EXHIBIT 10.1

 

THERMOENERGY CORPORATION

 

Securities Purchase Agreement

 

This Securities Purchase Agreement (this “Agreement”) is dated as of July 14,
2005, among ThermoEnergy Corporation, an Arkansas corporation (the “Company”),
and the investors identified on the signature pages hereto (each, an “Investor”
and collectively, the “Investors”).

 

WHEREAS, subject to the terms and conditions set forth in this Agreement and
pursuant to Section 4(2) of the Securities Act (as defined below) and Rule 506
promulgated thereunder, the Company desires to issue and sell to each Investor,
and each Investor, severally and not jointly, desires to purchase from the
Company certain 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 the Investors agree
as follows:

 

ARTICLE 1

 

Definitions

 

Section 1.1. Definitions. In addition to the terms defined elsewhere in this
Agreement, for all purposes of this Agreement, the following terms have the
meanings indicated in this Section 1.1:

 

“Action” means any action, suit, inquiry, notice of violation, proceeding
(including any partial proceeding such as a deposition) or investigation pending
or threatened in writing against or affecting the Company, any Subsidiary or any
of their respective properties before or by any court, arbitrator, governmental
or administrative agency, regulatory authority (federal, state, county, local or
foreign), stock market, stock exchange or trading facility.

 

“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.

 

“Business Day” means any day except Saturday, Sunday and any day which is a
federal legal holiday or a day on which banking institutions in the City of New
York are authorized or required by law or other governmental action to close.

 

“Certificate of Amendment” has the meaning set forth in Section 2.1.

 

“Claim” has the meaning set forth in Section 4.6(c).

 

“Closing” means the closing of the purchase and sale of the Shares and the
Warrants pursuant to Article 2. In the event there is more than one closing, the
term “Closing” shall apply to each such closing unless otherwise specified.

 

“Closing Date” means the Initial Closing Date and, in the event there is more
than one Closing, that date of each subsequent Closing unless otherwise
specified.

--------------------------------------------------------------------------------

“Commission” means the Securities and Exchange Commission.

 

“Common Stock” means the common stock of the Company, par value $0.001 per
share, and any securities into which such common stock may hereafter be
reclassified.

 

“Common Stock Equivalents” means any securities of the Company or any Subsidiary
which entitle the holder thereof to acquire Common Stock at any time, including
without limitation, any debt, preferred stock, rights, options, warrants or
other instrument that is at any time convertible into or exchangeable for, or
otherwise entitles the holder thereof to receive, Common Stock or other
securities that entitle the holder to receive, directly or indirectly, Common
Stock.

 

“Company Counsel” means Nixon Peabody, LLP.

 

“Company Deliverables” has the meaning set forth in Section 2.2(a).

 

“Company Stock Options” has the meaning set forth in Section 3.1(g).

 

“Contingent Obligations” has the meaning set forth in Section 3.1(r).

 

“Conversion Shares” means the shares of Common Stock issuable upon conversion of
the Shares.

 

“Convertible Securities” has the meaning set forth in Section 3.1(g).

 

“Disclosure Materials” has the meaning set forth in Section 3.1(h).

 

“Effective Date” means the date that any Registration Statement filed pursuant
to Article 4 is first declared effective by the Commission.

 

“Effectiveness Date” has the meaning set forth in Section 4.1.

 

“Environmental Law” has the meaning set forth in Section 3.1(aa).

 

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended,
and the rules and regulations promulgated thereunder.

 

“ERISA Affiliate” means any trade or business, whether or not incorporated, that
together with the Company would be deemed to be a single employer for purposes
of Section 4001 of ERISA or Sections 414(b), (c), (m), (n) or (o) of the
Internal Revenue Code of 1986, as amended.

 

“Evaluation Date” has the meaning set forth in Section 3.1(r).

 

“Event” has the meaning set forth in Section 4.8.

 

“Event Date” has the meaning set forth in Section 4.8.

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

“Exercise Price” has the meaning set forth in Section 4.8.

 

“Filing Date” has the meaning set forth in Section 4.1.

 

2

--------------------------------------------------------------------------------

“GAAP” means generally accepted accounting principles as in effect from time to
time in the United States of America.

 

“Governmental Authority” has the meaning set forth in Section 3.1(e).

 

“Hazardous Substance” has the meaning set forth in Section 3.1(aa).

 

“Indebtedness” has the meaning set forth in Section 3.1(r).

 

“Indemnified Party” has the meaning set forth in Section 4.6(c).

 

“Indemnified Person” has the meaning set forth in Section 4.6(a).

 

“Indemnifying Party” has the meaning set forth in Section 4.6(c).

 

“Initial Closing” means the Closing that occurs on the Initial Closing Date.

 

“Initial Closing Date” means the third Business Day immediately following the
date on which all of the conditions set forth in Sections 6.1 and 6.2 hereof are
satisfied, or such other date as the parties may agree.

 

“Intellectual Property Rights” has the meaning set forth in Section 3.1(o).

 

“Investment Amount” means, with respect to each Investor, the Investment Amount
indicated on such Investor’s signature page to this Agreement (subject to the
Company’s right, in its sole discretion, to reduce or cut back such amount).

 

“Investor Deliverables” has the meaning set forth in Section 2.2(b).

 

“Investor Party” has the meaning set forth in Section 5.7.

 

“Legend Removal Date” has the meaning set forth in Section 5.1(a).

 

“Lien” means any lien, charge, encumbrance, security interest, right of first
refusal or other restrictions of any kind.

 

“Losses” has the meaning set forth in Section 5.7.

 

“Material Adverse Effect” means any of (i) a material and adverse effect on the
legality, validity or enforceability of any Transaction Document, (ii) a
material and adverse effect on the results of operations, assets, prospects,
business or condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole, or (iii) a material impairment of the Company’s
ability to perform on a timely basis its obligations under any Transaction
Document.

 

“NASD Rules” has the meaning set forth in Section 4.3(o).

 

“Non-Responsive Investor” has the meaning set forth in Section 4.4(a).

 

“OFAC” has the meaning set forth in Section 3.1(ee).

 

3

--------------------------------------------------------------------------------

“Outside Date” means July 20, 2005.

 

“Per Unit Purchase Price” equals $1.20.

 

“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.

 

“Placement Agent” means Fieldstone Services Corp. and, where the context so
indicates, any other broker/dealer participating with the Placement Agent in the
sale and distribution of the Securities.

 

“Prior Warrants” has the meaning set forth in Section 3.1(g).

 

“Private Placement Memorandum” means the Private Placement Memorandum dated June
3, 2005 and delivered to the Investors in connection with the offer and sale of
the Securities (as such Private Placement Memorandum has been amended or
supplemented prior to the date hereof).

 

“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.

 

“Prospectus” has the meaning set forth in Section 4.3.

 

“Registrable Securities” means the Conversion Shares and the Warrant Shares;
provided, however, that the Investors shall not be required to convert any
Shares or to exercise any Warrants in order to have the Conversion Shares
issuable upon conversion of such Shares or the Warrant Shares issuable upon
exercise of such Warrants included in any Registration Statement.

 

“Registration Period” has the meaning set forth in Section 4.3.

 

“Registration Statement” means a registration statement filed on the appropriate
Form with, and declared effective by, the Commission under the Securities Act
and covering the resale by the Investors of the Registrable Securities.

 

“Requested Information” has the meaning set forth in Section 4.4(a).

 

“Rule 144” means Rule 144 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 effect as such Rule.

 

“SEC Reports” has the meaning set forth in Section 3.1(h).

 

“Securities” means the Shares, the Warrants, the Conversion Shares and the
Warrant Shares.

 

“Securities Act” means the Securities Act of 1933, as amended.

 

“Series A Preferred Stock” means the shares of the preferred stock of the
Company, par value $1.00 per share, that have been designated as “Series A
Convertible Preferred Stock.”

 

“Shares” means the shares of Series A Preferred Stock issued or issuable to the
Investors pursuant to this Agreement.

 

4

--------------------------------------------------------------------------------

“Short Sales” include, without limitation, all “short sales” as defined in Rule
200 promulgated under Regulation SHO under the Exchange Act and all types of
direct and indirect stock pledges, forward sale contracts, options, puts, calls,
short sales, swaps and similar arrangements (including on a total return basis),
and sales and other transactions through non-US broker dealers or foreign
regulated brokers.

 

“Subsequent Adjustment Date” has the meaning set forth in Section 4.8.

 

“Subsidiary” means any “significant subsidiary” as defined in Rule 1-02(w) of
Regulation S-X promulgated by the Commission under the Exchange Act.

 

“Trading Day” means (i) a day on which the Common Stock is traded on a Trading
Market, or (ii) if the Common Stock is not listed on a Trading Market, a day on
which the Common Stock is traded in the over-the-counter market, as reported by
the OTC Bulletin Board, or (iii) if the Common Stock is not then listed or
quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted in
the over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding to its functions
of reporting prices); provided, that in the event that the Common Stock is not
listed or quoted as set forth in (i), (ii) and (iii) hereof, then Trading Day
shall mean a Business Day.

 

“Trading Market” means whichever of the New York Stock Exchange, the American
Stock Exchange, the Nasdaq National Market, or the Nasdaq Small Cap Market on
which the Common Stock is listed or quoted for trading on the date in question.

 

“Transaction Documents” means this Agreement, the Warrants and any other
documents or agreements executed in connection with the transactions
contemplated hereunder.

 

“Courts” means the state and federal courts sitting in the State of New York.

 

“Warrants” means the Common Stock Purchase Warrants in the form of Exhibit A,
which are issuable to the Investors at the Closing.

 

“Warrant Shares” means the shares of Common Stock issuable upon exercise of the
Warrants.

 

ARTICLE 2

 

Purchase and Sale

 

Section 2.1. Designation of Series A Preferred Stock. The Company shall adopt
and file with the Secretary of State of the State of Arkansas on or before the
Initial Closing Date a Certificate of Amendment to the Company’s Articles of
Incorporation, in the form of Exhibit B attached to this Agreement, designating
all of the Company’s authorized and unissued preferred stock as Series A
Preferred Stock (the “Certificate of Amendment”).

 

Section 2.2 Closings. Subject to the terms and conditions set forth in this
Agreement, at each Closing the Company shall issue and sell to each Investor
purchasing Shares and Warrants at such Closing, and each Investor shall,
severally and not jointly, purchase from the Company by delivering such
Investor’s Investment Amount in accordance with the Placement Agent’s
instructions, the Shares and the Warrants representing such Investor’s
Investment Amount. The Closings shall take place at the offices of Nixon
Peabody, LLP, 437 Madison Avenue, New York, NY 10022 on the Closing Date or at
such other

 

5

--------------------------------------------------------------------------------

location or time as the parties may agree. After the Initial Closing, the
Company may sell, to no more than one additional Investor, pursuant to this
Agreement, 208,333 Shares and a Warrant to purchase 93,750 Warrant Shares, for
an Investment Amount of $250,000, provided that (i) such subsequent sale is
consummated prior to the Outside Date, (ii) such additional Investor shall
become a party to this Agreement by executing and delivering a counterpart
signature page to this Agreement and (iii) the Company gives all Investors
prompt notice of the Closing of such subsequent sale. Except as provided in the
foregoing sentence, after the Initial Closing the Company will not offer, issue
or sell any shares of Series A Preferred Stock.

 

Section 2.3. Closing Deliveries.

 

  (a) At each Closing, the Company shall deliver or cause to be delivered to
each Investor purchasing Shares and Warrants at such Closing the following (the
“Company Deliverables”):

 

  (i) A certificate evidencing a number of Shares equal to such Investor’s
Investment Amount divided by the Per Unit Purchase Price, registered in the name
of such Investor;

 

  (ii) A Warrant, registered in the name of such Investor, pursuant to which
such Investor shall have the right to acquire the number of Warrant Shares equal
to (i) the number of Shares issuable to such Investor pursuant to Section
2.3(a)(i) multiplied by (ii) 0.45 (which number of Warrant Shares shall be
subject to adjustment in accordance with the Warrant);

 

  (iii) The legal opinion of Company Counsel, in agreed form, addressed to the
Investors;

 

  (iv) Copies of each of the following documents, in each case certified by the
Secretary of the Company to be in full force and effect on the Closing Date:

 

  (A) the Articles of Incorporation of the Company, together with all amendments
thereto (including the Certificate of Amendment), certified by the Secretary of
State of the State of Arkansas as of a date not more than five Business Days
prior to the Closing Date;

 

  (B) resolutions of the board of directors of the Company determining the
preferences, limitations and rights of the Series A Preferred Stock;

 

  (C) resolutions of the board of directors of the Company approving the
execution, delivery and performance of the Transaction Documents and the
transactions contemplated thereby;

 

  (D) a good standing certificate of the Company issued by the Secretary of
State of the State of Arkansas dated as of a date no earlier than five Business
Days prior to the Closing Date;

 

  (E) the By-laws of the Company;

 

  (F) irrevocable instructions to the Company’s transfer agent as to the
reservation and issuance of the Conversion Shares and the Warrant Shares; and

 

6

--------------------------------------------------------------------------------

  (G) evidence reasonably satisfactory to the Investors that, as of the Closing
Date, the License Agreement dated as of December 30, 1997 by and between the
Company and Batelle Memorial Institute, as amended, is in full force and effect.

 

  (b) At each Closing, each Investor purchasing Shares and Warrants at such
Closing shall deliver or cause to be delivered to the Company its Investment
Amount, in United States dollars in immediately available funds, by wire
transfer to an account designated in writing by the Placement Agent for such
purpose.

 

ARTICLE 3

 

Representations and Warranties

 

Section 3.1. Representations and Warranties of the Company. The Company hereby
makes the following representations and warranties to each Investor:

 

  (a) Subsidiaries. The Company has no direct or indirect Subsidiaries other
than as specified in the SEC Reports. Except as disclosed in the SEC Reports,
the Company owns, directly or indirectly, all of the capital stock of each
Subsidiary free and clear of any and all Liens, and all 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.

 

  (b) Organization and Qualification. Each of the Company and each Subsidiary is
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 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 each Subsidiary is
duly qualified to conduct its respective 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, individually or in the aggregate, have or reasonably
be expected to result in a Material Adverse Effect, and no proceedings have been
instituted in any such jurisdiction revoking, limiting or curtailing, or seeking
to revoke, 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
thereunder. The execution and delivery of each of the Transaction Documents by
the Company and the consummation by it of the transactions contemplated thereby
have been duly authorized by all necessary action on the part of the Company and
no further action is required by the Company in connection therewith. Each
Transaction Document has been (or upon delivery will have been) duly executed by
the Company and, when delivered in accordance with the terms hereof, will
constitute the valid and binding obligation of the Company enforceable against
the Company in accordance with its terms, except as such

 

7

--------------------------------------------------------------------------------

enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of, creditors’ rights and remedies or by
other equitable principles of general application.

 

  (d) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the transactions
contemplated thereby do not and will not (i) conflict with or violate any
provision of the Company’s 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, or give to others any rights of
termination, amendment, acceleration or cancellation (with or without notice,
lapse of time or both) of, or result in the imposition of any Lien upon any of
the material properties or assets of the Company or of any Subsidiary pursuant
to, 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) 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, individually or in the aggregate, 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 (a “Governmental Authority”) or other Person in
connection with the execution, delivery and performance by the Company of the
Transaction Documents and the consummation of the transactions contemplated
thereby, other than (i) the filing with the Secretary of State of the State of
Arkansas, on or prior to the Initial Closing Date, of the Certificate of
Amendment, (ii) the filing with the Commission of one or more Registration
Statements in accordance with the requirements of Article 4 of this Agreement,
(iii) filings required by state securities laws, (iv) the filing of a Notice of
Sale of Securities on Form D with the Commission under Regulation D of the
Securities Act (v) any filings required in accordance with Section 4.3(d), and
(vi) those that have been made or obtained prior to the date of this Agreement.

 

  (f) Issuance of the Securities. The Securities have been duly authorized. The
Shares and Warrants, when issued and paid for in accordance with this Agreement,
will be duly and validly issued, fully paid and nonassessable, free and clear of
all Liens. The Company has reserved and set aside from its duly authorized
capital stock a sufficient number of shares of Common Stock to satisfy in full
the Company’s obligations (i) to issue the Warrant Shares upon exercise of the
Warrants and (ii) to issue the Conversion Shares upon conversion of the Shares.
The Warrants Shares, when issued and paid for upon exercise of the Warrants in
accordance with their terms, and the Conversion Shares, when issued upon
conversion of the Shares in accordance with their terms, will be duly and
validly issued, fully paid and nonassessable, free and clear of all Liens.

 

  (g) Capitalization. The authorized capital stock of the Company consists of
75,000,000 shares of Common Stock and 10,000,000 shares of preferred stock, par
value $1.00 per share. As of the close of business on the Business Day
immediately prior to the date

 

8

--------------------------------------------------------------------------------

hereof, no shares of the Company’s preferred stock were issued or outstanding
and (i) 22,608,445 shares of Common Stock were issued and outstanding, all of
which are validly issued, fully-paid and non-assessable, (ii) 83,829 shares of
Common Stock were held by the Company in Treasury, (iii) 3,565,700 shares of
Common Stock were reserved for issuance upon exercise of outstanding options
granted to employees, directors, and consultants of the Company (the “Company
Stock Options”); (iv) 2,961,104 shares of Common Stock were reserved for
issuance upon exercise of outstanding warrants to purchase Common Stock (the
“Prior Warrants”); and (v) no shares of Common Stock were reserved for issuance
upon conversion of outstanding convertible notes, debentures or securities
(“Convertible Securities”). Upon filing of the Certificate of Amendment with the
Secretary of State of the State of Arkansas, all of the Company’s authorized
preferred stock will be designated as Series A Preferred Stock. The Company has
not issued any capital stock since its most recently filed SEC Report. 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 pursuant to the Company Stock Options or the Prior Warrants or
as a result of the purchase and sale of the Securities as contemplated by this
Agreement, 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 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 issue 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 Investors and the Placement Agent) and
will not result in a right of any holder of Company securities to adjust the
exercise, conversion, exchange or reset price under 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. The Company has filed all reports
required to be filed by it under the Securities Act and the Exchange Act,
including pursuant to Section 13(a) or 15(d) thereof, for the twelve months
preceding the date hereof (or such shorter period as the Company was required by
law to file such reports) (the foregoing materials, being collectively referred
to herein as the “SEC Reports” and, together with the Private Placement
Memorandum, the “Disclosure Materials”) on a timely basis or has timely filed 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 and the rules and regulations of the
Commission promulgated thereunder, 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 light of the circumstances under which they were made, not
misleading. The financial statements of the Company included in the SEC Reports
comply in all material respects with applicable accounting requirements and the

 

9

--------------------------------------------------------------------------------

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
GAAP applied on a consistent basis during the periods involved, except as may be
otherwise specified in such financial statements or the notes thereto, 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
the SEC Reports, (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, accrued expenses and other liabilities incurred
in the ordinary course of business consistent with past practice and (B)
liabilities not required to be reflected in the Company’s financial statements
pursuant to GAAP or required to be disclosed in filings made with the
Commission, (iii) the Company has not altered its method of accounting or the
identity of its auditors, (iv) the Company has not declared or made 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 existing Company stock option plans.
The Company does not have pending before the Commission any request for
confidential treatment of information.

 

  (j) Litigation. There is no Action which (i) adversely affects or challenges
the legality, validity or enforceability of any of the Transaction Documents or
the Securities or (ii) except as specifically disclosed in the SEC Reports,
could, if there were an unfavorable decision, individually or in the aggregate,
have or reasonably be expected to result in a Material Adverse Effect. Neither
the Company nor any Subsidiary, nor any director or officer thereof (in his or
her capacity as such), 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, except as specifically disclosed in the SEC
Reports. There has not been, and to the knowledge of the Company, there is not
pending any investigation by the Commission involving the Company or any current
or former director or officer of the Company (in his or her capacity as such).
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. There are no
outstanding comments by the Staff of the Commission on any filing by the Company
or any Subsidiary under the Exchange Act or the Securities Act.

 

  (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.

 

  (l) Compliance. 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

 

10

--------------------------------------------------------------------------------

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 relating
to taxes, environmental protection, occupational health and safety, product
quality and safety and employment and labor matters, except in each case as
could not, individually or in the aggregate, 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, individually or in the aggregate, have or
reasonably be expected to result in a Material Adverse Effect, and neither the
Company nor any Subsidiary has received any notice of proceedings relating to
the revocation or modification of any such permits.

 

  (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 their
respective businesses and good and marketable title in all personal property
owned by them that is material to their respective businesses, 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 interfere with the use made and proposed
to be made of such property by the Company and the Subsidiaries. Any real
property and facilities held under lease by the Company and the Subsidiaries are
held by them under valid, subsisting and enforceable leases of which the Company
and the Subsidiaries are in compliance, except as could not, individually or in
the aggregate, have or reasonably be expected to result in a Material Adverse
Effect.

 

  (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, copyrights, licenses and other similar
rights that are 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, individually or in the aggregate, have or reasonably be expected
to result in a Material Adverse Effect (collectively, the “Intellectual Property
Rights”). The SEC Reports describe all claims and Actions made or filed by
others against the Company deemed material by the Company to the effect that
Intellectual Property Rights used by the Company or any Subsidiary violate or
infringe upon the rights of such claimant. Except as set forth in the SEC
Reports, to the knowledge of the Company, all of the Intellectual Property
Rights are enforceable and there is no existing infringement by another Person
of any of the Intellectual Property Rights.

 

  (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. The Company has no reason to believe that it will
not be able to renew its and the Subsidiaries’ 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 on terms consistent with
market for the Company’s and such Subsidiaries’ respective lines of business.

 

11

--------------------------------------------------------------------------------

  (q) Transactions With Affiliates and Employees. Except as set forth in the SEC
Reports, 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.

 

  (r) Sarbanes-Oxley; Internal Accounting Controls. The Company is in material
compliance with all provisions of the Sarbanes-Oxley Act of 2002 (including the
rules and regulations of the Commission adopted thereunder) which are applicable
to it as of the Closing Date. The Company’s certifying officers have evaluated
the effectiveness of the Company’s controls and procedures as of the date prior
to the filing date of the 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 significant changes in the Company’s
internal controls (as such term is defined in Item 307(b) of Regulation S-K
under the Exchange Act) or, to the Company’s knowledge, in other factors that
could significantly affect the Company’s internal controls.

 

  (s) Solvency. Based on the financial condition of the Company as of the
Closing Date (and assuming that the Closing shall have occurred), (i) the
Company’s assets do not constitute unreasonably small capital to carry on its
business for the current fiscal year 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 (ii) 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 debt
when such amounts are required to be paid. The Company does not intend to incur
indebtedness 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).

 

  (t) Certain Fees. Except with respect to fees and expenses to be paid to the
Placement Agent, 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 this Agreement. The Investors shall have no
obligation with respect to any fees or with respect to any claims (other than
such fees or commissions owed by an Investor pursuant to written agreements
executed by such Investor which fees or commissions shall be the sole
responsibility of such Investor) 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 this Agreement.

 

  (u)

Certain Registration Matters. Assuming the accuracy of the Investors’
representations and warranties set forth in Section 3.2(b)-(e), no registration
under the Securities Act is required for the offer and sale of the Securities by
the Company to the Investors under the Transaction Documents. Except as
specified in the Disclosure Materials, the Company

 

12

--------------------------------------------------------------------------------

 

has not granted or agreed to grant to any Person any rights (including
“piggy-back” registration rights) to have any securities of the Company
registered with the Commission or any other governmental authority that have not
been satisfied.

 

  (v) Investment Company. The Company is not, and is not an Affiliate of, and
immediately following the Closing will not have become, an “investment company”
within the meaning of the Investment Company Act of 1940, as amended.

 

  (w) Application of Anti-Takeover Protections. The Company has 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
Articles of Incorporation or the laws of its state of incorporation that is or
could become applicable to the Investors as a result of the Investors and the
Company fulfilling their obligations or exercising their rights under the
Transaction Documents, including without limitation the Company’s issuance of
the Securities and the Investors’ ownership of the Securities.

 

  (x) No Additional Agreements. The Company does not have any agreement or
understanding with any Investor with respect to the transactions contemplated by
the Transaction Documents other than as specified in the Transaction Documents.

 

  (y) Material Non-Public Information. The Company confirms that neither it nor
any Person acting on its behalf has provided any Investor or its respective
agents or counsel with any information that the Company believes constitutes
material, non-public information except:

 

  (i) Insofar as the existence and terms of the proposed transactions hereunder
may constitute such information.

 

  (ii) As to Investors who executed non-disclosure or confidentiality agreements
with the Company in connection with the transactions contemplated hereby.

 

The Company understands and confirms that the Investors will rely on the
foregoing representations and covenants in effecting transactions in securities
of the Company.

 

  (z) Full Disclosure. All disclosure provided to the Investors regarding the
Company, its business and the transactions contemplated hereby, furnished by or
on behalf of the Company (including the Company’s representations and warranties
set forth in this Agreement) are true and correct and do 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.

 

  (aa)

Environmental Matters. To the Company’s knowledge: (i) the Company and its
Subsidiaries have complied with all applicable Environmental Laws; (ii) the
properties currently owned or operated by Company (including soils, groundwater,
surface water, buildings or other structures) are not contaminated with any
Hazardous Substances; (iii) the properties formerly owned or operated by Company
or its Subsidiaries were not contaminated with Hazardous Substances during the
period of ownership or operation by Company and its Subsidiaries; (iv) Company
and its Subsidiaries are not subject to liability for any Hazardous Substance
disposal or contamination on any third party property; (v) Company and its
Subsidiaries have not been associated with any release or

 

13

--------------------------------------------------------------------------------

 

threat of release of any Hazardous Substance; (vi) Company and its Subsidiaries
have not received any notice, demand, letter, claim or request for information
alleging that Company and its Subsidiaries may be in violation of or liable
under any Environmental Law; and (vii) Company and its Subsidiaries are not
subject to any orders, decrees, injunctions or other arrangements with any
Governmental Authority or subject to any indemnity or other agreement with any
third party relating to liability under any Environmental Law or relating to
Hazardous Substances.

 

As used in this Agreement, the term “Environmental Law” means any federal,
state, local or foreign law, regulation, order, decree, permit, authorization,
opinion, common law or agency requirement relating to: (A) the protection,
investigation or restoration of the environment, health and safety, or natural
resources; (B) the handling, use, presence, disposal, release or threatened
release of any Hazardous Substance or (C) noise, odor, wetlands, pollution,
contamination or any injury or threat of injury to persons or property.

 

As used in this Agreement, the term “Hazardous Substance” means any substance
that is: (i) listed, classified or regulated pursuant to any Environmental Law;
(ii) any petroleum product or by-product, asbestos-containing material,
lead-containing paint or plumbing, polychlorinated biphenyls, radioactive
materials or radon; or (iii) any other substance which is the subject of
regulatory action by any Governmental Authority pursuant to any Environmental
Law.

 

  (bb) Taxes. The Company and its Subsidiaries have filed all necessary federal,
state and foreign income and franchise tax returns when due (or obtained
appropriate extensions for filing) and have paid or accrued all taxes shown as
due thereon, and the Company has no knowledge of a tax deficiency which has been
or might be asserted or threatened against it or any Subsidiary which would have
a Material Adverse Effect.

 

  (cc) Private Offering. Assuming the correctness of the representations and
warranties of the Investors set forth in this Agreement, the offer and sale of
the Shares and the Warrants hereunder are, and upon (i) exercise of the
Warrants, the issuance of the Warrant Shares and (ii) upon conversion of the
Shares, the issuance of the Conversion Shares will be, exempt from registration
under the Securities Act. Neither the Company nor any person acting on behalf of
the Company has offered or sold any of the Shares or the Warrants by any form of
general solicitation or general advertising. The Company has offered the Shares
and Warrants for sale only to the Investors and certain other “accredited
investors” within the meaning of Rule 501 under the Securities Act.

 

  (dd) ERISA. Neither the Company nor any ERISA Affiliate maintains, contributes
to or has any liability or contingent liability with respect to any employee
benefit plan subject to ERISA.

 

  (ee) Foreign Assets Control Regulations and Anti-Money Laundering.

 

(i) OFAC. Neither the issuance of the Shares and Warrants to the Investors, nor
the use of the respective proceeds thereof, shall cause the Investors to violate
the U.S. Bank Secrecy Act, as amended, and any applicable regulations thereunder
or any of the sanctions programs administered by the U.S. Department of the
Treasury’s Office of Foreign Assets Control (“OFAC”) of the United States
Department of Treasury, any regulations promulgated thereunder by OFAC or under
any affiliated or successor

 

14

--------------------------------------------------------------------------------

governmental or quasi-governmental office, bureau or agency and any enabling
legislation or executive order relating thereto. Without limiting the foregoing,
neither the Company nor any Subsidiary (i) is a person whose property or
interests in property are blocked or subject to blocking pursuant to Section 1
of Executive Order 13224 of September 23, 2001 Blocking Property and Prohibiting
Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism
(66 Fed. Reg. 49079 (2001)), (ii) engages in any dealings or transactions
prohibited by Section 2 of such executive order, or is otherwise associated with
any such person in any manner violative of Section 2, or (iii) is a person on
the list of Specially Designated Nationals and Blocked Persons or subject to the
limitations or prohibitions under any other OFAC regulation or executive order.

 

(ii) Patriot Act. Each of the Company and each of its Subsidiaries are in
compliance, in all material respects, with the Uniting and Strengthening of
America by Providing the Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001. No part of the proceeds of the sale of the Shares and the
Warrants hereunder will be used, directly or indirectly, for any payments to any
governmental official or employee, political party, official of a political
party, candidate for political office, or anyone else acting in an official
capacity, in order to obtain, retain or direct business or obtain any improper
advantage, in violation of the United States Foreign Corrupt Practices Act of
1977, as amended.

 

Section 3.2. Representations and Warranties of the Investors. Each Investor
hereby, for itself and for no other Investor, represents and warrants to the
Company as follows:

 

  (a) Organization; Authority. Such Investor is an entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization with the requisite corporate or partnership power and authority to
enter into and to consummate the transactions contemplated by the applicable
Transaction Documents and otherwise to carry out its obligations thereunder. The
execution, delivery and performance by such Investor of the transactions
contemplated by this Agreement has been duly authorized by all necessary
corporate or, if such Investor is not a corporation, such partnership, limited
liability company or other applicable like action, on the part of such Investor.
This Agreement has been duly executed by such Investor, and when delivered by
such Investor in accordance with terms hereof, will constitute the valid and
legally binding obligation of such Investor, enforceable against it in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally the enforcement of, creditors’
rights and remedies or by other equitable principles of general application.

 

  (b) Investment Intent. Such Investor is acquiring the Securities as principal
for its own account for investment purposes only and not with a view to or for
distributing or reselling such Securities or any part thereof, without
prejudice, however, to such Investor’s right at all times to sell or otherwise
dispose of all or any part of such Securities in compliance with applicable
federal and state securities laws. Subject to the immediately preceding
sentence, nothing contained herein shall be deemed a representation or warranty
by such Investor to hold the Securities for any period of time. Such Investor is
acquiring the Securities hereunder in the ordinary course of its business. Such
Investor does not have any agreement or understanding, directly or indirectly,
with any Person to distribute any of the Securities.

 

15

--------------------------------------------------------------------------------

  (c) Investor Status. At the time such Investor was offered the Securities, it
was, and at the date hereof it is, and on each date on which it exercises
Warrants it will be, an “accredited investor” as defined in Rule 501(a) under
the Securities Act. Such Investor is not a registered broker-dealer under
Section 15 of the Exchange Act.

 

  (d) Access to Information. Such Investor acknowledges that it has reviewed the
Disclosure Materials and has been afforded (i) the opportunity to ask such
questions as it has deemed necessary of, and to receive answers from,
representatives of the Company concerning the terms and conditions of the
offering of the Shares and the merits and risks of investing in the Securities;
(ii) access to information about the Company and the Subsidiaries and their
respective financial condition, results of operations, business, properties,
management and prospects sufficient to enable it to evaluate its investment; and
(iii) the opportunity to obtain such additional information that the Company
possesses or can acquire without unreasonable effort or expense that is
necessary to make an informed investment decision with respect to the
investment. Neither such inquiries nor any other investigation conducted by or
on behalf of such Investor or its representatives or counsel shall modify, amend
or affect such Investor’s right to rely on the truth, accuracy and completeness
of the Disclosure Materials and the Company’s representations and warranties
contained in the Transaction Documents.

 

  (e) Certain Trading Activities. Such Investor has not directly or indirectly,
nor has any Person acting on behalf of or pursuant to any understanding with
such Investor, engaged in any transactions in the securities of the Company
(including, without limitations, any Short Sales involving the Company’s
securities) since the earlier to occur of (1) the time that such Investor was
first contacted by the Company, the Placement Agent or any other Person
regarding an investment in the Company and (2) the 30th day prior to the date of
this Agreement. Such Investor covenants that neither it nor any Person acting on
its behalf or pursuant to any understanding with it will engage in any
transactions in the securities of the Company (including Short Sales) prior to
the time that the transactions contemplated by this Agreement are publicly
disclosed.

 

  (f) Independent Investment Decision. Such Investor has independently evaluated
the merits of its decision to purchase Securities pursuant to the Transaction
Documents, and such Investor confirms that it has not relied on the advice of
any other Investor’s business and/or legal counsel in making such decision. Such
Investor has not relied on the business or legal advice of a Placement Agent or
any of its agents, counsel or Affiliates in making its investment decision
hereunder, and confirms that none of such Persons has made any representations
or warranties to such Investor in connection with the transactions contemplated
by the Transaction Documents.

 

The Company acknowledges and agrees that no Investor has made or makes any
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 3.2.

 

16

--------------------------------------------------------------------------------

ARTICLE 4

 

Registration Rights

 

Section 4.1. Registration Statement. The Company shall prepare and file with the
Commission, not later than 60 days after the Initial Closing Date (the “Filing
Date”), a Registration Statement relating to the offer and sale from time to
time on a continuous basis by the Investors of the Registrable Securities and
shall use commercially reasonable efforts to cause the Commission to declare
such Registration Statement effective under the Securities Act as promptly as
practicable but in no event later than 150 days after the Initial Closing Date
(the “Effectiveness Date”). Except with respect to (i) shares of Common Stock
having an estimated aggregate sale price to the public of up to $1,000,000 to be
registered for sale by the Estate of Primo J. Montesi, Sr. or Betty Johnson
Montesi and (ii) up to 3,714,494 shares of Common Stock to be registered for
sale by Persons who purchased such shares from the Company in private placements
in 2003 and 2004, the Company shall not include any securities other than the
Registrable Securities in the Registration Statement.

 

Section 4.2. Registration Process. The Company shall promptly (and, in any
event, no more than 24 hours after it receives comments from the Commission),
notify the Investors whose Registrable Securities are covered by the
Registration Statement filed pursuant to this Article 4 when and if it receives
any comments from the Commission on such Registration Statement or any amendment
thereof and promptly forward a copy of such comments, if they are in writing, to
such Investors. At such time as the Commission indicates, either orally or in
writing, that it has no further comments with respect to such Registration
Statement or any amendment thereof or that it is willing to entertain
appropriate requests for acceleration of effectiveness of such Registration
Statement or any amendment thereof, the Company shall promptly, and in no event
later than two Business Days after receipt of such indication from the
Commission, request that the effectiveness of such Registration Statement or any
amendment thereof be accelerated within 48 hours of the Commission’s receipt of
such request. Within 24 hours of such declaration by the Commission, the Company
shall notify the Investors whose Registrable Securities are covered by such
Registration Statement that such Registration Statement or any amendment thereof
has been declared effective by the Commission.

 

Section 4.3. Obligations of the Company. In connection with the registration of
the Registrable Securities, the Company shall:

 

(a) Prepare and file the Registration Statement in accordance with the time
period set forth in Section 4.1 and promptly prepare and file with the
Commission such amendments (including post-effective amendments) to the
Registration Statement and supplements to the prospectus included therein (a
“Prospectus”) as may be necessary to keep the Registration Statement
continuously effective and in compliance with the provisions of the Securities
Act applicable thereto so as to permit the Prospectus forming part thereof to be
current and useable by Investors for resales of the Registrable Securities until
such date as is the earlier of (x) the date when all Registrable Securities
covered by such Registration Statement have been sold or (y) the date on which
the Registrable Securities may be sold without any restriction (including volume
limitations) pursuant to Rule 144 (the “Registration Period”) and take all
lawful action such that the Registration Statement and any amendment thereto
does not, when it becomes effective, 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, not misleading and that the Prospectus forming
part of the Registration Statement, and any amendment or supplement thereto,
does not

 

17

--------------------------------------------------------------------------------

at any time during the Registration Period include 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;

 

(b) During the Registration Period, comply with the provisions of the Securities
Act with respect to the Registrable Securities covered by the Registration
Statement until such time as all of such Registrable Securities have been
disposed of in accordance with the intended methods of disposition by the
Investors as set forth in the Prospectus forming part of the Registration
Statement;

 

(c) Prior to the filing with the Commission of the Registration Statement
(including any amendments thereto) and the distribution or delivery of any
Prospectus (including any supplements thereto), provide draft copies thereof to
the Investors and reflect in such documents all such comments as the Investors
(and their counsel) reasonably may propose and furnish to each Investor whose
Registrable Securities are included in the Registration Statement and its legal
counsel identified to the Company, (i) promptly after the same is prepared and
publicly distributed, filed with the Commission, or received by the Company, one
copy of the Registration Statement, each Prospectus, and each amendment or
supplement thereto, and (ii) such number of copies of the Prospectus and all
amendments and supplements thereto and such other documents, as such Investor
may reasonably request in order to facilitate the disposition of the Registrable
Securities owned by such Investor;

 

(d) (i) register or qualify the Registrable Securities covered by the
Registration Statement under such securities or “blue sky” laws of such
jurisdictions as the Investors reasonably request, (ii) prepare and file in such
jurisdictions such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof at all times during the Registration Period,
(iii) take all such other lawful actions as may be necessary to maintain such
registrations and qualifications in effect at all times during the Registration
Period, and (iv) take all such other lawful actions reasonably necessary or
advisable to qualify the Registrable Securities for sale in such jurisdictions;
provided, however, that the Company shall not be required in connection
therewith or as a condition thereto to (A) qualify to do business in any
jurisdiction where it would not otherwise be required to qualify, (B) subject
itself to general taxation in any such jurisdiction or (C) file a general
consent to service of process in any such jurisdiction;

 

(e) As promptly as practicable after becoming aware of such event, notify each
Investor of the occurrence of any event, as a result of which the Prospectus
included in the Registration Statement, as then in effect, includes an untrue
statement of a material fact or omits 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, and promptly prepare
an amendment to the Registration Statement and supplement to the Prospectus to
correct such untrue statement or omission, and deliver a number of copies of
such supplement and amendment to each Investor as such Investor may reasonably
request;

 

(f) As promptly as practicable after becoming aware of such event, notify each
Investor who holds Registrable Securities being sold (or, in the event of an
underwritten offering, the managing underwriters) of the issuance by the
Commission of any stop order or other suspension of the effectiveness of the
Registration Statement and take all lawful action to effect the withdrawal,
rescission or removal of such stop order or other suspension;

 

18

--------------------------------------------------------------------------------

(g) Take all such other lawful actions reasonably necessary to expedite and
facilitate the disposition by the Investors of their Registrable Securities in
accordance with the intended methods therefor provided in the Prospectus which
are customary under the circumstances;

 

(h) Make generally available to its security holders as soon as practicable, but
in any event not later than eighteen (18) months after (i) the Effective Date of
the Registration Statement, and (ii) the effective date of each post-effective
amendment to the Registration Statement, as the case may be, an earnings
statement of the Company and its subsidiaries complying with Section 11(a) of
the Securities Act and the rules and regulations of the Commission thereunder;

 

(i) In the event of an underwritten offering, promptly include or incorporate in
a Prospectus supplement or post-effective amendment to the Registration
Statement such information as the underwriters reasonably agree should be
included therein and to which the Company does not reasonably object and make
all required filings of such Prospectus supplement or post-effective amendment
as soon as practicable after it is notified of the matters to be included or
incorporated in such Prospectus supplement or post-effective amendment;

 

(j) Make reasonably available for inspection by Investors, any underwriter
participating in any disposition pursuant to the Registration Statement, and any
attorney, accountant or other agent retained by such Investors or any such
underwriter all relevant financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries, and (ii) cause the
Company’s officers, directors and employees to supply all information reasonably
requested by such Investors or any such underwriter, attorney, accountant or
agent in connection with the Registration Statement, in each case, as is
customary for similar due diligence examinations; provided, however, that all
records, information and documents that are designated in writing by the
Company, in good faith, as confidential, proprietary or containing any nonpublic
information shall be kept confidential by such Investors and any such
underwriter, attorney, accountant or agent (pursuant to an appropriate
confidentiality agreement in the case of any such holder or agent), unless such
disclosure is made pursuant to judicial process in a court proceeding (after
first giving the Company an opportunity promptly to seek a protective order or
otherwise limit the scope of the information sought to be disclosed) or is
required by law, or such records, information or documents become available to
the public generally or through a third party not in violation of an
accompanying obligation of confidentiality; and provided, further, that, if the
foregoing inspection and information gathering would otherwise disrupt the
Company’s conduct of its business, such inspection and information gathering
shall, to the maximum extent possible, be coordinated on behalf of the Investors
and the other parties entitled thereto by one firm of counsel designated by and
on behalf of the majority in interest of Investors and other parties;

 

(k) In connection with any offering, make such representations and warranties to
the Investors participating in such offering and to the underwriters if an
underwritten offering, in form, substance and scope as are customarily made by
the Company to underwriters in secondary underwritten offerings;

 

(l) In connection with the Registration Statement, obtain opinions of counsel to
the Company (which counsel and opinions (in form, scope and substance) shall be
reasonably satisfactory to the Investors) addressed to the Investors and the
underwriters, if any, covering such matters as are customarily covered in
opinions requested in secondary underwritten offerings (it being agreed that the
matters to be covered by such opinions shall include, without

 

19

--------------------------------------------------------------------------------

limitation, as of the date of the opinion and as of the Effective Time of the
Registration Statement or most recent post-effective amendment thereto, as the
case may be, the absence from the Registration Statement and the Prospectus,
including any documents incorporated by reference therein, of an untrue
statement of a material fact or the omission of a material fact required to be
stated therein or necessary to make the statements therein (in the case of the
Prospectus, in light of the circumstances under which they were made) not
misleading, subject to customary limitations);

 

(m) In connection with the Registration Statement, obtain “cold comfort” or
“procedures” letters and updates thereof from the independent public accountants
of the Company (and, if necessary, from the independent public accountants of
any subsidiary of the Company or of any business acquired by the Company, in
each case for which financial statements and financial data are, or are required
to be, included in the Registration Statement), addressed to each Investor and
each underwriter, if any, participating in an underwritten, if any, in customary
form and covering matters of the type customarily covered in such letters in
connection with secondary offerings;

 

(n) In connection with any underwritten offering, deliver such documents and
certificates as may be reasonably required by the managers, if any;

 

(o) In the event that any broker-dealer registered under the Exchange Act shall
be an “Affiliate” (as defined in Rule 2729(b)(1) of the rules and regulations of
the National Association of Securities Dealers, Inc. (the “NASD Rules”) (or any
successor provision thereto)) of the Company or has a “conflict of interest” (as
defined in Rule 2720(b)(7) of the NASD Rules (or any successor provision
thereto)) and such broker-dealer shall underwrite, participate as a member of an
underwriting syndicate or selling group or assist in the distribution of any
Registrable Securities covered by the Registration Statement, whether as a
holder of such Registrable Securities or as an underwriter, a placement or sales
agent or a broker or dealer in respect thereof, or otherwise, the Company shall
assist such broker-dealer in complying with the requirements of the NASD Rules,
including, without limitation, by (i) engaging a “qualified independent
underwriter” (as defined in Rule 2720(b)(15) of the NASD Rules (or any successor
provision thereto)) to participate in the preparation of the Registration
Statement relating to such Registrable Securities, to exercise usual standards
of due diligence in respect thereof and to recommend the public offering price
of such Registrable Securities, (ii) indemnifying such qualified independent
underwriter to the extent of the indemnification of underwriters provided in
Section 6 hereof, and (iii) providing such information to such broker-dealer as
may be required in order for such broker-dealer to comply with the requirements
of the NASD Rules;

 

(p) Cooperate with the Investors to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be sold pursuant
to the Registration Statement, which certificates shall, if required under the
terms of this Agreement, be free of all restrictive legends, and to enable such
Registrable Securities to be in such denominations and registered in such names
as any Investor may request and maintain a transfer agent for the Common Stock;
and

 

(q) Use its commercially reasonable efforts to cause all Registrable Securities
covered by the Registration Statement to be listed or qualified for trading on
the principal Trading Market, if any, on which the Common Stock is traded or
listed on the Effective Date of the Registration Statement.

 

20

--------------------------------------------------------------------------------

Section 4.4. Obligations and Acknowledgements of the Investors. In connection
with the registration of the Registrable Securities, the Investors shall have
the following obligations and hereby make the following acknowledgements:

 

(a) It shall be a condition precedent to the obligations of the Company to
include the Registrable Securities of a particular Investor in the Registration
Statement that such Investor (i) shall furnish to the Company such information
regarding itself, the Registrable Securities held by it and the intended method
of disposition of the Registrable Securities held by it as shall be reasonably
required to effect the registration of such Registrable Securities and (ii)
shall execute such documents in connection with such registration as the Company
may reasonably request. At least ten Business Days prior to the first
anticipated filing date of a Registration Statement, the Company shall notify
each Investor of the information the Company requires from such Investor (the
“Requested Information”) if such Investor elects to have any of its Registrable
Securities included in the Registration Statement. If at least two Business Days
prior to the anticipated filing date the Company has not received the Requested
Information from an Investor (a “Non-Responsive Investor”), then the Company may
file the Registration Statement without including any Registrable Securities of
such Non-Responsive Investor and the Company shall have no further obligations
under this Article 4 to the Non-Responsive Investor after such Registration
Statement has been declared effective. If such Non-Responsive Investor notifies
the Company and provides the Company the information required hereby prior to
the time the Registration Statement is declared effective, the Company will file
an amendment to the Registration Statement that includes the Registrable
Securities of such Non-Responsive Investor; provided, however, that the Company
shall not be required to file such amendment to the Registration Statement at
any time less than five Trading Days prior to the Effectiveness Date.

 

(b) Each Investor agrees to cooperate with the Company in connection with the
preparation and filing of a Registration Statement hereunder, unless such
Investor has notified the Company in writing of its election to exclude all of
its Registrable Securities from such Registration Statement;

 

(c) Each Investor agrees that, upon receipt of any notice from the Company of
the occurrence of any event of the kind described in Section 4.3(e) or 4.3(f),
it shall immediately discontinue its disposition of Registrable Securities
pursuant to the Registration Statement covering such Registrable Securities
until such Investor’s receipt of the copies of the supplemented or amended
Prospectus contemplated by Section 4.3(e) and, if so directed by the Company,
such Investor shall deliver to the Company (at the expense of the Company) or
destroy (and deliver to the Company a certificate of destruction) all copies in
such Investor’s possession, of the Prospectus covering such Registrable
Securities current at the time of receipt of such notice; and

 

(d) Each Investor acknowledges that it may be deemed to be a statutory
underwriter within the meaning of the Securities Act with respect to the
Registrable Securities being registered for resale by it, and each Investor
which includes Registrable Securities for offer and sale within a Registration
Statement hereby consents to the inclusion in such Registration Statement of a
disclosure to such effect.

 

Section 4.5. Expenses of Registration. All expenses, other than underwriting
discounts and commissions, incurred in connection with registrations, filings or
qualifications pursuant to this Article 4, including, without limitation, all
registration, listing, and qualifications fees, printing and engraving fees,
accounting fees, and the fees and disbursements of counsel for the Company, and
(with respect to the

 

21

--------------------------------------------------------------------------------

preparation and filing of the Registration Statement) the reasonable fees of one
firm of legal counsel for the Investors (selected by Investors holding a
majority of the Registrable Securities being included in the Registration
Statement) shall be borne by the Company.

 

Section 4.6. Indemnification and Contribution.

 

(a) Indemnification by the Company. The Company shall indemnify and hold
harmless each Investor and each underwriter, if any, which facilitates the
disposition of Registrable Securities, and each of their respective officers and
directors and each Person who controls such Investor or underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act
(each such Person being sometimes hereinafter referred to as an “Indemnified
Person”) from and against any losses, claims, damages or liabilities, joint or
several, to which such Indemnified Person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Registration Statement or an omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, not misleading, or arise out of or are based upon an untrue statement
or alleged untrue statement of a material fact contained in any Prospectus or an
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and the Company hereby
agrees to reimburse such Indemnified Person for all reasonable legal and other
expenses incurred by them in connection with investigating or defending any such
action or claim as and when such expenses are incurred; provided, however, that
the Company shall not be liable to any such Indemnified Person in any such case
to the extent that any such loss, claim, damage or liability arises out of or is
based upon (i) an untrue statement or alleged untrue statement made in, or an
omission or alleged omission from, such Registration Statement or Prospectus in
reliance upon and in conformity with written information furnished to the
Company by such Indemnified Person expressly for use therein or (ii) in the case
of the occurrence of an event of the type specified in Section 4.3(e), the use
by the Indemnified Person of an outdated or defective Prospectus after the
Company has provided to such Indemnified Person an updated Prospectus correcting
the untrue statement or alleged untrue statement or omission or alleged omission
giving rise to such loss, claim, damage or liability.

 

(b) Indemnification by the Investors and Underwriters. Each Investor agrees,
severally and not jointly, as a consequence of the inclusion of any of its
Registrable Securities in a Registration Statement, and each underwriter, if
any, which facilitates the disposition of Registrable Securities shall agree,
severally and not jointly, as a consequence of facilitating such disposition of
Registrable Securities to (i) indemnify and hold harmless the Company, its
directors (including any person who, with his or her consent, is named in the
Registration Statement as a director nominee of the Company), its officers who
sign any Registration Statement and each Person, if any, who controls the
Company within the meaning of either Section 15 of the Securities Act or Section
20 of the Exchange Act, against any losses, claims, damages or liabilities to
which the Company or such other persons may become subject, under the Securities
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue statement
or alleged untrue statement of a material fact contained in such Registration
Statement or Prospectus or arise out of or are based upon the omission or
alleged omission to state therein 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, in the case of the Prospectus), not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
holder or underwriter expressly for use therein, and (ii) reimburse the Company
for any legal or other expenses incurred by the Company in

 

22

--------------------------------------------------------------------------------

connection with investigating or defending any such action or claim as such
expenses are incurred; provided, however, that no Investor or underwriter shall
be liable under this Section 4.6(b) for any amount in excess of the net proceeds
paid to such Investor or underwriter in respect of shares sold by it.

 

(c) Notice of Claims, etc. Promptly after receipt by a Person seeking
indemnification pursuant to this Section 4.6 (an “Indemnified Party”) of written
notice of any investigation, claim, proceeding or other action in respect of
which indemnification is being sought (each, a “Claim”), the Indemnified Party
promptly shall notify the Person against whom indemnification pursuant to this
Section 4.6 is being sought (the “Indemnifying Party”) of the commencement
thereof; but the omission to so notify the Indemnifying Party shall not relieve
it from any liability that it otherwise may have to the Indemnified Party,
except to the extent that the Indemnifying Party is materially prejudiced and
forfeits substantive rights and defenses by reason of such failure. In
connection with any Claim as to which both the Indemnifying Party and the
Indemnified Party are parties, the Indemnifying Party shall be entitled to
assume the defense thereof. Notwithstanding the assumption of the defense of any
Claim by the Indemnifying Party, the Indemnified Party shall have the right to
employ separate legal counsel and to participate in the defense of such Claim,
and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs
and expenses of such separate legal counsel to the Indemnified Party if (and
only if): (i) the Indemnifying Party shall have agreed to pay such fees, costs
and expenses, (ii) the Indemnified Party shall reasonably have concluded that
representation of the Indemnified Party by the Indemnifying Party by the same
legal counsel would not be appropriate due to actual or, as reasonably
determined by legal counsel to the Indemnified Party, potentially differing
interests between such parties in the conduct of the defense of such Claim, or
if there may be legal defenses available to the Indemnified Party that are in
addition to or disparate from those available to the Indemnifying Party, or
(iii) the Indemnifying Party shall have failed to employ legal counsel
reasonably satisfactory to the Indemnified Party within a reasonable period of
time after notice of the commencement of such Claim. If the Indemnified Party
employs separate legal counsel in circumstances other than as described in the
preceding sentence, the fees, costs and expenses of such legal counsel shall be
borne exclusively by the Indemnified Party. Except as provided above, the
Indemnifying Party shall not, in connection with any Claim in the same
jurisdiction, be liable for the fees and expenses of more than one firm of
counsel for the Indemnified Party (together with appropriate local counsel). The
Indemnified Party shall not, without the prior written consent of the
Indemnifying Party (which consent shall not unreasonably be withheld), settle or
compromise any Claim or consent to the entry of any judgment that does not
include an unconditional release of the Indemnifying Party from all liabilities
with respect to such Claim or judgment or contain any admission of wrongdoing.

 

(d) Contribution. If the indemnification provided for in this Section 4.6 is
unavailable to or insufficient to hold harmless an Indemnified Party in respect
of any losses, claims, damages or liabilities (or actions in respect thereof)
referred to therein, then each Indemnifying Party shall contribute to the amount
paid or payable by such Indemnified Party as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and the
Indemnified Party in connection with the statements or omissions or alleged
statements or omissions which resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), 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 the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by
such Indemnifying Party or by such Indemnified Party, and the parties’ relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The parties hereto agree that it would not be just
and equitable if contribution pursuant to this Section 4.6(d) were determined by
pro rata allocation (even if the Investors or any underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in this Section 4.6(d).
The amount paid or payable by an

 

23

--------------------------------------------------------------------------------

Indemnified Party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above shall be deemed to include any
legal or other fees or expenses reasonably incurred by such Indemnified Party in
connection with investigating or defending any such action or claim. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The obligations of the
Investors and any underwriters in this Section 4.6(d) to contribute shall be
several in proportion to the percentage of Registrable Securities registered or
underwritten, as the case may be, by them and not joint.

 

(e) Limitation on Investors’ and Underwriters’ Obligations. Notwithstanding any
other provision of this Section 4.6, in no event shall any (i) Investor have any
liability under this Section 4.6 for any amounts in excess of the dollar amount
of the proceeds actually received by such Investor from the sale of such
Investor’s Registrable Securities (after deducting any fees, discounts and
commissions applicable thereto) pursuant to any Registration Statement under
which such Registrable Securities are registered under the Securities Act and
(ii) underwriter be required to undertake liability to any Person hereunder for
any amounts in excess of the aggregate discount, commission or other
compensation payable to such underwriter with respect to the Registrable
Securities underwritten by it and distributed pursuant to the Registration
Statement.

 

(f) Other Liabilities. The obligations of the Company under this Section 4.6
shall be in addition to any liability which the Company may otherwise have to
any Indemnified Person and the obligations of any Indemnified Person under this
Section 4.6 shall be in addition to any liability which such Indemnified Person
may otherwise have to the Company. The remedies provided in this Section 6 are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to an indemnified party at law or in equity.

 

Section 4.7. Rule 144. With a view to making available to the Investors the
benefits of Rule 144, the Company agrees to use its best efforts to:

 

(i) comply with the provisions of paragraph (c)(1) of Rule 144; and

 

(ii) file with the Commission in a timely manner all reports and other documents
required to be filed by the Company pursuant to Section 13 or 15(d) under the
Exchange Act; and, if at any time it is not required to file such reports but in
the past had been required to or did file such reports, it will, upon the
request of any Investor, make available other information as required by, and so
long as necessary to permit sales of, its Registrable Securities pursuant to
Rule 144.

 

Section 4.8. Failure to Satisfy Obligations Regarding Registration. If: (i) a
Registration Statement is not filed on or prior to the Filing Date (if the
Company files a Registration Statement without affording the Investors the
opportunity to review and comment on the same as required by Article 4, 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 two
Trading Days after the date on which the Company is notified (orally or in
writing, whichever is earlier) by the Commission that such Registration
Statement will not be “reviewed,” or is not subject to further review, or (iii)
a Registration Statement filed or required to be filed hereunder is not declared
effective by the Commission on or before the Effectiveness Date, or (iv) after a
Registration Statement is first declared effective by the Commission, it ceases
for any reason to remain continuously effective as to all Securities covered
thereby for which it is required to be effective, or the Holders are not
permitted to utilize the Prospectus therein to resell such Securities, for more
than an aggregate of 30 Trading Days

 

24

--------------------------------------------------------------------------------

during any 12-month period (which need not be consecutive Trading Days) (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 two Trading Day period is exceeded, or for
purposes of clause (iv) the date on which such 30 Trading Day period is exceeded
being referred to as “Event Date”), then in addition to any other rights the
Investors may have hereunder or under applicable law, on each such Event Date
and on the same date of each month thereafter (if the applicable Event shall not
have been cured by such date) (each, a “Subsequent Adjustment Date”) until the
applicable Event is cured, the Exercise Price of the Warrants (as such term is
defined in the Warrants, the “Exercise Price”) shall be reduced as provided in
the Warrants.

 

Section 4.9. Common Stock Issued Upon Stock Split, etc. The provisions of this
Article 4 shall apply to any shares of Common Stock or any other securities
issued as a dividend or distribution in respect of the Conversion Shares or the
Warrant Shares.

 

ARTICLE 5

 

Other Agreements of the Parties

 

Section 5.1. Certificates; Legends.

 

  (a) Securities may only be transferred of in compliance with state and federal
securities laws. In connection with any transfer of the Securities other than
pursuant to an effective registration statement, to the Company, to an Affiliate
of an Investor or in connection with a pledge as contemplated in Section 5.1(b),
the Company may require the transferor thereof to provide to the Company an
opinion of counsel selected by the transferor (which may be such transferor’s
in-house counsel), 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.

 

  (b) Certificates evidencing the Shares and the Warrants to be delivered at the
Closing and certificates evidencing the Conversion Shares and the Warrant Shares
to be delivered upon conversion of the Shares or exercise of the Warrants, as
the case may be, will contain appropriate legends referring to restrictions on
transfer relating to the registration requirements of the Securities Act and
applicable state securities laws.

 

The Company acknowledges and agrees that an Investor may from time to time
pledge, and/or grant a security interest in some or all of the Securities
pursuant to a bona fide margin agreement in connection with a bona fide margin
account and, if required under the terms of such agreement or account, such
Investor may transfer pledged or secured Securities to the pledgees or secured
parties. Such a pledge or transfer would not be subject to approval or consent
of the Company and no legal opinion of legal counsel to the pledgee, secured
party or pledgor shall be required in connection with the pledge, but such legal
opinion may be required in connection with a subsequent transfer following
default by the Investor transferee of the pledge. No notice shall be required of
such pledge. At the appropriate Investor’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 the preparation and filing of any required prospectus
supplement under Rule 424(b)(3) of the Securities Act or other applicable
provision of the Securities Act to appropriately amend the list of Selling
Stockholders thereunder.

 

25

--------------------------------------------------------------------------------

  (c) Certificates evidencing the Registrable Securities shall not contain any
legend (including the legend referred to in Section 5.1(b)), (i) while a
Registration Statement covering the resale of such Security is effective under
the Securities Act, or (ii) following any sale of such Registrable Securities
pursuant to Rule 144, or (iii) if such Registrable Securities 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) and such lack of
requirement is confirmed by a legal opinion satisfactory to the Company. If all
or any portion of a Warrant is exercised at a time when there is an effective
Registration Statement to cover the resale of the Warrant Shares, or if such
Warrant 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 thereof) then such Warrant 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 5.1(c), it will, no later
than three Trading Days following the delivery by a Investor to the Company or
the Company’s transfer agent of a certificate representing Registrable
Securities, as the case may be, issued with a restrictive legend (such date, the
“Legend Removal Date”), deliver or cause to be delivered to such Investor a
certificate representing such Securities that is free from all restrictive and
other legends. The Company may not make any notation on its records or give
instructions to any transfer agent of the Company that enlarge the restrictions
on transfer set forth in this Section.

 

  (d) Each Investor, severally and not jointly with the other Investors, agrees
that the removal of the restrictive legend from certificates representing
Securities as set forth in this Section 5.1 is predicated upon the Company’s
reliance that the Investor will sell any Securities pursuant to either the
registration requirements of the Securities Act, including any applicable
prospectus delivery requirements, or an exemption therefrom.

 

Section 5.2. Furnishing of Information. As long as any Investor owns the
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to the
Exchange Act. Upon reasonable request of such holder of Securities, the Company
shall deliver to such holder a written certification of a duly authorized
officer as to whether it has complied with the preceding sentence.

 

Section 5.3. Integration. The Company has not and shall not, and shall use its
best efforts to ensure that no Affiliate of the Company shall, 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
Investors, or that would be integrated with the offer or sale of the Securities
for purposes of the rules and regulations of any Trading Market in a manner that
would require stockholder approval of the sale of the securities to the
Investors.

 

Section 5.4. Subsequent Registrations. Other than pursuant to the Registration
Statement, prior to the Effective Date of the Registration Statement the Company
may not file any registration statement (other than on Form S-8) with the
Commission with respect to any securities of the Company.

 

Section 5.5. Securities Laws Disclosure; Publicity. By 9:00 a.m. (New York time)
on the Trading Day following the execution of this Agreement, and by 5:00 p.m.
(New York time) on the Initial Closing Date, the Company shall issue press
releases disclosing the transactions contemplated hereby and

 

26

--------------------------------------------------------------------------------

the Closing. On the Trading Day following the execution of this Agreement the
Company will file a Current Report on Form 8-K disclosing the material terms of
the Transaction Documents (and attach as exhibits thereto the Transaction
Documents), and on the Initial Closing Date the Company will file an additional
Current Report on Form 8-K to disclose the Initial Closing. In addition, the
Company will make such other filings and notices in the manner and time required
by the Commission and the Trading Market on which the Common Stock is listed.
Notwithstanding the foregoing, the Company shall not publicly disclose the name
of any Investor, or include the name of any Investor in any filing with the
Commission (other than the Registration Statement and any exhibits to filings
made in respect of this transaction in accordance with periodic filing
requirements under the Exchange Act) or any regulatory agency or Trading Market,
without the prior written consent of such Investor, except to the extent such
disclosure is required by law or Trading Market regulations.

 

Section 5.6. Limitation on Issuance of Future Priced Securities. During the six
months following the Closing Date, the Company shall not issue any future priced
securities.

 

Section 5.7. Indemnification of Investors. In addition to the indemnity provided
in Article 4, the Company will indemnify and hold the Investors and their
directors, officers, shareholders, partners, employees and agents (each, an
“Investor 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 (collectively, “Losses”) that any such Investor Party may
suffer or incur as a result of or relating to: (a) any misrepresentation, breach
or inaccuracy of any representation, warranty, covenant or agreement made by the
Company in any Transaction Document; and/or (b) any cause of action, suit or
claim brought or made against such Investor Party and arising solely out of or
solely resulting from the Investor’s execution, delivery, performance or
enforcement of this Agreement or any of the other Transaction Documents and
without causation by any other activity, obligation, condition or liability
pertaining to such Investor. In addition to the indemnity contained herein, the
Company will reimburse each Investor Party 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.

 

Section 5.8. Non-Public Information. The Company covenants and agrees that, from
and after the date of this Agreement, neither it nor any other Person acting on
its behalf will provide any Investor or its agents or counsel with any
information that the Company believes constitutes material non-public
information, unless prior thereto such Investor shall have executed a written
agreement regarding the confidentiality and use of such information. The Company
understands and confirms that each Investor shall be relying on the foregoing
representations in effecting transactions in securities of the Company.

 

Section 5.9. Net Proceeds. Except as otherwise disclosed in the Disclosure
Materials, the Company shall use the net proceeds from the sale of the
Securities hereunder for working capital purposes, to purchase fixed assets used
in the development or production of the Company’s products or for investment in
new technologies related to the Company’s business and not 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), to redeem
any Common Stock or Common Stock Equivalents or to settle any outstanding
litigation. On the Initial Closing Date, the Company shall use $71,024.10 of the
proceeds of the sale of Shares and Warrants hereunder to make a one-time payment
to Battelle Memorial Institute in connection with an agreement to implement a
lower royalty for use of the ARP technology licensed from Battelle Memorial
Institute, as a result of which payment there shall be no outstanding
delinquencies in the royalty obligations of the Company to Battelle Memorial
Institute.

 

27

--------------------------------------------------------------------------------

ARTICLE 6

 

Conditions Precedent to Closing

 

Section 6.1. Conditions Precedent to the Obligations of the Investors to
Purchase Securities. The obligation of each Investor to acquire Securities at
the Closing is subject to the satisfaction or waiver by such Investor, at or
before the Closing, of each of the following conditions:

 

  (a) Representations and Warranties. The Company shall have delivered a
certificate of the Company’s Chief Executive Officer certifying that the
representations and warranties of the Company contained herein shall be true and
correct in all material respects as of the date when made and as of the Closing
as though made on and as of such date;

 

  (b) Performance. The Company shall have performed, satisfied and complied in
all material respects with all covenants, agreements and conditions required by
the Transaction Documents to be performed, satisfied or complied with by it at
or prior to the Closing;

 

  (c) No Injunction. No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction that prohibits
the consummation of any of the transactions contemplated by the Transaction
Documents;

 

  (d) No Adverse Changes. Since the date of execution of this Agreement, no
event or series of events shall have occurred that reasonably could have or
result in a Material Adverse Effect;

 

  (e) No Suspensions of Trading in Common Stock. From the date hereof to the
Closing Date, trading in the Common Stock shall not have been suspended by the
Commission (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 Financial Markets 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 Investor, makes
it impracticable or inadvisable to purchase the Shares and the Warrants at the
Closing; and

 

  (f) Company Deliverables. The Company shall have delivered the Company
Deliverables in accordance with Section 2.2(a).

 

Section 6.2. Conditions Precedent to the Obligations of the Company to Sell
Securities. The obligation of the Company to sell Securities at the Closing is
subject to the satisfaction or waiver by the Company, at or before the Closing,
of each of the following conditions:

 

  (a) Representations and Warranties. The representations and warranties of each
Investor contained herein shall be true and correct in all material respects as
of the date when made and as of the Closing Date as though made on and as of
such date;

 

28

--------------------------------------------------------------------------------

  (b) Performance. Each Investor shall have performed, satisfied and complied in
all material respects with all covenants, agreements and conditions required by
the Transaction Documents to be performed, satisfied or complied with by such
Investor at or prior to the Closing;

 

  (c) No Injunction. No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction that prohibits
the consummation of any of the transactions contemplated by the Transaction
Documents; and

 

  (d) Investors Deliverables. Each Investor shall have delivered its Investment
Amount in accordance with Section 2.2(b); and

 

ARTICLE 7

 

Miscellaneous

 

Section 7.1. Fees and Expenses. 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 the Transaction Documents. The Company
shall pay all stamp and other taxes and duties levied in connection with the
sale of the Shares.

 

Section 7.2. Entire Agreement. The Transaction Documents, together with the
Exhibits thereto, contain the entire understanding of the parties with respect
to the subject matter hereof and supersede all prior agreements, understandings,
discussions and representations, oral or written, with respect to such matters,
which the parties acknowledge have been merged into such documents and exhibits.

 

Section 7.3. 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 (provided the sender
receives a machine-generated confirmation of successful transmission) at the
facsimile number specified in this Section prior to 6:30 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 specified in this Section on a day that is not a Trading Day or later
than 6:30 p.m. (New York City time) on any Trading Day, (c) the 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 follows:

 

If to the Company:    ThermoEnergy Corporation      Attn.: Chairman      1300
Tower Building      323 Center Street      Little Rock, AR 72201      Telephone:
(501) 376-6477      Facsimile: (501) 376-3643

 

 

29

--------------------------------------------------------------------------------

With a copy to:    Nixon Peabody, LLP      Attn.: William E. Kelly      100
Summer Street      Boston, MA 02110-2131      Telephone: (617) 345-1195     
Facsimile: (866) 743-4899 If to an Investor:    To the address set forth under
such Investor’s name on such Investor’s Counterpart Signature Page hereto;

 

or such other address as may be designated in writing hereafter, in the same
manner, by such Person.

 

Section 7.4. Amendments; Waivers; No Additional Consideration. No provision of
this Agreement may be waived or amended except in a written instrument signed by
the Company and by Investors holding at least sixty-six and two-thirds percent
(66 2/3%) of the then outstanding Shares. 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 either party to exercise any right hereunder in any manner
impair the exercise of any such right. No consideration shall be offered or paid
to any Investor to amend or consent to a waiver or modification of any provision
of any Transaction Document unless the same consideration is also offered to all
Investors who then hold Shares.

 

Section 7.5 Termination. This Agreement may be terminated prior to Closing:

 

  (a) by written agreement of the Investors and the Company;

 

  (b) by the Company or an Investor (as to itself but no other Investor) upon
written notice to the other, if the Closing shall not have taken place by 6:30
p.m. Eastern time on the Outside Date; provided, that the right to terminate
this Agreement under this Section 7.5(b) shall not be available to any Person
whose failure to comply with its obligations under this Agreement has been the
cause of or resulted in the failure of the Closing to occur on or before such
time;

 

  (c) by an Investor (as to itself but no other Investor) if it concludes in
good faith that any of the conditions precedent contained in Section 7.1 shall
have been breached or shall not be capable of being satisfied by the Outside
Date despite the assumed best efforts of the Company.

 

In the event of a termination pursuant to this Section, the Company shall
promptly notify all non-terminating Investors. Upon a termination in accordance
with this Section 7.5, the Company and the terminating Investor(s) shall have no
further obligation or liability (including as arising from such termination) to
the other and no Investor will have any liability to any other Investor under
the Transaction Documents as a result therefrom.

 

Section 7.6. Construction. 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. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party. This Agreement
shall be construed as if drafted jointly by the parties, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any provisions of this Agreement or any of the Transaction
Documents.

 

30

--------------------------------------------------------------------------------

Section 7.7. 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 the Investors. Any Investor may assign any
or all of its rights under this Agreement to any Person to whom such Investor
assigns or transfers any Securities, provided such transferee agrees in writing
to be bound, with respect to the transferred Securities, by the provisions
hereof that apply to the “Investors.”

 

Section 7.8. 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 Article 4. or Section 5.7
(with respect to rights to indemnification and contribution).

 

Section 7.9. Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement 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 Proceedings concerning the interpretations, enforcement and of
the transactions contemplated by this Agreement and any other Transaction
Documents (whether brought against a party hereto or its respective Affiliates,
employees or agents) shall be commenced exclusively in 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 the any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any
Proceeding, any claim that it is not personally subject to the jurisdiction of
any such New York Court, or that such Proceeding has been commenced in an
improper or inconvenient forum. Each party hereto hereby irrevocably waives
personal service of process and consents to process being served in any such
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 manner permitted by 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 Agreement or the
transactions contemplated hereby. If either party shall commence a Proceeding to
enforce any provisions of a Transaction Document, then the prevailing party in
such 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 Proceeding.

 

Section 7.10. Survival. The representations, warranties, agreements and
covenants contained herein shall survive the Closing and the delivery of the
Securities.

 

Section 7.11. 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, 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 signature page
were an original thereof.

 

 

31

--------------------------------------------------------------------------------

Section 7.12. Severability. If any provision of this Agreement is held to be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.

 

Section 7.13. Rescission and Withdrawal Right. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Investor 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 Investor
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.

 

Section 7.14. 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, 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 and customary and reasonable
indemnity, if requested. The applicants for a new certificate or instrument
under such circumstances shall also pay any reasonable third-party costs
associated with the issuance of such replacement Securities. If a replacement
certificate or instrument evidencing any Securities is requested due to a
mutilation thereof, the Company may require delivery of such mutilated
certificate or instrument as a condition precedent to any issuance of a
replacement.

 

Section 7.15. Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Investors 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 described in the foregoing sentence and hereby agrees to waive in
any action for specific performance of any such obligation the defense that a
remedy at law would be adequate.

 

Section 7.16. Payment Set Aside. To the extent that the Company makes a payment
or payments to any Investor pursuant to any Transaction Document or an Investor
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.

 

Section 7.17. Independent Nature of Investors’ Obligations and Rights. The
obligations of each Investor under any Transaction Document are several and not
joint with the obligations of any other Investor, and no Investor shall be
responsible in any way for the performance of the obligations of any other
Investor under any Transaction Document. The decision of each Investor to
purchase Securities pursuant to the Transaction Documents has been made by such
Investor independently of any other Investor. Nothing contained herein or in any
Transaction Document, and no action taken by any Investor pursuant thereto,
shall be deemed to constitute the Investors as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Investors 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
Investor acknowledges that no other Investor has acted as agent for such
Investor in

 

32

--------------------------------------------------------------------------------

connection with making its investment hereunder and that no Investor will be
acting as agent of such Investor in connection with monitoring its investment in
the Securities or enforcing its rights under the Transaction Documents. Each
Investor 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
Investor to be joined as an additional party in any proceeding for such purpose.
The Company acknowledges that each of the Investors has been provided with the
same Transaction Documents for the purpose of closing a transaction with
multiple Investors and not because it was required or requested to do so by any
Investor.

 

Section 7.18. Limitation of Liability. Notwithstanding anything herein to the
contrary, the Company acknowledges and agrees that the liability of an Investor
arising directly or indirectly, under any Transaction Document of any and every
nature whatsoever shall be satisfied solely out of the assets of such Investor,
and that no trustee, officer, other investment vehicle or any other Affiliate of
such Investor or any investor, shareholder or holder of shares of beneficial
interest of such a Investor shall be personally liable for any liabilities of
such Investor.

 

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.

 

THERMOENERGY CORPORATION By:  

/s/ Dennis C. Cossey

--------------------------------------------------------------------------------

    Dennis C. Cossey     Chairman and CEO

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

COUNTERPART SIGNATURE PAGES FOR INVESTORS FOLLOW]

 

33

--------------------------------------------------------------------------------

Investor’s Counterpart Signature Page to Securities Purchase Agreement

 

The undersigned hereby agrees to become a party as an Investor to the Securities
Purchase Agreement among ThermoEnergy Corporation (the “Company”) and the
Investors named therein (the “Purchase Agreement”), agreeing to invest the
Investment Amount (as such term is defined in the Purchase Agreement) set forth
below. The undersigned hereby authorizes the Company to attach this Counterpart
Signature Page to the Purchase Agreement.

 

            NAME OF INVESTOR        

 

--------------------------------------------------------------------------------

Date:                                   

 

By:

 

 

--------------------------------------------------------------------------------

                                    Signature             Name:  

 

--------------------------------------------------------------------------------

            Title:  

 

--------------------------------------------------------------------------------

           

Investment
Amount:

 

 

--------------------------------------------------------------------------------

            Tax ID No.:  

 

--------------------------------------------------------------------------------

ADDRESS FOR NOTICE       DELIVERY INSTRUCTIONS             (if different from
above) Street:  

 

--------------------------------------------------------------------------------

      c/o:  

 

--------------------------------------------------------------------------------

City:  

 

--------------------------------------------------------------------------------

      Street:  

 

--------------------------------------------------------------------------------

State/Zip:  

 

--------------------------------------------------------------------------------

      City:  

 

--------------------------------------------------------------------------------

Attn.:  

 

--------------------------------------------------------------------------------

      State/Zip:  

 

--------------------------------------------------------------------------------

Tel.:  

 

--------------------------------------------------------------------------------

      Attn.:  

 

--------------------------------------------------------------------------------

Fax:  

 

--------------------------------------------------------------------------------

      Tel.:  

 

--------------------------------------------------------------------------------

            Fax:  

 

--------------------------------------------------------------------------------

 

34