Exhibit 10.1

 

CONSENT AND AGREEMENT

OF

SERIES A CONVERTIBLE PREFERRED STOCKHOLDERS

 

AMERICAN DEFENSE SYSTEMS, INC.

 

May 23, 2008

 

Reference is made to (i) that certain Securities Purchase Agreement, dated
March 7, 2008 (“Purchase Agreement”), by and among American Defense
Systems, Inc. (the “Company”) and West Coast Opportunity Fund, LLC, Centaur
Value Fund, LP and United Centaur Master Fund (collectively, the “Holders”),
pursuant to which the Holders acquired shares of the Company’s Series A
Convertible Preferred Stock (“Preferred Shares”) and related warrants
(“Warrants”), and (ii) that certain Certificate of Designations, Preferences and
Rights of such Preferred Shares (“Certificate of Designations”).

 

The Company has applied (the “Application”) to list its common stock (“Common
Stock”) on the American Stock Exchange (“Amex”).  In order to comply with the
rules of the Amex, including, without limitation, Sections 101, 122 and 713 of
the Amex Company Guide, and for the Application to be approved, it is necessary,
among other things, that this Consent and Agreement be agreed to by the Holders.

 

The undersigned, being the holders of the outstanding Preferred Shares of the
Company, hereby consent and agree as follows:

 

1.                                       Minimum Conversion Price Regarding
Voting. Notwithstanding any contrary or inconsistent provision in the
Certificate of Designations or Purchase Agreement other than the limits
regarding the Maximum Percentage as set forth (and defined) in the Certificate
of Designations, for the purpose only of determining the number of votes each
Preferred Share shall be entitled to vote pursuant to the Certificate of
Designations, the Conversion Price (as defined in the Certificate of
Designations) on the record date for the taking of any vote (or, if no such
record date is established, at the date such vote is taken or any written
consent of stockholders is solicited) shall not in any case be deemed less than
an amount equal to $2.00 (as adjusted for any stock splits, stock dividends,
recapitalizations, combinations, reverse stock splits or other similar events
after the Subscription Date (as defined in the Certificate of Designations)).

 

2.                                       Limitations on Certain Conversions.
Notwithstanding any contrary or inconsistent provision of the Certificate of
Designations or Purchase Agreement, in no event shall (i) any Preferred Share be
converted into shares of Common Stock pursuant to the Certificate of
Designations, (ii) any Dividend Share (as defined in the Certificate of
Designations) be issued pursuant to the Certificate of Designations, or
(iii) any Warrant Share be issued upon exercise of the Warrants, if such
conversion, issuance or exercise would cause the Company to have issued in the
aggregate more than 7,858,358 shares of Common Stock (as adjusted for any stock
splits, stock dividends, recapitalizations, combinations, reverse stock splits
or other similar events after the Subscription Date) (which amount equals
approximately 19.99% of the total shares of Common Stock outstanding on the
initial closing date under the Purchase Agreement) (the “Exchange Cap”), without
approval of the holders of the Common Stock or the agreement,

 

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waiver of consent of the Amex with respect to such stockholder approval. Any
then outstanding Preferred Shares and Warrant Shares or fraction thereof that
cannot be converted or exercised, as applicable, as a result of the preceding
sentence shall remain outstanding in accordance with, and subject to, the
Certificate of Designations, the Warrants and Purchase Agreement, other than the
right of conversion or exercise as applicable, until such stockholder approval
or Amex consent is obtained.   Until such approval or waiver is obtained, no
Holder shall be issued, upon exercise or conversion, as applicable, of any
Warrants or Preferred Shares, shares of Common Stock in an amount greater than
the product of the Exchange Cap multiplied by a fraction, the numerator of which
is the aggregate stated value amount of the number of Preferred Shares issued to
such Holder pursuant to the Securities Purchase Agreement on the Closing Date
and the denominator of which is the aggregate stated value of all the Preferred
Shares issued to the Holders pursuant to the Securities Purchase Agreement on
the Closing Date (with respect to each holder, the “Exchange Cap Allocation”). 
In the event that any Holder shall sell or otherwise transfer any of such
Holder’s Warrants or Preferred Shares, the transferee shall be allocated a pro
rata portion of such Holder’s Exchange Cap Allocation, and the restrictions of
the prior sentence shall apply to such transferee with respect to the portion of
the Exchange Cap Allocation allocated to such transferee.  In the event that any
Holder of Preferred Shares shall convert or exercise all of such Holder’s
Preferred Shares and Warrants, as applicable, into a number of shares of Common
Stock which, in the aggregate, is less than such Holder’s Exchange Cap
Allocation, then the difference between such Holder’s Exchange Cap Allocation
and the number of shares of Common Stock actually issued to such Holder shall be
allocated to the respective Exchange Cap Allocations of the remaining Holders of
Preferred Shares and Warrants on a pro rata basis in proportion to the shares of
Common Stock underlying the Preferred Shares and Warrants then held by each such
Holder.

 

3.                                       Listing.  Notwithstanding any contrary
or inconsistent provision of the Certificate of Designations or Purchase
Agreement, including, without limitation, Section 4(f) (Listing) of the Purchase
Agreement, the Holders agree that the extent to which the Company is required to
secure or maintain the listing of the Conversion Shares, Warrant Shares,
Dividend Shares and other Listed Securities (each term as defined in the
Purchase Agreement) shall be subject to any limitations imposed, or otherwise
required, by the Amex pursuant to the Amex Company Guide or their discretionary
authority.

 

4.                                       Stockholder Approval.  The Company
shall provide each stockholder entitled to vote at a special or annual meeting
of stockholders of the Company (the “Stockholder Meeting”), which shall be
promptly called and held not later than December 31, 2008 (the “Stockholder
Meeting Deadline”), a proxy statement, substantially in the form which has been
previously reviewed by Schulte Roth & Zabel LLP, at the expense of the Company,
not to exceed $10,000 (which review shall be completed within five (5) Business
Days (as defined in the Purchase Agreement) of such counsel’s receipt of the
proxy statement and such review requirement shall be waived if such counsel has
not completed its review within such five (5) Business Day period), soliciting
each such stockholder’s affirmative vote at the Stockholder Meeting for approval
of resolutions providing for the Company’s issuance of all of the Securities (as
defined in the Purchase Agreement) as described in the Transaction Documents (as
defined in the Purchase Agreement) in accordance with applicable law and the
rules and regulations of Amex (such affirmative approval being referred to
herein as the “Stockholder Approval”), and the Company shall use its reasonable
best efforts to solicit its stockholders’ approval of such

 

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resolutions  and to cause the board of directors of the Company to recommend to
the stockholders that they approve such resolutions.  The Company shall be
obligated to use its reasonable best efforts to obtain the Stockholder Approval
by the Stockholder Meeting Deadline.  If, despite the Company’s reasonable best
efforts the Stockholder Approval is not obtained on or prior to the Stockholder
Meeting Deadline, the Company shall cause an additional Stockholder Meeting to
be held every six (6) months thereafter until such Stockholder Approval is
obtained or the Preferred Shares are no longer outstanding.

 

5.                                       Equity Conditions.  The parties hereby
agree that unless and until the Stockholder Approval is obtained, the Equity
Conditions (as defined in Certificate of Designations) shall not have been
satisfied.

 

6.                                       Financial Covenants and Operating
Results.

 

(A)                                  FOR PURPOSES OF THIS SECTION 6, THE
FOLLOWING DEFINITIONS SHALL APPLY.

 

(i)                                     “Affiliate” means, with respect to any
Person, any other Person that directly or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with,
such Person.  For purposes of this definition, “control” of a Person means the
power, directly or indirectly, to direct or cause the direction of the
management and policies of such Person whether through holding beneficial
ownership interests in such other Person, by contract or otherwise. 
Notwithstanding anything herein to the contrary, in no event shall any holder of
Preferred Stock be considered an “Affiliate” of the Company hereunder.

 

(ii)                                  “Consolidated EBITDA” means, with respect
to the Company for any period, the Consolidated Net Income of the Company and
its Subsidiaries for such period, plus (i) without duplication, the sum of the
following amounts of the Company and its Subsidiaries for such period and to the
extent deducted in determining Consolidated Net Income of the Company for such
period:  (A) Consolidated Net Interest Expense, (B) income tax expense,
(C) depreciation expense, and (D) amortization expense.

 

(iii)                               “Consolidated Net Income” means, with
respect to the Company for any period, the net income (loss) of the Company and
its Subsidiaries for such period, determined on a consolidated basis and in
accordance with GAAP, but excluding from the determination of Consolidated Net
Income (without duplication) (a) any extraordinary or non recurring gains or
losses or gains or losses from Dispositions, (b) restructuring charges, (c) any
tax refunds, net operating losses or other net tax benefits, (d) effects of
discontinued operations and (e) interest income (including interest
paid-in-kind).

 

(iv)                              “Consolidated Net Interest Expense” means,
with respect to any Person for any period, gross interest expense of the Company
and its Subsidiaries for such period determined on a consolidated basis and in
accordance with GAAP (including, without limitation, interest expense paid to
Affiliates of the Company), less (i) the sum of (A) interest income for such
period and (B) gains for such period on Hedging Agreements (to the extent not
included in interest income above and to the extent not deducted in the
calculation of gross interest expense), plus (ii) the sum of (A) losses for such
period on Hedging Agreements (to the extent not included in gross interest
expense) and (B) the upfront costs or fees for such period associated with

 

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Hedging Agreements (to the extent not included in gross interest expense), in
each case, determined on a consolidated basis and in accordance with GAAP.

 

(v)                                 “Fiscal Year” means the Company’s fiscal
year that ends on December 31, or such other fiscal year adopted by the Company
for the financial reporting purposes in accordance with GAAP.

 

(vi)                              “Hedging Agreement” means any interest rate,
foreign currency, commodity or equity swap, collar, cap, floor or forward rate
agreement, or other agreement or arrangement designed to protect against
fluctuations in interest rates or currency, commodity or equity values
(including, without limitation, any option with respect to any of the foregoing
and any combination of the foregoing agreements or arrangements), and any
confirmation executed in connection with any such agreement or arrangement.

 

(viii)                        “Revenues” means the amount set forth in the line
item entitled “Total Net Revenues” in the Company’s publicly available
consolidated financial statements, as prepared in accordance with GAAP.

 

(B)                                 FINANCIAL COVENANTS.  FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2008, THE COMPANY SHALL ACHIEVE (A) REVENUES EQUAL TO OR
EXCEEDING $50,000,000 FOR SUCH PERIOD AND (B) CONSOLIDATED EBITDA EQUAL TO OR
EXCEEDING $13,500,000 FOR SUCH PERIOD (THE “FINANCIAL COVENANTS”).  FOR PURPOSES
OF DETERMINING WHETHER REVENUES AND EBITDA SATISFY THE FOREGOING FINANCIAL
COVENANTS, THE FINANCIAL IMPACT OF ANY ACQUISITIONS (WHETHER STOCK OR ASSET
TRANSACTIONS), MERGERS, BUSINESS COMBINATIONS, TENDER OR EXCHANGE OFFERS OR
SIMILAR TRANSACTIONS CONSUMMATED BY THE COMPANY AND ITS SUBSIDIARIES AFTER THE
EFFECTIVE DATE SHALL NOT BE INCLUDED.

 

(C)                                  OPERATING RESULTS ANNOUNCEMENT.  NO LATER
THAN FEBRUARY 15, 2009 (THE “OPERATING RESULTS ANNOUNCEMENT DEADLINE”), THE
COMPANY SHALL PUBLICLY DISCLOSE AND DISSEMINATE (THE DATE OF SUCH DISCLOSURE,
THE “OPERATING RESULTS ANNOUNCEMENT DATE”) ITS OPERATING RESULTS (THE “OPERATING
RESULTS”) FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008.  THE ANNOUNCEMENT OF THE
OPERATING RESULTS SHALL STATE (A) THE AMOUNT OF THE CONSOLIDATED EBITDA AND
REVENUES FOR FISCAL YEAR ENDED DECEMBER 31, 2008 AND (B) WHETHER THE COMPANY HAS
ACHIEVED THE FINANCIAL COVENANTS; PROVIDED, HOWEVER, THAT IN THE EVENT THAT THE
COMPANY SHALL NOT HAVE ANNOUNCED THE OPERATING RESULTS FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2008 BY THE OPERATING RESULTS ANNOUNCEMENT DEADLINE, THE COMPANY
SHALL BE DEEMED TO HAVE FAILED TO ACHIEVE THE FINANCIAL COVENANTS.  ON THE
OPERATING RESULTS ANNOUNCEMENT DATE, THE COMPANY SHALL ALSO PROVIDE TO THE
HOLDERS A CERTIFICATION, EXECUTED ON BEHALF OF THE COMPANY BY THE CHIEF
FINANCIAL OFFICER OF THE COMPANY, CERTIFYING THAT THE COMPANY HAS EITHER
ACHIEVED OR FAILED TO ACHIEVE EACH FINANCIAL COVENANT.

 

7.                                       Transaction Documents.  The parties
hereby agree that this Consent and Agreement shall be deemed to be a Transaction
Document (as defined in the Securities Purchase Agreement).  For the avoidance
of doubt, any covenant herein which is breached shall be deemed a Triggering
Event under Section 3(a)(vii) the Certificate of Designations for which there
shall be no cure period.

 

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8.                                       Dilutive Issuances.  The Company shall
not, in any manner, enter into or effect any Dilutive Issuance (as defined in
the Certificate of Designations) until the Stockholder Approval is obtained.

 

9.                                       Effective Time.  This Consent and
Agreement shall be effective upon the delivery to each of the Holders of a
Voting Agreement in the form of Exhibit A attached hereto duly executed by the
Company and each of Anthony Piscitelli, Gary Sidorsky and Curtis Taufman (the
“Voting Agreements”) (the date of such delivery, the “Effective Date”).  Prior
to obtaining the Stockholder Approval, the Company shall not amend, waive or
modify any provision of any of the Voting Agreements.

 

10.                                 Disclosure.  On or before 8:30 a.m., New
York City time, on the first (1st) Business Day following the Effective Date,
the Company shall file a Current Report on Form 8-K describing the terms of this
Consent and Agreement and attaching a copy of the form of this Consent and
Agreement.

 

11.                                 Expenses.  The Company shall pay the
reasonable legal fees and expenses of Schulte Roth & Zabel LLP, incurred by the
Holders in connection with the negotiation of this Consent and Agreement and the
Voting Agreements.

 

12.                                 Transferees.  Notwithstanding any contrary
of inconsistent provision of the Certificate of Designations or Purchase
Agreement, the transfer of any Preferred Shares shall be subject to the
transferee’s written agreement to be bound by the terms of this Consent and
Agreement as a Holder.

 

This Consent and Agreement (i) may be executed and delivered in counterparts and
by PDF or facsimile, and (ii) shall be governed by the laws of the State of
Delaware (without giving effect to principles of conflicts of laws).

 

[Signatures follow]

 

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IN WITNESS WHEREOF, the undersigned have executed this Consent and Agreement as
of the date first set forth above.

 

 

WEST COAST OPPORTUNITY FUND, LLC

 

 

 

 

 

 

 

 

By:

 

 

 

 

Name:

 

 

 

Title:

 

 

 

 

 

 

 

 

CENTAUR VALUE FUND, LP

 

 

 

 

 

 

 

 

By:

 

 

 

 

Name:

 

 

 

Title:

 

 

 

 

 

 

 

 

UNITED CENTAUR MASTER FUND

 

 

 

 

 

 

 

 

By:

 

 

 

 

Name:

 

 

 

Title:

 

 

 

 

 

 

 

 

 

 

ACCEPTED AND AGREED:

 

 

 

 

 

 

 

 

AMERICAN DEFENSE SYSTEMS, INC.

 

 

 

 

 

 

 

 

By:

 

 

 

 

Name:

 

 

 

Title:

 

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