EXHIBIT 10.22
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE
AGREEMENT
DATED AS OF OCTOBER 7, 2002
AMONG
HIENERGY TECHNOLOGIES, INC.
AND
THE PURCHASERS LISTED ON EXHIBIT A
TABLE OF CONTENTS
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ARTICLE I Purchase and Sale of Preferred Stock 1
Section 1.1 Purchase and Sale of Stock 1
Section 1.2 The Conversion Shares. 1
Section 1.3 Purchase Price and Closing. 2
Section 1.4 Warrants 2
ARTICLE II Representations and Warranties 2
Section 2.1 Representations and Warranties of the Company 2
Section 2.2 Representations and Warranties of the Purchasers 13
ARTICLE III Covenants 16
Section 3.1 Securities Compliance. 16
Section 3.2 Registration and Listing 17
Section 3.3 Inspection Rights 17
Section 3.4 Compliance with Laws 17
Section 3.5 Keeping of Records and Books of Account 18
Section 3.6 Reporting Requirements 18
Section 3.7 Amendments 18
Section 3.8 Other Agreements 18
Section 3.9 Distributions 18
Section 3.10 Status of Dividends 19
Section 3.11 Reservation of Shares 20
Section 3.12 Transfer Agent Instructions 20
ARTICLE IV Conditions 21
Section 4.1 Conditions Precedent to the Obligation of the
Company to Sell the Shares. 21
Section 4.2 Conditions Precedent to the Obligation of the
Purchasers to Purchase the Shares 21
ARTICLE V Stock Certificate Legend 24
Section 5.1 Legend 24
ARTICLE VI Indemnification 25
Section 6.1 General Indemnity 25
Section 6.2 Indemnification Procedure 25
ARTICLE VII Miscellaneous 26
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Section 7.1 Fees and Expenses 26
Section 7.2 Specific Enforcement, Consent to Jurisdiction 26
Section 7.3 Entire Agreement; Amendment 27
Section 7.4 Notices 27
Section 7.5 Waivers 28
Section 7.6 Headings 28
Section 7.7 Successors and Assigns 28
Section 7.8 No Third Party Beneficiaries 28
Section 7.9 Governing Law 28
Section 7.10 Survival 28
Section 7.11 Counterparts 29
Section 7.12 Publicity 29
Section 7.13 Severability 29
Section 7.14 Further Assurances 29
Section 7.15 Most Favored Nations. 29
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SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
This SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (the
"Agreement") is dated as of October 7, 2002 by and among HiEnergy Technologies,
Inc., a Washington corporation (the "Company"), and each of the Purchasers of
shares of Series A Convertible Preferred Stock of the Company whose names are
set forth on Exhibit A hereto (individually, a "Purchaser" and collectively, the
"Purchasers").
The parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF PREFERRED STOCK
Section 1.1 Purchase and Sale of Stock. Upon the following terms and
conditions, the Company shall issue and sell to the Purchasers and each of the
Purchasers shall purchase from the Company, the number of shares of the
Company's Series A Convertible Preferred Stock, par value $0.0001 per share (the
"Preferred Shares"), at a purchase price of $10,000 per share, set forth with
respect to such Purchaser on Exhibit A hereto (as such exhibit may be updated
pursuant to the terms hereof for the successive closings contemplated by Section
1.3). Upon the following terms and conditions, the Purchasers shall be issued
Warrants, in substantially the form attached hereto as Exhibit B (the
"Warrants"), to purchase the Company's Common Stock, par value $0.0001 per share
(the "Common Stock"). The maximum aggregate purchase price for the Preferred
Shares and the Warrants shall be $3,450,000. There is no minimum aggregate
purchase price. The designation, rights, preferences and other terms and
provisions of the Series A Convertible Preferred Stock are set forth in the
Certificate of Designation of the Relative Rights and Preferences of the Series
A Convertible Preferred Stock attached hereto as Exhibit C (the "Certificate of
Designation"). The Company reserves the right to close this offering at any time
and accept no further subscriptions, even if subscriptions for the maximum
aggregate purchase price of $3,450,000 have been subscribed for but not accepted
by the Company. The Company and the Purchasers are executing and delivering this
Agreement in accordance with and in reliance upon the exemption from securities
registration afforded by 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") or Section 4(2) of the Securities Act.
Section 1.2 The Conversion Shares. The Company has authorized and has
reserved and covenants to continue to reserve, free of preemptive rights and
other similar contractual rights of stockholders, such number of shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all of the Preferred Shares and exercise of the Warrants then outstanding;
provided that the number of shares of Common Stock so reserved shall at no time
be less than 200% of the number of its authorized but unissued shares of its
Common Stock required to effect the conversion of the Preferred Shares and
exercise of the Warrants. Any shares of Common Stock issuable upon conversion
of the Preferred Shares and exercise of the Warrants (and such shares when
issued) are herein referred to as the "Conversion Shares" and the "Warrant
Shares", respectively. The Preferred Shares, the Conversion Shares and the
Warrant Shares are sometimes collectively referred to as the "Shares".
Section 1.3 Purchase Price and Closing. In consideration of and in express
reliance upon the representations, warranties, covenants, terms and conditions
of this Agreement, the Company agrees to issue and sell to the Purchasers and
the Purchasers, severally but not jointly, agree to purchase that number of the
Preferred Shares and Warrants set forth opposite their respective names on
Exhibit A. The aggregate purchase price of the Preferred Shares and Warrants
being acquired by each Purchaser is set forth opposite such Purchaser's name on
Exhibit A (for each such purchaser, the "Purchase Price" and collectively
referred to as the "Purchase Prices"). The closing of the execution and delivery
of this Agreement shall occur upon delivery by facsimile of executed signature
pages of this Agreement and all other documents, instruments and writings
required to be delivered pursuant to this Agreement to QED Law Group, P.L.L.C.,
3200 N.W. 68th Street, Seattle, Washington 98117. The Preferred Shares and
Warrants shall be sold and funded in one or more separate closings (each, a
"Closing"). The initial closing under this Agreement (the "Initial Closing")
shall take place no later than October 7, 2002 (the "Initial Closing Date") and
the second closing under this Agreement (the "Second Closing") shall take place
no later than October 22, 2002 (the "Second Closing Date"). Funding with respect
to each Closing shall take place by wire transfer of immediately available funds
on or prior to the applicable Closing Date, so long as the conditions set forth
in Article IV hereof shall be fulfilled or waived in accordance herewith. Each
Closing under this Agreement shall take place at the offices of QED Law Group,
P.L.L.C. at 1:00 p.m. (eastern time) (10:00 a.m. pacific time) upon the
satisfaction of each of the conditions set forth in Article IV hereof (each, a
"Closing Date").
Section 1.4 Warrants. The Company agrees to issue to each of the Purchasers
Warrants to purchase the number of shares of Common Stock set forth opposite
such Purchaser's name on Exhibit A hereto. The Warrants shall have an exercise
price equal to the Warrant Price (as defined in the Warrants) and shall expire
on the second (2nd) anniversary of the date of issuance.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Section 2.1 Representations and Warranties of the Company. The Company
hereby makes the following representations and warranties to the Purchasers,
subject to modification for information disclosed in the Company's disclosure
letter delivered with this Agreement (the "Disclosure Letter") or disclosed in
its filings with the Securities and Exchange Commission (sometimes referred to
redundantly in part hereinafter as "Form 10-KSB" or "Form 10-QSB"), as follows:
(a) Organization, Good Standing and Power. The Company is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Washington and has the requisite corporate power to own, lease and
operate its properties and assets and to conduct its business as it is now being
conducted. The Company does not have any subsidiaries except as set forth in the
Company's Form 10-KSB for the fiscal year ended April 30, 2002, including the
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accompanying financial statements (the "Form 10-KSB"), or in the Company's Form
10-QSB for the fiscal quarters ended July 31, 2002, October 31, 2002, or January
31, 2002 (collectively, the "Form 10-QSB"). The Company and each such subsidiary
is duly qualified as a foreign corporation to do business and is in good
standing in every jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary except for any
jurisdiction(s) (alone or in the aggregate) in which the failure to be so
qualified will not have a Material Adverse Effect (as defined in Section 2.1(c)
hereof) on the Company's financial condition.
(b) Authorization; Enforcement. The Company has the requisite corporate
power and authority to enter into and perform this Agreement, the Registration
Rights Agreement attached hereto as Exhibit D (the "Registration Rights
Agreement"), the Transfer Agent Instructions (as defined in Section 3.12), the
Certificate of Designation, and the Warrants (collectively, the "Transaction
Documents") and to issue and sell the Shares and the Warrants in accordance with
the terms hereof. The execution, delivery and performance of the Transaction
Documents and the Certificate of Designation by the Company and the consummation
by it of the transactions contemplated hereby and thereby have been duly and
validly authorized by all necessary corporate action, and no further consent or
authorization of the Company or its Board of Directors or stockholders is
required. This Agreement has been duly executed and delivered by the Company.
The other Transaction Documents will have been duly executed and delivered by
the Company at the Initial Closing. Each of the Transaction Documents
constitutes, or shall constitute when executed and delivered, a valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation,
conservatorship, receivership or similar laws relating to, or affecting
generally the enforcement of, creditor's rights and remedies or by other
equitable principles of general application.
(c) Capitalization. The authorized capital stock of the Company and the
shares thereof currently issued and outstanding as of September 30, 2002 are set
forth in the Disclosure Letter. All of the outstanding shares of the Company's
Common Stock and Series A Convertible Preferred Stock have been duly and validly
authorized. Except as set forth in this Agreement and the Registration Rights
Agreement and as set forth in the Form 10-KSB or Form 10-QSB, no shares of
Common Stock are entitled to preemptive rights or registration rights and there
are no outstanding options, warrants, scrip, rights to subscribe to, call or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company. Furthermore,
except as set forth in this Agreement and the Registration Rights Agreement and
as set forth in the Form 10-KSB or Form 10-QSB, there are no contracts,
commitments, understandings, or arrangements by which the Company is or may
become bound to issue additional shares of the capital stock of the Company or
options, securities or rights convertible into shares of capital stock of the
Company. Except for customary transfer restrictions contained in agreements
entered into by the Company in order to sell restricted securities or as
provided in the Form 10-KSB or Form 10-QSB, the Company is not a party to any
agreement granting registration or anti-dilution rights to any person with
respect to any of its equity or debt securities. The Company is not a party to,
and it has no knowledge of, any agreement restricting the voting or transfer of
any shares of the capital stock of the Company. Except as set forth in the Form
10-KSB or Form 10-QSB, the offer and sale of all capital stock, convertible
securities, rights, warrants, or options of the Company issued prior to the
Closing complied with all applicable Federal and state securities laws, and no
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stockholder has a right of rescission or claim for damages with respect thereto
which would have a Material Adverse Effect (as defined below) on the Company's
financial condition or operating results. The Company has furnished or made
available to the Purchasers true and correct copies of the Company's Articles of
Incorporation as in effect on the date hereof (the "Articles"), and the
Company's Bylaws as in effect on the date hereof (the "Bylaws"). For the
purposes of this Agreement, "Material Adverse Effect" means any adverse effect
on the business, operations, properties, prospects, or financial condition of
the Company or its subsidiaries and which is material to such entity or other
entities controlling or controlled by such entity.
(d) Issuance of Shares. The Preferred Shares and the Warrants to be issued
at each Closing have been duly authorized by all necessary corporate action and
the Preferred Shares, when paid for or issued in accordance with the terms
hereof, shall be validly issued and outstanding, fully paid and nonassessable
and entitled to the rights and preferences set forth in the Certificate of
Designation. When the Conversion Shares and the Warrant Shares are issued in
accordance with the terms of the Preferred Shares as set forth in the
Certificate of Designation and the Warrants, respectively, such shares will be
duly authorized by all necessary corporate action and validly issued and
outstanding, fully paid and nonassessable, and the holders shall be entitled to
all rights accorded to a holder of Common Stock.
(e) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company, the performance by the Company of its
obligations under the Certificate of Designation and the consummation by the
Company of the transactions contemplated herein and therein do not and will not
(i) violate any provision of the Company's Articles or Bylaws, (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, mortgage, deed of
trust, indenture, note, bond, license, lease agreement, instrument or obligation
to which the Company is a party or by which it or its properties or assets are
bound, (iii) create or impose a lien, mortgage, security interest, charge or
encumbrance of any nature on any property of the Company under any agreement or
any commitment to which the Company is a party or by which the Company is bound
or by which any of its respective properties or assets are bound, or (iv) result
in a violation of any federal, state, local or foreign statute, rule,
regulation, order, judgment or decree (including Federal and state securities
laws and regulations) applicable to the Company or any of its subsidiaries or by
which any property or asset of the Company or any of its subsidiaries are bound
or affected, except, in all cases other than violations pursuant to clauses (i)
and (iv) above, for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in the
aggregate, have a Material Adverse Effect. The business of the Company and its
subsidiaries is not being conducted in violation of any laws, ordinances or
regulations of any governmental entity, except for possible violations which
singularly or in the aggregate do not and will not have a Material Adverse
Effect. The Company is not required under Federal, state or local law, rule or
regulation 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 the Transaction
Documents or the Certificate of Designation, or issue and sell the Preferred
Shares, the Warrants, the Conversion Shares and the Warrant Shares in accordance
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with the terms hereof or thereof (other than any filings which may be required
to be made by the Company with the Commission or state securities administrators
subsequent to the Closing, any registration statement which may be filed
pursuant hereto, and the Certificate of Designation); provided that, for
purposes of the representation made in this sentence, the Company is assuming
and relying upon the accuracy of the relevant representations and agreements of
the Purchasers herein.
(f) Commission Documents, Financial Statements. The Common Stock of the
Company is registered pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, except as disclosed
in the Form 10-KSB or Form 10-QSB, since April 30, 2002, the Company has timely
filed all reports, schedules, forms, statements and other documents required to
be filed by it with the Commission pursuant to the reporting requirements of the
Exchange Act, including material filed pursuant to Section 13(a) or 15(d) of the
Exchange Act (all of the foregoing including filings incorporated by reference
therein being referred to herein as the "Commission Documents"). The Company has
delivered or made available (including by filing its Commission Documents with
the Commission) to each of the Purchasers true and complete copies of the
Commission Documents filed with the Commission since April 30, 2002. The Company
has not provided to the Purchasers any material non-public information or other
information which, according to applicable law, rule or regulation, was required
to have been disclosed publicly by the Company but which has not been so
disclosed, other than with respect to the transactions contemplated by this
Agreement. As of their respective dates, the Form 10-KSB and the Form 10-QSB
complied in all material respects with the requirements of the Exchange Act and
the rules and regulations of the Commission promulgated thereunder and other
federal, state and local laws, rules and regulations applicable to such
documents, and, as of their respective dates, none of the Form 10-KSB and the
Form 10-QSB contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The financial statements of the Company included in the
Commission Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the
Commission or other applicable rules and regulations with respect thereto. Such
financial statements have been prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis during the periods
involved (except (i) as may be otherwise indicated in such financial statements
or the notes thereto or (ii) in the case of unaudited interim statements, to the
extent they may not include footnotes or may be condensed or summary
statements), and fairly present in all material respects the financial position
of the Company and its subsidiaries as of the dates thereof and the results of
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments).
(g) Subsidiaries. The Form 10-KSB, Form 10-QSB or the Disclosure Letter
sets forth each subsidiary of the Company, showing the jurisdiction of its
incorporation or organization and showing the percentage of each person's
ownership of the outstanding stock or other interests of such subsidiary. For
the purposes of this Agreement, "subsidiary" shall mean any corporation or other
entity of which at least a majority of the securities or other ownership
interest having ordinary voting power (absolutely or contingently) for the
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election of directors or other persons performing similar functions are at the
time owned directly or indirectly by the Company and/or any of its other
subsidiaries. All of the outstanding shares of capital stock of each subsidiary
have been duly authorized and validly issued, and are fully paid and
nonassessable. There are no outstanding preemptive, conversion or other rights,
options, warrants or agreements granted or issued by or binding upon any
subsidiary for the purchase or acquisition of any shares of capital stock of any
subsidiary or any other securities convertible into, exchangeable for or
evidencing the rights to subscribe for any shares of such capital stock. Neither
the Company nor any subsidiary is subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any shares of the
capital stock of any subsidiary or any convertible securities, rights, warrants
or options of the type described in the preceding sentence. Neither the Company
nor any subsidiary is party to, nor has any knowledge of, any agreement
restricting the voting or transfer of any shares of the capital stock of any
subsidiary.
(h) No Material Adverse Change. Since April 30, 2002, the date through
which the most recent annual report of the Company on Form 10-KSB has been
prepared and filed with the Commission, a copy of which is included in the
Commission Documents, the Company has not experienced or suffered any Material
Adverse Effect.
(i) No Undisclosed Liabilities. Except as disclosed in the Form 10-KSB or
Form 10-QSB, neither the Company nor any of its subsidiaries has any
liabilities, obligations, claims or losses (whether liquidated or unliquidated,
secured or unsecured, absolute, accrued, contingent or otherwise) other than
those incurred in the ordinary course of the Company's or its subsidiaries
respective businesses since April 30, 2002 and which, individually or in the
aggregate, do not or would not have a Material Adverse Effect on the Company or
its subsidiaries.
(j) No Undisclosed Events or Circumstances. No event or circumstance has
occurred or exists with respect to the Company or its subsidiaries or their
respective businesses, properties, prospects, operations or financial condition,
which, under applicable law, rule or regulation, requires public disclosure or
announcement by the Company but which has not been so publicly announced or
disclosed.
(k) Indebtedness. The Form 10-KSB or Form 10-QSB sets forth as of the date
hereof all outstanding secured and unsecured Indebtedness of the Company or any
subsidiary, or for which the Company or any subsidiary has commitments. For the
purposes of this Agreement, "Indebtedness" shall mean (a) any liabilities for
borrowed money or amounts owed in excess of $100,000 (other than trade accounts
payable incurred in the ordinary course of business), (b) all guaranties,
endorsements and other contingent obligations in respect of Indebtedness of
others, whether or not the same are or should be reflected in the Company's
balance sheet (or the notes thereto), except guaranties by endorsement of
negotiable instruments for deposit or collection or similar transactions in the
ordinary course of business; and (c) the present value of any lease payments in
excess of $25,000 due under leases required to be capitalized in accordance with
GAAP. Neither the Company nor any subsidiary is in default with respect to any
Indebtedness.
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(l) Title to Assets. Each of the Company and the subsidiaries has good and
marketable title to all of its real and personal property reflected in the
Commission Documents, free and clear of any mortgages, pledges, charges, liens,
security interests or other encumbrances, except for those indicated in the Form
10-KSB or Form 10-QSB or such that, individually or in the aggregate, do not
cause a Material Adverse Effect on the Company's financial condition or
operating results. All said leases of the Company and each of its subsidiaries
are valid and subsisting and in full force and effect.
(m) Actions Pending. There is no action, suit, claim, investigation,
arbitration, alternate dispute resolution proceeding or any other proceeding
pending or, to the knowledge of the Company, threatened against the Company or
any subsidiary which questions the validity of this Agreement or any of the
other Transaction Documents or the transactions contemplated hereby or thereby
or any action taken or to be taken pursuant hereto or thereto. Except as set
forth in the Form 10-KSB or Form 10-QSB, there is no action, suit, claim,
investigation, arbitration, alternate dispute resolution proceeding or any other
proceeding pending or, to the knowledge of the Company, threatened, against or
involving the Company, any subsidiary or any of their respective properties or
assets. Except as set forth in the Form 10-KSB or Form 10-QSB, there are no
outstanding orders, judgments, injunctions, awards or decrees of any court,
arbitrator or governmental or regulatory body against the Company or any
subsidiary or any officers or directors of the Company or subsidiary in their
capacities as such.
(n) Compliance with Law. The business of the Company and the subsidiaries
has been and is presently being conducted in accordance with all applicable
federal, state and local governmental laws, rules, regulations and ordinances,
except as set forth in the Form 10-KSB or Form 10-QSB or such that, individually
or in the aggregate, do not cause a Material Adverse Effect. The Company and
each of its subsidiaries have all franchises, permits, licenses, consents and
other governmental or regulatory authorizations and approvals necessary for the
conduct of its business as now being conducted by it unless the failure to
possess such franchises, permits, licenses, consents and other governmental or
regulatory authorizations and approvals, individually or in the aggregate, could
not reasonably be expected to have a Material Adverse Effect.
(o) Taxes. Except as set forth in the Form 10-KSB or Form 10-QSB, the
Company and each of the subsidiaries has accurately prepared and filed all
federal, state and other tax returns required by law to be filed by it, has paid
or made provisions for the payment of all taxes shown to be due and all
additional assessments, and adequate provisions have been and are reflected in
the financial statements of the Company and the subsidiaries for all current
taxes and other charges to which the Company or any subsidiary is subject and
which are not currently due and payable. None of the federal income tax returns
of the Company or any subsidiary have been audited by the Internal Revenue
Service. The Company has no knowledge of any additional assessments, adjustments
or contingent tax liability (whether federal or state) of any nature whatsoever,
whether pending or threatened against the Company or any subsidiary for any
period, nor of any basis for any such assessment, adjustment or contingency.
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(p) Certain Fees. Except as set forth in this Agreement, no brokers,
finders or financial advisory fees or commissions will be payable by the Company
or any subsidiary or any Purchaser with respect to the transactions contemplated
by this Agreement.
(q) Disclosure. To the best of the Company's knowledge, neither this
Agreement or the Disclosure Letter nor any other documents, certificates or
instruments furnished to the Purchasers by the Company or any subsidiary in
connection with the transactions contemplated by this Agreement contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made herein or therein, in the light of the
circumstances under which they were made herein or therein, not misleading.
(r) Operation of Business. The Company and each of the subsidiaries owns or
possesses all patents, trademarks, domain names (whether or not registered) and
any patentable improvements or copyrightable derivative works thereof, websites
and intellectual property rights relating thereto, service marks, trade names,
copyrights, licenses and authorizations as set forth in the Form 10-KSB or Form
10-QSB, and all rights with respect to the foregoing, which are necessary for
the conduct of its business as now conducted without any conflict with the
rights of others.
(s) Environmental Compliance. The Company and each of its subsidiaries have
obtained all material approvals, authorization, certificates, consents,
licenses, orders and permits or other similar authorizations of all governmental
authorities, or from any other person, that are required under any Environmental
Laws. The Form 10-KSB or Form 10-QSB sets forth all material permits, licenses
and other authorizations issued under any Environmental Laws to the Company or
its subsidiaries. "Environmental Laws" shall mean all applicable laws relating
to the protection of the environment including, without limitation, all
requirements pertaining to reporting, licensing, permitting, controlling,
investigating or remediating emissions, discharges, releases or threatened
releases of hazardous substances, chemical substances, pollutants, contaminants
or toxic substances, materials or wastes, whether solid, liquid or gaseous in
nature, into the air, surface water, groundwater or land, or relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of hazardous substances, chemical substances, pollutants,
contaminants or toxic substances, material or wastes, whether solid, liquid or
gaseous in nature. The Company has all necessary governmental approvals required
under all Environmental Laws and used in its business or in the business of any
of its subsidiaries. The Company and each of its subsidiaries are also in
compliance with all other limitations, restrictions, conditions, standards,
requirements, schedules and timetables required or imposed under all
Environmental Laws. Except for such instances as would not individually or in
the aggregate have a Material Adverse Effect, there are no past or present
events, conditions, circumstances, incidents, actions or omissions relating to
or in any way affecting the Company or its subsidiaries that violate or may
violate any Environmental Law after the Closing Date or that may give rise to
any environmental liability, or otherwise form the basis of any claim, action,
demand, suit, proceeding, hearing, study or investigation (i) under any
Environmental Law, or (ii) based on or related to the manufacture, processing,
distribution, use, treatment, storage (including without limitation underground
storage tanks), disposal, transport or handling, or the emission, discharge,
release or threatened release of any hazardous substance. "Environmental
Liabilities" means all liabilities of a person (whether such liabilities are
owed by such person to governmental authorities, third parties or otherwise)
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whether currently in existence or arising hereafter which arise under or relate
to any Environmental Law.
(t) Books and Record Internal Accounting Controls. The records and
documents of the Company and its subsidiaries accurately reflect in all material
respects the information relating to the business of the Company and the
subsidiaries, the location and collection of their assets, and the nature of all
transactions giving rise to the obligations or accounts receivable of the
Company or any subsidiary. The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient, in the judgment of the
Company's board of directors, 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, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate actions is taken
with respect to any differences.
(u) Material Agreements. Except as set forth in the Form 10-KSB or Form
10-QSB, neither the Company nor any subsidiary is a party to any written or oral
contract, instrument, agreement, commitment, obligation, plan or arrangement, a
copy of which would be required to be filed with the Commission as an exhibit to
a registration statement on Form SB-2 or applicable form (collectively,
"Material Agreements") if the Company or any subsidiary were registering
securities under the Securities Act. The Company and each of its subsidiaries
has in all material respects performed all the obligations required to be
performed by them to date under the foregoing agreements, have received no
notice of default and, to the best of the Company's knowledge are not in default
under any Material Agreement now in effect, the result of which could cause a
Material Adverse Effect. No written or oral contract, instrument, agreement,
commitment, obligation, plan or arrangement of the Company or of any subsidiary
limits or shall limit the payment of dividends on the Company's Preferred
Shares, other Preferred Stock, if any, or its Common Stock.
(v) Transactions with Affiliates. Except as set forth in the Form 10-KSB or
Form 10-QSB, there are no loans, leases, agreements, contracts, royalty
agreements, management contracts or arrangements or other continuing
transactions between (a) the Company, any subsidiary or any of their respective
customers or suppliers on the one hand, and (b) on the other hand, any officer,
employee, consultant or director of the Company, or any of its subsidiaries, or
any person owning any capital stock of the Company or any subsidiary or any
member of the immediate family of such officer, employee, consultant, director
or stockholder or any corporation or other entity controlled by such officer,
employee, consultant, director or stockholder, or a member of the immediate
family of such officer, employee, consultant, director or stockholder.
(w) Securities Act of 1933. Based in material part upon the representations
herein of the Purchasers, the Company has complied and will comply with all
applicable federal and state securities laws in connection with the offer,
issuance and sale of the Shares and the Warrants hereunder. Neither the Company
nor anyone acting on its behalf, directly or indirectly, has or will sell, offer
to sell or solicit offers to buy any of the Shares, the Warrants or similar
securities to, or solicit offers with respect thereto from, or enter into any
preliminary conversations or negotiations relating thereto with, any person, or
has taken or will take any action so as to bring the issuance and sale of any of
the Shares and the Warrants under the registration provisions of the Securities
Act and applicable state securities laws, and neither the Company nor any of its
affiliates, 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
any of the Shares and the Warrants.
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(x) Governmental Approvals. Except as set forth in the Form 10-KSB or Form
10-QSB, and except for the filing of any notice prior or subsequent to the
Closing Date that may be required under applicable state and/or Federal
securities laws (which if required, shall be filed on a timely basis), including
the filing of a registration statement or statements pursuant to the
Registration Rights Agreement, and the filing of the Certificate of Designation
with the Secretary of State of the State of Washington, no authorization,
consent, approval, license, exemption of, filing or registration with any court
or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, is or will be necessary for, or in
connection with, the execution or delivery of the Preferred Shares and the
Warrants, or for the performance by the Company of its obligations under the
Transaction Documents or the Certificate of Designation.
(y) Employees. Neither the Company nor any subsidiary has any collective
bargaining arrangements or agreements covering any of its employees, except as
set forth in the Form 10-KSB or Form 10-QSB. Except as set forth in the Form
10-KSB or Form 10-QSB, neither the Company nor any subsidiary has any employment
contract, agreement regarding proprietary information, non-competition
agreement, non-solicitation agreement, confidentiality agreement, or any other
similar contract or restrictive covenant, relating to the right of any officer,
employee or consultant to be employed or engaged by the Company or such
subsidiary. Since April 30, 2002, no officer, consultant or key employee of the
Company or any subsidiary whose termination, either individually or in the
aggregate, could have a Material Adverse Effect, has terminated or, to the
knowledge of the Company, has any present intention of terminating his or her
employment or engagement with the Company or any subsidiary.
(z) Absence of Certain Developments. Except as provided in Form 10-KSB or
Form 10-QSB, since April 30, 2002, neither the Company nor any subsidiary has:
(i) issued any stock, bonds or other corporate securities or any rights,
options or warrants with respect thereto;
(ii) borrowed any amount or incurred or become subject to any liabilities
(absolute or contingent) except current liabilities incurred in the ordinary
course of business which are comparable in nature and amount to the current
liabilities incurred in the ordinary course of business during the comparable
portion of its prior fiscal year, as adjusted to reflect the current nature and
volume of the Company's or such subsidiary's business;
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(iii) discharged or satisfied any lien or encumbrance or paid any
obligation or liability (absolute or contingent), other than current liabilities
paid in the ordinary course of business;
(iv) declared or made any payment or distribution of cash or other property
to stockholders with respect to its stock, or purchased or redeemed, or made any
agreements so to purchase or redeem, any shares of its capital stock;
(v) sold, assigned or transferred any other tangible assets, or canceled
any debts or claims, except in the ordinary course of business;
(vi) sold, assigned or transferred any patent rights, trademarks, trade
names, copyrights, trade secrets or other intangible assets or intellectual
property rights, or disclosed any proprietary confidential information to any
person except to customers in the ordinary course of business or to the
Purchasers or their representatives;
(vii) suffered any substantial losses or waived any rights of material
value, whether or not in the ordinary course of business, or suffered the loss
of any material amount of prospective business;
(viii) made any changes in employee compensation except in the ordinary
course of business and consistent with past practices;
(ix) made capital expenditures or commitments therefor that aggregate in
excess of $100,000;
(x) entered into any other transaction other than in the ordinary course of
business, or entered into any other material transaction, whether or not in the
ordinary course of business;
(xi) made charitable contributions or pledges in excess of $25,000;
(xii) suffered any material damage, destruction or casualty loss, whether
or not covered by insurance;
(xiii) experienced any material problems with labor or management in
connection with the terms and conditions of their employment;
(xiv) effected any two or more events of the foregoing kind which in the
aggregate would be material to the Company or its subsidiaries; or
(xv) entered into an agreement, written or otherwise, to take any of the
foregoing actions.
(aa) Use of Proceeds. The proceeds from the sale of the Preferred Shares
will be used by the Company for working capital and general corporate purposes.
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(bb) Public Utility Holding Company Act and Investment Company Act Status.
The Company is not a "holding company" or a "public utility company" as such
terms are defined in the Public Utility Holding Company Act of 1935, as amended.
The Company is not, and as a result of and immediately upon the Closing will not
be, an "investment company" or a company "controlled" by an "investment
company," within the meaning of the Investment Company Act of 1940, as amended.
(cc) ERISA. No liability to the Pension Benefit Guaranty Corporation has
been incurred with respect to any Plan by the Company or any of its subsidiaries
which is or would be materially adverse to the Company and its subsidiaries. The
execution and delivery of this Agreement and the issue and sale of the Preferred
Shares will not involve any transaction which is subject to the prohibitions of
Section 406 of ERISA or in connection with which a tax could be imposed pursuant
to Section 4975 of the Internal Revenue Code of 1986, as amended, provided that,
if any of the Purchasers, or any person or entity that owns a beneficial
interest in any of the Purchasers, is an "employee pension benefit plan" (within
the meaning of Section 3(2) of ERISA) with respect to which the Company is a
"party in interest" (within the meaning of Section 3(14) of ERISA), the
requirements of Sections 407(d)(5) and 408(e) of ERISA, if applicable, are met.
As used in this Section 2.1(cc), the term "Plan" shall mean an "employee pension
benefit plan" (as defined in Section 3 of ERISA) which is or has been
established or maintained, or to which contributions are or have been made, by
the Company or any subsidiary or by any trade or business, whether or not
incorporated, which, together with the Company or any subsidiary, is under
common control, as described in Section 414(b) or (c) of the Code.
(dd) Dilutive Effect. The Company understands and acknowledges that the
number of Conversion Shares issuable upon conversion of the Preferred Shares and
the Warrant Shares issuable upon exercise of the Warrants will increase in
certain circumstances. The Company further acknowledges that its obligation to
issue Conversion Shares upon conversion of the Preferred Shares in accordance
with this Agreement and the Certificate of Designation and its obligations to
issue the Warrant Shares upon the exercise of the Warrants in accordance with
this Agreement and the Warrants, is, in each case, absolute and unconditional
regardless of the dilutive effect that such issuance may have on the ownership
interest of other stockholders of the Company.
(ee) Reincorporation. The Company's Board of Directors on May 29, 2002
approved the Company's reincorporation to Delaware and on July 16, 2002
recommended adoption and approval by its stockholders of the Agreement and Plan
of Merger to effect the reincorporation at the Company's annual meeting of
stockholders scheduled for October 10, 2002. At its July 16, 2002 meeting, the
Company's Board of Directors established the record date for the Company's
annual meeting of stockholders as Monday, August 12, 2002, so the Purchasers
will not be entitled to vote at the annual meeting. The Board of Directors on
August 11, 2002, approved revision of the Certificate of Incorporation of the
Delaware corporation to include the Series A Designation of Relative Rights and
Preferences subject to revision only for technical compliance with Delaware law.
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Section 2.2 Representations and Warranties of the Purchasers. Each of the
Purchasers hereby makes the following representations and warranties to the
Company with respect solely to itself and not with respect to any other
Purchaser:
(a) Organization and Standing of the Purchasers. If the Purchaser is an
entity, such Purchaser is a corporation or partnership duly incorporated or
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization.
(b) Authorization and Power. The Purchaser has the requisite power and
authority to enter into and perform this Agreement and to purchase the Preferred
Shares being sold to it hereunder. The execution, delivery and performance of
this Agreement and the Registration Rights Agreement by such Purchaser and the
consummation by it of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate or partnership action (if the
Purchaser is an entity), and no further consent or authorization of such
Purchaser or its Board of Directors, stockholders, or partners, as the case may
be, is required. Each of this Agreement and the Registration Rights Agreement
has been duly authorized, executed and delivered by such Purchaser. Each of the
Transaction Documents constitutes, or shall constitute when executed and
delivered, a valid and binding obligation of the Purchaser enforceable against
the Purchaser in accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation, conservatorship, receivership or similar laws relating to, or
affecting generally the enforcement of, creditor's rights and remedies or by
other equitable principles of general application.
(c) No Conflicts. The execution, delivery and performance of this Agreement
and the Registration Rights Agreement and the consummation by such Purchaser of
the transactions contemplated hereby and thereby or relating hereto do not and
will not (i) result in a violation of such Purchaser's charter documents or
bylaws or (ii) conflict with, or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of any
agreement, indenture or instrument to which such Purchaser is a party, or result
in a violation of any law, rule, or regulation, or any order, judgment or decree
of any court or governmental agency applicable to such Purchaser or its
properties (except for such conflicts, defaults and violations as would not,
individually or in the aggregate, have a material adverse effect on such
Purchaser). Such Purchaser 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 this Agreement or the Registration Rights Agreement or to purchase the
Preferred Shares or acquire the Warrants in accordance with the terms hereof,
provided that for purposes of the representation made in this sentence, such
Purchaser is assuming and relying upon the accuracy of the relevant
representations and agreements of the Company herein.
(d) Acquisition for Investment. Such Purchaser is acquiring the Preferred
Shares and the Warrants solely for its own account for the purpose of investment
and not with a view to or for sale in connection with distribution. Such
Purchaser does not have a present intention to sell the Preferred Shares or the
Warrants, nor a present arrangement (whether or not legally binding) or
intention to effect any distribution of the Preferred Shares or the Warrants to
or through any person or entity; provided, however, that by making the
representations herein and subject to Section 2.2(f) below, such Purchaser does
not agree to hold the Shares or the Warrants for any minimum or other specific
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term and reserves the right to dispose of the Shares or the Warrants at any time
in accordance with Federal and state securities laws applicable to such
disposition. Such Purchaser acknowledges that it is able to bear the financial
risks associated with an investment in the Preferred Shares and the Warrants and
that it has been given full access to such records of the Company and the
subsidiaries and to the officers of the Company and the subsidiaries and
received such information as it has deemed necessary or appropriate to conduct
its due diligence investigation.
(e) Accredited Purchasers. Such Purchaser is an "accredited investor" as
defined in Regulation D promulgated under the Securities Act.
(f) Rule 144. Such Purchaser understands that the Shares must be held
indefinitely unless such Shares are registered under the Securities Act or an
exemption from registration is available. Such Purchaser acknowledges that such
Purchaser is familiar with Rule 144 of the rules and regulations of the
Commission, as amended, promulgated pursuant to the Securities Act ("Rule 144"),
and that such person has been advised that Rule 144 permits resales only under
certain circumstances. Such Purchaser understands that to the extent that Rule
144 is not available, such Purchaser will be unable to sell any Shares without
either registration under the Securities Act or the existence of another
exemption from such registration requirement.
(g) Investment Experience. Each Purchaser has such knowledge and experience
in financial and business matters that it is capable of evaluating the merits
and risks of the prospective investment in the Preferred Shares and Warrants,
which are substantial and has in fact evaluated such merits and risks in making
its investment decision to purchase the Preferred Shares and Warrants. Each
Purchaser, by virtue of its business and financial expertise, has the capacity
to protect its own interest in connection with this transaction, or has
consulted with tax, financial, legal or business advisors as to the
appropriateness of an investment in the Preferred Shares and Warrants. Each
Purchaser has not been organized for the purpose of investing in the Preferred
Shares and Warrants, although such investment is consistent with its purposes.
(h) Access to Information. Each Purchaser or its professional advisor has
been granted the opportunity to conduct a full and fair examination of the
records, documents and files of the Company, to ask questions of and receive
answers from representatives of the Company, its officers, directors, employees
and agents concerning the terms and conditions of the offering, the Company and
its business and prospects, and to obtain any additional information which the
Purchaser or its professional advisor deems necessary to verify the accuracy of
the information received. Each Purchaser further represents that it has had an
opportunity to ask questions and receive answers from the Company regarding the
terms and conditions of the offering, and any information so requested has been
made available to the full and complete satisfaction of such Purchaser. Each
Purchaser hereby confirms that it has received and examined all material
information it considers necessary to make an informed decision to invest in the
Preferred Shares and Warrants. Each Purchaser hereby confirms that, in addition
to examining other information it requested during the course of its due
diligence, it has examined all of the Company's filings under the Exchange Act,
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including its financial statements. Each Purchaser acknowledges that its
decision to invest in the Company is solely based upon information provided to
the Purchaser by the Company in writing.
(i) No Distributor, Dealer or Underwriter. Each Purchaser is not a
distributor or dealer of the Preferred Shares and Warrants. The Purchaser is not
taking the Preferred Shares and Warrants with the intent of making a
distribution of the Preferred Shares and Warrants, as such terms are defined in
the Securities Act and the Exchange Act. In any event, if the Purchaser is
deemed to be the distributor of the Preferred Shares and Warrants offered
hereby, the Purchaser will act in accordance with applicable law.
(j) No Immediate Need for Liquidity. Each Purchaser understands that each
of the Preferred Shares, Warrants, Conversion Shares and Warrant Shares is a
"restricted security" within the meaning of the Securities Act, and certificates
representing the Preferred Shares, Warrants, Conversion Shares and Warrant
Shares are legended with certain restrictions on resale and may not be resold
without a valid exemption from registration under the Securities Act, or until a
registration statement is filed with respect thereto under the Securities Act.
There can be no assurance that upon registration of the Conversion Shares and
Warrant Shares pursuant to the Securities Act, that a market for the Conversion
Shares and Warrant Shares will exist on an exchange or market or quotation
system. Accordingly, each Purchaser is aware that there are legal and practical
limits on such Purchaser's ability to sell or dispose of the Conversion Shares
and Warrant Shares, and, therefore that the Purchaser must bear the economic
risk of the investment for an indefinite period of time. Each Purchaser has
adequate means of providing for the Purchaser's current needs and possible
personal contingencies and has need for only limited liquidity of this
investment. The Purchaser's commitment to illiquid investments is reasonable in
relation to the Purchaser's net worth. The Purchaser is capable of bearing the
high degree of economic risks and burdens of this investment, including but not
limited to the possibility of complete loss of all its investment capital and
the lack of a liquid market, such that it may not be able to liquidate readily
the investment whenever desired or at the then current asking price.
(k) Private Transaction. At no time was a Purchaser presented with or
solicited by any leaflet, public promotional meeting, circular, newspaper or
magazine article, radio or television advertisement or any other form of general
advertising.
(l) Reliance on Own Advisors. Each Purchaser has relied completely on the
advice of, or has consulted with, its own personal tax, investment, legal or
other advisors and has not relied on the Company or any of its affiliates,
officers, directors, attorneys, accountants or any affiliates of any thereof and
each other person, if any, who controls any thereof, within the meaning of
Section 15 of the Securities Act, except to the extent such advisors shall be
deemed to be as such.
(m) Limitations on Short Sales. Each Purchaser represents that it has not
entered into any Short Sales (as hereinafter defined) following their
introduction by H.C. Wainwright Co. Inc. to the Company from the date of such
introduction through the Initial Closing Date in connection with the sale of
Common Stock contemplated herein. Furthermore, each Purchaser agrees that it
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will not enter into any Short Sales for the period commencing on the Initial
Closing Date and ending on the date which all of the Preferred Shares have been
converted and all of the Warrants have been exercised and such Conversion Shares
and Warrant Shares are covered by the Registration Statement (as defined in the
Registration Rights Agreement). For purposes of this Section 2.2(m), a "Short
Sale" by a Purchaser shall mean a sale of Common Stock by a Purchaser that is
marked as a short sale and that is made at a time when there is no equivalent
offsetting long position in Common Stock held by such Purchaser. For purposes of
determining whether there is an equivalent offsetting long position in Common
Stock held by a Purchaser, Conversion Shares that have not yet been converted
upon conversion of the Preferred Shares and Warrant Shares that have not yet
been issued upon exercise of the Warrants shall be deemed to be held long by
such Purchaser, and the amount of shares of Common Stock held in a long position
shall be the number of Conversion Shares issuable upon conversion of the
Preferred Shares assuming such holder converted all the outstanding principal
amount of the Preferred Shares on such date and with respect to Warrant Shares,
the number of Warrant Shares issuable upon exercise of the Warrants assuming
such holder exercised all of the Warrants on such date.
(n) General. Such Purchaser understands that the Shares are being offered
and sold in reliance on a transactional exemption from the registration
requirement of Federal and state securities laws and the Company is relying upon
the truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of such Purchaser set forth herein in order
to determine the applicability of such exemptions and the suitability of such
Purchaser to acquire the Shares.
ARTICLE III
COVENANTS
The Company covenants with each of the Purchasers as follows, which
covenants are for the benefit of the Purchasers and their permitted assignees
(as defined herein).
Section 3.1 Securities Compliance.
(a) The Company shall notify the Commission in accordance with their rules
and regulations, of the transactions contemplated by any of the Transaction
Documents, including filing a Form D with respect to the Preferred Shares,
Warrants, Conversion Shares and Warrant Shares as required under Regulation D,
and shall take all other necessary action and proceedings as may be required and
permitted by applicable law, rule and regulation, for the legal and valid
issuance of the Preferred Shares, the Warrants, the Conversion Shares and the
Warrant Shares to the Purchasers or subsequent holders.
(b) The Company is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and understandings of
such Purchasers set forth herein in order to determine the applicability of
Federal and state securities laws exemptions and the suitability of such
Purchasers to acquire the Preferred Shares.
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(c) The Company covenants and agrees that it will not issue any shares of
the Common Stock to a Purchaser which would result in the issuance under this
Agreement of more than 19.9% of the issued and outstanding shares of the Common
Stock as of the date hereof, unless such issuance has been duly approved by the
shareholders of the Company.
(d) Unless waived by a Purchaser by means of providing sixty (60) days
notice to the Company, the Company covenants and agrees that the number of
Conversion Shares issuable upon conversion of the Preferred Shares and the
number of Warrant Shares issuable upon any exercise of such Warrant by a
Purchaser shall not exceed the number of such shares that, when aggregated with
all other shares of Common Stock disclosed to the Company in writing by a
Purchaser as being owned by a Purchaser beneficially or deemed beneficially
owned by a Purchaser, would result in a Purchaser owning more than 4.99% of all
of such Common Stock as would be outstanding on such date of conversion or such
date of exercise of the Warrant, as determined in accordance with Section 16 of
the Exchange Act and the regulations promulgated thereunder.
Section 3.2 Registration and Listing. The Company will cause its Common
Stock to continue to be registered under Sections 12(b) or 12(g) of the Exchange
Act, will comply in all respects with its reporting and filing obligations under
the Exchange Act, will comply with all requirements related to any registration
statement filed pursuant to this Agreement or the Registration Rights Agreement,
and will not take any action or file any document (whether or not permitted by
the Securities Act or the rules promulgated thereunder) to terminate or suspend
such registration or to terminate or suspend its reporting and filing
obligations under the Exchange Act or Securities Act, except as permitted
herein. The Company will take all action necessary to continue the listing or
trading of its Common Stock on the over-the-counter electronic bulletin board or
such other senior United States trading facility as it may elect.
Section 3.3 Inspection Rights. The Company shall permit, during normal
business hours and upon reasonable request and reasonable notice, each Purchaser
or any employees, agents or representatives thereof, so long as such Purchaser
shall be obligated hereunder to purchase the Preferred Shares or shall
beneficially own any Preferred Shares, or shall own Conversion Shares which, in
the aggregate, represent more than 2% of the total combined voting power of all
voting securities then outstanding, for purposes reasonably related to such
Purchaser's interests as a stockholder to examine and make reasonable copies of
and extracts from the records and books of account of, and visit and inspect the
properties, assets, operations and business of the Company and any subsidiary,
and to discuss the affairs, finances and accounts of the Company and any
subsidiary with any of its officers, consultants, directors, and key employees.
Section 3.4 Compliance with Laws. The Company shall comply, and cause each
subsidiary to comply, with all applicable laws, rules, regulations and orders,
noncompliance with which could have a Material Adverse Effect.
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Section 3.5 Keeping of Records and Books of Account. The Company shall keep
and cause each subsidiary to keep adequate records and books of account, in
which complete entries will be made in accordance with GAAP consistently
applied, reflecting all financial transactions of the Company and its
subsidiaries, and in which, for each fiscal year, all proper reserves for
depreciation, depletion, obsolescence, amortization, taxes, bad debts and other
purposes in connection with its business shall be made.
Section 3.6 Reporting Requirements. If the Company ceases to file its
periodic reports with the Commission, or if the Commission ceases making these
periodic reports available via the Internet without charge, then the Company
shall furnish the following to each Purchaser so long as such Purchaser shall be
obligated hereunder to purchase the Preferred Shares or shall beneficially own
any Preferred Shares, or shall own Conversion Shares which, in the aggregate,
represent more than 2% of the total combined voting power of all voting
securities then outstanding:
(a) Quarterly Reports filed with the Commission on Form 10-QSB as soon as
available, and in any event within forty-five (45) days after the end of each of
the first three fiscal quarters of the Company;
(b) Annual Reports filed with the Commission on Form 10-KSB as soon as
available, and in any event within ninety (90) days after the end of each fiscal
year of the Company; and
(c) Copies of all notices and information, including without limitation
notices and proxy statements in connection with any meetings, that are provided
to holders of shares of Common Stock, contemporaneously with the delivery of
such notices or information to such holders of Common Stock.
Section 3.7 Amendments. The Company shall not amend or waive any provision
of the Articles or Bylaws of the Company, or Registration Rights Agreement in
any way that would adversely affect the liquidation preferences, dividends
rights, conversion rights, voting rights or redemption rights of the holders of
the Preferred Shares.
Section 3.8 Other Agreements. The Company shall not enter into any
agreement in which the terms of such agreement would restrict or impair the
right or ability to perform of the Company or any subsidiary under any
Transaction Document or the Certificate of Designation.
Section 3.9 Distributions. So long as any Preferred Shares or Warrants
remain outstanding, the Company agrees that it shall not (i) declare or pay any
dividends or make any distributions to any holder(s) of Common Stock in
violation of the Certificate of Designation or (ii) purchase or otherwise
acquire for value, directly or indirectly, any Common Stock or other equity
security of the Company in violation of the Certificate of Designation.
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Section 3.10 Status of Dividends. If available to the Purchasers as of the
Initial Closing, the Company covenants and agrees that (i) no Federal income tax
return or claim for refund of Federal income tax or other submission to the
Internal Revenue Service will adversely affect the Preferred Shares, any other
series of its Preferred Stock, or the Common Stock, and any deduction shall not
operate to jeopardize the availability to Purchasers of the dividends received
deduction provided by Section 243(a)(1) of the Code or any successor provision,
(ii) in no report to shareholders or to any governmental body having
jurisdiction over the Company or otherwise will it treat the Preferred Shares
other than as equity capital or the dividends paid thereon other than as
dividends paid on equity capital unless required to do so by a governmental body
having jurisdiction over the accounts of the Company or by a change in generally
accepted accounting principles required as a result of action by an
authoritative accounting standards setting body, and (iii) other than pursuant
to this Agreement or the Certificate of Designation, it will take no action
which would result in the dividends paid by the Company on the Preferred Shares
out of the Company's current or accumulated earnings and profits being
ineligible for the dividends received deduction provided by Section 243(a)(1) of
the Code. The preceding sentence shall not be deemed to prevent the Company from
designating the Preferred Stock as "Convertible Preferred Stock" in its annual
and quarterly financial statements in accordance with its prior practice
concerning other series of preferred stock of the Company. Notwithstanding the
foregoing, the Company shall not be required to restate or modify its tax
returns for periods prior to the Closing Date. In the event that the Purchasers
have reasonable cause to believe that dividends paid by the Company on the
Preferred Shares out of the Company's current or accumulated earnings and
profits will not be treated as eligible for the dividends received deduction
provided by Section 243(a)(1) of the Code, or any successor provision, the
Company will, at the reasonable request of the Purchasers of 51% of the
outstanding Preferred Shares, join with the Purchasers in the submission to the
Service of a request for a ruling that dividends paid on the Shares will be so
eligible for Federal income tax purposes, at the Purchasers expense. In
addition, the Company will reasonably cooperate with the Purchasers (at
Purchasers' expense) in any litigation, appeal or other proceeding challenging
or contesting any ruling, technical advice, finding or determination that
earnings and profits are not eligible for the dividends received deduction
provided by Section 243(a)(1) of the Code, or any successor provision to the
extent that the position to be taken in any such litigation, appeal, or other
proceeding is not contrary to any provision of the Code or incurred in
connection with any such submission, litigation, appeal or other proceeding.
Notwithstanding the foregoing, nothing herein contained shall be deemed to
preclude the Company from claiming a deduction with respect to such dividends if
(i) the Code shall hereafter be amended, or final Treasury regulations
thereunder are issued or modified, to provide that dividends on the Preferred
Shares or Conversion Shares should not be treated as dividends for Federal
income tax purposes or that a deduction with respect to all or a portion of the
dividends on the Shares is allowable for Federal income tax purposes, or (ii) in
the absence of such an amendment, issuance or modification and after a
submission of a request for ruling or technical advice, the service shall rule
or advise that dividends on the shares should not be treated as dividends for
Federal income tax purposes. If the Service determines that the Preferred Shares
or Conversion Shares constitute debt, the Company may file protective claims for
refund.
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Section 3.11 Reservation of Shares. So long as any of the Preferred Shares
or Warrants remain outstanding, the Company shall take all action necessary to
at all times have authorized, and reserved for the purpose of issuance, no less
than 200% of the aggregate number of shares of Common Stock needed to provide
for the issuance of the Conversion Shares and the Warrant Shares.
Section 3.12 Transfer Agent Instructions. The Company shall issue
irrevocable instructions to its transfer agent, and any subsequent transfer
agent, to issue certificates, registered in the name of each Purchaser or its
respective nominee(s), for the Conversion Shares and the Warrant Shares in such
amounts as specified from time to time by each Purchaser to the Company upon
conversion of the Preferred Shares or exercise of the Warrants in the form of
Exhibit E attached hereto (the "Irrevocable Transfer Agent Instructions"). Prior
to registration of the Conversion Shares and the Warrant Shares under the
Securities Act, all such certificates shall bear the restrictive legend
specified in Section 5.1 of this Agreement. The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 3.12 will be given by the Company to its transfer agent and that
the Shares shall otherwise be freely transferable on the books and records of
the Company as and to the extent provided in this Agreement and the Registration
Rights Agreement. Nothing in this Section 3.12 shall affect in any way each
Purchaser's obligations and agreements set forth in Section 5.1 to comply with
all applicable prospectus delivery requirements, if any, upon resale of the
Shares. If a Purchaser provides the Company with an opinion of counsel, in a
generally acceptable form, to the effect that a public sale, assignment or
transfer of the Shares may be made without registration under the Securities Act
or the Purchaser provides the Company with reasonable assurances that the Shares
can be sold pursuant to Rule 144 without any restriction as to the number of
securities acquired as of a particular date that can then be immediately sold,
the Company shall permit the transfer, and, in the case of the Conversion Shares
and the Warrant Shares, promptly instruct its transfer agent to issue one or
more certificates in such name and in such denominations as specified by such
Purchaser and without any restrictive legend. Each Purchaser hereby covenants
that upon the provision of any such opinion that a sale may be undertaken in
accordance with all applicable securities laws, the Purchaser shall undertake,
and shall cause its broker with whom the Shares are to be placed to undertake,
to sell such Shares strictly in accordance with such opinion and, absent such a
sale in accordance with such opinion, to return such Shares to the Company for
reissuance with an appropriate restrictive legend. The Company acknowledges that
a breach by it of its obligations under this Section 3.12 will cause irreparable
harm to the Purchasers by vitiating the intent and purpose of the transaction
contemplated hereby. Accordingly, the Company acknowledges that the remedy at
law for a breach of its obligations under this Section 3.12 will be inadequate
and agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Section 3.12, that the Purchasers shall be entitled, in
addition to all other available remedies, to an order and/or injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.
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ARTICLE IV
CONDITIONS
Section 4.1 Conditions Precedent to the Obligation of the Company to Sell
the Shares. The obligation hereunder of the Company to issue and sell the
Preferred Shares and the Warrants to the Purchasers is subject to the
satisfaction or waiver, at or before each Closing, of each of the conditions set
forth below. These conditions are for the Company's sole benefit and may be
waived by the Company at any time in its sole discretion.
(a) Accuracy of Each Purchaser's Representations and Warranties. The
representations and warranties of each Purchaser shall be true and correct in
all material respects as of the date when made and as of each Closing Date as
though made at that time, except for representations and warranties that are
expressly made as of a particular date, which shall be true and correct in all
material respects as of such date.
(b) Performance by the Purchasers. Each Purchaser shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by such Purchaser at or prior to each Closing.
(c) No Injunction. No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction which prohibits
the consummation of any of the transactions contemplated by this Agreement.
Section 4.2 Conditions Precedent to the Obligation of the Purchasers to
Purchase the Shares. The obligation hereunder of each Purchaser to acquire and
pay for the Preferred Shares and the Warrants is subject to the satisfaction or
waiver, at or before each Closing, of each of the conditions set forth below.
These conditions are for each Purchaser's sole benefit and may be waived by such
Purchaser at any time in its sole discretion.
(a) Accuracy of the Company's Representations and Warranties. Each of the
representations and warranties of the Company shall be true and correct in all
material respects as of the date when made and as of each Closing Date as though
made at that time (except for representations and warranties that speak as of a
particular date), which shall be true and correct in all material respects as of
such date.
(b) Performance by the Company. The Company shall have performed, satisfied
and complied in all respects with all covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to each Closing.
(c) No Suspension, Etc. From the date hereof to the Closing Date, trading
in the Company's Common Stock shall not have been suspended by the Commission
(except for any suspension of trading of limited duration agreed to by the
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Company, which suspension shall be terminated prior to the Closing), and, at any
time prior to the Closing, trading in securities generally as reported by
Bloomberg Financial Markets ("Bloomberg") shall not have been suspended or
limited, or minimum prices shall not have been established on securities whose
trades are reported by Bloomberg, or on the New York Stock Exchange, nor shall a
banking moratorium have been declared either by the United States or New York
State authorities, nor shall there have occurred any material outbreak or
escalation of hostilities or other national or international calamity or crisis
of such magnitude in its effect on, or any material adverse change in any
financial market which, in each case, in the judgment of such Purchaser, makes
it impracticable or inadvisable to purchase the Preferred Shares.
(d) No Injunction. No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction which prohibits
the consummation of any of the transactions contemplated by this Agreement.
(e) No Proceedings or Litigation. No action, suit or proceeding before any
arbitrator or any governmental authority shall have been commenced, and no
investigation by any governmental authority shall have been threatened, against
the Company or any subsidiary, or any of the officers, directors or affiliates
of the Company or any subsidiary seeking to restrain, prevent or change the
transactions contemplated by this Agreement, or seeking damages in connection
with such transactions.
(f) Certificate of Designation of Rights and Preferences. Prior to the
Initial Closing, the Certificate of Designation in the form of Exhibit C
attached hereto shall have been filed with the Secretary of State of Washington.
(g) Opinion of Counsel, Etc. At each Closing, the Purchasers shall have
received an opinion of counsel to the Company, dated the date of such Closing,
in the form of Exhibit F hereto, and such other certificates and documents as
the Purchasers or its counsel shall reasonably require incident to such Closing.
(h) Registration Rights Agreement. At the Initial Closing, the Company
shall have executed and delivered the Registration Rights Agreement to each
Purchaser.
(i) Certificates. The Company shall have executed and delivered to the
Purchasers the certificates (in such denominations as such Purchaser shall
request) for the Preferred Shares and Warrants being acquired by such Purchaser
at each Closing.
(j) Resolutions. The Board of Directors of the Company shall have adopted
resolutions consistent with Section 2.1(b) above in a form reasonably acceptable
to such Purchaser (the "Resolutions").
(k) Reservation of Shares. As of each Closing Date, the Company shall have
reserved out of its authorized and unissued Common Stock, solely for the purpose
of effecting the conversion of the Preferred Shares and the exercise of the
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Warrants, a number of shares of Common Stock equal to at least 200% of the
aggregate number of Conversion Shares issuable upon conversion of the Preferred
Shares outstanding on the Closing Date and the number of Warrant Shares issuable
upon exercise of the number of Warrants assuming such Warrants were granted on
the Initial Closing Date (after giving effect to the Preferred Shares and the
Warrants to be issued on the Initial Closing Date and assuming all such
Preferred Shares and Warrants were fully convertible or exercisable on such date
regardless of any limitation on the timing or amount of such conversions or
exercises).
(l) Transfer Agent Instructions. The Irrevocable Transfer Agent
Instructions, in the form of Exhibit E attached hereto, shall have been
delivered to and acknowledged in writing by the Company's transfer agent.
(m) Secretary's Certificate. The Company shall have delivered to such
Purchaser a secretary's certificate, dated as of each Closing Date, as to (i)
the Resolutions, (ii) the Articles, (iii) the Bylaws, (iv) the Certificate of
Designation, each as in effect at the Closing, and (v) the authority and
incumbency of the officers of the Company executing the Transaction Documents
and any other documents required to be executed or delivered in connection
therewith.
(n) Officer's Certificate. The Company shall have delivered to the
Purchasers a certificate of an executive officer of the Company, dated as of
each Closing Date, confirming the accuracy of the Company's representations,
warranties and covenants as of such Closing Date and confirming the compliance
by the Company with the conditions precedent set forth in this Section 4.2 as of
such Closing Date.
(o) Material Adverse Effect. No Material Adverse Effect shall have occurred
at or before each Closing Date.
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ARTICLE V
STOCK CERTIFICATE LEGEND
Section 5.1 Legend. Each certificate representing the Preferred Shares and
the Warrants, and, if appropriate, securities issued upon conversion thereof,
shall be stamped or otherwise imprinted with a legend substantially in the
following form (in addition to any legend required by applicable state
securities or "blue sky" laws):
THESE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES")
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE
SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR HIENERGY
TECHNOLOGIES, INC. SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT
REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.
The Company agrees to reissue certificates representing the Shares without
the legend set forth above if at such time, prior to making any transfer of any
Shares or Shares, such holder thereof shall give written notice to the Company
describing the manner and terms of such transfer and removal as the Company may
reasonably request. Such proposed transfer will not be effected until: (a) the
Company has notified such holder that either (i) in the opinion of Company
counsel, the registration of such Shares under the Securities Act is not
required in connection with such proposed transfer; or (ii) a registration
statement under the Securities Act covering such proposed disposition has been
filed by the Company with the Commission and has become effective under the
Securities Act; and (b) the Company has notified such holder that either: (i) in
the opinion of Company counsel, the registration or qualification under the
securities or "blue sky" laws of any state is not required in connection with
such proposed disposition, or (ii) compliance with applicable state securities
or "blue sky" laws has been effected. The Company will use its best efforts to
respond to any such notice from a holder within ten (10) days. In the case of
any proposed transfer under this Section 5, the Company will use reasonable
efforts to comply with any such applicable state securities or "blue sky" laws,
but shall in no event be required, in connection therewith, to qualify to do
business in any state where it is not then qualified or to take any action that
would subject it to tax or to the general service of process in any state where
it is not then subject. The restrictions on transfer contained in Section 5.1
shall be in addition to, and not by way of limitation of, any other restrictions
on transfer contained in any other section of this Agreement.
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ARTICLE VI
INDEMNIFICATION
Section 6.1 General Indemnity. The Company agrees to indemnify and hold
harmless the Purchasers and any finder (and their respective directors,
officers, affiliates, agents, successors and assigns) from and against any and
all losses, liabilities, deficiencies, costs, damages and expenses (including,
without limitation, reasonable attorneys' fees, charges and disbursements)
incurred by the Purchasers as a result of any inaccuracy in or breach of the
representations, warranties or covenants made by the Company herein. Each
Purchaser severally but not jointly agrees to indemnify and hold harmless the
Company and its directors, officers, affiliates, agents, successors and assigns
from and against any and all losses, liabilities, deficiencies, costs, damages
and expenses (including, without limitation, reasonable attorneys' fees, charges
and disbursements) incurred by the Company as result of any inaccuracy in or
breach of the representations, warranties or covenants made by such Purchaser
herein.
Section 6.2 Indemnification Procedure. Any party entitled to
indemnification under this Article VI (an "indemnified party") will give written
notice to the indemnifying party of any matters giving rise to a claim for
indemnification; provided, that the failure of any party entitled to
indemnification hereunder to give notice as provided herein shall not relieve
the indemnifying party of its obligations under this Article VI except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice. In case any action, proceeding or claim is brought against an
indemnified party in respect of which indemnification is sought hereunder, the
indemnifying party shall be entitled to participate in and, unless in the
reasonable judgment of the indemnified party a conflict of interest between it
and the indemnifying party may exist with respect of such action, proceeding or
claim, to assume the defense thereof with counsel reasonably satisfactory to the
indemnified party. In the event that the indemnifying party advises an
indemnified party that it will contest such a claim for indemnification
hereunder, or fails, within thirty (30) days of receipt of any indemnification
notice to notify, in writing, such person of its election to defend, settle or
compromise, at its sole cost and expense, any action, proceeding or claim (or
discontinues its defense at any time after it commences such defense), then the
indemnified party may, at its option, defend, settle or otherwise compromise or
pay such action or claim. In any event, unless and until the indemnifying party
elects in writing to assume and does so assume the defense of any such claim,
proceeding or action, the indemnified party's costs and expenses arising out of
the defense, settlement or compromise of any such action, claim or proceeding
shall be losses subject to indemnification hereunder. The indemnified party
shall cooperate fully with the indemnifying party in connection with any
negotiation or defense of any such action or claim by the indemnifying party and
shall furnish to the indemnifying party all information reasonably available to
the indemnified party which relates to such action or claim. The indemnifying
party shall keep the indemnified party fully apprised at all times as to the
status of the defense or any settlement negotiations with respect thereto. If
the indemnifying party elects to defend any such action or claim, then the
indemnified party shall be entitled to participate in such defense with counsel
of its choice at its sole cost and expense. The indemnifying party shall not be
-25-
liable for any settlement of any action, claim or proceeding effected without
its prior written consent. Notwithstanding anything in this Article VI to the
contrary, the indemnifying party shall not, without the indemnified party's
prior written consent, settle or compromise any claim or consent to entry of any
judgment in respect thereof which imposes any future obligation on the
indemnified party or which does not include, as an unconditional term thereof,
the giving by the claimant or the plaintiff to the indemnified party of a
release from all liability in respect of such claim. The indemnification
required by this Article VI shall be made by periodic payments of the amount
thereof during the course of investigation or defense, as and when bills are
received or expense, loss, damage or liability is incurred, so long as the
indemnified party irrevocably agrees to refund such moneys if it is ultimately
determined by a court of competent jurisdiction that such party was not entitled
to indemnification. The indemnity agreements contained herein shall be in
addition to (a) any cause of action or similar rights of the indemnified party
against the indemnifying party or others, and (b) any liabilities the
indemnifying party may be subject to pursuant to the law.
ARTICLE VII
MISCELLANEOUS
Section 7.1 Fees and Expenses. Each party shall pay the fees and expenses
of its advisors, counsel, accountants and other experts, if any, and all other
expenses, incurred by such party incident to the negotiation, preparation,
execution, delivery and performance of this Agreement, provided that the Company
shall pay to H.C. Wainwright & Co., Inc. for appropriate disbursement, at the
Closing, the lesser of (i) the actual attorneys' fees and expenses (exclusive of
disbursements and out-of-pocket expenses) incurred by the Purchasers (which
shall include the fees and expenses of Jenkens & Gilchrist Parker Chapin LLP) in
connection with the preparation, negotiation, execution and delivery of this
Agreement, the Registration Rights Agreement and the transactions contemplated
thereunder or (ii) $10,000.
Section 7.2 Specific Enforcement, Consent to Jurisdiction.
(a) The Company and the Purchasers acknowledge and agree that irreparable
damage would occur in the event that any of the provisions of this Agreement,
the Certificate of Designation or the Registration Rights Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent or cure breaches of the provisions of this Agreement or
the Registration Rights Agreement and to enforce specifically the terms and
provisions hereof or thereof, this being in addition to any other remedy to
which any of them may be entitled by law or equity.
(b) Each of the Company and the Purchasers (i) hereby irrevocably submits
to the jurisdiction of the United States District Court sitting in the Southern
District of New York and the courts of the State of New York located in New York
county for the purposes of any suit, action or proceeding arising out of or
relating to this Agreement or any of the other Transaction Documents or the
transactions contemplated hereby or thereby and (ii) hereby waives, and agrees
not to assert in any such suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of such court, that the suit, action or
proceeding is brought in an inconvenient forum or that the venue of the suit,
action or proceeding is improper. Each of the Company and the Purchasers
consents to process being served in any such suit, action or proceeding by
-26-
mailing a copy thereof to such party at the address in effect for notices to it
under this Agreement and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing in this Section 7.2
shall affect or limit any right to serve process in any other manner permitted
by law.
Section 7.3 Entire Agreement; Amendment. This Agreement contains the entire
understanding of the parties with respect to the matters covered hereby and,
except as specifically set forth herein or in the Transaction Documents or the
Certificate of Designation, neither the Company nor any of the Purchasers makes
any representations, warranty, covenant or undertaking with respect to such
matters and they supersede all prior understandings and agreements with respect
to said subject matter, all of which are merged herein. No provision of this
Agreement may be waived or amended other than by a written instrument signed by
the Company and the holders of at least two-thirds (2/3) of the Preferred Shares
then outstanding, and no provision hereof may be waived other than by an a
written instrument signed by the party against whom enforcement of any such
amendment or waiver is sought. No such amendment shall be effective to the
extent that it applies to less than all of the holders of the Preferred Shares
then outstanding. No consideration shall be offered or paid to any person to
amend or consent to a waiver or modification of any provision of any of the
Transaction Documents or the Certificate of Designation unless the same
consideration is also offered to all of the parties to the Transaction Documents
or holders of Preferred Shares, as the case may be.
Section 7.4 Notices. Any notice, demand, request, waiver or other
communication required or permitted to be given hereunder shall be in writing
and shall be effective (a) upon hand delivery by telex (with correct answer back
received), telecopy or facsimile at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
If to the Company: HiEnergy Technologies, Inc.
1601 Alton Parkway, Unit B
Irvine, California 92606
Attention: President
Tel. No.: (949) 757-0855
Fax No.: (949) 757-1477
with copies to: QED Law Group, P.L.L.C.
3200 NW 68th Street
Seattle, Washington 98117
Attention: Shea Wilson, Esq.
Tel No.: (206) 781-7887
Fax No.: (206) 781-8002
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If to any Purchaser: At the address of such Purchaser set forth
on Exhibit A to this Agreement, with copies
to Purchaser's counsel as set forth on
Exhibit A or as specified in writing by
such Purchaser with copies to:
Jenkens & Gilchrist Parker Chapin LLP
The Chrysler Building
405 Lexington Avenue
New York, New York 10174
Attention: Christopher S. Auguste, Esq.
Tel No.: (212) 704-6000
Fax No.: (212) 704-6288
Any party hereto may from time to time change its address for notices by giving
at least ten (10) days written notice of such changed address to the other party
hereto.
Section 7.5 Waivers. No waiver by either party of any default with respect
to any provision, condition or requirement of this Agreement shall be deemed to
be a continuing waiver in the future or a waiver of any other provisions,
condition or requirement hereof, nor shall any delay or omission of any party to
exercise any right hereunder in any manner impair the exercise of any such right
accruing to it thereafter.
Section 7.6 Headings. The article, section and subsection headings in this
Agreement are for convenience only and shall not constitute a part of this
Agreement for any other purpose and shall not be deemed to limit or affect any
of the provisions hereof.
Section 7.7 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors and assigns. After
the Closing, the assignment by a party to this Agreement of any rights hereunder
shall not affect the obligations of such party under this Agreement.
Section 7.8 No Third Party Beneficiaries. This Agreement is intended for
the benefit of the parties hereto and their respective permitted successors and
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
Section 7.9 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York, without
giving effect to the choice of law provisions. This Agreement shall not
interpreted or construed with any presumption against the party causing this
Agreement to be drafted.
Section 7.10 Survival. The representations and warranties of the Company
and the Purchasers contained in Sections 2.1(o) and (s) should survive
indefinitely and those contained in Article II, with the exception of Sections
2.1(o) and (s), shall survive the execution and delivery hereof and the Closing
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until the date three (3) years from the Closing Date, and the agreements and
covenants set forth in Articles I, III and V of this Agreement shall survive the
execution and delivery hereof and the Closing hereunder until no Purchaser shall
in the aggregate beneficially own securities (determined in accordance with Rule
13d-3 under the Exchange Act) not eligible for resale under Section 4(1) or Rule
144 promulgated thereunder constituting more than 1% of the total combined
voting power of all voting securities then outstanding, provided, that Sections
3.1, 3.2, 3.4, 3.5, 3.7, 3.8, 3.9, 3.10 and 3.12 shall not expire until the
Registration Statement required by Section 2 of the Registration Rights
Agreement is no longer required to be effective under the terms and conditions
of Registration Rights Agreement.
Section 7.11 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and shall become effective when counterparts have been signed by each
party and delivered to the other parties hereto, it being understood that all
parties need not sign the same counterpart. In the event any signature is
delivered by facsimile transmission, the party using such means of delivery
shall cause four additional executed signature pages to be physically delivered
to the other parties within five days of the execution and delivery hereof.
Section 7.12 Publicity. The Company agrees that it will not disclose, and
will not include in any public announcement, the name of the Purchasers without
the consent of the Purchasers unless and until such disclosure is required by
law or applicable regulation, and then only to the extent of such requirement.
Section 7.13 Severability. The provisions of this Agreement, the
Certificate of Designation and the Registration Rights Agreement are severable
and, in the event that any court of competent jurisdiction shall determine that
any one or more of the provisions or part of the provisions contained in this
Agreement, the Certificate of Designation or the Registration Rights Agreement
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision or part of a provision of this Agreement, the Certificate of
Designation or the Registration Rights Agreement shall be reformed and construed
as if such invalid or illegal or unenforceable provision, or part of such
provision, had never been contained herein, so that such provisions would be
valid, legal and enforceable to the maximum extent possible.
Section 7.14 Further Assurances. From and after the date of this Agreement,
upon the request of any Purchaser or the Company, each of the Company and the
Purchasers shall execute and deliver such instrument, documents and other
writings as may be reasonably necessary or desirable to confirm and carry out
and to effectuate fully the intent and purposes of this Agreement, the Preferred
Shares, the Conversion Shares, the Warrants, the Warrant Shares, the Certificate
of Designation, and the Registration Rights Agreement.
Section 7.15 Most Favored Nations. Notwithstanding anything to the contrary
contained in this Agreement or any of the other Transaction Documents, if, at
any time during the period commencing after the date of this Agreement and
ending on the two (2) year anniversary of the Closing Date, the Company conducts
and closes a private equity or equity-linked financing on terms and conditions
more favorable than the terms governing the Preferred Shares with gross cash
proceeds in excess of $250,000 (each such financing a "New Financing"), the
Purchaser shall have the right to exchange (any such exchange being an "MFN
Change") its Preferred Shares, valued at an amount equal to the product of the
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number of Preferred Shares being exchanged times $10,000, for the securities
offered in the New Financing. The Company covenants and agrees to promptly give
written notice ("MFN Notice") to the Purchaser of the terms and conditions of
any such New Financing. On or prior to the expiration of the five (5) Business
Day period (the "MFN Review Period") after the Purchaser has received the MFN
Notice, the Purchaser shall notify the Company in writing (the "MFN Response")
specifying whether it elects to conduct an MFN Change. If the Purchaser fails to
send an MFN Response prior to the expiration of the MFN Review Period, the
Purchaser shall be deemed to have waived its rights under this Section 7.15
solely with respect to the MFN Change specified in the MFN Notice relating to
such MFN Review Period. Each potential MFN Change shall be communicated to the
Purchaser in accordance with this Section 7.15 until such time as the Purchaser
elects to conduct an MFN Change. Once the Purchaser elects to conduct an MFN
Change, the Purchaser shall have no further right to receive notice of or to
conduct any future MFN Change under this Section 7.15. The Company and the
Purchaser shall cooperate to promptly cancel the Preferred Shares being
exchanged and to promptly enter into such agreements, certificates, instruments
and other documents that are necessary to reflect an MFN Change that the
Purchaser elects to conduct.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officer as of the date first above
written.
HIENERGY TECHNOLOGIES, INC.
By: ___________________________________
Name: Tom Pascoe
Title: President and CEO
PURCHASER
By: ___________________________________
Name:
Title:
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HIET Series A Preferred Investor List
5%
Investor Principal Days Interest Buying Total
Name Invested Interest Earned Power Investment
Nathan Freund & Lila Freund. . . . . . . . . . . . . . . $100,000 14 $ 467 $ 5,024 $105,491
- -------------------------------------------------------------------------------------------------------
Robert A. Melnick. . . . . . . . . . . . . . . . . . . . $ 60,000 14 $ 280 $ 3,014 $ 63,294
- -------------------------------------------------------------------------------------------------------
Jacob Bar Lev & Zvia Bar Lev . . . . . . . . . . . . . . $ 50,000 14 $ 234 $ 2,512 $ 52,746
- -------------------------------------------------------------------------------------------------------
Robert J. Neborsky, M.C., Inc. Combined Retirement Trust $ 50,000 14 $ 234 $ 2,512 $ 52,746
- -------------------------------------------------------------------------------------------------------
David Wiener Revocable Trust - 96. . . . . . . . . . . . $ 30,000 14 $ 140 $ 1,507 $ 31,647
- -------------------------------------------------------------------------------------------------------
James Enright. . . . . . . . . . . . . . . . . . . . . . $ 25,000 10 $ 84 $ 1,255 $ 26,339
- -------------------------------------------------------------------------------------------------------
Ioannis Korologos. . . . . . . . . . . . . . . . . . . . $ 30,000 14 $ 140 $ 1,507 $ 31,647
- -------------------------------------------------------------------------------------------------------
Ruth Arbel-Magid & Eliezer Magid . . . . . . . . . . . . $ 25,000 10 $ 84 $ 1,255 $ 26,339
- -------------------------------------------------------------------------------------------------------
Richard Melnick. . . . . . . . . . . . . . . . . . . . . $150,000 10 $ 500 $ 7,525 $158,025
- -------------------------------------------------------------------------------------------------------
Kris S. Pogoloff . . . . . . . . . . . . . . . . . . . . $ 10,000 10 $ 34 $ 502 $ 10,536
- -------------------------------------------------------------------------------------------------------
Mark W. Collins. . . . . . . . . . . . . . . . . . . . . $ 25,875 14 $ 121 $ 1,300 $ 27,296
- -------------------------------------------------------------------------------------------------------
William I Shoenfeld & Rosalie G. Schoenfeld. . . . . . . $ 10,000 14 $ 47 $ 503 $ 10,550
- -------------------------------------------------------------------------------------------------------
Morrie Lieb. . . . . . . . . . . . . . . . . . . . . . . $ 10,000 10 $ 34 $ 502 $ 10,536
- -------------------------------------------------------------------------------------------------------
Mark Capital LLC . . . . . . . . . . . . . . . . . . . . $ 28,750 10 $ 96 $ 1,443 $ 30,289
- -------------------------------------------------------------------------------------------------------
Andrew J. Maffey . . . . . . . . . . . . . . . . . . . . $ 50,000 10 $ 167 $ 2,509 $ 52,676
- -------------------------------------------------------------------------------------------------------
Karma Kapital LLC. . . . . . . . . . . . . . . . . . . . $115,000 4 $ 154 $ 5,758 $120,912
- -------------------------------------------------------------------------------------------------------
Global Medicine, Inc, MPPP . . . . . . . . . . . . . . . $100,000 10 $ 334 $ 5,017 $105,351
- -------------------------------------------------------------------------------------------------------
Angeliki Frangou . . . . . . . . . . . . . . . . . . . . $ 50,000 4 $ 67 $ 2,504 $ 52,571
- -------------------------------------------------------------------------------------------------------
Jan H. Stahl & Cynthia M. Ruggero. . . . . . . . . . . . $ 10,000 4 $ 14 $ 501 $ 10,515
=======================================================================================================
TOTAL INVESTED . . . . . . . . . . . . . . . . . . . . . $929,625 $ 3,231 $ 46,650 $979,506
=======================================================================================================
EXHIBIT B TO THE
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
HIENERGY TECHNOLOGIES, INC.
FORM OF WARRANT
[SEE EXHIBIT 4.8 TO THE REGISTRATION STATEMENT ON FORM SB-2]
EXHIBIT C TO THE
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
HIENERGY TECHNOLOGIES, INC.
FORM OF CERTIFICATE OF DESIGNATION
[SEE SECTION 2.2.1 TO EXHIBIT 3.1 TO THE REGISTRATION STATEMENT ON FORM SB-2]
EXHIBIT D TO THE
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
HIENERGY TECHNOLOGIES, INC.
FORM OF REGISTRATION RIGHTS AGREEMENT
[SEE EXHIBIT 4.7 TO THE REGISTRATION STATEMENT ON FORM SB-2]
EXHIBIT E TO THE
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
HIENERGY TECHNOLOGIES, INC.
FORM OF IRREVOCABLE TRANSFER AGENT INSTRUCTIONS
HIENERGY TECHNOLOGIES, INC.
as of _________________, 2002
[Name and address of Transfer Agent]
Attn: _____________
LADIES AND GENTLEMEN:
Reference is made to that certain Series A Convertible Preferred Stock
Purchase Agreement, dated as of ____________________, 2002, by and among
HiEnergy Technologies, Inc., a Washington corporation (the "COMPANY"), and the
purchasers named therein (collectively, the "PURCHASERS") pursuant to which the
Company is issuing to the Purchasers shares of its Series A Convertible
Preferred Stock, par value $0.0001 per share, (the "PREFERRED SHARES") and
warrants (the "WARRANTS") to purchase shares of the Company's common stock, par
value $0.0001 per share (the "COMMON STOCK") Warrants in connection with the
sale and issuance of Preferred Shares and Warrants to the Purchasers. This
letter shall serve as our irrevocable authorization and direction to you
(provided that you are the transfer agent of the Company at such time) to issue
shares of Common Stock upon conversion of the Preferred Shares (the "CONVERSION
SHARES") and exercise of the Warrants (the "WARRANT SHARES") to or upon the
order of a Purchaser from time to time upon (a) (i) surrender to you of a
properly completed and duly executed Conversion Notice or Exercise Notice, as
the case may be, in the form attached hereto as Exhibit I and Exhibit II,
respectively, (ii) in the case of the conversion of Preferred Shares, a copy of
the certificates (with the original certificates delivered to the Company)
representing Preferred Shares being converted or, in the case of Warrants being
exercised, a copy of the Warrants (with the original Warrants delivered to the
Company) being exercised (or, in each case, an indemnification undertaking with
respect to such share certificates or the warrants in the case of their loss,
theft or destruction), and (iii) delivery of a treasury order or other
appropriate order duly executed by a duly authorized officer of the Company and
(b) the Company's failure to notify you that such Holder, in the opinion of
Company counsel, has not registered or qualified under the securities or "blue
sky" laws of any state in connection with such proposed disposition, or
qualified for an exemption therefrom. So long as you have previously received
(x) (i) written confirmation from counsel to the Company that a registration
statement covering resales of the Conversion Shares or Warrant Shares, as
applicable, has been declared effective by the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933
ACT"), and no subsequent notice by the Company or its counsel of the suspension
or termination of its effectiveness and (ii) no notification from the Company
that such Holder, in the opinion of Company counsel, has not registered or
qualified under the securities or "blue sky" laws of any state in connection
with such proposed disposition, or qualified for an exemption therefrom, and (y)
a copy of such registration statement, and if the Purchaser represents in
writing that the Conversion Shares or the Warrant Shares, as the case may be,
were sold pursuant to the Registration Statement, then certificates representing
the Conversion Shares and the Warrant Shares, as the case may be, shall not bear
any legend restricting transfer of the Conversion Shares and the Warrant Shares,
as the case may be, thereby and should not be subject to any stop-transfer
restriction. Provided, however, that if you have not previously received (i)
written confirmation from counsel to the Company that a registration statement
covering resales of the Conversion Shares or Warrant Shares, as applicable, has
been declared effective by the SEC under the 1933 Act, and (ii) a copy of such
registration statement, then the certificates for the Conversion Shares and the
Warrant Shares shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE
SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS, OR HIENERGY
TECHNOLOGIES, INC. SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT
REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED."
and, provided further, that the Company may from time to time notify you to
place stop-transfer restrictions on the certificates for the Conversion Shares
and the Warrant Shares in the event a registration statement covering the
Conversion Shares and the Warrant Shares is subject to amendment for events then
current.
A form of written confirmation from counsel to the Company that a
registration statement covering resales of the Conversion Shares and the Warrant
Shares has been declared effective by the SEC under the 1933 Act is attached
hereto as Exhibit III.
Please be advised that the Purchasers are relying upon this letter as an
inducement to enter into the Securities Purchase Agreement and, accordingly,
each Purchaser is a third party beneficiary to these instructions.
Please execute this letter in the space indicated to acknowledge your
agreement to act in accordance with these instructions. Should you have any
questions concerning this matter, please contact me at ___________.
Very truly yours,
HIENERGY TECHNOLOGIES, INC.
By: _____________________________________
Name: ______________________________
Title: ______________________________
ACKNOWLEDGED AND AGREED:
[TRANSFER AGENT]
By: _______________________________
Name: _______________________________
Title: _______________________________
Date: ______________
EXHIBIT I
HIENERGY TECHNOLOGIES, INC.
CONVERSION NOTICE
Reference is made to the Certificate of Designation of the Relative Rights and
Preferences of the Series A Preferred Stock of HiEnergy Technologies, Inc. (the
"Certificate of Designation"). In accordance with and pursuant to the
Certificate of Designation, the undersigned hereby elects to convert the number
of shares of Series A Preferred Stock, par value $0.0001 per share (the
"Preferred Shares"), of HiEnergy Technologies, Inc., a Washington corporation
(the "Company"), indicated below into shares of Common Stock, par value $0.0001
per share (the "Common Stock"), of the Company, by tendering the stock
certificate(s) representing the share(s) of Preferred Shares specified below as
of the date specified below.
Date of Conversion: ____________________________________
Number of Preferred Shares to be converted: ______
Stock certificate no(s). of Preferred Shares
to be converted: _________
The Common Stock have been sold pursuant to the Registration Statement (as
defined in the Registration Rights Agreement): YES ____ NO____
Please confirm the following information:
Conversion Price: ____________________________________
Number of shares of Common Stock
to be issued: ____________________________________
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue to: ____________________________________
Facsimile Number: ____________________________________
Authorization: ____________________________________
By: ____________________________________
Title: ____________________________________
Dated:
PRICES ATTACHED
EXHIBIT II
FORM OF EXERCISE NOTICE
EXERCISE FORM
HIENERGY TECHNOLOGIES, INC.
The undersigned _______________, pursuant to the provisions of the within
Warrant, hereby elects to purchase _____ shares of Common Stock of HiEnergy
Technologies, Inc. covered by the within Warrant.
Dated: _________________ Signature ___________________________
Address _____________________
_____________________
ASSIGNMENT
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the within Warrant and all rights evidenced thereby and does
irrevocably constitute and appoint _____________, attorney, to transfer the said
Warrant on the books of the within named corporation.
Dated: _________________ Signature ___________________________
Address _____________________
_____________________
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the right to purchase _________ shares of Warrant Stock
evidenced by the within Warrant together with all rights therein, and does
irrevocably constitute and appoint ___________________, attorney, to transfer
that part of the said Warrant on the books of the within named corporation.
Dated: _________________ Signature ___________________________
Address _____________________
_____________________
FOR USE BY THE ISSUER ONLY:
This Warrant No. W-_____ canceled (or transferred or exchanged) this _____ day
of ___________, _____, shares of Common Stock issued therefor in the name of
_______________, Warrant No. W-_____ issued for ____ shares of Common Stock in
the name of _______________.
EXHIBIT III
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[Name and address of Transfer Agent]
Attn: _____________
Re: HIENERGY TECHNOLOGIES, INC.
Ladies and Gentlemen:
We are counsel to HiEnergy Technologies, Inc., a Washington corporation
(the "COMPANY"), and have represented the Company in connection with that
certain Series A Convertible Preferred Stock Purchase Agreement (the "PURCHASE
AGREEMENT"), dated as of ____________________, 2002, by and among the Company
and the purchasers named therein (collectively, the "PURCHASERS") pursuant to
which the Company issued to the Purchasers shares of its Series A Convertible
Preferred Stock, par value $0.0001 per share, (the "PREFERRED SHARES") and
warrants (the "WARRANTS") to purchase shares of the Company's common stock, par
value $0.0001 per share (the "COMMON STOCK"). Pursuant to the Purchase
Agreement, the Company has also entered into a Registration Rights Agreement
with the Purchasers (the "REGISTRATION RIGHTS AGREEMENT"), dated as of
_____________________, 2002, pursuant to which the Company agreed, among other
things, to register the Registrable Securities (as defined in the Registration
Rights Agreement), including the shares of Common Stock issuable upon conversion
of the Preferred Shares and exercise of the Warrants, under the Securities Act
of 1933, as amended (the "1933 ACT"). In connection with the Company's
obligations under the Registration Rights Agreement, on ________________, 2002,
the Company filed a Registration Statement on Form SB-2 (File No. 333-________)
(the "REGISTRATION STATEMENT") with the Securities and Exchange Commission (the
"SEC") relating to the resale of the Registrable Securities which names each of
the present Purchasers as a selling stockholder thereunder.
In connection with the foregoing, we advise you that a member of the SEC's
staff has advised us by telephone that the SEC has entered an order declaring
the Registration Statement effective under the 1933 Act at [ENTER TIME OF
EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after
telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and accordingly, the
Registrable Securities are available for resale under the 1933 Act pursuant to
the Registration Statement.
Very truly yours,
[COMPANY COUNSEL]
By:
cc: [LIST NAMES OF PURCHASERS]
EXHIBIT F TO THE
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
HIENERGY TECHNOLOGIES, INC.
FORM OF OPINION OF THE COMPANY'S SPECIAL COUNSEL
[DATE]
[PURCHASER]
Re: Series A Convertible Preferred Stock Purchase Agreement Between HiEnergy
Technologies, Inc. and the Purchasers Listed on Exhibit A
Ladies and Gentlemen:
We have acted as special securities counsel to HiEnergy Technologies,
Inc., a Washington corporation ("the Company"), in connection with the Series A
Convertible Preferred Stock Purchase Agreement (the "Purchase Agreement") dated
as of _________________, between the Company and the Purchasers listed on
Exhibit A (the "Purchasers") and the transactions (the "Transactions")
contemplated by the Transaction Documents (as defined below). This opinion is
furnished to you pursuant to Section 4.2(g) of the Purchase Agreement. All
capitalized terms used herein have the meanings defined for them in the Purchase
Agreement or the Accord (as defined below) unless otherwise defined herein.
This Opinion Letter is governed by, and shall be interpreted in
accordance with, the Legal Opinion Accord and the accompanying commentary and
technical notes (which are an integral part thereof), all as published in The
Business Lawyer, Volume 47, No. 1, November 1991 (the "Accord"), which are
incorporated herein by this reference. As a consequence, this Opinion Letter is
subject to a number of assumptions, qualifications, exceptions, definitions,
limitations on coverage and other limitations, all as more particularly
described in the Accord, and this Opinion Letter should be read in conjunction
therewith. The law covered by the opinions expressed herein is limited to the
law of the State of Washington and United States federal securities laws. To
the extent that the Documents (as defined below) are governed by the laws of any
state other than Washington, we have assumed that the law of such other state is
identical to the law of Washington.
We have examined originals or copies certified or otherwise
identified as being true copies of the following agreements and instruments
(collectively the "Transaction Documents"):
1. The Purchase Agreement;
2. Warrants to Purchase Shares of Common Stock of HiEnergy Technologies,
Inc. that expire ________________, in favor of the Purchasers;
3. Registration Rights Agreement dated as of _________________, between the
Company and the Purchasers;
4. Note Purchase Agreements between the Company and the Purchasers,
variously dated September 23, 2002, September 27, 2002, and October 3, 2002; and
5. Promissory Notes made by the Company in favor of the Purchasers,
variously dated September 23, 2002, September 27, 2002, and October 3, 2002.
We have also examined originals or copies certified or otherwise identified
as being true copies of the following documents and instruments (collectively
the "Related Documents"):
a. Articles of Incorporation of the Company, as amended;
b. Articles of Amendment establishing the Series A Convertible
Preferred Stock;
c. Bylaws of the Company, as amended;
d. Specimen Series A Preferred Stock Certificate;
e. Irrevocable Transfer Agent Instructions dated
__________________to Signature Stock Transfer Company;
f. Certificate of Michal Levy, Secretary of the Company, dated
_______________;
g. Certificate of Thomas R. Pascoe, President and Chief Executive
Officer of the Company, dated _____________________;
h. The Company's Disclosure Letter to the Purchasers dated
_________________;
i. Resolutions of the Company's Board of Directors from a meeting
held August 11, 2002;
j. Resolutions of the Executive Committee of the Company's Board of
Directors adopted August 13, 2002, September 20, 2002, and
October 7, 2002, by unanimous written consent, and Designations
of Authority executed by the Company's President on September 24,
2002, and September 30, 2002;
k. Convertible Preferred Stock Term Sheet of HiEnergy Technologies,
Inc., a copy of which is attached hereto;
l. The Company's Form 10-KSB for the year ended April 30, 2002,
filed with the Securities and Exchange Commission on July 29,
2002, and Form 10-QSB for the quarter ended July 31, 2002, filed
with the Securities and Exchange Commission on September 20,
2002;
m. The electronic web page of the Washington Secretary of State on
October 9, 2002, confirming the valid existence of the Company;
and
n. The electronic web page of the California Secretary of State on
October 9, 2002, confirming that the Company is qualified to do
business in California.
The Transaction Documents and the Related Documents are collectively
referred to herein as the "Documents". We have examined such questions of law
that we consider necessary or advisable for the purpose of rendering this
opinion. In such examinations we have assumed the genuineness of all signatures
on original documents, the authenticity and completeness of all documents
submitted to us as originals, the conformity to original documents of all copies
submitted to us as copies thereof, the legal capacity of natural persons, and
the due authorization, execution and delivery of all documents (except as to due
authorization, execution and delivery by the Company) where due authorization,
execution and delivery are a prerequisite to the effectiveness thereof. We
have, with your permission, necessarily assumed the correctness and completeness
of the statements and representations made to us or included in the Documents.
In connection with the delivery of our opinions hereunder, you have acknowledged
that our knowledge of the Company's affairs extends only to the Documents.
We have not examined certificates representing the Preferred Shares
other than specimens of the certificates. In rendering our opinion we have,
with your permission, relied on the Company's Transfer Agent as to the issuance,
execution, countersignature, and delivery of the Shares according to the
instructions delivered by the Purchaser, whether in certificated form or via DTC
through its DWAC system.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Company is a corporation duly incorporated and validly existing
under the laws of the state of Washington and has the requisite corporate power
to own, lease and operate its properties and assets, and to carry on its
business as presently conducted. The Company is duly qualified as a foreign
corporation to do business and is in good standing in every jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary and in which the failure to so qualify would have a
material adverse effect upon the business, condition (financial or otherwise) or
properties of the Company taken as a whole.
2. The Company has the requisite corporate power and authority to enter
into and perform its obligations under the Transaction Documents and to issue
the Preferred Stock, the Warrants and the Common Stock issuable upon conversion
of the Preferred Stock and exercise of the Warrants in accordance with their
respective terms. Each of the Transaction Documents has been duly authorized,
executed and delivered by the Company, and no further consent or authorization
of the Company or its Board of Directors or stockholders is required. Each of
the Transaction Documents constitutes a legal, valid and binding obligation of
the Company enforceable against the Company in accordance with its respective
terms. The Common Stock issuable upon conversion of the Preferred Stock and
exercise of the Warrants in accordance with their respective terms is not
subject to any preemptive rights under the Articles of Incorporation or the
Bylaws.
3. The Preferred Stock and the Warrants to be issued and sold by the
Company in accordance with the Purchase Agreement have been duly authorized and
executed by the Company and, when delivered against payment in full in
accordance with the Purchase Agreement, will be validly issued, fully paid and
nonassessable. The shares of Common Stock issuable upon conversion of the
Preferred Stock and exercise of the Warrants in accordance with their respective
terms, have been duly authorized and reserved for issuance, and, when delivered
upon conversion or against payment in full in accordance with such respective
terms, will be validly issued, fully paid and nonassessable.
4. To the Actual Knowledge of the Primary Lawyer Group, the execution,
delivery and performance of the Transaction Documents and the consummation by
the Company of the transactions contemplated thereby and the issuance of the
Preferred Stock and the Warrants in accordance with the Purchase Agreement and
the Common Stock issuable upon conversion of the Preferred Stock and exercise of
the Warrants in accordance with their respective terms do not (i) violate any
provision of the Articles of Incorporation or Bylaws, (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any material agreement, mortgage,
deed of trust, indenture, note, bond, license, lease agreement, instrument or
obligation to which the Company is a party, (iii) create or impose a lien,
charge or encumbrance on any property of the Company under any agreement or any
commitment to which the Company is a party or by which the Company is bound or
by which any of its respective properties or assets are bound, or (iv) result in
a violation of any statute, rule, regulation, order, judgment, injunction or
decree applicable to the Company or to which any property or asset of the
Company is subject; except, in all cases other than violations pursuant to
clause (i) above, for such conflicts, default, terminations, amendments,
acceleration, cancellations and violations as would not, individually or in the
aggregate, have a material adverse effect upon the business, condition
(financial or otherwise) or properties of the Company taken as a whole.
5. No consent, approval or authorization of or designation, declaration or
filing with any governmental authority on the part of the Company is required in
connection with the valid execution and delivery of the Transaction Documents,
or the offer, sale or issuance of the Preferred Stock, the Warrants or the
Common Stock issuable upon conversion of the Preferred Stock and exercise of the
Warrants in accordance with their respective terms other than the filing of
Articles of Amendment and the Registration Statement, except such as may be
required under the Securities Act of 1933 or state securities laws.
6. The offer, issuance and sale of the Preferred Stock and the Warrants in
accordance with the Purchase Agreement and the conversion of the Preferred Stock
and exercise of the Warrants in accordance with their respective terms, are
exempt from the registration requirements of the Securities Act.
7. The Company is not, and as a result of and immediately upon Closing will
not be, an "investment company" or a company "controlled" by an "investment
company", within the meaning of the Investment Company Act of 1940, as amended.
In addition to the General Qualifications (which include the Bankruptcy and
Insolvency Exception, the Equitable Principles Exception, and the Other Common
Qualifications), all of which apply to the foregoing opinions, the foregoing
opinions are qualified by and subject to the following assumptions and
exceptions, which assumptions and exceptions modify the Accord to the extent
necessary:
A. We express no opinion on any fact made in any representation or warranty
or the accuracy of any calculations, descriptions or facts in the Transaction
Documents or in any exhibit or schedule to a Transaction Document or in any
document referenced in or related to any of the foregoing.
B. Rights to indemnification and contribution may be limited by provisions
of securities law and by principles governing the construction and
interpretation of indemnity provisions, in addition to the limitations stated in
the Accord.
C. We express no opinion as to the enforceability of cumulative remedies to
the extent such cumulative remedies purport to or would have the effect of
compensating the party entitled to the benefits thereof in amounts in excess of
the actual loss suffered by such party or would violate applicable laws
concerning election of remedies.
D. We express no opinion as to the enforceability of irrevocable
instructions whose enforcement would result in a violation of law.
E. The opinion at item (1) with respect to the Company's existence is given
in sole reliance on the electronic web page of the Washington Secretary of State
on October 9, 2002, confirming the valid existence of the Company and the
statements contained thereon. The opinion at item (1) with respect to the
Company's qualification as a foreign corporation to do business and to its good
standing in every jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary is given in sole
reliance on the electronic web page of the California Secretary of State on
October 9, 2002, confirming the Company's qualification to do business in
California.
F. The opinions set forth at item (3) are subject to (i) reliance on the
Company's Transfer Agent as to the issuance, execution, countersignature, and
delivery of the Shares according to the instructions delivered by the Purchaser
and (ii) the Company maintaining authorized but unissued shares in an amount
sufficient to satisfy its obligations under the Documents.
G. The opinions set forth at item (4)(iii) are subject to the interest of
H.C. Wainwright & Co., Inc., as a broker in the Transactions.
H. The opinions set forth at item (6) are subject to our assumption, made
with your permission, that the Purchasers have based their investment decisions
only on written materials and that the only written materials received by the
Purchasers in connection with their investment decisions are the Documents.
I. We are expressing no opinion with respect to the Blue Sky laws of any
state in which the Shares may be or may have been offered or sold.
J. Our opinions are subject to Purchasers returning their original
Promissory Notes (or Affidavits of Lost Promissory Note containing appropriate
indemnities) to the Company for cancellation.
The term "Primary Lawyer Group" as used in the Accord, is hereby modified
and for purposes of applying the Accord to this Opinion Letter shall mean Chapin
E. ("Shea") Wilson and Derek W. Woolston.
This Opinion Letter speaks as to the matters as of the date hereof and we
assume no responsibility for changes in law, regulations, facts or circumstances
after the date hereof. We have no duty, and undertake no duty, to update this
Opinion Letter or to deliver future opinions.
This Opinion Letter may be relied upon by you only in connection with the
Transactions and may not be used or relied upon by you or by any other person
for any purpose whatsoever, except to the extent authorized in the Accord,
without in each instance our prior written consent.
Very truly yours,
QED Law Group, P.L.L.C.
By
Chapin E. Wilson