Exhibit 4.1


 


LOAN AND SECURITIES PURCHASE AGREEMENT


 


This Loan and
Securities Purchase Agreement is entered into and dated as of March 5, 2003
(this “Agreement”),
among EarthShell Corporation, a Delaware corporation (the “Borrower”), and the lenders
identified on the signature pages hereto (each, a “Lender” and collectively,
the “Lenders”).


 


WHEREAS,
subject to the terms and conditions set forth in this Agreement, the Borrower
desires to borrow certain sums from the Lenders (the “Loan”) and sell certain securities
to the Lenders, and the Lenders, severally and not jointly, desire to loan
certain sums to the Borrower and purchase from the Borrower, certain securities
of the Borrower, pursuant to the terms set forth herein.


 


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
Borrower and the Lenders agree as follows:


 


ARTICLE I.


 


DEFINITIONS


 


1.1.                              Definitions.    In addition to the terms defined elsewhere
in this Agreement, the following terms shall have the meanings set forth in
this Section 1.1:


 


“Affiliate”
means any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with a
Person, as such terms are used in and construed under Rule 144 under the
Securities Act. With respect to a Lender, any investment fund or managed
account that is managed on a discretionary basis by the same investment manager
as such Lender will be deemed to be an Affiliate of such Lender.


“Bankruptcy Event”
means any of the following events: (a) the Borrower or any Subsidiary commences
a case or other proceeding under any bankruptcy, reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution, insolvency or liquidation
or similar law of any jurisdiction relating to the Borrower or any Subsidiary
thereof; (b) there is commenced against the Borrower or any Subsidiary any such
case or proceeding that is not dismissed within 60 days after commencement; (c)
the Borrower or any Subsidiary is adjudicated by a court of competent
jurisdiction insolvent or bankrupt or any order of relief or other order
approving any such case or proceeding is entered; (d) the Borrower or any
Subsidiary suffers any appointment of any custodian or the like for it or any
substantial part of its property that is not discharged or stayed within 60
days; (e) under applicable bankruptcy law the Borrower or any Subsidiary makes
a general assignment for the benefit of creditors; (f) the Borrower or any
Subsidiary fails to pay, or states that it is unable to pay or is unable to
pay, its debts generally as they become due; (g) the Borrower or any Subsidiary
calls a meeting of its creditors with a view to


 

















 


arranging a composition, adjustment or
restructuring of its debts; or (h) the Borrower or any Subsidiary, by any act
or failure to act, expressly indicates its consent to, approval of or
acquiescence in any of the foregoing or takes any corporate or other action for
the purpose of effecting any of the foregoing.


 


“BioTec” means, collectively, bio-tec
Biologische Naturverpackungen GmbH & Co. and bio-tec Biologische
Naturverpackungen Forschungs und Entwicklungs GmbH.


 


“BioTec Subordination Agreement” means the
subordination agreement in form and substance acceptable to the Lenders, duly
executed by the Lenders, the Borrower and BioTec.


 


“Capital Lease Obligations” of any Person
shall mean the obligations of such Person to pay rent or other amounts under
any lease of (or other arrangement conveying the right to use) real or personal
property, or a combination thereof, which obligations are required to be
classified and accounted for as capital leases on a balance sheet of such
Person under GAAP and, for the purposes of this Agreement, the amount of such
obligations at any time shall be the capitalized amount thereof at such time
determined in accordance with GAAP.


 


“Change of
Control” means the occurrence of any of the following in one or a
series of related transactions: (i) an acquisition after the date hereof by an
individual or legal entity or “group” (as described in Rule 13d-5(b)(1) under
the Exchange Act) of more than one-third of the voting rights or equity
interests in the Borrower; (ii) a replacement of more than one-half of the
members of the Borrower’s board of directors in a single election of directors
that is not approved by those individuals who are members of the board of
directors on the date hereof (or other directors previously approved by such
individuals); (iii) a merger or consolidation of the Borrower or any Subsidiary
or a sale of more than one-third of the assets of the Borrower in one or a
series of related transactions, unless following such transaction or series of
transactions, the holders of the Borrower’s securities prior to the first such
transaction continue to hold at least two-thirds of the voting rights and
equity interests in the surviving entity or acquirer of such assets; (iv) a
recapitalization, reorganization or other transaction involving the Borrower or
any Subsidiary that constitutes or results in a transfer of more than one-third
of the voting rights or equity interests in the Borrower, unless following such
transaction or series of transactions, the holders of the Borrower’s securities
prior to the first such transaction continue to hold at least two-thirds of the
voting rights and equity interests in the surviving entity or acquirer of such
assets; (v) consummation of a “Rule 13e-3 transaction” as defined in Rule 13e-3
under the Exchange Act with respect to the Borrower, (vi) the execution by the
Borrower or its controlling shareholders of an agreement providing for or
reasonably likely to result in any of the foregoing events or (vii) Essam
Khashoggi or any Person controlled by him shall cease to own 30% of the
outstanding shares of Common Stock, assuming conversion in full of the original
principal amount of Debentures (without consideration to any conversion
limitations set forth therein) (other than as a result of death, the conversion
or exercise of (A) any of the securities set forth on Schedule 3.1(m) or (B)
the warrants granted to Roth Capital LLC in connection with the transactions
contemplated hereby, or the pledge or foreclosure of shares of Common Stock as
described in Schedule 3 to the Letter Agreement).


 


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“Closing” means the closing of the Loan and
the related purchase and sale of the Securities pursuant to Section 2.1.


 


“Closing Date” means the date of the
Closing.


 


“Closing Price” means, for any date, the
price determined by the first of the following clauses that applies: (a) if the
Common Stock is then listed or quoted on an Eligible Market, the closing sale
price per share of the Common Stock for such date (or the nearest preceding
date) on the primary Eligible Market or exchange on which the Common Stock is
then listed or quoted; (b) if prices for the Common Stock are then quoted on
the OTC Bulletin Board, the closing sale price per share of the Common Stock
for such date (or the nearest preceding date) so quoted; (c) if prices for the
Common Stock are then reported in the “Pink Sheets” published by the National
Quotation Bureau Incorporated (or a similar organization or agency succeeding to
its functions of reporting prices), the most recent sale price per share of the
Common Stock so reported; or (d) in all other cases, the fair market value of a
share of Common Stock as determined by an independent appraiser selected in
good faith by a majority in interest of the Lenders.


 


“Commission” means the Securities and
Exchange Commission.


 


“Common Stock” means the common stock of the
Borrower, $0.01 par value per share, and any securities into which such common
stock may hereafter be reclassified.


 


“Borrower Counsel” means Gibson, Dunn &
Crutcher LLP, counsel to the Borrower.


 


“Debentures” means $10,550,000 in an
aggregate principal amount of secured convertible debentures due March 5, 2006
issuable by the Borrower to the Lenders on the Closing Date, in the form of Exhibit
A hereto.


 


“Eligible Market” means any of the New York
Stock Exchange, the American Stock Exchange, the Nasdaq National Market or the
Nasdaq Small Cap Market.


 


“EKI Subordination Agreement” means the
subordination agreement in form and substance acceptable to the Lenders, duly
executed by the Lenders, the Borrower Essam Khashoggi and E. Khashoggi
Industries, LLC.


 


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


 


“Guarantee” of or by any Person shall mean
any obligation, contingent or otherwise, of such Person guaranteeing or having
the economic effect of guaranteeing any Indebtedness of any other Person (the
“primary obligor”) in any manner, whether directly or indirectly, and including
any obligation of such Person, direct or indirect, (a) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness or to
purchase (or to advance or supply funds for the purchase of) any security for
the payment of such Indebtedness, (b) to purchase property, securities or
services for the purpose of assuring the owner of such Indebtedness of the
payment of such Indebtedness or (c) to maintain working capital, equity capital
or other financial


 


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statement condition or liquidity of the
primary obligor so as to enable the primary obligor to pay such Indebtedness, provided,
that the term Guarantee shall not include endorsements for collection or
deposit, in either case in the ordinary course of business.


 


“Indebtedness” of any Person shall mean,
without duplication, (a) all obligations of such Person for borrowed money or
with respect to deposits or advances of any kind, (b) all obligations of such
Person evidenced by bonds, debentures, notes or similar instruments, (c) all
obligations of such Person upon which interest charges are customarily paid,
(d) all obligations of such Person under conditional sale or other title
retention agreements relating to property or assets purchased by such Person,
(e) all obligations of such Person issued or assumed as the deferred purchase
price of property or services, (f) all Indebtedness of others secured by (or
for which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien on property owned or acquired by such
Person, whether or not the obligations secured thereby have been assumed, (g)
all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease
Obligations of such Person, (i) all obligations of such Person in respect of
interest rate protection agreements, foreign currency exchange agreements or
other interest or exchange rate hedging arrangements and (j) all obligations of
such Person as an account party in respect of letters of credit and bankers’
acceptances.  The Indebtedness of any
Person shall include the Indebtedness of any partnership in which such Person
is a general partner.


 


“Initial Shares” means the 4,203,187 shares
of Common Stock issuable by the Borrower to the Lenders hereunder on the
Closing Date.


 


“Letter Agreement” means the letter
agreement in form and substance acceptable to the Lenders, duly executed by the
Borrower, SF Capital, Essam Khashoggi and E. Khashoggi Industries, LLC.


 


“Losses” means any and all losses, claims,
damages, liabilities, settlement costs and expenses, including without
limitation costs of preparation of legal action and reasonable attorneys’ fees.


 


“Nasdaq” means the Nasdaq National Market.


 


“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.


 


“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.


 


“Lender
Percentage” means, with respect to a Lender, the
percentage equal to the product of (x) a fraction, the numerator of which shall
be the aggregate amount delivered by such Lender to the Borrower on the Closing
Date and the denominator of which shall be the amounts delivered by all Lenders
to the Borrower on the Closing Date times (y) 100.


 


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“Registration Statement” means the
Borrower’s registration statement on Form S-3 (No. 333-76092), declared
effective by the Commission on January 7, 2002, as supplemented, amended and
otherwise updated through the date hereof and from time to time thereafter.


 


“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.


 


“Securities” means the SF Shares, the
Initial Shares, the Debentures and the Underlying Shares issued or issuable (as
applicable) to the applicable Lender pursuant to the Transaction Documents.


 


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


 


“Security Agreement” means the security
agreement, in form and substance acceptable to the Lenders, duly executed by
the Lenders, the Borrower and E. Khashoggi Industries, LLC.


 


“SF Capital” means SF Capital Partners, Ltd.


 


“SF Shares” means the 650,000 shares of
Common Stock issuable by the Borrower to SF Capital on the Closing Date in
consideration of the investment hereunder by SF Capital in the transactions
contemplated by this Agreement.


 


“Subordination Agreements” means, collectively,
the BioTec Subordination Agreement and the EKI Subordination Agreement.


 


“Subsidiary” means any subsidiary of the
Borrower that is required to be listed in Schedule 3.1(a).


 


“Supplement” means the prospectus supplement
to the prospectus which was filed with the Registration Statement reflecting
the sale of the Securities.


 


“Trading Day” means: (a) a day on which
the shares of Common Stock are traded on an Eligible Market, or (b) if the
shares of Common Stock are not listed on an Eligible Market, a day on which the
shares of Common Stock are traded in the over–the–counter market,
as reported by the OTC Bulletin Board, or (c) if the shares of Common
Stock are not quoted on the OTC Bulletin Board, a day on which the shares of
Common Stock are quoted in the over–the–counter market as reported
by the National Quotation Bureau Incorporated (or any similar organization or
agency succeeding its functions of reporting prices); provided, that in
the event that the shares of Common Stock are not listed or quoted as set forth
in (a), (b) and (c) hereof, then Trading Day shall mean a business day.


 


“Transaction Documents” means this
Agreement, the Debentures, the Letter Agreement, the Subordination Agreements,
the Security Agreement and any other


 


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documents or agreements executed or delivered
in connection with the transactions contemplated hereunder.


 


“Underlying Shares” means the shares of
Common Stock issuable upon conversion of the Debentures and payment of interest
thereunder and in satisfaction of any other obligation of the Borrower to issue
shares of Common Stock pursuant to the Transaction Documents.


 


ARTICLE II.


 


CLOSING


 


2.1.                              Closing.    Subject to the terms and conditions set
forth in this Agreement, at the Closing the Company shall deliver to each
Lender its Debentures, Initial Shares and (if applicable) the SF Shares and
each Lender shall deliver to the Company the amount determined pursuant to
Section 2.2(b)(i) hereof.  The Closing
shall take place at the offices of Bryan Cave LLP, 1290 Avenue of the Americas,
New York, NY 10104, immediately following the execution and delivery of this
Agreement by the parties or at such other location or time as the parties may
agree.


 


2.2.                              Closing Deliveries.


 


(a)                                  At the Closing, the
Borrower shall deliver or cause to be delivered to each Lender the following:


 


(i)                                     this
Agreement duly executed by the Borrower;


 


(ii)                                  Debentures
in the aggregate principal amount indicated below such Lender’s name on the
signature page of this Agreement, registered in the name of such Lender;


 


(iii)                               a
number of Initial Shares equal to the product of 4,203,187 and such Lender’s
Lender Percentage, which shares of Common Stock shall be delivered
electronically via the Depositary Trust Corporation DWAC system to such
Lender’s DWAC account as indicated below such Lender’s name on the signature
page of this Agreement, provided, that the Borrower shall also deliver
to SF Capital the SF Shares, which shares of Common Stock shall be delivered electronically
via the Depositary Trust Corporation DWAC system to SF Capital’s DWAC account
as indicated below SF Capital’s name on the signature page of this Agreement;


 


(iv)                              the
legal opinion of Borrower Counsel, in the form of Exhibit C, executed by
such counsel and delivered to the Lenders;


 


(v)                                 evidence
that the Borrower has filed the Supplement with the Commission;


 


(vi)                              the
Letter Agreement;


 


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(vii)                           the EKI
Subordination Agreement;


 


(viii)                        the BioTec
Subordination Agreement;


 


(ix)                                the
Security Agreement; and


 


(x)                                   any
other document reasonably requested by the Lenders;


 


(b)                                 At the Closing, each
Lender shall deliver or cause to be delivered to the Borrower the following:


 


(i)                                     the
amount indicated below such Lender’s name on the signature page of this
Agreement, in United States dollars and in immediately available funds, by wire
transfer to an account designated in writing by the Borrower for such purpose;


 


(ii)                                  the
Letter Agreement;


 


(iii)                               the
EKI Subordination Agreement;


 


(iv)                              the
BioTec Subordination Agreement;


 


(v)                                 the
Security Agreement; and


 


(vi)                              this
Agreement duly executed by such Lender.


 


ARTICLE III.


 


REPRESENTATIONS AND WARRANTIES


 


3.1.                              Representations and
Warranties of the Borrower.    The
Borrower hereby makes the following representations and warranties to the
Lenders:


 


(a)                                  Subsidiaries.    The Borrower does not directly or
indirectly control or own any interest in any other corporation, partnership,
joint venture or other business association or entity (a “Subsidiary”), other than those listed in Schedule
3.1(a). Except as disclosed in Schedule 3.1(a), the Borrower owns,
directly or indirectly, all of the capital stock of each Subsidiary free and
clear of any lien, charge, claim, security interest, encumbrance, right of
first refusal or other restriction (collectively, “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
Borrower and the Subsidiaries is an entity duly incorporated or otherwise
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization (as applicable), with the
requisite power and authority to own and use its properties and assets and to
carry on its business as currently conducted. Neither the Borrower nor any
Subsidiary is in violation of any


 


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of the provisions of its respective certificate or articles of
incorporation, bylaws or other organizational or charter documents. Each of the
Borrower and the Subsidiaries is duly qualified to do 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, (i)
adversely affect the legality, validity or enforceability of any Transaction
Document, (ii) have or result in a material adverse effect on the results of
operations, assets, business or condition (financial or otherwise) of the
Borrower and the Subsidiaries, taken as a whole, or (iii) adversely impair the
Borrower’s ability to perform fully on a timely basis its obligations under any
of the Transaction Documents (any of (i), (ii) or (iii), a “Material Adverse Effect”).


 


(c)                                  Authorization;
Enforcement.    The Borrower has the
requisite corporate power and authority to enter into and to consummate the
transactions contemplated by each of the Transaction Documents and otherwise to
carry out its obligations hereunder. The execution and delivery of each of the
Transaction Documents by the Borrower and the consummation by it of the
transactions contemplated hereunder and thereunder have been duly authorized by
all necessary action on the part of the Borrower and no further consent or action
is required by the Borrower, its Board of Directors or its stockholders. Each
of the Transaction Documents has been (or upon delivery will be) duly executed
by the Borrower and, when delivered in accordance with the terms hereof, will
constitute the valid and binding obligation of the Borrower enforceable against
the Borrower in accordance with its terms.


 


(d)                                 No Conflicts.    The execution, delivery and performance of
the Transaction Documents by the Borrower and the consummation by the Borrower
of the transactions contemplated hereby do not and will not (i) conflict with
or violate any provision of the Borrower’s or any Subsidiary’s certificate or
articles of incorporation, bylaws or other organizational or charter documents,
or (ii) subject to obtaining the Required Approvals (as defined below),
conflict with, or constitute a default (or an event that with notice or lapse
of time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation  (with or without notice, lapse of time or both) of, any
agreement, credit facility, debt or other instrument (evidencing a Borrower or
Subsidiary debt or otherwise) or other understanding to which the Borrower or
any Subsidiary is a party or by which any property or asset of the Borrower 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 Borrower or a Subsidiary is
subject (including federal and state securities laws and regulations) and the
rules and regulations of any self-regulatory organization to which the Borrower
or its securities are subject, or by which any property or asset of the Borrower
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
result in a Material Adverse Effect.


 


(e)                                  Filings, Consents
and Approvals.    Neither the
Borrower nor any Subsidiary is required to obtain any consent, waiver,
authorization or order of, give any notice to, or make any filing or
registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Borrower of the Transaction Documents, other
than (i) the required filing of


 


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the Supplement, (ii) applicable Blue Sky filings, and (iii) in all
other cases where the failure to obtain such consent, waiver, authorization or
order, or to give such notice or make such filing or registration could not
have or result in, individually or in the aggregate, a Material Adverse Effect
(collectively, the “Required Approvals”).


 


(f)                                    Issuance of the
Securities.    The Securities have
been duly authorized and, when issued and paid for in accordance with the
Transaction Documents, will be duly and validly issued, fully paid and
nonassessable, free and clear of all Liens. The Borrower has reserved from its
duly authorized capital stock a number of shares of Common Stock to be issued
to the applicable Lenders upon conversion of the Debentures and such number of
reserved shares of Common Stock shall be at least equal to 21,100,000.


 


(g)                                 Registration
Statement. The Registration Statement was declared effective by the
Commission on January 7, 2002. The Registration Statement is effective on the
date hereof and the Borrower has not received notice that the Commission has
issued or intends to issue a stop order with respect to the Registration
Statement or that the Commission otherwise has suspended or withdrawn the
effectiveness of the Registration Statement, either temporarily or permanently,
or intends or has threatened in writing to do so. The Registration Statement
(including the information or documents incorporated by reference therein), as
of the time it was declared effective, and any amendments or supplements
thereto, each as of the time of filing, did not contain any untrue statement of
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading. All issuances of
the Securities to the Lenders pursuant to this Agreement and the Debentures are
registered by the Registration Statement.


 


(h)                                 Listing and
Maintenance Requirements.    Except
as specified in the SEC Reports or in the Company’s press releases issued
within the past six months, the Borrower has not, in the two years preceding
the date hereof, received notice (written or oral) from the Nasdaq to the
effect that the Borrower is not in compliance with the listing or maintenance
requirements thereof.  Except as set
forth in the Borrower’s press release dated November 26, 2002, the Borrower is,
and has no reason to believe that it will not in the foreseeable future
continue to be, in compliance with the listing and maintenance requirements for
continued trading of the Common Stock on the Nasdaq or another Eligible Market.
The issuance of the Securities pursuant to this Agreement and under the
Debentures including Underlying Shares issuable upon conversions thereof do not
contravene the rules and regulations of the Nasdaq and no approval of the
shareholders of the Borrower is required for the Borrower to issue and deliver
to the Lenders the maximum number of Securities contemplated by this Agreement
and the Debentures assuming conversion of the Debentures on the date hereof.


 


(i)                                     Certain Fees.    Except for listing fees to be paid by the
Borrower to the Nasdaq and the placement fee set forth in Schedule 3.1(i),
payable to Roth Capital Partners, LLC in connection with the transactions
contemplated by this Agreement, no fees or commissions will be payable by the
Borrower 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 Lenders shall have no obligation with
respect to any fees incurred by the Borrower or any other Person (other than
the Lenders, if the Lenders have agreed in writing to


 


9

















 


pay such fees) or with respect to any claims made by or on behalf of
other Persons for fees of a type contemplated in this Section that may be due
in connection with the transactions contemplated by this Agreement.


 


(j)                                     Disclosure.    Except as set forth in the press release
to be filed by the Borrower pursuant to Section 4.7 hereof, the Borrower
confirms that neither it nor any other Person acting on its behalf has provided
any of the Lenders or their respective agents or counsel with any information
that constitutes or might constitute material, nonpublic information. The
Borrower understands and confirms that each of the Lenders will rely on the
foregoing representations in effecting transactions in securities of the
Borrower. All disclosure provided to the Lenders regarding the Borrower, its
business and the transactions contemplated hereby, including the Schedules to
this Agreement, the Registration Statement and the Supplement, furnished by or
on behalf of the Borrower 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. No event or circumstance has occurred or
information exists with respect to the Borrower or any of its Subsidiaries or
its or their business, properties, prospects, operations or financial conditions,
which, under applicable law, rule or regulation, requires public disclosure or
announcement by the Borrower but which has not been so publicly announced or
disclosed (assuming for this purpose that the Borrower’s reports filed under
the Exchange Act are being incorporated into an effective registration
statement filed by the Borrower under the Securities Act). The Borrower
acknowledges and agrees that no Lender makes or has made any representations or
warranties with respect to the transactions contemplated hereby other than
those specifically set forth in Section 3.


 


(k)                                  No Violation.    The issuance and sale of the Securities
hereunder does not conflict with or violate any rules or regulations of the
Nasdaq.


 


(l)                                     SEC Reports;
Financial Statements.    The
Borrower has filed all reports required to be filed by it under the Exchange
Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years
preceding the date hereof (or such shorter period as the Borrower was required
by law to file such material) (the foregoing materials being collectively
referred to herein as the “SEC Reports” and, together with this Agreement and
the Schedules to this Agreement, the “Disclosure Materials”) on a timely basis
or has received a valid extension of such time of filing and has filed any such
SEC Reports prior to the expiration of any such extension. The Borrower has
delivered to the Lenders a copy of all SEC Reports filed within the 20 days
preceding the date hereof. 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 Borrower included in the SEC
Reports comply in all material respects with applicable accounting requirements
and the rules and regulations of the Commission with respect thereto as in
effect at the time of filing. Such financial statements have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved (“GAAP”), except as may be otherwise specified in such financial
statements or the


 


10

















 


notes thereto, and fairly present in all material respects the
financial position of the Borrower 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. All material agreements to which the
Borrower or any Subsidiary is a party or to which the property or assets of the
Borrower or any Subsidiary are subject are included as part of or specifically
identified in the SEC Reports.


 


(m)                               Capitalization.    The number of shares and type of all
authorized, issued and outstanding capital stock, options and other securities
of the Borrower (whether or not presently convertible or exchangeable for shares
of capital stock of the Borrower) is set forth in Schedule 3.1(m). All
outstanding shares of capital stock are duly authorized, validly issued, fully
paid and nonassessable and have been issued in compliance with all applicable
securities laws. Except as disclosed in Schedule 3.1(m), 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 Borrower or any
Subsidiary is or may become bound to issue additional shares of Common Stock,
or securities or rights convertible or exchangeable into shares of Common
Stock. Except as disclosed in Schedule 3.1(m), there are no
anti-dilution or price adjustment provisions contained in any security issued
by the Borrower (or in any agreement providing rights to security holders) and
the issue and sale of the Securities will not obligate the Borrower to issue
shares of Common Stock or other securities to any Person and will not result in
a right of any holder of Borrower securities to adjust the exercise, conversion,
exchange or reset price under such securities. To the knowledge of the
Borrower, except as specifically disclosed in Schedule 3.1(m), no Person
or group of related Persons beneficially owns (as determined pursuant to Rule
13d-3 under the Exchange Act), or has the right to acquire, by agreement with
or by obligation binding upon the Borrower, beneficial ownership of in excess
of 5% of the outstanding Common Stock, ignoring for such purposes any
limitation on the number of shares of Common Stock that may be owned at any
single time.


 


(n)                                 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 result in a Material Adverse Effect,
(ii) the Borrower has not incurred any liabilities (contingent or otherwise)
other than (A) trade payables and accrued expenses incurred in the ordinary
course of business consistent with past practice and (B) liabilities not
required to be reflected in the Borrower’s financial statements pursuant to
GAAP or required to be disclosed in filings made with the Commission, (iii) the
Borrower has not altered its method of accounting or the identity of its
auditors, (iv) the Borrower 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 Borrower has not issued any equity securities to any
officer, director or Affiliate, except pursuant to existing Borrower stock
option plans. The Borrower does not have pending before the Commission any
request for confidential treatment of information.


 


(o)                                 Litigation.    There is no action, suit, inquiry, notice
of violation, proceeding or investigation pending or, to the knowledge of the
Borrower, threatened against or


 


11

















 


affecting the Borrower, any Subsidiary or any of their respective
properties before or by any court, arbitrator, governmental or administrative
agency or regulatory authority (federal, state, county, local or foreign)
(collectively, an “Action”) which
(i) adversely affects or challenges the legality, validity or enforceability of
any of the Transaction Documents or the Securities or (ii) could, if there were
an unfavorable decision, individually or in the aggregate, have or result in a
Material Adverse Effect.  Schedule
3.1(o) contains a complete list and summary description of any pending or,
to the knowledge of the Borrower, threatened proceeding against or affecting
the Borrower or any of its Subsidiaries, without regard to whether it would
have a Material Adverse Effect. Neither the Borrower nor any Subsidiary, nor
any director or officer thereof, 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. The Borrower does not
have pending before the Commission any request for confidential treatment of
information. There has not been, and to the knowledge of the Borrower, there is
not pending or contemplated, any investigation by the Commission involving the
Borrower or any current or former director or officer of the Borrower. The
Commission has not issued any stop order or other order suspending the
effectiveness of any registration statement filed by the Borrower or any
Subsidiary under the Exchange Act or the Securities Act. No strike, work stoppage,
slow down or other material labor problem exists or, to the knowledge of the
Borrower, is threatened or imminent with respect to any of the employees of the
Borrower or the Subsidiaries.


 


(p)                                 Compliance.    Neither the Borrower 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 Borrower or any Subsidiary under), nor has the Borrower or any
Subsidiary received notice of a claim that it is in default under or that it is
in violation of, any indenture, loan or credit agreement or any other agreement
or instrument to which it is a party or by which it or any of its properties is
bound (whether or not such default or violation has been waived), (ii) is in
violation of any order of any court, arbitrator or governmental body, or (iii)
is or has been in violation of any statute, rule or regulation of any
governmental authority, including without limitation all foreign, federal,
state and local laws 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
result in a Material Adverse Effect.


 


(q)                                 Regulatory Permits.    The Borrower 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
result in a Material Adverse Effect (“Material Permits”), and neither the
Borrower nor any Subsidiary has received any notice of proceedings relating to
the revocation or modification of any Material Permit.


 


(r)                                    Title to Assets.    The Borrower and the Subsidiaries have
good and marketable title in fee simple to all real property owned by them that
is material to the business of the Borrower and the Subsidiaries and good and
marketable title in all personal property owned by them that is material to the
business of the Borrower and the Subsidiaries, in each case free and clear of
all Liens, except for Liens as do not materially affect the value of such
property and do not materially interfere with the use made and proposed to be
made of such property by


 


12

















 


the Borrower and the Subsidiaries. Any real property and facilities
held under lease by the Borrower and the Subsidiaries are held by them under
valid, subsisting and enforceable leases of which the Borrower and the
Subsidiaries are in compliance.


 


(s)                                  Patents and
Trademarks.    The Borrower 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 have a Material Adverse Effect
(collectively, the “Intellectual Property
Rights”). Neither the Borrower nor any Subsidiary has received a
written notice that the Intellectual Property Rights used by the Borrower or
any Subsidiary violates or infringes upon the rights of any Person. To the
knowledge of the Borrower, all such Intellectual Property Rights are
enforceable and there is no existing infringement by another Person of any of
the Intellectual Property Rights.


 


(t)                                    Insurance.    The Borrower 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 Borrower and the Subsidiaries are engaged. Neither the Borrower nor
any Subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business without a significant increase in cost.


 


(u)                                 Transactions With
Affiliates and Employees.    Except
as set forth in SEC Reports filed at least ten days prior to the date hereof or
as described in the Transaction Documents, neither the Borrower nor any
Subsidiary was or anticipates being party to any transaction that would be
required to be reported and described in accordance with Item 404 of Regulation
S-K, which for purposes of this representation and warranty extends to
transactions: (i) of which the Borrower has knowledge with employees of the
Borrower or a Subsidiary and (ii) with direct and indirect Affiliates of 5%
security holders of the Borrower.  The
Letter Agreement describes all agreements and understandings creating any
obligation related to indebtedness with beneficial owners of 5% or more of the
Common Stock and any direct and indirect Affiliates of such Persons.


 


(v)                                 Internal Accounting
Controls.    The Borrower and the
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management’s general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management’s general or specific authorization, and (iv) the recorded accountability
for assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.


 


(w)                               Solvency.    Based on the financial condition of the
Borrower as of the Closing Date, (i) the Borrower’s fair saleable value of its
assets exceeds the amount that will be required to be paid on or in respect of
the Borrower’s existing debts and other liabilities (including known contingent
liabilities) as they mature; and (ii) the current cash flow of the


 


13

















 


Borrower, together with the proceeds the Borrower 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 Borrower does not
intend to incur debts beyond its ability to pay such debts as they mature
(taking into account the timing and amounts of cash to be payable on or in
respect of its debt).


 


(x)                                   Acknowledgment
Regarding Loan and Lenders’ Purchase of Securities. The Borrower
acknowledges and agrees that each of the Lenders is acting solely in the
capacity of an arm’s length lender with respect to this Agreement, the purchase
of Securities hereunder, and the transactions contemplated hereby.  The Borrower further acknowledges that no
Lender is acting as a financial advisor or fiduciary of the Borrower (or in any
similar capacity) with respect to this Agreement and the transactions contemplated
hereby and any advice given by any Lender or any of their respective
representatives or agents in connection with this Agreement and the
transactions contemplated hereby is merely incidental to the Lenders’ purchase
of the Securities. The Borrower further represents to each Lender that the
Borrower’s decision to enter into this Agreement has been based solely on the
independent evaluation of the Borrower and its representatives.


 


(y)                                 Investment Borrower.    The Borrower is not, and is not an Affiliate
of, an “investment company” within the meaning of the Investment Borrower Act
of 1940, as amended.


 


(z)                                   Application of
Takeover Protections.    The
Borrower and its Board of Directors have taken all necessary action, if any, in
order to render inapplicable any control share acquisition, business
combination, poison pill (including any distribution under a rights agreement)
or other similar anti-takeover provision under the Borrower’s Certificate of
Incorporation (or similar charter documents) or the laws of its state of
incorporation that is or could become applicable to the Lenders as a result of
the Lenders and the Borrower fulfilling their obligations or exercising their
rights under the Transaction Documents, including without limitation the Borrower’s
issuance of the Securities and the Lenders’ ownership of the Securities.


 


(aa)                            Seniority.    As of the date of this Agreement, no
indebtedness of the Borrower or any Subsidiary is senior to the Debentures in
right of payment, whether with respect to interest or upon liquidation or
dissolution, or otherwise.


 


(bb)                          EKI License Agreement.  In case of a default by the Borrower under
that certain Amended and Restated License Agreement between the Borrower and E.
Khashoggi Industries LLC dated as of February 25, 1995 (as amended, the “EKI License Agreement”), the Borrower shall
be entitled to continued receipt of royalty payments pursuant to the EKI
License Agreement.  Except as set forth
in Schedule 3.1(bb), the EKI License Agreement is in full force and
effect and the Borrower has not given nor received any notice of a material
breach or intention to terminate or repudiate the EKI License Agreement other
than as specified in the SEC Reports.


 


(cc)                            BioTec License Agreement.  In case of a default by the Borrower under
that certain License and Information Transfer Agreement dated July 29, 2002,
between the Borrower and BioTec (the “BioTec
License Agreement” and together with the EKI License Agreement, the
“License Agreements”), the
Borrower shall be entitled to continued receipt of


 


14

















 


royalty payments pursuant to the BioTec License Agreement.  Except as set forth in Schedule 3.1(cc),
the BioTec License Agreement is in full force and effect and the Borrower has
not given nor received any notice of a material breach or intention to
terminate or repudiate the BioTec License Agreement other than as specified in
the SEC Reports.


 


3.2.                              Representations and
Warranties of the Lenders.    Each
Lender hereby for itself and for no other Lender, represents, warrants and
covenants to the Borrower that each such Borrower is an entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation. Such Lender has full right, power, authority and capacity to
enter into this Agreement and to consummate the transactions contemplated
hereby and has taken all necessary action to authorize the execution, delivery
and performance of this Agreement. Upon the execution and delivery of this Agreement
and assuming the valid execution hereof by the Borrower, this Agreement shall
constitute the valid and binding obligation of such Lender enforceable in
accordance with its terms.


 


The Borrower acknowledges and agrees that no
Lender makes or has made any representations or warranties with respect to the
transactions contemplated hereby other than those specifically set forth in
this Section 3.


 


ARTICLE IV.


 


OTHER AGREEMENTS OF THE PARTIES


 


4.1.                              Acknowledgment of
Dilution.    The Borrower
acknowledges that the issuance of the Securities (including the Underlying
Shares) will result in dilution of the outstanding shares of Common Stock,
which dilution may be substantial under certain market conditions. The Borrower
further acknowledges that its obligations under the Transaction Documents,
including without limitation its obligation to issue the Securities (including
the Underlying Shares) pursuant to the Transaction Documents, are unconditional
and absolute and not subject to any right of set off, counterclaim, delay or
reduction, regardless of the effect of any such dilution or any claim that the
Borrower may have against any Lender.


 


4.2.                              Furnishing of
Information.    As long as any
Lender owns the Securities issued or issuable to it, the Borrower 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 Borrower after
the date hereof pursuant to the Exchange Act. Upon the request of any such
Person, the Borrower shall deliver to such Person a written certification of a
duly authorized officer as to whether it has complied with the preceding
sentence.


 


4.3.                              Reservation and
Listing of Securities.


 


(a)                                  The Borrower shall
maintain a reserve from its duly authorized shares of Common Stock to comply
with its conversion and exercise obligations under the Debentures pursuant to
the Transaction Documents.  In
connection with the Borrower’s next annual meeting of stockholders, the Board of
Directors of the Borrower shall prepare and mail to the stockholders of the
Borrower proxy materials requesting authorization to amend the Borrower’s
certificate of incorporation to increase the number of shares of Common Stock
which the


 


15

















 


Borrower is authorized to issue so as to provide enough shares to
reserve for issuance all of the Underlying Shares issuable upon conversion of
the Debentures at an assumed conversion price equal to 50% of the then
effective Conversion Price (as defined in the Debentures) and assuming all
interest is accreted to principal.  In
addition, if on any other date the Borrower would be, if notice of exercise or
conversion were to be delivered on such date, precluded from issuing the number
of Underlying Shares, as the case may be, issuable upon conversion in full of
the Debentures due to the unavailability of a sufficient number of authorized
but unissued or reserved shares of Common Stock, then the Board of Directors of
the Borrower shall promptly prepare and mail to the stockholders of the
Borrower proxy materials requesting authorization to amend the Borrower’s
certificate of incorporation to increase the number of shares of Common Stock
which the Borrower is authorized to issue so as to provide enough shares for issuance
of the Underlying Shares.  In connection
with either such stockholder vote, the Board of Directors shall: (a) adopt
proper resolutions authorizing such increase, (b) recommend to and otherwise
use its best efforts to promptly and duly obtain stockholder approval to carry
out such resolutions (and hold a special meeting of the stockholders as soon as
practicable, but in any event not later than the 60th day after
delivery of the proxy materials relating to such meeting) and (c) within five
business days of obtaining such stockholder authorization, file an appropriate
amendment to the Borrower’s certificate of incorporation to evidence such
increase.


 


(b)                                 The Borrower shall:
(i) in the time and manner required by the Nasdaq, prepare and file with Nasdaq
an additional shares listing application covering the Initial Shares, the SF
Shares and the Underlying Shares, (ii) take all steps necessary to cause such
shares to be approved for listing on the Nasdaq as soon as possible thereafter,
(iii) provide to the Lenders evidence of such listing, and (iv) maintain the
listing of such shares on an Eligible Market.


 


4.4.                              Conversion and
Exercise Procedures.    The form of
Holder Conversion Notice included in the Debentures set forth the totality of
the procedures required by the Lenders in order to convert the Debentures. No
additional legal opinion or other information or instructions shall be
necessary to enable the Lenders to convert their Debentures. The Borrower shall
honor conversions of the Debentures and shall deliver Underlying Shares in
accordance with the terms, conditions and time periods set forth in the
Transaction Documents.


 


4.5.                              Subsequent Placements.


 


(a)                                  So long as any
Debentures are outstanding, the Borrower will not, directly or indirectly,
effect any, offer, sell, grant any option to purchase, or otherwise dispose of
(or announce any offer, sale, grant or any option to purchase or other
disposition of) any of its or the Subsidiaries’ equity or equity equivalent
securities, including, without limitation, any debt, preferred stock or other
instrument or security that is, at any time during its life and under any
circumstances, convertible into or exchangeable for Common Stock (any such
offer, sale, grant, disposition or announcement being referred to as a “Subsequent Placement”) unless the Borrower
shall have first complied with this Section 4.5(a).


 


(i)                                     The
Borrower shall not conduct any Subsequent Placement until six months shall have
elapsed from the Closing Date.


 


16

















 


(ii)                                  The
Borrower shall deliver to each Lender which at the time of the proposed
Subsequent Placement holds a Debenture or Debentures (a “Qualified Lender”) a written notice (the “Offer”) of any proposed or intended
issuance or sale or exchange of the securities being offered (the “Offered Securities”) in a Subsequent
Placement, which Offer shall (w) identify and describe the Offered Securities,
(x) describe the price and other terms upon which they are to be issued, sold
or exchanged, and the number or amount of the Offered Securities to be issued,
sold or exchanged, (y) identify the Persons to which or with which the Offered
Securities are to be offered, issued, sold or exchanged and (z) offer to issue
and sell to or exchange with each Qualified Lender (A) a pro rata portion of
the Offered Securities, based on such Qualified Lender’s pro rata portion of
the aggregate purchase price paid by any other Qualified Lenders for all of the
Securities purchased hereunder (it being understood that if there shall be only
one Qualified Lender, then such Qualified Lender’s pro-rata portion of the
Offered Securities shall equal 100%) (the “Basic
Amount”), and (B) with respect to each Qualified Lender that elects
to purchase its Basic Amount, any additional portion of the Offered Securities
attributable to the Basic Amounts of any other Qualified Lenders as such
Qualified Lender shall indicate it will purchase or acquire should any other
Qualified Lenders subscribe for less than their Basic Amounts (the “Undersubscription Amount”).   Notwithstanding anything to the contrary
set forth in any Transaction Document, in the event that any Offer pertaining
to a Subsequent Placement is provided prior to the one year anniversary of the
Closing Date, then the price at which a Qualified Lender may participate in
such Subsequent Placement shall be the lesser of (a) the price and terms
described in the Offer and (b) the Conversion Price then in effect under the
Debentures.  In furtherance of the
immediately prior sentence, if the Offer is for Common Stock, then the price
per share at which a Qualified Lender may acquire such stock shall equal the
Conversion Price then in effect, and if for Common Stock Equivalents, then the
price at which a Qualified Lender may acquire such Common Stock Equivalents (or
the Common Stock issuable in respect thereof) shall be determined by reference
to the Conversion Price then in effect.


 


(iii)                               To
accept an Offer, in whole or in part, a Qualified Lender must deliver a written
notice to the Borrower prior to 5:00 p.m., New York time, on the fifth Trading
Day after the Offer, setting forth the portion of the Qualified Lender’s Basic
Amount that such Qualified Lender elects to purchase and, if such Qualified
Lender shall elect to purchase all of its Basic Amount, the Undersubscription
Amount, if any, that such Qualified Lender elects to purchase (in either case,
the “Notice of Acceptance”). If
the Basic Amounts subscribed for by all Qualified Lenders in the aggregate are
less than the total of all of the Basic Amounts, then each Qualified Lender who
has set forth an Undersubscription Amount in its Notice of Acceptance shall be
entitled to purchase, in addition to the Basic Amounts subscribed for, the
Undersubscription Amount it has subscribed for; provided, however, that if the
Undersubscription Amounts subscribed for exceed the difference between the
total of all the Basic Amounts and the Basic Amounts subscribed for (the “Available Undersubscription Amount”), each
Qualified Lender who has subscribed for any Undersubscription Amount shall be
entitled to purchase that portion of the Available Undersubscription Amount as
the Basic Amount of such Qualified Lender bears to the total Basic Amounts of
all Qualified Lenders that have


 


17

















 


subscribed for
Undersubscription Amounts, subject to rounding by the Board of Directors to the
extent its deems reasonably necessary.


 


(iv)                              The
Borrower shall have five (5) Trading Days from the expiration of the period set
forth in Section 4.5(a)(ii) above to issue, sell or exchange all or any part of
such Offered Securities as to which a Notice of Acceptance has not been given
by the Qualified Lenders (the “Refused
Securities”), but only to the offerees described in the Offer (if so
described therein) and only upon terms and conditions (including, without
limitation, unit prices and interest rates) that are not more favorable to the
acquiring person or persons or less favorable to the Borrower than those set
forth in the Offer.


 


(v)                                 In
the event the Borrower shall propose to sell less than all the Refused
Securities (any such sale to be in the manner and on the terms specified in
Section 4.5(a)(iii) above), then each Qualified Lender may, at its sole option
and in its sole discretion, reduce the number or amount of the Offered
Securities specified in its Notice of Acceptance to an amount that shall be not
less than the number or amount of the Offered Securities that the Qualified
Lender elected to purchase pursuant to Section 4.5(a)(ii) above multiplied by a
fraction, (i) the numerator of which shall be the number or amount of Offered
Securities the Borrower actually proposes to issue, sell or exchange (including
Offered Securities to be issued or sold to Qualified Lenders pursuant to
Section 4.5 (a)(ii) above prior to such reduction) and (ii) the denominator of
which shall be the original amount of the Offered Securities. In the event that
any Qualified Lender so elects to reduce the number or amount of Offered
Securities specified in its Notice of Acceptance, the Borrower may not issue,
sell or exchange more than the reduced number or amount of the Offered
Securities unless and until such securities have again been offered to the
Qualified Lenders in accordance with Section 4.5(a)(i) above.


 


(vi)                              Upon
the closing of the issuance, sale or exchange of all or less than all of the
Refused Securities, the Qualified Lenders shall acquire from the Borrower, and
the Borrower shall issue to the Qualified Lenders, the number or amount of
Offered Securities specified in the Notices of Acceptance, as reduced pursuant
to Section 4.5(a)(iv) above if the Qualified Lenders have so elected, upon the
terms and conditions specified in the Offer. The purchase by the Qualified
Lenders of any Offered Securities is subject in all cases to the preparation,
execution and delivery by the Borrower and the Qualified Lenders of a purchase
agreement relating to such Offered Securities reasonably satisfactory in form
and substance to the Qualified Lenders, the Borrower and their respective
counsel.


 


(vii)                           Any
Offered Securities not acquired by the Qualified Lenders or other persons in
accordance with Section 4.5(a)(iii) above may not be issued, sold or exchanged
until they are again offered to the Qualified Lenders under the procedures
specified in this Agreement.


 


(b)                                 The restrictions
contained in paragraph (a) of this Section shall not apply to: (i) the granting
of options to employees, officers and directors of the Borrower pursuant to any
stock option plan duly adopted by the Borrower or to the issuance of Common
Stock upon exercise of such options (except to the extent that any such
securities are issued to Essam


 


18

















 


Khashoggi), (ii) issuances of Common Stock pursuant to the conversion
or exercise (as applicable) of Previous Debentures (pursuant to a request by
the holder thereof), options or warrants which are outstanding on the date
hereof, as set forth in Schedule 3.1(m) (except to the extent that the
resale of such securities would be restricted under the Letter Agreement),
(iii) any underwritten public offering of the Common Stock for an aggregate
price in excess of $10,000,000 (which shall not include equity lines of credit
or similar transactions), (iv) any issuance of shares of Common Stock in
satisfaction in full of all accounts payable of the Borrower to a particular
vendor incurred in the ordinary course, provided, that that effective
per share price utilized in any such issuance shall be greater than the greater
of (x) 90% of the then applicable Closing Price and (y) the then effective
Conversion Price of the Debenture, and that the Borrower shall not issue shares
with an aggregate effective per share price in excess of $3,000,000 under any
one or more such issuances or (v) any Subsequent Placement offered at a time
when less than $3,000,000 aggregate principal amount of Debentures is
outstanding.


 


4.6.                              Registration
Statements.  Except with respect to
a registration statement on Form S-3 with respect to the resale of shares of
Common Stock privately placed to vendors as contemplated by Section 4.5(b)(iv),
until 181 days following the Closing Date, the Borrower will not file any
registration statement (other than on a Form S-8).


 


4.7.                              Securities Laws Disclosure;
Publicity.  The Borrower shall: (i)
on the Closing Date: (x) issue a press release acceptable to the Lenders which
includes a description of any and all material and information delivered to the
Lenders (or to any agent thereof) which the Borrower believes might constitute
material non-public information, and (y) file a Current Report on Form 8-K
disclosing the transactions contemplated hereby and (ii) make such other
filings and notices in the manner and time required by the Commission.  Except as set forth above, the Borrower
shall not publicly disclose the name of any Lender, or include the name of any
Lender in any filing with the Commission or any regulatory agency or the Nasdaq
(other than the filing of the Transaction Documents with the Commission
pursuant to the Exchange Act), without the prior written consent of such
Lender, except to the extent such disclosure is required by law or Nasdaq
regulations, in which case the Borrower shall provide the Lenders with prior
notice of such disclosure.


 


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


 


4.9.                              Use of Proceeds.    The Borrower shall use the net proceeds
from the sale of the Securities hereunder for working capital purposes and not
for the satisfaction of any portion of the Borrower’s debt (other than payment
of trade payables and accrued expenses in the ordinary course of the Borrower’s
business and prior practices), to redeem any Borrower equity or
equity-equivalent securities or to settle any outstanding litigation, provided,
that: (A) the Borrower shall be entitled to use the proceeds from the sale of
Securities to settle outstanding litigation (other than with direct or indirect
Affiliates or related parties) in an aggregate amount not to exceed $150,000
per calendar year, (B) the Borrower shall use $208,000 of the net proceeds from
the


 


19

















 


sale of the Debentures hereunder for prepaying the 4% premium for
prepayment of $5,200,000 of the outstanding principal amount of the secured
convertible debentures, in the original principal amount of $10,000,000 (the “August Debentures”), issued and sold to
certain holders pursuant to that certain Securities Purchase Agreement dated as
of August 12, 2002, among the Borrower and the purchasers signatory thereto
(the “August Agreement”), (C) the
Borrower shall be entitled to use up to $300,000 from the proceeds from the
sale of Securities to pay BioTec in respect of materials and services delivered
to the Borrower pursuant to the BioTec License Agreement and (D) to pay up to $4,000,000
of its payables, as set forth in Schedule 4.9 hereof.  The use of proceeds from this financing
shall also be governed by the terms of the Letter Agreement and the
Subordination Agreements, each of which specifically prohibit certain payments
by the Borrower.


 


4.10.                        Indemnification.


 


(a)                                  The Borrower will
indemnify and hold harmless each Lender and any of their respective Affiliates
or any officer, director, partner, controlling person, employee or agent of a
Lender or any of their respective Affiliates (for purposes of this Section,
each Lender and such other Persons are referred to as the “Lender Indemnified Parties”) for its
respective reasonable legal and other expenses (including the costs of any
investigation, preparation and travel) and for any Losses incurred in
connection with any Proceeding, insofar as such Losses arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement or the Supplement, or any
amendment or supplement thereto, and all other documents filed as a part
thereof, as amended at the time of effectiveness of the Registration Statement,
including any information deemed to be a part thereof as of the time of
effectiveness pursuant to paragraph (b) of Rule 430A, or pursuant to Rule 434,
under the Securities Act, or arise out of or are based upon the omission or
alleged omission to state in any of them a material fact required to be stated
therein or necessary to make the statements in any of them, in light of the
circumstances under which they were made, not misleading, as such expenses or
Losses are incurred. In addition, the Borrower shall indemnify and hold
harmless each Lender Indemnified Party from and against any and all Losses, as
incurred, arising out of or relating to any breach by the Borrower of any of
the representations, warranties or covenants made by the Borrower in this
Agreement or any other Transaction Document, or any allegation by a third party
that, if true, would constitute such a breach. The conduct of any Proceeding
for which indemnification is available under this paragraph shall be governed
by Section 4.8(b). The indemnification obligations of the Borrower under this
paragraph shall be in addition to any liability that the Borrower may otherwise
have and shall be binding upon and inure to the benefit of any successors,
assigns, heirs and personal representatives of each Purchase Indemnified Party.
The Borrower also agrees that no Lender Indemnified Party shall have any
liability to the Borrower or any Person asserting claims on behalf of or in
right of the Borrower in connection with or as a result of the transactions
contemplated by the Transaction Documents, except to the extent that any
losses, claims, damages, liabilities or expenses incurred by the Borrower
result from the gross negligence or willful misconduct of the applicable Lender
Indemnified Party in connection with such transactions. If the Borrower
breaches its obligations under any Transaction Document, then, in addition to
any other liabilities the Borrower may have under any Transaction Document or
applicable law, the Borrower shall pay or reimburse each Lender Indemnified
Party on demand for all costs of collection and enforcement (including
reasonable attorneys fees and expenses). Without limiting the generality of the
foregoing, the Borrower


 


20

















 


specifically agrees to reimburse each Lender Indemnified Party on
demand for all costs of enforcing the indemnification obligations in this
Agreement.


 


(b)                                 If any Proceeding
shall be brought or asserted against any Person entitled to indemnity hereunder
(an “Indemnified Party”), such
Indemnified Party shall promptly notify the Person from whom indemnity is
sought (the “Indemnifying Party”)
in writing, and the Indemnifying Party shall have the right to assume the
defense thereof, including the employment of counsel reasonably satisfactory to
the Indemnified Party and the payment of all fees and expenses incurred in
connection with defense thereof; provided, that the failure of any Indemnified
Party to give such notice shall not relieve the Indemnifying Party of its
obligations or liabilities pursuant to this Agreement, except  (and only) to the extent that it shall be
finally determined by a court of competent jurisdiction (which determination is
not subject to appeal or further review) that such failure shall have
proximately and materially adversely prejudiced the Indemnifying Party.


 


(c)                                  An Indemnified Party
shall have the right to employ separate counsel in any such Proceeding and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Indemnified Party or Parties unless: (i) the
Indemnifying Party has agreed in writing to pay such fees and expenses; or (ii)
the Indemnifying Party shall have failed promptly to assume the defense of such
Proceeding and to employ counsel reasonably satisfactory to such Indemnified
Party in any such Proceeding; or (iii) the named parties to any such Proceeding
(including any impleaded parties) include both such Indemnified Party and the
Indemnifying Party, and such Indemnified Party shall have been advised by
counsel that a conflict of interest is likely to exist if the same counsel were
to represent such Indemnified Party and the Indemnifying Party (in which case,
if such Indemnified Party notifies the Indemnifying Party in writing that it
elects to employ separate counsel at the expense of the Indemnifying Party, the
Indemnifying Party shall not have the right to assume the defense thereof and
such counsel shall be at the expense of the Indemnifying Party). The
Indemnifying Party shall not be liable for any settlement of any such
Proceeding effected without its written consent, which consent shall not be
unreasonably withheld. No Indemnifying Party shall, without the prior written
consent of the Indemnified Party, effect any settlement of any pending
Proceeding in respect of which any Indemnified Party is a party, unless such
settlement includes an unconditional release of such Indemnified Party from all
liability on claims that are the subject matter of such Proceeding.


 


(d)                                 All fees and expenses
of the Indemnified Party (including reasonable fees and expenses to the extent
incurred in connection with investigating or preparing to defend such
Proceeding in a manner not inconsistent with this Section) shall be paid to the
Indemnified Party, as incurred, within ten Trading Days of written notice
thereof to the Indemnifying Party (regardless of whether it is ultimately
determined that an Indemnified Party is not entitled to indemnification
hereunder; provided, that the Indemnifying Party may require such Indemnified
Party to undertake to reimburse all such fees and expenses to the extent it is
finally judicially determined that such Indemnified Party is not entitled to
indemnification hereunder).


 


4.11.                        Shareholders Rights Plan.    No claim will be made or enforced by the
Borrower or any other Person that any Lender is an “Acquiring Person” under any
shareholders rights plan or similar plan or arrangement in effect or hereafter
adopted by the Borrower, or that any Lender


 


21

















 


could be deemed to trigger the provisions of any such plan or
arrangement, by virtue of receiving Underlying Shares under the Transaction
Documents or under any other agreement between the Borrower and the Lenders.


 


4.12.                        Post-closing Borrower
Revenues.  The Borrower shall have
the option to distribute all gross proceeds and revenues it receives from time
to time following the Closing Date in excess of an aggregate of $2,650,000 (the
“Excess Amount”) in accordance
with Section 4.12(a), (b) and (c).  The
proceeds and revenues from the following sources shall be subject to this
requirement: (i) sale of securities, (ii) post-Closing equipment sales to
unrelated third parties, (iii) operating revenues, (iv) any cash which becomes
available for use by the Borrower due to a reduction in that certain letter of
credit in favor of Haas Waffel Machinen in the original principal amount of
$3,500,000, provided, that the Borrower’s election to distribute any
Excess Amount must be made within 45 days of the close of the applicable
calendar quarter with respect to revenues or proceeds received or earned from
such quarter pursuant to clauses (i)-(iv) hereof.  Promptly following its receipt of any such revenues, the Borrower
will promptly: (x) file a Current Report on Form 8-K with the Commission
disclosing such revenues and (y) provide a written notice the Lenders (a “Proceeds Notice”).  Any Excess Amount shall be distributable by
the Borrower in the following manner:


 


(a)                                  1/3 of an Excess
Amount may be used for Borrower working capital purposes.


 


(b)                                 at the election of
each Lender, 1/3 of an Excess Amount multiplied by such Lender’s Purchase
Percentage shall be allocated for a prepayment of principal and interest of the
Debentures held by such Lender, pursuant to Section 8 of the Debentures.


 


(c)                                  1/3 of an Excess
Amount shall be allocated either for the repayment of Related Party Loans (as
defined under the Letter Agreement) or for the payment to BioTec of amounts due
under the BioTec License Agreement, provided, that if a Lender shall not
notify the Borrower that it does not desire to have prepaid a portion of its
Debentures in accordance with 4.12(b), then 1⁄2 of the Excess Amount to which
such Lender was entitled under Section 4.12(b) on account of the Proceeds
Notice at issue may be used by the Borrower either to repay Related Party Loans
or for the payment to BioTec of amounts due under the BioTec License Agreement
and 1⁄2 of the Excess Amount to which such Lender was entitled under Section
4.12(b) on account of the Proceeds Notice at issue may be used by the Borrower
for working capital purposes.


 


The Borrower shall provide the Lenders with quarterly updates not prior
to release of its quarterly reports under Form 10-Q pursuant to the Exchange
Act regarding its activities which relate to the receipt of proceeds in
connection with the provisions of this Section 4.12.


 


4.13.                        August Agreement.  Subsequent to its prepayment obligations
pursuant to Section 4.9(B) hereof, the Borrower shall use its best efforts to
keep in full force and effect the August Agreement and the transactions
contemplated thereby and to maintain the Borrower’s ability to require
redemptions and conversions of the August Debentures until December 31, 2003.


 


22

















 


4.14.                        Lock-Up of Initial Shares.  Each Lender agrees that during the six
months immediately following the Closing Date, it will not be entitled to sell,
assign or transfer Initial Shares, provided, that 1/6 of the Initial
Shares issued at the Closing to such Lender shall be available for resale,
assignment or transfer by such Lender on each month anniversary (and the 30
days following such anniversary) following the Closing Date on a cumulative
basis, provided, further, that the restriction set forth in this
Section 4.14 shall not apply to the SF Shares.


 


ARTICLE V.


 


NEGATIVE COVENANTS


 


The Borrower covenants and agrees that so
long as there remains outstanding any principal amount under the Debentures,
unless the holders of at least sixty-seven percent (67%) of the then
outstanding principal amount of Debentures otherwise consent in writing, the
Borrower shall not, and shall not permit its Subsidiaries to:


 


5.1.                              Indebtedness.  Incur, create, assume, guarantee or suffer
to exist, or become or remain liable, directly or indirectly, for or on account
of any Indebtedness, except:


 


(a)                                  Indebtedness under
the Debentures;


 


(b)                                 Existing Indebtedness
as set forth in the Borrower’s periodic reports filed with the Commission
pursuant to the Exchange Act (including any extensions or renewals thereof, provided,
there is no material increase in the principal amount thereof or other
significant change in the terms thereof); and


 


(c)                                  Incursion or payment
of trade payables, licensing fees and bonds to secure work contracts, in each
case, incurred or paid in the ordinary course of business.


 


5.2.                              Liens.  Create, incur or  assume any Lien on any property or assets (including, without
limitation, stock or other securities of any Person, including any Subsidiary),
tangible or intangible, now owned or hereafter acquired, or agree or become
liable to do so,  except:


 


(a)                                  Liens for taxes not
yet due or which are being contested in good faith for which adequate reserves
have been established;


 


(b)                                 carriers’,
warehousemen’s, mechanic’s, materialmen’s, repairmen’s or other like Liens
arising in the ordinary course of business and securing obligations that are
not due and payable or which are being contested in good faith for which
adequate reserves have been established;


 


(c)                                  pledges and deposits
made in the ordinary course of business in compliance with workmen’s compensation,
unemployment insurance and other social security laws or regulations;


 


(d)                                 deposits to secure the
performance of bids, trade contracts (other than for Indebtedness), leases
(other than Capital Lease Obligations), statutory obligations, surety and


 


23

















 


appeal bonds, performance bonds and other obligations of a like nature
incurred in the ordinary course of business;


 


(e)                                  zoning restrictions,
easements, rights-of-way, restrictions on use of real property and other
similar encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount and do not materially detract from the
value of the property subject thereto or interfere with the ordinary conduct of
the business of the Borrower or any of its Subsidiaries; and


 


(f)                                    Liens which, in the
aggregate, do not, at any time, secure assets valued in excess of $50,000 in
the aggregate.


 


5.3.                              Guaranties.  Directly or indirectly, become or be liable
in respect of any Guarantee, or assume, guarantee, become surety for, endorse
or otherwise agree, become or remain directly or contingently liable upon or
with respect to any obligation or liability of any other Person, except for
Guarantees of indebtedness of the Borrower permitted hereunder.


 


5.4.                              Dispositions of Assets
or Subsidiaries.  Sell, convey,
assign, lease, abandon or otherwise transfer or dispose of, voluntarily or
involuntarily (or enter into an agreement for any of the foregoing), any
material portion of its properties or assets, tangible or intangible (including
sale, assignment, discount or other disposition of accounts, contract rights,
chattel paper, equipment or general intangibles with or without recourse or of
capital stock, shares of beneficial interest, partnership interests or limited
liability company interests of a Subsidiary of the Borrower), except:


 


(a)                                  transactions
involving the sale of inventory or upgrade or exchange of machinery, in either
case, in the ordinary course of business and for usual and ordinary prices;


 


(b)                                 any sale, transfer or
lease of assets by any wholly owned Subsidiary to the Borrower or another
Subsidiary;


 


(c)                                  any sale, transfer or
lease of assets in the ordinary course of business which are replaced by
substitute assets acquired or leased;


 


(d)                                 any bona fide sale,
transfer or lease of assets, other than those specifically excepted pursuant to
clauses (i) through (iii) above, the aggregate fair market value of which does
not exceed $250,000 in the aggregate during the term of this Agreement; or


 


e)                                      any bona fide
sale, transfer or lease of assets constituting manufacturing equipment of the
Borrower offered for sale to Detroit Tool, Sweetheart Cup Borrower, Huhtamaki
Oyj, Green Earth Packaging, Green Packaging or any other licensee which is not
an Affiliate of the Borrower.


 


5.5.                              EKI License Agreement.  Amend, assign, terminate or modify the EKI
License Agreement in any material respect other than as permitted pursuant to
the Letter Agreement.


 


24

















 


5.6.                              BioTec License
Agreement.  Except pursuant to
Sections 4.9 and 4.12(c) of the Purchase Agreement and as permitted pursuant to
the BioTec Subordination Agreement, make any payment (whether royalty or
otherwise) on account of the BioTec License Agreement.


 


5.7.                              Related Party Loans.  Except pursuant to Section 4.12(c) of the
Purchase Agreement and as permitted by the Letter Agreement, the Borrower will
not repay to EKI any portion (whether principal, interest or otherwise) of the
Related Party Loans (as defined in the Letter Agreement).


 


5.8.                              Agreements with
Related Parties.  Enter into any
agreement with any Affiliate of the Borrower which require the Borrower to
either: (i) extend any form of payment or (ii) provide any form of security, unless
the applicable such Affiliate of the Borrower agrees to enter into a
subordination agreement with the Lenders, in form and substance acceptable to
the Lenders in their sole discretion.


 


ARTICLE VI.


 


MISCELLANEOUS


 


6.1.                              Termination.    This Agreement may be terminated prior to
the Closing by the Borrower or any Lender, by written notice to the other, if
the Closing has not been consummated by the third Trading Day following the
date of this Agreement; provided that no such termination will affect the right
of any party to sue for any breach by the other party (or parties).


 


6.2.                              Fees and Expenses.    In addition to the $30,000 previously
delivered by the Borrower to SF Capital, at the Closing the Borrower shall pay
to SF Capital $30,000 for reimbursement of its expenses incurred in connection
with this transaction prior to Closing. In lieu of the foregoing payment, SF
Capital may retain the applicable amount at the Closing.  Except as expressly set forth in the Transaction
Documents to the contrary, each party shall pay the fees and expenses of its
advisers, counsel, accountants and other experts, if any, and all other
expenses incurred by such party incident to the negotiation, preparation,
execution, delivery and performance of this Agreement. The Borrower shall pay
all transfer agent fees, stamp taxes and other taxes and duties levied in
connection with the issuance of any Securities.


 


6.3.                              Entire Agreement.    The Transaction Documents, together with
the Exhibits and Schedules thereto, contain the entire understanding of the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, oral or written, with respect to such matters,
which the parties acknowledge have been merged into such documents, exhibits and
schedules. At or after the Closing, and without further consideration, the
Borrower will execute and deliver to the Lenders such further documents as may
be reasonably requested in order to give practical effect to the intention of
the parties under the Transaction Documents.


 


6.4.                              Notices.    Any and all notices or other
communications or deliveries required or permitted to be provided hereunder
shall be in writing and shall be deemed given and effective on the earliest of
(i) the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile number specified in this Section prior to 6:30 p.m.
(New York City time) on a Trading Day, (ii) the Trading Day after the date of
transmission, if such notice or


 


25

















 


communication is delivered via facsimile at the facsimile number
specified in this Agreement later than 6:30 p.m. (New York City time) on any
date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the Trading
Day following the date of mailing, if sent by nationally recognized overnight
courier service, or (iv) upon actual receipt by the party to whom such notice
is required to be given. The address for such notices and communications shall
be as follows:


 


	
  If to the Borrower:

  	
   

  	
  EarthShell Corporation

  
	
   

  	
   

  	
  800 Miramonte Drive

  
	
   

  	
   

  	
  Santa Barbara, California 93109

  
	
   

  	
   

  	
  Facsimile No.: (805) 899-3517

  
	
   

  	
   

  	
  Attn: Chief Financial Officer

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  Gibson, Dunn & Crutcher LLP.

  
	
   

  	
   

  	
  2029 Century Park East

  
	
   

  	
   

  	
  Los Angeles, California 90067

  
	
   

  	
   

  	
  Facsimile No.: (310) 551-8741

  
	
   

  	
   

  	
  Attn: Robert K. Montgomery, Esq.

  
	
   

  	
   

  	
   

  
	
  If to the Lenders:

  	
   

  	
  To the address set forth under each
  Lender’s name on the

  
	
   

  	
   

  	
  signature pages attached hereto.

  



 


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


 


6.5.                              Amendments; Waivers.    No provision of this Agreement may be
waived or amended except in a written instrument signed, in the case of an
amendment, by the Borrower and each of the Lenders or, in the case of a waiver,
by the party against whom enforcement of any such waiver is sought. No waiver
of any default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver
of any subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right.


 


6.6.                              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.


 


6.7.                              Successors and Assigns.    This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
The Borrower may not assign this Agreement or any rights or obligations
hereunder without the prior written consent of the Lenders. Any Lender may
assign its rights under this Agreement to any Person to whom such Lender
assigns or transfers any Securities.


 


6.8.                              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 that each Related Person


 


26

















 


is an intended third party beneficiary of Section 4.8 and may enforce
the provisions of such Section directly against the Borrower.


 


6.9.                              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 legal proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by any of the
Transaction Documents (whether brought against a party hereto or its respective
Affiliates, directors, officers, shareholders, employees or agents) shall be
commenced exclusively in the state and federal courts sitting in the City of
New York, Borough of Manhattan. Each party hereto hereby irrevocably submits to
the exclusive jurisdiction of the state and federal courts sitting in the City
of New York, Borough of Manhattan for the adjudication of any dispute hereunder
or in connection herewith or with any transaction contemplated hereby or
discussed herein (including with respect to the enforcement of any of this
Agreement), and hereby irrevocably waives, and agrees not to assert in any
suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is
improper. Each party hereto hereby irrevocably waives personal service of
process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address in
effect for notices to it under this Agreement and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any 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 any of the Transaction Documents or the transactions contemplated
hereby or thereby. If either party shall commence an action or proceeding to
enforce any provisions of this Agreement or any Transaction Document, then the
prevailing party in such action or proceeding shall be reimbursed by the other
party for its reasonable attorneys fees and other reasonable costs and expenses
incurred with the investigation, preparation and prosecution of such action or
proceeding.


 


6.10.                        Survival.    The representations, warranties,
agreements and covenants contained herein shall survive the Closing and the
delivery, exercise and/or conversion of the Securities, as applicable.


 


6.11.                        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) the same with the same force and effect as if such facsimile
signature page were an original thereof.


 


6.12.                        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


 


27

















 


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.


 


6.13.                        Rescission and Withdrawal
Right.    Notwithstanding anything
to the contrary contained in (and without limiting any similar provisions of)
the Transaction Documents, whenever any Lender exercises a right, election,
demand or option under a Transaction Document and the Borrower does not timely
perform its related obligations within the periods therein provided, then such
Lender may rescind or withdraw, in its sole discretion from time to time upon
written notice to the Borrower, any relevant notice, demand or election in
whole or in part without prejudice to its future actions and rights.


 


6.14.                        Replacement of Securities.    If any certificate or instrument
evidencing any Securities is mutilated, lost, stolen or destroyed, the Borrower
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 Borrower 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.


 


6.15.                        Remedies.    In addition to being entitled to exercise
all rights provided herein or granted by law, including recovery of damages,
each of the Lenders and the Borrower 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.


 


6.16.                        Payment Set Aside.    To the extent that the Borrower makes a
payment or payments to any Lender pursuant to any Transaction Document or a
Lender 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 Borrower, 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.


 


6.17.                        Independent Nature of
Lenders.   The obligations of each
Lender under any Transaction Document are several and not joint with the
obligations of any other Lender, and no Lender shall be responsible in any way
for the performance of the obligations of any other Lender under any
Transaction Document. The decision of each Lender to purchase Securities
pursuant to this Agreement has been made by such Lender independently of any
other Lender and independently of any information, materials, statements or
opinions as to the business, affairs, operations, assets, properties,
liabilities, results of operations, condition (financial or otherwise) or
prospects of the Borrower or of the Subsidiary which may have been made or


 


28

















 


given by any other Lender or by any agent or employee of any other
Lender, and no Lender or any of its agents or employees shall have any
liability to any other Lender (or any other person) relating to or arising from
any such information, materials, statements or opinions. Nothing contained herein,
or in any Transaction Document, and no action taken by any Lender pursuant
hereto or thereto, shall be deemed to constitute the Lenders as a partnership,
an association, a joint venture or any other kind of entity, or create a
presumption that the Lenders 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 Lender 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 Lender to be joined as an additional party in any
proceeding for such purpose.


 


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SIGNATURE PAGES FOLLOW]


 


29

















 


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.


 


EARTHSHELL CORPORATION


 


 


	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  



 


[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK


SIGNATURE PAGES OF PURCHASERS FOLLOW]


 


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