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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Year Ended December 31, 1998
Commission File Number 1-10367
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
Delaware 71-0675758
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
801 N. Jefferson Street
P. O. Box 1237 72765
Springdale, Arkansas (Zip Code)
(Address of Principal Executive Office)
Registrant's telephone number, including Area Code: (501) 750-1299
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Class A Common
Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES: [X] NO: [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. YES: [X] NO: [ ]
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Number of shares of the common stock outstanding at March 31, 1999: Class A - 22,245,639
Class B - 1,465,530
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PART I
ITEM 1. BUSINESS
The Company
Advanced Environmental Recycling Technologies, Inc., (AERT or the Company)
manufactures and markets a growing line of innovative customer driven composite
building materials into several significant segments of the $190 billion plus U.
S. residential homebuilding industry. The products are manufactured from low
cost waste materials utilizing technology that was developed, patented and
commercialized by AERT which directly addresses the ever increasing market needs
for low maintenance building materials for exterior applications. The products
are sold as exterior door and window components, heavy industrial-flooring and
residential and commercial decking. AERT's composite building materials are
unique in that they do not swell, rot, warp or crack, like conventional wood
materials. The composites exhibit exceptional durability and stability and they
do not require toxic chemical or preservative treatments. The decking materials
do not require staining or water sealing like wood. They are sold under the
trade names MoistureShield(R), ChoiceDek(TM) and DreamWorks(TM) to an ever
increasing customer base that includes such household brand names as Therma Tru
Doors, Peachtree Doors and Windows, Crestline and Vetter Windows, Carolina
Builder's, Lowe's, Weyerhaeuser BMD and General Motors.
AERT has increased sales from $6,950,219 in 1996 to $7,982,381 in 1997 and
$12,408,591 in 1998, and has sold in excess of $39 million of composite building
materials since inception. The Company has proven products today in several
million homes in the U. S. and has additional significant manufacturing capacity
planned in Springdale, Arkansas. The additional manufacturing capacity is
dependent on the successful completion of the pending bond financing, but is
intended to increase annualized sales above $50 million with the successful
completion and start-up of four additional extrusion lines over the next 18
months. AERT is uniquely positioned to positively address the ever-increasing
needs of the market place for low maintenance composite building materials.
Background and History
Advanced Environmental Recycling Technologies, Inc., was founded in 1988, by the
Brooks family and associates of Springdale, Arkansas. Since inception, the
Company has developed, patented, and commercialized several new technologies and
products, which significantly advance state-of-the-art reclamation of
polyethylene plastic scrap and related manufacturing processes. Polyethylene
plastic is the largest segment of the plastic waste stream and used primarily
for packaging in items ranging from milk carton and frozen food linings to
grocery bags and milk jugs. AERT produces an innovative line of composite
building materials, which are primarily marketed to the national door and window
component market, the heavy industrial-flooring market, and the residential
decking market. The Company utilizes its proprietary and patented technologies
to produce a growing line of moisture-resistant and dimensionally stable
engineered composite building materials that are marketed under the trade names
MoistureShield(R) and ChoiceDek(TM). Since inception (1988) to December 31,
1998, the Company has generated net sales of $39,327,956, primarily into the
U.S. residential homebuilding market.
The Company's initial penetrations into the national building and construction
markets were focused on door
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rails, door subsills and windowsills and other exterior moisture stress areas.
These are primarily the major problem areas that manufacturers have in regard to
rotting, swelling and warping with wood. Therefore, AERT initially targeted this
market segment to maximize the value of its product line, in addition to
addressing a well-defined need in the marketplace for a wood component
replacement which does not absorb moisture, swell and rot.
Composite Manufacturing
The composite materials are hard, dense, short-grained substances with a dark,
speckled surface appearance depending on the wood fiber. They are manufactured
utilizing primarily recycled polyethylene plastics (both low and high density)
and waste wood fibers. 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, AERT composites are less subject
to thermal contraction or expansion and display greater dimensional stability
than conventional plastic materials for such applications. The composites are
denser than the straight-grained, clear grades of wood from western United
States forests, which are traditionally used in the building applications for
which AERT's products compete.
Principals of the Company began working on developing processes for re-utilizing
and recycling wood and plastics in 1985. Since that time extensive expertise,
including several patents have been developed, which significantly advance
state-of-the-art reclamation of plastic scrap and related manufacturing
processes. The composites manufacturing process involves proprietary and
patented technologies and specialized manufacturing equipment, custom-built or
modified for the Company's purposes. It utilizes recycled plastics and wood-
fiber 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 and/or machined into a desired shape while the end
product maintains many properties similar to traditional wood materials.
The initial composite extrusion production commenced in 1990 at the Company's
Junction, Texas facility. In June 1992, the Company was sued by Mobil Oil
Corporation in Delaware charging that four recently issued AERT composite
patents were invalid and unenforceable (See Legal Proceedings).
In August 1993, a fire severely damaged the Junction, Texas composites facility,
destroying the raw materials handling and processing area and one of the two
extrusion production lines. Clean up and reconstruction began immediately and
within two weeks, one production line was operating on a limited basis. As part
of the rebuilding, an in-house wood dryer was incorporated into the raw
materials processing area and improvements were made to production lines such
that both lines now operate more efficiently than before the fire occurred. The
reconstruction of the plant was completed in August 1994 with restored and
improved production capability. In December 1995, the Company exchanged certain
equipment, which was previously used for plastic sales to third parties at its
Rogers, Arkansas plant, for equipment required to complete a third extrusion
line at the Junction, Texas plant. The third line was installed during the
first half of 1996 and commenced full production in mid 1996. This increased
the Company's extrusion capacity.
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The Company initiated sales of its Lifecycle(TM) decking components early in
1993, however, the fire at the composite facility severely limited production
and the decking project was delayed as the plant was rebuilt.
In May 1995, the Company entered into an exclusive marketing and distribution
agreement with a division of Weyerhaeuser, Inc. (Weyerhaeuser) for sales of its
Lifecycle(TM) line of extruded decking components, which are primarily targeted
towards the high-end residential housing market. Weyerhaeuser currently markets
the product under the Company's trade name, ChoiceDek(TM), in a limited number
of its 80 distribution and reload centers primarily in the southwest, West
Coast, and western mountain regions of the United States. During the past two
years, the Company has not been able to further increase its decking sales to
meet customer demands due to production limitations. The Company intends to
continue to grow its decking business and add additional Weyerhaeuser
distribution as production increases, and to expand its distribution within its
established markets.
In 1998 decking sales increased to $4,260,169 from $1,836,961 in 1997. Although
significant customer demand existed for substantially higher sales, the Company
was unable to complete construction and bring on additional production lines in
a timely matter in order to meet customers demands.
The Plastics Reclamation Unit
The Plastics Reclamation Unit was originally located in Rogers, Arkansas and was
initially established to develop and commercialize plastic recycling technology
primarily to serve as a dependable, cost-effective source of plastic raw
materials for the Composite Manufacturing Unit. The Company began activities at
its Plastics Reclamation Unit in 1990. Since that time, the Company has further
developed and patented its proprietary waste plastics reclamation technologies
which allows it to recover waste plastics from the by-product of paper recycling
mills, as well as certain waste plastic from post-consumer or industrial plastic
films. Secondary fiber recovery mills recycle paper and polyethylene-coated
paperboard to recover the paper fiber through a process known as hydropulping.
The by-product of the hydropulping process is a water-saturated mixture of
polyethylene and unrecovered paper fiber, which most such mills currently
dispose of without further processing. Using certain plastics recycling
technologies, which such paper recycling companies do not generally have
available, the Company has been able to economically recover polyethylene
suitable for use in its composite manufacturing process at prices less than
virgin plastic.
In 1991, while continuing to develop its initial plastic recycling technology,
the Company entered into a technology development agreement with The Dow
Chemical Company for the purpose of further developing and commercializing the
Company's plastic reclamation technology for additional applications of
polyethylene films. Dow Chemical was the world's largest producer of
polyethylene plastic and the Company received an initial 10 million pounds
market development order from Dow in 1992 for recycled plastic. However, in
1994 when federal recycling legislation and market development waned for
recycled plastic, that order was restructured allowing the Company to
significantly reduce indebtedness. Pursuant to the restructuring, Dow forgave
approximately $879,000 in debt from the Company in lieu of purchasing the
remaining portion of the recycled plastic. Following the restructuring and
completion of the Dow contract, the Company began utilizing production capacity
not required for processing raw materials for the Composites Manufacturing Unit
to produce other types of materials for sale to manufacturers of grocery bags,
trash bags, and other manufacturers of plastic goods desiring recycled content
in their products.
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Through 1995, the Company's plastic reclamation facility was also involved in
sales of recycled plastics to third- party film manufacturers. The materials
desired by these customers required substantial processing beyond that necessary
to produce raw materials for the composites facility and sufficient efficiencies
of scale or market demands were never attained. Mandatory federal plastic
recycling content legislation also died in 1995 and failed to be enacted. This,
coupled with increased sales of the Company's composite products, and the
composites division's increased raw-material requirements, prompted the Company,
in the first quarter of 1996, to discontinue reclamation of plastics for sale to
third-parties and dedicate all of the plastic facility's production to providing
materials to its Junction composites operation. In connection with this
restructuring of the plastics reclamation plant, the Company exchanged certain
equipment, previously utilized to produce plastics for sale to third-parties,
for other equipment which was utilized to produce raw-materials and for
additional equipment necessary to complete the installation of a third
production line at the Company's composite facility.
The Company experienced a series of extensive fires that caused substantial
damage during the last half of 1996 at its Rogers, Arkansas plastic reclamation
facility. These fires in September and December of 1996 set back the Company's
plastic reclamation program and the resulting supply disruption of plastic raw
materials limited composite sales growth. The claim regarding the September
fire was settled in late 1996 for approximately $379,000 and the Rogers plastic
reclamation operation recommenced in late November. In December 1996, the
undamaged portion of the Rogers facility then suffered a second major fire and
the manufacturing portion experienced extensive damage closing the facility.
Both fires were deemed incendiary by independent investigators. The Company's
rebuilding efforts were delayed for most of the first half of 1997 due to the
ongoing fire investigation and insurance settlement delays. The December fire
claim was finally settled in June 1997 for $1.9 million. The Company began
relocating and reestablishing its internal plastic recycling capacity at a new
site in Springdale, Arkansas in late 1997.
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 its facilities. However, another major fire or similar disruptions
could materially adversely affect the Company and it could lose its ongoing
supply sources from plastic waste generator who might switch to competitors
rather than wait on the Company to rebuild its recycling facilities.
Product Testing and Field History
The Company has completed extensive testing of its products, developed
substantial positive-field history since inception in 1988, and continues to add
additional original equipment manufacturers (OEM) accounts in the door and
window market for components parts. The Company also works closely and has
developed strong relationships with its customer's Research and Development
Departments. This has allowed the Company to compete against higher-end
plastic, wood and engineered combinations and component systems and stay away
from commodity pricing. To accomplish this, AERT set up a millwork and
fabrication division and initiated manufacturing and selling finished products
as component parts to customer specifications. It also introduced the Company
to extensive experience in regard to long-term 25-year testing; or accelerated
aging of materials under extreme external environmental conditions. An example
of this was the Company having to bury its products into termite mounds in
Hawaii for a year.
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The Company's rot-proof, moisture-resistant component parts are now in several
million door and window components and market share is now increasing rapidly.
With increased sales to Therma Tru Doors and the addition of several OEM's such
as Carolina Builders, Endura, General Motors, SNE Enterprises, East Coast
Millwork, Lowe's, Peachtree and numerous small shop-built window manufacturers,
plus several additional large pending customers and the Weyerhaeuser extruded
decking line, the Company has strong composite sales demand in place.
Patented and Proprietary Technology
The Company's composite manufacturing process and its development efforts in
connection with waste plastics reclamation technologies involve patents and many
trade secrets which are considered proprietary by the Company, as well as
certain methods, processes and equipment designs for which the Company has
sought additional patent protection. The Company has taken measures, which are
designed to safeguard its trade secrets by, among other things, entering
confidentiality and nondisclosure agreements.
The Company has filed eighteen patent applications and has received issuance
from the United States Patent and Trademark Office for fourteen patents, six of
which relate to the Company's composite materials manufacturing operations and
product and eight of which relate to its waste plastics reclamation
technologies. The patents issued relate to the Company's extrusion process, the
composite product, extrusion apparatus, and its continuous down stream cooling
and forming conveyor system and its plastic reclamation process and equipment.
The Company received formal issuance of its fourteenth patent in June 1998.
Should the Company's trade secrets be disclosed notwithstanding these efforts,
the business and prospects of the Company could be materially and adversely
affected. The Company was sued in Delaware, in June 1992, by Mobil Oil
Corporation seeking a declaratory judgement that four recently issued composite
product patents were invalid and unenforceable. This was after several members
of the Mobil Composite Products staff toured the AERT Junction, Texas facility
in 1991 and signed confidentiality agreements. In February 1994, in litigation
with Mobil Oil Corporation, a Delaware jury returned a verdict that four AERT
patents on its composite product technology were invalid (See Item 3. Legal
Proceedings). The Company's additional pending applications relate to additional
manufacturing apparatus and technology involving its film reclamation processes.
There can be no assurance such additional patents will be allowed, or if allowed
that they will not be challenged and invalidated. The cost of patent protection,
and in particular, patent litigation is extremely high. It can also strain
resources and inhibit growth of emerging companies. AERT intends to take other
steps reasonably necessary in the future to protect its existing technology and
any technology, which may be subsequently developed. The Company may license its
technologies to industrial users in the future, and or enter into joint
ventures, if licensing terms can be agreed upon and if the Company believes it
can preserve adequate demand for its own products.
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Business
Advanced Environmental Recycling Technologies, Inc. is comprised of three
separate, yet interrelated manufacturing facilities; the Composites
Manufacturing Unit located in Junction, Texas and Springdale, Arkansas, which
manufactures and markets moisture resistant composite building materials made
from waste plastics and by-product wood fibers, and the Plastics Reclamation
Unit located in Springdale, Arkansas, which processes waste plastics, producing
various polyethylene materials that are used as feedstock in the composite
manufacturing process.
The Company employs a four-part business strategy: (1) it utilizes low-cost
waste products and internally-produced products as raw materials; (2) it
configures its production facilities so that it can economically manufacture a
broad range of products on the same equipment in short production runs; (3) it
maintains a high level of technical and product support for its customers and
places a major emphasis on quality control and consistency in regard to its
products; and (4) its marketing program identifies and sells to niche markets
with defined needs in which the Company believes it can be prominent or
dominant.
The Company is currently expanding its manufacturing capabilities at its
composite manufacturing and millwork facility in Springdale, Arkansas. Due to
strong customer demands, a third facility is planned for 1999-2000, if the
Company is able to successfully complete and obtain the funds necessary for such
expansion, which are currently pending as of this date. This is designed to
increase annualized sales from $12.4 to $50 million-plus per year over the
upcoming 18-month period.
The Company's Composites Manufacturing Unit located in Junction, Texas markets
its moisture-resistant composite building materials under the trade names
MoistureShield(R) and ChoiceDek(TM). The Company's Springdale, Arkansas multi-
purpose facility is focused on producing MoistureShield(R). As additional
production capacity comes on-line, the Company's Texas facility will be
increasingly shifted to ChoiceDek(TM). The Composite Manufacturing Units are
comprised of wood fiber raw material processing departments, composite extrusion
departments, millwork and fabrication departments, and priming and paint
department. The raw material processing departments consist of wood fiber
cleaning, drying, grinding and storage equipment; the extrusion departments
consist of currently five extrusion and downstream production lines; (a sixth is
under construction and a seventh is on order) the millwork departments currently
consist of four moulding and end-work lines; and the painting department consist
of inspection, preparation and a painting and drying line.
The Company during 1998 began working with a deck builder to test market a new
wood grained decking product. The product has been named DreamWorks(TM) and the
Company intends to commence limited distribution and sales of this product
during 1999 in certain markets.
The Company's main focus is utilizing the Plastics Reclamation Unit as a source
of supply for the Composites Manufacturing Unit. Therefore, as sales of the
Company's composite products and accordingly, the composites division's raw
materials requirements increase, additional supplies of recycled plastics will
be required.
The Company is currently expanding its existing plastic recycling capacity at
its Springdale, Arkansas plant. In addition, a second plastic recycling plant
is planned for later in 1999, if the Company is able to obtain the funds
necessary for such expansion.
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Supply and Pricing of Raw Materials
The Company's composites are currently manufactured from cedar and hardwood
fiber, polyethylene industrial and post-consumer film scrap and ground
industrial and post-consumer high-density polyethylene containers as well as
other sources of consistent polyethylene waste products. In addition, the
Arkansas facility utilizes hardwood fibers as its wood source. AERT has entered
informal supply agreements for the cedar fiber and a portion of the waste
plastics used in its composite manufacturing process, although it is the
Company's intention to enter additional supply agreements in the future. The
Company currently purchases raw materials from sources which it believes are
dependable and adequate for its short-term manufacturing requirements and the
Company believes suitable alternative sources are available. The Company
currently has a long-term supply agreement with a company that generates waste
polyethylene at two manufacturing plants. Additional raw material supply
sources of both plastic and wood fiber will be required for the Company to
continue to increase composite production and sales. The Company is currently
working to enter formal supply agreements for both additional plastic and fiber
supplies. However, a significant disruption of supply arrangements, a reduction
in raw material consistency or quality or significant increases in raw material
prices could have a material adverse effect on AERT's operations as experienced
with the Rogers, Arkansas fires.
Cedar Fiber. The Junction, Texas composite facility is located near four
cedar mills which extract cedar oil for perfumes and industrial detergents and
dispose of the cedar fiber as a by-product of their operations. It is also sold
by said mills in some instances as a horse stable bedding, or a drilling mud
bridging agent. The Company, in the past, has purchased the entire wood fiber
required for its manufacturing purposes from these mills. Although the Company
believes it has access to sufficient supplies of cedar fiber to supply its
initial customer requirements, the Company has manufactured its composite
material with other types of wood fibers. The Company has commenced a testing
program with hardwood waste, and believes that a number of substitute wood
fibers could be satisfactorily used in its manufacturing process and that other
sources are currently available. As the Company's ChoiceDek(TM) product line
continues to grow, additional cedar fiber will be required of which there is no
commitment at this time.
Hardwood Fiber. The Springdale facility is located in the Ozark Mountain area
with numerous hardwood mills and manufacturers. The Company has currently
established a minimum of two hardwood suppliers for the Springdale facility.
Recycled Plastics. The cost of recycled waste plastics for use in the
composites manufacturing process has been subject to significant market and
quality fluctuations over the past several years and the Company has experienced
supply problems associated with contaminated plastics in the past. In an effort
to reduce its exposure to price volatility, inconsistent quality, and potential
supply disruptions, the Company in 1990 developed its own patented plastic
recycling technologies and established the waste Plastics Reclamation Unit in
Rogers, Arkansas to assure itself of a cleaner, more dependable, and consistent
supply of plastic raw material for its composite manufacturing operations. The
Company currently performs its LDPE processing function at its facility in
Springdale, Arkansas, as well as with three outside independent contractors who
toll for the Company. The Company has also recently established several
additional plastic supply sourcing relationships in order to broaden its sources
of supply.
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The Company's plastics manufacturing processes primarily focus on recycling the
following polyethylene films for use in the composites manufacturing process:
- Low Density Polyethylene (LDPE) poly coatings or linings from recycled
bleached food-board, which are generated from the hydropulping
process;
- High Density Polyethylene (HDPE) and Linear Low Density Polyethylene
(LLDPE) mixed plastic grocery bags from supermarket and store
collection programs; and
- HDPE ground container material.
These films are highly contaminated with paper and other non-plastic materials,
which makes them less desirable for traditional plastic uses, and thus lessens
their value to producers of recycled plastics. However, plastic used for the
Company's Composites Manufacturing Unit does not require the purity, extensive
cleaning, additional washing and melt filtration associated with conventional
plastics, and can be processed faster and more economically. Further, the
contaminated plastics are acquired by the Company at minimal costs, primarily
only the handling and freight charges. By focusing on contaminated plastics,
the Company is able to process these materials through its Plastics Reclamation
Unit and produce an acceptable lower-cost feed stock for the composites
facility. The Company believes that it has adequate and reliable sources of
LDPE hydropulp and HDPE/LLDPE mixed plastic grocery bags for the near future
once its internal plastic reclamation facilities recommence full-scale
operations. The Company also from time to time purchases plastic, if available
at reasonable costs and quality, from outside sources, such as brokers or other
plastic recyclers, to supplement the above-described sources.
Marketing and Sales
The Company has directed its initial marketing activities to specialized market
segments in the building and construction industry in which cost and physical
characteristics place AERT's composite products, such as the subsurface
component pieces of standard door and window products, at a competitive
advantage over alternative conventional materials and in which the current
weaknesses of composites (for example, certain of its strength and aesthetic
characteristics) are not critical disadvantages. The Company also markets a
growing line of primed and painted window parts that substitute for wood and
wood clad components. The Company has developed an extensive customer base in
the national door and window market, and with Weyerhaeuser BMD, primarily
through members of management, and strives to maintain strong customer
relationships.
To the extent, a prospective customer currently uses wood for such component
pieces, the Company emphasizes the "value-added" potential of its
MoistureShield(R) composite product which, unlike competing wood products, can
be engineered to incorporate certain desired end-product characteristics. The
Company also calls the prospective customer's attention to the savings in time
and expense that can be achieved by designing into the equipment used in the
extrusion process much of the millwork required in the customer's finished
product. In addition, the Company emphasizes the customer's avoidance of the
chemical treatments and in plant volatile organic compounds requirements often
necessary to give competing wood products rot resistance and durability and the
customer's avoidance of the substantial scrap wood or sawdust waste-product
typically generated in the sawing and milling process. The Company also
stresses the additional durability and performance of its products, which allows
its customers to extend the lifetime or warranties of their products.
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MoistureShield(R) 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 periodic downturns caused by
general economic conditions. Reductions in construction activity could have an
adverse effect on the demand for AERT composites; however, the Company believes
that its market diversification program will reduce the effects that
fluctuations in construction activity would have on the Company. The Company
focuses heavily on products for the home improvement market, which often tends
to increase in activity when housing starts decline, and the Company is further
expanding its marketing focus and increasing its decking distribution with its
ChoiceDek(TM) products through Weyerhaeuser to accommodate a wider range of
applications in order to avoid being totally dependent on one industry.
The Company intends to further increase distribution and add additional markets
during 1999 while continuing to increase sales in its initial decking markets.
Weyerhaeuser markets ChoiceDek(TM) primarily through independent contractor
oriented lumber dealers. ChoiceDek(TM) is promoted through displays at regional
and local home, lawn and garden shows as well as store demonstration displays
and marketed via a web site on the Internet. The address is www.choicedek.com.
The Internet site targets high-end contractors and architects. The Company
intends to also initiate additional marketing through increased Internet
emphasis during 1999.
DreamWorks(TM) is a new wood grain-embossed designer product, which the Company
intends to market in 1999. Also, during 1999 and in conjunction with
Weyerhaeuser, the Company has initiated an advertising campaign in contractor
and builder magazines for ChoiceDek(TM). In addition, a celebrity marketing
video is also planned for use in promoting the products by mid-1999.
The Company currently maintains a concentrated customer base. The Company is
unable to predict the future size of the markets for its composite building
products, however, the Company believes that the national door and window and
residential decking material markets are significant. The Company believes that
it can further penetrate these markets and/or expand sales to its existing
customer base if the Company's goals for increased production capacity and
efficiency are achieved. By focusing its marketing strategy on a limited number
of large door and window companies, and by initiating sales of its new decking
products through the Weyerhaeuser marketing and distribution agreement, the
Company believes it can increase market penetration and sales without
significantly increasing administrative overhead. To a lesser extent, the
Company's marketing focus also utilizes outside commissioned sales
representatives for a portion of its door and window and decking customers.
Reductions in Construction Activity; Interest Rate Sensitivity
AERT composites will be 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. Increased interest rates can lead to reduced homebuilding activity.
Reductions in construction activity could necessarily have an adverse effect on
the demand for AERT composites. The Company, therefore, places a major emphasis
on components for customers in the home improvement market. However, the
Company has recently expanded its marketing focus to accommodate a wider range
of products and applications, and is continuing to increase market distribution.
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Industry Standards
ASTM and certain industry trade organizations have established general standards
and methods for measuring the characteristics of specific building materials.
Users of building materials (and frequently, issuers of building codes)
generally specify that the building materials comply with such standards
relative to the proposed applications. In regard to decking, many areas require
independent testing of specific test criteria in order to qualify for building
code approval. The Company has generated a substantial amount of independent
test data regarding its products and has developed an extensive field history in
conjunction with positive customer satisfaction for its components through its
large OEM customers. In addition, the Company has submitted its decking
products to extensive independent testing by certified laboratories. The
Company is currently finalizing such independent testing for submission to an
evaluation service in order to receive a formal BOCA (blanket building code
approval) rating for its decking products. The Company currently submits its
testing data and allows the user to determine suitability for the application.
The lack of such a standard (and the independent assurance of extensive testing,
quality control and performance capability which compliance with accepted
standards typically provide), may limit the market potential of the Company's
decking materials in certain areas and make potential purchasers of such
building materials reluctant to use them until independent certification is
granted by a universally recognized approval agency.
The Company has accumulated significant product test data and begun the internal
preparation of proposed guidelines for wood-plastic composite materials for
certain decking construction applications for submission and evaluation for an
independent BOCA approval rating. The Company intends to submit its application
in the near future. The consideration and evaluation of proposed testing
standards for BOCA is sometimes a lengthy process, typically requiring several
months at a minimum. The Company may also have to submit to additional
independent testing to gain approval. Management believes the Company's decking
products can meet and conform to nationally recognized BOCA performance
standards and intends to obtain an independent BOCA approval rating in the
future for its decking products.
Competition
In seeking to introduce MoistureShield(R) and ChoiceDek(TM) 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, aluminum fabricating
companies, and major plastic and petrochemical 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.
Many large competitors also have research and development budgets, marketing
staffs and financial and other resources, which far surpass the resources of the
Company. There can be no assurance that such competitors will not attempt to
develop and introduce similar recycled composite materials. 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. Mobil Oil
Corporation entered the market in 1992, after purchasing the assets and
technology of a company called Rivenite. Mobil formed a composite products
division, opened a plant, and introduced a decking and fencing product called
10
<PAGE>
Timbrex; which was later renamed Trex. Mobil initiated a large national
marketing and advertising program aimed at attaining significant distribution in
the decking market. Mobil divested this division in 1996 to a group of Trex
managers. The new company is called The Trex Co., LLC. Trex has continued to
advertise heavily and has generated composite decking sales in excess of $45
million during 1998.
As the Company has developed its own plastics reclamation technologies, it has
in certain instances been required to compete for 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 other than plastic lumber producers. Additional decking
competitors of wood composite decking are Crane Plastics with a product called
TimberTech and U. S. Plastic Lumber with a product called SmartDeck. As a
result, the Company has not historically experienced significant competition for
such raw materials, however the increasing market demand for composite products
is now changing and several additional competitors are starting to show interest
in poly waste. Further, the Company believes that the plastics reclamation
processes it has developed for composite manufacturing business are targeted to
the waste management needs of particular industrial waste generators, to plastic
film wastes and to other plastic waste generators, whose potential as a
recycling source is not being utilized to a significant extent by current
plastics recyclers, rather than to post-consumer, source-separated plastic
containers recycling processes, in which a substantially greater number of
plastics recyclers compete for plastic waste materials. As it grows, the
Company expects to encounter new entrants into the composites or plastics
reclamation business which could affect the Company's source of raw materials
supply and who may have substantially greater financial and other resources than
the Company and which may include beverage bottlers, distributors and retailers
as well as forestry product producers, petrochemical and other companies. For
example, The Trex Co., LLC is now competing with the Company for certain raw
materials in connection with the production of its Trex product described above.
This competition may cause the price of the Company's raw materials to rise
somewhat in the future.
Employees
On December 31, 1998, the Company employed 116 employees at the Texas facility
of which 8 are executive or office personnel and 99 are full-time factory
personnel. At the Arkansas facility there are 115 employees of which 7 are
executive or office personnel and 97 are full-time factory personnel. The
Company, from time-to-time, employs additional persons on a part-time basis in
its manufacturing operations. The Company anticipates that as its business
expands it will employ additional management and factory personnel.
11
<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
Company. In addition, this Form 10-K contains 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.
The success of the Company's continuing operations will depend upon the
availability of cash flow from operations and the Company's success in raising
additional funds through equity or debt financing. The expenses that might be
incurred in manufacturing and further developing, and marketing the Company's
products cannot be predicted with certainty. There is no assurance that
additional financing can be obtained, or obtained on terms satisfactory to the
Company.
ITEM 2. PROPERTY
The Company conducts its composite products manufacturing operations from a
49,000 square foot manufacturing and storage facility on a seven-acre site in
Junction, Texas. The grounds and a 10,500 square foot building are leased from
Marjorie S. Brooks, a major shareholder, under an agreement that expires April
30, 2001. The Company owns the building improvements located on the site and
currently pays a monthly rent of $1,519 for the lease. The Company believes
that the Junction facility is currently suitable for its composite materials
manufacturing requirements, however, the Company is evaluating ways to establish
additional composite capacity.
The Company's Springdale, Arkansas manufacturing facility consists of 103,000
square feet and is located on 10 acres with a rail siding in the Springdale
Industrial District. The Company has added additional storage sheds of
approximately 12,000 square feet during 1999. The facility has dual sprinkler
systems and houses the Company's corporate offices. The Company currently
leases the facility for $19,000 per month and has an option to purchase for $1.8
million. The Company intends to purchase said facility during 1999 assuming
that the proposed bond financing (see Liquidity and Capital Resources) is
successful.
In March 1999, the Company entered a lease agreement for an adjacent office
storage building and parking lot in Springdale, Arkansas. The lease is for
$3,500 per month for 2-years, renewable yearly. The Company also leases a
parking area for $200 per month. The office storage facility is comprised of
10,000 square feet and 2.36 acres. The Company has an option to purchase for
$360,000 with half of the lease payments applicable to the purchase price. The
Company has also entered a purchase and escrow agreement for the purchase of
18.6 acres, south of the existing facility. The pending purchase price is
$785,000 and the Company expects to close this transaction by July 1999 assuming
that the proposed bond financing is successful.
12
<PAGE>
ITEM 3. 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) The AERT patents are
invalid and unenforceable, and (c) Mobil has not infringed the AERT patents
through any products or method. Mobil seeks no monetary damages in this suit,
but does seek reimbursement of its attorneys' fees.
In December 1992, the Company answered Mobil's Complaint. In its Answer, 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. Mobil filed an answer to AERT's
counterclaims, denying any liability. 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,
which AERT had asserted against Mobil. 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 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 on July 10, 1995 on the
initial trial arguments. In January 1996, oral arguments were presented before
the U.S. Court of Appeals. In June 1996, the U.S. Court of Appeals reversed a
portion of the earlier ruling and restored the validity of two of the four
patents in suit. The court let stand a portion of the earlier ruling that two of
13
<PAGE>
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, all appellate processes available will
be pursued. 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. On November 1, 1994, the Court ruled that
the motion was premature and will not be considered at the present time. In
January 1995, Mobil renewed its Motion for Attorneys' Fees. In April 1995, the
Court requested AERT to respond to Mobil's Motion. The Motion is currently
stayed and the Company cannot currently predict when or if the Delaware Court
will consider this or the Motion for a new trial motion, with is also 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.
In June 1998, the Company received a formal notice of allowance from the United
States Patent and Trademark Office concerning a related product by process
patent application, which has been pending throughout the litigation. This is
an application, which was filed on the same date as those currently in
litigation, although substantial additional disclosures have been made.
The Company is currently involved in civil litigation in North Carolina
involving payment for equipment in its paint facility. The issue involves a
dispute over a final $70,000 payment for equipment, which has yet to operate
effectively. The Company has counter-claimed and asked that the manufacturer
refund its money or make the equipment function properly. The Company is also a
defendant in a federal action in Texas, involving allegations from a former
employee and officer of the Company that the Company breached an employment
agreement by terminating employment. The Company believes this action is without
merit and has filed a motion to dismiss this suit for lack of jurisdiction. The
Company is also involved in an action whereby it is the plaintiff seeking to
recover approximately $200,000 for merchandise sold for which it was not paid.
This action is currently pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted by the Company to a vote of security holders
during the quarter ended December 31, 1998.
14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Class A Common Stock is traded in the over-the-counter market and
is listed on The Nasdaq Stock Market(R) under the symbol AERTA. The Company's
Class B warrants AERTZ are no longer listed. In order to remain listed on
NASDAQ, the Company is required to meet certain criteria (Maintenance Standards)
established by NASDAQ. One such Maintenance Standard is a minimum bid price of
$1.00 per share. The Company has been formally notified by Nasdaq of increased
listing and maintenance standards for both the Nasdaq National and Small Cap
Markets. The increased Nasdaq listing standards went into effect on February
23, 1998. The increased listing and maintenance standards include a minimum bid
$1.00 common stock price and a $2 million net asset value. On March 12, 1999,
the Company attended a hearing in the matter of the continued listing of the
Company's stock in The Nasdaq Stock Market. The hearing was in regards to the
Company being notified on October 13, 1998, that it did not meet the $1.00
minimum bid price for continued listing. The Company was given ninety days,
until January 13, 1999, to regain compliance. The Company did not achieve
compliance during the grace period and subsequently requested the hearing.
Management of the Company believes that an additional waiver will be granted and
the Company will be allowed to regain compliance and meet minimum listing
standards, however, no formal notification has been received. A negative
decision could result in the immediate delisting of the Company's securities
from The Nasdaq Small Cap Market. Should the Company's securities be delisted,
the Company will not be notified of the decision until after the securities have
been removed from The Nasdaq Stock Market. The Company has a right to appeal
the decision, should that occur, although there can be no assurance that an
appeal would be successful. The minimum bid price must be above $1.00 for 10
trading days. The Company is also considering implementing a 1 for 2 or 1 for 3
reverse stock split in order to attain compliance. As of December 31, 1998, the
Company's bid price per share was below $1.00. As of December 31, 1998, the
Company's net asset value was $3,777,501.
If the Company is delisted, it would be required to meet the new listing
standards to be listed on the Nasdaq SmallCap Market. The standards for initial
listing require, among other things, that an issuer have total assets of $4
million and capital and surplus of at least $2 million; 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
million; and that there be at least two market makers for the issuer's
securities. As mentioned above, the Company is currently not in compliance with
the minimum bid price requirement for continued listing and, therefore, also
does not meet the minimum bid price for initial listing. Delisting of the
Company's common stock renders to holders of the Company's preferred stock the
right to present the preferred stock for redemption to the Company in the amount
of $2.9 million and would result in the immediate reclassification of the
preferred stock out of stockholder's equity, reducing the Company's net assets
below the threshold of $2 million for both continued and initial listing of the
stock. Delisting of the Company's stock also results in an event of default
under the bridge financing agreements. An event of default results in all the
then outstanding principal amounts and unpaid interests becoming due and payable
immediately. It is unlikely that the Company would have the financial resources
to redeem the preferred stock if the holders were to present such stock for
redemption or have the ability to pay its obligations under the bridge financing
agreements. Delisting would result in the Company's stock being moved to the
over-the-counter bulletin board which could result in less liquidity for the
holders of the Company's stock.
The following table sets forth the ranges of high and low bid prices (as
reported by NASDAQ) of the Company's Class A Common Stock and Redeemable Class B
Warrants, for the years ended December 31, 1996, 1997 and
15
<PAGE>
1998. The quotations represent prices between dealers, do not include retail
markup, markdown or commission, and do not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
Class A Class B
Common Stock Warrants
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
Fiscal 1996
First Quarter 1.31 0.75 0.19 0.13
Second Quarter 1.63 0.97 0.38 0.13
Third Quarter 1.00 0.75 0.13 0.06
Fourth Quarter 0.94 0.34 0.25 0.06
Fiscal 1997
First Quarter 0.56 0.31 * *
Second Quarter 0.44 0.28 * *
Third Quarter 0.63 0.34 * *
Fourth Quarter 0.59 0.25 * *
Fiscal 1998
First Quarter 1.938 0.375 * *
Second Quarter 1.813 1.000 * *
Third Quarter 1.438 0.531 * *
Fourth Quarter 1.031 0.719 * *
</TABLE>
* Securities were delisted due to lack of trading requirements in 1998.
As of March 31, 1999, there were 1,632 record holders of Class A Common Stock
and 11 record holders of Class B Common Stock. The number of beneficial owners
of the Class A Common Stock at March 31, 1999 is not known; however, management
believes the number of beneficial owners of Class A Common Stock at March 31,
1999 was in excess of 5,000.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth-selected historical data for the Company for the
years ended December 31, 1994 through 1998. For the years ended December 31,
1998 and December 31, 1997, the data was obtained from the Company financial
statements contained in this document at pages F-1 through F-24. Data for the
periods prior to December 31, 1997 was obtained from Item 6 of the Company's
Annual Report or Form 10-K for the year ended December 31, 1997.
Statements of Operations Data:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
-------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Sales $12,408,591 $ 7,982,381 $ 6,950,219 $ 5,581,172 $ 3,675,018
----------- ----------- ----------- ----------- -----------
Loss before
Extraordinary
Gain (3,605,180) (1,913,664) (2,933,698) (2,756 263) (2,970,135)
----------- ----------- -----------
Extraordinary
Gain - 757,644 36,666 - 879,373
----------- ----------- ----------- ----------- -----------
Loss applicable to common
stock $(3,653,070) $(1,156,020) $(2,897,032) $(2,756,263) $(2,090,762)
=========== =========== =========== =========== ===========
Loss before
Extraordinary gain per
common share $ (.16) $ (.09) $ (.15) $ (.17) $ (.21)
Extraordinary gain per
common share - .04 - - .06
----------- ----------- ----------- ----------- -----------
Net Loss per common
share/(1)/ (Basic and Diluted) $ (.16) $ (.05) $ (.15) $ (.17) $ (.15)
=========== =========== =========== =========== ===========
Weighted Average Number
of Shares Outstanding/(1)/ 22,895,517 21,800,170 19,134,484 15,779,721 14,166,869
</TABLE>
17
<PAGE>
Balance Sheet Data:
<TABLE>
<CAPTION>
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Working Capital $(4,625,935) $ (3,117,649) $ (892,995) $ (1,556,805) $ (599,753)
(Deficit)
Total Assets 10,941,927 7,641,328 6,725,599 7,357,742 8,781,907
Long-Term Debt
Less Current 227,376 588,412 955,776 1,266,642 1,844,597
Maturities
Total Liabilities 7,164,426 5,290,970 3,623,170 3,643,999 3,335,459
Stockholders' Equity 3,777,501 2,350,358 3,102,379 3,713,743 5,446,448
</TABLE>
(1) The net loss per share of common stock is based on the combined weighted
average of shares of Class A and Class B Common Stock outstanding during
the period.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Year Ended December 31, 1998 Compared To Year Ended December 31, 1997
- ---------------------------------------------------------------------
Net sales increased to $12,408,591 for the year ended December 31, 1998, which
represented an increase of $4,426,210 or 55% over the year ended December 31,
1997. The 1998 composite sales consisted of MoistureShield(R) sales of
$8,148,422 and ChoiceDek(TM) sales of $4,260,169. This compares with 1997
MoistureShield(R) sales of $6,145,420 and $1,836,961 for ChoiceDek(TM) sales.
Decking sales were limited during 1998 due to construction and production
restraints associated with start-up problems at the new Springdale plant.
The Texas plant increased sales from $7,982,381 in 1997 to $9,530,654 in 1998, a
19% increase. However, further sales increases were not attained due to start-
up delays with the second Springdale composite extrusion plant. This delayed
the Company's plans to shift the Texas plant to more decking and increasing
production runs of decking until late in 1998. The Company believes that by
reducing the amount of products run at the Texas plant and thereby reducing the
amount of down-time required to change extruder die heads for different
products, that it can significantly increase its extrusion line up-time and the
amount of decking produced at the Texas plant during 1999. The Springdale plant
reported composite sales of $2,877,937 for 1998. The Springdale plant was not
in operation in 1997 for composite production. The Springdale plant has been
designed to focus and produce the Company's MoistureShield(R) lines for its door
and window and industrial-flooring customers.
Construction problems and delays were encountered in starting up the Springdale
plant during the third and fourth quarters of 1998. The major problem was a
defective scale and air transfer system for conveying raw materials and loading
the extrusion lines, which would not work and move materials at the desired
throughput rate. This system, after several months of problems, was replaced by
the manufacturer with a larger system under warranty. This was done in November
and December 1998 and delayed the start-up of an additional production line at
the Springdale plant. It became operational to the manufacturers design
guarantee during January 1999. A second production line was started up in
December 1998 and commenced increased production during the first quarter of
1999. The Company intends to further increase production at the Springdale
facility with the addition of two more extrusion lines during 1999, which will
allow the Springdale facility to have four larger extrusion lines than the
initial three lines at the Texas plant. The Company believes that the
additional product volumes generated from a minimum of two extrusion lines at
the Springdale facility, will allow it to attain efficiencies of scale to cover
operating costs and attain positive cash flow from operations for the facility.
In addition, the Company believes that the combined production volumes from both
facilities should generate sufficient sales and revenues from operations to
attain operating income no later than second quarter 1999.
Cost of goods sold increased from $7,639,708 in 1997 to $11,688,448 in 1998.
The increase in cost of goods sold was primarily attributed to increased payroll
and payroll expenses, raw material costs and utility and operating costs, which
were associated with starting up the Springdale plant and operating two plants
in 1998 vs. one in 1997. Further improvements in efficiencies were limited due
to the above mentioned obstacles which the Company encountered in starting up
the Springdale facility.
19
<PAGE>
Significant categories are as follows:
Expense Category 1998 1997
---------------- ---- ----
Payroll and payroll taxes $ 4,094,877 $2,594,056
Depreciation 1,412,692 1,076,570
Raw Materials 2,976,338 1,937,400
Other 3,204,541 2,031,682
---------- ----------
Total $11,688,448 $7,639,708
=========== ==========
Payroll and payroll taxes in 1998 for two plants were approximately $4,094,877
vs. $2,594,056 during 1997 of which one plant was not in operation until late in
the year. Increased raw material cost of $2,976,338 or $1,038,938 over 1997 was
attributable to increased sales and some increases in plastic raw material
costs. Other expenses increased in 1998 vs. 1997 due to expansion of the
business and start-up of the Springdale plant.
Selling, General and Administrative expenses during 1997 were $2,090,049
compared to $3,220,233 for 1998. The increase in Selling, General and
Administrative expenses was primarily attributable to increased professional
fees and additional insurance and overhead, which the Company had to attain with
the start-up of the Springdale facility. Lease facility payments for the
Springdale facility also contributed to the overhead increase. As sales
increase and decking distribution increases, additional marketing expenses will
be incurred, overall, management believes marketing expenses as a percentage of
sales will remain the same.
With the anticipated completion of the pending bond financing in which the
Company intends to purchase the Springdale facility which it is currently
leasing for $19,000 per month; the Company believes it can reduce some of its
yearly operating expenses by spreading the payments over a longer, 20-year term.
In addition, the Company intends to add two additional extrusion lines and an
additional plastic recycling plant on the existing site to be financed with the
pending long-term bond proceeds.
The Company showed improvement even with one plant, under start-up conditions
and recorded a positive gross margin of $720,143 vs. $342,673 for the comparable
period a year earlier. This amounted to a $377,470 improvement over the prior
period however further improvement was limited by lower than desired throughputs
and delays associated with bringing on-line the fourth and fifth extrusion
lines. A sixth line is scheduled to start up in June 1999, followed by a seventh
line by the third quarter if adequate financial resources are available. An
additional plant for plastics and extrusion production is currently planned for
late 1999 and early 2000 based on successful completion of a pending Industrial
Revenue Bond financing for the Springdale facility.
The net loss for 1997 was $1,156,020 or a net loss per weighted average common
share outstanding of $0.05. The loss before extraordinary item for 1997 was
$1,913,664 or $0.09 per share, which was reduced by a one time extraordinary
gain of $757,644 relating to a fire insurance settlement. This compares to a
loss of $3,653,070 or a net loss per weighted average common share outstanding
of $0.16 for 1998. The 1998 loss did include a one-time charge of $135,000 that
was related to a write-off of a bad debt, plus debt discounts amortized to
interest expense of $675,153. This was in addition to interest expense of
$429,937 for 1998.
20
<PAGE>
The Company, during 1998, struggled to supply its existing customer base while
it worked to substantially increase its manufacturing capacities. Management's
objective continues to be to grow the business and maintain its existing
customer base. The decision to maintain a diversified customer base with a
larger number of products resulted in less than desired sales volumes and
limited operating efficiencies since the Springdale plant did not produce
effectively for most of the year and the Texas facility had to maintain the
customer base supply. The Company believes that it is better to maintain a
diversified customer base in several markets rather than focus on one market in
the short term. Establishing large OEM customer sales is a long, time consuming
and elaborate process and several of the Company's door and window customers had
completed years of testing prior to introducing AERT components into their
product lines. Component changeover is difficult for these types of customers
and after years of development work, AERT management was determined not to lose
its customer base, even when faced with the Rogers fires and later start-up
difficulties at the Springdale plant. Thus, the Company has been successful in
its efforts to hold onto and build its customer base during this difficult
period and is now positioned with increased manufacturing capacity to grow and
significantly expand sales in 1999.
The Company continues to maintain additional security measures, including
installation of surveillance cameras, and the addition of on-site security
personnel, which are intended to better protect the Company's facilities.
The Company is currently completing construction on the initial phases of its
multipurpose manufacturing facility in Springdale, Arkansas. The Company's
capital expansion program involved adding additional plastic processing
production, an upgraded painting and finishing facility, a second millwork
facility, and a fifth extrusion line (in addition to the fourth line already on
hand). Capital expenditures during 1998 at Springdale totaled $3.67 million and
when all phases are fully operational by mid year 1999 are intended to increase
the Company's manufacturing capacity significantly from both manufacturing
facilities. Once completed and operational and based upon customer forecasts
and demands, the Company intends to further implement additional expansion
during the third quarter of 1999, as the initial Springdale facility will
currently accommodate only four extrusion lines. This will require significant
additional capital expenditures, which is intended to be financed through a
pending $18 million Industrial Revenue Bond financing through the City of
Springdale and the State of Arkansas.
The Company's main focus in conjunction with this expansion is to further
improve operating efficiencies, and further reduce unit production costs to
levels required for positive gross margins and profitability. By shifting
MoistureShield(R) OEM products to what Management believes will be a newer, more
cost efficient manufacturing facility, in conjunction with reduced raw material
costs and increased extrusion throughputs; the Company believes it can reduce
its MoistureShield(R) production costs while also increasing sales volumes in
conjunction with increased ChoiceDek(TM) throughputs at its Texas facility.
This in conjunction with other efficiency enhancements at the Texas facility are
designed and intended to also enhance gross margins and attain profitability for
the ChoiceDek(TM) line.
The Company believes that 1999 first quarter sales will increase significantly
over the previous period of 1998, and that the Company's financial results will
improve significantly. Management believes that the Springdale manufacturing
plant will show substantial improvement although it is not expected to attain
profitability during the first quarter of 1999. The Company believes
substantial reductions of unit production costs will result from increased
automation and streamlining the amount of products run at the Company's
operation in Junction, Texas
21
<PAGE>
and that the Texas plant can further increase its profitability during
subsequent periods. There can be no assurance that the Company can attain its
anticipated continued operating improvements or that its additional production
efficiencies and resultant unit cost reductions required for profitability will
occur.
Year Ended December 31, 1997 Compared To Year Ended December 31, 1996
- ---------------------------------------------------------------------
Net sales increased to $7,982,381 for the year ended December 31, 1997, which
represented an increase of $1,032,162 or 15% over the year ended December 31,
1996. The 1997 composite sales consisted of door and window component sales of
$5,588,679, decking material sales of $1,836,961, and industrial-flooring sales
of $556,741. This compares with 1996 composite sales of $4,633,720 for door and
window components, $1,935,849 for decking sales, and $367,490 for industrial-
flooring sales. Increased decking sales were limited during 1997 due to
production restraints.
Although overall composite sales increased, primarily attributable to the
addition of a third extrusion line and related manufacturing equipment expansion
which started production during mid 1996; plastic raw material disruptions
caused by the 1996 Rogers fires and delays in starting up a fourth extrusion
line and new paint and finishing system limited further composites sales growth
for the year. Although production and sales increased slightly over prior
years, the Company was restrained in its attempt to further increase sales and
supply its existing customer commitments. The Junction, Texas composites
facility also experienced less than desired efficiencies due to the large number
of products run during the past year. The Company experienced significant raw
material problems in addition to negative cost variances with its plastic raw
material supplies when the Company had to purchase all plastic from outside
vendors and further process it at the Junction facility due to the extensive
fires experienced at the Rogers plastic reclamation facility. Both fires were
deemed arson by authorities. The exceptionally wet 1997 spring also disrupted
fiber supplies to the Company's cedar mill suppliers and the Company lost
significant production time due to flooding in the Central Texas area. The
Company's raw material costs increased from $1,077,054 in 1996 to $1,937,400 in
1997, even with increased utilization of composite regrind.
The claim regarding the September fire was settled in late 1996 for
approximately $379,000 and the Rogers plastic reclamation operation recommenced
in late November. On December 15, 1996, the undamaged portion of the Rogers
facility then suffered a second major fire and the manufacturing portion
experienced extensive damage closing the facility. The Company's rebuilding
efforts were delayed for most of the first half of 1997 due to the ongoing fire
investigation and insurance settlement delays. The December fire claim was
finally settled in June 1997, for $1.9 million.
Cost of goods sold decreased from $7,822,154 in 1996 compared to $7,639,708 for
1997. The decrease in cost of goods sold was primarily attributed to reduced
payroll and payroll expenses, which were primarily attributable to the shut down
of the Rogers facility, combined with the Junction plant's increased utilization
of regrindable scrap. Further improvements in efficiencies were limited due to
the above mentioned obstacles which the Company encountered.
Significant categories are as follows:
<TABLE>
<CAPTION>
Expense Category 1997 1996
- ---------------- ---- ----
<S> <C> <C>
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C>
Payroll and payroll taxes $2,594,056 $3,043,797
Depreciation 1,076,570 1,194,406
Raw Materials 1,937,400 1,077,054
Other 2,031,682 2,506,897
---------- ----------
Total $7,639,708 $7,822,154
========== ==========
</TABLE>
Payroll and payroll taxes in 1996 for Rogers were approximately $450,000, which
were not applicable during 1997. However, this overall labor (payroll)
reduction was offset by an increased raw material cost of $1,937,400 or $860,346
over 1996 in conjunction with higher amounts of regrind used during this period.
Other expenses were reduced somewhat in 1997 vs. 1996 with the exception of
increases in insurance premiums, security costs, and millwork tooling.
Selling, General and Administrative expenses during 1996 were $1,687,697
compared to $2,090,049 for 1997. The increase in Selling, General and
Administrative expenses was primarily attributable to increased professional
fees and additional insurance and overhead which the Company had to attain. The
Company also acquired a second manufacturing facility in August of 1997 and
lease facility payments also contributed to the overhead increase. In addition,
the Company began a more extensive marketing program for its ChoiceDekTM
products with the goal of increasing distribution and sales. As decking
distribution increases, additional marketing expenses will be incurred, although
based as a small percentage of sales, to further support increased sales levels.
The composites division showed significant improvement under difficult
conditions and recorded a positive gross margin of $342,673 vs. ($871,935) for
the comparable period a year earlier. This amounted to a $1,214,608 improvement
over the prior period however further improvement was limited by negative raw
material variances, reduced throughputs, and delays associated with bringing on-
line the fourth extrusion line and introducing the Company's new line of primed
window components which restricted additional sales. The Company originally
planned on placing its fourth extrusion line at its Junction, Texas facility.
However, the loss of raw materials from the Rogers fire, combined with the start
up of the Springdale facility prompted the Company to move the fourth extrusion
line equipment to Springdale, and order equipment for a fifth extrusion line.
The net loss for 1996 was $2,897,032 or a net loss per weighted average common
share outstanding of $0.15. This compares to a loss of $1,156,020 or a net loss
per weighted average common share outstanding of $0.05 for 1997. The 1996 loss
did include a one-time charge of $129,767, which related to a write off of
damaged equipment and leasehold improvements lost in the December fire in
Rogers. The loss before extraordinary item for 1997 was $1,913,664 or $0.09 per
share, which was reduced by a one time extraordinary gain of $757,644 relating
to a fire insurance settlement.
Liquidity and Capital Resources
- -------------------------------
At December 31, 1998, the Company had a working capital deficit of $4,625,935
compared to a working capital deficit of $3,117,649 at December 31, 1997. The
deficit is primarily attributable to the Company's delays in obtaining positive
cash flows from operations and delays in completing construction and starting up
its additional extrusion lines in a timely manner. Management's decision to
finance significant capital expenditures with short-term bridge loans also
contributed to the increased deficit. Of such deficit involving total
liabilities of approximately $7.1 million as of December 31, 1998, $1.6 million
was to the Company's major shareholder, $2.1 million was a short term bridge
loan, and approximately $2.6 million was in payables of which a significant
23
<PAGE>
portion reflects the ongoing construction in progress at the Springdale
facility. Trade payables were $1,034,436 (66%) higher than a year ago also due
to the Company's ongoing capital expenditure program. The $4.6 million working
capital deficit also reflects management decision to enter into short term debt
financing, while the Company is expanding, building and improving its production
and sales capacities to attain positive cash flows and profitability and
refinancing later, rather than enter into what it felt would have been more
expensive and dilutive equity financing at that time. Management plans to
reduce and eliminate the negative working capital deficit during 1999, through a
combination of debt reduction and debt restructuring through completion of its
pending bond financing, in conjunction with attaining positive cash flows and
profitability from operations. The Company believes that with the successful
completion of its pending bond financing that it can reduce its working capital
deficit through the pay off the remaining bridge note balance of $1.8 million.
This will restructure a significant portion of the Company's short-term
indebtedness into long-term debt with favorable interest rates. Purchasing the
existing site over a longer term should also help improve operating costs by
reducing the monthly lease payment cash requirement. By also having substantial
dollars allocated and available for capital expansion, the Company believes that
positive cash flows generated from operations can be used for working capital
and also help reduce the deficit.
The Company recapitalized during the second and third quarters of 1998 through a
voluntary conversion of Class B and Class C warrants in conjunction with a
private placement of preferred stock. The Company received voluntary
conversions of 1,054,670 shares at prices ranging from $1.075 to $1.20 per
share. Through December 31, 1998, this yielded net proceeds of $1,264,032. As
of February 12, 1999, all Class B and C warrants not exercised (3,549,776) were
allowed to expire by the Board of Directors. In conjunction with the voluntary
warrant conversion a bonus warrant exercisable for $3.00 per share for 2-years
was reserved for Bonus warrants to be issued. The Company plans to issue
1,054,670 bonus warrants in the near future which will expire in 2001. In
addition, 2,900 shares of preferred stock were issued to the major shareholder
and several close accredited investors for $1,000 per share. Classes were
issued in Series A, B and C with Series B having voting rights for the
underlying shares and warrants. On the 7th anniversary date of the issuance of
the preferred stock, the preferred stock will automatically be converted into
shares of common stock with the conversion price equal to the lower of the
average of the closing bid prices for the common stock for the 5 trading days
immediately preceding the 7th anniversary of the issuance or the fixed
conversion price. The fixed conversion price is $1.20. The Company must meet
certain milestones which include: (1) minimum sales of $4.5 million for first
quarter 1999 and sales of $6 million per quarter thereafter and (2) quarterly
cash flow from operations must be positive for each quarter beginning with the
fourth quarter of 1998 and for each quarter thereafter. If a milestone failure
occurs, the conversion price is the lower of the fixed conversion price or the
variable conversion price. The variable conversion price is the average of the
closing bid prices for the common stock during the 10 consecutive trading days
ending on the trading date immediately preceding the date of determination. A
10% premium is payable per year. Series X and Y warrants were issued in
connection with the preferred stock and are exercisable at $1.20 and $2.50 per
share, respectively. Each of the warrants has cashless exercise features that
are based on various conversion amounts and terms. Series X warrants cannot be
exercised for one year from date of issuance. The preferred stock agreements
require that the Company files a registration statement by August 1, 1999, to
register the preferred stock and the common stock required in relation to the
warrants. The Company will be required to pay certain penalties to the holders
of the preferred stock and warrants if the registration statement is not filed
by August 1, 1999. The penalties increase over time until the registration
statement is filed. The preferred stock agreements contain potential redemption
events, which would cause the Company to have to redeem the
24
<PAGE>
preferred stock. The agreements state that if a redemption event occurs, the
Company must pay each holder of preferred stock an amount equal to ten percent
of the aggregate stated value of the shares of preferred stock then outstanding.
The Company intends to file a registration statement for the preferred stock
during the second quarter 1999. With this commitment from its shareholders, the
Company increased its net assets from $2.4 million at September 30, 1998, to in
excess of $3.7 million as of December 31, 1998. It is the Company's intention to
increase and then maintain its net assets above $4 million, attain profitability
from operations and possibly adjust its capital structure by a reverse stock
split in order to attain a national Nasdaq market listing.
Cash and cash equivalents increased $569,066 in 1998. Significant components of
that increase were: (i) cash provided by operating activities of $161,356, which
consisted of the net loss for the period of $3,653,070 reduced by depreciation
and amortization of $1,412,692 and reduced by other sources of cash of
$2,079,022; (ii) cash used in investing activities of $3,670,247, and (iii) cash
provided by financing activities of $4,077,957. Payments on notes during the
period were $364,020 and proceeds from the issuances of notes amounted to
$1,380,842. At December 31, 1998, the Company had notes payable, net of debt
discount, in the amount of $3,180,262, of which $2,952,886 were current notes
payable, net of debt discount, or current portion of long-term debt. Of such
$2,952,886, $2,733,750 or 93% was to the major shareholder and other investors
closely associated with the Company. During the fourth quarter, the Company
reduced the indebtedness of its $3.16 million bridge loan by $1 million through
the issuance of preferred stock. During first quarter 1999, the loan was further
reduced $200,000 to $1.9 million. The Company intends to repay the remaining
$1.9 million during second quarter 1999 assuming the successful completion of
the pending bond financing.
The Company has five bridge financing agreements. The date of the first
agreement was October 30, 1997. The Company issued notes payable totaling $1.3
million, originally due and payable on July 27, 1998, unless extended, at the
option of the Company, to October 30, 1998. Interest on the notes is payable
every three months at 12% with the Company's Class A Common Stock. In
connection with the notes, the Company issued 2,600,000 consulting warrants and
156,000 placement warrants and paid loan origination costs of $169,000 to the
placement agent. The warrants expire October 30, 2002, and are exercisable at a
price of $0.375 per share of Class A Common Stock for each warrant exercised.
Per the agreement, if the notes were extended, an additional 650,000 consulting
warrants and 78,000 placement warrants would be issued. As of July 31, 1998, the
note holders extended the notes for 60 days without additional penalty warrants
in exchange for voluntary selling restrictions of the Company's stock by the
Company's officers and certain shareholders over the next 18 months, without
prior approval from the issuer of the note. As of November 5, 1998, the note
holders extended the notes through March 31, 1999, without penalty warrants
other than for 310,000 of the warrants to be issued to one of the note holders.
Also, during 1998, $1,050,000 of these bridge financing notes were paid-off with
the issuance of preferred stock (See Note 6). As of March 31, 1999, the note
holders extended the notes through June 1, 1999, without additional penalty
warrants.
The second bridge financing was completed on February 5, 1998. The Company
issued notes payable totaling $800,000, originally due and payable on November
2, 1998, unless extended, at the option of the Company, to January 31, 1999.
Interest on the notes is payable every three months at 12% in either cash or the
Company's Class A Common Stock, at the option of the Company. In connection
with the notes, the Company issued 1,600,000 consulting warrants and 96,000
placement warrants and paid loan origination costs of $104,000 to the placement
agent. The warrants expire February 5, 2003, and are exercisable at a price of
$0.375 per share of Class A Common Stock for each warrant exercised. As of
November 5, 1998, the note holders extended the
25
<PAGE>
notes through March 31, 1999. As of March 31, 1999, the note holders extended
the notes through June 1, 1999, without additional penalty warrants.
A third bridge financing was completed on April 7, 1998. The Company issued
notes payable totaling $410,000, originally due and payable on January 2, 1999,
unless extended, at the option of the Company, to April 2, 1999. As of March 31,
1999, the note holders extended the notes through June 1, 1999, without
additional penalty warrants. Interest on the notes is payable every three
months at 12% in either cash or the Company's Class A Common Stock, at the
option of the Company. In connection with the notes, the Company issued 820,000
consulting warrants and 49,200 placement warrants and paid loan origination
costs of $53,300 to the placement agent. If the notes are extended, additional
205,000 consulting warrants and 24,600 placement warrants will be issued. The
warrants expire April 7, 2003, and are exercisable at a price of $0.375 per
share of Class A Common Stock for each warrant exercised.
A fourth bridge financing was completed on June 3, 1998. The Company issued
notes payable totaling $359,963, due and payable on February 28, 1999, unless
extended, at the option of the Company, to May 29, 1999. As of March 31, 1999,
the note holders extended the notes through June 1, 1999, without additional
penalty warrants. Interest on the notes is payable every three months at 12% in
either cash or the Company's Class A Common Stock, at the option of the Company.
In connection with the notes, the Company issued 719,926 consulting warrants and
43,195 placement warrants and paid loan origination costs of $46,795 to the
placement agent. If the notes are extended, additional 179,981 consulting
warrants and 21,597 placement warrants will be issued. The warrants expire June
3, 2003, and are exercisable at a price of $0.375 per share of Class A Common
Stock for each warrant exercised.
A fifth bridge financing was completed on August 21, 1998. The Company issued
notes payable totaling $287,500, due and payable on May 18, 1999, unless the
notes are extended, at the option of the Company, to August 16, 1999. Interest
on the notes is payable every three months at 12% in either cash or the
Company's Class A Common Stock, at the option of the Company. In connection
with the notes, the Company issued 575,000 consulting warrants and 34,500
placement warrants and paid loan origination costs of $37,375 to the placement
agent. If the notes are extended, an additional 143,750 consulting warrants and
17,250 placement warrants will be issued. The warrants expire August 21, 2003,
and are exercisable at a price of $0.375 per share of Class A Common Stock for
each warrant exercised.
Delisting of the Company's stock results in an event of default under the bridge
financing agreements. An event of default results in all the then outstanding
principal amounts and unpaid interest becoming due and payable immediately.
The Company currently has pending up to an $18 million, low interest, job
creation financing through a State Economic Development Agency for acquisition
of and further expansion of the first Springdale facility. The Company expended
$3.7 million in 1998 in capital projects. The Company's current and ongoing
capital expansion program to increase capacity of the initial and proposed
Springdale facilities with six extrusion lines and a second moulding department
and second plastic recycling plant is estimated at $13.7 million of which
$807,331 had been expended as of March 31, 1999.
The Company maintained an accounts receivable factoring agreement for up to
$900,000 through an affiliated
26
<PAGE>
company of a related party. The terms of this initial agreement called 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. In
March 1999, the Company's major shareholder increased the Company's factoring
line to $2 million. The new terms allow the factor to charge up to 2% per
invoice and the Company must guarantee the receivables. It is currently
estimated that the factor charges will average around 1.5% during 1999.
The Company believes that if it can further improve and streamline the extrusion
production rates and efficiencies it is experiencing as of the date of this
filing in conjunction with adding additional production capacity at its
Springdale facility and that it can further improve gross margins to
significantly lower unit production cost then it will be able to achieve a level
of operations in periods subsequent to the first quarter of 1999 and thereafter
which will generate positive cash flows from operations. This in conjunction
with the pending completion of the pending bond financing for up to $18 million,
which will significantly reduce or eliminate the need for additional sources of
capital to support its operations. Management believes that increased
production and pending sales obtained with the additions of the fifth and
upcoming sixth composite lines operating for a full year; improved product focus
and increased throughputs from reduced changeovers in conjunction with reduced
plastics division raw material costs will allow it to attain positive cash flows
from operations and profitability. Additional production volumes and resultant
sales increases from its Springdale plant combined with continued improvements
in production efficiency and capacity as previously discussed will be required
for the Company to further increase sales levels to those necessary to attain
profitable results of operations and provide funds to repay the Company's
outstanding obligations and in order to refinance all or a portion of its short
term debt into longer term obligations and meet its debt service schedule.
There can be no assurance that such improvements in production efficiency or
capacity will occur, or that successful completion of the pending bond financing
will be achieved in a timely manner by the Company.
The Company has also been approached by several investment-banking groups, which
have expressed interest in helping the Company complete a secondary stock
offering over the next year. The Company is currently evaluating and discussing
several equity options, however management currently believes that this type of
financing is premature and could be too dilutive to shareholders at this time.
The Company believes it needs to complete its current construction and expansion
plan and attain positive cash flows from operations and profitability before
this is considered. It is management's intent to build shareholder value and to
be as non-dilutive as possible in regard to future Company growth.
The foregoing plan is not intended to satisfy the long-term cash needs of the
Company; rather the plan assumes that the Company will achieve and maintain
positive operating cash flows throughout the future. There can be no assurance
that the Company will be able to maintain its current operating levels or
achieve increased production volumes and sales levels required for positive cash
flows and profitability, or that the Company could obtain additional capital
resources to support manufacturing operations if required.
The foregoing discussion contains certain estimates, predictions, projections
and other forward-looking statements (within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934)
that involve various risks and uncertainties. While these forward-looking
statements, and any assumptions upon which they are based, are made in good
faith and reflect the Company's current judgment regarding the direction of its
business, actual results will almost always vary, sometimes materially, from any
estimates, predictions, projections, assumptions, or other future performance
suggested herein. Some important
27
<PAGE>
factors (but not necessarily all factors) that could affect the Company's sales
volumes, growth strategies, future profitability and operating results, or that
otherwise could cause actual results to differ materially from those expressed
in any forward-looking statement include the following: market, political or
other forces affecting the pricing and availability of plastics and other raw
material accidents or other unscheduled shutdowns affecting the Company's, its
suppliers or its customers plants, machinery, or equipment; competition from
products and services offered by other enterprises; state and federal
environmental, economic, safety and other policies and regulations, any changes
therein, and any legal or regulatory delays or other factors beyond the
Company's control; execution of planned capital projects; weather conditions
affecting the Company's operations or the areas in which the Company's products
are marketed; adverse rulings, judgments, or settlements in litigation or other
legal matters. The Company undertakes no obligation to publicly release the
result of any revisions to any such forward-looking statements that may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
YEAR 2000
- ---------
The Company has been and is currently conducting an ongoing evaluation of the
potential effects of the Year 2000 issue on its operations. The evaluation is
ongoing, however, at this time, management of the Company is not aware of any
problems that will occur within the Company's plant operations. However, the
Company has not yet contacted the manufacturers of the Company's operating
equipment to determine if the manufacturers are aware of Year 2000 issues with
the equipment. The Company plans to contact the equipment manufacturers during
the second quarter of 1999. The Company has been in contact with some of its
significant vendors and customers to determine their Year 2000 status and plans
to contact others during the second quarter of 1999. In assessing the impact of
the Year 2000 on administration, including accounting and financial reporting,
the Company has contacted its financial accounting software vendor and was
notified by the vendor that the software will be Year 2000 compliant, after
processing a required update to the software. The software vendor has provided
that update at no cost to the Company along with documentation that the software
is Year 2000 compliant. The update will be made to the Company's software during
the second quarter of 1999. The Company has identified a Year 2000 issue with
its telephone system and is currently in the process of correcting that issue
and does not expect to incur significant costs to correct the issue. Based on
the information above, the Company does not anticipate a material financial
impact as a result of the Year 2000 issues. However, the Company has no control
over Year 2000 compliance by its customers and vendors. If the Company's
customers and vendors are not prepared for the Year 2000 issue, this could
result in a material adverse financial impact to the Company, however, the
Company believes it is unlikely based on the nature of its business, customers
and vendors. The Company has not developed a contingency plan to deal with any
Year 2000 issues that may occur.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company has no material exposures relating to its long-term debt due to
virtually all of the Company's long-term debt bearing interest at fixed rates.
See Note 5 to the financial statements for discussion of the Company's debt. The
Company depends on the market for favorable long-term mortgage rates to help
generate sales of its product to its customers for use in the residential
construction industry. Should mortgage rates increase substantially, the Company
could be impacted by a reduction in the residential construction industry.
Important raw materials purchased by the Company are recycled plastic and wood
fiber, which are subject to price fluctuations. The Company attempts to limit
the impact of price increases on these materials by negotiating with each of its
suppliers on a term basis.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements on accounting and financial disclosures with
accountants during the periods reported upon herein.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- -------
<S> <C> <C>
Joe G. Brooks 43 Chairman and Co-Chief Executive Officer and Director
Sal Miwa 42 Vice-Chairman of the Board and Director
Stephen W. Brooks 42 Co-Chief Executive Officer and Director
J. Grant Martin 51 President
J. Douglas Brooks 39 Executive Vice-President
Marjorie S. Brooks 63 Secretary, Treasurer and Director
Jerry B. Burkett 42 Director
Dr. James H. Culp 53 Director
Peter S. Lau 45 Director
Michael M. Tull 44 Director
</TABLE>
The Company's Board of Directors elected Joe G. Brooks as its Chairman and Co-
Chief Executive Officer on December 11, 1998. Mr. Brooks has previously served
as President and has been a director since the Company's inception in December
1988. He was also previously Chairman and CEO from inception until August 1993.
Mr. Brooks is a director and Chairman of the Standing Committee of the Arkansas
Recycling Coalition for Buy Recycled Business Alliance for the State of Arkansas
and serves on their Executive Committee. He is a member of Clean Texas 2000,
appointed by Governor George Bush in 1995. He is a past President, director and
independent consultant of Juniper Products, Inc., from July 1985 until December
1988, which was an artificial firelog manufacturing entity in Junction, Texas.
Mr. Brooks has been past President of Southern Minerals and Fibers, Inc. (SMF),
a producer of drilling mud and fluid additives.
On December 11, 1998, the Company's Board of Directors elected Sal Miwa as its
Vice-Chairman. Mr. Miwa has served as its Chairman for 3 years before this
election. He has been an outside director of the Company since January 1994.
Sal Miwa is President and CEO of Seiwa Optical Co., and importer of special
camera systems located in Woodcliff Lake, New Jersey. For the past 20-years he
has been engaged in various international businesses located in U.S., Canada,
Japan and Europe. He received his Masters degree in Aerospace Engineering from
the Massachusetts Institute of Technology.
The Company's Board of Directors elected Stephen W. Brooks as Co-Chief Executive
Officer on December 11, 1998. Mr. Brooks has served as its Chief Executive
Officer for the last three years and has been a director since January 1996.
Mr. Brooks is CEO and Chairman of the Board of Razorback Farms, Inc.; a
Springdale, Arkansas based firm that specializes in vegetables for processing.
Mr. Brooks also serves on the Board of the Ozark Food Processors Association.
The Board of Directors elected J. Grant Martin as President on December 11,
1998. Mr. Martin joined the
29
<PAGE>
Company on February 24, 1997 and has served as Chief Operating Officer,
assumed day-to-day control and operating responsibilities over the Company's
composite manufacturing facility in Junction, Texas and Springdale, Arkansas.
Mr. Martin has extensive technical and manufacturing experience with companies
in the United States and overseas. Mr. Martin was previously employed as Vice-
President of operations of a large Texas manufacturing facility and before that
served as a Vice-President of Operations for a national engineering testing
company.
J. Douglas Brooks is Executive Vice-President and a previous board member. Mr.
Brooks serves on the Executive Committee and is in charge of Technical Services,
which includes Quality Assurance, R&D, Raw Material Processing, Development and
Sourcing. Mr. Brooks was previously Project Manager for AERT's polyethylene
recycling program with The Dow Chemical Company and is joint inventor on several
of AERT's process patents for recycling polyethylene film for composites. Mr.
Brooks has previously served as an independent consultant to Juniper Industries,
Inc. and as Vice President of SMF.
Marjorie S. Brooks is Secretary, Treasurer, and a director since the Company's
inception in December 1988. Mrs. Brooks also serves as a director of Juniper
Industries, Inc. and Razorback Farms, Inc., and has served as Secretary and
Treasurer of Brooks Investment Co., a holding company for the Brooks' family
investments, for more than the past thirty years, and has served as President of
Haskell Foods, Inc.
Jerry B. Burkett was appointed to the Board of Directors of the Company on May
17, 1993. Mr. Burkett has been a rice and grain farmer since 1979 and has been
a principal in other closely held businesses. He is the past President of the
Arkansas County Farm Bureau.
James H. Culp received a B.S. Degree in Chemistry from the University of Alabama
and Ph.D. Degree in Analytical and Nuclear Chemistry from Texas A&M University.
Dr. Culp was an Assistance Professor at Texas A&M University Chemical
Oceanography for two years before joining The Dow Chemical Company. Dr. Culp
worked at Dow in research, manufacturing, business development, and supply chain
for 24 years. His last responsibility at Dow was North American Supply Chain
Director for Engineering Thermoplastics and North American Recycle Plastics
Director. Dr. Culp retired from Dow in April 1996. He joined the AERT Board as
Director of Technology in July 1996 and served as Special board assistant to the
CEO in October 1996.
Peter S. Lau was appointed an outside director to the Board of Directors of the
Company in April 1997. Mr. Lau is managing director of corporate finance of
American Fronteer Financial Corporation (AFFC), formerly known as RAF Financial
Corporation, a regional securities broker/dealer with 11 offices in 10 states,
that is owned by Fronteer Financial Holdings, Ltd. (OTC BB: FDIR). Mr. Lau is
formerly an associate of Heng Fung Capital, Inc. and Heng Fung Equities, Inc.
(subsidiary of Heng Fung Holdings Company Limited, a Hong Kong public traded
company). Mr. Lau is a graduate of the University of Hartford with a B.S. and
M.S. in accounting.
Michael M. Tull was appointed an outside director to the Board of Directors of
the Company in December 1998. Mr. Tull is the President and majority owner of
I. W. Tull Sales Company, a manufacturer's representative company, which
professionally represents nine manufacturing companies and is responsible for
sales and marketing of those companies' window and door related components in
the southeastern Unites States. Mr. Tull serves on boards of several closely
held family businesses and is the President and a Board of Director member of
the National Wild Turkey Federation, which is one of the largest North American
conservation organization
30
<PAGE>
with membership of 200,000.
Joe G. Brooks, Stephen W. Brooks and J. Douglas Brooks are brothers and are sons
of Marjorie S. Brooks. There are no other familial relationships between the
current directors and executive officers.
Each of the Company's directors has been elected to serve until the next annual
meeting of stockholders or until their successors are elected and qualified.
Officers serve at the discretion of the Board of Directors.
The Audit Committee of the Board of Directors consists of three outside
directors of Peter S. Lau (Chairman), James H. Culp, and Sal Miwa. The Audit
Committee recommends engagement of the Company's independent accountants and is
primarily responsible for approving the services performed by the Company's
independent accountants and for reviewing and evaluating the Company's
accounting principles and its system of internal accounting controls.
The Compensation and Stock Option Committee consists of Jerry B. Burkett
(Chairman), Sal Miwa, Marjorie S. Brooks and Michael M. Tull. The Compensation
and Stock Option Committee establishes and administers the Company's
compensation and stock option plans on behalf of the Board of Directors and
approves stock options granted thereunder.
The Executive Committee consists of three outside board members with Sal Miwa
(Chairman), James H. Culp and Michael M. Tull and four executive management
members of Joe G. Brooks, Stephen W. Brooks, J. Douglas Brooks and J. Grant
Martin. The Executive Committee establishes corporate policies, manpower,
technology, cost accounting and day-to-day operations of the Company.
The Litigation Committee consists of Joe G. Brooks (Chairman), James H. Culp and
Sal Miwa. The Litigation Committee establishes and administers the Company's
litigation plans on behalf of the Board of Directors.
31
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid by the
Company during the three years ended December 31, 1998 to each executive officer
of the Company whose aggregate cash compensation exceeded $100,000, and to the
chief executive officer.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
- ------------------- ----------------------
Awards Payouts
------ -------
Name and Restricted Securities Long-term
Principal Other Annual Stock Underlying Incentive All Other
Position Year Salary Bonus Compensation Awards Options Payouts Compensation
- --------- ------ -------- ----- ------------ ---------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen W. Brooks 1998 $0 $0 $0 $0 $0 $0 $0
CEO
Joe G. Brooks 1998 $105,231 $0 $0 $0 $0 $0 $0
President
J. Grant Martin 1998 $90,000 $0 $0 $0 $0 $0 $45,500(1)
COO
Stephen W. Brooks CEO 1997 $0 $0 $0 $0 250,000 $0 $0
Stephen W. Brooks CEO 1996 $0 $0 $0 $0 0 $0 $0
</TABLE>
(1) relocation expense
AGGREGATED OPTION EXERCISES IN YEAR ENDED DECEMBER 31, 1998
AND OPTION VALUES AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
Number of Value of Unexercised
Number of Unexercised Options In-the-Money Options
Shares at December 31, 1998 at December 31, 1998
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stephen W. Brooks 0 $0 275,000/250,000 $64,850/$53,250
J. Grant Martin 150,000 $112,203 150,000/200,000 $56,300/$50,100
Joe G. Brooks 0 $0 300,000/200,000 $121,500/$50,100
</TABLE>
Compensation Committee Interlocks and Insider Participation
The Board of Directors of the Company does not currently maintain a Compensation
Committee. Accordingly, the Board of Directors, as a whole, reviews and acts
upon personnel policies and executive compensation matters. Joe G. Brooks and
Stephen W. Brooks serve as executive officers of the Company; however such
individuals do not participate in compensation decisions or in forming
compensation policies in which they have
32
<PAGE>
a personal interest, nor do they vote on any such matter.
Limited Liability of Officers and Directors
The Delaware Supreme Court has held that a director's duty of care to a
corporation and its stockholders require the exercise of an informed business
judgment. Having become informed of all material information reasonably
available to them, directors must act with requisite care in the discharge of
their duties. The Delaware General Corporation law permits a corporation
through its Certificate of Incorporation to exonerate its directors from
personal liability to the corporation or its stockholders for monetary damages
for breach of the fiduciary duty of care as a director, with certain exceptions.
The exceptions include a breach of the director's duty of loyalty, acts or
omissions not in good faith or which involve intentional misconduct or knowing
violations of law, improper declarations of dividends and transactions from
which the directors derived an improper personal benefit. The Company's
Certificate of Incorporation exonerates its directors, acting in such capacity,
from monetary liability to the extent permitted by this statutory provision.
The limitation of liability provision does not eliminate a stockholder's right
to seek non-monetary, equitable remedies such as injunction or rescission to
redress an action taken by directors. However, as a practical matter, equitable
remedies may not be available in all situations and there may be instances in
which no effective remedy is available.
33
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1998, certain information
with regard to the beneficial ownership of the Company's capital stock by each
holder of 5% or more of the outstanding stock, by each director of the Company,
and by all officers and directors as a group:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Name and Address Title of Number of Shares of Percentage of Class Percentage of
of Beneficial Owner Class(1) Common Stock(2) Outstanding (2)(16) Voting Power (2)(17)
- ------------------- --------- -------------- ------------------- --------------------
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Marjorie S. Brooks Class A 9,754,665 (3) 24.2% 29.0%
P. O. Box 1237 Class B 837,588 (4) 57.2%
Springdale, AR 72764 Preferred- 400 (5) 13.8%
Series B
- ------------------------------------------------------------------------------------------------------------------------------------
Joe G. Brooks Class A 738,442 (6) 1.8% 4.2%
HC 10, Box 116 Class B 284,396 19.4%
Junction, TX 76849
- ------------------------------------------------------------------------------------------------------------------------------------
J. Douglas Brooks Class A 721,573 (7) 1.8% 2.7%
P. O. Box 1237 Class B 131,051 8.9%
Springdale, AR 72764
- ------------------------------------------------------------------------------------------------------------------------------------
Jerry B. Burkett Class A 140,000 (8) * *
2110 Hemme Road Class B 33,311 * *
Stuttgart, AR 72160
- ------------------------------------------------------------------------------------------------------------------------------------
Sal Miwa Class A 328,000 (9) * *
c/o Seiwa Optical Co.
50 Tice Boulevard
Woodcliff Lake, NJ 07675
- ------------------------------------------------------------------------------------------------------------------------------------
Stephen W. Brooks Class A 645,116 (10) 1.7% 2.1%
P. O. Box 291 Class B 89,311 6.1%
Springdale, AR 72765
- ------------------------------------------------------------------------------------------------------------------------------------
J. Grant Martin Class A 150,000 (11) * *
P. O. Box 1237
Springdale, AR 72764
- ------------------------------------------------------------------------------------------------------------------------------------
James H. Culp, Ph.D. Class A 250,000 (11) * *
120 Silver Lace Drive
Lake Jackson, TX 77566
- ------------------------------------------------------------------------------------------------------------------------------------
Peter S. Lau Class A 79,715 (12) * *
30 Wall Street, 11th Floor
New York, NY 10005
- ------------------------------------------------------------------------------------------------------------------------------------
Michael M. Tull Class A 71,000 (13) * 2.1%
c/o I. W. Tull Sales Co. Preferred- 400 13.8%
1475 Holcomb Bridge Rd. Series B
Suite 113
Roswell, GA 30076
- ------------------------------------------------------------------------------------------------------------------------------------
R. A. Mackie & Co., L.P. Class A 1,947,736 (14) 4.8% 4.3%
and Robert A. Mackie, Jr. Preferred- 300 10.3%
P. O. Box 380 Series C
Irvington, NY 10533
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Name and Address Title of Number of Shares of Percentage of Class Percentage of
of Beneficial Owner Class(1) Common Stock(2) Outstanding (2)(16) Voting Power (2)(17)
- ------------------- --------- -------------- ------------------- --------------------
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Delbert & Pat Allen Class A 1,322,524 (15) 3.3% 2.6%
14128 Dawn Hill Road
Siloam Springs, AR 72761
- ------------------------------------------------------------------------------------------------------------------------------------
All officers and directors Class A 12,878,511 31.9%
as a group (ten persons) Class B 1,375,657 93.9% 42.2%
Preferred- 800 27.6%
Series B
- ------------------------------------------------------------------------------------------------------------------------------------
* Less than 1%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Class B Common Stock is substantially identical to the Class A Common
Stock, except that each share of Class B Common Stock has five votes per share
and each share of Class A Common Stock has one vote per share. Each share of
Class B Common Stock is convertible into one share of Class A Common Stock. Each
share of Preferred Stock is convertible into 833-1/3 shares of Class A Common
Stock. The Series B Preferred Stock (900 shares) has voting rights of 2,500
votes per share. No other Preferred Stock carries any voting rights.
(2) Beneficial ownership of shares determined in accordance with Rule 13d-
3(d)(1) of the Exchange Act and includes shares underlying outstanding warrants
and options which the named individual has the right to acquire within sixty
days of December 31, 1998.
(3) Includes 2,608,940 shares owned directly, 493,645 in trusts controlled by
Mrs. Brooks, 350,000 shares issuable upon exercise of stock options, 3,000
shares issuable upon exercise of Bonus Warrants, 325,000 shares issuable upon
exercise of Class C Warrants, 3,974,080 shares issuable upon exercise of Class F
and Class G Warrants issued in connection with a private placement of Class A
Common Stock in May of 1994 and 2,000,000 shares issuable upon exercise of Class
H Warrants.
(4) Includes 403,946 shares owned directly by Mrs. Brooks and 433,642 shares
owned by two corporations controlled by Mrs. Brooks. (Razorback Farms, Inc. is
the record owner of 312,320 shares and SMF is the record owner of 121,322
shares, representing approximately 21.3% and 8.3%, respectively, of the Class B
Common Stock). Excludes additional shares owned by adult children of Mrs.
Brooks, including Joe G. Brooks and J. Douglas Brooks, as to which she disclaims
a beneficial interest.
(5) Includes Series B Convertible Preferred Stock owned indirectly by Mrs.
Brooks. Razorback Farms, Inc. is the record owner of 165 shares. Brooks
Investment Company is the record owner of 235 shares.
(6) Includes 354,067 shares owned directly, 4,500 shares owned as custodian for
Joe G. Brooks' minor child, 38,205 shares owned as custodian for Brooks'
Children's Trust, 1,500 shares issuable upon exercise of Bonus Warrants owned as
custodian for Mr. Brook's minor child, 38,250 shares issuable upon exercise of
Bonus Warrants owned as custodian for Brook's Children's Trust, 1,875 shares
issuable upon exercise of Bonus Warrants owned directly and 300,000 shares
issuable upon exercise of stock options.
(7) Includes 370,932 shares owned directly, 33,021 shares owned indirectly,
7,620 shares issuable upon exercise
35
<PAGE>
of Bonus Warrants and 310,000 shares issuable upon exercise of stock options.
(8) Includes 13,000 shares owned directly, 2,000 shares owned by Mr. Burkett as
custodian for his minor child, 10,000 shares owned by a partnership controlled
by Mr. Burkett and 115,000 shares issuable upon exercise of stock options.
(9) Includes 3,000 shares owned directly and 325,000 shares issuable upon
exercise of stock options.
(10) Includes 370,116 shares owned directly and 275,000 shares issuable upon
exercise of stock options.
(11) Represents shares issuable upon exercise of stock options.
(12) Includes 50,000 shares issuable upon exercise of stock options and 29,715
shares issuable upon exercise of Class I Warrants.
(13) Includes 71,000 shares owned directly.
(14) Mr. Mackie is the beneficial and sole owner of 420,000 shares of Class A
Common Shares, 1,012,000 Class B Warrants of the Company and 50,000 other
warrants of the Company. R. A. Mackie & Co., L.P. is the beneficial and sole
owner of 156,136 Class B Warrants of the Company and 57,500 Warrants of the
Company. R. A. Mackie & Co., L.P. is also due an additional 252,100 Warrants
from the Company.
(15) Includes 777,214 shares owned directly, and 175,468 shares issuable upon
exercise of Class F Warrants and 175,468 shares issuable upon exercise of Class
G Warrants, and 194,374 shares issuable upon exercise of Bonus Warrants.
(16) Class A Common Stock beneficial ownership is calculated based on 40,342,397
shares outstanding as of December 31, 1998, which includes 18,345,062 shares
which any person has the right to acquire through the exercise of options and
warrants within 60 days of December 31, 1998. Class B Common Stock beneficial
ownership is calculated based on 1,465,530 shares outstanding on December 31,
1998. Preferred stock beneficial ownership is calculated based on 2,900 shares
outstanding on December 31, 1998.
(17) Calculated based on 51,586,713 shares outstanding on December 31, 1998,
which includes voting rights on all classes of stock, options and warrants which
can be acquired within 60 days of December 31, 1998.
At December 31, 1998, there were 22,245,639 shares of Class A Common Stock and
1,465,530 shares of Class B Common Stock issued and outstanding. The previous
table sets forth, the directors, officers and 5% shareholders, as a group
directly owned shares representing approximately 42.2% of the votes entitled to
be cast upon matters submitted to a vote of the Company's stockholders, and
Marjorie S. Brooks and corporations controlled by her owned shares representing
approximately 29.0% of the votes entitled to be cast and may be in a position to
control the Company.
36
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1998, the Company had an agreement with an affiliate whereby the Company
agreed to transfer certain of its trade receivables as collateral, which the
affiliate deemed acceptable, up to $900,000 at any one time. Upon acceptance of
a transfer of a receivable, the affiliate would remit to the Company 100% of the
receivable, as defined in the agreement, and the Company would remit to the
affiliate up to .88% as a factoring charge. The Company indemnified the
affiliate for any loss arising out of rejections or returns of any merchandise,
or any claims asserted by the Company's customers. During 1998, the Company
transferred an aggregate of approximately $12,863,000 in receivables under this
agreement, of which $695,447 remained to be collected as of December 31, 1998.
During 1997 and 1996, the Company transferred an aggregate of approximately
$9,090,000 and $7,317,000, respectively, in receivables under this agreement,
none of which remains to be collected. Costs of approximately $113,189, $73,718
and $61,555 associated with the factoring agreement are included in selling and
administrative costs at December 31, 1998, 1997 and 1996, respectively.
In March 1999, the Company's major shareholder increased the Company's factoring
line to $2 million. The new terms allow the factor to charge up to 2% per
invoice, and the Company must guarantee the receivables.
At December 31, 1998, accounts payable-related parties included the $695,447
discussed above and $149,203 relating to factoring charges and other
miscellaneous items owed to related parties.
37
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a1), (a2), and (d). The Financial Statements listed in the
accompanying Index to Financial Statements are filed as part of this report and
such Index is hereby incorporated by reference. All schedules for which
provision is made in the applicable accounting regulation on the Securities and
Exchange Commission are not required under the related instructions or are
inapplicable, and therefore have been omitted.
(a3) and (c). The exhibits listed in the accompanying Index to
Exhibits are filed or incorporated by reference as part of this report and such
Index is hereby incorporated by reference.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
38
<PAGE>
SIGNATURES
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized, in the City of Springdale, State
of Arkansas, on the 14th day of April, 1999.
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
<TABLE>
<S> <C>
BY: /s/ Joe G. Brooks /s/ David Sparks
- ---------------------------- --------------------------------------
JOE G. BROOKS, DAVID SPARKS,
Chairman Interim Corporate Controller
</TABLE>
Date: April 14, 1999 April 14, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Joe G. Brooks Chairman of the Board, Co-CEO April 14, 1999
- --------------------------- and Director
JOE G. BROOKS
/s/ Sal Miwa Vice-Chairman and Director April 14, 1999
- ---------------------------
SAL MIWA
/s/ Stephen W. Brooks Co-CEO and Director April 14, 1999
- ---------------------------
STEPHEN W. BROOKS
/s/ J. Grant Martin President April 14, 1999
- ---------------------------
J. GRANT MARTIN
/s/ Marjorie S. Brooks Secretary, Treasurer and Director April 14, 1999
- ---------------------------
MARJORIE S. BROOKS
</TABLE>
39
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Jerry B. Burkett Director April 14, 1999
- ---------------------------
JERRY B. BURKETT
/s/ James B. Culp Director April 14, 1999
JAMES B. CULP
- ---------------------------
/s/ Peter S. Lau Director April 14, 1999
- ---------------------------
PETER S. LAU
/s/ Michael M. Tull Director April 14, 1999
- ---------------------------
MICHAEL M. TULL
</TABLE>
40
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ---------- ----------------------
<S> <C>
3.1 Certificate of Incorporation, including Certificate of
Amendment filed on June 12, 1989(a), and Certificate of
Amendment filed on August 22, 1989.(b)
3.2 Certificate of Designation of Class B Common Stock.(a)
3.3 Bylaws of Registrant.(a)
4.1 Form of Class A Common Stock Certificate.(c)
4.2 Form of Class B Common Stock Certificate.(a)
4.3 Form of Warrant Agreement with American Stock Transfer
& Trust Company, including Class A and Class B Common
Stock Purchase Warrants.(a)
4.7 Form of Redeemable Class B Warrant Certificate.(c)
4.8 Form of Class C Warrant Certificate.(h)
4.9 Form of Class D Warrant Certificate.(h)
4.10 Form of Class E Warrant Certificate.(h)
4.11 Form of Class F Warrant Certificate.(i)
4.12 Form of Class G Warrant Certificate.(i)
4.13 Form of Class H Warrant Certificate.(j)
4.14 Form of Class I Warrant Certificate.(k)
4.15 Form of Class J Warrant Certificate.(l)
4.16 Form of Class K Warrant Certificate.(m)
10.1.1 Private Placement Agreement (o)
10.1.2 Consulting Agreement (o)
10.1.3 Note Purchase Agreement (o)
10.1.4 Form of Note (o)
10.1.5 Form of Private Placement Warrants (o)
10.1.6 Form of Consulting Warrants (o)
10.9 Form of Right of Refusal Agreement among Class B
Common Stockholders.(a)
10.10 1989 Stock Option plan.(a)
10.11 Form of Escrow Agreement with American Stock Transfer &
Trust Company.(c)
10.15 Lease Agreement dated June 1, 1990 between the Registrant
and J's Feed, Inc. for the Registrant's plastics reclamation
facility.(e)
10.16 Loan Agreement dated June 13, 1991 with Dow Credit
Corporation.(f)
10.16 Loan Agreement dated October 22, 1991 with Dow Credit
Corporation.(f)
10.16 Loan Agreement with City of Rogers, arranged through
</TABLE>
41
<PAGE>
<TABLE>
<S> <C>
Arkansas Industrial Development Commission.(f)
10.17 Lease Agreement dated June 15, 1992 between the Registrant and
George's, Inc. for the Registrant's corporate office facility.(g)
10.18 Factoring Agreement dated April 30, 1993 between the Registrant and
Brooks Investment Company.(h)
10.23 Private Placement Distribution Agreement dated September 23, 1993
between the Registrant and Berkshire International Finance,
Inc.(h)
10.26 Lease Agreement dated June 16, 1994 between Registrant and Marjorie S.
Brooks.(i)
10.27 Line of Credit Promissory Note payable to Jim G. Brooks and Marjorie S.
Brooks.(i)
10.28 Amended and Restated Stock Option Plan.(i)
10.29 Non-Employee Director Stock Option Plan.(i)
10.30 Chairman Stock Option Plan.(i)
10.31 Factoring Agreement dated April 30, 1994 between the Registrant and
Brooks Investment Company.(i)
10.32 Lease agreement dated July 29, 1997 between Registrant an Dwain A.
Newman, et ux., and National Home Center, Inc.(n)
10.33** Securities Purchase Agreement
10.34** Certificate of Designation of Series A Preferred Convertible Stock
10.35** Certificate of Designation of Series B Preferred Convertible Stock
10.36** Certificate of Designation of Series C Preferred Convertible Stock
10.37** Form of Series X Warrants
10.38** Form of Series Y Warrants
10.39** Registration Rights Agreement
10.40** Placement Agency Agreement
27.1** Financial data schedule
</TABLE>
_____________
* The Registrant has no exhibits corresponding to Exhibits 1, 2, 5, 6, 7,
8, 9, 11, through 23, or 26 through 29.
** Filed herewith.
(a) Contained in Exhibits to Registration Statement on Form S-1, No. 33-29595,
filed June 28, 1989.
(b) Contained in Exhibits to Amendment No. 1 to Registration Statement on Form
S-1, No. 33-29595, filed August 24,1989.
(c) Contained in Exhibits to Amendment No. 2 to Registration Statement on Form
S-1, No. 33-29595, filed November 8, 1989.
(d) Filed with Form 10-K for December 31, 1989.
(e) Filed with Form 10-K for December 31, 1990.
(f) Contained in Exhibits to Post Effective Amendment No. 1 to Registration
Statement on Form S-1, No. 33-29593, filed December 24, 1991.
(g) Filed with Form 10-K for December 31, 1992.
(h) Filed with Form 10-K for December 31, 1992.
(i) Filed with Form 10-K for December 31, 1994.
42
<PAGE>
(j) Filed with Form 10-K for December 31, 1996.
(k) Filed with Form 10-K for December 31, 1996.
(l) Filed with Form 10-K for December 31, 1996.
(m) Filed with Form 10-K for December 31, 1996.
(n) Filed with Form 10-K for December 31, 1997.
(o) Contained in Exhibits to Registration Statement on Form S-3, No. 333-42555
filed December 18, 1997.
43
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2), (c) AND (d)
LIST OF FINANCIAL STATEMENTS
CERTAIN EXHIBITS
YEAR ENDED DECEMBER 31, 1998
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
SPRINGDALE, ARKANSAS
44
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Page
Financial Statements: ----
Report of Independent Public Accountants F-2
Balance Sheets F-3 - F-4
Statements of Operations F-5
Statements of Stockholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8 - F-30
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Advanced Environmental Recycling Technologies, Inc.:
We have audited the accompanying balance sheets of Advanced Environmental
Recycling Technologies, Inc. (a Delaware corporation), as of December 31, 1998
and 1997, and the related statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Advanced Environmental
Recycling Technologies, Inc., as of December 31, 1998 and 1997, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As reflected in the accompanying
financial statements, the Company has incurred net losses since inception, has a
working capital deficit at December 31, 1998, and is subject to certain claims
in litigation as discussed in Note 12. These factors, among others, as
discussed in Note 2, raise substantial doubt concerning the ability of the
Company to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas
March 19, 1999
F-2
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
December 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 614,494 $ 45,428
Trade receivables, net of allowance of $20,000 in 1998 712,894 540,739
Note receivable - 81,571
Inventories 846,571 735,697
Prepaid expenses and other 89,266 181,474
----------- ---------
Total current assets 2,263,225 1,584,909
---------- ---------
Buildings and equipment:
Buildings and leasehold improvements 1,041,035 692,781
Machinery and equipment 10,937,425 6,209,614
Transportation equipment 108,355 98,242
Office equipment 159,295 156,064
Construction in progress 1,502,520 2,586,483
----------- ---------
13,748,630 9,743,184
Less accumulated depreciation
and amortization 5,452,638 4,093,031
----------- ---------
Net buildings and equipment 8,295,992 5,650,153
Other assets, at cost less
accumulated amortization of $271,570 (1998)
and $242,999 (1997) 382,710 406,266
-----------
Total assets $10,941,927 $ 7,641,328
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Current liabilities:
Accounts payable - trade $ 2,606,034 $ 1,571,598
Accounts payable - related parties 895,170 1,136,272
Current maturities of long-term debt:
Related parties 648,425 386,456
Other 199,873 108,454
Current maturities of capital lease obligations 19,263 -
Accrued liabilities 435,070 310,681
Notes payable, net of debt discount of $45,255
(1998) and $136,111 (1997) 2,085,325 1,189,097
------------ ------------
Total current liabilities 6,889,160 4,702,588
------------ ------------
Long-term debt, less current maturities:
Related parties 97,707 465,656
Other 52,747 122,756
------------ ------------
Total long-term debt 150,454 588,412
-------------- --------------
Capital lease obligation 76,922 -
-------------- --------------
Accrued dividends payable on convertible
preferred stock 47,890 -
-------------- --------------
Commitments and contingencies (Notes 12 and 13)
Stockholders' equity:
Convertible preferred stock, $1 par value;
5,000,000 shares authorized; 2,900 (1998) shares issued
and outstanding 2,900 -
Class A common stock, $.01 par value;
50,000,000 shares authorized; 22,245,639 (1998)
and 20,312,969 (1997) issued and outstanding 222,456 203,130
Class B convertible common stock, $.01 par value;
7,500,000 shares authorized; 1,465,530 issued and
outstanding 14,655 14,655
Additional paid-in capital 26,984,318 21,926,331
Accumulated deficit (23,446,828) (19,793,758)
-------------- --------------
Total stockholders' equity 3,777,501 2,350,358
-------------- --------------
Total liabilities and stockholders' equity $ 10,941,927 $ 7,641,328
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales $12,408,591 $ 7,982,381 $ 6,950,219
Cost of goods sold 11,688,448 7,639,708 7,822,154
----------- ----------- -------------
Gross margin 720,143 342,673 (871,935)
Loss on disposal of assets - - 178,061
Selling and administrative costs 3,220,233 2,090,049 1,687,697
----------- ----------- -------------
Operating loss (2,500,090) (1,747,376) (2,737,693)
Interest expense, net (1,105,090) (166,288) (196,005)
----------- ----------- -------------
Loss before extraordinary gain (3,605,180) (1,913,664) (2,933,698)
Extraordinary gain - 757,644 36,666
----------- ----------- -------------
Loss before dividends on
redeemable convertible preferred stock (3,605,180) (1,156,020) (2,897,032)
Accrued dividends on preferred stock (47,890) - -
----------- ----------- -------------
Net loss applicable to common stock $(3,653,070) $(1,156,020) $(2,897,032)
============ ============ ============
Loss per share of common stock
before extraordinary gain ($.16) ($.09) ($.15)
Extraordinary gain per share of common
stock - $.04 -
----------- ----------- -------------
Net loss per share of
common stock (Basic and Diluted) ($.16) ($.05) ($.15)
============ ============ ============
Weighted average number of common
shares outstanding 22,895,517 21,800,170 19,134,484
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
Preferred Stock Class A Common Stock Class B Common Stock
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1995 - $ - 15,692,866 $ 156,929 1,465,530 $ 14,655
Exercise of Class F Warrants - - 500,000 5,000 - -
Net Proceeds from Issuance of
Class A Common Stock - - 2,996,282 29,963 - -
Exercise of Stock Options - - 12,000 120 - -
Net loss for the year ended
December 31, 1996 - - - - - -
---------- ----------- ----------- ---------- ---------- ----------
Balance - December 31, 1996 - $ - 19,201,148 $ 192,012 1,465,530 $ 14,655
Net Proceeds from issuance of Class A
Common Stock - - 1,111,821 11,118 - -
Issuance of Detachable Stock Warrants - - - - - -
Net loss for the year ended
December 31, 1997 - - - - - -
---------- ----------- ----------- ---------- ---------- ----------
Balance - December 31, 1997 - $ - 20,312,969 $ 203,130 1,465,530 $ 14,655
---------- ----------- ----------- ---------- ---------- ----------
Issuance of shares for payment
of interest on bridge financings - - 260,708 2,607 - -
Exercise of stock options - - 493,333 4,933 - -
Exercise of Class B Warrants - - 779,670 7,797 - -
Exercise of Class C Warrants - - 275,000 2,750 - -
Exercise of Consultant Warrants - - 60,000 600 - -
Cashless exercise of Placement Warrants - - 40,434 404 - -
Issuance of Class A Common Stock to Vendor - - 23,525 235 - -
Issuance of extension warrants relating to
extension of first bridge financing - - - - - -
Debt discount on consulting
and placement warrants - - - - - -
Net proceeds from issuance of preferred stock 2,900 2,900 - - - -
Net loss for year ended December 31, 1998 - - - - - -
---------- ----------- ----------- ---------- ---------- ----------
Balance - December 31, 1998 2,900 $ 2,900 22,245,839 $ 222,456 1,465,530 $ 14,655
<CAPTION>
Additional
Paid-in Accumulated
Capital Deficit Total
------- ------- -----
<S> <C> <C> <C>
Balance - December 31, 1995 $ 19,282,865 $ (15,740,706) $ 3,713,743
Exercise of Class F Warrants 300,000 - 305,000
Net Proceeds from Issuance of
Class A Common Stock 1,942,785 - 1,972,748
Exercise of Stock Options 7,800 - 7,920
Net loss for the year ended
December 31, 1996 - (2,897,032) (2,897,032)
------------ ------------- -----------
Balance - December 31, 1996 $ 21,533,450 $ (18,637,738) $ 3,102,379
Net Proceeds from issuance of Class A
Common Stock 217,881 - 228,999
Issuance of Detachable Stock Warrants 175,000 - 175,000
Net loss for the year ended
December 31, 1997 - (1,156,020) (1,156,020)
------------ ------------- -----------
Balance - December 31, 1997 $ 21,926,331 $ (19,793,758) $ 2,350,358
------------ ------------- -----------
Issuance of shares for payment
of interest on bridge financings 282,803 - 285,410
Exercise of stock options 148,267 - 153,200
Exercise of Class B Warrants 926,233 - 934,030
Exercise of Class C Warrants 327,250 - 330,000
Exercise of Consultant Warrants 21,800 - 22,500
Cashless exercise of Placement Warrants (404) - -
Issuance of Class A Common Stock to Vendor 10,798 - 11,033
Issuance of extension warrants relating to
extension of first bridge financing 19,685 - 19,685
Debt discount on consulting
and placement warrants 618,355 - 619,355
Net proceeds from issuance of preferred stock 2,702,100 - 2,705,000
Net loss for year ended December 31, 1998 - (3,653,070) $(3,653,070)
------------ ------------- -----------
Balance - December 31, 1998 $ 26,984,318 $ (23,446,828) $ 3,777,501
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS Year ended Year ended Year ended
December 31, December 31, December 31,
1998 1997 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss applicable to common stock $(3,653,070) $(1,156,020) $(2,897,032)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,412,692 1,088,577 1,212,323
Amortization of other assets 412,505 65,319 24,740
Amortization of debt discount 675,153 38,889 -
Interest paid through issuance of common stock 285,410 - -
Extraordinary gain - (757,644) (36,666)
Loss on disposition of equipment 1,964 - 178,061
Increase in other assets (5,015) (125,098) (42,749)
Changes in current assets and current liabilities 1,031,717 379,429 400,246
--------- --------- ---------
Net cash provided by (used in) operating activities 161,356 (466,548) (1,161,077)
--------- --------- ---------
Cash flows from investing activities:
Additions to buildings and equipment (3,674,969) (2,134,067) (1,073,409)
Proceeds from sale of equipment 4,722 - -
Insurance recoveries, net of fire related expenses - 1,757,644 379,080
--------- --------- ---------
Net cash used in investing activities (3,670,247) (376,423) (649,329)
--------- --------- ---------
Cash flows from financing activities:
Prepaid stock subscriptions - - 85,000
Proceeds from issuance of notes 1,380,842 1,304,229 369,155
Payments on notes (364,020) (727,585) (732,011)
Payments on capital lease obligation (20,730) - -
Proceeds from issuance of common stock - 228,999 1,887,748
Proceeds from issuance of preferred stock 1,155,000 - -
Proceeds from exercise of stock options and
warrants, net 1,878,975 - 312,920
Dividends accrued on redeemable convertible
preferred stock 47,890 - -
--------- --------- ---------
Net cash provided by financing activities 4,077,957 805,643 1,922,812
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 569,066 (37,328) 67,406
Cash and cash equivalents:
Beginning of period 45,428 82,756 15,350
---------- ---------- ----------
End of period $ 614,494 $ 45,428 $ 82,756
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F -7
<PAGE>
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1: Description of the Company
- ----------------------------------
Advanced Environmental Recycling Technologies, Inc. (the Company or AERT)
manufacturers a line of composite building material from reclaimed plastic and
wood fiber waste for certain specialized applications in the construction
industry. The Company markets this material as a substitute for wood and
plastic filler materials for standard door frames, windowsills, flooring and
decking. The Company is comprised of two manufacturing facilities located in
Junction, Texas and Springdale, Arkansas. The Company's customers primarily
consist of a number of regional and national door and window manufacturers,
industrial-flooring companies and Weyerhaeuser, the Company's primary decking
customer.
Note 2: Future Operations
- -------------------------
The financial statements of the Company have been prepared on the basis of
accounting principles applicable to a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. At December 31, 1998, the Company had a working capital deficit of
$4,625,935 and had incurred net losses of $3,653,070, $1,156,020 and $2,897,032
for the years ended December 31, 1998, 1997 and 1996, respectively. The Company
has incurred operating losses in each year since its inception and has never
operated at successful manufacturing levels over an extended period. Such
losses have primarily been caused by problems in maintaining significant
production volumes of products and in producing products at economically
feasible operating cost levels. There is no assurance that the Company will be
able to improve its manufacturing process and operating costs to the extent
necessary to reach successful operating levels. Further, the Company has
limited additional financial resources available to support its operations and
in the past few years has, in large part, been supported by certain major
shareholders in conjunction with several accredited investors. There is no
commitment for such shareholders or accredited investors to continue such
support. As discussed in the following paragraphs, the Company will require
additional financial resources in order to complete its production plan and fund
maturities of debt and other obligations as they become due. There is no
assurance the Company will be successful in obtaining such necessary financial
resources. The Company also has claims in litigation outstanding against it as
described in Note 12, the outcome of which is uncertain. If the litigated
claims discussed in Note 12 were to be assessed against the Company, the Company
would likely be unable to pay such claims. These factors, among others, raise
substantial doubt concerning the ability of the Company to continue as a going
concern. The financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be unable
to continue as a going concern. The ability of the Company to continue as a
going concern is dependent upon the ongoing support of its stockholders,
investors, customers and creditors and its ability to successfully mass produce
and market its products at economically feasible levels.
The Company is currently implementing a production plan, which Management
believes will provide for better operating efficiencies and correct the
production problems encountered in the past. The plan includes increasing
production capacity, further automating the production process and better
utilizing regrindable scrap. However,
F-8
<PAGE>
completion of the production plan will require additional debt or equity
financing beyond those resources currently available to the Company. Also,
additional financial resources will be necessary to fund maturities of debt and
other obligations as they come due in 1999. There is no assurance the Company
will be able to correct prior production problems and improve operating
efficiencies or that the Company will be successful in securing sufficient
capital resources to complete its production plan, fund maturities of debt and
other obligations as they become due in 1999 or to support the Company until
such time, if ever, that the Company is able to generate income from operations.
The Company is currently pursuing an $18,000,000 financing package through the
City of Springdale, Arkansas, in conjunction with the Arkansas Development
Finance Authority for acquisition and further expansion of the Arkansas
facility. Bond proceeds of $10.4 million must be used to expand output
capacity. The expansion will involve the Company acquiring approximately ten
acres adjacent to the existing Springdale facility, construction of a three
building campus and installation of additional manufacturing lines and other
equipment. Bond proceeds of $1,750,000 must also be used to acquire the
existing Springdale plant, which is currently leased. Bond proceeds must also be
used to refinance $2,000,000 of bridge financing. The remaining proceeds would
be used for a debt service reserve fund, one year of construction period
interest and financing costs. The Company is working to finalize and close this
bond-financing package during the first half of 1999. The Company is also
exploring additional financial sources including conventional long-term debt to
repay the remaining bridge loans within the next six months. There is no
assurance that the Company will be successful in its efforts to obtain the bond
financing described above.
F-9
<PAGE>
Note 3: Significant Accounting Policies
- ---------------------------------------
Statements of Cash Flows
------------------------
In order to determine net cash provided by (used in) operating activities, net
loss has been adjusted by, among other things, changes in current assets and
current liabilities, excluding changes in cash and cash equivalents, current
maturities of long-term debt, capital lease obligations and current notes
payable. Those changes, shown as an (increase) decrease in current assets and
an increase (decrease) in current liabilities, are as follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Trade receivables $ (172,155) $ (529,802) $ 39,186
Note receivable 81,571 (81,571) -
Inventories (110,874) (142,372) (2,114)
Prepaid expenses and other (95,581) 15,114 69,860
Accounts payable -
Trade and related parties 1,204,367 1,014,444 253,028
Accrued liabilities 124,389 103,616 40,286
---------- ----------- ---------
$1,031,717 $ 379,429 $ 400,246
========== =========== =========
Cash paid for interest $ 52,395 $ 141,320 $ 168,322
Cash paid for income taxes - - -
</TABLE>
The Company considers all highly liquid investments, with a maturity of three
months or less when purchased, to be cash equivalents.
F-10
<PAGE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Note payable for financing of insurance policies $ 104,027 $ 109,207 $ 48,713
Notes payable for equipment 280,248 - -
Capital lease obligation for equipment 110,000 - -
Class A Common Stock issued in payment of
accounts payable 11,033 - -
Series B Preferred Stock issued in payment of
accounts payable - related parties 400,000 - -
Series B Preferred Stock issued in payment of
notes payable 100,000 - -
Series A Preferred Stock issued in payment of
notes payable 1,050,000 - -
Non-cash payment for financing costs 19,685 - -
Insurance proceeds due for fire losses of
buildings and equipment - - 1,001,660
Additions to buildings and equipment paid
directly
by insurance company - - 83,842
</TABLE>
Buildings and Equipment
- -----------------------
Buildings and equipment contributed to the Company in exchange for Class B
Common Stock are carried at the contributor's historical book value. Property
additions and betterments include capitalized interest and acquisition,
construction and administrative costs allocable to construction projects and
property purchases. Gains or losses on sales or other dispositions of property
are credited or charged to income.
Provision for depreciation of buildings and equipment is provided on a straight-
line basis for buildings, leasehold improvements, transportation equipment and
office equipment over the lesser of the estimated useful life of the asset or
the term of the lease. Estimated useful lives are: buildings - 5 to 19 years,
leasehold improvements - 6 years, transportation equipment - 3 to 5 years,
office equipment - 5 years and machinery and equipment - 3 to 8 years.
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". SFAS No. 121 requires an assessment of the
recoverability of the Company's investment in long-lived assets to be held and
used in operations whenever events or circumstances indicate that their carrying
amounts may not be recoverable. Such assessment requires that the future cash
flows associated with the long-lived assets be estimated over their remaining
useful lives and an impairment loss recognized when the future cash flows are
less than the carrying value of such assets.
The Company has assessed the recoverability of its investment in long-lived
assets to be held and used in operations under the guidelines set forth in SFAS
No. 121 and has determined that no impairment loss was
F-11
<PAGE>
required as of December 31, 1998. Such assessment required the Company to make
certain estimates of future production volumes, costs, future sales volumes, and
prices, which are expected to occur over the remaining useful lives of its long-
lived assets. Such long-lived assets primarily consist of the Company's
Springdale and Junction manufacturing facilities. The Company's estimates of
these factors are based upon Management's belief that future production volumes
will significantly increase over previous historical production levels achieved
by the Company's manufacturing facilities and that future production costs per
unit will also significantly decrease below previous historical cost levels.
Although the Company believes it has a reasonable basis for its estimates of
future production volumes and costs and future sales volumes and prices, it is
reasonably possible that the Company's actual performance could materially
differ from such estimates. Management expects that the Company's performance
subsequent to the completion of its production plan will provide additional
evidence to confirm or disprove such future estimates. Management also believes
that if such estimates are not confirmed, revisions to such estimates could
result in a material impairment loss on its long-lived assets constituting all
or a material portion of the carrying value of the Company's Springdale and
Junction manufacturing facilities, which was $8,295,992 at December 31, 1998.
Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Raw materials $ 486,068 $ 257,114
Work in process 263,573 319,034
Finished goods 96,930 159,549
-------- --------
$ 846,571 $ 735,697
========= =========
</TABLE>
Other Assets
------------
Other assets consist primarily of the costs for the preparation of patent
applications of $323,387, net, at December 31, 1998, which are amortized using
the straight-line method over 17 years.
Prepaid Expenses and Other
--------------------------
Prepaid expenses and other expenses consist primarily of prepaid insurance and
loan acquisition costs at December 31, 1998. The loan acquisition costs are
being amortized using the straight-line method over 9 months.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires
F-12
<PAGE>
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
SFAS No. 125
------------
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. This statement provides accounting and
reporting standards for, among other things, the transfer and servicing of
financial assets, such as transfers of receivables with recourse, and provides
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The Company presently transfers, with
recourse, receivables to a related party. Based on the requirements of SFAS No.
125, the receivables transferred to the related party with recourse are
accounted for as a secured borrowing because the Company is not considered to
have surrendered control over the transferred assets. Accounts receivable and
accounts payable-related parties at December 31, 1998 and 1997 were increased by
$695,447 and $533,796, respectively, to reflect these requirements (See Note 4).
SFAS No. 128
------------
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" (EPS). SFAS
No. 128 replaces the presentation of Primary EPS with Basic EPS and requires
dual presentation of Basic and Diluted EPS on the face of the statements of
operations and requires a reconciliation of the numerator and denominator of the
Basic EPS computation to the numerator and denominator of the Diluted EPS
computation. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company. Diluted EPS is computed
similarly to Fully Diluted EPS pursuant to Accounting Principles Board Opinion
No. 15, "Earnings Per Share". SFAS No. 128 requires restatement of all prior-
period EPS data presented. Implementation of SFAS No. 128 had no effect on
prior-period EPS data presented.
In computing Diluted EPS, only potential common shares that are dilutive--those
that reduce earnings per share or increase loss per share--are included.
Exercise of options and warrants or conversion of convertible securities is not
assumed if the result would be antidilutive, such as when a loss from continuing
operations is reported. The "control number" for determining whether including
potential common shares in the Diluted EPS computation would be antidilutive is
income from continuing operations. As a result, if there is a loss from
continuing operations, Diluted EPS would be computed in the same manner as Basic
EPS is computed, even if an entity has net income after adjusting for
discontinued operations, an extraordinary item or the cumulative effect of an
accounting change. The Company has incurred losses from continuing operations
and net losses for the years ended December 31, 1998, 1997 and 1996. Therefore,
Basic EPS and Diluted EPS are computed in the same manner. Although such
financial instruments were not included due to being antidilutive, the Company
does have potentially dilutive financial instruments in the form of warrants and
options (See Notes 6 and 8).
F-13
<PAGE>
Concentrations of Credit Risk
-----------------------------
The Company's revenues are derived principally from a number of regional and
national door and window manufacturers, industrial-flooring companies and
Weyerhaeuser, the Company's primary decking customer. The Company extends
unsecured credit to its customers. This industry concentration has the
potential to impact the Company's exposure to credit risk because changes in
economic or other conditions in the construction industry may similarly affect
the customers.
Disclosure About Fair Value of Financial Instruments
----------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument held by the Company:
Current assets and current liabilities: The carrying value approximates fair
value due to the short maturity of those items.
Long-term debt: The fair value of the Company's long-term debt has been
estimated by the Company based upon each obligation's characteristics, including
remaining maturities, interest rate, credit rating, collateral and amortization
schedule. The carrying amount approximates fair value.
Note 4: Related Party Transactions
- ----------------------------------
During 1998, the Company had an agreement with an affiliate whereby the Company
agreed to transfer certain of its trade receivables as collateral, which the
affiliate deemed acceptable, up to $900,000 at any one time. Upon acceptance of
a transfer of a receivable, the affiliate would remit to the Company 100% of the
receivable, as defined in the agreement, and the Company would remit to the
affiliate .88% as a factoring charge. The Company indemnified the affiliate for
any loss arising out of rejections or returns of any merchandise, or any claims
asserted by the Company's customers. During 1998, the Company transferred an
aggregate of approximately $12,863,000 in receivables under this agreement, of
which $695,447 remained to be collected as of December 31, 1998. During 1997 and
1996, the Company transferred an aggregate of approximately $9,090,000 and
$7,317,000, respectively, in receivables under this agreement, none of which
remains to be collected. Costs of approximately $113,189, $73,718 and $61,555
associated with the factoring agreement are included in selling and
administrative costs at December 31, 1998, 1997 and 1996, respectively.
In March 1999, the Company's major shareholder increased the Company's factoring
line to $2 million. The new terms allow the factor to charge up to 2% per
invoice and the Company must guarantee the receivables.
At December 31, 1998, accounts payable-related parties included the $695,447
discussed above and $149,203 relating to factoring charges and other
miscellaneous items owed to related parties
F-14
<PAGE>
Note 5: Notes Payable and Long-Term Debt
- ----------------------------------------
Notes payable and long-term debt as of December 31, 1998 and December 31, 1997,
consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
9.5% notes payable, due in monthly installments of $15,755, secured by
certain manufacturing equipment. $ 216,959 $ -
10.75% note payable, due in monthly installments of $15,354, secured by
certain manufacturing equipment, inventories and receivables. - 30,286
12% notes payable (the bridge financing), net of debt discount of $0 (1998)
and $136,111 (1997), interest payable quarterly in shares of the Company's
Class A common stock or cash, principal due in cash on June 1, 1999. The
effective interest rate on the debt is 33.0% (1). 250,000 1,163,889
12% notes payable (the bridge financing), interest payable quarterly in
shares of the Company's Class A Common Stock or cash, principal due in cash
on June 1, 1999. The effective interest rate on the debt is 61.8% (1). 800,000 -
12% notes payable (the bridge financing), interest payable quarterly in
shares of the Company's Class A Common Stock or cash, principal due in cash
on June 1, 1999. The effective interest rate on the debt is 188.9% (1). 410,000 -
12% notes payable (the bridge financing), net of debt discount of $20,255,
interest payable quarterly in shares of the Company's Class A Common Stock -
or cash, principal due in cash on June 1, 1999. The effective interest
rate on the debt is 57.8% (1). 339,438 -
12% notes payable (the bridge financing), net of debt discount of $25,000,
interest payable quarterly in shares of the Company's Class A Common Stock -
or cash, principal due in cash on June 1, 1999. The effective interest
rate on the debt is 37.1% (1). 262,500 -
</TABLE>
F-15
<PAGE>
<TABLE>
<S> <C> <C>
8% note payable, due in monthly installments of principal and interest of
$5,247, secured by unescrowed shares of Class B Common Stock owned by
certain officers of the Company and certain manufacturing equipment. 15,532 74,656
9.75% note payable to Marjorie S. Brooks (a related party), due in monthly
installments of principal and interest of $33,100, secured by substantially
all of the assets of the Company. 746,132 852,119
12% note payable converted to redeemable convertible preferred
stock during 1998. - 100,000
Other
43,516 51,469
--------- -----------
Total 3,084,077 2,272,419
Less current notes payable, net of debt discount (2,085,325) (1,189,097)
Less current maturities (848,298) (494,910)
----------- ------------
Long-term debt, net of current maturities $ 150,454 $ 588,412
=========== ===========
</TABLE>
The aggregate maturities of notes payable and long-term debt, net of debt
discount, as of December 31, 1998 are as follows:
1999 $2,933,623
2000 144,531
2001 4,686
2002 1,237
----------
$3,084,077
==========
(1) The Company has five bridge financing agreements. The date of the first
agreement was October 30, 1997. The Company issued notes payable totaling $1.3
million, originally due and payable on July 27, 1998, unless extended, at the
option of the Company, to October 30, 1998. Interest on the notes is payable
every three months at 12% with the Company's Class A Common Stock. In
connection with the notes, the Company issued 2,600,000 consulting warrants and
156,000 placement warrants and paid loan origination costs of $169,000 to the
placement agent. The warrants expire October 30, 2002, and are exercisable at a
price of $0.375 per share of Class A Common Stock for each warrant exercised.
Per the agreement, if the notes were extended, an additional 650,000 consulting
warrants and 78,000 placement warrants would be issued. As of July 31, 1998, the
note holders extended the notes for 60 days without additional penalty warrants
in exchange for voluntary selling restrictions of the Company's stock by the
Company's officers and certain shareholders over the next 18 months, without
prior approval from the issuer of the note. As of November 5, 1998, the note
holders extended the notes through March 31, 1999, without penalty warrants
other than for 310,000 of the warrants to be issued to one of
F-16
<PAGE>
the note holders. Also, during 1998, $1,050,000 of these bridge financing notes
were converted to preferred stock (See Note 6). As of March 31, 1999, the
noteholders extended the notes through June 1, 1999, without additional penalty
warrants.
The second bridge financing was completed on February 5, 1998. The Company
issued notes payable totaling $800,000, originally due and payable on November
2, 1998, unless extended, at the option of the Company, to January 31, 1999.
Interest on the notes is payable every three months at 12% in either cash or the
Company's Class A Common Stock, at the option of the Company. In connection
with the notes, the Company issued 1,600,000 consulting warrants and 96,000
placement warrants and paid loan origination costs of $104,000 to the placement
agent. The warrants expire February 5, 2003, and are exercisable at a price of
$0.375 per share of Class A Common Stock for each warrant exercised. As of
November 5, 1998, the note holders extended the notes through March 31, 1999,
without additional penalty warrants. As of March 31, 1999, the noteholders
extended the notes through June 1, 1999, without additional penalty warrants.
A third bridge financing was completed on April 7, 1998. The Company issued
notes payable totaling $410,000, originally due and payable on January 2, 1999,
unless extended, at the option of the Company, to April 2, 1999. Interest on
the notes is payable every three months at 12% in either cash or the Company's
Class A Common Stock, at the option of the Company. In connection with the
notes, the Company issued 820,000 consulting warrants and 49,200 placement
warrants and paid loan origination costs of $53,300 to the placement agent. If
the notes are extended, additional 205,000 consulting warrants and 24,600
placement warrants will be issued. The warrants expire April 7, 2003, and are
exercisable at a price of $0.375 per share of Class A Common Stock for each
warrant exercised. As of March 31, 1999, the noteholders extended the notes
through June 1, 1999, without additional penalty warrants.
A fourth bridge financing was completed on June 3, 1998. The Company issued
notes payable totaling $359,963, due and payable on February 28, 1999, unless
extended, at the option of the Company, to May 29, 1999. Interest on the notes
is payable every three months at 12% in either cash or the Company's Class A
Common Stock, at the option of the Company. In connection with the notes, the
Company issued 719,926 consulting warrants and 43,195 placement warrants and
paid loan origination costs of $46,795 to the placement agent. If the notes are
extended, an additional 179,981 consulting warrants and 21,597 placement
warrants will be issued. The warrants expire June 3, 2003, and are exercisable
at a price of $0.375 per share of Class A Common Stock for each warrant
exercised. As of March 31, 1999, the noteholders extended the notes through June
1, 1999, without additional penalty warrants.
A fifth bridge financing was completed on August 21, 1998. The Company issued
notes payable totaling $287,500, due and payable on May 18, 1999, unless the
notes are extended, at the option of the Company, to August 16, 1999. Interest
on the notes is payable every three months at 12% in either cash or the
Company's Class A Common Stock, at the option of the Company. In connection
with the notes, the Company issued 575,000 consulting warrants and 34,500
placement warrants and paid loan origination costs of $37,375 to the placement
agent. If the notes are extended, an additional 143,750 consulting warrants and
17,250 placement warrants will be issued. The warrants expire August 21, 2003,
and are exercisable at a price of $0.375 per share of Class A Common Stock for
each warrant exercised.
F-17
<PAGE>
Delisting of the Company's stock results in an event of default under the bridge
financing agreements. An event of default results in all the then outstanding
principal amounts and unpaid interest becoming due and payable immediately.
In regard to the warrant shares issued under the bridge financing agreements, if
the resale of the warrant shares by the holders is not then registered pursuant
to an effective registration statement under the Securities Act, the warrant
holders may effect a cashless exercise at any time after the first anniversary
of the respective dates of the note agreements until the end of the respective
exercise periods. In the event of a cashless exercise, in lieu of paying the
exercise price in cash, the warrant holder shall surrender his warrant to the
Company for a certain number of shares of Class A Common Stock, based on the
market value of the stock at the time of exercise.
Under a placement agency agreement entered into concurrently with the October
30, 1997 bridge financing agreement, the placement agent has a two year option
to "put" up to an additional $342,537 aggregate principal amount of notes to the
Company. If the additional notes are issued, then the Company will issue
685,074 consulting warrants and 41,104 placement warrants in connection with the
notes. If the notes are extended, an additional 171,268 consulting warrants and
20,552 placement warrants will be issued. Both the additional notes and related
consulting and placement warrants will have terms and provisions similar to
those of previous bridge financings.
Note 6: Stockholders' Equity
- ----------------------------
During 1998, the Company issued a series of voting and non-voting convertible
preferred stock, which raised an additional $2.9 million in equity. The Company
issued 1,500 Series A shares, 900 Series B shares and 500 Series C shares at a
price of $1,000 per share. Such stock was purchased by the major stockholder, a
5% holder and accredited institutional investors. The preferred stock bears
interest at 10% per year. On the 7th anniversary date of the issuance of
preferred stock, the preferred stock will automatically be converted into shares
of common stock with the conversion price equal to the lower of the average of
the closing bid prices for the common stock for the 5 trading days immediately
preceding the 7th anniversary of the issuance or the fixed conversion price. The
fixed conversion price is $1.20. The Company must meet certain milestones which
include: (1) minimum sales of $4.5 million for first quarter 1999 and sales of
$6 million per quarter thereafter and (2) quarterly cash flow from operations
must be positive for each quarter beginning with the fourth quarter of 1998 and
for each quarter thereafter. If a milestone failure occurs, the conversion price
is the lower of the fixed conversion price or the variable conversion price. The
variable conversion price is the average of the closing bid prices for the
common stock during the 10 consecutive trading days ending on the trading date
immediately preceding the date of determination. The Company, at its option and
2 years from the issuance date, can redeem the stock prior to conversion at a
premium of 150 percent. The stock was issued with a series of X and Y warrants,
which can be exercised at $1.20 and $2.50 per share, respectively. The X
warrants cannot be exercised for a minimum of 12 months and the exercisable
amount increases between one year after issuance and 485 days after issuance. In
connection with the 2,900 preferred shares, the Company issued 2,900 X warrants
and 2,900 Y warrants. Each of the Series X Warrants entitles the holder the
right to acquire 555 shares (for X Warrants issued with Series A shares) and
833.33 shares (for X Warrants issued with Series B and C shares) of the
F-18
<PAGE>
Company's common stock (1,999,162 shares). Each of the Series Y Warrants
entitles the holder the right to acquire 205 shares (for Y Warrants issued with
Series A shares) and 400 shares (for Y Warrants issued with Series B and C
shares) of the Company's common stock (867,500 shares). Each of the warrants has
cashless exercise features that are based on various conversion amounts and
terms.
The Series A preferred stock shares were placed through a placement agent.
Those shares required the Company to pay the placement agent a fee and an
expense allowance totaling $195,000. In addition, the placement agent and
certain officers of the placement agent were given Series X Warrants to
purchase, in the aggregate, 278.33 shares of the Company's common stock for each
$1,000 of Purchase Price (417,495 shares) and Series Y Warrants to purchase, in
the aggregate, 102.7 shares of the Company's common stock for each $1,000 of
Purchase Price (154,050 shares). The Series X Warrants are exercisable for a
period of six years from the first anniversary of the date of issuance at a
price per share equal to $1.20 and the Series Y Warrants are exercisable for a
period of five years from the second anniversary of the date of issuance at a
price per share equal to $2.50. No placement agent was used for the Series B
and C shares.
The preferred stock agreements require that the Company files a registration
statement by August 1, 1999, to register the preferred stock and the common
stock required in relation to the warrants. The Company will be required to pay
certain penalties to the holders of the preferred stock and warrants if the
registration statement is not filed by August 1, 1999. The penalties increase
over time until the registration statement is filed. The preferred stock
agreements contain potential redemption events, which would cause the Company to
have to redeem the preferred stock. The agreements state that if a redemption
event occurs, the Company must pay each holder of preferred stock an amount
equal to ten percent of the aggregate stated value of the shares of preferred
stock then outstanding.
The Class A Common Stock and the Class B Common Stock are substantially similar
in all respects except that the Class B Common Stock has five votes per share
while the Class A Common Stock has one vote per share. Each share of Class B
Common Stock is convertible at any time at the holder's option to one share of
Class A Common Stock and, except in certain instances, is automatically
converted into one share of Class A Common Stock upon any sale or transfer.
Class B Warrants
- ----------------
Each Class B Warrant entitles the holder to purchase one share of Class A Common
Stock at an exercise price of $1.075. During 1998, the Company received net
proceeds of $934,032 from the exercise of 779,670 B Warrants. As of December
31, 1998, 3,432,770 Class B Warrants were outstanding. An additional 257,994
warrants were exercised before expiration of the warrants resulting in proceeds
to the Company of $277,344. The remaining warrants were not exercised and
expired on February 12, 1999.
Class C Warrants
- ----------------
Each Class C Warrant is exercisable into one share of Class A Common Stock at an
exercise price of $1.075 per share. During 1998, the Company received net
proceeds of $330,000 from the exercise of 275,000 C Warrants. As of December 31,
1998, 375,000 Class C Warrants were outstanding. The remaining Class C Warrants
expire on February 12, 1999 (50,000 Warrants) and in June 2003 (325,000
Warrants). The 50,000 Class C Warrants expiring on February 12, 1999 were not
exercised and have expired.
F-19
<PAGE>
Class F and G Warrants
- ----------------------
The Class F and Class G Warrants expire in June 1999 (832,674 Warrants) and in
June 2004 (3,974,080 Warrants) and are exercisable at a price of $0.61 and
$0.92, respectively, per share of Class A Common Stock for each Class F or Class
G Warrant exercised. Subsequent to December 31, 1998, 175,396 F warrants were
exercised, at $.61 per share, resulting in proceeds of $106,992.
Class H Warrants
- ----------------
In 1995, in connection with the note payable to Marjorie S. Brooks and the
accounts payable-related parties (See Notes 4 and 5), the Company's Board of
Directors authorized the issuance of up to 2,000,000 Class H Warrants on a one-
for-one basis for each dollar advanced under the 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 warrants have been issued
as of the date of this filing, all authorized Class H Warrants are currently
issuable. Upon issue, the warrants will be exercisable at prices from $0.39 to
$0.49 per share of Class A Common Stock for each Class H Warrant exercised. The
Class H Warrants will expire in February 2005.
Class I Warrants
- ----------------
In June 1996, the Company completed an offering to qualified foreign investors
under Regulation S of the Securities Act of 1933 with the issuance of 1,666,893
shares of Class A Common Stock. Net offering proceeds consisted of $1,146,000
in cash. As part of the offering, the Company has issued 242,878 Class I
Warrants to the Stock Placement Distributor. The Class I Warrants expire three
years from the date of issue and are exercisable at prices ranging from $0.9375
to $1.125 per share of Class A Common Stock for each Class I Warrant exercised.
In May 1997, 150,462 warrants were issued in connection with the December 1996
Regulation S Offering, as described below, at exercise prices ranging from $0.31
to $0.56 per share of Class A Common Stock for each Class I Warrant exercised.
The Class I Warrants expire on January 15, 2000.
Class J and K Warrants
- ----------------------
In December 1996, in connection with a note payable of $100,000 (See Note 5),
the Company authorized and issued two sets of Warrants, Class J for 200,000 and
Class K for 150,000. Each Class J and Class K Warrant is exercisable on a one-
for-one basis with common stock. Each Class J Warrant is exercisable at $0.50
per share and each Class K Warrant is exercisable at $0.75 per share. Both
Class J and Class K Warrants expire five years from the date of issuance.
X and Y Warrants Issued In Connection With Preferred Stock (See Note 6)
- -----------------------------------------------------------------------
The preferred stock carries a series of X and Y Warrants, which will convert at
$1.20 and $2.50 per share. The X Warrants cannot be exercised for a minimum of
12 months and the exercisable amount increases between one year after issuance
and 485 days after issuance. In connection with the 2,900 preferred shares, the
Company
F-20
<PAGE>
issued 2,900 X Warrants and 2,900 Y Warrants. Each of the Series X Warrants
entitles the holder the right to acquire 555 shares (for X Warrants issued with
Series A Shares) and 833.33 shares (for X Warrants issued with Series B and C
shares) of the Company's common stock (1,999,162 shares). Each of the Series Y
Warrants entitles the holder the right to acquire 205 shares (for Y Warrants
issued with Series A shares) and 400 shares (for Y Warrants issued with Series B
and C shares) of the Company's common stock (867,500 shares). Each of the
warrants has cashless exercise features that are based on various conversion
amounts and terms.
X and Y Warrants to Placement Agent
- -----------------------------------
The Series A preferred stock shares were placed through a placement agent. The
placement agent and certain officers of the placement agent were given Series X
Warrants to purchase, in the aggregate, 278.33 shares of the Company's common
stock for each $1,000 of Purchase Price (417,495 shares) and Series Y Warrants
to purchase, in the aggregate, 102.7 shares of the Company's common stock for
each $1,000 of Purchase Price (154,050 shares). The Series X Warrants are
exercisable for a period of six years from the first anniversary of the date of
issuance at a price per share equal to $1.20 and the Series Y Warrants are
exercisable for a period of five years from the second anniversary of the date
of issuance at a price per share equal to $2.50. No placement agent was used
for the Series B and C shares.
Bonus Warrants
- --------------
In connection with the exercise of the B and C Warrants during 1998, the Company
granted a new warrant on a one-for-one basis for each Class B and C Warrant
exercised. The bonus warrants (1,054,670 at December 31, 1998) are exercisable
for 2-years from the date of issuance of the warrants at an exercise price of
$3.00.
Consulting and Placement Warrants
- ---------------------------------
In October 1997, the Company obtained bridge financing of $1.3 million (see Note
5). In connection with the financing obtained, 2,756,000 stock warrants were
issued. The stock warrants expire on October 30, 2002, and are exercisable at a
price of $0.375 per share of Class A Common Stock for each warrant exercised.
The debt and stock warrants were recorded at their estimated fair market value
at the date of the transaction. The value of the stock warrants was treated as
a debt discount. The debt discount is being amortized over the life of the loan
as interest expense.
In February 1998, the Company obtained bridge financing of $800,000 (see Note
5). In connection with the financing obtained, 1,696,000 stock warrants were
issued. The stock warrants expire on February 5, 2003, and are exercisable at a
price of $0.375 per share of Class A Common Stock for each warrant exercised.
The debt and stock warrants were recorded at their estimated fair market value
at the date of the transaction. The value of the stock warrants was treated as
a debt discount. The debt discount is being amortized over the life of the loan
as interest expense.
In April 1998, the Company obtained bridge financing of $410,000 (see Note 5).
In connection with the financing obtained, 869,200 stock warrants were issued.
The stock warrants expire on April 7, 2003, and are exercisable at a price of
$0.375 per share of Class A Common Stock for each warrant exercised. The debt
and
F-21
<PAGE>
stock warrants were recorded at their estimated fair market value at the date of
the transaction. The value of the stock warrants was treated as a debt
discount. The debt discount is being amortized over the life of the loan as
interest expense.
In June 1998, the Company obtained bridge financing of $359,963 (see Note 5).
In connection with the financing obtained, 763,121 stock warrants were issued.
The stock warrants expire on June 3, 2003, and are exercisable at a price of
$0.375 per share of Class A Common Stock for each warrant exercised. The debt
and stock warrants were recorded at their estimated fair market value at the
date of the transaction. The value of the stock warrants was treated as a debt
discount. The debt discount is being amortized over the life of the loan as
interest expense.
In August 1998, the Company obtained bridge financing of $287,500 (see Note 5).
In connection with the financing obtained, 609,500 stock warrants were issued.
The stock warrants expire on August 21, 2003, and are exercisable at a price of
$0.375 per share of Class A Common Stock for each warrant exercised. The debt
and stock warrants were recorded at their estimated fair market value at the
date of the transaction. The value of the stock warrants was treated as a debt
discount. The debt discount is being amortized over the life of the loan as
interest expense.
Extension Warrants
- ------------------
In connection with the extension of the October 30, 1997 bridge financing,
310,000 extension warrants were issued. The stock warrants expire on November
5, 2003, and are exercisable at a price of $0.375 per share of Class A Common
Stock for each warrant exercised.
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 September 1996, the Company received $500,000 in cash relating to an offering
to qualified foreign investors under Regulation S of the Securities Act of 1933
with the issuance of 762,194 shares of Class A Common Stock completed in October
1996.
In December 1996, the Company received $185,000 in cash relating to an offering
to qualified foreign investors under Regulation S of the Securities Act of 1933
with the issuance of 228,571 and 134,454 shares of Class A Common Stock in 1996
and 1997, respectively. Also, in 1997, $228,999 was received and 977,367 shares
of Class A Common Stock were issued.
F-22
<PAGE>
At December 31, 1998, the Company had outstanding warrants as follows:
<TABLE>
<CAPTION>
Weighted
Warrants for Average
Class A Exercise
Common Stock Price
------------ -----
<S> <C> <C>
Class B Warrants 3,432,770 $1.075
Class C Warrants 375,000 $1.075
Class F Warrants 1,337,904 $0.61
Class G Warrants 3,468,850 $0.92
Class H Warrants 2,000,000 $0.47
Class I Warrants 393,340 $0.75
Class J Warrants 200,000 $0.50
Class K Warrants 150,000 $0.75
Series X Warrants 1,999,162 $1.20
Series Y Warrants 867,500 $2.50
Series X Warrants - Placement Agent 417,495 $1.20
Series Y Warrants - Placement Agent 154,050 $2.50
Bonus Warrants 1,054,670 $3.00
Consulting Warrants 6,254,926 $0.375
Placement Warrants 318,895 $0.375
Extension Warrants 310,000 $0.375
---------- ------
22,734,562 $0.91
========== ======
</TABLE>
The Company has been formally notified by Nasdaq of increased listing and
maintenance standards for both the Nasdaq National and Small Cap Markets. The
increased Nasdaq listing standards went into effect on February 23, 1998. The
increased listing and maintenance standards include a minimum bid $1.00 common
stock price and a $2 million net asset value. On March 12, 1999, the Company
attended a hearing in the matter of the continued listing of the Company's stock
in The Nasdaq Stock Market. The hearing was in regards to the Company being
notified on October 13, 1998, that it did not meet the $1.00 minimum bid price
for continued listing. The Company was given ninety days, until January 13,
1999, to regain compliance. The Company did not achieve compliance during the
grace period and subsequently requested the hearing. Management of the Company
believes that an additional waiver will be granted, however, no formal
notification has been received. A negative decision could result in the
immediate delisting of the Company's securities from The Nasdaq Small Cap
Market. Should the Company's securities be delisted, the Company will not be
notified of the decision until after the securities have been removed from The
Nasdaq Stock Market. The minimum bid price must be above $1.00 for 10 trading
days. The Company is also considering implementing a 1 for 2 or 1 for 3 reverse
stock split in order to attain compliance. As of December 31, 1998, the
Company's bid price per share was below $1.00. As of December 31, 1998, the
Company's net asset value was $3,777,501.
If the Company is delisted, it would be required to meet the new listing
standards to be listed on the Nasdaq
F-23
<PAGE>
SmallCap Market. The standards for initial listing require, among other things,
that an issuer have total assets of $4 million and capital and surplus of at
least $2 million; 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 million; and that there be at least two market
makers for the issuer's securities. As mentioned above, the company is currently
not in compliance with the minimum bid price requirement for continued listing
and, therefore, also does not meet the minimum bid price for initial listing.
Delisting of the Company's common stock renders to holders of the Company's
preferred stock the right to present the preferred stock for redemption to the
Company in the amount of $2.9 million and would result in the immediate
reclassification of the preferred stock out of stockholders' equity, reducing
the Company's net assets below the threshold of $2 million for both continued
and initial listing of the stock. Delisting of the Company's stock also results
in an event of default under the bridge financing agreements. An event of
default results in all the then outstanding principal amounts and unpaid
interests becoming due and payable immediately. It is unlikely that the Company
would have the financial resources to redeem the preferred stock if the holders
were to present such stock for redemption or have the ability to pay its
obligations under the bridge financing agreements. Delisting would result in the
Company's stock being moved to the over-the-counter bulletin board which could
result in less liquidity for the holders of the Company's stock.
Note 7: Capital Lease Obligations
- ---------------------------------
The capital lease agreements are for machinery and equipment. Under the
agreements, the Company is to make aggregate monthly payments of $3,680,
including interest ranging from 7.7% to 28.51%, which expire at various times
from March 1999 through August 2003. The Company has the option to purchase the
property at the end of the lease term for $1.00.
The following is a schedule of future minimum-lease payments under capital
leases, together with the present value of the net minimum-lease payments as of
December 31, 1998:
<TABLE>
<S> <C>
1999 $ 40,430
2000 39,103
2001 31,816
2002 21,614
2003 12,608
Total minimum-lease payments 145,571
Less - amounts representing interest 49,386
---------
Present value of net minimum lease payments 96,185
Less - current maturities of capital leases 19,263
---------
$ 76,922
========
</TABLE>
Note 8: Stock Option Plans
- --------------------------
The Company's Stock Option Plans (the 1990 Plan and the 1989 Plan) authorize the
issuance of a total of 1,500,000 shares of the Company's Class A Common Stock to
its directors, employees and outside consultants. The option price of the stock
options awarded must be at least equal to the market value of the Class A Common
Stock on the date of grant. Stock options may not be granted to an individual
to the extent that in any calendar year in which options first become
exercisable, the shares subject to options first exercisable in such year have a
F-24
<PAGE>
fair market value on the date of grant in excess of $100,000. Stock options may
not be granted after March 2000 and May 1999 for the 1990 Plan and the 1989
Plan, respectively. No option may be outstanding for more than ten years after
its grant. The purpose of the Plans is to enable the Company to encourage key
employees, directors and outside consultants to contribute to the success of the
Company by granting such persons incentive stock options (ISOs) and/or non-
incentive stock options (nonqualified stock options). The ISOs are available
for employees only. In order to provide for disinterested administration of the
Plans for purposes of Rule 16b-3 under the Securities Exchange Act of 1934, the
1990 Plan also provides that outside directors will automatically receive annual
awards of nonqualified stock options.
In June 1994, stockholders of the Company approved the adoption of the Amended
and Restated Stock Option Plan, which superseded and replaced the Company's 1990
Stock Option Plan. The new Plan provides for the granting of options to purchase
up to 1,000,000 shares of the Company's Class A Common Stock by recipients of
incentive stock options or nonqualified stock options as granted by the
Company's Board of Directors. The Company's stockholders also approved the Non-
Employee Director Stock Option Plan (the Director Plan). The Director Plan
provides for the issuance of options to purchase up to an aggregate of 500,000
shares of the Company's Class A Common Stock to eligible outside directors of
the Company. Each eligible outside director will be granted options to purchase
25,000 shares of common stock annually commencing in 1995 and each year
thereafter.
Also in June 1994, stockholders of the Company approved the Chairman Stock
Option Plan. The Plan provided for a grant of 500,000 shares of the Company's
Class A Common Stock.
In July 1997, stockholders of the Company approved the adoption of the Advanced
Environmental Recycling Technologies, Inc. 1997 Securities Plan (the 1997 Plan).
The 1997 Plan provides for certain awards to be given to senior and executive
management of the Company to encourage and reward superior performance. The
awards can be in the form of stock options, restricted stock and other
performance awards to be given. The aggregate number of Shares which may be
offered pursuant to Incentive Stock Options under the 1997 Plan, shall not
exceed 3,000,000, while the aggregate number of Shares which may be offered for
purchase pursuant to Non-Qualified Stock Options shall not exceed 500,000
Shares. The Stock Options may not be granted with an exercise price less than
the fair market value of a share on the date the option is granted, unless
granted to a 10% shareholder, then the exercise price must be at least 110% of
the fair market value per share on the date such option is granted. The
Incentive Stock Options may not be exercised after ten years from the date the
option is granted unless the option is given to a 10% shareholder, then the
expiration date is five years from the date the option is granted. The options
must be exercised within three months after termination of employment.
F-25
<PAGE>
A summary of the activity in the Company's Stock Option Plans during the years
ended December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 4,003,000 $0.66 1,329,000 $1.30 1,506,668 $1.21
Granted 1,055,000 $0.89 3,300,000 $0.51 145,000 $0.84
Exercised (245,000) $0.42 - $ - (12,000) $0.66
Forfeited (441,500) $1.48 (626,000) $1.21 (310,668) $0.70
--------- ----- --------- ----- --------- -----
Outstanding at end of year 4,371,500 $0.65 4,003,000 $0.66 1,329,000 $1.30
</TABLE>
The weighted-average fair value of options granted during 1998, 1997 and 1996
was $0.53, $0.32 and $0.73, respectively. The following table summarizes
information about stock options outstanding under the Company's Stock Option
Plans as of December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------------------
Range Number Wtd. Avg. Wtd Avg. Number Wtd Avg.
Of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/98 Contract Life Price at 12/31/98 Price
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.38 - $0.48 1,791,000 7.27 years $0.43 1,371,000 $0.42
$0.56 - $1.00 2,185,000 8.07 years $0.62 725,000 $0.66
$1.19 - $1.34 195,500 7.05 years $1.25 95,500 $1.29
$1.88 - $2.63 200,000 .29 years $2.26 200,000 $2.26
- -------------------------------------------------------------------------------------------------------------------------
4,371,500 7.34 years $0.65 2,391,500 $0.68
</TABLE>
SFAS No. 123, "Accounting for Stock-Based-Compensation", issued by the FASB in
October 1995, encourages but does not require companies to measure and recognize
in their financial statements a compensation cost for stock-based employee
compensation plans based on the `fair value' method of accounting set forth in
the statement. The Company continues to account for its stock option plans and
other stock-based compensation using the "intrinsic value" method of accounting
set forth in Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's common stock at the date of the grant over
the amount an employee must pay to acquire the stock.
F-26
<PAGE>
Had compensation cost for the Company's stock option plans and other stock-based
compensation been determined consistent with SFAS No. 123, the Company's net
loss and net loss per share of common stock would have been increased to the
following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net loss applicable to common stock As Reported $(3,653,070) $(1,156,020) $(2,897,032)
Pro Forma (3,915,670) (1,536,041) (4,140,251)
Net loss per share of common stock As Reported (.16) (.05) (.15)
(Basic and Diluted) Pro Forma (.17) (.07) (.22)
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: risk-free
interest rates of 5.3, 6.7 and 6.2 percent; expected lives of 10, 10 and 3
years; and expected volatility of 87.4, 88.6 and 92.7 percent. Since no
dividends are expected to be paid by the Company during the expected lives of
the options, a dividend yield of zero was used for purposes of computing the
fair value of the options.
Note 9: Leases
- --------------
At December 31, 1998, the Company was obligated under a non-cancelable lease
with a principal stockholder for land and a building where a production facility
is located. This lease has an expiration date of April 30, 2001 and rental
payments of $1,519 per month. In 1997, the Company entered into a non-
cancelable sublease for a production facility which expires August 31, 2002.
The sublease contains an option to purchase the facility for $1.8 million,
exercisable at any time during the sublease and a renewal option to lease the
property for an additional five years at an increased rate. At December 31,
1998, the Company was obligated under various operating leases covering certain
equipment. Rent expense under operating leases for the years ended December 31,
1998, 1997 and 1996 was $432,356, $273,265 and $200,652, respectively. Future
minimum lease payments required under operating leases are as follows:
<TABLE>
<S> <C>
1999 $ 285.318
2000 284,781
2001 260,133
2002 154,573
2003 1,958
----------
Total minimum payments required $ 986,763
==========
</TABLE>
Note 10: Income Taxes
- ---------------------
The Company records income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes". Under this method, deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. The Company has generated book and tax losses for the period and
since inception.
F-27
<PAGE>
As of December 31, 1998, the Company had net operating loss carryforwards of
approximately $24.7 million for federal income tax purposes, which are available
to reduce future taxable income and will expire in 2004 through 2012 if not
utilized. For federal income tax purposes, the Company deferred for future
amortization start-up costs in the amount of $9.4 million. Such costs, which
have been expensed for financial reporting purposes, are being amortized for tax
purposes over five years.
The tax effects of significant temporary differences representing deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets-
Deferred start-up costs - $ 605,000 $ 1,540,000
Net operating loss carryforwards $ 7,311,702 6,355,000 4,885,000
Valuation allowance (7,155,941) (6,247,000) (5,845,000)
----------- ----------- -----------
Total deferred tax assets 155,761 713,000 580,000
Deferred tax liability-
Depreciation 155,761 713,000 580,000
----------- ----------- -----------
Net deferred tax $ - $ - $ -
=========== =========== ===========
</TABLE>
As the Company has generated net operating losses since its inception and there
is no assurance of future income, a valuation allowance of $7,155,941 has been
established at December 31, 1998 to recognize its deferred tax assets only to
the extent of its deferred tax liabilities. The Company will continue to
evaluate the need for such valuation allowance in the future.
Note 11: Significant Customers
- ------------------------------
During the year ended December 31, 1998, the Company had sales of approximately
$4.4 million to a single customer, which represented 34% of total sales. Sales
to this customer for the years ended December 31, 1997 and 1996 were
approximately $2.8 million (35%) and $2.2 million (32%), respectively.
Additionally, the Company had sales of approximately $3.1 million to another
customer, which represents 24% of total sales for the year ended December 31,
1998. Sales to this customer in 1997 and 1996 were approximately $1.8 million
(23%) and $1.9 million (28%), respectively.
Note 12: Commitments and Contingencies
- --------------------------------------
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) the AERT patents are
invalid and unenforceable, and (c) Mobil has not infringed the AERT patents
through any products or method. Mobil seeks no monetary damages in this suit,
but does seek reimbursement of its attorneys' fees.
F-28
<PAGE>
In December 1992, the Company answered Mobil's Complaint. In its Answer, 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. Mobil filed an answer to AERT's
counterclaims, denying any liability. 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,
which AERT had asserted against Mobil. 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 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 on July 10, 1995 on the
initial trial arguments. In January 1996, oral arguments were presented before
the U.S. Court of Appeals. 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, all appellate processes available will be pursued. 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 attorney's fees and
costs in the amount of $2.7 million. On November 1, 1994, the Court ruled that
the motion was premature and will not be considered at the present time. In
January 1995, Mobil renewed its Motion for Attorney's Fees. In April 1995, the
Court requested AERT to respond to Mobil's Motion. The Motion is currently
stayed. The Company will vigorously defend against
F-29
<PAGE>
Mobil's claim for attorney's 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 December 31, 1998.
Mobil Oil Corporation divested its composites business in 1996 and no longer
directly competes with the Company.
In June 1998, the Company received a formal notice of allowance from the United
States Patent and Trademark Office concerning a related product by process
patent application, which has been pending throughout the litigation. This is an
application, which was filed on the same date as those currently in litigation,
although substantial additional disclosures have been made.
Note 13: Other Litigation
- -------------------------
The Company is currently involved in litigation in North Carolina involving
payment for equipment in its paint facility. The issue involves a dispute over
a final $70,000 payment for equipment, which has yet to operate effectively.
The Company intends to counter-claim and ask that the manufacturer refund its
money or make the equipment function properly. The Company is also a defendant
in a federal action in Texas, involving allegations from a former employee and
officer of the Company that the Company breached an employment agreement by
terminating employment. The Company believes this action is without merit and
has filed a motion to dismiss this suit for lack of jurisdiction. The Company
is also involved in an action whereby it is the plaintiff seeking to recover
approximately $200,000 for merchandise sold for which it was not paid. This
action is currently pending.
Note 14: New Accounting Pronouncement
- -------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The Company has determined that the adoption of this statement will have no
effect on its financial statements.
Note 15: Accounting for Rogers Plastic Reclamation Facility Fires
- -----------------------------------------------------------------
During 1996, the Company experienced two fires at the Rogers Plastic Reclamation
Facility. In September 1996, the Company experienced an extraordinary gain of
$67,100 relating to the insurance proceeds for the loss of finished goods
inventory destroyed. In addition, the final settlement of the insurance claim
relating to the capital equipment destroyed in the September fire resulted in a
gain of $167,034. The impact of the extraordinary gain on the net loss per
share of common stock was immaterial.
In connection with the December 1996 fire, the Company recorded an extraordinary
loss at December 31, 1996, of $130,368 and a receivable from the insurance
company in the amount of $1,001,657, which represented the difference between
the net book value of equipment lost in the December fire which the Company
expected to be reimbursed for by insurance proceeds. During 1997, the Company
recognized an extraordinary gain of $757,644 from the insurance proceeds
received relating to the fire at the Rogers facility.
F-30
<PAGE>
EXHIBIT 10.33
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of September
30, 1998 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, HC 10, Box 116, 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 1,500 units (the "Units"), each Unit consisting of (i)
one share of the Company's Series A Convertible Preferred Stock, par value $1.00
per share (the "Preferred Shares"), convertible into shares of the Company's
Class A Common Stock, par value $.01 per share (the "Common Stock"), (ii) a
Series X Warrant, in the form attached hereto as Exhibit B-1 (the "Series X
Warrant"), to acquire 555 shares of Common Stock and (iii) a Series Y Warrant,
in the form attached hereto as Exhibit B-2 (the "Series Y Warrant" and, together
with the Series X Warrant, the "Warrants"), to acquire 205 shares of Common
Stock. The rights, preferences and privileges of the Preferred Shares, including
the terms upon which such Preferred Shares are convertible into shares of Common
Stock, are set forth in the form of Certificate of Designations, Rights and
Preferences attached hereto as Exhibit A (the "Certificate of Designation"). The
shares of Common Stock issuable upon conversion of the Preferred Shares or
otherwise pursuant to the Certificate of Designation are referred to herein as
the "Conversion Shares" and the shares of Common Stock issuable upon exercise of
or otherwise pursuant to the Warrants are referred to herein as the "Warrant
Shares." The Preferred Shares, the Warrants, the Conversion Shares and the
Warrant Shares are collectively referred to herein as the "Securities" and each
of them may individually be referred to herein as a "Security."
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 C (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 UNITS
<PAGE>
a. Purchase of Units. 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, that number of Units set forth on such Purchaser's Execution Page
hereto. The purchase price (the "Purchase Price") per Unit shall be equal
to One Thousand Dollars ($1,000). Each Purchaser's obligation to purchase
Units hereunder is distinct and separate from the other Purchasers'
obligation to purchase Units and no Purchaser shall be required to
purchase hereunder more than the number of Units set forth on such
Purchaser's Execution Page hereto notwithstanding any failure by the other
Purchasers to purchase Units hereunder.
b. Form of Payment. On the Closing Date, each Purchaser shall pay
the aggregate Purchase Price of the Units being purchased by such
Purchaser hereunder in the manner set forth on Schedule 1(b), which manner
will either be by (i) surrendering promissory notes of the Company payable
to the Purchasers (the "Notes") or (ii) wire transfer of immediately
available funds to the Company, in accordance with the Company's written
wiring instructions, in each case, against delivery of the duly executed
certificates representing the Preferred Shares and duly executed Warrants
being purchased by such Purchaser and the Company shall deliver such
certificates and Warrants against delivery of such aggregate Purchase
Price.
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 Units pursuant to this Agreement
(the "Closing") shall be 12:00 noon, New York City time, on November 2,
1998, 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.
2
<PAGE>
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 Units
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 Units.
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 Units 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 Units 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
Units.
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 certificates for the
Preferred Shares and the Warrants and, until such time as the Conversion
Shares and Warrant Shares have been registered under the Securities Act as
contemplated by the Registration Rights Agreement or otherwise may be sold
by the Purchaser under Rule 144, the certificates for the Conversion
Shares and Warrant 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
3
<PAGE>
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 or (b) such holder 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 Certificate of Designation, the Warrants 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.
4
<PAGE>
b. Authorization; Enforcement. (i) The Company has the requisite
corporate power and authority to enter into and perform its obligations
under this Agreement, the Warrants and the Registration Rights Agreement,
to issue and sell the Units in accordance with the terms hereof and to
issue Conversion Shares upon conversion of the Preferred Shares in
accordance with the terms of the Certificate of Designation and to issue
the Warrant Shares upon exercise of the Warrants in accordance with the
terms of such Warrants; (ii) the execution, delivery and performance of
this Agreement, the Warrants and the Registration Rights Agreement by the
Company and the consummation by it of the transactions contemplated hereby
and thereby (including, without limitation, the issuance of the Preferred
Shares and Warrants and the issuance and reservation for issuance of the
Conversion Shares and Warrant 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 Warrants 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 Preferred Shares, the Conversion Shares and the
Warrant 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 Conversion Shares in
accordance with the terms of the Certificate of Designation and the
Warrant Shares in accordance with the terms of the Warrants 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, the Certificate of
Designation or the Warrants. 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.
5
<PAGE>
d. Issuance of Shares. The Preferred Shares are duly authorized and,
upon issuance in accordance with the terms of this Agreement, 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 on the holders thereof. The Conversion Shares
and Warrant Shares are duly authorized and, on and after January 15, 1999
will be reserved for issuance, and, upon conversion of the Preferred
Shares in accordance with the terms of the Certificate of Designation, and
exercise of the Warrants in accordance with the terms thereof, 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.
e. No Conflicts. The execution, delivery and performance of this
Agreement, the Warrants and the Registration Rights Agreement by the
Company, the performance by the Company of its obligations under the
Certificate of Designation, and the consummation by the Company of the
transactions contemplated hereby and thereby (including, without
limitation, the issuance and reservation for issuance, as applicable, of
the Preferred Shares, Warrants, Conversion Shares and Warrant 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 and rules or regulations
of any self-regulatory organizations to which either the Company or its
securities are subject) 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 a Purchaser 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
Warrants or the Registration Rights Agreement or to perform its
obligations under the Certificate of Designation, in each case in
accordance with the terms hereof or thereof. Except as disclosed in
Schedule 3(e), the Company is not in violation of the
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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, 1995, 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, 1995, 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 Purchasers true and complete
copies of the SEC Documents, except for the exhibits and schedules thereto
and the documents 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, 1997, 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
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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, 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, 1997. 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.
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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
offers 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
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
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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 any Purchaser 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 Units to repay $400,000 aggregate principal amount of Notes and as
otherwise 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) 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.
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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 full conversion of the
outstanding Preferred Shares and issuance of the Conversion Shares in
connection therewith and the full exercise of the Warrants and the
issuance of the Warrant Shares in connection therewith, subject to and as
otherwise required by the Certificate of Designation and the Warrants.
g. Listing. The Company shall promptly secure the listing of the
Conversion Shares and 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 as any other shares of Common Stock shall be so
listed, such listing of all of the Conversion Shares and Warrant 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 a Purchaser owns any Securities,
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
Certificate of Designation, the Warrants 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 pursuant to this Agreement and the
Registration Rights Agreement) under circumstances that would require
registration of the Securities being offered or sold hereunder under the
Securities Act or cause the offering of the 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. Production Milestones. The Company shall use its best efforts to
ensure that the following production milestones are achieved:
(i) The Company shall transfer its paint production operations
from its Junction, Texas facility to its Springdale, Arkansas
facility on or before November 1, 1998, so as to have available two
production lines as its Junction, Texas facility for the Weyerhauser
project.
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(ii) So long as the new 6" air system at its Springdale,
Arkansas facility is operational at such time, the Company shall
start up one mixer on the second Springdale line by November 15,
1998 and the full line by January 1, 1999.
(iii) The Company shall install two large mixers to the deck
line at its Junction, Texas facility on or before January 1, 1999.
(iv) The Company shall install Line 6 or a third line at its
Springdale, Arkansas facility and such line shall be operational on
or before April 1, 1999.
(v) The Company's production of internal plastic LDPE shall
exceed 30,000 pounds per day on or before January 1, 1999.
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 Conversion Shares and Warrant 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
Conversion Shares or Warrant Shares prior to registration of the
Conversion Shares and Warrant 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 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
Conversion Shares and Warrant Shares, promptly instruct its transfer agent
to issue one or more certificates in such name and in such denominations
as specified by such Purchaser.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the Units 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.
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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 Purchase Price
for the Units 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
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 Units to be
purchased by it 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 Certificate of Designation shall have been accepted for
filing with the Secretary of State of the State of Delaware and a copy
thereof certified by the Secretary of State of the State of Delaware shall
have been delivered to such Purchaser.
c. The Company shall have delivered to such Purchaser the duly
executed Warrants and certificates representing the Preferred Shares being
purchased by such Purchaser (in such denominations as such Purchaser shall
request) in accordance with Section 1(b) above.
d. 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.
e. 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
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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.
f. 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.
g. 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 D attached hereto.
h. 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 E.
i. 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.
j. The Company shall have delivered to each of those Purchasers
surrendering Notes as Payment of the Purchase Price and those Purchasers
whose Notes are being repaid in accordance with Section 4(d) hereof,
certificates representing shares of Common Stock such that the accrued and
unpaid interest on all such Notes is paid in full in accordance with the
terms of such Notes.
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
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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.
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
HC 10, Box 116
Junction, Texas 76849
Telecopy: (915) 446-3864
Attention: Chief Executive Officer
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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 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 Certificate of Designation, the Warrants 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
review 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 which does not
name the Purchasers 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
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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 November 9, 1998, 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
Certificate of Designation, the Warrants 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 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:/s/ Joe G. Brooks
---------------------------------
Name: Joe G. Brooks
Title: President
By:/s/ Steve Brooks
---------------------------------
Name: Steve Brooks
Title: Chief Executive Officer
PURCHASER:
ZANETT LOMBARDIER, LTD.
By:/s/ Gianluca Cicogna
--------------------------
Name: Gianluca Cicogna
------------------------
Title: Director
-----------------------
RESIDENCE:
-------------------
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
SUBSCRIPTION AMOUNT:
NUMBER OF UNITS 275
----
PURCHASE PRICE ($1,000 per Unit) $275,000
--------
<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:/s/ Joe G. Brooks
---------------------------------
Name: Joe G. Brooks
Title: President
By:/s/ Steve Brooks
---------------------------------
Name: Steve Brooks
Title: Chief Executive Officer
PURCHASER:
HARLOW ENTERPRISES, INC.
By: /s/ Elayne Murphy
-----------------------------
Name: Elayne Murphy
---------------------------
Title: Authorized Representative
--------------------------
RESIDENCE:
ADDRESS:
Telecopy:
Attention:
SUBSCRIPTION AMOUNT:
NUMBER OF UNITS 25
---
PURCHASE PRICE ($1,000 per Unit) $25,000
-------
<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:/s/ Joe G. Brooks
---------------------------------
Name: Joe G. Brooks
Title: President
By:/s/ Steve Brooks
---------------------------------
Name: Steve Brooks
Title: Chief Executive Officer
PURCHASER:
PARKLAND LIMITED
By: /s/ Raymond O'Reilly
-----------------------------
Name: Raymond O'Reilly
---------------------------
Title: Director
--------------------------
RESIDENCE:
ADDRESS:
Telecopy:
Attention:
SUBSCRIPTION AMOUNT:
NUMBER OF UNITS 25
---
PURCHASE PRICE ($1,000 per Unit) $25,000
-------
<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:/s/ Joe G. Brooks
---------------------------------
Name: Joe G. Brooks
Title: President
By:/s/ Steve Brooks
---------------------------------
Name: Steve Brooks
Title: Chief Executive Officer
PURCHASER:
/s/ Samuel L. Milbank
- -------------------------------
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
SUBSCRIPTION AMOUNTS:
NUMBER OF UNITS 15
---
PURCHASE PRICE ($1,000 per Unit) $15,000
-------
<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:/s/ Joe G. Brooks
---------------------------------
Name: Joe G. Brooks
Title: President
By:/s/ Steve Brooks
---------------------------------
Name: Steve Brooks
Title: Chief Executive Officer
PURCHASER:
/s/ Bruno Guazzoni
- -------------------------------
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
SUBSCRIPTION AMOUNT:
NUMBER OF UNITS 310
----
PURCHASE PRICE ($1,000 per Unit) $310,000
--------
<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:/s/ Joe G. Brooks
---------------------------------
Name: Joe G. Brooks
Title: President
By:/s/ Steve Brooks
---------------------------------
Name: Steve Brooks
Title: Chief Executive Officer
PURCHASER:
GOLDMAN SACHS PERFORMANCE PARTNERS (OFFSHORE), L.P.
By: Commodities Corporation LLC, its general partner
By:/s/ Karen M. Judge
-----------------------------
Name: Karen M. Judge
---------------------------
Title:Vice President
--------------------------
RESIDENCE: Cayman Islands
ADDRESS: P.O. Box 309
South Church Street
George Town, Grand Cayman
Cayman Islands
with copies of all notices to:
c/o Commodities Corporation LLC
701 Mount Lucas Road
CN 850
Princeton, NJ 08540
SUBSCRIPTION AMOUNTS:
NUMBER OF UNITS 380.80
------
PURCHASE PRICE ($1,000 per Unit) $380,800
--------
<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:/s/ Joe G. Brooks
---------------------------------
Name: Joe G. Brooks
Title: President
By:/s/ Steve Brooks
---------------------------------
Name: Steve Brooks
Title: Chief Executive Officer
PURCHASER:
GOLDMAN SACHS PERFORMANCE PARTNERS, L.P.
By: Commodities Corporation LLC, its general partner
By:/s/ Karen M. Judge
-----------------------------
Name: Karen M. Judge
---------------------------
Title:Vice President
--------------------------
RESIDENCE: Delaware
ADDRESS: c/o Commodities Corporation LLC
701 Mount Lucas Road
CN 850
Princeton, NJ 08540
SUBSCRIPTION AMOUNTS:
NUMBER OF UNITS 469.20
------
PURCHASE PRICE ($1,000 per Unit) $469,200
--------
<PAGE>
EXHIBIT 10.34
EXHIBIT A
TO SECURITIES
PURCHASE
AGREEMENT
CERTIFICATE OF DESIGNATIONS,
RIGHTS AND PREFERENCES
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
Advanced Environmental Recycling Technologies, Inc., a corporation
organized and existing under the General Corporation Law of the State of
Delaware (the "Corporation"), hereby certifies that the following resolutions
were adopted by the Board of Directors of the Corporation pursuant to authority
of the Board of Directors as required by Section 151 of the Delaware General
Corporation Law;
RESOLVED, that pursuant to the authority granted to and vested in the Board
of Directors of this Corporation (the "Board of Directors" or the "Board") in
accordance with the provisions of its Certificate of Incorporation, the Board of
Directors hereby authorizes a series of the Corporation's previously authorized
Preferred Stock, par value $1.00 per share (the "Preferred Stock"), and hereby
states the designation and number of shares, and fixes the relative rights,
preferences, privileges, powers and restrictions thereof as follows:
Series A Convertible Preferred Stock:
I. DESIGNATION AND AMOUNT
The designation of this series, which consists of 1,500 shares of Preferred
Stock, is the Series A Convertible Preferred Stock (the "SERIES A PREFERRED
STOCK") and the stated value shall be One Thousand U.S. Dollars ($1,000.00) per
share (the "STATED VALUE").
II. NO DIVIDENDS
The Series A Preferred Stock will bear no dividends, and the holders of the
Series A Preferred Stock shall not be entitled to receive dividends on the
Series A Preferred Stock.
<PAGE>
III. CERTAIN DEFINITIONS
For purposes of this Certificate of Designation, the following terms shall
have the following meanings:
A. "CLOSING BID PRICE" means, for any security as of any date, the
closing bid price of such security on the principal 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 Corporation and reasonably acceptable to holders of a majority
of the then outstanding shares of Series A Preferred Stock. 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 bid 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
bid 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. If the Closing Bid Price cannot be
calculated for such security on such date 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
Corporation and reasonably acceptable to holders of a majority of the then
outstanding shares of Series A Preferred Stock, with the costs of such appraisal
to be borne by the Corporation.
B. "CONVERSION DATE" means, for any Optional Conversion, the date on
which the notice of conversion in the form attached hereto (the "NOTICE OF
CONVERSION") is delivered by fax, as evidenced by a mechanically or
electronically generated confirmation thereof, (or delivered by other means
resulting in notice) to the Corporation on the Conversion Date indicated in the
Notice of Conversion.
C. "CONVERSION PRICE" means the Fixed Conversion Price if no Milestone
Failure has occurred and, if a Milestone Failure has occurred, the lower of the
Fixed Conversion Price and the Variable Conversion Price, each in effect as of
such date and subject to adjustment as provided herein. Notwithstanding the
foregoing, at all times prior to the one (1) year anniversary of the Issuance
Date, the Conversion Price means the Fixed Conversion Price, in effect as of
such date and subject to adjustment as provided herein.
D. "FIXED CONVERSION PRICE" means $1.20.
E. "ISSUANCE DATE" means the date of the Closing (as defined in that
certain Securities Purchase Agreement by and among the Corporation and the
purchasers named therein with respect to the initial issuance of the Series A
Preferred Stock (the "SECURITIES PURCHASE AGREEMENT").
F. "MILESTONE FAILURE" means the Corporation's failure to achieve one or
more of the following milestones:
-2-
<PAGE>
(i) The Corporation's quarterly sales for the Corporation's first
fiscal quarter in 1999, as reported in the Corporation's Quarterly Report on
Form 10-Q ("FORM 10-Q") for such quarter, shall be not less than $4,500,000.
(ii) The Corporation's quarterly sales for each of the Corporation's
fiscal quarters commencing with the second fiscal quarter of 1999 and for each
fiscal quarter thereafter, as reported in Form 10-Q or in the Corporation's
Annual Report on Form 10-K ("FORM 10-K"), as applicable, for each such quarter,
shall be not less than $6,000,000.
(iii) The Corporation's quarterly cash flow from operations shall be
positive for each of the Corporation's fiscal quarters, commencing with the
fourth fiscal quarter of 1998 and for each fiscal quarter thereafter, as
reported in Form 10-Q or Form 10-K, as applicable.
G. "N" means the number of days from, but excluding, the Issuance Date.
H. "PREMIUM" means an amount equal to (.10)x(N/365)x(1,000).
I. "VARIABLE CONVERSION PRICE" means the average of the Closing Bid
Prices for the Common Stock (as defined below) 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).
IV. CONVERSION
A. Conversion at the Option of the Holder. (i) Subject to the limitations
--------------------------------------
on conversions contained in Paragraph C of this Article IV and to the
Corporation's right of redemption contained in Article VIII.D, each holder of
shares of Series A Preferred Stock may, at any time and from time to time on or
after the Issuance Date, convert (an "OPTIONAL CONVERSION") each of its shares
of Series A Preferred Stock into a number of fully paid and nonassessable shares
of the Corporation's Class A Common Stock, $.01 par value per share (the "COMMON
STOCK"), determined in accordance with the following formula if the Corporation
timely redeems the Premium thereon in cash in accordance with subparagraph (ii)
below:
1,000
------------------
Conversion Price
or in accordance with the following formula if the Corporation does not timely
redeem the Premium thereon in accordance with subparagraph (ii) below:
1,000 + the Premium
-------------------
CONVERSION PRICE
-3-
<PAGE>
(ii) (a) The Corporation shall have the right, in its sole
discretion, upon receipt of a Notice of Conversion, to redeem the Premium
subject to such conversion for a sum of cash equal to the amount of the Premium
being so redeemed. All cash redemption payments hereunder shall be paid in
lawful money of the United States of America at such address for the holder as
appears on the record books of the Corporation (or at such other address as such
holder shall hereafter give to the Corporation by written notice). In the event
the Corporation so elects to redeem the Premium in cash and fails to pay such
holder the applicable redemption amount to which such holder is entitled by
depositing a check in the U.S. Mail to such holder within four (4) business days
of receipt by the Corporation of a Notice of Conversion (in the case of a
redemption in connection with an Optional Conversion), the Corporation shall
thereafter forfeit its right to redeem such Premium in cash and such Premium
shall thereafter be converted into shares of Common Stock in accordance with
Article IV.A(i).
(b) Each holder of Series A Preferred Stock shall have the
right to require the Corporation to provide advance notice to such holder
stating whether the Corporation will elect to redeem the Premium in cash
pursuant to the Corporation's redemption rights discussed in subparagraph (a) of
this Article IV.A(ii). A holder may exercise such right from time to time by
sending notice (an "ELECTION NOTICE") to the Corporation, by facsimile,
requesting that the Corporation disclose to such holder whether the Corporation
would elect to redeem the Premium for cash in lieu of issuing shares of Common
Stock therefor if such holder were to exercise its right of conversion pursuant
to this Article IV.A. The Corporation shall, no later than the close of business
on the second business day following receipt of an Election Notice, disclose to
such holder whether the Corporation would elect to redeem the Premium in
connection with a conversion pursuant to a Notice of Conversion delivered over
the subsequent ten (10) business day period. If the Corporation does not respond
to such holder within such two business day period via facsimile, the
Corporation shall, with respect to any conversion pursuant to a Conversion
Notice delivered within the subsequent ten (10) business day period, forfeit its
right to redeem such Premium in accordance with subparagraph (a) of this Article
IV.A(ii) and shall be required to convert such Premium into shares of Common
Stock.
B. Mechanics of Conversion. In order to effect an Optional Conversion, a
-----------------------
holder shall: (x) fax (or otherwise deliver) a copy of the fully executed Notice
of Conversion to the Corporation or the transfer agent for the Common Stock and
(y) surrender or cause to be surrendered the original certificates representing
the Series A Preferred Stock being converted (the "PREFERRED STOCK
CERTIFICATES"), duly endorsed, along with a copy of the Notice of Conversion as
soon as practicable thereafter to the Corporation or the transfer agent. Upon
receipt by the Corporation of the Notice of Conversion by fax from a holder, the
Corporation shall, within one business day, send, via fax, a confirmation (the
"NOTICE OF CONVERSION CONFIRMATION") to such holder stating that the Notice of
Conversion has been received, the date upon which the Corporation expects to
deliver the Common Stock issuable upon such conversion, and the name and
telephone number of a contact person at the Corporation regarding the
conversion. The Corporation shall not be obligated to issue shares of Common
Stock upon a conversion unless either the Preferred Stock Certificates are
-4-
<PAGE>
delivered to the Corporation or the transfer agent as provided above, or the
holder notifies the Corporation or the transfer agent that such certificates
have been lost, stolen or destroyed and delivers the documentation to the
Corporation required by Article XIV.B hereof.
(i) Delivery of Common Stock Upon Conversion. Upon the surrender of
----------------------------------------
Preferred Stock Certificates from a holder of Series A Preferred Stock
accompanied by a Notice of Conversion, the Corporation shall, subject to the
Corporations redemption rights set forth in Article VIII.D, no later than the
later of (a) the third business day following the Conversion Date and (b) the
business day following the date of such surrender (or, in the case of lost,
stolen or destroyed certificates, after provision of documentation pursuant to
Article XIV.B) (the "DELIVERY PERIOD"), issue and deliver to the holder or its
nominee, (x) that number of shares of Common Stock issuable upon conversion of
such shares of Series A Preferred Stock being converted and (y) a certificate
representing the number of shares of Series A Preferred Stock not being
converted, if any. If the Corporation's transfer agent is participating in the
Depository Trust Company ("DTC") Fast Automated Securities Transfer program, and
so long as the certificates therefor do not bear a legend and the holder thereof
is not then required to return such certificate for the placement of a legend
thereon, the Corporation may cause its transfer agent to electronically transmit
the Common Stock issuable upon conversion to the holder by crediting the account
of the holder or its nominee with DTC through its Deposit Withdrawal Agent
Commission system ("DTC TRANSFER"). If the aforementioned conditions to a DTC
Transfer are not satisfied or a DTC Transfer is otherwise not effected, the
Corporation shall deliver to the holder physical certificates representing the
Common Stock issuable upon conversion. Further, a holder may instruct the
Corporation to deliver to the holder physical certificates representing the
Common Stock issuable upon conversion in lieu of delivering such shares by way
of DTC Transfer.
(ii) Taxes. The Corporation shall pay any and all taxes which may
-----
be imposed upon the Corporation with respect to the issuance and delivery of the
shares of Common Stock upon the conversion of the Series A Preferred Stock.
(iii) No Fractional Shares. If any conversion of Series A Preferred
---------------------
Stock 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 upon conversion of the Series A Preferred Stock shall be the next
higher whole number of shares.
(iv) Conversion Disputes. In the case of any dispute with respect to
-------------------
a conversion, the Corporation shall promptly issue such number of shares of
Common Stock as are not disputed in accordance with subparagraph (i) above. If
such dispute involves the calculation of the Conversion Price, the Corporation
shall submit the disputed calculations to an independent outside accountant
reasonably acceptable to the holder of Series A Preferred Stock being converted
via facsimile at any time prior to the expiration of the Delivery Period. The
accountant, at the expense of the party in error, shall audit the calculations
and notify the Corporation and the holder of the results as soon as practicable
following the date it receives the disputed calculations. The accountant's
calculation shall be deemed conclusive, absent manifest error. The Corporation
shall
-5-
<PAGE>
then issue the appropriate number of shares of Common Stock in accordance with
subparagraph (i) above.
C. Limitations on Conversions. The conversion of shares of Series A
--------------------------
Preferred Stock shall be subject to the following limitations (each of which
limitations shall be applied independently):
(i) Cap Amount. If, notwithstanding the representations and
----------
warranties of the Corporation contained in the Securities Purchase Agreement,
dated as of September 30, 1998, between the Corporation and the purchasers of
the Series A Preferred Stock named therein, the Corporation is prohibited by the
rules or regulations of any securities exchange or quotation system on which the
Common Stock is then listed or traded, from listing or issuing a number of
shares of Common Stock in excess of a prescribed amount (the "CAP AMOUNT")
without the approval of the Corporation's stockholders, then the Corporation
shall not be required to list or issue, as applicable, shares in excess of the
Cap Amount unless the Corporation has obtained the required approvals. The Cap
Amount which, as of the Issuance Date, shall be 5,970,000 shares, shall be
allocated pro rata to the holders of Series A Preferred Stock as provided in
Article XIV.C. In the event a holder of Series A Preferred Stock submits a
Notice of Conversion and the Corporation is prohibited from listing or issuing
shares of Common Stock to satisfy such Notice of Conversion as a result of the
operation of this subparagraph (i), such holder shall be entitled to the rights
set forth in Article VII hereof.
(ii) No Five Percent Holders. Except in connection with a Required
-----------------------
Conversion at Maturity (as defined below), in no event shall a holder of shares
of Series A Preferred Stock be entitled to receive shares of Common Stock upon a
conversion to the extent that the sum of (x) the number of shares of Common
Stock beneficially owned by the holder and its affiliates (exclusive of shares
issuable upon conversion of the unconverted portion of the shares of Series A
Preferred Stock or the unexercised or unconverted portion of any other
securities of the Corporation (including, without limitation, the warrants (the
"WARRANTS") issued by the Corporation pursuant to the Securities Purchase
Agreement) subject to a limitation on conversion or exercise analogous to the
limitations contained herein) and (y) the number of shares of Common Stock
issuable upon the conversion of the shares of Series A Preferred Stock with
respect to which the determination of this subparagraph is being made, would
result in beneficial ownership by the holder and its affiliates of more than
4.99% of the outstanding shares of Common Stock. For purposes of this
subparagraph, beneficial ownership shall be determined in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation
13 D-G thereunder, except as otherwise provided in clause (x) above. The
restriction contained in this subparagraph (ii) shall not be altered, amended,
deleted or changed in any manner whatsoever unless the holders of a majority of
the outstanding shares of Common Stock and each holder of outstanding shares of
Series A Preferred Stock shall approve such alteration, amendment, deletion or
change.
D. Required Conversion at Maturity. If the Corporation does not elect to
-------------------------------
exercise its redemption rights set forth in Article VIII.D hereof, subject to
the limitations set forth in Paragraph C(i) of this Article IV and provided all
shares of Common Stock issuable upon conversion
-6-
<PAGE>
of all outstanding shares of Series A Preferred Stock are then (i) authorized
and reserved for issuance, (ii) registered under the Securities Act of 1933, as
amended, for resale by the holders of such shares of Series A Preferred Stock
and (iii) eligible to be traded on either the Nasdaq SmallCap Market, The Nasdaq
National Market, the New York Stock Exchange or the American Stock Exchange,
each share of Series A Preferred Stock issued and outstanding on the seventh
anniversary of the Issuance Date thereof (the "MATURITY DATE"), automatically
shall be converted into shares of Common Stock on such date in accordance with
the conversion formulas set forth in Paragraph A of this Article IV (the
"REQUIRED CONVERSION AT MATURITY"); provided, however, in such case the
-------- -------
Conversion Price shall equal the lower of (i) the average of the Closing Bid
Prices for the Common Stock for the five (5) trading days immediately preceding
the Maturity Date and (ii) the Fixed Conversion Price; provided, further, the
-------- -------
Maturity Date shall be extended for a period equal to the number of days any
Conversion Default, Trading Market Trigger Event, Trading Market Prohibition or
Redemption Event is in existence. If the Required Conversion at Maturity occurs,
the Corporation and the holders of Series A Preferred Stock shall follow the
applicable conversion procedures set forth in Paragraph B of this Article IV;
provided, however, that the holders of Series A Preferred Stock are not required
to deliver a Notice of Conversion to the Corporation or its transfer agent.
V. RESERVATION OF SHARES OF COMMON STOCK
A. Reserved Amount. On or before January 15, 1999, the Corporation shall
---------------
reserve, from the authorized but unissued shares of Common Stock, for issuance
upon conversion of the Series A Preferred Stock, 200% of the number of shares
which would be issuable if the outstanding shares of Series A Preferred Stock
were converted in their entirety on the Issuance Date based on the Conversion
Price in effect on the Issuance Date, and thereafter the number of authorized
but unissued shares of Common Stock so reserved (the "RESERVED AMOUNT") shall
not be decreased and shall at all times be sufficient to provide for the
conversion of the Series A Preferred Stock outstanding at the then current
Conversion Price thereof. The Reserved Amount shall be allocated to the holders
of Series A Preferred Stock as provided in Article XIV.C.
B. Increases to Reserved Amount. If the Reserved Amount for any three
----------------------------
consecutive trading days (the last of such three trading days being the
"AUTHORIZATION TRIGGER DATE") shall be less than 135% of the number of shares of
Common Stock issuable upon conversion of the then outstanding shares of Series A
Preferred Stock, the Corporation shall immediately notify the holders of Series
A Preferred Stock of such occurrence and shall take immediate action (including,
if necessary, seeking stockholder approval to authorize the issuance of
additional shares of Common Stock) to increase the Reserved Amount to 200% of
the number of shares of Common Stock then issuable upon conversion of the
outstanding Series A Preferred Stock. In the event the Corporation fails to so
increase the Reserved Amount within 90 days after an Authorization Trigger Date
(such event being the RESERVED AMOUNT TRIGGER EVENT), each holder of Series A
Preferred Stock shall thereafter have the option, exercisable in whole or in
part at any time and from time to time by delivery of a Redemption Notice (as
defined in Article VIII.C) to the Corporation, to require the Corporation to
purchase for cash, at an amount per share equal to the Redemption Amount (as
defined in Article VIII.B), a portion of the holder's Series A Preferred Stock
such that, after giving
-7-
<PAGE>
effect to such purchase, the holder's allocated portion of the Reserved Amount
exceeds 135% of the total number of shares of Common Stock issuable to such
holder upon conversion of its Series A Preferred Stock. If the Corporation fails
to redeem any of such shares within five (5) business days after its receipt of
such Redemption Notice, then such holder shall be entitled to the remedies
provided in Article VIII.C.
C. Adjustment to Conversion Price. If the Corporation is prohibited, at
------------------------------
any time, from issuing shares of Common Stock upon conversion of Series A
Preferred Stock to any holder because the Corporation does not then have
available a sufficient number of authorized and reserved shares of Common Stock,
then the Fixed Conversion Price in respect of any shares of Series A Preferred
Stock held by any holder (including shares of Series A Preferred Stock submitted
to the Corporation for conversion, but for which shares of Common Stock have not
been issued to any such holder) shall be adjusted as provided in Article VI.B.
VI. FAILURE TO SATISFY CONVERSIONS
A. Conversion Default Payments. If, at any time, (x) a holder of shares
---------------------------
of Series A Preferred Stock submits a Notice of Conversion and the Corporation
fails for any reason (other than because such issuance would exceed such
holder's allocated portion of the Reserved Amount or Cap Amount, for which
failures the holders shall have the remedies set forth in Articles V and VII,
respectively) to deliver, on or prior to the fourth (4th) business day following
the expiration of the Delivery Period for such conversion, such number of
unlegended shares of Common Stock to which such holder is entitled upon such
conversion, or (y) the Corporation provides notice to any holder of Series A
Preferred Stock at any time of its intention not to issue unlegended shares of
Common Stock upon exercise by any holder of its conversion rights in accordance
with the terms of this Certificate of Designation (other than because such
issuance would exceed such holder's allocated portion of the Reserved Amount or
Cap Amount) (each of (x) and (y) being a "CONVERSION DEFAULT"), then the
Corporation shall pay to the affected holder, in the case of a Conversion
Default described in clause (x) above, and to all holders, in the case of a
Conversion Default described in clause (y) above, an amount equal to:
(.24) x (D/365) x (the Default Amount)
where:
"D" means the number of days after the expiration of the Delivery Period
through and including the Default Cure Date;
"DEFAULT AMOUNT" means (i) the total Stated Value of all shares of Series A
Preferred Stock held by such holder, plus (ii) the total accrued Premium as of
the first day of the Conversion Default on all shares of Series A Preferred
Stock included in clause (i) of this definition; and
-8-
<PAGE>
"DEFAULT CURE DATE" means (i) with respect to a Conversion Default
described in clause (x) of its definition, the date the Corporation effects the
conversion of the full number of shares of Series A Preferred Stock, and (ii)
with respect to a Conversion Default described in clause (y) of its definition,
the date the Corporation begins to issue freely tradeable shares of Common Stock
in satisfaction of all conversions of Series A Preferred Stock in accordance
with Article IV.A, and (iii) with respect to either type of a Conversion
Default, the date on which the Corporation redeems shares of Series A Preferred
Stock held by such holder pursuant to paragraph D of this Article VI.
The payments to which a holder shall be entitled pursuant to this Paragraph
A are referred to herein as "CONVERSION DEFAULT PAYMENTS." A holder may elect
to receive accrued Conversion Default Payments in cash or to convert all or any
portion of such accrued Conversion Default Payments, at any time, into Common
Stock at the lowest Conversion Price in effect during the period beginning on
the date of the Conversion Default through the Conversion Date or the Default
Cure Date, whichever is earlier, with respect to such Conversion Default
Payments. In the event a holder elects to receive any Conversion Default
Payments in cash, it shall so notify the Corporation in writing. Such payment
shall be made in accordance with and be subject to the provisions of Article
XIV.E. In the event a holder elects to convert all or any portion of the
Conversion Default Payments into Common Stock, the holder shall indicate on a
Notice of Conversion such portion of the Conversion Default Payments which such
holder elects to so convert and such conversion shall otherwise be effected in
accordance with the provisions of Article IV.
B. Adjustment to Conversion Price. If a holder has not received
------------------------------
certificates for all shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Delivery Period with respect to a conversion of
Series A Preferred Stock for any reason (other than because such issuance would
exceed such holder's allocated portion of the Reserved Amount or Cap Amount, for
which failures the holders shall have the remedies set forth in Articles V and
VII, respectively), then the Fixed Conversion Price in respect of any shares of
Series A Preferred Stock held by such holder (including shares of Series A
Preferred Stock submitted to the Corporation for conversion, but for which
shares of Common Stock have not been issued to such holder) shall thereafter be
the lesser of (i) the Fixed Conversion Price on the Conversion Date specified in
the Notice of Conversion which resulted in the Conversion Default and (ii) the
lowest Closing Bid Price for the Common Stock during the period beginning on,
and including, such Conversion Date through and including the earlier of (x) the
day such shares of Common Stock are delivered to the holder and (y) the day on
which the holder regains its rights as a holder of Series A Preferred Stock with
respect to such unconverted shares of Series A Preferred Stock pursuant to the
provisions of Article XIV.F hereof. If there shall occur a Conversion Default
of the type described in clause (y) of Article VI.A, then the Fixed Conversion
Price with respect to any conversion thereafter shall be the lowest Closing Bid
Price for the Common Stock during the period beginning on, and including, the
date of the occurrence of such Conversion Default through and including the
Default Cure Date. The Fixed Conversion Price shall thereafter be subject to
further adjustment for any events described in Article XI.
C. Buy-In Cure. Unless the Corporation has notified the applicable
-----------
holder in writing prior to the delivery by such holder of a Notice of Conversion
that the Corporation is
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<PAGE>
unable to honor conversions, if (i) (a) the Corporation fails for any reason to
deliver during the Delivery Period shares of Common Stock to a holder upon a
conversion of shares of Series A Preferred Stock or (b) there shall occur a
Legend Removal Failure (as defined in Article VIII.A(ii) below) and (ii)
thereafter, such holder purchases (in an open market transaction or otherwise)
shares of Common Stock to make delivery in satisfaction of a sale by such holder
of the unlegended shares of Common Stock (the "SOLD SHARES") which such holder
anticipated receiving upon such conversion (a "BUY-IN"), the Corporation shall
pay such holder (in addition to any other remedies available to the holder) the
amount by which (x) such holder's total purchase price (including brokerage
commissions, if any) for the unlegended shares of Common Stock so purchased
exceeds (y) the net proceeds received by such holder from the sale of the Sold
Shares. For example, if a holder purchases unlegended shares of Common Stock
having a total purchase price of $11,000 to cover a Buy-In with respect to
shares of Common Stock it sold for $10,000, the Corporation will be required to
pay the holder $1,000. A holder shall provide the Corporation written
notification indicating any amounts payable to such holder pursuant to this
Paragraph C. The Corporation shall make any payments required pursuant to this
Paragraph C in accordance with and subject to the provisions of Article XIV.E.
D. Redemption Right. If the Corporation fails, and such failure continues
----------------
uncured for five (5) business days after the Corporation has been notified
thereof in writing by the holder, for any reason (other than because such
issuance would exceed such holder's allocated portion of the Reserved Amount or
Cap Amount, for which failures the holders shall have the remedies set forth in
Articles V and VII, respectively) to issue shares of Common Stock within 10
business days after the expiration of the Delivery Period with respect to any
conversion of Series A Preferred Stock, then the holder may elect at any time
and from time to time prior to the Default Cure Date for such Conversion
Default, by delivery of a Redemption Notice to the Corporation, to have all of
such holders shares of Series A Preferred Stock which were submitted for
conversion purchased by the Corporation for cash, at an amount per share equal
to the Redemption Amount (as defined in Article VIII.B). If the Corporation
fails to redeem any of such shares within five business days after its receipt
of such Redemption Notice, then such holder shall be entitled to the remedies
provided in Article VIII.C.
E. Void Notice of Conversion. If for any reason a holder has not received
-------------------------
all of the shares of Common Stock prior to the tenth (10th) business day after
the expiration of the Delivery Period with respect to a conversion of Series A
Preferred Stock and (i) such shares have not been called for redemption pursuant
to Article VIII.D, provided the Redemption Amount therefor has been or may be
paid within the time limits set forth in Article VIII.D, and (ii) such shares
are not subject to a redemption notice from the holder thereof, then the holder,
upon written notice to the Corporation's transfer agent, with a copy to the
Corporation, may void its Notice of Conversion with respect to, and retain or
have returned, as the case may be, any shares of Series A Preferred Stock that
have not been converted pursuant to such holder's Notice of Conversion; provided
that the voiding of a holder's Notice of Conversion shall not affect such
holders rights and remedies which have accrued prior to the date of such notice
pursuant to Article VI hereof or otherwise.
<PAGE>
VII. INABILITY TO LIST OR CONVERT DUE TO CAP AMOUNT
A. Obligation to Cure. If at any time after the Initial Issuance Date
------------------
the then unissued portion of any holder's Cap Amount is less than 135% of the
number of shares of Common Stock then issuable upon conversion of such holder's
shares of Series A Preferred Stock (a "TRADING MARKET TRIGGER EVENT"), the
Corporation shall immediately notify the holders of Series A Preferred Stock of
such occurrence and shall take immediate action (including, if necessary,
seeking the approval of its stockholders to authorize the listing or issuance of
the full number of shares of Common Stock which would be issuable upon the
conversion of the then outstanding shares of Series A Preferred Stock but for
the Cap Amount) to eliminate any prohibitions under applicable law or the rules
or regulations of any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Corporation or any of
its securities on the Corporation's ability to list or issue shares of Common
Stock in excess of the Cap Amount ("TRADING MARKET PROHIBITIONS"). In the event
the Corporation fails to eliminate all such Trading Market Prohibitions within
120 days after the Trading Market Trigger Event, then each holder of Series A
Preferred Stock shall thereafter have the option, exercisable in whole or in
part at any time and from time to time until such date that all such Trading
Market Prohibitions are eliminated, by delivery of a Redemption Notice (as
defined in Article VIII.C) to the Corporation, to require the Corporation to
purchase for cash, at an amount per share equal to the Redemption Amount, a
number of the holder's shares of Series A Preferred Stock such that, after
giving effect to such redemption, the then unissued portion of such holder's Cap
Amount exceeds 135% of the total number of shares of Common Stock issuable upon
conversion of such holder's shares of Series A Preferred Stock. If the
Corporation fails to redeem any of such shares within five (5) business days
after its receipt of such Redemption Notice, then such holder shall be entitled
to the remedies provided in Articles VII.B and VIII.C.
B. Remedies. If the Corporation fails to redeem any shares of Series A
--------
Preferred Stock pursuant to Article VII.A within five business days after its
receipt of such Redemption Notice, and thereafter the Corporation is prohibited,
at any time, from listing shares of Common Stock or from issuing shares of
Common Stock upon conversion of Series A Preferred Stock to any holder because
such listing or issuance would exceed the then unissued portion of such holder's
Cap Amount because of applicable law or the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory organization
with jurisdiction over the Corporation or its securities, any holder who is so
prohibited from converting its Series A Preferred Stock because the shares of
Common Stock underlying such Series A Preferred Stock may not be listed or
issued, may elect either or both of the following additional remedies:
(i) to require, with the consent of holders of at least fifty percent
(50%) of the outstanding shares of Series A Preferred Stock (including any
shares of Series A Preferred Stock held by the requesting holder), the
Corporation to terminate the listing of its Common Stock on the AMEX (or any
other stock exchange, interdealer quotation system or trading market) and to
cause its Common Stock to be eligible for trading on the over-the-counter
electronic bulletin board; or
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<PAGE>
(ii) to require the Corporation to issue shares of Common Stock in
accordance with such holder's Notice of Conversion at a conversion price equal
to the average of the Closing Bid Prices for the Common Stock during the five
consecutive trading days ending on the trading day immediately preceding the
date of the holder's written notice to the Corporation of its election to
receive shares of Common Stock pursuant to this subparagraph (ii) (subject to
equitable adjustment for any stock splits, stock dividends, reclassifications or
similar events during such five trading day period).
C. Adjustment to Conversion Price. If the Corporation is prohibited, at
------------------------------
any time, from listing shares of Common Stock or from issuing shares of Common
Stock upon conversion of Series A Preferred Stock to any holder because such
listing or issuance would exceed the then unissued portion of such holder's Cap
Amount because of applicable law or the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory organization
with jurisdiction over the Corporation or its securities, then the Fixed
Conversion Price in respect of any shares of Series A Preferred Stock held by
any holder (including shares of Series A Preferred Stock submitted to the
Corporation for conversion, but for which shares of Common Stock have not been
issued) shall be adjusted as provided in Article VI.A.
VIII. REDEMPTION
A. Redemption by Holder. In the event (each of the events described in
--------------------
clauses (i)-(v) below after expiration of the applicable cure period (if any)
being a "REDEMPTION EVENT"):
(i) the Common Stock (including, from and after the Issuance Date,
any of the shares of Common Stock issuable upon conversion of the Series A
Preferred Stock) is suspended from trading on any of, or is not listed (and
authorized) for trading on at least one of, the NASDAQ Small Cap Market, the
NASDAQ National Market, the New York Stock Exchange or the American Stock
Exchange for an aggregate of 10 trading days in any nine month period;
(ii) the Corporation fails to remove any restrictive legend on any
certificate or any shares of Common Stock issued to the holders of Series A
Preferred Stock upon conversion of the Series A Preferred Stock as and when
required by this Certificate of Designation, the Securities Purchase Agreement
or the Registration Rights Agreement (as defined below) (a "LEGEND REMOVAL
FAILURE"), and any such failure continues uncured for ten business days after
the Corporation has been notified thereof in writing by the holder;
(iii) the Registration Statement required to be filed by the
Corporation pursuant to Section 2(a) of the Registration Rights Agreement by and
among the Corporation and the other signatories thereto entered into in
connection with the Securities Purchase Agreement (the "REGISTRATION RIGHTS
AGREEMENT") has not been declared effective by April 17, 1999, or such
Registration Statement, after being declared effective, cannot be utilized by
the
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<PAGE>
holders of Series A Preferred Stock for the resale of all of their Registrable
Securities (as defined in the Registration Rights Agreement) for an aggregate of
more than thirty (30) days;
(iv) the Corporation provides notice to any holder of Series A
Preferred Stock, including by way of public announcement, at any time, of its
intention not to issue, or otherwise refuses to issue, shares of Common Stock to
any holder of Series A Preferred Stock upon conversion in accordance with the
terms of this Certificate of Designation (other than due to the circumstances
contemplated by Articles V or VII for which the holders shall have the remedies
set forth in such Articles);
(v) the Corporation shall:
(a) sell, convey or dispose of all or substantially all of its
assets (the presentation of any such transaction for stockholder approval being
conclusive evidence that such transaction involves the sale of all or
substantially all of the assets of the Corporation);
(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 Corporation and other than pursuant to a merger in which the Corporation is
the surviving or continuing entity and the voting capital stock of the
Corporation immediately prior to such merger represents at least 50% of the
voting power of the capital stock of the Corporation after the merger); or
(c) have fifty percent (50%) or more of the voting power of its
capital stock is 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); or
(vi) the Corporation otherwise shall breach any material term
hereunder or under the Securities Purchase Agreement or the Registration Rights
Agreement.
then, upon the occurrence of any such Redemption Event, each holder of shares of
Series A Preferred Stock shall thereafter have the option, exercisable in whole
or in part at any time and from time to time by delivery of a Redemption Notice
(as defined in Paragraph C below) to the Corporation while such Redemption Event
continues, to require the Corporation to purchase for cash any or all of the
then outstanding shares of Series A Preferred Stock held by such holder for an
amount per share equal to the Redemption Amount (as defined in Paragraph B
below) in effect at the time of the redemption hereunder. For the avoidance of
doubt, the occurrence of any event described in clauses (i), (ii), (iii), (iv)
or (v) above shall immediately constitute a Redemption Event and there shall be
no cure period. Upon the Corporation's receipt of any Redemption Notice
hereunder (other than during the three trading day period following the
Corporation's delivery of a Redemption Announcement (as defined below) to all of
the holders in response to the Corporation's initial receipt of a Redemption
Notice from a holder of Series A Preferred Stock), the Corporation shall
promptly (and in any event within two business days following such receipt)
deliver a written notice (a
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<PAGE>
"REDEMPTION ANNOUNCEMENT") to all holders of Series A Preferred Stock stating
the date upon which the Corporation received such Redemption Notice and the
amount of Series A Preferred Stock covered thereby. Subject to Article VIII.D,
the Corporation shall not redeem any shares of Series A Preferred Stock during
the three trading day period following the delivery of a required Redemption
Announcement hereunder. At any time and from time to time during such three
trading day period, each holder of Series A Preferred Stock may request (either
orally or in writing) information from the Corporation with respect to the
instant redemption (including, but not limited to, the aggregate number of
shares of Series A Preferred Stock covered by Redemption Notices received by the
Corporation) and the Corporation shall furnish (either orally or in writing) as
soon as practicable such requested information to such requesting holder.
B. Definition of Redemption Amount. The "REDEMPTION AMOUNT" with respect
-------------------------------
to a share of Series A Preferred Stock means an amount equal to the greater of:
(a) V X M
---------
C P
and
(b) The product of (x) one hundred and fifteen percent (115%), times
(y) the sum of (I) Stated Value thereof, plus (II) the accrued Premium thereon,
plus (III) all unpaid Conversion Default Payments owing (if any) with respect
thereto through the Effective Date of Redemption (as defined in subparagraph
(iii) below).
where:
"V" means the Stated Value thereof, plus the accrued Premium thereon
through the date of payment of the Redemption Amount;
"CP" means the Conversion Price in effect on the date on which the
Corporation receives the Redemption Notice; and
"M" means (i) with respect to all redemptions other than redemptions
pursuant to Article VIII.A(v) hereof, the highest Closing Bid Price of the
Corporation's Common Stock during the period beginning on the date on which the
Corporation receives the Redemption Notice and ending on the date immediately
preceding the date of payment of the Redemption Amount and (ii) with respect to
redemptions pursuant to Article VIII.A(v) hereof, the greater of (a) the amount
determined pursuant to clause (i) of this definition or (b) the fair market
value, as of the date on which the Corporation receives the Redemption Notice,
of the consideration payable to the holder of a share of Common Stock pursuant
to the transaction which triggers the redemption. For purposes of this
definition, "fair market value" for any consideration other than cash (in which
case the fair market value shall equal the amount thereof) or any registered
security (in which case the fair market value shall equal the Closing Bid Price
thereof) shall be determined by the mutual agreement of the
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<PAGE>
Corporation and holders of a majority-in-interest of the shares of Series A
Preferred Stock then outstanding, or if such agreement cannot be reached within
five business days prior to the date of redemption, by an investment banking
firm selected by the Corporation and reasonably acceptable to holders of a
majority-in-interest of the then outstanding shares of Series A Preferred Stock,
with the costs of such appraisal to be borne by the Corporation.
C. Redemption Defaults. If the Corporation fails to pay any holder the
-------------------
Redemption Amount with respect to any share of Series A Preferred Stock within
five business days after its receipt of a notice requiring such redemption (a
"REDEMPTION NOTICE"), then the holder of Series A Preferred Stock delivering
such Redemption Notice (i) shall be entitled to interest on the Redemption
Amount at a per annum rate equal to the lower of twenty-four percent (24%) and
the highest interest rate permitted by applicable law from the date on which the
Corporation receives the Redemption Notice until the date of payment of the
Redemption Amount hereunder, and (ii) shall have the right, at any time and from
time to time, to require the Corporation, upon written notice, to immediately
convert (in accordance with the terms of Paragraph A of Article IV) all or any
portion of the Redemption Amount, plus interest as aforesaid, into shares of
Common Stock at a Conversion Price equal to the lowest Closing Bid Price for the
Common Stock during the period beginning on the date on which the Corporation
receives the Redemption Notice and ending on the Conversion Date with respect to
the conversion of such Redemption Amount. In the event the Corporation is not
able to redeem all of the shares of Series A Preferred Stock subject to
Redemption Notices delivered prior to the date upon which such redemption is to
be effected, the Corporation shall redeem shares of Series A Preferred Stock
from each holder pro rata, based on the total number of shares of Series A
Preferred Stock outstanding at the time of redemption included by such holder in
all Redemption Notices delivered prior to the date upon which such redemption is
to be effected relative to the total number of shares of Series A Preferred
Stock outstanding at the time of redemption included in all of the Redemption
Notices delivered prior to the date upon which such redemption is to be
effected.
D. Redemption by Corporation.
-------------------------
(i) The Corporation shall have the right at any time and from time to
time to redeem any shares which are the subject of a Notice of Conversion for an
amount of cash equal to the Redemption Amount as determined pursuant to clause
(a) of its definiton (a "REDEMPTION IN LIEU OF CONVERSION"), in its sole
discretion by delivery of an Optional Redemption Notice in accordance with the
redemption procedures set forth below.
(ii) Within ten (10) calendar days prior to the beginning of any
calendar month during which the Corporation elects to effect a Redemption in
Lieu of Conversion, the Corporation shall provide written notice to the holders
of Series A Preferred Stock by facsimile and overnight courier stating that the
Corporation will redeem any conversions of Series A Preferred Stock in such
calendar month (an "OPTIONAL REDEMPTION NOTICE"). In the event the Corporation
fails to provide an Optional Redemption Notice to the holders of Series A
Preferred Stock within such ten (10) day period, the Corporation shall not be
permitted to so redeem any
-15-
<PAGE>
conversions of Series A Preferred Stock during such calendar month. In the event
a timely Optional Redemption Notice is provided as aforesaid, upon the
Corporation's receipt of a Notice of Conversion the Corporation shall be
obligated to redeem on or before the fifth business day after the receipt of the
Notice of Conversion, the entire number of shares of the Series A Preferred
Stock which are the subject of the Notice of Conversion for the Redemption
Amount as determined pursuant to clause (a) of its definition.
(iii) After the two (2) year anniversary of the Issuance Date, the
Corporation shall have the right, on one occasion and on 10 business days prior
written notice, to redeem all, but not less than all, of the then outstanding
shares of Series A Preferred Stock by paying to each holder an amount per share
of Series A Preferred Stock equal to 150% of the sum of (x) the Stated Value
thereof, plus (y) accrued Premium thereon. At all times prior to redemption
pursuant to this Article VIII.D (including after receipt of the notice required
by this Article), each holder of Series A Preferred Stock shall remain entitled
to convert shares of Series A Preferred Stock into shares of Common Stock in
accordance with the terms of Article IV hereof.
E. Void Redemption. In the event that the Corporation does not pay the
---------------
Redemption Amount within the time period set forth in Article IV.D, Article
VIII.A or Article VIII.D, at any time thereafter and until the Corporation pays
such unpaid applicable Redemption Amount in full, a holder of Series A Preferred
Stock shall have the option (the "VOID OPTIONAL REDEMPTION OPTION") to, in lieu
of redemption, require the Corporation to promptly return to such holder any or
all of the shares of Series A Preferred Stock that were submitted for redemption
by such holder under this Article VIII and for which the applicable Redemption
Amount (together with any interest thereon) has not been paid, by sending
written notice thereof to the Corporation via facsimile and confirmed by
overnight courier, in person (by courier or otherwise) or by telephone (to an
authorized officer of the Corporation or his or her administrative assistant)
(the "VOID OPTIONAL REDEMPTION NOTICE"). Upon the Corporation's receipt of such
Void Optional Redemption Notice and overnight courier, in-person or telephone
confirmation, (i) the Notice of Redemption shall be null and void with respect
to those shares of Series A Preferred Stock subject to the Void Optional
Redemption Notice, and (ii) the Corporation shall immediately return any shares
of Series A Preferred Stock subject to the Void Optional Redemption Notice.
IX. RANK
The Series A Preferred Stock shall rank (i) prior to all classes of the
Corporation's common stock and any class or series of capital stock of the
Corporation hereafter created that, by its terms, ranks junior to the Series A
Preferred Stock (collectively, "JUNIOR SECURITIES"); (ii) junior to any class or
series of capital stock of the Corporation hereafter created (with the consent
of the holders of Series A Preferred Stock obtained in accordance with Article
XIII hereof) specifically ranking, by its terms, senior to the Series A
Preferred Stock ("SENIOR SECURITIES"); and (iii) pari passu with the Series B
----------
Preferred Stock of the Corporation, the Series C Preferred Stock of the
Corporation, and any class or series of capital stock of the Corporation
hereafter created (with the consent of the holders of the Series A Preferred
Stock obtained in accordance with Article XIII hereof) specifically
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<PAGE>
ranking by its terms on parity with the Series A Preferred Stock (collectively,
the "PARI PASSU SECURITIES"), in each case as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary.
X LIQUIDATION PREFERENCE
A If the Corporation shall commence a voluntary case under the U.S.
Federal bankruptcy laws or any other applicable bankruptcy, insolvency or
similar law, or consent to the entry of an order for relief in an involuntary
case under any law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Corporation
or of any substantial part of its property, or make an assignment for the
benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Corporation shall be entered by a court having jurisdiction in the premises
in an involuntary case under the U.S. Federal bankruptcy laws or any other
applicable bankruptcy, insolvency or similar law resulting in the appointment of
a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its property,
or ordering the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of 60 consecutive days and,
on account of any such event (a "LIQUIDATION EVENT"), the Corporation shall
liquidate, dissolve or wind up, or if the Corporation shall otherwise liquidate,
dissolve or wind up, no distribution shall be made to the holders of any shares
of capital stock of the Corporation (other than Senior Securities and Pari Passu
Securities) upon liquidation, dissolution or winding up unless prior thereto the
holders of shares of Series A Preferred Stock shall have received the
Liquidation Preference with respect to each share. If, upon the occurrence of a
Liquidation Event, the assets and funds available for distribution among the
holders of the Series A Preferred Stock and holders of Pari Passu Securities
---- -----
shall be insufficient to permit the payment to such holders of the preferential
amounts payable thereon, then the entire assets and funds of the Corporation
legally available for distribution to the Series A Preferred Stock and the Pari
----
Passu Securities shall be distributed ratably among such shares in proportion to
- -----
the ratio that the Liquidation Preference payable on each such share bears to
the aggregate Liquidation Preference payable on all such shares.
B At the option of any holder of Series A Preferred Stock, the occurrence
of any event enumerated in Article VIII.A(v) hereof shall either: (i) be deemed
to be a liquidation, dissolution or winding up of the Corporation for purposes
of this Article X; or (ii) be treated pursuant to Article XI hereof. "Person"
shall mean any individual, corporation, limited liability company, partnership,
association, trust or other entity or organization.
C The purchase or redemption by the Corporation of stock of any class, in
any manner permitted by law, shall not, for the purposes hereof, be regarded as
a liquidation, dissolution or winding up of the Corporation. Except as provided
in Paragraph B above, neither the consolidation or merger of the Corporation
with or into any other entity nor the sale or transfer by the Corporation of
less than substantially all of its assets shall, for the purposes hereof, be
deemed to be a liquidation, dissolution or winding up of the Corporation.
-17-
<PAGE>
D The "LIQUIDATION PREFERENCE" with respect to a share of Series A
Preferred Stock means an amount equal to the Stated Value thereof, plus the
accrued Premium thereon through the date of final distribution. The Liquidation
Preference with respect to any Pari Passu Securities shall be as set forth in
---- -----
the Certificate of Designation filed in respect thereof.
XI ADJUSTMENTS TO THE CONVERSION PRICE
The Conversion Price shall be subject to adjustment from time to time as
follows:
A Stock Splits, Stock Dividends, Etc. If, at any time on or after the
-----------------------------------
Issuance Date, the number of outstanding shares of Common Stock is increased by
a stock split, stock dividend, combination, reclassification or other similar
event, the Fixed Conversion Price shall be proportionately reduced, or if the
number of outstanding shares of Common Stock is decreased by a reverse stock
split, combination or reclassification of shares, or other similar event, the
Fixed Conversion Price shall be proportionately increased. In such event, the
Corporation shall notify the Corporation's transfer agent of such change on or
before the effective date thereof.
B Adjustment Due to Merger, Consolidation, Etc. If, at any time after
---------------------------------------------
the Issuance Date, there shall be (i) any reclassification or change of the
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination), (ii) any consolidation or merger of the
Corporation with any other entity (other than a merger in which the Corporation
is the surviving or continuing entity and its capital stock is unchanged) or
(iii) any share exchange pursuant to which all of the outstanding shares of
Common Stock are converted into other securities or property (each of (i) -
(iii) above being a "CORPORATE CHANGE"), then the holders of Series A Preferred
Stock shall thereafter have the right to receive upon conversion, in lieu of the
shares of Common Stock otherwise issuable, such shares of stock, securities
and/or other property as would have been issued or payable in such Corporate
Change with respect to or in exchange for the number of shares of Common Stock
which would have been issuable upon conversion (without giving effect to the
limitations contained in Article IV.C) had such Corporate Change not taken
place, and in any such case, appropriate provisions (in form and substance
reasonably satisfactory to the holders of a majority of the Series A Preferred
Shares then outstanding) shall be made with respect to the rights and interests
of the holders of the Series A Preferred Stock to the end that the economic
value of the shares of Series A Preferred Stock are in no way diminished by such
Corporate Change and that the provisions hereof (including, without limitation,
in the case of any such consolidation, merger or sale in which the successor
entity or purchasing entity is not the Corporation, an immediate adjustment of
the Fixed Conversion Price so that the Fixed Conversion Price immediately after
the Corporate Change reflects the same relative value as compared to the value
of the surviving entity's common stock that existed between the Fixed Conversion
Price and the value of the Corporation's Common Stock immediately prior to such
Corporate Change and an immediate revision to the Variable Conversion Price so
that it is determined as provided in Article III.I but based on the price of the
common stock of the surviving entity and the market in which such common stock
is traded) shall
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<PAGE>
thereafter be applicable, as nearly as may be practicable in relation to any
shares of stock or securities thereafter deliverable upon the conversion
thereof. The Corporation shall not effect any Corporate Change unless (i) each
holder of Series A Preferred Stock has received written notice of such
transaction along with the notice sent to the holders of the Common Stock of the
Corporation, but in no event later than 20 days prior to the record date for the
determination of stockholders entitled to vote with respect thereto, and (ii)
the resulting, successor or acquiring entity (if not the Corporation) assumes by
written instrument (in form and substance reasonably satisfactory to the holders
of a majority of the Series A Preferred Shares then outstanding) the obligations
of this Certificate of Designation. The above provisions shall apply regardless
of whether or not there would have been a sufficient number of shares of Common
Stock authorized and available for issuance upon conversion of the shares of
Series A Preferred Stock outstanding as of the date of such transaction, and
shall similarly apply to successive reclassifications, consolidations, mergers,
sales, transfers or share exchanges.
C Adjustment Due to Major Announcement. In the event the Corporation at
------------------------------------
any time after the Issuance Date and after the occurrence of a Milestone Failure
(i) makes a public announcement that it intends to consolidate or merge with any
other entity (other than a merger in which the Corporation is the surviving or
continuing entity and the voting capital stock of the Corporation immediately
prior to such merger represents at least 50% of the voting power of the capital
stock of the Corporation after the merger) or to sell or transfer all or
substantially all of the assets of the Corporation or (ii) any person, group or
entity (including the Corporation, but excluding the holders of Series A
Preferred Stock and their affiliates) publicly announces a tender offer,
exchange offer or another transaction to purchase 50% or more of the
Corporation's Common Stock or otherwise publicly announces an intention to
replace a majority of the Corporation's Board of Directors by waging a proxy
battle or otherwise (the date of the announcement or commencement referred to in
clause (i) or (ii) of this Paragraph C is hereinafter referred to as the
"ANNOUNCEMENT DATE"), then the Conversion Price shall, effective upon the
Announcement Date and continuing through the earlier of the consummation of the
proposed transaction or tender offer, exchange offer or another transaction or
the Abandonment Date (as defined below) (the earlier of such dates being the
"ADJUSTED CONVERSION PRICE TERMINATION DATE"), be equal to the lower of (x) the
Conversion Price which would have been applicable for an Optional Conversion
occurring on the Announcement Date and (y) the Conversion Price determined in
accordance with Article III.C on the Conversion Date set forth in the Notice of
Conversion for the Optional Conversion. After the Adjusted Conversion Price
Termination Date, the Conversion Price shall be determined as set forth in
Article III.C. "ABANDONMENT DATE" means with respect to any proposed
transaction or tender offer, exchange offer or another transaction for which a
public announcement or an action contemplated by this Paragraph C has been made
or commenced, the date upon which the Corporation (in the case of clause (i)
above) or the person, group or entity (in the case of clause (ii) above)
publicly announces the termination or abandonment of the proposed transaction or
tender offer, exchange offer or another transaction which caused this Paragraph
C to become operative.
D Adjustment Due to Distribution. If, at any time after the Issuance
------------------------------
Date, the Corporation shall declare or make any distribution of its assets (or
rights to acquire its assets) to holders of Common Stock as a partial
liquidating dividend, by way of return of capital or otherwise
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<PAGE>
(including any dividend or distribution to the Corporation's common stockholders
in shares (or rights to acquire shares) of capital stock of a subsidiary (i.e. a
spin-off)) (a "DISTRIBUTION"), then the holders of Series A Preferred Stock
shall be entitled, upon any conversion of shares of Series A Preferred Stock
after the date of record for determining stockholders entitled to such
Distribution, to receive the amount of such assets which would have been payable
to the holder with respect to the shares of Common Stock issuable upon such
conversion (without giving effect to the limitations contained in Article IV.C)
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.
E Issuance of Other Securities. If at any time after the Issuance Date
----------------------------
the Company issues or sells any shares of Common Stock or any securities which
are convertible into or exchangeable for Common Stock ("CONVERTIBLE SECURITIES")
for no consideration or for a consideration per share less than the Closing Bid
Price in effect on the date of issuance of such securities (a "DILUTIVE
ISSUANCE"), then effective immediately upon the Dilutive Issuance, the Fixed
Conversion Price will be adjusted in accordance with the formula below.
F' = F x O + P/CBP
-------------
CSDO
where:
F' = the adjusted Fixed Conversion Price;
F = the then current Fixed Conversion Price;
CBP = the then current Closing Bid Price;
O = the number of shares of Common Stock outstanding immediately
prior to the Dilutive Issuance;
P = the aggregate consideration, calculated as set forth herein,
received by the Company upon such Dilutive Issuance; and
CSDO = the total number of shares of Common Stock deemed
outstanding immediately after the Dilutive Issuance.
F Purchase Rights. If, at any time after the Issuance Date, the
---------------
Corporation issues any securities which are convertible into or exchangeable for
Common Stock, or rights to purchase stock, warrants, securities or other
property (the "PURCHASE RIGHTS") pro rata to the record holders of any class of
Common Stock, then the holders of Series A Preferred Stock will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which such holder could have acquired if such holder had held
the number of shares of Common Stock acquirable upon complete conversion of the
Series A Preferred Stock (without giving effect to the limitations contained in
Article IV.C) immediately before the date on which a record is taken for the
grant, issuance or sale of such Purchase Rights, or, if no such record is taken,
the date as of which the record holders of Common Stock are to be determined for
the grant, issue or sale of such Purchase Rights.
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<PAGE>
G Notice of Adjustments. Upon the occurrence of each adjustment or
---------------------
readjustment of the Conversion Price and/or the Fixed Conversion Price pursuant
to this Article XI, the Corporation, at its expense, shall promptly compute such
adjustment or readjustment and prepare and furnish to each holder of Series A
Preferred Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any holder of
Series A Preferred Stock, furnish to such holder a like certificate setting
forth (i) such adjustment or readjustment, (ii) the Conversion Price and/or the
Fixed Conversion Price at the time in effect and (iii) the number of shares of
Common Stock and the amount, if any, of other securities or property which at
the time would be received upon conversion of a share of Series A Preferred
Stock.
XII VOTING RIGHTS
The holders of the Series A Preferred Stock have no voting power
whatsoever, except as otherwise provided by the Delaware General Corporation Law
(the "BUSINESS CORPORATION ACT") and in Article XIII below.
Notwithstanding the above, the Corporation shall provide each holder of
Series A Preferred Stock with prior notification of any meeting of the
stockholders (and copies of proxy materials and other information sent to
stockholders) at the same time such notice and materials are provided to the
holders of Common Stock. If the Corporation takes a record of its stockholders
for the purpose of determining stockholders entitled to (a) receive payment of
any dividend or other distribution, any right to subscribe for, purchase or
otherwise acquire (including by way of merger consolidation or recapitalization)
any share of any class or any other securities or property, or to receive any
other right, or (b) to vote in connection with any proposed sale, lease or
conveyance of all or substantially all of the assets of the Corporation, or any
proposed merger, consolidation, liquidation, dissolution or winding up of the
Corporation, the Corporation shall mail a notice to each holder, at least 20
days prior to the record date specified therein (but in no event earlier than
public announcement of such proposed transaction), of the date on which any such
record is to be taken for the purpose of such dividend, distribution, right or
other event, and a brief statement regarding the amount and character of such
dividend, distribution, right or other event to the extent known at such time.
To the extent that under the Business Corporation Act the vote of the
holders of the Series A Preferred Stock, voting separately as a class or series,
as applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the holders of at least a majority of the then
outstanding shares of the Series A Preferred Stock represented at a duly held
meeting at which a quorum is present or by written consent of the holders of at
least a majority of the then outstanding shares of Series A Preferred Stock
(except as otherwise may be required under the Business Corporation Act) shall
constitute the approval of such action by the class. To the extent that under
the Business Corporation Act holders of the Series A Preferred Stock are
entitled to vote on a matter with holders of Common Stock, voting together as
one class, each share of Series A Preferred Stock shall be entitled to a number
of votes equal to the number of shares of Common Stock into which it is then
convertible (subject to the limitations contained in Article IV.C(ii)) using
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<PAGE>
the record date for the taking of such vote of stockholders as the date as of
which the Conversion Price is calculated.
XIII. PROTECTION PROVISIONS
So long as any shares of Series A Preferred Stock are outstanding, the
Corporation shall not without first obtaining the approval (by vote or written
consent, as provided by the Business Corporation Act) of the holders of 67% of
the then outstanding shares of Series A Preferred Stock:
(a) alter or change the rights, preferences or privileges of the
Series A Preferred Stock;
(b) alter or change the rights, preferences or privileges of any
previously issued shares of capital stock of the Corporation so as to affect
adversely the Series A Preferred Stock;
(c) create any new class or series of capital stock having a
preference over the Series A Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article IX hereof, "SENIOR SECURITIES");
(d) create any new class or series of capital stock (other than
the Series B Preferred Stock and Series C Preferred Stock) ranking pari passu
---- -----
with the Series A Preferred Stock as to distribution of assets upon liquidation,
dissolution or winding up of the Corporation (as previously defined in Article
IX hereof, "PARI PASSU SECURITIES");
---- -----
(e) increase the authorized number of shares of Series A
Preferred Stock;
(f) issue any shares of Senior Securities or Pari Passu
Securities, other than an aggregate of up to 1,400 shares of Series B Preferred
Stock and Series C Preferred Stock to Robert Mackie, Sr., Robert Mackie, Jr.,
Marjorie Brooks, Ike Tull, Michael Tull, Mr. and Mrs. Delbert Allen, Jr., Mr.
and Mrs. Fritz Friday, Allen & Co. and Millenco LLP;
(g) issue any shares of Series A Preferred Stock other than
pursuant to the Securities Purchase Agreement;
(h) redeem, or declare or pay any cash dividend or distribution
on, any Junior Securities; or
(i) increase the par value of the Common Stock.
Notwithstanding the foregoing, no change pursuant to this Article XIII shall be
effective to the extent that, by its terms, it applies to less than all of the
holders of shares of Series A Preferred Stock then outstanding.
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<PAGE>
XIV MISCELLANEOUS
A Cancellation of Series A Preferred Stock. If any shares of Series A
----------------------------------------
Preferred Stock are converted pursuant to Article IV, the shares so converted
shall be canceled, shall return to the status of authorized, but unissued
preferred stock of no designated series, and shall not be issuable by the
Corporation as Series A Preferred Stock.
B Lost or Stolen Certificates. Upon receipt by the Corporation of (i)
---------------------------
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of
indemnity (without any bond or other security) reasonably satisfactory to the
Corporation, or (z) in the case of mutilation, upon surrender and cancellation
of the Preferred Stock Certificate(s), the Corporation shall execute and deliver
new Preferred Stock Certificate(s) of like tenor and date. However, the
Corporation shall not be obligated to reissue such lost or stolen Preferred
Stock Certificate(s) if the holder contemporaneously requests the Corporation to
convert such Series A Preferred Stock.
C Allocation of Cap Amount and Reserved Amount. The initial Cap Amount
--------------------------------------------
and Reserved Amount shall be allocated pro rata among the holders of Series A
Preferred Stock based on the number of shares of Series A Preferred Stock issued
to each holder. Each increase to the Cap Amount and the Reserved Amount shall
be allocated pro rata among the holders of Series A Preferred Stock based on the
number of shares of Series A Preferred Stock held by each holder at the time of
the increase in the Cap Amount or Reserved Amount. In the event a holder shall
sell or otherwise transfer any of such holder's shares of Series A Preferred
Stock, each transferee shall be allocated a pro rata portion of such
transferor's Cap Amount and Reserved Amount. Any portion of the Cap Amount or
Reserved Amount which is allocated to any person or entity which does not hold
any Series A Preferred Stock shall be re-allocated to the remaining holders of
shares of Series A Preferred Stock, pro rata based on the number of shares of
Series A Preferred Stock then held by such holders.
D Quarterly Statements of Available Shares. For each calendar quarter
----------------------------------------
beginning in the quarter in which the initial registration statement required to
be filed pursuant to the Registration Rights Agreement is declared effective and
thereafter so long as any shares of Series A Preferred Stock are outstanding,
the Corporation shall deliver (or cause its transfer agent to deliver) to each
holder a written report notifying the holders of any occurrence which prohibits
the Corporation from issuing Common Stock upon any such conversion. The report
shall also specify (i) the total number of shares of Series A Preferred Stock
outstanding as of the end of such quarter, (ii) the total number of shares of
Common Stock issued upon all conversions of Series A Preferred Stock prior to
the end of such quarter, (iii) the total number of shares of Common Stock which
are reserved for issuance upon conversion of the Series A Preferred Stock as of
the end of such quarter and (iv) the total number of shares of Common Stock
which may thereafter be listed or issued by the Corporation upon conversion of
the Series A Preferred Stock before the Corporation would exceed the Cap Amount
and the Reserved Amount. The Corporation (or its transfer agent) shall deliver
the report
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<PAGE>
for each quarter to each holder prior to the tenth day of the calendar month
following the quarter to which such report relates. In addition, the Corporation
(or its transfer agent) shall provide, within 15 days after delivery to the
Corporation of a written request by any holder, any of the information
enumerated in clauses (i) - (iv) of this Paragraph D as of the date of such
request.
E Payment of Cash; Defaults. Whenever the Corporation is required to
-------------------------
make any cash payment to a holder under this Certificate of Designation (upon
redemption or otherwise), such cash payment shall be made to the holder within
five business days after delivery by such holder of a notice specifying that the
holder elects to receive such payment in cash and the method (e.g., by check,
wire transfer) in which such payment should be made. If such payment is not
delivered within such five business day period, such holder shall thereafter be
entitled to interest on the unpaid amount at a per annum rate equal to the lower
of twenty-four percent (24%) and the highest interest rate permitted by
applicable law until such amount is paid in full to the holder.
F Status as Stockholder. Upon submission of a Notice of Conversion by a
---------------------
holder of Series A Preferred Stock, (i) the shares covered thereby (other than
the shares, if any, which cannot be issued because their listing or issuance
would exceed such holder's allocated portion of the Reserved Amount or Cap
Amount) shall be deemed converted into shares of Common Stock and (ii) the
holder's rights as a holder of such converted shares of Series A Preferred Stock
shall cease and terminate, excepting only the right to receive certificates for
such shares of Common Stock and to any remedies provided herein or otherwise
available at law or in equity to such holder because of a failure by the
Corporation to comply with the terms of this Certificate of Designation.
Notwithstanding the foregoing, if a holder has not received certificates for all
shares of Common Stock prior to the tenth business day after the expiration of
the Delivery Period with respect to a conversion of Series A Preferred Stock for
any reason, then (unless the holder otherwise elects to retain its status as a
holder of Common Stock by so notifying the Corporation within five business days
after the expiration of such 10 business day period) the holder shall regain the
rights of a holder of Series A Preferred Stock with respect to such unconverted
shares of Series A Preferred Stock and the Corporation shall, as soon as
practicable, return such unconverted shares to the holder. In all cases, the
holder shall retain all of its rights and remedies (including, without
limitation, the right to have the Conversion Price with respect to subsequent
conversions determined in accordance with Article VI.A) for the Corporation's
failure to convert Series A Preferred Stock.
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<PAGE>
G Remedies Cumulative. The remedies provided in this Certificate of
-------------------
Designation shall be cumulative and in addition to all other remedies available
under this Certificate of Designation, at law or in equity (including a decree
of specific performance and/or other injunctive relief), and nothing herein
shall limit a holder's right to pursue actual damages for any failure by the
Corporation to comply with the terms of this Certificate of Designation. The
Corporation acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the holders of Series A Preferred Stock and that the
remedy at law for any such breach may be inadequate. The Corporation therefore
agrees, in the event of any such breach or threatened breach, that the holders
of Series A Preferred Stock shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf
of the Corporation this 9th day of November, 1998.
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
By:/s/ Joe G. Brooks
--------------------------------
Name: Joe. G. Brooks
Title: President
<PAGE>
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series A Preferred Stock)
The undersigned hereby irrevocably elects to convert ____________ shares of
Series A Preferred Stock (the "CONVERSION"), represented by stock certificate
Nos(s). ___________ (the "PREFERRED STOCK CERTIFICATES"), into shares of common
stock ("COMMON STOCK") of Advanced Environmental Recycling Technologies, Inc.
(the "CORPORATION") according to the conditions of the Certificate of
Designation, Rights and Preferences of the Series A Convertible Preferred Stock
of the Corporation as of the date written below. If securities are to be issued
in the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto. No fee will be charged to the
holder for any conversion, except for transfer taxes, if any. A copy of each
Preferred Stock Certificate is attached hereto (or evidence of loss, theft or
destruction thereof).
The undersigned requests that the Corporation electronically transmit the Common
Stock issuable pursuant to this Notice of Conversion to the account of the
undersigned or its nominee (which is _________________) with DTC through its
Deposit Withdrawal Agent Commission System ("DTC TRANSFER").
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Series A Preferred Stock shall be made pursuant to registration of the Common
Stock under the Securities Act of 1933, as amended (the "ACT"), or pursuant to
an exemption from registration under the Act.
[_] In lieu of receiving the shares of Common Stock issuable pursuant to this
Notice of Conversion by way of DTC Transfer, the undersigned hereby
requests that the Corporation issue and deliver to the undersigned physical
certificates representing such shares of Common Stock.
Date of Conversion:____________________________________
Applicable Conversion Price: __________________________
Number of Shares of Common
Stock to be Issued:____________________________________
Signature:_____________________________________________
Name:__________________________________________________
Address:_______________________________________
_______________________________________
_______________________________________
<PAGE>
EXHIBIT 10.35
EXHIBIT A
to Securities
Purchase
Agreement
CERTIFICATE OF DESIGNATIONS,
RIGHTS AND PREFERENCES
OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
Advanced Environmental Recycling Technologies, Inc., a corporation
organized and existing under the General Corporation Law of the State of
Delaware (the "Corporation"), hereby certifies that the following resolutions
were adopted by the Board of Directors of the Corporation pursuant to authority
of the Board of Directors as required by Section 151 of the Delaware General
Corporation Law;
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the "Board of Directors" or the "Board")
in accordance with the provisions of its Certificate of Incorporation, the Board
of Directors hereby authorizes a series of the Corporation's previously
authorized Preferred Stock, par value $1.00 per share (the "Preferred Stock"),
and hereby states the designation and number of shares, and fixes the relative
rights, preferences, privileges, powers and restrictions thereof as follows:
Series B Convertible Preferred Stock:
I. DESIGNATION AND AMOUNT
The designation of this series, which consists of 900 shares of Preferred
Stock, is the Series B Convertible Preferred Stock (the "Series B Preferred
Stock") and the stated value shall be One Thousand U.S. Dollars ($1,000.00) per
share (the "Stated Value").
II. NO DIVIDENDS
The Series B Preferred Stock will bear no dividends, and the holders of
the Series B Preferred Stock shall not be entitled to receive dividends on the
Series B Preferred Stock.
III. CERTAIN DEFINITIONS
<PAGE>
For purposes of this Certificate of Designation, the following terms shall
have the following meanings:
A. "Closing Bid Price" means, for any security as of any date, the closing
bid price of such security on the principal 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 Corporation and reasonably acceptable to holders of a majority
of the then outstanding shares of Series B Preferred Stock. 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 bid 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
bid 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. If the Closing Bid Price cannot be
calculated for such security on such date 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
Corporation and reasonably acceptable to holders of a majority of the then
outstanding shares of Series B Preferred Stock, with the costs of such appraisal
to be borne by the Corporation.
B. "Conversion Date" means, for any Optional Conversion, the date on which
the notice of conversion in the form attached hereto (the "Notice of
Conversion") is delivered by fax, as evidenced by a mechanically or
electronically generated confirmation thereof, (or delivered by other means
resulting in notice) to the Corporation on the Conversion Date indicated in the
Notice of Conversion.
C. "Conversion Price" means the Fixed Conversion Price if no Milestone
Failure has occurred and, if a Milestone Failure has occurred, the lower of the
Fixed Conversion Price and the Variable Conversion Price, each in effect as of
such date and subject to adjustment as provided herein. Notwithstanding the
foregoing, at all times prior to the one (1) year anniversary of the Issuance
Date, the Conversion Price means the Fixed Conversion Price, in effect as of
such date and subject to adjustment as provided herein.
D. "Fixed Conversion Price" means $1.20.
E. "Issuance Date" means the date of the Closing (as defined in that
certain Securities Purchase Agreement by and among the Corporation and the
purchasers named therein with respect to the initial issuance of the Series B
Preferred Stock (the "Securities Purchase Agreement").
F. "Milestone Failure" means the Corporation's failure to achieve one or
more of the following milestones:
(i) The Corporation's quarterly sales for the Corporation's first
fiscal quarter in 1999, as reported in the Corporation's Quarterly Report
on Form 10-Q ("Form 10-Q") for such quarter, shall be not less than
$4,500,000.
2
<PAGE>
(ii) The Corporation's quarterly sales for each of the Corporation's
fiscal quarters commencing with the second fiscal quarter of 1999 and for
each fiscal quarter thereafter, as reported in Form 10-Q or in the
Corporation's Annual Report on Form 10-K ("Form 10-K"), as applicable, for
each such quarter, shall be not less than $6,000,000.
(iii) The Corporation's quarterly cash flow from operations shall be
positive for each of the Corporation's fiscal quarters, commencing with
the fourth fiscal quarter of 1998 and for each fiscal quarter thereafter,
as reported in Form 10-Q or Form 10-K, as applicable.
G. "N" means the number of days from, but excluding, the Issuance Date.
H. "Premium" means an amount equal to (.10)x(N/365)x(1,000).
I. "Variable Conversion Price" means the average of the Closing Bid Prices
for the Common Stock (as defined below) 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).
IV. CONVERSION
A. Conversion at the Option of the Holder. (i) Subject to the limitations
on conversions contained in Paragraph C of this Article IV and to the
Corporation's right of redemption contained in Article VIII.D, each holder of
shares of Series B Preferred Stock may, at any time and from time to time on or
after the Issuance Date, convert (an "Optional Conversion") each of its shares
of Series B Preferred Stock into a number of fully paid and nonassessable shares
of the Corporation's Class A Common Stock, $.01 par value per share (the "Common
Stock"), determined in accordance with the following formula if the Corporation
timely redeems the Premium thereon in cash in accordance with subparagraph (ii)
below:
1,000
------------------
Conversion Price
or in accordance with the following formula if the Corporation does not timely
redeem the Premium thereon in accordance with subparagraph (ii) below:
1,000 + the Premium
------------------
Conversion Price
(ii) (a) The Corporation shall have the right, in its sole
discretion, upon receipt of a Notice of Conversion, to redeem the Premium
subject to such conversion for a sum of cash equal to the amount of the
Premium being so redeemed. All cash redemption payments hereunder shall be
paid in lawful money of the United States of America at such address for
the holder as appears on the record books of the Corporation (or at such
other address as such holder shall hereafter give to the Corporation by
written notice). In the event the Corporation so elects to redeem the
Premium in cash
3
<PAGE>
and fails to pay such holder the applicable redemption amount to which
such holder is entitled by depositing a check in the U.S. Mail to such
holder within four (4) business days of receipt by the Corporation of a
Notice of Conversion (in the case of a redemption in connection with an
Optional Conversion), the Corporation shall thereafter forfeit its right
to redeem such Premium in cash and such Premium shall thereafter be
converted into shares of Common Stock in accordance with Article IV.A(i).
(b) Each holder of Series B Preferred Stock shall have the
right to require the Corporation to provide advance notice to such
holder stating whether the Corporation will elect to redeem the
Premium in cash pursuant to the Corporation's redemption rights
discussed in subparagraph (a) of this Article IV.A(ii). A holder may
exercise such right from time to time by sending notice (an
"Election Notice") to the Corporation, by facsimile, requesting that
the Corporation disclose to such holder whether the Corporation
would elect to redeem the Premium for cash in lieu of issuing shares
of Common Stock therefor if such holder were to exercise its right
of conversion pursuant to this Article IV.A. The Corporation shall,
no later than the close of business on the second business day
following receipt of an Election Notice, disclose to such holder
whether the Corporation would elect to redeem the Premium in
connection with a conversion pursuant to a Notice of Conversion
delivered over the subsequent ten (10) business day period. If the
Corporation does not respond to such holder within such two business
day period via facsimile, the Corporation shall, with respect to any
conversion pursuant to a Conversion Notice delivered within the
subsequent ten (10) business day period, forfeit its right to redeem
such Premium in accordance with subparagraph (a) of this Article
IV.A(ii) and shall be required to convert such Premium into shares
of Common Stock.
B. Mechanics of Conversion. In order to effect an Optional Conversion, a
holder shall: (x) fax (or otherwise deliver) a copy of the fully executed Notice
of Conversion to the Corporation or the transfer agent for the Common Stock and
(y) surrender or cause to be surrendered the original certificates representing
the Series B Preferred Stock being converted (the "Preferred Stock
Certificates"), duly endorsed, along with a copy of the Notice of Conversion as
soon as practicable thereafter to the Corporation or the transfer agent. Upon
receipt by the Corporation of the Notice of Conversion by fax from a holder, the
Corporation shall, within one business day, send, via fax, a confirmation (the
"Notice of Conversion Confirmation") to such holder stating that the Notice of
Conversion has been received, the date upon which the Corporation expects to
deliver the Common Stock issuable upon such conversion, and the name and
telephone number of a contact person at the Corporation regarding the
conversion. The Corporation shall not be obligated to issue shares of Common
Stock upon a conversion unless either the Preferred Stock Certificates are
delivered to the Corporation or the transfer agent as provided above, or the
holder notifies the Corporation or the transfer agent that such certificates
have been lost, stolen or destroyed and delivers the documentation to the
Corporation required by Article XIV.B hereof.
(i) Delivery of Common Stock Upon Conversion. Upon the surrender of
Preferred Stock Certificates from a holder of Series B Preferred Stock
accompanied by a Notice of Conversion, the Corporation shall, subject to
the Corporation's redemption rights set forth in Article VIII.D, no later
than the later of (a) the third business day following the Conversion Date
and (b) the business day following the date of such surrender (or, in the
case of lost, stolen or destroyed certificates, after provision of
documentation pursuant to Article XIV.B) (the "Delivery Period"), issue
and deliver to the holder or its nominee, (x) that number of shares of
Common Stock issuable upon conversion of such
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shares of Series B Preferred Stock being converted and (y) a certificate
representing the number of shares of Series B Preferred Stock not being
converted, if any. If the Corporation's transfer agent is participating in
the Depository Trust Company ("DTC") Fast Automated Securities Transfer
program, and so long as the certificates therefor do not bear a legend and
the holder thereof is not then required to return such certificate for the
placement of a legend thereon, the Corporation may cause its transfer
agent to electronically transmit the Common Stock issuable upon conversion
to the holder by crediting the account of the holder or its nominee with
DTC through its Deposit Withdrawal Agent Commission system ("DTC
Transfer"). If the aforementioned conditions to a DTC Transfer are not
satisfied or a DTC Transfer is otherwise not effected, the Corporation
shall deliver to the holder physical certificates representing the Common
Stock issuable upon conversion. Further, a holder may instruct the
Corporation to deliver to the holder physical certificates representing
the Common Stock issuable upon conversion in lieu of delivering such
shares by way of DTC Transfer.
(ii) Taxes. The Corporation shall pay any and all taxes which may be
imposed upon the Corporation with respect to the issuance and delivery of
the shares of Common Stock upon the conversion of the Series B Preferred
Stock.
(iii) No Fractional Shares. If any conversion of Series B Preferred
Stock 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 upon conversion of the Series B Preferred Stock
shall be the next higher whole number of shares.
(iv) Conversion Disputes. In the case of any dispute with respect to
a conversion, the Corporation shall promptly issue such number of shares
of Common Stock as are not disputed in accordance with subparagraph (i)
above. If such dispute involves the calculation of the Conversion Price,
the Corporation shall submit the disputed calculations to an independent
outside accountant reasonably acceptable to the holder of Series B
Preferred Stock being converted via facsimile at any time prior to the
expiration of the Delivery Period. The accountant, at the Corporation's
sole expense of the party in error, shall audit the calculations and
notify the Corporation and the holder of the results as soon as
practicable following the date it receives the disputed calculations. The
accountant's calculation shall be deemed conclusive, absent manifest
error. The Corporation shall then issue the appropriate number of shares
of Common Stock in accordance with subparagraph (i) above.
C. Limitations on Conversions. The conversion of shares of Series B
Preferred Stock shall be subject to the following limitations (each of which
limitations shall be applied independently):
(i) Cap Amount. If, notwithstanding the representations and
warranties of the Corporation contained in the Securities Purchase
Agreement, dated as of September 30, 1998, between the Corporation and the
purchasers of the Series B Preferred Stock named therein, the Corporation
is prohibited by the rules or regulations of any securities exchange or
quotation system on which the Common Stock is then listed or traded, from
listing or issuing a number of shares of Common Stock in excess of a
prescribed amount (the "Cap Amount") without the approval of the
Corporation's stockholders, then the Corporation shall not be required to
list or issue, as applicable, shares in excess of the Cap Amount unless
the Corporation has obtained the required approvals. The Cap Amount which,
as of the Issuance Date, shall be 3,582,000 shares, shall be allocated pro
rata to the holders of
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Series B Preferred Stock as provided in Article XIV.C. In the event a
holder of Series B Preferred Stock submits a Notice of Conversion and the
Corporation is prohibited from listing or issuing shares of Common Stock
to satisfy such Notice of Conversion as a result of the operation of this
subparagraph (i), such holder shall be entitled to the rights set forth in
Article VII hereof.
D. Required Conversion at Maturity. If the Corporation does not elect to
exercise its redemption rights set forth in Article VIII.D hereof, subject to
the limitations set forth in Paragraph C(i) of this Article IV and provided all
shares of Common Stock issuable upon conversion of all outstanding shares of
Series B Preferred Stock are then (i) authorized and reserved for issuance, (ii)
registered under the Securities Act of 1933, as amended, for resale by the
holders of such shares of Series B Preferred Stock and (iii) eligible to be
traded on either the Nasdaq SmallCap Market, The Nasdaq National Market, the New
York Stock Exchange or the American Stock Exchange, each share of Series B
Preferred Stock issued and outstanding on the seventh anniversary of the
Issuance Date thereof (the "Maturity Date"), automatically shall be converted
into shares of Common Stock on such date in accordance with the conversion
formulas set forth in Paragraph A of this Article IV (the "Required Conversion
at Maturity"); provided, however, in such case the Conversion Price shall equal
the lower of (i) the average of the Closing Bid Prices for the Common Stock for
the five (5) trading days immediately preceding the Maturity Date and (ii) the
Fixed Conversion Price; provided, further, the Maturity Date shall be extended
for a period equal to the number of days any Conversion Default, Trading Market
Trigger Event, Trading Market Prohibition or Redemption Event is in existence.
If the Required Conversion at Maturity occurs, the Corporation and the holders
of Series B Preferred Stock shall follow the applicable conversion procedures
set forth in Paragraph B of this Article IV; provided, however, that the holders
of Series B Preferred Stock are not required to deliver a Notice of Conversion
to the Corporation or its transfer agent.
V. RESERVATION OF SHARES OF COMMON STOCK
A. Reserved Amount. On or before January 15, 1999, the Corporation shall
reserve, from the authorized but unissued shares of Common Stock, for issuance
upon conversion of the Series B Preferred Stock, 200% of the number of shares
which would be issuable if the outstanding shares of Series B Preferred Stock
were converted in their entirety on the Issuance Date based on the Conversion
Price in effect on the Issuance Date, and thereafter the number of authorized
but unissued shares of Common Stock so reserved (the "Reserved Amount") shall
not be decreased and shall at all times be sufficient to provide for the
conversion of the Series B Preferred Stock outstanding at the then current
Conversion Price thereof. The Reserved Amount shall be allocated to the holders
of Series B Preferred Stock as provided in Article XIV.C.
B. Increases to Reserved Amount. If the Reserved Amount for any three
consecutive trading days (the last of such three trading days being the
"Authorization Trigger Date") shall be less than 135% of the number of shares of
Common Stock issuable upon conversion of the then outstanding shares of Series B
Preferred Stock, the Corporation shall immediately notify the holders of Series
B Preferred Stock of such occurrence and shall take immediate action (including,
if necessary, seeking stockholders approval to authorize the issuance of
additional shares of Common Stock) to increase the Reserved Amount to 200% of
the number of shares of Common Stock then issuable upon conversion
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<PAGE>
of the outstanding Series B Preferred Stock. In the event the Corporation fails
to so increase the Reserved Amount within 90 days after an Authorization Trigger
Date (such event being the "Reserved Amount Trigger Event"), each holder of
Series B Preferred Stock shall thereafter have the option, exercisable in whole
or in part at any time and from time to time by delivery of a Redemption Notice
(as defined in Article VIII.C) to the Corporation, to require the Corporation to
purchase for cash, at an amount per share equal to the Redemption Amount (as
defined in Article VIII.B), a portion of the holder's Series B Preferred Stock
such that, after giving effect to such purchase, the holder's allocated portion
of the Reserved Amount exceeds 135% of the total number of shares of Common
Stock issuable to such holder upon conversion of its Series B Preferred Stock.
If the Corporation fails to redeem any of such shares within five (5) business
days after its receipt of such Redemption Notice, then such holder shall be
entitled to the remedies provided in Article VIII.C.
C. Adjustment to Conversion Price. If the Corporation is prohibited, at
any time, from issuing shares of Common Stock upon conversion of Series B
Preferred Stock to any holder because the Corporation does not then have
available a sufficient number of authorized and reserved shares of Common Stock,
then the Fixed Conversion Price in respect of any shares of Series B Preferred
Stock held by any holder (including shares of Series B Preferred Stock submitted
to the Corporation for conversion, but for which shares of Common Stock have not
been issued to any such holder) shall be adjusted as provided in Article VI.B.
VI. FAILURE TO SATISFY CONVERSIONS
A. Conversion Default Payments. If, at any time, (x) a holder of shares of
Series B Preferred Stock submits a Notice of Conversion and the Corporation
fails for any reason (other than because such issuance would exceed such
holder's allocated portion of the Reserved Amount or Cap Amount, for which
failures the holders shall have the remedies set forth in Articles V and VII,
respectively) to deliver, on or prior to the fourth (4th) business day following
the expiration of the Delivery Period for such conversion, such number of
unlegended shares of Common Stock to which such holder is entitled upon such
conversion, or (y) the Corporation provides notice to any holder of Series B
Preferred Stock at any time of its intention not to issue unlegended shares of
Common Stock upon exercise by any holder of its conversion rights in accordance
with the terms of this Certificate of Designation (other than because such
issuance would exceed such holder's allocated portion of the Reserved Amount or
Cap Amount) (each of (x) and (y) being a "Conversion Default"), then the
Corporation shall pay to the affected holder, in the case of a Conversion
Default described in clause (x) above, and to all holders, in the case of a
Conversion Default described in clause (y) above, an amount equal to:
(.24) x (D/365) x (the Default Amount)
where:
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"D" means the number of days after the expiration of the Delivery Period
through and including the Default Cure Date;
"Default Amount" means (i) the total Stated Value of all shares of Series
B Preferred Stock held by such holder, plus (ii) the total accrued Premium as of
the first day of the Conversion Default on all shares of Series B Preferred
Stock included in clause (i) of this definition; and
"Default Cure Date" means (i) with respect to a Conversion Default
described in clause (x) of its definition, the date the Corporation effects the
conversion of the full number of shares of Series B Preferred Stock, and (ii)
with respect to a Conversion Default described in clause (y) of its definition,
the date the Corporation begins to issue freely tradeable shares of Common Stock
in satisfaction of all conversions of Series B Preferred Stock in accordance
with Article IV.A, and (iii) with respect to either type of a Conversion
Default, the date on which the Corporation redeems shares of Series B Preferred
Stock held by such holder pursuant to paragraph D of this Article VI.
The payments to which a holder shall be entitled pursuant to this
Paragraph A are referred to herein as "Conversion Default Payments." A holder
may elect to receive accrued Conversion Default Payments in cash or to convert
all or any portion of such accrued Conversion Default Payments, at any time,
into Common Stock at the lowest Conversion Price in effect during the period
beginning on the date of the Conversion Default through the Conversion Date or
the Default Cure Date, whichever is earlier, with respect to such Conversion
Default Payments. In the event a holder elects to receive any Conversion Default
Payments in cash, it shall so notify the Corporation in writing. Such payment
shall be made in accordance with and be subject to the provisions of Article
XIV.E. In the event a holder elects to convert all or any portion of the
Conversion Default Payments into Common Stock, the holder shall indicate on a
Notice of Conversion such portion of the Conversion Default Payments which such
holder elects to so convert and such conversion shall otherwise be effected in
accordance with the provisions of Article IV.
B. Adjustment to Conversion Price. If a holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Delivery Period with respect to a conversion of
Series B Preferred Stock for any reason (other than because such issuance would
exceed such holder's allocated portion of the Reserved Amount or Cap Amount, for
which failures the holders shall have the remedies set forth in Articles V and
VII, respectively), then the Fixed Conversion Price in respect of any shares of
Series B Preferred Stock held by such holder (including shares of Series B
Preferred Stock submitted to the Corporation for conversion, but for which
shares of Common Stock have not been issued to such holder) shall thereafter be
the lesser of (i) the Fixed Conversion Price on the Conversion Date specified in
the Notice of Conversion which resulted in the Conversion Default and (ii) the
lowest Closing Bid Price for the Common Stock during the period beginning on,
and including, such Conversion Date through and including the earlier of (x) the
day such shares of Common Stock are delivered to the holder and (y) the day on
which the holder regains its rights as a holder of Series B Preferred Stock with
respect to such unconverted shares of Series B Preferred Stock pursuant to the
provisions of Article XIV.F hereof. If there shall occur a Conversion Default of
the type described in clause (y) of Article VI.A, then the Fixed Conversion
Price with respect to any conversion thereafter shall be the lowest Closing Bid
Price for the Common Stock during the period beginning on, and including, the
date of the occurrence of such Conversion Default through and
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including the Default Cure Date. The Fixed Conversion Price shall thereafter be
subject to further adjustment for any events described in Article XI.
C. Buy-In Cure. Unless the Corporation has notified the applicable holder
in writing prior to the delivery by such holder of a Notice of Conversion that
the Corporation is unable to honor conversions, if (i) (a) the Corporation fails
for any reason to deliver during the Delivery Period shares of Common Stock to a
holder upon a conversion of shares of Series B Preferred Stock or (b) there
shall occur a Legend Removal Failure (as defined in Article VIII.A(ii) below)
and (ii) thereafter, such holder purchases (in an open market transaction or
otherwise) shares of Common Stock to make delivery in satisfaction of a sale by
such holder of the unlegended shares of Common Stock (the "Sold Shares") which
such holder anticipated receiving upon such conversion (a "Buy-In"), the
Corporation shall pay such holder (in addition to any other remedies available
to the holder) the amount by which (x) such holder's total purchase price
(including brokerage commissions, if any) for the unlegended shares of Common
Stock so purchased exceeds (y) the net proceeds received by such holder from the
sale of the Sold Shares. For example, if a holder purchases unlegended shares of
Common Stock having a total purchase price of $11,000 to cover a Buy-In with
respect to shares of Common Stock it sold for $10,000, the Corporation will be
required to pay the holder $1,000. A holder shall provide the Corporation
written notification indicating any amounts payable to such holder pursuant to
this Paragraph C. The Corporation shall make any payments required pursuant to
this Paragraph C in accordance with and subject to the provisions of Article
XIV.E.
D. Redemption Right. If the Corporation fails, and such failure continues
uncured for five (5) business days after the Corporation has been notified
thereof in writing by the holder, for any reason (other than because such
issuance would exceed such holder's allocated portion of the Reserved Amount or
Cap Amount, for which failures the holders shall have the remedies set forth in
Articles V and VII, respectively) to issue shares of Common Stock within 10
business days after the expiration of the Delivery Period with respect to any
conversion of Series B Preferred Stock, then the holder may elect at any time
and from time to time prior to the Default Cure Date for such Conversion
Default, by delivery of a Redemption Notice to the Corporation, to have all of
such holder's shares of Series B Preferred Stock which were submitted for
conversion purchased by the Corporation for cash, at an amount per share equal
to the Redemption Amount (as defined in Article VIII.B). If the Corporation
fails to redeem any of such shares within five business days after its receipt
of such Redemption Notice, then such holder shall be entitled to the remedies
provided in Article VIII.C.
E. Void Notice of Conversion. If for any reason a holder has not received
all of the shares of Common Stock prior to the tenth (10th) business day after
the expiration of the Delivery Period with respect to a conversion of Series B
Preferred Stock and (i) such shares have not been called for redemption pursuant
to Article VIII.D, provided the Redemption Amount therefor has been or may be
paid within the time limits set forth in Article VIII.D, and (ii) such shares
are not subject to a redemption notice from the holder thereof, then the holder,
upon written notice to the Corporation's transfer agent, with a copy to the
Corporation, may void its Notice of Conversion with respect to, and retain or
have returned, as the case may be, any shares of Series B Preferred Stock that
have not been converted pursuant to such holder's Notice of Conversion; provided
that the voiding of a holder's Notice of Conversion shall not affect such
holders rights and remedies which have accrued prior to the date of such notice
pursuant to Article VI hereof or otherwise.
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VII. INABILITY TO LIST OR CONVERT DUE TO CAP AMOUNT
A. Obligation to Cure. If at any time after the Initial Issuance Date the
then unissued portion of any holder's Cap Amount is less than 135% of the number
of shares of Common Stock then issuable upon conversion of such holder's shares
of Series B Preferred Stock (a "Trading Market Trigger Event"), the Corporation
shall immediately notify the holders of Series B Preferred Stock of such
occurrence and shall take immediate action (including, if necessary, seeking the
approval of its stockholders to authorize the listing or issuance of the full
number of shares of Common Stock which would be issuable upon the conversion of
the then outstanding shares of Series B Preferred Stock but for the Cap Amount)
to eliminate any prohibitions under applicable law or the rules or regulations
of any stock exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Corporation or any of its securities on
the Corporation's ability to list or issue shares of Common Stock in excess of
the Cap Amount ("Trading Market Prohibitions"). In the event the Corporation
fails to eliminate all such Trading Market Prohibitions within 120 days after
the Trading Market Trigger Event, then each holder of Series B Preferred Stock
shall thereafter have the option, exercisable in whole or in part at any time
and from time to time until such date that all such Trading Market Prohibitions
are eliminated, by delivery of a Redemption Notice (as defined in Article
VIII.C) to the Corporation, to require the Corporation to purchase for cash, at
an amount per share equal to the Redemption Amount, a number of the holder's
shares of Series B Preferred Stock such that, after giving effect to such
redemption, the then unissued portion of such holder's Cap Amount exceeds 135%
of the total number of shares of Common Stock issuable upon conversion of such
holder's shares of Series B Preferred Stock. If the Corporation fails to redeem
any of such shares within five (5) business days after its receipt of such
Redemption Notice, then such holder shall be entitled to the remedies provided
in Articles VII.B and VIII.C.
B. Remedies. If the Corporation fails to redeem any shares of Series B
Preferred Stock pursuant to Article VII.A within five business days after its
receipt of such Redemption Notice, and thereafter the Corporation is prohibited,
at any time, from listing shares of Common Stock or from issuing shares of
Common Stock upon conversion of Series B Preferred Stock to any holder because
such listing or issuance would exceed the then unissued portion of such holder's
Cap Amount because of applicable law or the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory organization
with jurisdiction over the Corporation or its securities, any holder who is so
prohibited from converting its Series B Preferred Stock because the shares of
Common Stock underlying such Series B Preferred Stock may not be listed or
issued, may elect either or both of the following additional remedies:
(i) to require, with the consent of holders of at least fifty
percent (50%) of the outstanding shares of Series B Preferred Stock
(including any shares of Series B Preferred Stock held by the requesting
holder), the Corporation to terminate the listing of its Common Stock on
the AMEX (or any other stock exchange, interdealer quotation system or
trading market) and to cause its Common Stock to be eligible for trading
on the over-the-counter electronic bulletin board; or
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<PAGE>
(ii) to require the Corporation to issue shares of Common Stock in
accordance with such holder's Notice of Conversion at a conversion price
equal to the average of the Closing Bid Prices for the Common Stock during
the five consecutive trading days ending on the trading day immediately
preceding the date of the holder's written notice to the Corporation of
its election to receive shares of Common Stock pursuant to this
subparagraph (ii) (subject to equitable adjustment for any stock splits,
stock dividends, reclassifications or similar events during such five
trading day period).
C. Adjustment to Conversion Price. If the Corporation is prohibited, at
any time, from listing shares of Common Stock or from issuing shares of Common
Stock upon conversion of Series B Preferred Stock to any holder because such
listing or issuance would exceed the then unissued portion of such holder's Cap
Amount because of applicable law or the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory organization
with jurisdiction over the Corporation or its securities, then the Fixed
Conversion Price in respect of any shares of Series B Preferred Stock held by
any holder (including shares of Series B Preferred Stock submitted to the
Corporation for conversion, but for which shares of Common Stock have not been
issued) shall be adjusted as provided in Article VI.A.
VIII. REDEMPTION
A. Redemption by Holder. In the event (each of the events described in
clauses (i)-(v) below after expiration of the applicable cure period (if any)
being a "Redemption Event"):
(i) the Common Stock (including, from and after the Issuance Date,
any of the shares of Common Stock issuable upon conversion of the Series B
Preferred Stock) is suspended from trading on any of, or is not listed
(and authorized) for trading on at least one of, the NASDAQ Small Cap
Market, the NASDAQ National Market, the New York Stock Exchange or the
American Stock Exchange for an aggregate of 10 trading days in any nine
month period;
(ii) the Corporation fails to remove any restrictive legend on any
certificate or any shares of Common Stock issued to the holders of Series
B Preferred Stock upon conversion of the Series B Preferred Stock as and
when required by this Certificate of Designation, the Securities Purchase
Agreement or the Registration Rights Agreement (as defined below) (a
"Legend Removal Failure"), and any such failure continues uncured for ten
business days after the Corporation has been notified thereof in writing
by the holder;
(iii) the Registration Statement required to be filed by the
Corporation pursuant to Section 2(a) of the Registration Rights Agreement
by and among the Corporation and the other signatories thereto entered
into in connection with the Securities Purchase Agreement (the
"Registration Rights Agreement") has not been declared effective by April
17, 1999, or such Registration Statement, after being declared effective,
cannot be utilized by the holders of Series B Preferred Stock for the
resale of all of their Registrable Securities (as defined in the
Registration Rights Agreement) for an aggregate of more than thirty (30)
days
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(iv) the Corporation provides notice to any holder of Series B
Preferred Stock, including by way of public announcement, at any time, of
its intention not to issue, or otherwise refuses to issue, shares of
Common Stock to any holder of Series B Preferred Stock upon conversion in
accordance with the terms of this Certificate of Designation (other than
due to the circumstances contemplated by Articles V or VII for which the
holders shall have the remedies set forth in such Articles);
(v) the Corporation shall:
(a) sell, convey or dispose of all or substantially all of its
assets (the presentation of any such transaction for stockholder
approval being conclusive evidence that such transaction involves
the sale of all or substantially all of the assets of the
Corporation);
(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 Corporation and other than
pursuant to a merger in which the Corporation is the surviving or
continuing entity and the voting capital stock of the Corporation
immediately prior to such merger represents at least 50% of the
voting power of the capital stock of the Corporation after the
merger); or
(c) have fifty percent (50%) or more of the voting power of
its capital stock is 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); or
(vi) the Corporation otherwise shall breach any material term
hereunder or under the Securities Purchase Agreement or the Registration
Rights Agreement.
then, upon the occurrence of any such Redemption Event, each holder of shares of
Series B Preferred Stock shall thereafter have the option, exercisable in whole
or in part at any time and from time to time by delivery of a Redemption Notice
(as defined in Paragraph C below) to the Corporation while such Redemption Event
continues, to require the Corporation to purchase for cash any or all of the
then outstanding shares of Series B Preferred Stock held by such holder for an
amount per share equal to the Redemption Amount (as defined in Paragraph B
below) in effect at the time of the redemption hereunder. For the avoidance of
doubt, the occurrence of any event described in clauses (i), (ii), (iii), (iv)
or (v) above shall immediately constitute a Redemption Event and there shall be
no cure period. Upon the Corporation's receipt of any Redemption Notice
hereunder (other than during the three trading day period following the
Corporation's delivery of a Redemption Announcement (as defined below) to all of
the holders in response to the Corporation's initial receipt of a Redemption
Notice from a holder of Series B Preferred Stock), the Corporation shall
promptly (and in any event within two business days following such receipt)
deliver a written notice (a "Redemption Announcement") to all holders of Series
B Preferred Stock stating the date upon which the Corporation received such
Redemption Notice and the amount of Series B Preferred Stock covered thereby.
Subject to Article VIII.D, the Corporation shall not redeem any shares of Series
B Preferred Stock during the three trading day period following the delivery of
a required Redemption Announcement hereunder. At any time and from time to time
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during such three trading day period, each holder of Series B Preferred Stock
may request (either orally or in writing) information from the Corporation with
respect to the instant redemption (including, but not limited to, the aggregate
number of shares of Series B Preferred Stock covered by Redemption Notices
received by the Corporation) and the Corporation shall furnish (either orally or
in writing) as soon as practicable such requested information to such requesting
holder.
B. Definition of Redemption Amount. The "Redemption Amount" with respect
to a share of Series B Preferred Stock means an amount equal to the greater of:
(a) V x M
--------
C P
and
(b) The product of (x) one hundred and fifteen percent (115%), times
(y) the sum of (I) Stated Value thereof, plus (II) the accrued Premium
thereon, plus (III) all unpaid Conversion Default Payments owing (if any)
with respect thereto through the Effective Date of Redemption (as defined
in subparagraph (iii) below).
where:
"V" means the Stated Value thereof, plus the accrued Premium thereon
through the date of payment of the Redemption Amount;
"CP" means the Conversion Price in effect on the date on which the
Corporation receives the Redemption Notice; and
"M" means (i) with respect to all redemptions other than redemptions
pursuant to Article VIII.A(v) hereof, the highest Closing Bid Price of the
Corporation's Common Stock during the period beginning on the date on which the
Corporation receives the Redemption Notice and ending on the date immediately
preceding the date of payment of the Redemption Amount and (ii) with respect to
redemptions pursuant to Article VIII.A(v) hereof, the greater of (a) the amount
determined pursuant to clause (i) of this definition or (b) the fair market
value, as of the date on which the Corporation receives the Redemption Notice,
of the consideration payable to the holder of a share of Common Stock pursuant
to the transaction which triggers the redemption. For purposes of this
definition, "fair market value" for any consideration other than cash (in which
case the fair market value shall equal the amount thereof) or any registered
security (in which case the fair market value shall equal the Closing Bid Price
thereof) shall be determined by the mutual agreement of the Corporation and
holders of a majority-in-interest of the shares of Series B Preferred Stock then
outstanding, or if such agreement cannot be reached within five business days
prior to the date of redemption, by an investment banking firm selected by the
Corporation and reasonably acceptable to holders of a majority-in-interest of
the then outstanding shares of Series B Preferred Stock, with the costs of such
appraisal to be borne by the Corporation.
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C. Redemption Defaults. If the Corporation fails to pay any holder the
Redemption Amount with respect to any share of Series B Preferred Stock within
five business days after its receipt of a notice requiring such redemption (a
"Redemption Notice"), then the holder of Series B Preferred Stock delivering
such Redemption Notice (i) shall be entitled to interest on the Redemption
Amount at a per annum rate equal to the lower of twenty-four percent (24%) and
the highest interest rate permitted by applicable law from the date on which the
Corporation receives the Redemption Notice until the date of payment of the
Redemption Amount hereunder, and (ii) shall have the right, at any time and from
time to time, to require the Corporation, upon written notice, to immediately
convert (in accordance with the terms of Paragraph A of Article IV) all or any
portion of the Redemption Amount, plus interest as aforesaid, into shares of
Common Stock at a Conversion Price equal to the lowest Closing Bid Price for the
Common Stock during the period beginning on the date on which the Corporation
receives the Redemption Notice and ending on the Conversion Date with respect to
the conversion of such Redemption Amount. In the event the Corporation is not
able to redeem all of the shares of Series B Preferred Stock subject to
Redemption Notices delivered prior to the date upon which such redemption is to
be effected, the Corporation shall redeem shares of Series B Preferred Stock
from each holder pro rata, based on the total number of shares of Series B
Preferred Stock outstanding at the time of redemption included by such holder in
all Redemption Notices delivered prior to the date upon which such redemption is
to be effected relative to the total number of shares of Series B Preferred
Stock outstanding at the time of redemption included in all of the Redemption
Notices delivered prior to the date upon which such redemption is to be
effected.
D. Redemption by Corporation.
(i) The Corporation shall have the right at any time and from time
to time to redeem any shares which are the subject of a Notice of
Conversion for an amount of cash equal to the Redemption Amount as
determined pursuant to clause (a) of its definition (a "Redemption in Lieu
of Conversion"), in its sole discretion by delivery of an Optional
Redemption Notice in accordance with the redemption procedures set forth
below.
(ii) Within ten (10) calendar days prior to the beginning of any
calendar month during which the Corporation elects to effect a Redemption
in Lieu of Conversion, the Corporation shall provide written notice to the
holders of Series B Preferred Stock by facsimile and overnight courier
stating that the Corporation will redeem any conversions of Series A
Preferred Stock in such calendar month (an "Optional Redemption Notice").
In the event the Corporation fails to provide an Optional Redemption
Notice to the holders of Series B Preferred Stock within such ten (10) day
period, the Corporation shall not be permitted to so redeem any
conversions of Series A Preferred Stock during such calendar month. In the
event a timely Optional Redemption Notice is provided as aforesaid, upon
the Corporation's receipt of a Notice of Conversion the Corporation shall
be obligated to redeem on or before the fifth business day after the
receipt of the Notice of Conversion, the entire number of shares of the
Series B Preferred Stock which are the subject of the Notice of Conversion
for the Redemption Amount as determined pursuant to clause (a) of its
definition.
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(iii) After the two (2) year anniversary of the Issuance Date, the
Corporation shall have the right, on one occasion and on 10 business days
prior written notice, to redeem all, but not less than all, of the then
outstanding shares of Series B Preferred Stock by paying to each holder an
amount per share of Series B Preferred Stock equal to 150% of the sum of
(x) the Stated Value thereof, plus (y) accrued Premium thereon. At all
times prior to redemption pursuant to this Article VIII.D (including after
receipt of the notice required by this Article), each holder of Series B
Preferred Stock shall remain entitled to convert shares of Series B
Preferred Stock into shares of Common Stock in accordance with the terms
of Article IV hereof.
E. Void Redemption. In the event that the Corporation does not pay the
Redemption Amount within the time period set forth in Article IV.D, Article
VIII.A or Article VIII.D, at any time thereafter and until the Corporation pays
such unpaid applicable Redemption Amount in full, a holder of Series B Preferred
Stock shall have the option (the "Void Optional Redemption Option") to, in lieu
of redemption, require the Corporation to promptly return to such holder any or
all of the shares of Series B Preferred Stock that were submitted for redemption
by such holder under this Article VIII and for which the applicable Redemption
Amount (together with any interest thereon) has not been paid, by sending
written notice thereof to the Corporation via facsimile and confirmed by
overnight courier, in person (by courier or otherwise) or by telephone (to an
authorized officer of the Corporation or his or her administrative assistant)
(the "Void Optional Redemption Notice"). Upon the Corporation's receipt of such
Void Optional Redemption Notice and overnight courier, in-person or telephone
confirmation, (i) the Notice of Redemption shall be null and void with respect
to those shares of Series B Preferred Stock subject to the Void Optional
Redemption Notice, and (ii) the Corporation shall immediately return any shares
of Series B Preferred Stock subject to the Void Optional Redemption Notice
IX. RANK
The Series B Preferred Stock shall rank (i) prior to all classes of the
Corporation's common stock and any class or series of capital stock of the
Corporation hereafter created that, by its terms, ranks junior to the Series B
Preferred Stock (collectively, "Junior Securities"); (ii) junior to any class or
series of capital stock of the Corporation hereafter created (with the consent
of the holders of Series B Preferred Stock obtained in accordance with Article
XIII hereof) specifically ranking, by its terms, senior to the Series B
Preferred Stock ("Senior Securities"); and (iii) pari passu with the Series A
Preferred Stock of the Corporation, Series C Preferred Stock of the Corporation
and any class or series of capital stock of the Corporation hereafter created
(with the consent of the holders of the Series B Preferred Stock obtained in
accordance with Article XIII hereof) specifically ranking by its terms on parity
with the Series B Preferred Stock (collectively, the "Pari Passu Securities"),
in each case as to distribution of assets upon liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary.
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X. LIQUIDATION PREFERENCE
A. If the Corporation shall commence a voluntary case under the U.S.
Federal bankruptcy laws or any other applicable bankruptcy, insolvency or
similar law, or consent to the entry of an order for relief in an involuntary
case under any law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Corporation
or of any substantial part of its property, or make an assignment for the
benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Corporation shall be entered by a court having jurisdiction in the premises
in an involuntary case under the U.S. Federal bankruptcy laws or any other
applicable bankruptcy, insolvency or similar law resulting in the appointment of
a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its property,
or ordering the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of 60 consecutive days and,
on account of any such event (a "Liquidation Event"), the Corporation shall
liquidate, dissolve or wind up, or if the Corporation shall otherwise liquidate,
dissolve or wind up, no distribution shall be made to the holders of any shares
of capital stock of the Corporation (other than Senior Securities and Pari Passu
Securities) upon liquidation, dissolution or winding up unless prior thereto the
holders of shares of Series B Preferred Stock shall have received the
Liquidation Preference with respect to each share. If, upon the occurrence of a
Liquidation Event, the assets and funds available for distribution among the
holders of the Series B Preferred Stock and holders of Pari Passu Securities
shall be insufficient to permit the payment to such holders of the preferential
amounts payable thereon, then the entire assets and funds of the Corporation
legally available for distribution to the Series B Preferred Stock and the Pari
Passu Securities shall be distributed ratably among such shares in proportion to
the ratio that the Liquidation Preference payable on each such share bears to
the aggregate Liquidation Preference payable on all such shares.
B. At the option of any holder of Series B Preferred Stock, the occurrence
of any event enumerated in Article VIII.A(v) hereof shall either: (i) be deemed
to be a liquidation, dissolution or winding up of the Corporation for purposes
of this Article X; or (ii) be treated pursuant to Article XI hereof. "Person"
shall mean any individual, corporation, limited liability company, partnership,
association, trust or other entity or organization.
C. The purchase or redemption by the Corporation of stock of any class, in
any manner permitted by law, shall not, for the purposes hereof, be regarded as
a liquidation, dissolution or winding up of the Corporation. Except as provided
in Paragraph B above, neither the consolidation or merger of the Corporation
with or into any other entity nor the sale or transfer by the Corporation of
less than substantially all of its assets shall, for the purposes hereof, be
deemed to be a liquidation, dissolution or winding up of the Corporation.
D. The "Liquidation Preference" with respect to a share of Series B
Preferred Stock means an amount equal to the Stated Value thereof, plus the
accrued Premium thereon through the date of final distribution. The Liquidation
Preference with respect to any Pari Passu Securities shall be as set forth in
the Certificate of Designation filed in respect thereof.
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XI. ADJUSTMENTS TO THE CONVERSION PRICE
The Conversion Price shall be subject to adjustment from time to time as
follows:
A. Stock Splits, Stock Dividends, Etc. If, at any time on or after the
Issuance Date, the number of outstanding shares of Common Stock is increased by
a stock split, stock dividend, combination, reclassification or other similar
event, the Fixed Conversion Price shall be proportionately reduced, or if the
number of outstanding shares of Common Stock is decreased by a reverse stock
split, combination or reclassification of shares, or other similar event, the
Fixed Conversion Price shall be proportionately increased. In such event, the
Corporation shall notify the Corporation's transfer agent of such change on or
before the effective date thereof.
B. Adjustment Due to Merger, Consolidation, Etc. If, at any time after the
Issuance Date, there shall be (i) any reclassification or change of the
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination), (ii) any consolidation or merger of the
Corporation with any other entity (other than a merger in which the Corporation
is the surviving or continuing entity and its capital stock is unchanged) or
(iii) any share exchange pursuant to which all of the outstanding shares of
Common Stock are converted into other securities or property (each of (i) -
(iii) above being a "Corporate Change"), then the holders of Series B Preferred
Stock shall thereafter have the right to receive upon conversion, in lieu of the
shares of Common Stock otherwise issuable, such shares of stock, securities
and/or other property as would have been issued or payable in such Corporate
Change with respect to or in exchange for the number of shares of Common Stock
which would have been issuable upon conversion (without giving effect to the
limitations contained in Article IV.C) had such Corporate Change not taken
place, and in any such case, appropriate provisions (in form and substance
reasonably satisfactory to the holders of a majority of the Series B Preferred
Shares then outstanding) shall be made with respect to the rights and interests
of the holders of the Series B Preferred Stock to the end that the economic
value of the shares of Series B Preferred Stock are in no way diminished by such
Corporate Change and that the provisions hereof (including, without limitation,
in the case of any such consolidation, merger or sale in which the successor
entity or purchasing entity is not the Corporation, an immediate adjustment of
the Fixed Conversion Price so that the Fixed Conversion Price immediately after
the Corporate Change reflects the same relative value as compared to the value
of the surviving entity's common stock that existed between the Fixed Conversion
Price and the value of the Corporation's Common Stock immediately prior to such
Corporate Change and an immediate revision to the Variable Conversion Price so
that it is determined as provided in Article III.I but based on the price of the
common stock of the surviving entity and the market in which such common stock
is traded) shall thereafter be applicable, as nearly as may be practicable in
relation to any shares of stock or securities thereafter deliverable upon the
conversion thereof. The Corporation shall not effect any Corporate Change unless
(i) each holder of Series B Preferred Stock has received written notice of such
transaction along with the notice sent to the holders of the Common Stock of the
Corporation, but in no event later than 20 days prior to the record date for the
determination of stockholders entitled to vote with respect thereto, and (ii)
the resulting, successor or acquiring entity (if not the Corporation) assumes by
written instrument (in form and substance reasonably satisfactory to the holders
of a majority of the Series B Preferred Shares then outstanding) the obligations
of this Certificate of Designation. The above provisions shall apply regardless
of whether or not there would have been a sufficient number of shares
17
<PAGE>
of Common Stock authorized and available for issuance upon conversion of the
shares of Series B Preferred Stock outstanding as of the date of such
transaction, and shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges.
C. Adjustment Due to Major Announcement. In the event the Corporation at
any time after the Issuance Date and after the occurrence of a Milestone Failure
(i) makes a public announcement that it intends to consolidate or merge with any
other entity (other than a merger in which the Corporation is the surviving or
continuing entity and the voting capital stock of the Corporation immediately
prior to such merger represents at least 50% of the voting power of the capital
stock of the Corporation after the merger) or to sell or transfer all or
substantially all of the assets of the Corporation or (ii) any person, group or
entity (including the Corporation, but excluding the holders of Series B
Preferred Stock and their affiliates) publicly announces a tender offer,
exchange offer or another transaction to purchase 50% or more of the
Corporation's Common Stock or otherwise publicly announces an intention to
replace a majority of the Corporation's Board of Directors by waging a proxy
battle or otherwise (the date of the announcement or commencement referred to in
clause (i) or (ii) of this Paragraph C is hereinafter referred to as the
"Announcement Date"), then the Conversion Price shall, effective upon the
Announcement Date and continuing through the earlier of the consummation of the
proposed transaction or tender offer, exchange offer or another transaction or
the Abandonment Date (as defined below) (the earlier of such dates being the
"Adjusted Conversion Price Termination Date"), be equal to the lower of (x) the
Conversion Price which would have been applicable for an Optional Conversion
occurring on the Announcement Date and (y) the Conversion Price determined in
accordance with Article III.C on the Conversion Date set forth in the Notice of
Conversion for the Optional Conversion. After the Adjusted Conversion Price
Termination Date, the Conversion Price shall be determined as set forth in
Article III.C. "Abandonment Date" means with respect to any proposed transaction
or tender offer, exchange offer or another transaction for which a public
announcement or an action contemplated by this Paragraph C has been made or
commenced, the date upon which the Corporation (in the case of clause (i) above)
or the person, group or entity (in the case of clause (ii) above) publicly
announces the termination or abandonment of the proposed transaction or tender
offer, exchange offer or another transaction which caused this Paragraph C to
become operative.
D. Adjustment Due to Distribution. If, at any time after the Issuance
Date, the Corporation shall declare or make any distribution of its assets (or
rights to acquire its assets) to holders of Common Stock as a partial
liquidating dividend, by way of return of capital or otherwise (including any
dividend or distribution to the Corporation's common stockholders in shares (or
rights to acquire shares) of capital stock of a subsidiary (i.e. a spin-off)) (a
"Distribution"), then the holders of Series B Preferred Stock shall be entitled,
upon any conversion of shares of Series B Preferred Stock after the date of
record for determining stockholders entitled to such Distribution, to receive
the amount of such assets which would have been payable to the holder with
respect to the shares of Common Stock issuable upon such conversion (without
giving effect to the limitations contained in Article IV.C) 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.
E. Issuance of Other Securities. If at any time after the Issuance Date
the Company issues or sells any shares of Common Stock or any securities which
are convertible into or exchangeable for Common Stock ("Convertible Securities")
for no consideration or for a consideration per share less than the Closing Bid
Price in effect on the date of issuance of such securities (a "Dilutive
Issuance"),
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then effective immediately upon the Dilutive Issuance, the Fixed Conversion
Price will be adjusted in accordance with the formula below.
F' = F x O + P/CBP
------------
CSDO
where:
F' = the adjusted Fixed Conversion Price;
F = the then current Fixed Conversion Price;
CBP = the then current Closing Bid Price;
O = the number of shares of Common Stock outstanding
immediately prior to the Dilutive Issuance;
P = the aggregate consideration, calculated as set forth
herein, received by the Company upon such Dilutive
Issuance; and
CSDO = the total number of shares of Common Stock deemed
outstanding immediately after the Dilutive Issuance.
F. Purchase Rights. If, at any time after the Issuance Date, the
Corporation issues any securities which are convertible into or exchangeable for
Common Stock, or rights to purchase stock, warrants, securities or other
property (the "Purchase Rights") pro rata to the record holders of any class of
Common Stock, then the holders of Series B Preferred Stock will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which such holder could have acquired if such holder had held
the number of shares of Common Stock acquirable upon complete conversion of the
Series B Preferred Stock (without giving effect to the limitations contained in
Article IV.C) immediately before the date on which a record is taken for the
grant, issuance or sale of such Purchase Rights, or, if no such record is taken,
the date as of which the record holders of Common Stock are to be determined for
the grant, issue or sale of such Purchase Rights.
G. Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price and/or the Fixed Conversion Price pursuant
to this Article XI, the Corporation, at its expense, shall promptly compute such
adjustment or readjustment and prepare and furnish to each holder of Series B
Preferred Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any holder of
Series B Preferred Stock, furnish to such holder a like certificate setting
forth (i) such adjustment or readjustment, (ii) the Conversion Price and/or the
Fixed Conversion Price at the time in effect and (iii) the number of shares of
Common Stock and the amount, if any, of other securities or property which at
the time would be received upon conversion of a share of Series B Preferred
Stock.
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XII. VOTING RIGHTS
Each holder of shares of Series B Preferred Stock shall have the right to
one vote for each share of Common Stock into which such holder's shares of
Series B Preferred Stock could then be converted (with any fractional share
determined on an aggregate conversion basis being rounded to the nearest whole
share), and with respect to such vote, such holder shall have full voting rights
and powers equal to the voting rights and powers of the holders of Common Stock,
and shall be entitled to notice of any stockholder's meeting in accordance with
the by-laws of this Corporation, and shall be entitled to vote, together with
the holders of Common Stock, with respect to any question upon which holders of
Common Stock have the right to vote.
To the extent that under the Business Corporation Act the vote of the
holders of the Series B Preferred Stock, voting separately as a class or series,
as applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the holders of at least a majority of the then
outstanding shares of the Series B Preferred Stock represented at a duly held
meeting at which a quorum is present or by written consent of the holders of at
least a majority of the then outstanding shares of Series B Preferred Stock
(except as otherwise may be required under the Business Corporation Act) shall
constitute the approval of such action by the class. To the extent that under
the Business Corporation Act holders of the Series B Preferred Stock are
entitled to vote on a matter with holders of Common Stock, voting together as
one class, each share of Series B Preferred Stock shall be entitled to a number
of votes equal to the number of shares of Common Stock into which it is then
convertible (subject to the limitations contained in Article IV.C(ii)) using the
record date for the taking of such vote of stockholders as the date as of which
the Conversion Price is calculated.
XIII. PROTECTION PROVISIONS
So long as any shares of Series B Preferred Stock are outstanding, the
Corporation shall not without first obtaining the approval (by vote or written
consent, as provided by the Business Corporation Act) of the holders of 80% of
the then outstanding shares of Series B Preferred Stock:
(a) alter or change the rights, preferences or privileges of the
Series B Preferred Stock;
(b) alter or change the rights, preferences or privileges of any
previously issued shares of capital stock of the Corporation so as to
affect adversely the Series B Preferred Stock;
(c) create any new class or series of capital stock having a
preference over the Series B Preferred Stock as to distribution of assets
upon liquidation, dissolution or winding up of the Corporation (as
previously defined in Article IX hereof, "Senior Securities");
(d) create any new class or series of capital stock (other than the
Series A Preferred Stock and Series C Preferred Stock) ranking pari passu
with the Series B Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously
defined in Article IX hereof, "Pari Passu Securities");
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(e) increase the authorized number of shares of Series B Preferred
Stock;
(f) issue any shares of Senior Securities or Pari Passu Securities,
other than an aggregate of up to 1,500 shares of Series A Preferred Stock
and an aggregate of up to 500 Series C Preferred Stock pursuant to Robert
Mackie, Sr., Robert Mackie, Jr., Mr. and Mrs. Delbert Allen, Jr., Mr. and
Mrs. Fritz Friday, Allen & Co. and Millenco LLP;
(g) issue any shares of Series B Preferred Stock other than pursuant
to the Securities Purchase Agreement;
(h) redeem, or declare or pay any cash dividend or distribution on,
any Junior Securities; or
(i) increase the par value of the Common Stock.
Notwithstanding the foregoing, no change pursuant to this Article XIII shall be
effective to the extent that, by its terms, it applies to less than all of the
holders of shares of Series B Preferred Stock then outstanding.
XIV. MISCELLANEOUS
A. Cancellation of Series B Preferred Stock. If any shares of Series B
Preferred Stock are converted pursuant to Article IV, the shares so converted
shall be canceled, shall return to the status of authorized, but unissued
preferred stock of no designated series, and shall not be issuable by the
Corporation as Series B Preferred Stock.
B. Lost or Stolen Certificates. Upon receipt by the Corporation of (i)
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of
indemnity (without any bond or other security) reasonably satisfactory to the
Corporation, or (z) in the case of mutilation, upon surrender and cancellation
of the Preferred Stock Certificate(s), the Corporation shall execute and deliver
new Preferred Stock Certificate(s) of like tenor and date. However, the
Corporation shall not be obligated to reissue such lost or stolen Preferred
Stock Certificate(s) if the holder contemporaneously requests the Corporation to
convert such Series B Preferred Stock.
C. Allocation of Cap Amount and Reserved Amount. The initial Cap Amount
and Reserved Amount shall be allocated pro rata among the holders of Series B
Preferred Stock based on the number of shares of Series B Preferred Stock issued
to each holder. Each increase to the Cap Amount and the Reserved Amount shall be
allocated pro rata among the holders of Series B Preferred Stock based on the
number of shares of Series B Preferred Stock held by each holder at the time of
the increase in the Cap Amount or Reserved Amount. In the event a holder shall
sell or otherwise transfer any of such holder's shares of Series B Preferred
Stock, each transferee shall be allocated a pro rata portion of such
transferor's Cap Amount and Reserved Amount. Any portion of the Cap Amount or
Reserved Amount which is allocated to any person or entity which does not hold
any Series B Preferred
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Stock shall be re-allocated to the remaining holders of shares of Series B
Preferred Stock, pro rata based on the number of shares of Series B Preferred
Stock then held by such holders.
D. Quarterly Statements of Available Shares. For each calendar quarter
beginning in the quarter in which the initial registration statement required to
be filed pursuant to the Registration Rights Agreement is declared effective and
thereafter so long as any shares of Series B Preferred Stock are outstanding,
the Corporation shall deliver (or cause its transfer agent to deliver) to each
holder a written report notifying the holders of any occurrence which prohibits
the Corporation from issuing Common Stock upon any such conversion. The report
shall also specify (i) the total number of shares of Series B Preferred Stock
outstanding as of the end of such quarter, (ii) the total number of shares of
Common Stock issued upon all conversions of Series B Preferred Stock prior to
the end of such quarter, (iii) the total number of shares of Common Stock which
are reserved for issuance upon conversion of the Series B Preferred Stock as of
the end of such quarter and (iv) the total number of shares of Common Stock
which may thereafter be listed or issued by the Corporation upon conversion of
the Series B Preferred Stock before the Corporation would exceed the Cap Amount
and the Reserved Amount. The Corporation (or its transfer agent) shall deliver
the report for each quarter to each holder prior to the tenth day of the
calendar month following the quarter to which such report relates. In addition,
the Corporation (or its transfer agent) shall provide, within 15 days after
delivery to the Corporation of a written request by any holder, any of the
information enumerated in clauses (i) - (iv) of this Paragraph D as of the date
of such request.
E. Payment of Cash; Defaults. Whenever the Corporation is required to make
any cash payment to a holder under this Certificate of Designation (upon
redemption or otherwise), such cash payment shall be made to the holder within
five business days after delivery by such holder of a notice specifying that the
holder elects to receive such payment in cash and the method (e.g., by check,
wire transfer) in which such payment should be made. If such payment is not
delivered within such five business day period, such holder shall thereafter be
entitled to interest on the unpaid amount at a per annum rate equal to the lower
of twenty-four percent (24%) and the highest interest rate permitted by
applicable law until such amount is paid in full to the holder.
F. Status as Stockholder. Upon submission of a Notice of Conversion by a
holder of Series B Preferred Stock, (i) the shares covered thereby (other than
the shares, if any, which cannot be issued because their listing or issuance
would exceed such holder's allocated portion of the Reserved Amount or Cap
Amount) shall be deemed converted into shares of Common Stock and (ii) the
holder's rights as a holder of such converted shares of Series B Preferred Stock
shall cease and terminate, excepting only the right to receive certificates for
such shares of Common Stock and to any remedies provided herein or otherwise
available at law or in equity to such holder because of a failure by the
Corporation to comply with the terms of this Certificate of Designation.
Notwithstanding the foregoing, if a holder has not received certificates for all
shares of Common Stock prior to the tenth business day after the expiration of
the Delivery Period with respect to a conversion of Series B Preferred Stock for
any reason, then (unless the holder otherwise elects to retain its status as a
holder of Common Stock by so notifying the Corporation within five business days
after the expiration of such 10 business day period) the holder shall regain the
rights of a holder of Series B Preferred Stock with respect to such unconverted
shares of Series B Preferred Stock and the Corporation shall, as soon as
practicable, return such unconverted shares to the holder. In all cases, the
holder shall retain all of its rights and remedies (including, without
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<PAGE>
limitation, the right to have the Conversion Price with respect to subsequent
conversions determined in accordance with Article VI.A) for the Corporation's
failure to convert Series B Preferred Stock.
G. Remedies Cumulative. The remedies provided in this Certificate of
Designation shall be cumulative and in addition to all other remedies available
under this Certificate of Designation, at law or in equity (including a decree
of specific performance and/or other injunctive relief), and nothing herein
shall limit a holder's right to pursue actual damages for any failure by the
Corporation to comply with the terms of this Certificate of Designation. The
Corporation acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the holders of Series B Preferred Stock and that the
remedy at law for any such breach may be inadequate. The Corporation therefore
agrees, in the event of any such breach or threatened breach, that the holders
of Series B Preferred Stock shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.
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IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf
of the Corporation this 9th day of November, 1998.
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
By:/s/ Joe G. Brooks
--------------------------
Name: Joe. G. Brooks
Title: President
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NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series B Preferred Stock)
The undersigned hereby irrevocably elects to convert ____________ shares of
Series B Preferred Stock (the "Conversion"), represented by stock certificate
Nos(s). ___________ (the "Preferred Stock Certificates"), into shares of common
stock ("Common Stock") of Advanced Environmental Recycling Technologies, Inc.
(the "Corporation") according to the conditions of the Certificate of
Designation, Rights and Preferences of the Series B Convertible Preferred Stock
of the Corporation as of the date written below. If securities are to be issued
in the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto. No fee will be charged to the
holder for any conversion, except for transfer taxes, if any. A copy of each
Preferred Stock Certificate is attached hereto (or evidence of loss, theft or
destruction thereof).
The undersigned requests that the Corporation electronically transmit the Common
Stock issuable pursuant to this Notice of Conversion to the account of the
undersigned or its nominee (which is _________________) with DTC through its
Deposit Withdrawal Agent Commission System ("DTC Transfer").
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Series B Preferred Stock shall be made pursuant to registration of the Common
Stock under the Securities Act of 1933, as amended (the "Act"), or pursuant to
an exemption from registration under the Act.
|_| In lieu of receiving the shares of Common Stock issuable pursuant to this
Notice of Conversion by way of DTC Transfer, the undersigned hereby
requests that the Corporation issue and deliver to the undersigned
physical certificates representing such shares of Common Stock.
Date of Conversion:______________________________
Applicable Conversion Price:_____________________
Number of Shares of Common
Stock to be Issued:______________________________
Signature:_______________________________________
Name:____________________________________________
Address:_________________________________________
_________________________________________
_________________________________________
<PAGE>
EXHIBIT 10.36
EXHIBIT A
to Securities
Purchase
Agreement
CERTIFICATE OF DESIGNATIONS,
RIGHTS AND PREFERENCES
OF
SERIES C CONVERTIBLE PREFERRED STOCK
OF
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
Advanced Environmental Recycling Technologies, Inc., a corporation
organized and existing under the General Corporation Law of the State of
Delaware (the "Corporation"), hereby certifies that the following resolutions
were adopted by the Board of Directors of the Corporation pursuant to authority
of the Board of Directors as required by Section 151 of the Delaware General
Corporation Law;
RESOLVED, that pursuant to the authority granted to and vested in the Board
of Directors of this Corporation (the "Board of Directors" or the "Board") in
accordance with the provisions of its Certificate of Incorporation, the Board of
Directors hereby authorizes a series of the Corporation's previously authorized
Preferred Stock, par value $1.00 per share (the "Preferred Stock"), and hereby
states the designation and number of shares, and fixes the relative rights,
preferences, privileges, powers and restrictions thereof as follows:
Series C Convertible Preferred Stock:
I. DESIGNATION AND AMOUNT
The designation of this series, which consists of 500 shares of Preferred
Stock, is the Series C Convertible Preferred Stock (the "Series C Preferred
Stock") and the stated value shall be One Thousand U.S. Dollars ($1,000.00) per
share (the "Stated Value").
II. NO DIVIDENDS
The Series C Preferred Stock will bear no dividends, and the holders of the
Series C Preferred Stock shall not be entitled to receive dividends on the
Series C Preferred Stock.
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III. CERTAIN DEFINITIONS
For purposes of this Certificate of Designation, the following terms shall
have the following meanings:
A. "Closing Bid Price" means, for any security as of any date, the
closing bid price of such security on the principal 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 Corporation and reasonably acceptable to holders
of a majority of the then outstanding shares of Series C Preferred Stock.
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 bid 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 bid 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. If the
Closing Bid Price cannot be calculated for such security on such date 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 Corporation and reasonably
acceptable to holders of a majority of the then outstanding shares of
Series C Preferred Stock, with the costs of such appraisal to be borne by
the Corporation.
B. "Conversion Date" means, for any Optional Conversion, the date on
which the notice of conversion in the form attached hereto (the "Notice of
Conversion") is delivered by fax, as evidenced by a mechanically or
electronically generated confirmation thereof, (or delivered by other means
resulting in notice) to the Corporation on the Conversion Date indicated in
the Notice of Conversion.
C. "Conversion Price" means the Fixed Conversion Price if no Milestone
Failure has occurred and, if a Milestone Failure has occurred, the lower of
the Fixed Conversion Price and the Variable Conversion Price, each in
effect as of such date and subject to adjustment as provided herein.
Notwithstanding the foregoing, at all times prior to the one (1) year
anniversary of the Issuance Date, the Conversion Price means the Fixed
Conversion Price, in effect as of such date and subject to adjustment as
provided herein.
D. "Fixed Conversion Price" means $1.20.
E. "Issuance Date" means the date of the Closing (as defined in that
certain Securities Purchase Agreement by and among the Corporation and the
purchasers named therein with respect to the initial issuance of the Series
C Preferred Stock (the "Securities Purchase Agreement").
F. "Milestone Failure" means the Corporation's failure to achieve one
or more of the following milestones:
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(i) The Corporation's quarterly sales for the Corporation's first
fiscal quarter in 1999, as reported in the Corporation's Quarterly
Report on Form 10-Q ("Form 10-Q") for such quarter, shall be not less
than $4,500,000.
(ii) The Corporation's quarterly sales for each of the
Corporation's fiscal quarters commencing with the second fiscal
quarter of 1999 and for each fiscal quarter thereafter, as reported in
Form 10-Q or in the Corporation's Annual Report on Form 10-K ("Form
10-K"), as applicable, for each such quarter, shall be not less than
$6,000,000.
(iii) The Corporation's quarterly cash flow from operations shall
be positive for each of the Corporation's fiscal quarters, commencing
with the fourth fiscal quarter of 1998 and for each fiscal quarter
thereafter, as reported in Form 10-Q or Form 10-K, as applicable.
G. "N" means the number of days from, but excluding, the Issuance
Date.
H. "Premium" means an amount equal to (.10)x(N/365)x(1,000).
I. "Variable Conversion Price" means the average of the Closing Bid
Prices for the Common Stock (as defined below) 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).
IV. CONVERSION
A. Conversion at the Option of the Holder. (i) Subject to the
limitations on conversions contained in Paragraph C of this Article IV and
to the Corporation's right of redemption contained in Article VIII.D, each
holder of shares of Series C Preferred Stock may, at any time and from time
to time on or after the Issuance Date, convert (an "Optional Conversion")
each of its shares of Series C Preferred Stock into a number of fully paid
and nonassessable shares of the Corporation's Class A Common Stock, $.01
par value per share (the "Common Stock"), determined in accordance with the
following formula if the Corporation timely redeems the Premium thereon in
cash in accordance with subparagraph (ii) below:
1,000
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Conversion Price
or in accordance with the following formula if the Corporation does not
timely redeem the Premium thereon in accordance with subparagraph (ii)
below:
1,000 + the Premium
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Conversion Price
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(ii) (a) The Corporation shall have the right, in its sole
discretion, upon receipt of a Notice of Conversion, to redeem the
Premium subject to such conversion for a sum of cash equal to the
amount of the Premium being so redeemed. All cash redemption payments
hereunder shall be paid in lawful money of the United States of
America at such address for the holder as appears on the record books
of the Corporation (or at such other address as such holder shall
hereafter give to the Corporation by written notice). In the event the
Corporation so elects to redeem the Premium in cash and fails to pay
such holder the applicable redemption amount to which such holder is
entitled by depositing a check in the U.S. Mail to such holder within
four (4) business days of receipt by the Corporation of a Notice of
Conversion (in the case of a redemption in connection with an Optional
Conversion), the Corporation shall thereafter forfeit its right to
redeem such Premium in cash and such Premium shall thereafter be
converted into shares of Common Stock in accordance with Article
IV.A(i).
(b) Each holder of Series C Preferred Stock shall have the right
to require the Corporation to provide advance notice to such holder
stating whether the Corporation will elect to redeem the Premium in
cash pursuant to the Corporation's redemption rights discussed in
subparagraph (a) of this Article IV.A(ii). A holder may exercise such
right from time to time by sending notice (an "Election Notice") to
the Corporation, by facsimile, requesting that the Corporation
disclose to such holder whether the Corporation would elect to redeem
the Premium for cash in lieu of issuing shares of Common Stock
therefor if such holder were to exercise its right of conversion
pursuant to this Article IV.A. The Corporation shall, no later than
the close of business on the second business day following receipt of
an Election Notice, disclose to such holder whether the Corporation
would elect to redeem the Premium in connection with a conversion
pursuant to a Notice of Conversion delivered over the subsequent ten
(10) business day period. If the Corporation does not respond to such
holder within such two business day period via facsimile, the
Corporation shall, with respect to any conversion pursuant to a
Conversion Notice delivered within the subsequent ten (10) business
day period, forfeit its right to redeem such Premium in accordance
with subparagraph (a) of this Article IV.A(ii) and shall be required
to convert such Premium into shares of Common Stock.
B. Mechanics of Conversion. In order to effect an Optional Conversion,
a holder shall: (x) fax (or otherwise deliver) a copy of the fully executed
Notice of Conversion to the Corporation or the transfer agent for the
Common Stock and (y) surrender or cause to be surrendered the original
certificates representing the Series C Preferred Stock being converted (the
"Preferred Stock Certificates"), duly endorsed, along with a copy of the
Notice of Conversion as soon as practicable thereafter to the Corporation
or the transfer agent. Upon receipt by the Corporation of the Notice of
Conversion by fax from a holder, the Corporation shall, within one business
day, send, via fax, a confirmation (the "Notice of Conversion
Confirmation") to such holder stating that the Notice of Conversion has
been received, the date upon which the Corporation expects to deliver the
Common Stock issuable upon such conversion, and the name and telephone
number of a contact person at the Corporation regarding the conversion. The
Corporation shall not be obligated to issue shares of Common Stock upon a
conversion unless either the Preferred Stock Certificates are delivered to
the Corporation or the transfer agent as provided above, or the holder
notifies the Corporation or the transfer agent that such certificates have
been lost, stolen or destroyed and delivers the documentation to the
Corporation required by Article XIV.B hereof.
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(i) Delivery of Common Stock Upon Conversion. Upon the surrender
of Preferred Stock Certificates from a holder of Series C Preferred
Stock accompanied by a Notice of Conversion, the Corporation shall,
subject to the Corporation's redemption rights set forth in Article
VIII.D, no later than the later of (a) the third business day
following the Conversion Date and (b) the business day following the
date of such surrender (or, in the case of lost, stolen or destroyed
certificates, after provision of documentation pursuant to Article
XIV.B) (the "Delivery Period"), issue and deliver to the holder or its
nominee, (x) that number of shares of Common Stock issuable upon
conversion of such shares of Series C Preferred Stock being converted
and (y) a certificate representing the number of shares of Series C
Preferred Stock not being converted, if any. If the Corporation's
transfer agent is participating in the Depository Trust Company
("DTC") Fast Automated Securities Transfer program, and so long as the
certificates therefor do not bear a legend and the holder thereof is
not then required to return such certificate for the placement of a
legend thereon, the Corporation may cause its transfer agent to
electronically transmit the Common Stock issuable upon conversion to
the holder by crediting the account of the holder or its nominee with
DTC through its Deposit Withdrawal Agent Commission system ("DTC
Transfer"). If the aforementioned conditions to a DTC Transfer are not
satisfied or a DTC Transfer is otherwise not effected, the Corporation
shall deliver to the holder physical certificates representing the
Common Stock issuable upon conversion. Further, a holder may instruct
the Corporation to deliver to the holder physical certificates
representing the Common Stock issuable upon conversion in lieu of
delivering such shares by way of DTC Transfer.
(ii) Taxes. The Corporation shall pay any and all taxes which may
be imposed upon the Corporation with respect to the issuance and
delivery of the shares of Common Stock upon the conversion of the
Series C Preferred Stock.
(iii) No Fractional Shares. If any conversion of Series C
Preferred Stock 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 upon conversion of the
Series C Preferred Stock shall be the next higher whole number of
shares.
(iv) Conversion Disputes. In the case of any dispute with respect
to a conversion, the Corporation shall promptly issue such number of
shares of Common Stock as are not disputed in accordance with
subparagraph (i) above. If such dispute involves the calculation of
the Conversion Price, the Corporation shall submit the disputed
calculations to an independent outside accountant reasonably
acceptable to the holder of Series C Preferred Stock being converted
via facsimile at any time prior to the expiration of the Delivery
Period. The accountant, at the expense of the party in error, shall
audit the calculations and notify the Corporation and the holder of
the results as soon as practicable following the date it receives the
disputed calculations. The accountant's calculation shall be deemed
conclusive, absent manifest error. The Corporation shall then issue
the appropriate number of shares of Common Stock in accordance with
subparagraph (i) above.
C. Limitations on Conversions. The conversion of shares of Series C
Preferred Stock shall be subject to the following limitations (each of
which limitations shall be applied independently):
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(i) Cap Amount. If, notwithstanding the representations and warranties
of the Corporation contained in the Securities Purchase Agreement, dated as
of September 30, 1998, between the Corporation and the purchasers of the
Series C Preferred Stock named therein, the Corporation is prohibited by
the rules or regulations of any securities exchange or quotation system on
which the Common Stock is then listed or traded, from listing or issuing a
number of shares of Common Stock in excess of a prescribed amount (the "Cap
Amount") without the approval of the Corporation's stockholders, then the
Corporation shall not be required to list or issue, as applicable, shares
in excess of the Cap Amount unless the Corporation has obtained the
required approvals. The Cap Amount which, as of the Issuance Date, shall be
1,990,000 shares, shall be allocated pro rata to the holders of Series C
Preferred Stock as provided in Article XIV.C. In the event a holder of
Series C Preferred Stock submits a Notice of Conversion and the Corporation
is prohibited from listing or issuing shares of Common Stock to satisfy
such Notice of Conversion as a result of the operation of this subparagraph
(i), such holder shall be entitled to the rights set forth in Article VII
hereof.
(ii) No Ten Percent Holders. Except in connection with a Required
Conversion at Maturity (as defined below), in no event shall a holder
of shares of Series C Preferred Stock be entitled to receive shares of
Common Stock upon a conversion to the extent that the sum of (x) the
number of shares of Common Stock beneficially owned by the holder and
its affiliates (exclusive of shares issuable upon conversion of the
unconverted portion of the shares of Series C Preferred Stock or the
unexercised or unconverted portion of any other securities of the
Corporation (including, without limitation, the warrants (the
"Warrants") issued by the Corporation pursuant to the Securities
Purchase Agreement) subject to a limitation on conversion or exercise
analogous to the limitations contained herein) and (y) the number of
shares of Common Stock issuable upon the conversion of the shares of
Series C Preferred Stock with respect to which the determination of
this subparagraph is being made, would result in beneficial ownership
by the holder and its affiliates of more than 9.99% of the outstanding
shares of Common Stock. For purposes of this subparagraph, beneficial
ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13 D-G
thereunder, except as otherwise provided in clause (x) above. The
restriction contained in this subparagraph (ii) shall not be altered,
amended, deleted or changed in any manner whatsoever unless the
holders of a majority of the outstanding shares of Common Stock and
each holder of outstanding shares of Series C Preferred Stock shall
approve such alteration, amendment, deletion or change.
D. Required Conversion at Maturity. If the Corporation does not elect
to exercise its redemption rights set forth in Article VIII.D hereof,
subject to the limitations set forth in Paragraph C(i) of this Article IV
and provided all shares of Common Stock issuable upon conversion of all
outstanding shares of Series C Preferred Stock are then (i) authorized and
reserved for issuance, (ii) registered under the Securities Act of 1933, as
amended, for resale by the holders of such shares of Series C Preferred
Stock and (iii) eligible to be traded on either the Nasdaq SmallCap Market,
The Nasdaq National Market, the New York Stock Exchange or the American
Stock Exchange, each share of Series C Preferred Stock issued and
outstanding on the seventh anniversary of the Issuance Date thereof (the
"Maturity Date"), automatically shall be converted into shares of Common
Stock on such date in accordance with the conversion formulas set forth in
Paragraph A of this Article IV (the "Required
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Conversion at Maturity"); provided, however, in such case the Conversion
Price shall equal the lower of (i) the average of the Closing Bid Prices
for the Common Stock for the five (5) trading days immediately preceding
the Maturity Date and (ii) the Fixed Conversion Price; provided, further,
the Maturity Date shall be extended for a period equal to the number of
days any Conversion Default, Trading Market Trigger Event, Trading Market
Prohibition or Redemption Event is in existence. If the Required Conversion
at Maturity occurs, the Corporation and the holders of Series C Preferred
Stock shall follow the applicable conversion procedures set forth in
Paragraph B of this Article IV; provided, however, that the holders of
Series C Preferred Stock are not required to deliver a Notice of Conversion
to the Corporation or its transfer agent.
V. RESERVATION OF SHARES OF COMMON STOCK
A. Reserved Amount. On or before January 15, 1999, the Corporation
shall reserve, from the authorized but unissued shares of Common Stock, for
issuance upon conversion of the Series C Preferred Stock, 200% of the
number of shares which would be issuable if the outstanding shares of
Series C Preferred Stock were converted in their entirety on the Issuance
Date based on the Conversion Price in effect on the Issuance Date, and
thereafter the number of authorized but unissued shares of Common Stock so
reserved (the "Reserved Amount") shall not be decreased and shall at all
times be sufficient to provide for the conversion of the Series C Preferred
Stock outstanding at the then current Conversion Price thereof. The
Reserved Amount shall be allocated to the holders of Series C Preferred
Stock as provided in Article XIV.C.
B. Increases to Reserved Amount. If the Reserved Amount for any three
consecutive trading days (the last of such three trading days being the
"Authorization Trigger Date") shall be less than 135% of the number of
shares of Common Stock issuable upon conversion of the then outstanding
shares of Series C Preferred Stock, the Corporation shall immediately
notify the holders of Series C Preferred Stock of such occurrence and shall
take immediate action (including, if necessary, seeking stockholder
approval to authorize the issuance of additional shares of Common Stock) to
increase the Reserved Amount to 200% of the number of shares of Common
Stock then issuable upon conversion of the outstanding Series C Preferred
Stock. In the event the Corporation fails to so increase the Reserved
Amount within 90 days after an Authorization Trigger Date (such event being
the "Reserved Amount Trigger Event"), each holder of Series C Preferred
Stock shall thereafter have the option, exercisable in whole or in part at
any time and from time to time by delivery of a Redemption Notice (as
defined in Article VIII.C) to the Corporation, to require the Corporation
to purchase for cash, at an amount per share equal to the Redemption Amount
(as defined in Article VIII.B), a portion of the holder's Series C
Preferred Stock such that, after giving effect to such purchase, the
holder's allocated portion of the Reserved Amount exceeds 135% of the total
number of shares of Common Stock issuable to such holder upon conversion of
its Series C Preferred Stock. If the Corporation fails to redeem any of
such shares within five (5) business days after its receipt of such
Redemption Notice, then such holder shall be entitled to the remedies
provided in Article VIII.C.
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C. Adjustment to Conversion Price. If the Corporation is prohibited,
at any time, from issuing shares of Common Stock upon conversion of Series
C Preferred Stock to any holder because the Corporation does not then have
available a sufficient number of authorized and reserved shares of Common
Stock, then the Fixed Conversion Price in respect of any shares of Series C
Preferred Stock held by any holder (including shares of Series C Preferred
Stock submitted to the Corporation for conversion, but for which shares of
Common Stock have not been issued to any such holder) shall be adjusted as
provided in Article VI.B.
VI. FAILURE TO SATISFY CONVERSIONS
A. Conversion Default Payments. If, at any time, (x) a holder of
shares of Series C Preferred Stock submits a Notice of Conversion and the
Corporation fails for any reason (other than because such issuance would
exceed such holder's allocated portion of the Reserved Amount or Cap
Amount, for which failures the holders shall have the remedies set forth in
Articles V and VII, respectively) to deliver, on or prior to the fourth
(4th) business day following the expiration of the Delivery Period for such
conversion, such number of unlegended shares of Common Stock to which such
holder is entitled upon such conversion, or (y) the Corporation provides
notice to any holder of Series C Preferred Stock at any time of its
intention not to issue unlegended shares of Common Stock upon exercise by
any holder of its conversion rights in accordance with the terms of this
Certificate of Designation (other than because such issuance would exceed
such holder's allocated portion of the Reserved Amount or Cap Amount) (each
of (x) and (y) being a "Conversion Default"), then the Corporation shall
pay to the affected holder, in the case of a Conversion Default described
in clause (x) above, and to all holders, in the case of a Conversion
Default described in clause (y) above, an amount equal to:
(.24) x (D/365) x (the Default Amount)
where:
"D" means the number of days after the expiration of the Delivery
Period through and including the Default Cure Date;
"Default Amount" means (i) the total Stated Value of all shares
of Series C Preferred Stock held by such holder, plus (ii) the total
accrued Premium as of the first day of the Conversion Default on all
shares of Series C Preferred Stock included in clause (i) of this
definition; and
"Default Cure Date" means (i) with respect to a Conversion
Default described in clause (x) of its definition, the date the
Corporation effects the conversion of the full number of shares of
Series C Preferred Stock, and (ii) with respect to a Conversion
Default described in clause (y) of its definition, the date the
Corporation begins to issue unlegended shares of Common Stock in
satisfaction of all conversions of Series C Preferred Stock in
accordance with Article IV.A, and (iii) with respect to either type of
a Conversion Default, the date on which the Corporation redeems shares
of Series C Preferred Stock held by such holder pursuant to paragraph
D of this Article VI.
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The payments to which a holder shall be entitled pursuant to this
Paragraph A are referred to herein as "Conversion Default Payments." A
holder may elect to receive accrued Conversion Default Payments in cash or
to convert all or any portion of such accrued Conversion Default Payments,
at any time, into Common Stock at the lowest Conversion Price in effect
during the period beginning on the date of the Conversion Default through
the Conversion Date or the Default Cure Date, whichever is earlier, with
respect to such Conversion Default Payments. In the event a holder elects
to receive any Conversion Default Payments in cash, it shall so notify the
Corporation in writing. Such payment shall be made in accordance with and
be subject to the provisions of Article XIV.E. In the event a holder elects
to convert all or any portion of the Conversion Default Payments into
Common Stock, the holder shall indicate on a Notice of Conversion such
portion of the Conversion Default Payments which such holder elects to so
convert and such conversion shall otherwise be effected in accordance with
the provisions of Article IV.
B. Adjustment to Conversion Price. If a holder has not received
certificates for all shares of Common Stock prior to the tenth (10th)
business day after the expiration of the Delivery Period with respect to a
conversion of Series C Preferred Stock for any reason (other than because
such issuance would exceed such holder's allocated portion of the Reserved
Amount or Cap Amount, for which failures the holders shall have the
remedies set forth in Articles V and VII, respectively), then the Fixed
Conversion Price in respect of any shares of Series C Preferred Stock held
by such holder (including shares of Series C Preferred Stock submitted to
the Corporation for conversion, but for which shares of Common Stock have
not been issued to such holder) shall thereafter be the lesser of (i) the
Fixed Conversion Price on the Conversion Date specified in the Notice of
Conversion which resulted in the Conversion Default and (ii) the lowest
Closing Bid Price for the Common Stock during the period beginning on, and
including, such Conversion Date through and including the earlier of (x)
the day such shares of Common Stock are delivered to the holder and (y) the
day on which the holder regains its rights as a holder of Series C
Preferred Stock with respect to such unconverted shares of Series C
Preferred Stock pursuant to the provisions of Article XIV.F hereof. If
there shall occur a Conversion Default of the type described in clause (y)
of Article VI.A, then the Fixed Conversion Price with respect to any
conversion thereafter shall be the lowest Closing Bid Price for the Common
Stock during the period beginning on, and including, the date of the
occurrence of such Conversion Default through and including the Default
Cure Date. The Fixed Conversion Price shall thereafter be subject to
further adjustment for any events described in Article XI.
C. Buy-In Cure. Unless the Corporation has notified the applicable
holder in writing prior to the delivery by such holder of a Notice of
Conversion that the Corporation is unable to honor conversions, if (i) (a)
the Corporation fails for any reason to deliver during the Delivery Period
shares of Common Stock to a holder upon a conversion of shares of Series C
Preferred Stock or (b) there shall occur a Legend Removal Failure (as
defined in Article VIII.A(ii) below) and (ii) thereafter, such holder
purchases (in an open market transaction or otherwise) shares of Common
Stock to make delivery in satisfaction of a sale by such holder of the
unlegended shares of Common Stock (the "Sold Shares") which such holder
anticipated receiving upon such conversion (a "Buy-In"), the Corporation
shall pay such holder (in addition to any other remedies available to the
holder) the amount by which (x) such
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holder's total purchase price (including brokerage commissions, if any) for
the unlegended shares of Common Stock so purchased exceeds (y) the net
proceeds received by such holder from the sale of the Sold Shares. For
example, if a holder purchases unlegended shares of Common Stock having a
total purchase price of $11,000 to cover a Buy-In with respect to shares of
Common Stock it sold for $10,000, the Corporation will be required to pay
the holder $1,000. A holder shall provide the Corporation written
notification indicating any amounts payable to such holder pursuant to this
Paragraph C. The Corporation shall make any payments required pursuant to
this Paragraph C in accordance with and subject to the provisions of
Article XIV.E.
D. Redemption Right. If the Corporation fails, and such failure
continues uncured for five (5) business days after the Corporation has been
notified thereof in writing by the holder, for any reason (other than
because such issuance would exceed such holder's allocated portion of the
Reserved Amount or Cap Amount, for which failures the holders shall have
the remedies set forth in Articles V and VII, respectively) to issue shares
of Common Stock within 10 business days after the expiration of the
Delivery Period with respect to any conversion of Series C Preferred Stock,
then the holder may elect at any time and from time to time prior to the
Default Cure Date for such Conversion Default, by delivery of a Redemption
Notice to the Corporation, to have all of such holder's shares of Series C
Preferred Stock which were submitted for conversion purchased by the
Corporation for cash, at an amount per share equal to the Redemption Amount
(as defined in Article VIII.B). If the Corporation fails to redeem any of
such shares within five business days after its receipt of such Redemption
Notice, then such holder shall be entitled to the remedies provided in
Article VIII.C.
E. Void Notice of Conversion. If for any reason a holder has not
received all of the shares of Common Stock prior to the tenth (10th)
business day after the expiration of the Delivery Period with respect to a
conversion of Series C Preferred Stock and (i) such shares have not been
called for redemption pursuant to Article VIII.D, provided the Redemption
Amount therefor has been or may be paid within the time limits set forth in
Article VIII.D, and (ii) such shares are not subject to a redemption notice
from the holder thereof, then the holder, upon written notice to the
Corporation's transfer agent, with a copy to the Corporation, may void its
Notice of Conversion with respect to, and retain or have returned, as the
case may be, any shares of Series C Preferred Stock that have not been
converted pursuant to such holder's Notice of Conversion; provided that the
voiding of a holder's Notice of Conversion shall not affect such holders
rights and remedies which have accrued prior to the date of such notice
pursuant to Article VI hereof or otherwise.
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VII. INABILITY TO LIST OR CONVERT DUE TO CAP AMOUNT
A. Obligation to Cure. If at any time after the Initial Issuance Date
the then unissued portion of any holder's Cap Amount is less than 135% of
the number of shares of Common Stock then issuable upon conversion of such
holder's shares of Series C Preferred Stock (a "Trading Market Trigger
Event"), the Corporation shall immediately notify the holders of Series C
Preferred Stock of such occurrence and shall take immediate action
(including, if necessary, seeking the approval of its stockholders to
authorize the listing or issuance of the full number of shares of Common
Stock which would be issuable upon the conversion of the then outstanding
shares of Series C Preferred Stock but for the Cap Amount) to eliminate any
prohibitions under applicable law or the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Corporation or any of its
securities on the Corporation's ability to list or issue shares of Common
Stock in excess of the Cap Amount ("Trading Market Prohibitions"). In the
event the Corporation fails to eliminate all such Trading Market
Prohibitions within 120 days after the Trading Market Trigger Event, then
each holder of Series C Preferred Stock shall thereafter have the option,
exercisable in whole or in part at any time and from time to time until
such date that all such Trading Market Prohibitions are eliminated, by
delivery of a Redemption Notice (as defined in Article VIII.C) to the
Corporation, to require the Corporation to purchase for cash, at an amount
per share equal to the Redemption Amount, a number of the holder's shares
of Series C Preferred Stock such that, after giving effect to such
redemption, the then unissued portion of such holder's Cap Amount exceeds
135% of the total number of shares of Common Stock issuable upon conversion
of such holder's shares of Series C Preferred Stock. If the Corporation
fails to redeem any of such shares within five (5) business days after its
receipt of such Redemption Notice, then such holder shall be entitled to
the remedies provided in Articles VII.B and VIII.C.
B. Remedies. If the Corporation fails to redeem any shares of Series C
Preferred Stock pursuant to Article VII.A within five business days after
its receipt of such Redemption Notice, and thereafter the Corporation is
prohibited, at any time, from listing shares of Common Stock or from
issuing shares of Common Stock upon conversion of Series C Preferred Stock
to any holder because such listing or issuance would exceed the then
unissued portion of such holder's Cap Amount because of applicable law or
the rules or regulations of any stock exchange, interdealer quotation
system or other self-regulatory organization with jurisdiction over the
Corporation or its securities, any holder who is so prohibited from
converting its Series C Preferred Stock because the shares of Common Stock
underlying such Series C Preferred Stock may not be listed or issued, may
elect either or both of the following additional remedies:
(i) to require, with the consent of holders of at least fifty
percent (50%) of the outstanding shares of Series C Preferred Stock
(including any shares of Series C Preferred Stock held by the
requesting holder), the Corporation to terminate the listing of its
Common Stock on the AMEX (or any other stock exchange, interdealer
quotation system or trading market) and to cause its Common Stock to
be eligible for trading on the over-the-counter electronic bulletin
board; or
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<PAGE>
(ii) to require the Corporation to issue shares of Common Stock
in accordance with such holder's Notice of Conversion at a conversion
price equal to the average of the Closing Bid Prices for the Common
Stock during the five consecutive trading days ending on the trading
day immediately preceding the date of the holder's written notice to
the Corporation of its election to receive shares of Common Stock
pursuant to this subparagraph (ii) (subject to equitable adjustment
for any stock splits, stock dividends, reclassifications or similar
events during such five trading day period).
C. Adjustment to Conversion Price. If the Corporation is prohibited,
at any time, from listing shares of Common Stock or from issuing shares of
Common Stock upon conversion of Series C Preferred Stock to any holder
because such listing or issuance would exceed the then unissued portion of
such holder's Cap Amount because of applicable law or the rules or
regulations of any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Corporation or its
securities, then the Fixed Conversion Price in respect of any shares of
Series C Preferred Stock held by any holder (including shares of Series C
Preferred Stock submitted to the Corporation for conversion, but for which
shares of Common Stock have not been issued) shall be adjusted as provided
in Article VI.A.
VIII. REDEMPTION
A. Redemption by Holder. In the event (each of the events described in
clauses (i)-(v) below after expiration of the applicable cure period (if
any) being a "Redemption Event"):
(i) the Common Stock (including, from and after the Issuance
Date, any of the shares of Common Stock issuable upon conversion of
the Series C Preferred Stock) is suspended from trading on any of, or
is not listed (and authorized) for trading on at least one of, the
NASDAQ Small Cap Market, the NASDAQ National Market, the New York
Stock Exchange or the American Stock Exchange for an aggregate of 10
trading days in any nine month period;
(ii) the Corporation fails to remove any restrictive legend on
any certificate or any shares of Common Stock issued to the holders of
Series C Preferred Stock upon conversion of the Series C Preferred
Stock as and when required by this Certificate of Designation, the
Securities Purchase Agreement or the Registration Rights Agreement (as
defined below) (a "Legend Removal Failure"), and any such failure
continues uncured for ten business days after the Corporation has been
notified thereof in writing by the holder;
(iii) the Registration Statement required to be filed by the
Corporation pursuant to Section 2(a) of the Registration Rights
Agreement by and among the Corporation and the other signatories
thereto entered into in connection with the Securities Purchase
Agreement (the "Registration Rights Agreement") has not been declared
effective by April 17, 1999, or such Registration Statement, after
being declared effective, cannot be utilized by the holders of Series
C Preferred Stock for the resale of all of their Registrable
Securities (as defined in the Registration Rights Agreement) for an
aggregate of more than thirty (30) days
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<PAGE>
(iv) the Corporation provides notice to any holder of Series C
Preferred Stock, including by way of public announcement, at any time,
of its intention not to issue, or otherwise refuses to issue, shares
of Common Stock to any holder of Series C Preferred Stock upon
conversion in accordance with the terms of this Certificate of
Designation (other than due to the circumstances contemplated by
Articles V or VII for which the holders shall have the remedies set
forth in such Articles);
(v) the Corporation shall:
(a) sell, convey or dispose of all or substantially all of
its assets (the presentation of any such transaction for
stockholder approval being conclusive evidence that such
transaction involves the sale of all or substantially all of the
assets of the Corporation);
(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 Corporation and other than
pursuant to a merger in which the Corporation is the surviving or
continuing entity and the voting capital stock of the Corporation
immediately prior to such merger represents at least 50% of the
voting power of the capital stock of the Corporation after the
merger); or
(c) have fifty percent (50%) or more of the voting power of
its capital stock is 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); or
(vi) the Corporation otherwise shall breach any material term
hereunder or under the Securities Purchase Agreement or the
Registration Rights Agreement.
then, upon the occurrence of any such Redemption Event, each holder of shares of
Series C Preferred Stock shall thereafter have the option, exercisable in whole
or in part at any time and from time to time by delivery of a Redemption Notice
(as defined in Paragraph C below) to the Corporation while such Redemption Event
continues, to require the Corporation to purchase for cash any or all of the
then outstanding shares of Series C Preferred Stock held by such holder for an
amount per share equal to the Redemption Amount (as defined in Paragraph B
below) in effect at the time of the redemption hereunder. For the avoidance of
doubt, the occurrence of any event described in clauses (i), (ii), (iii), (iv)
or (v) above shall immediately constitute a Redemption Event and there shall be
no cure period. Upon the Corporation's receipt of any Redemption Notice
hereunder (other than during the three trading day period following the
Corporation's delivery of a Redemption Announcement (as defined below) to all of
the holders in response to the Corporation's initial receipt of a Redemption
Notice from a holder of Series C Preferred Stock), the Corporation shall
promptly (and in any event within two business days following such receipt)
deliver a written notice (a "Redemption Announcement") to all holders of Series
C Preferred Stock stating the date upon which the Corporation received such
Redemption Notice
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and the amount of Series C Preferred Stock covered thereby. Subject to Article
VIII.D, the Corporation shall not redeem any shares of Series C Preferred Stock
during the three trading day period following the delivery of a required
Redemption Announcement hereunder. At any time and from time to time during such
three trading day period, each holder of Series C Preferred Stock may request
(either orally or in writing) information from the Corporation with respect to
the instant redemption (including, but not limited to, the aggregate number of
shares of Series C Preferred Stock covered by Redemption Notices received by the
Corporation) and the Corporation shall furnish (either orally or in writing) as
soon as practicable such requested information to such requesting holder.
B. Definition of Redemption Amount. The "Redemption Amount" with
respect to a share of Series C Preferred Stock means an amount equal to the
greater of:
(a) V x M
------------
C P
and
(b) The product of (x) one hundred and fifteen percent (115%),
times (y) the sum of (I) Stated Value thereof, plus (II) the accrued
Premium thereon, plus (III) all unpaid Conversion Default Payments
owing (if any) with respect thereto through the Effective Date of
Redemption (as defined in subparagraph (iii) below).
where:
"V" means the Stated Value thereof, plus the accrued Premium thereon
through the date of payment of the Redemption Amount;
"CP" means the Conversion Price in effect on the date on which the
Corporation receives the Redemption Notice; and
"M" means (i) with respect to all redemptions other than redemptions
pursuant to Article VIII.A(v) hereof, the highest Closing Bid Price of the
Corporation's Common Stock during the period beginning on the date on which
the Corporation receives the Redemption Notice and ending on the date
immediately preceding the date of payment of the Redemption Amount and (ii)
with respect to redemptions pursuant to Article VIII.A(v) hereof, the
greater of (a) the amount determined pursuant to clause (i) of this
definition or (b) the fair market value, as of the date on which the
Corporation receives the Redemption Notice, of the consideration payable to
the holder of a share of Common Stock pursuant to the transaction which
triggers the redemption. For purposes of this definition, "fair market
value" for any consideration other than cash (in which case the fair market
value shall equal the amount thereof) or any registered security (in which
case the fair market value shall equal the Closing Bid Price thereof) shall
be determined by the mutual agreement of the Corporation and holders of a
majority-in-interest of the shares of Series C Preferred Stock then
outstanding, or if such agreement cannot be reached within
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five business days prior to the date of redemption, by an investment
banking firm selected by the Corporation and reasonably acceptable to
holders of a majority-in-interest of the then outstanding shares of Series
C Preferred Stock, with the costs of such appraisal to be borne by the
Corporation.
C. Redemption Defaults. If the Corporation fails to pay any holder the
Redemption Amount with respect to any share of Series C Preferred Stock
within five business days after its receipt of a notice requiring such
redemption (a "Redemption Notice"), then the holder of Series C Preferred
Stock delivering such Redemption Notice (i) shall be entitled to interest
on the Redemption Amount at a per annum rate equal to the lower of
twenty-four percent (24%) and the highest interest rate permitted by
applicable law from the date on which the Corporation receives the
Redemption Notice until the date of payment of the Redemption Amount
hereunder, and (ii) shall have the right, at any time and from time to
time, to require the Corporation, upon written notice, to immediately
convert (in accordance with the terms of Paragraph A of Article IV) all or
any portion of the Redemption Amount, plus interest as aforesaid, into
shares of Common Stock at a Conversion Price equal to the lowest Closing
Bid Price for the Common Stock during the period beginning on the date on
which the Corporation receives the Redemption Notice and ending on the
Conversion Date with respect to the conversion of such Redemption Amount.
In the event the Corporation is not able to redeem all of the shares of
Series C Preferred Stock subject to Redemption Notices delivered prior to
the date upon which such redemption is to be effected, the Corporation
shall redeem shares of Series C Preferred Stock from each holder pro rata,
based on the total number of shares of Series C Preferred Stock outstanding
at the time of redemption included by such holder in all Redemption Notices
delivered prior to the date upon which such redemption is to be effected
relative to the total number of shares of Series C Preferred Stock
outstanding at the time of redemption included in all of the Redemption
Notices delivered prior to the date upon which such redemption is to be
effected.
D. Redemption by Corporation.
(i) The Corporation shall have the right at any time and from
time to time to redeem any shares which are the subject of a Notice of
Conversion for an amount of cash equal to the Redemption Amount as
determined pursuant to clause (a) of its definition (a "Redemption in
Lieu of Conversion"), in its sole discretion by delivery of an
Optional Redemption Notice in accordance with the redemption
procedures set forth below.
(ii) Within ten (10) calendar days prior to the beginning of any
calendar month during which the Corporation elects to effect a
Redemption in Lieu of Conversion, the Corporation shall provide
written notice to the holders of Series C Preferred Stock by facsimile
and overnight courier stating that the Corporation will redeem any
conversions of Series C Preferred Stock in such calendar month (an
"Optional Redemption Notice"). In the event the Corporation fails to
provide an Optional Redemption Notice to the holders of Series C
Preferred Stock within such ten (10) day period, the Corporation shall
not be permitted to so redeem any conversions of Series C Preferred
Stock during such calendar month. In the event a timely Optional
Redemption Notice is provided as aforesaid, upon the Corporation's
receipt of a Notice of Conversion the Corporation shall be obligated
to redeem on or before the fifth business day after the receipt of the
Notice of Conversion, the entire number of shares
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<PAGE>
of the Series C Preferred Stock which are the subject of the Notice of
Conversion for the Redemption Amount as determined pursuant to clause
(a) of its definition.
(iii) After the two (2) year anniversary of the Issuance Date,
the Corporation shall have the right, on one occasion and on 10
business days prior written notice, to redeem all, but not less than
all, of the then outstanding shares of Series C Preferred Stock by
paying to each holder an amount per share of Series C Preferred Stock
equal to 150% of the sum of (x) the Stated Value thereof, plus (y)
accrued Premium thereon. At all times prior to redemption pursuant to
this Article VIII.D (including after receipt of the notice required by
this Article), each holder of Series C Preferred Stock shall remain
entitled to convert shares of Series C Preferred Stock into shares of
Common Stock in accordance with the terms of Article IV hereof.
E. Void Redemption. In the event that the Corporation does not pay the
Redemption Amount within the time period set forth in Article IV.D, Article
VIII.A or Article VIII.D, at any time thereafter and until the Corporation
pays such unpaid applicable Redemption Amount in full, a holder of Series C
Preferred Stock shall have the option (the "Void Optional Redemption
Option") to, in lieu of redemption, require the Corporation to promptly
return to such holder any or all of the shares of Series C Preferred Stock
that were submitted for redemption by such holder under this Article VIII
and for which the applicable Redemption Amount (together with any interest
thereon) has not been paid, by sending written notice thereof to the
Corporation via facsimile and confirmed by overnight courier, in person (by
courier or otherwise) or by telephone (to an authorized officer of the
Corporation or his or her administrative assistant) (the "Void Optional
Redemption Notice"). Upon the Corporation's receipt of such Void Optional
Redemption Notice and overnight courier, in-person or telephone
confirmation, (i) the Notice of Redemption shall be null and void with
respect to those shares of Series C Preferred Stock subject to the Void
Optional Redemption Notice, and (ii) the Corporation shall immediately
return any shares of Series C Preferred Stock subject to the Void Optional
Redemption Notice
IX. RANK
The Series C Preferred Stock shall rank (i) prior to all classes of the
Corporation's common stock and any class or series of capital stock of the
Corporation hereafter created that, by its terms, ranks junior to the Series C
Preferred Stock (collectively, "Junior Securities"); (ii) junior to any class or
series of capital stock of the Corporation hereafter created (with the consent
of the holders of Series C Preferred Stock obtained in accordance with Article
XIII hereof) specifically ranking, by its terms, senior to the Series C
Preferred Stock ("Senior Securities"); and (iii) pari passu with the Series A
Preferred Stock of the Corporation, Series B Preferred Stock of the Corporation
and any class or series of capital stock of the Corporation hereafter created
(with the consent of the holders of the Series C Preferred Stock obtained in
accordance with Article XIII hereof) specifically ranking by its terms on parity
with the Series C Preferred Stock (collectively, the "Pari Passu Securities"),
in each case as to distribution of assets upon liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary.
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<PAGE>
X. LIQUIDATION PREFERENCE
A. If the Corporation shall commence a voluntary case under the U.S.
Federal bankruptcy laws or any other applicable bankruptcy, insolvency or
similar law, or consent to the entry of an order for relief in an
involuntary case under any law or to the appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator (or other similar
official) of the Corporation or of any substantial part of its property, or
make an assignment for the benefit of its creditors, or admit in writing
its inability to pay its debts generally as they become due, or if a decree
or order for relief in respect of the Corporation shall be entered by a
court having jurisdiction in the premises in an involuntary case under the
U.S. Federal bankruptcy laws or any other applicable bankruptcy, insolvency
or similar law resulting in the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of
the Corporation or of any substantial part of its property, or ordering the
winding up or liquidation of its affairs, and any such decree or order
shall be unstayed and in effect for a period of 60 consecutive days and, on
account of any such event (a "Liquidation Event"), the Corporation shall
liquidate, dissolve or wind up, or if the Corporation shall otherwise
liquidate, dissolve or wind up, no distribution shall be made to the
holders of any shares of capital stock of the Corporation (other than
Senior Securities and Pari Passu Securities) upon liquidation, dissolution
or winding up unless prior thereto the holders of shares of Series C
Preferred Stock shall have received the Liquidation Preference with respect
to each share. If, upon the occurrence of a Liquidation Event, the assets
and funds available for distribution among the holders of the Series C
Preferred Stock and holders of Pari Passu Securities shall be insufficient
to permit the payment to such holders of the preferential amounts payable
thereon, then the entire assets and funds of the Corporation legally
available for distribution to the Series C Preferred Stock and the Pari
Passu Securities shall be distributed ratably among such shares in
proportion to the ratio that the Liquidation Preference payable on each
such share bears to the aggregate Liquidation Preference payable on all
such shares.
B. At the option of any holder of Series C Preferred Stock, the
occurrence of any event enumerated in Article VIII.A(v) hereof shall
either: (i) be deemed to be a liquidation, dissolution or winding up of the
Corporation for purposes of this Article X; or (ii) be treated pursuant to
Article XI hereof. "Person" shall mean any individual, corporation, limited
liability company, partnership, association, trust or other entity or
organization.
C. The purchase or redemption by the Corporation of stock of any
class, in any manner permitted by law, shall not, for the purposes hereof,
be regarded as a liquidation, dissolution or winding up of the Corporation.
Except as provided in Paragraph B above, neither the consolidation or
merger of the Corporation with or into any other entity nor the sale or
transfer by the Corporation of less than substantially all of its assets
shall, for the purposes hereof, be deemed to be a liquidation, dissolution
or winding up of the Corporation.
D. The "Liquidation Preference" with respect to a share of Series C
Preferred Stock means an amount equal to the Stated Value thereof, plus the
accrued Premium thereon through the date of final distribution. The Liquidation
Preference with respect to any Pari Passu Securities shall be as set forth in
the Certificate of Designation filed in respect thereof.
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XI. ADJUSTMENTS TO THE CONVERSION PRICE
The Conversion Price shall be subject to adjustment from time to time as
follows:
A. Stock Splits, Stock Dividends, Etc. If, at any time on or after the
Issuance Date, the number of outstanding shares of Common Stock is
increased by a stock split, stock dividend, combination, reclassification
or other similar event, the Fixed Conversion Price shall be proportionately
reduced, or if the number of outstanding shares of Common Stock is
decreased by a reverse stock split, combination or reclassification of
shares, or other similar event, the Fixed Conversion Price shall be
proportionately increased. In such event, the Corporation shall notify the
Corporation's transfer agent of such change on or before the effective date
thereof.
B. Adjustment Due to Merger, Consolidation, Etc. If, at any time after
the Issuance Date, there shall be (i) any reclassification or change of the
outstanding shares of Common Stock (other than a change in par value, or
from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination), (ii) any consolidation or merger
of the Corporation with any other entity (other than a merger in which the
Corporation is the surviving or continuing entity and its capital stock is
unchanged) or (iii) any share exchange pursuant to which all of the
outstanding shares of Common Stock are converted into other securities or
property (each of (i) - (iii) above being a "Corporate Change"), then the
holders of Series C Preferred Stock shall thereafter have the right to
receive upon conversion, in lieu of the shares of Common Stock otherwise
issuable, such shares of stock, securities and/or other property as would
have been issued or payable in such Corporate Change with respect to or in
exchange for the number of shares of Common Stock which would have been
issuable upon conversion (without giving effect to the limitations
contained in Article IV.C) had such Corporate Change not taken place, and
in any such case, appropriate provisions (in form and substance reasonably
satisfactory to the holders of a majority of the Series C Preferred Shares
then outstanding) shall be made with respect to the rights and interests of
the holders of the Series C Preferred Stock to the end that the economic
value of the shares of Series C Preferred Stock are in no way diminished by
such Corporate Change and that the provisions hereof (including, without
limitation, in the case of any such consolidation, merger or sale in which
the successor entity or purchasing entity is not the Corporation, an
immediate adjustment of the Fixed Conversion Price so that the Fixed
Conversion Price immediately after the Corporate Change reflects the same
relative value as compared to the value of the surviving entity's common
stock that existed between the Fixed Conversion Price and the value of the
Corporation's Common Stock immediately prior to such Corporate Change and
an immediate revision to the Variable Conversion Price so that it is
determined as provided in Article III.I but based on the price of the
common stock of the surviving entity and the market in which such common
stock is traded) shall thereafter be applicable, as nearly as may be
practicable in relation to any shares of stock or securities thereafter
deliverable upon the conversion thereof. The Corporation shall not effect
any Corporate Change unless (i) each holder of Series C Preferred Stock has
received written notice of such transaction along with the notice sent to
the holders of the Common Stock of the Corporation, but in no event later
than 20 days prior to the record date for the determination of stockholders
entitled to vote
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with respect thereto, and (ii) the resulting, successor or acquiring entity
(if not the Corporation) assumes by written instrument (in form and
substance reasonably satisfactory to the holders of a majority of the
Series C Preferred Shares then outstanding) the obligations of this
Certificate of Designation. The above provisions shall apply regardless of
whether or not there would have been a sufficient number of shares of
Common Stock authorized and available for issuance upon conversion of the
shares of Series C Preferred Stock outstanding as of the date of such
transaction, and shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges.
C. Adjustment Due to Major Announcement. In the event the Corporation
at any time after the Issuance Date and after the occurrence of a Milestone
Failure (i) makes a public announcement that it intends to consolidate or
merge with any other entity (other than a merger in which the Corporation
is the surviving or continuing entity and the voting capital stock of the
Corporation immediately prior to such merger represents at least 50% of the
voting power of the capital stock of the Corporation after the merger) or
to sell or transfer all or substantially all of the assets of the
Corporation or (ii) any person, group or entity (including the Corporation,
but excluding the holders of Series C Preferred Stock and their affiliates)
publicly announces a tender offer, exchange offer or another transaction to
purchase 50% or more of the Corporation's Common Stock or otherwise
publicly announces an intention to replace a majority of the Corporation's
Board of Directors by waging a proxy battle or otherwise (the date of the
announcement or commencement referred to in clause (i) or (ii) of this
Paragraph C is hereinafter referred to as the "Announcement Date"), then
the Conversion Price shall, effective upon the Announcement Date and
continuing through the earlier of the consummation of the proposed
transaction or tender offer, exchange offer or another transaction or the
Abandonment Date (as defined below) (the earlier of such dates being the
"Adjusted Conversion Price Termination Date"), be equal to the lower of (x)
the Conversion Price which would have been applicable for an Optional
Conversion occurring on the Announcement Date and (y) the Conversion Price
determined in accordance with Article III.C on the Conversion Date set
forth in the Notice of Conversion for the Optional Conversion. After the
Adjusted Conversion Price Termination Date, the Conversion Price shall be
determined as set forth in Article III.C. "Abandonment Date" means with
respect to any proposed transaction or tender offer, exchange offer or
another transaction for which a public announcement or an action
contemplated by this Paragraph C has been made or commenced, the date upon
which the Corporation (in the case of clause (i) above) or the person,
group or entity (in the case of clause (ii) above) publicly announces the
termination or abandonment of the proposed transaction or tender offer,
exchange offer or another transaction which caused this Paragraph C to
become operative.
D. Adjustment Due to Distribution. If, at any time after the Issuance
Date, the Corporation shall declare or make any distribution of its assets
(or rights to acquire its assets) to holders of Common Stock as a partial
liquidating dividend, by way of return of capital or otherwise (including
any dividend or distribution to the Corporation's common stockholders in
shares (or rights to acquire shares) of capital stock of a subsidiary (i.e.
a spin-off)) (a "Distribution"), then the holders of Series C Preferred
Stock shall be entitled, upon any conversion of shares of Series C
Preferred Stock after the date of record for determining stockholders
entitled to such Distribution, to receive the amount of such assets which
would have been payable to the holder with respect to the shares of Common
Stock issuable upon such conversion (without giving effect to the
limitations contained in Article IV.C) had such holder been the
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holder of such shares of Common Stock on the record date for the
determination of stockholders entitled to such Distribution.
E. Issuance of Other Securities. If at any time after the Issuance
Date the Company issues or sells any shares of Common Stock or any
securities which are convertible into or exchangeable for Common Stock
("Convertible Securities") for no consideration or for a consideration per
share less than the Closing Bid Price in effect on the date of issuance of
such securities (a "Dilutive Issuance"), then effective immediately upon
the Dilutive Issuance, the Fixed Conversion Price will be adjusted in
accordance with the formula below.
F' = F x O + P/CBP
--------------
CSDO
where:
F' = the adjusted Fixed Conversion Price;
F = the then current Fixed Conversion Price;
CBP = the then current Closing Bid Price;
O = the number of shares of Common Stock outstanding
immediately prior to the Dilutive Issuance;
P = the aggregate consideration, calculated as set
forth herein, received by the Company upon such
Dilutive Issuance; and
CSDO = the total number of shares of Common Stock
deemed outstanding immediately after the
Dilutive Issuance.
F. Purchase Rights. If, at any time after the Issuance Date, the
Corporation issues any securities which are convertible into or
exchangeable for Common Stock, or rights to purchase stock, warrants,
securities or other property (the "Purchase Rights") pro rata to the record
holders of any class of Common Stock, then the holders of Series C
Preferred Stock will be entitled to acquire, upon the terms applicable to
such Purchase Rights, the aggregate Purchase Rights which such holder could
have acquired if such holder had held the number of shares of Common Stock
acquirable upon complete conversion of the Series C Preferred Stock
(without giving effect to the limitations contained in Article IV.C)
immediately before the date on which a record is taken for the grant,
issuance or sale of such Purchase Rights, or, if no such record is taken,
the date as of which the record holders of Common Stock are to be
determined for the grant, issue or sale of such Purchase Rights.
G. Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price and/or the Fixed Conversion Price
pursuant to this Article XI, the Corporation, at its expense, shall
promptly compute such adjustment or readjustment and prepare and furnish to
each holder of Series C Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the
written request at any time of any holder of Series C Preferred Stock,
furnish to such holder
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a like certificate setting forth (i) such adjustment or readjustment, (ii)
the Conversion Price and/or the Fixed Conversion Price at the time in
effect and (iii) the number of shares of Common Stock and the amount, if
any, of other securities or property which at the time would be received
upon conversion of a share of Series C Preferred Stock.
XII. VOTING RIGHTS
The holders of the Series C Preferred Stock have no voting power
whatsoever, except as otherwise provided by the Delaware General Corporation Law
(the "Business Corporation Act") and in Article XIII below.
Notwithstanding the above, the Corporation shall provide each holder of
Series C Preferred Stock with prior notification of any meeting of the
stockholders (and copies of proxy materials and other information sent to
stockholders) at the same time such notice and materials are provided to the
holders of Common Stock. If the Corporation takes a record of its stockholders
for the purpose of determining stockholders entitled to (a) receive payment of
any dividend or other distribution, any right to subscribe for, purchase or
otherwise acquire (including by way of merger consolidation or recapitalization)
any share of any class or any other securities or property, or to receive any
other right, or (b) to vote in connection with any proposed sale, lease or
conveyance of all or substantially all of the assets of the Corporation, or any
proposed merger, consolidation, liquidation, dissolution or winding up of the
Corporation, the Corporation shall mail a notice to each holder, at least 20
days prior to the record date specified therein (but in no event earlier than
public announcement of such proposed transaction), of the date on which any such
record is to be taken for the purpose of such dividend, distribution, right or
other event, and a brief statement regarding the amount and character of such
dividend, distribution, right or other event to the extent known at such time.
To the extent that under the Business Corporation Act the vote of the
holders of the Series C Preferred Stock, voting separately as a class or series,
as applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the holders of at least a majority of the then
outstanding shares of the Series C Preferred Stock represented at a duly held
meeting at which a quorum is present or by written consent of the holders of at
least a majority of the then outstanding shares of Series C Preferred Stock
(except as otherwise may be required under the Business Corporation Act) shall
constitute the approval of such action by the class. To the extent that under
the Business Corporation Act holders of the Series C Preferred Stock are
entitled to vote on a matter with holders of Common Stock, voting together as
one class, each share of Series C Preferred Stock shall be entitled to a number
of votes equal to the number of shares of Common Stock into which it is then
convertible (subject to the limitations contained in Article IV.C(ii)) using the
record date for the taking of such vote of stockholders as the date as of which
the Conversion Price is calculated.
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XIII. PROTECTION PROVISIONS
So long as any shares of Series C Preferred Stock are outstanding, the
Corporation shall not without first obtaining the approval (by vote or written
consent, as provided by the Business Corporation Act) of the holders of 80% of
the then outstanding shares of Series C Preferred Stock:
(a) alter or change the rights, preferences or privileges of the
Series C Preferred Stock;
(b) alter or change the rights, preferences or privileges of any
previously issued shares of capital stock of the Corporation so as to
affect adversely the Series C Preferred Stock;
(c) create any new class or series of capital stock having a
preference over the Series C Preferred Stock as to distribution of assets
upon liquidation, dissolution or winding up of the Corporation (as
previously defined in Article IX hereof, "Senior Securities");
(d) create any new class or series of capital stock (other than the
Series A Preferred Stock and Series B Preferred Stock) ranking pari passu
with the Series C Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously
defined in Article IX hereof, "Pari Passu Securities");
(e) increase the authorized number of shares of Series C Preferred
Stock;
(f) issue any shares of Senior Securities or Pari Passu Securities,
other than an aggregate of up to 1,500 shares of Series A Preferred Stock
and an aggregate of up to 900 shares of Series B Preferred Stock Preferred
Stock to Marjorie Brooks, Ike Tull, Michael Tull, Mr. and Mrs. Delbert
Allen, Jr. and Mr. and Mrs. Fritz Friday;
(g) issue any shares of Series C Preferred Stock other than pursuant
to the Securities Purchase Agreement;
(h) redeem, or declare or pay any cash dividend or distribution on,
any Junior Securities; or
(i) increase the par value of the Common Stock.
Notwithstanding the foregoing, no change pursuant to this Article XIII shall be
effective to the extent that, by its terms, it applies to less than all of the
holders of shares of Series C Preferred Stock then outstanding.
-22-
<PAGE>
XIV. MISCELLANEOUS
A. Cancellation of Series C Preferred Stock. If any shares of Series C
Preferred Stock are converted pursuant to Article IV, the shares so converted
shall be canceled, shall return to the status of authorized, but unissued
preferred stock of no designated series, and shall not be issuable by the
Corporation as Series C Preferred Stock.
B. Lost or Stolen Certificates. Upon receipt by the Corporation of (i)
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of
indemnity (without any bond or other security) reasonably satisfactory to the
Corporation, or (z) in the case of mutilation, upon surrender and cancellation
of the Preferred Stock Certificate(s), the Corporation shall execute and deliver
new Preferred Stock Certificate(s) of like tenor and date. However, the
Corporation shall not be obligated to reissue such lost or stolen Preferred
Stock Certificate(s) if the holder contemporaneously requests the Corporation to
convert such Series C Preferred Stock.
C. Allocation of Cap Amount and Reserved Amount. The initial Cap Amount and
Reserved Amount shall be allocated pro rata among the holders of Series C
Preferred Stock based on the number of shares of Series C Preferred Stock issued
to each holder. Each increase to the Cap Amount and the Reserved Amount shall be
allocated pro rata among the holders of Series C Preferred Stock based on the
number of shares of Series C Preferred Stock held by each holder at the time of
the increase in the Cap Amount or Reserved Amount. In the event a holder shall
sell or otherwise transfer any of such holder's shares of Series C Preferred
Stock, each transferee shall be allocated a pro rata portion of such
transferor's Cap Amount and Reserved Amount. Any portion of the Cap Amount or
Reserved Amount which remains allocated to any person or entity which does not
hold any Series C Preferred Stock shall be allocated to the remaining holders of
shares of Series C Preferred Stock, pro rata based on the number of shares of
Series C Preferred Stock then held by such holders.
D. Quarterly Statements of Available Shares. For each calendar quarter
beginning in the quarter in which the initial registration statement required to
be filed pursuant to the Registration Rights Agreement is declared effective and
thereafter so long as any shares of Series C Preferred Stock are outstanding,
the Corporation shall deliver (or cause its transfer agent to deliver) to each
holder a written report notifying the holders of any occurrence which prohibits
the Corporation from issuing Common Stock upon any such conversion. The report
shall also specify (i) the total number of shares of Series C Preferred Stock
outstanding as of the end of such quarter, (ii) the total number of shares of
Common Stock issued upon all conversions of Series C Preferred Stock prior to
the end of such quarter, (iii) the total number of shares of Common Stock which
are reserved for issuance upon conversion of the Series C Preferred Stock as of
the end of such quarter and (iv) the total number of shares of Common Stock
which may thereafter be listed or issued by the Corporation upon conversion of
the Series C Preferred Stock before the Corporation would exceed the Cap Amount
and the Reserved Amount. The Corporation (or its transfer agent) shall deliver
the report for each quarter to each holder prior to the tenth day of the
calendar month following the quarter to which such report relates. In addition,
the Corporation (or its transfer agent) shall provide, within 15 days after
delivery to the Corporation of a
-23-
<PAGE>
written request by any holder, any of the information enumerated in clauses (i)
- - (iv) of this Paragraph D as of the date of such request.
E. Payment of Cash; Defaults. Whenever the Corporation is required to make
any cash payment to a holder under this Certificate of Designation (upon
redemption or otherwise), such cash payment shall be made to the holder within
five business days after delivery by such holder of a notice specifying that the
holder elects to receive such payment in cash and the method (e.g., by check,
wire transfer) in which such payment should be made. If such payment is not
delivered within such five business day period, such holder shall thereafter be
entitled to interest on the unpaid amount at a per annum rate equal to the lower
of twenty-four percent (24%) and the highest interest rate permitted by
applicable law until such amount is paid in full to the holder.
F. Status as Stockholder. Upon submission of a Notice of Conversion by a
holder of Series C Preferred Stock, (i) the shares covered thereby (other than
the shares, if any, which cannot be issued because their listing or issuance
would exceed such holder's allocated portion of the Reserved Amount or Cap
Amount) shall be deemed converted into shares of Common Stock and (ii) the
holder's rights as a holder of such converted shares of Series C Preferred Stock
shall cease and terminate, excepting only the right to receive certificates for
such shares of Common Stock and to any remedies provided herein or otherwise
available at law or in equity to such holder because of a failure by the
Corporation to comply with the terms of this Certificate of Designation.
Notwithstanding the foregoing, if a holder has not received certificates for all
shares of Common Stock prior to the tenth business day after the expiration of
the Delivery Period with respect to a conversion of Series C Preferred Stock for
any reason, then (unless the holder otherwise elects to retain its status as a
holder of Common Stock by so notifying the Corporation within five business days
after the expiration of such 10 business day period) the holder shall regain the
rights of a holder of Series C Preferred Stock with respect to such unconverted
shares of Series C Preferred Stock and the Corporation shall, as soon as
practicable, return such unconverted shares to the holder. In all cases, the
holder shall retain all of its rights and remedies (including, without
limitation, the right to have the Conversion Price with respect to subsequent
conversions determined in accordance with Article VI.A) for the Corporation's
failure to convert Series C Preferred Stock.
G. Remedies Cumulative. The remedies provided in this Certificate of
Designation shall be cumulative and in addition to all other remedies available
under this Certificate of Designation, at law or in equity (including a decree
of specific performance and/or other injunctive relief), and nothing herein
shall limit a holder's right to pursue actual damages for any failure by the
Corporation to comply with the terms of this Certificate of Designation. The
Corporation acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the holders of Series C Preferred Stock and that the
remedy at law for any such breach may be inadequate. The Corporation therefore
agrees, in the event of any such breach or threatened breach, that the holders
of Series C Preferred Stock shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.
-24-
<PAGE>
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-25-
<PAGE>
IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf
of the Corporation this 9th day of November, 1998.
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
By:/s/ Joe G. Brooks
---------------------
Name: Joe. G. Brooks
Title: President
-26-
<PAGE>
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series C Preferred Stock)
The undersigned hereby irrevocably elects to convert ____________ shares of
Series C Preferred Stock (the "Conversion"), represented by stock certificate
Nos(s). ___________ (the "Preferred Stock Certificates"), into shares of common
stock ("Common Stock") of Advanced Environmental Recycling Technologies, Inc.
(the "Corporation") according to the conditions of the Certificate of
Designation, Rights and Preferences of the Series C Convertible Preferred Stock
of the Corporation as of the date written below. If securities are to be issued
in the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto. No fee will be charged to the
holder for any conversion, except for transfer taxes, if any. A copy of each
Preferred Stock Certificate is attached hereto (or evidence of loss, theft or
destruction thereof).
The undersigned requests that the Corporation electronically transmit the Common
Stock issuable pursuant to this Notice of Conversion to the account of the
undersigned or its nominee (which is _________________) with DTC through its
Deposit Withdrawal Agent Commission System ("DTC Transfer").
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Series C Preferred Stock shall be made pursuant to registration of the Common
Stock under the Securities Act of 1933, as amended (the "Act"), or pursuant to
an exemption from registration under the Act.
[ ] In lieu of receiving the shares of Common Stock issuable pursuant to this
Notice of Conversion by way of DTC Transfer, the undersigned hereby
requests that the Corporation issue and deliver to the undersigned physical
certificates representing such shares of Common Stock.
Date of Conversion:_____________________________________
Applicable Conversion Price:____________________________
Number of Shares of Common
Stock to be Issued:_____________________________________
Signature:______________________________________________
Name:___________________________________________________
Address:________________________________________________
________________________________________________
________________________________________________
<PAGE>
EXHIBIT 10.37
VOID AFTER 5:00 P.M., NEW YORK
CITY TIME, ON NOVEMBER 10, 2005
(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: November 10, 1998 Right to Purchase 83,505
Shares of Class A Common Stock
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
SERIES X STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, The Zanett Securities Corporation
or its 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, eighty three thousand five hundred five (83,505) 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 $1.20 (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. The term "Warrants" means this Warrant and the
other Series X Warrants of the Company issued pursuant to that certain
Securities Purchase Agreement, dated as of September 30, 1998, by and among the
Company and the other signatories thereto (the "Securities Purchase Agreement").
<PAGE>
VOID AFTER 5:00 P.M., NEW YORK
CITY TIME, ON NOVEMBER 10, 2005
(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: November 10, 1998 Right to Purchase 125,250
Shares of Class A Common Stock
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
SERIES X STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, Claudio Guazzoni or its 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, one hundred twenty
five thousand two hundred fifty (125,250) 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 $1.20 (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. The
term "Warrants" means this Warrant and the other Series X Warrants of the
Company issued pursuant to that certain Securities Purchase Agreement, dated as
of September 30, 1998, by and among the Company and the other signatories
thereto (the "Securities Purchase Agreement").
<PAGE>
VOID AFTER 5:00 P.M., NEW YORK
CITY TIME, ON NOVEMBER 10, 2005
(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: November 10, 1998 Right to Purchase 125,250
Shares of Class A Common Stock
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
SERIES X STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, David McCarthy or its 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, one hundred twenty
five thousand two hundred fifty (125,250) 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 $1.20 (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. The
term "Warrants" means this Warrant and the other Series X Warrants of the
Company issued pursuant to that certain Securities Purchase Agreement, dated as
of September 30, 1998, by and among the Company and the other signatories
thereto (the "Securities Purchase Agreement").
<PAGE>
VOID AFTER 5:00 P.M., NEW YORK
CITY TIME, ON NOVEMBER 10, 2005
(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: November 10, 1998 Right to Purchase 83,495
Shares of Class A Common Stock
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
SERIES X STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, Samuel L. Milbank or its 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, eighty three
thousand four hundred ninety-five (83,495) 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 $1.20 (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. The term "Warrants" means this Warrant and the other Series X Warrants
of the Company issued pursuant to that certain Securities Purchase Agreement,
dated as of September 30, 1998, by and among the Company and the other
signatories thereto (the "Securities Purchase Agreement").
<PAGE>
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 notice to the holder hereof), and upon delivery
to the Company of a written notice of a Cashless Exercise (as defined in Section
11(c) below) 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. Certificates 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 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).
2. Period of Exercise.
------------------
(a) Subject to the limitations on exercise in Section 2(b) hereof, this
Warrant is exercisable at any time or from time to time on or after the one (1)
year anniversary of the initial issuance of this Warrant (the "Issue Date") and
before 5:00 p.m., New York City time, on the seventh (7th) anniversary of the
Issue Date (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.
(b) The holder may not exercise this Warrant to the extent that the
total number of Warrant Shares previously issued to such holder upon exercise of
Warrants together with the number of Warrant Shares which such holder is
attempting to receive upon exercise of this Warrant exceed the Maximum Exercise
Percentage (as defined below) multiplied by the total number of Warrant Shares
issuable to the holder upon exercise of the total number of Warrants purchased
by such holder pursuant to the Securities Purchase Agreement (the "Original
Warrant Share Amount"). The holder's Original Warrant Share Amount shall be
increased or decreased, as applicable, upon any sale or purchase by the holder
of Warrants after the Issue Date. "Maximum Exercise Percentage" means:
3
<PAGE>
<TABLE>
<CAPTION>
If the date of exercise is: Then the Maximum Exercise Percentage is:
--------------------------- ----------------------------------------
<S> <C>
On or after the 365th day following 20%
the Issue Date and before the 395th
day following the Issue Date
On or after the 395th day following 40%
the Issue Date and before the 425th
day following the Issue Date
On or after the 425th day following 60%
the Issue Date and before the 455th
day following the Issue Date
On or after the 455th day following 80%
the Issue Date and before the 485th
day following the Issue Date
On or after the 485th day following 100%
the Issue Date
</TABLE>
Notwithstanding the foregoing, the restrictions on exercise set forth in
this Section 2(b) shall terminate (i) on the date the Company makes a public
announcement that it intends to merge or consolidate with any other entity
(other than a merger in which the Company is the surviving or continuing entity
and the voting capital stock of the Company immediately prior to such merger
represents at least 50% of the voting power of the capital stock of the Company
after the merger) or to sell or transfer all or substantially all of the assets
of the Company, (ii) on the date any person, group or entity (including the
Company, but excluding the holder hereof and its affiliates) publicly announces
a tender offer, exchange offer or another transaction to purchase 50% or more of
the Company's Common Stock or otherwise publicly announces an intention to
replace a majority of the Company's Board of Directors by waging a proxy battle
or otherwise or (iii) on the date the Market Price (as defined in Section
4(l)(ii) below) is greater than or equal to $5.00 per share.
3. 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.
4
<PAGE>
(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 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 or consolidation.
(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.
4. 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 Issue Date, the Company issues or sells, or in
accordance with Section 4(b) hereof is deemed to have
5
<PAGE>
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.
(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 of such Options
("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.
6
<PAGE>
(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 of such convertible Securities, 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 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.
7
<PAGE>
(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 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 Issue Date 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; (iii) upon the issuance of any Preferred
Shares (as such term is defined in the Securities Purchase Agreement) or
Warrants issued or issuable in accordance with the terms of the Securities
Purchase Agreement; or (iv) upon conversion of the Preferred Shares or exercise
of the Warrants.
(c) Subdivision or Combination of Common Stock. If the Company, at
------------------------------------------
any time after the Issue Date 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
8
<PAGE>
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 Issue Date, 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 or Merger. In case of any consolidation of the
-----------------------
Company with, or merger of the Company into any other corporation, as a
condition of such consolidation or merger, 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 or merger 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 or merger 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 Issue Date, 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.
9
<PAGE>
(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.
(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. Notwithstanding the foregoing, the Company shall
publicly disclose the substance of any notice delivered hereunder prior to
delivery of such notice to the holder of this Warrant.
10
<PAGE>
(k) Certain Events. If, at any time after the Issue Date, 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 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
11
<PAGE>
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.
5. 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.
6. 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
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.
12
<PAGE>
7. 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 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
13
<PAGE>
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, this Warrant shall not be exercisable
by a holder hereof to the extent (but only to the extent) that (a) the number of
shares of Common Stock beneficially owned by such holder and its affiliates
(other than shares of Common Stock which may be deemed beneficially owned
through the ownership of the unexercised or unconverted portion of any other
securities of the Company (including the Preferred Shares) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein) and (b) the number of shares of Common Stock issuable upon exercise of
the Warrant (or portion thereof) with respect to which the determination
described herein is being made, would result in beneficial ownership by such
holder and its affiliates of more than 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 otherwise provided in clause (a) of such 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.
8. 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 September 30, 1998, 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.
9. 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:
14
<PAGE>
If to the Company:
Advanced Environmental Recycling
Technologies, Inc.
FM 2169
HC 10, Box 116
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.
10. 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.
11. 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.
15
<PAGE>
(c) Cashless Exercise. Notwithstanding anything to the contrary
-----------------
contained in this Warrant, this Warrant may only be exercised at any time during
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"). 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]
16
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer.
ADVANCED ENVIRONMENTAL
RECYCLING TECHNOLOGIES, INC.
By:/s/ Joe G. Brooks
----------------------
Name: Joe G. Brooks
Title: President
By:/s/ Steve Brooks
----------------------
Name: Steve Brooks
Title: Chief Executive Officer
<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 10.38
VOID AFTER 5:00 P.M., NEW YORK
CITY TIME, ON NOVEMBER 10, 2005
(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: November 10, 1998 Right to Purchase 30,825
Shares of Class A Common Stock
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
SERIES Y STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, Samuel L. Milbank or its 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, thirty thousand
eight hundred twenty-five (30,825) 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 $2.50 (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. The
term "Warrants" means this Warrant and the other Series Y Warrants of the
Company issued pursuant to that certain Securities Purchase Agreement, dated as
of September 30, 1998, by and among the Company and the other signatories
thereto (the "Securities Purchase Agreement").
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
<PAGE>
VOID AFTER 5:00 P.M., NEW YORK
CITY TIME, ON NOVEMBER 10, 2005
(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: November 10, 1998 Right to Purchase 30,814
Shares of Class A Common Stock
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
SERIES Y STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, The Zanett Securities Corporation
or its 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, thirty thousand eight hundred fourteen (30,814) 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 $2.50 (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. The term "Warrants" means this Warrant and the
other Series Y Warrants of the Company issued pursuant to that certain
Securities Purchase Agreement, dated as of September 30, 1998, by and among the
Company and the other signatories thereto (the "Securities Purchase Agreement").
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
<PAGE>
VOID AFTER 5:00 P.M., NEW YORK
CITY TIME, ON NOVEMBER 10, 2005
(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: November 10, 1998 Right to Purchase 46,200
Shares of Class A Common Stock
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
SERIES Y STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, Claudio Guazzoni or its 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, forty six thousand
two hundred (46,200) 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 $2.50 (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. The term "Warrants" means
this Warrant and the other Series Y Warrants of the Company issued pursuant to
that certain Securities Purchase Agreement, dated as of September 30, 1998, by
and among the Company and the other signatories thereto (the "Securities
Purchase Agreement").
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
<PAGE>
VOID AFTER 5:00 P.M., NEW YORK
CITY TIME, ON NOVEMBER 10, 2005
(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: November 10, 1998 Right to Purchase 46,200
Shares of Class A Common Stock
ADVANCED ENVIRONMENTAL RECYCLING
TECHNOLOGIES, INC.
SERIES Y STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, David McCarthy or its 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, forty six thousand
two hundred (46,200) 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 $2.50 (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. The term "Warrants" means
this Warrant and the other Series Y Warrants of the Company issued pursuant to
that certain Securities Purchase Agreement, dated as of September 30, 1998, by
and among the Company and the other signatories thereto (the "Securities
Purchase Agreement").
This Warrant is subject to the following terms, provisions and conditions:
<PAGE>
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 notice to the holder hereof), and upon delivery
to the Company of a written notice of 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. Certificates 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 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).
2. Period of Exercise. This Warrant is exercisable at any time or from
------------------
time to time on or after the two (2) year anniversary of the initial issuance of
this Warrant (the "Issue Date") and before 5:00 p.m., New York City time, on the
seventh (7th) anniversary of the Issue Date (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.
3. 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 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
3
<PAGE>
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 or consolidation.
(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.
4. 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 Issue Date, 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.
(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:
4
<PAGE>
(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 of such Options
("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 of such convertible Securities, 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 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.
5
<PAGE>
(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 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
6
<PAGE>
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 Issue Date 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; (iii) upon the issuance of any Preferred
Shares (as such term is defined in the Securities Purchase Agreement) or
Warrants issued or issuable in accordance with the terms of the Securities
Purchase Agreement; or (iv) upon conversion of the Preferred Shares or exercise
of the Warrants.
(c) Subdivision or Combination of Common Stock. If the Company, at
------------------------------------------
any time after the Issue Date 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 Issue Date, 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 or Merger. In case of any consolidation of the
-----------------------
Company with, or merger of the Company into any other corporation, as a
condition of such consolidation or merger, 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 or merger
7
<PAGE>
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 or merger 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 Issue Date, 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.
(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;
8
<PAGE>
(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. Notwithstanding the foregoing, the Company shall
publicly disclose the substance of any notice delivered hereunder prior to
delivery of such notice to the holder of this Warrant.
(k) Certain Events. If, at any time after the Issue Date, 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 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.
9
<PAGE>
(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.
5. 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.
6. 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
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.
10
<PAGE>
7. 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 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
11
<PAGE>
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, this Warrant shall not be exercisable
by a holder hereof to the extent (but only to the extent) that (a) the number of
shares of Common Stock beneficially owned by such holder and its affiliates
(other than shares of Common Stock which may be deemed beneficially owned
through the ownership of the unexercised or unconverted portion of any other
securities of the Company (including the Preferred Shares) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein) and (b) the number of shares of Common Stock issuable upon exercise of
the Warrant (or portion thereof) with respect to which the determination
described herein is being made, would result in beneficial ownership by such
holder and its affiliates of more than 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 otherwise provided in clause (a) of such 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.
8. 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 September 30, 1998, 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.
9. 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
HC 10, Box 116
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.
10. 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.
11. 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, this Warrant may only be exercised at any time during
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"). 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.
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: /s/ Joe G. Brooks
----------------------
Name: Joe G. Brooks
Title: President
By: /s/ Steve Brooks
----------------------
Name: Steve Brooks
Title: Chief Executive Officer
<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 10.39
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of September
30, 1998, by and among ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC., a
corporation organized under the laws of the State of Delaware, with headquarters
located at FM 2169, HC 10, Box 116, Junction, Texas 76849 (the "Company"), and
the undersigned (together with affiliates, the "Initial Investors").
WHEREAS:
A. In connection with that certain Securities Purchase Agreement dated as
of the date hereof by and among the Company and the Initial Investors (the "Note
Purchase Agreement"), the Company has agreed, upon the terms and subject to the
conditions contained therein, to issue and sell to the Initial Investors (i)
shares of its Series A Convertible Preferred Stock (the "Preferred Stock") that
are convertible into shares (the "Conversion Shares") of the Company's Class A
Common Stock, par value $.01 per share (the "Common Stock"), upon the terms and
subject to the limitations and conditions set forth in the Certificate of
Designations, Rights and Preferences with respect to such Preferred Stock (the
"Certificate of Designation") and (ii) Series X and Series Y warrants
(collectively, the "Investor Warrants") to acquire shares (the "Warrant Shares")
of Common Stock;
B. To induce the Initial Investors to execute and deliver the Securities
Purchase Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), and applicable state securities laws; and
C. The Company has agreed to issue to The Zanett Securities Corporation or
its assigns (the "Placement Agent") Series X and Series Y warrants
(collectively, the "Placement Warrants" and, together with the Investor
Warrants, the "Warrants") to purchase shares of Common Stock, pursuant to that
certain Placement Agency Agreement, dated as of even date herewith, by and
between the Company and the Placement Agent and has agreed to provide the
Placement Agent the rights set forth herein. For purposes of this Agreement, the
Placement Agent shall be deemed an AInitial Investor@ and the shares of Common
Stock issuable upon the exercise of, or otherwise pursuant to, the Placement
Agent Warrants shall be deemed "Warrant Shares."
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Initial
Investors hereby agree as follows:
<PAGE>
1. DEFINITIONS.
a. As used in this Agreement, the following terms shall have the
following meanings:
(i) "Investors" means the Initial Investors and any
transferees or assignees who agree to become bound by the provisions of
this Agreement in accordance with Section 9 hereof.
(ii) "register," "registered," and "registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415
under the Securities Act or any successor rule providing for offering
securities on a continuous basis ("Rule 415"), and the declaration or
ordering of effectiveness of such Registration Statement by the United
States Securities and Exchange Commission (the "SEC").
(iii) "Registrable Securities" means the Conversion Shares and
the Warrant Shares (including any Conversion Shares issuable in redemption
of any Preferred Stock and any Warrant Shares issuable with respect to
Exercise Default Payments under the Warrants) issued or issuable with
respect to the Preferred Stock and the Warrants and any shares of capital
stock issued or issuable, from time to time (with any adjustments), as a
distribution on or in exchange for or otherwise with respect to any of the
foregoing.
(iv) "Registration Statement" means a registration statement
of the Company under the Securities Act.
b. Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings set forth in the Securities Purchase
Agreement.
2. REGISTRATION.
a. Mandatory Registration. The Company shall prepare and, on or
before January 15, 1999 (the "Filing Date"), file with the SEC a
Registration Statement on Form S-3 (or, if Form S-3 is not then available,
on such form of Registration Statement as is then available to effect a
registration of all of the Registrable Securities, subject to the consent
of the Initial Investors (as determined pursuant to Section 11(j) hereof))
covering the resale of at least 5,970,000 Registrable Securities, which
Registration Statement, to the extent allowable under the Securities Act
and the Rules promulgated thereunder, shall state that such Registration
Statement also covers such indeterminate number of additional shares of
Common Stock as may become issuable upon conversion of the Preferred Stock
and exercise of the Warrants to prevent dilution resulting from stock
splits, stock dividends or similar transactions. The Registrable
Securities initially set forth in the Registration Statement shall be
allocated to the Investors as set forth in Section 11(k) hereof. The
Registration Statement (and each amendment or supplement thereto, and each
request for acceleration of effectiveness thereof) shall be provided to
(and subject to the approval of) the Initial Investors and their counsel
prior to its filing or other submission.
2
<PAGE>
b. Underwritten Offering. If any offering pursuant to a Registration
Statement pursuant to Section 2(a) hereof involves an underwritten
offering, the Investors who hold a majority in interest of the Registrable
Securities subject to such underwritten offering, with the consent of the
Initial Investors, shall have the right to select one legal counsel to
represent the Investors and an investment banker or bankers and manager or
managers to administer the offering, which investment banker or bankers or
manager or managers shall be reasonably satisfactory to the Company. In
the event that any Investors elect not to participate in such underwritten
offering, the Registration Statement covering all of the Registrable
Securities shall contain appropriate plans of distribution reasonably
satisfactory to the Investors participating in such underwritten offering
and the Investors electing not to participate in such underwritten
offering (including, without limitation, the ability of nonparticipating
Investors to sell from time to time and at any time during the
effectiveness of such Registration Statement).
c. Payments by the Company. The Company shall cause the Registration
Statement required to be filed pursuant to Section 2(a) hereof to become
effective as soon as practicable, but in no event later than March 17,
1999 (the "Registration Deadline"). If (i) the Registration Statement(s)
covering the Registrable Securities required to be filed by the Company
pursuant to Section 2(a) hereof is not filed with the SEC by the Filing
Date or is not declared effective by the SEC on or before the Registration
Deadline, or if, after the Registration Statement has been declared
effective by the SEC, sales of all of the Registrable Securities
(including any Registrable Securities required to be registered pursuant
to Section 3(b) hereof) cannot be made pursuant to the Registration
Statement (by reason of a stop order or the Company's failure to update
the Registration Statement or any other reason outside the control of the
Investors) or (ii) the Common Stock is not listed or included for
quotation on the Nasdaq SmallCap Market (the "SmallCap"), the Nasdaq
National Market (the "NNM"), the New York Stock Exchange (the "NYSE") or
the American Stock Exchange (the "AMEX") at any time after the
Registration Deadline, then the Company will make payments to the
Investors in such amounts and at such times as shall be determined
pursuant to this Section 2(c) as partial relief for the damages to the
Investors by reason of any such delay in or reduction of their ability to
sell the Registrable Securities (which remedy shall not be exclusive of
any other remedies available at law or in equity). The Company shall pay
to each Investor an amount equal to the product of (i) the aggregate
Purchase Price of the Preferred Stock and Warrants held by such Investor
(including, without limitation, Preferred Stock that has been converted
into Conversion Shares and Warrants that have been exercised for Warrant
Shares then held by such Investor) (the "Aggregate Share Price"),
multiplied by (ii) one hundredth (.01), for the first thirty (30) day
period (or portion thereof) (A) after the Filing Date and prior to the
date on which the Registration Statement required to be filed pursuant to
Section 2(a) hereof is filed with the SEC, (B) after the Registration
Deadline and prior to the date on which the Registration Statement
required to be filed pursuant to Section 2(a) hereof is declared effective
by the
3
<PAGE>
SEC, and (C) during which sales of any Registrable Securities cannot be
made pursuant to the Registration Statement after the Registration
Statement has been declared effective or the Common Stock is not listed or
included for quotation on the SmallCap, NNM, NYSE or AMEX. In addition,
the Company shall pay to each Investor an amount equal to the product of
(i) the Aggregate Share Price, multiplied by (ii) two hundredths (.02),
for each additional thirty (30) day period (or portion thereof) following
the initial thirty (30) day period referred to in the preceding sentence
(A) after the Filing Date and prior to the date on which the Registration
Statement required to be filed pursuant to Section 2(a) hereof is filed
with the SEC, (B) after the Registration Deadline and prior to the date on
which the Registration Statement required to be filed pursuant to Section
2(a) hereof is declared effective by the SEC, and (C) during which sales
of any Registrable Securities cannot be made pursuant to the Registration
Statement after the Registration Statement has been declared effective or
the Common Stock is not listed or included for quotation on the SmallCap,
NNM, NYSE or AMEX; provided, however, that there shall be excluded from
each such period any delays which are solely attributable to changes
(other than corrections of Company mistakes with respect to information
previously provided by the Investors) required by the Investors in the
Registration Statement with respect to information relating to the
Investors, including, without limitation, changes to the plan of
distribution. (For example, if the Registration Statement is not effective
by the Registration Deadline, the Company would pay $10,000 for the first
thirty (30) days and $20,000 for each thirty (30) day period thereafter
with respect to each $1,000,000 of Aggregate Share Price until the
Registration Statement becomes effective). Such amounts shall be paid in
cash. Payments of cash pursuant hereto shall be made within five (5) days
after the end of each period that gives rise to such obligation, provided
that, if any such period extends for more than thirty (30) days, interim
payments shall be made for each such thirty (30) day period.
d. Piggy-Back Registrations. If at any time prior to the expiration
of the Registration Period (as hereinafter defined) the Company shall file
with the SEC a Registration Statement relating to an offering for its own
account or the account of others under the Securities Act of any of its
equity securities (other than (i) on Form S-4 or Form S-8 or their then
equivalents relating to equity securities to be issued solely in
connection with any acquisition of any entity or business or equity
securities issuable in connection with stock option or other employee
benefit plans or (ii) any amendment to that certain Registration Statement
on Form S-3, Registration No. 333-42555), the Company shall send to each
Investor who is entitled to registration rights under this Section 2(d)
written notice of such determination and, if within fifteen (15) days
after the date of such notice, such Investor shall so request in writing,
the Company shall include in such Registration Statement all or any part
of the Registrable Securities such Investor requests to be registered,
except that if, in connection with any underwritten public offering for
the account of the Company, the managing underwriter(s) thereof shall
impose a limitation on the number of shares of Common Stock which may be
included in the Registration Statement because, in such underwriter(s)'
judgment, marketing or other factors dictate such limitation is necessary
to facilitate public distribution, then the Company shall be obligated to
include in such Registration Statement only such limited portion of the
Registrable Securities with respect to which such Investor has requested
inclusion hereunder as the underwriter shall permit. Any exclusion of
Registrable Securities shall be made pro rata among the Investors seeking
to include Registrable Securities, in proportion to the number of
Registrable Securities sought to be included by such Investors; provided,
however, that the Company shall not exclude any Registrable Securities
unless the Company has first excluded all outstanding securities, the
holders of which are not entitled to inclusion of such securities in such
Registration Statement or are not entitled to pro rata inclusion with the
Registrable Securities; and provided, further, however, that, after giving
effect to the immediately preceding proviso, any exclusion of Registrable
Securities shall be made pro rata with holders of other securities having
the right to include such securities in the Registration Statement other
than holders of securities entitled to inclusion of their securities in
such Registration Statement by reason of demand registration rights. No
right to registration of Registrable Securities under this Section 2(d)
shall be construed to limit any registration required under Section 2(a)
hereof. If an offering in connection with which an Investor is entitled to
registration under this Section 2(d) is an underwritten offering, then
each Investor whose Registrable Securities are included in such
Registration Statement shall, unless otherwise agreed by the Company,
offer and sell such Registrable Securities in an underwritten offering
using the
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same underwriter or underwriters and, subject to the provisions of this
Agreement (to the extent not inconsistent with the terms of such
underwritten offering), on the same terms and conditions as other shares
of Common Stock included in such underwritten offering.
e. Eligibility for Form S-3. The Company represents and warrants
that it meets the requirements for the use of Form S-3 for registration of
the sale by the Initial Investors and any other Investor of the
Registrable Securities and the Company shall file all reports required to
be filed by the Company with the SEC in a timely manner so as to maintain
such eligibility for the use of Form S-3.
f. Delay Periods. If at any time prior to the expiration of the
Registration Period (as defined below), the Company has determined in good
faith that (i) the filing of a Registration Statement or compliance by the
Company with its disclosure obligations in connection with the
Registration Statement would require the disclosure of material
information which the Company has a bona fide business purpose for
preserving as confidential or (ii) the Company then is unable to comply
with its disclosure obligations or SEC requirements in connection with the
Registration Statement, then in either such case the Company may delay the
filing of the Registration Statement (if not then filed) and shall not be
required to maintain the effectiveness thereof or amend or supplement the
Registration Statement for a period (a "Delay Period") expiring upon the
earlier to occur of (A) the date on which such material information is
disclosed to the public or ceases to be material or the Company is able to
so comply with its disclosure obligations and SEC requirements or (B) 20
days after the Company makes such good faith determination. The Company
will give prompt written notice, in the manner prescribed by Section 11(b)
hereof, to the Investors of each Delay Period. Advance notice shall be
given to the extent practicable. Such notice shall state an estimate of
the duration of such Delay Period. Each Investor, by its acceptance of any
share of Common Stock, agrees that, upon receipt of such notice it will
forthwith discontinue disposition of the Common Stock pursuant to the
Registration Statement, and will not deliver any prospectus forming a part
thereof in connection with any sale of Common Stock, until the expiration
of such Delay Period. In addition, the provisions of Section 2(c) shall
not apply to the Delay Periods. Notwithstanding anything in this Section
2(f) to the contrary, there shall not be (i) more than two (2) Delay
Periods in any twelve (12) month period or (ii) more than an aggregate of
20 calendar days of Delay Period in any twelve (12) month period.
3. OBLIGATIONS OF THE COMPANY.
In connection with the registration of the Registrable Securities, the
Company shall have the following obligations:
a. The Company shall prepare promptly and file with the SEC the
Registration Statement required by Section 2(a) as soon as practicable
after the date hereof (but in no event later than the Filing Date), and
cause such Registration Statement relating to Registrable Securities to
become effective as soon as practicable after such filing (but in no event
later than the Registration Deadline), and keep the Registration Statement
effective pursuant to Rule 415 at all times until such date as is the
earlier of (i) the date on which all of the Registrable Securities have
been sold and (ii) the date on which all of the Registrable Securities (in
the reasonable opinion of counsel to the Initial Investors) may be
immediately sold to the public without registration or restriction
pursuant to Rule 144(k) under the
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Securities Act or any successor provision (the "Registration Period"),
which Registration Statement (including any amendments or supplements
thereto and prospectuses contained therein and all documents incorporated
by reference therein) shall not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein, or
necessary to make the statements therein not misleading.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to the Registration
Statement and the prospectus used in connection with the Registration
Statement as may be necessary to keep the Registration Statement effective
at all times during the Registration Period, and, during such period,
comply with the provisions of the Securities Act with respect to the
disposition of all Registrable Securities of the Company covered by the
Registration Statement until such time as all of such Registrable
Securities have been disposed of in accordance with the intended methods
of disposition by the seller or sellers thereof as set forth in the
Registration Statement. In the event the number of shares available under
a Registration Statement filed pursuant to this Agreement is, for any
three (3) consecutive trading days (the last of such three (3) trading
days being the "Registration Trigger Date"), insufficient to cover one
hundred thirty-five percent (135%) of the Registrable Securities issued or
issuable upon conversion (without giving effect to any limitations on
conversion contained in Article IV.C of the Certificate of Designation) of
the Preferred Stock and exercise of the Warrants (without giving effect to
any limitations on exercise contained in Section 7 of the Warrants), the
Company shall amend the Registration Statement, or file a new Registration
Statement (on the short form available therefor, if applicable), or both,
so as to cover two hundred percent (200%) of the Registrable Securities
issued or issuable (without giving effect to any limitations on conversion
or exercise contained in the Certificate of Designation or the Warrants)
as of the Registration Trigger Date, in each case, as soon as practicable,
but in any event within fifteen (15) days after the Registration Trigger
Date (based on the market price then in effect of the Common Stock and
other relevant factors on which the Company reasonably elects to rely).
The Company shall cause such amendment(s) and/or new Registration
Statement to become effective as soon as practicable following the filing
thereof. The Company shall cause such amendment and/or new Registration
Statement to become effective as soon as practicable following the filing
thereof. In the event the Company fails to obtain the effectiveness of any
such Registration Statement within sixty (60) days after a Registration
Trigger Date, each Investor shall thereafter be entitled to the remedies
provided for in Section 2(c) above.
c. The Company shall furnish to each Investor whose Registrable
Securities are included in the Registration Statement and its legal
counsel (i) promptly after the same is prepared and publicly distributed,
filed with the SEC, or received by the Company, one copy of the
Registration Statement and any amendment thereto, each preliminary
prospectus and prospectus and each amendment or supplement thereto, and,
in the case of the Registration Statement referred to in Section 2(a),
each letter written by or on behalf of the Company to the SEC or the staff
of the SEC (including, without limitation, any request to accelerate the
effectiveness of any Registration Statement or amendment thereto), and
each item of correspondence from the SEC or the staff of the SEC, in each
case relating to such Registration Statement (other than any portion, if
any, thereof which contains information for which the Company has sought
confidential treatment), (ii) on the date of effectiveness of the
Registration Statement or any amendment thereto, a notice stating that the
Registration Statement or amendment has been declared effective, and (iii)
such number of copies of a prospectus, including
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a preliminary prospectus, and all amendments and supplements thereto and
such other documents as such Investor may reasonably request in order to
facilitate the disposition of the Registrable Securities owned by such
Investor.
d. The Company shall use its best efforts to (i) register and
qualify the Registrable Securities covered by the Registration Statement
under such other securities or "blue sky" laws of such jurisdictions in
the United States as each Investor who holds Registrable Securities being
offered reasonably requests, (ii) prepare and file in those jurisdictions
such amendments (including post-effective amendments) and supplements to
such registrations and qualifications as may be necessary to maintain the
effectiveness thereof during the Registration Period, (iii) take such
other actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and
(iv) take all other actions reasonably necessary or advisable to qualify
the Registrable Securities for sale in such jurisdictions; provided,
however, that the Company shall not be required in connection therewith or
as a condition thereto to (a) qualify to do business in any jurisdiction
where it would not otherwise be required to qualify but for this Section
3(d), (b) subject itself to general taxation in any such jurisdiction, (c)
file a general consent to service of process in any such jurisdiction, (d)
provide any undertakings that cause the Company undue expense or burden,
or (e) make any change in its charter or bylaws, which in each case the
Board of Directors of the Company determines to be contrary to the best
interests of the Company and its stockholders.
e. In the event the Investors who hold a majority in interest of the
Registrable Securities being offered in an offering select underwriters
for the offering, the Company shall enter into and perform its obligations
under an underwriting agreement, in usual and customary form, including,
without limitation, customary indemnification and contribution
obligations, with the underwriters of such offering.
f. As promptly as practicable after becoming aware of such event,
the Company shall notify each Investor of the happening of any event, of
which the Company has knowledge, as a result of which the prospectus
included in the Registration Statement, as then in effect, includes an
untrue statement of a material fact or omission to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, and use its best efforts promptly to prepare a supplement
or amendment to the Registration Statement to correct such untrue
statement or omission, and deliver such number of copies of such
supplement or amendment to each Investor as such Investor may reasonably
request.
g. The Company shall use its best efforts to prevent the issuance of
any stop order or other suspension of effectiveness of a Registration
Statement, and, if such an order is issued, to obtain the withdrawal of
such order at the earliest practicable moment (including in each case by
amending or supplementing such Registration Statement) and to notify each
Investor who holds Registrable Securities being sold (or, in the event of
an underwritten offering, the managing underwriters) of the issuance of
such order and the resolution thereof (and if such Registration Statement
is supplemented or amended, deliver such number of copies of such
supplement or amendment to each Investor as such Investor may reasonably
request).
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<PAGE>
h. The Company shall permit a single firm of counsel designated by
the Initial Investors to review the Registration Statement and all
amendments and supplements thereto a reasonable period of time prior to
their filing with the SEC, and not file any document in a form to which
such counsel reasonably objects.
i. The Company shall make generally available to its security
holders as soon as practical, but not later than ninety (90) days after
the close of the period covered thereby, an earnings statement (in form
complying with the provisions of Rule 158 under the Securities Act)
covering a twelve-month period beginning not later than the first day of
the Company's fiscal quarter next following the effective date of the
Registration Statement.
j. At the request of any Investor, the Company shall furnish, on the
date of effectiveness of the Registration Statement (i) an opinion, dated
as of such date, from counsel representing the Company addressed to the
Investors and in form, scope and substance as is customarily given in an
underwritten public offering and (ii) in the case of an underwriting, a
letter, dated such date, from the Company's independent certified public
accountants in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and the Investors.
k. The Company shall make available for inspection by (i) any
Investor, (ii) any underwriter participating in any disposition pursuant
to the Registration Statement, (iii) one firm of attorneys and one firm of
accountants or other agents retained by the Investors, and (iv) one firm
of attorneys retained by all such underwriters (collectively, the
"Inspectors") all pertinent financial and other records, and pertinent
corporate documents and properties of the Company (collectively, the
"Records"), as shall be reasonably deemed necessary by each Inspector to
enable each Inspector to exercise its due diligence responsibility, and
cause the Company's officers, directors and employees to supply all
information which any Inspector may reasonably request for purposes of
such due diligence; provided, however, that each Inspector shall hold in
confidence and shall not make any disclosure (except to an Investor) or
use of any Record or other information which the Company determines in
good faith to be confidential, and of which determination the Inspectors
are so notified, unless (a) the release of such Records is ordered
pursuant to a subpoena or other order from a court or government body of
competent jurisdiction or (b) the information in such Records has been
made generally available to the public other than by disclosure in
violation of this or any other agreement. The Company shall not be
required to disclose any confidential information in such Records to any
Inspector until and unless such Inspector shall have entered into
confidentiality agreements (in form and substance satisfactory to the
Company) with the Company with respect thereto, substantially in the form
of this Section 3(k). Each Investor agrees that it shall, upon learning
that disclosure of such Records is sought in or by a court or governmental
body of competent jurisdiction or through other means, give prompt notice
to the Company and allow the Company, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective
order for, the Records deemed confidential. Nothing herein shall be deemed
to limit the Investors' ability to sell Registrable Securities in a manner
which is otherwise consistent with applicable laws and regulations.
l. The Company shall hold in confidence and not make any disclosure
of information concerning an Investor provided to the Company unless (i)
disclosure of such information
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<PAGE>
is necessary to comply with federal or state securities laws, (ii) the
disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release
of such information is ordered pursuant to a subpoena or other order from
a court or governmental body of competent jurisdiction, (iv) such
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement, or (v) such
Investor consents to the form and content of any such disclosure. The
Company agrees that it shall, upon learning that disclosure of such
information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give
prompt notice to such Investor prior to making such disclosure, and allow
the Investor, at its expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, such information.
m. The Company shall use its best efforts to promptly either (i)
cause all the Registrable Securities covered by the Registration Statement
to be listed on the NYSE or the AMEX or another national securities
exchange and on each additional national securities exchange on which
securities of the same class or series issued by the Company are then
listed, if any, if the listing of such Registrable Securities is then
permitted under the rules of such exchange, or (ii) secure the designation
and quotation of all of the Registrable Securities covered by the
Registration Statement on the NNM or the SmallCap and, without limiting
the generality of the foregoing, to arrange for or maintain at least two
market makers to register with the National Association of Securities
Dealers, Inc. ("NASD") as such with respect to such Registrable
Securities.
n. The Company shall provide a transfer agent and registrar, which
may be a single entity, for the Registrable Securities not later than the
effective date of the Registration Statement.
o. The Company shall cooperate with the Investors who hold
Registrable Securities being offered and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing
Registrable Securities to be offered pursuant to the Registration
Statement and enable such certificates to be in such denominations or
amounts, as the case may be, as the managing underwriter or underwriters,
if any, or the Investors may reasonably request and registered in such
names as the managing underwriter or underwriters, if any, or the
Investors may request, and, within three (3) business days after a
Registration Statement which includes Registrable Securities is ordered
effective by the SEC, the Company shall deliver, and shall cause legal
counsel selected by the Company to deliver, to the transfer agent for the
Registrable Securities (with copies to the Investors whose Registrable
Securities are included in such Registration Statement) an opinion of such
counsel in the form attached hereto as Exhibit 1.
p. At the request of any Investor, the Company shall prepare and
file with the SEC such amendments (including post-effective amendments)
and supplements to a Registration Statement and the prospectus used in
connection with the Registration Statement as may be necessary in order to
change the plan of distribution set forth in such Registration Statement.
q. The Company shall comply with all applicable laws related to a
Registration Statement and offering and sale of securities and all
applicable rules and regulations of governmental
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<PAGE>
authorities in connection therewith (including, without limitation, the
Securities Act and the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the SEC.)
r. The Company shall take all such other actions as any Investor or
the underwriters, if any, reasonably request in order to expedite or
facilitate the disposition of the Registrable Securities.
s. From and after the date of this Agreement, the Company shall not,
and shall not agree to, allow the holders of any securities of the Company
to include any of their securities in any Registration Statement under
Section 2(a) hereof or any amendment or supplement thereto under Section
3(b) hereof without the consent of the holders of a majority in interest
of the Registrable Securities.
4. OBLIGATIONS OF THE INVESTORS.
In connection with the registration of the Registrable Securities, the
Investors shall have the following obligations:
a. It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with
respect to the Registrable Securities of a particular Investor that such
Investor shall furnish to the Company such information regarding itself,
the Registrable Securities held by it and the intended method of
disposition of the Registrable Securities held by it as shall be
reasonably required to effect the registration of such Registrable
Securities and shall execute such documents in connection with such
registration as the Company may reasonably request. At least five (5)
business days prior to the first anticipated filing date of the
Registration Statement, the Company shall notify each Investor of the
information the Company requires from each such Investor.
b. Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested
by the Company in connection with the preparation and filing of the
Registration Statement hereunder, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such
Investor's Registrable Securities from the Registration Statement.
c. In the event Investors holding a majority in interest of the
Registrable Securities being offered determine to engage the services of
an underwriter, each Investor agrees to enter into and perform such
Investor's obligations under an underwriting agreement, in usual and
customary form, including, without limitation, customary indemnification
and contribution obligations, with the managing underwriter of such
offering and take such other actions as are reasonably required in order
to expedite or facilitate the disposition of the Registrable Securities,
unless such Investor has notified the Company in writing of such
Investor's election not to participate in such underwritten distribution.
d. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section
3(f) or 3(g), such Investor will immediately discontinue disposition of
Registrable Securities pursuant to the Registration Statement covering
such
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Registrable Securities until such Investor's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(f) or 3(g)
and, if so directed by the Company, such Investor shall deliver to the
Company (at the expense of the Company) or destroy (and deliver to the
Company a certificate of destruction) all copies in such Investor's
possession, of the prospectus covering such Registrable Securities current
at the time of receipt of such notice.
e. No Investor may participate in any underwritten distribution
hereunder unless such Investor (i) agrees to sell such Investor's
Registrable Securities on the basis provided in any underwriting
arrangements in usual and customary form entered into by the Company, (ii)
completes and executes all questionnaires, powers of attorney,
indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements, and (iii)
agrees to pay its pro rata share of all underwriting discounts and
commissions and any expenses in excess of those payable by the Company
pursuant to Section 5 below.
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees, the
fees and disbursements of counsel for the Company, the fees and disbursements
contemplated by Section 3(k) hereof, and the reasonable fees and disbursements
of one counsel selected by the Investors pursuant to Section 2(b) hereof shall
be borne by the Company. In addition, the Company shall pay all of the
Investors' costs and expenses (including legal fees) incurred in connection with
the enforcement of the rights of the Investors hereunder.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
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a. To the extent permitted by law, the Company will indemnify, hold
harmless and defend (i) each Investor who holds such Registrable
Securities, and (ii) the directors, officers, partners, members,
employees, agents and each person who controls any Investor within the
meaning of Section 15 of the Securities Act or Section 20 of the
Securities Exchange Act of 1934, as amended (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 untrue statement or alleged untrue
statement of a material fact in a Registration Statement or the omission
or alleged omission to state therein a material fact required to be stated
or necessary to make the statements therein not misleading, (ii) any
untrue statement or alleged untrue statement of a material fact contained
in any preliminary prospectus if used prior to the effective date of such
Registration Statement, or contained in the final prospectus (as amended
or supplemented, if the Company files any amendment thereof or supplement
thereto with the SEC) or the omission or alleged omission to state therein
any material fact necessary to make the statements made therein, in light
of the circumstances under which the statements therein were made, not
misleading, or (iii) any violation or alleged violation by the Company of
the Securities Act, the Exchange Act, any other law, including, without
limitation, any state securities law, or any rule or regulation thereunder
relating to the offer or sale of the Registrable Securities (the matters
in the foregoing clauses (i) through (iii) being, collectively,
"Violations"). Subject to the restrictions set forth in Section 6(c) with
respect to the number of legal counsel, the Company shall reimburse the
Investors and each other Indemnified Person, 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
6(a): (i) shall not apply to a Claim arising out of or based upon a
Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company by such Indemnified Person expressly
for use in the Registration Statement or any such amendment thereof or
supplement thereto; (ii) shall not 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; and
(iii) with respect to any preliminary prospectus, shall not inure to the
benefit of any Indemnified Person if the untrue statement or omission of
material fact contained in the preliminary prospectus was corrected on a
timely basis in the prospectus, as then amended or supplemented, if such
corrected prospectus was timely made available by the Company pursuant to
Section 3(c) hereof, and the Indemnified Person was promptly advised in
writing not to use the incorrect prospectus prior to the use giving rise
to a Violation and such Indemnified Person, notwithstanding such advice,
used it. Such indemnity shall remain in full force and effect regardless
of any investigation made by or on behalf of the Indemnified Person and
shall survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9 hereof.
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b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees severally and not
jointly to indemnify, hold harmless and defend, to the same extent and in
the same manner set forth in Section 6(a), the Company, each of its
directors, each of its officers who signs the Registration Statement, its
employees, agents and each person, if any, who controls the Company within
the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, and any other stockholder selling securities pursuant to the
Registration Statement or any of its directors or officers or any person
who controls such stockholder within the meaning of the Securities Act or
the Exchange Act (collectively and together with an Indemnified Person, an
"Indemnified Party"), against any Claim to which any of them may become
subject, under the Securities Act, the Exchange Act or otherwise, insofar
as such Claim arises out of or is based upon any Violation, in each case
to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished to the
Company by such Investor expressly for use in connection with such
Registration Statement; and subject to Section 6(c) such Investor will
reimburse any legal or other expenses (promptly as such expenses are
incurred and are due and payable) reasonably incurred by them in
connection with investigating or defending any such Claim; provided,
however, that the indemnity agreement contained in this Section 6(b) shall
not apply to amounts paid in settlement of any Claim if such settlement is
effected without the prior written consent of such Investor, which consent
shall not be unreasonably withheld; provided, further, however, that the
Investor shall be liable under this Agreement (including this Section 6(b)
and Section 7) for only that amount as does not exceed the net proceeds
actually received by such Investor as a result of the sale of Registrable
Securities pursuant to such Registration Statement. Such indemnity shall
remain in full force and effect regardless of any investigation made by or
on behalf of such Indemnified Party and shall survive the transfer of the
Registrable Securities by the Investors pursuant to Section 9 hereof.
Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(b) with respect to
any preliminary prospectus shall not inure to the benefit of any
Indemnified Party if the untrue statement or omission of material fact
contained in the preliminary prospectus was corrected on a timely basis in
the prospectus, as then amended or supplemented, and the Indemnified Party
failed to utilize such corrected prospectus.
c. Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is made against any
indemnifying party under this Section 6, deliver to the indemnifying party
a written notice of the commencement thereof, and the indemnifying party
shall have the right to participate in, and, to the extent the
indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnified Person
or the Indemnified Party, as the case may be; provided, however, that such
indemnifying party shall not be entitled to assume such defense and an
Indemnified Person or Indemnified Party shall have the right to retain its
own counsel with the fees and expenses to be paid by the indemnifying
party, if, in the reasonable opinion of counsel retained by the
indemnifying party, the representation by such counsel of the Indemnified
Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential conflicts of interest between
such Indemnified Person or Indemnified Party and any other party
represented by such counsel in such proceeding or the actual or potential
defendants in, or targets of, any such action include both the Indemnified
Person or the Indemnified Party and the indemnifying party and any such
Indemnified Person or Indemnified Party
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reasonably determines that there may be legal defenses available to such
Indemnified Person or Indemnified Party which are different from or in
addition to those available to such indemnifying party. The indemnifying
party shall pay for only one separate legal counsel for the Indemnified
Persons or the Indemnified Parties, as applicable, and such legal counsel
shall be selected by Investors holding a majority-in-interest of the
Registrable Securities included in the Registration Statement to which the
Claim relates (with the approval of the Initial Investors if they hold
Registrable Securities included in such Registration Statement), if the
Investors are entitled to indemnification hereunder, or by the Company, if
the Company is entitled to indemnification hereunder, as applicable. The
failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall not relieve
such indemnifying party of any liability to the Indemnified Person or
Indemnified Party under this Section 6, except to the extent that the
indemnifying party is actually prejudiced in its ability to defend such
action. The indemnification required by this Section 6 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.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is prohibited
or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that
(i) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6, (ii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any seller of Registrable Securities who was not guilty of
such fraudulent misrepresentation, and (iii) contribution (together with any
indemnification or other obligations under this Agreement) by any seller of
Registrable Securities shall be limited in amount to the net amount of proceeds
received by such seller from the sale of such Registrable Securities.
8. REPORTS UNDER THE EXCHANGE ACT.
With a view to making available to the Investors the benefits of Rule 144
promulgated under the Securities Act or any other similar rule or regulation of
the SEC that may at any time permit the Investors to sell securities of the
Company to the public without registration ("Rule 144"), the Company agrees to:
a. File with the SEC in a timely manner and make and keep available
all reports and other documents required of the Company under the
Securities Act and the Exchange Act so long as the Company remains subject
to such requirements (it being understood that nothing herein shall limit
the Company's obligations under Section 4(c) of the Securities Purchase
Agreement) and the filing and availability of such reports and other
documents is required for the applicable provisions of Rule 144; and
14
<PAGE>
b. Furnish to each Investor so long as such Investor owns shares of
Preferred Stock, Warrants or Registrable Securities, promptly upon
request, (i) a written statement by the Company that it has complied with
the reporting requirements of Rule 144, the Securities Act and the
Exchange Act, (ii) a copy of the most recent annual or quarterly report of
the Company and such other reports and documents so filed by the Company,
and (iii) such other information as may be reasonably requested to permit
the Investors to sell such securities under Rule 144 without registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights of the Investors hereunder, including the right to have the
Company register Registrable Securities pursuant to this Agreement, shall be
automatically assignable by each Investor to any transferee of all or any
portion of the shares of Preferred Stock, the Warrants or the Registrable
Securities if: (i) the Investor agrees in writing with the transferee or
assignee to assign such rights, and a copy of such agreement is furnished to the
Company after such assignment, (ii) the Company is furnished with written notice
of (a) the name and address of such transferee or assignee, and (b) the
securities with respect to which such registration rights are being transferred
or assigned, (iii) following such transfer or assignment, the further
disposition of such securities by the transferee or assignee is restricted under
the Securities Act and applicable state securities laws, (iv) the transferee or
assignee agrees in writing for the benefit of the Company to be bound by all of
the provisions contained herein, and (v) such transfer shall have been made in
accordance with the applicable requirements of the Securities Purchase
Agreement.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance thereof may
be waived (either generally or in a particular instance and either retroactively
or prospectively), only with written consent of the Company and Investors who
hold a majority in interest of the Registrable Securities; provided, however,
that no amendment hereto which restricts the ability of an Investor to elect not
to participate in an underwritten offering shall be effective against any
Investor which does not consent in writing to such amendment. Any amendment or
waiver effected in accordance with this Section 10 shall be binding upon each
Investor and the Company.
11. MISCELLANEOUS.
a. A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of
instructions, notice or election received from the registered owner of
such Registrable Securities.
b. 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 (5) 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:
15
<PAGE>
If to the Company:
Advanced Environmental Recycling
Technologies, Inc.
FM 2169
HC 10, Box 116
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 any Investor, at such address as such Investor 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 11(b).
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
d. 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 Investors' 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.
e. This Agreement, the Securities Purchase Agreement (including all
schedules and exhibits thereto) and the Warrants constitute the entire
agreement among the parties hereto with respect to the subject matter
hereof and thereof. This Agreement, the Securities Purchase Agreement and
the Warrants supersede all prior agreements and understandings among the
parties hereto with respect to the subject matter hereof and thereof.
16
<PAGE>
f. Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and
assigns of each of the parties hereto.
g. The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which shall constitute one
and the same agreement. This Agreement, once executed by a party, may be
delivered to the other party hereto by facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this
Agreement.
i. 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.
j. All consents, approvals and other determinations to be made by
the Investors or the Initial Investors pursuant to this Agreement shall be
made by the Investors or the Initial Investors holding a majority in
interest of the Registrable Securities (determined as if all shares of
Preferred Stock and Warrants then outstanding had been converted into or
exercised for Registrable Securities) held by all Investors or Initial
Investors, as the case may be.
k. The initial number of Registrable Securities included on any
Registration Statement and each increase (if any) to the number of
Registrable Securities included thereon shall be allocated pro rata among
the Investors based on the number of Registrable Securities held by each
Investor at the time of such establishment or increase, as the case may
be. In the event an Investor shall sell or otherwise transfer any of such
holder=s Registrable Securities, each transferee shall be allocated a pro
rata portion of the number of Registrable Securities included on a
Registration Statement for such transferor. Any shares of Common Stock
included on a Registration Statement and which remain allocated to any
person or entity which does not hold any Registrable Securities shall be
allocated to the remaining Investors, pro rata based on the number of
shares of Registrable Securities then held by such Investors.
l. For purposes of this Agreement, the term "business day" means any
day other than a Saturday or Sunday or a day on which banking institutions
in the State of New York are authorized or obligated by law, regulation or
executive order to close.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
17
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
By:/s/ Joe G. Brooks
-------------------------------------
Name: Joe G. Brooks
Title: President
By:/s/ Steve Brooks
-------------------------------------
Name: Steve Brooks
Title: Chief Executive Officer
INITIAL INVESTORS:
ZANETT LOMBARDIER, LTD. HARLOW ENTERPRISES, INC.
By:/s/ Gianluca Cicognia By:/s/ Elayne Murphy
-------------------------- ------------------------------
Name: Gianluca Cicognia Name: Elayne Murphy
------------------------ ----------------------------
Title: Director Title: Authorized Representative
----------------------- ---------------------------
PARKLAND LIMITED THE ZANETT SECURITIES CORPORATION
By:/s/ Raymond O'Reilly By:/s/ David McCarthy
-------------------------- ------------------------------
Name: Raymond O'Reilly Name: David McCarthy
------------------------ ----------------------------
Title: Director Title: Managing Director
----------------------- ---------------------------
(SIGNATURES CONTINUED ON NEXT PAGE)
<PAGE>
(SIGNATURES CONTINUED FROM PRIOR PAGE)
GOLDMAN SACHS PERFORMANCE GOLDMAN SACHS PERFORMANCE
PARTNERS (OFFSHORE), L.P. PARTNERS, L.P.
By: Comodities Corporation LLC, By: Commodities Corporation LLC,
its general partner its general partner
By: /s/ Karen M. Judge By:/s/ Karen M. Judge
-------------------------- ------------------------------
Name: Karen M. Judge Name: Karen M. Judge
------------------------ ----------------------------
Title: Vice President Title: Vice President
----------------------- ---------------------------
/s/ Samuel L. Milbank /s/ Bruno Guazzoni
- ----------------------------- ---------------------------------
SAMUEL L. MILBANK BRUNO GUAZZONI
/s/ David McCarthy /s/ Claudio Guazzoni
- ----------------------------- ---------------------------------
DAVID McCARTHY CLAUDIO GUAZZONI
<PAGE>
EXHIBIT 1
to
Registration
Rights
Agreement
[Date]
[Name and address
of transfer agent]
RE: Advanced Environmental Recycling Technologies, Inc.
Ladies and Gentlemen:
We are counsel to Advanced Environmental Recycling Technologies, Inc., a
corporation organized under the laws of the State of Delaware (the "Company"),
and we understand that [Name of Investor] (the "Holder") has purchased from the
Company (i) shares of the Company's Series A Convertible Preferred Stock (the
"Preferred Stock") that are convertible into shares of the Company's Class A
Common Stock, par value $.01 per share (the "Common Stock"), and (ii) Series X
and Series Y warrants (the "Warrants") to acquire shares of Common Stock.
Pursuant to a Registration Rights Agreement, dated as of September 30, 1998, by
and among the Company, the Holder and the other signatories thereto (the
"Registration Rights Agreement"), the Company agreed with the Holder, among
other things, to register the Registrable Securities (as that term is defined in
the Registration Rights Agreement) under the Securities Act of 1933, as amended
(the "Securities Act"), upon the terms provided in the Registration Rights
Agreement. In connection with the Company's obligations under the Registration
Rights Agreement, on _____ __, 1998, the Company filed a Registration Statement
on Form S-___ (File No. 333- _____________) (the "Registration Statement") with
the Securities and Exchange Commission (the "SEC") relating to the Registrable
Securities, which names the Holder as a selling stockholder thereunder. The
Registration Statement was declared effective by the SEC on _________________,
1998.
[Other customary introductory and scope of examination language to be
inserted]
Based on the foregoing, we are of the opinion that the Registrable
Securities have been registered under the Securities Act.
[Other customary language to be included.]
Very truly yours,
cc: [Name of Investor]
<PAGE>
EXHIBIT 10.40
Placement Agency Agreement
September 30, 1998
The Zanett Securities Corporation
Tower 49, 31st Floor
12 East 49th Street
New York, NY 10017
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 (the "Term"), on a "best-efforts" basis, in
connection with the placement of up to 1,500 units (the "Units") at a price of
$1,000 per Unit, each Unit consisting of (i) one share of the Company's Series A
Convertible Preferred Stock, par value $1.00 per share (each, a "Preferred
Share"), convertible into shares of the Company's Class A Common Stock, par
value $.01 per share (the "Common Stock"), (ii) one Series X warrant to acquire
555 shares of Common Stock (each, a "Series X Warrant") and (iii) one Series Y
warrant to acquire 205 shares of Common Stock (each, a "Series Y Warrant" and,
together with a Series X Warrant, "Warrants"). The rights, preferences and
privileges of the Preferred Shares, including the terms upon which such
Preferred Shares will be convertible into shares of Common Stock, will be set
forth in a form of Certificate of Designations, Rights and Preferences to be
agreed upon by the Company and the Placement Agent (the "Certificate of
Designation"). The shares of Common Stock issuable upon conversion of the
Preferred Shares or otherwise pursuant to the Certificate of Designation are
referred to herein as the "Conversion Shares" and the shares of Common Stock
issuable upon exercise of or otherwise pursuant to the Warrants are referred to
herein as the "Warrant Shares." The Preferred Shares, the Warrants, the
Conversion Shares and the Warrant Shares are collectively referred to herein as
the "Securities." The Company agrees that, during the Term, Zanett shall have
the exclusive right to offer and place the Securities 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 Units 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 Units will be required to deliver, among other things, a Securities
Purchase Agreement between the Company and the Investor (the "Securities
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
<PAGE>
such term is defined in Regulation D. Contemporaneous with the execution and
delivery of the Securities 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 Conversion Shares and
Warrant Shares.
The Securities Purchase Agreement, the Certificate of Designation, the
Warrants and the Registration Rights Agreement are referred to herein
collectively as the "Offering Documents." The offering of Units described in the
Offering Documents is referred to herein as the "Offering."
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 the closing contained
in the Securities Purchase Agreement, the closing (the "Closing") of the
purchase and sale of the Units 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 Securities Purchase Agreement, the
Registration Rights Agreement, the Warrants and other documentation related to
the Offering, (B) the execution and filing of the Certificate of Designation
with the Secretary of State of the State of Delaware, and (c) the issuance of
the Preferred Shares and the reservation for issuance and issuance of the
Conversion Shares and the Warrant Shares, and certifying that such resolutions
have not been modified, rescinded or amended and are in full force and effect.
2
<PAGE>
(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 an executed copy
of the Securities Purchase Agreement and Registration Rights Agreement signed by
such Investor, and the Company shall deliver to the Escrow Agent with respect to
each Investor, an executed copy of its acceptance of the Securities Purchase
Agreement and Registration Rights Agreement executed by such Investor.
(v) Each Investor shall have delivered promissory notes of the
Company (the "Notes") to the Escrow Agent or wire transferred immediately
available funds to an escrow account designated by the Escrow Agent, in each
case, in an amount equal to the aggregate purchase price of the Units(s) being
purchased by such Investor at the Closing.
(vi) The Company shall have delivered to the Escrow Agent the duly
executed Preferred Shares and Warrants 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 deliver the Notes to the Company and pay to the Company the cash
purchase price (all such consideration referred to collectively as the "Purchase
Price") for the Units 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 Securities 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 Fees") equal to
10% of the aggregate Purchase Price. 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 Units at the Closing under
the Securities 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 Purchase Price. Such Expense Allowance shall be
delivered in the same manner as the Placement Agent Fee.
d. Warrants. In addition to the Placement Agent Fees, at the Closing
under the Securities Purchase Agreement, the Company shall issue to the
Placement Agent and those officers of the Placement Agent set forth on Schedule
2(d) (the "Zanett Officers"), (i) Series X Warrants, in substantially the form
attached hereto as Exhibit A-1, to purchase, in the aggregate, 278.33 shares of
the Company's Common Stock for each $1,000 of Purchase Price and (ii) Series Y
Warrants, in substantially the form attached hereto as Exhibit A-2, to purchase,
in the aggregate, 102.7 shares of the Company's Common Stock for each $1,000 of
Purchase Price (collectively, the "Placement Warrants"). The Series X Warrants
shall be exercisable for a period of six (6) years from the first
3
<PAGE>
(1st) anniversary of the date of issuance at a price per share equal to $1.20
and the Series Y Warrants shall be exercisable for a period of five (5) years
from the second (2nd) anniversary of the date of issuance at a price per share
equal to $3.25. The shares of the Company's Common Stock issuable upon exercise
of the Placement Warrants shall hereinafter be referred to as the "Placement
Warrant Shares." The Company shall grant the Placement Agent and such officers
certain registration rights under the Securities Act with respect to the
Placement Warrant Shares pursuant to the 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 the 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.
(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 on the date on which no Preferred Shares or Warrants remain
outstanding (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 sell up to 1,400 shares of Series B Preferred Stock and Series C
Preferred Stock of the Company to Marjorie Brooks, Steven Brooks, Joseph Brooks,
Douglas Brooks, Robert Mackie, Sr., Robert Mackie, Jr., Ike Tull, Michael Tull,
Mr. & Mrs. Delbert Allen, Jr., Mr. & Mrs. Fritz Friday, Allen & Co., Millenco
LLP and/or members of such individuals' immediate families.
4
<PAGE>
3. Representations and Warranties and Covenants.
a. The Company represents and warrants to Zanett that:
(i) 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.
(ii) The Company has delivered to Zanett true and complete copies of
the SEC Documents (as defined in the Securities Purchase Agreement) filed by the
Company on or after December 31, 1995 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").
(iii) 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 Securities Purchase Agreement and other Offering Documents 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.
(iv) 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 Securities Purchase Agreement and the other Offering Documents with
the same force and effect as if specifically set forth herein.
(v) 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
5
<PAGE>
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.
(vi) For a period of the later of (i) five years from the Closing and
(ii) so long as Zanett, the Zanett Officers and/or their 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.
(vii) The Company has the requisite corporate power and authority to
enter into and perform its obligations under this Agreement and to issue the
Placement Warrants in accordance with the terms hereof. The execution and
delivery of this Agreement and the Placement Warrants 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 Placement Warrant Shares issuable upon exercise of
the Placement Warrants) 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.
(viii) The Placement Warrant and the Placement 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.
(ix) 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
6
<PAGE>
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, 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 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.
(x) The Company shall at all times after January 15, 1999 have
authorized, and reserved for the purpose of issuance, a sufficient number of
Placement Warrant Shares to provide for the full exercise of the outstanding
Placement Warrants.
(xi) The Company shall promptly secure the listing of the Placement
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 as any other shares of
Common Stock shall be so listed, such listing of all Placement Warrant Shares
from time to time issuable upon exercise of the Placement Warrants.
b. The Zanett Officers each individually represent and warrant to the
Company that:
(i) The Zanett Officer is acquiring the Placement Warrants and the
Placement Warrant Shares for its own account and not with a present view towards
the public sale or distribution thereof.
(ii) The Zanett Officer is an "Accredited Investor" as that term is
defined in Rule 501(a) of Regulation D.
(iii) The Zanett Officer understands that the Placement Warrants and
the Placement Warrant Shares are being issued to the Zanett Officer 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 Zanett Officer's compliance with, the representations,
warranties, agreements, acknowledgments and understandings set forth herein in
order to determine the availability of such exemptions and the eligibility of
the Zanett Officer to acquire the Placement Warrants and the Placement Warrant
Shares.
(iv) The Zanett Officer understands that (i) except as provided in
the Registration Rights Agreement, the sale or resale of the Placement Warrants
and the Placement Warrant Shares issuable upon exercise thereof have not been
and are not being registered under the
7
<PAGE>
Securities Act or any state securities laws, and may not be transferred unless
(a) the resale of the Securities has been registered thereunder; or (b) the
Zanett Officer 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 pursuant to an exemption from such
registration; or (c) the Securities are sold under Rule 144 promulgated under
the Securities Act (or a successor rule) ("Rule 144"); or (d) the Securities are
sold or transferred to a non-broker dealer affiliate of the Zanett Officer who
agrees to sell or otherwise transfer such securities only in accordance with the
provisions of the terms hereof and who is an Accredited Investor; 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 (other
than pursuant to the Registration Rights Agreement). Notwithstanding the
foregoing or anything else contained herein to the contrary, such securities may
be pledged as collateral in connection with a bona fide margin account or other
lending arrangement.
(v) This Agreement has been duly and validly authorized, executed and
delivered on behalf of Placement Agent and duly and validly executed and
delivered by each Zanett Officer and is the valid and binding agreement of each
of them enforceable against each of them in accordance with its terms.
(vi) Placement Agent is a registered broker dealer (as such term is
defined under the Securities Act of 1933, as amended) and neither the Placement
Agent nor any Zanett Officer has made any general solicitations (as such term is
defined under the Securities Act of 1933, as amended) with respect to the sale
of the Securities.
(vii) Neither the Placement Agent nor the Zanett Officers have any
authority to act on behalf of, or otherwise bind, the Company.
4. Publicity. The Company shall not make any reference to Zanett, the
Zanett Officers or to any of their 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).
8
<PAGE>
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 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
9
<PAGE>
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, 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, 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 Person'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
10
<PAGE>
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
Tower 49, 31st Floor
12 East 49th Street
New York, NY 10017
Attention: Claudio Guazzoni
- with a copy to -
Klehr, Harrison, Harvey, Branzburg & Ellers
1401 Walnut Street
Philadelphia, PA 19102
Attention: Barry J. Siegel, Esquire
(ii) If to the Company, to
Advanced Environmental Recycling Technologies, Inc.
FM 2169
Junction, Texas 76849
Attention: Chairman of the Board
11
<PAGE>
-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 convenience of reference and are not a part of this Agreement.
e. This Agreement may not be modified or amended except in writing duly
signed 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
12
<PAGE>
the parties hereto to express their mutual intent, and no rule of strict
construction will be applied against any party to this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
13
<PAGE>
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: /s/ Joe G. Brooks
-----------------------------
Name: Joe. G. Brooks
Title: President
Accepted and Agreed to this
30th day of September, 1998.
THE ZANETT SECURITIES CORPORATION
By: /s/ CM Guazzoni
------------------------------
Name: CM Guazzoni
Title: President
/s/ Claudio Guazzoni
- ------------------------------------
Claudio Guazzoni
/s/ David McCarthy
- ------------------------------------
David McCarthy
/s/ Samuel L. Milbank
- ------------------------------------
Tony Milbank
14
<PAGE>
Schedule 2(d)
<TABLE>
<CAPTION>
Number of Series X Number of Series Y
Warrants per $1,000 Warrants per $1,000
Officer of Purchase Price of Purchase Price
------- ----------------- -----------------
<S> <C> <C>
Claudio Guazzoni 83.50 30.80
David McCarthy 83.50 30.80
Tony Milbank 55.66 20.55
The Zanett Securities Corporation 55.67 20.55
------ ------
Total 278.33 102.70
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 614,494
<SECURITIES> 0
<RECEIVABLES> 712,894
<ALLOWANCES> 0
<INVENTORY> 846,571
<CURRENT-ASSETS> 2,263,225
<PP&E> 13,748,630
<DEPRECIATION> 5,452,638
<TOTAL-ASSETS> 10,941,927
<CURRENT-LIABILITIES> 6,889,160
<BONDS> 0
0
2,900
<COMMON> 237,111
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10,941,927
<SALES> 12,408,591
<TOTAL-REVENUES> 12,408,591
<CGS> 11,688,448
<TOTAL-COSTS> 14,908,681
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,105,090
<INCOME-PRETAX> (3,653,070)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,653,070)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,653,070)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
