INVESTMENT AGREEMENT dated October 14, 1999 by and between MISONIX, INC.,
a New York corporation having its principal executive offices at 1938 New
Highway, Farmingdale, New York 11735 ("Misonix") and HEARING INNOVATIONS
INCORPORATED, a Delaware corporation having its principal executive offices at
9040 South Rita Road, Suite 2250, Tucson, Arizona 85747 ("Hearing").
R E C I T A L S :
A. Hearing develops and markets devices useful in the remediation of
hearing loss and related hearing and audio products utilizing novel and
proprietary technology, including ultrasonic technology. Misonix develops,
manufactures and markets equipment for scientific and industrial applications,
including equipment utilizing proprietary ultrasonic technology.
B. By Secured Note Agreements (the "Notes") dated March 11, 1999, June 29,
1999, July 28, 1999, August 30, 1999 and September 10, 1999 Misonix made loans
to Hearing in the aggregate principal amount of $400,000. Misonix desires to
acquire an equity interest in Hearing by contributing the indebtedness
represented by the Note, together with additional funds, to the capital of
Hearing in consideration for the issuance by Hearing of the various equity
interests described herein, and Hearing desires to receive such investment and
to issue such equity
interests, all in accordance with the terms and conditions set forth herein. In
addition, Hearing and Misonix desire to provide for certain opportunities for
mutual cooperation and business relations which are expected to be of material
benefit to both parties in accordance with the terms and conditions hereinafter
set forth.
NOW, THEREFORE, in consideration of the foregoing and of the mutual terms
and conditions set forth herein, the parties hereto hereby agree as follows:
1. Purchase and Sale of Preferred Stock; Issuance of Warrants; Other
Closing Documents.
1.1 In consideration for the contribution by Misonix to Hearing of the
Note (including all indebtedness represented thereby) and the payment by
Misonix of $350,000, receipt of which is hereby acknowledged, Hearing hereby
sells, conveys, issues and delivers to Misonix 295,700 shares (the "Shares") of
Hearing's Series A Convertible Preferred Stock (the "Preferred Stock"). The
Preferred Stock has the relative rights, preferences, dividend and liquidation
rights and other terms and conditions contained in the certificate of
designation ("Certificate of Designation") annexed hereto as Schedule A.
Hearing represents and warrants that the Certificate of Designation has been
duly filed with the Secretary of State of the State of Delaware on or before
the date hereof.
1.2 As further consideration for the investment made
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by Misonix, Hearing hereby sells, conveys, issues and delivers to Misonix a
warrant (the "First Warrant") to purchase 188,680 shares of the Common Stock,
par value $.0005 of Hearing (the "Common Stock") and a warrant (the "Second
Warrant") to purchase 200,000 shares of Common Stock. Each of the First Warrant
and Second Warrant have the terms and conditions, and are substantially in the
form, annexed to this Agreement as Schedules B and C, respectively.
1.3 Misonix hereby acknowledges receipt of a certificate representing
the Shares and of executed counterparts of warrant agreements representing each
of the First Warrant and the Second Warrant.
1.4 Simultaneously with the making of the investment described in
Section 1.1 and the delivery of instruments representing the Shares, the First
Warrant and the Second Warrant (each of such securities, together with shares
of Common Stock for which the First Warrant and Second Warrant are exercisable
and which may be obtained upon the due conversion of the Shares being referred
to collectively as the "Securities"), the parties hereto have duly executed and
delivered (or caused the execution and delivery of) the following:
(a) executed and delivered by or on behalf of Hearing:
(i) Opinion of Dornbush Mensch Mandelstam & Schaeffer, LLP
in form and substance as annexed hereto as Schedule D.
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(ii) Registration Rights Agreement (the "Registration
Rights Agreement") between Hearing and Misonix in form and
substance annexed hereto as Schedule E.
(iii) Secretary's Certificate of the Secretary of Hearing
in form and substance as annexed hereto as Schedule F.
(b) executed and delivered by or on behalf of Misonix:
(i) Opinion of Hartman & Craven, LLP in form and substance
as annexed hereto as Schedule G.
(ii) Registration Rights Agreement.
(iii) Secretary's Certificate of the Secretary of Misonix
in form and substance as annexed hereto as Schedule H.
1.5 Simultaneously with the transactions contemplated by Sections 1.1
through 1.4, Dan Purjes ("Purjes") has surrendered for cancellation to Hearing
that certain Revolving Secured Note Agreement dated as of February 12, 1998, as
amended by Amendment No. 1 dated May 28, 1998, Amendment No. 2 dated September
14, 1998 and Amendment No. 3 dated December 18, 1998 (the "Original Bridge
Notes") and in exchange therefore Hearing has issued to Purjes an Amended and
Restated Secured Term Note (the "Restated Bridge Note") dated of even date
herewith in form and substance as annexed hereto as Schedule I. The
indebtedness
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previously represented by the Original Bridge Notes and now represented by the
Restated Bridge Note is referred to hereinafter as the "Purjes Bridge Loan."
1.6 Hearing represents that all the Securities issued to Misonix
pursuant to this Agreement shall be validly issued, fully paid, and
nonassessable and all the Securities shall be issued to Misonix free and clear
of all liens, encumbrances, equitable rights of third parties, options, claims,
pledges and other limitations on the ownership, voting, convertibility, or
transferability, except as contemplated by this Agreement and the Schedules
hereto.
2 . Representations and Warranties of Hearing. As a material inducement to
Misonix to enter into and consummate the transactions contemplated by this
Agreement, Hearing hereby represents and warrants to Misonix that, except as
set forth on the disclosure schedule (the "Disclosure Schedule") annexed hereto
as Schedule 2, which exceptions shall be deemed incorporated in the
representations and warranties as if set forth in full herein:
2.1 Organization, Good Standing and Qualification. Hearing is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as now conducted and as proposed to be conducted. Hearing is duly qualified to
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transact business and is in good standing in each jurisdiction in which the
failure to so qualify would have a material adverse effect on its business or
properties.
2.2 Capitalization. The authorized and outstanding capital of Hearing
consists of:
(a) Preferred Stock. 1,000,000 authorized shares of preferred
stock, of which 295,700 shares have been designated Preferred Stock
and of which 295,700 shares are issued and outstanding upon
consummation of the transactions contemplated hereby. The relative
rights, privileges and preferences of the Preferred Stock are as set
forth in the Certificate of Designation. Without limiting the
generality of the foregoing, at the date hereof, upon due conversion
of all of the shares of Preferred Stock in accordance with the terms
of the Certificate of Designation, the holder thereof will be
entitled to receive 295,700 shares of Common Stock, representing 7.1%
of shares of Common Stock issued and outstanding or reserved for
issuance (excepting only the shares reserved for issuance upon the
exercise of the First Warrant and Second Warrant) as of the date
hereof.
(b) Common Stock. 10,000,000 authorized shares of Common Stock,
of which 3,722,566 shares are issued and outstanding as of the date
hereof.
(c) The outstanding shares of Preferred Stock and Common Stock
are all duly and validly authorized and issued, fully paid and
nonassessable.
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(d) Except for (A) the conversion privileges and exercise rights
of the Preferred Stock and the First Warrant and Second Warrant,
respectively, issued pursuant to this Agreement, and (B) currently
outstanding options to purchase shares of Common Stock set forth on
the Disclosure Schedule, there are not outstanding any subscription
rights, options, warrants, rights (including conversion, stock
appreciation or preemptive rights) or agreements for the purchase,
issuance, transfer or acquisition from Hearing of any shares of its
capital stock. Hearing is not a party or subject to any agreement or
understanding, and, to the best of Hearing's knowledge, there is no
agreement or understanding between any persons or entities, which
affects or relates to the voting or giving of written consents with
respect to any security or by a director of Hearing.
(e) Hearing has full right, power and authority to issue, sell,
transfer and deliver the Securities, and upon delivery of the stock
certificates therefor as contemplated by this Agreement, Hearing will
transfer to Misonix valid and marketable title to the Preferred
Stock, including all voting and other rights to such shares, free and
clear of all pledges, liens, security interests, options, rights of
any third party or other encumbrance.
2.3 Subsidiaries. Hearing does not presently own or control, directly
or indirectly, any interest in any other corporation, association, or other
business entity. Hearing is not a participant in any joint venture,
partnership, or similar
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arrangement.
2.4 Authorization. All corporate action on the part of Hearing, its
officers, directors and stockholders necessary for the authorization, execution
and delivery of this Agreement and the Registration Rights Agreement, the
performance of all obligations of Hearing hereunder and thereunder, and the
authorization, issuance (or reservation for issuance), sale and delivery of the
Securities being sold hereunder or reserved for issuance upon the due exercise
or conversion of the Preferred Stock, the First Warrant and the Second Warrant
has been taken and this Agreement and the Registration Rights Agreement
constitute valid and legally binding obligations of Hearing, enforceable in
accordance with their respective terms, except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, and other laws of general
application affecting enforcement of creditors' rights generally, (ii) as
limited by laws relating to the availability of specific performance,
injunctive relief, or other equitable remedies, and (iii) to the extent the
indemnification provisions contained in the Registration Rights Agreement may
be limited by applicable federal or state securities laws.
2.5 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
Hearing is required in connection with the consummation of the transactions
8
contemplated by this Agreement. Assuming the accuracy of the representations of
Misonix set forth in Section 3.2, the transactions contemplated by this
Agreement, including but not limited to the sale and delivery of the Preferred
Stock, the First Warrant and the Second Warrant pursuant to this Agreement, are
exempt from registration or prospectus delivery requirements under applicable
state or other securities laws.
2.6 Litigation. There is no action, suit, legal or administrative
proceeding or investigation pending or currently threatened against Hearing
that questions the validity of this Agreement or the Registration Rights
Agreement, or the right of Hearing to enter into such agreements, or to
consummate the transactions contemplated hereby or thereby, or that might
result, either individually or in the aggregate, in any material adverse
changes in the assets, condition, affairs or prospects of Hearing, financially
or otherwise, nor is Hearing aware of the basis for any of the foregoing.
Hearing is not a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality. Hearing has no action, suit or proceeding currently pending
against another party in which Hearing is the plaintiff, nor does Hearing
currently intend to initiate such an action, suit or proceeding.
2.7 Patents and Trademarks. Hearing has sufficient title and ownership
of all patents, trademarks, service marks, trade names, copyrights, trade
secrets, information, proprietary
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rights and processes necessary for its business as now conducted and with
respect to products currently in development and listed on the Disclosure
Schedule ("Intellectual Property") without, to the best of its knowledge, any
conflict with or infringement of the rights of others. Section 2.7 of the
Disclosure Schedule contains a complete list of patents and pending patent
applications of Hearing. Except as set forth on Section 2.7 of the Disclosure
Schedule, there are no outstanding options, licenses, or agreements of any kind
relating to the foregoing, nor is Hearing bound by or a party to any options,
licenses or agreements of any kind with respect to the patents, trademarks,
service marks, trade names, copyrights, trade secrets, licenses, information,
proprietary rights and processes of any other person or entity. Hearing has not
received any communication alleging that Hearing has infringed upon or violated
or, by conducting its business as proposed, would infringe upon or violate any
of the patents, trademarks, service marks, trade names, copyrights or trade
secrets or other proprietary rights of any other person or entity. All
Intellectual Property registrations are authorized and issued, valid and have
not been cancelled, amended, or modified, and Hearing is not aware of any facts
that would invalidate or render any of them unenforceable. All personnel who
have participated in the development of proprietary works for Hearing either
have been party to a work-for-hire relationship or have assigned or licensed to
Hearing all title in or right to use such proprietary works. No person has
given notice to Hearing
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that such person asserts any royalty claim or other claim whatsoever in respect
of the Intellectual Property. Hearing's license agreements pertaining to the
use of the Intellectual Property are valid and in full force and effect and
binding upon the parties thereto and Hearing is not in default under any of
such agreements.
2.8 Compliance with other Instruments.
(a) Hearing is not in violation or default of any provision of
its Certificate of Incorporation or Bylaws, or of any instrument,
note, lien, bond, mortgage, indenture, license, lease, agreement,
judgment, order, writ, decree or contract to which it is a party or
by which it is bound, or, to the best of its knowledge, of any
provision of any federal or state statute, rule or regulation
applicable to it. The execution, delivery and performance of this
Agreement and the Registration Rights Agreement, and the consummation
of the transactions contemplated hereby and thereby will not result
in any such violation or be in conflict with or constitute, with or
without the passage of time or giving of notice, or both, either a
default or trigger any right of termination, cancellation, or
acceleration under any instrument, agreement or other document
referred to in the first sentence of this representation or an event
that results in the creation of any lien, charge or encumbrance upon
any assets of Hearing or the suspension, revocation, impairment,
forfeiture, or non-renewal of any material permit, license,
authorization, or approval applicable to Hearing, its business or
operations or any
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of its assets or properties.
2.9 Agreements; Action.
(a) Except as set forth in Section 2.9 of the Disclosure
Schedule, there are no agreements, understandings, instruments,
contracts, proposed transactions, judgments, orders, writs or decrees
to which Hearing is a party or by which it is bound that may involve
(i) obligations (contingent or otherwise) of, or payments to Hearing
in excess of, $25,000 in any one case or in the aggregate, (ii) the
license, protection or use of any patent, copyright, trade secret or
other Intellectual Property right to or from Hearing, (iii)
provisions restricting or affecting the development, manufacture or
distribution of Hearing's products or services or (iv) relating to
the borrowing of money. Except as set forth in Section 2.9 of the
Disclosure Schedule, all of such contracts and other agreements are
valid and in full force and effect and binding upon the parties
thereto in accordance with their terms, and Hearing has paid in full
or accrued all amounts due by it thereunder and has satisfied in full
or provided for all of its liabilities and obligations thereunder,
and is not in default under any of them, nor, to the knowledge of
Hearing, is any other party to any such contract or other agreement
in default thereunder or does any condition exist that with notice or
lapse of time or both would constitute a default thereunder.
(b) Hearing has not (i) declared or paid any dividends or
authorized or made any distribution upon or with
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respect to any class or series of its capital stock, (ii) except for
the Purjes Bridge Loan, incurred any indebtedness for money borrowed
or any other liabilities individually in excess of $25,000, (iii) made
any loans or advances to any person, other than ordinary advances for
travel and similar out-of-pocket business expenses, or (iv) sold,
exchanged or otherwise disposed of any of its assets or rights, other
than the sale of its inventory in the ordinary course of business.
2.10 Related-Party Transactions. No employee, officer, or director of
Hearing or member of his or her immediate family is indebted to Hearing, nor is
Hearing indebted (or committed to make loans or extend or guarantee credit) to
any of them, except for the Purjes Bridge Loan or as otherwise set forth on
Section 2.10 of the Disclosure Schedule. To the best of Hearing's knowledge,
none of such persons has any direct or indirect ownership interest in any firm
or corporation with which Hearing is affiliated or with which Hearing has a
business relationship, or any firm or corporation that competes with Hearing.
No employee, officer or director nor any member of the immediate family of any
employee, officer or director of Hearing is directly or indirectly interested
in any material contract, business arrangement or relationship with Hearing.
2.11 Permits. Except as set forth in Section 2.11 of the Disclosure
Schedule, Hearing has all franchises, permits, licenses, and any similar
authority ("Permits") necessary for the conduct of its business as now being
conducted by it, the lack of
13
which could materially and adversely affect Hearing's business, properties,
prospects, or financial condition. All Permits are in full force and effect.
Hearing is not in default in any material respect under any of such franchises,
permits, licenses, or other similar authority and no proceeding is pending or
threatened to revoke or limit any of the Permits.
2.12 Environmental and Safety Laws. Hearing and all its properties and
operations are and have been in compliance, in all material respects, with, and
are not and have not been in material violation of, any Federal, state or local
statutes, laws, orders, ordinances, rules, regulations, policies or other
requirements of any governmental agency or authority regulating, relating to or
imposing liability or standards of conduct concerning any Hazardous Materials
(as defined below), including without limitation, the Federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), the Resource Conservation and Recovery Act of 1976, as amended
("RCRA"), the Superfund Amendment and Reauthorization Act of 1986 ("SARA"), the
Federal Water Pollution Control Act, and any state counterparts thereof (all of
the foregoing being herein referred to herein as "Environmental Laws"). As used
herein the term "Hazardous Materials" means any hazardous, toxic or dangerous
waste, substance or material defined as such in (or for purposes of) CERCLA,
SARA, RCRA or any other Environmental Laws as now in effect. Hearing has not
engaged in or permitted the generation, use, treatment, storage, discharge or
disposal of
14
any Hazardous Materials and has not caused or permitted a release of
Hazardous Materials onto, at, in, or under the real property located at
9040 South Rita Road, Tucson, Arizona in violation of any Environmental Laws.
Hearing has never received notice of any violation or noncompliance with any
Environmental Law.
2.13 Manufacturing and Marketing Rights. Hearing has not granted
rights to manufacture, produce, assemble, license, market, or sell its products
to any other person and is not bound by any agreement that affects Hearing's
exclusive right to develop, manufacture, assemble, distribute, market or sell
its products.
2.14 Registration Rights. Except as provided in the Registration
Rights Agreement or as set forth in Section 2.14 of the Disclosure Schedule,
Hearing has not granted or agreed to grant any registration rights, including
piggyback rights, to any person or entity.
2.15 Corporate Documents. Misonix has previously been furnished with
true and complete copies of the Certificate of Incorporation and Bylaws of
Hearing as currently in force and effect.
2.16 Title to Property and Assets. Except as set forth in Section 2.16
of the Disclosure Schedule, Hearing has good, valid and marketable title to all
property and assets which it purports to own. Hearing owns all its property and
assets free and clear of all title defects, mortgages, liens, loans and
encumbrances, except such encumbrances and liens that arise in
15
the ordinary course of business and do not materially impair Hearing's
ownership, the value or use of such property or assets. With respect to the
property and assets it leases, Hearing is in compliance with such leases and,
to the best of its knowledge, holds a valid leasehold interest free of any
liens, claims or encumbrances.
2.17 Financial Statements. Hearing has delivered to Misonix its
unaudited financial statements (balance sheet and profit and loss statement,
statement of stockholders' equity and statement of cash flows, including notes
thereto) at December 31, 1998 and for the fiscal year then ended, and its
unaudited financial statements (balance sheet and profit and loss statement) as
at and for the seven-month period ended July 31, 1999 (the "Financial
Statements") which are set forth in Section 2.17 of the Disclosure Schedule.
The Financial Statements are true, correct and complete in all material
respects, have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, and fairly
present the financial condition and operating results of Hearing as of the
dates, and for the periods, indicated therein. Except as set forth in the
Financial Statements, Hearing has no material debts, liabilities, or monetary
obligations of any nature contingent or otherwise, other than (i) liabilities
incurred in the ordinary course of business subsequent to July 31, 1999 and
(ii) obligations under contracts and commitments incurred in the ordinary
course of business and
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not required under generally accepted accounting principles to be reflected
in the Financial Statements, which, in both cases, individually or in the
aggregate, are not material to the financial condition or operating results of
Hearing. Except as disclosed in the Financial Statements, Hearing is not a
guarantor or indemnitor of any indebtedness of any other person, firm or
corporation.
2.18 Changes. Since July 31, 1999 there has not been:
(a) any change in the assets, liabilities, business financial
condition or operating results of Hearing from that reflected in the
Financial Statements, except changes in the ordinary course of
business that have not been, in the aggregate, materially adverse,
nor, to Hearing's knowledge, has there been any event which
reasonably can be expected to have a materially adverse effect on any
of the foregoing;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties,
business, financial condition, operating results or prospects of
Hearing (as such business is presently conducted and as it is
proposed to be conducted);
(c) any waiver by Hearing of a valuable right or of a material
debt owed to it;
(d) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by Hearing, except in the
ordinary course of business and that is not material to the assets,
properties, financial condition,
17
operating results or business of Hearing (as such business is
presently conducted and as it is proposed to be conducted);
(e) any material change or amendment to a material contract or
arrangement by which Hearing or any of its assets or properties is
bound or subject;
(f) any material change in any compensation arrangement or
agreement with any employee;
(g) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(h) any resignation or termination of employment of any officer
or key employee of Hearing; and Hearing, to the best of its
knowledge, does not know of the impending resignation or termination
of employment of any such officer or key employee;
(i) any mortgage, pledge, transfer of a security interest in, or
lien, created by Hearing, with respect to any of its material
properties or assets, except liens for taxes not yet due or payable;
(j) any loans or guarantees made by Hearing to or for the
benefit of its employees, officers or directors, or any members of
their immediate families, other than travel advances and other
advances made in the ordinary course of its business;
(k) any declaration, setting aside or payment or other
distribution in respect of any of Hearing's capital stock, or any
direct or indirect redemption, purchase or other acquisition of any
of such stock by Hearing; or
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(l) agreed, in writing or otherwise, to take any of the actions
set forth in this Section 2.18.
2.19 Employee Benefit Plans. Hearing does not have, maintain,
contribute to, or have any obligation in respect of any Employee Benefit Plan
as defined in the Employee Retirement Income Security Act of 1974, as amended.
2.20 Tax Returns, Payments and Elections. Hearing has timely filed all
tax returns and reports as required by law. These returns and reports are true
and correct in all material respects. Hearing has paid all taxes and other
assessments that have become due, except those contested by it in good faith
that are listed in Section 2.20 of the Disclosure Schedule, and has established
adequate reserves therefor. The provision for taxes of Hearing as shown in the
Financial Statements is adequate for taxes due or accrued as of the date
thereof. Hearing has not elected pursuant to the Internal Revenue Code of 1986,
as amended (the "Code"), to be treated as a Subchapter S corporation or a
collapsible corporation pursuant to Section 1362(a) and Section 341(f) of the
Code, respectively, nor has it made any other elections pursuant to the Code
(other than elections that relate solely to methods of accounting, depreciation
or amortization) that would have a material effect on Hearing, its financial
condition, its business as presently conducted or proposed to be conducted or
any of its properties or material assets, including any consent under Section
336(e) of the Code. Hearing has never had any tax deficiency proposed or
assessed against it and has
19
not executed any waiver of any statute of limitations on the assessment or
collection of any tax or governmental charge. None of Hearing's federal income
tax returns and none of its state income or franchise tax or sales or use tax
returns has ever been audited by governmental authorities. Since the date of
the Financial Statements, Hearing has made adequate provisions on its books of
account for all taxes, assessments and governmental charges with respect to its
business, properties and operations for such period. Hearing has withheld or
collected from each payment made to each of its employees, the amount of all
taxes (including, but not limited to, federal income taxes, Federal Insurance
Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be
withheld or collected therefrom, and has paid the same to the proper tax
receiving officers or authorized depositories.
2.21 Minutes. Copies of minutes of the proceedings of the Board of
Directors of Hearing previously provided to Misonix contain a complete summary
of all meetings of directors since the time of incorporation and reflect all
transactions referred to in such minutes accurately in all material respects.
2.22 Labor Agreements and Actions; Employment Agreements.
(a) Hearing is not bound by or subject to (and none of its
assets or properties is bound by or subject to) any written or oral,
express or implied, contract, commitment or arrangement with any
labor union, and no labor union has
20
requested or, to the best of Hearing's knowledge, has sought to
represent any of the employees, representatives or agents of Hearing.
There is no strike or other labor dispute involving Hearing pending,
or to the best of Hearing's knowledge, threatened, that could have a
material adverse effect on the assets, properties, financial
condition, operating results, or business of Hearing (as such
business is presently conducted and as it is proposed to be
conducted), nor is Hearing aware of any labor organization activity
involving its employees. Except as set forth in the Disclosure
Schedule, the employment of each officer and employee of Hearing is
terminable at the will of Hearing. To the best of its knowledge,
Hearing has complied in all material respects with all applicable
state and federal equal employment opportunity and other laws related
to employment.
(b) Section 2.22 of the Disclosure Schedule lists all written
agreements of employment between Hearing and any officer, director or
employee, true and complete copies of which have previously been
delivered to Misonix and lists all key employees of Hearing.
2.23 Compliance; Governmental Authorization. Except as set forth in
Section 2.23 of the Disclosure Schedule, Hearing:
(a) has complied in all material respects with, is not in
default or violation in any material respect under, any and all
Federal, state, local and foreign laws, statutes, rules, regulations
and ordinances ("Laws") that apply to Hearing and its operations,
properties and business;
21
(b) has not received any or been made the subject of any claims,
charges, or investigations, or threats of claims, charges, or
investigations alleging the failure of Hearing to comply with any
Laws; and
(c) has complied with all orders, writs, injunctions, and
decrees applicable to Hearing or to any of its operations, assets, or
properties.
2.24 Insurance. The assets, properties and operation of Hearing are
insured under various policies of general liability and other forms of
insurance as set forth in Section 2.24 of the Disclosure Schedule. All such
policies are in full force and effect in accordance with their terms, no notice
of cancellation has been received, and there is no existing default by Hearing
or, to Hearing's knowledge, event which, with the giving of notice or lapse of
time or both, would constitute a default by Hearing thereunder. All premiums to
date have been paid in full.
2.25 Full Disclosure. All documents, instruments and other materials
delivered or to be delivered by or on behalf of Hearing in connection with this
Agreement and the transactions contemplated hereby are true and complete in all
material respects. The information furnished by or on behalf of Hearing to
Misonix in connection with this Agreement and the transactions contemplated
hereby does not and shall not contain any untrue statement of material fact and
does not and shall not omit to state any material fact required to be stated
therein or
22
necessary to make the statements contained therein not false or misleading.
There is no fact which Hearing has not disclosed which materially adversely
affects or, is reasonably foreseeable to materially adversely affect, the
assets, properties, operations, business, financial condition or prospects of
Hearing.
3. Representations and Warranties of Misonix. Misonix hereby represents
and warrants to Hearing that:
3.1 Authorization. Misonix has full power and authority to enter into
this Agreement and the Registration Rights Agreement, and each such Agreement
constitutes its valid and legally binding obligation, enforceable in accordance
with its terms; except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief, or other equitable
remedies, and (iii) to the extent the indemnification provisions contained in
the Registration Rights Agreement may be limited by applicable federal or state
securities laws.
3.2 Purchase Entirely for Own Account. The Securities to be received
by Misonix (including the Common Stock issuable upon conversion or exercise
thereof) are being acquired for investment and not with a view to the resale or
distribution of any part thereof, and Misonix has no present intention of
23
selling, granting any participation in, or otherwise distributing the same.
Misonix 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 any of
the Securities.
3.3 Accredited Investor. Misonix is an "accredited investor" within
the meaning of Securities and Exchange Commission ("SEC") Rule 501 of
Regulation D, as presently in effect.
3.4 Restricted Securities. Misonix understands that the Securities it
is purchasing are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from Hearing in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold only through registration
under the Securities Act of 1933, as amended, or pursuant to the availability
of certain limited exceptions to such registration.
3.5 Legend. It is understood that the certificates evidencing the
Securities may bear a restrictive legend in substantially the following form
and substance:
"These securities have not been registered under the Securities
Act of 1933, as amended. They may not be sold, offered for sale,
pledged or hypothecated in the absence of a registration
statement in effect with respect to the securities
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under such Act or an opinion of counsel reasonably acceptable to
Hearing that such registration is not required or unless sold
pursuant to Rule 144 of such Act."
4. Technical Cooperation; Joint Venture Option.
4.1 From and after the date of the exercise in full by Misonix of the
First Warrant, Misonix shall have the option (the "Product Option"), but not
the obligation, to supply Hearing's requirements of products (or product
components) utilizing ultrasonic technology. The exercise of the Product Option
shall be subject to the following terms and conditions:
(a) upon request by Misonix, Hearing shall furnish to Misonix
(i) all specifications (the "Specifications"), including, without
limitations, required regulatory standards for manufacture,
applicable to any product or product component (each an "Option
Product") as to which Misonix has indicated an interest in supplying
to Hearing and (ii) a true and complete statement setting forth
Hearing's total costs ("Costs") of manufacturing or acquiring such
Option Product (including, in the case of Option Products
manufactured by Hearing, reasonable allocations of personnel costs
and manufacturing overheads directly related to the manufacture or
acquisition of such Option Product and reasonable allocations of
general corporate overheads), which statement shall describe each
material component of such Costs in reasonable detail. In the case of
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Option Products acquired by Hearing from third party suppliers,
"Costs" shall mean Hearing's total actual out-of-pocket costs in
acquiring its requirements of such products. Misonix hereby agrees
that it shall treat such Specifications and Costs as confidential and
proprietary information of Hearing, shall use such Specifications and
Costs solely for the purposes contemplated by this Section 4.1 and
shall not disclose such Specifications or Costs to any third party
without the prior written approval of Hearing. The Specifications and
Costs with respect to an Option Product are referred to collectively
hereinafter as the "Product Data." Whenever a determination of Costs
is required to be made pursuant to the provisions of Subsection
4.1(d), such determination shall refer to Costs determined as of such
time.
(b) Misonix may exercise the Product Option as to any Option
Product by delivering to Hearing, within 60 days of the receipt of
the Product Data as to such Option Product, Misonix's written offer
to supply such Option Product manufactured in accordance with the
Specifications and for a price no greater than the Costs of such
Option Product.
(c) Hearing agrees that, upon exercise of the Product Option by
Misonix, Hearing shall continue to purchase its requirements of the
Option Product as to which the Product Option has been exercised from
Misonix, provided that such Option Product conforms to the
Specifications (as they may be amended by mutual agreement of the
parties) in all material respects and the
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price charged by Misonix is no greater than the applicable Costs.
Hearing reserves the right to discontinue purchasing any Option
Product from Misonix in the event that Misonix fails to deliver such
Option Product on a timely basis or the Option Product supplied fails
to comply in all material respects with the applicable Specifications
(in each case, after reasonable notice by Hearing and a reasonable
opportunity by Misonix to cure).
(d) With respect to Option Products being manufactured by
Misonix for Hearing pursuant to this Section, Misonix shall be
entitled to increase the purchase price to Hearing no more than once
per year to reflect actual increases in Misonix's costs in
manufacturing such Option Product. In connection with any such
proposed increase, Hearing may discontinue purchasing such Option
Product from Misonix if the increased price proposed by Misonix would
exceed Hearing's Costs, as determined above, unless Misonix agrees to
continue to supply such Option Product at Hearing's Costs (determined
based on Hearing's actual intended alternative source of supply at
such time), in which case Hearing shall continue to purchase its
requirements of such Option Product from Misonix. Misonix shall have
the right to review, subject to appropriate safeguards of
confidentiality, all data underlying the determination of Costs and,
in the event of any disagreement concerning the determination of
Costs, the parties agree to meet and negotiate in good faith a
resolution of such disagreement on a basis consistent with the
intentions of this Section 4.1.
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Notwithstanding the foregoing, Costs shall be recalculated more
frequently than once per calendar year in the event either party
becomes aware of any development in the relevant marketplace which
reasonably indicates that Costs applicable to an Option Product are
materially incorrect as a result of such development.
4.2 From and after the exercise in full of the First Warrant, Misonix
shall have the option, but not the obligation, to require Hearing to enter into
a joint venture agreement (the "Joint Venture Agreement") having the terms and
conditions, and in substantially the form, as annexed hereto as Schedule J.
4.3 Hearing represents that it does not, and will not, have any
agreements with or commitments to any other person or entity which conflict
with, or will conflict with, any of Hearing's obligations to Misonix which
arise, or may arise, under any Product Option transaction or under the Joint
Venture Agreement.
5. Covenants of Hearing.
5.1 Reservation of Stock. Hearing shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, for the
purpose of allowing Misonix to exercise the Preferred Stock conversion right
and exercise the First Warrant and the Second Warrant, that number of shares of
Common Stock issuable upon conversion of all the Preferred Stock and exercise
o0f all the Warrants (subject to adjustment as provided by the terms set forth
in the governing instruments
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thereof).
5.2 Board of Directors. Michael A. McManus, Jr. has been duly
appointed as a fully voting member of the Board of Directors of Hearing (the
"Board of Directors"). Hearing agrees that Misonix shall be entitled to
maintain Mr. McManus (or another designee of Misonix to which Hearing shall
have no reasonable objection) as a member of Hearing's Board of Directors, and
Hearing agrees that in submitting to its shareholders or Board of Directors the
name of any Misonix nominee, to which Hearing shall have no reasonable
objection, for election as a director or appointment to fill an interim vacancy
relating to any nominee, Hearing will use its best efforts to cause the person
so nominated by Misonix to be elected as director of Hearing. Such Misonix
nominee shall be permitted, at his option, to serve on all committees of the
Board, including the Executive Committee. In addition, Misonix shall be
entitled to designate an individual to which Hearing shall have no reasonable
objection to attend meetings of Hearing's Board of Directors as a non-voting
observer, subject to appropriate and customary confidentiality undertakings by
such observer. Hearing's obligations pursuant to this Section shall expire and
be of no further force or effect upon the consummation by Hearing of an
underwritten public offering of shares of Common Stock resulting in gross
proceeds to Hearing of $5,000,000 or more. Until the expiration of such
obligations, Hearing agrees that its Board of Directors shall not consist of
more than six members.
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5.3 Use of Proceeds. Hearing agrees that the net proceeds from the sale of the
Preferred Stock to Misonix shall be used solely for the purposes described in
Section 5.3 of the Disclosure Schedule and, based on current estimates which
Hearing believes to be reasonable, substantially in accordance with the dollar
amounts set forth in said Schedule.
5.4 Additional Options. Hearing agrees that, except with the approval
of the Misonix designee to Hearing's Board of Directors, from and after the
date hereof, Hearing shall not issue or grant options or other rights to
purchase shares of Common Stock to officers, directors, employees or
consultants in an aggregate amount which exceeds 300,000 shares (as such number
is adjusted for stock splits, stock dividends or similar recapitalization
transactions following the date hereof but excluding the effect of dividends
paid on the Preferred Stock in shares of Common Stock). Hearing's obligations
pursuant to this Section shall be of no further force or effect upon the first
to occur of (i) the expiration of the First Warrant in accordance with its
terms without exercise in full by Misonix and (ii) the consummation by Hearing
of a financing (whether or not a public offering of securities and including
debt, equity or joint venture financing) resulting in gross proceeds to Hearing
of $3,000,000 or more.
5.5 Right of First Refusal. Hearing agrees that it will not sell all,
or substantially all, of its assets, or merge or combine with any other entity
or enter into any binding
30
agreement with respect to any of the foregoing (each a "Transaction") unless
Misonix has first been offered the opportunity to acquire such assets from
Hearing or acquire outstanding Common Stock of Hearing for an aggregate
consideration equal to the consideration being proposed for such Transaction.
In the event Hearing proposes to effect a Transaction, it will notify Misonix
of the terms and conditions thereof (including the identity of the other party
or parties and the kind and amount of consideration to be paid). Misonix shall
have a period of thirty (30) days after receipt of Hearing's notice to notify
Hearing whether or not Misonix is willing to negotiate to consummate the
proposed Transaction on the terms and conditions set forth in Hearing's notice.
In the event Misonix so notifies Hearing within such period, the parties shall
negotiate in good faith to conclude such Transaction. In the event, despite
such good faith negotiations, Hearing and Misonix have not executed a binding
legal agreement to consummate such Transaction within sixty (60) days following
the Misonix notice, Hearing shall be free to conclude the Transaction with the
third party or parties originally identified by Hearing on terms and conditions
no more favorable to such third party than proposed for the Transaction with
Misonix. Hearing's obligations pursuant to this Section shall expire at the
time provided for the expiration for Hearing's obligations pursuant to Section
5.4.
6. Miscellaneous.
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6.1 Successors and Assigns. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties. Nothing in
this Agreement, express or implied, is intended to confer upon any party other
than the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
6.2 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of New York as without giving effect to its
principles of conflicts of law.
6.3 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
6.4 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.5 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery (whether by United States mail or
reputable express delivery service) addressed to the party to be notified at
the address indicated for such party on the first page hereof, or at such other
address as such party may designate by ten (10) days'
32
advance written notice to the other parties.
6.6 Finder's Fee. Each party agrees to indemnify and to hold the other
harmless from any liability for any commission or compensation in the nature of
a finders' fee (and the costs and expenses of defending against such liability
or asserted liability) for which such party or any of its officers, partners,
employees, or representatives is responsible.
6.7 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 Hearing and Misonix.
6.8 Severability. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
6.9 Entire Agreement. This Agreement and the documents referred to
herein constitute the entire agreement among the parties and no party shall be
liable or bound to any other party in any manner by any warranties,
representations, or covenants except as specifically set forth herein or
therein.
6.10 Survival of Terms. Any obligations set forth herein which
expressly provide for performance or obligations beyond the date of this
Agreement shall be deemed to survive for
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the period of such performance or obligation.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
HEARING INNOVATIONS INCORPORATED
By:________________________________
MISONIX, INC.
By:________________________________
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