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EXHIBIT 2
U.S. ENERGY SYSTEMS, INC.
SUBSCRIPTION AGREEMENT
SUBSCRIBER: Energy Systems Investors LLC
SECURITIES SUBSCRIBED FOR: 250,000 shares of Series A Convertible
Preferred Stock, $.01 par value, at
$9.00 per share.
AGGREGATE PURCHASE PRICE: $2,250,000.00
SUBSCRIPTION AGREEMENT, dated as of March 20, 1998, by and between U.S.
Energy Systems, Inc., a Delaware corporation (the "Company"), and Energy Systems
Investors LLC, a Delaware limited liability company (the "Investor").
WITNESSETH:
The Company desires to sell, and the Investor desires to buy, an
aggregate of 250,000 shares of the Company's Series A Convertible Preferred
Stock, par value $.01 per share (the "Preferred Stock"), at a purchase price of
$9.00 per share, having the rights and preferences set forth in the Certificate
of Designation attached hereto as Exhibit A (the "Certificate of Designation").
The Preferred Stock is sometimes referred to herein as the "Securities."
The Company is described in the Company's Annual Report on Form 10-KSB
for the fiscal year ended January 31, 1997, Quarterly Reports on Form 1O-QSB for
the quarters ended April 30, 1997, July 31, 1997 and October 31, 1997, and
current reports on Form 8-K dated April 24, 1997, August 12, 1997, August 22,
1997 and November 3, 1997 (collectively, the "Reports") filed with the
Securities and Exchange Commission (the "Commission").
NOW, THEREFORE, the parties hereto agree as follows:
1. Subscription and Payment. Subject to the terms and conditions
herein set forth, the Investor hereby subscribes for the number of shares of
Preferred Stock set forth above. The Investor acknowledges that this
subscription shall not be effective until accepted by the Company.
The Investor agrees to deliver to the Company at the Closing (as
defined below) by wire transfer to an account designated by the Company the
aggregate purchase price of S2,250,000, payable in immediately available funds,
for the Securities subscribed for hereby.
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2. Closing. The closing (the "Closing") of the purchase and sale
of the Securities subscribed for hereby (the "Offering") shall occur on March
23, 1998 or the earliest date thereafter on which the closing conditions
specified in Sections 8 and 9 of this Agreement shall have been satisfied or
waived (any such date, the "Closing Date"); provided, however, that if the
Closing has not occurred by March 31, 1998, then this Agreement shall terminate
and the Closing shall not take place. At the Closing, the Company will deliver
to the Investor: (i) one executed copy of this Agreement; (ii) a stock
certificate representing the Investor's ownership of the Preferred Stock
subscribed for hereby; (iii) an executed Registration Rights Agreement in the
form attached hereto as Exhibit B (the "Registration Rights Agreement"); and
(iv) such other certificates, instruments, opinions and documents as are
otherwise set forth herein or contemplated hereby. Subject to the provisions of
Section 13 hereto and prior to execution by the Company, the Company shall have
the right to reject this Subscription Agreement and not issue the Securities to
the Investor, in its discretion.
3. Termination of Offering. The Investor understands and agrees
that it will not be entitled to exercise the rights of a Stockholder of the
Company until an appropriate certificate representing the Preferred Stock for
which it has subscribed has been issued to it on the day of the Closing. If (a)
the Company shall have reasonably determined that an event has occurred or a
condition exists which could materially and adversely affect the business or
proposed business of the Company and that such possibility warrants termination
of the Offering, (b) the conditions to the Closing of the Offering are not
satisfied or (c) the Company elects to terminate the Offering, the Offering will
be terminated, and the Company will not issue the Preferred Stock and the
Company will not be entitled to payment of the purchase price for the Preferred
Stock.
4. Representations and Warranties by Investor. The Investor
hereby represents and warrants to the Company that:
(a) it is an "accredited investor" as that term is
defined in Rule 501(a) under the Securities Act of 1933, as amended (the "Act");
(b) it has the requisite knowledge and experience in
financial and business matters through its managers to be capable of evaluating
the merits and risks of an investment in the Company;
(c) it has received and read the Reports and has
evaluated the risks of investing in the Company;
(d) it has been given the opportunity to ask questions
of, and receive answers from, the Company concerning the terms and conditions of
the Offering and to obtain additional information necessary to verify the
accuracy of the information contained in the Reports or such other information
as it desired in order to evaluate its investment;
(e) in making the decision to purchase the Securities
herein subscribed for, it has relied solely upon the Reports, the
representations, warranties, agreements, undertakings and acknowledgments of the
Company in this Subscription Agreement and independent investigations made by
such Member;
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(f) it understands that an investment in the Company
involves certain risks and the Investor has taken full cognizance of and
understands such risks, including those set forth in the Reports;
(g) it understands that neither the Preferred Stock nor
the shares of Common Stock into which the Preferred Stock is convertible has
been registered under the Act, and agrees that the Preferred Stock and the
Common Stock may not be sold, offered for sale, transferred, pledged,
hypothecated or otherwise disposed of except in compliance with the Act and
subject to the terms of this Subscription Agreement;
(h) it understands that no federal or state agency has
made any finding or determination as to the fairness of the investment in, or
any recommendation or endorsement of, the Preferred Stock;
(i) the Securities herein subscribed for are being
acquired by the Investor in good faith solely for the account of the Investor,
for investment purposes and not with a view to subdivision, distribution or
resale. The Investor will not sell or otherwise dispose of any shares of the
Preferred Stock or Common Stock, as the case may be, unless:
(i) the Investor shall have advised the Company
in writing that it intends to dispose of such shares of Preferred Stock
or Common Stock, as the case may be, in a manner to be described in
such advice, and counsel reasonably acceptable to the Company and its
respective counsel shall have delivered to the Company an opinion
reasonably acceptable to the Company and its respective counsel that
registration is not required under the Act or under any applicable
securities laws of any jurisdiction; or
(ii) a registration statement on an appropriate
form under the Act, or a post-effective amendment to such registration
statement, covering the proposed sale or other disposition of such
shares of Preferred Stock or Common Stock, as the case may be, shall be
in effect under the Act and such shares of Preferred Stock or Common
Stock or the proposed sale or other disposition thereof shall have been
registered or qualified under applicable securities laws of any
jurisdiction.
The Investor acknowledges and agrees that the certificates representing
the Preferred Stock and the Common Stock shall bear the following legend (unless
subsequently registered under the Act):
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 and may not be
sold, exchanged, hypothecated or transferred in any manner
except in compliance with such Act and that certain
Subscription Agreement dated as of March 20, 1998 between the
Corporation and Energy Systems Investors LLC."
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The Investor also acknowledges that the Comparing may place a stop
transfer order against transfer of the Preferred Stock and the Common Stock, if
necessary in the Company's reasonable judgment, in order to assure compliance by
the Investor with the terms of this Agreement.
(j) The Investor represents and warrants that (i) the
individual executing this Agreement has appropriate authority to act on behalf
of the Investor and (ii) the Investor is not an Investment Company, as defined
under the Investment Company Act of 1940, as amended. This Agreement has been
duly executed and delivered by or on behalf of the Investor and constitutes the
valid and binding agreement of the Investor, enforceable against the Investor in
accordance with its terms.
(k) The Investor understands that the Securities are
being offered and sold, and the shares of Common Stock issuable upon conversion
of the Preferred Stock are being offered hereby in reliance on specific
exemptions from the registration requirements of the Act and that the Company is
relying on the foregoing representations, warranties, agreements, undertakings
and acknowledgments in determining the availability of such exemptions and the
Investor's suitability as the purchaser of the Securities.
5. Representations and Warranties of the Company. The Company
represents and warrants to the Investor that:
(a) The Company has duly filed with the Commission all
reports required to be filed by it by the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Company has furnished to the Investor a true
and correct copy of each Report. Each Report did not, as of the date on which it
was signed, contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(b) The financial statements (including the related
notes) of the Company included in the Reports present fairly the financial
position of the Company as of the dates indicated and its results of operations
for the periods specified therein. All such financial statements have been
prepared in accordance with generally accepted accounting principles on a basis
consistently applied.
(c) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with full power and authority (corporate and other) to own its
properties and conduct its business as described in the Reports, and is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction in which the character of the business conducted by it or the
location of the properties owned or leased by it makes such qualification
necessary for the conduct of its business as described in the Reports except
where the failure to be so qualified would not have a material adverse effect on
the Company.
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(d) The authorized capital stock of the Company consists
of (i) 5,000,000 shares of Preferred Stock, par value S.01 per share, of which
none are outstanding as of January 31, 1998, and (ii) 35,000,000 shares of
Common Stock, par value $.01 per share, of which 5,160,609 shares are issued and
outstanding as of January 31, 1998. At January 31, 1998, there were outstanding
options, warrants and convertible debentures exercisable for or convertible into
a total of 5,912,725 shares of Common Stock. The Company has all requisite power
and authority to issue, sell and deliver the Preferred Stock in accordance with
and upon the terms and conditions set forth in this Agreement and the Common
Stock issuable upon conversion of the Preferred Stock; and all corporate action
required to be taken by the Company for the due and proper authorization,
issuance, sale and delivery of the Securities and Common Stock has been validly
and sufficiently taken. The outstanding shares of Common Stock are, and the
shares of Common Stock issuable upon conversion of the Preferred Stock in
accordance with their respective terms will be, when issued, duly authorized,
validly issued, fully paid and nonassessable.
(e) Except as set forth in this Agreement, or as
described in the Reports, subsequent to the respective dates as of which
information is given in the Reports, the Company has not incurred any material
liability or obligation, direct or contingent, or entered into any material
transaction (except for the transactions contemplated hereby), whether or not in
the ordinary course of business, and there has not been any material change on a
consolidated basis in the capital stock, or any material increase in the
short-term debt or long-term debt, or any material adverse change in the
condition (financial or other), business, key personnel, properties or results
of operations of the Company.
(f) The Company is not in violation of any material
provision of its Certificate of Incorporation or Bylaws or in default in the
performance of any material obligation contained in any material agreement,
indenture or other instrument. The performance by the Company of its obligations
under this Agreement and the consummation of the transactions herein
contemplated will not conflict with or result in a breach of the Certificate of
Incorporation or Bylaws of the Company, or any material agreement, indenture or
other instrument to which the Company is a party or by which it is bound, or
(assuming the accuracy of the Investor's representations and warranties herein)
any law, rule, administrative regulation or decree of any court or governmental
authority having jurisdiction over the Company or its properties, or result in
the creation or imposition of any material lien, charge, claim or encumbrance
upon any property or asset of the Company. Except as required by the Act and
applicable state securities or blue sky laws and except for the filing of the
Certificate of Designation with the Secretary of State of the State of Delaware,
no consent, approval, authorization or order of any court or governmental
authority is required in connection with the consummation of the transactions
contemplated by this Agreement. The rights granted to the Investor hereunder do
not in any way conflict with and are not inconsistent with any rights granted to
the holders of the Company's securities or debt instruments.
(g) The Common Stock issuable upon conversion of the
Preferred Stock, upon such issuance, will conform to the description thereof
contained in the Reports. Except as
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described in the Reports, there are no preemptive rights or other rights to
subscribe for or to purchase, or any restriction upon the voting or transfer of,
any shares of Common Stock pursuant to the Company's Certificate of
Incorporation or Bylaws or any agreement or other instrument to which the
Company is a party. Neither the Offering nor the sale of the Preferred Stock as
contemplated in this Agreement gives rise to any rights for or relating to the
registration of any shares of Common Stock (other than as provided in Section 10
of this Agreement).
(h) The Company has full right, power and authority to
enter into this Agreement and this Agreement has been duly authorized, executed
and delivered by the Company and (assuming the accuracy of the Investor's and
Members' representations and warranties herein) constitutes the legal, valid and
binding agreement of the Company enforceable against the Company in accordance
with its terms (except in all cases as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws
affecting the enforcement of creditors' rights generally and except that the
availability of the equitable remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any proceeding may
be brought).
(i) Except as set forth in the Reports, there are no
actions, suits or proceedings pending before or by any court or governmental
agency or authority, or any arbitrator, which seek to restrain or prohibit the
consummation of the transactions contemplated hereby or which might reasonably
be expected to result in any material adverse change in the condition (financial
or other), business or results of operations of the Company and, to the best of
the Company's knowledge, no such action, suit or proceeding has been threatened.
(j) The Company is not in violation of any law,
ordinance, governmental rule or regulation or court decree to which it may be
subject and the Company has not failed to obtain any license, permit, franchise
or other governmental authorization necessary to the ownership of its property
or to the conduct of its business, which violation or failure to obtain is
likely to have a material adverse effect on the condition (financial or other),
business or results of operations of the Company, except that (i) the Company
and its affiliates have not received all authorization required to construct the
private geothermal heating district project currently being developed by Reno
Energy LLC in Reno, Nevada, and (ii) the Company and its affiliates have not
received authorization necessary to renew its air commissions permit with
respect to its cogeneration unit in Lehi, Utah.
6. Covenants of the Investor.
(a) The Investor covenants with the Company that at all
times during which it holds the Preferred Stock or Common Stock, it shall comply
with all applicable federal and state securities laws, the rules and regulations
of the Nasdaq Stock Market, or any other market or exchange on which the
Company's securities are traded, and any applicable state law relating to the
governance of corporations, pertaining to the amount of equity ownership of the
Company that the Investor or its members may beneficially own, the aggregate
voting rights the Investor or its members may have in respect to all other
stockholders of the Company, and the affective
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change in control of the Company. Should the Company reasonably believe that any
dividend or distribution of Preferred Stock or Common Stock, additional grants
of Preferred Stock or Common Stock. Purchase Price adjustment or other
occurrence would place the Investor, the members or the Company in violation of
any such rules, regulations or laws, it shall have the right to take any action
it deems necessary to avoid any such violation, including, but not limited to,
substitution of cash for any payment of a stock dividend or distribution or
grant of additional securities of the Company.
(b) The Investor will not engage in any activity that
would jeopardize the status of the Offering as an exempt transaction under the
Act or under the laws of any state in which the Offering is made.
(c) The Investor acknowledges that the representations,
warranties, agreements, undertakings and acknowledgments are made by the
Investor with the intent that they be relied upon by the Company in determining
whether to issue the Securities.
7. Covenants of the Company. The Company covenants with the
Investor that:
(a) The Company will apply the net proceeds from the sale
of the Securities to working capital and other general corporate purposes and
possible acquisitions.
(b) The Company will, so long as the Investor shall be
the holder of Preferred Stock or Common Stock, furnish to the Investor, as soon
as practicable after the end of each fiscal year, an annual report with respect
to such year (including financial statements audited by independent public
accountants) and, as soon as practicable after the end of each quarterly period
(other than the last quarterly period) of each fiscal year, a statement (which
need not be audited) of the results of operations of the Company for such
period, and, to the extent not otherwise furnished, promptly upon the filing
thereof, copies of all reports filed by the Company with the Commission pursuant
to the Exchange Act.
(c) The Company shall at all times keep in reserve the
number of shares of its Common Stock issuable from time to time upon the
conversion of all the outstanding Preferred Stock.
(d) The Investor shall have the right to nominate one
person to the Company's Board of Directors, which person shall be appointed to
the Board of Directors at the Closing, and shall be included in the slate of the
Board of Directors for a three-year term as presented to the Stockholders of the
Company at their 1998 annual meeting.
(e) The Investor shall have the right to purchase in any
public or private offering of the Company's securities (exclusive of issuances
of Common Stock or options to purchase Common Stock to officers, directors,
employees and consultants of the Company, or stock issued in connection with an
acquisition or merger by the Company) within two (2) years
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of the Closing Date a portion of such offering, on the same terms offered to
other investors, equal to the Investor's then-current percentage of equity
ownership in the Company.
(f) Neither the Company nor any of its officers,
directors or employees will engage in any activity that would jeopardize the
status of the Offering as an exempt transaction under the Act or under the laws
of any state in which the offering is made.
(g) The Company acknowledges that the representations,
warranties, agreements, undertakings and acknowledgments are made by the Company
with the intent that they be relied upon by the Investor and the Members in
determining whether to subscribe for the Securities.
(h) The Company shall grant the Investor additional
shares of Preferred Stock or Common Stock (provided such grant does not increase
the Investor's (or combined group of investors) voting control in the Company
above 19.9% at such time unless previously approved by the stockholders of the
Company) or pay the Investor in cash, or some combination thereof at the
Company's option, if any non-operational, extraordinary or non-recurring event
(an "Event") occurs within 24 months of the Closing Date and which arises from a
situation preceding the Closing Date hereof, which diminishes the stockholder
equity in the Company as of January 31, 1998, in an amount greater than
$500,000. The amount of any additional grant of Preferred Stock (or Common
Stock, or payment of cash pursuant to this Section 7(h), shall be equal to the
decrease in stockholder equity multiplied by the Investor's then-current equity
percentage ownership in the Company, divided by the lesser of (a) the average
market price of the Company's Common Stock on the five days prior to the Event
or (b) 150% of the Conversion Price.
(i) Any dividends to be received by the Investor pursuant
to Section 3 of the Company's Certificate of Designation of its Series A
Convertible Preferred Stock shall be paid by the Company in cash or a grant of
Common Stock or some combination thereof, at the option of the Investor.
(j) Subject to the approval of a majority of the
stockholders of the Company in accordance with the rules of Nasdaq, the Investor
shall have the option to purchase up to an additional 222,000 shares of
Preferred Stock within one year of the date hereof on the same terms and
conditions as set forth herein.
8. Conditions of Investor Obligations. The Investor's obligations
under this Agreement are subject to the accuracy of the representations and
warranties of the Company made in Section 5 hereof in all material respects, and
to the performance by the Company of its other obligations under this Agreement
to be performed at or prior to the Closing.
9. Conditions of Obligations of the Company. The obligations of
the Company under this Agreement are subject to the accuracy of the
representations and warranties of the Investor and the Members made in Section 4
hereof in all material respects, and to the
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performance by the Investor and the Members of their other obligations under
this Agreement to be performed at or prior to the Closing.
10. Rule 144. The Company covenants that it will file the reports
required to be filed by it under the Act and the Exchange Act and the rules and
regulations adopted by the Commission thereunder (or, if it ceases to be
required to file such reports, it will, upon the request of the Investor, make
publicly available other information that fulfills the information requirements
set forth in Rule 144 (c) (2)), and it will take such further action as the
Investor may reasonably request, all to the extent required from time to time to
enable the Investor to sell the Common Stock without registration under the Act
within the limitation of the exemptions provided by (a) Rule 144 under the Act,
as such Rule may be amended from time to time, or (b) any similar rule or
regulation hereafter adopted by the Commission. Upon the request of the
Investor, the Company will deliver to it a written statement as to whether the
Company has complied with such information disclosure and other requirements.
11. Expenses. The Company agrees that it will pay in the aggregate
up to $25,000 of the Investor's and the members' legal and other expenses
incurred in connection with this Offering. All expenses of the Investor or any
member in excess of $25,000 shall be borne solely by them.
12. Notices.
(a) Any notice required to be given or delivered to the
Investor or the Members shall be mailed first class, postage prepaid, return
receipt requested, to the Investor's address shown on the signature page hereof.
(b) Any notice required to be given or delivered to the
Company shall be mailed first class, postage prepaid, return receipt requested,
to:
U.S. Energy Systems, Inc.
000 X. Xxxxxxx Xxxxx, Xxxxx 000
X. Xxxx Xxxxx, XX 00000
Attn: Xxxxxxx X. Xxxxxx, President and CEO
13. Break-up Fee. The Company shall pay the Investor a break-up
fee (the "Break-up Fee") in the amount of $100,000 if the Company refuses for
reasons within its control to issue the Preferred Stock to the Investor as set
forth herein, and engages in a corporate financing transaction with another
investor within 90 days of the termination of the Offering.
14. Survival of Representations and Warranties. All
representations and warranties and agreements hereunder shall survive execution
of this Agreement and delivery of the Securities.
15. Governing Law. This Agreement and the rights and obligations
of the parties shall be governed by and construed in accordance with the laws of
the State of Delaware applicable to contracts made and to be performed wholly
within that State.
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IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement as of the date first above written.
ENERGY SYSTEMS INVESTORS LLC, a
Delaware limited liability company
By: /s/ Xxxxxxxx X. Xxxxxxxxx
Xxxxxxxx X. Xxxxxxxxx, Manager
The terms of the foregoing including the
subscription described therein are agreed to
and accepted on this 20th day of March, 1998:
U.S. ENERGY SYSTEMS, INC.
By: /s/ Xxxxxxx X. Xxxxxx
Xxxxxxx X. Xxxxxx, President and CEO
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