SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT Dated as of October 29, 2007 among ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC. and THE PURCHASERS LISTED ON EXHIBIT A
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Exhibit 4.1
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE
AGREEMENT
Dated as of October 29, 2007
among
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
and
THE PURCHASERS LISTED ON EXHIBIT A
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This SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (the “Agreement”) is
dated as of October 29, 2007 by and among Advanced Environmental Recycling Technologies, Inc., a
Delaware corporation (the “Company”), and each of the Purchasers of shares of Series D
Convertible Preferred Stock of the Company whose names are set forth on Exhibit A hereto
(individually, a “Purchaser” and collectively, the “Purchasers”).
The parties hereto agree as follows:
ARTICLE I
Purchase and Sale of Preferred Stock
Section 1.1 Purchase and Sale of Stock. Upon the following terms and conditions, the
Company shall issue and sell to the Purchasers and each of the Purchasers shall purchase from the
Company, the number of shares of the Company’s Series D Convertible Preferred Stock, par value
$0.01 per share at a purchase price equal to $13.20 per share (the “Preferred Shares”),
convertible into shares of the Company’s Class A common stock, par value $0.01 per share (the
“Common Stock”), in the amounts set forth opposite such Purchaser’s name on Exhibit
A hereto. The designation, rights, preferences and other terms and provisions of the Series D
Convertible Preferred Stock are set forth in the Certificate of Designation of the Relative Rights
and Preferences of the Series D Convertible Preferred Stock attached hereto as Exhibit B
(the “Certificate of Designation”). The Company and the Purchasers are executing and
delivering this Agreement in accordance with and in reliance upon the exemption from securities
registration afforded by Rule 506 of Regulation D (“Regulation D”) as promulgated by the
United States Securities and Exchange Commission (the “Commission”) under the Securities
Act of 1933, as amended (the “Securities Act”) or Section 4(2) of the Securities Act.
Section 1.2 Warrants. The Company agrees to issue to each of the Purchasers Warrants
to purchase a number of shares of Common Stock equal to fifty percent (50%) of the number of
Conversion Shares initially issuable upon conversion of such Purchaser’s Preferred Shares
purchased. The number of Warrants each Purchaser shall be issued pursuant to this Agreement is set
forth opposite such Purchaser’s name on Exhibit A hereto. The Warrants shall have an
initial term of five (5) years from the Closing Date and shall have an exercise price per share
equal to the Warrant Price (as defined in the applicable Warrant).
Section 1.3 Conversion Shares. The Company has authorized and has reserved and
covenants to continue to reserve, free of preemptive rights and other similar contractual rights of
stockholders, a number of shares of Common Stock equal to one hundred twenty percent (120%) of the
number of shares of Common Stock as shall from time to time be sufficient to effect the conversion
of all of the Preferred Shares and exercise of the Warrants then outstanding. Any shares of Common
Stock issuable upon conversion of the Preferred Shares and exercise of the Warrants (and such
shares when issued) are herein referred to as the “Conversion Shares” and the “Warrant
Shares”, respectively. The Preferred Shares, the Conversion Shares and the Warrant Shares are
sometimes collectively referred to as the “Shares”.
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Section 1.4 Purchase Price and Closing. Subject to the terms and conditions hereof,
the Company agrees to issue and sell to the Purchasers and, in consideration of and in express
reliance upon the representations, warranties, covenants, terms and conditions of this Agreement,
the Purchasers, severally but not jointly with respect to the amounts set forth opposite the name
of each such Purchaser respectively on Exhibit A, agree to purchase the Preferred Shares
and the Warrants for an aggregate purchase price of up to $10,000,000 (the “Purchase
Price”). The closing of the purchase and sale of the Preferred Shares and the Warrants to be
acquired by the Purchasers from the Company under this Agreement shall take place at the offices of
Xxxxxx Xxxxx Xxxxxxxx & Xxxxxxx LLP, 0000 Xxxxxx xx xxx Xxxxxxxx, Xxx Xxxx, Xxx Xxxx 00000 (the
“Closing”) at 10:00 a.m., New York time (i) on or before October 29, 2007;
provided, that all of the conditions set forth in Article IV hereof and applicable to the
Closing shall have been fulfilled or waived in accordance herewith, or (ii) at such other time and
place or on such date as the Purchasers and the Company may agree upon (the “Closing
Date”). Subject to the terms and conditions of this Agreement, at the Closing the Company
shall deliver or cause to be delivered to each Purchaser (x) a certificate for the number of
Preferred Shares set forth opposite the name of such Purchaser on Exhibit A hereto, (y) a
Warrant to purchase such number of shares of Common Stock as is set forth opposite the name of such
Purchaser on Exhibit A attached hereto and (z) any other documents required to be delivered
pursuant to Article IV hereof. At the Closing, each Purchaser shall deliver its Purchase Price by
wire transfer to an escrow account designated by the escrow agent.
ARTICLE II
Representations and Warranties
Section 2.1 Representations and Warranties of the Company. The Company hereby
represents and warrants to the Purchasers, as of the date hereof and the Closing Date (except as
set forth on the Schedule of Exceptions attached hereto with each numbered Schedule corresponding
to the section number herein), as follows:
(a) Organization, Good Standing and Power. The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the State of Delaware and has
the requisite corporate power to own, lease and operate its properties and assets and to conduct
its business as it is now being conducted. The Company does not have any subsidiaries except as
set forth in the Company’s Form 10-K for the year ended December 31, 2006, as amended, including
the accompanying financial statements (the “Form 10-K”), or in the Company’s Form 10-Q for
the fiscal quarter ended June 30, 2007 (the “Form 10-Q”), or on Schedule 2.1(g)
hereto. The Company and each such subsidiary is duly qualified as a foreign corporation to do
business and is in good standing in every jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary except for any jurisdiction(s)
(alone or in the aggregate) in which the failure to be so qualified will not have a Material
Adverse Effect (as defined in Section 2.1(c) hereof) on the Company’s financial condition.
(b) Authorization; Enforcement. The Company has the requisite corporate power and
authority to enter into and perform this Agreement, the Registration Rights
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Agreement in the form attached hereto as Exhibit D (the “Registration Rights
Agreement”), the Escrow Agreement by and among the Company, the Purchasers and the escrow
agent, dated as of the date hereof, substantially in the form of Exhibit E attached hereto
(the “Escrow Agreement”), the Irrevocable Transfer Agent Instructions (as defined in
Section 3.13), the Certificate of Designation, and the Warrants (collectively, the “Transaction
Documents”) and to issue and sell the Shares and the Warrants in accordance with the terms
hereof. The execution, delivery and performance of the Transaction Documents by the Company and
the consummation by it of the transactions contemplated hereby and thereby have been duly and
validly authorized by all necessary corporate action, and no further consent or authorization of
the Company or its Board of Directors or stockholders is required. This Agreement has been duly
executed and delivered by the Company. The other Transaction Documents will have been duly
executed and delivered by the Company at the Closing. Each of the Transaction Documents
constitutes, or shall constitute when executed and delivered, a valid and binding obligation of the
Company enforceable against the Company in accordance with its terms, except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation,
conservatorship, receivership or similar laws relating to, or affecting generally the enforcement
of, creditor’s rights and remedies or by other equitable principles of general application.
(c) Capitalization. The authorized capital stock of the Company, the number of shares
of such capital stock issued and outstanding, and the number of shares of capital stock reserved
for issuance upon the exercise or conversion of all outstanding warrants, stock options, and other
securities issued by the Company, as of the date hereof, are set forth on Schedule 2.1(c)
hereto. All of the outstanding shares of the Common Stock and any other outstanding security of
the Company have been duly and validly authorized and validly issued, fully paid and nonassessable
and were issued in accordance with the registration or qualification provisions of the Securities
Act, or pursuant to valid exemptions therefrom. Except as set forth in this Agreement and as set
forth on Schedule 2.1(c) hereto, no shares of Common Stock or any other security of the
Company are entitled to preemptive rights, registration rights, rights of first refusal or similar
rights and there are no outstanding options, warrants, scrip, rights to subscribe to, call or
commitments of any character whatsoever granted by the Company or existing pursuant to agreements
to which the Company is a party and relating to, or securities or rights convertible into, any
shares of capital stock of the Company. Furthermore, except as set forth in this Agreement and as
set forth on Schedule 2.1(c) hereto, there are no contracts, commitments, understandings,
or arrangements by which the Company is or may become bound to issue additional shares of the
capital stock of the Company or options, securities or rights convertible into shares of capital
stock of the Company. Except for customary transfer restrictions contained in agreements entered
into by the Company in order to sell restricted securities or as provided on Schedule
2.1(c) hereto, the Company is not a party to or bound by any agreement or understanding
granting registration or anti-dilution rights to any person with respect to any of its equity or
debt securities. Except as set forth on Schedule 2.1(c), the Company is not a party to,
and it has no knowledge of, any agreement or understanding restricting the voting or transfer of
any shares of the capital stock of the Company. Except as disclosed on Schedule 2.1(c)
or 2.1(k), (i) there are no outstanding debt securities, or other form of material debt of
the Company or any of its subsidiaries, (ii) there are no outstanding securities of the Company or
any of its subsidiaries which contain any redemption or similar provisions, and there are no
contracts, commitments, understandings, agreements or arrangements by which the Company or any of
its
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subsidiaries is or may become bound to redeem a security of the Company or any of its
subsidiaries, (iii) the Company does not have any stock appreciation rights or “phantom stock”
plans or agreements, or any similar plan or agreement, and (iv) as of the date of this Agreement,
except as disclosed on Schedule 2.1(c), to the Company’s and each of its subsidiaries’
knowledge, no Person (as defined below) or group of related Persons beneficially owns or has the
right to acquire by agreement with or by obligation binding upon the Company, beneficial ownership
of in excess of 5% of the Common Stock. Any Person with any right to purchase securities of the
Company that would be triggered as a result of the transactions contemplated hereby or by any of
the other Transaction Documents has waived such rights or the time for the exercise of such rights
has passed, except
as a result of stock dividends, subdivisions or combinations or except where
failure of the Company to receive such waiver would not have a Material Adverse Effect (as defined
below). Except as set forth on Schedule 2.1(c), there are no options, warrants or other
outstanding securities of the Company (including, without limitation, any equity securities issued
pursuant to any Company Plan) the vesting of which will be accelerated by the transactions
contemplated hereby or by any of the other Transaction Documents. The Company has furnished or
made available to the Purchasers true and correct copies of the Company’s Certificate of
Incorporation as in effect on the date hereof (the “Certificate”), and the Company’s Bylaws
as in effect on the date hereof (the “Bylaws”). For purposes of this Agreement,
“Person” shall mean an individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint stock company,
government (or an agency or subdivision thereof) or other entity of any kind. For the purposes of
this Agreement, “Material Adverse Effect” means any material adverse effect on the
business, operations, properties, or financial condition of the Company and its subsidiaries and/or
any condition, circumstance, or situation that would prohibit or otherwise materially interfere
with the ability of the Company to perform any of its obligations under this Agreement in any
material respect.
(d) Issuance of Shares. The Preferred Shares and the Warrants to be issued at the
Closing have been duly authorized by all necessary corporate action and the Preferred Shares, when
paid for or issued in accordance with the terms hereof, shall be validly issued and outstanding,
fully paid and nonassessable and entitled to the rights and preferences set forth in the
Certificate of Designation. When the Conversion Shares and the Warrant Shares are issued in
accordance with the terms of the Certificate of Designation and the Warrants, respectively, such
shares will be duly authorized by all necessary corporate action and validly issued and
outstanding, fully paid and nonassessable, and the holders shall be entitled to all rights accorded
to a holder of Common Stock.
(e) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company, the performance by the Company of its obligations under the Certificate
of Designation and the consummation by the Company of the transactions contemplated herein and
therein do not and will not (i) violate any provision of the Company’s Certificate or Bylaws, (ii)
conflict with, or constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination, amendment, acceleration
or cancellation of, any agreement, mortgage, deed of trust, indenture, note, bond, license, lease
agreement, instrument or obligation to which the Company is a party or by which it or its
properties or assets are bound, subject to certain limitations on cash dividends
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under existing debt obligations described on Schedule 2.1(u), (iii) create or impose a lien,
mortgage, security interest, charge or encumbrance of any nature on any property of the Company
under any agreement or any commitment to which the Company is a party or by which the Company is
bound or by which any of its respective properties or assets are bound, or (iv) result in a
violation of any federal, state, local or foreign statute, rule, regulation, order, judgment or
decree (including Federal and state securities laws and regulations) applicable to the Company or
any of its subsidiaries or by which any property or asset of the Company or any of its subsidiaries
are bound or affected, except, in all cases other than violations pursuant to clauses (i) and (iv)
above, for such conflicts, defaults, terminations, amendments, accelerations, cancellations and
violations as would not, individually or in the aggregate, have a Material Adverse Effect. The
business of the Company and its subsidiaries is not being conducted in violation of any laws,
ordinances or regulations of any governmental entity, except for possible violations which
singularly or in the aggregate do not and will not have a Material Adverse Effect. The Company is
not required under Federal, state or local law, rule or regulation to obtain any consent,
authorization or order of, or make any filing or registration with, any court or governmental
agency in order for it to execute, deliver or perform any of its obligations under the Transaction
Documents, or issue and sell the Preferred Shares, the Warrants, the Conversion Shares and the
Warrant Shares in accordance with the terms hereof or thereof (other than any filings which may be
required to be made by the Company with the Commission or state securities administrators
subsequent to the Closing, any registration statement which may be filed pursuant hereto, and the
Certificate of Designation); provided that, for purposes of the representation made in this
sentence, the Company is assuming and relying upon the accuracy of the relevant representations and
agreements of the Purchasers herein.
(f) Commission Documents, Financial Statements. The Common Stock of the Company is
registered pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), and the Company has timely filed all reports, schedules, forms,
statements and other documents required to be filed by it with the Commission pursuant to the
reporting requirements of the Exchange Act, including material filed pursuant to Section 13(a) or
15(d) of the Exchange Act from January 1, 2005 through the date hereof (all of the foregoing
including filings incorporated by reference therein being referred to herein as the “Commission
Documents”). The Company has delivered or made available to each of the Purchasers true and
complete copies of the Commission Documents. The Company has not provided to the Purchasers any
material non-public information or other information which, according to applicable law, rule or
regulation, was required to have been disclosed publicly by the Company but which has not been so
disclosed, other than with respect to the transactions contemplated by this Agreement. At the
times of their respective filings, the Commission Documents complied in all material respects with
the requirements of the Exchange Act and the rules and regulations of the Commission promulgated
thereunder and other federal, state and local laws, rules and regulations applicable to such
documents, and, as of their respective dates, none of the Commission Documents contained any untrue
statement of a material fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances under which they
were made, not misleading. The financial statements of the Company included in the Commission
Documents comply as to form in all material respects with applicable accounting requirements and
the published rules and regulations of the Commission or other applicable rules and regulations
with respect thereto.
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Such financial statements have been prepared in accordance with United States generally
accepted accounting principles (“GAAP”) applied on a consistent basis during the periods
involved (except (i) as may be otherwise indicated in such financial statements or the notes
thereto or (ii) in the case of unaudited interim statements, to the extent they may not include
footnotes or may be condensed or summary statements), and fairly present in all material respects
the financial position of the Company and its subsidiaries as of the dates thereof and the results
of operations and cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments).
(g) Subsidiaries. Schedule 2.1(g) hereto sets forth each subsidiary of the
Company, showing the jurisdiction of its incorporation or organization and showing the percentage
of each person’s ownership. For the purposes of this Agreement, “subsidiary” shall mean
any corporation or other entity of which at least a majority of the securities or other ownership
interest having ordinary voting power (absolutely or contingently) for the election of directors or
other persons performing similar functions are at the time owned directly or indirectly by the
Company and/or any of its other subsidiaries. All of the outstanding shares of capital stock of
each subsidiary have been duly authorized and validly issued, and are fully paid and nonassessable.
There are no outstanding preemptive, conversion or other rights, options, warrants or agreements
granted or issued by or binding upon any subsidiary for the purchase or acquisition of any shares
of capital stock of any subsidiary or any other securities convertible into, exchangeable for or
evidencing the rights to subscribe for any shares of such capital stock. Neither the Company nor
any subsidiary is subject to any obligation (contingent or otherwise) to repurchase or otherwise
acquire or retire any shares of the capital stock of any subsidiary or any convertible securities,
rights, warrants or options of the type described in the preceding sentence. Neither the Company
nor any subsidiary is party to, nor has any knowledge of, any agreement restricting the voting or
transfer of any shares of the capital stock of any subsidiary.
(h) No Material Adverse Change. Since December 31, 2006, the Company has not
experienced or suffered any Material Adverse Effect.
(i) No Undisclosed Liabilities. Neither the Company nor any of its subsidiaries has
any liabilities, obligations, claims or losses (whether liquidated or unliquidated, secured or
unsecured, absolute, accrued, contingent or otherwise) other than those incurred in the ordinary
course of the Company’s or its subsidiaries respective businesses since December 31, 2006 and
which, individually or in the aggregate, do not or would not have a Material Adverse Effect on the
Company or its subsidiaries.
(j) No Undisclosed Events or Circumstances. No event or circumstance has occurred or
exists with respect to the Company or its subsidiaries or their respective businesses, properties,
prospects, operations or financial condition, which, under applicable law, rule or regulation,
requires public disclosure or announcement by the Company but which has not been so publicly
announced or disclosed.
(k) Indebtedness. The Commission Documents or Schedule 2.1(k) hereto sets
forth as of a recent date all outstanding secured and unsecured Indebtedness of the Company or any
subsidiary, or for which the Company or any subsidiary has commitments. For the purposes
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of this Agreement, “Indebtedness” shall mean (a) any liabilities for borrowed money or
amounts owed in excess of $100,000 (other than trade accounts payable incurred in the ordinary
course of business), (b) all guaranties, endorsements and other contingent obligations in respect
of Indebtedness of others, whether or not the same are or should be reflected in the Company’s
balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments
for deposit or collection or similar transactions in the ordinary course of business; and (c) the
present value of any lease payments in excess of $25,000 due under leases required to be
capitalized in accordance with GAAP. Except as set forth on Schedule 2.1(k), neither the
Company nor any subsidiary is in default with respect to any Indebtedness.
(l) Title to Assets. Each of the Company and the subsidiaries has good and marketable
title to all of its real and personal property reflected in the Form 10-K, free and clear of any
mortgages, pledges, charges, liens, security interests or other encumbrances, except for those
disclosed in the Company’s most recently filed Form 10-K or such that, individually or in the
aggregate, do not cause a Material Adverse Effect. All leases of the Company and each of its
subsidiaries are valid and subsisting and in full force and effect.
(m) Actions Pending. There is no action, suit, claim, investigation, arbitration,
alternate dispute resolution proceeding or any other proceeding pending or, to the knowledge of the
Company, threatened against the Company or any subsidiary which questions the validity of this
Agreement or any of the other Transaction Documents or the transactions contemplated hereby or
thereby or any action taken or to be taken pursuant hereto or thereto. Except as set forth in the
Commission Documents, there is no action, suit, claim, investigation, arbitration, alternate
dispute resolution proceeding or any other proceeding pending or, to the knowledge of the Company,
threatened, against or involving the Company, any subsidiary or any of their respective properties
or assets. There are no outstanding orders, judgments, injunctions, awards or decrees of any
court, arbitrator or governmental or regulatory body against the Company or any subsidiary or any
officers or directors of the Company or subsidiary in their capacities as such.
(n) Compliance with Law. The business of the Company and the subsidiaries has been
and is presently being conducted in accordance with all applicable federal, state and local
governmental laws, rules, regulations and ordinances, except for such noncompliance that,
individually or in the aggregate, would not cause a Material Adverse Effect. The Company and each
of its subsidiaries have all franchises, permits, licenses, consents and other governmental or
regulatory authorizations and approvals necessary for the conduct of its business as now being
conducted by it unless the failure to possess such franchises, permits, licenses, consents and
other governmental or regulatory authorizations and approvals, individually or in the aggregate,
could not reasonably be expected to have a Material Adverse Effect.
(o) Taxes. The Company and each of the subsidiaries has accurately prepared and filed
all federal, state and other tax returns required by law to be filed by it, has paid or made
provisions for the payment of all taxes shown to be due and all additional assessments, and
adequate provisions have been and are reflected in the financial statements of the Company and the
subsidiaries for all current taxes and other charges to which the Company or any subsidiary is
subject and which are not currently due and payable. None of the federal income tax returns of
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the Company or any subsidiary have been audited by the Internal Revenue Service. The Company
has no knowledge of any additional assessments, adjustments or contingent tax liability (whether
federal or state) of any nature whatsoever, whether pending or threatened against the Company or
any subsidiary for any completed tax period, nor of any basis for any such assessment, adjustment
or contingency.
(p) Certain Fees. Except as set forth on Schedule 2.1(p) hereto, no brokers,
finders or financial advisory fees or commissions will be payable by the Company or any subsidiary
or any Purchaser with respect to the transactions contemplated by this Agreement.
(q) Disclosure. Neither this Agreement or the Schedules hereto nor any other
documents, certificates or instruments furnished to the Purchasers by or on behalf of the Company
or any subsidiary in connection with the transactions contemplated by this Agreement contain any
untrue statement of a material fact or omit to state a material fact necessary in order to make the
statements made herein or therein, in the light of the circumstances under which they were made
herein or therein, not misleading.
(r) Operation of Business. The Company and each of the subsidiaries owns or possesses
all patents, trademarks, domain names (whether or not registered) and any patentable improvements
or copyrightable derivative works thereof, websites and intellectual property rights relating
thereto, service marks, trade names, copyrights, licenses and authorizations as set forth in the
Form 10-K, and all rights with respect to the foregoing, which are necessary for the conduct of its
business as now conducted without any conflict with the rights of others.
(s) Environmental Compliance. The Company and each of its subsidiaries have obtained
all material approvals, authorization, certificates, consents, licenses, orders and permits or
other similar authorizations of all governmental authorities, or from any other person, that are
required under any Environmental Laws and used in its business or in the business of any of its
subsidiaries, unless the failure to possess such approvals, authorizations, certificates, consents,
licenses, orders or permits, individually or in the aggregate could not reasonably be expected to
have a Material Adverse Effect. “Environmental Laws” shall mean all applicable laws
relating to the protection of the environment including, without limitation, all requirements
pertaining to reporting, licensing, permitting, controlling, investigating or remediating
emissions, discharges, releases or threatened releases of hazardous substances, chemical
substances, pollutants, contaminants or toxic substances, materials or wastes, whether solid,
liquid or gaseous in nature, into the air, surface water, groundwater or land, or relating to the
manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of
hazardous substances, chemical substances, pollutants, contaminants or toxic substances, material
or wastes, whether solid, liquid or gaseous in nature. Except for such instances as would not
individually or in the aggregate have a Material Adverse Effect, the Company and each of its
subsidiaries are also in compliance with all other limitations, restrictions, conditions,
standards, requirements, schedules and timetables required or imposed under all Environmental Laws
and there are no past or present events, conditions, circumstances, incidents, actions or omissions
relating to or in any way affecting the Company or its subsidiaries that violate or may violate any
Environmental Law after the Closing Date or that may give rise to any environmental liability, or
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otherwise form the basis of any claim, action, demand, suit, proceeding, hearing, study or
investigation (i) under any Environmental Law, or (ii) based on or related to the manufacture,
processing, distribution, use, treatment, storage (including without limitation underground storage
tanks), disposal, transport or handling, or the emission, discharge, release or threatened release
of any hazardous substance.
(t) Books and Record Internal Accounting Controls. The books and records of the
Company and its subsidiaries accurately reflect in all material respects the information relating
to the business of the Company and the subsidiaries, the location and collection of their assets,
and the nature of all transactions giving rise to the obligations or accounts receivable of the
Company or any subsidiary. The Company and each of its subsidiaries maintain a system of internal
accounting controls sufficient, in the judgment of the Company, to provide reasonable assurance
that (i) transactions are executed in accordance with management’s general or specific
authorizations, (ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is
permitted only in accordance with management’s general or specific authorization and (iv) the
recorded accountability for assets is compared with the existing assets at reasonable intervals and
appropriate actions is taken with respect to any differences.
(u) Material Agreements. Neither the Company nor any subsidiary is a party to any
written or oral contract, instrument, agreement, commitment, obligation, plan or arrangement, a
copy of which would be required to be filed with the Commission as an exhibit to a registration
statement on Form S-3 or applicable form (collectively, “Material Agreements”) if the
Company or any subsidiary were registering securities under the Securities Act which has not been
so filed. The Company and each of its subsidiaries has in all material respects performed all the
obligations required to be performed by them to date under the foregoing agreements, have received
no notice of default and are not in default under any Material Agreement now in effect, the result
of which could cause a Material Adverse Effect. Except as set forth on Schedule 2.1(u), no
written or oral contract, instrument, agreement, commitment, obligation, plan or arrangement of the
Company or of any subsidiary limits or shall limit the payment of dividends on the Company’s
Preferred Shares, other preferred stock, if any, or its Common Stock.
(v) Transactions with Affiliates. Except as set forth in the Commission Documents,
there are no loans, leases, agreements, contracts, royalty agreements, management contracts or
arrangements or other continuing transactions between (a) the Company or any subsidiary on the one
hand, and (b) on the other hand, any officer or director of the Company, or any of its
subsidiaries, or any person owning 5% or more of any class of the Company’s voting securities or
any member of the immediate family of such officer, employee, consultant, director or stockholder
or any corporation or other entity controlled by such officer, director or principal stockholder,
or a member of the immediate family of such officer, director or principal stockholder.
(w) Securities Act of 1933. Based in material part upon the representations herein of
the Purchasers, the Company has complied and will comply with all applicable federal and state
securities laws in connection with the offer, issuance and sale of the Shares and the
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Warrants hereunder. Neither the Company nor anyone acting on its behalf, directly or
indirectly, has or will sell, offer to sell or solicit offers to buy any of the Shares, the
Warrants or similar securities to, or solicit offers with respect thereto from, or enter into any
preliminary conversations or negotiations relating thereto with, any person, or has taken or will
take any action so as to bring the issuance and sale of any of the Shares and the Warrants under
the registration provisions of the Securities Act and applicable state securities laws, and neither
the Company nor any of its affiliates, nor any person acting on its or their behalf, has engaged in
any form of general solicitation or general advertising (within the meaning of Regulation D under
the Securities Act) in connection with the offer or sale of any of the Shares and the Warrants.
(x) Governmental Approvals. Except for the filing of any notice prior or subsequent
to the Closing Date that may be required under applicable state and/or Federal securities laws
(which if required, shall be filed on a timely basis), including the filing of a Form D and a
registration statement or statements pursuant to the Registration Rights Agreement, and the filing
of the Certificate of Designation with the Secretary of State for the State of Delaware, no
authorization, consent, approval, license, exemption of, filing or registration with any court or
governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign,
is or will be necessary for, or in connection with, the execution or delivery of the Preferred
Shares and the Warrants, or for the performance by the Company of its obligations under the
Transaction Documents.
(y) Employees. Neither the Company nor any subsidiary has any collective bargaining
arrangements or agreements covering any of its employees. Except as set forth on Schedule 2.1(y),
neither the Company nor any subsidiary has any employment contract, agreement regarding proprietary
information, non-competition agreement, non-solicitation agreement, confidentiality agreement, or
any other similar contract or restrictive covenant, relating to the right of any officer, employee
or consultant to be employed or engaged by the Company or such subsidiary. No officer, consultant
or key employee of the Company or any subsidiary whose termination, either individually or in the
aggregate, could have a Material Adverse Effect, has terminated or, to the knowledge of the
Company, has any present intention of terminating his or her employment or engagement with the
Company or any subsidiary.
(z) Absence of Certain Developments. Except as set forth in the Commission Documents
or on Schedule 2.1(c) hereto, since December 31, 2006, neither the Company nor any
subsidiary has:
(i) issued any stock, bonds or other corporate securities or any rights, options or warrants
with respect thereto;
(ii) borrowed any amount or incurred or become subject to any liabilities (absolute or
contingent) except current liabilities incurred in the ordinary course of business which are
comparable in nature and amount to the current liabilities incurred in the ordinary course of
business during the comparable portion of its prior fiscal year, as adjusted to reflect the current
nature and volume of the Company’s or such subsidiary’s business;
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(iii) discharged or satisfied any lien or encumbrance or paid any obligation or liability
(absolute or contingent), other than current liabilities paid in the ordinary course of business;
(iv) declared or made any payment or distribution of cash or other property to stockholders
with respect to its stock, or purchased or redeemed, or made any agreements so to purchase or
redeem, any shares of its capital stock;
(v) sold, assigned or transferred any other tangible assets, or canceled any debts or claims,
except in the ordinary course of business;
(vi) sold, assigned or transferred any patent rights, trademarks, trade names, copyrights,
trade secrets or other intangible assets or intellectual property rights, or disclosed any
proprietary confidential information to any person except to customers in the ordinary course of
business or to the Purchasers or their representatives;
(vii) suffered any substantial losses or waived any rights of material value, whether or not
in the ordinary course of business, or suffered the loss of any material amount of prospective
business from an existing customer;
(viii) made any changes in employee compensation except in the ordinary course of business and
consistent with past practices;
(ix) made capital expenditures or commitments therefor that aggregate in excess of $100,000;
(x) entered into any other contract or agreement involving payment obligations of more than
$50,000 other than in the ordinary course of business, or entered into any other material contract
or agreement involving payment obligations of more than $100,000 or performable over a period of
more than one year, whether or not in the ordinary course of business;
(xi) made charitable contributions or pledges in excess of $25,000;
(xii) suffered any material damage, destruction or casualty loss, whether or not covered by
insurance;
(xiii) experienced any material problems with labor or management in connection with the terms
and conditions of their employment; or
(xiv) entered into an agreement, written or otherwise, to take any of the foregoing actions.
(aa) Investment Company Act Status. The Company is not, and as a result of and
immediately upon the Closing will not be, an “investment company” or a company “controlled” by an
“investment company,” within the meaning of the Investment Company Act of 1940, as amended.
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(bb) ERISA. No liability to the Pension Benefit Guaranty Corporation has been
incurred with respect to any Plan (as defined below) by the Company or any of its subsidiaries
which is or would be materially adverse to the Company and its subsidiaries. The execution and
delivery of this Agreement and the issuance and sale of the Preferred Shares will not involve any
transaction which is subject to the prohibitions of Section 406 of ERISA or in connection with
which a tax could be imposed pursuant to Section 4975 of the Internal Revenue Code of 1986, as
amended, provided that, if any of the Purchasers, or any person or entity that owns a beneficial
interest in any of the Purchasers, is an “employee pension benefit plan” (within the meaning of
Section 3(2) of ERISA) with respect to which the Company is a “party in interest” (within the
meaning of Section 3(14) of ERISA), the requirements of Sections 407(d)(5) and 408(e) of ERISA, if
applicable, are met. As used in this Section 2.1(ac), the term “Plan” shall mean an
“employee pension benefit plan” (as defined in Section 3 of ERISA) which is or has been established
or maintained, or to which contributions are or have been made, by the Company or any subsidiary or
by any trade or business, whether or not incorporated, which, together with the Company or any
subsidiary, is under common control, as described in Section 414(b) or (c) of the Code.
(cc) Dilutive Effect. The Company understands and acknowledges that its obligation to
issue Conversion Shares upon conversion of the Preferred Shares in accordance with this Agreement
and the Certificate of Designation and its obligation to issue the Warrant Shares upon the exercise
of the Warrants in accordance with this Agreement and the Warrants, is, in each case, absolute and
unconditional regardless of the dilutive effect that such issuance may have on the ownership
interest of other stockholders of the Company.
(dd) No Integrated Offering. Neither the Company, nor any of its affiliates, nor any
person acting on its or their behalf, has directly or indirectly made any offers or sales of any
security or solicited any offers to buy any security under circumstances that would cause the
offering of the Shares pursuant to this Agreement to be integrated with prior offerings by the
Company for purposes of the Securities Act which would prevent the Company from selling the Shares
pursuant to Rule 506 under the Securities Act, or any applicable exchange-related stockholder
approval provisions, nor will the Company or any of its affiliates or subsidiaries take any action
or steps that would cause the offering of the Shares to be integrated with other offerings. The
Company does not have any registration statement pending but not yet effective before the
Commission or currently under the Commission’s review and except as set forth on Schedule
2.1(dd) hereto, since April 1, 2007, the Company has not offered or sold any of its equity
securities or debt securities convertible into shares of Common Stock.
(ee) Xxxxxxxx-Xxxxx Act. The Company is in compliance with the applicable provisions
of the Xxxxxxxx-Xxxxx Act of 2002 (the “Xxxxxxxx-Xxxxx Act”), and the rules and regulations
promulgated thereunder that are effective, and intends to comply with other applicable provisions
of the Xxxxxxxx-Xxxxx Act and the rules and regulations promulgated thereunder upon the
effectiveness of such provisions.
(ff) Independent Nature of Purchasers. The Company acknowledges that the obligations
of each Purchaser under the Transaction Documents are several and not joint with the obligations of
any other Purchaser, and no Purchaser shall be responsible in any way for the
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performance of the obligations of any other Purchaser under the Transaction Documents. The
Company acknowledges that to the best of its knowledge, the decision of each Purchaser to purchase
securities pursuant to this Agreement has been made by such Purchaser independently of any other
purchase and independently of any information, materials, statements or opinions as to the
business, affairs, operations, assets, properties, liabilities, results of operations, condition
(financial or otherwise) or prospects of the Company or of its subsidiaries which may have made or
given by any other Purchaser or by any agent or employee of any other Purchaser, and no Purchaser
or any of its agents or employees shall have any liability to any Purchaser (or any other person)
relating to or arising from any such information, materials, statements or opinions. The Company
acknowledges that nothing contained herein, or in any Transaction Document, and no action taken by
any Purchaser pursuant hereto or thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity, or create a presumption
that the Purchasers are in any way acting in concert or as a group with respect to such obligations
or the transactions contemplated by the Transaction Documents. The Company acknowledges that each
Purchaser shall be entitled to independently protect and enforce its rights, including without
limitation, the rights arising out of this Agreement or out of the other Transaction Documents, and
it shall not be necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose. The Company acknowledges that for reasons of administrative
convenience only, the Transaction Documents have been prepared by counsel for one of the Purchasers
and such counsel does not represent all of the Purchasers but only such Purchaser and the other
Purchasers have retained their own individual counsel with respect to the transactions contemplated
hereby. The Company acknowledges that it has elected to provide all Purchasers with the same terms
and Transaction Documents for the convenience of the Company and not because it was required or
requested to do so by the Purchasers.
(gg) DTC Status. The Company’s current transfer agent is a participant in and the
Common Stock is eligible for transfer pursuant to the Depository Trust Company Automated Securities
Transfer Program. The name, address, telephone number, fax number, contact person and email
address of the Company’s transfer agent is set forth on Schedule 2.1(gg) hereto.
(hh) Insurance. The Company and the subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such amounts as are
prudent and customary in the businesses in which the Company and the subsidiaries are engaged,
including, but not limited to, directors and officers insurance coverage of at least $10 million.
To the best of Company’s knowledge, such insurance contracts and policies are valid and in full
force and effect. Neither the Company nor any subsidiary has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its business without a
significant increase in cost.
(ii) Application of Takeover Protections. The Company and its Board of Directors have
taken all necessary action, if any, in order to render inapplicable any control share acquisition,
business combination, poison pill (including any distribution under a rights agreement) or other
similar anti-takeover provision under the Company’s Certificate (or similar charter documents) or
the laws of its state of incorporation that is or could become applicable to the Purchaser as a
result of the Purchaser and the Company fulfilling their obligations or
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exercising their rights under the Transaction Documents, including without limitation the
Company’s issuance of the Shares and the Purchaser’s ownership of the Shares.
(jj) Foreign Corrupt Practices. Neither the Company nor any subsidiary, nor to the
knowledge of the Company, any agent or other person acting on behalf of the Company or any
subsidiary, has (i) directly or indirectly, used any corporate funds for unlawful contributions,
gifts, entertainment or other unlawful expenses related to foreign or domestic political activity,
(ii) made any unlawful payment to foreign or domestic government officials or employees or to any
foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose
fully any contribution made by the Company (or made by any person acting on its behalf of which the
Company is aware) which is in violation of law, or (iv) violated in any material respect any
provision of the Foreign Corrupt Practices Act of 1977, as amended.
(kk) Off-Balance Sheet Arrangements. There is no transaction, arrangement, or other
relationship between the Company and an unconsolidated or other off balance sheet entity that is
not disclosed in its financial statements that should be disclosed in accordance with GAAP and that
would be reasonably likely to have a Material Adverse Effect.
(ll) Manipulation of Price. The Company has not, and to its knowledge no one acting
on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result or
that could reasonably be expected to cause or result, in the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of any of the Shares or (ii)
other than any placement agent, sold, bid for, purchased, or paid any compensation for soliciting
purchases of, any of the Shares.
(mm) No Disagreements with Accountants. There are no unresolved disagreements
regarding the Company’s accounting policies presently existing, or reasonably anticipated by the
Company to arise, between the Company and the accountants formerly or presently employed by the
Company. The Company’s accountants are set forth in the Commission Documents. To the Company’s
knowledge, such accountants are an independent registered public accounting firm as required by the
Securities Act.
(nn) Listing and Maintenance Requirements. The Common Stock currently trades on the
Nasdaq Capital Market. The Company is, and has no reason to believe that it will not in the
foreseeable future continue to be, in compliance with the maintenance requirements necessary to
maintain trading on the Nasdaq Capital Market. The Company has not received any delisting or
listing inquiry from the Nasdaq Capital Market in the past twelve (12) months.
(oo) Material Non-Public Information. Except with respect to the transactions
contemplated hereby, the Company has not provided any Purchaser or its agents or counsel with any
information that the Company believes constitutes material non-public information.
Section 2.2 Representations and Warranties of the Purchasers. Each of the Purchasers
hereby makes the following representations and warranties to the Company with respect solely to
itself and not with respect to any other Purchaser:
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(a) Organization and Standing of the Purchasers. If the Purchaser is an entity, such
Purchaser is a corporation, limited liability company or partnership duly incorporated or
organized, validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization.
(b) Authorization and Power. Each Purchaser has the requisite power and authority to
enter into and perform this Agreement and to purchase the Preferred Shares and Warrants being sold
to it hereunder. The execution, delivery and performance of this Agreement and the Registration
Rights Agreement by such Purchaser and the consummation by it of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate or partnership action, and
no further consent or authorization of such Purchaser or its Board of Directors, stockholders, or
partners, as the case may be, is required. Each of this Agreement and the Registration Rights
Agreement has been duly authorized, executed and delivered by such Purchaser and constitutes, or
shall constitute when executed and delivered, a valid and binding obligation of the Purchaser
enforceable against the Purchaser in accordance with the terms thereof.
(c) No Conflicts. The execution, delivery and performance of this Agreement and the
Registration Rights Agreement and the consummation by such Purchaser of the transactions
contemplated hereby and thereby or relating hereto do not and will not (i) result in a violation of
such Purchaser’s charter documents or bylaws or other organizational documents or (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time or both would become
a default) under, or give to others any rights of termination, amendment, acceleration or
cancellation of any agreement, indenture or instrument or obligation to which such Purchaser is a
party or by which its properties or assets are bound, or result in a violation of any law, rule, or
regulation, or any order, judgment or decree of any court or governmental agency applicable to such
Purchaser or its properties (except for such conflicts, defaults and violations as would not,
individually or in the aggregate, have a material adverse effect on such Purchaser). Such
Purchaser is not required to obtain any consent, authorization or order of, or make any filing or
registration with, any court or governmental agency in order for it to execute, deliver or perform
any of its obligations under this Agreement or the Registration Rights Agreement or to purchase the
Preferred Shares or acquire the Warrants in accordance with the terms hereof, provided that for
purposes of the representation made in this sentence, such Purchaser is assuming and relying upon
the accuracy of the relevant representations and agreements of the Company herein.
(d) Purchase For Own Account. Each Purchaser is acquiring the Preferred Shares and
the Warrants solely for its own account and not with a view to or for sale in connection with
distribution. Each Purchaser does not have a present intention to sell the Preferred Shares or the
Warrants, nor a present arrangement (whether or not legally binding) or intention to effect any
distribution of the Preferred Shares or the Warrants to or through any person or entity;
provided, however, that by making the representations herein and subject to Section
2.2(h) below, such Purchaser does not agree to hold the Shares or the Warrants for any minimum or
other specific term and reserves the right to dispose of the Shares or the Warrants at any time in
accordance with Federal and state securities laws applicable to such disposition. Each Purchaser
acknowledges that it is able to bear the financial risks associated with an
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investment in the Preferred Shares and the Warrants and that it has been given full access to
such records of the Company and the subsidiaries and to the officers of the Company and the
subsidiaries and received such information as it has deemed necessary or appropriate to conduct its
due diligence investigation and has sufficient knowledge and experience in investing in companies
similar to the Company in terms of the Company’s stage of development so as to be able to evaluate
the risks and merits of its investment in the Company.
(e) Status of Purchasers. Such Purchaser is an “accredited investor” as defined in
Regulation D promulgated under the Securities Act. Such Purchaser is not required to be registered
as a broker-dealer under Section 15 of the Exchange Act and such Purchaser is not a broker-dealer.
(f) Opportunities for Additional Information. Each Purchaser acknowledges that such
Purchaser has had the opportunity to ask questions of and receive answers from, or obtain
additional information from, the executive officers of the Company concerning the financial and
other affairs of the Company, and to the extent deemed necessary in light of such Purchaser’s
personal knowledge of the Company’s affairs, such Purchaser has asked such questions and received
answers to the full satisfaction of such Purchaser, and such Purchaser desires to invest in the
Company.
(g) No General Solicitation. Each Purchaser acknowledges that the Preferred Shares
and the Warrants were not offered to such Purchaser by means of any form of general or public
solicitation or general advertising, or publicly disseminated advertisements or sales literature,
including (i) any advertisement, article, notice or other communication published in any newspaper,
magazine, or similar media, or broadcast over television or radio, or (ii) any seminar or meeting
to which such Purchaser was invited by any of the foregoing means of communications.
(h) Rule 144. Such Purchaser understands that the Shares must be held indefinitely
unless such Shares are registered under the Securities Act or an exemption from registration is
available. Such Purchaser acknowledges that such Purchaser is familiar with Rule 144 of the rules
and regulations of the Commission, as amended, promulgated pursuant to the Securities Act
(“Rule 144”), and that such person has been advised that Rule 144 permits resales only
under certain circumstances. Such Purchaser understands that to the extent that Rule 144 is not
available, such Purchaser will be unable to sell any Shares without either registration under the
Securities Act or the existence of another exemption from such registration requirement.
(i) General. Such Purchaser understands that the Shares are being offered and sold in
reliance on a transactional exemption from the registration requirement of Federal and state
securities laws and the Company is relying upon the truth and accuracy of the representations,
warranties, agreements, acknowledgments and understandings of such Purchaser set forth herein in
order to determine the applicability of such exemptions and the suitability of such Purchaser to
acquire the Shares.
(j) Independent Investment. Except as may be disclosed in any filings with the
Commission by the Purchasers under Section 13 and/or Section 16 of the Exchange Act, no
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Purchaser has agreed to act with any other Purchaser for the purpose of acquiring, holding,
voting or disposing of the Shares purchased hereunder for purposes of Section 13(d) under the
Exchange Act, and each Purchaser is acting independently with respect to its investment in the
Shares.
ARTICLE III
Covenants
The Company covenants with the Purchasers as follows (subject to the provisions of Section 7.3
hereof), which covenants are for the benefit of the Purchasers and their permitted assignees (as
defined herein).
Section 3.1 Securities Compliance. The Company shall notify the Commission in
accordance with their rules and regulations, of the transactions contemplated by any of the
Transaction Documents, including filing a Form D with respect to the Preferred Shares, Warrants,
Conversion Shares and Warrant Shares as required under Regulation D, and shall take all other
necessary action and proceedings as may be required and permitted by applicable law, rule and
regulation, for the legal and valid issuance of the Preferred Shares, the Warrants, the Conversion
Shares and the Warrant Shares to the Purchasers or subsequent holders.
Section 3.2 Registration and Listing. So long as any Purchaser holds any Shares, the
Company shall cause its Common Stock to continue to be registered under Sections 12(b) or 12(g) of
the Exchange Act, to comply in all respects with its reporting and filing obligations under the
Exchange Act, to comply with all requirements related to any registration statement filed pursuant
to this Agreement, and to not take any action or file any document (whether or not permitted by the
Securities Act or the rules promulgated thereunder) to terminate or suspend such registration or to
terminate or suspend its reporting and filing obligations under the Exchange Act or Securities Act,
except as permitted herein. So long as any Purchaser holds any Shares, the Company will take all
action necessary to continue the listing or trading of its Common Stock on the Nasdaq Capital
Market or other exchange or market on which the Common Stock is trading. Subject to the terms of
the Transaction Documents, the Company further covenants that it will take such further action as
the Purchasers may reasonably request, all to the extent required from time to time to enable the
Purchasers to sell the Shares without registration under the Securities Act within the limitation
of the exemptions provided by Rule 144 promulgated under the Securities Act. Upon the request of
the Purchasers, the Company shall deliver to the Purchasers a written certification of a duly
authorized officer as to whether it has complied with such requirements.
Section 3.3 Inspection Rights. Subject to the prior execution of a confidentiality
agreement as determined to be appropriate by the Company and reasonably acceptable to the
Purchaser, the Company shall permit, during normal business hours and upon reasonable request and
reasonable notice, each Purchaser or any employees, agents or representatives thereof, so long as
such Purchaser shall be obligated hereunder to purchase the Preferred Shares or shall beneficially
own any Preferred Shares, or shall own Conversion Shares which, in the aggregate, represent more
than 2% of the total combined voting power of all voting
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securities then outstanding, for purposes reasonably related to such Purchaser’s interests as
a stockholder to examine and make reasonable copies of and extracts from the records and books of
account of, and visit and inspect the properties, assets, operations and business of the Company
and any subsidiary, and to discuss the affairs, finances and accounts of the Company and any
subsidiary with any of its officers, consultants, directors, and key employees.
Section 3.4 Compliance with Laws. The Company shall comply, and cause each subsidiary
to comply, with all applicable laws, rules, regulations and orders, noncompliance with which could
have a Material Adverse Effect.
Section 3.5 Keeping of Records and Books of Account. The Company shall keep and cause
each subsidiary to keep adequate records and books of account, in which complete entries will be
made in accordance with GAAP consistently applied, reflecting all financial transactions of the
Company and its subsidiaries, and in which, for each fiscal year, all proper reserves for
depreciation, depletion, obsolescence, amortization, taxes, bad debts and other purposes in
connection with its business shall be made.
Section 3.6 Reporting Requirements. If the Commission ceases making periodic reports
filed under the Exchange Act available via the Internet, then at a Purchaser’s request the Company
shall furnish the following to such Purchaser so long as such Purchaser shall be obligated
hereunder to purchase the Preferred Shares or shall beneficially own any Shares:
(a) Quarterly Reports filed with the Commission on Form 10-Q as soon as practical after the
document is filed with the Commission, and in any event within five (5) days after the document is
filed with the Commission;
(b) Annual Reports filed with the Commission on Form 10-K as soon as practical after the
document is filed with the Commission, and in any event within five (5) days after the document is
filed with the Commission; and
(c) Copies of all notices and information, including without limitation notices and proxy
statements in connection with any meetings, that are provided to holders of shares of Common Stock,
contemporaneously with the delivery of such notices or information to such holders of Common Stock.
Section 3.7 Amendments. The Company shall not amend or waive any provision of the
Certificate or Bylaws of the Company in any way that would adversely affect the liquidation
preferences, dividends rights, conversion rights, voting rights or redemption rights of the
Preferred Shares; provided, however, that any creation and issuance of another
series of Junior Stock (as defined in the Certificate of Designation) or any other class or series
of equity securities which by its terms shall rank junior to the Preferred Shares shall not be
deemed to materially and adversely affect such rights, preferences or privileges.
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Section 3.8 Other Agreements. The Company shall not enter into any agreement in which
the terms of such agreement would restrict or impair the right or ability to perform of the Company
or any subsidiary under any Transaction Document.
Section 3.9 Distributions. So long as any Preferred Shares or Warrants remain
outstanding, the Company agrees that it shall not (i) declare or pay any dividends or make any
distributions to any holder(s) of Common Stock or (ii) purchase or otherwise acquire for value,
directly or indirectly, any Common Stock or other equity security of the Company (other than
repurchases from employees of the Company not to exceed $100,000 in the aggregate amount per fiscal
year, or provided that all dividends have been paid upon the Preferred Shares, repurchases pursuant
to Rule 10b-18 under the Exchange Act or otherwise of up to $500,000 per fiscal year).
Section 3.10 Status of Dividends. The Company covenants and agrees that (i) in no
report to shareholders or to any governmental body having jurisdiction over the Company or
otherwise will it treat the Preferred Shares other than as equity capital or the dividends paid
thereon other than as dividends paid on equity capital unless required to do so by a governmental
body having jurisdiction over the accounts of the Company or by a change in generally accepted
accounting principles required as a result of action by an authoritative accounting standards
setting body, and (ii) it will take no action which would result in the dividends paid by the
Company on the Preferred Shares out of the Company’s current or accumulated earnings and profits
being ineligible for the dividends received deduction provided by Section 243(a)(1) of the Code.
The preceding sentence shall not be deemed to prevent the Company from designating the Preferred
Stock as “Convertible Preferred Stock” in its annual and quarterly financial statements in
accordance with its prior practice concerning other series of preferred stock of the Company. In
the event that the Purchasers have reasonable cause to believe that dividends paid by the Company
on the Preferred Shares out of the Company’s current or accumulated earnings and profits will not
be treated as eligible for the dividends received deduction provided by Section 243(a)(1) of the
Code, or any successor provision, the Company will, at the reasonable request of the Purchasers of
51% of the outstanding Preferred Shares, join with the Purchasers in the submission to the Internal
Revenue Service (the “Service”) of a request for a ruling that dividends paid on the Shares
will be so eligible for Federal income tax purposes, at the Purchasers expense. In addition, the
Company will reasonably cooperate with the Purchasers (at Purchasers’ expense) in any litigation,
appeal or other proceeding challenging or contesting any ruling, technical advice, finding or
determination that earnings and profits are not eligible for the dividends received deduction
provided by Section 243(a)(1) of the Code, or any successor provision to the extent that the
position to be taken in any such litigation, appeal, or other proceeding is not contrary to any
provision of the Code. Notwithstanding the foregoing, nothing herein contained shall be deemed to
preclude the Company from claiming a deduction with respect to such dividends if (i) the Code shall
hereafter be amended, or final Treasury regulations thereunder are issued or modified, to provide
that dividends on the Preferred Shares or Conversion Shares should not be treated as dividends for
Federal income tax purposes or that a deduction with respect to all or a portion of the dividends
on the Shares is allowable for Federal income tax purposes, or (ii) in the absence of such an
amendment, issuance or modification and after a submission of a request for ruling or technical
advice, the Service shall issue a published ruling or advise that dividends on the Shares should
not be treated as dividends for Federal
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income tax purposes. If the Service specifically determines that the Preferred Shares or
Conversion Shares constitute debt, the Company may file protective claims for refund.
Section 3.11 Use of Proceeds. The net proceeds from the sale of the Shares hereunder
shall be used by the Company as follows: (a) $3,000,000 to repay outstanding indebtedness; (b)
$2,000,000 to implement operating and manufacturing efficiencies; (c) $2,000,000 for marketing; and
(d) the remainder for working capital and general corporate purposes; provided,
however, the net proceeds from the sale of the Shares hereunder shall not be used to redeem
any Common Stock or securities convertible, exercisable or exchangeable into Common Stock or to
settle any outstanding litigation.
Section 3.12 Reservation of Shares. So long as any of the Preferred Shares or
Warrants remain outstanding, the Company shall take all action necessary to at all times have
authorized, and reserved for the purpose of issuance, no less than one hundred twenty percent
(120%) the aggregate number of shares of Common Stock needed to provide for the issuance of the
Conversion Shares and the Warrant Shares.
Section 3.13 Transfer Agent Instructions. The Company shall issue irrevocable
instructions to its transfer agent, and any subsequent transfer agent, to issue certificates,
registered in the name of each Purchaser or its respective nominee(s), for the Conversion Shares
and the Warrant Shares in such denominations as specified from time to time by each Purchaser to
the Company upon conversion of the Preferred Shares or exercise of the Warrants in the form of
Exhibit F attached hereto (the “Irrevocable Transfer Agent Instructions”). Prior
to registration of the Conversion Shares and the Warrant Shares under the Securities Act, all such
certificates shall bear the restrictive legend specified in Section 5.1 of this Agreement. The
Company warrants that no instruction other than the Irrevocable Transfer Agent Instructions
referred to in this Section 3.13 will be given by the Company to its transfer agent and that the
Shares shall otherwise be freely transferable on the books and records of the Company as and to the
extent provided in this Agreement and the Registration Rights Agreement. If a Purchaser provides
the Company with an opinion of counsel, in a generally acceptable form, to the effect that a public
sale, assignment or transfer of the Shares may be made without registration under the Securities
Act or the Purchaser provides the Company with reasonable assurances that the Shares can be sold
pursuant to Rule 144 without any restriction as to the number of securities acquired as of a
particular date that can then be immediately sold, the Company shall permit the transfer, and, in
the case of the Conversion Shares and the Warrant Shares, promptly instruct its transfer agent to
issue one or more certificates in such name and in such denominations as specified by such
Purchaser and without any restrictive legend. The Company acknowledges that a breach by it of its
obligations under this Section 3.13 will cause irreparable harm to the Purchasers by vitiating the
intent and purpose of the transactions contemplated hereby. Accordingly, the Company acknowledges
that the remedy at law for a breach of its obligations under this Section 3.13 will be inadequate
and agrees, in the event of a breach or threatened breach by the Company of the provisions of this
Section 3.13, that the Purchasers shall be entitled, in addition to all other available remedies,
to an order and/or injunction restraining any breach and requiring immediate issuance and transfer,
without the necessity of showing economic loss and without any bond or other security being
required.
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Section 3.14 Disposition of Assets. So long as the Preferred Shares remain
outstanding, neither the Company nor any subsidiary shall sell, transfer or otherwise dispose of
any of its properties, assets and rights including, without limitation, its software and
intellectual property, to any person except (i) for sales to customers in the ordinary course of
business, (ii) for sales or leases of permanently retired, obsolete or worn out assets or assets no
longer used or useful in the business or (iii) with the prior written consent of the holders of
sixty-six and two-thirds percent
(662/3%) of the Preferred Shares then outstanding.
Section 3.15 Reverse Stock Split. So long as the Shares and Warrants are outstanding,
the Company shall not effect a reverse stock split of its Common Stock without the prior written
consent of the Purchasers, except for the purpose of maintaining its listing requirements under the
Nasdaq Capital Market.
Section 3.16 Disclosure of Transaction. The Company shall issue a press release
describing the material terms of the transactions contemplated hereby (the “Press Release”)
as soon as practicable after the Closing but in no event later than 9:00 A.M. Eastern Time on the
first Trading Day following the Closing Date. The Company shall also file with the Commission a
Current Report on Form 8-K (the “Form 8-K”) describing the material terms of the
transactions contemplated hereby (and attaching as exhibits thereto this Agreement, the
Registration Rights Agreement, the Certificate of Designation, the form of Warrant and the Press
Release) as soon as practicable following the Closing Date but in no event later than two (2)
Trading Days following the Closing Date, which Press Release and Form 8-K shall be subject to prior
review and comment by the Purchasers. “Trading Day” means any day during which the Nasdaq
Capital Market (or other principal exchange on which the Common Stock is traded) shall be open for
trading.
Section 3.17 Disclosure of Material Information. The Company covenants and agrees
that neither it nor any other person acting on its behalf has provided or will provide any
Purchaser or its agents or counsel with any information that the Company believes constitutes
material non-public information, unless prior thereto such Purchaser shall have executed a written
agreement regarding the confidentiality and use of such information. The Company understands and
confirms that each Purchaser shall be relying on the foregoing representations in effecting
transactions in securities of the Company.
Section 3.18 Pledge of Securities. The Company acknowledges and agrees that the
Shares may be pledged by a Purchaser in connection with a bona fide margin
agreement or other loan or financing arrangement that is secured by the Common Stock. The pledge
of Common Stock shall not be deemed to be a transfer, sale or assignment of the Common Stock
hereunder, and no Purchaser effecting a pledge of Common Stock shall be required to provide the
Company with any notice thereof or otherwise make any delivery to the Company pursuant to this
Agreement or any other Transaction Document; provided that a Purchaser and its pledgee shall be
required to comply with the provisions of Article V hereof in order to effect a sale, transfer or
assignment of Common Stock to such pledgee. At the Purchasers’ expense, the Company hereby agrees
to execute and deliver such documentation as a pledgee of the Common Stock may reasonably request
in connection with a pledge of the Common Stock to such pledgee by a Purchaser.
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Section 3.19 Form S-3 Eligibility. The Company currently meets the “registrant
eligibility” and transaction requirements set forth in the general instructions to Form S-3
applicable to “resale” registrations on Form S-3.
Section 3.20 Shareholder Approval. The Company shall hold a special meeting of
shareholders (which may also be at the annual meeting of shareholders) no later than June 30, 2008
for the purpose of obtaining Shareholder Approval (as defined below), with the recommendation of
the Company’s Board of Directors that such proposal be approved, and the Company shall solicit
proxies from its stockholders in connection therewith in the same manner as all other management
proposals in such proxy statement and all management-appointed proxyholders shall vote their
proxies in favor of such proposal. If the Company does not obtain Shareholder Approval at the first
meeting, the Company shall call a meeting every four months thereafter to seek Shareholder Approval
until the earlier of the date Shareholder Approval is obtained or the Preferred Shares are no
longer outstanding. For purposes hereof, “Shareholder Approval” means such approval as
may be required by the applicable rules and regulations of the Nasdaq Capital Market (or any
successor entity) for companies listed thereon (whether or not the Company is then listed thereon)
from the shareholders of the Company with respect to the transactions contemplated by the
Transaction Documents, including the issuance of all of the shares of Common Stock issued and
issuable upon conversion of the Preferred Shares, upon exercise of the Warrants and issued and
issuable in lieu of the cash payment of dividends on the Preferred Shares in accordance with the
terms of the Certificate of Designation in excess of 19.99% of the issued and outstanding Common
Stock on the Closing Date.
Section 3.21 Subsequent Financings.
(a) For a period of one (1) year following the following the Closing Date, the Company
covenants and agrees to promptly notify (in no event later than five (5) days after making or
receiving an applicable offer) in writing (a “Rights Notice”) each Purchaser of the terms
and conditions of any proposed offer or sale to, or exchange with (or other type of distribution
to) any third party (a “Subsequent Financing”), of Common Stock or any debt or equity
securities convertible, exercisable or exchangeable into Common Stock; provided,
however, prior to delivering a Rights Notice to each Purchaser, the Company shall first
deliver to each Purchaser a written notice of the Company’s intention to effect a Subsequent
Financing (“Pre-Notice”) within three (3) Trading Days of receiving an applicable offer,
which Pre-Notice shall ask such Purchaser if it wants to review the details of such financing.
Each Purchaser must notify the Company within three (3) Trading Days of receipt of the Pre-Notice
that such Purchaser elects to review the details of such financing (“Pre-Notice
Acceptance”). Upon the Company’s receipt of a Pre-Notice Acceptance, and only upon the
Company’s receipt of a Pre-Notice Acceptance, the Company shall promptly, but no later than two (2)
Trading Days after such receipt, deliver a Rights Notice to such Purchaser. The Rights Notice
shall describe, in reasonable detail, the proposed Subsequent Financing, the names and investment
amounts of all investors participating in the Subsequent Financing (if known at such time), the
proposed closing date of the Subsequent Financing, which shall be within twenty (20) calendar days
from the date of the Rights Notice, and all of the terms and conditions thereof and proposed
definitive documentation to be entered into in connection therewith. The Rights Notice shall
provide each Purchaser an option (the “Rights Option”) during the ten (10) Trading Days
following delivery
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of the Rights Notice (the “Option Period”) to inform the Company whether such
Purchaser will purchase up to its pro rata portion of all or a portion of the securities being
offered in such Subsequent Financing on the same, absolute terms and conditions as contemplated by
such Subsequent Financing. If any Purchaser elects not to participate in such Subsequent
Financing, the other Purchasers may participate on a pro-rata basis so long as such participation
in the aggregate does not exceed the aggregate Purchase Price of all Purchasers hereunder. For
purposes of this Section, all references to “pro rata” means, for any Purchaser electing to
participate in such Subsequent Financing, the percentage obtained by dividing (x) the number of
Preferred Shares purchased by such Purchaser at the Closing by (y) the total number of all of the
Preferred Shares purchased by all of the participating Purchasers at the Closing. Delivery of any
Rights Notice constitutes a representation and warranty by the Company that there are no other
material terms and conditions, arrangements, agreements or otherwise except for those disclosed in
the Rights Notice, to provide additional compensation to any party participating in any proposed
Subsequent Financing, including, but not limited to, additional compensation based on changes in
the purchase price or any type of reset or adjustment of a purchase or conversion price or to issue
additional securities at any time after the closing date of a Subsequent Financing. If
the Company
does not receive notice of exercise of the Rights Option from the Purchasers within the Option
Period, the Company shall have the right to close the Subsequent Financing on the scheduled closing
date with a third party; provided that all of the material terms and conditions of the
closing are the same as those provided to the Purchasers in the Rights Notice. If the closing of
the proposed Subsequent Financing does not occur on that date, any closing of the contemplated
Subsequent Financing or any other Subsequent Financing shall be subject to all of the provisions of
this Section 3.21(a), including, without limitation, the delivery of a new Rights Notice. The
provisions of this Section 3.21(a) shall not apply to issuances of securities in a Permitted
Financing (as defined hereinafter).
(b) Except for a Permitted Financing, the Company shall not enter into any Subsequent
Financing for a period of ninety (90) days following the effective date of the Registration
Statement (as defined in the Registration Rights Agreement).
(c) For purposes of this Agreement, a Permitted Financing shall not be considered a Subsequent
Financing. A “Permitted Financing” shall mean (i) securities issued (other than for cash)
in connection with a merger, acquisition, or consolidation, (ii) securities issued pursuant to the
conversion or exercise of convertible or exercisable securities issued or outstanding on or prior
to the date of this Agreement or issued pursuant to this Agreement (so long as the conversion or
exercise price in such securities are not amended to lower such price, except as a result of stock
dividends, subdivisions or combinations, and/or adversely affect the Purchasers), (iii) securities
issued in connection with bona fide strategic license agreements or other partnering arrangements
so long as such issuances are not for the purpose of raising capital, (iv) Common Stock issued or
the issuance or grants of options to purchase Common Stock pursuant to the Company’s stock option
plans and employee stock purchase plans outstanding as they exist on the date of this Agreement,
(v) the payment of dividends on the Preferred Shares in shares of Common Stock or additional
Preferred Shares, and (vi) any warrants issued to the placement agent and its designees for the
transactions contemplated by the Purchase Agreement.
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(d) So long as any Preferred Shares are outstanding, the Company shall be
prohibited from effecting or entering into an agreement to effect any Subsequent Financing
involving a “Variable Rate Transaction”. The term “Variable Rate Transaction”
shall mean a transaction in which the Company issues or sells (i) any debt or equity securities
that are convertible into, exchangeable or exercisable for, or include the right to receive
additional shares of Common Stock either (A) at a conversion, exercise or exchange rate or other
price that is based upon and/or varies with the trading prices of or quotations for the shares of
Common Stock at any time after the initial issuance of such debt or equity securities, or (B) with
a conversion, exercise or exchange price that is subject to being reset at some future date after
the initial issuance of such debt or equity security or upon the occurrence of specified or
contingent events directly or indirectly related to the business of the Company or the market for
the Common Stock or (ii) enters into any agreement, including, but not limited to, an equity line
of credit, whereby the Company may sell securities at a future determined price.
(e) Unless Shareholder Approval has been obtained and deemed effective, neither the Company
nor any subsidiary shall make any issuance whatsoever of its securities which would cause any
adjustment of the Conversion Price (as defined in the Certificate of Designation) of the Preferred
Shares or Warrant Price of the Warrants. Any Purchaser shall be entitled to seek injunctive relief
against the Company to preclude any such issuance, which remedy shall be in addition to any right
to collect damages.
ARTICLE IV
CONDITIONS
Section 4.1 Conditions Precedent to the Obligation of the Company to Sell the Shares.
The obligation hereunder of the Company to issue and sell the Preferred Shares and the Warrants to
the Purchasers is subject to the satisfaction or waiver, at or before the Closing, of each of the
conditions set forth below. These conditions are for the Company’s sole benefit and may be waived
by the Company at any time in its sole discretion.
(a) Accuracy of Each Purchaser’s Representations and Warranties. The representations
and warranties of each Purchaser shall be true and correct in all respects as of the date when made
and as of the Closing Date as though made at that time, except for representations and warranties
that are expressly made as of a particular date, which shall be true and correct in all material
respects as of such date.
(b) Performance by the Purchasers. Each Purchaser shall have performed, satisfied and
complied in all respects with all covenants, agreements and conditions required by this Agreement
to be performed, satisfied or complied with by such Purchaser at or prior to the Closing.
(c) No Injunction. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction which prohibits the consummation of any of the transactions
contemplated by this Agreement.
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(d) Delivery of Purchase Price. The Purchase Price for the Preferred Shares and
Warrants has been delivered to the Company at the Closing Date.
(e) Delivery of Transaction Documents. The Transaction Documents shall have been duly
executed and delivered by the Purchasers and, with respect to the Escrow Agreement, the escrow
agent, to the Company.
Section 4.2 Conditions Precedent to the Obligation of the Purchasers to Purchase the
Shares. The obligation hereunder of each Purchaser to acquire and pay for the Preferred Shares
and the Warrants is subject to the satisfaction or waiver, at or before the Closing, of each of the
conditions set forth below. These conditions are for each Purchaser’s sole benefit and may be
waived by such Purchaser at any time in its sole discretion.
(a) Accuracy of the Company’s Representations and Warranties. Each of the
representations and warranties of the Company in this Agreement and the Registration Rights
Agreement shall be true and correct in all respects as of the date when made and as of the Closing
Date as though made at that time (except for representations and warranties that are expressly made
as of a particular date), which shall be true and correct in all respects as of such date.
(b) Performance by the Company. The Company shall have performed, satisfied and
complied in all respects with all covenants, agreements and conditions required by this Agreement
to be performed, satisfied or complied with by the Company at or prior to the Closing.
(c) No Suspension, Etc. Trading in the Company’s Common Stock shall not have been
suspended by the Commission or the Nasdaq Capital Market (except for any suspension of trading of
limited duration agreed to by the Company, which suspension shall be terminated prior to the
applicable Closing), and, at any time prior to the Closing Date, trading in securities generally as
reported by Bloomberg Financial Markets (“Bloomberg”) shall not have been suspended or
limited, or minimum prices shall not have been established on securities whose trades are reported
by Bloomberg, or on the New York Stock Exchange, nor shall a banking moratorium have been declared
either by the United States or New York State authorities, nor shall there have occurred any
material outbreak or escalation of hostilities or other national or international calamity or
crisis of such magnitude in its effect on, or any material adverse change in any financial market
which, in each case, in the judgment of such Purchaser, makes it impracticable or inadvisable to
purchase the Preferred Shares.
(d) No Injunction. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction which prohibits the consummation of any of the transactions
contemplated by this Agreement.
(e) No Proceedings or Litigation. No action, suit or proceeding before any arbitrator
or any governmental authority shall have been commenced, and no investigation by any governmental
authority shall have been threatened, against the Company or any subsidiary,
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or any of the officers, directors or affiliates of the Company or any subsidiary seeking to
restrain, prevent or change the transactions contemplated by this Agreement, or seeking damages in
connection with such transactions.
(f) Certificate of Designation of Rights and Preferences. Prior to the Closing, the
Certificate of Designation in the form of Exhibit B attached hereto shall have been filed
with the Secretary of State of Delaware.
(g) Opinion of Counsel, Etc. At the Closing, the Purchasers shall have received an
opinion of counsel to the Company, dated the date of the Closing, in the form of Exhibit G
hereto, and such other certificates and documents as the Purchasers or its counsel shall reasonably
require incident to the Closing.
(h) Registration Rights Agreement. At the Closing, the Company shall have executed
and delivered the Registration Rights Agreement to each Purchaser.
(i) Certificates. The Company shall have executed and delivered to the Purchasers the
certificates (in such denominations as such Purchaser shall request) for the Preferred Shares and
the Warrants being acquired by such Purchaser at the Closing (in such denominations as such
Purchaser shall request).
(j) Resolutions. The Board of Directors of the Company shall have adopted resolutions
consistent with Section 2.1(b) hereof in a form reasonably acceptable to such Purchaser (the
“Resolutions”).
(k) Reservation of Shares. As of the Closing Date, the Company shall have reserved
out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion
of the Preferred Shares and the exercise of the Warrants, a number of shares of Common Stock equal
to one hundred twenty percent (120%) of the aggregate number of Conversion Shares issuable upon
conversion of the Preferred Shares outstanding on the Closing Date and the number of Warrant Shares
issuable upon exercise of the number of Warrants assuming such Warrants were granted on the Closing
Date.
(l) Transfer Agent Instructions. The Irrevocable Transfer Agent Instructions, in the
form of Exhibit F attached hereto, shall have been delivered to and acknowledged in writing
by the Company’s transfer agent.
(m) Escrow Agreement. At the Closing, the Company and the escrow agent shall have
executed and delivered the Escrow Agreement to each Purchaser.
(n) Secretary’s Certificate. The Company shall have delivered to such Purchaser a
secretary’s certificate, dated as of the Closing Date, as to (i) the Resolutions, (ii) the
Certificate, (iii) the Bylaws, (iv) the Certificate of Designation, each as in effect at the
Closing, and (v) the authority and incumbency of the officers of the Company executing the
Transaction
Documents and any other documents required to be executed or delivered in connection
therewith.
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(o) Officer’s Certificate. The Company shall have delivered to the Purchasers a
certificate of an executive officer of the Company, dated as of the Closing Date, confirming the
accuracy of the Company’s representations, warranties and covenants as of such Closing Date and
confirming the compliance by the Company with the conditions precedent set forth in this Section
4.2 as of the Closing Date.
(p) Material Adverse Effect. No Material Adverse Effect shall have occurred at or
before the Closing Date.
ARTICLE V
Stock Certificate Legend
Section 5.1 Legend. Each certificate representing the Preferred Shares and the
Warrants, and, if appropriate, securities issued upon conversion thereof, shall be stamped or
otherwise imprinted with a legend substantially in the following form (in addition to any legend
required by applicable state securities or “blue sky” laws):
THESE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE “SECURITIES”) HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”) OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS OR ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC. SHALL HAVE RECEIVED AN OPINION OF COUNSEL THAT
REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.
The Company agrees to reissue certificates representing any of the Conversion Shares and the
Warrant Shares, without the legend set forth above if at such time, prior to making any transfer of
any such securities, such holder thereof shall give written notice to the Company describing the
manner and terms of such transfer and removal as the Company may reasonably request. Such proposed
transfer and removal will not be effected until: (a) either (i) the Company has received an opinion
of counsel reasonably satisfactory to the Company, to the effect that the registration of the
Conversion Shares or the Warrant Shares under the Securities Act is not required in connection with
such proposed transfer, (ii) a registration statement under the Securities Act covering such
proposed disposition has been filed by the Company with the Commission and has become effective
under the Securities Act, (iii) the Company has received other evidence reasonably satisfactory to
the Company that such registration and qualification under the Securities Act and state securities
laws are not required, or (iv) the holder provides the
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Company with reasonable assurances that such security can be sold pursuant to Rule 144 under
the Securities Act; and (b) either (i) the Company has received an opinion of counsel reasonably
satisfactory to the Company, to the effect that registration or qualification under the securities
or “blue sky” laws of any state is not required in connection with such proposed disposition, or
(ii) compliance with applicable state securities or “blue sky” laws has been effected or a valid
exemption exists with respect thereto. The Company will respond to any such notice from a holder
within three (3) business days. In the case of any proposed transfer under this Section 5.1, the
Company will use reasonable efforts to comply with any such applicable state securities or “blue
sky” laws, but shall in no event be required, (x) to qualify to do business in any state where it
is not then qualified, (y) to take any action that would subject it to tax or to the general
service of process in any state where it is not then subject, or (z) to comply with state
securities or “blue sky” laws of any state for which registration by coordination is unavailable to
the Company. The restrictions on transfer contained in this Section 5.1 shall be in addition to,
and not by way of limitation of, any other restrictions on transfer contained in any other section
of this Agreement. Whenever a certificate representing the Conversion Shares or Warrant Shares is
required to be issued to a Purchaser without a legend, in lieu of delivering physical certificates
representing the Conversion Shares or Warrant Shares (provided that a registration statement under
the Securities Act providing for the resale of the Warrant Shares and Conversion Shares is then in
effect), the Company shall cause its transfer agent to electronically transmit the Conversion
Shares or Warrant Shares to a Purchaser by crediting the account of such Purchaser’s Prime Broker
with the Depository Trust Company (“DTC”) through its Deposit Withdrawal Agent Commission
(“DWAC”) system (to the extent not inconsistent with any provisions of this Agreement)
provided that the Company and the Company’s transfer agent are participating in DTC through the
DWAC system.
Section 5.2 Liquidated Damages. In addition to such Purchasers’ other available
remedies, the Company shall pay to a Purchaser, in cash, as partial liquidated damages and not as a
penalty, for each $2,000 of Warrant Shares or Conversion Shares (based on the VWAP (as defined
hereinafter) of the Common Stock on the date such securities are submitted to the transfer agent)
delivered for removal of the restrictive legend and subject to Section 5.1, $10 per Trading Day
(increasing to $20 per Trading Day five (5) Trading Days after such damages have begun to accrue)
for each Trading Day after the fourth (4th) Trading Day following the legend removal date until
such certificate is delivered without a legend. Nothing herein shall limit such Purchasers’ rights
to pursue actual damages for the Company’s failure to deliver certificates representing any
securities as required by the Transaction Documents, and such Purchaser shall have the right to
pursue all remedies available to it at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief. In no event shall the liquidated damages that
accrue pursuant to this Section 5.2 exceed one and one half percent (1.5%) of the stated value of
such Purchaser’s Preferred Shares then outstanding for any thirty (30) day period. Notwithstanding
anything in this Section 5.2 to the contrary, a Purchaser may not invoke its rights under this
Section 5.2 if it has invoked its rights under Sections 5(b)(v) or (vi) of the Certificate of
Designation or Section 2(e) of the Warrants.
For purposes hereof, “VWAP” means, for any date, the price determined by the first of
the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading
Market (as defined hereinafter), the daily volume weighted average price of the
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Common Stock for such date (or the nearest preceding date) on the Trading Market on which the
Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from
9:30 a.m. (New York City time) to 4:02 p.m. (New York City time); (b) if the OTC Bulletin Board is
not a Trading Market, the volume weighted average price of the Common Stock for such date (or the
nearest preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then quoted for
trading on the OTC Bulletin Board and if prices for the Common Stock are then reported in the “Pink
Sheets” published by Pink Sheets, LLC (or a similar organization or agency succeeding to its
functions of reporting prices), the most recent bid price per share of the Common Stock so
reported; or (d) in all other cases, the fair market value of a share of Common Stock as determined
by an independent appraiser selected in good faith by the holders of a majority of the Preferred
Stock then outstanding and reasonably acceptable to the Company.
For purposes hereof, “Trading Market” means the following markets or exchanges on
which the Common Stock is listed or quoted for trading on the date in question: the American Stock
Exchange, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the
New York Stock Exchange or the OTC Bulletin Board.
ARTICLE VI
Indemnification
Section 6.1 Company Indemnity. The Company agrees to indemnify and hold harmless the
Purchasers (and their respective directors, officers, managers, partners, members, shareholders,
affiliates, agents, successors and assigns) from and against any and all losses, liabilities,
deficiencies, costs, damages and expenses (including, without limitation, reasonable attorneys’
fees, charges and disbursements) incurred by the Purchasers as a result of any inaccuracy in or
breach of the representations, warranties or covenants made by the Company herein.
Section 6.2 Indemnification Procedure. Any party entitled to indemnification under
this Article VI (an “indemnified party”) will give written notice to the indemnifying party of any
matters giving rise to a claim for indemnification; provided, that the failure of any party
entitled to indemnification hereunder to give notice as provided herein shall not relieve the
indemnifying party of its obligations under this Article VI except to the extent that the
indemnifying party is actually prejudiced by such failure to give notice. In case any action,
proceeding or claim is brought against an indemnified party in respect of which indemnification is
sought hereunder, the indemnifying party shall be entitled to participate in and, unless in the
reasonable judgment of the indemnified party a conflict of interest between it and the indemnifying
party may exist with respect of such action, proceeding or claim, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. In the event that the indemnifying
party advises an indemnified party that it will contest such a claim for indemnification hereunder,
or fails, within thirty (30) days of receipt of any indemnification notice to notify, in writing,
such person of its election to defend, settle or compromise, at its sole cost and expense, any
action, proceeding or claim (or discontinues its defense at any time after it commences such
defense), then the indemnified party may, at its option, defend, settle or
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otherwise compromise or pay such action or claim. In any event, unless and until the
indemnifying party elects in writing to assume and does so assume the defense of any such claim,
proceeding or action, the indemnified party’s costs and expenses arising out of the defense,
settlement or compromise of any such action, claim or proceeding shall be losses subject to
indemnification hereunder. The indemnified party shall cooperate fully with the indemnifying party
in connection with any negotiation or defense of any such action or claim by the indemnifying party
and shall furnish to the indemnifying party all information reasonably available to the indemnified
party which relates to such action or claim. The indemnifying party shall keep the indemnified
party fully apprised at all times as to the status of the defense or any settlement negotiations
with respect thereto. If the indemnifying party elects to defend any such action or claim, then
the indemnified party shall be entitled to participate in such defense with counsel of its choice
at its sole cost and expense. The indemnifying party shall not be liable for any settlement of any
action, claim or proceeding effected without its prior written consent. Notwithstanding anything
in this Article VI to the contrary, the indemnifying party shall not, without the indemnified
party’s prior written consent, settle or compromise any claim or consent to entry of any judgment
in respect thereof which imposes any future obligation on the indemnified party or which does not
include, as an unconditional term thereof, the giving by the claimant or the plaintiff to the
indemnified party of a release from all liability in respect of such claim. The indemnification
required by this Article VI shall be made by periodic payments of the amount thereof during the
course of investigation or defense, as and when bills are received or expense, loss, damage or
liability is incurred, so long as the indemnified party irrevocably agrees to refund such moneys if
it is ultimately determined by a court of competent jurisdiction that such party was not entitled
to indemnification. The indemnity agreements contained herein shall be in addition to (a) any
cause of action or similar rights of the indemnified party against the indemnifying party or
others, and (b) any liabilities the indemnifying party may be subject to pursuant to the law.
ARTICLE VII
Miscellaneous
Section 7.1 Fees and Expenses. Except as otherwise set forth in this Agreement and
the other Transaction Documents, each party shall pay the fees and expenses of its advisors,
counsel, accountants and other experts, if any, and all other expenses, incurred by such party
incident to the negotiation, preparation, execution, delivery and performance of this Agreement,
provided that the Company shall pay all actual attorneys’ fees and expenses (including
disbursements and out-of-pocket expenses) incurred by the Purchasers in connection with (i) the
preparation, negotiation, execution and delivery of this Agreement and the other Transaction
Documents and the transactions contemplated thereunder, including any services provided by the
escrow agent pursuant to the Escrow Agreement, which payment shall be made at Closing and shall not
exceed $40,000, (ii) the filing and declaration of effectiveness by the Commission of the
Registration Statement (as defined in the Registration Rights Agreement) and (iii) any amendments,
modifications or waivers of this Agreement or any of the other Transaction Documents. The Company
and the Purchasers hereby agree that the prevailing party in any suit, action or proceeding arising
out of or relating to the Shares, this Agreement or the other Transaction Documents, shall be
entitled to reimbursement for reasonable legal fees from
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the non-prevailing party. The parties hereby waive all rights to a trial by jury. The
Company shall pay all stamp or other similar taxes and duties levied in connection with issuance of
the Preferred Shares pursuant hereto.
Section 7.2 Specific Enforcement, Consent to Jurisdiction.
(a) The Company and the Purchasers acknowledge and agree that irreparable damage would occur
in the event that any of the provisions of this Agreement or the other Transaction Documents were
not performed in accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to seek an injunction or injunctions to
prevent or cure breaches of the provisions of this Agreement or the Registration Rights Agreement
and to enforce specifically the terms and provisions hereof or thereof, this being in addition to
any other remedy to which any of them may be entitled by law or equity.
(b) Each of the Company and the Purchasers (i) hereby irrevocably submits to the jurisdiction
of the United States District Court sitting in the Southern District of New York and the courts of
the State of New York located in New York county for the purposes of any suit, action or proceeding
arising out of or relating to this Agreement or any of the other Transaction Documents or the
transactions contemplated hereby or thereby and (ii) hereby waives, and agrees not to assert in any
such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of
such court, that the suit, action or proceeding is brought in an inconvenient forum or that the
venue of the suit, action or proceeding is improper. Each of the Company and the Purchasers
consents to process being served in any such suit, action or proceeding by mailing a copy thereof
to such party at the address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice thereof. Nothing in
this Section 7.2 shall affect or limit any right to serve process in any other manner permitted by
law.
Section 7.3 Entire Agreement; Amendment. This Agreement and the Transaction Documents
contains the entire understanding and agreement of the parties with respect to the matters covered
hereby and, except as specifically set forth herein or in the Transaction Documents, neither the
Company nor any of the Purchasers makes any representations, warranty, covenant or undertaking with
respect to such matters and they supersede all prior understandings and agreements with respect to
said subject matter, all of which are merged herein. No provision of this Agreement may be waived
or amended other than by a written instrument signed by the Company and the holders of at least
sixty-six and two-thirds percent (662/3%) of the Preferred Shares then outstanding, and no provision
hereof may be waived other than by an a written instrument signed by the party against whom
enforcement of any such amendment or waiver is sought. No such amendment shall be effective to the
extent that it applies to less than all of the holders of the Preferred Shares then outstanding.
No consideration shall be offered or paid to any person to amend or consent to a waiver or
modification of any provision of any of the Transaction Documents unless the same consideration is
also offered to all of the parties to the Transaction Documents or holders of Preferred Shares, as
the case may be.
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Section 7.4 Notices. Any notice, demand, request, waiver or other communication
required or permitted to be given hereunder shall be in writing and shall be effective (a) upon
hand delivery by telex (with correct answer back received), telecopy, e-mail or facsimile at the
address or number designated below (if delivered on a business day during normal business hours
where such notice is to be received), or the first business day following such delivery (if
delivered other than on a business day during normal business hours where such notice is to be
received) or (b) on the second business day following the date of mailing by express courier
service, fully prepaid, addressed to such address, or upon actual receipt of such mailing,
whichever shall first occur. The addresses for such communications shall be:
If to the Company:
|
Advanced Environmental Recycling Technologies, Inc. | |
| 000 X Xxxxxxxxx Xxxxxx | ||
| Post Office Box 1237 | ||
| Springdale, Arkansas 72765 | ||
| Attention: Chief Executive Officer | ||
| Tel. No.: (000) 000-0000 | ||
| Fax No.: (000) 000-0000 | ||
with copies to:
|
Akin Gump Xxxxxxx Xxxxx & Xxxx LLP | |
| 000 Xxxxxxx Xxxxxx | ||
| Xxxxx 0000 | ||
| Xxx Xxxxxxx, Xxxxx 00000-0000 | ||
| Attention: J. Xxxxxxx Xxxx | ||
| Tel. No.: (000) 000-0000 | ||
| Fax No.: (000) 000-0000 | ||
If to any Purchaser:
|
At the address of such Purchaser set forth on Exhibit A to this Agreement, with copies to Purchaser’s counsel as set forth on Exhibit A or as specified in writing by such Purchaser with copies to: | |
| Xxxxxx Xxxxx Xxxxxxxx & Xxxxxxx LLP | ||
| 0000 Xxxxxx xx xxx Xxxxxxxx | ||
| Xxx Xxxx, Xxx Xxxx 00000 | ||
| Attention: Xxxxxxxxxxx X. Xxxxxxx | ||
| Tel No.: (000) 000-0000 | ||
| Fax No.: (000) 000-0000 |
Any party hereto may from time to time change its address for notices by giving at least ten
(10) days written notice of such changed address to the other party hereto.
Section 7.5 Waivers. No waiver by either party of any default with respect to any
provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in
the future or a waiver of any other provisions, condition or requirement hereof, nor shall any
delay or omission of any party to exercise any right hereunder in any manner impair the exercise of
any such right accruing to it thereafter.
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Section 7.6 Headings. The article, section and subsection headings in this Agreement
are for convenience only and shall not constitute a part of this Agreement for any other purpose
and shall not be deemed to limit or affect any of the provisions hereof.
Section 7.7 Successors and Assigns; Restrictions on Transfer. This Agreement shall be
binding upon and inure to the benefit of the parties and their successors and assigns; provided,
however, no Purchaser or assignee thereof shall transfer or assign any of the Preferred Shares to
any person or entity known to be a competitor of the Company with respect to the manufacture of
composite wood-plastic decking or other composite wood-plastic construction materials.
Section 7.8 No Third Party Beneficiaries. This Agreement is intended for the benefit
of the parties hereto and their respective permitted successors and assigns and is not for the
benefit of, nor may any provision hereof be enforced by, any other person.
Section 7.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York, without giving effect to any of the
conflicts of law principles which would result in the application of the substantive law of another
jurisdiction. This Agreement shall not be interpreted or construed with any presumption against
the party causing this Agreement to be drafted.
Section 7.10 Survival. The representations and warranties of the Company and the
Purchasers shall survive the execution and delivery hereof and the Closing hereunder for the
applicable statute of limitations period.
Section 7.11 Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original and, all of which
taken together shall constitute one and the same Agreement and shall become effective when
counterparts have been signed by each party and delivered to the other parties hereto, it being
understood that all parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with the same force and
effect as if such facsimile signature were the original thereof.
Section 7.12 Publicity. The Company agrees that it will not disclose, and will not
include in any public announcement, the name of the Purchasers without the consent of the
Purchasers unless and until such disclosure is required by law or applicable regulation, and then
only to the extent of such requirement.
Section 7.13 Severability. The provisions of this Agreement and the Transaction
Documents are severable and, in the event that any court of competent jurisdiction shall determine
that any one or more of the provisions or part of the provisions contained in this Agreement or the
Transaction Documents 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 provision or
part of a provision of this Agreement or the Transaction Documents and such provision shall be
reformed and construed as if such invalid or illegal or unenforceable
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provision, or part of such provision, had never been contained herein, so that such provisions
would be valid, legal and enforceable to the maximum extent possible.
Section 7.14 Further Assurances. From and after the date of this Agreement, upon the
request of any Purchaser or the Company, each of the Company and the Purchasers shall execute and
deliver such instrument, documents and other writings as may be reasonably necessary or desirable
to confirm and carry out and to effectuate fully the intent and purposes of this Agreement, the
Preferred Shares, the Conversion Shares, the Warrants, the Warrant Shares, the Certificate of
Designation, and the Registration Rights Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their
respective authorized officer as of the date first above written.
| ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC. |
||||
| By: | ||||
| Name: | ||||
| Title: | ||||
| PURCHASER |
||||
| By: | ||||
| Name: | ||||
| Title: | ||||
Table of Contents
EXHIBIT A to the
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
Names and Addresses
|
Number of Preferred Shares | Dollar Amount of | ||
of Purchasers
|
& Warrants Purchased | Investment | ||
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EXHIBIT B to the
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
FORM OF CERTIFICATE OF DESIGNATION
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EXHIBIT C to the
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
FORM OF WARRANT
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EXHIBIT D to the
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
FORM OF REGISTRATION RIGHTS AGREEMENT
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EXHIBIT E to the
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
FORM OF ESCROW AGREEMENT
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EXHIBIT F to the
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
FORM OF IRREVOCABLE TRANSFER AGENT INSTRUCTIONS
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
as of October 29, 2007
American Stock Transfer & Trust Company
0000 00xx Xxxxxx
Xxxxxxxx, XX 00000
Contact person: Xxxxx Xxxxxxxx
0000 00xx Xxxxxx
Xxxxxxxx, XX 00000
Contact person: Xxxxx Xxxxxxxx
Ladies and Gentlemen:
Reference is made to that certain Series D Convertible Preferred Stock Purchase Agreement (the
“Purchase Agreement”), dated as of October 29, 2007, by and among Advanced Environmental Recycling
Technologies, Inc., a Delaware corporation (the “Company”), and the purchasers named therein
(collectively, the “Purchasers”) pursuant to which the Company is issuing to the Purchasers shares
of its Series D Convertible Preferred Stock, par value $0.01 per share, (the “Preferred Shares”)
and warrants (the “Warrants”) to purchase shares of the Company’s Class A common stock, par value
$0.01 per share (the “Common Stock”). This letter shall serve as our irrevocable authorization and
direction to you provided that you are the transfer agent of the Company at such time) to issue
shares of Common Stock upon conversion of the Preferred Shares (the “Conversion Shares”) and
exercise of the Warrants (the “Warrant Shares”) to or upon the order of a Purchaser from time to
time upon (i) surrender to you of a properly completed and duly executed Conversion Notice or
Exercise Notice, as the case may be, in the form attached hereto as Exhibit I and Exhibit II,
respectively, (ii) in the case of the conversion of Preferred Shares, a copy of the certificates
(with the original certificates delivered to the Company) representing Preferred Shares being
converted or, in the case of Warrants being exercised, a copy of the Warrants (with the original
Warrants delivered to the Company) being exercised (or, in each case, an indemnification
undertaking with respect to such share certificates or the warrants in the case of their loss,
theft or destruction), and (iii) delivery of a treasury order or other appropriate order duly
executed by a duly authorized officer of the Company. So long as you have previously received (x)
written confirmation from counsel to the Company that a registration statement covering resales of
the Conversion Shares or Warrant Shares, as applicable, has been declared effective by the
Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the
“1933 Act”), and no subsequent notice by the Company or its counsel of the suspension or
termination of its effectiveness and (y) a copy of such registration statement, and if the
Purchaser represents in writing that the Conversion Shares or the Warrant Shares, as the case may
be, were sold pursuant to the Registration Statement, then certificates representing the Conversion
Shares and the Warrant Shares, as the case may be, shall not bear any legend restricting transfer
of the Conversion Shares and the Warrant Shares, as the case may be, thereby and should not be
subject to any stop-transfer restriction. Provided, however, that if you have not previously
received those items and representations listed above, then the certificates for the Conversion
Shares and the Warrant Shares shall bear the following legend:
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“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
SECURITIES ACT”), OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE
SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS, OR ADVANCED
ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC. SHALL HAVE RECEIVED AN
OPINION OF ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE
SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE
SECURITIES LAWS IS NOT REQUIRED.”
and, provided further, that the Company may from time to time notify you to place stop-transfer
restrictions on the certificates for the Conversion Shares and the Warrant Shares in the event a
registration statement covering the Conversion Shares and the Warrant Shares is subject to
amendment for events then current.
A form of written confirmation from counsel to the Company that a registration statement
covering resales of the Conversion Shares and the Warrant Shares has been declared effective by the
SEC under the 1933 Act is attached hereto as Exhibit III.
Please be advised that the Purchasers are relying upon this letter as an inducement to enter
into the Purchase Agreement and, accordingly, each Purchaser is a third party beneficiary to these
instructions.
Please execute this letter in the space indicated to acknowledge your agreement to act in
accordance with these instructions. Should you have any questions concerning this matter, please
contact me at 000.000.0000.
Very truly yours,
| ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC. |
||||
| By: | ||||
| Name: | ||||
| Title: | ||||
ACKNOWLEDGED AND AGREED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
By: |
||||
Name: |
||||
Title: |
||||
Date: |
||||
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EXHIBIT H
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
CONVERSION NOTICE
CONVERSION NOTICE
Reference is made to the Certificate of Designation of the Relative Rights and Preferences of the
Preferred Stock of Advanced Environmental Recycling Technologies, Inc. (the “Certificate of
Designation”). In accordance with and pursuant to the Certificate of Designation, the undersigned
hereby elects to convert the number of shares of Preferred Stock, par value $0.01 per share (the
“Preferred Shares”), of Advanced Environmental Recycling Technologies, Inc., a Delaware corporation
(the “Company”), indicated below into shares of Class A Common Stock, par value $0.01 per share
(the “Common Stock”), of the Company, by tendering the stock certificate(s) representing the
share(s) of Preferred Shares specified below as of the date specified below.
Date of Conversion: |
||
Number of Preferred Shares to be converted: |
||
Stock certificate no(s). of Preferred Shares to be converted: |
||
The Common Stock have been sold pursuant to the Registration Statement (as defined in the
Registration Rights Agreement):
YES NO
YES NO
Please confirm the following information:
Conversion Price: |
||
Number of shares of Common Stock to be issued: |
||
Number of shares of Common Stock beneficially owned or deemed beneficially owned by the Holder on
the Date of Conversion:
Please issue the Common Stock into which the Preferred Shares are being converted and, if
applicable, any check drawn on an account of the Company in the following name and to the following
address:
Issue to: |
||
Facsimile Number: |
||
Authorization: |
||
| By: | ||||
| Title: | ||||
Dated:
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EXHIBIT II
FORM OF EXERCISE NOTICE
EXERCISE FORM
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
The undersigned , pursuant to the provisions of the within Warrant, hereby elects to
purchase
shares of Common Stock of Advanced Environmental Recycling Technologies, Inc.
covered by the within Warrant.
Dated:
|
Signature | |||||||||
| Address | ||||||||||
Number of shares of Common Stock beneficially owned or deemed beneficially owned by the Holder on
the date of Exercise:
ASSIGNMENT
FOR VALUE RECEIVED, hereby sells, assigns and transfers unto
the within Warrant and all rights evidenced thereby and does irrevocably constitute and appoint
, attorney, to transfer the said Warrant on the books of the within named corporation.
Dated:
|
Signature | |||||||||
| Address | ||||||||||
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, hereby sells, assigns and transfers unto
the right to purchase
shares of Warrant Stock evidenced by the within Warrant together
with all rights therein, and does irrevocably constitute and appoint , attorney,
to transfer that part of the said Warrant on the books of the within named corporation.
Dated:
|
Signature | |||||||||
| Address | ||||||||||
FOR USE BY THE ISSUER ONLY:
This Warrant No. W- canceled (or transferred or exchanged) this day of
,
, shares of Common Stock issued therefor in the name of , Warrant No. W-
issued for shares of Common Stock in the name of .
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EXHIBIT III
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
OF REGISTRATION STATEMENT
American Stock Transfer & Trust Company
0000 00xx Xxxxxx
Xxxxxxxx, XX 00000
Contact person: Xxxxx Xxxxxxxx
0000 00xx Xxxxxx
Xxxxxxxx, XX 00000
Contact person: Xxxxx Xxxxxxxx
Re: Advanced Environmental Recycling Technologies, Inc.
Ladies and Gentlemen:
We are counsel to Advanced Environmental Recycling Technologies, Inc., a Delaware corporation
(the “Company”), and have represented the Company in connection with that certain Series D
Convertible Preferred Stock Purchase Agreement (the “Purchase Agreement”), dated as of October 29,
2007, by and among the Company and the purchasers named therein (collectively, the “Purchasers”)
pursuant to which the Company issued to the Purchasers shares of its Series D Convertible Preferred
Stock, par value $0.01 per share, (the “Preferred Shares”) and warrants (the “Warrants”) to
purchase shares of the Company’s Class A common stock, par value $0.01 per share (the “Common
Stock”). Pursuant to the Purchase Agreement, the Company has also entered into a Registration
Rights Agreement with the Purchasers (the “Registration Rights Agreement”), dated as of October
___, 2007, pursuant to which the Company agreed, among other things, to register the Registrable
Securities (as defined in the Registration Rights Agreement), including the shares of Common Stock
issuable upon conversion of the Preferred Shares and exercise of the Warrants, under the Securities
Act of 1933, as amended (the “1933 Act”). In connection with the Company’s obligations under the
Registration Rights Agreement, on , 2007, the Company filed a Registration
Statement on Form S-3 (File No. 333- ) (the “Registration Statement”) with the Securities
and Exchange Commission (the “SEC”) relating to the resale of the Registrable Securities which
names each of the present Purchasers as a selling stockholder thereunder.
In connection with the foregoing, we advise you that a member of the SEC’s staff has advised
us by telephone that the SEC has entered an order declaring the Registration Statement effective
under the 1933 Act at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no
knowledge, after telephonic inquiry of a member of the SEC’s staff, that any stop order suspending
its effectiveness has been issued or that any proceedings for that purpose are pending before, or
threatened by, the SEC and accordingly, the Registrable Securities are available for resale under
the 1933 Act pursuant to the Registration Statement.
| Very truly yours, [COMPANY COUNSEL] |
||||
| By: | ||||
cc: [LIST NAMES OF PURCHASERS]
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EXHIBIT G to the
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
[TO BE NEGOTIATED AND SUBJECT TO REVISIONS]
FORM OF OPINION OF COUNSEL
1. The Company is a corporation duly incorporated, validly existing and in good standing under
the laws of the state of Delaware and has the requisite corporate power to own, lease and operate
its properties and assets, and to carry on its business as presently conducted. The Company is
duly qualified as a foreign corporation to do business and is in good standing in every
jurisdiction in which the nature of the business conducted or property owned by it makes such
qualification necessary.
2. The Company has the requisite corporate power and authority to enter into and perform its
obligations under the Transaction Documents and to issue the Preferred Stock, the Warrants and the
Common Stock issuable upon conversion of the Preferred Stock and exercise of the Warrants. The
execution, delivery and performance of each of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated thereby have been duly and validly authorized
by all necessary corporate action and no further consent or authorization of the Company or its
Board of Directors or stockholders is required. Each of the Transaction Documents have been duly
executed and delivered, and the Preferred Stock and the Warrants have been duly executed, issued
and delivered by the Company and each of the Transaction Documents constitutes a legal, valid and
binding obligation of the Company enforceable against the Company in accordance with its respective
terms. The Common Stock issuable upon conversion of the Preferred Stock and exercise of the
Warrants are not subject to any preemptive rights under the Certificate of Incorporation or the
Bylaws.
3. The Preferred Stock and the Warrants have been duly authorized and, when delivered against
payment in full as provided in the Purchase Agreement, will be validly issued, fully paid and
nonassessable. The shares of Common Stock issuable upon conversion of the Preferred Stock and
exercise of the Warrants, have been duly authorized and reserved for issuance, and, when delivered
upon conversion or against payment in full as provided in the Certificate of Designation and the
Warrants, as applicable, will be validly issued, fully paid and nonassessable.
4. The execution, delivery and performance of and compliance with the terms of the Transaction
Documents and the issuance of the Preferred Stock, the Warrants and the Common Stock issuable upon
conversion of the Preferred Stock and exercise of the Warrants do not (i) violate any provision of
the Certificate of Incorporation or Bylaws, (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, any material agreement,
mortgage, deed of trust, indenture, note, bond, license, lease agreement, instrument or obligation
to which the Company is a party, (iii) create or impose a lien, charge or encumbrance on any
property of the Company under any agreement or any commitment to which the Company is a party or by
which the Company is bound or by which any of its respective properties or assets are bound, or
(iv) result in a violation of any federal, state, local or foreign statute, rule, regulation,
order, judgment, injunction or decree (including Federal and state securities laws and regulations)
applicable to the Company or by which any property or asset of the Company is bound or affected,
except, in all cases other than violations pursuant to clauses (i) and (iv) above, for such
conflicts, default, terminations, amendments, acceleration, cancellations and violations as would
not, individually or in the aggregate, have a Material Adverse Effect.
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5. `No consent, approval or authorization of or designation, declaration or filing with any
governmental authority on the part of the Company is required under Federal, state or local law,
rule or regulation in connection with the valid execution and delivery of the Transaction
Documents, or the offer, sale or issuance of the Preferred Stock, the Warrants or the Common Stock
issuable upon conversion of the Preferred Stock and exercise of the Warrants other than the
Certificate of Designation and the Registration Statement.
6. There is no action, suit, claim, investigation or proceeding pending or threatened against
the Company which questions the validity of this Agreement or the transactions contemplated hereby
or any action taken or to be taken pursuant hereto or thereto. There is no action, suit, claim,
investigation or proceeding pending, or to our knowledge, threatened, against or involving the
Company or any of its properties or assets and which, if adversely determined, is reasonably likely
to result in a Material Adverse Effect. There are no outstanding orders, judgments, injunctions,
awards or decrees of any court, arbitrator or governmental or regulatory body against the Company
or any officers or directors of the Company in their capacities as such.
7. The offer, issuance and sale of the Preferred Stock and the Warrants and the offer,
issuance and sale of the shares of Common Stock issuable upon conversion of the Preferred Stock and
exercise of the Warrants pursuant to the Purchase Agreement, the Certificate of Designation and the
Warrants, as applicable, are exempt from the registration requirements of the Securities Act.
8. The Company is not, and as a result of and immediately upon Closing will not be, an
“investment company” or a company “controlled” by an “investment company,” within the meaning of
the Investment Company Act of 1940, as amended.
Very truly yours,
