the consent of the Subscribers holding 85% of
the outstanding Shares and Warrant Shares, until one hundred and eighty (180)
days after the Actual Effective Date during which such Registration Statement
shall have been current and available for use in connection with the public
resale of the Shares and Warrant Shares ("EXCLUSION PERIOD"). Nor will the
Company allow any registration statement except for the Registration Statement
to be declared effective by the Commission prior to the end of the Exclusion
Period.
(o) BLACKOUT. The Company undertakes and covenants
that until the first to occur of (i) the end of the Exclusion Period, or
(ii) until all the Shares and Warrant Shares have been resold pursuant to a
registration statement or Rule 144, 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 or
causing an already effective registration statement to no longer be effective or
current for a period of fifteen (15) or more days.
(p) NON-PUBLIC INFORMATION. The Company covenants and
agrees that neither it nor any other Person acting on its behalf will
provide any Subscriber or its agents or counsel with any information that the
Company believes constitutes material non-public information, unless prior
thereto such Subscriber shall have agreed in writing to receive such
information. The Company understands and confirms that each Subscriber shall be
relying on the foregoing representations in effecting transactions in securities
of the Company.
(q) NOTICE OF INTENT TO SELL OR MERGE COMPANY. The
Company will give Subscriber 90 days notice before entering into a transaction
to merge or sell a controlling interest in the Company.
(r) SALE OR MERGER OF COMPANY. In the event of a sale
of substantially all of the assets of the Company or a merger by the Company
with another entity, the 9.99% restriction described in Section 10 of the
Warrants shall no longer apply and the Subscriber will have the right to
exercise the Warrants concurrently with the sale of the Shares.
(s) INDEPENDENT DIRECTORS. The Company will cause the
appointment of at least two independent directors within sixty (60) days hereof.
If no such Directors are appointed, the Company shall pay to the Investors, pro
rata, as liquidated damages and not as a penalty, an amount equal to twenty four
percent (24%) of the Purchase Price per annum, payable monthly. The parties
agree that the liquidated damages described in this Section 8(s) shall
constitute the entire monetary amount of damages payable in connection with a
violation of the provisions of this Section 8(s). Nothing shall preclude the
Investor from pursuing or obtaining specific performance or other equitable
relief with respect to this Agreement. The parties hereto agree that the
liquidated damages provided for in this Section 8(s) constitute a reasonable
estimate of the damages that may be incurred by the Subscriber by reason of the
failure of the Company to appoint at least two independent directors in
accordance with the provision hereof.
(t) INDEPENDENT DIRECTORS BECOME MAJORITY OF AUDIT
AND COMPENSATION COMMITTEES. The Company will cause the appointment of a
majority of outside independent directors to the audit and compensation
committees of the board of directors within (90) days hereof. If no such
Directors are appointed, the Company shall pay to the Investors, pro rata, as
liquidated damages and not as a penalty, an amount equal to twenty four percent
(24%) of the Purchase Price per annum, payable monthly. The parties agree that
the liquidated damages described in this Section 8(t) shall constitute the
entire monetary amount of damages payable in connection with a violation of the
provisions of this Section 8(t). Nothing shall preclude the Subscriber from
pursuing or obtaining specific performance or other equitable relief with
respect to this Agreement. The parties hereto agree that the liquidated damages
provided for in this Section 8(t) constitute a reasonable estimate of the
damages that may be incurred by the Subscriber by reason of the failure of the
Company to appoint at least two independent directors in accordance with the
provision hereof.
12
(u) CONVERTIBLE DEBT. For a period of three years
from the Closing Date, the Company will not issue any convertible debt.
(v) FUTURE EQUITY DEALS. For a period of two years
from the Closing Date, the Company will not enter into any transactions
that have any reset features that could result in additional shares being
issued.
8.2 COVENANTS OF SUBSCRIBER. The Subscriber covenants and
promises to (i) the timely provision of any Subscriber information required
hereunder or reasonably requested by the Company in connection with the filing
and declaration of effectiveness of the Registration Statement (as defined
hereafter in Section 10.1(iv)); (ii) the timely execution of any and all
documents required hereunder or reasonably requested by the Company in
connection with the filing and declaration of effectiveness of the Registration
Statement; and (iii) any other timely action as required hereunder or reasonably
requested by the Company in connection with the filing and declaration of
effectiveness of the Registration Statement.
9. COVENANTS OF THE COMPANY AND SUBSCRIBER REGARDING
INDEMNIFICATION.
(a) The Company agrees to indemnify, hold harmless,
reimburse and defend the Subscribers, the Subscribers' 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 the
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 any of the Transaction Documents; 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 under any Transaction
Documents other than its obligations under Section 10 of this Agreement.
(b) Each 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
such 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
such Subscriber of any covenant or undertaking to be performed by such
Subscriber hereunder, or any other agreement entered into by the Company and
Subscribers, relating hereto.
(c) In no event shall the liability of any Subscriber
or permitted successor hereunder or under any other agreement delivered in
connection herewith be greater in amount than the dollar amount of the net
proceeds actually received by such Subscriber upon the sale of Registrable
Securities (as defined herein).
(d) The procedures set forth in Section 10.6 shall
apply to the indemnifications set forth in Sections 9(a) and 9(b) above.
10.1. REGISTRATION RIGHTS. The Company hereby grants the
following registration rights to holders of the Securities.
13
(i) On one occasion, for a period commencing one
hundred and twenty-one (121) days after the Closing Date, but not later than two
(2) years after the Closing Date ("REQUEST DATE"), upon a written request
therefor from any record holder or holders of more than 50% of the Shares issued
and Warrant Shares actually issued upon exercise of the Warrants, the Company
shall prepare and file with the Commission a registration statement under the
1933 Act registering the Shares and Warrant Shares issuable upon exercise of the
Class A Warrants and Class B Warrants (collectively "REGISTRABLE SECURITIES")
which are the subject of such request for unrestricted public resale by the
holder thereof. Registrable Securities shall not include and a holder may not
exercise holder's rights pursuant to this Section 10.1(i) or Section 10.1(ii) in
connection with (A) Securities which are already registered for resale in an
effective registration statement, (B) included for registration in a pending
registration statement, or (C) which have been issued without further transfer
restrictions after a sale or transfer pursuant to Rule 144 under the 1933 Act.
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 ten
(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).
(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 Subscribers or Holder pursuant to an effective registration statement, each
such time it will give at least fifteen (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 ten (10) days
after the giving of any such notice by the Company, to register any of the
Registrable Securities not previously registered, the Company will, subject to
the terms of this Agreement, 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" or "SELLERS"). 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 foregoing 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 and the
Company actually does file such other registration statement, 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 not
later than thirty (30) days after the Closing Date (the "FILING DATE"), and
cause to be declared effective within one hundred and twenty (120) days after
the Closing Date (the "EFFECTIVE DATE"), a registration statement on Form SB-2
(or such other form that it is eligible to use) in order to register the
Registrable Securities for resale and distribution under the 1933 Act (the
"REGISTRATION STATEMENT"). The Company will register not less than a number of
shares of common stock in the aforedescribed registration statement that is
equal to the Shares and all of the Warrant Shares issuable upon exercise of the
Warrants. The Registrable Securities shall be reserved and set aside exclusively
14
for the benefit of each Subscriber and Warrant holder, PRO RATA, and not issued,
employed or reserved for anyone other than each such Subscriber and Warrant
holder. The Registration Statement will immediately be amended or additional
registration statements will be immediately filed by the Company as necessary to
register additional shares of Common Stock to allow the public resale of all
Common Stock included in and issuable by virtue of the Registrable Securities.
Without the written consent of the Subscriber, no securities of the Company
other than the Registrable Securities will be included in the Registration
Statement except as disclosed on SCHEDULE 10.1. It shall be deemed a
Non-Registration Event (as defined in Section 10.4 of this Agreement) if at any
time after the Actual Effective Date, the Company has registered for
unrestricted resale on behalf of each Subscriber fewer than all the Shares and
Warrant Shares issuable upon exercise of the Warrants.
10.2. REGISTRATION PROCEDURES. If and whenever the Company is
required by the provisions of Section 10.1 to effect the registration of any
Registrable Securities under the 1933 Act, the Company will, as expeditiously as
possible:
(a) subject to the timelines provided in this
Agreement, prepare and file with the Commission a registration statement
required by Section 10, 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 the Registrable Securities copies of all
filings and Commission letters of comment and notify Subscribers and Grushko &
▇▇▇▇▇▇▇, P.C. (by telecopier and by email to ▇▇▇▇▇▇▇▇▇@▇▇▇.▇▇▇) within four (4)
hours of (i) notice that the Commission has no comments or no further comments
on the Registration Statement, and (ii) the declaration of effectiveness of the
registration statement, (failure to timely provide notice as required by this
Section 10.2(a) shall be a material breach of the Company's obligation hereunder
and a Non-Registration Event as defined in Section 10.4 of this Agreement;
(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 such registration statement has been effective for a
period of two (2) years, 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 Sellers' intended method of
disposition set forth in such registration statement for such period;
(c) furnish to the Sellers, 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
Registrable Securities covered by such registration statement under the
securities or "blue sky" laws of such jurisdictions as the Sellers shall request
in writing, 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) if applicable, list the Registrable Securities
covered by such registration statement with any securities exchange on
which the Common Stock of the Company is then listed;
15
(f) immediately notify the Sellers 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; and
(g) provided same would not be in violation of the
provision of Regulation FD under the 1934 Act, make available for inspection by
the Sellers, 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.
10.3. PROVISION OF DOCUMENTS. In connection with each
registration described in this Section 10, each 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.
10.4. NON-REGISTRATION EVENTS. The Company and the Subscribers
agree that the Sellers will suffer damages if the Registration Statement is not
filed by the Filing Date and not declared effective by the Commission by the
Effective Date, and any registration statement required under Section 10.1(i) or
10.1(ii) is not filed within 60 days after written request and declared
effective by the Commission within 120 days after such request, 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 is not filed on or before the
Filing Date, (ii)is not declared effective on or before the sooner of the
Effective Date, or within three (3) business days of receipt by the Company of a
written or oral communication from the Commission that the Registration
Statement will not be reviewed or that the Commission has no further comments,
(iii) if the registration statement described in Sections 10.1(i) or 10.1(ii) is
not filed within 60 days after such written request, or is not declared
effective within 120 days after such written request, or (iv) 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 within fifteen (15) business days by an effective replacement or
amended registration statement) for a period of time which shall exceed 30 days
in the aggregate per year (defined as a period of 365 days commencing on the
date the Registration Statement is declared effective) or more than 20
consecutive days (each such event referred to in clauses (i), (ii), (iii) and
(iv) of this Section 10.4 is referred to herein as a "Non-Registration Event"),
then the Company shall deliver to the holder of Registrable Securities, as
liquidated damages, an amount equal to two percent (2%) pro rated on a daily
basis for each thirty days or part thereof of the pendency of such
Non-Registration Event of the Purchase Price of the Shares owned of record by
such holder which are subject to such Non-Registration Event in connection with
a Non-Registration Event described in Section 10.4(i) and 10.4(iv) above.
Liquidated damages payable in connection with an Effective Date related
Non-Registration Event described in Section 10.4(ii) and 10.4(iii) above will
accrue at the rate of one and one-half percent (1.5%) pro rated on a daily basis
for the first sixty (60) days of such Non-Registration Event and thereafter for
each thirty days at the rate of two percent (2%) pro rated on a daily basis.
Liquidated damages that may accrue pursuant to Section 10.4(i) shall cease to
accrue pursuant to Section 10.4(i) from the earliest date upon which liquidated
damages begin to accrue as a result of any other Non-Registration Event. The
Company must pay the liquidated damages in cash within ten (10) days after the
end of each thirty (30) day period or shorter part thereof for which liquidated
16
damages are payable. Liquidated damages will not be payable to a Subscriber in
connection with the Non-Registration Event caused exclusively and solely by the
failure of such Subscriber to timely provide the information required by Section
8.2. Subscribers who timely provide the information required pursuant to Section
8.2 hereof shall be entitled to liquidated damages regardless of a default by
any other Subscriber or Subscribers. In the event a Registration Statement is
filed by the Filing Date but is withdrawn prior to being declared effective by
the Commission, then such Registration Statement will be deemed to have not been
filed. All oral or written comments received from the Commission relating to the
Registration Statement must be responded to within fifteen (15) business days.
Failure to timely respond is a Non-Registration Event for which liquidated
damages shall accrue and be payable by the Company to the holders of Registrable
Securities at the same rate set forth above. Notwithstanding the foregoing, the
Company shall not be liable to the Subscriber under this Section 10.4 for any
events or delays occurring as a consequence of the acts or omissions of the
Subscribers contrary to the obligations undertaken by Subscribers in this
Agreement.
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 for all Sellers are called "REGISTRATION EXPENSES." All
underwriting discounts and selling commissions applicable to the sale of
Registrable Securities, including any fees and disbursements of any additional
counsel to the Seller, are called "SELLING EXPENSES." The Company will pay all
Registration Expenses in connection with the registration statement under
Section 10. 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 1933 Act pursuant to Section 10, 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 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
in light of the circumstances when made, and will subject to the provisions of
Section 10.6(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
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.
17
(b) In the event of a registration of any of the
Registrable Securities under the 1933 Act pursuant to Section 10, each Seller
severally but not jointly 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 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 net proceeds actually 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, as a group, 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 1933 Act in any case in
which either (i) a Seller, or any controlling person of a 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
18
notwithstanding the fact that this Section 10.6 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 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 sold by it pursuant to such registration statement; and (z) no person
or entity guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the ▇▇▇▇ ▇▇▇) will be entitled to contribution from any person or
entity who was not guilty of such fraudulent misrepresentation.
10.7. DELIVERY OF UNLEGENDED SHARES.
(a) Within three (3) business days (such third (3rd)
business day being the "UNLEGENDED SHARES DELIVERY DATE") after the business day
on which the Company has received (i) a written notice that Registrable
Securities have been sold pursuant to Rule 144 under the 1933 Act, and the
requirements of Rule 144 have been satisfied, or at any time when the
Registrable Securities are included for public resale in an effective
registration statement, (ii) the original share certificates representing the
shares of Common Stock that have been sold under Rule 144 or included in the
effective registration statement, and (iii) in the case of sales under Rule 144,
customary representation letters of the Subscriber and/or Subscriber's broker
regarding compliance with the requirements of Rule 144, the Company at its
expense, (y) 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, directing the delivery of
shares of Common Stock without any legends including the legend set forth in
Section 4 above, issuable pursuant to any effective and current Registration
Statement described in Section 10 of this Agreement or pursuant to Rule 144
under the 1933 Act (the "UNLEGENDED SHARES"); and (z) cause the transmission of
the certificates representing the Unlegended Shares together with a legended
certificate representing the balance of the unsold shares of Common Stock, if
any, 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
Shares Delivery Date. Transfer fees shall be the responsibility of the Seller.
Each Subscriber, severally and not jointly with the other Subscribers, agrees
that the removal of the restrictive legend from certificates representing the
Shares is predicated upon the Company's reliance that the Subscriber will sell
the Shares pursuant to either the registration requirements of the 1933 Act,
including any applicable prospectus delivery requirements, or an exemption
therefrom.
(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 a Subscriber, so long as the certificates
therefor 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 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. Such delivery must be made on or before the Unlegended
Shares Delivery Date.
(c) The Company understands that a delay in the
delivery of the Unlegended Shares pursuant to Section 10 hereof later than two
business days after the Unlegended Shares Delivery Date could result in economic
loss to a Subscriber. As compensation to a 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 the Delivery Date for each $10,000 of purchase price of the
Unlegended Shares subject to the delivery default. Such liquidated damages will
increase to $200 per day for each $10,000 of purchase price of the Unlegended
Shares five days after the Delivery Date. If during any 360 day period, the
Company fails to deliver Unlegended Shares as required by this Section 10.7 for
an aggregate of thirty (30) days, then each Subscriber or assignee holding
Securities subject to such default may, at its option, require the Company to
redeem all or any portion of the Shares and Warrant Shares subject to such
19
default at a price per share equal to 120% of the Purchase Price of such Common
Stock and Warrant Shares ("UNLEGENDED REDEMPTION AMOUNT"). The amount of the
aforedescribed liquidated damages that have accrued or been paid for the twenty
day period prior to the receipt by the Subscriber of the Unlegended Redemption
Amount shall be credited against the Unlegended Redemption Amount. 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 a
Subscriber, if the Company fails to deliver to a Subscriber Unlegended
Shares as required pursuant to this Agreement, within seven (7) business days
after the Unlegended Shares 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 shares of Common Stock which
the Subscriber was entitled to receive 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 shares of Common Stock 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 a Subscriber purchases shares of Common Stock having a total
purchase price of $10,000 to cover a Buy-In with respect to $10,000 of purchase
price of shares of Common Stock 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.
(e) In the event a Subscriber shall request in
writing delivery of Unlegended Shares as described in Section 10.7(e) and the
Company is required to deliver such Unlegended Shares pursuant to Section
10.7(e), the Company may not refuse to deliver Unlegended Shares 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, the Company files for an injunction or temporary restraining order from
a court, on notice, restraining and or enjoining delivery of such Unlegended
Shares or exercise of all or part of said Warrant shall have been sought and
obtained and the Company has posted a surety bond for the benefit of such
Subscriber in the amount of 110% of the amount of the aggregate purchase price
of the Common Stock and Warrant Shares which are subject to the injunction or
temporary restraining order, 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 in
Subscriber's favor.
(f) Nothing contained herein shall limit a
Subscriber's right to pursue actual damages for the Company's failure to deliver
Unlegended Shares and Subscriber shall have the right to pursue all available
remedies at law or equity including, without limitation, a decree of specific
performance and/or injunctive relief.
11. (a) RIGHT OF FIRST REFUSAL. Until the end of the Exclusion
Period, the Subscribers shall be given not less than five (5) 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 has
20
been described in the Reports or Other Written Information filed with the
Commission or delivered to the Subscribers prior to the Closing Date
(collectively the foregoing are "EXCEPTED ISSUANCES"). The Subscribers who
exercise their rights pursuant to this Section 11(a) shall have the right during
the five (5) business days following receipt of the notice to purchase such
offered common stock, debt or other securities in accordance with the terms and
conditions set forth in the notice of sale in the same proportion to each other
as their purchase of Shares in the Offering. In the event such terms and
conditions are modified during the notice period, the Subscribers shall be given
prompt notice of such modification and shall have the right during the five (5)
business days following the notice of modification, whichever is longer, to
exercise such right.
(b) FAVORED NATIONS PROVISION. Other than the
Excepted Issuances, for a period of three years after the Effective Date, if
the Company shall offer, issue or agree to issue any common stock or securities
convertible into or exercisable for shares of common stock (or modify any of the
foregoing which may be outstanding at any time prior to the Closing Date) to any
person or entity at a price per common share or conversion or exercise price per
share which shall be less than the per Share Purchase Price, without the consent
of each Subscriber holding such Shares, then the Company shall issue, for each
such occasion, additional shares of Common Stock to each Subscriber so that the
average per Share Purchase Price of the shares of Common Stock issued to the
Subscriber (of only the Common Stock still owned by the Subscriber) is equal to
such other lower price per share. The delivery to the Subscriber of the
additional shares of Common Stock shall be not later than the closing date of
the transaction giving rise to the requirement to issue such additional shares
of Common Stock. The Subscriber is granted the registration rights described in
Section 10 hereof in relation to such additional shares of Common Stock except
that the Filing Date and Effective Date vis-a-vis such additional common shares
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 shares of Common Stock. 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 shares of Common Stock 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 at any time if such issuance is at a price lower than the per Share
Purchase Price. The rights of the Subscriber set forth in this Section 12 are in
addition to any other rights the Subscriber has pursuant to this Agreement and
any other agreement referred to or entered into in connection herewith.
(c) MAXIMUM EXERCISE OF RIGHTS. In the event the
exercise of the rights described in Sections 11(a) and 11(b) would result in the
issuance of an amount of common stock of the Company that would exceed the
maximum amount that may be issued to a Subscriber calculated in the manner
described in Section 10 of the Warrant, then the issuance of such additional
shares of common stock of the Company to such Subscriber will be deferred in
whole or in part until such time as such Subscriber is able to beneficially own
such common stock without exceeding the maximum amount set forth calculated in
the manner described in Section 10 of the Class A Warrant. The determination of
when such common stock may be issued shall be made by each Subscriber as to only
such Subscriber.
12. 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
21
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
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: American Oriental Bioengineering Inc., No. 308 Xuefu Road, Nangang
District, Harbin, China, 150086, Attn: ▇▇▇▇ ▇▇▇, telecopier number:
011-86-451-8666-6601, with a copy by telecopier only to: ▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, Attn:
▇▇▇▇▇▇ ▇. ▇▇▇▇▇, telecopier: ▇▇▇-▇▇▇-▇▇▇▇, and (ii) if to the Subscribers, to:
the one or more addresses and telecopier numbers indicated on the signature
pages hereto, with an additional copy by telecopier only to: Grushko & ▇▇▇▇▇▇▇,
P.C., ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇, telecopier: (212)
697-3575.
(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.
(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
Subscribers have relied on any representations not contained or referred to in
this Agreement and the documents delivered herewith. Except as set forth in this
Agreement, no right or obligation of any party hereto shall be assigned by that
party without prior notice to and the written consent of the other party.
(d) COUNTERPARTS/EXECUTION. This Agreement may be
executed in any number of counterparts and by the different signatories
hereto on separate counterparts, each of which, when so executed, shall be
deemed an original, but all such counterparts shall constitute but one and the
same instrument. This Agreement may be executed by facsimile signature and
delivered by facsimile transmission.
(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. THE PARTIES AND
THE INDIVIDUALS EXECUTING THIS AGREEMENT AND OTHER AGREEMENTS REFERRED TO HEREIN
OR DELIVERED IN CONNECTION HEREWITH 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.
22
(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, this being in addition
to any other remedy to which any of them may be entitled by law or equity.
Subject to Section 12(e) hereof, each of the Company, Subscriber and any
signator hereto in his personal capacity 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 in New York 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) INDEPENDENT NATURE OF SUBSCRIBERS. The Company
acknowledges that the obligations of each Subscriber under the
Transaction Documents are several and not joint with the obligations of any
other Subscriber, and no Subscriber shall be responsible in any way for the
performance of the obligations of any other Subscriber under the Transaction
Documents. The Company acknowledges that the decision of each Subscriber to
purchase Securities has been made by such Subscriber independently of any other
Subscriber and independently of any information, materials, statements or
opinions as to the business, affairs, operations, assets, properties,
liabilities, results of operations, condition (financial or otherwise) or
prospects of the Company which may have been made or given by any other
Subscriber or by any agent or employee of any other Subscriber, and no
Subscriber or any of its agents or employees shall have any liability to any
Subscriber (or any other person) relating to or arising from any such
information, materials, statements or opinions. The Company acknowledges that
nothing contained in any Transaction Document, and no action taken by any
Subscriber pursuant hereto or thereto (including, but not limited to, the (i)
inclusion of a Subscriber in the Registration Statement and (ii) review by, and
consent to, such Registration Statement by a Subscriber) shall be deemed to
constitute the Subscribers as a partnership, an association, a joint venture or
any other kind of entity, or create a presumption that the Subscribers are in
any way acting in concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents. The Company acknowledges
that each Subscriber shall be entitled to independently protect and enforce its
rights, including without limitation, the rights arising out of the Transaction
Documents, and it shall not be necessary for any other Subscriber to be joined
as an additional party in any proceeding for such purpose. The Company
acknowledges that it has elected to provide all Subscribers with the same terms
and Transaction Documents for the convenience of the Company and not because
Company was required or requested to do so by the Subscribers. The Company
acknowledges that such procedure with respect to the Transaction Documents in no
way creates a presumption that the Subscribers are in any way acting in concert
or as a group with respect to the Transaction Documents or the transactions
contemplated thereby.
23
(h) EQUITABLE ADJUSTMENT. The Securities and the
purchase prices of Securities shall be equitably adjusted to offset the
effect of stock splits, stock dividends, PRO RATA distributions of property or
equity interests of the Company to its shareholders.
[THIS SPACE INTENTIONALLY LEFT BLANK]
24
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (A)
--------------------------------------------
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.
AMERICAN ORIENTAL BIOENGINEERING INC.
a Nevada corporation
By:_________________________________
Name: ▇▇▇▇ ▇▇▇
Title: Chief Executive Officer and Chairman
Dated: as of November 23, 2004
------------------------------------------------- -------------------- ---------------- ------------------- ------------------
SUBSCRIBER PURCHASE PRICE SHARES CLASS A WARRANTS CLASS B WARRANTS
------------------------------------------------- -------------------- ---------------- ------------------- ------------------
---------------------------------
(Signature)
---------------------------------
Print Name and Title
25
LIST OF EXHIBITS AND SCHEDULES
------------------------------
Exhibit A1 Form of Class A Warrant
Exhibit A2 Form of Class B Warrant
Exhibit B Escrow Agreement
Exhibit C Form of Legal Opinion
Schedule 5(d) Disclosure Schedule
Schedule 5(s) Capitalization
Schedule 7(a) Due Diligence Fee Schedule
Schedule 8(e) Use of Proceeds
Schedule 10.1 Other Securities to be Registered
26
EXHIBIT A1
FORM OF CLASS A WARRANT
A1-1
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 UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO AMERICAN ORIENTAL BIOENGINEERING INC. THAT SUCH REGISTRATION IS
NOT REQUIRED.
Right to Purchase ________ shares of Common Stock of
American Oriental Bioengineering Inc. (subject to
adjustment as provided herein)
CLASS A COMMON STOCK PURCHASE WARRANT
No. 2004-A-001 Issue Date: November 23, 2004
AMERICAN ORIENTAL BIOENGINEERING INC., a corporation organized under
the laws of the State of Nevada (the "Company"), hereby certifies that, for
value received, __________________, or its assigns (the "Holder"), is entitled,
subject to the terms set forth below, to purchase from the Company at any time
after the Issue Date until 5:00 p.m., E.S.T on the third anniversary after the
Actual Effective Date (as defined in the Subscription Agreement) (the
"Expiration Date"), up to _________ fully paid and nonassessable shares of the
common stock of the Company (the "Common Stock"), $.001 par value per share at a
per share purchase price of $0.85 IN LAWFUL MONEY OF THE UNITED STATES. The
aforedescribed purchase price per share, as adjusted from time to time as herein
provided, is referred to herein as the "Purchase Price." The number and
character of such shares of Common Stock and the Purchase Price are subject to
adjustment as provided herein. The Company may reduce the Purchase Price without
the consent of the Holder. Capitalized terms used and not otherwise defined
herein shall have the meanings set forth in that certain Subscription Agreement
(the "SUBSCRIPTION AGREEMENT"), dated November 23, 2004, entered into by the
Company and the Holder.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
(a) The term "Company" shall include American Oriental Bioengineering
Inc. and any corporation which shall succeed or assume the obligations of
American Oriental Bioengineering Inc. hereunder.
(b) The term "Common Stock" includes (a) the Company's Common Stock,
$.001 par value per share, as authorized on the date of the Subscription
Agreement, and (b) any other securities into which or for which any of the
securities described in (a) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.
(c) The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the holder of the Warrant at any time shall be entitled to
receive, or shall have received, on the exercise of the Warrant, in lieu of or
in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 4 or otherwise.
A1-2
1. EXERCISE OF WARRANT.
--------------------
1.1. NUMBER OF SHARES ISSUABLE UPON EXERCISE. From and after
the Issue Date through and including the Expiration Date, the Holder hereof
shall be entitled to receive, upon exercise of this Warrant in whole in
accordance with the terms of subsection 1.2 or upon exercise of this Warrant in
part in accordance with subsection 1.3, shares of Common Stock of the Company,
subject to adjustment pursuant to Section 4.
1.2. FULL EXERCISE. This Warrant may be exercised in full by
the Holder hereof by delivery of an original or facsimile copy of the form of
subscription attached as Exhibit A hereto (the "Subscription Form") duly
executed by such Holder and surrender of the original Warrant within seven (7)
days of exercise, to the Company at its principal office or at the office of its
Warrant Agent (as provided hereinafter), accompanied by payment, in cash, wire
transfer or by certified or official bank check payable to the order of the
Company, in the amount obtained by multiplying the number of shares of Common
Stock for which this Warrant is then exercisable by the Purchase Price then in
effect.
1.3. PARTIAL EXERCISE. This Warrant may be exercised in part
(but not for a fractional share) by surrender of this Warrant in the manner and
at the place provided in subsection 1.2 except that the amount payable by the
Holder on such partial exercise shall be the amount obtained by multiplying (a)
the number of whole shares of Common Stock designated by the Holder in the
Subscription Form by (b) the Purchase Price then in effect. On any such partial
exercise, the Company, at its expense, will forthwith issue and deliver to or
upon the order of the Holder hereof a new Warrant of like tenor, in the name of
the Holder hereof or as such Holder (upon payment by such Holder of any
applicable transfer taxes) may request, the whole number of shares of Common
Stock for which such Warrant may still be exercised.
1.4. FAIR MARKET VALUE. Fair Market Value of a share of Common
Stock as of a particular date (the "Determination Date") shall mean:
(a) If the Company's Common Stock is traded on an
exchange or is quoted on the National Association of Securities Dealers,
Inc. Automated Quotation ("NASDAQ"), National Market System, the NASDAQ SmallCap
Market or the American Stock Exchange, LLC, then the closing or last sale price,
respectively, reported for the last business day immediately preceding the
Determination Date;
(b) If the Company's Common Stock is not traded on an
exchange or on the NASDAQ National Market System, the NASDAQ SmallCap Market or
the American Stock Exchange, Inc., but is traded in the over-the-counter market,
then the average of the closing bid and ask prices reported for the last
business day immediately preceding the Determination Date;
(c) Except as provided in clause (d) below, if the
Company's Common Stock is not publicly traded, then as the Holder and the
Company agree, or in the absence of such an agreement, by arbitration in
accordance with the rules then standing of the American Arbitration Association,
before a single arbitrator to be chosen from a panel of persons qualified by
education and training to pass on the matter to be decided; or
(d) If the Determination Date is the date of a
liquidation, dissolution or winding up, or any event deemed to be a
liquidation, dissolution or winding up pursuant to the Company's charter, then
all amounts to be payable per share to holders of the Common Stock pursuant to
the charter in the event of such liquidation, dissolution or winding up, plus
all other amounts to be payable per share in respect of the Common Stock in
liquidation under the charter, assuming for the purposes of this clause (d) that
all of the shares of Common Stock then issuable upon exercise of all of the
Warrants are outstanding at the Determination Date.
A1-3
1.5. COMPANY ACKNOWLEDGMENT. The Company will, at the time of
the exercise of the Warrant, upon the request of the Holder hereof acknowledge
in writing its continuing obligation to afford to such Holder any rights to
which such Holder shall continue to be entitled after such exercise in
accordance with the provisions of this Warrant. If the Holder shall fail to make
any such request, such failure shall not affect the continuing obligation of the
Company to afford to such Holder any such rights.
1.6. TRUSTEE FOR WARRANT HOLDERS. In the event that a bank or
trust company shall have been appointed as trustee for the Holder of the
Warrants pursuant to Subsection 3.2, such bank or trust company shall have all
the powers and duties of a warrant agent (as hereinafter described) and shall
accept, in its own name for the account of the Company or such successor person
as may be entitled thereto, all amounts otherwise payable to the Company or such
successor, as the case may be, on exercise of this Warrant pursuant to this
Section 1.
1.7. DELIVERY OF STOCK CERTIFICATES, ETC. ON EXERCISE. The
Company agrees that the shares of Common Stock purchased upon exercise of this
Warrant shall be deemed to be issued to the Holder hereof as the record owner of
such shares as of the close of business on the date on which this Warrant shall
have been surrendered and payment made for such shares as aforesaid. As soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within five (5) days thereafter, the Company at its expense (including the
payment by it of any applicable issue taxes) will cause to be issued in the name
of and delivered to the Holder hereof, or as such Holder (upon payment by such
Holder of any applicable transfer taxes) may direct in compliance with
applicable securities laws, a certificate or certificates for the number of duly
and validly issued, fully paid and nonassessable shares of Common Stock (or
Other Securities) to which such Holder shall be entitled on such exercise, plus,
in lieu of any fractional share to which such Holder would otherwise be
entitled, cash equal to such fraction multiplied by the then Fair Market Value
of one full share of Common Stock, together with any other stock or other
securities and property (including cash, where applicable) to which such Holder
is entitled upon such exercise pursuant to Section 1 or otherwise.
1.8 COMMON STOCK LEGEND. The Holder acknowledges and agrees
that the shares of Common Stock of the Company, and, until such time as the
Common Stock has been registered under the 1933 Act and sold in accordance with
an effective Registration Statement, or exemption from registration,
certificates and other instruments representing any of the Common Stock shall
bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of any such Securities):
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR APPLICABLE
STATE SECURITIES LAWS. 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 AMERICAN
ORIENTAL BIOENGINEERING INC. THAT SUCH REGISTRATION IS NOT REQUIRED."
2. CASHLESS EXERCISE.
------------------
A1-4
(a) If a Registration Statement as defined in the Subscription
Agreement ("Registration Statement") is effective and the Holder may sell its
shares of Common Stock upon exercise hereof, this Warrant may be exercisable in
whole or in part for cash only as set forth in Section 1 above. If no such
Registration Statement is available, then commencing one year after the Closing
Date, payment upon exercise may be made at the option of the Holder either in
(i) cash, wire transfer or by certified or official bank check payable to the
order of the Company equal to the applicable aggregate Purchase Price, (ii) by
delivery of Common Stock issuable upon exercise of the Warrants in accordance
with Section (b) below ("Cashless Exercise") or (iii) by a combination of any of
the foregoing methods, for the number of Common Stock specified in such form (as
such exercise number shall be adjusted to reflect any adjustment in the total
number of shares of Common Stock issuable to the holder per the terms of this
Warrant) and the holder shall thereupon be entitled to receive the number of
duly authorized, validly issued, fully paid and nonassessable shares of Common
Stock (or Other Securities) determined as provided herein.
(b) If the Fair Market Value of one share of Common Stock is
greater than the Purchase Price (at the date of calculation as set forth below)
and no Registration Statement relating to the shares of Common Stock underlying
this Warrant is effective, in lieu of exercising this Warrant for cash, the
holder may elect to receive shares equal to the value (as determined below) of
this Warrant (or the portion thereof being cancelled) by surrender of this
Warrant at the principal office of the Company together with the properly
endorsed Subscription Form in which event the Company shall issue to the holder
a number of shares of Common Stock computed using the following formula:
X= Y (A-B)
-------
A
Where X= the number of shares of Common Stock to be
issued to the holder
Y= the number of shares of Common Stock
purchasable under the Warrant or, if only a
portion of the Warrant is being exercised,
the portion of the Warrant being exercised
(at the date of such calculation)
A= the Fair Market Value of one share of the
Company's Common Stock (at the date of such
calculation)
B= Purchase Price (as adjusted to the date of
such calculation)
(c) The Holder may employ the cashless exercise
feature described above only during the pendency of a Non-Registration Event as
described in Section 10 of the Subscription Agreement.
For purposes of Rule 144 promulgated under the 1933 Act, it is
intended, understood and acknowledged that the Commission currently has
interpreted Rule 144 to mean that the Warrant Shares issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have commenced, on
the date this Warrant was originally issued pursuant to the Subscription
Agreement.
3. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC.
----------------------------------------------------------
3.1. REORGANIZATION, CONSOLIDATION, MERGER, ETC. In case at
any time or from time to time, the Company shall (a) effect a reorganization,
(b) consolidate with or merge into any other person or (c) transfer all or
substantially all of its properties or assets to any other person under any plan
or arrangement contemplating the dissolution of the Company, then, in each such
case, as a condition to the consummation of such a transaction, proper and
A1-5
adequate provision shall be made by the Company whereby the Holder of this
Warrant, on the exercise hereof as provided in Section 1, at any time after the
consummation of such reorganization, consolidation or merger or the effective
date of such dissolution, as the case may be, shall receive, in lieu of the
Common Stock (or Other Securities) issuable on such exercise prior to such
consummation or such effective date, the stock and other securities and property
(including cash) to which such Holder would have been entitled upon such
consummation or in connection with such dissolution, as the case may be, if such
Holder had so exercised this Warrant, immediately prior thereto, all subject to
further adjustment thereafter as provided in Section 4.
3.2. CONTINUATION OF TERMS. Upon any reorganization,
consolidation, merger or transfer (and any dissolution following any transfer)
referred to in this Section 3, this Warrant shall continue in full force and
effect and the terms hereof shall be applicable to the Other Securities and
property receivable on the exercise of this Warrant after the consummation of
such reorganization, consolidation or merger or the effective date of
dissolution following any such transfer, as the case may be, and shall be
binding upon the issuer of any Other Securities, including, in the case of any
such transfer, the person acquiring all or substantially all of the properties
or assets of the Company, whether or not such person shall have expressly
assumed the terms of this Warrant as provided in Section 4. In the event this
Warrant does not continue in full force and effect after the consummation of the
transaction described in this Section 3, then only in such event will the
Company's securities and property (including cash, where applicable) receivable
by the Holder of the Warrants be delivered to the Trustee as contemplated by
Section 3.2.
3.3 SHARE ISSUANCE. Until the Expiration Date, if the Company
shall issue any Common Stock except for the Excepted Issuances (as defined in
the Subscription Agreement), prior to the complete exercise of this Warrant for
a consideration less than the Purchase Price that would be in effect at the time
of such issue, then, and thereafter successively upon each such issue, the
Purchase Price shall be reduced to such other lower issue price. For purposes of
this adjustment, the issuance of any security or debt instrument of the Company
carrying the right to convert such security or debt instrument into Common Stock
or of any warrant, right or option to purchase Common Stock shall result in an
adjustment to the Purchase Price upon the issuance of the above-described
security, debt instrument, warrant, right, or option and again upon any
subsequent issuances of shares of Common Stock upon exercise of such conversion
or purchase rights at any time if such issuance is at a price lower than the
Purchase Price. The reduction of the Purchase Price described in this Section
3.3 is in addition to the other rights of the Holder described in the
Subscription Agreement.
4. EXTRAORDINARY EVENTS REGARDING COMMON STOCK. In the event that the
Company shall (a) issue additional shares of the Common Stock as a dividend or
other distribution on outstanding Common Stock, (b) subdivide its outstanding
shares of Common Stock, or (c) combine its outstanding shares of the Common
Stock into a smaller number of shares of the Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the then Purchase Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such event and the denominator of which shall be the number
of shares of Common Stock outstanding immediately after such event, and the
product so obtained shall thereafter be the Purchase Price then in effect. The
Purchase Price, as so adjusted, shall be readjusted in the same manner upon the
happening of any successive event or events described herein in this Section 4.
The number of shares of Common Stock that the Holder of this Warrant shall
thereafter, on the exercise hereof as provided in Section 1, be entitled to
receive shall be adjusted to a number determined by multiplying the number of
shares of Common Stock that would otherwise (but for the provisions of this
Section 4) be issuable on such exercise by a fraction of which (a) the numerator
is the Purchase Price that would otherwise (but for the provisions of this
Section 4) be in effect, and (b) the denominator is the Purchase Price in effect
on the date of such exercise.
A1-6
5. CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment or
readjustment in the shares of Common Stock (or Other Securities) issuable on the
exercise of the Warrants, the Company at its expense will promptly cause its
Chief Financial Officer or other appropriate designee to compute such adjustment
or readjustment in accordance with the terms of the Warrant and prepare a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (a) the consideration received or receivable by the Company for any
additional shares of Common Stock (or Other Securities) issued or sold or deemed
to have been issued or sold, (b) the number of shares of Common Stock (or Other
Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price
and the number of shares of Common Stock to be received upon exercise of this
Warrant, in effect immediately prior to such adjustment or readjustment and as
adjusted or readjusted as provided in this Warrant. The Company will forthwith
mail a copy of each such certificate to the Holder of the Warrant and any
Warrant Agent of the Company (appointed pursuant to Section 11 hereof).
6. RESERVATION OF STOCK, ETC. ISSUABLE ON EXERCISE OF WARRANT;
FINANCIAL STATEMENTS. The Company will at all times reserve and keep available,
solely for issuance and delivery on the exercise of the Warrants, all shares of
Common Stock (or Other Securities) from time to time issuable on the exercise of
the Warrant. This Warrant entitles the Holder hereof to receive copies of all
financial and other information distributed or required to be distributed to the
holders of the Company's Common Stock.
7. ASSIGNMENT; EXCHANGE OF WARRANT. Subject to compliance with
applicable securities laws, this Warrant, and the rights evidenced hereby, may
be transferred by any registered holder hereof (a "Transferor"). On the
surrender for exchange of this Warrant, with the Transferor's endorsement in the
form of Exhibit B attached hereto (the "Transferor Endorsement Form") and
together with an opinion of counsel reasonably satisfactory to the Company that
the transfer of this Warrant will be in compliance with applicable securities
laws, the Company at its expense, once only, but with payment by the Transferor
of any applicable transfer taxes, will issue and deliver to or on the order of
the Transferor thereof a new Warrant or Warrants of like tenor, in the name of
the Transferor and/or the transferee(s) specified in such Transferor Endorsement
Form (each a "Transferee"), calling in the aggregate on the face or faces
thereof for the number of shares of Common Stock called for on the face or faces
of the Warrant so surrendered by the Transferor. No such transfers shall result
in a public distribution of the Warrant.
8. REPLACEMENT OF WARRANT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of this Warrant, the Company at its
expense, twice only, will execute and deliver, in lieu thereof, a new Warrant of
like tenor.
9. REGISTRATION RIGHTS. The Holder of this Warrant has been granted
certain registration rights for the shares underlying this Warrant by the
Company. These registration rights are set forth in the Subscription Agreement.
The terms of the Subscription Agreement are incorporated herein by this
reference.
10. MAXIMUM EXERCISE. The Holder shall not be entitled to exercise this
Warrant on an exercise date nor may the Company exercise its right to give a
Call Notice (as defined in Section 11) in connection with that number of Common
Stock which would be in excess of the sum of (i) the number of Common Stock
beneficially owned by the Holder and its affiliates on an exercise date or Call
Date, and (ii) the number of Common Stock issuable upon the exercise of this
Warrant with respect to which the determination of this limitation is being made
A1-7
on an exercise date or Call Date, which would result in beneficial ownership by
the Holder and its affiliates of more than 9.99% of the outstanding Common Stock
on such date. For the purposes of 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 Holder shall not be limited to aggregate exercises which
would result in the issuance of more than 9.99%. The restriction described in
this paragraph may be revoked upon sixty-one (61) days prior notice from the
Holder to the Company. The Holder 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%.
11. CALL. The Company shall have the option to "call" the Warrants (the
"Warrant Call"), one or more times, in accordance with and governed by the
following:
(a) The Company shall exercise the Warrant Call by giving to
the Warrant Holder a written notice of call (the "Call Notice") during the
period in which the Warrant Call may be exercised. The effective date of each
Call Notice (the "Call Date") is the date on which notice is effective under the
notice provision of Section 14 of this Warrant.
(b) The Company's right to exercise the Warrant Call shall
commence thirty trading days after the actual effective date of a registration
statement described in Section 11.1(iv) of the Subscription Agreement and end
thirty trading days prior to the Expiration Date.
(c) The number of shares of Common Stock to be issued upon
exercise of the Warrant which are subject to a Call Notice must be registered in
a registration statement effective from twenty-two trading days prior to the
Call Date and through the Delivery Date.
(d) A Call Notice may be given not sooner than fifteen trading
days after the prior Call Date.
(e) A Call Notice may be given by the Company only within five
trading days after the Common Stock has had a closing price as reported for the
Principal Market (as defined in the Subscription Agreement) of $2.55 or above
for fifteen (15) consecutive trading days ("Lookback Period").
(f) The Common Stock must be listed on the Principal Market
for the Lookback Period and through the Delivery Date.
(g) The Company shall not have received a notice from the
Principal Market during the ninety calendar days prior to the Call Date that the
Company or the Common Stock does not meet the requirements for continued
quotation, listing or trading on the Principal Market.
(h) The Company and the Common Stock shall meet the
requirements for continued quotation, listing or trading on the Principal Market
for the Lookback Period and through the Delivery Date.
(i) Unless otherwise agreed to by the Holder of this Warrant,
a Call Notice must be given to all Warrant Holders who receive Warrants similar
to this Warrant (in terms of exercise price and other principal terms) issued on
or about the same Issue Date as this Warrant, in proportion to the amounts of
Common Stock which may be purchased by the respective Warrant Holders in
accordance with the respective Warrants held by each.
A1-8
(j) The Warrant Holder shall exercise his Warrant rights and
purchase the Called Common Stock and pay for same within fourteen trading days
after the Call Date. If the Warrant Holder fails to timely pay the amount
required by the Warrant Call, the Company's sole remedy shall be to cancel a
corresponding amount of this Warrant.
(k) The Company may not exercise the right to Call this
Warrant after the occurrence of a default by the Company of a material term of
this Warrant or the Subscription Agreement.
12. WARRANT AGENT. The Company may, by written notice to the Holder of
the Warrant, appoint an agent (a "Warrant Agent") for the purpose of issuing
Common Stock (or Other Securities) on the exercise of this Warrant pursuant to
Section 1, exchanging this Warrant pursuant to Section 7, and replacing this
Warrant pursuant to Section 8, or any of the foregoing, and thereafter any such
issuance, exchange or replacement, as the case may be, shall be made at such
office by such Warrant Agent.
13. TRANSFER ON THE COMPANY'S BOOKS. Until this Warrant is transferred
on the books of the Company, the Company may treat the registered holder hereof
as the absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.
14. 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 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: American Oriental
Bioengineering Inc., No. 308 Xuefu Road, Nangang District, Harbin, China,
150086, Attn: ▇▇▇▇ ▇▇▇, telecopier number: 011-86-451-8666-6601, with a copy by
telecopier only to: ▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, Attn: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Esq., telecopier:
▇▇▇-▇▇▇-▇▇▇▇, and (ii) if to the Holder, to the address or telecopier number
listed on the first paragraph of this Warrant, with an additional copy by
telecopier only to: Grushko & ▇▇▇▇▇▇▇, P.C., ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇
▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇, telecopier: (▇▇▇) ▇▇▇-▇▇▇▇.
15. MISCELLANEOUS. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant shall be construed and enforced in accordance with and
governed by the laws of New York. Any dispute relating to this Warrant shall be
adjudicated in New York County in the State of New York. The headings in this
Warrant are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision.
A1-9
IN WITNESS WHEREOF, the Company has executed this Warrant as of the
date first written above.
AMERICAN ORIENTAL BIOENGINEERING INC.
By:__________________________________
Name: ▇▇▇▇ ▇▇▇
Title: Chief Executive Officer and Chairman
Witness:
______________________
A1-10
EXHIBIT A
FORM OF SUBSCRIPTION
(to be signed only on exercise of Warrant)
TO: AMERICAN ORIENTAL BIOENGINEERING INC.
The undersigned, pursuant to the provisions set forth in the attached Warrant
(No.____), hereby irrevocably elects to purchase (check applicable box):
___ ________ shares of the Common Stock covered by such Warrant; or
___ the maximum number of shares of Common Stock covered by such Warrant
pursuant to the cashless exercise procedure set forth in Section 2.
The undersigned herewith makes payment of the full purchase price for such
shares at the price per share provided for in such Warrant, which is
$___________. Such payment takes the form of (check applicable box or boxes):
___ $__________ in lawful money of the United States (which sum reflects
the concession amount described in Section 14 of the Warrant; and/or
___ the cancellation of such portion of the attached Warrant as is
exercisable for a total of _______ shares of Common Stock (using a Fair Market
Value of $_______ per share for purposes of this calculation); and/or
___ the cancellation of such number of shares of Common Stock as is
necessary, in accordance with the formula set forth in Section 2, to exercise
this Warrant with respect to the maximum number of shares of Common Stock
purchasable pursuant to the cashless exercise procedure set forth in Section 2.
The undersigned requests that the certificates for such shares be issued in the
name of, and delivered to _____________________________________________________
whose address is ______________________________________________________________
_____________________________________________________________________________ .
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable upon exercise of the within Warrant shall
be made pursuant to registration of the Common Stock under the Securities Act of
1933, as amended (the "Securities Act"), or pursuant to an exemption from
registration under the Securities Act.
Dated:___________________ _____________________________________________
(Signature must conform to name of holder as
specified on the face of the Warrant)
_____________________________________________
_____________________________________________
(Address)
A1-11
EXHIBIT B
FORM OF TRANSFEROR ENDORSEMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and
transfers unto the person(s) named below under the heading "Transferees" the
right represented by the within Warrant to purchase the percentage and number of
shares of Common Stock of AMERICAN ORIENTAL BIOENGINEERING INC. to which the
within Warrant relates specified under the headings "Percentage Transferred" and
"Number Transferred," respectively, opposite the name(s) of such person(s) and
appoints each such person Attorney to transfer its respective right on the books
of AMERICAN ORIENTAL BIOENGINEERING INC. with full power of substitution in the
premises.
---------------------------------------- -------------------------------------- --------------------------------------
TRANSFEREES PERCENTAGE TRANSFERRED NUMBER TRANSFERRED
---------------------------------------- -------------------------------------- --------------------------------------
---------------------------------------- -------------------------------------- --------------------------------------
---------------------------------------- -------------------------------------- --------------------------------------
---------------------------------------- -------------------------------------- --------------------------------------
Dated: __________, _______ ____________________________________________
(Signature must conform to name of holder as
specified on the face of the warrant)
Signed in the presence of:
___________________________ ____________________________________________
(Name) ____________________________________________
(address)
ACCEPTED AND AGREED: ____________________________________________
[TRANSFEREE] ____________________________________________
(address)
__________________________
(Name)
A1-12
EXHIBIT A2
FORM OF CLASS B WARRANT
A2-1
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 UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO AMERICAN ORIENTAL BIOENGINEERING INC. THAT SUCH REGISTRATION IS
NOT REQUIRED.
Right to Purchase ________ shares of Common
Stock of American Oriental Bioengineering
Inc. (subject to adjustment as provided
herein)
CLASS B COMMON STOCK PURCHASE WARRANT
No. 2004-B-001 Issue Date: November 23, 2004
AMERICAN ORIENTAL BIOENGINEERING INC., a corporation organized under
the laws of the State of Nevada (the "Company"), hereby certifies that, for
value received, __________________, or its assigns (the "Holder"), is entitled,
subject to the terms set forth below, to purchase from the Company at any time
after the Issue Date until 5:00 p.m., E.S.T on the third anniversary after the
Actual Effective Date (as defined in the Subscription Agreement) (the
"Expiration Date"), up to _________ fully paid and nonassessable shares of the
common stock of the Company (the "Common Stock"), $.001 par value per share at a
per share purchase price of $1.60 IN LAWFUL MONEY OF THE UNITED STATES. The
aforedescribed purchase price per share, as adjusted from time to time as herein
provided, is referred to herein as the "Purchase Price." The number and
character of such shares of Common Stock and the Purchase Price are subject to
adjustment as provided herein. The Company may reduce the Purchase Price without
the consent of the Holder. Capitalized terms used and not otherwise defined
herein shall have the meanings set forth in that certain Subscription Agreement
(the "SUBSCRIPTION AGREEMENT"), dated November 23, 2004, entered into by the
Company and the Holder.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
(a) The term "Company" shall include American Oriental Bioengineering
Inc. and any corporation which shall succeed or assume the obligations of
American Oriental Bioengineering Inc. hereunder.
(b) The term "Common Stock" includes (a) the Company's Common Stock,
$.001 par value per share, as authorized on the date of the Subscription
Agreement, and (b) any other securities into which or for which any of the
securities described in (a) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.
(c) The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the holder of the Warrant at any time shall be entitled to
receive, or shall have received, on the exercise of the Warrant, in lieu of or
in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 4 or otherwise.
A2-2
1. EXERCISE OF WARRANT.
--------------------
1.1. NUMBER OF SHARES ISSUABLE UPON EXERCISE. From and after
the Issue Date through and including the Expiration Date, the Holder hereof
shall be entitled to receive, upon exercise of this Warrant in whole in
accordance with the terms of subsection 1.2 or upon exercise of this Warrant in
part in accordance with subsection 1.3, shares of Common Stock of the Company,
subject to adjustment pursuant to Section 4.
1.2. FULL EXERCISE. This Warrant may be exercised in full by
the Holder hereof by delivery of an original or facsimile copy of the form of
subscription attached as Exhibit A hereto (the "Subscription Form") duly
executed by such Holder and surrender of the original Warrant within seven (7)
days of exercise, to the Company at its principal office or at the office of its
Warrant Agent (as provided hereinafter), accompanied by payment, in cash, wire
transfer or by certified or official bank check payable to the order of the
Company, in the amount obtained by multiplying the number of shares of Common
Stock for which this Warrant is then exercisable by the Purchase Price then in
effect.
1.3. PARTIAL EXERCISE. This Warrant may be exercised in part
(but not for a fractional share) by surrender of this Warrant in the manner and
at the place provided in subsection 1.2 except that the amount payable by the
Holder on such partial exercise shall be the amount obtained by multiplying (a)
the number of whole shares of Common Stock designated by the Holder in the
Subscription Form by (b) the Purchase Price then in effect. On any such partial
exercise, the Company, at its expense, will forthwith issue and deliver to or
upon the order of the Holder hereof a new Warrant of like tenor, in the name of
the Holder hereof or as such Holder (upon payment by such Holder of any
applicable transfer taxes) may request, the whole number of shares of Common
Stock for which such Warrant may still be exercised.
1.4. FAIR MARKET VALUE. Fair Market Value of a share of Common
Stock as of a particular date (the "Determination Date") shall mean:
(a) If the Company's Common Stock is traded on an
exchange or is quoted on the National Association of Securities Dealers,
Inc. Automated Quotation ("NASDAQ"), National Market System, the NASDAQ SmallCap
Market or the American Stock Exchange, LLC, then the closing or last sale price,
respectively, reported for the last business day immediately preceding the
Determination Date;
(b) If the Company's Common Stock is not traded on an
exchange or on the NASDAQ National Market System, the NASDAQ SmallCap Market or
the American Stock Exchange, Inc., but is traded in the over-the-counter market,
then the average of the closing bid and ask prices reported for the last
business day immediately preceding the Determination Date;
(c) Except as provided in clause (d) below, if the
Company's Common Stock is not publicly traded, then as the Holder and the
Company agree, or in the absence of such an agreement, by arbitration in
accordance with the rules then standing of the American Arbitration Association,
before a single arbitrator to be chosen from a panel of persons qualified by
education and training to pass on the matter to be decided; or
(d) If the Determination Date is the date of a
liquidation, dissolution or winding up, or any event deemed to be a
liquidation, dissolution or winding up pursuant to the Company's charter, then
all amounts to be payable per share to holders of the Common Stock pursuant to
the charter in the event of such liquidation, dissolution or winding up, plus
all other amounts to be payable per share in respect of the Common Stock in
liquidation under the charter, assuming for the purposes of this clause (d) that
all of the shares of Common Stock then issuable upon exercise of all of the
Warrants are outstanding at the Determination Date.
A2-3
1.5. COMPANY ACKNOWLEDGMENT. The Company will, at the time of
the exercise of the Warrant, upon the request of the Holder hereof acknowledge
in writing its continuing obligation to afford to such Holder any rights to
which such Holder shall continue to be entitled after such exercise in
accordance with the provisions of this Warrant. If the Holder shall fail to make
any such request, such failure shall not affect the continuing obligation of the
Company to afford to such Holder any such rights.
1.6. TRUSTEE FOR WARRANT HOLDERS. In the event that a bank or
trust company shall have been appointed as trustee for the Holder of the
Warrants pursuant to Subsection 3.2, such bank or trust company shall have all
the powers and duties of a warrant agent (as hereinafter described) and shall
accept, in its own name for the account of the Company or such successor person
as may be entitled thereto, all amounts otherwise payable to the Company or such
successor, as the case may be, on exercise of this Warrant pursuant to this
Section 1.
1.7. DELIVERY OF STOCK CERTIFICATES, ETC. ON EXERCISE. The
Company agrees that the shares of Common Stock purchased upon exercise of this
Warrant shall be deemed to be issued to the Holder hereof as the record owner of
such shares as of the close of business on the date on which this Warrant shall
have been surrendered and payment made for such shares as aforesaid. As soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within five (5) days thereafter, the Company at its expense (including the
payment by it of any applicable issue taxes) will cause to be issued in the name
of and delivered to the Holder hereof, or as such Holder (upon payment by such
Holder of any applicable transfer taxes) may direct in compliance with
applicable securities laws, a certificate or certificates for the number of duly
and validly issued, fully paid and nonassessable shares of Common Stock (or
Other Securities) to which such Holder shall be entitled on such exercise, plus,
in lieu of any fractional share to which such Holder would otherwise be
entitled, cash equal to such fraction multiplied by the then Fair Market Value
of one full share of Common Stock, together with any other stock or other
securities and property (including cash, where applicable) to which such Holder
is entitled upon such exercise pursuant to Section 1 or otherwise.
1.8 COMMON STOCK LEGEND. The Holder acknowledges and agrees
that the shares of Common Stock of the Company, and, until such time as the
Common Stock has been registered under the 1933 Act and sold in accordance with
an effective Registration Statement, or exemption from registration,
certificates and other instruments representing any of the Common Stock shall
bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of any such Securities):
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR APPLICABLE
STATE SECURITIES LAWS. 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 AMERICAN
ORIENTAL BIOENGINEERING INC. THAT SUCH REGISTRATION IS NOT REQUIRED."
A2-4
2. CASHLESS EXERCISE.
------------------
(a) If a Registration Statement as defined in the Subscription
Agreement ("Registration Statement") is effective and the Holder may sell its
shares of Common Stock upon exercise hereof, this Warrant may be exercisable in
whole or in part for cash only as set forth in Section 1 above. If no such
Registration Statement is available, then commencing one year after the Closing
Date, payment upon exercise may be made at the option of the Holder either in
(i) cash, wire transfer or by certified or official bank check payable to the
order of the Company equal to the applicable aggregate Purchase Price, (ii) by
delivery of Common Stock issuable upon exercise of the Warrants in accordance
with Section (b) below ("Cashless Exercise") or (iii) by a combination of any of
the foregoing methods, for the number of Common Stock specified in such form (as
such exercise number shall be adjusted to reflect any adjustment in the total
number of shares of Common Stock issuable to the holder per the terms of this
Warrant) and the holder shall thereupon be entitled to receive the number of
duly authorized, validly issued, fully paid and nonassessable shares of Common
Stock (or Other Securities) determined as provided herein.
(b) If the Fair Market Value of one share of Common Stock is
greater than the Purchase Price (at the date of calculation as set forth below)
and no Registration Statement relating to the shares of Common Stock underlying
this Warrant is effective, in lieu of exercising this Warrant for cash, the
holder may elect to receive shares equal to the value (as determined below) of
this Warrant (or the portion thereof being cancelled) by surrender of this
Warrant at the principal office of the Company together with the properly
endorsed Subscription Form in which event the Company shall issue to the holder
a number of shares of Common Stock computed using the following formula:
X= Y (A-B)
-------
A
Where X= the number of shares of Common Stock to be
issued to the holder
Y= the number of shares of Common Stock
purchasable under the Warrant or, if only a
portion of the Warrant is being exercised,
the portion of the Warrant being exercised
(at the date of such calculation)
A= the Fair Market Value of one share of the
Company's Common Stock (at the date of such
calculation)
B= Purchase Price (as adjusted to the date of
such calculation)
(d) The Holder may employ the cashless exercise feature
described above only during the pendency of a Non-Registration Event as
described in Section 10 of the Subscription Agreement.
For purposes of Rule 144 promulgated under the 1933 Act, it is
intended, understood and acknowledged that the Commission currently has
interpreted Rule 144 to mean that the Warrant Shares issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have commenced, on
the date this Warrant was originally issued pursuant to the Subscription
Agreement.
3. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC.
----------------------------------------------------------
3.1. REORGANIZATION, CONSOLIDATION, MERGER, ETC. In case at
any time or from time to time, the Company shall (a) effect a reorganization,
(b) consolidate with or merge into any other person or (c) transfer all or
substantially all of its properties or assets to any other person under any plan
or arrangement contemplating the dissolution of the Company, then, in each such
case, as a condition to the consummation of such a transaction, proper and
A2-5
adequate provision shall be made by the Company whereby the Holder of this
Warrant, on the exercise hereof as provided in Section 1, at any time after the
consummation of such reorganization, consolidation or merger or the effective
date of such dissolution, as the case may be, shall receive, in lieu of the
Common Stock (or Other Securities) issuable on such exercise prior to such
consummation or such effective date, the stock and other securities and property
(including cash) to which such Holder would have been entitled upon such
consummation or in connection with such dissolution, as the case may be, if such
Holder had so exercised this Warrant, immediately prior thereto, all subject to
further adjustment thereafter as provided in Section 4.
3.2. CONTINUATION OF TERMS. Upon any reorganization,
consolidation, merger or transfer (and any dissolution following any transfer)
referred to in this Section 3, this Warrant shall continue in full force and
effect and the terms hereof shall be applicable to the Other Securities and
property receivable on the exercise of this Warrant after the consummation of
such reorganization, consolidation or merger or the effective date of
dissolution following any such transfer, as the case may be, and shall be
binding upon the issuer of any Other Securities, including, in the case of any
such transfer, the person acquiring all or substantially all of the properties
or assets of the Company, whether or not such person shall have expressly
assumed the terms of this Warrant as provided in Section 4. In the event this
Warrant does not continue in full force and effect after the consummation of the
transaction described in this Section 3, then only in such event will the
Company's securities and property (including cash, where applicable) receivable
by the Holder of the Warrants be delivered to the Trustee as contemplated by
Section 3.2.
3.3 SHARE ISSUANCE. Until the Expiration Date, if the Company
shall issue any Common Stock except for the Excepted Issuances (as defined in
the Subscription Agreement), prior to the complete exercise of this Warrant for
a consideration less than the Purchase Price that would be in effect at the time
of such issue, then, and thereafter successively upon each such issue, the
Purchase Price shall be reduced to such other lower issue price. For purposes of
this adjustment, the issuance of any security or debt instrument of the Company
carrying the right to convert such security or debt instrument into Common Stock
or of any warrant, right or option to purchase Common Stock shall result in an
adjustment to the Purchase Price upon the issuance of the above-described
security, debt instrument, warrant, right, or option and again upon any
subsequent issuances of shares of Common Stock upon exercise of such conversion
or purchase rights at any time if such issuance is at a price lower than the
Purchase Price. The reduction of the Purchase Price described in this Section
3.3 is in addition to the other rights of the Holder described in the
Subscription Agreement.
4. EXTRAORDINARY EVENTS REGARDING COMMON STOCK. In the event that the
Company shall (a) issue additional shares of the Common Stock as a dividend or
other distribution on outstanding Common Stock, (b) subdivide its outstanding
shares of Common Stock, or (c) combine its outstanding shares of the Common
Stock into a smaller number of shares of the Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the then Purchase Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such event and the denominator of which shall be the number
of shares of Common Stock outstanding immediately after such event, and the
product so obtained shall thereafter be the Purchase Price then in effect. The
Purchase Price, as so adjusted, shall be readjusted in the same manner upon the
happening of any successive event or events described herein in this Section 4.
The number of shares of Common Stock that the Holder of this Warrant shall
thereafter, on the exercise hereof as provided in Section 1, be entitled to
receive shall be adjusted to a number determined by multiplying the number of
shares of Common Stock that would otherwise (but for the provisions of this
Section 4) be issuable on such exercise by a fraction of which (a) the numerator
is the Purchase Price that would otherwise (but for the provisions of this
Section 4) be in effect, and (b) the denominator is the Purchase Price in effect
on the date of such exercise.
A2-6
5. CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment or
readjustment in the shares of Common Stock (or Other Securities) issuable on the
exercise of the Warrants, the Company at its expense will promptly cause its
Chief Financial Officer or other appropriate designee to compute such adjustment
or readjustment in accordance with the terms of the Warrant and prepare a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (a) the consideration received or receivable by the Company for any
additional shares of Common Stock (or Other Securities) issued or sold or deemed
to have been issued or sold, (b) the number of shares of Common Stock (or Other
Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price
and the number of shares of Common Stock to be received upon exercise of this
Warrant, in effect immediately prior to such adjustment or readjustment and as
adjusted or readjusted as provided in this Warrant. The Company will forthwith
mail a copy of each such certificate to the Holder of the Warrant and any
Warrant Agent of the Company (appointed pursuant to Section 11 hereof).
6. RESERVATION OF STOCK, ETC. ISSUABLE ON EXERCISE OF WARRANT;
FINANCIAL STATEMENTS. The Company will at all times reserve and keep available,
solely for issuance and delivery on the exercise of the Warrants, all shares of
Common Stock (or Other Securities) from time to time issuable on the exercise of
the Warrant. This Warrant entitles the Holder hereof to receive copies of all
financial and other information distributed or required to be distributed to the
holders of the Company's Common Stock.
7. ASSIGNMENT; EXCHANGE OF WARRANT. Subject to compliance with
applicable securities laws, this Warrant, and the rights evidenced hereby, may
be transferred by any registered holder hereof (a "Transferor"). On the
surrender for exchange of this Warrant, with the Transferor's endorsement in the
form of Exhibit B attached hereto (the "Transferor Endorsement Form") and
together with an opinion of counsel reasonably satisfactory to the Company that
the transfer of this Warrant will be in compliance with applicable securities
laws, the Company at its expense, once only, but with payment by the Transferor
of any applicable transfer taxes, will issue and deliver to or on the order of
the Transferor thereof a new Warrant or Warrants of like tenor, in the name of
the Transferor and/or the transferee(s) specified in such Transferor Endorsement
Form (each a "Transferee"), calling in the aggregate on the face or faces
thereof for the number of shares of Common Stock called for on the face or faces
of the Warrant so surrendered by the Transferor. No such transfers shall result
in a public distribution of the Warrant.
8. REPLACEMENT OF WARRANT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of this Warrant, the Company at its
expense, twice only, will execute and deliver, in lieu thereof, a new Warrant of
like tenor.
9. REGISTRATION RIGHTS. The Holder of this Warrant has been granted
certain registration rights for the shares underlying this Warrant by the
Company. These registration rights are set forth in the Subscription Agreement.
The terms of the Subscription Agreement are incorporated herein by this
reference.
10. MAXIMUM EXERCISE. The Holder shall not be entitled to exercise this
Warrant on an exercise date nor may the Company exercise its right to give a
Call Notice (as defined in Section 11) in connection with that number of Common
Stock which would be in excess of the sum of (i) the number of Common Stock
beneficially owned by the Holder and its affiliates on an exercise date or Call
Date, and (ii) the number of Common Stock issuable upon the exercise of this
Warrant with respect to which the determination of this limitation is being made
A2-7
on an exercise date or Call Date, which would result in beneficial ownership by
the Holder and its affiliates of more than 9.99% of the outstanding Common Stock
on such date. For the purposes of 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 Holder shall not be limited to aggregate exercises which
would result in the issuance of more than 9.99%. The restriction described in
this paragraph may be revoked upon sixty-one (61) days prior notice from the
Holder to the Company. The Holder 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%.
11. CALL. The Company shall have the option to "call" the Warrants (the
"Warrant Call"), one or more times, in accordance with and governed by the
following:
(a) The Company shall exercise the Warrant Call by giving to
the Warrant Holder a written notice of call (the "Call Notice") during the
period in which the Warrant Call may be exercised. The effective date of each
Call Notice (the "Call Date") is the date on which notice is effective under the
notice provision of Section 14 of this Warrant.
(b) The Company's right to exercise the Warrant Call shall
commence thirty trading days after the actual effective date of a registration
statement described in Section 11.1(iv) of the Subscription Agreement and end
thirty trading days prior to the Expiration Date.
(c) The number of shares of Common Stock to be issued upon
exercise of the Warrant which are subject to a Call Notice must be registered in
a registration statement effective from twenty-two trading days prior to the
Call Date and through the Delivery Date.
(d) A Call Notice may be given not sooner than fifteen trading
days after the prior Call Date.
(e) A Call Notice may be given by the Company only within five
trading days after the Common Stock has had a closing price as reported for the
Principal Market (as defined in the Subscription Agreement) of $4.00 or above
for fifteen (15) consecutive trading days ("Lookback Period").
(f) The Common Stock must be listed on the Principal Market
for the Lookback Period and through the Delivery Date.
(g) The Company shall not have received a notice from the
Principal Market during the ninety calendar days prior to the Call Date that the
Company or the Common Stock does not meet the requirements for continued
quotation, listing or trading on the Principal Market.
(h) The Company and the Common Stock shall meet the
requirements for continued quotation, listing or trading on the Principal Market
for the Lookback Period and through the Delivery Date.
(i) Unless otherwise agreed to by the Holder of this Warrant,
a Call Notice must be given to all Warrant Holders who receive Warrants similar
to this Warrant (in terms of exercise price and other principal terms) issued on
or about the same Issue Date as this Warrant, in proportion to the amounts of
Common Stock which may be purchased by the respective Warrant Holders in
accordance with the respective Warrants held by each.
A2-8
(j) The Warrant Holder shall exercise his Warrant rights and
purchase the Called Common Stock and pay for same within fourteen trading days
after the Call Date. If the Warrant Holder fails to timely pay the amount
required by the Warrant Call, the Company's sole remedy shall be to cancel a
corresponding amount of this Warrant.
(k) The Company may not exercise the right to Call this
Warrant after the occurrence of a default by the Company of a material term of
this Warrant or the Subscription Agreement.
12. WARRANT AGENT. The Company may, by written notice to the Holder of
the Warrant, appoint an agent (a "Warrant Agent") for the purpose of issuing
Common Stock (or Other Securities) on the exercise of this Warrant pursuant to
Section 1, exchanging this Warrant pursuant to Section 7, and replacing this
Warrant pursuant to Section 8, or any of the foregoing, and thereafter any such
issuance, exchange or replacement, as the case may be, shall be made at such
office by such Warrant Agent.
13. TRANSFER ON THE COMPANY'S BOOKS. Until this Warrant is transferred
on the books of the Company, the Company may treat the registered holder hereof
as the absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.
14. 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 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: American Oriental
Bioengineering Inc., No. 308 Xuefu Road, Nangang District, Harbin, China,
150086, Attn: ▇▇▇▇ ▇▇▇, telecopier number: 011-86-451-8666-6601, with a copy by
telecopier only to: ▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, Attn: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Esq., telecopier:
▇▇▇-▇▇▇-▇▇▇▇, and (ii) if to the Holder, to the address or telecopier number
listed on the first paragraph of this Warrant, with an additional copy by
telecopier only to: Grushko & ▇▇▇▇▇▇▇, P.C., ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇
▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇, telecopier: (▇▇▇) ▇▇▇-▇▇▇▇.
15. MISCELLANEOUS. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant shall be construed and enforced in accordance with and
governed by the laws of New York. Any dispute relating to this Warrant shall be
adjudicated in New York County in the State of New York. The headings in this
Warrant are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision.
A2-9
IN WITNESS WHEREOF, the Company has executed this Warrant as of the
date first written above.
AMERICAN ORIENTAL BIOENGINEERING INC.
By:________________________________________
Name: ▇▇▇▇ ▇▇▇
Title: Chief Executive Officer and Chairman
Witness:
___________________________
A2-10
EXHIBIT A
FORM OF SUBSCRIPTION
(to be signed only on exercise of Warrant)
TO: AMERICAN ORIENTAL BIOENGINEERING INC.
The undersigned, pursuant to the provisions set forth in the attached Warrant
(No.____), hereby irrevocably elects to purchase (check applicable box):
___ ________ shares of the Common Stock covered by such Warrant; or
___ the maximum number of shares of Common Stock covered by such Warrant
pursuant to the cashless exercise procedure set forth in Section 2.
The undersigned herewith makes payment of the full purchase price for such
shares at the price per share provided for in such Warrant, which is
$___________. Such payment takes the form of (check applicable box or boxes):
___ $__________ in lawful money of the United States (which sum reflects
the concession amount described in Section 14 of the Warrant; and/or
___ the cancellation of such portion of the attached Warrant as is
exercisable for a total of _______ shares of Common Stock (using a Fair Market
Value of $_______ per share for purposes of this calculation); and/or
___ the cancellation of such number of shares of Common Stock as is
necessary, in accordance with the formula set forth in Section 2, to exercise
this Warrant with respect to the maximum number of shares of Common Stock
purchasable pursuant to the cashless exercise procedure set forth in Section 2.
The undersigned requests that the certificates for such shares be issued in the
name of, and delivered to _____________________________________________________
whose address is ______________________________________________________________
_______________________________________________________________________________.
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable upon exercise of the within Warrant shall
be made pursuant to registration of the Common Stock under the Securities Act of
1933, as amended (the "Securities Act"), or pursuant to an exemption from
registration under the Securities Act.
Dated:___________________ ____________________________________________
(Signature must conform to name of holder as
specified on the face of the Warrant)
____________________________________________
____________________________________________
(Address)
A2-11
EXHIBIT B
FORM OF TRANSFEROR ENDORSEMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and
transfers unto the person(s) named below under the heading "Transferees" the
right represented by the within Warrant to purchase the percentage and number of
shares of Common Stock of AMERICAN ORIENTAL BIOENGINEERING INC. to which the
within Warrant relates specified under the headings "Percentage Transferred" and
"Number Transferred," respectively, opposite the name(s) of such person(s) and
appoints each such person Attorney to transfer its respective right on the books
of AMERICAN ORIENTAL BIOENGINEERING INC. with full power of substitution in the
premises.
---------------------------------------- -------------------------------------- --------------------------------------
TRANSFEREES PERCENTAGE TRANSFERRED NUMBER TRANSFERRED
---------------------------------------- -------------------------------------- --------------------------------------
---------------------------------------- -------------------------------------- --------------------------------------
---------------------------------------- -------------------------------------- --------------------------------------
---------------------------------------- -------------------------------------- --------------------------------------
Dated: __________, _______ ____________________________________________
(Signature must conform to name of holder as
specified on the face of the warrant)
Signed in the presence of:
___________________________ ____________________________________________
(Name) ____________________________________________
(address)
ACCEPTED AND AGREED: ____________________________________________
[TRANSFEREE] ____________________________________________
(address)
__________________________
(Name)
A2-12
EXHIBIT B
ESCROW AGREEMENT
OMITTED
A2-13
EXHIBIT C
FORM OF LEGAL OPINION
OMITTED
A2-14
SCHEDULE 5(d)
DISCLOSURE SCHEDULE
1) 24,000 warrants to purchase shares of the Company's common stock.
2) 19,393 shares granted under employee stock option arrangements with
▇▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇▇ ▇▇, Jun Min, and ▇▇▇▇▇▇▇▇ ▇▇, and any additional
stock options that may have accrued during the employment period.
3) Investment Agreement, dated July 18, 2003, between the Company and BH
Capital Investments, LP and Excalibur Limited Partnership (including
the Registration Rights Agreement attached as an exhibit thereto).
4) Amendment No. 1, dated as of December 5, 2003, to the Investment
Agreement by and among the Company and BH Capital Investments, LP and
Excalibur Limited Partnership.
5) Amendment No. 2, dated as of June 3, 2004, to the Investment Agreement
by and among the Company and BH Capital Investments, LP and Excalibur
Limited Partnership.
SCHEDULE 5(s)
CAPITALIZATION
The authorized capital stock of the Company consists of 60 million
shares of Common Stock, $0.001 par value, of which 33,631,827 shares are issued
and outstanding and 2 million Shares of Preferred Stock, $0.01 par value, of
which one million shares are issued and outstanding.
SCHEDULE 7(a)
DUE DILIGENCE FEE SCHEDULE
OMITTED
SCHEDULE 8(e)
USE OF PROCEEDS
Proceeds from the execution of this Subscription Agreement will be used to fund
the acquisition of Chinese Medicine Plant No. 4 and other general corporate
purposes.
SCHEDULE 10.1
OTHER SECURITIES TO BE REGISTERED
None.
