Document:

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

 

7

 

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

 

8

 

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.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

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]

 

30Exhibit 4.2

 

	
  No. [     ]

  	
  $[     ]

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

Date: March 5, 2003

 

EARTHSHELL CORPORATION

SECURED CONVERTIBLE DEBENTURE DUE MARCH 5, 2006

 

THIS DEBENTURE
is one of a series of duly authorized and issued debentures of EarthShell
Corporation, a Delaware corporation (the “Borrower”), designated as its Secured Convertible Debentures
due March 5, 2006, in the aggregate principal amount of Twelve Million Five
Hundred Fifty Thousand Dollars ($12,550,000) (the “Debentures”).

 

FOR VALUE
RECEIVED, the Borrower promises to pay to the order of [ ] or its registered
assigns (the “Holder”), the
principal sum of [ ] ($), on March 5, 2006 (the “Maturity
Date”), or such earlier date as this Debenture or the Debentures are
required or permitted to be repaid as provided hereunder, and to pay interest
to the Holder on the aggregate then outstanding principal amount of this
Debenture in accordance with the provisions hereof. The principal amount of
this Debenture may be increased as set forth in Section 2(c) below. All holders
of Debentures are referred to collectively, as the “Holders”.  This Debenture is subject to the following
additional provisions.

 

1.                                       Definitions.  In addition to the terms defined elsewhere
in this Debenture, (a) capitalized terms that are not otherwise defined herein
have the meanings given to such terms in the Loan and Securities Purchase
Agreement, dated as of March 5, 2003, among the Borrower and the lenders
identified therein (the “Loan Agreement”),
and (b) the following terms have the meanings indicated:

 

“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.

 

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

 

 

holder thereof to receive,
Common Stock or other securities that entitle the holder to receive, directly
or indirectly, Common Stock.

 

“Borrower
Conversion Date” means the date set forth on a Borrower Conversion
Notice, which date may not be earlier than the tenth (10th) Trading Day
immediately following, or later than the fifteenth (15th) Trading Day
immediately following, the date a Borrower Conversion Notice together with the
Conversion Schedule is delivered to the Holder in accordance with Section 5(b).

 

“Borrower
Conversion Notice” means a written notice in the form attached
hereto as Exhibit B.

 

“Conversion
Date” means either a Holder Conversion Date or a Borrower Conversion
Date.

 

“Conversion
Notice” means either a Holder Conversion Notice or a Borrower
Conversion Notice.

 

“Conversion
Price” means $0.50, subject to adjustment from time to time pursuant
to Section 12.

 

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

 

“Equity
Conditions” means, with respect to a specified issuance of Common
Stock, that each of the following conditions is satisfied: (i) the number of
authorized but unissued and otherwise unreserved shares of Common Stock is
sufficient for such issuance; (ii) the Common Stock is listed or quoted (and is
not suspended from trading) on an Eligible Market and such shares of Common
Stock are approved for listing on such Eligible Market upon issuance; (iii)
such Common Stock is covered under the Registration Statement, (iv) such
issuance would be permitted in full without violating Section 5(c) hereof or
the rules or regulations of the Eligible Market on which such shares are listed
or quoted; (v) no Event of Default nor any event that with the passage of time
and without being cured would constitute a Event of Default has occurred and
not been cured, and (vi) no public announcement of a pending or proposed Change
of Control transaction has occurred that has not been consummated.

 

“Event Equity
Value” means 115% of the average of the Closing Prices for the five
Trading Days preceding either (a) the date of delivery of the notice requiring
payment of the Event Equity Value or (b) the date on which such required
payment (together with any other payments, expenses and liquidated damages then
due and payable under the Transaction Documents) is paid in full, whichever is
greater.

 

“Event of
Default” means any one of the following events  (whatever the reason and whether it shall be
voluntary or involuntary or effected by operation of law or pursuant to any
judgment, decree or order of any court, or any order, rule or regulation of any
administrative or governmental body):

 

2

 

(i)                                       any
default in the payment (free of any claim of subordination) of principal,
interest or liquidated damages in respect of any Debentures, as and when the
same becomes due and payable (whether on a Conversion Date, Prepayment Date or
the Maturity Date or by acceleration or prepayment or otherwise).

 

(ii)                                    the
Borrower or any Subsidiary defaults in any of its obligations under any other
debenture or any mortgage, credit agreement or other facility, indenture
agreement, factoring agreement or other instrument under which there may be
issued, or by which there may be secured or evidenced, any indebtedness for
borrowed money or money due under any long term leasing or factoring
arrangement of the Borrower or any Subsidiary in an amount exceeding $250,000,
whether such indebtedness now exists or is hereafter created, and such default
results in such indebtedness becoming or being declared due and payable prior
to the date on which it would otherwise become due and payable, provided,
that, subject to clause (xiii), no Event of Default shall be deemed to have
occurred with respect to any default which exists on the Original Issue Date
with respect to the trade payables listed on Schedule 4.9 of the Loan Agreement.

 

(iii)                                 the
occurrence of a Change of Control transaction (as defined in the Loan
Agreement).

 

(iv)                                the
incurrence by the Borrower of any debt obligation that is senior in right of
payment to the Debentures or otherwise secured by any of the assets, income or
properties of the Borrower, provided, that the Borrower shall, after the
Original Issue Date, be entitled to acquire property, valued up to an aggregate
of $250,000, which is secured by a purchase-money security interest.

 

(v)                                   the
payment by the Borrower of any dividends or distributions of assets, properties
or cash to any Person that is either (A) outside of the ordinary course of the
Borrower’s business and consistent in amount and type with prior practice as
disclosed in SEC Reports (as defined in the Loan Agreement) or (B) other than
any other payment permitted under the Letter Agreement or Section 4.12 of the
Loan Agreement.

 

(vi)                                the
occurrence of any event of default (whether or not declared) under any
Debentures (as defined in the Loan Agreement).

 

(vii)                             the
Borrower shall fail to deliver an irrevocable notice to prepay $5,200,000 of
the outstanding principal amount of the secured convertible debentures
(including accrued and unpaid interest thereon and any other payments due
thereunder), in the original principal amount of $10,000,000, 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 “Previous Debentures”), by the
first Trading Day following the Original Issue Date.

 

(viii)                          the
Borrower shall fail to prepay in full the amount of outstanding principal
amount of the Previous Debentures (including accrued and unpaid interest
thereon and any other payments due thereunder), set forth in the prepayment
notice contemplated

 

3

 

by clause (vii) above, by the
first Trading Day immediately following the delivery of the prepayment notice
referenced in subsection (vii) hereof.

 

(ix)                                  any
prepayment by the Borrower of any debenture issued by it (except for the
Debentures pursuant to Section 4.12 of the Loan Agreement or Previous
Debentures pursuant to clause (vii) above) or any issuance of securities in
exchange for any debentures issued by it (other than Underlying Shares upon
conversion thereof in accordance with their terms as in effect on the Original
Issue Date thereof).

 

(x)                                     either
of the License Agreements (as defined in the Loan Agreement) ceases to be in
full force and effect or there should occur any material default  or modification thereunder that would give
any party thereto the right to terminate or otherwise reduce in any material
respect the amount of license fees that would be earned or paid thereunder, or
either of the License Agreements is repudiated or otherwise terminates or is
transferred or assigned to a third party.

 

(xi)                                  the
Borrower defaults in the timely performance of any  obligation under the Transaction Documents and such default
continues uncured for a period of five Trading Days after the date on which
written notice of such default is first given to the Borrower by the Holder (it
being understood that no prior notice need be given in the case of a default
that cannot reasonably be cured within five Trading Days).

 

(xii)                               any
of the Borrower’s representations and warranties set forth in the Loan
Agreement shall be incorrect as of the Closing Date and such incorrect
representation or warranty, either individually or together with any other
incorrect representation or warranty (if any), shall constitute a Material
Adverse Effect (as defined in the Loan Agreement).

 

(xiii)                            the
occurrence of a Bankruptcy Event.

 

(xiv)                           the
Common Stock is not listed or quoted, or is suspended from trading, on an
Eligible Market for a period of five Trading Days (which need not be
consecutive Trading Days).

 

(xv)                              the
Borrower breaches its obligations to deliver a certificate evidencing
Underlying Shares to a Holder within five Trading Days after a Conversion Date
or the conversion rights of the Holders pursuant to the terms hereof are
otherwise suspended for any reason other than the restrictions set forth in
Section 5(c) hereof.

 

(xvi)                           the
Borrower fails to have available a sufficient number of authorized but unissued
and otherwise unreserved shares of Common Stock available to issue Underlying
Shares upon any conversion of Debentures hereunder.

 

(xvii)                        the
Borrower effects or publicly announces its intention to effect any exchange,
recapitalization or other transaction that effectively requires or rewards
physical delivery of certificates evidencing the Common Stock, unless following
such transaction or series of transactions, the holders of the Borrower’s
securities prior to the first such 

 

4

 

transaction continue to hold at
least two-thirds of the voting rights and equity interests in the surviving
entity or acquirer of such assets.

 

(xviii)                     the Borrower
fails to make any cash payment required under the Transaction Documents and such
failure is not cured within five Trading Days after notice of such default is
first given to the Borrower by a Lender.

 

“Holder
Conversion Date” means the date a Holder Conversion Notice together
with the Conversion Schedule is delivered to the Borrower in accordance with
Section 5(a).

 

“Holder
Conversion Notice” means a written notice in the form attached
hereto as Exhibit A.

 

“Nasdaq”
means the Nasdaq National Market.

 

“Original
Issue Date” means the date of the first issuance of any Debentures,
regardless of the number of transfers of any particular Debenture.

 

“Registration Statement” shall have the
meaning set forth in the Loan Agreement.

 

“Security
Agreement” shall have the meaning set forth in the Loan Agreement.

 

“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.

 

“Underlying
Shares” means the shares of Common Stock issuable upon conversion of
the Debentures and payment of interest thereunder.

 

“VWAP” means on any particular Trading Day
or for any particular period, the volume weighted average trading price per
share of Common Stock on such date or for such period on an Eligible Market as
reported by Bloomberg L.P., or any successor performing similar functions.

 

2.                                       Interest.

 

(a)                                  The
Borrower shall pay interest to the Holder on the aggregate unconverted and then
outstanding principal amount of this Debenture (including any interest added to
such principal in accordance with this Section 2) at the rate of 2% per annum,
payable quarterly in arrears on each January 31, April 30, July 31 and October
31, except if such date is not a Trading Day, in which case such interest shall
be payable on the next succeeding Trading 

 

5

 

Day (each, an “Interest
Payment Date”). Interest shall be calculated on the basis of a
360-day year and shall accrue daily commencing on the Original Issue Date.

 

(b)                                 Subject
to the conditions and limitations set forth below, the Borrower may pay
interest on this Debenture in cash

 

(c)                                  So
long as any Debentures are outstanding, (i) neither the Borrower nor any
Subsidiary shall, directly or indirectly, redeem, purchase or otherwise acquire
any capital stock or set aside any monies for such a redemption, purchase or
other acquisition, and (ii) the Borrower shall not pay or declare any dividend
or make any distribution on any capital stock, except stock dividends on the
Common Stock payable in additional shares of Common Stock.

 

3.                                       Registration
of Debentures.  The Borrower shall
register the Debentures upon records to be maintained by the Borrower for that
purpose (the “Debenture Register”)
in the name of each record Holder thereof from time to time. The Borrower may
deem and treat the registered Holder of this Debenture as the absolute owner
hereof for the purpose of any conversion hereof or any payment of interest
hereon, and for all other purposes, absent actual notice to the contrary.

 

4.                                       Registration
of Transfers and Exchanges.  The
Borrower shall register the transfer of any portion of this Debenture in the
Debenture Register upon surrender of this Debenture to the Borrower at its
address for notice set forth herein. Upon any such registration or transfer, a
new Debenture, in substantially the form of this Debenture (any such new
debenture, a “New Debenture”),
evidencing the portion of this Debenture so transferred shall be issued to the
transferee and a New Debenture evidencing the remaining portion of this
Debenture not so transferred, if any, shall be issued to the transferring
Holder. The acceptance of the New Debenture by the transferee thereof shall be
deemed the acceptance by such transferee of all of the rights and obligations
of a holder of a Debenture. The Borrower agrees that its prior consent is not
required for the transfer of any portion of this Debenture.  This Debenture is exchangeable for an equal
aggregate principal amount of Debentures of different authorized denominations,
as reasonably requested by the Holder surrendering the same. No service charge
or other fee will be imposed in connection with any such registration of
transfer or exchange.

 

5.                                       Conversion.

 

(a)                                  At
the Option of the Holder.  All or
any portion of the principal amount of this Debenture then outstanding shall be
convertible into shares of Common Stock at the Conversion Price (subject to
limitations set forth in Section 5(c)), at the option of the Holder, at any
time and from time to time from and after the Original Issue Date. The Holder
may effect conversions under this Section 5(a), by delivering to the Borrower a
Holder Conversion Notice together with a schedule in the form of Schedule 1
attached hereto (the “Conversion Schedule”).
If the Holder is converting less than all of the principal amount represented
by this Debenture, or if a conversion hereunder may not be effected in full due
to the application of Section 5(c), the Borrower shall honor such conversion to
the extent permissible hereunder and shall promptly deliver to the Holder a
Conversion Schedule indicating the principal amount which has not been
converted.  Subject to the provisions of
this Section and Section 6 below and so long as the 

 

6

 

Equity Conditions are satisfied
with respect to such Underlying Shares then issuable upon the applicable
conversion, the conversion subject to each Holder Conversion Notice, once
given, shall be irrevocable.

 

(b)                                 At
the Option of the Borrower.   
Subject to the conditions set forth in this Section 5(b) and Section
5(c), at any time after the first anniversary of the Original Issue Date, the
Borrower may deliver a Borrower Conversion Notice to require a conversion of
all or a portion of the outstanding principal amount of this Debenture if: (i)
the Closing Prices during any 10 consecutive Trading Days following the first
year anniversary of the Original Issue Date is equal to or greater than 300% of
the Conversion Price, and (ii) all of the Equity Conditions are satisfied as of
the Borrower Conversion Date with respect to the Underlying Shares potentially
issuable in connection with such proposed conversion. Notwithstanding anything
set forth in this Debenture to the contrary, the Borrower may not require
conversion of Debentures pursuant to Section 5(b) and any attempted conversion
or Borrower Conversion Notice delivered will be void, unless on each Trading
Day from the date of the delivery of the Borrower Conversion Notice through and
including the later of the date the Holder receives the Underlying Shares
issuable upon such conversion and the Borrower Conversion Date: (i) the Closing
Price exceeds 300% of the Conversion Price measured on the Original Issue Date
(as adjusted only as a result of stock splits and reverse stock splits) and
(ii) the Equity Conditions have been satisfied. Subject to the provisions of
this Section, the conversion subject to each Borrower Conversion Notice, once
given, shall be irrevocable as to the Borrower. If the conversion of a
principal amount of Debentures indicated in a Borrower Conversion Notice would
result in the issuance to the Holder of Underlying Shares in excess of the
amount permitted pursuant to Section 5(c), the Holder shall notify the Borrower
in writing of this fact and the Borrower shall: (x) honor the conversion for
the maximum principal amount of Debentures permitted pursuant to Section 5(c)
to be converted on such Borrower Conversion Date and (y) cancel the Borrower
Conversion Notice with respect to the portion of the principal amount of
Debentures the conversion of which would violate Section 5(c).  Notwithstanding anything to the contrary
herein, the Borrower may not deliver a Borrower Conversion Notice pursuant to
Section 5(b) unless the Borrower delivers Borrower Conversion Notices to all of
the Holders requiring each Holder to convert a pro-rata portion of the
outstanding principal amount of its Debentures, provided, that in no
event will the reduction of the principal amount of a Debenture to be converted
pursuant to a Borrower Conversion Notice resulting from the application of the
limitation contained in Section 5(c) as to one Holder cause or result in a
reduction of the principal amount of the principal amount of any other
Debenture to be converted pursuant to a Borrower Conversion Notice.

 

(c)                                  Certain
Conversion Restrictions.

 

(i)             Notwithstanding
anything to the contrary contained herein, the number of shares of Common Stock
that may be acquired by a Holder upon any conversion of Debentures (or
otherwise in respect hereof) shall be limited to the extent necessary to insure
that, following such conversion (or other issuance), the total number of shares
of Common Stock then beneficially owned by such Holder and its Affiliates and
any other Persons whose beneficial ownership of Common Stock would be
aggregated with such Holder’s for purposes of Section 13(d) of the Exchange
Act, does not exceed 4.999% of the total number of issued and outstanding
shares of Common Stock (including for such purpose the shares of Common Stock
issuable upon such conversion).  For
such purposes, beneficial ownership shall be determined in

 

7

 

accordance with Section 13(d) of the Exchange Act and the rules and
regulations promulgated thereunder. Each delivery of a Holder Conversion Notice
hereunder will constitute a representation by the applicable Holder that it has
evaluated the limitation set forth in this paragraph and determined that
issuance of the full number of Underlying Shares issuable in respect of such
Conversion Notice does not violate the restriction contained in this paragraph.
This provision shall not restrict the number of shares of Common Stock which a
Holder may receive or beneficially own in order to determine the amount of
securities or other consideration that such Holder may receive in the event of
a merger, sale or other business combination or reclassification involving the
Borrower as contemplated herein.

 

(ii)          If the Borrower has not
previously obtained Shareholder Approval (as defined below), then the Borrower
may not issue in excess of the Issuable Maximum at a Conversion Price below the
Closing Price on the Trading Day immediately preceding the Original Issue Date,
upon conversions of the Debentures.  The
“Issuable Maximum” means a number
of shares of Common Stock equal to 29,270,290. The Issuable Maximum shall be
reduced, at any given time, by the number of shares of Common Stock previously
issued upon conversion of any Debentures (as defined in the Loan Agreement) at
such time.  Each Holder shall be
entitled to a portion of the Issuable Maximum equal to the quotient obtained by
dividing: (x) the principal amount of Debentures issued and sold to such Holder
on the Original Issue Date by (y) the aggregate principal amount of Debentures
issued and sold by the Borrower on the Original Issue Date.  If any Holder shall no longer hold
Debentures, then such Holder’s remaining portion of the Issuable Maximum shall
be allocated pro-rata among the remaining Holders. If on any Conversion Date:
(A) the aggregate number of shares of Common Stock that would then be issuable
upon conversion in full of all then outstanding principal amount of  Debentures would exceed the Issuable Maximum
on such date, and (B) the Borrower shall not have previously obtained the vote
of shareholders, as may be required by the applicable rules and regulations of
the Nasdaq (or any successor entity or any other Eligible Market on which the
Company’s securities then trade) applicable to approve the issuance of shares
of Common Stock  in excess of the
Issuable Maximum pursuant to the terms hereof (the “Shareholder Approval”), then, the Borrower shall issue to the
converting Holder a number of shares of Common Stock equal to such Holder’s
pro-rata portion (which shall be calculated pursuant to the terms hereof) of
the then-current Issuable Maximum and, with respect to the remainder of the
principal amount of Debentures then held by such Holder for which a conversion
would result in an issuance of shares of Common Stock in excess of such
Holder’s pro-rata portion (which shall be calculated pursuant to the terms
hereof) of the then-current Issuable Maximum (the “Excess Principal Amount”), the applicable Holder shall have
the right to obligate the Borrower to obtain the Shareholder Approval
applicable to such issuance as soon as is possible, but in any event not later
than the 90th day after such request. 
If a Holder shall have elected the option pursuant to the immediately
preceding sentence and the Borrower shall have failed to obtain the Shareholder
Approval on or prior to the 90th day after such request, then: (i) such Holder
will continue to hold the unconverted portion of the Debentures held by such Holder,
(ii) no additional shares of Common Stock will be issued in respect of such
Debentures, (iii) the Debentures held by such Holder shall no longer be
convertible into shares of Common Stock and (iv) such Holder shall continue to
be entitled to all of its rights and privileges under such Debentures. The
Borrower and the Holder understand and agree that shares of Common Stock issued
to and then held by the Holder as a result of conversions of Debentures 

 

8

 

shall not be entitled to cast votes on any resolution to obtain
Shareholder Approval pursuant hereto.

 

6.                                       Mechanics
of Conversion.

 

(a)                                  The
number of Underlying Shares issuable upon any conversion hereunder shall equal:
(i) the outstanding principal amount of this Debenture to be converted, divided
by the Conversion Price on the Conversion Date, plus (ii) the amount of any
accrued but unpaid interest on this Debenture through the Conversion Date
(including any interest payments accreted to principal pursuant to the terms of
this Debenture), divided by the Conversion Price on the Conversion Date.

 

(b)                                 Upon
conversion of this Debenture, the Borrower shall promptly (but in no event
later than three Trading Days after the Holder Conversion Notice, and in no event
later than two Trading Days after the Borrower Conversion Date) issue or cause
to be issued and cause to be delivered to or upon the written order of the
Holder and in such name or names as the Holder may designate a certificate for
the Underlying Shares issuable upon such conversion, free of restrictive
legends. The Holder, or any Person so designated by the Holder to receive
Underlying Shares, shall be deemed to have become holder of record of such
Underlying Shares as of the Conversion Date. The Borrower shall, upon request
of the Holder, use its best efforts to deliver Underlying Shares hereunder
electronically (via a DWAC) through the Depository Trust Corporation or another
established clearing corporation performing similar functions.

 

(c)                                  The
Holder shall not be required to deliver the original Debenture in order to
effect a conversion hereunder. Execution and delivery of the Conversion Notice
shall have the same effect as cancellation of the original Debenture and
issuance of a New Debenture representing the remaining outstanding principal
amount. Upon surrender of this Debenture following one or more partial
conversions, the Borrower shall promptly deliver to the Holder a New Debenture
representing the remaining outstanding principal amount.

 

(d)                                 The
Borrower’s obligations to issue and deliver Underlying Shares upon conversion
of this Debenture in accordance with the terms hereof are absolute and
unconditional, irrespective of any action or inaction by the Holder to enforce
the same, any waiver or consent with respect to any provision hereof, the
recovery of any judgment against any Person or any action to enforce the same,
or any setoff, counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the Holder or any other Person of any obligation to
the Borrower or any violation or alleged violation of law by the Holder or any
other Person, and irrespective of any other circumstance which might otherwise
limit such obligation of the Borrower to the Holder in connection with the
issuance of such Underlying Shares.

 

(e)                                  If
by the third Trading Day after a Conversion Date the Borrower fails to deliver
to the Holder such Underlying Shares in such amounts and in the manner required
pursuant to Section 6, then the Holder will have the right to rescind the
Conversion Notice (including a Borrower Conversion Notice) pertaining thereto
by giving written notice to the Borrower prior to such Holder’s receipt of such
Underlying Shares.

 

9

 

(f)                                    If
by the third Trading Day after a Conversion Date the Borrower fails to deliver
to the Holder such Underlying Shares in such amounts and in the manner required
pursuant to Section 6, and if after such third Trading Day the Holder purchases
(in an open market transaction or otherwise) shares of Common Stock to deliver
in satisfaction of a sale by such Holder of the Underlying Shares which the
Holder anticipated receiving upon such conversion (a “Buy-In”), then the Borrower shall (A) pay in cash to the
Holder (in addition to any remedies available to or elected by the Holder) the
amount by which (x) the Holder’s total purchase price (including brokerage
commissions, if any) for the shares of Common Stock so purchased exceeds (y)
the amount obtained by multiplying (1) the aggregate number of Underlying
Shares that the Borrower was required to deliver to the Holder in connection
with the conversion at issue by (2) the Closing Price at the time of the
obligation giving rise to such purchase obligation and (B) at the option of the
Holder, either void the conversion at issue and reinstate the principal amount
of Debentures (plus accreted interest thereon) for which such conversion was
not timely honored or deliver to the Holder the number of Underlying Shares
that would have been issued had the Borrower timely complied with its
conversion and delivery obligations hereunder. 
The Holder shall provide the Borrower reasonably detailed evidence or
written notice indicating the amounts payable to the Holder in respect of the
Buy-In.

 

7.                                       Events
of Default.

 

(a)                                  At
any time or times following the occurrence of an Event of Default, the Holder
shall have the option to elect, by notice to the Borrower (an “Event Notice”), to require the Borrower to
repurchase all or any portion of the outstanding principal amount of this
Debenture indicated in the Event Notice, at a repurchase price equal to the
greater of (A) 125% of such outstanding principal amount, plus all accrued but
unpaid interest thereon through the date of payment, or (B) the Event Equity
Value of the Underlying Shares issuable upon conversion of such principal
amount and all such accrued but unpaid interest thereon. The aggregate amount
payable pursuant to the preceding sentence is referred to as the “Event Price.” The Borrower shall pay the
aggregate Event Price to the Holder (free of any claim of subordination) no
later than the third Trading Day following the date of delivery of the Event
Notice, and upon receipt thereof the Holder shall deliver the original Debenture
and original certificates evidencing any Underlying Shares so repurchased to
the Borrower (to the extent such documents have been delivered to the Holder).

 

(b)                                 Upon
the occurrence of any Bankruptcy Event, all outstanding principal and accrued
but unpaid interest on this Debenture shall immediately become due and payable
in full in cash (free of any claim of subordination), without any further
action by the Holder, and the Borrower shall immediately be obligated to
repurchase this Debenture and all such Underlying Shares at the Event Price
pursuant to the preceding paragraph as if the Holder had delivered an Event
Notice immediately prior to the occurrence of such Bankruptcy Event.

 

(c)                                  In
connection with any Event of Default, the Holder need not provide and the
Borrower hereby waives any presentment, demand, protest or other notice of any
kind, and the Holder may immediately and without expiration of any grace period
enforce any and all of its rights and remedies hereunder and all other remedies
available to it under applicable law. Any such declaration may be rescinded and
annulled by the Holder at any time prior to 

 

10

 

payment hereunder. No such rescission or annulment shall affect any
subsequent Event of Default or impair any right consequent thereto.

 

8.                                       Prepayment
at the Option of the Holder.  Upon
each receipt of a Proceeds Notice delivered pursuant to Section 4.12 of the
Loan Agreement, the Holder shall have the right, exercisable at the sole option
of the Holder and by delivery of a written notice (a “Holder Prepayment Notice” and the date such
notice is delivered by the Holder, the “Holder
Notice Date”) to the Borrower, to require the Borrower to prepay all
or a portion of the Debentures then held by the Holder for an amount in cash,
equal to 102% of such outstanding principal amount, plus all accrued but unpaid
interest thereon through the date of payment (the “Prepayment Price”) which shall be due and payable on the 20th
Trading Day following the Holder Notice Date (such date, the “Prepayment Date”), provided, that
the Prepayment Price shall not exceed  of the applicable Excess Amount
multiplied by such Holder’s Purchase Percentage.  If any portion of the Holder Prepayment Price due pursuant to the
terms hereof remains unpaid after the 20th Trading Day following the
Holder Notice Date, the Holder may, in addition to any other rights available
hereunder, elect by written notice to the Borrower to invalidate ab initio such Holder Prepayment Notice
with respect to the unpaid amount, notwithstanding anything herein contained to
the contrary.  If the Holder makes such
an election, this Debenture shall be reinstated with respect to such unpaid
amount. For purposes of this Section , principal amount of Debentures shall
remain outstanding until such date as the Holder shall have received Underlying
Shares upon a conversion (or attempted conversion) thereof that meets the
requirements hereof.  The Holder may
convert any portion of the outstanding principal amount of the Debentures
subject to a prepayment hereunder prior to the date that the Prepayment Price
is due and paid in full.

 

9.                                       Ranking.  This Debenture ranks pari passu with (i) all
other Debentures (as defined in the Loan Agreement) now or hereafter issued
pursuant to the Transaction Documents and (ii) the Previous Debentures (which,
as of the Original Issue Date, reflect an aggregate principal amount of
$1,000,000 and, it being understood that the Previous Debentures shall not in
any manner be secured under the Security Agreement) and is senior to all
existing and hereafter created Indebtedness of the Borrower. No Indebtedness of
the Borrower is senior to this Debenture in right of payment, whether with
respect of interest, damages or upon liquidation or dissolution or otherwise.
The Borrower will not, and will not permit any Subsidiary to, directly or
indirectly, enter into, create, incur, assume or suffer to exist any
indebtedness of any kind, on or with respect to any of its property or assets
now owned or hereafter acquired or any interest therein or any income or
profits therefrom, that is senior in any respect to the Borrower’s obligations
under the Debentures.

 

10.                                 Charges,
Taxes and Expenses.  Issuance of
certificates for Underlying Shares upon conversion of (or otherwise in respect
of) this Debenture shall be made without charge to the Holder for any issue or
transfer tax, withholding tax, transfer agent fee or other incidental tax or
expense in respect of the issuance of such certificate, all of which taxes and
expenses shall be paid by the Borrower; provided, however, that the Borrower
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the registration of any certificates for Underlying Shares
or Debentures in a name other than that of the Holder. The Holder shall be
responsible for all other tax liability that may arise as a result of holding
or transferring this Debenture or receiving Underlying Shares in respect
hereof.

 

11.                                 Reservation
of Underlying Shares.  The Borrower
covenants that it will at all times reserve and keep available out of the
aggregate of its authorized but unissued and 

 

11

 

otherwise unreserved Common Stock, solely for
the purpose of enabling it to issue Underlying Shares as required hereunder,
the number of Underlying Shares which are then issuable and deliverable upon
the conversion of (and otherwise in respect of) this entire Debenture (taking
into account the adjustments of Section 12), free from preemptive rights or any
other contingent purchase rights of persons other than the Holder. The Borrower
covenants that all Underlying Shares so issuable and deliverable shall, upon
issuance in accordance with the terms hereof, be duly and validly authorized,
issued and fully paid and nonassessable.

 

12.                                 Certain
Adjustments.  The Conversion Price
is subject to adjustment from time to time as set forth in this Section 12.

 

(a)                                  Stock
Dividends and Splits.  If the
Borrower, at any time while this Debenture is outstanding: (i) pays a stock
dividend on its Common Stock or otherwise makes a distribution on any class of
capital stock that is payable in shares of Common Stock, (ii) subdivides
outstanding shares of Common Stock into a larger number of shares, or (iii)
combines outstanding shares of Common Stock into a smaller number of shares,
then in each such case the Conversion Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock
outstanding immediately before such event and of which the denominator shall be
the number of shares of Common Stock outstanding immediately after such
event.  Any adjustment made pursuant to
clause (i) of this paragraph shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
dividend or distribution, and any adjustment pursuant to clause (ii) or (iii)
of this paragraph shall become effective immediately after the effective date
of such subdivision or combination.

 

(b)                                 Pro
Rata Distributions.  If the
Borrower, at any time while this Debenture is outstanding, distributes to all
holders of Common Stock (i) evidences of its indebtedness, (ii) any security
(other than a distribution of Common Stock covered by the preceding paragraph),
(iii) rights or warrants to subscribe for or purchase any security, or (iv) any
other asset (in each case, “Distributed
Property”), then, at the request of the Holder delivered before the
90th day after the record date fixed for determination of stockholders entitled
to receive such distribution, the Borrower will deliver to the Holder, within
five Trading Days after such request (or, if later, on the effective date of
such distribution), the Distributed Property that the Holder would have been
entitled to receive in respect of the Underlying Shares for which this
Debenture could have been converted immediately prior to such record date.  If such Distributed Property is not
delivered to the Holder pursuant to the preceding sentence, then upon any
conversion of this Debenture that occurs after such record date, the Holder
shall be entitled to receive, in addition to the Underlying Shares otherwise
issuable upon such conversion, the Distributed Property that the Holder would
have been entitled to receive in respect of such number of Underlying Shares
had the Holder been the record holder of such Underlying Shares immediately
prior to such record date.

 

(c)                                  Fundamental
Transactions.  If, at any time while
this Debenture is outstanding, (i) the Borrower effects any merger or
consolidation of the Borrower with or into another Person, (ii) the Borrower
effects any sale of all or substantially all of its assets in one or a series
of related transactions, (iii) any tender offer or exchange offer (whether by
the Borrower or another Person) is completed pursuant to which holders of
Common Stock are permitted to tender or exchange their shares for other
securities, cash or property, or (iv) the Borrower effects 

 

12

 

any reclassification of the Common Stock or any compulsory share
exchange pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property (other than as a result of a
subdivision or combination of shares of Common Stock covered by Section 12(a) above)
(in any such case, a “Fundamental Transaction”),
then upon any subsequent conversion of this Debenture, the Holder shall have
the right to receive, for each Underlying Share that would have been issuable
upon such conversion absent such Fundamental Transaction, the same kind and
amount of securities, cash or property as it would have been entitled to
receive upon the occurrence of such Fundamental Transaction if it had been,
immediately prior to such Fundamental Transaction, the holder of one share of Common
Stock (the “Alternate Consideration”).
For purposes of any such conversion, the Borrower shall apportion the
Conversion Price among the Alternate Consideration in a reasonable manner
reflecting the relative value of any different components of the Alternate
Consideration. If holders of Common Stock are given any choice as to the
securities, cash or property to be received in a Fundamental Transaction, then
the Holder shall be given the same choice as to the Alternate Consideration it
receives upon any conversion of this Debenture following such Fundamental
Transaction. To the extent necessary to effectuate the foregoing provisions,
any successor to the Borrower or surviving entity in such Fundamental
Transaction (or, if different, the ultimate parent of such successor or entity
or the entity issuing the Alternate Consideration) shall issue to the Holder a
new debenture consistent with the foregoing provisions and evidencing the
Holder’s right to convert such debenture into Alternate Consideration. The terms
of any agreement pursuant to which a Fundamental Transaction is effected shall
include terms requiring any such successor or surviving entity to comply with
the provisions of this paragraph (c) and insuring that this Debenture (or any
such replacement security) will be similarly adjusted upon any subsequent
transaction analogous to a Fundamental Transaction.

 

(d)                                 Subsequent
Equity Sales.

 

(i)             If the Borrower or
any subsidiary thereof, as applicable, at any time while this Debenture is
outstanding, shall issue shares of Common Stock (whether upon conversion of
Previous Debentures or otherwise) or Common Stock Equivalents entitling any
Person to acquire shares of Common Stock, at a price per share (the “Effective Price”) less than the Conversion
Price (if the holder of the Common Stock or Common Stock Equivalent so issued
shall at any time, whether by operation of purchase price adjustments, reset
provisions, floating conversion, exercise or exchange prices or otherwise, or
due to warrants, options or rights issued in connection with such issuance, be
entitled to receive shares of Common Stock at a price less than the Conversion
Price, such issuance shall be deemed to have occurred for less than the
Conversion Price), then, at the option of the Holder for such conversions as it
shall indicate, the Conversion Price shall be adjusted to mirror the
conversion, exchange or purchase price for such Common Stock or Common Stock
Equivalents (including any reset provisions thereof) at issue.  Such adjustment shall be made whenever such
Common Stock or Common Stock Equivalents are issued.  The Borrower shall notify the Holder in writing, no later than
the Trading Day following the issuance of any Common Stock or Common Stock Equivalent
subject to this section, indicating therein the applicable issuance price, or
of applicable reset price, exchange price, conversion price and other pricing
terms.  No further adjustments shall be
made to the Conversion Price upon the actual issuance of Common Stock upon
conversion or exercise of the applicable Common Stock Equivalent.

 

13

 

(ii)          If, at any time while
this Debenture is outstanding, the Borrower or any Subsidiary issues Common
Stock Equivalents with an Effective Price or a number of underlying shares that
floats or resets or otherwise varies or is subject to adjustment based
(directly or indirectly) on market prices of the Common Stock (a “Floating Price Security”), then for purposes of applying the
preceding paragraph in connection with any subsequent conversion, the Effective
Price will be determined separately on each Conversion Date and will be deemed
to equal the lowest Effective Price at which any holder of such Floating Price
Security is entitled to acquire Common Stock, whether prior, on or after such
Conversion Date (regardless of whether any such holder actually acquires any
shares on such date).

 

(iii)       Notwithstanding the
foregoing, no adjustment will be made under this paragraph (d) in respect of:
(A) the issuance of Common Stock upon exercise or conversion of any Common
Stock Equivalents described in Schedule 3.1(m) to the Loan Agreement
(provided that such exercise or conversion occurs in accordance with the terms
thereof, without amendment or modification), (B) any grant of options to
employees, officers or directors of the Borrower pursuant to any stock option
plan duly adopted by the Borrower’s board of directors or in respect of the
issuance of Common Stock upon exercise of any such options, (C) issuances of
Common Stock Equivalents upon the conversion of Debenture or other Common Stock
Equivalent outstanding on the date hereof or (D) any shares of Common Stock or
Common Stock Equivalents issued to pay all or a portion of any investment
banking, finders or similar fee or commission, which entitles the holders
thereof to acquire shares of Common Stock at a price not less than the market
price of the Common Stock on the date of such issuance and which is not subject
to any adjustments other than on account of stock splits and reverse stock
splits and which does not exceed 6% of the amount of Common Stock issued or
issuable pursuant to the transaction for which such fee or commission is paid.

 

(e)                                  Reclassifications;
Share Exchanges.   In case of any
reclassification of the Common Stock, or any compulsory share exchange pursuant
to which the Common Stock is converted into other securities, cash or property
(other than compulsory share exchanges which constitute Change of Control
transactions), the Holders of the Debentures then outstanding shall have the
right thereafter to convert such shares only into the shares of stock and other
securities, cash and property receivable upon or deemed to be held by holders
of Common Stock following such reclassification or share exchange, and the
Holders shall be entitled upon such event to receive such amount of securities,
cash or property as a holder of the number of shares of Common Stock of the
Borrower into which such shares of Debentures could have been converted
immediately prior to such reclassification or share exchange would have been
entitled. This provision shall similarly apply to successive reclassifications
or share exchanges.

 

(f)                                    Calculations.    All calculations under this Section 12
shall be made to the nearest cent or the nearest 1/100th of a share, as
applicable. The number of shares of Common Stock outstanding at any given time
shall not include shares owned or held by or for the account of the Borrower,
and the disposition of any such shares shall be considered an issue or sale of
Common Stock.

 

(g)                                 Notice
of Adjustments.    Upon the
occurrence of each adjustment pursuant to this Section 12, the Borrower at its
expense will promptly compute such adjustment in accordance with the terms
hereof and prepare a certificate describing in reasonable detail such 

 

14

 

adjustment and the transactions
giving rise thereto, including all facts upon which such adjustment is based.
Upon written request, the Borrower will promptly deliver a copy of each such
certificate to the Holder.

 

(h)                                 Notice
of Corporate Events.    If the
Borrower (i) declares a dividend or any other distribution of cash, securities
or other property in respect of its Common Stock, including without limitation
any granting of rights or warrants to subscribe for or purchase any capital
stock of the Borrower or any Subsidiary, (ii) authorizes or approves, enters
into any agreement contemplating or solicits stockholder approval for any
Fundamental Transaction or (iii) authorizes the voluntary dissolution,
liquidation or winding up of the
affairs of the Borrower, then the Borrower shall deliver to the Holder a notice
describing the material terms and conditions of such transaction, at least 20
calendar days prior to the applicable record or effective date on which a
Person would need to hold Common Stock in order to participate in or vote with
respect to such transaction, and the Borrower will take all steps reasonably
necessary in order to insure that the Holder is given the practical opportunity
to convert this Debenture prior to such time so as to participate in or vote
with respect to such transaction; provided, however, that the failure to
deliver such notice or any defect therein shall not affect the validity of the corporate
action required to be described in such notice.

 

13.                                 Fractional
Shares.    The Borrower shall not be
required to issue or cause to be issued fractional Underlying Shares on
conversion of this Debenture. If any fraction of an Underlying Share would,
except for the provisions of this Section, be issuable upon conversion of this
Debenture, the number of Underlying Shares to be issued will be rounded up to
the nearest whole share.

 

14.                                 Notices.    Any and all notices or other
communications or deliveries hereunder (including without limitation any
Conversion Notice) 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
next Trading Day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified in
this Section on a day that is not a Trading Day or later than 6:30 p.m. (New
York City time) on any Trading Day, (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 addresses for such communications shall be: (i) if to the Borrower, to 800
Miramonte Drive, Santa Barbara, California 93109, facsimile: (805) 899-3517,
attention Chief Financial Officer, or (ii) if to the Holder, to the address or
facsimile number appearing on the Borrower’s stockholder records or such other
address or facsimile number as the Holder may provide to the Borrower in
accordance with this Section.

 

15.                                 Miscellaneous.

 

(a)                                  This
Debenture shall be binding on and inure to the benefit of the parties hereto
and their respective successors and assigns. This Debenture may be amended only in writing signed by the Borrower and the
Holder and their successors and assigns.

 

15

 

(b)                                 Subject
to Section 15(a), above, nothing in this Debenture shall be construed to give
to any person or corporation other than the Borrower and the Holder any legal or equitable right, remedy or cause
under this Debenture. This Debenture shall inure to the sole and exclusive
benefit of the Borrower and the Holder.

 

(c)                                  The
corporate laws of the State of Delaware shall govern all issues concerning the
relative rights of the Borrower and its stockholders. All questions concerning
the construction, validity, enforcement and interpretation of this Debenture
shall be governed by and construed and enforced in accordance with the internal
laws of the State of New York, without regard to the principles of conflicts of
law thereof.  Each party agrees that all
proceedings shall be commenced exclusively in the state and federal courts
sitting in the City of New York, Borough of Manhattan (the “New York Courts”).  Each party hereto hereby irrevocably submits
to the exclusive jurisdiction of the New York Courts for any proceeding, and
hereby irrevocably waives, and agrees not to assert in any proceeding, any
claim that it is not personally subject to the jurisdiction of any New York
Court or that a New York Court is an inconvenient forum for such proceeding.  Each party hereto hereby irrevocably waives
personal service of process and consents to process being served in any such
proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address in
effect for notices to it under this Debenture and agrees that such service
shall constitute good and sufficient service of process and notice
thereof.  Nothing contained herein shall
be deemed to limit in any way any right to serve process in any 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.  The prevailing party in a proceeding shall
be reimbursed by the other party for its attorney’s fees and other costs and
expenses incurred with the investigation, preparation and prosecution of such
proceeding.

 

(d)                                 The
headings herein are for convenience only, do not constitute a part of this
Debenture and shall not be deemed to limit or affect any of the provisions
hereof.

 

(e)                                  In
case any one or more of the provisions of this Debenture shall be invalid or
unenforceable in any respect, the validity and enforceability of the remaining
terms and provisions of this Debenture shall not in any way be affected or
impaired thereby and the parties will attempt in good faith to agree upon a
valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Debenture.

 

(f)                                    No
provision of this Debenture may be waived or amended except in a written
instrument signed, in the case of an amendment, by the Borrower and the Holder
or, or, in the case of a waiver, by the Holder. No waiver of any default with
respect to any provision, condition or requirement of this Debenture 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.

 

(g)                                 To
the extent it may lawfully do so, the Borrower hereby agrees not to insist upon
or plead or in any manner whatsoever claim, and will resist any and all efforts
to be compelled to take the benefit or advantage of, usury laws wherever
enacted, now or at any 

 

16

 

time hereafter in force, in connection with any claim, action or
proceeding that may be brought by any Holder in order to enforce any right or
remedy under the Debentures. Notwithstanding any provision to the contrary
contained in the Debentures, it is expressly agreed and provided that the total
liability of the Borrower under the Debentures for payments in the nature of
interest shall not exceed the maximum lawful rate authorized under applicable
law (the “Maximum Rate”), and,
without limiting the foregoing, in no event shall any rate of interest or
default interest, or both of them, when aggregated with any other sums in the
nature of interest that the Borrower may be obligated to pay under the
Debentures exceed such Maximum Rate. It is agreed that if the maximum contract
rate of interest allowed by law and applicable to the Debentures is increased
or decreased by statute or any official governmental action subsequent to the
date hereof, the new maximum contract rate of interest allowed by law will be
the Maximum Rate of interest applicable to the Debentures from the effective
date forward, unless such application is precluded by applicable law. If under
any circumstances whatsoever, interest in excess of the Maximum Rate is paid by
the Borrower to any Holder with respect to indebtedness evidenced by the
Debentures, such excess shall be applied by such Holder to the unpaid principal
balance of any such indebtedness or be refunded to the Borrower, the manner of
handling such excess to be at such Holder’s election.

 

(h)                                 Except
pursuant to Sections 5(c)(ii), 7 and 8 hereunder, the outstanding principal
amount and interest under this Debenture may not be prepaid by the Borrower
without the prior written consent of the Holder.

 

(i)                                     The
obligations under this Debenture are secured pursuant to the Security
Agreement.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOLLOWS]

 

17

 

IN WITNESS
WHEREOF, the Borrower has caused this Debenture to be duly executed by a duly
authorized officer as of the date first above indicated.

 

	
  EARTHSHELL
  CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

18

 

EXHIBIT
A

 

HOLDER CONVERSION NOTICE

 

(To be Executed by the Registered Holder

in order to convert Debentures)

 

The
undersigned hereby elects to convert the principal amount of Debenture
indicated below, into shares of Common Stock of EarthShell Corporation, as of
the date written below. If shares are to be issued in the name of a Person
other than undersigned, the undersigned will pay all transfer taxes payable
with respect thereto and is delivering herewith such certificates and opinions
as reasonably requested by the Borrower in accordance therewith. No fee will be
charged to the Holder for any conversion, except for such transfer taxes, if any.
All terms used in this notice shall have the meanings set forth in the
Debenture.

 

	
  Conversion calculations:

  	
   

  
	
   

  	
  Date to Effect Conversion

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Principal amount of Debenture owned prior to conversion

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Principal amount of Debenture to be Converted

  
	
   

  	
  (including
                
  of interest added under Section 2(c) of the Debenture)

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Principal amount of Debenture remaining after Conversion

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Number of shares of Common Stock to be Issued

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Applicable Conversion Price

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Name of Holder

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

[ ] By the delivery of this Conversion Notice the Holder represents and
warrants to the Borrower that its ownership of the Common Stock does not exceed
the restrictions set forth in Section 5(c) of the Debenture.

 

19

 

EXHIBIT
B

 

COMPANY CONVERSION NOTICE

 

(To be executed by the Borrower

in order to convert the Debenture)

 

The
undersigned in the name and on behalf of EarthShell Corporation, hereby
irrevocably elects to convert the principal amount of Debenture indicated
below, into shares of Common Stock of EarthShell Corporation, as of the date
written below. If shares are to be issued in the name of a Person other than
Holder, the Holder will pay all transfer taxes payable with respect thereto and
is delivering herewith such certificates and opinions as reasonably requested
by the Borrower in accordance therewith. No fee will be charged to the Holder
for any conversion, except for such transfer taxes, if any. All terms used in
this notice shall have the meanings set forth in the Debenture.

 

	
  Conversion calculations:

  	
   

  
	
   

  	
  Date to Effect Conversion

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Principal amount of Debenture owned prior to conversion

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Principal amount of Debenture to be Converted

  
	
   

  	
  (including
                
  of interest added under Section 2(c) of the Debenture)

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Principal amount of Debenture remaining after Conversion

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Number of shares of Common Stock to be Issued

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Applicable Conversion Price

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Name of Holder

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

20

 

	
   

  	
  EARTHSHELL CORPORATION

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

21

 

Schedule
1

 

CONVERSION SCHEDULE

 

Secured
Convertible Debentures due on the third year anniversary of the Original Issue
Date in the aggregate principal amount of $12,550,000 issued by EarthShell
Corporation. This Conversion Schedule reflects conversions made under the above
referenced Debentures.

 

Dated:

 

 

	
  Date of Conversion

  	
   

  	
  Amount of

  Conversion

  	
   

  	
  Aggregate

  Principal

  Amount

  Remaining

  Subsequent to

  Conversion

  	
   

  	
  Applicable Conversion

  Price

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

22

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