SECURITIES PURCHASE AGREEMENT LAURUS MASTER FUND, LTD. and IMPLANT SCIENCES CORPORATION Dated: December 29, 2006
LAURUS
MASTER FUND, LTD.
and
IMPLANT
SCIENCES CORPORATION
Dated:
December 29, 2006
THIS
SECURITIES PURCHASE AGREEMENT (this “Agreement”) is made and entered into as of
December 29, 2006, by and between IMPLANT SCIENCES CORPORATION, a Massachusetts
(the “Company”), and LAURUS MASTER FUND, LTD., a Cayman Islands company (the
“Purchaser”).
RECITALS
WHEREAS,
the Company has authorized the sale to the Purchaser of a Secured Term Note
in
the aggregate principal amount of One Million Five Hundred Thousand Dollars
($1,500,000) in the form of Exhibit A hereto (as amended, modified and/or
supplemented from time to time, the “Note”);
WHEREAS,
the Company wishes to issue to the Purchaser a warrant, on the date hereof,
in
the form of Exhibit B hereto (as amended, modified and/or supplemented from
time
to time, the “Warrant”) to purchase up to 458,000 shares of the Company’s Common
Stock (subject to adjustment as set forth therein) in connection with the
Purchaser’s purchase of the Note;
WHEREAS,
the Purchaser desires to purchase the Note and the Warrant on the terms and
conditions set forth herein; and
WHEREAS,
the Company desires to issue and sell the Note and Warrant to the Purchaser
on
the terms and conditions set forth herein.
AGREEMENT
NOW,
THEREFORE, in consideration of the foregoing recitals and the mutual promises,
representations, warranties and covenants hereinafter set forth and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Agreement
to Sell and Purchase.
Pursuant to the terms and conditions set forth in this Agreement, on the Closing
Date (as defined in Section 3), the Company shall sell to the Purchaser, and
the
Purchaser shall purchase from the Company, the Note. The sale of the Note on
the
Closing Date shall be known as the “Offering.” The Note will mature on the
Maturity Date (as defined in the Note). Collectively, the Note and Warrant
and
Common Stock issuable upon exercise of the Warrant are referred to as the
“Securities.”
2. Fees
and Warrant.
On the
Closing Date:
(a) The
Company will issue and deliver to the Purchaser the Warrant, on the date hereof,
to purchase up to 458,000 shares of Common Stock (subject to adjustment as
set
forth therein) in connection with the Offering, pursuant to Section 1 hereof.
All the representations, covenants, warranties, undertakings, and
indemnification, and other rights made or granted to or for the benefit of
the
Purchaser by the Company are hereby also made and granted for the benefit of
the
holder of the Warrant and shares of the Company’s Common Stock issuable upon
exercise of the Warrant (the “Warrant Shares”).
(b) Subject
to the terms of Section 2(d) below, the Company shall pay to Laurus Capital
Management, LLC, the manager of the Purchaser, a closing payment in an amount
equal to four percent (4.00%) of the aggregate principal amount of the Note.
The
foregoing fee is referred to herein as the “Closing Payment.”
(c) The
Closing Payment shall be paid at closing out of funds held pursuant to the
Escrow Agreement (as defined below) and a disbursement letter (the “Disbursement
Letter”).
3. Closing,
Delivery and Payment.
3.1 Closing.
Subject
to the terms and conditions herein, the closing of the transactions contemplated
hereby (the “Closing”), shall take place on the date hereof, at such time or
place as the Company and the Purchaser may mutually agree (such date is
hereinafter referred to as the “Closing Date”).
3.2 Delivery.
Pursuant to the Escrow Agreement, at the Closing on the Closing Date, the
Company will deliver to the Purchaser, among other things, the Note and the
Warrant and the Purchaser will deliver to the Company, among other things,
the
amounts set forth in the Disbursement Letter by certified funds or wire
transfer.
4. Representations
and Warranties of the Company.
The
Company hereby represents and warrants to the Purchaser as follows
4.1 Organization,
Good Standing and Qualification.
Each of
the Company and each of its Subsidiaries is a corporation, partnership or
limited liability company, as the case may be, duly organized, validly existing
and in good standing under the laws of its jurisdiction of organization. Each
of
the Company and each of its Subsidiaries has the corporate, limited liability
company or partnership, as the case may be, power and authority to own and
operate its properties and assets and, insofar as it is or shall be a party
thereto, to (1) execute and deliver (i) this Agreement, (ii) the Note and
the Warrant to be issued in connection with this Agreement, (iii) the Master
Security Agreement dated as of the date hereof between the Company, certain
Subsidiaries of the Company and the Purchaser (as amended, modified and/or
supplemented from time to time, the “Master Security Agreement”), (iv) the Funds
Escrow Agreement dated as of the date hereof among the Company, the Purchaser
and the escrow agent referred to therein, substantially in the form of Exhibit
D
hereto (as amended, modified and/or supplemented from time to time, the “Escrow
Agreement”) and (v) all other documents, instruments and agreements entered into
in connection with the transactions contemplated hereby and thereby (the
preceding clauses (ii) through (v), collectively, the “Related Agreements”); (2)
issue and sell the Note; (3) issue and sell the Warrant and the Warrant
Shares; and (4) carry out the provisions of this Agreement and the Related
Agreements and to carry on its business as presently conducted. Each of the
Company and its Subsidiaries is duly qualified and is authorized to do business
and is in good standing as a foreign corporation, partnership or limited
liability company, as the case may be, in all jurisdictions in which the nature
or location of its activities and of its properties (both owned and leased)
makes such qualification necessary, except for those jurisdictions in which
failure to do so has not, or could not reasonably be expected to have,
individually or in the aggregate, a material adverse effect on the business,
assets, liabilities, condition (financial or otherwise), properties, operations
or prospects of the Company and its Subsidiaries, taken individually and as
a
whole (a “Material Adverse Effect”).
4.2 Subsidiaries.
Each
direct and indirect Subsidiary of the Company, the direct owner of such
Subsidiary and its percentage ownership thereof, is set forth on Schedule 4.2.
For the purpose of this Agreement, a “Subsidiary” of any person or entity means
(i) a corporation or other entity whose shares of stock or other ownership
interests having ordinary voting power (other than stock or other ownership
interests having such power only by reason of the happening of a contingency)
to
elect a majority of the directors of such corporation, or other persons or
entities performing similar functions for such person or entity, are owned,
directly or indirectly, by such person or entity or (ii) a corporation or other
entity in which such person or entity owns, directly or indirectly, more than
50% of the equity interests at such time.
4.3 Capitalization;
Voting Rights.
(a) The
authorized capital stock of the Company, as of the date hereof consists of
55,000,000 shares, of which 50,000,000 are shares of Common Stock, par value
$0.10 per share, 11,800,811 shares of which are issued and outstanding, and
5,000,000 are shares of preferred stock, par value $0.01 per share of which
393.939 shares of preferred stock are issued and outstanding. The authorized,
issued and outstanding capital stock of each Subsidiary of each of the Company
and its Subsidiaries is set forth on Schedule 4.3.
(b) Except
as
disclosed on Schedule 4.3, or in Company’s Filings, other than: (i) the shares
reserved for issuance under the Company’s stock option plans; and (ii) shares
which may be granted pursuant to this Agreement and the Related Agreements,
there are no outstanding options, warrants, rights (including conversion or
preemptive rights and rights of first refusal), proxy or stockholder agreements,
or arrangements or agreements of any kind for the purchase or acquisition from
the Company of any of its securities. Except as disclosed on Schedule 4.3,
neither the offer, issuance or sale of any of the Note or the Warrant, or the
issuance of the Warrant Shares, nor the consummation of any transaction
contemplated hereby will result in a change in the price or number of any
securities of the Company outstanding, under anti-dilution or other similar
provisions contained in or affecting any such securities.
(c) All
issued and outstanding shares of the Company’s Common Stock: (i) have been
duly authorized and validly issued and are fully paid and nonassessable; and
(ii) were issued in compliance with all applicable state and federal laws
concerning the issuance of securities.
(d) The
rights, preferences, privileges and restrictions of the shares of the Common
Stock are as stated in the Company’s Certificate of Incorporation (the
“Charter”). The Warrant Shares have been duly and validly reserved for issuance.
When issued in compliance with the provisions of this Agreement and the
Company’s Charter, the Securities will be validly issued, fully paid and
nonassessable, and will be free of any liens or encumbrances; provided, however,
that the Securities may be subject to restrictions on transfer under state
and/or federal securities laws as set forth herein or as otherwise required
by
such laws at the time a transfer is proposed.
4.4 Authorization;
Binding Obligations.
All
corporate, partnership or limited liability company, as the case may be, action
on the part of the Company and each of its Subsidiaries (including their
respective officers and directors) necessary for the authorization of this
Agreement and the Related Agreements, the performance of all obligations of
the
Company and its Subsidiaries hereunder and under the other Related Agreements
at
the Closing and, the authorization, sale, issuance and delivery of the Note
and
Warrant has been taken or will be taken prior to the Closing. This Agreement
and
the Related Agreements, when executed and delivered and to the extent it is
a
party thereto, will be valid and binding obligations of each of the Company
and
each
of its Subsidiaries,
enforceable in accordance with their terms, except:
(a) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors’ rights;
and
(b) general
principles of equity that restrict the availability of equitable or legal
remedies.
The
sale
of the Note is not and will not be subject to any preemptive rights or rights
of
first refusal that have not been properly waived or complied with. The issuance
of the Warrant and the subsequent exercise of the Warrant for Warrant Shares
are
not and will not be subject to any preemptive rights or rights of first refusal
that have not been properly waived or complied with.
4.5 Liabilities.
Neither
the Company nor any of its Subsidiaries has any liabilities, except current
liabilities incurred in the ordinary course of business and liabilities
disclosed in any of
the
Company’s filings under the Securities Exchange Act of 1934 (“Exchange Act”)
made prior to the date of this Agreement (collectively, the “Exchange Act
Filings”), copies of which have been provided to the Purchaser.
4.6 Agreements;
Action.
Except
as set forth on Schedule 4.6 or as disclosed in any Exchange Act
Filings:
(a) there
are
no agreements, understandings, instruments, contracts, proposed transactions,
judgments, orders, writs or decrees to which Each of the Company and its
Subsidiaries is a party or by which it is bound which may involve: (i)
obligations (contingent or otherwise) of, or payments to, the Company or any
of
its Subsidiaries in excess of $50,000 (other than obligations of, or payments
to, the Company or any of its Subsidiaries arising from purchase or sale
agreements entered into in the ordinary course of business); or (ii) the
transfer or license of any patent, copyright, trade secret or other proprietary
right to or from the Company or any of its Subsidiaries (other than licenses
arising from the purchase of “off the shelf” or other standard products); or
(iii) provisions restricting the development, manufacture or distribution of
the
Company’s or any of its Subsidiaries’ products or services; or (iv)
indemnification by the Company or any of its Subsidiaries with respect to
infringements of proprietary rights.
(b) Since
September 30, 2006 (the “Balance Sheet Date”), neither the Company nor any of
its Subsidiaries has: (i) declared or paid any dividends, or authorized or
made
any distribution upon or with respect to any class or series of its capital
stock; (ii) incurred any indebtedness for money borrowed or any other
liabilities (other than ordinary course obligations) individually in excess
of
$50,000 or, in the case of indebtedness and/or liabilities individually less
than $50,000, in excess of $100,000 in the aggregate; (iii) made any loans
or
advances to any person or entity not in excess, individually or in the
aggregate, of $100,000, other than ordinary course advances for travel expenses;
or (iv) sold, exchanged or otherwise disposed of any of its assets or rights,
other than the sale of its inventory in the ordinary course of
business.
(c) For
the
purposes of subsections (a) and (b) above, all indebtedness, liabilities,
agreements, understandings, instruments, contracts and proposed transactions
involving the same person or entity (including persons or entities the Company
or any of its Subsidiaries has reason to believe are affiliated therewith)
shall
be aggregated for the purpose of meeting the individual minimum dollar amounts
of such subsections.
(d) The
Company maintains disclosure controls and procedures (“Disclosure Controls”)
designed to ensure that information required to be disclosed by the Company
in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized, and reported, within the time periods specified in the
rules and forms of the Securities and Exchange Commission (“SEC”).
(e) The
Company makes and keep books, records, and accounts, that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the Company’s
assets. The Company maintains internal control over financial reporting
(“Financial Reporting Controls”) designed by, or under the supervision of, the
Company’s principal executive and principal financial officers, and effected by
the Company’s board of directors, management, and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles (“GAAP”), including that:
(i) transactions
are executed in accordance with management’s general or specific
authorization;
(ii) unauthorized
acquisition, use, or disposition of the Company’s assets that could have a
material effect on the financial statements are prevented or timely
detected;
(iii) transactions
are recorded as necessary to permit preparation of financial statements in
accordance with GAAP, and that the Company’s receipts and expenditures are being
made only in accordance with authorizations of the Company’s management and
board of directors;
(iv) transactions
are recorded as necessary to maintain accountability for assets;
and
(v) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals, and appropriate action is taken with respect to any
differences.
(f) There
is
no weakness in any of the Company’s Disclosure Controls or Financial Reporting
Controls that is required to be disclosed in any of the Exchange Act Filings,
except as so disclosed.
4.7 Obligations
to Related Parties.
Except
as set forth on Schedule 4.7, there are no obligations of the Company
or
any of
its Subsidiaries to
officers, directors, stockholders or employees of the Company or
any of
its Subsidiaries other
than:
(a) for
payment of salary for services rendered and for bonus payments;
(b) reimbursement
for reasonable expenses incurred on behalf of the Company and its
Subsidiaries;
(c) for
other
standard employee benefits made generally available to all employees (including
stock option agreements outstanding under any stock option plan approved by
the
Board of Directors of the Company or any of its Subsidiaries); and
(d) obligations
listed in the Company’s and each of its Subsidiaries financial statements or
disclosed in any of the Company’s Exchange Act Filings.
Except
as
described above or set forth on Schedule 4.7, none of the officers, directors
or, to the best of the Company’s knowledge, key employees or stockholders of the
Company or any of its Subsidiaries or any members of their immediate families,
are indebted to the Company or any of its Subsidiaries, individually or in
the
aggregate, in excess of $50,000 or have any direct or indirect ownership
interest in any firm or corporation with which Each of the Company and its
Subsidiaries is affiliated or with which the Company or any of its Subsidiaries
has a business relationship, or any firm or corporation which competes with
the
Company or any of its Subsidiaries, other than passive investments in publicly
traded companies (representing less than one percent (1%) of such company)
which
may compete with the Company or any of its Subsidiaries. Except as described
above, no officer, director or stockholder of the Company or any of its
Subsidiaries, or any member of their immediate families, is, directly or
indirectly, interested in any material contract with the Company or any of
its
Subsidiaries and no agreements, understandings or proposed transactions are
contemplated between the Company or any of its Subsidiaries and any such person.
Except as set forth on Schedule 4.7, Each of the Company and its Subsidiaries
is
not a guarantor or indemnitor of any indebtedness of any other person or
entity.
4.8 Changes.
Since
the Balance Sheet Date, except as disclosed in any Exchange Act Filing or in
any
Schedule to this Agreement or to any of the Related Agreements, there has not
been:
(a) any
change in the business, assets, liabilities, condition (financial or otherwise),
properties, operations or prospects of the Company or any of its Subsidiaries,
which individually or in the aggregate has had, or could reasonably be expected
to have, individually or in the aggregate, a Material Adverse
Effect;
(b) any
resignation or termination of any officer, key employee or group of employees
of
the Company or any of its Subsidiaries;
(c) any
material change, except in the ordinary course of business, in the contingent
obligations of the Company or any of its Subsidiaries by way of guaranty,
endorsement, indemnity, warranty or otherwise;
(d) any
damage, destruction or loss, whether or not covered by insurance, which has
had,
or could reasonably be expected to have, individually or in the aggregate,
a
Material Adverse Effect;
(e) any
waiver by the Company or any of its Subsidiaries of a valuable right or of
a
material debt owed to it;
(f) any
direct or indirect loans made by the Company or any of its Subsidiaries to
any
stockholder, employee, officer or director of the Company or any of its
Subsidiaries, other than advances made in the ordinary course of
business;
(g) any
material change in any compensation arrangement or agreement with any employee,
officer, director or stockholder of the Company or any of its Subsidiaries;
(h) any
declaration or payment of any dividend or other distribution of the assets
of
the Company or any of its Subsidiaries ;
(i) any
labor
organization activity related to the Company or any of its
Subsidiaries;
(j) any
debt,
obligation or liability incurred, assumed or guaranteed by the Company or any
of
its Subsidiaries, except those for immaterial amounts and for current
liabilities incurred in the ordinary course of business;
(k) any
sale,
assignment or transfer of any patents, trademarks, copyrights, trade secrets
or
other intangible assets owned by the Company or any of its Subsidiaries
;
(l) any
change in any material agreement to which the Company or any of its Subsidiaries
is a party or by which either the Company or any of its Subsidiaries is bound
which either individually or in the aggregate has had, or could reasonably
be
expected to have, individually or in the aggregate, a Material Adverse
Effect;
(m) any
other
event or condition of any character that, either individually or in the
aggregate, has had, or could reasonably be expected to have, individually or
in
the aggregate, a Material Adverse Effect; or
(n) any
arrangement or commitment by the Company or any of its Subsidiaries to do any
of
the acts described in subsection (a) through (m) above.
4.9 Title
to Properties and Assets; Liens, Etc.
Except
as set forth on Schedule 4.9, each of the Company and each of
its
Subsidiaries
has good
and marketable title to its properties and assets, and good title to its
leasehold interests, in each case subject to no mortgage, pledge, lien, lease,
encumbrance or charge, other than:
(a) those
resulting from taxes which have not yet become delinquent;
(b) minor
liens and encumbrances which do not materially detract from the value of the
property subject thereto or materially impair the operations of the Company
or
any of its Subsidiaries, so long as in each such case, such liens and
encumbrances have no effect on the lien priority of the Purchaser in such
property; and
(c) those
that have otherwise arisen in the ordinary course of business, so long as they
have no effect on the lien priority of the Purchaser therein.
All
facilities, machinery, equipment, fixtures, vehicles and other properties owned,
leased or used by the Company or any of its Subsidiaries are in good operating
condition and repair and are reasonably fit and usable for the purposes for
which they are being used. Except as set forth on Schedule 4.9, the Company
and
each of its Subsidiaries is in compliance with all material terms of each lease
to which it is a party or is otherwise bound.
4.10 Intellectual
Property.
(a) The
Company and each of its Subsidiaries owns or possesses sufficient legal rights
to all patents, trademarks, service marks, trade names, copyrights, trade
secrets, licenses, information and other proprietary rights and processes
necessary for its business as now conducted and, to the Company’s knowledge, as
presently proposed to be conducted (the “Intellectual Property”), without any
known infringement of the rights of others. There are no outstanding options,
licenses or agreements of any kind relating to the foregoing proprietary rights,
nor is the Company or any of its Subsidiaries bound by or a party to any
options, licenses or agreements of any kind with respect to the patents,
trademarks, service marks, trade names, copyrights, trade secrets, licenses,
information and other proprietary rights and processes of any other person
or
entity other than such licenses or agreements arising from the purchase of
“off
the shelf” or standard products.
(b) Neither
the Company nor or any of its Subsidiaries has received any communications
alleging that the Company has violated any of the patents, trademarks, service
marks, trade names, copyrights or trade secrets or other proprietary rights
of
any other person or entity, nor is the Company or any of its Subsidiaries aware
of any basis therefor.
(c) The
Company does not believe it is or will be necessary to utilize any inventions,
trade secrets or proprietary information of any of its employees made prior
to
their employment by the Company, except for inventions, trade secrets or
proprietary information that have been rightfully assigned to the Company or
any
of its Subsidiaries.
4.11 Compliance
with Other Instruments.
Each of
the Company and its Subsidiaries is not in violation or default of (x) any
term
of its Charter or Bylaws, or (y) any provision of any indebtedness, mortgage,
indenture, contract, agreement or instrument to which it is party or by which
it
is bound or of any judgment, decree, order or writ, which violation or default,
in the case of this clause (y), has had, or could reasonably be expected to
have, either individually or in the aggregate, a Material Adverse Effect. The
execution, delivery and performance of and compliance with this Agreement and
the Related Agreements to which it is a party, and the issuance and sale of
the
Note by the Company and the other Securities by the Company each pursuant hereto
and thereto, will not, with or without the passage of time or giving of notice,
result in any such material violation, or be in conflict with or constitute
a
default under any such term or provision, or result in the creation of any
mortgage, pledge, lien, encumbrance or charge upon any of the properties or
assets of the Company or
any of
its Subsidiaries
or the
suspension, revocation, impairment, forfeiture or nonrenewal of any permit,
license, authorization or approval applicable to the Company, its business
or
operations or any of its assets or properties.
4.12 Litigation.
Except
as set forth on Schedule 4.12 hereto, there is no action, suit, proceeding
or
investigation pending or, to the Company’s or
any of
its Subsidiaries’
knowledge, currently threatened against the Company or
any of
its Subsidiaries
that
prevents the Company or
any of
its Subsidiaries
from
entering into this Agreement or the other Related Agreements, or from
consummating the transactions contemplated hereby or thereby, or which has
had,
or could reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect or any change in the current equity
ownership of the Company or
any of
its Subsidiaries,
nor is
the Company nor
any of
its Subsidiaries
aware
that there is any basis to assert any of the foregoing. Neither the Company
nor
any of
its Subsidiaries
is a
party to or subject to the provisions of any order, writ, injunction, judgment
or decree of any court or government agency or instrumentality. There is no
action, suit, proceeding or investigation by the Company or
any of
its Subsidiaries
currently pending or which the Company or
any of
its Subsidiaries
intends
to initiate.
4.13 Tax
Returns and Payments.
Each of
the Company and each of its Subsidiaries has timely filed all tax returns
(federal, state and local) required to be filed by it. All taxes shown to be
due
and payable on such returns, any assessments imposed, and all other taxes due
and payable by the Company or
any of
its Subsidiaries
on or
before the Closing, have been paid or will be paid prior to the time they become
delinquent. Except as set forth on Schedule 4.13, neither the Company
nor
any of
its Subsidiaries
has been
advised:
(a) that
any
of its returns, federal, state or other, have been or are being audited as
of
the date hereof; or
(b) of
any
adjustment, deficiency, assessment or court decision in respect of its federal,
state or other taxes.
The
Company has no knowledge of any liability for any tax to be imposed upon its
properties or assets as of the date of this Agreement that is not adequately
provided for.
4.14 Employees.
Except
as set forth on Schedule 4.14, neither the Company nor
any of
its Subsidiaries
has any
collective bargaining agreements with any of its employees. There is no labor
union organizing activity pending or, to the Company’s knowledge, threatened
with respect to the Company
or any
of its Subsidiaries.
Except
as disclosed in the Exchange Act Filings or on Schedule 4.14, neither the
Company nor
any of
its Subsidiaries
is a
party to or bound by any currently effective employment contract, deferred
compensation arrangement, bonus plan, incentive plan, profit sharing plan,
retirement agreement or other employee compensation plan or agreement. To the
Company’s knowledge, no employee of the Company or
any of
its Subsidiaries,
nor any
consultant with whom the Company or
any of
its Subsidiaries
has
contracted, is in violation of any term of any employment contract, proprietary
information agreement or any other agreement relating to the right of any such
individual to be employed by, or to contract with, the Company or
any of
its Subsidiaries
because
of the nature of the business to be conducted by the Company
or any
of its Subsidiaries;
and to
the Company’s knowledge the continued employment by the Company or
any of
its Subsidiaries
of their
present employees, and the performance of the Company’s contracts with its
independent contractors, will not result in any such violation. Neither the
Company nor
any of
its Subsidiaries
is aware
that any of its employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency that would
interfere with their duties to the Company
or any
of its Subsidiaries.
The
Company nor
any of
its Subsidiaries
has
received any notice alleging that any such violation has occurred. Except for
employees who have a current effective employment agreement with the Company,
no
employee of the Company has been granted the right to continued employment
by
the Company or to any material compensation following termination of employment
with the Company. Except as set forth on Schedule 4.14, None of the Company
nor
its Subsidiaries is aware that any officer, key employee or group of employees
intends to terminate his, her or their employment with the Company, nor does
the
Company have a present intention to terminate the employment of any officer,
key
employee or group of employees.
4.15 Voting
Rights.
Except
as set forth on Schedule 4.15 and except as disclosed in Exchange Act Filings,
to the Company’s knowledge, no stockholder of the Company or
any of
its Subsidiaries
has
entered into any agreement with respect to the voting of equity securities
of
the Company
or any
of its Subsidiaries
.
4.16 Compliance
with Laws; Permits.
Neither
of the Company nor its Subsidiaries is in violation of any provision of the
▇▇▇▇▇▇▇▇-▇▇▇▇▇ Act of 2002 or any SEC related regulation or rule or any rule
of
the Principal Market (as hereafter defined) promulgated thereunder or any other
applicable statute, rule, regulation, order or restriction of any domestic
or
foreign government or any instrumentality or agency thereof in respect of the
conduct of its business or the ownership of its properties which has had, or
could reasonably be expected to have, either individually or in the aggregate,
a
Material Adverse Effect. No governmental orders, permissions, consents,
approvals or authorizations are required to be obtained and no registrations
or
declarations are required to be filed in connection with the execution and
delivery of this Agreement or any other Related Agreement and the issuance
of
any of the Securities, except such as have been duly and validly obtained or
filed, or with respect to any filings that must be made after the Closing,
as
will be filed in a timely manner. Each of the Company and its Subsidiaries
has
all material franchises, permits, licenses and any similar authority necessary
for the conduct of its business as now being conducted by it, the lack of which
could, either individually or in the aggregate, reasonably be expected to have
a
Material Adverse Effect.
4.17 Environmental
and Safety Laws.
Neither
the Company or
any of
its Subsidiaries
is in
violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety, and to its knowledge, no material
expenditures are or will be required in order to comply with any such existing
statute, law or regulation. Except as set forth on Schedule 4.17, no Hazardous
Materials (as defined below) are used or have been used, stored, or disposed
of
by the Company or
any of
its Subsidiaries
or, to
the Company’s or
any of
its Subsidiaries’
knowledge, by any other person or entity on any property owned, leased or used
by the Company. For the purposes of the preceding sentence, “Hazardous
Materials” shall mean:
(a) materials
which are listed or otherwise defined as “hazardous” or “toxic” under any
applicable local, state, federal and/or foreign laws and regulations that govern
the existence and/or remedy of contamination on property, the protection of
the
environment from contamination, the control of hazardous wastes, or other
activities involving hazardous substances, including building materials;
or
(b) any
petroleum products or nuclear materials.
4.18 Valid
Offering.
Assuming the accuracy of the representations and warranties of the Purchaser
contained in this Agreement, the offer, sale and issuance of the Securities
will
be exempt from the registration requirements of the Securities Act of 1933,
as
amended (the “Securities Act”), and will have been registered or qualified (or
are exempt from registration and qualification) under the registration, permit
or qualification requirements of all applicable state securities
laws.
4.19 Full
Disclosure.
Each of
the Company and each of its Subsidiaries has provided the Purchaser with all
information requested by the Purchaser in connection with its decision to
purchase the Note and Warrant, including all information the Company and its
Subsidiaries believe is reasonably necessary to make such investment decision.
Neither this Agreement, the Related Agreements, the exhibits and schedules
hereto and thereto nor any other document delivered by the Company or
any of
its Subsidiaries
to
Purchaser or its attorneys or agents in connection herewith or therewith or
with
the transactions contemplated hereby or thereby, contain any untrue statement
of
a material fact nor omit to state a material fact necessary in order to make
the
statements contained herein or therein, in light of the circumstances in which
they are made, not misleading. Any financial projections and other estimates
provided to the Purchaser by the Company or
any of
its Subsidiaries
were
based on the Company’s and its Subsidiaries’ experience in the industry and on
assumptions of fact and opinion as to future events which the
Company
or any
of its Subsidiaries,
at the
date of the issuance of such projections or estimates, believed to be
reasonable.
4.20 Insurance.
Each of
the Company and each of its Subsidiaries has general commercial, product
liability, fire and casualty insurance policies with coverages which the Company
and
of
its Subsidiaries
believes
are customary for companies similarly situated to the Company and its
Subsidiaries in the same or similar business.
4.21 SEC
Reports.
Except
as set forth on Schedule 4.21, the Company has filed all proxy statements,
reports and other documents required to be filed by it under the Securities
▇▇▇▇▇▇▇▇ ▇▇▇ ▇▇▇▇, as amended (the “Exchange Act”). The Company has furnished
the Purchaser copies of: (i) its Annual Reports on Form 10-KSB for its fiscal
years ended June 30, 2006; and (ii) its Quarterly Reports on Form 10-QSB for
its
fiscal quarter ended September 30, 2006, and the Form 8-K filings which it
has
made during the fiscal year 2006 to date (collectively, the “SEC Reports”).
Except as set forth on Schedule 4.21, each SEC Report was, at the time of its
filing, in substantial compliance with the requirements of its respective form
and none of the SEC Reports, nor the financial statements (and the notes
thereto) included in the SEC Reports, as of their respective filing dates,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not
misleading.
4.22 Listing.
The
Company’s Common Stock is listed or quoted, as applicable, on a Principal Market
(as hereafter defined) and satisfies and at all times hereafter will satisfy,
all requirements for the continuation of such listing or quotation, as
applicable. The Company has not received any notice that its Common Stock will
be delisted from, or no longer quoted on, as applicable, the Principal Market
or
that its Common Stock does not meet all requirements for such listing or
quotation,
as
applicable. For purposes hereof, the term “Principal Market” means the NASD Over
The Counter Bulletin Board, NASDAQ SmallCap Market, NASDAQ National Markets
System, American Stock Exchange or New York Stock Exchange (whichever of the
foregoing is at the time the principal trading exchange or market for the Common
Stock).
4.23 No
Integrated Offering.
Neither
the Company, nor affiliates, nor any person acting on its or their behalf,
has
directly or indirectly made any offers or sales of any security or solicited
any
offers to buy any security under circumstances that would cause the offering
of
the Securities pursuant to this Agreement or any of the Related Agreements
to be
integrated with prior offerings by the Company for purposes of the Securities
Act which would prevent the Company from selling the Securities pursuant to
Rule
506 under the Securities Act, or any applicable exchange-related stockholder
approval provisions, nor will the Company or any of its affiliates or
Subsidiaries take any action or steps that would cause the offering of the
Securities to be integrated with other offerings.
4.24 Stop
Transfer.
The
Securities are restricted securities as of the date of this Agreement. The
Company shall not issue any stop transfer order or other order impeding the
sale
and delivery of any of the Securities at such time as the Securities are
registered for public sale or an exemption from registration is available,
except as required by state and federal securities laws.
4.25 Dilution.
The
Company specifically acknowledges that its obligation to issue the shares of
Common Stock upon exercise of the Warrant is binding upon the Company and
enforceable regardless of the dilution such issuance may have on the ownership
interests of other shareholders of the Company.
4.26 Patriot
Act.The
Company certifies that, to the best of Company’s knowledge, neither the Company
nor
any of
its Subsidiaries
has been
designated, nor is or shall be owned or controlled, by a “suspected terrorist”
as defined in Executive Order 13224. The Company hereby acknowledges that the
Purchaser seeks to comply with all applicable laws concerning money laundering
and related activities. In furtherance of those efforts, the Company hereby
represents, warrants and covenants that: (i) none of the cash or property that
the Company or
any of
its Subsidiaries
will pay
or will contribute to the Purchaser has been or shall be derived from, or
related to, any activity that is deemed criminal under United States law; and
(ii) no contribution or payment by the Company or
any of
its Subsidiaries
to the
Purchaser, to the extent that they are within the Company’s and/or its
Subsidiaries’ control shall cause the Purchaser or
any of
its Subsidiaries
to be in
violation of the United States Bank Secrecy Act, the United States International
Money Laundering Control Act of 1986 or the United States International Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001. The Company
shall
promptly notify the Purchaser if any of these representations, warranties or
covenants ceases to be true and accurate regarding the Company
or any
of its Subsidiaries.
The
Company shall provide the Purchaser all additional information regarding the
Company or
any of
its Subsidiaries
that the
Purchaser deems necessary or convenient to ensure compliance with all applicable
laws concerning money laundering and similar activities. The Company understands
and agrees that if at any time it is discovered that any of the foregoing
representations, warranties or covenants are incorrect, or if otherwise required
by applicable law or regulation related to money laundering or similar
activities, the Purchaser may undertake appropriate actions to ensure compliance
with applicable law or regulation, including but not limited to segregation
and/or redemption of the Purchaser’s investment in the Company. The Company
and
its
Subsidiaries
further
understand that the Purchaser may release confidential information about the
Company and its Subsidiaries and, if applicable, any underlying beneficial
owners, to proper authorities if the Purchaser, in its sole discretion,
determines that it is in the best interests of the Purchaser in light of
relevant rules and regulations under the laws set forth in subsection (ii)
above.
4.27 ERISA.
Based
upon the Employee Retirement Income Security Act of 1974 (“ERISA”),
and
the regulations and published interpretations thereunder: (i) neither the
Company nor
any of
its Subsidiaries
has
engaged in any Prohibited Transactions (as defined in Section 406 of ERISA
and
Section 4975 of the Internal
Revenue Code of 1986, as amended (the “Code”));
(ii)
each of the Company and each of its Subsidiaries has met all applicable minimum
funding requirements under Section 302 of ERISA in respect of its plans; (iii)
neither the Company nor
any of
its Subsidiaries
has any
knowledge of any event or occurrence which would cause the Pension Benefit
Guaranty Corporation to institute proceedings under Title IV of ERISA to
terminate any employee benefit plan(s); (iv) neither the Company nor
any of
its Subsidiaries
has any
fiduciary responsibility for investments with respect to any plan existing
for
the benefit of persons other than the Company’s or such Subsidiary’s employees;
and (v) neither the Company nor
any of
its Subsidiaries
has
withdrawn, completely or partially, from any multi-employer pension plan so
as
to incur liability under the Multiemployer Pension Plan Amendments Act of
1980.
5. Representations
and Warranties of the Purchaser.
The
Purchaser hereby represents and warrants to the Company as follows (such
representations and warranties do not lessen or obviate the representations
and
warranties of the Company set forth in this Agreement):
5.1 No
Shorting.
The
Purchaser or any of its affiliates and investment partners has not, will not
and
will not cause any person or entity, to directly engage in “short sales” of the
Company’s Common Stock as long as the Note shall be outstanding.
5.2 Requisite
Power and Authority.
The
Purchaser has all necessary power and authority under all applicable provisions
of law to execute and deliver this Agreement and the Related Agreements and
to
carry out their provisions. All corporate action on the Purchaser’s part
required for the lawful execution and delivery of this Agreement and the Related
Agreements have been or will be effectively taken prior to the Closing. Upon
their execution and delivery, this Agreement and the Related Agreements will
be
valid and binding obligations of the Purchaser, enforceable in accordance with
their terms, except:
(a) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors’ rights;
and
(b) as
limited by general principles of equity that restrict the availability of
equitable and legal remedies.
5.3 Investment
Representations.
The
Purchaser understands that the Securities are being offered and sold pursuant
to
an exemption from registration contained in the Securities Act based in part
upon the Purchaser’s representations contained in this Agreement, including,
without limitation, that the Purchaser is an “accredited investor” within the
meaning of Regulation D under the Securities Act of 1933, as amended (the
“Securities Act”). The Purchaser confirms that it has received or has had full
access to all the information it considers necessary or appropriate to make
an
informed investment decision with respect to the Note and the Warrant to be
purchased by it under this Agreement and the Warrant Shares acquired by it
upon
the exercise of the Warrant, respectively. The Purchaser further confirms that
it has had an opportunity to ask questions and receive answers from the Company
regarding the Company’s and its Subsidiaries’ business, management and financial
affairs and the terms and conditions of the Offering, the Note, the Warrant
and
the Securities and to obtain additional information (to the extent the Company
possessed such information or could acquire it without unreasonable effort
or
expense) necessary to verify any information furnished to the Purchaser or
to
which the Purchaser had access.
5.4 The
Purchaser Bears Economic Risk.
The
Purchaser has substantial experience in evaluating and investing in private
placement transactions of securities in companies similar to the Company so
that
it is capable of evaluating the merits and risks of its investment in the
Company and has the capacity to protect its own interests. The Purchaser must
bear the economic risk of this investment until the Securities are sold pursuant
to: (i) an effective registration statement under the Securities Act; or (ii)
an
exemption from registration is available with respect to such sale.
5.5 Acquisition
for Own Account.
The
Purchaser is acquiring the Note and Warrant and the Warrant Shares for the
Purchaser’s own account for investment only, and not as a nominee or agent and
not with a view towards or for resale in connection with their
distribution.
5.6 The
Purchaser Can Protect Its Interest.
The
Purchaser represents that by reason of its, or of its management’s, business and
financial experience, the Purchaser has the capacity to evaluate the merits
and
risks of its investment in the Note, the Warrant and the Securities and to
protect its own interests in connection with the transactions contemplated
in
this Agreement and the Related Agreements. Further, the Purchaser is aware
of no
publication of any advertisement in connection with the transactions
contemplated in the Agreement or the Related Agreements.
5.7 Accredited
Investor.
The
Purchaser represents that it is an accredited investor within the meaning of
Regulation D under the Securities Act.
5.8 Legends.
(a) The
Note
shall bear substantially the following legend:
“THIS
NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR
ANY APPLICABLE STATE SECURITIES LAWS. THIS NOTE MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS NOTE OR SUCH SHARES UNDER SAID ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IMPLANT
SCIENCES CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.”
(b) The
Warrant Shares shall bear a legend which shall be in substantially the following
form until such shares are covered by an effective registration statement filed
with the SEC:
“THE
SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS.
THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND
APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
IMPLANT SCIENCES CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED.”
(c) The
Warrant shall bear substantially the following legend:
“THIS
WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE
OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED
IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE
UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES
LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IMPLANT SCIENCES
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.”
6. Covenants
of the Company.
The
Company covenants and agrees with the Purchaser as follows:
6.1 Stop-Orders.
The
Company will advise the Purchaser, promptly after it receives notice of issuance
by the SEC, any state securities commission or any other regulatory authority
of
any stop order or of any order preventing or suspending any offering of any
securities of the Company, or of the suspension of the qualification of the
Common Stock of the Company for offering or sale in any jurisdiction, or the
initiation of any proceeding for any such purpose.
6.2 Listing.
The
Company will maintain the listing or quotation, as applicable, of its Common
Stock on the Principal Market, and will comply in all material respects with
the
Company’s reporting, filing and other obligations under the bylaws or rules of
the National Association of Securities Dealers (“NASD”) and such exchanges, as
applicable.
6.3 Market
Regulations.
The
Company shall notify the SEC, NASD and applicable state authorities, in
accordance with their requirements, of the transactions contemplated by this
Agreement, 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 Securities to the Purchaser and promptly provide copies
thereof to the Purchaser.
6.4 Reporting
Requirements.
The
Company
will deliver, or cause to be delivered to the Purchaser or make available to
the
Purchaser through its timely Exchange Act Filings, each of the following, which
shall be in form and detail acceptable to the Purchaser:
(a) As
soon
as available, and in any event within ninety (90) days after the end of each
fiscal year of the Company, each of the Company’s and each of its Subsidiaries’
audited financial statements with a report of independent certified public
accountants of recognized standing selected by the Company and acceptable to
the
Purchaser (the “Accountants”),
which
annual financial statements shall be without qualification and shall include
each of the Company’s and each of its Subsidiaries’ balance sheet as at the end
of such fiscal year and the related statements of each of the Company’s and each
of its Subsidiaries’ income, retained earnings and cash flows for the fiscal
year then ended, prepared on a consolidating and consolidated basis to include
the Company, each Subsidiary of the Company and each of their respective
affiliates, all in reasonable detail and prepared in accordance with GAAP,
together with (i) if and when available, copies of any management letters
prepared by the Accountants; and (ii) a certificate of the Company’s President,
Chief Executive Officer or Chief Financial Officer stating that such financial
statements have been prepared in accordance with GAAP and whether or not such
officer has knowledge of the occurrence of any Event of Default (as defined
in
the Note) and, if so, stating in reasonable detail the facts with respect
thereto;
(b) As
soon
as available and in any event within forty five (45) days after the end of
each
fiscal quarter of the Company, an unaudited/internal balance sheet and
statements of income, retained earnings and cash flows of the Company and each
of its Subsidiaries as at the end of and for such quarter and for the year
to
date period then ended, prepared on a consolidating and consolidated basis
to
include all the Company, each Subsidiary of the Company and each of their
respective affiliates, in reasonable detail and stating in comparative form
the
figures for the corresponding date and periods in the previous year, all
prepared in accordance with GAAP, subject to year-end adjustments and
accompanied by a certificate of the Company’s President, Chief Executive Officer
or Chief Financial Officer, stating (i) that such financial statements have
been
prepared in accordance with GAAP, subject to year-end audit adjustments, and
(ii) whether or not such officer has knowledge of the occurrence of any Event
of
Default (as defined in the Note) not theretofore reported and remedied and,
if
so, stating in reasonable detail the facts with respect thereto;
(c) The
Company shall timely file with the SEC all reports required to be filed pursuant
to the Exchange Act and refrain from terminating its status as an issuer
required by the Exchange Act to file reports thereunder even if the Exchange
Act
or the rules or regulations thereunder would permit such termination.
;
and
(d) The
Company shall deliver, or cause the applicable Subsidiary of the Company to
deliver, such other information as the Purchaser shall reasonably
request.
6.5 Use
of
Funds.
The
Company shall use the proceeds of the sale of the Note and the Warrant for
general working capital purposes.
6.6 Access
to Facilities.
Each of
the Company and each of its Subsidiaries will permit any representatives
designated by the Purchaser (or any successor of the Purchaser), upon reasonable
notice and during normal business hours, at such person’s expense and
accompanied by a representative of the Company or any Subsidiary (provided
that
no such prior notice shall be required to be given and no such representative
of
the Company or any Subsidiary shall be required to accompany the Purchaser
in
the event the Purchaser believes such access is necessary to preserve or protect
the Collateral (as defined in the Master Security Agreement) or following the
occurrence and during the continuance of an Event of Default (as defined in
the
Note)), to:
(a) visit
and
inspect any of the properties of the Company or any of its
Subsidiaries;
(b) examine
the corporate and financial records of the Company or any of its Subsidiaries
(unless such examination is not permitted by federal, state or local law or
by
contract) and make copies thereof or extracts therefrom; and
(c) discuss
the affairs, finances and accounts of the Company or any of its Subsidiaries
with the directors, officers and independent accountants of the Company or
any
of its Subsidiaries .
Notwithstanding
the foregoing, neither the Company nor any of its Subsidiaries will provide
any
material, non-public information to the Purchaser unless the Purchaser signs
a
confidentiality agreement and otherwise complies with Regulation FD, under
the
federal securities laws.
6.7 Taxes.
Each of
the Company and each of its Subsidiaries will promptly pay and discharge, or
cause to be paid and discharged, when due and payable, all taxes, assessments
and governmental charges or levies imposed upon the income, profits, property
or
business of the Company and its Subsidiaries; provided, however, that any such
tax, assessment, charge or levy need not be paid currently if (i) the validity
thereof shall currently and diligently be contested in good faith by appropriate
proceedings, (ii) such tax, assessment, charge or levy shall have no effect
on
the lien priority of the Purchaser in any property of the Company and (iii)
if
the Company and/or such Subsidiary shall have set aside on its books adequate
reserves with respect thereto in accordance with GAAP; and provided, further,
that the Company and its Subsidiaries will pay all such taxes, assessments,
charges or levies forthwith upon the commencement of proceedings to foreclose
any lien which may have attached as security therefor.
6.8 Insurance.
Each of
the Company and its Subsidiaries will keep its assets which are of an insurable
character insured by financially sound and reputable insurers against loss
or
damage by fire, explosion and other risks customarily insured against by
companies in similar business similarly situated as the Company and its
Subsidiaries; and the Company and its Subsidiaries will maintain, with
financially sound and reputable insurers, insurance against other hazards and
risks and liability to persons and property to the extent and in the manner
which the Company reasonably believes is customary for companies in similar
business similarly situated as the Company and its Subsidiaries and to the
extent available on commercially reasonable terms. The Company, and each of
its
Subsidiaries, will jointly and severally bear the full risk of loss from any
loss of any nature whatsoever with respect to the assets pledged to the
Purchaser as security for their respective obligations hereunder and under
the
Related Agreements. At the Company’s and each of its Subsidiaries’ joint and
several cost and expense in amounts and with carriers reasonably acceptable
to
the Purchaser, each of the Company and each of its Subsidiaries shall (i) keep
all its insurable properties and properties in which it has an interest insured
against the hazards of fire, flood, sprinkler leakage, those hazards covered
by
extended coverage insurance and such other hazards, and for such amounts, as
is
customary in the case of companies engaged in businesses similar to the
Company’s or the respective Subsidiary’s including business interruption
insurance; (ii) maintain a bond in such amounts as is customary in the case
of
companies engaged in businesses similar to the Company’s or the respective
Subsidiary’s insuring against larceny, embezzlement or other criminal
misappropriation of insured’s officers and employees who may either singly or
jointly with others at any time have access to the assets or funds of the
Company either directly or through governmental authority to draw upon such
funds or to direct generally the disposition of such assets; (iii) maintain
public and product liability insurance against claims for personal injury,
death
or property damage suffered by others; (iv) maintain all such worker’s
compensation or similar insurance as may be required under the laws of any
state
or jurisdiction in which the Company or the respective Subsidiary is engaged
in
business; and (v) furnish the Purchaser with (x) copies of all policies and
evidence of the maintenance of such policies at least thirty (30) days before
any expiration date, (y) excepting the Company’s workers’ compensation policy,
endorsements to such policies naming the Purchaser as “co-insured” or
“additional insured” and appropriate loss payable endorsements in form and
substance satisfactory to the Purchaser, naming the Purchaser as loss payee,
and
(z) evidence that as to the Purchaser the insurance coverage shall not be
impaired or invalidated by any act or neglect of the Company or any Subsidiary
and the insurer will provide the Purchaser with at least thirty (30) days notice
prior to cancellation. The Company and each Subsidiary shall instruct the
insurance carriers that in the event of any loss thereunder, the carriers shall
make payment for such loss to the Company and/or the Subsidiary and the
Purchaser jointly. In the event that as of the date of receipt of each loss
recovery upon any such insurance, the Purchaser has not declared an event of
default with respect to this Agreement or any of the Related Agreements, then
the Company and/or such Subsidiary shall be permitted to direct the application
of such loss recovery proceeds toward investment in property, plant and
equipment that would comprise “Collateral” secured by the Purchaser’s security
interest pursuant to the Master Security Agreement or such other security
agreement as shall be required by the Purchaser, with any surplus funds to
be
applied toward payment of the obligations of the Company to the Purchaser.
In
the event that the Purchaser has properly declared an event of default with
respect to this Agreement or any of the Related Agreements, then all loss
recoveries received by the Purchaser upon any such insurance thereafter may
be
applied to the obligations of the Company hereunder and under the Related
Agreements, in such order as the Purchaser may determine. Any surplus (following
satisfaction of all Company obligations to the Purchaser) shall be paid by
the
Purchaser to the Company or applied as may be otherwise required by law. Any
deficiency thereon shall be paid by the Company or the Subsidiary, as
applicable, to the Purchaser, on demand.
6.9 Intellectual
Property.
Each of
the Company and each of its Subsidiaries shall maintain in full force and effect
its existence, rights and franchises and all licenses and other rights to use
Intellectual Property owned or possessed by it and reasonably deemed to be
necessary to the conduct of its business.
6.10 Properties.
Each of
the Company and each of its Subsidiaries will keep its properties in good
repair, working order and condition, reasonable wear and tear excepted, and
from
time to time make all needful and proper repairs, renewals, replacements,
additions and improvements thereto; and each of the Company and each of its
Subsidiaries will at all times comply with each provision of all leases to
which
it is a party or under which it occupies property if the breach of such
provision could, either individually or in the aggregate, reasonably be expected
to have a Material Adverse Effect.
6.11 Confidentiality.
The
Company will not, and will not permit any of its Subsidiaries to, disclose,
and
will not include in any public announcement, the name of the Purchaser, unless
expressly agreed to by the Purchaser or unless and until such disclosure is
required by law or applicable regulation, and then only to the extent of such
requirement. Notwithstanding the foregoing, the Company may disclose the
Purchaser’s identity and the terms of this Agreement to its current and
prospective debt and equity financing sources.
6.12 Required
Approvals.
(I) For
so long as twenty-five percent (25%) of the principal amount of the Note is
outstanding, the Company, without the prior written consent of the Purchaser,
shall not, and shall not permit any of its Subsidiaries to:
(a) (i)
directly or indirectly declare or pay any dividends, other than dividends paid
to the Company or any of its wholly-owned Subsidiaries, (ii) issue any
preferred stock that is manditorily redeemable prior to the one year anniversary
of Maturity Date (as defined in the Note or (iii) redeem any of its preferred
stock or other equity interests;
(b) liquidate,
dissolve or effect a material reorganization (it being understood that in no
event shall the Company dissolve, liquidate or merge with any other person
or
entity (unless, in the case of such a merger, the Company or, in the case of
merger not involving the Company, such Subsidiary, as applicable, is the
surviving entity);
(c) become
subject to (including, without limitation, by way of amendment to or
modification of) any agreement or instrument which by its terms would (under
any
circumstances) restrict the Company’s, right to perform the provisions of this
Agreement, any Related Agreement or any of the agreements contemplated hereby
or
thereby;
(d) materially
alter or change the scope of the business of the Company and its Subsidiaries
taken as a whole; and
(e) (i)
create, incur, assume or suffer to exist any indebtedness (exclusive of trade
debt and debt incurred to finance the purchase of equipment (not in excess of
five percent (5%) of the fair market value of the Company’s and its
Subsidiaries’ assets)) whether secured or unsecured other than (x) the Company’s
obligations owed to the Purchaser, (y) indebtedness set forth on Schedule
6.12(e) attached hereto and made a part hereof and any refinancings or
replacements thereof on terms no less favorable to the Purchaser than the
indebtedness being refinanced or replaced, and (z) any indebtedness incurred
in
connection with the purchase of assets (other than equipment) in the ordinary
course of business, or any refinancings or replacements thereof on terms no
less
favorable to the Purchaser than the indebtedness being refinanced or replaced,
so long as any lien relating thereto shall only encumber the fixed assets so
purchased and no other assets of the Company ; (ii) cancel any indebtedness
owing to it in excess of $50,000 in the aggregate during any 12 month period;
(iii) assume, guarantee, endorse or otherwise become directly or contingently
liable in connection with any obligations of any other person or entity, except
the endorsement of negotiable instruments by the Company or any Subsidiary
thereof for deposit or collection or similar transactions in the ordinary course
of business or guarantees of indebtedness otherwise permitted to be outstanding
pursuant to this clause (e); and
(f) The
Company, without the prior written consent of the Purchaser, shall not, and
shall not permit any of its Subsidiaries to, create or acquire any Subsidiary
after the date hereof unless (i) such Subsidiary is a wholly-owned Subsidiary
of
the Company and (ii) such Subsidiary becomes a party to the Master Security
Agreement, the Stock Pledge Agreement and the Subsidiary Guaranty (either by
executing a counterpart thereof or an assumption or joinder agreement in respect
thereof) and, to the extent required by the Purchaser, satisfies each condition
of this Agreement and the Related Agreements as if such Subsidiary were a
Subsidiary on the Closing Date; provided, however, that this Section 6.12(f)
shall not be applicable to any joint venture in which the Company has less
than
a fifty (50%) percent interest.
6.13 Reissuance
of Securities.
The
Company agrees to reissue certificates representing the Securities without
the
legends set forth in Section 5.8 above at such time as:
(a) the
holder thereof is permitted to dispose of such Securities pursuant to Rule
144(k) under the Securities Act; or
(b) upon
resale subject to an effective registration statement if such Securities are
registered under the Securities Act.
The
Company agrees to cooperate with the Purchaser in connection with all resales
pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions necessary
to
allow such resales provided the Company and its counsel receive reasonably
requested representations from the Purchaser and broker, if any.
6.14 Opinion.
On the
Closing Date, the Company will deliver to the Purchaser an opinion acceptable
to
the Purchaser from the Company’s external legal counsel. The Company will
provide, at the Company’s expense, such other legal opinions in the future as
are deemed reasonably necessary by the Purchaser (and acceptable to the
Purchaser) in connection with the conversion of the Note and exercise of the
Warrant.
6.15 Margin
Stock.The
Company will not permit any of the proceeds of the Note or the Warrant to be
used directly or indirectly to “purchase” or “carry” “margin stock” or to repay
indebtedness incurred to “purchase” or “carry” “margin stock” within the
respective meanings of each of the quoted terms under Regulation U of the Board
of Governors of the Federal Reserve System as now and from time to time
hereafter in effect.
6.16 Authorization
and Reservation of Shares.
The
Company shall at all times have authorized and reserved a sufficient number
of
shares of Common Stock to provide for the exercise of the Warrants.
6.17 Each
of C
Acquisition Corporation and Accurel Systems International Corporation,
subsidiaries of the Company, shall execute and deliver to Purchaser on the
date
hereof a Master Security Agreement and a subsidiary guaranty, each in form
and
substance satisfactory to the Purchaser.
7. Covenants
of the Purchaser.
The
Purchaser covenants and agrees with the Company as follows:
7.1 Confidentiality.
The
Purchaser will not disclose, and will not include in any public announcement,
the name of the Company, unless expressly agreed to by the Company or unless
and
until such disclosure is required by law or applicable regulation, and then
only
to the extent of such requirement.
7.2 Non-Public
Information.
The
Purchaser will not effect any sales in the shares of the Company’s Common Stock
while in possession of material, non-public information regarding the Company
if
such sales would violate applicable securities law.
7.3 Limitation
on Acquisition of Common Stock of the Company.
Notwithstanding anything to the contrary contained in this Agreement, any
Related Agreement or any document, instrument or agreement entered into in
connection with any other transactions between the Purchaser and the Company,
the Purchaser may not acquire stock in the Company (including, without
limitation, pursuant to a contract to purchase, by exercising an option or
warrant, by converting any other security or instrument, by acquiring or
exercising any other right to acquire, shares of stock or other security
convertible into shares of stock in the Company, or otherwise, and such
contracts, options, warrants, conversion or other rights shall not be
enforceable or exercisable) to the extent such stock acquisition would cause
any
interest (including any original issue discount) payable by the Company to
the
Purchaser not to qualify as “portfolio interest” within the meaning of Section
881(c)(2) of the Code, by reason of Section 881(c)(3) of the Code, taking
into account the constructive ownership rules under Section 871(h)(3)(C) of
the
Code (the “Stock Acquisition Limitation”). The Stock Acquisition Limitation
shall automatically become null and void without any notice to the Company
upon
the existence of an Event of Default (as defined in the Note) at a time when
the
average closing price of the Company’s common stock as reported by Bloomberg,
L.P. on the Principal Market for the immediately preceding five trading days
is
greater than or equal to 150% of the Fixed Conversion Price (as defined in
the
any preferred stock issued by the Company to the Holder).
8. Covenants
of the Company and the Purchaser Regarding Indemnification.
8.1 Company
Indemnification.
The
Company agrees to indemnify, hold harmless, reimburse and defend the Purchaser,
each of the Purchaser’s officers, directors, agents, affiliates, control
persons, and principal shareholders, against all claims, costs, expenses,
liabilities, obligations, losses or damages (including reasonable legal fees)
of
any nature, incurred by or imposed upon the Purchaser which result, arise out
of
or are based upon: (i) any misrepresentation by the Company or
any of
its Subsidiaries
or
breach of any warranty by the Company or
any of
its Subsidiaries
in this
Agreement, any other Related Agreement or in any exhibits or schedules attached
hereto or thereto; or (ii) any breach or default in performance by Company
or
any of
its Subsidiaries
of any
covenant or undertaking to be performed by Company or
any of
its Subsidiaries
hereunder, under any other Related Agreement or any other agreement entered
into
by the Company or
any of
its Subsidiaries
and/ and
the Purchaser relating hereto or thereto.
8.2 Purchaser’s
Indemnification.
The
Purchaser agrees to indemnify, hold harmless, reimburse and defend the Company
and each of the Company’s officers, directors, agents, affiliates, control
persons and principal shareholders, at all times against any claims, costs,
expenses, liabilities, obligations, losses or damages (including reasonable
legal fees) of any nature, incurred by or imposed upon the Company which result,
arise out of or are based upon: (i) any misrepresentation by the Purchaser
or
breach of any warranty by the Purchaser in this Agreement or in any exhibits
or
schedules attached hereto or any Related Agreement; or (ii) any breach or
default in performance by the Purchaser of any covenant or undertaking to be
performed by the Purchaser hereunder, or any other agreement entered into by
the
Company and the Purchaser relating hereto.
9. Miscellaneous.
9.1 Severability.
Wherever possible each provision of this Agreement and the Related Agreements
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement or any Related Agreement
shall be prohibited by or invalid or illegal under applicable law such provision
shall be ineffective to the extent of such prohibition or invalidity or
illegality, without invalidating the remainder of such provision or the
remaining provisions thereof which shall not in any way be affected or impaired
thereby.
9.1 Survival.
The
representations, warranties, covenants and agreements made herein shall survive
any investigation made by the Purchaser and the closing of the transactions
contemplated hereby to the extent provided therein. All statements as to factual
matters contained in any certificate or other instrument delivered by or on
behalf of the Company pursuant hereto in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties by
the
Company hereunder solely as of the date of such certificate or
instrument.
All
indemnities set forth herein shall survive the execution, delivery and
termination of this Agreement and the Note and the making and repayment of
the
obligations arising hereunder, under the Note and under the other Related
Agreements.
9.3 Successors.
Except
as otherwise expressly provided herein, the provisions hereof shall inure to
the
benefit of, and be binding upon, the successors, heirs, executors and
administrators of the parties hereto and shall inure to the benefit of and
be
enforceable by each person or entity which shall be a holder of the Securities
from time to time, other than the holders of Common Stock which has been sold
by
the Purchaser pursuant to Rule 144 or an effective registration statement.
The
Purchaser shall not be permitted to assign its rights hereunder or under any
Related Agreement to a competitor of the Company unless an Event of Default
(as
defined in the Note) has occurred and is continuing.
9.4 Entire
Agreement; Maximum Interest.
This
Agreement, the Related Agreements, the exhibits and schedules hereto and thereto
and the other documents delivered pursuant hereto constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and no party shall be liable or bound to any other in any manner by
any
representations, warranties, covenants and agreements except as specifically
set
forth herein and therein. Nothing contained in this Agreement, any Related
Agreement or in any document referred to herein or delivered in connection
herewith shall be deemed to establish or require the payment of a rate of
interest or other charges in excess of the maximum rate permitted by applicable
law. In the event that the rate of interest or dividends required to be paid
or
other charges hereunder exceed the maximum rate permitted by such law, any
payments in excess of such maximum shall be credited against amounts owed by
the
Company to the Purchaser and thus refunded to the Company.
9.5 Amendment
and Waiver. This
Agreement may be amended or modified only upon the written consent of the
Company and the Purchaser. The obligations of the Company and the rights of
the
Purchaser under this Agreement may be waived only with the written consent
of
the Purchaser. The obligations of the Purchaser and the rights of the Company
under this Agreement may be waived only with the written consent of the
Company.
9.6 Delays
or Omissions.
It is
agreed that no delay or omission to exercise any right, power or remedy accruing
to any party, upon any breach, default or noncompliance by another party under
this Agreement or the Related Agreements, shall impair any such right, power
or
remedy, nor shall it be construed to be a waiver of any such breach, default
or
noncompliance, or any acquiescence therein, or of or in any similar breach,
default or noncompliance thereafter occurring. All remedies, either under this
Agreement or the Related Agreements, by law or otherwise afforded to any party,
shall be cumulative and not alternative.
9.7 Notices.
All
notices required or permitted hereunder shall be in writing and shall be deemed
effectively given: upon
personal delivery to the party to be notified; when sent by confirmed facsimile
if sent during normal business hours of the recipient, if not, then on the
next
business day; three (3) business days after having been sent by registered
or
certified mail, return receipt requested, postage prepaid; or one (1) day after
deposit with a nationally recognized overnight courier, specifying next day
delivery, with written verification of receipt.
All
communications shall be sent as follows:
|
If
to the Company, to:
|
IMPLANT
SCIENCES CORPORATION
▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇, #▇
▇▇▇▇▇▇▇▇▇,
▇▇ ▇▇▇▇▇
Attention: Chief
Financial Officer
Facsimile: ▇▇▇-▇▇▇-▇▇▇▇
|
|
with
a copy to:
|
|
|
Ellenoff
▇▇▇▇▇▇▇▇ & Schole
▇▇▇
▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇,
▇▇ ▇▇▇▇▇
Attention:
Attorney ▇▇▇▇▇ ▇▇▇▇▇▇▇▇
Facsimile:
▇▇▇-▇▇▇-▇▇▇▇
|
|
|
If
to the Purchaser, to:
|
Laurus
Master Fund, Ltd.
c/o
M&C Corporate Services Limited
▇.▇.
▇▇▇ ▇▇▇ ▇▇
▇▇▇▇▇▇
▇▇▇▇▇
▇▇▇▇▇▇
▇▇▇▇
South
Church Street
Grand
Cayman, Cayman Islands
Facsimile: ▇▇▇-▇▇▇-▇▇▇▇
|
|
with
a copy to:
|
|
|
▇▇▇▇
▇. ▇▇▇▇▇▇, Esq.
▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇
▇▇▇
▇▇▇▇, ▇▇ ▇▇▇▇▇
Facsimile: ▇▇▇-▇▇▇-▇▇▇▇
|
or
at
such other address as the Company or the Purchaser may designate by written
notice to the other parties hereto given in accordance herewith.
9.8 Attorneys’
Fees.
In the
event that any suit or action is instituted to enforce any provision in this
Agreement or any Related Agreement, the prevailing party in such dispute shall
be entitled to recover from the losing party all fees, costs and expenses of
enforcing any right of such prevailing party under or with respect to this
Agreement and/or such Related Agreement, including, without limitation, such
reasonable fees and expenses of attorneys and accountants, which shall include,
without limitation, all fees, costs and expenses of appeals.
9.9 Titles
and Subtitles.
The
titles of the sections and subsections of this Agreement are for convenience
of
reference only and are not to be considered in construing this
Agreement.
9.10 Facsimile
Signatures; Counterparts.
This
Agreement may be executed by facsimile signatures and in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one agreement.
9.11 Broker’s
Fees.
Except
as set forth on Schedule 11.12 hereof, each party hereto represents and warrants
that no agent, broker, investment banker, person or firm acting on behalf of
or
under the authority of such party hereto is or will be entitled to any broker’s
or finder’s fee or any other commission directly or indirectly in connection
with the transactions contemplated herein. Each party hereto further agrees
to
indemnify each other party for any claims, losses or expenses incurred by such
other party as a result of the representation in this Section 11.13 being
untrue.
9.12 Construction.
Each
party acknowledges that its legal counsel participated in the preparation of
this Agreement and the Related Agreements and, therefore, stipulates that the
rule of construction that ambiguities are to be resolved against the drafting
party shall not be applied in the interpretation of this Agreement or any
Related Agreement to favor any party against the other.
10. Offering
Restrictions.
Except
as previously disclosed in the SEC Reports or in the Exchange Act Filings,
or
stock or stock options granted to employees or directors of the Company (these
exceptions hereinafter referred to as the “Excepted Issuances”), the Company
nor
any of
its Subsidiaries
will
not, prior to the full repayment of the Note (together with all accrued and
unpaid interest and fees related thereto), (x) enter into any equity line of
credit agreement or similar agreement or (y) issue, or enter into any agreement
to issue, any securities with a variable/floating conversion and/or pricing
feature which are or could be (by conversion or registration) free-trading
securities (i.e. common stock subject to a registration statement).
11. Miscellaneous.
11.1 Governing
Law, Jurisdiction and Waiver of Jury Trial.
(a) THIS
AGREEMENT AND THE OTHER RELATED AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE
TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAWS.
(b) THE
COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED
IN
THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION
TO
HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE COMPANY, ON THE ONE HAND,
AND THE PURCHASER, ON THE OTHER HAND, PERTAINING TO THIS AGREEMENT OR ANY OF
THE
RELATED AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT
OR ANY OF THE OTHER RELATED AGREEMENTS; PROVIDED,
THAT
THE PURCHASER AND THE COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS
MAY
HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE
OF
NEW YORK; AND FURTHER PROVIDED,
THAT
NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE THE PURCHASER
FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO
COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL (AS DEFINED IN THE MASTER
SECURITY AGREEMENT) OR ANY OTHER SECURITY FOR THE OBLIGATIONS (AS DEFINED IN
THE
MASTER SECURITY AGREEMENT), OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN
FAVOR OF THE PURCHASER. THE COMPANY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE
TO
SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND THE
COMPANY HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF
PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM
NON CONVENIENS.
THE
COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER
PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH
SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED
MAIL
ADDRESSED TO THE COMPANY AT THE ADDRESS SET FORTH IN SECTION 11.9 AND THAT
SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF THE COMPANY’S
ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER
POSTAGE PREPAID.
THE
PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH
APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS
OF
THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS
TO
TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE,
WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE PURCHASER AND/OR
THE
COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, ANY
OTHER RELATED AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR
THERETO
[THE
REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
IN
WITNESS WHEREOF, the parties hereto have executed the SECURITIES PURCHASE
AGREEMENT as of the date set forth in the first paragraph hereof.
|
COMPANY:
|
PURCHASER:
|
|
IMPLANT
SCIENCES CORPORATION
|
LAURUS
MASTER FUND, LTD.
|
|
By:
/s/ ▇▇▇▇▇ ▇. ▇▇▇▇
|
By:
|
|
Name:
▇▇▇▇▇ ▇. ▇▇▇▇
|
Name:
|
|
Title:
VP and CFO
|
Title:
|
Schedules
4.2 Subsidiaries:
Name/Address Percent
of Ownership
C
Acquisition Corp 100%
dba
Core
Systems
▇▇▇▇
▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇▇,
▇▇ ▇▇▇▇▇
Accurel
Systems International Corp. 100%
▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇▇▇,
▇▇ ▇▇▇▇▇
| 4.3 |
Capitalization:
Voting Rights
|
The
authorized capital stock of the Company, as of the date hereof consists of
55,000,000 shares, of which 50,000,000 are shares of Common Stock, par value
$0.10 per share, 11,800,811 shares of which are issued and outstanding, and
5,000,000 are shares of preferred stock, par value $0.10 per share of which
393,939 shares of preferred stock are issued and outstanding.
Subject
to certain exceptions, investors in a March 2005 private placement have
the
right of first refusal, subject to Laurus Master Fund, Ltd.’s prior right of
first refusal.
The
authorized, issued and outstanding capital stock of each Subsidiary of the
Company is:
|
Name
|
#
Shares Authorized
|
Par
Value
|
Issued
and Outstanding
|
|
C
Acquisition Corp.
|
1,000
|
.001
|
100
|
|
|
|
|
|
|
Accurel
Systems
|
15,000,000
|
none
|
2,000,000
|
|
|
|
|
Other
shares subject to issue:
|
2004
Stock Option Plan
|
|
|
Balance
available to Grant
|
350,000
|
|
Granted
but unexercised
|
650,000
|
|
2000
Stock Option Plan
|
|
|
Balance
available to Grant
|
47,402
|
|
Granted
but unexercised
|
1,266,938
|
|
1998
Stock Option Plan
|
|
|
Balance
available to Grant
|
129,003
|
|
Granted
but unexercised
|
8,000
|
|
Warrants
|
|
|
Balance
Outstanding
|
1,663,828
|
|
AIR's
|
611,765
|
|
2006
Employee Stock Purchase Plan
|
500,000
|
|
1998
Employee Stock Purchase Plan
|
45,519
|
| 4.5 |
Term
Note with Comerica Bank
|
Line
of
Credit with Bridge Bank
Various
capital and operating leases
Series
D
with Laurus Master Fund
| 4.6 |
a)
Manufacturing and Distribution Agreement with Rapiscan Systems (See
legal)
|
| b) |
Dividends
paid to Laurus Master fund
|
Amended
and Restated revolving credit facility with Bridge Bank to be executed January
2007.
New
capital leases at Accurel Systems
See
schedule 4.5
| 4.7 |
Short
term loan to employee with 6/30/07 maturity
date
|
4.8
See
4.5
and 4.6
4.9
See
4.5
and 4.6
Lease
schedules as of 9/30/06
|
|
|
Capital
Lease Payments
|
|
Operating
Lease Payments
|
|
Year
ending June 30:
|
|
|
|
|
|
2007
remaining 9 months
|
|
$
107,000
|
|
$
1,267,000
|
|
2008
|
|
132,000
|
|
1,713,000
|
|
2009
|
|
117,000
|
|
1,454,000
|
|
2010
|
|
106,000
|
|
838,000
|
|
2011
and remaining
|
|
91,000
|
|
150,000
|
|
Total
future minimum lease payments
|
$553,000
|
|
$
5,422,000
|
|
|
Less:
amounts representing interest
|
(138,000)
|
|
|
|
|
Present
value of future minimum lease payments
|
415,000
|
|
|
|
|
Less:
current portion
|
(90,000)
|
|
|
|
|
Capital
lease obligation, net of current portion
|
$325,000
|
|
|
|
| 4.10 |
Intellectual
property royalty agreement with SPEC Med
LLC.
|
| 4.12 |
Litigation
|
On
or
about March 8, 2006, the Company commenced an arbitration under the Rules of
the
American Arbitration Association against Respondents ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ (“▇▇▇▇▇”)
and ▇▇▇▇ Sarkissisian (“▇▇▇▇”), seeking a total of $3,994,000 for
indemnification of various “Losses,” as defined in, and expressly allowed
pursuant to, a Stock Purchase Agreement dated March 9, 2005 (the “Agreement”),
between the Company, as the purchaser, Accurel Systems International Corporation
(“Accurel), and Majid and ▇▇▇▇, as the sellers of 100% of the issued and
outstanding shares of Accurel stock.
More
specifically, there are four claims asserted by the Company against Respondents:
(1) Damages of $3.4 million resulting from misrepresentations concerning the
loss of business from a key Accurel customer; (2) unauthorized withdrawals
in
the amount of approximately $276,000 from Accurel by the Respondents prior
to
the closing; (3) approximately $49,000 of disallowed transaction expenses that
the Respondents improperly received; and (4) undisclosed net liabilities
totaling approximately $269,000.
Respondents
have asserted counterclaims seeking “an aggregate amount in excess of
$1,750,000,” based on the allegedly “late payment” to Respondents of Company
stock and a Secured Promissory Note as part of the consideration for their
sale
of Accurel stock. The Company has filed a detailed denial of all
counterclaims.
The
arbitration is now in the discovery phase, and the hearing is scheduled for
February 2007.
At
this
early stage of the proceedings, particularly before the commencement of
depositions, it is difficult to assess the final outcome of this arbitration.
However, the Company believes that the counterclaims have no merit, and will
vigorously defend itself against such counterclaims.
On
March
23, 2005, we entered into a Development, Distribution and Manufacturing
Agreement (the “Rapiscan Agreement”) with Rapiscan Systems, Inc.
(“Rapiscan”). Under the terms of this agreement, we gave Rapiscan the
exclusive worldwide rights to market our Quantum SnifferTM portable
and benchtop trace detection devices under their private label. We also
agreed to give Rapiscan the exclusive worldwide rights to distribute certain
other new security products which we may develop in the future with their
funding, as well as rights, in some circumstances, to manufacture certain
components of the Quantum SnifferTM portable
and benchtop trace detection devices that they are able to sell.
On
March
24, 2006, the Company brought suit in the United States District Court in the
District of Massachusetts against Rapiscan and its parent, OSI Systems, Inc.
(“OSI”). The Company is requesting rescission of the Rapiscan Agreement, for
lack of performance and other grounds. In the alternative, the Company is
seeking termination of the Rapiscan Agreement due to material breaches of
contract and implied covenant of good faith and fair dealing and for damages
due
to Rapiscan’s breach of contract and the implied covenant of good faith and fair
dealing.
On
March
27, 2006, the Company received notice that Rapiscan filed a complaint against
the Company and its contract manufacturer, Columbia Tech, in the United States
District Court for the Central District of California, regarding the Rapiscan
Agreement. Rapiscan’s complaint against the Company is based upon claims of
breach of contract and breach of warranty and is requesting a decree for
specific performance, declaratory relief and injunctive relief. Rapiscan’s
complaint against Columbia Tech is based upon injunctive relief, declaratory
relief and tortuous interference with contractual relations. On April 12, 2006,
Rapiscan dismissed all claims against Columbia Tech.
As
of
August 18, 2006, as a result of motions made by both parties, the two lawsuits
have been consolidated in the United States District Court for the Central
District of California with the Company as plaintiff. Presently, discovery
is in
process. Rapiscan and OSI have filed a motion to dismiss certain of the
Company’s claims. As of October 30, 2006, the court has ruled that the Company’s
claim of breach of fiduciary duty was dismissed but OSI’s motion to dismiss all
other claims was denied.
Should
the Company be unsuccessful in prosecuting this matter, it may have a material
adverse effect on its business and results of operations. No revenue has been
recorded related to the Rapiscan Agreement.
We
may,
from time to time, be involved in other actual or potential proceedings that
we
consider to be in the normal course of our business. We do not believe that
any
of these proceedings will have a material adverse effect on our
business.
| 4.17 |
a)
All locations use approved toxic chemicals in semiconductor
services
|
b)
Wakefield has radioactive materials, regulated by Commonwealth of
MA