Exhibit 10.16
SUBORDINATED NOTE WITH WARRANTS PURCHASE AGREEMENT
Dated as of February 10, 2006
between
Basin Water, Inc., as Issuer
- and -
Aqua America, Inc.
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS 1 1.01 Defined Terms 1 1.02 Other Definitional Provisions. 7 ARTICLE II PURCHASE OF THE NOTES 7 2.01 The Notes. 7 2.02 The Closing 7 2.03 Security for the Note 8 2.04 Subordination 8 2.05 Registration, Transfer and Replacement of the Notes. 8 2.06 Revival of Obligations 8 ARTICLE III GRANT OF THE WARRANTS 9 3.01 The Warrants. 9 ARTICLE IV REPRESENTATIONS AND WARRANTIES 9 4.01 Organization and Authority 9 4.02 Organizational Information 9 4.03 Transactions Legal and Authorized 10 4.04 No Defaults, Restrictions 10 4.05 Material Contracts 10 4.06 Consents 11 4.07 Compliance with Law 11 4.08 Financial Statements. 11 4.09 Pending Litigation 12 4.10 Title to Properties 12 4.11 Licenses and Permits 12 4.12 Taxes 12 4.13 Margin Securities 12 4.14 No Investment Company 13 4.15 Securities Laws 13 4.16 Employee Relations 13 4.17 Insurance 13 4.18 Solvency. 13 4.19 Intellectual Property 14 4.20 No Payments Not in the Ordinary Course 15 4.21 No Change 15 4.22 ERISA 15 4.23 Environmental Matters 16 4.24 Registration Rights Agreements 18 4.25 Other Rights of Aqua 18 4.26 Actual Existence of Collateral; No Split Transaction 18 4.27 Business Relations 18 4.28 Relationships with Related Persons 19 4.29 Full Disclosure 19 ARTICLE V CONDITIONS TO CLOSING 19 5.01 Purchase Documents 19 5.02 Representations and Warranties True 20 5.03 Compliance with this Agreement 20 5.04 Payment of Fees 21 ARTICLE VI AFFIRMATIVE COVENANTS 21 6.01 Payment of the Note 21 6.02 Maintenance of Existence 21 6.03 Maintenance of Property 21 6.04 Reporting Requirements 21 6.05 Intellectual Property 22 6.06 Litigation 22 6.07 Financial Records 22 6.08 Additional Information 22 6.09 Insurance 22 6.10 Material Contracts 22 6.11 Taxes, Charges and Liens 23 6.12 Performance 23 6.13 Operations 23 6.14 Inspection 23 6.15 Observer Rights. 23 6.16 Compliance Certificate 24 6.17 Environmental Compliance and Reports 24 6.18 Location of Collateral 24 6.19 Further Assurances 24 6.20 ERISA 25 6.21 Use of Proceeds 25 6.22 Subordination Agreement 25 ARTICLE VII NEGATIVE COVENANTS 26 7.01 Limitations on Merger, Consolidation, Sales of Assets, Etc. 26 7.02 Limitations on Indebtedness 26 7.03 Continuity of Operations 26 7.04 Loans, Acquisitions and Guaranties 26 7.05 Prepayments; Changes in Terms 26 7.06 Limitation on Liens 26 7.07 Restrictions on Ability to Satisfy Obligations 26 7.08 Transactions with Affiliates 26 ARTICLE VIII EVENTS OF DEFAULT 27 8.01 Bankruptcy, etc. 27 8.02 Other Events 27 8.03 Notice of Defaults 28 8.04 Other Remedies 28 8.05 Waiver 28 ARTICLE IX MISCELLANEOUS 28 9.01 Amendments and Waivers 28 9.02 Notices 28 9.03 No Waiver; Cumulative Remedies 29 9.04 Survival of Representations and Warranties 29 9.05 Payment of Expenses, Taxes and Brokers' Fees 29 9.06 Indemnification 30 9.07 Aqua Representations 30 9.08 Counterparts 31 9.09 Severability 31 9.10 Integration 31 9.11 GOVERNING LAW 31 9.12 Successors and Assigns 31 9.13 Acknowledgements 31 9.14 Original Issue Discount 31 9.15 Confidentiality 32
SUBORDINATED NOTE WITH
WARRANTS PURCHASE AGREEMENT
THIS SUBORDINATED NOTE WITH WARRANTS PURCHASE AGREEMENT (this " Agreement" ), dated as of February 10, 2006, is by and among Basin Water, Inc., a California corporation with its principal place of business at 8731 Prestige Court, Rancho Cucamonga, California 91730 (the " Issuer" ) and Aqua America, Inc., a
Pennsylvania corporation with its principal place of business at 762 West Lancaster Avenue, Bryn Mawr, Pennsylvania 19010-3489 (" Aqua" ). Capitalized terms used in this Agreement and not otherwise defined have the meanings set forth in Article I .
Background:
A. The Issuer and Aqua are negotiating the terms of a strategic relationship in order to pursue opportunities in the area of water supply. The purpose of this relationship is to identify and treat drinking water sources which have been deemed unusable due to high levels of contaminants such as nitrate. It is intended that contaminated groundwater systems will be acquired, and the parties will utilize the Issuer' s proprietary treatment systems to treat the groundwater, thus providing a reliable source of drinking water in water-short areas of the United States.
B. In connection with such strategic relationship, the Issuer has agreed to sell the Note and to issue the Warrants to Aqua, and Aqua has agreed to purchase the Note and to acquire the Warrants, on the terms and conditions set forth therein.
NOW, THEREFORE, in consideration of the foregoing and the covenants and promises set forth herein, the parties hereto, intending to be legally bound, hereby agree as follows:
ARTICLE I DEFINITIONS
1.01 Defined Terms
As used in this Agreement, the following terms shall have the following meanings:
" ADA" means the Americans with Disabilities Act of 1990, as amended, and the rules and regulations promulgated thereunder.
" Affiliate" means (i) any Person that, directly or indirectly, is in control of, is controlled by, or is under common control with a Related Party, including, without limitation, any joint venture of the Related Parties or (ii) any Person who is a director, officer, member or partner of a Related Party or of any Person described in the preceding clause (i). For purposes of this definition, " control" of a Person means the power, directly or indirectly, either to (i) vote fifty percent (50%) or more of the voting equity having ordinary voting power for the election of the management of such Person, or (ii) direct or cause the direction of the management and policies of such Person whether by contract or otherwise.
" Agreed Transfer" has the meaning set forth in Section 2.06 .
" Board of Directors" means the board of directors of the Issuer.
" Business Day" means a day other than a Saturday, Sunday or other day on which commercial banks in New York, New York are authorized or required by law to close.
" Capital Lease" means any lease of property, real or personal by a Related Party, the obligations of which are required in accordance with GAAP to be capitalized on the balance sheet of the Issuer.
" Capital Stock" means (i) any and all shares, interests, participations or other equivalents (however designated) of the equity interests of any Person, (ii) any and all equivalent ownership interests in such Person and (iii) any and all warrants or options to purchase any of the foregoing.
" Closing" has the meaning set forth in Section 2.02 .
" Closing Date" means the date that is two (2) Business Days after the date on which all the conditions set forth in Article V shall first have been satisfied, or such other date agreed to by Aqua and Issuer.
" Code" means the Internal Revenue Code of 1986, as amended from time to time.
" Collateral" has the meaning set forth in Section 2.03 .
" Commonly Controlled Entity" means an entity, whether or not incorporated, that is under common control with the Issuer within the meaning of Section 4001 of ERISA or is part of a group which includes the Issuer and which is treated as a single employer under Section 414 of the Code.
" Common Stock" means the common stock of the Issuer, no par value.
" Copyrights" has the meaning set forth in Section 4.19(a) .
" Default" means any of the events specified in Sections 8.01 or 8.02 , hereof, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied.
" Default Rate" means nine percent (9%) per annum, compounded semi-annually and computed on the basis of a 360-day year.
" Disclosure Schedule" has the meaning set forth in the introductory paragraph of Article IV.
" ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time.
" Event of Default" means any of the events specified in Sections 8.01 or 8.02 , provided that any applicable requirement for the giving of notice, the lapse of time, or both, or any other applicable condition, has been satisfied.
" Financing Statements" means all UCC financing statements (or comparable documents now or hereafter filed in accordance with the UCC or comparable law) authorized by any Related Party to be filed in favor of Aqua in connection with the transactions contemplated hereby.
" GAAP" means generally accepted accounting principles in the United States of America in effect from time to time.
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" Governmental Authority" means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.
" Guarantee Obligation" means any obligation of the Issuer guaranteeing any indebtedness, leases, dividends or other obligations of any other Person in any manner, whether directly or indirectly or otherwise to assure or hold harmless the owner of any primary obligation against loss in respect thereof.
" Indebtedness" means, as of the date of determination, (i) all indebtedness of the Related Parties for borrowed money or for the deferred purchase price of property or services (other than current trade liabilities or accounts payable incurred in the ordinary course of business) or which is evidenced by a note, bond, debenture or similar instrument, (ii) all obligations of the Related Parties under Capital Leases, (iii) all obligations of the Issuer as an account party in respect of letters of credit or acceptances issued or created for or for the account of the Issuer, (iv) all obligations of the Issuer under currency exchange contracts or interest rate swap agreements and (v) all liabilities secured by any Lien on any property owned by the Related Parties whether or not the Related Parties have assumed or otherwise become liable for the payment thereof.
" Indemnified Person" has the meaning set forth in Section 9.06 .
" Initial Public Offering" means the date of the closing by the Issuer of an underwritten initial public offering of its Common Stock resulting in gross proceeds to the Issuer of at least Fifteen Million Dollars ($15,000,000) pursuant to an effective registration statement under the Securities Act.
" Insolvent" means, with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA.
" Intellectual Property Assets" has the meaning set forth in Section 4.19(a) .
" Issuer" has the meaning set forth in the preamble hereto.
" Knowledge" means the actual knowledge, or such knowledge as should have been obtained after reasonable inquiry with respect to the matter in question, of any Responsible Officer.
" Lien" means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), license, right of first refusal or similar restriction, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any Capital Lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the UCC or comparable law of any jurisdiction in respect of any of the foregoing).
" Marks" has the meaning set forth in Section 4.19(a) .
" Material Adverse Effect" means a material adverse effect on (i) the business, operations, property, condition (financial or otherwise) or prospects of the Related Parties, taken as a whole, (ii) the ability of the Issuer to perform its material obligations under the Purchase Documents or (iii) the validity or enforceability of the Purchase Documents or the rights or remedies of Aqua hereunder or thereunder that are material to Aqua; provided , however , that a material adverse effect with respect to the business, operations, property, condition (financial or otherwise) or prospects of the Related
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Parties, taken as a whole, shall not include such effects resulting from any one or more of the following: (a) the effect of any change in the United States or foreign economies or securities or financial markets in general, (b) the effect of any change that generally affects the industry in which the Related Parties operate, (c) the effect of any change arising in connection with earthquakes, hostilities, acts of war, sabotage or terrorism or military actions or any escalation or material worsening of any such hostilities, acts of war, sabotage or terrorism or military actions existing or underway as of the Closing Date or (d) the effect of any changes in applicable laws or accounting rules.
" Material Contract" has the meaning set forth in Section 4.05(a) .
" Multiemployer Plan" means a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA and which is or has been maintained or contributed to (or to which there is or has been an obligation to contribute to) by Issuer or a Commonly Controlled Entity.
" Net Names" has the meaning set forth in Section 4.19(a) .
" Note" means, as of a particular time, the promissory note issued pursuant to this Agreement substantially in the form of Exhibit 2.01 attached hereto and each Note delivered in substitution or exchange for any of such Notes, as applicable.
" Notice of Acceptance" has the meaning set forth in Section 9.17(b) .
" Obligations" means the obligation of the Issuer to (a) pay the principal of and interest on the Notes in accordance with the terms thereof, (b) reimburse Aqua for its fees and expenses as provided in Section 9.05 hereof and (c) provide the indemnification required by Section 9.06 hereof.
" Offer Period" has the meaning set forth in Section 9.17(a) .
" Offered Securities" has the meaning set forth in Section 9.17(a) .
" Operating Lease" means any lease of property, real or personal, which is not a Capital Lease.
" Patents" has the meaning set forth in Section 4.19(a) .
" PBGC" means the Pension Benefit Guaranty Corporation.
" Permitted Liens" means (i) Liens securing Indebtedness permitted under Section 7.02(a) , including Senior Debt, (ii) Liens in favor of Aqua, (iii) Liens securing Indebtedness permitted under Section 7.02(e) and 7.02(f) , (iv) Liens for taxes, assessments or charges of any Governmental Authority for claims not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect to such taxes, assessments or charges which are being contested are maintained on the books of the Issuer, in conformity with GAAP, (v) carriers' , warehousemen' s, construction liens, repairmen' s or other like Liens arising in the ordinary course of business which are not overdue for a period of more than ninety (90) days or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect to such underlying obligations which are being contested and maintained on the books of Issuer, in conformity with GAAP, (vi) pledges or deposits (including, without limitation, surety bonds and appeal bonds) in connection with workers' compensation, unemployment insurance and other social security legislation, (vii) deposits to secure the performance of bids, trade contracts
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(other than for borrowed money), leases, statutory obligations and other obligations of a like nature incurred in the ordinary course of business, (viii) Liens arising as a result of progress payments under government contracts, (ix) purchase money Liens in connection with the purchase by any Related Party of equipment in the ordinary course of business, (x) Liens in respect of any writ of execution, attachment, garnishment, judgment or award in an amount less than $250,000, (xi) easements, reservations, exceptions, rights-of-way, covenants, conditions, restrictions and other similar encumbrances which, in the aggregate, are not substantial in amount and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the Issuer and (xii) Liens set forth on Section 4.10 of the Disclosure Schedule.
" Permitted Sales" means (i) the lease or sale of water treatment systems or other inventory of the Issuer in the ordinary course of business, including the license of Intellectual Property Assets in connection therewith and (ii) the lease, sale, license or other transfer of the Intellectual Property Assets related to a proprietary process for biologically removing and destroying perchlorate load from used ion exchange resins and from perchlorate-laden ion exchange resin regeneration brines.
" Person" means an individual, partnership, corporation, business trust, joint stock company, limited liability company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature.
" Plan" means, as of the date of determination, any employee pension benefit plan as defined in Section 3(2) of ERISA (other than a Multiemployer Plan) which is or has been maintained or contributed to (or to which there is or has been an obligation to contribute to) by the Issuer or a Commonly Controlled Entity.
" Pro Rata Portion" has the meaning set forth in Section 9.17(a) .
" Purchase Documents" means the documents in identified in Section 5.01(a) whose delivery is a condition to the effectiveness of this Agreement.
" Purchased Securities" has the meaning set forth in Section 9.17(b) .
" Registration Rights Agreement" means the Registration Rights Agreement, dated as of the date hereof, by and among the Issuer and the holders of the Warrants.
" Related Party" means the Issuer and each Subsidiary of the Issuer.
" Rights Offer" has the meaning set forth in Section 9.17(a) .
" Reorganization" means, with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA.
" Reportable Event" means any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the thirty day notice period is waived under PBGC Reg. a7 4043.
" Requirement of Law" means, as to any Person, its certificate or articles of incorporation, certificate of formation, operating agreement, bylaws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or final and binding determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its material property is subject.
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" Responsible Officer" means the Chief Executive Officer, the President and/or the Chief Financial Officer of the Issuer.
" Securities Act" means the Securities Act of 1933, as amended.
" Security Documents" means (i) the Security Agreement between the Issuer and Aqua whereby the Issuer grants to Aqua a subordinated security interest in the Collateral substantially in the form attached as Exhibit 5.01(a)(iv) , (ii) the Financing Statements and (iii) all other security agreements, patent and trademark assignments, lease assignments and other similar agreements necessary to create or perfect Aqua' s security interest in the Collateral and all amendments, restatements, modifications or supplements thereof or thereto.
" Senior Credit Agreement" means the Business Loan Agreement dated as of July 1, 2003 between the Senior Secured Creditor and the Issuer, as the same may be amended from time to time.
" Senior Debt" means the obligations of the Issuer incurred which are senior in priority to the Obligations, including, without limitation, obligations under the Senior Credit Agreement, any refinancing thereof or obligations under any senior debt agreement entered into after the date hereof; provided , that , without the prior written consent of Aqua, the maximum aggregate principal amount of Senior Debt shall not exceed Eight Million Dollars ($8,000,000).
" Senior Secured Creditor" means BWCA I, LLC, a Delaware limited liability company, or any other party to whom the Issuer owes Senior Debt.
" Subordination Agreement" means the Subordination Agreement between the Senior Secured Creditor, the XACP Noteholders and Aqua as such agreement may be amended from time to time by such parties.
" Subsidiary" means, as to any Person, a corporation, partnership or other entity of which more than fifty percent (50%) of the shares of stock, or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect the board of directors or other managers of such corporation, partnership or other entity, are at the time owned, directly or indirectly, through one or more intermediaries, or both, by such Person.
" Taxes" means any amounts payable by a Person to any Governmental Authority, whether currently paid or accrued as a liability for future payment, that would be classified as taxes in accordance with GAAP (including, without limitation, deferred Taxes).
" Trade Secrets" has the meaning set forth in Section 4.19(a) .
" UCC" means the Uniform Commercial Code as from time to time in effect in the State of California.
" Unfunded Current Liability" means the amount, if any, by which the actuarial present value of accumulated benefits of any Plan subject to Title IV of ERISA as of the close of its most recent plan year, determined using actuarial assumptions at such time consistent with those prescribed by Financial Accounting Standard No. 87, exceeds the fair market value of the assets allocable to such liabilities.
" Warrants" has the meaning set forth in Section 3.01(a) .
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" Warrant Shares" means the shares of Common Stock issuable upon exercise of the Warrants.
" XACP Notes" means the
Promissory Notesissued pursuant to the Subordinated Note with Warrants Purchase Agreement, dated as of October 14, 2005, among the Issuer and the purchasers named therein, and each note delivered in substitution or exchange for any of such notes, as applicable.
" XACP Noteholders" means the holders of the XACP Notes.
1.02 Other Definitional Provisions .
(a) The words " hereof, " herein" and " hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, subsection, Schedule and Exhibit references are to this Agreement unless otherwise specified.
(b) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.
ARTICLE II
PURCHASE OF THE NOTES
2.01 The Note .
(a) Subject to the terms and conditions of this Agreement, the Issuer will authorize for issuance to Aqua on the Closing Date, a Note with an aggregate original principal amount of Two Million Dollars ($2,000,000). The Note shall accrue interest from and after the Closing Date and shall have such other terms as set forth in the form of Note attached hereto as Exhibit 2.01 . The Issuer agrees to sell the Note to Aqua on the Closing Date, and Aqua agrees to purchase the Note from the Issuer, in each case on the terms and conditions set forth herein.
(b) Payment of principal and interest on the Note shall be made in accordance with the terms of the Note as specified therein.
(c) Prepayment on the Note shall be made in accordance with the terms of the Note as specified therein.
(d) The Issuer will pay to Aqua in immediately available funds to the account designated by Aqua, all amounts payable to Aqua when due in respect of the principal of, or interest on, the Note, without any presentation of the Note.
2.02 The Closing .
The closing of the purchase and sale of the Note and the Warrants shall take place on the Closing Date with the documents set forth in Section 5.01 to be delivered by the Issuer to Aqua by facsimile and/or e-mail transmission (with originals to follow by overnight delivery to the addresses set forth in Section 9.02 ) and all payments to be made in connection with the Closing to be wired in immediately available funds to such accounts as the Issuer and Aqua may designate, as applicable, or in such other manner as the parties hereto may otherwise agree (the " Closing" ).
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2.03 Security for the Note .
Payment of all Obligations, including Indebtedness evidenced by the Note, shall be secured by a second priority subordinated lien and security interest in and on all of the assets of the Issuer as described in the Security Documents (the " Collateral" ). Aqua' s second priority lien on the Collateral will be subject only to the security interest of the Senior Secured Creditor and Permitted Liens.
2.04 Subordination . Payment of all Obligations shall be subordinated to the rights of the Senior Secured Creditor to the extent provided in the Subordination Agreement.
2.05 Registration, Transfer and Replacement of the Notes .
(a) Aqua may, at its option, in person or by delivery, surrender its Note for exchange at the principal office of the Issuer and, within a reasonable time thereafter and without expense for the issuance of replacement Note, receive in exchange therefor one or more duly executed Notes, dated as of the date to which interest has been paid on the Note so surrendered, or if no interest has yet been so paid, then dated the date hereof, and registered in such name or names, all as may be designated by Aqua, for the same aggregate principal amount as the then unpaid principal amount of the Note(s) so surrendered. The Issuer covenants and agrees to take and cause to be taken all action necessary to effect such exchanges; provided, that, notwithstanding the foregoing, Issuer shall not be responsible for any federal, state or other transfer taxes and charges which may be payable in connection with the exchange or transfer of any Note.
(b) The Issuer shall keep at its principal executive office a register for the registration of ownership and transfer of the Note or any portion thereof. The name and address of the holder of the Note, each transfer thereof and the name and address of each transferee of the Note shall be registered in such register. Any such issuance of a new Note shall not be deemed to be the sale of new securities and shall in all respects be subject to compliance with applicable federal, state and other securities laws. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Issuer shall not be affected by any notice or knowledge to the contrary. The Issuer shall give to any holder promptly upon request therefor, a complete and correct copy of the names and addresses of the registered holder of Note.
(c) Upon receipt by the Issuer of evidence satisfactory to it of the ownership of and the loss, theft, de ...