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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-21130
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ENERGY BIOSYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3078857
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ENERGY BIOSYSTEMS CORPORATION 77381
4200 RESEARCH FOREST DRIVE (ZIP CODE)
THE WOODLANDS, TEXAS
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(281) 364-6100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Title of Class
Common Stock, par value $.01 per share
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No______
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $75,573,256 as of March 14, 1997, based on the
closing sales price of the registrant's common stock on the Nasdaq National
Market on such date of $6.75 per share and assuming full conversion of the
registrant's Series A and Series B Convertible Preferred Stock. For purposes of
the preceding sentence only, all directors, executive officers and beneficial
owners of ten percent or more of the common stock are assumed to be affiliates.
As of March 14, 1997, 11,605,377 shares of common stock were outstanding, 2,000
shares of Series A Convertible Preferred Stock were outstanding and 702,100
shares of Series B Convertible Preferred Stock were outstanding.
Certain sections of the registrant's definitive proxy statement relating to
the registrant's 1997 annual meeting of stockholders, which proxy statement will
be filed under the Securities Exchange Act of 1934 within 120 days of the end of
the registrant's fiscal year ended December 31, 1996, are incorporated by
reference into Part III of this Form 10-K.
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When used in this document, the words "anticipate," "believe," "expect,"
"estimate," "project" and similar expressions are intended to identify forward-
looking statements. Such statements are subject to certain risks, uncertainties
and assumptions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, believed, expected, estimated or
projected. For additional discussion of such risks, uncertainties and
assumptions, see "Item 1. Business--Risk Factors" included elsewhere in this
report.
PART I.
ITEM 1. BUSINESS
OVERVIEW
Energy BioSystems Corporation ("EBC" or the "Company") is developing and
commercializing innovative biotechnology-based processes for the petroleum
refining and production industries. The Company's focus to date has been on
developing biocatalytic desulfurization ("BDS"), a proprietary process involving
the use of enzymes to remove sulfur from petroleum. EBC believes that BDS can
be used as a substitute for, or in conjunction with, existing desulfurization
technology and expects BDS to be significantly less expensive than conventional
desulfurization methods. The Company's BDS pilot plant, which is a fully
integrated desulfurization unit capable of processing up to five barrels of
diesel fuel per day, was completed in late 1994 and began processing diesel
feedstock in March 1995. The pilot plant is intended to provide the basis for
the design of a commercial-scale BDS unit.
Removal of sulfur is one of the most costly issues facing the petroleum
industry and is a growing problem worldwide. Sulfur removal is desirable to the
refining industry because of (i) environmental regulations mandating decreased
sulfur in refined products, (ii) an increasing level of sulfur in crude oil
processed by refiners and (iii) high operating and maintenance costs associated
with the existence of sulfur in petroleum. Desulfurization is also attractive
to the crude oil production market, where low-sulfur crude oil commands a
premium price over high-sulfur crude oil.
The Company has entered into a number of strategic alliances with recognized
industry leaders in support of the Company's BDS development and
commercialization activities, providing an opportunity for the Company to build
on established expertise and resources in critical areas. The Company has an
agreement with The M.W. Kellogg Company ("M.W. Kellogg") for the basic
engineering services necessary for BDS implementation at customer sites, and an
agreement with Petrolite Corporation ("Petrolite") relating to the development
of the Company's BDS technology and the construction and operation of the
Company's pilot plant. The Company also has entered into collaborations
focusing on the application of the BDS technology as follows: an alliance with
Total Raffinage Distribution, S.A. ("Total") to develop a BDS process for diesel
fuel streams; an alliance with Koch Refining Company ("Koch") to develop a BDS
process for certain gasoline streams; an alliance with the Exploration and
Production Technology Division of Texaco Inc. ("Texaco") to develop a BDS
process for crude oil; and an alliance with The Carbide/Graphite Group, Inc.
("Carbide/Graphite") to develop a BDS process for decant oil. The Company is
pursuing additional alliances with potential customers, particularly in the
Middle East and Asia, two markets which are expected to make significant
investments in desulfurization technology over the next decade. The Company is
also pursuing agreements with leading worldwide biocatalyst manufacturers to
ensure a continuous supply of biocatalyst for the Company's BDS process. See "-
- -Alliances."
To date, the Company has engaged primarily in research and development related
to its BDS process. The Company's BDS process will require substantial
additional research, development and testing in order to determine its
commercial viability. See "--Risk Factors--Technological Uncertainty; Risks
Associated with Commercialization of BDS Technology."
The Company was incorporated in Delaware on December 20, 1989. The Company's
executive offices are located at 4200 Research Forest Drive, The Woodlands,
Texas 77381 and its telephone number is (281) 364-6100.
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THE COMPANY'S TECHNOLOGY
Background of BDS
The first patents covering the use of bacteria to reduce the sulfur content of
petroleum were issued in the United States in 1948. However, early attempts to
utilize bacteria and enzymes to selectively remove sulfur from hydrocarbons
failed, primarily because of an inability to control the action of the bacteria,
which resulted in significant degradation of the fuel value of the hydrocarbon.
In 1988, researchers at the Institute of Gas Technology ("IGT") achieved a
breakthrough in microbial desulfurization when they isolated two unique strains
of bacteria. These strains have the ability to desulfurize coal and selectively
remove sulfur from dibenzothiophene, the industry-recognized model for
heterocyclic sulfur molecules found in coal and petroleum. U.S. patents were
issued on these two bacterial strains in 1992.
In 1991, the Company obtained exclusive, worldwide, royalty-free rights to
IGT's desulfurization technology. A critical milestone was achieved in 1992
when the relevant genes from the patented bacteria were cloned and sequenced.
These genes have now been characterized extensively. The cloned genes are now
being manipulated and transferred to alternative microbial hosts and modified to
increase the expression of the desired properties. The Company has been issued a
fundamental patent on these genes, plus numerous other patents on the BDS
process by the U.S. and foreign patent offices. With bacteria strain isolation
and molecular cloning of the genes achieved, further development of BDS
technology involves primarily a new combination of established biotechnology and
chemical engineering processes.
In late 1992, the Company initiated operations of a continuous bench-scale
unit capable of desulfurizing up to one-half of a barrel of crude oil per day.
A fully integrated BDS pilot plant capable of processing up to five barrels of
diesel fuel per day was constructed in late 1994 and began processing diesel
feedstock for desulfurization in March 1995. The pilot plant was designed with
the instrumentation and scale necessary to provide the operating data needed for
commercial scale-up. The pilot plant is utilizing diesel fuel from the
Company's strategic ally, Total, as feedstock, and is undergoing a variety of
experiments that will allow the Company's team of scientists and engineers to
evaluate the performance of the biocatalyst, the reactor and the separations
systems for a wide range of operating conditions. The information generated
from the pilot plant will also be used to guide further development of the
Company's other BDS applications for crude oil and other petroleum products.
Overview of the Company's BDS Technology
BDS is a proprietary process based on naturally occurring bacteria that can
remove organically bound sulfur from petroleum without degrading the fuel value
of the hydrocarbon. Enzymes in the bacteria selectively cleave carbon-sulfur
bonds in the presence of oxygen to yield an oxygenated hydrocarbon product and a
sulfate by-product. Because the chemical reaction is catalyzed by enzymes
associated with the bacteria, the bacteria do not have to grow in order to
desulfurize fossil fuels. Operating at ambient temperatures and atmospheric
pressure, BDS is expected to be significantly lower in cost than conventional
hydrodesulfurization ("HDS") technology and flexible enough to desulfurize a
wide range of petroleum streams including crude oil. Since the process is
oxidative, the addition of hydrogen is not required, thus avoiding a significant
element of conventional desulfurization operating costs.
The basic steps of the BDS process are:
The biocatalyst is combined with water and transferred to the bioreactor.
The biocatalyst slurry and high-sulfur petroleum stream are mixed in the
continuous stirred-tank bioreactor and air is sparged in as a source of
oxygen.
The desulfurized oil is separated from the oil/aqueous/biocatalyst output
stream.
The aqueous phase is further treated to separate out the biocatalyst and
water.
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The sulfur byproduct is captured from the aqueous phase as a sulfate salt
or other water-soluble sulfur compound and removed from the process.
The biocatalyst and water are recycled to the bioreactor and spent
biocatalyst is drawn off.
Conventional Desulfurization Technologies
Hydrotreating is the conventional technology for the removal of sulfur,
nitrogen and other impurities from oil. When this process is used primarily for
the removal of sulfur, it is called hydrodesulfurization ("HDS"). In this
process, petroleum fractions are subjected to high temperatures and pressure in
the presence of an inorganic catalyst and hydrogen. As a result, organic sulfur
molecules are converted to hydrogen sulfide, which is further processed to yield
elemental sulfur. HDS is relatively ineffective against more complex sulfur
molecules found in diesel and heavier fractions.
HDS is a costly process for refiners. A typical HDS unit costs between $30
million and $80 million to construct, depending on the product stream to be
treated, the level of desulfurization required and the unit size. The high
pressure and temperature required for HDS translate directly into high capital
and maintenance costs because these units require high-pressure vessels and
exotic metals which are expensive to manufacture and maintain. Although some
refinery units produce hydrogen, the large amount of hydrogen required for HDS
may require refiners to build new hydrogen production capacity at an additional
significant capital expense.
Benefits of BDS
The Company believes that its BDS technology will offer the refining industry
an effective alternative to HDS and will in many cases complement existing
technology. The Company believes that BDS may provide refiners with the
following principal benefits:
Cost Effectiveness. BDS is designed to operate at ambient temperatures and
pressures, in contrast to HDS, which requires thick-walled reactors and other
equipment designed to tolerate high temperatures and pressures. As a result,
the Company expects that its BDS units will be significantly less expensive to
build than HDS units. The Company expects that the capital costs of a BDS
unit will be approximately 50 percent less than a comparable HDS unit. In
addition, the BDS process will not require hydrogen, which is an expensive
component of HDS.
Ease of Integration. The Company believes the BDS process can be integrated
into refinery operations without significant difficulty. Most of the
components of the BDS units are expected to be readily available equipment.
The biocatalyst will be produced off-site and delivered to the refinery, as is
now the case with inorganic catalysts used in conventional refinery processes.
The BDS process is not expected to generate any unusual byproducts, and
byproduct disposition is expected to be accomplished with existing processes
familiar to most refiners. The mild operating conditions of BDS are also
expected to contribute to improved operating safety over HDS in many
applications.
Effectiveness Against Complex Sulfur Molecules. The Company believes that BDS
will be effective in removing complex sulfur molecules that are resistant to
conventional desulfurization technologies. Diesel fractions, for example,
contain more complex sulfur molecules against which HDS is relatively
ineffective. As a result, HDS becomes increasingly more costly and less
effective in desulfurizing diesel fuel as the lighter-sulfur compounds are
removed and the remaining complex molecules constitute an increasing
proportion of the remaining sulfur. Accordingly, the Company expects that any
reduction in the level of sulfur permitted under applicable regulations will
make BDS increasingly cost-effective as compared to HDS.
While the Company believes its BDS process will be economically attractive to
petroleum refiners and to crude oil producers, the BDS process will require
significant capital expenditures by refiners and producers. The refining and
oil production industries historically have been reluctant to accept new
technologies. There is a risk, therefore, that the Company will have difficulty
in obtaining the refining and oil production industries' acceptance of the BDS
process.
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Also, the rate of purchase of the Company's BDS process may be affected by
economic conditions in the refining and oil production industries. The refining
and oil production industries have been subject to periods of depressed
profitability and are substantially affected by fluctuations in the price of
crude oil and finished products. Oil production and drilling activity are also
largely dependent on the level and volatility of oil prices.
MARKET OVERVIEW
Refining Industry
One of the principal markets for the Company's BDS technology is the worldwide
refining industry, which processes more than 60 million barrels of crude oil per
day or approximately 22 billion barrels per year. A significant portion of
worldwide refining capacity is concentrated among a small number of large
corporations and nationalized oil companies. In the United States, the top 10
companies process approximately 60 percent of the refined petroleum products,
and in Western Europe and Asia, the 10 largest refining companies process more
than half of the refined petroleum products.
Refineries purchase crude oil and process it into three principal products:
(i) middle distillates (including diesel fuel), (ii) gasoline and (iii) residual
fuel oil (used primarily by electric utilities and ships). In the refining
process, crude oil is subjected to distillation, resulting in the separation or
fractionation of the hydrocarbons into several intermediate products. These
intermediate products are subjected to additional processing steps before
formulation into finished products. These additional processing steps include
the removal of impurities (such as sulfur, metals and nitrogen), the "cracking"
of large hydrocarbon molecules and the upgrading of lower-quality intermediate
products.
Refinery Desulfurization
The refining industry is expected to spend more than $35 billion in capital
and up to $10 billion annually in operating expenditures for sulfur removal
through the next decade, assuming the use of conventional technologies. Asia
accounts for approximately 40 percent of this total expenditure with Western
Europe and the United States accounting for approximately 30 percent each.
Pollution regulations have increasingly targeted sulfur in fossil fuels due to
its harmful effects on the environment. The combustion of sulfur results in the
emission of sulfur oxides ("SOx"), which are believed to be a cause of "acid
rain" and smog. Regulations issued under the 1990 amendments to the U.S.
federal Clean Air Act (the "Amendments") required a reduction in the sulfur
content of all on-highway diesel fuels to 500 ppm on October 1, 1993, from a
prior national average of over 2,000 ppm. Similar regulations worldwide will
significantly reduce the level of sulfur allowed in certain petroleum products,
including diesel fuel. In Western Europe, diesel fuel was required to meet the
500 ppm specification by October 1996. In Asia, many countries have adopted or
plan to adopt similar sulfur regulations on diesel fuel which will be
implemented in various stages over the next decade. The European Union has
announced its intention to implement regulations requiring the further reduction
in the sulfur content of diesel fuel, with the expectation that the diesel
sulfur specification will be reduced to 350 ppm by the year 2000 and to 100 ppm
by the year 2005. In the past, environmental standards in the larger economies
around the world have tended to follow each other. Therefore, it is possible
that another series of diesel sulfur regulations, similar to those now
anticipated in Europe, will be forthcoming in the U.S. and in Asian countries.
Sulfur also inactivates catalysts contained in automobile catalytic converters
over time, resulting in a significant increase in the emission of unburned
hydrocarbons and nitrogen oxides ("NOx") from automobile tailpipes, which in
turn contribute to smog. The Amendments required a targeted reduction in U.S.
gasoline emissions of 15 percent by the year 1995 and call for a targeted
reduction of 25 percent by the year 2000. The Environmental Protection Agency
(the "EPA") established a detailed model (the "Complex Model") for determining
the emissions of various gasoline formulations to be sold in most large cities
that have not attained certain prescribed levels of improvement in air quality
("Nonattainment Areas"). Use of the Complex Model becomes mandatory starting in
1998 for certifying gasoline sold in Nonattainment Areas, which currently
represents approximately 25 percent of all gasoline produced in the U.S. The
Complex Model explicitly recognizes the detrimental impact of sulfur on gasoline
tailpipe pollution, giving refiners
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incentive to decrease the level of sulfur in gasoline they produce. Regulations
in Europe further limiting sulfur levels permitted in gasoline are anticipated
for the year 2000 and similar regulations may be adopted in Asia. Industry
sources believe that sulfur will play a key role in refiners' plans to reduce
gasoline emissions in the latter part of this decade.
The Amendments, as well as various state and local regulations, generally
limit the atmospheric emission of SOx by stationary sources, such as refineries
and utilities. For example, permit regulations limit allowable SOx emissions
from fluid catalytic cracking units ("FCCUs") (the refinery processing unit for
upgrading heavier oil molecules to gasoline), which may cause refiners to
constrain the output of a unit that is critical to refining profitability. New
or modified FCCUs are also subject to SOx emissions limitations. The Amendments
and state and local regulations also limit the amount of high-sulfur fuel that
electric utilities may burn, restricting one of the refining industry's largest
end markets for residual fuels. Consequently, the value of residual fuel is
significantly affected by its sulfur content.
The increasing average level of sulfur in crude oils is also expected to
stimulate demand for new desulfurization technologies. Low-sulfur crude oils
have traditionally been in greater demand and commanded a price premium over
higher-sulfur crude oils. Over the last decade, the average sulfur content of
crude oil processed by U.S. refiners increased by more than 20 percent. In the
future, refiners worldwide are expected to process increased volumes of high-
sulfur crude oil, raising the demand for additional desulfurization capacity.
Sulfur in crude oil increases refiners' operating costs because of sulfur's
detrimental effect on refinery equipment and catalytic processes. Many sulfur
compounds are corrosive, and the processing of high-sulfur crude oil
necessitates more frequent maintenance of refinery processing units. The
presence of sulfur in the feedstock for FCCUs decreases the effectiveness of the
inorganic catalyst used to crack the fuel, increasing the operating cost of the
FCCU and decreasing product yield. Sulfur has a similar degrading effect on
most catalytic processes in the refinery, increasing operating costs on a
variety of key processing units.
Crude Oil Desulfurization
The price of crude oil is affected by its sulfur content. The difference in
price between low-sulfur and high-sulfur crude oils is affected by increasingly
stringent regulation of sulfur content in finished products. Lower-sulfur crude
oils have typically commanded a $1 to $3 per barrel premium in the market
compared to higher-sulfur crude. Over 50 percent of the crude oil produced
worldwide is considered high in sulfur (greater than one percent). The Company
believes the price difference between low-sulfur crude oil and high-sulfur crude
oil will create an incentive for oil producers to reduce the sulfur levels in
their product, resulting in demand for crude oil desulfurization technologies.
Accordingly, the Company believes that by reducing the sulfur content of crude
oil at the production stage, BDS has the potential to greatly improve the
marketability and value of higher-sulfur oil reserves and improve producers'
access to pipelines that limit the sulfur content of crude oil. To date,
conventional desulfurization technologies have not proven economically viable
for the desulfurization of crude oil.
Large reserves of high-sulfur crude oil exist in Venezuela, Canada, the United
States, Mexico, the former Soviet Union and the Middle East. Venezuela has
proven reserves in excess of one trillion barrels of crude oil with a sulfur
content greater than two percent. Canada has in excess of 50 billion barrels of
proven reserves of crude oil with a two percent or greater sulfur content, and
the United States has approximately 125 billion barrels of proven reserves of
crude oil with a two percent or greater sulfur content. Cost-effective
desulfurization technology will play a key role in making many of these high-
sulfur crude oil reserves more economically exploitable.
Other Potential Applications of Biorefining
The Company believes there are numerous other applications for its biorefining
technology. These potential applications include the following:
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Nitrogen Removal. Nitrogen compounds in petroleum present refiners with many
of the same problems associated with sulfur. Refiners currently remove nitrogen
using a hydrotreating process. The Company believes that a system similar to the
BDS system can be developed to remove nitrogen.
Metals Removal. Heavy metals in petroleum damage refinery catalysts and
reduce the value of refined petroleum products. In addition, heavy metals limit
the efficiency of conventional desulfurization technologies. Bioreactor systems
have been developed for the extraction of metals from wastewater. The Company
believes that similar systems can be developed for the biocatalytic removal of
metals from crude oil and residual oil.
Viscosity Reduction and Cracking. Bioprocessing technologies have been used
for many years to depolymerize very viscous solutions of corn starch to produce
high fructose corn syrup. A similar chemical process in refineries is called
cracking, which refers to the thermal degradation of complex hydrocarbon
molecules into simpler, higher-value products. The Company believes that a
biocatalytic liquefaction system could be applied to molecules in some highly
viscous crude oils which currently have little commercial value. The Company
believes that this process could produce crude oil with significantly reduced
viscosity, a higher proportion of molecules in the gasoline and diesel fuel
boiling range, and increased commercial value.
Coal Desulfurization. Conventional desulfurization technologies cannot
economically remove organic sulfur from coal. Therefore, high-sulfur coal
represents a potential future market for the Company's desulfurization
technology. The Company believes that the BDS technology it develops for liquid
fossil fuels may eventually have application in the desulfurization of coal and,
in particular, coal slurries.
BUSINESS STRATEGY
The Company's goal is to become the leading provider of biorefining solutions
for the petroleum industry. The Company's strategy is to concentrate its
internal resources on the research, development and marketing of the Company's
BDS technology while entering into strategic alliances to assist in the
engineering and construction of BDS units and in the manufacturing of the
biocatalyst employed in the BDS process. To commercialize BDS, the Company must
develop the BDS process to a competitive commercial level, establish the
infrastructure required to deliver, supply and service the BDS units, and sell
the BDS units to refiners and oil producers. The Company believes it has chosen
the most rapid commercialization strategy by working on these efforts in
parallel and leveraging internal resources with strategic alliances.
The Company believes that its technology has broad potential application in
the processing of petroleum products. Although the Company's technology will
first be directed at biocatalytic desulfurization, the Company's long-term plan
is to expand the capabilities of its technology to address the removal of other
petroleum impurities (e.g., nitrogen and metals), to address other refining
processes (e.g., viscosity reduction and cracking) and to remove sulfur from
coal.
RESEARCH AND DEVELOPMENT
To commercialize BDS, the Company must improve the productivity of the
biocatalyst to a competitive economic level while developing an engineered
bioreactor system that allows the control of several variables to induce optimal
biocatalytic desulfurization. To accomplish these goals, the Company has
conducted extensive research, development and testing of the biocatalyst and
bioreactor and has assembled a team of scientists and engineers with extensive
experience in microbial physiology, molecular biology, biochemistry,
fermentation, process development and scale-up, biochemical engineering,
separations technology, and refinery process engineering and operations.
The focus of the Company's research and development efforts has been to
develop the BDS process for use in treating diesel fuel, gasoline and crude oil.
The Company also has efforts underway to develop the BDS process for use in
treating decant oil under its collaboration with Carbide/Graphite. The Company
expects the desulfurization of diesel fuel, where its development efforts are
the most advanced, to be the first commercial application of its BDS technology.
As a result of the specificity of the biocatalyst for each product application,
the Company expects that further development will be required to commercialize
its BDS technology for use in treating gasoline and crude oil.
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In late 1992, the Company initiated operations of a continuous bench-scale
unit capable of desulfurizing up to one-half of a barrel of crude oil per day.
A fully integrated BDS pilot plant capable of processing up to five barrels of
diesel fuel per day was constructed in late 1994 and began processing diesel
feedstock for desulfurization in March 1995. The pilot plant was designed with
the instrumentation and scale necessary to provide the operating data needed for
commercial scale-up. The pilot plant is utilizing diesel fuel from Total as
feedstock, and is undergoing a variety of experiments that will allow the
Company's team of scientists and engineers to evaluate the performance of the
biocatalyst, the reactor and the separations systems for a wide range of
operating conditions. The information derived from operating the pilot plant
will provide the design basis for the first commercial units and will be used to
guide further development of the Company's other BDS applications for crude oil
and other petroleum products.
In 1994, the Company was awarded a $2 million federal grant under the Advanced
Technology Program ("ATP") administered by the National Institute of Standards
and Technology. The grant is dedicated to the development of a biotechnology-
based method of removing sulfur from crude oil. The three-year program funded
with this award is intended to accelerate the pace of development in crude oil
desulfurization, moving the BDS technology in this area from the research level
toward the pilot plant phase.
The Company had research and development expenses for the years ended December
31, 1994, 1995 and 1996 of $5,723,131, $7,338,319 and $9,210,227, respectively.
The Company expects its research and development expenditures to decrease in
1997, as a result of a nonrecurring $1,000,000 payment to Petrolite in 1996
offset in part by additional scientific and technical personnel and a recently
completed 4,500 square-foot expansion of the Company's laboratory facilities.
The Company's research and development expenses will increase substantially,
however, if the Company makes the $9,000,000 payment to exercise the Petrolite
option in 1997, the entire amount of which will be recorded as a research and
development expense. The Company does not presently intend to exercise the
Petrolite option until it has raised additional funds or received additional
capital.
Biocatalyst Productivity
The Company is focusing on maximizing the biocatalyst's productivity to
minimize the quantity of catalyst and the time needed to complete the reaction.
This biocatalyst strain improvement is being pursued through both conventional
and genetic engineering programs. The conventional programs rely on mutagenesis
to produce variants of the original bacteria that desulfurize more efficiently.
The molecular biology program has identified the genetic elements responsible
for desulfurization, and is pursuing direct improvements in their operation,
primarily through recombinant DNA techniques patented by the Company.
Additionally, fermentation development is being used to identify growth media
which optimize the production of the biocatalyst.
Development of BDS entails research and development in the areas of molecular
biology, biochemistry, fermentation and longevity of the biocatalyst. Set forth
below is a description of the Company's research in these areas.
Increasing the Specific Activity of the Biocatalyst. The understanding and
manipulation of the molecular biology involved in the BDS process is vital for
the successful commercialization of the BDS technology. The Company has cloned,
sequenced and characterized genes responsible for the desulfurization activity.
The genes are now being manipulated, transferred to alternative microbial hosts
and modified to increase the expression of the desired properties. Over the
past three years, the Company isolated, purified and characterized three key
enzymes used in the BDS process. Additionally, in 1995 the Company identified,
isolated, characterized and cloned the gene responsible for the expression of a
previously unrecognized fourth enzyme that increases the rate of the BDS
process. By manipulating the genes responsible for desulfurization activity to
increase the expression of the fourth enzyme and by transferring the
desulfurization genes to alternative microbial hosts, the Company increased the
productivity of the biocatalyst by a factor of ten in 1996. The Company's
ability to make the BDS technology commercially viable will depend in large part
on its success in manipulating these genes to increase the expression of the
desulfurization trait.
Production of the Biocatalyst. Large-scale growth and production, or
fermentation, of biocatalysts is essential to the commercialization of the BDS
technology. The Company's efforts in developing alternative microbial hosts
have been intended to select hosts that can be produced more rapidly and at
lower cost. The Company believes that this
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fermentation will not be substantially different from the many antibiotic and
enzyme fermentations routinely commercialized by other biotechnology companies.
The Company currently conducts small- and intermediate-scale (300 liter)
fermentations at its laboratory facilities. These facilities are sufficient to
supply laboratory and preliminary pilot plant needs for the biocatalyst. The
Company is pursuing agreements with leading worldwide biocatalyst manufacturers
to ensure a continuous supply of biocatalyst for the Company's BDS process.
Longevity of Biocatalysts. All catalysts become inactive after prolonged
exposure to hydrocarbons. Catalyst replacement is a significant factor in the
cost of BDS. By extending the longevity of the biocatalyst, this component of
the operating cost of BDS can be minimized. The Company is developing
resistant strains of bacteria to serve as hosts, or "platforms," for the
desulfurization enzymes in order to maximize the longevity of the biocatalyst in
diesel fuel.
Process Engineering
In addition to efforts in biocatalyst development, the Company has allocated
considerable resources to the development of the process engineering for the
first BDS units. The Company believes that scale-up of its BDS process can be
accomplished with conventional process engineering technology. The Company and
Petrolite jointly operate the BDS pilot plant, which is a fully integrated
desulfurization unit capable of processing up to five barrels of diesel fuel per
day. The pilot plant was completed in late 1994 and began processing diesel
feedstock in March 1995. The pilot plant is intended to provide the basis for
the design of a commercial-scale BDS unit. Although many aspects of the
bioreactor are standard, the specific configuration of the bioreactor to be used
at each site will be customized based on, among other things, the specific
petroleum fraction to be desulfurized and the configuration of the refinery.
Bioreactor Technology. The Company has designed and constructed the pilot
plant to develop the catalytic process with hydrocarbon molecules in the
presence of air, water and various process chemicals. Variables such as
temperature, agitation rate and pH (acidity or alkalinity) can be controlled,
and measured amounts of oxygen and process chemicals can be added to the mixture
of biocatalyst and petroleum, optimizing the desulfurization environment. The
Company, however, has not yet developed a bioreactor capable of operating at
commercial levels of throughput and desulfurization, and there can be no
assurance that the Company can develop a commercial-scale bioreactor that will
desulfurize petroleum on a commercial basis.
Separations Issues. The completion of the BDS process results in a mixture of
water, desulfurized hydrocarbons, biocatalyst and sulfur byproduct. The Company
has developed proprietary technology for the efficient separation of these
components. The Company's improved separations system has been demonstrated in
the laboratory and was successfully implemented at the Company's pilot plant in
1996. The separation process uses a unique combination of conventional
technologies which the Company believes can be scaled up to commercial levels
without substantial difficulty.
Byproduct Disposition. The principal by-product of the BDS process is a
water-soluble, inorganic sulfur compound which has been removed from the target
hydrocarbons. The Company has evaluated alternatives for the disposition of the
sulfur and believes that the best alternative for most refineries will be
conversion of the sulfur byproduct either to ammonium sulfate, which can be used
as a fertilizer, or to sodium sulfate. A secondary byproduct will be the spent
biocatalyst stream, which is expected to be disposed of at an off-site
commercial disposal facility as either a solid or other refinery waste.
Mass Transfer Issues
The Company's recent success in improving the productivity of the biocatalyst
has increased the intrinsic reaction rate of the biocatalyst to the point that
it exceeds the rate at which sulfur molecules transfer from the petroleum to the
surface of the biocatalyst. Limitations in the speed of a catalytic reaction as
a result of the rate at which a substrate transfers to a catalyst (known as
"mass transfer limitations") are commonly encountered in both biological and
chemical catalysis and can frequently be overcome through one or more commonly
used biological and chemical engineering solutions. The Company is modifying
both the biocatalyst and the reactor design in an effort to overcome the mass
transfer limitation that currently affects the rate of the BDS reaction.
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Scientific Advisory Board
The Company has retained a group of distinguished research scientists and
engineers to provide advice on matters relating to its research, development and
business activities. The Scientific Advisory Board, composed of six members,
meets with the Company's scientists and management and is regularly available
for consultation. Scientific advisors are compensated for expenses and certain
advisors have been granted options to acquire Common Stock. The members of the
Scientific Advisory Board are as follows:
Charles L. Cooney, Ph.D., Professor of Chemical and Biochemical Engineering,
Massachusetts Institute of Technology. Dr. Cooney is widely recognized as an
expert in the field of bioreactor design and engineering. Dr. Cooney is the
author or co-author of more than 200 scientific publications and patents and has
received many academic awards and honors, including being named Founding Fellow,
American Institute for Medical and Biological Engineering, in 1992. Dr. Cooney
received his B.S. in Chemical Engineering from the University of Pennsylvania
and his M.S. and Ph.D. in Biochemical Engineering from Massachusetts Institute
of Technology.
Norman Hackerman, Ph.D., President Emeritus and Distinguished Professor
Emeritus of Chemistry, Rice University, and Former President and Professor
Emeritus of Chemistry, The University of Texas at Austin. Dr. Hackerman is a
member of the National Academy of Sciences and of the American Philosophical
Society, a Fellow of the American Academy of Arts and Sciences, and Chairman of
the Scientific Board of the Robert A. Welch Foundation. Dr. Hackerman has been
the recipient of many awards, including the American Institute of Chemists Gold
Medal and the Mirabeau B. Lamar Award of the Association of Texas Colleges and
Universities. He received his A.B. and Ph.D. from Johns Hopkins University.
Herbert L. Heyneker, Ph.D., Visiting Scholar, Standford University School of
Medicine, Department of Genetics. Dr. Heyneker is an authority in microbial
expression of human proteins, including insulin, growth hormone and tPA; protein
engineering; and expression systems for industrial microorganisms. Dr. Heyneker
serves as a director of Genpharm International, Inc., and Genomysx Corporation.
He also serves as a scientific advisor for Institutional Venture Partners and as
a member of the scientific advisory board for Cytel Corporation. He earned his
Ph.D. from the University of Leiden, The Netherlands and completed his post-
doctoral fellowship at the University of California-San Francisco Medical
School.
Charles F. Kulpa, Jr., Ph.D., Professor of Microbiology, University of Notre
Dame. Dr. Kulpa is regarded as an expert in the fields of microbiology,
bioremediation and biochemistry. His laboratory research work is concentrated in
the areas of environmental and applied microbiology. Dr. Kulpa has authored or
co-authored numerous papers detailing his research in microbiological and
biochemistry processes. Active in many scientific organizations, Dr. Kulpa has
served as President of the Indiana Branch of the American Society for
Microbiology. He received his B.S., M.S. and Ph.D. in Microbiology from the
University of Michigan.
W. Arthur Porter, Ph.D., President and Chief Executive Officer of the Houston
Advanced Research Center. The Houston Advanced Research Center ("HARC") is a
non-profit research consortium with major research interests in materials
science, lasers, high energy physics, supercomputing, geotechnology, space and
policy studies located in The Woodlands, Texas. Dr. Porter is also adjunct
professor of electrical and computer engineering at Rice University in Houston.
Dr. Porter serves on the boards of Stewart Information Services Corporation;
Electro Scientific Industries; HARC; and the American Productivity and Quality
Center. He also serves as a Governor-appointed member of the Texas Partnership
for Economic Development Board and is a past member of the U.S. Department of
Commerce Semiconductor Technical Advisory Committee. He received his B.S. and
M.S. degrees in Physics from the University of North Texas and his Ph.D. in
Interdisciplinary Engineering from Texas A&M University.
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Derek Redmore, Ph.D., Vice President, Technology Department, Petrolite. Dr.
Redmore has served at the managerial level within Petrolite since he joined the
company as a Senior Research Chemist in 1965. During his career, he has received
108 patent awards and was named Missouri Inventor of the Year in 1981. He
received his B.Sc. and Ph.D. in Chemistry from Nottingham University in England
and completed his post-doctoral work at Washington University in St. Louis.
ALLIANCES
The Company has entered into alliances with potential customers and suppliers
in support of its BDS development and commercialization activities. These
alliances give the Company an opportunity to build on established expertise and
resources in areas critical to its success. In the case of alliances with
potential customers, the Company believes that these relationships may enhance
its ability to sell BDS units. Entering into alliances with recognized industry
suppliers is expected to facilitate commercialization of the BDS technology.
However, there can be no assurance that the Company will be successful in
maintaining its existing collaborative relationships or in establishing new
relationships.
Alliances with Potential Customers
Total Raffinage Distribution S.A. In July 1994, the Company entered into an
agreement with Total Raffinage Distribution S.A. ("Total") to collaborate on the
application of the Company's BDS process to diesel and other middle distillate
fuel streams. The Company and Total will each bear their own costs and expenses
incurred under the collaboration. In addition, as part of its obligations under
the agreement, Total has provided the Company with the use of analytical
equipment valued at approximately $200,000. The agreement with Total provides
that upon commercialization, the site licenses will be waived on Total's first
commercial BDS unit. In addition, Total will be entitled to receive a 10
percent discount on future site license and service fees until it has recovered
two and one-half times its research costs and expenses for BDS projects under
the agreement. The Company expects that its alliance with Total will facilitate
commercialization of the BDS technology for diesel fuel and the Company's
entrance into the European market.
The Company's alliance agreement with Total contemplates an evaluation of
pilot plant operations, commencing after the Company's completion of the
development of a prototype biocatalyst. The Company completed the development
of a prototype biocatalyst in late 1996 and expects to complete the evaluation
by mid-1997. The prototype biocatalyst is intended to possess characteristics
sufficiently similar to the commercial biocatalyst to permit the design of a
commercial-scale BDS unit although it is not expected or intended to possess
sufficient specific activity or other characteristics necessary to be
commercially viable. If the results from the pilot plant are satisfactory, it
is expected that Total will build and operate at Total's expense a pilot BDS
unit at Total's European Center for Research and Technology and simultaneously
will build a commercial BDS unit at one of its refineries. The Company intends
to continue the development of the biocatalyst to improve its specific activity
and other characteristics necessary for commercial viability during the period
in which Total is building these BDS units. Total has indicated that it intends
to employ its initial BDS units for the "ultra deep" (below 500 ppm)
desulfurization of diesel, a range of desulfurization below current regulatory
standards in which BDS is expected to possess greater cost advantages as
compared to HDS. The Company is also continuing to develop its BDS technology
for the desulfurization of diesel fuel in ranges above 500 ppm.
Total is a wholly owned subsidiary of Total S.A., a leading international oil
and gas company based in France. Total S.A. participates in every phase of the
oil and gas industry with operations in more than 80 countries worldwide and
revenues of over $25 billion.
Koch Refining Company. In December 1993, the Company entered into an alliance
with Koch Refining Company ("Koch") for the development of a biotechnology-based
desulfurization system for refinery oil streams. The alliance is expected to
accelerate the development of BDS for certain gasoline streams and customize
that development for Koch's applications. Under the terms of the alliance, the
Company is primarily responsible for improving the performance of the
biocatalyst used in the BDS process and developing a commercial BDS system.
Koch is primarily
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responsible for selecting and providing the target gasoline stream as well as
testing desulfurized product quality. Koch will also provide engineering support
as needed in the development of a BDS unit for Koch's operations. Until
commercialization, the Company and Koch will each bear their own costs and
expenses incurred in connection with the collaboration. Upon commercialization,
Koch will be repaid for direct costs and expenses incurred in assisting BDS
development. Repayment will be in the form of a 10 percent rebate on
desulfurization processing fees charged to Koch until Koch has been repaid its
share of BDS development costs. The Company expects that the development
alliance with Koch will facilitate commercialization of the Company's BDS
technology for target gasoline streams.
Koch is a part of Koch Industries, one of the largest privately held companies
in the United States. Koch Industries, with annual revenues in excess of $20
billion, is involved in virtually all phases of the oil and gas industry, as
well as chemicals, chemical technology products, agriculture, hard minerals,
real estate, and financial investments.
Texaco Exploration and Production Technology Division. In July 1993, the
Company signed an agreement with the Exploration and Production Technology
Division of Texaco Inc. ("Texaco") for the development of a BDS process for
crude oil. Under the terms of the alliance, the Company is primarily
responsible for improving the performance of the biocatalyst used in the BDS
process. Texaco is primarily responsible for field operations, analytical
chemistry work, and selecting and providing the target crude oil stream as well
as testing desulfurized product quality. Process engineering is conducted
jointly by the parties. The Company and Texaco each bear their own costs and
expenses incurred in connection with the collaboration. In the event the
Company sub-licenses Texaco's intellectual property and proprietary information,
licensed by Texaco to the Company, the Company has agreed to pay Texaco an
amount equal to 10 percent of the desulfurization processing fee charged to
Texaco until such time as the Company has paid Texaco an aggregate amount equal
to two and one-half times the aggregate amount of Texaco's direct costs and
expenses incurred in connection with the collaboration. The Company expects
that the development alliance with Texaco will facilitate commercialization of
the Company's BDS technology for crude oil applications.
Texaco Inc. is one of the largest oil companies in the world with operations
in crude oil production, refining and marketing. Texaco Inc. has annual
revenues in excess of $36 billion.
The Carbide/Graphite Group, Inc. In December, 1995, the Company entered into
an agreement with The Carbide/Graphite Group, Inc. ("Carbide/Graphite") to
collaborate on the development of the Company's BDS technology for the removal
of sulfur from decant oil. Decant oil is a heavy, highly viscous refined
petroleum product which is used primarily to make needle coke. Needle coke is
the principal raw material used in the manufacture of graphite electrodes.
Under the terms of the alliance, the Company will be primarily responsible for
customizing and commercializing a biocatalyst and desulfurization system
specifically for decant oil. Carbide/Graphite primarily will be responsible for
providing the development and commercialization funding for this particular BDS
process. The Company expects that the development alliance with
Carbide/Graphite will facilitate commercialization of the Company's BDS
technology for decant oil.
Carbide/Graphite, which has annual revenues in excess of $259 million, is a
major U.S. manufacturer of graphite electrode and calcium carbide products.
Graphite electrodes are used as conductors of electricity, and are consumed in
the electric arc furnace steelmaking process common to all mini-mill steel
producers. Carbide/Graphite is the only manufacturer of graphite electrodes
that produces its own requirements of needle coke. Carbide/Graphite also sells
needle coke to other manufacturers of graphite products.
Prospective Additional Customer Alliances. The Company is pursuing additional
alliances with potential customers, particularly in the Middle East and Asia,
two markets which are expected to make significant investments in
desulfurization technology over the next decade.
Alliances with Suppliers
The M.W. Kellogg Company. In August 1994, the Company signed an agreement
with The M.W. Kellogg Company ("M.W. Kellogg") to collaborate on the development
and commercialization of BDS technology. Under the terms of the collaboration,
M.W. Kellogg will serve as an engineering consultant to the Company during
completion
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of the BDS development process and will be the exclusive provider of the basic
engineering design services required for commercial BDS units. In return for
these services, M.W. Kellogg will receive a portion of the site license fee
generated by the sale of BDS units. The collaboration has a minimum term of at
least five years or the completion of 20 BDS units, whichever is longer, and
applies to all biorefining technologies the Company develops. During the first
phase of the collaboration, M.W. Kellogg provided 500 engineering work hours of
service at no cost to the Company. M.W. Kellogg also agreed to provide an
additional 1,500 work hours of service at M.W. Kellogg offices at reduced rates,
of which 500 had been utilized by the Company at December 31, 1996. The Company
expects that the development alliance with M.W. Kellogg will substantially
enhance its refinery engineering capabilities and market access.
M.W. Kellogg is an ISO 9001-certified, international technology-based
engineering and construction contractor, serving primarily the hydrocarbon,
chemical and energy related industries. M.W. Kellogg is a wholly owned
subsidiary of Dresser Industries, Inc., a major supplier of highly engineered
products and services primarily used in hydrocarbon and energy-related
activities throughout the world. Dresser Industries, Inc. has annual revenues
in excess of $6 billion.
Petrolite Corporation. In March 1992, the Company entered into a
collaboration agreement with Petrolite Corporation ("Petrolite"). The Company
and Petrolite agreed to jointly develop the Company's BDS process and utilize
emulsification and separations technologies and process chemicals developed by
Petrolite, if needed. In connection with this collaboration, Petrolite agreed
to provide the emulsification and separations equipment necessary for the
storage, mixing, injection and delivery of biocatalysts and process chemicals
used in the BDS process and to pay the Company $5.4 million during the first two
years of the agreement for research and development. Petrolite also agreed to
design and finance construction of the pilot plant and to provide service
personnel to operate and service the BDS units on site at customer locations.
The Company agreed to market the BDS process and the Company's biocatalyst, and
to fund, during the third through fifth years of the agreement, research and
development related to BDS at an annual rate of not less than four percent of
the Company's net revenues from BDS projects or $2.5 million, whichever is
greater. Under the collaboration agreement, the Company is obligated to pay
Petrolite 22 percent of all site license fees received by the Company from BDS
customers and 22 percent of adjusted gross profit (as defined in the agreement)
realized from operation of the BDS units. The Company expects that the
development alliance with Petrolite will facilitate commercialization of the
Company's BDS technology through the development and testing of the pilot plant.
In October 1996, the Company entered into an agreement with Petrolite
providing the Company with the option to amend the terms of its strategic
alliance with Petrolite. Under the agreement, the Company made an initial
payment of $1 million to Petrolite in December 1996 in exchange for the option
and the extension of Petrolite's obligations to provide operational and
technical support for the pilot plant from September 1, 1996 through December
31, 1998. If the Company exercises its option, the percentage of site license
fees and adjusted gross profit payable to Petrolite will be reduced to 9.5% from
22%, in exchange for which the Company will (i) assume responsibility for
servicing the BDS units on site at customer locations (ii) pay Petrolite an
additional $9 million in cash and (iii) issue to Petrolite a warrant entitling
Petrolite to purchase 138,889 shares of Common Stock at an exercise price of
$7.20 per share. The Company may exercise the Petrolite option at any time on
or before the earlier to occur of (i) ten business days following the closing of
any equity financing by the Company in which the gross cash proceeds raised in
such financing (together with the gross cash proceeds raised by the Company in
any other equity financing after the date of the option agreement, if
applicable) equal or exceed $25 million and (ii) December 30, 1998.
Petrolite is a refinery services company with over $360 million in annual
revenues. Petrolite's research and development capabilities include process
engineering, emulsification and separations chemistry and analytical chemistry.
Prospective Additional Supplier Alliances. The Company is pursuing agreements
with leading worldwide biocatalyst manufacturers to ensure a continuous supply
of biocatalyst for the Company's BDS process.
COMPETITION
The primary competition for BDS technology is expected to come from licensors
of HDS technology and the manufacturers of catalysts used in those units. In
most initial diesel fuel applications, BDS will be sold as a
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complementary process where expanded capacity is desired or a greater degree of
desulfurization becomes necessary in connection with an existing HDS unit.
Subsequently, BDS will be developed as a stand-alone diesel fuel desulfurization
process, competing directly with HDS. In the case of gasoline, where HDS units
are not typically used, the Company expects BDS to operate as a stand-alone
desulfurization system. The Company intends to compete on the basis of cost
effectiveness, ease of integration, effectiveness in removing complex sulfur
molecules that are resistant to conventional desulfurization technologies, and
the ability to process petroleum streams that are difficult for HDS to process.
HDS process technologies and catalysts are supplied by a small number of
companies that maintain their market positions through a combination of
recognized expertise, intellectual property rights and established relationships
with refiners. Increasing environmental regulation has caused these catalyst
suppliers to make significant investments in research and development during the
past several years to develop more efficient HDS technologies. The Company
believes that these efforts have been directed at refinement of the conventional
HDS technology rather than development of entirely new processes. Many of these
companies supplying HDS technology have substantially greater financial,
technical and human resources than the Company.
BDS may face competition from other biotechnology processes, although the
Company believes it is the leading developer of biorefining in the world. The
most significant competitive effort of which the Company is aware is based in
Japan at the Petroleum Energy Center ("PEC"), a consortium of Japanese petroleum
companies conducting research funded by the Japanese Ministry of International
Trade and Industry. The Company believes, based upon meetings with PEC
personnel and third-party sources, that it has a substantial lead in developing
BDS technology and that its patents provide it with a substantial competitive
advantage over the PEC effort. The Company is also aware that one or more major
oil companies have from time to time attempted to develop microbial or
biocatalytic desulfurization technologies, although the Company believes that
none of these companies has successfully developed any of these technologies to
date. Based upon information available to the Company, the Company believes
that these efforts do not currently present significant competition for its BDS
technology in its primary markets.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's ability to compete will depend in part on maintaining the
proprietary nature of its technology. The Company has established an active
program for the protection of its intellectual property. This program includes,
among other things: procedures, notebooks and forms for documenting, evidencing
and disclosing all Company inventions to management; a Patent Review Committee
which meets regularly to discuss all intellectual property issues; a system for
continuously monitoring patents issued to, and patent applications filed by,
relevant third parties; a program of seminars for employees on intellectual
property topics; a recognized intellectual property law firm on retainer; a
patent administrator and other personnel dedicated to assisting in the
preparation and prosecution of the Company's patents; personnel policies and
agreements requiring disclosure by employees of all inventions and protection of
confidential information; and agreements with all technical and scientific
employees providing for the assignment of inventions made by such employees to
the Company.
The Company has an active program in place to maintain and build its
intellectual property position. Seven U.S. patents on BDS technology have been
issued to The Institute of Gas Technology ("IGT") and licensed exclusively to
the Company, subject to the U.S. government's rights to certain of such patents.
Additionally, one U.S. patent has been issued to the Korean Institute of Science
& Technology and licensed on a nonexclusive basis to the Company. A U.S. patent
claiming the use of BDS in combination with HDS for BDS technology was issued to
the Company in 1993. The two-stage process for deep desulfurization covered
by this patent involves the use of BDS in conjunction with conventional HDS
technology, taking advantage of the significant synergies between the two
technologies. The Company was issued three patents during the year ended
December 31, 1994 and three patents during the year ended December 31, 1995.
The most significant of the three patents issued in 1994 is the "Recombinant DNA
Encoding a Desulfurization Biocatalyst" patent, which is a fundamental
recombinant DNA patent on the genetic sequences for enzymes that desulfurize
petroleum. This patent is an important milestone in the development of the
Company's worldwide competitive position and establishes its technical
leadership in biodesulfurization. The remaining two patents issued in 1994
include "A Process for the Desulfurization and the Desalting of Fossil Fuels"
and "Microemulsion
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Process for Direct Biocatalytic Desulfurization of Organosulfur Molecules." The
patents issued in 1995 include "Multistage Process for Deep Desulfurization of
Fossil Fuels," "Method for Separating a Sulfur Compound from Carbonaceous
Materials" and "Continuous Process for Biocatalytic Desulfurization of Sulfur-
Bearing Heterocyclic Molecules." In 1996, an additional five U.S. patents were
issued to the Company, including continuations in part on the HDS/BDS patent
first issued in 1993 and the desalting patent first issued in 1994 as well as
two entirely new patents related to oil/water separations technology and a novel
process for the reduction of oil viscosity. These patents are expected to yield
long-term improvement in the economics of biodesulfurization for the Company.
Patents issued to or licensed by the Company begin to expire in the year 2010.
The Company has filed patent applications in the U.S. and worldwide under the
Patent Cooperation Treaty as well as in targeted countries not involved in the
treaty such as Venezuela. In total, the Company has rights to 20 U.S. patents
(including cell recombinant DNA and fundamental process patents) and 32 foreign
patents. In addition, the Company has 12 applications pending in the U.S.
patent office, and more than 60 foreign patent applications pending to cover BDS
process technology and the molecular cloning of the biocatalyst gene. See "--
Risk Factors--Patents and Proprietary Technologies."
EMPLOYEES AND CONSULTANTS
The Company believes that its success will be based, among other things, on
achieving and retaining scientific and technological superiority and on
identifying and retaining capable management in order to conduct a fully
integrated program of biorefining technology development. The Company has
assembled a highly qualified team of scientists as well as executives with
extensive experience in the petroleum industry. The Company's product
development program combines basic scientific disciplines, such as molecular
biology, microbial genetics, biochemistry and biochemical engineering, with
applied disciplines such as fermentation, process development, petroleum product
separations and recovery, and byproduct disposition expertise.
As of December 31, 1996, the Company employed 83 people, 26 of whom hold Ph.D.
degrees and 13 of whom hold other advanced degrees. The Company's employees
with doctoral degrees represent collective expertise in molecular biology,
microbiology, biochemistry, chemistry and chemical and process engineering. The
Company believes that its relationship with its employees is good.
GOVERNMENT REGULATION
Certain of the Company's current and planned operations are, or may be,
subject to regulation under various federal and state laws pertaining to
protection of the environment and employee health and safety. In the course of
its current research and development activities, the Company generates small
quantities of solid and hazardous wastes that are subject to regulation under
the Resource Conservation and Recovery Act ("RCRA") and various other federal
and state regulations. The research and development activities of the Company
are also subject to the Occupational Safety and Health Act ("OSHA") and similar
state laws and regulations. Upon commercialization of the Company's technology,
the Company's operations will be subject to the full scope of environmental and
employee health and safety regulations including not only RCRA and OSHA, but
also the Clean Air Act, the Federal Water Pollution Control Act, the Toxic
Substances Control Act ("TSCA") and other applicable state and federal
environmental laws and regulations. Although current information is not
definitive enough to accurately predict compliance requirements with such laws
and regulations, the Company believes that compliance will not materially affect
its operations.
Under TSCA, the EPA regulates the use of chemicals for commercial purposes,
and the EPA has asserted that it has jurisdiction under TSCA to regulate
genetically engineered microorganisms ("GEMs"). Prior to commercialization of
the Company's biocatalyst product, the Company will most likely be subject to
the Premanufacture Notice Requirements under TSCA in marketing its BDS
technology. Under the Premanufacture Notice Requirements, if the EPA finds that
the Company's biocatalyst product poses an unreasonable risk to the environment,
it may establish controls on its manufacture, distribution or disposal. Based
on written communication with the EPA, the Company does not believe that
compliance with TSCA will delay the commercialization of the BDS process.
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Commercialization of the Company's technology outside the U.S. will require
compliance with the regulations of foreign countries. In anticipation of early
commercialization in Europe, the Company has begun efforts to prepare for
compliance with European Union regulations for genetically modified organisms
("GMOs"). Directive 90/219 of the European Commission provides a framework for
contained use of GMOs. Each of the member countries has enacted specific
regulations consistent with this directive. Based upon discussions with
authorities in France, Belgium and the United Kingdom regarding their
regulations under Directive 90/219, the Company does not believe that compliance
with such regulations will delay commercialization of the BDS process in Europe.
RISK FACTORS
Technological Uncertainty; Risks Associated with Commercialization of BDS
Technology
Since its inception, the Company has engaged primarily in research and
development related to its BDS process. The Company's BDS process will require
substantial additional research, development and testing in order to determine
its commercial viability. The Company has not proven its BDS technology other
than to a limited extent in laboratory, bench-scale and pilot plant trials. The
Company's ability to make its BDS technology commercially viable will depend in
large part on its success in (i) achieving improvement of its biocatalyst,
including the manipulation of the genes responsible for desulfurization activity
to increase the expression and longevity of the desulfurization trait, (ii)
improving the rate at which sulfur molecules transfer from petroleum to the
biocatalyst, (iii) developing the fermentation process, (iv) contracting for the
manufacture of, or manufacturing, sufficient biocatalyst for use in commercial
BDS units, (v) developing a bioreactor for use with the BDS process capable of
operating at commercial levels of throughput and desulfurization, (vi)
identifying economically viable processes for commercial-scale, sulfur byproduct
disposition and (vii) marketing its BDS systems effectively. The accomplishment
of some or all of these objectives may take longer than anticipated or may never
occur. If the accomplishment of any of these objectives takes longer than
anticipated, the Company may require additional capital to continue the
development and commercialization of its BDS technology, and there can be no
assurance that such capital will be available or that the Company will be able
to successfully commercialize the BDS technology.
History of Operating Losses and Uncertainty of Future Profitability
The Company has incurred net losses since its inception and expects its losses
to increase in the foreseeable future as it increases its expenditures for the
continued development and commercialization of its biorefining technology. The
Company has not derived any revenues to date from the use or sale of its
biorefining technology and had an accumulated deficit of $42,713,302 at December
31, 1996. The time required for the Company to become profitable is uncertain,
and there can be no assurance that the Company will achieve profitability on a
sustained basis, if at all.
Manufacture of Biocatalyst
The Company currently intends to manufacture, at its own facility, only a
quantity of biocatalyst sufficient for its in-house research and pilot plant
needs. The Company expects that the biocatalyst to be employed in the
commercial BDS process initially will be manufactured by a third party. The
Company has had discussions regarding non-exclusive biocatalyst supply
arrangements with several parties that it believes are capable of satisfying the
Company's supply requirements. If the Company is unable to enter into
agreements for the supply of commercial quantities of biocatalyst, the Company
may be forced to establish its own fermentation facilities. This alternative
could delay the commercialization of the BDS process and would require
significant capital expenditures.
Market Acceptance
The BDS process will require significant capital expenditures by refiners and
producers. The refining and oil production industries historically have been
reluctant to accept new technologies. There is a risk, therefore, that the
Company will have difficulty in obtaining the refining and oil production
industries' acceptance of the BDS process. Also, the rate of purchase of the
Company's BDS process may be affected by economic conditions in the refining and
oil production industries. The refining and oil production industries have been
subject to periods of depressed
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profitability and are substantially affected by fluctuations in the price of
crude oil and finished products. Oil production and drilling activity are also
largely dependent on the level and volatility of oil prices.
Reliance on Environmental Regulation
Demand for the BDS units and services being developed by the Company is based,
in large part, on legislation and regulations in the United States, Europe and
Asia that specify stringent environmental quality standards and that impose
penalties for noncompliance. The amendments to the federal Clean Air Act
required the EPA to develop maximum sulfur content standards for highway diesel
fuel and new standards for gasoline content. In response, EPA promulgated
regulations regarding the maximum sulfur content of highway diesel fuel in 1990
and regulations for a reformulated gasoline program in 1994. Similar
regulations regarding the maximum sulfur content of diesel fuel have been
adopted in Western Europe and certain Asian countries. The Company also expects
that European and Asian countries will adopt and enforce additional standards
requiring a reduction in the sulfur content of petroleum products. Any
reduction of severity in current regulations, lax enforcement of current
regulations, delay in implementation and enforcement of planned regulations, or
reduction of severity in planned or anticipated regulations worldwide may delay
or decrease the worldwide demand for the Company's BDS process.
Patents and Proprietary Technologies
The Company's success is heavily dependent upon its proprietary BDS and other
technologies. In total, the Company has rights to 20 U.S. and 32 foreign
patents. In addition, the Company has 12 patent applications pending in the
U.S. patent office and more than 60 foreign patent applications pending to cover
BDS process technology and the molecular cloning of the biocatalyst genes.
There can be no assurance concerning the scope, validity or value of such
patents, patent applications or related intellectual property rights.
Furthermore, there can be no assurance that the steps taken by the Company to
protect its proprietary technologies will be adequate to prevent
misappropriation of these technologies by third parties, particularly where
third parties may independently develop similar technologies, duplicate any of
the Company's technologies or design around any proprietary technologies owned
by the Company. Any such misappropriation could have a material adverse effect
on the Company. Although the Company does not believe any of its proprietary
technologies infringe the patent or other proprietary rights of third parties,
there can be no assurance that infringement claims will not be asserted against
the Company in the future or that any such claims will not require the Company
to enter into license arrangements or result in litigation. In the event that
the Company may be required to obtain licenses to patents or other proprietary
rights of third parties, there can be no assurance that any required licenses
would be made available to the Company on terms acceptable to the Company, or at
all. If the Company does not obtain such licenses, it could encounter delays in
commercializing its BDS technology while it attempts to design around such
patents or could find that the commercialization of its BDS technology could be
foreclosed. In addition, to the extent that the Company seeks to protect its
proprietary technologies overseas, there can be no assurance that steps taken by
the Company to protect its proprietary technologies will be adequate under the
laws of certain foreign countries, which may not protect the Company's
proprietary rights to the same extent as do the laws of the United States.
The Company relies on secrecy to protect its proprietary technologies in
addition to patent protection, especially where patent protection is not
believed to be appropriate or obtainable. The Company has entered into
confidentiality agreements with its employees, licensors and certain of its
collaborators and consultants. There can be no assurance that such obligations
of confidentiality will be honored, that other parties will not otherwise gain
access to the Company's trade secrets or that the Company can effectively
protect its rights to its unpatented trade secrets. See " -- Patents and
Proprietary Technology."
-16-
<PAGE>
Dependence on Collaborators
The Company has been dependent on collaborative relationships for development
of certain key components of the BDS process, and the Company's
commercialization strategy contemplates continued dependence on collaborative
relationships. The Company has signed an agreement with M. W. Kellogg to
provide the basic engineering designs necessary for BDS implementation at
customer sites and an agreement with Petrolite relating to the development of
the Company's BDS technology and the construction and operation of the Company's
pilot plant. Each alliance partner is currently providing technical assistance
during the development of the BDS process. The Company also has entered into an
alliance with Total relating to the application of the BDS process to diesel
fuel, an alliance with Koch to develop the BDS process for certain gasoline
products, an alliance with Texaco to develop a process for desulfurizing high-
sulfur crude oil, and an alliance with Carbide/Graphite relating to the
development of the BDS process for the desulfurization of decant oil.
Collaborative arrangements involve risks that the participating partners may
disagree on business decisions and strategies, which may result in delays,
additional costs or litigation. The inability of the Company to successfully
maintain existing collaborative relationships or enter into new collaborative
relationships could have a material adverse effect on the Company. See "--
Alliances."
Need for Additional Funds
EBC's operations to date have consumed substantial amounts of cash. The
negative cash flow from operations is expected to continue over the foreseeable
future. The Company believes that its existing capital resources will be
sufficient to fund its operations through year-end 1998. Thereafter, the
Company may need to raise additional funds to continue development and
commercialization of its biorefining technology. The Company may seek
additional funding through public or private financings, including equity
financings, and through collaborative arrangements. Adequate funds for these
purposes, whether obtained through financial markets or collaborative or other
arrangements with corporate partners or from other resources, may not be
available when needed or on terms acceptable to the Company. The Company's
inability to raise funds when needed may require the Company to delay, scale
back or eliminate some or all of its research and product development programs.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Limited Marketing Experience
The Company has only limited experience marketing its BDS technology, and has
assembled only a small sales and marketing staff. There can be no assurance
that the Company will be able to successfully implement its sales and marketing
plan.
Dependence on Key Personnel
The Company is dependent on the efforts of its executive officers, scientists
and other key employees, the loss of any one of whom could have a materially
adverse effect on the Company's business. Shortages of qualified scientists
within certain disciplines may occur and competition for the services of
qualified scientists may intensify. The Company may not be successful in
recruiting or retaining such personnel in the future.
Government Regulation
Certain of the Company's current and planned operations are, or may be,
subject to regulation under various federal and state laws pertaining to
protection of the environment and employee health and safety. In the course of
its current research and development activities, the Company generates small
quantities of solid and hazardous wastes that are subject to regulation under
the Resource Conservation and Recovery Act ("RCRA") and various other federal
and state regulations. The research and development activities of the Company
are also subject to the Occupational Safety and Health Act ("OSHA") and similar
state laws and regulations. Upon commercialization of the Company's technology,
the Company's operations will be subject to the full scope of environmental and
employee health and safety regulations including not only RCRA and OSHA, but
also the Clean Air Act, the Federal Water Pollution Control Act, the Toxic
Substances Control Act ("TSCA") and other applicable state and federal
environmental laws and regulations. In
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<PAGE>
addition, commercialization of the BDS technology outside the United States will
require compliance with the regulations of foreign countries. Failure to comply
with applicable regulations could have an adverse effect on the Company. See "--
Government Regulation."
Competition
The Company expects to encounter competition from suppliers of existing
desulfurization technology in the marketing of the Company's BDS units. These
companies have well-established relationships in the refining industry and have
substantially greater financial, technical and human resources than the Company.
In addition, new desulfurization technologies could be developed that are
competitive with or superior to the Company's BDS technology. See "--
Competition."
ITEM 2. PROPERTIES
FACILITIES
The Company's corporate offices and laboratories are situated in a 28,500
square-foot leased building located at 4200 Research Forest Drive in The
Woodlands, Texas, a suburb of Houston, Texas. Pursuant to the lease, monthly
payments of $30,440 are required for base rent. The lease for this facility
expires in 1998 and the Company has a renewal option extending the lease to
2003. Approximately 20,500 square feet of this space is devoted to research and
development. The facility includes two laboratories designed for molecular
biology/microbiology/microbial physiology, a process engineering laboratory, a
biochemistry laboratory, a media preparation laboratory, and an analytical
laboratory which provides all the routine sulfur and hydrocarbon analyses for
the operation. In March 1995 the Company completed construction of a
fermentation laboratory, microbiology laboratory and accelerated development
program laboratories.
See "Item 1. Business - Patents and Proprietary Technology" for a description
of the Company's patents.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings required to be reported in
response to this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders during
the last quarter of the fiscal year ended December 31, 1996.
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<PAGE>
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock (symbol: ENBC) is traded on the Nasdaq National
Market. The following table sets forth the range of high and low sales prices
for each calendar quarterly period in the two years ended December 31, 1996 as
reported on the Nasdaq National Market:
YEAR ENDED DECEMBER 31, 1996 High Low
- ---------------------------- ------ -----
First Quarter.............................. $ 8.75 $5.25
Second Quarter............................. 9.50 5.50
Third Quarter.............................. 8.63 4.38
Fourth Quarter............................. 7.50 4.88
YEAR ENDED DECEMBER 31, 1995 High Low
- ---------------------------- ------ -----
First Quarter.............................. $ 6.25 $4.75
Second Quarter............................. 8.00 3.75
Third Quarter.............................. 10.00 4.00
Fourth Quarter............................. 9.75 7.00
As of March 14, 1997, 11,605,377 shares of common stock were outstanding and
the Company had approximately 105 shareholders of record.
DIVIDENDS
The Company has never paid cash dividends on its common stock. The Company
currently intends to retain any earnings to finance the growth and development
of its business and does not anticipate paying cash dividends in the foreseeable
future.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
statements of operations for each of the five years in the period ended December
31, 1996 and with respect to the Company's balance sheets as of December 31,
1992, 1993, 1994, 1995 and 1996 are derived from the Financial Statements of the
Company that have been audited by Arthur Andersen LLP, independent public
accountants. The financial data should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Financial Statements and Notes thereto included
elsewhere in this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
--------- ---------- ---------- ----------- -----------
STATEMENTS OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Sponsored research revenues...................... $ 867 $ 1,134 $ 1,148 $ 1,567 $ 1,778
Interest and investment income................... 329 510 573 1,401 807
---------- ---------- ---------- ----------- -----------
Total revenues........................... 1,196 1,644 1,721 2,968 2,585
Costs and Expenses:
Research and development......................... 4,839 (1) 4,894 5,723 7,338 9,210
General and administrative....................... 3,162 (2) 2,037 2,978 2,877 2,608
---------- ---------- ---------- ----------- -----------
Total costs and expenses................. $ 8,001 $ 6,931 $ 8,701 $ 10,215 $ 11,818
---------- ---------- ---------- ----------- -----------
Net loss........................................... $ (6,805) $ (5,287) $ (6,980) $ (7,247) $ (9,233)
========== ========== ========== =========== ===========
Net loss per common share.......................... $ (0.96) $ (0.57) $ (0.75)(3) $ (0.95)(3) $ (1.04)(3)
========== ========== ========== =========== ===========
Shares used in computing net loss.................. 7,058,547 9,195,517 9,967,645 10,227,595 11,248,029
per common share................................. ========== ========== ========== =========== ===========
</TABLE>
- ----------------
(1) Includes a non-cash charge of $432,655 for compensation expense related to
executive stock options issued prior to the Company's initial public
offering.
(2) Includes a non-cash charge of $2,250,135 for compensation expense related to
executive stock options issued prior to the Company's initial public
offering.
(3) Net loss per common share has been computed by dividing the net loss, which
has been increased for periodic accretion and dividends on the preferred
stock issued in October 1994, by the weighted average number of shares of
common stock outstanding during the period.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1992 1993 1994 1995 1996
------------- --------- -------------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 3,496 $ 6,135 $ 28,284 $ 6,172 $ 3,106
Working capital........................................... 1,817 11,650 26,269 15,084 8,770
Total assets.............................................. 4,962 16,055 32,175 23,809 13,711
Long-term capital lease obligations....................... 44 32 21 11 --
Accumulated deficit....................................... (9,148) (14,501) (21,907) (31,321) (42,713)
Total stockholders' equity................................ 106 12,891 28,444 21,577 12,715
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Since its inception in December 1989, the Company has devoted substantially
all of its resources to research and development. To date, all of the Company's
revenues have resulted from interest and investment income and sponsored
research payments from collaborative agreements. The Company has incurred
cumulative losses since inception and expects to incur substantial losses for at
least the next several years, due primarily to the increase in its research and
development activities and acceleration of the development of its biocatalyst,
fermentation and bioreactor programs.
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<PAGE>
The Company expects that losses will fluctuate from quarter to quarter and that
such fluctuations may be substantial. As of December 31, 1996, the Company's
accumulated deficit was $42,713,302.
Results of Operations
The Company had total revenues for the years ended December 31, 1994, 1995 and
1996 of $1,721,309, $2,967,954 and $2,585,419, respectively. Sponsored research
revenues increased by $14,000, $419,329 and $211,354 in 1994, 1995 and 1996,
respectively, primarily as a result of the Company's grant from the National
Institute of Standards and Technology in 1995 and 1996 and the Carbide/Graphite
agreement in 1996. Payments under the Petrolite agreement were initiated on
April 1, 1992 and totaled $5,400,000 through March 1994. Payments received from
Petrolite were $675,000 in 1994; no payments were received from Petrolite in
1995 or 1996. In each of the years ended December 31, 1994, 1995 and 1996,
$1,134,000 was recognized as revenue under the Petrolite agreement; as of
December 31, 1994, 1995 and 1996, the Company had balances of $2,461,500,
$1,147,500 and $13,500 respectively, of deferred revenues under the Petrolite
agreement. The amount recognized is based on the total payments received in
relation to the total research and development costs to be incurred under the
terms of the agreement. Interest and investment income increased by $63,231 and
$827,316 in 1994 and 1995, respectively, as a result of the increase in cash and
cash equivalents and related investments in marketable securities. In 1996,
interest and investment income decreased by $593,889 as a result of the decrease
in cash and cash equivalents and related investments in marketable securities.
The Company had research and development expenses for the years ended December
31, 1994, 1995 and 1996 of $5,723,131, $7,338,319 and $9,210,227, respectively.
The $1,615,188 increase from 1994 to 1995 resulted from the addition of 16
personnel in the research and development department and the completion of 4,500
square feet of additional laboratory space at the end of the first quarter of
1995. The increase of $1,871,908 from 1995 to 1996 resulted from the addition
of nine personnel in the research and development department, additional office
space acquired during the first quarter of 1996 for research personnel and a
$1,000,000 option payment to Petrolite. The Company expects its research and
development expenses to decrease during 1997, reflecting the nonrecurring
payment to Petrolite in 1996 of $1,000,000, offset in part by a slight increase
in expenditures related to hiring additional personnel. The Company's research
and development expenses will increase substantially, however, if the Company
makes the $9,000,000 payment to exercise the Petrolite option in 1997, the
entire amount of which will be recorded as a research and development expense.
The Company does not presently intend to exercise the Petrolite option until it
has raised additional funds or received additional capital.
The Company had general and administrative expenses for the years ended
December 31, 1994, 1995 and 1996 of $2,977,679, $2,877,351 and $2,607,972,
respectively. The $100,328 decrease from 1994 to 1995 resulted primarily from
the reassignment of a vice president to responsibilities within the research and
development department offset in part by increased expenditures for consulting
related to the stock rights plan instituted in 1995. The $269,379 decrease from
1995 to 1996 resulted primarily from decreased consulting fees, legal fees and
insurance. The Company expects its general and administrative expenses to
increase slightly in 1997 in support of its research facilities and personnel,
and corporate development activities.
Liquidity and Capital Resources
In February 1997, the Company completed a convertible preferred stock offering
resulting in net cash proceeds of approximately $10.2 million in exchange for
the sale of 224,100 shares of Series B Convertible Preferred Stock. In October
1994, the Company completed a convertible preferred stock offering resulting in
net cash proceeds of approximately $22.2 million in exchange for the sale of
480,000 shares of Series A Convertible Preferred Stock. The Company completed
its initial public offering in the first quarter of 1993, resulting in net cash
proceeds of approximately $14.9 million.
For the year ended December 31, 1996, the Company used $4,787,699 of funds in
operating activities, and incurred $936,877 of capital expenditures. At
December 31, 1996, the Company had cash, cash equivalents, and short term
investments totaling $8,997,588 and working capital of $8,770,324.
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<PAGE>
The Company expects to incur substantial additional research and development
expenses, including expenses associated with biocatalyst, fermentation and
bioreactor development. The Company has commitments through 1997 requiring the
Company to spend approximately $95,000 under research and development
agreements. In addition, the Company is subject to cost sharing arrangements
under various collaborative agreements, as discussed below. The Company also
expects its general and administrative expenses to increase as it adds
marketing, sales and other personnel and prepares for the commercialization of
the Company's proprietary BDS technology.
To supplement its research and development budgets, the Company intends to
seek additional collaborative research and development agreements with corporate
partners. In this regard, the Company entered into an agreement with
Carbide/Graphite in December 1995 to collaborate on the development of the
Company's BDS technology for the removal of sulfur from decant oil. Under the
terms of the agreement, the Company will be primarily responsible for
customizing and commercializing a biocatalyst and desulfurization system
specifically for decant oil. Carbide/Graphite will be primarily responsible for
providing the development and commercialization funding for this particular BDS
process.
The Company signed an agreement with M.W. Kellogg in August 1994, to
collaborate on the development and commercialization of the Company's
proprietary biocatalytic desulfurization technology for reducing sulfur levels
in petroleum streams. Under the terms of the collaboration, M.W. Kellogg will
serve as an engineering partner to the Company during completion of the BDS
development process and will be the exclusive provider of the basic engineering
design services required for the commercial BDS units. In return for these
services, M.W. Kellogg will receive a portion of the site license fee generated
by the sale of BDS units. The collaboration has a minimum term of at least five
years or the completion of 20 BDS units, whichever is longer, and has
applications to all biorefining technologies the Company develops. During the
first phase of the collaboration, M.W. Kellogg provided 500 engineering work
hours of service at no cost to the Company. M.W. Kellogg has agreed to provide
an additional 1,500 work hours of service at M.W. Kellogg offices at reduced
rates, of which 500 had been utilized by the Company at December 31, 1996.
In July 1994, the Company entered into an Agreement with Total to collaborate
on the application of the Company's biodesulfurization process to diesel fuel
streams. Following the evaluation of results from Energy BioSystems' domestic
pilot operation, it is anticipated that Total will build and operate at Total's
expense a pilot BDS unit at Total's European Centre for Research and Technology.
Upon successful economic trials of the pilot unit, Total plans to build the
first commercial BDS unit at one of its refineries.
In December 1993, the Company entered into a research collaboration agreement
with Koch, to facilitate the development of BDS technology in refinery petroleum
streams. Under the terms of the alliance, the Company will be primarily
responsible for improving the performance of the biocatalyst used in the
desulfurization process. Koch will be primarily responsible for selecting and
improving the target refinery stream as well as testing desulfurized product
quality. Koch will also provide engineering support as needed in the
development of a BDS unit for Koch's operation. The Company and Koch will each
bear their own costs and expenses incurred in connection with the collaboration.
The Company expects that the development alliance with Koch will facilitate
commercialization of the Company's BDS technology.
In October 1993, the Company amended its existing Collaboration Agreement with
Petrolite. The Collaboration Agreement, as amended (the "Agreement"), provides
for an expanded territory covered by the Agreement and permits the use of third
party engineering and construction companies to assist with certain matters.
The Agreement expands the territory of Petrolite's participation from North
America, Venezuela and Mexico to the entire world. In return for the expansion
of the territory covered by the Agreement, the Company's primary participation
rate was increased from 70% of gross profits from biodesulfurization unit sales
and fees to 78% of worldwide gross profits from such sales and fees.
Additionally, the Agreement allows the Company, after obtaining the advice and
input of Petrolite, to enter into an alliance with one or more world-class third
party engineering and construction firms to provide certain equipment and
services in connection with the design and construction of biodesulfurization
units.
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<PAGE>
In October 1996, the Company entered into an agreement with Petrolite
providing the Company with the option to amend the terms of its strategic
alliance with Petrolite. Under the agreement, the Company made an initial
payment of $1 million to Petrolite in December 1996 in exchange for the option
and the extension of Petrolite's obligations to provide operational and
technical support for the pilot plant from September 1, 1996 through December
31, 1998. If the Company exercises its option, the percentage of site license
fees and adjusted gross profit payable to Petrolite will be reduced to 9.5% from
22%, in exchange for which the Company will (i) assume responsibility for
servicing the BDS units on site at customer locations, (ii) pay Petrolite an
additional $9 million in cash and (iii) issue to Petrolite a warrant entitling
Petrolite to purchase 138,889 shares of Common Stock at an exercise price of
$7.20 per share. The Company may exercise the Petrolite option at any time on
or before the earlier to occur of (i) ten business days following the close of
any equity financing by the Company in which the gross cash proceeds raised in
such financing (together with cash proceeds raised by the Company in any other
equity financing after the date of the option agreement, if applicable) equal or
exceed $25 million and (ii) December 30, 1998.
In July 1993, the Company entered into a research collaboration agreement with
Texaco to facilitate the development of the Company's BDS technology in crude
oil. Under the terms of the alliance, the Company will be primarily responsible
for improving the performance of the biocatalyst used in the desulfurization
process. Texaco will be primarily responsible for field operations and
analytical chemistry work with respect to the application of the Company's BDS
technology to crude oil. The Company and Texaco will each bear their own costs
and expenses incurred in connection with the collaboration. The Company expects
that the development alliance with Texaco will facilitate commercialization of
the Company's BDS technology.
The Company entered into a license agreement with Stanford University in
November 1993 for the use of its patented recombinant DNA technology which may
be employed in the development of the Company's biocatalytic desulfurization
process. The license requires a minimum annual advance on earned royalties of
$10,000.
The Company believes that its available cash, investments and interest income
will be adequate to satisfy its funding needs through year-end 1998. The
Company's future funding requirements will depend on many factors, including the
progress of the Company's research and development, timing of environmental
regulations, the rate of technological advances, determinations as to the
commercial potential of the Company's technology under development, the status
of competitive technology, the establishment of biocatalyst manufacturing
capacity or third-party manufacturing arrangements and the establishment of
other collaborative relationships. The Company may seek additional funding
through public or private financings, including equity financings, and through
collaborative arrangements.
ITEM 8. FINANCIAL STATEMENTS.
The financial statements required by this Item are incorporated under Item 14
in Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item as to the directors and executive
officers of the Company is hereby incorporated by reference from the information
appearing under the captions "Election of Directors" and "Executive Officers" in
the Company's definitive proxy statement which involves the election of
directors and is to be filed with the Securities and Exchange Commission
("Commission") pursuant to the Securities Exchange Act of 1934 within 120 days
of the end of the Company's fiscal year on December 31, 1996.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item as to the management of the Company is
hereby incorporated by reference from the information appearing under the
captions "Executive Compensation" and "Election of Directors - Director
Compensation" in the Company's definitive proxy statement which involves the
election of directors and is to be filed with the Commission pursuant to the
Securities Exchange Act of 1934 within 120 days of the end of the Company's
fiscal year on December 31, 1996. Notwithstanding the foregoing, in accordance
with the instructions to Item 402 of Regulation S-K, the information contained
in the Company's proxy statement under the sub-heading "Report of the
Compensation Committee of the Board of Directors" and "Performance Graph" shall
not be deemed to be filed as part of or incorporated by reference into this Form
10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item as to the ownership by management and
others of securities of the Company is hereby incorporated by reference from the
information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" to the Company's definitive proxy statement
which involves the election of directors and is to be filed with the Commission
pursuant to the Securities Exchange Act of 1934 within 120 days of the end of
the Company's fiscal year on December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item as to certain business relationships and
transactions with management and other related parties of the company is hereby
incorporated by reference to such information appearing under the captions
"Certain Transactions" and "Compensation Committee Interlocks and Insider
Participation" in the Company's definitive proxy statement which involves the
election of directors and is to be filed with the Commission pursuant to the
Securities Exchange Act of 1934 within 120 days of the end of the Company's
fiscal year on December 31, 1996.
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<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents Filed as a Part of this Report
1. FINANCIAL STATEMENTS:
PAGE
----
Report of Independent Public Accountants...................... F-1
Balance Sheets as of December 31, 1995 and 1996............... F-2
Statements of Operations for the Years Ended
December 31, 1994, 1995 and 1996............................. F-3
Statements of Stockholders' Equity for the Period
from December 31, 1993 to December 31, 1996.................. F-4
Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996............................. F-5
Notes to Financial Statements................................. F-6
All other schedules are omitted because they are not applicable, not required,
or because the required information is included in the financial statements or
notes thereto.
2. EXHIBITS:
Exhibits to the Form 10-K have been included only with the copies of the Form
10-K filed with the Commission and the Nasdaq Stock Market. Upon request to the
Company and payment of a reasonable fee, copies of the individual exhibits will
be furnished.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1(a) Amended and Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 2 filed with Post-Effective
Amendment No. 1 to the Registrant's Registration Statement on Form
8-A as filed with the Commission on March 15, 1993).
3.1(b) Certificate of the Powers, Designations, Preferences and Rights of
the Series A Convertible Preferred Stock (incorporated by reference
to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1994).
3.1(c) Certificate of Designation of Series One Junior Participating
Preferred Stock of the Company (incorporated by reference to
Exhibit 3.1(c) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994).
*3.1(d) Certificate of the Powers, Designation, Preferences and Rights of
the Series B Convertible Preferred Stock.
3.2 Bylaws of Registrant (incorporated by reference to Exhibit 3 filed
with Post-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form 8-A as filed with the Commission on
March 15, 1993).
4.1 Form of Stock Purchase Agreement, dated as of October 27, 1994, by
and between the Company and the Purchasers of the Series A
Convertible Preferred Stock (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994).
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<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
*4.2 Form of Stock Purchase Agreement, dated as of February 21, 1997, by
and between the Company and the Purchasers of the Series B
Convertible Preferred Stock.
*4.3 Form of Stock Exchange Agreement, dated as of February 21, 1997, by
and between the Company and the Exchanging Holders of Series A
Convertible Preferred Stock.
4.4 Stockholder Rights Agreement, dated as of March 8, 1995, between
the Company and Society National Bank (incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K dated March
8, 1995).
10.1 License and Technology Assistance Agreement, dated January 15,
1991, between the Company and Institute of Gas Technology ("IGT")
(incorporated by reference to the similarly numbered exhibit to the
Company's Registration Statement on Form S-1 (No. 33-56718)).
10.2 First Amendment to License and Technology Assistance Agreement,
dated June 25, 1992, between the Company and IGT (incorporated by
reference to the similarly numbered exhibit to the Company's
Registration Statement on Form S-1 (No. 33-56718)).
10.3 Agreement, dated August 27, 1992, among the Company, IGT, the
University of North Dakota ("UND") and Dr. Kevin Young
(incorporated by reference to the similarly numbered exhibit to the
Company's Registration Statement on Form S-1 (No. 33-56718)).
10.4 Agreement, dated September 30, 1992, among the Company, UND and Dr.
Kevin Young (incorporated by reference to the similarly numbered
exhibit to the Company's Registration Statement on Form S-1
(No. 33-56718)).
10.5 Collaboration Agreement, dated March 5, 1992, between the Company
and Petrolite Corporation (incorporated by reference to the
similarly numbered exhibit to the Company's Registration Statement
on Form S-1 (No. 33-56718)).
10.6 Lease Agreement, dated January 24, 1994, between The Woodlands
Corporation and the Company (incorporated by reference to Exhibit
10.6 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993).
10.7 Registration Agreement, dated January 30, 1992, among the Company,
The Travelers Indemnity Company and Gryphon Ventures II, Limited
Partnership (incorporated by reference to the similarly numbered
exhibit to the Company's Registration Statement on Form S-1
(No. 33-56718)).
10.8 Registration Agreement, dated April 29, 1991, between the Company
and Gryphon Ventures II, Limited Partnership (incorporated by
reference to the similarly numbered exhibit to the Company's
Registration Statement on Form S-1 (No. 33-56718)).
10.9** Energy BioSystems Corporation 1992 Stock Compensation Plan
(incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (No. 33-56718)).
*10.10** Employment Agreement, dated January 31, 1996, between the Company
and Daniel J. Monticello.
10.11** Consultant Agreement between the Company and John T. Preston
(incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (No. 33-56718)).
10.12** Employment Agreement, dated August 21, 1991, between the Company
and John H. Webb (incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1 (No. 33-56718)).
-26-
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.13** Amendment No. 1 to Employment Agreement, dated as of January 15,
1996, between the Company and John H. Webb (incorporated by
reference to Exhibit 10.35 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
10.14** Employment Agreement, dated July 18, 1995, between the Company and
Paul G. Brown, III (incorporated by reference to the similarly
numbered exhibit to the Company's Registration Statement on Form
S-1 (No. 33-96096)).
10.15** Employment Agreement, dated July 18, 1995, between the Company and
Mark W. John (incorporated by reference to the similarly numbered
exhibit to the Company's Registration Statement on Form S-1
(No. 33-96096)).
10.16** Employment Agreement, dated July 18, 1995, between the Company and
Robert E. Levy (incorporated by reference to the similarly numbered
exhibit to the Company's Registration Statement on Form S-1
(No. 33-96096)).
10.17** Amended and Restated Consultant Agreement between the Company and
William M. Haney, III (incorporated by reference to the Exhibit
10.14 to the Company's Registration Statement on Form S-1 (No. 33-
56718)).
10.18** Simplified Employee Pension Plan Retirement Plan Adoption Agreement
(incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1 (No. 33-56718)).
10.19** Energy BioSystems Corporation Non-Employee Director Option Plan
(incorporated by reference to the similarly numbered exhibit to the
Company's Registration Statement on Form S-1 (No. 33-96096)).
10.20 First Amendment to Collaboration Agreement, dated July 1, 1992,
between the Company and Petrolite Corporation (incorporated by
reference to the Exhibit 10.16 to the Company's Registration
Statement on Form S-1 (No. 33-56718)).
10.21 Research Agreement, dated November 8, 1993, between the Company and
The University of Notre Dame (incorporated by reference to Exhibit
10.19 to the Company's Registration Statement on Form S-1 (No. 33-
56718)).
10.22 Research Collaboration Agreement, dated July 8, 1993, between the
Company and Texaco, Inc. (incorporated by reference to Exhibit 99.1
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1993).
10.23 Extension and Assignment of Research Collaboration Agreement, dated
June 23, 1995, between the Company and Texaco Inc. (incorporated by
reference to the similarly numbered exhibits to the Company's
Registration Statement on Form S-1 (No. 3-96096)).
10.24 Second Amendment to Collaboration Agreement, dated October 18,
1993, between the Company and Petrolite Corporation (incorporated
by reference to Exhibit 99.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993).
10.25 Lease Agreement, dated May 24, 1993, between the Company and The
Woodlands Corporation (incorporated by reference to Exhibit 99.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993).
10.26 Second Amendment to License and Technology Assistance Agreement,
dated September 23, 1993, between the Company and IGT (incorporated
by reference to Exhibit 10.21 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993).
-27-
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.27 Letter Agreement dated February 10, 1994, between The M. W. Kellogg
Company and the Company (incorporated by reference to Exhibit 10.22
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993).
10.28 Letter Agreement for Accelerated Development Program dated December
8, 1993, between the Company and Koch Refining Company
(incorporated by reference to Exhibit 10.23 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993).
10.29 License Agreement dated November 1, 1993, between the Company and
Stanford University (incorporated by reference to Exhibit 10.25 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993).
10.30 Collaboration Agreement dated July 7, 1994, between the Company and
Total Raffinage Distribution S.A. (incorporated by reference to
Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q for the
second quarter ended June 30, 1994).
10.31 Research Agreement, dated July 1, 1994, between the Company and
Massachusetts Institute of Technology (incorporated by reference to
Exhibit 10.27 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994).
10.32 Research Agreement, dated November 8, 1994, between the Company and
The University of Notre Dame (incorporated by reference to Exhibit
10.28 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.33 Research, Option and License Agreement, dated December 15, 1994,
between the Company and the University of Houston (incorporated by
reference to Exhibit 10.29 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994).
10.34 Cooperative Agreement between the Company and the National
Institute of Standards and Technology (incorporated by reference to
Exhibit 10.30 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994).
10.35 Extension and Assignment of Research Collaboration Agreement, dated
July 3, 1996, between the Company and Texaco Group, Inc.
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
*10.36 Third Amendment and Addendum to Collaboration Agreement, dated
August 24, 1995, between the Company and Petrolite Corporation.
*10.37 Fourth Amendment and Addendum to Collaboration Agreement, dated
October 25, 1996, between the Company and Petrolite Corporation, as
modified by Letter Agreement dated December 30, 1996.
*11.1 Computation of earnings per share.
*23.1 Consent of Arthur Andersen LLP.
- ----------------
* Filed herewith
** Management contract or compensatory plan.
(b) Reports on Form 8-K
The Company filed one report on Form 8-K during the last quarter of the
year ended December 31, 1996. Such report on Form 10-K, dated November 20,
1996, enclosed a copy of a press release announcing the commencement of
-28-
<PAGE>
a private offering of Series B Convertible Preferred Stock, and was filed
pursuant to Rule 135c under the Securities Act of 1933, as amended.
-29-
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Energy BioSystems Corporation
By: /s/ John H. Webb
---------------------------------------
John H. Webb
Chairman of the Board,
President and Chief Executive Officer
DATED the 20th day of March, 1997.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY
AND IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ JOHN H. WEBB Chairman of the Board, President March 20, 1997
- ----------------------------- and Chief Executive Officer
John H. Webb (Principal executive officer)
/s/ PAUL G. BROWN, III Vice President--Finance and March 20, 1997
- ----------------------------- Administration (Principal
Paul G. Brown, III financial and accounting
officer)
/s/ DANIEL J. MONTICELLO, PH.D. Vice President--Science and March 20, 1997
- ------------------------------ Technology, and Director
Daniel J. Monticello, Ph.D.
/s/ BERNARD LEE, PH.D. Director March 20, 1997
- -----------------------------
Bernard Lee, Ph.D.
/s/ RAMON LOPEZ Director March 20, 1997
- -----------------------------
Ramon Lopez
/s/ EDWARD B. LURIER Director March 20, 1997
- -----------------------------
Edward B. Lurier
/s/ THOMAS E. MESSMORE Director March 20, 1997
- -----------------------------
Thomas E. Messmore
/s/ WILLIAM E. NASSER Director March 20, 1997
- -----------------------------
William E. Nasser
/s/ JOHN S. PATTON Director March 20, 1997
- -----------------------------
John S. Patton
/s/ JOHN T. PRESTON Director March 20, 1997
- -----------------------------
John T. Preston
/s/ WILLIAM D. YOUNG Director March 20, 1997
- -----------------------------
William D. Young
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Energy BioSystems Corporation:
We have audited the accompanying balance sheets of Energy BioSystems
Corporation (a Delaware corporation) as of December 31, 1995 and 1996, and the
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Energy BioSystems Corporation
as of December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
The Woodlands, Texas
March 7, 1997
F-1
<PAGE>
ENERGY BIOSYSTEMS CORPORATION
BALANCE SHEETS
December 31,
----------------------------
1995 1996
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents............. $ 6,172,400 $ 3,106,004
Short term investments................ 10,431,444 5,891,584
Prepaid expenses and other current.... 687,530 767,893
assets............................... ------------ ------------
Total current assets.......... $ 17,291,374 $ 9,765,481
------------ ------------
Long term investments................... 2,492,874 --
Note receivable......................... 45,633 6,683
Furniture, equipment and leasehold
improvements, net...................... 3,322,609 3,136,635
Intangible and other assets, net........ 656,961 801,832
------------ ------------
Total assets.................. $ 23,809,451 $ 13,710,631
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities.......................... $ 591,534 $ 537,583
Current portion of deferred revenue... 1,314,000 193,500
Current portion of obligations under
capital lease........................ 7,256 11,632
Note payable.......................... 294,713 252,443
------------ ------------
Total current liabilities..... $ 2,207,503 $ 995,158
------------ ------------
Long term liabilities:
Capital lease obligations............. 11,632 --
Deferred revenue...................... 13,500 --
------------ ------------
Total long term liabilities... $ 25,132 --
------------ ------------
Stockholders' equity:
Series A convertible preferred stock.... 22,968,152 23,295,585
$0.01 par value (liquidation value
$24,000,000,
508,800 shares authorized, 480,000
shares
issued and outstanding)
Common stock, $0.01 par value
(30,000,000 shares authorized, 10,584,269
and 11,497,135 shares issued and outstanding,
respectively)......................... 105,843 114,972
Additional paid-in capital.............. 29,823,343 32,018,218
Accumulated deficit..................... (31,320,522) (42,713,302)
------------ ------------
Total stockholders' equity.... $ 21,576,816 $ 12,715,473
------------ ------------
Total liabilities and......... $ 23,809,451 $ 13,710,631
stockholders' equity......... ============ ============
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
ENERGY BIOSYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1994 1995 1996
--------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Sponsored research revenues................. $ 1,148,000 $ 1,567,329 $ 1,778,683
Interest and investment income.............. 573,309 1,400,625 806,736
----------- ----------- -----------
Total revenues...................... 1,721,309 2,967,954 2,585,419
----------- ----------- -----------
COSTS AND EXPENSES:
Research and development.................... 5,723,131 7,338,319 9,210,227
General and administrative.................. 2,977,679 2,877,351 2,607,972
----------- ----------- -----------
Total costs and expenses............ 8,700,810 10,215,670 11,818,199
----------- ----------- -----------
NET LOSS...................................... $(6,979,501) $(7,247,716) $(9,232,780)
=========== =========== ===========
NET LOSS PER COMMON SHARE..................... $(0.75) $(0.95) $(1.04)
=========== =========== ===========
SHARES USED IN COMPUTING NET LOSS
PER COMMON SHARE........................... 9,967,645 10,227,595 11,248,029
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ENERGY BIOSYSTEMS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM DECEMBER 31, 1993 TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
--------------- ------------ Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
-------- -------- --------- -------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 -- $ -- 9,864,629 $ 98,646 $27,293,378 $(14,501,305) $12,890,719
Exercise of stock options
in 1994 ($0.3036 to $4.80
per share)................... -- -- 123,780 1,238 310,177 -- 311,415
Issuance of Series A
Convertible
Preferred Stock for cash at
October 27, 1994 ($50.00
per share), net of
$1,778,403 offering costs.... 480,000 22,221,597 -- -- -- -- 22,221,597
Accretion and dividends on
Series A Preferred Stock..... -- 473,334 -- -- (47,334) (426,000) --
Net loss...................... (6,979,501) (6,979,501)
-------- ----------- ---------- -------- ----------- ------------ -----------
BALANCE AT DECEMBER 31, 1994 480,000 22,694,931 9,988,409 99,884 27,556,221 (21,906,806) 28,444,230
Exercise of stock options in
1995 ($0.3036 to $7.25 per
share)....................... -- -- 261,949 2,620 329,392 -- 332,012
Issuance of stock for services
($6.25 per share)............ -- -- 10,000 100 62,400 -- 62,500
Additional offering costs for
Series A Preferred Stock..... -- (14,132) -- -- -- -- (14,132)
Dividends on Series A
Preferred Stock paid in
Common Stock................. -- (2,178,000) 323,910 3,239 2,174,683 -- (78)
Accretion and dividends on
Series A Preferred Stock..... 2,465,353 -- -- (299,353) (2,166,000) --
Net loss...................... -- -- -- -- -- (7,247,716) (7,247,716)
-------- ----------- ---------- -------- ----------- ------------ -----------
BALANCE AT DECEMBER 31, 1995 480,000 22,968,152 10,584,268 105,843 29,823,343 (31,320,522) 21,576,816
Exercise of stock options
in 1996 ($0.3036 to $5.50
per share)................... -- -- 589,200 5,892 365,620 -- 371,512
Dividends on Series A
Preferred Stock paid in
Common Stock................. -- (2,160,000) 323,667 3,237 2,156,688 -- (75)
Accretion and dividends on
Series A Preferred Stock..... -- 2,487,433 -- -- (327,433) (2,160,000) --
Net loss...................... -- -- -- -- -- (9,232,780) (9,232,780)
-------- ----------- ---------- -------- ----------- ------------ -----------
BALANCE AT DECEMBER 31, 1996 480,000 $23,295,585 11,497,135 $114,972 $32,018,218 $(42,713,302) $12,715,473
======== =========== ========== ======== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ENERGY BIOSYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1994 1995 1996
---------------------- ------------------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,979,501) $ (7,247,716) $(9,232,780)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization............ 676,873 998,384 1,160,179
Compensation expense related to stock
options and stock issued for services
rendered............................... 48,000 62,500 --
Loss on sale of leasehold improvements... -- -- --
Changes in assets and liabilities:
Decrease (increase) in trading
securities............................. 6,754,863 (4,419,020) 4,444,020
Decrease in prepaid expenses and
other current assets................... 301,153 143,061 172,079
Decrease in notes receivable............. 32,896 37,054 38,950
Increase in intangible and other assets.. (148,690) (211,804) (182,196)
Decrease in accounts payable and
accrued liabilities.................... 295,127 (377,958) (53,951)
Decrease in deferred revenue............. (279,000) (1,134,000) (1,134,000)
----------- ------------ -----------
Net cash (used in) provided by operating
activities................................ 701,721 (12,149,499) (4,787,699)
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................ (1,025,980) (1,505,045) (936,877)
Net purchase of investments held to
maturity.................................. -- (8,480,298) 2,588,713
----------- ------------ -----------
Net cash (used in) investing activities (1,025,980) (9,985,343) 1,651,836
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable................... -- (281,374) (294,713)
Payments on capital lease obligations....... (12,007) (12,995) (7,256)
Proceeds from Series A Preferred Stock, net. 22,221,597 (14,132) --
Proceeds from Common Stock, net............. 263,415 331,934 371,436
----------- ------------ -----------
Net cash provided by financing
activities............................... 22,473,005 23,433 69,467
----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS............................ 22,148,746 (22,111,409) (3,066,396)
----------- ------------ -----------
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR..................................... 6,135,063 28,283,809 6,172,400
----------- ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR..... $28,283,809 $ 6,172,400 $ 3,106,004
=========== ============ ===========
SUPPLEMENTAL INFORMATION OF CASH FLOWS:
Cash paid for interest....................... $ 4,078 $ 4,010 $ 2,046
=========== ============ ===========
SUPPLEMENTAL INFORMATION OF NONCASH FINANCING ACTIVITIES:
The Company had an outstanding note payable of $281,374, $294,713 and $252,442 for prepaid insurance for the
years ended December 31, 1994, 1995 and 1996, respectively.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ENERGY BIOSYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. DESCRIPTION OF THE COMPANY
Energy BioSystems Corporation (the "Company"), formerly Environmental
BioScience Corporation, was incorporated in the State of Delaware on December
20, 1989, and commenced operations in January 1990. The Company was formed to
develop and commercialize innovative biotechnology-based processes for the
refining of fossil fuels. The Company's focus to date has been on developing
biocatalytic desulfurization ("BDS"), a proprietary process involving the use of
enzymes to remove sulfur from petroleum. The Company's BDS process will require
substantial additional research, development and testing in order to determine
its commercial viability. The Company has not proven its BDS technology other
than to a limited extent in laboratory, bench-scale and pilot plant trials. If
the Company successfully field tests its BDS technology, the commercialization
of the Company's BDS technology will require significant additional time and
expenditures. The commercialization of the technology will depend on the
Company's success in achieving improvement of its biocatalyst and success in
developing fermentation processes, as well as the Company's ability to
manufacture or contract for the manufacture of sufficient biocatalyst for use in
commercial BDS units; to apply process engineering to design bioreactor systems
capable of accomplishing the BDS process on a commercial scale; and to market
its BDS systems effectively. The accomplishment of some or all of these
objectives may be delayed or may never occur. The Company may require additional
capital to continue the development and commercialization of its BDS technology,
and there can be no assurance that such capital will be available or that the
Company will be able to successfully commercialize BDS technology. The Company
believes that its available cash and cash equivalents, investments and interest
income will be adequate to satisfy its funding needs through year-end 1998. See
"Liquidity and Capital Resources" and "Risk Factors" included elsewhere herein.
The Company has devoted substantially all of its efforts to research and
development. There have been no revenues from operations other than sponsored
research revenues (see Note 7) and there is no assurance of future revenues.
Prior to the receipt of the sponsored research revenues, the Company was in the
development stage.
2. ACCOUNTING POLICIES
Cash, Cash Equivalents and Short Term Investments
Debt and equity securities that the Company has the intent and ability to
hold to maturity are classified as "held to maturity" and reported at amortized
cost. Debt and equity securities that are held for current resale are classified
as "trading securities" and reported at fair value with unrealized gains and
losses included in earnings. Debt and equity securities not classified as either
"held to maturity" or "trading securities" are classified as "securities
available for sale" and reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of stockholders'
equity.
Cash and cash equivalents include corporate debt securities with an
original maturity less than 90 days and are classified as held to maturity.
These securities have an amortized cost and fair market value of $245,000.
Included in short-term investments are U.S. government obligations and discount
commercial paper of $5,891,584 that are classified as held to maturity and
reported at amortized cost at December 31, 1996.
At December 31, 1995 and 1996, the Company had cash and cash equivalents of
approximately $257,284 and $49,684, respectively, in excess of the federally
insured amounts.
F-6
<PAGE>
ENERGY BIOSYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
Furniture, Equipment and Leasehold Improvements
Furniture and equipment consists of office furniture and equipment,
computers and laboratory equipment and is carried at cost. Depreciation is
calculated on the straight-line method using a five-year estimated useful life.
Leasehold improvements are amortized on the straight-line method over the term
of the lease or the useful life of the assets, whichever is shorter.
Maintenance and repairs that do not improve or extend the life of assets
and expenditures for research and development equipment for which there is no
future alternative use are expressed as incurred. Expenditures which improve or
extend the life of assets are capitalized.
Intangible and Other Assets
Intangible and other assets mainly consist of patent costs, which are
primarily legal fees. These costs are being amortized over 17 years. Accumulated
amortization at December 31, 1995 and 1996 amounted to $198,553 and $235,878,
respectively.
Research and Development
Sponsored research revenue is recognized based on the percentage of total
research payments to be received in relation to the total research and
development costs to be incurred under the specific research agreements. All
research and development costs, both generated internally and from research and
development contracts, are expensed as incurred. The Company allocates certain
indirect costs to research and development expenses which consist primarily of
overhead related to the administration of research and development activities.
Net Loss Per Common Share
Net loss per common share has been computed by dividing the net loss, which
has been increased for periodic accretion and accrued dividends on the Series A
Convertible Preferred Stock issued in October 1994, by the weighted average
number of shares of Common Stock outstanding during the periods. In all
applicable years, all Common Stock equivalents were antidilutive and,
accordingly, were not included in the computation.
Pending Accounting Change
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting No. 128, "Earnings Per Share." Statement 128 simplifies the
standards for computing earnings per share previously found in APB Opinion No.
15, Earnings per Share, and makes them comparable to international earnings per
share standards. The Statement also retroactively revises the presentation of
earnings per share in the financial statements. The Company will adopt this
Standard for the year ended December 31, 1997 and has not currently quantified
the effect of applying the new standard.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE>
ENERGY BIOSYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
Presentation
Certain reclassifications have been made to prior year balances to conform
to current year presentation.
3. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
A summary of furniture, equipment and leasehold improvements is as follows:
December 31,
---------------------------
1995 1996
------------- ------------
Office furniture and equipment $ 330,312 $ 395,332
Laboratory equipment 2,454,320 3,176,179
Computer equipment 683,218 805,850
Leasehold improvements 1,667,120 1,694,489
Equipment under capital lease 55,203 55,203
Automobiles 23,670 23,670
----------- -----------
$ 5,213,843 $ 6,150,723
Less--Accumulated depreciation (1,891,234) (3,014,088)
----------- -----------
Furniture, equipment and leasehold
improvements, net $ 3,322,609 $ 3,136,635
=========== ===========
4. STOCKHOLDERS' EQUITY
Series A Convertible Preferred Stock
On March 19, 1993, the Company filed an Amended and Restated Certificate of
Incorporation pursuant to which, among other things, the authorized shares of
Preferred Stock were increased from 2,400,000 to 5,000,000.
In October 1994, the Company offered and sold 480,000 shares of Series A
Convertible Preferred Stock at $50.00 per share. The net proceeds from the
offering were approximately $22.2 million. The placement agents for the Series A
Convertible Preferred Stock received warrants to purchase an aggregate of 28,800
shares of Series A Convertible Preferred Stock at an exercise price of $50.00
per share of Series A Convertible Preferred Stock, in addition to customary
commissions.
Dividends on the Series A Convertible Preferred Stock are cumulative and
payable semi-annually from October 27, 1994, at an annual rate equal to $4.00
per share if paid in cash and $4.50 per share if paid in Common Stock. The
shares of Series A Convertible Preferred Stock are convertible into Common Stock
at the option of the holder at a conversion price equal to $8.25 per share
subject to adjustment in certain circumstances. The Series A Convertible
Preferred Stock, if not earlier redeemed, must be redeemed on November 7, 1999
at the redemption price. The redemption price, which is equal to $50.00 per
share plus accrued and unpaid dividends, may be paid in shares of Common Stock
or cash or in a combination of Common Stock and cash, at the Company's option.
It is the Company's intent, however, to redeem the Series A Convertible
Preferred Stock for Common Stock. Accordingly, the Series A Convertible
Preferred Stock is included in stockholders' equity.
The carrying amount of the Preferred Stock is increased for accrued and
unpaid dividends plus periodic accretion, using the effective interest method,
such that the carrying amount will equal the redemption amount on November 7,
1999.
F-8
<PAGE>
ENERGY BIOSYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
Common Stock
On March 19, 1993, the Company filed an Amended and Restated Certificate of
Incorporation pursuant to which, among other things, the authorized shares of
Common Stock were increased from 20,000,000 to 30,000,000.
In March 1995, the Company adopted a Stockholder Rights Plan (the "Rights
Plan") in which Preferred Stock Purchase Rights (the "Rights") were distributed
for each share of Common Stock held as of the close of business on March 27,
1995 and are distributed to each share of Common Stock issued thereafter until
the earlier of (i) the Distribution Date (as defined in the Rights Plan), (ii)
the date Rights are redeemed or (iii) March 8, 2005. The Rights Plan is designed
to deter coercive takeover tactics and to prevent an acquirer from gaining
control of the Company without offering a fair price to all of the Company's
stockholders. The Rights will expire on March 8, 2005.
Each Right entitles stockholders to buy one-hundredth of a share of a new
series of Junior Preferred Stock of the Company at an exercise price of $50.00
per one-hundredth of a share. The Rights are exercisable only if a person
acquires beneficial ownership of 20% or more of the Company's outstanding Common
Stock. The Rights Plan grandfathers certain stockholders who beneficially owned
more than 20% of the outstanding shares of the Company's Common Stock on the
effective date of the Rights Plan from triggering the exercisability of the
Rights.
5. STOCK OPTIONS
The 1992 Stock Compensation Plan (the "1992 Plan") is composed of non-
qualified stock options, incentive stock options, year-end stock bonuses and
restricted and non-restricted stock grants. Under the 1992 Plan, 2,031,030
shares of Common Stock are reserved for issuance upon the exercise of stock
options. Under a 1994 Non-Employee Director Option Plan, composed of non-
qualified stock options, 175,000 shares of Common Stock are reserved for
issuance upon the exercise of stock options.
At December 31, 1996, employees had been granted options to purchase
1,637,638 shares of Common Stock pursuant to the 1992 Plan. Additionally, as of
December 31, 1996 consultants and directors had been granted options to purchase
386,155 shares of Common Stock that were not issued under the 1992 Plan. Options
generally vest over a three-year period and upon the earlier of the completion
of the specified performance milestones or nine years and ten months from the
date of grant. The options expire ten years from the date of grant. At December
31, 1996, 1,113,184 shares of Common Stock were exercisable at per share
exercise prices ranging from $.296 to $13.00.
The Company accounts for its stock options under APB Opinion No. 25 under
which no compensation cost has been recognized. The Company records deferred
compensation for the difference between the exercise price and the fair market
value on the measurement date. During 1994, 1995 and 1996, the Company issued
all options at fair market value. Had compensation cost for these options been
determined consistent with FASB Statement No. 123, the Company's net loss and
loss per share would have been increased to the following pro forma amounts:
1995 1996
---- ----
Net Loss: As Reported $(7,247,716) $(9,232,780)
----------- -----------
Pro Forma $(7,439,375) $(9,627,267)
----------- -----------
Net Loss Per Share: As Reported $ (0.95) $ (1.04)
----------- -----------
Pro Forma $ (0.97) $ (1.08)
----------- -----------
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that expected in future years. A summary of
F-9
<PAGE>
ENERGY BIOSYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
the status of the Company's stock options at December 31, 1994, 1995 and 1996
and changes during the years then ended is presented in the table and narrative
below:
<TABLE>
<CAPTION>
1992 Plan Options not issued under Plan
--------------------------- ---------------------------------------------
Number Weighted Avg. Number Weighted Avg.
of Options Exercise Price of Options Exercise Price
----------- -------------- ------------------------------ --------------
<S> <C> <C> <C> <C>
December 31, 1993 1,194,963 $ 3.28 994,920 $ 0.83
Granted 210,840 8.34 60,000 10.00
Exercised (94,580) 2.67 (29,200) 1.56
Forfeited (42,159) 4.93 -- --
--------- ------ ---------
Balance at December 31, 1994 1,269,064 4.04 1,025,720 1.34
Granted 270,880 5.03 -- --
Exercised (126,949) 1.86 (145,000) 0.64
Forfeited (19,550) 10.08 -- --
--------- ------ --------- ------
Balance at December 31, 1995 1,393,445 4.35 880,720 1.46
Granted 286,170 6.46 -- --
Exercised (26,645) 1.83 (562,565) 0.57
Forfeited (15,332) 8.49 -- --
--------- ------
Balance at December 31, 1996 1,637,638 $ 4.74 318,155 $ 3.02
========= ====== ========= ======
Exercisable at December 31, 1994 685,056 $ 2.55 959,020 $ 0.86
Exercisable at December 31, 1995 652,466 $ 3.21 838,220 $ 1.08
Exercisable at December 31, 1996 727,029 $ 3.77 318,155 $ 3.02
</TABLE>
The weighted average fair value of the options issued under the 1992 Plan for
the years ended December 31, 1995 and 1996 was $3.98 and $4.92, respectively.
During the years ended December 31, 1994, 1995 and 1996, the Company granted
20,000, 24,000 and 24,000 options, respectively, under the Non-Employee Director
Option Plan. These options are fully vested upon issuance. The weighted
average exercise price per share on these grants was $8.00, $4.00 and $7.88,
respectively. As of December 31, 1994, 1995 and 1996, the Company had 20,000,
44,000 and 68,000 options exercisable, respectively, under this plan with
weighted average exercise price of $8.00, $5.82 and $6.54 respectively. The
weighted average fair market value of the options issued under this plan during
the years ended December 31, 1995 and 1996 was $3.04 and $5.31, respectively.
The fair market value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: risk-free interest
rates of 6.6 and 6.5 percent for the 1992 Plan options and 6.6 and 6.9 percent
for the Non-Employee Director Plan options; expected dividend yields of zero for
both the 1992 Plan and the Non-Employee Director Plan; expected lives of nine
years and ten months for all options; and expected volatility of 60.5 and 65.4
percent for the 1992 Plan and 58.3 and 65.1 percent for the Non-Employee
Director Plan.
6. FEDERAL INCOME TAXES
The Company has had losses since inception and, therefore, has not been
subject to federal income taxes. As of December 31, 1996, the Company had
accumulated net operating loss ("NOL") and research and development tax credit
carryforwards for income tax purposes of approximately $34,750,000 and $980,000,
respectively. These carryforwards begin to expire in 2005. The Tax Reform Act
of 1986 provided for an annual limitation on the use of NOL and tax credit
carryforwards following certain ownership changes that limit the Company's
ability to utilize these carryforwards. In April 1991 and October 1994, the
Company underwent a "more than 50 percent change in ownership" as defined by
Internal Revenue Code Section 382. Additionally, because U.S. tax laws limit
the time during which NOL and tax credit
F-10
<PAGE>
ENERGY BIOSYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
carryforwards may be applied against future taxable income and tax liabilities,
the Company may not be able to take full advantage of its NOL and tax credits
for federal income tax purposes.
Significant components of the Company's net deferred tax asset at December
31, 1995 and 1996 are as follows:
1995 1996
------------- -------------
Deferred tax assets relating to:
- --------------------------------
Federal net operating loss
carryforwards......................... $ 8,475,689 $ 11,814,351
Research and development credit
carryovers............................ 923,338 989,171
Capital and Texas business loss
carryforwards......................... 301,346 357,846
Book/tax differences on depreciable,
amortizable and other assets and
accrued liabilities................... 73,081 263,347
Deferred revenue and unrealized gains 451,350 65,790
------------ ------------
Deferred tax valuation reserve......... (10,224,804) (13,490,505)
Net deferred tax asset................. $ -- $ --
============ ============
Beginning January 1, 1993, the Company adopted SFAS 109 which requires
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been recognized in the financial statements or
tax returns. Since the Company has had a net operating loss carry forward since
inception and there is no assurance of future taxable income, a valuation
allowance has been established to fully offset the deferred tax assets.
7. LICENSE AND RESEARCH AGREEMENTS
To supplement its research and development budgets, the Company intends to
seek additional collaborative research and development agreements with corporate
partners.
In this regard, the Company entered into an agreement with The
Carbide/Graphite Group, Inc. ("Carbide/Graphite") in December 1995 to
collaborate on the development of the Company's BDS technology for the removal
of sulfur from decant oil. Under the terms of the agreement, the Company will be
primarily responsible for customizing and commercializing a biocatalyst and
desulfurization system specifically for decant oil. Carbide/Graphite will be
primarily responsible for providing the development and commercialization
funding for this particular BDS process. The Company recognized $150,000 in
sponsored research revenue as of December 31, 1996.
The Company signed an agreement with The M.W. Kellogg Company ("M.W.
Kellogg") in August 1994, to collaborate on the development and
commercialization of the Company's biocatalytic desulfurization ("BDS")
technology. Under the collaboration, M.W. Kellogg will serve as an engineering
partner to the Company during completion of the BDS development process and will
be the exclusive provider of the basic engineering design services required for
the commercial units. In return for these services, M.W. Kellogg will receive a
portion of the site license fee generated by the sale of BDS units. The
collaboration has a minimum term of at least five years or the completion of 20
BDS units, whichever is longer, and has applications to all biorefining
technologies the Company develops. During the first phase of the collaboration,
M.W. Kellogg provided up to 500 engineering work hours of service at no cost to
the Company. M.W. Kellogg has also agreed to provide an additional 1,500 work
hours per year of service at M.W. Kellogg offices at reduced rates, of which 500
had been utilized by the Company at December 31, 1996.
In July 1994, the Company entered into an agreement with Total Raffinage
Distribution S.A. ("Total") to collaborate on the application of the Company's
biodesulfurization process to diesel fuel streams. Following the evaluation of
results from the Company's domestic pilot operation, it is anticipated that
Total will build and operate at Total's expense a pilot BDS unit at Total's
European Centre for Research and Technology. Upon successful economic trials of
the pilot unit, Total plans to build the first commercial BDS unit at one of its
refineries. The Company and Total
F-11
<PAGE>
ENERGY BIOSYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
will each bear their own costs and expenses incurred under the collaboration. In
addition, as part of its obligations under the agreement, Total will provide the
Company with the use of analytical equipment valued at approximately $200,000.
The Total agreement provides that upon commercialization, the site licenses will
be waived on Total's first commercial BDS unit. In addition, Total will be
entitled to receive a ten percent (10%) discount on future site licenses and
service fees until it has recovered two and one-half times its research cost and
expenses for BDS projects under the agreement. The Company expects that the
development alliance with Total will facilitate commercialization of the BDS
technology for middle distillates and facilitate the Company's entrance into the
European market.
In December 1993, the Company entered into an alliance with Koch Refining
Company ("Koch") to facilitate the development of BDS technology in crude oil.
Under the terms of the alliance, the Company will be primarily responsible for
improving the performance of the biocatalyst used in the desulfurization
process. Koch will be primarily responsible for selecting and improving the
target oil stream as well as testing desulfurized product quality. Koch will
also provide engineering support as needed in the development of a BDS unit for
Koch's operation. The Company and Koch will each bear their own costs and
expenses incurred in connection with the collaboration. Repayment will be in
the form of a ten percent (10%) rebate on desulfurization processing fees
charged to Koch until Koch has been repaid their contribution of BDS development
costs. The Company expects that the development alliance with Koch will
facilitate commercialization of the Company's BDS technology.
The Company entered into a license agreement with Stanford University in
November 1993 for the use of their patented recombinant DNA technology, which
may be employed in the development of the Company's BDS process. The license
requires a minimum annual advance on earned royalties of $10,000.
In July 1993, the Company entered into an agreement with the Exploration
and Development Division of Texaco, Inc. ("Texaco") to facilitate the
development of the Company's BDS technology in crude oil. Under the terms of the
alliance, the Company will be primarily responsible for improving the
performance of the biocatalyst used in the desulfurization process. Texaco will
be primarily responsible for field operations and analytical chemistry work with
respect to the application of the Company's BDS technology to crude oil. The
Company and Texaco will each bear their own costs and expenses incurred in
connection with the collaboration. In the event the Company sub-licenses
Texaco's intellectual and proprietary information, licensed by agreement to the
Company by Texaco, the Company shall pay Texaco an amount equal to ten percent
(10%) of the desulfurization processing fee charged to Texaco until such time as
the Company has paid Texaco an aggregate amount equal to two and one-half times
the aggregate amount of Texaco's direct costs and expenses incurred in
connection with the collaboration. The Company expects that the development
alliance with Texaco will facilitate commercialization of the Company's BDS
technology.
In January 1991, the Company paid $25,000 and issued 730,800 shares of its
Common Stock to the Institute of Gas Technology ("IGT") for the license to IGT's
technology for desulfurizing petroleum which expires at the later of 20 years or
when all patents related to the technology expire. As consideration for future
royalties, the Company agreed to pay IGT $400,000, of which $200,000 was paid
and charged to expense as of December 31, 1992 and the remaining $200,000 was
paid and charged to expense as of December 31, 1993. These payments eliminate
the royalty to be paid upon future revenues. Payments to IGT were approximately
none, $150,000 and none in 1994, 1995 and 1996, respectively, for research
performed under the terms of the research agreements. As part of the total
payments made to IGT in 1993, the Company had paid $150,000 under the amended
agreement which provided an additional $300,000 financing for research. The
remaining payment of $150,000 was made in June 1995.
The Company has also entered into other contracts with various institutions
for research and development. The amounts paid under these agreements totaled
$237,956, $211,500 and $114,900 for the years ended December 31, 1994, 1995 and
1996, respectively. The Company is also committed to pay these institutions
approximately $95,000 through December 1997 under various agreements.
F-12
<PAGE>
ENERGY BIOSYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
In March 1992, the Company entered into a collaborative agreement with
Petrolite Corporation ("Petrolite") to commercialize the Company's BDS
technology. Under the terms of the agreement, both parties are to perform
research and development. Petrolite is to perform research and development in
its own laboratory at its own cost and is to fund research, as agreed under the
terms of the agreement, at the Company beginning April 1, 1992, at a rate of
$225,000 per month for the first two years of the agreement for a total of
$5,400,000. Additionally, Petrolite, under the terms of the agreement,
constructed a pilot plant at its own expense, not to exceed $1,500,000, to begin
testing the effectiveness of the BDS technology. The Company is committed to
fund research and development at its own expense in the third through fifth
years of the agreement at an annual rate equal to the greater of $2,500,000 per
year or 4% of the Company's net revenues, as defined in the agreement. As of
December 31, 1996, the Company has received $5,400,000 in research payments of
which $1,134,000 has been recognized as revenue in each of the three years ended
December 31, 1994, 1995 and 1996. The revenue recognized is based on the
percentage of total research payments to be received from Petrolite in relation
to the total research and development costs to be incurred under the terms of
the agreement. The remaining $13,500 has been recorded as deferred revenue. The
amended collaborative agreement dated October 18, 1993, provides for an expanded
territory covered by the agreement from North America, Venezuela and Mexico to
the entire world and permits the use of third party engineering and construction
companies to assist with certain matters. In return, the Company's obligation to
pay Petrolite decreased from 30% to 22% of all site licenses fees and adjusted
gross profit from the operation of the desulfurization units. In the event the
collaboration is terminated, the percentage of site license fees and adjusted
gross profit paid to Petrolite will be adjusted as outlined under the terms of
the agreement.
In October 1996, the Company entered into an agreement with Petrolite
providing the Company with the option to amend the terms of its strategic
alliance with Petrolite. Under the agreement, the Company made an initial
payment of $1 million to Petrolite in December 1996, which was expensed by the
Company when made, in exchange for the option and the extension of Petrolite's
obligations to provide operational and technical support for the pilot plant
from September 1, 1996 through December 31, 1998. If the Company exercises its
option, the percentage of site license fees and adjusted gross profit payable to
Petrolite will be reduced to 9.5% from 22%, in exchange for which the Company
will (i) assume responsibility for servicing the BDS units on site at customer
locations, (ii) pay Petrolite an additional $9 million in cash and (iii) issue
to Petrolite a warrant entitling Petrolite to purchase 138,889 shares of Common
Stock at an exercise price of $7.20 per share. The Company may exercise the
Petrolite option at any time on or before the earlier to occur of (i) ten
business days following the close of any equity financing by the Company in
which the gross cash proceeds raised in such financing (together with cash
proceeds raised by the Company in any other equity financing after the date of
the option agreement, if applicable) equal or exceed $25 million and (ii)
December 30, 1998.
In December 1994, the Company was awarded a $2 million federal grant under
the Advanced Technology Programs administered by the National Institute of
Standards and Technology ("NIST"). The three-year program funded by this grant
is dedicated to the development of a biotechnology-based method of removing
sulfur from crude oil. As of December 31, 1996, the Company has recognized
$928,012 in sponsored research revenue relating to this grant. Included in this
revenue amount is $176,403 of grant receivable from NIST. The approved budget
for 1997 commits NIST to sponsor research of approximately $1,072,000.
8. COMMITMENTS
The Company maintains a Simplified Employee Pension Plan (the "Plan") for
all employees. Under the terms of the Plan, employees are eligible to
participate after completion of six months of service. The Company contributes
an amount equal to 8% of the employees' annual compensation to the Plan.
Employees are vested immediately and there is at present no employee
contribution. Total expenses under the Plan were approximately $206,000,
$246,000 and $302,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.
F-13
<PAGE>
ENERGY BIOSYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
The Company maintains two capital leases for computer and laboratory
equipment. In addition, the Company entered into an operating lease agreement in
May 1993 for its premises. In January 1994, the Company amended its lease
agreement to include additional space. The agreement expires in 1998.
Future minimum payments under the non-cancelable operating lease and
capital leases consist of the following at December 31, 1996:
Fiscal Year Operating Capital
- ----------- --------- ---------
1997 .................................. $378,228 $11,631
1998 .................................. 303,959 --
1999 .................................. 1,158 --
-------- -------
Total minimum lease payments ..... $683,345 11,631
========
Less interest ......................... (731)
-------
Present value of future minimum lease
payments ............................. $10,900
=======
The Company incurred rent expense of $278,824, $320,456 and $391,788 during
1994, 1995 and 1996, respectively.
9. RELATED-PARTY TRANSACTIONS
The Company paid consulting fees to certain stockholders and directors
totaling $44,100, $60,021 and $12,155 during the years ended December 31, 1994,
1995 and 1996, respectively.
The former Chairman of the Board and Chief Executive Officer of Petrolite
serves as a director for the Company.
10. SUBSEQUENT EVENTS
In January 1997, the Company's Board of Directors adopted the 1996 Stock
Option Plan (the "1996 Plan"). Under the 1996 Plan, the Company may issue
options for and sell up to 100,000 shares of Common Stock to employees and
consultants of the Company. The options granted under this plan may not have an
exercise price per share less than the fair market value on the date of grant
and are limited to a term not to exceed ten years.
In February and March 1997, the Company completed a convertible preferred
stock offering resulting in net cash proceeds of approximately $10.2 million in
exchange for the sale of 224,100 shares of Series B Convertible Preferred Stock.
Dividends on the Series B Convertible Preferred Stock will be cumulative from
the date of the initial closing and will be payable semi-annually commencing May
1, 1997, at an annual rate equal to (i) $4.00 per share of Series B Convertible
Preferred Stock to the extent the dividend is paid in cash and (ii) $4.50 per
share of Preferred Stock to the extent the dividend is paid in Common Stock.
Dividends on shares of Series B Convertible Preferred Stock are payable in cash
or Common Stock or a combination thereof, at the Company's option. In connection
with the offering, the Company also completed an exchange offering in which it
exchanged 478,000 shares of Series A Convertible Preferred Stock for an equal
number of shares of its Series B Convertible Preferred Stock.
F-14
<PAGE>
Exhibit 3.1(d)
CERTIFICATE OF THE POWERS, DESIGNATIONS,
PREFERENCES AND RIGHTS OF THE
SERIES B CONVERTIBLE PREFERRED STOCK
($.01 Par Value)
(Liquidation Preference $50.00 per Share)
OF
ENERGY BIOSYSTEMS CORPORATION
______________________
Pursuant to Section 151(g) of the General Corporation Law
of the State of Delaware
______________________
THE UNDERSIGNED, being the President and Chief Executive Officer of Energy
BioSystems Corporation, a Delaware corporation (the "Company"), DOES HEREBY
CERTIFY that, pursuant to the provisions of Section 151(g) of the General
Corporation Law of the State of Delaware and pursuant to authority conferred
upon the Board of Directors by the provisions of the Amended and Restated
Certificate of Incorporation of the Company (the "Certificate of Incorporation),
the Board of Directors of the Company has duly adopted resolutions providing for
the issuance of a series of its preferred stock and fixing the relative powers,
designations, preferences
<PAGE>
and rights of such stock and the qualifications, limitations and restrictions
thereof. These resolutions are as follows:
RESOLVED, that pursuant to authority expressly granted to and vested in the
Board of Directors of the Company by the provisions of the Certificate of
Incorporation, the issuance of a series of preferred stock, par value $.01 per
share, which shall consist of 785,350 of the 5,000,000 shares of preferred stock
which the Company now has authority to issue, be, and the same hereby is,
authorized, and the Board of Directors hereby fixes the powers, designations,
preferences and relative, participating, optional and other special rights, and
the qualifications, limitations and restrictions thereof, of the shares of such
series (in addition to the powers, designations, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations or restrictions thereof, set forth in the Certificate of
Incorporation which may be applicable to the preferred stock of this series) as
follows:
1. Number of Shares and Designation. 785,350 shares of the preferred
stock, $.01 par value per share, of the Company are hereby constituted as a
series of the preferred stock designated as Series B Convertible Preferred
Stock, par value $.01 per share (the "Series B Preferred Stock").
2. Definitions. For purposes of the Series B Preferred Stock, in
addition to those terms otherwise defined herein, the following terms shall have
the meanings indicated:
(a) "Board of Directors" shall mean the board of directors of the
Company or any committee authorized by such Board of Directors to perform any of
its responsibilities with respect to the Series B Preferred Stock.
(b) "Business Day" shall mean any day other than a Saturday, Sunday or
a day on which state or federally chartered banking institutions in the State of
New York or the State of Texas are authorized or obligated by law or executive
order to close.
(c) "Closing Price" of a security with respect to any day shall mean
the average of the daily closing prices for the ten (10) consecutive Trading
Dates commencing twelve (12) Trading Dates before such day. The closing price
for each Trading Date shall be the reported last sales price, regular way, for
the security or, in case no sale takes place on such day, the average of the
reported closing bid and asked prices, regular way, for the security in either
case as reported on the New York Stock Exchange or the principal national
securities exchange on which the security is listed or admitted to trading, or,
if not listed or admitted to trading on any national securities exchange, on The
Nasdaq Stock Market, Inc. ("Nasdaq") National Market, or if such security is not
quoted on such The Nasdaq National Market, the average of the closing bid and
asked prices on such day in the over-the-counter market as reported by Nasdaq.
If the Closing Price cannot be so determined, then the Closing Price shall be
determined:
-2-
<PAGE>
(i) by the written agreement of the Company and the holders of shares
of Series B Preferred Stock representing a majority of the Common Shares then
obtainable from the conversion of outstanding shares of Series B Preferred
Stock, or
(ii) in the event that no such agreement is reached within twenty (20)
days after the event giving rise to the need to determine the Closing Price, by
the agreement of two arbitrators, one of whom shall be selected by the Company
and the other of whom shall be selected by such majority holders or
(iii) if the two arbitrators so selected fail to agree within twenty
(20) days, by a third arbitrator selected by the mutual agreement of the other
two (with all costs and expenses of any arbitrators to be paid by the Company).
The Company shall cooperate to permit any determination under the preceding
clauses (i), (ii) or (iii).
(d) "Common Stock" shall mean the Common Stock of the Company, par value
$.01 per share.
(e) "Common Shares" shall have the meaning set forth in Section 7 hereof.
(f) "Company Notice" shall have the meaning set forth in paragraph (d) of
Section 5.
(g) "Conversion Price" shall mean the Conversion Price per Common Share
into which the Series B Preferred Stock is convertible, as such Conversion Price
may be adjusted pursuant to Section 7 hereof. The initial Conversion Price
shall be $7.25.
(h) "Dividend Payment Date" shall have the meaning set forth in paragraph
(a) of Section 3 hereof.
(i) "Dividend Payment Record Date" shall have the meaning set forth in
paragraph (a) of Section 3 hereof.
(j) "Dividend Periods" shall mean the interval beginning on the most recent
Dividend Payment Date and ending on and including the day immediately preceding
the next succeeding Dividend Payment Date.
(k) "Fundamental Change" shall have the meaning set forth in paragraph (c)
of Section 8 hereof.
-3-
<PAGE>
(l) "Initial Dividend Period" shall mean the interval beginning on the
Issue Date to and including May 1, 1997.
(m) "Issue Date" shall mean the first date on which shares of the Series B
Preferred Stock are issued.
(n) "Person" shall mean any individual, association, partnership,
corporation, a government or a political subdivision thereof, a governmental
agency or other entity, and shall include any agency successor (by merger or
otherwise) of such entity.
(o) "Series A Preferred Stock" shall mean the Company's Series A Preferred
Stock, as designated by the Certificate of the Powers, Designations, Preferences
and Rights filed with the Secretary of State of the State of Delaware on October
25, 1994.
(p) "Trading Date" with respect to Common Shares means (i) if the Common
Shares are listed or admitted for trading on the New York Stock Exchange or
another national securities exchange, a day on which the New York Stock Exchange
or such other national securities exchange is open for business, or (ii) if the
Common Shares are quoted on The Nasdaq National Market, a day on which trades
may be made on The Nasdaq National Market, or (iii) otherwise, any Business Day.
(q) "Transfer Agent" means KeyCorp Shareholder Services, Inc. or such other
agent or agents of the Company as may be designated by the Board of Directors of
the Company as the transfer agent for the Series B Preferred Stock.
3. Dividends.
(a) Holders of the Series B Preferred Stock are entitled to receive, when,
as and if declared by the Board of Directors, out of the funds of the Company
legally available therefor, a semi-annual dividend payable in Common Stock or
cash or a combination of Common Stock and cash, at the Board of Directors'
option (except that if in the preceding 6 months the Company has paid cash
dividends on any preferred stock other than the Preferred Stock with respect to
which the Company had the option to pay dividends in Common Stock, such semi-
annual dividend on the Preferred Stock shall be paid in cash), from the Issue
Date for the Initial Dividend Period and for each Dividend Period thereafter, at
an annual rate equal to (i) $4.00 per share of Series B Preferred Stock to the
extent the dividend is paid in cash and (ii) $4.50 per share of Series B
Preferred Stock to the extent the dividend is paid in Common Stock (and, in the
case of any accrued but unpaid dividends, upon liquidation as provided under
Section 4 hereof, upon redemption as provided under Section 5 hereof and upon
conversion as provided under Section 7 hereof). Notwithstanding the above, the
Company will not declare and cause to be paid dividends on the Series B
Preferred Stock in shares of Common Stock until a registration statement
covering the resale of such shares of Common Stock has been filed with the
Securities and Exchange Commission and has been declared
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effective thereby. If May 1 and November 1 of each year (each a "Dividend
Payment Date") or any other Dividend Payment Date shall be on a day other than a
Business Day, then the Dividend Payment Date shall be on the next succeeding
Business Day. Dividends on the Series B Preferred Stock will be cumulative from
the Issue Date, whether or not in any Dividend Period or Periods there shall be
funds of the Company legally available for the payment of such dividends,
whether or not such dividends are declared, and whether or not there are other
legal or contractual restrictions on the declaration or payment of such
dividends. Dividends will be payable to holders of record as they appear on the
stock books of the Company on the Dividend Payment Record Date (the "Dividend
Payment Record Date"), which shall be not more than 60 days nor less than 10
days preceding the Dividend Payment Dates thereof, as shall be fixed by the
Board of Directors. The amount of dividends payable per share of Series B
Preferred Stock for each full semi-annual Dividend Period shall be computed by
dividing the annual dividend rate by two. Dividends on the Series B Preferred
Stock shall accrue (whether or not declared) on a daily basis from the Issue
Date in the amounts described above. Accrued dividends for each Dividend Period
shall accumulate to the extent not paid on the Dividend Payment Date first
following the Dividend Period for which they accrue. As used herein, the term
"accrued" with respect to dividends includes both accrued and accumulated
dividends.
(b) If, and to the extent, the Board of Directors elects to pay dividends
on the Series B Preferred Stock in Common Stock, the number of shares of Common
Stock which shall be issued in payment of such dividend shall be equal to the
amount of such dividend specified in (a) of this Section 3 for dividends payable
in Common Stock divided by the Closing Price as of the relevant Dividend Payment
Date. No fractional shares of Common Stock shall be issued in connection with
such a dividend, but, in lieu of any fraction of a share of Common Stock which
would otherwise be issuable in respect of the aggregate number of shares of
Series B Preferred Stock held by the holder thereof, the holder shall have the
right to receive an amount in cash equal to the same fraction of the Closing
Price as of the Dividend Payment Date for such dividend.
(c) Holders of shares of Series B Preferred Stock called for redemption on
a redemption date falling between the close of business on a Dividend Payment
Record Date and the opening of business on the corresponding Dividend Payment
Date shall, in lieu of receiving such dividend payment on the Dividend Payment
Date fixed therefor, receive an amount equal to such dividend payment
(consisting of all accumulated and unpaid dividends through and including the
redemption date) on the date fixed for redemption (unless such holder converts
such shares of Series B Preferred Stock in accordance with Section 7 hereof).
If a conversion of shares of Series B Preferred Stock occurs between a Dividend
Payment Record Date and the corresponding Dividend Payment Date, the dividends
payable on the conversion date under Section 7 hereof shall be calculated
through and including such conversion date. If, for whatever reason (i) any
share of Series B Preferred Stock has not been converted pursuant to Section 7
hereof on a conversion date, or (ii) all payments have not been made with
respect to any share of Series B Preferred Stock as required by Section 5 on a
redemption date or all payments have not been made with respect to any share of
Series B Preferred
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Stock as required by Section 8 on a repurchase date (other than because of a
failure by the holder thereof to tender such shares for payment on such date)
then, notwithstanding any other provision hereof, dividends shall continue to
accrue on such outstanding shares until paid.
(d) If the Company shall, after the Issue Date, fix a record date for the
making of a Distribution on Common Stock to holders of its Common Stock (other
than any distribution referred to in Section 7(d) hereof and cash dividends paid
out of retained earnings of the Company determined under generally accepted
accounting principles consistently applied), the Company shall set aside in an
escrow reasonably acceptable to the holders of a majority of the Series B
Preferred Stock, the Distribution on Common Stock to which they would have been
entitled if they had converted all of the Series B Preferred Stock held by them
for the Company's Common Stock immediately prior to the record date for the
purpose of determining stockholders entitled to receive such Distribution on
Common Stock and any such Distribution on Common Stock shall thereafter be
distributed from time to time out of such escrow to persons converting the
Series B Preferred Stock (immediately upon conversion) to the extent such
Distribution on Common Stock relates to the shares of Series B Preferred Stock
then being converted. As used herein, the term "Distribution on Common Stock"
means a distribution to holders of the Common Stock (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing corporation) of (i) assets (including any cash
dividends or distributions), (ii) evidences of indebtedness or other securities
of the Company or of any entity other than the Company or (iii) subscription
rights (including, without limitation, rights issued pursuant to a rights plan
as authorized by Article Fifth of the Company's Amended and Restated Certificate
of Incorporation), options or warrants to purchase any of the foregoing assets
or securities, whether or not such rights, options or warrants are immediately
exerciseable.
(e) The amount of dividends payable on the Series B Preferred Stock for the
Initial Dividend Period and any other Dividend Period shorter or longer than a
full Dividend Period shall be computed on the basis of a 360-day year consisting
of twelve 30-day months. Holders of shares of Series B Preferred Stock shall
not be entitled to any dividends, whether payable in cash, property or stock, in
excess of the cumulative and other dividends herein provided. No interest, or
sum of money in lieu of interest, shall be payable in respect of any dividend
payment or payments on the Series B Preferred Stock which may be in arrears.
(f) So long as any shares of the Series B Preferred Stock are outstanding,
no dividends, except as described in the next succeeding sentence, shall be
declared or paid or set apart for payment on any class or series of stock of the
Company ranking, as to dividends, on a parity with the Series B Preferred Stock,
for any period unless full cumulative dividends have been or contemporaneously
are declared and paid, or declared and an amount sufficient for the payment
thereof set apart for such payment, on the Series B Preferred Stock for all
Dividend Periods terminating on or prior to the date of payment, or setting
apart for payment, of such dividends on such parity stock. When dividends are
not paid in full or a sum sufficient for such payment is not
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set apart, as aforesaid, upon the shares of the Series B Preferred Stock and any
other class or series of stock ranking on a parity as to dividends with the
Series B Preferred Stock, all dividends declared upon shares of the Series B
Preferred Stock and all dividends declared upon such other stock shall be
declared pro rata so that the amounts of dividends per share declared on the
Series B Preferred Stock and such other stock shall in all cases bear to each
other the same ratio that accrued dividends per share on the shares of the
Series B Preferred Stock and on such other stock bear to each other.
(g) So long as any shares of the Series B Preferred Stock are outstanding,
no other stock of the Company ranking on a parity with the Series B Preferred
Stock as to dividends or upon liquidation, dissolution or winding up shall be
redeemed, purchased or otherwise acquired for any consideration (or any moneys
be paid to or made available for a sinking fund or otherwise for the purchase or
redemption of any shares of any such stock) by the Company unless the full
cumulative dividends, if any, accrued on all outstanding shares of the Series B
Preferred Stock shall have been paid or set apart for payment for all past
Dividend Periods.
(h) So long as any shares of the Series B Preferred Stock are outstanding,
no dividends (other than dividends or distributions paid in shares of, or
options, warrants or rights to subscribe for or purchase shares of, Common Stock
or other stock ranking junior to the Series B Preferred Stock, as to dividends
and upon liquidation, dissolution or winding up) shall be declared or paid or
set apart for payment and no other distribution shall be declared or made or set
apart for payment, in each case upon the Common Stock or any other stock of the
Company ranking junior to the Series B Preferred Stock as to dividends or upon
liquidation, dissolution or winding up, nor shall any Common Stock nor any other
such stock of the Company ranking junior to the Series B Preferred Stock as to
dividends or upon liquidation, dissolution or winding up be redeemed, purchased
or otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund or otherwise for the purchase or redemption of any
shares of any such stock) by the Company except by conversion into or exchange
for stock of the Company ranking junior to the Series B Preferred Stock as to
dividends and upon liquidation, dissolution or winding up unless, in each case
the full cumulative dividends, if any, accrued on all outstanding shares of the
Series B Preferred Stock and any other stock of the Company ranking on a parity
with the Series B Preferred Stock as to dividends shall have been paid or set
apart for payment for all past Dividend Periods and all past dividend periods
with respect to such other stock.
4. Liquidation Preference. (a) In the event of any liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary,
before any payment or distribution of the assets of the Company (whether capital
or surplus) shall be made to or set apart for the holders of Common Stock or any
other series or class or classes of stock of the Company ranking junior to the
Series B Preferred Stock upon liquidation, dissolution or winding up, the
holders of the shares of Series B Preferred Stock shall be entitled to receive
from the assets of the Company, whether represented by capital, surplus,
reserves or earnings, payment in cash or other assets, if the holders of a
majority of the shares of Series B Preferred Stock have agreed to accept the
distribution
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hereunder in assets of the Company, in an amount (the "Preferred Liquidation
Value") equal to the greater of (i) $50.00 per share, or (ii) the amount per
share of Series B Preferred Stock that would have been payable had each such
share been converted to Common Shares immediately prior to such event of
liquidation, dissolution or winding-up pursuant to Section 7 hereof, plus, in
either case, an amount per share equal to all dividends (whether or not earned
or declared) accrued and unpaid thereon to the date of final distribution to
such holders; but such holders shall not be entitled to any further payment. No
payment on account of any liquidation, dissolution or winding up of the Company
shall be made to the holders of any class or series of stock ranking on a parity
with the Series B Preferred Stock in respect of the distribution of assets upon
dissolution, liquidation or winding up unless there shall likewise be paid at
the same time to the holders of the Series B Preferred Stock like proportionate
amounts determined ratably in proportion to the full amounts to which the
holders of all outstanding shares of Series B Preferred Stock and the holders of
all outstanding shares of such parity stock are respectively entitled with
respect to such distribution. If, upon any liquidation, dissolution or winding
up of the Company, the assets of the Company, or proceeds thereof, distributable
among the holders of the shares of Series B Preferred Stock shall be
insufficient to pay in full the preferential amount aforesaid and liquidating
payments on any other shares of stock ranking, as to liquidation, dissolution or
winding up, on a parity with the Series B Preferred Stock, then such assets, or
the proceeds thereof, shall be distributed among the holders of shares of Series
B Preferred Stock and any such other stock ratably in accordance with the
respective amounts which would be payable on such shares of Series B Preferred
Stock and any such other stock if all amounts payable thereon were paid in full.
For the purposes of this Section 4, (i) a consolidation or merger of the Company
with one or more corporations or other entities, (ii) a sale, lease, exchange or
transfer of all or any part of the Company's assets or (iii) a statutory share
exchange shall not be deemed to be a liquidation, dissolution or winding up,
voluntary or involuntary.
(b) Subject to the rights of the holders of shares of any series or class
or classes of stock ranking on a parity with or prior to the Series B Preferred
Stock upon liquidation, dissolution or winding up, upon any liquidation,
dissolution or winding up of the Company, after payment shall have been made in
full to the holders of Series B Preferred Stock, as provided in this Section 4,
any other series or class or classes of stock ranking junior to the Series B
Preferred Stock upon liquidation, dissolution or winding up shall, subject to
the respective terms and provisions (if any) applying thereto, be entitled to
receive any and all assets remaining to be paid or distributed, and the holders
of Series B Preferred Stock shall not be entitled to share therein.
(c) Written notice of any liquidation, dissolution or winding up of the
Company, stating the payment date or dates when and the place or places where
the amounts distributable in such circumstances shall be payable, shall be given
by first class mail, postage prepaid, not less than thirty (30) days prior to
any payment date stated therein, to the holders of record of the Series B
Preferred Stock at their respective addresses as the same shall appear on the
books of the Transfer Agent.
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5. Redemption.
(a) Any redemption of Series B Preferred Stock pursuant to this Section 5
shall be at a price equal to $50.00 per share of Series B Preferred Stock, plus
in each case an amount equal to accrued and unpaid dividends, if any, to (and
including) the redemption date, whether or not earned or declared (the
"Redemption Price"). The Redemption Price may be paid in cash or, at the
Company's option, subject to the provisions of this Section 5, in Common Shares
or in a combination of Common Shares and cash. If, and to the extent, the
Company elects to pay the Redemption Price for the Series B Preferred Stock in
Common Shares, then such number of Common Shares payable to a holder of Series B
Preferred Stock shall be equal to the greater of (i) the number of Common Shares
into which the shares of Series B Preferred Stock held by the holder of such
Series B Preferred Stock could be converted as of the date on which notice of
such redemption is given by the Company or (ii) the number of Common Shares
determined by dividing the Redemption Price payable to such holder of Series B
Preferred Stock by the Closing Price as of the date on which notice of such
redemption is given by the Company.
(b) At any time on or after February 26, 1999 (and not before) and prior to
February 26, 2002, if the daily closing price (as referred to in the second
sentence of the definition of "Closing Price" in Section 2) of the Common Shares
has been $10.875 (a 50% premium to the Conversion Price) or higher for the 30
consecutive Trading Dates commencing 32 Trading Dates before the date of the
notice of redemption under Section 5(d), the Company may at its option (subject
to the other provisions of this Section 5) redeem all or a portion of the
outstanding Series B Preferred Stock pursuant to this Section 5(b).
(c) On February 26, 2002 (or, if such date is not a Business Day, the next
succeeding Business Day), the Company shall (subject to the other provisions of
this Section 5) redeem all the outstanding Series B Preferred Stock pursuant to
this Section 5(c); provided, that if the Company intends to elect in accordance
with this Section 5 to pay the Redemption Price in Common Shares and, having
used its reasonable best efforts to do so, has not been able to arrange for the
firm commitment underwriting referred to in Section 5(d)(xi) below prior to such
date, the Company shall not be required to redeem the Series B Preferred Stock
for cash on such date but shall be required to (i) redeem for the Redemption
Price payable in Common Shares all Series B Preferred Stock held by holders
which waive the firm commitment underwriting requirements herein, and (ii) if
any Series B Preferred Stock is not so redeemed, to continue to use its
reasonable best efforts to arrange for such firm commitment underwriting as
promptly as practicable thereafter and shall effect the redemption of all
outstanding shares of Series B Preferred Stock upon arranging for such firm
commitment underwriting.
(d) In the event the Company shall elect to redeem shares of Series B
Preferred Stock pursuant to Section 5(b) or shall be required to redeem shares
of Series B Preferred Stock pursuant to Section 5(c), a notice of such
redemption shall be given by the Company (a "Company Notice")
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by first class mail, postage prepaid, mailed not less than 30 nor more than 90
days prior to the redemption date, to each holder of record of the shares to be
redeemed, at such holder's address as the same appears on the stock records of
the Company. Each such notice shall state:
(i) the redemption date;
(ii) the number of shares of Series B Preferred Stock to be redeemed
and, if less than all the shares held by such holder are to be redeemed, the
number of such shares to be redeemed from such holder;
(iii) the Redemption Price;
(iv) whether the Redemption Price will be paid in Common Shares or
cash, or in a combination of Common Shares and cash;
(v) the place or places where certificates for such shares of Series B
Preferred Stock are to be surrendered for payment of the Redemption Price;
(vi) that payment will be made upon presentation and surrender of such
Series B Preferred Stock;
(vii) the then current Conversion Price and the date on which the
right to convert such shares of Series B Preferred Stock will expire;
(viii) that dividends on the shares to be redeemed shall cease to
accrue following such redemption date;
(ix) whether such redemption is at the option of the Company;
(x) that dividends accrued to and including the date fixed for
redemption will be paid as specified in said notice on the shares to be
redeemed; and
(xi) if the Redemption Price will be paid in Common Shares, that an
investment banking firm mutually acceptable to the Company and the holders of a
majority of the shares of Series B Preferred Stock has agreed to proceed with a
firm commitment underwriting (l) for holders of Series B Preferred Stock to be
redeemed under this Section 5 by such notice, (m) with respect to the Common
Shares obtainable by such holders upon redemption of the Series B Preferred
Stock and (n) which will yield net proceeds (after deducting underwriting
commissions and fees and other expenses of the offering) (which net proceeds may
be supplemented by the Company, at its option, to meet the following threshold
amounts) (a) in the case of a redemption under section 5(b), for such holders
for such Common Shares equal to at least $10.875 (a 50% premium to the
Conversion Price)
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for each Common Share sold and (b) in the case of a redemption under Section
5(c), for such holders of such redeemed Series B Preferred Stock equal to the
Redemption Price for each redeemed share of Series B Preferred Stock.
Notice having been mailed as aforesaid, from and after the redemption date,
unless the Company shall be in default in providing money or Common Shares for
the payment of the Redemption Price (including any accrued and unpaid dividends
to (and including) the date fixed for redemption), (1) dividends on the shares
of the Series B Preferred Stock so called for redemption shall cease to accrue,
(2) said shares shall be deemed no longer outstanding, and (3) all rights of the
holders thereof as stockholders of the Company (except the right to receive from
the Company any moneys or Common Shares payable upon redemption without interest
thereon) shall cease except for the rights applicable to any Common Shares paid
pursuant to the redemption. Neither the failure to mail a Company Notice
required by this paragraph (d) nor any defect in the mailing thereof to a
particular holder, shall affect the sufficiency of the notice or the validity of
the proceedings for redemption with respect to any other holder. If the Company
chooses to redeem the Series B Preferred Stock for cash, its obligation to
provide moneys in accordance with this paragraph shall be deemed fulfilled if,
on or before the redemption date, the Company shall deposit with a bank or trust
company having an office or agency in the Borough of Manhattan, City of New
York, and having a capital and surplus of at least $50,000,000, the principal
amount of funds necessary for such redemption, in trust for the account of the
holders of the shares to be redeemed (and so as to be and continue to be
available therefor), with irrevocable instructions and authority to such bank or
trust company that such funds be applied to the redemption of the shares of
Series B Preferred Stock so called for redemption. Any interest accrued on such
funds shall be paid to the Company from time to time. Any funds so deposited
and unclaimed at the end of two years from such redemption date shall be
released or repaid to the Company, after which, subject to any applicable laws
relating to escheat or unclaimed property, the holder or holders of such shares
of Series B Preferred Stock so called for redemption shall look only to the
general funds of the Company for payment of the Redemption Price.
Upon surrender in accordance with said notice of the certificates for any
such shares so redeemed (properly endorsed or assigned for transfer, if the
Board of Directors shall so require and the notice shall so state), such shares
shall be redeemed by the Company at the applicable Redemption Price aforesaid.
If fewer than all the outstanding shares of Series B Preferred Stock are to be
redeemed, shares to be redeemed shall be selected by the Company from
outstanding shares of Series B Preferred Stock not previously called for
redemption by lot or pro rata (as near as may be) or by any other equitable
method determined by the Company in its sole discretion. If fewer than all the
shares represented by any certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares without cost to the holder thereof.
Notwithstanding the foregoing, if the Company Notice of redemption has been
given pursuant to this Section 5 and any holder of shares of Series B Preferred
Stock shall, prior to the
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close of business on the third Business Day preceding the redemption date, give
written notice to the Company pursuant to Section 7(b) hereof of the conversion
of any or all of the shares to be redeemed held by such holder (accompanied by a
certificate or certificates for such shares, duly endorsed or assigned to the
Company), then the conversion of such shares to be redeemed shall become
effective as provided in Section 7.
(e) In the case of a redemption under Section 5(b) or Section 5(c) hereof,
if the Redemption Price will be paid, in whole or in part, in Common Shares,
within 20 days after the receipt of the Company Notice described in Section 5(d)
hereof, each holder of Series B Preferred Stock shall notify the Company whether
or not it elects to participate in such underwritten offering (the failure to
timely provide the required notice being deemed an election not to participate
in such underwritten offering for purposes of this Section 5). As soon as
practicable thereafter, the Company and the holders wishing to participate in
such underwritten offering will, using such investment banking firm, proceed
with a registration, qualification and offering of the Common Shares obtainable
upon conversion of the Series B Preferred Stock held by such holders wishing to
participate and subject to required redemption by the Company under the notice
given under Section 5(d) hereof. It shall be a condition to the obligation of
selling holders to close under such firm commitment underwriting that such
underwriting shall net to the holders wishing to participate in such
underwritten offering an amount (after deducting underwriting commissions and
fees and other expenses of the underwriting) at least equal to the amounts
stated in Section 5(d)(xi)(n)(a) or (b), as the case may be.
(f) An election by any holders under the first sentence of Section 5(e)
hereof to participate in an underwritten public offering shall suspend any
redemption under this Section 5 with respect to Series B Preferred Stock held by
such holders. If such holders who notified the Company that they wished to
participate in the public offering refuse to close under the underwriting
agreement despite the satisfaction of all conditions therein to their obligation
to close thereunder, then the Company shall redeem the Series B Preferred Stock
held by such holders scheduled for redemption in accordance with the notice
given under Section 5(d) hereof; any such required redemption shall be made no
later than the date (which shall be a Business Day) to be specified (not more
than 20 days or less than 5 days after such failure to close) to such holders by
the Company. If any underwriting under Section 5(e) does not close due to one
or more of the conditions to the sellers' obligations to close under the
underwriting agreement not being satisfied, then the notice of the Company
requiring redemption of the Series B Preferred Stock described in Section 5(d)
hereof shall be rescinded with respect to the shares held by the holders
electing to participate in such offering, subject, in the case of a redemption
pursuant to Section 5(c) hereof, to an obligation of the Company to use its
reasonable best efforts to arrange as promptly as practicable thereafter for
another firm commitment underwriting for the Common Shares issuable in
connection with such redemption and to effect the redemption of all outstanding
shares of Series B Preferred Stock upon arranging for such firm commitment
underwriting.
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(g) Neither the Company nor any of its subsidiaries shall repurchase any
outstanding shares of Series B Preferred Stock unless the Company on the same
terms either (i) offers to purchase all of the then outstanding shares of Series
B Preferred Stock or (ii) offers to purchase shares of Series B Preferred Stock
from the holders thereof in proportion to the respective number of shares of
Series B Preferred Stock held by each holder. In any such repurchase by the
Company, if all shares of Series B Preferred Stock are not being repurchased,
then the number of shares of Series B Preferred Stock to be repurchased shall be
allocated among all shares of Series B Preferred Stock held by holders which
accept the Company's repurchase offer so that the shares of Series B Preferred
Stock are repurchased from such holders in proportion to the respective number
of shares of Series B Preferred Stock held by each such holder which accepts the
Company's offer (or in such other proportion as agreed by all such holders who
accept the Company's offer). Nothing in this Section 5(g) shall (i) obligate a
holder of shares of Series B Preferred Stock to accept the Company's repurchase
offer or (ii) prevent the Company from redeeming shares of Series B Preferred
Stock in accordance with the terms of Sections 5(a) through (f) hereof.
6. Shares To Be Retired. Any share of Series B Preferred Stock
converted, redeemed or otherwise acquired by the Company shall be retired and
canceled and shall upon cancellation be restored to the status of authorized but
unissued shares of preferred stock, subject to reissuance by the Board of
Directors as shares of preferred stock of one or more other series but not as
shares of Series B Preferred Stock.
7. Conversion. Holders of shares of Series B Preferred Stock shall have
the right to convert all or a portion of such shares (including fractions of
such shares) into fully paid and non-assessable shares of Common Stock or any
capital stock or other securities into which such Common Stock shall have been
changed or any capital stock or other securities resulting from a
reclassification thereof (such shares, the "Common Shares"), as follows:
(a) Subject to and upon compliance with the provisions of this Section 7, a
holder of shares of Series B Preferred Stock shall have the right, at the option
of such holder, at any time after the expiration of 60 days following the last
date of original issuance of the Series B Preferred Stock (excluding the Series
B Preferred Stock issued pursuant to the exercise of certain warrants referred
to in Section 7(d)(vi)(E)), to convert any of such shares (or fractions thereof)
into the number of fully paid and non-assessable shares of Common Stock
(calculated as to each conversion to the nearest 1/100th of a share) obtained by
dividing (x) the product of (i) the number of shares to be converted and (ii)
$50.00 per share by (y) the Conversion Price, and by surrender of such shares,
such surrender to be made in the manner provided in paragraph (b) of this
Section 7; provided, however, that the right to convert shares called for
redemption pursuant to Section 5 shall terminate at the close of business on the
third Business Day preceding the date fixed for such redemption, unless the
Company shall default in making payment of the amount payable upon such
redemption. Subject to the following provisions of this Section 7(a), any share
of Series B Preferred Stock may be converted, at the option of its holder, in
part into Common Shares under the procedures set forth
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above. If a part of a share of Series B Preferred Stock is converted, then the
Company will convert such share into the appropriate number of Common Shares
(subject to paragraph (c) of this Section 7) and issue a fractional share of
Series B Preferred Stock evidencing the remaining interest of such holder. The
Common Shares issuable upon conversion of the shares of Series B Preferred
Stock, when such Common Shares shall be issued in accordance with the terms
hereof, are hereby declared to be and shall be duly authorized, validly issued,
fully paid and non-assessable Common Shares held by the holders thereof.
(b) In order to exercise the conversion right, the holder of each share of
Series B Preferred Stock (or fraction thereof) to be converted shall surrender
the certificate representing such share, duly endorsed or assigned to the
Company or in blank, at the office or agency of the Transfer Agent in the
Borough of Manhattan, City of New York or Houston, Texas, accompanied by written
notice to the Company that the holder thereof elects to convert the holder's
Series B Preferred Stock or a specified portion thereof. Unless the shares
issuable on conversion are to be issued in the same name as the name in which
such share of Series B Preferred Stock is registered, each share surrendered for
conversion shall be accompanied by instruments of transfer, in form satisfactory
to the Company, duly executed by the holder or such holder's duly authorized
attorney and an amount sufficient to pay any required transfer or similar tax
(or evidence reasonably satisfactory to the Company demonstrating that such
taxes have been paid).
Within five (5) Business Days after receipt of any share of Series B
Preferred Stock and an election to convert all or a portion of such share of
Series B Preferred Stock under this Section 7, the Company will pay, out of
funds legally available therefor, to the holder of such share of Series B
Preferred Stock full cumulative dividends, if any, accrued to the effective date
of conversion of such share of Series B Preferred Stock and relating to the
portion of such share to be converted; provided, however, that if a share of
Series B Preferred Stock is surrendered for conversion between a Dividend
Payment Record Date and a Dividend Payment Date, the Company shall only be
obligated to pay such full cumulative dividends to the record holder of such
share of Series B Preferred Stock on the Dividend Payment Record Date.
As promptly as practicable after the surrender of certificates for shares
of Series B Preferred Stock as aforesaid and in any event within five (5)
Business Days thereafter (unless such conversion is in connection with an
underwritten public offering of Common Shares as specified in a written notice
provided to the Company, in which event concurrently with such conversion) the
Company shall issue and shall deliver at such office to such holder, or on his
or her written order, a certificate or certificates for the number of Common
Shares issuable upon the conversion of such shares in accordance with the
provisions of this Section 7, and any fractional interest in respect of a Common
Share arising upon such conversion shall be settled as provided in paragraph (c)
of this Section 7.
Each conversion shall be deemed to have been effected immediately prior to
the close of business on the date on which the certificate or certificates for
shares of Series B Preferred Stock
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shall have been surrendered and such notice received by the Company as aforesaid
(except that if such conversion is in connection with an underwritten public
offering of Common Shares, then such conversion shall be deemed to have been
effected upon such surrender), and the person or persons in whose name or names
any certificate or certificates for Common Shares shall be issuable upon such
conversion shall be deemed to have become the holder or holders of record of the
shares represented thereby at such time on such date, and such conversion shall
be at the Conversion Price in effect at such time on such date, unless the stock
transfer books of the Company shall be closed on that date, in which event such
person or persons shall be deemed to have become such holder or holders of
record at the close of business on the next succeeding day on which such stock
transfer books are open, but such conversion shall be at the Conversion Price in
effect on the date and at the time referred to above. All Common Shares
delivered upon conversion of the Series B Preferred Stock will, upon delivery,
be duly authorized, validly issued and fully paid and non-assessable.
(c) In connection with the conversion of any shares of Series B Preferred
Stock, fractions of such shares may be converted; however, no fractional shares
or securities representing fractions of Common Shares shall be issued upon
conversion of the Series B Preferred Stock. Instead of any fractional interest
in a Common Share which would otherwise be deliverable upon the conversion of a
share of Series B Preferred Stock (or fraction thereof), the Company shall pay
to the holder of such share an amount in cash (computed to the nearest cent)
equal to the daily closing price (as referred to in the second sentence of the
definition of "Closing Price'') of a Common Share on the Trading Date
immediately preceding the date of conversion multiplied by the fraction of a
share of Common Stock represented by such fractional interest. If more than one
share (or fraction thereof) of Series B Preferred Stock shall be surrendered for
conversion at one time by the same holder, the number of full shares of Common
Stock issuable upon conversion thereof shall be computed on the basis of the
aggregate number of shares of Series B Preferred Stock (or fractions thereof) so
surrendered.
(d) The Conversion Price shall be adjusted from time to time as follows:
(i) Stock Dividends and Stock Splits. If at any time after the Issue
Date, (i) the Company shall fix a record date for the issuance of any
dividend payable in Common Shares or (ii) the number of Common Shares shall
be increased by a subdivision or split-up of Common Shares, then, on the
record date fixed for the determination of holders of Common Shares
entitled to receive such dividend or immediately after the effective date
of such subdivision or split-up, as the case may be, the number of shares
to be delivered upon surrender of any share of Series B Preferred Stock for
conversion will be appropriately increased so that each holder of Series B
Preferred Stock thereafter will be entitled to receive the number of Common
Shares that such holder would have owned immediately following such action
had such share of Series B Preferred Stock been surrendered for conversion
immediately prior thereto, and the Conversion Price will be appropriately
adjusted. The time of occurrence of an event giving rise to an adjustment
made pursuant to this paragraph d(i)
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shall, in the case of a subdivision or split-up, be the effective date
thereof and shall, in the case of a stock dividend, be the record date
thereof.
(ii) Combination of Stock. If the number of Common Shares outstanding
at any time after the Issue Date shall have been decreased by a combination
of the outstanding Common Shares, then, immediately after the effective
date of such combination, the number of shares to be delivered upon
surrender of any share of Series B Preferred Stock for conversion will be
appropriately decreased so that each holder of Series B Preferred Stock
thereafter will be entitled to receive the number of Common Shares that
such holder would have owned immediately following such action had such
share of Series B Preferred Stock been surrendered for conversion
immediately prior thereto, and the Conversion Price will be appropriately
adjusted.
(iii) Reorganization. If any capital reorganization of the Company,
or any reclassification of the Common Stock, or any consolidation of the
Company with or merger of the Company with or into any other corporation or
any sale, lease or other transfer of all or substantially all of the assets
of the Company to any other person (including any individual, partnership,
joint venture, corporation, trust or group thereof) shall be effected in
such a way that the Common Shares shall be converted into the right to
receive stock, securities or other property (including cash or any
combination thereof), then, upon surrender of the Series B Preferred Stock
for conversion in accordance with the terms of this Section 7, each holder
shall have the right to receive the kind and amount of stock and other
securities and property receivable (including cash or any combination
thereof) upon such reorganization, reclassification, consolidation, merger
or sale, lease or other transfer by a holder of the number of Common Shares
that such holder of the Series B Preferred Stock would have been entitled
to receive upon surrender of the Series B Preferred Stock for conversion
pursuant to this Section 7 had the Series B Preferred Stock been
surrendered for conversion immediately prior to such reorganization,
reclassification, consolidation, merger or sale, lease or other transfer.
As a condition to any such transaction, the Company shall require such
person to confirm in writing the rights of the holders of Series B
Preferred Stock pursuant to this paragraph d(iii).
(iv) Rights Offering. If the Company at any time after the Issue Date
shall issue or sell or fix a record date for the issuance of rights,
options or warrants to all holders of Common Shares entitling the holders
thereof to subscribe for or purchase or otherwise acquire Common Shares (or
securities convertible into or exchangeable for Common Shares), in any such
case, at a price per share (or having a conversion price or exchange value
per share) that, together with the value (if for consideration other than
cash, as determined in good faith by the Board of Directors) of any
consideration paid for any such rights, options or warrants is less than
the Closing Price of the Common Shares as of the date of such issuance or
sale or as of such record date, then, immediately after such record date,
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the number of shares to be delivered upon surrender of the Series B
Preferred Stock for conversion shall be appropriately increased so that
each holder thereafter will be entitled to receive the number of Common
Shares determined by multiplying the number of Common Shares such holder
would have been entitled to receive immediately before the date of such
issuance or sale on such record date by a fraction, the numerator of which
will be the number of Common Shares outstanding on such date plus the
number of additional Common Shares offered for subscription or purchase (or
into which the convertible securities so offered are initially convertible)
and the denominator of which will be the number of Common Shares
outstanding on such date plus the number of Common Shares that the
aggregate offering price of the total number of shares so offered for
subscription or purchase would purchase at such Closing Price, and the
Conversion Price shall be appropriately adjusted. Notwithstanding the
foregoing, rights issued by the Company to all holders of its Common Shares
entitling the holders thereof to subscribe for or purchase securities of
the Company, which rights (i) are deemed to be transferred with such Common
Shares, (ii) are not immediately exerciseable, and (iii) are also issued in
respect of future issuances of Common Shares pursuant to a stockholder
rights plan or similar plan of the Company, in each case in clauses (i)
through (iii) until the occurrence of a specified event or events, shall
for purposes of this paragraph (d) of this Section 7 not be deemed issued
until the occurrence of the earliest such specified event.
(v) Certain Issuances. If the Company shall sell or issue any
Additional Stock (as defined below), the Conversion Price in effect
immediately prior to each such sale or issuance shall forthwith (except as
otherwise provided in this clause (v)) be adjusted to a price determined by
multiplying such Conversion Price by a fraction:
(x) the numerator of which shall be
(1) the aggregate number of outstanding Common Shares immediately
prior to such sale (assuming conversion of all outstanding shares of Series
B Preferred Stock into Common Shares); plus
(2) the number of Common Shares which the aggregate consideration
received by the Company for the shares of Additional Stock would purchase
at the current Conversion Price immediately prior to this adjustment ; and
(y) the denominator of which shall be
(1) the aggregate number of outstanding Common Shares immediately
prior to such sale (assuming conversion of all outstanding shares of Series
B Preferred Stock into Common Shares) ; plus
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(2) the number of such shares of Additional Stock so issued or
sold by the Company.
The consideration for the issuance of Common Shares shall be deemed to be
the amount of cash paid therefor before deducting any reasonable discounts,
commissions or other expenses allowed, paid or incurred by the Company for any
underwriting or otherwise in connection with the issuance and sale thereof or
the value of other consideration received therefor as determined in good faith
by the Board of Directors.
In the case of the issuance of Additional Stock consisting of Common Shares
issuable under options to purchase or rights to subscribe for Common Shares,
securities by their terms convertible into or exchangeable for Common Shares or
options to purchase or rights to subscribe for such convertible or exchangeable
securities, the following provisions shall apply:
(A) The aggregate maximum number of Common Shares deliverable upon
exercise of such options to purchase or rights to subscribe for Common Shares
shall be deemed to have been issued as Additional Stock at the time such options
or rights were issued and for a consideration equal to the cash consideration,
if any, received by the Company upon the issuance of such options or rights plus
the minimum purchase or exercise price provided in such options or rights for
the Common Shares covered thereby.
(B) The aggregate maximum number of Common Shares deliverable upon
conversion of or in exchange for any such convertible or exchangeable securities
or upon the exercise of options to purchase or rights to subscribe for such
convertible or exchangeable securities and subsequent conversion or exchange
thereof shall be deemed to have been issued as Additional Stock at the time such
securities were issued or such options or rights were issued and for a
consideration equal to the consideration, if any, received by the Company for
any such securities and related options or rights (excluding any cash received
on account of accrued interest or accrued dividends), plus the additional
consideration, if any, to be received by the Company upon the conversion or
exchange of such securities or the exercise of any related options or rights.
(C) In the event of any change in the number of Common Shares
deliverable or any change in the consideration payable to the Company upon
exercise of such options or rights or upon conversion of or in exchange for such
convertible or exchangeable securities, including, but not limited to, a change
resulting from the antidilution provisions thereof, the Conversion Price
obtained with respect to the adjustment which was made upon the issuance of such
options, rights or securities, and any subsequent adjustments based thereon,
shall be recomputed to reflect such change, but in no case shall a further
adjustment be made for the actual issuance of Common Shares or any payment of
such consideration upon the exercise of any such options or rights or the
conversion or exchange of such securities; provided, however, that this section
shall not have any effect on any conversion of the Series B Preferred Stock
prior to such change; provided, further, that
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if such adjustment would result in an increase in the Conversion Price then in
effect, such adjustment shall not be effective until 30 days after written
notice thereof has been given by the Company to all holders of the Series B
Preferred Stock; and provided further that the Conversion Price shall in no
event be increased to an amount greater than that which would have been
effective without regard to the original issuance.
(D) Upon the expiration of any such options or rights, the termination
of any such rights to convert or exchange or the expiration of any options or
rights related to such convertible or exchangeable securities, the Conversion
Price obtained with respect to the adjustment which was made upon the issuance
of such options, rights or securities or options or rights related to such
securities, and any subsequent adjustments based thereon, shall be recomputed to
reflect the issuance of only the number of Common Shares actually issued upon
the exercise of such options or rights, upon the conversion or exchange of such
securities or upon the exercise of the options or rights related to such
securities; provided, however, that this section shall not have any effect on
any conversion of Series B Preferred Stock prior to such expiration or
termination; and provided further that the Conversion Price shall in no event be
increased to an amount greater than that which would have been effective without
regard to the original issuance.
(vi) Additional Stock. "Additional Stock" shall mean any Common Shares
issued by the Company after the Issue Date for a consideration per share of
$6.50 or less, as adjusted for stock splits, dividends and combinations, (or
Common Shares issuable pursuant to options or rights or convertible or
exchangeable securities as referred to in paragraph (v) above if the
consideration therefor as provided in clause (A) therein is $6.50 or less, as
adjusted as aforesaid) other than
(A) Common Shares issued pursuant to any transaction described in
Sections 3(e) or 7(d)(i)-(iv) hereof,
(B) Common Shares issued or issuable to employees, directors,
consultants or advisors of the Company directly or pursuant to a stock plan or
stock purchase plan or agreement, which have been issued as of the date hereof
or are issuable pursuant to agreements entered into on or prior to the date
hereof. Any further Common Shares issued or issuable to employees, directors,
consultants or advisors of the Company other than those referenced in the
preceding sentence that in the aggregate do not exceed 5% of the outstanding
Common Shares at such Common Shares' date of issuance or deemed date of
issuance,
(C) Common Shares issued upon conversion or redemption of the Series A
Preferred Stock (provided, in the case of the redemption of the Series A
Preferred Stock, that Common Shares issued upon redemption of the Series A
Preferred Stock shall be deemed to be Additional Stock to the extent that the
number of Common Shares so issued exceeds the number of Common Shares issuable
immediately prior to such redemption upon conversion of the redeemed shares of
Series A Preferred Stock),
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(D) Common Shares issued in payment of dividends or upon conversion or
redemption of the Series B Preferred Stock,
(E) Securities issued or issuable for consideration other than solely
cash in connection with any license, collaborative, corporate partnership, co-
marketing or co-promotion, research and development or similar arrangement; and
(F) Common Shares issuable to a certain party retained as exclusive
agent of the Company in connection with the offer and sale by the Company of the
shares of Series B Preferred Stock pursuant to the exercise of warrants to
purchase shares of Series B Preferred Stock and the subsequent conversion of
such shares of Series B Preferred Stock.
(vii) No Adjustments to Exercise Price. No adjustment in the number of
Common Shares issuable upon conversion and consequently the Conversion Price in
accordance with the provisions of Sections 7(d)(i)-(v) above need be made if
such adjustment would amount to a change in such Conversion Price of less than
$.10; provided, however, that the amount by which any adjustment is not made by
reason of the provisions of this section shall be carried forward and taken into
account at the time of any subsequent adjustment in the Conversion Price; and
provided further, that adjustment shall be required and made in accordance with
the provisions of this Section 7 not later than such time as may be required in
order to preserve the tax free nature of a distribution to the holder of any
Common Share. Anything in this Section 7 to the contrary notwithstanding, the
Company shall be entitled to the extent permitted by law to make such reductions
in the Conversion Price, in addition to those required by this Section 7, as it
in its sole discretion shall determine to be advisable in order to avoid or
diminish any income tax to any holder of Common Share resulting from any
dividend or distribution of capital stock or rights or warrants to purchase
capital stock or from any event treated as such for income tax purposes or for
any other reasons.
(viii) Readjustments, Etc. If an adjustment is made under Sections
7(d)(i)-(v) above, and the event to which the adjustment relates does not occur,
then any adjustments in the Conversion Price or Common Shares to be delivered
upon surrender of the Series B Preferred Stock for conversion that were made in
accordance with such paragraphs shall be adjusted back to the Conversion Price
and the number of Common Shares to be delivered upon surrender of the Series B
Preferred Stock for conversion that were in effect immediately prior to the
record date for such event (subject to the effect of any subsequent intervening
adjustments).
(e) Whenever the Conversion Price is adjusted as herein provided, the
Company shall promptly file in the custody of its Secretary or an Assistant
Secretary at its principal office and with the Transfer Agent an officers'
certificate setting forth the adjusted number of Common Shares to be delivered
upon surrender of the Series B Preferred Stock for conversion and the Conversion
Price after such adjustment, the method of calculation thereof and a brief
statement of the facts requiring such adjustment and upon which such adjustment
is based. Promptly after each such adjustment, the
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Company shall cause a copy of such certificate to be mailed to the holder of
each share of Series B Preferred Stock at his or her last address as shown on
the stock books of the Company. Each such officers' certificate shall be made
available at all reasonable times for inspection by each holder of Series B
Preferred Stock.
(f) In any case in which paragraph (d) of this Section 7 provides that an
adjustment shall become effective immediately after a record date for an event
and the date fixed for conversion pursuant to Section 7 occurs after such record
date but before the occurrence of such event, the Company may defer until the
actual occurrence of such event (A) issuing to the holder of any share of Series
B Preferred Stock surrendered for conversion the additional Common Shares
issuable upon such conversion by reason of the adjustment required by such event
over and above the Common Shares issuable upon such conversion before giving
effect to such adjustment and (B) paying to such holder any amount in cash in
lieu of any fraction pursuant to paragraph (c) of this Section 7.
(g) The Company covenants that it will at all times reserve and keep
available, free from preemptive rights, out of the aggregate of its authorized
but unissued Common Shares the maximum number of Common Shares into which all
shares of the Series B Preferred Stock from time to time may be converted, but
Common Shares held in the treasury of the Company may, in its discretion, be
delivered upon any conversion of shares of Series B Preferred Stock.
Before taking any action which would cause an adjustment reducing the
Conversion Price below the then par value, if any, of the Common Shares issuable
upon conversion of the Series B Preferred Stock, the Company will take any
corporate action which may in the opinion of its counsel, be necessary in order
that the Company may validly and legally issue Common Shares at such adjusted
Conversion Price, which shares shall be fully-paid and nonassessable and free
from all taxes, liens and charges with respect to the issue thereof.
Prior to the delivery of any securities which the Company shall be
obligated to deliver upon conversion of the Series B Preferred Stock, the
Company will endeavor in good faith and as expeditiously as possible to comply
with all federal and state laws and regulations thereunder requiring the
registration of such securities with, or any approval of or consent to the
delivery thereof by, any governmental authority.
(h) The Company will pay any and all documentary stamp or similar issue or
transfer taxes payable in respect of the issue or delivery of the shares of
Series B Preferred Stock (or any other securities issued on account of the
Series B Preferred Stock pursuant hereto) or Common Shares on conversion of the
Series B Preferred Stock pursuant hereto; provided, however, that the Company
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issue or delivery of shares of Series B Preferred Stock
(or any other securities issued on account of the Series B Preferred Stock
pursuant hereto) or Common Shares in a name other than the name in which the
shares of Series B Preferred Stock with respect to which such Common Shares
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are issued were registered, and the Company shall not be required to make any
issue or delivery unless and until the person requesting such issue or delivery
has paid to the Company the amount of any such tax.
If:
(i) the Company shall authorize the issuance to all holders of Common
Shares of rights or warrants to subscribe for or purchase Common Shares or any
other subscription rights or warrants; or
(ii) the Company shall authorize the distribution to all holders of
Common Shares of evidences of its indebtedness or assets (other than cash
dividends payable out of retained earnings, distributions excluded from the
operation of subparagraph (d)(iv) of this Section 7, stock dividends or
securities issued pursuant to any stockholder rights plan or any similar plan of
the Company); or
(iii) there shall be any capital reorganization or reclassification
of the Common Shares (other than a subdivision, split-up or combination of the
outstanding Common Shares, an increase in the authorized capital stock of the
Company not involving the issuance of any shares thereof, or a change in par
value of the Common Shares), or any other consolidation or merger to which the
Company is a party (other than a consolidation or merger with a subsidiary in
which the Company is the continuing entity and that does not result in any
reclassification or change in the Common Shares outstanding) or a sale, lease or
transfer of all or substantially all of the assets of the Company; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company; or
(v) there shall be any other event that would result in an adjustment
pursuant to paragraph (d) of this Section 7 of the Conversion Price or the
number of Common Shares that may be issuable upon the conversion of the Series B
Preferred Stock;
then the Company will cause to be filed with the Transfer Agent and to be mailed
to each holder of Series B Preferred Stock by first class mail addressed to such
holder at the address appearing in the stock records of the Company, at least
twenty (20) days (or ten (10) days in any case specified in clauses (i) or (ii)
above) before the applicable record or effective date hereinafter specified, a
notice stating (A) the date as of which the holders of Common Shares of record
entitled to receive any such rights, warrants or distributions are to be
determined or (B) the date on which any such consolidation, merger, sale, lease,
transfer, dissolution, liquidation or winding-up is expected to become
effective, and the date as of which it is expected that holders of Common Shares
of record will be entitled to exchange their Common Shares for securities or
other property, if any, deliverable upon such reorganization, reclassification,
consolidation, merger, sale, lease, transfer, dissolution, liquidation or
winding-up. Such notice shall also state whether such transaction will result
in any
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adjustment in the Conversion Price and, if so, shall state what the adjusted
Conversion Price will be and when it will become effective. The failure to give
such notice or any defect therein shall not affect the legality or validity of
any distribution, right, warrant, consolidation, merger, sale, lease, transfer,
dissolution, liquidation or winding-up or the vote upon any such action.
8. Redemption at Option of Holder Upon a Fundamental Change. (a) If a
Fundamental Change (as defined in paragraph (c) of this Section 8) occurs, each
holder of Series B Preferred Stock shall have the right, at the holder's option,
to require the Company to redeem all of such holder's Series B Preferred Stock,
or any portion thereof that has an aggregate liquidation value that is a
multiple of $50.00, on the date (the "Repurchase Date") selected by the Company
that is not less than 10 nor more than 20 days after the Final Surrender Date
(as defined in paragraph (b) of this Section 8), at a price per share equal to
the Redemption Price. The Company may, at its option, pay all or any portion of
such Redemption Price upon a Fundamental Change in Common Shares, provided that
if the Company elects to pay all or any portion of the repurchase price in
Common Shares, the holders of Series B Preferred Stock electing to sell their
shares of Series B Preferred Stock to the Company pursuant to this Section 8
must be given the opportunity to sell the Common Shares received from the
Company pursuant to this Section 8 in a firm commitment underwriting by an
investment banking firm mutually acceptable to the Company and the holders of a
majority of such shares. For purposes of calculating the number of Common
Shares issuable upon such redemption, the value of any such Common Shares will
be equal to the Closing Price of such Common Shares as of the Repurchase Date.
Payment may not be made in Common Shares unless (i) the issuance or resale of
such shares has been, or will be registered on or prior to the Final Surrender
Date (as defined in paragraph (b) of this Section 8) under the Securities Act of
1933, as amended, or such shares are freely tradable pursuant to an exemption
thereunder and (ii) such shares are listed on a United States national
securities exchange or quoted on the National Market of NASDAQ at (or
immediately after) the time of payment.
(b) Within 30 days after the occurrence of a Fundamental Change, the
Company must mail to all holders of record of the Series B Preferred Stock a
Company Notice containing the information set out in paragraph (d) of Section 5,
except that, for purposes of this Section 8 only, instead of stating that a
redemption is occurring at the option of the Company, the Company Notice shall
describe the occurrence of such Fundamental Change and of the redemption right
arising as a result thereof. The Company must cause a copy of such notice to be
published in a newspaper of general circulation in the Borough of Manhattan, the
City of New York. At least two Business Days prior to the Repurchase Date, the
Company must publish a similar notice stating whether and to what extent the
Redemption Price will be paid in cash or Common Shares. To exercise the
redemption right, a holder of Series B Preferred Stock must surrender, on or
before the date which is, subject to any contrary requirements of applicable
law, 60 days after the date of mailing of the Company Notice (the "Final
Surrender Date"), the certificate or certificates representing the Series B
Preferred Stock with respect to which the right is being exercised, duly
endorsed for transfer to the Company, together with a written notice of
election.
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(c) The term "Fundamental Change" shall mean any of the following:
(i) a "person" or "group" (within the meaning of Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")),
together with any affiliates thereof, becoming the "beneficial owners" as
defined in Rule 13d-3 under the Exchange Act) of Voting Shares (as defined
in this Section 8) of the Company entitled to exercise more than 60% of the
total voting power of all outstanding Voting Shares of the Company
(including any Voting Shares that are not then outstanding of which such
person or group is deemed the beneficial owner);
(ii) any consolidation of the Company with, or merger of the Company
into, any other person, any merger of another person (other than a wholly-
owned subsidiary of the Company) into the Company, or any sale, lease or
transfer of all or substantially all of the assets of the Company to
another person (other than a merger (a) which results in the holders of
Common Stock of the Company immediately prior to giving effect to such
transaction owning shares of capital stock of the surviving corporation in
such transaction representing in excess of 40% of the total voting power of
all shares of capital stock of such surviving corporation entitled to vote
generally in the election of directors and (b) in which the shares of the
surviving corporation held by such holders are, or immediately upon
issuance will be, listed on a national securities exchange or quoted on the
National Market of NASDAQ, are not subject to any right of repurchase by
the issuer thereof or any third party and are not otherwise subject to any
encumbrance as a result of such transaction, provided, that the surviving
corporation amends its charter or certificate of incorporation to include
the rights of the Series B Preferred Stock and its terms as set forth
herein); or
(iii) the substantial reduction or elimination of a public market for
the Common Shares as the result of repurchases, delisting or deregistration
of the Common Shares or a corporate reorganization or recapitalization
undertaken by the Company;
provided, however, that a Fundamental Change shall not occur under clause (i) or
(ii) above if, (x) as of the fifteenth (15th) Trading Date after the public
announcement by the Company of such transaction and, if later, three days prior
to the consummation of such transaction, the Closing Price is at least equal to
110% of the Conversion Price then in effect on such dates and (y) in the case of
clause (ii) above, at least 90% of the consideration (excluding cash payments
for fractional shares) in such transaction or transactions to the holders of
Common Shares consists of shares of common stock that are, or immediately upon
issuance will be, listed on a national securities exchange or quoted on the
National Market of NASDAQ, and as a result of such transaction or transactions,
the Series B Preferred Stock becomes convertible into such common stock.
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(d) An election by a holder of Series B Preferred Stock to have the Company
redeem shares of Series B Preferred Stock pursuant to subsection 8(a) shall
become irrevocable at the close of business on the relevant Repurchase Date.
(e) The Company agrees that it will not complete any Fundamental Change
described in subsection 8(c) unless proper provision has been made to satisfy
its obligations under this Section 8.
For purposes of this Section 8, "Voting Shares" is defined to mean all
outstanding shares of any class or classes (however designated) of capital stock
entitled to vote generally in the election of members of the Board of Directors.
9. Ranking. Any class or classes of stock of the Company shall be deemed
to rank:
(i) prior to the Series B Preferred Stock, as to dividends or as to
distribution of assets upon liquidation, dissolution or winding up, if the
holders of such class shall be entitled to the receipt of dividends or of
amounts distributable upon liquidation, dissolution or winding up, as the case
may be, in preference or priority to the holders of Series B Preferred Stock.
(ii) on a parity with the Series B Preferred Stock, as to dividends or as
to distribution of assets upon liquidation, dissolution or winding up, whether
or not the dividend rates, dividend payment dates or redemption or liquidation
prices per share thereof be different from those of the Series B Preferred
Stock, if the holders of such class of stock and the Series B Preferred Stock
shall be entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in proportion to
their respective amounts of accrued and unpaid dividends per share or
liquidation prices, without preference or priority of one over the other; and
(iii) junior to the Series B Preferred Stock, as to dividends or as to the
distribution of assets upon liquidation, dissolution or winding up, if such
stock shall be Common Stock or if the holder of Series B Preferred Stock shall
be entitled to receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of shares of such stock.
Without limiting the foregoing, the Series A Preferred Stock shall be deemed to
rank on a parity with the Series B Preferred Stock as to dividends and as to
distributions of assets upon liquidation, dissolution or winding up.
10. Voting and Special Rights. (a) In addition to the voting rights
provided below, the holders of Series B Preferred Stock will have voting rights
on all matters subject to a vote of holders of Common Stock as if such shares of
Series B Preferred Stock were converted into the applicable number of Common
Shares consistent with Section 7 hereof; provided, however, that
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notwithstanding the foregoing provisions of this Section 10(a), any holder of
Series B Preferred Stock that would be required to make a filing under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") in connection
with the acquisition of Series B Preferred Stock shall not be entitled, pursuant
to the provisions of this Section 10(a), to vote in the election of directors of
the Company until (i) such holder has notified the Company in writing of its
election to exercise its right to vote in the election of directors of the
Company pursuant to the provisions of this Section 10(a), (ii) the required
filings under the HSR Act have been made and (iii) the waiting period under the
HSR Act applicable to the election by such holder described in (i) of this
Section 10(a) has expired or been terminated.
(b) Notwithstanding (a) above of this Section 10, so long as any shares of
the Series B Preferred Stock remain outstanding, the consent of the holders of
at least two-thirds (2/3) of the shares of Series B Preferred Stock outstanding
at the time, voting separately as a class, given in person or by proxy either in
writing (as permitted by law and the Certificate of Incorporation and By-laws of
the Company) or at any special or annual meeting, shall be necessary to permit,
effect or validate any one or more of the following:
(i) the authorization, creation or issuance, or any increase in the
authorized or issued amount, of any class or series of stock ranking prior to
the Series B Preferred Stock as to dividends or the distribution of assets upon
liquidation, dissolution or winding up;
(ii) the creation, authorization or issuance of any class or series of
common stock other than the class of Common Stock presently authorized for
issuance under the Certificate of Incorporation as in effect on January 1, 1997,
subject to changes to the terms thereof hereafter made to the Certificate of
Incorporation; provided that (A) there shall be no more than one class (and
there shall be no separate series) of Common Stock and (B) the Company will not
permit the par value or the determined or stated value of any shares of the
Common Stock receivable upon the conversion of the shares of Series B Preferred
Stock to exceed the amount payable therefor upon such conversion and (C) the
Company will not take any action which results in any adjustment of the current
Conversion Price under this Certificate if the total number of shares of Common
Stock then available for issuance upon conversion of all shares of Series B
Preferred Stock (and upon conversion of all other then outstanding shares of the
Company's capital stock convertible into Common Stock) would be insufficient to
satisfy all such conversion rights;
(iii) the amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the Certificate of
Incorporation of the Company which would adversely affect any right, preference,
privilege or voting power of the Series B Preferred Stock or of the holders
thereof; provided, however, that any increase in the amount of authorized
preferred stock or the creation and issuance of other series of preferred stock,
or any increase in the amount of authorized shares of such series or of any
other series of preferred stock, in each case ranking on a parity with or junior
to the Series B Preferred Stock with respect to the payment of dividends and
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the distribution of assets upon liquidation, dissolution or winding up, shall
not be deemed to adversely affect such rights, preferences or voting powers;
(iv) the authorization of any reclassification of the Series B Preferred
Stock;
(v) any increase in the number of shares of Series B Preferred Stock
authorized for issuance;
(vi) the creation, authorization or issuance of any series or class of
stock or any other obligation or security convertible into any capital stock
which capital stock is prohibited under clauses (i) or (ii) above;
(vii) the amendment of this Certificate of Designations; or
(viii) at any time after March 31, 1997, the issuance of any shares of
Series B Preferred Stock (excluding the issuance of share certificates upon
transfers or exchanges of shares by holders (other than the Company) or upon
replacement of lost, stolen, damaged or mutilated share certificates and
excluding the shares of Series B Preferred Stock to be issued upon the exercise
of the warrants issued to the exclusive agent for the Company in connection with
the issuance and sale of the shares of the Series B Preferred Stock).
(c) Additional Voting Rights.
(i) If on the sixth anniversary of the Issue Date any shares of the Series
B Preferred Stock are outstanding, the size of the Board of Directors of the
Company shall be increased by such number representing not less than 20%
(rounded to the nearest whole number) of the total number of directors after
giving effect to the increase in the size of the Board of Directors contemplated
by this paragraph and during the period (hereinafter in this Section 10 called
the "Class Voting Period") commencing upon such date and ending on the date on
which no shares of Series B Preferred Stock remain outstanding, the holders of
at least two-thirds (2/3) of the then outstanding shares of Series B Preferred
Stock, by the affirmative vote in person or by proxy at a special meeting of
holders of Series B Preferred Stock called for such purpose (or at any
adjournment thereof) by holders of at least 25% of the then outstanding shares
of Series B Preferred Stock or at any annual meeting of stockholders, or by
written consent delivered to the Secretary of the Company, with the holders of
the Series B Preferred Stock voting as a separate class and with each share of
Series B Preferred Stock having one vote, shall be entitled, as a class, to the
exclusion of the holders of all other classes or series of capital stock of the
Company, to elect such additional number of directors of the Company.
(ii) At any time when such voting right under this Section l0(c) shall have
vested in the holders of shares of Series B Preferred Stock entitled to vote
thereon, and if such right shall not
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already have been initially exercised, an officer of the Company shall, upon the
written request of at least 25% of the holders of record of shares of the Series
B Preferred Stock then outstanding, addressed to the Secretary of the
Corporation, call a special meeting of holders of shares of the Series B
Preferred Stock. Such meeting shall be held at the earliest practicable date
upon the notice required for special meetings of stockholders at the place for
holding annual meetings of stockholders of the Company or, if none, at a place
designated by the Secretary of the Company. If such meeting shall not be called
by the proper officers of the Company within 30 days after the personal service
of such written request upon the Secretary of the Company, or within 30 days
after mailing the same within the United States, by registered mail, addressed
to the Secretary of the Company at its principal office (such mailing to be
evidenced by the registry receipt issued by the political authorities), then the
holders of record of at least 25% of the shares of Series B Preferred Stock then
outstanding may designate in writing any person to call such meeting at the
expense of the Company, and such meeting may be called by such person so
designated upon the notice required for special meetings of stockholders and
shall be held at the same place as is elsewhere provided in this paragraph or,
if none, at a place designated by the person selected to call the meeting. Any
holder of shares of Series B Preferred Stock then outstanding that would be
entitled to vote at such meeting shall have access to the stock books of the
Company for the purpose of causing a meeting of stockholders to be called
pursuant to the provisions of this paragraph.
(iii) Any director who shall have been elected by the holders of Series B
Preferred Stock pursuant to this Section l0(c) may be removed at any time during
the Class Voting Period, by the vote of the holders of at least two-thirds (2/3)
of all of the then outstanding shares of Series B Preferred Stock, voting as a
separate class in person or by proxy at a special meeting of holders of shares
of Series B Preferred Stock called for such purpose by the holders of at least
25% of the then outstanding shares of Series B Preferred Stock. Any director
who shall have been elected by the holders of Series B Preferred Stock may not
be removed at any time during the Class Voting Period without the consent of the
holders of at least two-thirds (2/3) of all of the then outstanding shares of
Series B Preferred Stock. Any vacancy created by the removal, death or
resignation of a director elected by the holders of Series B Preferred Stock may
be filled during the Class Voting Period by the holders of at least two-thirds
(2/3) of all of the then outstanding shares of Series B Preferred Stock by vote
in person or by proxy at a special meeting of holders of shares of Series B
Preferred Stock of the Company called for such purpose by holders of at least
25% of the then outstanding shares of Series B Preferred Stock.
(iv) The term of any director elected pursuant to the provisions of this
Section l0(c) shall in all events expire at the end of the Class Voting Period
and the size of the Board of Directors shall be reduced accordingly.
(d) Special Rights. Each holder of 100,000 shares or more of Series B
Preferred Stock or such number of Common Shares issued upon conversion of at
least 100,000 or more shares of the Series B Preferred Stock (such number being
subject to adjustment in a manner consistent
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with the provisions of Section 7 hereof) (each such person, an "Eligible
Holder") shall have the right, during the period such Person holds the number of
shares of Series B Preferred Stock or Common Shares specified above, and (if
requested by the Company) subject to execution by such Eligible Holder of a
reasonable confidentiality agreement, to send one (1) representative to meetings
of the Company's and each subsidiary's, if any, Board of Directors (and the
executive committee if the executive committee has more than five members) of
such Board of Directors, such representatives to act as observers without a vote
or other rights as a director (except the right to receive sufficient notice to
enable such attendance and the right to receive all other communications,
information and materials furnished, from time to time, to directors of the
Company and each subsidiary).
(e) To alter or amend the voting or special rights of the holders of Series
B Preferred Stock or any Eligible Holder as provided in this Section 10 requires
the consent of the holders of a majority of the Common Shares issuable upon
conversion of the then outstanding Series B Preferred Stock; provided that the
holders of a majority of the Common Shares issuable upon conversion of the then
outstanding Series B Preferred Stock held by the Eligible Holders also consent
to such alteration or amendment.
11. Record Holders. The Company and the Transfer Agent may deem and treat
the record holder of any shares of Series B Preferred Stock as the true and
lawful owner thereof for all purposes, and neither the Company nor the Transfer
Agent shall be affected by any notice to the contrary.
12. Notices. Except as may otherwise be provided for herein, all notices
referred to herein shall be in writing, and all notices hereunder shall be
deemed to have been given upon receipt, in the case of a notice of conversion
given to the Company as contemplated in Section 7(b) hereof, or, in all other
cases, upon the earlier of receipt of such notice or three Business Days after
the mailing of such notice if sent by registered mail (unless first-class mail
shall be specifically permitted for such notice under the terms of this
Certificate of Designations) with postage prepaid, addressed: if to the
Company, to its offices at 4200 Research Forest Drive, The Woodlands, Texas
77381 (Attention: Investor Relations Department) or to an agent of the Company
designated as permitted by this Certificate of Designations, or, if to any
holder of the Series B Preferred Stock, to such holder at the address of such
holder of the Series B Preferred Stock as listed in the stock record books of
the Company (which may include the records of any transfer agent for the Series
B Preferred Stock); or to such other address as the Company or holder, as the
case may be, shall have designated by notice similarly given.
13. Rights Plan. The Company's ability to adopt a rights plan as
authorized by Article Fifth of the Company's Amended and Restated Certificate of
Incorporation shall not be limited or restricted in any respect by the
provisions of this Certificate, except as provided in Sections 3(e) and 7(d)(iv)
herein.
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<PAGE>
IN WITNESS WHEREOF, this Certificate has been signed by John H. Webb, and
attested to by Paul G. Brown, III, of the Company, all as of the 20th day of
February, l997.
ENERGY BIOSYSTEMS CORPORATION
By: /s/ John H. Webb
---------------------------------------
John H. Webb
President and Chief Executive Officer
Attest:
By: /s/ Paul G. Brown, III
----------------------------------
Paul G. Brown, III
Secretary
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Exhibit 4.2
SERIES B CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
BETWEEN
ENERGY BIOSYSTEMS CORPORATION
AND
THE PURCHASER LISTED ON SCHEDULE I
DATED AS OF FEBRUARY 21, 1997
<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT dated as of February 21, 1997 by and between
Energy BioSystems Corporation, a Delaware corporation (the "Company"), and the
Purchaser listed on Schedule I of this Agreement (the "Purchaser").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Company desires to sell to the Purchaser and the
Purchaser desires to purchase from the Company shares of the authorized but
unissued Series B Convertible Preferred Stock, par value $0.01 per share, of the
Company (the "Series B Preferred Stock"), upon the terms and provisions
hereinafter set forth.
WHEREAS, concurrently with this offering, the Company has made an
exchange offer whereby holders of Series A Preferred Stock will exchange shares
of Series A Preferred Stock for shares of the authorized but unissued Series B
Preferred Stock, par value $0.01 per share, of the Company (the "Exchange
Offer") to exchanging parties who will be executing Stock Exchange Agreements
substantially similar to this Agreement, containing similar representations and
warranties by the Company, covenants of the Company, registration rights,
conditions and other terms.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
SECTION 1. SALE AND PURCHASE OF THE PREFERRED SHARES
(a) The Company agrees to sell to the Purchaser and, subject to the
terms and conditions hereof and in reliance upon the representations and
warranties of the Company contained herein or made pursuant hereto, the
Purchaser agrees to purchase from the Company on the Closing Date specified in
Section 2 hereof, the number of shares of Series B Preferred Stock set forth
opposite the Purchaser's name on Schedule I hereto. The shares of Series B
Preferred Stock being acquired under this Agreement and by the other Purchasers
under the other Stock Purchase Agreements (as hereinafter defined) are
collectively herein referred to as the "Shares", containing rights and
privileges as more fully set forth in the Certificate of Designations for the
Series B Preferred Stock of the Board of Directors of the Company which shall be
substantially in the form attached hereto as Exhibit A (the "Series B
Certificate of Designations").
<PAGE>
(b) The aggregate purchase price to be paid to the Company by the
Purchaser for the Shares to be purchased by the Purchaser pursuant to this
Agreement shall be the amount set forth opposite the Purchaser's name on
Schedule I hereto. No further payment shall be required from the Purchaser for
the Shares.
(c) The Shares are being sold to the Purchaser listed on Schedule I
hereto and to other Purchasers under substantially identical agreements
(collectively, the "Purchasers") pursuant to this Agreement and other
substantially identical agreements dated as of the date hereof (all such
agreements collectively, as from time to time assigned, supplemented or amended
or as the terms thereof may be waived, the "Stock Purchase Agreements"). All
Stock Purchase Agreements shall be dated the date hereof and shall be identical
except as to the identities of the respective Purchasers. The sale of Shares to
each Purchaser under each Stock Purchase Agreement is to be a separate sale, and
no Purchaser shall have any liability under any Stock Purchase Agreement other
than the Stock Purchase Agreement to which it is a party.
(d) The Company will use the proceeds from the sale of the Shares as
described in the section of the Memorandum entitled "Use of Proceeds."
(e) If an aggregate of fewer than 280,000 Shares are sold at the
Closing under the Stock Purchase Agreements, the Company shall have the right,
from time to time thereafter, but not later than March 31, 1997, to sell
additional Shares up to an overall aggregate of 400,000 Shares pursuant to Stock
Purchase Agreements substantially identical to this Stock Purchase Agreement.
Upon completion of any such sale, such additional Shares shall be "Shares"
hereunder, the purchasers of such additional Shares shall be "Purchasers"
hereunder and such additional Stock Purchase Agreements shall be "Stock Purchase
Agreements" hereunder.
SECTION 2. THE CLOSING
(a) Subject to the terms and conditions hereof, the closing of the
purchase and sale of the Shares to be purchased by the Purchaser (the "Closing")
will take place at the offices of Andrews & Kurth L.L.P., 4200 Texas Commerce
Tower, Houston, Texas at 10:00 A.M., Houston, Texas time, on February 26, 1997,
or such other location, time and date as shall be determined by the Company and
the Agent. Such time and date are herein referred to as the "Closing Date."
(b) Subject to the terms and conditions hereof, on the Closing Date
(i) the Company will deliver to the Purchaser a certificate registered in the
Purchaser's name (or the name of its nominee, if any, as specified on Schedule I
hereto) evidencing the number of Shares equal to that number of Shares set forth
opposite the Purchaser's name on Schedule I, and (ii) upon the Purchaser's
receipt thereof, the escrow agent (the "Escrow Agent") for the Purchaser's funds
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<PAGE>
previously deposited in an escrow account will release from such escrow account
and deliver to the Company a certified or official bank check (or wire transfer)
in an amount equal to the purchase price (as specified in Section l(b) hereof)
for the Shares to be purchased by the Purchaser payable to the order of the
Company in next day funds.
SECTION 3. DEFINITIONS
(a) For purposes of this Agreement, the following definitions shall
apply (such definitions to be equally applicable to both the singular and plural
forms of the terms defined):
"Affiliate", when used with respect to any Person, means (i) if such
Person is a corporation, any executive officer or director thereof (other
than a director nominated pursuant to the Series B Certificate of
Designations) and any Person which is, directly or indirectly, the
beneficial owner (by itself or as part of any group) of more than five
percent (5%) of any class of any equity security (within the meaning of the
Securities Exchange Act) thereof, and, if such beneficial owner is a
partnership, any general partner thereof, or if such beneficial owner is a
corporation, any Person controlling, controlled by or under common control
with such beneficial owner, or any executive officer or director of such
beneficial owner or of any corporation occupying any such control
relationship, (ii) if such Person is a partnership, any general partner
thereof, and (iii) any other Person which, directly or indirectly, controls
or is controlled by or is under common control with such Person. For
purposes of this definition, "control" (including the correlative terms
"controlling", "controlled by" and "under common control with"), with
respect to any Person, shall mean possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies
of such Person, whether through the ownership of voting securities or by
contract or otherwise. Except as provided above, the holding of Shares (or
Conversion Shares obtained upon conversion of Shares), and the rights under
any Stock Purchase Agreement or under the Series B Certificate of
Designations (or the exercise of any such rights, including, without
limitation, nominating a director to the Board of the Company or sending an
observer to Board meetings of the Company or any of the Subsidiaries),
shall not, by themselves, cause a Purchaser to be deemed to be an
"Affiliate" of the Company or of any Subsidiary.
"Agreement" means this Stock Purchase Agreement (together with
exhibits and schedules) as from time to time assigned, supplemented or
amended or as the terms hereof may be waived.
"Board" or "Board of Directors" means with respect to any Person which
is a corporation, a business trust or other entity, the board of directors
or other group, however
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designated, which is charged with legal responsibility for the management
of such Person, or any committee of such board of directors or group,
however designated, which is authorized to exercise the power of such board
or group in respect of the matter in question.
"Business Day" means any day other than a Saturday, Sunday or a day on
which banking institutions in the State of New York or the State of Texas
are authorized or obligated by law or executive order to close.
"Capitalized Leases" means any lease to which the Company or a
Subsidiary is a party as lessee, or by which it is bound, under which it
leases any property (real, personal or mixed) from any lessor other than
the Company or a Subsidiary, and which is required to be capitalized in
accordance with generally accepted accounting principles consistently
applied.
"Closing" has the meaning set forth in Section 2(a) hereof.
"Closing Date" has the meaning set forth in Section 2(a) hereof.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time, and the regulations and interpretations thereunder.
"Commission" means the Securities and Exchange Commission and any
other similar or successor agency of the federal government administering
the Securities Act or the Securities Exchange Act.
"Common Stock" of the Company or of a Subsidiary (as the case may be)
shall mean the Company's or a Subsidiary's (as the case may be) present
authorized common stock and any stock into which such Common Stock may
hereafter be changed or for which such Common Stock may be exchanged after
giving effect to the terms of such change or exchange (by way of
reorganization, recapitalization, merger, consolidation or otherwise) and
shall also include any common stock of the Company or of a Subsidiary (as
the case may be) hereafter authorized and any capital stock of the Company
or of a Subsidiary (as the case may be) of any other class hereafter
authorized which is not preferred as to dividends or assets over any other
class of capital stock of the Company or of a Subsidiary (as the case may
be) or which has ordinary voting power for the election of directors of the
Company or of a Subsidiary (as the case may be); provided that preferred
stock of the Company or a Subsidiary with the right to vote together with
the common stock of such entity on various matters shall not be treated as
"Common Stock" hereunder.
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<PAGE>
"Company" means Energy BioSystems Corporation, a Delaware corporation,
its successors and assigns.
"Consent and Exchange Agreement" is the agreement by which holders of
Series A Preferred Stock elect to exchange shares of Series A Preferred
Stock for shares of Series B Preferred Stock on a one-for-one basis.
"Conversion Price" has the meaning specified in Section 2 of the
Series B Certificate of Designations.
"Conversion Share" or "Conversion Shares" means the shares of the
Company's Common Stock, par value $0.01 per share, obtained or obtainable
upon conversion of the Shares and shall also include any capital stock or
other securities into which Conversion Shares are changed and any capital
stock or other securities resulting from or comprising a reclassification,
combination or subdivision of, or a stock dividend on, any Conversion
Shares. In the event that any Conversion Shares are sold either in a
public offering pursuant to a registration statement under Section 6 of the
Securities Act or pursuant to a Rule 144 Transaction, then the transferees
of such Conversion Shares shall not be entitled to any benefits under this
Agreement with respect to such Conversion Shares and such Conversion Shares
shall no longer be considered to be "Conversion Shares" for purposes of
Section 8 hereof, for purposes of the definition of Majority Shareholders
or for purposes of any consent or waiver provision or any other provision
of this Agreement.
"Eligible Holder" means any holder (or group of affiliated holders)
which is a Purchaser (or transferee of a Purchaser approved by the Company,
such approval not to be unreasonably withheld) or a purchaser of Series A
Preferred Stock that has elected to exchange its shares of Series A
Preferred Stock for Shares (or a transferee of such exchanging party
approved by the Company, such approval not to be unreasonably withheld) and
which holds 100,000 or more Shares, or Conversion Shares issued on
conversion of 100,000 or more Shares, or an equivalent combination of the
foregoing.
"Environmental Lien" has the meaning set forth in Section 7.7 hereof.
"ERISA" means, collectively, the Employee Retirement Income Security
Act of 1974, as amended, and the regulations and interpretations
thereunder.
"Exchange Agreement" means the Series B Convertible Preferred Stock
Exchange Agreement, dated the date hereof, by which holders of Series A
Preferred Stock agree to exchange shares of Series A Preferred Stock for
shares of Series B Preferred Stock on a one-
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<PAGE>
for-one basis consistent with their election reflected in the Consent and
Exchange Agreement. The Exchange Agreement is substantially similar to this
Agreement, containing similar representations and warranties by the
Company, covenants of the Company, registration rights, conditions and
other terms.
"Guaranty" means (i) any guaranty or endorsement of the payment or
performance of, or any contingent obligation in respect of, any
indebtedness or other obligation of any other Person, (ii) any other
arrangement whereby credit is extended to one obligor (directly or
indirectly) on the basis of any promise or undertaking of another Person
(a) to pay the indebtedness of such obligor, (b) to purchase an obligation
owed by such obligor, (c) to purchase or lease assets (or to provide funds,
goods or services) under circumstances that would enable such obligor to
discharge one or more of its obligations or (d) to maintain the capital,
working capital, solvency or general financial condition of such obligor,
in each case whether or not such arrangement is disclosed in the balance
sheet of such other Person or is referred to in a footnote thereto and
(iii) any liability as a general partner of a partnership in respect of
indebtedness or other obligations of such partnership; provided, however,
that the term "Guaranty" shall not include (1) endorsements for collection
or deposit in the ordinary course of business or (2) obligations of the
Company or its Subsidiaries which would constitute Guaranties solely by
virtue of the continuing liability of a Person which has sold assets
subject to liabilities for the liabilities which were assumed by the Person
acquiring the assets, unless such liability is required to be carried on
the consolidated balance sheet of the Company. The amount of any Guaranty
and the amount of indebtedness resulting from such Guaranty shall be the
maximum amount of the guarantor's potential obligation in respect of such
Guaranty.
"Hazardous Materials" means any pollutant, toxic substance, petroleum
or petroleum by-products, hazardous waste, or any material, compound,
element or chemical identified as a pollutant, toxic substance or hazardous
waste or determined to be hazardous or toxic by a governmental agency under
the Comprehensive Environmental Response Compensation and Liability Act
(CERCLA), 42 U.S.C. 9601 et seq., the Resource Conservation and Recovery
Act (RCRA), 42 U.S.C. 6901 et seq., the Toxic Substances Control Act
(TSCA), 15 U.S.C. 2601 et seq., the Water Pollution Control Act (CWA), 33
U.S.C. 1251 et seq., the Clean Air Act (CAA), 42 U.S.C. 7501 et seq., the
Occupational Safety and Health Act (OSHA), 29 U.S.C. 655 and any other
federal, state, local or municipal laws, statutes, ordinances, codes, rules
or regulations imposing liability or establishing standards of conduct for
environmental protection. The term "Hazardous Materials" shall also
include: raw materials used or stored by the Company that contain Hazardous
Materials; building components (including but not limited to asbestos-
containing materials) that contain Hazardous Materials and manufactured
products containing Hazardous Materials.
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<PAGE>
"Indebtedness" of any Person means, without duplication, as of any
date as of which the amount thereof is to be determined, (i) all
obligations of such Person to repay money borrowed (including, without
limitation, all notes payable and drafts accepted representing extensions
of credit, all obligations under letters of credit, all obligations
evidenced by bonds, debentures, notes or other similar instruments and all
obligations upon which interest charges are customarily paid), (ii) all
Capitalized Leases in respect of which such Person is liable as lessee or
as the guarantor of the lessee, (iii) all monetary obligations which are
secured by any Lien existing on property owned by such Person whether or
not the obligations secured thereby have been incurred or assumed by such
Person, (iv) all conditional sales contracts and similar title retention
debt instruments under which such Person is obligated to make payments, (v)
all Guaranties by such Person and (vi) all contractual obligations (whether
absolute or contingent) of such Person to repurchase goods sold or
distributed. "Indebtedness" shall not include, however, Indebtedness of
the Company to any of its wholly-owned Subsidiaries or Indebtedness of any
wholly-owned Subsidiary to the Company or to another wholly-owned
Subsidiary.
"Lien" means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), or preference,
priority or other security interest of any kind or nature whatsoever
(including, without limitation, any conditional sale or other title
retention agreement, any financing lease having substantially the same
effect as any of the foregoing, any assignment or other conveyance of any
right to receive income and any assignment of receivables with recourse
against the assignor), any filing of a financing statement as debtor under
the Uniform Commercial Code or any similar statute and any agreement to
give or make any of the foregoing.
"Majority Shareholders" means the holder or holders, at the time, of
at least a majority of the Conversion Shares, including the Conversion
Shares then outstanding and the Conversion Shares then obtainable under
outstanding Shares; provided that such majority must in any event include
each Eligible Holder.
"Material Adverse Effect" means any material and adverse effect on the
assets, properties, liabilities, business affairs, results of operations,
condition (financial or otherwise) or prospects of the Company.
"Memorandum" means that certain Confidential Offering Memorandum dated
February 14, 1997 relating to the Shares.
"Outstanding" or "outstanding" means (a) when used with reference to
the Shares or the Conversion Shares as of a particular time, all Shares or
Conversion Shares theretofore
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duly issued except (i) Shares and Conversion Shares theretofore reported as
lost, stolen, mutilated or destroyed or surrendered for transfer, exchange
or replacement, in respect of which new or replacement Shares or Conversion
Shares have been issued by the Company, (ii) Shares and Conversion Shares
theretofore canceled by the Company and (iii) Shares and Conversion Shares
registered in the name of, as well as Shares and Conversion Shares owned
beneficially by, the Company, any Subsidiary or any of their Affiliates and
(b) when used with reference to the number of shares of Common Stock of the
Company as of a particular time, the then issued and outstanding shares of
Common Stock of the Company (not including treasury shares or any other
shares registered in the name of the Company, any Subsidiary or any of
their Affiliates), together with shares of Common Stock of the Company
issuable pursuant to any then outstanding warrants, options, convertible
securities or other rights to acquire shares of Common Stock of the
Company. For purposes of the preceding sentence, in no event shall
"Affiliates" include (x) the persons which are identified as "Purchasers"
on Schedule I hereto or (y) any Affiliates of any such persons, except if
such persons would otherwise fall within the definition of "Affiliate"
described above.
"Person" or "person" means an individual, corporation, partnership,
firm, association, joint venture, trust, unincorporated organization,
government, governmental body, agency, political subdivision or other
entity.
"Preferred Stock" means any class of the capital stock of a
corporation (whether or not convertible into any other class of such
capital stock) which has any right, whether absolute or contingent, to
receive dividends or other distributions of the assets of such corporation
(including, without limitation, amounts payable in the event of the
voluntary or involuntary liquidation, dissolution or winding-up of such
corporation), which right is superior to the rights of another class of the
capital stock of such corporation. "Preferred Stock" includes without
limitation the Series B Preferred Stock.
"Purchaser" means the person who accepts and agrees to the terms
hereof as indicated by such person's signature (as "the undersigned
Purchaser") on the execution page of this Agreement, together with such
person's successors and assigns.
"Purchasers" has the meaning set forth in Section l(c) hereof,
together with their respective successors and assigns.
"Registered Securities" means the Conversion Shares, any Common Stock
issued in payment of dividends on, or in connection with the redemption or
repurchase of, the Shares and any Shares included herein pursuant to
Section 8.1(g) hereof.
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"Restricted Payment" means (i) every dividend or other distribution
paid, made or declared by the Company or any Subsidiary on or in respect of
any class of its capital stock (as defined below), and (ii) every payment
in connection with the redemption, purchase, retirement or other
acquisition by or on behalf of the Company or any Subsidiary of any shares
of the Company's or a Subsidiary's capital stock (as defined below),
whether or not owned by the Company or any Subsidiary; provided, however,
that the restrictions of the foregoing clauses (i) and (ii) shall not apply
to (a) any dividend, distribution or other payment on or in respect of
capital stock of the Company to the extent payable in shares of Common
Stock of the Company, (b) any payments from the Company to a wholly-owned
Subsidiary, from a Subsidiary to the Company or from a Subsidiary to a
wholly-owned Subsidiary, (c) any repurchase of Common Stock under stock
purchase or option agreements from employees, advisors, consultants or
directors of the Company or otherwise upon termination of such relationship
with the Company (provided, that the aggregate amount paid pursuant to such
repurchases after the Closing Date shall not exceed $300,000 without the
consent of the Majority Shareholders), (d) any payments, dividends,
distributions or other transfers or actions (I) on or with respect to the
Company's Series A Preferred Stock or the shares of Common Stock issuable
upon conversion thereof pursuant to the terms of the Stock Purchase
Agreements or the Certificate of Designations relating to the Series A
Preferred Stock or (II) on or with respect to the Shares or the Conversion
Shares pursuant to terms of the Stock Purchase Agreements, Stock Exchange
Agreements or the Series B Certificate of Designations and (e) any payments
or distributions in respect of the liquidation and dissolution, or winding
up of the business and affairs, of the Company. For purposes of this
definition, "capital stock" shall also include warrants and other rights
and options to acquire shares of capital stock (whether upon exercise,
conversion, exchange or otherwise).
"Rights Expiration Date" means, with respect to any Eligible Holder,
the earlier of (a) the date on which such Eligible Holder owns neither (i)
100,000 or more Shares nor (ii) Conversion Shares issued on conversion of a
number of Shares at least equal to 100,000 less the number of any Shares
remaining owned by such Eligible Holder, and (b) the third anniversary of
the Closing Date, unless such Eligible Holder then owns 100,000 or more
Shares.
"Rule 144" means (i) Rule 144 under the Securities Act as such Rule is
in effect from time to time and (ii) any successor rule, regulation or law,
as in effect from time to time.
"Rule 144A" means (i) Rule 144A under the Securities Act as such Rule
is in effect from time to time and (ii) any successor rule, regulation or
law, as in effect from time to time.
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"Rule 144 Transaction" means a transfer of Shares or Conversion Shares
(A) complying with Rule 144 as such Rule is in effect on the date of such
transfer (but not including a sale other than pursuant to (i) "brokers'
transactions" as defined in clauses (1) and (2) of paragraph (g) or (ii)
paragraph (k) of such Rule as in effect on the date hereof) and (B)
occurring at a time when Shares (in the case of a transfer of Shares) or
Conversion Shares (in the case of a transfer of Conversion Shares) are
registered pursuant to Section 12 of the Securities Exchange Act.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules, regulations and interpretations thereunder.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
as amended, and the rules, regulations and interpretations thereunder.
"Series A Certificate of Designations" has the meaning set forth in
Section 4.2(d) hereof.
"Series A Preferred Stock" has the meaning set forth in Section 4.2(a)
hereof.
"Series B Certificate of Designations" has the meaning set forth in
Section l(a) hereof.
"Series B Preferred Stock" means the Company's Series B Convertible
Preferred Stock, par value $0.01 per share, which will be duly authorized
on the Closing Date and which will have the rights, powers and privileges
on the Closing Date as more fully set forth in the Series B Certificate of
Designations.
"Shares" has the meaning set forth in Section l(a) hereof, except that
for purposes of Section 7 and Section 8 hereof and the definition of
"Conversion Shares," the term "Shares" shall include the shares of Series B
Preferred Stock issued upon the exercise of the warrant, dated the date
hereof, granting Alex. Brown & Sons Incorporated (the "Agent") the right to
purchase a specified number of shares of Series B Preferred Stock and the
shares of Series B Preferred Stock issued upon the exchange of the Series A
Preferred Stock pursuant to the Exchange Agreement. In the event that any
Shares are sold either in a public offering pursuant to a registration
statement under Section 6 of the Securities Act or pursuant to a Rule 144
Transaction, then the transferees of such Shares shall not be entitled to
any benefits under this Agreement with respect to such Shares and such
Shares shall no longer be considered to be ''Shares" for purposes of
Section 8 hereof or any consent or waiver provision or any other provision
of this Agreement.
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"Stock Purchase Agreements" has the meaning set forth in Section l(c)
hereof.
"Subsidiary", with respect to any Person, means any corporation,
association or other entity of which more than 50% of the total voting
power of shares of stock or other equity interests (without regard to the
occurrence of any contingency) entitled to vote in the election of
directors, managers or trustees thereof is, at the time as of which any
determination is being made, owned or controlled, directly or indirectly,
by such Person or one or more of its Subsidiaries, or both. The term
"Subsidiary" or "Subsidiaries" when used herein without reference to any
particular Person, means a Subsidiary or Subsidiaries of the Company.
(b) For all purposes of this Agreement, except as otherwise expressly
provided or unless the context otherwise requires:
(i) the words "herein", "hereof" and "hereunder" and other words
of similar import refer to this Agreement as a whole and not to
any particular Section or other subdivision;
(ii) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted
accounting principles consistently applied (except as otherwise
provided herein);
(iii) all computations provided for herein, if any, shall be
made in accordance with generally accepted accounting principles
consistently applied (except as otherwise expressly provided
herein);
(iv) any uses of the masculine, feminine or neuter gender shall
also be deemed to include any other gender, as appropriate;
(v) all references herein to actions by the Company or any
Subsidiary, such as "create", "sell", "transfer", "dispose of",
etc., mean such action whether voluntary or involuntary, by
operation of law or otherwise;
(vi) the exhibits and schedules to this Agreement shall be deemed
a part of this Agreement;
(vii) each of the representations of the Company contained in
Section 4 hereof is separate and is not limited, qualified or
modified by the existence, wording or satisfaction of any other
representation of the Company in Section 4 or otherwise;
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(viii) each of the covenants of the Company contained in Section
7 hereof or otherwise contained in any Stock Purchase Agreement
or the Series B Certificate of Designations is separate and is
not limited or satisfied by the existence, wording or
satisfaction of any other covenant of the Company in Section 7 or
otherwise; and
(ix) all references herein (in covenants or otherwise) to any
action(s) which are to be taken (or which are prohibited from
being taken) by any Person, the Company or any Subsidiary shall
apply to such Person, the Company or such Subsidiary, as the case
may be, whether such action is taken directly or indirectly.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchaser as follows as of the
date hereof and as of the Closing Date:
4.1. Corporate Existence, Power and Authority.
(a) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. The Company is
duly qualified, licensed and authorized to do business and is in good standing
in each jurisdiction in which it owns or leases any material property or in
which the conduct of its business requires it to so qualify or be so licensed.
(b) The Company has no Subsidiaries, and does not control, directly
or indirectly, any other entity and does not own of record or beneficially,
directly or indirectly, (i) any shares of capital stock or securities
convertible into capital stock of any other corporation (except for short-term
investments of the Company's cash reserves and publicly-traded mutual funds) or
(ii) any participating interest in any partnership, joint venture or other non-
corporate business enterprise, except for the strategic alliances described in
the Memorandum.
(c) No proceeding has been commenced looking toward the dissolution
or merger of the Company or the amendment of its certificate of incorporation
(other than the Series B Certificate of Designations). The Company is not in
violation in any respect of its certificate of incorporation or bylaws.
(d) The Company has all requisite power, authority (corporate and
other) and legal right to own or to hold under lease and to operate the
properties it owns or holds and to conduct
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its business as now being conducted and as proposed to be conducted, except
where the failure to have such requisite power, authority and legal right would
not result in a Material Adverse Effect.
(e) The Company has all requisite power, authority (corporate and
other) and legal right to execute, deliver, enter into, consummate and perform
the Stock Purchase Agreements, including, without limitation, the issuance, sale
and delivery by the Company of the Shares and to issue and deliver the
Conversion Shares issuable upon conversion of the Shares as contemplated herein
and therein and in the Series B Certificate of Designations. The execution,
delivery and performance of the Stock Purchase Agreements by the Company
(including, without limitation, the issuance, sale and delivery by the Company
of the Shares and the issuance and delivery of the Conversion Shares upon
conversion of the Shares as contemplated herein and therein and in the Series B
Certificate of Designations) have been duly authorized by all required corporate
and other actions. As described in the Memorandum, the Company may not have the
ability to pay dividends on the Shares under certain circumstances. The Company
has duly executed and delivered the Stock Purchase Agreements. The Stock
Purchase Agreements constitute the legal, valid and binding obligations of the
Company enforceable in accordance with their respective terms, subject to
bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to the rights of creditors generally and except that the enforceability
of the indemnification provisions contained in the Stock Purchase Agreements may
be subject to considerations of public policy.
4.2. Stock.
(a) The authorized capital stock of the Company consists of (i)
30,000,000 shares of Common Stock, par value $0.01 per share, and (ii) 5,000,000
shares of Preferred Stock, par value $0.01 per share, issuable in one or more
series, of which, after giving effect to the Series B Certificate of
Designations, (w) 508,800 shares have been designated as Series A Convertible
Preferred Stock ("Series A Preferred Stock"), (x) 904,000 shares have been
designated as Series B Preferred Stock, (y) 300,000 shares have been designated
as Series One Junior Participating Preferred Stock and (z) 3,287,200 shares are
Undesignated Preferred Stock. On the Closing Date and before giving effect to
the exchange of any shares of Series A Preferred Stock into shares of Series B
Preferred Stock: (A) 11,505,395 shares of the Company's Common Stock, par value
$0.01 per share, will be issued and outstanding (plus any shares of Common Stock
issued after February 13, 1997 pursuant to stock options in effect on such
date), (B) 480,000 shares of Series A Preferred Stock will be issued and
outstanding and (C) up to 280,000 Shares of the Series B Preferred Stock will be
outstanding. The number of shares of Series A Preferred Stock will be reduced
and the number of shares of Series B Preferred Stock will be increased on a one-
for-one basis to the extent that shares of Series A Preferred Stock are
exchanged for shares of Series B Preferred Stock in the Exchange Offer. All of
such outstanding shares will be duly authorized, validly issued and outstanding,
fully paid and non-assessable with no personal liability attaching to the
ownership
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thereof. The Shares issued and delivered pursuant to this Stock Purchase
Agreement will be free and clear of all liens, charges, restrictions, claims and
encumbrances imposed by or through the Company. The Conversion Shares have been
reserved for issuance upon conversion of the Shares and, when issued in
accordance with the terms of the Shares, will be duly authorized, validly
issued, fully paid and non-assessable. None of the shares of the Company's
capital stock outstanding at Closing (including, without limitation, the Shares
issued under the Stock Purchase Agreements) (i) are subject to preemptive rights
or (ii) provide the holders thereof with any preemptive rights with respect to
any issuances of capital stock. Neither the issuance, sale or delivery of the
Shares nor the issuance or delivery of the Conversion Shares is subject to any
preemptive right of stockholders of the Company or to any right of first refusal
or other right in favor of any person.
(b) The only shares of the Company's Common Stock reserved for
issuance by the Company are as follows (before giving effect to the exchange of
any shares of Series A Preferred Stock into shares of Series B Preferred Stock):
(i) 3,083,636 shares issuable upon conversion of the Series A Preferred Stock
(including the Series A Preferred Stock issuable upon the exercise of warrants
issued to the placement agents in connection with the offering of the Series A
Preferred Stock), (ii) 2,105,862 shares issuable upon conversion of the Series B
Preferred Stock (including the Series B Preferred Stock issuable upon the
exercise of warrants issued to the Agent in connection with the offering of the
Series B Preferred Stock), (iii) 2,030,964 shares issuable upon exercise of
currently outstanding stock options pursuant to the Company's 1992 Stock
Compensation Plan, its Non-Employee Director Stock Option Plan and director and
consultant stock option agreements and (iv) 263,020 shares reserved for issuance
pursuant to the 1992 Stock Compensation Plan, the Non-Employee Director Stock
Option Plan and the Company's 1997 Stock Option Plan with respect to which no
options are presently outstanding.
(c) Except as referred to in Section 4.2(b) or in the Company's
Amended and Restated Certificate of Incorporation, there are no outstanding
options, warrants, subscriptions, rights, convertible securities or other
agreements or plans under which the Company may become obligated to issue, sell
or transfer shares of its capital stock or other securities.
(d) The designations, powers, preferences, rights, qualifications,
limitations and restrictions in respect of each class and series of authorized
capital stock of the Company are as set forth in the Amended and Restated
Certificate of Incorporation of the Company and the Certificate of Designations
with respect to the Series A Preferred Stock (the "Series A Certificate of
Designations"), a copy of each of which is attached hereto as Exhibit B and
Exhibit C, respectively, and the Series B Certificate of Designations.
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(e) Except as contemplated by Section 8 hereof or as summarized on
Schedule II hereto, there are no outstanding registration rights with respect to
any capital stock of the Company.
(f) Except as provided in the Series A Certificate of Designations and
the Series B Certificate of Designations, the Company has no obligation
(contingent or other) to purchase, redeem or otherwise acquire any of its
capital stock or any interest therein or to pay any dividend or make any other
distribution in respect thereof.
(g) The Company has no knowledge of any voting agreements, voting
trusts, stockholders' agreements, proxies or other agreements or understandings
that are currently in effect or that are currently contemplated with respect to
the voting of any capital stock of the Company.
(h) There are no anti-dilution protections or other adjustment
provisions in existence with respect to any capital stock of the Company or any
capital stock referred to in Section 4.2(b) or 4.2(c) above, except with respect
to the Shares and except as provided in the Amended and Restated Certificate of
Incorporation of the Company, the Series A Certificate of Designations and for
standard provisions in option agreements under the Company's plans for
employees, directors, consultants and advisors and in the warrants and warrant
agreements issued by the Company and described in (b) above.
(i) All of the outstanding securities of the Company were issued in
compliance with all applicable federal and state securities laws.
(j) The Series B Certificate of Designations has been duly adopted by
the Company and is fully effective. The Series B Certificate of Designations
accurately describes all of the rights, priorities and terms of the Shares.
4.3. Business.
The Company is engaged in the business of developing and commercializing
innovative biotechnology-based processes for the petroleum refining and
production industries. The Company does not currently engage in, or have any
intention of engaging in, any other business other than that which is described
in the Memorandum.
4.4. No Defaults or Conflicts.
(a) The Company is not in violation or default in any material respect
under any indenture, agreement or instrument to which it is a party or by which
it or its properties may be
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bound. The Company is not in violation of or default in any material respect
under any law, rule, regulation, order, writ, injunction, judgment, decree,
award or other action of any court or governmental authority or arbitrator(s).
The Company is not in violation of its certificate of incorporation or bylaws.
(b) The execution, delivery and performance by the Company of the
Stock Purchase Agreements and any of the transactions contemplated hereby or
thereby (including, without limitation, the issuance of the Shares and the
Conversion Shares as contemplated herein and therein and in the Series B
Certificate of Designations and the adoption of the Series B Certificate of
Designations) does not and will not (i) violate or conflict with, with or
without the giving of notice or the passage of time or both, any provision of
(A) the certificate of incorporation or bylaws of the Company or (B) any law,
rule, regulation or order of any federal, state, county, municipal or other
governmental authority, or any judgment, writ, injunction, decree, award or
other action of any court or governmental authority or arbitrator(s), or any
agreement, indenture or other instrument applicable to the Company or any of its
properties, except in the case of this clause (B) for such violations or
conflicts that will not individually or in the aggregate have a Material Adverse
Effect, (ii) result in the creation of any Lien upon any of the Company's
properties, assets or revenues, (iii) require the consent, waiver, approval,
order or authorization of, or declaration, registration, qualification or filing
with, any Person (whether or not a governmental authority and including, without
limitation, any shareholder approval) except for required securities law filings
and board of director approvals, certain approvals of the holders of Series A
Preferred Stock and certain registration rights modifications, which board of
director and Series A Preferred Stockholder approvals and registration rights
modifications have been obtained or (iv) cause anti-dilution clauses of any
outstanding securities to become operative except with respect to the Series A
Preferred Stock pursuant to the Series A Certificate of Designations or give
rise to any preemptive rights. No provision referred to in the preceding clause
(i) materially adversely affects or reasonably may be expected to materially
adversely affect the continued conduct of the Company's business as described in
the Memorandum or the ability of the Company to perform its obligations under
the Stock Purchase Agreements, the Series B Certificate of Designations or any
of the transactions contemplated hereby or thereby.
4.5. Disclosure Materials: Other Information.
(a) The Company has previously furnished to the Purchaser the
Confidential Offering Memorandum dated October 21, 1996 of the Company (Alex.
Brown & Sons Incorporated as exclusive agent), as updated by the Confidential
Offering Memorandum dated January 10, 1997, the Memorandum and the documents
incorporated therein (the "Disclosure Material"). The audited and unaudited
financial statements referred to or contained in the Disclosure Material fairly
present the financial condition of the Company as of the respective dates
thereof and the results of the operations of the Company for such periods and
have been prepared in accordance with generally
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accepted accounting principles consistently applied, except that any such
unaudited statements may omit notes and may be subject to normal year-end
adjustments.
(b) Since December 31, 1995, (i) the business of the Company has been
conducted in the ordinary course and (ii) there has been no material adverse
change in the assets, properties, liabilities, business, affairs, results of
operations, condition (financial or otherwise) or prospects of the Company that
has not been described in the Disclosure Material. As of the Closing Date and
as of the date hereof, there are no material liabilities of the Company which
would be required to be provided for in a balance sheet of the Company as of
either such date prepared in accordance with generally accepted accounting
principles consistently applied, other than liabilities provided for in the
financial statements referred to in Section 4.5(a) above. Since December 31,
1995, no amount or property has directly or indirectly been declared, ordered,
paid, made or set aside for any Restricted Payment nor has any such action been
agreed to.
(c) The Company is not aware of any material liabilities, contingent
or otherwise, of the Company that have not been disclosed in the financial
statements (including the notes thereto) referred to in Section 4.5(a) above or
otherwise disclosed in the Disclosure Material.
(d) Nothing has come to the attention of the Company that would cause
it to believe that any of the Disclosure Material contained or contains a false
or misleading statement of a material fact or omits to state any material fact
necessary in order to make the statements made in such material, in light of the
circumstances under which they were made, not misleading.
(e) There is no fact known to the Company which is not in the
Disclosure Material and which materially and adversely affects, or would
reasonably be expected to materially and adversely affect, the assets,
properties, liabilities, business, affairs, results of operations, condition
(financial or otherwise) or prospects of the Company.
4.6. Litigation.
There is no action, suit, proceeding, investigation or claim pending
against the Company or, to the knowledge of the Company, threatened against the
Company in law, equity or otherwise before any federal, state, municipal or
local court, administrative agency, commission, board, bureau, instrumentality
or arbitrator which either (i) questions the validity of the Stock Purchase
Agreements, the Series B Certificate of Designations, the Shares or the
Conversion Shares or any action taken or to be taken pursuant hereto or thereto,
or (ii) might adversely affect the right, title or interest of any Purchaser to
the Shares or the Conversion Shares or (iii) might result in a material adverse
change in the assets, properties, liabilities, business, affairs, results of
operations, condition (financial or otherwise) or prospects of the Company. The
Company has not received any
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opinion or memorandum or legal advice from legal counsel to the effect that it
is exposed, from a legal standpoint, to any liability or disadvantage which may
be material to its assets, properties, liabilities, business, affairs, results
of operations, condition (financial or otherwise) or prospects. There is no
action or suit by the Company pending or threatened against others.
4.7. Taxes.
The Company has filed all federal, state, local and other tax returns
and reports (except for foreign returns and reports the failure to file which
will not result in any material liability to the Company), and any other
material returns and reports with any governmental authorities (federal, state
or local), required to be filed by it. The Company has paid or caused to be
paid all taxes (including interest and penalties) that are due and payable,
except those which are being contested by it in good faith by appropriate
proceedings and in respect of which adequate reserves are being maintained on
its books in accordance with generally accepted accounting principles
consistently applied. The Company does not have any material liabilities for
taxes other than those incurred in the ordinary course of business and in
respect of which adequate reserves are being maintained by it in accordance with
generally accepted accounting principles consistently applied. Federal and
state income tax returns for the Company have not been audited by the Internal
Revenue Service or state authorities. No deficiency assessment with respect to
or proposed adjustment of the Company's federal, state, local or other tax
returns is pending or, to the best of the Company's knowledge, threatened.
There is no tax lien, whether imposed by any federal, state, local or other tax
authority outstanding against the assets, properties or business of the Company.
There are no applicable taxes, fees or other governmental charges payable by the
Company in connection with the execution and delivery of the Stock Purchase
Agreements or the issuance by the Company of the Shares or the Conversion
Shares, except for governmental fees paid in connection with securities law
filings.
4.8. Employees; ERISA.
The Company has good relationships with its employees and has not had
and does not expect to have any substantial labor problems. The Company does
not have any knowledge as to any intentions of any key employee or any group of
employees to leave the employ of the Company. Each of the officers of the
Company, each key employee and each other employee now employed by the Company
who has access to proprietary business information of the Company has executed a
confidentiality and non-disclosure agreement and such agreements are in full
force and effect. Other than the Company's Simplified Employee Pension Plan
adopted in April 1992, the Company has not established, sponsored, maintained,
made any contributions to or been obligated by law to establish, maintain,
sponsor or make any contributions to any "employee pension benefit plan" or
"employee welfare benefit plan" (as such terms are defined in ERISA), including,
without
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limitation, any "multi-employer plan". The Company has complied in all material
respects with all applicable laws relating to the employment of labor, including
provisions relating to wages, hours, equal opportunity, collective bargaining
and the payment of Social Security and other taxes, and with ERISA.
4.9. Legal Compliance.
(a) The Company has complied with all applicable laws, rules,
regulations, orders, licenses, judgments, writs, injunctions, decrees or
demands, except to the extent that failure to comply would not materially
adversely affect the assets, properties, liabilities, business, affairs, results
of operations, condition (financial or otherwise) or prospects of the Company.
The Company has all necessary permits, licenses and other authorizations
required to conduct its business as currently conducted, and as proposed to be
conducted, in all material respects.
(b) There are no adverse orders, judgments, writs, injunctions,
decrees or demands of any court or administrative body, domestic or foreign, or
of any other governmental agency or instrumentality, domestic or foreign,
outstanding against the Company.
(c) There is no existing law, rule, regulation or order, and the
Company is not aware of any proposed law, rule, regulation or order, which would
prohibit or materially restrict the Company from, or otherwise materially
adversely affect the Company in, conducting its business as now being conducted
and as proposed to be conducted.
4.10. Permits, Licenses and Approvals.
The Company owns or possesses and holds free from restrictions or
conflicts with the rights of others all franchises, licenses, permits, consents,
approvals and other authority (governmental or otherwise), and all rights and
privileges with respect to the foregoing, as are necessary for the conduct of
its business as now being conducted, and as proposed to be conducted,
except where the failure to own or possess and hold such franchises, licenses,
permits, consents, approvals and other authority (governmental or otherwise)
would not have a Material Adverse Effect, and none is in default in any material
respects under any of such franchises, licenses, permits, consents, approvals or
other authority.
4.11. Patents, Trademarks and Other Rights.
The Company has sufficient trademarks, trade names, service marks,
patent rights, copyrights, manufacturing processes, formulae, applications,
trade secrets, know how, licenses, approvals and governmental authorizations (or
rights thereto) (collectively, the "Intellectual
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Property") to conduct its business as now conducted and the Company believes
that it will be able to obtain such Intellectual Property as will be necessary
to conduct its business as proposed to be conducted except in either case where
the absence of such Intellectual Property would not have a Material Adverse
Effect. No claim is pending or, to the Company's knowledge, threatened to the
effect that any such Intellectual Property owned or licensed by the Company, or
which the Company otherwise has the right to use, is invalid or unenforceable by
the Company, and, to the best of the Company's knowledge, there is no basis for
any such claim (whether or not pending or threatened). To the best of the
Company's knowledge, all proprietary technology developed by or belonging to the
Company and material to its business which has not been patented has been kept
confidential by the Company, its employees and agents. The Company has no
knowledge of any infringement by it of any Intellectual Property or other
similar rights of others, and there is no claim being made or, to the Company's
knowledge, threatened against the Company regarding infringement by the Company
on such Intellectual Property of others which could reasonably be expected to
have a Material Adverse Effect and, to the Company's knowledge, there is no
basis for any such claim (whether or not pending or threatened).
4.12. Status Under Certain Statutes.
The Company is not: (i) a "public utility company" or a "holding
company", or an "affiliate" or a "subsidiary company" of a "holding company", or
an "affiliate" of such a "subsidiary company", as such terms are defined in the
Public Utility Holding Company Act of 1935, as amended, (ii) a "public utility"
as defined in the Federal Power Act, as amended, or (iii) an "investment
company" or an "affiliated person" thereof or an "affiliated person" of any such
"affiliated person", as such terms are defined in the Investment Company Act of
1940, as amended .
4.13. Title to Properties; Leasehold Interests.
The Company has good and marketable title to each of the properties
and assets owned by it. The Company does not own any real property. Certain
real property used by the Company in the conduct of its business is held under
lease, and the Company is not aware of any pending or threatened claim or action
by any lessor of any such property to terminate any such lease. None of the
properties owned or leased by the Company is subject to any Liens which could
reasonably be expected to materially and adversely affect the assets,
properties, liabilities, business, affairs, results of operations, condition
(financial or otherwise) or prospects of the Company. Each lease or agreement
to which the Company is a party under which it is the lessee of any property,
real or personal, is a valid and subsisting agreement without any material
default of the Company thereunder and, to the best of the Company's knowledge,
without any material default thereunder of any other party thereto. No event
has occurred and is continuing which, with due notice or lapse of time or both,
would constitute a default or event of default by the Company under any such
lease or
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agreement or, to the best of the Company's knowledge, by any party thereto,
except for such defaults that would not individually or in the aggregate have a
Material Adverse Effect. The Company's possession of such property has not been
disturbed and, to the best of the Company's knowledge, no claim has been
asserted against it adverse to its rights in such leasehold interests.
4.14. Environmental Compliance.
(a) There is no Hazardous Material about or in, any property, real
or personal, in which the Company has any interest, in violation of law in a
manner which could reasonably be expected to materially and adversely affect the
assets, properties, liabilities, business, affairs, results of operations,
condition (financial or otherwise) or prospects of the Company.
(b) There is no (and has not been any) off-site disposal or on-site
disposal at any locations currently or formerly owned or occupied by the Company
as a result of which disposal there would exist a reasonably foreseeable risk
that the Company would incur a material liability or obligation under federal,
state or local environmental or other laws, regulations or ordinances.
(c) Neither the Company nor, to the best of the knowledge of the
Company, any prior or present owner, operator, tenant, subtenant or invitee of
any of the real property (including improvements) currently or formerly owned or
occupied by the Company has (i) used, installed, stored, spilled, released,
transported, disposed of or discharged any Hazardous Material upon, into,
beneath, from or affecting such real property (including improvements) in
violation of law in a manner which could reasonably be expected to materially
and adversely affect the assets, properties, liabilities, business, affairs,
results of operations, condition (financial or otherwise) or prospects of the
Company, or (ii) received any verbal or written notice, citation, subpoena,
summons, complaint or other correspondence or communication from any Person (not
previously satisfactorily resolved) with respect to the presence of Hazardous
Material upon, into, beneath, or emanating from or affecting any of the real
property (including improvements) currently or formerly owned or occupied by the
Company which could materially and adversely affect the assets, properties,
liabilities, business, affairs, results of operations, condition (financial or
otherwise) or prospects of the Company.
(d) There has been no intentional or unintentional, gradual or
sudden, release, disposal or discharge upon, into or beneath the real property
(including improvements) currently or formerly owned or occupied by the Company
by the Company or, to the best of the knowledge of the Company, by any prior
owner, operator, tenant, subtenant or invitee with respect thereto, that has
caused or is causing soil or ground water contamination which under applicable
environmental laws, regulations or ordinances could require investigation or
remediation or could otherwise create a material liability or obligation on the
part of the Company.
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4.15. Disaster.
Neither the business nor the properties of the Company is currently
affected (or has been affected at any time since December 31, 1995) by any fire,
explosion, accident, strike, lockout or other dispute, drought, storm, hail,
earthquake, embargo, act of God or of the public enemy or other casualty
(whether or not covered by insurance), of a kind which (individually or in the
aggregate) has materially adversely affected, or could reasonably be expected to
materially adversely affect, the assets, properties, liabilities, business,
affairs, results of operations, condition (financial or otherwise) or prospects
of the Company.
4.16. No Burdensome Agreements; Transactions with Affiliates.
Except as disclosed in the Disclosure Material, the Company is not a
party to, or bound by (nor is any of its properties affected by), any
commitment, contract or agreement, any term of which materially adversely
affects, or which the Company expects in the future to materially adversely
affect, the assets, properties, business, affairs, results of operations,
condition (financial or otherwise) or prospects of the Company. Except as
disclosed in the Disclosure Material, the Company is not a party to any contract
or agreement with any Affiliate of the Company. The terms of any contracts or
agreements between the Company and any of its Affiliates are no less favorable
to the Company than those which might have been obtained, at the time such
contract or agreement was entered into, from a person who was not such an
Affiliate.
4.17. Other Names.
The business previously or presently conducted by the Company has
not been conducted under any corporate, trade or fictitious name other than
"Energy BioSystems Corporation" and "Environmental BioScience Corporation",
which was the name of the Company until it was so changed in March 1992.
4.18. Offering of the Shares.
Neither the Company nor, to the knowledge of the Company, any person
authorized or employed by the Company as agent, broker, dealer or otherwise
acting on its behalf, directly or indirectly, (i) offered any of the Shares or
any similar security of the Company (A) by any form of general solicitation or
general advertising (within the meaning of Regulation D under the Securities
Act) or (B) for sale to or solicited offers to buy any thereof from, or
otherwise approached or negotiated with respect thereto with, any person which
the Company did not reasonably believe was an "accredited investor" within the
meaning of Regulation D under the Securities Act or (ii) has done or caused to
be done (or has omitted to do or to cause to be done) any act, which act (or
which
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omission) would result in bringing the issuance or sale of the Shares within the
provisions of Section 5 of the Securities Act or the filing, notification or
reporting provisions of any state securities laws, except for filings, notices
or reports pursuant to state securities laws which have already been made or
which are contemplated in connection with the offering and sale of the Shares.
4.19. No Foreign Assets Control Regulation Violation.
The transactions contemplated by this Agreement will not result in a
violation of any of the foreign assets control regulations of the United States
Treasury Department, 31 C.F.R., Subtitle B, Chapter V, as amended (including,
without limitation, the Foreign Assets Control Regulations, the Transaction
Control Regulations, the Cuban Assets Control Regulations, the Foreign Funds
Control Regulations, the Iranian Assets Control Regulations, the Nicaraguan
Trade Control Regulations, the South African Transactions Regulations, the
Libyan Sanctions Regulations, the Soviet Gold Coin Regulations, the Panamanian
Transactions Regulations, the Kuwaiti Assets Control Regulations and the Iraqi
Sanctions Regulations contained in said Chapter V), or any ruling issued
thereunder or any enabling legislation or other Presidential Executive Order
granting authority therefor, and the proceeds of the sale of the Shares will not
be used by the Company in a manner which would violate any such regulations.
4.20. Indebtedness.
Schedule II hereto sets forth (i) the amount of all Indebtedness of
the Company outstanding on the Closing Date (excluding Indebtedness in
individual amounts of less than $35,000, but not exceeding an aggregate excluded
amount of $75,000), (ii) any Lien with respect to such Indebtedness and (iii) a
brief description of each instrument or agreement governing such Indebtedness.
The Company has made available to the Purchaser a complete and correct copy of
each such instrument or agreement (including all amendments, supplements or
modifications thereto). No default exists with respect to or under any such
Indebtedness or any instrument or agreement relating thereto.
4.21. Proprietary Information of Third Parties.
No third party has claimed or, to the best of the Company's
knowledge, has reason to claim that any person now or previously employed or
engaged as a consultant by the Company has (a) violated or, to the Company's
knowledge, may be violating any of the terms or conditions of his employment,
non-competition or non-disclosure agreement with such third party, (b) disclosed
or, to the best of the Company's knowledge, may be disclosing or utilized or, to
the best of the Company's knowledge, may be utilizing any trade secret or
proprietary information of documentation of such third party or violated any
confidential relationship which such person may
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have had with such third party in connection with the business of the Company or
(c) interfered or may be interfering in the employment relationship between such
third party and any of its present or former employees. No third party has
requested information from the Company which reasonably suggests that such a
claim might be contemplated. To the best of the Company's knowledge, none of the
execution or delivery of the Stock Purchase Agreements, or the carrying on the
business of the Company as officers, employees or agents by any officer,
director or key employee of the Company, or the conduct or proposed conduct of
the business of the Company, will conflict with or result in a breach of the
terms, conditions or provisions of or constitute a default under any contract,
covenant or instrument under which any such individual is obligated.
4.22 Insurance.
The Company holds valid policies covering insurance in the amounts and
type that the Company reasonably believes is appropriate and customary for
companies in the same or similar businesses to that of the Company or otherwise
required to be maintained by it.
4.23 Material Contracts and Agreements.
With respect to all material contracts, agreements, indentures or
instruments not otherwise specifically referred to herein, the Company and, to
the best of the Company's knowledge, each other party thereto have in all
material respects performed all the obligations required to be performed by them
to date, have received no notice of default and are not in default, in any
material respect, (with due notice or lapse of time or both) under any material
contract, agreement, indenture or other instrument now in effect to which the
Company is a party or by which it or its property may be bound. The Company has
no present expectation or intention of not fully performing all its obligations
under each such material contract, agreement, indenture or other instrument and
the Company has no knowledge of any breach and has received no written notice of
any anticipated breach by the other party to any material contract or commitment
which the Company is a party.
4.24. Governmental Approvals.
Subject to the accuracy of the representations and warranties of the
Purchaser set forth in Section 5 hereof, no registration or filing with, or
consent or approval of or other action by, any federal, state or other
governmental agency or instrumentality is or will be necessary for the valid
execution, delivery and performance by the Company of this Stock Purchase
Agreement, the issuance, sale and delivery of the Shares to the Purchaser or,
upon conversion thereof, the issuance and delivery of the Conversion Shares,
other than filings pursuant to federal and state securities laws (all of which
filings have been or, with respect to those filings which may be duly made after
the Closing will be, made by or on behalf of the Company) in connection with the
sale of the Shares.
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4.25. Brokers.
Except with respect to Alex. Brown & Sons Incorporated, which acted
as the exclusive agent on behalf of the Company, the Company has no contract,
arrangement or understanding with any broker, finder or similar agent with
respect to the transactions contemplated by this Agreement.
4.26. Disclosure.
The Disclosure Material, as of its date, does not contain an untrue
statement of a material fact or omit a material fact necessary to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading. All of the statements contained in this Stock
Purchase Agreement, including any Schedule or Exhibit hereto, and contained in
any document, certificate or other items prepared or supplied by the Company
directly to the Purchaser with respect to the transactions contemplated hereby
are accurate in all material respects. There is no fact which the Company has
not disclosed to the Purchaser in writing and of which the Company is aware
which materially and adversely affects or could reasonably be expected to
materially and adversely affect the assets, properties, liabilities, business,
affairs, results of operations, condition (financial or otherwise) or prospects
of the Company.
SECTION 5. REPRESENTATIONS OF THE PURCHASER
The Purchaser hereby makes the representations and warranties to the
Company contained in this Section 5.
(a) The Purchaser has all requisite power, authority and legal right
to execute, deliver, enter into, consummate and perform this Agreement. The
execution, delivery and performance of this Agreement by the Purchaser have been
duly authorized by all required corporate, partnership or other actions on the
part of the Purchaser. The Purchaser has duly executed and delivered this
Agreement, and this Agreement constitutes the legal, valid and binding
obligation of the Purchaser enforceable against the Purchaser in accordance with
its terms, subject to bankruptcy, insolvency, reorganization, moratorium and
other similar laws relating to the rights of creditors generally.
(b) The Purchaser hereby represents to the Company that it has
substantial knowledge, skill and experience in making investment decisions of
this type, it is capable of evaluating the risk of its investment in the Shares
being purchased by it and is able to bear the economic risk of such investment,
including the risk of losing the entire investment, that (except as the
Purchaser has otherwise advised the Company and the Purchaser's counsel in
writing) it is
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purchasing the Shares to be purchased by it for its own account, and that the
Shares are being purchased by it for investment and not with a present view to
any distribution thereof in violation of applicable securities laws. It is
understood that the disposition of the Purchaser's property shall at all times
be within the Purchaser's control. If the Purchaser should in the future decide
to dispose of any of its Shares, it is understood that it may do so only in
compliance with the Securities Act, applicable state securities laws and this
Agreement. The Purchaser represents that it is an "accredited investor" as
defined in Rule 501(a) under the Securities Act.
(c) The Purchaser has received and reviewed the Disclosure Material
and it has had an opportunity to fully discuss the Company's business,
management and financial affairs with the Company's management.
(d) The Purchaser understands that (i) the Shares and the Conversion
Shares have not been registered under the Securities Act by reason of their
issuance in a transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) or Section 3(b) thereof or Rule 506
promulgated under the Securities Act, (ii) the Shares and, upon conversion
thereof, the Conversion Shares must be held indefinitely unless a subsequent
disposition thereof is registered under the Securities Act or is exempt from
such registration and (iii) the Shares and the Conversion Shares will bear a
legend to such effect.
(e) The Purchaser represents that at no time was the Purchaser
presented with or solicited by or through any leaflet (other than the
Memorandum), public promotional meeting, advertisement or any other form of
general or public advertising or solicitation. In addition, the Purchaser
acknowledges that there has never been any representation, guaranty or warranty
made by the Company or any agent or representative of the Company as to the
amount of or type of consideration or profit, if any, to be realized as a result
of any investment by the Purchaser in the Preferred Stock.
(f) If the Purchaser is a resident of the State of Florida, he
understands that he has the privilege of voiding the purchase within three (3)
days after the first tender of consideration is made by such Purchaser to the
Company or an agent of the Company.
(g) If the Purchaser is a resident of the Commonwealth of
Pennsylvania, he will not sell his Shares within 12 months from the date of
purchase unless the Shares are registered under the Pennsylvania Securities Act
of 1972 or the Securities Act.
SECTION 6. RESTRICTIONS ON TRANSFER
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(a) The Purchaser agrees that it will not sell or otherwise dispose of
any Shares or Conversion Shares unless (i) such Shares or Conversion Shares have
been registered under the Securities Act and, to the extent required, under any
applicable state securities laws, or (ii) such Shares or Conversion Shares are
sold in accordance with the applicable requirements and limitations of Rule 144
or Rule 144A, or (iii) the Company has been furnished with an opinion or
opinions from counsel to the Purchaser (which counsel and which opinion(s) shall
be reasonably satisfactory to the Company and which counsel may be inside
counsel to the Purchaser) to the effect that registration under the Securities
Act is not required for the transfer as proposed (which opinion may be
conditioned upon the transferee assuming the obligations of a holder of Shares
or Conversion Shares under this Section) or (iv) the Company has been furnished
with a letter from the Division of Corporate Finance of the Commission to the
effect that such Division would not recommend any action to the Commission if
such proposed transfer were effected without a registration statement effective
under the Securities Act. The Company agrees that within five (5) Business Days
after receipt of any opinion referred to in (iii) above, it will notify the
holder supplying such opinion whether such opinion is satisfactory to the
Company.
(b) The Company may endorse on all certificates evidencing Shares or
Conversion Shares a legend stating or referring to the transfer restrictions
contained in paragraph (a) above; provided, that no such legend shall be
endorsed on any certificates which, when issued, are no longer subject to the
restrictions of this Section 6; provided, further, that if a transfer is made
pursuant to clause (i), (ii) (other than pursuant to Rule 144A) or (iv) of
paragraph (a) of this Section 6, or if an opinion of counsel provided pursuant
to clause (iii) of paragraph (a) concludes that the legend is no longer
necessary, the Company will deliver upon transfer, certificates without such
legends.
SECTION 7. COVENANTS OF THE COMPANY
The Company covenants and agrees, so long as (i) any Shares are outstanding
or (ii) there are any Eligible Holders, whichever is longer (unless such other
period is expressly provided in any subsections of this Section 7, in which case
such specific period will govern) as follows:
7.1. Use of Proceeds.
The Company will use the proceeds from the sale of the Shares for
purposes described in the section of the Memorandum entitled "Use of Proceeds."
No portion of such proceeds will be used for the purpose, whether immediate,
incidental or ultimate, of purchasing or carrying, within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System, as amended
from time to time, any "margin stock" as defined in said Regulation U, or any
"margin stock" as defined in Regulation G of the Board of Governors of the
Federal Reserve System, as amended from
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time to time, or for the purpose of purchasing, carrying or trading in
securities within the meaning of Regulation T of the Board of Governors of the
Federal Reserve System, as amended from time to time, or for the purpose of
reducing or retiring any indebtedness which both (i) was originally incurred to
purchase any such margin stock or other securities and (ii) was directly or
indirectly secured by such margin stock or other securities. None of the assets
of the Company or any Subsidiary includes any such "margin stock", and neither
the Company nor any Subsidiary has any present intention of acquiring any such
"margin stock."
7.2. Financial Information.
(a) The Company will maintain a system of accounting established and
administered in accordance with sound business practices to permit preparation
of financial statements in accordance with generally accepted accounting
principles consistently applied. The Company will deliver the following to each
Eligible Holder during the period through the Rights Expiration Date for such
Eligible Holder (and, in the case of paragraph (v) below, each other holder of
Shares and/or Conversion Shares):
(i) as soon as practicable but not later than ten (10) Business Days
after their issuance, and in any event within ninety (90) days after the close
of each fiscal year of the Company, (A) a consolidated balance sheet of the
Company and its Subsidiaries as of the end of such fiscal year and (B)
consolidated statements of operations, stockholders' equity and cash flows of
the Company and its Subsidiaries for such fiscal year, in each case setting
forth in comparative form the corresponding figures for the preceding fiscal
year, all such balance sheets and statements to be in reasonable detail and
certified by an independent public accounting firm of recognized national
standing selected by the Company, and such statements shall be accompanied by
management analyses of any material differences between the results for such
fiscal year and the corresponding figures for the preceding fiscal year and
between the budgeted figures (as supplied pursuant to paragraph (ii) below) and
the results for such year and a narrative discussion of the Company's liquidity
and capital resources as of the end of such year materially conforming to the
disclosure requirements contained in Item 303 of Regulation S-K under the
Securities Act. The Company's Annual Report on Form 10-K filed, or to be filed,
with the Commission will satisfy the requirements of this paragraph, except for
the requirement of the management analyses regarding the comparison of the
Company's results for such fiscal year to the budgeted figures (as supplied
pursuant to paragraph (ii) below);
(ii) as soon as reasonably practicable, and in any event within thirty
(30) days after the close of the preceding fiscal year of the Company, a budget
for the current fiscal year (or the upcoming fiscal year, as the case may be)
prepared on a quarterly basis regarding the Company's operations and capital
expenditures on a consolidated basis, together with an analysis
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of such budget prepared in reasonable detail by the Vice President of Finance or
the President of the Company; and (A) any operating budget of the Company
otherwise prepared and submitted to the Board and (B) any revisions or
amendments made by the Company (and submitted to its Board) to any budget
delivered under this paragraph (ii);
(iii) as soon as reasonably practicable, and in any event within
forty-five (45) days after the close of each of the first three (3) fiscal
quarters of the Company, (A) a consolidated balance sheet of the Company and its
Subsidiaries as of the end of such fiscal quarter and (B) consolidated
statements of operations and cash flows of the Company and its Subsidiaries for
the quarter just ended and for the portion of the fiscal year ended with the end
of such quarter, in each case in reasonable detail, certified by the Vice
President of Finance or the President of the Company and setting forth in
comparative form the corresponding figures for the comparable period one year
prior thereto (subject to normal year-end adjustments) and the comparable
figures included in the budget for such quarter (as delivered or modified
pursuant to paragraph (ii) above), together with management analyses of any
material differences between such results and the corresponding figures for such
prior period and between such results for such quarter and such budgeted
figures. The Company's Quarterly Report on Form 10-Q filed, or to be filed,
with the Commission will satisfy the requirements of this paragraph, except for
the requirement of the management analyses regarding the comparison of the
Company's results for such quarter to the budgeted figures;
(iv) as soon as reasonably practicable, copies of summary financial
information prepared on a quarterly basis regarding the Company on a
consolidated basis as presented to the Board and any other summary financial
information otherwise prepared and provided to the Board;
(v) as soon as reasonably practicable, copies of (A) all financial
statements, proxy material or reports sent by the Company to the Company's or
any Subsidiary's stockholders, (B) any public announcements or press releases
issued by the Company and (C) all reports or registration statements (excluding
registration statements on Form S-8) filed by the Company with the Commission
pursuant to the Securities Act or the Securities Exchange Act;
(vi) as soon as reasonably practicable and without duplication of any
of the above items, all materials furnished, from time to time, to the Board of
Directors of the Company (including without limitation all communications and
information furnished to the Board of Directors), and copies of minutes of
meetings of the Boards of Directors of the Company;
(vii) as soon as reasonably practicable and without duplication of
any of the above items, any other materials furnished to holders of the
Company's capital stock or any
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material information furnished to holders of the Company's indebtedness,
including without limitation any compliance certificates furnished in respect of
such indebtedness; and
(viii) as soon as reasonably practicable, such other material
information as may reasonably be requested by a holder of Shares (unless
reasonably objected to by the Company), regarding the assets, properties,
liabilities, business, affairs, results of operations, conditions (financial or
otherwise) or prospects of the Company or any Subsidiary.
All such financial statements shall be prepared in accordance with generally
accepted accounting principles consistently applied (except for any change in
accounting principles specified in the accompanying certificate and except that
any interim financial statements may omit notes and may be subject to normal
year-end adjustments).
(b) Without limiting the foregoing provisions of this Section 7.2,
the Company agrees that, if requested in writing by any Eligible Holder, it will
not deliver to such Eligible Holder (until otherwise instructed by such Eligible
Holder) (x) any non-public information or non-public materials regarding the
Company or any Subsidiary (whether described in this Section 7.2 or otherwise)
and (y) any information (whether or not included in clause (x)) which such
holder specifies that it does not want to receive. The Company shall comply with
any such request with respect to each such Eligible Holder and any subsequent
holders of Shares or Conversion Shares acquired directly or indirectly (through
one or more transfers) from such Eligible Holder, until instructed otherwise in
writing by the then holder of such Shares or Conversion Shares.
7.3. Tax Matters.
Unless otherwise required by the Code or applicable state or local
law, the Company agrees that it will not report the accrual of a dividend under
Section 305 of the Code with respect to any redemption premium with which the
Series B Preferred Stock may have been issued, whether on Form 1099 or any other
form, to the Internal Revenue Service or any state or local taxing authority.
7.4. Inspection.
At the request of an Eligible Holder, and without out of pocket
expenses to the Company, the Company will permit such Eligible Holder and any
authorized representative of such holder, subject to (if requested by the
Company) execution by such Eligible Holder of a reasonable confidentiality
agreement, to visit and inspect any of the properties of the Company and its
Subsidiaries, and to discuss with their officers the business, results of
operations, condition (financial or otherwise) or prospects of the Company or
any Subsidiary, at mutually acceptable times.
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7.5. Maintenance of Existence; Properties and Franchises; Compliance with
Law; Taxes; Insurance.
The Company will, and will cause each Subsidiary to:
(a) maintain their respective corporate existences, rights and other
franchises in full force and effect, except as may be affected by a transaction
permitted by Section 7.11; provided, that the Company may terminate the
corporate existence of any Subsidiary, or permit the termination or abandonment
of rights or other franchises, if in the opinion of the Company it is no longer
in the Company's best interests to maintain such existence, rights or other
franchises and such termination or abandonment will not be prejudicial in any
material respect to the holders of the Shares;
(b) maintain their respective tangible assets in good repair, working
order and condition so far as necessary or advantageous to the proper carrying
on of their respective businesses;
(c) comply with all applicable laws and with all applicable orders,
rules, rulings, certificates, licenses, regulations, demands, judgments, writs,
injunctions and decrees, provided, that such compliance shall not be necessary
so long as (i) the applicability or validity of any such law, order, rule,
ruling, certificate, license, regulation, demand, judgment, writ, injunction or
decree shall be contested in good faith by appropriate proceedings and (ii)
failure to comply will not have a Material Adverse Effect on a consolidated
basis;
(d) pay promptly when due all taxes, fees, assessments and other
government charges imposed upon their respective properties, assets or income
and all claims or indebtedness (including, without limitation, materialmen's,
vendor's, workmen's and like claims) which might become a lien upon such
properties or assets; provided, that payment of any such tax, fee, assessment,
charge, claim or indebtedness shall not be necessary so long as (i) the
applicability or validity thereof shall be contested in good faith by
appropriate proceedings and a reserve, if appropriate, shall have been
established with respect thereto and (ii) failure to make such payment will not
have a Material Adverse Effect on a consolidated basis; and
(e) keep adequately insured, by financially sound and reputable
insurers of nationally recognized stature, all their respective properties of a
character customarily insured by entities similarly situated, against loss or
damage of the kinds and in amounts customarily insured against by such entities
and with such deductibles or co-insurance as is customary.
7.6. Office for Payment, Exchange and Registration; Location of Office;
Notice of Change of Name or Office.
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(a) So long as any of the Shares is outstanding, the Company will
maintain an office or agency where Shares may be presented for payment,
exchange, conversion or registration of transfer as provided in this Agreement.
Such office or agency initially shall be the office of the Company's transfer
agent and shall be the following: KeyCorp Shareholder Services, Inc., 700
Louisiana, Suite 2620, Houston, Texas 77002.
(b) The Company shall give each holder of Shares at least twenty (20)
days' prior written notice of any change in (i) the name of the Company as then
in effect or (ii) the location of the office of the Company required to be
maintained under this Section 7.6.
7.7. Environmental Matters.
(a) The Company and each Subsidiary shall keep any property either
owned or occupied by the Company or any Subsidiary free and clear of any
material Liens imposed for failure to comply with any environmental laws,
regulations or ordinances (each, an "Environmental Lien"), and the Company and
each Subsidiary, as the case may be, shall keep all such property in material
compliance with all environmental laws, regulations and ordinances; provided,
however, that the Company or any Subsidiary shall have the right at its cost and
expense, and acting in good faith, to contest, object or appeal by appropriate
legal proceeding the validity of any Environmental Lien. The contest, objection
or appeal with respect to the validity of an Environmental Lien shall suspend
the Company's obligation to eliminate such Environmental Lien under this
paragraph pending a final determination by appropriate administrative or
judicial authority of the legality, enforceability or status of such
Environmental Lien, provided that the following conditions are satisfied: (i)
contemporaneously with the commencement of such proceedings, the Company shall
give written notice thereof to each holder of Shares or Conversion Shares; and
(ii) if under applicable law any real property or improvements thereon are
subject to sale or forfeiture for failure to satisfy the Environmental Lien
prior to a final determination of the legal proceedings, the Company or such
Subsidiary must successfully move to stay such sale, forfeiture or foreclosure
pending final determination of the Company's (or Subsidiary's) action; and (iii)
the Company or such Subsidiary must, if requested, furnish to the holders of
Shares or Conversion Shares a good and sufficient bond, surety, letter of credit
or other security satisfactory to such holders equal to the amount (including
any interest and penalty) secured by the Environmental Lien.
(b) The Company will defend, indemnify and hold harmless each current,
former and future holder of Shares or Conversion Shares, its employees,
officers, directors, stockholders, partners, agents, representatives and
assigns, from and against any liabilities, obligations, losses, damages,
penalties, actions, judgments, suits and claims, joint or several, and any
costs, disbursements and expenses (including attorneys' fees and expenses and
costs of investigation) of whatever kind or nature, known or unknown, contingent
or otherwise, arising out of or in any way
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related to (i) the presence, disposal, release, removal, discharge, storage or
transportation of any Hazardous Material upon, into, from or affecting any real
property (including improvements) owned or occupied (or formerly owned or
occupied) by the Company or any Subsidiary; and (ii) any judicial or
administrative action, suit or proceeding, actual or threatened, relating to
Hazardous Material upon, in, from or affecting any real property (including
improvements) owned or occupied (or formerly owned or occupied) by the Company
or any Subsidiary; and (iii) any violation of any environmental law, regulation
or ordinance by the Company or any Subsidiary or any of their agents, tenants,
subtenants or invitees; and (iv) the imposition of any Environmental Lien for
the recovery of costs expended in the investigation, study or remediation of any
environmental liability of (or asserted against) the Company or any Subsidiary,
provided, however, that in no case shall such persons be entitled to
indemnification under this Section 7.7(b) for a decrease in the value of the
Shares or the Conversion Shares resulting from or in any way related to items
(i) though (iv) herein, but that the preceding clause shall in no way limit any
indemnification that a Purchaser may otherwise be entitled to under any other
provisions of this Stock Purchase Agreement. This Section 7.7(b) shall survive
any payment, conversion or transfer of Shares and any termination of this
Agreement.
7.8. No Change in Business.
Neither the Company nor any of its Subsidiaries will engage in any
business other than business of the general nature described in the Memorandum.
7.9. Restrictive Agreements Prohibited.
Neither the Company nor any of its Subsidiaries shall become a party
to any agreement which by its terms restricts the Company's performance of this
Agreement.
7.10. Restricted Payments.
Neither the Company nor any Subsidiary will declare or make or permit
to be declared or made any Restricted Payment.
7.11. Consolidation, Merger and Sale.
Without the consent of the Majority Shareholders, neither the Company
nor any Subsidiary will do any of the following (or agree to do any of the
following) pursuant to a transaction approved by the Board of Directors of the
Company: (a) wind up, liquidate or dissolve its affairs; (b) sell, lease,
transfer or otherwise dispose of all or substantially all of its assets to any
other Person; (c) consolidate with, merge into or enter into a share exchange
with any other Person;
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or (d) permit any other Person (other than a wholly-owned Subsidiary on the date
hereof) to merge into or sell, lease or transfer all or substantially all of its
property, assets or capital stock to the Company or any Subsidiary, unless:
(i) in the case of actions under clause (a) or (b) above, a wholly-
owned Subsidiary is wound-up, dissolved and liquidated into another wholly-owned
Subsidiary or into the Company or a wholly-owned Subsidiary sells, leases,
transfers or otherwise disposes of all or substantially all of its assets to
another wholly-owned Subsidiary or to the Company; or
(ii) in the case of actions under clause (c) or (d) above, each of the
following conditions is satisfied:
(A) if such action involves the Company and if such surviving Person
is a corporation other than the Company, all liabilities and obligations of the
Company under the Stock Purchase Agreements shall remain in effect and shall
have been expressly assumed by such surviving Person (pursuant to a document in
form and substance reasonably satisfactory to the Majority Shareholders and
their counsel) as if such surviving Person were the "Company" hereunder and
thereunder; and
(B) either (x) the Common Stock of such transferee Person into which
the Series B Preferred Stock will thereafter be convertible (or American
Depositary Receipts with respect thereto) is listed on a national securities
exchange in the United States or traded on The Nasdaq Stock Market, or (y) all
of the Series B Preferred Stock is concurrently redeemed for cash in accordance
with Section 5 of the Series B Certificate of Designations.
7.12. Transactions with Affiliates.
The Company will not, and will not permit any Subsidiary to,
directly or indirectly, enter into any transaction or agreement (including,
without limitation, the purchase, sale, distribution, lease or exchange of any
property or the rendering of any service) with any Affiliate of the Company or
of any Subsidiary, other than a wholly-owned Subsidiary of the Company, unless
such transaction or agreement (a) is approved by disinterested members of the
Board of Directors of the Company, and (b) is on terms that are no less
favorable to the Company or such Subsidiary, as the case may be, than those
which might be obtained at the time of such transaction from a Person who is not
such an Affiliate; provided, however, that this Section 7.12 shall not limit, or
be applicable to, (i) employment arrangements with any individual who is an
employee of the Company or any Subsidiary if such arrangements are approved by
the Board; and (ii) the payment of reasonable and customary regular fees to
directors who are not employees of the Company.
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7.13. Observer Rights.
Each of the Eligible Holders shall have the right, during the period
through the Rights Expiration Date for such Eligible Holder, and (if requested
by the Company) subject to execution by such observer of a reasonable
confidentiality agreement, to send one (1) representative to meetings of the
Company's and each Subsidiary's Board of Directors (and the executive committee
if the executive committee has more than five members) of such Boards, such
representatives to act as observers without a vote or other rights as a director
(except the right to receive sufficient notice to enable such attendance and the
right to receive all other communications, information and materials furnished,
from time to time, to directors of the Company and each Subsidiary). Any
representative acting under this Section 7.13 shall be chosen from the list of
Persons provided to the Company concurrently with execution of this Agreement
(or another individual selected by such holders and reasonably acceptable to the
Company).
7.14. No Dilution or Impairment; No Changes in Capital Stock.
The Company will not, by amendment of its certificate of
incorporation or through any consolidation, merger, reorganization, transfer of
assets, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of the
Stock Purchase Agreements or the Series B Certificate of Designations. The
Company will at all times in good faith assist in the carrying out of all such
terms, and in the taking of all such action, as may be necessary or appropriate
in order to protect the rights of the holders of Shares (as such rights are set
forth in the Stock Purchase Agreements and the Series B Certificate of
Designations) against impairment. Without limiting the generality of the
foregoing, the Company (a) will not permit the par value or the determined or
stated value of any shares of the Company's Common Stock receivable upon the
conversion of the Shares to exceed the amount payable therefor upon such
conversion, (b) will take all such action as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and non-
assessable shares of the Company's Common Stock free from all taxes, Liens and
charges with respect to the issue thereof, upon the conversion of the Shares
from time to time outstanding, (c) will not take any action which results in any
adjustment of the Conversion Price under the Series B Certificate of
Designations if the total number of shares of the Company's Common Stock (or
other securities) issuable after the action upon the conversion of all of the
then outstanding Shares would exceed the total number of shares of the Company's
Common Stock (or other securities) then authorized by the Company's certificate
of incorporation and available for the purpose of issuance upon such conversion,
(d) will not have any authorized Common Stock other than its existing authorized
Common Stock, (e) will not amend its certificate of incorporation to change any
terms of its Common Stock, (f) will not amend its certificate of incorporation
in any manner to alter or change the powers, privileges or preferences of the
holders of the Series B Preferred Stock (including without limitation changing
the Series B
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Certificate of Designations after any Shares have been called for redemption),
(g) will not create or authorize the creation of any additional class or series
of shares of capital stock unless the same ranks junior to the Series B
Preferred Stock as to the payment of dividends or the distribution of assets on
the liquidation, dissolution or winding up of the Company, or increase the
authorized amount of the Series B Preferred Stock, or increase the authorized
amount of any additional class or series of shares of stock unless the same
ranks junior to the Series B Preferred Stock as to the payment of dividends or
the distribution of assets on the liquidation, dissolution or winding up of the
Company, or create or authorize any obligation or security convertible into
shares of Series B Preferred Stock or into shares of any other class or series
of stock unless the same ranks junior to the Series B Preferred Stock as to the
payment of dividends or the distribution of assets on the liquidation,
dissolution or winding up of the Company, whether any such creation,
authorization or increase shall be by means of amendment to the certificate of
incorporation or by merger, consolidation or otherwise and (h) after the date
hereof, will not create or establish (or make any grants or awards under) any
phantom stock, stock appreciation rights or other equity equivalent plan for
employees, officers, directors, agents or consultants of the Company (unless
such plans in the aggregate relate to the equivalent of less than 5% of the
Common Stock of the Company) whereby the Company or any Subsidiary agrees to pay
any Person a percentage of, or an amount otherwise determined by reference to,
the earnings of the Company or any Subsidiary, the value of their stock or the
proceeds from a sale of their stock or upon their liquidation.
7.15. Reservation of Shares.
There have been reserved, and the Company shall at all times keep
reserved, free from preemptive rights, out of its authorized Common Stock, a
number of shares of Common Stock sufficient to provide for the exercise of the
conversion rights of the Shares provided in the Series B Certificate of
Designations. If at any time the number of authorized but unissued shares of
Common Stock of the Company shall not be sufficient to effect the conversion of
the Shares or otherwise to comply with the terms of this Agreement, the Company
will forthwith take such corporate action as may be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose. The Company will obtain any authorization,
consent, approval or other action by or make any filing with any court or
administrative body that may be required under applicable state securities laws
in connection with the issuance of the Common Stock upon conversion of the
Shares.
7.16. Listing of Shares.
If any shares of the Company's Common Stock or Series B Preferred
Stock are listed on any national securities exchange (or on The Nasdaq Stock
Market or comparable system), then the Company will take such action as may be
necessary, from time to time, to list the Conversion
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Shares or the Shares, as the case may be, on such exchange (or system as the
case may be). The Company shall have no obligation to list the Shares if the
Series B Preferred Stock is not so listed.
7.17. Securities Exchange Act Registration.
(a) The Company will maintain effective a registration statement
(containing such information and documents as the Commission shall specify and
otherwise complying with the Securities Exchange Act) under Section 12(b) or
Section 12(g), whichever is applicable, of the Securities Exchange Act, with
respect to the Company's Common Stock, and will file on time such information,
documents and reports as the Commission may require or prescribe for companies
whose stock has been registered pursuant to such Section 12(b) or Section 12(g),
whichever is applicable.
(b) The Company will, upon the request of any holder of Shares or
Conversion Shares, make whatever other filings with the Commission, or otherwise
make generally available to the public such financial and other information, as
any such holder may deem reasonably necessary or desirable in order to enable
such holder to be permitted (i) to sell Conversion Shares pursuant to the
provisions of Rule 144 and (ii) after the Company has filed a registration
statement with respect to Series B Preferred Stock under Section 6 of the
Securities Act or Section 12(b) or 12(g) of the Securities Exchange Act, to sell
Shares pursuant to the provisions of Rule 144.
7.18. Maintenance of Public Market.
Except as contemplated by Section 7.11, the Company will not (i)
proceed with a program of acquisition of its own Common Stock or of Series B
Preferred Stock (other than by redemption in accordance with the Series B
Certificate of Designations), (ii) initiate a corporate reorganization or
recapitalization or undertake a consolidation or merger or (iii) authorize,
consent to or take any action without the consent of the Eligible Holders, which
would have the effect of:
(a) removing the Company from registration with the Commission
under the Securities Exchange Act with respect to the Company's Common Stock,
(b) requiring the Company to make a filing under Section 13(e) of
the Securities Exchange Act,
(c) reducing substantially or eliminating the public market for shares
of Common Stock of the Company,
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(d) if any shares of the Company's Common Stock or Series B Preferred
Stock are at any time listed on The Nasdaq Stock Market, causing a delisting of
the Company's Common Stock or Series B Preferred Stock, as the case may be, from
such systems (unless such stock is delisted as a result of being listed on a
national securities exchange), or
(e) if any shares of the Company's Common Stock or Series B Preferred
Stock are at any time listed on a national securities exchange, causing a
delisting of such stock from such exchange.
7.19. Private Placement Status.
Neither the Company nor any agent nor other Person acting on the
Company's behalf will do or cause to be done (or will omit to do or to cause to
be done) any act which act (or which omission) would result in bringing the
issuance or sale of the Shares or the Conversion Shares within the provisions of
Section 5 of the Securities Act or the filing, notification or reporting
requirements of any state securities law (other than in accordance with a
registration and qualification of Conversion Shares pursuant to Section 7.17
hereof), except for filings, notices or reports pursuant to state securities
laws which have already been made or which are contemplated in connection with
the offering and sale of the Shares.
7.20. Delivery of Information.
If a holder of Shares or Conversion Shares proposes to transfer any
such Shares or Conversion Shares pursuant to Rule 144A, the Company agrees to
provide (upon the request of such holder or the prospective transferee) to such
holder and (if requested) to the prospective transferee any information
concerning the Company and its Subsidiaries which is required to be delivered to
any transferee of such Shares or Conversion Shares pursuant to such Rule 144A.
7.21. Notices.
The Company will give to all holders of Shares or Conversion Shares
copies of all notices given by the Company to holders of its Common Stock
concurrently with the giving of such notices to such holders of Common Stock.
7.22 No Dividends in Common Stock Unless Registered.
The Company will not declare and cause to be paid dividends on the
Shares in shares of Common Stock until a registration statement covering the
resale of such Common Stock has been filed with the Commission and has been
declared effective thereby.
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SECTION 8. REGISTRATION RIGHTS
8.1. Registration of the Shares.
(a) The holders of at least an aggregate of 100,000 Shares may request
the Company to register under the Securities Act the resale of all or any
portion of such Shares, but in no event less than 60,000 Shares, held by such
requesting holder or holders for sale in the manner specified in such notice.
(b) Following receipt of any notice under this Section 8.1, the
Company shall immediately notify all holders of the Shares from whom notice has
not been received and shall commit to register under the Securities Act, for
public sale in accordance with the method of disposition specified in such
notice from requesting holders, the number of Shares specified in such notice
(and in all notices received by the Company from other holders within 30 days
after the giving of such notice by the Company). All such holders who submit
requests to the Company pursuant to this Section 8.1 shall be referred to
individually as a "Requesting Holder" and collectively as "Requesting Holders."
If the Requesting Holders may elect to have the Shares sold to one or more
persons participating as underwriters ("Underwriters") for an offering of Shares
to the public (an offering of any shares of capital stock of the Company by
means of Underwriters to the public shall be referred to as an "Underwritten
Offering"), the holders of a majority of the Shares to be sold in such offering
may designate the managing Underwriter of such offering, subject to approval of
the Company, which approval will not be unreasonably withheld or delayed. The
Company shall be obligated to register the Shares pursuant to this Section 8.1
on two occasions only, provided, however, that such obligation shall be deemed
satisfied only when a registration statement covering at least 60% of the total
Shares specified in notices received as aforesaid, for sale in accordance with
the method of disposition specified by the Requesting Holders, shall have become
effective and, if such method of disposition is an Underwritten Offering, all
such shares shall have been sold pursuant thereto.
(c) Except for registration statements on Form S-4, S-8 or any
successor thereto and except as required under the registration rights
agreements referred to in Schedule II hereto, the Company will not file with the
Commission without the approval of the Requesting Holders any other new
registration statements with respect to its capital stock, whether for its own
account or that of other stockholders, from the date of receipt of a notice from
Requesting Holders pursuant to this Section 8.1 until the earlier of (i) six (6)
months from the date of receipt of such notice and (ii) the completion of the
period of distribution of the registration contemplated thereby. The
registration statement, together with all amendments and supplements, including
post-effective amendments, in each case including the prospectus contained
therein (including the preliminary prospectus and all amendments and supplements
to the prospectus, including post-effective amendments) (collectively,
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the "Prospectus"), all exhibits thereto or to the Prospectus and all material
incorporated by reference therein or to the Prospectus, is referred to as the
"Registration Statement".
(d) If and whenever the Company is required by the provisions of this
Section 8.1 to effect the registration of any Shares under the Securities Act,
the Company will, as expeditiously as possible:
(i) prepare and file with the Commission, no later than 60 days
after the receipt of the first notice from the Requesting Holders, a
Registration Statement on Form S-2 (or other appropriate form) with respect to
such securities and use its reasonable best efforts to cause such Registration
Statement to become and remain effective for the period of distribution
contemplated thereby (determined as hereinafter provided);
(ii) prepare and file with the Commission such amendments and
supplements to such Registration Statement and the Prospectus used in connection
therewith as may be necessary to keep such Registration Statement effective for
the period contemplated in (i) above and comply with the provisions of the
Securities Act with respect to the disposition of all Shares covered by such
Registration Statement in accordance with the sellers' intended method of
disposition set forth in such Registration Statement for such period;
(iii) register or qualify the Shares, by the time the Registration
Statement is declared effective by the Commission, under all applicable state
securities or "Blue Sky" laws of such jurisdictions as each Underwriter, if any,
or the Requesting Holders shall request in writing, provided that the Company
shall not be obligated to qualify as a foreign corporation or as a dealer in
securities in any jurisdiction in which it is not so qualified or to subject
itself to taxation in respect of doing business in any jurisdiction in which it
is not otherwise so subject;
(iv) keep each such registration or qualification effective
during the period the Registration Statement is required to be kept effective;
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(v) upon request by the Requesting Holders, do any and all other
acts and things which may be reasonably necessary to enable such Underwriter, if
any, and the Requesting Holders to consummate the disposition of the Shares in
each such jurisdiction;
(vi) notify the Requesting Holders when the Registration
Statement has become effective and when any post-effective amendments and
supplements thereto become effective;
(vii) in connection with an Underwritten Offering, if any, notify
the Requesting Holders if, between the effective date of the Registration
Statement and the closing of any sale of Shares, the representations and
warranties of the Company contained in the underwriting agreement relating to
any Underwritten Offering cease to be true and correct in all material respects
or if the Company receives any notification with respect to the suspension of
the qualification of the Shares for sale in any jurisdiction or the initiation
of any proceeding for such purpose;
(viii) furnish or cause to be furnished forthwith to the Requesting
Holders, a "cold comfort" letter of the Company's independent accountants, as of
the effective date of the Registration Statement, as to such matters as
customarily are covered in accountant's letters delivered to underwriters in
underwritten public offerings of securities;
(ix) furnish or cause to be furnished forthwith to the Requesting
Holders, an opinion of counsel to the Company, as of the effective date of the
Registration Statement, in the form customarily provided by issuer's counsel in
underwritten public offerings of securities;
(x) furnish such number of Prospectuses and other documents
incident thereto, including any amendment of or supplement to the Prospectus as
the Requesting Holders from time to time may reasonably request during the
period of distribution of the Shares;
(xi) provide a transfer agent and registrar for all of the
Shares; and
(xii) otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Commission with respect to the
disposition of the Shares covered by such Registration Statement, and make
available to its security holders, as soon as reasonably practicable, an
earnings statement covering the period of at least twelve months, but not more
than eighteen months, beginning with the first month after the effective date of
the Registration Statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act.
(e) For purposes of this Section 8.1, the period of distribution of
the Shares in an Underwritten Offering shall be deemed to extend until each
Underwriter has completed the distribution of all securities purchased by it
(but no later than 180 days), and the period of distribution of the Shares in
any other registration shall be deemed to extend until the earlier of the sale
of all Shares covered thereby and 180 days after the effective date thereof.
(f) In connection with each registration under this Section 8.1, and
as a condition to the inclusion of their shares therein, the Requesting Holders
will furnish to the Company in writing such information with respect to
themselves and the proposed distribution by them as
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reasonably shall be necessary in order to assure compliance with federal and
applicable state securities laws.
(g) As soon as the Company is eligible to register the Shares on Form
S-3 (or any successor form thereto under the Securities Act), the Company will,
as expeditiously as possible but in any event no later than 60 days after the
Company is eligible to register the Shares on Form S-3, undertake to amend the
"shelf" Registration Statement on Form S-3 referred to in Section 8.2 to include
any Shares outstanding or to file and to use its reasonable best efforts to have
declared effective a separate registration statement registering the resale of
the Shares. Any Shares so registered pursuant to the Company's "shelf"
Registration Statement on Form S-3 or such other registration statement shall be
thereinafter included within the definition of "Registered Securities".
(h) Subject to Section 8.3 below, the Company agrees to supplement or
amend the Registration Statement, if required by the Securities Act.
8.2 Shelf Registration of the Registered Securities.
The Company agrees to use its reasonable best efforts to file with the
Commission a "shelf" Registration Statement on Form S-3 (or other appropriate
form under the Securities Act), providing for the resale of all of the
Registered Securities, within sixty (60) days after the Closing Date. The
Company will use its reasonable best efforts to have the Registration Statement
declared effective by the Commission as soon as practicable after the filing
thereof. Subject to Section 8.3 hereof, the Company will use its reasonable best
efforts to keep the Registration Statement continuously effective until the
earlier of:
(A) the date upon which all of the outstanding Registered Securities
have been sold pursuant to the Registration Statement or are no longer
outstanding, or
(B) such date as the Company and each of the Eligible Holders shall be
satisfied that Rule 144(k) of the regulations under the Securities Act is
available for the resale of the Registered Securities held by them, or, in the
case of Eligible Holders for whom Rule 144(k) is unavailable, such Eligible
Holders have consented in writing to permit the Company to discontinue the
effectiveness of the Registration Statement.
Subject to Section 8.3 below, the Company agrees to supplement or amend the
Registration Statement, if required by the Securities Act.
8.3. Interference with Registration.
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(a) For purposes of this Section 8.3, any Registration Statement
pursuant to either Section 8.1 or 8.2 hereof shall collectively be referred to
as the "Registration Statements." If, after the Registration Statements have
been declared effective, a stop order, injunction or other order or requirement
of the Commission or any other governmental agency or court is issued which
suspends the effectiveness of a Registration Statement, (i) upon receipt of
notice from the Company, the Requesting Holders or Purchaser (as applicable)
will discontinue any disposition of Shares or Registered Securities,
respectively, pursuant to that Registration Statement until receipt of notice
from the Company that the suspension of the effectiveness of the Registration
Statement has been withdrawn and (ii) the Company will use its reasonable best
efforts to obtain the withdrawal of such order or to meet such requirement at
the earliest possible time.
(b) If, after the Registration Statements have become effective, an
event occurs as a result of which the Company determines that a Registration
Statement or the related Prospectus contains any untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, the Company will notify the Requesting
Holders and any Purchaser (as applicable) thereof and, if applicable, use its
reasonable best efforts to prepare and promptly file a post-effective amendment
or a supplement to the Registration Statement or the related Prospectus or
promptly file any other required document so that, as thereafter delivered to
purchasers of the Shares or Registered Securities, such Prospectus will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(c) Without limiting Section 8.3(a) and 8.3(b) hereof, if any
Requesting Holder or Purchaser (as applicable) shall propose to sell any Shares
or Registered Securities, respectively, pursuant to the Registration Statements,
it shall notify the Company of its intent to do so at least three (3) full
Business Days prior to such sale. At any time within such three (3) Business
Day period, the Company may refuse to permit the Requesting Holder or Purchaser
(as applicable) to resell any Shares or Registered Securities, respectively,
pursuant to the Registration Statements; except that the Company may exercise
this right only once in any one hundred eighty (180) day period, unless the
matter giving rise to the exercise by the Company of this right is beyond the
Company's control; and provided, further, that in order to exercise this right,
the Company must deliver a certificate in writing to the Requesting Holder or
Purchaser (as applicable) to the effect that a delay in such sale is necessary
because a sale pursuant to such Registration Statement in its then-current form
would reasonably be expected to constitute a violation of the federal securities
laws. Without limiting Section 8.3(b) hereof, in no event shall such delay
exceed ten (10) Business Days; provided, however, that if, prior to the
expiration of such ten (10) Business Day period, the Company delivers a
certificate in writing to the Requesting Holder or Purchaser (as applicable) to
the effect that a further delay in such sale beyond such ten (10) Business Day
trading period is necessary
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because a sale pursuant to the Registration Statement in its then-current form
would reasonably be expected to constitute a violation of the federal securities
laws, the Company may refuse to permit such Requesting Holder or Purchaser (as
applicable) to resell any Shares or Registered Securities, respectively,
pursuant to the Registration Statement for an additional period not to exceed
five (5) Business Days, but in no event shall any such delay exceed in the
aggregate fifteen (15) Business Days, unless the matter giving rise to the
exercise of such right is beyond the Company's control.
8.4. Selection of Underwriters for Registered Securities.
With respect to the registration of Registered Securities pursuant to
Section 8.2 hereof, at any time or from time to time after the Closing, the
Purchaser may elect to have the Registered Securities sold to one or more
persons participating as Underwriters for an Underwritten Offering. In such
event, the Company shall engage (a) Alex. Brown & Sons Incorporated or (b)
another nationally recognized independent investment banking firm reasonably
acceptable to the holders of a majority of the Registered Securities, as
Underwriters; provided, however, that the Company shall not be required to
engage any Underwriter if such engagement would require the consent or approval
of any governmental authority (including the necessity of obtaining an exemptive
order under the Investment Company Act of 1940, as amended); provided, further,
that after three years after the Closing Date such Underwriters shall be
selected by mutual agreement of the Company and the holders of a majority of the
Registered Securities, each acting reasonably. In such event, the Company and
each such Purchaser will cooperate with the Underwriter or the managing
Underwriter and take all customary and reasonable actions to facilitate the
disposition of Registered Securities in an Underwritten Offering.
8.5. Other Obligations of the Company with respect to the Registered Securities.
After the Closing, the Company will:
(a) use its reasonable best efforts
(i) to register or qualify the Registered Securities, by the time
the Registration Statement is declared effective by the Commission, under all
applicable state securities or "Blue Sky" laws of such jurisdictions as each
Underwriter, if any, or the Purchaser shall request in writing, provided that
the Company shall not be obligated to qualify as a foreign corporation or as a
dealer in securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any jurisdiction in
which it is not otherwise so subject;
(ii) to keep each such registration or qualification effective
during the period the Registration Statement is required to be kept effective;
and
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(iii) upon request by the Purchaser, to do any and all other acts
and things which may be reasonably necessary to enable such Underwriter, if any,
and the Purchaser to consummate the disposition of the Registered Securities in
each such jurisdiction;
(b) notify the Purchaser
(i) when the Registration Statement has become effective and when
any post-effective amendments and supplements thereto become effective and
(ii) in connection with an Underwritten Offering, if any, if,
between the effective date of the Registration Statement and the closing of any
sale of Registered Securities, the representations and warranties of the Company
contained in the underwriting agreement relating to any Underwritten Offering
cease to be true and correct in all material respects or if the Company receives
any notification with respect to the suspension of the qualification of the
Registered Securities for sale in any jurisdiction or the initiation of any
proceeding for such purpose;
(c) Furnish or cause to be furnished forthwith to the Purchaser,
(i) a "cold comfort" letter of the Company's independent
accountants, as of the effective date of the Registration Statement, as to such
matters as customarily are covered in accountant's letters delivered to
underwriters in underwritten public offerings of securities and
(ii) an opinion of counsel to the Company, as of the effective
date of the Registration Statement, in the form customarily provided by issuer's
counsel in underwritten public offerings of securities;
(d) furnish such number of Prospectuses and other documents incident
thereto, including any amendment of or supplement to the Prospectus as a
Purchaser from time to time may reasonably request;
(e) cause all such Registered Securities registered as described
herein to be listed on each securities exchange and quoted on each quotation
service on which securities of the same class and series issued by the Company
are then listed or quoted;
(f) provide a transfer agent and registrar for all Registered
Securities;
(g) otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Commission with respect to the
disposition of the Registered Securities, and make available to its security
holders, as soon as reasonably practicable, an earnings statements
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covering the period of at least twelve months, but not more than eighteen
months, beginning with the first month after the effective date of the
Registration Statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act.
8.6. Registration Expenses.
The Company agrees to pay all Registration Expenses in connection with
the registrations pursuant to this Section 8. "Registration Expenses" means any
and all expenses incident to performance of or compliance with the provisions of
this Section 8 by the Company, including without limitation: (i) all Commission
and National Association of Securities Dealers, Inc. ("NASD") registration and
filing fees, (ii) all fees and expenses incurred in connection with compliance
with state securities or "Blue Sky" laws and compliance with the rules of the
NASD, (iii) all expenses in preparing, printing and distributing the
Registration Statements and other documents relating to the performance of and
compliance with this Agreement by the Company, (iv) the reasonable fees and
disbursements of counsel for the Company and of one counsel selected by the
Eligible Holders and reasonably acceptable to the Company and of the independent
public accountants of the Company, (v) any fees and disbursements of
Underwriters, dealers and agents, if any, customarily paid by issuers of
securities under similar circumstances relating to compliance with applicable
state securities or "Blue Sky" laws and the fees and expenses of any special
experts retained by the Company in connection with the Registration Statements;
but excluding (x) underwriting discounts and commissions and (other than as
provided in clause (v) of this paragraph) fees and disbursements of
Underwriters, dealers and agents in connection with an Underwritten Offering of
Shares or Registered Securities, if any, and (y) transfer taxes, if any,
relating to the sale and disposition of Shares or Registered Securities.
8.7. Short Sales.
No Purchaser shall engage in any short-sales of the Company's Common
Stock prior to the effectiveness of the Registration Statement, except to the
extent that any such shortsale is fully covered by freely tradable shares of
Common Stock of the Company.
8.8. Representations of the Company.
The Company represents and warrants to, and agrees with, the Purchaser
that:
(a) The Registration Statements and the Prospectuses contained
therein, when they become effective or are filed with the Commission, as the
case may be, and, in the case of an Underwritten Offering, at the time of the
closing under the underwriting agreement relating thereto, will conform in all
material respects to the requirements of the Securities Act and will not contain
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an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not misleading;
and at all times subsequent to the effective date of such Registration
Statements when a Prospectus would be required to be delivered under the
Securities Act, except for the periods provided under Section 8.3 hereof, such
Registration Statements and Prospectuses will conform in all material respects
to the requirements of the Securities Act and will not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing; provided, however, that this
representation and warranty shall not apply to any statements or omissions made
in reliance upon and in conformity with information furnished in writing to the
Company by the Purchaser or any Underwriter expressly for use therein.
(b) Any documents incorporated by reference in the Prospectuses, when
they become or became effective or are or were filed with the Commission, as the
case may be, will conform or conformed in all material respects to the
requirements of the Securities Act or the Exchange Act, as applicable, and none
of such documents will contain or contained, as of their respective dates, an
untrue statement of a material fact or will omit or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading at the time they become or became effective or are or were filed
with the Commission, as the case may be; provided, however, that this
representation and warranty shall not apply to any statements or omissions made
in reliance upon and conformity with information furnished in writing to the
Company by the Purchaser or any Underwriter expressly for use therein.
8.9. Indemnification.
(a) The Company will indemnify and hold harmless each holder of Shares
and Registered Securities and any underwriter (as defined in the Securities Act)
for such holder and each person, if any, who controls the holder or underwriter
within the meaning of the Securities Act against any losses, claims, damages or
liabilities, joint or several, and expenses (including reasonable attorneys'
fees and expenses and reasonable costs of investigation) to which the holder or
underwriter or such controlling person may be subject, under the Securities Act
or otherwise, insofar as any thereof arise out of or are based upon (x) any
untrue statement or alleged untrue statement of a material fact contained in a
Registration Statement, a Prospectus or any amendment or supplement thereto, or
(y) the omission or alleged omission to state in any item referred to in the
preceding clause a material fact required to be stated therein or necessary to
make the statements therein not misleading, except insofar as such losses,
claims, damages, liabilities or expenses arise out of or are based upon any
untrue statement or alleged untrue statement or omission or alleged omission
based upon information furnished to the Company in writing by such holder or by
any underwriter for such holder expressly for use therein (with respect to which
information such holder or underwriter shall so indemnify and hold harmless the
Company, any underwriter for the Company and each person,
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if any, who controls the Company or such underwriter within the meaning of the
Securities Act). The foregoing is subject to the condition that, insofar as the
foregoing indemnities relate to any untrue statement, alleged untrue statement,
omission or alleged omission made in any prospectus which is eliminated or
remedied in any amendment, supplement or final prospectus, the above indemnity
obligations of the Company shall not inure to the benefit of any indemnified
person (or to the benefit of any person who controls such indemnified person
within the meaning of the Securities Act) if a copy of such amendment,
supplement or final prospectus was not sent or given by such indemnified person
at or prior to the time such action is required of such indemnified person by
the Securities Act and if delivery of such amendment, supplement or final
prospectus would have eliminated (or been a sufficient defense to) any liability
of such indemnified person with respect to such statement or omission.
(b) The Purchaser will indemnify and hold harmless the Company, any
other Purchasers, any underwriter (as defined in the Securities Act) and each
person, if any, who controls the Company, such other Purchasers or any
underwriter within the meaning of the Securities Act, against any losses,
claims, damages or liabilities, joint and several, and expenses (including
reasonable attorneys' fees and expenses and reasonable costs of investigation)
to which the Company, such other Purchaser, underwriter or such controlling
person may be subject, under the Securities Act or otherwise, insofar as any
thereof arise out of or are based upon (x) any untrue statement or alleged
untrue statement of a material fact contained in a Registration Statement, a
Prospectus or any amendment or supplement thereto, (y) the omission or alleged
omission to state in any item referred to in the preceding clause a material
fact required to be stated therein or necessary to make the statements therein
not misleading or (z) any failure of the Purchaser to perform its obligations
hereunder or under law; provided, however, that the Purchaser will be liable
hereunder in any such case if and only to the extent that any such loss, claim,
damage, liability or expense arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in reliance
upon and in strict conformity with information pertaining to the Purchaser, as
such, furnished in writing to the Company by the Purchaser stated to be
specifically for use in such Registration Statement and Prospectus; provided,
further, however, that the liability of the Purchaser hereunder shall be limited
to the proportion of any such loss, claim, damage, liability or expense which is
equal to the proportion that the public offering price of the Shares or
Registered Securities sold by the Purchaser under such Registration Statement
bears to the total public offering price of all securities sold thereunder, but
not in any event to exceed the proceeds received by the Purchaser from the sale
of the Shares or Registered Securities covered by such Registration Statement.
The foregoing is subject to the condition that, insofar as the foregoing
indemnities relate to any untrue statement, alleged untrue statement, omission
or alleged omission made in any prospectus which is eliminated or remedied in
any amendment, supplement or final prospectus, the above indemnity obligations
of the Purchaser shall not inure to the benefit of any indemnified person (or to
the benefit of any person who controls such indemnified person within the
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meaning of the Securities Act) if a copy of such amendment, supplement or final
prospectus was not sent or given by such indemnified person at or prior to the
time such action is required of such indemnified person by the Securities Act
and if delivery of such amendment, supplement or final prospectus would have
eliminated (or been a sufficient defense to) any liability of such indemnified
person with respect to such statement or omission.
(c) Promptly after receipt by an indemnified party under Section
8.9(a) or (b) hereof of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against an
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the failure to so notify an
indemnifying party shall not relieve the indemnifying party of its obligations
under this Section 8.9 unless such failure to notify materially prejudices the
indemnifying party's defense. In case any such action shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party, and, after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party shall not be liable to such
indemnified party under this subsection for any legal expenses of other counsel
or any other expenses, in each case subsequently incurred by such indemnified
party, in connection with the defense thereof other than reasonable costs of
investigation. Notwithstanding the foregoing, the indemnifying party shall pay
as incurred the fees and expenses of separate counsel retained by the
indemnified party in the event (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees and expenses of more than one
separate firm for all such indemnified parties. In addition, an indemnifying
party shall not be required to indemnify, reimburse, or otherwise make any
contribution to the amount paid or payable by the indemnified party for any
losses, claims, damages, expenses or liabilities incurred by the indemnified
party in settlement of any actions, proceedings or investigations otherwise
covered hereunder, unless such settlement has been previously approved by the
indemnifying party, which approval shall not be unreasonably withheld.
(d) If the indemnification provided for in this Section 8.9 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8.9(a) or (b) hereof in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such
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indemnified party as a result of such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) in such proportion as is appropriate
to reflect not only (i) the relative benefits received by the Purchaser on the
one hand and the underwriter on the other from the offering of the Shares or the
Registered Securities but also (ii) the relative fault of the Company, the
Purchaser and the underwriter in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Purchaser on the one hand
and the underwriter on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses) received by
the Purchaser bear to the total underwriting discounts and commissions received
by the underwriter, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact related to
information supplied by the Company, the Purchaser or the underwriter and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
(e) The Company and the Purchaser agree that it would not be just and
equitable if contributions pursuant to this Section 8.9 were determined by pro
rata allocation (even if several underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 8.9. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
referred to above in this Section 8.9 shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 8.9, no underwriter, if any, will be required to
contribute any amount in excess of the amount agreed to between the Company and
the underwriter at the time of such offering. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. Any underwriters' obligations to contribute will
be several in proportion to their respective underwriting obligations and not
joint.
(f) In any proceeding relating to a Registration Statement, a
Prospectus or any supplement or amendment thereto, each party against whom
contribution may be sought under this Section 8.9 hereby consents to the
jurisdiction of any court having jurisdiction over any other contributing party,
agrees that process issuing from such court may be served upon him or it by any
other contributing party and consents to the service of such process and agrees
that any other contributing party may join him or it as an additional defendant
in any such proceeding in which such other contributing party is a party.
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8.10. Transferees.
The right to sell Shares and Registered Securities pursuant to a
Registration Statement described herein will automatically be assigned to each
transferee of Shares or Registered Securities, other than any purchaser of
Shares or Registered Securities sold under a Registration Statement. In the
event that it is necessary, in order to permit a Purchaser to sell Shares or
Registered Securities pursuant to a Registration Statement, to amend or
supplement the Registration Statement to name such transferee, such transferee
shall, upon written notice to the Company, be entitled to have the Company make
such amendment or supplement as soon as reasonably practicable.
SECTION 9. CONDITIONS TO PURCHASER'S OBLIGATIONS
The Purchaser's obligation to purchase Shares hereunder is subject to
satisfaction of the following conditions at the Closing (any of which may be
waived by the Purchaser)
9.1. Series B Certificate of Designations.
The Series B Certificate of Designations shall have been filed with
the Delaware Secretary of State in substantially the form attached hereto as
Exhibit A.
9.2. Certificates for Shares.
The Purchaser shall concurrently receive the certificates for Shares
contemplated by Section 2(b) hereof.
9.3. Accuracy of Representations and Warranties.
The representations and warranties of the Company in the Stock
Purchase Agreements or in any certificate or document delivered pursuant hereto
or thereto shall be correct and complete on and as of the Closing Date with the
same effect as though made on and as of the Closing Date (after giving effect to
transactions contemplated by this Agreement).
9.4. Compliance with Agreements.
The Company shall have performed and complied with all agreements,
covenants and conditions contained in the Stock Purchase Agreements and any
other document contemplated hereby or thereby which are required to be performed
or complied with by the Company on or before the Closing Date.
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9.5. Officers' Certificates.
The Purchaser shall have received a certificate dated the Closing Date
and signed by the President and by the Secretary of the Company, to the effect
that the conditions of this Section 9 have been satisfied.
9.6. Proceedings.
All corporate and other proceedings in connection with the
transactions contemplated by the Stock Purchase Agreements, and all documents
incident thereto, shall be in form and substance satisfactory to the Purchaser
and its counsel, and the Purchaser shall have received all such originals or
certified or other copies of such documents as the Purchaser or its counsel may
reasonably request.
9.7. Legality; Governmental and Other Authorization.
The purchase of and payment for the Shares shall not be prohibited by
any law or governmental order, rule, ruling, regulation, release, interpretation
or opinion applicable to the Purchaser and shall not subject the Purchaser to
any penalty, tax, liability or other onerous condition. Any necessary consents,
approvals, licenses, permits, orders and authorizations of, and any filings,
registrations or qualifications with, any governmental or administrative agency
or other person with respect to the transactions contemplated by the Stock
Purchase Agreements shall have been obtained or made and shall be in full force
and effect. The Company shall have delivered to the Purchaser upon its
reasonable request factual certificates or other evidence, in form and substance
satisfactory to the Purchaser and its counsel, setting forth what is required to
enable the Purchaser to establish compliance with this condition.
9.8. Time of Purchase.
The Closing shall not be later than 5:00 P.M., New York City time, on
March 31, 1997.
9.9. No Change in Law, etc.
No legislation, order, rule, ruling or regulation shall have been
proposed, enacted or made by or on behalf of any governmental body, department
or agency, and no legislation shall have been introduced in either House of
Congress, and no investigation by any governmental authority shall have been
commenced or threatened, and no action, suit or proceeding shall have been
commenced before, and no decision shall have been rendered by, any court, other
governmental
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body or arbitrator, which, in any such case, in the Purchaser's reasonable
judgment could adversely affect, restrain, prevent or change the transactions
contemplated by the Stock Purchase Agreements (including without limitation the
issuance of the Shares hereunder and thereunder and the issuance of the
Conversion Shares under the Series B Certificate of Designations) or materially
and adversely affect the assets, properties, liabilities, business, affairs,
results of operations, condition (financial or otherwise) or prospects of the
Company.
9.10. Opinions of Counsel.
The Purchaser shall have received an opinion dated the Closing Date
and addressed to the Purchaser of Andrews & Kurth L.L.P., counsel for the
Company, which opinion shall be in form and substance reasonably satisfactory to
the Purchaser.
9.11. Other Documents and Opinions.
The Purchaser shall have received such other documents and opinions,
in form and substance satisfactory to the Purchaser and its counsel, relating to
matters incident to the transactions contemplated hereby as the Purchaser may
reasonably request.
9.12 Receipt of Consent and Exchange Agreements.
The Company shall have received a sufficient number of Consent and
Exchange Agreements executed by the holders of Series A Preferred Stock in order
to have the necessary authorization for the parity treatment of the Series B
Preferred Stock and the modification to the registration rights as contemplated
therein.
SECTION 10. CONDITIONS TO COMPANY'S OBLIGATIONS
The Company's obligation to sell and issue the Shares at the Closing is, at
the option of the Company, subject to the fulfillment or waiver of the following
conditions:
10.1. Representations and Warranties Correct.
The representations and warranties made by the Purchaser in Section
5 hereof shall be true and correct in all material respects when made, and shall
be true and correct in all material respects on the Closing Date with the same
force and effect as if they had been made on and as of said date.
10.2. Covenants.
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All covenants, agreements and conditions contained in this Agreement
to be performed by the Purchaser on or prior to the Closing Date shall have been
performed or complied with in all material respects.
10.3. Blue Sky.
The Company shall have obtained all necessary blue sky law permits
and qualifications, or secured exemptions therefrom, required by any state for
the offer and sale of the Shares. No stop order or other order enjoining the
sale of the Shares shall have been issued and no proceedings for such purpose
shall be pending or, to the knowledge of the Company, threatened.
SECTION 11. BROKERS
Except for certain fees payable to the Agent (all of which fees will be
paid by the Company), the Company represents and warrants to the Purchaser that
there is no liability for (and the Company will pay and indemnify the Purchaser
against) any fees or expenses (or claims therefor) of any investment banker,
finder or broker retained by the Company or its Affiliates (or that claims it
was retained by the Company or its Affiliates) in connection with any Stock
Purchase Agreement or any of the transactions contemplated hereby or thereby.
The Company will indemnify the Purchaser against all such fees or expenses
payable to the enumerated persons in the preceding sentence and against any
other such fees, expenses or claims of any person, unless such person was
engaged by the Purchaser in connection with this Agreement or any of the
transactions contemplated hereby.
SECTION 12. BREACH OF REPRESENTATIONS, WARRANTIES AND COVENANTS
(a) The representations and warranties (as of the date hereof and as
of the Closing Date), covenants and agreements of the Company and the Purchaser
contained in this Agreement or in any document or certificate delivered pursuant
hereto or in connection herewith shall survive, and shall continue in effect
following, the execution and delivery of the Stock Purchase Agreements, the
closings hereunder and thereunder, any investigation at any time made by the
Purchaser or on its behalf or by any other Person, the issuance, sale and
delivery of the Shares, any disposition thereof and any payment, conversion or
cancellation of the Shares provided, that Section 7 (other than Sections 7.1,
7.2, 7.4, 7.5, 7.7, 7.8, 7.9, 7.12, 7.13, 7.16, 7.17, 7.18, 7.20 and 7.21) shall
terminate when no Shares are outstanding. All statements contained in any
certificate delivered to the Purchaser by or on behalf of the Company pursuant
hereto shall constitute representations and warranties by the Company hereunder.
(b) The Company agrees to indemnify and hold the Purchaser harmless
from and against and will pay to the Purchaser the full amount of any loss,
damage, liability or expense
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(including amounts paid in settlement and attorneys' fees and expenses) to the
Purchaser resulting either directly or indirectly from any breach of the
representations, warranties, covenants or agreements of the Company contained in
any Stock Purchase Agreement, or in any certificate delivered to the Purchaser
pursuant hereto or in connection herewith.
SECTION 13. SPECIFIC PERFORMANCE
The parties agree that irreparable damage will result in the event that
this Agreement is not specifically enforced, and the parties agree that any
damages available at law for a breach of this Agreement would not be an adequate
remedy. Therefore, the provisions hereof and the obligations of the parties
hereunder shall be enforceable in a court of equity, or other tribunal with
jurisdiction, by a decree of specific performance, and appropriate injunctive
relief may be applied for and granted in connection therewith. Such remedies
and all other remedies provided for in this Agreement shall, however, be
cumulative and not exclusive and shall be in addition to any other remedies
which a party may have under this Agreement or otherwise.
SECTION 14. EXPENSES
(a) Whether or not the transactions herein contemplated are
consummated, the Company will pay (i) the costs and expenses of the preparation
and production of the Stock Purchase Agreements and the Series B Certificate of
Designations and the issuance of the Shares and the Conversion Shares and the
furnishing of all opinions by counsel for the Company, (ii) the fees and
expenses of Piper & Marbury L.L.P. in connection with the Stock Purchase
Agreements and the Series B Certificate of Designations and the transactions
contemplated hereby and thereby (whether or not a closing occurs hereunder and
if a closing occurs the Company will make such payment on the Closing Date),
(iii) the reasonable fees and expenses of counsel to the Eligible Holders in
connection with any amendments to or modifications or waivers of any provisions
of the Stock Purchase Agreements or the Series B Certificate of Designations or
in connection with any other agreements between the Purchasers and the Company
after the date hereof, any of which are requested by the Company, (iv) the fees
and expenses of any investment banker, broker or finder retained by the Company
or its Affiliates (or that claims it was retained by the Company or its
Affiliates) and involved with the Stock Purchase Agreements or the Series B
Certificate of Designations or any of the transactions contemplated hereby or
thereby, and (v) the fees and expenses (including reasonable attorneys' fees and
expenses) of any holder of Shares or Conversion Shares in enforcing its rights
against the Company if the Company materially defaults in its obligations
hereunder or under the Series B Certificate of Designations. The obligations of
the Company under this Section 14 shall survive the Closing hereunder and any
termination of the Stock Purchase Agreements.
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(b) In addition to all other sums due hereunder or provided for in
this Agreement, the Company shall pay to the Purchaser or its agents,
respectively, an amount sufficient to indemnify such persons (net of any taxes
on any indemnity payments) against all reasonable costs and expenses (including
reasonable attorneys' fees and expenses and reasonable costs of investigation)
and damages and liabilities incurred by the Purchaser or its agents pursuant to
any investigation or proceeding against any or all of the Company, the
Purchasers, or their agents, arising out of or in connection with the Stock
Purchase Agreements, the Shares or the Conversion Shares (or any transaction
contemplated hereby or thereby or any other document or instrument executed
herewith or therewith or pursuant hereto or thereto), whether or not the
transactions contemplated by this Agreement are consummated, which investigation
or proceeding requires the participation of the Purchaser or its agents or is
commenced or filed against the Purchaser or its agents because of the Stock
Purchase Agreements, the Shares or the Conversion Shares or any of the
transactions contemplated hereby or thereby (or any other document or instrument
executed herewith or therewith or pursuant hereto or thereto), other than any
investigation or proceeding in which it is finally determined that there was
gross negligence or willful misconduct on the part of the Purchaser or its
agents which was not taken by them in reliance upon any of the Company's
representations, warranties, covenants or agreements in the Stock Purchase
Agreements or in any other documents or instruments contemplated hereby or
thereby or executed herewith or therewith or pursuant hereto or thereto, except
to the extent that any costs, expenses, damages or liabilities incurred by the
Purchaser is the direct result of its breach of any of its representations,
warranties, covenants or agreements in this Stock Purchase Agreement or in any
other documents or instruments contemplated hereby or thereby or executed in
connection herewith or therewith or pursuant hereto or thereto. The Company
shall assume the defense, and shall have its counsel represent the Purchaser and
such agents, in connection with investigating, defending or preparing to defend
any such action, suit, claim or proceeding (including any inquiry or
investigation); provided, however, that the Purchaser, or any such agent, shall
have the right (without releasing the Company from any of its obligations
hereunder) to employ its own counsel and either to direct its own defense or to
participate in the Company's defense, but the fees and expenses of such counsel
shall be at the expense of such person unless (i) the employment of such counsel
shall have been authorized in writing by the Company in connection with such
defense or (ii) the Company shall not have provided its counsel to take charge
of such defense or (iii) the Purchaser, or such agent of the Purchaser, shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to the Company, then
in any of such events referred to in clauses (i), (ii) or (iii) such reasonable
counsel fees and expenses (but only for one counsel for the Purchasers and their
agents) shall be borne by the Company. Any settlement of any such action, suit,
claim or proceeding shall require the consent of both the Company and such
indemnified person (neither of which shall unreasonably withhold its consent).
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(c) The Company agrees to pay, or to cause to be paid, all
documentary, stamp and other similar taxes levied under the laws of the United
States of America or any state or local taxing authority thereof or therein in
connection with the issuance and sale of the Shares and the execution and
delivery of the Stock Purchase Agreements and any other documents or instruments
contemplated hereby or thereby and any modification of the Series B Certificate
of Designations or the Stock Purchase Agreements or any such other documents or
instruments and will hold the Purchaser harmless without limitation as to time
against any and all liabilities with respect to all such taxes.
(d) The obligations of the Company under this Section 14 shall survive
the Closing hereunder and any termination of the Stock Purchase Agreements.
SECTION 15. HOME OFFICE PAYMENTS
As long as the Purchaser or any institutional holder which is a direct or
indirect transferee (as a result of one or more transfers) from the Purchaser
shall be the holder of record of any Shares, the Company will make all
dividends, redemption payments, repurchase payments, liquidation payments and
other distributions by wire transfer to the Purchaser's or such other holder's
(or its nominee's) account at any bank or trust company in the United States of
America, notwithstanding any contrary provision herein or in the Company's
certificate of incorporation with respect to the place of payment. The
Purchaser has provided an address on Schedule I hereto for payments by wire
transfer, and such address may be changed for the Purchaser or any subsequent
holder by notice to the Company. All such payments shall be made in U.S.
dollars and in federal or other immediately available funds.
SECTION 16. AMENDMENTS AND WAIVERS
(a) The terms and provisions of this Agreement may be amended, waived,
modified or terminated only with the written consent of the Majority
Shareholders; provided, however, that no such amendment, waiver, modification or
termination shall (i) change the provisions of Section 8 hereof in any material
respect, without the consent of the holders of all Shares or Conversion Shares
affected thereby or (ii) change the definition of Majority Shareholders or this
Section 16(a) without the written consent of the holders of all the Shares and
Conversion Shares then outstanding; and provided further that no such amendment,
waiver, modification or termination shall be effective with respect to a term or
provision of this Agreement unless it is also effective with respect to the
corresponding term or provision, if any, of each other Stock Purchase Agreement
and each Stock Exchange Agreement. The Purchaser acknowledges that by operation
hereof, the Majority Shareholders (which may not include the Purchaser) will
have the right and power to diminish or eliminate certain rights of the
Purchaser under this Agreement.
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<PAGE>
(b) The Company agrees that all holders of Shares and Conversion
Shares shall be notified by the Company in advance of any proposed amendment,
waiver, modification or termination, but failure to give such notice shall not
in any way affect the validity of any such amendment, waiver, modification or
termination. In addition, promptly after obtaining the written consent of the
holders as herein provided, the Company shall transmit a copy of any amendment,
waiver, modification or termination which has been adopted to all holders of
Shares and Conversion Shares then outstanding, but failure to transmit copies
shall not in any way affect the validity of any such amendment, waiver,
modification or termination.
SECTION 17. EXCHANGE OF SHARES; CANCELLATION OF SURRENDERED SHARES;
REPLACEMENT
(a) Subject to Section 6 hereof, at any time at the request of any
holder of Shares to the Company at its address provided under Section 18 hereof,
the Company at its expense (except for any transfer tax arising out of the
exchange) will issue and deliver to or upon the order of the holder in exchange
therefor a new certificate or certificates therefor in such amount or amounts as
such holder may request in the aggregate representing the number of Shares
represented by such surrendered certificates, and registered in the name of such
holder or otherwise as such holder may direct.
(b) Any Share certificate which is converted into Conversion Shares in
whole or in part shall be canceled by the Company, and no new Share certificates
shall be issued in lieu of any Shares which have been converted into Conversion
Shares. The Company shall issue a new certificate with respect to any Shares
which were not converted into Conversion Shares and were represented by a
certificate which was converted in part.
(c) Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction or mutilation of any Share certificate and, in the case of
any such loss, theft or destruction, upon delivery of an indemnity agreement
reasonably satisfactory to the Company (unsecured in the case of an
institutional holder), or in the case of any such mutilation, upon surrender of
such Share certificate (which surrendered Share certificate shall be canceled by
the Company), the Company will issue a new Share certificate, of like tenor in
lieu of such lost, stolen, destroyed or mutilated Share certificate as if the
lost, stolen, destroyed or mutilated Share certificate were then surrendered for
exchange.
SECTION 18. NOTICES
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All notices, requests, demands, consents and other communications hereunder
shall be in writing and shall be delivered by hand or shall be sent by telex or
telecopy (confirmed by registered, certified or overnight mail or courier,
postage and delivery charges prepaid), if to the Company at the address
indicated below, or if to the Purchaser at the address indicated on Schedule I
hereto, or at such other address as a party may from time to time designate as
its address in writing to the other party to this Agreement. Whenever any
notice is required to be given hereunder, such notice shall be deemed given and
such requirement satisfied only when such notice is delivered or, if sent by
telex or telecopier, when received.
(a) If to the Company:
Energy BioSystems Corporation
4200 Research Forest Drive
The Woodlands, Texas 77381
Attn: Vice President of Finance
With a copy to:
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002
Attn: William N. Finnegan, IV
(b) If to the Purchaser, at the address
of the Purchaser set forth on Schedule I.
SECTION 19. MISCELLANEOUS
(a) The Stock Purchase Agreements (including all schedules and
exhibits thereto) and, upon the closing hereunder, the Series B Certificate of
Designations, together with any further agreements entered into by the Purchaser
and the Company at the closing hereunder, contain the entire agreement between
the Purchaser and the Company, and supersede any prior oral or written
agreements, commitments, terms or understandings regarding the subject matter
hereof.
(b) Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. To the extent permitted by applicable law, the parties
hereby waive any provision of law which may render any provision hereof
prohibited or unenforceable in any respect.
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<PAGE>
(c) If the Company fails to pay any amount required to be paid to a
holder of Shares or Conversion Shares or to a party under this Agreement (not
including dividends not declared by the Board of Directors), within thirty (30)
days after notice from such holder or such party demanding such payment
(together with reasonably detailed supporting information), then the Company
agrees to pay such holder or such party interest on any such overdue amount at a
rate of 10% per annum from the date of such notice from such holder or such
party until such overdue amount is paid in full.
(d) Unless otherwise expressly provided herein, any provision of this
Agreement relating to the consent, determination, decision or waiver of a holder
or holders of Shares or Conversion Shares means such holder's consent,
determination, decision or waiver in such holder's sole discretion.
(e) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns, whether so
expressed or not; provided, that the Company may not assign any of its rights,
duties or obligations under this Agreement, except in connection with a
transaction permitted by Section 7.11 or with the Purchaser's written consent.
(f) In addition to any assignment by operation of law, the Purchaser
may assign, in whole or in part, any or all of its rights (and/or obligations)
under this Agreement to any permitted transferee of any or all of its Shares or
Conversion Shares, except as provided in Section 8.10, and (unless such
assignment expressly provides otherwise) any such assignment shall not diminish
the rights the Purchaser would otherwise have under this Agreement or with
respect to any remaining Shares or Conversion Shares held by the Purchaser.
(g) No course of dealing and no delay on the part of any party hereto
in exercising any right, power, or remedy conferred by this Agreement shall
operate as a waiver thereof or otherwise prejudice such party's rights, powers
and remedies. No single or partial exercise of any rights, powers or remedies
conferred by this Agreement shall preclude any other or further exercise thereof
or the exercise of any other right, power or remedy.
(h) The headings and captions in this Agreement are for convenience of
reference only and shall not define, limit or otherwise affect any of the terms
or provisions hereof.
(i) This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Delaware (other than any conflict of laws rule
which might result in the application of the laws of any other jurisdiction).
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(j) This Agreement may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall be an original,
but all such counterparts shall together constitute one and the same instrument,
and all signatures need not appear on any one counterpart.
(k) WAIVER OF JURY TRIAL. THE COMPANY AND THE PURCHASER HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF THIS AGREEMENT, THE SERIES B CERTIFICATE OF DESIGNATIONS,
THE SHARES OR THE CONVERSION SHARES, OR ANY DEALINGS BETWEEN THEM RELATING TO
THE SUBJECT MATTER OF THIS TRANSACTION. THE SCOPE OF THIS WAIVER IS INTENDED TO
BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND
THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING WITHOUT
LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW AND STATUTORY CLAIMS. THE COMPANY AND THE PURCHASER FURTHER WARRANT
AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND
THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT
MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO
ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO (OR
ASSIGNMENTS OF) THIS AGREEMENT, THE CERTIFICATE OF DESIGNATIONS, THE SHARES OR
THE CONVERSION SHARES. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED
AS A WRITTEN CONSENT TO A TRIAL (WITHOUT A JURY) BY THE COURT.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
ENERGY BIOSYSTEMS CORPORATION
By /s/ John H. Webb
----------------
Name: John H. Webb
Title: President
Accepted and Agreed to as of
the date first above written by
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<PAGE>
the undersigned Purchaser:
(See Omnibus Signature Page)
By ____________________________
Name:
Title:
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<PAGE>
SCHEDULE I
TO THE STOCK
PURCHASE AGREEMENT
Purchase
Name of Purchaser Number of Shares Price
----------------- ---------------- -----
(a) address for communications:
Attn:
(b) address for
payments by
wire
transfer:
Attn:
(providing sufficient
information with such
wire transfer to identify
the source and application
of such funds)
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<PAGE>
SCHEDULE II TO
THE STOCK
PURCHASE AGREEMENT
Summary of Registration Rights
1. Piggyback registration rights granted by the Company pursuant to that certain
First Amendment to License and Technology Assistance Agreement, dated June 25,
1992, between the Company and Institute of Gas Technology.
2. Demand and piggyback registration rights granted by the Company pursuant to
that certain Registration Agreement, dated January 30, 1992, by and among the
Company, The Travelers Indemnity Company, The Travelers Indemnity Company of
Rhode Island, The Phoenix Insurance Company and Gryphon Ventures II, Limited
Partnership.
3. Demand and piggyback registration rights granted by the Company pursuant to
that certain Registration Agreement, dated April 29, 1991, by and between the
Company and Gryphon Ventures II, Limited Partnership.
4. Registration rights granted by the Company to the holders of the Series A
Preferred Stock pursuant to those certain Stock Purchase Agreements dated
October 27, 1994.
5. Registration rights granted by the Company to the parties exchanging shares
of Series A Preferred Stock for shares of Series B Preferred Stock pursuant to
those certain Stock Exchange Agreements dated February 21, 1997.
Indebtedness
------------
NONE.
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<PAGE>
Exhibit 4.3
SERIES B CONVERTIBLE PREFERRED STOCK
EXCHANGE AGREEMENT
between
ENERGY BIOSYSTEMS CORPORATION
and
THE EXCHANGING PARTY LISTED ON SCHEDULE I
Dated as of February 21, 1997
<PAGE>
STOCK EXCHANGE AGREEMENT
STOCK EXCHANGE AGREEMENT dated as of February 21, 1997 by and between
Energy BioSystems Corporation, a Delaware corporation (the "Company"), and the
Exchanging Party listed on Schedule I of this Agreement (the "Exchanging
Party").
W I T N E S S E T H :
WHEREAS, the Company has offered to the holders of shares of Series A
Preferred Stock to exchange (the "Exchange Offer") their shares of Series A
Preferred Stock for shares of the authorized but unissued Series B Convertible
Preferred Stock, par value $0.01 per share, of the Company (the "Series B
Preferred Stock"), and the Exchanging Party desires to exchange its shares of
Series A Preferred Stock for shares of Series B Preferred Stock upon the terms
and provisions hereinafter set forth.
WHEREAS, concurrently with this Exchange Offer, the Company will be selling
up to 280,000 shares of the Company's authorized but unissued Series B Preferred
Stock to purchasers who will be executing Stock Purchase Agreements
substantially similar to this Agreement, containing similar representations and
warranties by the Company, covenants of the Company, registration rights,
conditions and other terms.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
SECTION 1. EXCHANGE OF THE PREFERRED SHARES
(a) The Company agrees to issue to the Exchanging Party and, subject to
the terms and conditions hereof and in reliance upon the representations and
warranties of the Company contained herein or made pursuant hereto, the
Exchanging Party agrees to exchange all of its shares of Series A Preferred
Stock which are set forth opposite the Exchanging Party's name on Schedule I
hereto (the "Exchanged Shares") for the same number of shares of the Company's
Series B Preferred Stock on the Closing Date specified in Section 2 hereof. The
exchange of Exchanged Shares for Shares shall be on a one-for-one basis. The
shares of Series B Preferred Stock being acquired under this Agreement and by
the other Exchanging Parties under the other Stock Exchange Agreements (as
hereinafter defined) are collectively herein referred to as the "Shares",
containing rights and privileges as more fully set forth in the Certificate of
Designations for the Series B Preferred Stock of the Board of Directors of the
Company which shall be substantially in the form attached hereto as Exhibit A
(the "Series B Certificate of Designations").
(b) The Shares are being issued to the Exchanging Party listed on Schedule
I hereto and to other Exchanging Parties under substantially identical
agreements (collectively, the "Exchanging Parties") pursuant to this Agreement
and other substantially identical agreements dated as of the date hereof (all
such agreements collectively, as from time to time assigned, supplemented or
amended
<PAGE>
or as the terms thereof may be waived, the "Stock Exchange Agreements").
All Stock Exchange Agreements shall be dated the date hereof and shall be
identical except as to the identities of the respective Exchanging Parties. The
exchange of Exchanged Shares for Shares by each Exchanging Party under each
Stock Exchange Agreement is to be a separate exchange, and no Exchanging Party
shall have any liability under any Stock Exchange Agreement other than the Stock
Exchange Agreement to which it is a party.
(c) The Company will not be receiving any proceeds from the exchange of
the Exchanged Shares for the Shares.
SECTION 2. THE CLOSING
(a) Subject to the terms and conditions hereof, the closing of the
exchange of the Exchanged Shares for Shares by the Exchanging Party (the
"Closing") will take place at the offices of Andrews & Kurth L.L.P., 4200 Texas
Commerce Tower, Houston, Texas at 10:00 A.M., Houston, Texas time, on February
26, 1997, or such other location, time and date as shall be determined by the
Company and the Agent. The Exchanging Party acknowledges that the Company will
conduct an initial closing of the Exchange Offer (the "Initial Closing")
concurrently with a closing of the sale of shares of Series B Preferred Stock
under one or more Stock Purchase Agreements, and may subsequently conduct an
additional closing or closings (a "Subsequent Closing") of the Exchange Offer
from time to time thereafter. The Closing shall occur on the date of the
Initial closing if the conditions to the Closing have been satisfied on or
before the Business Day preceding the Initial Closing and on the date of the
Subsequent Closing that follows the satisfaction of such conditions if the
Closing does not occur on the date of the Initial Closing. The Subsequent
Closing shall take place no later than March 10, 1997 unless such date is
extended by the Company in its sole discretion, to a date no later than March
31, 1997. The time and date of the Closing are herein referred to as the
"Closing Date."
(b) Subject to the terms and conditions hereof, on the Closing Date (i)
the Exchanging Party will deliver to the Company the certificate or certificates
representing the Exchanged Shares, duly endorsed for transfer to the Company and
(ii) the Company will deliver to the Exchanging Party a certificate registered
in the Exchanging Party's name (or the name of its nominee, if any, as specified
on Schedule I hereto) evidencing the same number of Shares.
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<PAGE>
SECTION 3. DEFINITIONS
(a) For purposes of this Agreement, the following definitions shall apply
(such definitions to be equally applicable to both the singular and plural forms
of the terms defined):
"Affiliate", when used with respect to any Person, means (i) if such Person
is a corporation, any executive officer or director thereof (other than a
director nominated pursuant to the Series B Certificate of Designations) and any
Person which is, directly or indirectly, the beneficial owner (by itself or as
part of any group) of more than five percent (5%) of any class of any equity
security (within the meaning of the Securities Exchange Act) thereof, and, if
such beneficial owner is a partnership, any general partner thereof, or if such
beneficial owner is a corporation, any Person controlling, controlled by or
under common control with such beneficial owner, or any executive officer or
director of such beneficial owner or of any corporation occupying any such
control relationship, (ii) if such Person is a partnership, any general partner
thereof, and (iii) any other Person which, directly or indirectly, controls or
is controlled by or is under common control with such Person. For purposes of
this definition, "control" (including the correlative terms "controlling",
"controlled by" and "under common control with"), with respect to any Person,
shall mean possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such Person, whether through the
ownership of voting securities or by contract or otherwise. Except as provided
above, the holding of Shares (or Conversion Shares obtained upon conversion of
Shares), and the rights under any Stock Exchange Agreement or under the Series B
Certificate of Designations (or the exercise of any such rights, including,
without limitation, nominating a director to the Board of the Company or sending
an observer to Board meetings of the Company or any of the Subsidiaries), shall
not, by themselves, cause an Exchanging Party to be deemed to be an "Affiliate"
of the Company or of any Subsidiary.
"Agreement" means this Stock Exchange Agreement (together with exhibits and
schedules) as from time to time assigned, supplemented or amended or as the
terms hereof may be waived.
"Board" or "Board of Directors" means with respect to any Person which is a
corporation, a business trust or other entity, the board of directors or other
group, however designated, which is charged with legal responsibility for the
management of such Person, or any committee of such board of directors or group,
however designated, which is authorized to exercise the power of such board or
group in respect of the matter in question.
"Business Day" means any day other than a Saturday, Sunday or a day on
which banking institutions in the State of New York or the State of Texas are
authorized or obligated by law or executive order to close.
"Capitalized Leases" means any lease to which the Company or a Subsidiary
is a party as lessee, or by which it is bound, under which it leases any
property (real, personal or mixed) from any lessor other than the Company or a
Subsidiary, and which is required to be capitalized in accordance with generally
accepted accounting principles consistently applied.
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<PAGE>
"Closing" has the meaning set forth in Section 2(a) hereof.
"Closing Date" has the meaning set forth in Section 2(a) hereof.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and the regulations and interpretations thereunder.
"Commission" means the Securities and Exchange Commission and any other
similar or successor agency of the federal government administering the
Securities Act or the Securities Exchange Act.
"Common Stock" of the Company or of a Subsidiary (as the case may be) shall
mean the Company's or a Subsidiary's (as the case may be) present authorized
common stock and any stock into which such Common Stock may hereafter be changed
or for which such Common Stock may be exchanged after giving effect to the terms
of such change or exchange (by way of reorganization, recapitalization, merger,
consolidation or otherwise) and shall also include any common stock of the
Company or of a Subsidiary (as the case may be) hereafter authorized and any
capital stock of the Company or of a Subsidiary (as the case may be) of any
other class hereafter authorized which is not preferred as to dividends or
assets over any other class of capital stock of the Company or of a Subsidiary
(as the case may be) or which has ordinary voting power for the election of
directors of the Company or of a Subsidiary (as the case may be); provided that
preferred stock of the Company or a Subsidiary with the right to vote together
with the common stock of such entity on various matters shall not be treated as
"Common Stock" hereunder.
"Company" means Energy BioSystems Corporation, a Delaware corporation, its
successors and assigns.
"Consent and Exchange Agreement" is the agreement by which holders of
Series A Preferred Stock elect to exchange shares of Series A Preferred Stock
for shares of Series B Preferred Stock on a one-for-one basis.
"Conversion Price" has the meaning specified in Section 2 of the Series B
Certificate of Designations.
"Conversion Share" or "Conversion Shares" means the shares of the Company's
Common Stock, par value $0.01 per share, obtained or obtainable upon conversion
of the Shares and shall also include any capital stock or other securities into
which Conversion Shares are changed and any capital stock or other securities
resulting from or comprising a reclassification, combination or subdivision of,
or a stock dividend on, any Conversion Shares. In the event that any Conversion
Shares are sold either in a public offering pursuant to a registration statement
under Section 6 of the Securities Act or pursuant to a Rule 144 Transaction,
then the transferees of such Conversion Shares shall not be entitled to any
benefits under this Agreement with respect to such Conversion Shares and such
Conversion Shares shall no longer be considered to be "Conversion Shares" for
purposes
-4-
<PAGE>
of Section 8 hereof, for purposes of the definition of Majority Shareholders or
for purposes of any consent or waiver provision or any other provision of this
Agreement.
"Eligible Holder" means any holder (or group of affiliated holders) which
is an Exchanging Party (or transferee of an Exchanging Party approved by the
Company, such approval not to be unreasonably withheld) or a purchaser of Series
B Preferred Stock (or transferee of such purchaser approved by the Company, such
approval not to be unreasonably withheld) and which holds 100,000 or more
Shares, or Conversion Shares issued on conversion of 100,000 or more Shares, or
an equivalent combination of the foregoing.
"Environmental Lien" has the meaning set forth in Section 7.7 hereof.
"ERISA" means, collectively, the Employee Retirement Income Security Act of
1974, as amended, and the regulations and interpretations thereunder.
"Exchanged Shares" has the meaning set forth in Section 1(a) hereof.
"Exchanging Party" means the person who accepts and agrees to the terms
hereof as indicated by such person's signature (as "the undersigned Exchanging
Party") on the execution page of this Agreement, together with such person's
successors and assigns.
"Exchanging Parties" has the meaning set forth in Section l(b) hereof,
together with their respective successors and assigns.
"Guaranty" means (i) any guaranty or endorsement of the payment or
performance of, or any contingent obligation in respect of, any indebtedness or
other obligation of any other Person, (ii) any other arrangement whereby credit
is extended to one obligor (directly or indirectly) on the basis of any promise
or undertaking of another Person (a) to pay the indebtedness of such obligor,
(b) to purchase an obligation owed by such obligor, (c) to purchase or lease
assets (or to provide funds, goods or services) under circumstances that would
enable such obligor to discharge one or more of its obligations or (d) to
maintain the capital, working capital, solvency or general financial condition
of such obligor, in each case whether or not such arrangement is disclosed in
the balance sheet of such other Person or is referred to in a footnote thereto
and (iii) any liability as a general partner of a partnership in respect of
indebtedness or other obligations of such partnership; provided, however, that
the term "Guaranty" shall not include (1) endorsements for collection or deposit
in the ordinary course of business or (2) obligations of the Company or its
Subsidiaries which would constitute Guaranties solely by virtue of the
continuing liability of a Person which has sold assets subject to liabilities
for the liabilities which were assumed by the Person acquiring the assets,
unless such liability is required to be carried on the consolidated balance
sheet of the Company. The amount of any Guaranty and the amount of indebtedness
resulting from such Guaranty shall be the maximum amount of the guarantor's
potential obligation in respect of such Guaranty.
"Hazardous Materials" means any pollutant, toxic substance, petroleum or
petroleum by-products, hazardous waste, or any material, compound, element or
chemical identified as a pollutant,
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<PAGE>
toxic substance or hazardous waste or determined to be hazardous or toxic by a
governmental agency under the Comprehensive Environmental Response Compensation
and Liability Act (CERCLA), 42 U.S.C. 9601 et seq., the Resource Conservation
and Recovery Act (RCRA), 42 U.S.C. 6901 et seq., the Toxic Substances Control
Act (TSCA), 15 U.S.C. 2601 et seq., the Water Pollution Control Act (CWA), 33
U.S.C. 1251 et seq., the Clean Air Act (CAA), 42 U.S.C. 7501 et seq., the
Occupational Safety and Health Act (OSHA), 29 U.S.C. 655 and any other federal,
state, local or municipal laws, statutes, ordinances, codes, rules or
regulations imposing liability or establishing standards of conduct for
environmental protection. The term "Hazardous Materials" shall also include: raw
materials used or stored by the Company that contain Hazardous Materials;
building components (including but not limited to asbestos-containing materials)
that contain Hazardous Materials and manufactured products containing Hazardous
Materials.
"Indebtedness" of any Person means, without duplication, as of any date as
of which the amount thereof is to be determined, (i) all obligations of such
Person to repay money borrowed (including, without limitation, all notes payable
and drafts accepted representing extensions of credit, all obligations under
letters of credit, all obligations evidenced by bonds, debentures, notes or
other similar instruments and all obligations upon which interest charges are
customarily paid), (ii) all Capitalized Leases in respect of which such Person
is liable as lessee or as the guarantor of the lessee, (iii) all monetary
obligations which are secured by any Lien existing on property owned by such
Person whether or not the obligations secured thereby have been incurred or
assumed by such Person, (iv) all conditional sales contracts and similar title
retention debt instruments under which such Person is obligated to make
payments, (v) all Guaranties by such Person and (vi) all contractual obligations
(whether absolute or contingent) of such Person to repurchase goods sold or
distributed. "Indebtedness" shall not include, however, Indebtedness of the
Company to any of its wholly-owned Subsidiaries or Indebtedness of any wholly-
owned Subsidiary to the Company or to another wholly-owned Subsidiary.
"Lien" means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), or preference, priority or
other security interest of any kind or nature whatsoever (including, without
limitation, any conditional sale or other title retention agreement, any
financing lease having substantially the same effect as any of the foregoing,
any assignment or other conveyance of any right to receive income and any
assignment of receivables with recourse against the assignor), any filing of a
financing statement as debtor under the Uniform Commercial Code or any similar
statute and any agreement to give or make any of the foregoing.
"Majority Shareholders" means the holder or holders, at the time, of at
least a majority of the Conversion Shares, including the Conversion Shares then
outstanding and the Conversion Shares then obtainable under outstanding Shares;
provided that such majority must in any event include each Eligible Holder.
"Material Adverse Effect" means any material and adverse effect on the
assets, properties, liabilities, business affairs, results of operations,
condition (financial or otherwise) or prospects of the Company.
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"Memorandum" means that certain Confidential Offering Memorandum dated
February 14, 1997 relating to the Shares.
"Outstanding" or "outstanding" means (a) when used with reference to the
Shares or the Conversion Shares as of a particular time, all Shares or
Conversion Shares theretofore duly issued except (i) Shares and Conversion
Shares theretofore reported as lost, stolen, mutilated or destroyed or
surrendered for transfer, exchange or replacement, in respect of which new or
replacement Shares or Conversion Shares have been issued by the Company, (ii)
Shares and Conversion Shares theretofore canceled by the Company and (iii)
Shares and Conversion Shares registered in the name of, as well as Shares and
Conversion Shares owned beneficially by, the Company, any Subsidiary or any of
their Affiliates and (b) when used with reference to the number of shares of
Common Stock of the Company as of a particular time, the then issued and
outstanding shares of Common Stock of the Company (not including treasury shares
or any other shares registered in the name of the Company, any Subsidiary or any
of their Affiliates), together with shares of Common Stock of the Company
issuable pursuant to any then outstanding warrants, options, convertible
securities or other rights to acquire shares of Common Stock of the Company.
For purposes of the preceding sentence, in no event shall "Affiliates" include
(x) the persons which are identified as "Exchanging Parties" on Schedule I
hereto or (y) any Affiliates of any such persons, except if such persons would
otherwise fall within the definition of "Affiliate" described above.
"Person" or "person" means an individual, corporation, partnership, firm,
association, joint venture, trust, unincorporated organization, government,
governmental body, agency, political subdivision or other entity.
"Preferred Stock" means any class of the capital stock of a corporation
(whether or not convertible into any other class of such capital stock) which
has any right, whether absolute or contingent, to receive dividends or other
distributions of the assets of such corporation (including, without limitation,
amounts payable in the event of the voluntary or involuntary liquidation,
dissolution or winding-up of such corporation), which right is superior to the
rights of another class of the capital stock of such corporation. "Preferred
Stock" includes without limitation the Series B Preferred Stock.
"Registered Securities" means the Conversion Shares, any Common Stock
issued in payment of dividends on, or in connection with the redemption or
repurchase of, the Shares and any Shares included herein pursuant to Section
8.1(g) hereof.
"Restricted Payment" means (i) every dividend or other distribution paid,
made or declared by the Company or any Subsidiary on or in respect of any class
of its capital stock (as defined below), and (ii) every payment in connection
with the redemption, purchase, retirement or other acquisition by or on behalf
of the Company or any Subsidiary of any shares of the Company's or a
Subsidiary's capital stock (as defined below), whether or not owned by the
Company or any Subsidiary; provided, however, that the restrictions of the
foregoing clauses (i) and (ii) shall not apply to (a) any dividend, distribution
or other payment on or in respect of capital stock of the
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Company to the extent payable in shares of Common Stock of the Company, (b) any
payments from the Company to a wholly-owned Subsidiary, from a Subsidiary to the
Company or from a Subsidiary to a wholly-owned Subsidiary, (c) any repurchase of
Common Stock under stock purchase or option agreements from employees, advisors,
consultants or directors of the Company or otherwise upon termination of such
relationship with the Company (provided, that the aggregate amount paid pursuant
to such repurchases after the Closing Date shall not exceed $300,000 without the
consent of the Majority Shareholders), (d) any payments, dividends,
distributions or other transfers or actions (I) on or with respect to the
Company's Series A Preferred Stock or the shares of Common Stock issuable upon
conversion thereof pursuant to the terms of the Stock Purchase Agreements or the
Certificate of Designations relating to the Series A Preferred Stock should any
such shares of Series A Preferred Stock be remaining after the exchange
contemplated by this Agreement or (II) on or with respect to the Shares or the
Conversion Shares pursuant to terms of the Stock Exchange Agreements, Stock
Purchase Agreements or the Series B Certificate of Designations and (e) any
payments or distributions in respect of the liquidation and dissolution, or
winding up of the business and affairs, of the Company. For purposes of this
definition, "capital stock" shall also include warrants and other rights and
options to acquire shares of capital stock (whether upon exercise, conversion,
exchange or otherwise).
"Rights Expiration Date" means, with respect to any Eligible Holder, the
earlier of (a) the date on which such Eligible Holder owns neither (i) 100,000
or more Shares nor (ii) Conversion Shares issued on conversion of a number of
Shares at least equal to 100,000 less the number of any Shares remaining owned
by such Eligible Holder, and (b) the third anniversary of the Closing Date,
unless such Eligible Holder then owns 100,000 or more Shares.
"Rule 144" means (i) Rule 144 under the Securities Act as such Rule is in
effect from time to time and (ii) any successor rule, regulation or law, as in
effect from time to time.
"Rule 144A" means (i) Rule 144A under the Securities Act as such Rule is in
effect from time to time and (ii) any successor rule, regulation or law, as in
effect from time to time.
"Rule 144 Transaction" means a transfer of Shares or Conversion Shares (A)
complying with Rule 144 as such Rule is in effect on the date of such transfer
(but not including a sale other than pursuant to (i) "brokers' transactions" as
defined in clauses (1) and (2) of paragraph (g) or (ii) paragraph (k) of such
Rule as in effect on the date hereof) and (B) occurring at a time when Shares
(in the case of a transfer of Shares) or Conversion Shares (in the case of a
transfer of Conversion Shares) are registered pursuant to Section 12 of the
Securities Exchange Act.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules, regulations and interpretations thereunder.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules, regulations and interpretations thereunder.
"Series A Certificate of Designations" has the meaning set forth in Section
4.2(d) hereof.
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"Series A Preferred Stock" has the meaning set forth in Section 4.2(a)
hereof.
"Series B Certificate of Designations" has the meaning set forth in Section
l(a) hereof.
"Series B Preferred Stock" means the Company's Series B Convertible
Preferred Stock, par value $0.01 per share, which will be duly authorized on the
Closing Date and which will have the rights, powers and privileges on the
Closing Date as more fully set forth in the Series B Certificate of
Designations.
"Shares" has the meaning set forth in Section l(a) hereof, except that for
purposes of Section 7 and Section 8 hereof and the definition of "Conversion
Shares," the term "Shares" shall include the shares of Series B Preferred Stock
issued upon the exercise of the warrant, dated the date hereof, granting Alex.
Brown & Sons Incorporated (the "Agent") the right to purchase a specified number
of shares of Series B Preferred Stock and the shares of Series B Preferred Stock
issued upon the sale of shares of Series B Preferred Stock to purchasers
pursuant to the Stock Purchase Agreements. In the event that any Shares are
sold either in a public offering pursuant to a registration statement under
Section 6 of the Securities Act or pursuant to a Rule 144 Transaction, then the
transferees of such Shares shall not be entitled to any benefits under this
Agreement with respect to such Shares and such Shares shall no longer be
considered to be "Shares" for purposes of Section 8 hereof or any consent or
waiver provision or any other provision of this Agreement.
"Stock Exchange Agreements" has the meaning set forth in Section 1(b)
hereof.
"Stock Purchase Agreements" means the Series B Convertible Stock Purchase
Agreements, dated the date hereof, by which purchasers agree to purchase and the
Company agrees to sell shares of its authorized but unissued shares of Series B
Preferred Stock, par value $.01 per share. The Stock Purchase Agreement is
substantially similar to this Agreement, containing similar representations and
warranties by the Company, covenants of the Company, registration rights,
conditions and other terms.
"Subsidiary", with respect to any Person, means any corporation,
association or other entity of which more than 50% of the total voting power of
shares of stock or other equity interests (without regard to the occurrence of
any contingency) entitled to vote in the election of directors, managers or
trustees thereof is, at the time as of which any determination is being made,
owned or controlled, directly or indirectly, by such Person or one or more of
its Subsidiaries, or both. The term "Subsidiary" or "Subsidiaries" when used
herein without reference to any particular Person, means a Subsidiary or
Subsidiaries of the Company.
(b) For all purposes of this Agreement, except as otherwise expressly
provided or unless the context otherwise requires:
(i) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Section or other subdivision;
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(ii) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles consistently applied (except as otherwise provided herein);
(iii) all computations provided for herein, if any, shall be made in
accordance with generally accepted accounting principles consistently
applied (except as otherwise expressly provided herein);
(iv) any uses of the masculine, feminine or neuter gender shall also be
deemed to include any other gender, as appropriate;
(v) all references herein to actions by the Company or any Subsidiary,
such as "create", "sell", "transfer", "dispose of", etc., mean such action
whether voluntary or involuntary, by operation of law or otherwise;
(vi) the exhibits and schedules to this Agreement shall be deemed a
part of this Agreement;
(vii) each of the representations of the Company contained in Section 4
hereof is separate and is not limited, qualified or modified by the
existence, wording or satisfaction of any other representation of the
Company in Section 4 or otherwise;
(viii) each of the covenants of the Company contained in Section 7
hereof or otherwise contained in any Stock Exchange Agreement or the Series
B Certificate of Designations is separate and is not limited or satisfied
by the existence, wording or satisfaction of any other covenant of the
Company in Section 7 or otherwise; and
(ix) all references herein (in covenants or otherwise) to any action(s)
which are to be taken (or which are prohibited from being taken) by any
Person, the Company or any Subsidiary shall apply to such Person, the
Company or such Subsidiary, as the case may be, whether such action is
taken directly or indirectly.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Exchanging Party as follows as
of the date hereof and as of the Closing Date:
4.1 Corporate Existence, Power and Authority.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. The Company is duly
qualified, licensed and authorized to
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do business and is in good standing in each jurisdiction in which it owns or
leases any material property or in which the conduct of its business requires it
to so qualify or be so licensed.
(b) The Company has no Subsidiaries, and does not control, directly or
indirectly, any other entity and does not own of record or beneficially,
directly or indirectly, (i) any shares of capital stock or securities
convertible into capital stock of any other corporation (except for short-term
investments of the Company's cash reserves and publicly-traded mutual funds) or
(ii) any participating interest in any partnership, joint venture or other non-
corporate business enterprise, except for the strategic alliances described in
the Memorandum.
(c) No proceeding has been commenced looking toward the dissolution or
merger of the Company or the amendment of its certificate of incorporation
(other than the Series B Certificate of Designations). The Company is not in
violation in any respect of its certificate of incorporation or bylaws.
(d) The Company has all requisite power, authority (corporate and other)
and legal right to own or to hold under lease and to operate the properties it
owns or holds and to conduct its business as now being conducted and as proposed
to be conducted, except where the failure to have such requisite power,
authority and legal right would not result in a Material Adverse Effect.
(e) The Company has all requisite power, authority (corporate and other)
and legal right to execute, deliver, enter into, consummate and perform the
Stock Exchange Agreements, including, without limitation, the issuance, exchange
and delivery by the Company of the Shares and to issue and deliver the
Conversion Shares issuable upon conversion of the Shares as contemplated herein
and therein and in the Series B Certificate of Designations. The execution,
delivery and performance of the Stock Exchange Agreements by the Company
(including, without limitation, the issuance, exchange and delivery by the
Company of the Shares and the issuance and delivery of the Conversion Shares
upon conversion of the Shares as contemplated herein and therein and in the
Series B Certificate of Designations) have been duly authorized by all required
corporate and other actions. As described in the Memorandum, the Company may
not have the ability to pay dividends on the Shares under certain circumstances.
The Company has duly executed and delivered the Stock Exchange Agreements. The
Stock Exchange Agreements constitute the legal, valid and binding obligations of
the Company enforceable in accordance with their respective terms, subject to
bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to the rights of creditors generally and except that the enforceability
of the indemnification provisions contained in the Stock Exchange Agreements may
be subject to considerations of public policy.
4.2 Stock.
(a) The authorized capital stock of the Company consists of (i) 30,000,000
shares of Common Stock, par value $0.01 per share, and (ii) 5,000,000 shares of
Preferred Stock, par value $0.01 per share, issuable in one or more series, of
which, after giving effect to the Series B Certificate of Designations, (w)
508,800 shares have been designated as Series A Convertible Preferred Stock
("Series A Preferred Stock"), (x) 904,000 shares have been designated as
Series B
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Preferred Stock, (y) 300,000 shares have been designated as Series One Junior
Participating Preferred Stock and (z) 3,287,200 shares are Undesignated
Preferred Stock. On the Closing Date and before giving effect to the exchange
of any shares of Series A Preferred Stock into shares of Series B Preferred
Stock: (A) 11,505,395 shares of the Company's Common Stock, par value $0.01 per
share, will be issued and outstanding (plus any shares of Common Stock issued
after February 13, 1997 pursuant to stock options in effect on such date), (B)
480,000 shares of Series A Preferred Stock will be issued and outstanding and
(C) up to 280,000 Shares of the Series B Preferred Stock will be outstanding.
The number of shares of Series A Preferred Stock will be reduced and the number
of shares of Series B Preferred Stock will be increased on a one-for-one basis
to the extent that shares of Series A Preferred Stock are exchanged for shares
of Series B Preferred Stock in the Exchange Offer. All of such outstanding
shares will be duly authorized, validly issued and outstanding, fully paid and
non-assessable with no personal liability attaching to the ownership thereof.
The Shares issued and delivered pursuant to this Stock Exchange Agreement will
be free and clear of all liens, charges, restrictions, claims and encumbrances
imposed by or through the Company. The Conversion Shares have been reserved for
issuance upon conversion of the Shares and, when issued in accordance with the
terms of the Shares, will be duly authorized, validly issued, fully paid and
non-assessable. None of the shares of the Company's capital stock outstanding
at Closing (including, without limitation, the Shares issued under the Stock
Exchange Agreements) (i) are subject to preemptive rights or (ii) provide the
holders thereof with any preemptive rights with respect to any issuances of
capital stock. Neither the issuance, exchange or delivery of the Shares nor the
issuance or delivery of the Conversion Shares is subject to any preemptive right
of stockholders of the Company or to any right of first refusal or other right
in favor of any person.
(b) The only shares of the Company's Common Stock reserved for issuance by
the Company are as follows (before giving effect to the exchange of any shares
of Series A Preferred Stock into shares of Series B Preferred Stock): (i)
3,083,636 shares issuable upon conversion of the Series A Preferred Stock
(including the Series A Preferred Stock issuable upon the exercise of warrants
issued to the placement agents in connection with the offering of the Series A
Preferred Stock), (ii) 2,105,862 shares issuable upon conversion of the Series B
Preferred Stock (including the Series B Preferred Stock issuable upon the
exercise of warrants issued to the Agent in connection with the offering of the
Series B Preferred Stock), (iii) 2,030,964 shares issuable upon exercise of
currently outstanding stock options pursuant to the Company's 1992 Stock
Compensation Plan, its Non-Employee Director Stock Option Plan and director and
consultant stock option agreements and (iv) 263,020 shares reserved for issuance
pursuant to the 1992 Stock Compensation Plan, the Non-Employee Director Stock
Option Plan and the Company's 1997 Stock Option Plan with respect to which no
options are presently outstanding.
(c) Except as referred to in Section 4.2(b) or in the Company's Amended
and Restated Certificate of Incorporation, there are no outstanding options,
warrants, subscriptions, rights, convertible securities or other agreements or
plans under which the Company may become obligated to issue, sell, exchange or
transfer shares of its capital stock or other securities.
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(d) The designations, powers, preferences, rights, qualifications,
limitations and restrictions in respect of each class and series of authorized
capital stock of the Company are as set forth in the Amended and Restated
Certificate of Incorporation of the Company and the Certificate of Designations
with respect to the Series A Preferred Stock (the "Series A Certificate of
Designations"), a copy of each of which is attached hereto as Exhibit B and
Exhibit C, respectively, and the Series B Certificate of Designations.
(e) Except as contemplated by Section 8 hereof or as summarized on
Schedule II hereto, there are no outstanding registration rights with respect to
any capital stock of the Company.
(f) Except as provided in the Series A Certificate of Designations and the
Series B Certificate of Designations, the Company has no obligation (contingent
or other) to purchase, redeem or otherwise acquire any of its capital stock or
any interest therein or to pay any dividend or make any other distribution in
respect thereof.
(g) The Company has no knowledge of any voting agreements, voting trusts,
stockholders' agreements, proxies or other agreements or understandings that are
currently in effect or that are currently contemplated with respect to the
voting of any capital stock of the Company.
(h) There are no anti-dilution protections or other adjustment provisions
in existence with respect to any capital stock of the Company or any capital
stock referred to in Section 4.2(b) or 4.2(c) above, except with respect to the
Shares and except as provided in the Amended and Restated Certificate of
Incorporation of the Company, the Series A Certificate of Designations and for
standard provisions in option agreements under the Company's plans for
employees, directors, consultants and advisors and in the warrants and warrant
agreements issued by the Company and described in (b) above.
(i) All of the outstanding securities of the Company were issued in
compliance with all applicable federal and state securities laws.
(j) The Series B Certificate of Designations has been duly adopted by the
Company and is fully effective. The Series B Certificate of Designations
accurately describes all of the rights, priorities and terms of the Shares.
4.3 Business.
The Company is engaged in the business of developing and commercializing
innovative biotechnology-based processes for the petroleum refining and
production industries. The Company
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does not currently engage in, or have any intention of engaging in, any other
business other than that which is described in the Memorandum.
4.4 No Defaults or Conflicts.
(a) The Company is not in violation or default in any material respect
under any indenture, agreement or instrument to which it is a party or by which
it or its properties may be bound. The Company is not in violation of or
default in any material respect under any law, rule, regulation, order, writ,
injunction, judgment, decree, award or other action of any court or governmental
authority or arbitrator(s). The Company is not in violation of its certificate
of incorporation or bylaws.
(b) The execution, delivery and performance by the Company of the Stock
Exchange Agreements and any of the transactions contemplated hereby or thereby
(including, without limitation, the issuance of the Shares and the Conversion
Shares as contemplated herein and therein and in the Series B Certificate of
Designations and the adoption of the Series B Certificate of Designations) does
not and will not (i) violate or conflict with, with or without the giving of
notice or the passage of time or both, any provision of (A) the certificate of
incorporation or bylaws of the Company or (B) any law, rule, regulation or order
of any federal, state, county, municipal or other governmental authority, or any
judgment, writ, injunction, decree, award or other action of any court or
governmental authority or arbitrator(s), or any agreement, indenture or other
instrument applicable to the Company or any of its properties, except in the
case of this clause (B) for such violations or conflicts that will not
individually or in the aggregate have a Material Adverse Effect, (ii) result in
the creation of any Lien upon any of the Company's properties, assets or
revenues, (iii) require the consent, waiver, approval, order or authorization
of, or declaration, registration, qualification or filing with, any Person
(whether or not a governmental authority and including, without limitation, any
shareholder approval) except for required securities law filings and board of
director approvals, certain approvals of the holders of Series A Preferred Stock
and certain registration rights modifications, which board of director and
Series A Preferred Stockholder approvals and registration rights modifications
have been obtained or (iv) cause anti-dilution clauses of any outstanding
securities to become operative except with respect to the Series A Preferred
Stock pursuant to the Series A Certificate of Designations or give rise to any
preemptive rights. No provision referred to in the preceding clause (i)
materially adversely affects or reasonably may be expected to materially
adversely affect the continued conduct of the Company's business as described in
the Memorandum or the ability of the Company to perform its obligations under
the Stock Exchange Agreements, the Series B Certificate of Designations or any
of the transactions contemplated hereby or thereby.
4.5 Disclosure Materials: Other Information.
(a) The Company has furnished to the Exchanging Party the Memorandum and
the documents incorporated therein (the "Disclosure Material"). The audited and
unaudited financial statements referred to or contained in the Disclosure
Material fairly present the financial condition of the Company as of the
respective dates thereof and the results of the operations of the Company
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for such periods and have been prepared in accordance with generally accepted
accounting principles consistently applied, except that any such unaudited
statements may omit notes and may be subject to normal year-end adjustments.
(b) Since December 31, 1995, (i) the business of the Company has been
conducted in the ordinary course and (ii) there has been no material adverse
change in the assets, properties, liabilities, business, affairs, results of
operations, condition (financial or otherwise) or prospects of the Company that
has not been described in the Disclosure Material. As of the Closing Date and
as of the date hereof, there are no material liabilities of the Company which
would be required to be provided for in a balance sheet of the Company as of
either such date prepared in accordance with generally accepted accounting
principles consistently applied, other than liabilities provided for in the
financial statements referred to in Section 4.5(a) above. Since December 31,
1995, no amount or property has directly or indirectly been declared, ordered,
paid, made or set aside for any Restricted Payment nor has any such action been
agreed to.
(c) The Company is not aware of any material liabilities, contingent or
otherwise, of the Company that have not been disclosed in the financial
statements (including the notes thereto) referred to in Section 4.5(a) above or
otherwise disclosed in the Disclosure Material.
(d) Nothing has come to the attention of the Company that would cause it
to believe that any of the Disclosure Material contained or contains a false or
misleading statement of a material fact or omits to state any material fact
necessary in order to make the statements made in such material, in light of the
circumstances under which they were made, not misleading.
(e) There is no fact known to the Company which is not in the Disclosure
Material and which materially and adversely affects, or would reasonably be
expected to materially and adversely affect, the assets, properties,
liabilities, business, affairs, results of operations, condition (financial or
otherwise) or prospects of the Company.
4.6 Litigation.
There is no action, suit, proceeding, investigation or claim pending
against the Company or, to the knowledge of the Company, threatened against the
Company in law, equity or otherwise before any federal, state, municipal or
local court, administrative agency, commission, board, bureau, instrumentality
or arbitrator which either (i) questions the validity of the Stock Exchange
Agreements, the Series B Certificate of Designations, the Shares or the
Conversion Shares or any action taken or to be taken pursuant hereto or thereto,
or (ii) might adversely affect the right, title or interest of any Exchanging
Party to the Shares or the Conversion Shares or (iii) might result in a material
adverse change in the assets, properties, liabilities, business, affairs,
results of operations, condition (financial or otherwise) or prospects of the
Company. The Company has not received any opinion or memorandum or legal advice
from legal counsel to the effect that it is exposed, from a legal standpoint, to
any liability or disadvantage which may be material to its assets, properties,
liabilities, business, affairs, results of operations, condition (financial or
otherwise) or prospects. There is no action or suit by the Company pending or
threatened against others.
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4.7 Taxes.
The Company has filed all federal, state, local and other tax returns and
reports (except for foreign returns and reports the failure to file which will
not result in any material liability to the Company), and any other material
returns and reports with any governmental authorities (federal, state or local),
required to be filed by it. The Company has paid or caused to be paid all taxes
(including interest and penalties) that are due and payable, except those which
are being contested by it in good faith by appropriate proceedings and in
respect of which adequate reserves are being maintained on its books in
accordance with generally accepted accounting principles consistently applied.
The Company does not have any material liabilities for taxes other than those
incurred in the ordinary course of business and in respect of which adequate
reserves are being maintained by it in accordance with generally accepted
accounting principles consistently applied. Federal and state income tax
returns for the Company have not been audited by the Internal Revenue Service or
state authorities. No deficiency assessment with respect to or proposed
adjustment of the Company's federal, state, local or other tax returns is
pending or, to the best of the Company's knowledge, threatened. There is no tax
lien, whether imposed by any federal, state, local or other tax authority
outstanding against the assets, properties or business of the Company. There
are no applicable taxes, fees or other governmental charges payable by the
Company in connection with the execution and delivery of the Stock Exchange
Agreements or the issuance by the Company of the Shares or the Conversion
Shares, except for governmental fees paid in connection with securities law
filings.
4.8 Employees; ERISA.
The Company has good relationships with its employees and has not had and
does not expect to have any substantial labor problems. The Company does not
have any knowledge as to any intentions of any key employee or any group of
employees to leave the employ of the Company. Each of the officers of the
Company, each key employee and each other employee now employed by the Company
who has access to proprietary business information of the Company has executed a
confidentiality and non-disclosure agreement and such agreements are in full
force and effect. Other than the Company's Simplified Employee Pension Plan
adopted in April 1992, the Company has not established, sponsored, maintained,
made any contributions to or been obligated by law to establish, maintain,
sponsor or make any contributions to any "employee pension benefit plan" or
"employee welfare benefit plan" (as such terms are defined in ERISA), including,
without limitation, any "multi-employer plan". The Company has complied in all
material respects with all applicable laws relating to the employment of labor,
including provisions relating to wages, hours, equal opportunity, collective
bargaining and the payment of Social Security and other taxes, and with ERISA.
4.9 Legal Compliance.
(a) The Company has complied with all applicable laws, rules, regulations,
orders, licenses, judgments, writs, injunctions, decrees or demands, except to
the extent that failure to
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comply would not materially adversely affect the assets, properties,
liabilities, business, affairs, results of operations, condition (financial or
otherwise) or prospects of the Company. The Company has all necessary permits,
licenses and other authorizations required to conduct its business as currently
conducted, and as proposed to be conducted, in all material respects.
(b) There are no adverse orders, judgments, writs, injunctions, decrees or
demands of any court or administrative body, domestic or foreign, or of any
other governmental agency or instrumentality, domestic or foreign, outstanding
against the Company.
(c) There is no existing law, rule, regulation or order, and the Company is
not aware of any proposed law, rule, regulation or order, which would prohibit
or materially restrict the Company from, or otherwise materially adversely
affect the Company in, conducting its business as now being conducted and as
proposed to be conducted.
4.10 Permits, Licenses and Approvals.
The Company owns or possesses and holds free from restrictions or conflicts
with the rights of others all franchises, licenses, permits, consents, approvals
and other authority (governmental or otherwise), and all rights and privileges
with respect to the foregoing, as are necessary for the conduct of its business
as now being conducted, and as proposed to be conducted, except where the
failure to own or possess and hold such franchises, licenses, permits, consents,
approvals and other authority (governmental or otherwise) would not have a
Material Adverse Effect, and none is in default in any material respects under
any of such franchises, licenses, permits, consents, approvals or other
authority.
4.11 Patents, Trademarks and Other Rights.
The Company has sufficient trademarks, trade names, service marks, patent
rights, copyrights, manufacturing processes, formulae, applications, trade
secrets, know how, licenses, approvals and governmental authorizations (or
rights thereto)(collectively, the "Intellectual Property") to conduct its
business as now conducted and the Company believes that it will be able to
obtain such Intellectual Property as will be necessary to conduct its business
as proposed to be conducted except in either case where the absence of such
Intellectual Property would not have a Material Adverse Effect. No claim is
pending or, to the Company's knowledge, threatened to the effect that any such
Intellectual Property owned or licensed by the Company, or which the Company
otherwise has the right to use, is invalid or unenforceable by the Company, and,
to the best of the Company's knowledge, there is no basis for any such claim
(whether or not pending or threatened). To the best of the Company's knowledge,
all proprietary technology developed by or belonging to the Company and material
to its business which has not been patented has been kept confidential by the
Company, its employees and agents. The Company has no knowledge of any
infringement by it of any Intellectual Property or other similar rights of
others, and there is no claim being made or, to the Company's knowledge,
threatened against the Company regarding infringement by the Company on such
Intellectual Property of others which could reasonably be expected to have a
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Material Adverse Effect and, to the Company's knowledge, there is no basis for
any such claim (whether or not pending or threatened).
4.12 Status Under Certain Statutes.
The Company is not: (i) a "public utility company" or a "holding company",
or an "affiliate" or a "subsidiary company" of a "holding company", or an
"affiliate" of such a "subsidiary company", as such terms are defined in the
Public Utility Holding Company Act of 1935, as amended, (ii) a "public utility"
as defined in the Federal Power Act, as amended, or (iii) an "investment
company" or an "affiliated person" thereof or an "affiliated person" of any such
"affiliated person", as such terms are defined in the Investment Company Act of
1940, as amended.
4.13 Title to Properties; Leasehold Interests.
The Company has good and marketable title to each of the properties and
assets owned by it. The Company does not own any real property. Certain real
property used by the Company in the conduct of its business is held under lease,
and the Company is not aware of any pending or threatened claim or action by any
lessor of any such property to terminate any such lease. None of the properties
owned or leased by the Company is subject to any Liens which could reasonably be
expected to materially and adversely affect the assets, properties, liabilities,
business, affairs, results of operations, condition (financial or otherwise) or
prospects of the Company. Each lease or agreement to which the Company is a
party under which it is the lessee of any property, real or personal, is a valid
and subsisting agreement without any material default of the Company thereunder
and, to the best of the Company's knowledge, without any material default
thereunder of any other party thereto. No event has occurred and is continuing
which, with due notice or lapse of time or both, would constitute a default or
event of default by the Company under any such lease or agreement or, to the
best of the Company's knowledge, by any party thereto, except for such defaults
that would not individually or in the aggregate have a Material Adverse Effect.
The Company's possession of such property has not been disturbed and, to the
best of the Company's knowledge, no claim has been asserted against it adverse
to its rights in such leasehold interests.
4.14 Environmental Compliance.
(a) There is no Hazardous Material about or in, any property, real or
personal, in which the Company has any interest, in violation of law in a manner
which could reasonably be expected to materially and adversely affect the
assets, properties, liabilities, business, affairs, results of operations,
condition (financial or otherwise) or prospects of the Company.
(b) There is no (and has not been any) off-site disposal or on-site
disposal at any locations currently or formerly owned or occupied by the Company
as a result of which disposal there would exist a reasonably foreseeable risk
that the Company would incur a material liability or obligation under federal,
state or local environmental or other laws, regulations or ordinances.
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(c) Neither the Company nor, to the best of the knowledge of the Company,
any prior or present owner, operator, tenant, subtenant or invitee of any of the
real property (including improvements) currently or formerly owned or occupied
by the Company has (i) used, installed, stored, spilled, released, transported,
disposed of or discharged any Hazardous Material upon, into, beneath, from or
affecting such real property (including improvements) in violation of law in a
manner which could reasonably be expected to materially and adversely affect the
assets, properties, liabilities, business, affairs, results of operations,
condition (financial or otherwise) or prospects of the Company, or (ii) received
any verbal or written notice, citation, subpoena, summons, complaint or other
correspondence or communication from any Person (not previously satisfactorily
resolved) with respect to the presence of Hazardous Material upon, into,
beneath, or emanating from or affecting any of the real property (including
improvements) currently or formerly owned or occupied by the Company which could
materially and adversely affect the assets, properties, liabilities, business,
affairs, results of operations, condition (financial or otherwise) or prospects
of the Company.
(d) There has been no intentional or unintentional, gradual or sudden,
release, disposal or discharge upon, into or beneath the real property
(including improvements) currently or formerly owned or occupied by the Company
by the Company or, to the best of the knowledge of the Company, by any prior
owner, operator, tenant, subtenant or invitee with respect thereto, that has
caused or is causing soil or ground water contamination which under applicable
environmental laws, regulations or ordinances could require investigation or
remediation or could otherwise create a material liability or obligation on the
part of the Company.
4.15 Disaster.
Neither the business nor the properties of the Company is currently
affected (or has been affected at any time since December 31, 1995) by any fire,
explosion, accident, strike, lockout or other dispute, drought, storm, hail,
earthquake, embargo, act of God or of the public enemy or other casualty
(whether or not covered by insurance), of a kind which (individually or in the
aggregate) has materially adversely affected, or could reasonably be expected to
materially adversely affect, the assets, properties, liabilities, business,
affairs, results of operations, condition (financial or otherwise) or prospects
of the Company.
4.16 No Burdensome Agreements; Transactions with Affiliates.
Except as disclosed in the Disclosure Material, the Company is not a party
to, or bound by (nor is any of its properties affected by), any commitment,
contract or agreement, any term of which materially adversely affects, or which
the Company expects in the future to materially adversely affect, the assets,
properties, business, affairs, results of operations, condition (financial or
otherwise) or prospects of the Company. Except as disclosed in the Disclosure
Material, the Company is not a party to any contract or agreement with any
Affiliate of the Company. The terms of any contracts or agreements between the
Company and any of its Affiliates are no less favorable to the Company
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than those which might have been obtained, at the time such contract or
agreement was entered into, from a person who was not such an Affiliate.
4.17 Other Names.
The business previously or presently conducted by the Company has not been
conducted under any corporate, trade or fictitious name other than "Energy
BioSystems Corporation" and "Environmental BioScience Corporation", which was
the name of the Company until it was so changed in March 1992.
4.18 Offering of the Shares.
Neither the Company nor, to the knowledge of the Company, any person
authorized or employed by the Company as agent, broker, dealer or otherwise
acting on its behalf, directly or indirectly, (i) offered any of the Shares or
any similar security of the Company (A) by any form of general solicitation or
general advertising (within the meaning of Regulation D under the Securities
Act) or (B) for sale to or solicited offers to buy any thereof from, or
otherwise approached or negotiated with respect thereto with, any person which
the Company did not reasonably believe was an "accredited investor" within the
meaning of Regulation D under the Securities Act or (ii) has done or caused to
be done (or has omitted to do or to cause to be done) any act, which act (or
which omission) would result in bringing the issuance or sale of the Shares
within the provisions of Section 5 of the Securities Act or the filing,
notification or reporting provisions of any state securities laws, except for
filings, notices or reports pursuant to state securities laws which have already
been made or which are contemplated in connection with the offering and exchange
of the Shares.
4.19 No Foreign Assets Control Regulation Violation.
The transactions contemplated by this Agreement will not result in a
violation of any of the foreign assets control regulations of the United States
Treasury Department, 31 C.F.R., Subtitle B, Chapter V, as amended (including,
without limitation, the Foreign Assets Control Regulations, the Transaction
Control Regulations, the Cuban Assets Control Regulations, the Foreign Funds
Control Regulations, the Iranian Assets Control Regulations, the Nicaraguan
Trade Control Regulations, the South African Transactions Regulations, the
Libyan Sanctions Regulations, the Soviet Gold Coin Regulations, the Panamanian
Transactions Regulations, the Kuwaiti Assets Control Regulations and the Iraqi
Sanctions Regulations contained in said Chapter V), or any ruling issued
thereunder or any enabling legislation or other Presidential Executive Order
granting authority therefor, and the proceeds of the sale of the Shares will not
be used by the Company in a manner which would violate any such regulations.
4.20 Indebtedness.
Schedule II hereto sets forth (i) the amount of all Indebtedness of the
Company outstanding on the Closing Date (excluding Indebtedness in individual
amounts of less than $35,000, but not exceeding an aggregate excluded amount of
$75,000), (ii) any Lien with respect to such Indebtedness
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and (iii) a brief description of each instrument or agreement governing such
Indebtedness. The Company has made available to the Exchanging Party a complete
and correct copy of each such instrument or agreement (including all amendments,
supplements or modifications thereto). No default exists with respect to or
under any such Indebtedness or any instrument or agreement relating thereto.
4.21 Proprietary Information of Third Parties.
No third party has claimed or, to the best of the Company's knowledge, has
reason to claim that any person now or previously employed or engaged as a
consultant by the Company has (a) violated or, to the Company's knowledge, may
be violating any of the terms or conditions of his employment, non-competition
or non-disclosure agreement with such third party, (b) disclosed or, to the best
of the Company's knowledge, may be disclosing or utilized or, to the best of the
Company's knowledge, may be utilizing any trade secret or proprietary
information of documentation of such third party or violated any confidential
relationship which such person may have had with such third party in connection
with the business of the Company or (c) interfered or may be interfering in the
employment relationship between such third party and any of its present or
former employees. No third party has requested information from the Company
which reasonably suggests that such a claim might be contemplated. To the best
of the Company's knowledge, none of the execution or delivery of the Stock
Exchange Agreements, or the carrying on the business of the Company as officers,
employees or agents by any officer, director or key employee of the Company, or
the conduct or proposed conduct of the business of the Company, will conflict
with or result in a breach of the terms, conditions or provisions of or
constitute a default under any contract, covenant or instrument under which any
such individual is obligated.
4.22 Insurance.
The Company holds valid policies covering insurance in the amounts and type
that the Company reasonably believes is appropriate and customary for companies
in the same or similar businesses to that of the Company or otherwise required
to be maintained by it.
4.23 Material Contracts and Agreements.
With respect to all material contracts, agreements, indentures or
instruments not otherwise specifically referred to herein, the Company and, to
the best of the Company's knowledge, each other party thereto have in all
material respects performed all the obligations required to be performed by them
to date, have received no notice of default and are not in default, in any
material respect, (with due notice or lapse of time or both) under any material
contract, agreement, indenture or other instrument now in effect to which the
Company is a party or by which it or its property may be bound. The Company has
no present expectation or intention of not fully performing all its obligations
under each such material contract, agreement, indenture or other instrument and
the Company has no knowledge of any breach and has received no written notice of
any anticipated breach by the other party to any material contract or commitment
which the Company is a party.
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4.24 Governmental Approvals.
Subject to the accuracy of the representations and warranties of the
Exchanging Party set forth in Section 5 hereof, no registration or filing with,
or consent or approval of or other action by, any federal, state or other
governmental agency or instrumentality is or will be necessary for the valid
execution, delivery and performance by the Company of this Stock Exchange
Agreement, the issuance, exchange and delivery of the Shares to the Exchanging
Party or, upon conversion thereof, the issuance and delivery of the Conversion
Shares, other than filings pursuant to federal and state securities laws (all of
which filings have been or, with respect to those filings which may be duly made
after the Closing will be, made by or on behalf of the Company) in connection
with the exchange of the Shares.
4.25 Brokers.
The Company has no contract, arrangement or understanding with any broker,
finder or similar agent with respect to the transactions contemplated by this
Agreement.
4.26 Disclosure.
The Disclosure Material, as of its date, does not contain an untrue
statement of a material fact or omit a material fact necessary to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading. All of the statements contained in this Stock
Exchange Agreement, including any Schedule or Exhibit hereto, and contained in
any document, certificate or other items prepared or supplied by the Company
directly to the Exchanging Party with respect to the transactions contemplated
hereby are accurate in all material respects. There is no fact which the
Company has not disclosed to the Exchanging Party in writing and of which the
Company is aware which materially and adversely affects or could reasonably be
expected to materially and adversely affect the assets, properties, liabilities,
business, affairs, results of operations, condition (financial or otherwise) or
prospects of the Company.
SECTION 5. REPRESENTATIONS OF THE EXCHANGING PARTY
The Exchanging Party hereby makes the representations and warranties to the
Company contained in this Section 5.
(a) The Exchanging Party has all requisite power, authority and legal
right to execute, deliver, enter into, consummate and perform this Agreement.
The execution, delivery and performance of this Agreement by the Exchanging
Party have been duly authorized by all required corporate, partnership or other
actions on the part of the Exchanging Party. The Exchanging Party has duly
executed and delivered this Agreement, and this Agreement constitutes the legal,
valid and binding obligation of the Exchanging Party enforceable against the
Exchanging Party in accordance with its terms, subject to bankruptcy,
insolvency, reorganization, moratorium and other similar laws relating to the
rights of creditors generally.
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(b) The Exchanging Party hereby represents to the Company that it has
substantial knowledge, skill and experience in making investment decisions of
this type, it is capable of evaluating the risk of its investment in the Shares
being received by it pursuant to the exchange and is able to bear the economic
risk of such investment, including the risk of losing the entire investment,
that (except as the Exchanging Party has otherwise advised the Company and the
Exchanging Party's counsel in writing) it is taking the Shares to be received by
it upon the exchange for its own account, and that the Shares are being
exchanged by it for investment and not with a present view to any distribution
thereof in violation of applicable securities laws. It is understood that the
disposition of the Exchanging Party's property shall at all times be within the
Exchanging Party's control. If the Exchanging Party should in the future decide
to dispose of any of its Shares, it is understood that it may do so only in
compliance with the Securities Act, applicable state securities laws and this
Agreement. The Exchanging Party represents that it is an "accredited investor"
as defined in Rule 501(a) under the Securities Act.
(c) The Exchanging Party has received and reviewed the Memorandum and it
has had an opportunity to fully discuss the Company's business, management and
financial affairs with the Company's management.
(d) The Exchanging Party understands that (i) the Shares and the
Conversion Shares have not been registered under the Securities Act by reason of
their issuance in a transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) or Section 3(b) thereof or Rule 506
promulgated under the Securities Act, (ii) the Shares and, upon conversion
thereof, the Conversion Shares must be held indefinitely unless a subsequent
disposition thereof is registered under the Securities Act or is exempt from
such registration and (iii) the Shares and the Conversion Shares will bear a
legend to such effect.
(e) The Exchanging Party represents that at no time was the Exchanging
Party presented with or solicited by or through any leaflet (other than the
Memorandum), public promotional meeting, advertisement or any other form of
general or public advertising or solicitation. In addition, the Exchanging
Party acknowledges that there has never been any representation, guaranty or
warranty made by the Company or any agent or representative of the Company as to
the amount of or type of consideration or profit, if any, to be realized as a
result of any investment by the Exchanging Party in the Preferred Stock.
(f) If the Exchanging Party is a resident of the State of Florida, he
understands that he has the privilege of voiding the exchange within three (3)
days after the first tender of consideration is made by such Exchanging Party to
the Company or an agent of the Company.
(g) If the Exchanging Party is a resident of the Commonwealth of
Pennsylvania, he will not sell his Shares within 12 months from the date of
receipt upon exchange unless the Shares are registered under the Pennsylvania
Securities Act of 1972 or the Securities Act.
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SECTION 6. RESTRICTIONS ON TRANSFER
(a) The Exchanging Party agrees that it will not sell or otherwise dispose
of any Shares or Conversion Shares unless (i) such Shares or Conversion Shares
have been registered under the Securities Act and, to the extent required, under
any applicable state securities laws, or (ii) such Shares or Conversion Shares
are sold in accordance with the applicable requirements and limitations of Rule
144 or Rule 144A, or (iii) the Company has been furnished with an opinion or
opinions from counsel to the Exchanging Party (which counsel and which
opinion(s) shall be reasonably satisfactory to the Company and which counsel may
be inside counsel to the Exchanging Party) to the effect that registration under
the Securities Act is not required for the transfer as proposed (which opinion
may be conditioned upon the transferee assuming the obligations of a holder of
Shares or Conversion Shares under this Section) or (iv) the Company has been
furnished with a letter from the Division of Corporate Finance of the Commission
to the effect that such Division would not recommend any action to the
Commission if such proposed transfer were effected without a registration
statement effective under the Securities Act. The Company agrees that within
five (5) Business Days after receipt of any opinion referred to in (iii) above,
it will notify the holder supplying such opinion whether such opinion is
satisfactory to the Company.
(b) The Company may endorse on all certificates evidencing Shares or
Conversion Shares a legend stating or referring to the transfer restrictions
contained in paragraph (a) above; provided, that no such legend shall be
endorsed on any certificates which, when issued, are no longer subject to the
restrictions of this Section 6; provided, further, that if a transfer is made
pursuant to clause (i), (ii) (other than pursuant to Rule 144A) or (iv) of
paragraph (a) of this Section 6, or if an opinion of counsel provided pursuant
to clause (iii) of paragraph (a) concludes that the legend is no longer
necessary, the Company will deliver upon transfer, certificates without such
legends.
SECTION 7. COVENANTS OF THE COMPANY
The Company covenants and agrees, so long as (i) any Shares are outstanding
or (ii) there are any Eligible Holders, whichever is longer (unless such other
period is expressly provided in any subsections of this Section 7, in which case
such specific period will govern) as follows:
7.1 Use of Proceeds.
The Company will use the proceeds from the sale of the Shares pursuant to
the Stock Purchase Agreements for purposes described in the section of the
Memorandum entitled "Use of Proceeds." No portion of such proceeds will be used
for the purpose, whether immediate, incidental or ultimate, of purchasing or
carrying, within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System, as amended from time to time, any "margin stock" as
defined in said Regulation U, or any "margin stock" as defined in Regulation G
of the Board of Governors of the Federal Reserve System, as amended from time to
time, or for the purpose of purchasing, carrying or trading in securities within
the meaning of Regulation T of the Board of Governors of the Federal Reserve
System, as amended from time to time, or for the purpose of reducing or retiring
any indebtedness which both (i) was originally incurred to purchase any such
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margin stock or other securities and (ii) was directly or indirectly secured by
such margin stock or other securities. None of the assets of the Company or any
Subsidiary includes any such "margin stock", and neither the Company nor any
Subsidiary has any present intention of acquiring any such "margin stock."
7.2 Financial Information.
(a) The Company will maintain a system of accounting established and
administered in accordance with sound business practices to permit preparation
of financial statements in accordance with generally accepted accounting
principles consistently applied. The Company will deliver the following to each
Eligible Holder during the period through the Rights Expiration Date for such
Eligible Holder (and, in the case of paragraph (v) below, each other holder of
Shares and/or Conversion Shares):
(i) as soon as practicable but not later than ten (10) Business Days
after their issuance, and in any event within ninety (90) days after the
close of each fiscal year of the Company, (A) a consolidated balance sheet
of the Company and its Subsidiaries as of the end of such fiscal year and
(B) consolidated statements of operations, stockholders' equity and cash
flows of the Company and its Subsidiaries for such fiscal year, in each
case setting forth in comparative form the corresponding figures for the
preceding fiscal year, all such balance sheets and statements to be in
reasonable detail and certified by an independent public accounting firm of
recognized national standing selected by the Company, and such statements
shall be accompanied by management analyses of any material differences
between the results for such fiscal year and the corresponding figures for
the preceding fiscal year and between the budgeted figures (as supplied
pursuant to paragraph (ii) below) and the results for such year and a
narrative discussion of the Company's liquidity and capital resources as of
the end of such year materially conforming to the disclosure requirements
contained in Item 303 of Regulation S-K under the Securities Act. The
Company's Annual Report on Form 10-K filed, or to be filed, with the
Commission will satisfy the requirements of this paragraph, except for the
requirement of the management analyses regarding the comparison of the
Company's results for such fiscal year to the budgeted figures (as supplied
pursuant to paragraph (ii) below);
(ii) as soon as reasonably practicable, and in any event within thirty
(30) days after the close of the preceding fiscal year of the Company, a
budget for the current fiscal year (or the upcoming fiscal year, as the
case may be) prepared on a quarterly basis regarding the Company's
operations and capital expenditures on a consolidated basis, together with
an analysis of such budget prepared in reasonable detail by the Vice
President of Finance or the President of the Company; and (A) any operating
budget of the Company otherwise prepared and submitted to the Board and (B)
any revisions or amendments made by the Company (and submitted to its
Board) to any budget delivered under this paragraph (ii);
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(iii) as soon as reasonably practicable, and in any event within forty-
five (45) days after the close of each of the first three (3) fiscal
quarters of the Company, (A) a consolidated balance sheet of the Company
and its Subsidiaries as of the end of such fiscal quarter and (B)
consolidated statements of operations and cash flows of the Company and its
Subsidiaries for the quarter just ended and for the portion of the fiscal
year ended with the end of such quarter, in each case in reasonable detail,
certified by the Vice President of Finance or the President of the Company
and setting forth in comparative form the corresponding figures for the
comparable period one year prior thereto (subject to normal year-end
adjustments) and the comparable figures included in the budget for such
quarter (as delivered or modified pursuant to paragraph (ii) above),
together with management analyses of any material differences between such
results and the corresponding figures for such prior period and between
such results for such quarter and such budgeted figures. The Company's
Quarterly Report on Form 10-Q filed, or to be filed, with the Commission
will satisfy the requirements of this paragraph, except for the requirement
of the management analyses regarding the comparison of the Company's
results for such quarter to the budgeted figures;
(iv) as soon as reasonably practicable, copies of summary financial
information prepared on a quarterly basis regarding the Company on a
consolidated basis as presented to the Board and any other summary
financial information otherwise prepared and provided to the Board;
(v) as soon as reasonably practicable, copies of (A) all financial
statements, proxy material or reports sent by the Company to the Company's
or any Subsidiary's stockholders, (B) any public announcements or press
releases issued by the Company and (C) all reports or registration
statements (excluding registration statements on Form S-8) filed by the
Company with the Commission pursuant to the Securities Act or the
Securities Exchange Act;
(vi) as soon as reasonably practicable and without duplication of any
of the above items, all materials furnished, from time to time, to the
Board of Directors of the Company (including without limitation all
communications and information furnished to the Board of Directors), and
copies of minutes of meetings of the Boards of Directors of the Company;
(vii) as soon as reasonably practicable and without duplication of any
of the above items, any other materials furnished to holders of the
Company's capital stock or any material information furnished to holders of
the Company's indebtedness, including without limitation any compliance
certificates furnished in respect of such indebtedness; and
(viii) as soon as reasonably practicable, such other material
information as may reasonably be requested by a holder of Shares (unless
reasonably objected to by the Company), regarding the assets, properties,
liabilities, business, affairs, results of operations, conditions
(financial or otherwise) or prospects of the Company or any Subsidiary.
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All such financial statements shall be prepared in accordance with generally
accepted accounting principles consistently applied (except for any change in
accounting principles specified in the accompanying certificate and except that
any interim financial statements may omit notes and may be subject to normal
year-end adjustments).
(b) Without limiting the foregoing provisions of this Section 7.2, the
Company agrees that, if requested in writing by any Eligible Holder, it will not
deliver to such Eligible Holder (until otherwise instructed by such Eligible
Holder) (x) any non-public information or non-public materials regarding the
Company or any Subsidiary (whether described in this Section 7.2 or otherwise)
and (y) any information (whether or not included in clause (x)) which such
holder specifies that it does not want to receive. The Company shall comply
with any such request with respect to each such Eligible Holder and any
subsequent holders of Shares or Conversion Shares acquired directly or
indirectly (through one or more transfers) from such Eligible Holder, until
instructed otherwise in writing by the then holder of such Shares or Conversion
Shares.
7.3 Tax Matters.
Unless otherwise required by the Code or applicable state or local law, the
Company agrees that it will not report the accrual of a dividend under Section
305 of the Code with respect to any redemption premium with which the Series B
Preferred Stock may have been issued, whether on Form 1099 or any other form, to
the Internal Revenue Service or any state or local taxing authority.
7.4 Inspection.
At the request of an Eligible Holder, and without out of pocket expenses to
the Company, the Company will permit such Eligible Holder and any authorized
representative of such holder, subject to (if requested by the Company)
execution by such Eligible Holder of a reasonable confidentiality agreement, to
visit and inspect any of the properties of the Company and its Subsidiaries, and
to discuss with their officers the business, results of operations, condition
(financial or otherwise) or prospects of the Company or any Subsidiary, at
mutually acceptable times.
7.5 Maintenance of Existence; Properties and Franchises; Compliance with
Law; Taxes; Insurance.
The Company will, and will cause each Subsidiary to:
(a) maintain their respective corporate existences, rights and other
franchises in full force and effect, except as may be affected by a transaction
permitted by Section 7.11; provided, that the Company may terminate the
corporate existence of any Subsidiary, or permit the termination or abandonment
of rights or other franchises, if in the opinion of the Company it is no longer
in the Company's best interests to maintain such existence, rights or other
franchises and such termination or abandonment will not be prejudicial in any
material respect to the holders of the Shares;
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(b) maintain their respective tangible assets in good repair, working
order and condition so far as necessary or advantageous to the proper carrying
on of their respective businesses;
(c) comply with all applicable laws and with all applicable orders, rules,
rulings, certificates, licenses, regulations, demands, judgments, writs,
injunctions and decrees, provided, that such compliance shall not be necessary
so long as (i) the applicability or validity of any such law, order, rule,
ruling, certificate, license, regulation, demand, judgment, writ, injunction or
decree shall be contested in good faith by appropriate proceedings and (ii)
failure to comply will not have a Material Adverse Effect on a consolidated
basis;
(d) pay promptly when due all taxes, fees, assessments and other
government charges imposed upon their respective properties, assets or income
and all claims or indebtedness (including, without limitation, materialmen's,
vendor's, workmen's and like claims) which might become a lien upon such
properties or assets; provided, that payment of any such tax, fee, assessment,
charge, claim or indebtedness shall not be necessary so long as (i) the
applicability or validity thereof shall be contested in good faith by
appropriate proceedings and a reserve, if appropriate, shall have been
established with respect thereto and (ii) failure to make such payment will not
have a Material Adverse Effect on a consolidated basis; and
(e) keep adequately insured, by financially sound and reputable insurers
of nationally recognized stature, all their respective properties of a character
customarily insured by entities similarly situated, against loss or damage of
the kinds and in amounts customarily insured against by such entities and with
such deductibles or co-insurance as is customary.
7.6 Office for Payment, Exchange and Registration; Location of Office;
Notice of Change of Name or Office.
(a) So long as any of the Shares is outstanding, the Company will maintain
an office or agency where Shares may be presented for payment, exchange,
conversion or registration of transfer as provided in this Agreement. Such
office or agency initially shall be the office of the Company's transfer agent
and shall be the following: KeyCorp Shareholder Services, Inc., 700 Louisiana,
Suite 2620, Houston, Texas 77002.
(b) The Company shall give each holder of Shares at least twenty (20)
days' prior written notice of any change in (i) the name of the Company as then
in effect or (ii) the location of the office of the Company required to be
maintained under this Section 7.6.
7.7 Environmental Matters.
(a) The Company and each Subsidiary shall keep any property either owned
or occupied by the Company or any Subsidiary free and clear of any material
Liens imposed for failure to comply with any environmental laws, regulations or
ordinances (each, an "Environmental Lien"), and the Company and each Subsidiary,
as the case may be, shall keep all such property in material compliance with all
environmental laws, regulations and ordinances; provided, however, that the
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Company or any Subsidiary shall have the right at its cost and expense, and
acting in good faith, to contest, object or appeal by appropriate legal
proceeding the validity of any Environmental Lien. The contest, objection or
appeal with respect to the validity of an Environmental Lien shall suspend the
Company's obligation to eliminate such Environmental Lien under this paragraph
pending a final determination by appropriate administrative or judicial
authority of the legality, enforceability or status of such Environmental Lien,
provided that the following conditions are satisfied: (i) contemporaneously
with the commencement of such proceedings, the Company shall give written notice
thereof to each holder of Shares or Conversion Shares; and (ii) if under
applicable law any real property or improvements thereon are subject to sale or
forfeiture for failure to satisfy the Environmental Lien prior to a final
determination of the legal proceedings, the Company or such Subsidiary must
successfully move to stay such sale, forfeiture or foreclosure pending final
determination of the Company's (or Subsidiary's) action; and (iii) the Company
or such Subsidiary must, if requested, furnish to the holders of Shares or
Conversion Shares a good and sufficient bond, surety, letter of credit or other
security satisfactory to such holders equal to the amount (including any
interest and penalty) secured by the Environmental Lien.
(b) The Company will defend, indemnify and hold harmless each current,
former and future holder of Shares or Conversion Shares, its employees,
officers, directors, stockholders, partners, agents, representatives and
assigns, from and against any liabilities, obligations, losses, damages,
penalties, actions, judgments, suits and claims, joint or several, and any
costs, disbursements and expenses (including attorneys' fees and expenses and
costs of investigation) of whatever kind or nature, known or unknown, contingent
or otherwise, arising out of or in any way related to (i) the presence,
disposal, release, removal, discharge, storage or transportation of any
Hazardous Material upon, into, from or affecting any real property (including
improvements) owned or occupied (or formerly owned or occupied) by the Company
or any Subsidiary; and (ii) any judicial or administrative action, suit or
proceeding, actual or threatened, relating to Hazardous Material upon, in, from
or affecting any real property (including improvements) owned or occupied (or
formerly owned or occupied) by the Company or any Subsidiary; and (iii) any
violation of any environmental law, regulation or ordinance by the Company or
any Subsidiary or any of their agents, tenants, subtenants or invitees; and (iv)
the imposition of any Environmental Lien for the recovery of costs expended in
the investigation, study or remediation of any environmental liability of (or
asserted against) the Company or any Subsidiary, provided, however, that in no
case shall such persons be entitled to indemnification under this Section 7.7(b)
for a decrease in the value of the Shares or the Conversion Shares resulting
from or in any way related to items (i) though (iv) herein, but that the
preceding clause shall in no way limit any indemnification that an Exchanging
Party may otherwise be entitled to under any other provisions of this Stock
Exchange Agreement. This Section 7.7(b) shall survive any payment, conversion or
transfer of Shares and any termination of this Agreement.
7.8 No Change in Business.
Neither the Company nor any of its Subsidiaries will engage in any business
other than business of the general nature described in the Memorandum.
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7.9 Restrictive Agreements Prohibited.
Neither the Company nor any of its Subsidiaries shall become a party to any
agreement which by its terms restricts the Company's performance of this
Agreement.
7.10 Restricted Payments.
Neither the Company nor any Subsidiary will declare or make or permit to be
declared or made any Restricted Payment.
7.11 Consolidation, Merger and Sale.
Without the consent of the Majority Shareholders, neither the Company nor
any Subsidiary will do any of the following (or agree to do any of the
following) pursuant to a transaction approved by the Board of Directors of the
Company: (a) wind up, liquidate or dissolve its affairs; (b) sell, lease,
transfer or otherwise dispose of all or substantially all of its assets to any
other Person; (c) consolidate with, merge into or enter into a share exchange
with any other Person; or (d) permit any other Person (other than a wholly-owned
Subsidiary on the date hereof) to merge into or sell, lease or transfer all or
substantially all of its property, assets or capital stock to the Company or any
Subsidiary, unless:
(i) in the case of actions under clause (a) or (b) above, a wholly-
owned Subsidiary is wound-up, dissolved and liquidated into another wholly-
owned Subsidiary or into the Company or a wholly-owned Subsidiary sells,
leases, transfers or otherwise disposes of all or substantially all of its
assets to another wholly-owned Subsidiary or to the Company; or
(ii) in the case of actions under clause (c) or (d) above, each of the
following conditions is satisfied:
(A) if such action involves the Company and if such surviving
Person is a corporation other than the Company, all liabilities and
obligations of the Company under the Stock Exchange Agreements shall remain
in effect and shall have been expressly assumed by such surviving Person
(pursuant to a document in form and substance reasonably satisfactory to
the Majority Shareholders and their counsel) as if such surviving Person
were the "Company" hereunder and thereunder; and
(B) either (x) the Common Stock of such transferee Person into
which the Series B Preferred Stock will thereafter be convertible (or
American Depositary Receipts with respect thereto) is listed on a national
securities exchange in the United States or traded on The Nasdaq Stock
Market, or (y) all of the Series B Preferred Stock is concurrently redeemed
for cash in accordance with Section 5 of the Series B Certificate of
Designations.
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7.12 Transactions with Affiliates.
The Company will not, and will not permit any Subsidiary to, directly or
indirectly, enter into any transaction or agreement (including, without
limitation, the purchase, sale, distribution, lease or exchange of any property
or the rendering of any service) with any Affiliate of the Company or of any
Subsidiary, other than a wholly-owned Subsidiary of the Company, unless such
transaction or agreement (a) is approved by disinterested members of the Board
of Directors of the Company, and (b) is on terms that are no less favorable to
the Company or such Subsidiary, as the case may be, than those which might be
obtained at the time of such transaction from a Person who is not such an
Affiliate; provided, however, that this Section 7.12 shall not limit, or be
applicable to, (i) employment arrangements with any individual who is an
employee of the Company or any Subsidiary if such arrangements are approved by
the Board; and (ii) the payment of reasonable and customary regular fees to
directors who are not employees of the Company.
7.13 Observer Rights.
Each of the Eligible Holders shall have the right, during the period
through the Rights Expiration Date for such Eligible Holder, and (if requested
by the Company) subject to execution by such observer of a reasonable
confidentiality agreement, to send one (1) representative to meetings of the
Company's and each Subsidiary's Board of Directors (and the executive committee
if the executive committee has more than five members) of such Boards, such
representatives to act as observers without a vote or other rights as a director
(except the right to receive sufficient notice to enable such attendance and the
right to receive all other communications, information and materials furnished,
from time to time, to directors of the Company and each Subsidiary). Any
representative acting under this Section 7.13 shall be chosen from the list of
Persons provided to the Company concurrently with execution of this Agreement
(or another individual selected by such holders and reasonably acceptable to the
Company)
7.14 No Dilution or Impairment; No Changes in Capital Stock.
The Company will not, by amendment of its certificate of incorporation or
through any consolidation, merger, reorganization, transfer of assets,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms of the Stock
Exchange Agreements or the Series B Certificate of Designations. The Company
will at all times in good faith assist in the carrying out of all such terms,
and in the taking of all such action, as may be necessary or appropriate in
order to protect the rights of the holders of Shares (as such rights are set
forth in the Stock Exchange Agreements and the Series B Certificate of
Designations) against impairment. Without limiting the generality of the
foregoing, the Company (a) will not permit the par value or the determined or
stated value of any shares of the Company's Common Stock receivable upon the
conversion of the Shares to exceed the amount payable therefor upon such
conversion, (b) will take all such action as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and non-
assessable shares of the Company's Common Stock free from all taxes, Liens and
charges with respect to the issue thereof, upon the
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conversion of the Shares from time to time outstanding, (c) will not take any
action which results in any adjustment of the Conversion Price under the Series
B Certificate of Designations if the total number of shares of the Company's
Common Stock (or other securities) issuable after the action upon the conversion
of all of the then outstanding Shares would exceed the total number of shares of
the Company's Common Stock (or other securities) then authorized by the
Company's certificate of incorporation and available for the purpose of issuance
upon such conversion, (d) will not have any authorized Common Stock other than
its existing authorized Common Stock, (e) will not amend its certificate of
incorporation to change any terms of its Common Stock, (f) will not amend its
certificate of incorporation in any manner to alter or change the powers,
privileges or preferences of the holders of the Series B Preferred Stock
(including without limitation changing the Series B Certificate of Designations
after any Shares have been called for redemption), (g) will not create or
authorize the creation of any additional class or series of shares of capital
stock unless the same ranks junior to the Series B Preferred Stock as to the
payment of dividends or the distribution of assets on the liquidation,
dissolution or winding up of the Company, or increase the authorized amount of
the Series B Preferred Stock, or increase the authorized amount of any
additional class or series of shares of stock unless the same ranks junior to
the Series B Preferred Stock as to the payment of dividends or the distribution
of assets on the liquidation, dissolution or winding up of the Company, or
create or authorize any obligation or security convertible into shares of Series
B Preferred Stock or into shares of any other class or series of stock unless
the same ranks junior to the Series B Preferred Stock as to the payment of
dividends or the distribution of assets on the liquidation, dissolution or
winding up of the Company, whether any such creation, authorization or increase
shall be by means of amendment to the certificate of incorporation or by merger,
consolidation or otherwise and (h) after the date hereof, will not create or
establish (or make any grants or awards under) any phantom stock, stock
appreciation rights or other equity equivalent plan for employees, officers,
directors, agents or consultants of the Company (unless such plans in the
aggregate relate to the equivalent of less than 5% of the Common Stock of the
Company) whereby the Company or any Subsidiary agrees to pay any Person a
percentage of, or an amount otherwise determined by reference to, the earnings
of the Company or any Subsidiary, the value of their stock or the proceeds from
a sale of their stock or upon their liquidation.
7.15 Reservation of Shares.
There have been reserved, and the Company shall at all times keep reserved,
free from preemptive rights, out of its authorized Common Stock, a number of
shares of Common Stock sufficient to provide for the exercise of the conversion
rights of the Shares provided in the Series B Certificate of Designations. If
at any time the number of authorized but unissued shares of Common Stock of the
Company shall not be sufficient to effect the conversion of the Shares or
otherwise to comply with the terms of this Agreement, the Company will forthwith
take such corporate action as may be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose. The Company will obtain any authorization, consent, approval
or other action by or make any filing with any court or administrative body that
may be required under applicable state securities laws in connection with the
issuance of the Common Stock upon conversion of the Shares.
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7.16 Listing of Shares.
If any shares of the Company's Common Stock or Series B Preferred Stock are
listed on any national securities exchange (or on The Nasdaq Stock Market or
comparable system), then the Company will take such action as may be necessary,
from time to time, to list the Conversion Shares or the Shares, as the case may
be, on such exchange (or system as the case may be). The Company shall have no
obligation to list the Shares if the Series B Preferred Stock is not so listed.
7.17 Securities Exchange Act Registration.
(a) The Company will maintain effective a registration statement
(containing such information and documents as the Commission shall specify and
otherwise complying with the Securities Exchange Act) under Section 12(b) or
Section 12(g), whichever is applicable, of the Securities Exchange Act, with
respect to the Company's Common Stock, and will file on time such information,
documents and reports as the Commission may require or prescribe for companies
whose stock has been registered pursuant to such Section 12(b) or Section 12(g),
whichever is applicable.
(b) The Company will, upon the request of any holder of Shares or
Conversion Shares, make whatever other filings with the Commission, or otherwise
make generally available to the public such financial and other information, as
any such holder may deem reasonably necessary or desirable in order to enable
such holder to be permitted (i) to sell Conversion Shares pursuant to the
provisions of Rule 144 and (ii) after the Company has filed a registration
statement with respect to Series B Preferred Stock under Section 6 of the
Securities Act or Section 12(b) or 12(g) of the Securities Exchange Act, to sell
Shares pursuant to the provisions of Rule 144.
7.18 Maintenance of Public Market.
Except as contemplated by Section 7.11, the Company will not (i) proceed
with a program of acquisition of its own Common Stock or of Series B Preferred
Stock (other than by redemption in accordance with the Series B Certificate of
Designations), (ii) initiate a corporate reorganization or recapitalization or
undertake a consolidation or merger or (iii) authorize, consent to or take any
action without the consent of the Eligible Holders, which would have the effect
of:
(a) removing the Company from registration with the Commission under
the Securities Exchange Act with respect to the Company's Common Stock,
(b) requiring the Company to make a filing under Section 13(e) of the
Securities Exchange Act,
(c) reducing substantially or eliminating the public market for
shares of Common Stock of the Company
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(d) if any shares of the Company's Common Stock or Series B Preferred
Stock are at any time listed on The Nasdaq Stock Market, causing a
delisting of the Company's Common Stock or Series B Preferred Stock, as the
case may be, from such systems (unless such stock is delisted as a result
of being listed on a national securities exchange), or
(e) if any shares of the Company's Common Stock or Series B Preferred
Stock are at any time listed on a national securities exchange, causing a
delisting of such stock from such exchange.
7.19 Private Placement Status.
Neither the Company nor any agent nor other Person acting on the Company's
behalf will do or cause to be done (or will omit to do or to cause to be done)
any act which act (or which omission) would result in bringing the issuance or
exchange of the Shares or the Conversion Shares within the provisions of Section
5 of the Securities Act or the filing, notification or reporting requirements of
any state securities law (other than in accordance with a registration and
qualification of Conversion Shares pursuant to Section 7.17 hereof), except for
filings, notices or reports pursuant to state securities laws which have already
been made or which are contemplated in connection with the offering and exchange
of the Shares.
7.20 Delivery of Information.
If a holder of Shares or Conversion Shares proposes to transfer any such
Shares or Conversion Shares pursuant to Rule 144A, the Company agrees to provide
(upon the request of such holder or the prospective transferee) to such holder
and (if requested) to the prospective transferee any information concerning the
Company and its Subsidiaries which is required to be delivered to any transferee
of such Shares or Conversion Shares pursuant to such Rule 144A.
7.21 Notices.
The Company will give to all holders of Shares or Conversion Shares copies
of all notices given by the Company to holders of its Common Stock concurrently
with the giving of such notices to such holders of Common Stock.
7.22 No Dividends in Common Stock Unless Registered.
The Company will not declare and cause to be paid dividends on the Shares
in shares of Common Stock until a registration statement covering the resale of
such Common Stock has been filed with the Commission and has been declared
effective thereby.
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SECTION 8. REGISTRATION RIGHTS
8.1 Registration of the Shares.
(a) The holders of at least an aggregate of 100,000 Shares may request the
Company to register under the Securities Act the resale of all or any portion of
such Shares, but in no event less than 60,000 Shares, held by such requesting
holder or holders for sale in the manner specified in such notice.
(b) Following receipt of any notice under this Section 8.1, the Company
shall immediately notify all holders of the Shares from whom notice has not been
received and shall commit to register under the Securities Act, for public sale
in accordance with the method of disposition specified in such notice from
requesting holders, the number of Shares specified in such notice (and in all
notices received by the Company from other holders within 30 days after the
giving of such notice by the Company). All such holders who submit requests to
the Company pursuant to this Section 8.1 shall be referred to individually as a
"Requesting Holder" and collectively as "Requesting Holders." If the Requesting
Holders may elect to have the Shares sold to one or more persons participating
as underwriters ("Underwriters") for an offering of Shares to the public (an
offering of any shares of capital stock of the Company by means of Underwriters
to the public shall be referred to as an "Underwritten Offering"), the holders
of a majority of the Shares to be sold in such offering may designate the
managing Underwriter of such offering, subject to approval of the Company, which
approval will not be unreasonably withheld or delayed. The Company shall be
obligated to register the Shares pursuant to this Section 8.1 on two occasions
only, provided, however, that such obligation shall be deemed satisfied only
when a registration statement covering at least 60% of the total Shares
specified in notices received as aforesaid, for sale in accordance with the
method of disposition specified by the Requesting Holders, shall have become
effective and, if such method of disposition is an Underwritten Offering, all
such shares shall have been sold pursuant thereto.
(c) Except for registration statements on Form S-4, S-8 or any successor
thereto and except as required under the registration rights agreements referred
to in Schedule II hereto, the Company will not file with the Commission without
the approval of the Requesting Holders any other new registration statements
with respect to its capital stock, whether for its own account or that of other
stockholders, from the date of receipt of a notice from Requesting Holders
pursuant to this Section 8.1 until the earlier of (i) six (6) months from the
date of receipt of such notice and (ii) the completion of the period of
distribution of the registration contemplated thereby. The registration
statement, together with all amendments and supplements, including post-
effective amendments, in each case including the prospectus contained therein
(including the preliminary prospectus and all amendments and supplements to the
prospectus, including post-effective amendments) (collectively, the
"Prospectus"), all exhibits thereto or to the Prospectus and all material
incorporated by reference therein or to the Prospectus, is referred to as the
"Registration Statement".
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(d) If and whenever the Company is required by the provisions of this
Section 8.1 to effect the registration of any Shares under the Securities Act,
the Company will, as expeditiously as possible:
(i) prepare and file with the Commission, no later than 60 days after
the receipt of the first notice from the Requesting Holders, a Registration
Statement on Form S-2 (or other appropriate form) with respect to such
securities and use its reasonable best efforts to cause such Registration
Statement to become and remain effective for the period of distribution
contemplated thereby (determined as hereinafter provided);
(ii) prepare and file with the Commission such amendments and
supplements to such Registration Statement and the Prospectus used in
connection therewith as may be necessary to keep such Registration
Statement effective for the period contemplated in (i) above and comply
with the provisions of the Securities Act with respect to the disposition
of all Shares covered by such Registration Statement in accordance with the
sellers' intended method of disposition set forth in such Registration
Statement for such period;
(iii) register or qualify the Shares, by the time the Registration
Statement is declared effective by the Commission, under all applicable
state securities or "Blue Sky" laws of such jurisdictions as each
Underwriter, if any, or the Requesting Holders shall request in writing,
provided that the Company shall not be obligated to qualify as a foreign
corporation or as a dealer in securities in any jurisdiction in which it is
not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject;
(iv) keep each such registration or qualification effective during the
period the Registration Statement is required to be kept effective;
(v) upon request by the Requesting Holders, do any and all other acts
and things which may be reasonably necessary to enable such Underwriter, if
any, and the Requesting Holders to consummate the disposition of the Shares
in each such jurisdiction;
(vi) notify the Requesting Holders when the Registration Statement has
become effective and when any post-effective amendments and supplements
thereto become effective;
(vii) in connection with an Underwritten Offering, if any, notify the
Requesting Holders if, between the effective date of the Registration
Statement and the closing of any sale of Shares, the representations and
warranties of the Company contained in the underwriting agreement relating
to any Underwritten Offering cease to be true and correct in all material
respects or if the Company receives any notification with respect to the
suspension of the qualification of the Shares for sale in any jurisdiction
or the initiation of any proceeding for such purpose;
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(viii) furnish or cause to be furnished forthwith to the Requesting
Holders, a "cold comfort" letter of the Company's independent accountants,
as of the effective date of the Registration Statement, as to such matters
as customarily are covered in accountant's letters delivered to
underwriters in underwritten public offerings of securities;
(ix) furnish or cause to be furnished forthwith to the Requesting
Holders, an opinion of counsel to the Company, as of the effective date of
the Registration Statement, in the form customarily provided by issuer's
counsel in underwritten public offerings of securities;
(x) furnish such number of Prospectuses and other documents incident
thereto, including any amendment of or supplement to the Prospectus as the
Requesting Holders from time to time may reasonably request during the
period of distribution of the Shares;
(xi) provide a transfer agent and registrar for all of the Shares; and
(xii) otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Commission with respect to the
disposition of the Shares covered by such Registration Statement, and make
available to its security holders, as soon as reasonably practicable, an
earnings statement covering the period of at least twelve months, but not
more than eighteen months, beginning with the first month after the
effective date of the Registration Statement, which earnings statement
shall satisfy the provisions of Section 11(a) of the Securities Act.
(e) For purposes of this Section 8.1, the period of distribution of the
Shares in an Underwritten Offering shall be deemed to extend until each
Underwriter has completed the distribution of all securities purchased by it
(but no later than 180 days), and the period of distribution of the Shares in
any other registration shall be deemed to extend until the earlier of the sale
of all Shares covered thereby and 180 days after the effective date thereof.
(f) In connection with each registration under this Section 8.1, and as a
condition to the inclusion of their shares therein, the Requesting Holders will
furnish to the Company in writing such information with respect to themselves
and the proposed distribution by them as reasonably shall be necessary in order
to assure compliance with federal and applicable state securities laws.
(g) As soon as the Company is eligible to register the Shares on Form S-3
(or any successor form thereto under the Securities Act), the Company will, as
expeditiously as possible but in any event no later than 60 days after the
Company is eligible to register the Shares on Form S-3, undertake to amend the
"shelf" Registration Statement on Form S-3 referred to in Section 8.2 to include
any Shares outstanding or to file and to use its reasonable best efforts to have
declared effective a separate registration statement registering the resale of
the Shares. Any Shares so registered pursuant to the Company's "shelf"
Registration Statement on Form S-3 or such other registration statement shall be
thereinafter included within the definition of "Registered Securities".
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(h) Subject to Section 8.3 below, the Company agrees to supplement or
amend the Registration Statement, if required by the Securities Act.
8.2 Shelf Registration of the Registered Securities.
The Company agrees to use its reasonable best efforts to file with the
Commission a "shelf" Registration Statement on Form S-3 (or other appropriate
form under the Securities Act), providing for the resale of all of the
Registered Securities, within sixty (60) days after the Closing Date. The
Company will use its reasonable best efforts to have the Registration Statement
declared effective by the Commission as soon as practicable after the filing
thereof. Subject to Section 8.3 hereof, the Company will use its reasonable best
efforts to keep the Registration Statement continuously effective until the
earlier of:
(A) the date upon which all of the outstanding Registered
Securities have been sold pursuant to the Registration Statement or are no
longer outstanding, or
(B) such date as the Company and each of the Eligible Holders
shall be satisfied that Rule 144(k) of the regulations under the Securities
Act is available for the resale of the Registered Securities held by them,
or, in the case of Eligible Holders for whom Rule 144(k) is unavailable,
such Eligible Holders have consented in writing to permit the Company to
discontinue the effectiveness of the Registration Statement.
Subject to Section 8.3 below, the Company agrees to supplement or amend the
Registration Statement, if required by the Securities Act.
8.3 Interference with Registration.
(a) For purposes of this Section 8.3, any Registration Statement pursuant
to either Section 8.1 or 8.2 hereof shall collectively be referred to as the
"Registration Statements." If, after the Registration Statements have been
declared effective, a stop order, injunction or other order or requirement of
the Commission or any other governmental agency or court is issued which
suspends the effectiveness of a Registration Statement, (i) upon receipt of
notice from the Company, the Requesting Holders or Exchanging Party (as
applicable) will discontinue any disposition of Shares or Registered Securities,
respectively, pursuant to that Registration Statement until receipt of notice
from the Company that the suspension of the effectiveness of the Registration
Statement has been withdrawn and (ii) the Company will use its reasonable best
efforts to obtain the withdrawal of such order or to meet such requirement at
the earliest possible time.
(b) If, after the Registration Statements have become effective, an event
occurs as a result of which the Company determines that a Registration Statement
or the related Prospectus contains any untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
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made, not misleading, the Company will notify the Requesting Holders and any
Exchanging Party (as applicable) thereof and, if applicable, use its reasonable
best efforts to prepare and promptly file a post-effective amendment or a
supplement to the Registration Statement or the related Prospectus or promptly
file any other required document so that, as thereafter delivered to purchasers
of the Shares or Registered Securities, such Prospectus will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(c) Without limiting Section 8.3(a) and 8.3(b) hereof, if any Requesting
Holder or Exchanging Party (as applicable) shall propose to sell any Shares or
Registered Securities, respectively, pursuant to the Registration Statements, it
shall notify the Company of its intent to do so at least three (3) full Business
Days prior to such sale. At any time within such three (3) Business Day period,
the Company may refuse to permit the Requesting Holder or Exchanging Party (as
applicable) to resell any Shares or Registered Securities, respectively,
pursuant to the Registration Statements; except that the Company may exercise
this right only once in any one hundred eighty (180) day period, unless the
matter giving rise to the exercise by the Company of this right is beyond the
Company's control; and provided, further, that in order to exercise this right,
the Company must deliver a certificate in writing to the Requesting Holder or
Exchanging Party (as applicable) to the effect that a delay in such sale is
necessary because a sale pursuant to such Registration Statement in its then-
current form would reasonably be expected to constitute a violation of the
federal securities laws. Without limiting Section 8.3(b) hereof, in no event
shall such delay exceed ten (10) Business Days; provided, however, that if,
prior to the expiration of such ten (10) Business Day period, the Company
delivers a certificate in writing to the Requesting Holder or Exchanging Party
(as applicable) to the effect that a further delay in such sale beyond such ten
(10) Business Day trading period is necessary because a sale pursuant to the
Registration Statement in its then-current form would reasonably be expected to
constitute a violation of the federal securities laws, the Company may refuse to
permit such Requesting Holder or Exchanging Party (as applicable) to resell any
Shares or Registered Securities, respectively, pursuant to the Registration
Statement for an additional period not to exceed five (5) Business Days, but in
no event shall any such delay exceed in the aggregate fifteen (15) Business
Days, unless the matter giving rise to the exercise of such right is beyond the
Company's control.
8.4 Selection of Underwriters for Registered Securities.
With respect to the registration of Registered Securities pursuant to
Section 8.2 hereof, at any time or from time to time after the Closing, the
Exchanging Party may elect to have the Registered Securities sold to one or more
persons participating as Underwriters for an Underwritten Offering. In such
event, the Company shall engage (a) Alex. Brown & Sons Incorporated or (b)
another nationally recognized independent investment banking firm reasonably
acceptable to the holders of a majority of the Registered Securities, as
Underwriters; provided, however, that the Company shall not be required to
engage any Underwriter if such engagement would require the consent or approval
of any governmental authority (including the necessity of obtaining an exemptive
order under the Investment Company Act of 1940, as amended); provided, further,
that after three years after the
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Closing Date such Underwriters shall be selected by mutual agreement of the
Company and the holders of a majority of the Registered Securities, each acting
reasonably. In such event, the Company and each such Exchanging Party will
cooperate with the Underwriter or the managing Underwriter and take all
customary and reasonable actions to facilitate the disposition of Registered
Securities in an Underwritten Offering.
8.5 Other Obligations of the Company with respect to the Registered
Securities.
After the Closing, the Company will:
(a) use its reasonable best efforts
(i) to register or qualify the Registered Securities, by the time the
Registration Statement is declared effective by the Commission, under all
applicable state securities or "Blue Sky" laws of such jurisdictions as
each Underwriter, if any, or the Exchanging Party shall request in writing,
provided that the Company shall not be obligated to qualify as a foreign
corporation or as a dealer in securities in any jurisdiction in which it is
not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject;
(ii) to keep each such registration or qualification effective during
the period the Registration Statement is required to be kept effective; and
(iii) upon request by the Exchanging Party, to do any and all other
acts and things which may be reasonably necessary to enable such
Underwriter, if any, and the Exchanging Party to consummate the disposition
of the Registered Securities in each such jurisdiction;
(b) notify the Exchanging Party
(i) when the Registration Statement has become effective and when any
post-effective amendments and supplements thereto become effective and
(ii) in connection with an Underwritten Offering, if any, if, between
the effective date of the Registration Statement and the closing of any
sale of Registered Securities, the representations and warranties of the
Company contained in the underwriting agreement relating to any
Underwritten Offering cease to be true and correct in all material respects
or if the Company receives any notification with respect to the suspension
of the qualification of the Registered Securities for sale in any
jurisdiction or the initiation of any proceeding for such purpose;
(c) Furnish or cause to be furnished forthwith to the Exchanging Party,
(i) a "cold comfort" letter of the Company's independent accountants,
as of the effective date of the Registration Statement, as to such matters
as customarily are covered
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in accountant's letters delivered to underwriters in underwritten public
offerings of securities and
(ii) an opinion of counsel to the Company, as of the effective date of
the Registration Statement, in the form customarily provided by issuer's
counsel in underwritten public offerings of securities;
(d) furnish such number of Prospectuses and other documents incident
thereto, including any amendment of or supplement to the Prospectus as an
Exchanging Party from time to time may reasonably request;
(e) cause all such Registered Securities registered as described herein to
be listed on each securities exchange and quoted on each quotation service on
which securities of the same class and series issued by the Company are then
listed or quoted;
(f) provide a transfer agent and registrar for all Registered Securities;
(g) otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Commission with respect to the
disposition of the Registered Securities, and make available to its security
holders, as soon as reasonably practicable, an earnings statements covering the
period of at least twelve months, but not more than eighteen months, beginning
with the first month after the effective date of the Registration Statement,
which earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act.
8.6 Registration Expenses.
The Company agrees to pay all Registration Expenses in connection with the
registrations pursuant to this Section 8. "Registration Expenses" means any and
all expenses incident to performance of or compliance with the provisions of
this Section 8 by the Company, including without limitation: (i) all Commission
and National Association of Securities Dealers, Inc. ("NASD") registration and
filing fees, (ii) all fees and expenses incurred in connection with compliance
with state securities or "Blue Sky" laws and compliance with the rules of the
NASD, (iii) all expenses in preparing, printing and distributing the
Registration Statements and other documents relating to the performance of and
compliance with this Agreement by the Company, (iv) the reasonable fees and
disbursements of counsel for the Company and of one counsel selected by the
Eligible Holders and reasonably acceptable to the Company and of the independent
public accountants of the Company, (v) any fees and disbursements of
Underwriters, dealers and agents, if any, customarily paid by issuers of
securities under similar circumstances relating to compliance with applicable
state securities or "Blue Sky" laws and the fees and expenses of any special
experts retained by the Company in connection with the Registration Statements;
but excluding (x) underwriting discounts and commissions and (other than as
provided in clause (v) of this paragraph) fees and disbursements of
Underwriters, dealers and agents in connection with an Underwritten Offering of
Shares or Registered Securities, if any, and (y) transfer taxes, if any,
relating to the sale and disposition of Shares or Registered Securities.
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8.7 Short Sales.
No Exchanging Party shall engage in any short-sales of the Company's Common
Stock prior to the effectiveness of the Registration Statement, except to the
extent that any such shortsale is fully covered by freely tradable shares of
Common Stock of the Company.
8.8 Representations of the Company.
The Company represents and warrants to, and agrees with, the Exchanging
Party that:
(a) The Registration Statements and the Prospectuses contained therein,
when they become effective or are filed with the Commission, as the case may be,
and, in the case of an Underwritten Offering, at the time of the closing under
the underwriting agreement relating thereto, will conform in all material
respects to the requirements of the Securities Act and will not contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading;
and at all times subsequent to the effective date of such Registration
Statements when a Prospectus would be required to be delivered under the
Securities Act, except for the periods provided under Section 8.3 hereof, such
Registration Statements and Prospectuses will conform in all material respects
to the requirements of the Securities Act and will not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing; provided, however, that this
representation and warranty shall not apply to any statements or omissions made
in reliance upon and in conformity with information furnished in writing to the
Company by the Exchanging Party or any Underwriter expressly for use therein.
(b) Any documents incorporated by reference in the Prospectuses, when they
become or became effective or are or were filed with the Commission, as the case
may be, will conform or conformed in all material respects to the requirements
of the Securities Act or the Exchange Act, as applicable, and none of such
documents will contain or contained, as of their respective dates, an untrue
statement of a material fact or will omit or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading at the time they become or became effective or are or were filed with
the Commission, as the case may be; provided, however, that this representation
and warranty shall not apply to any statements or omissions made in reliance
upon and conformity with information furnished in writing to the Company by the
Exchanging Party or any Underwriter expressly for use therein.
8.9 Indemnification.
(a) The Company will indemnify and hold harmless each holder of Shares and
Registered Securities and any underwriter (as defined in the Securities Act) for
such holder and each person, if any, who controls the holder or underwriter
within the meaning of the Securities Act against any losses, claims, damages or
liabilities, joint or several, and expenses (including reasonable attorneys'
fees and expenses and reasonable costs of investigation) to which the holder or
underwriter or such
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controlling person may be subject, under the Securities Act or otherwise,
insofar as any thereof arise out of or are based upon (x) any untrue statement
or alleged untrue statement of a material fact contained in a Registration
Statement, a Prospectus or any amendment or supplement thereto, or (y) the
omission or alleged omission to state in any item referred to in the preceding
clause a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or expenses arise out of or are based upon any untrue
statement or alleged untrue statement or omission or alleged omission based upon
information furnished to the Company in writing by such holder or by any
underwriter for such holder expressly for use therein (with respect to which
information such holder or underwriter shall so indemnify and hold harmless the
Company, any underwriter for the Company and each person, if any, who controls
the Company or such underwriter within the meaning of the Securities Act). The
foregoing is subject to the condition that, insofar as the foregoing indemnities
relate to any untrue statement, alleged untrue statement, omission or alleged
omission made in any prospectus which is eliminated or remedied in any
amendment, supplement or final prospectus, the above indemnity obligations of
the Company shall not inure to the benefit of any indemnified person (or to the
benefit of any person who controls such indemnified person within the meaning of
the Securities Act) if a copy of such amendment, supplement or final prospectus
was not sent or given by such indemnified person at or prior to the time such
action is required of such indemnified person by the Securities Act and if
delivery of such amendment, supplement or final prospectus would have eliminated
(or been a sufficient defense to) any liability of such indemnified person with
respect to such statement or omission.
(b) The Exchanging Party will indemnify and hold harmless the Company, any
other Exchanging Parties, any underwriter (as defined in the Securities Act) and
each person, if any, who controls the Company, such other Exchanging Parties or
any underwriter within the meaning of the Securities Act, against any losses,
claims, damages or liabilities, joint and several, and expenses (including
reasonable attorneys' fees and expenses and reasonable costs of investigation)
to which the Company, such other Exchanging Party, underwriter or such
controlling person may be subject, under the Securities Act or otherwise,
insofar as any thereof arise out of or are based upon (x) any untrue statement
or alleged untrue statement of a material fact contained in a Registration
Statement, a Prospectus or any amendment or supplement thereto, (y) the omission
or alleged omission to state in any item referred to in the preceding clause a
material fact required to be stated therein or necessary to make the statements
therein not misleading or (z) any failure of the Exchanging Party to perform its
obligations hereunder or under law; provided, however, that the Exchanging Party
will be liable hereunder in any such case if and only to the extent that any
such loss, claim, damage, liability or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in reliance upon and in strict conformity with information pertaining to
the Exchanging Party, as such, furnished in writing to the Company by the
Exchanging Party stated to be specifically for use in such Registration
Statement and Prospectus; provided, further, however, that the liability of the
Exchanging Party hereunder shall be limited to the proportion of any such loss,
claim, damage, liability or expense which is equal to the proportion that the
public offering price of the Shares or Registered Securities sold by the
Exchanging Party under such Registration Statement bears to the total public
offering price of all securities sold thereunder,
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but not in any event to exceed the proceeds received by the Exchanging Party
from the sale of the Shares or Registered Securities covered by such
Registration Statement. The foregoing is subject to the condition that, insofar
as the foregoing indemnities relate to any untrue statement, alleged untrue
statement, omission or alleged omission made in any prospectus which is
eliminated or remedied in any amendment, supplement or final prospectus, the
above indemnity obligations of the Exchanging Party shall not inure to the
benefit of any indemnified person (or to the benefit of any person who controls
such indemnified person within the meaning of the Securities Act) if a copy of
such amendment, supplement or final prospectus was not sent or given by such
indemnified person at or prior to the time such action is required of such
indemnified person by the Securities Act and if delivery of such amendment,
supplement or final prospectus would have eliminated (or been a sufficient
defense to) any liability of such indemnified person with respect to such
statement or omission.
(c) Promptly after receipt by an indemnified party under Section 8.9(a) or
(b) hereof of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against an indemnifying party
under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the failure to so notify an indemnifying party shall
not relieve the indemnifying party of its obligations under this Section 8.9
unless such failure to notify materially prejudices the indemnifying party's
defense. In case any such action shall be brought against any indemnified party
and it shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate therein and, to the extent
that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel reasonably satisfactory to
such indemnified party, and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under this
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by such indemnified party, in connection with
the defense thereof other than reasonable costs of investigation.
Notwithstanding the foregoing, the indemnifying party shall pay as incurred the
fees and expenses of separate counsel retained by the indemnified party in the
event (i) the indemnifying party and the indemnified party shall have mutually
agreed to the retention of such counsel or (ii) the named parties to any such
proceeding (including any impleaded parties) include both the indemnifying party
and the indemnified party and representation of both parties by the same counsel
would be inappropriate due to actual or potential differing interests between
them. It is understood that the indemnifying party shall not, in connection
with any proceeding or related proceedings in the same jurisdiction, be liable
for the reasonable fees and expenses of more than one separate firm for all such
indemnified parties. In addition, an indemnifying party shall not be required
to indemnify, reimburse, or otherwise make any contribution to the amount paid
or payable by the indemnified party for any losses, claims, damages, expenses or
liabilities incurred by the indemnified party in settlement of any actions,
proceedings or investigations otherwise covered hereunder, unless such
settlement has been previously approved by the indemnifying party, which
approval shall not be unreasonably withheld.
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(d) If the indemnification provided for in this Section 8.9 is unavailable
to or insufficient to hold harmless an indemnified party under Section 8.9(a) or
(b) hereof in respect of any losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) referred to therein, then each indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) in such proportion as is appropriate to reflect
not only (i) the relative benefits received by the Exchanging Party on the one
hand and the underwriter on the other from the offering of the Shares or the
Registered Securities but also (ii) the relative fault of the Company, the
Exchanging Party and the underwriter in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Exchanging
Party on the one hand and the underwriter on the other shall be deemed to be in
the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Exchanging Party bear to the total
underwriting discounts and commissions received by the underwriter, in each case
as set forth in the table on the cover page of the Prospectus. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact related to information supplied by the
Company, the Exchanging Party or the underwriter and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
(e) The Company and the Exchanging Party agree that it would not be just
and equitable if contributions pursuant to this Section 8.9 were determined by
pro rata allocation (even if several underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 8.9. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
referred to above in this Section 8.9 shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 8.9, no underwriter, if any, will be required to
contribute any amount in excess of the amount agreed to between the Company and
the underwriter at the time of such offering. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. Any underwriters' obligations to contribute will
be several in proportion to their respective underwriting obligations and not
joint.
(f) In any proceeding relating to a Registration Statement, a Prospectus
or any supplement or amendment thereto, each party against whom contribution may
be sought under this Section 8.9 hereby consents to the jurisdiction of any
court having jurisdiction over any other contributing party, agrees that process
issuing from such court may be served upon him or it by any other contributing
party and consents to the service of such process and agrees that any other
contributing party may join him or it as an additional defendant in any such
proceeding in which such other contributing party is a party.
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8.10 Transferees.
The right to sell Shares and Registered Securities pursuant to a
Registration Statement described herein will automatically be assigned to each
transferee of Shares or Registered Securities, other than any purchaser of
Shares or Registered Securities sold under a Registration Statement. In the
event that it is necessary, in order to permit an Exchanging Party to sell
Shares or Registered Securities pursuant to a Registration Statement, to amend
or supplement the Registration Statement to name such transferee, such
transferee shall, upon written notice to the Company, be entitled to have the
Company make such amendment or supplement as soon as reasonably practicable.
SECTION 9. CONDITIONS TO EXCHANGING PARTY'S OBLIGATIONS
The Exchanging Party's obligation to exchange Shares hereunder is subject
to satisfaction of the following conditions at the Closing (any of which may be
waived by the Exchanging Party):
9.1 Series B Certificate of Designations.
The Series B Certificate of Designations shall have been filed with the
Delaware Secretary of State in substantially the form attached hereto as
Exhibit A.
9.2 Certificates for Shares.
The Exchanging Party shall concurrently receive the certificates for Shares
contemplated by Section 2(b) hereof.
9.3 Accuracy of Representations and Warranties.
The representations and warranties of the Company in the Stock Exchange
Agreements or in any certificate or document delivered pursuant hereto or
thereto shall be correct and complete on and as of the Closing Date with the
same effect as though made on and as of the Closing Date (after giving effect to
transactions contemplated by this Agreement).
9.4 Compliance with Agreements.
The Company shall have performed and complied with all agreements,
covenants and conditions contained in the Stock Exchange Agreements and any
other document contemplated hereby or thereby which are required to be performed
or complied with by the Company on or before the Closing Date.
9.5 Officers' Certificates.
The Exchanging Party shall have received a certificate dated the Closing
Date and signed by the President and by the Secretary of the Company, to the
effect that the conditions of this Section 9 have been satisfied.
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9.6 Proceedings.
All corporate and other proceedings in connection with the transactions
contemplated by the Stock Exchange Agreements, and all documents incident
thereto, shall be in form and substance satisfactory to the Exchanging Party and
its counsel, and the Exchanging Party shall have received all such originals or
certified or other copies of such documents as the Exchanging Party or its
counsel may reasonably request.
9.7 Legality; Governmental and Other Authorization.
The purchase of and payment for the Shares shall not be prohibited by any
law or governmental order, rule, ruling, regulation, release, interpretation or
opinion applicable to the Exchanging Party and shall not subject the Exchanging
Party to any penalty, tax, liability or other onerous condition. Any necessary
consents, approvals, licenses, permits, orders and authorizations of, and any
filings, registrations or qualifications with, any governmental or
administrative agency or other person with respect to the transactions
contemplated by the Stock Exchange Agreements shall have been obtained or made
and shall be in full force and effect. The Company shall have delivered to the
Exchanging Party upon its reasonable request factual certificates or other
evidence, in form and substance satisfactory to the Exchanging Party and its
counsel, setting forth what is required to enable the Exchanging Party to
establish compliance with this condition.
9.8 Time of Exchange.
The Closing shall not be later than 5:00 P.M., New York City time, on March
10, 1997 unless such date is extended by the Company, in its sole discretion, to
a date no later than March 31, 1997.
9.9 No Change in Law, etc.
No legislation, order, rule, ruling or regulation shall have been proposed,
enacted or made by or on behalf of any governmental body, department or agency,
and no legislation shall have been introduced in either House of Congress, and
no investigation by any governmental authority shall have been commenced or
threatened, and no action, suit or proceeding shall have been commenced before,
and no decision shall have been rendered by, any court, other governmental body
or arbitrator, which, in any such case, in the Exchanging Party's reasonable
judgment could adversely affect, restrain, prevent or change the transactions
contemplated by the Stock Exchange Agreements (including without limitation the
issuance of the Shares hereunder and thereunder and the issuance of the
Conversion Shares under the Series B Certificate of Designations) or materially
and adversely affect the assets, properties, liabilities, business, affairs,
results of operations, condition (financial or otherwise) or prospects of the
Company.
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9.10 Opinions of Counsel.
The Exchanging Party shall have received an opinion dated the Closing Date
and addressed to the Exchanging Party of Andrews & Kurth L.L.P., counsel for the
Company, which opinion shall be in form and substance reasonably satisfactory to
the Exchanging Party.
9.11 Other Documents and Opinions.
The Exchanging Party shall have received such other documents and opinions,
in form and substance satisfactory to the Exchanging Party and its counsel,
relating to matters incident to the transactions contemplated hereby as the
Exchanging Party may reasonably request.
9.12 Receipt of Consent and Exchange Agreements.
The Company shall have received a sufficient number of Consent and Exchange
Agreements executed by the holders of Series A Preferred Stock in order to have
the necessary authorization for the parity treatment of the Series B Preferred
Stock and the modification to the registration rights as contemplated therein.
9.13 Special Dividend.
The Company shall have declared a dividend on the Series A Preferred Stock
to the holders of record of shares of Series A Preferred Stock immediately
preceding the Initial Closing Date. Such dividend shall be paid promptly
following the Initial Closing and shall constitute the amount of all accrued but
unpaid dividends on the Series A Preferred Stock through the date of the Initial
Closing.
SECTION 10. CONDITIONS TO COMPANY'S OBLIGATIONS
The Company's obligation to exchange and issue the Shares at the Closing
is, at the option of the Company, subject to the fulfillment or waiver of the
following conditions:
10.1 Representations and Warranties Correct.
The representations and warranties made by the Exchanging Party in Section
5 hereof shall be true and correct in all material respects when made, and shall
be true and correct in all material respects on the Closing Date with the same
force and effect as if they had been made on and as of said date.
10.2 Covenants.
All covenants, agreements and conditions contained in this Agreement to be
performed by the Exchanging Party on or prior to the Closing Date shall have
been performed or complied with in all material respects.
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10.3 Blue Sky.
The Company shall have obtained all necessary blue sky law permits and
qualifications, or secured exemptions therefrom, required by any state for the
offer and sale of the Shares. No stop order or other order enjoining the sale
of the Shares shall have been issued and no proceedings for such purpose shall
be pending or, to the knowledge of the Company, threatened.
10.4 Surrender of Certificates.
The Exchanging Party shall have delivered to the Company, on or prior to
the Closing Date, the certificate or certificates representing the Exchanged
Shares, duly endorsed for transfer to the Company.
10.5 Closing of Private Placement.
The Company shall have completed a closing of the sale of shares of Series
B Preferred Stock under one or more Stock Purchase Agreements.
SECTION 11. BROKERS
Except for certain fees payable to the Agent (all of which fees will be
paid by the Company), the Company represents and warrants to the Exchanging
Party that there is no liability for (and the Company will pay and indemnify the
Exchanging Party against) any fees or expenses (or claims therefor) of any
investment banker, finder or broker retained by the Company or its Affiliates
(or that claims it was retained by the Company or its Affiliates) in connection
with any Stock Exchange Agreement or any of the transactions contemplated hereby
or thereby. The Company will indemnify the Exchanging Party against all such
fees or expenses payable to the enumerated persons in the preceding sentence and
against any other such fees, expenses or claims of any person, unless such
person was engaged by the Exchanging Party in connection with this Agreement or
any of the transactions contemplated hereby.
SECTION 12. BREACH OF REPRESENTATIONS, WARRANTIES AND COVENANTS
(a) The representations and warranties (as of the date hereof and as of
the Closing Date), covenants and agreements of the Company and the Exchanging
Party contained in this Agreement or in any document or certificate delivered
pursuant hereto or in connection herewith shall survive, and shall continue in
effect following, the execution and delivery of the Stock Exchange Agreements,
the closings hereunder and thereunder, any investigation at any time made by the
Exchanging Party or on its behalf or by any other Person, the issuance, exchange
and delivery of the Shares, any disposition thereof and any payment, conversion
or cancellation of the Shares provided, that Section 7 (other than Sections 7.1,
7.2, 7.4, 7.5, 7.7, 7.8, 7.9, 7.12, 7.13, 7.16, 7.17, 7.18, 7.20 and 7.21) shall
terminate when no Shares are outstanding. All statements contained in any
certificate delivered to the Exchanging Party by or on behalf of the Company
pursuant hereto shall constitute representations and warranties by the Company
hereunder.
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(b) The Company agrees to indemnify and hold the Exchanging Party harmless
from and against and will pay to the Exchanging Party the full amount of any
loss, damage, liability or expense (including amounts paid in settlement and
attorneys' fees and expenses) to the Exchanging Party resulting either directly
or indirectly from any breach of the representations, warranties, covenants or
agreements of the Company contained in any Stock Exchange Agreement, or in any
certificate delivered to the Exchanging Party pursuant hereto or in connection
herewith.
SECTION 13. SPECIFIC PERFORMANCE
The parties agree that irreparable damage will result in the event that
this Agreement is not specifically enforced, and the parties agree that any
damages available at law for a breach of this Agreement would not be an adequate
remedy. Therefore, the provisions hereof and the obligations of the parties
hereunder shall be enforceable in a court of equity, or other tribunal with
jurisdiction, by a decree of specific performance, and appropriate injunctive
relief may be applied for and granted in connection therewith. Such remedies
and all other remedies provided for in this Agreement shall, however, be
cumulative and not exclusive and shall be in addition to any other remedies
which a party may have under this Agreement or otherwise.
SECTION 14. EXPENSES
(a) Whether or not the transactions herein contemplated are consummated,
the Company will pay (i) the costs and expenses of the preparation and
production of the Stock Exchange Agreements and the Series B Certificate of
Designations and the issuance of the Shares and the Conversion Shares and the
furnishing of all opinions by counsel for the Company, (ii) the fees and
expenses of Piper & Marbury L.L.P. in connection with the Stock Exchange
Agreements and the Series B Certificate of Designations and the transactions
contemplated hereby and thereby (whether or not a closing occurs hereunder and
if a closing occurs the Company will make such payment on the Closing Date),
(iii) the reasonable fees and expenses of counsel to the Eligible Holders in
connection with any amendments to or modifications or waivers of any provisions
of the Stock Exchange Agreements or the Series B Certificate of Designations or
in connection with any other agreements between the Exchanging Parties and the
Company after the date hereof, any of which are requested by the Company, (iv)
the fees and expenses of any investment banker, broker or finder retained by the
Company or its Affiliates (or that claims it was retained by the Company or its
Affiliates) and involved with the Stock Exchange Agreements or the Series B
Certificate of Designations or any of the transactions contemplated hereby or
thereby, and (v) the fees and expenses (including reasonable attorneys' fees and
expenses) of any holder of Shares or Conversion Shares in enforcing its rights
against the Company if the Company materially defaults in its obligations
hereunder or under the Series B Certificate of Designations. The obligations of
the Company under this Section 14 shall survive the Closing hereunder and any
termination of the Stock Exchange Agreements.
(b) In addition to all other sums due hereunder or provided for in this
Agreement, the Company shall pay to the Exchanging Party or its agents,
respectively, an amount sufficient to
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indemnify such persons (net of any taxes on any indemnity payments) against all
reasonable costs and expenses (including reasonable attorneys' fees and expenses
and reasonable costs of investigation) and damages and liabilities incurred by
the Exchanging Party or its agents pursuant to any investigation or proceeding
against any or all of the Company, the Exchanging Parties, or their agents,
arising out of or in connection with the Stock Exchange Agreements, the Shares
or the Conversion Shares (or any transaction contemplated hereby or thereby or
any other document or instrument executed herewith or therewith or pursuant
hereto or thereto), whether or not the transactions contemplated by this
Agreement are consummated, which investigation or proceeding requires the
participation of the Exchanging Party or its agents or is commenced or filed
against the Exchanging Party or its agents because of the Stock Exchange
Agreements, the Shares or the Conversion Shares or any of the transactions
contemplated hereby or thereby (or any other document or instrument executed
herewith or therewith or pursuant hereto or thereto), other than any
investigation or proceeding in which it is finally determined that there was
gross negligence or willful misconduct on the part of the Exchanging Party or
its agents which was not taken by them in reliance upon any of the Company's
representations, warranties, covenants or agreements in the Stock Exchange
Agreements or in any other documents or instruments contemplated hereby or
thereby or executed herewith or therewith or pursuant hereto or thereto, except
to the extent that any costs, expenses, damages or liabilities incurred by the
Exchanging Party is the direct result of its breach of any of its
representations, warranties, covenants or agreements in this Stock Exchange
Agreement or in any other documents or instruments contemplated hereby or
thereby or executed in connection herewith or therewith or pursuant hereto or
thereto. The Company shall assume the defense, and shall have its counsel
represent the Exchanging Party and such agents, in connection with
investigating, defending or preparing to defend any such action, suit, claim or
proceeding (including any inquiry or investigation); provided, however, that the
Exchanging Party, or any such agent, shall have the right (without releasing the
Company from any of its obligations hereunder) to employ its own counsel and
either to direct its own defense or to participate in the Company's defense, but
the fees and expenses of such counsel shall be at the expense of such person
unless (i) the employment of such counsel shall have been authorized in writing
by the Company in connection with such defense or (ii) the Company shall not
have provided its counsel to take charge of such defense or (iii) the Exchanging
Party, or such agent of the Exchanging Party, shall have reasonably concluded
that there may be defenses available to it or them which are different from or
additional to those available to the Company, then in any of such events
referred to in clauses (i), (ii) or (iii) such reasonable counsel fees and
expenses (but only for one counsel for the Exchanging Parties and their agents)
shall be borne by the Company. Any settlement of any such action, suit, claim or
proceeding shall require the consent of both the Company and such indemnified
person (neither of which shall unreasonably withhold its consent).
(c) The Company agrees to pay, or to cause to be paid, all documentary,
stamp and other similar taxes levied under the laws of the United States of
America or any state or local taxing authority thereof or therein in connection
with the issuance and exchange of the Shares and the execution and delivery of
the Stock Exchange Agreements and any other documents or instruments
contemplated hereby or thereby and any modification of the Series B Certificate
of Designations or the Stock Exchange Agreements or any such other documents or
instruments and will hold the
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Exchanging Party harmless without limitation as to time against any and all
liabilities with respect to all such taxes.
(d) The obligations of the Company under this Section 14 shall survive the
Closing hereunder and any termination of the Stock Exchange Agreements.
SECTION 15. HOME OFFICE PAYMENTS
As long as the Exchanging Party or any institutional holder which is a
direct or indirect transferee (as a result of one or more transfers) from the
Exchanging Party shall be the holder of record of any Shares, the Company will
make all dividends, redemption payments, repurchase payments, liquidation
payments and other distributions by wire transfer to the Exchanging Party's or
such other holder's (or its nominee's) account at any bank or trust company in
the United States of America, notwithstanding any contrary provision herein or
in the Company's certificate of incorporation with respect to the place of
payment. The Exchanging Party has provided an address on Schedule I hereto for
payments by wire transfer, and such address may be changed for the Exchanging
Party or any subsequent holder by notice to the Company. All such payments
shall be made in U.S. dollars and in federal or other immediately available
funds.
SECTION 16. AMENDMENTS AND WAIVERS
(a) The terms and provisions of this Agreement may be amended, waived,
modified or terminated only with the written consent of the Majority
Shareholders; provided, however, that no such amendment, waiver, modification or
termination shall (i) change the provisions of Section 8 hereof in any material
respect, without the consent of the holders of all Shares or Conversion Shares
affected thereby or (ii) change the definition of Majority Shareholders or this
Section 16(a) without the written consent of the holders of all the Shares and
Conversion Shares then outstanding; and provided further that no such amendment,
waiver, modification or termination shall be effective with respect to a term or
provision of this Agreement unless it is also effective with respect to the
corresponding term or provision, if any, of each other Stock Exchange Agreement
and each Stock Purchase Agreement. The Exchanging Party acknowledges that by
operation hereof, the Majority Shareholders (which may not include the
Exchanging Party) will have the right and power to diminish or eliminate certain
rights of the Exchanging Party under this Agreement.
(b) The Company agrees that all holders of Shares and Conversion Shares
shall be notified by the Company in advance of any proposed amendment, waiver,
modification or termination, but failure to give such notice shall not in any
way affect the validity of any such amendment, waiver, modification or
termination. In addition, promptly after obtaining the written consent of the
holders as herein provided, the Company shall transmit a copy of any amendment,
waiver, modification or termination which has been adopted to all holders of
Shares and Conversion Shares then outstanding, but failure to transmit copies
shall not in any way affect the validity of any such amendment, waiver,
modification or termination.
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SECTION 17. EXCHANGE OF SHARES; CANCELLATION OF SURRENDERED SHARES;
REPLACEMENT
(a) Subject to Section 6 hereof, at any time at the request of any holder
of Shares to the Company at its address provided under Section 18 hereof, the
Company at its expense (except for any transfer tax arising out of the exchange)
will issue and deliver to or upon the order of the holder in exchange therefor a
new certificate or certificates therefor in such amount or amounts as such
holder may request in the aggregate representing the number of Shares
represented by such surrendered certificates, and registered in the name of such
holder or otherwise as such holder may direct.
(b) Any Share certificate which is converted into Conversion Shares in
whole or in part shall be canceled by the Company, and no new Share certificates
shall be issued in lieu of any Shares which have been converted into Conversion
Shares. The Company shall issue a new certificate with respect to any Shares
which were not converted into Conversion Shares and were represented by a
certificate which was converted in part.
(c) Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction or mutilation of any Share certificate and, in the case of
any such loss, theft or destruction, upon delivery of an indemnity agreement
reasonably satisfactory to the Company (unsecured in the case of an
institutional holder), or in the case of any such mutilation, upon surrender of
such Share certificate (which surrendered Share certificate shall be canceled by
the Company), the Company will issue a new Share certificate, of like tenor in
lieu of such lost, stolen, destroyed or mutilated Share certificate as if the
lost, stolen, destroyed or mutilated Share certificate were then surrendered for
exchange.
SECTION 18. NOTICES
All notices, requests, demands, consents and other communications hereunder
shall be in writing and shall be delivered by hand or shall be sent by telex or
telecopy (confirmed by registered, certified or overnight mail or courier,
postage and delivery charges prepaid), if to the Company at the address
indicated below, or if to the Exchanging Party at the address indicated on
Schedule I hereto, or at such other address as a party may from time to time
designate as its address in writing to the other party to this Agreement.
Whenever any notice is required to be given hereunder, such notice shall be
deemed given and such requirement satisfied only when such notice is delivered
or, if sent by telex or telecopier, when received.
a. If to the Company:
Energy BioSystems Corporation
4200 Research Forest Drive
The Woodlands, Texas 77381
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Attn: Vice President of Finance
With a copy to:
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002
Attn: William N. Finnegan, IV
(b) If to the Exchanging Party, at the
address of the Exchanging Party
set forth on Schedule I.
SECTION 19. MISCELLANEOUS
(a) The Stock Exchange Agreements (including all schedules and exhibits
thereto) and, upon the closing hereunder, the Series B Certificate of
Designations, together with any further agreements entered into by the
Exchanging Party and the Company at the closing hereunder, contain the entire
agreement between the Exchanging Party and the Company, and supersede any prior
oral or written agreements, commitments, terms or understandings regarding the
subject matter hereof.
(b) Any provision of this Agreement which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. To the extent permitted by applicable law, the parties
hereby waive any provision of law which may render any provision hereof
prohibited or unenforceable in any respect.
(c) If the Company fails to pay any amount required to be paid to a holder
of Shares or Conversion Shares or to a party under this Agreement (not including
dividends not declared by the Board of Directors), within thirty (30) days after
notice from such holder or such party demanding such payment (together with
reasonably detailed supporting information), then the Company agrees to pay such
holder or such party interest on any such overdue amount at a rate of 10% per
annum from the date of such notice from such holder or such party until such
overdue amount is paid in full.
(d) Unless otherwise expressly provided herein, any provision of this
Agreement relating to the consent, determination, decision or waiver of a holder
or holders of Shares or Conversion
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Shares means such holder's consent, determination, decision or waiver in such
holder's sole discretion.
(e) This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, whether so expressed
or not; provided, that the Company may not assign any of its rights, duties or
obligations under this Agreement, except in connection with a transaction
permitted by Section 7.11 or with the Exchanging Party's written consent.
(f) In addition to any assignment by operation of law, the Exchanging
Party may assign, in whole or in part, any or all of its rights (and/or
obligations) under this Agreement to any permitted transferee of any or all of
its Shares or Conversion Shares, except as provided in Section 8.10, and (unless
such assignment expressly provides otherwise) any such assignment shall not
diminish the rights the Exchanging Party would otherwise have under this
Agreement or with respect to any remaining Shares or Conversion Shares held by
the Exchanging Party.
(g) No course of dealing and no delay on the part of any party hereto in
exercising any right, power, or remedy conferred by this Agreement shall operate
as a waiver thereof or otherwise prejudice such party's rights, powers and
remedies. No single or partial exercise of any rights, powers or remedies
conferred by this Agreement shall preclude any other or further exercise thereof
or the exercise of any other right, power or remedy.
(h) The headings and captions in this Agreement are for convenience of
reference only and shall not define, limit or otherwise affect any of the terms
or provisions hereof.
(i) This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Delaware (other than any conflict of laws rule which
might result in the application of the laws of any other jurisdiction).
(j) This Agreement may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall be an original,
but all such counterparts shall together constitute one and the same instrument,
and all signatures need not appear on any one counterpart.
(k) WAIVER OF JURY TRIAL. THE COMPANY AND THE EXCHANGING PARTY HEREBY
WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE SERIES B CERTIFICATE OF
DESIGNATIONS, THE SHARES OR THE CONVERSION SHARES, OR ANY DEALINGS BETWEEN THEM
RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION. THE SCOPE OF THIS WAIVER IS
INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY
COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING
WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW AND STATUTORY CLAIMS. THE COMPANY AND THE EXCHANGING PARTY
FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL, AND THAT EACH
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<PAGE>
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE
MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO (OR ASSIGNMENTS
OF) THIS AGREEMENT, THE CERTIFICATE OF DESIGNATIONS, THE SHARES OR THE
CONVERSION SHARES. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A
WRITTEN CONSENT TO A TRIAL (WITHOUT A JURY) BY THE COURT.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
ENERGY BIOSYSTEMS CORPORATION
By /s/ John H. Webb
-------------------------
Name: John H. Webb
Title: President
Accepted and Agreed to as of
the date first above written by
the undersigned Exchanging Party:
(See Omnibus Signature Page)
By _____________________________
Name:
Title:
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<PAGE>
SCHEDULE I
TO THE STOCK
EXCHANGE AGREEMENT
Number of Shares
of Series A Preferred
Name of Exchanging Party Number of Shares Received Stock Exchanged
- ------------------------ ------------------------- ---------------
(a) address for communications:
Attn:
(b) address for payments by wire
transfer:
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<PAGE>
Attn:
(providing sufficient
information with such
wire transfer to identify
the source and application
of such funds)
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<PAGE>
SCHEDULE II TO
THE STOCK
EXCHANGE AGREEMENT
Summary of Registration Rights
1. Piggyback registration rights granted by the Company pursuant to that
certain First Amendment to License and Technology Assistance Agreement,
dated June 25, 1992, between the Company and Institute of Gas Technology.
2. Demand and piggyback registration rights granted by the Company pursuant to
that certain Registration Agreement, dated January 30, 1992, by and among
the Company, The Travelers Indemnity Company, The Travelers Indemnity
Company of Rhode Island, The Phoenix Insurance Company and Gryphon Ventures
II, Limited Partnership.
3. Demand and piggyback registration rights granted by the Company pursuant to
that certain Registration Agreement, dated April 29, 1991, by and between
the Company and Gryphon Ventures II, Limited Partnership.
4. Registration rights granted by the Company to the holders of the Series A
Preferred Stock pursuant to those certain Stock Purchase Agreements dated
October 27, 1994.
5. Registration rights granted by the Company to the purchasers of Series B
Preferred Stock pursuant to those certain Stock Purchase Agreements dated
February 21, 1997.
Indebtedness
NONE.
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EXHIBIT 10.10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made as of the 31st day of January, 1996 by
and between Energy BioSystems Corporation, a Delaware corporation (the
"Company"), and Daniel J. Monticello ("Employee").
W I T N E S S E T H :
WHEREAS, the Company wishes to employ Employee and Employee wishes to be
employed by the Company on the terms and subject to the conditions set forth
below;
NOW, THEREFORE, in consideration of the foregoing recital and of the mutual
covenants herein set forth, the Company and Employee hereby agree as follows:
1. Employment. Effective as of January 15, 1996 (the "Effective Date"),
the Company hereby employs Employee and Employee accepts such
employment, effective as of the Effective Date, for the compensation
and on the terms and subject to the conditions herein set forth.
2. Compensation. The Company shall pay Employee an initial monthly
salary equivalent to Employee's current monthly salary payable in
accordance with the Company's normal pay practices, which shall be
reviewed no less than annually and from time to time changed (but not
to be decreased to an amount below the initial monthly salary) at the
discretion of the Board of Directors of the Company. Employee shall
also be entitled to all rights and benefits for which he shall be
eligible under group insurance and other fringe benefits which may be
in force from time to time (including any profit-sharing, option or
other incentive compensation plan either Company-wide or specific to
the Employee) and provided to the Company's employees generally.
3. Duties. Prior to the termination hereof, Employee agrees to devote
his full time and attention to the service of the Company and, in
furtherance thereof, to use his best efforts and to perform such
duties as may be assigned to him from time to time by or under
authority of the Board of Directors of the Company. Employee agrees
that he will not undertake any other employment, consulting services
or business venture during the period of his employment hereunder,
unless the Company, by action of the Board, shall consent thereto in
writing. The foregoing shall not be construed as preventing Employee
from engaging in such personal and business investment activities as
are essentially passive in nature and do not conflict with or
adversely affect in any material respect the performance or discharge
of Employee's duties and responsibilities hereunder.
<PAGE>
4. Term and Termination.
4.1 The term of this Agreement shall commence on the Effective Date and
shall continue until April 1, 1999 unless earlier terminated as
hereinafter provided.
4.2 This Agreement shall terminate automatically on the death of Employee.
4.3 The Company shall have the right to terminate Employee's employment
for cause by giving notice in writing to Employee. As used herein,
the term "cause" shall mean (i) dishonesty; (ii) conviction of any
crime other than misdemeanors or minor traffic violations; (iii)
material breach of any provision of this Agreement; (iv) commission of
any action or omission to take any action in bad faith and to the
detriment of the Company; (v) willful refusal or failure of Employee
to obey the lawful directions of the Board of Directors of the
Company; or (vi) failure to adequately perform the duties and
responsibilities assigned to Employee pursuant to this Agreement,
which failure shall continue for a period of thirty (30) days after
receipt of written notice from the Board of Directors indicating with
specificity the acts or omissions upon which the Board intends to
terminate his employment.
4.4 The Company shall have the right to terminate Employee's employment in
the event of complete disability by giving notice in writing to
Employee. As used herein, the term "complete disability" shall mean
the inability of Employee, due to illness or injury, to perform his
duties hereunder for a period of 180 consecutive days.
4.5 The foregoing notwithstanding, the Company may terminate Employee's
employment for whatever reason it deems appropriate by one month's
prior notice in writing.
4.6 Employee shall have the right to terminate Employee's employment at
any time following the occurrence of a Change in Control, as defined
below, if Employee's duties or responsibilities are materially reduced
in connection with or following the Change in Control from those in
effect immediately prior to the Change in Control, except in
connection with the termination of Employee's employment pursuant to
Sections 4.2, 4.3, 4.4, 4.5 or 4.7. For purposes of this Agreement, a
"Change in Control" shall be deemed to have occurred if:
(i) any individual, entity or group (within the meaning of Section
13(d) or 14(d)(2) of the Securities and Exchange Act of 1934)
shall become (directly or indirectly) the "beneficial owner"
(within the meaning of Rule 13d-3 promulgated under such Act) of
more than 50% of the combined voting power of the then
outstanding securities of the Company entitled to vote generally
in the election of directors ("Voting Power"); or
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<PAGE>
(ii) the Company's stockholders shall approve a merger or
consolidation, sale or disposition of all or substantially all of
the Company's assets or a plan of liquidation or dissolution of
the Company, other than (A) a merger or consolidation in which
the voting securities of the Company outstanding immediately
prior thereto will become (by operation of law), or are to be
converted into, voting securities of the surviving corporation or
its parent corporation that, immediately after such merger or
consolidation, (x) are owned by the same person or entity or
persons or entities that owned the voting securities of the
Company immediately prior thereto and (y) possess at least 75% of
the Voting Power held by the voting securities of the surviving
corporation or its parent corporation, or (B) a merger or
consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no person acquires more
than 50% of the Voting Power.
4.7 The foregoing notwithstanding, Employee shall have the right to
terminate Employee's employment for whatever reason Employee deems
appropriate by one month's prior notice in writing.
4.8 In the event of termination of Employee's employment pursuant to
Sections 4.2, 4.3, 4.4 or 4.7 hereof, the Company shall pay Employee
his salary at the then current rate up to the date of such
termination, and Employee shall be entitled to no further
compensation hereunder.
4.9 In the event of termination of Employee's employment pursuant to
Sections 4.5 or 4.6 hereof, the Company shall pay Employee severance
compensation for the lesser of a period of (i) six (6) months from
the date of such termination, (ii) the remaining term of this
Agreement, or (iii) a period ending on the date on which Employee
becomes employed by another entity, payable as and when Employee
would otherwise be paid his salary under Section 2 hereof.
5. Nondisclosure; Inventions; Non-Competition.
5.1 For the purposes of this Agreement the terms set forth below shall
have the following meanings:
5.1.1 Confidential Information. That secret proprietary information of the
Company of whatever kind or nature disclosed to Employee or known by
Employee (whether or not invented, discovered or developed by
Employee). Such proprietary information shall include information
relating to the design, manufacture and application of the Company's
products, know-how and research and development relating to the
Company's products, sources of supply and material, operating and
other cost data, lists of present, past or prospective customers,
customer proposals, and price lists and
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<PAGE>
data relating to pricing of the Company's products or services, any
of which information is not generally known in the industry, and
shall specifically include, without limitation, all information
contained in manuals, memoranda, formulae, plans, drawings and
designs, specifications, supply sources, and records of the Company.
5.1.2 Concepts and Ideas. Those concepts and ideas known to Employee
relating to the Company's activities and products.
5.1.3 Inventions. Those discoveries and developments, whether or not
patentable, relating to the Company's activities and products
(whether made by Employee acting alone or in conjunction with others)
made (i) prior to July 23, 1990 related to microbial desulfurization
of fossil fuels or (ii) on or after July 23, 1990 and prior to three
years after the termination of Employee's employment with the
Company. The term "Invention" shall also include any other discovery
or development made by Employee on or after July 23, 1990 and prior
to the termination of this Agreement, except for any invention or
discovery for which no equipment, supplies, facility, or trade secret
information of the Company was used and which was developed entirely
on the Employee's own time and (i) which does not relate (a) to the
business of the Company, or (b) to the Company's actual or
demonstrably anticipated research or development, or (ii) which does
not result from any work performed by the Employee for the Company.
Such term shall not be limited to the meaning of "invention" under
the United States patent laws. Listed below by descriptive title for
purposes of identification are all inventions made by Employee prior
to the date on which Employee was first employed by the Company in
any capacity which he considers to be his property and which are
hereby excluded from this Agreement:
NONE
5.2 All Inventions and all Concepts and Ideas shall be the property of
and are hereby assigned to the Company free of any reserved or other
rights of any kind on the part of Employee in respect thereof.
5.3 Employee will promptly make full disclosure of any such Inventions
and Concepts and Ideas to the Company. Further, Employee will, at the
Company's cost and expense, promptly execute formal applications for
patents and also do all other acts and things (including, among
others, the execution and delivery of instruments of further
assurance or confirmation) deemed by the Company to be necessary or
desirable at any time or times in order to effect the full assignment
to the Company of Employee's right and title to such Inventions and
Concepts and Ideas, without, during the term of this Agreement,
further compensation beyond Employee's agreed salary. Employee
further understands that the absence of a request by the Company for
information, or for the making of an oath, or for the execution of
any document,
-4-
<PAGE>
shall in no way be construed to constitute a waiver of the Company's
rights under this Agreement.
5.4 Except as required by Employee's duties hereunder, Employee will not,
directly or indirectly, use, publish, disseminate or otherwise
disclose any Confidential Information, Concepts and Ideas or
Inventions relating to the past, present or planned business of the
Company without the prior written consent of the Company, unless any
such items are, prior to such disclosure, part of the written public
knowledge or become part of the written public knowledge through no
fault of Employee or are disclosed to Employee by a third party
having the right to do so.
5.5 All documents, procedural manuals, guides, specifications, plans,
drawings, designs and similar materials, lists of present, past or
prospective customers, customer proposals, invitations to submit
proposals, price lists and data relating to pricing of the Company's
products and services, records, notebooks and similar repositories of
or containing Confidential Information and Inventions, including all
copies thereof, that are or come into Employee's possession or
control by reason of Employee's employment, whether prepared by
Employee or others, are the property of the Company, will not be used
by Employee in any way adverse to the Company, will not be removed
from the Company's premises except as Employee's normal duties
require and, at the termination of Employee's employment with the
Company, will be left with or forthwith returned by Employee to the
Company.
5.6 During the term of Employee's employment with the Company and for a
period of five (5) years thereafter, Employee shall not, individually
or on behalf of or in conjunction with any other person or entity,
directly or indirectly, own, manage, operate, control or be employed
by, solicit the Company's past, present or prospective employees or
customers on behalf of, or, otherwise participate in any manner in
any corporation, partnership, proprietorship or other business entity
which is engaged in the development or sale of technology for the
microbial desulfurization of hydrocarbons or in any activity or
development of any product directly competitive with any of the
activities engaged in or products developed by the Company at the
time of Employee's termination; provided, however, that Employee may
own not more than 1% of the outstanding capital stock of a company in
a competitive business whose stock is publicly traded.
6. Expenses. Employee shall be entitled to reimbursement for reasonable
expenses incurred in the performance of services hereunder, provided
that the same are accounted for in accordance with the Company's
general requirements.
7. Survival; Remedies. Employee's duties under sections 5.2, 5.3, 5.4,
5.5, and 5.6 of this Agreement shall survive termination of this
Agreement and Employee's employment with the Company. Employee
acknowledges that a remedy at law for
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<PAGE>
any breach or threatened breach by Employee of the provisions of this
Agreement may be inadequate and Employee therefore agrees that the
Company shall be entitled to injunctive relief in case of any such
breach or threatened breach.
8. Assignment. This Agreement and the rights and obligations of the
parties hereto shall bind and inure to the benefit of each of the
parties hereto and shall also bind and inure to the benefit of any
successor or successors of the Company by reorganization, merger or
consolidation and any assignee of all or substantially all of its
business and properties, but, except as to any such successor or
assignee of the Company, neither this Agreement nor any rights or
benefits hereunder may be assigned by the Company or by Employee.
9. Governing Law. This Agreement shall be construed in accordance with
and governed for all purposes by the laws and public policy of the
State of Texas applicable to contracts executed and wholly performed
within such state.
10. Separability. In case any one or more of the provisions contained in
this Agreement shall, for any reason, be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provisions of this
Agreement, but this Agreement shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein.
If, moreover, any one or more of the provisions contained in this
Agreement shall for any reason be held to be excessively broad as to
duration, geographical scope, activity or subject, it shall be
construed by limiting and reducing it, so as to be enforceable to the
extent compatible with the applicable law as it shall then appear.
11. Waiver. If either party should waive any breach of any provision of
this Agreement, he or it shall not thereby be deemed to have waived
any preceding or succeeding breach of the same or any other provision
of this Agreement. No party shall be deemed to waive any rights
hereunder unless such waiver be in writing and signed by such party.
12. Entire Agreement. The foregoing is the entire Agreement of the
parties with respect to the subject matter hereof and may not be
amended, supplemented, cancelled or discharged except by written
instrument executed by both parties hereto. This Agreement supersedes
and replaces in all respects the employment agreement dated April 5,
1991 between the Company and Employee.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day,
month and year first above stated.
/s/ Daniel J. Monticello
--------------------------------
Daniel J. Monticello
ENERGY BIOSYSTEMS CORPORATION
By:/s/ John H. Webb
-----------------------------
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EXHIBIT 10.36
THIRD AMENDMENT AND ADDENDUM TO COLLABORATION AGREEMENT
This Third Amendment and Addendum (the "Third Amendment") is made and
entered into as of the 24th day of August, 1995, by and between Energy
BioSystems Corporation, a Delaware corporation, ("EBC"), and Petrolite
Corporation, a Delaware corporation, ("PLIT").
WITNESSETH:
WHEREAS, EBC and PLIT are parties to that certain Collaboration Agreement
dated March 5, 1992 (the "Collaboration Agreement");
WHEREAS, the Collaboration Agreement was amended by the parties on
July 1, 1992 (the "First Amendment") and again on October 18, 1993 (the "second
Amendment");
WHEREAS, PLIT has fully paid all of the amounts due under Section 2.5 of
the Collaboration Agreement;
WHEREAS, Article II of the Collaboration Agreement provides that PLIT shall
use its best efforts at its sole expense to develop and deliver to EBC a Working
Pilot Plant, as defined therein, as promptly as possible;
WHEREAS, EBC has requested PLIT to develop and deliver to EBC a Working
Pilot Plant even though the process provided by EBC has not been the subject of
ten (10) bench scale test trials as contemplated in paragraph 1.74 of the
Collaboration Agreement, and even though EBC contemplates that additional
modifications to the process as currently developed by EBC may be necessary;
WHEREAS, PLIT is willing to begin work on a Working Pilot Plant as request
by EBC only pursuant to the terms of this Third Amendment to the Collaboration
Agreement:
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein and other good and valuable consideration, the receipt and
sufficiency of which hereby are acknowledged, the parties hereby agree to the
following:
1. The "Process" contemplated by Sections 1.57 and 1.74 of the Collaboration
Agreement shall, for purposes of PLIT's obligation to deliver a Working
Pilot Plant pursuant to Section 2.1 of Article II of the Collaboration
Agreement, be the process described on Exhibit A, which is attached hereto
and incorporated herein by this reference.
<PAGE>
2. Section 1.74 of the Collaboration Agreement, as amended, hereby is deleted
in its entirety, and the following new Section 1.74 is substituted
therefor;
"Working Pilot Plant - shall mean a pilot plant constructed in accordance
with the design specifications contained on Exhibit B attached hereto and
incorporated herein by reference; provided, however, that in no event shall
PLIT be required to expend more than $1.5 million towards the design,
procurement, fabrication and construction of the Working Pilot Plant."
3. PLIT shall be deemed to have fulfilled its obligations under Article II,
Section 2.1(1) of the Collaboration Agreement, as amended, and shall be
deemed to have delivered a Working Pilot Plant for all purposes under the
Collaboration Agreement, upon PLIT's design, procurement, fabrication and
construction of the Working Pilot Plant as defined in this Third Amendment
as promptly as possible, or upon PLIT's expenditure of $1.5 million towards
the design, procurement, fabrication and construction of the Working Pilot
Plant, as defined in this Third Amendment, as promptly as possible,
whichever first occurs, regardless of whether the process shown on Exhibit
A is the Process developed and commercialized pursuant to the collaboration
Agreement, regardless of whether the Working Pilot Plant is capable of
reducing the sulfur content of any hydrocarbon stream, and regardless of
whether additional changes or modifications to the process shown on Exhibit
A or the design specifications shown on Exhibit B are made after the date
of the Third Amendment. In addition, in the event PLIT has expended $1.5
million towards the design, procurement, fabrication and construction of
the Working Pilot Plant but the working Pilot Plant has not been completed,
PLIT agrees that (a) EBC shall have the right to complete the design,
procurement, fabrication, construction and installation of the Working
Pilot Plant at EBC's own expense, and (b) PLIT shall cooperate with EBC in
EBC's efforts to complete the design, procurement, fabrication,
construction and installation of the Working Pilot Plant in order to permit
start-up of the Working Pilot Plant.
4. The parties intend that the Working Pilot Plant will be used as a research
tool only at such times as may be reasonably required by EBC pursuant to
the Collaboration, but in no event will the Working Pilot Plant be operated
more than five (5) consecutive days, twenty-four (24) hours per day. Until
September 1, 1996, or some other date as to which the parties agree in
writing, PLIT will assign not less than three (3) employees full-time to
provide operational and engineering staff support for the Working Pilot
Plant. The costs of these employees, and the reasonable costs of
maintaining the Working Pilot Plant and providing analytical lab support
for the Working Pilot Plant, will be the sole responsibility of PLIT until
September 1, 1996, unless the parties agree in writing to some other date.
EBC will be solely responsible for all other costs of the Working Pilot
Plant including, but not limited to: (a) having an appropriate individual
on-site to direct and supervise the experimental program and operating
parameters to be followed at the Working Pilot Plant and to provide such
other staff support as necessary for operation of the Working Pilot Plant,
(b) paying the costs of such individual and such other staff support as is
necessary to guide the experimental program to be conducted at the Working
Pilot Plant, (c) supplying all Catalyst and feedstock
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for the Working Pilot Plant, and (d) paying the costs of disposing of all
wastes and by-products from the Working Pilot Plant.
IN WITNESS WHEREOF, the parties have caused this Third Amendment to be
executed by their duly authorized representatives as of the date set forth
above.
ENERGY BIOSYSTEMS CORPORATION PETROLITE CORPORATION
By: /s/ John H. Webb By: /s/ J. S. Titone
______________________________ _________________________________
Title: Chief Executive Officer Title: Vice President
___________________________ _____________________________
Date: September 5, 1995 Date: October 12, 1995
___________________________ ______________________________
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EXHIBIT 10.37
FOURTH AMENDMENT AND ADDENDUM
TO COLLABORATION AGREEMENT
THIS FOURTH AMENDMENT AND ADDENDUM TO COLLABORATION AGREEMENT (the "Fourth
Amendment") is made and entered into as of the 25th day of October, 1996 (the
"Effective Date"), by and between Energy BioSystems Corporation, a Delaware
corporation ("EBC"), and Petrolite Corporation, a Delaware corporation ("PLIT").
WITNESSETH
WHEREAS, EBC and PLIT are parties to that certain Collaboration Agreement
dated March 5, 1992, as amended July 1, 1992 (the "First Amendment"), October
18, 1993 (the "Second Amendment") and August 24, 1995 (the "Third Amendment")
(collectively, the "Collaboration Agreement");
WHEREAS, EBC is engaged in discussions with an investment banking firm
regarding a possible equity financing scheduled to be completed in 1996 (the
"Financing") and in connection therewith has agreed with PLIT to amend and grant
to EBC the right to amend the Collaboration Agreement pursuant to the terms of
this Fourth Amendment to the Collaboration Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, One Dollar ($1.00) and other good and valuable consideration,
the receipt and sufficiency of which hereby are acknowledged, the parties hereby
agree to the following:
1. (a) If the Financing is completed during 1996, EBC shall pay to PLIT
One Million Dollars ($1,000,000) (the "First Cash Payment") by corporate check
or wire transfer within ten business days of the closing of the Financing and
the Collaboration Agreement shall be amended as provided in Section 1(b) hereof.
(b) Upon delivery of the First Cash Payment, without any further action by
the parties:
(i) Until the first to occur of the Election Date and the Expiration Date,
as hereinafter defined, except as provided in this Section 1(b) PLIT
shall be under no obligation to provide any research and development,
technical support or consulting services pursuant to the Collaboration
Agreement including, but not limited to, any obligations contained in
Section 2.4 of the Collaboration Agreement.
(ii) The Collaboration Agreement shall be automatically amended by deleting
the second and third sentence of Section 4 of the Third Amendment and
substituting in place thereof the following sentences:
<PAGE>
"Until December 31, 1998, or some other date as to which the
parties agree in writing, PLIT will assign not less than three
(3) employees full-time to provide operational and engineering
staff support for the Working Pilot Plant. The costs of these
employees and the reasonable costs of maintaining the Working
Pilot Plant and providing analytical lab support for the Working
Pilot Plant, will be the sole responsibility of PLIT until
December 31, 1998, unless the parties agree in writing to some
other date; provided that during the period commencing January 1,
1997 and ending on the date of the Second Cash Payment (as
defined in the Fourth Amendment and Addendum to Collaboration
Agreement dated October 25, 1996), EBC will reimburse PLIT
quarterly for the direct out-of-pocket cash costs and expenses
incurred by PLIT relating to these employees, maintaining the
Working Pilot Plant and providing analytical lab support for the
Working Pilot Plant (the "Reimbursable Expenses")."
2. (a) EBC may, at any time during the period commencing with the payment
of the First Cash Payment and ending at 5:00 p.m. (Central time) on the
"Expiration Date," as hereinafter defined, elect to amend the Collaboration
Agreement as provided in Section 2(b) hereof. If EBC shall elect to amend the
Collaboration Agreement as provided in Section 2(b) hereof, on the date of such
election (the "Election Date") EBC shall deliver to PLIT: (i) written notice
(the "Notice") of the exercise of its right to amend the Collaboration Agreement
as provided in Section 2(b) hereof; (ii) Nine Million Dollars ($9,000,000) less
the amount of Reimbursable Expenses previously paid by EBC to PLIT (the "Second
Cash Payment") by corporate check or wire transfer; and (iii) a warrant (the
"Warrant"), in the form attached hereto as Exhibit A, granting PLIT the right to
purchase upon the terms and subject to the conditions set forth in the Warrant
at an aggregate exercise price of One Million Dollars ($1,000,000) that number
of shares of EBC common stock, par value $0.01 per share, (the "Common Stock"),
equal to One Million dollars ($1,000,000) divided by the "Conversion Price,") as
hereinafter defined.
The "Expiration date" shall mean (x) if the Financing raises at least
Twenty-Five Million Dollars ($25,000,000) in gross cash proceeds, December 31,
1996 or (y) if the Financing raises less than Twenty-Five Million Dollars
($25,000,000) in gross cash proceeds, the earlier to occur of (i) ten business
days following the closing of any subsequent equity financing by EBC in which
the gross cash proceeds raised in such equity financing together with the gross
cash proceeds raised in the Financing equal or exceed Twenty-Five Million
Dollars ($25,000,000) and (ii) the date that is 24 months following the payment
of the First Cash Payment.
The "Conversion Price" shall mean the initial per share price at which the
EBC securities issued in the Financing may be converted into one share of Common
Stock.
(b) Upon delivery of the Notice, the Second Cash Payment and the Warrant,
the Collaboration Agreement shall be automatically amended, without any further
action by the parties, as follows:
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(i) Section 1.24 of the Collaboration Agreement, as amended by the Second
Amendment, is hereby deleted in its entirety, and the following new Section 1.24
is substituted therefor:
"1.24 EBC Ninety and One-Half Percent Royalty - shall be equal to
ninety and one-half percent (90.5%) of the Throughput Base for PLIT
for each barrel of liquid hydrocarbons throughput by Site Licensees of
PLIT during a calendar month plus ninety and one-half percent (90.5%)
of the site Fee base for PLIT for such calendar month."
(ii) Section 5.1 of the Collaboration Agreement, as amended by the Second
Amendment, is hereby deleted in its entirety, and the following new Section 5.1
is substituted therefor:
"5.1 Site License Fees. During the Collaboration Period, EBC shall
be entitled to retain ninety and one-half percent (90.5%) of all Site
License Fees and shall pay the remaining nine and one-half percent
(9.5%) of such Site License Fees to PLIT."
(iii) Section 5.2 of the Collaboration Agreement, as amended by the Second
Amendment, is hereby deleted in its entirety, and the following new Section 5.2
is substituted therefor:
"5.2 Site Throughput Fees. During the Collaboration Period, EBC
shall be entitled to keep ninety and one-half percent (90.5%) of the
Adjusted Gross Profit of EBC and EBC shall pay nine and one-half
percent (9.5%) of the Adjusted Gross Profit of EBC to PLIT. The
Catalyst Charge shall be paid by the Site Licensor to the Third Party
Catalyst Supplier unless the Site Licensee has purchased the Catalyst
directly from the Third Party Catalyst Supplier. EBC shall not
collect any Equipment Amortization Charge from the Site Licensee if
the Site Licensee purchases the Equipment itself."
(iv) Section 6.2 of the Collaboration Agreement is hereby deleted in its
entirety, and the following new Section 6.2 is substituted therefor:
"6.2 Termination. Either party may terminate the Collaboration for
Cause, effective on one hundred twenty (120) days' notice, unless the
party in breach makes all payments under or cures the breach within
said one hundred twenty (120) days. PLIT may terminate the
Collaboration without Cause upon one (1) year's notice. If not
earlier terminated, the Collaboration shall terminate on March 5,
2016."
(v) Subsections 7.1(2)(e) and 7.1(3)(e) of the Collaboration Agreement, as
amended by the Second Amendment, are hereby deleted in their entirety and the
following new Subsections 7.1(2)(e) and 7.1(3)(e) are substituted therefor:
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"7.1(2)(e) If the termination is with Cause, PLIT shall pay EBC the
EBC Fifty Percent Royalty and the Five Percent Customer Products
Royalty. If the termination is without Cause, PLIT shall pay EBC the
EBC Ninety and One-Half Percent Royalty and the Five Percent Customer
Products Royalty."
"7.1(3)(e) PLIT shall pay EBC the EBC Ninety and One-Half Percent
Royalty and the Five Percent Customer Products Royalty."
(vi) Section 7.2(1) of the Collaboration Agreement is hereby deleted in its
entirety.
(vii) Section 7.2(2) of the Collaboration Agreement is hereby deleted in
its entirety.
(viii) Section 7.2(4) of the Collaboration Agreement is hereby deleted in
its entirety.
(ix) The percentage "22%," "18%," "11%," and "3%" in subsections i), ii),
iii) and iv) of the Section a) of Schedule A of the Collaboration Agreement, as
amended by the Second Amendment, are hereby deleted and "9.5%," "7.8%," "4.7%"
and "1.3%" are hereby substituted, respectively, therefor.
(x) The percentages "18%," "15%," "11%" and "3%" in subsections i), ii),
iii) and iv) of Section b) of Schedule A of the Collaboration Agreement, as
amended by the Second Amendment, are hereby deleted and "7.8%," "6.5%," "4.7%"
and "1.3%" are hereby substituted, respectively, therefor.
(xi) The percentages "15%," "11%," "7%" and "3%" in subsections i), ii),
iii) and iv) of Section c) of Schedule A of the Collaboration Agreement, as
amended by the Second Amendment, are hereby deleted and "6.5%," "4.7%," "3.0%"
and "1.3%" are hereby substituted, respectively, therefor.
(xii) The percentages "11%," "7%," "3%" and "3%" in subsections i), ii),
iii) and iv) of Section d) of Schedule A of the Collaboration Agreement, as
amended by the Second Amendment, are hereby deleted and "4.7%," "3.0%," "1.3%"
and "1.3%" are hereby substituted respectively, therefor.
(xiii) All of PLIT's obligations to provide research and development,
technical support or consulting services in the Collaboration Agreement
including, but not limited to, those set out in Section 2.4 of the Collaboration
Agreement, are hereby deleted and the following shall remain the sole obligation
of PLIT to provide research and development, technical support or consulting
services pursuant to the Collaboration Agreement:
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"Until December 31, 1998, or some other date as to which the parties
agree in writing, PLIT will assign not less than three (3) employees
full-time to provide operational and engineering staff support for the
Working Pilot Plant. The costs of these employees and the reasonable
costs of maintaining the Working Pilot Plant and providing analytical
lab support for the Working Pilot Plant, will be the sole
responsibility of PLIT until December 31, 1998, unless the parties
agree in writing to some other date. In addition to the foregoing
support, during the Collaboration Period PLIT shall make the
appropriate employees available upon reasonable request, to consult
with EBC employees or consultants regarding the operation of the
Working Pilot Plant and the commercialization of MDS."
3. Except as expressly amended herein, the Collaboration Agreement shall
remain in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Fourth Amendment to be
executed by their duly authorized representatives as of the Effective Date.
ENERGY BIOSYSTEMS CORPORATION PETROLITE CORPORATION
By: /s/ John H. Webb By: /s/ David Winslette
---------------- ------------------------------
Title: President and Chief Executive Officer Title: Vice President, Technology
------------------------------------- ---------------------------
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EXHIBIT A
NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR THE SECURITIES LAWS OF ANY STATE. SUCH SECURITIES MAY NOT BE SOLD OR
OTHERWISE DISPOSED OF UNLESS PURSUANT TO A REGISTERED OFFERING OR BY TRANSFER
EXEMPT FROM REGISTRATION OR UNLESS SOLD PURSUANT TO RULE 144 UNDER THE
SECURITIES ACT.
THIS WARRANT SHALL BE VOID AFTER 5:00 P.M., CENTRAL TIME, ON ____________ /(1)/,
2001 OR, IF SUCH DAY IS NOT A BUSINESS DAY, AT 5:00 P.M., CENTRAL TIME, ON THE
NEXT FOLLOWING BUSINESS DAY. THE TRANSFER OF THIS WARRANT IS RESTRICTED. SEE
SECTION 6.02 - "RESTRICTIONS ON TRANSFER." THE COMPANY HAS THE RIGHT TO
ACCELERATE THE EXPIRATION DATE OF THIS WARRANT UNDER CERTAIN CIRCUMSTANCES. SEE
SECTION 4.04 - "COMPANY'S RIGHT TO ACCELERATE EXPIRATION DATE."
COMMON STOCK PURCHASE WARRANT
OF
ENERGY BIOSYSTEMS CORPORATION
NO. ___ ____________, 1996
This certifies that Petrolite Corporation, a Delaware corporation, any successor
in interest thereto, or any assignee or transferee thereof in whose name this
Warrant is registered upon the books to be maintained by the Company for that
purpose (the "Warrantholder"), is entitled to purchase from Energy BioSystems
Corporation, a Delaware corporation (the "Company"), at any time on or prior to
5:00 p.m., Central time, on the Expiration Date (as hereinafter defined) and
subject to the terms and conditions hereof _________/2/, fully paid and
nonassessable shares of the Company's Common Stock at a price per share equal to
the Exercise Price. The Exercise Price and the number of shares which may be
purchased pursuant to this Warrant are subject to adjustment under certain
conditions as provided in Article III hereof.
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/1/ Five years after EBC issues this Warrant.
/2/ A number of shares equal to One Million Dollars ($1,000,000) divided
by the Conversion Price (as such term is defined in the Fourth Amendment
and Addendum to Collaboration Agreement).
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Stock at a price per share equal to the Exercise Price. The Exercise Price and
the number of shares which may be purchased pursuant to this Warrant are subject
to adjustment under certain conditions as provided in Article III hereof.
ARTICLE I
DEFINITIONS
As used in this Warrant, the following capitalized terms shall have the
following respective meanings:
(a) Business Day: A day other than a Saturday, Sunday or other day on
which banks in the States of New York or Texas are authorized by law to
remain closed.
(b) Common Stock: Common Stock, par value $0.01 per share, of the Company.
(c) Exercise Price: The per share price for which the Warrantholder may
purchase shares of Common Stock pursuant to this Warrant. The initial
Exercise Price is $____/3/. The Exercise Price may be adjusted from time to
time pursuant to Article III hereof.
(d) Expiration Date: _____________/4/, 2001 or, if such day is not a
Business Day, on the next following Business Day.
(e) Net Consideration Per Share: The Total Consideration attributable to
purchase rights, options or warrants exercisable for Common Stock, divided
by the aggregate number of shares of Common Stock that would be issued if
all such purchase rights, options or warrants were exercised.
(f) Person: An individual, partnership, joint venture, corporation, trust,
unincorporated organization or government or any department or agency
thereof.
(g) Registrable Securities: (i) The Warrant Shares, and (ii) any Common
Stock issued as a dividend or other distribution with respect to or in
exchange for or in replacement of such Warrant Shares, provided, however,
that Registrable Securities shall not include any shares of Common Stock
which have previously been registered under the Securities Act or which may
be sold pursuant to Rule 144 (or any successor to such Rule).
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/3/ A number equal to $1,000,000 divided by the number of shares
calculated pursuant to footnote (2).
/4/ Five years after EBC issues this Warrant.
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(h) Securities Act: The Securities Act of 1933, as amended.
(i) Total Consideration: The amount equal to the total amount of
consideration received by the Company for the issuance of purchase rights,
options or warrants exercisable for Common Stock, plus the minimum amount
of consideration, if any, payable to the Company upon exercise thereof.
(j) Warrant: This Warrant and all other warrants that may be issued in its
place.
(k) Warrant Shares: Shares of Common Stock purchasable upon exercise of
the Warrant.
ARTICLE II
DURATION AND EXERCISE OF WARRANT
Section 2.01 Duration of Warrant. Subject to the terms contained herein, this
Warrant may be exercised at any time on or after the date of issuance of this
Warrant and before 5:00 p.m., Central time, on the Expiration Date. If this
Warrant is not exercised at or before 5:00 p.m., Central time, on the Expiration
Date, it shall become void and all rights hereunder shall thereupon cease.
Section 2.02 Exercise of Warrant.
(a) The Warrantholder may exercise this Warrant, in whole or in part, upon
surrender of this Warrant with the Subscription Form attached hereto duly
executed, to the Company at its corporate office, together with payment in full
of the Exercise Price for the Warrant Shares to be purchased in lawful money of
the United States or by certified check or bank draft payable in currency of the
United States to the order of the Company.
(b) Upon receipt of this Warrant with the Subscription Form duly executed and
accompanied by payment of the Exercise Price for the Warrant Shares for which
this Warrant is then being exercised, the Company will cause to be issued
certificates for the total number of whole shares of Common Stock for which this
Warrant is being exercised in such denominations as are required for delivery to
the Warrantholder and the Company shall thereupon deliver such certificates to
the Warrantholder.
(c) In case the Warrantholder shall exercise this Warrant with respect to less
than all of the Warrant Shares that may then be purchased under this Warrant,
the Company will execute a new warrant in the form of this Warrant for the
balance of such Warrant Shares and deliver such new warrant to the
Warrantholder.
(d) The Company covenants and agrees that (i) it will pay, when due and
payable, any and all stock transfer and similar taxes that may be payable in
respect of the issuance of this Warrant or of
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any Warrant Shares; and (ii) the Warrant Shares shall be deemed to be issued to
the Warrantholder as the record owner of such Warrant Shares as of the close of
business on the date on which this Warrant shall have been surrendered and
payment has been tendered for the purchase of such Warrant Shares.
ARTICLE III
ADJUSTMENT OF SHARES OF COMMON STOCK
PURCHASABLE AND OF EXERCISE PRICE
The Exercise Price and the number and type of Warrant Shares shall be subject to
adjustment from time to time upon the occurrence of certain events as provided
in this Article III.
Section 3.01 Mechanical Adjustments.
(a) If at any time prior to the full exercise of this Warrant, the Company
shall: (i) pay a dividend or make a distribution on its shares of Common Stock
in shares of Common Stock; (ii) subdivide, reclassify or recapitalize its
outstanding shares of Common Stock into a greater number of shares; or (iii)
combine, reclassify or recapitalize its outstanding shares of Common Stock into
a smaller number of shares, the number of Warrant Shares in effect at the time
of the record date of such dividend, subdivision, combination, reclassification
or recapitalization shall be proportionately adjusted so that the Warrantholder
shall be entitled to receive the aggregate number and type of shares that, if
this Warrant had been exercised in full immediately prior to such time, it would
have owned upon such exercise and been entitled to receive upon such dividend,
distribution, subdivision, combination, reclassification or recapitalization.
Such adjustment shall be made successively whenever any event listed in this
Section 3.01 (a) shall occur.
(b) In case the Company shall issue after the date hereof purchase rights,
options or warrants exercisable for Common Stock to Persons other than
employees, directors, consultants or advisors of the Company entitling the
holders thereof to subscribe for or purchase shares of Common Stock at a Net
Consideration Per Share which is less than the Exercise Price at the time of
such issuance, the Exercise Price shall be adjusted so that the same shall equal
the price determined by multiplying the Exercise Price in effect immediately
prior thereto by a fraction, of which the numerator shall be the number of
shares of Common Stock outstanding on the date of such issuance, plus the number
of additional shares of Common Stock which the Total Consideration could
purchase at the Exercise Price, and of which the denominator shall be the number
of shares of Common Stock outstanding on such record date plus the number of
shares of Common Stock issuable upon the exercise of such purchase rights,
options or warrants. Such adjustment shall be made whenever such purchase
rights, options or warrants are issued and shall become effective immediately
(or if a record date has been established by the Company for the determination
of stockholders entitled to receive such purchase rights, options or warrants,
shall become effective retroactively immediately after the record date for the
determination of stockholders entitled to receive such purchase rights, options
or warrants). In
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the event the Company shall subsequently cancel or terminate any of such
purchase rights, options or warrants, or any of such purchase rights, options or
warrants shall expire unexercised, the Exercise Price shall be readjusted to be
the same as if the Company had not issued such purchase rights, options or
warrants so cancelled, terminated or expired.
(c) Whenever the number of Warrant Shares issuable upon exercise of this Warrant
is adjusted pursuant to Section 3.01(a), the Exercise Price payable for such
Warrant Shares shall simultaneously be adjusted by multiplying the number of
Warrant Shares initially issuable upon exercise of each Warrant by the Exercise
Price in effect on the date thereof and dividing the product so obtained by the
number of Warrant Shares, as adjusted.
(d) No adjustment in the Exercise Price shall be required unless such adjustment
would require an increase or decrease of at least five cents ($.05) in such
price; provided, however, that any adjustments which by reason of this Section
3.01(d) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 3.01
shall be made to the nearest cent or to the nearest one-hundredth of a share, as
the case may be.
(e) In the event that at any time, as a result of any adjustment made pursuant
to this Section 3.01(a), the Warrantholder thereafter shall become entitled to
receive any securities of the Company other than shares of Common Stock,
thereafter the number of such other securities so receivable upon exercise of
any warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in this Section 3.01.
Section 3.02 No Adjustment for Cash Dividends. No adjustment in respect of any
cash dividends shall be made during the term of this Warrant or upon the
exercise of this Warrant.
Section 3.03 Adjustment for Merger, Consolidation, etc. In case of any
consolidation of the Company with or merger of the Company into another
corporation or any sale or other disposition to another corporation of all or
substantially all the property of the Company, the corporation resulting from
such consolidation or surviving such merger or to which such sale or transfer
shall be made, as the case may be, shall make suitable provision and shall
assume the obligations of the Company hereunder (by written instrument executed
and mailed to the Warrantholder) pursuant to which, upon exercise of this
Warrant, at any time during the duration of this Warrant after such
consolidation, merger, sale or other disposition the Warrantholder shall be
entitled to receive the stock or other securities or property that the
Warrantholder would have been entitled to receive upon consummation if the
Warrantholder had executed this Warrant immediately prior thereto, all subject
to further adjustment as provided in this Article III.
Section 3.04 Notice of Adjustment. Whenever the number of Warrant Shares or
the Exercise Price is adjusted as herein provided, the Company shall prepare and
deliver to the Warrantholder a certificate signed by its President, or any Vice
President, Treasurer or Secretary, setting forth the adjusted number of shares
purchasable upon the exercise of this Warrant and the Exercise Price of
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<PAGE>
such shares after such adjustment, setting forth a brief statement of the facts
requiring such adjustment and setting forth the computation by which such
adjustment was made.
Section 3.05 Form of Warrant After Adjustments. The form of this Warrant need
not be changed because of any adjustments in the Exercise Price or the number or
kind of the Warrant Shares, and Warrants theretofore and thereafter issued may
continue to express the same price and number and kind of shares as are stated
in this Warrant as initially issued.
Section 3.06 Action by the Company. The Company will not, by amendment of its
certificate of incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of the Warrant but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the Warrantholder
against dilution or other impairment; provided, that the provisions of this
Section 3.06 shall not preclude the Company from taking any action that the
Company determines is in the best interests of the Company and its stockholders,
independent of its effect on the Warrant and the Warrantholder.
ARTICLE IV
OTHER PROVISIONS RELATING TO RIGHTS OF WARRANTHOLDER
Section 4.01 Lost, Stolen, Mutilated or Destroyed Warrants. If this Warrant is
lost, stolen, mutilated or destroyed, the Company shall, on such reasonable
terms as it may in its discretion impose (which shall, in the case of a
mutilated Warrant, include the surrender thereof), issue a new Warrant of like
denomination and tenor as, and in substitution for, this Warrant.
Section 4.02 Reservation of Shares. The Company covenants and agrees that at
all times it shall reserve and keep available for the exercise of this Warrant
such number of authorized shares of Common Stock as are sufficient to permit the
exercise in full of this Warrant, and that it will take such action as may be
required from time to time to assure that the par value per share of the Warrant
Shares is at all times equal to or less than the per share Exercise Price.
Section 4.03 No Fractional Shares. Anything contained herein to the contrary
notwithstanding, the Company shall not be required to issue any fraction of a
share in connection with the exercise of this Warrant, and in any case where the
Warrantholder would, except for the provisions of this Section 4.03, be entitled
under the terms of this Warrant to receive a fraction of a share upon the
exercise of this Warrant, the Company shall, upon the exercise of this Warrant
and receipt of the Exercise Price, issue the larger number of whole shares
purchasable upon exercise of this Warrant.
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Section 4.04 Company's Right to Accelerate Expiration Date. If at any time
after _________/5/, 1998, the Common Stock trades at a price per share that is
greater than two times the Exercise Price for a period of 20 trading days, the
Company shall thereafter have the right, exercisable at any time in its sole
discretion, to accelerate the Expiration Date of this Warrant by providing
written notice of such acceleration to Warrantholder. The Warrantholder shall
have the right to exercise this Warrant, in whole or in part, at any time during
the period of 60 days after the date such notice is given. The Company's
provision of written notice of acceleration hereunder shall have the effect of
causing the last day of such 60 day period to be the Expiration Date of this
Warrant for all purposes thereof.
Section 4.05 Notice of Record Date. In case of:
(a) any setting of a record date by the Company for the purpose of determining
the holders of any class of securities who are entitled to receive any dividend
or other distribution, or any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or property, or
to receive any other right, that, in any such case, will result in an adjustment
in the number of Warrant Shares or the Exercise Price pursuant to Article III,
or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the Common Stock of the Company or any transfer of all or
substantially all the assets of the Company to or consolidation or merger of the
Company with or into any other person, or
(c) any voluntary or involuntary dissolution, liquidation or winding up of the
Company, or
(d) any proposed issue or grant by the Company of any purchase right, option or
warrant to subscribe for, purchase or otherwise acquire any shares of Common
Stock that will result in an adjustment to the Exercise Price pursuant to
Article III,
then and in each such event the Company will mail or cause to be mailed to the
Warrantholder a notice specifying (i) the date on which any such record is to be
taken for the purpose of such dividend, distribution or right, and stating the
amount and character of such dividend, distribution or right, (ii) the date on
which any such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding up is to take place,
and the time, if any is to be fixed, as of which the holders of record of Common
Stock shall be entitled to exchange their shares of Common Stock for securities
or other property deliverable on such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding up, and (iii) the amount and character of any purchase rights, options
or warrants with respect to Common Stock that will result in an adjustment to
the Exercise Price pursuant to Article III, proposed to be issued or granted,
the date of such proposed issue or grant and the persons or class of persons to
whom such proposed issue or grant is to be offered or made. Such notice shall
be
- --------------
/5/ Two years after EBC issues this Warrant.
-7-
<PAGE>
mailed at least 30 days prior to the date specified in such notice on which
any such action is to be taken.
Section 4.06 Incidental Registration Rights
(a) Notice of Registration. If the Company shall determine to register any of
its Common Stock either for its own account or the account of a stockholder,
other than a registration relating solely to employee benefit plans, a
registration on Form S-4 or S-8 or any successor or similar forms, or a
registration on any registration form that does not permit secondary sales, the
Company will:
(i) promptly give to Petrolite Corporation ("Petrolite") written notice
thereof; and
(ii) use reasonable efforts to include in such registration (and any
related qualification under blue sky laws or other compliance), except as
set forth in Sections 4.06(b) and (c), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made by Petrolite within 20 days after the written notice from
the Company described in clause (i) above is given. Such written request
may specify all or a part of Petrolite's Registrable Securities.
(b) Right to Terminate Registration. The Company shall have the right to
terminate or withdraw any registration prior to the effectiveness of such
registration whether or not Petrolite has elected to include Registrable
Securities in such registration.
(c) Underwriting. (i) If the registration of which the Company gives notice is
for a registered public offering involving an underwriting, the Company
shall so advise Petrolite as a part of the written notice given pursuant to
subsection Section 4.06(a). In such event, the right of Petrolite to
registration pursuant to this Section 4.06 shall be conditioned upon
Petrolite's participation in such underwriting and the inclusion of
Petrolite's Registrable Securities in the underwriting to the extent
provided herein. Petrolite (together with the Company and such other
stockholders of the Company exercising registration rights with respect to
such registration) shall enter into an underwriting agreement in customary
form with the representative of the underwriter or underwriters selected by
the Company or the stockholders initiating such registration, as the case
may be.
(ii) Notwithstanding any other provision of this Section 4.06, if the
representative of the underwriters advises the Company in writing that
marketing factors require a limitation on the number of shares to be
underwritten, the representative may (subject to the limitations set forth
below) exclude all Registrable Securities from, or limit the number of
Registrable Securities to be included in, the registration and
underwriting. The Company shall so advise all holders of securities
requesting registration, and the amount of securities that are entitled to
be included in the registration and underwriting shall be allocated as
follows: (a) first, to the Company up to the full number of securities
proposed to be sold for its own account) (b) second, to the stockholders on
behalf of whom registration may have been initially requested
-8-
<PAGE>
up to the full number of securities proposed to be sold for the account of
such stockholders, and (c) third, to Petrolite and other stockholders
entitled to participate in the registration, drawn from them pro rata based
on the number of securities each has requested to be included in such
registration. If Petrolite does not agree to the terms of any such
underwriting, Petrolite shall be excluded therefrom by written notice from
the Company or the underwriter. Any Registrable Securities or other
securities excluded or withdrawn from such underwriting shall be withdrawn
from such registration.
(d) Delay of Registration. Petrolite shall not have any right to take any
action to restrain, enjoin, or otherwise delay any registration as the result of
any controversy that might arise with respect to the interpretation or
implementation of this Section 4.06.
(e) Termination of Registration Rights. The right of Petrolite to request
registration or inclusion in any registration pursuant to this Section 4.06
shall terminate on the earlier of (i) the second anniversary of the earlier of
(A) the Expiration Date and (B) the date on which the Warrant has been exercised
in full and (ii) such date as all shares of Registrable Securities held or
entitled to be held upon conversion by such Holder may immediately be sold under
Rule 144 (or any successor to such Rule).
(f) Number of Incidental Registrations. Petrolite may exercise its right to
incidental registration under this Section 4.06 two times; provided, however,
that if Petrolite has exercised its incidental registration rights during the
term of this Agreement but was prevented from registering all Registrable
Securities due to Section 4.06(c)(ii), Petrolite may exercise its right to
incidental registration one additional time for each such occurrence.
ARTICLE V
TREATMENT OF WARRANTHOLDER
Prior to due presentment for registration of transfer of this Warrant, the
Company may deem and treat the Warrantholder as the absolute owner of this
Warrant (notwithstanding any notation of ownership or other writing hereon) for
the purpose of any exercise hereof and for all other purposes and the Company
shall not be affected by any notice to the contrary. This Warrant does not
entitle the Warrantholder to any rights of a stockholder of the Company.
-9-
<PAGE>
ARTICLE VI
SPLIT-UP, COMBINATION EXCHANGE AND TRANSFER OF WARRANTS
Section 6.01 Split-Up, Combination, Exchange and Transfer of Warrants. Subject
to and limited by the provisions of Section 6.02 hereof, this Warrant may be
split up, combined or exchanged for another Warrant or Warrants containing the
same terms and entitling the Warrantholder to purchase a like aggregate number
of Warrant Shares. If the Warrantholder desires to split up, combine or
exchange this Warrant, it shall make such request in writing delivered to the
Company and shall surrender to the Company this Warrant and any other Warrants
to be so split up, combined or exchanged. Upon any such surrender for a split-
up, combination or exchange, the Company shall execute and deliver to the Person
entitled thereto a Warrant or Warrants, as the case may be, as so requested.
The Company shall not be required to effect any split-up, combination or
exchange which will result in the issuance of a Warrant entitling the
Warrantholder to purchase upon exercise a fraction of a share of Common Stock or
a fractional Warrant. The Company may require such Warrantholder to pay a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection with any split-up, combination or exchange of Warrants.
Section 6.02 Restrictions on Transfer.
(a) This Warrant and the Warrant Shares shall be restricted from sale,
transfer, assignment, exercise or hypothecation, except in compliance with the
Securities Act and the provisions of this Section 6.02.
(b) The Company may require the Person to whom the Warrantholder or holder of
such Warrant Shares proposes to transfer such Warrant or Warrant Shares to make
such investment intent representations, and may place such legends on
certificates representing this Warrant or the Warrant Shares, as may reasonably
be required in the opinion of counsel to the Company to permit the Warrant or
Warrant Shares, as the case may be, to be transferred without registration under
the Securities Act.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
Section 7.01 Representations and Warranties of the Company. The Company
represents and warrants to and agrees with the Warrantholder that:
(a) The Company has all requisite power and authority, corporate or
otherwise, and has taken all necessary action, to execute, deliver and
perform its obligations under this Warrant. This Warrant has been duly and
validly authorized, executed and delivered by the Company and constitutes a
valid and binding agreement of the Company enforceable against the
-10-
<PAGE>
Company in accordance with its terms. No authorization, approval, consent,
order, license, franchise, certificate or permit of or from any Person or
regulatory authority is required to be obtained by the Company in
connection with the execution, delivery or performance of this Warrant.
(b) None of the execution, delivery or performance of the Company's
obligations under this Warrant will conflict with, or result in a breach of
any of the terms or provisions of, or constitute a default under or violate
any term of (i) the certificate of incorporation, as amended, or the by-
laws of the Company; (ii) any indenture, mortgage, joint venture agreement,
lease, sublease, sales agreement or other agreement or instrument to which
the Company is a party or by which it or any of its properties is bound;
or (iii) any law, rule, regulation, judgment, order or decree of any
government, governmental or regulatory body or court, foreign or domestic,
having jurisdiction over the Company or any of its properties or assets.
(c) The Warrant Shares have been duly reserved for issuance upon exercise
of this Warrant and, when issued upon such exercise in accordance with the
terms of this Warrant, will be duly and validly issued, fully paid and
nonassessable, and the issuance of the Warrant Shares is not subject to any
preemptive or similar rights granted by the Company, any other Person or
any statute.
Section 7.02 Representations and Warranties of the Warrantholder. The
Warrantholder represents and warrants to the Company that it is acquiring this
Warrant for its own account, for investment purposes and not with a view to, or
for resale in connection with, any distribution or public offering thereof. The
Warrantholder understands that this Warrant has not been registered under the
Securities Act or any applicable state securities laws; that it was issued in
reliance upon an exemption therefrom; that it may not be transferred unless
registered under the Securities Act and such state securities laws or pursuant
to an exemption therefrom; and that it will bear a restrictive legend to such
effect.
ARTICLE VIII
MISCELLANEOUS
Section 8.01 Expenses of Transfer. The Company will from time to time promptly
pay all taxes and charges that may be imposed upon the Company with respect to
the issuance or delivery of Warrant Shares upon the exercise of this Warrant by
the Warrantholder.
Section 8.02 Successors and Assigns. All the covenants and provisions of this
Warrant shall bind and inure to the benefit of successors and assigns of the
Company and the Warrantholder; provided that the rights granted to Petrolite
pursuant to Section 4.06 are personal to Petrolite and may not be assigned by
Petrolite to any other Person.
-11-
<PAGE>
Section 8.03 No Inconsistent Agreements. The Company will not on or after the
date of this Warrant enter into any agreement with respect to its capital stock
which is inconsistent with the rights granted to the Warrantholder in this
Warrant or otherwise conflicts with the provisions hereof.
Section 8.04 Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, EXCEPT FOR THE CONFLICTS OF
LAWS PRINCIPLES THEREOF.
Section 8.05 Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provisions in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
Section 8.06 Integration/Entire Agreement. This Warrant is intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto
with respect to the subject matter contained herein. This Warrant supersedes all
prior agreements and understandings between the parties with respect to such
subject matter.
Section 8.07 Attorney's Fees. In any action or proceeding brought to enforce
any provisions of this Warrant, or where any provisions hereof or thereof is
validly asserted as a defense, the successful party shall be entitled to recover
attorneys' fees and disbursements in addition to its costs and expenses and any
other available remedy.
Section 8.08 Notices. Notice or demand pursuant to this Warrant to be given or
made by the Warrantholder to or on the Company shall be sufficiently given or
made if sent by first class mail, postage prepaid, addressed (until another
address is designated in writing by the Company) as follows:
Energy BioSystems Corporation
4200 Research Forest Drive
The Woodlands, Texas 77381
Attention: President
Any notice or demand authorized by this Warrant to be given or made by the
Company to or on the Warrantholder shall be sufficiently given or made if sent
by first class mail, postage prepaid, to the Warrantholder at its last known
address as it shall appear on the books of the Company.
Section 8.09 Headings. The article and section headings in this Warrant are
for convenience only and are not part of this Warrant and shall not affect the
interpretation thereof.
IN WITNESS WHEREOF, this Warrant has been duly executed by the Company as of the
____ day of __________, 1996.
-12-
<PAGE>
ENERGY BIOSYSTEMS CORPORATION
By:
--------------------------
John H. Webb
President and Chief Executive Officer
-13-
<PAGE>
ASSIGNMENT
(TO BE EXECUTED ONLY UPON ASSIGNMENT OF WARRANT)
For value received, _________________________ hereby sells, assigns and
transfers unto _________________________ the within Warrant, together with all
right, title and interest therein, and does hereby irrevocably constitute and
appoint _________________________ attorney, to transfer said Warrant on the
books of the within-named Company with respect to the number of Warrant Shares
set forth below, with full power of substitution in the premises:
NAME(S) OF
ASSIGNEE(S) ADDRESS NO. OF WARRANTS
- --------------------------------------------------------------------------------
If said number of Warrant Shares shall not be all the Warrant Shares represented
by the Warrant, a new Warrant is to be issued in the name of said undersigned
for the balance remaining of the Warrant Shares represented by said Warrant.
Signature: __________________________________
Note: The above signature should correspond
exactly with the name on the first page of said
Warrant.
Dated:____________
-14-
<PAGE>
SUBSCRIPTION FORM
(TO BE EXECUTED UPON EXERCISE OF WARRANT)
Energy BioSystems Corporation:
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant for, and to purchase thereunder, _______
shares of Common Stock, as provided for therein, and tenders herewith payment of
the purchase price in full in the form of cash or a certified or official bank
check in the amount of $__________________.
Please issue a certificate or certificates for such shares of Common Stock in
the name of:
Name:_______________________
Address:
Social Security Number:
(Please Print)
If said number of shares shall not be all the shares purchasable under the
within Warrant, a new Warrant is to be issued in the name of said undersigned
for the balance remaining of the shares purchasable thereunder.
Signature:__________________
NOTE: The above signature should correspond
exactly with the name on the first page of
said Warrant or with the name of the
assignee appearing in the assignment form
above.
Dated: _________________
-15-
<PAGE>
[LOGO OF ENERGY BIOSYSTEMS APPEARS HERE]
PAUL G. BROWN, III
Vice President, Finance
December 27, 1996
Mr. Charles Miller
Petrolite Corporation
369 Marshall Ave
St. Louis, MO 63119
Dear Mr. Miller:
At this time it appears that the Financing referred to in the Fourth
Amendment and Addendum to Collaboration Agreement (the "Fourth Amendment")
between Energy Biosystems Corporation and Petrolite Corporation will close
sometime early in 1997. We would like, however, to proceed with the payment of
the First Cash Payment under the Fourth Amendment of One Million Dollars
($1,000,000). By acceptance of the First Cash Payment of One Million Dollars
($1,000,000) you also agree that the definitions of Expiration Date and
Conversion Price as set forth in the Fourth Amendment shall be amended and
restated in their entirety as set forth on Exhibit A hereto.
If you are in agreement with the foregoing, please execute a copy of
this letter in the space provided below. Upon receipt of a copy of this letter
signed by Petrolite Corporation we will wire transfer to your account the First
Cash Payment of One Million Dollars ($1,000,000).
Sincerely,
ENERGY BIOSYSTEMS CORPORATION
By: /s/ PAUL G. BROWN III
---------------------------
Name: Paul G. Brown
-------------------------
Title: Vice President Finance
------------------------
Agreed to this 30th day of December, 1996:
PETROLITE CORPORATION
By: /s/ DAVID WINSLETT
-------------------------
Name: David Winslett
-----------------------
Title: Vice President
----------------------
ENERGY BIOSYSTEMS CORPORATION
4200 Research Forest Drive, The Woodlands, Texas 77381
TEL 281.364.6100 FAX 281.364.6110
<PAGE>
EXHIBIT A
The "Expiration Date" shall mean the earlier to occur of (x) ten
business days following the closing of any equity financing by EBC after the
date hereof in which the gross cash proceeds raised in such equity financing
together with the gross cash proceeds raised in any other equity financings by
EBC after the date hereof equal or exceed Twenty-Five Million Dollars
($25,000,000) and (y) the date that is 24 months following the payment of the
First Cash Payment.
The "Conversion Price" shall mean (x) if the Financing is completed by
January 31, 1997, and the securities issued in the Financing are convertible
into shares of Common Stock, the initial conversion price per share of Common
Stock at which the EBC securities issued in the Financing may be converted into
Common Stock or (y) if the Financing is not completed by January 31, 1997, or if
the securities issued in the Financing are not convertible into shares of Common
Stock, 120% of the closing sale price of the shares of EBC Common Stock as
reported on the Nasdaq Stock Market on the date of the First Cash Payment.
<PAGE>
EXHIBIT 11.1
ENERGY BIOSYSTEMS CORPORATION
COMPUTATION OF EARNINGS PER SHARE
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994
Weighted Average Shares Outstanding:
# Days
Total Shares Outstanding
9,864,629 x 3 = 29,593,887
9,872,629 x 1 = 9,872,629
9,874,629 x 1 = 9,874,629
9,875,629 x 1 = 9,875,629
9,880,629 x 4 = 39,522,516
9,881,629 x 1 = 9,881,629
9,882,629 x 22 = 217,417,838
9,892,949 x 4 = 39,571,796
9,901,209 x 3 = 29,703,627
9,909,609 x 15 = 148,644,135
9,917,609 x 4 = 39,670,436
9,969,809 x 3 = 29,909,427
9,970,609 x 21 = 209,382,789
9,975,609 x 73 = 728,219,457
9,979,609 x 36 = 359,265,924
9,980,409 x 20 = 199,608,180
9,983,809 x 11 = 109,821,899
9,988,409 x 142 = 1,418,354,078
--- -------------
365 3,638,190,505
Weighted Avg. Shares: 3,638,190,505 / 365 = 9,967,645
=========
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994
Loss Per Share:
Net Loss plus dividend accrual plus
accretion of offering costs $(7,452,835) = $($0.75)
--------------------------- ---------- =======
Weighted Avg. Shares 9,967,645
<PAGE>
ENERGY BIOSYSTEMS CORPORATION
COMPUTATION OF EARNINGS PER SHARE
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995
Weighted Average Shares Outstanding:
# Days
Total Shares Outstanding
9,988,409 x 28 = 19,976,81
9,998,409 x 28 = 279,955,452
9,999,404 x 4 = 39,997,616
10,000,604 x 4 = 40,002,416
10,040,604 x 16 = 160,649,664
10,041,604 x 1 = 10,041,604
10,046,604 x 62 = 622,889,448
10,228,645 x 21 = 214,801,545
10,233,645 x 89 = 910,794,405
10,235,645 x 2 = 20,471,290
10,237,645 x 7 = 71,663,515
10,242,640 x 18 = 184,367,520
10,249,640 x 13 = 133,245,320
10,258,241 x 7 = 71,807,687
10,270,241 x 1 = 10,270,241
10,293,241 x 4 = 41,172,964
10,368,241 x 3 = 31,104,723
10,370,749 x 23 = 238,527,227
10,512,618 x 1 = 10,512,618
10,513,388 x 6 = 63,080,328
10,514,288 x 1 = 10,514,288
10,514,788 x 2 = 21,029,576
10,516,788 x 2 = 21,033,576
10,524,188 x 30 = 315,725,640
10,524,268 x 18 = 189,436,824
--- --------------
365 3,733,072,305
Weighted Avg. Shares: 3,733,072,305 / 365 = 10,227,595
==========
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995
Loss Per Share:
Net Loss plus dividend accrual plus
accretion of offering costs $(9,713,069) = $(0.95)
--------------------------- ----------- ======
Weighted Avg. Shares 10,227,595
<PAGE>
ENERGY BIOSYSTEMS CORPORATION
COMPUTATION OF EARNINGS PER SHARE
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
Weighted Average Shares Outstanding:
Total Shares # Days Outstanding
10,584,268 x 23 = 243,438,164
11,107,568 x 14 = 155,505,952
11,139,268 x 27 = 300,760,236
11,140,768 x 8 = 89,126,144
11,142,868 x 55 = 612,857,740
11,301,975 x 28 = 316,455,300
11,302,025 x 16 = 180,832,400
11,303,525 x 7 = 79,124,675
11,309,355 x 1 = 11,309,295
11,309,355 x 5 = 56,546,775
11,310,855 x 7 = 79,175,985
11,311,955 x 5 = 56,559,775
11,316,955 x 4 = 45,267,820
11,318,210 x 28 = 316,909,880
11,320,010 x 4 = 45,280,040
11,320,210 x 23 = 260,364,830
11,325,210 x 41 = 464,333,610
11,326,210 x 9 = 101,935,890
11,490,770 x 52 = 597,520,040
11,497,135 x 9 = 103,474,215
--- -------------
366 4,116,778,766
Weighted Avg. Shares: 4,116,778,766 / 366 = 11,248,029
==========
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
Loss Per Share:
Net Loss plus dividend accrual plus
accretion of offering costs $(11,720,213) = $(1.04)
--------------------------- ------------ ======
Weighted Avg. Shares 11,248,029
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTS
As independent public accountants, we hereby consent to the incorporation of our
reports incorporated by reference in this Form 10-K, into the Company's
previously filed Registration Statement on Form S-8 dated September 9, 1993 and
September 13, 1993, and Form S-3 dated February 13, 1995.
ARTHUR ANDERSEN LLP
The Woodlands, Texas
March 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,106,004
<SECURITIES> 5,891,584
<RECEIVABLES> 197,264
<ALLOWANCES> 0
<INVENTORY> 14,252
<CURRENT-ASSETS> 9,765,481
<PP&E> 6,150,723
<DEPRECIATION> 3,014,088
<TOTAL-ASSETS> 13,710,631
<CURRENT-LIABILITIES> 995,158
<BONDS> 0
0
23,295,585
<COMMON> 114,972
<OTHER-SE> 32,018,218
<TOTAL-LIABILITY-AND-EQUITY> 13,710,631
<SALES> 0
<TOTAL-REVENUES> 2,585,419
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,818,199
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,232,780)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,232,780)
<EPS-PRIMARY> (1.04)
<EPS-DILUTED> 0
</TABLE>
