exv10w2






EXHIBIT 10.2




SECURITIES PURCHASE AGREEMENT




          THIS SECURITIES PURCHASE AGREEMENT is entered into as of
September 4, 2009, by and between PMFG, Inc. (the “Company”), a corporation organized under
the laws of the State of Delaware, with its principal offices at 14651 North Dallas Parkway, Suite
500, Dallas, Texas 75254, and the purchasers whose names and addresses are set forth on the
signature pages hereof (individually referred to as a “Purchaser” and, collectively, the
“Purchasers”).




          WHEREAS, on June 16, 2009, the Company’s stockholders approved an amendment to the Company’s
certificate of incorporation to authorize the issuance of 5,000,000 shares of preferred stock, par
value $0.01 per share (the “Preferred Stock”);




          WHEREAS, the Company proposes to create a new series of Preferred Stock, designated as the
Series A Convertible Preferred Stock, par value $0.01 per share (the “Convertible Preferred
Stock”), by filing a Certificate of Designations in the form attached hereto as Exhibit A
(the “Certificate of Designations”) with the office of the Secretary of State of the State of
Delaware. The form of notice of conversion for the Convertible Preferred Stock is attached hereto
as Exhibit B; and




          WHEREAS, on the terms and subject to the conditions set forth in this Agreement, the Company
proposes to issue and sell to the Purchasers shares of Convertible Preferred Stock (the “Preferred
Shares”) convertible into shares of common stock, par value $0.01 per share (the “Common Stock”),
of the Company and Warrants (the “Warrants”, and together with the Preferred Shares, the
“Securities”) exercisable for shares of Common Stock, in substantially the form attached hereto as
Exhibit C.




          NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement, the
Company and the Purchasers agree as follows:




          SECTION 1. Authorization of Sale of the Securities. Subject to the terms and
conditions of this Agreement, the Company has authorized the sale of the Securities.




          SECTION 2. Agreement to Sell and Purchase the Securities. At the Closing (as defined
in Section 3.1), the Company will sell to the Purchasers, and the Purchasers will buy from
the Company, upon the terms and conditions hereinafter set forth, (i) the number of Preferred
Shares (at the purchase price) set forth below such Purchaser’s name on the signature pages hereof
and (ii) a Warrant to purchase the number of shares of Common Stock equal to 50% of the shares of
Common Stock underlying the Preferred Shares referred to in clause (i) above. The purchase price
for each Preferred Share shall be $1,000 (the “Purchase Price”). The purchase price for the
Preferred Shares and the Warrant being purchased by each Purchaser at the Closing (as defined in
Section 3.1) shall be equal to the aggregate Purchase Price of the Preferred Shares being
so purchased by such Purchaser.




 









 








          SECTION 3. Closing and Delivery of the Securities.




          3.1 Closing. The purchase and sale of the Securities shall occur (the “Closing”) at
10:00 a.m., Dallas, Texas time, on the date hereof (the “Closing Date”). The Closing shall take
place at the office of Jones Day located at 2727 North Harwood Street, Dallas, Texas 75201.




          3.2 Delivery of the Securities. At the Closing, the Company shall deliver to each
Purchaser (or to its designated representative) one or more stock certificates representing the
Preferred Shares and the Warrants registered in the name of each Purchaser, or in such nominee
name(s) as designated in such Purchaser’s Stock Certificate Questionnaire, in the form set forth in
Exhibit D attached hereto, representing the number of Securities set forth in
Section 2 above and bearing the legend specified in Section 5.12 hereof referring
to the fact that the Securities were sold in reliance upon the exemption from registration under
the Securities Act of 1933, as amended (the “Securities Act”), provided by Section 4(2) thereof and
Rule 506 thereunder.




          3.3 Conditions to Closing. (a) The Company’s obligation to complete the purchase and
sale of the Securities and deliver the stock certificates representing the Preferred Shares and the
Warrants to the Purchasers at the Closing shall be subject to the following conditions, any one or
more of which may be waived by the Company: (i) receipt by the Company of same-day funds in the
full amount of the purchase price for the Securities being purchased hereunder; (ii) the accuracy
of the representations and warranties made by the Purchasers and the fulfillment of those
undertakings of the Purchasers to be fulfilled prior to the Closing; and (iii) receipt by the
Company for each Purchaser of completed versions of Exhibit D, Exhibit E and
Exhibit F-1 or F-2 (as applicable) attached hereto.




          (b) The Purchasers’ obligation to accept delivery of the stock certificates representing the
Preferred Shares and the Warrants and to pay for the Securities evidenced thereby shall be subject
to the following conditions: (i) the accuracy in all material respects of the representations and
warranties made by the Company herein and the fulfillment in all material respects of those
undertakings of the Company to be fulfilled prior to Closing, (ii) receipt of an opinion of Jones
Day, counsel to the Company, addressed to the Purchasers in form and substance reasonably
satisfactory to Needham & Company, LLC (the “Placement Agent”) and the Purchasers’ counsel and
rendering the opinions set forth in Exhibit G attached hereto, (iii) receipt of a lock-up
agreement in the form set forth in Exhibit H attached hereto by each of the individuals set
forth on Schedule 3.3 and (iv) receipt of (x) a certificate executed by the Chief Executive
Officer and the Chief Financial Officer of the Company, dated as of the Closing Date, in form and
substance reasonably satisfactory to the Purchasers, to the effect that the representations and
warranties of the Company set forth in Section 4 of this Agreement are true and correct in
all material respects as of the date hereof, and the Company has complied in all material respects
with all the agreements and satisfied in all material respects all the conditions herein on its
part to be performed or satisfied on or prior to the Closing Date and (y) a certificate signed by
the Secretary of the Company to which is attached a true, complete and correct copy of each of the
amended and restated certificate of incorporation of the Company, the amended and restated bylaws
of the Company and certain resolutions of the Board of Directors of the Company, to the effect that
(1) other than the Certificate of Designations, no document



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with respect to any amendment to the certificate of incorporation of the Company has been
filed in the office of the Secretary of State of the State of Delaware since June 16, 2009, and no
action has been taken or, to the best knowledge of the Secretary of the Company, is contemplated by
the Board of Directors or the stockholders of the Company, for the purpose of effecting any such
amendment or the dissolution, merger or consolidation of the Company, (2) no proposal for any
amendment, repeal or other modification to the amended and restated bylaws of the Company has been
taken since August 15, 2008 or is currently pending before the Board of Directors or stockholders
of the Company and (3) the resolutions of the Board of Directors of the Company authorizing the
execution, delivery and performance of this Agreement and the consummation of the transactions
contemplated by this Agreement have not been altered, amended or superseded and remain in full
force and effect as of the date hereof. Each Purchaser’s obligations hereunder are expressly
conditioned on the purchase by all of the other Purchasers of the Securities that they have agreed
to purchase from the Company.




          SECTION 4. Representations, Warranties and Covenants of the Company. Except as
otherwise described in (i) the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and definitive proxy statements filed or furnished by the Company and Peerless
Mfg. Co. (“Peerless”), the Company’s predecessor, with the Securities and Exchange Commission (the
“SEC”) since June 30, 2008 (the “SEC Documents” and collectively, including the documents
incorporated by reference therein, the “Company Information”), (ii) as set forth on the Disclosure
Schedules (provided, that disclosure in any subparagraph of such Disclosure Schedules shall
apply to any section or subparagraph hereof to the extent it is reasonably apparent on its face
that such disclosure would apply to, and fulfill the disclosure requirement of, such section or
subparagraph of this Agreement), or (iii) other disclosure materials previously delivered to the
Purchasers (the “Disclosure Materials”), each which qualify the following representations and
warranties in their entirety, the Company hereby represents and warrants to, and covenants with,
the Purchasers, effective as of the Closing Date (unless otherwise stated), as follows:




          4.1 Organization and Qualification. The Company and each of the subsidiaries (each a
“Subsidiary” and, collectively, the “Subsidiaries”) listed in Exhibit 21.1 to the Company’s Annual
Report on Form 10-K for the fiscal year ended June 30, 2008 (the “2008 Form 10-K”) is a business
entity duly organized, validly existing and in good standing under the laws of the jurisdiction of
its organization, to the extent such concepts are applicable under the laws of such jurisdiction.
The Company and each Subsidiary has all requisite power and authority to carry on its business as
now conducted. The Company and each of its Subsidiaries is duly licensed or qualified as a foreign
business entity (corporate or otherwise) to do business and is in good standing in all
jurisdictions in which the nature of the activities conducted by it or the character of the assets
owned or leased by it requires such license or qualification, to the extent such concepts are
applicable under the laws of each such jurisdiction, except to the extent that the failure to be so
qualified or be in good standing would not reasonably be expected to, individually or in the
aggregate, (i) have a material adverse effect on the Company’s performance of its obligations under
this Agreement or the Warrants or the consummation of any transaction contemplated hereby, or (ii)
materially and adversely affect the Company and its Subsidiaries, taken as a whole, or their
respective businesses, properties, business prospects, conditions (financial or other) or results
of operations, taken as a whole (such effects described in clauses (i) and (ii) being referred to
collectively herein as a “Material Adverse Effect”).




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          4.2 Authorized Capital Stock. The Company has authorized, issued and outstanding
capital stock as set forth on Schedule 4.2 as of the date set forth therein. All of the
issued and outstanding shares of the Company’s Common Stock have been duly authorized, validly
issued and are fully paid and nonassessable, were issued in compliance with all applicable federal
and state securities laws, and were not issued in violation of or subject to any preemptive rights
or other rights to subscribe for or purchase securities. As of the date hereof, there are no
shares of Preferred Stock issued and outstanding. The rights, preferences, privileges and
restrictions of the Preferred Shares will be as set forth in the Certificate of Designations. The
shares of Common Stock issuable upon conversion of the Preferred Shares (the “Conversion Shares”)
and the exercise of the Warrants (the “Warrant Shares”) have been duly and validly reserved for
issuance. Except as set forth on Schedule 4.2, the Company does not have outstanding any
options to purchase, or any right of first refusal or preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into or exchangeable or
exercisable for, or any contracts or commitments to issue or sell, shares of its capital stock, or
any similar right to participate in the transactions contemplated by the Agreement and the
Warrants. Except for customary adjustments as a result of stock dividends, stock splits,
combinations of shares, reorganizations, recapitalizations, reclassifications or other similar
events, there are no anti-dilution or price adjustment provisions contained in any security issued
by the Company (or in any agreement providing rights to security holders) and the issuance and sale
of the Preferred Shares and Warrants or other securities pursuant to any provision of this
Agreement will not give rise to any preemptive rights or rights of first refusal, co-sale rights or
any other similar rights on behalf of any person or result in the triggering of any anti-dilution
or other similar rights. Except as set forth on Schedule 4.2, with respect to each
Subsidiary, (i) the Company owns all of the Subsidiary’s capital stock (except for directors’
qualifying shares), directly or indirectly through its other Subsidiaries, and free and clear of
all liens, mortgages, pledges, charges and encumbrances (collectively, “Liens”) of any kind, (ii)
all the issued and outstanding shares of the Subsidiary’s capital stock have been duly authorized,
validly issued and are fully paid and nonassessable, were issued in compliance with applicable
federal and state securities laws, and were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase securities, and (iii) there are no outstanding
options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into or exchangeable or exercisable for, or any contracts or
commitments to issue or sell, shares of the Subsidiary’s capital stock.




          4.3 Issuance, Sale and Delivery of Shares. When issued and delivered in accordance
with the terms of this Agreement, the Warrants and the Certificate of Designations, as applicable,
the Preferred Shares, Conversion Shares and Warrant Shares will be duly authorized, validly issued,
fully paid and nonassessable, and free and clear of all Liens imposed by the Company. Except for
the Purchasers, no stockholder of the Company has any right (which has not been waived or has not
expired by reason of lapse of time) following notification of the Company’s intent to file the
Registration Statement (as defined in Section 7.1(a)) to require the Company to register
the sale of any shares owned by such stockholder under the Securities Act, in the Registration
Statement. Subject to the Nasdaq Issuance Limitation, the Maximum Share Limitation and the
Stockholder Approval (each defined in Section 5.13 below), no further approval or authority
of the stockholders or the Board of Directors of the Company will be required for the issuance and
sale of the Securities to be sold by the Company as
contemplated herein or for the issuance of the Conversion Shares as contemplated by the
Preferred Shares or the Warrant Shares as contemplated by the Warrants.




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          4.4 Due Execution, Delivery and Performance. The Company has full corporate power and
authority to enter into the Agreement and the Warrants and perform the transactions contemplated
hereby and thereby. The Agreement has been duly authorized, executed and delivered by the Company.
Each of the Warrants has been duly authorized and, as of the Closing, will have been executed and
delivered by the Company. The making and performance of the Agreement and the Warrants by the
Company and the consummation of the transactions contemplated herein and therein will not result in
the creation of any Liens upon any assets of the Company pursuant to the terms or provisions of, or
result in a breach or violation of, or constitute, either by itself or upon notice or the passage
of time or both, a default under any agreement, mortgage, deed of trust, lease, franchise, license,
indenture, permit or other instrument to which the Company or any Subsidiary is a party or by which
the Company or its properties, or any Subsidiary or such Subsidiary’s properties, may be bound or
affected and in each case which would have a Material Adverse Effect or, to the Company’s knowledge
(which, as used herein, in each instance shall mean the actual knowledge of the Company’s Chief
Executive Officer or Chief Financial Officer), any statute or any authorization, judgment, decree,
order, rule or regulation of any court or any regulatory body, administrative agency or other
governmental body applicable to the Company or any Subsidiary or any of their respective
properties. No consent, approval, authorization or other order of any court, regulatory body,
administrative agency or other governmental body is required for the execution and delivery of this
Agreement or the Warrants or the consummation of the transactions contemplated by this Agreement,
except for the filing of a Form D with the SEC, the filing of the Registration Statement (as
defined in Section 7.1(a)) and compliance with the applicable federal and state securities
laws with respect to post-Closing obligations. Upon their execution and delivery, and with respect
to the Agreement, assuming the valid execution thereof by the respective Purchasers, the Agreement
and the Warrants will constitute valid and binding obligations of the Company, enforceable in
accordance with their respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ and
contracting parties’ rights generally and except as enforceability may be subject to general
principles of equity (regardless of whether such enforceability is considered in a proceeding in
equity or at law) and, with respect to the Agreement, except as the indemnification agreements of
the Company in Section 7.3 hereof may be legally unenforceable.




          4.5 No Conflicts. The execution, delivery and performance of the Agreement and the
Warrants by the Company and the consummation by the Company of the transactions contemplated hereby
and thereby do not and will not: (i) conflict with or violate any provision of the Company’s or its
Subsidiaries’ certificates of incorporation, bylaws or other organizational documents, (ii)
conflict with, or constitute a default (or an event that with notice or lapse of time or both would
become a default) under, result in the creation of any Liens upon any of the properties or assets
of the Company or any Subsidiary, or give to others any rights of termination, amendment,
acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement,
credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise) or
other understanding to which the Company or any Subsidiary is a party or by which any property or
asset of the Company or any Subsidiary is bound or affected, or (iii) conflict with or result in a
violation of any law, rule, regulation, order, judgment,



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injunction, decree or other restriction of any court or governmental authority to which the
Company or a Subsidiary is subject (including federal and state securities laws and regulations),
or by which any property or asset of the Company or a Subsidiary is bound or affected; except in
the case of each of clauses (ii) and (iii), such as could not have or reasonably be expected to
result in a Material Adverse Effect.




          4.6 SEC Documents. Each of the Company and Peerless have timely filed all reports,
schedules, forms, statements and other documents required to be filed by it with the SEC since June
30, 2008, pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). As of their respective filing dates, the SEC Documents complied in all
material respects with the requirements of the Exchange Act and the rules and regulations of the
SEC promulgated thereunder applicable to the SEC Documents. As of their respective filing dates,
the SEC Documents, taken as a whole, did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were made, not misleading.




          4.7 Accountants. Grant Thornton LLP, whose report on the consolidated financial
statements (which term as used in this Agreement includes the related notes thereto) of the Company
was included in the 2008 Form 10-K, are independent accountants with respect to the Company as
required by the Exchange Act and the rules and regulations promulgated thereunder.




          4.8 Contracts. All agreements that were required to be filed as exhibits to the SEC
Documents under Item 601 of Regulation S-K (collectively, the “Material Agreements”) to which the
Company or any Subsidiary is a party, or the property or assets of the Company or any Subsidiary
are subject, have been filed as exhibits to one or more of the SEC Documents. All Material
Agreements, other than those agreements that are substantially performed or expired by their terms,
are valid and enforceable against the Company or one of its Subsidiaries, as the case may be, in
accordance with their respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ and
contracting parties’ rights generally and except as enforceability may be subject to general
principles of equity and except as rights to indemnity and contribution may be limited by state or
federal securities laws or public policy underlying such laws. Neither the Company nor any of its
Subsidiaries is in breach of or default under any of the Material Agreements, and to the Company’s
knowledge, no other party to a Material Agreement is in breach of or default under such Material
Agreement, except in each case, for such breaches or defaults as would not reasonably be expected
to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries has received a
notice of termination nor is the Company otherwise aware of any threats to terminate any of the
Material Agreements.




          4.9 No Defaults. Except as to defaults, violations and breaches which individually or
in the aggregate would not reasonably be expected to have a Material Adverse Effect, the Company is
not in violation or default of any provision of its certificate of incorporation, bylaws or other
organizational documents, or in breach of or default with respect to any provision of any
agreement, judgment, decree, order, mortgage, deed of trust, lease, franchise, license, indenture,
permit or other instrument to which it is a party or by which it or



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any of its properties are bound; and no event has occurred that, with notice or lapse of time
or both, would constitute an event of default on the part of the Company as defined in such
documents, except such defaults which individually or in the aggregate would not reasonably be
expected to have a Material Adverse Effect.




          4.10 No Actions. There are no legal or governmental actions, suits or proceedings
pending or, to the Company’s knowledge, threatened to which the Company or any Subsidiary is or may
be a party to or of which property owned or leased by the Company or any Subsidiary is or may be
the subject, or related to environmental or discrimination matters, or instituted by the SEC, The
NASDAQ Stock Market, LLC, any state securities commission or other governmental or regulatory
agency, which actions, suits or proceedings, individually or in the aggregate, might prevent or
might reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect.
Neither the Company nor any Subsidiary, nor, to the Company’s knowledge, any director or officer
thereof, is or has been the subject of any actions, suits or proceedings pending or, to the
Company’s knowledge, threatened involving a claim of violation of or liability under federal or
state securities laws or a claim of breach of fiduciary duty. No labor disturbance by the
employees of the Company or any Subsidiary exists or, to the Company’s knowledge, is imminent which
might reasonably be expected to have a Material Adverse Effect. Neither the Company nor any
Subsidiary is a party to or subject to the provisions of any material injunction, judgment, decree
or order of any court, regulatory body, administrative agency or other governmental body.




          4.11 Regulatory Permits. The Company and the Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state, local or foreign regulatory
authorities necessary to conduct their respective businesses as described in the SEC Documents,
except where the failure to possess such permits could not have or reasonably be expected to result
in a Material Adverse Effect (“Material Permits”), and neither the Company nor any Subsidiary has
received any notice of proceedings relating to the revocation or modification of any Material
Permit.




          4.12 Properties. Each of the Company and its Subsidiaries has good and marketable
title to all the properties and assets reflected as owned by it in the consolidated financial
statements included in the 2008 Form 10-K, in each case free and clear of all Liens of any kind
except (i) those, if any, reflected in such consolidated financial statements, or (ii) those which,
individually or in the aggregate, would not have a Material Adverse Effect. The properties
described in the 2008 Form 10-K as being leased by the Company or any Subsidiary, are held under
valid and binding leases with such exceptions as do not materially interfere with the use made or
proposed to be made of such property by the Company or such subsidiary.




          4.13 No Material Change. Since June 30, 2008, except as disclosed in the SEC
Documents or the Disclosure Materials, (i) neither the Company nor any Subsidiary has incurred any
material liabilities or obligations, indirect, or contingent, or entered into any material verbal
or written agreement or other transaction which is not in the ordinary course of business or which
could reasonably be expected to result in a material reduction in the future earnings of the
Company; (ii) neither the Company nor any Subsidiary has incurred any liabilities not (a) required
to be reflected in the Company’s financial statements pursuant to accounting principles generally
accepted in the United States of America or (b) required to be disclosed in



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filings made with the SEC; (iii) neither the Company nor any Subsidiary has altered its method
of accounting; (iv) neither the Company nor any Subsidiary has sustained any material loss or
interference with its respective businesses or properties from fire, flood, windstorm, accident or
other calamity not covered by insurance; (v) the Company has not paid or declared any dividends or
other distributions with respect to its capital stock and neither the Company nor any Subsidiary is
in default in the payment of principal or interest on any outstanding debt obligations; (vi) there
has not been any change in the capital stock of the Company, other than the sale of the Securities
hereunder and shares or options issued pursuant to employee equity incentive plans or purchase
plans approved by the Company’s Board of Directors, or indebtedness material to the Company (other
than in the ordinary course of business); and (vii) there has not been any material adverse change
in the condition (financial or otherwise), assets, properties, business, prospects or results of
operations of the Company. The Company does not have pending before the SEC any request for
confidential treatment of information.




          4.14 Intellectual Property. The Company and the Subsidiaries have, or have rights to
use, all patents, patent applications, patent rights, inventions, trademarks (both registered and
unregistered), trademark applications, service marks, trade names, trade secrets, inventions,
copyrights, licenses, know-how and other similar intellectual property rights necessary or material
for use in connection with their respective businesses and which the failure to so have could have
a Material Adverse Effect (collectively, the “Intellectual Property Rights”). Neither the Company
nor any Subsidiary has received a notice (written notice or otherwise), and has no knowledge, that
the Intellectual Property Rights used by the Company or any Subsidiary violates or infringes upon
the rights of any others. To the knowledge of the Company, all such Intellectual Property Rights
are enforceable and there is no existing infringement of any of the Intellectual Property Rights of
others. The Company and its Subsidiaries have taken reasonable security measures to protect the
secrecy, confidentiality and value of all of their intellectual properties, except where failure to
do so could not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.




          4.15 Compliance. The Company has not been advised, and has no reason to believe, that
it is not conducting its business in compliance with all applicable laws, rules and regulations of
the jurisdictions in which it is conducting business, including, without limitation, all applicable
local, state and federal environmental laws and regulations; except where failure to be so in
compliance would not have a Material Adverse Effect.




          4.16 Taxes. The Company has filed all necessary federal, state and foreign income and
franchise tax returns and has paid or accrued all taxes shown as due thereon, to the extent such
taxes have become due, except where the failure to so file would not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect. The Company has no knowledge of
a tax deficiency which has been or might be asserted or threatened against it that would reasonably
be expected to have, individually or in the aggregate, a Material Adverse Effect.




          4.17 Transfer Taxes. On the Closing Date, all stock transfer or other taxes (other
than income taxes) which are required to be paid in connection with the sale and transfer of the
Securities to be sold to each Purchaser hereunder will be, or will have been, fully paid or
provided for by the Company and all laws imposing such taxes will be or will have been fully
complied with.




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          4.18 Disclosure Controls and Procedures. Except as disclosed in the SEC Documents,
the Company has established and maintains disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that material information
relating to the Company and its Subsidiaries is made known to the Company’s principal executive
officer and principal financial officer by others within those entities; and such disclosure
controls and procedures are effective in all material respects to perform the functions for which
they were established. The Company is not aware of any change in its internal control over
financial reporting that has occurred during its most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company’s internal control over
financial reporting.




          4.19 Accounting Controls. Except as disclosed in the SEC Documents, the Company
maintains a system of accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management’s general or specific authorization, (ii)
transactions are recorded as necessary to permit preparation of financial statements in conformity
with generally accepted accounting principles as applied in the United States and to maintain
accountability for assets, (iii) access to assets is permitted only in accordance with management’s
general or specific authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with respect to any
differences.




          4.20 Investment Company. The Company is not an “investment company” or an “affiliated
person” of, or “promoter” or “principal underwriter” for an investment company, within the meaning
of the Investment Company Act of 1940, as amended.




          4.21 No General Solicitation; Offering Materials. Neither the Company, nor any of its
affiliates (as such term is defined in the Exchange Act), nor any person acting on its behalf, has
engaged in any form of general solicitation or general advertising (within the meaning of
Regulation D promulgated under the Securities Act) in connection with the offer or sale of the
Securities. The Company has not distributed any offering material in connection with the offering
and sale of the Securities. The Company has not in the past nor will it hereafter take any action
independent of the Placement Agent to sell, offer for sale or solicit offers to buy any securities
of the Company which would bring the offer, issuance or sale of the Securities, as contemplated by
this Agreement, within the provisions of Section 5 of the Securities Act, unless such offer,
issuance or sale was or shall be within the exemptions of Section 4 of the Securities Act.




          4.22 Private Placement. No registration under the Securities Act is required for the
offer and sale of the Securities by the Company to the Purchasers as contemplated hereby. The
issuance and sale of the Securities hereunder does not contravene the rules and regulations of The
NASDAQ Stock Market LLC.




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          4.23 Disclosure. As of the date of this Agreement, all disclosure provided to the
Purchasers regarding the Company, its business and the transactions contemplated hereby, including
the Disclosure Schedules to this Agreement and the Disclosure Materials, furnished by or on behalf
of the Company with respect to the representations and warranties made herein are true and correct
with respect to such representations and warranties and do not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not misleading. The Company
acknowledges and agrees that no Purchaser makes or has made any representations or warranties with
respect to the transactions contemplated hereby other than those specifically set forth in
Section 5 hereof. Notwithstanding the provisions of this Section 4.23, the Company
and its Subsidiaries shall not provide the Purchasers or their agents or counsel with any
information that constitutes or might constitute material, nonpublic information without their
prior written consent other than as may be included in the Disclosure Schedules to this Agreement
and the Disclosure Materials. The Company agrees that it will promptly disclose to the public any
such material, nonpublic information by the earlier of (i) the date on which the Company files its
Annual Report on Form 10-K for the fiscal year ended June 30, 2009 (the “2009 Form 10-K”) with the
SEC, and (ii) the date on which the Company is required to file its 2009 Form 10-K with the SEC
pursuant to the Exchange Act, including any extension permitted pursuant to Rule 12b-25 under the
Exchange Act.




          4.24 Insurance. The Company and its Subsidiaries maintain insurance of the types and
in the amounts as are prudent and customary for their respective businesses, including, but not
limited to, insurance covering all real and personal property owned or leased by the Company
against theft, damage, destruction, acts of vandalism and all other risks customarily insured
against by similarly situated companies, all of which is in full force and effect.




          4.25 Corrupt Practices. Neither the Company nor, to the knowledge of the Company, any
agent or other person acting on behalf of the Company, has violated in any material respect any
provision of the Foreign Corrupt Practices Act of 1977, as amended, including (i) directly or
indirectly, using any corporate funds for unlawful contributions, gifts, entertainment or other
unlawful expenses related to foreign or domestic political activity, (ii) making any unlawful
payment to foreign or domestic government officials or employees or to foreign or domestic
political parties or campaigns from corporate funds, or (iii) failing to disclose fully any
contribution made by the Company or made by any person acting on its behalf and of which the
Company is aware in violation of law.




          4.26 Price of Common Stock. The Company has not, and to its knowledge no one acting
on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in
the stabilization or manipulation of the price of any security of the Company to facilitate the
sale or resale of any of the Securities, (ii) sold, bid for, purchased, or, paid any compensation
for soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay to any person
any compensation for soliciting another to purchase any other securities of the Company, other
than, in the case of clauses (ii) and (iii), compensation paid to the Placement Agent in connection
with the placement of the Securities.




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          4.27 Transactions with Affiliates. Except as disclosed in the SEC Documents, none of
the officers or directors of the Company is presently a party to any transaction with the Company
or any Subsidiary (other than as holders of stock options and/or warrants, and for services as
officers and directors), including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal property to or from, or
otherwise requiring payments to or from any officer or director or, to the Company’s knowledge, any
entity in which any officer or director has a substantial interest or is an officer, director,
trustee or partner.




          4.28 Employee Relations. The Company is not involved in any union labor dispute nor,
to the Company’s knowledge, is any such dispute threatened. The Company is not a party to a
collective bargaining agreement, and the Company believes that its relations with its employees are
good. No executive officer (as defined in Rule 501(f) of the Securities Act) of the Company has
notified the Company that such officer intends to leave the employ of the Company or otherwise
terminate such officer’s employment with the Company. To the Company’s knowledge, no executive
officer of the Company, as a consequence of his or her employment by the Company is, or is now
expected to be, in violation of any material term of any agreement, covenant or contract (including
any employment contract, confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any restrictive covenant with any
previous employer), and the continued employment of each such executive officer by the Company will
not subject the Company to any liability with respect to any of the foregoing matters. The Company
and its Subsidiaries are in compliance with all U.S. federal, state, local and foreign laws and
regulations relating to employment and employment practices, terms and conditions of employment and
wages and hours, except where the failure to be in compliance could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.




          4.29 Application of Takeover Protection. Assuming the accuracy of, and compliance
with, the Purchaser’s representations, warranties and covenants herein, the execution and delivery
of this Agreement and the Warrants and the consummation of the transactions contemplated hereby and
thereby will not impose any restriction on any Purchaser, or create in any party (including any
current stockholder of the Company) any rights, under any share acquisition, business combination,
poison pill (including any distribution under a rights agreement), or other similar anti-takeover
provisions under the Company’s certificate of incorporation, bylaws or other organizational
documents or the laws of its state of incorporation.




          4.30 Public Announcements. Prior to Closing, no party shall make any public
announcement regarding the existence or terms of the Agreement without the prior written consent of
all of the parties, other than as required by law. No later than 9:00 A.M., Eastern Daylight Time,
on the first trading day immediately following the date hereof, the Company shall issue a press
release reasonably acceptable to the Purchasers’ counsel disclosing the material terms of the
transactions contemplated by this Agreement.




          4.31 NASDAQ Compliance and Listing. The Company’s Common Stock is registered pursuant
to Section 12(b) of the Exchange Act and the Company’s outstanding shares of Common Stock are
listed on the NASDAQ Global Market. The Company has filed an application with The NASDAQ Stock
Market LLC to list the Conversion Shares and Warrant



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Shares on the NASDAQ Global Market, and has received notification that the listing has been
approved, subject to notice of issuance of such shares. The SEC has not issued any stop order or
other order suspending the effectiveness of any registration statement filed by the Company or any
Subsidiary under the Exchange Act or the Securities Act.




          4.32 No Integrated or Aggregated Offering. Neither the Company, nor any person acting
on its behalf, has, directly or indirectly, made, or will make, any offers or sales of any security
or solicited any offers to buy any security, under circumstances that would cause the offering of
Securities contemplated by this Agreement to be (i) integrated with prior offerings by the Company
for purposes of the Securities Act or (ii) aggregated with prior offerings by the Company for the
purposes of the rules and regulations of the NASDAQ Global Market.




          4.33 Seniority. As of the Closing, no indebtedness or other equity of the Company is
senior to the Convertible Preferred Stock in right of payment, whether with respect to interest or
upon liquidation or dissolution, or otherwise, other than (a) indebtedness secured by purchase
money security interests (which is senior only as to underlying assets covered thereby),
(b) capital lease obligations (which is senior only as to the property covered thereby) and (c) the
Company’s obligations under the Revolving Credit and Term Loan Agreement, dated as of April 30,
2008, among Peerless Mfg. Co., PMC Acquisition, Inc., the Company, Comerica Bank, as administrative
agent for the lenders, and the other lenders party thereto, as such credit facility may be amended,
restated, modified, renewed, replaced, supplemented or refinanced in whole or in part from time to
time (including successive amendments, restatements, modifications, renewals, replacements,
supplements or refinancings and whether or not with the original administrative agent and lenders
or another administrative agent or agents or other lenders) (the “Credit Facility”);
provided, that any such amendment, restatement, modification, renewal, replacement,
supplement or refinancing shall not increase by more than ten (10) percent the aggregate amount of
the indebtedness and commitments covered thereby as of the date hereof, or impose materially more
restrictive limitations on the payment of dividends on, or the redemption of, the Preferred Stock,
than those set forth therein as of the date hereof; provided, further, that the
modification of financial or other covenants (other than the covenant set forth in Section
8.5 of the Credit Facility on the date hereof with respect to dividends and redemptions) or
defaults, which has the effect of making them more restrictive, shall be deemed (for purposes of
this Section 4.33) not to be an additional restriction on the payment of dividends on, or
the redemption of, the Preferred Stock.




          4.34 Registration. The Company satisfies the eligibility requirements for the use of
a registration statement on Form S-3 to register the Conversion Shares and the Warrant Shares for
resale by the Purchasers under the Securities Act.




          4.35 Shareholder Rights Plan. Assuming the accuracy of, and compliance with, the
Purchaser’s representations, warranties and covenants herein, by reason of the Purchasers’
acquisition of Securities hereunder, no claim will be made or enforced by the Company or, to the
knowledge of the Company, any other entity that any Purchaser is an “Acquiring Person” under any
shareholder rights plan or similar plan or arrangement in effect or hereafter adopted by the
Company, or that any Purchaser could be deemed to trigger the provisions of any such plan or
arrangement, by virtue of receiving Securities under the Agreement or the Warrants or under any
other agreement between the Company and the Purchasers.




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          4.36 Acknowledgement Regarding Purchasers’ Trading Activity. Anything in this
Agreement or elsewhere herein to the contrary notwithstanding (except for Section 5.10
hereof), it is understood and agreed by the Company that none of the Purchasers have been asked to
agree, nor has any Purchaser agreed, to desist from purchasing or selling, long and/or short,
securities of the Company, or “derivative” securities based on securities issued by the Company or
to hold the Securities for any specified term. The Company further understands and acknowledges
that (a) one or more Purchasers may engage in hedging activities at various times during the period
that the Securities are outstanding, including, without limitation, during the periods that the
value of the Conversion Shares and Warrant Shares deliverable with respect to Securities are being
determined and (b) such hedging activities (if any) could reduce the value of the existing
stockholders’ equity interests in the Company at and after the time that the hedging activities are
being conducted. The Company acknowledges that such aforementioned hedging activities do not
constitute a breach of the Agreement or the Warrants.




          4.37 Reimbursement. If any Purchaser becomes involved in any capacity in any action,
suit or proceeding by or against any stockholder of the Company (except as a result of sales,
pledges, margin sales and similar transactions by such Purchaser to or with any current
stockholder), solely as a result of such Purchaser’s acquisition of the Securities under this
Agreement, the Company will reimburse such Purchaser for its reasonable legal and other expenses
(including the cost of any investigation preparation and travel in connection therewith) incurred
in connection therewith, as such expenses are incurred. The reimbursement obligations of the
Company under this paragraph shall be in addition to any liability which the Company may otherwise
have, shall extend upon the same terms and conditions to any affiliates of the Purchasers who are
actually named in such action, proceeding or investigation, and partners, directors, agents,
employees and controlling persons (if any), as the case may be, of the Purchasers and any such
affiliate (each, a “Purchaser Party”), and shall be binding upon and inure to the benefit of any
successors, assigns, heirs and personal representatives of the Company, the Purchasers and any such
affiliate. If any action shall be brought against any Purchaser Party in respect of which
reimbursement may be sought pursuant to this Section 4.37, such Purchaser Party shall
promptly notify the Company in writing, and all Purchaser Parties who are party to such action
shall have the right to reimbursement for reasonable fees and expenses for one counsel selected by
such Purchaser Parties, which counsel shall be reasonably satisfactory to the Company. Any
Purchaser Party shall have the right to employ separate counsel in any such action, but the fees
and expenses of such counsel shall be at the expense of such Purchaser Party except to the extent
that (i) the employment thereof has been specifically authorized by the Company in writing, or (ii)
in such action there is, in the reasonable opinion of such separate counsel, a material conflict on
any material issue between the position of such Purchaser Party and the position of the other
Purchaser Parties who are party to such action. The Company will not be liable to any Purchaser
Party under this Agreement (i) for any settlement by a Purchaser Party effected without the
Company’s prior written consent, which shall not be unreasonably withheld or delayed, or (ii) to
the extent, but only to the extent that a loss, claim, damage or liability is attributable to any
Purchaser Party’s breach of any of the representations, warranties, covenants or agreements made by
the Purchasers in this Agreement or the Warrants or is a result of any violations by such Purchaser
of state or federal securities laws or any conduct by such Purchaser which constitutes fraud, gross
negligence, willful misconduct or malfeasance.




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          4.38 Use of Proceeds. The Company will use the proceeds received from the issuance
and sale of the Securities to repay debt obligations as required under the Credit Facility and the
Senior Subordinated Loan Agreement, dated as of April 30, 2008, by and among the Company, Peerless,
PMC Acquisition, Inc. and Prospect Capital Corporation, subject to any amendments or waivers the
Company may receive prior to the Closing.




          4.39 Equal Treatment of Purchasers. No consideration shall be offered or paid to any
person to amend or consent to a waiver or modification of any provision of any of the Agreement or
the Warrants unless the same consideration is also offered to all of the parties to the Agreement
and the Warrants. For clarification purposes, this provision constitutes a separate right granted
to each Purchaser by the Company and negotiated separately by each Purchaser, and is intended for
the Company to treat the Purchasers as a class and shall not in any way be construed as the
Purchasers acting in concert or as a group with respect to the purchase, disposition or voting of
Securities or otherwise.




          4.40 Preemptive Rights.




          (a) Subject to Section 4.40(g) below, from and after the Closing, each Purchaser shall
have the right to exercise the preemptive rights set forth in this Section 4.40 (such
Purchaser who exercises such right, an “Exercising Party”). If the Company, at any time following
the Closing, intends to offer any of its equity securities, including any security convertible
into, or exercisable or exchangeable for, any equity security of the Company (any such security, a
“New Security”) (other than (i) a registered offering of Common Stock, (ii) pursuant to the
granting or exercise of compensatory stock options or other equity-based awards pursuant to the
Company’s stock incentive plans in the ordinary course of equity compensation awards and any other
compensatory stock options or equity-based awards that may be considered an “inducement grant”
pursuant to NASDAQ Marketplace Rule 5635(c)(4), (iii) issuances of securities to holders of
securities of acquired entities in connection with acquisition transactions, (iv) issuances of
securities to holders of assets in connection with acquisition transactions, (v) issuances of
shares of Common Stock issued upon conversion of, or as a dividend on, any convertible or
exchangeable securities of the Company issued pursuant to the transactions contemplated hereby and
(vi) distributions or issuances pursuant to the Company’s rights plan), the Exercising Party shall
be afforded the opportunity to acquire from the Company a portion of such New Securities (the
“Purchaser New Securities”) for the same price (net of any underwriting discounts or sales
commissions) and on the same terms as such New Securities are sold to others, up to the amount
specified in the following sentence. The amount of Purchaser New Securities that the Exercising
Party shall be entitled to purchase in the aggregate shall be determined by multiplying (x) the
total number of such offered shares of New Securities by (y) a fraction, the numerator of which is
the number of shares of Common Stock held by such Purchaser on a fully-diluted basis (assuming
conversion, exercise or exchange of all “in-the-money” securities or other “in-the-money” interests
convertible into, exercisable for or exchangeable for shares of Common Stock) from either
Conversion Shares or Warrant Shares, as of such date, and the denominator of which is the number of
shares of Common Stock then outstanding on a fully-diluted basis (assuming conversion, exercise or
exchange of all “in-the-money” securities or other “in-the-money” interests convertible into,
exercisable for or exchangeable for shares of Common Stock), as of such date (such fraction, a
“Preemptive Rights Fraction”).




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          (b) In the event the Company proposes to offer New Securities, it shall deliver written notice
thereof to each Purchaser (the “Offer Notice”), which Offer Notice shall also describe the price,
anticipated amount of New Securities to be sold, the anticipated timing of such sale and the other
material terms upon which the Company proposes to offer same (including, in the case of a
registered public offering, to the extent possible, a copy of the prospectus included in the
registration statement filed with respect to such offering, and, in the case of a private offering,
any term sheet and other offering materials used or prepared to be used by the Company in
connection with such offering) no later than five (5) business days, as the case may be, after the
initial filing of a registration statement with the SEC with respect to an underwritten public
offering, after the commencement of marketing with respect to a Rule 144A offering or after the
Company determines to pursue any other offering. The Exercising Party shall have ten (10) business
days from the date of receipt of such notice to notify the Company in writing that it intends to
exercise such preemptive rights and as to the amount of New Securities the Exercising Party desires
to purchase, up to the maximum amount of Purchaser New Securities calculated pursuant to
Section 4.40(a) above (such notice, the “Exercise Notice”). The failure of the Exercising
Party to respond within such ten (10) business day period shall be deemed a waiver of the
Exercising Party’s rights under this Section 4.40 only with respect to the offering
described in the applicable Offer Notice.




          (c) If the Exercising Party exercises its preemptive rights provided in this Section
4.40, the closing of the purchase of the Purchaser New Securities with respect to which such
right has been exercised shall take place simultaneously with the closing of the sale of the New
Securities to the other purchasers thereof (or, if such purchasers close on different dates,
simultaneously with the earliest of such closing date); provided, that the closing may be
extended for a maximum of ninety (90) days in order to comply with applicable laws, rules and
regulations (including receipt of any applicable regulatory or stockholder approvals). Each of the
Company and the Exercising Party agrees to use its commercially reasonable efforts to secure any
regulatory or stockholder approvals or other consents applicable to it, and to comply with any
laws, rules and regulations as necessary in connection with the offer, sale and purchase of such
Purchaser New Securities.




          (d) In the event the Exercising Party fails to exercise its preemptive rights as provided in
this Section 4.40 within ten (10) business days or, if so exercised, the Exercising Party
is unable to consummate such purchase within the time period specified in Section 4.40(c)
above because of the failure to obtain any required regulatory or stockholder consent or approval,
the Company shall thereafter be entitled, during the period of ninety (90) days following the
conclusion of the applicable period, to enter into an agreement (pursuant to which the sale of the
New Securities covered thereby shall be consummated, if at all, within sixty (60) days from the
date of such agreement) to sell the New Securities not elected to be purchased pursuant to this
Section 4.40 or which the Exercising Party is unable to purchase because of such failure to
obtain any such consent or approval (such New Securities, “Remaining New Securities”), at a price
and upon terms no more favorable to the purchasers of such Remaining New Securities than were
specified in the Company’s original Offer Notice therefor. In the event the Company has not sold
the Remaining New Securities or entered into an agreement to sell the Remaining New Securities
within the ninety (90)-day period (or sold and issued Remaining New Securities in accordance with
the foregoing within sixty (60) days from the date of such agreement), the Company shall not
thereafter offer, issue or sell such Remaining New
Securities without first offering such securities once again in the manner provided in
Section 4.40(a) and (b) above.




15









 








          (e) The Company and each applicable Purchaser shall cooperate in good faith to facilitate the
exercise of the applicable Exercising Party’s preemptive rights hereunder, including securing any
required approvals or consents.




          (f) To the extent the procedure described in Section 4.40(a) through (e) does
not result in the purchase of all Remaining New Securities, if any, such procedure shall be
repeated for the benefit of any Exercising Party who has successfully consummated the purchase of
its Purchaser New Securities as offered under the original Offer Notice until there are no
Remaining New Securities.




          (g) To the extent that the terms of any offering of New Securities are revised, the Company
shall again comply with the procedures of this Section 4.40, including delivery of a New
Offering Notice; provided, however, the Exercising Party shall only have three (3)
business days from the date of receipt of such notice to notify the Company pursuant to
Section 4.40(b) if such revisions are not material.




          (h) The preemptive rights under this Section 4.40 shall be terminated and not
exercisable if the liquidation preference of the Preferred Shares outstanding is less than
$5,000,000.




          4.41 Furnishing of Information. As long as any Purchaser owns Securities, the Company
covenants to timely file (or obtain extensions in respect thereof and file within the applicable
grace period) all reports required to be filed by the Company after the date hereof pursuant to the
Exchange Act. As long as any Purchaser owns Securities, if the Company is not required to file
reports pursuant to the Exchange Act, it will prepare and furnish to the Purchasers and make
publicly available in accordance with Rule 144(c) such information as is required for the
Purchasers to sell the Securities under Rule 144.




          4.42 Stockholders Meeting. The Company shall, in accordance with the laws of the
State of Delaware and the Company’s certificate of incorporation and bylaws, take all action
necessary to duly call, give notice of, convene and hold a meeting of stockholders for the purpose
of obtaining the Stockholder Approval (as defined in Section 5.13) as promptly as
reasonably practicable, and in no event later than December 31, 2009, including filing a proxy
statement no later than November 15, 2009, which includes the unanimous recommendation of the
Company’s Board of Directors for the Company’s stockholders to vote for the Stockholder Approval,
subject to the fiduciary obligations under applicable law of the Company’s Board of Directors (as
determined in good faith by the Company’s Board of Directors after consultation with the Company’s
outside counsel).




          4.43 Restrictions on Dividends. During the period for which any of the Preferred
Shares are outstanding, the Company shall not enter into any agreement, other than the Credit
Facility, restricting its ability to perform its obligations under this Agreement, the Certificate
of Designations and the Warrants, including, without limitation, the payment of
dividends on, the making of other distributions with respect to, and the redemption of, the
Preferred Shares.




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          SECTION 5. Representations, Warranties and Covenants of the Purchaser. Each Purchaser
hereby, for itself and no other Purchaser, represents and warrants to, and covenants with, the
Company, effective as of the Closing Date, as follows:




          5.1 Investment Representations and Covenants. Such Purchaser represents and warrants
to, and covenants with, the Company that: (i) such Purchaser is knowledgeable, sophisticated and
experienced in making, and is qualified to make, decisions with respect to investments in
securities representing an investment decision like that involved in the purchase of the
securities, including investments in securities issued by the Company and has requested, received,
reviewed and considered all information it deems relevant in making an informed decision to
purchase the Securities; (ii) such Purchaser is acquiring the number of Securities set forth in
Section 2 above in the ordinary course of its business and for its own account for
investment (as defined for purposes of the Hart-Scott-Rodino Antitrust Improvement Act of 1976 and
the regulations thereunder) only and with no present intention of distributing any of such
Securities or any arrangement or understanding with any other persons regarding the distribution of
such Securities within the meaning of Section 2(11) of the Securities Act; (iii) such Purchaser
will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit
any offers to buy, purchase or otherwise acquire or take a pledge of) any of the Securities except
in compliance with the Securities Act and the rules and regulations promulgated thereunder; (iv)
such Purchaser has completed or caused to be completed the Stock Certificate Questionnaire attached
hereto as Exhibit D and the Registration Statement Questionnaire attached hereto as
Exhibit E, for use in preparation of the Registration Statement and the Certificate
attached hereto as Exhibit F-1 or F-2, as applicable, and the answers thereto are
true and correct as of the date hereof and will be true and correct as of the effective date of the
Registration Statement; (v) the Purchaser will notify the Company immediately of any change in any
of such information until such time as the Purchaser has sold all of its Conversion Shares and
Warrant Shares or until the Company is no longer required to keep the Registration Statement
effective; (vi) the Purchaser has, in connection with its decision to purchase the number of
Securities set forth in Section 2 above, relied solely upon the SEC Documents, Disclosure
Schedules, Disclosure Materials and the representations and warranties of the Company contained
herein; (vii) such Purchaser understands that except as set forth in Section 7, neither the
Company nor any other person is under any obligation to register the resale of the Securities,
Conversion Shares or Warrant Shares under the Securities Act or any state securities laws or to
comply with the terms and conditions of any exemption thereunder and that the Registration
Statement contemplated by Section 7 will only register for resale the Conversion Shares and
the Warrant Shares and not the Preferred Shares and Warrants themselves; and (viii) such Purchaser
is an “accredited investor” within the meaning of Rule 501 of Regulation D promulgated under the
Securities Act.




          5.2 No General Solicitation. Such Purchaser is not purchasing the Securities as a
result of any “general solicitation” or “general advertising,” as such terms are used in Regulation
D under the Securities Act, including any advertisement, article, notice or other communication
regarding the Securities published in any newspaper, magazine or similar media or broadcast over
the television or radio or presented at any seminar or any other general solicitation or general
advertisement. Prior to the time that such Purchaser was first contacted



17









 






with respect to the offer of Securities contemplated herein by the Company or the Placement
Agent, such Purchaser had a pre-existing and substantial relationship with the Company or the
Placement Agent.




          5.3 Compliance with Resale Requirements. Such Purchaser agrees that if it decides to
offer, sell or otherwise transfer any of the Securities, such Securities may be offered, sold or
otherwise transferred only pursuant to an effective registration statement under the Securities Act
or pursuant to an applicable exemption from the registration requirements under the Securities Act.
In connection with any sale pursuant to an effective registration statement, the Purchaser hereby
covenants with the Company not to make any sale of the Conversion Shares and Warrant Shares without
satisfying the prospectus delivery requirement under the Securities Act, if any, and such Purchaser
acknowledges and agrees that such Conversion Shares or Warrant Shares are not transferable by such
Purchaser on the books of the Company unless the certificate submitted to the transfer agent
evidencing the Conversion Shares or Warrant Shares is accompanied by a separate officer’s
certificate: (i) in the form of Exhibit I hereto, (ii) executed by an officer of, or other
authorized person designated by, such Purchaser, and (iii) to the effect that (A) the Conversion
Shares or Warrant Shares, as the case may be, have been sold in accordance with the Registration
Statement, the Securities Act and the rules and regulations promulgated thereunder and any
applicable state securities or blue sky laws and (B) the requirement of delivering a current
prospectus has been satisfied. Without prejudice to the Company’s obligations under
Section 7.7, such Purchaser acknowledges that there may occasionally be times when the
Company must suspend the use of the prospectus forming a part of the Registration Statement until
such time as an amendment or supplement to the Registration Statement or such prospectus has been
filed by the Company and declared effective by the SEC, or until such time as the Company has filed
an appropriate report with the SEC pursuant to the Exchange Act. Such Purchaser hereby covenants
that it will not sell any Conversion Shares or Warrant Shares pursuant to the prospectus forming a
part of the Registration Statement during the period commencing at the time at which the Company
gives such Purchaser written notice of the suspension of the use of said prospectus and ending at
the time the Company gives such Purchaser written notice that the Purchaser may thereafter effect
sales pursuant to said prospectus. Such Purchaser further covenants to notify the Company promptly
of the sale of all of its Conversion Shares and Warrant Shares, if any.




          5.4 Filings. If required by applicable securities legislation, regulatory policy or
order, or if required or requested by any securities commission, stock exchange or other regulatory
authority, at the request of and at the sole expense of the Company, such Purchaser will use
commercially reasonable efforts to execute, deliver and file and otherwise assist the Company in
filing reports, questionnaires, undertakings and other documents with respect to the issue of the
Securities.




          5.5 Organization; Authority. Such Purchaser is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its organization, to the extent
such concepts are applicable under the laws of such jurisdiction, with the requisite power and
authority to enter into and to consummate the transactions contemplated by this Agreement and
otherwise to carry out its obligations hereunder.




18









 








          5.6 Authorization; Validity of Agreement. Such Purchaser further represents and
warrants to, and covenants with, the Company that (i) such Purchaser has full right, power,
authority and capacity to enter into this Agreement and to consummate the transactions contemplated
hereby and has taken all necessary action to authorize the execution, delivery and performance of
this Agreement, and (ii) upon the execution and delivery of this Agreement, this Agreement shall
constitute a valid and binding obligation of such Purchaser enforceable in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors’ and contracting parties’ rights
generally and except as enforceability may be subject to general principles of equity (regardless
of whether such enforceability is considered in a proceeding in equity or at law).




          5.7 No Conflicts. The execution, delivery and performance by such Purchaser of this
Agreement and the consummation by such Purchaser of the transactions contemplated hereby will not
(i) result in a violation of the organizational documents of such Purchaser 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 material agreement, indenture or instrument to which such Purchaser is a
party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree
(including federal and state securities laws) applicable to such Purchaser, except in the case of
clauses (ii) and (iii) above, for such conflicts, defaults, rights or violations which would not,
individually or in the aggregate, reasonably be expected to have a material adverse effect on the
ability of such Purchaser to perform its obligations hereunder.




          5.8 Requirements of Foreign Jurisdictions. Such Purchaser acknowledges and agrees
that no action has been or will be taken in any jurisdiction outside the United States by the
Company or the Placement Agent that would permit an offering of the Securities, or possession or
distribution of offering materials in connection with the issue of the Securities, in any
jurisdiction outside the United States where action for that purpose is required. Each Purchaser
outside the United States will comply with all applicable laws and regulations in each foreign
jurisdiction in which it purchases, offers, sells or delivers Securities or has in its possession
or distributes any offering material, in all cases at its own expense. The Placement Agent is not
authorized to make any representation or use any information in connection with the issue,
placement, purchase and sale of the Securities.




          5.9 No Legal, Tax or Investment Advice. Such Purchaser understands that nothing in
this Agreement or any other materials presented to such Purchaser in connection with the purchase
and sale of the Securities constitutes legal, tax or investment advice. Such Purchaser has
consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed
necessary or appropriate in connection with its purchase of Securities.




          5.10 Trading Restrictions and Confidentiality.




          (a) Other than the transaction contemplated hereunder, such Purchaser has not directly or
indirectly, nor has anyone acting on behalf of or pursuant to any understanding with such
Purchaser, executed any disposition, including short sales as defined in Rule 200 of Regulation SHO
under the Exchange Act (“Short Sales”) (but not including the location and/or



19









 






reservation of borrowable shares of Common Stock), in the securities of the Company during the
period commencing from the time that such Purchaser first received a term sheet from the Company or
any other entity setting forth the material terms of the transactions contemplated hereunder until
the date hereof. Such Purchaser covenants that neither it nor any person acting on its behalf or
pursuant to any understanding with such Purchaser will engage, directly or indirectly, in any
transactions in the securities of the Company (including Short Sales) prior to the time the Company
is required to file the 2009 Form 10-K, including any extension permitted by Rule 12b-25 of the
Exchange Act. Notwithstanding the foregoing, in the case of a Purchaser that is a multi-managed
investment vehicle whereby separate portfolio managers manage separate portions of such Purchaser’s
assets and the portfolio managers have no direct knowledge of the investment decisions made by the
portfolio managers managing other portions of such Purchaser’s assets, the representation and
covenant set forth above shall only apply with respect to the portion of assets managed by the
portfolio manager that made the investment decision to purchase the Securities covered by this
Agreement.




          (b) Beginning on the 120th day prior to the fifth anniversary of the date hereof, such
Purchaser will not, directly or indirectly, nor will anyone acting on behalf of or pursuant to any
understanding with such Purchaser, engage in any Short Sales in the securities of the Company with
the intent of depressing the price of the Common Stock. Notwithstanding the foregoing, in the case
of a Purchaser that is a multi-managed investment vehicle whereby separate portfolio managers
manage separate portions of such Purchaser’s assets and the portfolio managers have no direct
knowledge of the investment decisions made by the portfolio managers managing other portions of
such Purchaser’s assets, the representation and covenant set forth above shall only apply with
respect to the portion of assets managed by the portfolio manager that made the investment decision
to purchase the Securities covered by this Agreement.




          (c) Notwithstanding the provisions of this Section 5.10, no Purchaser who shares
dispositive power with respect to shares of Common Stock prior to the date hereof with BAHI
(defined below) shall be deemed to have engaged in any transaction in the securities of the Company
(including Short Sales) in the event another person that is not a Purchaser and shares dispositive
power over shares of Common Stock with BAHI engages in any transaction in the securities of the
Company (including Short Sales); provided, that neither BAHI nor any other Purchaser shall
have informed such person, directly or indirectly, of any Purchaser’s or BAHI’s investment decision
with respect to the Securities or the information included in the Disclosure Materials.




          5.11 Beneficial Ownership; Group Status.




          (a) By reason of the acquisition of the Securities hereunder (assuming the acquisition of the
Warrant Shares on the date hereof), such Purchaser would not be required to make any filing in
accordance with Section 13(d) of the Exchange Act as a group with any other Purchaser or other
beneficial owner of Common Stock resulting in any such group having beneficial ownership of more
than 9.9% of the Common Stock, other than any group including Brown Advisory Holdings Incorporated
or its affiliates (“BAHI”) with beneficial ownership equal to or less than 49.9% of the Common
Stock.




20









 








          (b) Such Purchaser will not share voting power or dispositive power with respect to the
Securities, Conversion Shares or Warrant Shares with any person if such shared voting or
dispositive power would result in any such person beneficially owning more than 9.9% of the Common
Stock; provided, however, such Purchaser may share dispositive power with respect
to the Securities, Conversion Shares or Warrant Shares with BAHI.




          5.12 Restrictive Legend. The Purchaser understands that, until such time as the
Registration Statement has been declared effective (with respect to the Conversion Shares and
Warrant Shares) or the Securities, Conversion Shares or Warrant Shares may be sold pursuant to Rule
144 under the Securities Act without any restriction as to the number of securities as of a
particular date that can then be immediately sold, the certificates or other instruments
representing the Securities, Conversion Shares and Warrant Shares, and all certificates or other
instruments issued in exchange therefore or in substitution thereof, shall bear a restrictive
legend in substantially the following form (and a stop-transfer order may be placed against
transfer of the certificates for the Conversion Shares and Warrant Shares):




“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR
ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
UNDER SAID ACT, OR AN OPINION OF COUNSEL OR OTHER EVIDENCE, IN FORM, SUBSTANCE AND
SCOPE REASONABLY ACCEPTABLE TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION
IS NOT REQUIRED UNDER SAID ACT.”




          5.13 Acknowledgment of Issuance Limitations. Such Purchaser acknowledges:




          (a) no holder of Preferred Shares will be entitled to receive Conversion Shares or other
shares of Common Stock issuable upon redemption, dividend payments, or as otherwise provided in the
Certificate of Designations, to the extent (but only to the extent) that such receipt would cause
the aggregate number of Conversion Shares and other shares of Common Stock issued upon redemption,
dividend payments, or as otherwise provided in the Certificate of Designations, to all Purchasers,
to represent more than 19.99% of the number of shares of Common Stock outstanding on the Closing
Date (the “Nasdaq Issuance Limitation”), unless the Company obtains the requisite stockholder
approval under NASDAQ Marketplace Rule 5635(d) (the “Nasdaq Stockholder Approval”), in which case,
the Nasdaq Issuance Limitation would no longer apply to the Purchasers;




          (b) no holder of Preferred Shares will be entitled to receive shares of Common Stock issuable
upon redemption, dividend payments, or otherwise, pursuant to the Certificate of Designations to
the extent (but only to the extent) that such receipt would cause such holder to become, directly
or indirectly, a “beneficial owner” (within the meaning of Section 13(d) of the Exchange Act and
the rules and regulations promulgated thereunder) of more than 9.9% of the shares of Common Stock
outstanding at such time, other than any group including BAHI; and




21









 








          (c) no holder of Securities will be entitled to receive Conversion Shares or other shares of
Common Stock issuable upon redemption of or dividend payments on the Preferred Stock, to the extent
(but only to the extent) that such receipt would cause the aggregate number of shares of Common
Stock so issued to all Purchasers, to represent more than 8,879,374 shares of Common Stock, (the
“Maximum Share Limitation”) unless the Company obtains stockholder approval of an amendment to the
Company’s certificate of incorporation increasing the number of authorized shares thereunder by
25,000,000 shares (the “Amendment Stockholder Approval”, and together with the Nasdaq Stockholder
Approval, the “Stockholder Approval”).




          SECTION 6. Termination of Representations, Warranties and Agreements. All covenants,
agreements, representations and warranties made by the Company and the Purchasers herein shall
survive the Closing and the delivery, exercise and conversion of the Securities, as applicable, in
accordance with their terms and for the applicable statute of limitations.




          SECTION 7. Registration of Shares; Compliance with the Securities Act.




          7.1 Registration Procedures and Expenses. The Company shall:




          (a) as soon as reasonably practicable following the Closing Date, but in no event by the later
of thirty (30) days following the Closing Date and ten (10) calendar days after the Company files
the 2009 Form 10-K with the SEC (the “Filing Date”), prepare and file with the SEC a Registration
Statement on Form S-3 (or any successor form to Form S-3) (the “S-3 Registration Statement”)
relating to the resale of all of the Conversion Shares and Warrant Shares by the Purchasers,
together with any shares of capital stock issued or issuable, from time to time, upon any
reclassification, share combination, share subdivision, stock split, share dividend or similar
transaction or event or otherwise as a distribution on, in exchange for or with respect to any of
the foregoing, in each case held at the relevant time by a Purchaser (the “Registrable
Securities”); provided, however, that in the event that the SEC specifically
prohibits the S-3 Registration Statement from including all Registrable Securities of each
Purchaser (“Commission Guidance”) (provided, that the Company shall advocate with the SEC
for the registration of all or the maximum number of the Registrable Securities permitted by
Commission Guidance), then the Company will file such additional Registration Statements (the
“Subsequent Registration Statements,” together with the Initial Registration Statement, the
“Registration Statements”) at the earliest practicable date on which the Company is permitted by
Commission Guidance to file such additional Registration Statements related to the Registrable
Securities. If any Commission Guidance specifically limits the number of Registrable Securities to
be registered on a particular Registration Statement, the number of Registrable Securities to be
registered on such Registration Statement will first be reduced by the Registrable Securities
represented by Warrant Shares on a pro rata basis based on the total number of unregistered Warrant
Shares held by such Purchasers on a fully diluted basis, and second by the Registrable Securities
represented by Conversion Shares on a pro rata basis based on the total number of unregistered
Preferred Shares held by such Purchasers. If the context so requires, Conversion Shares and
Warrant Shares of any Purchaser will not be considered Registrable Securities for the purposes of a
certain determination of Registrable Securities hereunder if, at that time of such determination,
they can be sold pursuant to Rule 144 without volume or manner of sales limitations or have been
sold under an effective Registration Statement. In the event that Form S-3 (or any successor form
to Form S-3) becomes unavailable to maintain registration of the




22









 







resale of the Conversion Shares and Warrant Shares at any time prior to the expiration of the
Effectiveness Period pursuant to Section 7.1(c), the Company shall prepare and file with
the SEC, as soon as reasonably practicable following the Closing but in no event by the Filing
Date, a registration statement on Form S-1 (or any successor to Form S 1), covering the resale of
the Conversion Shares and Warrant Shares (the “S-1 Registration Statement” and collectively with
the S-3 Registration Statement, the “Registration Statement”);




          (b) use its reasonable best efforts, subject to receipt of necessary information from the
Purchasers, to cause the SEC to declare the Registration Statement effective within ninety (90)
calendar days of the Closing Date (the “Required Effective Date”); provided,
however, that if the Registration Statement receives SEC review, then the Required
Effective Date will be the 120th calendar day after the Closing Date. If the Company receives
notification from the SEC that the Registration Statement will receive no action or review from the
SEC, then the Company will use its reasonable best efforts to cause the Registration Statement to
become effective within five (5) business days after such notification;




          (c) prepare and file with the SEC (and promptly notify the Purchasers of such filing) such
amendments, including post-effective amendments, and supplements to the Registration Statement and
the prospectus used in connection therewith as may be necessary to keep the Registration Statement
continuously effective until the earlier of (i) the first anniversary of the date hereof, (ii) the
date on which all Registrable Securities have been resold under the Registration Statement or (iii)
the date on which the Registrable Securities may be resold by the Purchasers without registration
by reason of Rule 144 under the Securities Act or any other rule of similar effect without volume
or manner of sale limitations (the period ending on the earliest such date, the “Effectiveness
Period”);




          (d) furnish to the Purchasers with respect to the Conversion Shares and Warrant Shares
registered under the Registration Statement (and to each underwriter, if any, of such Conversion
Shares and Warrant Shares) such reasonable number of copies of prospectuses and such other
documents as the Purchasers may reasonably request, in order to facilitate the public sale or other
disposition of all or any of the Conversion Shares and Warrant Shares by the Purchaser;




          (e) comply with all applicable rules and regulations of the SEC under the Securities Act and
the Exchange Act, including, without limitation, Rule 172 under the Securities Act, file any final
Prospectus (as defined in Section 7.3), including any supplement or amendment thereof, with
the SEC pursuant to Rule 424 under the Securities Act, promptly inform each Purchaser in writing
if, at any time during the Effectiveness Period, the Company does not satisfy the conditions
specified in Rule 172 and, as a result thereof, the Purchasers are required to deliver a Prospectus
in connection with any disposition of the Conversion Shares or Warrant Shares and take such other
actions as may be reasonably necessary to facilitate the registration of the Conversion Shares and
Warrant Shares hereunder;




23









 








          (f) advise each Purchaser promptly:




(i) of any request by the SEC for amendments to the Registration Statement
or amendments to the prospectus or for additional information relating
thereto;




(ii) of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement under the Securities Act or of
the suspension by any state securities commission of the qualification of
the Conversion Shares or Warrant Shares for offering or sale in any
jurisdiction, or the initiation of any proceeding for any preceding of the
purposes; and




(iii) of the existence of any fact and the happening of any event that makes
any statement of a material fact made in the Registration Statement, the
prospectus and amendment or supplement thereto, or any document incorporated
by reference therein, untrue, or that requires the making of any additions
to or changes in the Registration Statement or the prospectus in order to
make the statements therein, in the light of the circumstances in which they
were made, not misleading; and




          (g) bear all expenses in connection with the procedures in paragraphs (a) through (f) of this
Section 7.1 and the registration of the Conversion Shares and Warrant Shares pursuant to
the Registration Statement, other than fees and expenses, if any, of counsel or other advisers to
the Purchasers or underwriting discounts, brokerage fees and commissions incurred by the
Purchasers, if any.




          (h) use its best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of any
order suspending the effectiveness of a Registration Statement, at the earliest practicable moment.




          (i) if FINRA Rule 5190 requires any broker-dealer to make a filing prior to executing a sale
by a Purchaser, the Company shall (i) make such filing with the Financial Industry Regulatory
Authority, Inc. Market Regulation Department pursuant to FINRA Rule 5190(c), (ii) respond within
five Trading Days to any comments received from FINRA in connection therewith, and (iii) pay the
filing fee required in connection therewith.




          (j) prior to any resale of Registrable Securities by a Purchaser, use its commercially
reasonable efforts to register or qualify or cooperate with such Purchaser in connection with the
registration or qualification (or exemption from the registration or qualification) of such
Registrable Securities for the resale by such Purchaser under the securities or blue sky laws of
such jurisdictions within the United States as any Purchaser reasonably requests in writing, to
keep each registration or qualification (or exemption therefrom) effective during the Effectiveness
Period and to do any and all other acts or things reasonably necessary to enable the disposition in
such jurisdictions of the Registrable Securities covered by each Registration Statement;
provided, that the Company shall not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified, subject the Company to any material tax in any such
jurisdiction where it is not then so subject or file a general consent to service of process in any
such jurisdiction.




24









 








          7.2 Transfer of Conversion Shares and Warrant Shares After Registration. The
Purchasers agree not to effect any disposition of the Conversion Shares or Warrant Shares or the
right to purchase the Conversion Shares or Warrant Shares that would constitute a sale within the
meaning of the Securities Act, except as contemplated in the Registration Statement referred to in
Section 7.1 or as otherwise permitted by the Securities Act or applicable law, and that the
Purchasers will promptly notify the Company of any changes in the information set forth in the
Registration Statement regarding such Purchaser or its plan of distribution, as described on the
Registration Statement Questionnaire attached hereto as Exhibit E.




          7.3 Indemnification. For the purpose of this Section 7.3:




(i) the term “Purchaser” shall include the Purchaser and any affiliate of
such Purchaser; and




(ii) the term “Registration Statement” shall include any final prospectus,
exhibit, supplement or amendment included in or relating to the Registration
Statement referred to in Section 7.1.




          (a) The Company agrees to indemnify and hold harmless each of the Purchasers and each person,
if any, who controls any Purchaser within the meaning of the Securities Act, against any losses,
claims, damages, liabilities or expenses, joint or several, to which such Purchasers or such
controlling persons may become subject, under the Securities Act, the Exchange Act, or any other
federal or state statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written consent of the
Company), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect
thereof as contemplated below) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement, including the
prospectus, financial statements and schedules, and all other documents filed as a part thereof, as
amended at the time of effectiveness of the Registration Statement, including any information
deemed to be a part thereof as of the time of effectiveness pursuant to paragraph (b) of Rule 430A,
Rule 434 or other rules and regulations promulgated under the Securities Act, or the prospectus, in
the form first filed with the SEC pursuant to Rule 424(b) under the Securities Act, or filed as
part of the Registration Statement at the time of effectiveness if no Rule 424(b) filing is
required (the “Prospectus”), or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state in any of them a material fact required to be stated
therein or necessary to make the statements in any of them, in the light of the circumstances under
which they were made, not misleading, or arise out of or are based in whole or in part on any
inaccuracy in the representations and warranties of the Company contained in this Agreement, or any
failure of the Company to perform its obligations hereunder or under law, and will reimburse each
of the Purchasers and each such Purchaser’s controlling persons for any legal and other expenses as
such expenses are reasonably incurred by such Purchasers or such controlling persons in connection
with investigating, defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that the Company will not be
liable in any such case to a Purchaser or such Purchaser’s controlling persons to the extent that
any such loss, claim, damage, liability or expense arises solely out of or is based upon (i) an
untrue statement or alleged untrue statement or omission or alleged omission made in the
Registration Statement, the Prospectus or any amendment or



25









 






supplement thereto in reliance upon and in conformity with written information furnished to
the Company by or on behalf of such Purchaser expressly for use therein, (ii) the failure of such
Purchaser to comply with the covenants and agreements contained in Sections 5.3 or
7.2 hereof respecting sale of the Conversion Shares and Warrant Shares (unless such failure
shall be a result of the Company breaching any of its obligations to such Purchaser hereunder),
(iii) the inaccuracy of any representations made by such Purchaser herein or (iv) any statement or
omission in any Prospectus that is corrected in any subsequent Prospectus that was delivered to
such Purchaser prior to the pertinent sale or sales by such Purchaser.




          (b) Each Purchaser will severally, and not jointly, indemnify and hold harmless the Company,
each of its directors, each of its officers who signed the Registration Statement and each person,
if any, who controls the Company within the meaning of the Securities Act, against any losses,
claims, damages, liabilities or expenses to which the Company, each of its directors, each of its
officers who signed the Registration Statement or controlling person may become subject, under the
Securities Act, the Exchange Act, or any other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if such settlement is effected
with the written consent of such Purchaser) insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof as contemplated below) arise out of or are based upon (i)
any failure to comply with the covenants and agreements contained in Sections 5.3 or
7.2 hereof respecting the sale of the Conversion Shares and Warrant Shares (unless such
failure shall be a result of the Company breaching any of its obligations to such Purchaser
hereunder), (ii) the inaccuracy of any representation made by such Purchaser herein or (iii) any
untrue or alleged untrue statement of any material fact contained in the Registration Statement,
the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances in which they were
made, not misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made in the Registration
Statement, the Prospectus, or any amendment or supplement thereto, in reliance upon and in
conformity with written information furnished to the Company by or on behalf of such Purchaser
expressly for use therein, and will reimburse the Company, each of its directors, each of its
officers who signed the Registration Statement or controlling person for any legal and other
expense reasonably incurred by the Company, each of its directors, each of its officers who signed
the Registration Statement or controlling person in connection with investigating, defending,
settling, compromising or paying any such loss, claim, damage, liability, expense or action;
provided, however, that no Purchaser shall be liable for any amount in excess of
the net proceeds (the “Net Proceeds”) received by such Purchaser with respect to such Purchaser’s
sale of the Conversion Shares and Warrant Shares.




          (c) Promptly after receipt by an indemnified party under this Section 7.3 of notice of
the threat or commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 7.3 promptly notify
the indemnifying party in writing thereof; but the omission to so notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified party for contribution
or otherwise than under the indemnity agreement contained in this Section 7.3 or to the
extent it is not materially prejudiced as a result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or intends to seek



26









 






indemnity from an indemnifying party, the indemnifying party will be entitled to participate
in, and, to the extent that it may wish, jointly with all other indemnifying parties similarly
notified, to assume the defense thereof with counsel reasonably satisfactory to such indemnified
party; provided, however, that if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be a conflict between the positions of the indemnifying party and the
indemnified party in conducting the defense of any such action or that there may be legal defenses
available to it and/or other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise participate in the defense
of such action on behalf of such indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of its election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party will not be liable
to such indemnified party under this Section 7.3 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense thereof unless (i)
the indemnified party shall have employed such counsel in connection with the assumption of legal
defenses in accordance with the proviso to the preceding sentence (it being understood, however,
that the indemnifying party shall not be liable for the expenses of more than one separate counsel
(plus one local counsel in each applicable jurisdiction), approved by such indemnifying party in
the case of paragraph (a), representing the indemnified parties who are parties to such action) or
(ii) the indemnified party shall not have employed counsel reasonably satisfactory to the
indemnified party to represent the indemnified party within a reasonable time after notice of
commencement of action, in each of which cases the reasonable fees and expenses of counsel shall be
at the expense of the indemnifying party.




          (d) If the indemnification provided for in this Section 7.3 is required by its terms
but is for any reason held to be unavailable to or otherwise insufficient to hold harmless an
indemnified party under paragraphs (a), (b) or (c) of this Section 7.3 in respect to any
losses, claims, damages, liabilities or expenses referred to herein, then each applicable
indemnifying party shall contribute to the amount paid or payable by such indemnified party as a
result of any losses, claims, damages, liabilities or expenses referred to herein (i) in such
proportion as is appropriate to reflect the relative fault of the Company and any such Purchaser in
connection with the statements or omissions or inaccuracies in the representations and warranties
in this Agreement which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative fault of the Company and each
Purchaser shall be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state a material fact or
the inaccurate or the alleged inaccurate representation and/or warranty relates to information
supplied by the Company or by each such Purchaser and the parties’ relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or omission. The amount
paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses
referred to above shall be deemed to include, subject to the limitations set forth in paragraph (c)
of this Section 7.3, any legal or other fees or expenses reasonably incurred by such party
in connection with investigating or defending any action or claim. The provisions set forth in
paragraph (c) of this Section 7.3 with respect to the notice of the threat or commencement
of any threat or action shall apply if a claim for contribution is to be made under this paragraph
(d); provided, however, that no additional notice shall be required with respect to
any threat or action



27









 






for which notice has been given under paragraph (c) for purposes of indemnification. The
Company and each Purchaser agree that it would not be just and equitable if contribution pursuant
to this Section 7.3 were determined solely by pro rata allocation (even if the Purchasers
were treated as one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in this paragraph. Notwithstanding the
provisions of this Section 7.3, no Purchaser shall be required to contribute any amount in
excess of the amount by which the Net Proceeds exceeds the amount of any damages that such
Purchaser has otherwise been required to pay by reason of all such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The Purchasers’ obligations to
contribute pursuant to this Section 7.3 are several and not joint.




          7.4 Termination of Conditions and Obligations. The restrictions imposed by
Section 5 or this Section 7 upon the transferability of the Conversion Shares and
Warrant Shares shall cease and terminate as to any particular number of the Conversion Shares and
Warrant Shares upon the expiration of the Effectiveness Period or at such time as an opinion of
counsel satisfactory in form and substance to the Company shall have been rendered to the effect
that such conditions are not necessary in order to comply with the Securities Act.




          7.5 Information Available. So long as the Registration Statement is effective
covering the resale of Conversion Shares and Warrant Shares owned by the Purchasers, the Company
will furnish (or, in the case of the documents listed in clause (a)(ii), (iii) and (iv), make
available via the SEC’s EDGAR website) to the Purchasers:




          (a) as soon as practicable after available (but in the case of the Company’s Annual Report to
Stockholders, within 120 days after the end of each fiscal year of the Company), one copy of (i)
its Annual Report to Stockholders (which Annual Report shall contain financial statements audited
in accordance with generally accepted accounting principles by a national firm of certified public
accountants), (ii) if not included in substance in the Annual Report to Stockholders, its Annual
Report on Form 10-K, (iii) its quarterly reports on Form 10-Q, and (iv) a full copy of the
particular Registration Statement covering the Conversion Shares and Warrant Shares (the foregoing,
in each case, excluding exhibits);




          (b) upon the reasonable request of a Purchaser, a reasonable number of copies of the
prospectuses to supply to any other party requiring such prospectuses;



and the Company, upon the reasonable request of a Purchaser, will meet with such Purchaser or a
representative thereof at the Company’s headquarters to discuss information relevant for disclosure
in the Registration Statement covering the Conversion Shares and Warrant Shares subject to
appropriate confidentiality limitations.




          7.6 Allowed Delays in Effectiveness. For not more than twenty (20) consecutive days
or for a total of not more than forty (40) days in any twelve (12) month period, the Company may
delay the disclosure of material non-public information concerning the Company, by suspending the
use of any Prospectus included in the Registration Statement, the disclosure of which at the time
of such suspension is not, in the good faith opinion of the



28









 






Company, in the best interests of the Company (an “Allowed Delay”); provided,
however, if Form S-3 (or any successor form to Form S-3) becomes unavailable to maintain
the registration of the resale of the Conversion Shares and Warrant Shares at any time prior to the
expiration of the Effectiveness Period and the Company is required to file a registration statement
on Form S-1 (or any successor to Form S-1) pursuant to Section 7.1, then such Allowed Delay
shall be increased to not more than sixty (60) consecutive days or for a total of not more than
sixty (60) days in any twelve (12) month period. Upon the occurrence of an Allowed Delay, the
Company shall promptly (a) notify each Purchaser in writing of the existence of an Allowed Delay
(but in no event, without the prior written consent of a Purchaser, shall the Company disclose to
such Purchaser any of the facts or circumstances regarding material non-public information giving
rise to an Allowed Delay), (b) advise each Purchaser in writing to cease all sales under the
Registration Statement until the end of the Allowed Delay and (c) use reasonable best efforts to
terminate an Allowed Delay as promptly as practicable. In connection with any such notice, the
Company shall not provide any material nonpublic information to the Purchasers unless subsequently
requested by such Purchasers.




          7.7 Damages. Should an Event (as defined below) occur, then upon the occurrence of
such Event, each Purchaser shall be entitled to damages from the Company equal to one percent
(1.0%) per month of the aggregate Purchase Price paid by such Purchaser to the Company with respect
to the Preferred Shares then held by such Purchaser. Any such damages payable pursuant to the
terms hereof (i) shall be payable within five (5) days after each monthly anniversary of such Event
until the applicable Event is cured and (ii) apply on a pro rated basis for any portion of a month
prior to the cure of an Event. All pro rated calculations made pursuant to this paragraph shall be
based upon the actual number of days in such pro rated month.




     For purposes of this Section 7.7, each of the following shall constitute an “Event”:
(i) the Registration Statement is not filed by the Company with the SEC on or prior to the Filing
Date, or is not declared effective by the SEC by the Required Effective Date and (ii) if the
Registration Statement is filed and declared effective but, during the Effectiveness Period, the
Registration Statement shall thereafter cease to be effective or fails to be usable for its
intended purpose, other than as a result of an Allowed Delay. Notwithstanding the foregoing
provisions, in no event shall the Company be obligated to pay such damages to more than one
Purchaser in respect of the same Securities for the same period of time. Such payments shall be
made to the Purchasers in cash.



          SECTION 8. Broker’s Fee. The Purchasers acknowledge that the Company intends to pay
to the Placement Agent a fee in respect of the sale of the Securities to the Purchasers. Each of
the parties hereto hereby represents that, on the basis of any actions and agreements by it, there
are no other brokers or finders entitled to compensation in connection with the sale of the
Securities to the Purchasers.




          SECTION 9. Notices. All notices, requests, consents and other communications
hereunder shall be in writing, shall be mailed by first-class registered or certified airmail,
facsimile (with receipt confirmed by telephone) or nationally recognized overnight express courier
postage prepaid, and shall be deemed given when so mailed and shall be delivered as addressed as
follows:




29









 











	 	(a)	if to the Company, to:
	 
	 	 	 	PMFG, Inc.

14651 North Dallas Parkway

Suite 500

Dallas, Texas 75254

Attention: Melissa G. Beare

Facsimile: (214) 351-4172
	 
	 	 	with a copy to:
	 
	 	 	 	Jones Day

2727 North Harwood Street

Dallas, Texas 75201

Attention: James E. O’Bannon

Facsimile: (214) 969-5100
	 
	 	 	or to such other person at such other place as the Company shall designate
to the Purchasers in writing; and





          (b) if to the Purchasers, at the addresses as set forth on the signature pages of this
Agreement, or at such other addresses as may have been furnished to the Company in writing.




          SECTION 10. Changes. With the exception of Section 7 hereof, this Agreement
may not be modified or amended except pursuant to an instrument in writing signed by the Company
and Purchasers holding a majority of the liquidation preference of the Preferred Shares;
provided, that any such modification or amendment to this Section 10 may not affect
the following sentence governing amendments and waivers to Section 7 hereof. With respect
to Section 7 hereof, with the written consent of the Company and holders of a majority of
the Securities then outstanding, the terms of the Agreement may be waived or amended and any such
waiver or amendment shall be binding upon the Company and all holders of Securities.




          SECTION 11. Headings. The headings of the various sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed to be part of this
Agreement.




          SECTION 12. Severability. In case any provision contained in this Agreement should be
invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or impaired thereby.




          SECTION 13. Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of the parties and their successors and permitted assigns. The Company may not assign
this Agreement or any rights or obligations hereunder without the prior written consent of each
Purchaser, except in connection with a consolidation, reorganization, merger, sale of substantially
all of the Company’s assets or otherwise pursuant to assignments by operation of law. Any
Purchaser may assign any or all of its rights under this Agreement to any



30









 






entity to whom such Purchaser assigns or transfers any Securities, provided such
transferee agrees in writing to be bound, with respect to the transferred Securities, by the
provisions hereof that apply to the “Purchasers”.




          SECTION 14. Governing Law; Jurisdiction. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without giving effect to the
principles of conflicts of laws. Each party hereby irrevocably submits to the non-exclusive
jurisdiction of the state and federal courts sitting in the City and County of New York for the
adjudication of any dispute hereunder or in connection herewith or with any transaction
contemplated hereby (including without limitation any dispute under or with respect to the
Agreement and the Warrants), and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding involving any Purchaser or permitted assignee of such Purchaser, any claim
that it is not personally subject to the jurisdiction of any such court, that such suit, action or
proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding
is improper. Each party hereby irrevocably waives personal service of process and consents to
process being served in any such suit, action or proceeding by mailing a copy thereof to such party
at the address in effect for notices to it under this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any manner permitted by law.




          SECTION 15. Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall constitute an original, but all of which, when taken together, shall constitute
but one instrument, and shall become effective when one or more counterparts have been signed by
each party hereto and delivered to the other parties.




          SECTION 16. Independent Nature of Purchasers’ Obligations and Rights. No Purchaser
shall be responsible in any way for the performance of the obligations of any other Purchaser under
the Agreement. Nothing contained herein and no action taken by any Purchaser pursuant to the
Agreement shall be deemed to constitute the Purchasers as a partnership, an association, a joint
venture or any other kind of entity, or create a presumption that the Purchasers are in any way
acting in concert or as a group, or are deemed affiliates (as such term is defined under the
Exchange Act) with respect to such obligations or the transactions contemplated by this Agreement.
Each Purchaser shall be entitled to independently protect and enforce its rights, including without
limitation the rights arising out of the Agreement, and it shall not be necessary for any other
Purchaser to be joined as an additional party in any proceeding for such purpose.




          SECTION 17. Fees and Expenses. The Company shall (i) at the Closing, pay the fees and
expenses of its advisers (other than the Placement Agent), counsel, accountants and other experts,
if any, the reasonable legal fees and expenses incurred by the Purchasers, and all other expenses
incurred by the Company, in each case incident to the negotiation, preparation, execution, delivery
and performance of this Agreement, (ii) pay all Transfer Agent fees, stamp taxes and other taxes
and duties levied in connection with the sale and issuance of their applicable Securities and (iii)
reimburse the Purchasers for reasonable legal fees and expenses incurred by the Purchasers with
respect to the review of the Registration Statement and Subsequent Registration Statements.




31









 








     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly
authorized representatives as of the day and year first above written.



	 	 	 	 	 
	 	PMFG, INC.

 	 
	 	By  	/s/ Peter J. Burlage
 	 
	 	 	Peter J. Burlage 	 
	 	 	President and Chief Executive Officer 	 
	 



[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGES FOR PURCHASERS FOLLOW]




32









 







[SIGNATURE PAGES INTENTIONALLY OMITTED.
PLEASE SEE ATTACHED
 SCHEDULE FOR NAMES OF PURCHASERS AND
NUMBER OF SHARES OF
 PREFERRED STOCK PURCHASED]





33









 








SCHEDULE OF PURCHASERS AND SHARES PURCHASED




	 	 	 	 	 
	Purchaser	 	Number of Shares Purchased
	1. AARD Defined Pension Plan
	 	 	75	 
	 
	2. Frederick Battenfeld
	 	 	100	 
	 
	3. Suzanne Battenfeld
	 	 	250	 
	 
	4. Suzanne Battenfeld
	 	 	250	 
	 
	5. Richard A. Bayles Revocable Trust
	 	 	1,000	 
	 
	6. Peter E. Bennett
	 	 	500	 
	 
	7. Frank A. Bonsal Irrevocable Trust
	 	 	150	 
	 
	8. Edward L. Cahill
	 	 	200	 
	 
	9. David J. Callard Living Trust
	 	 	500	 
	 
	10. Martin A. Desmery (IRA)
	 	 	200	 
	 
	11. Drake, Loeb, Heller, Kennedy, Gogerty, Gaba &
Rodd 401K, Profit Sharing Plan & Trust
	 	 	200	 
	 
	12. Richard J. and Margaret D. Drake Joint
	 	 	100	 
	 
	13. EFCO Products Pension Plan
	 	 	200	 
	 
	14. EFCO Products PSP Plan
	 	 	100	 
	 
	15. Ganfer and Shore LLP Pension Plan
	 	 	50	 
	 
	16. Ganfer and Shore LLP PSP
	 	 	100	 
	 
	17. Richard A. Gerentine and Domenica L. Gerentine
	 	 	125	 
	 
	18. Lynn E. Gorguze Separate Property Trust
	 	 	2,500	 
	 
	19. Vincent and Gloria Gorguze Trust
	 	 	2,500	 
	 
	20. Paul J. Huston and Linda A. Huston
	 	 	100	 
	 
	21. Jacques Kohn
	 	 	250	 
	 
	22. Margot W. Kohn
	 	 	250	 






 









 






	 	 	 	 	 
	Purchaser	 	Number of Shares Purchased
	23. Estate of Barbara Krieger
	 	 	250	 
	 
	24. John Monfort (IRA)
	 	 	2,000	 
	 
	25. Christine Murphy
	 	 	75	 
	 
	26. Edmund H. Nicklin Jr.
	 	 	500	 
	 
	27. Franklin C. Nicklin Test Trust
	 	 	100	 
	 
	28. Freda W. Nicklin
	 	 	250	 
	 
	29. John William Nicklin
	 	 	250	 
	 
	30. Jonathan Case Nicklin
	 	 	250	 
	 
	31. V. Adah Nicklin
	 	 	250	 
	 
	32. William F. Nicklin
	 	 	2,000	 
	 
	33. John O’Shea (IRA)
	 	 	250	 
	 
	34. Anthony M. Pascale (IRA)
	 	 	250	 
	 
	35. Pohogonot Ventures II, LLC
	 	 	200	 
	 
	36. Russell T. Ray
	 	 	500	 
	 
	37. George Rich
	 	 	100	 
	 
	38. George Rich
	 	 	150	 
	 
	39. George S. Rich Family Foundation
	 	 	500	 
	 
	40. RichFam LLLP
	 	 	250	 
	 
	41. Carl Ring
	 	 	100	 
	 
	42. Tarshis, Catania, Liberth, Mahon & Milligram,
PLLC
	 	 	150	 
	 
	43. Barrie Holt Thrasher and J. Tammenoms Bakker
	 	 	200	 
	 
	44. Utility Service Holding Co. Inc.
	 	 	2,865