U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: March 31, 2001
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________________ to ________________
000-28745
NATIONAL SCIENTIFIC CORPORATION
(602) 954-1492
(Commission File No.)
(Exact name of small business issuer as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Phoenix, AZ
(Address of Principal Executive Offices)
(Zip Code)
(Issuer’s telephone number)
| Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. |
Yes [X] No [ ]
There were 47,357,498 shares of Common Stock, par value $.01 per share, were outstanding at May 11, 2001.
Transitional Small Business Disclosure Format (Check One): Yes No X
1
NATIONAL SCIENTIFIC CORPORATION
FORM 10-QSB
INDEX
Part I —Financial Information
Item 1. Financial Statements (unaudited)
Item 2. Management’s Discussion and Analysis or Plan of Operation
Part II —Other Information
Item 1 —Legal
Proceedings
Item 2 —Changes in Securities and Use of Proceeds
Item 4 —Submission
of Matters To A Vote of Security Holders
Item 6 —Exhibits and reports on Form 8-K
Signatures
2
PART I —FINANCIAL INFORMATION
NATIONAL SCIENTIFIC CORPORATION
(A Development Stage Company)
The accompanying notes are an integral part of these financial statements.
3
NATIONAL SCIENTIFIC CORPORATION
(A Development Stage Company)
The accompanying notes are an integral part of these financial statements.
4
NATIONAL SCIENTIFIC CORPORATION
(A Development Stage Company)
The accompanying notes are an integral part of these financial statements.
5
NATIONAL SCIENTIFIC CORPORATION
(A Development Stage Company)
Supplementary Disclosure of Cash Flow Information
Summary of Non-Cash Investing and Financing Activities
During the quarter-ended December 31, 1999, the Company issued 1,128,600 shares of restricted common stock to a Director’s family member in
exchange for 580,000 shares of unrestricted common stock.
The accompanying notes are an integral part of these financial statements.
6
NATIONAL SCIENTIFIC CORPORATION
(A Development Stage Company)
The accompanying notes are an integral part of these financial statements.
7
NATIONAL SCIENTIFIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
8
9
10
Item 2. Management’s Discussion and Analysis or Plan of Operation
SAFE HARBOR STATEMENT
The statements contained in this report on Form 10-QSB that are not historical
fact are forward-looking statements (as such term is defined in the Private
Securities Litigation Reform Act of 1995). These statements can be identified
by the use of forward looking terminology such as “believes,” “expects,” “may,”
“will,” “should,” “anticipates,” or “possible,” or the negative thereof or
other written variations thereof or comparable terminology. The
forward-looking statements contained herein are based on current expectations
that involve a number of risks and uncertainties. Although the Company
believes that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could prove inaccurate and, therefore, there
can be no assurance that the results contemplated in forward-looking statements
will be realized. In addition, the business and operations of the Company are
subject to substantial risks, which increase the uncertainty inherent in such
forward-looking statements. In light of the significant uncertainties inherent
in the forward-looking information included herein, such information should not
be regarded as a representation by the Company, or any other person, that the
objectives or plans for the Company will be achieved.
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
We are a development stage company. Revenues generated during the three month
period ended totaled $317,780 and resulted from the export of electronic
products we purchased from a third party. The export of purchased product is
not representative of the principal operations of the Company, which is the
development and commercialization of patented technology. Therefore, the
Company remains in the development stage.
In the next twelve months, we expect to continue research and development
expenditures. The purpose of these expenditures is to bring our existing
products closer to the point of market readiness by producing working
prototypes along with design and process specifications. Additionally, these
expenditures will be used for continued research into RF technologies that are
anticipated to provide wireless products into next generation electronic
devices. There can be no assurance that we will be successful in completing
these tasks in the time period estimated.
Operating expenses for the three months ended March 31, 2001, of approximately
$1.4 million are up from the comparable period ended March 31, 2000, which were
approximately $375,000. This increase was primarily due to the employment of
approximately 10 employees in the Company’s corporate office, which constitute
the management team for the Company. In addition, in September 2000 we opened
our research and development facility in San Jose, California, which now
consists of five additional full time employees.
The employment agreement with Dr. Hashemi became effective as of December 1,
2000. The 1,325,000 shares of restricted common stock previously granted to
him have been exchanged for options to purchase 2,100,000 and 666,700 shares of
common stock at per share exercise prices of $.46 and $.29, respectively.
These exercise prices represented 25% of the fair market value of the common
stock on December 1, 2000 and January 1, 2001, respectively. Compensation
expense of $3,418,260 for these below market option grants was recorded in the
quarter ended December 31, 2000.
Compensation and benefits have increased by approximately $182,000 due to the
addition of the Chief Executive Officer, Chief Operating and Financial
Officers, the Global Director of Marketing, and other corporate support staff.
In addition, research and development costs increased approximately $110,000.
Research and development costs increased due primarily to our opening our San
Jose, California research facility and hiring an additional research scientist.
Liquidity and Capital Resources
For the three months ended March 31, 2001, no additional capital was received.
During the three months ended December 31, 2000, the Company received
$1,291,730 and issued 1,291,730 shares of restricted common stock in connection
with the exercise of its $1.00 common stock warrants. The Company also issued
100,000 shares of restricted common stock valued at $92,000 to consultants and
principals as compensation for services rendered.
11
During the three months ended December 31, 2000, the Company issued 20,000
shares of restricted common stock valued at $24,900 to consultants as
compensation for services.
Warrants to acquire 4,150,000 shares of restricted common stock at per share
exercise price of $1.50 were issued in conjunction with our August 1999 private
placement, at an exercise price of $1.50 per share. Prior to the fiscal
quarter ended March 31, 2001, 120,000 of these warrants were exercised,
yielding proceeds to the Company of $180,000. The warrants expire on December
31, 2001.
Cash used in operations was approximately $1,668,000 for the six months ended
March 31, 2001, compared with approximately $348,000 for the six month period
ended March 31, 2000. The increase in cash used in operations was primarily
attributable to the hiring of additional personnel, including the Chief
Operating and Financial Officers, both of whom were hired in October 2000, the
Global Director of Marketing who was hired on December 1, 2000 and a research
scientist in San Jose, California who was hired on November 1, 2000. In
addition, the Group President and Chief Technology Officer of NSC, as an
independent consultant, was engaged on September 1, 2000 and employed on
December 1, 2000.
We believe that our cash position of approximately $1.9 million as of March 31,
2001, combined with expected proceeds from the exercise of outstanding warrants
to be sufficient to continue operations for the next twelve months. Such future
requirements are based upon management’s best estimates based upon current
conditions and the most recent results of operations. Should the stock price
not support the exercise of options, alternative financing will be pursued.
There can be no assurance that alternative financing will be available.
PART II —OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
On December 31, 1999, we completed a private placement of 4,165,000 restricted
shares of common stock at an average per share price of $.20, yielding proceeds
to the Company of $830,000. Of these totals, $750,000 was raised and 3,765,000
shares were sold during the quarter ended December 31, 1999.
As part of this offering, we also issued warrants to purchase an aggregate of
4,150,000 shares of common stock at a per share price of $1.50. These warrants
are immediately exercisable and expire on December 31, 2001. One hundred
twenty thousand (120,000) of these warrants have been exercised as of the date
of this report. These securities were sold in reliance on the exemption
provided by Sections 4 (2) and 4 (6) of the Securities Act of 1933, as amended,
and Rule 506 of Regulation D promulgated thereunder.
During the three months ended December 31, 2000, approximately 1.3 million
warrants were exercised at $1.00 each. These represent a portion of the
9,650,000 warrants issued in conjunction with our March 15, 1998, primate
placement. The remaining and unexercised warrants issued in this private
offering expired on December 31, 2000. The shares were sold in reliance on the
exemption provided by Sections 4(2) and 4(6) of the Securities Act of 1933 and
Rule 506 of Regulation D.
In addition, during the three months ended December 31, 2000, 100,000
restricted shares of common stock were issued to the Chief Operating Officer,
in accordance with his employment agreement, and 15,000 shares were granted to
a consultant for services rendered
Item 4. Submission of Matters to a Vote of Security Holders
None.
12
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K —No reports on Form 8-K were filed during the
quarter.
SIGNATURES
13
INDEX TO EXHIBITS
[THIS SECTION LEFT BLANK INTENTIONALLY]
14
Table of Contents
Item 1. Financial Statements
Unaudited Condensed Balance Sheet
March 31, 2001
Table of Contents
Unaudited Condensed Statements of Operations
For the Quarters Ended and Six Months Ended March 31, 2001 and 2000, and
For the Period from October 1, 1997 (Inception of Development Stage)
Through March 31, 2001
Three Months
Three Months
Six Months
Six Months
Cumulative
Ended
Ended
Ended
Ended
Development
March 31, 2001
March 31, 2000
March 31, 2001
March 31, 2000
Stage
$
317,780
$
—
$
317,780
$
—
$
317,780
312,000
—
312,000
—
312,000
5,780
—
5,780
—
5,780
181,802
—
311,433
—
385,139
—
115,540
422,008
520,540
3,856,991
327,824
218,259
514,259
296,286
2,399,540
571,682
—
4,014,842
50,320
4,170,118
344,292
41,291
558,981
103,615
1,028,778
1,425,600
375,090
5,821,523
970,761
11,840,566
(1,419,820
)
(375,090
)
(5,815,743
)
(970,761
)
(11,834,786
)
29,163
9,086
71,907
13,160
144,854
—
(2,439
)
—
(5,189
)
(16,316
)
—
—
—
—
(28,555
)
29,163
6,647
71,907
7,971
99,983
(1,390,657
)
(368,443
)
(5,743,836
)
(962,790
)
(11,734,803
)
—
—
—
—
—
$
(1,390,657
)
$
(368,443
)
$
(5,743,836
)
$
(962,790
)
$
(11,734,803
)
$
(.03
)
$
(.01
)
$
(0.12
)
(.02
)
Table of Contents
Unaudited Condensed Statements of Cash Flows
For the Six Months Ended March 31, 2001 and 2000, and
For the Period from October 1, 1997 (Inception of Development Stage)
Through March 31, 2001
Six Months
Six Months
Cumulative
Ended
Ended
Development
March 31, 2001
March 31, 2000
Stage
$
(5,743,836
)
$
(962,790
)
$
(11,734,803
)
7,433
668
17,452
—
—
28,555
952,342
598,289
7,210,257
3,062,500
1,000,000
—
—
30,000
36,379
(4,174
)
(58,606
)
16,969
28,669
20,344
—
(8,530
)
—
(1,668,213
)
(347,868
)
(3,486,801
)
(200,000
)
—
(400,000
)
50,000
—
50,000
(123,600
)
(129,449
)
—
—
4,660
(273,600
)
—
(474,789
)
—
—
(10,000
)
—
(110,000
)
(110,000
)
—
—
(1,819
)
1,291,730
2,419,150
5,532,108
—
—
482,500
1,291,730
2,309,150
5,892,789
(650,083
)
1,961,282
1,931,199
2,584,900
62,185
3,618
$
1,934,817
$
2,023,467
$
1,934,817
Table of Contents
Unaudited Condensed Statements of Cash Flows
For the Six Months Ended March 31, 2001 and 2000, and
For the Period from October 1, 1997 (Inception of Development Stage)
Through March 31, 2001
Cumulative
Development
March 31, 2001
March 31, 2000
Stage
—
13,720
2,597
—
—
—
Table of Contents
Statements of Changes in Shareholders’ Equity (Deficit)
For the Six Months Ended March 31, 2001
Common Stock
Preferred Stock
Additional
Development
Number of
Number of
Paid-In
Accumulated
Stage
Shares
Amount
Shares
Amount
Capital
Deficit
Deficit
Total
47,195,768
471,958
—
—
10,785,588
(2,394,680
)
(5,990,967
)
2,871,899
120,000
1,200
—
—
115,700
—
—
116,900
1,291,730
12,917
—
—
1,278,813
—
—
1,291,730
—
—
—
—
2,062,500
—
—
2,062,500
(1,325,000
)
(13,250
)
—
—
13,250
—
—
—
—
—
—
—
1,835,442
—
—
1,835,442
—
—
—
—
—
—
(5,743,836
)
(5,743,836
)
47,282,498
472,825
—
—
16,091,293
(2,394,680
)
(11,734,803
)
2,434,635
Table of Contents
1.
Basis of Presentation
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles (“GAAP”), pursuant to the
rules and regulations of the Securities and Exchange Commission (the
“SEC”), and are unaudited. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary
to present fairly the financial position, results of operations and
cash flows for the periods presented have been made. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or
omitted pursuant to the rules and regulations of the SEC. The results
of operations for the three and six months ended March 31, 2001, are
not necessarily indicative of the results to be expected for the full
fiscal year.
These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company’s annual
report on Form 10-KSB for the fiscal year ended September 30, 2000.
2.
Revenues
We are a development stage company. Revenues generated during the
three month period ended March 31, 2001 totaled $317,780 and resulted from the export
of electronic products we purchased from a third party. The export of
purchased product is not representative of the principal operations of
the Company, which is the development and commercialization of patented
technology. Therefore, the Company remains in the development stage.
The profit margins are low on these exports, but generate some cash to
allow the Company to continue to grow its corporate infrastructure.
3.
Employment Agreement
The employment agreement with Dr. Hashemi became effective as of
December 1, 2000. The 1,325,000 shares of restricted common stock
previously granted to him have been exchanged for options to purchase
2,100,000 and 666,700 shares of common stock at per share exercise
prices of $.46 and $.29, respectively. These exercise prices
represented 25% of the fair market value of the common stock on
December 1, 2000 and January 1, 2001, respectively. Compensation
expense of $3,418,260 for these below market option grants was recorded
in the quarter ended December 31, 2000.
4.
Issuance of Common Stock
During the three months ended March 31, 2001, there were no issuances of
common stock. During the three months ended December 31, 2000, the
Company received $1,291,730 and issued 1,291,730 shares of restricted
common stock in connection with the exercise of its $1.00 common stock
warrants. The Company also issued 100,000 shares of restricted common
stock valued at $92,000 to consultants and principals as compensation
for services rendered. During the three months ended December 31,
2000, the Company issued 20,000 shares of restricted common stock
valued at $24,900 to consultants as compensation for services.
During the quarter ended March 31, 2000, the Company received $750,000 from
a private placement of common stock. In conjunction with the private
placement, the Company issued 600,000 shares of restricted stock valued
at $72,000 to a principal and a consultant of the Company. The Company
also issued 500,000 shares of restricted common stock to consultants as
compensation for services.
Table of Contents
5.
Stock Options
The Company from time to time issues stock options for the purchase of
common stock to directors, officers, employees and consultants. The
Company adopted a qualified stock option plan for its executives and
employees in December 2000.
The Company adopted Accounting Practices Bulletin (“ABP”) Opinion 25,
“Accounting for Stock Issued to Employees” and related interpretations
in accounting for the plan. Accordingly, for employees and directors
compensation expense is equal to the difference between the exercise
price of the options granted and the fair value of the common stock at
the date of grant. Compensation of $571,682 was recognized for the
quarter ended March 31, 2001. Under the terms of the Company’s stock
options granted to certain directors, officers, employees and
consultants, the Board of Directors, at its sole discretion, determines
at the time of grant when certain options granted shall be fully vested
and exercisable. At March 31, 2001, vested options outstanding were
4,560,001 and non-vested outstanding options were 287,000.
In accordance with APB Opinion 25, the fair value of option grants is
estimated on the date of grant using the Black-Scholes option-pricing
model for pro forma footnote purposes with the following assumptions
used for grants in all years; dividend yield of 0%, risk-free interest
rate of 5%, and expected option life of 5 years. Expected volatility
was assumed to be 100% as of the date of issue.
Weighted
Number
Average
Of
Exercise
Shares
Price
—
—
4,938,668
$
0.87
(91,667
)
$
0.84
—
—
4,847,001
$
0.87
Had the Company fully adopted State of Financial Accounting Standards
No. 123, “Accounting for Stock Based Compensation” the loss from
operations for the second fiscal quarter ended March 31, 2001, would
have been approximately ($8.8) million and basic loss per share would
have been ($0.18).
6.
Loan to Officer
During the quarter ended December 31, 2000, the Company renewed a loan with
a director and officer for $200,000, bearing interest at 10% per annum
and due on December 1, 2001. As of March 31, 2001, accrued interest on
this note totaled $19,275.
7.
Notes Receivable
In January 2001, the Company loaned $100,000 to Phoenix Semiconductor,
Inc., as part of a comprehensive business relationship. This loan
bears interest at the rate of 12% per annum and is due and payable in
two installments of $50,000 plus accrued interest in March and April
2001. At March 31, 2001, $50,000 of this loan plus accrued interest
was outstanding. See Note 9 below.
Also in January 2001, the Company loaned $100,000 to an entity bearing
interest at the rate of 12% per annum. The Chairman of the Board of
the entity is also a director of the Company. The loan is due and
payable in July 2001.
Table of Contents
8.
Net Loss Per Share
Net loss per share is computed by dividing the loss attributable to
common shareholders by the weighted average number of shares
outstanding during the period, which was assumed to be 47,474,131 and
41,898,332 for the six months ended March 31, 2001 and 2000,
respectively. Stock options and warrants are considered anti-dilutive
and were not considered in the calculation.
9.
Subsequent Event
In May 2001, we entered into an agreement with Phoenix Semiconductor,
Inc. (PSI) which grants the Company exclusive distribution rights for
certain Thyristor and Schottky wafer related products produced by PSI.
Under the terms of the agreement, PSI has agreed to manufacture wafers
containing these products for the Company. In return, the Company
intends to market and sell these wafers or packaged products to third
parties. The agreement has a one-year term and is renewable at the
option of the Company for additional one-year terms. We expect
production of wafers to begin in the third fiscal quarter of 2001 and
sales of these products to be recorded in the final quarter of fiscal
2001.
Table of Contents
Table of Contents
Table of Contents
Exhibit 10.1 Employment Agreement- Majid Hashemi, Ph.D. dated December 1,
2000
Exhibit 10.2 Letter Agreement Between National Scientific Corporation and
E4World Regarding Electronic Component Logistic Services (ECLS)
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 15, 2001
DATE
/s/ L.L. Ross
L.L Ross
Chairman of the Board, President & C.E.O.
/s/ Sam H. Carr
Sam H. Carr
Corporate Secretary
Table of Contents
Exhibit 10.1 Employment Agreement- Majid Hashemi, Ph.D., dated December
1, 2000
Exhibit 10.2 Letter Agreement Between National Scientific Corporation and
E4World Regarding Electronic Component Logistic Services (ECLS)
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement (“Agreement”) is entered between National Scientific Corporation and Majid Hashemi, effective December 1, 2000. “NSC,” “Employer,” or “Company” as used in this Agreement means National Scientific Corporation and/or its subsidiaries or affiliate corporations located in the United States or elsewhere. “Employee” or “Hashemi” as used in this Agreement means Majid Hashemi.
For good and valuable consideration, including the covenants set forth herein, the parties agree as follows:
1. Displacement of Existing Contracts : This Agreement supersedes and entirely revokes, abrogates, and displaces any and all existing independent contractor agreements and other agreements between the parties hereto, including, without limitation, that certain Consulting Agreement dated September 1, 2000 between the Company and Employee (the “Consulting Agreement”).
2. Position and Duties of Employee : Effective December 1, 2000, Hashemi is retained by NSC in the position of President. Hashemi will perform such duties as are assigned by the Chief Executive Officer or the Board of Directors consistent with that position, including, without limitation, development on behalf of NSC of quality patentable technology and products, and will devote his full knowledge, skills, attention, and efforts to the business of the Company.
3. Period of Employment : The term of this Agreement (“Period of Employment”) will be one (1) year, commencing the date on which Hashemi is retained, unless sooner terminated in accordance with the provisions set forth herein. This Agreement will be self-renewing for subsequent one-year Periods of Employment unless one of the parties notifies the other in writing at least sixty days before the end of the then-current Period of Employment of his/its intent not to renew.
4. Compensation : For his services under this Agreement, Hashemi will:
1
| a. | receive an annual gross salary of Two Hundred Fifty-Two Thousand Dollars ($252,000.00), payable semi-monthly. Adjustments to annual salary are to be determined by the Board of Directors. Adjustments to annual salary must be in writing. | ||
| b. | be entitled to participate in benefits programs offered employees of NSC in his benefits classification. | ||
| c. | be entitled to four (4) weeks of paid vacation per year. | ||
| d. | be eligible for future cash and stock incentives the Company may, in its sole discretion, decide to offer him. | ||
| 5. | Additional Equity Compensation . | ||
| a. | Contemporaneously with the execution of this Agreement, Employee will surrender to the Company the stock certificate(s) representing the 1,000,000 shares of the Company’s Common Stock issued to Employee pursuant to Section 4.1 of the Consulting Agreement. In addition, Employee will surrender to the Company the stock certificate(s) representing the 250,000 shares of the Company’s Common Stock issued to Employee in two separate, 125,000 share increments, in May and July 2000 respectively, stock certificate(s) issued in March, 2000 representing 50,000 shares of the Company’s Common Stock and stock certificate(s) issued in April, 2000 representing 25,000 shares of the Company’s Common Stock. | ||
| b. | Contemporaneously with the execution of this Agreement, the Company will issue to Employee an option to purchase 2,100,000 shares of the Company’s Common Stock at an exercise price of $.46 per share pursuant to the terms of an option agreement in the form attached hereto as Exhibit A . | ||
| c. | On January 1, 2001, the Company will issue to Employee an option to purchase 666,667 shares of the Company’s Common Stock at an exercise price equal to |
2
| 25% of the closing sales price of the Company’s Common Stock on January 1, 2001. The option shall be evidenced by an option agreement substantially in the form attached hereto as Exhibit B . These options are to be granted in lieu of the restricted stock grants referred to in Section 4.1 of the Consulting Agreement, which originally called for the issuances of 250,000 restricted shares each on February 1, 2001 and April 1, 2000, respectively. |
6. Expenses : NSC will reimburse Hashemi for all reasonable business expenses incurred and documented in compliance with Company policy and procedure.
7. External Covenants and Restrictions : Hashemi certifies that he has notified NSC and provided NSC a copy of any and all restrictive covenants and similar obligations he may have undertaken by reason of a prior employment or other relationship. Hashemi agrees not to undertake, during his employment by NSC, any external obligation that could restrict his ability to perform his duties under this Agreement.
8. Ownership of Work Product : Hashemi acknowledges and agrees that the nature of his services to NSC and its clients/customers may have involved and continue to involve development and/or improvement of technology, systems, processes, procedures, computer-software programs, other programs, and related documentation.
| a. | Hashemi agrees that all new or improved technology, systems, processes, procedures, computer-software programs, other programs, and related documentation that Hashemi has or has had any part in developing or improving will be and remain the sole and exclusive property of NSC and that Hashemi will acquire no right, title, or interest therein. Hashemi further agrees to execute any and all documents necessary for NSC to secure and protect its interest in any such technology, systems, processes, procedures, computer-software programs, other programs, and related documentation, including but not limited to documents related to non-disclosure, patents, licenses, or copyrights, whether of any state, federal, or foreign government. |
3
| b. | Hashemi further acknowledges and expressly agrees that all files, records, lists, books, literature, correspondence, documents, services, products and data of any type whatsoever related to or used in the conduct of the business of NSC, its customers/clients, or prospective customers/clients will remain the property of NSC. Hashemi agrees that, upon termination of his employment for any reason whatsoever, he will surrender and deliver to NSC all such information and materials. | ||
| c. | The parties agree that this section survives the termination of this Agreement. |
9. Confidential Information : Hashemi acknowledges that, in the course of his previous contract(s) with NSC and this employment, he has acquired and will be acquiring, using, and adding to confidential information of a special and unique nature and value. Hashemi acknowledges and understands that NSC is in a highly competitive business and that its success depends in significant part on maintaining a competitive advantage. Hashemi acknowledges and understands that NSC maintains and uses confidential information to gain and maintain such a competitive advantage.
| a. | For the purposes of this Agreement, “confidential information” is that which is not routinely disclosed by the management or Board of Directors of NSC in response to inquiries and is not readily obtainable elsewhere without expenditure of significant time, effort, or expense. “Confidential information” includes but is not limited to information related to the business, operations, assets, systems, plans, products, contracts, procedures, processes, documentation, computer programs, or software products of NSC and/or its customers or clients and any information about the development or improvement of any technology by NSC and/or its customers or clients. Information obtained by Hashemi in the course of his previous work with NSC or employment under this Agreement is confidential information unless it can reasonably be presumed to be in the public domain. | ||
| b. | Hashemi agrees that he will not, during or after his employment, disclose any confidential information to any person(s) without the express written permission of NSC. |
4
| c. | Hashemi acknowledges and agrees that any disclosure of confidential information by him will constitute a material breach of this Agreement and cause for termination of this Agreement and will give rise to such other legal remedies as NSC may elect to pursue. | ||
| d. | The parties agree that this section survives the termination of this Agreement. |
10. Agreement Not to Compete : Hashemi acknowledges that, in addition to confidential information to which he has had access and will have access during the course of his employment, he will be given the opportunity to develop and maintain close personal rapport and good relations on behalf of NSC with other employees of NSC and with existing and future customers and prospective customers of NSC. Hashemi agrees that during the Period of Employment and any extension thereof and for a period of one (1) year after termination of this Agreement, he will not, directly or indirectly, as owner, partner, principal, shareholder, director, officer, agent, or in any other capacity:
| a. | solicit, divert, or accept business from any current or prospective customer or client of NSC with whom Hashemi had contact in his capacity as an employee or contractor of NSC during the one-year period before termination of this Agreement or | ||
| b. | employ or solicit for employment any employee of NSC with whom Hashemi worked during the one-year period before termination of this Agreement. | ||
| c. | For purposes of this Agreement, a “prospective” customer or client is one that, during the one-year period before termination of this Agreement, received a proposal from NSC or whose business was demonstrably solicited by NSC. | ||
| d. | The parties agree that this section survives the termination of this Agreement. |
11. Termination of Employment : This Agreement will terminate as provided in Section 3 unless sooner terminated pursuant to one of the following events.
5
| a. | This Agreement will terminate upon mutual written agreement of NSC and Hashemi, in accordance with the terms of that mutual agreement. | ||
| b. | This Agreement will terminate upon the sale of all or substantially all of the assets or outstanding capital stock of NSC or any other material change in control of the Company. In the event of such termination, NSC will pay Hashemi an amount equivalent to one hundred fifty percent (150%) of his then-current annual gross salary. | ||
| c. | This Agreement will terminate upon the liquidation, dissolution or bankruptcy of NSC. In the event of such termination, however, NSC will pay Hashemi an amount equivalent to twenty-five percent (25%) of his then-current annual gross salary. | ||
| d. | This Agreement will terminate on the date of Hashemi’s death. | ||
| e. | Hashemi may terminate this Agreement without cause upon thirty (30) days written notice to NSC. In the event of such termination, Hashemi will be entitled only to compensation earned on or before the final date of employment. In addition, should Hashemi terminate this Agreement pursuant to this Section 11.e, all unexercised options are deemed void and cannot be exercised. | ||
| f. | NSC may terminate this Agreement without cause upon written notice to Hashemi. In the event of such termination, however, NSC will pay Hashemi a lump sum payment equivalent to one half his then-current annual gross salary. Additionally, in the event of termination of this Agreement pursuant to this Section 11.f or Section 11.g the unexercised portion of the options granted under Sections 5.b and 5.c of this Agreement (collectively, the “Unexercised Options”) shall expire concurrently with the termination of this Agreement, and within ninety (90) days of the termination of this Agreement Hashemi shall surrender to the Company the agreements evidencing the Unexercised Options and the Company shall issue to Hashemi (i) a number of shares of the Company’s Common Stock having a Fair Market Value equal to the product of the number of |
6
| shares of the Company’s Common Stock for which the Unexercised Options granted pursuant to Section 5.b of this Agreement were exercisable at the date of termination of this Agreement multiplied by the difference between (x) the Fair Market Value of the Company’s Common Stock at the date of termination of this Agreement and (y) $0.46 and (ii) a number of shares of the Company’s Common Stock having a Fair Market Value equal to the product of the number of shares of the Company’s Common Stock for which the Unexercised Options granted pursuant to Section 5.c of this Agreement were exercisable at the date of termination of this Agreement multiplied by the difference between (x) the Fair Market Value of the Company’s Common Stock at the date of termination of this Agreement and (y) the exercise price of the Unexercised Option granted pursuant to Section 5.c of this Agreement. If the calculations set forth in the immediately preceding sentence result in a negative number, the Company shall have no obligation to issue shares of the Company’s Common Stock to Hashemi. As used in this Section 11.f, the term “Fair Market Value” of the Company’s Common Stock shall mean (i) if the Company’s Common Stock is listed on a national securities exchange or quoted in an interdealer quotation system, the average closing sales price for the Company’s Common Stock for the thirty (30) trading days immediately preceding the date of termination of this Agreement or (ii) if the Company’s Common Stock is not listed on a national securities exchange or quoted in an interdealer quotation system, the value as determined by the Board of Directors of the Company. | |||
| g. | Notwithstanding any other provision hereof, NSC may terminate this Agreement and Hashemi’s employment for cause upon written notice to Hashemi, specifying the cause for termination. “Cause for termination” is defined as any of the following: neglect of duties, insubordination, failure to comply with lawful instructions, fraud, theft, habitual drunkenness or substance abuse, unethical business conduct, conviction of a felony, any act or failure to act that would constitute a felony if prosecuted pursuant to applicable criminal statutes, any material breach of this Agreement, any willful or repeated violation of material company policy; failure to comply with applicable federal or state statute or |
7
| regulations in trading Company stock. In the event of termination pursuant to this Section 11.g, Hashemi will be entitled only to compensation earned on or before the final date of employment. |
12. Scope and Modification of Agreement : The parties agree that this Agreement contains the entire agreement between the parties concerning Hashemi’s employment by NSC. All previous and contemporaneous statements and representations by either party are of no effect and are expressly superseded and replaced by this Agreement. Neither party has relied on any statement or representation by the other party or any representative of the other party that is not expressly stated in this Agreement. Changes or amendments to this Agreement are of no effect unless in writing signed by both parties.
13. Severability : The provisions herein entitled Position and Duties of Employee, Compensation, Expenses, Termination of Employment, and Prohibition of Assignment are not severable. The ruling of any court or arbitrator of competent jurisdiction that any severable provision is void, voidable, or otherwise unenforceable shall have no effect on the validity and enforceability of any other provision.
14. Standstill : Through the term of this Agreement and for a period of three (3) years following termination of this Agreement, Hashemi agrees that he will not during any calendar quarter sell, transfer, pledge or otherwise dispose of more than the lesser of (i) 250,000 shares of the Company’s Common Stock owned by him or (ii) the maximum number or shares of the Company’s Common Stock owned by him that may be sold, transferred, pledged or otherwise disposed of by him on a legally permissible basis. The parties agree that this section survives the termination of this Agreement.
15. Prohibition of Assignment : This Agreement is personal to Hashemi and neither party can assign his/its performance obligations hereunder to any third party. Notwithstanding that, the rights of the parties under this Agreement inure to the benefit of their respective successors, heirs, and assigns.
16. Choice of Law : This Agreement is to be construed and interpreted in accordance with the laws of Arizona, except as those laws may be preempted by federal law. No action
8
involving this Agreement may be brought except as provided in Sections 19 and 20 below, and no court action challenging the enforceability of Section 19 may be brought except in the United States District Court for the District of Arizona.
17. Waiver : Waiver by either party of any breach under this Agreement shall not operate as a waiver of any subsequent breach of the same or any other provision of this Agreement.
18. Notices : Any notice required under this Agreement shall be sufficient if given in writing and sent by registered mail to the below address of the party to be noticed.
|
National Scientific Corporation
|
Majid Hashemi
|
|
|
4455 E. Camelback Road
|
1363 Corte Bonita
|
|
|
Suite E-160
|
San Jose, California 95102
|
|
|
Phoenix, Arizona 85018
|
19. Arbitration of Claims and Disputes : Except as otherwise expressly provided in this Agreement, any civil claim (except workers’ compensation and unemployment compensation claims) which arises out of or relates in any way to this Agreement, to the parties’ previous contract(s), or to the employment relationship between the parties shall be settled by exclusive, binding, and final arbitration in Phoenix, Arizona, in accordance with the following terms and procedures. This includes but is not limited to claims arising under the common law of contract or tort and claims arising under any federal, state, county, or municipal constitution, charter, statute, rule, or regulation. The parties expressly agree to forego any right to trial by a judge and/or jury in favor of final, binding, and exclusive arbitration.
| a. | The party with a civil claim must notify the other party in writing by registered mail within the times set forth by statute for filing a civil claim of the type asserted of its desire to have the claim resolved by arbitration. | ||
| b. | Upon notice of a timely civil claim, the parties will agree upon an arbitrator or, if unable to agree, will request a list from the American Arbitration Association or some other mutually-agreed-upon provider of arbitrators from which list the parties will alternate strikes until only one name remains. That last remaining |
9
| name will be the arbitrator. If that person is unavailable, the name last struck will be the arbitrator, and so forth until an arbitrator is secured. | |||
| c. | The arbitrator shall have no authority to add to, subtract from, or otherwise modify the terms of this Agreement or to make awards beyond those provided for by the statute or other theory of action under which the claim arises. Both parties must submit for arbitration at this time or permanently forego any and all existing claims against the other party arising from this Agreement, the previous contract(s) between the parties, or the employment relationship between them. | ||
| d. | Any party to the arbitration may be represented by counsel. Each party shall bear his/its own attorney’s fees. The party producing a witness is responsible for paying that witness’ fees and expenses. The arbitrator’s fees and expenses, including required travel and per diem costs, and the cost of any evidence or proof produced at the arbitrator’s direction are apportionable and shall be borne as determined by the arbitrator. All decisions of the arbitrator made in accordance with this policy shall be final and conclusively binding upon the parties. The parties agree that the arbitrator’s award may be entered as a judgment by any court of competent jurisdiction. | ||
| e. | Issues of procedure, arbitrability, appeal, or confirmation of award shall be governed by the Federal Arbitration Act, 9 U.S.C. sections 1-16. | ||
| f. | The parties agree that this section survives the termination of this Agreement. |
20. Right to Injunctive Relief : Notwithstanding the parties’ agreement to arbitrate any and all civil claims that may arise from this Agreement, their previous contract(s), or the employment relationship between them, Hashemi acknowledges and agrees that any breach or threatened breach of Section 8 or Section 9 will cause NSC irreparable harm and entitle NSC to such injunctive relief as may be necessary to prevent such a breach by Hashemi and/or any person acting for or with him. This right to injunctive relief is in addition to and without limitation of any other rights, remedies, or damages available to NSC under this Agreement or at law or in equity. Hashemi shall reimburse NSC its costs and reasonable attorney’s fees incurred
10
in obtaining such injunctive relief. The parties agree that this section survives the termination of this Agreement
21. Damages for Breach : NSC’s liability to Hashemi for wrongful termination of this Agreement or any other breach thereof shall not exceed the amount of actual damages proven and, in any case, shall not exceed the amount of compensation and expenses Hashemi did not receive and would have received had he completed the then-current Period of Employment.
22. Independent Legal Counsel : Each of the parties agrees that he/it has read and understands the terms of this Agreement and that he/it has had ample opportunity to seek the counsel of his/its own attorney before executing this Agreement.
23.
Execution in Counterparts
: This Agreement may be executed in
counterparts with the same effect as if the parties had signed the same
document. The counterparts shall be construed together and shall constitute
one Agreement.
National Scientific Corporation
11
EXHIBIT A
NATIONAL SCIENTIFIC CORPORATION
NONQUALIFIED STOCK OPTION AGREEMENT
This Nonqualified Stock Option Agreement (the “Agreement”) is entered into between NATIONAL SCIENTIFIC CORPORATION, a Texas corporation (the “Company”), and Majid Hashemi (the “Optionee”) as of the 1st day of December, 2000 (the “Date of Grant”). In consideration of the mutual promises and covenants made herein, the parties hereby agree as follows:
1. Grant of Option. Under the terms and conditions of the Company’s Amended and Restated 2000 Stock Compensation Plan (the “Plan”), which is incorporated herein by reference, the Company grants to the Optionee an option (the “Option”) to purchase from the Company all or any part of a total of two million (2,100,000) shares of the Company’s Common Stock, par value $.01 per share, at a price of $.46 per share. All capitalized terms used in this Agreement not otherwise defined herein shall have the meaning set forth in the Plan.
2. Character of Option. The Option is not an “incentive stock option” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”).
3. Term. The Option will expire on the day prior to the tenth anniversary of the Date of Grant or, in the event of the Optionee’s termination of service as an employee of the Company for any reason other than his death, on the date of termination of Optionee’s employment. In the event of Optionee’s death, the term of the Option will expire one year from the date of Optionee’s death.
4. Vesting; Exercisability. The Option is vested and exercisable from and after the Date of Grant and, during the term of the Option. Notwithstanding the foregoing, the Option may only be exercised with respect to 250,000 shares of the Company’s Common Stock during any calendar quarter.
5. Procedure for Exercise. Exercise of the Option or a portion thereof shall be effected by giving the written notice to the Company required by Article 9 of the Plan.
6. Payment of Purchase Price. Payment of the purchase price for any shares purchased pursuant to the Option shall be in accordance with Article 9 of the Plan.
7. Transfer of Options. The Option may not be transferred other than by will or the laws of descent and distribution and may be exercised during the lifetime of an Optionee only by that Optionee or by his legally authorized representative.
8. Acceptance of the Plan. The Option is granted subject to all of the applicable terms and provisions of the Plan, and such terms and provisions are incorporated by reference herein. The Optionee hereby accepts and agrees to be bound by all the terms and conditions of the Plan.
9. Amendment. This Agreement may be amended by an instrument in writing signed by both the Company and the Optionee.
10. Miscellaneous. This Agreement will be construed and enforced in accordance with the laws of the State of Arizona and will be binding upon and inure to the benefit of any successor or assign of the Company and any executor, administrator, trustee, guarantor or other legal representative of the Optionee.
[REMAINDER OF PAGE LEFT BLANK]
2
Executed to be effective as of the date set forth above.
NATIONAL SCIENTIFIC CORPORATION
By: ______________________________
Print: ______________________________
Its: ______________________________
Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under the Plan.
Optionee further agrees to notify the Company upon any change in the residence address indicated below.
____________________________________
Majid Hashemi, Optionee
Residence Address:
____________________________________
____________________________________
____________________________________
Social Security Number:
____________________________________
3
EXHIBIT B
NATIONAL SCIENTIFIC CORPORATION
NONQUALIFIED STOCK OPTION AGREEMENT
This Nonqualified Stock Option Agreement (the “Agreement”) is entered into between NATIONAL SCIENTIFIC CORPORATION, a Texas corporation (the “Company”), and Majid Hashemi (the “Optionee”) as of the 1st day of January, 2001 (the “Date of Grant”). In consideration of the mutual promises and covenants made herein, the parties hereby agree as follows:
1. Grant of Option. Under the terms and conditions of the Company’s Amended and Restated 2000 Stock Compensation Plan (the “Plan”), which is incorporated herein by reference, the Company grants to the Optionee an option (the “Option”) to purchase from the Company all or any part of a total of six hundred sixty six thousand (666,666) shares of the Company’s Common Stock, par value $.01 per share, at a price of $.29 per share. All capitalized terms used in this Agreement not otherwise defined herein shall have the meaning set forth in the Plan.
2. Character of Option. The Option is not an “incentive stock option” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”).
3. Term. The Option will expire on the day prior to the tenth anniversary of the Date of Grant or, in the event of the Optionee’s termination of service as an employee of the Company for any reason other than his death, on the date of termination of Optionee’s employment. In the event of Optionee’s death, the term of the Option will expire one year from the date of Optionee’s death.
4. Vesting; Exercisability. The Option is vested and exercisable from and after the Date of Grant and, during the term of the Option. Notwithstanding the foregoing, the Option may only be exercised with respect to 250,000 shares of the Company’s Common Stock during any calendar quarter.
5. Procedure for Exercise. Exercise of the Option or a portion thereof shall be effected by giving the written notice to the Company required by Article 9 of the Plan.
6. Payment of Purchase Price. Payment of the purchase price for any shares purchased pursuant to the Option shall be in accordance with Article 9 of the Plan.
7. Transfer of Options. The Option may not be transferred other than by will or the laws of descent and distribution and may be exercised during the lifetime of an Optionee only by that Optionee or by his legally authorized representative.
8. Acceptance of the Plan. The Option is granted subject to all of the applicable terms and provisions of the Plan, and such terms and provisions are incorporated by reference herein. The Optionee hereby accepts and agrees to be bound by all the terms and conditions of the Plan.
9. Amendment. This Agreement may be amended by an instrument in writing signed by both the Company and the Optionee.
10. Miscellaneous. This Agreement will be construed and enforced in accordance with the laws of the State of Arizona and will be binding upon and inure to the benefit of any successor or assign of the Company and any executor, administrator, trustee, guarantor or other legal representative of the Optionee.
[REMAINDER OF PAGE LEFT BLANK]
2
Executed to be effective as of the date set forth above.
NATIONAL SCIENTIFIC CORPORATION
By: ______________________________
Print: ______________________________
Its: ______________________________
Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under the Plan.
Optionee further agrees to notify the Company upon any change in the residence address indicated below.
____________________________________
Majid Hashemi, Optionee
Residence Address:
____________________________________
____________________________________
____________________________________
Social Security Number:
____________________________________
17
EXHIBIT 10.2
Letter of Agreement Between National Scientific Corp. & E4World
Regarding Electronic Component Logistics Services
(ECLS)
January 4, 2001
The parties agree on a common language basis as follows;
| 1. | Purpose : To cooperate on the importing and immediate reselling of up to $10M worth of PC/electronic components from a set of Korean Manufacturers (“Manufacturers”, listed below) to a set of U.S. Distributors (“Distributors”, listed below) over the next 12 months, starting January 4, 2001. These transactions will be engineered with no material inventory carrying risk or obsolesce risk for either party, because these transactions will be designed so that no Manufacturer purchase order will be released from NSC before NSC has in-hand non-cancelable PO’s with Net 30 terms or better from Distributors, which E4 shall facilitate and secure for NSC. | ||
| 2. | Start-up : E4 will assist NSC in establish the necessary contractual relationships in the next 30 days with known set of Korean Manufacturers and a known set of U.S. Distributors in order to support this business. E4 will assist NSC in establishing the necessary facilities and contractual relations in L.A. to manage the logistics for these transactions on a fully outsourced and insurance basis, whose performance E4 shall oversee and assure during this course of this agreement. | ||
| 3. | Foreign Inbound Shipment Trigger : NSC will receive from Distributors Non-cancelable PO’s, whose receipt shall be communicated to E4. Then NSC shall issue a Purchase Order to the Manufacturers and shall purchase the product on Net 45 to 90 (depending on parts or manufacturer, although parties will target average terms of better than Net 60) FOB L.A. terms or better from the Manufacturers. NSC shall use its good faith and credit to secure these terms from the Manufacturers. All goods will be delivered to pre-determined locations in LA, where NSC will briefly assume title. The goods will be stored using bonded and insured logistics services secured by E4 and approved by both parties. Manufacturers who desire to ship goods prior to issuance of an NSC Purchase Order may do so on a contingency basis only —NSC will not assume title for such product shipments. | ||
| 4. | U.S. Outbound Shipment Trigger : NSC will from there they will be immediately shipped to appropriate Distributors in the U.S using bonded and insured logistics services secured by E4 and approved by both parties. That NSC shall invoice Distributors for amounts specified in their P.O., and shall collect such payments. | ||
| 5. | Forms of Payment : All forms of payment or remuneration between the parties and the Manufactures and the Distributors shall be made clear in writing to both parties as these payments occur. This shall include but not be limited to payment of coop fees, rebates, market development funds, and any other source of funds in any form that is directly or indirectly linked to the transactions covered in this agreement. Any of these payments shall be referred to as “Special Funds.” All business will be conducted in US dollars. | ||
| 6. | Meaning of Landed Cost : Landed Cost of Product shall be defined to include invoices from Manufacturers for such product, shipping fees, import fees and duties, taxes, storage and full insurance, packaging, handling and all outbound logistics, less any “Special Funds” received by either party for the goods in question. | ||
| 7. | Division of Gross Margins : NSC shall claim the first 1.0 Percentage Points above Landed Cost for its services. NSC will remit to E4 60% of all margins earned between 1 and 10 points, and 80% of all margins earned above 10 points. These amounts will be paid to E4 as “commissions.” NSC will remit these funds to E4 within 10 business days of payment by Distributors. | ||
| 8. | Minimum Volume : E4 shall guaranty to NSC between $2.5M and $10M in Non-Cancelable Distributor Purchase Orders during the term of this agreement. Total gross margin from these revenues is guaranteed to be $250,00. NSC will be given the first $10M in E4 business in this |
| matter. After reaching $10M combined revenue, E4 has the right to conduct its own distribution business or to extend this agreement with NSC. | |||
| 9. | Indemnification : Because of its unique relationships between E4 and the Manufacturers and Distributors in this transaction, E4 agrees to indemnify NSC and its officers and directors against the following items: inventory loss, inventory obsolesce, failure of Manufacturers to deliver on accepted Purchase Orders, illegal acts or Bankruptcy by Manufactures or E4, failure of Distributors to make promised payments in such as fashion that Manufacturer terms are violated. Indemnification shall be limited to working with all parties using all best efforts to complete the transactions as originally designed and documented in the associated Purchase Orders. This shall include but not be limited to buying at Landed Cost any Inventory held for longer than 90 days by NSC, should NSC request such a remedy. This clause does not include clerical error or other error by NSC, for which E4 is not liable. | ||
| 10. | Initial Payment: NSC will pre-pay $100,000 to E4 as advance upon commissions upon execution of this agreement, which shall be treated as a secured loan until earned, at 12% per annum interest and secured by the attached note. E4 shall provide best efforts to help NSC perfect its security interest in this loan. If E4 has failed to generate at least $500,000 in non-cancelable PO’s from Distributors for reasonably available product by March 31, 2001, then the remainder of this advance shall be refunded on that date to NSC along with a cash penalty of $10,000. NSC may also request repayment of this $100,000 at any time if NSC has reason to believe that this agreement has been breached, and E4 will remit such funds to NSC within 30 business days. Each party will be responsible for its own expenses. | ||
| 11. | Converting into Final Agreement : The parties agree to convert this common language agreement into a more fully structured contract within 21 days of the date of this agreement. The more fully structured contract will replace this agreement in its entirety. |
Agreed this date in Phoenix, Arizona,
Proposed Table of Manufacturers and Distributors (subject to change)
Manufacturers
Distributors
(CA), Incomex (Miami)