MODIFICATION
AND SATISFACTION AGREEMENT
THIS MODIFICATION AND SATISFACTION
AGREEMENT (the “Modification and Satisfaction Agreement”) is made and entered
into effective as of January 31, 2008, by and among Save the World Air, Inc.
(the “Company”), Morale Orchards, LLC (“Morale”) and Matthews & Partners, a
law firm (the “Matthews Law Firm”).
RECITALS
A. WHEREAS,
on December 5, 2006, the Company entered into a Note Purchase Agreement (the
“Note Purchase Agreement”) with Morale, pursuant to which Morale purchased from
the Company two (2) Convertible Promissory Notes, one dated December 5, 2006
(the “2006 Morale Note”), in the principal face amount of $612,500, and another,
dated January 10, 2007 (the “2007 Morale Note”), also in the principal face
amount of $612,500 (collectively, the “Morale Notes”), and two (2) warrants, one
accompanying the 2006 Morale Note, and the other accompanying the 2007 Morale
Note. Each warrant provides Morale the right to purchase shares of
common stock of the Company (each either the “2006 Warrant or 2007 Warrant, or
collectively the Morale Warrants”). The aggregate purchase price for
the Morale Notes and Morale Warrants was $1,000,000, of which $500,000 was paid
by Morale and received by the Company on or about December 5, 2006, and of which
$500,000 was paid by Morale and received by the Company on or about January 10,
2007;
B. WHEREAS,
each of the Morale Notes is convertible into shares of common stock of the
Company. The 2006 Morale Note is convertible at the rate of $0.85 per
share into 720,588 shares of the Company’s common stock, and the 2007 Morale
Note is convertible at the rate of $0.70 per share into 875,000 shares of the
Company’s common stock;
C. WHEREAS,
the 2006 Morale Warrant is exercisable at $0.85 per share for 360,294 shares of
the Company’s common stock, and the 2007 Morale Warrant is exercisable at $.70
per share for 437,500 shares of the Company’s common stock;
D. WHEREAS,
the Note Purchase Agreement provides, in pertinent part, that in the event the
Company has not repaid each of the Morale Notes in full by the anniversary date
of their issuances, the principal balances of each note shall be increased by
ten percent (10%) and the Company shall pay interest at two and one-half percent
(2½%) per month, compounded daily, for each month until each of the Morale Notes
is paid in full;
E. WHEREAS,
the Morale Notes, as of the date hereof, are unpaid, and neither the Morale
Notes nor the Morale Warrants have been converted into shares of common stock of
the Company;
F. WHEREAS,
Morale also has piggy-back registration rights pursuant to which Morale may
require the Company to include the shares of the Company’s common stock issuable
upon conversion of the Morale Notes and exercise of the Morale Warrants in
certain future registration statements the Company may elect to file (the
“Morale Registration Rights”);
G. WHEREAS,
the amount due and owing as of January 31, 2008, under the 2006 Morale Note is
$689,327 (the “Unpaid 2006 Morale Note Debt”);
H. WHEREAS,
the amount due and owing as of January 31, 2008, under the 2007 Morale Note is
$672,885 (the “Unpaid 2007 Morale Note Debt”);
I. WHEREAS,
the Company borrowed the principal sum of $20,000 from Morale on October 30,
2007, at an interest rate of ten percent (10%) per annum (the “Additional Morale
Note”). Principal and accrued interest under the Additional Morale
Note is due on demand, and no payments thereunder have been made by the
Company. The parties agree hereto that the amount due and owing under
the Additional Morale Note as of January 31, 2008, is $20,000 (the “Unpaid
Additional Morale Note Debt”);
J. WHEREAS,
Morale is beneficially owned by Leodis Matthews, who, through his law firm, the
Matthews Law Firm, serves as outside legal counsel to the
Company. The Company is indebted to the Matthews Law Firm for unpaid
legal fees and costs through January 31, 2008, in the aggregate amount of
$472,762 (the “Matthews Law Firm Debt”);
K. WHEREAS,
the Company, Morale and the Matthews Law Firm now desire to modify the terms and
provisions of, and to provide for the satisfaction of the Company’s obligations
under, the Morale Notes, the Additional Morale Note and the Matthews Law Firm
Debt, pursuant to the terms and conditions set forth in this Modification and
Satisfaction Agreement.
NOW,
THEREFORE, in consideration of the mutual promises and covenants contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the Company, Morale and the Matthew Law
Firm agree as follows:
1. Incorporation
of Recitals. The Recitals set
forth above are hereby agreed to and incorporated herein as an integral part of
this Modification and Satisfaction Agreement.
2. Waiver of
Interest.
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(i)
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Morale
agrees to forgive and waive any and all accrued interest on the Morale
Notes from and after January 31,
2008;
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(ii)
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Morale
agrees to forgive and waive any and all accrued interest due on the
Additional Morale Note from the date of its issuance;
and
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(iii)
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The
Matthews Law Firm agrees to forgive any and all interest which may have
accrued on the Matthews Law Firm
Debt.
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3. Cancellation
of Notes, Debt and Obligations. Upon the
execution of this Modification and Satisfaction Agreement, the 2006 Morale Note,
the 2007 Morale Note, the Additional Morale Note, the Unpaid 2006 Morale Note
Debt, the Unpaid 2007 Morale Note Debt, the Unpaid Additional Morale Note Debt
and the Matthews Law Firm Debt, shall all be cancelled, be deemed satisfied in
full and be of no further force or effect, effective January 31,
2008. Upon execution hereof, originals of the Morale Notes, the
Additional Morale Note, and insofar as there exists a note relating to the
Matthews Law Firm Debt, shall be delivered to the Company, whereupon in
furtherance hereof they shall all be marked and deemed cancelled and of no
further force or effect.
4. No
Registration Rights. Upon execution
hereof, the Morale Registration Rights shall be cancelled and be of no further
force or effect.
5. Issuance
of Shares. In consideration
of this Modification and Satisfaction Agreement, including the waivers and
cancellations as set forth in paragraphs 1 and 2, above, upon execution hereof,
and concurrently with the waivers and cancellations provided hereunder, the
Company shall issue a total of 7,421,896 shares of its common stock to Morale
and the Matthews Law Firm, allocable as follows: (i) 2,759,308 shares
shall be issued to Morale arising out of and in exchange for cancellation of the
2006 Morale Note and the Unpaid 2006 Morale Note Debt; (ii) 2,691,540 shares
shall be issued to Morale arising out of and in exchange for cancellation of the
2007 Morale Note and the Unpaid 2007 Morale Note Debt; (iii) 80,000 shares shall
be issued to Morale arising out of and in exchange for cancellation of the
Additional Morale Note and the Unpaid Additional Morale Note Debt; and (iv)
1,891,048 shares shall be issued to the Matthews Law Firm arising out of and in
exchange for cancellation of the Matthews Law Firm Debt. The Company
shall not be required to, and shall not, file a Registration Statement with the
Securities and Exchange Commission or any state securities agency to register or
qualify the shares of common stock of the Company issuable to Morale and the
Matthews Law Firm hereunder, and all such shares when issued shall be deemed
restrictive securities and bear appropriate legends.
6. Representations. Each of the
parties hereto agree and represent that he or it is entering into this
Modification and Satisfaction Agreement without reliance on any statement,
representation or promise of any of the other party, except as expressly set
forth in this Modification and Satisfaction Agreement. The parties
hereto have made such investigation into matters pertaining to this Modification
and Satisfaction Agreement as each has deemed necessary. Morale and
the Matthews Law Firm acknowledge and agree that the shares issuable hereunder
are restricted and not qualified nor registered under federal or state
securities laws. Morale and the Matthews Law Firm also acknowledge
and agree that they are acquiring the shares issuable hereunder in furtherance
of the terms and conditions of this Modification and Satisfaction Agreement and
for their own account and not with a view to or for sale in connection with any
distribution of the shares. Morale and the Matthews Law Firm also
acknowledge and agree that they fully understand the speculative nature and
risks associated with ownership of the shares issuable
hereunder. Morale and the Matthews Law Firm also acknowledge and
agree that they are aware of the current financial condition of the Company and
its business, and that they have had an opportunity to ask questions of, and
receive answers and/or obtain information from, officers and directors of the
Company regarding the Company and its business. Morale and the
Matthews Law Firm further acknowledge and agree that they enter into this
Modification and Satisfaction Agreement and accept the Company’s shares
voluntarily and of their own free will, and that they have not been coerced or
induced to accept the Company’s shares under this Modification and Satisfaction
Agreement. Morale and the Matthews Law Firm also acknowledge and
agree that each is an “accredited investor” within the meaning of the Securities
and Exchange Commission Rule 501 of Regulation D, as presently in effect, under
the Securities Act of 1933.
7. Conflict. In the event of
any conflict between the terms and conditions of this Modification and
Satisfaction Agreement, on the one hand, and the Note Purchase Agreement, the
Morale Notes, the Morale Warrants, the Additional Morale Note, or any agreement
or note relating to the Matthews Law Firm Debt, on the other hand, this
Modification and Satisfaction Agreement shall govern and control.
8. Governing
Law. This Modification
and Satisfaction Agreement shall be governed by the laws of the State of
California.
9. Arbitration. Any controversy
or claim arising out of or relating to this Modification and Satisfaction
Agreement shall be settled by binding and non-appealable arbitration in Los
Angeles County, California, in accordance with Commercial Arbitration Rules of
the American Arbitration Association or such other arbitration forum as the
parties may mutually agree, and any judgment upon the award rendered may be
entered in any court having jurisdiction thereof.
10. Morale
Warrants. The terms and
conditions of the Morale Warrants, to the extent not expressly amended in this
Modification and Satisfaction Agreement, shall remain in full force and
effect.
11. Counterparts. This Modification
and Satisfaction Agreement may be executed in two (2) or more counterparts, each
of which shall be deemed to be an original copy of this Modification and
Satisfaction Agreement and all of which, when taken together, shall be deemed to
constitute one and the same agreement. The parties hereto may execute
this Modification and Satisfaction Agreement by facsimile delivery or manually
signed copies or by the electronic delivery of copies bearing an electronic
facsimile signature.
IN
WITNESS WHEREOF, the Company, Morale and the Matthews Law Firm have caused this
Modification and Satisfaction Agreement to be executed effective as of the date
first above written.
SAVE THE
WORLD AIR, INC.
By: /s/
Charles R. Blum, President and
CEO
MORALE ORCHARDS, LLC
By: /s/
Jacqueline Alexander, its
Manager
MATTHEWS & PARTNERS, A LAW
FIRM
By: /s/
Leodis Matthews, Partner
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