EXHIBIT 10.23
SUBSCRIPTION AGREEMENT
FOR
PATRON SYSTEMS, INC.
Patron Systems, Inc.
000 Xxxxx Xxxxxxxx Xxxxxx
Xxxxx 000
Xxxxxxx, Xxxxxxxx 00000
Ladies and Gentlemen:
1. SUBSCRIPTION. The undersigned (the "PURCHASER"), intending to be
legally bound, subject to the conditions set forth in SECTION 7, hereby
agrees to purchase a junior convertible promissory note bearing
interest at a rate of ten percent (10%) per annum (the "NOTE"), in the
principal amount set forth on the signature page to this Agreement and
will be issued a warrant (the "INVESTOR WARRANT") to purchase one-half
share (the "INVESTOR WARRANT SHARES") of the Company's common stock,
par value $.01 per share (the "COMMON STOCK") at an initial exercise
price of $.60 per share, for each $1.00 of principal amount of the Note
purchased by the Purchaser in the form attached hereto as EXHIBIT A.
The subscription for the Note will be made in accordance with and
subject to the terms and conditions of this Subscription Agreement and
any amendments and/or supplements thereto, the Company's filings with
the Securities and Exchange Commission and the other diligence
materials provided to the Purchaser (collectively "DILIGENCE
MATERIALS").
2. CLOSING. The sale and purchase of the Note shall occur at the offices
of Xxxxxx Xxxxxxxx & Markiles, LLP, 00000 Xxxxxxx Xxxxxxxxx, Xxxxx 000,
Xxxxxx, Xxxxxxxxxx, at a closing (the "CLOSING") on a business day on
or prior to __________, 2005, or on such other date as may be agreed
upon by the Company and the Purchaser. At the Closing, the Company will
deliver to the Purchaser the Note in the form attached hereto as
EXHIBIT A dated the date of the Closing and registered in the
Purchaser's name, and the Purchaser shall deliver to the Company (i) an
executed copy of this Subscription Agreement and (ii) immediately
available funds in the amount of the purchase price for the Note by
wire transfer for the account of the Company to account number
1633216476 at Bank One, Boulder Colorado, ABA No. 000000000. If at the
Closing the Company shall fail to tender the Note to the Purchaser as
provided above in this SECTION 2, or any of the conditions specified in
SECTION 7 shall not have been fulfilled to the Purchaser's
satisfaction, the Purchaser shall, at its election, be relieved of all
further obligations under this Subscription Agreement.
3. [INTENTIONALLY OMITTED.]
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby
acknowledges, represents, warrants, and agrees as follows:
(a) Neither the Note, the securities issued upon any conversion of
the Note, the Extension Warrant (as defined in the Note), the
Incentive Warrant (as defined in the Note), the Penalty
Warrant (as defined in the Note) and the Investor Warrant
(collectively, the "WARRANTS") nor the shares of Common Stock
issuable upon exercise of any such Warrants (collectively, the
"WARRANT SHARES") (collectively, the "SECURITIES") are
registered under the Securities Act of 1933, as amended (the
"SECURITIES ACT"), or any state securities laws. The Purchaser
understands that the offering and sale of the Note and the
Warrants are intended to be exempt from registration under the
Securities Act by virtue of Section 4(2) thereof and the
provisions of Regulation D promulgated thereunder, based, in
part, upon the representations, warranties and agreements of
the Purchaser contained in this Subscription Agreement;
(b) The Purchaser and the Purchaser's attorney, accountant,
purchaser representative and/or tax advisor, if any
(collectively, "ADVISORS"), have received the Diligence
Materials and all other documents requested by the Purchaser
or its Advisors, if any, have carefully reviewed them and
understand the information contained therein, prior to the
execution of this Subscription Agreement;
(c) Neither the Securities and Exchange Commission (the
"COMMISSION") nor any state securities commission has approved
the Note or any of the other Securities, or confirmed the
accuracy or determined the adequacy of the Diligence
Materials. The Diligence Materials have not been reviewed by
any Federal, state or other regulatory authority;
(d) All documents, records, and books pertaining to the investment
in the Note (including, without limitation, the Diligence
Materials) have been made available for inspection by the
Purchaser and its Advisors, if any;
(e) The Purchaser and its Advisors, if any, have had a reasonable
opportunity to ask questions of and receive answers from a
person or persons acting on behalf of the Company concerning
the offering of the Securities and the business, financial
condition, results of operations and prospects of the Company,
and all such questions have been answered by the Company in
writing to the full satisfaction of the Purchaser and its
Advisors, if any;
(f) In evaluating the suitability of an investment in the Company,
the Purchaser has not relied upon any representation or other
information (oral or written) other than as stated in the
Diligence Materials or as contained in documents so furnished
to the Purchaser or its Advisors, if any, by the Company in
writing;
(g) The Purchaser is unaware of, is in no way relying on, and did
not become aware of the offering of the Securities through or
as a result of, any form of general solicitation or general
advertising including, without limitation, any article,
notice, advertisement or other communication published in any
newspaper, magazine or similar media or broadcast over
television, radio or over the Internet, in connection with the
offering and sale of the Securities and is not subscribing for
Notes and did not become aware of the offering of the
Securities through or as a result of any seminar or meeting to
which the Purchaser was invited by, or any solicitation of a
subscription by, a
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person not previously known to the Purchaser in connection
with investments in securities generally;
(h) The Purchaser has taken no action which would give rise to any
claim by any person for brokerage commissions, finders' fees
or the like relating to this Subscription Agreement or the
transactions contemplated hereby;
(i) The Purchaser, either alone or together with its Advisors, if
any, has such knowledge and experience in financial, tax, and
business matters, and, in particular, investments in
securities, so as to enable it to utilize the information made
available to it in connection with the offering of the
Securities to evaluate the merits and risks (including tax
implications) of an investment in the Securities and the
Company and to make an informed investment decision with
respect thereto;
(j) The Purchaser is not relying on the Company, or any of its
respective employees or agents with respect to the legal, tax,
economic and related considerations of an investment in the
Securities, and the Purchaser has relied on the advice of, or
has consulted with, only its own Advisors;
(k) The Purchaser is acquiring the Securities solely for such
Purchaser's own account for investment and not with a view to
resale or distribution thereof, in whole or in part. The
Purchaser has no agreement or arrangement, formal or informal,
with any person to sell or transfer all or any part of the
Securities and the Purchaser has no plans to enter into any
such agreement or arrangement;
(l) The purchase of the Securities represents a high risk
investment and the Purchaser is able to afford an investment
in a speculative venture having the risks and objectives of
the Company. The Purchaser must bear the substantial economic
risks of the investment in the Securities indefinitely because
none of the securities included in the Securities may be sold,
hypothecated or otherwise disposed of unless subsequently
registered under the Securities Act and applicable state
securities laws or an exemption from such registration is
available. Legends will be placed on the Securities to the
effect that they have not been registered under the Securities
Act or applicable state securities laws and appropriate
notations thereof will be made in the Company's stock books.
Stop transfer instructions will be placed with the transfer
agent of the Securities. The Company has agreed that the
Purchaser will have, with respect to the Warrant Shares, the
registration rights described in the Registration Rights
Agreement attached hereto as EXHIBIT B. Notwithstanding such
registration rights, it is not anticipated that there will be
any market for resale of any of the Securities, and such
Securities will not be freely transferable at any time in the
foreseeable future, if ever;
(m) The Purchaser has adequate means of providing for such
Purchaser's current financial needs and foreseeable
contingencies and has no need for liquidity of the investment
in the Securities for an indefinite period of time;
(n) The Purchaser is aware that an investment in the Securities
involves a number of very significant risks and has carefully
read and considered the matters set forth in the Diligence
Materials and, in particular, the matters under any risk
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factor captions in the Diligence Materials, and that any of
such risks may materially adversely affect the Company's
results of operations and future prospects. The Purchaser
specifically acknowledges that the Purchaser is aware that the
Company is not current on its filings under the Securities
Exchange Act and does not have audited financial statements on
which the Purchaser can rely;
(o) The Purchaser is an "accredited investor" as that term is
defined in Regulation D under the Securities Act, and has
truthfully and accurately completed the Accredited Investor
Certification contained herein;
(p) The Purchaser: (i) if a natural person, represents that the
Purchaser has reached the age of 21 and has full power and
authority to execute and deliver this Subscription Agreement
and all other related agreements or certificates and to carry
out the provisions hereof and thereof; (ii) if a corporation,
partnership, or limited liability company or partnership, or
association, joint stock company, trust, unincorporated
organization or other entity, represents that such entity was
not formed for the specific purpose of acquiring the
Securities, such entity is duly organized, validly existing
and in good standing under the laws of the state of its
organization, the consummation of the transactions
contemplated hereby is authorized by, and will not result in a
violation of state law or its charter or other organizational
documents which could have a material adverse effect on the
Purchaser's ability to perform its obligations under this
Subscription Agreement, such entity has full power and
authority to execute and deliver this Subscription Agreement
and all other related agreements or certificates and to carry
out the provisions hereof and thereof and to purchase and hold
the securities constituting the Securities, the execution and
delivery of this Subscription Agreement has been duly
authorized by all necessary action, this Subscription
Agreement has been duly executed and delivered on behalf of
such entity and is a legal, valid and binding obligation of
such entity; or (iii) if executing this Subscription Agreement
in a representative or fiduciary capacity, represents that it
has full power and authority to execute and deliver this
Subscription Agreement in such capacity and on behalf of the
subscribing individual, xxxx, partnership, trust, estate,
corporation, or limited liability company or partnership, or
other entity for whom the Purchaser is executing this
Subscription Agreement, and such individual, partnership,
xxxx, trust, estate, corporation, or limited liability company
or partnership, or other entity has full right and power to
perform pursuant to this Subscription Agreement and make an
investment in the Company, and represents that this
Subscription Agreement constitutes a legal, valid and binding
obligation of such entity. The execution and delivery of this
Subscription Agreement will not violate or be in conflict with
any order, judgment, injunction, agreement or controlling
document to which the Purchaser is a party or by which it is
bound;
(q) The Purchaser and its Advisors, if any, have had the
opportunity to obtain any additional information, to the
extent the Company had such information in their possession or
could acquire it without unreasonable effort or expense,
necessary to verify the accuracy of the information contained
in the Diligence Materials and all documents received or
reviewed in connection with the purchase of the Securities and
have had the opportunity to have representatives of the
Company provide them with such additional information
regarding the terms and conditions of this particular
investment and the financial condition, results of operations,
business and prospects of the Company
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deemed relevant by the Purchaser or its Advisors, if any, and
all such requested information, to the extent the Company had
such information in its possession or could acquire it without
unreasonable effort or expense, has been provided by the
Company in writing to the full satisfaction of the Purchaser
and its Advisors, if any;
(r) The Purchaser represents to the Company that any information
which the undersigned has heretofore furnished or is
furnishing herewith to the Company is complete and accurate
and may be relied upon by the Company in determining the
availability of an exemption from registration under Federal
and state securities laws in connection with the offering of
the Securities. The Purchaser further represents and warrants
that it will notify and supply corrective information to the
Company immediately upon the occurrence of any change therein
occurring prior to the Company's issuance of any of the
Securities;
(s) The Purchaser has significant prior investment experience,
including investment in non-listed and non-registered
securities. The Purchaser is knowledgeable about investment
considerations in public companies and, in particular, public
companies traded Over the Counter in the "pink sheets." The
Purchaser has a sufficient net worth to sustain a loss of its
entire investment in the Company in the event such a loss
should occur. The Purchaser's overall commitment to
investments which are not readily marketable is not excessive
in view of the Purchaser's net worth and financial
circumstances and the purchase of the Securities will not
cause such commitment to become excessive. This investment is
a suitable one for the Purchaser;
(t) The Purchaser is satisfied that it has received adequate
information with respect to all matters which it or its
Advisors, if any, consider material to its decision to make
this investment;
(u) The Purchaser acknowledges that any estimates or
forward-looking statements or projections included in the
Diligence Materials were prepared by the Company in good
faith, but that the attainment of any such projections,
estimates or forward-looking statements cannot be guaranteed,
will not be updated by the Company and should not be relied
upon;
(v) No oral or written representations have been made, or oral or
written information furnished by the Company, to the Purchaser
or its Advisors, if any, in connection with the offering of
the Securities which are in any way inconsistent with the
information contained in the Diligence Materials;
(w) Within five (5) days after receipt of a request from the
Company, the Purchaser will provide such information and
deliver such documents as may reasonably be necessary to
comply with any and all laws and ordinances to which the
Company is subject;
(x) The Purchaser's substantive relationship with the Company or
any broker through which the Purchaser is subscribing for the
Note predates the Company's or such broker's contact with the
Purchaser regarding an investment in the Note;
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(y) THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OR THE SECURITIES LAWS OF CERTAIN STATES
AND ARE BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM
THE REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS. THE
SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER SAID ACT AND SUCH LAWS PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. THE SECURITIES HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE COMMISSION, ANY STATE
SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR
HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED
THE MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE
DILIGENCE MATERIALS. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL;
(z) The Purchaser acknowledges that neither the Note, nor any of
the other Securities, have been recommended by any Federal or
state securities commission or regulatory authority. In making
an investment decision, investors must rely on their own
examination of the Company, including the merits and risks
involved. Furthermore, the foregoing authorities have not
confirmed the accuracy or determined the adequacy of this
Subscription Agreement. Any representation to the contrary is
a criminal offense. The Note and the other Securities are
subject to restrictions on transferability and resale and may
not be transferred or resold except as permitted under the
Securities Act, and the applicable state securities laws,
pursuant to registration or exemption therefrom. Investors
should be aware that they will be required to bear the
financial risks of this investment for an indefinite period of
time;
(aa) (FOR ERISA PLANS ONLY) The fiduciary of the ERISA plan (the
"PLAN") represents that such fiduciary has been informed of
and understands the Company's investment objectives, policies
and strategies, and that the decision to invest "plan assets"
(as such term is defined in ERISA) in the Company is
consistent with the provisions of ERISA that require
diversification of plan assets and impose other fiduciary
responsibilities. The Purchaser or Plan fiduciary (a) is
responsible for the decision to invest in the Company; (b) is
independent of the Company and any of its affiliates; (c) is
qualified to make such investment decision; and (d) in making
such decision, the Purchaser or Plan fiduciary has not relied
on any advice or recommendation of the Company or any of its
affiliates; and
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
acknowledges, represents, warrants, and agrees as follows:
(a) Other than as expressly disclosed in the Diligence Materials,
the Company does not own or control, directly or indirectly,
any interest in any other corporation, association or other
business entity (a "SUBSIDIARY" and collectively, the
"SUBSIDIARIES"). The Company owns, directly or indirectly, all
of the capital stock of each Subsidiary free and clear of any
material lien, charge, security interest, encumbrance, right
of first refusal or other restriction (collectively, "LIENS"),
and all the
6
issued and outstanding shares of capital stock of each
Subsidiary are validly issued and are fully paid,
non-assessable and free of preemptive and similar rights.
(b) Each of the Company and the Subsidiaries is an entity duly
incorporated or otherwise organized, validly existing and in
good standing under the laws of the jurisdiction of its
incorporation or organization (as applicable), with the
requisite corporate power and authority to own and use its
properties and assets and to carry on its business as
currently conducted. Neither the Company nor any Subsidiary is
in violation of any of the provisions of its respective
certificate or articles of incorporation, by-laws or other
organizational or charter documents. Each of the Company and
the Subsidiaries is duly qualified to conduct business and is
in good standing as a foreign corporation or other entity in
each jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification
necessary, except where the failure to be so qualified or in
good standing, as the case may be, would not result in (i) a
material adverse effect on the legality, validity or
enforceability of the Note, any other Securities, this
Subscription Agreement, the Registration Rights Agreement
(collectively the "TRANSACTION DOCUMENTS"), (ii) a material
adverse effect on the results of operations, assets, business
or financial condition of the Company and the Subsidiaries,
taken as a whole, or (iii) a material adverse effect on the
Company's ability to perform in any material respect on a
timely basis its obligations under any Transaction Document
(any of (i), (ii) or (iii), a "MATERIAL ADVERSE EFFECT").
(c) The Company has the requisite corporate power and authority to
enter into and to consummate the transactions contemplated by
each of the Transaction Documents and otherwise to carry out
its obligations thereunder. The execution and delivery of each
of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated thereby
have been duly authorized by all necessary action on the part
of the Company and no further corporate action is required by
the Company in connection therewith. Each Transaction Document
has been (or upon delivery will have been) duly executed by
the Company and, when delivered in accordance with the terms
hereof, will constitute the valid and binding obligation of
the Company enforceable against the Company in accordance with
its terms except as limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of
general application affecting enforcement of creditors' rights
generally.
(d) The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company
of the transactions contemplated thereby, do not and will not
(i) conflict with or violate any provision of the Company's
Certificate of Incorporation or by-laws and any and all
amendments thereto (collectively, the "INTERNAL DOCUMENTS"),
(ii) conflict with, or constitute a default (or an event that
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 (with or without notice, lapse of
time or both) of, any material agreement, credit facility,
debt or other instrument (evidencing a Company or Subsidiary
debt or otherwise), or other understanding to which the
Company or any Subsidiary is a party or by which any property
or asset of the Company or any Subsidiary is bound or
affected, or (iii) result in a violation of any law, rule,
regulation, order, judgment, injunction, decree or other
restriction of any court or governmental authority to which
the Company or a Subsidiary is subject (including
7
federal and state securities laws and regulations), or by
which any property or asset of the Company or a Subsidiary is
bound or affected.
(e) The Company is not required to obtain any consent, waiver,
authorization or order of, give any notice to, or make any
filing or registration with, any court or other federal,
state, local or other governmental authority or other
individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or
subdivision thereof) or other entity of any kind (a "PERSON")
in connection with the execution, delivery and performance by
the Company of the Transaction Documents, other than the
filing with the Commission of the Registration Statement (as
defined in the Registration Rights Agreement) and applicable
Blue Sky filings.
(f) All of the Securities have been duly authorized and, when
issued and paid for in accordance with the Transaction
Documents, will be duly and validly issued, fully paid and
nonassessable, free and clear of all Liens and not subject to
any preemptive rights. The Company has reserved from its duly
authorized capital stock such number of shares of Common Stock
so as to permit the full issuance of the Warrant Shares.
(g) Other than as expressly disclosed in the Diligence Materials
(i) there are no outstanding securities of the Company or any
of its Subsidiaries which contain any preemptive, redemption
or similar provisions, nor is any holder of securities of the
Company or any Subsidiary entitled to preemptive or similar
rights arising out of any agreement or understanding with the
Company or any Subsidiary by virtue of any of the Transaction
Documents, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of
its Subsidiaries is or may become bound to redeem a security
of the Company or any of its Subsidiaries; (ii) the Company
does not have any stock appreciation rights or "phantom stock"
plans or agreements or any similar plan or agreement; and
(iii) there are no outstanding options, warrants, script
rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities, except as a result of
the purchase and sale of the Securities, or rights or
obligations convertible into or exchangeable for, or giving
any Person any right to subscribe for or acquire, any shares
of Common Stock, or contracts, commitments, understandings, or
arrangements by which the Company or any Subsidiary is or may
become bound to issue additional shares of Common Stock, or
securities or rights convertible or exchangeable into shares
of Common Stock.
(h) Except as expressly disclosed in the Diligence Materials (i)
there has been no event, occurrence or development that has
had or that could reasonably be expected to result in a
Material Adverse Effect, (ii) the Company has not incurred any
material liabilities (contingent or otherwise) other than (A)
trade payables and accrued expenses incurred in the ordinary
course of business consistent with past practice and (B)
liabilities not required to be reflected in the Company's
financial statements pursuant to GAAP or required to be
disclosed in filings made with the Commission, (iii) the
Company has not altered its method of accounting or the
identity of its auditors, (iv) the Company has not declared or
made payment or distribution of any dividend or distribution
of cash or other property to its holders of Common Stock or
purchased, redeemed or made any agreements to purchase or
redeem any shares of its capital stock and (v) the Company has
8
not issued any equity securities to any officer, director or
Affiliate, except pursuant to existing Company stock option
plans.
(i) Other than an ongoing investigation by the Securities and
Exchange Commission and pending or threatened litigation
matters as disclosed in the Diligence Materials, there is no
action, suit, inquiry, notice of violation, proceeding or
investigation pending or, to the knowledge of the Company,
currently threatened against or affecting the Company, any
Subsidiary or any of their respective properties before or by
any court, arbitrator, governmental or administrative agency
and/or regulatory authority (federal, state, county, local or
foreign), (collectively, an "ACTION") which does and/or could
(i) adversely affects or challenges the legality, validity or
enforceability of any of the Transaction Documents and/or the
Securities or to consummate the transactions contemplated
hereby or thereby or (ii) could, if there were an unfavorable
decision, have or reasonably be expected to result in, either
individually or in the aggregate, a Material Adverse Effect.
The Commission has not issued any stop order or other order
suspending the effectiveness of any registration statement
filed by the Company or any Subsidiary under the 1934 Act or
the Securities Act. The foregoing includes, without
limitation, actions, pending or threatened (or any basis
therefor known to the Company), involving the prior employment
of any of the Company's employees, their use in connection
with the Company's business of any information or techniques
allegedly proprietary to any of their former employers, or
their obligations under any agreements with prior employers.
The Company is not a party or subject to the provisions of any
order, writ, injunction, judgment, or decree of any court or
government agency or instrumentality.
(j) No material labor dispute exists or, to the knowledge of the
Company, is imminent with respect to any of the employees of
the Company which could reasonably be expected to result in a
Material Adverse Effect.
(k) Other than those certain demand notes issued to Xxx Xxxxx, as
further described in the Diligence Materials, neither the
Company nor any Subsidiary (i) is in default under or in
violation of (and no event has occurred that has not been
waived that, with notice or lapse of time or both, would
result in a default by the Company or any Subsidiary under),
nor has the Company or any Subsidiary received notice of a
claim that it is in default under or that it is in violation
of, any indenture, mortgage, decree, lease, license, loan or
credit agreement or any other agreement or instrument to which
it is a party or by which it or any of its properties is bound
(whether or not such default or violation has been waived),
(ii) is in violation of any order of any court, arbitrator or
governmental body, or (iii) is or has been in violation of any
statute, rule or regulation of any governmental authority,
including without limitation all foreign, federal, state and
local laws applicable to its business, except in the case of
clauses (i), (ii) and (iii) as would not result in a Material
Adverse Effect. Neither the Company nor any of the
Subsidiaries has received any written notice of any violation
of or noncompliance with, any federal, state, local or foreign
laws, ordinances, regulations and orders (including, without
limitation, those relating to environmental protection,
occupational safety and health, federal securities laws, equal
employment opportunity, consumer protection, credit reporting,
"truth-in-lending", and warranties and trade practices)
applicable to its business or to the business of any
Subsidiary, the violation of, or noncompliance with, which
would have a materially adverse effect on either the Company's
business or
9
operations, or that of any Subsidiary, and the Company knows
of no facts or set of circumstances which would give rise to
such a notice. The execution, delivery, and performance of the
Transaction Documents and the consummation of the transactions
contemplated thereby will not result in any such violation or
be in conflict with or constitute, with or without the passage
of time and giving of notice, either a default under any such
provision, instrument, judgment, order, writ, decree or
contract, or an event which results in the creation of any
lien, charge, or encumbrance upon any assets of the Company or
the suspension, revocation, impairment, forfeiture, or
nonrenewal of any material permit, license, authorization, or
approval applicable to the Company, its business or
operations, or any of its assets or properties, except as
would not reasonably be expected to have a Material Adverse
Effect.
(l) The Company and the Subsidiaries possess all licenses,
certificates, authorizations and permits issued by the
appropriate federal, state, local or foreign regulatory
authorities necessary to conduct their respective businesses,
except where the failure to possess such permits would not
have or reasonably be expected to result in a Material Adverse
Effect ("MATERIAL PERMITS"), and believes it can obtain,
without undue burden or expense, any similar authority for the
conduct of its business as planned to be conducted, and
neither the Company nor any Subsidiary has received any notice
of proceedings relating to the revocation or modification of
any Material Permit.
(m) Other than as expressly disclosed in the Diligence Materials,
the Company owns its property and assets free and clear of all
mortgages, liens, loans, pledges, security interests, claims,
equitable interests, charges, and encumbrances, except such
encumbrances and liens which arise in the ordinary course of
business and do not materially impair the Company's ownership
or use of such property or assets. With respect to the
property and assets it leases, the Company is in compliance in
all material respects with such leases and, to its knowledge,
holds a valid leasehold interest free of any liens, claims, or
encumbrances.
(n) The Company and its Subsidiaries own, or possess adequate
rights or licenses to use all trademarks, trade names, service
marks, service xxxx registrations, service names, patents,
patent rights, copyrights, inventions, licenses, approvals,
governmental authorizations, trade secrets and rights
necessary to conduct their respective businesses as now
conducted, the lack of which could reasonably be expected to
have a Material Adverse Effect. The Company and its
Subsidiaries do not have any knowledge of any infringement by
the Company or its Subsidiaries of trademarks, trade name
rights, patents, patent rights, copyrights, inventions,
licenses, service names, service marks, service xxxx
registrations, trade secrets or other similar rights of
others, or of any such development of similar or identical
trade secrets or technical information by others and no claim,
action or proceeding has been made or brought against, or to
the Company's knowledge, has been threatened against, the
Company or its Subsidiaries regarding trademarks, trade name
rights, patents, patent rights, inventions, copyrights,
licenses, service names, service marks, service xxxx
registrations, trade secrets or other infringement, except
where such infringement, claim, action or proceeding would not
reasonably be expected to have either individually or in the
aggregate a Material Adverse Effect. The Company is not aware
that any of its employees, officers, or consultants are
obligated under any contract (including licenses, covenants,
or commitments of any
10
nature) or other agreement, or subject to any judgment,
decree, or order of any court or administrative agency, that
would interfere with the use of such employee's, officer's, or
consultant's commercially reasonable efforts to promote the
interests of the Company or that would conflict with the
Company's business as conducted. Neither the execution nor
delivery of the Transaction Documents, nor the carrying on of
the Company's business by the employees of the Company, as is
presently conducted, nor the conduct of the Company's
business, will, to the Company's knowledge, conflict with or
result in a breach of the terms, conditions, or provisions of,
or constitute a default under, any contract, covenant, or
instrument under which any of such employees, officers or
consultants are now obligated.
(o) The Company has not entered into agreement to pay any
brokerage or finder's fees or commissions to any person
including, but not limited to, any broker, financial advisor
or consultant, finder, placement agent, investment banker,
bank or other Person with respect to the transactions
contemplated by this Agreement, other than introducing brokers
as further described in the Diligence Materials.
(p) Assuming the accuracy of the Purchaser's representations and
warranties set forth in this Subscription Agreement, no
registration under the Securities Act is required for the
offer and sale of the securities by the Company to the
Purchaser as contemplated hereby.
(q) The Company is not, and is not an affiliate of, an "investment
company" within the meaning of the Investment Company Act of
1940, as amended.
(r) Neither the Company, its Subsidiaries, any of their affiliates
nor any person acting on 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 Securities.
(s) Other than as expressly disclosed in the Diligence Materials,
neither the Company, its Subsidiaries, any of their affiliates
nor any person acting on their behalf has, directly or
indirectly, made any offers or sales of any security or
solicited any offers to buy any security, under circumstances
that would require registration of any of the Securities under
the Securities Act or cause the offering of the Securities to
be integrated with prior offerings by the Company for purposes
of the Securities Act or any applicable stockholder approval
provisions, including without limitation, under the rules and
regulations of any exchange or automated quotation system on
which any of the securities of the Company are listed or
designated. None of the Company, its Subsidiaries, their
affiliates and any person acting on their behalf will take any
action or steps referred to in the preceding sentence that
would require registration of any of the Securities under the
Securities Act or cause the offering of the Securities to be
integrated with other offerings.
(t) Except for fiscal years 2003 and 2004 (which returns are being
prepared by the Company's current independent auditors), the
Company and each of its Subsidiaries has made or filed all
federal and state income and all other tax returns, reports
and declarations required by any jurisdiction to which it is
subject, except when
11
the failure to do so would not have a Material Adverse Effect,
and has paid all taxes and other governmental assessments and
charges that are material in amount, shown or determined to be
due on such returns, reports and declarations otherwise due
and payable, except those being contested in good faith and
has set aside on its books reserves in accordance with GAAP
reasonably adequate for the payment of all taxes for periods
subsequent to the periods to which such returns, reports or
declarations apply. There are no unpaid taxes in any material
amount claimed to be due by the taxing authority of any
jurisdiction, and the officers of the Company know of no basis
for any such claim. The Company has not executed a waiver with
respect to the statute of limitations relating to the
assessment or collection of any foreign, federal, statue or
local tax. To the Company's knowledge, none of the Company's
tax returns is presently being audited by any taxing
authority.
(u) Except as expressly disclosed in the Diligence Materials, (i)
the Company is not indebted in excess of $20,000, directly or
indirectly, to any of its employees, officers or directors or
to their respective spouses or children, in any amount
whatsoever other than in connection with accrued but unpaid
salary payments, expenses or advances of expenses incurred in
the ordinary course of business or relocation expenses of
employees, officers and directors, nor is the Company
contemplating such indebtedness as of the date of this
Agreement, (ii) to the Company's knowledge, none of said
employees, officers or directors, or any member of their
immediate families, is directly or indirectly indebted to the
Company (other than in connection with purchases of the
Company's stock) or have any direct or indirect ownership
interest in any firm or corporation with which the Company is
affiliated or with which the Company has a business
relationship or any firm or corporation which competes with
the Company, nor is the Company contemplating such
indebtedness as of the date of this Agreement, except that
employees, officers, directors and/or shareholders of the
Company may own stock in publicly traded companies (not in
excess of 1% of the outstanding capital stock thereof) which
may directly compete with the Company and (iii) to the
Company's knowledge, no employee, shareholder, officer or
director, or any member of their immediate families, is,
directly or indirectly, interested in any material contract
with the Company, nor does any such person own, directly or
indirectly, in whole or in part, any material tangible or
intangible property that the Company uses or contemplates
using in the conduct of its business. The Company is not a
guarantor or indemnitor of any indebtedness of any other
Person.
(v) If the offering of the Securities is conducted in accordance
with the Transaction Documents and the Diligence Materials,
neither the sale of any of the Securities by the Company
hereunder nor its use of the proceeds thereof will violate the
Trading with the Enemy Act, as amended, or any of the foreign
assets control regulations of the United States Treasury
Department (31 CFR, Subtitle B, Chapter V, as amended) or any
enabling legislation or executive order relating thereto.
Without limiting the foregoing, neither the Company nor any of
its Subsidiaries (a) is a person whose property or interests
in property are blocked pursuant to Section 1 of Executive
Order 13224 of September 23, 2001 Blocking Property and
Prohibiting Transactions With Persons Who Commit, Threaten to
Commit, or Support Terrorism (66 Fed. Reg. 49079 (2001)) or
(b) engages in any dealings or transactions, or is otherwise
associated, with any such person.
12
The Company and its Subsidiaries are in compliance with the
anti-money laundering requirements of the USA Patriot Act of
2001 (signed into law October 26, 2001).
7. CONDITIONS PRECEDENT. The Purchaser's obligation to purchase the Note
to be sold to it at the Closing is subject to the fulfillment, prior to
or at the Closing, of the following conditions:
(a) The representations and warranties of the Company in this
Subscription Agreement shall be correct when made and at the
time of the Closing.
(b) The Company shall have performed and complied with all
agreements and conditions contained in this Subscription
Agreement required to be performed or complied with by it
prior to or at the Closing.
(c) The Company shall have delivered to the Purchaser a
certificate certifying as to the resolutions attached thereto
and other corporate proceedings relating to the authorization,
execution and delivery of the Note and the transactions
contemplated by the offering of the Securities and certifying
that the conditions specified herein have been fulfilled.
8. INDEMNIFICATION. The Purchaser hereby expressly and irrevocably agrees
to indemnify and hold harmless the Company, and each of its respective
officers, directors, employees, agents, attorneys, control persons and
affiliates from and against all losses, liabilities, claims, damages,
costs, fees and expenses whatsoever (including, but not limited to, any
and all expenses incurred in investigating, preparing or defending
against any litigation commenced or threatened) based upon or arising
out of any false acknowledgment, representation or warranty, or
misrepresentation, or breach by the Purchaser of any covenant or
agreement made by the Purchaser herein or in any other document
delivered in connection with this Subscription Agreement.
9. IRREVOCABILITY; BINDING EFFECT. Subject to the fulfillment of the
conditions set forth in SECTION 7, the Purchaser hereby acknowledges
and agrees that the subscription hereunder is irrevocable by the
Purchaser, except as required by applicable law, and that this
Subscription Agreement will survive the death or disability of the
Purchaser and will be binding upon and inure to the benefit of the
parties and their heirs, executors, administrators, successors, legal
representatives, and permitted assigns. If the Purchaser is more than
one person, the obligations of the Purchaser hereunder will be joint
and several and the agreements, representations, warranties and
acknowledgments herein will be deemed to be made by and be binding upon
each such person and such person's heirs, executors, administrators,
successors, legal representatives and permitted assigns.
10. MODIFICATION. This Subscription Agreement will not be modified or
waived except by an instrument in writing signed by the party against
whom any such modification or waiver is sought.
11. NOTICES. Any notice or other communication required or permitted to be
given hereunder will be in writing and will be mailed by certified
mail, return receipt
13
requested, or delivered against receipt to the party to whom it is to
be given (a) if to the Company, at the address set forth above or (b)
if to the Purchaser, at the address set forth on the signature page
hereof (or, in either case, to such other address as the party will
have furnished in writing in accordance with the provisions of this
SECTION 11). Any notice or other communication given by certified mail
will be deemed given at the time of certification thereof, except for a
notice changing a party's address which will be deemed given at the
time of receipt thereof.
12. ASSIGNABILITY. This Subscription Agreement and the rights, interests
and obligations hereunder are not transferable or assignable by the
Purchaser and the transfer or assignment of the Notes, the Warrants or
the Warrant Shares will be made only in accordance with all applicable
laws.
13. APPLICABLE LAW. This Subscription Agreement will be governed by and
construed under the laws of the State of New York as applied to
agreements among New York residents entered into and to be performed
entirely within New York. Each of the parties hereto (1) agree that any
legal suit, action or proceeding arising out of or relating to this
Agreement will be instituted exclusively in a federal or state court
located in the County of Xxxx, State of Illinois, (2) waive any
objection to the venue of any such suit, action or proceeding, and (3)
irrevocably consent to the jurisdiction of the federal or state courts
located in the County of Xxxx, State of Illinois in any such suit,
action or proceeding. Each of the parties hereto further agrees to
accept and acknowledge service of any and all process which may be
served in any such suit, action or proceeding in the federal or state
courts located in the County of Xxxx, State of Illinois and agree that
service of process upon it mailed by certified mail to its address will
be deemed in every respect effective service of process upon it, in any
such suit, action or proceeding. THE PARTIES HERETO AGREE TO WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF THIS SUBSCRIPTION AGREEMENT OR ANY
DOCUMENT OR AGREEMENT CONTEMPLATED HEREBY.
14. BLUE SKY QUALIFICATION. The purchase of the Securities under this
Subscription Agreement is expressly conditioned upon the exemption from
qualification of the offer and sale of the Securities from applicable
Federal and state securities laws. The Company will not be required to
qualify this transaction under the securities laws of any jurisdiction
and, should qualification be necessary, the Company will be released
from any and all obligations to maintain its offer, and may rescind any
sale contracted, in the jurisdiction.
15. USE OF PRONOUNS. All pronouns and any variations thereof used herein
will be deemed to refer to the masculine, feminine, neuter, singular or
plural as the identity of the person or persons referred to may
require.
16. CONFIDENTIALITY. The Purchaser acknowledges and agrees that any
information or data the Purchaser has acquired from the Company or its
agents, not otherwise properly in the public domain, was received in
confidence. The Purchaser agrees not to divulge, communicate or
disclose, or use to the detriment of the Company or for the benefit of
any other person or persons, or misuse in any way, any such
14
confidential information of the Company, including any scientific,
technical, trade or business secrets of the Company and any scientific,
technical, trade or business materials that are treated by the Company
as confidential or proprietary, including, but not limited to, ideas,
discoveries, inventions, developments and improvements belonging to the
Company and confidential information obtained by or given to the
Company about or belonging to third parties, PROVIDED that the
Purchaser may deliver or disclose such confidential information to (i)
its directors, trustees, officers, employees, agents, attorneys and
affiliates, (ii) its financial advisors and other professional advisors
who agree to hold confidential such confidential information
substantially in accordance with the terms of this SECTION 16, (iii)
any federal or state regulatory authority having jurisdiction over the
Purchaser, (iv) the National Association of Insurance Commissioners or
any similar organization, or any nationally recognized rating agency
that requires access to information about the Purchaser's investment
portfolio, or (vi) any other Person to which such delivery or
disclosure may be necessary or appropriate (1) to effect compliance
with any law, rule, regulation or order applicable to the Purchaser,
(2) in response to any subpoena or other legal process, or (3) in
connection with any litigation to which the Purchaser is a party.
17. MISCELLANEOUS.
(a) This Subscription Agreement, together with the Notes, the
Warrants and the Registration Rights Agreement, constitute the
entire agreement between the Purchaser and the Company with
respect to the subject matter hereof and supersede all prior
oral or written agreements and understandings, if any,
relating to the subject matter hereof. The terms and
provisions of this Subscription Agreement may be waived, or
consent for the departure therefrom granted, only by a written
document executed by the party entitled to the benefits of
such terms or provisions.
(b) Each of the Purchaser's and the Company's representations and
warranties made in this Subscription Agreement will survive
the execution and delivery hereof and delivery of the Notes
and Investor Warrants for a period of twenty-four (24) months
from the date of issuance.
(c) Each of the parties hereto will pay its own fees and expenses
(including the fees of any attorneys, accountants, appraisers
or others engaged by such party) in connection with this
Subscription Agreement and the transactions contemplated
hereby whether or not the transactions contemplated hereby are
consummated.
(d) This Subscription Agreement may be executed manually or by
facsimile signature in two or more counterparts each of which
will be deemed an original, but all of which will together
constitute one and the same instrument.
(e) Each provision of this Subscription Agreement will be
considered separable and, if for any reason any provision or
provisions hereof are determined to be invalid or contrary to
applicable law, such invalidity or illegality will not impair
the operation of or affect the remaining portions of this
Subscription Agreement.
15
(f) Paragraph titles are for descriptive purposes only and will
not control or alter the meaning of this Subscription
Agreement as set forth in the text.
18. OMNIBUS SIGNATURE PAGE. This Subscription Agreement is intended to be
read and construed in conjunction with the Registration Rights
Agreement. Accordingly, pursuant to the terms and conditions of this
Subscription Agreement and such related agreements it is hereby agreed
that the execution by the Purchaser of this Subscription Agreement, in
the place set forth herein, will constitute agreement to be bound by
the terms and conditions hereof and the terms and conditions of the
Registration Rights Agreement, with the same effect as if each of such
separate, but related agreement, were separately signed.
16
PATRON SYSTEMS, INC.
OMNIBUS SIGNATURE PAGE TO
SUBSCRIPTION AGREEMENT AND REGISTRATION RIGHTS AGREEMENT
.................................................................................
PURCHASER HEREBY ELECTS TO PURCHASE $---------------- AGGREGATE PRINCIPAL AMOUNT
OF NOTES (NOTE: TO BE COMPLETED BY THE PURCHASER).
.................................................................................
Date (NOTE: To be completed by the Purchaser): __________________, 2005
If the Purchaser is an INDIVIDUAL, and if
purchased as JOINT TENANTS, as TENANTS IN COMMON, or as
COMMUNITY PROPERTY:
---------------------------- ------------------------------
PRINT NAME(S) SOCIAL SECURITY NUMBER(S)
--------------------------- ------------------------------
SIGNATURE(S) OF PURCHASER(S) SIGNATURE
---------------------------- ------------------------------
DATE ADDRESS
If the Purchaser is a PARTNERSHIP, CORPORATION, LIMITED
LIABILITY COMPANY or TRUST:
---------------------------- ------------------------------
NAME OF PARTNERSHIP, FEDERAL TAXPAYER
CORPORATION, LIMITED IDENTIFICATION NUMBER
LIABILITY COMPANY OR TRUST
BY:_________________________ ______________________________
NAME: STATE OF ORGANIZATION
TITLE:
---------------------------- ------------------------------
DATE ADDRESS
PATRON SYSTEMS, INC.
By: __________________________
AUTHORIZED OFFICER
17
PATRON SYSTEMS, INC.
ACCREDITED INVESTOR CERTIFICATION
FOR INDIVIDUAL INVESTORS ONLY
(ALL INDIVIDUAL INVESTORS MUST INITIAL WHERE APPROPRIATE.
WHERE THERE ARE JOINT INVESTORS BOTH PARTIES MUST INITIAL):
INITIAL _______ I certify that I have a net worth (including home, furnishings
and automobiles) of at least $1 million either individually or
through aggregating my individual holdings and those in which
I have a joint, community property or other similar shared
ownership interest with my spouse.
INITIAL _______ I certify that I have had an annual gross income for the past
two years of at least $200,000 (or $300,000 jointly with my
spouse) and expect my income (or joint income, as appropriate)
to reach the same level in the current year.
INITIAL _______ I certify that I am a director or executive officer of Patron
Systems, Inc. (the "COMPANY").
FOR NON-INDIVIDUAL INVESTORS
(ALL NON-INDIVIDUAL INVESTORS MUST INITIAL WHERE APPROPRIATE):
INITIAL _______ The undersigned certifies that it is a partnership,
corporation, limited liability company or business trust that
is 100% owned by persons who meet either of the criteria for
Individual Investors, above.
INITIAL _______ The undersigned certifies that it is a partnership,
corporation, limited liability company or business trust that
has total assets of at least $5 million and was not formed for
the purpose of investing in the Company.
INITIAL _______ The undersigned certifies that it is an employee benefit plan
whose investment decision is made by a plan fiduciary (as
defined in ERISA ss.3(21)) that is a bank, savings and loan
association, insurance company or registered investment
adviser.
INITIAL _______ The undersigned certifies that it is an employee benefit plan
whose total assets exceed $5,000,000 as of the date of the
Subscription Agreement.
INITIAL _______ The undersigned certifies that it is a self-directed employee
benefit plan whose investment decisions are made solely by
persons who meet either of the criteria for Individual
Investors, above.
INITIAL _______ The undersigned certifies that it is a U.S. bank, U.S. savings
and loan association or other similar U.S. institution acting
in its individual or fiduciary capacity.
INITIAL _______ The undersigned certifies that it is a broker-dealer
registered pursuant to ss.15 of the Securities Exchange Act of
1934.
INITIAL _______ The undersigned certifies that it is an organization described
in ss.501(c)(3) of the Internal Revenue Code with total assets
exceeding $5,000,000 and not formed for the specific purpose
of investing in the Company.
18
INITIAL _______ The undersigned certifies that it is a trust with total assets
of at least $5,000,000, not formed for the specific purpose of
investing in the Company, and whose purchase is directed by a
person with such knowledge and experience in financial and
business matters that he is capable of evaluating the merits
and risks of the prospective investment.
INITIAL _______ The undersigned certifies that it is a plan established and
maintained by a state or its political subdivisions, or any
agency or instrumentality thereof, for the benefit of its
employees, and which has total assets in excess of $5,000,000.
INITIAL _______ The undersigned certifies that it is an insurance company as
defined in ss.2(a)(13) of the Securities Act of 1933, as
amended, or a registered investment company.
19
PATRON SYSTEMS, INC.
INVESTOR PROFILE
(MUST BE COMPLETED BY INVESTOR)
SECTION A - PERSONAL INVESTOR INFORMATION
Investor Name(s): ______________________________________________________________
Individual executing Profile or Trustee: _______________________________________
Social Security Numbers / Federal I.D. Number:
------------------------------------------------------------------------
Date of Birth: _________________ Marital Status: _________________
Joint Party Date of Birth:_________________
Investment Experience (Years): ___________
Annual Income: _________________
Liquid Net Worth:_____________
Net Worth: ________________
Investment Objectives (CIRCLE ONE OR MORE):
Long Term Capital Appreciation, Short Term Trading,
Businessman's Risk, Income, Safety of Principal, Tax Exempt
Income or other Home Street Address:
Home City, State & Zip Code: ___________________________________________________
Home Phone: ________________________ Home Fax: ________________________
Home Email: _______________________________
Employer: ______________________________________________________________________
Employer Street Address: _______________________________________________________
Employer City, State & Zip Code: _______________________________________________
Bus. Phone: __________________________ Bus. Fax: __________________________
Bus. Email: ________________________________
Type of Business: ______________________________________________________________
20
SECTION B - FORM OF PAYMENT - CHECK OR WIRE TRANSFER
____ Check payable to "PATRON SYSTEMS, INC."
____ Wire funds from my outside account according to the "To subscribe for
Notes in the private offering of PATRON SYSTEMS, Inc." page (page "i")
____ The funds for this investment are rolled over, tax deferred from
____________________ within the allowed 60-day window
Please check if you are a NASD member or affiliate of a NASD member firm: ______
INVESTOR SIGNATURE ______________________ DATE_______________
21
EXHIBIT A
FORM OF JUNIOR CONVERTIBLE PROMISSORY NOTE
22
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
23
