EXHIBIT 10.1
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this "Agreement") is dated as of
December 15, 2006 among Ecosphere Technologies, Inc., a Delaware corporation
(the "Company"), and each purchaser identified on the signature pages hereto
(each, including its successors and assigns, a "Purchaser" and collectively the
"Purchasers").
WHEREAS, subject to the terms and conditions set forth in this
Agreement and pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act") and Rule 506 promulgated thereunder, the Company desires
to issue and sell to each Purchaser, and each Purchaser, severally and not
jointly, desires to purchase from the Company, securities of the Company as more
fully described in this Agreement.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in
this Agreement, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Company and each Purchaser agree
as follows:
ARTICLE I.
DEFINITIONS
1.1 Definitions. In addition to the terms defined elsewhere in this
Agreement: (a) capitalized terms that are not otherwise defined herein have the
meanings given to such terms in the Debentures (as defined herein), and (b) the
following terms have the meanings indicated in this Section 1.1:
"Accredited Investor Offering" means the offering by the
Company to individual accredited investors of $1,250,000 of securities
either from the transactions contemplated hereby or from the sale of
unregistered common stock at a 10% discount from the Closing Price with
100% warrant coverage with an exercise price of 110% of the Closing
Price, and otherwise substantially similar to the Warrants herein, and
no registration rights.
"Action" shall have the meaning ascribed to such term in
Section 3.1(j).
"Affiliate" means any Person that, directly or indirectly
through one or more intermediaries, controls or is controlled by or is
under common control with a Person, as such terms are used in and
construed under Rule 144 under the Securities Act. With respect to a
Purchaser, any investment fund or managed account that is managed on a
discretionary basis by the same investment manager as such Purchaser
will be deemed to be an Affiliate of such Purchaser.
"Business Day" means any day except Saturday, Sunday, any day
which shall be a federal legal holiday in the United States or any day
on which banking institutions in the State of New York are authorized
or required by law or other governmental action to close.
"Closing" means the closing of the purchase and sale of the
Securities pursuant to Section 2.1.
"Closing Date" means the Trading Day when all of the
Transaction Documents have been executed and delivered by the
applicable parties thereto, and all conditions precedent to (i) the
Purchasers' obligations to pay the Subscription Amount and (ii) the
Company's obligations to deliver the Securities have been satisfied or
waived.
"Closing Price" means on any particular date (a) the last
reported closing bid price per share of Common Stock on such date on
the Trading Market (as reported by Bloomberg L.P. at 4:15 p.m. (New
York City time)), or (b) if there is no such price on such date, then
the closing bid price on the Trading Market on the date nearest
preceding such date (as reported by Bloomberg L.P. at 4:15 p.m. (New
York City time)), or (c) if the Common Stock is not then listed or
quoted on the Trading Market and if prices for the Common Stock are
then reported in the "pink sheets" published by Pink Sheets LLC (or a
similar organization or agency succeeding to its functions of reporting
prices), the most recent bid price per share of the Common Stock so
reported, or (d) if the shares of Common Stock are not then publicly
traded the fair market value of a share of Common Stock as determined
by an appraiser selected in good faith by the Purchasers of a majority
in interest of the Shares then outstanding.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock of the Company, par
value $0.01 per share, and any other class of securities into which
such securities may hereafter be reclassified or changed into.
"Common Stock Equivalents" means any securities of the Company
or the Subsidiaries which would entitle the holder thereof to acquire
at any time Common Stock, including, without limitation, any debt,
preferred stock, rights, options, warrants or other instrument that is
at any time convertible into or exercisable or exchangeable for, or
otherwise entitles the holder thereof to receive, Common Stock.
"Company Counsel" means Xxxxxx Xxxxxx LLP, with offices
located at 0000 Xxxx Xxxxx Xxxxx Xxxxxxxxx, Xxxxx 000, Xxxx Xxxx Xxxxx,
Xxxxxxx 00000.
"Conversion Price" shall have the meaning ascribed to such
term in the Debentures.
"Debentures" means, the Original Issue Discount 9% Senior
Convertible Debentures due, subject to the terms therein, 3 years from
their date of issuance, issued by the Company to the Purchasers
hereunder, in the form of Exhibit A attached hereto.
"Disclosure Schedules" shall have the meaning ascribed to such
term in Section 3.1.
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"Effective Date" means the date that the initial Registration
Statement filed by the Company pursuant to the Registration Rights
Agreement is first declared effective by the Commission.
"Evaluation Date" shall have the meaning ascribed to such term
in Section 3.1(r).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Exempt Issuance" means the issuance of (a) shares of Common
Stock or options to employees, officers or directors of the Company
pursuant to any stock or option plan duly adopted by a majority of the
non-employee members of the Board of Directors of the Company or a
majority of the members of a committee of non-employee directors
established for such purpose, (b) grants of Common Stock or Common
Stock Equivalents to any person who agrees to become an employee of the
Company or any of its Subsidiaries and who is not at the time an
employee, (c) securities upon the exercise or exchange of or conversion
of any Securities issued hereunder and/or other securities exercisable
or exchangeable for or convertible into shares of Common Stock issued
and outstanding on the date of this Agreement, provided that such
securities have not been amended since the date of this Agreement to
increase the number of such securities or to decrease the exercise,
exchange or conversion price of such securities, and (d) securities
issued pursuant to acquisitions or strategic transactions approved by a
majority of the disinterested directors of the Company, provided any
such issuance shall only be to a Person which is, itself or through its
subsidiaries, an operating company in a business synergistic with the
business of the Company and in which the Company receives benefits in
addition to the investment of funds, but shall not include a
transaction in which the Company is issuing securities primarily for
the purpose of raising capital or to an entity whose primary business
is investing in securities.
"FWS" means Xxxxxxx Xxxxxxxxx & Xxxxx LLP with offices
located at 000 Xxxxxxxxx Xxxxxx, Xxxxx 0000, Xxx Xxxx, Xxx Xxxx
00000-0000.
"GAAP" shall have the meaning ascribed to such term in Section
3.1(h).
"Indebtedness" shall have the meaning ascribed to such term in
Section 3.1(aa).
"Intellectual Property Rights" shall have the meaning ascribed
to such term in Section 3.1(o).
"Legend Removal Date" shall have the meaning ascribed to such
term in Section 4.1(c).
"Liens" means a lien, charge, security interest, encumbrance,
right of first refusal, preemptive right or other restriction.
"Material Adverse Effect" shall have the meaning assigned to
such term in Section 3.1(b).
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"Material Permits" shall have the meaning ascribed to such
term in Section 3.1(m).
"Maximum Rate" shall have the meaning ascribed to such term in
Section 5.17.
"Participation Maximum" shall have the meaning ascribed to
such term in Section 4.13.
"Person" means an 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.
"Pre-Notice" shall have the meaning ascribed to such term in
Section 4.13.
"Principal Amount" shall mean, as to each Purchaser, the
amounts set forth below such Purchaser's signature block on the
signature pages hereto and next to the heading "Principal Amount," in
United States dollars, which shall equal such Purchaser's Subscription
Amount multiplied by 1.1904761.
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Purchaser Party" shall have the meaning ascribed to such term
in Section 4.11.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated the date hereof, among the Company and the Purchasers,
in the form of Exhibit B attached hereto.
"Registration Statement" means a registration statement
meeting the requirements set forth in the Registration Rights Agreement
and covering the resale of the Underlying Shares by each Purchaser as
provided for in the Registration Rights Agreement.
"Required Approvals" shall have the meaning ascribed to such
term in Section 3.1(e).
"Required Minimum" means, as of any date, the maximum
aggregate number of shares of Common Stock then issued or potentially
issuable in the future pursuant to the Transaction Documents, including
any Underlying Shares issuable upon exercise or conversion in full of
all Warrants and Debentures (including Underlying Shares issuable as
payment of interest), ignoring any conversion or exercise limits set
forth therein, and assuming that the Conversion Price is at all times
on and after the date of determination 75% of the then Conversion Price
on the Trading Day immediately prior to the date of determination.
"Rule 144" means Rule 144 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time
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to time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same effect as such Rule.
"SEC Reports" shall have the meaning ascribed to such term in
Section 3.1(h).
"Securities" means the Debentures, the Warrants, the Warrant
Shares and the Underlying Shares.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated hereunder.
"Shareholder Lock-up Agreement" means the Lock-Up Agreement,
dated as of November 27, 2006, between the Company and the directors,
officers and 10% shareholders of the Company, in the form of Exhibit E
attached hereto.
"Short Sales" means all "short sales" as defined in Rule 200
of Regulation SHO under the Exchange Act (but shall not be deemed to
include the location and/or reservation of borrowable shares of Common
Stock).
"Subscription Amount" means, as to each Purchaser, the
aggregate amount to be paid for Debentures and Warrants purchased
hereunder as specified below such Purchaser's name on the signature
page of this Agreement and next to the heading "Subscription Amount,"
in United States dollars and in immediately available funds.
"Subsequent Financing" shall have the meaning ascribed to such
term in Section 4.13.
"Subsequent Financing Notice" shall have the meaning ascribed
to such term in Section 4.13.
"Subsidiary" means any subsidiary of the Company as set forth
on Schedule 3.1(a).
"Trading Day" means a day on which the Common Stock is traded
on a Trading Market.
"Trading Market" means the principal market for the Common
Stock which is one of the following exchanges or market on which the
Common Stock is listed or quoted for trading on the date in question:
the American Stock Exchange, the Nasdaq Capital Market, the Nasdaq
Global Market, the Nasdaq Global Select Market, the New York Stock
Exchange or the OTC Bulletin Board.
"Transaction Documents" means this Agreement, the Debentures,
the Warrants, the Registration Rights Agreement and any other documents
or agreements executed in connection with the transactions contemplated
hereunder.
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"Transfer Agent" means Computershare, with a mailing address
of Mail Room, 000 Xxxxxx Xxxxxx, Xxxxxx, XX 00000, and a facsimile
number of (000) 000-0000, and any successor transfer agent of the
Company.
"Underlying Shares" means the shares of Common Stock issued
and issuable upon conversion or redemption of the Debentures and upon
exercise of the Warrants and issued and issuable in lieu of the cash
payment of interest on the Debentures in accordance with the terms of
the Debentures.
"Variable Rate Transaction" shall have the meaning ascribed to
such term in Section 4.14(b).
"VWAP" means, for any date, the price determined by the first
of the following clauses that applies: (a) if the Common Stock is then
listed or quoted on a Trading Market, the daily volume weighted average
price of the Common Stock for the period in question (or the nearest
preceding date) on the Trading Market on which the Common Stock is then
listed or quoted as reported by Bloomberg L.P. (based on a Trading Day
from 9:30 a.m. New York City time to 4:02 p.m. New York City time); (b)
if the Common Stock is not then listed or quoted on a Trading Market
and if prices for the Common Stock are then reported in the "Pink
Sheets" published by Pink Sheets, LLC (or a similar organization or
agency succeeding to its functions of reporting prices), the most
recent bid price per share of the Common Stock so reported; or (d) in
all other cases, the fair market value of a share of Common Stock as
determined by an independent appraiser selected in good faith by the
Purchaser, or its transferee, and reasonably acceptable to the Company,
the fees and expenses of which shall be paid by the Company.
"Warrants" means collectively the Common Stock purchase
warrants delivered to the Purchasers at the Closing in accordance with
Section 2.2(a) hereof, which Warrants shall be exercisable immediately
and have a term of exercise equal to 5 years, in the form of Exhibit C
attached hereto.
"Warrant Shares" means the shares of Common Stock issuable
upon exercise of the Warrants.
ARTICLE II.
PURCHASE AND SALE
2.1 Closing. On the Closing Date, upon the terms and subject to the
conditions set forth herein, substantially concurrent with the execution and
delivery of this Agreement by the parties hereto, the Company agrees to sell,
and each Purchaser, severally and not jointly, agrees to purchase, up to an
aggregate of $5,595,280 in Principal Amount of the Debentures. Each Purchaser
shall deliver to the Company, via wire transfer equal to its Subscription Amount
and the Company shall deliver to each Purchaser its respective Debenture and a
Warrant, as determined pursuant to Section 2.2(a), and the Company and each
Purchaser shall deliver the other items set forth in Section 2.2 deliverable at
the Closing. Upon satisfaction of the conditions set forth in Sections 2.2 and
2.3, the Closing shall occur at the offices of FWS or such other location as the
parties shall mutually agree.
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2.2 Deliveries.
(a) On the Closing Date, the Company shall deliver or cause to be
delivered to each Purchaser the following:
(i) this Agreement duly executed by the Company;
(ii) a legal opinion of Company Counsel, in the form of Exhibit
D attached hereto;
(iii) a Debenture with a principal amount equal to such
Purchaser's Subscription Amount, registered in the name of such
Purchaser;
(iv) a Warrant registered in the name of such Purchaser to
purchase up to a number of shares of Common Stock equal to 75% of
such Purchaser's Subscription Amount divided by $0.369 with an
exercise price equal to $0.4715 subject to adjustment therein;
(v) the Shareholder Lock-up Agreement duly executed by the
Company and each director, officer and 10% shareholder of the
Company; and
(vi) the Registration Rights Agreement duly executed by the
Company.
(b) On the Closing Date, each Purchaser shall deliver or cause to
be delivered to the Company the following:
(i) this Agreement duly executed by such Purchaser;
(ii) such Purchaser's Subscription Amount by wire transfer to
the account as specified in writing by the Company; and
(iii) the Registration Rights Agreement duly executed by such
Purchaser.
2.3 Closing Conditions.
(a) The obligations of the Company hereunder in connection with the
Closing are subject to the following conditions being met:
(i) the accuracy in all material respects when made and on the
Closing Date of the representations and warranties of the
Purchasers contained herein;
(ii) all obligations, covenants and agreements of the
Purchasers required to be performed at or prior to the Closing Date
shall have been performed; and
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(iii) the delivery by the Purchasers of the items set forth in
Section 2.2(b) of this Agreement.
(b) The respective obligations of the Purchasers hereunder in
connection with the Closing are subject to the following conditions
being met:
(i) the accuracy in all material respects when made and on the
Closing Date of the representations and warranties of the Company
contained herein;
(ii) all obligations, covenants and agreements of the Company
required to be performed at or prior to the Closing Date shall have
been performed;
(iii) the delivery by the Company of the items set forth in
Section 2.2(a) of this Agreement
(iv) the Company shall have received an aggregate of $5,000,000
of Subscription Amounts and gross proceeds from the Accredited
Investor Offering;
(v) there shall have been no Material Adverse Effect with
respect to the Company since the date hereof; and
(vi) from the date hereof to the Closing Date, trading in the
Common Stock shall not have been suspended by the Commission or the
Company's Trading Market (except for any suspension of trading of
limited duration agreed to by the Company, which suspension shall
be terminated prior to the Closing), and, at any time prior to the
Closing Date, trading in securities generally as reported by
Bloomberg L.P. shall not have been suspended or limited, or minimum
prices shall not have been established on securities whose trades
are reported by such service, or on any Trading Market, nor shall a
banking moratorium have been declared either by the United States
or New York State authorities nor shall there have occurred any
material outbreak or escalation of hostilities or other national or
international calamity of such magnitude in its effect on, or any
material adverse change in, any financial market which, in each
case, in the reasonable judgment of each Purchaser, makes it
impracticable or inadvisable to purchase the Debentures at the
Closing.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company. Except as set forth
under the corresponding section of the disclosure schedules delivered to the
Purchasers concurrently herewith (the "Disclosure Schedules"), which Disclosure
Schedules shall be deemed a part hereof and to qualify any representation or
warranty otherwise made herein to the extent of such disclosure, the Company
hereby makes the following representations and warranties to each Purchaser:
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(a) Subsidiaries. All of the direct and indirect Subsidiaries of
the Company are set forth on Schedule 3.1(a). The Company owns,
directly or indirectly, all of the capital stock or other equity
interests of each Subsidiary free and clear of any Liens, and all of
the 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 to subscribe for or purchase securities.
If the Company has no subsidiaries, all other references to the
Subsidiaries or any of them in the Transaction Documents shall be
disregarded.
(b) Organization and Qualification. The Company and each of 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 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 or default of any of the
provisions of its respective certificate or articles of incorporation,
bylaws 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,
could not have or reasonably be expected to result in (i) a material
adverse effect on the legality, validity or enforceability of any
Transaction Document, (ii) a material adverse effect on the results of
operations, assets, business, prospects or condition (financial or
otherwise) 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") and no Proceeding has been instituted in any such jurisdiction
revoking, limiting or curtailing or seeking to revoke, limit or curtail
such power and authority or qualification.
(c) Authorization; Enforcement. 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 hereunder and thereunder. The
execution and delivery of each of the Transaction Documents by the
Company and the consummation by it of the transactions contemplated
hereby and thereby have been duly authorized by all necessary action on
the part of the Company and no further action is required by the
Company, its board of directors or its stockholders in connection
therewith other than in connection with the Required Approvals. 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 and thereof, will constitute the valid and binding
obligation of the Company enforceable against the Company in accordance
with its terms except (i) as limited by general equitable principles
and applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors'
rights generally, (ii) as limited by laws relating to the availability
of specific performance, injunctive relief or other equitable remedies
and (iii) insofar as indemnification and contribution provisions may be
limited by applicable law.
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(d) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the
Company of the other transactions contemplated hereby and thereby do
not and will not: (i) conflict with or violate any provision of the
Company's or any Subsidiary's certificate or articles of incorporation,
bylaws or other organizational or charter documents, or (ii) conflict
with, or constitute a default (or an event that with notice or lapse of
time or both would become a default) under, result in the creation of
any Lien upon any of the properties or assets of the Company or any
Subsidiary, or give to others any rights of termination, amendment,
acceleration or cancellation (with or without notice, lapse of time or
both) of, any 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) subject to the Required Approvals, to the
knowledge of the Company and any Subsidiary, conflict with or 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 federal and
state securities laws and regulations), or by which any property or
asset of the Company or a Subsidiary is bound or affected; except in
the case of each of clauses (ii) and (iii), such as could not have or
reasonably be expected to result in a Material Adverse Effect.
(e) Filings, Consents and Approvals. 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 Person
in connection with the execution, delivery and performance by the
Company of the Transaction Documents, other than (i) filings required
pursuant to Section 4.6, (ii) the filing with the Commission of the
Registration Statement, (iii) to the extent applicable, the notice
and/or application(s) to each applicable Trading Market for the
issuance and sale of the Securities and the listing of the Underlying
Shares for trading thereon in the time and manner required thereby and
(iv) the filing of Form D with the Commission and such filings as are
required to be made under applicable state securities laws
(collectively, the "Required Approvals").
(f) Issuance of the Securities. The Securities are duly authorized
and, when issued and paid for in accordance with the applicable
Transaction Documents, will be duly and validly issued, fully paid and
nonassessable, free and clear of all Liens imposed by the Company other
than restrictions on transfer provided for in the Transaction
Documents. The Underlying Shares, when issued in accordance with the
terms of the Transaction Documents, will be validly issued, fully paid
and nonassessable, free and clear of all Liens imposed by the Company
subject to each holder then being an accredited investor. The Company
has reserved from its duly authorized capital stock a number of shares
of Common Stock for issuance of the Underlying Shares at least equal to
the Required Minimum on the date hereof.
(g) Capitalization. The capitalization of the Company is as set
forth on Schedule 3.1(g). Except as disclosed on Schedule 3.1(g), the
Company has not issued any capital stock since its most recently filed
periodic report under the Exchange Act, other than pursuant to the
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exercise of employee stock options under the Company's stock option
plans, the issuance of shares of Common Stock to directors pursuant to
the Company's 2006 Equity Incentive Plan and pursuant to the conversion
or exercise of Common Stock Equivalents outstanding as of the date of
the most recently filed periodic report under the Exchange Act. No
Person has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents. Except as a result of the
purchase and sale of the Securities or except as disclosed on Schedule
3.1(g), there are no outstanding options, warrants, script rights to
subscribe to, calls or commitments of any character whatsoever relating
to, or securities, rights or obligations convertible into or
exercisable 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 Common Stock Equivalents. The issuance and sale of the
Securities will not obligate the Company to issue shares of Common
Stock or other securities to any Person (other than the Purchasers) and
will not result in a right of any holder of Company securities to
adjust the exercise, conversion, exchange or reset price under any of
such securities. All of the outstanding shares of capital stock of the
Company are validly issued, fully paid and nonassessable, have been
issued in compliance with all federal and state securities laws, and
none of such outstanding shares was issued in violation of any
preemptive rights or similar rights to subscribe for or purchase
securities. No further approval or authorization of any stockholder,
the Board of Directors of the Company or others is required for the
issuance and sale of the Securities. There are no stockholders
agreements, voting agreements or other similar agreements with respect
to the Company's capital stock to which the Company is a party or, to
the knowledge of the Company, between or among any of the Company's
stockholders.
(h) SEC Reports; Financial Statements. Except as disclosed on
Schedule 3.1(h), the Company has filed all reports, schedules, forms,
statements and other documents required to be filed by the Company
under the Securities Act and the Exchange Act, including pursuant to
Section 13(a) or 15(d) thereof, for the two years preceding the date
hereof (or such shorter period as the Company was required by law or
regulation to file such material) (the foregoing materials, including
the exhibits thereto and documents incorporated by reference therein,
being collectively referred to herein as the "SEC Reports") on a timely
basis or has received a valid extension of such time of filing and has
filed any such SEC Reports prior to the expiration of any such
extension. As of their respective dates, the SEC Reports complied in
all material respects with the requirements of the Securities Act and
the Exchange Act, as applicable, and none of the SEC Reports, when
filed, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. The financial statements of
the Company included in the SEC Reports complied in all material
respects with applicable accounting requirements and the rules and
regulations of the Commission with respect thereto as in effect at the
time of filing. Such financial statements have been prepared in
accordance with United States generally accepted accounting principles
applied on a consistent basis during the periods involved ("GAAP"),
except as may be otherwise specified in such financial statements or
the notes thereto and except that unaudited financial statements may
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not contain all footnotes required by GAAP, and fairly present in all
material respects the financial position of the Company and its
consolidated Subsidiaries as of and for the dates thereof and the
results of operations and cash flows for the periods then ended,
subject, in the case of unaudited statements, to normal, immaterial,
year-end audit adjustments.
(i) Material Changes. Since the date of the latest audited
financial statements included within the SEC Reports, except as
specifically disclosed in a subsequent SEC Report filed prior to the
date hereof or on Schedule 3.1(i), (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 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 disclosed in filings made with the Commission, (iii) the Company has
not altered its method of accounting, (iv) the Company has not declared
or made any dividend or distribution of cash or other property to its
stockholders or purchased, redeemed or made any agreements to purchase
or redeem any shares of its capital stock and (v) the Company has not
issued any equity securities to any officer, director or Affiliate,
except pursuant to its 2006 Equity Incentive Plan, its 2006 Management
Compensation Adjustment Plan and its 2003 Equity Incentive Plan. The
Company does not have pending before the Commission any request for
confidential treatment of information. Except for the issuance of the
Securities contemplated by this Agreement or as set forth on Schedule
3.1(i), no event, liability or development has occurred or exists with
respect to the Company or its Subsidiaries or their respective
business, properties, operations or financial condition, that would be
required to be disclosed by the Company under applicable securities
laws at the time this representation is made that has not been publicly
disclosed at least one Trading Day prior to the date that this
representation is made.
(j) Litigation. There is no action, suit, inquiry, notice of
violation, proceeding or investigation pending or, to the knowledge of
the Company, threatened against or affecting the Company, any
Subsidiary or any of their respective properties before or by any
court, arbitrator, governmental or administrative agency or regulatory
authority (federal, state, county, local or foreign) (collectively, an
"Action") which (i) adversely affects or challenges the legality,
validity or enforceability of any of the Transaction Documents or the
Securities or (ii) could, if there were an unfavorable decision, have
or reasonably be expected to result in a Material Adverse Effect.
Neither the Company nor any Subsidiary, nor any current director or
officer thereof since January 1, 2005, is or has been the subject of
any Action involving a claim of violation of or liability under federal
or state securities laws or a claim of breach of fiduciary duty. There
has not been, and to the knowledge of the Company, there is not pending
or contemplated, any investigation by the Commission involving the
Company or any current director or officer of the Company. 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 Exchange Act or the Securities Act.
12
(k) Labor Relations. 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. None of the Company's or its
Subsidiaries' employees is a member of a union that relates to such
employee's relationship with the Company, and neither the Company or
any of its Subsidiaries is a party to a collective bargaining
agreement, and the Company and its Subsidiaries believe that their
relationships with their employees are good. No executive officer, to
the knowledge of the Company, is, or is now expected to be, in
violation of any material term of any employment contract,
confidentiality, disclosure or proprietary information agreement or
non-competition agreement, or any other contract or agreement or any
restrictive covenant, and the continued employment of each such
executive officer does not subject the Company or any of its
Subsidiaries to any liability with respect to any of the foregoing
matters. The Company and its Subsidiaries are in compliance with all
U.S. federal, state, local and foreign laws and regulations relating to
employment and employment practices, terms and conditions of employment
and wages and hours, except where the failure to be in compliance could
not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.
(l) Compliance. Except as disclosed on Schedule 3.1(l), 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, 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 and all such laws that affect the
environment, except in each case as could not have or reasonably be
expected to result in a Material Adverse Effect.
(m) Regulatory Permits. The Company and the Subsidiaries possess
all certificates, authorizations and permits issued by the appropriate
federal, state, local or foreign regulatory authorities necessary to
conduct their respective businesses as described in the SEC Reports,
except where the failure to possess such permits could not have or
reasonably be expected to result in a Material Adverse Effect
("Material Permits"), and neither the Company nor any Subsidiary has
received any notice of proceedings relating to the revocation or
modification of any Material Permit.
(n) Title to Assets. The Company and the Subsidiaries have good and
marketable title in fee simple to all real property owned by them that
is material to the business of the Company and the Subsidiaries and
good and marketable title in all personal property owned by them that
is material to the business of the Company and the Subsidiaries, in
each case free and clear of all Liens, except for Liens as do not
materially affect the value of such property and do not materially
13
interfere with the use made and proposed to be made of such property by
the Company and the Subsidiaries and Liens for the payment of federal,
state or other taxes, the payment of which is neither delinquent nor
subject to penalties. Any real property and facilities held under lease
by the Company and the Subsidiaries are held by them, to their
knowledge, under valid, subsisting and enforceable leases with which
the Company and the Subsidiaries are in compliance.
(o) Patents and Trademarks. The Company and the Subsidiaries have,
or have rights to use, all patents, patent applications, trademarks,
trademark applications, service marks, trade names, trade secrets,
inventions, copyrights, licenses and other intellectual property rights
and similar rights necessary or material for use in connection with
their respective businesses as described in the SEC Reports and which
the failure to so have could have a Material Adverse Effect
(collectively, the "Intellectual Property Rights"). Neither the Company
nor any Subsidiary has received a notice (written or otherwise) that
the Intellectual Property Rights used by the Company or any Subsidiary
violates or infringes upon the rights of any Person. To the knowledge
of the Company, all such Intellectual Property Rights are enforceable
and there is no existing infringement by another Person of any of the
Intellectual Property Rights. The Company and its Subsidiaries have
taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their intellectual properties,
except where failure to do so could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.
(p) Insurance. The Company and the Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the
businesses in which the Company and the Subsidiaries are engaged,
including, but not limited to, directors and officers insurance
coverage as disclosed on Schedule 3.1(p). Neither the Company nor any
Subsidiary has any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to
continue its business without a significant increase in cost.
(q) Transactions With Affiliates and Employees. Except as set forth
in the SEC Reports or on Schedule 3.1(q), none of the officers or
directors of the Company and, to the knowledge of the Company, none of
the employees of the Company is presently a party to any transaction
with the Company or any Subsidiary (other than for services as
employees, officers and directors), including any contract, agreement
or other arrangement providing for the furnishing of services to or by,
providing for rental of real or personal property to or from, or
otherwise requiring payments to or from any officer, director or such
employee or, to the knowledge of the Company, any entity in which any
officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner, in each case in excess of
$60,000 other than (i) for payment of salary or consulting fees for
services rendered, (ii) reimbursement for expenses incurred on behalf
of the Company and (iii) for other employee benefits, including stock
option agreements under and outside of any equity incentive plan of the
Company.
(r) Xxxxxxxx-Xxxxx; Internal Accounting Controls. The Company is in
material compliance with all provisions of the Xxxxxxxx-Xxxxx Act of
14
2002 which are applicable to it as of the Closing Date. The Company and
the Subsidiaries taken as a whole maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with GAAP and
to maintain asset accountability, (iii) access to assets is permitted
only in accordance with management's general or specific authorization,
and (iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences. The Company has established disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the Company and designed such disclosure controls and
procedures to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods
specified in the Commission's rules and forms. The Company's certifying
officers have evaluated the effectiveness of the Company's disclosure
controls and procedures as of the end of the period covered by the
Company's most recently filed periodic report under the Exchange Act
(such date, the "Evaluation Date"). The Company presented in its most
recently filed periodic report under the Exchange Act the conclusions
of the certifying officers about the effectiveness of the disclosure
controls and procedures based on their evaluations as of the Evaluation
Date. Since the Evaluation Date, there have been no changes in the
Company's internal control over financial reporting (as such term is
defined in the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, the Company's internal control
over financial reporting.
(s) Certain Fees. Except as listed on Schedule 3.1(s), no brokerage
or finder's fees or commissions are or will be payable by the Company
to any broker, financial advisor or consultant, finder, placement
agent, investment banker, bank or other Person with respect to the
transactions contemplated by the Transaction Documents. The Purchasers
shall have no obligation with respect to any fees or with respect to
any claims made by or on behalf of other Persons for fees of a type
contemplated in this Section that may be due in connection with the
transactions contemplated by the Transaction Documents.
(t) Private Placement. Assuming the accuracy of the Purchasers'
representations and warranties set forth in Section 3.2, and of the
purchasers in the Accredited Investor Offering, no registration under
the Securities Act is required for the offer and sale of the Securities
by the Company to the Purchasers as contemplated hereby. The issuance
and sale of the Securities hereunder does not contravene the rules and
regulations of the Trading Market.
(u) Investment Company. The Company is not, and is not an Affiliate
of, and immediately after receipt of payment for the Securities, will
not be or be an Affiliate of, an "investment company" within the
meaning of the Investment Company Act of 1940, as amended. The Company
shall conduct its business in a manner so that it will not become
subject to the Investment Company Act of 1940, as amended.
15
(v) Registration Rights. Other than each of the Purchasers, no
Person has any right to cause the Company to effect the registration
under the Securities Act of any securities of the Company, except as
disclosed on Schedule 3.1(v).
(w) Listing and Maintenance Requirements. The Company's Common
Stock is registered pursuant to Section 12(b) or 12(g) of the Exchange
Act, and the Company has taken no action designed to, or which to its
knowledge is likely to have the effect of, terminating the registration
of the Common Stock under the Exchange Act nor has the Company received
any notification that the Commission is contemplating terminating such
registration. The Company has not, in the 12 months preceding the date
hereof, received notice from any Trading Market on which the Common
Stock is or has been listed or quoted to the effect that the Company is
not in compliance with the listing or maintenance requirements of such
Trading Market. The Company is, and has no reason to believe that it
will not in the foreseeable future continue to be, in compliance with
all such listing and maintenance requirements.
(x) Disclosure. Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction
Documents, the Company confirms that neither it nor any other Person
acting on its behalf has provided any of the Purchasers or their agents
or counsel with any information that it believes constitutes or might
constitute material, nonpublic information. The Company understands and
confirms that the Purchasers will rely on the foregoing representation
in effecting transactions in securities of the Company. All disclosure
furnished by or on behalf of the Company to the Purchasers regarding
the Company, its business and the transactions contemplated hereby,
including the Disclosure Schedules to this Agreement, is true and
correct and does not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they
were made, not misleading. The press releases disseminated by the
Company during the twelve months preceding the date of this Agreement
taken as a whole do not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary in order to make the statements, in light of the
circumstances under which they were made and when made, not misleading.
The Company acknowledges and agrees that no Purchaser makes or has made
any representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in Section
3.2 hereof.
(y) Application of Takeover Protections. The Company and its Board
of Directors have taken all necessary action, if any, in order to
render inapplicable any control share acquisition, business
combination, poison pill (including any distribution under a rights
agreement) or other similar anti-takeover provision under the Company's
Certificate of Incorporation (or similar charter documents) or the laws
of its state of incorporation that is or could become applicable to the
Purchasers as a result of the Purchasers and the Company fulfilling
their obligations or exercising their rights under the Transaction
Documents, including without limitation as a result of the Company's
issuance of the Securities and the Purchasers' ownership of the
Securities.
16
(z) No Integrated Offering. Assuming the accuracy of the
Purchasers' representations and warranties set forth in Section 3.2,
and except for the Accredited Investor Offering, neither the Company,
nor any of its Affiliates, nor any Person acting on its or their behalf
has, directly or indirectly, made any offers or sales of any security
or solicited any offers to buy any security, under circumstances that
would cause this offering of the Securities to be integrated with prior
offerings by the Company for purposes of the Securities Act or any
applicable shareholder approval provision of any Trading Market on
which any of the securities of the Company are listed or designated.
(aa) Solvency. Based on the financial condition of the Company as
of the Closing Date after giving effect to the receipt by the Company
of the proceeds from the sale of the Securities hereunder, (i) the fair
saleable value of the Company's assets exceeds the amount that will be
required to be paid on or in respect of the Company's existing debts
and other liabilities (including known contingent liabilities) as they
mature; (ii) the Company's assets are not unreasonably small and the
Company can carry on its business as now conducted and as proposed to
be conducted including its capital needs taking into account the
particular capital requirements of the business conducted by the
Company, and projected capital requirements and capital availability
thereof; and (iii) the current cash flow of the Company, together with
the proceeds the Company would receive, were it to liquidate all of its
assets, after taking into account all anticipated uses of the cash,
would be sufficient to pay all amounts on or in respect of its
liabilities when such amounts are required to be paid. The Company does
not intend to incur debts beyond its ability to pay such debts as they
mature (taking into account the timing and amounts of cash to be
payable on or in respect of its debt). The Company has no knowledge of
any facts or circumstances which lead it to believe that it will file
for reorganization or liquidation under the bankruptcy or
reorganization laws of any jurisdiction within one year from the
Closing Date. Schedule 3.1(aa) sets forth as of the dates thereof all
outstanding secured and unsecured Indebtedness of the Company or any
Subsidiary, or for which the Company or any Subsidiary has commitments.
For the purposes of this Agreement, "Indebtedness" shall mean (a) any
liabilities for borrowed money or amounts owed in excess of $50,000
(other than trade accounts payable incurred in the ordinary course of
business), (b) all guaranties, endorsements and other contingent
obligations in respect of Indebtedness of others, whether or not the
same are or should be reflected in the Company's balance sheet (or the
notes thereto), except guaranties by endorsement of negotiable
instruments for deposit or collection or similar transactions in the
ordinary course of business; and (c) the present value of any lease
payments in excess of $50,000 due under leases required to be
capitalized in accordance with GAAP. Neither the Company nor any
Subsidiary is in default with respect to any Indebtedness.
(bb) Tax Status. Except for matters that would not, individually or
in the aggregate, have or reasonably be expected to result in a
Material Adverse Effect, the Company and each Subsidiary has filed all
necessary federal, state and foreign income and franchise tax returns
and has paid or accrued all taxes shown as due thereon, and the Company
has no knowledge of a tax deficiency which has been asserted or
threatened against the Company or any Subsidiary.
17
(cc) No General Solicitation. Neither the Company nor any person
acting on behalf of the Company has offered or sold any of the
Securities by any form of general solicitation or general advertising.
The Company has offered the Securities for sale only to the Purchasers
and certain other "accredited investors" within the meaning of Rule 501
under the Securities Act.
(dd) Foreign Corrupt Practices. Neither the Company, nor to the
knowledge of the Company, any agent or other person acting on behalf of
the Company, has (i) directly or indirectly, used any funds for
unlawful contributions, gifts, entertainment or other unlawful expenses
related to foreign or domestic political activity, (ii) made any
unlawful payment to foreign or domestic government officials or
employees or to any foreign or domestic political parties or campaigns
from corporate funds, (iii) failed to disclose fully any contribution
made by the Company (or made by any person acting on its behalf of
which the Company is aware) which is in violation of law, or (iv)
violated in any material respect any provision of the Foreign Corrupt
Practices Act of 1977, as amended.
(ee) Accountants. The Company's accounting firm is set forth on
Schedule 3.1(ee) of the Disclosure Schedule. To the knowledge and
belief of the Company, such accounting firm (i) is a registered public
accounting firm as required by the Exchange Act and (ii) shall express
its opinion with respect to the financial statements to be included in
the Company's Annual Report on Form 10-KSB for the year ending December
31, 2006.
(ff) Seniority. As of the Closing Date, no Indebtedness or other
claim against the Company is senior to the Debentures in right of
payment, whether with respect to interest or upon liquidation or
dissolution, or otherwise, other than indebtedness secured by purchase
money security interests (which is senior only as to underlying assets
covered thereby) and capital lease obligations (which is senior only as
to the property covered thereby).
(gg) No Disagreements with Accountants and Lawyers. There are no
disagreements of any kind presently existing, or reasonably anticipated
by the Company to arise, between the Company and the accountants and
lawyers formerly or presently employed by the Company and the Company
is current with respect to any fees owed to its accountants and
lawyers, except as disclosed on Schedule 3.1(gg).
(hh) Acknowledgment Regarding Purchasers' Purchase of Securities.
The Company acknowledges and agrees that, to its knowledge, each of the
Purchasers is acting solely in the capacity of an arm's length
purchaser with respect to the Transaction Documents and the
transactions contemplated thereby. The Company further acknowledges
that, to its knowledge, no Purchaser is acting as a financial advisor
or fiduciary of the Company (or in any similar capacity) with respect
to the Transaction Documents and the transactions contemplated thereby
and, to its knowledge, any advice given by any Purchaser or any of
their respective representatives or agents in connection with the
Transaction Documents and the transactions contemplated thereby is
merely incidental to the Purchasers' purchase of the Securities. The
Company further represents to each Purchaser that the Company's
decision to enter into this Agreement and the other Transaction
Documents has been based solely on the independent evaluation of the
18
transactions contemplated hereby by the Company and its
representatives.
(ii) Acknowledgment Regarding Purchasers Trading Activity. Anything
in this Agreement or elsewhere herein to the contrary notwithstanding
(except for Sections 3.2(f) and 4.16 hereof), it is understood and
acknowledged by the Company (i) that none of the Purchasers have been
asked to agree, nor has any Purchaser agreed, to desist from purchasing
or selling, long and/or short, securities of the Company, or
"derivative" securities based on securities issued by the Company or to
hold the Securities for any specified term; (ii) that past or future
open market or other transactions by any Purchaser, including Short
Sales, and specifically including, without limitation, Short Sales or
"derivative" transactions, before or after the closing of this or
future private placement transactions, may negatively impact the market
price of the Company's publicly-traded securities; (iii) that any
Purchaser, and counter-parties in "derivative" transactions to which
any such Purchaser is a party, directly or indirectly, presently may
have a "short" position in the Common Stock, and (iv) that each
Purchaser shall not be deemed to have any affiliation with or control
over any arm's length counter-party in any "derivative" transaction.
The Company further understands and acknowledges that except as limited
by Section 3.2(f) and Section 4.16, (a) one or more Purchasers may
engage in hedging activities at various times during the period that
the Securities are outstanding, including, without limitation, during
the periods that the value of the Underlying Shares deliverable with
respect to Securities are being determined and (b) such hedging
activities (if any) could reduce the value of the existing
stockholders' equity interests in the Company at and after the time
that the hedging activities are being conducted. The Company
acknowledges that such aforementioned hedging activities do not
constitute a breach of any of the Transaction Documents.
(jj) Regulation M Compliance. The Company has not, and to its
knowledge no one acting on its behalf has, (i) taken, directly or
indirectly, any action designed to cause or to result in the
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of any of the Securities, (ii)
sold, bid for, purchased, or paid any compensation for soliciting
purchases of, any of the securities of the Company or (iii) paid or
agreed to pay to any Person any compensation for soliciting another to
purchase any other securities of the Company, other than, in the case
of clauses (ii) and (iii), compensation paid to the Company's placement
agent in connection with the placement of the Securities
3.2 Representations and Warranties of the Purchasers. Each Purchaser
hereby, for itself and for no other Purchaser, represents and warrants as of the
date hereof and as of the Closing Date to the Company as follows:
(a) Organization; Authority. Such Purchaser is an entity duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with full right, corporate or
partnership power and authority to enter into and to consummate the
transactions contemplated by the Transaction Documents and otherwise to
carry out its obligations hereunder and thereunder. The execution,
19
delivery and performance by such Purchaser of the transactions
contemplated by this Agreement have been duly authorized by all
necessary corporate or similar action on the part of such Purchaser.
Each Transaction Document to which it is a party has been duly executed
by such Purchaser, and when delivered by such Purchaser in accordance
with the terms hereof, will constitute the valid and legally binding
obligation of such Purchaser, enforceable against it in accordance with
its terms, except (i) as limited by general equitable principles and
applicable bankruptcy, insolvency, reorganization, moratorium and other
laws of general application affecting enforcement of creditors' rights
generally, (ii) as limited by laws relating to the availability of
specific performance, injunctive relief or other equitable remedies and
(iii) insofar as indemnification and contribution provisions may be
limited by applicable law.
(b) Own Account. Such Purchaser understands that the Securities are
"restricted securities" and have not been registered under the
Securities Act or any applicable state securities law and is acquiring
the Securities as principal for its own account and not with a view to
or for distributing or reselling such Securities or any part thereof in
violation of the Securities Act or any applicable state securities law,
has no present intention of distributing any of such Securities in
violation of the Securities Act or any applicable state securities law
and has no direct or indirect arrangement or understandings with any
other persons to distribute or regarding the distribution of such
Securities (this representation and warranty not limiting such
Purchaser's right to sell the Securities pursuant to the Registration
Statement or otherwise in compliance with applicable federal and state
securities laws) in violation of the Securities Act or any applicable
state securities law. Such Purchaser is acquiring the Securities
hereunder in the ordinary course of its business.
(c) Purchaser Status. At the time such Purchaser was offered the
Securities, it was, and at the date hereof it is, and on each date on
which it exercises any Warrants or converts any Debentures it will be
either: (i) an "accredited investor" as defined in Rule 501(a)(1),
(a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a
"qualified institutional buyer" as defined in Rule 144A(a) under the
Securities Act. Such Purchaser is not required to be registered as a
broker-dealer under Section 15 of the Exchange Act.
(d) Experience of Such Purchaser. Such Purchaser, either alone or
together with its representatives, has such knowledge, sophistication
and experience in business and financial matters so as to be capable of
evaluating the merits and risks of the prospective investment in the
Securities, and has so evaluated the merits and risks of such
investment. Such Purchaser is able to bear the economic risk of an
investment in the Securities and, at the present time, is able to
afford a complete loss of such investment.
(e) General Solicitation. Such Purchaser is not purchasing the
Securities as a result of any advertisement, article, notice or other
communication regarding the Securities published in any newspaper,
magazine or similar media or broadcast over television or radio or
presented at any seminar or any other general solicitation or general
advertisement.
(f) Short Sales and Confidentiality Prior To The Date Hereof. Other
than the transaction contemplated hereunder, such Purchaser has not
20
directly or indirectly, nor has any Person acting on behalf of or
pursuant to any understanding with such Purchaser, executed any
transaction, including Short Sales and the pre-borrowing or borrowing
of any shares of Common Stock, in the securities of the Company during
the period commencing from the time that such Purchaser first received
a term sheet (written or oral) from the Company or any other Person
setting forth the material terms of the transactions contemplated
hereunder until the date hereof (such period, the "Discussion Time").
Notwithstanding the foregoing, in the case of a Purchaser that is a
multi-managed investment vehicle whereby separate portfolio managers
manage separate portions of such Purchaser's assets and the portfolio
managers have no direct knowledge of the investment decisions made by
the portfolio managers managing other portions of such Purchaser's
assets, the representation set forth above shall only apply with
respect to the portion of assets managed by the portfolio manager that
made the investment decision to purchase the Securities covered by this
Agreement. Other than to other Persons party to this Agreement, such
Purchaser has maintained the confidentiality of all disclosures made to
it in connection with this transaction (including the existence and
terms of this transaction).
(g) State Securities Law Application. Other than in the State of
Florida and the state or other jurisdiction where each Purchaser
maintains its principal office, each Purchaser has not engaged in any
discussions relating to the offer or sale of the Debentures and
Warrants.
ARTICLE IV.
OTHER AGREEMENTS OF THE PARTIES
4.1 Transfer Restrictions.
(a) The Securities may only be disposed of in compliance with state
and federal securities laws. In connection with any transfer of
Securities other than pursuant to an effective registration statement
or Rule 144, to an Affiliate of a Purchaser or in connection with a
pledge as contemplated in Section 4.1(b), the Company may require the
transferor thereof to provide to the Company an opinion of counsel
selected by the transferor and reasonably acceptable to the Company,
the form and substance of which opinion shall be reasonably
satisfactory to the Company, to the effect that such transfer does not
require registration of such transferred Securities under the
Securities Act. As a condition of transfer, any such transferee shall
agree in writing to be bound by the terms of this Agreement and shall
have the rights of a Purchaser under this Agreement and the
Registration Rights Agreement.
(b) The Purchasers agree to the imprinting, so long as is required
by this Section 4.1, of a legend on any of the Securities in the
following form:
[NEITHER] THIS SECURITY [NOR THE SECURITIES INTO WHICH THIS SECURITY IS
[EXERCISABLE] [CONVERTIBLE]] HAS BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
21
OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT
BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE
STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE
TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE
UPON [EXERCISE] [CONVERSION] OF THIS SECURITY MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY
SUCH SECURITIES.
The Company acknowledges and agrees that a Purchaser may from time
to time pledge pursuant to a bona fide margin agreement with a
registered broker-dealer or grant a security interest in some or all of
the Securities to a financial institution that is an "accredited
investor" as defined in Rule 501(a) under the Securities Act and who
agrees to be bound by the provisions of this Agreement and the
Registration Rights Agreement and, if required under the terms of such
arrangement, such Purchaser may transfer pledged or secured Securities
to the pledgees or secured parties. Such a pledge or transfer would not
be subject to approval of the Company and no legal opinion of legal
counsel of the pledgee, secured party or pledgor shall be required in
connection therewith. Further, no notice shall be required of such
pledge. At the appropriate Purchaser's expense, the Company will
execute and deliver such reasonable documentation as a pledgee or
secured party of Securities may reasonably request in connection with a
pledge or transfer of the Securities, including, if the Securities are
subject to registration pursuant to the Registration Rights Agreement,
the preparation and filing of any required prospectus supplement under
Rule 424(b)(3) under the Securities Act or other applicable provision
of the Securities Act to appropriately amend the list of Selling
Stockholders thereunder.
(c) Certificates evidencing the Underlying Shares shall not contain
any legend (including the legend set forth in Section 4.1(b) hereof):
(i) while a registration statement (including the Registration
Statement) covering the resale of such security is effective under the
Securities Act, or (ii) following any sale of such Underlying Shares
pursuant to Rule 144, or (iii) if such Underlying Shares are eligible
for sale under Rule 144(k), or (iv) if such legend is not required
under applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the
Commission). The Company shall cause its counsel to issue a legal
opinion to the Transfer Agent promptly after the Effective Date if
required by the Transfer Agent to effect the removal of the legend
hereunder. If all or any portion of a Debenture or Warrant is converted
or exercised (as applicable) at a time when there is an effective
registration statement to cover the resale of the Underlying Shares, or
22
if such Underlying Shares may be sold under Rule 144(k) or if such
legend is not otherwise required under applicable requirements of the
Securities Act (including judicial interpretations and pronouncements
issued by the staff of the Commission) then such Underlying Shares
shall be issued free of all legends. The Company agrees that following
the Effective Date or at such time as such legend is no longer required
under this Section 4.1(c), it will, no later than three Trading Days
following the delivery by a Purchaser to the Company or the Transfer
Agent of a certificate representing Underlying Shares, as applicable,
issued with a restrictive legend (such third Trading Day, the "Legend
Removal Date"), deliver or cause to be delivered to such Purchaser a
certificate representing such shares that is free from all restrictive
and other legends. The Company may not make any notation on its records
or give instructions to the Transfer Agent that enlarge the
restrictions on transfer set forth in this Section. Certificate for
Underlying Shares subject to legend removal hereunder shall be
transmitted by the Transfer Agent to the Purchasers by crediting the
account of the Purchaser's prime broker with the Depository Trust
Company System.
(d) In addition to such Purchaser's other available remedies, the
Company shall pay to a Purchaser, in cash, as partial liquidated
damages and not as a penalty, for each $1,000 of Underlying Shares
(based on the VWAP of the Common Stock on the date such Securities are
submitted to the Transfer Agent) delivered for removal of the
restrictive legend and subject to Section 4.1(c), $10 per Trading Day
(increasing to $20 per Trading Day 5 Trading Days after such damages
have begun to accrue) for each Trading Day after the Legend Removal
Date until such certificate is delivered without a legend. Nothing
herein shall limit such Purchaser's right to pursue actual damages for
the Company's failure to deliver certificates representing any
Securities as required by the Transaction Documents, and such Purchaser
shall have the right to pursue all remedies available to it at law or
in equity including, without limitation, a decree of specific
performance and/or injunctive relief.
(e) Each Purchaser, severally and not jointly with the other
Purchasers, agrees that the removal of the restrictive legend from
certificates representing Securities as set forth in this Section 4.1
is predicated upon the Company's reliance that the Purchaser will sell
any Securities pursuant to either the registration requirements of the
Securities Act, including any applicable prospectus delivery
requirements, or an exemption therefrom, and that if Securities are
sold pursuant to a Registration Statement, they will be sold in
compliance with the plan of distribution set forth therein.
4.2 Acknowledgment of Dilution. The Company acknowledges that the
issuance of the Securities may result in dilution of the outstanding shares of
Common Stock, which dilution may be substantial under certain market conditions.
The Company further acknowledges that its obligations under the Transaction
Documents, including without limitation its obligation to issue the Underlying
Shares pursuant to the Transaction Documents, are unconditional and absolute and
not subject to any right of set off, counterclaim, delay or reduction,
regardless of the effect of any such dilution or any claim the Company may have
against any Purchaser and regardless of the dilutive effect that such issuance
may have on the ownership of the other stockholders of the Company.
4.3 Furnishing of Information. As long as any Purchaser owns
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
23
required to be filed by the Company after the date hereof pursuant to the
Exchange Act. As long as any Purchaser owns Securities, if the Company is not
required to file reports pursuant to the Exchange Act, it will prepare and
furnish to the Purchasers and make publicly available in accordance with Rule
144(c) such information as is required for the Purchasers to sell the Securities
under Rule 144. The Company further covenants that it will take such further
action as any holder of Securities may reasonably request, to the extent
required from time to time to enable such Person to sell such Securities without
registration under the Securities Act within the requirements of the exemption
provided by Rule 144.
4.4 Integration. The Company shall not sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or sale
of the Securities in a manner that would require the registration under the
Securities Act of the sale of the Securities to the Purchasers or that would be
integrated with the offer or sale of the Securities or the Accredited Investor
Offering for purposes of the rules and regulations of any Trading Market.
4.5 Conversion and Exercise Procedures. The form of Notice of Exercise
included in the Warrants and the form of Notice of Conversion included in the
Debentures set forth the totality of the procedures required of the Purchasers
in order to exercise the Warrants or convert the Debentures. No additional legal
opinion or other information or instructions shall be required of the Purchasers
to exercise their Warrants or convert their Debentures. The Company shall honor
exercises of the Warrants and conversions of the Debentures and shall deliver
Underlying Shares in accordance with the terms, conditions and time periods set
forth in the Transaction Documents.
4.6 Securities Laws Disclosure; Publicity. The Company shall, by 8:30
a.m. New York City time on December 20, 2006, issue a Current Report on Form 8-K
disclosing the material terms of the transactions contemplated hereby and
attaching this Agreement and forms of the Debenture and Warrant thereto. The
Company and each Purchaser shall consult with each other in issuing any other
press releases with respect to the transactions contemplated hereby, and neither
the Company nor any Purchaser shall issue any such press release or otherwise
make any such public statement without the prior consent of the Company, with
respect to any press release of any Purchaser, or without the prior consent of
each Purchaser, with respect to any press release of the Company, which consent
shall not unreasonably be withheld or delayed, except if such disclosure is
required by law, in which case the disclosing party shall promptly provide the
other party with prior notice of such public statement or communication.
Notwithstanding the foregoing, the Company shall not publicly disclose the name
of any Purchaser, or include the name of any Purchaser in any filing with the
Commission or any regulatory agency or Trading Market, without the prior written
consent of such Purchaser, except (i) as required by federal securities law in
connection with (A) any registration statement contemplated by the Registration
Rights Agreement and (B) the filing of final Transaction Documents (including
signature pages thereto) with the Commission and (ii) to the extent such
disclosure is required by law or Trading Market regulations, in which case the
Company shall provide the Purchasers with prior notice of such disclosure
permitted under this subclause (ii).
4.7 Shareholder Rights Plan. No claim will be made or enforced by the
Company or, with the consent of the Company, any other Person, that any
24
Purchaser is an "Acquiring Person" under any control share acquisition, business
combination, poison pill (including any distribution under a rights agreement)
or similar anti-takeover plan or arrangement in effect or hereafter adopted by
the Company, or, except to the extent that Florida law is applicable, that any
Purchaser could be deemed to trigger the provisions of any such plan or
arrangement, by virtue of receiving Securities under the Transaction Documents
or under any other agreement between the Company and the Purchasers.
4.8 Non-Public Information. Except with respect to the material terms
and conditions of the transactions contemplated by the Transaction Documents,
the Company covenants and agrees that neither it nor any other Person acting on
its behalf will provide any Purchaser or its agents or counsel with any
information that the Company believes constitutes material non-public
information, unless prior thereto such Purchaser shall have executed a written
agreement regarding the confidentiality and use of such information. The Company
understands and confirms that each Purchaser shall be relying on the foregoing
representations in effecting transactions in securities of the Company.
4.9 Use of Proceeds. Except as set forth on Schedule 4.9 attached
hereto, the Company shall use the net proceeds from the sale of the Securities
hereunder and under the Accredited Investor Offering for working capital
purposes and shall not use such proceeds for the satisfaction of any portion of
the Company's debt (other than payment of trade payables in the ordinary course
of the Company's business and prior practices), or to redeem any Common Stock or
Common Stock Equivalents, or to settle any outstanding litigation.
4.10 Reimbursement. If any Purchaser becomes involved in any capacity
in any Proceeding by or against any Person who is a stockholder of the Company
(except as a result of sales, pledges, margin sales and similar transactions by
such Purchaser to or with any other stockholder), solely as a result of such
Purchaser's acquisition of the Securities under this Agreement, the Company will
reimburse such Purchaser for its reasonable legal and other expenses (including
the cost of any investigation preparation and travel in connection therewith)
incurred in connection therewith, as such expenses are incurred. The
reimbursement obligations of the Company under this paragraph shall be in
addition to any liability which the Company may otherwise have, shall extend
upon the same terms and conditions to any Affiliates of the Purchasers who are
actually named in such action, proceeding or investigation, and partners,
directors, agents, employees and controlling persons (if any), as the case may
be, of the Purchasers and any such Affiliate, and shall be binding upon and
inure to the benefit of any successors, assigns, heirs and personal
representatives of the Company, the Purchasers and any such Affiliate and any
such Person. The Company also agrees that neither the Purchasers nor any such
Affiliates, partners, directors, agents, employees or controlling persons shall
have any liability to the Company or any Person asserting claims on behalf of or
in right of the Company solely as a result of acquiring the Securities under
this Agreement.
4.11 Indemnification of Purchasers. Subject to the provisions of this
Section 4.11, the Company will indemnify and hold each Purchaser and its
directors, officers, shareholders, members, partners, employees and agents (and
any other Persons with a functionally equivalent role of a Person holding such
titles notwithstanding a lack of such title or any other title), each Person who
controls such Purchaser (within the meaning of Section 15 of the Securities Act
25
and Section 20 of the Exchange Act), and the directors, officers, shareholders,
agents, members, partners or employees (and any other Persons with a
functionally equivalent role of a Person holding such titles notwithstanding a
lack of such title or any other title) of such controlling person (each, a
"Purchaser Party") harmless from any and all losses, liabilities, obligations,
claims, contingencies, damages, costs and expenses, including all judgments,
amounts paid in settlements, court costs and reasonable attorneys' fees and
costs of investigation that any such Purchaser Party may suffer or incur as a
result of or relating to (a) any breach of any of the representations,
warranties, covenants or agreements made by the Company in this Agreement or in
the other Transaction Documents or (b) any action instituted against a
Purchaser, or any of them or their respective Affiliates, by any stockholder of
the Company who is not an Affiliate of such Purchaser, with respect to any of
the transactions contemplated by the Transaction Documents (unless such action
is based upon a breach of such Purchaser's representations, warranties or
covenants under the Transaction Documents or any agreements or understandings
such Purchaser may have with any such stockholder or any violations by the
Purchaser of state or federal securities laws or any conduct by such Purchaser
which constitutes fraud, gross negligence, willful misconduct or malfeasance).
If any action shall be brought against any Purchaser Party in respect of which
indemnity may be sought pursuant to this Agreement, such Purchaser Party shall
promptly notify the Company in writing, and the Company shall have the right to
assume the defense thereof with counsel of its own choosing reasonably
acceptable to the Purchaser Party. Any Purchaser Party shall have the right to
employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Purchaser Party except to the extent that (i) the employment thereof has
been specifically authorized by the Company in writing, (ii) the Company has
failed after a reasonable period of time to assume such defense and to employ
counsel or (iii) in such action there is, in the reasonable opinion of counsel
appointed by the Company, a material conflict on any material issue between the
position of the Company and the position of such Purchaser Party, in which case
the Company shall be responsible for the reasonable fees and expenses of no more
than one such separate counsel. The Company will not be liable to any Purchaser
Party under this Agreement (i) for any settlement by a Purchaser Party effected
without the Company's prior written consent, which shall not be unreasonably
withheld or delayed; or (ii) to the extent, but only to the extent that a loss,
claim, damage or liability is attributable to any Purchaser Party's breach of
any of the representations, warranties, covenants or agreements made by such
Purchaser Party in this Agreement or in the other Transaction Documents.
4.12 Reservation and Listing of Securities.
(a) The Company shall maintain a reserve from its duly authorized
shares of Common Stock for issuance pursuant to the Transaction
Documents in such amount as may be required to fulfill its obligations
in full under the Transaction Documents.
(b) If, on any date, the number of authorized but unissued (and
otherwise unreserved) shares of Common Stock is less than the Required
Minimum on such date, then the Board of Directors of the Company shall
use commercially reasonable efforts to amend the Company's certificate
or articles of incorporation to increase the number of authorized but
unissued shares of Common Stock to at least the Required Minimum at
such time, as soon as possible and in any event not later than the 75th
day after such date.
26
(c) The Company shall, if applicable: (i) in the time and manner
required by the principal Trading Market, prepare and file with such
Trading Market an additional shares listing application covering a
number of shares of Common Stock at least equal to the Required Minimum
on the date of such application, (ii) take all steps necessary to cause
such shares of Common Stock to be approved for listing on such Trading
Market as soon as possible thereafter, (iii) provide to the Purchasers
evidence of such listing, and (iv) maintain the listing of such Common
Stock on any date at least equal to the Required Minimum on such date
on such Trading Market or another Trading Market.
4.13 Participation in Future Financing.
(a) From the date hereof until the date that is the 12 month
anniversary of the Effective Date, upon any issuance by the Company or
any of its Subsidiaries of Common Stock or Common Stock Equivalents (a
"Subsequent Financing"), each Purchaser shall have the right to
participate in up to an amount of the Subsequent Financing equal to
100% of the Subsequent Financing (the "Participation Maximum") on the
same terms, conditions and price provided for in the Subsequent
Financing.
(b) At least 5 Trading Days prior to the closing of the Subsequent
Financing, the Company shall deliver to each Purchaser a written notice
of its intention to effect a Subsequent Financing ("Pre-Notice"), which
Pre-Notice shall ask such Purchaser if it wants to review the details
of such financing (such additional notice, a "Subsequent Financing
Notice"). Upon the request of a Purchaser, and only upon a request by
such Purchaser, for a Subsequent Financing Notice, the Company shall
promptly, but no later than 1 Trading Day after such request, deliver a
Subsequent Financing Notice to such Purchaser. The Subsequent Financing
Notice shall describe in reasonable detail the proposed terms of such
Subsequent Financing, the amount of proceeds intended to be raised
thereunder and the Person or Persons through or with whom such
Subsequent Financing is proposed to be effected and shall include a
term sheet or similar document relating thereto as an attachment.
(c) Any Purchaser desiring to participate in such Subsequent
Financing must provide written notice to the Company by not later than
5:30 p.m. (New York City time) on the 5th Trading Day after all of the
Purchasers have received the Pre-Notice that the Purchaser is willing
to participate in the Subsequent Financing, the amount of the
Purchaser's participation, and that the Purchaser has such funds ready,
willing, and available for investment on the terms set forth in the
Subsequent Financing Notice. If the Company receives no notice from a
Purchaser as of such 5th Trading Day, such Purchaser shall be deemed to
have notified the Company that it does not elect to participate.
(d) If by 5:30 p.m. (New York City time) on the 5th Trading Day
after all of the Purchasers have received the Pre-Notice, notifications
by the Purchasers of their willingness to participate in the Subsequent
Financing (or to cause their designees to participate) is, in the
aggregate, less than the total amount of the Subsequent Financing, then
the Company may effect the remaining portion of such Subsequent
Financing on the terms and with the Persons set forth in the Subsequent
Financing Notice.
27
(e) If by 5:30 p.m. (New York City time) on the 5th Trading Day
after all of the Purchasers have received the Pre-Notice, the Company
receives responses to a Subsequent Financing Notice from Purchasers
seeking to purchase more than the aggregate amount of the Participation
Maximum, each such Purchaser shall have the right to purchase the
greater of (a) their Pro Rata Portion (as defined below) of the
Participation Maximum and (b) the difference between the Participation
Maximum and the aggregate amount of participation by all other
Purchasers. "Pro Rata Portion" is the ratio of (x) the Subscription
Amount of Securities purchased on the Closing Date by a Purchaser
participating under this Section 4.13 and (y) the sum of the aggregate
Subscription Amounts of Securities purchased on the Closing Date by all
Purchasers participating under this Section 4.13.
(f) The Company must provide the Purchasers with a second
Subsequent Financing Notice, and the Purchasers will again have the
right of participation set forth above in this Section 4.13, if the
Subsequent Financing subject to the initial Subsequent Financing Notice
is not consummated for any reason on the terms set forth in such
Subsequent Financing Notice within 60 Trading Days after the date of
the initial Subsequent Financing Notice.
(g) Notwithstanding the foregoing, this Section 4.13 shall not
apply in respect of (i) an Exempt Issuance or (ii) an underwritten
public offering of Common Stock.
4.14 Subsequent Equity Sales.
(a) From the date hereof until the earlier of (i) the 12 month
anniversary of the Effective Date and (ii) such time as no Purchaser
holds any Debentures, the Company shall be prohibited from effecting or
entering into an agreement to effect any Subsequent Financing involving
a Variable Rate Transaction. The term "Variable Rate Transaction" means
a transaction in which the Company (i) issues or sells any debt or
equity securities that are convertible into, exchangeable or
exercisable for, or include the right to receive additional shares of
Common Stock either (A) at a conversion, exercise or exchange rate or
other price that is based upon and/or varies with the trading prices of
or quotations for the shares of Common Stock at any time after the
initial issuance of such debt or equity securities, or (B) with a
conversion, exercise or exchange price that is subject to being reset
at some future date after the initial issuance of such debt or equity
security or upon the occurrence of specified or contingent events
directly or indirectly related to the business of the Company or the
market for the Common Stock or (ii) enters into any agreement,
including, but not limited to, an equity line of credit, whereby the
Company may sell securities at a future determined price.
(b) Notwithstanding the foregoing, this Section 4.14 shall not
apply in respect of an Exempt Issuance, except that no Variable Rate
Transaction shall be an Exempt Issuance.
4.15 Equal Treatment of Purchasers. No consideration shall be offered
or paid to any Person to amend or consent to a waiver or modification of any
provision of any of the Transaction Documents unless the same consideration is
28
also offered to all of the parties to the Transaction Documents. Further, the
Company shall not make any payment of principal or interest on the Debentures in
amounts which are disproportionate to the respective principal amounts
outstanding on the Debentures at any applicable time. For clarification
purposes, this provision constitutes a separate right granted to each Purchaser
by the Company and negotiated separately by each Purchaser, and is intended for
the Company to treat the Purchasers as a class and shall not in any way be
construed as the Purchasers acting in concert or as a group with respect to the
purchase, disposition or voting of Securities or otherwise.
4.16 (a) Short Sales and Confidentiality After The Date Hereof. Each
Purchaser, severally and not jointly with the other Purchasers, covenants that
neither it nor any Affiliate acting on its behalf or pursuant to any
understanding with it shall execute any Short Sales during the period commencing
at the Discussion Time and ending on the earlier of (i) the Effective Date or
(ii) the Effectiveness Date (as defined in the Registration Rights Agreement).
Each Purchaser, severally and not jointly with the other Purchasers, covenants
that until such time as the transactions contemplated by this Agreement are
publicly disclosed by the Company as described in Section 4.6, such Purchaser
will maintain the confidentiality of all disclosures made to it in connection
with this transaction (including the existence and terms of this transaction).
Each Purchaser understands and acknowledges, severally and not jointly with any
other Purchaser, that the Commission currently takes the position that coverage
of short sales of shares of the Common Stock "against the box" prior to the
Effective Date of the Registration Statement with the Securities is a violation
of Section 5 of the Securities Act, as set forth in Item 65, Section A, of the
Manual of Publicly Available Telephone Interpretations, dated July 1997,
compiled by the Office of Chief Counsel, Division of Corporation Finance.
Notwithstanding the foregoing, no Purchaser makes any representation, warranty
or covenant hereby that it will not engage in Short Sales in the securities of
the Company after the time that the transactions contemplated by this Agreement
are first publicly announced as described in Section 4.6. Notwithstanding the
foregoing, in the case of a Purchaser that is a multi-managed investment vehicle
whereby separate portfolio managers manage separate portions of such Purchaser's
assets and the portfolio managers have no direct knowledge of the investment
decisions made by the portfolio managers managing other portions of such
Purchaser's assets, the covenant set forth above shall only apply with respect
to the portion of assets managed by the portfolio manager that made the
investment decision to purchase the Securities covered by this Agreement.
(b) Short Sales After the Effective Date. Each Purchaser, severally and
not jointly with the other Purchasers, covenants that, during the period
commencing on the earlier of the Effective Date or the Effectiveness Date and
terminating on the date when such Purchaser holds no Debentures, neither such
Purchaser nor any Affiliate acting on its behalf or pursuant to any
understanding with it, shall knowingly engage in any Short Sales, except on
those days (each a "Permitted Day") on which the aggregate short position with
respect to the Common Stock of such Purchaser prior to giving effect to any
Short Sales by such Purchaser on such Permitted Day does not exceed such
Purchaser's Permitted Share Position (as defined below) on such Permitted Day;
provided, however, that a Purchaser will only be entitled to engage in
transactions that constitute Short Sales on a Permitted Day to the extent that
following such transaction, the aggregate short position with respect to the
Common Stock of such Purchaser does not exceed such Purchaser's Permitted Share
29
Position. For purposes of this Section 4.16, a Purchaser's "Permitted Share
Position" means, with respect to any date of determination, the number of shares
of Common Stock beneficially owned by such Purchaser (including Conversion
Shares, Warrant Shares and shares purchased in the open market or otherwise)
plus the sum of (i) the maximum number of Conversion Shares then issuable
(including as to portions of the Debentures not yet converted and without regard
to any exercise caps or other exercise restrictions applicable to the Debentures
and assuming the lowest possible Conversion Price based on the Conversion Price
that would be applicable on the date in question) to such Purchaser and (ii) the
maximum number of Warrant Shares then issuable (including as to portions of the
Warrants not yet exercised and without regard to any conversion caps or other
conversion restrictions applicable to the Warrants) to such Purchaser.
Notwithstanding the foregoing, in the case of a Purchaser that is a
multi-managed investment vehicle whereby separate portfolio managers manage
separate portions of such Purchaser's assets and the portfolio managers have no
direct knowledge of the investment decisions made by the portfolio managers
managing other portions of such Purchaser's assets, the covenant set forth above
shall only apply with respect to the portion of assets managed by the portfolio
manager that made the investment decision to purchase the Securities covered by
this Agreement.
4.17 Form D; Blue Sky Filings. The Company agrees to timely file a Form
D with respect to the Securities as required under Regulation D and to provide a
copy thereof, promptly upon request of any Purchaser. The Company shall take
such action as the Company shall reasonably determine is necessary in order to
obtain an exemption for, or to qualify the Securities for, sale to the
Purchasers at the Closing under applicable securities or "Blue Sky" laws of the
states of the United States, and shall provide evidence of such actions promptly
upon request of any Purchaser.
4.18 Capital Changes. From the date hereof until such time as no
Purchaser holds any of the Debentures, unless Purchasers who still own the
Debentures and hold in the aggregate at least 75% of the Principal Amount of the
then outstanding Debentures shall otherwise consent in writing, the Company
shall not undertake a reverse stock split or reclassification of the Common
Stock.
ARTICLE V.
MISCELLANEOUS
5.1 Termination. This Agreement may be terminated by any Purchaser, as
to such Purchaser's obligations hereunder only and without any effect whatsoever
on the obligations between the Company and the other Purchasers, by written
notice to the other parties, if the Closing has not been consummated on or
before December 29, 2006; provided, however, that such termination will not
affect the right of any party to xxx for any breach by the other party (or
parties).
5.2 Fees and Expenses. At the Closing, the Company has agreed to
reimburse Enable Capital Management, LLC ("Enable") the non-accountable sum of
$40,000, for its due diligence and legal fees and expenses, $10,000 which has
been paid prior to the Closing. Accordingly, in lieu of the foregoing payments,
the aggregate amount that the funds managed by Enable that are Purchasers shall
pay for the Securities at the Closing shall be reduced by $30,000 in lieu
30
thereof; provided, however, that if the transactions contemplated by this
Agreement shall not be consummated by the date set forth in Section 5.1, and
such failure of consummation is not caused by Enable, the Company shall pay upon
demand $30,000 to Enable at any time after the date set forth in Section 5.1.
Except as expressly set forth in the Transaction Documents to the contrary, each
party shall pay the fees and expenses of its advisers, counsel, accountants and
other experts, if any, and all other expenses incurred by such party incident to
the negotiation, preparation, execution, delivery and performance of this
Agreement. The Company shall pay all transfer agent fees, stamp taxes and other
taxes and duties levied in connection with the delivery of any Securities to the
Purchasers.
5.3 Entire Agreement. The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.
5.4 Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
set forth on the signature pages attached hereto prior to 5:30 p.m. (New York
City time) on a Trading Day, (b) the next Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number set forth on the signature pages attached hereto on a day that
is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading
Day, (c) the 2nd Trading Day following the date of mailing, if sent by U.S.
nationally recognized overnight courier service, or (d) upon actual receipt by
the party to whom such notice is required to be given. The address for such
notices and communications shall be as set forth on the signature pages attached
hereto.
5.5 Amendments; Waivers. No provision of this Agreement may be waived,
modified, supplemented or amended except in a written instrument signed, in the
case of an amendment, by the Company and each Purchaser or, in the case of a
waiver, by the party against whom enforcement of any such waived provision is
sought. No waiver of any default with respect to any provision, condition or
requirement of this Agreement shall be deemed to be a continuing waiver in the
future or a waiver of any subsequent default or a waiver of any other provision,
condition or requirement hereof, nor shall any delay or omission of any party to
exercise any right hereunder in any manner impair the exercise of any such
right.
5.6 Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
5.7 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
The Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of each Purchaser (other than by merger). Any
Purchaser may assign any or all of its rights under this Agreement to any Person
to whom such Purchaser assigns or transfers any Securities, provided such
transferee agrees in writing to be bound, with respect to the transferred
Securities, by the provisions of the Transaction Documents that apply to the
"Purchasers".
31
5.8 No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.11.
5.9 Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of the Transaction Documents shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. Each
party agrees that all legal proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by this Agreement and
any other Transaction Documents (whether brought against a party hereto or its
respective affiliates, directors, officers, shareholders, employees or agents)
shall be commenced exclusively in the state and federal courts sitting in the
City of New York. Each party hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in the City of New York,
borough of Manhattan for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein (including with respect to the enforcement of any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is improper
or is an inconvenient venue for such proceeding. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any other manner permitted by law. The parties hereby waive
all rights to a trial by jury. If either party shall commence an action or
proceeding to enforce any provisions of the Transaction Documents, then the
prevailing party in such action or proceeding shall be reimbursed by the other
party for its reasonable attorneys' fees and other costs and expenses incurred
with the investigation, preparation and prosecution of such action or
proceeding.
5.10 Survival. The representations and warranties shall survive the
Closing and the delivery of the Securities for the applicable statue of
limitations.
5.11 Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission or by e-mail delivery of a ".pdf" format
data file, such signature shall create a valid and binding obligation of the
party executing (or on whose behalf such signature is executed) with the same
force and effect as if such facsimile or ".pdf" signature page were an original
thereof.
5.12 Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
32
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their commercially reasonable efforts to find and employ an
alternative means to achieve the same or substantially the same result as that
contemplated by such term, provision, covenant or restriction. It is hereby
stipulated and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any of such that may be hereafter declared invalid, illegal, void or
unenforceable.
5.13 Rescission and Withdrawal Right. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) any of
the other Transaction Documents, whenever any Purchaser exercises a right,
election, demand or option under a Transaction Document and the Company does not
timely perform its related obligations within the periods therein provided, then
such Purchaser may rescind or withdraw, in its sole discretion from time to time
upon written notice to the Company, any relevant notice, demand or election in
whole or in part without prejudice to its future actions and rights; provided,
however, in the case of a rescission of a conversion of a Debenture or exercise
of a Warrant, the Purchaser shall be required to return any shares of Common
Stock delivered in connection with any such rescinded conversion or exercise
notice.
5.14 Replacement of Securities. If any certificate or instrument
evidencing any Securities is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon
cancellation thereof (in the case of mutilation), or in lieu of and substitution
therefor, a new certificate or instrument, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction. The
applicant for a new certificate or instrument under such circumstances shall
also pay any reasonable third-party costs (including customary indemnity)
associated with the issuance of such replacement Securities.
5.15 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Purchasers and the Company will be entitled to specific performance under the
Transaction Documents. The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations contained in the Transaction Documents and hereby agrees to waive
and not to assert in any action for specific performance of any such obligation
the defense that a remedy at law would be adequate.
5.16 Payment Set Aside. To the extent that the Company makes a payment
or payments to any Purchaser pursuant to any Transaction Document or a Purchaser
enforces or exercises its rights thereunder, and such payment or payments or the
proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered
from, disgorged by or are required to be refunded, repaid or otherwise restored
to the Company, a trustee, receiver or any other person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.
5.17 Usury. To the extent it may lawfully do so, the Company hereby
agrees not to insist upon or plead or in any manner whatsoever claim, and will
33
resist any and all efforts to be compelled to take the benefit or advantage of,
usury laws wherever enacted, now or at any time hereafter in force, in
connection with any claim, action or proceeding that may be brought by any
Purchaser in order to enforce any right or remedy under any Transaction
Document. Notwithstanding any provision to the contrary contained in any
Transaction Document, it is expressly agreed and provided that the total
liability of the Company under the Transaction Documents for payments in the
nature of interest shall not exceed the maximum lawful rate authorized under
applicable law (the "Maximum Rate"), and, without limiting the foregoing, in no
event shall any rate of interest or default interest, or both of them, when
aggregated with any other sums in the nature of interest that the Company may be
obligated to pay under the Transaction Documents exceed such Maximum Rate. It is
agreed that if the maximum contract rate of interest allowed by law and
applicable to the Transaction Documents is increased or decreased by statute or
any official governmental action subsequent to the date hereof, the new maximum
contract rate of interest allowed by law will be the Maximum Rate applicable to
the Transaction Documents from the effective date forward, unless such
application is precluded by applicable law. If under any circumstances
whatsoever, interest in excess of the Maximum Rate is paid by the Company to any
Purchaser with respect to indebtedness evidenced by the Transaction Documents,
such excess shall be applied by such Purchaser to the unpaid principal balance
of any such indebtedness or be refunded to the Company, the manner of handling
such excess to be at such Purchaser's election.
5.18 Independent Nature of Purchasers' Obligations and Rights. The
obligations of each Purchaser under any Transaction Document are several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance or non-performance of the obligations
of any other Purchaser under any Transaction Document. Nothing contained herein
or in any other Transaction Document, and no action taken by any Purchaser
pursuant thereto, shall be deemed to constitute the Purchasers as a partnership,
an association, a joint venture or any other kind of entity, or create a
presumption that the Purchasers are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated by the
Transaction Documents. Each Purchaser shall be entitled to independently protect
and enforce its rights, including without limitation the rights arising out of
this Agreement or out of the other Transaction Documents, and it shall not be
necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose. Each Purchaser has been represented by its own
separate legal counsel in their review and negotiation of the Transaction
Documents. For reasons of administrative convenience only, Purchasers and their
respective counsel have chosen to communicate with the Company through FWS. FWS
does not represent all of the Purchasers but only Enable. The Company has
elected to provide all Purchasers with the same terms and Transaction Documents
for the convenience of the Company and not because it was required or requested
to do so by the Purchasers.
5.19 Liquidated Damages. The Company's obligations to pay any partial
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of the Company and shall not terminate until all unpaid
partial liquidated damages and other amounts have been paid notwithstanding the
fact that the instrument or security pursuant to which such partial liquidated
damages or other amounts are due and payable shall have been canceled.
34
5.20 Construction. The parties agree that each of them and/or their
respective counsel has reviewed and had an opportunity to revise the Transaction
Documents and, therefore, the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of the Transaction Documents or any amendments hereto.
5.21 Florida Rescission Rights. Florida law provides that when sales
are made to five or more persons in Florida, any sale made in Florida is
voidable by the Purchaser within three days after the first tender of
consideration is made by such Purchaser to the Company, an agent of the Company
or an escrow agent or within three days after the availability of that privilege
is communicated to such Purchaser, whichever occurs later. All sales in this
offering are for this purpose only, deemed to be sales in Florida. Payments for
terminated subscriptions voided by Purchasers as provided for in this paragraph
will be promptly refunded without interest. Notice should be given to the
Company to the attention of Xxxxx X. Xxxxxxx III at the address set forth on the
cover page of this Agreement.
(Signature Pages Follow)
35
IN WITNESS WHEREOF, the parties hereto have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.
ECOSPHERE TECHNOLOGIES, INC. Address for Notice:
By:___________________________________ 0000 X. X. Xxxxxx Xxxxxxx
Name: Xxxxxx, XX 00000
Title: Facsimile: (000) 000-0000
Attention: Xxxxx X. Xxxxxxx III
With a copy to Xxxxxx Xxxxxx LLP
(which shall not constitute notice): 0000 Xxxx Xxxxx Xxxxx Xxxxxxxxx Xxxxx 000
Xxxx Xxxx Xxxxx, XX 00000
Facsimile: (000) 000-0000
Attention: Xxxxxxx X. Xxxxxx, Esq.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOR PURCHASER FOLLOWS]
36
[PURCHASER SIGNATURE PAGES TO ESPH SECURITIES PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the undersigned have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.
Name of Purchaser: _____________________________________________________________
Signature of Authorized Signatory of Purchaser: ________________________________
Name of Authorized Signatory: __________________________________________________
Title of Authorized Signatory: _________________________________________________
Email Address of Purchaser: ____________________________________________________
Facsimile Number of Purchaser: _________________________________________________
Address for Notice of Purchaser:
Address for Delivery of Securities for Purchaser (if not same as above):
Subscription Amount: _____________
Principal Amount: ________________
Warrant Shares: __________________
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]
[SIGNATURE PAGES CONTINUE]
37
EXHIBIT A
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.
Original Issue Date: ___________, 2006
Original Conversion Price (subject to adjustment herein): $0.369
$_______________
ORIGINAL ISSUE DISCOUNT 9% SENIOR CONVERTIBLE DEBENTURE
DUE _____________, 2009
THIS ORIGINAL ISSUE DISCOUNT 9% SENIOR CONVERTIBLE DEBENTURE is one of
a series of duly authorized and validly issued 9% Original Issue Discount Senior
Convertible Debentures of Ecosphere Technologies, Inc., a Delaware corporation,
having its principal place of business at 0000 X. X. Xxxxxx Xxxxxxx, Xxxxxx,
Xxxxxxx 00000 (the "Company"), designated as its Original Issue Discount 9%
Senior Convertible Debenture due ____________, 2009 (this debenture, the
"Debenture" and, collectively with the other such series of debentures, the
"Debentures").
FOR VALUE RECEIVED, the Company promises to pay to
________________________ or its registered assigns (the "Holder"), or shall have
paid pursuant to the terms hereunder, the principal sum of $__________ by
_________ __, 2009 (the "Maturity Date") or such earlier date as this Debenture
is required or permitted to be repaid as provided hereunder, and to pay interest
to the Holder on the aggregate unconverted and then outstanding Principal Amount
of this Debenture in accordance with the provisions hereof. This Debenture is
subject to the following additional provisions:
Section 1. Definitions. For the purposes hereof, in addition to the
terms defined elsewhere in this Debenture, (a) capitalized terms not otherwise
defined herein shall have the meanings set forth in the Purchase Agreement and
(b) the following terms shall have the following meanings:
1
"Alternate Consideration" shall have the meaning set forth in
Section 5(e).
"Bankruptcy Event" means any of the following events: (a) the
Company or any Significant Subsidiary (as such term is defined in Rule
1-02(w) of Regulation S-X) thereof commences a case or other proceeding
under any bankruptcy, reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar
law of any jurisdiction relating to the Company or any Significant
Subsidiary thereof; (b) there is commenced against the Company or any
Significant Subsidiary thereof any such case or proceeding that is not
dismissed within 60 days after commencement; (c) the Company or any
Significant Subsidiary thereof is adjudicated insolvent or bankrupt or
any order of relief or other order approving any such case or
proceeding is entered; (d) the Company or any Significant Subsidiary
thereof suffers any appointment of any custodian or the like for it or
any substantial part of its property that is not discharged or stayed
within 60 calendar days after such appointment; (e) the Company or any
Significant Subsidiary thereof makes a general assignment for the
benefit of creditors; (f) the Company or any Significant Subsidiary
thereof calls a meeting of its creditors with a view to arranging a
composition, adjustment or restructuring of its debts; or (g) the
Company or any Significant Subsidiary thereof, by any act or failure to
act, expressly indicates its consent to, approval of or acquiescence in
any of the foregoing or takes any corporate or other action for the
purpose of effecting any of the foregoing.
"Base Conversion Price" shall have the meaning set forth in
Section 5(b).
"Business Day" means any day except Saturday, Sunday, any day
which shall be a federal legal holiday in the United States or any day
on which banking institutions in the State of New York are authorized
or required by law or other governmental action to close.
"Buy-In" shall have the meaning set forth in Section 4(d)(v).
"Change of Control Transaction" means the occurrence after the
date hereof of any of (i) an acquisition after the date hereof by an
individual or legal entity or "group" (as described in Rule 13d-5(b)(1)
promulgated under the Exchange Act) of effective control (whether
through legal or beneficial ownership of capital stock of the Company,
by contract or otherwise) of in excess of 33% of the voting securities
of the Company (other than by means of ownership, conversion or
exercise of the Debentures and the Securities issued together with the
Debentures), or (ii) the Company merges into or consolidates with any
other Person, or any Person merges into or consolidates with the
Company and, after giving effect to such transaction, the stockholders
of the Company immediately prior to such transaction own less than 66%
of the aggregate voting power of the Company or the successor entity of
such transaction, or (iii) the Company sells or transfers all or
2
substantially all of its assets to another Person and the stockholders
of the Company immediately prior to such transaction own less than 66%
of the aggregate voting power of the acquiring entity immediately after
the transaction, or (iv) a replacement at one time or within a three
year period of more than one-half of the members of the Company's board
of directors which is not approved by a majority of those individuals
who are members of the board of directors on the date hereof (or by
those individuals who are serving as members of the board of directors
on any date whose nomination to the board of directors was approved by
a majority of the members of the board of directors who are members on
the date hereof), or (v) the execution by the Company of an agreement
to which the Company is a party or by which it is bound, providing for
any of the events set forth in clauses (i) through (iv) above.
"Common Stock" means the common stock, par value $0.01 per
share, of the Company and stock of any other class of securities into
which such securities may hereafter be reclassified or changed into.
"Conversion Date" shall have the meaning set forth in Section
4(a).
"Conversion Price" shall have the meaning set forth in Section
4(b).
"Conversion Shares" means, collectively, the shares of Common
Stock issuable upon conversion of this Debenture in accordance with the
terms hereof.
"Current Ratio" means the current assets of the Company
divided by the current liabilities of the Company, as measured by the
Company's most recently filed financial statement in an SEC Report.
"Debenture Register" shall have the meaning set forth in
Section 2(c).
"Dilutive Issuance" shall have the meaning set forth in
Section 5(b).
"Dilutive Issuance Notice" shall have the meaning set forth in
Section 5(b).
"Effectiveness Period" shall have the meaning set forth in the
Registration Rights Agreement.
"Equity Conditions" means, during the period in question, (i)
the Company shall have duly honored all conversions and redemptions
scheduled to occur or occurring by virtue of one or more Notices of
Conversion of the Holder, if any, (ii) the Company shall have paid all
liquidated damages and other amounts owing to the Holder in respect of
this Debenture, (iii) there is an effective Registration Statement
pursuant to which the Holder is permitted to utilize the prospectus
thereunder to resell all of the shares issuable pursuant to the
Transaction Documents (and the Company believes, in good faith, that
such effectiveness will continue uninterrupted for the foreseeable
future), (iv) the Common Stock is trading on a Trading Market and, to
the extent required, all of the shares issuable pursuant to the
Transaction Documents are listed or quoted for trading on such Trading
3
Market (and the Company believes, in good faith, that trading of the
Common Stock on a Trading Market will continue uninterrupted for the
foreseeable future), (v) there is a sufficient number of authorized but
unissued and otherwise unreserved shares of Common Stock for the
issuance of all of the shares issuable pursuant to the Transaction
Documents, (vi) there is no existing Event of Default or no existing
event which, with the passage of time or the giving of notice, would
constitute an Event of Default, (vii) the issuance of the shares in
question to the Holder would not violate the limitations set forth in
Section 4(c) herein, (viii) there has been no public announcement of a
pending or proposed Fundamental Transaction or Change of Control
Transaction that has not been consummated, (ix) the Holder is not in
possession of any information provided by the Company that the Company
believes constitutes material non-public information and (x) for a
period of 20 consecutive Trading Days prior to the applicable date in
question, the median daily trading volume for the Common Stock on the
principal Trading Market exceeds 100,000 shares (subject to adjustment
for forward and reverse stock splits and the like) per Trading Day.
"Event of Default" shall have the meaning set forth in Section
8.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Forced Conversion" shall have the meaning set forth in
Section 6(d).
"Forced Conversion Date" shall have the meaning set forth in
Section 6(d).
"Forced Conversion Notice" shall have the meaning set forth in
Section 6(d).
"Forced Conversion Notice Date" shall have the meaning set
forth in Section 6(d).
"Fundamental Transaction" shall have the meaning set forth in
Section 5(e).
"Interest Conversion Rate" means the lesser of (a) the
Conversion Price or (b) the 85% of the lesser of (i) the average of the
VWAP for the 10 consecutive Trading Days ending on the Trading Day that
is immediately prior to the applicable Interest Payment Date or (ii)
the average of the VWAP for the 10 consecutive Trading Days ending on
the Trading Day that is immediately prior to the date the applicable
Interest Conversion Shares are issued and delivered if after the
Interest Payment Date.
"Interest Conversion Shares" shall have the meaning set forth
in Section 2(a).
"Interest Notice Period" shall have the meaning set forth in
Section 2(a).
"Interest Payment Date" shall have the meaning set forth in
Section 2(a).
"Interest Share Amount" shall have the meaning set forth in
Section 2(a).
"Late Fees" shall have the meaning set forth in Section 2(d).
4
"Mandatory Default Amount" means the sum of (i) the greater of
(A) 130% of the outstanding Principal Amount of this Debenture, plus
all accrued and unpaid interest hereon, or (B) the outstanding
Principal Amount of this Debenture, plus all accrued and unpaid
interest hereon, divided by the Conversion Price on the date the
Mandatory Default Amount is either (a) demanded (if demand or notice is
required to create an Event of Default) or otherwise due or (b) paid in
full, whichever has a lower Conversion Price, multiplied by the VWAP on
the date the Mandatory Default Amount is either (x) demanded or
otherwise due or (y) paid in full, whichever has a higher VWAP, and
(ii) all other amounts, costs, expenses and liquidated damages due in
respect of this Debenture.
"Measurement Period" shall have the meaning set forth in
Section 6(d).
"New York Courts" shall have the meaning set forth in Section
9(d).
"Notice of Conversion" shall have the meaning set forth in
Section 4(a).
"Original Issue Date" means the date of the first issuance of
the Debentures, regardless of any transfers of any Debenture and
regardless of the number of instruments which may be issued to evidence
such Debentures.
"Permitted Indebtedness" means (a) the Indebtedness existing
on the Original Issue Date and set forth on Schedule 3.1(aa) attached
to the Purchase Agreement, (b) lease obligations and purchase money
indebtedness incurred in connection with the acquisition of capital
assets and lease obligations with respect to newly acquired or leased
assets, (c) a line of credit which may be secured only by a lien on the
Company's accounts receivable and inventory, and (d) indebtedness that
is expressly subordinate to the Debentures pursuant to a written
subordination agreement with the Purchasers that is acceptable to each
Purchaser in its sole and absolute discretion.
"Permitted Lien" means the individual and collective reference
to the following: (a) Liens for taxes, assessments and other
governmental charges or levies not yet due or Liens for taxes,
assessments and other governmental charges or levies being contested in
good faith and by appropriate proceedings for which adequate reserves
(in the good faith judgment of the management of the Company) have been
established in accordance with GAAP; (b) Liens imposed by law which
were incurred in the ordinary course of the Company's business, such as
carriers', warehousemen's and mechanics' Liens, statutory landlords'
Liens, and other similar Liens arising in the ordinary course of the
Company's business, and which (x) do not individually or in the
aggregate materially detract from the value of such property or assets
or materially impair the use thereof in the operation of the business
of the Company and its consolidated Subsidiaries or (y) are being
contested in good faith by appropriate proceedings, which proceedings
have the effect of preventing for the foreseeable future the forfeiture
or sale of the property or asset subject to such Lien; (c) Liens
incurred in connection with Permitted Indebtedness under clause (a) or
(c) thereunder; and (d) Liens incurred in connection with Permitted
Indebtedness under clause (b) thereunder, provided that such Liens are
not secured by assets of the Company or its Subsidiaries other than the
assets so acquired or leased.
5
"Person" means an 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.
"Preferred Stock" means the Series A Redeemable Convertible
Preferred Stock and the Series B Redeemable Convertible Preferred Stock
of the Company.
"Prepayment Amount" means the sum of (i) (A) at any time prior
to the two year anniversary of the Closing Date, 110% of the then
outstanding Principal Amount of the Debenture or (B) at any time after
the two year anniversary of the Closing Date, 130% of the then
outstanding Principal Amount of the Debenture, (ii) accrued but unpaid
interest and (iii) all liquidated damages and other amounts due in
respect of the Debenture.
"Purchase Agreement" means the Securities Purchase Agreement,
dated as of December 15, 2006, among the Company and the original
Holders, as amended, modified or supplemented from time to time in
accordance with its terms.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the date of the Purchase Agreement, among the
Company and the original Holders, as amended, modified or supplemented
from time to time in accordance with its terms.
"Registration Statement" means a registration statement that
registers the resale of all Conversion Shares and Interest Conversion
Shares of the Holder, names such Holder as a "selling stockholder"
therein, and meets the requirements of the Registration Rights
Agreement.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"Share Delivery Date" shall have the meaning set forth in
Section 4(d).
"Subsidiary" shall have the meaning set forth in the Purchase
Agreement.
"Trading Day" means a day on which the principal Trading
Market is open for business.
"Trading Market" means the principal market for the Common
Stock which is one of the following exchanges or market on which the
Common Stock is listed or quoted for trading on the date in question:
the American Stock Exchange, the Nasdaq Capital Market, the Nasdaq
Global Market, the Nasdaq Global Select Market, the New York Stock
Exchange or the OTC Bulletin Board.
"Transaction Documents" shall have the meaning set forth in
the Purchase Agreement.
6
"VWAP" means, for any period of Trading Days, the price
determined by the first of the following clauses that applies: (a) if
the Common Stock is then listed or quoted on a Trading Market, the
daily volume weighted average price of the Common Stock for such period
on the Trading Market on which the Common Stock is then listed or
quoted for trading as reported by Bloomberg L.P. (based on a Trading
Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City
time); (b) if the Common Stock is not then quoted for trading on a
Trading Market and if prices for the Common Stock are then reported in
the "Pink Sheets" published by Pink Sheets, LLC (or a similar
organization or agency succeeding to its functions of reporting
prices), the most recent bid price per share of the Common Stock so
reported; or (c) in all other cases, the fair market value of a share
of Common Stock as determined by an independent appraiser selected in
good faith by the Holder or the Holder's transferee, and reasonably
acceptable to the Company.
Section 2. Interest.
a) Payment of Interest in Cash or Kind. The Company shall pay
interest to the Holder on the aggregate unconverted and then
outstanding Principal Amount of this Debenture at the rate of 9% per
annum, payable quarterly on January 1, April 1, July 1 and October 1,
beginning on the first such date following the three month anniversary
of Original Issue Date, on each Conversion Date (as to that Principal
Amount then being converted) and on the Maturity Date (each such date,
an "Interest Payment Date") (if any Interest Payment Date is not a
Business Day, then the applicable payment shall be due on the next
succeeding Business Day), in cash or duly authorized, validly issued,
fully paid and non-assessable shares of Common Stock at the Interest
Conversion Rate (the dollar amount to be paid in shares, the "Interest
Share Amount") or a combination thereof; provided, however, that
payment in shares of Common Stock may only occur if (i) all of the
Equity Conditions have been met (unless waived by the Holder in
writing) during the 20 Trading Days immediately prior to the applicable
Interest Payment Date (the "Interest Notice Period") and through and
including the date such shares of Common Stock are issued to the
Holder, (ii) the Company shall have given the Holder notice in
accordance with the notice requirements set forth below and (iii) as to
such Interest Payment Date, prior to such Interest Notice Period (but
not more than 5 Trading Days prior to the commencement of such Interest
Notice Period), the Company shall have delivered to the Holder's
account with The Depository Trust Company a number of shares of Common
Stock to be applied against such Interest Share Amount equal to the
quotient of (x) the applicable Interest Share Amount divided by (y) the
then Conversion Price (the "Interest Conversion Shares").
b) Company's Election to Pay Interest in Kind. Subject to the
terms and conditions herein, the decision whether to pay interest
hereunder in cash, shares of Common Stock or a combination thereof
shall be at the discretion of the Company. Prior to the commencement of
any Interest Notice Period, the Company shall deliver to the Holder a
written notice of its election to pay interest hereunder on the
applicable Interest Payment Date either in cash, shares of Common Stock
or a combination thereof and the Interest Share Amount as to the
7
applicable Interest Payment Date, provided that the Company may
indicate in such notice that the election contained in such notice
shall apply to future Interest Payment Dates until revised by a
subsequent notice. During any Interest Notice Period, the Company's
election (whether specific to an Interest Payment Date or continuous)
shall be irrevocable as to such Interest Payment Date. Subject to the
aforementioned conditions, failure to timely deliver such written
notice to the Holder shall be deemed an election by the Company to pay
the interest on such Interest Payment Date in cash. At any time the
Company delivers a notice to the Holder of its election to pay the
interest in shares of Common Stock, the Company shall timely file a
prospectus supplement pursuant to Rule 424 disclosing such election.
The aggregate number of shares of Common Stock otherwise issuable to
the Holder on an Interest Payment Date shall be reduced by the number
of Interest Conversion Shares previously issued to the Holder in
connection with such Interest Payment Date.
c) Interest Calculations. Interest shall be calculated on the
basis of a 360-day year, consisting of twelve 30 calendar day periods,
and shall accrue daily commencing on the Original Issue Date until
payment in full of the principal sum, together with all accrued and
unpaid interest, liquidated damages and other amounts which may become
due hereunder, has been made. Payment of interest in shares of Common
Stock (other than the Interest Conversion Shares issued prior to an
Interest Notice Period) shall otherwise occur pursuant to Section
4(d)(ii) herein and, solely for purposes of the payment of interest in
shares, the Interest Payment Date shall be deemed the Conversion Date.
Interest shall cease to accrue with respect to any Principal Amount
converted, provided that the Company actually delivers the Conversion
Shares within the time period required by Section 4(d)(ii) herein.
Interest hereunder will be paid to the Person in whose name this
Debenture is registered on the records of the Company regarding
registration and transfers of this Debenture (the "Debenture
Register"). Except as otherwise provided herein, if at any time the
Company pays interest partially in cash and partially in shares of
Common Stock to the holders of the Debentures, then such payment of
cash shall be distributed ratably among the holders of the
then-outstanding Debentures based on their (or their predecessor's)
initial purchases of Debentures pursuant to the Purchase Agreement.
d) Late Fee. All overdue accrued and unpaid interest to be
paid hereunder shall entail a late fee at an interest rate equal to the
lesser of 18% per annum or the maximum rate permitted by applicable law
("Late Fees") which shall accrue daily from the date such interest is
due hereunder through and including the date of payment in full.
Notwithstanding anything to the contrary contained herein, if on any
Interest Payment Date the Company has elected to pay accrued interest
in the form of Common Stock but the Company is not permitted to pay
accrued interest in Common Stock because it fails to satisfy the
conditions for payment in Common Stock set forth in Section 2(a)
herein, then, at the option of the Holder, the Company, in lieu of
delivering either shares of Common Stock pursuant to this Section 2 or
paying the regularly scheduled interest payment in cash, shall deliver,
within three Trading Days of each applicable Interest Payment Date, an
amount in cash equal to the product of (x) the number of shares of
Common Stock otherwise deliverable to the Holder in connection with the
payment of interest due on such Interest Payment Date multiplied by (y)
the highest Closing Price during the period commencing on the Interest
Payment Date and ending on the Trading Day prior to the date such
8
payment is made. If any Interest Conversion Shares are issued to the
Holder in connection with an Interest Payment Date and are not applied
against an Interest Share Amount, then the Holder shall promptly return
such excess shares to the Company.
e) Prepayment. At any time after the Effective Date, provided
that the Registration Statement remains effective from the date of
notice of prepayment through the date of actual prepayment, the Company
may prepay all or any portion of the Principal Amount of this Debenture
for an amount in cash equal to the Prepayment Amount without the prior
written consent of the Holder; provided, however, that (i) the Company
shall deliver a written notice to the Holder at least 10 Trading Days
prior to a full or partial prepayment of this Debenture, which notice
shall specify the date of prepayment and amount of prepayment of this
Debenture and (ii) the Company shall honor any Notice of Conversion
delivered by the Holder up to the later of (a) 10 Trading Days
following the written notice of prepayment and (b) the date on which
the prepayment amount is actually received by the Holder. Any
prepayment pursuant to this Section 2(e) shall be applied ratably to
all Holders based on such Holders' initial purchases of Debentures
pursuant to the Purchase Agreement.
Section 3. Registration of Transfers and Exchanges.
a) Different Denominations. This Debenture is exchangeable for
an equal aggregate Principal Amount of Debentures of different
authorized denominations, as requested by the Holder surrendering the
same. No service charge will be payable for such registration of
transfer or exchange.
b) Investment Representations. This Debenture has been issued
subject to certain investment representations of the original Holder
set forth in the Purchase Agreement and may be transferred or exchanged
only in compliance with the Purchase Agreement and applicable federal
and state securities laws and regulations.
c) Reliance on Debenture Register. Prior to due presentment
for transfer to the Company of this Debenture, the Company and any
agent of the Company may treat the Person in whose name this Debenture
is duly registered on the Debenture Register as the owner hereof for
the purpose of receiving payment as herein provided and for all other
purposes, whether or not this Debenture is overdue, and neither the
Company nor any such agent shall be affected by notice to the contrary.
Section 4. Conversion.
a) Voluntary Conversion. At any time after the Original Issue
Date until this Debenture is no longer outstanding, this Debenture
shall be convertible, in whole or in part, into shares of Common Stock
at the option of the Holder, at any time and from time to time (subject
to the conversion limitations set forth in Section 4(c) hereof). The
Holder shall effect conversions by delivering to the Company a Notice
9
of Conversion, the form of which is attached hereto as Annex A (a
"Notice of Conversion"), specifying therein the Principal Amount of
this Debenture to be converted and the date on which such conversion
shall be effected (such date, the "Conversion Date"). If no Conversion
Date is specified in a Notice of Conversion, the Conversion Date shall
be the date that such Notice of Conversion is deemed delivered
hereunder. To effect conversions hereunder, the Holder shall not be
required to physically surrender this Debenture to the Company unless
the entire Principal Amount of this Debenture, plus all accrued and
unpaid interest thereon, has been so converted. Conversions hereunder
shall have the effect of lowering the outstanding Principal Amount of
this Debenture in an amount equal to the applicable conversion. The
Holder and the Company shall maintain records showing the Principal
Amount(s) converted and the date of such conversion(s). The Company may
deliver an objection to any Notice of Conversion within 1 Business Day
of delivery of such Notice of Conversion. In the event of any dispute
or discrepancy, the records of the Holder shall be controlling and
determinative in the absence of manifest error. THE HOLDER, AND ANY
ASSIGNEE BY ACCEPTANCE OF THIS DEBENTURE, ACKNOWLEDGE AND AGREE THAT,
BY REASON OF THE PROVISIONS OF THIS PARAGRAPH, FOLLOWING CONVERSION OF
A PORTION OF THIS DEBENTURE, THE UNPAID AND UNCONVERTED PRINCIPAL
AMOUNT OF THIS DEBENTURE MAY BE LESS THAN THE AMOUNT STATED ON THE FACE
HEREOF.
b) Conversion Price. The conversion price in effect on any
Conversion Date shall be equal to $0.369 (subject to adjustment herein)
(the "Conversion Price").
c) Conversion Limitations. The Company shall not effect any
conversion of this Debenture, and a Holder shall not have the right to
convert any portion of this Debenture, to the extent that after giving
effect to the conversion set forth on the applicable Notice of
Conversion, such Holder (together with such Holder's Affiliates, and
any other person or entity acting as a group together with such Holder
or any of such Holder's Affiliates) would beneficially own in excess of
the Beneficial Ownership Limitation (as defined below). For purposes of
the foregoing sentence, the number of shares of Common Stock
beneficially owned by such Holder and its Affiliates shall include the
number of shares of Common Stock issuable upon conversion of this
Debenture with respect to which such determination is being made, but
shall exclude the number of shares of Common Stock which are issuable
upon (A) conversion of the remaining, unconverted Principal Amount of
this Debenture beneficially owned by such Holder or any of its
Affiliates and (B) exercise or conversion of the unexercised or
unconverted portion of any other securities of the Company subject to a
limitation on conversion or exercise analogous to the limitation
contained herein (including, without limitation, any other Debentures
or the Warrants) beneficially owned by such Holder or any of its
Affiliates. Except as set forth in the preceding sentence, for purposes
of this Section 4(c), beneficial ownership shall be calculated in
accordance with Section 13(d) of the Exchange Act and the rules and
regulations promulgated thereunder. To the extent that the limitation
contained in this Section 4(c) applies, the determination of whether
10
this Debenture is convertible (in relation to other securities owned by
such Holder together with any Affiliates) and of which Principal Amount
of this Debenture is convertible shall be in the sole discretion of
such Holder, and the submission of a Notice of Conversion shall be
deemed to be such Holder's determination of whether this Debenture may
be converted (in relation to other securities owned by such Holder
together with any Affiliates) and which Principal Amount of this
Debenture is convertible, in each case subject to such aggregate
percentage limitations. To ensure compliance with this restriction,
each Holder will be deemed to represent to the Company each time it
delivers a Notice of Conversion that such Notice of Conversion has not
violated the restrictions set forth in this paragraph and the Company
shall have no obligation to verify or confirm the accuracy of such
determination. In addition, a determination as to any group status as
contemplated above shall be determined in accordance with Section 13(d)
of the Exchange Act and the rules and regulations promulgated
thereunder. For purposes of this Section 4(c)(ii), in determining the
number of outstanding shares of Common Stock, a Holder may rely on the
number of outstanding shares of Common Stock as stated in the most
recent of the following: (A) the Company's most recent Form 10-QSB or
Form 10-KSB, as the case may be; (B) a more recent public announcement
by the Company; or (C) a more recent notice by the Company or the
Company's transfer agent setting forth the number of shares of Common
Stock outstanding. Upon the written or oral request of a Holder, the
Company shall within two Trading Days confirm orally and in writing to
such Holder the number of shares of Common Stock then outstanding. In
any case, the number of outstanding shares of Common Stock shall be
determined after giving effect to the conversion or exercise of
securities of the Company, including this Debenture, by such Holder or
its Affiliates since the date as of which such number of outstanding
shares of Common Stock was reported. The "Beneficial Ownership
Limitation" shall be 4.99% of the number of shares of the Common Stock
outstanding immediately after giving effect to the issuance of shares
of Common Stock issuable upon conversion of this Debenture held by the
Holder. The Beneficial Ownership Limitation provisions of this Section
4(c) may be waived by such Holder, at the election of such Holder, upon
not less than 61 days' prior notice to the Company, to change the
Beneficial Ownership Limitation to 9.99% of the number of shares of the
Common Stock outstanding immediately after giving effect to the
issuance of shares of Common Stock upon conversion of this Debenture
held by the Holder and the provisions of this Section 4(c) shall
continue to apply. Upon such a change by a Holder of the Beneficial
Ownership Limitation from such 4.99% limitation to such 9.99%
limitation, the Beneficial Ownership Limitation may not be further
waived by such Holder. The provisions of this paragraph shall be
construed and implemented in a manner otherwise than in strict
conformity with the terms of this Section 4(c) to correct this
paragraph (or any portion hereof) which may be defective or
inconsistent with the intended Beneficial Ownership Limitation herein
contained or to make changes or supplements necessary or desirable to
properly give effect to such limitation. The limitations contained in
this paragraph shall apply to a successor holder of this Debenture.
Notwithstanding the foregoing, the Company shall have no liability to
the Holder or any successor if it fails to comply with the first
sentence and permits any exercise in excess of the Beneficial Ownership
Limitation.
d) Mechanics of Conversion.
i. Conversion Shares Issuable Upon Conversion of Principal
Amount. The number of shares of Common Stock issuable upon a
conversion hereunder shall be determined by the quotient
11
obtained by dividing (x) the outstanding Principal Amount of
this Debenture to be converted by (y) the Conversion Price.
ii. Delivery of Certificate Upon Conversion. Not later than
three Trading Days after each Conversion Date (the "Share
Delivery Date"), the Company shall deliver, or cause to be
delivered, to the Holder (A) a certificate or certificates
representing the Conversion Shares which, on or after the
Effective Date, shall be free of restrictive legends and
trading restrictions (other than those which may then be
required by the Purchase Agreement) representing the number of
shares of Common Stock being acquired upon the conversion of
this Debenture (including, if the Company has given continuous
notice pursuant to Section 2(b) for payment of interest in
shares of Common Stock at least 20 Trading Days prior to the
date on which the Conversion Notice is delivered to the
Company, shares of Common Stock representing the payment of
accrued interest otherwise determined pursuant to Section 2(a)
but assuming that the Interest Payment Period is the 20
Trading Days period immediately prior to the date on which the
Conversion Notice is delivered to the Company and excluding
for such issuance the condition that the Company deliver
Interest Conversion Shares as to such interest payment) and
(B) a bank check in the amount of accrued and unpaid interest
(if the Company has elected or is required to pay accrued
interest in cash). On or after the Effective Date, the Company
shall use its best efforts to deliver any certificate or
certificates required to be delivered by the Company under
this Section 4 electronically through the Depository Trust
Company or another established clearing corporation performing
similar functions.
iii. Failure to Deliver Certificates. If in the case of any
Notice of Conversion such certificate or certificates are not
delivered to or as directed by the applicable Holder by the
third Trading Day after the Conversion Date, the Holder shall
be entitled to elect by written notice to the Company at any
time on or before its receipt of such certificate or
certificates, to rescind such Conversion, in which event the
Company shall promptly return to the Holder any original
Debenture delivered to the Company and the Holder shall
promptly return the Common Stock certificates representing the
Principal Amount of this Debenture tendered for conversion to
the Company.
iv. Obligation Absolute; Partial Liquidated Damages. The
Company's obligations to issue and deliver the Conversion
Shares upon conversion of this Debenture in accordance with
the terms hereof are absolute and unconditional, irrespective
of any action or inaction by the Holder to enforce the same,
any waiver or consent with respect to any provision hereof,
the recovery of any judgment against any Person or any action
to enforce the same, or any setoff, counterclaim, recoupment,
limitation or termination, or any breach or alleged breach by
the Holder or any other Person of any obligation to the
Company or any violation or alleged violation of law by the
12
Holder or any other Person, and irrespective of any other
circumstance which might otherwise limit such obligation of
the Company to the Holder in connection with the issuance of
such Conversion Shares; provided, however, that such delivery
shall not operate as a waiver by the Company of any such
action the Company may have against the Holder. In the event
the Holder of this Debenture shall elect to convert any or all
of the outstanding Principal Amount hereof, the Company may
not refuse conversion based on any claim that the Holder or
anyone associated or affiliated with the Holder has been
engaged in any violation of law, agreement or for any other
reason, unless an injunction from a court, on notice to
Holder, restraining and or enjoining conversion of all or part
of this Debenture shall have been sought and obtained, and the
Company posts a surety bond for the benefit of the Holder in
the amount of 150% of the outstanding Principal Amount of this
Debenture, which is subject to the injunction, which bond
shall remain in effect until the completion of
arbitration/litigation of the underlying dispute and the
proceeds of which shall be payable to such Holder to the
extent it obtains judgment. In the absence of such injunction,
the Company shall issue Conversion Shares or, if applicable,
cash, upon a properly noticed conversion. If the Company fails
for any reason to deliver to the Holder such certificate or
certificates pursuant to Section 4(d)(ii) by the third Trading
Day after the Conversion Date, the Company shall pay to such
Holder, in cash, as liquidated damages and not as a penalty,
for each $1000 of Principal Amount being converted, $10 per
Trading Day (increasing to $20 per Trading Day on the fifth
Trading Day after such liquidated damages begin to accrue) for
each Trading Day after such third Trading Day until such
certificates are delivered. Nothing herein shall limit a
Holder's right to pursue actual damages or declare an Event of
Default pursuant to Section 8 hereof for the Company's failure
to deliver Conversion Shares within the period specified
herein and such Holder shall have the right to pursue all
remedies available to it hereunder, at law or in equity
including, without limitation, a decree of specific
performance and/or injunctive relief. The exercise of any such
rights shall not prohibit the Holder from seeking to enforce
damages pursuant to any other Section hereof or under
applicable law.
v. Compensation for Buy-In on Failure to Timely Deliver
Certificates Upon Conversion. In addition to any other rights
available to the Holder, if the Company fails for any reason
to deliver to the Holder such certificate or certificates by
the Share Delivery Date pursuant to Section 4(d)(ii), and if
after such Share Delivery Date the Holder is required by its
brokerage firm to purchase (in an open market transaction or
otherwise), or the Holder's brokerage firm otherwise
purchases, shares of Common Stock to deliver in satisfaction
of a sale by such Holder of the Conversion Shares which the
Holder was entitled to receive upon the conversion relating to
such Share Delivery Date (a "Buy-In"), then the Company shall
(A) pay in cash to the Holder (in addition to any other
remedies available to or elected by the Holder) the amount by
which (x) the Holder's total purchase price (including any
13
brokerage commissions) for the Common Stock so purchased
exceeds (y) the product of (1) the aggregate number of shares
of Common Stock that such Holder was entitled to receive from
the conversion at issue multiplied by (2) the actual sale
price at which the sell order giving rise to such purchase
obligation was executed (including any brokerage commissions),
and (B) at the option of the Holder, either reissue (if
surrendered) this Debenture in a Principal Amount equal to the
Principal Amount of the attempted conversion or deliver to the
Holder the number of shares of Common Stock that would have
been issued if the Company had timely complied with its
delivery requirements under Section 4(d)(ii) plus (C) the
brokerage commissions, if any, resulting from such sale. For
example, if the Holder purchases Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to an
attempted conversion of this Debenture with respect to which
the actual sale price of the Conversion Shares (including any
brokerage commissions) giving rise to such purchase obligation
was a total of $10,000 under clause (A) of the immediately
preceding sentence, the Company shall be required to pay the
Holder $1,000. The Holder shall provide the Company written
notice indicating the amounts payable to the Holder in respect
of the Buy-In and, upon request of the Company, evidence of
the amount of such loss. Nothing herein shall limit a Holder's
right to pursue any other remedies available to it hereunder,
at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief with respect to
the Company's failure to timely deliver certificates
representing shares of Common Stock upon conversion of this
Debenture as required pursuant to the terms hereof.
vi. Reservation of Shares Issuable Upon Conversion. The
Company covenants that it will at all times reserve and keep
available out of its authorized and unissued shares of Common
Stock for the sole purpose of issuance upon conversion of this
Debenture and payment of interest on this Debenture, each as
herein provided, free from preemptive rights or any other
actual contingent purchase rights of Persons other than the
Holder (and the other holders of the Debentures), not less
than such aggregate number of shares of the Common Stock as
shall (subject to the terms and conditions set forth in the
Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5) upon the conversion
of the outstanding Principal Amount of this Debenture and
payment of interest hereunder. The Company covenants that all
shares of Common Stock that shall be so issuable shall, upon
issue, be duly authorized, validly issued, fully paid and
nonassessable and, if the Registration Statement is then
effective under the Securities Act, shall be registered for
public sale in accordance with such Registration Statement.
vii. Fractional Shares. Upon a conversion hereunder the
Company shall not be required to issue stock certificates
representing fractions of shares of Common Stock, but may if
otherwise permitted, make a cash payment in respect of any
final fraction of a share based on the Closing Price as of the
Trading Day immediately preceding the final Conversation Date
at such time. If the Company elects not, or is unable, to make
such a cash payment, the Holder shall be entitled to receive,
in lieu of the final fraction of a share, 1 whole share of
Common Stock.
14
viii. Transfer Taxes. The issuance of certificates for
shares of the Common Stock on conversion of this Debenture
shall be made without charge to the Holder hereof for any
documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificates,
provided that the Company shall not be required to pay any tax
that may be payable in respect of any transfer involved in the
issuance and delivery of any such certificate upon conversion
in a name other than that of the Holder of this Debenture so
converted and the Company shall not be required to issue or
deliver such certificates unless or until the person or
persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to
the satisfaction of the Company that such tax has been paid.
Section 5. Certain Adjustments.
a) Stock Dividends and Stock Splits. If the Company, at any
time while this Debenture is outstanding: (A) pays a stock dividend or
otherwise makes a distribution or distributions payable in shares of
Common Stock on shares of Common Stock or any Common Stock Equivalents
(which, for avoidance of doubt, shall not include any shares of Common
Stock issued by the Company upon conversion of, or payment of interest
on, this Debenture); (B) subdivides outstanding shares of Common Stock
into a larger number of shares; (C) combines (including by way of a
reverse stock split) outstanding shares of Common Stock into a smaller
number of shares; or (D) issues, in the event of a reclassification of
shares of the Common Stock, any shares of capital stock of the Company,
then the Conversion Price shall be multiplied by a fraction of which
the numerator shall be the number of shares of Common Stock (excluding
any treasury shares of the Company) outstanding immediately before such
event and of which the denominator shall be the number of shares of
Common Stock outstanding immediately after such event. Any adjustment
made pursuant to this Section shall become effective immediately after
the record date for the determination of stockholders entitled to
receive such dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision,
combination or re-classification.
b) Subsequent Equity Sales. If, at any time from the Original
Issue Date until the date that is the 12 month anniversary of the
Effective Date, the Company or any Subsidiary, as applicable, sells or
grants any option to purchase or sells or grants any right to reprice,
or otherwise disposes of or issues (or announces any sale, grant or any
option to purchase or other disposition), any Common Stock or Common
Stock Equivalents entitling any Person to acquire shares of Common
Stock at an effective price per share that is lower than the then
Conversion Price (such lower price, the "Base Conversion Price" and
such issuances, collectively, a "Dilutive Issuance") (if the holder of
the Common Stock or Common Stock Equivalents so issued shall at any
time, whether by operation of purchase price adjustments, reset
provisions, floating conversion, exercise or exchange prices or
15
otherwise, or due to warrants, options or rights per share which are
issued in connection with such issuance, be entitled to receive shares
of Common Stock at an effective price per share that is lower than the
Conversion Price, such issuance shall be deemed to have occurred for
less than the Conversion Price on such date of the Dilutive Issuance),
then the Conversion Price shall be reduced to equal the Base Conversion
Price. Such adjustment shall be made whenever such Common Stock or
Common Stock Equivalents are issued. Notwithstanding the foregoing, no
adjustment will be made under this Section 5(b) in respect of an Exempt
Issuance. The Company shall notify the Holder in writing, no later than
1 Business Day following the issuance of any Common Stock or Common
Stock Equivalents subject to this Section 5(b), indicating therein the
applicable issuance price, or applicable reset price, exchange price,
conversion price and other pricing terms (such notice, the "Dilutive
Issuance Notice"). For purposes of clarification, whether or not the
Company provides a Dilutive Issuance Notice pursuant to this Section
5(b), upon the occurrence of any Dilutive Issuance, the Holder is
entitled to receive a number of Conversion Shares based upon the Base
Conversion Price on or after the date of such Dilutive Issuance,
regardless of whether the Holder accurately refers to the Base
Conversion Price in the Notice of Conversion.
c) Subsequent Rights Offerings. If the Company, at any time
while the Debenture is outstanding, shall issue rights, options or
warrants to all holders of Common Stock (and not to Holders) (any a
"Rights Offering") entitling them to subscribe for or purchase shares
of Common Stock at a price per share that is lower than the Conversion
Price, then the Conversion Price shall be multiplied by a fraction of
which the denominator shall be the number of shares of the Common Stock
outstanding on the date of issuance of such rights or warrants plus the
number of additional shares of Common Stock offered for subscription or
purchase, and of which the numerator shall be the number of shares of
the Common Stock outstanding on the date of issuance of such rights or
warrants plus the number of shares which the aggregate offering price
of the total number of shares so offered (assuming delivery to the
Company in full of all consideration payable upon exercise of such
rights, options or warrants) would purchase at such Conversion Price.
Such adjustment shall be made whenever such rights or warrants are
issued, and shall become effective immediately after the record date
for the determination of stockholders entitled to receive such rights,
options or warrants. To the extent that following expiration of the
Rights Offering, all securities have not been exercised, the foregoing
adjustment shall be recalculated.
d) Pro Rata Distributions. If the Company, at any time while
this Debenture is outstanding, distributes to all holders of Common
Stock (and not to the Holders) evidences of its indebtedness or assets
(including cash and cash dividends) or rights or warrants to subscribe
for or purchase any security (other than the Common Stock, which shall
be subject to Section 5(b)), then in each such case the Conversion
Price shall be adjusted by multiplying such Conversion Price in effect
immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of
which the denominator shall be the Closing Price determined as of the
record date mentioned above, and of which the numerator shall be such
16
Closing Price on such record date less the then fair market value at
such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to 1 outstanding share of the
Common Stock as determined by the Board of Directors of the Company in
good faith. In either case the adjustments shall be described in a
statement delivered to the Holder describing the portion of assets or
evidences of indebtedness so distributed or such subscription rights
applicable to 1 share of Common Stock. Such adjustment shall be made
whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
e) Fundamental Transaction. If, at any time while this
Debenture is outstanding, (A) the Company effects any merger or
consolidation of the Company with or into another Person, (B) the
Company effects any sale of all or substantially all of its assets in
one transaction or a series of related transactions, (C) any tender
offer or exchange offer (whether by the Company or another Person) is
completed pursuant to which holders of Common Stock are permitted to
tender or exchange their shares for other securities, cash or property,
or (D) the Company effects any reclassification of the Common Stock or
any compulsory share exchange pursuant to which the Common Stock is
effectively converted into or exchanged for other securities, cash or
property (in any such case, a "Fundamental Transaction"), then, upon
any subsequent conversion of this Debenture, the Holder shall have the
right to receive, for each Conversion Share that would have been
issuable upon such conversion immediately prior to the occurrence of
such Fundamental Transaction, the same kind and amount of securities,
cash or property as it would have been entitled to receive upon the
occurrence of such Fundamental Transaction if it had been, immediately
prior to such Fundamental Transaction, the holder of 1 share of Common
Stock (the "Alternate Consideration"). For purposes of any such
conversion, the determination of the Conversion Price shall be
appropriately adjusted to apply to such Alternate Consideration based
on the amount of Alternate Consideration issuable in respect of 1 share
of Common Stock in such Fundamental Transaction, and the Company shall
apportion the Conversion Price among the Alternate Consideration in a
reasonable manner reflecting the relative value of any different
components of the Alternate Consideration. If holders of Common Stock
are given any choice as to the securities, cash or property to be
received in a Fundamental Transaction, then the Holder shall be given
the same choice as to the Alternate Consideration it receives upon any
conversion of this Debenture following such Fundamental Transaction. To
the extent necessary to effectuate the foregoing provisions, any
successor to the Company or surviving entity in such Fundamental
Transaction shall issue to the Holder a new debenture consistent with
the foregoing provisions and evidencing the Holder's right to convert
such debenture into Alternate Consideration. The terms of any agreement
pursuant to which a Fundamental Transaction is effected shall include
terms requiring any such successor or surviving entity to comply with
the provisions of this Section 5(e) and insuring that this Debenture
(or any such replacement security) will be similarly adjusted upon any
subsequent transaction analogous to a Fundamental Transaction.
f) Calculations. All calculations under this Section 5 shall
be made to the nearest cent or the nearest 1/100th of a share, as the
case may be. For purposes of this Section 5, the number of shares of
17
Common Stock deemed to be issued and outstanding as of a given date
shall be the sum of the number of shares of Common Stock (excluding any
treasury shares of the Company) issued and outstanding.
g) Notice to the Holder.
i. Adjustment to Conversion Price. Whenever the Conversion
Price is adjusted pursuant to any provision of this Section 5,
the Company shall promptly mail to each Holder a notice
setting forth the Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such
adjustment. If the Company issues a variable rate security,
despite the prohibition thereon in the Purchase Agreement
prior to the 12-month anniversary of the Effective Date, the
Company shall be deemed to have issued Common Stock or Common
Stock Equivalents at the lowest possible conversion or
exercise price at which such securities may be converted or
exercised in the case of a Variable Rate Transaction (as
defined in the Purchase Agreement).
ii. Notice to Allow Conversion by Holder. If (A) the Company
shall declare a dividend (or any other distribution in
whatever form) on the Common Stock, (B) the Company shall
declare a special nonrecurring cash dividend on or a
redemption of the Common Stock, (C) the Company shall
authorize the granting to all holders of the Common Stock of
rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights, (D) the approval
of any stockholders of the Company shall be required in
connection with any reclassification of the Common Stock, any
consolidation or merger to which the Company is a party, any
sale or transfer of all or substantially all of the assets of
the Company, of any compulsory share exchange whereby the
Common Stock is converted into other securities, cash or
property or (E) the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up of the
affairs of the Company, then, in each case, the Company shall
cause to be filed at each office or agency maintained for the
purpose of conversion of this Debenture, and shall cause to be
delivered to the Holder at its last address as it shall appear
upon the Debenture Register, at least 20 calendar days prior
to the applicable record or effective date hereinafter
specified, a notice stating (x) the date on which a record is
to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be
taken, the date as of which the holders of the Common Stock of
record to be entitled to such dividend, distributions,
redemption, rights or warrants are to be determined or (y) the
date on which such reclassification, consolidation, merger,
sale, transfer or share exchange is expected to become
effective or close, and the date as of which it is expected
that holders of the Common Stock of record shall be entitled
to exchange their shares of the Common Stock for securities,
cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange,
provided that the failure to deliver such notice or any defect
therein or in the delivery thereof shall not affect the
validity of the corporate action required to be specified in
such notice. The Holder is entitled to convert this Debenture
during the 20-day period commencing on the date of such notice
18
through the effective date of the event triggering such
notice.
Section 6. Forced Conversion. Notwithstanding anything herein to the
contrary, at any time after the Effective Date, if the VWAP for each of 20
Trading Days during any 30 consecutive Trading Day period (such 30 consecutive
Trading Day period, the "Measurement Period," which period shall have commenced
only after the Effective Date) exceeds the then effective Conversion Price by at
least 200%, the Company may, within 1 Trading Day after the end of any such
Measurement Period, deliver a written notice to the Holder (a "Forced Conversion
Notice" and the date such notice is delivered to the Holder, the "Forced
Conversion Notice Date") to cause the Holder to convert all or part of the then
outstanding Principal Amount of this Debenture plus, if so specified in the
Forced Conversion Notice, accrued but unpaid interest, liquidated damages and
other amounts owing to the Holder under this Debenture, it being agreed that the
"Conversion Date" for purposes of Section 4 shall be deemed to occur on the
third Trading Day following the Forced Conversion Notice Date (such third
Trading Day, the "Forced Conversion Date"). The Company may not deliver a Forced
Conversion Notice, and any Forced Conversion Notice delivered by the Company
shall not be effective, unless all of the Equity Conditions are met on the later
of the Forced Conversion Date and the Trading Day after the date such Conversion
Shares pursuant to such conversion are delivered to the Holder. Any Forced
Conversion shall be applied ratably to all Holders based on their initial
purchases of Debentures pursuant to the Purchase Agreement, provided that any
voluntary conversions by a Holder shall be applied against such Holder's
pro-rata allocation, thereby decreasing the aggregate amount forcibly converted
hereunder if only a portion of this Debenture is forcibly converted. For
purposes of clarification, a Forced Conversion shall be subject to all of the
provisions of Section 4, including, without limitation, the provision requiring
payment of liquidated damages and limitations on conversions.
Section 7. Negative Covenants. As long as any portion of this Debenture
remains outstanding, the Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly:
a) incur Indebtedness other than Permitted Indebtedness,
unless (i) immediately after the occurrence of such Indebtedness, the
Company shall have a Current Ratio of 1.0 or higher, as shall be
certified in writing to the Holder by the Company's Chief Financial
Officer within 5 Trading Days following the incurrence of such
Indebtedness or (ii) Purchasers holding in the aggregate at least 75%
of the Principal Amount of the then outstanding Debentures shall
otherwise consent in writing;
b) other than Permitted Liens, enter into, create, incur,
assume or suffer to exist any Liens of any kind, on or with respect to
any of its property or assets now owned or hereafter acquired or any
interest therein or any income or profits therefrom;
c) amend its charter documents, including, without limitation,
the certificate of incorporation and bylaws, in any manner that
19
materially and adversely affects any rights of the Holder provided,
however, the Company may amend its certificate of incorporation to
increase its authorized capital stock;
d) unless Purchasers holding in the aggregate at least 75% of
the Principal Amount of the then outstanding Debentures shall otherwise
consent in writing, repay, repurchase or offer to repay, repurchase or
otherwise acquire more than a de minimis number of shares of its Common
Stock or Common Stock Equivalents other than as to (a) the Conversion
Shares or Warrant Shares as permitted or required under the Transaction
Documents, (b) repurchases of Common Stock or Common Stock Equivalents
of departing officers and directors of the Company, provided that such
repurchases shall not exceed an aggregate of $100,000 for all officers
and directors during the term of this Debenture) and (c) shares of
Preferred Stock;
e) pay cash dividends or distributions on any equity
securities of the Company;
f) enter into any transaction with any Affiliate of the
Company which would be required to be disclosed in any public filing
with the Commission, unless such transaction is made on an arm's-length
basis and expressly approved by a majority of the disinterested
directors of the Company (even if less than a quorum otherwise required
for board approval); or
g) enter into any agreement with respect to any of the
foregoing.
Section 8. Events of Default.
a) "Event of Default" means, wherever used herein, any of the
following events (whatever the reason for such event and whether such
event shall be voluntary or involuntary or effected by operation of law
or pursuant to any judgment, decree or order of any court, or any
order, rule or regulation of any administrative or governmental body):
i. any default in the payment of (A) the Principal Amount of
any Debenture or (B) interest, liquidated damages and other
amounts owing to a Holder on any Debenture, as and when the
same shall become due and payable (whether on a Conversion
Date or the Maturity Date or by acceleration or otherwise)
which default, solely in the case of an interest payment or
other default under clause (B) above, is not cured within 3
Trading Days;
ii. the Company shall fail to observe or perform any other
covenant or agreement contained in the Debentures (other than
a breach by the Company of its obligations to deliver shares
of Common Stock to the Holder upon conversion, which breach is
addressed in clause (xi) below) which failure is not cured, if
20
possible to cure, within the earlier to occur of (A) 5 Trading
Days after notice of such failure sent by the Holder or by any
other Holder and (B) 10 Trading Days after the Company has
become or should have become aware of such failure;
iii. a default or event of default (subject to any grace or
cure period provided in the applicable agreement, document or
instrument) shall occur under (A) any of the Transaction
Documents or (B) any other material agreement, lease, document
or instrument to which the Company or any Subsidiary is
obligated (and not covered by clause (vi) below);
iv. any representation or warranty made in this Debenture,
any other Transaction Documents, any written statement
pursuant hereto or thereto or any other report, financial
statement or certificate made or delivered to the Holder or
any other Holder shall be untrue or incorrect in any material
respect as of the date when made or deemed made;
v. the Company or any Significant Subsidiary shall be
subject to a Bankruptcy Event;
vi. the Company or any Subsidiary shall default on any of
its obligations under any mortgage, credit agreement or other
facility, indenture agreement, factoring agreement or other
instrument under which there may be issued, or by which there
may be secured or evidenced, any Indebtedness or money due
under any long term leasing or factoring arrangement that (a)
involves an obligation greater than $150,000, whether such
Indebtedness now exists or shall hereafter be created, and (b)
results in such Indebtedness becoming or being declared due
and payable prior to the date on which it would otherwise
become due and payable;
vii. the Common Stock shall not be eligible for listing or
quotation for trading on the Trading Market and shall not be
eligible to resume listing or quotation for trading thereon
within five Trading Days;
viii. the Company shall be a party to any Change of Control
Transaction or Fundamental Transaction or shall agree to sell
or dispose of all or in excess of 33% of its assets in one
transaction or a series of related transactions (whether or
not such sale would constitute a Change of Control
Transaction) (based upon the most recently filed balance sheet
filed as part of an Exchange Act periodic report).
ix. any Person shall breach any agreement delivered to the
initial Holders pursuant to Section 2.2(a)(v) of the Purchase
Agreement;
x. the lien on the Company's assets held of record by Xxxxxx
Xxxxxx shall not have been released of record within 45
calendar days of the Original Issue Date; or
21
xi. any monetary judgment, writ or similar final process
shall be entered or filed against the Company, any Subsidiary
or any of their respective property or other assets for more
than $50,000, and such judgment, writ or similar final process
shall remain unvacated, unbonded or unstayed for a period of
45 calendar days.
b) Remedies Upon Event of Default. If any Event of Default
occurs, the outstanding Principal Amount of this Debenture, plus
accrued but unpaid interest, liquidated damages and other amounts owing
in respect thereof through the date of acceleration, shall become, at
the Holder's election, immediately due and payable in cash at the
Mandatory Default Amount. Commencing 5 days after the occurrence of any
Event of Default that results in the eventual acceleration of this
Debenture, the interest rate on this Debenture shall accrue at an
interest rate equal to the lesser of 18% per annum or the maximum rate
permitted under applicable law. Upon the payment in full of the
Mandatory Default Amount, the Holder shall promptly surrender this
Debenture to or as directed by the Company. In connection with such
acceleration described herein, the Holder need not provide, and the
Company hereby waives, any presentment, demand, protest or other notice
of any kind, and the Holder may immediately and without expiration of
any grace period enforce any and all of its rights and remedies
hereunder and all other remedies available to it under applicable law.
Such acceleration may be rescinded and annulled by Holder at any time
prior to payment hereunder and the Holder shall have all rights as a
holder of the Debenture until such time, if any, as the Holder receives
full payment pursuant to this Section 8(b). No such rescission or
annulment shall affect any subsequent Event of Default or impair any
right consequent thereon.
Section 9. Miscellaneous.
a) Notices. Any and all notices or other communications or
deliveries to be provided by the Holder hereunder, including, without
limitation, any Notice of Conversion, shall be in writing and delivered
personally, by facsimile, or sent by a nationally recognized overnight
courier service, addressed to the Company, at the address set forth
above, facsimile number (000) 000-0000, ATTN: Xxxxx X. Xxxxxxx III or
such other facsimile number or address as the Company may specify for
such purpose by notice to the Holder delivered in accordance with this
Section 9. Any and all notices or other communications or deliveries to
be provided by the Company hereunder shall be in writing and delivered
personally, by facsimile, or sent by a nationally recognized overnight
courier service addressed to each Holder at the facsimile number or
address of such Holder appearing on the books of the Company, or if no
such facsimile number or address appears, at the principal place of
business of the Holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if such notice or communication is delivered
22
via facsimile at the facsimile number specified in this Section 9 prior
to 5:30 p.m. (New York City time), (ii) the date immediately following
the date of transmission, if such notice or communication is delivered
via facsimile at the facsimile number specified in this Section 9
between 5:30 p.m. (New York City time) and 11:59 p.m. (New York City
time) on any date, (iii) the second Business Day following the date of
mailing, if sent by nationally recognized overnight courier service, or
(iv) upon actual receipt by the party to whom such notice is required
to be given.
b) Absolute Obligation. Except as expressly provided herein,
no provision of this Debenture shall alter or impair the obligation of
the Company, which is absolute and unconditional, to pay the principal
of, liquidated damages and accrued interest, as applicable, on this
Debenture at the time, place, and rate, and in the coin or currency,
herein prescribed. This Debenture is a direct debt obligation of the
Company. This Debenture ranks pari passu with all other Debentures now
or hereafter issued under the terms set forth herein.
c) Lost or Mutilated Debenture. If this Debenture shall be
mutilated, lost, stolen or destroyed, the Company shall execute and
deliver, in exchange and substitution for and upon cancellation of a
mutilated Debenture, or in lieu of or in substitution for a lost,
stolen or destroyed Debenture, a new Debenture for the Principal Amount
of this Debenture so mutilated, lost, stolen or destroyed, but only
upon receipt of evidence of such loss, theft or destruction of such
Debenture, and of the ownership hereof, reasonably satisfactory to the
Company.
d) Governing Law. All questions concerning the construction,
validity, enforcement and interpretation of this Debenture shall be
governed by and construed and enforced in accordance with the internal
laws of the State of New York, without regard to the principles of
conflict of laws thereof. Each party agrees that all legal proceedings
concerning the interpretation, enforcement and defense of the
transactions contemplated by any of the Transaction Documents (whether
brought against a party hereto or its respective Affiliates, directors,
officers, shareholders, employees or agents) shall be commenced in the
state and federal courts sitting in the City of New York, Borough of
Manhattan (the "New York Courts"). Each party hereto hereby irrevocably
submits to the exclusive jurisdiction of the New York Courts for the
adjudication of any dispute hereunder or in connection herewith or with
any transaction contemplated hereby or discussed herein (including with
respect to the enforcement of any of the Transaction Documents), and
hereby irrevocably waives, and agrees not to assert in any suit, action
or proceeding, any claim that it is not personally subject to the
jurisdiction of such New York Courts, or such New York Courts are
improper or inconvenient venue for such proceeding. Each party hereby
irrevocably waives personal service of process and consents to process
being served in any such suit, action or proceeding by mailing a copy
thereof via registered or certified mail or overnight delivery (with
evidence of delivery) to such party at the address in effect for
notices to it under this Debenture and agrees that such service shall
constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right
to serve process in any other manner permitted by applicable law. Each
party hereto hereby irrevocably waives, to the fullest extent permitted
by applicable law, any and all right to trial by jury in any legal
proceeding arising out of or relating to this Debenture or the
transactions contemplated hereby. If either party shall commence an
action or proceeding to enforce any provisions of this Debenture, then
23
the prevailing party in such action or proceeding shall be reimbursed
by the other party for its attorneys' fees and other costs and expenses
incurred in the investigation, preparation and prosecution of such
action or proceeding.
e) Waiver. Any waiver by the Company or the Holder of a breach
of any provision of this Debenture shall not operate as or be construed
to be a waiver of any other breach of such provision or of any breach
of any other provision of this Debenture. The failure of the Company or
the Holder to insist upon strict adherence to any term of this
Debenture on one or more occasions shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this Debenture. Any waiver
by the Company or the Holder must be in writing.
f) Severability. If any provision of this Debenture is
invalid, illegal or unenforceable, the balance of this Debenture shall
remain in effect, and if any provision is inapplicable to any Person or
circumstance, it shall nevertheless remain applicable to all other
Persons and circumstances. If it shall be found that any interest or
other amount deemed interest due hereunder violates the applicable law
governing usury, the applicable rate of interest due hereunder shall
automatically be lowered to equal the maximum rate of interest
permitted under applicable law. The Company covenants (to the extent
that it may lawfully do so) that it shall not at any time insist upon,
plead, or in any manner whatsoever claim or take the benefit or
advantage of, any stay, extension or usury law or other law which would
prohibit or forgive the Company from paying all or any portion of the
principal of or interest on this Debenture as contemplated herein,
wherever enacted, now or at any time hereafter in force, or which may
affect the covenants or the performance of this indenture, and the
Company (to the extent it may lawfully do so) hereby expressly waives
all benefits or advantage of any such law, and covenants that it will
not, by resort to any such law, hinder, delay or impeded the execution
of any power herein granted to the Holder, but will suffer and permit
the execution of every such as though no such law has been enacted.
g) Next Business Day. Whenever any payment or other obligation
hereunder shall be due on a day other than a Business Day, such payment
shall be made on the next succeeding Business Day.
h) Headings. The headings contained herein are for convenience
only, do not constitute a part of this Debenture and shall not be
deemed to limit or affect any of the provisions hereof.
i) Assumption. Any successor to the Company or any surviving
entity in a Fundamental Transaction shall (i) assume, prior to such
Fundamental Transaction, all of the obligations of the Company under
this Debenture and the other Transaction Documents pursuant to written
agreements in form and substance satisfactory to the Holder (such
approval not to be unreasonably withheld or delayed) and (ii) issue to
24
the Holder a new debenture of such successor entity evidenced by a
written instrument substantially similar in form and substance to this
Debenture, including, without limitation, having a Principal Amount and
interest rate equal to the Principal Amount and the interest rate of
this Debenture and having similar ranking to this Debenture, which
shall be satisfactory to the Holder (any such approval not to be
unreasonably withheld or delayed). The provisions of this Section 9(i)
shall apply similarly and equally to successive Fundamental
Transactions and shall be applied without regard to any limitations of
this Debenture.
*********************
25
IN WITNESS WHEREOF, the Company has caused this Debenture to be duly
executed by a duly authorized officer as of the date first above indicated.
ECOSPHERE TECHNOLOGIES, INC.
By:____________________________________________
Name: Xxxxxx XxXxxxx
Title: President and Chief Executive Officer
26
ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal under the Original
Issue Discount 9% Senior Convertible Debenture due ________________, 2009 of
Ecosphere Technologies, Inc., a Delaware corporation (the "Company"), into
shares of common stock, par value $0.01 per share (the "Common Stock"), of the
Company according to the conditions hereof, as of the date written below. If
shares of Common Stock are to be issued in the name of a person other than the
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to the
holder for any conversion, except for such transfer taxes, if any.
By the delivery of this Notice of Conversion the undersigned represents
and warrants to the Company that its ownership of the Common Stock does not
exceed the amounts specified under Section 4 of this Debenture, as determined in
accordance with Section 13(d) of the Exchange Act.
The undersigned agrees to comply with the prospectus delivery
requirements under the applicable securities laws in connection with any
transfer of the aforesaid shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:
Principal Amount of Debenture to be Converted:
Payment of Interest in Common Stock __ yes __ no
If yes, $_____ of Interest Accrued on
Account of Conversion at Issue.
Number of shares of Common Stock to be issued:
Signature:
Name:
Address:
27
SCHEDULE 1
CONVERSION SCHEDULE
The Original Issue Discount 9% Senior Convertible Debentures due on
____________, 2009 in the aggregate Principal Amount of $____________ is issued
by Ecosphere Technologies, Inc. This Conversion Schedule reflects conversions
made under Section 4 of the above referenced Debenture.
Dated:
=============================== ------------------------- ======================= ------------------------------
Aggregate Principal
Amount Remaining
Date of Conversion Subsequent to
(or for first entry, Original Conversion
Issue Date) Amount of Conversion (or original Company Attest
Principal Amount)
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
=============================== ========================= ======================= ------------------------------
28
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of December 15, 2006, among Ecosphere Technologies, Inc., a
Delaware corporation (the "Company") and the several purchasers signatory hereto
(each such purchaser, a "Purchaser" and, collectively, the "Purchasers").
This Agreement is made pursuant to the Securities Purchase Agreement,
dated as of the date hereof, between the Company and each Purchaser (the
"Purchase Agreement").
The Company and each Purchaser hereby agrees as follows:
1. Definitions
CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED HEREIN THAT ARE
DEFINED IN THE PURCHASE AGREEMENT SHALL HAVE THE MEANINGS GIVEN SUCH TERMS IN
THE PURCHASE AGREEMENT. As used in this Agreement, the following terms shall
have the following meanings:
"Advice" shall have the meaning set forth in Section 6(d).
"Effectiveness Date" means, with respect to the initial
Registration Statement required to be filed hereunder, the 90th
calendar day following the date hereof (or the 120th calendar day
following the date hereof in the event of a "full review" by the
Commission of the initial Registration Statement) and, with respect to
any additional Registration Statements which may be required pursuant
to Section 3(c), the 60th calendar day following the date on which the
Company first knows, or reasonably should have known, that such
additional Registration Statement is required hereunder; provided,
however, that in the event the Company is notified by the Commission
that one of the above Registration Statements will not be reviewed or
is no longer subject to further review and comments, the Effectiveness
Date as to such Registration Statement shall be the fifth Trading Day
following the date on which the Company is so notified if such date
precedes the dates required above. Provided, however, the applicable
number of days shall be extended to the extent provided in Section
3(a).
"Effectiveness Period" shall have the meaning set forth in
Section 2(a).
"Event" shall have the meaning set forth in Section 2(b).
"Event Date" shall have the meaning set forth in Section 2(b).
"Filing Date" means, with respect to the initial Registration
Statement required hereunder, the 30th calendar day following the date
hereof and, with respect to any additional Registration Statements
1
which may be required pursuant to Section 3(c), the 30th calendar day
following the date on which the Company first knows, or reasonably
should have known, that such additional Registration Statement is
required hereunder.
"Holder" or "Holders" means the holder or holders, as the case
may be, from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in
Section 5(c).
"Indemnifying Party" shall have the meaning set forth in
Section 5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Plan of Distribution" shall have the meaning set forth in
Section 2(a).
"Prospectus" means the prospectus included in a Registration
Statement (including, without limitation, a prospectus that includes
any information previously omitted from a prospectus filed as part of
an effective registration statement in reliance upon Rule 430A
promulgated under the Securities Act), as amended or supplemented by
any prospectus supplement, with respect to the terms of the offering of
any portion of the Registrable Securities covered by a Registration
Statement, and all other amendments and supplements to the Prospectus,
including post-effective amendments, and all material incorporated by
reference or deemed to be incorporated by reference in such Prospectus.
"Registrable Securities" means (i) all of the shares of Common
Stock issuable upon conversion in full of the Debentures, (ii) all
shares of Common Stock issuable as interest or principal on the
Debentures assuming all permissible interest and principal payments are
made in shares of Common Stock and the Debentures are held until
maturity; provided, that if the Commission shall refuse to permit the
registration for resale by the Holders in ordinary trading transactions
of any of the shares described in this clause (ii), the such shares
(and only such shares) shall not be Registrable Securities), (iii) all
Warrant Shares, (iv) any additional shares of Common Stock issuable in
connection with any anti-dilution provisions in the Debentures or the
Warrants (in each case, without giving effect to any limitations on
conversion set forth in the Debenture or limitations on exercise set
forth in the Warrant) and (v) any securities issued or issuable upon
any stock split, dividend or other distribution, recapitalization or
similar event with respect to the foregoing.
"Registration Statement" means the registration statements
required to be filed hereunder and any additional registration
statements contemplated by Section 3(c), including (in each case) the
Prospectus, amendments and supplements to such registration statement
or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference or deemed
to be incorporated by reference in such registration statement.
"Rule 415" means Rule 415 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time
2
to time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same purpose and effect as such
Rule.
"Rule 424" means Rule 424 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time
to time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same purpose and effect as such
Rule.
"Selling Shareholder Questionnaire" shall have the meaning set
forth in Section 3(a).
2. Shelf Registration
(a) On or prior to each Filing Date, the Company shall prepare
and file with the Commission a "Shelf" Registration Statement covering
the resale of 130% of the Registrable Securities on such Filing Date
for an offering to be made on a continuous basis pursuant to Rule 415;
provided, however, that if 130% of the Registrable Securities hereunder
shall equal or exceed 30% of the issued and outstanding Common Stock of
the Company on the actual filing date of the initial Registration
Statement, the initial Registration Statement shall register a number
of shares of Common Stock which is equal to 30% of the issued and
outstanding shares of Common Stock of the Company on such actual filing
date minus 10,000 shares of Common Stock, and the remaining Registrable
Securities shall be subject to Section 3(c). In such event, the number
of Registrable Securities to be registered for each Holder shall be
reduced pro-rata among all Holders and each Holder shall have the right
to designate which of its Registrable Securities shall be omitted from
the initial Registration Statement. The Registration Statement shall be
on Form SB-2 (except if the Company is not then eligible to register
for resale the Registrable Securities on Form SB-2, in which case such
registration shall be on another appropriate form in accordance
herewith) and shall contain (unless otherwise directed by at least an
85% majority in interest of the Holders) substantially the "Plan of
Distribution" attached hereto as Annex A. Subject to the terms of this
Agreement, the Company shall use its best efforts to cause a
Registration Statement to be declared effective under the Securities
Act as promptly as possible after the filing thereof, but in any event
prior to the applicable Effectiveness Date, and shall use its best
efforts to keep such Registration Statement continuously effective
under the Securities Act until all Registrable Securities covered by
such Registration Statement have been sold, or may be sold without
volume restrictions pursuant to Rule 144(k), as determined by the
counsel to the Company pursuant to a written opinion letter to such
effect, addressed and acceptable to the Company's transfer agent and
the affected Holders (the "Effectiveness Period"). The Company shall
telephonically request effectiveness of a Registration Statement as of
5:00 p.m. New York City time on a Trading Day. The Company shall
immediately notify the Holders via facsimile of the effectiveness of a
Registration Statement on the same Trading Day that the Company
telephonically confirms effectiveness with the Commission, which shall
be the date requested for effectiveness of a Registration Statement.
The Company shall, by 9:30 a.m. New York City time on the Trading Day
after the Effective Date (as defined in the Purchase Agreement), file a
final Prospectus with the Commission as required by Rule 424. Failure
3
to so notify the Holder within 1 Trading Day of such notification of
effectiveness or failure to file a final Prospectus as foresaid shall
be deemed an Event under Section 2(b).
(b) If (i) a Registration Statement is not filed on or prior
to its Filing Date (if the Company files a Registration Statement
without affording the Holders the opportunity to review and comment on
the same as required by Section 3(a) herein, the Company shall not be
deemed to have satisfied this clause (i)), or (ii) the Company fails to
file with the Commission a request for acceleration in accordance with
Rule 461 promulgated under the Securities Act, within five Trading Days
of the date that the Company is notified (orally or in writing,
whichever is earlier) by the Commission that a Registration Statement
will not be "reviewed," or not subject to further review, or (iii) a
Registration Statement filed or required to be filed hereunder is not
declared effective by the Commission by its Effectiveness Date, or (iv)
after the Effectiveness Date, a Registration Statement ceases for any
reason to remain continuously effective as to all Registrable
Securities for which it is required to be effective, or the Holders are
otherwise not permitted to utilize the Prospectus therein to resell
such Registrable Securities (a) because the Company is negotiating a
merger, consolidation, acquisition or sale of all or substantially all
of its assets or a similar transaction which, in the good faith
judgment of the Company's board of directors, requires the Registration
Statement to be amended to include information in connection with such
pending transaction (including the parties thereto) and such
information is not yet available or publicly disclosable, for more than
an aggregate of 30 non-consecutive calendar days during any 12 month
period or (b) for any other reason, more than an aggregate of 60
non-consecutive calendar days during any 12 month period (any such
failure or breach being referred to as an "Event," and for purposes of
clause (i) or (iii) the date on which such Event occurs, or for
purposes of clause (ii) the date on which such five Trading Day period
is exceeded, or for purposes of clause (iv) the date on which such 30
or 60 calendar day period, as applicable, is exceeded being referred to
as "Event Date", then in addition to any other rights the Holders may
have hereunder or under applicable law, on each such Event Date and on
each monthly anniversary of each such Event Date (if the applicable
Event shall not have been cured by such date) until the applicable
Event is cured, the Company shall pay to each Holder an amount in cash,
as partial liquidated damages and not as a penalty, equal to 2% of the
aggregate purchase price paid by such Holder pursuant to the Purchase
Agreement for any Registrable Securities then held by such Holder
(calculated as if all convertible securities had been fully converted).
The parties agree that (1) the Company will not be liable for
liquidated damages under this Agreement with respect to any Warrants or
Warrant Shares, (2) in no event will the Company be liable for
liquidated damages under this Agreement in excess of 2% of the
aggregate Subscription Amount of the Holders in any 30-day period and
(3) the maximum aggregate liquidated damages payable to a Holder under
this Agreement shall be ten percent (10%) of the aggregate Subscription
Amount paid by such Holder pursuant to the Purchase Agreement. If the
Company fails to pay any partial liquidated damages pursuant to this
Section in full within seven days after the date payable, the Company
will pay interest thereon at a rate of 18% per annum (or such lesser
maximum amount that is permitted to be paid by applicable law) to the
Holder, accruing daily from the date such partial liquidated damages
are due until such amounts, plus all such interest thereon, are paid in
4
full. The partial liquidated damages pursuant to the terms hereof shall
apply on a daily pro-rata basis for any portion of a month prior to the
cure of an Event.
(c) Provided, however, that the Event in clause (iii) of
Section 2(b) shall be temporarily suspended and no liquidated damages
due for as long as (A) the Company responds in writing to comments made
by the Commission within 10 calendar days of receipt of such comments
or (B) such Event directly results from a request by the Commission
that the applicable Registration Statement include the Company's next
quarterly or annual financial statement, provided that the Company
provide to each Holder a copy of all written communications (or a
written summary of verbal communications) in connection with clauses
(A) or (B) within 5 calendar days of the receipt of such comments or
request).
3. Registration Procedures.
In connection with the Company's registration obligations hereunder,
the Company shall:
(a) Not less than five Trading Days prior to the filing of the
Registration Statement (and not less than one Trading Day for each
Amendment to a Registration Statement) and not less than one Trading
Day prior to the filing of any related Prospectus or any amendment or
supplement thereto, the Company shall (i) furnish to each Holder copies
of all such documents proposed to be filed, which documents (other than
those incorporated or deemed to be incorporated by reference) will be
subject to the review of such Holders and (ii) cause its officers and
directors, counsel and independent certified public accountants to
respond to such inquiries as shall be necessary, in the reasonable
opinion of respective counsel to each Holder, to conduct a reasonable
investigation within the meaning of the Securities Act. The Company
shall not file a Registration Statement or any such Prospectus or any
amendments or supplements thereto to which the Holders of a majority of
the Registrable Securities shall reasonably object in good faith,
provided that the Company is notified of such objection in writing no
later than 5 Trading Days after the Holders have been so furnished
copies of a Registration Statement or 1 Trading Day after the Holders
have been so furnished copies of any Amendment to the Registration
Statement or any related Prospectus or amendments or supplements
thereto. In the event that the Company receives such an objection, the
time periods referred to in clauses (i), (iii) and (iv) of Section 2(b)
shall be extended for a reasonable period of time not to exceed 10
calendar days for the Company and the Holders of a majority of the
Registrable Securities to resolve such objection. Each Holder agrees to
furnish to the Company a completed questionnaire in the form attached
to this Agreement as Annex B (a "Selling Shareholder Questionnaire")
not less than two Trading Days prior to the Filing Date or by the end
of the fourth Trading Day following the date on which such Holder
receives draft materials in accordance with this Section.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to a Registration Statement and
the Prospectus used in connection therewith as may be necessary to keep
5
a Registration Statement continuously effective as to the applicable
Registrable Securities for the Effectiveness Period and prepare and
file with the Commission such additional Registration Statements in
order to register for resale under the Securities Act all of the
Registrable Securities; (ii) cause the related Prospectus to be amended
or supplemented by any required Prospectus supplement (subject to the
terms of this Agreement), and, as so supplemented or amended, to be
filed pursuant to Rule 424; (iii) respond as promptly as reasonably
possible to any comments received from the Commission with respect to a
Registration Statement or any amendment thereto and provide as promptly
as reasonably possible to the Holders true and complete copies of all
correspondence from and to the Commission relating to a Registration
Statement (provided that the Company may excise any information
contained therein which would constitute material non-public
information as to any Holder which has not executed a confidentiality
agreement with the Company); and (iv) comply in all material respects
with the provisions of the Securities Act and the Exchange Act with
respect to the disposition of all Registrable Securities covered by a
Registration Statement during the applicable period in accordance
(subject to the terms of this Agreement) with the intended methods of
disposition by the Holders thereof set forth in such Registration
Statement as so amended or in such Prospectus as so supplemented.
(c) If during the Effectiveness Period, the number of
Registrable Securities at any time exceeds 90% of the number of shares
of Common Stock then registered in a Registration Statement, then the
Company shall file as soon as reasonably practicable, but in any case
prior to the applicable Filing Date, an additional Registration
Statement covering the resale by the Holders of not less than 130% of
the number of such Registrable Securities. In addition, in the event
that all Registrable Securities are not included in the initial
Registration Statement as contemplated by the proviso regarding
Registrable Securities in Section 2(a) above, then, upon the written
request of Holders holding at least 51% of the then outstanding
Registrable Securities, the Company shall file as soon as reasonably
practicable, but in no event earlier than six months after the
Effective Date of the original Registration Statement, an additional
Registration Statement covering the resale by the Holders of not less
than the difference between 130% of the Registrable Securities and the
number of Registrable Securities in the initial Registration Statement.
(d) Notify the Holders of Registrable Securities to be sold
(which notice shall, pursuant to clauses (iii) through (vi) hereof, be
accompanied by an instruction to suspend the use of the Prospectus
until the requisite changes have been made) as promptly as reasonably
possible (and, in the case of (i)(A) below, not less than one Trading
Day prior to such filing) and (if requested by any such Person) confirm
such notice in writing no later than one Trading Day following the day
(i)(A) when a Prospectus or any Prospectus supplement or post-effective
amendment to a Registration Statement is proposed to be filed; (B) when
the Commission notifies the Company whether there will be a "review" of
such Registration Statement and whenever the Commission comments in
writing on such Registration Statement; and (C) with respect to a
Registration Statement or any post-effective amendment, when the same
6
has become effective; (ii) of any request by the Commission or any
other federal or state governmental authority for amendments or
supplements to a Registration Statement or Prospectus or for additional
information; (iii) of the issuance by the Commission or any other
federal or state governmental authority of any stop order suspending
the effectiveness of a Registration Statement covering any or all of
the Registrable Securities or the initiation of any Proceedings for
that purpose; (iv) of the receipt by the Company of any notification
with respect to the suspension of the qualification or exemption from
qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for
such purpose; (v) of the occurrence of any event or passage of time
that makes the financial statements included in a Registration
Statement ineligible for inclusion therein or any statement made in a
Registration Statement or Prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material
respect or that requires any revisions to a Registration Statement,
Prospectus or other documents so that, in the case of a Registration
Statement or the Prospectus, as the case may be, it will not contain
any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; and (vi) the occurrence or existence of any pending
corporate development or other event (without specifying the nature of
such pending corporate development or other event) with respect to the
Company that the Company believes may be material and that, in the
determination of the Company, makes it not in the best interest of the
Company to allow continued availability of a Registration Statement or
Prospectus; provided that any and all of such information shall remain
confidential to each Holder until such information otherwise becomes
public, unless disclosure by a Holder is required by law; provided,
further, notwithstanding each Holder's agreement to keep such
information confidential, the Holders make no acknowledgement that any
such information is material, non-public information.
(e) Use its best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of (i) any order suspending the
effectiveness of a Registration Statement, or (ii) any suspension of
the qualification (or exemption from qualification) of any of the
Registrable Securities for sale in any jurisdiction, at the earliest
practicable moment.
(f) Furnish to each Holder, without charge, at least one
conformed copy of each such Registration Statement and each amendment
thereto, including financial statements and schedules, all documents
incorporated or deemed to be incorporated therein by reference to the
extent requested by such Person, and all exhibits to the extent
requested by such Person (including those previously furnished or
incorporated by reference) promptly after the filing of such documents
with the Commission.
(g) Subject to the terms of this Agreement, the Company hereby
consents to the use of such Prospectus and each amendment or supplement
thereto by each of the selling Holders in connection with the offering
and sale of the Registrable Securities covered by such Prospectus and
any amendment or supplement thereto, except after the giving of any
notice pursuant to Section 3(d).
(h) If NASD Rule 2710 requires any broker-dealer to make a
filing prior to executing a sale by a Holder, the Company shall (i)
make an Issuer Filing with the NASD, Inc. Corporate Financing
7
Department pursuant to proposed NASD Rule 2710(b)(10)(A)(i), (ii)
respond within five Trading Days to any comments received from NASD in
connection therewith, (iii) and pay the filing fee required in
connection therewith.
(i) Prior to any resale of Registrable Securities by a Holder,
use its commercially reasonable efforts to register or qualify or
cooperate with the selling Holders in connection with the registration
or qualification (or exemption from the Registration or qualification)
of such Registrable Securities for the resale by the Holder under the
securities or Blue Sky laws of such jurisdictions within the United
States as any Holder reasonably requests in writing, to keep each
registration or qualification (or exemption therefrom) effective during
the Effectiveness Period and to do any and all other acts or things
reasonably necessary to enable the disposition in such jurisdictions of
the Registrable Securities covered by each Registration Statement;
provided, that the Company shall not be required to (i) register or
qualify the Registrable Securities in any state or other jurisdiction
which utilizes what is commonly referred to as a merit review process,
(ii) qualify generally to do business in any jurisdiction where it is
not then so qualified, (iii) subject the Company to any material tax in
any such jurisdiction where it is not then so subject or (iv) file a
general consent to service of process in any such jurisdiction.
(j) If requested by the Holders, cooperate with the Holders to
facilitate the timely preparation and delivery of certificates
representing Registrable Securities to be delivered to a transferee
pursuant to a Registration Statement, which certificates shall be free,
to the extent permitted by the Purchase Agreement, of all restrictive
legends, and to enable such Registrable Securities to be in such
denominations and registered in such names as any such Holders may
request.
(k) Upon the occurrence of any event contemplated by this
Section 3, as promptly as reasonably possible under the circumstances
taking into account the Company's good faith assessment of any adverse
consequences to the Company and its stockholders of the premature
disclosure of such event, prepare a supplement or amendment, including
a post-effective amendment, to a Registration Statement or a supplement
to the related Prospectus or any document incorporated or deemed to be
incorporated therein by reference, and file any other required document
so that, as thereafter delivered, neither a Registration Statement nor
such Prospectus will contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. If the Company notifies the
Holders in accordance with clauses (iii) through (vi) of Section 3(d)
above to suspend the use of any Prospectus until the requisite changes
to such Prospectus have been made, then the Holders shall suspend use
of such Prospectus. The Company will use its best efforts to ensure
that the use of the Prospectus may be resumed as promptly as is
practicable. The Company shall be entitled to exercise its right under
this Section 3(k) to suspend the availability of a Registration
Statement and Prospectus for a period not to exceed 60 calendar days
(which need not be consecutive days) in any 12 month period.
8
(l) Comply with all applicable rules and regulations of the
Commission.
(m) The Company may require each selling Holder to furnish to
the Company a certified statement as to the number of shares of Common
Stock beneficially owned by such Holder and, if required by the
Commission, the natural persons thereof that have voting and
dispositive control over the Shares. During any periods that the
Company is unable to meet its obligations hereunder with respect to the
registration of the Registrable Securities solely because any Holder
fails to furnish such information within three Trading Days of the
Company's request, any liquidated damages that are accruing at such
time as to such Holder only shall be tolled and any Event that may
otherwise occur solely because of such delay shall be suspended as to
such Holder only, until such information is delivered to the Company.
(n) Use its best efforts (a) to become eligible to file an S-3
registration statement as soon as practicable following a listing of
the Common Stock on a Trading Market other than the OTC Bulletin Board
and (b) to retain on an ongoing basis such eligibility to file an S-3
registration statement.
4. Registration Expenses. All fees and expenses incident to the
performance of or compliance with this Agreement by the Company shall be borne
by the Company whether or not any Registrable Securities are sold pursuant to a
Registration Statement. The fees and expenses referred to in the foregoing
sentence shall include, without limitation, (i) all registration and filing fees
(including, without limitation, fees and expenses) (A) with respect to filings
required to be made with any Trading Market on which the Common Stock is then
listed for trading, (B) in compliance with applicable state securities or Blue
Sky laws reasonably agreed to by the Company in writing (including, without
limitation, fees and disbursements of counsel for the Company in connection with
Blue Sky qualifications or exemptions of the Registrable Securities) and (C) if
not previously paid by the Company in connection with an Issuer Filing, with
respect to any filing that may be required to be made by any broker through
which a Holder intends to make sales of Registrable Securities with NASD, Inc.
pursuant to the NASD Rule 2710, so long as the broker is receiving no more than
a customary brokerage commission in connection with such sale, (ii) printing
expenses (including, without limitation, expenses of printing certificates for
Registrable Securities), (iii) messenger, telephone and delivery expenses, (iv)
fees and disbursements of counsel for the Company, (v) Securities Act liability
insurance, if the Company so desires such insurance, and (vi) fees and expenses
of all other Persons retained by the Company in connection with the consummation
of the transactions contemplated by this Agreement. In addition, the Company
shall be responsible for all of its internal expenses incurred in connection
with the consummation of the transactions contemplated by this Agreement
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit and the fees and expenses incurred in connection with the listing of the
Registrable Securities on any securities exchange as required hereunder. In no
event shall the Company be responsible for any broker or similar commissions of
any Holder or, except to the extent provided for in the Transaction Documents,
any legal fees or other costs of the Holders.
5. Indemnification
9
(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold
harmless each Holder, the officers, directors, members, partners,
agents, and employees (and any other Persons with a functionally
equivalent role of a Person holding such titles, notwithstanding a lack
of such title or any other title) of each of them, each Person who
controls any such Holder (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) and the officers,
directors, members, shareholders, partners, agents and employees (and
any other Persons with a functionally equivalent role of a Person
holding such titles, notwithstanding a lack of such title or any other
title) of each such controlling Person, to the fullest extent permitted
by applicable law, from and against any and all losses, claims,
damages, liabilities, costs (including, without limitation, reasonable
attorneys' fees) and expenses (collectively, "Losses"), as incurred,
arising out of or relating to (1) any untrue or alleged untrue
statement of a material fact contained in a Registration Statement, any
Prospectus or any form of prospectus or in any amendment or supplement
thereto or in any preliminary prospectus, or arising out of or relating
to any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein (in the case
of any Prospectus or form of prospectus or supplement thereto, in light
of the circumstances under which they were made) not misleading or (2)
any violation or alleged violation by the Company of the Securities
Act, the Exchange Act or any state securities law, or any rule or
regulation thereunder, in connection with the performance of its
obligations under this Agreement, except to the extent, but only to the
extent, that (i) such untrue statements or omissions are based solely
upon information regarding such Holder furnished in writing to the
Company by such Holder expressly for use therein, or to the extent that
such information relates to such Holder or such Holder's proposed
method of distribution of Registrable Securities and was reviewed and
expressly approved in writing by such Holder expressly for use in a
Registration Statement, such Prospectus or such form of Prospectus or
in any amendment or supplement thereto, (ii) in the case of an
occurrence of an event of the type specified in Section 3(d)(iii)-(vi),
the use by such Holder of an outdated or defective Prospectus after the
Company has notified such Holder in writing that the Prospectus is
outdated or defective and prior to the receipt by such Holder of the
Advice contemplated in Section 6(d), (iii) the sale by the Holder in
violation of any securities law relating to registration or
qualification in any state, except where the Company failed to comply
with its obligations under this Agreement, or the sale by the Holder
through a broker-dealer where it or its agent is not licensed as a
broker-dealer (or the state law equivalent) as required by law, or (iv)
the Holder is alleged to have failed to deliver a Prospectus under
Section 5(b) of the Securities Act. The Company shall notify the
Holders promptly of the institution, threat or assertion of any
Proceeding arising from or in connection with the transactions
contemplated by this Agreement of which the Company is aware. Since the
Holder has approved Annex A hereto, if the Registration Statement or
Prospectus use the language as contained in Annex A without making any
substantive changes, prior written approval by the Holder is not
required.
(b) Indemnification by Holders. Each Holder shall, severally
and not jointly, indemnify and hold harmless the Company, its
10
directors, officers, agents and employees, each Person who controls the
Company (within the meaning of Section 15 of the Securities Act and
Section 20 of the Exchange Act), and the directors, officers, agents or
employees of such controlling Persons, to the fullest extent permitted
by applicable law, from and against all Losses, as incurred, to the
extent arising out of or based solely upon those matters for which the
Holder is not entitled to indemnification under Section 5(a). In no
event shall the liability of any selling Holder hereunder be greater in
amount than the dollar amount of the net proceeds received by such
Holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity
hereunder (an "Indemnified Party"), such Indemnified Party shall
promptly notify the Person from whom indemnity is sought (the
"Indemnifying Party") in writing, and the Indemnifying Party shall have
the right to assume the defense thereof, including the employment of
counsel reasonably satisfactory to the Indemnified Party and the
payment of all fees and expenses incurred in connection with defense
thereof; provided, that the failure of any Indemnified Party to give
such notice shall not relieve the Indemnifying Party of its obligations
or liabilities pursuant to this Agreement, except (and only) to the
extent that it shall be finally determined by a court of competent
jurisdiction (which determination is not subject to appeal or further
review) that such failure shall have prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense
thereof, but the fees and expenses of such counsel shall be at the
expense of such Indemnified Party or Parties unless: (1) the
Indemnifying Party has agreed in writing to pay such fees and expenses;
(2) the Indemnifying Party shall have failed promptly to assume the
defense of such Proceeding and to employ counsel reasonably
satisfactory to such Indemnified Party in any such Proceeding; or (3)
the named parties to any such Proceeding (including any impleaded
parties) include both such Indemnified Party and the Indemnifying
Party, and counsel to the Indemnified Party shall reasonably believe
that a material conflict of interest is likely to exist if the same
counsel were to represent such Indemnified Party and the Indemnifying
Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel
at the expense of the Indemnifying Party, the Indemnifying Party shall
not have the right to assume the defense thereof and the reasonable
fees and expenses of no more than one separate counsel shall be at the
expense of the Indemnifying Party). The Indemnifying Party shall not be
liable for any settlement of any such Proceeding effected without its
written consent, which consent shall not be unreasonably withheld or
delayed. No Indemnifying Party shall, without the prior written consent
of the Indemnified Party, effect any settlement of any pending
Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified
Party from all liability on claims that are the subject matter of such
Proceeding.
Subject to the terms of this Agreement, all reasonable fees
and expenses of the Indemnified Party (including reasonable fees and
expenses to the extent incurred in connection with investigating or
11
preparing to defend such Proceeding in a manner not inconsistent with
this Section) shall be paid to the Indemnified Party, as incurred,
within ten Trading Days of written notice thereof to the Indemnifying
Party; provided, that the Indemnified Party shall promptly reimburse
the Indemnifying Party for that portion of such fees and expenses
applicable to such actions for which such Indemnified Party is
judicially determined to be not entitled to indemnification hereunder.
(d) Contribution. If the indemnification under Section 5(a) or
5(b) is unavailable to an Indemnified Party or insufficient to hold an
Indemnified Party harmless for any Losses, then each Indemnifying Party
shall contribute to the amount paid or payable by such Indemnified
Party, in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party and Indemnified Party in connection
with the actions, statements or omissions that resulted in such Losses
as well as any other relevant equitable considerations. The relative
fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in
question, including any untrue or alleged untrue statement of a
material fact or omission or alleged omission of a material fact, has
been taken or made by, or relates to information supplied by, such
Indemnifying Party or Indemnified Party, and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such action, statement or omission. The amount paid or payable
by a party as a result of any Losses shall be deemed to include,
subject to the limitations set forth in this Agreement, any reasonable
attorneys' or other fees or expenses incurred by such party in
connection with any Proceeding to the extent such party would have been
indemnified for such fees or expenses if the indemnification provided
for in this Section was available to such party in accordance with its
terms.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 5(d) were determined
by pro rata allocation or by any other method of allocation that does
not take into account the equitable considerations referred to in the
immediately preceding paragraph. Notwithstanding the provisions of this
Section 5(d), no Holder shall be required to contribute, in the
aggregate, any amount in excess of the amount by which the net proceeds
actually received by such Holder from the sale of the Registrable
Securities subject to the Proceeding exceeds the amount of any damages
that such Holder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties
may otherwise have to the Indemnified Parties or any of them under any
other principle of law or equity.
6. Miscellaneous
(a) Remedies. In the event of a breach by the Company or by a
Holder of any of their respective obligations under this Agreement,
each Holder or the Company, as the case may be, in addition to being
entitled to exercise all rights granted by law and under this
Agreement, including recovery of damages, shall be entitled to specific
12
performance of its rights under this Agreement. The Company and each
Holder agree that monetary damages would not provide adequate
compensation for any losses incurred by reason of a breach by it of any
of the provisions of this Agreement and hereby further agrees that, in
the event of any action for specific performance in respect of such
breach, it shall not assert or shall waive the defense that a remedy at
law would be adequate.
(b) No Piggyback on Registrations. Except as set forth on
Schedule 6(b) attached hereto, neither the Company nor any of its
security holders (other than the Holders in such capacity pursuant
hereto) may include securities of the Company in the Registration
Statements other than the Registrable Securities. The Company shall not
file any other registration statements until all Registrable Securities
are registered pursuant to a Registration Statement that is declared
effective by the Commission, provided that this Section 6(b) shall not
prohibit the Company from filing (i) amendments to registration
statements filed prior to the date of this Agreement or (ii)
registration statements set forth on Schedule 6(b) attached hereto.
(c) Compliance. Each Holder covenants and agrees that it will
comply with the prospectus delivery requirements of the Securities Act
as applicable to it in connection with sales of Registrable Securities
pursuant to a Registration Statement.
(d) Discontinued Disposition. By its acquisition of
Registrable Securities, each Holder agrees that, upon receipt of a
notice from the Company of the occurrence of any event of the kind
described in Section 3(d)(iii) through (vi), such Holder will forthwith
discontinue disposition of such Registrable Securities under a
Registration Statement until it is advised in writing (the "Advice") by
the Company that the use of the applicable Prospectus (as it may have
been supplemented or amended) may be resumed. The Company will use its
best efforts to ensure that the use of the Prospectus may be resumed as
promptly as it practicable, to be subject to the provisions of Section
2(b).
(e) Piggy-Back Registrations. If at any time during the
Effectiveness Period there is not an effective Registration Statement
covering all of the Registrable Securities and the Company shall
determine to prepare and file with the Commission a registration
statement relating to an offering for its own account or the account of
others under the Securities Act of any of its equity securities, other
than on Form S-4 or Form S-8 (each as promulgated under the Securities
Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or
business or equity securities issuable in connection with stock option
or other employee benefit plans, then the Company shall send to each
Holder a written notice of such determination and, if within fifteen
days after the date of such notice, any such Holder shall so request in
writing, the Company shall include in such registration statement all
or any part of such Registrable Securities such Holder requests to be
registered; provided, however, that the Company shall not be required
to register any Registrable Securities pursuant to this Section 6(e)
that are eligible for resale pursuant to Rule 144(k) promulgated under
the Securities Act or that are the subject of a then effective
Registration Statement.
(f) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified
or supplemented, and waivers or consents to departures from the
13
provisions hereof may not be given, unless the same shall be in writing
and signed by the Company and each Holder of the then outstanding
Registrable Securities. Notwithstanding the foregoing, a waiver or
consent to depart from the provisions hereof with respect to a matter
that relates exclusively to the rights of Holders and that does not
directly or indirectly affect the rights of other Holders may be given
by Holders of all of the Registrable Securities to which such waiver or
consent relates; provided, however, that the provisions of this
sentence may not be amended, modified, or supplemented except in
accordance with the provisions of the immediately preceding sentence.
(g) Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be
delivered as set forth in the Purchase Agreement.
(h) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of
each of the parties and shall inure to the benefit of each Holder. The
Company may not assign (except by merger) its rights or obligations
hereunder without the prior written consent of all of the Holders of
the then-outstanding Registrable Securities. Each Holder may assign
their respective rights hereunder in the manner and to the Persons as
permitted under the Purchase Agreement.
(i) No Inconsistent Agreements. Neither the Company nor any of
its Subsidiaries has entered, as of the date hereof, nor shall the
Company or any of its Subsidiaries, on or after the date of this
Agreement, enter into any agreement with respect to its securities,
that would have the effect of impairing the rights granted to the
Holders in this Agreement or otherwise conflicts with the provisions
hereof. Except as set forth on Schedule 6(i), neither the Company nor
any of its subsidiaries has previously entered into any agreement
granting any registration rights with respect to any of its securities
to any Person that have not been satisfied in full.
(j) Execution and Counterparts. This Agreement may be executed
in two or more counterparts, all of which when taken together shall be
considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other
party, it being understood that both parties need not sign the same
counterpart. In the event that any signature is delivered by facsimile
transmission or by e-mail delivery of a ".pdf" format data file, such
signature shall create a valid and binding obligation of the party
executing (or on whose behalf such signature is executed) with the same
force and effect as if such facsimile or ".pdf" signature page were an
original thereof.
(k) Governing Law. All questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be
determined in accordance with the provisions of the Purchase Agreement.
(l) Cumulative Remedies. The remedies provided herein are
cumulative and not exclusive of any other remedies provided by law.
(m) Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent
jurisdiction to be invalid, illegal, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions set
14
forth herein shall remain in full force and effect and shall in no way
be affected, impaired or invalidated, and the parties hereto shall use
their commercially reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that
contemplated by such term, provision, covenant or restriction. It is
hereby stipulated and declared to be the intention of the parties that
they would have executed the remaining terms, provisions, covenants and
restrictions without including any of such that may be hereafter
declared invalid, illegal, void or unenforceable.
(n) Headings. The headings in this Agreement are for
convenience only, do not constitute a part of the Agreement and shall
not be deemed to limit or affect any of the provisions hereof.
(o) Independent Nature of Holders' Obligations and Rights. The
obligations of each Holder hereunder are several and not joint with the
obligations of any other Holder hereunder, and no Holder shall be
responsible in any way for the performance of the obligations of any
other Holder hereunder. Nothing contained herein or in any other
agreement or document delivered at any closing, and no action taken by
any Holder pursuant hereto or thereto, shall be deemed to constitute
the Holders as a partnership, an association, a joint venture or any
other kind of entity, or create a presumption that the Holders are in
any way acting in concert with respect to such obligations or the
transactions contemplated by this Agreement. Each Holder shall be
entitled to protect and enforce its rights, including without
limitation the rights arising out of this Agreement, and it shall not
be necessary for any other Holder to be joined as an additional party
in any proceeding for such purpose.
********************
15
IN WITNESS WHEREOF, the parties have executed this Registration
Rights Agreement as of the date first written above.
ECOSPHERE TECHNOLOGIES, INC.
By:_________________________
Name:
Title:
[SIGNATURE PAGE OF HOLDERS FOLLOWS]
16
[SIGNATURE PAGE OF HOLDERS TO esph RRA]
Name of Holder: ________________________________________________________________
Signature of Authorized Signatory of Holder: ___________________________________
Name of Authorized Signatory: __________________________________________________
Title of Authorized Signatory: _________________________________________________
[SIGNATURE PAGES CONTINUE]
17
ANNEX A
Plan of Distribution
Each Selling Stockholder (the "Selling Stockholders") of the common
stock and any of their pledgees, assignees and successors-in-interest may, from
time to time, sell any or all of their shares of common stock on the OTC
Bulletin Board or any other stock exchange, market or trading facility on which
the shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. A Selling Stockholder may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales entered into after the effective
date of the registration statement of which this prospectus is
a part;
o broker-dealers may agree with the Selling Stockholders to sell
a specified number of such shares at a stipulated price per
share;
o through the writing or settlement of options or other hedging
transactions, whether through an options exchange or
otherwise;
o a combination of any such methods of sale; or
o any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"), if available, rather
than under this prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for
other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the Selling Stockholders (or, if any broker-dealer
acts as agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated, but, except as set forth in a supplement to this Prospectus, in the
case of an agency transaction not in excess of a customary brokerage commission
18
in compliance with NASD Rule 2440; and in the case of a principal transaction a
markup or markdown in compliance with NASD IM-2440.
In connection with the sale of the common stock or interests therein,
the Selling Stockholders may enter into hedging transactions with broker-dealers
or other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of the common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The Selling Stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Each Selling Stockholder has
informed the Company that it does not have any written or oral agreement or
understanding, directly or indirectly, with any person to distribute the Common
Stock. In no event shall any broker-dealer receive fees, commissions and markups
which, in the aggregate, would exceed eight percent (8%).
The Company is required to pay certain fees and expenses incurred by
the Company incident to the registration of the shares. The Company has agreed
to indemnify the Selling Stockholders against certain losses, claims, damages
and liabilities, including liabilities under the Securities Act.
Because Selling Stockholders may be deemed to be "underwriters" within
the meaning of the Securities Act, they will be subject to the prospectus
delivery requirements of the Securities Act including Rule 172 thereunder. In
addition, any securities covered by this prospectus which qualify for sale
pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather
than under this prospectus. There is no underwriter or coordinating broker
acting in connection with the proposed sale of the resale shares by the Selling
Stockholders.
We agreed to keep this prospectus effective until the earlier of (i)
the date on which the shares may be resold by the Selling Stockholders without
registration and without regard to any volume limitations by reason of Rule
144(k) under the Securities Act or any other rule of similar effect or (ii) all
of the shares have been sold pursuant to this prospectus or Rule 144 under the
Securities Act or any other rule of similar effect. The resale shares will be
sold only through registered or licensed brokers or dealers if required under
applicable state securities laws. In addition, in certain states, the resale
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
19
Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the resale shares may not simultaneously
engage in market making activities with respect to the common stock for the
applicable restricted period, as defined in Regulation M, prior to the
commencement of the distribution. In addition, the Selling Stockholders will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including Regulation M, which may limit the timing of
purchases and sales of shares of the common stock by the Selling Stockholders or
any other person. We will make copies of this prospectus available to the
Selling Stockholders and have informed them of the need to deliver a copy of
this prospectus to each purchaser at or prior to the time of the sale (including
by compliance with Rule 172 under the Securities Act).
20
ANNEX B
ECOSPHERE TECHNOLOGIES, INC.
SELLING SECURITYHOLDER NOTICE AND QUESTIONNAIRE
The undersigned beneficial owner of common stock (the "Registrable
Securities") of Ecosphere Technologies, Inc., a Delaware corporation (the
"Company"), understands that the Company has filed or intends to file with the
Securities and Exchange Commission (the "Commission") a registration statement
(the "Registration Statement") for the registration and resale under Rule 415 of
the Securities Act of 1933, as amended (the "Securities Act"), of the
Registrable Securities, in accordance with the terms of the Registration Rights
Agreement (the "Registration Rights Agreement") to which this document is
annexed. A copy of the Registration Rights Agreement is available from the
Company upon request at the address set forth below. All capitalized terms not
otherwise defined herein shall have the meanings ascribed thereto in the
Registration Rights Agreement.
Certain legal consequences arise from being named as a selling
securityholder in the Registration Statement and the related prospectus.
Accordingly, holders and beneficial owners of Registrable Securities are advised
to consult their own securities law counsel regarding the consequences of being
named or not being named as a selling securityholder in the Registration
Statement and the related prospectus.
NOTICE
The undersigned beneficial owner (the "Selling Securityholder") of
Registrable Securities hereby elects to include the Registrable Securities owned
by it in the Registration Statement.
21
The undersigned hereby provides the following information to the Company and
represents and warrants that such information is accurate:
QUESTIONNAIRE
1. NAME.
(a) Full Legal Name of Selling Securityholder
______________________________________________________________
(b) Full Legal Name of Registered Holder (if not the same as (a)
above) through which Registrable Securities are held:
______________________________________________________________
(c) Full Legal Name of Natural Control Person (which means a
natural person who directly or indirectly alone or with others
has power to vote or dispose of the securities covered by the
questionnaire):
______________________________________________________________
2. ADDRESS FOR NOTICES TO SELLING SECURITYHOLDER:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Telephone:______________________________________________________________________
Fax:____________________________________________________________________________
Contact Person:_________________________________________________________________
3. BROKER-DEALER STATUS:
(a) Are you a broker-dealer?
Yes [ ] No [ ]
(b) If "yes" to Section 3(a), did you receive your Registrable
Securities as compensation for investment banking services to
the Company.
Yes [ ] No [ ]
Note: If no, the Commission's staff has indicated that you should
be identified as an underwriter in the Registration
Statement.
22
(c) Are you an affiliate of a broker-dealer?
Yes [ ] No [ ]
(d) If you are an affiliate of a broker-dealer, do you certify
that you bought the Registrable Securities in the ordinary
course of business, and at the time of the purchase of the
Registrable Securities to be resold, you had no agreements or
understandings, directly or indirectly, with any person to
distribute the Registrable Securities?
Yes [ ] No [ ]
Note: If no, the Commission's staff has indicated that you should
be identified as an underwriter in the Registration
Statement.
4. BENEFICIAL OWNERSHIP OF SECURITIES OF THE COMPANY OWNED BY THE SELLING
SECURITYHOLDER.
Except as set forth below in this Item 4, the undersigned is not the
beneficial or registered owner of any securities of the Company other
than the securities issuable pursuant to the Purchase Agreement.
(a) Type and Amount of other securities beneficially owned by the
Selling Securityholder:
______________________________________________________________
______________________________________________________________
23
5. RELATIONSHIPS WITH THE COMPANY:
Except as set forth below, neither the undersigned nor any of its
affiliates, officers, directors or principal equity holders (owners of
5% of more of the equity securities of the undersigned) has held any
position or office or has had any other material relationship with the
Company (or its predecessors or affiliates) during the past three
years.
State any exceptions here:
_______________________________________________________________________
_______________________________________________________________________
The undersigned agrees to promptly notify the Company of any
inaccuracies or changes in the information provided herein that may occur
subsequent to the date hereof at any time while the Registration Statement
remains effective.
By signing below, the undersigned consents to the disclosure of the
information contained herein in its answers to Items 1 through 5 and the
inclusion of such information in the Registration Statement and the related
prospectus and any amendments or supplements thereto. The undersigned
understands that such information will be relied upon by the Company in
connection with the preparation or amendment of the Registration Statement and
the related prospectus.
IN WITNESS WHEREOF the undersigned, by authority duly given, has caused
this Notice and Questionnaire to be executed and delivered either in person or
by its duly authorized agent.
Dated:___________________ Beneficial Owner:_______________________
By:_____________________________________
Name:
Title:
PLEASE FAX A COPY OF THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE, AND
RETURN THE ORIGINAL BY OVERNIGHT MAIL, TO:
24
EXHIBIT C
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.
COMMON STOCK PURCHASE WARRANT
ECOSPHERE TECHNOLOGIES, INC.
Warrant Shares: ______ Initial Exercise Date: ____________, 2006
THIS COMMON STOCK PURCHASE WARRANT (the "Warrant") certifies
that, for value received, _____________ (the "Holder"), is entitled, upon the
terms and subject to the limitations on exercise and the conditions hereinafter
set forth, at any time on or after the date hereof (the "Initial Exercise Date")
and on or prior to the close of business on the 5 year anniversary of the
Initial Exercise Date (the "Termination Date") but not thereafter, to subscribe
for and purchase from Ecosphere Technologies, Inc., a Delaware corporation (the
"Company"), up to ______ shares (the "Warrant Shares") of common stock, par
value $0.01 per share, of the Company (the "Common Stock"). The purchase price
of one share of Common Stock under this Warrant shall be equal to the Exercise
Price, as defined in Section 2(b).
Section 1. Definitions. Capitalized terms used and not otherwise
defined herein shall have the meanings set forth in that certain Securities
Purchase Agreement (the "Purchase Agreement"), dated December 15, 2006, among
the Company and the purchasers signatory thereto.
Section 2. Exercise.
a) Exercise of Warrant. Exercise of the purchase rights
represented by this Warrant may be made, in whole or in part, at any
time or times on or after the Initial Exercise Date and on or before
1
the Termination Date by delivery to the Company of a duly executed
facsimile copy of the Notice of Exercise Form annexed hereto (or such
other office or agency of the Company as it may designate by notice in
writing to the registered Holder at the address of such Holder
appearing on the books of the Company) and delivery of the Exercise
Price to the Company by wire transfer or cashier's check drawn on a
United States bank. Notwithstanding anything herein to the contrary,
the Holder shall not be required to physically surrender this Warrant
to the Company until the Holder has purchased all of the Warrant Shares
available hereunder and the Warrant has been exercised in full, in
which case, the Holder shall surrender this Warrant to the Company for
cancellation within 3 Trading Days of the date the final Notice of
Exercise is delivered to the Company. Partial exercises of this Warrant
resulting in purchases of a portion of the total number of Warrant
Shares available hereunder shall have the effect of lowering the
outstanding number of Warrant Shares purchasable hereunder in an amount
equal to the applicable number of Warrant Shares purchased. The Holder
and the Company shall maintain records showing the number of Warrant
Shares purchased and the date of such purchases. The Company shall
deliver any objection to any Notice of Exercise Form within 1 Business
Day of receipt of such notice. In the event of any dispute or
discrepancy, the records of the Holder shall be controlling and
determinative in the absence of manifest error. The Holder and any
assignee, by acceptance of this Warrant, acknowledge and agree that, by
reason of the provisions of this paragraph, following the purchase of a
portion of the Warrant Shares hereunder, the number of Warrant Shares
available for purchase hereunder at any given time may be less than the
amount stated on the face hereof.
b) Exercise Price. The exercise price per share of the Common
Stock under this Warrant shall be $0.4715 subject to adjustment
hereunder (the "Exercise Price").
c) Cashless Exercise. If at any time after one year from the
date of issuance of this Warrant there is no effective Registration
Statement registering, or no current prospectus available for, the
resale of the Warrant Shares by the Holder, then this Warrant may also
be exercised at such time by means of a "cashless exercise" in which
the Holder shall be entitled to receive a certificate for the number of
Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)]
by (A), where:
(A) = the closing price of the Common Stock on the Trading
Market on the Trading Day immediately preceding the
date of such election;
(B) = the Exercise Price of this Warrant, as adjusted; and
(X) = the number of Warrant Shares issuable upon exercise
of this Warrant in accordance with the terms of this
Warrant by means of a cash exercise rather than a
cashless exercise.
Notwithstanding anything herein to the contrary, on the
Termination Date to the extent the closing price of the Common Stock on
the Trading Market Day prior to the Termination Date is higher than the
Exercise Price, this Warrant shall be automatically exercised via
cashless exercise pursuant to this Section 2(c).
2
d) Exercise Limitations. The Company shall not effect any
exercise of this Warrant, and a Holder shall not have the right to
exercise any portion of this Warrant, pursuant to Section 2(c) or
otherwise, to the extent that after giving effect to such issuance
after exercise as set forth on the applicable Notice of Exercise, such
Holder (together with such Holder's Affiliates, and any other person or
entity acting as a group together with such Holder or any of such
Holder's Affiliates), as set forth on the applicable Notice of
Exercise, would beneficially own in excess of the Beneficial Ownership
Limitation (as defined below). For purposes of the foregoing sentence,
the number of shares of Common Stock beneficially owned by such Holder
and its Affiliates shall include the number of shares of Common Stock
issuable upon exercise of this Warrant with respect to which such
determination is being made, but shall exclude the number of shares of
Common Stock which would be issuable upon (A) exercise of the
remaining, nonexercised portion of this Warrant beneficially owned by
such Holder or any of its Affiliates and (B) exercise or conversion of
the unexercised or nonconverted portion of any other securities of the
Company (including, without limitation, any other Debentures or
Warrants) subject to a limitation on conversion or exercise analogous
to the limitation contained herein beneficially owned by such Holder or
any of its affiliates. Except as set forth in the preceding sentence,
for purposes of this Section 2(d), beneficial ownership shall be
calculated in accordance with Section 13(d) of the Exchange Act and the
rules and regulations promulgated thereunder, it being acknowledged by
a Holder that the Company is not representing to such Holder that such
calculation is in compliance with Section 13(d) of the Exchange Act and
such Holder is solely responsible for any schedules required to be
filed in accordance therewith. To the extent that the limitation
contained in this Section 2(d) applies, the determination of whether
this Warrant is exercisable (in relation to other securities owned by
such Holder together with any Affiliates) and of which a portion of
this Warrant is exercisable shall be in the sole discretion of a
Holder, and the submission of a Notice of Exercise shall be deemed to
be each Holder's determination of whether this Warrant is exercisable
(in relation to other securities owned by such Holder together with any
Affiliates) and of which portion of this Warrant is exercisable, in
each case subject to such aggregate percentage limitation, and the
Company shall have no obligation to verify or confirm the accuracy of
such determination. In addition, a determination as to any group status
as contemplated above shall be determined in accordance with Section
13(d) of the Exchange Act and the rules and regulations promulgated
thereunder. For purposes of this Section 2(d), in determining the
number of outstanding shares of Common Stock, a Holder may rely on the
number of outstanding shares of Common Stock as reflected in (x) the
Company's most recent Form 10-QSB or Form 10-KSB, as the case may be,
(y) a more recent public announcement by the Company or (z) any other
notice by the Company or the Company's Transfer Agent setting forth the
number of shares of Common Stock outstanding. Upon the written or oral
request of a Holder, the Company shall within two Trading Days confirm
orally and in writing to such Holder the number of shares of Common
Stock then outstanding. In any case, the number of outstanding shares
of Common Stock shall be determined after giving effect to the
conversion or exercise of securities of the Company, including this
Warrant, by such Holder or its Affiliates since the date as of which
such number of outstanding shares of Common Stock was reported. The
"Beneficial Ownership Limitation" shall be 4.99% of the number of
shares of the Common Stock outstanding immediately after giving effect
to the issuance of shares of Common Stock issuable upon exercise of
this Warrant. The Beneficial Ownership Limitation provisions of this
Section 2(d) may be waived by such Holder, at the election of such
3
Holder, upon not less than 61 days' prior notice to the Company to
change the Beneficial Ownership Limitation to 9.99% of the number of
shares of the Common Stock outstanding immediately after giving effect
to the issuance of shares of Common Stock upon exercise of this
Warrant, and the provisions of this Section 2(d) shall continue to
apply. Upon such a change by a Holder of the Beneficial Ownership
Limitation from such 4.99% limitation to such 9.99% limitation, the
Beneficial Ownership Limitation may not be further waived by such
Holder. The provisions of this paragraph shall be construed and
implemented in a manner otherwise than in strict conformity with the
terms of this Section 2(d) to correct this paragraph (or any portion
hereof) which may be defective or inconsistent with the intended
Beneficial Ownership Limitation herein contained or to make changes or
supplements necessary or desirable to properly give effect to such
limitation. The limitations contained in this paragraph shall apply to
a successor holder of this Warrant. Notwithstanding the foregoing, the
Company shall have no liability to the Holder or any successor if it
fails to comply with the first sentence and permits any exercise in
excess of the Beneficial Ownership Limitation.
e) Mechanics of Exercise.
i. Authorization of Warrant Shares. The Company covenants
that all Warrant Shares which may be issued upon the exercise
of the purchase rights represented by this Warrant will, upon
exercise of the purchase rights represented by this Warrant,
be duly authorized, validly issued, fully paid and
nonassessable and free from all taxes, liens and charges
created by the Company in respect of the issue thereof (other
than taxes in respect of any transfer occurring
contemporaneously with such issue).
ii. Delivery of Certificates Upon Exercise. Certificates for
shares purchased hereunder shall be transmitted by the
transfer agent of the Company to the Holder by crediting the
account of the Holder's prime broker with the Depository Trust
Company through its Deposit Withdrawal Agent Commission
("DWAC") system if the Company is a participant in such
system, and otherwise by physical delivery to the address
specified by the Holder in the Notice of Exercise within 3
Trading Days from the delivery to the Company of the Notice of
Exercise Form, surrender of this Warrant (if required) and
payment of the aggregate Exercise Price as set forth above
("Warrant Share Delivery Date"). This Warrant shall be deemed
to have been exercised on the date the Exercise Price is
received by the Company. The Warrant Shares shall be deemed to
have been issued, and Holder or any other person so designated
to be named therein shall be deemed to have become a holder of
record of such shares for all purposes, as of the date the
Warrant has been exercised, the Company has received payment
of the Exercise Price (or by cashless exercise, if permitted)
and all taxes required to be paid by the Holder, if any,
4
pursuant to Section 2(e)(vii) prior to the issuance of such
shares, have been paid.
iii. Delivery of New Warrants Upon Exercise. If this Warrant
shall have been exercised in part, the Company shall, at the
request of a Holder and upon surrender of this Warrant
certificate, at the time of delivery of the certificate or
certificates representing Warrant Shares, deliver to Holder a
new Warrant evidencing the rights of Holder to purchase the
unpurchased Warrant Shares called for by this Warrant, which
new Warrant shall in all other respects be identical with this
Warrant.
iv. Rescission Rights. If the Company fails to cause its
transfer agent to transmit to the Holder a certificate or
certificates representing the Warrant Shares pursuant to this
Section 2(e)(iv) by the Warrant Share Delivery Date, then the
Holder will have the right to rescind such exercise.
v. Compensation for Buy-In on Failure to Timely Deliver
Certificates Upon Exercise. In addition to any other rights
available to the Holder, if the Company fails to cause its
transfer agent to transmit to the Holder a certificate or
certificates representing the Warrant Shares pursuant to an
exercise on or before the Warrant Share Delivery Date, and if
after such date the Holder is required by its broker to
purchase (in an open market transaction or otherwise) or the
Holder's brokerage firm otherwise purchases, shares of Common
Stock to deliver in satisfaction of a sale by the Holder of
the Warrant Shares which the Holder anticipated receiving upon
such exercise (a "Buy-In"), then the Company shall (1) pay in
cash to the Holder the amount by which (x) the Holder's total
purchase price (including brokerage commissions, if any) for
the shares of Common Stock so purchased exceeds (y) the amount
obtained by multiplying (A) the number of Warrant Shares that
the Company was required to deliver to the Holder in
connection with the exercise at issue times (B) the price at
which the sell order giving rise to such purchase obligation
was executed, plus (C) the brokerage commissions, if any,
resulting from such sale and (2) at the option of the Holder,
either reinstate the portion of the Warrant and equivalent
number of Warrant Shares for which such exercise was not
honored or deliver to the Holder the number of shares of
Common Stock that would have been issued had the Company
timely complied with its exercise and delivery obligations
hereunder. For example, if the Holder purchases Common Stock
having a total purchase price of $11,000 to cover a Buy-In
with respect to an attempted exercise of shares of Common
Stock with an aggregate sale price giving rise to such
purchase obligation of $10,000, under clause (1) of the
immediately preceding sentence the Company shall be required
to pay the Holder $1,000. The Holder shall provide the Company
written notice indicating the amounts payable to the Holder in
respect of the Buy-In and, upon request of the Company,
evidence of the amount of such loss. Nothing herein shall
5
limit a Holder's right to pursue any other remedies available
to it hereunder, at law or in equity including, without
limitation, a decree of specific performance and/or injunctive
relief with respect to the Company's failure to timely deliver
certificates representing shares of Common Stock upon exercise
of the Warrant as required pursuant to the terms hereof.
vi. No Fractional Shares or Scrip. No fractional shares or
scrip representing fractional shares shall be issued upon the
exercise of this Warrant. As to any fraction of a share which
Holder would otherwise be entitled to purchase upon such
exercise, the Company shall at its election, either pay a cash
adjustment in respect of such final fraction in an amount
equal to such fraction multiplied by the Exercise Price or
round up to the next whole share.
vii. Charges, Taxes and Expenses. Issuance of certificates
for Warrant Shares shall be made without charge to the Holder
for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificate, all of which
taxes and expenses shall be paid by the Company, and such
certificates shall be issued in the name of the Holder or in
such name or names as may be directed by the Holder; provided,
however, that in the event certificates for Warrant Shares are
to be issued in a name other than the name of the Holder, this
Warrant when surrendered for exercise shall be accompanied by
the Assignment Form attached hereto duly executed by the
Holder; and the Company may require, as a condition thereto,
the payment of a sum sufficient to reimburse it for any
transfer tax incidental thereto.
viii. Closing of Books. The Company will not close its
stockholder books or records in any manner which prevents the
timely exercise of this Warrant, pursuant to the terms hereof.
Section 3. Certain Adjustments.
a) Stock Dividends and Splits. If, at any time while this
Warrant is outstanding, the Company: (A) pays a stock dividend or
otherwise make a distribution or distributions on shares of its Common
Stock or any other equity or equity equivalent securities payable in
shares of Common Stock (which, for avoidance of doubt, shall not
include any shares of Common Stock issued by the Company upon exercise
of this Warrant), (B) subdivides outstanding shares of Common Stock
into a larger number of shares, (C) combines (including by way of
reverse stock split) outstanding shares of Common Stock into a smaller
number of shares, or (D) issues by reclassification of shares of the
Common Stock any shares of capital stock of the Company, then in each
case the Exercise Price shall be multiplied by a fraction of which the
numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding immediately before such event and
of which the denominator shall be the number of shares of Common Stock
outstanding immediately after such event and the number of shares
issuable upon exercise of this Warrant shall be proportionately
adjusted. Any adjustment made pursuant to this Section 3(a) shall
6
become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective
date in the case of a subdivision, combination or re-classification.
b) Subsequent Equity Sales. If the Company or any Subsidiary
thereof, as applicable, at any time while this Warrant is outstanding,
shall sell or grant any option to purchase, or sell or grant any right
to reprice its securities, or otherwise dispose of or issue (or
announce any offer, sale, grant or any option to purchase or other
disposition) any Common Stock or Common Stock Equivalents entitling any
Person to acquire shares of Common Stock, at an effective price per
share less than the then Exercise Price (such lower price, the "Base
Share Price" and such issuances collectively, a "Dilutive Issuance")
(if the holder of the Common Stock or Common Stock Equivalents so
issued shall at any time, whether by operation of purchase price
adjustments, reset provisions, floating conversion, exercise or
exchange prices or otherwise, or due to warrants, options or rights per
share which are issued in connection with such issuance, be entitled to
receive shares of Common Stock at an effective price per share which is
less than the Exercise Price, such issuance shall be deemed to have
occurred for less than the Exercise Price on such date of the Dilutive
Issuance), then the Exercise Price shall be reduced and only reduced to
equal the Base Share Price and the number of Warrant Shares issuable
hereunder shall be increased such that the aggregate Exercise Price
payable hereunder, after taking into account the decrease in the
Exercise Price, shall be equal to the aggregate Exercise Price prior to
such adjustment. Such adjustment shall be made whenever such Common
Stock or Common Stock Equivalents are issued. Notwithstanding the
foregoing, no adjustments shall be made, paid or issued under this
Section 3(b) in respect of an Exempt Issuance. The Company shall notify
the Holder in writing, no later than the Trading Day following the
issuance of any Common Stock or Common Stock Equivalents subject to
this Section 3(b), indicating therein the applicable issuance price, or
applicable reset price, exchange price, conversion price and other
pricing terms (such notice the "Dilutive Issuance Notice"). For
purposes of clarification, whether or not the Company provides a
Dilutive Issuance Notice pursuant to this Section 3(b), upon the
occurrence of any Dilutive Issuance, after the date of such Dilutive
Issuance the Holder is entitled to receive a number of Warrant Shares
based upon the Base Share Price regardless of whether the Holder
accurately refers to the Base Share Price in the Notice of Exercise.
c) Subsequent Rights Offerings. If the Company, at any time
while the Warrant is outstanding, shall issue rights, options or
warrants to all holders of Common Stock (and not to Holders) (any a
"Rights Offering") entitling them to subscribe for or purchase shares
of Common Stock at a price per share less than the Exercise Price, then
the Exercise Price shall be multiplied by a fraction, of which the
denominator shall be the number of shares of the Common Stock
outstanding on the date of issuance of such rights or warrants plus the
number of additional shares of Common Stock offered for subscription or
purchase, and of which the numerator shall be the number of shares of
the Common Stock outstanding on the date of issuance of such rights or
7
warrants plus the number of shares which the aggregate offering price
of the total number of shares so offered (assuming receipt by the
Company in full of all consideration payable upon exercise of such
rights, options or warrants) would purchase at such Exercise Price.
Such adjustment shall be made whenever such rights or warrants are
issued, and shall become effective immediately after the record date
for the determination of stockholders entitled to receive such rights,
options or warrants. To the extent that following expiration of the
Rights Offering, all securities have not been exercised, the foregoing
adjustment shall be recalculated.
d) Pro Rata Distributions. If the Company, at any time prior
to the Termination Date, shall distribute to all holders of Common
Stock (and not to Holders of the Warrants) evidences of its
indebtedness or assets (including cash and cash dividends) or rights or
warrants to subscribe for or purchase any security other than the
Common Stock (which shall be subject to Section 3(b)), then in each
such case the Exercise Price shall be adjusted by multiplying the
Exercise Price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such distribution by
a fraction of which the denominator shall be the closing price of the
Common Stock (the "Closing Price") determined as of the record date
mentioned above, and of which the numerator shall be such Closing Price
on such record date less the then per share fair market value at such
record date of the portion of such assets or evidence of indebtedness
so distributed applicable to one outstanding share of the Common Stock
as determined by the Board of Directors in good faith. In either case
the adjustments shall be described in a statement provided to the
Holder of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of
Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the
record date mentioned above.
e) Fundamental Transaction. If, at any time while this Warrant
is outstanding, (A) the Company effects any merger or consolidation of
the Company with or into another Person, (B) the Company effects any
sale of all or substantially all of its assets in one or a series of
related transactions, (C) any tender offer or exchange offer (whether
by the Company or another Person) is completed pursuant to which
holders of Common Stock are permitted to tender or exchange their
shares for other securities, cash or property, or (D) the Company
effects any reclassification of the Common Stock or any compulsory
share exchange pursuant to which the Common Stock is effectively
converted into or exchanged for other securities, cash or property (in
any such case, a "Fundamental Transaction"), then, upon any subsequent
exercise of this Warrant, the Holder shall have the right to receive,
for each Warrant Share that would have been issuable upon such exercise
immediately prior to the occurrence of such Fundamental Transaction, at
the option of the Holder, (a) upon exercise of this Warrant, the number
of shares of Common Stock of the successor or acquiring corporation or
of the Company, if it is the surviving corporation, and any additional
consideration (the "Alternate Consideration") receivable upon or as a
result of such reorganization, reclassification, merger, consolidation
or disposition of assets by a Holder of the number of shares of Common
Stock for which this Warrant is exercisable immediately prior to such
8
event or (b) if the Company is acquired in an all cash transaction,
cash equal to the value of this Warrant as determined in accordance
with the Black-Scholes option pricing formula. For purposes of any such
exercise, the determination of the Exercise Price shall be
appropriately adjusted to apply to such Alternate Consideration based
on the amount of Alternate Consideration issuable in respect of one
share of Common Stock in such Fundamental Transaction, and the Company
shall apportion the Exercise Price among the Alternate Consideration in
a reasonable manner reflecting the relative value of any different
components of the Alternate Consideration. If holders of Common Stock
are given any choice as to the securities, cash or property to be
received in a Fundamental Transaction, then the Holder shall be given
the same choice as to the Alternate Consideration it receives upon any
exercise of this Warrant following such Fundamental Transaction. To the
extent necessary to effectuate the foregoing provisions, any successor
to the Company or surviving entity in such Fundamental Transaction
shall issue to the Holder a new warrant consistent with the foregoing
provisions and evidencing the Holder's right to exercise such warrant
into Alternate Consideration. The terms of any agreement pursuant to
which a Fundamental Transaction is effected shall include terms
requiring any such successor or surviving entity to comply with the
provisions of this Section 3(e) and insuring that this Warrant (or any
such replacement security) will be similarly adjusted upon any
subsequent transaction analogous to a Fundamental Transaction.
f) Calculations. All calculations under this Section 3 shall
be made to the nearest cent or the nearest 1/100th of a share, as the
case may be. For purposes of this Section 3, the number of shares of
Common Stock deemed to be issued and outstanding as of a given date
shall be the sum of the number of shares of Common Stock (excluding
treasury shares, if any) issued and outstanding.
g) Voluntary Adjustment By Company. The Company may at any
time during the term of this Warrant reduce the then current Exercise
Price to any amount and for any period of time deemed appropriate by
the Board of Directors of the Company.
h) Notice to Holder.
i. Adjustment to Exercise Price. Whenever the Exercise Price
is adjusted pursuant to any provision of this Section 3, the
Company shall promptly mail to the Holder a notice setting
forth the Exercise Price after such adjustment and setting
forth a brief statement of the facts requiring such
adjustment. If the Company issues a variable rate security,
despite the prohibition thereon in the Purchase Agreement
prior to the 12-month anniversary of the Effective Date, the
Company shall be deemed to have issued Common Stock or Common
Stock Equivalents at the lowest possible conversion or
exercise price at which such securities may be converted or
exercised in the case of a Variable Rate Transaction (as
defined in the Purchase Agreement).
ii. Notice to Allow Exercise by Holder. If (A) the Company
shall declare a dividend (or any other distribution in
whatever form) on the Common Stock; (B) the Company shall
declare a special nonrecurring cash dividend on or a
redemption of the Common Stock; (C) the Company shall
authorize the granting to all holders of the Common Stock
9
rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights; (D) the approval
of any stockholders of the Company shall be required in
connection with any reclassification of the Common Stock, any
consolidation or merger to which the Company is a party, any
sale or transfer of all or substantially all of the assets of
the Company, of any compulsory share exchange whereby the
Common Stock is converted into other securities, cash or
property; (E) the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up of the
affairs of the Company; then, in each case, the Company shall
cause to be mailed to the Holder at its last address as it
shall appear upon the Warrant Register of the Company, at
least 20 calendar days prior to the applicable record or
effective date hereinafter specified, a notice stating (x) the
date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if
a record is not to be taken, the date as of which the holders
of the Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is
expected to become effective or close, and the date as of
which it is expected that holders of the Common Stock of
record shall be entitled to exchange their shares of the
Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange; provided that the failure to
mail such notice or any defect therein or in the mailing
thereof shall not affect the validity of the corporate action
required to be specified in such notice. The Holder is
entitled to exercise this Warrant during the 20-day period
commencing on the date of such notice to the effective date of
the event triggering such notice.
Section 4. Transfer of Warrant.
a) Transferability. Subject to compliance with any applicable
securities laws and the conditions set forth in Section 4(d) hereof and
to the provisions of Section 4.1 of the Purchase Agreement, this
Warrant and all rights hereunder (including, without limitation, any
registration rights) are transferable, in whole or in part, upon
surrender of this Warrant at the principal office of the Company or its
designated agent, together with a written assignment of this Warrant
substantially in the form attached hereto duly executed by the Holder
or its agent or attorney and funds sufficient to pay any transfer taxes
payable upon the making of such transfer. Upon such surrender and, if
required, such payment, the Company shall execute and deliver a new
Warrant or Warrants in the name of the assignee or assignees and in the
denomination or denominations specified in such instrument of
assignment, and shall issue to the assignor a new Warrant evidencing
the portion of this Warrant not so assigned, and this Warrant shall
promptly be cancelled. A Warrant, if properly assigned, may be
exercised by a new holder for the purchase of Warrant Shares without
having a new Warrant issued.
b) New Warrants. This Warrant may be divided or combined with
other Warrants upon presentation hereof at the aforesaid office of the
10
Company, together with a written notice specifying the names and
denominations in which new Warrants are to be issued, signed by the
Holder or its agent or attorney. Subject to compliance with Section
4(a), as to any transfer which may be involved in such division or
combination, the Company shall execute and deliver a new Warrant or
Warrants in exchange for the Warrant or Warrants to be divided or
combined in accordance with such notice.
c) Warrant Register. The Company shall register this Warrant,
upon records to be maintained by the Company for that purpose (the
"Warrant Register"), in the name of the record Holder hereof from time
to time. The Company may deem and treat the registered Holder of this
Warrant as the absolute owner hereof for the purpose of any exercise
hereof or any distribution to the Holder, and for all other purposes,
absent actual notice to the contrary.
d) Transfer Restrictions. If, at the time of the surrender of
this Warrant in connection with any transfer of this Warrant, the
transfer of this Warrant shall not be registered pursuant to an
effective registration statement under the Securities Act and under
applicable state securities or blue sky laws, the Company may require,
as a condition of allowing such transfer, that (i) the Holder or
transferee of this Warrant, as the case may be, furnish to the Company
a written opinion of counsel (which opinion shall be in form, substance
and scope customary for opinions of counsel in comparable transactions)
to the effect that such transfer may be made without registration under
the Securities Act and under applicable state securities or blue sky
laws, and (ii) the Holder or transferee execute and deliver to the
Company an investment letter in form and substance acceptable to the
Company, and (iii) the transferee be an "accredited investor" as
defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8)
promulgated under the Securities Act or a "qualified institutional
buyer" as defined in Rule 144A(a) promulgated under the Securities Act.
Section 5. Miscellaneous.
a) No Rights as Shareholder Until Exercise. This Warrant does
not entitle the Holder to any voting rights or other rights as a
shareholder of the Company prior to the exercise hereof as set forth in
Section 2(e)(ii).
b) Loss, Theft, Destruction or Mutilation of Warrant. The
Company covenants that upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant or any stock certificate relating to the
Warrant Shares, and in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to it (which, in the case of the
Warrant, shall not include the posting of any bond), and upon surrender
and cancellation of such Warrant or stock certificate, if mutilated,
the Company will make and deliver a new Warrant or stock certificate of
like tenor and dated as of such cancellation, in lieu of such Warrant
or stock certificate.
c) Saturdays, Sundays, Holidays, etc. If the last or appointed
day for the taking of any action or the expiration of any right
11
required or granted herein shall not be a Business Day, then such
action may be taken or such right may be exercised on the next
succeeding Business Day.
d) Authorized Shares.
The Company covenants that during the period the
Warrant is outstanding, it will reserve from its authorized
and unissued Common Stock a sufficient number of shares to
provide for the issuance of the Warrant Shares upon the
exercise of any purchase rights under this Warrant. The
Company further covenants that its issuance of this Warrant
shall constitute full authority to its officers who are
charged with the duty of executing stock certificates to
execute and issue the necessary certificates for the Warrant
Shares upon the exercise of the purchase rights under this
Warrant. The Company will take all such reasonable action as
may be necessary to assure that such Warrant Shares may be
issued as provided herein without violation of any applicable
law or regulation, or of any requirements of the Trading
Market upon which the Common Stock may be listed.
Except and to the extent as waived or consented to by
the Holder, the Company shall not by any action, including,
without limitation, amending its certificate of incorporation
or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of
this Warrant, but will at all times in good faith assist in
the carrying out of all such terms and in the taking of all
such actions as may be necessary or appropriate to protect the
rights of Holder as set forth in this Warrant against
impairment. Without limiting the generality of the foregoing,
the Company will (a) not increase the par value of any Warrant
Shares above the amount payable therefor upon such exercise
immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that
the Company may validly and legally issue fully paid and
nonassessable Warrant Shares upon the exercise of this
Warrant, and (c) use commercially reasonable efforts to obtain
all such authorizations, exemptions or consents from any
public regulatory body having jurisdiction thereof as may be
necessary to enable the Company to perform its obligations
under this Warrant.
Before taking any action which would result in an
adjustment in the number of Warrant Shares for which this
Warrant is exercisable or in the Exercise Price, the Company
shall obtain all such authorizations or exemptions thereof, or
consents thereto, as may be necessary from any public
regulatory body or bodies having jurisdiction thereof.
e) Jurisdiction. All questions concerning the construction,
validity, enforcement and interpretation of this Warrant shall be
determined in accordance with the provisions of the Purchase Agreement.
12
f) Restrictions. The Holder acknowledges that the Warrant
Shares acquired upon the exercise of this Warrant, if not registered,
will have restrictions upon resale imposed by state and federal
securities laws.
g) Nonwaiver and Expenses. No course of dealing or any delay
or failure to exercise any right hereunder on the part of Holder shall
operate as a waiver of such right or otherwise prejudice Holder's
rights, powers or remedies, notwithstanding the fact that all rights
hereunder terminate on the Termination Date. If the Company willfully
and knowingly fails to comply with any provision of this Warrant, which
results in any material damages to the Holder, the Company shall pay to
Holder such amounts as shall be sufficient to cover any costs and
expenses including, but not limited to, reasonable attorneys' fees,
including those of appellate proceedings, incurred by Holder in
collecting any amounts due pursuant hereto or in otherwise enforcing
any of its rights, powers or remedies hereunder.
h) Notices. Any notice, request or other document required or
permitted to be given or delivered to the Holder by the Company shall
be delivered in accordance with the notice provisions of the Purchase
Agreement.
i) Limitation of Liability. No provision hereof, in the
absence of any affirmative action by Holder to exercise this Warrant to
purchase Warrant Shares, and no enumeration herein of the rights or
privileges of Holder, shall give rise to any liability of Holder for
the purchase price of any Common Stock or as a stockholder of the
Company, whether such liability is asserted by the Company or by
creditors of the Company.
j) Remedies. Holder, in addition to being entitled to exercise
all rights granted by law, including recovery of damages, will be
entitled to specific performance of its rights under this Warrant. The
Company agrees that monetary damages would not be adequate compensation
for any loss incurred by reason of a breach by it of the provisions of
this Warrant and hereby agrees to waive and not to assert the defense
in any action for specific performance that a remedy at law would be
adequate.
k) Successors and Assigns. Subject to applicable securities
laws, this Warrant and the rights and obligations evidenced hereby
shall inure to the benefit of and be binding upon the successors of the
Company and the successors and permitted assigns of Holder. The
provisions of this Warrant are intended to be for the benefit of all
Holders from time to time of this Warrant and shall be enforceable by
any such Holder or holder of Warrant Shares.
l) Amendment. This Warrant may be modified or amended or the
provisions hereof waived with the written consent of the Company and
the Holder.
m) Severability. Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Warrant shall
be prohibited by or invalid under applicable law, such provision shall
be ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provisions or the remaining
provisions of this Warrant.
13
n) Headings. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed
a part of this Warrant.
********************
14
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its officer thereunto duly authorized as of the date first above
indicated.
ECOSPHERE TECHNOLOGIES, INC.
By:_____________________________________
Name: Xxxxxx XxXxxxx
Title: President and Chief Executive Officer
15
NOTICE OF EXERCISE
To: Ecosphere technologies, inc.
(1) The undersigned hereby elects to purchase ________ Warrant Shares
of the Company pursuant to the terms of the attached Warrant (only if exercised
in full), and tenders herewith payment of the exercise price in full, together
with all applicable transfer taxes, if any.
(2) Payment shall take the form of (check applicable box):
[ ] in lawful money of the United States; or
[ ] [if permitted] the cancellation of such number of Warrant
Shares as is necessary, in accordance with the formula set
forth in subsection 2(c), to exercise this Warrant with
respect to the maximum number of Warrant Shares purchasable
pursuant to the cashless exercise procedure set forth in
subsection 2(c).
(3) Please issue a certificate or certificates representing said
Warrant Shares in the name of the undersigned or in such other name as is
specified below:
________________________________________
The Warrant Shares shall be delivered to the following DWAC Account Number or by
physical delivery of a certificate to:
________________________________________
________________________________________
________________________________________
(4) Accredited Investor. The undersigned is an "accredited investor" as
defined in Regulation D promulgated under the Securities Act of 1933, as
amended.
[SIGNATURE OF HOLDER]
Name of Investing Entity: ______________________________________________________
Signature of Authorized Signatory of Investing Entity: _________________________
Name of Authorized Signatory: __________________________________________________
Title of Authorized Signatory: _________________________________________________
Date: __________________________________________________________________________
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, [____] all of or [_______] shares of the
foregoing Warrant and all rights evidenced thereby are hereby assigned to
_______________________________________________ whose address is
_______________________________________________________________.
_______________________________________________________________
Dated: ______________, _______
Holder's Signature:__________________________________
Holder's Address:____________________________________
____________________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
EXHIBIT D
-----------------
XXXXXX XXXXXX LLP 0000 Xxxx Xxxxx Xxxxx Xxxxxxxxx, Xxxxx 000
----------------- West Palm Beach, FL 33401-2327
Attorneys At Law Tel: (000) 000-0000
Fax: (000) 000-0000
xxx.xxxxxxxxxxxx.xxx
[HC}
December 15, 2006
Purchasers Listed on Schedule A
Re: Ecosphere Technologies, Inc.
Ladies and Gentlemen:
We have acted as counsel to Ecosphere Technologies, Inc. (the
"Company") regarding the purchase of units consisting of Original Issue Discount
No. 9% Senior Convertible Debentures due December 15, 2009 (the "Debentures")
and common stock purchase warrants (the "Warrants") by each of you
(collectively, the "Purchasers"). In this transaction as of this date, the
Company and the Purchasers entered into a Securities Purchase Agreement
containing the terms and conditions of the acquisition of the securities, and a
Registration Rights Agreement. The Securities Purchase Agreement, the
Registration Rights Agreement, the Warrants and the Debentures are collectively
referred to in this opinion as the "Transaction Documents." This opinion is
furnished at your request and is given with the consent of the Company.
Capitalized terms that are otherwise defined in this opinion shall have the
definitions set forth in the Securities Purchase Agreement.
We do not express any opinion concerning any law other than the laws of
Florida, the Delaware General Corporation Law and the federal law of the United
States. We note that the Agreement provides that it is governed by the law of
the State of New York. We have assumed, with your permission, that the law of
New York is identical to the law of Florida in all respects material to our
opinions.
This opinion has been prepared and is to be construed in accordance
with the Report on Standards for Florida Opinions dated April 8, 1991 issued by
the Business Law Section of the Florida Bar (the "Report"). The Report is
incorporated by reference into this opinion.
In rendering the following opinion, we have relied, with your approval,
as to factual matters that affect our opinion, solely on our examination of the
following documents or certificates and have made no independent verification of
the facts asserted to be true and correct in those documents, including the
factual representations and warranties contained in the Securities Purchase
Agreement:
A. Securities Purchase Agreement;
Purchasers Listed on Schedule A
December 15, 2006
Page 2
B. Registration Rights Agreement;
C. Debenture;
D. Warrant;
E. Certificate of Xxxxx X. Xxxxxxx III dated December 15, 2006.
In addition to the assumptions contained in the Report, we have, with
your consent, assumed the due execution and delivery of the Transaction
Documents.
Based on the foregoing, and subject to the qualifications and
limitations stated in this opinion and the Report, we are of the opinion that:
1. The Company has been incorporated under the Delaware Corporation Law
and its status is active.
2. The Company was organized under the Delaware General Corporation Law.
3. The Company has three subsidiaries, Ecosphere Systems, Inc., UltraStrip
Envirobotic Solutions, Inc. and Ecosphere Energy Solutions, Inc.
(collectively, the "Subsidiaries'), each of which have been
incorporated under the Florida Business Corporation Act and their
respective status is active.
4. The Subsidiaries were organized under the Florida Business Corporation
Act.
5. To our knowledge after limited investigation, the Company is required
to be qualified as a foreign corporation in the State of Florida and
based on a copy of the Certificate of Good Standing issued by the State
of Florida, the Company is qualified as a foreign corporation to
conduct business in the State of Florida.
6. The Company has the corporate power to conduct its business and to
execute and deliver the Transaction Documents and to perform its
respective obligations under the Transaction Documents.
7. The Company has authorized the execution, delivery and performance of
the Transaction Documents by all necessary corporate action.
8. The execution and delivery of the Transaction Documents, performance by
Purchasers Listed on Schedule A
December 15, 2006
Page 3
the Company of its respective obligations under the Transaction
Documents and the exercise by the Company of the rights created by the
Transaction Documents do not (a) violate the Company's Articles of
Incorporation or Bylaws or any amendments thereto; (b) to our knowledge
constitute a breach of or a default under any agreement or instrument
to which the Company is a party or by which it or its assets are bound,
or result in the creation of a mortgage, security interest or other
encumbrance upon the assets of the Company except as set forth in the
Transaction Documents; (c) to our knowledge violate a judgment, a
decree or order of any court or administrative tribunal, which
judgment, decree or order is binding on the Company or its assets; or
(d) violate any federal or Florida law, rule or regulation.
9. We have no knowledge of any pending or overtly threatened actions,
claims, investigations or other proceedings against the Company which
may have a Material Adverse Effect.
10. Subject to the limitations contained in the next paragraph, the
Transaction Documents are the valid and binding obligation of the
Company enforceable against the Company under the law of Florida and
the federal law of the United States.
Our opinion concerning the validity, binding and effective and
enforceability of the Transaction Documents means that (a) the Transaction
Documents constitute an effective contract under applicable law, (b) none of the
Transaction Documents is invalid in its entirety because of a specific statutory
prohibition or public policy and none is subject in its entirety to a
contractual defense, and (c) subject to the last sentence of this paragraph,
some remedies are available if the Company is in material default under the
Transaction Documents. This opinion does not mean that (a) any particular remedy
is available upon a material default, or (b) every provision of the Transaction
Documents will be upheld or enforced in any or each circumstance by a court.
Furthermore, the validity, binding effect and enforceability of the Transaction
Documents may be limited or otherwise affected by (a) bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other similar statutes,
rules regulations or other laws affecting the enforcement of creditors' rights
and remedies generally and (b) the unavailability of, or limitation on the
availability of, a particular right or remedy (whether in a proceeding in equity
or at law) because of an equitable principle or a requirement as to commercial
reasonableness, conscionability or good faith.
11. To our knowledge, since January 1, 2005, the Company has filed all
reports (the "SEC Reports") required to be filed by it under Section 13
of the Securities Exchange Act of 0000 (xxx "Xxxxxxxx Xxx"). As of
their respective filing dates, the SEC Reports complied in all material
respects as to form with the requirements of the Exchange Act and the
rules and regulations of the SEC promulgated thereunder.
Purchasers Listed on Schedule A
December 15, 2006
Page 4
12. Based in part upon the representations of the Purchasers contained in
the Agreement, the Debentures and the Warrants may be issued to the
Purchasers without registration under the Securities Act of 1933.
13. Except for the filing of Form D with the SEC and applicable states (and
such other forms as may be required in such states), no consent,
license, permit, waiver, approval or authorization of, or designation,
declaration, registration or filing with, any court, governmental or
regulatory authority, or self-regulatory organization, is required in
connection with the valid execution, delivery and performance by the
Company of the Transaction Documents, or the offer, sale, issuance or
delivery of the Debentures or the Warrants or the consummation of the
transactions contemplated thereby.
14. The Company is not an Investment Company within the meaning of the
Investment Company Act of 1940.
This opinion is furnished to you by us as counsel for the Company and
is solely for your benefit and is rendered solely in connection with the
transaction to which this opinion relates. This opinion may be relied upon only
in connection with this transaction and may not be relied upon by any other
persons without our prior written consent. This opinion is furnished as of this
date, and we do not undertake any duty to update this opinion.
Very truly yours,
XXXXXX XXXXXX LLP
SCHEDULE A
Enable Growth Partners LP
Xxx Xxxxx Xxxxxxxx, Xxxxx 000
Xxx Xxxxxxxxx, XX 00000
Enable Opportunity Partners LP
Xxx Xxxxx Xxxxxxxx, Xxxxx 000
Xxx Xxxxxxxxx, XX 00000
Xxxxxx Diversified Strategy Master Fund LLC, Ena
Xxx Xxxxx Xxxxxxxx, Xxxxx 000
Xxx Xxxxxxxxx, XX 00000
Xxxxxx Xxxx, Xx.
0000 XX Xxxxx'x Xxxx Xxx
Xxxxxx Xxxxx, XX 00000
Gemini Master Fund, Ltd.
? Gemini Strategies, LLC
00000 Xx Xxxxxx Xxxx
Xxx Xxxxx, XX 00000
EXHIBIT E
FORM OF LOCK-UP AGREEMENT
October __, 2006
Each Purchaser referenced below:
Re: Securities Purchase Agreement, dated as of October __, 2006
(the "Purchase Agreement"), between Ecosphere Technologies,
Inc., a Delaware corporation (the "Company") and the
purchasers signatory thereto (each, a "Purchaser" and,
collectively, the "Purchasers")
Ladies and Gentlemen:
Defined terms not otherwise defined in this letter agreement (the
"Letter Agreement") shall have the meanings set forth in the Purchase Agreement.
Pursuant to Section 2.2(a)(v) of the Purchase Agreement and in satisfaction of a
condition of the Company's obligations under the Purchase Agreement, the
undersigned irrevocably agrees with the Company that, from the date hereof until
the 90th calendar day following the Effective Date (such period, the
"Restriction Period"), the undersigned will not offer, sell, contract to sell,
hypothecate, pledge or otherwise dispose of (or enter into any transaction which
is designed to, or might reasonably be expected to, result in the disposition
(whether by actual disposition or effective economic disposition due to cash
settlement or otherwise) by the undersigned or any Affiliate of the undersigned
or any person in privity with the undersigned or any Affiliate of the
undersigned), directly or indirectly, including the filing (or participation in
the filing) of a registration statement with the Commission in respect of, or
establish or increase a put equivalent position or liquidate or decrease a call
equivalent position within the meaning of Section 16 of the Exchange Act with
respect to, any shares of Common Stock or Common Stock Equivalents beneficially
owned, held or hereafter acquired by the undersigned (the "Securities").
Beneficial ownership shall be calculated in accordance with Section 13(d) of the
Exchange Act. In order to enforce this covenant, the Company shall impose
irrevocable stop-transfer instructions preventing the Transfer Agent from
effecting any actions in violation of this Letter Agreement.
The undersigned acknowledges that the execution, delivery and
performance of this Letter Agreement is a material inducement to each Purchaser
to complete the transactions contemplated by the Purchase Agreement and that
each Purchaser (which shall be a third party beneficiary of this Letter
Agreement) and the Company shall be entitled to specific performance of the
undersigned's obligations hereunder. The undersigned hereby represents that the
undersigned has the power and authority to execute, deliver and perform this
Letter Agreement, that the undersigned has received adequate consideration
therefor and that the undersigned will indirectly benefit from the closing of
the transactions contemplated by the Purchase Agreement.
This Letter Agreement may not be amended or otherwise modified in any
respect without the written consent of each of the Company, each Purchaser and
the undersigned. This Letter Agreement shall be construed and enforced in
accordance with the laws of the State of New York without regard to the
principles of conflict of laws. The undersigned hereby irrevocably submits to
the exclusive jurisdiction of the United States District Court sitting in the
Southern District of New York and the courts of the State of New York located in
Manhattan, for the purposes of any suit, action or proceeding arising out of or
relating to this Letter Agreement, and hereby waives, and agrees not to assert
in any such suit, action or proceeding, any claim that (i) it is not personally
subject to the jurisdiction of such court, (ii) the suit, action or proceeding
is brought in an inconvenient forum, or (iii) the venue of the suit, action or
proceeding is improper. The undersigned hereby irrevocably waives personal
service of process and consents to process being served in any such suit, action
or proceeding by receiving a copy thereof sent to the Company at the address in
effect for notices to it under the Purchase Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. The undersigned hereby waives any right to a trial by jury. Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. The undersigned agrees and understands that this
Letter Agreement does not intend to create any relationship between the
undersigned and each Purchaser and that each Purchaser is not entitled to cast
any votes on the matters herein contemplated and that no issuance or sale of the
Securities is created or intended by virtue of this Letter Agreement.
By its signature below, the Company's Transfer Agent hereby
acknowledges and agrees that, reflecting this Letter Agreement, it has placed an
irrevocable stop transfer instruction on all Securities beneficially owned by
the undersigned until the end of the Restriction Period. This Letter Agreement
shall be binding on successors and assigns of the undersigned with respect to
the Securities and any such successor or assign shall enter into a similar
agreement for the benefit of the Purchasers.
*** SIGNATURE PAGE FOLLOWS***
2
This Letter Agreement may be executed in two or more counterparts, all
of which when taken together may be considered one and the same agreement.
_________________________
Signature
__________________________
Print Name
__________________________
Position in Company
Address for Notice:
__________________________
__________________________
__________________________
Number of shares of Common Stock
_____________________________________________________________________________
Number of shares of Common Stock underlying subject to warrants, options,
debentures or other convertible securities
By signing below, the Company agrees to enforce the restrictions on
transfer set forth in this Letter Agreement.
__________________________________
By: _________________________________
Name:
Title:
Acknowledged and agreed to as of the date set forth above:
[insert name of transfer agent]
By:_____________________________________
Name:
Title:
3
