Exhibit 10.1
SECURITIES PURCHASE AGREEMENT
     SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of April 4, 2006,
by and among Touchstone Resources USA Inc., a Delaware corporation, with
headquarters located at 1600 Smith Street, Suite 5100, Houston, Texas 77002 (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 senior convertible notes of
the Company, which Notes shall be convertible into the Company’s common stock,
$0.001 par value per share (the “Common Stock”), in accordance with the terms of
the Notes.
     C. Each Buyer wishes to purchase, and the Company wishes to sell, upon the
terms and conditions stated in this Agreement, (i) the aggregate principal
amount of $22,000,000 in Notes, in substantially the form attached hereto as
Exhibit A (the “Notes”), in individual amounts as set forth opposite such
Buyer’s name in column (3) on the Schedule of Buyers (which aggregate amount for
all Buyers shall be $22,000,000) (as converted, collectively, the “Conversion
Shares”), (ii) warrants, in substantially the form attached hereto as
Exhibit B-1 (the “Series A Warrants”), to acquire that number of shares of
Common Stock set forth opposite such Buyer’s name in column (4) on the Schedule
of Buyers and (iii) warrants in substantially the form attached hereto as
Exhibit B-2 (the “Series B Warrants”) to acquire that number of shares of Common
Stock set forth opposite such Buyer’s name in column (5) on the Schedule of
Buyers (collectively with the Series A Warrants, the “Warrants”) (as exercised,
collectively, the “Warrant Shares”).
     D. 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 Conversion Shares and Warrant Shares
under the 1933 Act and the rules and regulations promulgated thereunder, and
applicable state securities laws.
     E. The Notes, the Conversion Shares, the Warrants and the Warrant Shares,
are collectively are referred to herein as the “Securities”.
     NOW, THEREFORE, the Company and each Buyer hereby agree as follows:
     1. PURCHASE AND SALE OF NOTES AND WARRANTS.

 

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          (a) Amount. 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), a principal amount of Notes, as
is set forth opposite such Buyer’s name in column (3) on the Schedule of Buyers,
along with Series A 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 and
Series B Warrants to acquire that number of Warrant Shares as is set forth
opposite such Buyer’s name in column (5) on the Schedule of Buyers.
          (b) Closing. The closing (the “Closing”) of the purchase of the Notes
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 purchase price for each Buyer (the “Purchase
Price”) of the Notes and related Warrants to be purchased by each Buyer at the
Closing shall be equal to $1.00 for each $1.00 of principal amount of Notes
being purchased by such Buyer at the Closing.
          (d) Form of Payment. On the Closing Date, (A) each Buyer shall pay its
aggregate Purchase Price to the Company for the Notes and the Warrants to be
issued and sold to such Buyer at the Closing, by wire transfer of immediately
available funds in accordance with the Company’s written wire instructions, and
(B) the Company shall deliver to each Buyer the Notes (in the principal amounts
as such Buyer shall have requested prior to the Closing) which such Buyer is
then purchasing along with the Warrants (in the amounts as such Buyer shall have
requested prior to the Closing) such Buyer is purchasing, 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) No Public Sale or Distribution. Such Buyer is (i) acquiring the
Notes and the Warrants, (ii) upon conversion of the Notes will acquire the
Conversion Shares, and (iii) 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.
          (b) Accredited Investor Status. Such Buyer is an “accredited investor”
as

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that term is defined in Rule 501(a) of Regulation D.
          (c) 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.
          (d) 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.
          (e) 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.
          (f) 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 transferred unless (A) subsequently
registered thereunder, or (B) 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 (as long as such pledge is in compliance with 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

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Transaction Document (as defined in Section 3(b)), including, without
limitation, this Section 2(f).
          (g) Legends. Such Buyer understands that the certificates or other
instruments representing the Notes 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 each of 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 OR (B) THE PROVISION
OF REASONABLE ASSURANCES THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
(II) UNLESS SOLD PURSUANT TO RULE 144(K) UNDER SAID ACT. NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED 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
reasonable assurance that the 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).
          (h) 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.
          (i) No Conflicts. The execution, delivery and performance by such
Buyer

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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.
          (j) Residency. Such Buyer is incorporated or formed in the
jurisdiction specified below its address on the Schedule of Buyers and is
resident for state securities laws purposes at the address indicated 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
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 whole, or on the
transactions contemplated hereby and 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 (as defined below). The Company has
no Subsidiaries, except as set forth on Schedule 3(a).
          (b) Authorization; Enforcement; Validity. The Company has the
requisite power and authority to enter into and perform its obligations under
this Agreement, the Notes, 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 Notes, the
reservation for issuance and the issuance of

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the Conversion Shares issuable upon conversion of the Notes, 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) 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.
          (c) Issuance of Securities. The issuance of the Notes and the Warrants
are duly authorized and are free from all taxes, liens and charges with respect
to the issue thereof. As of the Closing, the Company shall have reserved from
its duly authorized capital stock all of the available shares of Common Stock
for issuance upon conversion of the Notes and exercise of the Warrants, which
amount shall be sufficient to convert no less than 100% of the Notes at the
initial Conversion Price and 100% of the Warrants at the initial Exercise Price,
other than the Warrant Shares underlying the Series B Warrants. From and after
the Capital Increase, the Company shall have reserved from its duly authorized
capital stock not less than the sum of (i) 130% of the maximum number of shares
of Common Stock issuable upon conversion of the Notes (assuming for purposes
hereof, that the Notes are convertible at the Conversion Price and without
taking into account any limitations on the conversion of the Notes set forth in
the Notes) and (ii) 130% 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). Upon
issuance or conversion in accordance with the Notes or exercise in accordance
with the Warrants, as the case may be, the Conversion 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. 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 Notes and the Warrants and the reservation for issuance and of
the Conversion Shares and the Warrant 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, any capital stock of the Company or Bylaws (as
defined in Section 3(r)) of the Company or any of its Subsidiaries or
(ii) except as set forth on Schedule 3(d), 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 NASD’s OTC Bulletin Board (the “Principal Market”)) applicable to the
Company or any of its Subsidiaries or by

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which any property or asset of the Company or any of its Subsidiaries is bound
or affected.
          (e) Consents. Neither the Company nor any of its Subsidiaries is
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 or filings pursuant
to the preceding sentence. The Company is not in violation of the listing
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. The Company further acknowledges
that no Buyer is acting as a financial advisor or fiduciary of the Company or
any of its Subsidiaries (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 Subsidiaries or affiliates, nor, to the Company’s
knowledge, 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.
          (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 to cause violations of 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 Notes, and, the
Warrant Shares

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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 Notes in accordance with this Agreement and the Notes 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 control share acquisition, business combination, poison
pill (including any distribution under a rights agreement) or other similar
anti-takeover provision under the Certificate of Incorporation or the laws of
the jurisdiction of its formation 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. Except as set forth on
Schedule 3(k), 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
Securities Exchange Act of 1934, as amended (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 the SEC Documents not available on the EDGAR
system if such SEC Documents have been requested in writing by Buyers. As of
their respective dates and subject to the Company’s current status as being
non-compliant with Section 404 of the Sarbanes-Oxley Act of 2002 relating to
internal controls and procedures as set forth on the Company’s quarterly report
on Form 10-QSB for the period ended September 30, 2005 filed on November 14,
2005 (the “Section 404 Deficiency”), 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 and subject to the Section 404 Deficiency, the financial
statements of the Company included in the SEC Documents complied as to form in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto. Such financial statements
have been prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or
(ii) in the case of unaudited interim statements, to the extent they may 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).

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          (l) Absence of Certain Changes. Except as disclosed in Schedule 3(l),
since the date of the Company’s most recent audited financial statements
contained in a Form 10-K, 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 audited financial statements contained in a Form 10-K, neither the
Company nor any of its Subsidiaries has (i) declared or paid any dividends,
(ii) sold any assets, individually or in the aggregate, in excess of $100,000
outside of the ordinary course of business or (iii) except as set forth in
Schedule 3(l) (which shall list capital expenditures for each oil field by
category), had capital expenditures, individually or in the aggregate, in excess
of $100,000. Neither Company nor any of its Subsidiaries has 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 and its Subsidiaries,
individually and on a consolidated basis, are 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 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 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, other than the pending investigation by the SEC relating
to the Common Stock and certain affiliates of the Company and the related
subpoena received by the Company from the SEC in connection therewith as set
forth on the Company’s quarterly report on Form 10-QSB for the period ended
September 30, 2005 filed on November 14, 2005 (the “SEC Investigation”), has no
knowledge of any facts or circumstances that would reasonably lead to delisting
or

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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.
          (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 or any of its Subsidiaries (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. Except as disclosed in Schedule 3(p), the
Company is in compliance with any and all requirements of the Sarbanes-Oxley Act
of 2002 that are effective as of the date hereof and applicable to the Company,
and any and all applicable rules and regulations promulgated by the SEC
thereunder that are effective as of the date hereof.
          (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 the
grant of stock options disclosed on Schedule 3(q), none of the officers,
directors or employees of the Company or any of its Subsidiaries 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 or any of its Subsidiaries, 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 150,000,000 shares of Common Stock, of
which as of the date hereof, 79,188,709 are issued and outstanding, 5,367,540
shares are reserved for issuance pursuant to the Company’s stock option and
purchase plans and 30,297,188 shares are reserved for issuance pursuant to
securities (other than the Warrants and the Notes) exercisable or exchangeable
for, or convertible into, shares of Common Stock and 5,000,000 shares of
preferred stock, par value $.001 per share, of which as of the date hereof,
710,063 are issued and outstanding. All of such outstanding shares have been, or
upon issuance will be, validly

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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 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
(as defined in Section 3(s)) 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, except for standard memoranda of Joint Operating Agreements and
Financing Statements in counties in which the Company is operating; (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 pursuant to 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 disclosed in
Schedule 3(s), neither the Company nor any of its Subsidiaries (i) has any
outstanding Indebtedness (as defined below), (ii) is a party to any contract,
agreement or instrument, the violation of which, or default under which, by the
other party(ies) to such contract, agreement or instrument would result in a
Material Adverse Effect, (iii) 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 (iv) 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

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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 principles
(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 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, except that ordinary course trade payables will not be
considered Indebtedness for purposes of this Section 3(s); (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. Except for the SEC Investigation and as set
forth in Schedule 3(t), 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 or any of
its Subsidiaries, the Common Stock or any of the Company’s Subsidiaries or any
of the Company’s or its Subsidiaries’ officers or directors that would have 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

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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 the 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. 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.
               (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 on 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 where failure to have such
title would cause a Material Adverse Effect and, except that this is limited to
the Company’s knowledge with respect to title in fee simple for oil and gas
leasehold interests. Any real property and facilities held under lease by the
Company or 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 as set forth in Schedule 3(x), 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 any of its Subsidiaries
regarding its Intellectual Property Rights. Neither the Company nor any of its
Subsidiaries is unaware of

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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 Property Rights.
          (y) Environmental Laws. To the Company’s knowledge, 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 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. Except as set forth in Schedule 3(z), 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) Tax Status. The Company and each of its Subsidiaries (i) has made
or filed all foreign, 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.
          (bb) Internal Accounting and Disclosure Controls. Except for the
Section 404 Deficiency, the Company and each of its Subsidiaries maintain 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

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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
effective in ensuring 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.
          (cc) 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 Exchange Act filings and is not so disclosed or that otherwise would be
reasonably likely to have a Material Adverse Effect.
          (dd) Ranking of Notes. No Indebtedness of the Company is senior to or
ranks pari passu with the Notes in right of payment, whether with respect of
payment of redemptions, interest, damages or upon liquidation or dissolution or
otherwise.
          (ee) Acknowledgement Regarding Buyers’ Trading Activity. It is
understood and acknowledged by the Company (i) that none of the Buyers have been
asked to agree, nor has any Buyer agreed, to desist from purchasing or selling,
long and/or short, securities of the Company, or “derivative” securities based
on securities issued by the Company or to hold the Securities for any specified
term; (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 and the Company
further understand and acknowledge that 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 (b) such hedging and/or trading
activities, if any, can reduce the value of the existing stockholders’ equity
interest in the Company both at and after the time the hedging and/or trading
activities are being conducted. The Company acknowledges that such
aforementioned hedging and/or trading activities do not constitute a breach of
this Agreement, the Notes, the Warrants or any of the documents executed in
connection herewith.
          (ff) Form S-1 Eligibility. The Company is eligible to register the
Conversion Shares and the Warrant Shares for resale by the Buyers using Form S-1
promulgated under the 1933 Act.
          (gg) 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.

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          (hh) Manipulation of Price. Except as raised by the SEC Investigation,
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.
          (ii) 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.
          (jj) Disclosure. 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 the Securities. 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 or its Subsidiaries 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 were
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) Commercially Reasonable Best Efforts. Each party shall use its
commercially reasonable 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

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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 the Investors (as
defined in the Registration Rights Agreement) shall have sold more than eighty
percent (80%) of the Conversion Shares and Warrant Shares and none of the Notes
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 (i) to repay its 12% secured convertible promissory note,
dated March 23, 2004, by and between the Company and Trident Growth Fund, L.P.
in the principal amount of $2,100,000 (the “Trident Note”) plus accrued interest
not in excess of $20,000, (ii) to repay its 12% convertible promissory note,
dated November 18, 2004, by and between the Company and DDH Resources II Limited
(“DDH II”) in the principal amount of $1,000,000 (the “DDH II Note”) and
(iii) for general corporate purposes, and not for (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.
          (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, its Quarterly Reports on Form 10-Q or Form
10-QSB, any Current Reports on Form 8-K and any registration statements (other
than on Form S-8) 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. As used herein “Business Day” means any other day other
than a Saturday, Sunday, or other day on which commercial banks in The City of
New York are authorized or required by law to remain closed.
          (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 Common Stocks’ authorization for quotation 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).

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          (g) Fees. The Company shall reimburse Kings Road Holdings II LLC (a
Buyer) 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
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) in an
amount not to exceed $100,000, without the Company’s prior approval which amount
shall be withheld by such Buyer from its Purchase Price at the Closing. The
Company acknowledges that it has only engaged First Albany Capital as placement
agent (the “Agent”) in connection with the sale of the Securities. 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 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 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(f) hereof; provided that an
Investor and its pledgee shall be required to comply with the provisions of
Section 2(f) 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 9:00 a.m., New York time, on the first Business Day following the date of
this Agreement, the Company shall issue a press release reasonably acceptable to
the Buyers disclosing all material terms of the transactions contemplated hereby
and 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 each of the Notes, the forms of Warrants and the Registration Rights
Agreement) as exhibits to such filing (including all attachments, the “8-K
Filing”). From and after the filing of the 8-K Filing with the SEC, no Buyer
shall be in possession of any material, nonpublic information received from the
Company or any of its Subsidiaries, or any of their respective officers,
directors, employees or agents, that is not disclosed in the 8-K Filing. Unless
otherwise required by the Transaction Documents, 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 filing of the 8-K Filing with the SEC without the express
written consent of such Buyer. In the event a Buyer becomes aware of

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material, nonpublic information, such Buyer shall inform the Company of such
information. The Company shall promptly make a public disclosure, in the form of
a press release, public advertisement or otherwise, of such material, nonpublic
information in a form mutually agreeable to both such Buyer and the Company.
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, neither the Company nor any of
its Subsidiaries shall disclose the name of any Buyer in any filing,
announcement, release or otherwise.
          (j) Restriction on Redemption and Cash Dividends. So long as any Notes
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 Notes representing not less
than a majority of the aggregate principal amount of the then outstanding Notes.
          (k) Additional Notes; Variable Securities; Dilutive Issuances. So long
as any Buyer beneficially owns any Securities, the Company will not issue any
Notes (other than to the Buyers as contemplated hereby) and the Company shall
not issue any other securities that would cause a breach or default under the
Notes. For so long as any Notes 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 directly or indirectly convertible
into or exchangeable or exercisable for Common Stock at a 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 Notes) with respect to the Common Stock into
which any Note is 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 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. For so long as any Notes or Warrants remain
outstanding, the Company shall not, in any manner, enter into or affect any
Dilutive Issuance (as defined in the Notes) if the effect of such Dilutive
Issuance is to cause the Company to be required to issue upon conversion of any
Note or exercise of any Warrant any shares of Common Stock in excess of that
number of shares of Common Stock which the Company has authorized and reserved
for purposes of such conversions or exercises or which the Company may issue
upon conversion of the Notes 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

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Notes) unless the Company is in compliance with the applicable provisions
governing Fundamental Transactions set forth in the Notes and the Warrants.
          (m) Incurrence of Liens. So long as any Notes are outstanding, the
Company shall not, directly or indirectly, allow or suffer to exist any Lien,
other than Permitted Liens (as defined in the Notes), upon any property or
assets (including accounts and contract rights) owned by the Company except as
may be created by memoranda of Joint Operating Agreements.
          (n) 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 number of shares of Common Stock issuable upon conversion of all
of the Notes and shares of Common Stock issuable upon exercise of the Warrants,
as is set forth in Section 3(c).
          (o) 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.
          (p) Additional Issuances of Securities.
               (i) For purposes of this Section 4(p), 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) From the date hereof until 30 days after the Effective Date
(as defined in the Registration Rights Agreement) the Company will not, directly
or indirectly, file any registration statement with the SEC other than the
Registration Statement (as defined in the Registration Rights Agreement). From
the date hereof until 30 days after the Effective Date, the Company will not,
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”).

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               (iii) From the Effective Date until the date no Notes are
outstanding, the Company will not, directly or indirectly, effect any Subsequent
Placement unless the Company shall have first complied with this
Section 4(p)(iii).
                    (1) The Company shall deliver to each Buyer a written notice
(the “Offer Notice”) of any proposed or intended 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 Buyers at least 80% of the first $25 million of Offered Securities in any
Subsequent Placement and at least 50% of any additional Offered Securities in
such Subsequent Placement over $25 million, allocated among such Buyers
(a) based on such Buyer’s pro rata portion of the aggregate principal amount of
Notes purchased hereunder (the “Basic Amount”), and (b) with respect to each
Buyer that elects to purchase its Basic Amount, any additional portion of the
Offered Securities attributable to the Basic Amounts of other Buyers as such
Buyer shall indicate it will purchase or acquire should the other Buyers
subscribe for less than their Basic Amounts (the “Undersubscription Amount”).
                    (2) To accept an Offer, in whole or in part, such Buyer must
deliver a written notice to the Company prior to the end of the tenth (10th)
Business Day after such Buyer’s receipt of the Offer Notice (the “Offer
Period”), setting forth the portion of such Buyer’s Basic Amount that such Buyer
elects to purchase and, if such Buyer shall elect to purchase all of its Basic
Amount, the Undersubscription Amount, if any, that such Buyer elects to purchase
(in either case, the “Notice of Acceptance”). If the Basic Amounts subscribed
for by all Buyers are less than the total of all of the Basic Amounts, then each
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 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 Buyer bears to
the total Basic Amounts of all 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

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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(p)(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 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(p)(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(p)(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(p)(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(p)(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(p)(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(p) shall not apply in connection with the issuance of any
Excluded Securities (as defined in the Notes).
          (q) Stockholder Approval. The Company shall provide each stockholder
entitled to vote at a special or annual meeting of stockholders of the Company
(the “Stockholder Meeting”), which shall be promptly called and held not later
than May 23, 2006 (the “Stockholder Meeting Deadline”), a proxy statement,
substantially in the form which has been previously reviewed by the Buyers and
Schulte Roth & Zabel LLP, soliciting each such stockholder’s affirmative vote at
the Stockholder Meeting for approval of resolutions providing for the Company’s
issuance of all of the Securities as described in the Transaction Documents in
accordance with applicable law and the rules and regulations of the Principal
Market and increase in the authorized capital of the Company to not less than
300 million shares of

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Common Stock (the “Capital Increase” and such affirmative approval being
referred to herein as the “Stockholder Approval”), and the Company shall use its
commercially reasonable best efforts to solicit its stockholders’ approval of
such resolutions and to cause the Board of Directors of the Company to recommend
to the stockholders that they approve such resolutions. The Company shall be
obligated to use its commercially reasonable best efforts to obtain the
Stockholder Approval by the Stockholder Meeting Deadline. If, despite the
Company’s commercially reasonable best efforts the Stockholder Approval is not
obtained on or prior to the Stockholder Meeting Deadline, the Company shall seek
Stockholder Approval at all regularly scheduled annual meetings of stockholders
of the Company until such Stockholder Approval is obtained.
     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 Notes and the Warrants
in which the Company shall record the name and address of the Person in whose
name the Notes and the Warrants have been issued (including the name and address
of each transferee), the principal amount of Notes held by such Person, the
number of Conversion Shares issuable upon conversion of the Notes 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 Notes 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 or
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

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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.
     6. CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.
          The obligation of the Company hereunder to issue and sell the Notes
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 Kings Road Holdings II LLC, the
amounts withheld pursuant to Section 4(g)) for the Notes and the related
Warrants being purchased by such Buyer at the Closing by wire transfer of
immediately available funds pursuant to the wire instructions provided by the
Company.
               (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.
          The obligation of each Buyer hereunder to purchase the Notes 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 Notes (in such principal
amounts as such Buyer shall have requested prior to the Closing) and the related
Warrants (in such amounts as such Buyer shall have requested prior to the
Closing) being purchased by such Buyer at the Closing pursuant to this
Agreement.
               (ii) Such Buyer shall have received the opinion of Winstead, 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

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instructions shall have been delivered to and acknowledged in writing by the
Company’s transfer agent.
               (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 in such entity’s jurisdiction of formation issued by the Secretary
of State (or comparable office) of such jurisdiction, as of a date within
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 is qualified, 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 Delaware 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 listing maintenance
requirements of the Principal Market.
               (xi) Voting Agreement. The Company shall have entered into the
Voting Agreement, substantially in the form attached hereto as Exhibit H,
executed by the Company and Roger Abel, Stephen P. Harrington and Stephen C.
Haynes (the “Voting Agreement”).

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               (xii) The Company shall have obtained all governmental,
regulatory or third party consents and approvals, if any, necessary for the sale
of the Securities.
               (xiii) Roger Abel and Stephen C. Haynes shall have entered into
Lock-Up Agreements substantially in the form attached hereto as Exhibit I-1 (the
“Lock-Up Agreement”).
               (xiv) Stephen P. Harrington shall have entered into a Lock-Up
Agreement substantially in the form attached hereto as Exhibit I-2 (the
“Harrington Lock-Up Agreement”).
               (xv) On or prior to the Closing, the Company shall have delivered
to the Buyer a pay-off letter in form and substance satisfactory to the Buyer
from Trident Growth Fund, L.P. and simultaneously with the Closing, the Company
shall have repaid in full, the Trident Note.
               (xvi) On or prior to the Closing, the Company shall have
delivered to the Buyer a pay-off letter in form and substance satisfactory to
the Buyer from DDH II and simultaneously with the Closing, the Company shall
have repaid in full, the DDH II Note.
               (xvii) 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, this 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, 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

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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 aggregate number of
Registrable Securities 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 applicable
Securities 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 Notes 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 Documents. Without limiting the foregoing, the Company confirms
that, except as set forth in this Agreement, no Buyer has made any

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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:
Touchstone Resources USA, Inc.
1600 Smith Street,
Houston, TX 77002
Telephone: (713) 784-1113
Facsimile: (713) 785-8530
Attention: Roger Abel
               With a copy (for informational purposes only) to:
Winstead
600 Town One Center
1450 Lake Robbins Drive
The Woodlands, TX 77380
Telephone: (281) 681-5900
Facsimile: (281) 681-5901
Attention: Paul Aubert
               If to the Transfer Agent:
StockTrans, Inc
44 West Lancaster Avenue
Ardmore, PA 19003
Telephone: 610-649-7300
Facsimile: 610-649-7302
Attention: Bob Winterle
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

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Facsimile: (212) 593-5955
Attention: Eleazer N. Klein, Esq.
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 Notes 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 Notes and the
Warrants). A Buyer may assign some or all of its rights hereunder (other than
the rights set forth in Section 4(p)(iii)) 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 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
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)

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(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(k) shall be the same as those set forth in
Section 6 of the Registration Rights Agreement. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 9(k) shall not apply to a claim by any Indemnitee arising out of or
based upon an Indemnified Liability which occurs in reliance upon and in
conformity with information furnished in writing to the Company by such
Indemnitee in connection with this 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) Rescission and Withdrawal Right. Notwithstanding anything to the

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contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Buyer exercises a right, election, demand or
option under a Transaction Document and the Company does not timely perform its
related obligations within the periods therein provided, then such Buyer may
rescind or withdraw, in its sole discretion from time to time upon written
notice to the Company, any relevant notice, demand or election in whole or in
part without prejudice to its future actions and rights.
          (o) 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, 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.
          (p) 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]

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     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:    
 
                    TOUCHSTONE RESOURCES USA, INC.    
 
               
 
  By:   /s/ Roger Abel                      
 
      Name: Roger Abel
 
      Title:   Chairman and Chief Executive Officer

 

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     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.

                      BUYERS:    
 
                    KINGS ROAD HOLDINGS II LLC    
 
               
 
  By:   /s/ Erik M. W. Caspersen                      
 
      Name: Erik M. W. Caspersen
 
      Title:   Authorized Signatory

 

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     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.

                  CAPITAL VENTURES     INTERNATIONAL
 
           
 
  By: Heights Capital Management Inc.    
 
           
 
  By:   /s/ Martin Kobinger    
 
     
 
   
 
      Name: Martin Kobinger    
 
      Title:   Authorized Signatory    

 

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     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.

                  SF CAPITAL PARTNERS LTD.
 
           
 
  By:   /s/ Brian H. Davidson    
 
     
 
   
 
      Name: Brian H. Davidson    
 
      Title:   Authorized Signatory    

 

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     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.

                  RHP MASTER FUND, LTD
 
           
 
  By:   Rock Hill Investment Management, L.P.    
 
  By:   RHP General Partner, LLC    
 
           
 
  By:   /s/ Keith Marlowe                
 
      Name: Keith Marlowe    
 
      Title:   Authorized Signatory    

 

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SCHEDULE OF BUYERS

                      (1)   (2)   (3)   (4)   (5)   (5)         Aggregate
Principal   Aggregate Number of   Aggregate Number of   Legal Representative’s
Buyer   Address and Facsimile Number   Amount of Notes   Series A Warrants  
Series B Warrants   Address and Facsimile Number  
Kings Road
  c/o Polygon Investment Partners   11,000,000   7,783,019   4,150,944   Schulte
Roth & Zabel LLP
Holdings II LLC
  LP               919 Third Avenue
 
  598 Madison Avenue, 14th Floor               New York, New York 10022
 
  New York, NY 10022               Attention: Eleazer Klein, Esq.
 
  Attention: Erik M.W. Caspersen               Facsimile: (212) 593-5955
 
  and Brandon L. Jones               Telephone: (212) 756-2376
 
  Facsimile: (212) 359-7303                
 
  Telephone: (212) 359-7300                
 
  Jurisdiction: Delaware                  
Capital Ventures
  c/o Heights Capital Management,   4,000,000   1,886,793   1,509,434    
International
  Inc.                
 
  101 California Street, Suite 3250                
 
  San Francisco, California 94111                
 
  Attention: Sam Winer                
 
  Facsimile: (415) 403-6525                
 
  Telephone: (415) 403-6500                
 
  Jurisdiction: Cayman Islands                
 
                 
SF Capital Partners Ltd.
  c/o Stark Offshore Management, LLC   4,000,000   1,886,793   1,509,434    
 
  3600 South Lake Drive                
 
  St. Francis, WI 53235                
 
  Attention: Brian Davidson                
 
  Facsimile: (414) 294-7700                
 
  Telephone: (414) 294-7000                
 
  Jurisdiction: British Virgin                
 
  Islands                
 
                 
RHP Master Fund, Ltd
  c/o Rock Hill Investment Management, LP   3,000,000   1,415,095   1,132,076  
 
 
  3 Bala Plaza East, Suite 585                
 
  Bala Cynwyd, PA 19004                
 
  Facsimile:(610)-949-9600                
 
  Telephone:(610) 949-9700                
 
  Jurisdiction: Cayman Islands                

 

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EXHIBITS

     
Exhibit A
  Form of Notes
Exhibit B-1
  Form of Series A Warrants
Exhibit B-2
  Form of Series B Warrants
Exhibit C
  Registration Rights Agreement
Exhibit D
  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
  Voting Agreement
Exhibit I-1
  Lock-Up Agreement
Exhibit I-2
  Harrington Lock-Up Agreement

SCHEDULES

     
Schedule 3(a)
  Subsidiaries
Schedule 3(d)
  No Conflicts
Schedule 3(k)
  SEC Documents; Financial Statements
Schedule 3(l)
  Absence of Certain Changes
Schedule 3 (p)
  Sarbanes-Oxley Act
Schedule 3(q)
  Transactions with Affiliates
Schedule 3(r)
  Capitalization
Schedule 3(s)
  Indebtedness and Other Contracts
Schedule 3(t)
  Litigation
Schedule 3(w)
  Title
Schedule 3(x)
  Intellectual Property
Schedule 3(z)
  Subsidiary Rights
Schedule 3(dd)
  Ranking of Notes