Exhibit 10.1
 
EXECUTION COPY
 
 
SECURITIES PURCHASE AGREEMENT
 
THIS SECURITIES PURCHASE AGREEMENT (this “Agreement”) is made by and among U.S.
Dry Cleaning Services Corporation, a Delaware corporation (the “Company”), and
each purchaser identified on the signature pages hereto (each, including its
successors and assigns, a “Purchaser” and collectively, the “Purchasers”)
effective as of the date this Agreement is executed by the Company.
 
Subject to the terms and conditions set forth in this Agreement and pursuant to
Section 4(2) of the Securities Act and Rule 506 promulgated thereunder, the
Company desires to issue and sell to each Purchaser, and each Purchaser,
severally and not jointly, desires to purchase from the Company, securities of
the Company as more fully described in this Agreement.
 
NOW, THEREFORE, in consideration of the agreements contained herein and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto hereby agree as follows:
 
ARTICLE I
DEFINITIONS
 
1.1           Definitions. In addition to the terms defined elsewhere in this
Agreement: (a) capitalized terms that are not otherwise defined herein have the
meanings given to such terms in the Debentures (as defined herein), and (b) the
following terms have the meanings set forth in this Section 1.1:
 
“Acquiring Person” shall have the meaning ascribed to such term in Section 4.7.
 
“Action” shall have the meaning ascribed to such term in Section 3.1(j).
 
“Affiliate” means any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with a
Person, as such terms are used in and construed under Rule 405 under the
Securities Act.
 
“Available Undersubscription Amount” shall have the meaning ascribed to such
term in Section 4.15(b).
 
“Bankruptcy Court” means the United States Bankruptcy Court for the Central
District of California, Santa Ana Division.
 
“Bankruptcy Plan” means the Company’s Joint and Consolidated Chapter 11 Plan of
Reorganization (as may be amended or modified, the “Plan”) filed in their
Chapter 11 bankruptcy cases, which are jointly administered under case number
8:10-bk-12735-RK.
 
“Base Conversion Price” shall have the meaning ascribed to such term in Section
4.3.
 
“Basic Amount” shall have the meaning ascribed to such term in Section 4.15(a).
 
 
 

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“Board of Directors” means the board of directors of the Company.
 
“Business Day” means any day except any Saturday, any Sunday, any day which is a
federal legal holiday in the United States or any day on which banking
institutions in the State of California are authorized or required by law or
other governmental action to close.
 
“Closings” means each of the First Closing and the Subsequent Closings.
 
“Commission” means the United States Securities and Exchange Commission.
 
“Common Stock” means the common stock of the Company, par value $0.001 per
share, and any other class of securities into which such securities may
hereafter be reclassified or changed.
 
“Common Stock Equivalents” means any securities of the Company which would
entitle the holder thereof to acquire at any time Common Stock, including,
without limitation, any debt, preferred stock, rights, options, warrants or
other instrument that is at any time convertible into or exercisable or
exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock.
 
“Consulting Expense Amount” shall have the meaning ascribed to such term in
Section 4.19(b).
 
“Conversion Price” shall have the meaning ascribed to such term in the
Debentures.
 
“Conversion Shares” means shares of Common Stock issued and issuable upon
conversion of the Principal Amount of the Debentures.
 
“Counsel Expense Amount” shall have the meaning ascribed to such term in Section
4.19(a).
 
“Debentures” means, collectively, the 10% Senior Secured Original Issue Discount
Convertible Debentures Due September 23, 2013, issued by the Company to the
Purchasers hereunder with an aggregate Principal Amount not to exceed
$8,800,000, in the form of Exhibit A attached hereto.
 
“Dilutive Issuance” shall have the meaning ascribed to such term in Section 4.3.
 
“Disclosure Materials” shall have the meaning ascribed to such term in Section
3.2(f).
 
“Disclosure Schedules” shall have the meaning ascribed to such term in
Section 3.1.
 
“Disclosure Statement” shall mean the Company’s First Amended Disclosure
Statement Dated April 22, 2011, as Modified (as may be further amended or
modified) [Docket No. 627 in bankruptcy case number 8:10-bk-12735-RK].
 
 “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.
 
 
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“Exempt Issuance” means the issuance of (a) shares of Common Stock or Common
Stock Equivalents to employees, consultants, officers or directors of the
Company approved by a majority of the non-employee members of the Board of
Directors or a majority of the members of a committee of non-employee directors
established for such purpose, (b) shares of Common Stock or Common Stock
Equivalents upon the exercise or exchange of or conversion of any Securities
issued hereunder or the Junior Secured Subordinated Convertible Debentures
and/or other securities exercisable or exchangeable for or convertible into
shares of Common Stock issued and outstanding on the date of this Agreement,
provided that such securities have not been amended since the date of this
Agreement to increase the number of such securities or to decrease the exercise
price, exchange price or conversion price of such securities, (c) shares of
Common Stock or Common Stock Equivalents issued in or in connection with the
Subsequent Public Offering and (d) shares of Common Stock or Common Stock
Equivalents issued in connection with the acquisition of another corporation by
the Company by merger, purchase of substantially all the assets or other
reorganization, provided that such issuances are approved by the Board of
Directors.
 
“First Closing” means the closing of the purchase and sale of the Securities
pursuant to Section 2.1(a).
 
“First Closing Date” means the date when the Segregated Accounts hold
Subscription Amounts equal to the Minimum Investment Amount (i.e., $4,950,000).
 
“GAAP” means generally accepted accounting principles in the United States.
 
“Indebtedness” shall have the meaning ascribed to such term in Section 3.1(x).
 
“Intellectual Property Rights” shall have the meaning ascribed to such term in
Section 3.1(o).
 
“Interest Shares” means shares of Common Stock issued and issuable upon
conversion of the Debentures in satisfaction of accrued and unpaid interest
thereon.
 
“Junior Secured Subordinated Convertible Debentures” shall mean approximately
$9.1 million in principal amount of Junior Secured Subordinated Convertible
Debentures to be issued by the Company in connection with the Bankruptcy Plan.
 
“Lead Investor” means Setal 7, LLC, a California limited liability company.
 
“Legend Removal Date” shall have the meaning ascribed to such term in
Section 4.1(c).
 
“Liens” means a lien, charge, security interest, encumbrance, right of first
refusal, preemptive right or other restriction.
 
“Material Adverse Effect” shall have the meaning assigned to such term in
Section 3.1(b).
 
“Material Permits” shall have the meaning ascribed to such term in
Section 3.1(m).
 
 
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“Maximum Rate” shall have the meaning ascribed to such term in Section 5.19.
 
“Minimum Investment Amount” means Debentures with an aggregate Principal Amount
of $4,950,000, which provide aggregate gross proceeds to the Company of
$4,500,000.
 
“MORs” shall have the meaning ascribed to such term in Section 3.1(h).
 
“Notice of Acceptance” shall have the meaning ascribed to such term in
Section 4.15(b).
 
“Offer” shall have the meaning ascribed to such term in Section 4.15(a).
 
“Offer Notice” shall have the meaning ascribed to such term in Section 4.15(a).
 
“Offer Period” shall have the meaning ascribed to such term in Section 4.15(b).
 
“Offered Securities” shall have the meaning ascribed to such term in
Section 4.15(a).
 
“Permitted Liens” shall have the meaning ascribed to such term in Section 1 of
the Debenture.
 
“Person” means an individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or subdivision thereof) or other entity
of any kind.
 
“Plan Effective Date” means the effective date of the Bankruptcy Plan determined
in accordance therein.
 
“Principal Amount” means, as to each Purchaser, the amount set forth on such
Purchaser’s signature page attached hereto, in United States Dollars, which
shall equal such Purchaser’s Subscription Amount multiplied by 1.10.
 
“Professional Notes” means the Company’s 10% Senior Secured Promissory Notes due
September 23, 2013 issued to certain professionals and advisors to the Company
and certain employees of the Company as partial payment for services rendered to
the Company in the aggregate principal amount equal to $1,430,000, which 10%
Senior Secured Promissory Notes due September 23, 2013 shall be pari passu with
the Debentures with respect to right of payment and shall be secured by the
assets of the Company under the terms of the Security Agreement.
 
“Public Offering Price” shall have the meaning ascribed to such term in
Section 4.14.
 
“Proceeding” means an action, claim, suit, investigation or proceeding
(including, without limitation, an informal investigation or partial proceeding,
such as a deposition), whether commenced or threatened.
 
“Refused Securities” shall have the meaning ascribed to such term in
Section 4.15(c).
 
“Registration Rights Agreement” means that certain Registration Rights Agreement
between the Company and each Purchaser in the form of Exhibit B attached hereto.
 
 
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“Registration Statement” means a registration statement filed, registering the
resale, by the Purchasers, of all of the Conversion Shares, Warrant Shares and
Interest Shares.
 
“Required Approvals” shall have the meaning ascribed to such term in
Section 3.1(e).
 
“Required Minimum” means, as of any date, the maximum aggregate number of shares
of Common Stock then issued or potentially issuable in the future pursuant to
the Transaction Documents, including any Underlying Shares issuable upon
exercise in full of all Warrants or conversion in full of all Debentures.
 
“Rule 144” means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
 
“Securities” means the Debentures, the Warrants, the Warrant Shares, the
Conversion Shares and the Interest Shares.
 
“Securities Act” means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
 
“Security Agreement” means the Security Agreement among the Company, the
Purchasers and the holders of the Professional Notes, in the form of Exhibit C
attached hereto.
 
“Security Documents” shall mean the Security Agreement and any other documents
and filing required thereunder in order to grant the Purchasers a first priority
security interest in the assets of the Company as provided in the Security
Agreement, including all UCC-1 filing receipts.
 
“Segregated Accounts” means non-interest bearing accounts established for the
benefit of the Company into which Subscription Amounts are deposited and held
until Closing.
 
“Senior Indebtedness” shall have the meaning ascribed to such term in Section 1
of the Debentures.
 
“Subscription Amount” means, as to each Purchaser, the aggregate amount to be
paid for the Units purchased at the First Closing or any Subsequent Closing, as
the case may be, and as specified below such Purchaser’s name on the signature
page of this Agreement and next to the heading “Subscription Amount,” in United
States dollars and in immediately available funds.
 
“Subsequent Closings” means one or more closings, after the First Closing Date,
of the purchase and sale of the Securities.
 
“Subsequent Closing Dates” means each Business Day mutually agreed upon by the
Company and a Purchaser after the First Closing Date and no later than the
Termination Date and after which the Segregated Accounts hold Subscription
Amounts for any amount of Units, all of the Transaction Documents have been
executed and delivered by the applicable parties thereto pursuant to Section
2.2(a) and Section 2.2(b), and all conditions precedent to (i) the Purchasers’
obligation to pay the Subscription Amount as of the Subsequent Closing and (ii)
the Company’s obligations to deliver the Securities as of the Subsequent
Closing, in each case, have been satisfied or waived.
 
 
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“Subsequent Placement” means the issuance, offer, sale, grant, disposition or
announcement by the Company, directly or indirectly, of any option or right to
purchase, or otherwise dispose of any equity security or any equity-linked or
related security (including, without limitation, any “equity security” (as that
term is defined under Rule 405 promulgated under the Securities Act), any
convertible securities, any debt, any preferred stock or any purchase rights),
other than Exempt Issuances.
 
“Subsequent Placement Agreement” shall have the meaning ascribed to such term in
Section 4.15(c).
 
“Subsequent Placement Documents” shall have the meaning ascribed to such term in
Section 4.15(g).
 
“Subsequent Public Offering” shall have the meaning set forth in the Bankruptcy
Plan.
 
“Termination Date” means later of (i) the 90th day following the Plan Effective
Date or (ii) the day immediately prior to the date on which the Registration
Statement is filed with the Commission.
 
“Trading Day” means a day on which the principal Trading Market is open for
trading.
 
“Trading Market” means any of the following markets or exchanges on which the
Common Stock is listed or quoted for trading on the date in question: the NYSE
AMEX, the NASDAQ Capital Market, the NASDAQ Global Market, the NASDAQ Global
Select Market, the New York Stock Exchange or the OTC Bulletin Board (or any
successors to any of the foregoing).
 
“Transaction Documents” means this Agreement, the Debentures, the Warrants, the
Security Agreement, the Registration Rights Agreement, all exhibits and
schedules thereto and hereto and any other documents or agreements executed in
connection with the transactions contemplated hereunder.
 
“Transfer Agent” means the transfer agent of the Company.
 
“Undersubscription Amount” shall have the meaning ascribed to such term in
Section 4.15(a).
 
“Unit” means a security consisting of (i) a Debenture and (ii) the right to
receive a Warrant to acquire the number of shares of Common Stock set forth in
Section 4.14.
 
“Underlying Shares” means the Warrant Shares, the Conversion Shares and the
Interest Shares.
 
“Warrants” means, collectively, the Common Stock purchase warrants, to delivered
to the Purchasers in accordance with Section 4.14 which shall be exercisable
upon the earlier of (i) closing of the Subsequent Public Offering or (ii) nine
(9) months after the Plan Effective Date, and have a term of exercise equal to
five (5) years, in the form of Exhibit D attached hereto.
 
 
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“Warrant Shares” means the shares of Common Stock issuable upon exercise of the
Warrants.
 
ARTICLE II
PURCHASE AND SALE
 
2.1           Closings.
 
(a)           On the First Closing Date, upon the terms and subject to the
conditions set forth herein, the Company agrees to sell and issue, and each
Purchaser who has executed and delivered to the Company the signature page to
this Agreement prior to the First Closing Date agrees to subscribe for and
purchase, a Debenture with a Principal Amount set forth in such Purchaser’s
signature page to this Agreement.  On or prior to the First Closing Date, each
Purchaser shall deliver to a Segregated Account, via wire transfer or a
certified check of immediately available funds, an amount equal to such
Purchaser’s Subscription Amount as set forth on such Purchaser’s signature page
to this Agreement, and the Company shall deliver to each such Purchaser its
respective Debenture, as determined pursuant to Section 2.2(a)(iii), and the
Company and each such Purchaser shall deliver the other items set forth in
Section 2.2 deliverable at the First Closing. Upon satisfaction of the covenants
and conditions set forth in Sections 2.2 and 2.3, the First Closing shall occur
at the offices of the Company or such other location as the parties shall
mutually agree. The Company shall return all Subscription Amounts in the
Segregated Accounts to the appropriate Purchasers, without interest, if the
First Closing does not occur with respect to such Purchasers’ subscriptions.
 
(b)           Subsequent Closings.  On each Subsequent Closing Date, upon the
terms and subject to the conditions set forth herein, the Company agrees to
sell, and each Purchaser who has executed and delivered to the Company the
signature page to this Agreement prior to the Subsequent Closing Date agrees to
subscribe for and purchase, a Debenture with a Principal Amount set forth in
such Purchaser’s signature page to this Agreement.  On or prior to a Subsequent
Closing Date, each Purchaser shall deliver to a Segregated Account, via wire
transfer or a certified check of immediately available funds, an amount equal to
such Purchaser’s Subscription Amount as set forth on such Purchaser’s signature
page to this Agreement, and the Company shall deliver to each such Purchaser its
respective Debenture, as determined pursuant to Section 2.2(a)(iii), and the
Company and each such Purchaser shall deliver the other items set forth in
Section 2.2 deliverable at the Sebsequent Closing. Upon satisfaction of the
covenants and conditions set forth in Sections 2.2 and 2.3, the Subsequent
Closing shall occur at the offices of the Company or such other location as the
parties shall mutually agree. The Company shall return all Subscription Amounts
in the Segregated Accounts to the appropriate Purchasers, without interest, if
the Subsequent Closing does not occur with respect to such Purchasers’
subscriptions..

 
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2.2           Deliveries.
 
(a)           On or prior to each Closing, the Company shall deliver or cause to
be delivered to each Purchaser the following:
 
(i)           this Agreement, duly executed by the Company;
 
(ii)           a Debenture with a Principal Amount set forth in such Purchaser’s
signature page hereto, registered in the name of such Purchaser;
 
(iii)           the Security Agreement, duly executed by the Company;
 
(iv)           an Intellectual Property Security Agreement in the form attached
to the Security Agreement; and
 
(v)           the Registration Rights Agreement, duly executed by the Company.
 
(b)           On or prior to each Closing, each Purchaser shall deliver or cause
to be delivered to the Company the following:
 
(i)           this Agreement duly executed by such Purchaser;
 
(ii)           such Purchaser’s Subscription Amount;
 
(iii)           the Security Agreement duly executed by such Purchaser; and
 
(iv)           the Registration Rights Agreement duly executed by such
Purchaser.
 
2.3           Closing Conditions.
 
(a)           The obligations of the Company hereunder in connection with each
Closing (unless otherwise provided below) are subject to the following
conditions being met:
 
(i)           the accuracy in all material respects on the applicable Closing of
the representations and warranties of the Purchasers contained herein (unless as
of a specific date therein);
 
(ii)           all obligations, covenants and agreements of each Purchaser
required to be performed at or prior to the applicable Closing shall have been
performed;
 
(iii)           the delivery by each Purchaser of the items set forth in
Section 2.2(b), as applicable;
 
(iv)           with respect to the First Closing, the Minimum Investment Amount
shall have been deposited in the Segregated Accounts; and
 
 
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(v)           an order confirming the Bankruptcy Plan shall have been entered by
the Bankruptcy Court.
 
(b)           The respective obligations of the Purchasers hereunder in
connection with each Closing are subject to the following conditions being met:
 
(i)           the accuracy in all material respects when made and on the
applicable Closing of the representations and warranties of the Company
contained herein (unless as of a specific date therein);
 
(ii)           all obligations, covenants and agreements of the Company required
to be performed at or prior to the applicable Closing shall have been performed;
 
(iii)           the delivery by the Company of the items set forth in
Section 2.2(a), as applicable;
 
(iv)           there shall have been no Material Adverse Effect with respect to
the Company since the date hereof; and
 
(v)           the Bankruptcy Plan shall have been confirmed by the Bankruptcy
Court.
 
ARTICLE III
REPRESENTATIONS AND WARRANTIES
 
3.1           Representations and Warranties of the Company. Except as set forth
in the Disclosure Schedules, which Disclosure Schedules shall be deemed a part
hereof and shall qualify any representation or otherwise made herein to the
extent of the disclosure contained in the corresponding section of the
Disclosure Schedules, the Company hereby makes the following representations and
warranties to each Purchaser as of the applicable Closing:
 
(a)           Subsidiaries.  Except as set forth in Section 3.1(a) of the
Disclosure Schedule, the Company has no direct or indirect subsidiaries.
 
(b)           Organization and Qualification. The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, with the requisite power and authority to own
and use its properties and assets and to carry on its business as currently
conducted. The Company is not in violation nor default of any of the provisions
of its respective articles of incorporation, bylaws or other organizational or
charter documents. The Company is duly qualified to conduct business and is in
good standing as a foreign corporation in each jurisdiction in which the nature
of the business conducted or property owned by it makes such qualification
necessary, except where the failure to be so qualified or in good standing, as
the case may be, could not have or reasonably be expected to result in: (i) a
material adverse effect on the legality, validity or enforceability of any
Transaction Document, (ii) a material adverse effect on the results of
operations, assets, business or condition (financial or otherwise) of the
Company, or (iii) a material adverse effect on the Company’s ability to perform
in any material respect on a timely basis its obligations under any Transaction
Document (any of (i), (ii) or (iii), a “Material Adverse Effect”) and no
Proceeding has been instituted in any such jurisdiction revoking, limiting or
curtailing or seeking to revoke, limit or curtail such power and authority or
qualification.
 
 
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(c)           Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents and otherwise to carry out its
obligations hereunder and thereunder. The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary action on the part of the Company and no further action is required by
the Company, the Board of Directors or the Company’s stockholders in connection
therewith other than in connection with the Required Approvals.  Each
Transaction Document to which it is a party has been (or upon delivery will have
been) duly executed by the Company and, when delivered in accordance with the
terms hereof and thereof, will constitute the valid and binding obligation of
the Company enforceable against the Company in accordance with its terms,
except: (i) as limited by general equitable principles and applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors’ rights generally, (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief or other equitable remedies and (iii) insofar as indemnification and
contribution provisions may be limited by applicable law.
 
(d)           No Conflicts. The execution, delivery and performance by the
Company of the Transaction Documents, the issuance and sale of the Securities
and the consummation by it of the transactions contemplated hereby and thereby
to which it is a party do not and will not: (i) conflict with or violate any of
the provisions of the Company’s certificate of incorporation, bylaws or other
organizational or charter documents, (ii) conflict with, or constitute a default
(or an event that with notice or lapse of time or both would become a default)
under, result in the creation of any Lien upon any of the properties or assets
of the Company, or give to others any rights of termination, amendment,
acceleration or cancellation (with or without notice, lapse of time or both) of,
any agreement, credit facility, debt or other instrument (evidencing a Company
debt or otherwise) or other understanding to which the Company is a party or by
which any property or asset of the Company is bound or affected, or (iii)
subject to the Required Approvals, conflict with or result in a violation of any
law, rule, regulation, order, judgment, injunction, decree or other restriction
of any court or governmental authority to which the Company is subject
(including federal and state securities laws and regulations), or by which any
property or asset of the Company is bound or affected; except in the case of
each of clauses (ii) and (iii), such as could not have or reasonably be expected
to result in a Material Adverse Effect.
 
(e)           Filings, Consents and Approvals. The Company is not required to
obtain any consent, waiver, authorization or order of, give any notice to, or
make any filing or registration with, any court or other federal, state, local
or other governmental authority or other Person in connection with the
execution, delivery and performance by the Company of the Transaction Documents,
other than: (i) the Bankruptcy Plan; (ii) the filings required by the
Registration Rights Agreement, and (iii) the filing of a Form D with the
Commission and such filings as are required to be made under applicable state
securities laws (collectively, the “Required Approvals”).
 
 
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(f)            Issuance of the Securities. The Securities are duly authorized
and, when issued and paid for in accordance with the applicable Transaction
Documents, will be duly and validly issued, fully paid and nonassessable, free
and clear of all Liens imposed by the Company other than restrictions on
transfer provided for in the Transaction Documents. The Underlying Shares, when
issued in accordance with the terms of the Transaction Documents, will be
validly issued, fully paid and nonassessable, free and clear of all Liens
imposed by the Company other than restrictions on transfer provided for in the
Transaction Documents. The Company has reserved from its duly authorized capital
stock a number of shares of Common Stock issuable pursuant to this Agreement and
for issuance of the Underlying Shares at least equal to the Required Minimum on
the date hereof.
 
(g)           Capitalization. The capitalization of the Company is as of the
Plan Effective Date set forth in Section 3.1(g) of the Disclosure Schedule.
Other than each of the Purchasers, no Person has any right of first refusal,
preemptive right, right of participation, or any similar right to participate in
the transactions contemplated by the Transaction Documents. Except as a result
of the purchase and sale of the Securities and except as set forth in the
Bankruptcy Plan, there are no outstanding options, warrants, scrip rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities, rights or obligations convertible into or exercisable or
exchangeable for, or giving any Person any right to subscribe for or acquire any
shares of Common Stock, or contracts, commitments, understandings or
arrangements by which the Company is or may become bound to issue additional
shares of Common Stock or Common Stock Equivalents. The issuance and sale of the
Securities will not obligate the Company to issue shares of Common Stock or
other securities to any Person (other than the Purchasers) and will not result
in a right of any holder of Company securities to adjust the exercise,
conversion, exchange or reset price under any of such securities. All of
the outstanding shares of capital stock of the Company are validly issued, fully
paid and non-assessable, have been issued in compliance with all federal and
state securities laws (subject to the filing of a Form D with the Commission and
such other filings as are required to be made under applicable state securities
laws), and none of such outstanding shares was issued in violation of any
preemptive rights or similar rights to subscribe for or purchase securities. No
further approval or authorization of any stockholder, the Board of Directors or
others is required for the issuance and sale of the Securities. There are no
stockholders agreements, voting agreements or other similar agreements with
respect to the Company’s capital stock to which the Company is a party or, to
the knowledge of the Company, between or among any of the Company’s
stockholders.
 
(h)           SEC Reports; Financial Statements. The Company has not filed any
reports, schedules, forms, statements and other documents required to be filed
by the Company under the Securities Act and the Exchange Act, including pursuant
to Section 13(a) or Section 15(d) thereof, since its Quarterly Report on Form
10-Q filed with the Commission on August 14, 2008.  The Company has filed all
monthly operating reports (“MORs”) with the Bankruptcy Court covering periods
ended March 31, 2010 through July 31, 2011.
 
 
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(i)            Material Changes; Undisclosed Events, Liabilities or
Developments.  Since the Plan Effective Date: (i) there has been no event,
occurrence or development that has had or that could reasonably be expected to
result in a Material Adverse Effect, (ii) the Company has not incurred any
liabilities (contingent or otherwise) other than (A) trade payables and accrued
expenses incurred in the ordinary course of business consistent with past
practice and (B) liabilities not required to be reflected in the Company’s MORs,
(iii) the Company has not altered its method of accounting, (iv) the Company has
not declared or made any dividend or distribution of cash or other property to
its stockholders or purchased, redeemed or made any agreements to purchase or
redeem any shares of its capital stock and (v) the Company has not issued any
equity securities to any officer, director or Affiliate, except pursuant to
existing Company stock option plans.
 
(j)            Litigation.  Except as set forth in Section 3.1(j) of the
Disclosure Schedule, there is no action, suit, inquiry, notice of violation,
proceeding or investigation pending or, to the knowledge of the Company,
threatened against or affecting the Company or its properties before or by any
court, arbitrator, governmental or administrative agency or regulatory authority
(federal, state, county, local or foreign) (collectively, an “Action”) other
than as disclosed in the Bankruptcy Plan. Neither the Company nor any director
or officer thereof, is or has been the subject of any Action involving a claim
of violation of or liability under federal or state securities laws or a claim
of breach of fiduciary duty. There has not been, and to the knowledge of the
Company, there is not pending or contemplated, any investigation by the
Commission involving the Company or any current or former director or officer of
the Company.
 
(k)           Labor Relations.  No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company, which could reasonably be expected to result in a Material Adverse
Effect. None of the Company’s employees is a member of a union that relates to
such employee’s relationship with the Company, and neither the Company is a
party to a collective bargaining agreement, and the Company believes that their
relationships with their employees are good. No executive officer, to the
knowledge of the Company, is, or is now expected to be, in violation of any
material term of any employment contract, confidentiality, disclosure or
proprietary information agreement or non-competition agreement, or any other
contract or agreement or any restrictive covenant in favor of any third party,
and the continued employment of each such executive officer does not subject the
Company to any liability with respect to any of the foregoing matters. The
Company is in compliance with all U.S. federal, state, local and foreign laws
and regulations relating to employment and employment practices, terms and
conditions of employment and wages and hours, except where the failure to be in
compliance could not, individually or in the aggregate, reasonably be expected
to have a Material Adverse Effect.
 
(l)            Compliance. Other than as identified in the Bankruptcy Plan or as
set forth in Section 3.1(l) of the Disclosure Schedule, the Company is not: (i)
in default under or in violation of (and no event has occurred that has not been
waived that, with notice or lapse of time or both, would result in a default by
the Company under), nor has the Company received notice of a claim that it is in
default under or that it is in violation of, any indenture, loan or credit
agreement or any other agreement or instrument to which it is a party or by
which it or any of its properties is bound (whether or not such default or
violation has been waived), (ii) in violation of any judgment, decree or order
of any court, arbitrator or governmental body or (iii) in or has not been in
violation of any statute, rule, ordinance or regulation of any governmental
authority, including without limitation all foreign, federal, state and local
laws applicable to its business and all such laws that affect the environment,
except in each case as could not have or reasonably be expected to result in a
Material Adverse Effect.
 
 
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(m)           Regulatory Permits. As of the Plan Effective Date, the Company
possesses all certificates, authorizations and permits issued by the appropriate
federal, state, local or foreign regulatory authorities necessary to conduct its
business, except where the failure to possess such permits could not reasonably
be expected to result in a Material Adverse Effect (“Material Permits”), and the
Company has not received any notice of proceedings relating to the revocation or
modification of any Material Permit.
 
(n)           Title to Assets. Upon the Plan Effective Date, except as set forth
in Section 3.1(n) of the Disclosure Schedule, the Company has good and
marketable title in fee simple to all real property owned by it and good and
marketable title in all personal property owned by it that is material to the
business of the Company, in each case free and clear of all Liens, except for
Permitted Liens and Liens as do not materially affect the value of such property
and do not materially interfere with the use made and proposed to be made of
such property by the Company. Any real property and facilities held under lease
by the Company is held by the Company under valid, subsisting and enforceable
leases with which the Company is in compliance.
 
(o)           Patents and Trademarks. The Company has rights to use, all
patents, patent applications, trademarks, trademark applications, service marks,
trade names, trade secrets, inventions, copyrights, licenses and other
intellectual property rights and similar rights as necessary or material for use
in connection with its business and which the failure to so have could have a
Material Adverse Effect (collectively, the “Intellectual Property Rights”).  The
Company has not received a notice (written or otherwise) that any of the
Intellectual Property Rights used by the Company violates or infringes upon the
rights of any Person. To the knowledge of the Company, all such Intellectual
Property Rights are enforceable and there is no existing infringement by another
Person of any of the Intellectual Property Rights. The Company has taken
reasonable security measures to protect the secrecy, confidentiality and value
of all of their intellectual properties, except where failure to do so could
not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
 
(p)           Insurance. The Company is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
are prudent and customary in the businesses in which the Company is engaged,
including, but not limited to, directors and officers insurance coverage. The
Company has no reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business
without a significant increase in cost.
 
(q)           Transactions With Affiliates and Employees. Except as set forth in
Section 3.1(q) of the Disclosure Schedule and identified in the Bankruptcy Plan
or Disclosure Statement, none of the officers or directors of the Company and,
to the knowledge of the Company, none of the employees of the Company is
presently a party to any transaction with the Company (other than for services
as employees, officers and directors), including any contract, agreement or
other arrangement providing for the furnishing of services to or by, providing
for rental of real or personal property to or from, or otherwise requiring
payments to or from any officer, director or such employee or, to the knowledge
of the Company, any entity in which any officer, director, or any such employee
has a substantial interest or is an officer, director, trustee or partner, in
each case in excess of $120,000 other than for: (i) payment of salary or
consulting fees for services rendered, (ii) reimbursement for expenses incurred
on behalf of the Company and (iii) other employee benefits, including stock
option agreements under any stock option plan of the Company.
 
 
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(r)            Certain Fees. Except as set forth in Section 3.1(r) of the
Disclosure Schedule or in any orders of the Bankruptcy Court confirming the
employment of investment bankers or advisors, no brokerage or finder’s fees or
commissions are or will be payable by the Company to any broker, financial
advisor or consultant, finder, placement agent, investment banker, bank or other
Person with respect to the transactions contemplated by the Transaction
Documents. The Purchasers shall have no obligation with respect to any fees or
with respect to any claims made by or on behalf of other Persons for fees of a
type contemplated in this Section that may be due in connection with the
transactions contemplated by the Transaction Documents.
 
(s)           Private Placement. Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2, no registration under
the Securities Act is required for the offer and sale of the Securities by the
Company to the Purchasers as contemplated hereby.
 
(t)            Investment Company. The Company is not, and is not an Affiliate
of, and immediately after receipt of payment for the Securities, will not be or
be an Affiliate of, an “investment company” within the meaning of the Investment
Company Act of 1940, as amended. The Company shall conduct its business in a
manner so that it will not become an “investment company” subject to
registration under the Investment Company Act of 1940, as amended.
 
(u)           Registration Rights.  Other than each of the Purchasers and except
as set forth in Section 3.1(u) of the Disclosure Schedule, no Person has any
right to cause the Company to effect the registration under the Securities Act
of any securities of the Company.
 
(v)           Disclosure. All of the disclosure furnished by or on behalf of the
Company to the Purchasers regarding the Company, its business and the
transactions contemplated hereby, including the Disclosure Schedules to this
Agreement, 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 light of the circumstances under which they were
made, not misleading. The Company acknowledges and agrees that no Purchaser
makes or has made any representations or warranties with respect to the
transactions contemplated hereby other than those specifically set forth in
Section 3.2.
 
(w)           No Integrated Offering. Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2, neither the Company,
nor any of its Affiliates, nor any Person acting on its or their behalf has,
directly or indirectly, made any offers or sales of any security or solicited
any offers to buy any security, under circumstances that would cause this
offering of the Securities to be integrated with prior offerings by the Company
for purposes of (i) the Securities Act which would require the registration of
any such securities under the Securities Act, or (ii) any applicable shareholder
approval provisions of any Trading Market on which any of the securities of the
Company are listed or designated.
 
 
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(x)            Solvency. Except as set forth in Section 3.1(x) of the Disclosure
Schedule, based on the consolidated financial condition of the Company as of the
First Closing, after giving effect to the receipt by the Company of the Minimum
Investment Amount: (i) the fair saleable value of the Company’s assets exceeds
the amount that will be required to be paid on or in respect of the Company’s
existing debts and other liabilities (including known contingent liabilities) as
they mature, (ii) the Company’s assets do not constitute unreasonably small
capital to carry on its business as now conducted and as proposed to be
conducted including its capital needs taking into account the particular capital
requirements of the business conducted by the Company, and projected capital
requirements and capital availability thereof, and (iii) the current cash flow
of the Company, together with the proceeds the Company would receive, were it to
liquidate all of its assets, after taking into account all anticipated uses of
the cash, would be sufficient to pay all amounts on or in respect of its
liabilities when such amounts are required to be paid. The Company does not
intend to incur debts beyond its ability to pay such debts as they mature
(taking into account the timing and amounts of cash to be payable on or in
respect of its debt). The Company has no knowledge of any facts or circumstances
which lead it to believe that it will file for reorganization or liquidation
under the bankruptcy or reorganization laws of any jurisdiction within one year
from the First Closing or any Subsequent Closing, as the case may be. Except as
identified in the Bankruptcy Plan, Schedule 3.1(x) of the Disclosure Schedule
sets forth as of the Plan Effective Date all outstanding secured and unsecured
Indebtedness of the Company, or for which the Company has commitments. For the
purposes of this Agreement, “Indebtedness” means (x) any liabilities for
borrowed money or amounts owed in excess of $50,000 (other than trade accounts
payable incurred in the ordinary course of business), (y) all guaranties,
endorsements and other contingent obligations in respect of indebtedness of
others, whether or not the same are or should be reflected in the Company’s
balance sheet (or the notes thereto), except guaranties by endorsement of
negotiable instruments for deposit or collection or similar transactions in the
ordinary course of business; and (z) the present value of any lease payments in
excess of $50,000 due under leases required to be capitalized in accordance with
GAAP. The Company is not in default with respect to any Indebtedness.
 
(y)           Tax Status. Except as set forth in Section 3.1(y) of the
Disclosure Schedule or as otherwise indentified in the Bankruptcy Plan, and
except for matters that would not, individually or in the aggregate, have or
reasonably be expected to result in a Material Adverse Effect, the Company has
filed all necessary federal, state and foreign income and franchise tax returns
and has paid or accrued all taxes shown as due thereon, and the Company has no
knowledge of a tax deficiency which has been asserted or threatened against the
Company.
 
(z)            No General Solicitation. Neither the Company nor any person
acting on behalf of the Company has offered or sold any of the Securities by any
form of general solicitation or general advertising. The Company has offered the
Securities for sale only to the Purchasers and certain other “accredited
investors” within the meaning of Rule 501 under the Securities Act.
 
 
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(aa)          Foreign Corrupt Practices. Neither the Company, nor to the
knowledge of the Company, any agent or other person acting on behalf of the
Company, has: (i) directly or indirectly, used any funds for unlawful
contributions, gifts, entertainment or other unlawful expenses related to
foreign or domestic political activity, (ii) made any unlawful payment to
foreign or domestic government officials or employees or to any foreign or
domestic political parties or campaigns from corporate funds, (iii) failed to
disclose fully any contribution made by the Company (or made by any person
acting on its behalf of which the Company is aware) which is in violation of law
or (iv) violated in any material respect any provision of the Foreign Corrupt
Practices Act of 1977, as amended.
 
(bb)         Seniority. As of each Closing, except for Senior Indebtedness, no
Indebtedness or other claim against the Company is senior to the Debentures in
right of payment, whether with respect to interest or upon liquidation or
dissolution, or otherwise, other than indebtedness secured by purchase money
security interests (which is senior only as to underlying assets covered
thereby) and capital lease obligations (which is senior only as to the property
covered thereby).  As of each Closing, except for the Indebtedness represented
by the Professional Notes, no Indebtedness or other claim against the Company is
pari passu with the Debentures in right of payment, whether with respect to
interest or upon liquidation or dissolution, or otherwise.
 
(cc)          Acknowledgment Regarding Purchasers’ Purchase of Securities. The
Company acknowledges and agrees that each of the Purchasers is acting solely in
the capacity of an arm’s length purchaser with respect to the Transaction
Documents and the transactions contemplated thereby. The Company further
acknowledges that no Purchaser is acting as a financial advisor or fiduciary of
the Company (or in any similar capacity) with respect to the Transaction
Documents and the transactions contemplated thereby and any advice given by any
Purchaser or any of their respective representatives or agents in connection
with the Transaction Documents and the transactions contemplated thereby is
merely incidental to the Purchasers’ purchase of the Securities. The Company
further represents to each Purchaser that the Company’s decision to enter into
this Agreement and the other Transaction Documents has been based solely on the
independent evaluation of the transactions contemplated hereby by the Company
and its representatives.
 
3.2           Representations and Warranties of the Purchasers. Each Purchaser,
for itself and for no other Purchaser, hereby represents and warrants as of the
date hereof to the Company as follows (unless as of a specific date therein):
 
(a)           Organization; Authority. Such Purchaser is either an individual or
an entity duly organized, validly existing and in good standing under the laws
of the jurisdiction of its organization with full right, corporate or
partnership power and authority to enter into and to consummate the transactions
contemplated by the Transaction Documents and otherwise to carry out its
obligations hereunder and thereunder. The execution and delivery of the
Transaction Documents and performance by such Purchaser of the transactions
contemplated by the Transaction Documents have been duly authorized by all
necessary corporate, partnership, limited liability company or similar action,
as applicable, on the part of such Purchaser. Each Transaction Document to which
it is a party has been duly executed by such Purchaser, and when delivered by
such Purchaser in accordance with the terms hereof, will constitute the valid
and legally binding obligation of such Purchaser, enforceable against it in
accordance with its terms, except: (i) as limited by general equitable
principles and applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors’ rights
generally, (ii) as limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies and (iii) insofar as
indemnification and contribution provisions may be limited by applicable law.
 
 
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(b)           Own Account. Such Purchaser understands that the Securities are
“restricted securities” and have not been registered under the Securities Act or
any applicable state securities law and is acquiring the Securities as principal
for its own account and not with a view to or for distributing or reselling such
Securities or any part thereof in violation of the Securities Act or any
applicable state securities law, has no present intention of distributing any of
such Securities in violation of the Securities Act or any applicable state
securities law and has no direct or indirect arrangement or understandings with
any other persons to distribute or regarding the distribution of such Securities
in violation of the Securities Act or any applicable state securities law (this
representation and warranty not limiting such Purchaser’s right to sell the
Underlying Shares pursuant to the Registration Statement or to sell the
Securities otherwise in compliance with applicable federal and state securities
laws).
 
(c)           Purchaser Status. At the time such Purchaser was offered the
Securities, it was, and as of the date hereof it is, and on each date on which
it exercises any Warrants or converts any Debentures it will be either: (i) an
“accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or
(a)(8) under the Securities Act or (ii) a “qualified institutional buyer” as
defined in Rule 144A(a) under the Securities Act. Such Purchaser is not required
to be registered as a broker-dealer under Section 15 of the Exchange Act.
 
(d)           Experience of Such Purchaser. Such Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has so
evaluated the merits and risks of such investment. Such Purchaser is able to
bear the economic risk of an investment in the Securities and, at the present
time, is able to afford a complete loss of such investment.
 
(e)           General Solicitation. Such Purchaser is not purchasing the
Securities as a result of any advertisement, article, notice or other
communication regarding the Securities published in any newspaper, magazine or
similar media or broadcast over television or radio or presented at any seminar
or any other general solicitation or general advertisement.
 
(f)           Receipt of Information. Such Purchaser has received and read
carefully a copy of the Company’s Private Placement Memorandum, dated July 20,
2011, as it pertains to the description of the Company and its business and
certain other matters not related to the offer and/or terms of the Securities
and all other documents furnished to the undersigned relating to the Company and
its business, including, without limitation, the MORs, the Bankruptcy Plan and
the Disclosure Statement (hereinafter sometimes referred to collectively, as the
“Disclosure Materials”).  The Purchaser has had the opportunity to ask questions
of representatives of the Company concerning the finances, operations, business
and prospects of the Company, and the Company has answered all inquiries that
the Purchaser or its representatives have put to it relating to such
matters.  The Purchaser has had access to all additional information necessary
to verify the accuracy of the information set forth in the Disclosure Materials,
including access via the Company’s website (www.usdrycleaning.com) to the
Bankruptcy Plan and Disclosure Statement, and has taken all the steps necessary
to evaluate the merits and risks of an investment in the Company. The Purchaser
acknowledges that it has received no representations or warranties from the
Company or any other person or entity in making this investment decision.
 
 
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The Company acknowledges and agrees that the representations contained in
Section 3.2 shall not modify, amend or affect such Purchaser’s right to rely on
the Company’s representations and warranties contained in this Agreement or any
representations and warranties contained in any other Transaction Document or
any other document or instrument executed and/or delivered in connection with
this Agreement or the consummation of the transaction contemplated hereby.
 
ARTICLE IV
OTHER AGREEMENTS OF THE PARTIES
 
4.1           Transfer Restrictions.
 
(a)           The Securities may only be disposed of in compliance with state
and federal securities laws. In connection with any transfer of Securities other
than pursuant to an effective registration statement or Rule 144, to the Company
or to an Affiliate of a Purchaser or in connection with a pledge as contemplated
in Section 4.1(b), the Company may require the transferor thereof to provide to
the Company an opinion of counsel selected by the transferor and reasonably
acceptable to the Company, the form and substance of which opinion shall be
reasonably satisfactory to the Company, to the effect that such transfer does
not require registration of such transferred Securities under the Securities
Act. As a condition of transfer, any such transferee shall agree in writing to
be bound by the terms of this Agreement and shall have the rights and
obligations of a Purchaser under this Agreement.
 
(b)           The Purchasers agree to the imprinting, so long as is required by
this Section 4.1, of a legend on any of the Securities in the following form:
 
NEITHER THIS SECURITY [NOR THE SECURITIES INTO WHICH THIS SECURITY IS
[EXERCISABLE] [CONVERTIBLE]] HAS BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON
AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO
THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY. THIS SECURITY [AND THE SECURITIES ISSUABLE UPON
[EXERCISE] [CONVERSION] OF THIS SECURITY] MAY BE PLEDGED IN CONNECTION WITH A
BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A
FINANCIAL INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a)
UNDER THE SECURITIES ACT OR OTHER LOAN SECURED BY SUCH SECURITIES.
 
 
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The Company acknowledges and agrees that a Purchaser may from time to time
pledge pursuant to a bona fide margin agreement with a registered broker-dealer
or grant a security interest in some or all of the Securities to a financial
institution that is an “accredited investor” as defined in Rule 501(a) under the
Securities Act and who agrees to be bound by the provisions of this Agreement
and, if required under the terms of such arrangement, such Purchaser may
transfer pledged or secured Securities to the pledgees or secured parties;
provided, however, that any such Securities pledged or transferred shall remain
subject to the restrictions set forth in any lock-up agreement between the
Purchaser and the Company. Such a pledge or transfer would not be subject to
approval of the Company and no legal opinion of legal counsel of the pledgee,
secured party or pledgor shall be required in connection therewith. Further, no
notice shall be required of such pledge. At the appropriate Purchaser’s expense,
the Company will execute and deliver such reasonable documentation as a pledgee
or secured party of Securities may reasonably request in connection with a
pledge or transfer of the Securities.
 
(c)           Certificates evidencing the Underlying Shares shall not contain
any legend (including the legend set forth in Section 4.1(b)): (i) following the
sale of such Underlying Shares pursuant to a registration statement (including
the Registration Statement), (ii) following any sale of such Underlying Shares
pursuant to Rule 144, or (iii) if such legend is not required under applicable
requirements of the Securities Act (including judicial interpretations and
pronouncements issued by the staff of the Commission).  The Company agrees that
at such time as such legend is no longer required under this Section 4.1(c), it
will, no later than three Trading Days following the delivery by a Purchaser to
the Company or the Transfer Agent of a certificate representing Underlying
Shares issued with a restrictive legend (such third Trading Day, the “Legend
Removal Date”), deliver or cause to be delivered to such Purchaser a certificate
representing such shares that is free from all restrictive and other legends.
The Company may not make any notation on its records or give instructions to the
Transfer Agent that enlarge the restrictions on transfer set forth in this
Section 4.1. Certificates for Securities subject to legend removal hereunder
shall be transmitted by the Transfer Agent to the Purchaser by crediting the
account of the Purchaser’s prime broker with the Depository Trust Company System
as directed by such Purchaser or as otherwise directed by such Purchaser.
 
(d)           Each Purchaser, severally and not jointly with the other
Purchasers, agrees with the Company that such Purchaser will sell any Securities
pursuant to either the registration requirements of the Securities Act,
including any applicable prospectus delivery requirements, or an exemption
therefrom, and that if Securities are sold pursuant to a Registration Statement,
they will be sold in compliance with the plan of distribution set forth therein,
and acknowledges that the removal of the restrictive legend from certificates
representing Securities as set forth in this Section 4.1 is predicated upon the
Company’s reliance upon this understanding.
 
4.2           Acknowledgment of Dilution. The Company acknowledges that the
issuance of the Securities may result in dilution of the outstanding shares of
Common Stock, which dilution may be substantial under certain market conditions.
The Company further acknowledges that its obligations under the Transaction
Documents, including, without limitation, its obligation to issue the Underlying
Shares pursuant to the Transaction Documents, are unconditional and absolute and
not subject to any right of set off, counterclaim, delay or reduction,
regardless of the effect of any such dilution or any claim the Company may have
against any Purchaser and regardless of the dilutive effect that such issuance
may have on the ownership of the other stockholders of the Company.
 
 
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4.3           No Future Dilutive Issuances.  So long as any Debenture is
outstanding, other than in connection with Exempt Issuances, the Company will
not sell or grant any option to purchase or sell or grant any right to reprice,
or otherwise disposes of or issue (or announces any sale, grant or any option to
purchase or other disposition), any Common Stock or Common Stock Equivalents
entitling any Person to acquire shares of Common Stock at an effective price per
share that is lower than the then Conversion Price (such lower price, the “Base
Conversion Price” and such issuances, collectively, a “Dilutive Issuance”) (if
the holder of the Common Stock or Common Stock Equivalents so issued shall at
any time, whether by operation of purchase price adjustments, reset provisions,
floating conversion, exercise or exchange prices or otherwise, or due to
warrants, options or rights per share which are issued in connection with such
issuance, be entitled to receive shares of Common Stock at an effective price
per share that is lower than the Conversion Price, such issuance shall be deemed
to have occurred for less than the Conversion Price on such date of the proposed
Dilutive Issuance).
 
4.4           Furnishing of Information; Public Information.  Upon the closing
of the Subsequent Public Offering and until the earliest of the time that no
Purchaser owns Securities, the Company covenants to maintain the registration of
the Common Stock under Section 12(b) or Section 12(g) of the Exchange Act and to
timely file (or obtain extensions in respect thereof and file within the
applicable grace period) all reports required to be filed by the Company after
the date hereof pursuant to the Exchange Act even if the Company is not then
subject to the reporting requirements of the Exchange Act. As long as any
Purchaser owns Securities, if the Company is not required to file reports
pursuant to the Exchange Act, it will prepare and furnish to the Purchasers and
make publicly available in accordance with Rule 144(c) such information as is
required for the Purchasers to sell the Securities, including without
limitation, under Rule 144. The Company further covenants that it will take such
further action as any holder of Securities may reasonably request, to the extent
required from time to time to enable such Person to sell such Securities without
registration under the Securities Act, including without limitation, within the
requirements of the exemption provided by Rule 144.
 
4.5           Integration. The Company shall not sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or sale
of the Securities in a manner that would require the registration under the
Securities Act of the sale of the Securities or that would be integrated with
the offer or sale of the Securities for purposes of the rules and regulations of
any Trading Market such that it would require shareholder approval prior to the
closing of such other transaction unless shareholder approval is obtained before
the closing of such subsequent transaction.
 
4.6           Conversion and Exercise Procedures. Each of the form of Notice of
Exercise included in the Warrants and the form of Notice of Conversion included
in the Debentures set forth the totality of the procedures required of the
Purchasers in order to exercise the Warrants or convert the Debentures. No
additional legal opinion, other information or instructions shall be required of
the Purchasers to exercise their Warrants or convert their Debentures. The
Company shall honor exercises of the Warrants and conversions of the Debentures
and shall deliver Underlying Shares in accordance with the terms, conditions and
time periods set forth in the Transaction Documents.
 
 
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4.7           Shareholder Rights Plan. No claim will be made or enforced by the
Company or, with the consent of the Company, any other Person, that any
Purchaser is an “Acquiring Person” under any control share acquisition, business
combination, poison pill (including any distribution under a rights agreement)
or similar anti-takeover plan or arrangement in effect or hereafter adopted by
the Company, or that any Purchaser could be deemed to trigger the provisions of
any such plan or arrangement, by virtue of receiving Securities under the
Transaction Documents or under any other agreement between the Company and the
Purchasers.
 
4.8           Short Sales.  As long as Purchaser holds a Debenture or Warrant,
Purchaser shall not engage in any short sales (as such term is defined in Rule
200 of Regulation SHO under the Exchange Act), puts, calls, futures contracts or
hedging or arbitrage transactions with respect to the Company’s Common Stock.
 
4.9           Use of Proceeds. The Company shall use the net proceeds from the
sale of the Securities hereunder exclusively for (a) working capital,
(b) repayment of unsecured creditors as outlined in the Bankruptcy Plan,
(c) repayment of the DIP Lender (as defined in the Bankruptcy Plan), (d)
repayment of $1,000,000 of the amounts owed to the Company’s current senior debt
holders, (e) implementation of payment plans with current existing junior
secured creditors as outlined in the Bankruptcy Plan, (f) payment of certain
secured/lease amounts as outlined in the Bankruptcy Plan, and (g) bankruptcy and
transaction fees.
 
4.10         Indemnification of Purchasers. Subject to the provisions of this
Section 4.10, the Company will indemnify and hold each Purchaser and its
directors, officers, shareholders, members, partners, employees and agents (and
any other Persons with a functionally equivalent role of a Person holding such
titles notwithstanding a lack of such title or any other title), each Person who
controls such Purchaser (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act), and the directors, officers, shareholders,
agents, members, partners or employees (and any other Persons with a
functionally equivalent role of a Person holding such titles notwithstanding a
lack of such title or any other title) of such controlling persons (each, a
“Purchaser Party”) harmless from any and all losses, liabilities, obligations,
claims, contingencies, damages, costs and expenses, including all judgments,
amounts paid in settlements, court costs and reasonable attorneys’ fees and
costs of investigation that any such Purchaser Party may suffer or incur as a
result of or relating to (a) any breach of any of the representations,
warranties, covenants or agreements made by the Company in this Agreement or in
the other Transaction Documents or (b) any action instituted against a Purchaser
in any capacity, or any of them or their respective Affiliates, by any
stockholder of the Company who is not an Affiliate of such Purchaser, with
respect to any of the transactions contemplated by the Transaction Documents
(unless such action is based upon a breach of such Purchaser’s representations,
warranties or covenants under the Transaction Documents or any agreements or
understandings such Purchaser may have with any such stockholder or any
violations by such Purchaser of state or federal securities laws or any conduct
by such Purchaser which constitutes fraud, gross negligence, willful misconduct
or malfeasance). If any action shall be brought against any Purchaser Party in
respect of which indemnity may be sought pursuant to this Agreement, such
Purchaser Party shall promptly notify the Company in writing, and the Company
shall have the right to assume the defense thereof with counsel of its own
choosing reasonably acceptable to the Purchaser Party. Any Purchaser Party shall
have the right to employ separate counsel in any such action and participate in
the defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Purchaser Party except to the extent that (i) the employment
thereof has been specifically authorized by the Company in writing, (ii) the
Company has failed after a reasonable period of time to assume such defense and
to employ counsel or (iii) in such action there is, in the reasonable opinion of
counsel, a material conflict on any material issue between the position of the
Company and the position of such Purchaser Party, in which case the Company
shall be responsible for the reasonable fees and expenses of no more than one
such separate counsel. The Company will not be liable to any Purchaser Party
under this Agreement (y) for any settlement by a Purchaser Party effected
without the Company’s prior written consent, which shall not be unreasonably
withheld or delayed; or (z) to the extent, but only to the extent that a loss,
claim, damage or liability is attributable to any Purchaser Party’s breach of
any of the representations, warranties, covenants or agreements made by such
Purchaser Party in this Agreement or in the other Transaction Documents.
 
 
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4.11         Reservation and Listing of Securities.
 
(a)           The Company shall maintain a reserve from its duly authorized
shares of Common Stock for issuance pursuant to the Transaction Documents in
such amount as may then be required to fulfill its obligations in full under the
Transaction Documents.
 
(b)           If, on any date, the number of authorized but unissued (and
otherwise unreserved) shares of Common Stock is less than the Required Minimum
on such date, then the Board of Directors shall use commercially reasonable
efforts to amend the Company’s certificate of incorporation to increase the
number of authorized but unissued shares of Common Stock to at least the
Required Minimum at such time, as soon as possible and in any event not later
than the 90th day after such date.
 
(c)           The Company shall, if applicable: (i) in the time and manner
required by the principal Trading Market, prepare and file with such Trading
Market an additional shares listing application covering a number of shares of
Common Stock at least equal to the Required Minimum on the date of such
application, (ii) take all steps necessary to cause such shares of Common Stock
to be approved for listing or quotation on such Trading Market as soon as
possible thereafter, (iii) provide to the Purchasers evidence of such listing or
quotation and (iv) maintain the listing or quotation of such Common Stock on any
date at least equal to the Required Minimum on such date on such Trading Market
or another Trading Market.
 
4.12         Equal Treatment of Purchasers. No consideration (including any
modification of any Transaction Document) 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 is also offered to all of
the parties to the Transaction Documents. Further, the Company shall not make
any payment of principal or interest on the Debentures in amounts which are
disproportionate to the respective Principal Amounts outstanding on the
Debentures at any applicable time. For clarification purposes, this provision
constitutes a separate right granted to each Purchaser by the Company and
negotiated separately by each Purchaser, and is intended for the Company to
treat the Purchasers as a class and shall not in any way be construed as the
Purchasers acting in concert or as a group with respect to the purchase,
disposition or voting of Securities or otherwise.
 
 
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4.13         Form D; Blue Sky Filings. The Company agrees to timely file a Form
D with respect to the Securities as required under Regulation D and to provide a
copy thereof, promptly upon request of any Purchaser. The Company shall 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
Purchasers at the Closings under applicable securities or “Blue Sky” laws of the
states of the United States, and shall provide evidence of such actions promptly
upon request of any Purchaser.
 
4.14         Warrants.  Concurrent with the effectiveness of the Subsequent
Public Offering, the Company shall issue to each Purchaser a Warrant in the form
of Exhibit D attached hereto registered in the name of such Purchaser (a) to
purchase up to a number of shares of Common Stock equal to 100% of the Principal
Amount of the Debentures issued to such Purchaser hereunder divided by the per
share price to the public in the Subsequent Public Offering (the “Public
Offering Price”); (b) with an exercise price equal to 100% of the Public
Offering Price, subject to adjustment therein, and (c) with a five-year term
from the closing of the Subsequent Public Offering; provided, however, that if
the Subsequent Public Offering is not completed by the date nine (9) months
after the Plan Effective Date, the Company shall issue to each Purchaser a
Warrant in the form of Exhibit D attached hereto registered in the name of such
Purchaser (i) to purchase up to a number of shares of Common Stock equal to 100%
of the Principal Amount of the Debentures issued to such Purchaser hereunder
divided by $2.00, (ii) with an exercise price equal to $2.00, subject to
adjustment therein, and (iii) with a five-year term from the date thereof.
 
4.15         Participation Right. From the date hereof until no Debentures
remain outstanding, the Company shall not, directly or indirectly, effect any
Subsequent Placement unless the Company shall have first complied with this
Section 4.15. The Company acknowledges and agrees that the right set forth in
this Section 4.15 is a right granted by the Company, separately, to each
Purchaser.
 
(a)           At least 5 Trading Days prior to any proposed or intended
Subsequent Placement, the Company shall deliver to each Purchaser 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 (i) identify
and describe the Offered Securities, (ii) 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, (iii) identify the
Persons (if known) to which or with which the Offered Securities are to be
offered, issued, sold or exchanged and (iv) offer to issue and sell to or
exchange with such Purchaser in accordance with the terms of the Offer (x) such
Purchaser’s a percentage of the Offered Securities equal to the ratio of the
face value of the then outstanding Debentures to the amount raised in new
capital based on such Purchaser’s pro rata portion of the aggregate original
Principal Amount of the Debentures purchased hereunder by all Purchasers (the
“Basic Amount”), and (y) with respect to each Purchaser that elects to purchase
its Basic Amount, any additional portion of the Offered Securities attributable
to the Basic Amounts of other Purchasers as such Purchaser shall indicate it
will purchase or acquire should the other Purchasers subscribe for less than
their Basic Amounts (the “Undersubscription Amount”).
 
 
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(b)           To accept an Offer, in whole or in part, such Purchaser must
deliver a written notice to the Company prior to the end of the 5th Business Day
after such Purchaser’s receipt of the Offer Notice (the “Offer Period”), setting
forth the portion of such Purchaser’s Basic Amount that such Purchaser elects to
purchase and, if such Purchaser shall elect to purchase all of its Basic Amount,
the Undersubscription Amount, if any, that such Purchaser elects to purchase (in
either case, the “Notice of Acceptance”). If the Basic Amounts subscribed for by
all Purchasers are less than the total of all of the Basic Amounts, then such
Purchaser 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, 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”), such Purchaser 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 Purchaser
bears to the total Basic Amounts of all Purchasers that have subscribed for
Undersubscription Amounts, subject to rounding by the Company to the extent it
deems reasonably necessary. Notwithstanding the foregoing, if the Company
desires to modify or amend the terms and conditions of the Offer prior to the
expiration of the Offer Period, the Company may deliver to each Purchaser a new
Offer Notice and the Offer Period shall expire on the 5th Business Day after
such Purchaser’s receipt of such new Offer Notice.
 
(c)           The Company shall have 5 days from the expiration of the Offer
Period above (i) 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 a
Purchaser (the “Refused Securities”) pursuant to a definitive agreement (the
“Subsequent Placement Agreement”), but only to the offerees described in the
Offer Notice (if so described therein) and only upon terms and conditions
(including, without limitation, unit prices and interest rates) that are not
more favorable to the acquiring Person or Persons or less favorable to the
Company than those set forth in the Offer Notice and (ii) to publicly announce
(A) the execution of such Subsequent Placement Agreement, and (B) either (x) the
consummation of the transactions contemplated by such Subsequent Placement
Agreement or (y) the termination of such Subsequent Placement Agreement, which
shall be filed with the Commission on a Current Report on Form 8-K with such
Subsequent Placement Agreement and any documents contemplated therein filed as
exhibits thereto.
 
(d)           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 4.14(c) above), then such Purchaser 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 Purchaser elected to
purchase pursuant to Section 4.14(b) 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 Purchasers pursuant to this Section 4.14
prior to such reduction) and (ii) the denominator of which shall be the original
amount of the Offered Securities. In the event that any Purchaser 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 Purchasers in accordance with Section 4.14(a) above.
 
 
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(e)           Upon the closing of the issuance, sale or exchange of all or less
than all of the Refused Securities, such Purchaser shall acquire from the
Company, and the Company shall issue to such Purchaser, the number or amount of
Offered Securities specified in its Notice of Acceptance. The purchase by such
Purchaser of any Offered Securities is subject in all cases to the preparation,
execution and delivery by the Company and such Purchaser of a separate purchase
agreement relating to such Offered Securities reasonably satisfactory in form
and substance to such Purchaser and its counsel.
 
(f)            Any Offered Securities not acquired by a Purchaser or other
Persons in accordance with this Section 4.14 may not be issued, sold or
exchanged until they are again offered to such Purchaser under the procedures
specified in this Agreement.
 
(g)           The Company and each Purchaser agree that if any Purchaser elects
to participate in the Offer, neither the Subsequent Placement Agreement with
respect to such Offer nor any other transaction documents related thereto
(collectively, the “Subsequent Placement Documents”) shall include any term or
provision whereby such Purchaser shall be required to agree to any restrictions
on trading as to any securities of the Company or be required to consent to any
amendment to or termination of, or grant any waiver, release or the like under
or in connection with, any agreement previously entered into with the Company or
any instrument received from the Company.
 
(h)           Notwithstanding anything to the contrary in this Section 4.14 and
unless otherwise agreed to by such Purchaser, the Company shall either confirm
in writing to such Purchaser that the transaction with respect to the Subsequent
Placement has been abandoned or shall publicly disclose its intention to issue
the Offered Securities, in either case, in such a manner such that such
Purchaser will not be in possession of any material, non-public information, by
the 5th Business Day following delivery of the Offer Notice. If by such 5th
Business Day, no public disclosure regarding a transaction with respect to the
Offered Securities has been made, and no notice regarding the abandonment of
such transaction has been received by such Purchaser, such transaction shall be
deemed to have been abandoned and such Purchaser shall not be deemed to be in
possession of any material, non-public information with respect to the Company
or any of its Subsidiaries. Should the Company decide to pursue such transaction
with respect to the Offered Securities, the Company shall provide such Purchaser
with another Offer Notice and such Purchaser will again have the right of
participation set forth in this Section 4.14. The Company shall not be permitted
to deliver more than one such Offer Notice to such Purchaser in any 60 day
period.
 
(i)            The restrictions contained in this Section 4.14 shall not apply
in connection with an Exempt Issuance or in connection with the Subsequent
Public Offering. The Company shall not circumvent the provisions of this Section
4.14 by providing terms or conditions to one Purchaser that are not provided to
all.
 
 
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4.16         Employment Agreements.  Within 20 days of the First Closing Date,
the Company shall enter into employment agreements with members of the Company’s
senior management, which employment agreements shall be reasonably acceptable to
the Purchasers who purchased Units at the First Closing.
 
4.17         Lock-Up Agreement.  The Purchaser acknowledges and agrees that the
Conversion Shares, the Warrant Shares and the Interest Shares shall be subject
to the terms of a lock-up agreement to be executed by the Purchaser and the
Company restricting the ability of the Purchaser to transfer Conversion Shares
and/or Warrant Shares for a period not to exceed 6 months after the closing of
the Subsequent Public Offering.
 
4.18         Lock-Up Release Participation Right.  If (a) the Company desires to
increase the public float of its Common Stock by allowing any Purchaser or any
holder of equity securities of the Company who are subject to a lock-up
agreement to sell shares of Common Stock prior to the time such shares can be
sold under the terms of such lock-up agreement, or (b) stockholders of the
Company other than the Purchasers that are subject to lock-up agreements
covering shares of the Company’s Common Stock seek the Company’s consent to sell
shares of Common Stock subject to a lock-up agreement prior to the time such
shares can be sold under the terms of such lock-up agreement, the Company shall
provide to the Lead Investor (and its affiliates that also own shares of Common
Stock and are subject to lock-up agreements) with the ability to sell such
number of shares of Common Stock held by the Lead Investor (together with its
affiliates) that are being allowed or requested to be sold as a result of the
events described in clauses (a) and/or (b) immediately above.
 
4.19         Fees.
 
(a)           The Company shall reimburse Rutan & Tucker, LLP (counsel to the
Lead Investor) for all reasonable costs and expenses incurred by it in
connection with the transactions contemplated by the Transaction Documents
(including, without limitation, 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 up to a maximum amount of $75,000 (the “Counsel Expense Amount”).  At
the First Closing the Company shall pay, by wire transfer in U.S. Dollars and
immediately available funds, the invoice with respect to the Transaction Expense
Amount, dated on or about the First Closing Date and delivered to the Company on
or prior to the First Closing Date.
 
(b)           The Company shall reimburse the Lead Investor for all reasonable
third party consulting fees and disbursements in connection therewith up to a
maximum amount of $50,000 (the “Consulting Expense Amount”).  At the First
Closing the Company shall pay, by wire transfer in U.S. Dollars and immediately
available funds, the invoice with respect to the Consulting Expense Amount,
dated on or about the First Closing Date and delivered to the Company on or
prior to the First Closing Date.
 
(c)           The Company shall reimburse the Lead Investor for all reasonable
costs  and expenses incurred by it in connection with any filings to be made by
the Lead Investors or the Class 14 Claimants under the Bankruptcy Plan with the
Comission.
 
 
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ARTICLE V
MISCELLANEOUS
 
5.1           Termination. This Agreement may be terminated by any Purchaser, as
to such Purchaser’s obligations hereunder only and without any effect whatsoever
on the obligations between the Company and the other Purchasers, by written
notice to the other parties, if the First Closing has not been consummated on or
before the Termination Date; provided, however, that such termination will not
affect the right of any party to sue for any breach by the other party (or
parties).  The Company shall return such Purchaser’s Subscription Amount held in
the Segregated Account to such Purchaser upon a termination effected under this
Section 5.1.
 
5.2           Fees and Expenses. Except as expressly set forth in this
Agreement, the Transaction Documents or the Bankruptcy Plan to the contrary,
each party shall pay the fees and expenses of its advisers, counsel, accountants
and other experts, if any, and all other expenses incurred by such party
incident to the negotiation, preparation, execution, delivery and performance of
this Agreement. The Company shall pay all Transfer Agent fees, stamp taxes and
other taxes and duties levied in connection with the delivery of any Securities
to the Purchasers.
 
5.3           Entire Agreement. The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.
 
5.4           Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of: (a) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
set forth on the signature pages attached hereto or by electronic mail at the
e-mail address set forth on the signature pages attached hereto prior to 5:30
p.m. (California time) on a Trading Day, (b) the next Trading Day after the date
of transmission, if such notice or communication is delivered via facsimile at
the facsimile number set forth on the signature pages attached hereto or by
electronic mail at the e-mail address set forth on the signature pages attached
hereto on a day that is not a Trading Day or later than 5:30 p.m. (California
time) on any Trading Day, (c) the 2nd Trading Day following the date of mailing,
if sent by U.S. nationally recognized overnight courier service or (d) upon
actual receipt by the party to whom such notice is required to be given. The
address for such notices and communications shall be as set forth on the
signature pages attached hereto or such other address as the recipient party to
whom notice is to be given may have furnished to the other party in writing in
accordance herewith.
 
5.5           Amendments; Waivers. No provision of this Agreement may be waived,
modified, supplemented or amended except in a written instrument signed, in the
case of an amendment, by the Company and the Purchasers holding at least 51% in
Principal Amount of the Debentures then outstanding or, in the case of a waiver,
by the party against whom enforcement of any such waived provision is sought. No
waiver of any default with respect to any provision, condition or requirement of
this Agreement shall be deemed to be a continuing waiver in the future or a
waiver of any subsequent default or a waiver of any other provision, condition
or requirement hereof, nor shall any delay or omission of any party to exercise
any right hereunder in any manner impair the exercise of any such right.
 
 
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5.6           Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
 
5.7           Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
The Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of each Purchaser (other than by merger). Any
Purchaser may assign any or all of its rights under this Agreement to any Person
to whom such Purchaser assigns or transfers any Securities, provided that such
transferee agrees in writing to be bound, with respect to the transferred
Securities, by the provisions of the Transaction Documents that apply to the
Purchasers.
 
5.8           No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.10.
 
5.9           Governing Law.  This Agreement and any controversy arising out of
or relating to this Agreement shall be governed by and construed in accordance
with the laws of the State of California without regard to conflict of law
principles that would result in the application of any law other than the law of
the State of California.
 
5.10         Dispute Resolution.  The parties (a) hereby irrevocably and
unconditionally submit to the jurisdiction of the federal and state courts
located within the geographic boundaries of Orange County, California for the
purpose of any suit, action or other proceeding arising out of or based upon
this Agreement, (b) agree not to commence any suit, action or other proceeding
arising out of or based upon this Agreement except in the federal and state
courts located within the geographic boundaries of Orange County, California and
(c) hereby waive, and agree not to assert, by way of motion, as a defense, or
otherwise, in any such suit, action or proceeding, any claim that it is not
subject personally to the jurisdiction of the above-named courts, that its
property is exempt or immune from attachment or execution, that the suit, action
or proceeding is brought in an inconvenient forum, that the venue of the suit,
action or proceeding is improper or that this Agreement or the subject matter
hereof may not be enforced in or by such court. The prevailing party shall be
entitled to reasonable attorney’s fees, costs, and necessary disbursements in
addition to any other relief to which such party may be entitled.
 
5.11         Survival. The representations and warranties contained herein shall
survive each Closing and the delivery of the Securities for the applicable
statute of limitations.
 
5.12         Attorneys’ Fees.  If any action at law or in equity (including
arbitration) is necessary to enforce or interpret the terms of the Agreement,
the prevailing party shall be entitled to reasonable attorneys’ fees, costs and
necessary disbursements in addition to any other relief to which such party may
be entitled.
 
 
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5.13         Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together 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, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission or by e-mail delivery of a “.pdf” format
data file, such signature shall create a valid and binding obligation of the
party executing (or on whose behalf such signature is executed) with the same
force and effect as if such facsimile or “.pdf” signature page were an original
thereof.
 
5.14         Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their commercially reasonable efforts to find and employ an
alternative means to achieve the same or substantially the same result as that
contemplated by such term, provision, covenant or restriction. It is hereby
stipulated and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any of such that may be hereafter declared invalid, illegal, void or
unenforceable.
 
5.15         Rescission and Withdrawal Right. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) any of
the other Transaction Documents, from and after the Plan Effective Date any
Purchaser 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 Purchaser 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; provided, however, that in the case of a rescission
of a conversion of a Debenture or exercise of a Warrant, the applicable
Purchaser shall be required to return any shares of Common Stock subject to any
such rescinded conversion or exercise notice concurrently with the return to
such Purchaser of the aggregate exercise price paid to the Company for such
shares and the restoration of such Purchaser’s right to acquire such shares
pursuant to such Purchaser’s Warrant (including, issuance of a replacement
warrant certificate evidencing such restored right).
 
5.16         Replacement of Securities. If any certificate or instrument
evidencing any Securities is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon
cancellation thereof (in the case of mutilation), or in lieu of and substitution
therefor, a new certificate or instrument, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction. The
applicant for a new certificate or instrument under such circumstances shall
also pay any reasonable third-party costs (including customary indemnity)
associated with the issuance of such replacement Securities.
 
5.17         Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Purchasers and the Company will be entitled to specific performance under the
Transaction Documents. The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations contained in the Transaction Documents and hereby agree to waive and
not to assert in any action for specific performance of any such obligation the
defense that a remedy at law would be adequate.
 
 
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5.18         Payment Set Aside. To the extent that the Company makes a payment
or payments to any Purchaser pursuant to any Transaction Document or a Purchaser
enforces or exercises its rights 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, 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.
 
5.19         Usury. To the extent it may lawfully do so, the Company hereby
agrees not to insist upon or plead or in any manner whatsoever claim, and will
resist any and all efforts to be compelled to take the benefit or advantage of,
usury laws wherever enacted, now or at any time hereafter in force, in
connection with any claim, action or proceeding that may be brought by any
Purchaser in order to enforce any right or remedy under any Transaction
Document. Notwithstanding any provision to the contrary contained in any
Transaction Document, it is expressly agreed and provided that the total
liability of the Company under the Transaction Documents for payments in the
nature of interest shall not exceed the maximum lawful rate authorized under
applicable law (the “Maximum Rate”), and, without limiting the foregoing, in no
event shall any rate of interest or default interest, or both of them, when
aggregated with any other sums in the nature of interest that the Company may be
obligated to pay under the Transaction Documents exceed such Maximum Rate. It is
agreed that if the maximum contract rate of interest allowed by law and
applicable to the Transaction Documents is increased or decreased by statute or
any official governmental action subsequent to the date hereof, the new maximum
contract rate of interest allowed by law will be the Maximum Rate applicable to
the Transaction Documents from the effective date thereof forward, unless such
application is precluded by applicable law. If under any circumstances
whatsoever, interest in excess of the Maximum Rate is paid by the Company to any
Purchaser with respect to indebtedness evidenced by the Transaction Documents,
such excess shall be applied by such Purchaser to the unpaid principal balance
of any such indebtedness or be refunded to the Company, the manner of handling
such excess to be at such Purchaser’s election.
 
5.20         Independent Nature of Purchasers’ Obligations and Rights. The
obligations of each Purchaser under any Transaction Document are several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance or non-performance of the obligations
of any other Purchaser under any Transaction Document. Nothing contained herein
or in any other Transaction Document, and no action taken by any Purchaser
pursuant thereto, shall be deemed to constitute the Purchasers as a partnership,
an association, a joint venture or any other kind of entity, or create a
presumption that the Purchasers are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated by the
Transaction Documents. Each Purchaser shall be entitled to independently protect
and enforce its rights, including, without limitation, the rights arising out of
this Agreement or out of the other Transaction Documents, and it shall not be
necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose. Each Purchaser has been represented by its own
separate legal counsel in their review and negotiation of the Transaction
Documents. The Company has elected to provide all Purchasers with the same terms
and Transaction Documents for the convenience of the Company and not because it
was required or requested to do so by any of the Purchasers.
 
 
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5.21         Saturdays, Sundays, Holidays, etc. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall not be a Business Day, then such action may be taken or such right
may be exercised on the next succeeding Business Day.
 
5.22         Construction. The parties agree that each of them and/or their
respective counsel has reviewed and had an opportunity to revise the Transaction
Documents and, therefore, the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of the Transaction Documents or any amendments hereto. In
addition, each and every reference to share prices and shares of Common Stock in
any Transaction Document shall be subject to adjustment for reverse and forward
stock splits, stock dividends, stock combinations and other similar transactions
of the Common Stock that occur after the date of this Agreement.
 
5.23         Corporate Securities Law.  THE SALE OF THE SECURITIES WHICH ARE THE
SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE
QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE
QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS
CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON
THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT.
 
[SIGNATURE PAGES FOLLOW]
 
 
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IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the dates set forth below.
 

 
U.S. DRY CLEANING SERVICES
CORPORATION, a Delaware corporation
                   
By:
     
Robert Y. Lee, Chief Executive Officer
                   
Dated: September __, 2011
                   
Address for notice:
     
4040 MacArthur Blvd., Suite 305
Newport Beach, CA 92660
Fax: (949) 863-9657

 

 
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.
SIGNATURE PAGE FOR PURCHASER FOLLOWS]
 
 
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PURCHASER SIGNATURE PAGE TO U.S. DRY CLEANING SERVICES CORPORATION SECURITIES
PURCHASE AGREEMENT
 
IN WITNESS WHEREOF, the undersigned have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date set forth below.
 
Name of Purchaser:
 

Signature of Purchaser or Authorized Signatory (if an entity):
 

 
Name of Authorized Signatory (if an entity):  
 

Title of Authorized Signatory (if an entity):
 

Address for Notice of Purchaser:
 

Email Address of Purchaser:
 

Facsimile Number of Purchaser:
 

Telephone Number of Purchaser:
 

Principal Amount:
 

Subscription Amount:
 

EIN Number:
 

Dated:
 

 
 
 

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EXHIBIT A
 
Debenture
 
 

 
 
 
 
A-1

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EXHIBIT B
 
Registration Rights Agreement

 
 
 
 
 
 
B-1

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EXHIBIT C
 
Security Agreement
 
 
 
 

 
 
C-1

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EXHIBIT D
 
Warrant
 
 
 
 
 
D-1

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