Exhibit 10(a)

 

SECURITIES PURCHASE AGREEMENT

 

SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of February 15, 2006,
by and among Universal Food & Beverage Company, a Nevada corporation, with
headquarters located at 3830 Commerce Drive, St. Charles, Illinois 60174
(the ”Company”), and the investors listed on the Schedule of Buyers attached
hereto (individually, a “Buyer” and collectively, the “Buyers”).

 

WHEREAS:

 

A. The Company and each Buyer is executing and delivering this Agreement in
reliance upon the exemption from securities registration afforded by
Section 4(2) of the Securities Act of 1933, as amended (the “1933 Act”), and
Rule 506 of Regulation D (“Regulation D”) as promulgated by the United States
Securities and Exchange Commission (the “SEC”) under the 1933 Act.

 

B. The Company has authorized a new series of convertible preferred shares of
the Company designated as Series A Convertible Preferred Stock, the terms of
which are set forth in the certificate of designations for such series of
preferred shares (the “Certificate of Designations”) in the form attached hereto
as Exhibit A (together with any convertible preferred shares issued in
replacement thereof in accordance with the terms thereof, the “Preferred
Shares”), which Preferred Shares shall be convertible into the Company’s common
stock, $0.01 par value per share (the “Common Stock”), in accordance with the
terms of the Certificate of Designations.

 

C. Each Buyer wishes to purchase, and the Company wishes to sell, upon the terms
and conditions stated in this Agreement, (i) that aggregate number of Preferred
Shares set forth opposite such Buyer’s name in column (3) on the Schedule of
Buyers (which aggregate number for all Buyers shall be 20,704 (as converted,
collectively, the “Conversion Shares”) and (ii) Warrants in substantially the
form attached hereto as Exhibit B (the “Warrants”), to acquire that number of
shares of Common Stock (as exercised, collectively, the “Warrant Shares”) set
forth opposite such Buyer’s name in column (4) on the Schedule of Buyers.

 

D. The Preferred Shares may be entitled to dividends, which at the option of the
Company, subject to certain conditions, may be paid in shares of Common Stock
(the “Dividend Shares”).

 

E. Contemporaneously with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement,
substantially in the form attached hereto as Exhibit C (the “Registration Rights
Agreement”), pursuant to which the Company has agreed to provide certain
registration rights with respect to the Registrable Securities (as defined in
the Registration Rights Agreement) under the 1933 Act and the rules and
regulations promulgated thereunder, and applicable state securities laws.

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F. The Preferred Shares, the Conversion Shares, the Dividend Shares, the
Warrants and the Warrant Shares are collectively are referred to herein as the
“Securities”.

 

G. The Company will consummate, contemporaneously with the Closing, the
transactions contemplated by the Savannah Purchase Agreement (as defined below).

 

NOW, THEREFORE, the Company and each Buyer hereby agree as follows:

 

1. PURCHASE AND SALE OF PREFERRED SHARES AND WARRANTS.

 

(a) Preferred Shares and Warrants. Subject to the satisfaction (or waiver) of
the conditions set forth in Sections 6 and 7 below, the Company shall issue and
sell to each Buyer, and each Buyer severally, but not jointly, agrees to
purchase from the Company on the Closing Date (as defined below), the number of
Preferred Shares as is set forth opposite such Buyer’s name in column (3) on the
Schedule of Buyers, along with Warrants to acquire that number of Warrant Shares
as is set forth opposite such Buyer’s name in column (4) on the Schedule of
Buyers.

 

(b) Closing. The closing (the “Closing”) of the purchase of the Preferred Shares
and the Warrants by the Buyers shall occur at the offices of Schulte Roth &
Zabel LLP, 919 Third Avenue, New York, New York 10022. The date and time of the
Closing (the “Closing Date”) shall be 10:00 a.m., New York City Time, on the
date hereof, subject to notification of satisfaction (or waiver) of the
conditions to the Closing set forth in Sections 6 and 7 below (or such later
date as is mutually agreed to by the Company and each Buyer).

 

(c) Purchase Price. The aggregate purchase price for the Preferred Shares and
the Warrants to be purchased by each Buyer (the “Purchase Price”) shall be the
amount set forth opposite such Buyer’s name in column (5) on the Schedule of
Buyers. Each Buyer shall pay $1,000 for each Preferred Share and related
Warrants to be purchased by such Buyer at the Closing.

 

(d) Form of Payment. On the Closing Date, (A) each Buyer shall pay its portion
of the Purchase Price to the Company for the Preferred Shares and the Warrants
to be issued and sold to such Buyer at the Closing, (i) by wire transfer of
immediately available funds in accordance with the Company’s written wire
instructions or (ii) by exchange of the Exchangeable Notes (as defined below)
pursuant to the terms thereof, and (B) the Company shall deliver to each Buyer
the number of Preferred Shares as is set forth opposite such Buyer’s name in
column (3) on the Schedule of Buyers, along with the Warrants exercisable for
the number of shares of Common Stock as is set forth opposite such Buyer’s name
in column (4) on the Schedule of Buyers, each duly executed on behalf of the
Company and registered in the name of such Buyer or its designee.

 

2. BUYER’S REPRESENTATIONS AND WARRANTIES.

 

Each Buyer represents and warrants with respect to only itself that:

 

(a) Organization; Authority. Such Buyer is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization with the

 

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requisite power and authority to enter into and to consummate the transactions
contemplated by the Transaction Documents (as defined below) to which it is a
party and otherwise to carry out its obligations hereunder and thereunder.

 

(b) No Public Sale or Distribution. Such Buyer (i) is acquiring the Preferred
Shares and the Warrants (ii) upon conversion of the Preferred Shares will
acquire the Conversion Shares and (ii) upon exercise of the Warrants will
acquire the Warrant Shares, in each case, for its own account and not with a
view towards, or for resale in connection with, the public sale or distribution
thereof, except pursuant to sales registered or exempted under the 1933 Act;
provided, however, that by making the representations herein, such Buyer does
not agree to hold any of the Securities for any minimum or other specific term
and reserves the right to dispose of the Securities at any time in accordance
with or pursuant to a registration statement or an exemption under the 1933 Act.
Such Buyer is acquiring the Securities hereunder in the ordinary course of its
business. Such Buyer does not presently have any agreement or understanding,
directly or indirectly, with any Person to distribute any of the Securities.

 

(c) Accredited Investor Status. Such Buyer is an “accredited investor” as that
term is defined in Rule 501(a) of Regulation D.

 

(d) Reliance on Exemptions. Such Buyer understands that the Securities are being
offered and sold to it in reliance on specific exemptions from the registration
requirements of United States federal and state securities laws and that the
Company is relying in part upon the truth and accuracy of, and such Buyer’s
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of such Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of such Buyer to acquire the
Securities.

 

(e) Information. Such Buyer and its advisors, if any, have been furnished with
all materials relating to the business, finances and operations of the Company
and materials relating to the offer and sale of the Securities which have been
requested by such Buyer. Such Buyer and its advisors, if any, have been afforded
the opportunity to ask questions of the Company. Neither such inquiries nor any
other due diligence investigations conducted by such Buyer or its advisors, if
any, or its representatives shall modify, amend or affect such Buyer’s right to
rely on the Company’s representations and warranties contained herein. Such
Buyer understands that its investment in the Securities involves a high degree
of risk. Such Buyer has sought such accounting, legal and tax advice as it has
considered necessary to make an informed investment decision with respect to its
acquisition of the Securities.

 

(f) No Governmental Review. Such Buyer understands that no United States federal
or state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the Securities or the fairness or
suitability of the investment in the Securities nor have such authorities passed
upon or endorsed the merits of the offering of the Securities.

 

(g) Transfer or Resale. Such Buyer understands that except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not
being registered under the 1933 Act or any state securities laws, and may not be
offered for sale, sold, assigned or

 

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transferred unless (A) subsequently registered thereunder, (B) such Buyer shall
have delivered to the Company an opinion of counsel, by counsel reasonably
acceptable to the Company and in form and substance reasonably satisfactory to
the Company, to the effect that such Securities to be sold, assigned or
transferred may be sold, assigned or transferred pursuant to an exemption from
such registration, or (C) such Buyer provides the Company with reasonable
assurance that such Securities can be sold, assigned or transferred pursuant to
Rule 144 or Rule 144A promulgated under the 1933 Act, as amended, (or a
successor rule thereto) (collectively, “Rule 144”); (ii) any sale of the
Securities made in reliance on Rule 144 may be made only in accordance with the
terms of Rule 144 and further, if Rule 144 is not applicable, any resale of the
Securities under circumstances in which the seller (or the Person (as defined in
Section 3(s)) through whom the sale is made) may be deemed to be an underwriter
(as that term is defined in the 1933 Act) may require compliance with some other
exemption under the 1933 Act or the rules and regulations of the SEC thereunder;
and (iii) neither the Company nor any other Person is under any obligation to
register the Securities under the 1933 Act or any state securities laws or to
comply with the terms and conditions of any exemption thereunder. The Securities
may be pledged pursuant to an available exemption from registration under the
1933 Act in connection with a bona fide margin account or other loan or
financing arrangement secured by the Securities and such pledge of Securities
shall not be deemed to be a transfer, sale or assignment of the Securities
hereunder, and no Buyer effecting a pledge of Securities shall be required to
provide the Company with any notice thereof or otherwise make any delivery to
the Company pursuant to this Agreement or any other Transaction Document (as
defined in Section 3(b)), including, without limitation, this Section 2(g).

 

(h) Legends. Such Buyer understands that the certificates or other instruments
representing the Preferred Shares and the Warrants and, until such time as the
resale of the Conversion Shares and the Warrant Shares have been registered
under the 1933 Act as contemplated by the Registration Rights Agreement, the
stock certificates representing the Conversion Shares and the Warrant Shares,
except as set forth below, shall bear any legend as required by the “blue sky”
laws of any state and a restrictive legend in substantially the following form
(and a stop-transfer order may be placed against transfer of such stock
certificates):

 

[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE] [EXERCISABLE]
HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN]
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE
STATE SECURITIES LAWS, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE
FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND APPLICABLE STATE
SECURITIES LAWS OR (II) UNLESS SOLD PURSUANT TO RULE 144(K) UNDER SAID ACT.
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED PURSUANT TO AN
AVAILABLE EXEMPTION FROM

 

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REGISTRATION UNDER THE 1933 ACT IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

 

The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if, unless otherwise required by state securities laws, (i) such
Securities are registered for resale under the 1933 Act, (ii) in connection with
a sale, assignment or other transfer, such holder provides the Company with an
opinion of counsel, by counsel reasonably acceptable to the Company and in form
and substance reasonably satisfactory to the Company, to the effect that such
sale, assignment or transfer of the Securities may be made without registration
under the applicable requirements of the 1933 Act, or (iii) such holder provides
the Company with reasonable assurance that the Securities can be sold, assigned
or transferred pursuant to Rule 144(k).

 

(i) Validity; Enforcement. This Agreement and the Registration Rights Agreement
to which such Buyer is a party have been duly and validly authorized, executed
and delivered on behalf of such Buyer and shall constitute the legal, valid and
binding obligations of such Buyer enforceable against such Buyer in accordance
with their respective terms, except as such enforceability may be limited by
general principles of equity or to applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation and other similar laws relating to, or
affecting generally, the enforcement of applicable creditors’ rights and
remedies.

 

(j) No Conflicts. The execution, delivery and performance by such Buyer of this
Agreement and the Registration Rights Agreement to which such Buyer is a party
and the consummation by such Buyer of the transactions contemplated hereby and
thereby will not (i) result in a violation of the organizational documents of
such Buyer or (ii) conflict with, or constitute a default (or an event which
with notice or lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation of,
any agreement, indenture or instrument to which such Buyer 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 Buyer,
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 Buyer to perform its obligations hereunder.

 

(k) Residency. Such Buyer is a resident of that jurisdiction specified below its
address on the Schedule of Buyers.

 

3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

 

The Company represents and warrants to each of the Buyers that:

 

(a) Organization and Qualification. The Company and its “Subsidiaries” (which
for purposes of this Agreement means any entity in which the Company, directly
or indirectly, owns capital stock or holds an equity or similar interest) are
entities duly organized and validly existing in good standing under the laws of
the jurisdiction in which they are formed, and have the requisite power and
authorization to own their properties and to carry on their

 

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business as now being conducted. Each of the Company and its Subsidiaries is
duly qualified as a foreign entity to do business and is in good standing in
every jurisdiction in which its ownership of property or the nature of the
business conducted by it makes such qualification necessary, except to the
extent that the failure to be so qualified or be in good standing would not have
a Material Adverse Effect. As used in this Agreement, “Material Adverse Effect”
means any material adverse effect on the business, properties, assets,
operations, results of operations, condition (financial or otherwise) or
prospects of the Company and its Subsidiaries, taken as a whole, or on the
transactions contemplated hereby and by the other Transaction Documents or by
the agreements and instruments to be entered into in connection herewith or
therewith, or on the authority or ability of the Company to perform its
obligations under the Transaction Documents. The Company has no Subsidiaries,
except as set forth on Schedule 3(a).

 

(b) Authorization; Enforcement; Validity. The Company has the requisite
corporate power and authority to enter into and perform its obligations under
this Agreement, the Certificate of Designations, the Warrants, the Registration
Rights Agreement, the Irrevocable Transfer Agent Instructions (as defined in
Section 5(b)), and each of the other agreements entered into by the parties
hereto in connection with the transactions contemplated by this Agreement
(collectively, the “Transaction Documents”) and to issue the Securities in
accordance with the terms hereof and thereof. The execution and delivery of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby, including, without limitation, the
issuance of the Preferred Shares, the reservation for issuance and the issuance
of the Conversion Shares issuable upon conversion of the Preferred Shares, the
reservation for issuance and the issuance of the Dividend Shares issuable with
respect to the Preferred Shares, the issuance of the Warrants and the
reservation for issuance and issuance of the Warrant Shares issuable upon
exercise of the Warrants, have been duly authorized by the Company’s Board of
Directors and (other than the filing with the SEC of one or more Registration
Statements in accordance with the requirements of the Registration Rights
Agreement and any other filings as may be required by any state securities
agencies) no further filing, consent, or authorization is required by the
Company, its Board of Directors or its stockholders. This Agreement and the
other Transaction Documents of even date herewith have been duly executed and
delivered by the Company, and constitute the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation or similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights and remedies and except as rights to
indemnification and to contribution may be limited by federal or state
securities law. The Certificate of Designations in the form attached hereto as
Exhibit A has been filed with the Secretary of State of the State of Nevada and
is in full force and effect, enforceable against the Company in accordance with
its terms and has not been amended.

 

(c) Issuance of Securities. The issuance of the Preferred Shares and the
Warrants are duly authorized and upon issuance in accordance with the terms of
the Transaction Documents shall be free from all taxes, liens and charges with
respect to the issue thereof, and the Preferred Shares shall be entitled to the
rights and preferences set forth in the Certificate of Designations. As of the
Closing, the Company shall have reserved from its duly authorized capital stock
not less than all of its available authorized shares of Common Stock not
otherwise

 

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reserved for issuance, and shall, on the Business Day immediately following the
earlier of the Stockholder Approval and the Stockholder Approval Deadline,
authorize and reserve for issuance such additional shares of Common Stock such
that there shall be reserved from the Company’s capital stock not less than the
sum of (i) 125% of the maximum number of shares of Common Stock issuable upon
conversion of the Preferred Shares (assuming for purposes hereof, that the
Preferred Shares are convertible at the Conversion Price and without taking into
account any limitations on the conversion of the Preferred Shares set forth in
the Certificate of Designations), (ii) 125% of the maximum number of shares of
Common Stock issuable upon exercise of the Warrants (without taking into account
any limitations on the exercise of the Warrants set forth in the Warrants) and
(iii) 100% of the maximum number of shares of Common Stock issuable as Dividend
Shares with respect to the Preferred Shares as of the Trading Day immediately
prior to the applicable date of determination. Upon issuance or conversion in
accordance with the Certificate of Designations or exercise in accordance with
the Warrants, as the case may be, the Conversion Shares, the Dividend Shares and
the Warrant Shares, respectively, will be validly issued, fully paid and
nonassessable and free from all preemptive or similar rights, taxes, liens and
charges with respect to the issue thereof, with the holders being entitled to
all rights accorded to a holder of Common Stock. Subject to the representations
and warranties of the Buyers in this Agreement, the offer and issuance by the
Company of the Securities is exempt from registration under the 1933 Act.

 

(d) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the issuance of
the Preferred Shares, the Warrants, and reservation for issuance of the
Conversion Shares, the Warrant Shares and the Dividend Shares) will not
(i) result in a violation of the Certificate of Incorporation (as defined in
Section 3(r)) of the Company or any of its Subsidiaries or the Certificate of
Designations of the Company, or the Bylaws (as defined in Section 3(r)) or
(ii) conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Company or any of its
Subsidiaries is a party, or (iii) result in a violation of any law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations and the rules and regulations of the OTC Bulletin Board
(the “Principal Market”) applicable to the Company or any of its Subsidiaries or
by which any property or asset of the Company or any of its Subsidiaries is
bound or affected except, in the case of clause (ii) or (iii) above, to the
extent such conflict, default, termination right or violation would not
reasonably be expected to have a Material Adverse Effect.

 

(e) Consents. Except as set forth in Schedule 3(e), the Company is not required
to obtain any consent, authorization or order of, or make any filing or
registration with, any court, governmental agency or any regulatory or
self-regulatory agency or any other Person in order for it to execute, deliver
or perform any of its obligations under or contemplated by the Transaction
Documents, in each case in accordance with the terms hereof or thereof. All
consents, authorizations, orders, filings and registrations which the Company is
required to obtain pursuant to the preceding sentence have been obtained or
effected on or prior to the Closing Date, and the Company and its Subsidiaries
are unaware of any facts or circumstances which might prevent the Company from
obtaining or effecting any of the registration, application

 

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or filings pursuant to the preceding sentence. The Company is not in violation
of the requirements of the Principal Market and has no knowledge of any facts
which would reasonably lead to delisting or suspension of the Common Stock in
the foreseeable future.

 

(f) Acknowledgment Regarding Buyer’s Purchase of Securities. The Company
acknowledges and agrees that each Buyer is acting solely in the capacity of
arm’s length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby and that no Buyer is (i) an officer
or director of the Company, (ii) an “affiliate” of the Company (as defined in
Rule 144) or (iii) to the knowledge of the Company, a “beneficial owner” of more
than 10% of the shares of Common Stock (as defined for purposes of Rule 13d-3 of
the Securities Exchange Act of 1934, as amended (the “1934 Act”)). The Company
further acknowledges that no Buyer is acting as a financial advisor or fiduciary
of the Company (or in any similar capacity) with respect to the Transaction
Documents and the transactions contemplated hereby and thereby, and any advice
given by a Buyer or any of its representatives or agents in connection with the
Transaction Documents and the transactions contemplated hereby and thereby is
merely incidental to such Buyer’s purchase of the Securities. The Company
further represents to each Buyer that the Company’s decision to enter into the
Transaction Documents has been based solely on the independent evaluation by the
Company and its representatives.

 

(g) No General Solicitation; Placement Agent’s Fees. Neither the Company, nor
any of its affiliates, nor any Person acting on its or their behalf, has engaged
in any form of general solicitation or general advertising (within the meaning
of Regulation D) in connection with the offer or sale of the Securities. The
Company shall be responsible for the payment of any placement agent’s fees,
financial advisory fees, or brokers’ commissions (other than for persons engaged
by any Buyer or its investment advisor) relating to or arising out of the
transactions contemplated hereby. The Company shall pay, and hold each Buyer
harmless against, any liability, loss or expense (including, without limitation,
attorney’s fees and out-of-pocket expenses) arising in connection with any such
claim. The Company acknowledges that it has engaged Illington Capital Inc. as
placement agent (the “Agent”) in connection with the sale of the Securities.
Other than the Agent, the Company has not engaged any placement agent or other
agent in connection with the sale of the Securities.

 

(h) No Integrated Offering. None of the Company, its Subsidiaries, any of their
affiliates, and any Person acting on their behalf has, directly or indirectly,
made any offers or sales of any security or solicited any offers to buy any
security, under circumstances that would require registration of any of the
Securities under the 1933 Act or cause this offering of the Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable stockholder approval provisions, including, without limitation,
under the rules and regulations of any exchange or automated quotation system on
which any of the securities of the Company are listed or designated. None of the
Company, its Subsidiaries, their affiliates and any Person acting on their
behalf will take any action or steps referred to in the preceding sentence that
would require registration of any of the Securities under the 1933 Act or cause
the offering of the Securities to be integrated with other offerings.

 

(i) Dilutive Effect. The Company understands and acknowledges that the number of
Conversion Shares issuable upon conversion of the Preferred Shares, the number
of

 

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Dividend Shares issuable with respect to the Preferred Shares and the Warrant
Shares issuable upon exercise of the Warrants, will increase in certain
circumstances. The Company further acknowledges that its obligation to issue
Conversion Shares upon conversion of the Preferred Shares in accordance with
this Agreement and the Certificate of Designations and its obligation to issue
the Warrant Shares upon exercise of the Warrants in accordance with this
Agreement and the Warrants is, in each case, absolute and unconditional
regardless of the dilutive effect that such issuance may have on the ownership
interests of other stockholders of the Company.

 

(j) Application of Takeover Protections; Rights Agreement. The Company and its
Board of Directors have taken all necessary action, if any, in order to render
inapplicable any poison pill (including any distribution under a rights
agreement) or other similar anti-takeover provision which is or could become
applicable to any Buyer as a result of the transactions contemplated by this
Agreement, including, without limitation, the Company’s issuance of the
Securities and any Buyer’s ownership of the Securities. The Company has not
adopted a stockholder rights plan or similar arrangement relating to
accumulations of beneficial ownership of Common Stock or a change in control of
the Company.

 

(k) SEC Documents; Financial Statements. During the two (2) years prior to the
date hereof, the Company has filed all reports, schedules, forms, statements and
other documents required to be filed by it with the SEC pursuant to the
reporting requirements of the 1934 Act (all of the foregoing filed prior to the
date hereof and all exhibits included therein and financial statements, notes
and schedules thereto and documents incorporated by reference therein being
hereinafter referred to as the “SEC Documents”). The Company has delivered to
the Buyers or their respective representatives true, correct and complete copies
of each of the SEC Documents not available on the EDGAR system that have been
requested by each Buyer. As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the 1934 Act and the
rules and regulations of the SEC promulgated thereunder applicable to the SEC
Documents, and none of the SEC Documents, at the time they were filed with the
SEC, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. As of their respective dates, the financial statements of
the Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto as in effect as of the time of
filing. Such financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied, during the
periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto, or (ii) in the case of unaudited interim
statements, to the extent they may exclude footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments).

 

(l) Absence of Certain Changes. Except as disclosed in Section 3(l), since the
date of the Company’s most recent financial statements contained in a Form
10-QSB, there has been no material adverse change and no material adverse
development in the business, assets, properties, operations, condition
(financial or otherwise), results of operations or prospects of the Company.
Except as disclosed in Schedule 3(l), since the date of the Company’s most
recent

 

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financials statements contained in a Form 10-QSB, the Company has not
(i) declared or paid any dividends, (ii) sold any assets, individually or in the
aggregate, in excess of $50,000 outside of the ordinary course of business or
(iii) had capital expenditures, individually or in the aggregate, in excess of
$50,000. The Company has not taken any steps to seek protection pursuant to any
bankruptcy law nor does the Company have any knowledge or reason to believe that
its creditors intend to initiate involuntary bankruptcy proceedings or any
actual knowledge of any fact which would reasonably lead a creditor to do so.
The Company is not as of the date hereof, and after giving effect to the
transactions contemplated hereby to occur at the Closing, will not be Insolvent
(as defined below). For purposes of this Section 3(l), “Insolvent” means (i) the
present fair saleable value of the Company’s assets is less than the amount
required to pay the Company’s total Indebtedness (as defined in Section 3(s)),
(ii) the Company is unable to pay its debts and liabilities, subordinated,
contingent or otherwise, as such debts and liabilities become absolute and
matured, (iii) the Company intends to incur or believes that it will incur debts
that would be beyond its ability to pay as such debts mature or (iv) the Company
has unreasonably small capital with which to conduct the business in which it is
engaged as such business is now conducted and is proposed to be conducted.

 

(m) No Undisclosed Events, Liabilities, Developments or Circumstances. No event,
liability, development or circumstance has occurred or exists, or is
contemplated to occur with respect to the Company, its Subsidiaries or their
respective business, properties, prospects, operations or financial condition,
that would be required to be disclosed by the Company under applicable
securities laws on a registration statement on Form S-1 filed with the SEC
relating to an issuance and sale by the Company of its Common Stock and which
has not been publicly announced.

 

(n) Conduct of Business; Regulatory Permits. Neither the Company nor its
Subsidiaries is in violation of any term of or in default under its Certificate
of Incorporation, the Certificate of Designations, any other certificate of
designation, preferences or rights of any other outstanding series of preferred
stock of the Company or Bylaws or their organizational charter or certificate of
incorporation or bylaws, respectively. Neither the Company nor any of its
Subsidiaries is in violation of any judgment, decree or order or any statute,
ordinance, rule or regulation applicable to the Company or its Subsidiaries, and
neither the Company nor any of its Subsidiaries will conduct its business in
violation of any of the foregoing, except in all cases for possible violations
which would not, individually or in the aggregate, have a Material Adverse
Effect. Without limiting the generality of the foregoing, the Company is not in
violation of any of the rules, regulations or requirements of the Principal
Market and has no knowledge of any facts or circumstances that would reasonably
lead to delisting or suspension of the Common Stock by the Principal Market in
the foreseeable future. During the two (2) years prior to the date hereof,
(i) the Common Stock has been designated for quotation on the Principal Market,
(ii) trading in the Common Stock has not been suspended by the SEC or the
Principal Market and (iii) the Company has received no communication, written or
oral, from the SEC or the Principal Market regarding the suspension or delisting
of the Common Stock from the Principal Market. The Company and its Subsidiaries
possess all certificates, authorizations and permits issued by the appropriate
regulatory authorities necessary to conduct their respective businesses, except
where the failure to possess such certificates, authorizations or permits would
not have, individually or in the aggregate, a Material Adverse Effect, and
neither the Company nor any such Subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificate,
authorization or permit.

 

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(o) Foreign Corrupt Practices. Neither the Company nor any of its Subsidiaries
nor any director, officer, agent, employee or other Person acting on behalf of
the Company or any of its Subsidiaries has, in the course of its actions for, or
on behalf of, the Company (i) used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity; (ii) made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate funds;
(iii) violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate,
payoff, influence payment, kickback or other unlawful payment to any foreign or
domestic government official or employee.

 

(p) Sarbanes-Oxley Act. The Company is in compliance with any and all applicable
requirements of the Sarbanes-Oxley Act of 2002 that are effective as of the date
hereof, and any and all applicable rules and regulations promulgated by the SEC
thereunder that are effective as of the date hereof, except where such
noncompliance would not have, individually or in the aggregate, a Material
Adverse Effect.

 

(q) Transactions With Affiliates. Except as set forth in the SEC Documents filed
at least ten days prior to the date hereof and other than disclosed on Schedule
3(q), none of the officers, directors or employees of the Company is presently a
party to any transaction with the Company or any of its Subsidiaries (other than
for ordinary course services as employees, officers or 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 such officer, director or
employee or, to the knowledge of the Company, any corporation, partnership,
trust or other entity in which any such officer, director, or employee has a
substantial interest or is an officer, director, trustee or partner.

 

(r) Equity Capitalization. As of the date hereof, the authorized capital stock
of the Company consists of (i) 100,000,000 shares of Common Stock and
(ii) 25,000,000 shares of preferred stock, $0.01 par value. As of the date of
this Agreement, the capitalization of the Company is as set forth on Schedule
3(r) to this Agreement, which is specifically incorporated herein by this
reference. Other than as set forth in Schedule 3(r) to this Agreement, there are
no other shares of capital stock of the Company issued, outstanding or reserved
for issuance pursuant to securities (other than the Preferred Shares and the
Warrants) exercisable or exchangeable for, or convertible into, shares of Common
Stock. All of such outstanding shares have been, or upon issuance will be,
validly issued and are fully paid and nonassessable. Except as disclosed in
Schedule 3(r): (i) none of the Company’s share capital is subject to preemptive
rights or any other similar rights or any liens or encumbrances suffered or
permitted by the Company; (ii) there are no outstanding options, warrants,
scrip, rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, or exercisable or
exchangeable for, any share capital of the Company or any of its Subsidiaries,
or contracts, commitments, understandings or arrangements by which the Company
or any of its Subsidiaries is or may become bound to issue additional share
capital of the Company or any of its Subsidiaries or options, warrants, scrip,
rights to subscribe to, calls or commitments of any

 

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character whatsoever relating to, or securities or rights convertible into, or
exercisable or exchangeable for, any share capital of the Company or any of its
Subsidiaries; (iii) there are no outstanding debt securities, notes, credit
agreements, credit facilities or other agreements, documents or instruments
evidencing Indebtedness of the Company or any of its Subsidiaries or by which
the Company or any of its Subsidiaries is or may become bound; (iv) there are no
financing statements securing obligations in any material amounts, either singly
or in the aggregate, filed in connection with the Company or any of its
Subsidiaries; (v) there are no agreements or arrangements under which the
Company or any of its Subsidiaries is obligated to register the sale of any of
their securities under the 1933 Act (except the Registration Rights Agreement);
(vi) there are no outstanding securities or instruments of the Company or any of
its Subsidiaries which contain any redemption or similar provisions, and there
are no contracts, commitments, understandings or arrangements by which the
Company or any of its Subsidiaries is or may become bound to redeem a security
of the Company or any of its Subsidiaries; (vii) there are no securities or
instruments containing anti-dilution or similar provisions that will be
triggered by the issuance of the Securities; (viii) the Company does not have
any stock appreciation rights or “phantom stock” plans or agreements or any
similar plan or agreement; and (ix) the Company and its Subsidiaries have no
liabilities or obligations required to be disclosed in the SEC Documents but not
so disclosed in the SEC Documents, other than those incurred in the ordinary
course of the Company’s or its Subsidiaries’ respective businesses and which,
individually or in the aggregate, do not or would not have a Material Adverse
Effect. The Company has furnished to the Buyer true, correct and complete copies
of the Company’s Certificate of Incorporation, as amended and as in effect on
the date hereof (the “Certificate of Incorporation”) and the Company’s Bylaws,
as amended and as in effect on the date hereof (the “Bylaws”), and the terms of
all securities convertible into, or exercisable or exchangeable for, shares of
Common Stock and the material rights of the holders thereof in respect thereto.

 

(s) Indebtedness and Other Contracts. Except as set forth on Schedule 3(s),
neither the Company nor any of its Subsidiaries (i) has any outstanding
Indebtedness (as defined below), (ii) is in violation of any term of or in
default under any contract, agreement or instrument relating to any
Indebtedness, except where such violations and defaults would not result,
individually or in the aggregate, in a Material Adverse Effect, or (iii) is a
party to any contract, agreement or instrument relating to any Indebtedness, the
performance of which, in the judgment of the Company’s officers, has or is
expected to have a Material Adverse Effect. Schedule 3(s) provides a detailed
description of the material terms of any such outstanding Indebtedness. For
purposes of this Agreement: (x) “Indebtedness” of any Person means, without
duplication (A) all indebtedness for borrowed money, (B) all obligations issued,
undertaken or assumed as the deferred purchase price of property or services
(including, without limitation, “capital leases” in accordance with generally
accepted accounting principals) (other than trade payables entered into in the
ordinary course of business), (C) all reimbursement or payment obligations with
respect to letters of credit, surety bonds and other similar instruments,
(D) all obligations evidenced by notes, bonds, debentures or similar
instruments, including obligations so evidenced incurred in connection with the
acquisition of property, assets or businesses, (E) all indebtedness created or
arising under any conditional sale or other title retention agreement, or
incurred as financing, in either case with respect to any property or assets
acquired with the proceeds of such indebtedness (even though the rights and
remedies of the seller or bank under such agreement in the event of default are
limited to repossession or sale of such property), (F) all monetary obligations
under any leasing or similar arrangement which, in

 

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connection with generally accepted accounting principles, consistently applied
for the periods covered thereby, is classified as a capital lease, (G) all
indebtedness referred to in clauses (A) through (F) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any mortgage, lien, pledge, charge, security
interest or other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by any Person, even though the Person which
owns such assets or property has not assumed or become liable for the payment of
such indebtedness, and (H) all Contingent Obligations in respect of indebtedness
or obligations of others of the kinds referred to in clauses (A) through
(G) above; (y) “Contingent Obligation” means, as to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto; and
(z) “Person” means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof.

 

(t) Absence of Litigation. There is no action, suit, proceeding, inquiry or
investigation before or by the Principal Market, any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the Company, threatened against or affecting the Company, the
Common Stock or any of the Company’s Subsidiaries or any of the Company’s or its
Subsidiaries’ officers or directors, that could, individually or in the
aggregate, reasonably be expected to result in a Material Adverse Effect.

 

(u) Insurance. The Company and each of its Subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as management of the Company believes to be prudent and customary in the
businesses in which the Company and its Subsidiaries are engaged. Neither the
Company nor any such Subsidiary has been refused any insurance coverage sought
or applied for and neither the Company nor any such Subsidiary has any reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not have a
Material Adverse Effect.

 

(v) Employee Relations. (i) Neither Company nor any of its Subsidiaries is a
party to any collective bargaining agreement or employs any member of a union.
The Company and its Subsidiaries believe that their relations with their
employees are good. Except as set forth on Schedule 3(v), no executive officer
of the Company or any of its Subsidiaries (as defined in Rule 501(f) of the 1933
Act) has notified the Company or any such Subsidiary that such officer intends
to leave the Company or any such Subsidiary or otherwise terminate such
officer’s employment with the Company or any such Subsidiary. No executive
officer of the Company or any of its Subsidiaries, to the knowledge of the
Company or any such Subsidiary, is, or is now expected to be, in violation of
any material term of any employment contract, confidentiality, disclosure or
proprietary information agreement, non-competition agreement, or any other
contract or agreement or any restrictive covenant, and the continued employment
of each such executive officer does not subject the Company or any such
Subsidiary to any liability with respect to any of the foregoing matters.

 

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(ii) The Company and its Subsidiaries are in compliance with all federal, state,
local and foreign laws and regulations respecting labor, employment and
employment practices and benefits, terms and conditions of employment and wages
and hours, except where failure to be in compliance would not, either
individually or in the aggregate, reasonably be expected to result in a Material
Adverse Effect.

 

(w) Title. Except as set forth in Schedule 3(w), the Company and its
Subsidiaries have good and marketable title in fee simple to all real property
and good and marketable title to all personal property owned by them which is
material to the business of the Company and its Subsidiaries, in each case free
and clear of all liens, encumbrances and defects except such as do not
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company and any of its
Subsidiaries. Any real property and facilities held under lease by the Company
and any of its Subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its Subsidiaries.

 

(x) Intellectual Property Rights. The Company and its Subsidiaries own or
possess adequate rights or licenses to use all trademarks, trade names, service
marks, service mark registrations, service names, patents, patent rights,
copyrights, inventions, licenses, approvals, governmental authorizations, trade
secrets and other intellectual property rights (“Intellectual Property Rights”)
necessary to conduct their respective businesses as now conducted except where
the failure to so own or possess would not reasonably be expected to result in a
Material Adverse Effect. None of the Company’s Intellectual Property Rights have
expired or terminated, or are expected to expire or terminate, within three
years from the date of this Agreement. The Company does not have any knowledge
of any infringement by the Company or its Subsidiaries of Intellectual Property
Rights of others. There is no claim, action or proceeding being made or brought,
or to the knowledge of the Company, being threatened, against the Company or its
Subsidiaries regarding its Intellectual Property Rights. The Company is unaware
of any facts or circumstances which might give rise to any of the foregoing
infringements or claims, actions or proceedings. The Company and its
Subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their intellectual properties.

 

(y) Environmental Laws. The Company and its Subsidiaries (i) are in compliance
with any and all Environmental Laws (as hereinafter defined), (ii) have received
all permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are in
compliance with all terms and conditions of any such permit, license or approval
where, in each of the foregoing clauses (i), (ii) and (iii), the failure to so
comply could be reasonably expected to have, individually or in the aggregate, a
Material Adverse Effect. The term “Environmental Laws” means all federal, state,
local or foreign laws relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), including, without limitation,
laws relating to emissions, discharges, releases or threatened

 

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releases of chemicals, pollutants, contaminants, or toxic or hazardous
substances or wastes (collectively, “Hazardous Materials”) into the environment,
or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Materials, as
well as all authorizations, codes, decrees, demands or demand letters,
injunctions, judgments, licenses, notices or notice letters, orders, permits,
plans or regulations issued, entered, promulgated or approved thereunder.

 

(z) Subsidiary Rights. The Company or one of its Subsidiaries has the
unrestricted right to vote, and (subject to limitations imposed by applicable
law) to receive dividends and distributions on, all capital securities of its
Subsidiaries as owned by the Company or such Subsidiary.

 

(aa) Investment Company Status. The Company is not, and upon consummation of the
sale of the Securities will not be, an “investment company,” a company
controlled by an “investment company” or an “affiliated person” of, or
“promoter” or “principal underwriter” for, an “investment company” as such terms
are defined in the Investment Company Act of 1940, as amended.

 

(bb) Tax Status. The Company and each of its Subsidiaries (i) has made or filed
all foreign, Canadian, federal and state income and all other tax returns,
reports and declarations required by any jurisdiction to which it is subject,
(ii) has paid all taxes and other governmental assessments and charges that are
material in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set aside
on its books provision reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations
apply. There are no unpaid taxes in any material amount claimed to be due by the
taxing authority of any jurisdiction, and the officers of the Company know of no
basis for any such claim.

 

(cc) Internal Accounting and Disclosure Controls. The Company maintains a system
of internal accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management’s general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset and liability accountability,
(iii) access to assets or incurrence of liabilities is permitted only in
accordance with management’s general or specific authorization and (iv) the
recorded accountability for assets and liabilities is compared with the existing
assets and liabilities at reasonable intervals and appropriate action is taken
with respect to any difference. The Company maintains disclosure controls and
procedures (as such term is defined in Rule 13a-14 under the 1934 Act) that are
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the 1934 Act is recorded, processed,
summarized and reported, within the time periods specified in the rules and
forms of the SEC, including, without limitation, controls and procedures
designed in to ensure that information required to be disclosed by the Company
in the reports that it files or submits under the 1934 Act is accumulated and
communicated to the Company’s management, including its principal executive
officer or officers and its principal financial officer or officers, as
appropriate, to allow timely decisions regarding required disclosure. During the
twelve months prior to the date hereof neither the Company nor any of its
Subsidiaries have received any notice or correspondence from any accountant
relating to any potential material weakness in any part of the system of
internal accounting controls of the Company or any of its Subsidiaries.

 

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(dd) Off Balance Sheet Arrangements. There is no transaction, arrangement, or
other relationship between the Company and an unconsolidated or other off
balance sheet entity that is required to be disclosed by the Company in its 1934
Act filings and is not so disclosed or that otherwise would be reasonably likely
to have a Material Adverse Effect.

 

(ee) Transfer Taxes. On the Closing Date, all stock transfer or other taxes
(other than income or similar taxes) which are required to be paid in connection
with the sale and transfer of the Securities to be sold to each Buyer 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 complied with.

 

(ff) Registration Eligibility. The Company is eligible to register the
Conversion Shares, the Dividend Shares and the Warrant Shares for resale by the
Buyers using Form SB-2 promulgated under the 1933 Act.

 

(gg) Manipulation of Price. The Company has not, and to its knowledge no one
acting on its behalf has, (i) taken, directly or indirectly, any action designed
to cause or to result 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) other than the Agent, sold, bid for, purchased, or paid any
compensation for soliciting purchases of, any of the Securities, or (iii) other
than the Agent, paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company.

 

(hh) Acknowledgement Regarding Buyers’ Trading Activity. It is understood and
acknowledged by the Company (i) that, except as set forth in Section 4(r), none
of the Buyers have been asked by the Company or its Subsidiaries to agree, nor
has any Buyer agreed with the Company or its Subsidiaries, 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; (ii) that any Buyer, and counter parties in
“derivative” transactions to which any such Buyer is a party, directly or
indirectly, presently may have a “short” position in the Common Stock, and
(iii) that each Buyer shall not be deemed to have any affiliation with or
control over any arm’s length counter party in any “derivative” transaction. The
Company further understands and acknowledges that, except as restricted by the
provisions of Section 4(r), one or more Buyers may engage in hedging and/or
trading 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 the Warrant Shares deliverable with respect to
Securities are being determined and such hedging and/or trading activities, if
any, can reduce the value of the existing Shareholders’ equity interest in the
Company both at and after the time the hedging and/or trading activities are
being conducted. The Company acknowledges that, except if in violation of
Section 4(r), such aforementioned hedging and/or trading activities do not
constitute a breach of this Agreement, the Certificate of Designations, the
Warrants or any of the documents executed in connection herewith.

 

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(ii) Disclosure. Except for information that will be disclosed in a periodic
report on Form 8-K to be filed in accordance with the provisions of
Section 4(i), the Company confirms that neither it nor any other Person acting
on its behalf has provided any of the Buyers or their agents or counsel with any
information that constitutes or could reasonably be expected to constitute
material, nonpublic information. The Company understands and confirms that each
of the Buyers will rely on the foregoing representations in effecting
transactions in securities of the Company. All disclosure provided to the Buyers
regarding the Company, its business and the transactions contemplated hereby,
including the Schedules to this Agreement, furnished by or on behalf of the
Company is true and correct and does 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 the light of the circumstances under which they were
made, not misleading. Each press release issued by the Company during the twelve
(12) months preceding the date of this Agreement did not at the time of release
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 are made, not
misleading. No event or circumstance has occurred or information exists with
respect to the Company or any of its Subsidiaries or its or their business,
properties, prospects, operations or financial conditions, which, under
applicable law, rule or regulation, requires public disclosure or announcement
by the Company but which has not been so publicly announced or disclosed.

 

4. COVENANTS.

 

(a) Best Efforts. Each party shall use its best efforts timely to satisfy each
of the conditions to be satisfied by it as provided in Sections 6 and 7 of this
Agreement.

 

(b) Form D and Blue Sky. The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to each
Buyer promptly after such filing. The Company shall, on or before the Closing
Date, take such action as the Company shall reasonably determine is necessary in
order to obtain an exemption for or to qualify the Securities for sale to the
Buyers at the Closing pursuant to this Agreement under applicable securities or
“Blue Sky” laws of the states of the United States (or to obtain an exemption
from such qualification), and shall provide evidence of any such action so taken
to the Buyers on or prior to the Closing Date. The Company shall make all
filings and reports relating to the offer and sale of the Securities required
under applicable securities or “Blue Sky” laws of the states of the United
States following the Closing Date.

 

(c) Reporting Status. Until the date on which (i) the Investors (as defined in
the Registration Rights Agreement) shall have sold all the Conversion Shares,
Dividend Shares and Warrant Shares, and (ii) none of the Preferred Shares or
Warrants is outstanding (the “Reporting Period”), the Company shall file all
reports required to be filed with the SEC pursuant to the 1934 Act, and the
Company shall not terminate its status as an issuer required to file reports
under the 1934 Act even if the 1934 Act or the rules and regulations thereunder
would otherwise permit such termination.

 

(d) Use of Proceeds. The Company will use the proceeds from the sale of the
Securities as set forth on Schedule 4(d), and not for, except as specifically
set forth on Schedule 4(d), (A) repayment of any outstanding Indebtedness of the
Company or any of its Subsidiaries or (B) redemption or repurchase of any of its
or its Subsidiaries’ equity securities.

 

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(e) Financial Information. The Company agrees to send the following to each
Investor (as defined in the Registration Rights Agreement) during the Reporting
Period (i) unless the following are filed with the SEC through EDGAR and are
available to the public through the EDGAR system, within one (1) Business Day
after the filing thereof with the SEC, a copy of its Annual Reports on Form 10-K
or 10-KSB, any interim reports or any consolidated balance sheets, income
statements, stockholders’ equity statements and/or cash flow statements for any
period other than annual, any Current Reports on Form 8-K and any registration
statements or amendments filed pursuant to the 1933 Act, (ii) on the same day as
the release thereof, facsimile or e-mailed copies of all press releases issued
by the Company or any of its Subsidiaries, and (iii) copies of any notices and
other information made available or given to the stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the
stockholders.

 

(f) Listing. The Company shall promptly secure the listing of all of the
Registrable Securities (as defined in the Registration Rights Agreement) upon
each national securities exchange and automated quotation system, if any, upon
which the Common Stock is then listed (subject to official notice of issuance)
and shall maintain such listing of all Registrable Securities from time to time
issuable under the terms of the Transaction Documents. The Company shall
maintain the authorization for quotation of the Common Stock on the Principal
Market. Neither the Company nor any of its Subsidiaries shall take any action
which would be reasonably expected to result in the delisting or suspension of
the Common Stock on the Principal Market. The Company shall pay all fees and
expenses in connection with satisfying its obligations under this Section 4(f).

 

(g) Fees. The Company shall reimburse Magnetar Financial LLC or its designee(s)
(in addition to any other expense amounts paid to any Buyer prior to the date of
this Agreement) for all reasonable costs and expenses, not to exceed $85,000,
incurred in connection with the transactions contemplated by the Transaction
Documents (including all reasonable legal fees and disbursements in connection
therewith, documentation and implementation of the transactions contemplated by
the Transaction Documents and due diligence in connection therewith), which
amount shall be non-accountable and withheld by Magnetar Capital Master Fund,
Ltd. from its Purchase Price at the Closing. The Company shall be responsible
for the payment of any placement agent’s fees, financial advisory fees, or
broker’s commissions (other than for Persons engaged by any Buyer) relating to
or arising out of the transactions contemplated hereby, including, without
limitation, any fees payable to the Agent. The Company shall pay, and hold each
Buyer harmless against, any liability, loss or expense (including, without
limitation, reasonable attorney’s fees and out-of-pocket expenses) arising in
connection with any claim relating to any such payment.

 

(h) Pledge of Securities. The Company acknowledges and agrees that the
Securities may be pledged pursuant to an available exemption from registration
under the 1933 Act by an Investor (as defined in the Registration Rights
Agreement) in connection with a bona fide margin agreement or other loan or
financing arrangement that is secured by the Securities. The pledge of
Securities shall not be deemed to be a transfer, sale or assignment of the
Securities

 

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hereunder, and no Investor effecting a pledge of Securities shall be required to
provide the Company with any notice thereof or otherwise make any delivery to
the Company pursuant to this Agreement or any other Transaction Document,
including, without limitation, Section 2(g) hereof; provided that an Investor
and its pledgee shall be required to comply with the provisions of Section 2(g)
hereof in order to effect a sale, transfer or assignment of Securities to such
pledgee. The Company hereby agrees to execute and deliver such documentation as
a pledgee of the Securities may reasonably request in connection with a pledge
of the Securities to such pledgee by an Investor.

 

(i) Disclosure of Transactions and Other Material Information. On or before 8:30
a.m., New York Time, on the first Business Day following the date of this
Agreement, the Company shall file a Current Report on Form 8-K describing the
terms of the transactions contemplated by the Transaction Documents in the form
required by the 1934 Act and attaching the material Transaction Documents
(including, without limitation, this Agreement (and all schedules to this
Agreement), the form of Certificate of Designations, the form of Warrant and the
Registration Rights Agreement) (including all attachments, the “8-K Filing”).
From and after the filing of the 8-K Filing with the SEC, the Company shall have
disclosed any material nonpublic information delivered to the Buyers by the
Company or any of its Subsidiaries, or any of their respective officers,
directors, employees or agents. The Company shall not, and shall cause each of
its Subsidiaries and its and each of their respective officers, directors,
employees and agents, not to, provide any Buyer with any material, nonpublic
information regarding the Company or any of its Subsidiaries from and after the
date of this Agreement without the express written consent of such Buyer. In the
event of a breach of the foregoing covenant by the Company, or any of its
Subsidiaries, or any of its or their respective officers, directors, employees
and agents, in addition to any other remedy provided herein or in the
Transaction Documents, a Buyer shall have the right to make a public disclosure,
in the form of a press release, public advertisement or otherwise, of such
material, nonpublic information without the prior approval by the Company, its
Subsidiaries, or any of its or their respective officers, directors, employees
or agents. No Buyer shall have any liability to the Company, its Subsidiaries,
or any of its or their respective officers, directors, employees, stockholders
or agents, for any such disclosure. Subject to the foregoing, neither the
Company, its Subsidiaries nor any Buyer shall issue any press releases or any
other public statements with respect to the transactions contemplated hereby;
provided, however, that the Company shall be entitled, without the prior
approval of any Buyer, to make any press release or other public disclosure with
respect to such transactions (i) in substantial conformity with the 8-K Filing
and contemporaneously therewith and (ii) as is required by applicable law and
regulations (provided that in the case of clause (i) each Buyer shall be
consulted by the Company in connection with any such press release or other
public disclosure prior to its release). Without the prior written consent of
any applicable Buyer, the Company shall not disclose the name of any Buyer in
any filing, announcement, release or otherwise.

 

(j) Restriction on Redemption and Cash Dividends; Additional Registration
Statements. So long as any Preferred Shares are outstanding, the Company shall
not, directly or indirectly, redeem, or declare or pay any cash dividend or
distribution on, the Common Stock without the prior express written consent of
the holders of Preferred Shares representing not less than a majority of the
aggregate number of the then outstanding Preferred Shares. Until the Effective
Date of the last Registration Statement required to be filed pursuant to the
Registration

 

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Rights Agreement, the Company shall not file a registration statement under the
1933 Act relating to securities that are not the Securities, other than as
required by the Registration Rights Agreement dated as of December 30, 2005 to
which the Company is a party.

 

(k) Additional Preferred Shares; Variable Securities; Dilutive Issuances. So
long as any Buyer beneficially owns any Securities, the Company will not,
without the prior written consent of Buyers holding a majority of the Preferred
Shares, issue any Preferred Shares (other than to the Buyers as contemplated
hereby or under the Certificate of Designations) and the Company shall not issue
any other securities that would cause a breach or default under the Certificate
of Designations or the Warrants. From and after the date of this Agreement, and
for so long as any Preferred Shares or Warrants remain outstanding, the Company
shall not, in any manner, issue or sell any rights, warrants or options to
subscribe for or purchase Common Stock or securities directly or indirectly
convertible into or exchangeable or exercisable for Common Stock at a
conversion, exchange or exercise price which varies or may vary after issuance
with the market price of the Common Stock, including by way of one or more
reset(s) to any fixed price unless the conversion, exchange or exercise price of
any such security cannot be less than the then applicable Conversion Price (as
defined in the Certificate of Designations) with respect to the Common Stock
into which any Preferred Shares are convertible or the then applicable Exercise
Price (as defined in the Warrants) with respect to the Common Stock into which
any Warrant is exercisable. For purposes of clarification, this does not
prohibit (i) the issuance of securities with customary “weighted average” or
“full ratchet” anti-dilution adjustments which adjust a fixed conversion or
exercise price of securities sold by the Company in the future or (ii) the
issuance of any securities under the terms and conditions of any rights,
warrants, options or securities of the Company issued and outstanding as of the
date of this Agreement; provided that none of such rights, options or securities
are modified or amended. For so long as any Preferred Shares or Warrants remain
outstanding, the Company shall not, in any manner, enter into or affect any
dilutive issuance if the effect of such dilutive issuance is to cause the
Company to be required to issue upon conversion of any Preferred Shares or
exercise of any Warrant any shares of Common Stock in excess of that number of
shares of Common Stock which the Company may issue upon conversion of the
Preferred Shares and exercise of the Warrants without breaching the Company’s
obligations under the rules or regulations of the Principal Market.

 

(l) Corporate Existence. So long as any Buyer beneficially owns any Securities,
the Company shall not be party to any Fundamental Transaction (as defined in the
Certificate of Designations) unless the Company is in compliance with the
applicable provisions governing Fundamental Transactions set forth in the
Certificate of Designations and the Warrants.

 

(m) Reservation of Shares. The Company shall take all action necessary to at all
times have authorized, and reserved for the purpose of issuance, no less than
the sum of (1) 125% of the number of shares of Common Stock issuable upon
conversion of the issued and outstanding Preferred Shares, (2) 100% of the
number of Dividend Shares issuable pursuant to the terms of the Preferred Shares
as of the Trading Day immediately prior to the applicable date of determination
and (3) 125% of the number of shares of Common Stock issuable upon exercise of
the issued and outstanding Warrants; provided, that the parties acknowledge that
the number of shares of Common Stock authorized on the date hereof are, and, on
the Closing Date, will be, less than the amount required to satisfy the
requirements of this Section 4(m); provided, further,

 

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that the Company hereby covenants and agrees to call a meeting of stockholders
on or prior to May 15, 2006 (the “Stockholder Approval Deadline”) to increase
the number of authorized shares of Common Stock to 300,000,000 (the “Stockholder
Approval”).

 

(n) Conduct of Business. The business of the Company and its Subsidiaries shall
not be conducted in violation of any law, ordinance or regulation of any
governmental entity, except where such violations would not result, either
individually or in the aggregate, in a Material Adverse Effect.

 

(o) Additional Issuances of Securities.

 

(i) For purposes of this Section 4(o), the following definitions shall apply.

 

(1) “Convertible Securities” means any stock or securities (other than Options)
convertible into or exercisable or exchangeable for shares of Common Stock.

 

(2) “Options” means any rights, warrants or options to subscribe for or purchase
shares of Common Stock or Convertible Securities.

 

(3) “Common Stock Equivalents” means, collectively, Options and Convertible
Securities.

 

(ii) The Company will not, directly or indirectly, (A) from the date hereof
until two hundred seventy (270) days after the Effective Date of the last
Registration Statement required to be filed pursuant to the Registration Rights
Agreement, file any registration statement with the SEC other than the
Registration Statement (as defined in the Registration Rights Agreement), a
registration statement on Form S-8 pursuant to the 1933 Act to register shares
of Common Stock issuable pursuant to the Stock Option Program or the
Registration Statement contemplated pursuant to the Registration Rights
Agreement dated as of December 30, 2005 or,(B) from and after the date hereof
until the Effective Date of the last Registration Statement required to be filed
pursuant to the registration statement, directly or indirectly, offer, sell,
grant any option to purchase, or otherwise dispose of (or announce any offer,
sale, grant or any option to purchase or other disposition of) any of its or its
Subsidiaries’ equity or equity equivalent securities, including without
limitation any debt, preferred stock or other instrument or security that is, at
any time during its life and under any circumstances, convertible into or
exchangeable or exercisable for shares of Common Stock or Common Stock
Equivalents (any such offer, sale, grant, disposition or announcement being
referred to as a “Subsequent Placement”).

 

(iii) The Company will not, directly or indirectly, effect any Subsequent
Placement unless the Company shall have first complied with this
Section 4(o)(iii).

 

(1) The Company shall deliver to each Buyer that owns, at such time, at least
50% of the Securities that such Buyer purchased at the Closing (including the
Securities into which such Preferred Shares and Warrants are convertible or
exercisable into), a written notice (the ”Offer Notice”) of any proposed or
intended

 

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issuance or sale or exchange (the ”Offer”) of the securities being offered (the
“Offered Securities”) in a Subsequent Placement, which Offer Notice shall
(w) identify and describe the Offered Securities, (x) describe the price and
other terms upon which they are to be issued, sold or exchanged, and the number
or amount of the Offered Securities to be issued, sold or exchanged,
(y) identify the persons or entities (if known) to which or with which the
Offered Securities are to be offered, issued, sold or exchanged and (z) offer to
issue and sell to or exchange with such eligible Buyers all of the Offered
Securities, allocated among such eligible Buyers (a) based on such Buyer’s pro
rata portion of the aggregate number of Preferred Shares purchased hereunder by
all such eligible Buyers (the “Basic Amount”), and (b) with respect to each
eligible Buyer that elects to purchase its Basic Amount, any additional portion
of the Offered Securities attributable to the Basic Amounts of other eligible
Buyers as such eligible Buyer shall indicate it will purchase or acquire should
the other eligible Buyers subscribe for less than their Basic Amounts (the
“Undersubscription Amount”).

 

(2) To accept an Offer, in whole or in part, such eligible Buyer must deliver a
written notice to the Company prior to the end of the fifth (5th) Business Day
after such eligible Buyer’s receipt of the Offer Notice (the “Offer Period”),
setting forth the portion of such eligible Buyer’s Basic Amount that such
eligible Buyer elects to purchase and, if such eligible Buyer shall elect to
purchase all of its Basic Amount, the Undersubscription Amount, if any, that
such eligible Buyer elects to purchase (in either case, the “Notice of
Acceptance”). If the Basic Amounts subscribed for by all eligible Buyers are
less than the total of all of the Basic Amounts, then each eligible Buyer who
has set forth an Undersubscription Amount in its Notice of Acceptance shall be
entitled to purchase, in addition to the Basic Amounts subscribed for, the
Undersubscription Amount it has subscribed for; provided, however, that if the
Undersubscription Amounts subscribed for exceed the difference between the total
of all the Basic Amounts and the Basic Amounts subscribed for (the “Available
Undersubscription Amount”), each eligible Buyer who has subscribed for any
Undersubscription Amount shall be entitled to purchase only that portion of the
Available Undersubscription Amount as the Basic Amount of such eligible Buyer
bears to the total Basic Amounts of all eligible Buyers that have subscribed for
Undersubscription Amounts, subject to rounding by the Company to the extent its
deems reasonably necessary.

 

(3) The Company shall have five (5) Business Days from the expiration of the
Offer Period above to offer, issue, sell or exchange all or any part of such
Offered Securities as to which a Notice of Acceptance has not been given by the
Buyers (the “Refused Securities”), but only to the offerees described in the
Offer Notice (if so described therein) and only upon terms and conditions
(including, without limitation, unit prices and interest rates) that are not
more favorable to the acquiring person or persons or less favorable to the
Company than those set forth in the Offer Notice.

 

(4) In the event the Company shall propose to sell less than all the Refused
Securities (any such sale to be in the manner and on the terms specified in
Section 4(o)(iii)(3) above), then each Buyer may, at its sole option and in its
sole discretion, reduce the number or amount of the Offered Securities specified
in its Notice

 

22

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of Acceptance to an amount that shall be not less than the number or amount of
the Offered Securities that such Buyer elected to purchase pursuant to
Section 4(o)(iii)(2) above multiplied by a fraction, (i) the numerator of which
shall be the number or amount of Offered Securities the Company actually
proposes to issue, sell or exchange (including Offered Securities to be issued
or sold to Buyers pursuant to Section 4(o)(iii)(3) above prior to such
reduction) and (ii) the denominator of which shall be the original amount of the
Offered Securities. In the event that any Buyer so elects to reduce the number
or amount of Offered Securities specified in its Notice of Acceptance, the
Company may not issue, sell or exchange more than the reduced number or amount
of the Offered Securities unless and until such securities have again been
offered to the Buyers in accordance with Section 4(o)(iii)(1) above.

 

(5) Upon the closing of the issuance, sale or exchange of all or less than all
of the Refused Securities, the Buyers shall acquire from the Company, and the
Company shall issue to the Buyers, the number or amount of Offered Securities
specified in the Notices of Acceptance, as reduced pursuant to
Section 4(o)(iii)(3) above if the Buyers have so elected, upon the terms and
conditions specified in the Offer. The purchase by the Buyers of any Offered
Securities is subject in all cases to the preparation, execution and delivery by
the Company and the Buyers of a purchase agreement relating to such Offered
Securities reasonably satisfactory in form and substance to the Buyers and their
respective counsel.

 

(6) Any Offered Securities not acquired by the Buyers or other persons in
accordance with Section 4(o)(iii)(3) above may not be issued, sold or exchanged
until they are again offered to the Buyers under the procedures specified in
this Agreement.

 

(iv) The restrictions contained in subsections (ii) and (iii) of this
Section 4(o) shall not apply in connection with the issuance of any Excluded
Securities (as defined in the Certificate of Designations).

 

(p) Appointment of CFO. Not later than 90 days after the Closing Date, the
Company shall have appointed a chief financial officer (other than John Levy)
reasonably acceptable to Magnetar Capital Master Fund, Ltd.

 

(q) Investor Relations Firm. Not later than 120 days after the Closing Date, the
Company shall have hired an investor relations firm reasonably acceptable to
Magnetar Capital Master Fund, Ltd.

 

(r) Restrictions on Short Sales. Until the earlier of the first Effective Date
and the 50% Effectiveness Deadline (as such terms are defined in the
Registration Rights Agreement), each Buyer hereby agrees not to enter into any
Short Sales with respect to the Common Stock of the Company. As used herein,
“Short Sales” shall have the meaning ascribed to such term in Rule 3b-3 of the
Exchange Act and Rule 200 promulgated under Regulation SHO under the Exchange
Act.

 

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(s) Incurrence of Indebtedness. Until such time as the Buyers hold less than 20%
of the Registrable Securities (as defined in the Registration Rights Agreement),
the Company shall not, and the Company shall not permit any of its Subsidiaries
to, directly or indirectly, incur or guarantee, assume or suffer to exist any
Indebtedness other than as provided in Schedule 3(s) hereto or as contemplated
in Schedule 4(s) hereto.

 

5. REGISTER; TRANSFER AGENT INSTRUCTIONS.

 

(a) Register. The Company shall maintain at its principal executive offices (or
such other office or agency of the Company as it may designate by notice to each
holder of Securities), a register for the Preferred Shares and the Warrants in
which the Company shall record the name and address of the Person in whose name
the Preferred Shares and the Warrants have been issued (including the name and
address of each transferee), the number of Preferred Shares held by such Person,
the number of Conversion Shares issuable upon conversion of the Preferred Shares
and Warrant Shares issuable upon exercise of the Warrants held by such Person.
The Company shall keep the register open and available at all times during
business hours for inspection of any Buyer or its legal representatives.

 

(b) Transfer Agent Instructions. The Company shall issue irrevocable
instructions to its transfer agent, and any subsequent transfer agent, to issue
certificates or credit shares to the applicable balance accounts at The
Depository Trust Company (“DTC”), registered in the name of each Buyer or its
respective nominee(s), for the Conversion Shares, and the Warrant Shares in such
amounts as specified from time to time by each Buyer to the Company upon
conversion of the Preferred Shares or exercise of the Warrants in the form of
Exhibit D attached hereto (the “Irrevocable Transfer Agent Instructions”). The
Company warrants that no instruction other than the Irrevocable Transfer Agent
Instructions referred to in this Section 5(b), and stop transfer instructions to
give effect to Section 2(g) hereof, will be given by the Company to its transfer
agent with respect to the Securities, and that the Securities shall otherwise be
freely transferable on the books and records of the Company, as applicable, and
to the extent provided in this Agreement and the other Transaction Documents. If
a Buyer effects a sale, assignment or transfer of the Securities in accordance
with Section 2(g), the Company shall permit the transfer and shall promptly
instruct its transfer agent to issue one or more certificates or credit shares
to the applicable balance accounts at DTC in such name and in such denominations
as specified by such Buyer to effect such sale, transfer or assignment. In the
event that such sale, assignment or transfer involves Conversion Shares and
Warrant Shares sold, assigned or transferred pursuant to an effective
registration statement or pursuant to Rule 144, the transfer agent shall issue
such Securities to the Buyer, assignee or transferee, as the case may be,
without any restrictive legend. The Company acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to a Buyer. Accordingly,
the Company acknowledges that the remedy at law for a breach of its obligations
under this Section 5(b) will be inadequate and agrees, in the event of a breach
or threatened breach by the Company of the provisions of this Section 5(b), that
a Buyer shall be entitled, in addition to all other available remedies, to an
order and/or injunction restraining any breach and requiring immediate issuance
and transfer, without the necessity of showing economic loss and without any
bond or other security being required.

 

24

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6. CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.

 

(a) The obligation of the Company hereunder to issue and sell the Preferred
Shares and the related Warrants to each Buyer at the Closing is subject to the
satisfaction, at or before the Closing Date, of each of the following
conditions, provided that these conditions are for the Company’s sole benefit
and may be waived by the Company at any time in its sole discretion by providing
each Buyer with prior written notice thereof:

 

(i) Such Buyer shall have executed each of the Transaction Documents to which it
is a party and delivered the same to the Company.

 

(ii) Such Buyer and each other Buyer shall have delivered to the Company the
Purchase Price (less, in the case of Magnetar Capital Master Fund, Ltd., the
amount withheld pursuant to Section 4(g)) for the Preferred Shares and the
related Warrants being purchased by such Buyer at the Closing (i) by wire
transfer of immediately available funds pursuant to the wire instructions
provided by the Company or (ii) by exchange of the outstanding principal and
interest of the Exchangeable Notes pursuant to the terms thereof.

 

(iii) The representations and warranties of such Buyer shall be true and correct
in all material respects as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date), and such Buyer shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by such
Buyer at or prior to the Closing Date.

 

7. CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE.

 

(a) The obligation of each Buyer hereunder to purchase the Preferred Shares and
the related Warrants at the Closing is subject to the satisfaction, at or before
the Closing Date, of each of the following conditions, provided that these
conditions are for each Buyer’s sole benefit and may be waived by such Buyer at
any time in its sole discretion by providing the Company with prior written
notice thereof:

 

(i) The Company shall have executed and delivered to such Buyer (A) each of the
Transaction Documents and (B) the number of Preferred Shares as is set forth
across from such Buyer’s name in column (3) of the Schedule of Buyers and the
related Warrants for that number of shares of Common Stock as is set forth
across from such Buyer’s name in column (4) of the Schedule of Buyers being
purchased by such Buyer at the Closing pursuant to this Agreement.

 

(ii) Such Buyer shall have received the opinion of Holland & Knight, LLP, the
Company’s outside counsel, dated as of the Closing Date, in substantially the
form of Exhibit E attached hereto.

 

(iii) The Company shall have delivered to such Buyer a copy of the Irrevocable
Transfer Agent Instructions, in the form of Exhibit D attached hereto, which
instructions shall have been delivered to and acknowledged in writing by the
Company’s transfer agent.

 

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(iv) The Company shall have delivered to such Buyer a certificate evidencing the
formation and good standing of the Company and each of its Subsidiaries by the
Secretary of State (or equivalent) in its jurisdiction of formation as of a date
within ten (10) days of the Closing Date.

 

(v) The Company shall have delivered to such Buyer a certificate evidencing the
Company’s qualification as a foreign corporation and good standing issued by the
Secretary of State (or comparable office) of each jurisdiction in which the
Company conducts business and is required to so qualify, as of a date within 10
days of the Closing Date.

 

(vi) The Company shall have delivered to such Buyer a certified copy of the
Certificate of Incorporation as certified by the Secretary of State of the State
of Nevada within ten (10) days of the Closing Date.

 

(vii) The Company shall have delivered to such Buyer a certificate, executed by
the Secretary of the Company and dated as of the Closing Date, as to (i) the
resolutions consistent with Section 3(b) as adopted by the Company’s Board of
Directors in a form reasonably acceptable to such Buyer, (ii) the Certificate of
Incorporation and (iii) the Bylaws, each as in effect at the Closing, in the
form attached hereto as Exhibit F.

 

(viii) The representations and warranties of the Company shall be true and
correct as of the date when made and as of the Closing Date as though made at
that time (except for representations and warranties that speak as of a specific
date) and the Company shall have performed, satisfied and complied in all
respects with the covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by the Company
at or prior to the Closing Date. Such Buyer shall have received a certificate,
executed by the Chief Executive Officer of the Company, dated as of the Closing
Date, to the foregoing effect and as to such other matters as may be reasonably
requested by such Buyer in the form attached hereto as Exhibit G.

 

(ix) The Company shall have delivered to such Buyer a letter from the Company’s
transfer agent certifying the number of shares of Common Stock outstanding as of
a date within five days of the Closing Date.

 

(x) The Common Stock (I) shall be designated for quotation or listed on the
Principal Market and (II) shall not have been suspended, as of the Closing Date,
by the SEC or the Principal Market from trading on the Principal Market nor
shall suspension by the SEC or the Principal Market have been threatened, as of
the Closing Date, either (A) in writing by the SEC or the Principal Market or
(B) by falling below the minimum maintenance requirements of the Principal
Market.

 

(xi) The Company shall have obtained all governmental, regulatory or third party
consents and approvals, if any, necessary for the sale of the Securities.

 

(xii) The Certificate of Designations in the form attached hereto as Exhibit A
shall have been filed with the Secretary of State of the State of Nevada and
shall be in full force and effect, enforceable against the Company in accordance
with its terms and shall not have been amended.

 

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(xiii) The Company, contemporaneously with the Closing, shall have consummated
the transactions contemplated by the Asset Purchase Agreement dated as of
February 16, 2006 by and among the Company and California Natural Products, Inc.
(the “Savannah Purchase Agreement”) in the form attached hereto as Exhibit H.

 

(xiv) The Board of Directors of the Company shall have authorized a formal stock
option program (the “Stock Option Program”) on terms acceptable to the Buyers.

 

(xv) The Company shall have taken all necessary action to authorize the
designation of one member of the board of directors of the Company by Magnetar
Capital Master Fund, Ltd., such that at any time that Magnetar Capital Master
Fund, Ltd. continues to own any Preferred Shares, it shall have the right, by
written request to the Company, to designate a representative, chosen by it in
its sole discretion, to the board of directors of the Company

 

(xvi) The Company and Duane N. Martin, Marc R. Fry, Ralph M. Passino, Joseph
Balistreri, Charles Sizer, Newlin Martin and Bruce Neviaser shall have executed
and delivered to the Buyers a Voting Agreement in the form attached hereto as
Exhibit I.

 

(xvii) The Company shall have delivered a duly executed lock-up agreement from
each of Duane N. Martin and Marc R. Fry, each in the form attached hereto as
Exhibit J.

 

(xviii) The Company shall have delivered to such Buyer such other documents
relating to the transactions contemplated by this Agreement as such Buyer or its
counsel may reasonably request.

 

8. TERMINATION. In the event that the Closing shall not have occurred with
respect to a Buyer on or before five (5) Business Days from the date hereof due
to the Company’s or such Buyer’s failure to satisfy the conditions set forth in
Sections 6 and 7 above (and the nonbreaching party’s failure to waive such
unsatisfied condition(s)), the nonbreaching party shall have the option to
terminate this Agreement with respect to such breaching party at the close of
business on such date without liability of any party to any other party;
provided, however, if this Agreement is terminated pursuant to this Section 8,
the Company shall remain obligated to reimburse the non-breaching Buyers for the
expenses described in Section 4(g) above.

 

9. MISCELLANEOUS.

 

(a) Governing Law; Jurisdiction; Jury Trial. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by the internal laws of the State of New York, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York. Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in The City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit,

 

27

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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 for such 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. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY
RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION
OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT
OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

(b) Counterparts. This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party; provided that a facsimile signature shall be
considered due execution and shall be binding upon the signatory thereto with
the same force and effect as if the signature were an original, not a facsimile
signature.

 

(c) Headings. The headings of this Agreement are for convenience of reference
and shall not form part of, or affect the interpretation of, this Agreement.

 

(d) Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.

 

(e) Entire Agreement; Amendments. This Agreement and the other Transaction
Documents supersede all other prior oral or written agreements between the
Buyers, the Company, their Affiliates and Persons acting on their behalf with
respect to the matters discussed herein, and this Agreement, the other
Transaction Documents and the instruments referenced herein and therein contain
the entire understanding of the parties with respect to the matters covered
herein and therein and, except as specifically set forth herein or therein,
neither the Company nor any Buyer makes any representation, warranty, covenant
or undertaking with respect to such matters. No provision of this Agreement may
be amended other than by an instrument in writing signed by the Company and the
holders of at least a majority of the Preferred Shares issued and issuable
hereunder, and any amendment to this Agreement made in conformity with the
provisions of this Section 9(e) shall be binding on all Buyers and holders of
Securities, as applicable. No provision hereof may be waived other than by an
instrument in writing signed by the party against whom enforcement is sought. No
such amendment shall be effective to the extent that it applies to less than all
of the holders of the Preferred Shares then outstanding. No consideration shall
be offered or paid to any Person to amend or consent to a waiver or modification
of any provision of any of the Transaction Documents unless the same
consideration also is offered to all of the parties to the Transaction
Documents, holders of Preferred Shares or holders of the Warrants, as the case
may be. The Company has not, directly or indirectly, made any agreements with
any Buyers relating to the terms or conditions of the transactions contemplated
by the Transaction Documents except as set forth in the Transaction

 

28

--------------------------------------------------------------------------------

Documents. Without limiting the foregoing, the Company confirms that, except as
set forth in this Agreement, no Buyer has made any commitment or promise or has
any other obligation to provide any financing to the Company or otherwise.

 

(f) Notices. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party); or (iii) one Business Day after deposit with an overnight
courier service, in each case properly addressed to the party to receive the
same. The addresses and facsimile numbers for such communications shall be:

 

If to the Company:

 

Universal Food & Beverage Company

3830 Commerce Drive,

St. Charles, Illinois 60174

Telephone:        (630) 584-8670

Facsimile:         (630) 584-8674

Attention:          Chief Executive Officer

 

With a copy (for informational purposes only) to:

 

Holland & Knight, LLP

131 S. Dearborn, 30th Floor

Chicago, IL 60603

Telephone:        (312) 263-3600

Facsimile:         (312) 578-6666

Attention:          Carl Neumann, Esq.

 

If to the Transfer Agent:

 

Interwest Transfer Co., Inc.

1981 East 4800 South, Suite 100

Salt Lake City, UT 84117

Telephone:        (801) 272-9294

Facsimile:         (801) 277-3147

Attention:          Melina Orth

 

If to a Buyer, to its address and facsimile number set forth on the Schedule of
Buyers, with copies to such Buyer’s representatives as set forth on the Schedule
of Buyers,

 

with a copy (for informational purposes only) to:

 

Schulte Roth & Zabel LLP

919 Third Avenue

New York, New York 10022

Telephone:        (212) 756-2000

Facsimile:         (212) 593-5955

Attention:          Eleazer N. Klein, Esq.

 

29

--------------------------------------------------------------------------------

or to such other address and/or facsimile number and/or to the attention of such
other Person as the recipient party has specified by written notice given to
each other party five (5) days prior to the effectiveness of such change.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender’s facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission or
(C) provided by an overnight courier service shall be rebuttable evidence of
personal service, receipt by facsimile or receipt from an overnight courier
service in accordance with clause (i), (ii) or (iii) above, respectively.

 

(g) Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of the parties and their respective successors and assigns,
including any purchasers of the Preferred Shares or the Warrants. The Company
shall not assign this Agreement or any rights or obligations hereunder without
the prior written consent of the holders of at least a majority of the aggregate
number of Registrable Securities issued and issuable hereunder, including by way
of a Fundamental Transaction (unless the Company is in compliance with the
applicable provisions governing Fundamental Transactions set forth in the
Certificate of Designations and the Warrants). A Buyer may assign some or all of
its rights hereunder in connection with transfer of any of its Securities
without the consent of the Company, in which event such assignee shall be deemed
to be a Buyer hereunder with respect to such assigned rights.

 

(h) No Third Party Beneficiaries. This Agreement is intended for the benefit of
the parties hereto and their respective permitted successors and assigns, and,
except as set forth in Section 9(k) below, is not for the benefit of, nor may
any provision hereof be enforced by, any other Person.

 

(i) Survival. Unless this Agreement is terminated under Section 8, the
representations and warranties of the Company and the Buyers contained in
Sections 2 and 3 and the agreements and covenants set forth in Sections 4, 5 and
9 shall survive the Closing. Each Buyer shall be responsible only for its own
representations, warranties, agreements and covenants hereunder.

 

(j) Further Assurances. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as any other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.

 

(k) Indemnification. In consideration of each Buyer’s execution and delivery of
the Transaction Documents and acquiring the Securities thereunder and in
addition to all of the Company’s other obligations under the Transaction
Documents, the Company shall defend, protect, indemnify and hold harmless each
Buyer and each other holder of the Securities and all of their stockholders,
partners, members, officers, directors, employees and direct or indirect

 

30

--------------------------------------------------------------------------------

investors and any of the foregoing Persons’ agents or other representatives
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the “Indemnitees”)
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorneys’ fees and disbursements (the “Indemnified Liabilities”), incurred by
any Indemnitee as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby or
(c) any cause of action, suit or claim brought or made against such Indemnitee
by a third party (including for these purposes a derivative action brought on
behalf of the Company) and arising out of or resulting from (i) the execution,
delivery, performance or enforcement of the Transaction Documents or any other
certificate, instrument or document contemplated hereby or thereby, (ii) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, (iii) any
disclosure made by such Buyer pursuant to Section 4(i), or (iv) the status of
such Buyer or holder of the Securities as an investor in the Company pursuant to
the transactions contemplated by the Transaction Documents. To the extent that
the foregoing undertaking by the Company may be unenforceable for any reason,
the Company shall make the maximum contribution to the payment and satisfaction
of each of the Indemnified Liabilities which is permissible under applicable
law. Except as otherwise set forth herein, the mechanics and procedures with
respect to the rights and obligations under this Section 9(l) shall be the same
as those set forth in Section 6 of the Registration Rights Agreement.

 

(l) No Strict Construction. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.

 

(m) Remedies. Each Buyer and each holder of the Securities shall have all rights
and remedies set forth in the Transaction Documents and all rights and remedies
which such holders have been granted at any time under any other agreement or
contract and all of the rights which such holders have under any law. Any Person
having any rights under any provision of this Agreement shall be entitled to
enforce such rights specifically (without posting a bond or other security), to
recover damages by reason of any breach of any provision of this Agreement and
to exercise all other rights granted by law. Furthermore, the Company recognizes
that in the event that it fails to perform, observe, or discharge any or all of
its obligations under the Transaction Documents, any remedy at law may prove to
be inadequate relief to the Buyers. The Company therefore agrees that the Buyers
shall be entitled to seek temporary and permanent injunctive relief in any such
case without the necessity of proving actual damages and without posting a bond
or other security.

 

(n) Payment Set Aside. To the extent that the Company makes a payment or
payments to the Buyers hereunder or pursuant to any of the other Transaction
Documents or the Buyers enforce or exercise their rights hereunder or
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated,

 

31

--------------------------------------------------------------------------------

declared to be fraudulent or preferential, set aside, recovered from, disgorged
by or are required to be refunded, repaid or otherwise restored to the Company,
a trustee, receiver or any other Person under any law (including, without
limitation, any bankruptcy law, foreign, state or federal law, common law or
equitable cause of action), then to the extent of any such restoration the
obligation or part thereof originally intended to be satisfied shall be revived
and continued in full force and effect as if such payment had not been made or
such enforcement or setoff had not occurred.

 

(o) Independent Nature of Buyers’ Obligations and Rights. The obligations of
each Buyer under any Transaction Document are several and not joint with the
obligations of any other Buyer, and no Buyer shall be responsible in any way for
the performance of the obligations of any other Buyer under any Transaction
Document. Nothing contained herein or in any other Transaction Document, and no
action taken by any Buyer pursuant hereto or thereto, shall be deemed to
constitute the Buyers as a partnership, an association, a joint venture or any
other kind of entity, or create a presumption that the Buyers are in any way
acting in concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents and the Company
acknowledges that the Buyers are not acting in concert or as a group with
respect to such obligations or the transactions contemplated by the Transaction
Documents. Each Buyer confirms that it has independently participated in the
negotiation of the transaction contemplated hereby with the advice of its own
counsel and advisors. Each Buyer shall be entitled to independently protect and
enforce its rights, including, without limitation, the rights arising out of
this Agreement or out of any other Transaction Documents, and it shall not be
necessary for any other Buyer to be joined as an additional party in any
proceeding for such purpose.

 

[Signature Page Follows]

 

32

--------------------------------------------------------------------------------

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

 

COMPANY: UNIVERSAL FOOD & BEVERAGE COMPANY By:  

/s/ Duane N. Martin

--------------------------------------------------------------------------------

Name:   Duane N. Martin Title:   Chief Executive Officer [BUYERS’ SIGNATURE
PAGES]

--------------------------------------------------------------------------------

EXHIBITS

 

Exhibit A    Form of Certificate of Designations Exhibit B    Form of Warrants
Exhibit C    Form of Registration Rights Agreement Exhibit D    Form of
Irrevocable Transfer Agent Instructions Exhibit E    Form of Outside Company
Counsel Opinion Exhibit F    Form of Secretary’s Certificate Exhibit G    Form
of Officer’s Certificate Exhibit H    Form of Savannah Purchase Agreement
Exhibit I    Form of Voting Agreement Exhibit J    Form of Lock-up Agreement

--------------------------------------------------------------------------------

Schedules to

Securities Purchase Agreement

dated as of February 15, 2006

by and between

Universal Food & Beverage Company

and the Buyers Identified in that Agreement

--------------------------------------------------------------------------------

Schedule 3(a)

 

1. Universal Food & Beverage Company, a Delaware Corporation (“Delaware
Subsidiary”).

 

2. Universal Food & Beverage Company of Virginia, a Virginia Corporation
(“Virginia Subsidiary”). The Virginia Subsidiary is wholly-owned by the Delaware
Subsidiary.

 

3. Universal Food & Beverage Company of Georgia, a Georgia Corporation (“Georgia
Subsidiary”).

--------------------------------------------------------------------------------

Schedule 3(e)

 

None.

--------------------------------------------------------------------------------

Schedule 3(l)

 

1. The Company issued $3,250,000 in Senior Convertible Exchangeable Notes
(“Senior Notes”) and related Warrants on December 30, 2005 and January 11, 2006.

 

2. The Company entered into a letter of intent on June 30, 2005 with respect to
the acquisition of certain assets of California Natural Products, Inc. (“CNP”)
located in Savannah, Georgia and used in the operation of an aseptic processing
and packaging facility (“Savannah Acquisition”).

 

3. The Company organized the Georgia Subsidiary on February 3, 2006 in
connection with the Savannah Acquisition.

 

4. The Company will enter into an Asset Purchase Agreement to be dated
February 16, 2006 with CNP with respect to the Savannah Acquisition (the
“Savannah Acquisition Agreement”).

--------------------------------------------------------------------------------

Schedule 3(q)

 

1. There is an outstanding contractual obligation to provide options to purchase
460,000 shares of the Company’s common stock to John F. Levy at an exercise
price of $0.70 per share (the closing price of the Common Stock on the day prior
to the November 28, 2005 agreement) pursuant to a stock option agreement to be
approved by the Board of Directors.

 

2. There is a lease for a pick-up truck between the Company and Marc Fry. The
rent is $225 per month. The truck is used at the water plant in Independence,
Virginia.

 

3. The following shareholder notes (the “Shareholder Notes”) are outstanding:

 

Maker

--------------------------------------------------------------------------------

   Principal Amount

--------------------------------------------------------------------------------

Duane Martin

   $ 204,000.00

Ralph Passino

   $ 45,000.00

Bruce Neviaser

   $ 450,000.00

 

4. The Company owes the following executive officers the following amounts as
defined compensation as of the date of this Agreement (officers agreed to defer
50% of their compensation until the Company’s operations reaches an annual
revenue rate of $4 million):

 

Name

--------------------------------------------------------------------------------

   Deferred Compensation Owed

--------------------------------------------------------------------------------

Duane N. Martin

   $ 167,788.55

Marc R. Fry

   $ 119,471.18

Ralph M. Passino

   $ 94,791.71

Joseph Balistreri

   $ 67,115.40

Charles Sizer

   $ 97,451.96

--------------------------------------------------------------------------------

Schedule 3(r)

 

A. As of the date of this Agreement, there were issued and outstanding
37,439,536 shares of our common stock and no shares of our preferred stock. As
of the date of this Agreement, there are outstanding rights, warrants and
options to acquire up to 19,947,453 shares of our common stock, including the
common stock issuable on conversion of the Senior Notes and the outstanding
common stock purchase warrants and options for our common stock described below.
We have reserved 21,847,585 shares of our common stock as of the date of this
Agreement.

 

Description

--------------------------------------------------------------------------------

  

No. of Shares

Subject to Rights

--------------------------------------------------------------------------------

  

Exercise or

Conversion Price

--------------------------------------------------------------------------------

  

Shares Reserved

For Issuance

--------------------------------------------------------------------------------

Common stock purchase warrants issued as a result of the share exchange

   5,914,345    $ 2.50    5,914,345

Common stock purchase warrants issued in connection with acquisition of IWG
assets

   2,945,000    $ 1.00    2,945,000

Common stock awards under the consultants’ compensation plan

   0      N/A    837,500

Options to purchase common stock under agreement with interim chief financial
officer

   460,000    $ 0.70    460,000

Common stock issuable on conversion of senior secured convertible exchangeable
notes

   8,125,000    $ 0.40    8,937,500

Common stock purchase warrants issued to senior note holders

   2,503,108    $ 0.01    2,753,420

 

B. Following the sale of the Preferred Shares contemplated by this Agreement,
and assuming 20,704 Preferred Shares are sold, the Company will have outstanding
20,704 shares of Series A Convertible Preferred Stock. In connection with the
sale of the Preferred Shares, the Senior Notes will be exchanged for Preferred
Shares, and the 8,937,500 shares of common stock shown as reserved in the table
in Item A for conversion of the Senior Notes will no longer be reserved.
Following the sale of the Preferred Shares, we will have outstanding additional
rights, warrants and options to acquire 77,240,053 shares of our common stock,
including conversion rights provided with respect to the Preferred Shares and
common stock purchase warrants as described below. In connection with the sale
of the Preferred Shares, we will reserve 87,245,600 shares of our common stock
for issuance upon conversion of the Preferred Shares, issuance of dividends in
connection with the Preferred Shares and exercise of the warrants. We will also
reserve 14,000,000 shares of common stock for awards under our 2006 Omnibus
Stock Plan.

 

Description

--------------------------------------------------------------------------------

  

No. of Shares

Subject to Rights

--------------------------------------------------------------------------------

  

Exercise or

Conversion Price

--------------------------------------------------------------------------------

  

Shares Reserved

For Issuance

--------------------------------------------------------------------------------

Common stock issuable in conversion of convertible preferred stock

   41,408,000    $ 0.50    51,760,000

Common stock issuable as dividend on convertible preferred stock

   N/A      N/A    6,500,000

Common stock purchase warrants issued to convertible preferred stock holders

   20,704,000    $ 0.70    25,880,000

Common stock purchase warrants issued to Illington Capital, Inc.

   3,105,600    $ 0.50    3,105,600

Common stock issuable on exercise of awards under 2006 Omnibus Stock Plan

   0      As provided in plan    14,000,000

Total

   65,217,600           101,245,600

--------------------------------------------------------------------------------

(ii) See tables above under Item A and Item B.

 

(iii) 1. Secured Mortgage Note dated March 31, 2005 payable by the Virginia
Subsidiary to Grayson National Bank in the original principal amount of
$2,500,000 due March 31, 2035 (“Virginia Mortgage Note”).

 

2. Secured Equipment Note dated March 31, 2005 payable by the Virginia
Subsidiary to Grayson National Bank in the original principal amount of
$500,000, due March 31, 2006 (“Virginia Equipment Note”).

 

3. Secured Subordinated Promissory Note dated March 31, 2005 payable by the
Virginia Subsidiary to Independence Water Group, LLC (“IWG Note”) in the
original principal amount of $850,000 due March 31, 2006.

 

4. The Senior Notes.

 

5. Promissory Note dated May 23, 2005 payable to Sterling Trust Company, fbo
Dalton L. Lott Roth IRA #065038 (“Lott Note”) in the original principal amount
of $60,000.

 

6. Promissory Note dated May 23, 2005 payable to Sterling Trust Company, fbo
Kenneth W. Bain Roth IRA #027584 (“Bain Note”) in the original principal amount
of $40,000.

 

(iv) 1. Financing statements filed by Grayson National Bank in connection with
the Virginia Equipment Note.

 

2. Financing Statements filed by Independence Water Group LLC in connection with
the IWG Note.

 

3. Deed of Trust dated March 31, 2005 between Grayson National Bank and the
Virginia Subsidiary securing the Virginia Mortgage Note.

 

(v) 1. Registration Rights Agreement dated as of December 30, 2005.

 

2. Registration Rights Agreement dated as of February 16, 2006.

 

(vi) 1. The Senior Notes.

 

2. The Preferred Shares.

--------------------------------------------------------------------------------

Schedule 3(s)

 

1. The Virginia Mortgage Note. The current amount outstanding on this note is
$2,461,858.29.

 

2. The Virginia Equipment Note. The current amount outstanding on this note is
$505,589.00.

 

3. The IWG Note. The current amount outstanding on this note is $610,513.83.

 

4. The Senior Notes. The current amount outstanding on the Senior Notes is
$3,250,000.

 

5. The Shareholder Notes. The current amounts outstanding on the Shareholder
Notes are $708,536.

 

6. The Bain Note. The current amount outstanding on the Bain Note is $42,239.

 

7. The Lott Note. The current amount outstanding on the Lott Note is $63,358.

 

8. Guaranty of the Company dated March 31, 2005 in favor of Grayson National
Bank with respect to Virginia Subsidiary obligations under the Virginia Mortgage
Note.

 

9. Guaranty of the Delaware Subsidiary dated March 31, 2005 in favor of Grayson
National Bank with respect to Virginia Subsidiary obligations under the Virginia
Mortgage Note.

 

10. Guaranty of the Delaware Subsidiary dated March 31, 2005 in favor of Grayson
National Bank with respect to Virginia Subsidiary obligations under the Virginia
Equipment Note.

 

11. Guaranty of the Company dated March 31, 2005 in favor of Grayson National
Bank with respect to Virginia Subsidiary obligations under the Virginia
Equipment Note.

 

$3,000,000 in principal amount (and $303,863.01 in related buy-in amounts) of
the Senior Notes and $204,000 in principal amount of the Shareholder Notes
payable to Duane Martin will be exchanged for Preferred Shares and Warrants and
cancelled. The proceeds from the sale of the Preferred Shares and Warrants will
be used to pay off the balance of the Senior Notes, the Virginia Equipment Note,
the IWG Note, the Bain Note, the Lott Note and the Shareholder Notes payable to
Ralph Passino and Bruce Neviaser, and the related Guarantees will be terminated.

--------------------------------------------------------------------------------

Schedule 3(v)

 

1. The term of the employment agreement with John Levy expires March 31, 2006.

--------------------------------------------------------------------------------

Schedule 3(w)

 

There are liens on the assets of the Company and its Subsidiaries established by
the following agreements:

 

1. Grayson National Bank Deed of Trust dated March 31, 2005.

 

2. Grayson National Bank Equipment Loan Security Agreement dated March 31,
2005.*

 

3. The IWG Note.*

 

--------------------------------------------------------------------------------

* These liens will be released at the Closing of the sale of the Preferred
Shares on satisfaction of the underlying obligations.

--------------------------------------------------------------------------------

Schedule 4(d)

 

The following Schedule was prepared assuming all 20,704 Preferred Shares are
sold.

 

Use

--------------------------------------------------------------------------------

   Amount

--------------------------------------------------------------------------------

Bridge Payout/Buy-In

   $ 3,342,493.00

Duane Martin Notes Rollover

   $ 204,000.00

Savannah Purchase Price

   $ 8,738,537.78

Cipher Senior Note Payout

   $ 202,081.41

Reifler Senior Note Payout

   $ 50,520.36

IWG Note Payout

   $ 610,513.83

Virginia Equipment Note Payout

   $ 505,589.05

Bruce Neviaser Note Payout

   $ 459,535.71

Lott Note Payout

   $ 63,358.00

Bain Note Payout

   $ 42,239.00

Ralph Passino Note Payout

   $ 45,000.00

Agent Fees

   $ 1,514,710.20

Buyers’ Legal Fees

   $ 85,000.00

Working Capital

   $ 4,840,420.97     

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

Total

   $ 20,704,000.00

--------------------------------------------------------------------------------

Schedule 4(s)

 

The Company may incur the following Indebtedness:

 

  (i) Indebtedness received pursuant to any Permitted Receivables and Inventory
Financing;

 

  (ii) Indebtedness consisting of Approved Obligations;

 

  (iii) Indebtedness consisting of Purchase Money Indebtedness (including
Indebtedness that is in existence with respect to any asset or other property at
the time such asset or other property is acquired), industrial revenue bonds, or
Capital Lease Obligations incurred to finance capital expenditures, provided
that the Indebtedness incurred shall not exceed the purchase price of the assets
financed thereby;

 

  (iii) The Guarantee of any of the Indebtedness outstanding as of the date of
this Agreement or incurred in connection with any of the Indebtedness permitted
under subsections (i), (ii) or (iii) above; and

 

  (iv) Indebtedness relating to Trade Payables.

 

For purpose of this Schedule 4(s), the following terms shall have the following
meanings:

 

“Approved Obligations” means obligations of the Company or a Subsidiary in
connection with the financing related to the acquisition, lease or other use of
(i) aseptic bottle or bag filling equipment for the Savannah facilities or
(ii) equipment for the Virginia facilities.

 

“Capital Lease Obligation” shall mean an obligation of the Company or its
Subsidiaries that is required to be classified and accounted for as a capital
lease for financial reporting purposes in accordance with GAAP, and the amount
of such obligation shall be the capitalized amount thereof determined in
accordance with GAAP.

 

“Guarantee” means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and any obligation, direct or indirect, contingent or otherwise, by
such Person.

 

“Permitted Receivables and Inventory Financing” shall mean any monetary
obligations under factoring or similar arrangement entered into by the Company
or any Subsidiary from time to time and any financing secured by receivables
(and related assets) or inventory originated by the Company or any Subsidiary in
any amount, provided that such financing is non-recourse to the Company and its
Subsidiaries except to a limited extent customary for such financing.

 

“Purchase Money Indebtedness” means Indebtedness (i) consisting of the deferred
purchase price of an asset, any conditional sale obligation, any obligation
under any title retention agreement or any other purchase money obligation, in
each case where the maturity of such Indebtedness does not exceed the
anticipated useful life of the asset being financed, and (ii) incurred to
finance the acquisition by the Company or a Subsidiary of such asset, including
additions and improvements; provided, that such Indebtedness is incurred within
ninety days after the acquisition by the Company of such asset, or is in
existence with respect to any asset or other property at the time such asset or
property is acquired.

--------------------------------------------------------------------------------

“Trade Payables” means any accounts payable or any unsecured indebtedness or
monetary obligation to trade creditors of the Company or its Subsidiaries
created, assumed or guaranteed by any of the Company or its Subsidiaries arising
in the ordinary course of business in connection with the acquisition of goods
or services and not outstanding for more than 90 days after the date such
payable was created.