SECURITIES PURCHASE AGREEMENT
This SECURITIES PURCHASE AGREEMENT, is entered into as of December 23,
1994, by and among MYO DIAGNOSTICS, INC., a California corporation (the
"Company") and ONTARIO MUNICIPAL EMPLOYEES RETIREMENT BOARD (THE "Purchaser")
and GERALD D. APPEL and HERSHEL TOOMIM (individually a "Stockholder" and
collectively, the "Stockholders").
In consideration of the premises and the mutual promises, representations,
warranties, covenants and conditions set forth below, the parties hereto agree
as follows:
ARTICLE 1. CERTAIN DEFINITIONS
1.01 Certain Definitions. For the purposes of this Agreement, the following
terms shall have the following meanings:
"Affiliate" of a specified Person means any Person who directly or
indirectly controls or is controlled by, or is under common control with, such
specified person.
"Agreement" or this "Agreement" means this Securities Purchase Agreement
including any Exhibits hereto.
"Blue Sky Laws" means the securities laws and regulations of any political
subdivision of the United States.
"Business Day" means any day other than a Saturday, Sunday or other day on
which commercial banks in Los Angeles, California, USA or Toronto, Ontario,
Canada are authorized by law to close.
"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended.
"Closing" shall have the meaning set forth in Section 2.01.
"Closing Date" means 9:00 a.m., Los Angeles time, on December 23, 1994, or
such later date as shall be agreed upon by the Company and the Purchaser.
"Closing Shares" shall have the meaning set forth in Section 2.01.
"Code" means the Internal Revenue Code of 1986, as amended.
"Combined Financial Statements" means the combined balance sheet of the
Company and the Partnership as at November 30, 1994 and the combined profit and
loss report of the Company and the Partnership for the eleven months then ended,
copies of which are attached hereto as Exhibit A.
"Commission" means the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"Common Stock" means the Common Stock of the Company.
"Environmental Damages" means all claims, judgments, damages, losses,
penalties, fines, liabilities, encumbrances, taxes, fees, liens, costs and
expenses of investigation and defense of any claim, whether or not such claim is
ultimately defeated, including without limitation reasonable attorneys' fees and
disbursements and consultants' fees, any of which are incurred at any time as a
result of the existence or alleged existence of Hazardous Material in, on, under
or migrating to or from the Real Property or the existence or alleged existence
of a violation or obligation arising under any Environmental Requirements.
"Environmental Requirements" means all applicable statutes, laws,
regulations, rules, ordinances, codes, licenses, permits, orders, standards,
guidelines, policies and similar items of any governmental authority having
jurisdiction and all applicable judicial, administrative and regulatory decrees,
judgments and orders and common law relating to the protection of human health
or the environment including, without limitation, all requirements pertaining to
the reporting, licensing, permitting, use, handling, generation, storage,
treatment, transportation, disposal, release, discharge, investigation and
remediation of Hazardous Material.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the regulations promulgated and rulings issued thereunder.
"ERISA Affiliate" means any Person who is a member of the Company's
controlled group, or under common control with the Company, within the meaning
of Section 414 of the Code and the regulations promulgated and rulings issued
thereunder.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any similar successor federal statute, and the rules and regulations thereunder,
all as the same shall be in effect from time to time.
"Hazardous Material" means any substance (i) the presence of which requires
reporting, investigation or remediation under any applicable statute,
regulation, ordinance, order, action, policy or common law; or (ii) which is
defined as a "hazardous waste", "hazardous substance", pollutant or contaminant
under any statute, regulation, rule, or ordinance of any governmental authority
having jurisdiction; or (iii) which is toxic, explosive, corrosive, flammable,
infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous and is
regulated by any governmental authority having jurisdiction; or (iv) the
presence of which on the Real
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Property causes or threatens to cause a nuisance upon the Real Property or to
adjacent properties or poses or threatens to pose a hazard to the health or
safety of persons on or about the Real Property.
"Holder" means the Purchaser and any holder of Registrable Securities to
whom the Registration rights conferred by this Agreement have been transferred
in compliance with Section 8.11 of this Agreement.
"Indemnified Party" shall have the meaning set forth in Section 8.08(c).
"Indemnifying Party" shall have the meaning set forth in Section 8.08(c).
"Latest Balance Sheet" means the latest combined balance sheet of the
Company and the Partnership included in the Combined Financial Statements.
"License Agreement" means that certain Licensing Agreement, dated as of
October 31, 1993, by and between the Company and the Licensor.
"Licensor" means Toomim Research Group, a partnership.
"Ontco" means 1020826 Ontario Inc., a corporation incorporated under the
laws of the Province of Ontario, Canada.
"Ontco Documents" means, the Ontco Revenue Sharing Agreement, the
Agreements, each dated as of June 1, 1993, between the Company and each
shareholder of Ontco, that certain Agreement, dated as of December 6, 1994,
between the Partnership, the Company and Ontco, that certain Exercise Notice,
dated as of December 6, 1994, and sent by the Company to each shareholder of
Ontco, the form of Acceptance Notice executed or to be executed by each
shareholder of Ontco, and the form of Supplement to Acceptance Notice executed
or to be executed by each Ontco Shareholder.
"Ontco Revenue Sharing Agreement" means that certain Agreement, dated as of
June 1, 1993, between the Partnership, the Company and Ontco.
"Partnership" means MYO Diagnostics, A Limited Partnership, a California
partnership.
"Partnership Agreement" means the Partnership's Agreement of Limited
Partnership, dated as of September 17, 1991, as amended by Amendment to the
Agreement of Limited Partnership, dated as of May 20, 1993, Amendment B to the
Agreement of Limited Partnership, dated as of December 30, 1993, and Amendment C
to Agreement of Limited Partnership, dated as of November 20, 1994.
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"Person" means an individual, firm, corporation, division, operation,
partnership, joint venture, trust, unincorporated association, government or any
agency or political subdivision thereof, or any other entity.
"Proprietary Rights" means patents, inventions, shop rights, knowhow, trade
secrets, confidentiality agreements and confidential information; registered and
unregistered trademarks, service marks, logos, corporate names, trade names, and
other trademark rights; registered and unregistered copyrights; and all
registrations for, and applications for registration of, any of the foregoing.
"Projections" means the Two Year Financial Projections, a copy of which is
attached hereto as Exhibit B.
"Purchased Securities" means the Closing Shares, the Series A Warrant, the
Series B Warrant, the Series A Warrant Shares and the Series B Warrant Shares.
"Qualified Public Offering" means a firm commitment underwritten offer and
sale by the Company of its Common Stock pursuant to a Registered public offering
for an aggregate price to the public of not less than $5,000,000.
"RCRA" means the Resource Conservation and Recovery Act of 1976, as
amended.
"Real Property" means any real property owned or leased by the Company.
"Register", "Registered" and "Registration" shall refer to a registration
effected by preparing and filing a registration statement in compliance with the
Securities. Act, and the declaration or ordering of the effectiveness of such
registration statement.
"Registerable Securities" means (i) the Shares and (ii) any Common Stock
issued as a dividend or other distribution with respect to, or in exchange for,
or in replacement of, the shares referred to in the foregoing clause (i)
provided, however, that Registerable Securities shall not include any shares of
Common Stock which have been previously Registered and sold to the public or
which have been sold in a private transaction in which the transferor's rights
under this Agreement were not transferred.
"Registration Expenses" means all expenses incurred in effecting any
Registration pursuant to this Agreement, including, without limitation, all
registration, qualification, and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for the Company, fees under Blue Sky Laws, and
expenses of any regular or special audits incident to or required by any such
Registration, and fees and disbursements of one counsel for the
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selling Holders, but shall not include Selling Expenses, fees and disbursements
of additional counsel for the Holders and the compensation of regular employees
of the Company, which shall be paid in any event by the Company.
"Restricted Securities" means any Registrable Securities required to bear
the legend set forth in Section 4.06 of this Agreement.
"Rule 144" means Rule 144 as promulgated by the Commission under the
Securities Act, as such Rule may be amended from time to time, or any similar
successor rule that may be promulgated by the Commission.
"Rule 145" means Rule 145 as promulgated by the Commission under the
Securities Act, as such Rule may be amended from time to time, or any similar
successor rule that may be promulgated by the Commission.
"Securities Act" means the Securities Act of 1933, as amended, and any
similar successor federal statute and the rules and regulations thereunder, all
as the same may be in effect from time to time.
"Selling Expenses" means all underwriting discounts and selling commission
applicable to the sale of Registrable Securities and fees and disbursements of
counsel for any Holder (other than fees and disbursements of counsel included in
Registration Expenses.)
"Series A Warrant" shall have the meaning set forth in Section 5.01 (i).
"Series A Warrant Shares" means the shares of Common Stock issued or to be
issued upon exercise of the Series A Warrant.
"Series B Warrant" shall have the meaning set forth in Section 5.01(i).
"Series B Warrant Shares" means the shares of Common Stock issued or to be
issued upon exercise of the Series B Warrant.
"Shareholders Agreement" means that certain Shareholders Agreement dated as
of February 1, 1989 by and among Hershel Toomim, John Kasten and Gerald D.
Appel.
"Shares" means the Closing Shares, the Series A Warrant Shares and the
Series, B Warrant Shares.
"Significant Stockholder" means any stockholder (or one of a number of
stockholders acting in concert) who beneficially owns, or in the aggregate with
other stockholders acting in concert,
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directly or indirectly, more than 5% of the outstanding Common Stock or rights,
options or warrants to acquire the same.
"Taxes" means all federal, state, county, local, foreign and other taxes
and governmental assessments, including but not limited to, income taxes,
estimated taxes, withholding taxes, transfer taxes, excise taxes, real and
personal property taxes, ad valorem taxes, payroll-related taxes, employment
taxes, franchise taxes and import duties, together with any related liabilities
penalties, fines, additions to tax and interest.
"Tax Returns" means the Partnership's Form 1065 U.S. Partnership Return of
Income and the Company's Form 1120 U.S. Corporation Income Tax Return in each
case for each of the years in the three-year period ended December 31, 1993,
copies of which are attached hereto as Exhibit C.
"Warrants" means the Series A Warrant and the Series B Warrant.
ARTICLE 2. PURCHASE AND SALE OF SECURITIES
2.01 CLOSING. On the terms and subject to the conditions set forth in this
Agreement, at a closing (the "Closing") to be held on the Closing Date, and in
reliance on the representations and warranties contained in this Agreement, the
Company shall issue, sell and deliver to the Purchaser, and the Purchaser shall
purchase from the Company, 680,741 shares of Common Stock (the "Closing Shares")
for an aggregate purchase price of $1,000,000. At the Closing, the Company
shall issue and deliver to the Purchaser upon tender of the purchase price
therefor, one or more certificates representing the Closing Shares.
2.02 PLACE OF CLOSING. On the terms and subject to the conditions set forth
in this Agreement, the Closing shall be held at the offices of Pircher, Nichols
& Meeks, 1999 Avenue of the Stars, Los Angeles, California 90067 or at such
other place as shall be mutually agreed upon by the Company and the Purchaser.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF THE
STOCKHOLDERS AND THE COMPANY
The Company and each Stockholder, jointly and severally, represents and
warrants to the Purchaser as follows:
3.01 ORGANIZATION AND GOOD STANDING, ETC. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California, and has all requisite corporate power and authority to own and lease
its properties and to carry on its business as presently conducted and as
proposed to be conducted. The Company is duly registered or qualified and in
good standing as a foreign corporation in each jurisdiction where
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the ownership or leasing of its properties or the conduct of its business makes
such registration or qualification necessary, the copies of the Company's
Articles of Incorporation and Bylaws which have been furnished to Pircher,
Nichols & Meeks, special counsel for the Purchaser, include all amendments made
thereto at any time prior to the date of this Agreement and are correct and
complete. The minute books of the Company made available to Pircher, Nichols &
Meeks, special counsel for the Purchaser, contain minutes of all meetings of
directors (and any committee of directors) and shareholders of the Company and
all actions by written consent without a meeting by the directors (or any
committee of directors) and stockholders since the date of incorporation of the
Company and accurately reflect all actions by the directors (or any committee of
directors) and shareholders of the Company with respect to all transactions
referred to in such minutes. Exhibit D hereto sets forth a true and complete
list of all the names of all directors of the Company and the names and offices
held of all officers of the Company.
3.02 SUBSIDIARIES. The Company does not own, beneficially or of record, any
shares or capital stock of, or hold any other equity interest in, any Person, is
not committed to purchase or acquire any such interest, and is not a participant
in any joint venture, partnership or similar arrangement except that the Company
intends to acquire all of the outstanding shares of Ontco pursuant to the Ontco
Documents. The Ontco Revenue Sharing Agreement has been terminated. To the best
knowledge of the Company or any Stockholder, (1) Ontco is a corporation duly
organized, validly existing and in good standing under the laws of the Provence
of Ontario, Canada, and has all requisite corporate power and authority to own
and lease its properties and to carry on its business; (2) the only business
conducted by Ontco was to enter into the Ontco Revenue Sharing Agreement; and
(3) Ontco has no assets or liabilities.
3.03 DISSOLUTION OF THE PARTNERSHIP. The Company has purchased all of the
Units held by all of the Unit Holders (as such terms are defined in the
Partnership Agreement) in consideration of the issuance by the Company to the
Unit Holders of an aggregate of 420,000 shares of Common Stock, no distributions
or other amounts are due from the Partnership or the Company to the Unit
Holders, the Partnership has been dissolved in accordance with the provisions of
the Partnership Agreement and/or California law, all of the assets (including,
without limitation, the License Agreement) of the Partnership have been
distributed to the Company, and the Company has assumed all of the liabilities
of the Partnership.
3.04 CAPITALIZATION. The authorized capital stock of the Company consists
of 10,000,000 shares of Common Stock, of which 5,106,720 shares are issued and
outstanding. The outstanding shares of Common Stock are owned by the
stockholders and in the
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numbers set forth in Exhibit E hereto. Except as set forth in Exhibit F hereto,
there are no authorized, issued or outstanding options, warrants, conversion
privileges, preemptive rights or other rights, agreements, arrangements or
understandings (whether or not presently exercisable) to purchase or otherwise
acquire any Common Stock or other securities of the Company or other securities
convertible into or evidencing the right to purchase or otherwise acquire any
shares of such stock or other securities except for the rights in favor of the
Purchaser created by this Agreement. All of the issued and outstanding shares
of Common Stock are, and all shares issued upon the exercise of all options and
warrants described in Exhibit F hereto for the consideration set forth therein
will be, duly authorized, validly issued, fully paid and nonassessable and were,
or will be, issued in compliance with the Securities Act and all applicable Blue
Sky Laws. Except as provided in this Agreement and as set froth in Exhibit F
hereto, (a) there are no shareholders' agreements, voting trusts, irrevocable
proxies or similar arrangements by which any Person other than the shareholders
of record of the Company in their individual capacities as such have or may
acquire authority to vote any Common Stock or other securities of the Company,
(b) there are no restrictions upon the sale, voting or transfer of any shares of
Common Stock pursuant to the Company's Articles of Incorporation, Bylaws or
other governing instruments or any agreement or other instrument to which the
Company or any Stockholder is a party or by which it or any of them may be
bound, (c) there are no preemptive or similar rights with respect to the Common
Stock or any other securities of the Company and (d) the Company is under no
obligation to redeem or repurchase any shares of Common Stock or other
securities of the Company.
3.05 AUTHORIZATION. The Company has all requisite power and authority to
execute and deliver this Agreement, to issue and sell the Shares, to issue and
deliver the Warrants, and to perform its obligations hereunder. All corporate
action on the part of the Company, its officers, directors and shareholders
which is necessary for the authorization, issuance (or reservation for
issuance), sale and delivery of the Shares, the issue and delivery of the
Warrants, the authorization, execution, delivery and performance of this
Agreement, has been taken. Each Stockholder has all requisite power, authority
and capacity to execute and deliver this Agreement and to perform his
obligations hereunder.
3.06 VALIDITY AND ENFORCEABILITY. This Agreement has been duly executed and
delivered by the Company and each Stockholder and constitutes, and the Warrants
when executed and delivered by the Company will constitute, legal, valid and
binding obligations of the Company and, in the case of this Agreement, each
Stockholder, enforceable against the Company and, in the case of this Agreement,
each Stockholder in accordance with its terms, except as enforceability (a) may
be limited by bankruptcy, insolvency, reorganization, moratorium or other laws
relating to or affecting
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the enforcement of creditors' rights generally or by general equitable
principles and (b) to the extent the indemnification provisions contained in
Article 8 hereof may be limited by applicable federal or state securities laws.
3.07 VALID ISSUANCE OF SHARES. The Closing Shares, the Series A Warrant
Shares and the Series B Warrant Shares, when issued, sold and delivered in
accordance with the terms of this Agreement, the Series A Warrant or the Series
B Warrant, as the case may be, for the consideration set forth herein or
therein, will be duly and validly authorized and issued, fully paid, and
nonassessable shares of Common Stock, and will be free of restrictions on
transfer other than restrictions on transfer contained in this Agreement and
under the Securities Act and applicable Blue Sky Laws. The Company has duly and
validly reserved 100,000 shares of the Common Stock for issuance upon the
exercise of the Series A Warrant and 83,333 shares of Common Stock for issuance
upon the exercise of the Series B Warrant.
3.08 NO CONFLICT. The Company is not in violation of or default under its
Articles or Incorporation or Bylaws or any provision of any indenture, mortgage,
lease, loan agreement or other agreement or instrument to which the Company is a
party or by which it is bound or to which any of its properties or assets is
subject or any judgment, order writ or decree applicable to the Company. None
of the execution and delivery of this Agreement by the Company or any
Stockholder, the issuance and sale of the Shares, the issuance and delivery of
the Warrants, or the consummation of the transactions contemplated hereunder,
will (i) conflict with or result in a breach or violation of, or constitute a
default under, or result in the creation of any lien, charge or encumbrance
upon, any of the properties or assets of the Company pursuant to the Articles of
Incorporation or Bylaws of the Company or any indenture, mortgage, lease, loan
agreement or other agreement or instrument to which the Company is a party or by
which it is bound or to which any of its properties or assets is subject or (ii)
violate any law, statute, rule, regulation, judgment or decree applicable to the
Company. Except as set forth in Exhibit G hereto, no third party consents are
required by the terms of any indenture, mortgage, lease, loan agreement or other
agreement or instrument to which the Company is a party or by which it is bound
or to which any of its properties or assets is subject for the execution and
delivery of this Agreement, the issuance of the Shares, the issuance and
delivery of the Warrants, or the consummation of the transactions provided for
herein.
3.09 NO CONSENT OR APPROVAL REQUIRED. No consent, approval or authorization
of, or declaration to or filing with, any governmental or regulatory authority
is required for the valid execution and delivery by the Company or any
Stockholder of this Agreement, the issuance and sale of the Shares, the issuance
and delivery of the Warrants or the consummation of the transactions
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provided for herein except the filing of any notice of sale required to be filed
under Regulation D adopted by the Commission or such post-closing filings as may
be required under applicable Blue Sky Laws, which will be timely filed within
the applicable periods provided therefor.
3.10 FINANCIAL STATEMENTS. The Combined Financial Statements were prepared
in accordance with generally accepted accounting principles consistently applied
throughout the periods involved, are complete and correct in all material
respects, and present fairly the combined financial condition of the Company and
the Partnership and their combined results of operations as of the dates and for
the periods indicated.
3.11 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the extent
reflected or reserved against in the Latest Balance Sheet or set forth in
Schedule 3.11 hereto, at the date of the Latest Balance Sheet, the Company did
not have any material obligation or liability of any kind (whether accrued,
absolute, contingent, unliquidated, civil, criminal or otherwise and whether due
or to become due), whether or not any such liability or obligation would have
been required to be disclosed on a balance sheet prepared in accordance with
generally accepted accounting principles.
3.12 ABSENCE OF CERTAIN CHANGES OR EVENTS.
Since the date of the Latest Balance Sheet and except as set forth in
Schedule 3.12, the Company has been operated in the ordinary course of business,
and there has not been:
(a) Any change in the assets, liabilities, obligations, financial
condition or results of operations of the Company from that reflected in the
Financial Statements, except changes in the ordinary course of business that
have not been, either individually or in the aggregate, materially adverse;
(b) Any material change (individually or in the aggregate) in the
contingent obligations of the Company by way of guaranty, endorsement,
indemnity, warranty, or otherwise;
(c) Any change in material standards, principles, policies or practices
(including, without limitation, financial or financial reporting and accounting
methods and practices) relating to the Company's business;
(d) Any sale, assignment, lease or other transfer or disposition of any
assets of the Company other than in the ordinary course of business;
(e) Any damage, destruction or loss, whether or not covered by insurance,
materially and adversely affecting the business, properties, prospects or
financial condition of the Company;
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(f) Any satisfaction or discharge of any lien, claim, or encumbrance or
payment of any obligation by the Company, except in the ordinary course of
business and which is not material to the business, properties, prospects or
financial condition of the Company;
(g) Any termination, amendment or modification of any material contract or
arrangement to which the Company is a party or by which it is bound;
(h) Any sale, assignment, license, or other transfer or disposition of any
Proprietary Rights;
(i) Any resignation or termination of employment of any officer or key
employee of the Company or any termination of any consulting arrangement to
which the Company is a party;
(j) Any mortgage, pledge, grant of a security interest in, or lien,
created by the Company with respect to any of its properties or assets, except
liens for current property taxes not yet due and payable;
(k) Any waiver or compromise by the Company of any valuable right or of a
material debt owed to it;
(l) Any loans or advances to, guaranties for the benefit of, or
investments in, any Person (other than customary travel advances in accordance
with past practices);
(m) Any general increase in the salary or other compensation of the
Company's employees, officers, directors, or consultants, or any specific
increase in the salary or other compensation of any such employee, officer,
director, or consultant, whose combined salary and other compensation after such
increase would be in excess of $30,000;
(n) Any adoption of, or change in, any executive compensation plan, bonus
plan, incentive compensation plan, deferred compensation agreement or other
employee benefit plan or arrangement.
(o) Any declaration, setting aside, or payment of any dividend or other
distribution in respect of the Common Stock;
(p) Any issue or sale by the Company of any shares of Common Stock or
other securities or any purchase by the Company of any shares of Common Stock or
other securities;
(q) Any other event or condition (individually or in the aggregate) of any
character that has materially and adversely affected the Company's business or
prospects; or
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(r) Any agreement or commitment by the Company to do any of the things
described in this Section 3.12.
3.13 CONTRACTS AND COMMITMENTS. Except as set forth in Schedule 3.13
hereto, the Company is not a party to any contract, agreement, lease,
commitment, or proposed transaction, written or oral, other than (1) contracts
for the purchase of supplies and services that were entered to in the ordinary
course of business and that do not provide for aggregate payments in excess of
$25,000, and do not extend for more than one year from the date hereof, (2)
sales contracts entered into in the ordinary course of business, and (iii)
contracts terminable at will by the Company on no more than 30 days' notice
without any cost or liability to the Company and that do not involve any
employment or consulting arrangement and are not material to the conduct of the
business of the Company. For the purposes of this Section, employment and
consulting contracts, collective bargaining agreements, and licensing agreements
and other agreements relating to the acquisition of disposition of the Company's
Proprietary Rights (other than standard end-user license agreements), shall not
be considered to be contracts entered into in the ordinary course of business.
The Company has delivered to Pircher, Nichols & Meeks, special counsel to the
Purchaser, true and complete copies of all contracts and agreements, including
all amendments thereto, listed in Schedule 3.13. All contracts, agreements,
leases and commitments referred to in Schedule 3.13 are valid and enforceable in
accordance with their respective terms for the periods stated therein, and there
is not under any of them any existing breach, default, or event of default by
the Company or, to the best knowledge of the Company or any Stockholder, by any
other party thereto, or event which with notice or lapse of time would
constitute a default nor has any party thereto given notice of or made a claim
with respect to any breach or default. Neither the Company nor any Stockholder
has any knowledge of any existing laws, regulations or decrees, which materially
and adversely affect, or may materially and adversely affect any of such
contracts, agreements, leases, or commitments or the business, properties,
operations or condition, financial or other, of the Company.
3.14 TITLE TO PROPERTY AND ASSETS; LEASES. The Company does not own any
real property. Except (1) as reflected in the Financial Statements, (2) for
liens for current taxes not yet delinquent, (3) for liens imposed by law and
incurred in the ordinary course of business for obligations not past due to
carriers, warehousemen, laborers, materialmen and the like, (4) for minor
defects in title, none of which, individually or in the aggregate, materially
interferes with the use of such property, the Company owns its assets free and
clear of all mortgages, liens, claims, security interests, and encumbrances.
The Company's only lease of real property is a month-to-month lease for its
premises at 3710 South Robertson Boulevard, Suite 212 and Suite 220, Los
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Angeles, California 90232 with which lease the Company is in compliance.
3.15 ADEQUACY OF ASSETS. The Company owns or has a valid leasehold interest
in all assets, properties, real and personal, contract rights, licenses and
Proprietary Rights necessary for the continued operation of the Company in
substantially the same manner in which it has been and is now operating.
3.16 LITIGATION. Except as set forth in Schedule 3.16, there is no action,
suit, proceeding, or investigation pending or, to the best knowledge of each
Stockholder and the Company, threatened, against or affecting the Company that
questions the validity of this Agreement or the right of the Company to enter
into this Agreement or to consummate the transactions contemplated hereby or
that might result, either individually or in the aggregate, in any material
adverse change in the assets, business, properties, prospects, financial
condition or operating results of the Company, or in any material change in the
current equity ownership of the Company. The foregoing includes, without
limitation, any action, suit, proceeding or investigation pending or threatened
involving the prior employment of any of the Company's employees, their use in
connection with the Company's business of any information or techniques
allegedly proprietary to any of their former employees, their obligations under
any agreements with prior employees, or negotiations by the Company with
potential backers of, or investors in, the Company or its proposed business. The
Company is not a party to or, to the best knowledge of the Company and each
Stockholder, named in any order, writ, injunction, judgment or decree of any
court, governmental agency, or instrumentality. There is no action, suit or
proceeding by the Company currently pending or that the Company currently
intends to initiate.
3.17 TAXES. All returns and reports of all Taxes required to be filed by
the Company have been filed, and all such returns and reports, including without
limitation, the Tax Returns, are true, correct and complete in all material
respects, and all Taxes payable pursuant thereto have been paid. No deficiency
or adjustment in respect of any Taxes which was assessed against the Company
remains unpaid and no such claim or assessment is pending or, to the best
knowledge of the Company and each Stockholder, threatened. The Company has made
all withholdings of Taxes required to be made under all applicable federal,
state and local tax regulations and such withholdings have either been paid to
the respective governmental agencies or set side in accounts for such purpose or
accrued, reserved against and entered upon the books of the Company. No
provision for income taxes payable is required to be reflected on the Latest
Balance Sheet. There are no outstanding agreements or waivers extending the
statutory period of limitations applicable to any tax return or tax liability of
the Company, and to the best knowledge of the Company and each Stockholder,
there is no proposed liability for any Taxes for which there is not an
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adequate reserve reflected on the Latest Balance Sheet. The Company has not
filed any consent with the Internal Revenue Service described in Section 341(f)
of the Code.
3.18 PROPRIETARY RIGHTS. The Company owns or possesses adequate licenses or
other rights to all Proprietary Rights necessary for the conduct of the business
of the Company as presently conducted and as proposed to be conducted without,
to the best knowledge of the Company and each Stockholder, any conflict with or
infringement of, the Proprietary Rights of any other Person. Schedule 3.18
contains a complete list of all Proprietary rights of the Company. Except as
set forth in Schedule 3.18 and except for standard end-user agreements, there
are not outstanding options, licenses, or agreements of any kind relating to the
foregoing, nor is the Company bound by or a party to any option, license or
agreement of any kind with respect to its Proprietary Rights or the Proprietary
rights of any other Person. Neither the Company nor any Stockholder has
received any notice or other communication alleging that the Company has
violated, or, by conducting its business as presently conducted and proposed to
be conducted, would violate any Proprietary Rights of any other Person. Neither
the Company nor any Stockholder is aware that any of the Company's employees or
consultants is 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 such employee's or consultant's best efforts to promote the interests
of the Company or that would conflict with its business as presently conducted
and proposed to be conducted. Neither the execution and delivery of this
Agreement, nor the carrying on of the business of the Company by its employees
and consultants, nor the conduct of the Company's business as presently
conducted and proposed to be conducted, will, to the best knowledge of the
Company and each Stockholder, conflict with or result in a breach of, or
constitute a default under, any contract covenant or agreement under which any
of such employees or consultants is now obligated.
3.19 MANUFACTURING AND MARKETING RIGHTS. Except as set forth in Schedule
3.13 and Schedule 3.19, the Company has not granted rights to manufacture,
produce, assemble, license, market or sell its products or services to any other
Person and is not bound by any agreement that affects the Company's exclusive
right to develop, manufacture, assemble, distribute, market or sell its products
and services.
3.20 EMPLOYEES. Schedule 3.20 sets forth the names and current annual or
monthly compensation rates of all employees of the Company. There are no
material controversies pending or, to the best knowledge of the Company and each
Stockholder, threatened, between the Company and any of its employees, former
employees or
14
applicants for employment. The Company has complied in all material respects
with all laws relating to the employment of labor, including any provisions
thereof relating to wages, hours, equal employment opportunity, collective
bargaining, federal immigration law, and the payment of social security and
similar taxes and is not liable for any arrears of wages or any taxes or
penalties for failure to comply with any of the foregoing. None of the
employees of the Company are covered by any collective bargaining agreement and,
to the best knowledge of the Company and each Stockholder, there are no
organizational efforts currently being made or threatened involving any
employees of the Company. Except as set forth in Schedule 3.20, the Company is
not a party to or bound by any currently effective employment agreement,
contract, deferred compensation arrangement, bonus plan, incentive compensation
plan, profit sharing plan, retirement agreement, stock option agreement, stock
option plan, group life, hospitalization or disability insurance, severance
policy or other employee compensation agreement or arrangement. The Company is
not aware that any officer or key employee intends to terminate his or her
employment by the Company, nor does the Company have any present intention to
terminate the employment of any such officer or key employee. Subject to
general principles relating to wrongful termination of employees, the employment
of each officer and employee of the Company is terminable at the will of the
Company.
3.21 ERISA. The Company does not maintain or contribute to and is not
obligated to contribute to, and has never maintained or contributed to or been
obligated to contribute to, (i) any employee plan that is subject to the
provisions of Title IV of ERISA or subject to the minimum funding standards of
Section 412 of the Code; (ii) any "multi employer plan" as defined in Section
4001(a)(3) of ERISA; or (iii) any "single employer plan" as defined in Section
4001(a)(15) of ERISA, which (a) is maintained for employees of the Company or
any ERISA Affiliate and at least one other Person or (b) was so maintained and
in respect of which the Company or an ERISA Affiliate could have liability under
Section 4064 or 4069 of ERISA in the event such plan has been or were to be
terminated.
3.22 TRANSACTIONS WITH MANAGEMENT. Except as set forth in Schedule 3.22,
the Company is not a party to any contract, lease, agreement or other commitment
with any officer, director or shareholder of the Company or any Affiliate of any
such Person, and there are no loans outstanding from the Company to, or to the
Company from, any such Person or any Affiliate of any such Person.
3.23 REGISTRATION RIGHTS. Except as set forth in Schedule 3.23 and except
as provided in this Agreement, the Company is not obligated to Register under
the Securities Act any of its presently outstanding securities or any of its
securities that may subsequently be issued.
15
3.24 PERMITS; COMPLIANCE WITH LAWS. The Company holds all permits,
licenses, consents and authorizations issued by any government or governmental
authority which are material and necessary in connection with the conduct of the
business of the Company. The Company is not in default in any material respect
under any such permit, license, consent or authorization. The conduct of the
business of the Company as presently conducted complies in all material respects
with all applicable laws, ordinances, regulations and orders, including, without
limitation, all Environmental Requirements. The Company has not received any
notice of any violation of any law, ordinance, regulation or order applicable to
the Company or the business conducted by it.
3.25 ENVIRONMENTAL MATTERS. There has been no "release or threatened
release of a hazardous substance" (as defined in CERCLA) or any other release,
emission, disposal or discharge into the environment or any use, storage,
transport or handling (collectively, "activities") of Hazardous Material on,
under, about or from the Real Property other than those activities which have
not resulted and could not reasonably be expected to result in any material
liability on the part of the Company. To the best knowledge of the Company and
each Stockholder, all "hazardous waste" (as defined in RCRA and the regulations
thereunder) generated at the Real Property have been disposed of at sites which
maintain valid permits under RCRA and any other applicable Environmental
Requirement. To the best knowledge of the Company and each Stockholder, there
are no underground tanks, PCBs or asbestos containing materials on the Real
Property. The Company has no notice of any pending formal or informal assertion
by any governmental agency or other Person that the Company or any predecessor
business or owner or operator of the Real Property may be a responsible or
potentially responsible party in connection with any violation or obligation
arising under any Environmental Requirement at any site or facility (including
the Real Property itself.) Schedule 3.25 sets forth a list of all documents
pertaining to the environmental conditions (actual, potential or threatened) of
any of the Real Property including, without limitation, all environmental
reports, assessments and audits and all notices, orders, permits or any other
documents from any governmental authority which refer or relate to any
environmental condition of the Real Property or any personal property owned or
leased by the Company or which relate to any actual or potential liabilities or
obligations arising out of such environmental conditions.
3.26 ADVERSE AGREEMENTS. The Company is not a party to or subject to any
contract, agreement or commitment or subject to any charter or other corporate
restriction or any judgment, order, writ, injunction, decree, law, rule or
regulation which adversely affects, or could reasonably be expected to adversely
affect, the business, operations, prospects, properties, assets or condition,
financial or other, of the Company.
16
3.27 NO BROKERS OR FINDERS. Neither the Company nor any Stockholder has
retained any investment banker, broker or finder in connection with the
transactions contemplated by this Agreement except Wayne Cockburn whose entire
compensation in connection therewith consists of $100,000 and will be paid by
the Company.
3.28 BOOKS AND RECORDS. The books, records and work papers of the Company
are complete and correct, have been maintained in accordance with good business
practice and accurately reflect the bases for the financial condition and
results of operations of the Company set forth in the Financial Statements.
3.29 DISCLOSURE. The Company has provided the Purchaser with all the
information reasonably available to it without undue expense that the Purchaser
has requested for deciding whether to purchase the Shares and all information
that the Company believes is reasonably necessary to enable the Purchaser to
make such decision. None of this Agreement, the Company Financial Statements,
the Combined Financial Statements, or any other written documents, statements or
certificates made or delivered to the Purchaser in connection herewith contains
any untrue statement of a material fact or omits to state a material fact
necessary to make the statements contained herein or therein, in the light of
the circumstances in which they were made, not misleading. Neither the Company
nor any Stockholder has knowledge of any liability, contingent or otherwise, not
disclosed in the Company Financial Statements, the Combined Financial Statements
or other document delivered to the Purchaser in connection herewith that
materially affects the financial position or results of operations of the
Company or the Projections.
3.30 PROJECTIONS. The Projections were made in good faith based upon
assumptions which the Company and each Stockholder believes are reasonable and
reflect all assumptions which the Company and each Stockholder believes are
necessary under the circumstances.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Company as follows:
4.01 REQUISITE POWER AND AUTHORITY. The Purchaser has all necessary power
and authority under all applicable provisions of law to execute, deliver and
perform this Agreement; all actions on the Purchaser's part required for the
lawful execution, delivery and performance of this Agreement have been or will
be duly and effectively taken prior to the Closing Date; and this Agreement
constitutes a legal, valid and binding obligation of the Purchaser enforceable
against the Purchaser in accordance with its terms, except as enforceability (a)
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
laws relating to or
17
affecting the enforcement of creditors' rights generally or by general equitable
principles and (b) to the extent the indemnification provisions contained in
Article 8 hereof may be limited by applicable federal or state securities laws.
4.02 PURCHASE FOR OWN ACCOUNT. This Agreement is made with the Purchaser in
reliance upon the Purchaser's representation to the Company, which by its
execution of this Agreement the Purchaser hereby confirms, that the Purchased
Securities are being acquired by the Purchaser for investment for the
Purchaser's own account, not as a nominee or agent, and not with a view to or
for sale in connection with any distribution of the Purchased Securities or any
part thereof, and that the Purchaser has no present intention of selling,
granting any participation in, or otherwise distributing the same, but subject
nevertheless to any requirement of law that the disposition of the Purchaser's
property shall at all times be within its control. By executing this Agreement,
the Purchaser further represents that it does not have any contract,
undertaking, agreement or arrangement with any Person to sell, transfer, or
grant participations to such Person, or to any third Person, with respect to the
Purchased Securities.
4.03 RELIANCE UPON PURCHASER'S REPRESENTATIONS. The Purchaser understands
that the Purchased Securities at the time of issuance may not be: (1) registered
under the Securities Act on the ground that the sale provided for in this
Agreement and the issuance of securities hereunder is exempt from registration
under the Securities Act pursuant to Section 3(b) thereof and Regulation D
promulgated thereunder, or (2) qualified with the Commissioner of Corporations
of the State of California on the ground that the sale provided for in this
Agreement and the issuance of securities is exempt from such qualification
pursuant to Section 25102(f) of the California Corporate Securities Law, and
that the Company's reliance on such exemptions is predicated in part on the
Purchaser's representations set forth herein.
4.04 INVESTOR EXPERIENCE. The Purchaser represents that it is experienced
in evaluating and investing in companies in the development stage, is able to
fend for itself, has such knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of its investment in
the Purchased Securities, and has the ability to bear the economic risks of its
investment.
4.05 ACCESS TO INFORMATION. The Purchaser believes that it has had access,
during the course of the transaction and prior to its purchase of the Purchased
Securities hereunder, to all information as it deems necessary or appropriate
(to the extent the Company possessed such information or could acquire it
without unreasonable effort or expense) and that the Purchaser has had, during
the course of the transaction and prior to its purchase of the Purchased
Securities hereunder, the opportunity to ask questions
18
of, and receive answers from, the Company concerning the terms and conditions of
the offering and to obtain additional information (to the extent the Company
possessed such information or could acquire it without unreasonable effort or
expense) necessary to verify the accuracy of any information furnished to the
Purchaser or to which the Purchaser had access. The foregoing, however, does
not limit or modify the representations and warranties of the Company and the
Stockholders contained in Article 3 of this Agreement or the right of the
Purchaser to rely thereon.
4.05 RESTRICTED SECURITIES. The Purchaser understands that the Purchased
Securities, or any portion thereof, may not be sold, transferred, or otherwise
disposed of without Registration under the Securities Act or an exemption
therefrom, and that in the absence of an effective registration statement
covering the Purchased Securities or an available exemption from Registration
under the Securities Act, the Purchased Securities must be held indefinitely.
In particular, the Purchaser is aware that the Purchased Securities may not be
sold pursuant to Rule 144 unless all of the conditions of that Rule are met.
Among the conditions for use of Rule 144 may be the availability of current
information to the public about the Company. Such information is not now
available and the Company has no present plans to make such information
available.
4.06 RESTRICTIVE LEGEND. Each certificate representing Shares may bear the
following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED THEY MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED
OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL (WHO MAY
BE COUNSEL TO THE COMPANY) OR OTHER EVIDENCE SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
4.07 PUBLIC SALE. The Purchaser agrees not to make, without the prior
written consent of the Company, any public offering or sale of the Purchased
Securities although permitted to do so pursuant to Rule 144(k) promulgated under
the Securities Act, until the earlier of (i) the date on which the Company
effects its initial registered public offering pursuant to the Securities Act,
(ii) the date on which the Company becomes a registered company pursuant to
Section 12(g) of the Securities Exchange Act of 1934, as amended, or (iii) five
years after the Closing Date.
ARTICLE 5. CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF THE PURCHASER
5.01 CLOSING. The obligation of the Purchaser to purchase the Closing
Shares is subject to the satisfaction at or prior to the
19
Closing Date of each of the following conditions (compliance with which or the
occurrence of which may be waived in whole or in part by the Purchaser):
(a) Accuracy of Representations and Warranties. The representations and
warranties of the Company and the Stockholders contained herein shall be true
and correct on and as of the Closing Date with the same force and effect as
though made on and as of the Closing Date.
(b) Performance of Agreements. The Company and each Stockholder shall have
performed all obligations and agreements and complied with all covenants and
conditions contained in this Agreement to be performed or complied with by them
on or prior to the Closing Date.
(c) Stockholder Certificates. Each Stockholder shall have furnished the
Purchaser with a certificate, dated the Closing Date, to the effect that (i) the
representations and warranties of such Stockholder contained herein are true and
correct on and as of the Closing Date with the same force and effect as though
made on and as of the Closing Date and (ii) such Stockholder has performed and
complied with all covenants and conditions contained in this Agreement to be
performed or complied with by him on or prior to the Closing Date.
(d) Company Certificate. The Company shall have furnished the Purchaser
with a certificate, dated the Closing Date, of the President of the Company (i)
to the effect that the representations and warranties of the Company contained
herein are true and correct on and as of the Closing Date with the same force
and effect as though made on and as of the Closing Date and (ii) to the effect
that the Company has performed and complied with all covenants and conditions
contained in this Agreement to be performed or complied with by it on or prior
to the Closing Date.
(e) Charter Documents. There shall have been delivered to the Purchaser
(i) a Certificate, dated within ten days of the Closing Date, of the Secretary
of State of the State of California listing all charter documents of the Company
on file in the office of said Secretary of State and (ii) copies of the Articles
of Incorporation of the Company and all amendments thereto, certified as true
and correct by the Secretary of State of the State of California within ten days
of the Closing Date.
(f) Good Standing Certificates. There shall have been delivered to the
Purchaser (i) a Certificate, dated within ten days of the Closing Date, of the
Secretary of State of the State of California with respect to the incorporation,
subsistence and good legal standing of the Company, and (ii) a letter, dated
within ten days of the Closing Date, of the California Franchise Tax Board as
20
to the good standing and entitlement to transact business of the Company.
(g) Secretary's Certificate of the Company. There shall have been
delivered to the Purchaser a Certificate, dated the Closing Date of the
Secretary of the Company (i) to the effect that the Articles of Incorporation of
the Company have not been amended since the date of the Certificate referred to
in Section 5.01(e)(i) above, (ii) attaching a true and complete copy of the
Bylaws of the Company as in effect on the Closing Date, (iii) attaching a true
and complete copy of the resolutions of the Board of Directors of the Company
approving the execution and delivery of this Agreement, the issuance and sale of
the Purchased Securities and authorizing the consummation of the transactions
contemplated herein.
(h) Incumbency Certificate of the Company. There shall have been delivered
to the Purchaser a Certificate, dated the Closing Date, with respect to the
incumbency and signatures of all officers of the Company signing this Agreement
and any other certificate, agreement or instrument delivered on behalf of the
Company in connection with this Agreement or the Closing.
(i) Warrants. The Company shall have issued and delivered to the Purchaser
(1) a warrant, dated the Closing Date and expiring on the first anniversary of
the Closing Date, to purchase 100,000 shares of Common Stock at an initial
exercise price of $2.50 per share, substantially in the form of Exhibit H hereto
(the "Series A Warrant") and (2) a warrant, dated the Closing Date and expiring
30 months following the Closing Date, to purchase 83,333 shares of Common Stock
at an initial exercise price of $3.00 per share, substantially in the form of
Exhibit I hereto (the "Series B Warrant").
(j) Opinion of Counsel There shall have been delivered to the Purchaser an
opinion of Pillsbury Madison & Sutro, special counsel to the Company, dated the
Closing Date and in form and substance satisfactory to the Purchaser and its
counsel to the following effect:
(1) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of California, and has all
requisite corporate power and authority to own and lease its Properties and
to carry on its business as presently conducted. The Company is duly
registered or qualified and in good standing in each jurisdiction where the
ownership or leasing of its properties or the conduct of its business makes
such registration or qualification necessary except for jurisdictions,
individually or in the aggregate, where the failure to be so registered or
qualified would not have a material adverse effect on the business,
properties, operations or condition, financial or other, of the Company.
21
(2) The Partnership has been dissolved in accordance with the
provisions of the Partnership Agreement and California law, all of the
assets (including, without limitation, the License Agreement) of the
Partnership have been distributed to the Company, and the Company has
assumed all of the liabilities of the Partnership.
(3) The authorized capital stock of the Company consists of 10,000,000
shares of Common Stock, of which 5,106,720 shares are issued and
outstanding. The outstanding shares of Common Stock are owned of record by
the stockholders and in the numbers set forth in Exhibit E hereto. To the
knowledge of such counsel and except as set forth in Exhibit F hereto,
there are no authorized, issued or outstanding options, warrants,
conversion privileges, preemptive rights or other rights, agreements,
arrangements or understandings (whether or not presently exercisable) to
purchase or otherwise acquire any Common Stock or other securities of the
Company or other securities convertible into or evidencing the right to
purchase or otherwise acquire any shares of such stock or other securities
except for the rights in favor of the Purchaser created by this Agreement.
All of the issued and outstanding shares of Common Stock are, and all
shares issued upon the exercise of all options and warrants described in
Exhibit F hereto will be, duly authorized, validly issued, fully paid and
nonassessable. To the knowledge of such counsel and except as provided in
this Agreement and as set forth in Exhibit F hereto, (a) there are no
shareholders' agreements, voting trusts, irrevocable proxies or similar
arrangements by which any Person other than the shareholders of record of
the Company in their individual capacities as such have or may acquire
authority to vote any Common Stock or other securities of the Company, (b)
there are no restrictions upon the sale, voting or transfer of any shares
of Common Stock pursuant to the Company's Articles of Incorporation, Bylaws
or other governing instruments or any agreement or other instrument known
to such counsel to which the Company or any Stockholder is a party or by
which it or any of them may be bound, (c) there are no preemptive or
similar rights with respect to the Common Stock or any other securities of
the Company and (d) the Company is under no obligation to redeem or
repurchase any shares of Common Stock or other securities of the Company.
(4) The Company has all requisite corporate power and authority to
execute and deliver this Agreement, to issue and sell the Shares, to issue
and deliver the Warrants, and to perform its obligations hereunder. All
corporate action on the part of the Company, its officers, directors and
shareholders which is necessary for the authorization, issuance
(or reservation for issuance), sale and delivery of the Shares, the
issuance and delivery of the Warrants, the authorization,
22
execution, delivery and performance of this Agreement, has been taken.
(5) This Agreement has been duly executed and delivered by the
Company and each Stockholder and constitutes a legal, valid and binding
obligation of the Company and each Stockholder enforceable against the
Company and each Stockholder in accordance with its terms, and the Warrants
have been duly executed and delivered by the Company and constitute legal,
valid and binding obligations of the Company enforceable against the
Company in accordance with their terms, except as enforceability (a) may be
limited by bankruptcy, insolvency, reorganization, moratorium or other laws
relating to or affecting the enforcement of creditors' rights generally or
by general equitable principles and (b) to the extent the indemnification
provisions contained in Article 8 hereof may be limited by applicable
federal or state securities laws.
(6) The Closing Shares constitute, the Series A Warrant Shares, when
issued, sold and delivered in accordance with the terms of the Series A
Warrant for the consideration set forth therein will constitute, and the
Series B Warrant Shares when issued sold and delivered in accordance with
the terms of the Series B Warrant for the consideration set forth therein,
will constitute, duly and validly authorized and issued, fully paid, and
nonassessable shares of Common Stock. The Company has duly and validly
reserved 100,000 shares of the Common Stock for issuance upon the exercise
of the Series A Warrant and 83,333 shares of Common Stock for issuance upon
the exercise of the Series B Warrant.
(7) None of the execution and delivery of this Agreement by the
Company, the issuance and sale of the Shares, the issuance and delivery of
the Warrants, or the consummation of the transactions contemplated
hereunder, will (i) conflict with or result in a breach or violation of, or
constitute a default under, or result in the creation of any lien, charge
or encumbrance upon, any of the properties or assets of the Company
pursuant to the Articles of Incorporation or Bylaws of the Company or any
indenture, mortgage, lease, loan agreement or other agreement or instrument
known to such counsel to which the Company is a party or by which it is
bound or to which any of its properties or assets is subject or (ii)
violate any law, statute, rule, regulation, judgment or decree applicable
to the Company. Except as set forth in Exhibit G hereto, no third party
consents are required by the terms of any indenture, mortgage, lease, loan
agreement or other agreement or instrument known to such counsel to which
the Company is a party or by which it is bound or to which any of its
properties or assets is subject for the execution and delivery of this
Agreement, the issuance of the Shares, the
23
issuance and delivery of the Warrants, or the consummation of the
transactions provided for herein.
(8) No consent, approval or authorization of, or declaration to or
filing with, any governmental or regulatory authority is required for the
valid execution and delivery by the Company of this Agreement, the issuance
and sale of the Shares, or the issuance and delivery of the Warrants or the
consummation of the transactions provided for herein or therein except the
filing of any notice of sale required to be filed with under Regulation D
adopted by the Commission or such post-closing filings as may be required
under applicable Blue Sky Laws.
(9) To the knowledge of such counsel and except as set forth in
Schedule 3.16, there is no action, suit, proceeding, or investigation
pending or threatened, against or affecting the Company that questions the
validity of this Agreement or the right of the Company to enter into this
Agreement or to consummate the transactions contemplated hereby or that
might result, either individually or in the aggregate, in any material
adverse change in the assets, business, properties, prospects, financial
condition or operating results of the Company, or in any material change in
the current equity ownership of the Company. To the knowledge of such
counsel, the Company is not a party to or named in any order, writ,
injunction, judgment or decree of any court, governmental agency, or
instrumentality. To the knowledge of such counsel, there is no action,
suit or proceeding by the Company currently pending or that the Company
currently intends to initiate.
(k) Amendment of License Agreement. The Company and the Licensor shall
have executed and delivered an Amendment No. One, Waiver and Consent to the
License Agreement, in the form of Exhibit J hereto.
(l) Certificate and Estoppel The Licensor shall have executed and
delivered to the Purchaser a Licensor's Estoppel Certificate, dated the Closing
Date, and in the form of Exhibit K hereto.
(m) Consents and Approvals. All consents and approvals of any third
parties required in connection with the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby shall have been
obtained and delivered to the Purchaser.
(n) No Litigation. No action, suit or proceeding shall be pending or
threatened by or before any court or governmental body in which an unfavorable
judgment, order or decree would prevent any of the transactions contemplated
hereby or cause any such transaction to be declared unlawful or rescinded or
which could
24
reasonably be expected to materially and adversely affect the assets, financial
condition or results of operations of the Company, and no temporary restraining
order or injunction shall have been issued by any such court or governmental
authority restraining or prohibiting the performance of this Agreement or the
consummation of any of the transactions contemplated hereby.
(o) Termination of Shareholders Agreement. There shall have been
delivered to the Purchaser the written confirmation of the Stockholders, in form
and substance satisfactory to the Purchaser and its counsel, of the termination
of the Shareholders Agreement.
(p) Cancellation of Indebtedness. There shall have been delivered to the
Purchaser evidence in form and substance satisfactory to the Purchaser and its
counsel of the cancellation of indebtedness from the Company to Gerald D. Appel
in the aggregate principal amount of $212,590 in consideration of the issuance
by the Company to Gerald D. Appel of 144,619 shares of Common Stock.
(q) Payment of Fees. The Company shall have paid the estimated fees and
disbursements of Pircher, Nichols & Meeks, special counsel to the Purchaser,
through the Closing Date.
(r) Delivery of Certificates. The Company shall have delivered to the
Purchaser the certificate(s) representing the Closing Shares in accordance with
the provisions of Section 2.01.
(s) Proceedings and Documents. All corporate and other proceedings to be
taken by the Company or any Stockholders in connection with this Agreement and
the consummation of the transactions contemplated hereby and all documents and
instruments delivered by the Company or any Stockholder in connection therewith
shall be in form and substance reasonably satisfactory to the Purchaser and its
counsel, and the Purchaser shall have received such other documents and
instruments as it may reasonably request in connection therewith.
ARTICLE 6. CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF THE COMPANY
6.01 CLOSING. The obligation of the Company to sell the Closing Shares is
subject to the satisfaction at or prior to the Closing Date of each of the
following conditions (compliance with which or the occurrence of which may be
waived in whole or in part by the Company):
(a) Accuracy of Representations and Warranties. The representations and
warranties of the Purchaser contained herein shall be true and correct on and as
of the Closing Date with the same force and effect as though made on and as of
the Closing Date.
25
(b) Consideration. The Purchaser shall have tendered the purchase price
for the Closing Shares in accordance with the provisions of Section 2.01.
ARTICLE 7. COVENANTS
7.01 AFFIRMATIVE COVENANTS. The Company covenants and agrees that until the
earlier of (1) the consummation of a Qualified Public Offering and (2) the date
that the Holders of Registrable Securities hold fewer than 250,000 Shares:
(a) Corporate Existence. The Company will, and will cause each of its
subsidiaries (if any) at all times to maintain, preserve and renew its
respective corporate existence, rights and franchises and all licenses and other
rights to use patents, processes, licenses, trademarks, trade names, or
copyrights owned or possessed by it and deemed by the Company to be necessary to
the conduct of its business except that the Company may dissolve Ontco.
(b) Financial Statements. (1) as soon as practicable after the end of each
fiscal year of the Company, and in any event within 90 days thereafter, (A) a
consolidated balance sheet of the Company and its subsidiaries, if any, as at
the end of such fiscal year, and consolidated statements of income and cash
flows of the Company and its subsidiaries, if any, for such year, prepared in
accordance with generally accepted accounting principles consistently applied
and setting forth in each case in comparative form the figures for the previous
fiscal year, all in reasonable detail and certified by independent public
accountants selected by the Company and reasonably acceptable to the Purchaser;
(B) a comparison of the financial statements for the most recent fiscal year to
the financial plan required by Section 7.01(c) hereof and (2) as soon as
practicable after the end of the first, second and third quarterly accounting
periods in each fiscal year of the Company, and in any event within 45 days
thereafter, a consolidated balance sheet of the Company and its subsidiaries, if
any, as of the end of each such quarterly period, and consolidated statements of
income and cash flows of the Company and its subsidiaries, if any, for such
period and for the current fiscal year to date, prepared in accordance with
generally accepted accounting principles consistently applied and setting forth
in comparative form the figures for the corresponding periods of the previous
fiscal year and to the Company's financial plan required by Section 7.01 (c)
hereof, subject to changes resulting from normal year-end audit adjustments, all
in reasonable detail and certified by the principal financial or accounting
officer of the Company, except that such financial statements need not contain
the notes required by generally accepted accounting principles; (C) as soon as
practicable after the end of each month and in any event within 30 days
thereafter, a consolidated balance sheet of the Company and its subsidiaries, if
any, as at the end of such month and consolidated statements of income and cash
flows for the Company
26
and its subsidiaries, if any, for such month and for the current fiscal year of
the Company to date, all subject to year-end audit adjustments, prepared in
accordance with generally accepted accounting principles consistently applied
and certified by the principal financial or accounting officer of the Company,
except that such financial statements need not contain the notes required by
generally accepted accounting principles: and (D) with reasonable promptness,
such other information and data with respect to the Company and its subsidiaries
(if any) as any Holder may from time to time reasonably request.
(c) Annual Budget. At least 60 days prior to the beginning of each fiscal
year of the Company, the Company shall furnish to each Holder a financial plan
of the Company for such fiscal year, which financial plan shall include at least
a projection of income and a projected cash flow statement for each fiscal
quarter in such fiscal year and a projected balance sheet as of the end of each
fiscal quarter in such fiscal year.
(d) Inspection. The Company shall permit each Holder and its
representatives, counsel and accountants to visit and inspect the Company's and
its subsidiaries' (if any) properties, to examine the Company's and its
subsidiaries' (if any) books of account and records (including, without
limitation, working papers), and to discuss the Company's and its subsidiaries'
(if any) affairs, finances and accounts with their respective officers, all at
such reasonable times as may be requested by such Holder. The foregoing rights
shall be in addition to all shareholder rights conferred by law.
(e) Taxes. The Company will, and will cause each subsidiary (if any) to,
promptly pay and discharge, or cause to be paid and discharged, when due and
payable, all taxes, assessments and governmental charges or levies imposed upon
its income, profits, property, or business; provided, however, that any such
tax, assessment, charge, or levy need not be paid if the validity thereof shall
currently be contested in good faith by appropriate proceedings and if adequate
reserves are established therefor in accordance with generally accepted
accounting principles, and provided further, that the Company or any such
subsidiary shall pay all such taxes, assessments, charges, or levies forthwith
upon the commencement of proceedings to foreclose any lien that may have
attached as security therefor.
(f) Maintenance of Properties. The Company will, and will cause each of
its subsidiaries (if any) to, maintain their respective properties in good
repair, working order, and condition, reasonable wear and tear excepted, and
from time to time make all needful and proper repairs, renewals, replacements,
additions, and improvements thereto. The Company will, and will cause each of
its subsidiaries (if any) to, at all times comply with the provisions of all
material leases to which it is a party or under which it
27
occupied property so as to prevent any loss or forfeiture thereof or thereunder.
(g) Insurance. The Company will, and will cause each of its subsidiaries
(if any) to, keep its assets that are of an insurable character insured by
financially sound and reputable insurers against loss or damage by fire,
extended coverage, and explosion insurance in amounts customary for companies in
similar businesses similarly situated. The Company will, and will cause each of
its subsidiaries (if any) to, maintain with financially sound and reputable
insurers, insurance against other hazards, risks, and liabilities to persons and
property to the extent and in the manner customary for companies in similar
businesses similarly situated.
(h) Key-person Life Insurance. If requested by the Purchaser, the Company
shall obtain from financially sound and reputable insurers term life insurance
on the life of Gerald D. Appel in the amount of $1,000,000 and on the life of
Daniel J. Levendowski in the amount of $1,000,000 and maintain such insurance
unless otherwise agreed by the Purchaser. Such policies shall name the Company
as loss payee and shall not be cancellable by the Company without the prior
written approval of the Purchaser.
(i) Books and Records. The Company will, and will cause each of its
subsidiaries (if any) to, keep true records and books of account in which full,
true and correct entries will be made of dealings and transactions in relation
to its business and affairs in accordance with generally accepted accounting
principles applied on a consistent basis.
(j) Compliance. The Company will, and will cause each of its subsidiaries
(if any) to, duly observe and conform to all valid requirements of governmental
authorities relating to the conduct of its business or to its property or
assets.
(k) Use of Proceeds. The proceeds from the sale of the Closing Shares will
be used for general corporate purposes. Notwithstanding the foregoing, none of
such proceeds will be used (1) to repay indebtedness of the Company to Gerald D.
Appel and Daniel J. Levendowski in excess of $68,500 in the aggregate or (2) to
pay all or any part of the promissory notes described in Schedule 3.11 hereto.
7.02 NEGATIVE COVENANTS. The Company covenants and agrees that until the
earlier of (1) the consummation of a Qualified Public Offering and (2) the date
that the Holders of Registrable Securities hold fewer than 250,000 Shares:
(a) Amendments. The Company will not amend or permit any amendment of its
Articles of Incorporation. The Company will not amend or permit any amendment of
its By-Laws in any manner which
28
would be materially adverse to the interests of the Holders of Registerable
Securities.
(b) Additional Stock. The Company will not authorize or issue any other
class or series of stock in addition to Common Stock.
(c) Dividends; Purchases. The Company will not, and will not permit any of
its subsidiaries (if any) to, redeem, retire, purchase or otherwise acquire any
shares of the Common Stock of the Company, and the Company will not declare or
pay any dividend or make any other distribution on its Common Stock other than
dividends payable solely in Common Stock and cash dividends payable out of
retained earnings.
(d) Loans and investments. The Company will not make, and will not permit
any of its subsidiaries (if any) to make, any loan or advance to, or own any
stock or other securities of, any subsidiary or other corporation, partnership,
or other entity unless it is wholly owned, directly or indirectly, by the
Company.
(e) Loans and Advances. The Company will not, and will not permit any of
its subsidiaries to, make any loan or advance to any Person, including, without
limitation, any employee, officer, director or shareholder of the Company or any
of its subsidiaries, except for advances for reimbursable expenses to be
incurred by any such employee, officer, or director.
(f) Guaranties. The Company will not, and will not permit any of its
subsidiaries to, directly or indirectly, guaranty any indebtedness or other
obligations of any Person.
(g) Merger. The Company will not, and will not permit any of its
subsidiaries (if any) to, merge with or into or consolidate with any other
corporation or entity except that (i) any wholly-owned subsidiary of the Company
may be merged with or consolidated into any other wholly-owned subsidiary and
(ii) any wholly-owned subsidiary of the Company may be merged with or
consolidated into the Company, provided that the Company shall be the surviving
or resulting corporation.
(h) Sale of Assets. The Company will not, and will not permit any of its
subsidiaries (if any) to, sell, lease or otherwise dispose of, in any one
transaction or in a series of related transactions, all or a substantial portion
of its assets.
(i) Compensation. The Company will not pay any salaries, bonuses,
retirement benefits or other remuneration or grant any stock options, stock
bonuses, or stock purchase plan rights to any Significant Stockholder of the
Company or any subsidiary of the Company or any Affiliate of any of the
foregoing except as approved by the unanimous vote of a Compensation Committee
consisting of two certified public accountants and Howard Fullman (or if he is
unable
29
or unwilling to serve, a successor approved by the Company and the Purchaser).
(j) Partnerships, etc. The Company will not and will not permit any
subsidiary to enter into any partnership, joint venture or other similar
arrangement for the sharing of income, profits or expenses, with any Person
except that the foregoing shall not prohibit (1) the payment of commissions or
other compensation to sales representatives and agents or (2) other contracts
(other than any direct or indirect debt or equity financing) entered into by the
Company in the ordinary course of business.
(k) Other Investors. The Company will not agree to affirmative or negative
covenants more favorable to an equity investor in the Company than those
contained in this Article 7.
7.03 Board Representation. The Company covenants and agrees that so long as
the Purchaser is the owner of at least 50% of the Shares, upon the request of
the Purchaser, the Company will use its best efforts to cause and maintain the
election to the Board of Directors of the Company of such person as shall be
designated in writing to the Company by the Purchaser from time to time. Each
Shareholder agrees that (i) he will vote shares of the Common Stock of the
Company (including the cumulation of votes as necessary) to assure the election
and the maintenance of the election to the Board of Directors of the person so
designated by the Purchaser from time to time and (ii) he will not vote any
shares of the Common Stock of the Company owned by him (or give any consent,
waiver or ratification with respect thereto) for, or otherwise permit the
Company to take, any action which would be inconsistent with or violate any
term, condition or provision of this Agreement or any other document or
instrument required by this Agreement.
ARTICLE 8. REGISTRATION UNDER THE SECURITIES ACT
8.01 NOTICE OF PROPOSED DISPOSITIONS. The Holder of each certificate
representing Restricted Securities by acceptance thereof agrees to comply in all
respects with the provisions of this Section 8.01. Prior to any proposed
disposition of any Restricted Securities (unless there is in effect a
registration statement under the Securities Act covering such proposed
disposition and such disposition is made in accordance with such registration
statement) the holder thereof shall give written notice to the Company of such
Holder's intention to effect such disposition. Each such notice shall describe
the manner and circumstances of the proposed disposition, and shall be
accompanied (except in transactions intended to comply with Rule 144) by either
(a) a written opinion of legal counsel addressed to the Company and reasonably
satisfactory in form and substance to the Company, to the effect that
the proposed disposition of Restricted Securities may be effected without
Registration of such Restricted Securities or (b) a "no action" letter from the
Commission to the effect that
30
such disposition without Registration of such Restricted Securities will not
result in a recommendation by the staff of the Commission that enforcement
action be taken with respect thereto, whereupon the Holder of such Restricted
Securities shall be entitled to transfer such Restricted Securities in
accordance with the terms of the notice delivered by the Holder to the
Company. Each certificate evidencing the Restricted Securities disposed of as
above provided shall bear the legend set forth in Section 4.06 of this
Agreement, except that such certificate shall not bear such legend if (1) the
opinion of counsel referred to above is to the further effect that such
legend is not required in order to establish compliance with any provisions
of the Securities Act, (2) the transfer is in connection with a transaction
intended to comply with Rule 144, or (3) an appropriate registration
statement with respect to such Restricted Securities has been filed by the
Company with the Commission and has been declared effective by the
Commission; in those events, the Company shall cause new unlegended
certificates to be issued promptly to the Holder in exchange for outstanding
legended certificates.
8.02 COMPANY REGISTRATION.
(a) If at any time, or from time to time, the Company shall determine to
Register any of its securities either for its own account for the account of any
holder of its securities (including a Holder) (other than pursuant to Section
8.03 or 8.05 hereof), other than a Registration relating solely to employee
benefit plans, or a Registration relating solely to a Rule 145 transaction or a
Registration on any Registration form that does not permit secondary sales, the
Company will:
(1) promptly give to each Holder written notice thereof;
(2) include in such Registration (and any related qualification under
Blue Sky Laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests made within 20 days after receipt of such written notice from the
Company, by any Holder or Holders, except as set forth in Section 8.02(b)
hereof. Any such written request may specify all or a part of a Holder's
Registrable Securities.
(b) If the Registration of which the Company gives notice is for a
Registered public offering involving an underwriting, the Company shall so
advise the Holders as part of the written notice given pursuant to Section
8.02(a) hereof. In such event, the right of a Holder to Registration pursuant
to this Section 8.02 shall be conditioned upon such Holder's participation in
such underwriting and the inclusion of such Holder's Registrable Securities in
the underwriting to the extent provided herein. All Holders proposing to
distribute their Registrable Securities through such underwriting shall
(together with the Company and the other holders
31
of securities of the Company with registration rights to participate therein
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company. Notwithstanding any other
provision of this Section 8.02, if the underwriter advises the Company in
writing that marketing factors require a limitation on the number of shares to
be underwritten, the underwriter may limit the amount of Registrable Securities
to be included in the Registration and underwriting, and the number of shares to
be included in such underwriting or Registration shall be allocated as set forth
in Section 13 hereof.
8.03 DEMAND REGISTRATION.
(a) At any time following the earlier of (1) the fifth anniversary of the
date of this Agreement, and (2) one year after the effective date of the first
registration statement filed by the Company covering an underwritten offering of
any of its securities to the public, if the Company shall receive a written
request (specifying that it is being made pursuant to this Section 8.03) from
any Holder or Holders that the Company file a registration statement under the
Securities Act covering the Registration of at least 50% of the Registrable
Securities, then the Company shall promptly notify all other Holders of such
request and shall use its best efforts to cause all Registrable Securities that
Holders have requested within 20 days after receipt of the Company's notice to
be registered under the Securities Act. The Company shall be obligated to effect
no more than two Registrations pursuant to this Section 8.03 and the Company
shall not be obligated to effect any Registration pursuant to this Section 8.03
if the written request therefor is made within 12 months following the effective
date of any previous registration statement filed by the Company pursuant to
this Section 8.03.
(b) Notwithstanding the foregoing, the Company shall not be obligated to
effect a Registration pursuant to Section 8.03(a) with respect to a proposed
distribution of Registrable Securities by a Holder thereof (1) during the period
starting with the date 30 days prior to the Company's estimated date of filing
of, and ending on a date 90 days following the effective date of, a registration
statement pertaining to an underwritten public offering of securities for the
account of the Company, provided that the Company is actively employing in good
faith all reasonable efforts to cause such registration statement to become
effective and that the Company's estimate of the date of filing of such
Registration is made in good faith; (2) within a period of 180 days after the
effective date of any previous Registration by the Company with respect to which
Holders of Registrable Securities were given the opportunity pursuant to this
Article 8 of this Agreement, to include therein all Registrable Securities which
were requested to be included therein; (3) if the Holders propose to dispose of
32
Registrable Securities which may be immediately registered on Form S-3 pursuant
to a request made under Section 8.05 hereof; or (4) if (i) in the good faith
judgment of the Board of Directors of the Company, such Registration would be
seriously detrimental to the Company and the Board of Directors of the Company
concludes, as a result, that it is essential to defer the filing of a
registration statement with respect to such Registration at such time, and (ii)
the Company shall furnish to the Holders requesting such Registration a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Director of the Company it would be seriously
detrimental to the Company for such registration statement to be filed in the
near future, and that it is, therefore essential to defer such filing (except as
provided in clause (1) above) for a period of not more than 180 days after the
receipt of the such request, and provided further, that the Company may not
defer its obligation in the manner provided in this clause (4) more than once in
any 12-month period.
(c) Any Registration statement filed pursuant to this Section 8.03 may,
subject to the provisions of Section 8.13 hereof, include other securities of
the Company with respect to which registration rights have been granted.
8.04 EXPENSES OF REGISTRATION. All Registration Expenses incurred in
connection with any Registration, qualification or compliance pursuant to
Sections 8.02, 8.03 and 8.04 hereof, shall be borne by the Company. All Selling
Expenses relating to the Registrable Securities so Registered shall be borne by
the Holders of such Registrable Securities pro rata on the basis of the number
of shares of Registrable Securities so Registered on their behalf.
8.05 REGISTRATION ON FORM S-3. After its initial public offering, the
Company shall use its best efforts to quality for registration on Form S-3 or
any comparable or successor form or forms. After the Company has qualified for
the use of Form S-3, in addition to the rights contained in the foregoing
provisions of this Article 8, the Holders of Registrable Securities shall have
the right to request registrations on Form S-3 (such requests shall be in
writing and shall state the number of shares of Registrable Securities to be
disposed of and the intended methods of disposition of such shares by such
Holder or Holders), provided, however, that the Company shall not be obligated
to effect any such Registration if (1) the Company shall have delivered to such
Holder an opinion of counsel to the Company, addressed to such Holder and
reasonably satisfactory in form and substance to such Holder to the effect that
such Registrable Securities proposed to be included may lawfully be so disposed
of without Registration or (2) within a period of 180 days after the effective
date of any previous such Registration. If a request complying with the
requirements of this Section 8.04 is delivered to the Company, the provisions of
Section 8.03(a) shall apply to such Registration.
33
8.06 REGISTRATION PROCEDURES. In the case of each Registration effected by
the Company pursuant to this Article 8, the Company will keep each Holder
advised in writing as to the initiation of each registration and as to the
completion thereof. At its expense, the Company will:
(a) Keep such registration effective for a period of 180 days or until the
Holder or Holders have completed the distribution described in the registration
statement relating thereto, whichever first occurs; provided, however, that (i)
such 180-day period shall be extended for a period of time equal to the period
the Holder refrains from selling any securities included in such Registration at
the request of an underwriter of Common Stock (or other securities) of the
Company; and (ii) in the case of any registration of Registrable Securities on
Form S-3 which are intended to be offered on a continuous or delayed basis, such
180-day period shall be extended, if necessary, to keep the registration
statement effective until all such Registrable Securities are sold, provided
that Rule 145, or any successor rule under the Securities Act, permits an
offering on a continuous or delayed basis, and provided further that applicable
rules under the Securities Act governing the obligation to file a post-effective
amendment permit, in lieu of filing a post-effective amendment that (1) includes
any prospectus required by Section 10(a)(3) of the Securities Act or (2)
reflects facts or events representing a material or fundamental change in the
information set forth in the registration statement, the incorporation by
reference of information required to be included in (1) and (2) above to be
contained in periodic reports filed pursuant to Section 13 or 15(d) of the
Exchange Act in the registration statement;
(b) Prepare and file with the Commission such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement;
(c) Furnish such number of prospectuses and other documents incident
thereto, including any amendment of or supplement to the prospectus, as a Holder
from time to time may reasonably request;
(d) Register or qualify the securities covered by such registration
statement under the Blue Sky Laws of such jurisdictions as shall be reasonably
appropriate for the distribution of the securities covered thereby;
(e) At the time when any Registration statement pursuant to this Section 8
becomes effective, and at the time when any post-effective amendment thereto
becomes effective, furnish to the Holder or Holders of the Registrable
Securities being registered under such Registration statement, an opinion of
counsel
34
satisfactory to such Holder or Holders to the effect that (1) to the best
knowledge of such counsel, no stop order suspending the effectiveness of the
Registration statement has been issued and no proceedings for that purpose have
been instituted or are pending or contemplated under the Securities Act, (2) the
Registration statement and the prospectus, and each amendment or supplement
thereto, as of their respective effective or issue dates, comply as to form in
all material respects with the requirements of the Securities Act, (3) such
counsel has no reason to believe that the Registration statement, the
prospectus, or any amendment or supplement thereto, as of their respective
dates, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and (4) the descriptions in the Registration statement,
the prospectus and any amendment or supplement thereto of statutes, legal and
governmental proceedings, and contracts or other documents are accurate and
fairly present the information required to be shown, and such counsel does not
know of any legal or governmental proceedings required to be described in the
Registration statement, the prospectus or any amendment or supplement thereto
which are not described as required, nor of any contracts or documents of a
character required to be described in the Registration statement or prospectus
or any amendment or supplement thereto, or to be filed as exhibits to the
Registration statement which are not described and filed as required, provided
that such counsel need not express any opinion as to the financial statements
and schedules included in or omitted from any such Registration statement,
prospectus or amendment or supplement thereto.
(f) Notify each seller of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing, and at the request of any such seller, prepare and
furnish to such seller a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such shares, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make such statements therein not misleading or
incomplete in the light of the circumstances then existing;
(g) Cause all such Registrable Securities registered pursuant hereunder to
be listed on each securities exchange on which similar securities issued by the
Company are then listed;
35
(h) Provide a transfer agent and registrar for all Registrable Securities
registered pursuant to such registration statement and a CUSIP number for all
such Registrable Securities, in each case not later than the effective date of
such registration;
(i) Otherwise use its best efforts to comply with all applicable rules and
regulations of the Commission, and make available to its security holders, as
soon as reasonably practicable, an earnings statement covering the period of at
least twelve months, but not more than eighteen months, beginning with the first
month after the effective date of the registration statement, which earnings
statement shall satisfy the provisions of Section 11 (a) of the Securities Act;
and
(j) In connection with any underwritten offering pursuant to a
registration statement filed pursuant to Section 8.03 hereof, the Company will
enter into an underwriting agreement in form reasonably necessary to effect the
offer and sale of Common Stock, provided such underwriting agreement contains
customary underwriting provisions and provided further than if the underwriter
so requests the underwriting agreement will contain customary contribution
provisions.
8.07 FURNISH INFORMATION. The Holder or Holders of Registrable Securities
included in any Registration shall furnish to the Company such information
regarding such Holder or Holders and the distribution proposed by such Holder or
Holders as the Company may request in writing and as shall be reasonably
required in connection with any Registration, qualification or compliance
referred to in this Article 8.
8.08 INDEMNIFICATION.
(a) The Company will indemnify each Holder, each of its officers,
directors and partners, legal counsel, and accountants and each Person
controlling such Holder within the meaning of Section 15 of the Securities Act,
with respect to which Registration, qualification, or compliance has been
effected pursuant to this Article 8; and each underwriter, if any, and each
Person who controls within the meaning of Section 15 of the Securities Act any
underwriter, against all expenses, claims, losses, damages, and liabilities (or
actions, proceedings, or settlements in respect thereof) arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any prospectus, offering circular, or other document (including any
related registration statement, notification, or the like) 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, or any violation by the
Company of the Securities Act or any rule or regulation
36
thereunder applicable to the Company and relating to action or inaction required
of the Company in connection with any such Registration, qualification, or
compliance; and will reimburse each such Holder, each of its officers,
directors, partners, legal counsel, and accountants and each person controlling
such Holder, each such underwriter, and each Person who controls any such
underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating and defending or settling any such claim, loss,
damage, liability, or action, provided that the Company will not be liable in
any such case to the extent that any such claim, loss, damage, liability, or
expense arises out of or is based on any untrue statement or omission based upon
written information furnished to the Company by such Holder or underwriter and
stated to be specifically for use therein. It is agreed that the indemnity
agreement contained in this Section 8.08(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent has not
been unreasonably withheld).
(b) Each Holder will, 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,
officers, partners, legal counsel, and accountants and each underwriter, if any,
of the Company's securities covered by such a registration statement, each
Person who controls the Company of such underwriter within the meaning of
Section 15 of the Securities Act, each other such Holder, and each of their
officers, directors, and partners, and each person controlling such Holder
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular, or other document, or 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, and will reimburse the
Company and such Holders, directors, officers, partners, legal counsel, and
accountants, persons, underwriters, or control persons for any legal or any
other expenses reasonably incurred in connection with investigating or defending
any such claim, loss, damage, liability, or action, in each case to the extent,
but only to the extent, that such untrue statement (or alleged untrue statement)
or omission (or alleged omission) is made in such registration statement,
prospectus, offering circular, or other document in reliance upon and in
conformity with written information furnished to the Company by such Holder and
stated to be specifically for use therein provided, however, that the
obligations of such Holder hereunder shall not apply to amounts paid in
settlement of any such claims, losses, damages, or liabilities (or actions in
respect thereof) if such settlement is effected without the consent of such
Holder (which consent shall not be unreasonably withheld); and provided that in
37
no event shall any indemnity under this Section 8.08(b) exceed the gross
proceeds from the offering received by such Holder.
(c) Each party entitled to indemnification under this Section 8.08 (the
"Indemnified Party") shall give notice to the party required to provide
indemnity (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 such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, 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 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 Article 8, to the extent such
failure is not prejudicial. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement that does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect to such
claim or litigation. Each Indemnified Party shall furnish such information
regarding itself or the claim in question as an Indemnifying Party may
reasonably request in writing and as shall be reasonably required in connection
with defense of such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 8.08 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
hereunder, shall contribute to the amount paid or payable by such Indemnified
Party hereunder 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 that 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.
(e) The obligations of the parties under this Section 8.08 shall survive
the completion of the offering of Registrable Securities under the registration
statement and, otherwise.
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8.09 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the date
of this Agreement, the Company shall not, without the prior written consent of a
majority in interest of the Holders, enter into any agreement with any holder or
prospective holder of any securities of the Company giving such holder or
prospective holder any registration rights the terms of which are more favorable
than the registration rights granted to the Holders hereunder.
8.10 RULE 144 REPORTING. With a view to making available to the Holders the
benefits of certain rules and regulations of the Commission that may permit the
sale of the Restricted Securities to the public without registration, the
Company agrees, so long as any Holder owns Registrable Securities:
(a) Make and keep public information regarding the Company available as
those terms are understood and defined in Rule 144 under the Securities Act, at
all times from and after 90 days following the effective date of the first
Registration under the Securities Act filed by the Company for a public offering
of its securities;
(b) File with the Commission in a timely manner all reports and other
documents required of the company under the Securities Act and the Exchange Act
at any time after it has become subject to such reporting requirements;
(c) Furnish to the Holder forthwith upon written request a written
statement by the Company as to its compliance with the reporting requirements of
Rule 144 (at any time from and after 90 days following the effective date of the
first registration statement filed by the Company for an offering of its
securities to the general public), and of the Securities Act and the Exchange
Act (at any time after it has become subject to such reporting requirements), a
copy of the most recent annual or quarterly report of the Company, and such
other reports and documents so filed as a Holder may reasonably request in
availing itself of any rule or regulation of the Commission allowing a Holder to
sell any such securities without registration.
8.11 TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS. The rights of any
Holder under this Agreement including, without limitation, the registration
rights under Article 8 and the rights of first refusal under Article 9 may be
transferred or assigned by a Holder only to a transferee or assignee of not less
than 25,000 shares of Registrable Securities (as presently constituted and
subject to subsequent adjustments for stock splits, stock dividends, reverse
stock splits, and the like), provided that the Company is given written notice
at the time of or within a reasonable time after said transfer or assignment,
stating the name and address of the transferee or assignee and identifying the
securities with respect
39
to which such registration rights are being transferred or assigned.
8.12 LOCKUP AGREEMENT. The Holder of each certificate representing
Registrable Securities by acceptance thereof agrees in connection with any
Registration of the Company's securities that, upon the request of the Company
or the underwriter(s) managing any underwritten offering of the Company's
securities, not to sell, make any short sale of, loan, grant option for the
purchase of, or otherwise dispose of any Registrable Securities (other than
those included in such Registration) without the prior written consent of the
Company or such underwriter(s), as the case may be, for such period of time (not
to exceed 180 days) from the effective date of such Registration as the Company
or the underwriter(s) may specify, provided that all Holders and officers and
directors of the Company are bound by and have entered into similar agreements.
The obligations described in this Section 8.12 shall not apply to a Registration
relating solely to employee benefit plans on Form S-1 or S-8 or similar forms
that may be promulgated in the future or a Registration relating solely to a
Rule 145 transaction on Form S-4 or any similar form promulgated in the future.
8.13 ALLOCATION OF REGISTRATION OPPORTUNITIES. In any circumstance in which
all of the Registrable Securities and other shares of Common Stock of the
Company (including shares of Common Stock issued or issuable upon conversion of
shares of any currently unissued series of Preferred Stock of the Company) with
Registration rights (the "Other Shares") requested to be included in a
Registration on behalf of the Holders or other selling stockholders cannot be so
included as a result of limitations on the aggregate number of shares of
Registrable Securities and Other Shares that may be so included, the number of
shares of Registrable Securities and Other Shares that may be so included shall
be allocated among the Holders and other selling stockholders requesting
inclusion of shares pro rata based upon total number of shares requested to be
so included. In the event a Holder or other selling stockholder subsequently
withdraws or reduces a request for inclusion in such Registration, the number of
shares which may be so included shall be re-allocated in the same manner. The
Company may not limit the number of Registrable Securities to be included in a
Registration pursuant to this Agreement in order to accommodate the request of
any Significant Stockholder to include more than 25% (prior to the application
of the pro rata allocations provided for above) of the shares of Common Stock
held by such Significant Stockholder, or with respect to Registrations under
Section 8.03 or 8.06 hereof, in order to include in such Registration securities
registered for the Company's own account.
8.14 DELAY OF REGISTRATION. No Holder shall have any right to take any
action to restrain, enjoin, or otherwise delay any registration as the result of
any controversy that might arise with respect to the interpretation or
implementation of this Article 8.
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8.15 SUSPENSION OF REGISTRATION RIGHTS. Except as set forth in subparagraph
(b) below, no Holder may request Registration pursuant to Section 8.03 at any
time that all Registrable Securities held by such Holder may immediately be sold
under Rule 144 during any 90-day period, provided, however, that the foregoing
shall not be applicable in the case of any Holder who owns more than 2% of the
outstanding Common Stock of the Company.
(b) The provisions of subparagraph (a) above shall not apply to any Holder
who owns more than 2% of the Company's outstanding Common Stock at the time of
determination.
ARTICLE 9. RIGHT OF FIRST REFUSAL
9.01 RIGHT OF FIRST REFUSAL. The Company hereby grants to each Holder who
owns any Registrable Securities the right of first refusal to purchase a pro
rata share of New Securities (as defined in this Section 9.01) which the Company
may, from time to time, propose to sell and issue. A Holder's pro rata share,
for purposes of this right of first refusal, is the ratio of the number of
shares of Common Stock owned by such Holder immediately prior to the issuance of
New Securities, assuming full conversion of all outstanding securities
convertible into Common Stock and exercise of any option or warrant to purchase
Common Stock held by said Holder, to the total number of shares of Common Stock
outstanding immediately prior to the issuance of New Securities, assuming full
conversion of all securities convertible into Common Stock and exercise of all
outstanding rights, options and warrants to acquire Common Stock. Each Holder
shall have a right of over-allotment such that if any Holder fails to exercise
its right hereunder to purchase its pro rata share of New Securities, the other
Holders may purchase the non-purchasing Holder's portion on a pro rata basis
within ten days from the date such non-purchasing Holder fails to exercise its
right hereunder to purchase its pro rata share of New Securities. This right of
first refusal shall be subject to the following provisions:
(a) "New Securities" shall mean any capital stock (including Common Stock
and/or Preferred Stock) of the Company whether now authorized or not, and
rights, options or warrants to purchase such capital stock, and securities of
any type whatsoever that are, or may become, convertible into capital stock;
provided that the term "New Securities" does not include (1) securities issued
upon exercise of the Warrants; (2) securities issued upon the exercise of any
warrants or options described in Exhibit F hereto; (3) any borrowings, direct or
indirect, from financial institutions or other Persons by the Company, whether
or not presently authorized, including any type of loan or payment evidenced by
any type of debt instrument, provided such borrowings do not have any equity
features including warrants, options or other rights to purchase capital stock
and are not convertible into capital stock of the Company; (4) not in excess of
an aggregate of 400,000 shares of
41
Common Stock issued to employees, consultants, officers or directors of the
Company pursuant to any stock option, stock purchase or stock bonus plan,
agreement or arrangement approved by the Board of Directors; (5) securities
issued in connection with any stock split, stock dividend or recapitalization of
the Company; and (6) any right, option or warrant to acquire any security
convertible into the securities excluded from the definition of New Securities
pursuant to subsections (1) through (5) above.
(b) In the event the Company proposes to undertake an issuance of New
Securities, it shall give each Holder written notice of its intention,
describing the type of New Securities, and their price and the general terms
upon which the Company proposes to issue the same. Each Holder shall have 20
days after receipt of such notice to agree to purchase such Holder's pro rata
share of such New Securities for the price and upon the terms specified in the
notice by giving written notice to the Company and stating therein the quantity
of New Securities to be purchased.
(c) In the event the Holders fail to exercise the right of first refusal
within said 20-day period and after the expiration of the ten-day period for the
exercise of the over-allotment provisions of this Section 9.01, the Company
shall have 120 days thereafter to sell or enter into an agreement (pursuant to
which the sale of New Securities covered thereby shall be closed, if at all,
within 120 days from the date of said agreement) to sell the New Securities
respecting which the Holders' right of first refusal option set forth in this
Section 9.01 was not exercised, at a price and upon terms no more favorable to
the purchasers thereof than specified in the Company's notice to Holders
pursuant to subsection (b) above. In the event the Company has not sold within
said 120-day period or entered into an agreement to sell the New Securities in
accordance with the foregoing within 120 days from the date of said agreement,
the Company shall not thereafter issue or sell any New Securities, without first
again offering such securities to the Holders in the manner provided in
subsection (b) above.
(d) The right of first refusal granted under this Agreement shall expire
upon, and shall not be applicable to, the first Qualified Public Offering
provided that the Holders are offered the opportunity to purchase, in whole or
in part, 10% of the Common Stock being sold in such sale.
ARTICLE 10. MISCELLANEOUS PROVISIONS
10.01 SURVIVAL. All covenants, agreements, representations and
warranties of the Company, the Stockholders and the Purchaser contained in or
made pursuant to this Agreement shall survive the Closing and the sale, issuance
and delivery of the Purchased Shares notwithstanding any investigation made by
or on behalf of the Purchaser, the Company or any Stockholder.
42
10.02 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), only
with the written consent of the Company and the Holders of 66 2/3% or more of
the Registerable Securities, provided that no consent under this Section 10.02
shall alter the provisions of this Agreement to reduce the percentage of the
Registrable Securities which is required for any consent to any amendment or
waiver without the consent of the Holders of all Registerable Securities. Any
amendment or waiver effected in accordance with this Section 10.02 shall be
binding upon each Holder of Purchased Securities, each future Holder of
Purchased Securities and the Company.
10.03 NON-WAIVER. No failure by or neglect of any party to this
Agreement in any instance to exercise any right, power or privilege under this
Agreement or under law shall constitute a waiver of any other right, power or
privilege or of the same right, power or privilege in any other instance.
10.04 PAYMENT OF EXPENSES. Except as expressly provided in this
Agreement to the contrary, whether or not the transactions contemplated by this
Agreement are consummated, each party to this Agreement shall pay the fees and
expenses of its counsel, accountants and other experts and all other expenses
incurred by it, incident to the negotiation, preparation and execution of this
Agreement and the performance by it of its obligations hereunder except that the
Company shall pay the reasonable fees and disbursements of Pircher, Nichols &
Meeks, special counsel to the Purchaser, incurred by the Purchaser in connection
with the negotiation, preparation and execution of this Agreement.
10.05 NOTICES. All notices or other communications hereunder shall be
in writing and shall be sufficiently given for all purposes when sent by first
class United States mail, postage prepaid, registered or certified, or by any
national express air courier which courier shall maintain written verification
of actual delivery, or by delivering the same in person to any party hereto as
follows:
If to the Purchaser to:
Ontario Municipal Employees Retirement Board
One University Avenue, Suite 1000
Toronto, Ontario M5J 2P1
Canada
Attention: Peter D. Friend
with a copy to:
Pircher, Nichols & Meeks
1999 Avenue of the Stars
43
Los Angeles, California 90067
USA
Attention: Larry M. Meeks, Esq.
If to the Company to:
Myo Diagnostics, Inc.
3710 South Robertson Boulevard, Suite 212
Culver City, California 90232
USA
Attention: Gerald D. Appel
President
With a copy to:
Pillsbury, Madison & Sutro
725 S. Figueroa Street, Suite 1200
Los Angeles, California 90017
USA
Attention: Blase P. Dillingham, Esq.
or at such other address of which any such party shall have notified the party
giving such notice in writing in accordance with the foregoing requirements.
Notice so mailed shall be effective three Business Days following deposit or, if
sooner, upon receipt. Notice given in any other manner permitted herein shall be
effective only if and when received by the addressee.
10.06 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon,
inure to the benefit of, and be enforceable by, the parties hereto and their
respective successors, assigns, heirs, executors, and legal representatives but
shall not be assignable or delegable by any party without the prior written
consent of the other parties hereto except that the Purchaser may assign its
rights under this Agreement to any Affiliate of the Purchaser and as provided in
Sections 8.11 and 9.01 of this Agreement. This Agreement is not made for the
benefit of any Person not a party hereto, and no Person other than the parties
hereto or their respective successors, permitted assigns, heirs, or legal
representatives shall acquire or have any right, remedy or claim under or by
virtue of this Agreement.
10.07 SEVERABILITY. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
10.08 ENTIRE AGREEMENT. This Agreement and the documents and
instruments referred to herein contain the complete agreement
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among the parties with respect to the transactions contemplated hereby and
supersede all previous negotiations, understandings, agreements, or
representations, written or oral, made by or among the parties, relating
thereto.
10.09 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California applicable to contracts
entered into and to be performed within such state.
10.10 HEADINGS. The headings and subheadings used in this Agreement are
for convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
10.11 ATTORNEYS' FEES. If any action at law or in equity is necessary
to enforce or interpret the terms of this Agreement, the prevailing party shall
be entitled to reasonable attorneys' fees, costs and disbursements in addition
to any other relief to which such party may be entitled.
10.12 ADJUSTMENTS. In interpreting any provision of this Agreement
which refers to a specific number of shares of Purchased Securities, such number
shall be appropriately adjusted to account for stock splits, combinations and
like events which may occur from time to time.
10.13 COUNTERPARTS. This Agreement may be executed in two or more
counterparts and by different parties in separate counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same agreement.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
MYO DIAGNOSTICS, INC.
By/S/ Gerald D. Appel
--------------------------------------
Gerald D. Appel
President
/S/ Gerald D. Appel
----------------------------------------
GERALD D. APPEL
/S/ Hershel Toomim
----------------------------------------
HERSHEL TOOMIM
ONTARIO MUNICIPAL EMPLOYEES
RETIREMENT BOARD
By/S/ Peter D. Friend
--------------------------------------
Peter D. Friend
Portfolio Manager
By/S/ Henry A. Rachfalowski
--------------------------------------
Henry A. Rachfalowski
Vice President
46