EXHIBIT 4.2
FORM OF SUBSCRIPTION AGREEMENT
This Subscription Agreement (the "Agreement" or "Subscription Agreement")
is made as of the date indicated on the signature page of this Agreement by and
between National Scientific Corporation, a Texas corporation (the "Company"),
and each party who is a signatory hereto and any other Subscribers who are made
a party to this Agreement pursuant to Section 1 (individually, a "Subscriber"
and collectively, the "Subscribers").
RECITALS
The Company hereby offers to persons who qualify as "accredited investors"
as defined in Rule 501 of Regulation D promulgated under the under the
Securities Act of 1933, as amended (the "Securities Act"), 10 million units for
aggregate gross proceed of $1.1 million ("Base Offering") in a private placement
("Offering") to be conducted through Casimir Capital L.P., as Placement Agent
("Casimir" or the "Placement Agent"). The Company is offering the units pursuant
to Rule 506 of Regulation D promulgated under the Securities Act. The Base
Offering will be conducted on a "best efforts, all or none basis," as more
thoroughly described in the Confidential Offering Memorandum, dated March 15,
2004 (hereinafter, with all Exhibits and Schedules annexed thereto, and any
supplements and/or amendments, the "Offering Memorandum"). Each unit (a "Unit")
shall consist of (i) one (1) share of common stock, par value $0.01 per share,
of the Company (the "Common Stock"), and (ii) a 5-year warrant (the "Warrant")
to purchase three quarters (3/4) of a share of Common Stock. The offering price
per Unit ("Purchase Price") shall be $0.11. The initial exercise price of each
Warrant shall be equal to the Purchase Price.
During the Offering Period (as hereinafter defined), the Company has the
option to sell up to an additional 4,545,455 Units, for additional aggregate
gross proceeds of up to $500,000, thereby possibly increasing the aggregate
gross proceeds of the Offering to up to $1.6 million (hereinafter such
additional gross proceeds of up to $500,000, referred to as the "Over-allotment
Option"). In the event the Company exercises the Over-allotment Option, it may
choose to have more than one closing in connection with the Offering.
The Common Stock, Warrants and shares of Common Stock underlying the
Warrants ("Warrant Shares"), including any such securities sold in connection
with the Over-allotment Option, shall collectively be referred to as the "Unit
Securities." The term "Offering" shall include any Units sold in connection with
the Base Offering and the Over-allotment Option.
In consideration of the premises and the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Company and the Subscribers hereby agree as
follows:
ARTICLE I
PURCHASE AND SALE OF SECURITIES
1.1 PURCHASE AND SALE OF UNIT SECURITIES. Subject to the terms and
conditions set forth herein, Subscriber hereby subscribes for and agrees to
purchase from the Company and the Company agrees to issue and sell to each
Subscriber at the Closing the number of Units set forth on the signature page
hereto.
1.2 PAYMENT. Prior to the Closing, each Subscriber will deposit, by wire
transfer or check of immediately available funds in accordance with the
Company's wire instructions, the aggregate Purchase Price set forth beneath its
1
name on the signature page hereof in a segregated escrow account with an escrow
agent reasonably acceptable to Casimir. The Company will deliver certificates
representing the Common Stock and Warrants within 10 business days of the
earlier to occur of the (a) Closing Date or (b) the Termination Date.
1.3 OFFERING PERIOD. Unless terminated earlier in the Company's sole
discretion, the offering period (the "Offering Period") will expire May 14, 2004
(subject to extension at the Company's discretion for an additional 30 days
without notice to investors) (the "Termination Date").
ARTICLE II
SUBSCRIBER'S REPRESENTATIONS AND WARRANTIES
Each Subscriber represents and warrants to the Company and Casimir,
severally and solely with respect to itself and its purchase hereunder and not
with respect to any other Subscriber, that:
2.1 INVESTMENT PURPOSE. The Subscriber is purchasing the Unit Securities
for its own account and not with a present view toward the public sale or
distribution thereof; provided, however, that by making the representation
herein, the Subscriber does not agree to hold any of the Unit Securities for any
minimum or other specific term and reserves the right to dispose of the Unit
Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the Securities Act.
2.2 ACCREDITED SUBSCRIBER STATUS. The Subscriber is an "accredited
investor" as defined in Rule 501(a) of Regulation D. The Subscriber has
delivered to the Company a Confidential Investor Questionnaire in the form
annexed to the Offering Memorandum. The Subscriber hereby represents that,
either by reason of the Subscriber's business or financial experience or the
business or financial experience of the Subscriber's advisors, the Subscriber
has the capacity to protect the Subscriber's own interests in connection with
the transaction contemplated hereby and is capable of evaluating the merits and
risks of an investment in the Unit Securities.
2.3 RELIANCE ON EXEMPTIONS. The Subscriber understands that the Unit
Securities are being offered and sold to it in reliance upon specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying upon the truth and accuracy of, and the
Subscriber's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Subscriber set forth herein in order
to determine the availability of such exemptions and the eligibility of the
Subscriber to acquire the Unit Securities.
2.4 INFORMATION. (a) The Subscriber and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company, and materials relating to the offer and sale of the Unit
Securities that have been requested by the Subscriber or its advisors, if any,
including, without limitation, the Offering Memorandum. The Subscriber and its
advisors, if any, have been afforded the opportunity to ask questions of the
Company. Neither such inquiries nor any other due diligence investigation
conducted by Subscriber or any of its advisors or representatives modify, amend
or affect the Subscriber's right to rely on the Company's representations and
warranties contained in Article III below.
(b) The Subscriber acknowledges and agrees that Casimir has not
supplied any information for inclusion herein other than information furnished
in writing to the Company by Casimir specifically for inclusion herein relating
to Casimir, that Casimir has no responsibility for the accuracy or completeness
of the Offering Memorandum, and that the Subscriber has not relied upon the
independent investigation or verification, if any, which may have been
undertaken by Casimir.
2
2.5 ACKNOWLEDGEMENT OF RISK. The Subscriber acknowledges and understands
that its investment in the Unit Securities involves a high degree of risk,
including, without limitation, those risk factors set forth in the Company's
Form 10-KSB for the fiscal year ended September 30, 2003, and that (i) the
Company has experienced losses for the past 7 years, including net losses of
$1,883,489, $952,564 and $210,778 for the years ended September 30, 2002 and
2003 and the quarter ended December 31, 2003, respectively, and its auditor's
report for the years ended September 30, 2002 and 2003 raise doubt regarding the
ability of the Company to continue as a going concern; (ii) the Company changed
its focus in February 2002 to applications of electronic devices in the location
services market and, accordingly, is considered a development stage company and
as such, has limited operating history in its current business and has not
generated significant revenues; (iii) the Company is dependent upon raising
capital from investors and requires substantial funds in addition to the
proceeds from the sale of Unit Securities; (iv) an investment in the Company is
highly speculative, and only Subscribers who can afford the loss of their entire
investment should consider investing in the Company and the Unit Securities; (v)
the Subscriber may not be able to liquidate its investment; (vi) transferability
of the Unit Securities is extremely limited; (vii) in the event of a disposition
of the Unit Securities, the Subscriber could sustain the loss of its entire
investment and (viii) the Company has not paid any dividends on its Common Stock
since inception and does not anticipate the payment of dividends in the
foreseeable future.
2.6 GOVERNMENTAL REVIEW. The Subscriber understands that no United States
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities or an
investment therein.
2.7 TRANSFER OR RESALE. The Subscriber understands that:
(a) except as otherwise provided in Article V, the Unit Securities
have not been and are not being registered under the Securities Act or any
applicable state securities laws and, consequently, the Subscriber may have to
bear the risk of owning the Unit Securities for an indefinite period of time
because the Unit Securities may not be transferred unless (i) the resale of the
Unit Securities is registered pursuant to an effective registration statement
under the Securities Act; (ii) the Subscriber has delivered to the Company an
opinion of counsel reasonably acceptable to the Company (in form, substance and
scope customary for opinions of counsel in comparable transactions) to the
effect that the Unit Securities to be sold or transferred may be sold or
transferred pursuant to an exemption from such registration; or (iii) the Unit
Securities are sold or transferred pursuant to Rule 144;
(b) any sale of the Unit Securities made in reliance on Rule 144 may
be made only in accordance with the terms of Rule 144 and, if Rule 144 is not
applicable, any resale of the Unit Securities under circumstances in which the
seller (or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the Securities Act) may require
compliance with some other exemption under the Securities Act or the rules and
regulations of the SEC promulgated thereunder; and
(c) except as set forth in Article V, neither the Company nor any
other person is under any obligation to register the Unit Securities under the
Securities Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder. There can be no assurance that the
Registration Statement provided for in Article V will ever be effective or
remain effective, or that there will be any liquidity with respect to the sale
of the Registrable Securities (as hereinafter defined), if and when registered.
Subscriber understands that although the Company's Common Stock is traded on the
OTCBB, there is currently a limited public market for such securities and the
price of the Company's Common Stock has fluctuated widely in the past. Even if
3
the Subscriber is able to sell the Registrable Securities, there is no assurance
regarding a return of or on Subscriber's investment in the Unit Securities.
2.8 LEGENDS. The Subscriber understands the certificates representing the
Unit Securities will bear a restrictive legend in substantially the following
form (and a stop-transfer order may be placed against transfer of the
certificates for such securities):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY
STATE OF THE UNITED STATES. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR
ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER APPLICABLE SECURITIES LAWS, OR UNLESS OFFERED, SOLD OR
TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THOSE LAWS.
2.9 AUTHORIZATION; ENFORCEMENT. This Agreement has been duly and validly
authorized, executed and delivered on behalf of the Subscriber and represents
the valid and binding obligations of the Subscriber enforceable in accordance
with its terms, subject to the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the rights of creditors
generally and the application of general principles of equity.
2.10 ACKNOWLEDGEMENTS REGARDING CASIMIR. The Subscriber acknowledges that
Casimir is acting as placement agent for the Unit Securities being offered
hereby and will be compensated by the Company for acting in such capacity. The
Subscriber further acknowledges that Casimir has acted solely as agent of the
Company in connection with the offering of the Unit Securities by the Company,
that the information and data provided to the Subscriber in connection with the
transactions contemplated hereby have not been subjected to independent
verification by Casimir, and that Casimir makes no representation or warranty
with respect to the accuracy or completeness of such information, data or other
related disclosure material. The Subscriber further acknowledges that in making
its decision to enter into this Agreement and purchase the Unit Securities it
has relied on its own examination of the Company and the terms of, and
consequences, of holding the Unit Securities. The Subscriber further
acknowledges that the provisions of this Section 2.10 are for the benefit of,
and may be enforced by, Casimir.
2.11 NOT A REGISTERED REPRESENTATIVE. The Subscriber acknowledges that if
he or she is a Registered Representative of an NASD member firm, he or she must
give such firm the notice required by the NASD's Rules of Fair Practice, receipt
of which must be acknowledged by such firm in the Confidential Investor
Questionnaire.
2.12 INDEMNIFICATION. The Subscriber agrees to hold the Company and its
directors, officers, employees, controlling persons and agents (including
Casimir and its officers, directors, partners, employees, counsel, controlling
persons and agents) and their respective heirs, representatives, successors and
assigns harmless and to indemnify them against all liabilities, costs, and
expenses incurred by them as a result of, (i) any misrepresentation made by the
Subscriber contained in this Agreement (including the Confidential Investor
Questionnaire, (ii) any sale or distribution by the Subscriber in violation of
the Securities Act or any applicable state securities or "blue sky" laws or
(iii) any untrue statement of a material fact made by the Subscriber and
contained herein.
2.13 AFFILIATE INVESTMENTS. Subscriber acknowledges and understands that
certain affiliates of Casimir may purchase Unit Securities in the Offering.
4
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Subscribers and Casimir that:
3.1 ORGANIZATION AND QUALIFICATION. The Company is duly incorporated,
validly existing and in good standing under the laws of the jurisdiction in
which it is incorporated, with full power and authority (corporate and other) to
own, lease, use and operate its properties and to carry on its business as and
where now owned, leased, used, operated and conducted. The Company is duly
qualified to do business and is in good standing in every jurisdiction in which
the nature of the business conducted by it makes such qualification necessary,
except where the failure to be so qualified or in good standing would not have a
Material Adverse Effect. The Company has no direct or indirect subsidiaries.
3.2 AUTHORIZATION; ENFORCEMENT. (a) The Company has all requisite
corporate power and authority to conduct the Offering as contemplated in the
Offering Memorandum and to enter into and to perform its obligations under this
Agreement, the Placement Agent Agreement, Escrow Agreement, Right of First
Refusal Agreement and Mergers and Acquisition Agreement (collectively, the
"Transaction Documents"), to consummate the transactions contemplated hereby and
thereby and to issue the Unit Securities in accordance with the terms hereof,
and to issue the Placement Agent Warrants and Initiation Warrants in accordance
with the Placement Agent Agreement, and to issue the shares of Common Stock
underlying the Placement Agent Warrants and Initiation Warrants; (b) the
execution, delivery and performance of the Transaction Documents by the Company
and the consummation by it of the transactions contemplated hereby and thereby
(including without limitation the issuance of the Securities) have been duly
authorized by the Company's Board of Directors and no further consent or
authorization of the Company, its Board of Directors, or its shareholders is
required; (c) Each of the Transaction Documents has been duly executed by the
Company; and (d) Each of Transaction Documents constitutes a legal, valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms, subject to the effect of any applicable bankruptcy, insolvency,
reorganization, or moratorium or similar laws affecting the rights of creditors
generally and the application of general principles of equity.
3.3 CAPITALIZATION. The authorized and issued capitalization of the
Company is as set forth in the Offering Memorandum. All outstanding shares of
Common Stock are, and all shares which may be issued pursuant to the Transaction
Documents or otherwise will be, when issued, duly authorized, validly issued,
fully paid and nonassessable and will not be subject to preemptive rights.
Except as set forth on SCHEDULE 3.3, there are not issued, reserved for issuance
or outstanding (a) any shares of capital stock or other voting securities of the
Company, (b) any securities of the Company convertible into or exchangeable or
exercisable for shares of capital stock or voting securities of the Company, (c)
any warrants, calls, options or other rights to acquire from the Company, and
any obligation of the Company to issue, any capital stock, voting securities or
securities convertible into or exchangeable or exercisable for capital stock or
voting securities of the Company.
3.4 ISSUANCE OF SECURITIES. The shares of Common Stock of the Company
purchased under this Agreement, and the shares of Common Stock issuable upon
exercise of the Warrants, Placement Agent Warrants and Initiation Warrants,
including such indeterminate number of shares of Common Stock as may be issued
as a result of the anti-dilution provisions contained therein (collectively, the
"Warrant Shares"), are duly authorized and, upon issuance in accordance with the
terms of this Agreement, the Placement Agent Warrants and Initiation Warrants,
as the case may be, will be validly issued, fully paid and non-assessable, free
from all taxes, liens, claims, encumbrances and charges with respect to the
issue thereof, will not be subject to preemptive rights or other similar rights
of stockholders of the Company, and will not impose personal liability on the
5
holders thereof. The Company has a sufficient number of authorized but unissued
shares of Common Stock, assuming the Maximum Offering, giving effect to (i) the
exercise of the Warrants, Placement Agent Warrants and Initiation Warrants and
(ii) the conversion, exercise and/or exchange of all other securities
outstanding on the date hereof, which are convertible, exercisable or
exchangeable for shares of Common Stock. As of the First Closing Date and for as
long as the Warrants, Placement Agent Warrants and Initiation Warrants are
outstanding, the Company shall have reserved a sufficient number of Warrant
Shares to be issued upon exercise of the Warrants, Placement Agent Warrants and
Initiation Warrants.
3.5 NO CONFLICTS; NO VIOLATION.
(a) Other than as set forth in SCHEDULE 3.5, the execution, delivery
and performance of each of the Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
(including, without limitation, the issuance of the Securities) will not (i)
conflict with or result in a violation of any provision of its Certificate of
Incorporation or Bylaws, (ii) violate or conflict with, or result in a breach of
any provision of, or constitute a default (or an event which with notice or
lapse of time or both could become a default) under, or give to others any
rights of termination, amendment (including without limitation, the triggering
of any anti-dilution or right of first refusal provision), acceleration or
cancellation of, any agreement, indenture, patent, patent license, or instrument
to which the Company is a party ( any one or all being referred to as a "Company
Obligation"), or (iii) to the best of the Company's knowledge, result in a
violation of any law, rule, regulation, order, judgment or decree (including
U.S. federal and state securities laws and regulations and regulations of any
self-regulatory organizations to which the Company or its securities are
subject) applicable to the Company or by which any property or asset of the
Company is bound or affected (except for such conflicts, breaches, defaults,
terminations, amendments, accelerations, cancellations and violations as would
not, individually or in the aggregate, have a Material Adverse Effect).
(b) The Company is not in violation of its Articles of Incorporation,
Bylaws or other organizational documents and is not in default (and no event has
occurred which with notice or lapse of time or both could put the Company in
default) under any Company Obligation to which it is a party or by which any
property or assets of the Company is bound or affected, except for possible
defaults as would not, individually or in the aggregate, have a Material Adverse
Effect, nor is any other party in violation and/or breach of any such Company
Obligation. Each such Company Obligation is the legal, valid and binding
obligation of the Company enforceable in accordance with its terms.
(c) The Company is not conducting its business in violation of any
law, ordinance or regulation of any governmental entity, the failure to comply
with which would, individually or in the aggregate, have a Material Adverse
Effect.
(d) Except as specifically contemplated by this Agreement and as
required under the Securities Act and any applicable state securities laws or
any listing agreement with any securities exchange or automated quotation
system, the Company is not required to obtain any consent, authorization or
order of, or make any filing or registration with, any court or governmental
agency or any regulatory or self regulatory agency in order for it to execute,
deliver or perform any of its obligations under any of the Transaction Documents
in accordance with the terms hereof and thereof, or to issue and sell the Unit
Securities or Securities in accordance with the terms hereof and thereof. All
consents, authorizations, orders, filings and registrations which the Company is
required to obtain pursuant to the preceding sentence have been obtained or
effected on or prior to the date hereof.
6
3.6 SEC DOCUMENTS, FINANCIAL STATEMENTS. The Company has filed all
reports, schedules, forms, statements and other documents required to be filed
by it with the SEC since September 30, 2000, pursuant to the reporting
requirements of the Exchange Act (all of the foregoing filed prior to the date
hereof and all exhibits included therein and financial statements and schedules
thereto and documents incorporated by reference therein, being hereinafter
referred to as the "SEC Documents"). Each Subscriber has had access to, true and
complete copies of the SEC Documents. As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the
Exchange Act or the Securities Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC,
contained any untrue statement of a material fact or omitted stating 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. As of their respective dates, the financial statements of the
Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have been
prepared in accordance with U.S. generally accepted accounting principles,
consistently applied, 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 as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). Except as set forth in the financial statements included in the
SEC Documents, the Company has no liabilities, contingent or otherwise, other
than liabilities incurred in the ordinary course of business subsequent to
December 31, 2003 and liabilities of the type not required under generally
accepted accounting principles to be reflected in such financial statements.
Such liabilities incurred subsequent to December 31, 2003 are not, in the
aggregate, material to the financial condition or operating results of the
Company.
3.7 ABSENCE OF CERTAIN CHANGES. Except as disclosed in the SEC Documents
or on SCHEDULE 3.7, Since December 31, 2003, there has been no material adverse
change in the assets, liabilities, business, properties, operations, financial
condition, prospects or results of operations of the Company, except that the
Company has continued losses from operations.
3.8 DISCLOSURE. None of the Offering Documents contains or will contain
during the Offering Period any untrue statement of a material fact or omits or
will omit to state a material fact necessary in order to make the statements
contained herein and therein not misleading, in light of the circumstances under
which they were made.
3.9 ABSENCE OF LITIGATION. Except as disclosed in the SEC Documents, there
is no action, suit, claim, proceeding, inquiry or investigation before or by any
court, public board, government agency, self-regulatory organization or body
pending or, to the knowledge of the Company, threatened against or affecting the
Company or its officers or directors acting as such that could, individually or
in the aggregate, have a Material Adverse Effect.
3.10 INTELLECTUAL PROPERTY. The Company owns or possesses adequate and
enforceable rights to use all material patents, patent applications, trademarks,
service marks, trade names, logos, corporate names, copyrights, trade secrets,
processes, mask works, licenses, inventions, formulations, technology and
7
know-how and other intangible property used or proposed to be used in the
conduct of the Company's business as currently conducted or as proposed to be
conducted (the "Proprietary Rights"). The Company or the entities from whom the
Company has acquired rights has taken all necessary action to protect all of the
Company's Proprietary Rights. The Company has not received any notice of, and
there are not any facts known to the Company which indicate the existence of (i)
any infringement or misappropriation by any third party of any of the
Proprietary Rights, (ii) any claim by a third party contesting the validity of
any of the Proprietary Rights or (iii) any infringement, misappropriation or
violation by the Company or any of its employees of any Proprietary Rights of
third parties. To the best of the Company's knowledge, neither the Company nor
any of its employees has infringed, misappropriated or otherwise violated any
Proprietary Rights of any third parties. To the Company's knowledge, no
infringement, illicit copying, misappropriation or violation of any intellectual
property rights of any third party has occurred or will occur with respect to
any products currently being sold by the Company or with respect to any products
currently under development by the Company or with respect to the conduct of the
business of the Company or as currently contemplated. The Company is not aware
that any of its employees are obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of the employee's best efforts to promote the interests
of the Company or that would conflict with the business of the Company as
currently conducted or as proposed to be conducted. To the Company's knowledge,
neither the execution and delivery of this Agreement, nor the carrying on of the
business of the Company by the employees of the Company, nor the conduct of the
business of the Company, as currently conducted or as proposed to be conducted,
will conflict with or result in a breach of the terms, conditions or provisions
of, or constitute a default under, any contract, covenant or instrument under
which any such employee is now obligated.
3.11 TAX STATUS. The Company has made or filed all federal, state and
foreign income and all other tax returns, reports and declarations required by
any jurisdiction to which it is subject (unless and only to the extent that the
Company has set aside on its books provisions reasonably adequate for the
payment of all unpaid and unreported taxes) and has timely paid all taxes and
other governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith, and has set aside on its books provisions
reasonably adequate for the payment of all taxes for periods subsequent to the
periods to which such returns, reports or declarations apply. To the knowledge
of the Company, there are no unpaid taxes in any material amount claimed to be
due by the taxing authority of any jurisdiction, and the officers of the Company
know of no basis for any such claim. The Company has not executed a waiver with
respect to the statute of limitations relating to the assessment or collection
of any foreign, federal, state or local tax. None of the Company's tax returns
is presently being audited by any taxing authority.
3.12 ENVIRONMENTAL LAWS. To the best the Company's knowledge, the Company
(i) is in compliance with all applicable foreign federal, state and local laws
and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) has received all permits, licenses or
other approvals required of them under applicable Environmental Laws to conduct
business and (iii) is in compliance with all terms and conditions of any such
permit, license or approval where, in each of the three foregoing clauses, the
failure to so comply would have, individually or in the aggregate, a Material
Adverse Effect
3.13 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 in any security or solicited any offers to
8
buy any security under circumstances that would require registration under the
Securities Act of the issuance of the Securities to the Subscribers. The
issuance of the Securities to the Subscribers will not be integrated with any
other issuance of the Company's securities (past, current or future) for
purposes of the Securities Act or any applicable rules of Nasdaq.
3.14 NO BROKERS. Neither the Company nor any officer or director has taken
any action which would give rise to any claim by any person or entity for
brokerage commissions, finder's fees or similar payments relating to this
Agreement or the transactions contemplated hereby, except for dealings with
Casimir, whose commissions and fees will be paid by the Company. Similarly,
neither the Company nor any officer or director has taken any action which would
give rise to any claim or right of any person or entity to participate or act as
agent in the Offering, or otherwise generate any fees.
3.15 INSURANCE. The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as management
of the Company believes to be prudent and customary in the businesses in which
the Company is engaged.
3.16 EMPLOYMENT MATTERS. The Company is in compliance with all federal,
state, local and foreign laws and regulations respecting employment and
employment practices, terms and conditions of employment and wages and hours
except where failure to be in compliance would not have a Material Adverse
Effect. The Company is not bound by or subject to (and none of its assets or
properties is bound by or subject to) any written or oral, express or implied,
contract, commitment or arrangement with any labor union, and no labor union has
requested or, to the Company's knowledge, has sought to represent any of the
employees, representatives or agents of the Company. The Company is not aware
that any officer or key employee, or that any group of officers or key
employees, intends to terminate their employment with the Company, nor does the
Company have a present intention to terminate the employment of any of the
foregoing.
3.17 INVESTMENT COMPANY STATUS. The Company is not and upon consummation of
the sale of the Unit Securities will not be an "investment company," a company
controlled by an "investment company" or an "affiliated person" of, or
"promoter" or "principal underwriter" for, an "investment company" as such terms
are defined in the Investment Company Act of 1940, as amended.
3.18 SUBSIDIARIES. Except as disclosed in the SEC Documents, the Company
does not presently own or control, directly or indirectly, any interest in any
other corporation, association, joint venture, partnership or other business
entity and the Company is not a direct or indirect participant in any joint
venture or partnership.
3.19 NO CONFLICT OF INTEREST; TRANSACTIONS WITH AFFILIATE. Except as set
forth in the SEC Documents, The Company is not indebted, directly or indirectly,
to any of its beneficial holders of five percent (5%) or more of the Company's
outstanding Common Stock ("Principal Stockholders") or officers or directors or
to their respective spouses or children, in any amount. None of the Company's
officers, directors, Principal Stockholders or employees, or any members of
their immediate families, are directly, or indirectly, indebted to the Company
or, to the best of the Company's knowledge, have any direct or indirect
ownership interest in any entity with which the Company is affiliated or with
which the Company has a business relationship, or any entity which competes with
the Company, except that officers, directors, employees and/or Principal
Stockholders of the Company may own stock in (but not exceeding five percent
(5%) of the outstanding capital stock of) any publicly traded company that may
compete with the Company. To the best of the Company's knowledge, none of the
Company's officers, directors, Principal Stockholders or employees or any
9
members of their immediate families are, directly or indirectly, a party to or
interested in any material contract with the Company or any Subsidiary. The
Company is not a guarantor or indemnitor of any indebtedness of any other person
or entity.
3.20 COMPLIANCE WITH SARBANES OXLEY. To the best of its knowledge, the
Company is in compliance with the Sarbanes Oxley Act of 2002.
3.21 REGISTRATION RIGHTS; SB-2 REGISTRATION STATEMENT. Except as disclosed
in SCHEDULE 3.21, none of the Company's security holders have any registration
rights, including any right to effect a demand or shelf-registration under the
Securities Act or exercise any "piggyback" registration rights with respect to
any filing under the Securities Act. The Company satisfies all requirements
necessary in order to file a registration statement with the SEC on Form SB-2
under the Securities Act.
3.22 ACKNOWLEDGEMENTS REGARDING CASIMIR. The Company acknowledges that
Casimir, in acting as Placement Agent for the Unit Securities offered hereby in
accordance with the terms of Section 2 of the Placement Agent Agreement is
relying on the representations and warranties contained in this Section 3 and
that such provisions of this Section 3 are for the benefit of Casimir (in
addition to the Subscribers), and may be enforced by Casimir.
ARTICLE IV
COVENANTS
4.1 COVENANTS OF THE COMPANY.
(a) FORM D; BLUE SKY LAWS. The Company will timely file a Notice of
Sale of Securities on Form D with respect to the Unit Securities, as required
under Regulation D. The Company will, on or before the Closing Date, take such
action as it reasonably determines to be necessary to qualify the Unit
Securities for sale to the Unit Subscribers under this Agreement under
applicable securities (or "blue sky") laws of the states of the United States
(or to obtain an exemption from such qualification).
(b) REPORTING STATUS. The Company's Common Stock is registered under
Section 12 of the Exchange Act. During the period commencing on the date of the
First Closing until the expiration of the Registration Period (as defined
below), the Company will timely file all reports, schedules, forms, statements
and other documents required to be filed by it with the SEC under the reporting
requirements of the Exchange Act, and the Company will 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.
(c) EXPENSES. The Company and each Subscriber is liable for, and will
pay, its own expenses incurred in connection with the negotiation, preparation,
execution and delivery of this Agreement and the transactions contemplated
hereby, including, without limitation, attorneys' and consultants' fees and
expenses.
(d) FINANCIAL INFORMATION. The financial statements of the Company
will be prepared in accordance with United States generally accepted accounting
principles, consistently applied, and will fairly present in all material
respects the consolidated financial position of the Company and results of its
operations and cash flows as of, and for the periods covered by, such financial
statements (subject, in the case of unaudited statements, to normal year-end
audit adjustments).
10
(e) COMPLIANCE WITH LAW. As long as any Registrable Securities (as
hereinafter defined) are held by a Subscriber the Company will conduct its
business in compliance with all applicable laws, rules and regulations of the
jurisdictions in which it is conducting business (including, without limitation,
all applicable local, state and federal environmental laws and regulations), the
failure to comply with which would have a Material Adverse Effect.
(f) NO INTEGRATION. The Company will not make any offers or sales of
any security (other than the Unit Securities) under circumstances that would
cause the offering of the Unit Securities to be integrated with any other
offering of securities by the Company (i) for the purpose of any stockholder
approval provision applicable to the Company or its securities or (ii) for
purposes of any registration requirement under the Securities Act.
4.2 COVENANTS OF SUBSCRIBERS.
(a) SALES BY SUBSCRIBERS. Each Subscriber covenants to sell any Unit
Securities sold by it in compliance with applicable prospectus delivery
requirements, if any, or otherwise in compliance with the requirements for an
exemption from registration under the Securities Act and the rules and
regulations promulgated thereunder. No Subscriber will make any sale, transfer
or other disposition of the Unit Securities in violation of federal or state
securities laws.
(b) NO VOTING AGREEMENT. Each Subscriber covenants and agrees with
the Company that, so long as such Subscriber holds any of the Unit Securities,
such subscriber shall refrain from entering into any voting agreement with any
other Subscriber or any third-party, including without limitation Casimir.
ARTICLE V
REGISTRATION RIGHTS
5.1 DEFINITIONS. As used in this Agreement, the following terms shall have
the following meanings:
(a) "AFFILIATE" shall mean, with respect to any Person (as defined
below), any other Person controlling, controlled by or under direct or indirect
common control with such Person (for the purposes of this definition "control,"
when used with respect to any specified Person, shall mean the power to direct
the management and policies of such person, directly or indirectly, whether
through ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" shall have meanings correlative to the
foregoing).
(b) "BUSINESS DAY" shall mean a day Monday through Friday on which
banks are generally open for business in New York.
(c) "HOLDERS" shall mean the Subscribers, holders of the Placement
Agent Warrants, holders of the Initiation Warrants and the holders of the Common
Stock issued upon the exercise of the Placement Agent Warrants and Initiation
Warrants, any person holding Registrable Securities, or any person to whom the
rights under Article V have been transferred in accordance with Section 5.8
hereof.
(d) "PERSON" shall mean any person, individual, corporation, limited
liability company, partnership, trust or other nongovernmental entity or any
governmental agency, court, authority or other body (whether foreign, federal,
state, local or otherwise).
(e) The terms "REGISTER," "REGISTERED" and "REGISTRATION" refer to
the registration effected by preparing and filing a registration statement in
11
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
(f) "REGISTRABLE SECURITIES" shall mean (i) the shares of Common
Stock included in the Units; (ii) the shares of Common Stock issuable upon
exercise of the Warrants included in the Units; (iii) the shares of Common Stock
issuable upon exercise of the Placement Agent Warrants and the Initiation
Warrants; and (iv) any shares of Common Stock issued as (or issuable upon the
conversion of any warrant, right or other security which is issued as) a
dividend, distribution or split, recapitalization, merger, consolidation, any
reorganization of or other distribution with respect to or in replacement of the
Common Stock, Warrants, Placement Warrants and/or Initiation Warrants; provided,
however, that securities shall only be treated as Registrable Securities if and
only for so long as they (a) have not been disposed of pursuant to a
registration statement declared effective by the SEC, (b) have not been sold in
a transaction exempt from the registration and prospectus delivery requirements
of the Securities Act so that all transfer restrictions and restrictive legends
with respect thereto are removed upon the consummation of such sale or (c) are
held by a Holder or a permitted transferee pursuant to Section 5.8.
(g) "REGISTRATION EXPENSES" shall mean all expenses incurred by the
Company in complying with Section 5.2 hereof, including, without limitation, all
registration, qualification and filing fees, printing expenses, listing fees,
escrow fees, fees and expenses of counsel for the Company, blue sky fees and
expenses, the expense of any special audits incident to or required by any such
registration.
(h) "REGISTRATION PERIOD" shall have the meaning ascribed to such
term in Section 5.4(a).
(i) "REGISTRATION STATEMENT" shall mean any registration statement
filed with the SEC in accordance with Sections 5.2(a) and (b) herein.
(j) "SELLING EXPENSES" shall mean all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities and all
fees and expenses of legal counsel for any Holder, other than as provided in
paragraph (g) above.
5.2 REGISTRATION RIGHTS. (a) No later than 60 days after the Final Closing
Date (the "Filing Date"), the Company shall file a Registration Statement on
Form SB-2 or if unavailable another appropriate registration document, covering
the Registrable Securities with the SEC and use its best efforts to effect the
registration, qualifications or compliances (including, without limitation, the
execution of any required undertaking to file post-effective amendments,
appropriate qualifications or exemptions under applicable blue sky or other
state securities laws and appropriate compliance with applicable securities
laws, requirements or regulations) prior to the date which is 60 days after the
Filing Date ("Effective Date").
(b) From and after the Final Closing Date if the Company shall
determine to proceed with the preparation and filing of a Registration Statement
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 X-0,
X-0 or other limited purpose form), the Company will give written notice of its
determination to all Holders. Upon receipt of a written request from any such
holder within thirty (30) days after receipt of any such notice from the
Company, the Company will cause all the Registrable Securities owned by such
holders to be included in such Registration Statement, all to the extent
requisite to permit the sale or other disposition by the prospective seller or
12
sellers of the Registrable Securities to be so registered. If any registration
pursuant to this Section 5.2(b) shall be underwritten in whole or in part, the
Company may require that the Registrable Securities requested for inclusion
pursuant to this Section 5.2(b) be included in the underwriting on the same
terms and conditions as the securities otherwise being sold through the
underwriters. The obligation of the Company under this Section 5.2(b) shall be
unlimited as to the number of Registration Statements to which it applies.
5.3 REGISTRATION EXPENSES. All Registration Expenses incurred in
connection with any registration, qualification, exemption or compliance
pursuant to Section 5.2 shall be borne by the Company. All Selling Expenses
relating to the sale of securities registered by or on behalf of Holders shall
be borne by such Holders pro rata on the basis of the number of securities so
registered.
5.4 COMPANY OBLIGATIONS. In the case of the registration, qualification,
exemption or compliance effected by the Company pursuant to this Agreement, the
Company shall, upon reasonable request, inform each Holder as to the status of
such registration, qualification, exemption and compliance. At its expense the
Company shall:
(a) use its best efforts to keep any such registration under Sections
5.2(a) and (b), and any qualification, exemption compliance under state
securities laws which the Company determines to obtain, continuously effective
until the Holders have completed the distribution described in the registration
statement relating thereto. The period of time during which the Company is
required hereunder to keep any Registration Statement effective is referred to
herein as "the Registration Period." Notwithstanding the foregoing, at the
Company's election, the Company may cease to keep such registration,
qualification, exemption or compliance effective with respect to any Registrable
Securities, and the registration rights of a Holder shall expire, at such time
as the earlier of (i) the date on which all the Holders have completed the
distribution of the Registrable Securities, or (ii) the date all Registrable
Securities may be sold under Rule 144 during any ninety (90) day period; and
(b) advise the Holders:
(i) when the Registration Statement or any amendment thereto has
been filed with the SEC and when the Registration Statement or any
post-effective amendment thereto has become effective;
(ii) of any request by the SEC for amendments or supplements to
the Registration Statement or the prospectus included therein or for additional
information;
(iii) of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any proceedings
for such purpose;
(iv) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Registrable Securities
included therein for sale in any jurisdiction or the initiation or threatening
of any proceeding for such purpose; and
(v) of the happening of any event that requires the making of
any changes in the Registration Statement or the prospectus so that, as of such
date, the statements therein are not misleading and do not omit to state a
material fact required to be stated therein or necessary to make the statements
13
therein (in the case of the prospectus, in the light of the circumstances under
which they were made) not misleading;
(c) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of any Registration Statement at the earliest
possible time;
(d) furnish to each Holder, without charge, at least one copy of such
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules, and, if the Holder so requests in writing,
all exhibits (including those incorporated by reference) in the form filed with
the SEC;
(e) during the Registration Period, deliver to each Holder, without
charge, as many copies of the prospectus included in such Registration Statement
and any amendment or supplement thereto as such Holder may reasonably request;
and the Company consents to the use, consistent with the provisions hereof, of
the prospectus or any amendment or supplement thereto by each of the selling
Holders of Registrable Securities in connection with the offering and sale of
the Registrable Securities covered by the prospectus or any amendment or
supplement thereto. In addition, upon the reasonable request of the Holder and
subject in all cases to confidentiality protections reasonably acceptable to the
Company, the Company will meet with a Holder or a representative thereof at the
Company's headquarters to discuss all information relevant for disclosure in the
Registration Statement covering the Registrable Securities, and will otherwise
cooperate with any Holder conducting an investigation for the purpose of
reducing or eliminating such Holder's exposure to liability under the Securities
Act, including the reasonable production of information at the Company's
headquarters;
(f) during the Registration Period, deliver to each Holder, without
charge, (i) as soon as practicable (but in the case of the annual report of the
Company to its stockholders, within 120 days after the end of each fiscal year
of the Company) one copy of the following documents, other than those documents
available via XXXXX: (A) its annual report to its stockholders, if any (which
annual report shall contain financial statements audited in accordance with
generally accepted accounting principles in the United States of America by a
firm of certified public accountants of recognized standing); (B) if not
included in substance in its annual report to stockholders, its annual report on
Form 10-KSB (or similar form); (C) each of its quarterly reports to its
stockholders, and, if not included in substance in its quarterly reports to
stockholders, its quarterly report on Form 10-QSB (or similar form), and (D) a
copy of the full Registration Statement (the foregoing, in each case, excluding
exhibits); and (ii) upon reasonable request, all exhibits excluded by the
parenthetical to the immediately preceding clause (E), and all other information
that is generally available to the public;
(g) prior to any public offering of Registrable Securities pursuant
to any Registration Statement, register or qualify or obtain an exemption for
offer and sale under the securities or blue sky laws of such jurisdictions as
any such Holders reasonably request in writing, provided 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, and do any and
all other acts or things reasonably necessary or advisable to enable the offer
and sale in such jurisdictions of the Registrable Securities covered by such
Registration Statement;
14
(h) cooperate with the Holders to facilitate the timely preparation
and delivery of certificates representing Registrable Securities to be sold
pursuant to any Registration Statement free of any restrictive legends to the
extent not required at such time and in such denominations and registered in
such names as Holders may request at least five (5) business days prior to sales
of Registrable Securities pursuant to such Registration Statement;
(i) upon the occurrence of any event contemplated by Section
5.4(b)(v) above, the Company shall prepare a post-effective amendment to the
Registration Statement or a supplement to the related prospectus, or file any
other required document so that, as thereafter delivered to subscribers of the
Registrable Securities included therein, the prospectus will not include any
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 under which
they are made, not misleading;
(j) in the event that a registration involves an underwritten
offering, enter into and perform its obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the managing underwriting
underwriter or such offering;
(k) notify the security holders participating in such registration
and the Placement Agent, promptly after it shall receive notice thereof, of the
time when the Registration Statement has become effective or a supplement to any
prospectus forming a part of the Registration Statement has been filed;
(l) at the request of holders of a majority of the Registrable
Securities included in the Registration Statement, furnish to the underwriters
on the date that the Registrable Securities are delivered to underwriters for
sale in connection with a Registration Statement: (i) an opinion, dated such
date, of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to underwriters in
an underwritten public offering, addressed to the underwriters and (ii) a letter
dated such date, from the independent certified accountants of the Company, in
form an substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering, addressed to the
underwriters;
(m) make available for inspection by any underwriters participating
in an offering covering Registrable Securities, and the counsel, accountants or
other agents retained by any such underwriter, all pertinent financial and other
records, corporate documents, and properties of the Company, and cause the
Company's officers, directors and employees to supply all information reasonably
requested by any such underwriters in connection with such offering;
(n) if the Common Stock is then listed on a national securities
exchange, cause the Registrable Securities to be listed on such exchange, or if
reported on NASDAQ, to be reported on NASDAQ. If the Common Stock is not then
listed on a national securities exchange or reported on NASDAQ, facilitate the
reporting of the Registrable Securities on NASDAQ; and:
(o) provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the effective date of the
Registration Statement in which Registrable Securities are included.
5.5 INDEMNIFICATION. (a) To the extent permitted by law, the Company shall
indemnify each Holder, each underwriter of the Registrable Securities and each
person controlling such Holder within the meaning of Section 15 of the Act, with
15
respect to which any registration, qualification or compliance has been effected
pursuant to this Agreement, against all claims, losses, damages and liabilities
(or action in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened (subject to Section 5.5(c)
below), arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any registration statement,
prospectus or offering circular, or any amendment or supplement thereof,
incident to any such registration, qualification or compliance, or based on any
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 in which they were made, and will reimburse each
Holder, each underwriter of the Registrable Securities and each person
controlling such Holder, for reasonable legal and other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability or action as incurred; provided that the Company will not be
liable in any such case to the extent that any untrue statement or omission or
allegation thereof is made in reliance upon and in conformity with written
information furnished to the Company by or on behalf of such Holder and stated
to be specifically for use in preparation of such registration statement,
prospectus or offering circular; provided that the Company will not be liable in
any such case where the claim, loss, damage or liability arises out of or is
related to the failure of the Holder to comply with the covenants and agreements
contained in this Agreement respecting sales of Registrable Securities, and
except that the foregoing indemnity agreement is subject to the condition that,
insofar as it relates to any such untrue statement or alleged untrue statement
or omission or alleged omission made in the preliminary prospectus but
eliminated or remedied in the amended prospectus on file with the SEC at the
time the registration statement becomes effective or in the amended prospectus
filed with the SEC pursuant to Rule 424(b) or in the prospectus subject to
completion and term sheet under Rule 434 of the Act, which together meet the
requirements of Section 10(a) of the Act (the "Final Prospectus"), such
indemnity agreement shall not inure to the benefit of any such Holder, any such
underwriter or any such controlling person, if a copy of the Final Prospectus
furnished by the Company to the Holder for delivery was not furnished to the
person or entity asserting the loss, liability, claim or damage at or prior to
the time such furnishing is required by the Securities Act and the Final
Prospectus would have cured the defect giving rise to such loss, liability,
claim or damage.
(b) Each Holder will severally, if Registrable Securities held by
such Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors and officers, each underwriter of the Registrable Securities and
each person who controls the Company within the meaning of Section 15 of the
Act, against all claims, losses, damages and liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened (subject to Section 5.5(c) below), arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement, prospectus or offering
circular, or any amendment or supplement thereof, incident to any such
registration, qualification or compliance, or based on any 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 in which they were made, and will reimburse the Company, such
directors and officers, each underwriter of the Registrable Securities and each
person controlling the Company for reasonable legal and any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action as incurred, in each case to the
extent, but only to the extent, that such untrue statement or omission or
16
allegation thereof is made in reliance upon and in conformity with written
information furnished to the Company by or on behalf of the Holder and stated to
be specifically for use in preparation of such registration statement,
prospectus or offering circular; provided that the indemnity shall not apply to
the extent that such claim, loss, damage or liability results from the fact that
a current copy of the prospectus was not made available to the Holder and such
current copy of the prospectus would have cured the defect giving rise to such
loss, claim, damage or liability. Notwithstanding the foregoing, in no event
shall a Holder be liable for any such claims, losses, damages or liabilities in
excess of the proceeds received by such Holder in the offering, except in the
event of fraud by such Holder.
(c) Each party entitled to indemnification under this Section 5.5
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
Indemnified Party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Agreement, unless such failure
is materially prejudicial to the Indemnifying Party in defending such claim or
litigation. An Indemnifying Party shall not be liable for any settlement of an
action or claim effected without its written consent (which consent will not be
unreasonably withheld).
(d) If the indemnification provided for in this Section 5.5 is held
by a court of competent jurisdiction to be unavailable to an Indemnified Party
with respect to any loss, liability, claim, damage or expense referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party thereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other in
connection with the statements or omissions which resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
5.6 HOLDER OBLIGATIONS. (a) Each Holder agrees that, upon receipt of any
notice from the Company of the happening of any event requiring the preparation
of a supplement or amendment to a prospectus relating to Registrable Securities
so that, as thereafter delivered to the Holders, such prospectus shall not
contain an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, each Holder will forthwith discontinue disposition of
Registrable Securities pursuant to the registration statement contemplated by
Section 5.2 until its receipt of copies of the supplemented or amended
prospectus from the Company and, if so directed by the Company, each Holder
shall deliver to the Company all copies, other than permanent file copies then
in such Holder's possession, of the prospectus covering such Registrable
Securities current at the time of receipt of such notice.
17
(b) As a condition to the inclusion of its Registrable Securities,
each Holder shall furnish to the Company such information regarding such Holder
and the distribution proposed by such Holder as the Company may request in
writing or as shall be required in connection with any registration,
qualification or compliance referred to in this Article V.
(c) Each Holder agrees not to take any action with respect to any
distribution deemed to be made pursuant to such Registration Statement which
would constitute a violation of Regulation M under the Exchange Act or any other
applicable rule, regulation or law.
5.7 COMPANY REPORTING OBLIGATIONS. With a view to making available to the
Holders the benefits of certain rules and regulations of the SEC which at any
time permit the sale of the Registrable Securities to the public without
registration, the Company shall use its reasonable best efforts to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144 under the Act, at all times;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Exchange Act; and
(c) so long as a Holder owns any unregistered Registrable Securities,
furnish to such Holder, upon any reasonable request, a written statement by the
Company as to its compliance with Rule 144 under the Securities Act, and of the
Exchange Act, a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents of the Company as such Holder may
reasonably request in availing itself of any rule or regulation of the SEC
allowing a Holder to sell any such securities without registration.
5.8 TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company to
register Registrable Securities granted to the Holders by the Company under
Section 5.2 may be assigned in full by a Holder in connection with a transfer by
such Holder of its Registrable Securities. The obligations of the Company
contained in this Article V shall be binding upon any successor to the Company
and continue to be in effect with respect to any securities issued by any
successor to the Company in substitution or exchange for any Registrable
Securities.
5.9 WAIVER OR AMENDMENT. With the written consent of the Company and the
Holders holding at least a majority of the Registrable Securities that are then
outstanding and/or securities convertible into or exercisable for Registrable
Securities, any provision of this Article V may be waived (either generally or
in a particular instance, either retroactively or prospectively and either for a
specified period of time or indefinitely) or amended. Upon the effectuation of
each such waiver or amendment, the Company shall promptly give written notice
thereof to the Holders, if any, who have not previously received notice thereof
or consented thereto in writing.
5.10 PENALTY UPON DELAY OF REGISTRATION FILING. Except to the extent any
delay is solely and directly due to the failure of a Holder to reasonably
cooperate in providing to the Company such information as shall be reasonably
requested by the Company in writing for use in the Registration Statement
contemplated by Section 5.2(a), if such Registration Statement is not filed with
the SEC by the Filing Date or effective prior to the Effective Date, the Company
shall immediately pay to each Holder of Registrable Securities issued in the
Offering an amount in cash equal to one percent (1%) per month, or fraction
thereof, of such Holder's aggregate investment until the Registration Statement
is filed with the SEC or is declared effective by the SEC, as applicable. If the
18
Company fails to pay any liquidated damages pursuant to this Section in full
within seven days after the date payable, the Company will pay interest thereon
at a rate of 15% per annum (or such lesser maximum amount that is permitted to
be paid by applicable law) to each Holder, accruing daily from the date such
liquidated damages are due until such amounts, plus all such interest thereon,
are paid in full. The liquidated damages pursuant to the terms hereof shall
apply on a pro-rata basis for any portion of a month prior to the filing or
effectiveness of the Registration Statement, as applicable.
5.11 CASIMIR RELIANCE. The Company acknowledges that the holders of the
Placement Agent Warrants and Initiation Warrants (and the holders of the
underlying shares of Common Stock) are relying on the Company's obligations in
this Article V and that the provisions contained in this Article V are for the
benefit of and may be enforced by such Holders.
ARTICLE VI
DEFINITIONS
6.1 "Closing" means the closing of the purchase and sale of the Unit
Securities under this Agreement.
6.2 "Common Stock" means the common stock, par value $0.01 per share, of
the Company.
6.3 "Company" means National Scientific Corporation.
6.4 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
6.5 "Final Closing Date" means the last Closing of the Offering in the
event there is more than one Closing.
6.6 "Initiation Warrants" mean Warrants to purchase an aggregate of
500,000 shares of Common Stock issued to Casimir as an initiation fee in
connection with the Offering.
6.7 "Subscribers" means the Subscribers whose names are set forth on the
signature pages of this Agreement, and their transferees.
6.8 "Material Adverse Effect" means a material adverse effect on (a) the
business, prospects, operations, assets or financial condition of the Company,
when taken as a whole, or (b) the ability of the Company to perform its
obligations pursuant to the transactions contemplated by this Agreement or under
any instruments to be entered into or filed in connection herewith.
6.9 "Mergers and Acquisition Agreement" means the agreement to be
delivered by the Company pursuant to Section 4(f) of the Placement Agent
Agreement.
6.10 "Placement Agent Agreement" means the agreement by and between the
Company and the Placement Agent with respect to the Offering.
6.11 "Placement Agent Warrants" means the Warrants issued to the Placement
Agent pursuant to the Placement Agent Agreement.
6.12 "Regulation D" means Regulation D as promulgated under by the SEC
under the Securities Act.
19
6.13 "Right of First Refusal Agreement" means the agreement to be delivered
by the Company pursuant to Section 4(e) of the Placement Agent Agreement.
6.14 "Rule 144" means Rule 144 promulgated under the Securities Act, or any
successor rule.
6.15 "SEC" means the United States Securities and Exchange Commission.
6.16 "SEC Documents" has the meaning set forth in Section 3.6.
6.17 "Securities" means the Unit Securities, Placement Agent Warrants,
Initiation Warrants and shares of Common Stock issuable upon exercise of the
Placement Agent Warrants and Initiation Warrants.
6.18 "Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations thereunder, or any similar successor statute.
6.19 "Warrant Shares" means the shares of Common Stock issuable upon
exercise of the Warrants, Placement Agent Warrants and Initiation Warrants.
ARTICLE VII
GOVERNING LAW; MISCELLANEOUS
7.1 GOVERNING LAW; JURISDICTION. This Agreement will be governed by and
interpreted in accordance with the laws of the State of New York without regard
to the principles of conflict of laws. The parties hereto hereby submit to the
exclusive jurisdiction of the United States federal and state courts located in
the State of New York with respect to any dispute arising under this Agreement
or the transactions contemplated hereby or thereby.
7.2 COUNTERPARTS; SIGNATURES BY FACSIMILE. This Agreement may be executed
in two or more counterparts, all of which are considered one and the same
agreement and will become effective when counterparts have been signed by each
party and delivered to the other parties. This Agreement, once executed by a
party, may be delivered to the other parties hereto by facsimile transmission of
a copy of this Agreement bearing the signature of the party so delivering this
Agreement.
7.3 HEADINGS. The headings of this Agreement are for convenience of
reference only, are not part of this Agreement and do not affect its
interpretation.
7.4 SEVERABILITY. If any provision of this Agreement is invalid or
unenforceable under any applicable statute or rule of law, then such provision
will be deemed modified in order to conform with such statute or rule of law.
Any provision hereof that may prove invalid or unenforceable under any law will
not affect the validity or enforceability of any other provision hereof.
7.5 ENTIRE AGREEMENT; AMENDMENTS. This Agreement (including all schedules
and exhibits hereto) constitutes the entire agreement among the parties hereto
with respect to the subject matter hereof and thereof. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein or therein. This Agreement supersedes all prior agreements
and understandings among the parties hereto with respect to the subject matter
hereof. No provision of this Agreement may be waived or amended other than by an
instrument in writing signed by the party to be charged with enforcement.
7.6 NOTICES. Any notices required or permitted to be given under the terms
of this Agreement must be sent by certified or registered mail (return receipt
20
requested) or delivered personally or by courier (including a recognized
overnight delivery service) and will be effective five days after being placed
in the mail, if mailed by regular U.S. mail, or upon receipt, if delivered
personally, or by courier (including a recognized overnight delivery service),
in each case addressed to a party. The addresses for such communications are:
If to the Company: National Scientific Corporation
00000 X. Xxxxxx Xxxx
Xxxxx 000
Xxxxxxxxxx, XX 00000
If to a Subscriber: To the address set forth immediately below such
Subscriber's name on the signature pages hereto.
Each party will provide written notice to the other parties of any
change in its address.
7.7 SUCCESSORS AND ASSIGNS. This Agreement is binding upon and inures to
the benefit of the parties and their successors and assigns. The Company will
not assign this Agreement or any rights or obligations hereunder without the
prior written consent of the Subscribers, and no Subscriber may assign this
Agreement or any rights or obligations hereunder without the prior written
consent of the Company. Notwithstanding the foregoing, a Subscriber may assign
all or part of its rights and obligations hereunder to any of its "affiliates,"
as that term is defined under the Securities Act, without the consent of the
Company so long as the affiliate is an accredited subscriber (within the meaning
of Regulation D under the Securities Act) and agrees in writing to be bound by
this Agreement. This provision does not limit the Subscriber's right to transfer
the Securities pursuant to the terms of this Agreement or to assign the
Subscriber's rights hereunder to any such transferee pursuant to the terms of
this Agreement.
7.8 THIRD PARTY BENEFICIARIES. This Agreement is intended for the benefit
of the parties hereto and their respective permitted successors and assigns, and
is not for the benefit of, nor may any provision hereof be enforced by, any
other person other than as provided in Sections 3.22 and 5.11 herein.
7.9 FURTHER ASSURANCES. Each party will do and perform, or cause to be
done and performed, all such further acts and things, and will execute and
deliver all other agreements, certificates, instruments and documents, as
another party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
7.10 NO STRICT CONSTRUCTION. The language used in this Agreement is deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.
7.11 EQUITABLE RELIEF. The Company recognizes that, if it fails to perform
or discharge any of its obligations under this Agreement, any remedy at law may
prove to be inadequate relief to the Subscribers and other beneficiaries hereof.
The Company therefore agrees that the Subscribers and other beneficiaries hereof
are entitled to seek temporary and permanent injunctive relief in any such case.
21
CONFIDENTIAL INVESTOR QUESTIONNAIRE
In connection with the purchase of Units of National Scientific Corporation,
pursuant to the terms of the Confidential Offering Memorandum dated March 15,
2004, as it may be supplemented from time-to-time, the Subscriber represents and
warrants that he, she or it comes within one category marked below, and that for
any category marked, he, she or it has truthfully set forth, where applicable,
the factual basis or reason the Subscriber comes within that category. ALL
INFORMATION IN RESPONSE TO THIS SECTION WILL BE KEPT STRICTLY CONFIDENTIAL. The
undersigned agrees to furnish any additional information that the Company deems
necessary in order to verify the answers set forth below.
A. INDIVIDUAL INVESTORS: (Please INITIAL one or more of the following five
statements)
1. _____ I certify that I am an accredited investor because I have had
individual income (exclusive of any income earned by my spouse) of
more than $200,000 in each of the most recent two years and I
reasonably expect to have an individual income in excess of $200,000
for the current year.
2. _____ I certify that I am an accredited investor because I have had joint
income with my spouse in excess of $300,000 in each of the most recent
two years and reasonably expect to have joint income with my spouse in
excess of $300,000 for the current year.
3. _____ I certify that I am an accredited investor because I have an
individual net worth, or my spouse and I have a joint net worth, in
excess of $1,000,000.
4. _____ I am a director or executive officer of National Scientific
Corporation.
5. _____ I have individual net worth or my spouse and I have joint net worth of
over $ 5,000,000.
B. PARTNERSHIPS, CORPORATIONS, TRUSTS OR OTHER ENTITIES: (Please INITIAL one
of the following seven statements). The undersigned hereby certifies that
it is an accredited investor because it is:
1. _____ an employee benefit plan whose total assets exceed $5,000,000;
2. _____ an employee benefit plan whose investments decisions are made by a
plan fiduciary which is either a bank, savings and loan association or
an insurance company (as defined in Section 3(a) of the Securities
Act) or an investment adviser registered as such under the Investment
Advisers Act of 1940;
3. _____ a self-directed employee benefit plan, including an Individual
Retirement Account, with investment decisions made solely by persons
that are accredited investors;
4. _____ an organization described in Section 501(c)(3) of the Internal Revenue
Code of 1986, as amended, not formed for the specific purpose of
acquiring the Units, with total assets in excess of $5,000,000;
22
5. _____ a corporation, partnership, limited liability company, limited
liability partnership, other entity or similar business trust, not
formed for the specific purpose of acquiring the Units, with total
assets excess of $5,000,000;
6. _____ a trust, not formed for the specific purpose of acquiring the Units,
with total assets exceed $5,000,000, whose purchase is directed by a
person who has such knowledge and experience in financial and business
matters that he is capable of evaluating the merits and risks of an
investment in the Units; or
7. _____ an entity (including a revocable grantor trust but other than a
conventional trust) in which each of the equity owners qualifies as an
accredited investor under items A(1), (2) or (3) or item B(1) above.
NASD AFFILIATION
Are you affiliated or associated with an NASD member firm (please check one):
Yes _________ No __________
If Yes, please describe:
--------------------------------------------------------------------------------
If Subscriber is a Registered Representative with an NASD member firm, have the
following acknowledgment signed by the appropriate party:
The undersigned NASD member firm acknowledges receipt of the notice required by
Article 3, Sections 28(a) and (b) of the Rules of Fair Practice.
----------------------------------
Name of NASD Member Firm
By: ______________________________
Authorized Officer
Date: ____________________________
23
SIGNATURE
THE UNDERSIGNED IS INFORMED OF THE SIGNIFICANCE TO THE COMPANY AND CASIMIR
OF THE FOREGOING REPRESENTATIONS AND ANSWERS CONTAINED IN THE CONFIDENTIAL
SUBSCRIBER QUESTIONNAIRE AND SUCH ANSWERS HAVE BEEN PROVIDED UNDER THE
ASSUMPTION THAT THE COMPANY AND CASIMIR WILL RELY ON THEM.
IF AN INDIVIDUAL:
Sign Name:
--------------------------------------------
Print Name:
--------------------------------------------
Date:
--------------------------------------------
IF AN ENTITY (I.E., PARTNERSHIP, CORPORATION OR TRUST):
Name of Entity:
-------------------------------------
By:(Print Name)
-------------------------------------
Title:
-------------------------------------
Signature:
-------------------------------------
Date:
-------------------------------------
24
SUBSCRIPTION AGREEMENT SIGNATURE PAGE
NUMBER OF UNITS __________ X $0.11 = $____________ (THE "PURCHASE PRICE")
------------------------------------ -------------------------------------
Signature Signature (if purchasing jointly)
------------------------------------ -------------------------------------
Name Typed or Printed Name Typed or Printed
------------------------------------ -------------------------------------
Entity Name Entity Name
------------------------------------ -------------------------------------
Address Address
------------------------------------ -------------------------------------
City, State and Zip Code City, State and Zip Code
------------------------------------ -------------------------------------
Telephone-Business Telephone-Business
------------------------------------ -------------------------------------
Telephone-Residence Telephone-Residence
------------------------------------ -------------------------------------
Facsimile-Business Facsimile-Business
------------------------------------ -------------------------------------
Facsimile-Residence Facsimile-Residence
------------------------------------ -------------------------------------
Tax ID # or Social Security # Tax ID # or Social Security #
Name in which securities should be issued:
-------------------------------------
INVESTORS: YOU MUST COMPLETE THE CONFIDENTIAL INVESTOR QUESTIONNAIRE.
Dated: _____________, 2004
This Subscription Agreement is agreed to and accepted as
of ____________________, 2004.
NATIONAL SCIENTIFIC CORPORATION
By:
-------------------------------------------
Name: Xxxxxxx X. Xxxxxxxx
Title: Chief Executive Officer and Chairman
25
THIS PAGE LEFT INTENTIONALLY BLANK
26
SCHEDULES TO SUBSCRIPTION AGREEMENT
SCHEDULE 3.3: Capitalization Reservations
The Capital Structure of the Company is described in the Company's Form 10-KSB
for the year ended September 30, 2003, NSC'S Annual Proxy Report on Form 14A
dated January 30, 2004, and Form 10-QSB for the three months ended December 31,
2003, filed February 13, 2004, which should be read in conjunction with this
Schedule.
The tables below provide unaudited summary descriptions of total shares issued
and outstanding, and of the options and warrants outstanding and of any other
shares reservations as OF MARCH 15, 2004.
1.) As of March 15, 2004, Preferred stock, par value $0.10; 4,000,000
shares authorized, and no shares issued or outstanding
2.) As of March 15, 2004, Common stock, par value $0.01; 120,000,000
shares authorized, and 73,814,465 shares issued and outstanding.
3.) Options Outstanding at March 15, 2004 (total plan authorized shares up
to 7,000,000, of which as of March 15, 2004, the board has reserved a total
of 4,000,000 shares).
Weighted Weighted
Number Average Average
of Exercise Fair
Shares Price Value
--------------------------------
Options Outstanding, September 30, 2003 3,329,757 $ 0.90 $ 0.06
Granted 170,000 0.15 0.10
Exercised --
Canceled 250,000 0.015 0.11
--------------------------------
Options Outstanding, March 15, 2004 3,249,757 $ 0.92 $ 0.08
================================
4.) Warrants Outstanding at March 15, 2004
Number of Exercise Expiration
Shares Price Date
--------------------------------
Outstanding at September 30, 2003 7,412,201
Exercised --
Expired --
New issues 275,000 $ 0.50 6/06
275,000 $ 0.75 6/06
640,000 $ 0.13 1/07
500,000 $ 0.10 3/11
--------------------------------
Outstanding at March 15, 2004 9,102,201
================================
S-1
5.) Other Share Reservations as of March 15, 2004
The Company has issued a Convertible Note for $160,000 in January 2004 to a
Private Investment Fund, as described in the Company's Form 10-KSB report
for the period ending September 30, 2003. This Note has a feature that
allows the holder of the Note to covert the Note into the Company's
restricted common stock at approximately a 10% discount from the
then-current market price of the Company's common stock during the life of
the Note. As such, the Company has reserved approximately 1,200,000 shares
in the case of this Note holder executing these rights. However, since the
Company plans to pay off this Note in full with the proceeds from the First
Closing of this Offering, and since the Company believes it unlikely these
rights will be executed prior to this Note's full pay-off at that point,
the Company fully expects that the shares reserved for this Convertible
Note will not longer be reserved after the First Closing of this Offering.
Additionally, the Company has reserved approximately 1,000,000 shares of
its common stock to address unknown issues, including antidilution
provisions and other provisions associated with the Convertible Note from
this Private Investment Fund.
SCHEDULE 3.5: Conflicts, Violations and Related Matters
Other than as listed herein below, as of March 15, 2004, the Transaction
Documents issued by the Company will not (i) conflict with or result in a
violation of any provision of its Articles of Incorporation or Bylaws, (ii)
violate or conflict with, or result in a breach of any provision of, or
constitute a default (or an event which with notice or lapse of time or both
could become a default) under, or give to others any rights of termination,
amendment (including without limitation, the triggering of any anti-dilution or
right of first refusal provision), acceleration or cancellation of, any
agreement, indenture, patent, patent license, or instrument to which the Company
is a party ( any one or all being referred to as a "Company Obligation"), or
(iii) to the best of the Company's knowledge, result in a violation of any law,
rule, regulation, order, judgment or decree (including U.S. federal and state
securities laws and regulations and regulations of any self-regulatory
organizations to which the Company or its securities are subject) applicable to
the Company or by which any property or asset of the Company is bound or
affected (except for such conflicts, breaches, defaults, terminations,
amendments, accelerations, cancellations and violations as would not,
individually or in the aggregate, have a Material Adverse Effect):
1. The issuance of common stock and warrants at less than 13 cents per
share may trigger the antidilution provisions of 640,000 warrants
Private Investment Fund as described in the Company's Form 10-KSB
report for the period ending September 30, 2003, and as described in
Schedule 3.20. The cumulative effect of the triggering of these
provisions, should they be so triggered, is expected to be equal to or
less than the issuance of approximately an additional 100,000 shares
of Common Stock to this Private Investment Fund, should this fund
choose to execute these warrants, for a total of approximately 740,000
shares of common stock.
2. The issuance of common stock and warrants under this Offering may
trigger the First Right of Refusal provisions a Private Investment
Fund's investment in the Company in January 2004, as described in the
Company's Form 10-KSB report for the period ending September 30, 2003.
The Private Investment Fund has agreed to waive these rights as
relates to this Offering.
S-2
SCHEDULE 3.7: Recent Material Adverse Changes
Other than as listed herein below, of as March 15, 2004, and since February 13,
2004, date of the Company's most recent period 10-QSB filing with the SEC, there
has been no material adverse change in the assets, liabilities, business,
properties, operations, financial condition, prospects or results of operations
of the Company, except that the Company has continued losses from operations.
Recent Material Adverse Changes: None.
SCHEDULE 3.21: Registration Rights of Current Company Security holders
Other than as listed herein below, none of the Company's security holders have
any special registration rights, including any rights to effect a demand or
shelf-registration under the Securities Act or exercise any "piggyback"
registration rights with respect to any filing under the Securities Act.
RIGHT HOLDER: Private Investment Fund
SECURITY HELD: Warrants to purchase 640,000 shares of NSC restricted common
stock at prices ranging from $0.13 to $0.15. These warrants expire in
January 2007.
SUMMARY OF RIGHTS HELD: Piggyback registration rights, weighted
average-based antidilution provision.
SPECIAL ISSUES WITH FUTURE RIGHTS: This investor also holds a Note from the
Company, due in July of 2004, for $160,000. In the event that the Company
does not pay this Note on time, which the Company intends to do, this
investor will be granted an additional 640,000 warrants to purchase NSC
restricted Common Stock at prices ranging from $0.13 to $0.15. These new
warrants expire in January 2007. Additionally, this investor will be
granted some demand registration rights for all warrants held in the event
that the this Note is not paid by due date.
S-3