Document:

exv10w2

 

Exhibit 10.2

REGISTRATION RIGHTS AGREEMENT

     Registration
Rights Agreement (the “Agreement”), dated as of September 15, 2006, by
and between Save the World Air, Inc., a corporation organized under the laws of the state of
Nevada, with its principal executive office at 5125 Lankershim Blvd., North Hollywood, CA 91601
(the “Company”), and Dutchess Private Equities Fund, L.P., a Delaware limited partnership with its
principal office at 50 Commonwealth Avenue, Suite 2, Boston, MA 02116 (the “Holder”).

     Whereas, in connection with the Investment Agreement by and between the Company and the
Investor of this date (the “Investment Agreement”), the Company has agreed to issue and
sell to the Investor an indeterminate number of shares of the Company’s Common Stock, $.001 par
value per share (the “Common Stock”), to be purchased pursuant to the terms and subject to the
conditions set forth in the Investment Agreement; and

     Whereas, to induce the Investor to execute and deliver the Investment Agreement, the Company
has agreed to provide certain registration rights under the Securities Act of 1933, as amended,
and the rules and regulations thereunder, or any similar successor statute (collectively, the
“1933 Act”), and applicable state securities laws, with respect to the shares of Common Stock
issuable pursuant to the Investment Agreement.

     Now therefore, in consideration of the foregoing promises and the mutual covenants contained
hereinafter and other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Company and the Investor hereby agree as follows:

Section 1.
DEFINITIONS.

     As used in this Agreement, the following terms shall have the following meanings:

     “Execution Date” means the date of this Agreement set forth above.

     “Investor” means Dutchess Private Equities Fund, L.P., a Delaware limited partnership.

     “Person” means a corporation, a limited liability company, an association, a partnership, an
organization, a business, an individual, a governmental or political subdivision thereof or a
governmental agency.

     “Potential Material Event” means any of the following: (i) the possession by the
Company of material information not ripe for disclosure in the Registration Statement, which shall
be evidenced by determinations in good faith by the Board of Directors of the Company that
disclosure of such information in the Registration Statement would be

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detrimental to the business and affairs of the Company, or (ii) any material engagement or activity
by the Company which would, in the good faith determination of the Board of Directors of the
Company, be adversely affected by disclosure in the Registration Statement at such time, which
determination shall be accompanied by a good faith determination by the Board of Directors of the
Company that the Registration Statement would be materially misleading absent the inclusion of such
information.

     “Principal Market” shall mean The American Stock Exchange, National Association of
Securities Dealer’s, Inc., Over-the-Counter electronic bulletin board, the Nasdaq National Market
or The Nasdaq SmallCap Market whichever is the principal market on which the Common Stock of the
Company is listed or quoted.

     “Register.” “Registered.” and “Registration” refer to the Registration effected by
preparing and filing one (1) or more Registration Statements in compliance with the 1933 Act and
pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on
a continuous basis (“Rule 415”), and the declaration or ordering of effectiveness of such
Registration Statement(s) by the United States Securities and Exchange Commission (the “SEC”).

     “Registrable Securities” means (i) the shares of Common Stock issued or issuable
pursuant to the Investment Agreement, and (ii) any shares of capital stock issued or issuable with
respect to such shares of Common Stock, if any, as a result of any stock split, stock dividend,
recapitalization, exchange or similar event or otherwise, which have not been (x) included in the
Registration Statement that has been declared effective by the SEC, or (y) sold under circumstances
meeting all of the applicable conditions of Rule 144 (or any similar provision then in force) under
the 1933 Act.

     “Registration Statement” means the registration statement of the Company filed under
the 1933 Act covering the Registrable Securities.

     All capitalized terms used in this Agreement and not otherwise defined herein shall have the
same meaning ascribed to them as in the Investment Agreement.

Section 2.
REGISTRATION.

     (a) The Company shall, within thirty (30) days of the date of this Agreement, file with the
SEC the Registration Statement or Registration Statements (as is necessary) on Form SB-2 (or, if
such form is unavailable for such a registration, on such other form as is available for such
registration), covering the resale of all of the Registrable Securities, which Registration
Statement(s) shall state that, in accordance with Rule 416 promulgated under the 1933 Act, such
Registration Statement also covers such indeterminate number of additional shares of Common Stock
as may become issuable upon stock splits, stock dividends or similar transactions. The Company
shall initially register for resale 7,000,000 shares of Common Stock which would be issuable on the
date preceding the filing of the Registration Statement based on the closing bid price of the
Company’s Common Stock on such date and the amount reasonably calculated that

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represents Common Stock issuable to other parties as set forth in the Investment Agreement except
to the extent that the SEC requires the share amount to be reduced as a condition of
effectiveness.

     (b) The Company shall use commercially reasonable efforts to have the
Registration Statement(s) declared effective by the SEC within ninety (90) calendar
days after the Execution Date.

     (c) The Company agrees not to include any other securities in the Registration
Statement covering the Registrable Securities without Investor’s prior written consent
which Investor may withhold in its sole discretion; provided, however, that Investor
consents to the inclusion in the Registration Statement of up to 50,000 shares of the
Company’s Common Stock to be registered on behalf of the bankruptcy trustee in
Australia pursuant to a settlement agreement entered into between the Company and
said trustee in connection with royalty payments to be made in connection with the sale
of the Company’s ZEFS products. Furthermore, the Company agrees that it will not file
any other Registration Statement for other securities until thirty (30) calendar days after
the Registration Statement for the Registrable Securities is declared effective by the
SEC.

Sections 3. RELATED OBLIGATIONS.

     At such time as the Company is obligated to prepare and file the Registration Statement with
the SEC pursuant to Section 2(a), the Company will effect the registration of the Registrable
Securities in accordance with the intended method of disposition thereof and, with respect thereto,
the Company shall have the following obligations:

     (a) The Company shall use commercially reasonable efforts to cause such Registration Statement
relating to the Registrable Securities to become effective within ninety (90) days after the
Execution Date and shall keep such Registration Statement effective until the earlier to occur of
the date on which (A) the Investor shall have sold all the Registrable Securities; or (B) the
Investor has no right to acquire any additional shares of Common Stock under the Investment
Agreement (the “Registration Period”). The Registration Statement (including any amendments or
supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein, or necessary to make
the statements therein, in light of the circumstances in which they were made, not misleading. The
Company shall use all commercially reasonable efforts to respond to all SEC comments within seven
(7) business days from receipt of such comments by the Company. The Company shall use all
commercially reasonable efforts to cause the Registration Statement relating to the Registrable
Securities to become effective no later than five (5) business days after notice from the SEC that
the Registration Statement may be declared effective. The Investor agrees to provide all
information which it is required by law to provide to the Company, including the intended method of
disposition of the Registrable Securities, and the Company’s obligations set forth above

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shall be conditioned on the receipt of such information.

     (b) The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to the Registration Statement
and the prospectus used in connection with such Registration Statement, which
prospectus is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may
be necessary to keep such Registration Statement effective during the Registration
Period, and, during such period, comply with the provisions of the 1933 Act with respect
to the disposition of all Registrable Securities of the Company covered by such
Registration Statement until such time as all of such Registrable Securities shall have
been disposed of in accordance with the intended methods of disposition by the
Investor thereof as set forth in such Registration Statement. In the event the number of
shares of Common Stock covered by the Registration Statement filed pursuant to this
Agreement is at any time insufficient to cover all of the Registrable Securities, the
Company shall amend such Registration Statement, or file a new Registration
Statement (on the short form available therefor, if applicable), or both, so as to cover all
of the Registrable Securities, in each case, as soon as practicable, but in any event
within thirty (30) calendar days after the necessity therefor arises (based on the then
Purchase Price of the Common Stock and other relevant factors on which the Company
reasonably elects to rely), assuming the Company has sufficient authorized shares at
that time, and if it does not, within thirty (30) calendar days after such shares are
authorized. The Company shall use commercially reasonable efforts to cause such
amendment and/or new Registration Statement to become effective as soon as
practicable following the filing thereof.

     (c) The Company shall make available to the Investor whose Registrable
Securities are included in any Registration Statement and its legal counsel without
charge (i) promptly after the same is prepared and filed with the SEC at least one (1)
copy of such Registration Statement and any amendment(s) thereto, including financial
statements and schedules, all documents incorporated therein by reference and all
exhibits, the prospectus included in such Registration Statement (including each
preliminary prospectus) and, with regards to such Registration Statement(s), any
correspondence by or on behalf of the Company to the SEC or the staff of the SEC and
any correspondence from the SEC or the staff of the SEC to the Company or its
representatives; (ii) upon the effectiveness of any Registration Statement, the Company
shall make available copies of the prospectus, via EDGAR, included in such
Registration Statement and all amendments and supplements thereto; and (iii) such
other documents, including copies of any preliminary or final prospectus, as the Investor
may reasonably request from time to time in order to facilitate the disposition of the
Registrable Securities.

     (d) The Company shall use commercially reasonable efforts to (i) register and
qualify the Registrable Securities covered by the Registration Statement under such
other securities or “blue sky” laws of such states in the United States as the Investor
reasonably requests; (ii) prepare and file in those jurisdictions, such amendments
(including post-effective amendments) and supplements to such registrations and

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qualifications as may be necessary to maintain the effectiveness thereof during the
Registration Period; (iii) take such other actions as may be necessary to maintain such
registrations and qualifications in effect at all times during the Registration Period, and (iv)
take all other actions reasonably necessary or advisable to qualify the Registrable Securities for
sale in such jurisdictions; provided, however, that the Company shall not be required in connection
therewith or as a condition thereto to (x) qualify to do business in any jurisdiction where it
would not otherwise be required to qualify but for this Section 3(d), or (y) subject itself to
general taxation in any such jurisdiction. The Company shall promptly notify the Investor who holds
Registrable Securities of the receipt by the Company of any notification with respect to the
suspension of the registration or qualification of any of the Registrable Securities for sale under
the securities or “blue sky” laws of any jurisdiction in the United States or its receipt of actual
notice of the initiation or threatening of any proceeding for such purpose.

     (e) As promptly as practicable after becoming aware of such event, the Company shall notify
Investor in writing of the happening of any event as a result of which the prospectus included in
the Registration Statement, as then in effect, includes an untrue statement of a material fact or
omission to state a material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not misleading (“Registration
Default”) and use all diligent efforts to promptly prepare a supplement or amendment to such
Registration Statement and take any other necessary steps to cure the Registration Default (which,
if such Registration Statement is on Form S-3, may consist of a document to be filed by the Company
with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act (as defined below) and
to be incorporated by reference in the prospectus) to correct such untrue statement or omission,
and make available copies of such supplement or amendment to the Investor. The Company shall also
promptly notify the Investor (i) when a prospectus or any prospectus supplement or post-effective
amendment has been filed, and when the Registration Statement or any post-effective amendment has
become effective (the Company will prepare notification of such effectiveness which shall be
delivered to the Investor on the same day of such effectiveness and by overnight mail),
additionally, the Company will promptly provide to the Investor, a copy of the effectiveness order
prepared by the SEC once it is received by the Company; (ii) of any request by the SEC for
amendments or supplements to the Registration Statement or related prospectus or related
information, (iii) of the Company’s reasonable determination that a post-effective amendment to the
Registration Statement would be appropriate, (iv) in the event the Registration Statement is no
longer effective, or (v) if the Registration Statement is stale as a result of the Company’s
failure to timely file its financials or otherwise. The Company acknowledges that its failure to
cure the Registration Default within ten (10) business days will cause the Investor to suffer
damages in an amount that will be difficult to ascertain. Accordingly, the parties agree that it is
appropriate to include a provision for liquidated damages. The parties acknowledge and agree that
the liquidated damages provision set forth in this section represents the parties’ good faith
effort to quantify such damages and, as such, agree that the form and amount of such liquidated
damages are reasonable and will not constitute a penalty. It is the intention of the parties that
interest payable under

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any of the terms of this Agreement shall not exceed the maximum amount permitted under any
applicable law. If a law, which applies to this Agreement, which sets the maximum interest amount,
is finally interpreted so that the interest in connection with this Agreement exceeds the
permitted limits, then: (1) any such interest shall be reduced by the amount necessary to reduce
the interest to the permitted limit; and (2) any sums already collected (if any) from the Company
which exceed the permitted limits will be refunded to the Company. The Investor may choose to make
this refund by reducing the amount that the Company owes under this Agreement or by making a
direct payment to the Company. If a refund reduces the amount that the Company owes the Investor,
the reduction will be treated as a partial payment.

     (f) The Company shall use commercially reasonable efforts to prevent the
issuance of any stop order or other suspension of effectiveness of the Registration
Statement, or the suspension of the qualification of any of the Registrable Securities for
sale in any jurisdiction and, if such an order or suspension is issued, to obtain the
withdrawal of such order or suspension at the earliest possible moment and to notify the
Investor holding Registrable Securities being sold of the issuance of such order and the
resolution thereof or its receipt of actual notice of the initiation or threat of any
proceeding concerning the effectiveness of the registration statement.

     (g) The Company shall permit the Investor and one (1) legal counsel, designated
by the Investor, to review and comment upon the Registration Statement and all
amendments and supplements thereto at least one (1) calendar day prior to their filing
with the SEC. However, any postponement of a filing of a Registration Statement or
any postponement of a request for acceleration or any postponement of the effective
date or effectiveness of a Registration Statement by written request of the Investor
(collectively, the “Investor’s Delay”) shall not act to trigger any penalty of any kind, or
any cash amount due or any in-kind amount due the Investor from the Company under
any and all agreements of any nature or kind between the Company and the Investor.
The event(s) of an Investor’s Delay shall act to suspend all obligations of any kind or
nature of the Company under any and all agreements of any nature or kind between the
Company and the Investor.

     (h) At the request of the Investor, the Company’s counsel shall furnish to the Investor an
opinion letter confirming the effectiveness of the registration statement. Such opinion letter
shall be issued as of the date of the effectiveness of the registration statement and be in the
form attached as Exhibit B to the Investment Agreement.

     (i) The Company shall hold in confidence and not make any disclosure of information concerning
the Investor unless (i) disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of such information is
ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental
body of competent jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this Agreement or any other

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agreement. The Company agrees that it shall, upon learning that disclosure of such
information concerning the Investor is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt written notice to the Investor and allow the
Investor, at the Investor’s expense, to undertake appropriate action to prevent disclosure of, or
to obtain a protective order covering such information.

     (j) The Company shall use commercially reasonable efforts to maintain designation and
quotation of all the Registrable Securities covered by any Registration Statement on the Principal
Market. If, despite the Company’s commercially reasonable efforts, the Company is unsuccessful in
satisfying the preceding sentence, it shall use commercially reasonable efforts to cause all the
Registrable Securities covered by any Registration Statement to be listed on each other national
securities exchange and automated quotation system, if any, on which securities of the same class
or series issued by the Company are then listed, if any, if the listing of such Registrable
Securities is then permitted under the rules of such exchange or system. The Company shall pay all
fees and expenses in connection with satisfying its obligation under
this Section 3(j).

     (k) The Company shall cooperate with the Investor to facilitate the prompt preparation and
delivery of certificates representing the Registrable Securities to be offered pursuant to the
Registration Statement and enable such certificates to be in such denominations or amounts, as the
case may be, as the Investor may reasonably request (and after any sales of such Registrable
Securities by the Investor, such certificates not bearing any restrictive legend).

     (l) The Company shall provide a transfer agent for all the Registrable Securities not later
than the effective date of the first Registration Statement filed pursuant hereto.

     (m) If requested by the Investor, the Company shall (i) as soon as reasonably practical
incorporate in a prospectus supplement or post-effective amendment such information as the
Investor reasonably determines should be included therein relating to the sale and distribution of
Registrable Securities, including, without limitation, information with respect to the offering of
the Registrable Securities to be sold in such offering; (ii) make all required filings of such
prospectus supplement or post-effective amendment as soon as reasonably possible after being
notified of the matters to be incorporated in such prospectus supplement or post-effective
amendment; and (iii) supplement or make amendments to any Registration Statement if reasonably
requested by the Investor.

     (n) The Company shall use commercially reasonable efforts to cause the Registrable Securities
covered by the applicable Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to facilitate the disposition of such
Registrable Securities.

     (o) The Company shall otherwise use commercially reasonable efforts to comply with all
applicable rules and regulations of the SEC in connection with any

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registration hereunder.

     (p) Within one (1) business day after the Registration Statement which includes Registrable
Securities is declared effective by the SEC, the Company shall deliver to the transfer agent for
such Registrable Securities, with copies to the Investor, confirmation that such Registration
Statement has been declared effective by the SEC.

     (q) The Company shall take all other reasonable actions necessary to expedite and facilitate
disposition by the Investor of Registrable Securities pursuant to the Registration Statement.

Section 4. OBLIGATIONS OF THE INVESTOR.

     (a) At least five (5) calendar days prior to the first anticipated filing date of the
Registration Statement the Company shall notify the Investor in writing of the
information the Company requires from the Investor for the Registration Statement. It
shall be a condition precedent to the obligations of the Company to complete the
registration pursuant to this Agreement with respect to the Registrable Securities and
the Investor agrees to furnish to the Company that information regarding itself, the
Registrable Securities and the intended method of disposition of the Registrable
Securities as shall reasonably be required to effect the registration of such Registrable
Securities and the Investor shall execute such documents in connection with such
registration as the Company may reasonably request. The Investor covenants and
agrees that, in connection with any sale of Registrable Securities by it pursuant to the
Registration Statement, it shall comply with the “Plan of Distribution” section of the then
current prospectus relating to such Registration Statement.

     (b) The Investor, by its acceptance of the Registrable Securities, agrees to
cooperate with the Company as reasonably requested by the Company in connection
with the preparation and filing of any Registration Statement hereunder, unless the
Investor has notified the Company in writing of an election to exclude all of the
Investor’s Registrable Securities from such Registration Statement.

     (c) The Investor agrees that, upon receipt of written notice from the Company of
the happening of any event of the kind described in Section 3(f) or the first sentence of
3(e), the Investor will immediately discontinue disposition of Registrable Securities
pursuant to any Registration Statement(s) covering such Registrable Securities until the
Investor’s receipt of the copies of the supplemented or amended prospectus
contemplated by Section 3(f) or the first sentence of 3(e).

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Section 5.
EXPENSES OF REGISTRATION.

     All expenses, other than underwriting discounts and commissions and other than as set forth
in the Investment Agreement, incurred in connection with registrations including comments, filings
or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration,
listing and qualifications fees, printing and accounting fees, and fees and disbursements of
counsel for the Company or for the Investor shall be paid by the Company.

Section 6. INDEMNIFICATION.

     In the event any Registrable Securities are included in the Registration Statement under this
Agreement:

     (a) To the fullest extent permitted by law, the Company, under this Agreement, will, and
hereby does, indemnify, hold harmless and defend the Investor who holds Registrable Securities, the
directors, officers, partners, employees, counsel, agents, representatives of, and each Person, if
any, who controls, any Investor within the meaning of the 1933 Act or the Securities Exchange Act
of 1934, as amended (the “1934 Act”) (each, an
“Indemnified Person”), against any losses, claims,
damages, liabilities, judgments, fines, penalties, charges, costs, attorneys’ fees, amounts paid in
settlement or expenses, joint or several (collectively,
“Claims”), incurred in investigating,
preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken
from the foregoing by or before any court or governmental, administrative or other regulatory
agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or
may be a party thereto (“Indemnified Damages”), to which any of them may become subject insofar as
such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise
out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact
in the Registration Statement or any post-effective amendment thereto or in any filing made in
connection with the qualification of the offering under the securities or other “blue sky” laws of
any jurisdiction in which the Investor has requested in writing that the Company register or
qualify the Shares (“Blue Sky Filing”), or the omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein, in light of the
circumstances under which the statements therein were made, not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in the final prospectus (as
amended or supplemented, if the Company files any amendment thereof or supplement thereto with the
SEC) or the omission or alleged omission to state therein any material fact necessary to make the
statements made therein, in light of the circumstances under which the statements therein were
made, not misleading, or (iii) any violation or alleged violation by the Company of the 1933 Act,
the 1934 Act, any other law, including, without limitation, any state securities law, or any rule
or regulation thereunder relating to the offer or sale of the Registrable Securities pursuant to
the Registration Statement (the matters in the foregoing clauses (i) through (iii) being,
collectively, “Violations”). Subject to the

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restrictions set forth in Section 6(c) the Company shall reimburse the Investor and each
such controlling person, promptly as such expenses are incurred and are due and payable, for any
reasonable legal fees or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(a): (i) shall not apply to a
Claim arising out of or based upon a Violation which is due to the inclusion in the Registration
Statement of the information furnished to the Company by any Indemnified Person expressly for use
in connection with the preparation of the Registration Statement or any such amendment thereof or
supplement thereto; (ii) shall not be available to the extent
such Claim is based on (a) a failure
of the Investor to deliver or to cause to be delivered the prospectus made available by the Company
or (b) the Indemnified Person’s use of an incorrect prospectus despite being promptly advised in
advance by the Company in writing not to use such incorrect prospectus; (iii) any claims based on
the manner of sale of the Registrable Securities by the Investor or of the Investor’s failure to
register as a dealer under applicable securities laws; (iv) any omission of the Investor to notify
the Company of any material fact that should be stated in the Registration Statement or prospectus
relating to the Investor or the manner of sale; and (v) any amounts paid in settlement of any Claim
if such settlement is effected without the prior written consent of the Company, which consent
shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless
of any investigation made by or on behalf of the Indemnified Person and shall survive the resale of
the Registrable Securities by the Investor pursuant to the Registration Statement.

     (b) In connection with any Registration Statement in which Investor is participating, the
Investor agrees to severally and jointly indemnify, hold harmless and defend, to the same extent
and in the same manner as is set forth in Section 6(a), the Company, each of its directors, each
of its officers who signs the Registration Statement, each Person, if any, who controls the
Company within the meaning of the 1933 Act or the 1934 Act and the Company’s agents (collectively
and together with an Indemnified Person, an “Indemnified
Party”), against any Claim or Indemnified
Damages to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise,
insofar as such Claim or Indemnified Damages arise out of or are based upon any Violation, in each
case to the extent, and only to the extent, that such Violation is due to the inclusion in the
Registration Statement of the written information furnished to the Company by the Investor
expressly for use in connection with such Registration Statement; and, subject to Section 6(c),
the Investor will reimburse any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such Claim; provided, however, that the indemnity agreement
contained in this Section 6(b) and the agreement with respect to contribution contained in Section
7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of the Investor, which consent shall not be unreasonably
withheld; provided, further, however, that the Investor shall only be liable under this Section
6(b) for that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to such
Investor as a result of the sale of Registrable Securities pursuant to such Registration
Statement. Such indemnity shall remain in full

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force and effect regardless of any investigation made by or on behalf of such Indemnified
Party and shall survive the resale of the Registrable Securities by the Investor pursuant to the
Registration Statement. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(b) with respect to any preliminary
prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or
omission of material fact contained in the preliminary prospectus were corrected on a timely basis
in the prospectus, as then amended or supplemented. This indemnification provision shall apply
separately to each Investor and liability hereunder shall not be joint and several.

     (c) Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6
of notice of the commencement of any action or proceeding (including any governmental action or
proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in
respect thereof is to be made against any indemnifying party under this Section 6, deliver to the
indemnifying party a written notice of the commencement thereof, and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume control of the defense thereof with
counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the
Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified
Party shall have the right to retain its own counsel with the fees and expenses to be paid by the
indemnifying party, if, in the reasonable opinion of counsel retained by the Indemnified Person or
Indemnified Party, the representation by counsel of the Indemnified Person or Indemnified Party and
the indemnifying party would be inappropriate due to actual or potential differing interests
between such Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding. The indemnifying party shall pay for only one (1) separate legal
counsel for the Indemnified Persons or the Indemnified Parties, as applicable, and such counsel
shall be selected by the Investor, if the Investor are entitled to indemnification hereunder, or
the Company, if the Company is entitled to indemnification hereunder, as applicable. The
Indemnified Party or Indemnified Person shall cooperate fully with the indemnifying party in
connection with any negotiation or defense of any such action or Claim by the indemnifying party
and shall furnish to the indemnifying party all information reasonably available to the Indemnified
Party or Indemnified Person which relates to such action or Claim. The indemnifying party shall
keep the Indemnified Party or Indemnified Person fully apprised at all times as to the status of
the defense or any settlement negotiations with respect thereto. No indemnifying party shall be
liable for any settlement of any action, claim or proceeding effected without its written consent,
provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition
its consent. No indemnifying party shall, without the consent of the Indemnified Party or
Indemnified Person, consent to entry of any judgment or enter into any settlement or other
compromise which does not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in
respect to such Claim. Following indemnification as provided for hereunder, the indemnifying party
shall be subrogated to all rights of the Indemnified Party or Indemnified Person with respect

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to all third parties, firms or corporations relating to the matter for which indemnification has
been made. The failure to deliver written notice to the indemnifying party within a reasonable
time of the commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is prejudiced in its ability to defend such action.

     (d) The
indemnity agreements contained herein shall be in addition to (i) any cause of action
or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or
others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law.

Section 7. CONTRIBUTION.

     To the extent any indemnification by an indemnifying party is prohibited or limited by law,
the indemnifying party agrees to make the maximum contribution with respect to any amounts for
which it would otherwise be liable under Section 6 to the fullest extent permitted by law;
provided, however, that: (i) no contribution shall be made under circumstances where the maker
would not have been liable for indemnification under the fault standards set forth in Section 6;
(ii) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable
Securities who was not guilty of fraudulent misrepresentation; and (iii) contribution by any seller
of Registrable Securities shall be limited in amount to the net amount of proceeds received by such
seller from the sale of such Registrable Securities.

Section 8. REPORTS UNDER THE 1934 ACT.

     With a view to making available to the Investor the benefits of Rule 144 promulgated under
the 1933 Act or any other similar rule or regulation of the SEC that may at any time permit the
Investor to sell securities of the Company to the public without
registration (“Rule 144”).
provided that the Investor holds any Registrable Securities are eligible for resale under Rule 144
(k), the Company agrees to:

     (a) make and keep public information available, as those terms are
understood and defined in Rule 144;

     (b) file with the SEC in a timely manner all reports and other documents
required of the Company under the 1933 Act and the 1934 Act so long as the Company
remains subject to such requirements (it being understood that nothing herein shall limit
the Company’s obligations under Section 5(c) of the Investment Agreement) and the
filing of such reports and other documents is required for the applicable provisions of
Rule 144; and

12

 

     (c) furnish
to the Investor, promptly upon request, (i) a written statement by the Company
that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act,
(ii) a copy of the most recent annual or quarterly report of the Company and such other reports
and documents so filed by the Company, and (iii) such other information as may be reasonably
requested to permit the Investor to sell such securities pursuant to Rule 144 without
registration.

Section 9. NO ASSIGNMENT OF REGISTRATION RIGHTS.

     The rights and obligations under this Agreement shall not be assignable.

Section 10. AMENDMENT OF REGISTRATION RIGHTS.

     The provisions of this Agreement may be amended only with the written consent of the Company
and Investor.

Section 11. MISCELLANEOUS.

     (a) Any notices or other communications required or permitted to be given under the terms of
this Agreement that must be in writing will be deemed to have been
delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided a confirmation of
transmission is mechanically or electronically generated and kept on file by the sending party); or
(iii) one (1) day after deposit with a nationally recognized overnight delivery service, in each
case properly addressed to the party to receive the same. The addresses and facsimile numbers for
such communications shall be:

If to the Company:

Save the World Air, Inc.
 5125
Lankershim Blvd.
 North
Hollywood, CA 91601
 Telephone:
(818) 487-8000
 Facsimile: (818)
487-8003

with a copy to:

Lance Jon Kimmel, Esq.

SEC Law Firm

11693 San Vicente Boulevard, Suite 357

Los Angeles, CA 90049

Telephone: (310) 557-3059

Facsimile: (310) 388-1320

13

 

If to the Investor:

Dutchess Private Equities Fund, LP

50 Commonwealth Ave, Suite 2

Boston, MA 02116

Telephone: (617) 301-4700

Facsimile: (617) 249-0947

     Each party shall provide five (5) business days prior notice to the other party of any change
in address, phone number or facsimile number.

     (b) Failure of any party to exercise any right or remedy under this Agreement or
otherwise, or delay by a party in exercising such right or remedy, shall not operate as a
waiver thereof.

     (c) This Agreement and the Transaction Documents constitute the entire
agreement among the parties hereto with respect to the subject matter hereof and
thereof. There are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein and therein.

     (d) This Agreement and the Transaction Documents supersede all prior
agreements and understandings among the parties hereto with respect to the subject
matter hereof and thereof.

     (e) The headings in this Agreement are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof. Whenever required by the context
of this Agreement, the singular shall include the plural and masculine shall include the
feminine. This Agreement shall not be construed as if it had been prepared by one of
the parties, but rather as if all the parties had prepared the same.

     (f) This Agreement may be executed in two or more identical counterparts, each
of which shall be deemed an original but all of which shall constitute one and the same
agreement. This Agreement, once executed by a party, may be delivered to the other
party hereto by facsimile transmission of a copy of this Agreement bearing the signature
of the party so delivering this Agreement.

     (g) Each party shall do and perform, or cause to be done and performed, all
such further acts and things, and shall execute and deliver all such other agreements,
certificates, instruments and documents, as the other party may reasonably request in
order to carry out the intent and accomplish the purposes of this Agreement and the
consummation of the transactions contemplated hereby.

     (h) In case any provision of this Agreement is held by a court of competent jurisdiction to
be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted
rather than voided, if possible, so that it is enforceable to the

14

 

maximum extent possible, and the validity and enforceability of the remaining provisions of this
Agreement will not in any way be affected or impaired thereby.

Section 12. DISPUTES SUBJECT TO ARBITRATION GOVERNED BY MASSACHUSETTS LAW

     All disputes arising under this agreement shall be governed by and interpreted in
accordance with the laws of the Commonwealth of Massachusetts, without regard to principles of
conflict of laws. The parties to this agreement will submit all disputes arising under this
agreement to arbitration in Boston, Massachusetts before a single arbitrator of the American
Arbitration Association (“AAA”). The arbitrator shall be selected by application of the rules of
the AAA, or by mutual agreement of the parties, except that such arbitrator shall be an attorney
admitted to practice law in the Commonwealth of Massachusetts. No party to this agreement will
challenge the jurisdiction or venue provisions as provided in this section. Nothing contained
herein shall prevent the party from obtaining an injunction.

[remainder of page intentionally left blank]

15

 

SIGNATURE PAGE OF REGISTRATION RIGHTS AGREEMENT

Your signature on this Signature Page evidences your agreement to be bound by the terms and
conditions of the Investment Agreement and the Registration Rights Agreement as of the date first
written above.

The undersigned signatory hereby certifies that he has read and understands the Registration
Rights Agreement, and the representations made by the undersigned in this Registration Rights
Agreement are true and accurate, and agrees to be bound by its terms.

	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 
	 	 	DUTCHESS PRIVATE EQUITIES FUND, L.P.,	 	 
	 	 	BY ITS GENERAL PARTNER,	 	 
	 	 	DUTCHESS CAPITAL MANAGEMENT, LLC	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Douglas H. Leighton, Managing Member	 	 

	 	 	 	 	 
	 

	 	 	 	 
	SAVE THE WORLD AIR, INC.	 	 
	 
	 	 	 	 
	By
	 	 	 	 
	 

	 	 	 	 
	 

	 	Eugene E. Eichler, Chief Executive Officer	 	 

16exv10w1

 

EXHIBIT 10.1

Summary Terms

Asset Acceptance Capital Corp.

 2006 Annual Incentive Compensation Plan for Management

General

     Each year, following approval of the annual budget and forecast, the Compensation Committee
(the “Committee”) of the Board of Directors (the “Board”) of Asset Acceptance Capital Corp. (the
“Company”) will establish an annual incentive compensation plan for key executives and certain
other management level employees (the “Plan Participant(s)”) of the Company.

     The
Annual Incentive Compensation Plan (the “Plan”) will establish for each Plan Participant a “bonus
target” equal to a specified percentage of “base salary”. Each Plan Participant will be eligible
to earn from 0% to 200% (expressed as “points”) of his bonus target based upon the achievement of
objectives between a “minimum” and “maximum”. The “bonus target” percentage will be set by the
Committee at a level consistent with each executive’s responsibilities. “Base salary” shall be the
Plan Participant’s base compensation (excluding any incentive compensation) paid during 2006. For
individuals who become Plan Participants during 2006, Base Salary shall be the base compensation
(excluding any incentive compensation) paid in 2006 beginning on the date the individual first
becomes eligible to participate in the Annual Incentive Compensation Plan.

     The Annual Incentive Compensation Plan will be comprised of two parts: (a) Financial
Objectives and (b) Personal Objectives. The Compensation Committee of the Board of Directors will
approve the relative weighting of financial and personal objectives for all Plan Participants.

     The bonus will be pro rated for Plan Participants that begin employment or otherwise become
eligible for the Plan after the first day of 2006. Final payments under the Annual Incentive
Compensation Plan will be made after receipt and approval by the Board of the annual audited
financial statements of the Company. A Plan Participant will not be paid a bonus unless the Plan
Participant is employed by the Company on the date the Board approves the annual audited financial
statements for 2006.

     The Compensation Committee recognizes the need of the Plan Participants to achieve their goals
and conduct themselves in compliance with the Code of Business Conduct. In addition to the
non-financial consequences contained in the Code of Business Conduct, any violation of the Code of
Business Conduct, shall result in complete forfeiture of any bonus which would otherwise be paid
under this Plan.

1

 

Financial Objectives

     The financial performance of the Company will be measured against Earnings Before Interest,
Taxes, Depreciation and Amortization (“EBITDA”), after accrual of all incentive compensation plan
payments. EBITDA will be determined by the Board in a manner consistent with the definition of
EBITDA contained in Exhibit 1.

     For the fiscal year ended December 31, 2006, the Financial Objective “goal” will be set at the
budgeted EBITDA of $XXX,XXX,XXX. The “minimum” will be set at 95% of the budgeted EBITDA. The
“maximum” will be set at 110% of the budgeted EBITDA.

     At “maximum” performance, 200% of the “bonus target” percentage is earned. At “goal”
performance, 100% of the “bonus target” percentage is earned. At “minimum” performance, 50% of the
“bonus target” percentage is earned. At less than “minimum” performance, no financial objective
points will be earned. For EBITDA performance between “minimum” and “goal”, and “goal” and
“maximum”, the points earned will be prorated on a straight-line basis.

Personal Performance Objectives

     Personal Objectives should be measurable goals jointly developed by the Plan
Participant and his/her immediate supervisor (subject to approval by the Chairman and Chief
Executive Officer or their designee(s), and for certain participants, the Compensation Committee of
the Board of Directors). The points earned under Personal Performance will be calculated based on
the percentage of completion of each assigned objective, recognizing the determination of such
percentage completion is in part subjective. For Plan Participants the personal performance
objectives may represent up to 50% of the payout weighting, such weighting to be determined by the
Chairman and Chief Executive Officer or their designee(s), and for certain employees, the
Compensation Committee of the Board of Directors. If there is any disagreement as to the scoring
of each assigned objective, the determination of the Chairman and Chief Executive Officer or their
designee(s) shall be binding.

     Payout on personal objectives will not be made to any Plan Participant unless the Company
achieves at least the “minimum” Financial Objective.

2

 

CORPORATE FINANCIAL OBJECTIVES:

2006 EBITDA

$XXX,XXX,XXX

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Minimum	 	Goal	 	Maximum
	 	 	(95%)	 	(100%)	 	(110%)
	Earnings Level
	 	$	XXX,XXX,XXX
	 	 	$	XXX,XXX,XXX
	 	 	$	XXX,XXX,XXX
	 
	Points

	 	 	50.0	 	 	 	100.0	 	 	 	200.0	 

At less than Minimum EBITDA Achievement:

     ZERO Financial Objective points will be earned and no bonus will be paid.

At greater than Minimum up to and including Goal EBITDA Achievement:

     

 

At more than 100% EBITDA Achievement:

     

 

Corporate Financial Objectives Payment equals:

(Bonus Points achieved) X (Financial Objective Weighting) X (Bonus Target)

Personal Objectives Payment equals:

(Bonus Points achieved) X (Percentage of Personal Objective Points Earned) X (Personal Objective
Weighting) X (Bonus Target)

            . . . . . . . . . . . . . . . . . . . . . . .

Total Incentive Compensation Payment equals:

     Corporate Financial Objectives Payment + Personal Objectives Payment

3

 

	 	 	 
	Name:

	 	Insert Name
	 
	 	 
	Title:

	 	Insert Title
	 
	 	 
	Salary:

	 	1/1/06 Compensation

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	Bonus as %	 	 
	 	 	Objectives	 	 	% of Target	 	of Salary	 	$ Bonus
	Pre SOX & State Tax EBITDA
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Minimum
	 	$	XXX,XXX,XXX
	 	 	 	 	95.0	%	50% of Target rate	 	Computed
	Target
	 	$	XXX,XXX,XXX
	 	 	 	 	100.0	%	Target rate	 	Computed
	Maximum
	 	$	XXX,XXX,XXX
	 	 	 	 	110.0	%	200% of Target rate	 	Computed
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	% Based on Company Objectives
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Minimum
	 	 	50.0	%	 	Computed	 	Computed	 	Computed
	Target
	 	 	50.0	%	 	Computed	 	Computed	 	Computed
	Maximum
	 	 	50.0	%	 	Computed	 	Computed	 	Computed
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	% Based on Personal Objectives
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Minimum
	 	 	50.0	%	 	Computed	 	Computed	 	Computed
	Target
	 	 	50.0	%	 	Computed	 	Computed	 	Computed
	Maximum
	 	 	50.0	%	 	Computed	 	Computed	 	Computed

	 	 	 	 	 	 	 
	Personal Objectives 	 	% of Personal Bonus
	(1)	 	Insert Goal 1
	 	Goal 1 Weight
	 	 	 
	 	 	 	 
	(2)	 	Insert Goal 2
	 	Goal 2 Weight
	 	 	 
	 	 	 	 
	(3)	 	Insert Goal 3
	 	Goal 3 Weight
	 	 	 
	 	 	 	 
	(4)	 	Insert Goal 4
	 	Goal 4 Weight
	 	 	 
	 	 	 	 
	(5)	 	Insert Goal 5
	 	Goal 5 Weight

4

 

Exhibit 1

     EBITDA: The earnings of the Company before interest, income taxes,
depreciation and amortization (including amortization of purchased receivables). The
determination of EBITDA, for purposes of this Plan, shall be made by the Board in accordance
with generally accepted accounting principles in effect in the United States, applied on a
consistent basis (“GAAP”); provided, however, that EBITDA shall be adjusted for this purpose
to (A) exclude net gains and losses on the disposal of assets and other non-operating income
or expense items and (B) exclude EBITDA generated from acquisitions of new businesses or
companies during the year (an acquisition of a new office would not be deemed to be a
material acquisition). EBITDA will be determined after accrual for all bonuses, including
bonuses to be paid under this and all other Company annual incentive compensation plans.

5

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