SUBSCRIPTION AGREEMENT (the “Agreement”)
Exhibit
10.1
SUBSCRIPTION
AGREEMENT (the “Agreement”)
Name
of
Subscriber
China
Digital Media Corporation
▇▇▇▇
▇▇▇▇-▇▇, ▇▇/▇, ▇▇▇▇▇▇ ▇▇▇▇▇,
▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇,
▇▇▇▇ ▇▇▇▇
Ladies
and Gentlemen:
1. Subscription.
I
(sometimes referred to herein as the “Investor”) hereby subscribe for and agree
to purchase $______________(insert
dollar amount) in
Unit(s)
(as defined below) (“Subscription Amount”) of China Digital Media Corporation, a
Nevada corporation (the “Company”), on the terms and conditions described herein
(the “Offering Document”). The amount
of
Units being offered by the Company
is
$3,000,000 (the “Minimum Offering”) to $4,100,000 (the “Maximum Offering”) (the
Minimum and Maximum Offering are collectively referred to herein as the
“Offering”).
THE
AGGREGATE AMOUNT SUBSCRIBED FOR IN
THIS OFFERING includes up to $1,100,000 worth of the Units originally subscribed
to on _July 6, 2006 (the “Initial Investment”). With regard to the Investors of
the Initial Investment, acceptance of this subscription shall acknowledge on
the
part of the Company that up to $1,100,000 subscribed for pursuant to the Initial
Investment shall be credited to the Subscription Agreement for each such
Investor in the amount each such Investor actually purchased in the Initial
Investment and that, with regard to such $1,100,000, the terms of this
Subscription Agreement with regard to the Units shall apply.
The
purchase price for the Units shall be deposited in escrow pursuant to an escrow
agreement, in the Form attached hereto as Exhibit 1, until such time as
$3,000,000, including the Prior Securities (as defined below), is raised and
accepted by the Company or the parties hereto otherwise determine.
Upon
the
Closing on this Agreement, the Investors of the Initial Investment agree to
return the original notes payable in the principal amount of up to $1,100,000
issued July 6, 2006 (the “Original Notes”), and the Class A, Class B, Class C,
Class D, and Class J warrants issued in connection with such notes (“Prior
Securities”). Upon the Closing on this Agreement, the Investors hereby waive any
rights associated with the Prior Securities, and hereby waive any interest
payments accrued on the Original Notes.
2. Description
of Units; Lock-Up.
The
Unit consists of:
(i)
an
interest bearing convertible debenture in principal amount of $100,000
(the
“Debentures”),
(ii)
a
six-year Class A warrant to purchase 222,222
shares
of Company common stock, par value $0.001 per share (“Common Stock”) at an
exercise price of $0.80 per share (“Class A Warrant”),
(iii)
a
six-year Class B warrant to purchase 222,222
shares
of Company Common Stock at an exercise price of $1.20 per share (“Class B
Warrant”),
and,
(iv) a
six-year Class C warrant to purchase 111,111
shares
of Company Common Stock at an exercise price of $2.25 per share (“Class C
Warrant;” collectively, the Class A Warrant, Class B Warrant and Class C Warrant
are referred to as the “Warrants”).
1
The
securities issuable upon conversion of the Debenture and exercise of the
Warrants are eligible for certain registration rights as set forth in Section
5(c) of this Agreement and in the Warrant Agreements, respectively; provided
that the Investor hereby agrees to enter into a 90 day post-Public Offering
lock-up on shares issued upon conversion of the Debenture and exercise of the
Warrants, pursuant to the underwriter’s customary lock-up agreement (“Absolute
Lock-up Period”). For purposes of this Agreement, “Public Offering” means the
completion of a firm underwritten public offering of the Company’s securities.
For the 90 days post the Absolute Lock-up Period, no Investor shall sell more
than five percent (5%) of the Company’s outstanding common stock, on a fully
diluted basis, as of the date of such sale.
3.
Conversion
Shares.
The
Company has authorized and has reserved and covenants to continue to reserve,
free of preemptive rights and other similar contractual rights of stockholders,
a number of shares of Common Stock equal to one hundred twenty percent (120%)
of
the number of shares of Common Stock as shall from time to time be sufficient
to
effect the conversion of all of the Debentures and exercise of the Warrants
then
outstanding. Any shares of Common Stock issuable upon conversion of the
Debentures and exercise of the Warrants (and such shares when issued) are herein
referred to as the “Conversion
Shares”
and
the
"Warrant
Shares",
respectively. The Conversion Shares and the Warrant Shares are sometimes
collectively referred to as the “Shares”.
4.
Lock-Up
Agreements.
The
Company’s officers, directors and 5% or greater stockholders shall be subject to
the terms and provisions of a lock-up agreement, which shall provide the manner
in which such persons or entity will sell, transfer or dispose of their shares
of Common Stock. The Lead Investor, as hereinafter defined, maintains the right
to waive this lock-up agreement requirement for any such persons.
5. Purchase;
Registration Rights.
(a) I
hereby
tender to the Company cash or a check or wire as follows, an executed copy
of
this Subscription Agreement and if an investor of the Initial Investment, the
original copies of the Prior Securities:
Account
Name:
Law
Offices of ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, P.C., ▇▇▇▇ Account
Bank
Name:
983902739
Bank
Address:
▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Bank
Account #:
983902739
ABA#:
▇▇▇▇▇▇▇▇▇
(b) The
Company employed a placement agent in connection with the sale of the
Units
offered hereby and agreed to pay such placement agent a cash commission
equal
to
6% of the proceeds from this Offering and warrants to purchase an amount equal
to
4% of
the number of Shares issued in this Offering (the “Placement Agents’ Fee”).
(c) REGISTRATION
RIGHTS.
(1) If
the
Company shall at any time determine to proceed with the actual preparation
and
filing of a registration statement under the Act in connection with the proposed
offer and sale of any of its securities by it or any of its security holders
(other than a registration statement on Form ▇-▇, ▇-▇ or other limited purpose
form), then the Company will give written notice of its determination to all
record holders of the Debentures and the Warrants. Upon the written request
from
any holder, the Company will, except as herein provided, cause all such
securities underlying the Debentures and the Warrants to be included in such
registration statement, all to the extent requisite to permit the sale or other
disposition by the prospective seller or sellers of the securities underlying
the Debentures and the Warrants to be so registered; provided, further, that
nothing herein shall prevent the Company from, at any time, abandoning or
delaying any registration. If any registration pursuant to this Section c(1)
shall be underwritten in whole or in part, the Company may require that the
securities underlying the Debentures requested for inclusion by the Holders
be
included in the underwriting on the same terms and conditions as the securities
otherwise being sold through the underwriters. In connection a registration
statement, except for a registration statement in connection with an
underwritten public offering of securities, fees of one (1) counsel for the
holders of the Debentures shall be paid by the Company.
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(2) If
the
Company does not file a registration statement as set forth in Section c(1)
on
or before February 28, 2007 ( the “Due Date”), the Company shall file a
registration statement on Form SB-2 (or any other applicable form exclusively
for this offering) to register 100% of the shares issuable upon conversion
of
the Debentures and upon exercise of all the Warrants within one (1) week after
the Due Date (the “Filing Date”) and have it declared effective by the sooner of
the date (i) within three (3) days after the Commission states that there will
be no review or that the Commission has no further comments or (ii) 120 days
after the Due Date (the “Effective Date”). In the event of a full review of the
Registration Statement by the SEC, the required Effective Date will be extended
by 30 days. The Company shall use its best efforts to keep any registration
statement filed pursuant to Sections c(1) and (2) continuously effective under
the Securities Act until such date as is the earlier of (x) the date when all
securities covered by such registration statement have been sold or (y) the
date
on which such securities may be sold without any restriction pursuant to Rule
144 as determined by the counsel to the Company pursuant to a written opinion
letter, addressed to the Company's transfer agent to such effect. If at any
time
and for any reason, an additional registration statement is required to be
filed
because at such time the actual number of shares of common stock into which
the
Debentures are convertible or the Warrants are exercisable exceeds the number
of
shares of securities remaining under the registration statement, the Company
shall have twenty (20) business days to file such additional registration
statement, and the Company shall use its best efforts to cause such additional
registration statement to be declared effective by the Commission as soon as
possible, but in no event later than sixty (60) days after filing.
(3) If
the
registration statement is not filed by the Filing Date or declared effective
on
the Effective Date or upon the occurrence of any other registration default
hereunder (a “Registration Default”), the Company shall pay liquidated damages
of 2% of the Subscription Amount per each 30 day period or part thereof
following any Registration Default; provided, however, that such liquidated
damages shall not exceed 20% of the amount invested by each Holder in this
offering. Such damages shall be paid in common stock (with the same registration
rights as set forth herein) valued at an amount equal to ninety percent (90%)
of
the average of the VWAP (as defined below) for the five (5) trading days
immediately preceding the date the liquidated damages become due, but in no
event less than $0.45.
(4) For
purposes hereof, “VWAP”
means,
for any date, (i) the daily volume weighted average price of the Common Stock
for such date on the OTC Bulletin Board as reported by Bloomberg Financial
L.P.
(based on a trading day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time);
(ii) if the Common Stock is listed on a national securities exchange or admitted
to unlisted trading privileges on such exchange or listed for trading on the
Nasdaq National Market, the current market value shall be the last reported
sale
price of the Common Stock on such exchange or market or if no such sale is
made
on any day, the average of the closing bid and asked prices for such day on
such
exchange or market, (iii) if the Common Stock is not then listed or quoted
on
the OTC Bulletin Board and if prices for the Common Stock are then reported
in
the “Pink Sheets” published by the Pink Sheets, LLC (or a similar organization
or agency succeeding to its functions of reporting prices), the most recent
bid
price per share of the Common Stock so reported; or (iv) in all other cases,
the
fair market value of a share of Common Stock as determined by an independent
appraiser selected in good faith by the Holder and reasonably acceptable to
the
Company.
(5) In
connection with the Company's registration obligations hereunder, the
Company
shall:
(A) prepare
and file with the SEC such amendments to such registration statement and
supplements to the prospectus contained therein as may be necessary to keep
such
registration statement effective;
(B) furnish
to the Investors participating in such registration and to the underwriters
of
the securities being registered such reasonable number of copies of the
registration statement, preliminary prospectus, final prospectus and such other
documents as such underwriters may reasonably request in order to facilitate
the
public offering of such securities; and subject to the provisions of SubSections
(K) and (L), the Company hereby consents to the use of such Prospectus and
each
amendment or supplement thereto by each of the selling Investors in connection
with the offering and sale of the Shares covered by such Prospectus and any
amendment or supplement thereto;
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(C) use
its
best efforts to register or qualify the securities covered by such registration
statement under such state securities or blue sky laws of such jurisdictions
as
the Investors may reasonably request in writing within twenty (20) days
following the original filing of such registration statement, except that the
Company shall not for any purpose be required to execute a general consent
to
service of process or to qualify to do business as a foreign corporation in
any
jurisdiction wherein it is not so qualified or subject itself to taxation in
any
such jurisdiction;
(D) notify
the Investors, promptly after it shall receive notice thereof, of the time
when
such registration statement has become effective or a supplement to any
prospectus forming a part of such registration statement has been
filed;
(E) notify
the Investors promptly of any request by the SEC for the amending or
supplementing of such registration statement or prospectus or for additional
information;
(F) prepare
and file with the SEC, promptly upon the request of any Holders, any amendments
or supplements to such registration statement or prospectus which, in the
opinion of counsel for such Investors (and concurred in by counsel for the
Company), is required under the Act or the rules and regulations thereunder
in
connection with the distribution of Common Stock by such Investors;
(G) prepare
and promptly file with the SEC and promptly notify such Investors of the filing
of such amendment or supplement to such registration statement or prospectus
as
may be necessary to correct any statements or omissions if, at the time when
a
prospectus relating to such securities is required to be delivered under the
Act, any event shall have occurred as the result of which any such prospectus
or
any other prospectus as then in effect would include an untrue statement of
a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances in which they were made,
not misleading;
(H) advise
the Investors, promptly after it shall receive notice or obtain knowledge
thereof, of the issuance of any stop order by the SEC suspending the
effectiveness of such registration statement or the initiation or threatening
of
any proceeding for that purpose and promptly use its best efforts to prevent
the
issuance of any stop order or to obtain its withdrawal if such stop order should
be issued;
(I) advise
the Investors, promptly after receipt by the Company of any notification with
respect to the suspension of the qualification or exemption from qualification
of any of the Registrable Securities for sale in any jurisdiction, or the
initiation of any Proceeding for such purpose;
(J) Use
its
best efforts to avoid the issuance of, or, if issued, obtain the withdrawal
of,
as promptly as possible, (i) any order suspending the effectiveness of the
Registration Statement or (ii) any suspension of the qualification (or exemption
from qualification) of any of the Shares for sale in any jurisdiction;
(K) The
Company may require each selling Investor to furnish to the Company information
regarding such Investor and the distribution of such Shares as is required
by
law to be disclosed in the Registration Statement, Prospectus, or any amendment
or supplement thereto, and the Company may exclude from such registration the
Shares of any such Investor who unreasonably fails to furnish such information
within a reasonable time after receiving such request.
4
Each
Investor covenants and agrees that it will not sell any Shares under the
Registration Statement until the Company has electronically filed the Prospectus
as then amended or supplemented as contemplated in SubSection (F) and (G) and
notice from the Company that such Registration Statement and any post-effective
amendments thereto have become effective as contemplated by SubSection
D.
Each
Investor agrees by its acquisition of such Shares that, upon receipt of a notice
from the Company of the occurrence of any event of the kind described in
SubSection (E), (F), (G), (H), (I) or (L), such Investor will forthwith
discontinue disposition of such Shares under the Registration Statement until
such Investor's receipt of the copies of the supplemented Prospectus and/or
amended Registration Statement contemplated by SubSection (G), or until it
is
advised in writing (the "Advice") by the Company that the use of the applicable
Prospectus may be resumed, and, in either case, has received copies of any
additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement.
(L)
If
(i) there is material non-public information regarding the Company which
the
Company's Board of Directors (the "Board") determines not to be in the Company's
best interest to disclose and which the Company is not otherwise required to
disclose, (ii) there is a significant business opportunity (including, but
not
limited to, the acquisition or disposition of assets (other than in the ordinary
course of business) or any merger, consolidation, tender offer or other similar
transaction) available to the Company which the Board determines not to be
in
the Company's best interest to disclose, or (iii) the Company is required to
file a post- effective
amendment to the Registration Statement to incorporate the Company’s quarterly
and annual reports and audited financial statements on Forms 10-QSB and 10-KSB,
then the Company may (x) postpone or suspend filing of a registration statement
for a period not to exceed thirty (30) consecutive days or (y) postpone or
suspend effectiveness of a registration statement for a period not to exceed
twenty (20) consecutive days; provided that the Company may not postpone or
suspend effectiveness of a registration statement under this Section for more
than forty-five (45) days in the aggregate during any three hundred sixty (360)
day period; provided, however, that no such postponement or suspension shall
be
permitted for consecutive twenty (20) day periods arising out of the same set
of
facts, circumstances or transactions.
(6) All
fees,
costs and expenses of and incidental to such registration, inclusion and public
offering in connection therewith shall be borne by the Company, provided,
however, that the holders shall bear their pro rata share of the underwriting
discount and commissions and transfer taxes. The fees, costs and expenses of
registration to be borne by the Company as provided above shall include, without
limitation, all registration, filing, and NASD fees, printing expenses, fees
and
disbursements of counsel and accountants for the Company, and all legal fees
and
disbursements and other expenses of complying with state securities or blue
sky
laws of any jurisdictions in which the securities to be offered are to be
registered and qualified (except as provided above). Fees and disbursements
of
counsel and accountants for the holders and any other expenses incurred by
the
holders not expressly included above shall be borne by the holders.
(7) The
Company will indemnify and hold harmless each holder of the securities
underlying the Debentures and the Warrants which are included in a registration
statement pursuant to the provisions of Section (c)(1) hereof, its directors
and
officers, and any underwriter (as defined in the Act) for such Holder and each
person, if any, who controls such Holder or such underwriter within the meaning
of the Act, from and against, and will reimburse such Holder and each such
underwriter and controlling person with respect to, any and all loss, damage,
liability, cost and expense to which such Holder or any such underwriter or
controlling person may become subject under the Act or otherwise, insofar as
such losses, damages, liabilities, costs or expenses are caused by any untrue
statement or alleged untrue statement of any material fact contained in such
registration statement, any prospectus contained therein or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in
which
they were made, not misleading; provided, however, that the Company will not
be
liable in any such case to the extent that any such loss, damage, liability,
cost or expenses 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 such Holder, such underwriter or such controlling
person in writing specifically for use in the preparation thereof.
5
(8) Each
Holder of securities underlying the Debentures and the Warrants included in
a
registration pursuant to the provisions of Section (c)(1) hereof will indemnify
and hold harmless the Company, its directors and officers, any controlling
person and any underwriter from and against, and will reimburse the Company,
its
directors and officers, any controlling person and any underwriter with respect
to, any and all loss, damage, liability, cost or expense to which the Company
or
any controlling person and/or any underwriter may become subject under the
Act
or otherwise, insofar as such losses, damages, liabilities, costs or expenses
are caused by any untrue statement or alleged untrue statement of any material
fact contained in such registration statement, any prospectus contained therein
or any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was so made in reliance upon and
in
strict conformity with written information furnished by or on behalf of such
Holder specifically for use in the preparation thereof. Notwithstanding anything
to the contrary contained herein, each Holder shall be liable under this Section
c(7) for only that amount as does not exceed the net proceeds to such Holder
as
a result of the sale of any securities registered on such Holders behalf
pursuant to such registration statement.
(9) Promptly
after receipt by an indemnified party pursuant to the provisions of Sections
(c)(3) or (4) of notice of the commencement of any action involving the subject
matter of the foregoing indemnity provisions such indemnified party will, if
a
claim thereof is to be made against the indemnifying party pursuant to the
provisions of said Sections (c)(3) or (4), promptly notify the indemnifying
party of the commencement thereof; but the omission to so notify the
indemnifying party will not relieve it from any liability which it may have
to
any indemnified party otherwise than hereunder. In case such action is brought
against any indemnified party and it notifies the indemnifying party of the
commencement thereof, the indemnifying party shall have the right to participate
in, and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party, provided, however, if counsel for the
indemnifying party concludes that a single counsel cannot under applicable
legal
and ethical considerations, represent both the indemnifying party and the
indemnified party, the indemnified party or parties have the right to select
separate counsel to participate in the defense of such action on behalf of
such
indemnified party or parties. After notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party pursuant to
the
provisions of said Sections (c)(3) or (4) for any legal or other expense
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation, unless (i) the indemnified
party shall have employed counsel in accordance with the provisions of the
preceding sentence, (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after the notice of the commencement of the action or (iii)
the indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party.
(11) If,
prior
to the dates set forth in Section (5) hereof, the Conversion Shares or
Warrant Shares have been included in Registration Statement filed with the
SEC
in connection
with the Public Offering, or otherwise, and if such Registration Statement
is
declared
effective, and for so long as it remains effective, the Investor shall have
no
rights
to
demand a registration.
6. Acceptance
or Rejection of Subscription.
(a) I
understand and agree that the Company reserves the right to reject this
subscription for the Units, in whole or in part, for any reason and at any
time
prior to the Closing, notwithstanding prior receipt by me of notice of
acceptance of my subscription.
(b) In
the
event of the rejection of this subscription, my subscription payment will be
promptly returned to me without interest or deduction and this Agreement shall
have no force or effect. In the event my subscription is accepted and the
offering is completed, the funds specified above shall be released to the
Company.
6
7. Closing.
The
closing (“Closing”) of this offering shall occur when the Company has received
and accepted subscriptions for the Offering. The Units subscribed for herein
shall not be deemed issued to or owned by me until one copy of this Agreement
has been executed by me and countersigned by the Company and the Closing with
respect to such Units has occurred.
8. Disclosure.
Because
this offering is limited to accredited investors as defined in Section
2(15) of
the
Act, and Rule 501 promulgated
thereunder, in reliance upon the exemption contained in Section 4(2) of the
Act
and applicable state securities laws, the Units are being sold without
registration under the Act. I acknowledge receipt of the Offering Documents
and
all related documents and represent that I have carefully reviewed and
understand the Offering Documents. I have received all information and materials
regarding the Company that I have requested.
I
fully
understand that the Company has a limited financial and operating history and
that the Units are speculative investments which involve a high degree of risk
of the loss of my entire investment. I fully understand the nature of the risks
involved in purchasing the Units and I am qualified by my knowledge and
experience to evaluate investments of this type. I have carefully considered
the
potential risks relating to the Company and purchase of its Units and have,
in
particular, reviewed each of the risks set forth in the Offering Documents.
Both
my advisors and I have had the opportunity to ask questions of and receive
answers from representatives of the Company or persons acting on its behalf
concerning the Company and the terms and conditions of a proposed investment
in
the Company and my advisors and I have also had the opportunity to obtain
additional information necessary to verify the accuracy of information furnished
about the Company. Accordingly, I have independently evaluated the risks of
purchasing the Units.
9.
Company
Representations and Warranties. The
Company acknowledges, represents and warrants to, and agrees with, the Investors
as follows:
a) Organization,
Good Standing and Power.
The
Company is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Nevada and has the requisite corporate
power to own, lease and operate its properties and assets and to conduct its
business as it is now being conducted. The Company does not have any
subsidiaries except as set forth in the Company’s Form 10-KSB for the year ended
December 31, 2005, including the accompanying financial statements (the
“Form
10-KSB”),
or in
the Company’s Form 10-QSB for the fiscal quarter ended June 30, 2006 (the
“Form
10-QSB”)
(collectively, the Form 10-KSB and 10-QSB are referred to herein as the “SEC
Documents”). The Company and each such subsidiary is duly qualified as a foreign
corporation to do business and is in good standing in every jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary except for any jurisdiction(s) (alone or in the
aggregate) in which the failure to be so qualified will not have a Material
Adverse Effect (as defined in Section 9(c) hereof) on the Company’s financial
condition.
(b) Authorization;
Enforcement.
The
Company has the requisite corporate power and authority to enter into and
perform this Agreement, the Lock-Up Agreements (as defined in Paragraph 4)
in
the form attached hereto as Exhibit
E,
the
Debentures, and the Warrants (collectively, the “Transaction
Documents”)
and to
issue and sell the Shares and the Warrants in accordance with the terms hereof.
The execution, delivery and performance of the Transaction Documents by the
Company and the consummation by it of the transactions contemplated hereby
and
thereby have been duly and validly authorized by all necessary corporate action,
and no further consent or authorization of the Company or its Board of Directors
or stockholders is required. This Agreement has been duly executed and delivered
by the Company. The other Transaction Documents will have been duly executed
and
delivered by the Company at the Closing. Each of the Transaction Documents
constitutes, or shall constitute when executed and delivered, a valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation,
conservatorship, receivership or similar laws relating to, or affecting
generally the enforcement of, creditor’s rights and remedies or by other
equitable principles of general application.
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(c) Capitalization.
Except
as set forth on Schedule 9(c), the authorized capital stock of the Company
and
the shares thereof currently issued and outstanding as of the date hereof are
set forth on the dates indicated in the Commission Documents. All of the
outstanding shares of the Common Stock have been duly and validly authorized.
Except as set forth on Schedule 9(c), no shares of Common Stock are entitled
to
preemptive rights or registration rights and there are no outstanding options,
warrants, scrip, rights to subscribe to, call or commitments of any character
whatsoever relating to, or securities or rights convertible into, any shares
of
capital stock of the Company. There are no contracts, commitments,
understandings, or arrangements by which the Company is to issue additional
shares of the capital stock of the Company or options, securities or rights
convertible into shares of capital stock of the Company. Except as set forth
on
Schedule 9(c), the Company is not a party to any agreement granting
anti-dilution rights to any person with respect to any of its equity or debt
securities. The Company is not a party to, and it has no knowledge of, any
agreement restricting the voting or transfer of any shares of the capital stock
of the Company. The offer and sale of all capital stock, convertible securities,
rights, warrants, or options of the Company issued prior to the Closing complied
with all applicable Federal and state securities laws, and no stockholder has
a
right of rescission or claim for damages with respect thereto which would have
a
Material Adverse Effect (as defined below). The Company has furnished or made
available to the Investors true and correct copies of the Company’s Articles of
Incorporation as in effect on the date hereof (the “Articles”),
and
the Company’s Bylaws as in effect on the date hereof (the “Bylaws”).
For
the purposes of this Agreement, “Material
Adverse Effect”
means
any material adverse effect on the business, operations, properties, prospects,
or financial condition of the Company and its subsidiaries and/or any condition,
circumstance, or situation that would prohibit or otherwise materially interfere
with the ability of the Company to perform any of its obligations under this
Agreement in any material respect.
(d) Issuance
of Shares.
The
Debentures and the Warrants to be issued at the Closing have been duly
authorized by all necessary corporate action. When the Conversion Shares and
the
Warrant Shares are issued in accordance with the terms of the Debenture and
the
Warrants, respectively, such shares will be duly authorized by all necessary
corporate action and validly issued and outstanding, fully paid and
nonassessable, and the holders shall be entitled to all rights accorded to
a
holder of Common Stock.
(e) No
Conflicts.
The
execution, delivery and performance of the Transaction Documents by the Company
and the consummation by the Company of the transactions contemplated herein
and
therein do not and will not (i) violate any provision of the Company’s Articles
or Bylaws (ii) except as set forth on Schedule 9(c), conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, mortgage, deed of
trust, indenture, note, bond, license, lease agreement, instrument or obligation
to which the Company is a party or by which it or its properties or assets
are
bound, (iii) create or impose a lien, mortgage, security interest, charge or
encumbrance of any nature on any property of the Company under any agreement
or
any commitment to which the Company is a party or by which the Company is bound
or by which any of its respective properties or assets are bound, or (iv) result
in a violation of any federal, state, local or foreign statute, rule,
regulation, order, judgment or decree (including Federal and state securities
laws and regulations) applicable to the Company or any of its subsidiaries
or by
which any property or asset of the Company or any of its subsidiaries are bound
or affected except, in all cases other than violations pursuant to clauses
(i)
and (iv) above, for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in
the
aggregate, have a Material Adverse Effect. The business of the Company and
its
subsidiaries is not being conducted in violation of any laws, ordinances or
regulations of any governmental entity, except for possible violations which
singularly or in the aggregate do not and will not have a Material Adverse
Effect. The Company is not required under Federal, state or local law, rule
or
regulation to obtain any consent, authorization or order of, or make any filing
or registration with, any court or governmental agency in order for it to
execute, deliver or perform any of its obligations under the Transaction
Documents, or issue and sell the Warrants, the Conversion Shares and the Warrant
Shares in accordance with the terms hereof or thereof (other than any filings
which may be required to be made by the Company with the Commission or state
securities administrators subsequent to the Closing, any registration statement
which may be filed pursuant hereto, and the Certificate of Designation);
provided that,
for
purposes of the representation made in this sentence, the Company is assuming
and relying upon the accuracy of the relevant representations and agreements
of
the Investors herein.
8
(f) Commission
Documents, Financial Statements.
The
Company is a filer pursuant to Section 13(a) of the Securities Exchange Act
of
1934, as amended (the “Exchange
Act”),
and
since January 1, 2005, the Company has timely filed all reports, schedules,
forms, statements and other documents required to be filed by it with the
Commission pursuant to the reporting requirements of the Exchange Act, including
material filed pursuant to Section 13(a) or 15(d) of the Exchange Act (all
of
the foregoing including filings incorporated by reference therein, and together
with the SEC Documents being referred to herein as the “Commission
Documents”).
The
Company has delivered or made available to each of the Investors true and
complete copies of the Commission Documents. The Company has not provided to
the
Investors any material non-public information or other information which,
according to applicable law, rule or regulation, was required to have been
disclosed publicly by the Company but which has not been so disclosed, other
than with respect to the transactions contemplated by this Agreement. At the
times of their respective filings, the SEC Documents complied in all material
respects with the requirements of the Exchange Act and the rules and regulations
of the Commission promulgated thereunder and other federal, state and local
laws, rules and regulations applicable to such documents, and, as of their
respective dates, none of the SEC Documents contained any untrue statement
of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the Commission Documents comply as to
form
in all material respects with applicable accounting requirements and the
published rules and regulations of the Commission or other applicable rules
and
regulations with respect thereto. Such financial statements have been prepared
in accordance with United States generally accepted accounting principles
(“GAAP”)
applied on a consistent basis during the periods involved (except (i) as may
be
otherwise indicated in such financial statements or the notes thereto or (ii)
in
the case of unaudited interim statements, to the extent they may not include
footnotes or may be condensed or summary statements), and fairly present in
all
material respects the financial position of the Company and its subsidiaries
as
of the dates thereof and the results of operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments).
(g) Subsidiaries.
The
Commission Documents set forth each operating subsidiary of the Company, showing
the jurisdiction of its incorporation or organization. For the purposes of
this
Agreement, “subsidiary”
shall
mean any corporation or other entity of which at least a majority of the
securities or other ownership interest having ordinary voting power (absolutely
or contingently) for the election of directors or other persons performing
similar functions are at the time owned directly by the Company and/or any
of
its other subsidiaries. All of the outstanding shares of capital stock of each
subsidiary have been duly authorized and validly issued, and are fully paid
and
nonassessable, as such terms may be interpreted in the jurisdictions in which
the subsidiaries are domiciled. Except as set forth in the Commission Documents,
there are no outstanding preemptive, conversion or other rights, options,
warrants or agreements granted or issued by or binding upon any subsidiary
for
the purchase or acquisition of any shares of capital stock of any subsidiary
or
any other securities convertible into, exchangeable for or evidencing the rights
to subscribe for any shares of such capital stock. Neither the Company nor
any
subsidiary is subject to any obligation (contingent or otherwise) to repurchase
or otherwise acquire or retire any shares of the capital stock of any subsidiary
or any convertible securities, rights, warrants or options of the type described
in the preceding sentence. Neither the Company nor any subsidiary is party
to,
nor has any knowledge of, any agreement restricting the voting or transfer
of
any shares of the capital stock of any subsidiary.
(h) No
Material Adverse Change.
Since
June 30, 2006, the Company has not experienced or suffered any Material Adverse
Effect.
(i) No
Undisclosed Liabilities.
Neither
the Company nor any of its subsidiaries has any liabilities, obligations, claims
or losses (whether liquidated or unliquidated, secured or unsecured, absolute,
accrued, contingent or otherwise) other than those incurred in the ordinary
course of the Company’s or its subsidiaries respective businesses since June 30,
2006 and which, individually or in the aggregate, do not or would not have
a
Material Adverse Effect on the Company or its subsidiaries.
9
(j) No
Undisclosed Events or Circumstances.
No
event or circumstance has occurred or exists with respect to the Company or
its
subsidiaries or their respective businesses, properties, prospects, operations
or financial condition, which, under applicable law, rule or regulation,
requires public disclosure or announcement by the Company but which has not
been
so publicly announced or disclosed.
(k) Indebtedness.
The
Commission Documents set forth as of a recent date all outstanding secured
and
unsecured Indebtedness of the Company or any subsidiary, or for which the
Company or any subsidiary has commitments. For the purposes of this Agreement,
“Indebtedness”
shall
mean (a) any liabilities for borrowed money or amounts owed in excess of
$500,000 (other than trade accounts payable incurred in the ordinary course
of
business), (b) all guaranties, endorsements and other contingent obligations
in
respect of Indebtedness of others, whether or not the same are or should be
reflected in the Company’s balance sheet (or the notes thereto), except
guaranties by endorsement of negotiable instruments for deposit or collection
or
similar transactions in the ordinary course of business; and (c) the present
value of any lease payments in excess of $25,000 due under leases required
to be
capitalized in accordance with GAAP. Except as set forth in the Commission
Documents, neither the Company nor any subsidiary is in default with respect
to
any Indebtedness.
(l) Title
to Assets.
Each of
the Company and the subsidiaries has good and marketable title to all of its
real and personal property reflected in the Form 10-KSB, free and clear of
any
mortgages, pledges, charges, liens, security interests or other encumbrances,
except for those disclosed in the Form 10-KSB or such that, individually or
in
the aggregate, do not cause a Material Adverse Effect. All leases of the Company
and each of its subsidiaries are valid and subsisting and in full force and
effect.
(m) Actions
Pending.
Except
as set forth in the Commission Documents, there is no action, suit, claim,
investigation, arbitration, alternate dispute resolution proceeding or any
other
proceeding pending or, to the knowledge of the Company, threatened against
the
Company or any subsidiary which questions the validity of this Agreement or
any
of the other Transaction Documents or the transactions contemplated hereby
or
thereby or any action taken or to be taken pursuant hereto or thereto. Except
as
set forth in the Commission Documents, there is no action, suit, claim,
investigation, arbitration, alternate dispute resolution proceeding or any
other
proceeding pending or, to the knowledge of the Company, threatened, against
or
involving the Company, any subsidiary or any of their respective properties
or
assets. Except as set forth in the Commission Documents, there are no
outstanding orders, judgments, injunctions, awards or decrees of any court,
arbitrator or governmental or regulatory body against the Company or any
subsidiary or any officers or directors of the Company or subsidiary in their
capacities as such.
(n) Compliance
with Law.
The
business of the Company and the subsidiaries has been and is presently being
conducted in accordance with all applicable federal, state and local
governmental laws, rules, regulations and ordinances, except for such
noncompliance that, individually or in the aggregate, would not cause a Material
Adverse Effect. The Company and each of its subsidiaries have all franchises,
permits, licenses, consents and other governmental or regulatory authorizations
and approvals necessary for the conduct of its business as now being conducted
by it unless the failure to possess such franchises, permits, licenses, consents
and other governmental or regulatory authorizations and approvals, individually
or in the aggregate, could not reasonably be expected to have a Material Adverse
Effect.
(o) Taxes.
The
Company and each of the subsidiaries has accurately prepared and filed all
federal, state and other tax returns required by law to be filed by it, has
paid
or made provisions for the payment of all taxes shown to be due and all
additional assessments, and adequate provisions have been and are reflected
in
the financial statements of the Company and the subsidiaries for all current
taxes and other charges to which the Company or any subsidiary is subject and
which are not currently due and payable. None of the federal income tax returns
of the Company or any subsidiary have been audited by the Internal Revenue
Service. The Company has no knowledge of any additional assessments, adjustments
or contingent tax liability (whether federal or state) of any nature whatsoever,
whether pending or threatened against the Company or any subsidiary for any
period, nor of any basis for any such assessment, adjustment or
contingency.
10
(p) Certain
Fees.
Except
as set forth in Schedule 9(p), no brokers, finders or financial advisory fees
or
commissions will be payable by the Company or any subsidiary or any Investor
with respect to the transactions contemplated by this Agreement.
(q) Disclosure.
Neither
this Agreement or the Schedules hereto nor any other documents, certificates
or
instruments furnished to the Investors by or on behalf of the Company or any
subsidiary in connection with the transactions contemplated by this Agreement
contain any untrue statement of a material fact or omit to state a material
fact
necessary in order to make the statements made herein or therein, in the light
of the circumstances under which they were made herein or therein, not
misleading.
(r) Operation
of Business.
The
Company and each of the subsidiaries owns or possesses all patents, trademarks,
domain names (whether or not registered) and any patentable improvements or
copyrightable derivative works thereof, websites and intellectual property
rights relating thereto, service marks, trade names, copyrights, licenses and
authorizations as set forth in the Commission Documents, and all rights with
respect to the foregoing, which are necessary for the conduct of its business
as
now conducted without any conflict with the rights of others.
(s) Books
and Record Internal Accounting Controls.
The
books and records of the Company and its subsidiaries accurately reflect in
all
material respects the information relating to the business of the Company and
the subsidiaries, the location and collection of their assets, and the nature
of
all transactions giving rise to the obligations or accounts receivable of the
Company or any subsidiary. The Company and each of its subsidiaries maintain
a
system of internal accounting controls sufficient, in the judgment of the
Company, to provide reasonable assurance that (i) transactions are executed
in
accordance with management’s general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management’s general or
specific authorization and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
actions is taken with respect to any differences.
(t) Material
Agreements.
Except
as discussed in the Commission Documents, the Company has no other material
agreements.
(u) Transactions
with Affiliates.
Except
as set forth in the Commission Documents and excluding certain working capital
loans made to the Company by affiliates of the Company, there are no loans,
leases, agreements, contracts, royalty agreements, management contracts or
arrangements or other continuing transactions between (a) the Company or any
subsidiary on the one hand, and (b) on the other hand, any officer or director
of the Company, or any of its subsidiaries, or any person owning 5% or greater
interest in the capital stock of the Company or any subsidiary or any member
of
the immediate family of such officer, director or stockholder or any corporation
or other entity controlled by such officer, director or stockholder, or a member
of the immediate family of such officer, director or stockholder.
(v) Securities
Act of 1933.
Based
in material part upon the representations herein of the Investors, the Company
has complied and will comply with all applicable federal and state securities
laws in connection with the offer, issuance and sale of the Shares and the
Warrants hereunder. Neither the Company nor anyone acting on its behalf,
directly or indirectly, has or will sell, offer to sell or solicit offers to
buy
any of the Shares, the Warrants or similar securities to, or solicit offers
with
respect thereto from, or enter into any preliminary conversations or
negotiations relating thereto with, any person, or has taken or will take any
action so as to bring the issuance and sale of any of the Shares and the
Warrants under the registration provisions of the Securities Act and applicable
state securities laws, and neither the Company nor any of its affiliates, nor
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 Securities Act) in connection with the offer or sale of any of the Shares
and the Warrants.
11
(w) Governmental
Approvals.
Except
for the filing of any notice prior or subsequent to the Closing Date that may
be
required under applicable state and/or Federal securities laws (which if
required, shall be filed on a timely basis), including the filing of a Form
D
and a registration statement or statements pursuant to the Registration Rights
Agreement, no authorization, consent, approval, license, exemption of, filing
or
registration with any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, is or will be necessary
for, or in connection with, the execution or delivery of the Debentures and
the
Warrants, or for the performance by the Company of its obligations under the
Transaction Documents.
(x) Employees.
Except
as discussed in the Commission Documents or Offering Documents, neither the
Company nor any subsidiary has any employment contract, agreement regarding
proprietary information, non-competition agreement, non-solicitation agreement,
confidentiality agreement, or any other similar contract or restrictive
covenant, relating to the right of any officer, employee or consultant to be
employed or engaged by the Company or such subsidiary. No officer, consultant
or
key employee of the Company or any subsidiary whose termination, either
individually or in the aggregate, could have a Material Adverse Effect, has
terminated or, to the knowledge of the Company, has any present intention of
terminating his or her employment or engagement with the Company or any
subsidiary.
(y) Absence
of Certain Developments.
Except
as set forth in the Commission Documents, since June 30, 2006, neither the
Company nor any subsidiary has:
a) issued
any stock, bonds or other corporate securities or any rights, options or
warrants with respect thereto, excluding the securities listed on Schedule
9(c);
b) discharged
or satisfied any lien or encumbrance or paid any obligation or liability
(absolute or contingent) of material value, other than current liabilities
paid
in the ordinary course of business;
c) declared
or made any payment or distribution of cash or other property to stockholders
with respect to its stock, or purchased or redeemed, or made any agreements
so
to purchase or redeem, any shares of its capital stock;
d) sold,
assigned or transferred any other material tangible assets, or canceled any
debts or claims of material value, except in the ordinary course of
business;
e) sold,
assigned or transferred any patent rights, trademarks, trade names, copyrights,
trade secrets or other intangible assets or intellectual property rights, or
disclosed any proprietary confidential information to any person except to
customers in the ordinary course of business or to the Investors or their
representatives;
f) suffered
any substantial losses or waived any rights of material value, whether or not
in
the ordinary course of business, or suffered the loss of any material amount
of
prospective business;
12
g) made
any
changes in employee compensation except in the ordinary course of business
and
consistent with past practices;
h) except
in
the ordinary course of business, made capital expenditures or commitments
therefor that aggregate in excess of $100,000;
i) entered
into any other transaction other than in the ordinary course of business, or
entered into any other material transaction, whether or not in the ordinary
course of business;
j) made
charitable contributions or pledges in excess of $25,000;
k) suffered
any material damage, destruction or casualty loss, whether or not covered by
insurance;
l) experienced
any material problems with labor or management in connection with the terms
and
conditions of their employment; or
m) entered
into an agreement, written or otherwise, to take any of the foregoing
actions.
(z) Investment
Company Act Status.
The
Company is not, and as a result of and immediately upon the Closing will not
be,
an “investment company” or a company “controlled” by an “investment company,”
within the meaning of the Investment Company Act of 1940, as
amended.
(aa) Dilutive
Effect.
The
Company understands and acknowledges that its obligation to issue Conversion
Shares upon conversion of the Debenture in accordance with this Agreement and
the Debenture and its obligations to issue the Warrant Shares upon the exercise
of the Warrants in accordance with this Agreement and the Warrants, is, in
each
case, absolute and unconditional regardless of the dilutive effect that such
issuance may have on the ownership interest of other stockholders of the
Company.
(bb) No
Integrated Offering.
Neither
the Company, nor any of its affiliates, nor any person acting on its or their
behalf, has directly or indirectly made any offers or sales of any security
or
solicited any offers to buy any security under circumstances that would cause
the offering of the Shares pursuant to this Agreement to be integrated with
prior offerings by the Company for purposes of the Securities Act which would
prevent the Company from selling the Shares pursuant to Rule 506 under the
Securities Act, or any applicable exchange-related stockholder approval
provisions, nor will the Company or any of its affiliates or subsidiaries take
any action or steps that would cause the offering of the Shares to be integrated
with other offerings. The Company does not have any registration statement
pending before the Commission or currently under the Commission’s review and
since January
1, 2006, the Company has not offered or sold any of its equity securities or
debt securities convertible into shares of Common Stock.
(cc) ▇▇▇▇▇▇▇▇-▇▇▇▇▇
Act.
The
Company is in compliance with the applicable provisions of the ▇▇▇▇▇▇▇▇-▇▇▇▇▇
Act of 2002 (the “▇▇▇▇▇▇▇▇-▇▇▇▇▇
Act”),
and
the rules and regulations promulgated thereunder, that are effective, and
intends to comply with other applicable provisions of the ▇▇▇▇▇▇▇▇-▇▇▇▇▇ Act,
and the rules and regulations promulgated thereunder, upon the effectiveness
of
such provisions.
13
(dd) Intentionally
Left Blank.
(ee) Transfer
Agent.
Transfer Agent: First American Stock, Inc. of Arizona, address, telephone
number: ▇▇▇-▇▇▇-▇▇▇▇, fax number ▇▇▇-▇▇▇-▇▇▇▇,
contact person: ▇▇▇▇ ▇▇▇▇▇▇ of the Company’s transfer agent.
10.
Investor
Representations and Warranties.
I
acknowledge, represent and warrant to, and agree with, the Company as
follows:
(a) I
am
aware that my investment involves a high degree of risk as disclosed in the
Offering Documents and have read carefully the Offering Documents and Commission
Documents.
(b) I
acknowledge and am aware that there is no assurance as to the future performance
of the Company.
(c) I
acknowledge that there may be certain adverse tax consequences to me in
connection with my purchase of Units, and the Company has advised me to seek
the
advice of experts in such areas prior to making this investment.
(d) I
am
purchasing the Units for my own account for investment purposes and not with
a
view to or for sale in connection with the distribution of the Units, the
Debentures, the Warrants, or the shares of Common Stock or other securities
issuable upon conversion of the Debentures and exercise of the Warrants, nor
with any present intention of selling or otherwise disposing of all or any
part
of the foregoing securities. I agree that I must bear the entire economic risk
of my investment for an indefinite period of time because, among other reasons,
the Units have not been registered under the Act or under the securities laws
of
any state and, therefore, cannot be resold, pledged, assigned or otherwise
disposed of unless they are subsequently registered under the Act and under
applicable securities laws of certain states or an exemption from such
registration is available. Furthermore, I hereby acknowledge and agree that
I
will not sell, transfer, pledge, encumber, give or otherwise dispose of, either
publicly or privately, the Units, the Debentures, or the shares of Common Stock
or other securities issuable upon conversion of the Debentures and exercise
of
the Warrants, except in compliance with securities law. I hereby authorize
the
Company to place a legend denoting the restrictions on the Units that may be
issued to me, as well as the Debentures, Warrants, and shares of Common Stock
or
other securities issuable upon conversion of the Debentures and exercise of
the
Warrants.
(e) I
am not
a member of the National Association of Securities Dealers, Inc. (“NASD”); I am
not and have not, for a period of 12 months prior to the date of this Agreement,
been affiliated or associated with any company, firm, or other entity which
is a
member of the NASD; and I do not own any stock or other interest in any member
of the NASD (other than interests acquired in open market
purchases).
(f) I
recognize that the Units, as an investment, involve a high degree of risk
including, but not limited to, the risk of economic losses from operations
of
the Company and the total loss of my investment. I believe that the investment
in the Units is suitable for me based upon my investment objectives and
financial needs, and I have adequate means for providing for my current
financial needs and contingencies and have no need for liquidity with respect
to
my investment in the Company.
14
(g) I
have
been given access to full and complete information regarding the Company and
have utilized such access to my satisfaction for the purpose of obtaining
information in addition to, or verifying information included in, the Offering
Documents and related documents, and I have either met with or been given
reasonable opportunity to meet with officers of the Company for the purpose
of
asking questions of, and
receiving answers from, such officers concerning the terms and conditions of
the
offering of the Units and the business and operations of the Company and to
obtain any additional information, to the extent reasonably
available.
(h) I
have
such knowledge and experience in financial and business matters as to be capable
of evaluating the merits and risks of an investment in the Units and have
obtained, in my judgment, sufficient information from the Company to evaluate
the merits and risks of an investment in the Company. I have not utilized any
person as my purchaser representative as defined in Regulation D under the
Act
in connection with evaluating such merits and risks.
(i) I
have
relied solely upon my own investigation in making a decision to invest in the
Company.
(j) I
have
received no representation or warranty from the Company or any of its officers,
directors, employees or agents in respect of my investment in the Company and
I
have received no information (written or otherwise) from them relating to the
Company or its business other than as set forth in the Offering Documents.
I am
not participating in the offer as a result of or subsequent to: (i) any
advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio
or
(ii) any seminar or meeting whose attendees have been invited by any general
solicitation or general advertising.
(k) I
have
had full opportunity to ask questions and to receive satisfactory answers
concerning the offering and other matters pertaining to my investment and all
such questions have been answered to my full satisfaction.
(l) I
have
been provided an opportunity to obtain any additional information concerning
the
offering and the Company and all other information to the extent the Company
possesses such information or can acquire it without unreasonable effort or
expense.
(m)
I am an
“accredited investor” as defined in Section 2(15) of the Act and in Rule 501
promulgated thereunder. I can bear the entire economic risk of the investment
in
the Units for an indefinite period of time and I am knowledgeable about and
experienced in investments in the equity securities of small publicly traded
companies, including early stage companies. I am acquiring the Units for my
own
account for investment purposes only and not with a view to the resale or
distribution of such securities within the meaning of the Act, as amended.
I am
not acting as an underwriter or a conduit for sale to the public or to others
of
unregistered securities, directly or indirectly, on behalf of the Company or
any
person with respect to such securities.
(n) I
understand that (i) the Units and the underlying securities have not been
registered under the Act, or the securities laws of certain states in reliance
on specific exemptions from registration, (ii) no securities administrator
of
any state or the federal government has recommended or endorsed this Offering
or
made any finding or determination relating to the fairness of an investment
in
the Company and (iii) the Company is relying on my representations and
agreements for the purpose of determining whether this transaction meets the
requirements of the exemptions afforded by the Act and certain state securities
laws.
15
(o) I
understand that (i) since neither the offer nor sale of the Units has been
registered under the Act or the securities laws of any state, the Units may
not
be sold, assigned, pledged or otherwise disposed of unless they are so
registered or an exemption from such registration is available, and (ii) it
is
not anticipated that there will be any market for the resale of the
Units.
(p) I
have
been urged to seek independent advice from my professional advisors relating
to
the suitability of an investment in the Company in view of my overall financial
needs and with respect to the legal and tax implications of such
investment.
(q) If
the
Investor is a corporation, company, trust, employee benefit plan, individual
retirement account, ▇▇▇▇▇ Plan, or other tax-exempt entity, it is authorized
and
qualified to become an Investor in the Company and the person signing this
Agreement on behalf of such entity has been duly authorized by such entity
to do
so.
(r) The
information contained herein, as well as any information which I have furnished
to the Company with respect to my financial position and business experience,
is
correct and complete as of the date of this Agreement and, if there should
be
any material change in such information prior to the Closing of the Offering,
I
will furnish such revised or corrected information to the Company.
I
hereby
acknowledge and am aware that except for any rescission rights that may be
provided under applicable laws, I am not entitled to cancel, terminate or revoke
this subscription, and any agreements made in connection herewith shall survive
my death or disability.
11.
Subsequent
Financings.
Each
Investor in this Offering investing $2,000,000 or greater (including any amounts
represented by the Prior Securities being exchanged for the Units herein) (the
“Lead Investor”) shall be entitled to the following:
(A)
For
a
period of fifteen (15) months following the Public Offering, the Company
covenants and agrees to promptly notify (in no event later than five (5) days
after making or receiving an applicable offer) in writing (a "Rights Notice")
the Investor of the terms and conditions of any proposed offer or sale to,
or
exchange with (or other type of distribution to) any third party, of Common
Stock or any debt or equity securities convertible, exercisable or exchangeable
into Common Stock or other securities of the Company that the Company chooses
to
accept (a “Subsequent Financing”). The Rights Notice shall describe, in
reasonable detail, the proposed Subsequent Financing, the names and investment
amounts of all investors participating in the Subsequent Financing, the proposed
closing date of the Subsequent Financing, which shall be within twenty (20)
calendar days from the date of the Rights Notice, and all of the material terms
and conditions thereof. The Rights Notice shall provide the Investor an option
(the “Rights Option”) during the ten (10) Trading Days following delivery of the
Rights Notice (the “Option Period”) to inform the Company whether such Investor
will purchase up to 50% of the securities being offered in such Subsequent
Financing on the same, absolute terms and conditions as contemplated by such
Subsequent Financing and the amount of securities the Investor will purchase,
which shall not exceed $2,000,000.
Delivery
of any Rights Notice constitutes a representation and warranty by the Company
that there are no other material terms and conditions, arrangements, agreements
or otherwise, except for those disclosed in the Rights Notice, to provide
additional compensation to any party participating in any proposed Subsequent
Financing, including, but not limited to, additional compensation based on
changes in the Purchase Price or any type of reset or adjustment of a purchase
or conversion price or to issue additional securities at any time after the
closing date of a Subsequent Financing. If the Company does not receive notice
of exercise of the Rights Option from the Investor within the Option Period,
the
Company shall have the right to close the Subsequent Financing on the scheduled
closing date with a third party; provided that all of the material terms and
conditions of the closing are the same as those provided to the Purchaser in
the
Rights Notice. If the closing of the proposed Subsequent Financing does not
occur on that date, any closing of the contemplated Subsequent Financing or
any
other Subsequent Financing shall be subject to all of the provisions of this
Section 11(A) including, without limitation, the delivery of a new Rights
Notice. The provisions of this Section 11(A) shall not apply to issuances of
securities in a Permitted Financing.
16
(B)
For
purposes of this Agreement, a Permitted Financing (as defined hereinafter)
shall
not be considered a Subsequent Financing. A "Permitted Financing" shall mean
(i)
securities issued in a Public Offering, (ii) securities issued (other than
for
cash) in connection with a merger, acquisition, or consolidation, (iii)
securities issued pursuant to the conversion or exercise of convertible or
exercisable securities issued or outstanding on or prior to the date of this
Agreement or issued pursuant to this Agreement (so long as the conversion or
exercise price in such securities are not amended to lower such price and/or
adversely affect the Investor), (iv) securities issued in connection with bona
fide strategic license agreements or other partnering arrangements so long
as
such issuances are not for the primary purpose of raising capital, (v) Common
Stock issued or the issuance or grants of options to purchase Common Stock
pursuant to the Company’s stock option plans and employee stock purchase plans,
and, (vi) any warrants issued to the placement agent and its designees for
the
transactions contemplated by the Offering Documents.
(C) For
a
period of two (2) years following the Closing Date, the Company shall be
prohibited from effecting or entering into an agreement to effect a subsequent
financing involving a “Variable
Rate Transaction”.
The
term “Variable
Rate Transaction”
shall
mean a transaction in which the Company issues or sells (i) any debt or equity
securities that are convertible into, exchangeable or exercisable for, or
include the right to receive additional shares of Common Stock either (A) at
a
conversion, exercise or exchange rate or other price that is based upon and/or
varies with the trading prices of or quotations for the shares of Common Stock
at any time after the initial issuance of such debt or equity securities, or
(B)
with a conversion, exercise or exchange price that is subject to being reset
at
some future date after the initial issuance of such debt or equity security
or
upon the occurrence of specified or contingent events directly or indirectly
related to the business of the Company or the market for the Common Stock or
(ii) enters into any agreement, including, but not limited to, an equity line
of
credit, whereby the Company may sell securities at a future determined price.
Notwithstanding the foregoing, except for any equity line of credit or similar
agreement referred to in subclause (ii) of this Section 11, the prohibition
against Variable Rate Transactions shall not apply in connection with a
transaction that contains a definite minimum price of $1.00 upon conversion
or
issuance below which such securities cannot be converted or issued.
(D) Disclosure
of Material Information. The Company covenants and agrees that neither it nor
any other person acting on its behalf has provided or will provide the Investor
or its agents or counsel with any information that the Company believes
constitutes material non-public information, unless prior thereto the Company
shall have given three (3) business days notice that it intends to disclose
such
information to the Investor and such Investor shall have agreed in writing
that
it is willing to accept such information. If the Investor does not agree to
accept such information, it will be deemed to have waived its rights pursuant
Section 11(A) for the purpose of the Subsequent Financing at issue but not
for
any additional Subsequent Financings for which it may be entitled to receive
notice hereunder. The Company understands and confirms that the Investor will
rely on the foregoing representations in effecting transactions in securities
of
the Company.
12.
Other
Agreements.
The
Company shall not enter into any agreement in which the terms of such agreement
would restrict the right or ability to perform of the Company or any subsidiary
under any Transaction Documents.
13.
Reporting
Status. So
long
as the Investor beneficially owns any of the Shares, the Company shall timely
file all reports required to be filed with the Commission pursuant to the
Exchange Act, and the Company shall not terminate its status as an issuer
required to file reports under the Exchange Act even if the Exchange Act or
the
rules and regulations thereunder would permit such termination.
14. Indemnification.
I
hereby agree to indemnify and hold harmless the Company and its officers,
directors, stockholders, employees, agents, and counsel against any and all
losses, claims, demands, liabilities, and expenses (including reasonable legal
or other expenses, including reasonable attorneys' fees) incurred by each such
person in connection with defending or investigating any such claims or
liabilities, whether or not resulting in any liability to such person, to which
any such indemnified party may become subject under the Act, under any other
statute, at common law or otherwise, insofar as such losses, claims, demands,
liabilities and expenses (a) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact made by me and contained in
this
Agreement, or (b) arise out of or are based upon any breach by me of any
representation, warranty, or agreement made by me contained herein or therein.
Notwithstanding anything to the contrary contained herein, my liability under
this Section 14 shall be limited to the amount I have invested pursuant to
this
Agreement.
17
15. Severability.
In the
event any parts of this Agreement are found to be void, the remaining provisions
of this Agreement shall nevertheless be binding with the same effect as though
the void parts were deleted.
16. Choice
of Law.
This
Agreement shall be governed by the laws of the State of New York as applied
to
contracts entered into and to be performed entirely within the State of New
York.
17. Counterparts.
This
Agreement may be executed in one or more counterparts, each of which shall
be
deemed an original but all of which together shall constitute one and the same
instrument. The execution of this Agreement may be by actual or facsimile
signature.
18. Benefit.
This
Agreement shall be binding upon and inure to the benefit of the parties
hereto.
19. Notices
and Addresses.
All
notices, offers, acceptance and any other acts under this Agreement (except
payment) shall be in writing, and shall be sufficiently given if delivered
to
the addresses in person, by Federal Express or similar courier delivery or
by
facsimile delivery, as follows:
Investor: At
the
address designated on the signature page of this Agreement.
The
Company:
China
Digital Media Corporation
▇▇▇▇
▇▇▇▇-▇▇, ▇▇/▇, ▇▇▇▇▇▇ ▇▇▇▇▇,
▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇,
▇▇▇▇ ▇▇▇▇
Attention:
Ng ▇▇▇ ▇▇▇▇▇ (a.k.a. ▇▇▇▇▇▇ ▇▇)
With
a
copy to:
Cozen
▇’▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇▇▇▇,
▇▇ ▇▇▇▇▇
Attention:
Cavas ▇. ▇▇▇▇▇, Esq.
Telephone:
(▇▇▇) ▇▇▇-▇▇▇▇
Facsimile:
(▇▇▇) ▇▇▇-▇▇▇▇
or
to
such other address as any of them, by notice to the others may designate from
time to time. The transmission confirmation receipt from the sender's facsimile
machine shall be conclusive evidence of successful facsimile delivery. Time
shall be counted to, or from, as the case may be, the delivery in person or
by
mailing.
18
20. Entire
Agreement.
This
Agreement constitutes the entire agreement between the parties with respect
to
the subject matter hereof and supersedes all prior oral and written agreements
between the parties hereto with respect to the subject matter hereof. This
Agreement may not be changed, waived, discharged, or terminated orally but,
rather, only by a statement in writing signed by the party or parties against
which enforcement or the change, waiver, discharge or termination is
sought.
21. Section
Headings.
Section
headings herein have been inserted for reference only and shall not be deemed
to
limit or otherwise affect, in any matter, or be deemed to interpret in whole
or
in part, any of the terms or provisions of this Agreement.
22. Survival
of Representations, Warranties and Agreements.
The
representations, warranties and agreements contained herein shall survive the
delivery of, and the payment for, the Units.
23. Acceptance
of Subscription.
The
Company may accept this Agreement at any time for all or any portion of the
Units subscribed for by executing a copy hereof as provided and notifying me
within a reasonable time thereafter.
RESIDENTS OF ALL STATES:
THE
UNITS
OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION AND ARE
BEING
OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS
OF
SAID ACT AND SUCH LAWS. THE UNITS ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY
AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SAID
ACT AND SUCH LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS
SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS
INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE UNITS HAVE NOT BEEN APPROVED
OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION OR OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING
AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY
OR ADEQUACY OF THE OFFERING DOCUMENTS. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
19
Manner
in
Which Title is to be Held. (check one)
___
Individual Ownership
___
Community Property
___
Joint
Tenant with Right of Survivorship (both parties must sign)
___
Partnership
___
Tenants in common
___
Corporation
___
Trust
___
▇▇▇
or ▇▇▇▇▇▇
___
Other
(please indicate)
Dated:________________________
INDIVIDUAL
INVESTORS
ENTITY
INVESTORS*
______________________
Name
of
entity, if any _____________________
Signature
(Individual)
Foreign
individual investors must
provide
By:____________________________
a
photocopy of his/her
passport
*Signature
_________________________
Its ____________________________
Signature
(Joint)
Title
(all
record holders must sign)
Foreign
individual investors must provide
a
photocopy of his/her passport
___________________
_______________________________
Name(s)
Typed or
Printed
Name
Typed or Printed
Address
to Which
Correspondence
Address
to Which Correspondence
Should
be
Directed Should
be
Directed
________________________ ________________________
City,
State and Zip
Code
City,
State and Zip Code
_________________
__________________
Tax
Identification
or
Tax
Identification or
Social
Security
Number
Social
Security Number
| * |
If
Units are being subscribed for by any entity, the Certificate of
Signatory
on the next page must also be completed and
if
the entity is a foreign entity, must also submit a Certificate of
Incorporation.
|
20
The
foregoing subscription is accepted and the Company hereby agrees to be bound
by
its terms.
CHINA
DIGITAL MEDIA CORPORATION
Dated:
______________
By: ________________________________
Ng
▇▇▇ ▇▇▇▇▇ (a.k.a. ▇▇▇▇▇▇ ▇▇), President and Chief Executive Officer
21
CERTIFICATE
OF SIGNATORY
(To
be
completed if Units are being subscribed for by an entity)
I, ____________________________________, the
______________________________
(name
of signatory) (title)
of______________________________
“Entity”), a _______________________________
(name
of entity)
_________________________________________
(type
of entity)
hereby
certify that I am empowered and duly authorized by the Entity to execute the
Agreement and to purchase the Units, and certify further that the Agreement
has
been duly and validly executed on behalf of the Entity and constitutes a legal
and binding obligation of the Entity.
IN
WITNESS WHEREOF, I have set my hand this_______ day
of
__________,
2006.
(Signature)
___________________________________
22
Form
of Debenture
23
Form
of Series A Warrant
24
Form
of Series B Warrant
25
Form
of Series C Warrant
26