Formation Agreement

EXHIBIT 10.25
FORMATION AGREEMENT
WITH
SOFINOV


FORMATION AGREEMENT


This Agreement to Form (the "Formation Agreement") is entered into as of the 7th day of August, 1996 by and between Hydrogen Burner Technology, Inc., a California Corporation ("HBT") and Sofinov Societe Financiere d'Innovation Inc., a Quebec Corporation ("Sofinov") with reference to the following facts:


A. HBT is the sole owner of certain rights in and to the patents and pending patents described in the PHS License (as defined in Section 2.2B below) (the "Licensed UOB-TM Patents"). Generally, the Licensed UOB-TM- Patents relate to what is referred to as "Underoxidized Burner Technology" (the "UOB-TM- Technology"). The terms "UOB-TM- Technology", "Licensed UOB-TM- Patents", "UOB-TM-Systems", and "Tradenames" and "Trademarks", shall have the respective meanings assigned to them in the PHS License.


B. HBT formed Phoenix Gas Systems LLC ("PGS") as a California limited liability company, and currently has a ninety-seven percent (97%) membership interest in the profits and losses of PGS. Two parties now have the right to acquire from PGS an additional 2% membership interest, which would reduce HBT's interest to 95%. It is possible that a strategic partner may acquire from PGS an additional 5% membership interest for no less than $1,250,000 before or after Sofinov has made its contribution, which would decrease the Membership Interests of HBT and the Sofinov Affiliate referred to below.


C. To partially exploit the UOB-TM- Technology, HBT granted a license (the "PGS License") to PGS with respect to the field of use described therein.


D. HBT requires additional capital to exploit the UOB-TM- Technology, which Sofinov has agreed to provide by acquiring a membership interest in PHS (as defined in Paragraph E below) and PGS subject to the terms and conditions herein set forth.


E. HBT and Sofinov have agreed to form a California limited liability company, which will be known as Phoenix Hydrogen Systems LLC ("PHS"), for exploitation of the UOB-TM- Technology. To that end, HBT will license to PHS the Licensed UOB-TM- Patents, the UOB-TM- Technology, the Tradenames and Trademarks in contemplation of PHS being a sublicensor to PGS and one or more other operating companies.


NOW, THEREFORE, FOR GOOD AND VALUABLE CONSIDERATION, HBT AND SOFINOV AGREE AS FOLLOWS:


1. FORMATION OF PHS. On or before the Closing Date (as defined in Section 2.1 below) HBT and one of the "Sofinov Affiliates" (as described below), shall file Articles of Organization for PHS and execute an Operating Agreement for PHS substantially in the form attached hereto as Exhibit A. Appropriate provisions of this Formation Agreement will be incorporated in said Operating Agreement for PHS.


1


2. INVESTMENT BY SOFINOV AND HBT IN PHS.


2.1 AMOUNT AND TIMING OF INVESTMENT BY SOFINOV. Subject to the conditions precedent set forth in Section 2.2 below, Sofinov, through two affiliates (each a "Sofinov Affiliate" and both, the "Sofinov Affiliates") shall contribute Four Million Dollars ($4,000,000) (the "Sofinov Contribution") in the aggregate to the capital of PHS and PGS and acquire a 30% membership interest in PHS (the "PHS Interest") and a membership interest in PGS equal to 30% of HBT's membership interest in PGS immediately preceding this transaction subject to the provisions of Paragraph B on page 1 hereof (the PGS Interest," and together with the PHS Interest, the "Interests"). The Sofinov Contribution shall be made on August 23, 1996 or such other date as the parties may reasonably agree upon (the "Closing Date"), at a closing (the "Closing") to be held at the offices of Alschuler Grossman & Pines LLP, 2049 Century Park East, 39th Floor, Los Angeles, California 90067.


2.2 CONDITIONS TO CLOSING. Sofinov's obligation to make the Sofinov Contribution is conditioned upon the occurrence of each of the following, each, any or all of which may be waived by Sofinov.


A. The PGS License shall have been assigned by HBT to PHS and shall have been modified to conform to the requirements of the PHS License (including its conversion into a sublicense) and this Formation Agreement. The form of the PGS License, as so amended, is attached hereto as Exhibit B.


B. HBT and PHS shall have executed a license (the "PHS License") (in the form attached hereto as Exhibit C), whereby HBT grants to PHS, in perpetuity (but in the event this is not permitted then for the longest period permitted by law), subject only to the provisions of the PGS License (as amended) as to a certain field of use, an exclusive, irrevocable worldwide license for the use, exploitation, and sublicense of the Licensed UOB-TM- Patents, the UOB-TM- Technology and the Tradenames and Trademarks.


C. The members of PGS shall have executed a revised Operating Agreement for PGS to conform to the requirements of this Formation Agreement substantially in the form attached hereto as Exhibit D.


D. Each of the agreements referred to in Schedule A hereto (collectively, along with this Formation Agreement, referred to as the "Documents") shall have been duly executed and delivered; and each act required by the Documents shall have been performed.


E. RIGHT OF FIRST REFUSAL GRANTED BY HBT SHAREHOLDERS. HBT shall have delivered to Sofinov an agreement (the "First Refusal Agreement") executed by each of the current shareholders of HBT (in the form attached hereto as Exhibit E) granting to Sofinov a right of first refusal to purchase the HBT shares owned by them. HBT shall require that any new shareholder of HBT execute the First Refusal Agreement as a condition to acquiring any shares of HBT, and HBT shall amend its Articles of Incorporation, if required,


2


and legend each of its share certificates to provide notice that the shares of HBT are subject to the terms and conditions of a First Refusal Agreement dated as of August 23, 1996, a copy of which is available for examination in HBT's office.


F. All corporate and other proceedings to be taken and all waivers and consents, approvals, qualifications and/or registrations required to be obtained or effected in connection with the issuance, execution, delivery and performance of the Documents and transactions contemplated thereby shall have been taken, obtained or effected and all documents incident thereto shall be satisfactory in form and substance to both parties. Any filings required to be made to the State of California in connection with the formation of PHS shall have been made.


G. Sofinov shall have received from counsel for HBT its attorney's opinion letter addressed to Sofinov, dated as of the Closing Date, substantially in the form attached hereto as Exhibit F.


H. The benefits of each UOB-TM- Technology Contract (as defined in Section 7.12) covered by the PGS License shall have been assigned to PGS.


I. HBT and PGS shall not, between the date of this Formation Agreement and the Closing Date, have (i) suffered any material adverse change; or (ii) entered into any material contract, including the sale of shares or issuance of membership interest, except as contemplated by Paragraph B of the Preamble and Sections 2.1 and 2.3 hereof. HBT and PGS shall, between the date of this Formation Agreement and the Closing Date, have operated their businesses in the ordinary course.


J. Each representation and warranty made by each party hereto shall be true, complete and correct in all material respects on and as of the Closing Date.


2.3 INVESTMENT BY HBT. On or before the Closing Date, HBT shall contribute to PHS the PHS License which the parties agree has a fair market value of Nine Million Three Hundred Thirty Three Thousand Three Hundred Thirty Three Dollars ($9,333,333). In consideration thereof, HBT will receive a 70% membership interest in PHS.


2.4 STRUCTURING. HBT acknowledges that it has been advised that (a) Sofinov intends to ultimately dispose of the interests and any other interest it may acquire in any other operating company yet to be created to exploit the Licensed UOB-TM- Patents and the UOB-TM- Technology, such disposal to be effectuated by means of a sale of stock in a corporation, (b) Sofinov will make its investments in PHS, PGS and all other operating companies through one or more entities controlled by Sofinov, and (c) each such separate entity may be merged or otherwise consolidated with PGS or another operating company, as the case may be, concurrently with or following the incorporation of such operating company in anticipation of an Initial Public Offering or otherwise. Each party shall use its best efforts to accommodate the others' structuring needs and preferences.


3


2.5 USE OF SOFINOV CONTRIBUTION. The parties agree that the Sofinov Contribution will be used consistent with the uses described in Schedule B hereto.


3. RESTRICTION ON TRANSFERS AND HYPOTHECATION. HBT agrees that it will not voluntarily or by operation of law, assign, hypothecate, give, transfer, mortgage, sublet, license, or otherwise transfer or encumber, or allow a lien to be placed upon all or any part of the Licensed UOB-TM- Patents or the UOB-TM- Technology.


4. PARTICIPATION IN HBT BOARD MEETING. At all times while Sofinov has any interest of no less than ten percent (10%) in PHS, PGS or any affiliate of either of them (including the operating companies to be formed pursuant to Section 8) HBT shall give written notice (the "Meeting Notice") to Sofinov prior to each meeting or action in lieu of a meeting by HBT's Board of Directors (the "HBT Board"). The form, substance and date of delivery of each Meeting Notice shall be identical to the notices given to each member of the HBT Board. Sofinov shall be permitted to designate one or more nominees (but only one at a time) who shall be permitted to attend and participate in, but not vote at, each meeting of the HBT Board. The action taken by the HBT Board in approving the execution of this Formation Agreement and the consummation of the transactions contemplated hereby shall be deemed to be the approval of the HBT Board of this Section 4. If requested by Sofinov, HBT shall amend its By-Laws or other organizational documents to reflect and evidence the obligations described hereunder.


5. REIMBURSEMENT FOR CERTAIN FEES AND COSTS. PHS shall, (a) upon demand by Sofinov (which demand may only be made if and after the Sofinov Affiliate has made the Sofinov Contribution) reimburse Sofinov for legal fees and expenses incurred by Sofinov, and (b) upon demand by HBT reimburse HBT for reasonable legal fees and expenses incurred by HBT; in the case of each of Sofinov and HBT, up to a maximum of Fifty Thousand Dollars ($50,000), in connection with the negotiation and preparation of the Documents and transactions referred to herein.


6. REPRESENTATIONS AND WARRANTIES BY SOFINOV. Sofinov represents and warrants to HBT as follows:


6.1 ORGANIZATION; POWER AND AUTHORITY OF SOFINOV. Sofinov is a corporation duly organized, validly existing and in good standing under the laws of the Province of Quebec, Canada with the requisite corporate power and authority to own, lease and operate its properties, to carry on its business as presently conducted and as proposed to be conducted and to carry out the transactions contemplated by this Formation Agreement and the other Documents executed by it.


6.2 ORGANIZATION; POWER AND AUTHORITY OF THE SOFINOV AFFILIATES. On or prior to the Closing Date, each of the Sofinov Affiliates will be a corporation and/or limited liability company (as the case may be) duly organized, validly existing and in good standing under the laws of the State of California, each with the requisite power and authority to own, lease and operate its properties, to carry on its business as presently conducted and as


4


proposed to be conducted and to carry out the transactions contemplated by this Formation Agreement and the other Documents executed in connection with any of the foregoing.


6.3 INVESTMENT INTENT.


A. Sofinov and the Sofinov Affiliates will be acquiring the Interests for their own account, for investment and not with a view to the distribution thereof within the meaning of the Securities Act of 1933.


B. Sofinov understands that (i) the Interests have not been registered under the Securities Act of 1933 and (ii) the Interests must be held by the Sofinov Affiliates unless a subsequent disposition thereof is registered under the Securities Act of 1933 or is exempt from registration thereunder.


C. Sofinov represents that it has not employed any broker or finder in connection with the transactions contemplated by this Formation Agreement.


D. Sofinov further represents that it and the Sofinov Affiliates are (or, as applicable, will be) each an "accredited investor" within the meaning of Rule 501 under the Securities Act of 1933.


6.4 AUTHORIZATION. The execution and delivery of this Formation Agreement and the other Documents to which Sofinov or any Sofinov Affiliate, as each appears as a party to each of these agreements, is or will be a party have been duly authorized by each (as applicable) and this Formation Agreement and the other Documents are valid and legally binding obligations of Sofinov or any such Sofinov Affiliate, as the case may be, enforceable against it in accordance with their respective terms.


6.5 CONFLICT. The execution, delivery and performance by Sofinov or any Sofinov Affiliate, as the case may be, of this Formation Agreement and the other Documents to which each is a party do not violate, conflict with or constitute a breach or default in any material respect under any material contract, agreement or instrument to which Sofinov or any such Sofinov Affiliate is a party or by which either is bound.


6.6 CONTINUING EFFECT OF REPRESENTATIONS. Each representation made in this Section 6 and elsewhere in the Formation Agreement shall be true, correct and complete in all material respects as of the Closing Date.


7. REPRESENTATIONS AND WARRANTIES BY HBT. HBT represents and warrants to Sofinov as follows:


7.1 ORGANIZATION; POWER AND AUTHORITY. HBT is a corporation duly organized, validly existing and in good standing under the laws of the State of California with the requisite corporate power and authority to own, lease and operate its properties, to carry


5


on its business as presently conducted and as proposed to be conducted and to carry out the transactions contemplated by this Formation Agreement and the other Documents.


7.2 CORPORATE POWER; AUTHORIZATION OF THE DOCUMENTS; NO CONFLICTS. HBT has the corporate power to execute, deliver and perform its obligations under this Formation Agreement and the other Documents to which it is a party. The execution, delivery and performance by HBT of the Documents to which it is a party have been duly authorized by all requisite corporate and shareholder action by HBT and each such Document constitutes a legal, valid and binding obligation of HBT, enforceable against it in accordance with its terms. The execution, delivery and performance of the Documents to which HBT is a party and the consummation of the transactions contemplated thereby and compliance with the provisions thereof by HBT, the acquisition by Sofinov of the Interests and the contribution of the PHS License will not (a) violate or conflict with any provision of any applicable law, or any ruling, writ, injunction, order, judgment or decree of any governmental authority (a "Judgment") applicable to HBT, PHS or PGS or any of their respective properties or assets, (b) conflict with or result in any breach of any of the terms, conditions or provisions of, or constitute (with due notice or lapse of time, or both) a default (or give rise to any right of termination, cancellation or acceleration) under any note, indenture, guaranty or mortgage or any material lease, license, franchise, contract, agreement, commitment, arrangement, understanding or instrument, oral or written, to which HBT, PHS or PGS is a party or by which any of their respective properties or assets is bound or affected or (c) result in the creation or imposition of any encumbrance upon any of the material properties or assets of HBT, PHS or PGS.


7.3 AUTHORIZATION. The authorization, issuance, and delivery of the Interests has been duly authorized by all requisite corporate and shareholder action of HBT and manager and member action of PHS and PGS and, when issued and delivered in accordance with the terms of the Documents, the Interests will be validly issued and outstanding, fully paid and nonassessable with no personal liability attaching to the ownership thereof, and not subject to preemptive or any other, similar rights. The terms, designations, powers, preferences and relative participating, optional and other special rights, and the qualifications, limitations, and restrictions, of the Interests are as stated in the respective Operating Agreements for PHS and PGS.


7.4 NO CONSENT OR APPROVAL REQUIRED. No consent of any natural person, company, partnership, joint venture, corporation, business trust, unincorporated organization or other entity (a "Person") and no consent, approval or authorization of, or declaration to or filing with, any federal, state, municipal or other government department, commission, board, bureau, agency or instrumentality, or any court, arbitral tribunal or arbitrator, and any nongovernmental regulating body, to the extent that the rules and regulations or orders of such body have the force of law, in each case whether of the United States of America or any foreign country (a "Governmental Authority"), is or will be required for the valid authorization, execution and delivery of any Document to which HBT, PHS or PGS is a party or for the consummation of the transactions contemplated thereby, or for the valid authorization, issuance and delivery of the Interests, other than those consents,


6


approvals, authorizations, declarations or filings which have been obtained or made, as the case may be.


7.5 PROPRIETARY RIGHTS.


A. HBT is the sole owner of, and has the sole right to use, the Licensed UOB-TM- Patents, the UOB-TM- Technology, the Tradenames and the Trademarks, free and clear of any liens, claims, encumbrances or other rights, subject only to the PHS, License and the PGS License.


B. The Licensed UOB-TM- Patents and the UOB-TM- Technology (as of the Closing Date) represent all of HBT's rights in or relating to all inventions, technology and information acquired by or licensed to HBT relating to the UOB-TM-.


C. Following its due execution and delivery, the PHS License will be a valid and legally enforceable agreement.


D. Except as set forth in the PHS License and the PGS License, no royalties, percentages, honoraria, fees or payments of any kind are or will be payable by PHS and PGS, respectively, to any other Person by reason of their respective exploitation and use of the Licensed UOB-TM- Patents and the UOB-TM- Technology.


E. HBT has no knowledge, and has no reason to believe that (a) any of the rights associated with the PHS License and the PGS License violate, or will violate any contract of HBT with any Person, or infringes, or will infringe, any intellectual property rights of any Person, and (b) there exists any prior art that is more pertinent to the patentability of the UOB-TM- Technology than the references cited by the U.S. Patent and Trademark Office in connection with prosecution of the Licensed UOB-TM- Patents (as of the Closing Date). There is no pending nor threatened claim nor litigation contesting the validity of or HBT's exploitation rights in and to the UOB-TM- Technology nor has HBT received any notice that any of the UOB-TM- Technology conflicts, or will conflict, with the asserted rights of others.


F. Following modification of the PGS License, as provided above, neither PGS (except under the PHS/PGS License) nor any other Person (other than PGS, Southern California Gas (pursuant to the agreement described in Section 7.5G below), and Unitel (pursuant to the agreement described in Section 7.5G below), will have any exploitation rights or any other rights in and to the Licensed UOB-TM- Patents or the UOB-TM- Technology.


G. Except for (i) the PHS License, (ii) the PGS License, (iii) the Agreement for Hydrogen Producing Underoxidized Burners dated June 15, 1993, between HBT and the Southern California Gas Company, and (iv) the Agreement dated March 28, 1996 between HBT and Unitel Technologies, Inc. for distribution of UOB-TM- Systems in India, HBT on behalf of itself, PGS, PHS or any other Person, has not granted or transferred,


7


or agreed to grant or transfer, any exploitation rights or other right or interest in and to the Licensed UOB-TM- Patents or the UOB-TM- Technology, except that PGS has entered into a loan and security agreement with Peter/Mat Partners and others dated July 1, 1996, pursuant to which PGS has granted to Peter/Mat a security interest in all of PGS, equipment and inventory.


7.6 LITIGATION. There is no action, suit, claim, arbitration, proceeding or investigation at law or in equity or by or before any Governmental Authority now pending or threatened against or affecting HBT, PGS, PHS, the Licensed UOB-TM- Patents, the UOB-TM- Technology, the Tradenames or the Trademarks. There are no judgments to which HBT or PGS is a party or by which any of its properties or assets are bound.


7.7 NO DEFAULTS. Neither HBT nor PGS is in default under its Articles of Incorporation or By-Laws or its Articles of Organization, as applicable, or any Contract (as defined in Section 7.12). There exists no condition, event or act which constitutes, or which after notice, lapse of time or both, would constitute, a default under any of the foregoing.


7.8 EQUITY INVESTMENTS. Except for its interest in PHS (when formed), PGS and its former interest in PGS, Inc., a California corporation that was dissolved in December 1995, HBT has never had, nor does it presently have, any subsidiaries, nor has it owned, nor does it presently own, any capital stock or other proprietary interest, directly or indirectly, in any Person.


7.9 CAPITALIZATION. The authorized and issued capital stock of HBT and the owners thereof are as set forth in Schedule C hereto.


7.10 PGS INTEREST. The membership interests in, and the capital contributions to, PIGS are as reflected in Schedule D attached hereto. Prior to the Closing Date, HBT will not transfer or issue, or cause or allow PGS to transfer or issue, any other interest in the profits and losses of PGS, except that HBT shall, at any time prior to the Closing Date be permitted (after notice to Sofinov) to cause PGS to issue to a strategic partner a five percent (5%) interest in the profits and losses of PGS for a capital contribution, in cash, of no less than One Million Two Hundred Fifty Thousand Dollars ($1,250,000).


7.11 TRUE AND CORRECT COPIES. From the inception of the relationship between HBT and Sofinov until the date of execution of this Formation Agreement each party has delivered, or caused to be delivered, to the other copies of agreements, correspondence and other documents (collectively, the "Due Diligence Documents"). Each of the Due Diligence Documents is (and will be) a true and correct copy of its original, unless a copy of a copy, in which event it is (and will be) a true and correct copy of such copy.


7.12 MATERIAL CONTRACTS. Attached hereto as Schedule E is a complete and accurate list of all material contracts, indentures, mortgages, agreements, leases, licenses, purchase orders, sales orders, and other instruments to which either HBT or PGS is a party or by which either of them is bound (the "Contracts"). All of the Contracts listed on Schedule E


8


are in full force and effect and are valid and binding obligations of the parties thereto. To the knowledge of HBT, no party to a Contract has given notice of termination of, or taken any action inconsistent with the continuation of, the Contract. HBT has provided to Sofinov complete and accurate copies of each Contract listed on Schedule E. Each contract and sales order entered into by HBT or PGS in connection with the exploitation of the UOB-TM- Technology is listed on Schedule E, and is so identified (the "UOB-TM- Technology Contracts").


7.13 COMPLIANCE WITH LAW. To the best of HBT's knowledge and belief, the UOB-TM- Technology and each product produced as a result of the exploitation of the UOB-TM- Technology complies with all United States laws which govern the development, use, or sale of the UOB-TM- Technology.


7.14 CONTINUING EFFECT OF REPRESENTATIONS. Each representation made in this Section 7 and elsewhere in this Formation Agreement shall be true, correct and complete in all material respects as of the Closing Date.


8. FORMATION OF OPERATING COMPANIES.


8.1 OPERATING COMPANIES. Sofinov and HBT intend to create and own a variety of operating companies. Each operating company shall sublicense from PHS the right to use the Licensed UOB-TM- Patents, the UOB-TM- Technology, the Tradenames and the Trademarks in the exploitation of a specified field of use for the UOB-TM- Technology. All of the terms, conditions, rights, obligations, and requirements described in this Section 8 shall apply to each of the operating companies so formed, including PGS, and shall be set forth in the operating agreement and/or other appropriate operational or organizational document for each of the operating companies as required.


8.2 OWNERSHIP INTERESTS.


A. Except for PGS, each operating company shall be owned as to (a) 70% by HBT; and (b) 30% by one or more newly formed California corporations (or limited liability companies), each of which shall be 100% owned by one or more companies designated by Sofinov (the "Sofinov Subsidiary"); provided, however, that each operating company's ownership shall be subject to dilution as described below.


B. Upon the agreement of Sofinov and HBT to form a new operating company to exploit a new field of use of the UOB-TM- Technology, Sofinov (through the Sofinov Subsidiary) shall have the first right to make the full amou ...