SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule14a6(e)(2))
NATIONAL SCIENTIFIC CORPORATION
------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(I)(4) and 0-11:
(1) Title of each class of securities to which transaction applies;
(2) Aggregate number of securities to which transaction applies;
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11. (Set forth the amount on which the
filing fee is calculated and state how it was determined.);
(4) Proposed maximum aggregate value of transaction;
(5) Total fee paid.
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number or the
Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement Number:
(3) Filing party:
(4) Date filed.
NATIONAL SCIENTIFIC CORPORATION
14455 N. HAYDEN ROAD, SUITE 202
SCOTTSDALE, ARIZONA 85260-6947
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 31, 2004
To the Shareholders of National Scientific Corporation:
Notice is hereby given that the Annual Meeting of Shareholders of National
Scientific Corporation, a Texas corporation (NSC), will be held on Wednesday,
March 31, 2004, at National Scientific Corporation, 14455 North Hayden Road,
Suite 202, Scottsdale, Arizona, 85260-6947 at 10:00 a.m., local time, for the
following purposes:
1. To elect three directors to the Board of Directors to serve for a
one-year term.
2. To recommend the appointment of Hurley & Company to serve as the
auditors for the Company for the fiscal year ending September 30,
2004.
3. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
Shareholders of record at the close of business on February 3, 2004 (the "Record
Date"), are entitled to vote at the Annual Meeting or any adjournment or
postponement thereof. Shares may be voted at the Annual Meeting only if the
holder is present or represented by proxy. A list of shareholders entitled to
vote at the Annual Meeting will be available for inspection at the Company's
corporate headquarters for any purpose germane to the Annual Meeting during
ordinary business hours for ten (10) days prior to the Annual Meeting.
A copy of NSC's Annual Report to Shareholders, which includes audited financial
statements, is included with this mailing, which is being first mailed on or
about February 20, 2004. Management and the Board of Directors cordially invite
you to attend the Annual Meeting.
By Order of the Board of Directors
/s/ Graham L. Clark
Graham L. Clark, Secretary
Phoenix, Arizona
January 30, 2004
SHAREHOLDERS ARE ENCOURAGED TO SIGN, DATE AND MAIL THE ENCLOSED PROXY. A
PRE-ADDRESSED ENVELOPE IS PROVIDED FOR THEIR CONVENIENCE. SHAREHOLDERS ARE
ENCOURAGED TO VOTE REGARDLESS OF WHETHER OR NOT THEY ATTEND THE ANNUAL MEETING
OF SHAREHOLDERS.
NATIONAL SCIENTIFIC CORPORATION
14455 NORTH HAYDEN ROAD, SUITE 202
SCOTTSDALE, ARIZONA 85260-6947
PROXY STATEMENT
2004 ANNUAL MEETING OF SHAREHOLDERS
MARCH 31, 2004
This Proxy Statement is furnished by the Board of Directors of National
Scientific Corporation, a Texas corporation (the "Company" or "NSC"), in
connection with the solicitation of proxies to be used for the purposes of
voting at the 2004 Annual Meeting of Shareholders (the "Annual Meeting") of the
Company. The Annual Meeting will be held on Wednesday March 31, 2004, at 10:00
a.m., local time at National Scientific Corporation, 14455 North Hayden Road,
Suite 202, Scottsdale, Arizona, 85260-6947.
SOLICITATION AND VOTING OF PROXIES
The enclosed proxy is solicited by the Board of Directors of the Company.
The proxy materials related to the Annual Meeting are to be mailed on or about
February 20, 2004, to shareholders of record at the close of business on
February 3, 2004 (the "Record Date"). Only shareholders of record at the close
of business on the Record Date will be entitled to vote at the Annual Meeting,
or any adjournment or postponement thereof, either in person or by valid proxy.
As of the Record Date, there are approximately 73,614,465 outstanding shares of
Common Stock, $.01 par value per share (the "Common Stock") of the Company.
Shareholders are entitled to one vote for each share of Common Stock held
of record on each matter of business to be considered at the Annual Meeting.
Ballots cast at the Annual Meeting will be counted by the Inspector of Elections
and determinations of whether a quorum exists and whether the proposals are
approved will be announced at the Annual Meeting. The three nominees receiving a
plurality of votes by shares represented and entitled to vote at the Annual
Meeting, if a quorum is present, will be elected as directors of the Company.
All valid proxies received before the Annual Meeting and not revoked will
be exercised. All shares represented by proxy will be voted, and where a
shareholder specifies by means of his, her or its proxy a choice with respect to
any matter to be acted upon, the shares will be voted in accordance with the
specifications so made. If no specification is indicated and authority to vote
is not specifically withheld, the shares will be voted (i) "for" the election of
the persons named in the proxy to serve as Directors; and (ii) "for" the
recommendation of Hurley & Company as the independent auditors of the Company.
The Inspector of Elections will treat abstentions and broker non-votes received
as shares that are present and entitled to vote for purposes of determining a
quorum, but as unvoted for purposes of determining the approval of any matter.
If a broker indicates on the proxy that it does not have discretionary authority
as to certain shares to vote on a particular matter, those shares will not be
considered as present and entitled to vote with respect to that matter.
The Company will bear the cost of the solicitation of proxies, including
the charges and expenses of brokerage firms and others for forwarding
solicitation materials to the beneficial owners of the outstanding Common Stock.
In addition to soliciting proxies by mail, proxies may be solicited by personal
interview or telephone. A person giving the enclosed proxy has the power to
revoke it at any time before it is exercised by: (i) attending the Annual
Meeting and voting in person; (ii) duly executing and delivering a proxy bearing
a later date; or (iii) sending a written notice of revocation to the Secretary
of the Company at its corporate offices. The corporate offices of the Company
are located at 14455 North Hayden Road, Suite 202, Scottsdale, Arizona
85260-6947 and its telephone number is (480) 948-8324.
The information included herein should be reviewed in conjunction with the
financial statements, notes to financial statements, independent accountants'
report and other information included in the Company's 2004 Annual Report to
Shareholders that was mailed with this Proxy Statement to all shareholders of
record on the Record Date. The Board of Directors knows of no other matters that
may be brought before the Annual Meeting. However, if any other matters are
properly brought before the Annual Meeting, persons named in the enclosed proxy
or their substitutes will vote in accordance with their best judgment on such
matters.
ELECTION OF DIRECTORS
The Board of Directors of NSC (the "Board") has recommended the election of
three directors. The Board recommends that the shareholders elect the nominees
named below as directors of NSC for the ensuing year and until their successors
are elected and qualified. The persons named in the enclosed form of proxy
intend to vote for the election of the three nominees listed below. Mr. Grollman
is Chairman of the Board, and Mr. Clark is currently serving as Secretary and a
director, and Mr. Szabo is current serving as an outside director. Each nominee
has indicated a willingness to serve, but in the event any one or more of such
nominees for any reason should not be available as a candidate for director,
votes cast will be cast pursuant to authority granted by the enclosed proxy for
such other candidate or candidates as may be determined by the holders of such
proxy. The Board knows of no reason to anticipate that any of the nominees will
not be a candidate at the Meeting.
Name Current Position With NSC Age
- ---- ------------------------- ---
Michael A. Grollman Chief Executive Officer and 42
Chairman of the Board
Graham L. Clark President, Director, Secretary 49
Gregory Szabo Director (Outside) 50
MICHAEL A. GROLLMAN first became Chief Operating Officer in October 2000.
We appointed Mr. Grollman our President in April 2001, Chief Executive Officer
in January of 2002, Chairman of the Board in December 2002, and Acting Chief
Financial Officer in June of 2003. From 1998 to September 2000, Mr. Grollman
served as Regional Service Director of MicroAge, Inc., a company that provides
customer-configured technology solutions to businesses. He served as General
Manager, Executive Vice President and Chief Technology Officer for Advanced
Information Systems from 1987 to 1998. Mr. Grollman received his Bachelor of
Science degree in chemistry from the State University of New York, and his MBA
from Arizona State University.
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GRAHAM L. CLARK joined the Company in early 2001 as leader of the sales
organization. He became Vice President of Technology Applications & Sales for
National Scientific in the spring of 2002, a Director in August of 2002, and
became Corporate Secretary in January of 2003. Mr. Clark was promoted to
President of the Corporation in September of 2003. Before joining National
Scientific, Mr. Clark was the General Manager of the Billet Precision
Engineering Group, a privately held start-up manufacturing company providing
custom engineering and manufacturing solutions to the semiconductor industry and
other related industries. Prior to his tenure with Billet, he worked as
Corporate General Manager for Amtech Systems, a publicly traded semiconductor
equipment manufacturer. Six years prior, he was a founder and senior partner of
GC Technology, a private representative organization for semiconductor capital
equipment.
GREGORY SZABO joined the Company's board on October 1, 2003 as an outside
Director. Mr. Szabo serves on the Board's Audit and Compensation Committees. Mr.
Szabo currently serves as President of Exten Corp. and CEO of MultiCell
Technologies, where he is responsible for public reporting, fund-raising for the
corporation and overall accountability for its subsidiaries, including revenue
generation, intellectual property protection and organizational development.
Prior to joining Exten, Mr. Szabo was president & CEO of Titan Scan Corporation,
a division of Titan Corporation, a $350M firm with subsidiaries in
sterilization, defense, software and communications. Mr. Szabo has held several
executive positions with Sunrise Medical Inc., a large global manufacturer, and
distributor of numerous institutional and retail products. Mr. Szabo earned a BA
in Psychology from the University of Toledo and a MA in Management from the
Drucker Graduate School at Claremont University.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE FOR EACH NOMINEE "FOR" THE
BOARD OF DIRECTORS.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
The business of NSC is managed under the direction of the Board. The Board
meets on a regularly scheduled basis to review significant developments
affecting NSC and to act on matters requiring Board approval. It also holds
special meetings when an important matter requires Board action between
scheduled meetings. The Board met ten (10) times during fiscal 2003 and did not
act by consent in lieu of any meetings. Each serving director attended 100% of
the meetings held in 2003 by the Board and the committees of the Board on which
such director served.
On September 30, 2003 Lou L. Ross, retired from the Board. He stated his
decision to retire was not related to any conflict with Board or Company policy.
Prior to August 2002, directors of NSC who are not employees of NSC were
compensated at a rate of $2,000 cash per month and $100 per Board meeting, with
the then-Chairman, Mr. Ross receiving an additional $500 per month Chairman's
fee. In August 2002 and forward, the Company determined it would reduce in cash
board expenses, and pay non-Employee directors $2,000 per month in NSC
restricted Common Stock, and make no cash payments for any Board members. Mr.
Ross was compensated on this basis of $2,500 per month in restricted Company
Common Stock, paid quarterly, through January 2003. Starting in February 2003,
Mr. Ross agreed to take an additional reduction in his director's fees for the
period from February 2003 to the end of September 2003, and accept 50,000 shares
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of NSC restricted Common Stock in lieu of cash for these board services total,
or approximately $1,000 per month for the period. The stock was issued to him on
June 11, 2003.
As of September 30, 2003, the Company had one committee, the Audit
Committee. During most of fiscal 2003, Michael A. Grollman was the sole member
of the Audit Committee. On October 1, 2003 Gregory Szabo joined the Board and
will serve on the Board's Audit and Compensation Committees, and Mr. Grollman
will no longer serve on the Audit Committee.
All new directors appointed after the end of fiscal year 2002 (employee or
non-employee) will be provided with a one-time grant of 20,000 shares of NSC
restricted Common Stock upon original appointment to the Board. This stock will
be subject to forfeiture back to the Company should the Director for any reason
not serve a full term on the Board at least up to the next annual meeting of
shareholders.
Current employee-directors are not paid cash or stock for board service,
but are expected to provide board service as a part of their standard
compensation from the Company.
Non-employee directors will also be paid $1,250 per Board meeting, which
includes telephone board meetings as well as face-to-face board meetings. This
$1,250 fee will be in the form of $250 cash and $1,000 of NSC restricted common
stock. The restricted Common Stock will be at risk of forfeiture back to the
Company if the director does not serve his complete term out to the next annual
shareholders' meeting. This fee will not be paid for telephone conversations
involving board members or others where no formal board meeting has been
declared, or for normal committee meetings.
Non-employee directors will also be paid retrospectively a quarterly
retainer of 10,000 options (as defined in the 2000 NSC Stock Option Plan) to
purchase free trading the Company's common stock at the end of each fiscal
quarter they have served. The options will be immediately vested at point of
grant, and will be issued at a strike price equal to the average closing price
for the Company's common stock for that quarter.
Non-employee directors who serve on a board committee, such as the audit,
nominating, or compensation committees, will also be paid retrospectively a
quarterly additional retainer of 10,000 options (as defined in the 2000 NSC
Stock Option Plan) to purchase free trading common stock at the end of each
fiscal quarter they have served. The options will be immediately vested at point
of grant, and will be issued at a strike price equal to the average closing
price for the Company's common stock for that quarter. Non-employee directors
who serve on multiple committees will be paid this bonus only once for general
committee service, however, as it is not paid for each committee of service.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth certain information, as of the Record Date,
concerning the beneficial ownership by (i) each fiscal year 2003 director and
fiscal year 2004 nominee of the Company, (ii) each of the Company's named
executive officers, (iii) each person known to the Company to be the beneficial
owner of more than five percent (5%) of NSC's outstanding Common Shares, and
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(iv) all directors and executive officers of the Company as a group. To the
knowledge of the Company, all persons listed in the table have sole voting and
investment power with respect to their shares, except to the extent that their
respective spouses share authority under applicable law.
Number of
Common Shares Percent of
Name and Address of Beneficially Outstanding
Beneficial Owner (1) Owned (2) Shares
- ------------------------ ------------- -----------
Michael A. Grollman 4,066,000 (3) 5.5%
Lou L. Ross 3,164,644 (4) 4.3%
Graham L. Clark 1,451,667 (5) 2.0%
Gregory Szabo 53,333 (6) 0.1%
All executive officers and directors
as a group (4 persons) 8,735,644 11.9%
- ------------
(1) The business address for all directors and officers of the Company is c/o
the Company, 14455 North Hayden Road, Suite 202, Scottsdale, Arizona
85260-6947.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from the date set forth above through the exercise
of any option, warrant or right. Shares of Common Stock subject to options,
warrants or rights that are currently exercisable or exercisable within 60
days are deemed outstanding for computing the percentage of the person
holding such options, warrants or rights, but are not deemed outstanding
for computing the percentage of any other person. The amounts and
percentages are based upon the approximately 73,614,465 shares of Common
Stock outstanding as of January 28, 2004.
(3) Includes 1,050,000 shares underlying currently exercisable stock options
and warrants, and 2,750,000 shares of restricted Common Stock subject to
substantial risk of forfeiture.
(4) Includes 1,000,000 shares held by Mr. Ross' wife.
(5) Includes 326,667 shares underlying currently exercisable stock options and
warrants and 1,000,000 shares of restricted Common Stock subject to
substantial risk of forfeiture.
(6) Includes 20,000 shares underlying currently exercisable stock options and
warrants and 33,333 shares of restricted Common Stock subject to
substantial risk of forfeiture. A Form 3 report was filed on January 28,
2004 describing the issuance of these options and shares.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, as well as persons beneficially
owning more than 10% of the Company's outstanding Common Stock, to file certain
reports of ownership with the Commission within specified time periods. Such
officers, directors and shareholders are also required by Commission's rules to
furnish the Company with copies of all Section 16(a) forms they file.
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Based solely on its review of such forms, all requirements received by it,
or written representations from certain reporting persons, the Company believes
that between October 1, 2002 and September 30, 2003, all Section 16(a) filing
requirements applicable to its officers, directors and 10% shareholders were
met.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding annual and
long-term compensation for services rendered to the Company during the fiscal
years ended September 30, 2003, 2002, and 2001 to the Chief Executive Officer of
the Company, and other named executive officers who served NSC in fiscal year
2003 and whose total salary and non-cash compensation exceeded $100,000 for the
applicable fiscal periods. The table below includes salary earned and paid in
the fiscal year ending September 30, 2003, and also salary earned in that year
but as yet unpaid as of December 31, 2003.
SUMMARY COMPENSATION TABLE
Annual Compensation
---------------------------------------
Salary Other Annual
Fiscal Salary Paid Deferred Compensation
Name and Principal Position Year ($)(1) ($)(1) ($)(2) Total
- -------------------------- ------ ----------- -------- ------------ -------
Michael A. Grollman, CEO, Chairman (3) 2003 64,640 73,292 -- 137,932
2002 138,000 43,500 78,750 260,250
2001 172,500 -- 165,000 337,500
Graham L Clark, President, Director (4) 2003 69,639 52,289 -- 121,928
2002 104,400 15,600 63,000 183,000
2001 120,000 -- -- 120,000
Lou L. Ross, Chairman-Emeritus of the Board (5) 2003 -- -- 17,650 17,650
2002 86,000 12,700 4,500 103,200
2001 120,465 -- -- 120,465
Sam H. Carr (6) 2003 -- -- 32,362 32,362
2002 160,275 -- 34,166 194,441
2001 158,075 -- 138,000 296,075
- ------------
(1) Unpaid wages in this table are subject to Agreements with listed persons
that allow for interest of approximately prime rate plus 2% to accrue on
those unpaid wages until paid. These accruals for interest are shown as
approximate through fiscal year-end September 2003.
(2) Stock grants included in this column are for restricted Common Stock shares
valued at 90% of the closing sales price for such shares on the date of
grant. Closing sales price at fiscal year end September 2002 was
approximately $.07 per share, and closing sales price at fiscal year end
September 2003 was approximately $.15 per share.
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(3) For 2003 salary of $70,360 was not paid in cash, but deferred to a future
period, along with $2,932 estimated interest on this unpaid amount. For
2002 salary of $43,500 was not paid in cash, but deferred to a future
period, along with $1,500 estimated interest on this unpaid amount.
Subsequent to year end of September 2002, Mr. Grollman exchanged $10,000 of
this deferred salary for a B Unit in the Company's November 2002 Private
Placement Offering for 125,000 shares of restricted stock and 100,000
Common Stock purchase warrants exercisable at a price of $.50 per share,
thus reducing 2002 unpaid wages for that year to $33,500. Other
Compensation for 2002 also includes $78,750 for restricted Common Stock
grants subject to risk of forfeiture if calendar 2004 sales do not meet or
exceed key targets, and in exchange for salary reduction in calendar year
2003 of $60,000 (See Note 2 above and Employment Agreements below). Also
subsequent to fiscal 2003 year-end, Mr. Grollman deferred substantially all
his October and November salary of $10,000 each month to a future period,
and this amount of $19,900 remains unpaid. From September 2002 Mr.
Grollman's share of contributions to the Company's health insurance program
of approximately $6,600 were deducted from the balance of wages owing,
leaving as of the end of December 2003,unpaid wages of approximately $
117,000, accrued vacation pay of approximately $60,000 and accrued interest
of approximately $7,000 for a combined total of approximately $184,000.
(See Employment Agreements below).
(4) For 2003 salary of $50,360 was not paid in cash, but deferred to a future
period, along with $ 1,929 estimated interest on this unpaid amount. For
2002 salary of $15,600 was not paid in cash, but deferred to a future
period. Subsequent to year end September 2002, Mr. Clark exchanged $10,000
of deferred salary for a B Unit in the Company's November 2002 Private
Placement Offering for 125,000 shares of restricted stock and 100,000
Common Stock purchase warrants exercisable at a price of $.50 per share.
Other Compensation for 2002 also includes $63,000 for restricted Common
Stock grants subject to risk of forfeiture if 2004 sales do not meet or
exceed key targets (See Note 2 above and Employment Agreements below). Also
subsequent to September 30, 2003 year end, Mr. Clark deferred substantially
all his October and November salary of $10,000 each month to a future
period, and this amount of $19,900 remains unpaid. From September 2002 Mr.
Clark's share of contributions to the Company's health insurance program of
approximately $7,900 were deducted from the balance of wages owing, leaving
as of the end of December 2003, unpaid wages of approximately $ 68,000,
accrued vacation pay of approximately $19,000 and accrued interest of
approximately $3,000 for a combined total of approximately $90,000. (See
Employment Agreements below).
(5) Other Compensation for 2003 and 2002 includes restricted Common Stock
grants paid as Board fees. Mr. Ross resigned as an employee in January of
2002, and as a director in September 2003. (See Employment Agreements
below).
(6) Other Compensation for 2003 includes $32,362 of contractor fees for
services rendered in the six months to March 2003, of which approximately
$17,083 remains unpaid. For 2002 salary of $30,173 was not paid out in
cash, but deferred to a future period, and remains unpaid, including all
accrued vacation through July 2002, plus an estimated $1,500 in interest
through September 30, 2002. Other Compensation for 2002 includes $34,166 of
contractor fees for services rendered in August and September of 2002, of
which $21,337 remains unpaid. Subsequent to year ending September 2002,
$10,000 of other deferred contractor fees was exchanged by Mr. Carr for an
A Unit in the Company's November 2002 Private Placement Offering for
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250,000 shares of restricted stock and 100,000 Common Stock purchase
warrants exercisable at a price of $.30 per share. Other Compensation in
2001 for Mr. Carr includes the value of options granted at an exercise
price below the market value of the stock on the date of grant. Mr. Carr
resigned in July 2002 as an employee and a director. (See Employment
Agreements below).
EMPLOYMENT AGREEMENTS
Throughout fiscal 2000, Mr. Ross was engaged as an independent contractor
for the Company. As such, Mr. Ross was paid a monthly fee of $9,500, subject to
cash availability. Effective December 1, 2001, Mr. Ross became an employee of
the Company. Throughout fiscal 2001 and continuing into the current fiscal year,
Mr. Ross served without a written contract and was paid $9,500 monthly. In
addition, in connection with an equity transaction involving Mr. Ross and his
spouse in September 1999, the Board granted Mr. Ross the right to receive 4% of
the gross revenues of NSC. In partial consideration for the forgiveness of this
right to 4% of NSC's future revenues, the Company agreed to issue 500,000
restricted shares of Common Stock in NSC to Mr. Ross. The 500,000 shares are
subject to the terms of a Restricted Stock Award Agreement, which required that
the shares issued be released only when the market price of the stock exceeds
$2.50 per share.
Subsequent to fiscal year end 2001, the Company granted Mr. Ross options to
purchase an aggregate of 750,000 shares of Common Stock. These options consist
of ten separate tranches of 75,000 shares each, whose exercise prices range from
$1 to $10 per share, which vest when the previous five day average market price
exceeds even dollar levels beginning with $1 per share through $10 per share. On
September 30, 2003, these options were forfeited and returned to the company per
previous employment and other agreements with Mr. Ross.
In February of 2002, Mr. Ross resigned as an employee of NSC, and became a
part-time contractor for the Company, paid at a rate of $10,000 per month, of
which 20% would be deferred until a future date. The term of the agreement was
two years and it required that Mr. Ross provide management-consulting services
to the Company of approximately 80 hours per month, and to serve as a director.
In July 2002 NSC and Mr. Ross amended the contract to eliminate mandatory
monthly minimum cash payments and minimum hours per month for on-going
consulting duties outside of his role as a director. Per Mr. Ross's contract he
was paid a director's fee of $2,500 per month in NSC restricted Common Stock,
which the Company has issued through January 2003. For the period from February
2003 to September 30, 2003 Mr. Ross agreed to take a reduction in his director's
fees and accept 50,000 shares of the Company's restricted Common Stock in lieu
of cash for these board services. Mr. Ross retired from the board on September
30, 2003. Unless renewed, his contract as a consultant with the Company is
scheduled to end in February 2004.
Mr. Grollman was engaged by NSC as an independent contractor from October
7, 2000 until November 30, 2000. He was paid $15,000 monthly for his services as
an independent contractor. Effective December 1, 2000, Mr. Grollman became an
employee of NSC under a one-year contract to serve as NSC's Chief Operating
Officer. Mr. Grollman was promoted to President in April 2001. The contract
automatically renews for additional one-year terms unless either party chooses
to terminate, and it remains in force through at least calendar year 2004. Mr.
8
Grollman's contract calls for an annual gross salary of $180,000, payable
semi-monthly. Also in accordance with the contract, on December 1, 2000, NSC
granted Mr. Grollman 100,000 shares of restricted Common Stock, subject to risk
of forfeiture should Mr. Grollman not fulfill his employment agreement. Also on
December 1, 2000, NSC granted Mr. Grollman 500,000 vested options to purchase
Common Stock at the closing sales price of the Common Stock on December 1, 2000.
Additional option grants are included in Mr. Grollman's employment contract for
each whole dollar amount increase in the market value of NSC's Common Stock. The
whole dollar amount increase is measured over a moving two-week average. For
each whole dollar amount attained between $1 and $15 inclusive, Mr. Grollman
will receive 75,000 options at the whole dollar amount option price. Mr.
Grollman is also entitled to additional options at various but declining levels
for increases in stock value up to $50 per Common Share. In the event of a
change in control or sale of substantially all the assets of NSC, the employment
agreement between Mr. Grollman and NSC automatically terminates, and Mr.
Grollman is to receive one hundred fifty percent (150%) of the then current
year's annual salary.
In January of 2002 Mr. Grollman agreed to defer 20% of his salary until
such a time as cash was more available, reducing his immediately payable cash
salary to $12,000 per month. For September, October, and November of 2002, Mr.
Grollman deferred 100% of his payable salary, reducing his immediately payable
cash salary to $0 per month. Mr. Grollman agreed from January 2003 through
December 2003 to reduce his total payable salary for the 2003 year to $120,000
per year. In addition to this reduction, during the year ended September 30,
2003 Mr. Grollman deferred $70,360 of his salary and was paid $64,640 in cash.
For the three months ending December 31, 2003, Mr. Grollman deferred $19,900 in
salary and was paid $10,100 in cash. For calendar year 2004, Mr. Grollman agreed
to defer up to $30,000 of his contracted pay as needed.
In September 2002, the Company's Board initiated a restricted stock
retainage program ("Stock Retainage Program") to retain key staff during a
period of financial difficulty in calendar year 2002. The Company allocated
approximately $150,000 in restricted Common Stock from this Stock Retainage
Program pool of shares, to be granted to key employees during the year, subject
to the Company exceeding sales growth objectives and expense reduction
objectives in 2003. Failure to meet these objectives under the plan would result
in the forfeiture by staff of this entire stock grant by all participants. These
goals were not met in calendar year 2003. In January of 2004, the Company's
Board extended this program into 2004, and set new sales growth objectives for
the year at a level 50% higher than the previous year's program, giving plan
participants an additional year to fully earn this stock grant. On August 19,
2003, a participant of the plan left the company and his grant of 800,000 shares
were forfeited back to the company at the average market price per share of
$0.15. On September 30, 2003 the $120,000 resulting from the forfeiture was
allocated to the plan. It is the intention of the Company to issue all or part
of these shares during the first quarter of 2004.
Mr. Grollman was granted 750,000 shares of stock from this Stock Retainage
Program pool of shares, subject to the Company achieving in excess of $400,000
in sales in calendar year 2004. Mr. Grollman was granted an additional 500,000
shares of stock under this program, subject to sales exceeding $1,500,000 for
calendar year 2004.
9
In December 2003 Mr. Grollman agreed to convert approximately $150,000 of
his back pay and accrued vacation pay (See Summary Compensation Table above -
note 4) to the Company's restricted Common Stock, at a rate equal to the then
currently available private placement share price of $0.10 per share. Mr.
Grollman took constructive receipt of this restricted stock in January of 2004.
The board has also determined that it may grant approximately 500,00
additional options to Mr. Grollman in calendar year 2004 based on the
achievement of calendar year 2004 business objectives, including such areas as
product development and customer base development. Such a plan has not yet
received final board approval.
Mr. Clark was hired in December 2000 as manager of the sales organization.
He was hired as an at-will employee at a rate of $120,000 per year base salary,
plus commission on sales. He became Vice President of Technology Applications &
Sales for National Scientific in September 2001, and a director and formally an
officer of the corporation in August of 2002. In January of 2003, Mr. Clark
entered into a one-year employment contract with the Company to serve as Vice
President of Technology Applications & Sales. In June of 2003 Mr. Clark was
promoted to President of the Company. The contract automatically renews for
additional one-year terms unless either party chooses to terminate. Mr. Clark's
contract provides for an annual gross salary of $150,000, payable monthly. In
the event of a change in control or sale of substantially all the assets of NSC,
the employment agreement between Mr. Clark and NSC automatically terminates, and
Mr. Clark is to receive fifty percent (50%) of the then current year's annual
salary.
For September, October, and November of 2002, Mr. Clark deferred 100% of
his payable salary, reducing his immediately payable cash salary to $0 per
month. During the year ended September 30, 2003 Mr. Clark deferred $50,360 of
his salary and was paid $69,640 in cash. For the three months ending December
31, 2003, Mr. Clark deferred $19,900 in salary and was paid $10,100 in cash.
Mr. Clark was granted 500,000 shares of stock from the Company's Stock
Retainage Program pool of shares discussed above, subject to the Company
achieving in excess of $400,000 in sales in calendar year 2004. Mr. Clark was
granted an additional 500,000 shares of stock under this program, subject to
sales exceeding $1,500,000 for calendar year 2004.
The board has also determined that it may grant approximately 500,00
additional options to Mr. Clark in calendar year 2004 based on the achievement
of calendar year 2004 business objectives, including such areas as product
development and customer base development. Such a plan has not yet received
final board approval.
Mr. Carr served NSC as an independent contractor from October 15, 2000
until November 30, 2000. He was paid $13,750 monthly for his services. Effective
December 1, 2000, Mr. Carr became employed under a one year contract to serve as
NSC's Chief Financial Officer. The contract automatically renews for additional
one-year terms unless either party chose to terminate. Mr. Carr's contract
provided for an annual gross salary of $180,000, payable semi-monthly. Also in
accordance with the contract, on December 1, 2000, NSC granted Mr. Carr 100,000
vested options to purchase Common Stock at a price equal to 25% of the closing
price per share on December 1, 2000. Also on December 1, 2000, NSC granted Mr.
Carr 500,000 vested options to purchase Common Stock at the closing sales price
10
of the shares on December 1, 2000. Additional option grants were included in Mr.
Carr's employment contract for each whole dollar amount increase in the market
value of NSC's Common Shares. The whole dollar amount increase is measured over
a moving two-week average. For each whole dollar amount attained between $1 and
$15 inclusive, Mr. Carr would receive 75,000 options at the whole dollar amount
option price. Mr. Carr was also entitled to additional options at various but
declining levels for increases in stock value up to $50 per Common Share.
From January of 2002 through July of 2002, Mr. Carr deferred 20% of his
salary, subject to future cash availability, reducing his monthly salary cash
payments to $12,000 per month.
In July of 2002, Mr. Carr resigned as CFO and also as an employee and a
director of NSC, and became a full-time non-employee contractor for the Company.
He signed a one-year contract, the terms of which were similar to his previous
employment contract with the Company, although all employee-related benefits
were eliminated, and his hourly rate of pay was changed to approximately $97 per
hour, or approximately $17,000 per month. Mr. Carr's contract provided his
oversight of important financial activities within the Company. In November
2002, the Company and Mr. Carr amended this contract to eliminate his on-going
oversight duties, and to eliminate mandatory monthly payments. Mr. Carr was
retained on this basis during the month of December 2002 to assist with
preparation of the Company's annual 10-KSB report and other matters, for which
he was paid approximately $12,000 in cash. In January 2003 Mr. Carr and the
Company agreed to secure his services as a financial consultant for a minimum
retainer of ten hours per month at a rate of $120 per hour. This retainer
agreement ended on April 1, 2003.
REPORT OF AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee of the Board of Directors (the "Audit Committee") is
responsible for, among other things, reviewing and discussing the audited
financial statements with management, discussing with the Company's auditors
information relating to the auditors' judgments about the quality of the
Company's accounting principles, recommending to the Board of Directors that the
Company include the audited financials in its Annual Report on Form 10-KSB and
overseeing compliance with the Securities and Exchange Commission requirements
for disclosure of auditors' services and activities.
REVIEW OF AUDITED FINANCIAL STATEMENTS
The Audit Committee was established in December 2000. The Audit Committee
met once during calendar year 2003 (see "Committees and Meetings of the Board of
Directors" above). Mr. Greg Szabo heads the Company's Audit Committee as an
outside director, and is currently its sole member. The Board has reviewed the
Company's financial statements for the fiscal year ended September 30, 2003, as
audited by Hurley & Company, the Company's independent auditors. Hurley &
Company has discussed these financial statements with management and the Board
has discussed the audit process and results with Hurley & Company.
AUDIT FEES
Hurley & Company billed the Company approximately $17,000 for the following
professional services: audit of the annual financial statements of the Company
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for the fiscal year ended September 30, 2003, and review of the interim
financial statements included in quarterly reports on Form 10-QSB for the
quarterly periods ended December 31, 2002, March 31, 2003 and June 30, 2003.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
The Company did not engage Hurley & Company to provide services to the
Company regarding financial information systems design and implementation during
the fiscal year ended September 30, 2003.
ALL OTHER FEES
None
OTHER
The Board of Directors has considered whether the provision of non-audit
services is compatible with maintaining Hurley & Company's independence, and has
decided not to secure such services from Hurley & Company at this time.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 2002, Mr. Lou Ross, the former Chairman of the Board, and a
Director until September 30, 2003, was paid for his services as an active member
of the board in shares of restricted common stock, in lieu of cash. The former
Chairman received 66,806 restricted common shares at an average price on the
date of grant of $0.11 per share.
As described in the Company 10-KSB filing for the year ending September 30,
2002, and also in the Company Proxy Statement for 2003 filed January 27, 2003,
the Company's Board initiated on September 30, 2003 a restricted stock retainage
program ("Stock Retainage Program") to retain key staff during a period of
financial difficulty. The Company allocated approximately $150,000 in restricted
Common Stock from this Stock Retainage Program pool of shares in fiscal 2002, to
be granted to key employees during the year, subject to the Company exceeding
sales growth objectives and expense reduction objectives in 2003. Failure to
meet these objectives under the plan would result in the forfeiture by staff of
this entire stock grant by all participants. These goals were not met in
calendar year 2003. In January of 2004, the Company's Board extended this
program into 2004, and set new sales growth objectives for the year at a level
50% higher than the previous year's program, giving plan participants an
additional year to fully earn this stock grant. Initial stock grants under this
program were granted in September 2002 and issued in January of 2003. In August
2003 a participant left the program, and in January 2004 two new participants
were added, although the total number of shares involved has remained
approximately constant since program inception. All of the stock under this
program is restricted under SEC section 144, and cannot be traded by the Stock
Retainage Program participants for at least one year from date of issue.
The Company CEO, Michael Grollman was granted 750,000 shares of stock from
this Stock Retainage Program pool of shares, subject to the Company achieving in
excess of $400,000 in sales in calendar year 2004. Mr. Grollman was granted an
additional 500,000 shares of stock under this program, subject to sales
exceeding $1,500,000 for calendar year 2004. The CEO has an employment contract
12
that includes termination clauses and the granting of stock or options. The
Company's President and Director Graham Clark was granted 500,000 shares of
stock from the Company's Stock Retainage Program pool of shares discussed above,
subject to the Company achieving in excess of $400,000 in sales in calendar year
2004. Mr. Clark was granted an additional 500,000 shares of stock under this
program, subject to sales exceeding $1,500,000 for calendar year 2004. The
majority of the remaining restricted stock allocated under this program was
granted to other Company's staff, and is subject to substantially the same risk
of forfeiture as the stock granted to Grollman and Clark under the Program.
In January 2003, Mr. Lou Ross, was paid for his services as an active
member of the board in shares of restricted Common Stock, in lieu of cash. The
former Chairman received 54,464 restricted Common Stock at an average market
price on the date of grant of $0.14 per share.
In June 2003, the Company issued Mr. Lou Ross, 288,334 restricted Common
Stock as part of its program to lower debt without expending cash resources, in
exchange for the forgiveness of $43,250 of debt, or one half of the total debt
owed by the company to Mr. Ross of $86,500. The debt forgiven included various
disclosed notes, salary deferred in 2002 and board fees deferred in 2002. The
shares were issued at an average market price per share of $0.15. The Company
also issued Mr. Ross, 50,000 restricted Common Stock for reduced Director's fees
for February 2003 through the end of this fiscal year in September 2003. These
shares were issued at an average market price per share of $0.15.
APPROVAL AND RECOMMENDATION OF INDEPENDENT AUDITORS
(PROPOSAL NO. 2)
The Board of Directors has selected Hurley & Company ("Hurley") as the
independent public accountants for the Company for fiscal 2004, and recommends
that the shareholders vote for recommendation of such appointment. Shareholder
recommendation of the selection of Hurley as the Company's independent auditors
is not required by the Company's Bylaws or otherwise. However, the Board is
submitting the selection of Hurley for shareholder recommendation as a matter of
good corporate practice. Hurley has audited the Company's financial statements
since fiscal 1998. Notwithstanding the selection, the Board and its Audit
Committee, at its sole discretion, may direct the appointment of a new
independent accounting firm at any time during the year if the Board feels that
such a change would be in the best interests of the Company and its
shareholders. A representative of Hurley is expected to be present at the Annual
Meeting via teleconference with the opportunity to make a statement if he so
desires and to be available to respond to appropriate questions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR"
THIS PROPOSAL.
PROPOSALS FOR NEXT ANNUAL MEETING
Any shareholder who wishes to present any proposal for shareholder action
at the next Annual Meeting of Shareholders to be held in 2005, must send the
proposal in time for it to be received by the Company's Secretary, at the
Company's offices, not later than Friday, September 24, 2004, in order to be
included in the Company's proxy statement and form of proxy for that meeting.
13
Such proposals should be addressed to the Corporate Secretary, 14455 North
Hayden Road, Suite 202, Scottsdale, Arizona 85260-6947. If a shareholder
proposal is introduced at the 2005 Annual Meeting of Shareholders without any
discussion of the proposal in the Company's proxy statement, and the shareholder
does not notify the Company on or before Friday, September 24, 2004, as required
by SEC Rule 14(a)-4(c)(1), of the intent to raise such proposal at the Annual
Meeting of Shareholders, then proxies received by the Company for the 2005
Annual Meeting will be voted by the persons named as such proxies in their
discretion with respect to such proposals. Notice of such proposal is to be sent
to the above address.
By Order of the Board of Directors
/s/ Graham L. Clark, Secretary
Graham L. Clark, Secretary
Dated January 30, 2004
REQUESTS FOR FORM 10-KSB
UPON WRITTEN REQUEST, NATIONAL SCIENTIFIC CORPORATION WILL FURNISH, WITHOUT
CHARGE TO PERSONS SOLICITED BY THIS PROXY STATEMENT, A COPY OF OUR REPORT ON
FORM 10-KSB FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FOR THE FISCAL
YEAR ENDED SEPTEMBER 30, 2003. REQUESTS SHOULD BE ADDRESSED TO: NATIONAL
SCIENTIFIC CORPORATION, 14455 NORTH HAYDEN ROAD, SUITE 202, SCOTTSDALE, ARIZONA
85260-6947, ATTENTION: KAREN FUHRE.
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