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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 |_|
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| | Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Under Rule 14a-12
PATIENT PORTAL TECHNOLOGIES, INC.
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(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Persons(s) Filing Proxy Statement, if Other Than the Registrant)
1
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2
PATIENT PORTAL TECHNOLOGIES, INC.
8276 Willett Parkway
Baldwinsville, NY 13027
August 25, 2009
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
to be held September 17, 2009
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TO THE STOCKHOLDERS OF PATIENT PORTAL TECHNOLOGIES, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the "Meeting")
of PATIENT PORTAL TECHNOLOGIES, INC., a Delaware Corporation (the "Company"),
will be held at the Company Offices at 8276 Willett Parkway, Baldwinsville, NY
13027 on Thursday, September 17, 2009, at 4:00 P.M., local time, for the
following purposes:
1. To elect a Board of Directors to serve for the ensuing year until
the next Annual Meeting of Stockholders and until their respective
successors have been duly elected and qualified.
2. To amend the Certificate of Incorporation of the Company, as
amended, to create a series of Preferred stock to be known as the
Series C Convertible Preferred Stock, par value $0.01 per share.
3. To amend the Certificate of Incorporation of the Company as
amended, to authorize the Board of Directors to authorize, create
and issue new classes and series of preferred stock without
requiring the Board of Directors to obtain shareholder approval
for each new class and series (blank check preferred).
4. To approve the Company's 2009 Long-Term Incentive Stock Option
Plan
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Only stockholders of record at the close of business on May 1, 2009 will be
entitled to notice of and to vote at the Meeting or any adjournments or
postponements thereof. Any stockholder may revoke a proxy at any time prior to
its exercise by filing a later-dated proxy or a written notice of revocation
with the Secretary of the Company, or by voting in person at the Meeting. If a
stockholder is not attending the Meeting, any proxy or notice should be returned
in time for receipt no later than the close of business on the day preceding the
Meeting.
The holders of a majority of the Common Stock have indicated to the Company that
they will vote FOR each of the foregoing proposals. In addition, the Board of
Directors of the Company recommends that each of the stockholders vote FOR each
of the foregoing proposals. Nevertheless, your vote is important to the Company
and you are urged to vote date, sign and return the enclosed proxy.
DUE TO LIMITED SEATING CAPACITY, ADMISSION WILL BE LIMITED TO ONE (1) SEAT PER
STOCKHOLDER OF RECORD. IF YOUR SHARES ARE HELD BY A BANK OR BROKER, YOU MUST
BRING YOUR BANK OR BROKER'S STATEMENT EVIDENCING YOUR BENEFICIAL OWNERSHIP OF
PATIENT PORTAL TECHNOLOGIES, INC. STOCK TO THE MEETING.
By Order of the Board of Directors
/s/ Thomas Hagan
THOMAS HAGAN, Secretary
Baldwinsville, NY
August 25, 2009
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, YOU ARE URGED TO
FILL IN, DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE
ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES.
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PATIENT PORTAL TECHNOLOGIES, INC.
8276 Willett Parkway
Baldwinsville, NY 13027
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PROXY STATEMENT
dated as of August 25, 2009
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TABLE OF CONTENTS
Proposal 1 -- Election of A Board of Directors
A. The Company's Board of Directors
B. Responsibilities, Committees and Matters Regarding the Board of Directors
1. Corporate Governance
2. Code of Ethics
3. Director Independence
4. Nominations for Directors
5. Meetings and Committees of the Board of Directors
6. Procedures for Contacting Directors.
7. Executive Compensation
C. Required Vote; Approval by Stockholders
D. Recommendation of the Board of Directors
Proposal 2 -- Approval of an Amendment to the Certificate of Incorporation of
the Company to Create the Series C Convertible Preferred Stock of the Company
A. Existing Capital Structure; Conversion of Existing
B. Background
C. The Dutchess Restructuring Transaction
1. Advantages
2. Risk Factors
4. Ownership Dilution
5. Reports About Ownership of the Company's Common Stock and Compliance With
Section 16(a) of the Securities And Exchange Act Of 1934**
6. Capitalization Before and After the Dutchess Transaction
D. Recommendation of the Board of Directors
E. Required Vote; Approval by Stockholders
Proposal 3 - Approval of an Amendment to the Certificate of Incorporation to
Authorize the Board of Directors to Authorize, Create and Issue New Classes and
Series of Capital Stock Without Requiring Stockholder Approval (Blank Check
Preferred).
A. Delaware General Corporation Law
B. Authority Granted Under the Certificate of Incorporation
C. Blank Check Stock Amendment
D. Risk Factors
E. Recommendation of the Board of Directors
F. No Impact on Capitalization
G. Required Vote; Approval by Stockholders
H. Financial Information
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Proposal 4 - Approval of the Long-Term Incentive Stock Option Plan.
A. Terms of the Company's Long-Term Incentive Stock Option Plan
B. Benefits of the Plan
C. Securities Exchange Act of 1934
D. Recommendation of the Board of Directors
E. Required Vote; Approval by Stockholders
Miscellaneous Items
A. Report of the Audit Committee
B. Audit Fees and Expenses
C. Electronic Access to Proxy Statement and Annual Report
D. Incorporation by Reference
Expenses
Other Business
Attachments: Stockholders' Resolutions and Exhibits
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PATIENT PORTAL TECHNOLOGIES, INC.
8276 Willett Parkway
Baldwinsville, NY 13027
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PROXY STATEMENT
dated as of August 25, 2009
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This proxy statement (the "Proxy Statement") is being furnished in connection
with the solicitation of proxies ("Proxies," or if one, a "Proxy") by the Board
of Directors of Patient Portal Technologies, Inc. (the "Company") for use at the
Annual Meeting of Stockholders of the Company to be held at PATIENT PORTAL
TECHNOLOGIES, INC., 8276 Willett Parkway, Baldwinsville, NY 13027 on Thursday,
September 17, 2009, at 4:00 P.M., local time, and any adjournments or
postponements thereof (the "Meeting").
The principal executive offices of the Company are located at 8276 Willett
Parkway, Baldwinsville, NY 13027. The approximate date on which this Proxy
Statement and the accompanying Proxy will first be sent or given to stockholders
is August 25, 2009.
At the Meeting, the following proposals will be presented to the stockholders
for approval:
1. To elect a Board of Directors to serve for the ensuing year until
the next Annual Meeting of Stockholders and until their respective
successors have been duly elected and qualified.
2. To amend the Certificate of Incorporation of the Company, as
amended, to create a series of Preferred stock to be known as the
Series C Convertible Preferred Stock, par value $0.01 per share.
3. To amend the Certificate of Incorporation of the Company as
amended, to authorize the Board of Directors to authorize, create
and issue new classes and series of preferred stock without
requiring the Board of Directors to obtain shareholder approval
for each new class and series (blank check preferred).
4. To approve the Company's 2009 Long-Term Incentive Stock Option
Plan
DUE TO LIMITED SEATING CAPACITY, ADMISSION WILL BE LIMITED TO ONE (1) SEAT PER
STOCKHOLDER OF RECORD. IF YOUR SHARES ARE HELD BY A BANK OR BROKER, YOU MUST
BRING YOUR BANK OR BROKER'S STATEMENT EVIDENCING YOUR BENEFICIAL OWNERSHIP OF
PATIENT PORTAL TECHNOLOGIES, INC. STOCK TO THE MEETING.
RECORD AND VOTING SECURITIES
Only stockholders of record at the close of business on May 1, 2009 (the "Record
Date") will be entitled to notice of and to vote at the Meeting. At the close of
business on such record date, the Company had 42,951,130 shares of Common Stock,
par value $.001 per share (the "Common Stock"), outstanding and entitled to vote
at the Meeting. Each outstanding share of Common Stock is entitled to one vote.
There was no other class of voting securities of the Company outstanding on the
Record Date. A majority of the outstanding shares of Common Stock present in
person or by Proxy is required for a quorum.
The holders of a majority of the Common Stock have indicated that they will vote
FOR each of the foregoing proposals. In addition, the Board of Directors of the
Company recommends that each of the stockholders vote FOR each of the foregoing
proposals. Nevertheless, your vote is important to the Company and you are urged
to vote date, sign and return the enclosed proxy.
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PROXIES AND VOTING RIGHTS
Shares of Common Stock represented by Proxies that are properly executed, duly
returned and not revoked will be voted in accordance with the instructions
contained therein. If no instructions are contained in a Proxy, the shares of
Common Stock represented thereby will be voted in FOR all four of the
above-mentioned proposals and, upon any other matter that may properly be
brought before the Meeting, in accordance with the judgment of the person or
persons voting the Proxy. The execution of a Proxy will in no way affect a
stockholder's right to attend the Meeting and to vote in person. Any Proxy
executed and returned by a stockholder may be revoked at any time thereafter by
written notice of revocation given to the Secretary of the Company prior to the
vote to be taken at the Meeting by execution of a subsequent Proxy that is
presented at the Meeting or by voting in person at the Meeting in any such case,
except as to any matter or matters upon which a vote shall have been cast
pursuant to the authority conferred by such Proxy prior to such revocation.
Broker "non-votes" and the shares of Common Stock as to which a stockholder
abstains are included for purposes of determining the presence or absence of a
quorum for the transaction of business at the Meeting. A broker "non-vote"
occurs when a nominee holding shares for a beneficial owner does not vote on a
particular proposal because the nominee does not have discretionary voting power
with respect to that item and has not received instructions from the beneficial
owner.
Proposal 1. ELECTION OF A BOARD OF DIRECTORS
The directors of the Company are elected annually and hold office for the
ensuing year until the next Annual Meeting of Stockholders and until their
successors have been duly elected and qualified. The directors are elected by
plurality of votes cast by stockholders. The Company's by-laws state that the
number of directors constituting the entire Board of Directors shall be
determined by resolution of the Board of Directors. The number of directors
currently fixed by the Board of Directors is five.
The following table and the paragraphs following the table set forth information
regarding the current ages, terms of office and business experience of the
proposed directors and current executive officers of the Company, all of whom
are being nominated for election to the Board of Directors.
The existing Board of Directors of the Company consists of Mr. Kevin Kelly, Mr.
Thomas Hagan, and Mr. Rounsevelle Shaum. Mr. Schaum is resigning as a director
contemporaneously with the election of the directors listed below. Messrs.
Douglas Leighton, Michael Novielli and Douglas D'Agata have been nominated by
Dutchess Private Equities Fund, Ltd. ("Dutchess") pursuant to agreement with
Dutchess as a result of the restructuring described under Proposal 2 below.
Following their election, as a result of the restructuring described under
Proposal 2 below, the holders of the Common Stock will have the right to elect
two directors of the Company and Dutchess, as the holder of the Series C
Convertible Preferred Stock referred to below under Proposal 2 below, will have
the right to elect three directors of the Company.
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Name Position Age Year First Elected
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Kevin Kelly President, CEO 48 2006
Thomas Hagan Secretary and Director 65 2004
Douglas Leighton Director 40
Michael Novielli Director 44
Douglas D'Agata Director 39
A. THE COMPANY'S BOARD OF DIRECTORS AND NOMINEES:
Kevin Kelly, age 48, is the President and Chief Executive Officer of the Company
and is currently a director of the Company. Mr. Kelly formerly was Chief
Executive Officer of Patient Portal Connect, Inc. (PPC), a Company he founded
with his brothers in 2003. In December 2006, PPC acquired controlling interest
in an inactive public entity and "reversed' the assets of PPC into this shell to
form Patient Portal Technologies, Inc. In his role as CEO, Mr. Kelly is
responsible for strategic planning, developing alliances, and assuring synergy
between the business plan and operations. His vision and expertise helped
position the launch of our innovative healthcare services platform, which are
truly unique in the industry. Prior to joining Patient Portal Connect, Inc., Mr.
Kelly co-founded a telecommunications company, Telergy, with his brothers.
During his five-year tenure with the company, he was responsible for financial
planning, strategic direction, and developing the structures for the highly
successful energy partnerships. Mr. Kelly grew the company from a start-up to a
company that raised more than $600 million in capital, built the fifth largest
fiber network in the country, employed more than 650 employees, leading to a
private valuation of $2.5B. Mr. Kelly also helped secure more than $400 million
in contract sales. He is a graduate of LeMoyne College with a degree in
Industrial Relations.
Thomas Hagan, age 65, has served as Acting Chief Financial Officer since 2004 in
addition to serving as Secretary. He is currently a Director of the Company and
brings to the Company a strong background in marketing, manufacturing and
general management. Mr. Hagan served as President of The Dorette Company, a
manufacturer of point of purchase advertising products company, from January,
1987 until October, 2002, and was responsible for a ten-fold increase in sales
at that company during his tenure. His prior business experience includes
management positions at General Electric Company in Cleveland, Philadelphia and
Schenectady from 1960 to 1970. As a management consultant at McKinsey & Company
from 1970 to 1973, he developed and managed marketing programs for numerous
sales representative organizations, trade shows, key accounts and national
accounts. Mr. Hagan is a graduate of Boston College School of Management, and
received his Masters in Business Administration Degree from Case Western
University. He has also served as a Captain in the U.S. Army Corps of Engineers.
Douglas Leighton, age 40, is a co-founder and principal of Dutchess Capital
Management LLC ("DCM"), which since 1996 had arranged private equity and debt
financings for publicly traded-companies. Since 2000, he has overseen the
trading, investment due diligence, transaction structure, and risk management of
DCM managed Funds and is a member of the firm's Investment Committee. Mr.
Leighton has over 16 years of experience in securities, investment banking and
asset management. In 1990 he received a combined Bachelor of Arts and Bachelor
of Science degree in Economics and Finance from the University of Hartford. Mr.
Leighton also is a director of Naturewell, Inc.
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Michael Novielli, age 44, is a co-founder and principal of DCM and its
predecessor firm Dutchess Advisors, Ltd., which since 1996 had arranged private
equity and debt financings for publicly traded-companies. Since 2000, he has
overseen transaction structure, risk management and regulatory compliance for
DCM managed Funds and is a member of the firm's Investment Committee. Mike has
over 15 years experience in securities, investment banking and asset management
including tenure with PaineWebber (now UBS). He received a Bachelor of Science
degree in Business from the University of South Florida in 1987. Mr. Novielli
also is a director of Naturewell, Inc.
Douglas D'Agata, age 39, is the Director of Research for Dutchess since 2004.
From 1998 to 2004, he was a financial advisor at Prudential Securities. Mr.
D'Agata graduated from Hobart College with a degree in Political Science in 1993
and received a masters in finance from Bentley College in 2004.
B. RESPONSIBILITIES, COMMITTEES AND MATTERS REGARDING THE BOARD OF DIRECTORS
1. Corporate Governance
The Company's corporate governance is designed to ensure that members of the
Board of Directors, including all independent outside Directors, perform in
their capacity to ensure that the interests of the Board and management are in
alignment with the interests of the stockholders. Effective for the current
fiscal year, the Board has established Audit and Compensation Committees and
will be expanding its membership from four to seven Members.
On an annual basis, each Director and named executive officer is required to
complete a Director and Officer Questionnaire. Within this questionnaire are
requirements for disclosure of any transactions with the Company in which the
Director or named executive officer, or any member of his or her immediate
family, have a direct or indirect material conflict of interest in which the
Board is responsible for resolving any such conflict.
In April, 2008, the Company formed a Disclosure Committee in response to
Management Certification Responsibilities under Sections 302 and 404 of the
Sarbanes-Oxley Act of 2002. The Disclosure Committee assists the Chief Executive
Officer, the Chief Financial Officer and the Audit Committee in monitoring (1)
the integrity of the financial statements, policies, procedures and the internal
financial and disclosure controls and risks of the Company, (2) the compliance
by the Company with legal and regulatory requirements, to the extent that these
policies, procedures and controls may generate either financial or non-financial
disclosures in the Company's filings with the Securities and Exchange
Commission. Additionally, in 2006, the Company also initiated a Code of Ethics,
and in 2007, it initiated an Insider Trading Policy for all employees of the
Company.
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2. Code of Ethics
The Company's Code of Ethics was instituted in December, 2006 and is applicable
to all Directors, officers and employees. Each person, whether an employee,
officer or director, has an individual responsibility to deal ethically in all
aspects of the Company's business and to comply fully with all laws,
regulations, and Company policies. In complying with the Company's Code of
Ethics, individuals are expected to exercise high standards of integrity and
good judgment and among other items, to apply principles of: honesty; avoid
conflicts of interest, illegal or unethical conduct; advancement for legitimate
interests to the Company's when the opportunity to do so arises; protecting the
Company's assets and ensure their efficient use and to comply with all laws,
rules, regulations, policies and guidelines applicable to the operation of the
Company.
3. Director Independence
In accordance with Nasdaq and American Stock Exchange rules, the Board will
affirmatively determine the independence of each of its independent outside
Directors and any nominee for election as an independent outside Director in
accordance with required guidelines as set forth in the Exchange listing
standards.
Based on these standards, the Board has determined that each of its non-employee
Directors will have no relationship with the Company, except as a Director
and/or stockholder of the Company.
4. Nominations for Directors
The Company does not have a designated nominating committee. The Board of
Directors does not consider a nominating committee necessary in that its
independent directors will be expected to perform the same role as a nominating
committee.
The Company has not adopted a formal policy with respect to minimum
qualifications for members of its Board of Directors. However, in making its
nominations, the Board will consider, among other things, an individual's senior
level business experience, industry experience, financial background, breadth of
knowledge about issues affecting the Company, time available for meetings and
consultation regarding Company matters and other particular skills and
experience possessed by the individual. Additionally, each proposed director
must have the highest personal and professional ethics, integrity and values
including the ability and fortitude to advance constructive opinion on issues
affecting the Company and to be able to function appropriately in an atmosphere
by and between other members of the Board of Directors.
Stockholders wishing to recommend candidates for consideration by the Board of
Directors may do so by writing to the Secretary of the Company and providing the
candidate's name, biographical data and qualifications. Such candidates
recommended by stockholders will be evaluated on the same basis as all other
candidates.
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5. Meetings and Committees of the Board of Directors
For the fiscal year ended December 31, 2008, there were six meetings of the
Board of Directors. Each of the directors attended (or participated by telephone
in) more than 75% of such meetings of the Board of Directors. During 2008, the
Board of Directors did not act by unanimous written consent in lieu of a meeting
on any occasion. During 2007, the Board had no established Committees.
6. Procedures for Contacting Directors
The Company has adopted a procedure by which stockholders may send
communications to one or more members of the Board of Directors by writing to
such director(s) at their respective address listed in the Security Ownership
section of this Proxy Statement or to the whole Board of Directors care of the
Corporate Secretary, Patient Portal Technologies, Inc., 8276 Willett Parkway,
Baldwinsville, NY 13027. Any such communications addressed to the whole Board of
Directors will be promptly distributed by the Secretary to each director.
7. Executive Compensation
a. Compensation Discussion and Analysis
i. Overview
The Board of Directors has approved the establishment of a Compensation
Committee ("Committee" within this report) effective for the current fiscal
year. The Committee does not have a specific charter and has the responsibility
for establishing, implementing, monitoring and reviewing the Company's
compensation philosophy and along with the other outside director, approves the
salary and other compensation of officers and key employees of the Company. The
Committee also administers the Company's 2004 Stock Option Plan and recommends
the terms of grants of stock options and the persons to whom such options shall
be granted in accordance with such plan, which are subject to approval by the
full Board of Directors.
Individuals who served as the Company's Chief Executive Officer and Chief
Financial Officer during fiscal 2008, as well as the other individuals included
in the Summary Compensation Table on page 9, are referred to as the named
"executive(s)" officers within this report.
ii. Compensation Philosophy
In reaching decisions regarding executive compensation, the Committee balances
the total compensation package for each executive with sales and profits
attained as well as achievement of annual and long-term goals. Competitive
levels of compensation are necessary in attracting, rewarding, motivating, and
retaining qualified management and that compensation provided to executives
remains competitive relative to the compensation paid to comparable executives
of similar companies. The Committee also believes that the potential for equity
ownership by management is beneficial in aligning management's and stockholders'
interests in the enhancement of stockholder value.
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Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"),
places a limit of $1,000,000 on the amount of compensation that may be deducted
by the Company in any year with respect to certain of the Company's highest paid
executives. Certain performance-based compensation that has been approved by
stockholders is not subject to the deduction limit. If necessary, the Company
may attempt to qualify certain compensation paid to executive officers for
deductibility under the Code, including Section 162(m). However, the Company may
from time to time pay compensation to its executive officers that may not be
deductible.
iii. Role of Executive Officers in Compensation Decisions
The Committee makes all compensation decisions based upon recommendations made
by the Chief Executive Officer and Chief Financial Officer regarding equity
awards to participating executives and employees of the Company.
The Committee annually reviews the performance of the executives including
salary adjustments and equity awards whereby the Committee can exercise its
discretion in modifying any recommended adjustments or awards to executives.
iv. Compensation Program
The Company has a comprehensive compensation program, which consists of cash
compensation, both fixed and variable, and equity-based compensation. Overall
compensation is predicated on industry and peer group comparisons and on
performance judgments as to past and expected future contributions of the
individual executive. Specific compensation for each executive is designed to
fairly remunerate that employee of the Company for the effective exercise of
their responsibilities, their management of the business functions for which
they are responsible, their extended period of service to the Company and their
dedication and diligence in carrying out their responsibilities for the Company.
Additionally, as the Company must compete with other healthcare technology
companies for executive employees, the Committee sets overall compensation paid
to these executives to attract and subsequently retain such employees. This
objective may vary, but generally is dictated by the experience level of the
individual, specific employment requirements of the Company and current market
factors occurring in the healthcare technology industry. The Committee
recognizes that closely monitoring these expectations over the long term will
continue to be in the best interest for the enhancement of stockholder value.
13
The fixed aspect is intended to meet the requirements of compensating the
executive for meeting essential goals in performance and are in place to insure
the Company of consistency of leadership and the retention of qualified
executives to foster a spirit of employment security, which thereby encourages
decisions that will benefit long-term stockholders. Variable compensation is
based upon the Committee annually adopting and approving sales, profit and stock
price performance goals to be attained for the ensuing year.
v. Base Salary
The Company provides executives with a base salary to compensate them for
services rendered during the fiscal year. Base salary for executives are
determined for each executive based on their position and responsibility by
using comparative market data within the health-care industry. Base salary
determinations are designed to recognize the contributions made or expected to
be made in the future by the executive.
Base salary levels are reviewed annually as part of the Company's performance
review process as well as upon a promotion or other change in position
responsibility. The Compensation Committee which was established by the Board of
Directors will consider current market data individually relative to the
position and responsibilities and to other executives, including the individual
performance of the executive during its review of base salaries for executives.
vi. Performance-Based Incentive Compensation
Variable or performance-based incentive compensation is based upon the
Compensation Committee annually adopting and approving sales, profit and stock
price performance goals to be attained for the ensuing year.
This cash incentive portion of executive compensation gives the Committee the
latitude to design incentive compensation programs to promote a team approach
for high performance and achievement of corporate goals by directors, executives
and employees, encourage the growth of stockholder value and allows all
employees to participate in the successes of the Company.
At the end of the fiscal year in order to set performance-based incentive
compensation, the Committee assesses the performance of the Company and
executives for objectives achieved, including estimated results for the next
fiscal year. In order to pre-determine minimum and maximum levels for each
objective, an overall percentage and cash payouts for the corporate financial
objectives are calculated in order to balance such payouts relative to the
overall success of the Company.
In making the annual determination of the minimum, target and maximum levels,
the Committee may consider the specific circumstances facing the Company during
the coming year. Sales volume, necessary research and development expenditures
for its ethical pharmaceutical subsidiary and return to shareholders for
improved stock price targets are set in alignment with the Company's strategic
plan, expectations and performance.
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vii. Long-Term Incentive Compensation
The Company has a long term incentive Stock Option Plan (the "Plan") in place
which was approved in 2004. The Company will cancel this plan and replace it
with the plan explained further in Proposal 4. No awards have been granted under
the current plan through the current period.
viii. Perquisites and Other Personal Benefits
The Company provides executives with limited personal benefits that the Company
and the Committee believe are reasonable and consistent with its overall
compensation program to better enable the Company to attract and retain desired
employees for key positions. The Committee reviews annually the levels of these
limited personal benefits provided to the executives, which includes the use of
Company vehicles and subsequently, the ability of the executive to purchase such
asset at a later date. Additionally, life and disability insurance is provided
at no cost to the executive and medical insurance is provided to each executive
after each executive contributes to such costs for health and dental insurance
as is also available to other employees. The effects of such benefits are
included in the Summary Compensation Table on page 9 as Other Compensation.
ix. Executive Compensation Summary
The Summary Compensation table provides summary information concerning cash and
certain other compensation for the years ended December 31, 2008 and 2007,
respectively, paid or accrued by the Company to the Company's Chief Executive
Officer and Chief Financial Officer and each highly compensated executive
officer of the Company whose compensation exceeded $100,000 (the "Named
Executive Officers") during 2008 and 2007. We have included the annual
compensation received by the Officers of our TB&A Hospital Television, Inc.
subsidiary, which we acquired in November, 2007. As part of the acquisition, the
Company entered into employment agreements with Robert Baren and Thomas
Brunskole, who are officers of the Compnay's subsidiary, TB & A.
In reviewing compensation for each of the named executive officers, the
Committee reviews summaries which show the executive's current and previous
compensation, including equity and non-equity based compensation.
15
SUMMARY COMPENSATION TABLE
Option All Other
Name and Salary Bonus Awards Compensation Total
Principal (1) (2) (3)
Position Year ($) ($) ($) ($) ($)
- ------------------------------------- ------------------- ----------------------
KEVIN KELLY 2008 $ 90,000 $ 0 $ 13,102 $ 103,102
2007 $ 90,000 $ 0 $ 13,213 $ 103,213
DANIEL COHOLAN 2008 $ 50,769 $ 0 $ 2,890 $ 53,659
2007 $ 48,923 $ 0 $ 2,975 $ 51,898
THOMAS HAGAN 2008 $ 0 $ 0 $ 4,000 $ 4,000
2007 $ 0 $ 0 $ 6,000 $ 6,000
ROBERT BAREN 2008 $ 175,000 $ 0 $ 503 $ 175,503
2007 $ 145,393 $ 0 $ 503 $ 145,896
TOM BRUNSKOLE 2008 $ 214,577 $ 0 $ 10,180 $ 224,757
2007 $ 145,393 $ 0 $ 8.950 $ 154,343
(1) Bonuses paid pursuant to the Company attaining specified sales and
net income goals. There were no bonuses paid during 2008 and 2007.
(2) There were no option awards during 2008 and 2007.
(3) The value of attributable personal benefits for each Named
Executive Officers of the Company such as; insurances for life, health, dental
and disability. Additionally, there was no additional compensation from Stock
Awards; Change in Pension Value and Nonqualified Deferred Compensation Earnings
or Non-Equity Incentive Plan Compensation.
x. Compensation Pursuant to Plans
An incentive stock option plan was instituted in 2004 (the "2004 Stock Option
Plan") and approved by the stockholders in 2004. Pursuant to the 2004 Stock
Option Plan, no options have been granted to directors, executive officers, and
employees during 2008 or since its inception. The Company will cancel this plan
and replace it with the Plan explained further in Proposal 4. No awards have
been granted under the current plan through the current period.
16
Outstanding Equity Awards at Fiscal Year End
(Common Stock Purchase Warrants)
Equity
Incentive
Plan Awards
Number of Number of Number of
Securities Securities Securities
Underlying Underlying Underlying Warrant
Unexercised Unexercised Unexercised Exercise Stock
Name of Officer Warrants Warrants Unearned Price Warrant Awards
and Director Exercisable Unexercisable Warrants ($) Expiration (1)
Kevin Kelly
President,
Chief Executive
Officer 500,000 0 500,000 $ 0.50 12/31/11 0
Thomas Hagan
Secretary, Director 100,000 0 100,000 $ 0.50 12/31/11 0
Daniel Cohalan (2)
Director 500,000 0 500,000 $ 0.50 12/31/11 0
Rounsevelle W
Schaum (2)
Director 100,000 0 100,000 $ 0.50 12/31/11 0
(1) The Company does not have any stock awards.
(2) Past Directors
17
xi Option Exercises and Vesting During 2007
The Company had no option/warrant or stock awards for the fiscal year ended
December 31,
xii. Compensation of Directors
The Company had only one independent director for the fiscal year ended December
31, 2008, Rousenvelle W. Scham. Mr. Scham received $10,000 in cash compensation
for his service as a director, and received no options, awards or other
compensation.
C. Required Vote
Directors are elected by a plurality of the votes cast, in person or by proxy,
at a meeting. The holders of a majority of the shares of Common Stock entitled
to vote have indicated that they will vote their shares in favor of Messrs.
Hagan and Kelly as Directors. Moreover, such holders have indicated that they
will vote in favor of the transaction described in Proposal No. 2, below. As a
part of such transaction, Messrs. Leighton, Novielli and D'Agata have been
nominated as directors of the Company and, accordingly, such holders have
indicated that they will vote in favor of the election of Messrs. Leighton,
Novielli and D'Agata. Accordingly, so long as such holders vote as they have
indicated, Messrs. Kelly, Hagan, Leighton, Novielli and D'Agata will be elected
as directors of the Company at the meeting. Nevertheless, your vote is important
and the Company is soliciting the proxy of each stockholder (including such
holders and all other stockholders).
D. Recommendation of the Board of Directors
The Board of Directors of the Company recommended that you vote "FOR" the
election of each of the nominees.
E. Annual Report
For the further information of the stockholders, the Company is delivering with
this Proxy Statement a copy of its Annual Report on Form 10-K / A (1) for the
fiscal year ended December 31, 2008 filed with the Securities and Exchange
Commission. You should carefully review the Annual Report in conjunction with
the information presented in this Proxy Statement.
18
Proposal 2. APPROVAL OF AN AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF THE
COMPANY TO CREATE THE SERIES C CONVERTIBLE PREFERRED STOCK OF THE COMPANY
A. Existing Capital Structure; Conversion of Existing Preferred Stock
The certificate of incorporation of the Company, as amended through the date
hereof (as amended, the "Certificate of Incorporation") currently authorizes up
to 1,000,000 undesignated shares of preferred stock. The proposed amendment to
the Certificate of Incorporation authorizing the creation of the Series C
Preferred Stock (the "Charter Amendment"), if adopted, will designate 200,000 of
such 1,000,000 preferred shares as shares of the Series C Preferred Stock. Those
200,000 shares of Series C Preferred Stock are issuable at the discretion of our
Board of Directors. The designation of such shares will not increase the
aggregate number of authorized shares of preferred stock (and no approval of the
stockholders to any such increase is being requested); instead, the remaining
800,000 shares of preferred stock will remain undesignated. If Proposal 3,
below, is adopted, the terms of some or all of those 800,000 authorized but
undesignated shares may be designated in the future by our Board of Directors
and issued at their discretion.
It is anticipated that 7,500 of the authorized shares of Series C Preferred
Stock will be issued to Dutchess in the transaction described below in this
Proposal 2. The Company has no plans to issue any additional shares of Series C
Preferred Stock, or to designate or issue any other preferred shares, at this
time, but the Board of Directors may determine to do so in the future without
any further approval of the stockholders.
As of December 31, 2008, the Company had outstanding 55,000 shares denominated
as Series A Preferred Stock and 33,333 shares denominated as Series B Preferred
Stock. The Series A Preferred Stock accrued dividends at the rate of 10% per
annum. The Series B Preferred accrued dividends at the rate of 10% per annum,
and unpaid dividends accrued interest at 8% per annum. Both series had
liquidation preferences of $10.00 per share. The holders of the Series A
Preferred Stock had the right to put to the Company for redemption in each
calendar quarter that number of shares which equals 50% of any cash distribution
or dividend declared or paid by the Company in such calendar quarter, divided by
$10.00 per share, at a put price of $10.00 per share. Each share of the Series B
Preferred Stock was convertible at the option of the holder into 10 shares of
Common Stock.
In April 2009, in orderby agreement between the Company and each of the holders
of such stock, 88,333 shares of Series A Preferred Stock and Series B Preferred
Stock were converted into 1,170,873 shares of Common Stock (the "Old Preferred
Stock Conversion"). The Old Preferred Stock Conversion was undertaken to
terminate any further dividend accrual on the Series A Preferred Stock and the
Series B Preferred Stock, to rationalize the Company's capital structure and to
facilitate the closing of the transaction referred to below, the Company and
each of the preferred stockholders agreed to convert the 88,333 shares of Series
A Preferred Stock and Series B Preferred Stock into 1,170,873 shares of Common
Stock (the "Old Preferred Stock Conversion").For a table reflecting the capital
structure of the Company prior to and after giving effect to the Series A and
Series B Preferred Stock conversion, and after giving effect to the transactions
contemplated by Proposal 2 and Proposal 3, please see Proposal 3; F. Pro Forma
Capitalization, below. Accordingly, on the date of this proxy statement none of
the 1,000,000 authorized shares of preferred stock are designated by series or
class and no preferred stock is outstanding. After giving effect to the Charter
Amendment, assuming this Proposal 2 is adopted by the stockholders, 200,000
shares of the preferred stock will be designated as the Series C Preferred Stock
and the remaining 800,000 shares will remain undesignated.
19
B. Background
To provide funds for potential acquisition purposes, on November 1, 2007, the
Company entered into a $7,000,000 convertible debenture agreement with Dutchess.
The debenture agreement permitted Dutchess to elect to convert its debentures
(the "Debentures") into shares of Common Stock. The conversion price for their
shares of Common Stock is the lower of 85% of the lowest closing bid during the
previous twenty (20) day period prior to the conversion date or $0.46. The
financing transaction included issuing warrants to purchase up to an additional
22,826,086 shares of the Common Stock at a price of $0.46 per share. The warrant
agreement expires on November 1, 2012. Dutchess' overall ownership in the
Company is limited to 4.99% of the total outstanding shares of Common Stock, at
any point in time, in accordance with the financing documents. As a result, the
number of shares issuable to Dutchess, upon conversion of the Debenture and
exercising of its warrants, could potentially be materially adverse to current
and potential investors due to significant dilution. Although there is a
restriction on ownership of more than 4.99% at any one time, Dutchess is free to
sell any shares issued to them into the market, thereby enabling Dutchess
(subject to market conditions) to systematically convert the remaining
Debentures or exercise additional Warrants into shares of Common Stock.
C. The Dutchess Restructuring Transaction
In order to help fulfill our business plan, meet our cash flow requirements
throughout fiscal 2009, continue our product development efforts and adjust our
operating structure to reduce losses and ultimately attain profitability, we
have been seeking to convert the Dutchess Debenture into equity and to reach an
agreement with a lending institution to provide us with additional working
capital. Toward this end, in the first quarter of 2009 the Company entered into
agreements with Dutchess which, when finalized, will result in a complete
restructuring of the debt transaction concluded in November 2007 (the "Dutchess
Restructuring").
The key aspects of the Dutchess Restructuring are as follows. Dutchess will
convert 100% of the outstanding Debenture as of the current period in 2009
(estimated at approximately $6.525 million as at April 30, 2009) into 7,500
shares of a new series of convertible preferred stock (the "Series C Preferred
Stock") at a purchase price of $1,000 per share (or an aggregate liquidation
preference of $7,500,000) and cash in the amount of $500,000. The Series C
Preferred Stock has a conversion feature and three call features.
Dutchess will have the right to convert the Series C Preferred Stock into a 35%
interest in the then outstanding Common Stock of the Company, at the time of
conversion. Dutchess can covert the Series C Preferred Stock at any time after
the closing.
20
The Series C Preferred Stock also has three call features. First, the Company
will call $20,000 of preferred stock each calendar month from the holder.
Second, the Company will use 25% of any earnings before interest, depreciation
and amortization in excess of one million dollars ($1,000,000) each calendar
quarter, to call the representative number of shares of preferred stock from the
holder. Thirdly, the Company agrees to apply 20% of the proceeds from subsequent
capital raises, up to a cap of two million dollars ($2,000,000), toward
redemption of preferred stock from the holder. The holder retains the right to
limit this redemption to one million dollars ($1,000,000).
As part of the transaction Dutchess will retire all 22,826,026 warrants that it
received in 2007 for 4% of the current outstanding Common Stock or 1,718,045
shares, and release its security interest in the assets of the Company.
Additionally, the Company is working to finalize an agreement for new working
capital through a commercial bank, and it is confident that the new bank
financing will adequately fund current and near term working capital
requirements. The Company believes that the Dutchess Restructuring together with
other relevant actions being implemented will generate sufficient revenues and
profits and increase cash flows from operations and that sufficient capital will
be available, when required, to permit the Company to realize its plans.
However, there can be no assurance that this will occur.
The terms of the new Series C Preferred Stock and those of the Dutchess
Restructuring are as follows. The following is merely a description of the
terms, and the stockholder is strongly encouraged to read the exhibits to this
Proxy Statement which contain the terms of the Dutchess Restructuring in far
greater detail.
- --------------------------------------------------------------------------------
Dutchess Restructuring Terms
- --------------------------------------------------------------------------------
Existing Debenture The principal amount and accrued
interest on the Debenture, aggregating
approximately $6,525,000 at April 30,
2009, will be converted into (a) 7,500
shares of Series C Preferred Stock and
(b) a cash payment of $500,000.
- --------------------------------------------------------------------------------
Security Interest Will be released upon consummation.
- --------------------------------------------------------------------------------
Existing Warrants 22,826,026 Warrants to purchase shares
of the Common Stock will be cancelled in
return for 1,718,045 shares of Common
Stock.
- --------------------------------------------------------------------------------
Preferred Stock 7,500 shares of Series C Preferred Stock
- --------------------------------------------------------------------------------
Liquidation Preference $1,000 per share ($7,500,000).
- --------------------------------------------------------------------------------
Dividend Cumulative 8% dividend, payable, at the
Company's option, either in cash or in
additional shares of Series C Preferred
Stock
- --------------------------------------------------------------------------------
Conversion Each share of Series C Preferred Stock
is convertible at Dutchess's option into
a number of shares equal to 0.0072% of
the number of outstanding shares of
Common Stock at the time of conversion.
- --------------------------------------------------------------------------------
21
- --------------------------------------------------------------------------------
Scheduled Redemption The Company will redeem 20 shares
($20,000 liquidation preference) of the
Series C Preferred Stock each calendar
month at a price of $1,000 per share
- --------------------------------------------------------------------------------
Redemption from Excess In addition, in each calendar quarter
Cash Flow the Company will apply an aggregate 25%
of its earnings before interest, taxes,
depreciation and amortization for such
quarter to redeem additional shares of
Series C Preferred Stock at a price of
$1,000 per share at the discretion of
the holder.
- --------------------------------------------------------------------------------
Repurchase from Future In addition, the Company will apply an
Capital Raises aggregate 20% of any future equity
capital raised (but not more than
$2,000,000) to repurchase additional
shares of Series C Preferred Stock at a
price of $1,000 per share, at the option
of the holder. Dutchess will be required
to accept any offered repurchase up to
the amount of $1,000,000.
- --------------------------------------------------------------------------------
Directors Dutchess will be entitled to name three
(3) of the total five (5) Directors.
- --------------------------------------------------------------------------------
1. Advantages
The Company believes that the Dutchess Restructuring will help it achieve the
objectives outlined in its business plan, meet its cash flow requirements
throughout fiscal 2009, continue its product development efforts and adjust its
operating structure to reduce losses and ultimately attain profitability. The
conversion of the Debenture will have the effect of converting indebtedness into
equity and thereby reducing the Company's leverage. Release of the security
interest will free up collateral which the Company can use to obtain the
additional bank financing it seeks, which financing would not be otherwise
obtainable without the availability of the collateral. Retirement of the
Debenture and the Warrants will eliminate any dilution that might have resulted
from the conversion of the Debenture or exercise of the Warrants. Conversion of
the Debenture and exercise of the Warrants at current prices would result in
dilution that would significantly exceed the dilution resulting from the
conversion of the Series C Preferred Stock being issued in the Dutchess
Restructuring. See "4. Ownership Dilution" below.
2. Risk Factors
The consummation of the Dutchess Restructuring, however, presents the following
risks to the Company and to the stockholders.
o The $7,500,000 aggregate liquidation preference of the shares of
Series C Preferred Stock being issued exceeds the $6,525,000
outstanding amount of the Debenture potentially exposing the
Company to a cash shortfall attributed to the difference.
o The conversion of the Debenture will require a cash payment of
$500,000 from the Company to Dutchess and the issuance of 4% of
the Common Stock to Dutchess in addition to the issuance of the
shares of Series C Preferred Stock resulting in a negative effect
on the Company's cash flow and a dilution effect to the Company's
current stockholders.
22
o Because the shares of Series C Preferred Stock are redeemable, the
Company will have to generate sufficient cash flow both to service
any additional debt it incurs and to permit the required
redemption payments on the Series C Preferred Stock. There can be
no assurance that the Company will generate sufficient cash flow
to service its debt and redeem the Series C Preferred Stock.
o The dividend payment on the Series C Preferred Stock may either
require the Company to expend cash or to compound the number of
shares of Series C Preferred Stock outstanding resulting in
further dilution to the stockholders.
o If and when Dutchess converted the Series C Preferred Stock it
would result in substantial dilution to the holders of the Common
Stock (although significantly less than the dilution that would
result from the conversion of the Debenture and exercise of the
existing Warrants at current prices under the current agreement).
See "4. Ownership Dilution" below.
o Nomination of three (3) directors will give Dutchess effective
control of the Board of Directors.
o The Charter Amendment will permit the Board of Directors of the
Company (after giving effect to the 7,500 shares of Series C
Preferred Stock that the Company intends to issue to Dutchess) to
issue up to 192,500 additional shares of the Series C Preferred
Stock without any further approval of the stockholders being
required.
3. Current Equity Security Ownership
The following table sets forth information concerning ownership of the Company's
Common Stock as of December 31, 2008 by each person known by the Company to be
the beneficial owner of more than five percent of the Common Stock, each
Director and Executive Officer and all directors and executive officers of the
Company as a group. Unless otherwise indicated, the address of each person or
entity listed below is the Company's principal executive office.
Percent
Name and Amount and Nature of of
Address of Owner Position Beneficial Ownership Class
- --------------------------------------------------------------------------------
Kevin Kelly (1,2) President & Director 2,666,666 Owner 6.8 %
Thomas Hagan (1) CFO, Sec. & Director 240,000 Owner <1 %
Daniel Coholan (1,2) Shareholder 2,966,666 Owner 7.5 %
Rounsevelle W. Schaum (1) Director 275,000 Owner <1 %
Brian Kelly (1,2) Shareholder 2,266,666 Owner 5.7 %
William Kelly (1,2) Shareholder 2,666,666 Owner 6.8 %
Vicki Ramundo (1,2) Shareholder 2,666,666 Owner 6.8 %
David Wolf (1,2) Shareholder 2,666,666 Owner 6.8 %
------------- -------
TOTAL OFFICERS, DIRECTORS
& SIGNIFICANT SHAREHOLDERS
AS A GROUP: 16,414,996 41.6 %
============= =======
23
(1) Unless otherwise indicated, the Company believes that all persons
named in the table have sole voting and investment power with respect to all
shares of the Company either owned directly or deemed to be beneficially owned
by them. The percentage for each beneficial owner listed above is based on
39,466,757 shares outstanding on December 31, 2008, with respect to each such
person holding options or warrants to purchase shares that are exercisable
within 60 days after December 31, 2008, the number of options and warrants are
deemed to be outstanding and beneficially owned by the person for computing such
person's percentage ownership, but are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person. The number of
shares indicated in the table include the following number of shares issuable
upon the exercise of warrants: Kevin Kelly - 500,000 warrants, Thomas Hagan -
100,000 warrants, Daniel Coholan- 500,000 warrants, Brian Kelly - 500,000
warrants, William Kelly - 500,000 warrants, Vicki Ramundo- 500,000 warrants,
David Wolf- 500,000 warrants, Rounsevelle W. Schaum- 100,000 Warrants.
(2) On December 31, 2008, the Dutchess Debenture was currently
convertible into Common Stock and the Dutchess Warrants were then exercisable.
The number of shares of Common Stock into which the Dutchess Debenture is
convertible is determined buy reference to the market price of the Common Stock.
Taking into account all shares of Common Stock that were then issuable upon the
conversion all the Debenture and exercise of all of the Dutchess Warrants at the
$0.29 stock price on December 31, 2008, the following executive officers and
directors beneficially owning more than 1% of the Common Stock would have
beneficially owned the following percentages of the Common Stock: Mr. Cohalan,
3.3%; each of Messrs. Kevin Kelly, Brian Kelly, William Kelly and Wolf and Ms.
Ramundo, 3,0%; and Mr. Brian Kelly, 2.6%. The shares beneficially owned by
Dutchess at any such time, however (after giving effect to any shares sold by
Dutchess), would have been limited to 4,429,292, or 4.99% of the Common Stock.
4. Ownership Dilution
Conversion of the entire Dutchess Debenture and exercise of the Dutchess
Warrants in full would result in significant ownership dilution to the existing
holders of the Common Stock. The number of shares of Common Stock into which the
Dutchess Debenture is convertible is determined by reference to the market price
of the Common Stock. By way of example, taking into account all shares of Common
Stock that were then issuable upon the conversion all the Debenture and exercise
of all of the Dutchess Warrants at the $0.06 stock price on April 9, 2009, the
number of outstanding shares of Common Stock would have increased by 150,767,143
from 42,951,130 to 193,718,273. Accordingly, the percentage interest of a holder
of 1,000,000 shares of the Common Stock would decrease as a result of the
conversion of the Debenture and exercise of the Warrants by 1.81% from 2.33%
before such events to 0.52% after such events, without any change in the fair
market value of the Company as a whole. This would result in a dilution to the
ownership percentage of over 77%. Moreover, since Dutchess would be required
sell all but a 4.99% interest in the Common Stock, the large number of shares of
Common Stock that Dutchess would be required to divest could have an additional
and significant adverse impact on the market price of the Common Stock.
The Dutchess Restructuring would result in significantly less ownership dilution
to the holders of the Common Stock. Dutchess will receive 4% of the outstanding
number of shares of Common Stock at closing, and its shares of Series C
Preferred Stock would be convertible into only 35% of the then-outstanding
Common Stock. Assuming no other changes in the Company's capitalization, were
Dutchess to convert all its shares of Series C Preferred Stock into shares of
Common Stock, the percentage interest of a holder of 1,000,000 shares of the
Common Stock would decrease as a result by 0.87% from 2.33% before such events
to 1.46% after such events, without any change in the fair market value of the
Company as a whole. This would result in a dilution to the ownership percentage
of approximately 37.3%.
It should be noted that under both conversion scenarios the amount of potential
dilution to the value of a share of stock, if any, is unknown.
24
5. Reports About Ownership Of The Company's Common Stock And Compliance
With Section 16 (A) Of The Securities And Exchange Act Of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's officers, directors and persons who own more than ten percent of a
registered class of the Company's equity securities to file reports of ownership
and changes in ownership with the Securities and Exchange Commission (the
"Commission"). Officers, directors and greater than ten-percent stockholders are
required by the Commission's regulations to furnish the Company with copies of
all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Company believes that during the fiscal year ended December 31, 2008, all
reports of ownership and changes in ownership applicable to its executive
officers, directors, and greater than ten-percent beneficial owners were filed
on a timely basis.
6. Capitalization Before and After the Dutchess Transaction.
The following table reflects the issued shares and other equity securities as
they currently exist (the "Before" column), the changes that will result from
the Dutchess transaction assuming Proposal 2 is approved by the stockholders
("Dutchess Changes") and the equity capital as it will exist after giving effect
to the Dutchess transaction assuming Proposal 2 is approved by the stockholders
("After"). The "Dutchess Changes" reflect the cancellation of approximately
$6,525,000 due in respect of the Dutchess Debenture in exchange for 7,500 shares
of Series C Preferred Stock and the cancellation of 22,826,026 warrants held by
Dutchess in exchange for the issuance of 1,718,045 shares of Common Stock to
Dutchess.
Current Dutchess Changes After
--------------- ------------------- -----------------
Convertible Debenture $ 6,525,000 $ (6,525,000) $ 0
Series C Preferred 0 7,500 7,500
Undesignated Preferred 0 0
--------------- ------------------- -----------------
TOTAL PREFERRED 0 7,500
COMMON STOCK 42,951,130 1,718,045 44,669,175
WARRANTS 24,026,026 (22,826,026) 1,200,000
D. Recommendation of the Board of Directors
After discussion and careful analysis, the Board of Directors of the Company
determined that the advantages to be realized from the Debenture Conversion
substantially outweigh the risk factors. The Board has unanimously approved the
Debenture Conversion and the Charter Amendment and recommended that the
stockholders vote "FOR" the Charter Amendment.
E. Required Vote; Approval by Stockholders
In order to issue the Series C Preferred Stock, the Certificate of Incorporation
must be amended by the Charter Amendment to authorize the terms, power, rights
and designations of the Series C Preferred Stock. The Charter Amendment will
authorize the issuance of up to 200,000 shares of the Series C Preferred Stock.
The Charter Amendment has been approved by the Board of Directors, has been
recommended to, and is being presented for approval by, the stockholders of the
Company. In order to adopt the Charter Amendment, it must be approved by a
majority of the total number of votes entitled to be cast by all the
stockholders. The holders of a majority of the shares of Common Stock entitled
to vote have indicated that they will vote their shares in favor of the Charter
Amendment. Accordingly, assuming such holders vote as they intend, the Charter
Amendment will be approved and adopted by the stockholders of the Company at the
meeting. Nevertheless, your vote is important and the Company is soliciting the
proxy of each stockholder (including such holders and all other stockholders).
F. Financial Information
Financial information relevant to this proposal is hereby incorporated by
reference to the Annual Report. Each stockholder should carefully review the
Annual Report in conjunction with this Proxy Statement.
25
Proposal 3. APPROVAL OF AN AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO
AUTHORIZE THE BOARD OF DIRECTORS OF THE COMPANY TO AUTHORIZE, CREATE AND ISSUE
NEW CLASSES AND SERIES OF CAPITAL STOCK WITHOUT REQUIRING SHAREHOLDER APPROVAL
(BLANK CHECK PREFERRED).
A. Existing Capital Structure
In considering Proposal 3, stockholders should carefully review the discussion
under A. Existing Capital Structure; Conversion of Existing Preferred Stock
under Proposal 2 above.
B. Delaware General Corporation Law
For a Delaware corporation to authorize a class or series of capital stock, a
resolution approving an amendment to the certificate of incorporation providing
the terms, conditions and designations of the class or series of such stock must
be approved by the board of directors, submitted to the stockholders for a vote
and approved by the holders of a majority of the shares entitled to vote (and,
in case the holders of any other class of stock having the right to vote in
respect of such amendment, the holders of a majority of such class).
However, Delaware law also permits the board of directors of a corporation to
adopt and create a class or series of stock by resolution adopting a certificate
of designation containing the terms, conditions and designations of such stock.
The directors may adopt the series or class of stock without approval of the
stockholders, but only if the certificate of incorporation expressly vests such
authority in the board of directors.
There is no express grant of authority to the Board of Directors in its
Certificate of Incorporation. Accordingly, the authorization of the Series C
Preferred Stock required an amendment to the Certificate of Incorporation
approved by a majority of the stockholders.
C. Blank Check Stock Amendment
1. Generally.
The Board of Directors already has the authority to adopt the terms of loans to,
and debt securities of, the Company that would be prior in right of payment to
any class of stock and that may otherwise have terms that may under certain
circumstances be materially adverse to the rights of the holders of the Common
Stock. Moreover, in deciding whether to approve any new class or series of
capital stock, the Board of Directors would be obligated to exercise their
fiduciary duties of care and loyalty to the stockholders, approving only those
classes of capital stock that were in the best interest of the Company.
Accordingly, the Board of Directors has proposed an amendment to the Certificate
of Incorporation expressly vesting in the Board of Directors the authority to
adopt and approve new classes of capital stock of the Company without
stockholder consent (the "Blank Check Stock Amendment"). The preferred stock to
be authorized is commonly referred to as "blank check" preferred stock ("Blank
Check Preferred").
26
The Board of Directors believes that the creation of Blank Check Preferred is
advisable and in the best interest of the Company and its stockholders for
numerous reasons. For instance, the Company expects that it may need to raise
capital again in the future to continue funding its operations and its growth
strategy. It may be important in taking advantage of a potential corporate
opportunity to act quickly in order to raise additional capital; the delay
necessary to obtain consent of the shareholders could have an adverse effect
upon the Company's ability to consummate such a transaction, the terms that may
be available in such a transaction or both. However, the Company has no current
plans either to designate or issue any other preferred shares at this time.
2. Capitalization
The approval and authorization of the Blank Check Preferred will not change the
authorized capitalization of the Company until or unless any shares are
designated as being of any particular class or series, and the Company is not
seeking approval of any increase in the authorized capitalization. The
Certificate of Incorporation already authorizes up to 1,000,000 undesignated
shares of preferred stock. The Charter Amendment, if adopted, will designate
200,000 of such 1,000,000 preferred shares as shares of the Series C Preferred
Stock. The remaining 800,000 shares of preferred stock will remain undesignated
and will be available for issuance. The Blank Check Amendment, if approved, will
operate merely to permit the Board of Directors to designate classes and series
of preferred stock from the 800,000 undesignated shares, to fix their terms and
designations and to issue them, in each case, without further stockholder
approval.
3. Impact Upon a Possible Change of Control
The authorization of the Blank Check Preferred would also afford the Company
greater flexibility in responding to unsolicited acquisition proposals and
hostile takeover bids. The issuance of Blank Check Preferred could have the
effect of making it more difficult or time consuming for a third party to
acquire a majority of the Company's outstanding Common Stock or otherwise effect
a change of control. Shares of Blank Check Preferred may also be sold to third
parties that indicate that they would support the Board in opposing a hostile
takeover bid. The availability of Blank Check Preferred could have the effect of
delaying a change of control and of increasing the consideration ultimately paid
to the Company and its shareholders.
The proposed Blank Check Amendment is not intended to be an anti-takeover
measure, and the Board of Directors is not aware of any present third party
plans to gain control of the Company
The actual effect of the issuance of any shared of Blank Check Preferred upon
the rights of holders of Common Stock cannot be stated until the Board
determines the specific rights of the holders of such Blank Check Preferred.
However, the effects might include, among other things, restricting dividends on
the Common Stock, diluting the voting power of the Common Stock, reducing the
market price of the Common Stock or impairing the liquidation rights of the
Common Stock, without further action by the stockholders. Holders of the
Company's Common Stock will not have preemptive rights with respect to the Blank
Check Preferred.
Although the Company may consider issuing Blank Check Preferred in the future
for purposes of raising additional capital or in connection with acquisition
transactions, the Company currently has not binding agreements or commitments
with respect to the issuance of the Blank Check Preferred.
27
D. Risk Factors
If the Blank Check Stock Amendment is approved, the Board of Directors may
approve the creation and issuance of classes of capital stock without the
requirement of stockholder approval. The terms of classes of stock adopted by
the Board of Directors may be materially adverse under certain circumstances to
holders of existing classes of stock. It is possible that the Board of Directors
could create a class of stock under authority granted under the Blank Check
Stock Amendment that may have terms that would not have been approved had the
terms been presented to the stockholders for approval prior to such creation or
adoption. Accordingly, the actual effect of the issuance of any shares of such
Blank Check Preferred upon the rights of holders of Common Stock cannot be
stated until the Board of Directors determines the specific rights of the
holders of such Blank Check Preferred. However, the effects might include, among
other things, restricting dividends on the Common Stock, diluting the voting
power of the Common Stock, reducing the market price of the Common Stock, or
impairing the liquidation rights of the Common Stock, without further action by
the shareholders. Holders of the Company's Common Stock will not have preemptive
rights with respect to the Blank Check Preferred.
E. Recommendation of the Board of Directors
The Board of Directors believes that the advantages to be realized from the
Blank Check Stock Amendment substantially outweigh the risk factors. The Board
of Directors has unanimously approved, and recommended that the stockholders
vote "FOR," the Blank Check Stock Amendment.
F. No Impact on Capitalization
G. Required Vote: Approval by Stockholders
In order to approve the Blank Check Stock Amendment, the Certificate of
Incorporation must be amended. The Blank Check Stock Amendment has been approved
by the Board of Directors and has been recommended to, and presented for
approval by, the stockholders of the Company. In order to approve the Blank
Check Stock Amendment, the Blank Check Stock Amendment must be approved by a
majority of the total number of votes entitled to be cast by all the
stockholders. The holders of a majority of the shares of Common Stock entitled
to vote have indicated that they intend to vote their shares in favor of the
Blank Check Stock Amendment. Accordingly, assuming such holders vote as they
have indicated, the Blank Check Stock Amendment will be approved by the
stockholders of the Company at the meeting. Nevertheless, your vote is important
and the Company is soliciting the proxy of each stockholder (including such
holders and all other stockholders).
H. Financial Information
Financial information relevant to this proposal is hereby incorporated by
reference to the Annual Report. Each stockholder should carefully review the
Annual Report in conjunction with this Proxy Statement.
28
Proposal 4. APPROVAL OF THE LONG-TERM INCENTIVE STOCK OPTION PLAN.
The Board of Directors has approved the 2009 Long-Term Incentive Stock Option
Plan (the "Plan").
A. Material Terms of the Company's 2009 Long-Term Incentive Stock Option Plan
1. Purpose.
The purpose of the Plan is to promote the interests of the Company by providing
current and future directors, officers, key employees and advisors with
incentive stock options, non-statutory stock options, and/or restricted stock in
the Company.
2. Eligible Participants.
Directors and officers of the Company or its subsidiaries, key employees of the
Company or its subsidiaries, and advisors to the Board of Directors shall be
eligible to participate in the Plan. Employee participants shall be selected by
a committee (the "Committee") appointed by the Board of Directors to administer
the Plan based upon such factors as the employee's past and potential
contributions to the success, profitability, and growth of the Company.
3. Shares Subject to the Plan.
The shares of Common Stock of the Company subject to the Plan may be either
shares of original issue, treasury shares, or a combination of the two. The
maximum number of shares of Common Stock that may be the subject to the Plan
shall be ten million (10,000,000) shares.
4. Option Grants Under the Plan.
The Committee, or the full Board of Directors, may, from time to time and upon
such terms and conditions as it may determine in its sole and absolute
discretion authorize the granting of option rights under the Plan. Each such
grant shall be subject to certain limitations, including, but not limited to,
(i) the specific number of shares of Common Stock to which it pertains, (ii) an
option price not less than 100 percent of the market value per share on the date
the option right is granted, (iii) payment of the option price in cash or by the
redemption of shares of Common Stock by the optionee or by combination of the
two or by any other payment acceptable to the Committee and (iv) each grant
shall be evidenced by an agreement executed on behalf of the Company by any
officer designated by the Committee. Restricted stock awards under the Plan may
be issued in a manner and may be subject to vesting for the period of time
determined by the Committee in its absolute discretion.
29
5. Exercise Periods.
a. General.
The period of each incentive stock option by its terms shall be not more than
ten years from the date the option is granted as specified by the Committee.
b. Employment Status.
Subject to the foregoing, generally, incentive stock options that are
exercisable as of the date of termination of an optionee's employment shall
remain exercisable for a period of three months following such termination for
any cause other than death or disability, and for a period of one year following
a termination of employment due to death or disability.
Non-statutory stock options that are exercisable as of the date of termination
of an optionee's employment shall remain exercisable for a period of three years
following such termination, and the right to exercise non-statutory stock
options that are not exercisable as of the date of termination shall be
forfeited.
c. Change in Control.
If an optionee terminates his or her employment with the Company only for "good
reason" (as defined in the Plan) within one year following a "Change in Control"
(as defined in the Plan), (i) all options granted under the Plan shall be fully
exercisable as of the date of such termination and shall remain exercisable for
the entire exercise period provided in the original grant under the Plan and
(ii) all vesting with respect to restricted stock awards shall be fully
accelerated as of the date of such termination.
6. Other Terms.
The Committee consists of at least three members of the Board of Directors,
appointed and replaced at any time by the Board of Directors. The Committee has
plenary powers to interpret and construe provisions of the Plan or any agreement
regarding rights granted under the Plan. Any determination by the Committee with
respect to the Plan shall be final and binding and no member of the Committee is
liable for any action or good faith determination.
Subject to certain limitations, the Plan may be terminated and provisions of the
Plan may be amended by resolutions of the Board of Directors, including the
acceleration, cancellation or granting of new option rights (with the consent of
the affected optionee).
At present, the Company does not intend to make grants under the Plan.
30
B. Benefits of the Plan
The Board of Directors approved the Plan for several reasons. First, the Company
wishes to be able to attract and retain the best available managers and
employees by being able to compensate those managers and employees on
competitive terms. Second, the Board of Directors believes that compensation of
managers and employees through equity awards will reduce the amount of cash that
would have been needed to adequately compensate these managers and employees
with salary and bonuses. Third, the Board of Directors believes that
compensating managers and employees through the award of equity will better
align the interests of managers and employees, on the one hand, and the
stockholders, on the other hand, by providing incentives to managers and
employees to enhance the equity value of the Company.
Upon the approval of the Plan by the stockholders, the Company's 2004 Stock
Option Plan will be terminated. See part B.7.a.4, 7, 8, 11 and 12 of this Proxy
Statement.
C. Securities Exchange Act of 1934
Approval of the Plan is being sought from the stockholders in order to permit
the Plan to be treated as a qualified plan under the Internal Revenue Code.
Section 16 of the Securities Exchange Act of 1934 (the "Act") governs
short-swing profits by corporate insiders, including directors, and generally
requires that any profit obtained by such insider from a combination of any
purchase and any sale within six months of each other must be paid to the
Company. Rule 16b-3 under the Act provides an exemption from this short-swing
profit recovery for certain transactions pursuant to plans approved by
stockholders. The Company believes that the Plan will qualify for exemption from
Section 16 of the Act pursuant to Rule 16b-3 under the Act once it is approved
by the stockholders. Accordingly, transactions by managers and employees in
awards they receive under the plan and capital stock they receive pursuant to
such awards, other than certain transactions initiated at the discretion of the
manager or employee, will be exempt from the short-swing profits provisions of
section 16 of the Act.
D. Recommendation of the Board of Directors
The Board of Directors believes that the Company will benefit from the adoption
and ratification by the stockholders of the Long-Term Incentive Compensation
Plan. The Board of Directors has unanimously approved, and recommended that the
stockholders vote "FOR," the Long-Term Incentive Compensation Plan.
E. Required Vote: Approval by Stockholders
In order to approve the Long-Term Incentive Compensation Plan, it must be
approved by a majority of the total number of votes entitled to be cast by all
the stockholders. The holders of a majority of the shares of the Common Stock
have indicated that they intend to vote their shares in favor of the Long-Term
Incentive Compensation Plan. Accordingly, assuming that such holders vote as
they intend, the Long-Term Incentive Compensation Plan Amendment will be
approved by the stockholders of the Company at the meeting. Nevertheless, your
vote is important and the Company is soliciting the proxy of each stockholder
(including such holders and all other stockholders).
31
MISCELLANEOUS ITEMS
A. Report of the Audit Committee
On April 25, 2008, The Board of Directors established an Audit Committee and
appointed Mr. Rounsevelle W. Schaum as its Chairman. Mr. Schaum is a director as
defined under FINRA Rule 4200(a)(15). Mr. Shaum and all of the members to be
appointed in the future to the Audit Committee are financially literate under
current listing standards of Nasdaq and the American Stock Exchange. The Board
of Directors has determined that Mr. Schaum is a financial expert, as defined
under SEC rules, and is fully qualified to serve on the Audit Committee. The
Company did not have an Audit Committee in place for the fiscal year ended
December 31, 2007, and therefore there is no Report with respect to that fiscal
year. The Audit Committee was fully operational for the current fiscal year
ending December 31, 2008. Mr. Schaum will resign from the Board of Directors
upon completion of the proposed Dutchess transaction. The Company will appoint a
new Chairman of the Audit Committee at its first meeting. The new Board of
Directors will also appoint an audit firm which may or may not be the current
firm.
Management of the Company is responsible for the financial reporting process,
including its systems of internal and disclosure controls, and for the
preparation of consolidated financial statements in accordance with generally
accepted accounting principles. The Company's independent registered public
accountants, who are appointed by the Audit Committee, are responsible for
auditing those financial statements. The Audit Committee's responsibility is to
monitor and review these processes.
B. Audit Fees And Expenses
Additionally, audit fees, audit related fees, tax fees and all other service
fees that were paid or payable to Hattray and Associates CPA, PA for 2007 and
2008 amounted to:
Audit Fees and Expenses for Year Ended December 31, 2007: $36,160
Audit Fees and Expenses for Year Ended December 31, 2008: $37,090
(1) Included audit fees and expenses related to the acquisition of TB&A
Hospital Television, Inc.
Beginning with 2009, the Company's Audit Committee shall review and pre-approve
all audit and non-audit services to be provided by the independent auditor
(other than with respect to the de minimis exceptions permitted by the Act).
This duty may be delegated to one or more designated members of the Audit
Committee with any such pre-approval reported to the Audit Committee at its next
regularly scheduled meeting.
32
C. Electronic Access To Proxy Statement And Annual Report.
This proxy statement may be viewed online at patientportal.com and our 2008
Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission, at patientportal.com.
D. Incorporation by Reference.
For the further information of the stockholders, the Company is delivering with
this Proxy Statement a copy of its Annual Report on Form 10-K for the fiscal
year ended December 31, 2008 (the "Form 10-K") filed with the Securities and
Exchange Commission. Certain portions of the Form 10-K, including, without
limitation, Item 6 (Selected Financial Data), Item 7 (Management's Discussion
and Analysis of Financial Condition and Results of Operations), Item 7A
(Quantitative and Qualitative Disclosures About Market Risk), Item 8 (Financial
Statements and Supplementary Data) and Item 9 (Changes in and Disagreements With
Accountants on Accounting and Financial Disclosure Controls and Procedures), are
incorporated in the Proxy Statement by reference. You should refer to the Form
10-K and review such information.
EXPENSES
All expenses in connection with this Proxy Statement will be borne by the
Company.
OTHER BUSINESS
There is no other business that will be presented for consideration in this
Proxy Statement other than those items stated above.
Dated: June 2, 2009 PATIENT PORTAL TECHNOLOGIES, INC.
By: /s/ Thomas Hagen
Thomas Hagan
33
This Proxy Is Solicited On Behalf Of The
Board Of Directors Of Patient Portal
Technologies, Inc.
PROXY -- ANNUAL MEETING OF STOCKHOLDERS
July 9, 2009
The undersigned, a stockholder of Patient Portal Technologies, Inc., a Delaware
corporation (the "Company"), does hereby appoint Kevin Kelly and Thomas Hagan
and each of them, the true and lawful attorneys and proxies with full power of
substitution, for and in the name, place and stead of the undersigned, to vote
all of the shares of Common Stock of the Company which the undersigned would be
entitled to vote if personally present at the Annual Meeting of Stockholders of
the Company to be held at 8276 Willett Parkway, Baldwinsville, NY 13027, on
Thursday, July 9, 2009, at 4:00 P.M., local time, or at any adjournment thereof.
The undersigned hereby instructs said proxies ortheir substitutes:
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR
VOTE IN BLUE OR BLACK INK AS SHOWN HERE?|X| .
1. ELECTION OF DIRECTORS. The Election of the following directors to serve until
the next annual meeting of stockholders and until their successors have been
duly elected and qualified.
NOMINEES:
| |FOR ALL NOMINEES 0 KEVIN KELLY
0 THOMAS HAGAN
| |WITHHOLD AUTHORITY FOR ALL NOMINEES 0 DOUGLAS LEIGHTON
0 MICHAEL NOVIELLI
| |FOR ALL EXCEPT: (SEE INSTRUCTION BELOW) 0 DOUGLAS D'AGATA
INSTRUCTION: To withhold authority to vote for any individual nominee(s), mark
"FOR ALL EXCEPT" and fill in the circle next to each nominee you wish to
withhold, as shown here. [0]
34
2. APPROVAL OF AN AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF THE COMPANY
TO CREATE THE SERIES C CONVERTIBLE PREFERRED STOCK OF THE COMPANY. To amend the
Certificate of Incorporation of the Company, as amended, to create a series of
Preferred stock to be known as the Series C Convertible Preferred Stock, par
value $0.01 per share.
| | FOR | | AGAINST | | ABSTAIN
INSTRUCTION: Fill in the circle next to the action you wish to take, as shown
here. [0] If you fail to fill in a circle above, your proxy will be counted as a
vote FOR the indicated proposal.
3. APPROVAL OF AN AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO AUTHORIZE THE
BOARD OF DIRECTORS OF THE COMPANY TO AUTHORIZE, CREATE AND ISSUE NEW CLASSES AND
SERIES OF CAPITAL STOCK WITHOUT REQUIRING SHAREHOLDER APPROVAL (BLANK CHECK
PREFERRED). To amend the Certificate of Incorporation of the Company as amended,
to authorize the Board of Directors to authorize, create and issue new classes
and series of preferred stock without requiring the Board of Directors to obtain
shareholder approval for each new class and series (blank check preferred.
| | FOR | | AGAINST | | ABSTAIN
INSTRUCTION: Fill in the circle next to the action you wish to take, as shown
here. [0] If you fail to fill in a circle above, your proxy will be counted as a
vote FOR the indicated proposal.
4. APPROVAL OF THE LONG-TERM INCENTIVE STOCK OPTION PLAN. To approve the
Company's 2009 Long-Term Incentive Stock Option Plan.
| | FOR | | AGAINST | | ABSTAIN
INSTRUCTION: Fill in the circle next to the action you wish to take, as shown
here. [0] If you fail to fill in a circle above, your proxy will be counted as a
vote FOR the indicated proposal.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH ANY DIRECTIONS HEREINBEFORE GIVEN.
UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED TO ELECT THE DIRECTORS AND
IN FAVOR OF THE OTHER INDIACTED PROPOSALS AND IN ACCORDANCE WITH THE DISCRETION
OF THE HOLDER OF THIS PROXY WITH RESPECT TO ANY OTHER BUSINESS TRANSACTED AT THE
MEETING.
35
The undersigned hereby revokes any proxy or proxies heretofore given and
acknowledges receipt of a copy of the Notice of Annual Meeting and Proxy
Statement, both dated June 2, 2009.
TO CHANGE YOUR ADDRESS ON YOUR ACCOUNT,
PLEASE CHECK THE BOX AT RIGHT AND
INDICATE YOUR NEW ADDRESS IN THE ADDRESS |_|
SPACE ABOVE. PLEASE NOTE THAT CHANGES
TO THE REGISTERED NAME(S) ON THE ACCOUNT MAY NOT BE SUBMITTED VIA THIS METHOD.
Signature: _______________________________ Date: ___________
Signature: _______________________________ Date: ___________
NOTE: Please sign exactly as your name or names appears on this Proxy. When
shares are held jointly, each holder should sign. When signing as executor,
administrator, attorney, trustee or guardian, please give full titles as such.
If the signer is a corporation, please sign full corporate name by duly
authorized officer, giving full title as such. If signer is a partnership,
please sign in partnership name by authorized person.
36
EXHIBIT A- Form of Stockholder Resolutions
PATIENT PORTAL TECHNOLOGIES, INC.
Resolutions to be Acted Upon by the Stockholders at the Annual Meeting
On Thursday, July 9
Relative to Proposal 1:
RESOLVED, that each of Kevin Kelly, Thomas Hagan, Douglas
Leighton, Michael Novielli and Douglas D'Agata is, and each hereby
shall be, elected as a director of the Corporation, to hold office for
the ensuing year until the next annual meeting of stockholders of the
Corporation and until their respective successors have been duly
elected and qualified; and it is further
Relative to Proposal 2 and Proposal 3:
RESOLVED, that the Certificate of Amendment to the Certificate
of Incorporation of the Company in the form annexed hereto as
Attachment 1 hereto and declared advisable by the Board of Directors of
the Corporation is hereby is hereby authorized and approved; and is its
further
Relative to Proposal 4:
RESOLVED, that the Long-Term Incentive Compensation Plan of
the Company in the form annexed hereto as Attachment 2 hereto and
approved by the Board of Directors of the Corporation is hereby is
hereby authorized and approved; and is its further
Relative to All Proposals:
RESOLVED, that all actions taken by the Board of Directors of
the Corporation and the officers of the Corporation in furtherance of
the foregoing are hereby approved and ratified in all respects.
37
Attachment 1 to Exhibit A
CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PATIENT PORTAL TECHNOLOGIES, INC.
PATIENT PORTAL TECHNOLOGIES, INC., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify:
1. That at a meeting of the Board of Directors of the Corporation, the
Board of Directors adopted a resolution setting forth a proposed amendment to
the Certificate of Incorporation of the Corporation, as amended, declaring such
amendment to be advisable and submitted said amendment to the stockholders of
the Corporation for consideration thereof. The text of the resolution setting
for the amendment is as follows:
"RESOLVED, that the Certificate of Incorporation of this corporation be
amended by changing the Article thereof numbered FOURTH so that, as amended,
said Article FOURTH shall be and read as follows:
"FOURTH: The amount of the total stock this corporation is authorized
to issue is 100,000,000 shares of Common Stock with a par value of $0.001 per
share and 1,000,000 shares of Preferred Stock with a par value of $0.01 per
share. Of the shares of Preferred Stock with a par value of $0.01 per share,
800,000 shares of Preferred Stock shall be unclassified, and the board of
directors shall have the authority by resolution, without requiring the consent
of the holders of any shares of the capital stock of the corporation, to
classify or create any series from such shares of Preferred Stock and to fix by
resolution the designations, preferences and relative, participating, optional
or other special rights, and qualifications, limitations and restrictions, of
such shares. The remaining 200,000 shares of Preferred Stock (subject to
increase or decrease as provided below) shall be designated the "Series C
Preferred Stock," par value $0.01 per share (the "Series C Preferred Stock"),
and shall have the designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations and
restrictions, set forth below.
"Series C Preferred Stock
"(1) Designation and Amount. The number of shares constituting the
Series C Preferred Stock shall be two hundred thousand (200,000). Such number of
shares may be increased or decreased by resolution of the Board; provided that
no decrease shall reduce the number of shares of Series C Preferred Stock to a
number less than the number of shares then outstanding plus the number of shares
reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
Corporation into Series C Preferred Stock.
38
"(2) Liquidation Preference. In the event of (a) a sale, financing
or refinancing of all or substantially all of the assets of the Corporation, or
(b) the liquidation of the Corporation, the holders of the Series C Preferred
Stock, on a pro rata basis, shall (prior to any distribution on behalf of the
holders of the Common Stock, $0.001 par value per share, of the Corporation (the
"Common Stock")) be entitled to a preferential distribution up to the amount of
their unreturned capital contribution from the proceeds of such sale, financing,
refinancing or liquidation net of expenses of the transaction, debt obligations
of the Corporation, designated use of proceeds for the financing or refinancing,
and any reserves deemed appropriate by the Board in its sole discretion (a
"Preferred Distribution"). Thereafter, all such distributions from such
transaction shall be allocated pro rata to the holders of the Series C Preferred
Stock and the holder of the Common Stock according to their number of shares.
Except as may otherwise be provided by law or the Articles of Incorporation of
the Corporation, any operating or other distributions shall be pro rata on a per
share basis among all holders of Common Stock and the holders of Preferred
Stock.
"(3) The Corporation intends to sell Series C Preferred Stock
and/or Common Stock to Dutchess Private Equities Fund, Ltd. ("Dutchess") through
a private placement offering (the "Dutchess Offering"). In the event the
Corporation sells Series C Preferred Stock to a person or entity other than
Dutchess ("Additional Stock") at a per share value below the value paid by
Dutchess in the Dutchess Offering, the Corporation will issue additional Series
B Preferred Stock to Dutchess so the number of shares of Series C Preferred
Stock owned by Dutchess shall be equivalent to the number of shares of
Additional Stock purchased by such other person or entity with an investment
identical in amount to such person or entity. In the event a person or entity
obtains warrants or other securities convertible into Series C Preferred Stock,
such warrants or other securities shall be considered in determining the per
share value of the Additional Stock for the purposes of this provision.
"(4) Voting Rights. The Series C Preferred Stock shall have a
series vote: (i) with regard to any items that any Series of Preferred Stock,
either individually or jointly, has a series vote; (ii) as provided under
"Protective Provisions" below; or (iii) as required by law. Such series vote
will require the approval of holders of fifty-one percent (51%) of the
outstanding shares of Series C Preferred Stock.
"(5) Protective Provisions. The Corporation hereby covenants that
so long as any of the Series C Preferred Stock is outstanding, neither it nor
any of its subsidiaries will, without the prior written approval of holders of
at least fifty-one percent (51%) of the outstanding shares of Series C Preferred
Stock, do or commit to do any of the actions described on Appendix A attached
hereto (either directly or by amendment, merger, consolidation, or otherwise).
"(6) Cumulative Dividend. To each holder of Series C Preferred
Stock, the Corporation shall pay an annual dividend equal to Eight Percent (8%)
of the per share price of each share of Series C Preferred Stock in cash or in
Series C Preferred Stock, at the option of the Corporation, held by such holder
(the "Dividend"). One-quarter of the annual Dividend shall be paid within
fifteen (15) days after the end of each of the Corporation's fiscal quarters.
Declaration and payment of the Dividend shall be in accordance with the DCGL.
"(7) Conversion.
"(a) Mechanics of Conversion. Each share of Series C
Preferred Stock shall be convertible, at the sole option of the holder thereof,
into share(s) of the Corporation's Common Stock (such shares of Common Stock
hereinafter being referred to as "Conversion Shares") by the holder thereof
sending to the Corporation a Conversion Notice (as defined below) for such
shares. The term "Conversion Notice" shall mean a written notice signed and
dated ("Conversion Date") by the holder of the Series C Preferred Stock wherein
the holder has set forth the number of shares of Series C Preferred Stock that
39
it intends to convert pursuant to the terms of this Certificate of Designation
and computation of the number of Conversion Shares that the holder believes it
is entitled to receive as a result of the application of the Conversion Formula
(as defined below) to such conversion. The term "Conversion Formula" shall mean
that number of Conversion Shares to be received by the holder of Series C
Preferred Stock in exchange for each share of Series C Preferred Stock that such
holder intends to covert pursuant to this provision, where such number of
Conversion Shares shall be equal to the number of shares of Common Stock
representing seventy two hundredths of a percent (.0072%) of the Common Stock
outstanding, for each share of preferred stock, at the time of conversion.
"(8) Put Right.
"(a) The holder of Series C Preferred Stock shall have the
right, at its sole option, to request the Company buy a specified number of its
shares of Series C Preferred Stock back to the Corporation in exchange for
payment by the Corporation of the Put Consideration (as defined below) in
accordance with the terms of this provision. In order to exercise such right,
the holder of the Series C Preferred Stock shall remit to the Company a Put
Notice (as defined below) and the Put Consideration for such shares. The term
"Put Notice" shall mean a written notice signed and dated by the holder of the
Series C Preferred Stock and sent to the Corporation and has set forth the
number of shares of Series C Preferred Stock that it intends to sell pursuant to
the terms of this Certificate of Designation and computation of the Put
Consideration. The term "Put Consideration" shall mean the number of shares of
Series C Preferred that the Corporation thereof intends to purchase pursuant to
this provision multiplied by the Put Price (as defined below). The term "Put
Price" shall mean One Thousand Dollars ($1,000.00) per share of Series C
Preferred Stock. The holder of the Series C Preferred Stock shall only be
permitted to submit a Put Notice to the Company so long as the total Put
Consideration does not exceed twenty thousand dollars ($20,000) per calendar
month. The initial Put Notice can begin with any month after April 2009. The
Company, in its sole discretion, may determine whether to accept to increase the
Put Consideration described herein.
"(b) In the event the Company raises funds from a third
party, the holder of Series C Preferred Stock shall have the right, at its sole
option, to request the Company buy a specified number of its shares of Series C
Preferred Stock back to the Corporation in exchange for payment by the
Corporation of the Put Consideration (as defined below) in accordance with the
terms of this provision. In order to exercise such right, the holder of the
Series C Preferred Stock shall remit to the Company a Put Notice (as defined
below) and the Put Consideration for such shares. The term "Put Notice" shall
mean a written notice signed and dated by the holder of the Series C Preferred
Stock and sent to the Corporation and has set forth the number of shares of
Series C Preferred Stock that it intends to sell pursuant to the terms of this
Certificate of Designation and computation of the Put Consideration. The term
"Put Consideration" shall mean the number of shares of Series C Preferred that
the Corporation thereof intends to purchase pursuant to this provision
multiplied by the Put Price (as defined below). The term "Put Price" shall mean
One Thousand Dollars ($1,000.00) per share of Series C Preferred Stock. The
holder of the Series C Preferred Stock shall only be permitted to submit a Put
Notice to the Company so long as the total Put Consideration does not exceed one
million dollars ($1,000,000).
"(9) Call Right. Each quarter, the Call Consideration (as
defined below) shall be, equal to twenty-five percent (25%) of the Company's
earning before interest, taxes, deprecation and amortization ("EBITDA") which
exceeds one million dollars ($1,000,000) per quarter but shall not be less that
four million dollars ($4,000,000) per year. Those amounts shall be deposited
into a separate account ("Separate Account") maintained by the Company, to be
used for use by the Company only with the expressed written consent of the
holders of the Series C Preferred . If in any fiscal year, the Company's EBITDA
40
does not exceed four million dollars ($4,000,000) the holder of the Series C
Preferred shall allow the repayment, upon request of the Company, of any amounts
deposited in the Separate Account back to the Company within five days of filing
of the annual report with the United States Securities and Exchange Commission.
If funds are left in the Separate Account at the end of the fiscal year
("Remaining Funds"), the Corporation shall be obligated to request that a holder
of Series C Preferred Stock sell a specified number of its shares of Series C
Preferred Stock (the "Call Shares") to the Corporation in exchange for payment
by the Corporation of the Call Consideration (as defined below) in accordance
with the terms of this provision. In order to exercise such right, the
Corporation shall remit to such holder of Series C Preferred Stock a Call Notice
(as defined below). Upon receipt of the Call Notice, each holder shall have a
period of three (3) days (the "Call Notice Period") during which time it may, in
its sole discretion, convert any or all of the shares of Series C Preferred
Stock (up to the Call Consideration , and such converted shares may be sold at
the holder's discretion, subject to compliance with federal and applicable state
securities laws). Upon the expiration of the Call Notice Period, provided that
the holder still beneficially owns any shares of Series C Preferred Stock, it
shall deliver the Call Shares in exchange for the Call Consideration. The term
"Call Notice" shall mean a written notice signed and dated by the Corporation to
such holder of Series C Preferred Stock from whom the Corporation desires to
repurchase the Call Shares wherein the Corporation has set forth the number of
shares of Series C Preferred Stock that it intends to purchase pursuant to the
terms of this Certificate and computation of the Call Consideration. The term
"Call Consideration" shall mean the number of shares of Series C Preferred Stock
that the Corporation thereof intends to purchase pursuant to this provision
multiplied by the Call Price (as defined below). The Call Consideration shall be
equal to the Remaining Funds. The term "Call Price" shall mean One Thousand
Dollars ($1,000) per share of Series C Preferred Stock (subject to appropriate
adjustment in the event of any stock dividend, stock split, combination or other
similar recapitalization with respect to the Series C Preferred Stock)."
2. Pursuant to the resolution of its Board of Directors, the holders of
a majority of the Common Stock and entitled to vote, acting in lieu of a meeting
of the stockholders pursuant to Section 228 of the General Corporation Law of
the State of Delaware consented to the adoption of the amendment.
3. This amendment was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said corporation has caused this certificate to be
signed this _____ day of May, 2009.
----------------------------
Kevin Kelly
Chief Executive Officer
41
Appendix A
Protective Provisions
(i) sell all or any portion of the Corporation or any subsidiary,
whether by sale of equity interests, merger (other than a merger in which the
Corporation is the surviving entity and no change of control occurs as a result
of such merger), reorganization, consolidation, refinancing or recapitalization
that results in a change in controlling equity ownership of the Corporation or
any subsidiary or sale, lease, exchange, transfer or other disposition of all or
substantially all of the assets of the Corporation or such subsidiary;
(ii) Except as set forth in the term sheet dated April 1,2009 between
Five Star Bank and the Company incur any indebtedness, for borrowed money or
grant except for purchase money security interests, create or permit the
imposition of any lien, charge, security interest or other encumbrance upon any
of the assets or properties of the Corporation or any subsidiary or guaranty or
provide surety for the obligations of any third-party, other than (a) ordinary
course trade payables, (b) financings of budgeted capital expenditures reflected
in annual budgets approved by the Board, and (c) not more than two million
dollars ($2,000,000) of traditional working capital financing from commercial
lenders based on a borrowing base and secured only by the Corporation's accounts
receivable;
(iii) amend or modify (a) the Articles of Incorporation, Bylaws or
similar governing instrument(s) of the Corporation or any of its subsidiaries,
or (b) documentation relating to indebtedness for borrowed money of the
Corporation or any subsidiary, other than indebtedness permitted under clause
(ii) above;
(iv) enter into any new transactions between or among the Corporation
and/or any subsidiary, on the one hand, and any of their respective equity
owners, directors, officers, employees or affiliates, on the other hand, except
agreements which have been executed prior to the date of execution of this
Certificate; provided, however, that nothing in this clause (iv) shall be deemed
to prohibit (a) normal and customary employment and benefit programs on terms
approved by the Board (including at least a majority of the directors designated
by the holders of the Series C Preferred), or (b) transactions between the
Corporation and its wholly-owned subsidiaries (or between such subsidiaries) and
transactions that are on terms no less favorable to the Corporation and/or its
subsidiaries than those the Corporation and/or its subsidiaries could otherwise
receive in an arms length transaction from an unaffiliated third-party;
(v) make any payment on account of, or set aside any assets for a
sinking or other analogous fund for, the purchase redemption, defeasance,
retirement or other acquisition of any equity interest of the Corporation or any
subsidiary, except other redemptions from officers, directors, employees or
consultants to the Corporation upon termination of their employment or
association with the Corporation pursuant to agreements between such persons and
the Corporation approved by the Board;
(vi) voluntarily liquidate, wind-up, dissolve or commence any
bankruptcy, insolvency, reorganization, debt arrangement or other case or
proceeding under any bankruptcy or insolvency law or make a general assignment
for the benefit of creditors with respect to the Corporation or any of its
subsidiaries;
42
(vii) commence or settle any material litigation (defined as two
hundred and fifty thousand dollars or more) or similar action to which the
Corporation or any subsidiary is a party or could otherwise be bound;
(viii) make any investment in one or more persons or entities in excess
of five thousand dollars ($5,000) individually;
(ix) change the line of business which is the sale of televisions and
associated equipment to hospital facilities and providing non medical management
and patient support services assisting hospitals to improve patient satisfaction
and outcomes. of the Corporation or any subsidiary;
(x) increase the size of the Board beyond five (5) directors;
(xi) change the independent auditors of the Corporation;
(xii) authorize, issue or agree to issue any equity securities
(including convertible and exchangeable securities) of the Corporation or any
subsidiary;
(xiii) pay or make any dividends or distributions to its equity
holders, other than distributions by subsidiaries of the Corporation to the
Corporation and/or distributions in respect of the Series C Preferred Stock; or
(xiv) adopt any new equity based or phantom incentive plan or program
for the Corporation or any subsidiary (the approving board and shareholder
resolutions should include the approval of the stock option plan)..
(xv) the holders of the Series C Preferred shall have the right to
appoint three (3) directors to the Company's Board.
43
Attachment 2 to Exhibit A
LONG-TERM INCENTIVE STOCK OPTION PLAN
PATIENT PORTAL TECHNOLOGIES, INC.
LONG-TERM INCENTIVE STOCK OPTION PLAN
-------------------------------------
1. Preamble. This document sets forth the terms of the PATIENT PORTAL
TECHNOLOGIES, INC. Long-Term Incentive Stock Option Plan ("Plan"), which shall
become effective as of May , 2009, contingent upon the approval of the Plan by
the shareholders of PATIENT PORTAL TECHNOLOGIES, INC.
2. Purpose. The purpose of the Plan is to promote the interests of the
Company by providing current and future directors, officers, key employees and
advisors with incentive stock options, non-statutory stock options, and/or
restricted stock in the Company, so that the interests of such directors,
officers, employees and advisors will be closely associated with the interests
of shareholders by reinforcing the relationship between shareholder gains and
compensation.
3. Eligibility. Directors and officers of the Company or its
Subsidiaries, key employees of the Company or its Subsidiaries, and Advisors to
the Board of Directors shall be eligible to participate in the Plan. Employee
participants shall be selected by the Committee based upon such factors as the
employee's past and potential contributions to the success, profitability, and
growth of the Company.
4. Definitions. As used in this Plan,
(a) "Advisor" shall mean any natural person who is engaged to
render bona fide consulting or advisory services to the
Board of Directors.
(b) "Board of Directors" shall mean the Board of Directors of
the Company.
(c) "Committee" shall mean the committee appointed by the Board
of Directors to administer the Plan in accordance with
Paragraph 14.
(d) "Common Stock" shall mean the Common Stock, $.001 par
value, of the Company.
(e) "Company" shall mean PATIENT PORTAL TECHNOLOGIES, INC.
(f) "Director" shall mean a member of the Board of Directors.
(g) "Eligible Employees" shall mean persons treated by the
Company for payroll and employment tax purposes as common
law employees of the Company and described in Paragraph 3.
44
(h) "Incentive Stock Option" shall mean the right granted to an
Eligible Employee to purchase Common Stock under this Plan,
the grant, exercise and disposition of which are intended
to comply with, and to be governed by, Internal Revenue
Code Section 422.
(i) "Market Value per Share" shall mean, at any date, the fair
market value per share of the shares of Common Stock, as
determined by the Committee in accordance with Internal
Revenue Code Sections 409A and 422.
(j) "Non-Statutory Stock Option" shall mean the right granted
to an Eligible Employee, Director or Advisor to purchase
Common Stock under this Plan, the grant, exercise and
disposition of which are not intended to be subject to the
requirements and limitations of Internal Revenue Code
Section 422.
(k) "Optionee" shall mean the Eligible Employee, Director or
Advisor to whom an Option Right is granted pursuant to an
agreement evidencing an outstanding Incentive Stock Option
or Non-Statutory Stock Option.
(l) "Option Right" shall mean the right to purchase a share of
Common Stock upon exercise of an outstanding Incentive
Stock Option or Non-Statutory Stock Option.
(m) "Restricted Stock Award" shall mean an award of Common
Stock to an Eligible Employee or Advisor that is subject to
the restrictions described in Paragraph 9 and subject to
tax under Internal Revenue Code Section 83.
(n) "Subsidiary" shall mean any corporation in which (at the
time of determination) the Company owns or controls,
directly or indirectly, 50 percent or more of the total
combined voting power of all classes of stock issued by the
corporation.
5. Shares Available Under the Plan.
(a) The shares of Common Stock which may be made the subject of
Option Rights or Restricted Stock Awards pursuant to this
Plan may be either (i) shares of original issue, (ii)
treasury shares, or (iii) a combination of the foregoing.
(b) Subject to adjustments in accordance with Paragraph 11 of
this Plan, the maximum number of shares of Common Stock
that may be the subject of Option Rights or Restricted
Stock Awards granted pursuant to this Plan shall be ten
million (10,000,000) shares of Common Stock which are made
available by virtue of this Plan.
45
6. Grants of Option Rights Generally. The Committee, or the full Board
of Directors, may, from time to time and upon such terms and conditions as it
may determine, authorize the granting of Option Rights to Directors, Eligible
Employees or Advisors. Each such grant may utilize any or all of the
authorizations, and shall be subject to all of the limitations, contained in the
following provisions:
(a) Each grant shall specify whether it is intended as a grant
of Incentive Stock Options or Non-Statutory Stock Options.
(b) Each grant shall specify the number of shares of Common
Stock to which it pertains.
(c) Each grant shall specify an option price not less than 100
percent of the Market Value per Share on the date the
Option Right is granted.
(d) Successive grants may be made to the same Optionee whether
or not any Option Rights previously granted to such
Optionee remain unexercised.
(e) Upon exercise of an Option Right, the entire option price
shall be payable (i) in cash, (ii) by the transfer to the
Company by the Optionee of shares of Common Stock with a
value (Market Value per Share times the number of shares)
equal to the total option price, (iii) by a combination of
such methods of payment described in (i) and (ii) above, or
(iv) any other lawful means of payment acceptable to the
Committee. Payment may not be made with Common Stock issued
to the Optionee by the Company upon his or her prior
exercise of an incentive stock option under this Plan or
any other option plan unless the Common Stock received upon
that prior exercise shall have been held by the Optionee
for at least one year.
(f) Each grant of Option Rights shall be evidenced by an
agreement executed on behalf of the Company by any officer
designated by the Committee for this purpose and delivered
to and accepted by the Optionee and shall contain such
terms and provisions, consistent with this Plan, as the
Committee may approve.
7. Special Rules for Grants of Incentive Stock Options.
(a) As provided in Paragraph 6(c), the option price per share
of an Incentive Stock Option shall not be less than 100
percent of the Market Value per Share on the date of the
grant of the option; provided, however, that, if an
Incentive Stock Option is granted to any Eligible Employee
who, immediately after such option is granted, is
considered to own stock possessing more than ten percent of
the combined voting power of all classes of stock of the
Company, or any of its subsidiaries, the option price per
share shall be not less than 110 percent of the Market
Value per Share on the date of the grant of the option, and
such option may be exercised only within five years of the
date of the grant.
46
(b) The period of each Incentive Stock Option by its terms
shall be not more than ten years from the date the option
is granted as specified by the Committee.
(c) The Committee shall establish the time or times within the
option period when the Incentive Stock Option may be
exercised in whole or in such parts as may be specified
from time to time by the Committee, except that Incentive
Stock Options shall not be exercisable later than ten
years, following the date the option is granted. The date
of grant of each Option Right shall be the date of its
authorization by the Committee.
(d) Except as provided in Paragraph 12, or as may be provided
by the Committee at the time of grant, (i) in the event of
the Optionee's termination of employment due to any cause,
including death or retirement, rights to exercise Incentive
Stock Options shall cease, except for those which are
exercisable as of the date of termination, and (ii) rights
that are exercisable as of the date of termination shall
remain exercisable for a period of three months following a
termination of employment for any cause other than death or
disability, and for a period of one year following a
termination due to death or disability. However, no
Incentive Stock Option shall, in any event, be exercised
after the expiration of ten years from the date such option
is granted, or such earlier date as may be specified in the
option.
(e) No Incentive Stock Options shall be granted hereunder to
any Optionee that would allow the aggregate fair market
value (determined at the time the option is granted) of the
stock subject of all post-1986 incentive stock options,
including the Incentive Stock Option in question, which
such Optionee may exercise for the first time during any
calendar year, to exceed $100,000. The term "post-1986
incentive stock options" shall mean all rights, which are
intended to be "incentive stock options" under the Internal
Revenue Code, granted on or after January 1, 1987 under any
stock option plan of the Company or its Subsidiaries. If
the Company shall ever be deemed to have a "parent", as
such term is used for purposes of Section 422 of the
Internal Revenue Code, then rights intended to be
"incentive stock options" under the Internal Revenue Code,
granted after January 1, 1987 under such parent's stock
option plans, shall be included with the terms of the
definition of "post-1986 incentive stock options".
47
8. Special Rules for Grants of Non-Statutory Stock Options.
(a) Except as provided in Paragraph 12, or as may be provided
by the Committee at the time of grant, (i) in the event of
the Optionee's termination of employment due to death or
disability, rights to exercise Non-Statutory Stock Options
that are exercisable as of the date of termination shall
remain exercisable for a period of three years following
termination, (ii) in the event of the Optionee's
termination of employment due to any other reason, the
rights to exercise Non-Statutory Stock Options that are
exercisable as of the date of termination shall remain
exercisable for a period of three years following
termination, and (iii) the right to exercise Non-Statutory
Stock Options that are not exercisable as of the date of
termination shall be forfeited.
(b) The Company shall not issue stock certificates to an
Optionee who exercises a Non-Statutory Stock Option, unless
payment of the required lawful withholding taxes has been
made to the Company by check, payroll deduction or other
arrangements satisfactory to the Committee.
9. Restricted Stock Awards.
(a) Shares of Common Stock granted pursuant to a Restricted
Stock Award issued under the Plan (except as otherwise
provided in the Plan) shall not be sold, exchanged,
transferred, assigned, pledged, hypothecated, or otherwise
disposed of, for the period of time determined by the
Committee in its absolute discretion (the "Forfeiture
Period"). Except as provided in Paragraph 12, or as may be
provided by the Committee at the time of grant, if the
recipient's employment with the Company or any of its
Subsidiaries terminates prior to the expiration of the
Forfeiture Period, the recipient shall, on the date
employment terminates, forfeit and surrender to the Company
the number of shares of Common Stock with respect to which
the Forfeiture Period has not expired as of the date
employment terminates. If Common Stock is forfeited,
dividends paid on those shares during the Forfeiture Period
may be retained by the recipient.
(b) Upon each grant of a Restricted Stock Award, the Committee
shall fix the Forfeiture Period. The Committee also shall
determine whether to (i) issue certificates for the awarded
shares of Common Stock to the grantee prior to the
expiration of the Forfeiture Period, or (ii) transfer
certificates for the awarded shares of Common Stock to an
escrow agent, which agent shall hold the certificates until
the expiration of the Forfeiture Period. Each certificate
of Common Stock issued to the grantee pursuant to the
Restricted Stock Award prior to the expiration of the
Forfeiture Period shall bear a legend to reflect the
Forfeiture Period until the Forfeiture Period expires. As a
condition to issuance of Common Stock, the Committee may
require the recipient to enter into an agreement providing
for the Forfeiture Period and such other terms and
conditions that it prescribes, including, but not limited
to, a provision that Common Stock issued to the recipient
may be held by an escrow agent until the Forfeiture Period
lapses. The Committee also may require a written
representation by the recipient that he or she is acquiring
the shares for investment.
48
(c) When the Forfeiture Period with respect to shares of Common
Stock held in escrow lapses, a certificate for such shares
shall be issued, free of any escrow; such certificate shall
not bear a legend relating to the Forfeiture Period.
(d) Each recipient shall agree, at the time he or she receives
a Restricted Stock Award and as a condition thereof, to pay
or make arrangements satisfactory to the Committee
regarding the payment to the Company of any federal, state
or local taxes of any kind required by law to be withheld
with respect to any award or with respect to the lapse of
any restrictions on shares of restricted Common Stock
awarded under this Plan, or the waiver of any forfeiture
hereunder, and also shall agree that the Company may, to
the extent permitted by law, deduct such taxes from any
payments of any kind due or to become due to such recipient
from the Company, sell by public or private sale, with ten
days notice or such longer notice as may be required by
applicable law, a sufficient number of shares of Common
Stock so awarded in order to cover all or part of the
amount required to be withheld, or pursue any other remedy
at law or in equity. In the event that the recipient of
shares of Common Stock under this Plan shall fail to pay to
the Company all such federal, state and local taxes, or to
make arrangements satisfactory to the Committee regarding
the payment of such taxes, the shares to which such taxes
relate shall be forfeited and returned to the Company.
(e) The Committee shall have the authority at any time to
accelerate the time at which any or all or the restrictions
set forth in this Plan with respect to any or all shares of
restricted Common Stock awarded hereunder shall lapse.
10. Transferability. No Incentive Stock Option shall be transferable by
an Optionee other than by will or the laws of descent and distribution.
Incentive Stock Options shall be exercisable during the Optionee's lifetime only
by the Optionee. Other rights granted pursuant to this Plan also shall not be
subject to assignment, alienation, lien, transfer, sale or exchange, except to
the extent provided otherwise by the Committee at the time the right is granted.
11. Adjustments. The Committee shall make or provide for such
adjustments in the maximum number of shares of Common Stock specified in
Paragraph 5 of this Plan, in the numbers of shares of Common Stock covered by
other rights granted hereunder, and in the prices per share applicable under all
such rights, as the Committee in its sole discretion, exercised in good faith,
shall determine is equitably required to prevent dilution or enlargement of the
rights of Optionees that otherwise would result from any stock dividend, stock
split, combination of shares, recapitalization or other change in the capital
structure of the Company, merger, consolidation, spin-off, reorganization,
partial or complete liquidation, issuance of rights or warrants to purchase
securities, or any other transaction or event having an effect similar to any of
the foregoing.
49
12. Change in Control.
(a) Except as may be provided at the time an Option Right or
Restricted Stock Award is granted, and notwithstanding any
other term or provision of this Plan, in the event the
employment of an Eligible Employee is terminated for any
reason, including the Eligible Employee's voluntary
termination for "good reason" (as defined in (c) below),
but not including the Eligible Employee's voluntary
termination without "good reason" or the Eligible
Employee's termination for "cause" (as defined in (d)
below), within one year following a "Change in Control" (as
defined in (b) below):
(i) all Option Rights granted to the Eligible
Employee under this Plan prior to the date
of termination, but not exercisable as of
such date, shall become exercisable
automatically as of the date of termination;
(ii) any Option Right that is exercisable as of
the date of termination, or that becomes
exercisable pursuant to (i) above, shall
remain exercisable until the end of the
exercise period provided in the original
grant of the Option Right (determined
without regard to the Eligible Employee's
termination of employment); and
(iii) any Forfeiture Period (with respect to a
Restricted Stock Award) that shall be
unexpired as of the date of termination
shall expire automatically as of such date.
(b) For purpose of this Plan, a "Change in Control" shall mean
the occurrence of any one of the following events: (i) any
"person" including a "group" as determined in accordance
with the Section 13(d)(3) of the Securities Exchange Act of
1934 ("Exchange Act"), is or becomes the beneficial owner,
directly or indirectly, of securities of the Company
representing 30 percent or more of the combined voting
power of the Company's then outstanding securities; (ii) as
a result of, or in connection with, any tender offer or
exchange offer, merger or other business combination (a
"Transaction"), the persons who were directors of the
Company before the Transaction shall cease to constitute a
majority of the Board of Directors of the Company or any
successor to the Company; (iii) the Company is merged or
consolidated with another corporation and as a result of
the merger or consolidation less than 70 percent of the
outstanding voting securities of the surviving or resulting
corporation shall be owned in the aggregate by the former
stockholders of the Company, other than (A) affiliates
within the meaning of the Exchange Act, or (B) any party to
the merger or consolidation; (iv) a tender offer or
exchange offer is made and consummated for the ownership of
securities of the Company representing 30 percent or more
of the combined voting power of the Company's then
outstanding voting securities; or (v) the Company transfers
substantially all of its assets to another corporation
which is not controlled by the Company.
50
(c) For purposes of this Paragraph 12, "good reason" shall mean
action taken by the Company that results in: (i) an
involuntary and material adverse change in the Eligible
Employee's title, duties, responsibilities, or total
remuneration; (ii) an involuntary and material relocation
of the office from which the Eligible Employee is expected
to perform the Eligible Employee's duties; or (iii) an
involuntary and material adverse change in the general
working conditions (including travel requirements)
applicable to the Eligible Employee.
(d) Termination "for cause" for purposes of this Paragraph 12
shall include, but not be limited to, any of the following:
(i) any act of dishonesty, misconduct or fraud, acts of
moral turpitude, or the commission of a felony; (ii)
unreasonable neglect or refusal to perform the duties
assigned to the Eligible Employee, unless cured within 30
days; (iii) breach of duty or obligation to the Company or
receipt of financial or other economic profit or gain as a
result of or in any way arising out of the Eligible
Employee's position with the Company and failure to account
to the Company for such profits or other gains; or (iv)
disclosure of confidential or private Company information
or aiding a competitor of the Company (or any affiliate of
the Company) to the detriment of the Company (or any
affiliate of the Company).
13. Fractional Shares. The Company shall not be required to issue any
fractional shares of Common Stock pursuant to this Plan. The Committee may
provide for the elimination of fractions or for the settlement of fractions in
cash.
14. Administration of the Plan.
(a) This Plan shall be administered by the Committee, which
shall consist of at least three members of the Board of
Directors. Members of the Committee and the Chair of the
Committee shall be appointed by the Board of Directors and
may be replaced at any time by the Board of Directors. At
any time deemed necessary or appropriate by the Board of
Directors, the full Board of Directors may act as the
Committee.
(b) The Committee shall have the power to interpret and
construe any provision of this Plan. The interpretation and
construction by the Committee of any provision of this Plan
or of any agreement evidencing the grant of rights
hereunder, and any determination by the Committee pursuant
to any provision of this Plan or of any such agreement,
shall be final and binding. No member of the Committee
shall be liable for any such action or determination made
in good faith.
51
(c) Notwithstanding any other provision of this Plan, the
Committee may impose such conditions on the exercise of any
right granted hereunder (including, without limitation, the
right of the Committee to limit the time of exercise to
specified periods) as may be required to satisfy the
requirements of Section 16 (or any successor rule) of the
Securities Exchange Act of 1934, as may be amended from
time to time, or any successor statute.
15. Amendments, Termination, Etc.
(a) This Plan may be amended from time to time by resolutions
of the Board of Directors, provided that no such amendment
shall (i) increase the maximum numbers of shares of Common
Stock specified in Paragraph 5 of this Plan (except that
adjustments authorized by Paragraph 11 of this Plan shall
not be limited by this provision), or (ii) change the
definition of "Eligible Employees", without further
approval by the stockholders of the Company.
(b) The Committee may, with the concurrence of the affected
Optionee, cancel any agreement evidencing Option Rights
granted under this Plan. In the event of such cancellation,
the Committee may authorize the granting of new Option
Rights (which may or may not cover the same number of
shares which had been the subject of the prior agreement)
in such manner, at such option price and subject to the
same terms and conditions as, under this Plan, would have
been applicable had the canceled Option Rights not been
granted.
(c) In the case of any Option Right not immediately exercisable
in full, the Committee in its discretion may accelerate the
time at which the Option Right may be exercised, subject to
the limitation described in Paragraph 7(c).
(d) Notwithstanding any other provision of the Plan to the
contrary, (i) the Plan may be terminated at any time by
resolutions of the Board of Directors, and (ii) no rights
shall be granted pursuant to this Plan after ten years from
the date of approval of this plan by the shareholders.
52
EXHIBIT B - Debt Conversion Agreement
DEBT CONVERSION AGREEMENT
THIS DEBT CONVERSION AGREEMENT (this "Agreement") is made and entered
into as of March XX, 2009, by and between Patient Portal Technologies, Inc., a
Delaware corporation with an office at 8276 Willett Parkway, Baldwinsville, NY
13027 (the "Company"), and Dutchess Private Equities Fund Ltd. ("Dutchess").
RECITALS
WHEREAS, The Company owes Dutchess amounts of principal, interest and
penalties under the Convertible Debenture issued to Dutchess by the Company on
November 1, 2007, a copy of which are attached hereto as Exhibit A (the
"Convertible Debenture").
WHEREAS, The Company has issued to Dutchess a certain warrant for the
purchase of common shares of the company dated November 1, 2007 in the amount of
22,826,086 shares of the common stock, $.001 par value per share (the "Common
Stock:") (the "Warrants")
WHEREAS in connection with the issuance of the Convertible Debenture,
the Company has given to Dutchess a Security Agreement made as of the 10th day
of July, 2008 as collateral security for the Convertible Debenture (the
"Security Agreement")
WHEREAS in connection with the issuance of the Convertible Debenture,
certain shareholders in the Company have pledged shares in the Company as
collateral security for the Convertible Debenture (the" Pledge Agreement")
WHEREAS, Dutchess desires to convert five million nine hundred
sixty-nine thousand nine hundred sixty-six dollars and eleven cents
($5,969,966.11) under the Convertible Debenture (the "Obligation") into an
aggregate of 7,500 shares of Series B preferred stock, par value $0.01 per share
("Preferred Stock"), of the Company (the "Shares"), and the Company desires to
convert such Obligation into such Shares.
WHEREAS, Dutchess shall retain five hundred thousand dollars ($500,000)
as a balance on the Obligation.
NOW, THEREFORE, for and in consideration of the foregoing premises, the
mutual covenants and agreements contained herein, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto, intending to be legally bound, hereby agree as
follows:
4. Conversion of the Obligations; Issuance of the Shares.
4.1 At the Closing (as defined in Section 2 hereof) and subject to
the terms and conditions of this Agreement, Dutchess hereby agrees to convert
all of the Obligations into the Shares at a price of one thousand dollars
($1,000) per share, and the Company hereby agrees to issue an aggregate of seven
thousand five hundred (7,500) shares of Preferred Stock to Dutchess. By
converting the Obligation into the Shares, Dutchess acknowledges and agrees
that, except as provided in Section 7 hereof, the Obligation will be cancelled
and terminated in all respects and for all purposes and that Dutchess will be
deemed to have released all claims held by Dutchess with respect to the
Obligations, including the payment of principal and interest thereon,
cancellation of the Warrants, the extinguishment of the Security Agreement and
the cancellation of the Pledge Agreement and any fees and other amounts payable
with respect to the Obligations.
53
4.2 For purposes of calculating the holding periods for the
Shares, Dutchess shall tack back to the holding period(s) for the Obligation
under which Dutchess became entitled to receive the Shares pursuant to this
Agreement. The Company shall not adopt a position inconsistent with the
foregoing or contest such tacking for any reason, and the Company shall
cooperate with Dutchess in any efforts Dutchess may undertake to assert such
tacking in connection with the future sale of any Shares or any other purpose.
(e) Closing; Delivery of Shares.
a. Closing. The closing of the conversion of the Obligations and
the issuance of the Shares (the "Closing") shall occur on the date which the
Company has duly issued and authorized Preferred Stock and is able to deliver to
Dutchess the Shares free and clear of all leins as outlined in the Stock SERIES
C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT dated April XX, 2009 between
the Company and Dutchess.
b. Deliveries. At the Closing, the Company shall deliver to
Dutchess (i) a stock certificate representing the Shares in the name of
Dutchess; (ii) the Stock Purchase Agreement described in Section 7 hereof,
executed by an authorized representative of the Company; the original Warrants,
and (iii) issuance of 1,718,045 restricted shares of the Company's Common Stock.
c. Repayment of Debenture. Within sixty (60) days of Closing the
Company shall make a Payment to Dutchess in the amount of five hundred thousand
dollars ($500,000) to be applied to the Debenture obligation. In the event of
the Company's failure to pay such amount, the Investor may demand 500 additional
shares of Preferred Stock in cancellation of this obligation, which shall be
promptly tendered by the Company.
(f) Representations and Warranties of Dutchess. Dutchess represents and
warrants to the Company as follows.
a. Acquisition for Own Account for Investment. Dutchess is
acquiring the Shares for Dutchess's own account for investment purposes only and
not with a view to, or for sale in connection with, a distribution of the Shares
within the meaning of the Securities Act of 1933, as amended (the "1933 Act").
b. Understanding of Risks. Dutchess is aware of the highly
speculative nature of the investment in the Shares and the financial hazards
involved in such investment.
c. Dutchess's Qualifications. By reason of Dutchess's business or
financial experience, Dutchess is capable of evaluating the merits and risks of
this investment, has the ability to protect Dutchess's own interests in this
transaction, and is financially capable of bearing a total loss of the
investment.
d. No General Solicitation; Place of Sale. At no time was Dutchess
presented with or solicited by any publicly issued or circulated newspaper,
mail, radio, television or other form of general advertising or solicitation in
connection with the offer, sale and purchase of the Shares.
e. Compliance with Securities Laws. Dutchess understands and
acknowledges that the Shares are not being registered with the United States
Securities and Exchange Commission (the "Commission") under the 1933 Act, but
instead are being sold under an exemption or exemptions from the registration
and qualification requirements of the 1933 Act or applicable state securities
laws that impose certain restrictions on Dutchess's ability to transfer the
Shares.
54
f. Restrictions on Transfer. Dutchess understands that Dutchess
may not transfer any Shares unless such Shares are registered under the 1933 Act
or applicable state securities laws, or unless exemptions from such registration
and qualification requirements are available.
g. Representation by Counsel. Dutchess has been represented by its
own counsel, accountant and tax specialist in connection with the acquisition of
the Shares and entering into this Agreement and acknowledges that Dutchess is
not relying on any securities, tax, accounting or other advice from the Company
or its counsel or advisors.
(g) Representations and Warranties of the Company. The Company
represents and warrants to Dutchess as follows.
a. Authority. The Company has the power and authority to enter
into and perform its obligations under this Agreement and to issue the Shares to
Dutchess. The Company has been duly organized and is validly existing in good
standing under the laws of the jurisdiction of its organization as the type of
entity that it purports to be. The execution and delivery of this Agreement by
the Company, and the consummation by the Company of the transactions
contemplated hereby, have been duly authorized by all necessary action and no
other proceeding on the part of the Company is necessary to authorize the
execution, delivery and performance of this Agreement and the transactions
contemplated hereby.
b. Valid Issuance of Shares. The Shares, when issued and delivered
in accordance with the terms of this Agreement for the consideration expressed
herein, will be duly and validly issued, fully paid and non-assessable shares of
Common Stock of the Company.
c. Representation by Counsel. The Company has been represented by
its own counsel, accountant and tax specialist in connection with the issuance
of the Shares and entering into this Agreement and acknowledges that the Company
is not relying on any securities, tax, accounting or other advice from Dutchess
or its counsel or advisors.
d. Consent. No consent, approval, authorization or order of any
court or governmental authority or third-party is required in connection with
the execution, delivery or performance of this Agreement by the parties.
(h) Covenants of the Company. The Company hereby covenants to Dutchess
as follows:
a. Intentionally Omitted.
b. On or before the Closing, the Company shall file a Certificate
of Designation with the Delaware Secretary of State setting forth the rights,
privileges and preferences of the Preferred Stock, which shall include, among
other rights, privileges and preferences, the following:
55
i. a. Dividends shall be paid quarterly, in cash or
Preferred Stock at the Company's option, at the rate of eight percent (8.00%)
per annum. Dividends shall be cumulative.
ii. b. At the option of the holder thereof, shares of
Preferred Stock may be converted into shares of the Company's common stock, par
value $0.001 per share ("Common Stock"), as set forth in the Company's Articles
of Incorporation (as amended by the filing of the Certificate of Designation
described above).
c. The Series C Preferred Stock shall be senior in rights,
privileges and preferences to all other series of preferred or common stock of
the Company, including with respect to dividend, distribution and liquidation
rights, privileges and preferences.
c. While the Preferred Stock is outstanding, the Company shall
authorize and reserve a sufficient number of its previously authorized but
unissued shares of Common Stock to satisfy the rights of conversion and purchase
of the holders of the Series C Stock, which amounts shall be determined by
reference to the Company's Articles of Incorporation (as amended by the filing
of the Certificate of Designation described above).
(i) Acknowledgements. The parties hereby acknowledge and agree that, as
of the date hereof, the outstanding balances under the Convertible Debentures,
and is as set forth on Exhibit B attached hereto.
(j) Intentionally Omitted.
(k) Restrictive Legend.
a. Legend. Dutchess understands and agrees that the Company will
place the legend set forth below or a similar legend on any stock certificates
evidencing the Shares, together with any other legends that may be required by
state or federal securities laws or the Company's Articles of Incorporation or
Bylaws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES
LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT
AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS,
PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
(l) Compliance with Laws and Regulations. The sale and transfer of the
Shares will be subject to and conditioned upon compliance by the Company and
Dutchess with all applicable state and federal laws and regulations and with all
applicable requirements of any stock exchange or automated quotation system on
which the Company's Common Stock may be listed or quoted at the time of such
issuance or transfer.
(m) General Provisions.
a. Successors and Assigns; Assignment. Except as otherwise
provided in this Agreement, this Agreement, and the rights and obligations of
the parties hereunder, will be binding upon and inure to the benefit of their
respective successors, assigns, heirs, executors, administrators and legal
representatives. This Agreement is not assignable without the prior written
consent of the parties hereto, except that Dutchess may assign this Agreement to
any affiliate without the consent of the Company.
56
b. Governing Law. The validity, terms, performance and enforcement
of this Agreement shall be governed and construed by the provisions hereof and
in accordance with the laws of the Commonwealth of Massachusetts applicable to
agreements that are negotiated, executed, delivered and performed solely in the
Commonwealth of Massachusetts.
c. Notices. Any and all notices required or permitted to be given
to a party pursuant to the provisions of this Agreement will be in writing and
will be effective and deemed to provide such party sufficient notice under this
Agreement on the earliest of the following: (i) at the time of personal
delivery, if delivery is in person; (ii) one (1) business day after deposit with
an express overnight courier for United States deliveries, or two (2) business
days after such deposit for deliveries outside of the United States, with proof
of delivery from the courier requested; or (iii) three (3) business days after
deposit in the United States mail by certified mail (return receipt requested)
for United States deliveries. All notices for delivery outside the United States
will be sent by express courier. All notices not delivered personally will be
sent with postage and/or other charges prepaid and properly addressed to the
party to be notified at such address as such party may designate by one of the
indicated means of notice herein to the other party hereto. If the notice shall
be given to the Company, a copy of which shall be given to Michael Lorenz,
residing at 5109 Waterford Wood Way, Fayetteville, NY13066.
13.4 Further Assurances. The parties agree to execute such further
documents and instruments and to take such further actions as may be reasonably
necessary to carry out the purposes and intent of this Agreement.
13.5 Titles and Headings. The titles, captions and headings of
this Agreement are included for ease of reference only and will be disregarded
in interpreting or construing this Agreement.
13.6 Entire Agreement. This Agreement constitutes the entire
agreement and understanding of the parties with respect to the subject matter of
this Agreement, and supersedes all prior understandings and agreements, whether
oral or written, between or among the parties hereto with respect to the
specific subject matter hereof.
13.7 Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered will be deemed an
original, and all of which together shall constitute one and the same agreement.
13.8 Facsimile Signatures. This Agreement may be executed and
delivered by facsimile and upon such delivery the facsimile signature will be
deemed to have the same effect as if the original signature had been delivered
to the other party
13.9 Amendment and Waivers. This Agreement may be amended only by
a written agreement executed by each of the parties hereto. No amendment of or
waiver of, or modification of any obligation under this Agreement will be
enforceable unless set forth in a writing signed by the party against which
enforcement is sought. Any amendment effected in accordance with this section
will be binding upon all parties hereto and each of their respective successors
and assigns. No delay or failure to require performance of any provision of this
Agreement shall constitute a waiver of that provision as to that or any other
instance. No waiver granted under this Agreement as to any one provision herein
shall constitute a subsequent waiver of such provision or of any other provision
herein, nor shall it constitute the waiver of any performance other than the
actual performance specifically waived.
57
13.10 Third-Party Beneficiaries. Nothing in this Agreement is
intended to confer upon any other person, whether or not named herein, and
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
13.11 Disputes Under the Agreement. All disputes arising under
this Agreement shall be governed by and interpreted in accordance with the laws
of the Commonwealth of Massachusetts, without regard to principles of conflict
of laws. The parties to this Agreement shall submit all disputes arising under
this Agreement to arbitration in Boston, Massachusetts before a single
arbitrator of the American Arbitration Association (the "AAA"). The arbitrator
shall be selected by application of the rules of the AAA, or by mutual agreement
of the parties, except that such arbitrator shall be an attorney admitted to
practice law in the Commonwealth of Massachusetts. No party hereto will
challenge the jurisdiction or venue provisions as provided in this section.
Nothing in this section shall limit the Holder's right to obtain an injunction
for a breach of this Debenture from a court of law. Any injunction obtained
shall remain in full force and effect until the arbitrator, as set forth herein,
fully adjudicates the dispute.
[Signature page follows]
58
IN WITNESS WHEREOF, the Company and Dutchess have caused this Debt
Conversion Agreement to be executed and delivered as of the date first written
above.
DUTCHESS PRIVATE EQUITIES FUND, LTD.:
By: ____________________________
Name: Douglas H. Leighton
Title: Director
THE COMPANY:
PATIENT PORTAL TECHNOLOGIES, INC.
By: ____________________________
Name: Kevin Kelly
Its: Chairman of the Board
59
EXHIBIT A
Convertible Debentures
SENIOR DEBENTURE
----------------
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND ARE
BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION
REQUIREMENTS OF SUCH LAWS. THE SECURITIES ARE SUBJECT TO RESTRICTIONS OF
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER SUCH LAWS PURSUANT TO REGISTRATION OR AN EXEMPTION THEREFROM.
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION" OR THE "SEC") OR ANY OTHER
REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR
ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING
MATERIALS. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
FACE AMOUNT: $7,000,000
PRICE: $7,000,000
DEBENTURE NUMBER: November 2007 101
ISSUANCE DATE: November 1, 2007
MATURITY DATE: November 1, 2012
FOR VALUE RECEIVED, Patient Portal Technologies, Inc., a Delaware
corporation ("Company"), hereby promises to pay DUTCHESS PRIVATE EQUITIES FUND,
LTD. ("Holder") by November 1, 2012 (the "Maturity Date"), the principal amount
of Seven Million U.S. Dollars ($7,000,000) (the "Face Amount"), and to pay
interest and redemption on the principal amount thereof, and any accrued
penalties, in such amounts, at such times and on such terms and conditions as
are specified herein.
This Senior Debenture (this "Debenture") is subject to automatic
conversion at the end of five (5) years from the date of issuance, at which time
the Debenture outstanding will be automatically converted based upon the formula
set forth in Article 3.2(c) hereof.
60
Article 1 Interest.
(a) Company shall pay interest ("Interest") at the rate of twelve
percent (12%) per annum, compounded daily, on the unpaid Face Amount of this
Debenture at such times and in such amounts as outlined in this Article 1.
Company shall make mandatory monthly payments of interest (the "Interest
Payments"), in an amount equal to the interest accrued on the principal balance
of the Debenture from the last Interest Payment until such time as the current
Interest Payment is due and payable. The Interest Payments shall commence the
first month following the Issuance Date and shall continue until the Face Amount
is paid in full, and the Interest Payments shall be paid the last day of each
such month. Holder shall retain the right, but not the obligation, to convert
any Interest due and payable under this Debenture on terms outlined in Section 3
of this Debenture.
(b) Any monies paid to Holder in excess of the Interest due when paid
shall be credited toward the redemption of the Face Amount of this Debenture.
Article 2 Method of Payment.
Section 2.1 Repayment of Debenture.
(a) Commencing on the seventh (7th) month following the Issuance
Date, Company shall make the Interest Payment outlined in Article 1 hereof and
monthly amortizing payments to Holder (the "Amortizing Payments") on the Face
Amount of the Debenture, plus the Redemption Amount on the principal (as defined
in Article 14 hereof), with such Amortizing Payments to be paid on the last
business day of each month for so long as there is an outstanding balance on
this Debenture, in the amount of One Hundred and Eighty-Three Thousand Eight
Hundred and Twenty-Five dollars and 17/100 U.S. dollars ($183,825.17) (the
"Amortizing Payment Amount").
(b) At the end of the thirty-six (36) month anniversary of the
Issuance Date ("Anniversary Date"), all amount then currently owed under the
Debenture shall become immediately due and payable to Holder.
(c) Notwithstanding any provision to the contrary in this
Debenture, Company may pay in full to Holder the Face Amount, or any balance
remaining thereon, in readily available funds, at any time and from time to time
without penalty.
(d) After the date (the "Effective Date") on which United States
Securities and Exchange Commission (the "Commission" or the "SEC") declares the
registration statement (the "Registration Statement") covering the shares
underlying the conversion of this Debenture (the "Conversion Shares") effective:
61
(i) if the Conversion Price, as defined herein, is above
the Maximum Conversion Price, as defined herein, Holder, at
its sole option, shall be entitled to either (i) request an
Interest Payment and Amortizing Payment from Company in the
amounts set forth above; or (ii) elect to convert a portion
of this Debenture pursuant to Article 3 hereof in an amount
equal to or greater than the Amortizing Payment Amount. In
the event Holder is unable to convert that portion of this
Debenture equal to the Amortizing Payment Amount during any
calendar month, Holder shall send a notice to Company
within three (3) days of the date on which such Interest
Payment and Amortizing Payment is due (the "Payment Date")
with the total amount then due and Company shall make a
payment in cash in an amount equal to the difference
between the amount converted by Holder and the Amortizing
Payment Amount due for that month.
(ii) if the Conversion Price, as defined herein, is below
the Maximum Conversion Price, as defined herein, Company,
at its sole option, shall be entitled to either (i) make an
Interest Payment and Amortizing Payment to Holder in the
amounts set forth above; or (ii) request Holder to convert
a portion of this Debenture pursuant to Article 3 hereof in
an amount equal to or greater than the Amortizing Payment
Amount. In the event Holder is unable to convert that
portion of this Debenture equal to the Amortizing Payment
Amount during any calendar month, Holder shall send a
notice to Company within three (3) days of the Payment Date
with the total amount then due and Company shall make a
payment in cash in an amount equal to the difference
between the amount converted by Holder and the Amortizing
Payment Amount due for that month.
(e) Nothing contained in this Article 2 shall limit the amount
Holder can elect to convert during a calendar month except as defined in Section
3.2 (i) hereof.
(f) All payments made under this Article 2 shall be applied toward
the total Redemption Amount as outlined in Article 14 hereof.
(g) Company may make additional payments toward Redemption
("Prepayments") without any penalties.
Article 3 Conversion.
Section 3.1 Conversion Privilege.
(a) Holder of this Debenture, subject to Article 2 above, shall
have the right to convert (a "Conversion") any and all amounts owing under this
Debenture into shares of common stock of Company, par value $0.001 per share
(the "Common Stock"), at any time following the Closing Date (as such term is
defined in that certain Subscription Agreement, of even date herewith, by and
between Company and Holder (the "Subscription Rights Agreement")) but which is
before the close of business on the Maturity Date, except as set forth in
Section 3.2(c) hereof. The number of shares of Common Stock issuable upon the
Conversion of this Debenture is determined pursuant to Section 3.2 hereof and
rounding the result up to the nearest whole share.
62
(b) This Debenture may only be converted, whether in whole or in
part, in accordance with this Article 3.
(c) In the event all or any portion of this Debenture remains
outstanding on the Maturity Date, the unconverted portion of such Debenture
shall automatically be converted into shares of Common Stock on such date in the
manner set forth in Section 3.2 hereof.
Section 3.2 Conversion Procedure.
(a) Conversion Procedures. Holder may elect to convert the unpaid
Face Amount of and accrued Interest on this Debenture, in whole or in part, at
any time following the Closing Date. Such Conversion shall be effectuated by
Holder sending to Company a facsimile or electronic mail version of the signed
Notice of Conversion, attached hereto as Exhibit A, which evidences Holder's
intention to convert the Debenture as indicated. The date on which the Notice of
Conversion is delivered (the "Conversion Date") shall be deemed to be the date
on which Holder has delivered to Company a facsimile or electronic mail of the
signed Notice of Conversion. Notwithstanding the above, any Notice of Conversion
received by 5:00 P.M. Boston time shall be deemed to have been received the
previous business day, with receipt being via a confirmation of time of
facsimile of Holder.
(b) Common Stock to be Issued. Upon Holder's Conversion of any
Debenture, Company shall issue the number of shares of Common Stock equal to the
Conversion. If, at the time of Conversion, the Registration Statement has been
declared effective, Company shall instruct its transfer agent to issue stock
certificates without restrictive legend (other than a legend referring to such
Registration Statement and prospectus delivery requirements) or stop transfer
instructions. If, at the time of Holder's Conversion, the Registration Statement
has not been declared effective, Company shall instruct the transfer agent to
issue the certificates with an appropriate legend. Company shall act as
Registrar and shall maintain an appropriate ledger containing the necessary
information with respect to this Debenture. Company represents and warrants to
Holder that no instructions, other than these instructions, have been given or
will be given to the transfer agent and that the Common Stock shall otherwise be
freely resold, except as may be otherwise set forth herein.
(c) Conversion Price. Holder is entitled to convert the unpaid
Face Amount of this Debenture, plus accrued interest, any time following a
Closing Date, at the lesser of the following prices (each (i) and (ii) being the
"Conversion Price"): (i) eighty-five percent (85%) of the lowest closing bid
price of the Common Stock during the twenty (20) trading days immediately prior
to a Conversion Notice; or (ii) 46/100 U.S. dollars ($0.46) ("Maximum Conversion
Price"). No fractional shares or scrip representing fractions of shares will be
issued upon Conversion, but the number of shares issuable shall be rounded up,
in the event of a partial share, to the nearest whole share. Holder shall retain
all rights of Conversion during any partial trading days.
63
(d) Maximum Interest. Nothing contained in this Debenture shall be
deemed to establish or require Company to pay interest to Holder at a rate in
excess of the maximum rate permitted by applicable law. In the event that the
rate of interest required to be paid exceeds the maximum rate permitted by
applicable law, the rate of interest required to be paid thereunder shall be
automatically reduced to the maximum rate permitted under applicable law and
such excess, if so ordered, shall be credited on any remaining balances due to
Holder. In the event that the interest rate on this Debenture is required to be
adjusted pursuant to this Section 3.2(d), then the parties hereto agree that the
terms of this Debenture shall remain in full force and effect except as is
necessary to make the interest rate comply with applicable law.
(e) Opinion Letter. It shall be Company's responsibility to take
all necessary actions and to bear all such costs to issue the Common Stock as
provided herein, including the responsibility and cost for delivery of an
opinion letter to the transfer agent, if so required. The person or entity in
whose name the certificate of Common Stock is to be registered shall be treated
as a shareholder of record on and after the Conversion Date. Upon surrender of
any Debentures that are to be converted in part, Company shall issue to Holder a
new Debenture equal to the unconverted amount. Company hereby acknowledges that
the date of consideration for this Debenture is the Issuance Date and shall use
all commercially reasonable best efforts to facilitate sales under Rule 144 of
the Securities Act.
(f) Delivery of Shares.
(i) Within three (3) business days after receipt of the
Notice of Conversion (the "Certificate Deadline"), Company shall deliver a
certificate, in accordance with Section 3.2(c) hereof for the number of shares
of Common Stock issuable upon a Conversion. In the event Company does not make
delivery of said certificate by the Certificate Deadline, Company shall pay to
Holder in cash, as liquidated damages, an additional fee per day equal to three
percent (3%) of the dollar value of the Debentures being converted.
(ii) If the failure of Company to issue the certificate
pursuant to this Article 3.2(f) is due to the unavailability of a sufficient
number of authorized shares of Common Stock of Company, then the provisions of
this Article 3.2(f) shall apply as well as the provisions of Article 3.2(k)
hereof shall apply.
(iii) Company shall make any payments required under this
Article 3.2(f) in immediately available funds by the Certificate Deadline.
Nothing herein shall limit Holder's right, at Holder's sole discretion, to
pursue actual damages or cancel the conversion for Company's failure to issue
and deliver the certificate by the Certificate Deadline.
64
(iv) Company shall at all times reserve (or make
alternative written arrangements for reservation or contribution of shares) and
have available all Common Stock necessary to meet Conversion of the full amount
of the Debentures then outstanding and due to Holder, unless so waived by Holder
in writing. If, at any time, Holder submits a Notice of Conversion and Company
does not have sufficient authorized but unissued shares of Common Stock (or
alternative shares of Common Stock as may be contributed by stockholders)
available to effect, in full, a Conversion of the Debentures (a "Conversion
Default", the date of such default being referred to herein as the "Conversion
Default Date"), Company shall issue to Holder all of the shares of Common Stock
which are then currently available. Any Debentures or any portion thereof, which
cannot be converted due to Company's lack of sufficient authorized common stock
(the "Unconverted Debentures"), may be deemed null and void upon written notice
sent by Holder to Company. Company shall provide notice of such Conversion
Default ("Notice of Conversion Default") to Holder, by facsimile, within one (1)
business days of such default.
(v) In the event of Conversion Default, Company will pay to
Holder an amount computed as follows (the "Conversion Default Rate"):
(N / 365) x (0.24) x (initial issuance price of outstanding and/or tendered but
not converted Debentures held by Holder)
Where N is equal to the number of days from the Conversion Default Date
to the date that Company authorizes a sufficient number of shares of Common
Stock to effect conversion of all remaining Debentures (the "Authorization
Date"). Company shall send notice to Holder of the outstanding Debentures that
additional shares of Common Stock have been authorized, stating the
Authorization Date and the amount of Holder's accrued Conversion Default
payments ("Authorization Notice"). The accrued Conversion Default shall be paid
in cash or shall be convertible into Common Stock at the Conversion Rate, upon
written notice sent by Holder to Company, as follows: (i) in the event Holder
elects to take such payment in cash, cash payment shall be made to Holder within
five (5) business days, or (ii) in the event Holder elects to take such payment
in stock, Holder may convert at the Conversion Default Rate within five (5)
business days until the expiration of the Conversion period.
65
(vi) Company acknowledges that its failure to maintain a
sufficient number of authorized but unissued shares of Common Stock to effect in
full a Conversion of the Debentures will cause Holder to suffer irreparable
harm, and that damages will be difficult to ascertain. Accordingly, the parties
agree that it is appropriate to include in this Debenture a provision for
liquidated damages. The parties acknowledge and agree that the liquidated
damages provision set forth in this Section represents the parties' good faith
effort to quantify such damages and, as such, agree that the form and amount of
such liquidated damages are reasonable and will not constitute a penalty. The
payment of liquidated damages shall not relieve Company from its obligations to
deliver the Common Stock pursuant to the terms of this Debenture. Nothing herein
shall limit Holder's right to pursue actual damages for Company's failure to
maintain a sufficient number of authorized shares of Common Stock.
(vii) If by the Certificate Deadline, any portion of the
shares of the Debentures have not been delivered to Holder and Holder purchases,
in an open market transaction or otherwise, shares of Common Stock necessary to
make delivery of shares which would have been delivered if the full amount of
the shares to be converted and delivered to Holder by Company (the "Covering
Shares"), then Company shall pay to Holder, in addition to any other amounts due
to Holder pursuant to this Debenture, and not in lieu thereof, the Buy-In
Adjustment Amount (as defined below). The "Buy In Adjustment Amount" is the
amount equal to the excess, if any, of (x) Holder's total purchase price
(including brokerage commissions, if any) for the Covering Shares, minus (y) the
net proceeds (after brokerage commissions, if any) received by Holder from the
sale of the sold shares. Company shall pay the Buy-In Adjustment Amount to
Holder in immediately available funds within five (5) business days of written
demand by Holder. By way of illustration and not in limitation of the foregoing,
if Holder purchases shares of Common Stock having a total purchase price
(including brokerage commissions) of $11,000 to cover a buy-in with respect to
shares of Common Stock it sold for net proceeds of $10,000, the Buy-In
Adjustment Amount which Company would be required to pay to Holder would be
$1,000.
(g) Prospectus and Other Documents. Company shall furnish to
Holder one (1) prospectus and any other documents incidental to the registration
of the Conversion Shares, including any amendment of or supplements thereto. Any
filings submitted via EDGAR will constitute fulfillment of Company's obligation
under this Section.
(h) Limitation on Issuance of Shares. If Company's Common Stock
becomes listed on the Nasdaq SmallCap Market after the issuance of this
Debenture, Company may be limited in the number of shares of Common Stock it may
issue by virtue of (A) the number of authorized shares or (B) the applicable
rules and regulations of the principal securities market on which the Common
Stock is listed or traded, including, but not necessarily limited to, NASDAQ
Rule 4310(c)(25)(H)(i) or Rule 4460(i)(1), as may be applicable (collectively,
the "Cap Regulations"). Without limiting the other provisions thereof: (i)
Company will take all steps necessary to issue the Conversion Shares without
violating the Cap Regulations, and (ii) if, despite taking such steps, Company
cannot issue such Conversion Shares without violating the Cap Regulations or
Holder cannot convert as a result of the Cap Regulations (each such Debenture,
an "Unconverted Debenture") Holder shall have the right to elect either of the
following options:
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(i) if permitted by the Cap Regulations, require Company to
issue shares of Common Stock in accordance with Holder's Notice of Conversion at
a conversion purchase price equal to the average of the closing bid price per
share of Common Stock for any five (5) consecutive Trading Days (subject to
certain equitable adjustments for certain events occurring during such period)
during the sixty (60) Trading Days immediately preceding the Conversion Date; or
(ii) require Company to redeem each Unconverted Debenture
for an amount (the "Redemption Amount"), payable in cash, equal to the sum of
(i) one hundred thirty-three percent (133%) of the principal of an Unconverted
Debenture, plus (ii) any accrued but unpaid interest thereon through and
including the date on which the Redemption Amount is paid to Holder (the
"Redemption Date").
Holder may elect, without limitation, one of the above remedies with
respect to a portion of such Unconverted Debenture and the other remedy with
respect to other portions of the Unconverted Debenture. The Unconverted
Debenture shall contain provisions substantially consistent with the above
terms, with such additional provisions as may be consented to by Holder. The
provisions of this Section are not intended to limit the scope of the provisions
otherwise included in the Unconverted Debenture.
(i) Limitation on Amount of Conversion and Ownership.
Notwithstanding anything to the contrary in this Debenture, in no event shall
Holder be entitled to convert that amount of Debenture, and in no event shall
Company permit that amount of conversion, into that number of shares, which when
added to the sum of the number of shares of Common Stock beneficially owned, (as
such term is defined under Section 13(d) and Rule 13d-3 of the Securities
Exchange Act of 1934, as may be amended, (the "Exchange Act")), by Holder, would
exceed four and ninety-nine one hundredths percent (4.99%) of the number of
shares of Common Stock outstanding on the Conversion Date, as determined in
accordance with Rule 13d-1(j) of the Exchange Act. In the event that the number
of shares of Common Stock outstanding as determined in accordance with Section
13(d) of the Exchange Act is different on any Conversion Date than it was on the
Closing Date, then the number of shares of Common Stock outstanding on such
Conversion Date shall govern for purposes of determining whether Holder would be
acquiring beneficial ownership of more than four and ninety-nine one hundredths
percent (4.99%) of the number of shares of Common Stock outstanding on such
Conversion Date. However, nothing in this Section 3.2(i) shall be read to reduce
the amount of principal, Interest or penalties, if any, due to Holder.
(j) Legend. Holder acknowledges that each certificate representing
the Debentures, and the Common Stock unless registered pursuant to the Debenture
Registration Rights Agreement, shall be stamped or otherwise imprinted with a
legend substantially in the following form:
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THE SECURITIES EVIDENCED BY THIS CERTIFICATE MAY NOT BE
OFFERED OR SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF EXCEPT (i) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, (ii) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144
UNDER THE ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO
THE DISPOSITION OF SECURITIES), OR (iii) PURSUANT TO AN
AVAILABLE EXEMPTION FROM REGISTRATION UNDER SUCH ACT.
(k) Prior to Conversion of this Debenture, if at any time the
Conversion of all the Debentures and exercise of all the Warrants outstanding
would result in an insufficient number of authorized shares of Common Stock
being available to cover all the Conversions, then in such event, Company will
move to call and hold a shareholder's meeting or have shareholder action with
written consent of the proper number of shareholders within thirty (30) days of
such event, or such greater period of time if statutorily required or reasonably
necessary as regards standard brokerage house and/or SEC requirements and/or
procedures, for the purpose of authorizing additional shares of Common Stock
such as necessary to facilitate Holder's Conversions. In such an event,
management of Company shall recommend to all shareholders to vote their shares
in favor of increasing the authorized number of shares of Common Stock.
Management of Company shall vote all of its shares of Common Stock in favor of
increasing the number of shares of authorized Common Stock to an amount equal to
three hundred percent (300%) of the remaining balance on this Debenture. Company
represents and warrants that under no circumstances will it deny or prevent
Holder's right to convert the Debentures as permitted under the terms of any of
the Transaction Documents (as such term is defined in that certain Debenture
Registration Rights Agreement, of even date herewith, by and between Company and
Holder). Nothing in this Section shall limit the obligation of Company to make
the payments set forth in this Article 3. Holder, at its sole option, may
request Company to authorize and issue additional shares if Holder feels it is
necessary for Conversions in the future. In the event Company's shareholder's
meeting does not result in the necessary authorization, Company shall redeem the
outstanding Debentures for an amount equal to the sum of the principal of the
outstanding Debentures plus accrued interest thereon multiplied by one hundred
thirty-three percent (133%).
Section 3.3 Fractional Shares. Company shall not issue fractional
shares of Common Stock, or scrip representing fractions of such shares, upon the
conversion of this Debenture. Instead, Company shall round up, to the nearest
whole share.
Section 3.4 Taxes on Conversion. Company shall pay any documentary,
stamp or similar issue or transfer tax due on the issue of shares of Common
Stock upon the conversion of this Debenture. However, Holder shall pay any such
tax which is due because the shares are issued in a name other than its name.
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Section 3.5 Company to Reserve Stock. Company shall reserve and
maintain the number of shares of Common Stock required pursuant to and upon the
terms set forth in the Transaction Documents to permit the Conversion of this
Debenture. All Conversion Shares shall, upon issuance by Company, be validly
issued, fully paid and nonassessable and free and clear from all taxes, liens,
charges and encumbrances with respect to the issuance thereof.
Section 3.6 Restrictions on Sale. This Debenture has not been
registered under the Securities Act and is being issued under Section 4(2) of
Securities Act and Rule 506 of Regulation D promulgated under the Securities
Act. This Debenture and the Conversion Shares may only be sold pursuant to
registration under or an exemption from the Securities Act.
Section 3.7 Stock Splits, Combinations and Dividends. If the shares of
Common Stock are subdivided or combined into a greater or smaller number of
shares of Common Stock, or if a dividend is paid on the Common Stock in shares
of Common Stock, the Conversion Price shall be proportionately reduced in the
case of a subdivision of shares or stock dividend, or proportionately increased
in the case of combination of shares, in each such case, by the ratio that the
total number of shares of Common Stock outstanding immediately after such event
bears to the total number of shares of Common Stock outstanding immediately
prior to such event.
Article 4 Mergers.
Company shall not consolidate or merge into, or transfer any or all of
its assets to, any person, unless such person assumes in writing the obligations
of Company under this Debenture and immediately after such transaction no Event
of Default (as defined below) exists. Any reference herein to Company shall
refer to such surviving or transferee corporation and the obligations of Company
shall terminate only upon such written assumption of Company's obligation. In
the event of a merger, or other consolidation, Company shall give notice to
Holder simultaneously with the announcement to the public markets.
Article 5 Security.
This Debenture, and Company's obligations hereunder, are secured by
that certain Security Agreement, of even date herewith, by and between Company
and Holder (the "Security Agreement").
Article 6 Defaults and Remedies.
Section 6.1 Events of Default. An "Event of Default" occurs if any
one of the following occur:
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(a) Company does not make timely payment or Conversion, in
whole or in part, necessary to cover the principal, interest or other sum due on
the Maturity Date, Conversion Date, upon redemption, or otherwise described
herein;
(b) Company does not make a payment in cash for a period of
five (5) business days when due as described in this Debenture; or,
(c) any of Company's representations or warranties
contained in the Transaction Documents or this Debenture were false when made or
Company fails to comply with any of its other agreements in the Transaction
Documents and such failure continues for a period of five (5) business days; or,
(d) Company defaults in the material terms of any of the
Transaction Documents;
(e) Company pursuant to or within the meaning of any
bankruptcy law: (i) commences a voluntary case; (ii) consents to the entry of an
order for relief against it in an involuntary case; (iii) consents to the
appointment of a custodian of it or for all or substantially all of its property
or (iv) makes a general assignment for the benefit of its creditors or (v) a
court of competent jurisdiction enters an order or decree under any bankruptcy
law that (A) is for relief against Company in an involuntary case; (B) appoints
a custodian of Company for all or substantially all of its property or (C)
orders the liquidation of Company, and the order or decree remains unstayed and
in effect for sixty (60) calendar days; or,
(f) Company's Common Stock is suspended or no longer listed
on any recognized exchange including electronic over-the-counter bulletin board
("Principal Market") for in excess of three (3) consecutive Trading Days.
Failure to comply with the requirements for continued listing on a Principal
Market for a period of five (5) trading days; or notification from a Principal
Market that Company is not in compliance with the conditions for such continued
listing on such Principal Market; or,
(g) Company breaches any covenant or condition of the
Transaction Documents, and such breach, if subject to cure, continues for a
period of five (5) business days; or,
(h) the Registration Statement is not declared effective by
the SEC within twelve (12) months of the Issuance Date; or,
(i) the underlying Registration Statement subsequently
becomes ineffective and does not become effective again within fifteen (15) days
of such notice of ineffectiveness by the SEC; or,
(j) Company's failure to pay any taxes when due unless such
taxes are being contested in good faith by appropriate proceedings and with
respect to which adequate reserves have been provided on Company's books;
provided, however, that in the event that such failure is curable, Company shall
have ten (10) business days to cure such failure; or,
70
(k) an attachment or levy is made upon Company's assets
having an aggregate value in excess of twenty-five thousand dollars ($25,000) or
a judgment is rendered against Company or Company's property involving a
liability of more than twenty-five thousand dollars ($25,000) which shall not
have been vacated, discharged, stayed or bonded pending appeal within ninety
(90) days from the entry hereof; or,
(l) any change in Company's condition or affairs (financial
or otherwise) which in Holder's reasonable, good faith opinion, would have a
Material Adverse Effect (as that term is defined in the Subscription Agreement);
provided, however, that in the event that such failure is curable, Company shall
have ten (10) business days to cure such failure; or,
(m) any Lien, except for Permitted Liens (as those terms
are defined in the Security Agreement), created hereunder or under any of the
Transaction Documents for any reason ceases to be or is not a valid and
perfected Lien having a first priority interest; or,
(n) the indictment or threatened indictment of Company, any
officer of Company under any criminal statute, or commencement or threatened
commencement of criminal or civil proceeding against Company or any officer of
Company pursuant to which statute or proceeding penalties or remedies sought or
available include forfeiture of any of the property of Company.
(o) There is an outstanding balance on the Face Amount of
the Debenture upon the Anniversary Date.
Section 6.2 Remedies.
(a) In the Event of Default, Holder may elect to secure a portion
of the Security Interest (as defined in the Security Agreement). Holder may also
elect to garnish revenue from Company in an amount that will repay Holder on the
schedules outlined in this Debenture.
(b) In the Event of Default, as outlined in this Debenture, Holder
may exercise its right to increase the Face Amount of the Debenture by ten
percent (10%) as an initial penalty, and by ten percent (10%) for each
subsequent Event of Default. In addition, Holder may elect to increase the Face
Amount by two and one-half percent (2.5%) per month (pro-rata for partial
periods) paid as liquated damages ("Liquidated Damages"), compounded daily. It
is the intention and acknowledgement of both parties that the Liquidated Damages
not be deemed as interest or a penalty under the terms of this Debenture.
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(c) In the event of Default, under Section 6.1(h) hereof, Holder
may elect to switch the Conversion Price of the Debenture as outlined in Section
3.2(c) above ("Default Conversion Price"). The Default Conversion Price shall be
equal to the lesser of (i) the Conversion Price or (ii) seventy percent (70%) of
the lowest closing bid price of the Common Stock during the twenty (20) trading
days prior to conversion. Upon written notice being sent to Company by Holder of
Default under Section 6.1(h), and Holder's election to exercise the remedy to
switch the conversion price to the Default Conversion Price, Company shall
immediately withdraw the Registration Statement. Further, Company agrees that
the date of consideration for the Debenture shall remain the Issuance Date
stated herein. Company shall provide an opinion letter from counsel within two
(2) business days of written request by Holder stating that the date of
consideration for the Debenture is the Issuance Date and submission of proper
Rule 144 support documentation consisting of a Form 144, a broker's
representation letter and a seller's representation letter. In the event Company
does not deliver the opinion letter within two business days, the Default
Conversion Price shall immediately decrease by two percent (2%) for each
business day an opinion letter fails to be delivered. In the event that counsel
to Company fails or refuses to render an opinion as required to issue the
Conversion Shares in accordance with this paragraph (either with or without
restrictive legends, as applicable), then Company irrevocably and expressly
authorizes counsel to Holder to render such opinion and shall authorize the
Transfer Agent to accept and to rely on such opinion for the purposes of issuing
the Conversion Shares (which is attached as Exhibit E to that certain
Subscription Agreement, of even date herewith, by and between Company and
Holder). Any costs incurred by Holder for such opinion letter shall be added to
the Face Amount of the Debenture.
Section 6.3 Acceleration. If an Event of Default occurs, Holder by
notice to Company may declare the remaining principal amount of this Debenture,
together with all accrued interest and any liquidated damages, to be immediately
due and payable in full.
Section 6.4 Seniority. Company warrants that no indebtedness of Company
is senior to this Debenture in right of payment, whether with respect to
interest, damages or upon liquidation or dissolution or otherwise. Company
warrants that it has taken all necessary steps to subordinate its other
obligations to the rights of Holder hereunder.
Section 6.5 Cost of Collections. If an Event of Default occurs, Company
shall pay Holder's reasonable costs of collection, including reasonable
attorney's fees and costs of arbitration.
Article 7 Registered Debentures.
Section 7.1 Record Ownership. Company or its attorney shall maintain a
register of Holder of the Debentures (the "Register") showing their names and
addresses and the serial numbers and principal amounts of Debentures issued to
them. The Register may be maintained in electronic, magnetic or other
computerized form. Company may treat the person named as Holder of this
Debenture in the Register as the sole owner of this Debenture. Holder of this
Debenture is exclusively entitled to receive payments of interest on this
Debenture, receive notifications with respect to this Debenture, convert it into
Common Stock and otherwise exercise all of the rights and powers as the absolute
owner hereof.
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Section 7.2 Worn or Lost Debentures. If this Debenture becomes worn,
defaced or mutilated but is still substantially intact and recognizable, Company
or its agent may issue a new Debenture in lieu hereof upon its surrender. Where
Holder of this Debenture claims that the Debenture has been lost, destroyed or
wrongfully taken, Company shall issue a new Debenture in place of the Debenture
if Holder so requests by written notice to Company.
Article 8 Notice.
Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Debenture must be in writing and
will be deemed to have been delivered (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided a confirmation
of transmission is mechanically or electronically generated and kept on file by
the sending party); or (iii) one (1) day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to Company: Attn: Kevin Kelly
Patient Portal Technologies, Inc.
7108 Fairway Drive, Ste. 215
Palm Beach Gardens, FL 33418
Telephone: (561) 630-7688
Fax:
If to the Holder: Dutchess Capital Management, LLC
50 Commonwealth Ave, Suite 2
Boston, MA 02116
Attention: Douglas Leighton
Telephone: (617) 301-4700
Facsimile: (617) 249-0947
Each party hereto shall provide five (5) business days prior notice to
the other party hereto of any change in address, phone number or facsimile
number.
Article 9 Time.
Where this Debenture authorizes or requires the payment of money or the
performance of a condition or obligation on a Saturday or Sunday or a holiday on
which the United States Stock Markets ("US Markets") are closed (a "Holiday"),
such payment shall be made or condition or obligation performed on the last
business day preceding such Saturday, Sunday or Holiday. A "business day" shall
mean a day on which the US Markets are open for a full day or half day of
trading.
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Article 10 No Assignment.
This Debenture and the obligations of Company hereunder shall not be
assignable by Company.
Article 11 Rules of Construction.
In this Debenture, unless the context otherwise requires, words in the
singular number include the plural, and in the plural include the singular, and
words of the masculine gender include the feminine and the neuter, and when the
tense so indicates, words of the neuter gender may refer to any gender. The
numbers and titles of sections contained in the Debenture are inserted for
convenience of reference only, and they neither form a part of this Debenture
nor are they to be used in the construction or interpretation hereof. Wherever,
in this Debenture, a determination of Company is required or allowed, such
determination shall be made by a majority of the Board of Directors of Company
and if it is made in good faith, it shall be conclusive and binding upon Company
and Holder of this Debenture. Any capitalized term used but not defined in this
Debenture shall have the meaning ascribed to it in the Transaction Documents (as
such term is defined in that certain Debenture Registration Rights Agreement, of
even date herewith, by and between Company and Holder).
Article 12 Governing Law.
This Debenture and all related instruments and documents and the rights
and obligations of the parties hereunder and thereunder shall, in all respects,
be governed by, and construed in accordance with, the internal laws of the
Commonwealth of Massachusetts, without regard to conflicts of law principles.
Article 13 Disputes Under Debenture.
The parties to this Debenture will submit all disputes arising under it
to arbitration in Boston, Massachusetts before a single arbitrator of the
American Arbitration Association ("AAA"). The arbitrator shall be selected by
application of the rules of the AAA, or by mutual agreement of the parties,
except that such arbitrator shall be an attorney admitted to practice law in the
Commonwealth of Massachusetts. No party to this Debenture will challenge the
jurisdiction or venue provisions as provided in this section. Nothing in this
section shall limit Holder's right to obtain an injunction for a breach of this
Debenture from a court of law.
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Article 14 Redemption.
Company shall have the right to redeem Holder, in cash, the Debenture,
in whole or in part ("Redemption Amount"), at a price equal to one hundred and
twenty-five percent (125%) of the outstanding principal amount of the Debenture,
including accrued interest (and penalties if applicable). Any Amortizing
Payments, as defined in Article 2 hereof, shall apply to the Redemption Amount.
Any portion of the Redemption Amount not converted shall be paid in cash to
Holder under the terms described in this Article 14. In the event Company's
Common Stock is trading above the Maximum Conversion Price, Holder shall retain
the right to refuse Redemption in cash by Company and convert any Interest
Payments and Amortizing Payments due as outlined in Article 3.
Article 15 Holder Warrants.
As an additional inducement to Holder entering into the Transaction
Documents, Company shall issue to Holder a warrant to purchase twenty-two
million eight hundred and twenty-six thousand eight-six (22,826,086) shares of
its common stock exercisable at the strike price outlined in the Warrant.
Article 16 Waiver.
Holder's delay or failure at any time or times hereafter to require
strict performance by Company of any undertakings, agreements or covenants shall
not waive, affect, or diminish any right of Holder under this Debenture to
demand strict compliance and performance herewith. Any waiver by Holder of any
Event of Default shall not waive or affect any other Event of Default, whether
such Event of Default is prior or subsequent thereto and whether of the same or
a different type. None of the undertakings, agreements and covenants of Company
contained in this Debenture, and no Event of Default, shall be deemed to have
been waived by Holder, nor may this Debenture be amended, changed or modified,
unless such waiver, amendment, change or modification is evidenced by an
instrument in writing specifying such waiver, amendment, change or modification
and signed by Holder.
Article 17 Integration.
This Debenture is the final definitive agreement between Company and
Holder with respect to the terms and conditions set forth herein, and, the terms
of this Debenture may not be contradicted by evidence of prior, contemporaneous,
or subsequent oral agreements of the parties hereto. The execution and delivery
of this Debenture is done in conjunction with the execution of the other
Transaction Documents.
Article 18 Failure To Meet Obligations by Company.
Company acknowledges that its failure to timely meet any of its
obligations hereunder, including, but without limitation, its obligations to
make payments, deliver shares and, as necessary, to register and maintain
sufficient number of shares, will cause Holder to suffer irreparable harm and
that the actual damage to Holder will be difficult to ascertain. Accordingly,
the parties hereto agree that it is appropriate to include in this Debenture a
provision for liquidated damages. The parties acknowledge and agree that the
liquidated damages provision set forth in this section represents the parties'
good faith effort to quantify such damages and, as such, agree that the form and
amount of such liquidated damages are reasonable and do not constitute a
penalty. The payment of liquidated damages shall not relieve Company from its
obligations to deliver the Common Stock pursuant to the terms of this Debenture.
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Article 19 Representations and Warranties of Company.
Company hereby represent and warrants to Holder that: (i) it is
voluntarily issuing this Debenture of its own freewill, (ii) it is not issuing
this Debenture under economic duress, (iii) the terms of this debenture are
reasonable and fair to Company, and (iv) Company has had independent legal
counsel of its own choosing review this Debenture, advise Company with respect
to this Debenture, and represent Company in connection with its issuance of this
Debenture.
Article 20 Acknowledgements of the Parties.
Notwithstanding anything in this Debenture to the contrary, the parties
hereto hereby acknowledge and agree to the following: (i) Holder makes no
representations or covenants that it will not engage in trading in the
securities of Company; (ii) Company shall, by 8:30 a.m. Boston time on the
trading day following the date hereof, file a current report on Form 8-K
disclosing the material terms of the transactions contemplated hereby and in the
other Transaction Documents; (iii) Company has not and shall not provide
material non-public information to Holder unless prior thereto Holder shall have
executed a written agreement regarding the confidentiality and use of such
information; and (iv) Company understands and confirms that Holder will be
relying on the acknowledgements set forth in clauses (i) through (iii) above if
Holder effects any transactions in the securities of Company.
Article 21 Amendments, Waivers and Consents; Successors and Assigns.
Neither this Agreement nor any other Transaction Document nor any of
the terms hereof or thereof may be amended, modified, changed, waived,
discharged or terminated, nor shall any consent be given, unless such amendment,
modification, change, waiver, discharge, termination or consent is in writing
signed by Holder and Company. This Agreement may not be assigned by Company
without prior written consent of Holder, which consent may be withheld in
Holder's sole discretion. The rights and privileges of Holder hereunder shall
inure to the benefit of its successors and assigns.
Article 22 Severability.
Any provision of this Agreement, or of any other Transaction Document,
that is prohibited by, or unenforceable under, the laws of any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such prohibition
or unenforceability, without invalidating the remaining provisions of this
Agreement, and any such prohibition or unenforceability in any jurisdiction
shall not invalidate or render unenforceable such provision in any other
jurisdiction. To the extent permitted by applicable law, each Company hereby
waives any provision of law which renders any provision of this Agreement or any
other Transaction Document prohibited or unenforceable in any respect.
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Article 23 Counterparts.
This Agreement may be executed in counterparts and each shall be
effective as an original, and a photocopy, facsimile or telecopy of this
executed Agreement shall be effective as an original. In making proof of this
Agreement, it shall not be necessary to produce more than one counterpart,
photocopy, facsimile, or telecopy of this executed Agreement.
Article 24 Time.
Time is of the essence of this Agreement.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Debenture to be
duly executed on the day and year first above written.
Patient Portal TECHNOLOGIES, Inc.
By ____________________________________________
Name: Kevin Kelly, Chief Executive Officer
By:_____________________________________________
Thomas Hagan, Secretary, Acting CFO and Director
By:_____________________________________________
David Wolf , Chief Operating Officer
DUTCHESS PRIVATE EQUITIES FUND, LTD.
By: ___________________________________________
Name: Douglas H. Leighton
Title: Director
78
EXHIBIT A
---------
NOTICE OF CONVERSION
Patient Portal Technologies, Inc.
Re: Notice of Conversion
- ------------------------
Gentlemen:
The undersigned hereby irrevocably elects, as of ________________, to
convert $________________ of its convertible debenture (the "Debenture") into
Common Stock of Patient Portal Technologies, Inc. ("Company") according to the
conditions set forth in the Debenture issued by Company.
Date of Conversion_______________________________________________
Applicable Conversion Price________________________________________
Number of Debentures Issuable upon this Conversion____________________
Name: Dutchess Private Equities Fund, LTD.
Address: 50 Commonwealth Ave, Boston, MA 02116
Phone: 617-301-4700 Fax: 617-249-0947
DUTCHESS PRIVATE EQUITIES FUND, LTD.,
By: _______________________________________
Name: Douglas H. Leighton
Title: Director
79
EXHIBIT B
Balance Face of Debt Deb calculation Interest Principal Premium Prin & Total
Date Outstanding Conv Date Due Payment Payment Prem Interest Pmt
- ---------------------------------------------------------------------------------------------------------------
1-Apr-09 $ 6,469,966.11 4-Jan-09 $64,118.51 $0.00 $ - $ - $0.00 -
80
EXHIBIT C - Series C Preferred Stock Purchase Agreement
SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (this
"Agreement") is made and entered into as of April ____, 2009, by and among
Patient Portal Technologies, Inc., a Delaware corporation, and its subsidiaries
with an office at 8276 Willett Parkway, Baldwinsville, NY 13027 (collectively,
the "Company"), and the investors listed on Schedule 1 attached hereto (who
shall execute this Agreement and who are collectively referred to as the
"Investors").
RECITALS
WHEREAS, the Company and the Investors are executing and delivering
this Agreement in reliance upon an exemption from securities registration
pursuant to Section 4(2) and/or Rule 506 of Regulation D ("Regulation D") as
promulgated by the United States Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act");
WHEREAS, the Company desires to authorize, issue and sell shares of its
Series C Convertible Preferred Stock, $0.01 par value per share (the "Series C
Stock") to the Investors, and the Investors desire to purchase shares of the
Series C Stock, all on the terms and subject to the conditions herein set forth;
and
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Debt Conversion
Agreement (the "Debt Conversion Agreement") to take effect upon such time as the
fulfillment of the Company obligations herein for duly authorized issuance of
the Series C Stock.
WHEREAS, The Company has issued to Dutchess a certain warrant for the
purchase of common shares of the company dated November 1, 2007 in the amount of
22,826,086 shares of the common stock, $.001 par value per share (the "Common
Stock:") (the "Warrants")
WHEREAS in connection with the issuance of the Convertible Debenture,
the Company has given to Dutchess a Security Agreement made as of the 1st day of
November, 2007, 2008 as collateral security for the Convertible Debenture (the
"Security Agreement")
WHEREAS in connection with the issuance of the Convertible Debenture,
certain shareholders in the Company have pledged shares in the Company as
collateral security for the Convertible Debenture (the" Pledge Agreement")
WHEREAS, the Investors have entered into a certain Intercreditor,
Subordination and Standby Agreement with the Company, Five Star Bank and TB&A
hospital Television, Inc. dated the 12th day of February, 2008 and amended March
24, 2009 (the "intercreditor Agreement")
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NOW, THEREFORE, for and in consideration of the foregoing premises, the
mutual covenants and agreements contained herein, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto, intending to be legally bound, hereby agree as
follows:
Article 14 Authorization of Securities. The Company has authorized the
number of shares of Series C Stock as provided herein, which shall be entitled
to the rights, privileges and preferences set forth in the Company's Articles of
Incorporation as modified by the Certificate of Designation for the Series C
Stock that has been filed by the Company with the Delaware Secretary of State
on, before or within fifteen (15) days of the Closing. As used in this
Agreement, the term "Preferred Stock" shall mean the shares of Series C Stock
issued and outstanding immediately after the closing described in Section 4.3
hereof and all shares of Series C Stock issued in exchange or substitution
therefore. The Series C Stock shall be convertible into shares of the Common
Stock, $0.01 par value per share (the "Common Stock"), as set forth in the
Articles of Incorporation. The Company shall authorize and reserve a sufficient
number of its previously authorized but unissued shares of Common Stock to
satisfy the rights of conversion and purchase of the holders of the Series C
Stock. Any shares of Common Stock issuable upon conversion of the Series C
Stock, when issued, shall be referred to as "Conversion Shares".
Article 15 Sale and Purchase of Shares of the Series C Stock. Subject
to the terms and conditions herein, the Company agrees to sell to the Investors,
and each of the Investors severally agrees to purchase from the Company on the
date hereof in accordance with this Agreement, the number of shares of Series C
Stock set forth opposite such Investor's name on Schedule 1 at a purchase price
of One Thousand Dollars ($1,000.00) per share (the "Purchase Commitment"). The
Company's agreement with each Investor is a separate agreement, and the sale of
the Series C Stock to each Investor is a separate sale.
Article 16 The Closing. The closing of the sale of the Series C Stock
shall take place at 10:00 a.m. Boston time (the "Closing"). The date and time on
which the Closing occurs shall be referred to as the "Closing Date". On the
Closing Date, the Company shall deliver to each of the Investors purchasing
shares of the Series C Stock on such date a stock certificate for the number of
shares of Series C Stock being acquired by such Investor, which shares shall be
registered in the Investor's name or as otherwise designated by the Investor.
Article 17 Representations and Warranties by the Company. As a material
inducement to each of the Investors to enter into this Agreement and to purchase
the number of shares of the Series C Stock set forth after such Investor's name
on Schedule 1, with the understanding that each Investor will be relying thereon
in consummating the transactions contemplated hereunder, the Company hereby
represents and warrants to each Investor that, except as set forth (i) in the
Disclosure Schedule attached hereto and prepared and delivered by the Company to
the Investors on the date hereof (the "Disclosure Schedule"), or (ii) the SEC
Documents (as defined herein), the statements contained in this Section 4 are
true and correct. The Disclosure Schedule is arranged in sections corresponding
to the sections and subsections of this Section 4:
Section 17.1 Organization, Qualification and Power. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation, and has all requisite corporate power
and authority, and all governmental licenses, governmental authorizations,
governmental consents and governmental approvals, required to carry on its
business as now conducted and to own, lease and operate the assets and
properties of the Company as now owned, leased and operated. The Company is duly
qualified or licensed to do business as a foreign corporation and is in good
standing in every jurisdiction in which the character or location of its
properties and assets owned, leased or operated by the Company or the nature of
the business conducted by the Company requires such qualification or licensing,
except where the failure to be so qualified, licensed or in good standing in
such other jurisdiction could not, individually or in the aggregate, have a
Material Adverse Effect (as defined herein) on the Company. The Company has
heretofore delivered to the Investors complete and accurate copies of its
Articles of Incorporation and Bylaws, as currently in effect. The Company has
previously delivered to the Investors a complete and accurate list of all
jurisdictions in which the Company is qualified or licensed to do business as of
the date hereof.
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Section 17.2 Authorization; Enforcement. The Company has full
power and authority to enter into this Agreement, the related Debt Conversion
Agreement, any and all agreements referenced herein or therein, and all
agreements and documents related to the foregoing (collectively, the
"Transaction Documents") and to carry out the transactions contemplated in the
Transaction Documents. The Board of Directors of the Company and the Company's
stockholders have taken all action required by law, the Company's charter
documents and otherwise to duly and validly authorize and approve the execution,
delivery and performance by the Company of the Transaction Documents and the
consummation by the Company of the transactions contemplated in the Transaction
Documents and no other corporate proceedings on the part of the Company are
necessary to authorize the Transaction Documents or to consummate the
transactions contemplated thereby. The Transaction Documents have been duly and
validly executed and delivered by the Company and constitute the legal, valid
and binding obligations of the Company, enforceable against it in accordance
with their respective terms, subject to laws of general application relating to
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and rules of law governing specific
performance, injunctive relief or other equitable remedies.
Section 17.3 Capitalization of the Company. The Company has
authorized (a) 100,000,000 shares of Common Stock, 42,951,130 of which shares
are issued and outstanding, and (b) 1,000,000 shares of Series A and B Preferred
Stock, none of which are issued and outstanding and (c) 0 shares of Series C
Preferred Stock, all of which has been issued and subsequently converted to
Common Stock (together with the Common Stock the "Capital Stock"). All of the
issued and outstanding shares of the Capital Stock are duly authorized, validly
issued, fully paid, non-assessable and, except for the Series C Stock, free of
preemptive rights. There are no outstanding obligations of the Company to
repurchase, redeem or otherwise acquire any of its securities excluding the
Investors. There are no stockholder agreements, voting trusts or other
agreements or understandings to which the Company is a party or by which it is
bound relating to the voting or registration of any shares of Capital Stock. As
of the date hereof, except to the Investors and set forth in the Disclosure
Schedule (i) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock of the
Company or any of its subsidiaries, or contracts, commitments, understandings or
arrangements by which the Company or any of its subsidiaries is or may become
bound to issue additional shares of capital stock of the Company or any of its
subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
subsidiaries, (ii) there are no outstanding debt securities, (iii) there are no
agreements or arrangements under which the Company or any of its subsidiaries is
obligated to register the sale of any of their securities under the Securities
Act, and (iv) there are no outstanding registration statements and there are no
outstanding comment letters from the Commission or any other regulatory agency.
There are no securities or instruments containing anti-dilution or similar
provisions that will be triggered by the issuance of the Preferred Stock as
described in this Agreement.
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Section 17.4 Non-Contravention. Neither the execution, delivery
and performance by the Company of the Transaction Documents nor the consummation
of the transactions contemplated therein will (i) contravene or conflict with
the charter documents of the Company, (ii) contravene or conflict with or
constitute a violation of any provision of any Applicable Law (as defined
herein) binding upon or applicable to the Company or any of the Company's
assets, (iii) result in the creation or imposition of any Lien (as defined
herein) on any of the Company's assets, other than Permitted Liens (as defined
herein), (iv) be in conflict with, constitute (with or without due notice or
lapse of time or both) a default under, result in the loss of any material
benefit under, or give rise to any right of termination, cancellation, increased
payments or acceleration under any terms, conditions or provisions of any
material note, bond, lease, mortgage, indenture, license, contract, franchise,
permit, instrument or other agreement or obligation to which the Company is a
party, or by which any of its properties or assets may be bound, or (v) to the
knowledge of the Company, disrupt or impair any business relationship with any
material supplier, customer, distributor, sales representative or employee of
the Company. Except to the Investors, neither the Company nor its subsidiaries
is in violation of any term of or in default under its charter documents or any
material contract, agreement, mortgage, indebtedness, indenture, instrument,
judgment, decree or order or any statute, rule or regulation applicable to the
Company or its subsidiaries. The business of the Company and its subsidiaries is
not being conducted, and shall not be conducted in violation of any material
law, ordinance, or regulation of any governmental entity. Except as specifically
contemplated by this Agreement and as required under the Securities Act and any
Applicable Law, the Company is not required to obtain any consent, authorization
or order of, or make any filing or registration with, any court or governmental
agency in order for it to execute, deliver or perform any of its obligations
under or contemplated by the Transaction Documents in accordance with the terms
thereof. All consents, authorizations, orders, filings and registrations which
the Company is required to obtain pursuant to the preceding sentence have been
obtained or effected on or prior to the date hereof. The Company and its
subsidiaries are unaware of any facts or circumstance, which might give rise to
any of the foregoing.
Section 17.5 Consents and Approvals. No consent, approval, order
or authorization of or from, or registration, notification, declaration or
filing with (hereinafter sometimes separately referred to as a "Consent" and
sometimes collectively as "Consents"), any Person, including, without
limitation, any Governmental Authority (as defined herein), is required in
connection with the execution, delivery or performance of the Transaction
Documents by the Company or the consummation by the Company of the transactions
contemplated therein. To the knowledge of the Company, there are no facts
relating to the identity or circumstances of the Company that would prevent or
materially delay obtaining any of the Consents.
Section 17.6 Financial Statements; Undisclosed Liabilities.
(a) The Company has previously delivered to the Investors
complete and accurate copies of the audited balance sheet of the Company as of
December 31, 2007 (the "Latest Balance Sheet") and the unaudited statements of
income of the Company quarter ended June 30, 2007 (such statements of income and
the Latest Balance Sheet being herein referred to as the "Latest Financial
Statements"). The Latest Financial Statements are based upon the information
contained in the books and records of the Company and fairly and accurately
present the financial condition of the Company as of the dates thereof and
results of operations for the periods referred to therein. The Latest Financial
Statements have been prepared in accordance with GAAP (as defined herein)
applicable to unaudited interim financial statements (and thus may not contain
all notes and may not contain prior period comparative data which are required
for compliance with GAAP), and reflect all adjustments necessary to a fair and
accurate statement of the financial condition and results of operations of the
Company for the interim periods presented.
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(b) All accounts, books and ledgers related to the business
of the Company and its subsidiaries are properly and accurately kept, are
complete in all material respects, and there are no material inaccuracies or
discrepancies of any kind contained or reflected therein subject to the yearend
adjustments made by the outside accountant which shall be in accordance with
prior practice.. Neither the Company nor its subsidiaries have any of its
material records, systems, controls, data, or information recorded, stored,
maintained, operated or otherwise wholly or partly dependent upon or held by any
means (including any electronic, mechanical or photographic process, whether
computerized or not) which (including all means of access thereto and therefrom)
are not under the exclusive ownership (excluding licensed software programs) and
direct control of the Company or its subsidiaries.
(c) Except as and to the extent reflected in the Latest
Balance Sheet subject to yearend adjustments made in accordance with prior
practice, the Company does not have any Liabilities (as defined herein) of any
nature (whether accrued, absolute, contingent, unliquidated or otherwise,
whether due or to become due, and regardless of when asserted), other than
Liabilities incurred in the Ordinary Course of Business (as defined herein)
since the date of the Latest Balance Sheet and Liabilities arising in connection
with this Agreement and the transactions contemplated herein.
Section 17.7 Assets and Properties.
(a) Except as previously disclosed in the SEC Filings, the
Company has good and valid right, title and interest in and to or, in the case
of leased properties or properties held under license, good and valid leasehold
or license interests in, all of their assets and properties, including, but not
limited to, all of the machinery, equipment, terminals, computers, vehicles, and
all other assets and properties (real, personal or mixed, tangible or
intangible) reflected in the Latest Balance Sheet and all of the assets
purchased or otherwise acquired since the date of the Latest Balance Sheet,
except those assets and properties disposed of in the Company's ordinary course
of business after the date of the Latest Balance Sheet. The Company holds title
to each such property and asset free and clear of all Liens, except Permitted
Liens, and is in sole possession of, and has sole control of, its material
assets.
(b) Except as previously disclosed in the SEC Filings, the
material equipment owed by the Company has been properly maintained and is in
good operating condition and repair and is adequate for the uses for which they
are currently being put by the Company, normal wear and tear excepted. To the
knowledge of the Company, no such asset is in need of maintenance or repair,
except for routine maintenance and repairs that are in the ordinary course.
(c) Except as previously disclosed in the SEC Filings, the
Company owns or has the right to use all material property, real or personal,
tangible or intangible, which is necessary for the operation of its business in
substantially the same manner as it has been conducted during the period covered
by the Latest Balance Sheet.
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Section 17.8 Compliance with Applicable Laws. Except as set forth
in the Disclosure Schedule, the Company has not violated or infringed, nor is it
in violation or infringement of, any Applicable Law or any order, writ,
injunction or decree of any Governmental Authority in connection with its
activities. The Company, and its officers, directors, agents and employees, have
complied with all Applicable Laws. No claims have been filed against the Company
alleging a violation of any Applicable Law.
Section 17.9 Permits. The Company has conducted its business in
compliance with all material terms and conditions of all licenses, permits,
quotas, authorizations, registrations and other approvals that are necessary to
the operation of, or relate solely to, the Company's business (collectively, the
"Permits"). Each Permit is valid and in full force and effect and none of the
Permits will be terminated, revoked, modified or become terminable or impaired
in any respect for any reason, except as would not have a Material Adverse
Effect.
Section 17.10 Receivables. The accounts receivable and other
receivables reflected on the Latest Balance Sheet, and those arising after the
date thereof, are valid receivables that have arisen from bona fide transactions
in the Company's ordinary course of business, and the Company is not aware that
such accounts are subject to valid counterclaims or setoffs, and are collectible
in accordance with their terms, except as and to the extent of the bad debt
allowance reflected on the Latest Balance Sheet.
Section 17.11 Litigation. Except as set forth in the Disclosure
Schedule, there are no (a) actions, suits, claims, hearings, arbitrations,
proceedings (public or private) or governmental investigations that have been
brought by or against any Governmental Authority or any other Person, nor any
investigations or reviews by any Governmental Authority against or affecting the
Company, pending or, to the Company's knowledge, threatened, against or by the
Company or any of its assets or which seek to enjoin or rescind the transactions
contemplated by this Agreement; or (b) existing orders, judgments or decrees of
any Governmental Authority naming the Company as an affected party or otherwise
affecting any of the assets or the business of the Company.
Section 17.12 Labor and Employment Matters. Except as set forth in
the Disclosure Schedule, the Company has previously delivered to the Investors a
complete and accurate list of all current employees, officers and directors of
the Company, which list includes their base salaries and bonus. All employees of
the Company are employed on an at-will basis. Neither the Company nor any of its
subsidiaries is involved in any labor dispute nor, to the knowledge of the
Company or any of its subsidiaries, is any such dispute threatened. None of the
Company's or its subsidiaries' employees is a member of a union and the Company
and its subsidiaries believe that their relations with their employees are good
Section 17.13 Tax Matters. Except as otherwise noted in its
filings with the SEC, as and with the exception of its corporate federal and
state income tax return for the year ended December 31, 2007, the Company has,
or will have prior to Closing (a) properly completed and filed on a timely basis
all tax returns (federal, provincial, state, county, local and other) relating
to all excise, payroll, real estate, capital stock, intangible, value-added,
income, sales, use, service, employment, property and, without limitation of the
foregoing, all other taxes of every kind and nature which the Company is
required to file in connection with its business prior to the Closing Date
(i.e., the due date for such tax return being on or before the Closing Date) and
for which the non-payment of, or failure to file, could result in a Lien on any
of the Company's assets, or result in the Investors becoming liable or
responsible therefore, and (b) paid in full all Taxes (as defined herein),
interest, penalties, assessments or deficiencies shown to be due to any taxing
authority on such returns. The Company is not currently the beneficiary of any
extension of time within which to file any such return. The Company is not a
party to any pending or, to the knowledge of the Company, any threatened action
or proceeding against the Company for the assessment or collection of Taxes by
any Governmental Authority, and there is no basis for any such action or
proceeding. There are no audits pending with respect to any liabilities for
Taxes of the Company.
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Section 17.14 Bank Accounts; Powers of Attorney. In addition to
the updated Disclosure Schedule items, the Company has previously delivered to
the Investors a complete and accurate list of the names of all (i) financial
institutions, investment banking and brokerage houses, and other similar
institutions at which the Company maintains accounts, deposits, safe deposit
boxes of any nature, and the names of all persons authorized to draw thereon or
make withdrawals therefrom and a description of such accounts; and (ii) Persons
holding general or special powers of attorney from the Company and copies
thereof.
Section 17.15 Indemnification, Guarantee or Assumption of
Liability Obligations. The Company is not a party to any Contract that contains
any provisions requiring the Company to indemnify, guarantee or assume
liabilities of any Person except as made in the ordinary course of business with
routine agreements. There is no event, circumstance or other basis that could
give rise to any indemnification, guarantee or assumption of liabilities
obligation of the Company to its officers and directors under the Company's
Articles of Incorporation, Bylaws, similar governing documents, or any Contract
between the Company and any of its officers or directors or to any other Person
under any Contract
Section 17.16 Employee Benefit Plans. The Company does not have
any liability arising directly or indirectly under Section 412 of the Code, or
Section 302 of Title IV of ERISA. The Company does not have any liability
arising directly or indirectly to or with respect to any "multiemployer plan"
within the meaning of Section 4001(a)(3) of ERISA. The Company does not have any
liability arising under the Consolidated Omnibus Reconciliation Act of 1985, as
amended, Section 4980B of the Code and Part 6 of Subtitle B of Title I of ERISA.
Nothing has occurred or failed to occur with respect to any the Company Pension
Plan that could result in any liability to the Investors.
Section 17.17 Disclosure. No representation or warranty by the
Company in this Agreement and no statement contained or to be contained in any
document, certificate or other writing furnished or to be furnished by the
Company to the Investors, contains or will contain any untrue statement of a
material fact or omits or will omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. There is no fact that has not been
disclosed to the Investors of which any officer or director of the Company is
aware which has or could reasonably be expected to have a Material Adverse
Effect.
Section 17.18 Investigation by the Investors. Notwithstanding
anything to the contrary in this Agreement, (i) no investigation by the
Investors shall affect the representations and warranties of the Company under
any of the Transaction Document or contained in any other writing to be
furnished to the Investors in connection with the transactions contemplated
thereunder provided that such information discovered by the Investors prior to
this date and was disclosed in writing to the Company, and (ii) such
representations and warranties shall not be affected or deemed waived by reason
of the fact that the Investors knew or should have known that any of the same is
or might be inaccurate in any respect.
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Section 17.19 Environmental Laws. The Company and its subsidiaries
are (i) in compliance with any and all applicable foreign, federal, state and
local laws and regulations relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes, pollutants
or contaminants ("Environmental Laws"), (ii) have received all Permits, licenses
or other approvals required of them under applicable Environmental Laws to
conduct their respective businesses, and (iii) are in compliance with all terms
and conditions of any such Permit, license or approval.
Section 17.20 Insurance. The Company and each of its subsidiaries
are insured by insurers of recognized financial responsibility against such
losses and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its
subsidiaries are engaged. Neither the Company nor any such subsidiary has been
refused any insurance coverage sought or applied for and neither the Company nor
any such subsidiary has any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition,
financial or otherwise, or the earnings, business or operations of the Company
and its subsidiaries, taken as a whole.
Section 17.21 Regulatory Permits. The Company and its subsidiaries
possess all material certificates, authorizations and permits issued by the
appropriate federal, state or foreign regulatory authorities necessary to
conduct their respective businesses, and neither the Company nor any such
subsidiary has received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit.
Section 17.22 Internal Accounting Controls. The Company and each
of its subsidiaries maintain a system of internal accounting controls sufficient
to provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, and (iii) the recorded amounts for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
Section 17.23 SEC Documents: Financial Statements. Except as set
forth in the Disclosure Schedule, since the date hereof, the Company has filed
all reports, schedules, forms, statements and other documents required to be
filed by it with the Commission under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (all of the foregoing filed prior to the date
hereof or amended after the date hereof and all exhibits included therein and
financial statements and schedules thereto and documents incorporated by
reference therein, being hereinafter referred to as the "SEC Documents"). The
Company has delivered to the Investors or their representatives, or made
available through the Commission's website at www.sec.gov., complete and
accurate copies of the SEC Documents. As of their respective dates, the
financial statements of the Company disclosed in the SEC Documents (the
"Financial Statements") complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the Commission with respect thereto. Such financial statements have been
prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such Financial Statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and, fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). No other information provided by or on behalf of the Company to
the Investor which is not included in the SEC Documents, including, without
limitation, information referred to in the Transaction Documents, contains any
untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading./\
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Section 17.24 10(b)-5. The SEC Documents do not include any untrue
statements of material fact, nor do they omit to state any material fact
required to be stated therein necessary to make the statements made, in light of
the circumstances under which they were made, not misleading.
Section 17.25 Acknowledgment Regarding Investor's Purchase of the
Preferred Stock. The Company acknowledges and agrees that the Investors are
acting solely in the capacity of an arm's-length purchaser with respect to the
Transaction Documents and the transactions contemplated thereby. The Company
further acknowledges that the Investors are not acting as a financial advisor or
fiduciary of the Company (or in any similar capacity) with respect to the
Transaction Documents and the transactions contemplated thereby and any advice
given by the Investors or any of their respective representatives or agents in
connection with the Transaction Documents and the transactions contemplated
thereby is merely incidental to such Investor's purchase of the Preferred Stock
or the Conversion Shares. The Company further represents to the Investor that
the Company's decision to enter into the Transaction Documents has been based
solely on the independent evaluation by the Company and its representatives.
Section 17.26 No General Solicitation. None of the Company, its
subsidiaries or Affiliates (as defined herein), nor any person acting on its or
their behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D under the Securities Act) in
connection with the offer or sale of the Preferred Stock.
Section 17.27 No Integrated Offering. None of the Company, its
subsidiaries or Affiliates, nor any person acting on its or their behalf has,
directly or indirectly, made any offers or sales of any security or solicited
any offers to buy any security, under circumstances that would require
registration of the Preferred Stock under the Securities Act or cause this
offering of the Preferred Stock to be integrated with prior offerings by the
Company for purposes of the Securities Act.
Section 17.28 Certain Transactions. Except as set forth in the
Disclosure Schedule and except for arm's-length transactions pursuant to which
the Company makes payments in the ordinary course of business upon terms no less
favorable than the Company could obtain from third parties and other than the
grant of stock options disclosed in the SEC Documents, none of the officers,
directors, or employees of the Company, its subsidiaries or Affiliates is
presently a party to any transaction with the Company, its subsidiaries or
Affiliates (other than for services as employees, officers and directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any corporation,
partnership, trust or other entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner.
Section 17.29 Fees and Rights of First Refusal. The Company is not
obligated to offer the securities offered hereunder on a right of first refusal
basis or otherwise to any third parties, including but not limited to, current
or former shareholders of the Company, its subsidiaries, Affiliates,
underwriters, brokers, agents or other third parties.
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Section 17.30 No Material Adverse Breaches, etc. None of the
Company, its subsidiaries or Affiliates is subject to any charter, corporate or
other legal restriction, or any judgment, decree, order, rule or regulation
which in the judgment of the Company's officers has or is expected in the future
to have a Material Adverse Effect on the business, properties, operations,
financial condition, results of operations or prospects of the Company or its
subsidiaries. None of the Company, its subsidiaries or Affiliates is in breach
of any contract or agreement which breach, in the judgment of the Company's
officers, has or is expected to have a Material Adverse Effect on the business,
properties, operations, financial condition, results of operations or prospects
of the Company or its subsidiaries.
4.31. The Investor and the Company agree to cancel the Convertible
Debenture between the Company and Dutchess Private Equities Fund, LTD dated
November 1, 2007 all Transaction Documents associated with the Debenture, all
Warrants, termination of the Stock Pledge Agreement and return of the Common
Stock to the owners and notification to Five Star Bank (the "Bank"), that it has
no further interest in the Intercreditor Agreement and the Bank may proceed
without notification and the obtaining of the consent of the Investors..
Article 18 Representations of the Investors. Each of the Investors
severally represents to the Company for such Investor that:
Section 18.1 Investment Intent. The shares of the Series C Stock
and the Conversion Shares into which such shares may be converted that are being
acquired by the Investor are being purchased for investment for the Investor's
own account and not with the view to, or for resale in connection with, any
distribution or public offering thereof. The Investor has no present plan or
intention to engage in a sale, exchange, transfer, distribution, redemption,
reduction in any way of the Investor's risk of ownership by short sale or
otherwise, or other disposition, directly or indirectly of the Series C Stock
being acquired by the Investor pursuant to the Transaction Documents or the
Conversion Shares into which such shares may be converted. The Investor is able
to bear the economic risk of its investment and has the knowledge and experience
in financial and business matters that it is capable of evaluating the merits
and risks (including tax considerations) of its investment, including the high
degree of risk of loss of the Investor's entire investment herein.
Section 18.2 Restrictions on Resale, Rule 144. The Investor
understands that the shares of the Series C Stock have not been registered under
the Securities Act or any state securities laws by reason of their contemplated
issuance in transactions exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof or Rule 504, 505 or 506
promulgated under the Securities Act and applicable state securities laws, and
that the reliance of the Company and others upon these exemptions is predicated
in part upon this representation by the Investor. The Investor further
understands that the Series C Stock may not be transferred or resold without (i)
registration under the Securities Act and any applicable state securities laws,
or (ii) an exemption from the requirements of the Securities Act and applicable
state securities laws. The Investor also understands that the Conversion Shares
will be issued without prior registration thereof under the Securities Act or
applicable state securities laws in reliance upon Section 4(2) of the Securities
Act and transactional exemptions from registration under applicable state
securities laws based upon appropriate representations of the Investor. As such,
the Conversion Shares will be subject to transfer restrictions similar to
restrictions applicable to the Series C Stock. The Investor understands that (i)
an exemption from such registration is not presently available pursuant to Rule
144 promulgated under the Securities Act by the Commission, (ii) the Company has
made no commitment to become eligible for Rule 144, and (iii) in any event the
Investor may not sell any securities acquired hereunder pursuant to Rule 144
prior to the expiration of a six month period (or such other period as the
Commission may hereafter adopt) after the Investor has acquired such securities.
The Investor understands that any sales pursuant to Rule 144 can be made only in
full compliance with the provisions of Rule 144.
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If so requested by the Investors, the Company shall instruct counsel to
write a Rule 144 opinion letter provided the necessary paperwork has been
submitted and the Exemption applies (as defined herein). If the Company's
counsel fails to provide a Rule 144 opinion letter within three (3) days, then
the Company shall: (a) pay the Investor's counsel to write said Rule 144 opinion
letter; and (b) instruct the designated transfer agent to accept and rely upon
the Rule 144 Opinion letter.
Section 18.3 Location of Principal Office, Qualification as an
Accredited Investor, etc. The state in which the Investor's principal office (or
domicile, if the Investor is an individual) is located is the state set forth in
the Investor's address on Schedule 1. The Investor by execution of this
Agreement hereby represents that he, she or it qualifies as an "accredited
investor" for purposes of Regulation D promulgated under the Securities Act. The
Investor (i) is an investor in securities of companies in the development stage
and acknowledges that it is able to fend for itself, and bear the loss of its
entire investment in the Series C Stock, and (ii) has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of the investment to be made by it pursuant to this
Agreement. If other than an individual, the Investor also represents it has not
been organized solely for the purpose of acquiring the Series C Stock or the
Conversion Shares.
Section 18.4 Acts and Proceedings. The Investor has full power and
authority to enter into and perform under the Transaction Documents in
accordance with their respective terms. The Transaction Documents have been duly
authorized by all necessary action on the part of the Investor, has been duly
executed and delivered by the Investor, and is a valid and binding agreement of
the Investor and enforceable against the Investor in accordance with their
terms, except as enforceability may be limited by bankruptcy, insolvency,
moratorium, reorganization or other similar laws affecting the enforcement of
creditors' rights generally and to judicial limitations on the remedy of
specific enforcement and other equitable remedies.
Section 18.5 Exculpation Among Investors. The Investor
acknowledges that in making the decision to invest in the Company, the Investor
is not relying on any other Investor or upon any person, firm or company, other
than the Company and its officers, employees and/or directors. The Investor
agrees that none of any of the other Investor, nor their partners, employees,
officers or controlling persons, shall be liable for any actions taken by the
Investor, or omitted to be taken by the Investor, in connection with such
investment.
Section 18.6 Disclosure of Information. The Investor represents
that the Company has made available to the Investor at a reasonable time prior
to the execution of the Transaction Documents the opportunity to ask questions
and receive answers from the Company's management concerning the Company's
business, management and financial affairs, the terms and conditions of the
offering of the Series C Stock and to obtain any additional information (that
the Company possesses or can acquire without unreasonable effort or expense) as
may be necessary to verify the accuracy of information furnished to such
Investor. Investor further represents that it, except as otherwise provided by
law, is entering into the Transaction Documents and is acquiring the Series C
Stock without any representation or warranty, express or implied, by the Company
or any of its officers, directors, employees or affiliated, except as expressly
set forth in this Agreement. The foregoing, however, does not limit or modify
the representations and warranties of the Company in the Transaction Documents
or the right of the Investors to rely thereon.
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Section 18.7 Legend; Stop Transfer. The Series C Stock, and any
Conversion Shares issued upon conversion thereof, shall bear a legend
substantially similar to the following:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER EITHER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR APPLICABLE BLUE SKY LAWS, AND ARE SUBJECT TO
CERTAIN INVESTMENT REPRESENTATIONS. THESE SECURITIES MAY NOT
BE SOLD, OFFERED FOR SALE OR TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION UNDER THE ACT AND SUCH APPLICABLE BLUE
SKY LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED.
The Company shall make a notation regarding the restrictions on
transfer of the Series C Stock and any such Conversion Shares in its books and
the Series C Stock and any such Conversion Shares shall be transferred on the
books of the Company only if transferred or sold pursuant to an effective
registration statement under the Securities Act covering the securities to be
transferred or an opinion of counsel satisfactory to the Company that such
registration is not required.
Any legend endorsed on a certificate pursuant to Section 5.7 hereof
shall be removed, and the Company shall issue a certificate without such legend
to the holder of such security, if such security is being disposed of pursuant
to a registration under the Securities Act or pursuant to Rule 144 or any
similar rule then in effect or if such holder provides the Company with an
opinion of counsel satisfactory to the Company to the effect that a transfer of
such securities may be made without registration. In addition, if the holder of
such securities delivers to the Company an opinion of such counsel to the effect
that no subsequent transfer of such securities will require registration under
the Securities Act, the Company will promptly upon such contemplated transfer
deliver new certificates evidencing such security that do not bear the legend
set forth in Section 5.7 hereof.
Section 18.8 No Brokers or Finders. No person, firm or corporation
has or will have, as a result of any contractual undertaking by the Investor,
any right, interest or valid claim against the Investor or the Company for any
commission, fee or other compensation as a finder or broker, or in any similar
capacity, in connection with the transactions contemplated by the Transaction
Documents. Each responsible Investor will indemnify and hold the Company
harmless against any and all liability with respect to any such commission, fee
or other compensation which may be payable or determined to be payable.
Section 18.9 No Governmental Review. Each Investor understands
that no United States federal or state agency or any other government or
governmental agency has passed on or made any recommendation or endorsement of
the Preferred Stock or the Conversion Shares, or the fairness or suitability of
the investment in the Preferred Stock or the Conversion Shares, nor have such
authorities passed upon or endorsed the merits of the offering of the Preferred
Stock or the Conversion Shares.
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Section 18.10 Receipt of Documents. Each Investor and his or its
counsel has received and read in their entirety: (i) the Transaction Documents
and each representation, warranty and covenant set forth therein; (ii) all due
diligence and other information necessary to verify the accuracy and
completeness of such representations, warranties and covenants; (iii) the
Company's Form 10-KSB for the fiscal year ended December 31, 2007; (iv) the
Company's Form 10-QSB for the fiscal quarter ended September 30, 2008 and (v)
answers to all questions each Investor submitted to the Company regarding an
investment in the Company; and each Investor has relied on the information
contained therein and has not been furnished any other documents, literature,
memorandum or prospectus.
Section 18.11 Due Formation of Corporate and Other Investors. If
the Investors is a corporation, trust, partnership or other entity that is not
an individual person, it has been formed and validly exists and has not been
organized for the specific purpose of purchasing the Preferred Stock and is not
prohibited from doing so.
Section 18.12 No Legal Advice From the Company. Each Investor
acknowledges, that it had the opportunity to review the Transaction Documents
and the transactions contemplated thereby with his or its own legal counsel and
investment and tax advisors. Each Investor is relying solely on such counsel and
advisors and not on any statements or representations of the Company, its
subsidiaries, Affiliates or any of their respective representatives or agents
for legal, tax or investment advice with respect to this investment, the
transactions contemplated by the Transaction Documents or the securities laws of
any jurisdiction.
Section 18.13 Intentionally Omitted.
Article 19 Covenants.
Section 19.1 Best Efforts. Each party shall use its best efforts
to timely satisfy each of the conditions to be satisfied by it as provided in
Sections 8 and 9 hereof.
Section 19.2 Reporting Status. Until the earlier of (i) the date
as of which the Investors may sell all of the Conversion Shares without
restriction pursuant to Rule 144(k) promulgated under the Securities Act (or
successor thereto), or (ii) the date on which (A) the Investors shall have sold
all the Conversion Shares and (B) none of the Preferred Stock are outstanding
(the "Registration Period"), the Company shall file in a timely manner all
reports required to be filed with the Commission pursuant to the Exchange Act
and the regulations of the Commission thereunder, and the Company shall not
terminate its status as an issuer required to file reports under the Exchange
Act even if the Exchange Act or the rules and regulations thereunder would
otherwise permit such termination.
Section 19.3 Registration of Shares. As outlined in the
Certificate of Designation.
Section 19.4 Reservation of Shares. The Company shall take all
action reasonably necessary to at all times have authorized, and reserved for
the purpose of issuance, such number of shares of Common Stock as shall be
necessary to effect the issuance of the Conversion Shares. If at any time the
Company does not have available such shares of Common Stock as shall from
time-to-time be sufficient to effect the conversion of all of the Conversion
Shares, then the Company and its management shall, upon the written request of
the Investors, do the following: (i) call and hold a special meeting of the
shareholders within thirty (30) days of such occurrence for the sole purpose of
increasing the number of shares authorized, (ii) recommend to the shareholders
that they vote in favor of increasing the number of shares of Common Stock
authorized, and (iii) vote all of their shares in favor of increasing the number
of authorized shares of Common Stock.
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Section 19.5 Listings or Quotation. If not already done prior to
the Closing, the Company shall promptly secure the listing or quotation of the
Conversion Shares upon each national securities exchange, automated quotation
system or The National Association of Securities Dealers Inc.'s Over-The-Counter
Bulletin Board ("OTCBB") or other market, if any, upon which shares of Common
Stock are then listed or quoted. The Company shall use its best efforts to
maintain, so long as any other shares of Common Stock shall be so listed, such
listing of all Conversion Shares from time-to-time issuable under the terms of
this Agreement. The Company shall maintain the Common Stock's authorization for
quotation on the OTCBB.
Section 19.6 Fees and Expenses. Each of the Company and the
Investors shall pay all costs and expenses incurred by such party in connection
with the negotiation, investigation, preparation, execution and delivery of the
Transaction Documents.
Section 19.7 Corporate Existence. So long as any of the Preferred
Stock remains outstanding, the Company shall not directly or indirectly
consummate any merger, reorganization, restructuring, reverse stock split
consolidation, sale of all or substantially all of the Company's assets or any
similar transaction or related transactions (each such transaction, an
"Organizational Change") unless, prior to the consummation an Organizational
Change, the Company obtains the written consent of each Investor. In any such
case, the Company will make appropriate provision with respect to such holders'
rights and interests to insure that the provisions of this Section 6.8 will
thereafter be applicable to the Preferred Stock.
Section 19.8 Transactions With Affiliates. Except as set forth in
the Disclosure Schedule, so long as any Preferred Stock is outstanding, the
Company shall not, and shall cause each of its subsidiaries not to, enter into,
amend, modify or supplement, or permit any subsidiary to enter into, amend,
modify or supplement any agreement, transaction, commitment, or arrangement with
any of its or any subsidiary's officers, directors, person who were officers or
directors at any time during the previous two (2) years, stockholders who
beneficially own five percent (5%) or more of the Common Stock, or Affiliates,
or with any individual related by blood, marriage, or adoption to any such
individual or with any entity in which any such entity or individual owns a five
percent (5%) or more beneficial interest (each a "Related Party"), except for
(i) customary employment arrangements and benefit programs on reasonable terms,
(ii) any investment in an Affiliate of the Company, (iii) any agreement,
transaction, commitment, or arrangement on an arms-length basis on terms no less
favorable than terms which would have been obtainable from a person other than
such Related Party, (iv) any agreement, transaction, commitment, or arrangement
which is approved by a majority of the disinterested directors of the Company
(for purposes hereof, any director who is also an officer of the Company or any
subsidiary of the Company shall not be considered a disinterested director with
respect to any such agreement, transaction, commitment, or arrangement).
Notwithstanding the foregoing, for purposes of this Section 6.8, the Investors
and their respective Affiliates shall not be considered Affiliates of the
Company
Section 19.9 Transfer Agent. The Company covenants and agrees
that, in the event that the Company's agency relationship with the transfer
agent should be terminated for any reason after the Closing Date, the Company
shall immediately appoint a new transfer agent and shall require that the new
transfer agent agree to be bound by the terms of any transfer agent instructions
issued by the Company and in place as of the date hereof.
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Section 19.10 Restriction on Issuance of the Capital Stock. So
long as any Preferred Stock is outstanding, the Company shall not, without the
prior written consent of the Investors, (i) issue or sell shares of Common Stock
or Preferred Stock without consideration or for a consideration per share less
than the bid price of the Common Stock determined immediately prior to its
issuance, (ii) issue any preferred stock, warrant, option, right, contract,
call, or other security or instrument granting the holder thereof the right to
acquire Common Stock without consideration or for a consideration less than such
Common Stock's Bid Price determined immediately prior to it's issuance, (iii)
enter into any security instrument granting the holder a security interest in
any and all assets of the Company, or (iv) file any registration statement on
Form S-8.
Section 19.11 INTENTIONALLY OMITTED.
Article 20 Conditions To The Company's Obligation To Sell. The
obligation of the Company hereunder to issue and sell the Preferred Stock to the
Investors at the Closing(s) is subject to the satisfaction, at or before the
Closing Date(s), of each of the following conditions, provided that these
conditions are for the Company's sole benefit and may be waived by the Company
at any time in its sole discretion:
Section 20.1 Each Investor shall have executed the Transaction
Documents and delivered them to the Company.
Section 20.2 The representations and warranties of the Investors
shall be true and correct in all material respects as of the date when made and
as of the Closing Date(s) as though made at that time (except for
representations and warranties that speak as of a specific date), and the
Investors shall have performed, satisfied and complied in all material respects
with the covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by the Investors at or
prior to the Closing Date(s).
Article 21 Conditions To The Investor's Obligation To Purchase. The
obligation of the Investors hereunder to purchase the Preferred Stock at the
Closing(s) is subject to the satisfaction, at or before the Closing Date, of
each of the following conditions, provided that these conditions are for the
Investors' sole benefit and may be waived by the Investors at any time in their
sole discretion:
Section 21.1 The Company shall have executed the Transaction
Documents and delivered the same to the Investors.
Section 21.2 The Common Stock shall be authorized for quotation on
the OTCBB, trading in the Common Stock shall not have been suspended for any
reason, and all the Conversion Shares issuable upon the conversion of the
Preferred Stock shall be approved by the OTCBB.
Section 21.3 The representations and warranties of the Company
shall be true and correct in all material respects (except to the extent that
any of such representations and warranties is already qualified as to
materiality in Section 4 hereof, in which case, such representations and
warranties shall be true and correct without further qualification) as of the
date when made and as of the Closing Date as though made at that time (except
for representations and warranties that speak as of a specific date) and the
Company shall have performed, satisfied and complied in all material respects
with the covenants, agreements and conditions required by the Transaction
Document to be performed, satisfied or complied with by the Company at or prior
to the Closing Date. If requested by the Investor, the Investor shall have
received a certificate, executed by the President of the Company, dated as of
the Closing Date, to the foregoing effect and as to such other matters as may be
reasonably requested by the Investor.
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Section 21.4 The Company shall have delivered to the Investors the
Preferred Stock in the respective amounts set forth opposite each Investors name
on Schedule 1 attached hereto.
Section 21.5 The Company shall have delivered to the Investors a
certificate of good standing from the Delaware Secretary of State.
Section 21.6 The Company shall have reserved out of its authorized
and unissued Common Stock, solely for the purpose of effecting the conversion of
the Preferred Stock, shares of Common Stock to effect the conversion of all of
the Conversion Shares then outstanding.
Section 21.7 No Events of Default past any applicable cure period,
shall have occurred under the Transaction Documents.
Section 21.8 The Company shall deliver to the Investor a board
resolution stating that all management, director and officers will cancel any
debts owed to them by the Company for past salaries.
Article 22 Indemnification.
Section 22.1 In consideration of the Investor's execution and
delivery of this Agreement and acquiring the Preferred Stock and the Conversion
Shares hereunder, and in addition to all of the Company's other obligations
under the Transaction Documents, the Company shall defend, protect, indemnify
and hold harmless the Investors and each other holder of the Preferred Stock and
the Conversion Shares, and all of their officers, directors, employees and
agents (including, without limitation, those retained in connection with the
transactions contemplated by the Transaction Documents) (collectively, the
"Investor Indemnitees") from and against any and all actions, causes of action,
suits, claims, losses, costs, penalties, fees, liabilities and damages, and
expenses in connection therewith (irrespective of whether any such Investor
Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys' fees and disbursements (the
"Indemnified Liabilities"), incurred by the Investor Indemnitees or any of them
as a result of, or arising out of, or relating to (a) any misrepresentation or
breach of any representation or warranty made by the Company in the Transaction
Documents or any other certificate, instrument or document contemplated thereby,
(b) any breach of any covenant, agreement or obligation of the Company contained
in the Transaction Documents or any other certificate, instrument or document
contemplated thereby, or (c) any cause of action, suit or claim brought or made
against such Indemnitee and arising out of or resulting from the execution,
delivery, performance or enforcement of the Transaction Documents or any other
instrument, document or agreement executed pursuant thereto by any of the
parties thereto, any transaction financed or to be financed in whole or in part,
directly or indirectly, with the proceeds of the issuance of the Preferred Stock
or the Conversion Shares or the status of the Investor or holder of the
Preferred Stock or the Conversion Shares. To the extent that the foregoing
undertaking by the Company may be unenforceable for any reason, the Company
shall make the maximum contribution to the payment and satisfaction of each of
the Indemnified Liabilities, which is permissible under applicable law.
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Section 22.2 In consideration of the Company's execution and
delivery of the Transaction Documents, and in addition to all of the Investor's
other obligations under the Transaction Documents, the Investor shall defend,
protect, indemnify and hold harmless the Company and all of its officers,
directors, employees and agents (including, without limitation, those retained
in connection with the transactions contemplated by the Transaction Documents)
(collectively, the "Company Indemnitees") from and against any and all
Indemnified Liabilities incurred by the Indemnitees or any of them as a result
of, or arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Investors in the Transaction Documents,
instrument or document contemplated thereby or executed by the Investor, (b) any
breach of any covenant, agreement or obligation of the Investors contained in
the Transaction Documents or any other certificate, instrument or document
contemplated thereby or executed by the Investor, or (c) any cause of action,
suit or claim brought or made against such Company Indemnitee based on material
misrepresentations or due to a material breach and arising out of or resulting
from the execution, delivery, performance or enforcement of the Transaction
Documents or any other instrument, document or agreement executed pursuant
thereto by any of the parties thereto. To the extent that the foregoing
undertaking by each Investor may be unenforceable for any reason, each Investor
shall make the maximum contribution to the payment and satisfaction of each of
the Indemnified Liabilities, which is permissible under applicable law.
Article 23 Definitions. The following terms, as used herein, have the
following meanings:
Section 23.1 "Affiliate" means, with respect to any person or
entity, another person or entity that, directly or indirectly, (i) has a ten
percent (10%) or more equity interest in that person or entity, (ii) has ten
percent (10%) or more common ownership with that person or entity, (iii)
controls that person or entity, or (iv) shares common control with that person
or entity. "Control" or "controls" for purposes hereof means that a person or
entity has the power, direct or indirect, to conduct or govern the policies of
another person or entity.
Section 23.2 "Agreement" has the meaning set forth in the
Introduction.
Section 23.3 "Applicable Law" means, with respect to any Person,
any domestic or foreign, federal, state or local common law or duty, case law or
ruling, statute, law, ordinance, policy, guidance, rule, administrative
interpretation, regulation, code, order, writ, injunction, directive, judgment,
decree or other requirement of any Governmental Authority applicable to such
Person or any of its Affiliates or Plan Affiliates or any of their respective
properties, assets, officers, directors, employees, consultants or agents (in
connection with such officer's, director's, employee's, consultant's or agent's
activities on behalf of such Person or any of its Affiliates or Plan
Affiliates).
Section 23.4 "Capital Stock" has the meaning set forth in Section
4.3 hereof.
Section 23.5 "Articles of Incorporation" means the Company's
Articles of Incorporation as filed with the Nevada Secretary of State, as may be
amended from time to time.
Section 23.6 "Closing" has the meaning set forth in Section 3
hereof.
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Section 23.7 "Closing Date" has the meaning set forth in Section 3
hereof.
Section 23.8 "Code" means the Internal Revenue Code of 1986, as
amended, and the regulations or other binding pronouncements promulgated
thereunder.
Section 23.9 "Common Stock" has the meaning set forth in Section 1
hereof.
Section 23.10 "Company" has the meaning set forth in the
Introduction.
Section 23.11 "Compensation Plan" means any material benefit or
arrangement that is not either a Pension Plan or a Welfare Plan, including,
without limitation, (i) each employment or consulting agreement, (ii) each
arrangement providing for insurance coverage or workers' compensation benefits,
(iii) each bonus, incentive bonus or deferred bonus arrangement, (iv) each
arrangement providing termination allowance, severance or similar benefits, (v)
each equity compensation plan, (vi) each current or deferred compensation
agreement, arrangement or policy, (vii) each compensation policy and practice
maintained by the Company or any ERISA Affiliate of the Company covering the
employees, former employees, directors and former directors of the Company and
the beneficiaries of any of them, and (viii) each agreement, arrangement or plan
that provides for the payment of compensation to any person who provides
services to the Company and who is not an employee, former employee, director or
former director of the Company.
Section 23.12 "Consent" or "Consents" have the meanings set forth
in Section 4.5 hereof.
Section 23.13 "Contracts" means all contracts, agreements,
options, leases, licenses, sales and accepted purchase orders, commitments and
other instruments of any kind, whether written or oral, to which the Company is
a party on the Closing Date, including the Scheduled Contracts.
Section 23.14 "Conversion Shares" has the meaning set forth in
Section 1 hereof.
Section 23.15 "Disclosure Schedule" has the meaning set forth in
Section 4 hereof.
Section 23.16 "Effective Date" has the meaning set forth in
Section 6.3 hereof.
Section 23.17 "Employee Benefit Plan" means all Pension Plans,
Welfare Plans and Compensation Plans.
Section 23.18 "ERISA" means the Employee Retirement Income
Security Act of 1974, as amended.
Section 23.19 "ERISA Affiliate" means any "person," within the
meaning of Section 7701(a)(1) of the Code, that together with the Company is
considered a single employer pursuant to Section 414(b), (c), (m) or (o) of the
Code or Section 3(5) or 4001(b)(1) of ERISA.
Section 23.20 "Exchange Act" means the Securities Exchange Act of
1934, as amended.
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Section 23.21 "Filing Date" has the meaning set forth in Section
6.3 hereof.
Section 23.22 "GAAP" means generally accepted accounting
principles in the United States, consistently applied.
Section 23.23 "Governmental Authority" means any foreign,
domestic, federal, territorial, state or local governmental authority,
quasi-governmental authority, instrumentality, court, government or
self-regulatory organization, commission, tribunal or organization or any
regulatory, administrative or other agency, or any political or other
subdivision, department or branch of any of the foregoing.
Section 23.24 "Intellectual Property" means all rights in patents,
patent applications, trademarks (whether registered or not), trademark
applications, service mark registrations and service mark applications, trade
names, trade dress, logos, slogans, tag lines, uniform resource locators,
Internet domain names, Internet domain name applications, corporate names,
copyright applications, registered copyrighted works and commercially
significant unregistered copyrightable works (including proprietary software,
books, written materials, prerecorded video or audio tapes, and other
copyrightable works), technology, software, trade secrets, know-how, technical
documentation, specifications, data, designs and other intellectual property and
proprietary rights used in or necessary to the conduct of the business of the
Company, but excluding third-party off-the-shelf computer programs.
Section 23.25 "Investors" has the meaning set forth in the
Introduction.
Section 23.26 "Latest Balance Sheet" has the meaning set forth in
Section 4.6(a) hereof.
Section 23.27 "Latest Financial Statements" has the meaning set
forth in Section 4.6(a) hereof.
Section 23.28 "Liability" or "Liabilities" means any liabilities,
obligations or claims of any kind whatsoever whether absolute, accrued or
un-accrued, fixed or contingent, matured or un-matured, asserted or unasserted,
known or unknown, direct or indirect, contingent or otherwise and whether due or
to become due, including without limitation any foreign or domestic tax
liabilities or deferred tax liabilities incurred in respect of or measured by
the Company's income, or any other debts, liabilities or obligations relating to
or arising out of any act, omission, transaction, circumstance, sale of goods or
services, state of facts or other condition which occurred or existed on or
before the date hereof, whether or not known, due or payable, whether or not the
same is required to be accrued on the financial statements or is disclosed on
the Disclosure Schedule.
Section 23.29 "Lien" means, with respect to any asset, any
mortgage, title defect or objection, lien, pledge, charge, security interest,
hypothecation, restriction, encumbrance, adverse claim or charge of any kind in
respect of such asset.
Section 23.30 "Material Adverse Effect" means, with respect to the
Company, an individual or cumulative adverse change in or effect on its
business, customers, customer relations, operations, properties, working capital
condition (financial or otherwise), assets, properties, liabilities or prospects
(financial or otherwise) that (i) is reasonably expected to be materially
adverse to its business, properties, working capital condition (financial or
otherwise), assets, liabilities or prospects (financial or otherwise); or (ii)
would prevent it from consummating the transactions contemplated hereby.
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Section 23.31 "Material Customers" has the meaning set forth in
Section 4.17 hereof.
Section 23.32 "Ordinary Course of Business" means any action taken
by the Company that is (i) consistent with its past practices and is taken in
the ordinary course of its normal day-to-day operations, and (ii) not required
to be specifically authorized by its Board of Directors.
Section 23.33 "Penalty Date" has the meaning set forth in Section
6.3 hereof.
Section 23.34 "Pension Plan" means an "employee pension benefit
plan" as such term is defined in Sections 3(2) or 3(3) of ERISA and all other
material employee benefit arrangements or programs relating to the Company's
business, including, without limitation, any such arrangements or programs
providing severance pay, sick leave, vacation pay, salary continuation for
disability, retirement benefits, deferred compensation, bonus pay, incentive
pay, stock options, hospitalization insurance, medical insurance and life
insurance, sponsored or maintained by the Company or any Affiliate of the
Company or to which the Company or any Affiliate of the Company is obligated to
contribute thereunder on behalf of any current or former employee who performed
services with respect to the Company's business.
Section 23.35 "Permits" has the meaning set forth in Section 4.9
hereof.
Section 23.36 "Permitted Liens" means (i) Liens for Taxes or
governmental assessments, charges or claims the payment of which is not yet due,
or for Taxes the validity of which are being contested in good faith by
appropriate proceedings; (ii) statutory Liens of landlords and Liens of
carriers, warehousemen, mechanics, materialmen and other similar Persons and
other Liens imposed by Applicable Law incurred in the Ordinary Course of
Business for sums not yet delinquent or being contested in good faith; (iii)
Liens relating to deposits made in the Ordinary Course of Business in connection
with workers' compensation, unemployment insurance and other types of social
security or to secure the performance of leases, trade contracts or other
similar agreements; and (iii) other Liens set forth on the Disclosure Schedule;
provided, however, that, with respect to each of clauses (i) through (iii), to
the extent that any such Lien on that arose prior to the date of the Latest
Balance Sheet and relates to, or secures the payment of, a Liability that is
required to be accrued for under GAAP, such Lien shall not be a Permitted Lien
unless all such Liabilities have been fully accrued or otherwise reflected on
the Latest Balance Sheet. Notwithstanding the foregoing, no Lien arising under
the Code or ERISA with respect to the operation, termination, restoration or
funding of any Employee Benefit Plan sponsored by, maintained by or contributed
to by the Company or any of its ERISA Affiliates or arising in connection with
any excise tax or penalty tax with respect to such Employee Benefit Plan shall
be a Permitted Lien.
Section 23.37 "Person" means an individual, corporation,
partnership, limited liability company, association, trust, estate or other
entity or organization, including a Governmental Authority.
Section 23.38 "Plan Affiliate" means, with respect to any Person,
any Employee Benefit Plan sponsored by, maintained by or contributed to by such
Person, and with respect to any Employee Benefit Plan, any Person sponsoring,
maintaining or contributing to such plan or arrangement.
100
Section 23.39 "Preferred Stock" has the meaning set forth in
Section 1 hereof.
Section 23.40 "Purchase Commitment" has the meaning set forth in
Section 2 hereof.
Section 23.41 "Scheduled Contracts" has the meaning set forth in
Section 4.12 hereof.
Section 23.42 "SEC Documents" has the meaning set forth in Section
4.26 hereof.
Section 23.43 "Securities Act" means the Securities Act of 1933,
as amended.
Section 23.44 Security Agreement" has the meaning set forth in the
Recitals.
Section 23.45 "Series C Stock" has the meaning set forth in the
Recitals.
Section 23.46 "Tax" or "Taxes" means all taxes imposed of any
nature including federal, state, local or foreign net income tax, alternative or
add-on minimum tax, profits or excess profits tax, franchise tax, gross income,
adjusted gross income or gross receipts tax, employment related tax (including
employee withholding or employer payroll tax, FICA or FUTA), real or personal
property tax or ad valorem tax, sales or use tax, excise tax, stamp tax or duty,
any withholding or back up withholding tax, value added tax, severance tax,
prohibited transaction tax, premiums tax, environmental tax, intangibles tax or
occupation tax, together with any interest or any penalty, addition to tax or
additional amount imposed by any Governmental Authority (domestic or foreign)
responsible for the imposition of any such tax. The term Tax shall also include
any Liability of the Company for the Taxes of any other Person under U.S.
Treasury Regulations Section 1.1502-6 (or similar provisions of state, local or
foreign law), as a transferee or successor by contract or otherwise.
Section 23.47 "Tax Return" means all returns, declarations,
reports, estimates, forms, information returns and statements or other
information required to be filed with respect to any Tax.
Section 23.48 "Transaction Documents" has the meaning set forth in
Section 4.2 hereof.
Section 23.49 "Welfare Plan" means an "employee welfare benefit
plan" as such term is defined in Section 3(1) of ERISA (including without
limitation a plan excluded from coverage by Section 4 of ERISA).
Article 24 Miscellaneous.
101
Section 24.1 Waivers, Amendments and Approvals. In each case in
which approval of the Investors is required by the terms of this Agreement, such
requirement shall be satisfied by a vote or the written action of the Investors.
With the written consent of the Investors, the obligations of the Company under
this Agreement may be waived (either generally or in a particular instance and
either retroactively or prospectively) and with the written approval of the
Investors, the Company may enter into a supplementary agreement for the purpose
of adding any provisions to or changing in any manner or eliminating any of the
provisions of this Agreement; provided, however, that no such waiver or
supplemental agreement shall amend the terms of the shares of the Series C Stock
as set forth in the Articles of Incorporation (any such amendment to the terms
of the shares of Series C Stock shall require the vote of the holders of shares
of Series C Stock called for by the Articles of Incorporation).
Section 24.2 Written Changes, Waivers, Etc. Neither this Agreement
nor any provision hereof may be changed, waived, discharged or terminated
orally, except by a statement in writing signed by the party against which
enforcement of the change, waiver, discharge or termination is sought, except to
the extent provided in Section 11.1 hereof.
Section 24.3 Notices. Any and all notices required or permitted to
be given to a party pursuant to the provisions of this Agreement will be in
writing and will be effective and deemed to provide such party sufficient notice
under this Agreement on the earliest of the following: (i) at the time of
personal delivery, if delivery is in person; (ii) one (1) business day after
deposit with an express overnight courier for United States deliveries, or two
(2) business days after such deposit for deliveries outside of the United
States, with proof of delivery from the courier requested; or (iii) three (3)
business days after deposit in the United States mail by certified mail (return
receipt requested) for United States deliveries. All notices for delivery
outside the United States will be sent by express courier. All notices not
delivered personally will be sent with postage and/or other charges prepaid and
properly addressed to the party or parties to be notified at such address or
addresses as such party or parties may designate by one of the indicated means
of notice herein to the other party or parties hereto. If the notice shall be
given to the Company, a copy of which shall simultaneously be given to Michael
Lorenz, residing at 5109 Waterford Wood Way, Fayetteville, NY 13066
Section 24.4 Survival of Representations, Warranties, Etc. All
representations, warranties, covenants and agreements contained herein,
including the indemnification obligations set forth in Section 9 hereof, shall
survive after the execution and delivery of this Agreement or such certificate
or document, as the case may be, for a period of two (2) years.
Section 24.5 Delays or Omissions. Except as expressly provided
herein, no delay or omission to exercise any right, power or remedy accruing to
any party under this Agreement shall impair any such right, power or remedy of
such party nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence thereto, or of a similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of any party hereto of any breach or default under this Agreement, or
any waiver on the part of any party of any provisions or conditions of this
Agreement, must be in writing and shall be effective only to the extent
specifically set forth in such writing.
Section 24.6 Other Remedies. Any and all remedies herein expressly
conferred upon a party shall be deemed cumulative with, and not exclusive of,
any other remedy conferred hereby or by law on such party, and the exercise of
anyone remedy shall not preclude the exercise of any other.
102
Section 24.7 Attorney Fees. Should suit be brought to enforce or
interpret any part of this Agreement, the prevailing party shall be entitled to
recover, as an element of the costs of suit and not as damages, reasonable
attorney fees to be fixed by the court (including, without limitation, costs,
expenses and fees on any appeal). The prevailing party shall be the party
entitled to recover its costs of suit, regardless of whether such suit proceeds
to final judgment. A party not entitled to recover its costs shall not be
entitled to recover attorney fees. No sum for attorney fees shall be counted in
calculating the amount of a judgment for purposes of determining if a party is
entitled to recover costs or attorney fees.
Section 24.8 Entire Agreement. This Agreement, the exhibits
hereto, the documents referenced herein and the exhibits thereto, constitute the
entire understanding and agreement of the parties hereto with respect to the
subject matter hereof and thereof and supersede all prior and contemporaneous
agreements or understandings, inducements or conditions, express or implied,
written or oral, between the parties with respect hereto and thereto. The
express terms hereof control and supersede any course of performance or usage of
the trade inconsistent with any of the terms hereof.
Section 24.9 Severability. Should any one or more of the
provisions of this Agreement or of any agreement entered into pursuant to this
Agreement be determined to be illegal or unenforceable, all other provisions of
this Agreement and of each other agreement entered into pursuant to this
Agreement, shall be given effect separately from the provision or provisions
determined to be illegal or unenforceable and shall not be affected thereby. The
parties further agree to replace such void or unenforceable provision of this
Agreement with a valid and enforceable provision which will achieve, to the
extent possible, the economic, business and other purposes of the void or
unenforceable provision.
Section 24.10 Successors and Assigns. The terms and conditions of
this Agreement shall inure to the benefit of and be binding upon and be
enforceable by the successors and assigns of the parties hereto, including the
holder(s) from time-to-time of any of the Series C Stock. This Agreement is
intended for the benefit of the parties hereto and their respective permitted
successors and assigns, and is not for the benefit of, nor may any provision
hereof be enforced by, any other Person.
Section 24.11 Governing Law. The validity, terms, performance and
enforcement of this Agreement shall be governed and construed by the provisions
hereof and in accordance with the laws of the Commonwealth of Massachusetts
applicable to agreements that are negotiated, executed, delivered and performed
solely in the Commonwealth of Massachusetts.
Section 24.12 Counterparts. This Agreement may be executed
concurrently 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.
Section 24.13 Publicity. The Company and the Investors shall have
the right to approve, before issuance any press release or any other public
statement with respect to the transactions contemplated hereby made by any
party; provided, however, that the Company shall be entitled, without the prior
approval of the Investors, to issue any press release or other public disclosure
with respect to such transactions required under applicable securities or other
laws or regulations (the Company shall use its best efforts to consult the
Investors in connection with any such press release or other public disclosure
prior to its release and Investors shall be provided with a copy thereof upon
release thereof).
103
Section 24.14 Further Assurances. Each party shall do and perform,
or cause to be done and performed, all such further acts and things, and shall
execute and deliver all such other agreements, certificates, instruments and
documents, as the other party may reasonably request in order to carry out the
intent and accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
Section 24.15 Tacking. For purposes of calculating the holding
period for the Preferred Stock purchased pursuant to this Agreement and the
Common Shares underlying the Preferred Stock, the Investors shall tack back to
the Closing Date of the original Debenture, as defined in the Debt Conversion
Agreement. The Company shall not adopt a position inconsistent with the
foregoing or contest such tacking for any reason, and the Company shall use its
best efforts to cooperate with Dutchess in any efforts Dutchess may undertake to
assert such tacking in connection with the future sale of the Preferred Stock
purchased pursuant to this Agreement or any securities issued upon the
conversion of such Preferred Stock or any other purpose.
Section 24.16 No Strict Construction. The language used in this
Agreement will be deemed to be the language chosen by the parties to express
their mutual intent, and no rules of strict construction will be applied against
any party.
Section 24.17 Headings. The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
Section 24.18 Disputes Under Debenture. All disputes arising under
this Agreement shall be governed by and interpreted in accordance with the laws
of the Commonwealth of Massachusetts, without regard to principles of conflict
of laws. The parties to this Agreement shall submit all disputes arising under
this Agreement to arbitration in Boston, Massachusetts before a single
arbitrator of the American Arbitration Association (the "AAA"). The arbitrator
shall be selected by application of the rules of the AAA, or by mutual agreement
of the parties, except that such arbitrator shall be an attorney admitted to
practice law in the Commonwealth of Massachusetts. No party hereto will
challenge the jurisdiction or venue provisions as provided in this section.
Nothing in this section shall limit the Holder's right to obtain an injunction
for a breach of this Debenture from a court of law. Any injunction obtained
shall remain in full force and effect until the arbitrator, as set forth in
herein, fully adjudicates the dispute.
IN WITNESS WHEREOF, the parties hereto have caused this Series C
Convertible Preferred Stock Purchase Agreement to be executed by their
respective officers thereunto duly authorized as of the day and year first above
written.
THE COMPANY:
PATIENT PORTAL TECHNOLOGIES, INC.
By: ___________________________
Name: Kevin Kelly
Its: Chairman of the Board
104
SCHEDULE 1
List of Investors, Signatures and Purchase Commitments
- ----------------------- ------------------------- ------------------------------------ -------------------- ----------------------
Address/Facsimile Purchase Purchase Commitment
Name Signature Number of Investor Commitment ($) (# Shares)
- ----------------------- ------------------------- ------------------------------------ -------------------- ----------------------
- ----------------------
Dutchess Private ___________________ $7,500,000 7,500
Equities Fund Ltd. Douglas H. Leighton, Douglas H. Leighton
Director c/o Dutchess Capital Management
50 Commonwealth Ave., Suite 2
Boston, MA 02116
Tel: 617-301-4700
Fax: 617-249-0947
105
DISCLOSURE SCHEDULE
SERIES C CONVERTIBLE PREFERENCE STOCK PURCHASE AGREEMENT
PATIENT PORTAL TECHNOLOGIES, INC. AND INVESTORS
A. Section 4.3
1. Common Stock Warrants
Class A 250,000 $2.00 December 31, 2011
Class B 250,000 $3.00 December 31, 2011
Class C 250,000 $4.00 December 31, 2011
Class D 9,810,050 $ .50 December 31, 2011
2 Debt Securities
Five Star Bank - Line of Credit with TB &A Inc., guaranteed by
the Company -dated February 11, 2008 (Includes Security
Agreement and Intercreditor Agreement dated February 11, 2008
and amended March 24, 2009).
3. Comment Letter - SEC
There is an open letter from SEC dated January 12, 2009
regarding comments on the amended 2007 Form 10K and the
amended Form 10Q for March and June 2008. The comments were
responded to by the Company in April 2009.
B. Section 4.8 and 4.23
1. Letter from SEC dated January 12, 2009 regarding comments on the
amended 2007 Form 10K and the amended Form 10Q for March and June
2008. The comments were responded to by the Company in April 2009.
C. Sections 4.11
1. Telehealth Lawsuit - There is one outstanding lawsuit that both
the company and its counsel believe has no merit associated with
the purchase of contracts in 2007 from Worldnet, Inc DBA TMS.
Discussions are underway toward settlement to be paid for by TMS.
106
D. Section 4.12
1. There are presently two employment contracts that were entered
into with the former owners of TB &A, Robert Baren and Tom
Brunskole.
E. Section 4.14
Bank Type A/C # Signatories
PPC
Bank of America Checking 2290 0382 0000 Kevin J. Kelly
Bank of America Savings 0022 9261 8664 N/A
TB&A:
Robert A. Baren,
Thomas E. Brunskole,
Kevin J. Kelly,
M&T Bank Checking 10500502 Richard J. Oliver
M&T Bank Checking 10500734 Robert A. Baren,
Thomas E. Brunskole,
Kevin Kelly
Five Star Bank Checking 751257133 Robert A. Baren,
Thomas E. Brunskole,
Kevin J. Kelly
1. G. See 4.3 also
F. Section 4.28 Exceptions
1. Auspicium, LLC - Consulting agreement
2. Dan Coholan - Consulting Agreement
G. Section 6.8 Exception
1. Virtual Nurse - The Company currently has a preferred marketing
agreement with Virtual Nurse (an Affiliate) to sell services to
hospitals. From time to time the company has advanced small
amounts to Virtual Nurse against future amounts due.
2. Auspicium, LLC - Consulting agreement
3. Dan Coholan - Consulting Agreement
H. Section 6.10 2009 Long Term Incentive Stock Option Plan.
107
PART II: INFORMATION FILED WTH THE COMMISSION
EXHIBITS
Index to Exhibits:
Exhibit Description: Number:
- -------------------------------------------------------------------------------
Certificate of Incorporation of Suncoast Naturals, Inc. 3.1
(the predecessor to the Company) the Company, as filed
with the Secretary of State of Delaware on November 21, 2002
- -------------------------------------------------------------------------------
Certificate For Renewal and Revival of Charter of Suncoast 3.2
Naturals, Inc., as filed with the Secretary of State of
Delaware on August 15, 2005
- -------------------------------------------------------------------------------
Certificate of Amendment of Certificate of Incorporation 3.3
of Suncoast Naturals, Inc., as filed with the Secretary
of State of Delaware on August 18, 2005 changing name to
"Intelligent Security Networks, Inc.")
- -------------------------------------------------------------------------------
Certificate of Amendment of Certificate of Incorporation 3.4
of Intelligent Security Networks Inc., as filed with the
Secretary of State of Delaware on April 4, 2006
(changing name to "Gambino Apparel Group, Inc.")
- -------------------------------------------------------------------------------
Certificate of Amendment of Certificate of Incorporation 3.5
of Gambino Apparel Group, Inc., as filed with the Secretary
of State of Delaware on August 28, 2006 (changing name
to "Patient Portal Technologies, Inc.")
- -------------------------------------------------------------------------------
Certificate For Renewal and Revival of Charter of the 3.6
Company, as filed with the Secretary of State of Delaware
on January 24, 2008
- -------------------------------------------------------------------------------
Bylaws of the Company 3.7
- -------------------------------------------------------------------------------
108
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