<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 71-06757581
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
801 N. JEFFERSON STREET JOE G. BROOKS
SPRINGDALE, ARKANSAS 72764 801 N. JEFFERSON STREET
(501) 750-1299 SPRINGDALE, ARKANSAS 72764
(ADDRESS OF REGISTRANT'S PRINCIPAL (501) 750-1299
EXECUTIVE OFFICES) (NAME, ADDRESS AND TELEPHONE NUMBER
OF AGENT FOR SERVICE)
COPIES OF COMMUNICATIONS TO:
J. PATRICK RYAN, ESQ.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
1500 NATIONSBANK PLAZA
300 CONVENT STREET
SAN ANTONIO, TX 78205
(210) 270-0800
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time to
time after the effective date of this Registration Statement as determined by
market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUMAGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock,
($.01 Par Value)............... 4,334,000(2) $0.41 $1,776,940 $525
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</TABLE>
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(1) Calculated pursuant to Rule 457(c) and solely for the purpose of
determining the registration fee, based on the average high and low sales
price per share, as reported by NASDAQ SmallCap Market System on December
15, 1997.
(2) Represents up to 850,000 shares (the "Interest Shares") of the Company's
Class A Common Stock, par value $0.01 per share ("Common Stock"), issuable
as quarterly interest payments upon $1.3 million aggregate principal
amount of 12% Promissory Notes due July 27, 1998 (extendable at the
Company's option to October 30, 1998) (the "Notes") and up to 3,484,000
shares of Common Stock issuable upon the exercise of certain stock
purchase warrants (the "Warrants") issued by the Company and, pursuant to
Rule 416 of the Securities Act of 1933, as amended (the "Securities Act"),
also includes an indeterminate number of shares of Common Stock which may
become issuable: (A) with respect to the Interest Shares or upon exercise
of the Warrants to prevent dilution resulting from stock splits, stock
dividends or similar transactions and (B) pursuant to the Notes by reason
of increases in the interest rates applicable thereto and/or the amount of
interest payable thereon and by reason of reductions in the market price
of the Company's Common Stock.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THAT THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 18, 1997
PROSPECTUS
UP TO 4,334,000 SHARES
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
CLASS A COMMON STOCK
($.01 PAR VALUE PER SHARE)
-----------
This Prospectus relates to an aggregate of up to 4,334,000 shares (the
"Shares") of Class A Common Stock, par value $.01 per share ("Common Stock") of
Advanced Environmental Recycling Technologies, Inc. (the "Company" or "AERT")
which may be offered from time to time by the selling stockholders named herein
(the "Selling Stockholders"). See "Selling Stockholders." The Shares are
issuable from time to time by the Company to the Selling Stockholders as
follows:
(i) up to 850,000 Shares (the "Interest Shares") issuable as quarterly
interest payments upon $1.3 million aggregate principal amount of 12%
Promissory Notes due July 27, 1998 (extendable at the Company's option to
October 30, 1998) (the "Notes"), issued to certain of the Selling
Stockholders (the "Noteholders") in connection with a private placement of
securities pursuant to a Note Purchase Agreement entered into as of October
30, 1997, between the Company and the Noteholders (the "Note Purchase
Agreement"), (as described herein, the actual number of Interest Shares that
are issued will depend on the average closing bid price of the Common Stock
prior to each quarterly payment);
(ii) up to 234,000 Shares (the "Private Placement Warrant Shares")
issuable upon the stock purchase warrants (the "Private Placement Warrants")
issued and issuable hereafter to certain of the Selling Stockholders
pursuant to a Placement Agency Agreement dated October 30, 1997 executed
with The Zanett Securities Corporation (the "Placement Agent") pursuant to
the Note Purchase Agreement; and,
(iii) up to 3,250,000 Shares (the "Consulting Shares") issuable upon the
exercise of stock purchase warrants (the "Consulting Warrants") issued to
certain Selling Stockholders pursuant to a Consulting Agreement dated
October 30, 1997 with Bruno Guazzoni (the "Consultant"), one of such Selling
Stockholder.
This prospectus also covers, pursuant to Rule 416 of the Securities Act of
1933, as amended (the "Securities Act"), the offer and sale by the Selling
Stockholders of any and all shares of Common Stock which may become issuable
with respect to the Interest Stock, or upon exercise of the Private Placement
Warrants and the Consulting Warrants to prevent dilution resulting from stock
splits, stock dividends and similar transactions and pursuant to the Notes by
reason of increases in the interest rate applicable thereto and/or the amount
of interest payable thereon and by reason of reductions in the average closing
bid price of the Common Stock.
The Company will receive proceeds, under certain conditions, only upon the
exercise of the Private Placement Warrants and the Consulting Warrants and will
not receive any of the proceeds from the sale of the Shares by the Selling
Stockholders. See "Use of Proceeds".
The Company's Common Stock is traded in the over-the-counter market under the
NASDAQ SmallCap Market under the symbol "AERTA". On December 15, 1997 the last
reported sale price of the Common Stock, as reported by the NASDAQ SmallCap
Market System was $0.41 per share.
-----------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
SEE "RISK FACTORS"
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1998.
<PAGE>
The Shares covered under the Registration Statement of which this Prospectus
is a part may be offered and sold from time to time by the Selling Stockholders
in the open market, on the NASDAQ SmallCap Market, in privately negotiated
transactions, as an underwritten offering, or in a combination of such methods,
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices, or at negotiated prices. The Shares are intended to
be sold through one or more broker-dealers or directly to purchasers. Such
broker-dealers may receive compensation in the form of discounts, concessions,
or commissions from the Selling Stockholders and/or the purchasers of the
Shares for whom such broker-dealers may act as agent or to whom they may sell
as principal, or both (which compensation as to a particular broker-dealer may
be in excess of customary commissions). The Selling Stockholders and any
broker-dealers acting in connection with the sale of the Shares hereunder may
be deemed to be "'underwriters" within the meaning of Section 2(11) of the
Securities Act, and any commissions received by them and any profits realized
by them on resale of the Shares as principals may be deemed underwriting
compensation under the Securities Act. See "Selling Stockholders" and "Plan of
Distribution".
The Company has agreed to bear the expenses incident to the offer and sale of
the Shares to the public, including the costs associated with the registration
of the Shares under the Securities Act and preparing and printing this
Prospectus. Underwriting commissions and broker fees, however, as well as any
applicable transfer taxes, are payable individually by the Selling
Stockholders. The Company and the Selling Stockholders have agreed to indemnify
each other against certain liabilities, including liabilities under the
Securities Act.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy statements, and other information with
the Securities and Exchange Commission (the "SEC") relating to its business,
financial statements, and other matters. The Company has filed a Registration
Statement on Form S-3 (the "Registration Statement") under the Securities Act,
with the SEC covering the Shares of Common Stock to be sold pursuant to this
Prospectus. As permitted by the rules and regulations of the SEC, this
Prospectus omits certain information, exhibits, and undertakings contained in
the Registration Statement. Reference is made to the Registration Statement and
to the exhibits thereto for further information. Statements contained in this
Prospectus relating to the contents of any contract or other document referred
to herein or therein are not necessarily complete and, in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement or such other document. Each such statement is qualified
in its entirety by such reference.
Reports, proxy and information statements filed by the Company with the
Commission pursuant to the information requirements of the Exchange Act may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at the
following Regional Offices of the Commission: New York Regional Office, Seven
World Trade Center, 13th Floor, New York, New York 10048; Los Angeles Regional
Office, Suite 1100, 5670 Wilshire Boulevard, Los Angeles, California 90036; and
Chicago Regional Office, 500 W. Madison Street, 4th Floor, Chicago, Illinois
60661. Copies of such material may be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W. Washington, D.C. 20549, at
prescribed rates. The Commission also maintains a site on the World Wide Web at
http://www.sec.gov that contains reports, proxies and information statements
and other information regarding registrants (including the Company) that file
electronically. In addition, reports, proxy statements and other information
concerning the Company can be inspected and copied at the offices of NASDAQ,
Report Section, 1735 K Street, N.W., Washington, D.C. 20006.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROSPECTUS INCORPORATES CERTAIN DOCUMENTS BY REFERENCE, WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (WITHOUT EXHIBITS
UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE
WITHOUT CHARGE TO EACH PERSON TO WHOM A COPY OF THIS PROSPECTUS IS DELIVERED,
UPON WRITTEN OR ORAL REQUEST TO JOE G. BROOKS, PRESIDENT, ADVANCED
ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC., 801 N. JEFFERSON STREET,
SPRINGDALE, ARKANSAS 72764 (501) 750-1299.
The following documents previously filed by the Company with the SEC are
incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
2. The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997;
3. The Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997;
4. The Company's Quarterly Report on Form 10-Q of the quarter ended
September 30, 1997; and
5. The "Description of Securities" on pages 37 through 40 in Amendment No. 1
to Registration Statement on Form S-1 filed August 24, 1989 (No. 33-29595)
incorporated by reference in the Company's Registration Statement on Form
8-A filed October 23, 1989 (No. 1-10367).
The information relating to the Company contained in this Prospectus does not
purport to be comprehensive and should be read together with the information in
the documents incorporated by reference.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to termination of the offering of the Shares shall be deemed to be
incorporated by reference and to be a part of this Prospectus from the date of
filing of such document. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for the purpose of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any statement so modified or superseded shall not
be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus has been delivered, upon the oral or
written request of such person, a copy of any and all of the documents
incorporated herein by reference (other than exhibits to such documents,
unless specifically incorporated by reference). Such requests for copies
should be directed to Joe G. Brooks, President, Advanced Environmental
Recycling Technologies, Inc., 801 N. Jefferson Street, Springdale, Arkansas
72764 (501) 750-1299.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. Capitalized terms not
defined in the summary are defined elsewhere herein.
THE COMPANY
The Company manufactures and markets a line of engineered composite building
material products that exhibit superior moisture resistance and dimensional
stability, as well as, several other unique properties over traditional wood
products. The Company's products have been extensively tested and used by
several leading national companies. The Company primarily utilizes waste wood
fiber and reclaimed polyethylene plastic as its raw material sources. The
Company markets its products under the trade names MoistureShield (TM) and
ChoiceDek (TM) and its sales are now primarily focused towards the following
three market areas which are currently supplied by the Company's composites
manufacturing facility in Junction, Texas: (1) components for the national door
and window market, (2) the heavy industrial flooring market as floor blocks for
industrial applications, and (3) as decking components for commercial and
residential applications through Weyerhaeuser. The Company is currently
expanding its manufacturing capabilities with the addition of a second
composite manufacturing and plastic reclamation facility in Springdale,
Arkansas.
THE OFFERING
<TABLE>
<C> <S>
Shares Offered................... Up to 4,334,000 shares of Common Stock.
Use of Proceeds.................. The Company will not directly receive any
proceeds from the Shares being offered by
the Selling Stockholders, nor will any such
proceeds be available for use by it or for
its benefit; however, the Company could
receive proceeds from the exercise of the
Warrants to which certain of such Shares
relate. See "Risk Factors--Notes, Warrants
and Options; Dilution" and "Selling
Stockholders" for a description of the
Warrants, including the exercise price
thereof. Any such proceeds received by the
Company upon exercise of Warrants will be
used for general corporate and working
capital purposes.
NASDAQ Symbol.................... AERTA.
</TABLE>
RISK FACTORS
An investment in the Shares involves a high degree of risk. Each prospective
purchaser of the Shares should review "Risk Factors" for a discussion of
certain factors that should be considered in connection with an investment in
the Shares.
4
<PAGE>
RISK FACTORS
An investment in the Company's securities involves a high degree of risk.
Prior to making an investment, prospective investors should carefully consider
the following factors, among others, and seek professional advice in analyzing
this offering. In addition, this Prospectus and the documents incorporated
herein by reference contain certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Such forward-looking statements, which are often identified by words such
as "believes," "anticipates," "expects", "estimates," "should," "may," "will"
and similar expressions, represent the Company's expectations or beliefs
concerning future events. Numerous assumptions, risks and uncertainties,
including the factors set forth below, could cause actual results to differ
materially from the results discussed in the forward looking statements.
Prospective purchasers of the Shares should carefully consider the factors set
forth below, as well as the other information contained herein or in the
documents incorporated herein by reference.
FINANCIAL POSITION OF THE COMPANY, WORKING CAPITAL DEFICIT; REPORT OF
INDEPENDENT AUDITORS
The Company through September 30, 1997 had only generated aggregate sales
revenues of $25,052,815 since inception in December 1988. ($6,115,592 for the
nine months ended September 30, 1997). At September 30, 1997, the Company had
a working capital deficit of $1,883,364 and had incurred cumulative losses
from inception on December 2, 1988 through September 30, 1997 of $18,940,428
($302,690 for the nine months ended September 30, 1997). The Company has not
yet generated operating income from operations, nor is there any assurance
that the Company will achieve future revenue levels and operating efficiencies
to support existing operations, generate positive cash flow from operations or
recover its investment in its property, plant and equipment. The Company
expects to continue to incur losses through the fourth quarter of 1997 and
there can be no assurance that such losses will not continue thereafter. The
success of the Company's operations are largely dependent upon its ability to
maintain and improve operating efficiencies and overall production capacity,
generate substantial sales revenues and generate adequate cash-flows from
operations, as to which there can be no assurance. The Company has recently
increased its manufacturing efforts through expanded production, is building a
second manufacturing facility, and is currently experiencing a backlog in
purchase orders and projects pending already received from certain composites
customers. However, the Company's operations are subject to numerous risks
associated with the continued establishment of its business, including lack of
adequate financing sources, competition from numerous large, well-established
and well-capitalized competitors who manufacture products for the same
applications. In addition, the Company has in the past and may again in the
future encounter unanticipated problems, including manufacturing, distribution
and marketing difficulties, some of which may be beyond the Company's
financial and technical abilities to resolve. The failure to adequately
address such difficulties could have a materially adverse effect on the
Company's prospects.
The independent accountant's report on the Company's financial statements
for the year ended December 31, 1996 contains an explanatory paragraph
regarding the Company's ability to continue as a going concern. See Report of
Independent Accountant's contained in, and Note 2 to, the Financial Statements
for the year ended December 31, 1996 and Note 3 to the Company's Interim
Financial Statements contained in its Quarterly Reports on Form 10-Q for the
quarters ended March 31 and June 30, and September 30, 1997, respectively,
which are incorporated by reference herein.
NEED FOR ADDITIONAL FINANCING
Substantially all of the Company's working capital and capital improvement
needs for the preceding twelve months have been met from proceeds of
approximately $1.3 million in additional debt financing obtained during 1997,
and of $2 million obtained from equity private placements during 1996 and
1997. Substantially all of the proceeds from such financings have been
expended by the Company. The Company has been primarily dependent, until
recently, on financing from a major stockholder, and there is no assurance
that such support can continue. In particular the Company has been dependent
over the last twelve months on the fund raising efforts
5
<PAGE>
of its President with accredited investors. See Note 5 to the Financial
Statements for the year ended December 31, 1996, which is incorporated by
reference herein. The Company maintains an accounts receivable factoring
agreement for up to $700,000 through a related party. The terms of this
agreement call for the factor to advance 99.12% of the total of invoices
presented by the Company and for the Company to indemnify the factor against
loss of the amounts advanced. The Company as of September 30, 1997 also owed
$1,004,805 to a major stockholder, of which $552,194 was classified as long-
term debt.
The Company recently secured a bridge loan from certain of the Selling
Stockholders, all of whom were accredited investors, during October 1997,
which provided approximately $1.3 million of additional cash for expansion and
limited corporate purposes through November 1997. Pursuant to the Placement
Agreement, the Company has also granted to the Placement Agent a two-year
option to offer and place on behalf of the Company an additional $2,200,000 in
aggregate principal amount of promissory notes (the "Additional Notes"); the
terms of such Additional Notes may vary from the terms of the Notes, but shall
provide that, unless extended by the Company at its option, the Additional
Notes shall mature and become payable on a date 270 days from the date of
initial issuance thereof. In addition, subject to certain exceptions, the
Placement Agent has rights to approve and/or participate in future debt or
equity financings by the Company for a two-year term. Such rights could have
an adverse effort on the Company's ability to obtain additional financing. In
the event that the Placement Agent exercises its option to offer and place the
Additional Notes, the Placement Agent will be entitled to receive a 10%
placement agent fee and 3% nonaccountable expense allowance based on the
aggregate gross proceeds to the Company from the sale of the Additional Notes
and the Placement Agent and the Consultant will be entitled to receive
additional Warrants. See "Risk Factors--Notes, Warrants and Options;
Dilution."
The Company is also currently pursuing low interest bond financing from a
state economic development agency, and a working capital line of credit with a
major financial institution. There can be no assurance that the Company will
be successful in its efforts to secure additional financing.
The Company currently does not have additional commitments for financing
beyond the sources described immediately above and revenues have not
historically been sufficient to support operational needs. Although the
Company believes that if it can maintain its current production rates and
efficiencies it will be able to achieve a level of operations sufficient to
support its operations for the next twelve months, there can be no assurance
that such production rates or efficiencies will be maintained or that the
Company will not encounter unanticipated difficulties in its manufacturing
processes which adversely affects such rates or efficiencies. Further,
continued improvements in production efficiency and capacity will be required
for the Company to increase sales levels to those necessary to attain
profitable results of operations and provide funds to repay the Company's
outstanding obligations, approximately $3.2 million of which represent short-
term indebtedness.
Proceeds from the Company's financing sources have been largely expended.
Accordingly, if the Company cannot generate sufficient cash flow from existing
operations, it could be dependent in the near future on additional debt or
equity financing, as to which there can be no assurance. Should the Company be
unable to secure additional financing, the Company's operations would be
materially adversely affected, and in particular the Company's operations
might be delayed or discontinued until such time, if ever, as funds are
generated in order to resume operations. There can be no assurance that
current or prospective purchasers of the Company's products would accept any
such delay or that they would not locate alternative supply sources.
Accordingly, the long-term success of its operations hereafter may depend
upon cash flow from operations and the Company's success in raising additional
funds, if necessary, through equity or debt financing. There is no assurance
that required additional financing can be obtained, or obtained on terms
satisfactory to the Company.
6
<PAGE>
LEGAL PROCEEDINGS
In June 1992, Mobil Oil Corporation ("Mobil") commenced an action against the
Company in the United States District Court for the District of Delaware
entitled Mobil Oil Corporation v. Advanced Environmental Recycling
Technologies, Inc. In its complaint, Mobil sought entry of a declaratory
judgment that: (a) AERT is without right or authority to threaten suit against
Mobil or its customers for alleged infringement of AERT patents; (b) certain
key AERT patents relating to composite manufacturing are invalid and
unenforceable, and (c) Mobil has not infringed the AERT patents through any
products or method. Mobil sought no monetary damages in this suit, but does
seek reimbursement of its attorneys' fees.
The Company denied Mobil's claims and asserted counterclaims against Mobil
and three Mobil executives for: (1) an illegal combination or contract in
restraint of trade in violation of federal antitrust laws; (2) a pattern of
intentional misconduct constituting an attempt to monopolize in violation of
federal antitrust laws; (3) breach of a confidential relationship between Mobil
and the Company; and (4) unfair competition. The Company sought monetary
damages, punitive damages and injunctive relief. The Delaware Court then
bifurcated the trial into patent and non-patent issues and ordered the patent
issues tried first.
In February 1994, after a trial on the patent issues, a Delaware jury
returned a verdict that four AERT patents on its composite product technology
were invalid. The jury also determined that Mobil had not infringed two of the
four patents. The jury verdict answered a number of interrogatories on the
factual issues, and rendered advisory findings for the Court on Mobil's
allegation that AERT had obtained its patents by inequitable conduct.
Thereafter, the Judge adopted the jury's advisory findings on inequitable
conduct and held that each of the four AERT patents were unenforceable for
failure to disclose certain alleged prior art to the patent office during
patent prosecution. Because of the nature of certain of the jury verdict
interrogatory responses, AERT's counsel concluded that the verdict was
adversely affected by improper conduct by Mobil counsel during trial, and false
statements of law and fact made during closing argument, that caused the jury
to misapply the law on inequitable conduct and to render clearly erroneous
findings. Consequently, AERT moved for a new trial. That motion was denied. The
Company's additional post-trial motions were also denied by the Delaware Court.
On March 14, 1995, the Company filed a sealed motion with the Court based upon
newly discovered evidence, which alleges prejudicial misconduct by Mobil prior
to the trial. The motion also brings to the Court's attention, evidence which
the Company believes was intentionally withheld from it in direct defiance of
the Delaware Court's January 4, 1994 Motion to Compel, prior to the trial. It
also brings to the Court's attention, an official government safety approval
document which was altered prior to submission to AERT during pre-trial
discovery, which also relates to a portion of the alleged withheld discovery
documentation. The motion seeks further discovery into Mobil's misconduct, and
a new trial. In December 1995, the Company also moved to supplement its pending
March 14, 1995 Motion with alleged additional tampered evidence and discovery
misconduct by Mobil. The March 14, 1995 Motion is currently stayed before the
Delaware Court. The Company filed an appeal with the U.S. Court of Appeals in
July 1995 on the initial trial arguments. In June 1996, the U.S. Court of
Appeals reversed a portion of the earlier ruling that two of the patents were
invalid, and that Mobil did not infringe. The Company did not further appeal
this issue to the Supreme Court. Should the Delaware Court deny the Company's
pending Prejudicial Misconduct Motion, the Company intends to follow-up with an
additional appeal on these issues. Should the Court not rule in favor of the
Company on such motions, the Company intends to pursue all appellate processes
available. There can be no assurance that the Company will receive a more
favorable outcome upon appeal.
In August 1994, Mobil filed a motion seeking an award of attorneys' fees and
costs in the amount of $2.7 million. In November 1994, the Court ruled that the
motion was premature and would not be considered and such motion is currently
stayed. The Company will vigorously defend against Mobil's claim for attorneys
fees and costs, however, there can be no assurances as to the outcome of this
litigation. The Company at present cannot predict when the Mobil motion for
attorney's fees and the AERT prejudicial misconduct motion for a new trial will
be addressed by the Delaware Court. The Company has not recorded any liability
related to such litigation at September 30, 1997. Mobil divested its composite
business in late 1996, and no longer directly competes with the company.
7
<PAGE>
In a related matter, the Company in July 1997, received a favorable response
from the United States Patent and Trademark Office concerning a related
product by process patent application which has been pending throughout the
Mobil litigation. This is an application, which was filed on the same date as
those currently in litigation, although substantial additional disclosures
have been made. Allowance of this patent could have a positive impact for the
Company in regard to the motions currently stayed before the Delaware District
Court, as well as business in general.
REDUCTIONS IN CONSTRUCTION ACTIVITY
AERT engineered composites have been previously marketed primarily to
companies that manufacture products for use by the construction industry in
new home construction and home improvement work. The construction industry is
subject to significant fluctuations in activity and to periodic downturns
caused by general economic conditions. Single housing construction starts were
steady over the proceeding year and there was good demand for door and window
components from the Company. Reductions in construction activity could have an
adverse effect on the demand for AERT composites in the door and window
market. The Company's decking line is primarily targeted to the remodeling
market.
The Company believes significant demand now exists for its products and by
broadening its composites sale base it can reduce the effects that reductions
in construction activity would have on the Company.
LIMITED MANUFACTURING CAPABILITIES
Although the Company has exited the development stage and has substantially
completed development of its commercial manufacturing processes at its
Junction, Texas facility, the long-term success of the Company's operations
will depend upon the manufacture of AERT composite products on a substantially
greater commercial scale than the Company has engaged in to-date. The Company
currently only has one composite manufacturing facility, although the Company
is currently constructing a second composite manufacturing facility in
Springdale, Arkansas. There can be no assurance the Company will prove able to
expand its operations to the extent required or achieve improved operational
efficiencies, and in particular, increased throughputs and or capacities in
order to realize profitable operations, even assuming the availability of
adequate financing and customer demand for its products. The Company's primary
customers and markets are large and increased sales growth will require
significant capital expenditures. There can be no assurance that financing can
be obtained to expand existing or build additional manufacturing facilities or
that, if obtained, they could become operational in a timely manner.
DEPENDENCE ON KEY CUSTOMERS
The Company limited its initial marketing to prospective customers that are
major industrial companies with large market shares nationwide in the building
material and door and window construction industries. A few large door and
window construction companies have purchased substantially all of the
Company's Moistureshied (TM) product since inception. Additional customers for
the Company's Moistureshield (TM) products are now coming on-line or are in
the early stages of their commercial use of such products and there can be no
assurance of their continuing interest or support regarding ongoing production
delays by the Company. A division of Weyerhaeuser, one of the world's largest
forest products companies is engaged with the Company and is the marketing and
distribution channel of ChoiceDek (TM), the residential decking material
produced from the Company's composite manufacturing facility. These large
customers are key to the Company's success. Although the Company's composites
customers have indicated to the Company that it is their intention to purchase
products from the Company on a regular basis and in substantial volumes,
assuming current product quality and pricing levels can be achieved
commercially and that volume requirements can be met, none of such key
customers is contractually obligated to purchase a substantial amount of
additional products from the Company. These companies and other prospective
customers with which the Company has dealt have high quality standards, and
require elaborate and extensive testing for new products, component parts,
and/or services. Those that account for more than 10% of sales for the current
year are Carolina Builders Corporation, ThermaTru Corporation and
Weyerhaeuser. The Company could be materially adversely affected if it were to
lose one or more of its large existing customers.
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PATENTS AND PROTECTION OF TECHNOLOGY
The Company's composite materials manufacturing process and its waste
plastics reclamation technologies involve many proprietary trade secrets, as
well as certain methods, processes and equipment designs for which the Company
has sought and received patent protection. Although the Company has taken
measures to safeguard its trade secrets by limiting access to its manufacturing
facility and requiring confidentiality and nondisclosure agreements of
employees and third parties, there can be no assurance that its trade secrets
will not be disclosed or that others will not independently develop comparable
or superior technology. The Company has filed seventeen patent applications and
has received issuance from the United States Patent and Trademark Office for
thirteen patents, five of which relate to the Company's composite materials
manufacturing operations and eight of which relate to its waste plastics
reclamation technologies. However, four composite patents were recently
challenged by Mobil Oil Corporation and found invalid. (See "Legal
Proceedings"). Two were later restored upon appeal. The cost of litigation to
preserve proprietary rights is high and in the past has strained the financial
resources of the Company as well as impeded sales growth. Further, to the
extent that employees, consultants or other third parties working with the
Company develop new technology, disputes may arise as to the proprietary rights
to such technology which may not be resolved in favor of the Company.
GOVERNMENT REGULATION
The Company at present is able to incorporate a substantial majority of the
waste plastic feedstocks it receives into its composite materials manufacturing
and plastic reclamation processes without significant waste disposal problems
of its own. However, its current supply sources are relatively homogeneous and
consistent, and there can be no assurance that in the future continuing
regulations will not adversely affect the Company's operations or require the
introduction of costly additional manufacturing or waste disposal processes.
Certain customers have expressed interest in the Company's products because
use of the Company's products could reduce the sawdust or other solid waste
generated by such customers' operations. The Company believes that the demand
for its products and technology could be decreased if there is a lessening of
public concern or government pressure on private industries and municipal solid
waste disposal authorities to deal with solid waste disposal problems. Further,
the Company believes that a lessening of environmental concerns could reduce
the rate at which plastics are recycled, which ultimately could have the effect
of increasing the Company's cost of raw materials for its manufacturing
operations.
Although state and federal legislation currently provide for certain
procurement preferences for recycled materials, such preferences for materials
containing waste plastics are dependent upon the eventual promulgation of
product or performance standard guidelines by state or federal regulatory
agencies. Such guidelines for recycled plastic building materials may not be
released or, if released, the product performance standards required by such
guidelines may be incompatible with the Company's manufacturing capabilities.
COMPETITION
In seeking to market AERT composites as alternative building materials to
high grade western pine and other woods, aluminum, high-performance plastics
and other construction materials, the Company competes with major forestry
product companies and aluminum fabricating companies. The conventional material
manufacturers with which the Company must compete have, in many cases, long-
established ties to the building and construction industry and have proven
well-accepted products. Although the Company has recently entered into a
national marketing and distribution agreement with Weyerhaeuser, there are many
additional large competitors in this market.
Many large competitors also have research and development budgets, marketing
staffs and financial and other resources which far surpass the resources of the
Company. Several such competitors are currently attempting to develop and
introduce similar recycled composite materials. Competitive products currently
entering the market include Trex, TimberTech (TM) and Strandex. The Company
must also compete in the building materials market with certain other plastics
recyclers currently manufacturing recycled materials intended for similar
building material applications, including decking and fencing. None of such
recyclers, to the Company's knowledge, have achieved significant commercial
acceptance to-date.
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The Company competes for certain raw materials with other plastics recyclers,
or plastic resin producers, most of which are far larger and better established
than the Company. However, management believes that its focus towards sources
of contaminated polyethylene films that it recycles and uses in its composites
business are less attractive to most producers of recycled plastics. As a
result, the Company has not historically experienced significant competition
for such raw materials. Further, the Company believes that the plastics
reclamation processes it has developed for its composites manufacturing
business are able to source raw materials from industrial waste, plastic film
waste and other plastic waste generators whose potential as a recycling source
is not being significantly utilized by conventional plastics recyclers who
primarily rely on post-consumer, source-separated plastic container recycling
processes such as HDPE milk containers. The Company expects new entrants into
the plastics reclamation business which could effect the Company's source of
raw materials supply and who may have substantially greater financial and other
resources than the Company. Such entrants may include beverage bottlers,
distributors and retailers as well as forestry product, petrochemical and other
companies.
FIRE DISRUPTIONS
The Company experienced a series of fires over the past several years, which
has severely disrupted its manufacturing operations. In 1996, the Company
experienced two fires at its Rogers, Arkansas plastic reclamation facility,
which were ruled arson by authorities. The pattern of continued fires caused
the Company's fire insurance to be cancelled. The Company was able to renew its
fire insurance, but at a substantially higher rate. The Company has increased
security and added armed guards at the facilities. However, another major fire
or similar disruptions could materially adversely affect the Company.
RELIANCE UPON MANAGEMENT AND QUALIFIED TECHNICAL ASSISTANCE
The Company is substantially dependent upon the personal efforts and
abilities of Joe G. Brooks, its President, Grant Martin, its Chief Operating
Officer, and J. Douglas Brooks, its Vice President of Recycled Plastics, and a
limited number of corporate and technical staff who devote all of their
business time to the affairs of the Company. The Company has also obtained a
$1,000,000 "key man" life insurance policy on the life of Joe G. Brooks. The
loss of the services of one or more of these persons could have a material
adverse effect upon the Company's activities. The Company is also dependent
upon the continuing availability of capable independent engineering services
and other technical assistance. There is no assurance that it will be able to
locate, maintain, and/or obtain such necessary technical assistance from time
to time.
VOTING CONTROL BY MANAGEMENT
At September 30, 1997, the Company's directors and officers in the aggregate
beneficially owned 13,324,214 shares of Class A Common Stock (which amount
includes shares underlying outstanding options and Warrants which such
directors and officers have the right to acquire within sixty days) and
1,358,157 shares of Class B Common Stock, which constituted approximately 31%
and 92.7% of the Class A Common Stock and Class B Common Stock, respectively,
and approximately 45% of the combined general voting power of the Company.
Accordingly, such persons will be able to elect all of the Company's directors
and otherwise control the Company. Holders of Class B Common Stock and Class A
Common Stock will generally vote together as a single class upon matters
submitted to a vote of stockholders, though the holders of Class B Common Stock
will be entitled to five votes per share of Class B Common Stock while holders
of Class A Common Stock will be entitled to only one vote per share. Although
no voting agreement exists among the holders of Class B Common Stock, because
of the family and prior business relations among such stockholders it may be
anticipated that Class B stockholders will often vote the same way on matters
requiring stockholder approval or authorization. The Class B stockholders have
entered into a Right of First Refusal Agreement among themselves granting such
stockholders a right to purchase Class B Common Stock on a pro rata basis from
any Class B stockholder desiring to sell such shares.
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NOTES, WARRANTS AND OPTIONS; DILUTION
On November 9, 1989, the Company completed a public offering of 1,250,000
units, at a price to the public of $4.00 per unit. In December 1989, the
Company sold an additional 100,000 units to the underwriter in the public
offering at the same price. Each unit consisted of three shares of Class A
Common Stock and three redeemable Class A Warrants, which were separable and
transferable immediately upon issuance. Each Class A Warrant entitled the
holder to purchase a unit consisting of one share of Class A Common Stock and
one Class B Warrant at an exercise price of $2.00. Each Class B Warrant
entitled the holder to purchase one share of Class A Common Stock at an
exercise price of $3.00. As a result thereof the Company has issued and
outstanding 4,212,740 shares of Class B Warrants. The Board of Directors has
extended the expiration date of the outstanding Class B Warrants to January 1,
1998.
In July 1993, the Company completed a $1.2 million private placement by
issuing $650,000 in short-term notes, due June 29, 1994 and 650,000 Class C
Warrants. Certain of such notes and Class C Warrants were issued to related
parties, including the Company's major stockholder. The Class C Warrants,
which are exercisable ratably into one share of Class A Common Stock at an
exercise price of $3.00 per share, expire on June 29, 1998. In consideration
of other financing and support provided by Marjorie S. Brooks, the expiration
date of 325,000 Class C Warrants was extended by the Board of Directors to
June 2003. In May 1994, $600,000 of such notes were converted into Class A
Common Stock as a portion of the consideration for a May, 1994 private
placement offering described below.
In May 1994, the Company completed a private placement offering at market
price to certain affiliated stockholders and noteholders with the issuance of
3,468,400 shares of Class A Common Stock, 3,468,400 Class F Warrants, and
3,468,400 Class G Warrants. Net offering proceeds of approximately $2,065,000
were received by the Company, consisting of $2,020,000 conversion of debt and
accrued interest and $45,000 in cash. The Class F and Class G Warrants expire
five years from the date of issuance and are exercisable at a price of $.61
and $.92 per share, respectively, for each share of Class A Common Stock
purchased. In consideration of other financing and support provided by
Marjorie Brooks, the expiration dates of 856,094 Class F Warrants and
2,986,590 Class G Warrants were extended by the Board of Directors to June
2004.
In 1995, in connection with an extension of a line of credit to the Company
by its major stockholder the Company's Board of Directors authorized the
issuance of up to 2,000,000 of Class H Warrants on a one-for-one basis for
each dollar advanced under the loan agreement and having an exercise price
equal to the per share market value of the Company's Class A Common Stock on
the date of such advances. While no, Class H Warrants have been issued as of
the date of this Prospectus, all authorized Class H Warrants are currently
issuable and are expected to be issued in the near future. Upon issue, the
Class H Warrants will be exercisable at prices from $.39 to $.49 per share of
Class A Common Stock for each Class H Warrant exercised. The Class H Warrants
will expire in February 2005.
In May 1996, the Company completed a private placement offering with the
issuance of 338,624 shares of Class A Common Stock. Net offering proceeds
consisted of $200,000 in cash.
In 1996 and 1997, the Company issued 8,933,763 shares for $2,060,000 net
proceeds to accredited institutional investors under a Regulation S exemption.
As part of said transaction, the Company issued 393,344 warrants at prices
ranging from $0.31 to $1.125 to the stock placement agents.
In October 1997, the Company issued $1.3 million aggregate principal amount
of 12% Promissory Notes due July 27, 1998 (extendable at the Company's option
to October 30, 1998) in a private placement to certain of the Selling
Stockholders. Quarterly interest on the Notes is payable in shares of Common
Stock, valued at the average closing bid price over the ten days prior to each
such interest payment date. Concurrently with the Note Purchase Agreement, the
Company issued Private Placement Warrants to the Placement Agent, 156,000 of
which Private Placement Warrants are outstanding as of December 15, 1997. The
Private Placement Warrants are exercisable at a price of $0.375 per share
through October 30, 2002 and are subject to customary anti-dilution provisions
for stock splits, stock dividends, reverse stock splits, mergers or
consolidations, below market stock issuances and similar events. Also,
concurrently therewith, in October 1997 the Company entered into the
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Consulting Agreement with the Consultant pursuant to which the Consultant will
provide investment banking and general financial and strategic advisory
services during a five-year term. In consideration thereof, the Company
granted to the Consultant and one affiliated Selling Stockholder 2,540,000 and
60,000 Consulting Warrants, respectively. The Consulting Warrants are
exercisable at a price of $0.375 per share through October 30, 2002 and are
subject to customary anti-dilution adjustments similar to the Private
Placement Warrants.
Pursuant to the Placement Agreement, the Company also granted to the
Placement Agent a two-year option to offer and place on behalf of the Company
an additional $2,200,000 in aggregate principal amount of the Additional
Notes; the terms of such Additional Notes may vary from the terms of the
Notes, but will provide that, unless extended by the Company as its option,
the Additional Notes will mature and become payable on a date 270 days from
the date of initial issuance thereof. In the event that the Placement Agent
exercises its option to offer and place the Additional Notes, the Company will
deliver to the Placement Agent warrants, in substantially the form of the
Private Placement Warrants, to purchase such number of shares of the Company's
Common Stock as is equal to 12% of the aggregate purchase price of the
Additional Notes (as expressed in numerical rather than dollar terms) or in
the event that the term of the Additional Notes is extended, at the Company's
option, from 270 days to 365 days, such number of shares of Common Stock as is
equal to 18% of the aggregate purchase price of the Additional Notes (as
expressed in numerical rather than dollar terms) (in either case the
"Additional Placement Warrants"). In addition, in the event of the sale of
such Additional Notes, the Consultant would become entitled under the
Consulting Agreement to additional warrants, in substantially the form of the
Consulting Warrants, to purchase such number of shares of the Company's Common
Stock as is equal to 200% of the aggregate purchase price of the Additional
Notes (as expressed in numerical rather than dollar terms) or in the event
that the term of the Additional Notes is extended, such number of shares as is
equal to 250% of the aggregate purchase price of the Additional Notes (the
"Additional Consulting Warrants"). The Additional Placement Warrants and
Additional Consulting Warrants will be exercisable for a period of five years
from the date of issuance at a price per share equal to the average of the
closing bid prices (as defined) for the Common Stock during the five
consecutive trading days ending on the trading day immediately preceding the
closing date for the sale of the Additional Notes. The warrant shares issuable
upon exercise of the Additional Placement Warrants and Additional Consulting
Warrants will be considered "Registerable Securities" under the Registration
Rights Agreement executed with the Placement Agent and Consultant.
In addition to the Warrants described above, the Company has various stock
option plans which authorize the issuance of up to an aggregate of 3,909,000
shares of Class A Common Stock. At December 17, 1997, the Company had
outstanding stock options under such plans which provided for the purchase of
up to 3,909,000 shares of Class A Common Stock at exercise prices ranging from
$0.375-$3.00 per share, of which 2,262,332 were currently exercisable.
For the term of each of the warrants discussed herein, the holders thereof
will have, at a fixed cost, the opportunity to profit from a rise in the
market price of the Common Stock without assuming the risk of ownership, with
a resulting dilution in the interest of the other security holders. As long as
such warrants and options remain unexercised, the Company's ability to obtain
additional capital might be adversely affected. Moreover, the holders of such
warrants and options may be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain any needed capital through
a new offering of its securities on terms more favorable than those provided
in by warrants.
POTENTIAL ADVERSE EFFECT OF SUBSTANTIAL SHARES OF COMMON STOCK RESERVED.
Out of an authorized capitalization of 62,500,000 shares of capital stock,
including 50,000,000 of Class A Common Stock, as of December 15, 1997, there
were 19,954,858 shares of Common Stock and 1,465,530 shares of Class B Common
Stock outstanding (which are convertible into Common Stock and for which
1,465,530 shares of authorized but unissued Common stock have been reserved).
In addition, the Company has reserved a
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total of 28,037,006 shares of Common Stock for issuance as follows: (i)
12,618,839 shares for issuance upon exercise of the Series B -- Series K
Warrants described above; (ii) 3,909,000 shares for issuance pursuant to the
stock option plan described above, (iii) 2,129,167 shares for potential
issuance of Interest Shares; (iv) 630,000 shares for potential issuance
pursuant to Private Placement Warrants or Additional Private Placement
Warrants, and (v) 8,750,000 shares for potential issuance pursuant to
Consulting Warrants or Additional Consulting Warrants. The existence of the
warrants and options described herein and the unavailability of additional
shares of authorized Class A Common Stock may adversely affect the Company's
ability to consummate future equity financing. Further, the holders of such
warrants and options may exercise them at a time when the Company would
otherwise be able to obtain additional equity capital on terms more favorable
to the Company.
POTENTIAL INFLUENCE ON THE MARKET AND THE COMPANY.
A significant amount of the Shares offered hereby will be held by, and may
be sold to customers of the Placement Agent. If the Placement Agent
participates in the market, as a market maker or otherwise, the Placement
Agent may exert a dominating influence on the market for the Shares described
in this Prospectus. Such market making activity may be discontinued at any
time. The price and liquidity of the Common Stock may be significantly
affected by the degree, if any, of the Placement Agent's participation in such
market.
NO ASSURANCE OF NASDAQ SMALLCAP MARKET LISTING; RISK OF LOW-PRICED SECURITIES;
RISK OF APPLICATION OF PENNY STOCK RULES.
The Board of Governors of the National Association of Securities Dealers,
Inc. has established certain standards for the initial listing and continued
listing of a security on the Nasdaq SmallCap Market. The standards for initial
listing require, among other things, that an issuer have total assets of
$4,000,000 and capital and surplus of at least $2,000,000; that the minimum
bid price for the listed securities be $3.00 per share; that the minimum
market value of the public float (the shares held by non-insiders) be at least
$2,000,000; and that there be at least two market makers for the issuer's
securities. The maintenance standards require, among other things, that an
issuer have total assets of at least $2,000,000 and capital and surplus of at
least $1,000,000; that the minimum bid price for the listed securities be
$1.00 per share; that the minimum market value of the "public float" be at
least $1,000,000;and that there be at least two market makers for the issuer's
securities. A deficiency in either the market value of the public float or the
bid price maintenance standard will be deemed to exist if the issuer fails the
individual stated requirement for ten consecutive trading days. If an issuer
falls below the bid price maintenance standard, it may remain on the Nasdaq
SmallCap Market if the market value of the public float is at least $1,000,000
and the issuer has $2,000,000 in equity. The Nasdaq SmallCap Market has
recently proposed new maintenance criteria, which when implemented, would
eliminate the exception to the $1.00 per share minimum bid price and require,
among other things, $2,000,000 net tangible assets, $1,000,000 market value of
the public float and adherence to certain corporate governance provisions. The
Company has been formally notified by Nasdaq that it has until February 24,
1998 to bring the price of its stock up to a minimum $1.00 bid. As of December
10, 1997, the Company's closing bid price was $0.41. The Company's
stockholders, in August authorized a 6 for 1 reverse stock split. There can be
no assurance that the Company will continue to satisfy the requirements for
maintaining a Nasdaq SmallCap Market listing. If the Company's securities were
to be excluded from the Nasdaq SMALLCAP Market, it would adversely affect the
prices of such securities and the ability of holders to sell them, and the
Company would be required to comply with the initial listing requirements to
be relisted on the Nasdaq SmallCap Market.
If the Company is unable to satisfy maintenance requirements and the price
per share were to drop below $1.00, then unless the Company satisfied certain
net tests, the Company's securities would become subject to certain penny
stock rules promulgated by the SEC. The penny stock rules require a broker-
dealer, prior to a transaction in a penny stock not otherwise exempt form the
rules, to deliver a standardized risk disclosure document prepared by the SEC
that provides information about penny stocks and the nature and level of risks
of penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account. In addition, the penny
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stock rules require that prior to a transaction in a penny stock not otherwise
exempt from such rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the penny
stock. If the Common Stock becomes subject to the penny stock rules, investors
in the Offering may find it more difficult to sell their shares.
POTENTIAL ISSUANCE OF PREFERRED STOCK
The Company is authorized to issue up to 5,000,000 shares of Preferred
Stock, $1.00 par value, none of which have been issued. The Board of Directors
of the Company is empowered to fix the terms of the Preferred Stock without
stockholder approval, which terms may adversely affect the rights of holders
of the Class A Common Stock. The Company has no current plans to issue any
shares of its Preferred Stock.
DIVIDEND POLICY
The Company has not paid any cash dividends in the past and expects to
retain any future earnings for expansion of its business rather than to pay
cash dividends in the foreseeable future.
NON-REGISTRATION IN CERTAIN JURISDICTIONS
Although the Securities have been registered for sale with the SEC under the
Securities Act, action has only been taken in a very limited number of state
jurisdictions to register or qualify the Shares for sale to prospective
purchasers. Accordingly, in the absence of any specific registration or
qualification, any purchasers of the Shares from the Selling Stockholder will
be required to rely upon applicable exemptions from registration in such state
jurisdictions. Purchasers should inquire of the Selling Stockholders to
determine what action, if any, has been taken to qualify the Shares for sale
in a particular state jurisdiction and should consult their own legal counsel
prior to effecting sales of Shares in any jurisdiction.
THE COMPANY
The Company manufactures and markets a line of engineered composite building
material products that exhibit superior moisture resistance and dimensional
stability, as well as, several other unique properties over traditional wood
products. The Company's products have been extensively tested and used by
several leading national companies. The Company primarily utilizes waste wood
fiber and reclaimed polyethylene plastic as its raw material sources and to-
date, the Company has received 13 United States Patents on its technologies
and processes and additional patent applications are currently pending. (See
Note 6: Commitments and Contingencies) The Company markets its products under
the trade names Moistureshield (TM) and ChoiceDek (TM) and its sales are now
primarily focused towards the following three market areas which are currently
supplied by the Company's composites manufacturing facility in Junction,
Texas: (1) components for the national door and window market, (2) the heavy
industrial flooring market as floor blocks for industrial applications, and
(3) as decking components for commercial and residential applications through
Weyerhaeuser. The Company is currently expanding its manufacturing
capabilities with the addition of a second manufacturing and plastic
reclamation facility in Springdale, Arkansas.
The Company's Manufacturing Unit, located in Junction, Texas markets its
moisture-resistant composite building materials under the trade names
Moistureshield (TM), LIFECYCLE (TM) and ChoiceDek (TM). Because of their
plastic content, the composites can be engineered for moisture resistance, do
not require preservative or chemical treatments like traditional wood, can be
designed and extruded to customer specifications to minimize waste, and are
less subject to rotting, cracking, warping, insect infestation and water
absorption than conventional wood materials. Because of the wood fiber
content, composites are less subject to thermal contraction or expansion and
display greater dimensional stability than conventional plastic materials. The
composites are denser than the straight-grained, clear grades of wood from
western United States forests traditionally used in the building
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applications for which AERT's products compete. The composites manufacturing
process involves proprietary technologies and specialized manufacturing
equipment, custom-built or modified for the Company's purposes. It utilizes
recycled plastics and wood-filler materials and, in certain cases, special
additives or virgin plastics in varying mixtures, which can be formulated,
based on the customer's desired end-product characteristics. A key advantage
of the Company's process is the ability to utilize plentiful, low-cost raw
material components, encapsulate the wood fibers in the plastic and create a
consistent material, free of foreign matter, which can be extruded into a
desired shape while the end product maintains many properties similar to
traditional wood materials.
In May 1995, the Company entered into an exclusive marketing and
distribution agreement with a division of Weyerhaeuser ("Weyerhaeuser") for
sales of its LIFECYCLE (TM) line of extruded decking components, which are
primarily targeted towards the high-end residential housing market.
Weyerhaeuser will market the product under the Company's trade name,
ChoiceDek (TM), initially in a limited number of its 80 distribution and
reload centers throughout the United States.
USE OF PROCEEDS
The Company will not directly receive any proceeds from the Shares being
offered by the Selling Stockholders, nor will any such proceeds be available
for use by it or for its benefit. However, the Company could receive proceeds
from the exercise of the Private Placement Warrants and the Consulting
Warrants to which certain of the Shares relate. Any such proceeds received by
the Company upon exercise of a Warrant will be used for general corporate and
working capital purposes.
SELLING STOCKHOLDERS
The following table sets forth the names of the Selling Stockholders, the
number of shares of Common Stock owned beneficially by each of the Selling
Stockholders as of December 15, 1997, and the number of shares which may be
offered for sale pursuant to this Prospectus. Information set forth herein
with respect to each Selling Stockholder's beneficial ownership of Common
Stock has been provided by such Selling Stockholder. Because the Selling
Stockholders may offer all, some or none of their Common Stock, no definitive
estimate as to the number of shares that will be held by the Selling
Stockholders after such offering can be provided and the following table has
been prepared on the assumptions that all shares of Common Stock covered by
this prospectus will be sold. Unless otherwise indicated, the persons and
entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable. Except, as stated herein, none of the Selling Stockholders
are affiliated with the Company or has had any material relationship with the
Company within the past three years.
This prospectus also covers, pursuant to Rule 416 of the Securities Act, the
offer and sale by the Selling Stockholders of any and all shares of Common
Stock which may become issuable with respect to the Interest Shares or upon
exercise of the Private Placement Warrants and the Consulting Warrants to
prevent dilution resulting from stock splits, stock dividends and similar
transactions and pursuant to the Notes by reason of increases in the interest
rate applicable thereto and/or the amount of interest payable thereon and by
reason of reductions in the average closing bid price of the Common Stock.
<TABLE>
<CAPTION>
% BENEFICIALLY
NUMBER OF SHARES BENEFICIALLY OWNED FOLLOWING
NAME AND ADDRESS NUMBER OF SHARES SHARES OWNED FOLLOWING COMPLETION
OF SELLING STOCKHOLDER(2) BENEFICIALLY OWNED TO BE OFFERED COMPLETION OF OFFERING(1) OF OFFERING(1)
- ------------------------- ------------------ ------------- ------------------------- ---------------
<S> <C> <C> <C> <C>
Zanett Lombardier,
Ltd.(2)................ -- (4) 148,704(4) 0 --
Harlow Enterprises,
Inc.(2)................ -- (5) 12,519(5) 0 --
Parkland Limited(2)..... -- (6) 12,519(6) 0 --
Samuel L. Milbank(2)(3). 60,000(7) 68,111(7) 0 --
Bruno Guazzoni(2)(3).... 2,540,000(8) 3,838,704(8) 0 --
The Zanett Securities
Corp.(2)(3)............ 156,000(9) 234,000(9) 0 --
</TABLE>
15
<PAGE>
- --------
(1) Assumes the sale of all Shares offered hereby.
(2) Address: c/o The Zanett Securities Corporation, Tower 49, 31st Floor, 12
East 49th Street, New York, NY 10017.
(3) Except under certain circumstances, none of such Selling Stockholders is
entitled to exercise Consulting Warrants or Private Placement Warrants, as
applicable, to the extent that such exercise would cause the Selling
Stockholder to beneficially own more than 4.99% of the total outstanding
Common Stock of the Company. Therefore the number of shares set forth
herein and which a Selling Stockholder may sell pursuant to this
Prospectus may exceed the number of shares such Selling Shareholder may be
deemed to beneficially own as determined pursuant to Section 13(d) of the
Exchange Act.
(4) Beneficially owns 0 shares as of the date of this Prospectus. Number of
Shares to be Offered represents up to 148,704 Interest Shares (assuming a
one-year term for the Notes and a pro forma Conversion Price of $0.45 per
share, (equal to the 10-business day average closing bid price prevailing
as of December 8, 1997), which may be issued on a quarterly basis pursuant
to $550,000 principal amount of Notes acquired October 30, 1997.
(5) Beneficially owns 0 shares as of the date of this Prospectus. Number of
Shares to be Offered represents up to 12,519 Interest Shares (assuming a
one-year term for the Notes and a pro forma Conversion Price of $0.45 per
share, (equal to the 10-business day average closing bid price prevailing
as of December 8, 1997), which may be issued on a quarterly basis pursuant
to $50,000 principal amount of Notes acquired October 30, 1997.
(6) Beneficially owns 0 shares as of the date of this Prospectus. Number of
Shares to be Offered represents up to 12,519 Interest Shares, (assuming a
one-year term for the Notes and a pro forma Conversion Price of $0.45 per
share, (equal to the 10-business day average closing bid price prevailing
as of December 8, 1997), which may be issued on a quarterly basis pursuant
to $50,000 principal amount of Notes acquired October 30, 1997.
(7) Number of Shares to be Offered represents (i) up to 8,111 Interest Shares
(assuming a one-year term for the Notes and pro forma Conversion Price of
$0.45 per share, (equal to the 10-business day average closing bid price
prevailing as of December 8, 1997), which may be issued on a quarterly
basis pursuant to $30,000 principal amount of Notes acquired October 30,
1997 and (ii) up to 60,000 Consulting Warrant Shares (subject to
adjustment), which may be acquired upon exercise of Consulting Warrants at
a price of $0.375 per share.
(8) Represents (i) up to 2,540,000 Consulting Warrant Shares (subject to
adjustment), which may be acquired upon exercise of Consulting Warrants
issued on October 30, 1997 at a price of $0.375 per share, (ii) up to
650,000 Additional Consulting Warrant Shares, which may be issued upon
exercise of Additional Consulting Warrants which may become issuable in
the future depending upon whether the term of the Notes is extended from
270 days to 365 days, and (iii) up to 148,704 Interest Shares (assuming a
one-year term for the Notes and pro forma Conversion Price of $0.45 per
share (equal to the 10-business day average closing bid price prevailing
as of December 8, 1997), which may be issued on a quarterly basis pursuant
to $550,000 principal amount of Notes acquired October 30, 1997.
(9) Represents up to 156,000 Private Placement Warrant Shares (subject to
adjustment), which may be acquired upon exercise of Private Placement
Warrants issued on October 30, 1997 at a price of $0.375 per share and up
to 78,000 additional Private Placement Warrant Shares which may be issued
upon exercise of additional Private Placement Warrants, which may become
issuable in the future depending upon whether the term of the Notes is
extended from 270 days to 365 days.
16
<PAGE>
PLAN OF DISTRIBUTION
The Shares may be sold or distributed from time to time by the Selling
Stockholders, or by pledgees, donees or transferees of, or other successors in
interest to, the Selling Stockholder, directly to one or more purchasers
(including pledgees) or through brokers, dealers or underwriters who may act
solely as agents or may acquire Shares as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at negotiated prices, or at fixed price which may be charged. The
distribution of the Shares maybe effected in one or more of the following
methods: (i) ordinary brokers' transactions, with may include long or short
sales; (ii) transactions involving cross or block trades or otherwise on the
NASDAQ SmallCap Market System; (iii) purchase by broker, dealers or
underwriters as principal and resale by such purchasers for their own accounts
pursuant to this Prospectus; (iv) "at the market" to or through market makers
or into an existing market for the Common stock; (v) in other ways not
involving market makers or established trading markets, including direct sales
to purchasers or sales effected through agents; (vi) through transactions in
options, swaps or other derivatives (whether exchange-listed or otherwise), or
(vii) any combination of the foregoing, or by any other legally available
means. In addition, the Selling Stockholders of their successors in interest
may enter into hedging transactions with broker-dealers who may engage in
short sales of Common Stock in the course of hedging the positions they assume
with the Selling Stockholders. The Selling Stockholders or their successors in
interest may also enter into option or other transactions with broker-dealers
that require the delivery of such broker-dealers of the Shares, with Shares
may be resold thereafter pursuant to this Prospectus.
Brokers, dealers, underwriters or agents participating in the distribution
of the Shares as agent may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders (and, if they act as
agent for the purchaser of such Shares, from such purchaser). Such discounts,
concession or commissions as to a particular broker, dealer, underwriter or
agent might be greater or less than those customary in the type of transaction
involved.
The Selling Stockholders and any brokers, dealers, underwriters or agents
that participate in the distribution of the Shares may deemed to be
"underwriters" within the meaning of the Securities Act, and any discounts,
commissions or concessions received by any such persons might be deemed to be
underwriting discounts and commissions under the Securities Act. Neither the
Company nor the Selling Stockholders can presently estimate the amount of such
compensation. The Company knows of no existing arrangements between any
Selling Stockholder and any other Stockholder, broker, dealer, underwriter or
agent relating to the sale or distribution of the Shares.
To the extent required, the Company will file, during any period in which
offers or sales are being made, a supplement to this Prospectus which sets
forth, with respect to a particular offering, the specific number of Shares to
be sold, the name of the selling Stockholder, the sales price, the name of any
participating broker, dealer, underwriter or agent, any applicable commission
or discount and any other material information with respect to the plan of
distribution not previously disclosed.
The Company will not receive any of the proceeds from the sale of the Shares
offered hereby. The Company will pay substantially all of the expenses
incident to this Offering of the Shares by the Selling Stockholders to the
public other than commissions and discounts of brokers, dealers, underwriters
or agents. Such expenses are currently estimated to be approximately $24,525.
The Company has agreed to indemnify the Selling Stockholders and certain
related persons against certain liabilities, including certain liabilities
under the Securities Act.
17
<PAGE>
LEGAL MATTERS
The validity of the Shares offered hereby is being passed upon for the
Company by Akin, Gump, Strauss, Hauer & Feld, L.L.P., San Antonio, Texas.
EXPERTS
The financial statements incorporated by reference in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report. Reference is made to said report which includes
an explanatory paragraph describing the going concern and litigation
uncertainties discussed in Notes 2 and 14 to the financial statements to the
Annual Report on Form 10-K for the year ended December 31, 1996.
18
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED, IN CONNECTION WITH OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS ANY DATE SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... 2
Incorporation of Certain Documents by Reference............................ 3
Prospectus Summary ........................................................ 4
Risk Factors............................................................... 4
The Company................................................................ 14
Use of Proceeds............................................................ 15
Selling Stockholders....................................................... 15
Plan of Distribution....................................................... 17
Legal Matters.............................................................. 18
Experts.................................................................... 18
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UP TO 4,334,000 SHARES
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
----------------
PROSPECTUS
----------------
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses payable by the Company
in connection with the offering described in this Registration Statement. No
such expenses will be borne by the Selling Stockholders.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............... $ 525
Legal Fees........................................................ 10,000
Accountant's Fees................................................. 10,000
Miscellaneous Expenses............................................ 4,000
-------
Total........................................................... $24,525
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits the Registrant
to indemnify directors, officers, employees or agents against judgments,
fines, amounts paid in settlement, and reasonable costs, expenses and counsel
fees paid or incurred in connection with any proceeding, other than an action
by or in the right of the Registrant, to which such director, officer or
employee or his legal representative may be a party, provided such director,
officer or employee shall have acted in good faith and shall have reasonably
believed (a) in the case of a civil proceeding, that his conduct was in or not
opposed to the best interests of the Registrant, or (b) in the case of a
criminal proceeding, that he had no reasonable cause to believe his conduct
was unlawful. In connection with an action by or in the right of the
Registrant against a director, officer, employee or agent, the Registrant has
the power to indemnify such director, officer, employee or agent for
reasonable expenses incurred in connection with such suit (a) if such person
acted in good faith and in a manner not opposed to the best interest of the
Registrant, and (b) if found liable to the Registrant, only if ordered by a
court of law. Section 145 provides that such section is not exclusive of any
other indemnification rights granted by the Registrant to directors, officers,
employees or agents.
The Certificate of Incorporation of the Registrant provides for mandatory
indemnification of directors, officers and employees to the fullest extent
permitted by Section 145, unless the Registrant proves that the person seeking
indemnification did not meet the standard set forth above. The Certificate
permits the Registrant to indemnify agents to the extent authorized from time
to time by the Board of Directors. The right to indemnification is a contract
right and includes the right to be paid by the Registrant the expenses
incurred in defending any such proceeding in advance of its final disposition,
provided that the indemnitee undertakes to repay all amounts so advanced if it
is ultimately determined that such indemnitee is not entitled to be
indemnified for such expenses.
The Certificate of Incorporation of the Registrant also contains a provision
eliminating the liability of a director to the Registrant or its stockholders
for monetary damages for breach of fiduciary duty as a director, other than
liability for (a) breach of the director's duty of loyalty to the Corporation
or its stockholders, (b) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (c) unlawful payment of
a dividend or unlawful stock purchase or redemption, or (d) any transaction
from which the director derived an improper personal benefit.
Inasmuch as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
informed that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
II-1
<PAGE>
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
4.1 Certificate of Incorporation of Registrant, including Certificates of
Amendment (incorporated by reference from Exhibit to Registration
Statement on Form S-1, No. 33-29595, filed with the Commission on June
28, 1989 and Exhibit to Amendment No. 1 to Registration Statement on
Form S-1, No. 33-29595, filed with the Commission on August 24, 1989)
4.2 Bylaws of Registrant (incorporated by reference from Exhibit to
Registration Statement on Form S-1, No. 33-29595, filed with the
Commission on June 28, 1989)
4.3 Form of Class A Common Certificate (incorporated by reference from
Exhibit to Amendment No. 2 to Registration Statement on Form S-1, No.
33-29595, filed with the Commission on November 8, 1989)
5 Opinion and Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
10.1 Private Placement Agreement
10.2 Consulting Agreement
10.3 Note Purchase Agreement
10.4 Form of Notes
10.5 Form of Private Placement Warrants
10.6 Form of Consulting Warrants
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
</TABLE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(a) To include any Prospectus required by Section 10 (a) (3) of the
Securities Act of 1933, unless the information required to be included
in such post-effective amendment is contained in a periodic report
filed by registrant pursuant to Section 13 or Section 15 (d) of the
Securities Exchange Act of 1934 and incorporated herein by reference;
(b) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement, unless the information required to be
included in such post-effective amendment is contained in a periodic
report filed by registrant pursuant to Section 13 or Section 15 (d) of
the Securities Exchange Act of 1934 and incorporated herein by
reference; and
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
II-2
<PAGE>
4. That, for purposes of determining liability under the Securities Act
of 1933, each filing of the registrant's annual report pursuant to Section
13 (a) or Section 15 (d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions referred to in Item 15 above,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether or not such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver,
or cause to be delivered to each person to whom the prospectus is sent or
given, the latest quarterly report that is specifically incorporated by
reference in the prospectus to provide such interim financial information.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE COMPANY
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE COUNTY OF WASHINGTON, STATE OF ARKANSAS, ON DECEMBER 16,
1997.
Advanced Environmental Recycling
Technologies, Inc.
(Registrant)
/s/ Joe G Brooks
By: _________________________________
JOE G BROOKS
PRESIDENT AND DIRECTOR
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Joe G. Brooks and Steve Brooks, and each of them, each with full power to act
without the other, his true and lawful attorneys-in-fact and agents, each with
full power of substitution and resubstitution for him and his name, place and
stead, in any and all capacities, to sign any and all amendments to this
Registration Statement (including post-affective amendments), and to file the
same with all exhibits thereto and other documents in connection therewith,
with such changes as they may deem appropriate, with the Securities and
Exchange Commission, granting unto each of said attorneys-in-fact and agents
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person hereby ratifying and
confirming that each of said attorneys-in-fact and agents or his substitutes
may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Sal Miwa Chairman of the December 16,
- ------------------------------------- Board 1997
SAL MIWA
/s/ Joe G. Brooks President and December 16,
- ------------------------------------- Director 1997
JOE G. BROOKS
/s/ Jerry B. Burkett Director December 16,
- ------------------------------------- 1997
JERRY B. BURKETT
/s/ Stephen W. Brooks Chief Executive December 16,
- ------------------------------------- Officer and 1997
STEPHEN W. BROOKS Director
/s/ Marjorie S. Brooks Secretary, Treasurer December 16,
- ------------------------------------- and Director 1997
MARJORIE S. BROOKS
/s/ Peter Lau Director December 16,
- ------------------------------------- 1997
PETER LAU
/s/ James Culp Director December 16,
- ------------------------------------- 1997
JAMES CULP
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C> <S>
4.1 Certificate of Incorporation of Registrant, including Certificates
of Amendment (incorporated by reference from Exhibit to
Registration Statement on Form S-1, No. 33-29595, filed with the
Commission on June 28, 1989 and Exhibit to Amendment No. 1 to
Registration Statement on Form S-1, No. 33-29595, filed with the
Commission on August 24, 1989)
4.2 Bylaws of Registrant (incorporated by reference from Exhibit to
Registration Statement on Form S 1, No. 33-29595, filed with the
Commission on June 28, 1989)
4.3 Form of Class A Common Certificate (incorporated by reference from
Exhibit to Amendment No. 2 to Registration Statement on Form S-1,
No. 33-29595, filed with the Commission on November 8, 1989)
5 Opinion and Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
10.1* Private Placement Agreement
10.2 Consulting Agreement
10.3 Note Purchase Agreement
23.1 Consent of Arthur Andersen LLP
23.2* Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
Exhibit 5)
</TABLE>
- --------
* Previously filed
II-5
<PAGE>
Exhibit 5
[LETTERHEAD OF AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. APPEARS HERE]
December 17, 1997
Advanced Environmental Recycling Technologies, Inc.
801 N. Jefferson Street
Springdale, Arkansas 72765
Re: Advanced Environmental Recycling Technology, Inc. ("Company")
Registration Statement on Form S-8
Gentlemen:
We have acted as counsel for the Company in connection with the
registration by the Company under the Securities Act of 1933, as amended (the
"Act"), pursuant to the Company's registration statement on Form S-3 (the
"Registration Statement") of an aggregate of up to 4,334,000 shares of the
Company's Class A Common Stock, $.01 par value (the "Common Stock"), issued or
issuable from time to time by the Company as follows:
(i) up to 850,000 Shares (the "Interest Shares") issuable as
quarterly interest payments upon $1.3 million aggregate principal amount of
12% Promissory Notes due July 27, 1998 (extendable at the Company's option
to October 30, 1998) (the "Notes"), issued to certain of the Selling
Stockholders pursuant to a Note Purchase Agreement entered into as of
October 30, 1997;
(ii) up to 234,000 Shares (the "Private Placement Warrant Shares")
issuable upon the exercise of stock purchase warrants (the "Private
Placement Warrants") issued and issuable hereafter to certain of the Selling
Stockholders pursuant to a Placement Agency Agreement dated October 30,
1997; and,
(iii) up to 3,250,000 Shares (the "Consulting Shares") issuable
upon the exercise of stock purchase warrants (the "Consulting Warrants")
issued to certain Selling Stockholders pursuant to a Consulting Agreement
dated October 30, 1997.
We have, as counsel, examined such corporate records, certificates and
other documents and reviewed such questions of law as we have deemed necessary,
relevant or appropriate to enable us to render the opinion expressed below. In
rendering such opinion, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures and the authenticity of all documents
examined by us. As to various questions of fact material to such opinion, we
have relied upon representations of the Company.
Based upon such examination and representations, we advise you that, in
our opinion:
(i) when issued to the holders of the Notes in accordance with the
terms of the Notes, the Interest Shares will be duly authorized,
validly issued, fully paid and nonassessable; and
(ii) when issued to the holders of the Private Placement Warrants and
the Consulting Warrants upon the exercise thereof in accordance
with the terms of the respective warrant agreements (including
the payment of the exercise price specified therein), the
Private Placement Warrant Shares and Consulting Warrant Shares,
as the case may be, will be duly authorized, validly issued,
fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the reference of this firm under the caption
"Legal Matters" in the Prospectus contained therein.
This opinion is to be used only in connection with the issuance of the
Common Stock while the Registration Statement is in effect.
We hereby consent to the use of this opinion as an exhibit to the
referenced Registration Statement.
Very truly yours,
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
<PAGE>
EXHIBIT 10.1
PLACEMENT AGENCY AGREEMENT
--------------------------
October 30, 1997
The Zanett Securities Corporation
767 Fifth Avenue
New York, New York 10153
Gentlemen:
This agreement ("AGREEMENT") will confirm that Advanced Environmental
Recycling Technologies, Inc., a Delaware corporation (the "COMPANY"), has
retained The Zanett Securities Corporation ("ZANETT" or the "PLACEMENT AGENT")
as its exclusive placement agent to assist the Company, during the four-week
period commencing on the date hereof ("TERM"), on a "best-efforts" basis, in
connection with the placement of $1,300,000 in aggregate principal amount of the
Company's Promissory Notes (the "NOTES"), which Notes shall bear interest at the
rate of 12% per annum and shall become due and payable on the date which is 270
days from the issuance date (subject to the right of the Company to extend the
maturity date to the date which is 365 days from the issuance date). All
interest which may become due and payable under the Notes shall be payable
quarterly in arrears through the issuance by the Company of shares of the
Company's Class A Common Stock, par value $.01 per share (the "COMMON STOCK").
The Company agrees that, during the Term, Zanett shall have the exclusive right
to offer and place the Notes and that all conversations, negotiations, documents
and other materials exchanged between the Company and the Placement Agent shall
not be disclosed or released to any third party without the prior written
consent of Zanett. The Company acknowledges that certain of the aforementioned
securities may be purchased by affiliates of Zanett.
The Notes are being offered to "accredited investors" in accordance with
Regulation D promulgated under the Securities Act of 1933, as amended (the
"SECURITIES ACT"). Each prospective investor ("INVESTOR") subscribing to
purchase the Notes will be required to deliver, among other things, a note
purchase agreement between the Company and the Investor (the "NOTE PURCHASE
AGREEMENT") in form and substance reasonably satisfactory to Zanett and the
Company, representing and warranting, among other things, that such Investor is
an "accredited investor" as such term is defined in Regulation D.
Contemporaneous with the execution and delivery of the Note Purchase Agreement,
the Investors shall execute and deliver a Registration Rights Agreement (the
"REGISTRATION RIGHTS AGREEMENT") in form and substance reasonably satisfactory
to Zanett and the Company pursuant to which the Company will agree to provide
the Investors certain registration rights under the Securities Act with respect
to the shares of the Company's Common Stock issuable pursuant to the Notes (the
"NOTE SHARES").
The Note Purchase Agreement, the Notes and the Registration Rights
Agreement are referred to herein collectively as the "OFFERING DOCUMENTS." The
offering of Notes described in the Offering Documents is referred to herein as
the "OFFERING."
<PAGE>
1. Appointment of Placement Agent. Zanett is hereby appointed Placement
------------------------------
Agent of the Company for the purposes of assisting the Company in finding
qualified Investors to participate in the Offering. On the basis of the
representations and warranties and subject to the terms and conditions contained
herein, Zanett hereby accepts such agency and agrees to assist the Company in
finding qualified Investors to participate in the Offering. Zanett's agency
hereunder is not terminable by the Company except upon termination of the
Offering. Upon termination of the Offering, all subscriptions received, if any,
shall be returned to Investors.
2. Closing; Placement Fee and Warrant; Expenses.
--------------------------------------------
(a) Closing. Upon satisfaction of the conditions to closing
-------
contained in the Note Purchase Agreement, the closing (the "CLOSING") of the
purchase and sale of the Notes shall take place at the offices of Klehr,
Harrison, Harvey, Branzburg & Ellers LLP or such other mutually agreed place, at
such time and date (the "CLOSING DATE") as may be agreed upon between the
Placement Agent, the Investors and the Company.
(b) Procedures at Closing. Counsel for the Placement Agent shall act
---------------------
as escrow agent for the Closing (the "ESCROW AGENT"). At the Closing:
(i) The Company shall deliver to the Escrow Agent, on behalf of
the Placement Agent and the Investors, an opinion of the Company's outside legal
counsel, dated as of the Closing Date, in such form as may be reasonably
acceptable to the Placement Agent and its counsel.
(ii) The Company shall deliver to the Escrow Agent certificates
from the Company, signed by the President or a Vice President thereof,
certifying that attached thereto is a true and correct copy of resolutions
adopted by the Company's Board of Directors authorizing (A) the execution,
delivery and performance of this Agreement, the Note Purchase Agreement, the
Registration Rights Agreement, the Notes and other documentation related to the
Offering, and (B) the issuance of the Notes and the reservation for issuance and
issuance of the Note Shares, and certifying that such resolutions have not been
modified, rescinded or amended and are in full force and effect.
(iii) The Company shall deliver to the Escrow Agent a certificate
of good standing of the Company, dated as of a recent date, from the Secretary
of State of the State of Delaware.
(iv) Each Investor shall deliver to the Escrow Agent two
executed copies of the Note Purchase Agreement and Registration Rights Agreement
signed by such Investor, and the Company shall deliver to the Escrow Agent with
respect to each Investor two executed copies of its acceptance of the Note
Purchase Agreement and Registration Rights Agreement executed by such Investor.
-2-
<PAGE>
(v) Each Investor shall have delivered by wire transfer to an
escrow account designated by the Escrow Agent an amount equal to the aggregate
principal amount of the Note(s) being purchased by such Investor at the Closing.
(vi) The Company shall have delivered to the Escrow Agent the
duly executed Notes being purchased by the Investors in such denominations as
the Investors shall request.
(vii) The Company and the Placement Agent shall instruct the
Escrow Agent to pay to the Company the purchase price (the "PURCHASE PRICE") for
the Notes subscribed for at the Closing, less the Placement Agent Fee (as
defined below), out of the funds on deposit in the escrow account received from
Investors whose Note Purchase Agreements have been accepted.
(c) Placement Fee; Expenses. The Company covenants and agrees to pay
-----------------------
to the Placement Agent at the Closing a fee (the "PLACEMENT AGENT FEE") equal
to ten percent (10%) of the aggregate gross proceeds received by the Company
from the sale of the Notes at such Closing. Such Placement Agent Fee shall be
delivered by the Escrow Agent to Zanett by wire transfer, in accordance with
Zanett's written wiring instructions, from the funds on deposit in the escrow
account simultaneously with payment for and delivery of the Notes at the Closing
under the Note Purchase Agreement as provided in paragraph 2(a) above. In
addition, the Placement Agent shall be entitled to receive from the Company a
non-accountable expense allowance (the "EXPENSE ALLOWANCE") equal to three
percent (3%) of the aggregate gross proceeds received by the Company from the
sale of the Notes at the Closing. Such Expense Allowance shall be delivered in
the same manner as the Placement Agent Fee.
(d) Warrants. In addition to the Placement Agent Fee, at the Closing
--------
under the Note Purchase Agreement, the Company shall issue to the Placement
Agent warrants, in substantially the form attached hereto as Exhibit A, to
---------
purchase such number of shares of the Company's Common Stock as is equal to
twelve percent (12%) of the aggregate Purchase Price (as expressed in numerical
rather than dollar terms) (the "AGGREGATE PURCHASE PRICE") of all Notes sold at
the Closing (the "INITIAL PLACEMENT WARRANTS"); provided, however, that in the
-------- -------
event that the maturity date of the Notes is extended, at the Company's option
as set forth in the Note Purchase Agreement, from a date 270 days from the date
of issuance of the Notes (the "ISSUANCE DATE") to a date up to and including 365
days from the Issuance Date, the Company shall, concurrently with notice to the
Investors and Zanett of such extension, issue to the Placement Agent additional
warrants (the "EXTENSION WARRANTS") to purchase such number of shares of Common
Stock as is equal to the difference between eighteen percent (18%) of the
Aggregate Purchase Price (as expressed in numerical rather than dollar terms)
minus the number of Initial Placement Warrants. The Initial Placement Warrants
and the Extension Warrants shall be exercisable for a period of five (5) years
from the date of issuance at a price per share equal to the average of the
Closing Bid Prices (as defined in the Notes) for the Common Stock during the
five (5) consecutive trading days ending on the trading day immediately
preceding the Closing Date. The Initial Placement Warrants, the Extension
Warrants, the Additional Placement
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<PAGE>
Warrants (as defined in Section 2(f)(iii)) and the Additional Extension Warrants
(as defined in Section 2(f)(iii)) are collectively referred to as the "PLACEMENT
WARRANTS." The shares of the Company's Common Stock issuable upon exercise of
the Placement Warrants shall hereinafter be referred to as the "WARRANT SHARES."
The Company shall grant the Placement Agent certain registration rights under
the Securities Act with respect to the Warrant Shares pursuant to a Registration
Rights Agreement, in substantially the form attached hereto as Exhibit B, to be
---------
entered into by the Company and the Placement Agent at the Closing (the "ZANETT
REGISTRATION RIGHTS AGREEMENT").
(e) Expenses of Offering. The Company shall be responsible for and
--------------------
shall bear all expenses directly and necessarily incurred by it in connection
with the Offering, including, but not limited to, the following: filing fees,
registrar and transfer agent fees, investigatory fees (including, but not
limited to travel, lodging and entertainment expenses), issuer's counsel and
accounting fees, blue sky fees and counsel, if any, and issue and transfer
taxes, if any. In the event a Closing does not occur during the Term, the
Company shall reimburse the Placement Agent for its reasonable out-of-pocket
expenses incurred in connection with the Offering.
(f) Non-Circumvention Period; Lockup Period; Additional Financing
-------------------------------------------------------------
Period.
- ------
(i) The Company agrees that, during the period beginning on the
date hereof and ending five (5) years following the later of the date hereof and
the date of the Closing (as defined in Section 2(a) hereof) (the "NON-
CIRCUMVENTION PERIOD"), it will not, without the prior written consent of the
Placement Agent, negotiate or contract or have discussions concerning any such
matters with any Investor or any other party introduced to the Company by
Placement Agent to obtain additional financing in any form.
(ii) The Company agrees that, during the period beginning on the
date hereof and ending two (2) years following the later of the date hereof and
the date of the Closing (the "LOCK-UP PERIOD"), it will not, without the prior
written consent of the Placement Agent, negotiate or contract or have
discussions concerning any such matters with any other party to obtain
additional financing of any type in any form; provided, however, that the
-------- -------
foregoing shall not limit the Company's ability during the Lock-up Period (A) to
obtain bank financing, governmental bond or loan financing, equipment financing,
and factoring or receivable and inventory financing without the consent of the
Placement Agent; or (B) to obtain equity, debt or other financing from Marjorie
Brooks, Steven Brooks, Joseph Brooks, Douglas Brooks and/or members of their
immediate family so long as (x) in the event that such financing takes the form
of a sale by the Company of shares of Common Stock or any security convertible
into or exercisable for shares of Common Stock, the price at which such shares
of Common Stock may be acquired from the Company is greater than or equal to the
Closing Bid Price (as defined in the Notes) of the Common Stock on the date of
issuance of such security, (y) no fees (whether payable in cash, through the
issuance of warrants to acquire shares of Common Stock or otherwise) are paid by
the Company to any purchaser or any third party in connection with such
financing, and (z) the Company shall have first delivered to the Placement
Agent, at least thirty
-4-
<PAGE>
(30) days prior to the closing of such financing, written notice describing the
proposed financing, including the terms and conditions thereof, and providing
the Placement Agent and its affiliates an option during the thirty (30) day
period following delivery of such notice to purchase all of the securities being
offered in the financing on the same terms as contemplated by such financing.
(iii) The Company agrees that, at any time during the period
beginning on the date hereof and ending two (2) years following the later of the
date hereof and the date of the Closing (the "ADDITIONAL FINANCING PERIOD"), the
Placement Agent shall have the right, but not the obligation, to offer and place
on behalf of the Company an additional $2,200,000 in aggregate principal amount
of the Notes (the "ADDITIONAL NOTES"), and the Company agrees to issue and sell
such Additional Notes to Investors identified by the Placement Agent in
accordance with the procedures set forth in Section 2 above. The terms of such
Additional Notes may vary from the terms of the Notes, but shall provide,
without limitation, that, unless extended by the Company at its option, the
Additional Notes shall mature and become payable on a date 270 days from the
date of initial issuance thereof. In the event that Zanett exercises its option
to offer and place the Additional Notes during the Additional Financing Period,
and the closing of the issuance and sale of the Additional Notes (the
"ADDITIONAL CLOSING") occurs at any time on or before the sixtieth (60th) day
following the expiration of the Additional Financing Period, the Placement Agent
shall be entitled to receive from the Company the Placement Agent Fee and
Expense Allowance indicated in Section 2(c) hereof calculated based on the
aggregate gross proceeds to the Company from the sale of the Additional Notes.
Such amounts will be paid to the Placement Agent in the manner set forth in
Section 2(c) hereof at the Additional Closing. In addition, at the Additional
Closing, the Company shall deliver to the Placement Agent warrants, in
substantially the form attached hereto as Exhibit A, to purchase such number of
---------
shares of the Company's Common Stock as is equal to twelve percent (12%) of the
aggregate Purchase Price of the Additional Notes (as expressed in numerical
rather than dollar terms) (the "ADDITIONAL PLACEMENT WARRANTS"); provided,
--------
however, that in the event that the maturity date of the Additional Notes is
- -------
extended, at the Company's option, from a date 270 days from the date of
issuance of the Additional Notes (the "ADDITIONAL NOTE ISSUANCE DATE") to a date
up to and including 365 days from the Additional Note Issuance Date, the Company
shall, concurrently with notice to the purchasers of such Additional Notes and
Zanett of such extension, issue to the Placement Agent additional warrants (the
"ADDITIONAL EXTENSION WARRANTS") to purchase such number of shares of Common
Stock as is equal to the difference between eighteen percent (18%) of the
aggregate Purchase Price of the Additional Notes (as expressed in numerical
rather than dollar terms) minus the number of Additional Placement Warrants.
The Additional Placement Warrants and the Additional Extension Warrants shall be
exercisable for a period of five (5) years from the date of issuance at a price
per share equal to the average of the Closing Bid Prices (as defined in the
Notes) for the Common Stock during the five (5) consecutive trading days ending
on the trading day immediately preceding the Additional Closing Date. The
Warrant Shares issuable upon exercise of the Additional Placement Warrants and
the Additional Extension Warrants shall be considered "REGISTRABLE SECURITIES"
under the Zanett Registration Rights Agreement.
-5-
<PAGE>
3. Representations and Warranties and Covenants of the Company.
-----------------------------------------------------------
(a) The Company represents and warrants to Zanett that this Agreement
has been duly authorized, executed and delivered by the Company and, assuming
the due execution by Zanett, constitutes a legal, valid and binding agreement of
the Company, enforceable against the Company in accordance with its terms.
(b) The Company has delivered to Zanett true and complete copies of
all reports, schedules, forms, statements and other documents filed by the
Company on or after December 31, 1993 with the Securities and Exchange
Commission (the "SEC") pursuant to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT") (all of the foregoing
filed prior to the date hereof and all exhibits included therein and financial
statements and schedules thereto and documents (other than exhibits)
incorporated by reference therein, being hereinafter referred to as the "SEC
DOCUMENTS"). As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the Exchange Act and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC,
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. As of their respective dates, the financial statements of the
Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have
been prepared in accordance with generally accepted accounting principles,
consistently applied, 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 consolidated financial position of the Company and its
consolidated subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments). Except as
set forth in the financial statements of the Company included in the SEC
Documents, the Company has no liabilities, contingent or otherwise, other than
(i) liabilities incurred in the ordinary course of business subsequent to
December 31, 1996, and (ii) obligations under contracts and commitments incurred
in the ordinary course of business and not required under generally accepted
accounting principles to be reflected in such financial statements, which,
individually or in the aggregate, are not material to the financial condition or
operating results of the Company.
(c) The Company recognizes and confirms that Zanett (i) will use and
rely primarily on the SEC Documents and on information available from generally
recognized public sources in performing the services contemplated by this
Agreement without having independently verified the same; (ii) is authorized to
assist the Company in the structuring of the Offering with any prospective
purchaser who is an "accredited investor" as defined in Regulation D under the
Securities Act and to provide copies of the SEC Documents and forms of the Note
Purchase Agreement and other legal documentation to prospective purchasers of
the Company's securities in connection with the performance of Zanett's services
hereunder; and (iii) does not assume responsibility for the accuracy or
completeness of the SEC Documents.
-6-
<PAGE>
(d) In addition to the foregoing, the Company hereby incorporates by
reference all of the representations and warranties and covenants to be set
forth in the Note Purchase Agreement and the other Offering Documents with the
same force and effect as if specifically set forth herein.
(e) For a period of five years from the Closing, (i) the Company shall
provide Zanett, within three (3) business days of the filing or preparation
thereof, with such financial and other statements including, without limitation,
management letters and consolidated financial statements as are provided to any
other lenders to or security holders of the Company; (ii) in the event any
current officer, director, employee, consultant or other agent ceases,
subsequent to the date hereof, to have such relationship with the Company and
such cessation has, or is likely to have, a material adverse effect on the
Company, taken as a whole, the Company shall promptly notify Zanett of such
event, which notification shall comprehensively describe such circumstances;
(iii) the Company shall, on a regular basis, provide to Zanett updates of any
material litigation and/or governmental proceedings which could reasonably be
expected to have a material adverse effect on the business of the Company; and
(iv) the Company shall promptly provide to Zanett notice of any event of default
under any agreement or other document with any lender or holder of any security
of the Company. Zanett shall hold in confidence and shall not make any
disclosure (except to an Investor) or use of any such information disclosed to
it pursuant to clauses (i) through (iv) above which the Company determines in
good faith to be confidential, and of which determination Zanett is so notified,
unless (a) the release of such information is ordered pursuant to a subpoena or
other order from a court or government body of competent jurisdiction or (b) the
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement. Anything contained
herein to the contrary notwithstanding, Placement Agent's obligations to proceed
with the Offering is conditioned upon Placement Agent's due diligence
investigation of the Company. Zanett shall be fully informed by the Company of
any events which might have a material affect on the financial condition of the
Company. If, in Zanett's opinion, the condition of the Company, financial or
otherwise, and its prospects are affected in a material and/or adverse manner
and do not fulfill Zanett's expectations, Zanett shall have the sole discretion
to review and determine its continued interest in the Offering.
(f) For a period of the later of (i) five years from the Closing and
(ii) so long as Zanett and/or affiliates own any securities of the Company, the
Company shall make available, during regular business hours, all records and
books of account of the Company for inspection by Zanett. The Company shall
permit Zanett, during regular business hours, to inspect its properties.
(g) The Company has the requisite corporate power and authority to
enter into and perform this Agreement and to issue the Placement Warrants in
accordance with the terms hereof. The execution and delivery of this Agreement
by the Company and the consummation by it of the transactions contemplated
hereby (including, without limitation, the issuance of the Placement Warrants
and the reservation for issuance and issuance of the Warrant Shares issuable
-7-
<PAGE>
upon exercise thereof) have been duly authorized by the Company's Board of
Directors and no further consent or authorization of the Company, its Board of
Directors, or its shareholders is required.
(h) The Placement Warrants and the Warrant Shares issuable upon the
exercise thereof are duly authorized and, upon issuance of the Placement
Warrants in accordance with the terms hereof and the Warrant Shares upon
exercise of the Placement Warrants in accordance with the terms thereof, will be
validly issued, fully paid and non-assessable, and free from all taxes, liens
and charges with respect to the issue thereof and shall not be subject to
preemptive rights or other similar rights of the shareholders of the Company.
(i) The execution, delivery and performance of this Agreement by the
Company and the consummation by the Company of the transactions contemplated
hereby will not (A) result in a violation of the Company's Certificate of
Incorporation or By-laws or (B) 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 to which the Company is
a party, or result in a violation of any law, rule, regulation, order, judgment
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, with respect to clause (B), for such conflicts,
defaults, terminations, amendments, accelerations, cancellations and violations
as would not, individually or in the aggregate, have a material adverse effect
on the operation, properties, prospects or financial condition of the Company
("MATERIAL ADVERSE EFFECT")). The Company is not in violation of its
Certificate of Incorporation or By-laws and is not in default (and no event has
occurred which with notice or lapse of time of both would put the Company in
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company is a party, except for possible defaults as would not, individually
or in the aggregate, have a Material Adverse Effect. The business of the
Company is not being conducted, and shall not be conducted, in violation of any
law, ordinance or regulation of any governmental entity, except for possible
violations which either singly or in the aggregate do not have a Material
Adverse Effect. Except as specifically contemplated by this Agreement and as
required under the Securities Act and any applicable state securities laws, the
Company is not required to obtain any consent, authorization or order of, or
make any filing or registration with, any court or governmental agency or any
regulatory or self regulatory agency in order for it to execute, deliver or
perform any of its obligations under this Agreement in accordance with the terms
hereof.
(j) The Company shall at all times have authorized, and reserved for
the purpose of issuance, a sufficient number of Warrant Shares to provide for
the full exercise of the outstanding Placement Warrants.
(k) The Company shall promptly secure the listing of the Warrant
Shares upon each national securities exchange or automated quotation system, if
any, upon which shares of Common Stock are then listed (subject to official
notice of issuance) and shall maintain, so long
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<PAGE>
as any other shares of Common Stock shall be so listed, such listing of all
Warrant Shares from time to time issuable upon exercise of the Warrants.
4. Publicity. The Company shall not make any reference to Zanett or to
---------
any of its affiliates in any release or other communication without Zanett's
prior written consent. Without Zanett's prior written consent, no advice
rendered by Zanett in connection with the services performed by Zanett pursuant
to this Agreement will be quoted by the Company, its affiliates or
representatives nor will any such advice be referred to in any report, document,
release or other communication, whether oral or written, prepared or issued or
transmitted by such person, except to the extent required by law (in which case
the appropriate party shall so advise Zanett in writing prior to such use and
shall consult with Zanett with respect to the form and timing of the
disclosure).
5. Indemnification and Contribution.
--------------------------------
(a) To the extent permitted by law, the Company will indemnify, hold
harmless and defend Zanett and each of its directors, officers, partners,
members, employees, agents and each person who controls Zanett within the
meaning of the Securities Act or the Exchange Act, if any, (each, an
"INDEMNIFIED PERSON"), against any joint or several losses, claims, damages,
liabilities or expenses (collectively, together with actions, proceedings or
inquiries by any regulatory or self-regulatory organization, whether commenced
or threatened, in respect thereof, "CLAIMS") to which any of them may become
subject insofar as such Claims arise out of or are based upon: (i) any
transaction contemplated by this Agreement, the retention of Zanett as Placement
Agent under this Agreement, the performance of services by Zanett hereunder or
any involvement or alleged involvement of Zanett in the Offering or (ii) any
breach of any of the Company's representations, warranties or covenants
contained herein. The Company shall reimburse each of the Indemnified Persons,
promptly as such expenses are incurred and are due and payable, for any
reasonable legal fees or other reasonable expenses incurred by them in
connection with investigating or defending any such Claim. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 5(a) shall not (i) apply in instances where the Claims
were the result of Zanett's gross negligence or based on Zanett's wilful
misconduct, and (ii) apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of the Company, which
consent shall not be unreasonably withheld.
(b) Promptly after receipt by an Indemnified Person under this Section
5 of notice of the commencement of any action (including any governmental
action), such Indemnified Person shall, if a Claim in respect thereof is made
against the Company under this Section 5, deliver to the Company a written
notice of the commencement thereof, and the Company shall have the right to
participate in, and, to the extent the Company so desires, to assume control of
the defense thereof with counsel mutually satisfactory to the Company and the
Indemnified Person; provided, however, that an Indemnified Person shall have the
-------- -------
right to retain its own counsel, with the fees and expenses to be paid by the
Company, if, in the reasonable opinion of counsel retained by the Indemnified
Person, the representation by such counsel of the
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<PAGE>
Indemnified Person and the Company would be inappropriate due to actual or
potential differing interests between such Indemnified Person and any other
party represented by the Company's counsel in such proceeding. The Company shall
pay for only one separate legal counsel for the Indemnified Persons, and such
legal counsel shall be selected by Placement Agent. The failure to deliver
written notice to the Company within a reasonable time of the commencement of
any such action shall not relieve the Company of any liability to the
Indemnified Person under this Section 5, except to the extent that the Company
is actually prejudiced in its ability to defend such action. The indemnification
required by this Section 5 shall be made by periodic payments of the amount
thereof during the course of the investigation or defense, as such expense,
loss, damage or liability is incurred and is due and payable.
(c) To the extent any indemnification by the Company of an Indemnified
Person is prohibited or limited by law or otherwise unavailable in respect of
any Claim, the Company agrees to make the maximum contribution with respect to
any amounts for which it would otherwise be liable under Section 5 to the
fullest extent permitted by law. In this regard, the Company shall contribute
to the amount paid or payable by such Indemnified Person as a result of any such
Claim (i) in such portion as is appropriate to reflect the relative benefits
received by the Company, on the one hand, and the Indemnified Person, on the
other, from the structuring and issuance of the securities in the Offering or
any other transaction in which Zanett rendered services hereunder or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company, on
the one hand, and of the Indemnified Person, on the other, in connection with
untrue statements or omissions or other actions (or alleged untrue statements,
omissions or other actions) which resulted in such Claim as well as any other
relevant equitable considerations. The relative benefits received by the
Company, on the one hand, and the Indemnified Person, on the other, shall be
deemed to be in the same proportion as the total gross proceeds received by the
Company in the Offering or any other financing bears to such Indemnified
Person's compensation. The relative fault of the Company on the one hand and of
the Indemnified Person on the other shall be determined by reference to, among
other things, whether such untrue statements or omissions or other actions (or
alleged untrue statements, omissions or other actions) relate to information
supplied or action taken by the Company, on the one hand, or by the Indemnified
Person, on the other, and the relevant persons' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statements, omission or actions. The amount paid or payable by a party as a
result of the Claim shall be deemed to include any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim. The Company and Zanett agree that it would not
be just and equitable if contribution pursuant to this Section 5 were determined
by pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to above.
(d) The aforesaid indemnity and contribution agreements shall apply to
any related activities engaged in by any Indemnified Person prior to this date
and to any modification of Zanett's engagement hereunder, and shall remain in
full force and effect regardless of any investigation made by or on behalf of
Placement Agent or any of its agents, employees, officers,
-10-
<PAGE>
directors or controlling persons and shall survive the issuance of any
securities in any transaction referred to hereunder (including the Offering) and
any termination of this Agreement or Placement Agent's engagement hereunder. The
Company agrees to promptly notify Zanett of the commencement of any litigation
or proceeding against it or any of its directors, officers, agents or employees
in connection with the transactions contemplated hereby.
(e) The Company also agrees that no Indemnified Person shall have any
liability (whether direct or indirect, in contract or tort or otherwise) to the
Company, its owners, creditors or security holders for or in connection with
advice or services rendered or to be rendered by Zanett pursuant to this
Agreement, the transactions contemplated hereby or any Indemnified Person's
actions or inactions in connection with any such advice, services or
transactions except for liabilities (and related expenses) of the Company that
are determined by a final judgment of a court of competent jurisdiction to have
resulted primarily from such Indemnified Party's gross negligence or wilful
misconduct in connection with any such advice, actions, inactions or services.
6. Survival of Certain Provisions. The representations, warranties,
------------------------------
covenants and provisions contained in Section 2(f), Section 3, Section 4 and
Section 5 hereof shall survive in full force and effect until that date which is
three (3) years from the date hereof (or such longer period as may be specified
in such provisions) regardless of (a) any completion or termination of any
financing contemplated by this Agreement (including the Offering), (b) any
termination of this Agreement, or (c) any investigation made by or on behalf of
Placement Agent or any affiliate of Placement Agent, and shall be binding upon,
and shall inure to the benefit of, any successors, assigns, heirs and personal
representatives of the Company, Zanett, the Indemnified Parties and any holder
of Placement Warrants.
7. Miscellaneous.
-------------
(a) All notices, requests, demands and other communications which are
required or may be given hereunder shall be in writing and shall be deemed to
have been duly given when delivered personally, receipt acknowledged or five (5)
days after being sent by registered or certified mail, return receipt requested,
postage prepaid. All notices shall be made to the parties at the addresses
designated above or at such other or different addresses which party may
subsequently provided with notice thereof, and, to their respective legal
counsel, as follows:
(i) If to Placement Agent, to
---------------------
The Zanett Securities Corporation
767 Fifth Avenue
New York, NY 10153
Attention: Claudio Guazzoni
-with a copy to -
-11-
<PAGE>
Klehr, Harrison, Harvey, Branzburg & Ellers
1401 Walnut Street
Philadelphia, PA 19102
Attention: Stephen T. Burdumy, Esquire
(ii) If to the Company, to
-----------------
Advanced Environmental Recycling Technologies, Inc.
FM 2169
Junction, Texas 76849
Attention: Chairman of the Board
-with a copy to -
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1500 NationsBank Plaza
300 Convent Street
San Antonio, Texas 78205
Attention: Pat Ryan, Esq.
(b) This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument. This Agreement, once executed by a
party, may be delivered to the other parties hereto by facsimile transmission of
a copy of this Agreement bearing the signature of the party so delivering this
Agreement.
(c) This Agreement shall be governed by, and construed in accordance
with, the laws of the State of New York (without regard to its conflict of laws
provisions). The Company hereby agrees to submit to the exclusive jurisdiction
of an arbitration panel of the National Association of Securities Dealers, Inc.
located in the City of New York in connection with any suit, action or
proceeding related to this Agreement or any of the matters contemplated hereby,
irrevocably waives any defense of lack of personal jurisdiction and irrevocably
agrees that all claims in respect of any suit, action or proceeding may be heard
and determined in by such panel. The Company irrevocably waives, to the fullest
extent it may effectively do so under applicable law any objection which it may
now or hereafter have to the laying of venue of any such suit, action or
proceeding brought before any such court and any claims that any such suit,
action or proceeding brought in any such arbitration panel has been brought in
an inconvenient forum. The Company further agrees to pay or reimburse Zanett
for all reasonable costs and expenses incurred by Placement Agent in connection
with the enforcement of any of its rights under this Agreement, including
without limitation, all attorneys' fees and expenses of its counsel.
(d) The section headings in this Agreement have been inserted as a
matter of
-12-
<PAGE>
convenience of reference and are not a part of this Agreement.
(e) This Agreement may not be modified or amended except in writing
duly sworn by the parties hereto.
(f) If any term, provision, covenant or restriction contained in this
Agreement is held by a court of competent jurisdiction or other authority to be
invalid, void, unenforceable or against its regulatory policy, the remainder of
the terms, provisions, covenants and restrictions contained in this Agreement
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated.
(g) Each party to this Agreement has participated in the negotiation
and drafting of this Agreement. As such, the language used herein shall be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction will be applied against any party to
this Agreement.
Please sign and return the original and one copy of this letter to indicate
your acceptance of the terms set forth herein whereupon this letter and your
acceptance shall constitute a binding agreement between you and the Company.
Very truly yours,
Advanced Environmental Recycling
Technologies, Inc.
By:
--------------------------------------
Accepted and Agreed to
this 30th day of October, 1997.
THE ZANETT SECURITIES CORPORATION
By:
----------------------------
Name: Claudio Guazzoni
Title: President
-13-
<PAGE>
EXHIBIT 10.2
CONSULTING AGREEMENT
--------------------
This Consulting Agreement (the "AGREEMENT") is entered into as of this 30th
day of October, 1997 by and between ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC., a corporation organized under the laws of the State of
Delaware (the "COMPANY"), and Mr. Bruno Guazzoni (the "CONSULTANT").
W I T N E S S E T H:
WHEREAS, the Consultant has provided certain financial and investment
banking advisory services to the Company in connection with the offer and sale
by the Company of $1,300,000 in aggregate principal amount of promissory notes
(the "INITIAL NOTES") in accordance with the terms of that certain Note Purchase
Agreement, dated as of October 30, 1997 (the "INITIAL OFFERING"); and
WHEREAS, the Consultant desires to assist the Company in connection with
the offer and sale by the Company, at any time or from time to time during the
two (2) year period following the later of the date hereof and the closing date
of the Initial Offering (the "ADDITIONAL FINANCING PERIOD"), of up to an
additional $2,200,000 in aggregate principal amount of promissory notes (the
"ADDITIONAL NOTES" and, together with the Initial Notes, the "NOTES") on terms
substantially similar to those contained in the Initial Notes (the "SECONDARY
OFFERING"); and
WHEREAS, the Consultant desires to provide to the Company ongoing (i)
investment banking and general financial advisory services, (ii) advisory
services relating to financial and strategic ventures and alliances and (iii)
market development advisory services (all such advisory services, together with
the advice and assistance previously rendered in connection with the Initial
Offering and to be rendered in connection with the Secondary Offering, being
hereinafter collectively referred to as the "SERVICES"); and
WHEREAS, the Company has determined that the Services of the Consultant
have been and will continue to be of value to the Company and desires to engage
the Consultant in accordance with the terms hereof.
NOW, THEREFORE, with the foregoing deemed incorporated herein, in
consideration of the foregoing premises and the mutual promises, covenants and
agreements herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Consultant, intending to be legally bound hereby, agree as follows:
<PAGE>
1. Engagement. During the Term of this Agreement (as hereinafter
----------
defined), the Company agrees to engage the Consultant to perform the Services
and the Consultant agrees to perform the Services for the Company, subject to
the terms and conditions hereinafter set forth. In connection with the
performance of the Consultant's duties hereunder, the Consultant agrees to
devote all necessary time, energy and skill to the provision of the Services and
to generally make available to the Company his expertise and knowledge at such
times as may be mutually agreed upon by the parties; provided, however, that in
-------- -------
no event shall the Consultant be required to devote a specific number of hours
or days during the Term hereof to the provision of the Services hereunder and,
provided, further, that nothing contained herein shall prohibit the Consultant
- -------- -------
from engaging in any other activities or from providing advisory services of a
nature similar to the Services hereunder to any other person or entity.
2. Term. The term of this Agreement shall commence on the date hereof
----
and shall continue for a period of five (5) years (the "TERM").
3. Compensation.
------------
(a) For Services previously rendered in connection with the Initial
Offering and for Services to be rendered hereunder, the Company agrees to issue
and deliver to the Consultant as of the date hereof a warrant (the "INITIAL
WARRANT"), in the form attached hereto as Exhibit A, to acquire 2,600,000 shares
---------
of the Company's Class A Common Stock, par value $.01 per share (the "COMMON
STOCK"), on the terms and subject to the conditions set forth therein; provided,
--------
however, that in the event that the maturity date of the Initial Notes is
- -------
extended, at the Company's option as provided in the Initial Notes, from a date
270 days from the date of issuance of the Initial Notes (the "INITIAL NOTE
ISSUANCE DATE") to a date up to and including 365 days from the Initial Note
Issuance Date, the Company shall, concurrently with notice to the purchasers of
the Initial Notes and the Consultant of such extension, issue to the Consultant
an additional warrant identical to the Initial Warrant (the "INITIAL EXTENSION
WARRANT") to purchase an additional 650,000 shares of Common Stock.
(b) In the event that the Company conducts a closing with respect to
the Secondary Offering at any time on or before the sixtieth (60th) day
following the expiration of the Additional Financing Period, the Company shall
issue and delivery to the Consultant a warrant identical to the Initial Warrant
(the "SECONDARY WARRANT") to purchase such number of shares of the Company's
Common Stock as is equal to two hundred percent (200%) of the aggregate
principal amount of the Additional Notes; provided, however, that in the event
-------- -------
that the maturity date of the Additional Notes is extended, at the Company's
option, from a date 270 days from the date of issuance of the Additional Notes
(the "ADDITIONAL NOTE ISSUANCE DATE") to a date up to and including 365 days
from the Additional Note Issuance Date, the Company shall, concurrently with
notice to the purchasers of such Additional Notes and the Consultant of such
extension, issue to the Consultant an additional warrant identical to the
Initial Warrant (the "SECONDARY EXTENSION WARRANT") to purchase such number of
shares of the Company's Common Stock as is equal to the difference between two
hundred fifty percent (250%) of the aggregate principal amount of the Additional
Notes minus the number of shares of Common
2
<PAGE>
Stock subject to the Secondary Warrant.
(c) The Initial Warrant, the Initial Extension Warrant, the Secondary
Warrant and the Secondary Extension Warrant are collectively referred to as the
"WARRANTS." The Warrants shall be exercisable for a period of five (5) years
from the date of issuance thereof at a price per share equal to the average of
the Closing Bid Prices (as defined in the Notes) for the Common Stock during the
five (5) consecutive trading days ending on the trading day immediately
preceding the closing date of the Initial Offering or the Secondary Offering, as
applicable. The Warrants shall be immediately exercisable and shall not be
subject to vesting or forfeiture. The Company agrees to provide the Consultant
with certain registration rights with respect to the shares of Common Stock
issuable upon exercise of or otherwise pursuant to the Warrants (the "WARRANT
SHARES") in accordance with the provisions of that certain Registration Rights
Agreement, in the form attached hereto as Exhibit B, to be entered into by the
---------
Company and Consultant on even date herewith.
4. Reimbursement of Expenses. The Consultant shall be reimbursed for
-------------------------
all reasonable and necessary out-of-pocket expenses incurred by him in the
performance of requested Services under this Agreement upon presentation to the
Company of appropriate vouchers or other documentation.
5. Termination. This Agreement shall terminate automatically upon the
-----------
expiration of its Term. No termination of this Agreement shall affect
Consultant's rights with respect to the Warrants and the Warrant Shares.
6. Independent Contractor Status. The relationship of the Consultant to
-----------------------------
the Company shall be that of an independent contractor, and not that of an agent
or employee of the Company. The Consultant agrees that he shall be solely
responsible for paying any and all federal, state and local income taxes, as
well as any Social Security tax, which may become due and payable as a result of
the compensation to be received by the Consultant from the Company for
performing the Services hereunder. No federal, state or local income taxes, or
any other payroll tax of any kind, shall be withheld or paid by the Company on
behalf of the Consultant. The Consultant agrees to indemnify and hold harmless
the Company and its affiliates from any loss, liability, damage or expense which
it or they may suffer or incur by reason of the Consultant's failure to pay any
taxes which may become payable as a result of the compensation to be received by
the Consultant from the Company for performing the Services hereunder.
7. Indemnification. The Company shall indemnify the Consultant and shall
---------------
save and hold the Consultant harmless from and against any and all damages,
losses, obligations, deficiencies, costs and expenses, including, without
limitation, reasonable attorneys' fees and other costs and expenses, incurred by
the Consultant in connection with any proceeding to which the Consultant is a
party by reason of his engagement with the Company pursuant hereto and/or the
performance of his duties hereunder to the extent and in a manner consistent
with the Company's policies for the indemnification of its officers and
directors.
8. Company Property. During the Term of this Agreement and thereafter,
----------------
all
3
<PAGE>
materials, know-how, inventions, trade secrets, data and other proprietary
information of any kind furnished by the Company to the Consultant are and shall
remain the sole and confidential property of the Company. In the event that the
Company requests the return of such materials at any time during the Term of
this Agreement or following its termination, the Consultant shall immediately
deliver such material to the Company.
9. Confidentiality. All disclosures of trade secrets, inventions, know-
---------------
how, financial information or other confidential or proprietary information made
by the Company to the Consultant shall be received and maintained in confidence
by the Consultant during the Term of this Agreement and thereafter and the
Consultant shall treat all such trade secrets, inventions, know-how, financial
information or other confidential or proprietary information as confidential
except (a) as to the persons directly responsible for the effective operation of
the Company; (b) as to the professional advisers of the Company; (c) as to such
information as is required by law to be disclosed by the Consultant or by the
Company; and (d) as to such information as is or may fall within the public
domain.
10. Equitable Relief. The Consultant recognizes that the remedy at law
----------------
for any breach or threatened breach by him of his covenants and agreements set
forth in Sections 8 and 9 hereof would be inadequate and that any such breach or
threatened breach would cause such immediate and permanent damage as would be
irreparable and the exact amount of which would be impossible to ascertain.
Accordingly, the Consultant agrees that in the event of any breach or threatened
breach of any such covenant or agreement, in addition to any other legal and
equitable remedies which may be available to the Company, the Company may
specifically enforce the covenants and restrictions pertaining to his
obligations set forth in Sections 8 and 9 hereof and may obtain temporary and/or
permanent injunctive relief without the necessity of proving actual damage by
reason of such breach or threatened breach thereof and, to the extent
permissible under the applicable statutes and rules of procedure, a temporary
injunction may be granted immediately upon the commencement of any such suit and
without notice. The covenants and restrictions pertaining to the Consultant's
obligations set forth in Sections 8 and 9 hereof shall survive the expiration or
sooner termination of this Agreement in accordance with the terms hereof and
shall remain in full force and effect.
11. Entire Agreement. This Agreement, the Warrants and the Registration
----------------
Rights Agreement constitute the entire understanding between the parties with
respect to the subject matter contained herein and supersede any prior
understandings and agreements between them respecting such subject matter.
12. Headings. The headings describing the provisions of this Agreement
--------
are for convenience of reference only and shall not affect its interpretation.
13. Severability. If any provision of this Agreement is held illegal,
------------
invalid or unenforceable, such illegality, invalidity, or unenforceability shall
not affect any other provision hereof. Such provision and the remainder of this
Agreement shall, in such circumstances, be modified to the extent necessary to
render enforceable the remaining provisions hereof.
4
<PAGE>
14. Notices. All notices shall be in writing and shall be deemed to have
-------
been given if presented personally, sent by recognized national overnight
courier, or sent by certified or registered mail, postage prepaid, return
receipt requested, to the following addressees:
If to the Company:
Advanced Environmental Recycling
Technologies, Inc.
FM 2169
Junction, Texas 76849
Telecopy: (915) 446-3864
Attention: Chief Executive Officer
With a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1500 NationsBank Plaza
300 Convent Street
San Antonio, Texas 78205
Telecopy: (210) 224-2035
Attention: Pat Ryan, Esq.
If to the Consultant, to such address as the Consultant shall
provide to the Company pursuant to the provisions hereof.
Notice of any change in such addresses shall also be given in the manner set
forth above. Whenever the giving of notice is required, the giving of such
notice may be waived by the party entitled to receive such notice.
15. Counterparts. This Agreement may be executed in counterparts, all of
------------
which taken together shall constitute one and the same instrument.
16. Waiver. The failure of either party to insist upon strict performance
------
of any of the terms or conditions of this Agreement shall not constitute a
waiver of any of its rights hereunder.
17. Successors and Assigns. This Agreement binds, inures to the benefit
----------------------
of, and is enforceable by the Consultant and his heirs and personal
representatives, and the Company and its successors and permitted assigns, and
does not confer any rights on any other persons or entities. Neither party to
this Agreement may assign its rights or obligations hereunder without the
express written consent of the other party; provided, however, that the
-------- -------
foregoing shall not be deemed to prohibit the assignment by the Consultant of
the Warrants (or the right to acquire Common Stock upon exercise thereof) in
accordance with the terms thereof.
5
<PAGE>
18. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the internal laws of the State of Delaware.
19. Amendments. This Agreement may be amended and supplemented only by a
----------
written instrument duly executed by both parties.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
By:
------------------------------
Name:
Title:
-----------------------------
Bruno Guazzoni
7
<PAGE>
EXHIBIT 10.3
NOTE PURCHASE AGREEMENT
-----------------------
NOTE PURCHASE AGREEMENT (this "AGREEMENT"), dated as of October 30, 1997,
by and among ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC., a corporation
organized under the laws of the State of Delaware (the "COMPANY"), with
headquarters located at FM 2169, Junction, Texas 76849, and each of the
purchasers (collectively, the "PURCHASERS") set forth on the execution pages
hereof (the "EXECUTION PAGES").
WHEREAS:
A. The Company and each Purchaser are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by the provisions of Regulation D ("REGULATION D"), as promulgated by the United
States Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "SECURITIES ACT").
B. The Purchasers desire to purchase, upon the terms and conditions
stated in this Agreement, up to One Million Three Hundred Thousand Dollars
($1,300,000) in aggregate principal amount of promissory notes of the Company,
in the form attached hereto as Exhibit A (the "NOTES"). All interest which may
---------
become due and payable by the Company in accordance with the terms of the Notes
shall be paid through the issuance of shares of the Company's Class A Common
Stock, par value $.01 per share (the "COMMON STOCK"). The shares of Common
Stock issuable as payment of interest due on the Notes are referred to herein as
the "NOTE SHARES." The Notes and the Note Shares are collectively referred to
herein as the "SECURITIES."
C. Contemporaneous with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement, in
the form attached hereto as Exhibit B (the "REGISTRATION RIGHTS AGREEMENT"),
---------
pursuant to which the Company has agreed to provide certain registration rights
under the Securities Act and the rules and regulations promulgated thereunder,
and applicable state securities laws.
NOW, THEREFORE, the Company and the Purchasers hereby agree as follows:
1. PURCHASE AND SALE OF SECURITIES
-------------------------------
a. Purchase of Notes. On the Closing Date (as defined below), subject to
-----------------
the satisfaction (or waiver) of the conditions set forth in Section 6 and
Section 7 below, the Company shall issue and sell to each Purchaser, and each
Purchaser severally agrees to purchase from the Company, Note(s) in the
aggregate principal amount set forth on such Purchaser's Execution Page hereto.
Each Purchaser's obligation to purchase Notes hereunder is distinct and separate
from the other Purchasers' obligation to purchase Notes and no Purchaser shall
be required to purchase hereunder more than the aggregate principal amount of
Notes set forth on
<PAGE>
such Purchaser's Execution Page hereto notwithstanding any failure by the other
Purchasers to purchase Notes hereunder.
b. Form of Payment. On the Closing Date, each Purchaser shall pay the
---------------
aggregate principal amount of the Notes being purchased by such Purchaser
hereunder by wire transfer to the Company, in accordance with the Company's
written wiring instructions, against delivery of the duly executed Notes being
purchased by such Purchaser and the Company shall deliver such Notes against
delivery of such aggregate principal amount.
c. Closing Date. Subject to the satisfaction (or waiver) of the
------------
conditions thereto set forth in Section 6 and Section 7 below, the date and time
of the issuance and sale of the Notes pursuant to this Agreement (the "CLOSING")
shall be 12:00 noon, New York City time, on October 30, 1997, or such other time
as may be mutually agreed upon by the parties (the "CLOSING DATE"). The Closing
shall occur at the offices of Klehr, Harrison, Harvey, Branzburg & Ellers, 1401
Walnut Street, Philadelphia, Pennsylvania 19102.
2. PURCHASERS' REPRESENTATIONS AND WARRANTIES
------------------------------------------
Each Purchaser severally represents and warrants to the Company as follows:
a. Investment Purpose. The Purchaser is purchasing the Securities for
------------------
the Purchaser's own account for investment purposes and not with a present view
towards the public sale or distribution thereof, except pursuant to sales that
are exempt from the registration requirements of the Securities Act and/or sales
registered under the Securities Act. The Purchaser understands that the
Purchaser must bear the economic risk of this investment indefinitely, unless
the Securities are registered pursuant to the Securities Act and any applicable
state securities or blue sky laws or an exemption from such registration is
available, and that the Company has no present intention of registering any such
Securities other than as contemplated by the Registration Rights Agreement.
Notwithstanding anything in this Section 2(a) to the contrary, by making the
representations herein, the Purchaser does not agree to hold the Securities for
any minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the Securities Act.
b. Accredited Investor Status. The Purchaser is an "ACCREDITED INVESTOR"
--------------------------
as that term is defined in Rule 501(a) of Regulation D.
c. Reliance on Exemptions. The Purchaser understands that the Securities
----------------------
are being offered and sold to the Purchaser in reliance upon specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying upon the truth and accuracy of, and the
Purchaser's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Purchaser set forth herein in order to
determine the availability of such exemptions and the eligibility of the
Purchaser to acquire the Securities.
-2-
<PAGE>
d. Information. The Purchaser and its counsel have been furnished all
-----------
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Securities which have been
specifically requested by the Purchaser or its counsel. The Purchaser and its
counsel have been afforded the opportunity to ask questions of the Company and
have received what the Purchaser believes to be satisfactory answers to any such
inquiries. Neither such inquiries nor any other due diligence investigation
conducted by the Purchaser or its counsel or any of its representatives shall
modify, amend or affect the Purchaser's right to rely on the Company's
representations and warranties contained in Section 3 below. The Purchaser
understands that its investment in the Securities involves a high degree of
risk.
e. Governmental Review. The Purchaser understands that no United States
-------------------
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities.
f. Transfer or Resale. The Purchaser understands that (i) except as
------------------
provided in the Registration Rights Agreement, the Securities have not been and
are not being registered under the Securities Act or any state securities laws,
and may not be transferred unless (a) subsequently registered thereunder, or (b)
the Purchaser shall have delivered to the Company an opinion of counsel (which
opinion shall be in form, substance and scope customary for opinions of counsel
in comparable transactions) to the effect that the Securities to be sold or
transferred may be sold or transferred under an exemption from such
registration, or (c) sold under Rule 144 promulgated under the Securities Act
(or a successor rule) ("RULE 144"), or (d) sold or transferred to an affiliate
of the Purchaser; and (ii) neither the Company nor any other person is under any
obligation to register such Securities under the Securities Act or any state
securities laws or to comply with the terms and conditions of any exemption
thereunder (in each case, other than pursuant to the Registration Rights
Agreement).
g. Legends. The Purchaser understands that the Notes and, until such
-------
time as the Note Shares have been registered under the Securities Act (including
registration pursuant to Rule 416 thereunder) as contemplated by the
Registration Rights Agreement or otherwise may be sold by the Purchaser under
Rule 144, the certificates for the Note Shares may bear a restrictive legend in
substantially the following form:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or the securities laws of any
state of the United States. The securities represented hereby may not be
offered or sold in the absence of an effective registration statement for
the securities under applicable securities laws unless offered, sold or
transferred under an available exemption from the registration requirements
of those laws.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of any Security upon which such
legend is stamped, if, unless otherwise required by state securities laws, (a)
the sale of such Security is registered under the Securities Act (including
registration pursuant to Rule 416 thereunder), or (b) such holder
-3-
<PAGE>
provides the Company with an opinion of counsel, in form, substance and scope
customary for opinions of counsel in comparable transactions, to the effect that
a public sale or transfer of such Security may be made without registration
under the Securities Act or (c) such holder provides the Company with reasonable
assurances that such Security can be sold under Rule 144. The Purchaser agrees
to sell all Securities, including those represented by a certificate(s) from
which the legend has been removed, pursuant to an effective registration
statement or under an exemption from the registration requirements of the
Securities Act. In the event the above legend is removed from any certificate(s)
and thereafter the effectiveness of a registration statement covering such
Security is suspended or the Company determines that a supplement or amendment
thereto is required by applicable securities laws, then upon reasonable advance
notice to the Purchaser the Company may require that the above legend be placed
on any such Security and the Purchaser shall cooperate in the prompt replacement
of such legend. Such legend shall be removed when such Security may be sold
pursuant to an effective registration statement or sold under Rule 144.
h. Authorization; Enforcement. This Agreement and the Registration
--------------------------
Rights Agreement have been duly and validly authorized, executed and delivered
on behalf of the Purchaser and are valid and binding agreements of the Purchaser
enforceable in accordance with their terms.
i. Residency. The Purchaser is a resident of the jurisdiction set forth
---------
under the Purchaser's name on the Execution Page hereto executed by such
Purchaser.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
---------------------------------------------
The Company represents and warrants to each Purchaser as follows:
a. Organization and Qualification. The Company and each of its
------------------------------
subsidiaries is a corporation duly organized and existing in good standing under
the laws of the jurisdiction in which it is incorporated, and has the requisite
corporate power to own its properties and to carry on its business as it is now
being conducted. The Company and each of its subsidiaries 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 by it makes such
qualification necessary and where the failure so to qualify would have a
Material Adverse Effect. "MATERIAL ADVERSE EFFECT" means any material adverse
effect on (i) the Securities, (ii) the ability of the Company to perform its
obligations hereunder and under the Notes or the Registration Rights Agreement
or (iii) the business, operations, properties, prospects or financial condition
of the Company and its subsidiaries, taken as a whole.
b. Authorization; Enforcement. (i) The Company has the requisite
--------------------------
corporate power and authority to enter into and perform its obligations under
this Agreement, the Notes and the Registration Rights Agreement, to issue and
sell the Notes in accordance with the terms hereof and to issue the Note Shares
in accordance with the terms of the Notes; (ii) the execution, delivery and
performance of this Agreement, the Notes and the Registration Rights Agreement
by
-4-
<PAGE>
the Company and the consummation by it of the transactions contemplated hereby
and thereby (including, without limitation, the issuance of the Notes and the
issuance and reservation for issuance of the Note Shares) have been duly
authorized by the Company's Board of Directors and no further consent or
authorization of the Company, its Board or Directors or its stockholders is
required (under the rules promulgated by the National Association of Securities
Dealers ("NASD") or otherwise); (iii) this Agreement has been duly executed and
delivered by the Company; and (iv) this Agreement constitutes, and, upon
execution and delivery by the Company of the Notes and the Registration Rights
Agreement, such agreements will constitute, valid and binding obligations of the
Company enforceable against the Company in accordance with their terms.
c. Capitalization. The capitalization of the Company as of the date
--------------
hereof, including the authorized capital stock, the number of shares issued and
outstanding, the number of shares issuable and reserved for issuance pursuant to
the Company's stock option plans, the number of shares issuable and reserved for
issuance pursuant to securities exercisable for, or convertible into or
exchangeable for any shares of capital stock and the number of shares to be
reserved for issuance pursuant hereto is set forth on Schedule 3(c). All of
-------------
such outstanding shares of capital stock have been, or upon issuance will be,
validly issued, fully paid and nonassessable. No shares of capital stock of the
Company (including the Note Shares) are subject to preemptive rights or any
other similar rights of the stockholders of the Company or any liens or
encumbrances. Except for the obligation of the Company to issue the Note Shares
in accordance with the terms of the Notes and except as disclosed in Schedule
--------
3(c), as of the date of this Agreement, (i) there are no outstanding options,
- ----
warrants, scrip, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into or exercisable
or exchangeable for, any shares of capital stock of the Company or any of its
subsidiaries, or arrangements by which the Company or any of its subsidiaries is
or may become bound to issue additional shares of capital stock of the Company
or any of its subsidiaries, and (ii) there are no agreements or arrangements
under which the Company or any of its subsidiaries is obligated to register the
sale of any of its or their securities under the Securities Act (except the
Registration Rights Agreement). Except as set forth on Schedule 3(c), there are
-------------
no securities or instruments containing antidilution or similar provisions that
will be triggered by the issuance of the Securities in accordance with the terms
of this Agreement or the Notes. The Company has furnished to each Purchaser
true and correct copies of the Company's Certificate of Incorporation as in
effect on the date hereof ("CERTIFICATE OF INCORPORATION"), the Company's By-
laws as in effect on the date hereof (the "BY-LAWS"), and all other instruments
and agreements governing securities convertible into or exercisable or
exchangeable for capital stock of the Company.
d. Issuance of Note Shares. The Note Shares are duly authorized and
-----------------------
reserved for issuance in accordance with the terms of the Notes, and, upon
issuance in accordance with the terms of the Notes, will be validly issued,
fully paid and non-assessable, and free from all taxes, liens, claims and
encumbrances and will not be subject to preemptive rights or other similar
rights of stockholders of the Company and will not impose personal liability
upon the holder thereof.
-5-
<PAGE>
e. No Conflicts. The execution, delivery and performance of this
------------
Agreement, the Registration Rights Agreement and the Notes by the Company, and
the consummation by the Company of the transactions contemplated hereby and
thereby (including, without limitation, the issuance of the Notes and the
issuance and reservation for issuance of the Note Shares) will not (i) result in
a violation of the Certificate of Incorporation or By-laws 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 to which the Company or any of its subsidiaries is a party, or result
in a violation of any law, rule, regulation, order, judgment or decree
(including U.S. 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 is bound or affected (except, with respect to
clause (ii), for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in the
aggregate, have a Material Adverse Effect). Neither the Company nor any of its
subsidiaries is in violation of its Certificate of Incorporation, By-laws or
other organizational documents and neither the Company nor any of its
subsidiaries is in default (and no event has occurred which, with notice or
lapse of time or both, would put the Company or any of its subsidiaries in
default) under, nor has there occurred any event giving others (with notice or
lapse of time or both) any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its subsidiaries is a party, except for actual or possible violations,
defaults or rights as would not, individually or in the aggregate, have a
Material Adverse Effect. The businesses of the Company and its subsidiaries are
not being conducted, and shall not be conducted so long as the Notes are
outstanding or any Purchaser beneficially owns any of the Securities, in
violation of any law, ordinance or regulation of any governmental entity, except
for actual or possible violations, if any, the sanctions for which either singly
or in the aggregate would not have a Material Adverse Effect. Except as
specifically contemplated by this Agreement and as required under the Securities
Act and any applicable state securities laws, the Company is not required to
obtain any consent, approval, authorization or order of, or make any filing or
registration with, any court or governmental agency or any regulatory or self
regulatory agency in order for it to execute, deliver or perform any of its
obligations under this Agreement, the Registration Rights Agreement or the
Notes, in each case in accordance with the terms hereof or thereof. The Company
is not in violation of the listing requirements of The Nasdaq Smallcap Market
("NASDAQ") and the Company does not reasonably anticipate that the Common Stock
will be delisted by NASDAQ for the foreseeable future.
f. SEC Documents, Financial Statements. Since December 31, 1993, the
-----------------------------------
Company has timely filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC pursuant to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT") (all of the foregoing filed prior to the date hereof and after December
31, 1993, and all exhibits included therein and financial statements and
schedules thereto and documents incorporated by reference therein, being
hereinafter referred to herein as the "SEC DOCUMENTS"). The Company has
delivered to the Purchaser true and complete copies of the SEC Documents, except
for the exhibits and schedules thereto and the documents
-6-
<PAGE>
incorporated therein. As of their respective dates, the SEC Documents complied
in all material respects with the requirements of the Exchange Act or the
Securities Act, as the case may be, and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, 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. None of the
statements made in any such SEC Documents is, or has been, required to be
updated or amended under applicable law. As of their respective dates, the
financial statements of the Company included in the SEC Documents complied as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC applicable with respect thereto. Such
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles, consistently applied, 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 consolidated
financial position of the Company and its consolidated subsidiaries as of the
dates thereof and the consolidated results of their operations and cash flows
for the periods then ended (subject, in the case of unaudited statements, to
immaterial year-end audit adjustments). Except as set forth in the financial
statements of the Company included in the SEC Documents filed prior to the date
hereof, the Company has no liabilities, contingent or otherwise, other than (i)
liabilities incurred in the ordinary course of business subsequent to the date
of such financial statements and (ii) obligations under contracts and
commitments incurred in the ordinary course of business and not required under
generally accepted accounting principles to be reflected in such financial
statements, which liabilities and obligations referred to in clauses (i) and
(ii), individually or in the aggregate, are not material to the financial
condition or operating results of the Company.
g. Absence of Certain Changes. Since December 31, 1996, there has been
--------------------------
no material adverse change and no material adverse development in the business,
properties, operations, financial condition, results of operations or prospects
of the Company, except as disclosed in Schedule 3(g) or in the SEC Documents
-------------
filed prior to the date hereof.
h. Absence of Litigation. Except as disclosed in the SEC Documents filed
---------------------
prior to the date hereof, there is no action, suit, proceeding, inquiry or
investigation before or by any court, public board, government agency, self-
regulatory organization or body pending or, to the knowledge of the Company or
any of its subsidiaries, threatened against or affecting the Company, any of its
subsidiaries, or any of their respective directors or officers in their
capacities as such which will have a Material Adverse Effect. There are no
facts which, if known by a potential claimant or governmental authority, could
give rise to a claim or proceeding which, if asserted or conducted with results
unfavorable to the Company or any of its subsidiaries, could have a Material
Adverse Effect.
i. Intellectual Property. Each of the Company and its subsidiaries owns
---------------------
or is licensed to use all patents, patent applications, trademarks, trademark
applications, trade names,
-7-
<PAGE>
service marks, copyrights, copyright applications, licenses, permits, know-how
(including trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures) and other similar rights and
proprietary knowledge (collectively, "INTANGIBLES") necessary for the conduct of
its business as now being conducted and as described in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996. To the best
knowledge of the Company, neither the Company nor any subsidiary of the Company
infringes or is in conflict with any right of any other person with respect to
any Intangibles which, individually or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a Material Adverse Effect.
Neither the Company nor any of its subsidiaries has received written notice of
any pending conflict with or infringement upon such third party Intangibles.
Neither the Company nor any of its subsidiaries has entered into any consent,
indemnification, forbearance to sue or settlement agreements with respect to the
validity of the Company's or its subsidiaries' ownership or right to use its
Intangibles and, to the best knowledge of the Company, there is no reasonable
basis for any such claim to be successful. The Intangibles are valid and
enforceable and no registration relating thereto has lapsed, expired or been
abandoned or canceled or is the subject of cancellation or other adversarial
proceedings, and all applications therefor are pending and in good standing. The
Company and its subsidiaries have complied, in all material respects, with their
respective contractual obligations relating to the protection of the Intangibles
used pursuant to licenses. To the best knowledge of the Company, no person is
infringing on or violating the Intangibles owned or used by the Company of its
subsidiaries.
j. Foreign Corrupt Practices. Neither the Company, nor any of its
-------------------------
subsidiaries, nor any director, officer, agent, employee or other person acting
on behalf of the Company or any subsidiary has, in the course of his actions
for, or on behalf of, the Company, used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity; made any direct or indirect unlawful payment to any foreign
or domestic government official or employee from corporate funds; violated or is
in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977;
or made any bribe, rebate, payoff, influence payment, kickback or other unlawful
payment to any foreign or domestic government official or employee.
k. Disclosure. All information relating to or concerning the Company set
----------
forth in this Agreement or provided to the Purchasers pursuant to Section 2(d)
hereof and otherwise in connection with the transactions contemplated hereby is
true and correct in all material respects and the Company has not omitted to
state any material fact necessary in order to make the statements made herein or
therein, in light of the circumstances under which they were made, not
misleading. 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 conditions, which has not been publicly
disclosed but, under applicable law, rule or regulation, would be required to be
disclosed by the Company in a registration statement filed on the date hereof by
the Company under the Securities Act with respect to a primary issuance of the
Company's securities.
-8-
<PAGE>
l. Acknowledgment Regarding the Purchasers' Purchase of the Securities.
-------------------------------------------------------------------
The Company acknowledges and agrees that no Purchaser is acting as a financial
advisor or fiduciary of the Company (or in any similar capacity) with respect to
this Agreement or the transactions contemplated hereby, and the relationship
between the Company and each of the Purchasers is "arms length" and that any
statement made by any Purchaser or any of its representatives or agents in
connection with this Agreement and the transactions contemplated hereby is not
advice or a recommendation and is merely incidental to each Purchaser's purchase
of Securities and has not been relied upon by the Company, its officers or
directors in any way. The Company further represents to each Purchaser that the
Company's decision to enter into this Agreement has been based solely on an
independent evaluation by the Company and its representatives.
m. Form S-3 Eligibility. The Company is currently eligible to register
--------------------
the resale of its Common Stock on a registration statement on Form S-3 under the
Securities Act. There exist no facts or circumstances that would prohibit or
delay the preparation and filing of a registration statement on Form S-3 with
respect to the Registrable Securities (as defined in the Registration Rights
Agreement).
n. No General Solicitation. Neither the Company nor any distributor
-----------------------
participating on the Company's behalf in the transactions contemplated hereby
(if any) nor any person acting for the Company, or any such distributor, has
conducted any "general solicitation," as such term is defined in Regulation D,
with respect to any of the Securities being offered hereby.
o. 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 offerers to
buy any security under circumstances that would require registration of the
Securities being offered hereby under the Securities Act or cause this offering
of Securities to be integrated with any prior offering of securities of the
Company for purposes of the Securities Act or any applicable stockholder
approval provisions.
p. Brokers. The Company has taken no action which would give rise to any
-------
claim by any person for brokerage commissions, finder's fees or similar payments
by any Purchaser relating to this Agreement or the transactions contemplated
hereby except for dealings with The Zanett Securities Corporation, whose
commissions and fees will be paid by the Company.
q. Tax Status. Except as set forth in the SEC Documents filed prior to
----------
the date hereof or on Schedule 3(q), the Company and each of its subsidiaries
-------------
has made or filed all federal, state and local income and all other tax returns,
reports and declarations required by any jurisdiction to which it is subject
(unless and only to the extent that the Company and each of its subsidiaries has
set aside on its books provisions reasonably adequate for the payment of all
unpaid and unreported taxes) and has paid all taxes and other governmental
assessments and charges that are material in amount, shown or determined to be
due on such returns, reports and declarations, except those being contested in
good faith and has set aside on its books provisions reasonably adequate for the
payment of all taxes for periods subsequent to the periods to which such
returns, reports or declarations apply. There are no unpaid taxes in any
material amount
-9-
<PAGE>
claimed to be due by the taxing authority of any jurisdiction, and the officers
of the Company know of no basis for any such claim. The Company has not executed
a waiver with respect to any statute of limitations relating to the assessment
or collection of any federal, state or local tax. None of the Company's tax
returns has been or is being audited by any taxing authority.
r. Title. The Company and its subsidiaries have good and marketable
-----
title in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the Company
and its subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such as are described in Schedule 3(r) or such as do not
-------------
materially affect the value of such property and do not materially interfere
with the use made and proposed to be made of such property by the Company and
its subsidiaries. Any real property and facilities held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
materially interfere with the use made and proposed to be made of such property
and buildings by the Company and its subsidiaries.
s. Absence of Events of Default. No Event of Default (as defined in the
----------------------------
Notes) and no event which, with the giving of notice or the passage of time or
both, would become an Event of Default, has occurred and is continuing.
4. COVENANTS.
---------
a. Best Efforts. The parties shall use their best efforts timely to
------------
satisfy each of the conditions described in Section 6 and Section 7 of this
Agreement.
b. Form D; Blue Sky Laws. The Company agrees to file a Form D with
---------------------
respect to the Securities as required under Regulation D and to provide a copy
thereof to each Purchaser promptly after such filing. The Company shall, on or
before the Closing Date, take such action as the Company shall reasonably
determine is necessary to qualify the Securities for sale to the Purchasers
pursuant to this Agreement under applicable securities or "blue sky" laws of the
states of the United States or obtain exemption therefrom, and shall provide
evidence of any such action so taken to the Purchasers on or prior to the
Closing Date.
c. Reporting Status. So long as the Notes are outstanding or any
----------------
Purchaser beneficially owns any of the Securities, the Company shall timely file
all reports required to be filed with the SEC pursuant to the Exchange Act, and
the Company shall not terminate its status as an issuer required to file reports
under the Exchange Act even if the Exchange Act or the rules and regulations
thereunder would permit such termination.
d. Use of Proceeds. The Company shall use the proceeds from the sale of
---------------
the Prepaid Warrants as set forth on Schedule 4(d).
-------------
e. Financial Information. The Company agrees to send the following
---------------------
reports to each Purchaser until such Purchaser transfers, assigns or sells all
of its Securities: (i) within ten (10)
-10-
<PAGE>
days after the filing with the SEC, a copy of its Annual Report on Form 10-K,
its Quarterly Reports on Form 10-Q, its proxy statements and any Current Reports
on Form 8-K; and (ii) within one (1) business day after release, copies of all
press releases issued by the Company or any of its subsidiaries.
f. Reservation of Shares. The Company shall at all times have authorized
---------------------
and reserved for the purpose of issuance a sufficient number of shares of Common
Stock to provide for the issuance of the Note Shares required by the Notes.
g. Listing. The Company shall promptly secure the listing of the Note
-------
Shares upon each national securities exchange or automated quotation system, if
any, upon which shares of Common Stock are then listed (subject to official
notice of issuance) and shall maintain, so long as any other shares of Common
Stock shall be so listed, such listing of all of the Note Shares. The Company
will take all action necessary to continue the listing and trading of its Common
Stock on the NASDAQ, the Nasdaq National Market ("NNM"), the New York Stock
Exchange ("NYSE") or the American Stock Exchange ("AMEX") and will comply in all
respects with the Company's reporting, filing and other obligations under the
bylaws or rules of such exchanges and the NASD, as applicable. In the event the
Common Stock is not eligible to be traded on any of the NASDAQ, NNM, NYSE or
AMEX and the Common Stock is not eligible for listing on any such exchange or
system, the Company shall use its best efforts to cause the Common Stock to be
eligible for trading on the over-the-counter bulletin board at the earliest
practicable date and remain eligible for trading while any Securities are
outstanding. The Company shall promptly provide to the Purchasers copies of any
notices it receives regarding the continued eligibility of the Common Stock for
trading in the over-the-counter market or, if applicable, any securities
exchange (including the NASDAQ) on which securities of the same class or series
issued by the Company are then listed or quoted, if any.
h. Corporate Existence. So long as the Notes are outstanding or any
-------------------
Purchaser beneficially owns any Note Shares, the Company shall maintain its
corporate existence, except in the event of a merger, consolidation or sale of
all or substantially all of the Company's assets, as long as the surviving or
successor entity in such transaction (i) assumes the Company's obligations
hereunder and under the Notes and the agreements and instruments entered into in
connection herewith and (ii) is a publicly traded corporation whose common stock
is listed for trading on the NASDAQ, NNM, NYSE or AMEX.
i. No Integrated Offerings. The Company shall not make any offers or
-----------------------
sales of any security (other than the Securities) under circumstances that would
require registration of the Securities being offered or sold hereunder under the
Securities Act or cause this offering of Securities to be integrated with any
other offering of securities by the Company for purposes of any stockholder
approval provision applicable to the Company or its securities.
j. Redemptions and Dividends. So long as any of the Notes are
-------------------------
outstanding, the Company shall not, without first obtaining the written approval
of each of the holders of the Notes, redeem, or declare or pay any cash dividend
or distribution on, any shares of capital stock
-11-
<PAGE>
of the Company.
5. TRANSFER AGENT INSTRUCTIONS.
---------------------------
a. The Company shall instruct its transfer agent to issue certificates,
registered in the name of each Purchaser or its nominee, for the Note Shares in
such amounts as specified from time to time by such Purchaser to the Company.
To the extent and during the periods provided in Section 2(f) and Section 2(g)
of this Agreement, all such certificates shall bear the restrictive legend
specified in Section 2(g) of this Agreement.
b. The Company warrants that no instruction other than such instructions
referred to in this Section 5, and stop transfer instructions to give effect to
Section 2(f) hereof in the case of the transfer of the Note Shares prior to
registration of the Note Shares under the Securities Act or without an exemption
therefrom, will be given by the Company to its transfer agent and that the
Securities shall otherwise be freely transferable on the books and records of
the Company as and to the extent provided in this Agreement, the Notes and the
Registration Rights Agreement. Nothing in this Section shall affect in any way
each Purchaser's obligations and agreement set forth in Section 2(g) hereof to
resell the Securities pursuant to an effective registration statement or under
an exemption from the registration requirements of applicable securities law.
c. If a Purchaser provides the Company with an opinion of counsel, which
opinion of counsel shall be in form, substance and scope customary for opinions
of counsel in comparable transactions, to the effect that the Securities to be
sold or transferred may be sold or transferred pursuant to an exemption from
registration, or a Purchaser provides the Company with reasonable assurances
that such Securities may be sold under Rule 144, the Company shall permit the
transfer, and, in the case of the Note Shares, promptly instruct its transfer
agent to issue one or more certificates in such name and in such denominations
as specified by such Purchaser.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
----------------------------------------------
The obligation of the Company hereunder to issue and sell the Notes to a
Purchaser hereunder is subject to the satisfaction, at or before the Closing
Date, of each of the following conditions thereto, provided that these
conditions are for the Company's sole benefit and may be waived by the Company
at any time in its sole discretion.
a. The applicable Purchaser shall have executed the signature page to
this Agreement and the Registration Rights Agreement, and delivered the same to
the Company.
b. The applicable Purchaser shall have delivered the aggregate principal
amount of the Note(s) being purchased by it in accordance with Section 1(b)
above.
c. The representations and warranties of the applicable Purchaser shall
be true and correct as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date, which representations and
-12-
<PAGE>
warranties shall be true and correct as of such date), and the applicable
Purchaser shall have performed, satisfied and complied in all material respects
with the covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the applicable Purchaser at or prior to
the Closing Date.
d. 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 or any self-regulatory
organization having authority over the matters contemplated hereby which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
7. CONDITIONS TO EACH PURCHASER'S OBLIGATION TO PURCHASE.
-----------------------------------------------------
The obligation of each Purchaser hereunder to purchase the Notes hereunder
is subject to the satisfaction, at or before the Closing Date, of each of the
following conditions, provided that these conditions are for such Purchaser's
sole benefit and may be waived by such Purchaser at any time in the Purchaser's
sole discretion:
a. The Company shall have executed the signature page to this Agreement
and the Registration Rights Agreement, and delivered the same to such Purchaser.
b. The Company shall have delivered to such Purchaser the duly executed
Note(s) being purchased by such Purchaser (in such denominations as such
Purchaser shall request) in accordance with Section 1(b) above.
c. The Common Stock shall be authorized for quotation on the NASDAQ and
trading in the Common Stock (or the NASDAQ generally) shall not have been
suspended by the SEC or the NASDAQ.
d. The representations and warranties of the Company shall be true and
correct as of the date when made and as of the Closing Date as though made at
that time (except for representations and warranties that speak as of a specific
date, which representations and warranties shall be true and correct as of such
date) and the Company shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Company at or prior
to the Closing Date. Such Purchaser shall have received a certificate, executed
by the Chief Executive Officer of the Company, dated as of the Closing Date, to
the foregoing effect and as to such other matters as may be reasonably requested
by such Purchaser.
e. No statute, rule, regulation, executive order, decree, ruling,
injunction, action or proceeding shall have been enacted, entered, promulgated
or endorsed by any court or governmental authority of competent jurisdiction or
any self-regulatory organization having authority over the matters contemplated
hereby which questions the validity of, or challenges or prohibits the
consummation of, any of the transactions contemplated by this Agreement.
-13-
<PAGE>
f. Such Purchaser shall have received an opinion of the Company's
counsel, dated as of the Closing Date, in form, scope and substance reasonably
satisfactory to the Purchaser and in substantially the form of Exhibit C
---------
attached hereto.
g. The Company shall have delivered evidence reasonably satisfactory to
the Purchasers that the Company's transfer agent has agreed to act in accordance
with irrevocable instructions in the form attached hereto as Exhibit D.
---------
h. No material adverse change or development in the business, operations,
properties, prospects, financial condition, or results of operations of the
Company shall have occurred since the date hereof.
8. GOVERNING LAW; MISCELLANEOUS.
----------------------------
a. Governing Law; Jurisdiction. This Agreement shall be governed by and
---------------------------
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in the State of Delaware. The Company
irrevocably consents to the jurisdiction of the United States federal courts and
the state courts located in the City of New York in the State of New York in any
suit or proceeding based on or arising under this Agreement and irrevocably
agrees that all claims in respect of such suit or proceeding may be determined
in such courts. The Company irrevocably waives the defense of an inconvenient
forum to the maintenance of such suit or proceeding. The Company further agrees
that service of process upon the Company mailed by first class mail shall be
deemed in every respect effective service of process upon the Company in any
such suit or proceeding. Nothing herein shall affect the right of any Purchaser
to serve process in any other manner permitted by law. The Company agrees that
a final non-appealable judgment in any such suit or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on such judgment
or in any other lawful manner.
b. Counterparts. This Agreement may be executed in two or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party. This Agreement, once executed by a party, may be
delivered to the other parties hereto by facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
In the event any signature is delivered by facsimile transmission, the party
using such means of delivery shall cause the manually executed Execution Page(s)
hereof to be physically delivered to the other party within five (5) days of the
execution hereof.
c. Headings. The headings of this Agreement are for convenience of
--------
reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. Severability. If any provision of this Agreement shall be invalid or
------------
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
-14-
<PAGE>
e. Entire Agreement; Amendments. This Agreement and the other agreements
----------------------------
and instruments referenced herein contain the entire understanding of the
parties with respect to the matters covered herein and therein and, except as
specifically set forth herein or therein, neither the Company nor the Purchasers
make any representation, warranty, covenant or undertaking with respect to such
matters. No provision of this Agreement may be waived other than by an
instrument in writing signed by the party to be charged with enforcement and no
provision of this Agreement may be amended other than by an instrument in
writing signed by the Company and each Purchaser.
f. Notices. Any notices required or permitted to be given under the
-------
terms of this Agreement shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier or by confirmed
telecopy, and shall be effective five days after being placed in the mail, if
mailed, or upon receipt or refusal of receipt, if delivered personally or by
courier or confirmed telecopy, in each case addressed to a party. The addresses
for such communications shall be:
If to the Company:
Advanced Environmental Recycling
Technologies, Inc.
FM 2169
Junction, Texas 76849
Telecopy: (915) 446-3864
Attention: Chief Executive Officer
With a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1500 NationsBank Plaza
300 Convent Street
San Antonio, Texas 78205
Telecopy: (210) 224-2035
Attention: Pat Ryan, Esq.
If to a Purchaser, to the address set forth under such Purchaser's name on
the signature page hereto executed by the Purchaser.
Each party shall provide notice to the other parties of any change in
address.
g. Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties and their successors and assigns. Except as
provided herein, neither the Company nor any Purchaser shall assign this
Agreement or any rights or obligations hereunder. Notwithstanding the foregoing,
any Purchaser may assign its rights hereunder to any of its "affiliates," as
that term is defined under the Exchange Act, without the consent of the Company
-15-
<PAGE>
or to any other person or entity with the consent of the Company. This
provision shall not limit a Purchaser's right to transfer the Securities
pursuant to the terms of this Agreement, the Notes or the Registration Rights
Agreement or to assign such Purchaser's rights hereunder and/or thereunder to
any such transferee.
h. 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.
i. Survival. The representations and warranties of the Company and the
--------
agreements and covenants set forth in Sections 3, 4, 5 and 8 shall survive the
Closing hereunder notwithstanding any due diligence investigation conducted by
or on behalf of any Purchasers. Moreover, none of the representations and
warranties made by the Company herein shall act as a waiver of any rights or
remedies a Purchaser may have under applicable federal or state securities laws.
j. Publicity. The Company and each Purchaser shall have the right to
---------
approve before issuance any press releases, SEC, NASDAQ or NASD filings, or any
other public statements with respect to the transactions contemplated hereby;
provided, however, that the Company shall be entitled, without the prior
approval of the Purchasers, to make any press release or SEC, NASDAQ or NASD
filings with respect to such transactions as is required by applicable law and
regulations (although the Purchasers shall be consulted by the Company in
connection with any such press release prior to its release and shall be
provided with a copy thereof).
k. Further Assurances. Each party shall do and perform, or cause to be
------------------
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. Termination. In the event that the Closing Date shall not have
-----------
occurred on or before October 30, 1997, unless the parties agree otherwise, this
Agreement shall terminate at the close of business on such date.
Notwithstanding any termination of this Agreement, any party not in breach of
this Agreement shall preserve all rights and remedies it may have against
another party hereto for a breach of this Agreement prior to or relating to the
termination hereof.
m. Joint Participation in Drafting. Each party to this Agreement has
-------------------------------
participated in the negotiation and drafting of this Agreement, the Notes and
the Registration Rights Agreement. As such, the language used herein and
therein shall be deemed to be the language chosen by the parties hereto to
express their mutual intent, and no rule of strict construction will be applied
against any party to this Agreement.
n. Equitable Relief. The Company acknowledges that a breach by it of its
----------------
obligations hereunder will cause irreparable harm to a Purchaser by vitiating
the intent and
-16-
<PAGE>
purpose of the transactions contemplated hereby. Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations hereunder
(including, but not limited to, its obligations pursuant to Section 5 hereof)
will be inadequate and agrees, in the event of a breach or threatened breach by
the Company of the provisions of this Agreement (including, but not limited to,
its obligations pursuant to Section 5 hereof), that a Purchaser shall be
entitled, in addition to all other available remedies, to an 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.
o. "TRADING DAY" and "BUSINESS DAY" shall mean any day on which the New
York Stock Exchange is open for trading.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-17-
<PAGE>
IN WITNESS WHEREOF, the undersigned Purchaser and the Company have caused
this Agreement to be duly executed as of the date first above written.
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
By:
-------------------------
Name:
-----------------------
Title:
----------------------
PURCHASER:
ZANETT LOMBARDIER, LTD.
By:
-------------------------
Name:
-----------------------
Title:
----------------------
RESIDENCE: Cayman Islands
ADDRESS:
Zanett Lombardier, Ltd.
c/o Bank Julius Baer
Kirk House, P.O. Box 1100
Grand Cayman, Cayman Islands
British West Indies
Telecopy: (809) 949-0993
Attention: Peter Goulden
AGGREGATE PRINCIPAL AMOUNT OF NOTES: 550,000
---------------
<PAGE>
IN WITNESS WHEREOF, the undersigned Purchaser and the Company have caused
this Agreement to be duly executed as of the date first above written.
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
By:
-------------------------
Name:
-----------------------
Title:
----------------------
PURCHASER:
HARLOW ENTERPRISES, INC.
By:
-------------------------
Name:
-----------------------
Title:
----------------------
RESIDENCE:
ADDRESS:
Telecopy:
Attention:
AGGREGATE PRINCIPAL AMOUNT OF NOTES: 50,000
--------------
<PAGE>
IN WITNESS WHEREOF, the undersigned Purchaser and the Company have caused
this Agreement to be duly executed as of the date first above written.
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
By:
-------------------------
Name:
-----------------------
Title:
----------------------
PURCHASER:
PARKLAND LIMITED
By:
-------------------------
Name:
-----------------------
Title:
----------------------
RESIDENCE:
ADDRESS:
Telecopy:
Attention:
AGGREGATE PRINCIPAL AMOUNT OF NOTES: 50,000
--------------
<PAGE>
IN WITNESS WHEREOF, the undersigned Purchaser and the Company have caused
this Agreement to be duly executed as of the date first above written.
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
By:
-------------------------
Name:
-----------------------
Title:
----------------------
PURCHASER:
- -------------------
SAMUEL L. MILBANK
RESIDENCE:
ADDRESS:
c/o The Zanett Securities Corporation
Tower 49 - 31st Floor
12 East 49th Street
New York, New York 10017
Telecopy: (212) 343-2121
Attention: Mr. Samuel L. Milbank
AGGREGATE PRINCIPAL AMOUNT OF NOTES: 30,000
---------------
<PAGE>
IN WITNESS WHEREOF, the undersigned Purchaser and the Company have caused
this Agreement to be duly executed as of the date first above written.
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
By:
-------------------------
Name:
-----------------------
Title:
----------------------
PURCHASER:
- ----------------
BRUNO GUAZZONI
RESIDENCE:
ADDRESS:
c/o The Zanett Securities Corporation
Tower 49 - 31st Floor
12 East 49th Street
New York, New York 10017
Telecopy: (212) 343-2121
Attention: Mr. Claudio Guazzoni
AGGREGATE PRINCIPAL AMOUNT OF NOTES: 620,000
---------------
<PAGE>
EXHIBIT 10.4
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF
THE UNITED STATES. THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
APPLICABLE SECURITIES LAWS UNLESS OFFERED, SOLD OR TRANSFERRED UNDER AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
PROMISSORY NOTE
---------------
October 30, 1997 $550,000
FOR VALUE RECEIVED, ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES,
INC., a Delaware corporation (hereinafter called the "BORROWER"), hereby
promises to pay to the order of ZANETT LOMBARDIER, LTD. or registered assigns
(the "HOLDER") the sum of Five Hundred Fifty Thousand Dollars ($550,000) on July
27, 1998 (the "SCHEDULED MATURITY DATE"), unless extended, at the option of the
Borrower exercisable through the delivery of written notice (the "EXTENSION
NOTICE") to the Holder and to each other holder (collectively, the "OTHER
HOLDERS" and, together with the Holder hereof, the "HOLDERS") of promissory
notes (the "OTHER NOTES" and, together with this Note, the "NOTES") issued by
the Borrower pursuant to that certain Note Purchase Agreement, dated as of
October 30, 1997, by and among the Borrower, the Holder and the other
signatories thereto (the "PURCHASE AGREEMENT"), to October 30, 1998 (the
"EXTENDED MATURITY DATE"). To be effective, the Extension Notice must be
delivered by the Borrower to the Holders on or before the thirtieth (30th) day
prior to the Scheduled Maturity Date in the manner specified herein for the
giving of notices. The Borrower hereby promises to pay interest on the unpaid
principal balance hereof at the rate of twelve percent (12%) per annum from the
date hereof (the "ISSUE DATE") until the same becomes due and payable, whether
at maturity or upon acceleration or otherwise. Interest shall be calculated
based on a three hundred sixty (360) day year, shall commence accruing on the
Issue Date and shall be payable at the times and in the manner provided in
Article II hereof. Any amount of principal of or interest on this Note which is
not paid when due shall bear interest at a per annum rate (the "PENALTY RATE")
equal to the lower of eighteen percent (18%) and the highest interest rate
permitted by applicable law from the due date thereof until the same is paid.
All payments of principal shall be made in lawful money of the United States of
America. All payments shall be made at such address as the Holder shall
hereafter give to the Borrower by written notice made in accordance with the
provisions of this Note.
<PAGE>
ARTICLE I
NO PREPAYMENT
1.1 Prepayment. This Note is not subject to prepayment.
----------
ARTICLE II
PAYMENTS OF INTEREST
2.1 Issuance of Shares.
------------------
(a) All payments of interest hereunder shall be payable quarterly in
arrears on each of January 28, 1998, April 28, 1998, July 27, 1998 and, if the
Borrower has timely delivered an Extension Notice to the Holders in accordance
with the terms hereof, October 30 ,1998 (each, an "INTEREST PAYMENT DATE"). All
such interest payments shall be payable by the Borrower through the delivery to
the Holder of fully paid and non-assessable shares of Class A Common Stock, par
value $.01 per share, of the Borrower as such stock exists on the date of
issuance of this Note, or any shares of capital stock of the Borrower into which
such stock shall hereafter be changed or reclassified (the "COMMON STOCK"), at
the Conversion Price (as defined below) then in effect. Such shares of Common
Stock shall be delivered by the Borrower to the Holder within five (5) business
days after the applicable Interest Payment Date. The Borrower shall pay any and
all taxes which may be imposed upon it with respect to the issuance and delivery
of the shares of Common Stock as payment of interest hereunder.
(b) The number of shares of Common Stock to be issued on any Interest
Payment Date shall be determined by dividing (i) the product of (A) the
principal amount of this Note, multiplied by (B) a fraction (x) the numerator of
which is the number of days elapsed since the date of issuance of this Note or
the last Interest Payment Date, as applicable, and (y) the denominator of which
is 360, multiplied by (c) 0.12, by (ii) the Conversion Price in effect on the
Interest Payment Date. If any calculation in accordance with the preceding
formula would result in the issuance of a fractional share of Common Stock, such
fractional share shall be disregarded and the number of shares of Common Stock
issuable as payment of interest hereunder shall be the nearest whole number of
shares.
(c) If the Borrower fails to deliver shares of Common Stock to the
holder within five (5) business days after the applicable Interest Payment Date,
the Conversion Price to be used for purposes of the calculation set forth in
subparagraph (b) above shall be equal to the lesser of (i) the Conversion Price
in effect on the applicable Interest Payment Date and (ii) the lowest Closing
Bid Price (as defined below) of the Common Stock during the period beginning on
the applicable Interest Payment Date and ending on the trading day immediately
preceding the date on which the shares of Common Stock are delivered to the
Holder.
2
<PAGE>
2.2 Certain Definitions.
-------------------
(a) "CLOSING BID PRICE" means, for any security as of any date, the
closing bid price of such security on the principal United States securities
exchange or trading market where such security is listed or traded as reported
by Bloomberg Financial Markets (or a comparable reporting service of national
reputation selected by the Borrower and reasonably acceptable to holders of a
majority of the aggregate principal amount represented by the Notes ("MAJORITY
HOLDERS") if Bloomberg Financial Markets is not then reporting closing bid
prices of such security) (collectively, "BLOOMBERG"), or if the foregoing does
not apply, the last reported sale price of such security in the over-the-counter
market on the electronic bulletin board for such security as reported by
Bloomberg, or, if no sale price is reported for such security by Bloomberg, the
average of the bid prices of any market makers for such security as reported in
the "pink sheets" by the National Quotation Bureau, Inc., in each case for such
date or, if such date was not a trading date for such security, on the next
preceding date which was a trading date. If the Closing Bid Price cannot be
calculated for such security as of either of such dates on any of the foregoing
bases, the Closing Bid Price of such security on such date shall be the fair
market value as reasonably determined by an investment banking firm selected by
the Borrower and reasonably acceptable to the Majority Holders, with the costs
of such appraisal to be borne by the Borrower.
(b) "CONVERSION PRICE" means, as of any date of determination, the
average of the Closing Bid Prices for the Common Stock during the ten (10)
consecutive trading days ending on the trading day immediately preceding such
date of determination (subject to equitable adjustment for any stock splits,
stock dividends, reclassifications or similar events during such ten (10)
trading day period).
(c) "BUSINESS DAY" and "TRADING DAY" mean any day on which the New
York Stock Exchange is open for trading.
2.3 Reservation of Shares. The Borrower covenants and agrees that it will
---------------------
reserve from its authorized and unissued Common Stock a sufficient number of
shares to provide for the issuance of Common Stock in full satisfaction of its
obligation to pay interest hereunder. The Borrower represents that upon
issuance, such shares will be duly and validly issued, fully paid and non-
assessable. The Borrower (i) represents and warrants that it has delivered to
its transfer agent the instructions referred to in Section 5(a) of the Purchase
Agreement and (ii) agrees that its issuance of this Note shall constitute full
authority to its officers and agents, who are charged with the duty of executing
stock certificates, to execute and issue the necessary certificates for shares
of Common Stock as payment of interest in accordance with the terms of this
Note.
2.4 Restrictions on Shares. The shares of Common Stock issuable as
----------------------
payment of interest on this Note may not be sold or transferred unless (i) they
first shall have been registered under the Securities Act of 1933, as amended
(the "SECURITIES ACT"), and applicable state securities laws, (ii) the Borrower
shall have been furnished with an opinion of legal counsel (in form, substance
and scope customary for opinions in comparable transactions) to the effect that
such sale or transfer is exempt from the registration requirements of the
Securities Act or (iii) they are sold under Rule 144 (or a successor rule) under
the Securities Act. Except as otherwise provided in the Purchase Agreement,
each certificate for shares of Common Stock issuable as payment of interest on
this Note that have not been so registered and that have not been sold pursuant
to an exemption that permits removal of the legend, shall bear a legend
substantially in the following form, as
3
<PAGE>
appropriate:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF
ANY STATE OF THE UNITED STATES. THE SECURITIES REPRESENTED HEREBY MAY
NOT BE OFFERED OR SOLD IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS UNLESS
OFFERED, SOLD OR TRANSFERRED UNDER AN AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THOSE LAWS.
Upon the request of a holder of a certificate representing any shares of Common
Stock issuable as payment of interest on this Note, the Borrower shall remove
the foregoing legend from the certificate or issue to such holder a new
certificate therefor free of any transfer legend, if (i) with such request, the
Borrower shall have received either (A) an opinion of counsel, in form,
substance and scope customary for opinions of counsel in comparable
transactions, to the effect that any such legend may be removed from such
certificate, or (B) satisfactory representations from the holder that such
holder is eligible to sell such shares of Common Stock under Rule 144 (or a
successor rule) under the Securities Act or (ii) a registration statement under
the Securities Act covering the resale of such shares of Common Stock is in
effect. Nothing in this Note shall (i) limit the Borrower's obligations under
the Purchase Agreement and under that certain Registration Rights Agreement,
dated as of October 30, 1997, by and among the Borrower, the Holder and the
other signatories thereto (the "REGISTRATION RIGHTS AGREEMENT") or (ii) affect
in any way the Holder's obligations to comply with applicable securities laws
upon the resale of the shares of Common Stock referred to herein.
ARTICLE III
EVENTS OF DEFAULT
If of any of the following events of default (each, an "EVENT OF
DEFAULT" ) shall occur:
3.1 Failure to Pay Principal. The Borrower fails to pay the principal
------------------------
amount hereof when due, whether at maturity, upon acceleration or otherwise;
3.2 Failure to Deliver Shares as Payment of Interest. The Borrower fails to
------------------------------------------------
issue shares of Common Stock to the Holder as payment of interest on this Note
within five (5) business days of the applicable Interest Payment Date;
3.3 Suspension or Delisting of Shares. The Common Stock (including any of
---------------------------------
the shares of Common Stock issuable as payment of interest on this Note) is
suspended from trading on any of, or is not listed (and authorized) for trading
on at least one of, the New York Stock Exchange, the American
4
<PAGE>
Stock Exchange, the Nasdaq National Market or the Nasdaq SmallCap Market for an
aggregate of ten (10) trading days in any nine (9) month period;
3.4 Failure to Register Shares. The Registration Statement required to be
--------------------------
filed by the Borrower pursuant to Section 2(a) of the Registration Rights
Agreement has not been declared effective by the 180th day following the Issue
Date or such Registration Statement, after being declared effective, cannot be
utilized by Holder for the resale of all of its Registrable Securities (as
defined in the Registration Rights Agreement) for an aggregate of more than
thirty (30) days;
3.5 Failure to Remove Legend. The Borrower fails to remove any restrictive
------------------------
legend on any certificate or any shares of Common Stock issued to the Holder as
payment of interest on this Note as and when required by the Note, the Purchase
Agreement or the Registration Rights Agreement (a "LEGEND REMOVAL FAILURE"), and
any such failure continues uncured for five (5) business days after the Borrower
has been notified thereof in writing by the Holder;
3.6 Major Events. The Borrower shall:
------------
(a) sell, convey or dispose of all or substantially all of its
assets; or
(b) merge, consolidate or engage in any other business combination
with any other entity (other than pursuant to a migratory merger effected solely
for the purpose of changing the jurisdiction of incorporation of the Borrower);
or
(c) have fifty percent (50%) or more of the voting power of its
capital stock owned beneficially by one person, entity or "group" (as such term
is used under Section 13(d) of the Securities Exchange Act of 1934, as amended)
other than Marjorie Brooks, Steven Brooks, Joseph Brooks, Douglas Brooks and
members of their immediate family.
3.7 Breach of Covenant. The Borrower breaches any material covenant or
------------------
other material term or condition of this Note (other than as specifically
provided in Sections 3.1 through 3.6 hereof), the Purchase Agreement or the
Registration Rights Agreement and such breach continues for a period of ten (10)
business days after written notice thereof to the Borrower from the Holder;
3.8 Breach of Representations and Warranties. Any representation or
----------------------------------------
warranty of the Borrower made herein or in any agreement, statement or
certificate given in writing pursuant hereto or in connection herewith
(including, without limitation, the Purchase Agreement and the Registration
Rights Agreement), shall be false or misleading in any material respect when
made and the breach of which would have a material adverse effect on the
Borrower or the prospects of the Borrower or a material adverse effect on the
Holder or the rights of the Holder with respect to this Note or the shares of
Common Stock issuable as payment of interest on this Note;
3.9 Receiver or Trustee. The Borrower or any subsidiary of the Borrower
-------------------
shall make an assignment for the benefit of creditors, or apply for or consent
to the appointment of a receiver or trustee
5
<PAGE>
for it or for a substantial part of its property or business, or such a receiver
or trustee shall otherwise be appointed;
3.10 Judgments. Any money judgment, writ or similar process shall be
---------
entered or filed against the Borrower or any subsidiary of the Borrower or any
of its property or other assets for more than $100,000, and shall remain
unvacated, unbonded or unstayed for a period of twenty (20) days unless
otherwise consented to by the Majority Holders;
3.11 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation
----------
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Borrower or any
subsidiary of the Borrower; or
3.12 Material Adverse Change. Any material adverse change in the financial
-----------------------
condition or business of the Borrower, or any material adverse change in the
Borrower's business plans and/or operations, as determined by the Majority
Holders in their sole and reasonable discretion;
then, upon the occurrence and during the continuation of any Event of Default
specified in Sections 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, 3.8, 3.10 or 3.12
hereof, at the option of the Holder, and upon the occurrence of any Event of
Default specified in Sections 3.9 or 3.11 hereof, all the then outstanding
principal amount of this Note plus accrued and unpaid interest thereon to the
date of payment, together with all other ancillary amounts payable hereunder
(the "DEFAULT AMOUNT"), shall immediately become due and payable, all without
demand, presentment or notice, all of which hereby are expressly waived,
together with all costs, including, without limitation, legal fees and expenses
of collection, and the Holder shall be entitled to exercise all other rights and
remedies available at law or in equity. Unless otherwise specified by the
Holder in writing, any portion of the Default Amount which constitutes accrued
and unpaid interest shall be payable by the Borrower through the issuance and
delivery of shares of Common Stock at a price per share equal to the lesser of
(x) the Conversion Price in effect on the date of the Event of Default and (y)
the lowest Closing Bid Price of the Common Stock during the period beginning on
the date of the Event of Default and ending on the trading day immediately
preceding the date on which the shares of Common Stock are delivered to the
Holder.
ARTICLE IV
MISCELLANEOUS
4.1 Failure or Indulgency Not Waiver. No failure or delay on the part of
--------------------------------
the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privilege. All rights and remedies existing hereunder
are cumulative to, and not exclusive of, any rights or remedies otherwise
available.
4.2 Notices. Any notice herein required or permitted to be given shall be
-------
in writing and may
6
<PAGE>
be personally served or delivered by courier or sent by United States mail and
shall be deemed to have been given upon receipt if personally served (which
shall include telephone line facsimile transmission) or sent by courier or three
(3) days after being deposited in the United States mail, certified, with
postage pre-paid and properly addressed, if sent by mail. The addresses for such
communications shall be:
If to the Borrower:
Advanced Environmental Recycling
Technologies, Inc.
FM 2169
Junction, Texas 76849
Telecopy: (915) 446-3864
Attention: Chief Executive Officer
With a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1500 NationsBank Plaza
300 Convent Street
San Antonio, Texas 78205
Telecopy: (210) 224-2035
Attention: Pat Ryan, Esq.
If to the Holder, to the address for the Holder as shown on the records of
the Borrower. Both the Holder and the Borrower may change the address for
service by service of written notice to the other as herein provided.
4.3 Amendment Provision. This Note and any provision hereof may only be
-------------------
amended by an instrument in writing signed by the Borrower and the Majority
Holders. The term "Note" and all references thereto, as used throughout this
instrument, shall mean this instrument as originally executed, or if later
amended or supplemented, then as so amended or supplemented.
4.4 Assignability. This Note shall be binding upon the Borrower and its
-------------
successors and assigns and shall inure to be the benefit of the Holder and its
successors and assigns; provided, however, that so long as no Event of Default
has occurred, this Note shall only be transferable in whole or in increments of
$50,000 to "Accredited Investors" (as defined in Rule 501(a) under the
Securities Act).
4.5 Cost of Collection. If default is made in the payment of this Note,
------------------
the Borrower shall pay the Holder hereof costs of collection, including
reasonable attorneys' fees.
4.6 Governing Law; Jurisdiction. This Note shall be governed by and
---------------------------
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in the State of Delaware. The Borrower
irrevocably consents to the jurisdiction of the United States federal courts and
7
<PAGE>
the state courts located in the City of New York in the State of New York in any
suit or proceeding based on or arising under this Note and irrevocably agrees
that all claims in respect of such suit or proceeding may be determined in such
courts. The Borrower irrevocably waives the defense of an inconvenient forum to
the maintenance of such suit or proceeding. The Borrower further agrees that
service of process upon the Borrower mailed by first class mail shall be deemed
in every respect effective service of process upon the Borrower in any such suit
or proceeding. Nothing herein shall affect Holder's right to serve process in
any other manner permitted by law. The Borrower agrees that a final non-
appealable judgment in any such suit or proceeding shall be conclusive and may
be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner.
4.7 Lost or Stolen Debentures. Upon receipt by the Borrower of (i)
-------------------------
evidence of the loss, theft, destruction or mutilation of this Note and (ii) (y)
in the case of loss, theft or destruction, of indemnity reasonably satisfactory
to the Borrower, or (z) in the case of mutilation, upon surrender and
cancellation of this Note, the Borrower shall execute and deliver new Notes, in
the form hereof, in such denominations of at least $50,000 as Holder may
request.
4.8 Denominations. At the request of the Holder, upon surrender of this
-------------
Note, the Borrower shall promptly issue new Notes in the aggregate outstanding
principal amount hereof, in the form hereof, in such denominations of at least
$50,000 as the Holder shall request.
4.9 WARRANT OF ATTORNEY TO CONFESS JUDGMENT. THE BORROWER HEREBY
---------------------------------------
IRREVOCABLY AUTHORIZES AND EMPOWERS ANY ATTORNEY OR ANY CLERK OF ANY COURT OF
RECORD, AT ANY TIME UPON AND AFTER THE OCCURRENCE OF ANY EVENT OF DEFAULT, TO
APPEAR FOR AND CONFESS JUDGMENT AGAINST THE BORROWER, FOR SUCH SUMS AS ARE DUE
AND/OR MAY BECOME DUE HEREUNDER (COLLECTIVELY, THE "OBLIGATIONS"), WITH OR
WITHOUT DECLARATION, WITH COSTS OF SUIT. TO THE EXTENT PERMITTED BY LAW, THE
BORROWER: (a) WAIVES AND RELEASES ALL RELIEF FROM ALL APPRAISEMENT, STAY,
EXEMPTION OR APPEAL LAWS OF ANY STATE NOW IN FORCE OR HEREAFTER ENACTED; AND (b)
RELEASES ALL PROCEDURAL ERRORS IN SUCH PROCEEDINGS. IF A COPY OF THIS NOTE,
VERIFIED BY AFFIDAVIT BY OR ON BEHALF OF THE HOLDER SHALL HAVE BEEN FILED IN
SUCH ACTION, IT SHALL NOT BE NECESSARY TO FILE THE ORIGINAL NOTE AS A WARRANT OF
ATTORNEY. THE AUTHORITY AND POWER TO APPEAR FOR AND CONFESS JUDGMENT AGAINST
THE BORROWER SHALL NOT BE EXHAUSTED BY THE INITIAL EXERCISE THEREOF, AND THE
SAME MAY BE EXERCISED, FROM TIME TO TIME, AS OFTEN AS THE HOLDER SHALL DEEM
NECESSARY AND DESIRABLE, AND THIS NOTE SHALL BE A SUFFICIENT WARRANT OF ATTORNEY
THEREFOR. THE HOLDER MAY CONFESS ONE OR MORE JUDGMENTS IN THE SAME OR DIFFERENT
JURISDICTIONS FOR ALL OR PART OF THE OBLIGATIONS, WITHOUT REGARD TO WHETHER
JUDGMENT HAS THERETOFORE BEEN ENTERED ON MORE THAN ONE OCCASION FOR THE SAME
OBLIGATIONS. IN THE EVENT ANY JUDGMENT ENTERED AGAINST THE BORROWER HEREUNDER
IS STRICKEN OR OPENED UPON APPLICATION BY OR ON THE BORROWER'S BEHALF FOR ANY
REASON WHATSOEVER, THE HOLDER IS HEREBY AUTHORIZED AND EMPOWERED TO AGAIN APPEAR
FOR AND CONFESS JUDGMENT AGAINST THE BORROWER FOR ANY PART OR ALL OF THE
OBLIGATIONS; SUBJECT, HOWEVER, TO THE LIMITATION THAT SUCH SUBSEQUENT ENTRY OR
ENTRIES OF JUDGMENT BY THE HOLDER FOLLOWING ANY PROCEEDING TO OPEN OR STRIKE MAY
ONLY BE DONE TO CURE ANY ERRORS OR DEFECTS IN SUCH PRIOR PROCEEDINGS, AND ONLY
TO THE EXTENT THAT SUCH ERRORS OR DEFECTS ARE SUBJECT TO CURE IN SUCH LATER
PROCEEDINGS.
8
<PAGE>
4.10 WAIVER OF RIGHT TO JURY TRIAL. THE BORROWER HEREBY KNOWINGLY,
-----------------------------
VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY
IN RESPECT OF ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS NOTE OR ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE HOLDER.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
9
<PAGE>
IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name
by its duly authorized officer this 30th day of October, 1997.
ADVANCED ENVIRONMENTAL
RECYCLING TECHNOLOGIES, INC.
By:
-------------------------------
Name:
Title:
<PAGE>
EXHIBIT 10.5
VOID AFTER 5:00 P.M., NEW YORK
CITY TIME, ON OCTOBER 30, 2002
(UNLESS EXTENDED PURSUANT TO SECTION 2 HEREOF)
THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES
REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS
THE SECURITIES ARE REGISTERED UNDER THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS, OR ANY SUCH OFFER, SALE OR TRANSFER IS MADE PURSUANT TO AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
Date: October 30, 1997 Right to Purchase 156,000
Shares of Common Stock
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, THE ZANETT SECURITIES CORPORATION
or its registered assigns is entitled to purchase from Advanced Environmental
Recycling Technologies, Inc., a Delaware corporation (the "COMPANY"), at any
time or from time to time during the period specified in Section 2 hereof, One
Hundred Fifty-Six Thousand (156,000) fully paid and nonassessable shares of the
Company's Class A Common Stock, par value $.01 per share ("COMMON STOCK"), at an
exercise price per share equal to $.375 (i.e., the Market Price (as defined in
Section 4(l)(ii) hereof) of the Common Stock as of the date of this Warrant)
(the "EXERCISE PRICE"). The number of shares of Common Stock purchasable
hereunder (the "WARRANT SHARES") and the Exercise Price are subject to
adjustment as provided in Section 4 hereof.
This Warrant is subject to the following terms, provisions and conditions:
3. MANNER OF EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
----------------------------------------------------------------
Subject to the provisions hereof, including, without limitation, the limitations
contained in Section 7 hereof, this Warrant may be exercised by the holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the "EXERCISE
AGREEMENT"), to the Company during normal business hours on any business day at
the Company's principal executive offices (or such other office or agency of the
Company as it may designate by
<PAGE>
notice to the holder hereof), and upon (i) payment to the Company in cash, by
certified or official bank check or by wire transfer for the account of the
Company, of the Exercise Price for the Warrant Shares specified in the Exercise
Agreement or (ii) if the holder is effectuating a Cashless Exercise (as defined
in Section 11(c) below) pursuant to Section 11(c) hereof, delivery to the
Company of a written notice of an election to effect a Cashless Exercise for the
Warrant Shares specified in the Exercise Agreement. The Warrant Shares so
purchased shall be deemed to be issued to the holder hereof or such holder's
designee, as the record owner of such shares, as of the close of business on the
date on which this Warrant shall have been surrendered, the completed Exercise
Agreement shall have been delivered, and payment shall have been made for such
shares as set forth above. Certifi cates for the Warrant Shares so purchased,
representing the aggregate number of shares specified in the Exercise Agreement,
shall be delivered to the holder hereof within a reasonable time, not exceeding
two (2) business days, after this Warrant shall have been so exercised (the
"DELIVERY PERIOD"). The certificates so delivered shall be in such denominations
as may be requested by the holder hereof and shall be registered in the name of
such holder or such other name as shall be designated by such holder. If this
Warrant shall have been exercised only in part, then, unless this Warrant has
expired, the Company shall, at its expense, at the time of delivery of such
certificates, deliver to the holder a new Warrant representing the number of
shares with respect to which this Warrant shall not then have been exercised.
If, at any time, a holder of this Warrant submits this Warrant, an Exercise
Agreement and payment to the Company of the Exercise Price for each of the
Warrant Shares specified in the Exercise Agreement (including pursuant to a
Cashless Exercise), and the Company fails for any reason to deliver, on or prior
to the fourth business day following the expiration of the Delivery Period for
such exercise, the number of shares of Common Stock to which the holder is
entitled upon such exercise (an "EXERCISE DEFAULT"), then the Company shall pay
to the holder payments ("EXERCISE DEFAULT PAYMENTS") for an Exercise Default in
the amount of (a) (N/365), multiplied by (b) the difference between the Market
Price (as defined in Section 4(l)(ii) hereof) on the date the Exercise Agreement
giving rise to the Exercise Default is transmitted in accordance with Section 1
(the "EXERCISE DEFAULT DATE") less the Exercise Price, multiplied by (c) the
number of shares of Common Stock the Company failed to so deliver in such
Exercise Default, multiplied by (d) .24, where N = the number of days from the
Exercise Default Date to the date that the Company effects the full exercise of
this Warrant which gave rise to the Exercise Default. The accrued Exercise
Default Payment for each calendar month shall be paid in cash or shall be
convertible into Common Stock at the Exercise Price, at the holder's option, as
follows:
(a) In the event holder elects to take such payment in cash, cash
payment shall be made to holder by the fifth (5th) day of the month following
the month in which it has accrued; and
(b) In the event holder elects to take such payment in Common Stock,
the holder may convert such payment amount into Common Stock at the Exercise
Price (as in effect at the time of conversion) at any time after the fifth (5th)
day of the month following the month in which it has accrued.
2
<PAGE>
Nothing herein shall limit the holder's right to pursue actual damages
for the Company's failure to maintain a sufficient number of authorized shares
of Common Stock as required pursuant to the terms of Section 3(b) hereof, or to
otherwise issue shares of Common Stock upon exercise of this Warrant in
accordance with the terms hereof, and the holder shall have the right to pursue
all remedies available at law or in equity (including a decree of specific
performance and/or injunctive relief).
4. PERIOD OF EXERCISE. This Warrant is exercisable at any time or from
------------------
time to time on or after the date hereof and before 5:00 p.m., New York City
time, on the fifth (5th) anniversary of the date hereof (the "EXERCISE PERIOD").
The Exercise Period shall automatically be extended by one (1) day for each day
on which the Company does not have a number of shares of Common Stock reserved
for issuance upon exercise hereof at least equal to the number of shares of
Common Stock issuable upon exercise hereof.
5. CERTAIN AGREEMENTS OF THE COMPANY. The Company hereby covenants and
---------------------------------
agrees as follows:
(a) SHARES TO BE FULLY PAID. All Warrant Shares will, upon issuance
-----------------------
in accordance with the terms of this Warrant, be validly issued, fully paid, and
nonassessable and free from all taxes, liens, claims and encumbrances.
(b) RESERVATION OF SHARES. During the Exercise Period, the Company
---------------------
shall at all times have authorized, and reserved for the purpose of issuance
upon exercise of this Warrant, a sufficient number of shares of Common Stock to
provide for the exercise of this Warrant.
(c) LISTING. The Company shall promptly secure the listing of the
-------
shares of Common Stock issuable upon exercise of this Warrant upon each national
securities exchange or automated quotation system, if any, upon which shares of
Common Stock are then listed or become listed (subject to official notice of
issuance upon exercise of this Warrant) and shall maintain, so long as any other
shares of Common Stock shall be so listed, such listing of all shares of Common
Stock from time to time issuable upon the exercise of this Warrant; and the
Company shall so list on each national securities exchange or automated
quotation system, as the case may be, and shall maintain such listing of, any
other shares of capital stock of the Company issuable upon the exercise of this
Warrant if and so long as any shares of the same class shall be listed on such
national securities exchange or automated quotation system.
(d) CERTAIN ACTIONS PROHIBITED. The Company will not, by amendment of
--------------------------
its charter or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. Without limiting the generality of the foregoing, the Company (i)
will not increase the par value of any shares of Common Stock receivable upon
the
3
<PAGE>
exercise of this Warrant above the Exercise Price then in effect, and (ii) will
take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.
(e) SUCCESSORS AND ASSIGNS. This Warrant will be binding upon any
----------------------
entity succeeding to the Company by merger, consolidation, or acquisition of all
or substantially all of the Company's assets.
(f) BLUE SKY LAWS. The Company shall, on or before the date of
-------------
issuance of any Warrant Shares, take such actions as the Company shall
reasonably determine are necessary to qualify the Warrant Shares for, or obtain
exemption for the Warrant Shares for, sale to the holder of this Warrant upon
the exercise hereof under applicable securities or "blue sky" laws of the states
of the United States, and shall provide evidence of any such action so taken to
the holder of this Warrant prior to such date; provided, however, that the
Company shall not be required to qualify as a foreign corporation or file a
general consent to service of process in any such jurisdiction.
6. ANTIDILUTION PROVISIONS. During the Exercise Period, the Exercise
-----------------------
Price and the number of Warrant Shares shall be subject to adjustment from time
to time as provided in this Section 4.
In the event that any adjustment of the Exercise Price as required herein
results in a fraction of a cent, such Exercise Price shall be rounded up or down
to the nearest cent.
(a) ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES UPON ISSUANCE OF
------------------------------------------------------------------
COMMON STOCK. Except as otherwise provided in Sections 4(c) and 4(e) hereof, if
- ------------
and whenever after the initial issuance of this Warrant, the Company issues or
sells, or in accordance with Section 4(b) hereof is deemed to have issued or
sold, any shares of Common Stock for no consideration or for a consideration per
share less than the Market Price on the date of issuance (a "DILUTIVE
ISSUANCE"), then effective immediately upon the Dilutive Issuance, the Exercise
Price will be adjusted in accordance with the following formula:
E' = E x O + P/M
--------
CSDO
where:
E' = the adjusted Exercise Price;
E = the then current Exercise Price;
M = the then current Market Price
(as defined in Section 4(l)(ii));
O = the number of shares of Common Stock outstanding immediately
prior to the Dilutive Issuance;
P = the aggregate consideration, calculated as set forth in
Section 4(b) hereof, received by the Company upon such
Dilutive Issuance; and
CSDO = the total number of shares of Common Stock Deemed Outstanding
(as defined in Section 4(l)(i)) immediately after the
Dilutive Issuance.
4
<PAGE>
(b) EFFECT ON EXERCISE PRICE OF CERTAIN EVENTS. For purposes of
------------------------------------------
determining the adjusted Exercise Price under Section 4(a) hereof, the following
will be applicable:
(i) ISSUANCE OF RIGHTS OR OPTIONS. If the Company in any manner
-----------------------------
issues or grants any warrants, rights or options, whether or not immediately
exercisable, to subscribe for or to purchase Common Stock or other securities
exercisable, convertible into or exchangeable for Common Stock ("CONVERTIBLE
SECURITIES") (such warrants, rights and options to purchase Common Stock or
Convertible Securities are hereinafter referred to as "OPTIONS") and the price
per share for which Common Stock is issuable upon the exercise of such Options
is less than the Market Price on the date of issuance ("BELOW MARKET OPTIONS"),
then the maximum total number of shares of Common Stock issuable upon the
exercise of all such Below Market Options (assuming full exercise, conversion or
exchange of Convertible Securities, if applicable) will, as of the date of the
issuance or grant of such Below Market Options, be deemed to be outstanding and
to have been issued and sold by the Company for such price per share. For
purposes of the preceding sentence, the "price per share for which Common Stock
is issuable upon the exercise of such Below Market Options" is determined by
dividing (i) the total amount, if any, received or receivable by the Company as
consideration for the issuance or granting of all such Below Market Options,
plus the minimum aggregate amount of additional consideration, if any, payable
to the Company upon the exercise of all such Below Market Options, plus, in the
case of Convertible Securities issuable upon the exercise of such Below Market
Options, the minimum aggregate amount of additional consideration payable upon
the exercise, conversion or exchange thereof at the time such Convertible
Securities first become exercisable, convertible or exchangeable, by (ii) the
maximum total number of shares of Common Stock issuable upon the exercise of all
such Below Market Options (assuming full conversion of Convertible Securities,
if applicable). No further adjustment to the Exercise Price will be made upon
the actual issuance of such Common Stock upon the exercise of such Below Market
Options or upon the exercise, conversion or exchange of Convertible Securities
issuable upon exercise of such Below Market Options.
(ii) ISSUANCE OF CONVERTIBLE SECURITIES.
----------------------------------
(A) If the Company in any manner issues or sells any
Convertible Securities, whether or not immediately convertible (other than where
the same are issuable upon the exercise of Options) and the price per share for
which Common Stock is issuable upon such exercise, conversion or exchange (as
determined pursuant to Section 4(b)(ii)(B) if applicable) is less than the
Market Price on the date of issuance, then the maximum total number of shares of
Common Stock issuable upon the exercise, conversion or exchange of all such
Convertible Securities will, as of the date of the issuance of such Convertible
Securities, be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. For the purposes of the preceding sentence,
the "price per share for which Common Stock is issuable upon such exercise,
conversion or exchange" is determined by dividing (i) the total amount, if any,
received or receivable by the Company as consideration for the issuance or sale
of all such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the exercise,
conversion or exchange thereof at the time such Convertible Securities first
become exercisable, convertible or exchangeable, by (ii) the maximum total
number of shares of Common Stock issuable upon the exercise, conversion or
exchange of all such Convertible Securities. No
5
<PAGE>
further adjustment to the Exercise Price will be made upon the actual issuance
of such Common Stock upon exercise, conversion or exchange of such Convertible
Securities.
(B) If the Company in any manner issues or sells any
Convertible Securities with a fluctuating conversion or exercise price or
exchange ratio (a "VARIABLE RATE CONVERTIBLE SECURITY"), then the "price per
share for which Common Stock is issuable upon such exercise, conversion or
exchange" for purposes of the calculation contemplated by Section 4(b)(ii)(A)
shall be deemed to be the lowest price per share which would be applicable
(assuming all holding period and other conditions to any discounts contained in
such Convertible Security have been satisfied) if the Market Price on the date
of issuance of such Convertible Security was 75% of the Market Price on such
date (the "ASSUMED VARIABLE MARKET PRICE"). Further, if the Market Price at any
time or times thereafter is less than or equal to the Assumed Variable Market
Price last used for making any adjustment under this Section 4 with respect to
any Variable Rate Convertible Security, the Exercise Price in effect at such
time shall be readjusted to equal the Exercise Price which would have resulted
if the Assumed Variable Market Price at the time of issuance of the Variable
Rate Convertible Security had been 75% of the Market Price existing at the time
of the adjustment required by this sentence.
(iii) CHANGE IN OPTION PRICE OR CONVERSION RATE. If there is a
-----------------------------------------
change at any time in (i) the amount of additional consideration payable to the
Company upon the exercise of any Options; (ii) the amount of additional
consideration, if any, payable to the Company upon the exercise, conversion or
exchange of any Convertible Securities; or (iii) the rate at which any
Convertible Securities are convertible into or exchangeable for Common Stock (in
each such case, other than under or by reason of provisions designed to protect
against dilution), the Exercise Price in effect at the time of such change will
be readjusted to the Exercise Price which would have been in effect at such time
had such Options or Convertible Securities still outstanding provided for such
changed additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold.
(iv) TREATMENT OF EXPIRED OPTIONS AND UNEXERCISED CONVERTIBLE
--------------------------------------------------------
SECURITIES. If, in any case, the total number of shares of Common Stock
- ----------
issuable upon exercise of any Option or upon exercise, conversion or exchange
of any Convertible Securities is not, in fact, issued and the rights to exercise
such Option or to exercise, convert or exchange such Convertible Securities
shall have expired or terminated, the Exercise Price then in effect will be
readjusted to the Exercise Price which would have been in effect at the time of
such expiration or termination had such Option or Convertible Securities, to the
extent outstanding immediately prior to such expiration or termination (other
than in respect of the actual number of shares of Common Stock issued upon
exercise or conversion thereof), never been issued.
(v) CALCULATION OF CONSIDERATION RECEIVED. If any Common Stock,
-------------------------------------
Options or Convertible Securities are issued, granted or sold for cash, the
consideration received therefor for purposes of this Warrant will be the amount
received by the Company therefor, before deduction of reasonable commissions,
underwriting discounts or allowances or other reasonable expenses paid or
incurred by the Company in connection with such issuance, grant or sale. In
case any Common Stock, Options or Convertible Securities are issued or sold for
a consideration part or
6
<PAGE>
all of which shall be other than cash, the amount of the consideration other
than cash received by the Company will be the fair market value of such
consideration, except where such consideration consists of securities, in which
case the amount of consideration received by the Company will be the Market
Price thereof as of the date of receipt. In case any Common Stock, Options or
Convertible Securities are issued in connection with any merger or consolidation
in which the Company is the surviving corporation, the amount of consideration
therefor will be deemed to be the fair market value of such portion of the net
assets and business of the non-surviving corporation as is attributable to such
Common Stock, Options or Convertible Securities, as the case may be. The fair
market value of any consideration other than cash or securities will be
determined in good faith by an investment banker or other appropriate expert of
national reputation selected by the Company and reasonably acceptable to the
holder hereof, with the costs of such appraisal to be borne by the Company;
provided, however, that if the Company and the holder reasonably-------- -------
agree that the fair market value of such consideration is less than $100,000,
the fair market value will be determined in good faith by the Board of Directors
of the Company.
(vi) EXCEPTIONS TO ADJUSTMENT OF EXERCISE PRICE. No adjustment
------------------------------------------
to the Exercise Price will be made (i) upon the exercise of any warrants,
options or convertible securities issued and outstanding on the date hereof in
accordance with the terms of such securities as of such date; (ii) upon the
grant or exercise of any stock or options which may hereafter be granted or
exercised under any employee benefit plan of the Company now existing or to be
implemented in the future, so long as the issuance of such stock or options is
approved by a majority of the non-employee members of the Board of Directors of
the Company or a majority of the members of a committee of non-employee
directors established for such purpose; or (iii) upon the issuance of any
securities in accordance with the terms of those certain promissory notes issued
by the Company pursuant to that certain Note Purchase Agreement, dated as of
October 30, 1997.
(c) SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company, at
------------------------------------------
any time after the initial issuance of this Warrant, subdivides (by any stock
split, stock dividend, recapitalization, reorganization, reclassification or
otherwise) its shares of Common Stock into a greater number of shares, then,
after the date of record for effecting such subdivision, the Exercise Price in
effect immediately prior to such subdivision will be proportionately reduced.
If the Company, at any time after the initial issuance of this Warrant, combines
(by reverse stock split, recapitalization, reorganization, reclassification or
otherwise) its shares of Common Stock into a smaller number of shares, then,
after the date of record for effecting such combination, the Exercise Price in
effect immediately prior to such combination will be proportionately increased.
(d) ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of the
------------------------------
Exercise Price pursuant to the provisions of this Section 4, the number of
shares of Common Stock issuable upon exercise of this Warrant shall be adjusted
by multiplying a number equal to the Exercise Price in effect immediately prior
to such adjustment by the number of shares of Common Stock issuable upon
exercise of this Warrant immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
(e) CONSOLIDATION, MERGER OR SALE. In case of any consolidation of
-----------------------------
the Company with, or merger of the Company into any other corporation, or in
case of any sale or conveyance of
7
<PAGE>
all or substantially all of the assets of the Company other than in connection
with a plan of complete liquidation of the Company at any time after the initial
issuance of this Warrant, then as a condition of such consolidation, merger or
sale or conveyance, adequate provision will be made whereby the holder of this
Warrant will have the right to acquire and receive upon exercise of this Warrant
in lieu of the shares of Common Stock immediately theretofore acquirable upon
the exercise of this Warrant, such shares of stock, securities or assets as may
be issued or payable with respect to or in exchange for the number of shares of
Common Stock immediately theretofore acquirable and receivable upon exercise of
this Warrant had such consolidation, merger or sale or conveyance not taken
place. In any such case, the Company will make appropriate provision to insure
that the provisions of this Section 4 hereof will thereafter be applicable as
nearly as may be in relation to any shares of stock or securities thereafter
deliverable upon the exercise of this Warrant. The Company will not effect any
consolidation, merger or sale or conveyance unless prior to the consummation
thereof, the successor corporation (if other than the Company) assumes by
written instrument the obligations under this Section 4 and the obligations to
deliver to the holder of this Warrant such shares of stock, securities or assets
as, in accordance with the foregoing provisions, the holder may be entitled to
acquire.
(f) DISTRIBUTION OF ASSETS. In case the Company shall declare or make
----------------------
any distribution of its assets (or rights to acquire its assets) to holders of
Common Stock as a dividend, by way of return of capital or otherwise (including
any dividend or distribution to the Company's stockholders of cash or shares (or
rights to acquire shares) of capital stock of a subsidiary) (a "DISTRIBUTION"),
at any time after the initial issuance of this Warrant, then the holder of this
Warrant shall be entitled upon exercise of this Warrant for the purchase of any
or all of the shares of Common Stock subject hereto, to receive the amount of
such assets (or rights) which would have been payable to the holder had such
holder been the holder of such shares of Common Stock on the record date for the
determination of stockholders entitled to such Distribution.
(g) NOTICE OF ADJUSTMENT. Upon the occurrence of any event which
--------------------
requires any adjustment of the Exercise Price, then, and in each such case, the
Company shall give notice thereof to the holder of this Warrant, which notice
shall state the Exercise Price resulting from such adjustment and the increase
or decrease in the number of Warrant Shares purchasable at such price upon
exercise, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Such calculation shall be certified
by the chief financial officer of the Company.
(h) MINIMUM ADJUSTMENT OF EXERCISE PRICE. No adjustment of the
------------------------------------
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
(i) NO FRACTIONAL SHARES. No fractional shares of Common Stock are to
--------------------
be issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Market Price of a share of Common
Stock on the date of such exercise.
8
<PAGE>
(j) OTHER NOTICES. In case at any time:
-------------
(i) the Company shall declare any dividend upon the Common Stock
payable in shares of stock of any class or make any other distribution (other
than dividends or distributions payable in cash out of retained earnings
consistent with the Company's past practices with respect to declaring dividends
and making distributions) to the holders of the Common Stock;
(ii) the Company shall offer for subscription pro rata to the
holders of the Common Stock any additional shares of stock of any class or other
rights;
(iii) there shall be any capital reorganization of the Company, or
reclassification of the Common Stock, or consolidation or merger of the Company
with or into, or sale of all or substantially all of its assets to, another
corporation or entity; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Common Stock entitled to receive
any such dividend, distribution, or subscription rights or for determining the
holders of Common Stock entitled to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up and (b) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, notice of
the date (or, if not then known, a reasonable approximation thereof by the
Company) when the same shall take place. Such notice shall also specify the
date on which the holders of Common Stock shall be entitled to receive such
dividend, distribution, or subscription rights or to exchange their Common Stock
for stock or other securities or property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding-up, as the case may be. Such notice shall be given at least seventy-
five (75) days prior to the record date or the date on which the Company's books
are closed in respect thereto. Failure to give any such notice or any defect
therein shall not affect the validity of the proceedings referred to in clauses
(i), (ii), (iii) and (iv) above.
(k) CERTAIN EVENTS. If, at any time after the initial issuance of
--------------
this Warrant, any event occurs of the type contemplated by the adjustment
provisions of this Section 4 but not expressly provided for by such provisions,
the Company will give notice of such event as provided in Section 4(g) hereof,
and the Company's Board of Directors will make an appropriate adjustment in the
Exercise Price and the number of shares of Common Stock acquirable upon exercise
of this Warrant so that the rights of the holder shall be neither enhanced nor
diminished by such event.
(l) CERTAIN DEFINITIONS.
-------------------
(i) "COMMON STOCK DEEMED OUTSTANDING" shall mean the number of
-------------------------------
shares of Common Stock actually outstanding (not including shares of
Common Stock held in the treasury of the Company), plus (x) in the case of
any adjustment required by Section 4(a) resulting
9
<PAGE>
from the issuance of any Options, the maximum total number of shares of
Common Stock issuable upon the exercise of the Options for which the
adjustment is required (including any Common Stock issuable upon the
conversion of Convertible Securities issuable upon the exercise of such
Options), and (y) in the case of any adjustment required by Section 4(a)
resulting from the issuance of any Convertible Securities, the maximum
total number of shares of Common Stock issuable upon the exercise,
conversion or exchange of the Convertible Securities for which the
adjustment is required, as of the date of issuance of such Convertible
Securities, if any.
(ii) "MARKET PRICE," as of any date, (i) means the average of the
------------
closing bid prices for the shares of Common Stock as reported on the Nasdaq
SmallCap Market by Bloomberg Financial Markets ("BLOOMBERG") for the five (5)
consecutive trading days immediately preceding such date, or (ii) if the Nasdaq
SmallCap Market is not the principal trading market for the shares of Common
Stock, the average of the last bid prices reported by Bloomberg on the principal
trading market for the Common Stock during the same period, or, if there is no
bid price for such period, the last sales price reported by Bloomberg for such
period, or (iii) if the foregoing do not apply, the last closing bid price of
such security in the over-the-counter market on the pink sheets or bulletin
board for such security as reported by Bloomberg, or if no closing bid price is
so reported for such security, the last closing trade price of such security as
reported by Bloomberg, or (iv) if market value cannot be calculated as of such
date on any of the foregoing bases, the Market Price shall be the average fair
market value as reasonably determined by an investment banking firm selected by
the Company and reasonably acceptable to the holder, with the costs of the
appraisal to be borne by the Company. The manner of determining the Market
Price of the Common Stock set forth in the foregoing definition shall apply with
respect to any other security in respect of which a determination as to market
value must be made hereunder.
(iii) "COMMON STOCK," for purposes of this Section 4, includes the
------------
Common Stock and any additional class of stock of the Company having no
preference as to dividends or distributions on liquidation, provided that the
shares purchasable pursuant to this Warrant shall include only Common Stock, par
value $.01 per share, in respect of which this Warrant is exercisable, or shares
resulting from any subdivision or combination of such Common Stock, or in the
case of any reorganization, reclassification, consolidation, merger, or sale of
the character referred to in Section 4(e) hereof, the stock or other securities
or property provided for in such Section.
7. ISSUE TAX. The issuance of certificates for Warrant Shares upon the
---------
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof,
provided that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than the holder of this Warrant.
8. NO RIGHTS OR LIABILITIES AS A STOCKHOLDER. This Warrant shall not
-----------------------------------------
entitle the holder hereof to any voting rights or other rights as a stockholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
10
<PAGE>
liability of such holder for the Exercise Price or as a stockholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
9. TRANSFER, EXCHANGE, REDEMPTION AND REPLACEMENT OF WARRANT.
---------------------------------------------------------
(a) RESTRICTION ON TRANSFER. This Warrant and the rights granted to
-----------------------
the holder hereof are transferable, in whole or in part, upon surrender of this
Warrant, together with a properly executed assignment in the form attached
hereto, at the office or agency of the Company referred to in Section 7(e)
below, provided, however, that any transfer or assignment shall be subject to
the conditions set forth in Sections 7(f) and (g) hereof. Until due presentment
for registration of transfer on the books of the Company, the Company may treat
the registered holder hereof as the owner and holder hereof for all purposes,
and the Company shall not be affected by any notice to the contrary.
(b) WARRANT EXCHANGEABLE FOR DIFFERENT DENOMINATIONS. This Warrant is
------------------------------------------------
exchangeable, upon the surrender hereof by the holder hereof at the office or
agency of the Company referred to in Section 7(e) below, for new Warrants of
like tenor of different denominations representing in the aggregate the right to
purchase the number of shares of Common Stock which may be purchased hereunder,
each of such new Warrants to represent the right to purchase such number of
shares as shall be designated by the holder hereof at the time of such
surrender.
(c) REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
----------------------
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
(d) CANCELLATION; PAYMENT OF EXPENSES. Upon the surrender of this
---------------------------------
Warrant in connection with any transfer, exchange, or replacement as provided in
this Section 7, this Warrant shall be promptly canceled by the Company. The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses (other than legal expenses, if any, incurred by the Holder or
transferees) and charges payable in connection with the preparation, execution,
and delivery of Warrants pursuant to this Section 7. The Company shall
indemnify and reimburse the holder of this Warrant for all costs and expenses
(including legal fees) incurred by such holder in connection with the
enforcement of its rights hereunder.
(e) WARRANT REGISTER. The Company shall maintain, at its principal
----------------
executive offices (or such other office or agency of the Company as it may
designate by notice to the holder hereof), a register for this Warrant, in which
the Company shall record the name and address of the person in whose name this
Warrant has been issued, as well as the name and address of each transferee and
each prior owner of this Warrant.
(f) EXERCISE OR TRANSFER WITHOUT REGISTRATION. If, at the time of the
-----------------------------------------
surrender of this Warrant in connection with any exercise, transfer, or exchange
of this Warrant, this Warrant (or, in the case of any exercise, the Warrant
Shares issuable hereunder), shall not be registered under
11
<PAGE>
the Securities Act and under applicable state securities or blue sky laws, the
Company may require, as a condition of allowing such exercise, transfer, or
exchange, (i) that the holder or transferee of this Warrant, as the case may be,
furnish to the Company a written opinion of counsel (which opinion shall be in
form, substance and scope customary for opinions of counsel in comparable
transactions) to the effect that such exercise, transfer, or exchange may be
made without registration under the Securities Act and under applicable state
securities or blue sky laws (the cost of which shall be borne by the Company if
the Company's counsel renders such opinion and up to $250 of such cost shall be
borne by the Company if the holder's counsel is requested to render such
opinion), (ii) that the holder or transferee execute and deliver to the Company
an investment letter in form and substance acceptable to the Company and (iii)
that the transferee be an "ACCREDITED INVESTOR" as defined in Rule 501(a)
promulgated under the Securities Act.
(g) ADDITIONAL RESTRICTIONS ON EXERCISE OR TRANSFER. Notwithstanding
-----------------------------------------------
anything contained herein to the contrary, unless the holder hereof delivers a
waiver in accordance with the last sentence of this Section 7(g), this Warrant
shall not be exercisable by a holder hereof to the extent (but only to the
extent) that, if exercisable by such holder, such holder would beneficially own
in excess of 4.99% of the outstanding shares of Common Stock. To the extent the
above limitation applies, the determination of whether and to what extent this
Warrant shall be exercisable vis-a-vis other securities owned by such holder
shall be in the sole discretion of the holder and submission of this Warrant for
full or partial exercise shall be deemed to be the holder's determination of
whether and the extent to which this Warrant is exercisable, in each case
subject to such aggregate percentage limitation. No prior inability to exercise
the Warrant pursuant to this Section shall have any effect on the applicability
of the provisions of this Section with respect to any subsequent determination
of exerciseability. For purposes of the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13D-G thereunder.
Except as provided in the immediately succeeding sentence, the restrictions
contained in this Section 7(g) may not be amended without the consent of the
holder of this Warrant and the holders of a majority of the Company's then
outstanding Common Stock. Notwithstanding the foregoing, the holder hereof may
waive the restrictions set forth in this Section 7(g) by written notice to the
Company upon not less than sixty-one (61) days prior notice (with such waiver
taking effect only upon the expiration of such sixty-one (61) day notice
period).
10. REGISTRATION RIGHTS. The initial holder of this Warrant (and certain
-------------------
assignees thereof) is entitled to the benefit of such registration rights in
respect of the Warrant Shares as are set forth in the Registration Rights
Agreement, dated as of the date hereof, by and between the Company, the initial
holder hereof and the other signatories thereto, including the right to assign
such rights to certain assignees, as set forth therein.
11. NOTICES. Any notices required or permitted to be given under the
-------
terms of this Warrant shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier or by confirmed
telecopy, and shall be effective five days after being placed in the mail, if
mailed, or upon receipt or refusal of receipt, if delivered personally or by
courier or confirmed telecopy, in each case addressed to a party. The addresses
for such communications shall be:
12
<PAGE>
If to the Company:
Advanced Environmental Recycling
Technologies, Inc.
FM 2169
Junction, Texas 76849
Telecopy: (915) 446-3864
Attention: Chief Executive Officer
With a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1500 NationsBank Plaza
300 Convent Street
San Antonio, Texas 78205
Telecopy: (210) 224-2035
Attention: Pat Ryan, Esq.
and if to the holder, at such address as such holder shall have provided in
writing to the Company, or at such other address as each such party furnishes by
notice given in accordance with this Section 9.
12. GOVERNING LAW; JURISDICTION. This Warrant shall be governed by and
---------------------------
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in the State of Delaware. The Company
irrevocably consents to the jurisdiction of the United States federal courts and
the state courts located in the City of New York in the State of New York in any
suit or proceeding based on or arising under this Warrant and irrevocably agrees
that all claims in respect of such suit or proceeding may be determined in such
courts. The Company irrevocably waives the defense of an inconvenient forum to
the maintenance of such suit or proceeding. The Company agrees that service of
process upon the Company mailed by first class mail shall be deemed in every
respect effective service of process upon the Company in any such suit or
proceeding. Nothing herein shall affect the holder's right to serve process in
any other manner permitted by law. The Company agrees that a final non-
appealable judgment in any such suit or proceeding shall be conclusive and may
be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner.
13. MISCELLANEOUS.
-------------
(a) AMENDMENTS. This Warrant and any provision hereof may only be
----------
amended by an instrument in writing signed by the Company and the holder hereof.
(b) DESCRIPTIVE HEADINGS. The descriptive headings of the several
--------------------
Sections of this Warrant are inserted for purposes of reference only, and shall
not affect the meaning or construction of any of the provisions hereof.
13
<PAGE>
(c) CASHLESS EXERCISE. Notwithstanding anything to the contrary
-----------------
contained in this Warrant, if the resale of the Warrant Shares by the holder is
not then registered pursuant to an effective registration statement under the
Securities Act, this Warrant may be exercised at any time after the first
anniversary of the date hereof until the end of the Exercise Period by
presentation and surrender of this Warrant to the Company at its principal
executive offices with a written notice of the holder's intention to effect a
cashless exercise, including a calculation of the number of shares of Common
Stock to be issued upon such exercise in accordance with the terms hereof (a
"CASHLESS EXERCISE"). In the event of a Cashless Exercise, in lieu of paying
the Exercise Price in cash, the holder shall surrender this Warrant for that
number of shares of Common Stock determined by multiplying the number of Warrant
Shares to which it would otherwise be entitled by a fraction, the numerator of
which shall be the difference between the then current Market Price per share of
the Common Stock and the Exercise Price, and the denominator of which shall be
the then current Market Price per share of Common Stock.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
14
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer.
ADVANCED ENVIRONMENTAL
RECYCLING TECHNOLOGIES, INC.
By:
---------------------------
Name:
----------------------
Title:
---------------------
<PAGE>
FORM OF EXERCISE AGREEMENT
(TO BE EXECUTED BY THE HOLDER IN ORDER TO EXERCISE THE WARRANT)
The undersigned hereby irrevocably exercises the right to purchase
_____________ of the shares of Common Stock of Advanced Environmental Recycling
Technologies, Inc., a Delaware corporation (the "COMPANY"), evidenced by the
attached Warrant, and herewith makes payment of the Exercise Price with respect
to such shares in full, all in accordance with the conditions and provisions of
said Warrant.
i. The undersigned agrees not to offer, sell, transfer or otherwise
dispose of any Common Stock obtained on exercise of the Warrant, except under
circumstances that will not result in a violation of the Securities Act of 1933,
as amended, or any state securities laws, and agrees that the following legend
may be affixed to the stock certificate for the Common Stock hereby subscribed
for if resale of such Common Stock is not registered or if Rule 144 is
unavailable for the immediate resale of such shares:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE SECURITIES
REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE
SECURITIES LAWS UNLESS OFFERED, SOLD OR TRANSFERRED UNDER AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
ii. The undersigned requests that stock certificates for such shares be
issued, and a Warrant representing any unexercised portion hereof be issued,
pursuant to the Warrant in the name of the Holder and delivered to the
undersigned at the address set forth below:
Dated:
----------------- --------------------------------------------
Signature of Holder
--------------------------------------------
Name of Holder (Print)
Address:
--------------------------------------------
--------------------------------------------
--------------------------------------------
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
all the rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock covered thereby set forth hereinbelow, to:
Name of Assignee Address Number of Shares
- ---------------- ------- ----------------
, and hereby irrevocably constitutes and appoints_______________________________
as agent and attorney-in-fact to transfer said Warrant on the books of the
within-named corporation, with full power of substitution in the premises.
Dated: ,
--------------------- ----
In the presence of
- ------------------
Name:
-----------------------------
Signature:
-----------------------------
Title of Signing Officer or Agent (if any):
-------------------------------
Address:
-------------------------------
-------------------------------
Note: The above signature should
correspond exactly with the name on
the face of the within Warrant.
<PAGE>
EXHIBIT 10.6
VOID AFTER 5:00 P.M., NEW YORK
CITY TIME, ON OCTOBER 30, 2002
(UNLESS EXTENDED PURSUANT TO SECTION 2 HEREOF)
THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES
REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS
THE SECURITIES ARE REGISTERED UNDER THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS, OR ANY SUCH OFFER, SALE OR TRANSFER IS MADE PURSUANT TO AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
Date: October 30, 1997 Right to Purchase 2,540,000
Shares of Common Stock
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, BRUNO GUAZZONI or his registered
assigns is entitled to purchase from Advanced Environmental Recycling
Technologies, Inc., a Delaware corporation (the "COMPANY"), at any time or from
time to time during the period specified in Section 2 hereof, Two Million Five
Hundred Forty Thousand (2,540,000) fully paid and nonassessable shares of the
Company's Class A Common Stock, par value $.01 per share ("COMMON STOCK"), at an
exercise price per share equal to $.375 (i.e., the Market Price (as defined in
Section 4(l)(ii) hereof) of the Common Stock as of the date of this Warrant)
(the "EXERCISE PRICE"). The number of shares of Common Stock purchasable
hereunder (the "WARRANT SHARES") and the Exercise Price are subject to
adjustment as provided in Section 4 hereof.
This Warrant is subject to the following terms, provisions and conditions:
1. MANNER OF EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
----------------------------------------------------------------
Subject to the provisions hereof, including, without limitation, the limitations
contained in Section 7 hereof, this Warrant may be exercised by the holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the "EXERCISE
AGREEMENT"), to the Company during normal business hours on any business day at
the Company's principal executive offices (or such other office or agency of the
Company as it may designate by
<PAGE>
notice to the holder hereof), and upon (i) payment to the Company in cash, by
certified or official bank check or by wire transfer for the account of the
Company, of the Exercise Price for the Warrant Shares specified in the Exercise
Agreement or (ii) if the holder is effectuating a Cashless Exercise (as defined
in Section 11(c) below) pursuant to Section 11(c) hereof, delivery to the
Company of a written notice of an election to effect a Cashless Exercise for the
Warrant Shares specified in the Exercise Agreement. The Warrant Shares so
purchased shall be deemed to be issued to the holder hereof or such holder's
designee, as the record owner of such shares, as of the close of business on the
date on which this Warrant shall have been surrendered, the completed Exercise
Agreement shall have been delivered, and payment shall have been made for such
shares as set forth above. Certifi cates for the Warrant Shares so purchased,
representing the aggregate number of shares specified in the Exercise Agreement,
shall be delivered to the holder hereof within a reasonable time, not exceeding
two (2) business days, after this Warrant shall have been so exercised (the
"DELIVERY PERIOD"). The certificates so delivered shall be in such denominations
as may be requested by the holder hereof and shall be registered in the name of
such holder or such other name as shall be designated by such holder. If this
Warrant shall have been exercised only in part, then, unless this Warrant has
expired, the Company shall, at its expense, at the time of delivery of such
certificates, deliver to the holder a new Warrant representing the number of
shares with respect to which this Warrant shall not then have been exercised.
If, at any time, a holder of this Warrant submits this Warrant, an Exercise
Agreement and payment to the Company of the Exercise Price for each of the
Warrant Shares specified in the Exercise Agreement (including pursuant to a
Cashless Exercise), and the Company fails for any reason to deliver, on or prior
to the fourth business day following the expiration of the Delivery Period for
such exercise, the number of shares of Common Stock to which the holder is
entitled upon such exercise (an "EXERCISE DEFAULT"), then the Company shall pay
to the holder payments ("EXERCISE DEFAULT PAYMENTS") for an Exercise Default in
the amount of (a) (N/365), multiplied by (b) the difference between the Market
Price (as defined in Section 4(l)(ii) hereof) on the date the Exercise Agreement
giving rise to the Exercise Default is transmitted in accordance with Section 1
(the "EXERCISE DEFAULT DATE") less the Exercise Price, multiplied by (c) the
number of shares of Common Stock the Company failed to so deliver in such
Exercise Default, multiplied by (d) .24, where N = the number of days from the
Exercise Default Date to the date that the Company effects the full exercise of
this Warrant which gave rise to the Exercise Default. The accrued Exercise
Default Payment for each calendar month shall be paid in cash or shall be
convertible into Common Stock at the Exercise Price, at the holder's option, as
follows:
(a) In the event holder elects to take such payment in cash, cash
payment shall be made to holder by the fifth (5th) day of the month following
the month in which it has accrued; and
(b) In the event holder elects to take such payment in Common Stock,
the holder may convert such payment amount into Common Stock at the Exercise
Price (as in effect at the time of conversion) at any time after the fifth (5th)
day of the month following the month in which it has accrued.
2
<PAGE>
Nothing herein shall limit the holder's right to pursue actual damages
for the Company's failure to maintain a sufficient number of authorized shares
of Common Stock as required pursuant to the terms of Section 3(b) hereof, or to
otherwise issue shares of Common Stock upon exercise of this Warrant in
accordance with the terms hereof, and the holder shall have the right to pursue
all remedies available at law or in equity (including a decree of specific
performance and/or injunctive relief).
4. PERIOD OF EXERCISE. This Warrant is exercisable at any time or from
------------------
time to time on or after the date hereof and before 5:00 p.m., New York City
time, on the fifth (5th) anniversary of the date hereof (the "EXERCISE PERIOD").
The Exercise Period shall automatically be extended by one (1) day for each day
on which the Company does not have a number of shares of Common Stock reserved
for issuance upon exercise hereof at least equal to the number of shares of
Common Stock issuable upon exercise hereof.
5. CERTAIN AGREEMENTS OF THE COMPANY. The Company hereby covenants and
---------------------------------
agrees as follows:
(a) SHARES TO BE FULLY PAID. All Warrant Shares will, upon issuance
-----------------------
in accordance with the terms of this Warrant, be validly issued, fully paid, and
nonassessable and free from all taxes, liens, claims and encumbrances.
(b) RESERVATION OF SHARES. During the Exercise Period, the Company
---------------------
shall at all times have authorized, and reserved for the purpose of issuance
upon exercise of this Warrant, a sufficient number of shares of Common Stock to
provide for the exercise of this Warrant.
(c) LISTING. The Company shall promptly secure the listing of the
-------
shares of Common Stock issuable upon exercise of this Warrant upon each national
securities exchange or automated quotation system, if any, upon which shares of
Common Stock are then listed or become listed (subject to official notice of
issuance upon exercise of this Warrant) and shall maintain, so long as any other
shares of Common Stock shall be so listed, such listing of all shares of Common
Stock from time to time issuable upon the exercise of this Warrant; and the
Company shall so list on each national securities exchange or automated
quotation system, as the case may be, and shall maintain such listing of, any
other shares of capital stock of the Company issuable upon the exercise of this
Warrant if and so long as any shares of the same class shall be listed on such
national securities exchange or automated quotation system.
(d) CERTAIN ACTIONS PROHIBITED. The Company will not, by amendment of
--------------------------
its charter or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. Without limiting the generality of the foregoing, the Company (i)
will not increase the par value of any shares of Common Stock receivable upon
the
3
<PAGE>
exercise of this Warrant above the Exercise Price then in effect, and (ii) will
take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.
(e) SUCCESSORS AND ASSIGNS. This Warrant will be binding upon any
----------------------
entity succeeding to the Company by merger, consolidation, or acquisition of all
or substantially all of the Company's assets.
(f) BLUE SKY LAWS. The Company shall, on or before the date of
-------------
issuance of any Warrant Shares, take such actions as the Company shall
reasonably determine are necessary to qualify the Warrant Shares for, or obtain
exemption for the Warrant Shares for, sale to the holder of this Warrant upon
the exercise hereof under applicable securities or "blue sky" laws of the states
of the United States, and shall provide evidence of any such action so taken to
the holder of this Warrant prior to such date; provided, however, that the
Company shall not be required to qualify as a foreign corporation or file a
general consent to service of process in any such jurisdiction.
6. ANTIDILUTION PROVISIONS. During the Exercise Period, the Exercise
-----------------------
Price and the number of Warrant Shares shall be subject to adjustment from time
to time as provided in this Section 4.
In the event that any adjustment of the Exercise Price as required herein
results in a fraction of a cent, such Exercise Price shall be rounded up or down
to the nearest cent.
(a) ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES UPON ISSUANCE OF
------------------------------------------------------------------
COMMON STOCK. Except as otherwise provided in Sections 4(c) and 4(e) hereof, if
- ------------
and whenever after the initial issuance of this Warrant, the Company issues or
sells, or in accordance with Section 4(b) hereof is deemed to have issued or
sold, any shares of Common Stock for no consideration or for a consideration per
share less than the Market Price on the date of issuance (a "DILUTIVE
ISSUANCE"), then effective immediately upon the Dilutive Issuance, the Exercise
Price will be adjusted in accordance with the following formula:
E' = E x O + P/M
--------
CSDO
where:
E' = the adjusted Exercise Price;
E = the then current Exercise Price;
M = the then current Market Price
(as defined in Section 4(l)(ii));
O = the number of shares of Common Stock outstanding immediately
prior to the Dilutive Issuance;
P = the aggregate consideration, calculated as set forth in
Section 4(b) hereof, received by the Company upon such
Dilutive Issuance; and
CSDO = the total number of shares of Common Stock Deemed Outstanding
(as defined in Section 4(l)(i)) immediately after the
Dilutive Issuance.
4
<PAGE>
(b) EFFECT ON EXERCISE PRICE OF CERTAIN EVENTS. For purposes of
------------------------------------------
determining the adjusted Exercise Price under Section 4(a) hereof, the following
will be applicable:
(i) ISSUANCE OF RIGHTS OR OPTIONS. If the Company in any manner
-----------------------------
issues or grants any warrants, rights or options, whether or not immediately
exercisable, to subscribe for or to purchase Common Stock or other securities
exercisable, convertible into or exchangeable for Common Stock ("CONVERTIBLE
SECURITIES") (such warrants, rights and options to purchase Common Stock or
Convertible Securities are hereinafter referred to as "OPTIONS") and the price
per share for which Common Stock is issuable upon the exercise of such Options
is less than the Market Price on the date of issuance ("BELOW MARKET OPTIONS"),
then the maximum total number of shares of Common Stock issuable upon the
exercise of all such Below Market Options (assuming full exercise, conversion or
exchange of Convertible Securities, if applicable) will, as of the date of the
issuance or grant of such Below Market Options, be deemed to be outstanding and
to have been issued and sold by the Company for such price per share. For
purposes of the preceding sentence, the "price per share for which Common Stock
is issuable upon the exercise of such Below Market Options" is determined by
dividing (i) the total amount, if any, received or receivable by the Company as
consideration for the issuance or granting of all such Below Market Options,
plus the minimum aggregate amount of additional consideration, if any, payable
to the Company upon the exercise of all such Below Market Options, plus, in the
case of Convertible Securities issuable upon the exercise of such Below Market
Options, the minimum aggregate amount of additional consideration payable upon
the exercise, conversion or exchange thereof at the time such Convertible
Securities first become exercisable, convertible or exchangeable, by (ii) the
maximum total number of shares of Common Stock issuable upon the exercise of all
such Below Market Options (assuming full conversion of Convertible Securities,
if applicable). No further adjustment to the Exercise Price will be made upon
the actual issuance of such Common Stock upon the exercise of such Below Market
Options or upon the exercise, conversion or exchange of Convertible Securities
issuable upon exercise of such Below Market Options.
(ii) ISSUANCE OF CONVERTIBLE SECURITIES.
----------------------------------
(A) If the Company in any manner issues or sells any
Convertible Securities, whether or not immediately convertible (other than where
the same are issuable upon the exercise of Options) and the price per share for
which Common Stock is issuable upon such exercise, conversion or exchange (as
determined pursuant to Section 4(b)(ii)(B) if applicable) is less than the
Market Price on the date of issuance, then the maximum total number of shares of
Common Stock issuable upon the exercise, conversion or exchange of all such
Convertible Securities will, as of the date of the issuance of such Convertible
Securities, be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. For the purposes of the preceding sentence,
the "price per share for which Common Stock is issuable upon such exercise,
conversion or exchange" is determined by dividing (i) the total amount, if any,
received or receivable by the Company as consideration for the issuance or sale
of all such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the exercise,
conversion or exchange thereof at the time such Convertible Securities first
become exercisable, convertible or exchangeable, by (ii) the maximum total
number of shares of Common Stock issuable upon the exercise, conversion or
exchange of all such Convertible Securities. No
5
<PAGE>
further adjustment to the Exercise Price will be made upon the actual issuance
of such Common Stock upon exercise, conversion or exchange of such Convertible
Securities.
(B) If the Company in any manner issues or sells any
Convertible Securities with a fluctuating conversion or exercise price or
exchange ratio (a "VARIABLE RATE CONVERTIBLE SECURITY"), then the "price per
share for which Common Stock is issuable upon such exercise, conversion or
exchange" for purposes of the calculation contemplated by Section 4(b)(ii)(A)
shall be deemed to be the lowest price per share which would be applicable
(assuming all holding period and other conditions to any discounts contained in
such Convertible Security have been satisfied) if the Market Price on the date
of issuance of such Convertible Security was 75% of the Market Price on such
date (the "ASSUMED VARIABLE MARKET PRICE"). Further, if the Market Price at any
time or times thereafter is less than or equal to the Assumed Variable Market
Price last used for making any adjustment under this Section 4 with respect to
any Variable Rate Convertible Security, the Exercise Price in effect at such
time shall be readjusted to equal the Exercise Price which would have resulted
if the Assumed Variable Market Price at the time of issuance of the Variable
Rate Convertible Security had been 75% of the Market Price existing at the time
of the adjustment required by this sentence.
(iii) CHANGE IN OPTION PRICE OR CONVERSION RATE. If there is a
-----------------------------------------
change at any time in (i) the amount of additional consideration payable to the
Company upon the exercise of any Options; (ii) the amount of additional
consideration, if any, payable to the Company upon the exercise, conversion or
exchange of any Convertible Securities; or (iii) the rate at which any
Convertible Securities are convertible into or exchangeable for Common Stock (in
each such case, other than under or by reason of provisions designed to protect
against dilution), the Exercise Price in effect at the time of such change will
be readjusted to the Exercise Price which would have been in effect at such time
had such Options or Convertible Securities still outstanding provided for such
changed additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold.
(iv) TREATMENT OF EXPIRED OPTIONS AND UNEXERCISED CONVERTIBLE
--------------------------------------------------------
SECURITIES. If, in any case, the total number of shares of Common Stock
- ----------
issuable upon exercise of any Option or upon exercise, conversion or exchange
of any Convertible Securities is not, in fact, issued and the rights to exercise
such Option or to exercise, convert or exchange such Convertible Securities
shall have expired or terminated, the Exercise Price then in effect will be
readjusted to the Exercise Price which would have been in effect at the time of
such expiration or termination had such Option or Convertible Securities, to the
extent outstanding immediately prior to such expiration or termination (other
than in respect of the actual number of shares of Common Stock issued upon
exercise or conversion thereof), never been issued.
(v) CALCULATION OF CONSIDERATION RECEIVED. If any Common Stock,
-------------------------------------
Options or Convertible Securities are issued, granted or sold for cash, the
consideration received therefor for purposes of this Warrant will be the amount
received by the Company therefor, before deduction of reasonable commissions,
underwriting discounts or allowances or other reasonable expenses paid or
incurred by the Company in connection with such issuance, grant or sale. In
case any Common Stock, Options or Convertible Securities are issued or sold for
a consideration part or
6
<PAGE>
all of which shall be other than cash, the amount of the consideration other
than cash received by the Company will be the fair market value of such
consideration, except where such consideration consists of securities, in which
case the amount of consideration received by the Company will be the Market
Price thereof as of the date of receipt. In case any Common Stock, Options or
Convertible Securities are issued in connection with any merger or consolidation
in which the Company is the surviving corporation, the amount of consideration
therefor will be deemed to be the fair market value of such portion of the net
assets and business of the non-surviving corporation as is attributable to such
Common Stock, Options or Convertible Securities, as the case may be. The fair
market value of any consideration other than cash or securities will be
determined in good faith by an investment banker or other appropriate expert of
national reputation selected by the Company and reasonably acceptable to the
holder hereof, with the costs of such appraisal to be borne by the Company;
provided, however, that if the Company and the holder reasonably-------- -------
agree that the fair market value of such consideration is less than $100,000,
the fair market value will be determined in good faith by the Board of Directors
of the Company.
(vi) EXCEPTIONS TO ADJUSTMENT OF EXERCISE PRICE. No adjustment
------------------------------------------
to the Exercise Price will be made (i) upon the exercise of any warrants,
options or convertible securities issued and outstanding on the date hereof in
accordance with the terms of such securities as of such date; (ii) upon the
grant or exercise of any stock or options which may hereafter be granted or
exercised under any employee benefit plan of the Company now existing or to be
implemented in the future, so long as the issuance of such stock or options is
approved by a majority of the non-employee members of the Board of Directors of
the Company or a majority of the members of a committee of non-employee
directors established for such purpose; or (iii) upon the issuance of any
securities in accordance with the terms of those certain promissory notes issued
by the Company pursuant to that certain Note Purchase Agreement, dated as of
October 30, 1997.
(c) SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company, at
------------------------------------------
any time after the initial issuance of this Warrant, subdivides (by any stock
split, stock dividend, recapitalization, reorganization, reclassification or
otherwise) its shares of Common Stock into a greater number of shares, then,
after the date of record for effecting such subdivision, the Exercise Price in
effect immediately prior to such subdivision will be proportionately reduced.
If the Company, at any time after the initial issuance of this Warrant, combines
(by reverse stock split, recapitalization, reorganization, reclassification or
otherwise) its shares of Common Stock into a smaller number of shares, then,
after the date of record for effecting such combination, the Exercise Price in
effect immediately prior to such combination will be proportionately increased.
(d) ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of the
------------------------------
Exercise Price pursuant to the provisions of this Section 4, the number of
shares of Common Stock issuable upon exercise of this Warrant shall be adjusted
by multiplying a number equal to the Exercise Price in effect immediately prior
to such adjustment by the number of shares of Common Stock issuable upon
exercise of this Warrant immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
(e) CONSOLIDATION, MERGER OR SALE. In case of any consolidation of
-----------------------------
the Company with, or merger of the Company into any other corporation, or in
case of any sale or conveyance of
7
<PAGE>
all or substantially all of the assets of the Company other than in connection
with a plan of complete liquidation of the Company at any time after the initial
issuance of this Warrant, then as a condition of such consolidation, merger or
sale or conveyance, adequate provision will be made whereby the holder of this
Warrant will have the right to acquire and receive upon exercise of this Warrant
in lieu of the shares of Common Stock immediately theretofore acquirable upon
the exercise of this Warrant, such shares of stock, securities or assets as may
be issued or payable with respect to or in exchange for the number of shares of
Common Stock immediately theretofore acquirable and receivable upon exercise of
this Warrant had such consolidation, merger or sale or conveyance not taken
place. In any such case, the Company will make appropriate provision to insure
that the provisions of this Section 4 hereof will thereafter be applicable as
nearly as may be in relation to any shares of stock or securities thereafter
deliverable upon the exercise of this Warrant. The Company will not effect any
consolidation, merger or sale or conveyance unless prior to the consummation
thereof, the successor corporation (if other than the Company) assumes by
written instrument the obligations under this Section 4 and the obligations to
deliver to the holder of this Warrant such shares of stock, securities or assets
as, in accordance with the foregoing provisions, the holder may be entitled to
acquire.
(f) DISTRIBUTION OF ASSETS. In case the Company shall declare or make
----------------------
any distribution of its assets (or rights to acquire its assets) to holders of
Common Stock as a dividend, by way of return of capital or otherwise (including
any dividend or distribution to the Company's stockholders of cash or shares (or
rights to acquire shares) of capital stock of a subsidiary) (a "DISTRIBUTION"),
at any time after the initial issuance of this Warrant, then the holder of this
Warrant shall be entitled upon exercise of this Warrant for the purchase of any
or all of the shares of Common Stock subject hereto, to receive the amount of
such assets (or rights) which would have been payable to the holder had such
holder been the holder of such shares of Common Stock on the record date for the
determination of stockholders entitled to such Distribution.
(g) NOTICE OF ADJUSTMENT. Upon the occurrence of any event which
--------------------
requires any adjustment of the Exercise Price, then, and in each such case, the
Company shall give notice thereof to the holder of this Warrant, which notice
shall state the Exercise Price resulting from such adjustment and the increase
or decrease in the number of Warrant Shares purchasable at such price upon
exercise, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Such calculation shall be certified
by the chief financial officer of the Company.
(h) MINIMUM ADJUSTMENT OF EXERCISE PRICE. No adjustment of the
------------------------------------
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
(i) NO FRACTIONAL SHARES. No fractional shares of Common Stock are to
--------------------
be issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Market Price of a share of Common
Stock on the date of such exercise.
8
<PAGE>
(j) OTHER NOTICES. In case at any time:
-------------
(i) the Company shall declare any dividend upon the Common Stock
payable in shares of stock of any class or make any other distribution (other
than dividends or distributions payable in cash out of retained earnings
consistent with the Company's past practices with respect to declaring dividends
and making distributions) to the holders of the Common Stock;
(ii) the Company shall offer for subscription pro rata to the
holders of the Common Stock any additional shares of stock of any class or other
rights;
(iii) there shall be any capital reorganization of the Company, or
reclassification of the Common Stock, or consolidation or merger of the Company
with or into, or sale of all or substantially all of its assets to, another
corporation or entity; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Common Stock entitled to receive
any such dividend, distribution, or subscription rights or for determining the
holders of Common Stock entitled to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up and (b) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, notice of
the date (or, if not then known, a reasonable approximation thereof by the
Company) when the same shall take place. Such notice shall also specify the
date on which the holders of Common Stock shall be entitled to receive such
dividend, distribution, or subscription rights or to exchange their Common Stock
for stock or other securities or property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding-up, as the case may be. Such notice shall be given at least seventy-
five (75) days prior to the record date or the date on which the Company's books
are closed in respect thereto. Failure to give any such notice or any defect
therein shall not affect the validity of the proceedings referred to in clauses
(i), (ii), (iii) and (iv) above.
(k) CERTAIN EVENTS. If, at any time after the initial issuance of
--------------
this Warrant, any event occurs of the type contemplated by the adjustment
provisions of this Section 4 but not expressly provided for by such provisions,
the Company will give notice of such event as provided in Section 4(g) hereof,
and the Company's Board of Directors will make an appropriate adjustment in the
Exercise Price and the number of shares of Common Stock acquirable upon exercise
of this Warrant so that the rights of the holder shall be neither enhanced nor
diminished by such event.
(l) CERTAIN DEFINITIONS.
-------------------
(i) "COMMON STOCK DEEMED OUTSTANDING" shall mean the number of
-------------------------------
shares of Common Stock actually outstanding (not including shares of
Common Stock held in the treasury of the Company), plus (x) in the case of
any adjustment required by Section 4(a) resulting
9
<PAGE>
from the issuance of any Options, the maximum total number of shares of
Common Stock issuable upon the exercise of the Options for which the
adjustment is required (including any Common Stock issuable upon the
conversion of Convertible Securities issuable upon the exercise of such
Options), and (y) in the case of any adjustment required by Section 4(a)
resulting from the issuance of any Convertible Securities, the maximum
total number of shares of Common Stock issuable upon the exercise,
conversion or exchange of the Convertible Securities for which the
adjustment is required, as of the date of issuance of such Convertible
Securities, if any.
(ii) "MARKET PRICE," as of any date, (i) means the average of the
------------
closing bid prices for the shares of Common Stock as reported on the Nasdaq
SmallCap Market by Bloomberg Financial Markets ("BLOOMBERG") for the five (5)
consecutive trading days immediately preceding such date, or (ii) if the Nasdaq
SmallCap Market is not the principal trading market for the shares of Common
Stock, the average of the last bid prices reported by Bloomberg on the principal
trading market for the Common Stock during the same period, or, if there is no
bid price for such period, the last sales price reported by Bloomberg for such
period, or (iii) if the foregoing do not apply, the last closing bid price of
such security in the over-the-counter market on the pink sheets or bulletin
board for such security as reported by Bloomberg, or if no closing bid price is
so reported for such security, the last closing trade price of such security as
reported by Bloomberg, or (iv) if market value cannot be calculated as of such
date on any of the foregoing bases, the Market Price shall be the average fair
market value as reasonably determined by an investment banking firm selected by
the Company and reasonably acceptable to the holder, with the costs of the
appraisal to be borne by the Company. The manner of determining the Market
Price of the Common Stock set forth in the foregoing definition shall apply with
respect to any other security in respect of which a determination as to market
value must be made hereunder.
(iii) "COMMON STOCK," for purposes of this Section 4, includes the
------------
Common Stock and any additional class of stock of the Company having no
preference as to dividends or distributions on liquidation, provided that the
shares purchasable pursuant to this Warrant shall include only Common Stock, par
value $.01 per share, in respect of which this Warrant is exercisable, or shares
resulting from any subdivision or combination of such Common Stock, or in the
case of any reorganization, reclassification, consolidation, merger, or sale of
the character referred to in Section 4(e) hereof, the stock or other securities
or property provided for in such Section.
7. ISSUE TAX. The issuance of certificates for Warrant Shares upon the
---------
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof,
provided that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than the holder of this Warrant.
8. NO RIGHTS OR LIABILITIES AS A STOCKHOLDER. This Warrant shall not
-----------------------------------------
entitle the holder hereof to any voting rights or other rights as a stockholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
10
<PAGE>
liability of such holder for the Exercise Price or as a stockholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
9. TRANSFER, EXCHANGE, REDEMPTION AND REPLACEMENT OF WARRANT.
---------------------------------------------------------
(a) RESTRICTION ON TRANSFER. This Warrant and the rights granted to
-----------------------
the holder hereof are transferable, in whole or in part, upon surrender of this
Warrant, together with a properly executed assignment in the form attached
hereto, at the office or agency of the Company referred to in Section 7(e)
below, provided, however, that any transfer or assignment shall be subject to
the conditions set forth in Sections 7(f) and (g) hereof. Until due presentment
for registration of transfer on the books of the Company, the Company may treat
the registered holder hereof as the owner and holder hereof for all purposes,
and the Company shall not be affected by any notice to the contrary.
(b) WARRANT EXCHANGEABLE FOR DIFFERENT DENOMINATIONS. This Warrant is
------------------------------------------------
exchangeable, upon the surrender hereof by the holder hereof at the office or
agency of the Company referred to in Section 7(e) below, for new Warrants of
like tenor of different denominations representing in the aggregate the right to
purchase the number of shares of Common Stock which may be purchased hereunder,
each of such new Warrants to represent the right to purchase such number of
shares as shall be designated by the holder hereof at the time of such
surrender.
(c) REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
----------------------
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
(d) CANCELLATION; PAYMENT OF EXPENSES. Upon the surrender of this
---------------------------------
Warrant in connection with any transfer, exchange, or replacement as provided in
this Section 7, this Warrant shall be promptly canceled by the Company. The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses (other than legal expenses, if any, incurred by the Holder or
transferees) and charges payable in connection with the preparation, execution,
and delivery of Warrants pursuant to this Section 7. The Company shall
indemnify and reimburse the holder of this Warrant for all costs and expenses
(including legal fees) incurred by such holder in connection with the
enforcement of its rights hereunder.
(e) WARRANT REGISTER. The Company shall maintain, at its principal
----------------
executive offices (or such other office or agency of the Company as it may
designate by notice to the holder hereof), a register for this Warrant, in which
the Company shall record the name and address of the person in whose name this
Warrant has been issued, as well as the name and address of each transferee and
each prior owner of this Warrant.
(f) EXERCISE OR TRANSFER WITHOUT REGISTRATION. If, at the time of the
-----------------------------------------
surrender of this Warrant in connection with any exercise, transfer, or exchange
of this Warrant, this Warrant (or, in the case of any exercise, the Warrant
Shares issuable hereunder), shall not be registered under
11
<PAGE>
the Securities Act and under applicable state securities or blue sky laws, the
Company may require, as a condition of allowing such exercise, transfer, or
exchange, (i) that the holder or transferee of this Warrant, as the case may be,
furnish to the Company a written opinion of counsel (which opinion shall be in
form, substance and scope customary for opinions of counsel in comparable
transactions) to the effect that such exercise, transfer, or exchange may be
made without registration under the Securities Act and under applicable state
securities or blue sky laws (the cost of which shall be borne by the Company if
the Company's counsel renders such opinion and up to $250 of such cost shall be
borne by the Company if the holder's counsel is requested to render such
opinion), (ii) that the holder or transferee execute and deliver to the Company
an investment letter in form and substance acceptable to the Company and (iii)
that the transferee be an "ACCREDITED INVESTOR" as defined in Rule 501(a)
promulgated under the Securities Act.
(g) ADDITIONAL RESTRICTIONS ON EXERCISE OR TRANSFER. Notwithstanding
-----------------------------------------------
anything contained herein to the contrary, unless the holder hereof delivers a
waiver in accordance with the last sentence of this Section 7(g), this Warrant
shall not be exercisable by a holder hereof to the extent (but only to the
extent) that, if exercisable by such holder, such holder would beneficially own
in excess of 4.99% of the outstanding shares of Common Stock. To the extent the
above limitation applies, the determination of whether and to what extent this
Warrant shall be exercisable vis-a-vis other securities owned by such holder
shall be in the sole discretion of the holder and submission of this Warrant for
full or partial exercise shall be deemed to be the holder's determination of
whether and the extent to which this Warrant is exercisable, in each case
subject to such aggregate percentage limitation. No prior inability to exercise
the Warrant pursuant to this Section shall have any effect on the applicability
of the provisions of this Section with respect to any subsequent determination
of exerciseability. For purposes of the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13D-G thereunder.
Except as provided in the immediately succeeding sentence, the restrictions
contained in this Section 7(g) may not be amended without the consent of the
holder of this Warrant and the holders of a majority of the Company's then
outstanding Common Stock. Notwithstanding the foregoing, the holder hereof may
waive the restrictions set forth in this Section 7(g) by written notice to the
Company upon not less than sixty-one (61) days prior notice (with such waiver
taking effect only upon the expiration of such sixty-one (61) day notice
period).
10. REGISTRATION RIGHTS. The initial holder of this Warrant (and certain
-------------------
assignees thereof) is entitled to the benefit of such registration rights in
respect of the Warrant Shares as are set forth in the Registration Rights
Agreement, dated as of the date hereof, by and between the Company, the initial
holder hereof and the other signatories thereto, including the right to assign
such rights to certain assignees, as set forth therein.
11. NOTICES. Any notices required or permitted to be given under the
-------
terms of this Warrant shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier or by confirmed
telecopy, and shall be effective five days after being placed in the mail, if
mailed, or upon receipt or refusal of receipt, if delivered personally or by
courier or confirmed telecopy, in each case addressed to a party. The addresses
for such communications shall be:
12
<PAGE>
If to the Company:
Advanced Environmental Recycling
Technologies, Inc.
FM 2169
Junction, Texas 76849
Telecopy: (915) 446-3864
Attention: Chief Executive Officer
With a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1500 NationsBank Plaza
300 Convent Street
San Antonio, Texas 78205
Telecopy: (210) 224-2035
Attention: Pat Ryan, Esq.
and if to the holder, at such address as such holder shall have provided in
writing to the Company, or at such other address as each such party furnishes by
notice given in accordance with this Section 9.
12. GOVERNING LAW; JURISDICTION. This Warrant shall be governed by and
---------------------------
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in the State of Delaware. The Company
irrevocably consents to the jurisdiction of the United States federal courts and
the state courts located in the City of New York in the State of New York in any
suit or proceeding based on or arising under this Warrant and irrevocably agrees
that all claims in respect of such suit or proceeding may be determined in such
courts. The Company irrevocably waives the defense of an inconvenient forum to
the maintenance of such suit or proceeding. The Company agrees that service of
process upon the Company mailed by first class mail shall be deemed in every
respect effective service of process upon the Company in any such suit or
proceeding. Nothing herein shall affect the holder's right to serve process in
any other manner permitted by law. The Company agrees that a final non-
appealable judgment in any such suit or proceeding shall be conclusive and may
be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner.
13. MISCELLANEOUS.
-------------
(a) AMENDMENTS. This Warrant and any provision hereof may only be
----------
amended by an instrument in writing signed by the Company and the holder hereof.
(b) DESCRIPTIVE HEADINGS. The descriptive headings of the several
--------------------
Sections of this Warrant are inserted for purposes of reference only, and shall
not affect the meaning or construction of any of the provisions hereof.
13
<PAGE>
(c) CASHLESS EXERCISE. Notwithstanding anything to the contrary
-----------------
contained in this Warrant, if the resale of the Warrant Shares by the holder is
not then registered pursuant to an effective registration statement under the
Securities Act, this Warrant may be exercised at any time after the first
anniversary of the date hereof until the end of the Exercise Period by
presentation and surrender of this Warrant to the Company at its principal
executive offices with a written notice of the holder's intention to effect a
cashless exercise, including a calculation of the number of shares of Common
Stock to be issued upon such exercise in accordance with the terms hereof (a
"CASHLESS EXERCISE"). In the event of a Cashless Exercise, in lieu of paying
the Exercise Price in cash, the holder shall surrender this Warrant for that
number of shares of Common Stock determined by multiplying the number of Warrant
Shares to which it would otherwise be entitled by a fraction, the numerator of
which shall be the difference between the then current Market Price per share of
the Common Stock and the Exercise Price, and the denominator of which shall be
the then current Market Price per share of Common Stock.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
14
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer.
ADVANCED ENVIRONMENTAL
RECYCLING TECHNOLOGIES, INC.
By:
---------------------------
Name:
----------------------
Title:
---------------------
<PAGE>
FORM OF EXERCISE AGREEMENT
(TO BE EXECUTED BY THE HOLDER IN ORDER TO EXERCISE THE WARRANT)
The undersigned hereby irrevocably exercises the right to purchase
_____________ of the shares of Common Stock of Advanced Environmental Recycling
Technologies, Inc., a Delaware corporation (the "COMPANY"), evidenced by the
attached Warrant, and herewith makes payment of the Exercise Price with respect
to such shares in full, all in accordance with the conditions and provisions of
said Warrant.
i. The undersigned agrees not to offer, sell, transfer or otherwise
dispose of any Common Stock obtained on exercise of the Warrant, except under
circumstances that will not result in a violation of the Securities Act of 1933,
as amended, or any state securities laws, and agrees that the following legend
may be affixed to the stock certificate for the Common Stock hereby subscribed
for if resale of such Common Stock is not registered or if Rule 144 is
unavailable for the immediate resale of such shares:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE SECURITIES
REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE
SECURITIES LAWS UNLESS OFFERED, SOLD OR TRANSFERRED UNDER AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
ii. The undersigned requests that stock certificates for such shares be
issued, and a Warrant representing any unexercised portion hereof be issued,
pursuant to the Warrant in the name of the Holder and delivered to the
undersigned at the address set forth below:
Dated:
----------------- --------------------------------------------
Signature of Holder
--------------------------------------------
Name of Holder (Print)
Address:
--------------------------------------------
--------------------------------------------
--------------------------------------------
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
all the rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock covered thereby set forth hereinbelow, to:
Name of Assignee Address Number of Shares
- ---------------- ------- ----------------
, and hereby irrevocably constitutes and appoints_______________________________
as agent and attorney-in-fact to transfer said Warrant on the books of the
within-named corporation, with full power of substitution in the premises.
Dated: ,
--------------------- ----
In the presence of
- ------------------
Name:
-----------------------------
Signature:
-----------------------------
Title of Signing Officer or Agent (if any):
-------------------------------
Address:
-------------------------------
-------------------------------
Note: The above signature should
correspond exactly with the name on
the face of the within Warrant.
<PAGE>
EXHIBIT 23.1
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement of our report dated March 14, 1997,
included in Advanced Environmental Recycling Technologies, Inc.'s Form 10-K
for the year ended December 31, 1996, and to all references to our firm
included in this Registration Statement.
/s/ Arthur Andersen LLP
Dallas, Texas
December 17, 1997
