Exhibit 10.1

EXECUTION COPY

SECURITIES PURCHASE AGREEMENT

SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of February 10, 2006,
by and among Devcon International Corp., a Florida corporation, with
headquarters located at 595 South Federal Highway, Suite 500, Boca Raton,
Florida 33432 (the ”Company”), and the investors listed on the Schedule of
Buyers attached hereto (individually, a “Buyer” and collectively, the “Buyers”).

WHEREAS:

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

B. The Company’s board of directors has authorized the issuance of a series of
notes (the “Notes”) in the form attached hereto as Exhibit A.

C. The Company’s board of directors has authorized, subject to the effectiveness
of the Shareholder Approval (as defined below), a new series of convertible
preferred stock of the Company designated as Series A Convertible Preferred
Stock, the terms of which are set forth in the certificate of designation for
such series of preferred stock (the “Certificate of Designations”) in the form
attached hereto as Exhibit B (together with any convertible preferred shares
issued in replacement thereof in accordance with the terms thereof, the
“Preferred Shares”), which Preferred Shares shall be convertible into the
Company’s common stock, par value $0.10 per share (the “Common Stock”), in
accordance with the terms of the Certificate of Designations.

D. Each Buyer wishes to purchase, and the Company wishes to sell, upon the terms
and conditions stated in this Agreement, at the Initial Closing (as defined in
Section 1(a)(i) below), (i) that aggregate principal amount of Notes set forth
opposite such Buyer’s name in column (3) on the Schedule of Buyers (which
aggregate amount for all Buyers shall be $45,000,000) and (ii) Warrants in
substantially the form attached hereto as Exhibit C (the “Warrants”), to acquire
that number of shares of Common Stock (as exercised, collectively, the “Warrant
Shares”) set forth opposite such Buyer’s name in column (5) on the Schedule of
Buyers.

E. Each Buyer wishes to purchase, upon the satisfaction of certain conditions,
and the Company wishes to sell, upon the terms and conditions stated in this
Agreement, at the Additional Closing (as defined in Section 1(a)(ii) below),
that aggregate number of Preferred Shares set forth opposite such Buyer’s name
in column (4) on the Schedule of Buyers (which aggregate number for all Buyers
shall be 45,000) (as converted, collectively, the “Conversion Shares”).

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F. The Preferred Shares may be entitled to dividends, which, at the option of
the Company and subject to certain conditions, may be paid in shares of Common
Stock that have been registered for resale (the “Dividend Shares”) or in cash.

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

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

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

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

1. PURCHASE AND SALE OF NOTES, PREFERRED STOCK AND WARRANTS.

(a) Notes, Preferred Shares and Warrants.

(i) Subject to the satisfaction (or waiver) of the conditions set forth in
Sections 6(a) and 7(a) below, the Company shall issue and sell to each Buyer,
and each Buyer severally, but not jointly, agrees to purchase from the Company
on the Initial Closing Date (as defined below), that principal amount of Notes,
as is set forth opposite such Buyer’s name in column (3) on the Schedule of
Buyers, along with Warrants to acquire that number of Warrant Shares as is set
forth opposite such Buyer’s name in column (5) on the Schedule of Buyers.

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

(b) Initial Closing Date. The Company shall deliver a notice (the “Initial
Closing Notice”) of the date that the closing of the purchase of the Notes and
Warrants (the “Initial Closing”) shall occur, which Initial Closing Notice must
be delivered to each Buyer by February 24, 2006 (the “Initial Closing Notice
Deadline”)(unless the Initial Closing Notice Deadline is waived by the Buyers).
The date and time of the Initial Closing (the “Initial Closing Date”) shall be
10:00 a.m., New York Time, on the fifth (5th) Business Day after the Initial
Closing Notice has been delivered to each Buyer (or such other date as is
mutually agreed to by the Company and each Buyer). The Initial Closing shall
occur at the offices of Schulte Roth & Zabel LLP, 919 Third Avenue, New York,
New York 10022. The Initial Closing Notice shall be irrevocable and must be
delivered to each Buyer. Notwithstanding anything in this Agreement to the
contrary, the Company shall not be entitled to require the Buyers to purchase
the Notes or

 

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Warrants unless the requirements of Section 7(a) below are satisfied or waived
by each Buyer. As used herein, “Business Day” means any day other than Saturday,
Sunday or other day on which commercial banks in The City of New York are
authorized or required by law to remain closed.

(c) Additional Closing Date. The Company is required to deliver a notice (the
“Additional Closing Notice”) certifying that the Shareholder Approval (as
defined below) is effective. The Additional Closing Notice must be delivered to
each Buyer by the earlier to occur of (the “Additional Closing Notice Deadline”)
(unless the Additional Closing Notice Deadline is waived by the Buyers) (x) five
(5) Business Days after the Securities and Exchange Commission (the “SEC”)
indicates it has no comments or no further review to the information or proxy
statement (the “SEC Statement”) filed in connection with the Shareholder
Approval (as defined below) (the “SEC Indication of Completion of Review”), and
(y) (i) in the event the SEC does not review the SEC Statements, April 5, 2006
and (ii) otherwise July 20, 2006. The date and time of the closing (the
“Additional Closing”, and together with the Initial Closing, the “Closing”) of
the purchase of the Preferred Shares (the “Additional Closing Date”, and
together with the Initial Closing Date, the “Closing Date”) shall be 10:00 a.m.,
New York Time, on the earlier of (the “Additional Closing Deadline”) (or such
other date as is mutually agreed to by the Company and each Buyer) (x) the later
of (A) the fifth (5th) Business Day after the date that the Additional Closing
Notice has been delivered to each Buyer and (B) in the event that there has been
no previous mailing of the applicable SEC Statement or the applicable rules and
regulations of the SEC requires an additional mailing of the applicable SEC
Statement, a date indicated in the Additional Closing Notice which may be up to
twenty-two calendar days after the SEC Indication of Completion of Review and
(y) (I) in the event the SEC does not review the SEC Statements, April 15, 2006
and (II) otherwise July 31, 2006. The Additional Closing shall occur at the
offices of Schulte Roth & Zabel LLP, 919 Third Avenue, New York, New York 10022.
The Additional Closing Notice shall be irrevocable and must be delivered to each
Buyer. Notwithstanding anything in this Agreement to the contrary, the Company
shall not be entitled to require the Buyers to purchase the Preferred Shares
unless the requirements of Section 7(b) below are satisfied or waived by each
Buyer.

(d) Purchase Price. The purchase price for each Buyer (the “Initial Purchase
Price”) of the Notes and the related Warrants to be purchased by each such Buyer
at the Initial Closing shall be equal to $1.00 for each $1.00 of principal
amount of Notes being purchased by such Buyer at the Initial Closing. The
aggregate purchase price for the Notes and the related Warrants to be paid by
each Buyer at the Initial Closing shall be the amount set forth opposite such
Buyer’s name in column (3) on the Schedule of Buyers, less, in the case of
Steelhead Investments Ltd. (“Steelhead”) and Castlerigg Master Investments Ltd.
(“Castlerigg”), each a Buyer, any amounts withheld pursuant to Section 4(g). The
purchase price for the Preferred Shares to be purchased by each Buyer at the
Additional Closing (the “Additional Purchase Price”, and together with the
Initial Purchase Price, the “Purchase Price”) shall be the amount set forth
opposite such Buyer’s name in column (6) on the Schedule of Buyers, less (1) in
the case of Steelhead and Castlerigg, any amounts withheld pursuant to
Section 4(g) or (2) such Buyer’s pro rata share of any amount outstanding under
any outstanding Notes (including any outstanding principal, accrued and unpaid
interest, fees, late charges and other amounts due in respect thereof) (the
“Note Amount”), provided, however, that if the Note Amount of such Buyer exceeds
the Additional Purchase Price of such Buyer, on the Additional Closing Date the

 

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Company shall pay such Buyer such excess amount by wire transfer of immediately
available funds in accordance with such Buyer’s wire instructions (the “Excess
Note Amount”). Each Buyer shall pay $1,000 for each Preferred Share to be
purchased by such Buyer at the Additional Closing.

(e) Form of Payment.

(i) On the Initial Closing Date, (A) each Buyer shall pay its portion of the
Purchase Price to the Company for the Notes and the Warrants to be issued and
sold to such Buyer at the Initial Closing, by wire transfer of immediately
available funds in accordance with the Company’s written wire instructions and
(B) the Company shall deliver to each Buyer the Notes which such Buyer is then
purchasing as is set forth opposite such Buyer’s name in column (3) on the
Schedule of Buyers (in the principal amounts as such Buyer shall request), along
with the Warrants (exercisable for the number of shares of Common Stock as is
set forth opposite such Buyer’s name in column (5) on the Schedule of Buyers),
each duly executed on behalf of the Company and registered in the name of such
Buyer or its designee.

(ii) On the Additional Closing Date, (A) each Buyer shall pay its portion of the
Purchase Price to the Company for the Preferred Shares to be issued and sold to
such Buyer at the Additional Closing, by exchange of such Buyer’s Notes or, if
such Buyer on the Additional Closing Date does not hold any Notes, by wire
transfer of immediately available funds in accordance with the Company’s written
wire instructions and (B) the Company shall deliver to each Buyer the Preferred
Shares (in such denominations as is set forth opposite such Buyer’s name in
column (4) on the Schedule of Buyers), each duly executed on behalf of the
Company and registered in the name of such Buyer or its designee.

2. BUYER’S REPRESENTATIONS AND WARRANTIES.

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

(a) Organization; Authority. Such Buyer is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization with the requisite power and authority to enter into and to
consummate the transactions contemplated by the Transaction Documents (as
defined below) to which it is a party and otherwise to carry out its obligations
hereunder and thereunder.

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

 

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

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

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

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

(g) Transfer or Resale. Such Buyer understands that except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not
being registered under the 1933 Act or any state securities laws, and may not be
offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) such Buyer shall have delivered to the Company an
opinion of counsel, in a generally acceptable form, to the effect that such
Securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, or (C) such Buyer
provides the Company with reasonable assurance that such Securities can be sold,
assigned or transferred pursuant to Rule 144 or Rule 144A promulgated under the
1933 Act, as amended, (or a successor rule thereto) (collectively, “Rule 144”);
(ii) any sale of the Securities made in reliance on Rule 144 may be made only in
accordance with the terms of Rule 144 and further, if Rule 144 is not
applicable, any resale of the Securities under circumstances in which the seller
(or the Person (as defined in Section 3(s)) through whom the sale is made) may
be deemed to be an underwriter (as that term is defined in the 1933 Act) may
require compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder; and (iii) neither the Company nor any other
Person is under any obligation to register the Securities under the 1933 Act or
any state securities laws or to comply with the terms and conditions of any
exemption thereunder. The Securities may be pledged in connection with a bona
fide margin account or other loan or financing arrangement secured by the
Securities and such pledge of Securities shall not be deemed to be a transfer,
sale

 

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or assignment of the Securities hereunder, and no Buyer effecting a pledge of
Securities shall be required to provide the Company with any notice thereof or
otherwise make any delivery to the Company pursuant to this Agreement or any
other Transaction Document (as defined in Section 3(b)), including, without
limitation, this Section 2(f).

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

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

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

(i) Validity; Enforcement. This Agreement and the Registration Rights Agreement
have been duly and validly authorized, executed and delivered on behalf of such
Buyer and shall constitute the legal, valid and binding obligations of such
Buyer enforceable against such Buyer in accordance with their respective terms,
except as such enforceability may be limited by general principles of equity or
to applicable bankruptcy, insolvency,

 

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reorganization, moratorium, liquidation and other similar laws relating to, or
affecting generally, the enforcement of applicable creditors’ rights and
remedies.

(j) No Conflicts. The execution, delivery and performance by such Buyer of this
Agreement and the Registration Rights Agreement and the consummation by such
Buyer of the transactions contemplated hereby and thereby will not (i) result in
a violation of the organizational documents of such Buyer or (ii) conflict with,
or constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which such Buyer is a party, or (iii) result in a violation of any
law, rule, regulation, order, judgment or decree (including federal and state
securities laws) applicable to such Buyer, except in the case of clauses
(ii) and (iii) above, for such conflicts, defaults, rights or violations which
would not, individually or in the aggregate, reasonably be expected to have a
material adverse effect on the ability of such Buyer to perform its obligations
hereunder.

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

3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

The Company represents and warrants to each of the Buyers :

(a) Organization and Qualification. The Company and its “Subsidiaries” (which
for purposes of this Agreement means any entity listed on Schedule 3(a)(i)) are
entities duly organized and validly existing and in good standing under the laws
of the jurisdiction in which they are formed, and have the requisite power and
authorization to own their properties and to carry on their business as now
being conducted. Each of the Company and its Subsidiaries is duly qualified as a
foreign entity to do business and is in good standing in every jurisdiction in
which its ownership of property or the nature of the business conducted by it
makes such qualification necessary, except to the extent that the failure to be
so qualified or be in good standing would not have a Material Adverse Effect.
Except as set forth in Schedule 3(a)(ii), the Company has no Material
Subsidiaries (as defined in SEC Regulation S-X) other than the Subsidiaries. As
used in this Agreement, “Material Adverse Effect” means any material adverse
effect on the business, properties, assets, operations, results of operations or
condition (financial or otherwise) of the Company, its Subsidiaries,
individually or taken as a whole, or on the transactions contemplated hereby or
in the other Transaction Documents or by the agreements and instruments to be
entered into in connection herewith or therewith, or on the authority or ability
of the Company to perform its obligations under the Transaction Documents (as
defined below).

(b) Authorization; Enforcement; Validity. The Company has the requisite power
and authority to enter into and perform its obligations under this Agreement,
the Notes, the Certificate of Designations, the Warrants, the Registration
Rights Agreement, the Irrevocable Transfer Agent Instructions (as defined in
Section 5(b)), and each of the other agreements entered into by the parties
hereto in connection with the transactions contemplated by this Agreement
(collectively, the “Transaction Documents”) and to issue the Securities in
accordance with the terms hereof and thereof. Subject to the effectiveness of
the Shareholder

 

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Approval (as defined below) and the filing of articles of amendment to the
Company’s Articles of Incorporation authorizing the Preferred Shares, the
execution and delivery of the Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby,
including, without limitation, the issuance of the Notes, the issuance of the
Preferred Shares, the reservation for issuance and the issuance of the
Conversion Shares issuable upon conversion of the Preferred Shares, the issuance
of the Warrants and the reservation for issuance and issuance of the Warrant
Shares issuable upon exercise of the Warrants, have been duly authorized by the
Company’s board of directors and (other than the filing with the SEC of one or
more Registration Statements in accordance with the requirements of the
Registration Rights Agreement, any other filings as may be required by any state
securities agencies and the filing of an additional listing application with the
Principal Market) no further filing, consent, or authorization is required by
the Company, its board of directors or its shareholders. This Agreement and the
other Transaction Documents of even date herewith have been duly executed and
delivered by the Company, and constitute the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation or similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights and remedies and except as rights to
indemnification and to contribution may be limited by federal or state
securities law.

(c) Issuance of Securities. Subject to effectiveness of the Shareholder Approval
and filing of articles of amendment to the Company’s Articles of Incorporation
authorizing the Preferred Shares, the issuance of the Notes, the Preferred
Shares and the Warrants are duly authorized and upon issuance in accordance with
the terms of the Transaction Documents shall be free from all taxes, liens and
charges with respect to the issue thereof, and the Preferred Shares shall be
entitled to the rights and preferences set forth in the Certificate of
Designations. As of the Additional Closing, the Company shall have reserved from
its duly authorized capital stock not less than the sum of (i) 120% of the
maximum number of shares of Common Stock issuable upon conversion of the
Preferred Shares (assuming for purposes hereof, that the Preferred Shares are
convertible at the Conversion Price and without taking into account any
limitations on the conversion of the Preferred Shares set forth in the
Certificate of Designations), (ii) 120% of the maximum number of Dividend Shares
issuable pursuant to the terms of the Certificate of Designations, determined as
if issued as of the trading day immediately preceding the applicable date of
determination and assuming that all of the Preferred Shares remain outstanding
until the Maturity Date (as defined in the Certificate of Designations), and
(ii) 120% of the maximum number of shares of Common Stock issuable upon exercise
of the Warrants (without taking into account any limitations on the exercise of
the Warrants set forth in the Warrants). Upon issuance or conversion in
accordance with the Certificate of Designations or exercise in accordance with
the Warrants, as the case may be, the Conversion Shares and the Warrant Shares,
respectively, will be validly issued, fully paid and nonassessable and free from
all preemptive or similar rights, taxes, liens and charges with respect to the
issue thereof, with the holders being entitled to all rights accorded to a
holder of Common Stock. Subject to the representations and warranties of the
Buyers in this Agreement, the offer and issuance by the Company of the
Securities is exempt from registration under the 1933 Act.

 

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

(e) Consents. Except set forth on Schedule 3(e), other than the filing with the
SEC of one or more Registration Statements in accordance with the requirements
of the Registration Rights Agreement, any other filings as may be required by
any state securities agencies and the filing of an additional listing
application with the Principal Market, the Company is not required to obtain any
consent, authorization or order of, or make any filing or registration with, any
court, governmental agency or any regulatory or self-regulatory agency or any
other Person in order for it to execute, deliver or perform any of its
obligations under or contemplated by the Transaction Documents, in each case in
accordance with the terms hereof or thereof. Except as otherwise contemplated in
the Registration Rights Agreement, all consents, authorizations, orders, filings
and registrations which the Company is required to obtain pursuant to the
preceding sentence will be obtained or effected on or prior to the Initial
Closing Date, and the Company and its Subsidiaries are unaware of any facts or
circumstances which might prevent the Company from obtaining or effecting any of
the registration, application or filings pursuant to the preceding sentence.
Except as disclosed in the Company’s Current Report on Form 8-K, as filed with
the SEC on January 31, 2006 with a Date of Report of January 25, 2006, the
Company is not in violation of the requirements of the Principal Market and has
no knowledge of any facts which would reasonably lead to delisting or suspension
of the Common Stock in the foreseeable future.

(f) Acknowledgment Regarding Buyer’s Purchase of Securities. The Company
acknowledges and agrees that each Buyer is acting solely in the capacity of
arm’s length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby and that, to the Company’s
knowledge, no Buyer is (i) an officer or director of the Company, (ii) an
“affiliate” of the Company or any of its Subsidiaries (as defined in Rule 144)
or (iii) to the knowledge of the Company, a “beneficial owner” of more than 10%
of the shares of Common Stock (as defined for purposes of Rule 13d-3 of the
Securities Exchange Act

 

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of 1934, as amended (the “1934 Act”)). The Company further acknowledges that no
Buyer is acting as a financial advisor or fiduciary of the Company or any of its
Subsidiaries (or in any similar capacity) with respect to the Transaction
Documents and the transactions contemplated hereby and thereby, and any advice
given by a Buyer or any of its representatives or agents in connection with the
Transaction Documents and the transactions contemplated hereby and thereby is
merely incidental to such Buyer’s purchase of the Securities. The Company
further represents to each Buyer that the Company’s decision to enter into the
Transaction Documents has been based solely on the independent evaluation by the
Company and its representatives.

(g) No General Solicitation; Placement Agent’s Fees. Neither the Company, nor
any of its Subsidiaries or affiliates, nor any Person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D) in connection with the offer or sale of the
Securities. The Company shall be responsible for the payment of any placement
agent’s fees, financial advisory fees, or brokers’ commissions (other than for
persons engaged by any Buyer or its investment advisor) relating to or arising
out of the transactions contemplated hereby. The Company shall pay, and hold
each Buyer harmless against, any liability, loss or expense (including, without
limitation, attorney’s fees and out-of-pocket expenses) arising in connection
with any such claim. The Company acknowledges that it has engaged an investment
bank of international standing and reputation as placement agent (the “Agent”)
in connection with the sale of the Securities. Other than the Agent, neither the
Company nor any of its Subsidiaries has engaged any placement agent or other
agent in connection with the sale of the Securities.

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

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

(j) Application of Takeover Protections; Rights Agreement. The Company and its
board of directors have taken all necessary action, if any, in order to render
inapplicable

 

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any control share acquisition, business combination, poison pill (including any
distribution under a rights agreement) or other similar anti-takeover provision
under the Articles of Incorporation or the laws of the jurisdiction of its
incorporation which is or could become applicable to any Buyer as a result of
the transactions contemplated by this Agreement, including, without limitation,
the Company’s issuance of the Securities and any Buyer’s ownership of the
Securities. The Company has not adopted a shareholder rights plan or similar
arrangement relating to accumulations of beneficial ownership of Common Stock or
a change in control of the Company.

(k) SEC Documents; Financial Statements. During the two (2) years prior to the
date hereof, the Company has filed all reports, schedules, forms, statements and
other documents required to be filed by it with the SEC pursuant to the
reporting requirements of the 1934 Act (all of the foregoing filed prior to the
date hereof and all exhibits included therein and financial statements, notes
and schedules thereto and documents incorporated by reference therein being
hereinafter referred to as the “SEC Documents”). The Company has delivered to
the Buyers or their respective representatives true, correct and complete copies
of each of the SEC Documents not available on the EDGAR system that have been
requested by each Buyer. As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the 1934 Act and the
rules and regulations of the SEC promulgated thereunder applicable to the SEC
Documents, and none of the SEC Documents, at the time they were filed with the
SEC, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. As of their respective dates, the financial statements of
the Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto as in effect as of the time of
filing. Such financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied, during the
periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto, or (ii) in the case of unaudited interim
statements, to the extent they may exclude footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments). No other
information provided on or behalf of the Company to the Buyers which is not
included in the SEC Documents, including, without limitation, information
referred to in Section 2(e) of this Agreement, contains any untrue statement of
a material fact or omits to state any material fact necessary in order to make
the statements therein not misleading, in the light of the circumstance under
which they are or were made.

(l) Absence of Certain Changes. Except as disclosed in Schedule 3(l), since the
Company’s most recently filed audited financial statements contained in a Form
10-K, there has been no material adverse change and no material adverse
development in the business, assets, properties, operations, condition
(financial or otherwise), results of operations or prospects of the Company.
Except as disclosed in Schedule 3(l), since the Company’s most recently filed
audited financials statements contained in a Form 10-K, neither the Company nor
any of its Subsidiaries has (i) declared or paid any dividends (except dividends
paid directly to the Company by its Subsidiaries), (ii) sold any assets,
individually or in the aggregate, in excess of $1,000,000 outside of the
ordinary course of business or (iii) had capital expenditures,

 

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individually or in the aggregate, in excess of $1,000,000. Neither the Company
nor any of its Subsidiaries has taken any steps to seek protection pursuant to
any bankruptcy law nor does the Company have any knowledge or reason to believe
that its creditors intend to initiate involuntary bankruptcy proceedings or any
actual knowledge of any fact which would reasonably lead a creditor to do so.
The Company and its Subsidiaries, individually and on a consolidated basis, are
not as of the date hereof, and after giving effect to the transactions
contemplated hereby to occur at the applicable Closing, will not be, Insolvent
(as defined below). For purposes of this Section 3(l), “Insolvent” means, with
respect to any Person (as defined in Section 3(s)) (i) the present fair saleable
value of such Person’s assets is less than the amount required to pay such
Person’s total Indebtedness (as defined in Section 3(s)), (ii) such Person is
unable to pay its debts and liabilities, subordinated, contingent or otherwise,
as such debts and liabilities become absolute and matured, (iii) such Person
intends to incur or believes that it will incur debts that would be beyond its
ability to pay as such debts mature or (iv) such Person has unreasonably small
capital with which to conduct the business in which it is engaged as such
business is now conducted and is proposed to be conducted.

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

(n) Conduct of Business; Regulatory Permits. Neither the Company nor its
Subsidiaries is in violation of any term of or in default under its Articles of
Incorporation, the Certificate of Designations, any other certificate of
designation, preferences or rights of any other outstanding series of preferred
stock of the Company or Bylaws or their organizational charter or articles of
incorporation or bylaws, respectively. Except as set forth on Schedule 3(n),
neither the Company nor any of its Subsidiaries is in violation of any judgment,
decree or order or any statute, ordinance, rule or regulation applicable to the
Company or its Subsidiaries, and neither the Company nor any of its Subsidiaries
will conduct its business in violation of any of the foregoing, except in all
cases for possible violations which would not, individually or in the aggregate,
have a Material Adverse Effect. Without limiting the generality of the
foregoing, except as set forth on Schedule 3(n), the Company is not in violation
of any of the rules, regulations or requirements of the Principal Market and has
no knowledge of any facts or circumstances that would reasonably lead to
delisting or suspension of the Common Stock by the Principal Market in the
foreseeable future. During the two (2) years prior to the date hereof, (i) the
Common Stock has been designated for quotation on the Principal Market,
(ii) trading in the Common Stock has not been suspended by the SEC or the
Principal Market and (iii) except for communication from the Principal Market
regarding the Company’s compliance with Marketplace Rule 4350 of the Principal
Market concerning the independence of the Company’s board after the death of
Robert Armstrong and the resignation of James Cast, the two directors of the
Company, the Company has received no communication, written or oral, from the
SEC or the Principal Market regarding the suspension or delisting of the Common
Stock from the Principal Market. The Company and its Subsidiaries possess all
certificates, authorizations and permits

 

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issued by the appropriate regulatory authorities necessary to conduct their
respective businesses, except where the failure to possess such certificates,
authorizations or permits would not have, individually or in the aggregate, a
Material Adverse Effect, and neither the Company nor any such Subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit.

(o) Foreign Corrupt Practices. Neither the Company nor any of its Subsidiaries
nor any director, officer, agent, employee or other Person acting on behalf of
the Company or any of its Subsidiaries has, in the course of its actions for, or
on behalf of, the Company or any of its Subsidiaries (i) used any corporate
funds for any unlawful contribution, gift, entertainment or other unlawful
expenses relating to political activity; (ii) made any direct or indirect
unlawful payment to any foreign or domestic government official or employee from
corporate funds; (iii) violated or is in violation of any provision of the U.S.
Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any unlawful
bribe, rebate, payoff, influence payment, kickback or other unlawful payment to
any foreign or domestic government official or employee; except in all cases to
the extent such actions would not, individually or in the aggregate, have a
Material Adverse Effect.

(p) Sarbanes-Oxley Act. The Company is in compliance in all material respects
with any and all applicable requirements of the Sarbanes-Oxley Act of 2002 that
are effective as of the date hereof, and any and all applicable rules and
regulations promulgated by the SEC thereunder that are effective as of the date
hereof.

(q) Transactions With Affiliates. Except as set forth in the SEC Documents filed
at least ten (10) days prior to the date hereof, the grant of stock options
disclosed on Schedule 3(q) and those certain Consulting Agreements entered into
between the Company and Donald L. Smith, Jr., the Company’s former Chairman of
the Board, and James R. Cast, a former director of the Company (which Consulting
Agreements were immaterial and did not require filing as part of the SEC
Documents), none of the officers, directors or employees of the Company or any
of its Subsidiaries is presently a party to any transaction with the Company or
any of its Subsidiaries (other than for ordinary course services as employees,
officers or directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real
or personal property to or from, or otherwise requiring payments to or from any
such officer, director or employee or, to the knowledge of the Company or any of
its Subsidiaries, any corporation, partnership, trust or other entity in which
any such officer, director, or employee has a substantial interest or is an
officer, director, trustee or partner.

(r) Equity Capitalization. As of the date hereof, the authorized capital stock
of the Company consists of 50,000,000 shares of Common Stock, of which as of the
date hereof, 6,003,404 are issued and outstanding and 4,800,840 shares are
reserved for issuance pursuant to securities (other than the Preferred Shares
and the Warrants) exercisable or exchangeable for, or convertible into, shares
of Common Stock. All of such outstanding or reserved shares have been, or upon
issuance will be, validly issued and are fully paid and nonassessable. Except as
set forth on Schedule 3(r), (i) none of the Company’s share capital is subject
to preemptive rights or any other similar rights or any liens or encumbrances
suffered or permitted by the Company and (ii) there are no securities or
instruments containing anti-dilution or similar provisions that will be

 

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triggered by the issuance of the Securities. Except as disclosed in the SEC
Documents or the Disclosure 8-K: (i) there are no outstanding options, warrants,
scrip, rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, or exercisable or
exchangeable for, any share capital of the Company or any of its Subsidiaries,
or contracts, commitments, understandings or arrangements by which the Company
or any of its Subsidiaries is or may become bound to issue additional share
capital of the Company or any of its Subsidiaries or options, warrants, scrip,
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, or exercisable or
exchangeable for, any share capital of the Company or any of its Subsidiaries;
(ii) there are no outstanding debt securities, notes, credit agreements, credit
facilities or other agreements, documents or instruments evidencing Indebtedness
(as defined in Section 3(s)) of the Company or any of its Subsidiaries or by
which the Company or any of its Subsidiaries is or may become bound; (iii) there
are no financing statements securing obligations in any material amounts, either
singly or in the aggregate, filed in connection with the Company or any of its
Subsidiaries; (iv) there are no agreements or arrangements under which the
Company or any of its Subsidiaries is obligated to register the sale of any of
their securities under the 1933 Act (except pursuant to the Registration Rights
Agreement); (v) there are no outstanding securities or instruments of the
Company or any of its Subsidiaries which contain any redemption or similar
provisions, and there are no contracts, commitments, understandings or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to redeem a security of the Company or any of its Subsidiaries; (vi) the
Company does not have any stock appreciation rights or “phantom stock” plans or
agreements or any similar plan or agreement; and (vii) the Company and its
Subsidiaries have no liabilities or obligations required to be disclosed in the
SEC Documents but not so disclosed in the SEC Documents, other than those
incurred in the ordinary course of the Company’s or its Subsidiaries’ respective
businesses and which, individually or in the aggregate, do not or would not have
a Material Adverse Effect. The Company has furnished to the Buyer true, correct
and complete copies of the Company’s Articles of Incorporation, as amended and
as in effect on the date hereof (the “Articles of Incorporation”), and the
Company’s Bylaws, as amended and as in effect on the date hereof (the “Bylaws”),
and the terms of all securities convertible into, or exercisable or exchangeable
for, shares of Common Stock and the material rights of the holders thereof in
respect thereto.

(s) Indebtedness and Other Contracts. Except as disclosed in the SEC Documents,
the Disclosure 8-K or Schedule 3(s), neither the Company nor any of its
Subsidiaries (i) has any outstanding Indebtedness (as defined below) with an
outstanding principal amount in excess of $250,000 individually, (ii) is a party
to any contract, agreement or instrument, the violation of which, or default
under which, by the other party(ies) to such contract, agreement or instrument
could reasonably be expected to result in a Material Adverse Effect, (iii) is in
violation of any term of or in default under any contract, agreement or
instrument relating to any Indebtedness, except where such violations and
defaults would not result, individually or in the aggregate, in a Material
Adverse Effect, or (iv) is a party to any contract, agreement or instrument
relating to any Indebtedness, the performance of which, in the judgment of the
Company’s officers, has or is expected to have a Material Adverse Effect. The
SEC Documents or the Disclosure 8-K provide a detailed description of the
material terms of any such outstanding Indebtedness. For purposes of this
Agreement: (x) “Indebtedness” of any Person means, without duplication (A) all
indebtedness for borrowed money, (B) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services (including,
without

 

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limitation, “capital leases” in accordance with generally accepted accounting
principles) (other than trade payables entered into in the ordinary course of
business), (C) all reimbursement or payment obligations with respect to letters
of credit, surety bonds and other similar instruments, (D) all obligations
evidenced by notes, bonds, debentures or similar instruments, including
obligations so evidenced incurred in connection with the acquisition of
property, assets or businesses, (E) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (F) all monetary obligations under any
leasing or similar arrangement which, in connection with generally accepted
accounting principles, consistently applied for the periods covered thereby, is
classified as a capital lease, (G) all indebtedness referred to in clauses
(A) through (F) above secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any Person,
even though the Person which owns such assets or property has not assumed or
become liable for the payment of such indebtedness, and (H) all Contingent
Obligations in respect of indebtedness or obligations of others of the kinds
referred to in clauses (A) through (G) above; (y) “Contingent Obligation” means,
as to any Person, any direct or indirect liability, contingent or otherwise, of
that Person with respect to any indebtedness, lease, dividend or other
obligation of another Person if the primary purpose or intent of the Person
incurring such liability, or the primary effect thereof, is to provide assurance
to the obligee of such liability that such liability will be paid or discharged,
or that any agreements relating thereto will be complied with, or that the
holders of such liability will be protected (in whole or in part) against loss
with respect thereto; and (z) “Person” means an individual, a limited liability
company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization and a government or any department or agency
thereof.

(t) Absence of Litigation. Except as set forth under “HISTORICAL OVERVIEW OF
ELECTRONIC SECURITY SERVICES DIVISION—Acquisition of Electronic Security
Services Operations of Starpoint”, the Risk Factor concerning the “Petit
Litigation” in the Company’s Current Report on Form 8-K, as filed with the SEC
on January 31, 2006 with a Date of Report of January 31, 2006 (the “Disclosure
8-K”) and under “Item 3 - Legal Proceedings” in the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2004, there is no action, suit,
proceeding, inquiry or investigation before or by the Principal Market, any
court, public board, government agency, self-regulatory organization or body
pending or, to the knowledge of the Company, threatened against or affecting the
Company or any of its Subsidiaries, the Common Stock or any of the Company’s
Subsidiaries or any of the Company’s or its Subsidiaries’ officers or directors,
except as would not, either individually or in the aggregate, reasonably be
expected to result in a Material Adverse Effect.

(u) Insurance. The Company and each of its Subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as management of the Company believes to be prudent and customary in the
businesses in which the Company and its Subsidiaries are engaged. Neither the
Company nor any such Subsidiary has been refused any insurance coverage sought
or applied for and neither the Company nor any such Subsidiary has any reason to
believe that it will not be able to renew its existing insurance

 

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coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not have a Material Adverse Effect.

(v) Employee Relations.

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

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

(w) Title. Except as set forth under “Management Discussion And Analysis Of
Financial Condition and Results Of Operations - Liquidity and Related Party
Transactions” in the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended on September 30, 2005 and as set forth on Schedule 3(w), the
Company and its Subsidiaries have good and marketable title in fee simple to all
real property and good and marketable title to all personal property owned by
them which is material to the business of the Company and its Subsidiaries, in
each case free and clear of all liens, encumbrances and defects except such as
do not materially affect the value of such property and do not interfere with
the use made and proposed to be made of such property by the Company and any of
its Subsidiaries. Any real property and facilities held under lease by the
Company or any of its Subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its Subsidiaries.

(x) Intellectual Property Rights. The Company and its Subsidiaries own or
possess adequate rights or licenses to use all trademarks, trade names, service
marks, service mark registrations, service names, patents, patent rights,
copyrights, inventions, licenses, approvals, governmental authorizations, trade
secrets and other intellectual property rights (“Intellectual Property Rights”)
necessary to conduct their respective businesses as now conducted except where
the failure to so own or possess would not reasonably be expected to result in a
Material Adverse Effect. None of the Company’s or its Subsidiaries’ Intellectual
Property Rights have expired, terminated or been abandoned, or are expected to
expire, terminate

 

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or be abandoned, within three years from the date of this Agreement. The Company
does not have any knowledge of any infringement by the Company or any of its
Subsidiaries of Intellectual Property Rights of others. There is no claim,
action or proceeding being made or brought, or to the knowledge of the Company,
being threatened, against the Company or any of its Subsidiaries regarding its
Intellectual Property Rights. The Company is unaware of any facts or
circumstances which might give rise to any of the foregoing infringements or
claims, actions or proceedings. The Company and its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of all of their Intellectual Property Rights.

(y) Environmental Laws. To the knowledge of the Company, the Company and its
Subsidiaries (i) are in compliance with any and all Environmental Laws (as
hereinafter defined), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct their
respective businesses and (iii) are in compliance with all terms and conditions
of any such permit, license or approval where, in each of the foregoing clauses
(i), (ii) and (iii), the failure to so comply could be reasonably expected to
have, individually or in the aggregate, a Material Adverse Effect. The term
“Environmental Laws” means all federal, state, local or foreign laws relating to
pollution or protection of human health or the environment, including, without
limitation, laws relating to emissions, discharges, releases or threatened
releases of chemicals, pollutants, contaminants, or toxic or hazardous
substances or wastes (collectively, “Hazardous Materials”) into the environment,
or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Materials.

(z) Subsidiary Rights. Except for certain restrictions set forth in the
CapitalSource Credit Agreements (as defined in the Certificate of Designations)
dated November 10, 2005 and as set forth in Schedule 3(z) which set forth
certain minority holders and rights held by such minority holders pursuant to
shareholder agreements, the Company or one of its Subsidiaries has the
unrestricted right to vote, and (subject to limitations imposed by applicable
law) to receive dividends and distributions on, all capital securities of its
Subsidiaries as owned by the Company or such Subsidiary.

(aa) Tax Status. Except set forth on Schedule 3(aa) and except to the extent any
violations hereof would not, either individually or in the aggregate, have a
Material Adverse Effect, the Company and each of its Subsidiaries (i) has made
or filed all foreign, federal and state income and all other tax returns,
reports and declarations required by any jurisdiction to which it is subject,
(ii) has paid all taxes and other governmental assessments and charges that are
material in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set aside
on its books provision reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations
apply. There are no unpaid taxes in any material amount claimed to be due by the
taxing authority of any jurisdiction, and the officers of the Company know of no
basis for any such claim.

(bb) Internal Accounting and Disclosure Controls. The Company and each of its
Subsidiaries maintains a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management’s general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of

 

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financial statements in conformity with generally accepted accounting principles
and to maintain asset and liability accountability, (iii) access to assets or
incurrence of liabilities is permitted only in accordance with management’s
general or specific authorization and (iv) the recorded accountability for
assets and liabilities is compared with the existing assets and liabilities at
reasonable intervals and appropriate action is taken with respect to any
difference. The Company is not an “accelerated filer” as defined in Rule 12b-2
under the Exchange Act and, accordingly, has not complied with Section 404 of
the Sarbanes-Oxley Act of 2002. Except as set forth in the SEC Documents, the
Company maintains disclosure controls and procedures (as such term is defined in
Rule 13a-14 under the 1934 Act) that are effective in ensuring that information
required to be disclosed by the Company in the reports that it files or submits
under the 1934 Act is recorded, processed, summarized and reported, within the
time periods specified in the rules and forms of the SEC, including, without
limitation, controls and procedures designed in to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the 1934 Act is accumulated and communicated to the Company’s management,
including its principal executive officer or officers and its principal
financial officer or officers, as appropriate, to allow timely decisions
regarding required disclosure. Except as set forth in the SEC Documents, during
the twelve months prior to the date hereof neither the Company nor any of its
Subsidiaries have received any notice or correspondence from any accountant
relating to any potential material weakness in any part of the system of
internal accounting controls of the Company or any of its Subsidiaries.

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

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

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

(ff) Acknowledgement Regarding Buyers’ Trading Activity. It is understood and
acknowledged by the Company, except as set forth in that certain confidentiality
agreement, dated as of January 1, 2006 with an affiliate of a Buyer (the
“Confidentiality Agreement”) and those certain confidentiality agreements, dated
December 6, 2005 and January 30, 2006, by and between each respective Buyer and
the Company, and certain understandings between the Company and certain Buyers
with respect to short sales of the Company’s capital stock, (i) that none of the
Buyers have been asked by the Company or its Subsidiaries to agree, nor has any
Buyer agreed with the Company or its Subsidiaries, to desist from purchasing or
selling, long and/or short, securities of the Company, or “derivative”
securities based on securities issued by

 

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the Company or to hold the Securities for any specified term; (ii) that any
Buyer, and counter parties in “derivative” transactions to which any such Buyer
is a party, directly or indirectly, presently may have a “short” position in the
Common Stock, and (iii) that each Buyer shall not be deemed to have any
affiliation with or control over any arm’s length counter party in any
“derivative” transaction. The Company further understands and acknowledges that
one or more Buyers may engage in hedging and/or trading activities at various
times during the period that the Securities are outstanding, including, without
limitation, during the periods that the value of the Conversion Shares and the
Warrant Shares deliverable with respect to Securities are being determined and
(b) such hedging and/or trading activities, if any, can reduce the value of the
existing Shareholders’ equity interest in the Company both at and after the time
the hedging and/or trading activities are being conducted. The Company
acknowledges that such aforementioned hedging and/or trading activities do not
constitute a breach of this Agreement, the Notes, the Warrants or any of the
documents executed in connection herewith.

(gg) Registration Eligibility. The Company is eligible to register the
Conversion Shares, the Dividend Shares and the Warrant Shares for resale by the
Buyers using Form S-3 promulgated under the 1933 Act.

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

(ii) U.S. Real Property Holding Corporation. The Company is not, nor has ever
been, a U.S. real property holding corporation within the meaning of Section 897
of the Internal Revenue Code of 1986, as amended, and the Company shall so
certify upon Buyer’s request.

(jj) Disclosure. The Company confirms that neither it nor any other Person
acting on its behalf has provided any of the Buyers or their agents or counsel
with any information that constitutes or could reasonably be expected to
constitute material, nonpublic information (other than (i) any such information
which has been publicly disclosed prior to the date hereof and (ii) as to the
Buyers other than Castlerigg, pro forma information with respect to Guardian
International, Inc. (the “Guardian Information”). The Company understands and
confirms that each of the Buyers will rely on the foregoing representations in
effecting transactions in securities of the Company. All disclosure provided to
the Buyers regarding the Company and its Subsidiaries, their business and the
transactions contemplated hereby, including the Schedules to this Agreement,
furnished by or on behalf of the Company is true and correct and does not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. Each press release
issued by the Company or its Subsidiaries during the twelve (12) months
preceding the date of this Agreement did not at the time of release contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading. No event
or circumstance has

 

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occurred or information exists with respect to the Company or any of its
Subsidiaries or its or their business, properties, prospects, operations or
financial conditions, which, under applicable law, rule or regulation, requires
public disclosure or announcement by the Company but which has not been so
publicly announced or disclosed.

(kk) ERISA. The Company and each Person required to be aggregated with the
Company and its Subsidiaries under Sections 414(b),(c), (m) or (o) of the
Internal Revenue Code of 1986 (each such Person, an “ERISA Affiliate”) is in
compliance with ERISA, except for such failures to comply that, in the
aggregate, would reasonably be expected to have an Material Adverse Effect and
no contributions required to be made by the Company or any ERISA Affiliate to
any pension plan are overdue. No liability to the Pension Benefit Guaranty
Corporation (“PBGC”) has been or is expected to be incurred by the Company or
any ERISA Affiliate with respect to any pension plan that, individually or in
the aggregate would reasonably be expected to have a Material Adverse Effect. No
circumstance exists that constitutes grounds under Section 4042 of ERISA
entitling the PBGC to institute proceedings to terminate, or appoint a trustee
to administer, any pension plan or trust created thereunder, nor has the PBGC
instituted any such proceeding. Neither the Company nor any ERISA Affiliate has
incurred or presently expects to incur any withdrawal liability under Title IV
of ERISA with respect to any multiemployer plan except for such withdrawal
liability that, in the aggregate of all such liabilities, would not reasonably
be expected to have a Material Adverse Effect. There have been no “reportable
events” (as such term is defined in section 4043 of ERISA) with respect to any
multiemployer plan that could result in the termination of such multiemployer
plan and give rise to a liability of the Company or any ERISA Affiliate in
respect thereof except for such “reportable events” that in the aggregate, would
not reasonably be expected to have a Material Adverse Effect.

(ll) Shareholder Approval. The Company has received the approval of its
shareholders in accordance with applicable law and the Company’s governing
documents of resolutions (the “Resolutions”) in the form attached hereto as
Exhibit K providing for (x) the amendment to the Articles of Incorporation to
provide for the creation of the Preferred Shares and the entering into of the
Certificate of Designations and (y) the Company’s issuance of all of the
Securities as described in the Transaction Documents in accordance with
applicable law and the rules and regulations of the Principal Market (such
affirmative approval being referred to herein as the “Shareholder Approval”).

4. COVENANTS.

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

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

 

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any such action so taken to the Buyers on or prior to the applicable Closing
Date. The Company shall make all filings and reports relating to the offer and
sale of the Securities required under applicable securities or “Blue Sky” laws
of the states of the United States following the applicable Closing Date.

(c) Reporting Status. Until the date on which the Buyers shall have sold all the
Conversion Shares, Dividend Shares and Warrant Shares, and none of the Preferred
Shares or Warrants is outstanding (the “Reporting Period”), the Company shall
timely file all reports required to be filed with the SEC pursuant to the 1934
Act, and the Company shall not terminate its status as an issuer required to
file reports under the 1934 Act even if the 1934 Act or the rules and
regulations thereunder would no longer require or otherwise permit such
termination, and the Company shall take all actions necessary to maintain its
eligibility to register the Conversion Shares and Warrant Shares for resale by
the Buyers on Form S-3.

(d) Use of Proceeds. The Company will use the proceeds from the sale of the
Securities as set forth in the private placement memorandum previously delivered
to the Buyers, and not for, except with respect to any of the indebtedness owed
by the Company to CapitalSource Finance LLC or any of the indebtedness owed by
Guardian International, Inc. to third parties or with respect to the outstanding
shares of preferred stock of Guardian International, Inc. or as specifically set
forth on Schedule 4(d), (A) repayment of any outstanding Indebtedness of the
Company or any of its Subsidiaries or (B) redemption or repurchase of any of its
or its Subsidiaries’ equity securities.

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

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

 

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(g) Fees. The Company shall reimburse Steelhead or its designee(s) (in addition
to any other expense amounts paid to any Buyer prior to the date of this
Agreement) for all reasonable costs and expenses, in the amount of $100,000,
incurred in connection with the transactions contemplated by the Transaction
Documents and due diligence in connection therewith, which amount shall be
non-accountable, and shall be paid to Steelhead or its counsel within one
(1) Business Day of execution of this Agreement. The Company shall reimburse
Castlerigg or its designee(s) (in addition to any other expense amounts paid to
any Buyer prior to the date of this Agreement) for all reasonable costs and
expenses, not to exceed $7,500, incurred in connection with the transactions
contemplated by the Transaction Documents and due diligence in connection
therewith, which amount shall be non-accountable and shall be paid to Castlerigg
or its counsel within one (1) Business Day of execution of this Agreement. The
Company shall be responsible for the payment of any placement agent’s fees,
financial advisory fees, or broker’s commissions (other than for Persons engaged
by any Buyer) relating to or arising out of the transactions contemplated
hereby, including, without limitation, any fees payable to the Agent. The
Company shall pay, and hold each Buyer harmless against, any liability, loss or
expense (including, without limitation, reasonable attorney’s fees and
out-of-pocket expenses) arising in connection with any claim relating to any
such payment.

(h) Pledge of Securities. The Company acknowledges and agrees that the
Securities may be pledged by an Investor (as defined in the Registration Rights
Agreement) in connection with a bona fide margin agreement or other loan or
financing arrangement that is secured by the Securities. The pledge of
Securities shall not be deemed to be a transfer, sale or assignment of the
Securities hereunder, and no Investor effecting a pledge of Securities shall be
required to provide the Company with any notice thereof or otherwise make any
delivery to the Company pursuant to this Agreement or any other Transaction
Document. The Company hereby agrees to execute and deliver such documentation as
a pledgee of the Securities may reasonably request in connection with a pledge
of the Securities to such pledgee by an Investor.

(i) Disclosure of Transactions and Other Material Information. On or before 8:30
a.m., New York Time, on the third (3rd) Business Day following the date of this
Agreement, the Company shall file a Current Report on Form 8-K describing the
terms of the transactions contemplated by the Transaction Documents in the form
required by the 1934 Act and attaching the material Transaction Documents
(including, without limitation, this Agreement (and all schedules to this
Agreement), the form of Note, the form of Certificate of Designations, the form
of Warrant and the Registration Rights Agreement) (including all attachments,
the “Initial 8-K Filing”). On or before 8:30 a.m., New York time, on the third
(3rd) Business Day following the Additional Closing Date, the Company shall file
a Current Report on Form 8-K describing the Additional Closing and disclosing
any previously undisclosed material, nonpublic information in the form required
by the 1934 Act and attaching any material transaction documents not previously
filed as exhibits to such filing (including all attachments, the “Final 8-K
Filing”, and collectively with the Initial 8-K Filing, the “8-K Filings”). From
and after the filing with the SEC of the Company’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2005 (the “2005 Form 10-K”) and as to the
Guardian Information, on or after such information is made public, which shall
occur by no later than May 15, 2006, the Company shall have disclosed any
material nonpublic information delivered to the Buyers by the Company or any of
its Subsidiaries, or any of their respective officers, directors, employees or
agents. The Company shall not, and shall cause each of its Subsidiaries and its
and each of their respective officers,

 

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directors, employees and agents, not to, provide any Buyer with any material,
nonpublic information regarding the Company or any of its Subsidiaries from and
after the filing of the 2005 Form 10-K with the SEC without the express written
consent of such Buyer. Subject to the foregoing, neither the Company, its
Subsidiaries nor any Buyer shall issue any press releases or any other public
statements with respect to the transactions contemplated hereby; provided,
however, that the Company shall be entitled, without the prior approval of any
Buyer, to make any press release or other public disclosure with respect to such
transactions (i) in substantial conformity with the 8-K Filings or the 2005 Form
10-K and contemporaneously therewith and (ii) as is required by applicable law
and regulations (provided that in the case of clause (i) each Buyer shall be
consulted by the Company in connection with any such press release or other
public disclosure prior to its release). Without the prior written consent of
any applicable Buyer, neither the Company nor any of its Subsidiaries shall
disclose the name of any Buyer in any filing, announcement, release or
otherwise.

(j) Additional Registration Statements. Until the Effective Date (as defined in
the Registration Rights Agreement), the Company shall not file a registration
statement under the 1933 Act relating to securities that are not the Securities.

(k) Notes, Additional Preferred Shares; Variable Securities; Dilutive Issuances.
So long as any Buyer beneficially owns any Notes, neither the Company, nor any
of its Subsidiaries, will, without the prior written consent of Buyers holding a
majority in principal amount outstanding of the Notes, issue any Common Stock,
Common Stock Equivalents (as defined below) or other equity or equity-linked
securities of the Company or any Subsidiary of the Company (other than the
Preferred Shares and Warrants to the Buyers as contemplated hereby and other
than in connection with an Approved Share Plan (as defined in the Certificate of
Designations)). So long as any Buyer beneficially owns any Securities, the
Company will not, without the prior written consent of Buyers holding a majority
of the Preferred Shares, issue any Preferred Shares (other than to the Buyers as
contemplated hereby) and the Company shall not issue any other securities that
would cause a breach or default under the Certificate of Designations or the
Warrants. For so long as any Preferred Shares or Warrants remain outstanding,
without the prior written consent of Buyers holding a majority of the Preferred
Shares, the Company shall not, in any manner, issue or sell any rights, warrants
or options to subscribe for or purchase Common Stock or directly or indirectly
convertible into or exchangeable or exercisable for Common Stock at a
conversion, exchange or exercise price which varies or may vary after issuance
with the market price of the Common Stock, including by way of one or more
reset(s) to any fixed price unless the conversion, exchange or exercise price of
any such security cannot be less than the then applicable Conversion Price (as
defined in the Certificate of Designations) with respect to the Common Stock
into which any Preferred Shares are convertible or the then applicable Exercise
Price (as defined in the Warrants) with respect to the Common Stock into which
any Warrant is exercisable. For purposes of clarification, this does not
prohibit the issuance of securities with customary “weighted average” or “full
ratchet” anti-dilution adjustments which adjust a fixed conversion or exercise
price of securities sold by the Company in the future. For so long as any
Preferred Shares or Warrants remain outstanding, without the prior written
consent of Buyers holding a majority of the Preferred Shares, the Company shall
not, in any manner, enter into or affect any dilutive issuance if the effect of
such dilutive issuance is to cause the Company to be required to issue upon
conversion of any Preferred Shares or exercise of any Warrant any shares of
Common Stock in

 

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excess of that number of shares of Common Stock which the Company may issue upon
conversion of the Preferred Shares and exercise of the Warrants without
breaching the Company’s obligations under the rules or regulations of the
Principal Market.

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

(m) Reservation of Shares. The Company shall take all action necessary to at all
times have authorized, and reserved for the purpose of issuance, no less than
(i) 120% of the maximum number of shares of Common Stock issuable upon
conversion of the Preferred Shares (assuming for purposes hereof, that the
Preferred Shares are convertible at the Conversion Price and without taking into
account any limitations on the conversion of the Preferred Shares set forth in
the Certificate of Designations), (ii) 120% of the maximum number of Dividend
Shares issuable pursuant to the terms of the Certificate of Designations,
determined as if issued as of the trading day immediately preceding the
applicable date of determination and assuming that all of the Preferred Shares
remain outstanding until the Maturity Date, and (ii) 120% of the maximum number
of shares of Common Stock issuable upon exercise of the Warrants (without taking
into account any limitations on the exercise of the Warrants set forth in the
Warrants).

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

(o) Additional Issuances of Securities.

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

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

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

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

(ii) From the date hereof until the date that is thirty (30) Trading Days (as
defined in the Certificate of Designations) after the Effective Date (the
“Trigger Date”), the Company will not, directly or indirectly, offer, sell,
grant any option to purchase, or otherwise dispose of (or announce any offer,
sale, grant or any option to purchase or other disposition of) any of its or its
Subsidiaries’ equity or equity equivalent securities, including without
limitation any debt, preferred stock or other instrument or security that is, at
any time

 

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during its life and under any circumstances, convertible into or exchangeable or
exercisable for shares of Common Stock or Common Stock Equivalents (any such
offer, sale, grant, disposition or announcement being referred to as a
“Subsequent Placement”).

(iii) From the Trigger Date until the eighteen (18) month anniversary of the
later of (x) the Additional Closing Deadline and (y) the Additional Closing
Date, the Company will not, directly or indirectly, effect any Subsequent
Placement unless (x) such Subsequent Placement is not structured in any manner
to avoid the application of this Section 4(o)(iii) and (y) the Company shall
have first complied with this Section 4(o)(iii).

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

(2) To accept an Offer, in whole or in part, such Buyer must deliver a written
notice to the Company prior to the end of the seventh (7th) Business Day after
such Buyer’s receipt of the Offer Notice (the “Offer Period”), setting forth the
portion of such Buyer’s Basic Amount that such Buyer elects to purchase and, if
such Buyer shall elect to purchase all of its Basic Amount, the
Undersubscription Amount, if any, that such Buyer elects to purchase (in either
case, the “Notice of Acceptance”). If the Basic Amounts subscribed for by all
Buyers are less than the total of all of the Basic Amounts, then each Buyer who
has set forth an Undersubscription Amount in its Notice of Acceptance shall be
entitled to purchase, in addition to the Basic Amounts subscribed for, the
Undersubscription Amount it has subscribed for; provided, however, that if the
Undersubscription Amounts subscribed for exceed the difference between the total
of all the Basic Amounts and the Basic Amounts subscribed for (the “Available
Undersubscription Amount”), each Buyer who has subscribed for any
Undersubscription Amount shall be entitled to purchase only that portion of the
Available Undersubscription Amount as the Basic Amount of such Buyer bears to
the total Basic Amounts of all Buyers that have subscribed for Undersubscription
Amounts, subject to rounding by the Company to the extent its deems reasonably
necessary. 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 do so on only two occasions and shall deliver to the
Buyers a new Offer Notice (an “Amended Offer Notice”) and the Offer Period shall
expire on the seventh (7th) Business Day after such Buyer’s receipt of any such
Amended Offer Notice.

(3) The Company shall have forty-five (45) Business Days from the expiration of
the Offer Period above (i) to offer, issue, sell or exchange all or any part

 

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of such Offered Securities as to which a Notice of Acceptance has not been given
by the Buyers (the “Refused Securities”) pursuant to a definitive agreement(s)
(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 SEC on a Current Report on Form 8-K with such Subsequent
Placement Agreement and any documents contemplated therein filed as exhibits
thereto.

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

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

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

(7) The Company and the Buyers agree that if any Buyer elects to participate in
the Offer, (x) neither the Subsequent Placement Agreement nor any other
transaction documents related thereto (collectively, the “Subsequent Placement
Documents”) shall include any term or provisions whereby any Buyer shall be
required to agree to any restrictions in trading as to any securities of the
Company owned by such Buyer prior to such Subsequent Placement, and (y) any
registration rights set forth in such Subsequent Placement

 

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Documents shall be similar in all material respects to the registration rights
contained in the Registration Rights Agreement.

(8) Notwithstanding anything to the contrary in this Section 4(o) and unless
otherwise agreed to by the Buyers, the Company shall either confirm in writing
to the Buyers that the transaction with respect to the Subsequent Placement has
been abandoned or shall publicly disclose its intention on a Form 8-K to issue
the Offered Securities, in either case in such a manner such that the Buyers
will not be in possession of material non-public information, by the tenth
(10th) Business Day following delivery of the Offer Notice or the last Amended
Offer Notice, as the case may be. If by the tenth (10th) Business Day following
delivery of the Offer Notice or the last Amended Offer Notice, as the case may
be, 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 the Buyers, such transaction shall be deemed to
have been abandoned and the Buyers shall not be deemed to be in possession of
any material, non-public information with respect to the Company. Should the
Company decide to pursue such transaction with respect to the Offered
Securities, the Company shall provide each Buyer with another Offer Notice and
each Buyer will again have the right of participation set forth in this
Section 4(o)(iii). The Company shall not be permitted to deliver more than one
such Offer Notice (with the aforementioned right to deliver up to two Amended
Offer Notices with respect thereto) to the Buyers in any sixty (60) day period.

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

(p) Shareholder Approval.

The Company shall file with the SEC and provide each shareholder of the Company
with an information statement complying with the requirements of the Exchange
Act and substantially in the form that has been previously reviewed and approved
by Steelhead and Schulte Roth & Zabel LLP at the expense of the Company
informing such shareholders of the actions taken in accordance with the
Resolutions and of the Shareholder Approval. In addition to the foregoing, if
required by any governmental or regulatory agency, the Company shall provide
each shareholder entitled to vote at a special or annual meeting of shareholders
of the Company (the “Shareholder Meeting”), which initially shall be promptly
called and held not later than (x) in the event the applicable proxy statement
is not reviewed by the SEC, April 15, 2006 and (y) otherwise, July 31, 2006 (the
“Shareholder Meeting Deadline” and the actual date of such meeting, the
“Shareholder Meeting Date”), a proxy statement, substantially in the form which
has been previously reviewed and approved by the Buyers and one counsel of their
choice at the expense of the Company, soliciting each such shareholder’s
affirmative vote at the Shareholder Meeting for Shareholder Approval of the
Resolutions (the date such approval is obtained, the “Shareholder Approval
Date”), and the Company shall use its reasonable best efforts to solicit its
shareholders’ approval of the Resolutions and to cause the Board to recommend to
the shareholders that they approve the Resolutions. The Company shall be
obligated to seek to obtain such Shareholder Approval by the Shareholder Meeting
Deadline. If, despite the Company’s best efforts the Shareholder Approval is not
obtained on or prior to the Shareholder Meeting Deadline, the Company shall
cause an additional Shareholder Meeting to be held each

 

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calendar quarter thereafter (or such longer period as is necessary to the extent
of SEC comments on any proxy statement) until such Shareholder Approval is
obtained.

(q) Nasdaq Compliance. The Company shall regain compliance with Marketplace Rule
4350(c)(1) of the Nasdaq Stock Market within the cure period established by
Nasdaq for such compliance.

(r) Competing Transactions. Prior to the Additional Closing Date, neither the
Company nor any of its Subsidiaries shall, nor shall they authorize or permit
any of their officers, directors, employees or affiliates or any investment
banker, financial advisor, attorney, accountant or other representative to,
directly or indirectly, (i) initiate, encourage (including by way of furnishing
information or assistance) or solicit offers, inquiries or proposals for, or
entertain any offer, inquiry or proposal to enter into, or take any other action
to facilitate any inquiries or the making of any proposal that constitutes, or
may reasonably be expected to lead to, or enter into discussions or negotiate
with any Person or entity in furtherance of: (A) any merger, consolidation,
share exchange, business combination or other similar transaction involving the
Company or any of its Subsidiaries; (B) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition of all or substantially all of the assets
of the Company or any of its Subsidiaries in a single transaction or series of
transactions; (C) any acquisition of any shares or interests (however
designated) of capital stock of the Company, its Subsidiaries or a corporation,
any and all equivalent ownership or equity interests in any Person and any and
all warrant, options or other securities exercisable or exchangeable for, or
convertible into, any of the foregoing; or (D) any other equity investment in
the Company (any of the foregoing, a “Competing Transaction”), (ii) provide
information to any other person regarding the Company or its Subsidiaries
(except in the ordinary course of business), or (iii) conduct any discussions or
negotiations, or enter into any agreement, arrangement or understanding,
regarding a Competing Transaction. The Company and its Subsidiaries shall, and
shall instruct and order all of their officers, directors, employees and
affiliates and all investment bankers, financial advisors, attorneys,
accountants and other representatives to immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any parties
conducted heretofore with respect to any of the foregoing. The Company and its
Subsidiaries agree not to release any Person or group other than the Company and
its Subsidiaries or any of their respective affiliates from, or waive any
provision of, any confidentiality or standstill agreement to which the Company
or any of its Subsidiaries is a party.

5. REGISTER; TRANSFER AGENT INSTRUCTIONS.

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

 

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

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

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

(i) Such Buyer shall have executed this Agreement and the Registration Rights
Agreement and delivered the same to the Company.

(ii) Such Buyer and each other Buyer shall have delivered to the Company the
Initial Purchase Price (less, in the case of Steelhead, the amount withheld
pursuant to Section 4(g)) for the Notes and the related Warrants being purchased
by such Buyer at the Initial Closing by wire transfer of immediately available
funds pursuant to the wire instructions provided by the Company.

(iii) The representations and warranties of such Buyer shall be true and correct
in all material respects as of the date when made and as of the Initial Closing
Date as

 

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

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

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

(i) Such Buyer and each other Buyer shall have delivered to the Company the
Additional Purchase Price less (1) in the case of Steelhead and Castlerigg, the
amounts withheld pursuant to Section 4(g) or (2) such Buyer’s pro rata share of
any amount outstanding under any outstanding Notes (including any outstanding
principal, accrued and unpaid interest, fees, late charges and other amounts due
in respect thereof)) for the Preferred Shares being purchased by such Buyer at
the Additional Closing by wire transfer of immediately available funds pursuant
to the wire instructions provided by the Company.

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

(iii) The Shareholder Approval shall have been obtained and shall be effective
under applicable rules and regulations.

(iv) The Company, prior to the Additional Closing, shall have consummated the
transactions contemplated by the Purchase Agreement, dated as of November 9,
2005 by and among the Company and Guardian International, Inc. (“Guardian
Purchase Agreement”) in the form attached hereto as Exhibit I.

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

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

(a) Initial Closing. The obligation of each Buyer hereunder to purchase the
Notes and the related Warrants at the Initial Closing is subject to the
satisfaction, at or before the Initial Closing Date, of each of the following
conditions, provided that these conditions are for

 

30

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each Buyer’s sole benefit and may be waived by such Buyer at any time in its
sole discretion by providing the Company with prior written notice thereof:

(i) The Company shall have duly executed and delivered to such Buyer this
Agreement, the Voting Agreement, the Registration Rights Agreement, the Notes
(in such principal amounts as is set forth across from such Buyer’s name in
column (3) of the Schedule of Buyers) and the related Warrants (in such numbers
as is set forth across from such Buyer’s name in column (5) of the Schedule of
Buyers) being purchased by such Buyer at the Initial Closing pursuant to this
Agreement.

(ii) Such Buyer shall have received the opinion of Greenberg Traurig, P.A. the
Company’s outside counsel, dated as of the Initial Closing Date, in
substantially the form of Exhibit F-1 attached hereto, and the opinion of
Akerman Senterfitt, in substantially the form of Exhibit F-2 attached hereto.

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

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

(v) The Company shall have delivered to such Buyer a certified copy of the
Articles of Incorporation as certified by the Secretary of State of the State of
Florida within ten (10) days of the Initial Closing Date.

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

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

 

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(viii) The Company shall have delivered to such Buyer a letter from the
Company’s transfer agent certifying the number of shares of Common Stock
outstanding as of a date within five (5) days of the Initial Closing Date.

(ix) The Common Stock (I) shall be designated for quotation or listed on the
Principal Market and (II) shall not have been suspended, as of the Initial
Closing Date, by the SEC or the Principal Market from trading on the Principal
Market nor shall proceedings regarding such suspension by the SEC or the
Principal Market have been threatened, as of the Initial Closing Date, either
(A) by the SEC or the Principal Market or (B) by falling below the minimum
maintenance requirements of the Principal Market, other than with respect to
those issues set forth on the Company’s Current Report on Form 8-K, dated as of
January 25, 2006.

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

(xi) The Company shall have delivered to such Buyer duly executed Voting
Agreements, in the form attached hereto as Exhibit J (the “Voting Agreements”).

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

(xiii) No event or events shall have occurred since the date hereof that, taken
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect.

(xiv) The Company, contemporaneously with the Initial Closing, shall have
consummated the transactions contemplated by the Guardian Purchase Agreement.

(xv) The aggregate of the Initial Purchase Prices paid by all Buyers shall be
not less than $45 million.

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

(i) The Company shall have duly executed and delivered to such Buyer (A) each of
the Transaction Documents and (B) the Preferred Shares (in such numbers as is
set forth across from such Buyer’s name in column (4) of the Schedule of Buyers)
being purchased by such Buyer at the Additional Closing pursuant to this
Agreement.

(ii) The Company shall have delivered to such Buyer the Excess Note Amount, if
any, of the Notes of such Buyer being exchanged in accordance herewith.

 

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(iii) Such Buyer shall have received the opinion of Greenberg Traurig, P.A. the
Company’s outside counsel, dated as of the Additional Closing Date, in
substantially the form of Exhibit F-3 attached hereto, and the opinion of
Akerman Senterfitt, in substantially the form of Exhibit F-4 attached hereto.

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

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

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

(vii) The Company shall have delivered to such Buyer a certified copy of the
Articles of Incorporation as certified by the Secretary of State of the State of
Florida within ten (10) days of the Additional Closing Date.

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

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

(x) The Company shall have delivered to such Buyer a letter from the Company’s
transfer agent certifying the number of shares of Common Stock outstanding as of
a date within five (5) days of the Additional Closing Date.

(xi) The Common Stock (I) shall be designated for quotation or listed on the
Principal Market and (II) shall not have been suspended, as of the Additional
Closing

 

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Date, by the SEC or the Principal Market from trading on the Principal Market
nor shall proceedings regarding such suspension by the SEC or the Principal
Market have been threatened, as of the Additional Closing Date, either (A) by
the SEC or the Principal Market or (B) by falling below the minimum maintenance
requirements of the Principal Market, other than with respect to those issues
set forth on the Company’s Current Report on Form 8-K, dated as of January 25,
2006.

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

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

(xiv) The Shareholder Approval shall have been obtained and shall be effective
under applicable rules and regulations.

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

(xvi) No event or events shall have occurred since the date hereof that, taken
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect.

8. TERMINATION.

In the event that (A) the Initial Closing shall not have occurred with respect
to a Buyer on or before March 9, 2006 or (B) the Additional Closing shall not
have occurred with respect to a Buyer on or before the applicable Additional
Closing Deadline, due to the Company’s or such Buyer’s failure to satisfy the
conditions set forth in Sections 6 and 7 above (and the nonbreaching party’s
failure to waive such unsatisfied condition(s)), the nonbreaching party shall
have the option to terminate this Agreement with respect to such breaching party
at the close of business on such date without liability of any party to any
other party; provided, however, if this Agreement is terminated pursuant to this
Section 8, the Company shall remain obligated to reimburse the non-breaching
Buyers for the expenses described in Section 4(g) above.

9. MISCELLANEOUS.

(a) Governing Law; Jurisdiction; Jury Trial. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by the internal laws of the State of New York, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York. Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in The City of New York, Borough of Manhattan, for the
adjudication of any dispute

 

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hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. Each party hereby irrevocably waives personal service of
process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address for such
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process in any
manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY
HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY
DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY
TRANSACTION CONTEMPLATED HEREBY.

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

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

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

(e) Entire Agreement; Amendments. This Agreement and the other Transaction
Documents supersede all other prior oral or written agreements between the
Buyers, the Company, their Affiliates and Persons acting on their behalf with
respect to the matters discussed herein, including, without limitation,
Section 16 of the Confidentiality Agreement which is terminated hereby, and this
Agreement, the other Transaction Documents and the instruments referenced herein
and therein contain the entire understanding of the parties with respect to the
matters covered herein and therein and, except as specifically set forth herein
or therein, neither the Company nor any Buyer makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be amended other than by an instrument in writing signed by
the Company and the holders of at least a majority of the Preferred Shares
issued and issuable hereunder, and any amendment to this Agreement made in
conformity with the provisions of this Section 9(e) shall be binding on all
Buyers and holders of Securities, as applicable. No provision hereof may be
waived other than by an instrument in writing signed by the party against whom
enforcement is sought. No such amendment shall be effective to the extent that
it applies to less than all of the holders of the Preferred Shares then
outstanding. No consideration shall be offered or paid to any Person to amend or
consent to a waiver or modification of any provision of any of the Transaction
Documents unless the same

 

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consideration also is offered to all of the parties to the Transaction
Documents, holders of Preferred Shares or holders of the Warrants, as the case
may be. The Company has not, directly or indirectly, made any agreements with
any Buyers relating to the terms or conditions of the transactions contemplated
by the Transaction Documents except as set forth in the Transaction Documents.
Without limiting the foregoing, the Company confirms that, except as set forth
in this Agreement, no Buyer has made any commitment or promise or has any other
obligation to provide any financing to the Company or otherwise.

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

If to the Company:

 

Devcon International Corp.

595 South Federal Highway

Suite 500

Boca Raton, Florida 33432

Telephone:

   (561) 955-7300

Facsimile:

   (561) 955-7333

Attention:

   Stephen J. Ruzika

With a copy (for informational purposes only) to:

 

Greenberg Traurig, P.A.

1221 Brickell Avenue

Miami, Florida 33131

Telephone:

   (305) 579-0756

Facsimile:

   (305) 961-5756

Attention:

   Robert L. Grossman, Esq.

If to the Transfer Agent:

 

Registrar and Transfer Company

10 Commerce Drive

Cranford, NJ 07016

Telephone:

   (908) 497-2300

Facsimile:

   (908) 497-2310

Attention:

   Michael Jones

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

 

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with a copy (for informational purposes only) to:

 

Schulte Roth & Zabel LLP

919 Third Avenue

New York, New York 10022

Telephone:

   (212) 756-2000

Facsimile:

   (212) 593-5955

Attention:

   Eleazer N. Klein, Esq.

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

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

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

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

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

(k) Indemnification. In consideration of each Buyer’s execution and delivery of
the Transaction Documents and acquiring the Securities thereunder and in
addition to all of the Company’s other obligations under the Transaction
Documents, the Company shall defend,

 

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

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

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

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

 

- 38 -

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

(o) No Effect Upon Lending Relationships. Nothing contained in this Agreement
shall affect, limit or impair the rights and remedies of CapitalSource Finance
LLC or its affiliates in their capacities as lenders pursuant to the
CapitalSource Credit Agreements, including, without limitation, in exercising
its rights as a lender and making any decision on whether to foreclose on any
collateral security, and they shall not have any duty to consider (a) their
status as a direct or indirect equityholder of the Company, (b) the interests of
the Company or any of its Subsidiaries (other than with respect to any
obligations they may have as a lender) or (c) any duty they may have to any
other direct or indirect equityholder of the Company, except as may be required
under the applicable loan documents, by commercial law applicable to creditors
generally or pursuant to the Transaction Documents.

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

[Signature Page Follows]

 

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

 

COMPANY: DEVCON INTERNATIONAL CORP. By:  

/s/ Stephen J. Ruzika

 

Stephen J. Ruzika

 

President & Chief Executive Officer

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

 

BUYERS: STEELHEAD INVESTMENTS LTD. By:  

HBK Investments, L.P.,

its Investment Advisor

By:  

/s/ Kevin O’Neal

 

Kevin O’Neal

 

Authorized Signatory

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

 

BUYERS:

CASTLERIGG MASTER INVESTMENTS, LTD.

By:  

Sandell Asset Management Corp.

By:  

/s/ Patrick T. Burke

 

Patrick T. Burke

 

Senior Managing Director

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

 

BUYERS: CS EQUITY II LLC By:  

/s/ Dean C. Graham

 

Dean C. Graham

 

President & Chief Operating Officer

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SCHEDULE OF BUYERS

 

(1)    (2)    (3)    (4)    (5)    (6)    (7)

Buyer

  

Address and Facsimile Number

   Aggregate
Principal
Amount of
Notes    Aggregate
Number of
Preferred
Shares    Aggregate
Number of
Warrants    Purchase Price   

Legal Representative’s
Address and Facsimile Number

Steelhead

Investments Ltd.

  

c/o HBK Investments L.P.

300 Crescent Court, Suite 700

Dallas, TX 75201

Attn: Legal (PP)

Telephone: 214-758-6107

Facsimile: 214-758-1207

Residence: Cayman Islands

   $ 35,000,000    35,000    1,284,067    $ 35,000,000   

Schulte Roth & Zabel LLP 919 Third Avenue

New York, New York 10022 Attention: Eleazer Klein, Esq. Facsimile: (212)
593-5955 Telephone: (212) 756-2376

Castlerigg Master Investments Ltd.   

c/o Sandell Asset Management

40 West 57th St

26th Floor

New York, NY 10019

Attention: Cem Hacioglu / Matthew Pliskin

Telephone: 212-603-5700

Fax: 212-603-5710

Residence: British Virgin Islands

   $ 7,000,000    7,000    256,813    $ 7,000,000    McDermott Will & Emery LLP
340 Madison Avenue New York, New York 10017 Attention: Stephen Older, Esq.
Facsimile: (212) 547-5444 Telephone: (212) 547-5649 CS Equity II LLC   

c/o CapitalSource Finance, LLC

4445 Willard Avenue, 12th Floor

Chevy Chase, Maryland 20815

Attention: HSB, Portfolio Manager

Telephone: (301) 841-2700

Fax: (301) 841-2360

Residence: Delaware

   $ 3,000,000    3,000    110,063    $ 3,000,000   

Katten Muchin Rosenman LLP 525 West Monroe Street Chicago, Ill. 60661 Attention:
Jeffrey L. Elegant, Esq. and Mark R. Grossman, Esq.

Facsimile: (312) 577-4408 Telephone: (312) 902-5200

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EXHIBITS

 

Exhibit A  

Form of Notes

Exhibit B  

Form of Certificate of Designations

Exhibit C  

Form of Warrants

Exhibit D  

Form of Registration Rights Agreement

Exhibit E  

Form of Irrevocable Transfer Agent Instructions

Exhibit F-1  

Form of Outside Company Counsel Opinion with respect to the Notes and Warrants

Exhibit F-2  

Form of Opinion of Akerman Senterfitt in connection with Initial Closing

Exhibit F-3  

Form of Outside Company Counsel Opinion with respect to the Preferred Shares

Exhibit F-4  

Form of Opinion of Akerman Senterfitt in connection with Additional Closing

Exhibit G  

Form of Secretary’s Certificate

Exhibit H  

Form of Officer’s Certificate

Exhibit I  

Form of Guardian Purchase Agreement (See Exhibit 2.1 filed with the Company’s
Current Report on Form 8-K filed with the SEC on November 16, 2005.)

Exhibit J  

Form of Voting Agreement

Exhibit K  

Form of Resolutions

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

EXHIBIT A

THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THIS SECURITY MAY NOT BE OFFERED
FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS
OR (II) UNLESS SOLD PURSUANT TO RULE 144(K) UNDER SAID ACT. NOTWITHSTANDING THE
FOREGOING, THIS SECURITY MAY BE PLEDGED PURSUANT TO AN AVAILABLE EXEMPTION FROM
REGISTRATION UNDER THE 1933 ACT IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THIS SECURITY.

PROMISSORY NOTE

 

US$[$35,000,000][$7,000,000][$3,000,000]

   New York, New York   

February __, 2006

FOR VALUE RECEIVED, the undersigned, DEVCON INTERNATIONAL CORP., a Florida
corporation (the “Borrower”), HEREBY PROMISES TO PAY to [STEELHEADS INVESTMENT
LTD.] [CASTLERIGG MASTER INVESTMENTS LTD.] [CS EQUITY II LLC](the “Lender”) (i)
the principal sum of [THIRTY FIVE][SEVEN][THREE] MILLION UNITED STATES DOLLARS
(US[$35,000,000][$7,000,000][$3,000,000]), and (ii) interest on the principal
amount remaining unpaid hereunder from time to time outstanding, from the date
hereof until paid in full, at a fixed rate equal to 8% per annum, in each case,
payable on the earlier of the following dates (the “Maturity Date”): (x) the
Additional Closing Deadline (as defined in that certain Securities Purchase
Agreement, dated as of February 10, 2006, (the “Securities Purchase Agreement”),
by and among the Borrower and the investors referred to therein (the “Buyers”))
and the date of the Additional Closing (as defined the Securities Purchase
Agreement). This Note (including all Notes issued in exchange, transfer or
replacement hereof, this “Note”) is one of an issue of Notes issued pursuant to
the Securities Purchase Agreement (collectively, the “Notes” and such other
Notes, the “Other Notes”).

Any amount of principal hereof that is not paid when due (whether upon demand,
by acceleration or otherwise) shall bear interest from the day when due until
such principal amount is paid in full, payable on demand, at a fixed rate equal
to 18.0% per annum (the “Default Rate”). All interest shall be computed on the
basis of a year of 360 days for the actual number of days (including the first
day but excluding the last day) elapsed.

Notwithstanding any other provision of this Note, interest paid or becoming due
hereunder, or any document or instrument executed in connection herewith, shall
in no event exceed the maximum rate permitted by applicable law. Both principal
and interest are payable in

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

lawful money of the United States in immediately available funds to the Lender
of by (i) wire transfer to the Lender at such account as the Lender shall
designate or (ii) as a credit to the Additional Purchase Price (as defined in
the Securities Purchase Agreement) of such Lender pursuant to the Securities
Purchase Agreement or (iii) a combination of the foregoing.

If any amount payable hereunder shall be due on any Saturday, Sunday or other
day on which commercial banks in The City of New York are authorized or required
by law to remain closed (any other day being a “Business Day”), such payment may
be made on the next succeeding Business Day, and such extension of time shall in
such case be included in the computation of interest payable hereon.

The Borrower may not prepay this Note, in whole or in part, prior to the
Maturity Date without the written consent of the Lender.

The Borrower represents and warrants that this Note and each other instrument,
agreement and other document delivered by the Borrower to the Lender in
connection with this Note (the Note, together with all such other agreements,
instruments and other documents, are hereinafter referred to individually as a
“Document” and collectively as the “Documents”) constitute the legal, valid and
binding obligation of the Borrower, enforceable against the Borrower in
accordance with its terms subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other laws relating to or
affecting creditors’ rights and remedies generally, and subject, as to
enforceability, to general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing (regardless of whether
enforcement is sought in a proceeding at law or in equity).

So long as this Note is outstanding, the Borrower shall not, and the Borrower
shall not permit any of its Subsidiaries (as defined in the Securities Purchase
Agreement) to, (a) directly or indirectly, incur or guarantee, assume or suffer
to exist any Indebtedness (as defined in the Securities Purchase Agreement),
other than (i) the Indebtedness evidenced by this Note and the Other Notes and
(ii) Permitted Indebtedness (as defined below); (b) allow or suffer to exist any
mortgage, lien, pledge, charge, security interest or other encumbrance upon or
in any property or assets (including accounts and contract rights) owned by the
Borrower or any of its Subsidiaries (collectively, “Liens”) other than Permitted
Liens (as defined below); and (c) without the prior written consent of the
holders of a majority in principal amount outstanding of the Notes and Other
Notes, issue any Common Stock, Common Stock Equivalents (as defined in the
Securities Purchase Agreement) or other equity or equity-linked securities of
the Borrower (other than the Preferred Shares (as defined in the Securities
Purchase Agreement) and Warrants (as defined in the Securities Purchase
Agreement) to the Buyers as contemplated thereby) and other than in connection
with an Approved Share Plan (as defined in the form of certificate of
designations of Series A Convertible Preferred Stock of the Company attached to
the Securities Purchase Agreement as Exhibit B thereto (the “Certificate of
Designations”)).

The Borrower shall not, and the Borrower shall not permit any of its
Subsidiaries to, directly or indirectly, redeem, defease, repurchase, repay or
make any payments in respect of, by the payment of cash or cash equivalents (in
whole or in part, whether by way of

 

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open market purchases, tender offers, private transactions or otherwise), all or
any portion of any Indebtedness or any Permitted Indebtedness (other than (i) in
connection with the cancellation of the Don Smith Jr. Note (as defined on
Schedule 3(s) to the Securities Purchase Agreement) in connection with partial
payment of the purchase price to be received by the Company with respect to its
sale of its Antigua operations to Mr. Smith, (ii) debt between the Company and
its Subsidiaries and (iii) as expressly set forth on Schedule I) whether by way
of payment in respect of principal of (or premium, if any) or interest on such
Indebtedness so long as this Note or the Other Notes remain outstanding. Until
all of the Notes have been redeemed or otherwise satisfied in accordance with
their terms, the Borrower shall not, directly or indirectly, redeem, repurchase
or declare or pay any cash dividend or distribution on its capital stock without
the prior express written consent of the Lender.

For the purpose of this Note, (x) “Permitted Indebtedness” means (A) the
CapitalSource Credit Agreements (as defined in the Certificate of Designations)
(the “Senior Facility”), including any amendment to increase the loans issued
pursuant to the Senior Facility to an amount not to exceed $100 million, in the
aggregate, (B) that certain Wachovia Line of Credit Agreement maturing on
June 30, 2006 (the “Wachovia Facility”), (C) Indebtedness incurred by the
Borrower that is made expressly subordinate in right of payment to the
Indebtedness evidenced by this Note, as reflected in a written agreement
acceptable to the Lender and approved by the Lender in writing, and which
Indebtedness does not provide at any time for (1) the payment, prepayment,
repayment, repurchase or defeasance, directly or indirectly, of any principal or
premium, if any, thereon until ninety-one (91) days after the Maturity Date or
later and (2) total interest and fees at a rate in excess of six percent
(6%) per annum, (D) Indebtedness secured by Permitted Liens, (E) Indebtedness to
trade creditors incurred in the ordinary course of business, (F) extensions,
refinancings and renewals of any items of Permitted Indebtedness, provided that
the principal amount is not increased or the terms modified to impose more
burdensome terms upon the Borrower or its Subsidiary, as the case may be and
(G) surety bonds arising in the ordinary course of business, and (y) “Permitted
Liens” means (i) any Lien for taxes not yet due or delinquent or being contested
in good faith by appropriate proceedings for which adequate reserves have been
established in accordance with GAAP, (ii) any statutory Lien arising in the
ordinary course of business by operation of law with respect to a liability that
is not yet due or delinquent, (iii) any Lien created by operation of law, such
as materialmen’s liens, mechanics’ liens and other similar liens, arising in the
ordinary course of business with respect to a liability that is not yet due or
delinquent or that are being contested in good faith by appropriate proceedings,
(iv) any Lien incurred to secure the Senior Facility or the Wachovia Facility,
(v) Liens securing the Borrower’s obligations under the Notes, (vi) Liens
(A) upon or in any equipment acquired or held by the Borrower or any of its
Subsidiaries to secure the purchase price of such equipment or indebtedness
incurred solely for the purpose of financing the acquisition or lease of such
equipment, or (B) existing on such equipment at the time of its acquisition,
provided that the Lien is confined solely to the property so acquired and
improvements thereon, and the proceeds of such equipment, (vii) Liens incurred
in connection with the extension, renewal or refinancing of the indebtedness
secured by Liens of the type described in clauses (i) and (vi) above, provided
that any extension, renewal or replacement Lien shall be limited to the property
encumbered by the existing Lien and the principal amount of the Indebtedness
being extended, renewed or refinanced does not increase, (viii) leases or
subleases and licenses and sublicenses granted to others in the ordinary course
of

 

-3-

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the Borrower’s business, not interfering in any material respect with the
business of the Borrower and its Subsidiaries taken as a whole, (ix) Liens in
favor of customs and revenue authorities arising as a matter of law to secure
payments of custom duties in connection with the importation of goods,
(x) deposits and pledges of cash securing obligations on surety bonds, but only
to the extent such deposits or pledges are made or otherwise arise in the
ordinary course of business and secure obligations not past due and (xi) Liens
arising from judgments, decrees or attachments in circumstances not constituting
an Event of Default (defined below).

If any of the following shall occur (each a “Event of Default”):

(a) the suspension from trading or failure of the Common Stock, $0.10 par value
of the Borrower to be listed on an Eligible Market (as defined in the Warrant)
for a period of five (5) consecutive days or for more than an aggregate of ten
(10) days in any 365-day period;

(b) (1) the Borrower’s failure to pay to the Lender any amount of Principal,
when and as due under this Note (including, without limitation, the Borrower’s
failure to pay any redemption payments) or (2) the Borrower’s failure to pay to
the Lender any other amounts when due hereunder, under any Transaction Document
(as defined in the Securities Purchase Agreement) or any other agreement,
document, certificate or other instrument delivered in connection with the
transactions contemplated hereby and thereby to which the Lender is a party, if
such failure continues for a period of at least five (5) Business Days;

(c) (1) any payment default or other default occurs under any Indebtedness of
the Borrower or any of its Subsidiaries that results in a redemption of or
acceleration prior to maturity of $250,000 or more of such Indebtedness in the
aggregate, (2) any material default occurs under any Indebtedness of the
Borrower or any of its Subsidiaries having an aggregate outstanding balance in
excess of $250,000 and such default continues uncured for more than ten
(10) Business Days, other than, in each case (1) and (2) above, a default with
respect to any Other Notes , or (C) any “event of default” occurs under any
Indebtedness;

(d) the Borrower or any of its Subsidiaries, pursuant to or within the meaning
of Title 11, U.S. Code, or any similar Federal, foreign or state law for the
relief of debtors (collectively, “Bankruptcy Law”), (A) commences a voluntary
case, (B) consents to the entry of an order for relief against it in an
involuntary case, (C) consents to the appointment of a receiver, trustee,
assignee, liquidator or similar official (a “Custodian”), (D) makes a general
assignment for the benefit of its creditors or (E) admits in writing that it is
generally unable to pay its debts as they become due;

(e) a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that (A) is for relief against the Borrower or any of its
Subsidiaries in an involuntary case, (B) appoints a Custodian of the Borrower or
any of its Subsidiaries or (C) orders the liquidation of the Borrower or any of
its Subsidiaries;

(f) a final judgment or judgments for the payment of money aggregating in excess
of $250,000 are rendered against the Borrower or any of its Subsidiaries and
which

 

-4-

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judgments are not, within sixty (60) days after the entry thereof, bonded,
discharged or stayed pending appeal, or are not discharged within sixty
(60) days after the expiration of such stay; provided, however, that any
judgment which is covered by insurance or an indemnity from a credit worthy
party shall not be included in calculating the $250,000 amount set forth above
so long as the Borrower provides the Lender a written statement from such
insurer or indemnity provider (which written statement shall be reasonably
satisfactory to the Lender) to the effect that such judgment is covered by
insurance or an indemnity and the Borrower will receive the proceeds of such
insurance or indemnity within thirty (30) days of the issuance of such judgment;

(g) the Borrower breaches in any material respect any representation, warranty,
covenant or other term or condition of any Transaction Document, after giving
effect to any relevant grace or cure period but in no event more ten
(10) consecutive Business Days;

(h) any Event of Default (as defined in the Other Notes) occurs with respect to
any Other Notes; or

(i) any provision of this Note shall at any time for any reason be declared to
be null and void by a court of competent jurisdiction, or the validity or
enforceability thereof shall be contested by the Borrower, or a proceeding shall
be commenced by the Borrower seeking to establish the invalidity or
unenforceability thereof, or the Borrower shall deny that the Borrower has any
liability or obligation hereunder;

then, the Lender may (i) declare the outstanding principal amount of this Note
and all other amounts due hereunder to be immediately due and payable, whereupon
the outstanding principal amount of this Note and all such other amounts shall
become and shall be forthwith due and payable, without diligence, presentment,
demand, protest or other notice of any kind, all of which are hereby expressly
waived, and (ii) exercise any and all of its other rights under applicable law
and/or hereunder.

The Borrower hereby indemnifies and holds harmless the Lender, each of its
affiliates and correspondents and each of their respective directors, officers,
employees, agents and advisors (each an “Indemnified Party”) from and against
any and all actions, claims, damages, losses, liabilities, fines, penalties,
costs and expenses of any kind (including, without limitation, counsel fees and
disbursements in connection with any subpoena, investigative, administrative or
judicial proceeding, whether or not the Indemnified Party shall be designated a
party thereto) which may be incurred by the Indemnified Party or which may be
claimed against the Indemnified Party by any person by reason of or in
connection with the execution, delivery or performance of this Note, or action
taken or omitted to be taken by the Lender under, this Note, (but in no event by
reason of or in connection with the execution, delivery or performance of the
Securities Purchase Agreement or any transaction contemplated by (other than the
execution, delivery and performance of this Note), or action taken or omitted to
be taken by the Lender under the Securities Purchase Agreement), provided,
however, that the Borrower shall not be liable for any portion of such damages,
losses, liabilities, fines, penalties, costs and expenses resulting from any
Indemnified Party’s gross negligence or willful misconduct. Nothing in this
paragraph is intended to limit the Borrower’s obligations contained elsewhere in
this Note. Without prejudice to the survival of any

 

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other obligation of the Borrower hereunder, the indemnities and obligations of
the Borrower contained in this paragraph shall survive the payment in full of
all obligations hereunder.

All notices or other communications provided for hereunder shall be made in
accordance with Section 9(f) of the Securities Purchase Agreement.

No failure on the part of the Lender to exercise, and no delay in exercising,
any right, power, privilege or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise thereof by the Lender preclude
any other or further exercise thereof or the exercise of any other right, power,
privilege or remedy of the Lender. No amendment or waiver of any provision of
this Note, nor consent to any departure by the Borrower therefrom, shall in any
event be effective unless the same shall be in writing and signed by the Lender,
and then such waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.

The remedies provided in this Note shall be cumulative and in addition to all
other remedies available under this Note and the other Transaction Documents at
law or in equity (including a decree of specific performance and/or other
injunctive relief), and nothing herein shall limit the Lender’s right to pursue
actual and consequential damages for any failure by the Borrower to comply with
the terms of this Note. Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the
amounts to be received by the Lender and shall not, except as expressly provided
herein, be subject to any other obligation of the Borrower (or the performance
thereof). The Borrower acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Lender and that the remedy at law
for any such breach may be inadequate. The Borrower therefore agrees that, in
the event of any such breach or threatened breach, the Lender shall be entitled,
in addition to all other available remedies, to an injunction restraining any
breach, without the necessity of showing economic loss and without any bond or
other security being required.

Any provision hereof which is prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective only to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof or affecting the validity or enforceability of such provision in any
other jurisdiction.

The Borrower hereby agrees to pay on demand all costs and expenses (including,
without limitation, all reasonable fees, expenses and other client charges of
counsel to the Lender) incurred by the Lender in connection with the enforcement
of the Lender’s rights, and the collection of all amounts due, hereunder.

This Note may not be amended except by an instrument in writing signed by the
Lender and the Borrower. This Note shall be binding upon and inure to each
benefit of the Lender and the Borrower and their respective successors and, if
permitted, their assigns. The Borrower shall not delegate any of its obligations
under this Note without the prior written consent of the Lender.

 

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In the case of any assignment of this Note, Borrower shall maintain a register
(the “Register”) for the recordation of the names and addresses of the Lenders
and the principal amount of the Note (and stated interest thereon) (the
“Registered Note”). The entries in the Register shall be conclusive and binding
for all purposes, absent manifest error. The Registered Note may be assigned or
sold in whole or in part only by registration of such assignment or sale on the
Register. Any assignment or sale of all or part of such Registered Loan may be
effected only by registration of such assignment or sale on the Register.

The Borrower acknowledges that the transaction of which this Note is a part is a
commercial transaction and hereby waives its right to any notice and hearing as
may be allowed by any state or federal law with respect to any prejudgment
remedy which the Lender or its successors or assigns may use.

Upon receipt by the Borrower of evidence reasonably satisfactory to the Borrower
of the loss, theft, destruction or mutilation of this Note, and, in the case of
loss, theft or destruction, of any indemnification undertaking by the Lender to
the Borrower in customary form and, in the case of mutilation, upon surrender
and cancellation of this Note, the Borrower shall execute and deliver to the
Lender a new Note representing the outstanding principal amount of the Note.

The Borrower hereby (i) irrevocably submits to the jurisdiction of any New York
State or Federal court sitting in New York City in any action or proceeding
arising out of or relating to this Note, (ii) waives any defense based on
doctrines of venue or forum non conveniens, or similar rules or doctrines, and
(iii) irrevocably agrees that all claims in respect of such an action or
proceeding may be heard and determined in such New York State or Federal court.
The Borrower and each Lender (by its acceptance hereof) mutually waive any right
to trial by jury in any action, proceeding or counterclaim arising out of or
relating to this Note.

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This Note shall be governed by, and construed in accordance with, the laws of
the State of New York.

 

DEVCON INTERNATIONAL CORP.

By:

           

Name:

   

Title:

   

Address:

   

Attention:

  ________________  

Telephone:

  ________________  

Telecopier:

  ________________

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EXHIBIT B

CERTIFICATE OF DESIGNATIONS OF

DEVCON INTERNATIONAL CORP.

Devcon International Corp. (the “Company”), a corporation organized and existing
under the Florida Business Corporation Act (the “FBCA”), does hereby certify
that, pursuant to authority conferred upon the Board of Directors of the Company
by the Certificate of Incorporation, as amended, of the Company, and pursuant to
Section 607.1006 of the FBCA, the Board of Directors of the Company (a) is
authorized to issue preferred stock, par value $0.10 per share, of the Company
(“Preferred Stock”) in one or more series and to designate the powers,
preferences, relative rights, qualifications, limitations and restrictions
relating to the shares of each such series, and (b) has adopted resolutions
(i) designating forty-five thousand (45,000) shares of the Company’s previously
authorized Preferred Stock as “Series A Convertible Preferred Stock,” par value
$0.10 per share (the “Preferred Shares”), and (ii) providing for the
designations, powers, preferences and relative, optional or other rights, and
the qualifications, limitations or restrictions thereof, as follows:

RESOLVED, that the Company is authorized to issue up to forty-five thousand
(45,000) shares of Series A Convertible Preferred Stock, par value $0.10 per
share, which shall have the following designations, powers, preferences,
relative rights, qualifications, limitations and restrictions (with certain
defined terms set forth in Section 2(a) below):

(1) Dividends. The holders of the Preferred Shares (each, a “Holder” and
collectively, the “Holders”) shall be entitled to receive dividends
(“Dividends”) payable on the Stated Value (as defined below) of such Preferred
Share at the Dividend Rate (as defined below). Dividends on the Preferred Shares
shall commence accruing on the Initial Issuance Date and shall be computed on
the basis of a 360-day year consisting of twelve 30-day months and shall be
payable in arrears for each Calendar Quarter on the first day of the succeeding
Calendar Quarter during the period beginning on the Initial Issuance Date and
ending on, and including, the Maturity Date and shall be due and payable on each
Conversion Date by inclusion in the applicable Conversion Amount (as defined
below) (each, an “Dividend Date”) with the first Dividend Date being April 1,
2006. Prior to the payment of Dividends on a Dividend Date, Dividends on the
Preferred Shares shall accrue at the Dividend Rate. If a Dividend Date is not a
Business Day (as defined below), then the Dividend shall be due and payable on
the Business Day immediately following such Dividend Date. Provided that the
Equity Conditions are satisfied (or waived by the applicable Holder) during the
period commencing ten (10) Business Days prior to the Dividend Date through such
Dividend Date, Dividends shall be payable in shares of Common Stock (“Dividend
Shares”) or, at the option of the Company, in cash, provided that the Dividends
which accrued during any period shall be payable in cash only if the Company
indicates that the Dividend will be paid in cash in the Dividend Notice (as
defined below). At least twenty-five (25) Trading Days prior to the applicable
Dividend Date (the “Dividend Notice Date”), the Company shall provide written
notice (the “Dividend Notice”) to each Holder of Preferred Shares either
indicating that the Dividend is to be paid in cash or confirming that the
Dividend shall be paid in Dividend Shares and the Dividend Notice shall contain
a certification that the Equity Conditions have been satisfied as of the
Dividend Notice Date. On or before the sixty-fifth day prior to any Dividend
Date, a Holder may deliver notice to the Company (a “Dividend

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Limitation Notice”) indicating that the issuance of Dividend Shares on the
applicable Dividend Date may cause the applicable Holder’s beneficial ownership
in accordance with Section 5 to exceed the Maximum Percentage (such number of
excess shares, the “Dividend Excess Shares”). In the event that the Company
receives a Dividend Limitation Notice, the Company shall either indicate in the
applicable Dividend Notice that it is electing to pay at least the portion of
the applicable Dividend attributable to the Dividend Excess Shares in cash or
that the portion of the applicable Dividend attributable to the Dividend Excess
Shares shall be included as part of the next succeeding Dividend. If the Equity
Conditions are not satisfied as of the Dividend Notice Date, then unless the
Company has elected to pay such Dividend in cash, the Dividend Notice shall
indicate that unless the Holder waives the Equity Conditions, the Dividend shall
be paid in cash. If the Equity Conditions were satisfied as of the Dividend
Notice Date but the Equity Conditions are no longer satisfied at any time prior
to the Dividend Date, the Company shall provide each Holder a subsequent notice
to that effect indicating that unless the Holder waives the Equity Conditions,
the Dividend shall be paid in cash. Dividends paid in Dividend Shares shall be
paid in a number of fully paid and nonassessable shares (rounded to the nearest
whole share) of Common Stock equal to the quotient of (i) the Additional Amount
divided by (ii) the Stock Dividend Rate. If any Dividend Shares are to be issued
on a Dividend Date, then the Company shall within two (2) Business Days of the
applicable Dividend Date, (X) provided that the Company’s designated transfer
agent (the “Transfer Agent”) is participating in The Depository Trust Company
(“DTC”) Fast Automated Securities Transfer Program, upon the request of the
Holder, credit such aggregate number of shares of Common Stock to which the
Holder shall be entitled to the Holder’s or its designee’s balance account with
DTC through its Deposit Withdrawal Agent Commission system, or (Y) if the
Transfer Agent is not participating in the DTC Fast Automated Securities
Transfer Program, issue and deliver to such Holder, a certificate, registered in
the name of the Holder or its designee, for the number of shares of Common Stock
to which the Holder shall be entitled.

(2) Conversion of Preferred Shares. Preferred Shares shall be convertible into
shares of Common Stock on the terms and conditions set forth in this Section 2.

(a) Certain Defined Terms. For purposes of this Certificate of Designations, the
following terms shall have the following meanings:

(i) “Additional Amount” means, on a per Preferred Share basis, the product of
(x) the result of the following formula: (Dividend Rate)(N/360) and (y) the
Stated Value.

(ii) “Adjusted Dividend Rate” means (i) during the period commencing on the
Initial Issuance Date and ending on June 30, 2006, nine percent (9.0%) per
annum, (ii) during the period commencing on the July 1, 2006 and ending on
December 31, 2006, ten percent (10.0%) per annum, (iii) during the period
commencing on the January 1, 2007 and continuing so long as any Preferred Shares
remain outstanding, eleven percent (11.0%) per annum; provided, however, that if
the Company sells any of the Legacy Operations Assets, the Adjusted Dividend
Rate in effect immediately following any such sale or series of sales shall be
reduced after such sale or series of sales by 20 basis points per each $1
million of

 

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the net cash proceeds (as reported on the Company’s previously filed Form 8-K,
Form 10-Q, Form 10-QSB, Form 10-K or Form 10-KSB, as the case may be, filed with
the SEC and as set forth on or after such filing in a notice to each Holder)
paid to the Company, in the aggregate, in such sale or series of sales of the
Legacy Operations Assets; provided, further, that at no time may the Adjusted
Dividend Rate be less than eight percent (8.0%) per annum.

(iii) “Annualized EBITDA” means (i) for the period commencing on the
Subscription Date and ending on June 30, 2007, the most recent Calendar
Quarter’s EBITDA multiplied by four (4) and (ii) for all other periods, the sum
of the two most recent Calendar Quarters’ EBITDA multiplied by two (2).

(iv) “Approved Share Plan” means any employee benefit plan which has been
approved by the Board of Directors of the Company, pursuant to which the
Company’s securities may be issued to any employee, officer, consultant or
director for services provided to the Company.

(v) “Bloomberg” means Bloomberg Financial Markets.

(vi) “Business Day” means any day other than Saturday, Sunday or other day on
which commercial banks in The City of New York are authorized or required by law
to remain closed.

(vii) “Calendar Quarter” means each of the following periods: the period
beginning on and including January 1 and ending on and including March 31; the
period beginning on and including April 1 and ending on and including June 30;
the period beginning on and including July 1 and ending on and including
September 30; and the period beginning on and including October 1 and ending on
and including December 31.

(viii) “CapitalSource Credit Agreements” means (i) that certain Credit
Agreement, dated November 10, 2005, by and among the Devcon Security Holdings,
Inc., Devcon Security Services Corp., Coastal Security Company, Coastal Security
Systems, Inc., Central One, Inc. and CapitalSource Finance LLC, (ii) that
certain Bridge Loan Agreement, dated November 10, 2005, by and among the Devcon
Security Holdings, Inc., Devcon Security Services Corp., Coastal Security
Company, Coastal Security Systems, Inc., Central One, Inc. and CapitalSource
Finance LLC, (iii) that certain Guaranty, dated as of November 10, 2005, by the
Company to and for the benefit of CapitalSource Finance LLC and (iv) any
agreements relating to the foregoing.

 

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(ix) “Change of Control” means any Fundamental Transaction other than (A) any
reorganization, recapitalization or reclassification in which holders of the
Company’s voting power immediately prior to such reorganization,
recapitalization or reclassification continue after such reorganization,
recapitalization or reclassification to hold publicly traded securities and,
directly or indirectly, the voting power of the surviving entity or entities
necessary to elect a majority of the members of the board of directors (or their
equivalent if other than a corporation) of such entity or entities, or
(B) pursuant to a migratory merger effected solely for the purpose of changing
the jurisdiction of incorporation of the Company.

(x) “Closing Bid Price” and “Closing Sale Price” means, for any security as of
any date, the last closing bid price and last closing trade price, respectively,
for such security on the Principal Market, as reported by Bloomberg, or, if the
Principal Market begins to operate on an extended hours basis and does not
designate the closing bid price or the closing trade price, as the case may be,
then the last bid price or last trade price, respectively, of such security
prior to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the
Principal Market is not the principal securities exchange or trading market for
such security, the last closing bid price or last trade price, respectively, of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing bid price or last trade price, respectively, of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no closing bid price or last
trade price, respectively, is reported for such security by Bloomberg, the
average of the bid prices, or the ask prices, respectively, of any market makers
for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly
the National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing
Sale Price cannot be calculated for a security on a particular date on any of
the foregoing bases, the Closing Bid Price or the Closing Sale Price, as the
case may be, of such security on such date shall be the fair market value as
mutually determined by the Company and the Required Holders. If the Company and
the Holder are unable to agree upon the fair market value of such security, then
such dispute shall be resolved pursuant to Section 2(d)(vii). All such
determinations to be appropriately adjusted for any share dividend, share split,
share combination or other similar transaction during the applicable calculation
period.

(xi) “Common Stock” means the common stock of the Company, par value $0.10 per
share.

(xii) “Common Stock Deemed Outstanding” means, at any given time, the number of
shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock deemed to be

 

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outstanding pursuant to Sections 2(f)(i)(A) and 2(f)(i)(B) hereof regardless of
whether the Options or Convertible Securities are actually exercisable at such
time, but excluding any shares of Common Stock owned or held by or for the
account of the Company or issuable upon conversion of the Preferred Shares.

(xiii) “Conversion Amount” means the sum of (1) the Additional Amount and
(2) the Stated Value.

(xiv) “Conversion Price” means, with respect to the Preferred Shares, as of any
Conversion Date or other date of determination, $9.54, subject to adjustment as
provided herein.

(xv) “Convertible Securities” means any shares or securities (other than
Options) directly or indirectly convertible into or exchangeable or exercisable
for Common Stock.

(xvi) “Default Conversion Price” means as of any date of determination, the
product of (x) 90% and (y) the lowest Closing Bid Price during the three
(3) Trading Days ending on and including such date of determination.

(xvii) “Dividend Rate” means (i) (1) if the Legacy Milestones for such Dividend
Date have not been met and if the Legacy Event has not yet occurred, the
Adjusted Dividend Rate applicable to such Dividend Date, or (2) if the Legacy
Milestones for such Dividend Date have been met or if the Legacy Event has
occurred, eight percent (8.0%) per annum and (ii) for the period from and after
the occurrence of a Triggering Event through such time that such Triggering
Event is cured, the sum of (A) the Dividend Rate in effect pursuant to clause
(i) above plus (B) five percent (5%) per annum.

(xviii) “EBITDA” means, with respect to the Company and its consolidated
Subsidiaries, for any applicable period, without duplication, an amount equal to
(a) consolidated net income for such period, determined in accordance with GAAP,
minus (b) the sum of (i) income tax credits, (ii) interest income, (iii) income
or gain from extraordinary items for such period, (iv) any aggregate net gain
(or net loss) during such period arising from the sale, exchange or other
disposition of capital assets (including any fixed assets, whether tangible or
intangible, all inventory sold in conjunction with the disposition of fixed
assets and all securities), (v) Restricted Payments, and (vi) any other non-cash
gains that have been added in determining consolidated net income, in each case
to the extent included in the calculation of consolidated net income for such
period in accordance with GAAP, but without duplication, plus (c) the sum of
(i) any provision for income taxes, (ii) Interest Expense, including fees in
respect of any Indebtedness, (iii) loss from extraordinary items for such

 

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period, (iv) depreciation and amortization for such period, and (v) any other
adjustments agreed to by Agent in its sole discretion; provided that, for the
purposes of the calculation of Leverage Ratio (as defined in this Certificate of
Designations) hereunder, EBITDA shall be calculated to include (or exclude), on
a pro forma basis, cash flow relating to the acquisition (or
disposition/cancellation) of Alarm Contracts during such reporting period (the
“Pro Forma Cash Flow Adjustment”). Subject to the review and consent of the
Agent, such Pro Forma Cash Flow Adjustment shall be determined by multiplying
(a) the combined RMR of such Alarm Contracts over the applicable period by
(b) the actual EBITDA Margin for such period (calculated without reference to
this proviso). Each capitalized term set forth in this definition of “EBITDA”
shall have the meaning as set forth in the CapitalSource Credit Agreement, as in
effect as of the Initial Issuance Date, and each action to be taken by the Agent
referenced in this definition of “EBITDA” shall be in accordance with the terms
and conditions of the CapitalSource Credit Agreement as in effect as of the
Initial Issuance Date and shall cease to apply at such time as the CapitalSource
Credit Agreement terminates.

(xix) “Eligible Market” means the Principal Market, NYSE, the Nasdaq National
Market, The American Stock Exchange or The Nasdaq Capital Market.

(xx) “Equity Conditions” means: (i) on each day during the period beginning
ninety-five (95) days prior to the applicable date of determination and ending
on and including the applicable date of determination (the “Equity Conditions
Measuring Period”), either (x) the Registration Statement (as defined in the
Registration Rights Agreement, the “Registration Statement”) filed pursuant to
the Registration Rights Agreement shall be effective and available for the
resale of all of the Registrable Securities in accordance with the terms of the
Registration Rights Agreement and there shall not have been any Grace Periods
(as defined in the Registration Rights Agreement) or (y) all shares of Common
Stock issuable upon conversion of the Preferred Shares, as Dividend Shares and
the exercise of Warrants shall be eligible for sale without restriction and
without the need for registration under any applicable federal or state
securities laws; (ii) on each day during the Equity Conditions Measuring Period,
the Common Stock is designated for quotation on the Principal Market and shall
not have been suspended from trading on such exchange or market (other than
suspensions of not more than two days and occurring prior to the applicable date
of determination due to business announcements by the Company) nor shall
proceedings for such delisting or suspension by such exchange or market have
been commenced threatened or pending either (A) in writing by such exchange or
market (other than with respect to those issues set forth on the Company’s
Current Report on Form 8-K, dated as of January 25, 2006) or (B) by falling
below the minimum listing maintenance requirements of

 

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such exchange or market; (iii) on each day during the Equity Conditions
Measuring Period, the Company shall have delivered Conversion Shares upon
conversion of the Preferred Shares and Common Stock upon exercise of the
Warrants to the Holders on a timely basis as set forth in Section 2(c)(ii)
hereof and Section 1(a) of the Warrants; (iv) any applicable shares of Common
Stock to be issued in connection with the event requiring determination may be
issued in full without violating Section 5 hereof, Section 14 hereof or the
rules or regulations of the applicable Principal Market; (v) during the Equity
Conditions Measuring Period, the Company shall not have failed to timely make
any payments within five (5) Business Days of when such payment is due pursuant
to any Transaction Document (as defined in the Securities Purchase Agreement);
(vi) during the Equity Conditions Measuring Period, there shall not have
occurred either (A) the public announcement of a pending, proposed or intended
Fundamental Transaction which has not been abandoned, terminated or consummated
or (B) a Triggering Event or an event that with the passage of time or giving of
notice would constitute a Triggering Event; (vii) the Company shall have no
knowledge of any fact that would cause (x) the Registration Statements required
pursuant to the Registration Rights Agreement not to be effective and available
for the resale of at least all of the Registrable Securities in accordance with
the terms of the Registration Rights Agreement or (y) any shares of Common Stock
issuable upon conversion of the Preferred Shares, as Dividend Shares and shares
of Common Stock issuable upon exercise of the Warrants not to be eligible for
sale without restriction pursuant to Rule 144(k) and any applicable state
securities laws; and (viii) the Company otherwise shall have been in material
compliance with and shall not have materially breached any provision, covenant,
representation or warranty of any Transaction Document.

(xxi) “Excluded Securities” means any Common Stock issued or deemed to be issued
in accordance with Section 2(f) hereof by the Company: (A) in connection with an
Approved Share Plan; (B) upon issuance of the Preferred Shares or Dividend
Shares or, upon conversion of the Preferred Shares or upon exercise of the
Warrants; (C) pursuant to a bona fide underwritten public offering at a price
per share of Common Stock not less than the Conversion Price in effect at the
time of such offering with a nationally recognized underwriter which generates
gross proceeds to the Company of at least $15,000,000 (other than an
“at-the-market offering” as defined in Rule 415(a)(4) under the 1933 Act and
“equity lines”); (D) issued upon exercise of Options or Convertible Securities
which are outstanding on the date immediately preceding the Subscription Date,
provided that such issuance of Common Stock upon exercise of such Options or
Convertible Securities is made pursuant to the terms of such Options or
Convertible Securities in effect on the date immediately preceding the
Subscription Date and such Options or Convertible Securities are not amended
after the date immediately

 

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preceding the Subscription Date; and (E) issued in connection with any share
split, share dividend, recapitalization or similar transaction by the Company
for which adjustment is made pursuant to Section 2(f)(ii).

(xxii) “Fundamental Transaction” means that (i) the Company shall, directly or
indirectly, in one or more related transactions, (A) consolidate or merge with
or into (whether or not the Company is the surviving corporation) another
Person, or (B) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of the Company to another Person,
or (C) allow another Person to make a purchase, tender or exchange offer that is
accepted by the holders of more than the 50% of the outstanding Common Stock
(not including any Common Stock held by the Person or Persons making or party
to, or associated or affiliated with the Persons making or party to, such
purchase, tender or exchange offer), (D) consummate a share purchase agreement
or other business combination (including, without limitation, a reorganization,
recapitalization, spin-off or scheme of arrangement) with another Person whereby
such other Person acquires more than the 50% of the outstanding shares of Common
Stock (not including any Common Stock held by the other Person or other Persons
making or party to, or associated or affiliated with the other Persons making or
party to, such share purchase agreement or other business combination), or
(E) reorganize, recapitalize or reclassify its Common Stock or (ii) any “person”
or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of
the Exchange Act) is or shall become the “beneficial owner” (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 50% of the issued and
outstanding Common Stock or the aggregate ordinary voting power represented by
issued and outstanding Common Stock. Notwithstanding anything stated herein to
the contrary, a sale of all or any portion of the Company’s Legacy Operations or
Legacy Operations Assets shall not constitute a Fundamental Transaction.

(xxiii) “Holder Pro Rata Amount” means a fraction (i) the numerator of which is
the number of Preferred Shares issued to such Holder on the Initial Issuance
Date and (ii) the denominator of which is the number of Preferred Shares issued
on the Initial Issuance Date.

(xxiv) “Indebtedness” shall have the meaning as set forth in the Securities
Purchase Agreement.

(xxv) “Initial Issuance Date” means ________ __, 20061.

(xxvi) “Installment Date” means each of the following dates: (i) the fourth
anniversary of the Initial Issuance Date, (ii) the fifth anniversary of the
Initial Issuance Date and (iii) the sixth anniversary of the Initial

 

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1 Insert date of Additional Closing.

 

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Issuance Date; provided, however, that in the event the Company fails to meet
the Equity Conditions on any such Installment Date, then as to each Holder that
does not waive such failure on such Installment Date, an additional Installment
Date shall occur six months after such Installment Date (each, an “Additional
Installment Date”).

(xxvii) “Installment Amount” means with respect to each Holder as of any
Installment Date, a number of Preferred Shares equal to the lesser of (A) the
product of (i) 15,000, multiplied by (ii) the applicable Holder Pro Rata Amount
and (B) the number of Preferred Shares held by such Holder as of such
Installment Date, as any such Installment Amount may be reduced pursuant to the
terms of this Note, whether upon conversion, redemption or otherwise provided,
however, that in the event the Company fails to meet the Equity Conditions on
any Installment Date, then as to each Holder that does not waive such failure on
such Installment Date, the Installment Amount for the next succeeding
Installment Date shall equal the sum of (i) the Installment Amount for such
Installment Date and (ii) any Installment Amounts not previously redeemed on an
Installment Date due to such failure; provided, further that the Installment
Amount for any Additional Installment Date shall equal the Installment Amount
for the immediately preceding Installment Date. In the event the Holder shall
sell or otherwise transfer any Preferred Shares, the transferee shall be
allocated a pro rata portion of the each unpaid Installment Amount hereunder.

(xxviii) “Legacy Event” means the sale by the Company of all the Legacy
Operations Assets.

(xxix) “Legacy Milestones” means (i) for any Dividend Date during the calendar
year ending December 31, 2006, the EBITDA of the Company from the Legacy
Operations for the twelve month period prior to the applicable Dividend Date as
set forth in the financial statements included in the Company’s previously SEC
filed Form 8-K, Form 10-Q, Form 10-QSB, Form 10-K or Form 10-KSB, as the case
may be, is equal to or greater than $5.5 million, or (ii) for any Dividend Date
thereafter, the EBITDA of the Company from the Legacy Operations for the twelve
month period prior to the applicable Dividend Date as set forth in the financial
statements included in the Company’s previously SEC filed Form 8-K, Form 10-Q,
Form 10-QSB, Form 10-K or Form 10-KSB, as the case may be, is equal to or
greater than $7.0 million.

(xxx) “Legacy Operations” means the Company’s Construction Division, the
Company’s remaining Materials operations and DevMat, an 80 percent-owned joint
venture which conducts the Company’s desalination utility operations.

 

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(xxxi) “Legacy Operations Assets” means those certain directly and indirectly
held Subsidiaries and other net assets of the Company that collectively comprise
the Legacy Operations.

(xxxii) “Leverage Ratio” means as of any date, (1) (x) the Net Indebtedness on
such date plus (y) the Stated Value of any outstanding Preferred Shares on such
date, divided by (2) Annualized EBITDA as of such date.

(xxxiii) “Limited Restriction Periods” mean any of the following times or
periods: (i) from the date of receipt of a Company Installment Notice through
the applicable Installment Date, (ii) from the date of receipt of a Mandatory
Conversion Notice through the Mandatory Conversion Date, (iii) from the date of
receipt of a Notice of Mandatory Redemption, (iv) during a Change of Control
Period and (v) during the ten (10) Trading Days prior to the Maturity Date.

(xxxiv) “Limited Restriction Notice” means a notice delivered by a Holder to the
Company during a Limited Restriction Period indicating that the restrictions set
forth in Section 5 herein shall no longer apply after the end of such Limited
Restriction Period.

(xxxv) “Liquidation Event” means the voluntary or involuntary liquidation,
dissolution or winding up of the Company or such Subsidiaries the assets of
which constitute all or substantially all of the business of the Company and its
Subsidiaries taken as a whole, in a single transaction or series of
transactions.

(xxxvi) “Market Capitalization” means the product of (x) the number of shares of
Common Stock as reported as outstanding on the Company’s most recent Form 8-K,
Form 10-Q, Form 10-QSB, Form 10-K or Form 10-KSB, as the case may be, filed with
the SEC and (y) the lowest Closing Sale Price during the Limitation Measuring
Period.

(xxxvii) “Maturity Date” means, with respect to a Preferred Share, the sixth
anniversary of the Initial Issuance Date, unless extended pursuant to
Section 2(d)(viii).

(xxxviii) “N” means the number of days from, but excluding, the last Dividend
Date with respect to which dividends have been paid by the Company on the
applicable Preferred Share, or the Initial Issuance Date if no Dividend Date has
occurred, through and including the Conversion Date or other date of
determination for such Preferred Share, as the case may be, for which such
determination is being made.

(xxxix) “Net Indebtedness” means an amount equal to (a) Indebtedness minus
(b) cash and cash equivalents and certificates of deposits, each as determined
in accordance with GAAP consistent with

 

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past practices, which practices were in place at the Company as of the close of
business on the day immediately prior to the Subscription Date.

(xl) “NYSE” means The New York Stock Exchange, Inc.

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

(xlii) “Parent Entity” of a Person means an entity that, directly or indirectly,
controls the applicable Person and whose common shares or equivalent equity
security are quoted or listed on an Eligible Market, or, if there is more than
one such Person or Parent Entity, the Person or Parent Entity with the largest
public market capitalization as of the date of consummation of the Fundamental
Transaction.

(xliii) “Person” means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.

(xliv) “Principal Market” means the Nasdaq National Market.

(xlv) “Registration Rights Agreement” means that certain registration rights
agreement by and among the Company and the initial Holders of the Preferred
Shares relating to the filing of a registration statement covering the resale of
the Common Stock issuable upon conversion of the Preferred Shares, as Dividend
Shares and exercise of the Warrants, as such agreement may be amended from time
to time as provided in such agreement.

(xlvi) “Required Holders” means the Holders of Preferred Shares representing at
least a majority of the aggregate Preferred Shares then outstanding.

(xlvii) “SEC” means the Securities and Exchange Commission.

(xlviii) “Securities Purchase Agreement” means that certain securities purchase
agreement by and among the Company and the initial Holders, dated as of the
Subscription Date, as such agreement further may be amended from time to time as
provided in such agreement.

(xlix) “Senior Management” means Richard C. Rochon, Stephen J. Ruzika, George M.
Hare and Ron G. Lakey (collectively, the “Initial Officers”) and Royal Palm
Capital Partners, Ltd. and any of the following officers of the Company (or
their equivalent) (1) the Chairman of the Company’s Board of Directors,
(2) Chief Executive Officer, (3) President, (4) Chief Financial Officer,
(5) President – Construction and Materials Division; provided, however such
Initial Officers shall not be deemed a

 

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member of Senior Management hereunder following the termination of employment of
such Initial Officer.

(l) “Stated Value” means $1,000.

(li) “Stock Dividend Rate” means, with respect to any Dividend Date, that price
which shall be computed as 90% of the arithmetic average of the Weighted Average
Price of the Common Stock on each of the twenty (20) consecutive trading days
immediately preceding (but not including) such Dividend Date. All such
determinations to be appropriately adjusted for any stock split, stock dividend,
stock combination or other similar transaction during such period.

(lii) “Subscription Date” means February 10, 2006.

(liii) “Subsidiaries” has the meaning set forth in the Securities Purchase
Agreement.

(liv) “Successor Entity” means the Person, which may be the Company, formed by,
resulting from or surviving any Fundamental Transaction or the Person with which
such Fundamental Transaction shall have been made, provided that if such Person
is not a publicly traded entity whose common shares or equivalent equity
security are quoted or listed for trading on an Eligible Market, Successor
Entity shall mean such Person’s Parent Entity.

(lv) “Trading Day” means any day on which the Common Stock is traded on the
Principal Market, or, if the Principal Market is not the principal trading
market for the Common Stock, then on the principal securities exchange or
securities market on which the Common Stock is then traded; provided that
“Trading Day” shall not include any day on which the Common Stock is scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock is suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00:00 p.m., New York Time).

(lvi) “Warrants” has the meaning ascribed to such term in the Securities
Purchase Agreement, and shall include all warrants issued in exchange therefor
or replacement thereof.

(lvii) “Weighted Average Price” means, for any security as of any date, the
dollar volume-weighted average price for such security on the Principal Market
during the period beginning at 9:30:01 a.m., New York City Time, and ending at
4:00:00 p.m., New York City Time, as reported by Bloomberg through its “Volume
at Price” function or, if the foregoing does not apply, the dollar
volume-weighted average price of such security

 

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in the over-the-counter market on the electronic bulletin board for such
security during the period beginning at 9:30:01 a.m., New York City Time, and
ending at 4:00:00 p.m., New York City Time, as reported by Bloomberg, or, if no
dollar volume-weighted average price is reported for such security by Bloomberg
for such hours, the average of the highest closing bid price and the lowest
closing ask price of any of the market makers for such security as reported in
the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau,
Inc.). If the Weighted Average Price cannot be calculated for such security on
such date on any of the foregoing bases, the Weighted Average Price of such
security on such date shall be the fair market value as mutually determined by
the Company and the Required Holders. If the Company and the Required Holders
are unable to agree upon the fair market value of such security, then such
dispute shall be resolved pursuant to Section 2(d)(iii) below with the term
“Weighted Average Price” being substituted for the term “Closing Sale Price.”
All such determinations shall be appropriately adjusted for any share dividend,
share split or other similar transaction during such period.

(b) Holder’s Conversion Right. Subject to the provisions of Section 5 and
Section 14, at any time or times on or after the Initial Issuance Date, any
Holder shall be entitled to convert any whole number of Preferred Shares, plus
the amount of any accrued but unpaid Dividends per Preferred Share then
remaining, into fully paid and nonassessable shares of Common Stock in
accordance with Section 2(d) at the Conversion Rate (as defined below).

(c) Conversion. The number of shares of Common Stock issuable upon conversion of
each Preferred Share pursuant to Section 2(b) shall be determined according to
the following formula (the “Conversion Rate”):

Conversion Amount

Conversion Price

No fractional shares of Common Stock are to be issued upon the conversion of any
Preferred Share, but rather the number of shares of Common Stock to be issued
shall be rounded to the nearest whole number.

(d) Mechanics of Conversion. The conversion of Preferred Shares shall be
conducted in the following manner:

(i) Holder’s Delivery Requirements. To convert Preferred Shares into shares of
Common Stock on any date (the “Conversion Date”), the Holder shall (A) transmit
by facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m., New
York City Time, on such date, a copy of a properly completed notice of
conversion executed by the registered Holder of the Preferred Shares subject to
such conversion in the form attached hereto as Exhibit I (the “Conversion
Notice”) to the

 

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Company and the Transfer Agent and (B) if required by Section 2(d)(viii),
surrender to a common carrier for delivery to the Company as soon as practicable
following such date the original certificates representing the Preferred Shares
being converted (or compliance with the procedures set forth in Section 16) (the
“Preferred Share Certificates”).

(ii) Company’s Response. Upon receipt by the Company of copy of a Conversion
Notice, the Company shall as soon as practicable, but in any event within two
(2) Business Days, send, via facsimile, a confirmation of receipt of such
Conversion Notice to such Holder and the Transfer Agent, which confirmation
shall constitute an instruction to the Transfer Agent to process such Conversion
Notice in accordance with the terms herein. On or before the third (3rd)
Business Day following the date of receipt by the Company of such Conversion
Notice (the “Share Delivery Date”), the Company shall (A) provided the Transfer
Agent is participating in DTC Fast Automated Securities Transfer Program, credit
such aggregate number of shares of Common Stock to which the Holder shall be
entitled to the Holder’s or its designee’s balance account with DTC through its
Deposit Withdrawal Agent Commission system, or (B) if the Transfer Agent is not
participating in the DTC Fast Automated Securities Transfer Program, issue and
deliver to the address as specified in the Conversion Notice, a certificate,
registered in the name of the Holder or its designee, for the number of shares
of Common Stock to which the Holder shall be entitled. If the number of
Preferred Shares represented by the Preferred Share Certificate(s) submitted for
conversion, as may be required pursuant to Section 2(d)(viii), is greater than
the number of Preferred Shares being converted, then the Company shall, as soon
as practicable and in no event later than fifth (5) Business Days after receipt
of the Preferred Share Certificate(s) (the “Preferred Share Delivery Date”) and
at its own expense, issue and deliver to the Holder a new Preferred Share
Certificate representing the number of Preferred Shares not converted.

(iii) Dispute Resolution. In the case of a dispute as to the determination of
the Closing Sale Price or the arithmetic calculation of the Conversion Rate, the
Company shall instruct the Transfer Agent to issue to the Holder the number of
shares of Common Stock that is not disputed and shall transmit an explanation of
the disputed determinations or arithmetic calculations to the Holder via
facsimile within three (3) Business Day of receipt of such Holder’s Conversion
Notice or other date of determination. If such Holder and the Company are unable
to agree upon the determination of the Closing Sale Price or arithmetic
calculation of the Conversion Rate within two (2) Business Days of such disputed
determination or arithmetic calculation being transmitted to the Holder, then
the Company shall within ten (10) Business Day submit via facsimile (A) the
disputed determination of the Closing Sale Price to an independent, reputable
investment bank selected by the Company and

 

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approved by the Required Holders or (B) the disputed arithmetic calculation of
the Conversion Rate to the Company’s independent, outside accountant. The
Company shall cause, at the Company’s expense, the investment bank or the
accountant, as the case may be, to perform the determinations or calculations
and notify the Company and the Holders of the results no later than two
(2) Business Days from the time it receives the disputed determinations or
calculations. Such investment bank’s or accountant’s determination or
calculation, as the case may be, shall be binding upon all parties absent error.

(iv) Miscellaneous; Record Holder. The Person or Persons entitled to receive the
Common Stock issuable upon a conversion of Preferred Shares shall be treated for
all purposes as the record holder or holders of such Common Stock on the
Conversion Date. In the event of a conversion of Preferred Shares pursuant
hereto, the number of Preferred Shares converted shall be deducted from the
Installment Amounts relating to the Installment Dates as set forth in the
Conversion Notice.

(v) Company’s Failure to Timely Convert.

(A) Cash Damages. If (I) within three (3) Trading Days after the Company’s
receipt of the facsimile copy of a Conversion Notice the Company shall fail to
credit a Holder’s balance account with DTC or issue and deliver a certificate to
such Holder for the number of shares of Common Stock to which such Holder is
entitled upon such Holder’s conversion of Preferred Shares (a “Conversion
Failure”) or (II) within three (3) Trading Days of the Company’s receipt of a
Preferred Share Certificate the Company shall fail to issue and deliver a new
Preferred Share Certificate representing the number of Preferred Shares to which
such Holder is entitled pursuant to Section 2(d)(ii), then in addition to all
other available remedies which such holder may pursue hereunder and under the
Securities Purchase Agreement (including indemnification pursuant to
Section 9(k) thereof), the Company shall pay additional damages to such Holder
for each day after the Share Delivery Date that such conversion is not timely
effected and/or each day after the Preferred Share Delivery Date that such
Preferred Share Certificate is not delivered in an amount equal to 1.0% of the
product of (I) the sum of the number of shares of Common Stock not issued to the
Holder on or prior to the Share Delivery Date and to which such Holder is
entitled as set forth in the applicable Conversion Notice and, in the event the
Company has failed to deliver a Preferred Share Certificate to the Holder on or
prior to the Preferred Share Delivery Date, the number of shares of Common Stock
issuable upon conversion of the Preferred Shares represented by such Preferred
Share Certificate as of the Preferred Share Delivery Date and (II) the Closing
Sale Price of

 

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the Common Stock on the Share Delivery Date, in the case of the failure to
deliver Common Stock, or the Preferred Share Delivery Date, in the case of
failure to deliver a Preferred Share Certificate. If the Company fails to pay
the additional damages set forth in this Section 2(d)(v) within five
(5) Business Days of the date incurred, then the Holder entitled to such
payments shall have the right at any time, so long as the Company continues to
fail to make such payments, to require the Company, upon written notice, to
immediately issue, in lieu of such cash damages, the number of shares of Common
Stock equal to the quotient of (X) the aggregate amount of the damages payments
described herein divided by (Y) the Conversion Price in effect on such
Conversion Date as specified by the Holder in the Conversion Notice. In addition
to the foregoing, if within three (3) Business Days after the Company’s receipt
of the facsimile copy of a Conversion Notice the Company shall fail to issue and
deliver a certificate to a Holder or credit such Holder’s balance account with
DTC for the number of shares of Common Stock to which such Holder is entitled
upon such Holder’s conversion of Preferred Shares, and if on or after such
Business Day the Holder purchases (in an open market transaction or in another
bona fide transaction) Common Stock to deliver in satisfaction of a sale by the
Holder of the Common Stock issuable upon such conversion that the Holder
anticipated receiving from the Company (a “Buy-In”), then the Company shall,
within three (3) Business Days after the Holder’s request and in the Holder’s
discretion, either (i) pay cash to the Holder in an amount equal to the Holder’s
total purchase price (including brokerage commissions, if any) for the Common
Stock so purchased (the “Buy-In Price”), at which point the Company’s obligation
to deliver such certificate (and to issue such Common Stock) shall terminate, or
(ii) promptly honor its obligation to deliver to the Holder a certificate or
certificates representing such Common Stock and pay cash to the Holder in an
amount equal to the excess (if any) of the Buy-In Price over the product of
(A) such number of shares of Common Stock, times (B) the Closing Sale Price on
the Conversion Date.

(B) Void Conversion Notice; Adjustment of Conversion Price. If for any reason a
Holder has not received all of the Common Stock to which such Holder is entitled
prior to the fifth (5th) Business Day after the Share Delivery Date with respect
to a conversion of Preferred Shares, then the Holder, upon written notice to the
Company, with a copy to the Transfer Agent, may void its Conversion Notice with
respect to, and retain or have returned, as the case may be, any Preferred
Shares that have not been converted pursuant to such Holder’s Conversion Notice;
provided that the voiding of a Holder’s Conversion Notice shall not

 

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effect the Company’s obligations to make any payments which have accrued prior
to the date of such notice pursuant to Section 2(d)(v)(A) or otherwise.
Thereafter, the Conversion Price of any Preferred Shares returned or retained by
the Holder for failure to timely convert shall be adjusted to the lesser of
(I) the Conversion Price relating to the voided Conversion Notice and (II) the
lowest Weighted Average Price of the Common Stock during the period beginning on
the Conversion Date and ending on the date such Holder voided the Conversion
Notice, subject to further adjustment as provided in this Certificate of
Designations.

(vi) Pro Rata Conversion; Disputes. Subject to Section 14, in the event the
Company receives a Conversion Notice from more than one Holder for the same
Conversion Date and the Company can convert some, but not all, of such Preferred
Shares, the Company shall convert from each Holder electing to have Preferred
Shares converted at such time a pro rata amount of such Holder’s Preferred
Shares submitted for conversion based on the number of Preferred Shares
submitted for conversion on such date by such Holder relative to the number of
Preferred Shares submitted for conversion on such date. In the event of a
dispute as to the number of shares of Common Stock issuable to a Holder in
connection with a conversion of Preferred Shares, the Company shall issue to
such Holder the number of shares of Common Stock not in dispute and resolve such
dispute in accordance with Section 2(d)(iii).

(vii) Installment Payments.

(A) Company Installment Redemption. On each applicable Installment Date,
provided that during the period commencing with the Company Installment Notice
(as defined below) through the applicable Installment Date, the Equity
Conditions have been satisfied (or waived in writing by the applicable Holder),
the Company shall pay to each Holder the Installment Amount as of such
Installment Date by redeeming the applicable Installment Amount, in whole or in
part, in accordance with this Section (a “Company Installment Redemption”). On
or prior to the date which is the tenth (10th) Trading Day prior to each
Installment Date (each, an “Installment Notice Due Date”), the Company shall
deliver written notice (each, a “Company Installment Notice”), to each Holder
which Company Installment Notice shall state the applicable Installment Amount
of such Holder which the Company shall redeem pursuant to a Company Installment
Redemption (the “Company Installment Redemption Amount”) and the Company
Installment Notice shall certify that the Equity Conditions have been satisfied
as of the date of the Company Installment Notice. If the Equity Conditions are
not satisfied as of the Installment Notice Due Date, the Installment

 

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Notice Due Date shall indicate that unless the Holder waives the Equity
Conditions, the applicable Company Installment Redemption shall not occur. If
the Equity Conditions were satisfied as of the Installment Notice Due Date but
the Equity Conditions are no longer satisfied at any time prior to the
applicable Installment Date, the Company shall provide each Holder a subsequent
notice to that effect indicating that unless the Holder waives the Equity
Conditions, the applicable Company Installment Redemption shall not occur.
Except as expressly provided in this Section, the Company shall redeem from each
Holder such Holder’s applicable Installment Amount pursuant to this Section.

(B) Mechanics of Company Installment Redemption. The Company Installment
Redemption Amount which is to be paid to each Holder on the applicable
Installment Date shall be redeemed by the Company on such Installment Date, and
the Company shall pay to the Holder on such Installment Date, by wire transfer
of immediately available funds, an amount in cash (the “Company Installment
Redemption Price”) equal to the sum of (x) the Stated Value of the Preferred
Shares being redeemed and (y) any accrued and unpaid Dividends with respect to
such Preferred Shares. Notwithstanding anything to the contrary in this Section,
but subject to Section 14, until the Company Installment Redemption Price is
paid in full, the Company Installment Redemption Amount may be converted, in
whole or in part, by any Holder into Common Stock pursuant to Section 2(d). In
the event a Holder elects to convert all or any portion of the Company
Installment Redemption Amount prior to the applicable Installment Date as set
forth in the immediately preceding sentence, the Company Installment Redemption
Amount so converted shall be deducted from the Installment Amounts relating to
the applicable Installment Dates as set forth in the applicable Conversion
Notice.

(viii) Mandatory Redemption at Maturity. If any Preferred Shares remains
outstanding on the Maturity Date, and the Equity Conditions have been satisfied
(as indicated in a notice from the Company to the Holders delivered thirty
(30) Trading Days prior to the Maturity Date) or waived by the applicable
Holder, the Company shall redeem such Preferred Shares in cash in an amount
equal to the outstanding Conversion Amount for such Preferred Shares (the
“Maturity Date Redemption Price”). The Company shall pay the Maturity Date
Redemption Price on the Maturity Date by wire transfer of immediately available
funds to an account designated in writing by such Holder. If the Company fails
to redeem all of the Preferred Shares outstanding on the Maturity Date by
payment of the Maturity Date Redemption Price for each such Preferred Share,
then in addition to any remedy such Holder may have under any

 

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Transaction Document, (I) the applicable Maturity Date Redemption Price payable
in respect of such unredeemed Preferred Shares shall bear interest at the rate
of 1.5% per month, prorated for partial months, until paid in full, and (II) any
Holder shall have the option to require the Company to convert any or all of
such Holder’s Preferred Shares and for which the Maturity Date Redemption Price
(together with any interest thereon) has not been paid into (on a per Preferred
Share basis) shares of Common Stock equal to the number which results from
dividing the Maturity Date Redemption Price (together with any interest thereon)
by the Default Conversion Price. If the Company has failed to pay the Maturity
Date Redemption Price in a timely manner as described above, then the Maturity
Date shall be automatically extended for any Preferred Shares until the date the
Holders receive such shares of Common Stock or Maturity Date Redemption Price
and shall be further extended for any Preferred Shares for as long as (A) the
conversion of such Preferred Shares would violate the provisions of Section 5,
(B) a Triggering Event or an event that with the passage of time or giving of
notice would constitute a Triggering Event shall have occurred and be continuing
or (C) the Equity Conditions have not been satisfied (or waived by the
applicable Holder).

(ix) Book-Entry. Notwithstanding anything to the contrary set forth herein, upon
conversion of Preferred Shares in accordance with the terms hereof, any Holder
thereof shall not be required to physically surrender the certificate
representing the Preferred Shares to the Company unless (A) the full or
remaining number of Preferred Shares represented by the certificate are being
converted or (B) such Holder has provided the Company with prior written notice
(which notice may be included in a Conversion Notice) requesting reissuance of
Preferred Shares upon physical surrender of any Preferred Shares. The Holders
and the Company shall maintain records showing the number of Preferred Shares so
converted and the dates of such conversions or shall use such other method,
reasonably satisfactory to the Holders and the Company, so as not to require
physical surrender of the certificate representing the Preferred Shares upon
each such conversion. In the event of any dispute or discrepancy, such records
of the Company establishing the number of Preferred Shares to which the record
holder is entitled shall be controlling and determinative in the absence of
manifest error. Notwithstanding the foregoing, if Preferred Shares represented
by a certificate are converted as aforesaid, a Holder may not transfer the
certificate representing the Preferred Shares unless such Holder first
physically surrenders the certificate representing the Preferred Shares to the
Company, whereupon the Company will forthwith issue and deliver upon the order
of such Holder a new certificate of like tenor, registered as such Holder may
request, representing in the aggregate the remaining number of Preferred Shares
represented by such certificate. A Holder and any assignee, by acceptance of a
certificate, acknowledge and agree that, by reason of the

 

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provisions of this paragraph, following conversion of any Preferred Shares, the
number of Preferred Shares represented by such certificate may be less than the
number of Preferred Shares stated on the face thereof. Each certificate for
Preferred Shares shall bear the following legend:

ANY TRANSFEREE OF THIS CERTIFICATE SHOULD CAREFULLY REVIEW THE TERMS OF THE
COMPANY’S CERTIFICATE OF DESIGNATIONS RELATING TO THE PREFERRED SHARES
REPRESENTED BY THIS CERTIFICATE, INCLUDING SECTION 2(d)(ix) THEREOF. THE NUMBER
OF PREFERRED SHARES REPRESENTED BY THIS CERTIFICATE MAY BE LESS THAN THE NUMBER
OF PREFERRED SHARES STATED ON THE FACE HEREOF PURSUANT TO SECTION 2(d)(ix) OF
THE CERTIFICATE OF DESIGNATIONS RELATING TO THE PREFERRED SHARES REPRESENTED BY
THIS CERTIFICATE.

(e) Taxes. The Company shall pay any and all documentary, stamp, transfer (but
only in respect of the registered holder thereof) and other similar taxes that
may be payable with respect to the issuance and delivery of Common Stock upon
the conversion of Preferred Shares.

(f) Adjustments to Conversion Price. The Conversion Price will be subject to
adjustment from time to time as provided in this Section 2(f).

(i) Adjustment of Conversion Price upon Issuance of Common Stock. If and
whenever on or after the Subscription Date, the Company issues or sells, or in
accordance with this Section 2(f) is deemed to have issued or sold, any shares
of Common Stock (including the issuance or sale of shares of Common Stock owned
or held by or for the account of the Company but excluding Excluded Securities)
for a consideration per share (the “New Securities Issuance Price”) less than a
price (the “Applicable Price”) equal to the Conversion Price in effect
immediately prior to such time (a “Dilutive Issuance”), then immediately after
such issue or sale, the Conversion Price then in effect shall be reduced to an
amount equal to the product of (x) the Conversion Price in effect immediately
prior to such Dilutive Issuance and (y) the quotient of (1) the sum of (I) the
product of the Applicable Price and the number of shares of Common Stock Deemed
Outstanding immediately prior to such Dilutive Issuance and (II) the
consideration, if any, received by the Company upon such Dilutive Issuance,
divided by (2) the product of (I) the Applicable Price multiplied by (II) the
number of shares of Common Stock Deemed Outstanding immediately after such
Dilutive Issuance. For purposes of

 

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determining the adjusted Conversion Price under this Section 2(f)(i), the
following shall be applicable:

(A) Issuance of Options. If the Company in any manner grants or sells any
Options and the lowest price per share for which one share of Common Stock is
issuable upon the exercise of any such Option or upon conversion, exchange or
exercise of any Convertible Securities issuable upon exercise of such Option is
less than the Applicable Price, then such share of Common Stock shall be deemed
to be outstanding and to have been issued and sold by the Company at the time of
the granting or sale of such Option for such price per share. For purposes of
this Section 2(f)(i)(A), the “lowest price per share for which one share of
Common Stock is issuable upon the exercise of any such Option or upon
conversion, exchange or exercise of any Convertible Securities issuable upon
exercise of such Option” shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to any
one share of Common Stock upon granting or sale of the Option, upon exercise of
the Option and upon conversion, exchange or exercise of any Convertible Security
issuable upon exercise of such Option. No further adjustment of the Conversion
Price shall be made upon the actual issuance of such Common Stock or of such
Convertible Securities upon the exercise of such Options or upon the actual
issuance of such Common Stock upon conversion, exchange or exercise of such
Convertible Securities.

(B) Issuance of Convertible Securities. If the Company in any manner issues or
sells any Convertible Securities and the lowest price per share for which one
share of Common Stock is issuable upon such conversion, exchange or exercise
thereof is less than the Applicable Price, then such Common Stock shall be
deemed to be outstanding and to have been issued and sold by the Company at the
time of the issuance of sale of such Convertible Securities for such price per
share. For the purposes of this Section 2(f)(i)(B), the “lowest price per share
for which one share of Common Stock is issuable upon such conversion, exchange
or exercise” shall be equal to the sum of the lowest amounts of consideration
(if any) received or receivable by the Company with respect to any one share of
Common Stock upon the issuance or sale of the Convertible Security and upon the
conversion, exchange or exercise of such Convertible Security. No further
adjustment of the Conversion Price shall be made upon the actual issuance of
such Common Stock upon conversion, exchange or exercise of such Convertible
Securities, and if any such issue or sale of such Convertible Securities is made
upon exercise of any Options for which adjustment of the Conversion Price had
been or are to be

 

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made pursuant to other provisions of this Section 2(f)(i), no further adjustment
of the Conversion Price shall be made by reason of such issue or sale.

(C) Change in Option Price or Rate of Conversion. If the purchase or exercise
price provided for in any Options, the additional consideration, if any, payable
upon the issue, conversion, exchange or exercise of any Convertible Securities,
or the rate at which any Convertible Securities are convertible into or
exchangeable or exercisable for Common Stock changes at any time, the Conversion
Price in effect at the time of such change shall be adjusted to the Conversion
Price which would have been in effect at such time had such Options or
Convertible Securities provided for such changed purchase price, additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold. For purposes of this Section 2(f)(i)(C), if
the terms of any Option or Convertible Security that was outstanding as of the
date of issuance of the Preferred Shares are changed in the manner described in
the immediately preceding sentence, then such Option or Convertible Security and
the Common Stock deemed issuable upon exercise, conversion or exchange thereof
shall be deemed to have been issued as of the date of such change. No adjustment
shall be made if such adjustment would result in an increase of the Conversion
Price then in effect.

(D) Calculation of Consideration Received. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options will be deemed to
have been issued for a consideration of $0.01. If any Common Stock, Options or
Convertible Securities are issued or sold or deemed to have been issued or sold
for cash, the consideration received therefor will be deemed to be the gross
amount received by the Company therefor. If any Common Stock, Options or
Convertible Securities are issued or sold for a consideration other than cash,
the amount of the consideration other than cash received by the Company will be
the fair value of such consideration, except where such consideration consists
of marketable securities, in which case the amount of consideration received by
the Company will be the arithmetic average of the Closing Sale Prices of such
securities during the ten (10) consecutive Trading Days ending on the date of
receipt of such securities. The fair value of any consideration other than cash
or securities will be determined jointly by the Company and the Required
Holders. If such parties are unable to reach agreement within ten (10) days
after the

 

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occurrence of an event requiring valuation (the “Valuation Event”), the fair
value of such consideration will be determined within five (5) Business Days
after the tenth (10th) day following the Valuation Event by an independent,
reputable appraiser selected by the Company and the Required Holders. The
determination of such appraiser shall be deemed binding upon all parties absent
manifest error and the fees and expenses of such appraiser shall be borne by the
Company.

(E) Record Date. If the Company takes a record of the holders of Common Stock
for the purpose of entitling them (I) to receive a dividend or other
distribution payable in Common Stock, Options or Convertible Securities or (II)
to subscribe for or purchase Common Stock, Options or Convertible Securities,
then such record date will be deemed to be the date of the issue or sale of the
Common Stock deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date of the granting of
such right of subscription or purchase, as the case may be.

(ii) Adjustment of Conversion Price upon Subdivision or Combination of Common
Stock. If the Company at any time after the Subscription Date subdivides (by any
share split, share dividend, recapitalization or otherwise) its outstanding
Common Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision will be proportionately reduced. If the
Company at any time combines (by combination, reverse share split or otherwise)
its outstanding Common Stock into a smaller number of shares and the Conversion
Price in effect immediately prior to such combination will be proportionately
increased.

(iii) Other Events. If any event occurs of the type contemplated by the
provisions of this Section 2(f) but not expressly provided for by such
provisions (including, without limitation, the granting of share appreciation
rights, phantom share rights or other rights with equity features), then the
Company’s Board of Directors will make an appropriate adjustment in the
Conversion Price so as to protect the rights of the Holders; provided that no
such adjustment will increase the Conversion Price as otherwise determined
pursuant to this Section 2(f).

(iv) Notices.

(A) Within three (3) Business days of any adjustment of the Conversion Price
pursuant to this Section 2(f), the Company will give written notice thereof to
each Holder, setting forth in reasonable detail, and certifying, the calculation
of such adjustment. In the case of a dispute as to the determination of such

 

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adjustment, then such dispute shall be resolved in accordance with the
procedures set forth in Section 2(d)(iii).

(B) The Company will give written notice to each Holder at least ten
(10) Business Days prior to the date on which the Company closes its books or
takes a record (I) with respect to any dividend or distribution upon the Common
Stock, (II) with respect to any pro rata subscription offer to holders of Common
Stock or (III) for determining rights to vote with respect to any Fundamental
Transaction or Liquidation Event, provided that such information shall be made
known to the public prior to or in conjunction with such notice being provided
to such Holder.

(C) The Company will also give written notice to each Holder at least ten
(10) Business Days prior to the date on which any Fundamental Transaction or
Liquidation Event will take place, provided that such information shall be made
known to the public prior to or in conjunction with such notice being provided
to such Holder.

(3) Redemption at Option of Holders.

(a) Triggering Event. A “Triggering Event” shall be deemed to have occurred at
such time as any of the following events:

(i) the Leverage Ratio exceeds the ratios specified in Section 13;

(ii) the failure of the applicable Registration Statement to be declared
effective by the SEC on or prior to the date that is sixty (60) days after the
applicable Effectiveness Deadline (as defined in the Registration Rights
Agreement);

(iii) while the Registration Statement is required to be maintained effective
pursuant to the terms of the Registration Rights Agreement, the effectiveness of
the Registration Statement lapses for any reason (including, without limitation,
the issuance of a stop order) or is unavailable to the Holder for sale of all of
the Registrable Securities in accordance with the terms of the Registration
Rights Agreement, and such lapse or unavailability continues for a period of
five (5) consecutive Trading Days or for more than an aggregate of ten (10) days
in any 365-day period (excluding days during an Allowable Grace Period (as
defined in the Registration Rights Agreement));

(iv) the suspension from trading or failure of the Common Stock to be listed on
an Eligible Market for a period of five (5) consecutive Trading Days or for more
than an aggregate of ten (10) Trading Days in any 365-day period;

 

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(v) the Company’s (A) failure to cure a Conversion Failure by delivery of the
required number of shares of Common Stock within ten (10) Trading Days after the
applicable Conversion Date or (B) notice, written or oral, to any Holder,
including by way of public announcement or through any of its agents, at any
time, of its intention not to comply, as required, with a request for conversion
of any Preferred Shares into Common Stock that is tendered in accordance with
the provisions of this Certificate of Designations;

(vi) at any time following the tenth (10th) consecutive Business Day that a
Holder’s Authorized Share Allocation is less than the number of shares of Common
Stock that such Holder would be entitled to receive upon a conversion of the
full Conversion Amount of the Preferred Shares (without regard to any
limitations on conversion set forth in Section 5 or otherwise);

(vii) the Company’s failure to pay to the Holder any amounts when and as due
pursuant to this Certificate of Designations or any other Transaction Document
(as defined in the Securities Purchase Agreement);

(viii) the entry by a court having jurisdiction in the premises of (i) a decree
or order for relief in respect of the Company or any Subsidiary of a voluntary
case or proceeding under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or (ii) a decree or order adjudging the
Company or any Subsidiary as bankrupt or insolvent, or approving as properly
filed a petition seeking reorganization, arrangement, adjustment or composition
of or in respect of the Company or any Subsidiary under any applicable Federal
or State law or (iii) appointing a custodian, receiver, liquidator, assignee,
trustee, sequestrator or other similar official of the Company or any Subsidiary
or of any substantial part of its property, or ordering the winding up or
liquidation of its affairs, and the continuance of any such decree or order for
relief or any such other decree or order unstayed and in effect for a period of
60 consecutive days;

(ix) the commencement by the Company or any Subsidiary of a voluntary case or
proceeding under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or of any other case or proceeding to be
adjudicated a bankrupt or insolvent, or the consent by it to the entry of a
decree or order for relief in respect of the Company or any Subsidiary in an
involuntary case or proceeding under any applicable Federal or State bankruptcy,
insolvency, reorganization or other similar law or to the commencement of any
bankruptcy or insolvency case or proceeding against it, or the filing by it of a
petition or answer or consent seeking reorganization or relief under any
applicable Federal or State law, or the consent by it to the filing of such
petition or to the appointment of or taking possession by a custodian, receiver,

 

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liquidator, assignee, trustee, sequestrator or other similar official of the
Company or any Subsidiary or of any substantial part of its property, or the
making by it of an assignment for the benefit of creditors, or the admission by
it in writing of its inability to pay its debts generally as they become due, or
the taking of corporate action by the Company or any Subsidiary in furtherance
of any such action;

(x) any event of default occurs with respect to any Indebtedness, including
borrowings under any of the CapitalSource Credit Agreements and any applicable
grace periods in such Indebtedness with respect to such event of default shall
have expired; provided, however, that with respect to any event of default under
a CapitalSource Credit Agreement that is not a payment default, only after
acceleration of such loan pursuant to such CapitalSource Credit Agreement; or

(xi) the Company breaches any representation, warranty, covenant or other term
or condition herein or in any Transaction Document (as defined in the Securities
Purchase Agreement) and such breach constitutes, individually or in the
aggregate, a Material Adverse Effect (as defined in the Securities Purchase
Agreement); provided, however, that in the case of a breach of a covenant or
other term or condition herein or in any Transaction Document which is curable,
only if such breach remains uncured for a period of at least ten
(10) consecutive Business Days after receipt of notice from any Holder of such
breach.

(b) Redemption Option Upon Triggering Event or Put Date.

(i) In addition to all other rights of the Holders contained herein, after a
Triggering Event, the Required Holders shall have the right to require the
Company to redeem all or a portion of the Preferred Shares at a price per
Preferred Share equal to the greater of 115% of (x) the Conversion Amount and
(y) the product of (A) the Conversion Rate in effect at such time as such Holder
delivers a Notice of Redemption at Option of Holder (as defined below) and
(B) the Closing Sale Price of the Common Stock on the Trading Day immediately
preceding such Triggering Event (the “Triggering Redemption Price”).

(ii) In addition to all other rights of the Holders contained herein, at any
time on May 11, 2009 (the “Put Date”), each Holder shall have the right, at such
Holder’s option, to require the Company to redeem all or a portion of such
Holder’s Preferred Shares at a price per Preferred Share equal to the
outstanding Conversion Amount for such Preferred Shares (the “Put Redemption
Price”, and together with the Triggering Redemption Price, the “Redemption
Price”).

 

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(c) Mechanics of Redemption at Option of Buyer.

(i) Within two (2) Business Days after the occurrence of a qualifying Triggering
Event, the Company shall deliver written notice thereof via facsimile and
overnight courier (“Notice of Triggering Event”) to each Holder.

(ii) At any time after (i) the earlier of a Holder’s receipt of a Notice of
Triggering Event and such Holder becoming aware of a Triggering Event or
(ii) the Put Date, any Holder of Preferred Shares then outstanding may require
the Company to redeem up to all of such Holder’s Preferred Shares by delivering
written notice thereof via facsimile and overnight courier (“Notice of
Redemption at Option of Holder”) to the Company, which Notice of Redemption at
Option of Holder shall indicate the number of Preferred Shares that such Holder
is electing to redeem. In the event of a partial redemption of Preferred Shares
pursuant hereto, the Conversion Amount shall be deducted from the Installment
Amounts relating to the applicable Installment Dates as set forth in the Notice
of Redemption at Option of Holder.

(d) Payment of Redemption Price. Upon the Company’s receipt of a Notice(s) of
Redemption at Option of Buyer from any Holder, the Company shall within one
(1) Business Day of such receipt notify each Holder by facsimile of the
Company’s receipt of such notice(s). The Company shall deliver on the fifth
(5th) Business Day after the Company’s receipt of the first Notice of Redemption
at Option of Holder the applicable Redemption Price to all Holders that deliver
a Notice of Redemption at Option of Holder prior to the fifth (5th) Business Day
after the Company’s receipt of the first Notice of Redemption at Option of
Holder; provided that, if required by Section 2(d)(ix), a Holder’s Preferred
Share Certificates shall have been delivered to the Transfer Agent. To the
extent redemptions required by this Section 3 are deemed or determined by a
court of competent jurisdiction to be prepayments of the Preferred Shares by the
Company, such redemptions shall be deemed to be voluntary prepayments. If the
Company is unable to redeem all of the Preferred Shares submitted for
redemption, the Company shall (i) redeem a pro rata amount from each Holder
based on the number of Preferred Shares submitted for redemption by such Holder
relative to the total number of Preferred Shares submitted for redemption by all
Holders and (ii) in addition to any remedy such Holder may have under this
Certificate of Designation and the Securities Purchase Agreement, pay to each
Holder interest at the rate of 1.5% per month (prorated for partial months) in
respect of each unredeemed Preferred Share until paid in full. The Holders and
Company agree that in the event of the Company’s redemption of any Preferred
Shares under this Section 3, the Holders’ damages would be uncertain and
difficult to estimate because of the parties’ inability to predict future
interest rates and the uncertainty of the availability of a suitable substitute
investment opportunity for the Holders. Accordingly, any redemption premium due
under this Section 3 is intended by the parties to be, and shall be deemed, a
reasonable estimate of the Holders’ actual loss of its investment opportunity
and not as a penalty.

 

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(e) Void Redemption. In the event that the Company does not pay the Redemption
Price within the time period set forth in Section 3(d), at any time thereafter
and until the Company pays such unpaid applicable Redemption Price in full, a
Holder shall have the option to, in lieu of redemption, require the Company to
promptly return to such Holder any or all of the Preferred Shares that were
submitted for redemption by such Holder under this Section 3 and for which the
applicable Redemption Price (together with any interest thereon) has not been
paid, by sending written notice thereof to the Company via facsimile (the “Void
Optional Redemption Notice”). Upon the Company’s receipt of such Void Optional
Redemption Notice, (i) the Notice of Redemption at Option of Holder shall be
null and void with respect to those Preferred Shares subject to the Void
Optional Redemption Notice, (ii) the Company shall immediately return any
Preferred Shares subject to the Void Optional Redemption Notice, and (iii) the
Conversion Price of such returned Preferred Shares shall be adjusted to the
lesser of (A) the Conversion Price as in effect on the date on which the Void
Optional Redemption Notice is delivered to the Company and (B) the lowest
Weighted Average Price of the Common Stock during the period beginning on the
date on which the Notice of Redemption at Option of Holder is delivered to the
Company and ending on the date on which the Void Optional Redemption Notice is
delivered to the Company.

(f) Disputes; Miscellaneous. In the event of a dispute as to the determination
of the arithmetic calculation of the Redemption Price, such dispute shall be
resolved pursuant to Section 2(d)(iii) above with the term “Redemption Price”
being substituted for the term “Conversion Rate”. A Holder’s delivery of a Void
Optional Redemption Notice and exercise of its rights following such notice
shall not effect the Company’s obligations to make any payments which have
accrued prior to the date of such notice. In the event of a redemption pursuant
to this Section 3 of less than all of the Preferred Shares represented by a
particular Preferred Share Certificate, the Company shall promptly cause to be
issued and delivered to the Holder of such Preferred Shares a Preferred Share
Certificate representing the remaining Preferred Shares which have not been
redeemed, if necessary.

(4) Other Rights of Holders.

(a) Assumption. The Company shall not enter into or be party to a Fundamental
Transaction unless (i) the Successor Entity assumes in writing (with the
purchase of at least a majority of the outstanding shares of the Company’s
Common Stock automatically constituting an assumption in writing) all of the
obligations of the Company under this Certificate of Designations and the other
Transaction Documents in accordance with the provisions of this Section 4(a)
pursuant to written agreements in form and substance satisfactory to the
Required Holders and approved by the Required Holders prior to such Fundamental
Transaction, including agreements to deliver to each holder of Preferred Shares
in exchange for such Preferred Shares a security of the Successor Entity
evidenced by a written instrument substantially similar in form and substance to
this

 

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Certificate of Designations, including, without limitation, having a stated
value and dividend rate equal to the stated value and dividend rate of the
Preferred Shares held by such holder and having similar ranking to the Preferred
Shares, and satisfactory to the Required Holders and (ii) the Successor Entity
(including its Parent Entity) is a publicly traded corporation whose common
shares are quoted on or listed for trading on an Eligible Market. Upon the
occurrence of any Fundamental Transaction, the Successor Entity shall succeed
to, and be substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Certificate of Designations referring to the
“Company” shall refer instead to the Successor Entity), and may exercise every
right and power of the Company and shall assume all of the obligations of the
Company under this Certificate of Designations with the same effect as if such
Successor Entity had been named as the Company herein. Upon consummation of the
Fundamental Transaction, the Successor Entity shall deliver to the Holder
confirmation that there shall be issued upon conversion or redemption of the
Preferred Shares at any time after the consummation of the Fundamental
Transaction, in lieu of the Common Stock (or other securities, cash, assets or
other property) purchasable upon the conversion or redemption of the Preferred
Shares prior to such Fundamental Transaction, such publicly traded common shares
(or their equivalent) of the Successor Entity, as adjusted in accordance with
the provisions of this Certificate of Designations. The provisions of this
Section shall apply similarly and equally to successive Fundamental Transactions
and shall be applied without regard to any limitations on the conversion or
redemption of the Preferred Shares. Notwithstanding the foregoing, this
Section 4(a) shall not apply to the Preferred Shares of a Holder upon the
Company’s delivery of a Notice of Mandatory Redemption to such Holder in
connection with a Cash Change of Control Event (as defined below).

(b) Purchase Rights. If at any time the Company grants, issues or sells any
Options, Convertible Securities or rights to purchase shares, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the “Purchase Rights”), then the Holders will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which such Holder could have acquired if such Holder had held
the number of shares of Common Stock acquirable upon complete conversion of the
Preferred Shares (without taking into account any limitations or restrictions on
the convertibility of the Preferred Shares) immediately before the date on which
a record is taken for the grant, issuance or sale of such Purchase Rights, or,
if no such record is taken, the date as of which the record holders of Common
Stock are to be determined for the grant, issue or sale of such Purchase Rights.

(c) Limitations on Senior Management Securities. The Company shall not permit
any of its Senior Management to sell or transfer, directly or indirectly, any
Common Stock, Option, Convertible Security or any other instrument convertible
into or exercisable or exchangeable for Common Stock, or to convert or exercise
any such convertible or exercisable instrument (except as may be issued pursuant
to the terms of an Approved Share Plan) beneficially owned by such Person,

 

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unless (i) the Required Holders shall have executed a written consent to such
sale, transfer or exercise or (ii) the Weighted Average Price of the Common
Stock shall have equaled or exceeded 175% of the initial Conversion Price
(subject to appropriate adjustments for stock splits, stock dividends, stock
combinations and other similar transactions after the Subscription Date) for
each of the sixty (60) consecutive Trading Days’ (the “Limitation Measuring
Period”) prior to the date of such sale, transfer or exercise (the “Senior
Management Limitation”). Notwithstanding the foregoing, the Senior Management
Limitation shall not apply to such sale, transfer or exercise if either (x) the
Market Capitalization of the Company exceeds $200 million on the date of such
sale, transfer or exercise or (ii) the average daily trading volume as reported
by Bloomberg of the Company’s Common Stock on the Principal Market during the
Limitation Measuring Period exceeds 50,000 shares. Notwithstanding anything
stated herein to the contrary, the Securities may be pledged by Senior
Management in connection with a bona fide margin account or other loan or
financing arrangement secured by the Securities and such pledge of Securities
(or resulting foreclosure on such Securities by such lender) shall not be deemed
to be a transfer, sale or assignment of the Securities hereunder, and Senior
Management shall not be required to provide the Holder with any notice thereof
or otherwise make any delivery to the Holder pursuant to this Agreement or any
other Transaction Document.

(5) Limitation on Beneficial Ownership. Other than during Limited Restriction
Periods or after delivery of a Limited Restriction Notice, the Company shall not
effect and shall have no obligation to effect any conversion of Preferred
Shares, and no Holder shall have the right to convert any Preferred Shares, to
the extent that after giving effect to such conversion, such conversion shall
cause the beneficial owner of such shares (together with such Person’s
affiliates) to have acquired, through conversion of Preferred Shares or
otherwise, beneficial ownership of a number of shares of Common Stock that
exceeds 9.99% (or, in the case of each of Castlerigg Master Investments Ltd. and
CapitalSource Finance LLC, 4.99%) (“Maximum Percentage”) of the number of shares
of Common Stock outstanding immediately after giving effect to such conversion.
Likewise, other than during the Limited Restriction Periods or after delivery of
a Limited Restriction Notice, the Company shall not give effect to any voting
rights of the Preferred Shares, and any Holder shall not have the right to
exercise voting rights with respect to any Preferred Shares pursuant hereto, to
the extent that giving effect to such voting rights would cause such Holder
(together with its affiliates) to be deemed to beneficially own in excess of the
Maximum Percentage of the number of shares of Common Stock outstanding
immediately after giving effect to such exercise of voting rights. For purposes
of the foregoing sentence, the number of shares of Common Stock beneficially
owned by a Person and its affiliates shall include the number of shares of
Common Stock issuable upon conversion of the Preferred Shares with respect to
which the determination of such sentence is being made, but shall exclude the
number of shares of Common Stock which would be issuable upon (A) conversion of
the remaining, nonconverted Preferred Shares beneficially owned by such Person
or any of its affiliates and (B) exercise or conversion of the unexercised or
unconverted portion of any other securities of the Company (including, without
limitation, any warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by such Person
or any of its affiliates. Except as set forth in the preceding sentence, for
purposes of this Section 5, beneficial ownership shall be calculated in
accordance with Section 13(d) of the

 

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Securities Exchange Act of 1934, as amended. For purposes of this Section 5, in
determining the number of outstanding shares of Common Stock, a Holder may rely
on the number of outstanding shares of Common Stock as reflected in (1) the
Company’s most recent Form 8-K, Form 10-Q, Form 10-QSB, Form 10-K or Form 10-KSB
as the case may be, (2) a more recent public announcement by the Company, or
(3) any other notice by the Company or its transfer agent setting forth the
number of shares of Common Stock outstanding. Upon the written request of any
Holder, the Company shall promptly, but in no event later than two (2) Business
Days following the receipt of such notice, confirm orally and in writing to any
such Holder the number of shares of Common Stock then outstanding. In any case,
the number of outstanding shares of Common Stock shall be determined after
giving effect to conversions of Preferred Shares by such Holder and its
affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. By written notice to the Company, the Holder may
increase or decrease the Maximum Percentage to any other percentage not in
excess of 9.99% specified in such notice; provided that (i) any such increase
will not be effective until the sixty-first (61st) day after such notice is
delivered to the Company, and (ii) any such increase or decrease will apply only
to the Holder and not to any other Holder.

(6) Authorized Shares.

(a) Reservation. The Company shall have sufficient authorized and unissued
shares of Common Stock for each of the Preferred Shares equal to 120% of the sum
of (i) the number of shares of Common Stock necessary to effect the conversion
at the Conversion Rate with respect to the Conversion Amount of each such
Preferred Share as of the Initial Issuance Date, (ii) the number of Dividend
Shares issuable hereunder, determined as if issued as of the trading day
immediately preceding the applicable date of determination and assuming the
Preferred Shares remain outstanding until the Maturity Date, and (iii) the
number of shares of Common Stock necessary to effect the exercise of all of the
Warrants. So long as any of the Preferred Shares are outstanding, the Company
shall take all action necessary to reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of the Preferred Shares, the number of shares of Common Stock as
shall from time to time be necessary to effect the conversion of all of the
Preferred Shares then outstanding; provided that at no time shall the number of
shares of Common Stock so available be less than the number of shares required
to be reserved by the previous sentence (without regard to any limitations on
conversions) (the “Required Amount”); provided, further, that any Dividend
Shares issued by the Company shall not be issued from any shares of Common Stock
so reserved. The initial number of shares of Common Stock reserved for
conversions of the Preferred Shares and each increase in the number of shares so
reserved shall be allocated pro rata among the Holders based on the number of
Preferred Shares held by each Holder at the time of issuance of the Preferred
Shares or increase in the number of reserved shares, as the case may be (the
“Authorized Share Allocation”). In the event a Holder shall sell or otherwise
transfer any of such Holder’s Preferred Shares, each transferee shall be
allocated a pro rata portion of the number of reserved shares of Common Stock
reserved for such transferor. Any Common Stock reserved and allocated to any
Person which ceases to hold any Preferred Shares shall be allocated to the
remaining Holders of Preferred Shares, pro rata based on the number of Preferred
Shares then held by such Holders.

 

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(b) Insufficient Authorized Shares. If at any time while any of the Preferred
Shares remain outstanding the Company does not have a sufficient number of
authorized and unissued shares of Common Stock to satisfy its obligation to have
available for issuance upon conversion of the Preferred Shares at least a number
of shares of Common Stock equal to the Required Amount (an “Authorized Share
Failure”), then the Company shall as promptly as practicable take all action
necessary to increase the Company’s authorized Common Stock to an amount
sufficient to allow the Company to have available the Required Amount for the
Preferred Shares then outstanding.

(7) Voting Rights. Subject to Section 5 and the Maximum Percentage, each Holder
shall be entitled to the whole number of votes equal to the number of shares of
Common Stock into which such holder’s Preferred Shares would be convertible on
the record date for the vote or consent of stockholders, and shall otherwise
have voting rights and powers equal to the voting rights and powers of the
Common Stock. Each Holder shall be entitled to receive the same prior notice of
any stockholders’ meeting as is provided to the holders of Common Stock in
accordance with the bylaws of the Company, as well as prior notice of all
stockholder actions to be taken by legally available means in lieu of a meeting
and shall vote as a class with the holders of Common Stock on all matters except
those matters required by law or by the terms hereof to be submitted to a class
vote of the Holders of Preferred Shares, in which case the Holders of Preferred
Shares only shall vote as a separate class.

(8) Change of Control Redemption Right. So long as Holders (and their
transferees) continue to hold in the aggregate at least 25% of the aggregate
number of Preferred Shares purchased on the Initial Issuance Date (such Holders,
the “Eligible Holders”), no sooner than fifteen (15) days nor later than ten
(10) days prior to the consummation of a Change of Control, but not prior to the
public announcement of such Change of Control, the Company shall deliver written
notice thereof via facsimile and overnight courier to the Eligible Holders (a
“Change of Control Notice”). At any time during the period (the “Change of
Control Period”) beginning after a Holder’s receipt of a Change of Control
Notice and ending on the date that is twenty (20) Trading Days after the
consummation of such Change of Control, such Eligible Holder may require the
Company to redeem all or any portion of such Holder’s Preferred Shares by
delivering written notice thereof (“Change of Control Redemption Notice”) to the
Company, which Change of Control Redemption Notice shall indicate the Conversion
Amount the Holder is electing to redeem. Any Preferred Shares subject to
redemption pursuant to this Section 8 shall be redeemed by the Company in cash
at a price equal to the greater of (i) the product (x) the sum of the Conversion
Amount being redeemed together with any accrued but unpaid Dividends per
Preferred Share and (y) the quotient determined by dividing (A) the Closing Sale
Price of the Common Stock immediately following the public announcement of such
proposed Change of Control by (B) the Conversion Price and (ii) 115% of the sum
of the Conversion Amount being redeemed together with any accrued but unpaid
Dividends per Preferred Share (the “Change of Control Redemption Price”). The
Company shall made payment of the Change of Control Redemption Price
concurrently with the consummation of such Change of Control if such a Change of
Control Redemption Notice is received prior to the consummation of such Change
of Control and within five (5) Trading Days after the Company’s receipt of such
notice otherwise (the “Change of Control Redemption Date”). To the extent
redemptions required by this Section 8 are deemed or determined by a court of
competent jurisdiction to be prepayments of the Preferred Shares by the Company,
such redemptions shall be deemed to be voluntary

 

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prepayments. Notwithstanding anything to the contrary in this Section 8, until
the Change of Control Redemption Price (together with any interest thereon) is
paid in full, the Conversion Amount submitted for redemption under this
Section 8 may be converted, in whole or in part, by the Holder into shares of
Common Stock, or in the event the Conversion Date is after the consummation of
the Change of Control, shares or equity interests of the Successor Entity
substantially equivalent to the Company’s Common Stock pursuant to
Section 2(c)(i). The parties hereto agree that in the event of the Company’s
redemption of any portion of the Note under this Section 8, the Holder’s damages
would be uncertain and difficult to estimate because of the parties’ inability
to predict future interest rates and the uncertainty of the availability of a
suitable substitute investment opportunity for the Holder. Accordingly, any
redemption premium due under this Section 8 is intended by the parties to be,
and shall be deemed, a reasonable estimate of the Holder’s actual loss of its
investment opportunity and not as a penalty. In the event that the Company does
not pay the Change of Control Redemption Price on the Change of Control
Redemption Date, then the Holder shall have the right to void the redemption
pursuant to Section 3(e) with the term “Change of Control Redemption Price”
being substituted for “Redemption Price” and “Change of Control Redemption
Notice” being substituted for “Notice of Redemption at Option of Holder”. In the
event of a partial redemption of Preferred Shares pursuant hereto, the
Conversion Amount redeemed shall be deducted from the Installment Amounts
relating to the applicable Installment Dates as set forth in the Change of
Control Redemption Notice.

(9) COMPANY’S RIGHT OF MANDATORY CONVERSION OR REDEMPTION

(a) Mandatory Conversion. If at any time after the second anniversary of the
Initial Issuance Date (the “Mandatory Conversion Eligibility Date”), (i) the
Weighted Average Price of the Common Stock equals or exceeds 175% of the initial
Conversion Price (subject to appropriate adjustments for stock splits, stock
dividends, stock combinations and other similar transactions after the
Subscription Date) for each of any sixty (60) consecutive Trading Days following
the Mandatory Conversion Eligibility Date (the “Mandatory Conversion Measuring
Period”) and (ii) the Equity Conditions shall have been satisfied or waived in
writing by the Holder on each day during the period commencing on the Mandatory
Conversion Notice Date and ending on the Mandatory Conversion Date (each, as
defined below), the Company shall have the right to require the Holder to
convert up to all of the Conversion Amount then remaining into fully paid,
validly issued and nonassessable shares of Common Stock in accordance with
Section 3(c) hereof at the Conversion Rate as of the Mandatory Conversion Date
(as defined below) (a “Mandatory Conversion”). The Company may exercise its
right to require conversion under this Section 9(a) on one occasion by
delivering within not more than two (2) Trading Days following the end of such
Mandatory Conversion Measuring Period a written notice thereof by facsimile and
overnight courier to all, but not less than all, of the holders of Preferred
Shares and the Transfer Agent (the “Mandatory Conversion Notice” and the date
all of the holders received such notice by facsimile is referred to as the
“Mandatory Conversion Notice Date”). The Mandatory Conversion Notice shall be
irrevocable. The Mandatory Conversion Notice shall state (i) the Trading Day
selected for the Mandatory Conversion in accordance with Section 9(a), which
Trading Day shall be at least twenty (20) Business Days but not more than sixty
(60) Business Days following the Mandatory Conversion Notice Date (the
“Mandatory Conversion Date”), (ii) the number of Preferred Shares of such Holder
subject to the Mandatory Conversion, (iii) the aggregate Conversion Amount of
the

 

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Preferred Shares subject to Mandatory Conversion from all of the holders of the
Preferred Shares pursuant to this Section 9 and (iv) the number of shares of
Common Stock to be issued to such Holder on the Mandatory Conversion Date.

(b) Mandatory Redemption. In addition to all other rights of the Company
contained herein, (x) at any time on or after May 11, 2009 (the “Call Date”) if
the Equity Conditions shall have been satisfied or waived in writing by the
Required Holders from and including the Notice of Mandatory Redemption Date (as
defined below) through and including the Mandatory Redemption Date (as defined
below), the Company shall have the right, at the Company’s option, to redeem (a
“Mandatory Call Redemption”) all, but not less than all, of the Preferred Shares
at a price per Preferred Share equal the outstanding Conversion Amount for such
Preferred Share (the “Call Redemption Price”) and (y) upon the occurrence of a
Change of Control of the Company with aggregate consideration to be paid to the
holders of capital stock of the Company solely consisting of cash (a “Cash
Change of Control Event”), the Company shall have the right, at the Company’s
option, to redeem (a “Mandatory Cash Change of Control Redemption”, and together
with the Mandatory Call Redemption, a “Mandatory Redemption”) all, but not less
than all, of the Preferred Shares at a price per Preferred Share in cash equal
to the greater of (i) the product (x) the sum of the Conversion Amount being
redeemed together with any accrued but unpaid Dividends per Preferred Share and
(y) the quotient determined by dividing (A) the Closing Sale Price of the Common
Stock immediately following the public announcement of such proposed Change of
Control by (B) the Conversion Price and (ii) 115% of the sum of the Conversion
Amount being redeemed together with any accrued but unpaid Dividends per
Preferred Share (the “Mandatory Cash Change of Control Redemption Price”, and
together with the Call Redemption Price, the “Mandatory Redemption Price”)

(i) Mechanics of Mandatory Redemption. At any time after the Call Date or upon a
Cash Change of Control Event, the Company may redeem all of the outstanding
Preferred Shares by delivering written notice thereof via facsimile and
overnight courier (“Notice of Mandatory Redemption”) to the Holders, which
Notice of Mandatory Redemption shall indicate the date of such redemption (the
“Mandatory Redemption Date”) and the applicable Mandatory Redemption Price (the
date of such Notice, the “Notice of Mandatory Redemption Date”). The Notice of
Mandatory Redemption shall state (i) the Trading Day selected for the Mandatory
Redemption in accordance with Section 9(b), which Trading Day shall be at least
twenty (20) Business Days but not more than sixty (60) Business Days following
the Notice of Mandatory Redemption Date (the “Mandatory Redemption Date”),
(ii) the number of Preferred Shares of such Holder subject to the Mandatory
Redemption, (ii) the aggregate Conversion Amount of the Preferred Shares subject
to Mandatory Redemption from all of the holders of the Preferred Shares pursuant
to this Section 9 and (iv) the number of shares of Common Stock to be issued to
such Holder on the Mandatory Redemption Date.

(ii) Disputes; Miscellaneous. In the event of a dispute as to the determination
of the arithmetic calculation of the Call Redemption Price, such dispute

 

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shall be resolved pursuant to Section 2(d)(iii) above with the term “Call
Redemption Price” being substituted for the term “Conversion Rate”.

(c) Pro Rata Conversion and Redemption Requirements.

(i) If the Company elects to cause a conversion of any Conversion Amount of
Preferred Shares pursuant to Section 9(a) or any redemption of Preferred Shares
pursuant to Section 9(b), then it must simultaneously take the same action in
the same proportion with respect to all Preferred Shares.

(ii) All Conversion Amounts converted by the Holder after the Mandatory
Conversion Notice Date shall reduce the Conversion Amount required to be
converted on the Mandatory Conversion Date. If the Company has elected a
Mandatory Conversion, the mechanics of conversion set forth in Section 2(d)
shall apply, to the extent applicable, as if the Company and the Transfer Agent
had received from the Holder on the Mandatory Conversion Date a Conversion
Notice with respect to the Conversion Amount being converted pursuant to the
Mandatory Conversion.

(10) Liquidation, Dissolution, Winding-Up. In the event of a Liquidation Event,
the Holders shall be entitled to receive in cash out of the assets of the
Company, whether from capital or from earnings available for distribution to its
shareholders (the “Liquidation Funds”), before any amount shall be paid to the
holders of any of the capital shares of the Company of any class junior in rank
to the Preferred Shares in respect of the preferences as to distributions and
payments on the liquidation, dissolution and winding up of the Company, an
amount per Preferred Share equal to the Conversion Amount; provided that, if the
Liquidation Funds are insufficient to pay the full amount due to the Holders and
holders of shares of other classes or series of preferred shares of the Company
that are of equal rank with the Preferred Shares as to payments of Liquidation
Funds (the “Pari Passu Shares”), then each Holder and Pari Passu Shares shall
receive a percentage of the Liquidation Funds equal to the full amount of
Liquidation Funds payable to such Holder as a liquidation preference, in
accordance with their respective certificate of designations (or equivalent), as
a percentage of the full amount of Liquidation Funds payable to all holders of
Preferred Shares and Pari Passu Shares. To the extent necessary, the Company
shall cause such actions to be taken by any of its Subsidiaries so as to enable,
to the maximum extent permitted by law, the proceeds of a Liquidation Event to
be distributed to the Holders in accordance with this Section. All the
preferential amounts to be paid to the Holders under this Section shall be paid
or set apart for payment before the payment or setting apart for payment of any
amount for, or the distribution of any Liquidation Funds of the Company to the
holders of shares of other classes or series of preferred shares of the Company
junior in rank to the Preferred Shares in connection with a Liquidation Event as
to which this Section applies. The purchase or redemption by the Company of
shares of any class, in any manner permitted by law, shall not, for the purposes
hereof, be regarded as a Liquidation Event.

(11) Preferred Rank. All Common Stock shall be of junior rank to all Preferred
Shares with respect to the preferences as to dividends, distributions and
payments upon the liquidation, dissolution and winding up of the Company. The
rights of the Common Stock shall be subject to the preferences and relative
rights of the Preferred Shares. Without the prior express written consent of the
Required Holders, the Company shall not hereafter authorize or issue

 

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additional or other capital shares that is of senior or pari-passu rank to the
Preferred Shares in respect of the preferences as to distributions and payments
upon the liquidation, dissolution and winding up of the Company. The Company
shall be permitted to issue preferred shares that are junior in rank to the
Preferred Shares in respect of the preferences as to distributions and payments
upon the liquidation, dissolution and winding up of the Company, provided that
the maturity date (or any other date requiring redemption or repayment of such
preferred shares) of any such junior preferred shares are not on or before the
Maturity Date. In the event of the merger or consolidation of the Company with
or into another corporation, the Preferred Shares shall maintain their relative
powers, designations and preferences provided for herein (except that the
Preferred Shares may be pari passu with, but not junior to, any capital shares
of the successor entity) and no merger shall result inconsistent therewith.

(12) Participation. The Holders shall, as holders of Preferred Shares, be
entitled to such dividends paid and distributions made to the holders of Common
Stock to the same extent as if such Holders had converted the Preferred Shares
into Common Stock (without regard to any limitations on conversion herein or
elsewhere) and had held such Common Stock on the record date for such dividends
and distributions. Payments under the preceding sentence shall be made
concurrently with the dividend or distribution to the holders of Common Stock.

(13) Leverage Ratio Test. So long as any Preferred Shares remain outstanding,
the Company shall not allow the Leverage Ratio to exceed the following ratios
for the following periods:

 

Periods

   Maximum
Leverage Ratio

Subscription Date to June 30, 2007

   6.50x

July 1, 2007 to September 30, 2007

   6.25x

October 1, 2007 to December 31, 2007

   6.00x

January 1, 2008 to March 31, 2008

   6.00x

April 1, 2008 to June 30, 2008

   5.50x

July 1, 2008 to September 30, 2008

   5.50x

September 31, 2008 and thereafter

   5.00x

(14) Limitation on Number of Conversion Shares. Notwithstanding anything to the
contrary contained herein, the Company shall not be obligated to issue any
shares of Common Stock upon conversion of the Preferred Shares or exercise of
the Warrants if the issuance of such Common Stock would exceed that number of
shares of Common Stock which the Company may issue upon conversion of the
Preferred Shares without breaching the Company’s obligations under the rules or
regulations of the Principal Market (the “Exchange Cap”), except that such
limitation shall not apply in the event that the Company (a) obtains the
approval of its shareholders as required by the applicable rules of the
Principal Market (or any successor rule or regulation) for issuances of Common
Stock in excess of such amount, or (b) obtains a written opinion from outside
counsel to the Company that such approval is not required, which opinion shall
be reasonably satisfactory to the Required Holders. Until such approval or
written opinion is obtained, no purchaser of Preferred Shares pursuant to the
Securities Purchase Agreement (the “Purchasers”) shall be issued, in the
aggregate, upon conversion of Preferred

 

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Shares or exercise of the Warrants, shares of Common Stock in an amount greater
than the product of (i) the Exchange Cap amount multiplied by (ii) a fraction,
the numerator of which is the number of Preferred Shares issued to such
Purchaser pursuant to the Securities Purchase Agreement on the Initial Issuance
Date and the denominator of which is the aggregate amount of all the Preferred
Shares issued to the Purchasers pursuant to the Securities Purchase Agreement on
the Initial Issuance Date (the “Exchange Cap Allocation”). In the event that any
Purchaser shall sell or otherwise transfer any of such Purchaser’s Preferred
Shares, the transferee shall be allocated a pro rata portion of such Purchaser’s
Exchange Cap Allocation. In the event that any Holder shall convert all of such
Holder’s Preferred Shares into a number of shares of Common Stock which, in the
aggregate, is less than such Holder’s Exchange Cap Allocation, then the
difference between such Holder’s Exchange Cap Allocation and the number of
shares of Common Stock actually issued to such Holder shall be allocated to the
respective Exchange Cap Allocations of the remaining Holders on a pro rata basis
in proportion to the number of Preferred Shares then held by each such Holder.

(15) Vote to Change the Terms of or Issue Preferred Shares. In addition to any
other rights provided by law, except where the vote or written consent of the
holders of a greater number of shares is required by law or by another provision
of the Certificate of Incorporation, without first obtaining the affirmative
vote at a meeting duly called for such purpose or the written consent without a
meeting of the Required Holders, voting together as a single class, the Company
shall not: (u) amend or repeal any provision of, or add any provision to, the
Articles of Incorporation or bylaws, or file any certificate of designations or
articles of amendment of any series of preferred shares, if such action would
adversely alter or change the preferences, rights, privileges or powers of, or
restrictions provided for the benefit of the Preferred Shares, regardless of
whether any such action shall be by means of amendment to the Articles of
Incorporation or by merger, consolidation or otherwise; (v) increase or decrease
(other than by conversion) the authorized number of shares of the Preferred
Shares; (w) create or authorize (by reclassification or otherwise) any new class
or series of shares that has a preference over or is on a parity with the
Preferred Shares with respect to dividends or the distribution of assets on the
liquidation, dissolution or winding up of the Company; (x) purchase, repurchase
or redeem any shares of Common Stock (other than pursuant to equity incentive
agreements with employees giving the Company the right to repurchase shares upon
the termination of services); (y) pay dividends or make any other distribution
on the Common Stock; or (z) whether or not prohibited by the terms of the
Preferred Shares, circumvent a right of the Preferred Shares.

(16) Lost or Stolen Certificates. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of any Preferred Share Certificates representing the Preferred
Shares, and, in the case of loss, theft or destruction, of an indemnification
undertaking by the Holder to the Company in customary form and, in the case of
mutilation, upon surrender and cancellation of the Preferred Share
Certificate(s), the Company shall execute and deliver new Preferred Share
Certificate(s) of like tenor and date; provided, however, the Company shall not
be obligated to re-issue Preferred Share Certificates if the Holder
contemporaneously requests the Company to convert such Preferred Shares into
shares of Common Stock.

(17) Remedies, Characterizations, Other Obligations, Breaches and Injunctive
Relief. The remedies provided in this Certificate of Designations shall be
cumulative and in

 

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addition to all other remedies available under this Certificate of Designations,
at law or in equity (including a decree of specific performance and/or other
injunctive relief). No remedy contained herein shall be deemed a waiver of
compliance with the provisions giving rise to such remedy. Nothing herein shall
limit a Holder’s right to pursue actual damages for any failure by the Company
to comply with the terms of this Certificate of Designations. The Company
covenants to each Holder that there shall be no characterization concerning this
instrument other than as expressly provided herein. Amounts set forth or
provided for herein with respect to payments, conversion and the like (and the
computation thereof) shall be the amounts to be received by the Holder thereof
and shall not, except as expressly provided herein, be subject to any other
obligation of the Company (or the performance thereof). The Company acknowledges
that a breach by it of its obligations hereunder will cause irreparable harm to
the Holders and that the remedy at law for any such breach may be inadequate.
The Company therefore agrees that, in the event of any such breach or threatened
breach, the Holders shall be entitled, in addition to all other available
remedies, to an injunction restraining any breach, without the necessity of
showing economic loss and without any bond or other security being required.

(18) Construction. This Certificate of Designations shall be deemed to be
jointly drafted by the Company and all Buyers and shall not be construed against
any person as the drafter hereof.

(19) Failure or Indulgence Not Waiver. No failure or delay on the part of a
Holder in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privilege.

(20) Notice. Whenever notice is required to be given under this Certificate of
Designations, unless otherwise provided herein, such notice shall be given in
accordance with Section 9(f) of the Securities Purchase Agreement (provided that
if the Preferred Shares are not held by a Buyer (as defined in the Securities
Purchase Agreement) then substituting the words “holder of Securities” for the
word “Buyer”).

(21) Transfer of Preferred Shares. A Holder may assign some or all of the
Preferred Shares and the accompanying rights hereunder held by such Holder
without the consent of the Company; provided that such assignment is in
compliance with applicable securities laws.

(22) Preferred Share Register. The Company shall maintain at its principal
executive offices (or such other office or agency of the Company as it may
designate by notice to the Holders), a register for the Preferred Shares, in
which the Company shall record the name and address of the persons in whose name
the Preferred Shares have been issued, as well as the name and address of each
transferee. The Company may treat the person in whose name any Preferred Share
is registered on the register as the owner and holder thereof for all purposes,
notwithstanding any notice to the contrary, but in all events recognizing any
properly made transfers.

(23) Shareholder Matters. Any shareholder action, approval or consent required,
desired or otherwise sought by the Company pursuant to the rules and regulations
of the Principal Market, the Florida General Corporation Act, this Certificate
of Designation or

 

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otherwise with respect to the issuance of the Preferred Shares or the Common
Stock issuable upon conversion thereof or the issuance of any Warrants and the
Common Stock issuable upon exercise thereof may be effected by written consent
of the Company’s shareholders or at a duly called meeting of the Company’s
shareholders, all in accordance with the applicable rules and regulations of the
Principal Market and the Florida General Corporation Act. This provision is
intended to comply with the applicable sections of the Florida General
Corporation Act permitting shareholder action, approval and consent affected by
written consent in lieu of a meeting.

(24) Involuntary Bankruptcy. So long as the CapitalSource Credit Agreements
remains outstanding, no holder of Preferred Shares shall institute proceedings
to have the Company adjudicated bankrupt or insolvent, or consent to the
institution of bankruptcy or insolvency proceedings against the Company.

(25) Disclosure. Upon receipt or delivery by the Company of any notice in
accordance with the terms of this Certificate of Designations, unless the
Company has in good faith determined that the matters relating to such notice do
not constitute material, nonpublic information relating to the Company or its
Subsidiaries, the Company shall within one (1) Business Day after any such
receipt or delivery publicly disclose such material, nonpublic information on a
Current Report on Form 8-K or otherwise. In the event that the Company believes
that a notice contains material, nonpublic information relating to the Company
or its Subsidiaries, the Company so shall indicate to the Holders
contemporaneously with delivery of such notice, and in the absence of any such
indication, the Holders shall be allowed to presume that all matters relating to
such notice do not constitute material, nonpublic information relating to the
Company or its Subsidiaries.

* * * * *

 

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IN WITNESS WHEREOF, the Company has caused this Certificate of Designations to
be signed by [NAME], its [OFFICE], as of the ____ day of ________, 2006

 

DEVCON INTERNATIONAL CORP.

By:

           

Name:

   

Title:

 

 

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EXHIBIT I

DEVCON INTERNATIONAL CORP. CONVERSION NOTICE

Reference is made to the Certificate of Designations of Series A Convertible
Preferred Shares of Devcon International Corp. (the “Certificate of
Designations”). In accordance with and pursuant to the Certificate of
Designations, the undersigned hereby elects to convert the number of shares of
Series A Convertible Preferred Shares, par value $0.10 per share (the “Preferred
Shares”), of Devcon International Corp., a Florida corporation (the “Company”),
indicated below into shares of Common Stock, par value $0.10 per share (the
“Common Stock”), of the Company, as of the date specified below.

Date of
Conversion:_________________________________________________________________________

Number of Preferred Shares to be
converted:_______________________________________________________

Share certificate no(s). of Preferred Shares to be
converted:____________________________________________

Tax ID Number (If
applicable):__________________________________________________________________

Please confirm the following
information:________________________________________________________________

Conversion
Price:___________________________________________________________________________

Number of shares of Common Stock to be
issued:____________________________________________________

Please issue the Common Stock into which the Preferred Shares are being
converted in the following name and to the following address:

 

Issue to:

         

Address:

    

Telephone Number:

    

Facsimile Number:

    

Authorization:

    

By:

    

Title:

    

Dated:

 

Account Number (if electronic book entry transfer):
_____________________________________

Transaction Code Number (if electronic book entry
transfer):______________________________

Installment Amounts to be reduced and amount of reduction:
______________________________

 

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[NOTE TO HOLDER — THIS FORM MUST BE SENT CONCURRENTLY TO TRANSFER AGENT]

 

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ACKNOWLEDGMENT

The Company hereby acknowledges this Conversion Notice and hereby directs
[                                ] to issue the above-indicated number of shares
of Common Stock in accordance with the Irrevocable Transfer Agent Instructions
dated February __, 2006 from the Company and acknowledged and agreed to by
[                            ].

 

DEVCON INTERNATIONAL CORP.

By:

    

Name:

    

Title:

    

 

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EXHIBIT C

 

[FORM OF WARRANT]

 

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISEABLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID
ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED
BY THE SECURITIES.

 

DEVCON INTERNATIONAL CORP.

 

WARRANT TO PURCHASE COMMON STOCK

 

Warrant No.:___________

Number of Shares of Common Stock:_____________

Date of Issuance: February __, 2006 (“Issuance Date”)

 

Devcon International Corp., a Florida corporation (the “Company”), hereby
certifies that, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, [STEELHEAD INVESTMENTS LTD.] [CASTLERIGG
MASTER INVESTMENTS LTD.] [CS EQUITY II LLC], the registered holder hereof or its
permitted assigns (the “Holder”), is entitled, subject to the terms set forth
below, to purchase from the Company, at the Exercise Price (as defined below)
then in effect, upon surrender of this Warrant to Purchase Common Stock
(including any Warrants to Purchase Common Stock issued in exchange, transfer or
replacement hereof, the “Warrant”), at any time or times on or after the date
hereof, but not after 11:59 p.m., New York Time, on the Expiration Date (as
defined below), [1,284,067][256,813][110,063] fully paid nonassessable shares of
Common Stock (as defined below) (the “Warrant Shares”). Except as otherwise
defined herein, capitalized terms in this Warrant shall have the meanings set
forth in Section 15. This Warrant is one of the Warrants to purchase Common
Stock (the “SPA Warrants”) issued pursuant to Section 1 of that certain
Securities Purchase Agreement, dated as of February 10, 2006 (the “Subscription
Date”), by and among the Company and the investors (the “Buyers”) referred to
therein (the “Securities Purchase Agreement”).

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

1. EXERCISE OF WARRANT.

 

(a) Mechanics of Exercise. Subject to the terms and conditions hereof
(including, without limitation, the limitations set forth in Section 1(f)), this
Warrant may be exercised by the Holder on any day on or after the date hereof,
in whole or in part, by (i) delivery of a written notice, in the form attached
hereto as Exhibit A (the “Exercise Notice”), of the Holder’s election to
exercise this Warrant and (ii) (A) payment to the Company of an amount equal to
the applicable Exercise Price multiplied by the number of Warrant Shares as to
which this Warrant is being exercised (the “Aggregate Exercise Price”) in cash
or wire transfer of immediately available funds or (B) by notifying the Company
that this Warrant is being exercised pursuant to a Cashless Exercise (as defined
in Section 1(d)). The Holder shall not be required to deliver the original
Warrant in order to effect an exercise hereunder. Execution and delivery of the
Exercise Notice with respect to less than all of the Warrant Shares shall have
the same effect as cancellation of the original Warrant and issuance of a new
Warrant evidencing the right to purchase the remaining number of Warrant Shares.
On or before the first Business Day following the date on which the Company has
received each of the Exercise Notice and the Aggregate Exercise Price (or notice
of a Cashless Exercise) (the “Exercise Delivery Documents”), the Company shall
transmit by facsimile an acknowledgment of confirmation of receipt of the
Exercise Delivery Documents to the Holder and the Company’s transfer agent (the
“Transfer Agent”). On or before the second Business Day following the date on
which the Company has received all of the Exercise Delivery Documents (the
“Share Delivery Date”), the Company shall (X) provided that the Transfer Agent
is participating in The Depository Trust Company (“DTC”) Fast Automated
Securities Transfer Program, upon the request of the Holder, credit such
aggregate number of shares of Common Stock to which the Holder is entitled
pursuant to such exercise to the Holder’s or its designee’s balance account with
DTC through its Deposit Withdrawal Agent Commission system, or (Y) if the
Transfer Agent is not participating in the DTC Fast Automated Securities
Transfer Program, issue and dispatch by overnight courier to the address as
specified in the Exercise Notice, a certificate, registered in the Company’s
share register in the name of the Holder or its designee, for the number of
shares of Common Stock to which the Holder is entitled pursuant to such
exercise. Upon delivery of the Exercise Notice and Aggregate Exercise Price
referred to in clause (ii)(A) above or notification to the Company of a Cashless
Exercise referred to in Section 1(d), the Holder shall be deemed for all
corporate purposes to have become the holder of record of the Warrant Shares
with respect to which this Warrant has been exercised, irrespective of the date
of delivery of the certificates evidencing such Warrant Shares. If this Warrant
is submitted in connection with any exercise pursuant to this Section 1(a) and
the number of Warrant Shares represented by this Warrant submitted for exercise
is greater than the number of Warrant Shares being acquired upon an exercise,
then the Company shall as soon as practicable and in no event later than five
Business Days after any exercise and at its own expense, issue a new Warrant (in
accordance with Section 7(d)) representing the right to purchase the number of
Warrant Shares purchasable immediately prior to such exercise under this
Warrant, less the number of Warrant Shares with respect to which this Warrant is
exercised. No fractional shares of Common Stock are to be issued upon the
exercise of this Warrant, but rather the number of shares of Common Stock to be
issued shall be rounded to the nearest whole number. The Company shall pay any
and all taxes which may be payable with respect to the issuance and delivery of
Warrant Shares upon exercise of this Warrant. Notwithstanding the foregoing,
until such time as the Shareholder Approval (as defined in the

 

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Securities Purchase Agreement), the maximum number of Warrant Shares issuable
upon exercise of this Warrant shall be [933,395][186,679][80,005] (subject to
adjustment for stock splits, stock dividends, reverse stock splits,
reclassifications, recapitalizations and similar events after the Subscription
Date).

 

(b) Exercise Price. For purposes of this Warrant, “Exercise Price” means
$11.925, subject to adjustment as provided herein.

 

(c) Company’s Failure to Timely Deliver Securities. If the Company shall fail
for any reason or for no reason to issue to the Holder within five (5) Business
Days of receipt of the Exercise Delivery Documents, a certificate for the number
of shares of Common Stock to which the Holder is entitled and register such
shares of Common Stock on the Company’s share register or to credit the Holder’s
balance account with DTC for such number of shares of Common Stock to which the
Holder is entitled upon the Holder’s exercise of this Warrant, then, in addition
to all other remedies available to the Holder, the Company shall pay in cash to
the Holder on each day after such fifth Business Day that the issuance of such
shares of Common Stock is not timely effected an amount equal to 1.5% of the
product of (A) the sum of the number of shares of Common Stock not issued to the
Holder on a timely basis and to which the Holder is entitled and (B) the Closing
Sale Price of the shares of Common Stock on the trading day immediately
preceding the last possible date which the Company could have issued such shares
of Common Stock to the Holder without violating Section 1(a). In addition to the
foregoing, if within three (3) trading days after the Company’s receipt of the
facsimile copy of a Exercise Notice the Company shall fail to issue and deliver
a certificate to the Holder and register such shares of Common Stock on the
Company’s share register or credit the Holder’s balance account with DTC for the
number of shares of Common Stock to which the Holder is entitled upon such
holder’s exercise hereunder, and if on or after such Trading Day the Holder
purchases (in an open market transaction or in another bona fide transaction)
shares of Common Stock to deliver in satisfaction of a sale by the Holder of
shares of Common Stock issuable upon such exercise that the Holder anticipated
receiving from the Company (a “Buy-In”), then the Company shall, within three
Business Days after the Holder’s request and in the Holder’s discretion, either
(i) pay cash to the Holder in an amount equal to the Holder’s total purchase
price (including brokerage commissions, if any) for the shares of Common Stock
so purchased (the “Buy-In Price”), at which point the Company’s obligation to
deliver such certificate (and to issue such shares of Common Stock) shall
terminate, or (ii) promptly honor its obligation to deliver to the Holder a
certificate or certificates representing such shares of Common Stock and pay
cash to the Holder in an amount equal to the excess (if any) of the Buy-In Price
over the product of (A) such number of shares of Common Stock, times (B) the
Closing Bid Price on the date of exercise.

 

(d) Cashless Exercise. Notwithstanding anything contained herein to the
contrary, if a Registration Statement (as defined in the Registration Rights
Agreement) covering the Warrant Shares that are the subject of the Exercise
Notice (the “Unavailable Warrant Shares”) is not available for the resale of
such Unavailable Warrant Shares, the Holder may, in its sole discretion,
exercise this Warrant in whole or in part and, in lieu of making the cash
payment otherwise contemplated to be made to the Company upon such exercise in
payment of the Aggregate Exercise Price, elect instead to receive upon such
exercise the “Net Number” of

 

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shares of Common Stock determined according to the following formula (a
“Cashless Exercise”):

 

Net Number

   =    (A x B) - (A x C)          

B

 

For purposes of the foregoing formula:

 

A= the total number of shares with respect to which this Warrant is then being
exercised.

 

B= the Closing Sale Price of the shares of Common Stock (as reported by
Bloomberg) on the date immediately preceding the date of the Exercise Notice.

 

C= the Exercise Price then in effect for the applicable Warrant Shares at the
time of such exercise.

 

(e) Disputes. In the case of a dispute as to the determination of the Exercise
Price or the arithmetic calculation of the Warrant Shares, the Company shall
promptly issue to the Holder the number of Warrant Shares that are not disputed
and resolve such dispute in accordance with Section 12.

 

(f) Limitations on Exercises.

 

(i) Beneficial Ownership. The Company shall not effect the exercise of this
Warrant, and the Holder shall not have the right to exercise this Warrant, to
the extent that after giving effect to such exercise, such Person (together with
such Person’s affiliates) would beneficially own in excess of 9.99%1 of the
shares of Common Stock outstanding immediately after giving effect to such
exercise. For purposes of the foregoing sentence, the aggregate number of shares
of Common Stock beneficially owned by such Person and its affiliates shall
include the number of shares of Common Stock issuable upon exercise of this
Warrant with respect to which the determination of such sentence is being made,
but shall exclude shares of Common Stock which would be issuable upon
(i) exercise of the remaining, unexercised portion of this Warrant beneficially
owned by such Person and its affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Company
beneficially owned by such Person and its affiliates (including, without
limitation, any convertible notes or convertible preferred stock or warrants)
subject to a limitation on conversion or exercise analogous to the limitation
contained herein. Except as set forth in the preceding sentence, for purposes of
this paragraph, beneficial ownership shall be calculated in accordance with

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

1 [4.99% for Castlerigg Master Investments Ltd. and Capital Sources.]

 

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Section 13(d) of the Securities Exchange Act of 1934, as amended. For purposes
of this Warrant, in determining the number of outstanding shares of Common
Stock, the Holder may rely on the number of outstanding shares of Common Stock
as reflected in (1) the Company’s most recent Form 10-K, Form 10-Q, Current
Report on Form 8-K or other public filing with the Securities and Exchange
Commission, as the case may be, (2) a more recent public announcement by the
Company or (3) any other notice by the Company or the Transfer Agent setting
forth the number of shares of Common Stock outstanding. For any reason at any
time, upon the written or oral request of the Holder, the Company shall within
two (2) Business Day confirm orally and in writing to the Holder the number of
shares of Common Stock then outstanding. In any case, the number of outstanding
shares of Common Stock shall be determined after giving effect to the conversion
or exercise of securities of the Company, including the SPA Securities and the
SPA Warrants, by the Holder and its affiliates since the date as of which such
number of outstanding shares of Common Stock was reported. By written notice to
the Company, the Holder may increase or decrease the Maximum Percentage to any
other percentage not in excess of 9.99% specified in such notice; provided that
(i) any such increase will not be effective until the sixty-first (61st) day
after such notice is delivered to the Company, and (ii) any such increase or
decrease will apply only to the Holder and not to any other holder of SPA
Warrants.

 

(ii) Principal Market Regulation. The Company shall not be obligated to issue
any shares of Common Stock upon exercise of this Warrant if the issuance of such
shares of Common Stock would exceed that number of shares of Common Stock which
the Company may issue upon exercise or conversion, as applicable, of the SPA
Warrants and SPA Securities or otherwise without breaching the Company’s
obligations under the rules or regulations of the Principal Market (the
“Exchange Cap”), except that such limitation shall not apply in the event that
the Company (A) obtains the approval of its shareholders as required by the
applicable rules of the Principal Market for issuances of shares of Common Stock
in excess of such amount or (B) obtains a written opinion from outside counsel
to the Company that such approval is not required, which opinion shall be
reasonably satisfactory to the Required Holders. Until such approval or written
opinion is obtained, no Buyer shall be issued in the aggregate, upon exercise or
conversion, as applicable, of any SPA Warrants or SPA Securities, shares of
Common Stock in an amount greater than the product of the Exchange Cap
multiplied by a fraction, the numerator of which is the total number of shares
of Common Stock underlying the SPA Warrants issued to such Buyer pursuant to the
Securities Purchase Agreement on the Issuance Date and the denominator of which
is the aggregate number of shares of Common Stock underlying the SPA Warrants
issued to the Buyers pursuant to the Securities Purchase

 

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Agreement on the Issuance Date (with respect to each Buyer, the “Exchange Cap
Allocation”). In the event that any Buyer shall sell or otherwise transfer any
of such Buyer’s SPA Warrants, the transferee shall be allocated a pro rata
portion of such Buyer’s Exchange Cap Allocation, and the restrictions of the
prior sentence shall apply to such transferee with respect to the portion of the
Exchange Cap Allocation allocated to such transferee. In the event that any
holder of SPA Warrants shall exercise all of such holder’s SPA Warrants into a
number of shares of Common Stock which, in the aggregate, is less than such
holder’s Exchange Cap Allocation, then the difference between such holder’s
Exchange Cap Allocation and the number of shares of Common Stock actually issued
to such holder shall be allocated to the respective Exchange Cap Allocations of
the remaining holders of SPA Warrants on a pro rata basis in proportion to the
shares of Common Stock underlying the SPA Warrants then held by each such
holder. In the event that the Company is prohibited from issuing any Warrant
Shares for which an Exercise Notice has been received as a result of the
operation of this Section 1(f)(ii), the Company shall pay cash in exchange for
cancellation of such Warrant Shares, at a price per Warrant Share equal to the
difference between the Closing Sale Price and the Exercise Price as of the date
of the attempted exercise.

 

2. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The Exercise Price
and the number of Warrant Shares shall be adjusted from time to time as follows:

 

(a) Adjustment upon Issuance of shares of Common Stock. If and whenever on or
after the Subscription Date the Company issues or sells, or in accordance with
this Section 2 is deemed to have issued or sold, any shares of Common Stock
(including the issuance or sale of shares of Common Stock owned or held by or
for the account of the Company, but excluding Excluded Securities (as defined in
the SPA Securities) for a consideration per share less than a price (the
“Applicable Price”) equal to the Exercise Price in effect immediately prior to
such issue or sale or deemed issuance or sale (the foregoing a “Dilutive
Issuance”), then immediately after such Dilutive Issuance, the Exercise Price
then in effect shall be reduced to an amount equal to the product of (A) the
Exercise Price in effect immediately prior to such Dilutive Issuance and (B) the
quotient determined by dividing (1) the sum of (I) the product derived by
multiplying the Exercise Price in effect immediately prior to such Dilutive
Issuance and the number of Common Stock Deemed Outstanding immediately prior to
such Dilutive Issuance plus (II) the consideration, if any, received by the
Company upon such Dilutive Issuance, by (2) the product derived by multiplying
(I) the Exercise Price in effect immediately prior to such Dilutive Issuance by
(II) the number of Common Stock Deemed Outstanding immediately after such
Dilutive Issuance. Upon each such adjustment of the Exercise Price hereunder,
the number of Warrant Shares shall be adjusted to the number of shares of Common
Stock determined by multiplying the Exercise Price in effect immediately prior
to such adjustment by the number of Warrant Shares acquirable upon exercise of
this Warrant immediately prior to such adjustment and dividing the product
thereof by the Exercise

 

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Price resulting from such adjustment. For purposes of determining the adjusted
Exercise Price under this Section 2(a), the following shall be applicable:

 

(i) Issuance of Options. If the Company in any manner grants any Options and the
lowest price per share for which one share of shares of Common Stock is issuable
upon the exercise of any such Option or upon conversion, exercise or exchange of
any Convertible Securities issuable upon exercise of any such Option is less
than the Applicable Price, then such share of shares of Common Stock shall be
deemed to be outstanding and to have been issued and sold by the Company at the
time of the granting or sale of such Option for such price per share. For
purposes of this Section 2(a)(i), the “lowest price per share for which one
share of shares of Common Stock is issuable upon exercise of such Options or
upon conversion, exercise or exchange of such Convertible Securities” shall be
equal to the sum of the lowest amounts of consideration (if any) received or
receivable by the Company with respect to any one share of shares of Common
Stock upon the granting or sale of the Option, upon exercise of the Option and
upon conversion, exercise or exchange of any Convertible Security issuable upon
exercise of such Option. No further adjustment of the Exercise Price or number
of Warrant Shares shall be made upon the actual issuance of such shares of
Common Stock or of such Convertible Securities upon the exercise of such Options
or upon the actual issuance of such shares of Common Stock upon conversion,
exercise or exchange of such Convertible Securities.

 

(ii) Issuance of Convertible Securities. If the Company in any manner issues or
sells any Convertible Securities and the lowest price per share for which one
share of shares of Common Stock is issuable upon the conversion, exercise or
exchange thereof is less than the Applicable Price, then such share of shares of
Common Stock shall be deemed to be outstanding and to have been issued and sold
by the Company at the time of the issuance or sale of such Convertible
Securities for such price per share. For the purposes of this Section 2(a)(ii),
the “lowest price per share for which one share of shares of Common Stock is
issuable upon the conversion, exercise or exchange” shall be equal to the sum of
the lowest amounts of consideration (if any) received or receivable by the
Company with respect to one share of shares of Common Stock upon the issuance or
sale of the Convertible Security and upon conversion, exercise or exchange of
such Convertible Security. No further adjustment of the Exercise Price or number
of Warrant Shares shall be made upon the actual issuance of such shares of
Common Stock upon conversion, exercise or exchange of such Convertible
Securities, and if any such issue or sale of such Convertible Securities is made
upon exercise of any Options for which adjustment of this Warrant has been or is
to be made pursuant to other provisions of this Section 2(a), no further
adjustment of the Exercise

 

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Price or number of Warrant Shares shall be made by reason of such issue or sale.

 

(iii) Change in Option Price or Rate of Conversion. If the purchase price
provided for in any Options, the additional consideration, if any, payable upon
the issue, conversion, exercise or exchange of any Convertible Securities, or
the rate at which any Convertible Securities are convertible into or exercisable
or exchangeable for shares of Common Stock increases or decreases at any time,
the Exercise Price and the number of Warrant Shares in effect at the time of
such increase or decrease shall be adjusted to the Exercise Price and the number
of Warrant Shares which would have been in effect at such time had such Options
or Convertible Securities provided for such increased or decreased purchase
price, additional consideration or increased or decreased conversion rate, as
the case may be, at the time initially granted, issued or sold. For purposes of
this Section 2(a)(iii), if the terms of any Option or Convertible Security that
was outstanding as of the date of issuance of this Warrant are increased or
decreased in the manner described in the immediately preceding sentence, then
such Option or Convertible Security and the shares of Common Stock deemed
issuable upon exercise, conversion or exchange thereof shall be deemed to have
been issued as of the date of such increase or decrease. No adjustment pursuant
to this Section 2(a) shall be made if such adjustment would result in an
increase of the Exercise Price then in effect or a decrease in the number of
Warrant Shares.

 

(iv) Calculation of Consideration Received. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options will be deemed to
have been issued for a consideration of $0.01. If any shares of Common Stock,
Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor will be deemed to
be the net amount received by the Company therefor. If any shares of Common
Stock, Options or Convertible Securities are issued or sold for a consideration
other than cash, the amount of such consideration received by the Company will
be the fair value of such consideration, except where such consideration
consists of securities, in which case the amount of consideration received by
the Company will be the Closing Sale Price of such security on the date of
receipt. If any shares of Common Stock, Options or Convertible Securities are
issued to the owners of the non-surviving entity in connection with any merger
in which the Company is the surviving entity, the amount of consideration
therefor will be deemed to be the fair value of such portion of the net assets
and business of the non-surviving entity as is attributable to such shares of
Common Stock,

 

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Options or Convertible Securities, as the case may be. The fair value of any
consideration other than cash or securities will be determined jointly by the
Company and the Required Holders. If such parties are unable to reach agreement
within ten (10) days after the occurrence of an event requiring valuation (the
“Valuation Event”), the fair value of such consideration will be determined
within five (5) Business Days after the tenth day following the Valuation Event
by an independent, reputable appraiser jointly selected by the Company and the
Required Holders. The determination of such appraiser shall be final and binding
upon all parties absent manifest error and the fees and expenses of such
appraiser shall be borne by the Company.

 

(v) Record Date. If the Company takes a record of the holders of shares of
Common Stock for the purpose of entitling them (A) to receive a dividend or
other distribution payable in shares of Common Stock, Options or in Convertible
Securities or (B) to subscribe for or purchase shares of Common Stock, Options
or Convertible Securities, then such record date will be deemed to be the date
of the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.

 

(b) Adjustment upon Subdivision or Combination of shares of Common Stock. If the
Company at any time on or after the Subscription Date subdivides (by any stock
split, stock dividend, recapitalization or otherwise) one or more classes of its
outstanding shares of Common Stock into a greater number of shares, the Exercise
Price in effect immediately prior to such subdivision will be proportionately
reduced and the number of Warrant Shares will be proportionately increased. If
the Company at any time on or after the Subscription Date combines (by
combination, reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the Exercise
Price in effect immediately prior to such combination will be proportionately
increased and the number of Warrant Shares will be proportionately decreased.
Any adjustment under this Section 2(b) shall become effective at the close of
business on the date the subdivision or combination becomes effective.

 

(c) Other Events. If any event occurs of the type contemplated by the provisions
of this Section 2 but not expressly provided for by such provisions (including,
without limitation, the granting of stock appreciation rights, phantom stock
rights or other rights with equity features), then the Company’s Board of
Directors will make an appropriate adjustment in the Exercise Price and the
number of Warrant Shares so as to protect the rights of the Holder; provided
that no such adjustment pursuant to this Section 2(c) will increase the Exercise
Price or decrease the number of Warrant Shares as otherwise determined pursuant
to this Section 2.

 

3. RIGHTS UPON DISTRIBUTION OF ASSETS. If the Company shall declare or make any
dividend or other distribution of its assets (or rights to acquire its assets)
to

 

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holders of shares of Common Stock, by way of return of capital or otherwise
(including, without limitation, any distribution of cash, stock or other
securities, property or options by way of a dividend, spin off,
reclassification, corporate rearrangement, scheme of arrangement or other
similar transaction) (a “Distribution”), at any time after the issuance of this
Warrant, then, in each such case:

 

(a) any Exercise Price in effect immediately prior to the close of business on
the record date fixed for the determination of holders of shares of Common Stock
entitled to receive the Distribution shall be reduced, effective as of the close
of business on such record date, to a price determined by multiplying such
Exercise Price by a fraction of which (i) the numerator shall be the Closing Bid
Price of the shares of Common Stock on the trading day immediately preceding
such record date minus the value of the Distribution (as determined in good
faith by the Company’s Board of Directors) applicable to one share of shares of
Common Stock, and (ii) the denominator shall be the Closing Bid Price of the
shares of Common Stock on the trading day immediately preceding such record
date; and

 

(b) the number of Warrant Shares shall be increased to a number of shares equal
to the number of shares of Common Stock obtainable immediately prior to the
close of business on the record date fixed for the determination of holders of
shares of Common Stock entitled to receive the Distribution multiplied by the
reciprocal of the fraction set forth in the immediately preceding paragraph (a);
provided that in the event that the Distribution is of shares of Common Stock
(or common stock) (“Other Shares of Common Stock”) of a company whose common
shares are traded on a national securities exchange or a national automated
quotation system, then the Holder may elect to receive a warrant to purchase
Other Shares of Common Stock in lieu of an increase in the number of Warrant
Shares, the terms of which shall be identical to those of this Warrant, except
that such warrant shall be exercisable into the number of shares of Other Shares
of Common Stock that would have been payable to the Holder pursuant to the
Distribution had the Holder exercised this Warrant immediately prior to such
record date and with an aggregate exercise price equal to the product of the
amount by which the exercise price of this Warrant was decreased with respect to
the Distribution pursuant to the terms of the immediately preceding paragraph
(a) and the number of Warrant Shares calculated in accordance with the first
part of this paragraph (b).

 

4. PURCHASE RIGHTS; FUNDAMENTAL TRANSACTIONS.

 

(a) Purchase Rights. In addition to any adjustments pursuant to Section 2 above,
if at any time the Company grants, issues or sells any Options, Convertible
Securities or rights to purchase stock, warrants, securities or other property
pro rata to the record holders of any class of shares of Common Stock (the
“Purchase Rights”), then the Holder will be entitled to acquire, upon the terms
applicable to such Purchase Rights, the aggregate Purchase Rights which the
Holder could have acquired if the Holder had held the number of shares of Common
Stock acquirable upon complete exercise of this Warrant (without regard to any
limitations on the exercise of this Warrant) immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of

 

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which the record holders of shares of Common Stock are to be determined for the
grant, issue or sale of such Purchase Rights.

 

(b) Fundamental Transactions. The Company shall not enter into or be party to a
Fundamental Transaction unless (i) the Successor Entity assumes in writing (with
the purchase of at least a majority of the outstanding shares of the Company’s
Common Stock automatically constituting an assumption in writing) all of the
obligations of the Company under this Warrant and the other Transaction
Documents in accordance with the provisions of this Section (4)(b) pursuant to
written agreements in form and substance reasonably satisfactory to the Required
Holders and approved by the Required Holders prior to such Fundamental
Transaction, including agreements to deliver to each holder of Warrants in
exchange for such Warrants a security of the Successor Entity evidenced by a
written instrument substantially similar in form and substance to this Warrant,
including, without limitation, an adjusted exercise price equal to the value for
the shares of Common Stock reflected by the terms of such Fundamental
Transaction, and exercisable for a corresponding number of shares of capital
stock equivalent to the shares of Common Stock acquirable and receivable upon
exercise of this Warrant (without regard to any limitations on the exercise of
this Warrant) prior to such Fundamental Transaction, and satisfactory to the
Required Holders and (ii) the Successor Entity (including its Parent Entity) is
a publicly traded corporation whose common stock is quoted on or listed for
trading on an Eligible Market. Upon the occurrence of any Fundamental
Transaction, the Successor Entity shall succeed to, and be substituted for (so
that from and after the date of such Fundamental Transaction, the provisions of
this Warrant referring to the “Company” shall refer instead to the Successor
Entity), and may exercise every right and power of the Company and shall assume
all of the obligations of the Company under this Warrant with the same effect as
if such Successor Entity had been named as the Company herein. Upon consummation
of the Fundamental Transaction, the Successor Entity shall deliver to the Holder
confirmation that there shall be issued upon exercise of this Warrant at any
time after the consummation of the Fundamental Transaction, in lieu of the
shares of the Common Stock (or other securities, cash, assets or other property)
purchasable upon the exercise of the Warrant prior to such Fundamental
Transaction, such shares of stock, securities, cash, assets or any other
property whatsoever (including warrants or other purchase or subscription
rights) which the Holder would have been entitled to receive upon the happening
of such Fundamental Transaction had this Warrant been converted immediately
prior to such Fundamental Transaction, as adjusted in accordance with the
provisions of this Warrant. In addition to and not in substitution for any other
rights hereunder, prior to the consummation of any Fundamental Transaction
pursuant to which holders of shares of Common Stock are entitled to receive
securities or other assets with respect to or in exchange for shares of Common
Stock (a “Corporate Event”), the Company shall make appropriate provision to
insure that the Holder will thereafter have the right to receive upon an
exercise of this Warrant at any time after the consummation of the Fundamental
Transaction but prior to the Expiration Date, in lieu of the shares of the
Common Stock (or other securities, cash, assets or other property) purchasable
upon the exercise of the Warrant prior to such Fundamental Transaction, such
shares of stock, securities, cash, assets or any other property whatsoever
(including warrants or other purchase or subscription rights) which the Holder
would have been entitled to receive upon the happening of such Fundamental
Transaction had the Warrant been exercised immediately prior to such Fundamental
Transaction. Provision made pursuant to the preceding sentence shall be in a
form and substance reasonably satisfactory to the

 

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Required Holders. The provisions of this Section shall apply similarly and
equally to successive Fundamental Transactions and Corporate Events and shall be
applied without regard to any limitations on the exercise of this Warrant.

 

(c) Notwithstanding the foregoing and the provisions of Section 4(b) above, in
the event of a Fundamental Transaction where the Successor Entity is not a
Public Successor, if the Holder has not exercised the Warrant in full prior to
the consummation of the Fundamental Transaction, then the Holder shall have the
right to require such Successor Entity to purchase this Warrant from the Holder
by paying to the Holder, simultaneously with the consummation of the Fundamental
Transaction and in lieu of the warrant referred to in Section 4(b), cash in an
amount equal to the value of the remaining unexercised portion of this Warrant
on the date of such consummation, which value shall be determined by use of the
Black and Scholes Option Pricing Model reflecting (i) a risk-free interest rate
corresponding to the U.S. Treasury rate for a period equal to the remaining term
of this Warrant as of such date of request and (ii) an expected volatility equal
to the greater of 60% and the 100 day volatility obtained from the HVT function
on Bloomberg.

 

5. NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company
will not, by amendment of its Articles of Incorporation, Bylaws or through any
reorganization, transfer of assets, consolidation, merger, scheme of
arrangement, dissolution, issue or sale of securities, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Warrant, and will at all times in good faith carry out all the
provisions of this Warrant and take all action as may be required to protect the
rights of the Holder. Without limiting the generality of the foregoing, the
Company (i) shall not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the Exercise Price then in
effect, (ii) shall take all such actions as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this Warrant, and
(iii) shall, so long as any of the SPA Warrants are outstanding, take all action
necessary to reserve and keep available out of its authorized and unissued
shares of Common Stock, solely for the purpose of effecting the exercise of the
SPA Warrants, 120% of the number of shares of Common Stock as shall from time to
time be necessary to effect the exercise of the SPA Warrants then outstanding
(without regard to any limitations on exercise).

 

6. WARRANT HOLDER NOT DEEMED A SHAREHOLDER. Except as otherwise specifically
provided herein, the Holder, solely in such Person’s capacity as a holder of
this Warrant, shall not be entitled to vote or receive dividends or be deemed
the holder of share capital of the Company for any purpose, nor shall anything
contained in this Warrant be construed to confer upon the Holder, solely in such
Person’s capacity as the Holder of this Warrant, any of the rights of a
shareholder of the Company or any right to vote, give or withhold consent to any
corporate action (whether any reorganization, issue of stock, reclassification
of stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings, receive dividends or subscription rights, or otherwise, prior to the
issuance to the Holder of the Warrant Shares which such Person is then entitled
to receive upon the due exercise of this Warrant. In addition, nothing contained
in this Warrant shall be construed as imposing any liabilities on the Holder to
purchase any securities (upon exercise of this Warrant or otherwise) or as a

 

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shareholder of the Company, whether such liabilities are asserted by the Company
or by creditors of the Company. Notwithstanding this Section 6, the Company
shall provide the Holder with copies of the same notices and other information
given to the shareholders of the Company generally, contemporaneously with the
giving thereof to the shareholders.

 

7. REISSUANCE OF WARRANTS.

 

(a) Transfer of Warrant. If this Warrant is to be transferred, the Holder shall
surrender this Warrant to the Company, whereupon the Company will forthwith
issue and deliver upon the order of the Holder a new Warrant (in accordance with
Section 7(d)), registered as the Holder may request, representing the right to
purchase the number of Warrant Shares being transferred by the Holder and, if
less then the total number of Warrant Shares then underlying this Warrant is
being transferred, a new Warrant (in accordance with Section 7(d)) to the Holder
representing the right to purchase the number of Warrant Shares not being
transferred.

 

(b) Lost, Stolen or Mutilated Warrant. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant, and, in the case of loss, theft or destruction, of
any indemnification undertaking by the Holder to the Company in customary form
and, in the case of mutilation, upon surrender and cancellation of this Warrant,
the Company shall execute and deliver to the Holder a new Warrant (in accordance
with Section 7(d)) representing the right to purchase the Warrant Shares then
underlying this Warrant.

 

(c) Exchangeable for Multiple Warrants. This Warrant is exchangeable, upon the
surrender hereof by the Holder at the principal office of the Company, for a new
Warrant or Warrants (in accordance with Section 7(d)) representing in the
aggregate the right to purchase the number of Warrant Shares then underlying
this Warrant, and each such new Warrant will represent the right to purchase
such portion of such Warrant Shares as is designated by the Holder at the time
of such surrender; provided, however, that no Warrants for fractional shares of
Common Stock shall be given.

 

(d) Issuance of New Warrants. Whenever the Company is required to issue a new
Warrant pursuant to the terms of this Warrant, such new Warrant (i) shall be of
like tenor with this Warrant, (ii) shall represent, as indicated on the face of
such new Warrant, the right to purchase the Warrant Shares then underlying this
Warrant (or in the case of a new Warrant being issued pursuant to Section 7(a)
or Section 7(c), the Warrant Shares designated by the Holder which, when added
to the number of shares of Common Stock underlying the other new Warrants issued
in connection with such issuance, does not exceed the number of Warrant Shares
then underlying this Warrant), (iii) shall have an issuance date, as indicated
on the face of such new Warrant which is the same as the Issuance Date, and
(iv) shall have the same rights and conditions as this Warrant.

 

8. NOTICES. Whenever notice is required to be given under this Warrant, unless
otherwise provided herein, such notice shall be given in accordance with
Section 9(f) of the Securities Purchase Agreement. The Company shall provide the
Holder with prompt written

 

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notice of all actions taken pursuant to this Warrant, including in reasonable
detail a description of such action and the reason therefore. Without limiting
the generality of the foregoing, the Company will give written notice to the
Holder (i) immediately upon any adjustment of the Exercise Price, setting forth
in reasonable detail, and certifying, the calculation of such adjustment and
(ii) at least fifteen days prior to the date on which the Company closes its
books or takes a record (A) with respect to any dividend or distribution upon
the shares of Common Stock, (B) with respect to any grants, issuances or sales
of any Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property to holders of shares of Common Stock or (C) for
determining rights to vote with respect to any Fundamental Transaction,
dissolution or liquidation, provided in each case that such information shall be
made known to the public prior to or in conjunction with such notice being
provided to the Holder.

 

9. AMENDMENT AND WAIVER. Except as otherwise provided herein, the provisions of
this Warrant may be amended and the Company may take any action herein
prohibited, or omit to perform any act herein required to be performed by it,
only if the Company has obtained the written consent of the Required Holders;
provided that no such action may increase the exercise price of any SPA Warrant
or decrease the number of shares or class of stock obtainable upon exercise of
any SPA Warrant without the written consent of the Holder. No such amendment
shall be effective to the extent that it applies to less than all of the holders
of the SPA Warrants then outstanding.

 

10. GOVERNING LAW. This Warrant shall be governed by and construed and enforced
in accordance with, and all questions concerning the construction, validity,
interpretation and performance of this Warrant shall be governed by, the
internal laws of the State of New York, without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York.

 

11. CONSTRUCTION; HEADINGS. This Warrant shall be deemed to be jointly drafted
by the Company and all the Buyers and shall not be construed against any person
as the drafter hereof. The headings of this Warrant are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Warrant.

 

12. DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Exercise Price or the arithmetic calculation of the Warrant Shares, the Company
shall submit the disputed determinations or arithmetic calculations via
facsimile within two Business Days of receipt of the Exercise Notice giving rise
to such dispute, as the case may be, to the Holder. If the Holder and the
Company are unable to agree upon such determination or calculation of the
Exercise Price or the Warrant Shares within five Business Days of such disputed
determination or arithmetic calculation being submitted to the Holder, then the
Company shall, within two Business Days submit via facsimile (a) the disputed
determination of the Exercise Price to an independent, reputable investment bank
selected by the Company and approved by the Holder or (b) the disputed
arithmetic calculation of the Warrant Shares to the Company’s independent,
outside accountant. The Company shall cause at its expense the investment bank
or the accountant, as the case may be, to perform the determinations or
calculations and notify the Company and the Holder of the results no later than
ten Business Days from the time it receives

 

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the disputed determinations or calculations. Such investment bank’s or
accountant’s determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error.

 

13. REMEDIES, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies
provided in this Warrant shall be cumulative and in addition to all other
remedies available under this Warrant and the other Transaction Documents, at
law or in equity (including a decree of specific performance and/or other
injunctive relief), and nothing herein shall limit the right of the Holder right
to pursue actual damages for any failure by the Company to comply with the terms
of this Warrant. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Holder and that the remedy at law
for any such breach may be inadequate. The Company therefore agrees that, in the
event of any such breach or threatened breach, the holder of this Warrant shall
be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.

 

14. TRANSFER. This Warrant may be offered for sale, sold, transferred or
assigned without the consent of the Company, except as may otherwise be required
by Section 2(f) of the Securities Purchase Agreement.

 

15. CERTAIN DEFINITIONS. For purposes of this Warrant, the following terms shall
have the following meanings:

 

(a) “Bloomberg” means Bloomberg Financial Markets.

 

(b) “Business Day” means any day other than Saturday, Sunday or other day on
which commercial banks in The City of New York are authorized or required by law
to remain closed.

 

(c) “Closing Bid Price” and “Closing Sale Price” means, for any security as of
any date, the last closing bid price and last closing trade price, respectively,
for such security on the Principal Market, as reported by Bloomberg, or, if the
Principal Market begins to operate on an extended hours basis and does not
designate the closing bid price or the closing trade price, as the case may be,
then the last bid price or last trade price, respectively, of such security
prior to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the
Principal Market is not the principal securities exchange or trading market for
such security, the last closing bid price or last trade price, respectively, of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing bid price or last trade price, respectively, of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no closing bid price or last
trade price, respectively, is reported for such security by Bloomberg, the
average of the bid prices, or the ask prices, respectively, of any market makers
for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly
the National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing
Sale Price cannot be calculated for a security on a particular date on any of
the foregoing bases, the Closing Bid Price or the Closing Sale Price, as the
case may be, of such security on such date shall be the fair

 

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market value as mutually determined by the Company and the Holder. If the
Company and the Holder are unable to agree upon the fair market value of such
security, then such dispute shall be resolved pursuant to Section 12. All such
determinations to be appropriately adjusted for any stock dividend, stock split,
stock combination or other similar transaction during the applicable calculation
period.

 

(d) “Common Stock” means (i) the Company’s shares of Common Stock, par value
$.10 per share, and (ii) any share capital into which such Common Stock shall
have been changed or any share capital resulting from a reclassification of such
Common Stock.

 

(e) “Common Stock Deemed Outstanding” means, at any given time, the number of
shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock deemed to be outstanding pursuant to Sections 2(a)(i) and
2(a)(ii) hereof regardless of whether the Options or Convertible Securities are
actually exercisable at such time, but excluding any shares of Common Stock
owned or held by or for the account of the Company or issuable upon conversion
and exercise, as applicable, of the SPA Securities and the Warrants.

 

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

 

(g) “Eligible Market” means the Principal Market, the American Stock Exchange,
The New York Stock Exchange, Inc., the Nasdaq National Market or The Nasdaq
Capital Market.

 

(h) “Expiration Date” means the date thirty-six (36) months after the Issuance
Date or, if such date falls on a day other than a Business Day or on which
trading does not take place on the Principal Market (a “Holiday”), the next date
that is not a Holiday.

 

(i) “Fundamental Transaction” means that the Company shall, directly or
indirectly, in one or more related transactions, (i) consolidate or merge with
or into (whether or not the Company is the surviving corporation) another
Person, or (ii) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of the Company to another Person,
or (iii) allow another Person to make a purchase, tender or exchange offer that
is accepted by the holders of more than the 50% of either the outstanding shares
of Common Stock (not including any shares of Common Stock held by the Person or
Persons making or party to, or associated or affiliated with the Persons making
or party to, such purchase, tender or exchange offer), or (iv) consummate a
stock purchase agreement or other business combination (including, without
limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another Person whereby such other Person acquires more than
the 50% of the outstanding shares of Common Stock (not including any shares of
Common Stock held by the other Person or other Persons making or party to, or
associated or affiliated with the other Persons making or party to, such stock
purchase agreement or other business combination), or (v) reorganize,
recapitalize or reclassify its Common Stock, or (vi) any “person” or “group” (as
these terms are used for purposes of Sections 13(d) and 14(d) of the Exchange
Act) is or shall

 

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become the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of 50% of the aggregate ordinary voting power
represented by issued and outstanding Common Stock. Notwithstanding anything
stated herein to the contrary, a sale of all or any portion of the Company’s
Legacy Operations or Legacy Operations Assets (as either term is defined in the
Certificate of Designations setting forth the terms of the Company’s Series A
Convertible Preferred Stock) shall not constitute a Fundamental Transaction.

 

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

 

(k) “Parent Entity” of a Person means an entity that, directly or indirectly,
controls the applicable Person and whose common stock or equivalent equity
security is quoted or listed on an Eligible Market, or, if there is more than
one such Person or Parent Entity, the Person or Parent Entity with the largest
public market capitalization as of the date of consummation of the Fundamental
Transaction.

 

(l) “Person” means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization, any other
entity and a government or any department or agency thereof.

 

(m) “Principal Market” means the Nasdaq National Market.

 

(n) “Registration Rights Agreement” means that certain registration rights
agreement by and among the Company and the Buyers.

 

(o) “Required Holders” means the holders of the SPA Warrants representing at
least a majority of shares of Common Stock underlying the SPA Warrants then
outstanding.

 

(p) “SPA Securities” means the Preferred Shares issued pursuant to the
Securities Purchase Agreement.

 

(q) “Successor Entity” means the Person (or, if so elected by the Required
Holders, the Parent Entity) formed by, resulting from or surviving any
Fundamental Transaction or the Person (or, if so elected by the Required
Holders, the Parent Entity) with which such Fundamental Transaction shall have
been entered into.

 

[Signature Page Follows]

 

- 17 -

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IN WITNESS WHEREOF, the Company has caused this Warrant to Purchase Common Stock
to be duly executed as of the Issuance Date set out above.

 

DEVCON INTERNATIONAL CORP. By:    

Name:

   

Title:

   

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EXHIBIT A

 

EXERCISE NOTICE

 

TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS

WARRANT TO PURCHASE COMMON STOCK

 

DEVCON INTERNATIONAL CORP.

 

The undersigned holder hereby exercises the right to purchase _________________
of the shares of Common Stock (“Warrant Shares”) of Devcon International Corp.,
a Florida corporation (the “Company”), evidenced by the attached Warrant to
Purchase Common Stock (the “Warrant”). Capitalized terms used herein and not
otherwise defined shall have the respective meanings set forth in the Warrant.

 

1. Form of Exercise Price. The Holder intends that payment of the Exercise Price
shall be made as:

 

____________ a “Cash Exercise” with respect to _________________ Warrant Shares;
and/or

 

____________ a “Cashless Exercise” with respect to _______________ Warrant
Shares.

 

2. Payment of Exercise Price. In the event that the holder has elected a Cash
Exercise with respect to some or all of the Warrant Shares to be issued pursuant
hereto, the holder shall pay the Aggregate Exercise Price in the sum of
$___________________ to the Company in accordance with the terms of the Warrant.

 

3. Delivery of Warrant Shares. The Company shall deliver to the holder
__________ Warrant Shares in accordance with the terms of the Warrant.

 

Date: _______________ __, ______

 

       Name of Registered Holder

 

By:         Name:     Title:

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ACKNOWLEDGMENT

 

The Company hereby acknowledges this Exercise Notice and hereby directs [Insert
Name of Transfer Agent] to issue the above indicated number of shares of Common
Stock in accordance with the Transfer Agent Instructions dated February __, 2006
from the Company and acknowledged and agreed to by [Insert Name of Transfer
Agent].

 

DEVCON INTERNATIONAL CORP. By:         Name:     Title:

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EXHIBIT D

 

[FORM OF REGISTRATION RIGHTS AGREEMENT]

 

REGISTRATION RIGHTS AGREEMENT

 

REGISTRATION RIGHTS AGREEMENT (this “Agreement”), dated as of February __, 2006,
by and among Devcon International Corp., a Florida corporation, with
headquarters located at 595 South Federal Highway, Suite 500, Boca Raton,
Florida 33432 (the ”Company”), and the undersigned buyers (each, a “Buyer”, and
collectively, the “Buyers”).

 

WHEREAS:

 

A. In connection with the Securities Purchase Agreement by and among the parties
hereto of even date herewith (the “Securities Purchase Agreement”), the Company
has agreed, upon the terms and subject to the conditions set forth in the
Securities Purchase Agreement, to issue and sell to each Buyer (i) at the
Initial Closing (as defined in the Securities Purchase Agreement) warrants (the
“Warrants”) which will be exercisable to purchase shares of Common Stock (as
exercised collectively, the “Warrant Shares”) and (ii) at the Additional Closing
(as defined in the Securities Purchase Agreement), subject the satisfaction of
certain terms and conditions, preferred shares of the Company designated as
Series A Convertible Preferred Stock, the terms of which are set forth in the
certificate of designation for such series of preferred shares (the “Certificate
of Designations”) in the form attached as Exhibit A to the Securities Purchase
Agreement (the “Preferred Shares”) which, among other things, will be
convertible into shares of the Company’s common stock, par value $0.10 per share
(the “Common Stock”) (as converted, the “Conversion Shares”), in accordance with
the terms of the Certificate of Designations

 

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

 

C. To induce the Buyers to execute and deliver the Securities Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the “1933 Act”), and
applicable state securities laws.

 

NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and each of the Buyers
hereby agree as follows:

 

1. Definitions.

 

Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Securities Purchase Agreement. As used in
this Agreement, the following terms shall have the following meanings:

 

a. “Business Day” means any day other than Saturday, Sunday or any other day on
which commercial banks in The City of New York are authorized or required by law
to remain closed.

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

b. “Effective Date” means the date that the Registration Statement has been
declared effective by the SEC.

 

c. “Effectiveness Deadline” means the date which is 45 days after the Filing
Deadline (as defined below), or if there is a full review of the Registration
Statement by the SEC, 90 days after the Filing Deadline.

 

d. “Filing Deadline” means five (5) Business Days following the earlier to occur
of (a) the Additional Closing Date and (b) the Additional Closing Deadline (as
defined in the Securities Purchase Agreement).

 

e. “Investor” means a Buyer or any transferee or assignee of the Preferred
Shares or Warrants, as applicable, to whom a Buyer assigns its rights under this
Agreement and who agrees to become bound by the provisions of this Agreement in
accordance with Section 9 and any transferee or assignee thereof to whom a
transferee or assignee of the Preferred Shares or Warrants, as applicable,
assigns its rights under this Agreement and who agrees to become bound by the
provisions of this Agreement in accordance with Section 9.

 

f. “Person” means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof.

 

g. “register,” “registered,” and “registration” refer to a registration effected
by preparing and filing one or more Registration Statements (as defined below)
in compliance with the 1933 Act and pursuant to Rule 415 and the declaration of
effectiveness of such Registration Statement(s) by the SEC.

 

h. “Registrable Securities” means (i) the Conversion Shares issued or issuable
upon conversion of the Preferred Shares, (ii) the Warrant Shares issued or
issuable upon exercise of the Warrants, (iii) any Dividend Shares issued or
issuable with respect to the Preferred Shares and (iv) any share capital of the
Company issued or issuable, with respect to the Preferred Shares, the Conversion
Shares, the Dividend Shares, the Warrant Shares or the Warrants as a result of
any share split, share dividend, recapitalization, exchange or similar event or
otherwise, without regard to any limitations on conversions of the Preferred
Shares or exercises of the Warrants.

 

i. “Registration Statement” means a registration statement or registration
statements of the Company filed under the 1933 Act covering the Registrable
Securities.

 

j. “Required Holders” means the holders of at least a majority of the
Registrable Securities.

 

k. “Required Registration Amount” means 120% of the sum of (i) the number of
Conversion Shares issued and issuable pursuant to the Certificate of
Designation, as

 

2

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of the trading day immediately preceding the applicable date of determination,
(ii) the number of Dividend Shares issuable pursuant to the terms of the
Certificate of Designation, determined as if issued as of the trading day
immediately preceding the applicable date of determination and assuming that all
of the Preferred Shares remain outstanding until the Mandatory Date (as defined
in the Certificate of Designations), and (iii) the number of Warrant Shares
issued and issuable pursuant to the Warrants as of the trading day immediately
preceding the applicable date of determination, all subject to adjustment as
provided in Section 2(e), without regard to any limitations on conversion of the
Preferred Shares.

 

l. “Rule 415” means Rule 415 under the 1933 Act or any successor rule providing
for offering securities on a continuous or delayed basis.

 

m. “SEC” means the United States Securities and Exchange Commission.

 

2. Registration.

 

a. Mandatory Registration. The Company shall prepare, and, as soon as
practicable, but in no event later than the Filing Deadline, file with the SEC
the Registration Statement on Form S-3 covering the resale of all of the
Registrable Securities. In the event that Form S-3 is unavailable for such a
registration, the Company shall use such other form as is available for such a
registration on another appropriate form reasonably acceptable to the Required
Holders, subject to the provisions of Section 2(d). The Registration Statement
prepared pursuant hereto shall register for resale at least the number of shares
of Common Stock equal to the Required Registration Amount as of the date the
Registration Statement is initially filed with the SEC. The Registration
Statement shall contain (except if otherwise directed by the Required Holders)
the “Selling Shareholders” and “Plan of Distribution” sections in substantially
the form attached hereto as Exhibit B. The Company shall use its best efforts to
have the Registration Statement declared effective by the SEC as soon as
practicable, but in no event later than the Effectiveness Deadline. By 9:30 a.m.
on the first Business Day following the Effective Date, the Company shall file
with the SEC in accordance with Rule 424 under the 1933 Act the final prospectus
to be used in connection with sales pursuant to such Registration Statement.

 

b. Allocation of Registrable Securities. The initial number of Registrable
Securities included in any Registration Statement and any increase in the number
of Registrable Securities included therein shall be allocated pro rata among the
Investors based on the number of Registrable Securities held by each Investor at
the time the Registration Statement covering such initial number of Registrable
Securities or increase thereof is declared effective by the SEC. In the event
that an Investor sells or otherwise transfers any of such Investor’s Registrable
Securities, each transferee that becomes an Investor shall be allocated a pro
rata portion of the then remaining number of Registrable Securities included in
such Registration Statement for such transferor. Any shares of Common Stock
included in a Registration Statement and which remain allocated to any Person
which ceases to hold any Registrable Securities covered by such Registration
Statement shall be allocated to the remaining Investors, pro rata based on the
number of Registrable Securities then held by such Investors which are covered
by such Registration Statement. In no event shall the Company

 

3

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include any securities other than Registrable Securities on any Registration
Statement without the prior written consent of the Required Holders.

 

c. Legal Counsel. Subject to Section 5 hereof, the Required Holders shall have
the right to select one legal counsel to review and oversee any registration
pursuant to this Section 2 (“Legal Counsel”), which shall be Schulte Roth &
Zabel LLP or such other counsel as thereafter designated by the Required
Holders. The Company and Legal Counsel shall reasonably cooperate with each
other in regards to the performance of the Company’s obligations under this
Agreement.

 

d. Ineligibility for Form S-3. In the event that Form S-3 is not available for
the registration of the resale of Registrable Securities hereunder, the Company
shall (i) register the resale of the Registrable Securities on another
appropriate form reasonably acceptable to the Required Holders and
(ii) undertake to register the Registrable Securities on Form S-3 as soon as
such form is available, provided that the Company shall maintain the
effectiveness of the Registration Statement then in effect until such time as a
Registration Statement on Form S-3 covering the Registrable Securities has been
declared effective by the SEC.

 

e. Sufficient Number of Shares Registered. In the event the number of shares
available under a Registration Statement filed pursuant to Section 2(a) is
insufficient to cover all of the Registrable Securities required to be covered
by such Registration Statement or an Investor’s allocated portion of the
Registrable Securities pursuant to Section 2(b), the Company shall amend the
applicable Registration Statement, or file a new Registration Statement (on the
short form available therefor, if applicable), or both, so as to cover at least
the Required Registration Amount as of the trading day immediately preceding the
date of the filing of such amendment or new Registration Statement, in each
case, as soon as practicable, but in any event not later than fifteen (15) days
after the necessity therefor arises. The Company shall use its best efforts to
cause such amendment and/or new Registration Statement to become effective as
soon as practicable following the filing thereof. For purposes of the foregoing
provision, the number of shares available under a Registration Statement shall
be deemed “insufficient to cover all of the Registrable Securities” if at any
time the number of shares of Common Stock available for resale under the
Registration Statement is less than the product determined by multiplying
(i) the Required Registration Amount as of such time by (ii) 0.90. The
calculation set forth in the foregoing sentence shall be made without regard to
any limitations on the conversion of the Preferred Shares or the exercise of the
Warrants and such calculation shall assume that the Preferred Shares are then
convertible into shares of Common Stock at the then prevailing Conversion Rate
(as defined in the Certificate of Designations) and that the Warrants are then
exercisable for shares of Common Stock at the then prevailing Exercise Price (as
defined in the Warrants).

 

f. Effect of Failure to File and Obtain and Maintain Effectiveness of
Registration Statement. If (i) a Registration Statement covering all of the
Registrable Securities required to be covered thereby and required to be filed
by the Company pursuant to this Agreement is (A) not filed with the SEC on or
before the respective Filing Deadline (a “Filing Failure”) or (B) filed with the
SEC but not declared effective by the SEC on or before the respective
Effectiveness Deadline (an “Effectiveness Failure”) or (ii) on any day after the
Effective Date sales of all of the Registrable Securities required to be
included on such

 

4

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Registration Statement cannot be made (other than during an Allowable Grace
Period (as defined in Section 3(r)) pursuant to such Registration Statement
(including, without limitation, because of a failure to keep such Registration
Statement effective, to disclose such information as is necessary for sales to
be made pursuant to such Registration Statement, a suspension or delisting of
the Common Stock on its principal trading market or exchange, or to register a
sufficient number of shares of Common Stock) (a “Maintenance Failure”) then, as
partial relief for the damages to any holder by reason of any such delay in or
reduction of its ability to sell the underlying shares of Common Stock (which
remedy shall not be exclusive of any other remedies available at law or in
equity), the Company shall pay to each holder of Registrable Securities relating
to such Registration Statement an amount in cash equal to one percent (1%) of
the aggregate Purchase Price (as such term is defined in the Securities Purchase
Agreement) of such Investor’s Registrable Securities included in such
Registration Statement on each of the following dates: (i) on every thirtieth
day (pro rated for periods totaling less than thirty days) after a Filing
Failure until such Filing Failure is cured; (ii) on every thirtieth day (pro
rated for periods totaling less than thirty days) after an Effectiveness Failure
until such Effectiveness Failure is cured; and (iii) on every thirtieth day (pro
rated for periods totaling less than thirty days) after a Maintenance Failure
until such Maintenance Failure is cured. The Company shall also pay the
reasonable fees of Legal Counsel to enforce the provisions hereof. The payments
to which a holder shall be entitled pursuant to this Section 2(f) are referred
to herein as “Registration Delay Payments.” Registration Delay Payments shall be
paid on the day of the Filing Failure, Effectiveness Failure and the initial day
of a Maintenance Failure, as applicable, and thereafter on the earlier of
(I) the thirtieth day after the event or failure giving rise to the Registration
Delay Payments has occurred and (II) the third Business Day after the event or
failure giving rise to the Registration Delay Payments is cured. In the event
the Company fails to make Registration Delay Payments in a timely manner, such
Registration Delay Payments shall bear interest at the rate of one and one-half
percent (1.5%) per month (prorated for partial months) until paid in full.

 

3. Related Obligations.

 

At such time as the Company is obligated to file a Registration Statement with
the SEC pursuant to Section 2(a), 2(d) or 2(e), the Company will use its best
efforts to effect the registration of the Registrable Securities in accordance
with the intended method of disposition thereof and, pursuant thereto, the
Company shall have the following obligations:

 

a. The Company shall promptly prepare and file with the SEC a Registration
Statement with respect to the Registrable Securities and use its best efforts to
cause such Registration Statement relating to the Registrable Securities to
become effective as soon as practicable after such filing (but in no event later
than the Effectiveness Deadline). The Company shall keep each Registration
Statement effective pursuant to Rule 415 at all times until the earlier of
(i) the date as of which all of the Investors (other than any Investors who are
“affiliates” of the Company as such term is used in Rule 144(k) promulgated
under the Securities Act) may sell all of the Registrable Securities covered by
such Registration Statement without restriction pursuant to Rule 144(k) (or any
successor thereto) promulgated under the 1933 Act or (ii) the date on which the
Investors shall have sold all of the Registrable Securities covered by such
Registration Statement (the “Registration Period”). The Company shall ensure
that each Registration Statement (including any amendments or supplements

 

5

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thereto and prospectuses contained therein) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein, or necessary to make the statements therein (in the case of
prospectuses, in the light of the circumstances in which they were made) not
misleading. The Company shall submit to the SEC, within two (2) Business Days
after the later of the date that (i) the Company learns that no review of a
particular Registration Statement will be made by the staff of the SEC or that
the staff has no further comments on a particular Registration Statement, as the
case may be, and (ii) the approval of Legal Counsel pursuant to Section 3(c)
(which approval is immediately sought), a request for acceleration of
effectiveness of such Registration Statement to a time and date not later than
48 hours after the submission of such request.

 

b. Subject to Section 3(r) of this Agreement, the Company shall prepare and file
with the SEC such amendments (including post-effective amendments) and
supplements to a Registration Statement and the prospectus used in connection
with such Registration Statement, which prospectus is to be filed pursuant to
Rule 424 promulgated under the 1933 Act, as may be necessary to keep such
Registration Statement effective at all times during the Registration Period,
and, during such period, comply with the provisions of the 1933 Act with respect
to the disposition of all Registrable Securities of the Company covered by such
Registration Statement until such time as all of such Registrable Securities
shall have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof as set forth in such Registration
Statement. In the case of amendments and supplements to a Registration Statement
which are required to be filed pursuant to this Agreement (including pursuant to
this Section 3(b)) by reason of the Company filing a report on Form 10-Q, Form
10-K or any analogous report under the Securities Exchange Act of 1934, as
amended (the “1934 Act”), the Company shall have incorporated such report by
reference into such Registration Statement, if applicable, or shall file such
amendments or supplements with the SEC on the same day on which the 1934 Act
report is filed which created the requirement for the Company to amend or
supplement such Registration Statement.

 

c. The Company shall (A) permit Legal Counsel to review and comment upon (i) a
Registration Statement at least five (5) Business Days prior to its filing with
the SEC (and for at least two (2) Business Days after any final, material
changes are made to any draft thereof) (provided that the Filing Deadline shall
be extended by the time taken by Legal Counsel beyond such specified periods in
exercising its right to review the Registration Statement pursuant to this
Section 3) and (ii) all amendments and supplements to all Registration
Statements (except for Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and any similar or successor reports) within
a reasonable number of days prior to their filing with the SEC, and (B) not file
any Registration Statement or amendment or supplement thereto in a form to which
Legal Counsel reasonably objects. The Company shall not submit a request for
acceleration of the effectiveness of a Registration Statement or any amendment
or supplement thereto without the prior approval of Legal Counsel, which consent
shall not be unreasonably withheld. The Company shall furnish to Legal Counsel,
without charge, (i) copies of any correspondence from the SEC or the staff of
the SEC to the Company or its representatives relating to any Registration
Statement (except for reports previously filed pursuant to the Securities
Exchange Act of 1934, as amended), (ii) promptly after the same is prepared and
filed with the SEC, one copy of any Registration Statement and any amendment(s)
thereto, including financial statements and schedules, all

 

6

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documents incorporated therein by reference, if requested by an Investor, and
all exhibits and (iii) upon the effectiveness of any Registration Statement, one
copy of the prospectus included in such Registration Statement and all
amendments and supplements thereto. The Company shall reasonably cooperate with
Legal Counsel in performing the Company’s obligations pursuant to this
Section 3.

 

d. The Company shall furnish to each Investor whose Registrable Securities are
included in any Registration Statement, without charge, (i) promptly after the
same is prepared and filed with the SEC, at least one copy of any Registration
Statement and any amendment(s) thereto, including financial statements and
schedules, all documents incorporated therein by reference, if requested by an
Investor, all exhibits and each preliminary prospectus, (ii) upon the
effectiveness of any Registration Statement, one (1) copy of the prospectus
included in such Registration Statement and all amendments and supplements
thereto (or such other number of copies as such Investor may reasonably request)
and (iii) such other documents, including copies of any preliminary or final
prospectus, as such Investor may reasonably request from time to time in order
to facilitate the disposition of the Registrable Securities owned by such
Investor.

 

e. The Company shall use its reasonable best efforts to (i) register and
qualify, unless an exemption from registration and qualification applies, the
resale by Investors of the Registrable Securities covered by a Registration
Statement under such other securities or “blue sky” laws of all applicable
jurisdictions in the United States, (ii) prepare and file in those
jurisdictions, such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof during the Registration Period, (iii) take
such other actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and
(iv) take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (x) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(e), (y) subject itself
to general taxation in any such jurisdiction, or (z) file a general consent to
service of process in any such jurisdiction. The Company shall promptly notify
Legal Counsel and each Investor who holds Registrable Securities of the receipt
by the Company of any notification with respect to the suspension of the
registration or qualification of any of the Registrable Securities for sale
under the securities or “blue sky” laws of any jurisdiction in the United States
or its receipt of actual notice of the initiation or threatening of any
proceeding for such purpose.

 

f. The Company shall notify Legal Counsel and each Investor in writing of the
happening of any event, as promptly as practicable after becoming aware of such
event, as a result of which the prospectus included in a Registration Statement,
as then in effect, includes an untrue statement of a material fact or omission
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading (provided that in no event shall such notice contain any
material, nonpublic information), and, subject to Section 3(r), promptly prepare
a supplement or amendment to such Registration Statement to correct such untrue
statement or omission and deliver one (1) copy of such supplement or amendment
to Legal Counsel and each Investor (or

 

7

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such other number of copies as Legal Counsel or such Investor may reasonably
request). The Company shall also promptly notify Legal Counsel and each Investor
in writing (i) when a prospectus or any prospectus supplement or post-effective
amendment has been filed, and when a Registration Statement or any
post-effective amendment has become effective (notification of such
effectiveness shall be delivered to Legal Counsel and each Investor by facsimile
or e-mail on the same day of such effectiveness and by overnight mail), (ii) of
any request by the SEC for amendments or supplements to a Registration Statement
or related prospectus or related information, and (iii) of the Company’s
reasonable determination that a post-effective amendment to a Registration
Statement would be appropriate.

 

g. The Company shall use its best efforts to prevent the issuance of any stop
order or other suspension of effectiveness of a Registration Statement, or the
suspension of the qualification of any of the Registrable Securities for sale in
any jurisdiction and, if such an order or suspension is issued, to obtain the
withdrawal of such order or suspension at the earliest possible moment and to
notify Legal Counsel and each Investor who holds Registrable Securities being
sold of the issuance of such order and the resolution thereof or its receipt of
actual notice of the initiation or threat of any proceeding for such purpose.

 

h. If any Investor may be required under applicable securities law to be
described in the Registration Statement as an underwriter, at the reasonable
request of any Investor, the Company shall furnish to such Investor, on the date
of the effectiveness of the Registration Statement and thereafter from time to
time on such dates as an Investor may reasonably request (i) a letter, dated
such date, from the Company’s independent certified public accountants in form
and substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering, addressed to the
Investors, and (ii) an opinion, dated as of such date, of counsel representing
the Company for purposes of such Registration Statement, in form, scope and
substance as is customarily given in an underwritten public offering, addressed
to the Investors.

 

i. If any Investor may be required under applicable securities law to be
described in the Registration Statement as an underwriter, the Company shall
make available for inspection by (i) any Investor, (ii) Legal Counsel and
(iii) one firm of accountants or other agents retained by the Investors
(collectively, the “Inspectors”), all pertinent financial and other records, and
pertinent corporate documents and properties of the Company (collectively, the
“Records”), as shall be reasonably deemed necessary by each Inspector, and cause
the Company’s officers, directors and employees to supply all information which
any Inspector may reasonably request; provided, however, that each Inspector
shall agree in writing to hold in strict confidence and not to make any
disclosure (except to an Investor) or use of any Record or other information
which the Company determines in good faith to be confidential, and of which
determination the Inspectors are so notified, unless (a) the disclosure of such
Records is necessary to avoid or correct a misstatement or omission in any
Registration Statement or is otherwise required under the 1933 Act, (b) the
release of such Records is ordered pursuant to a final, non-appealable subpoena
or order from a court or government body of competent jurisdiction, or (c) the
information in such Records has been made generally available to the public
other than by disclosure in violation of this or any other agreement of which
the Inspector has knowledge. Each Investor agrees that it shall, upon learning
that disclosure of such Records is sought in or by a court or governmental body
of competent jurisdiction or

 

8

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through other means, give prompt notice to the Company and allow the Company, at
its expense, to undertake appropriate action to prevent disclosure of, or to
obtain a protective order for, the Records deemed confidential. Nothing herein
(or in any other confidentiality agreement between the Company and any Investor)
shall be deemed to limit the Investors’ ability to sell Registrable Securities
in a manner which is otherwise consistent with applicable laws and regulations.

 

j. The Company shall hold in confidence and not make any disclosure of
information concerning an Investor provided to the Company unless (i) disclosure
of such information is necessary to comply with federal or state securities
laws, (ii) the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this Agreement or any other
agreement. The Company agrees that it shall, upon learning that disclosure of
such information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
written notice to such Investor and allow such Investor, at the Investor’s
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, such information.

 

k. The Company shall use its best efforts either to (i) cause all of the
Registrable Securities covered by a Registration Statement to be listed on each
securities exchange on which securities of the same class or series issued by
the Company are then listed, if any, if the listing of such Registrable
Securities is then permitted under the rules of such exchange, or (ii) secure
designation and quotation of all of the Registrable Securities covered by a
Registration Statement on the Nasdaq National Market, or (iii) if, despite the
Company’s best efforts to satisfy the preceding clause (i) or (ii) the Company
is unsuccessful in satisfying the preceding clause (i) or (ii), to secure the
inclusion for quotation on The Nasdaq Capital Market for such Registrable
Securities and, without limiting the generality of the foregoing, to use its
best efforts to arrange for at least two market makers to register with the
National Association of Securities Dealers, Inc. (“NASD”) as such with respect
to such Registrable Securities. The Company shall pay all fees and expenses in
connection with satisfying its obligation under this Section 3(k).

 

l. The Company shall cooperate with the Investors who hold Registrable
Securities being offered and, to the extent applicable, facilitate the timely
preparation and delivery of certificates (not bearing any restrictive legend)
representing the Registrable Securities to be offered pursuant to a Registration
Statement and enable such certificates to be in such denominations or amounts,
as the case may be, as the Investors may reasonably request and registered in
such names as the Investors may request.

 

m. If requested by an Investor, the Company shall as soon as practicable after
receipt of notice from such Investor and subject to Section 3(r) hereof,
(i) incorporate in a prospectus supplement or post-effective amendment such
information as an Investor reasonably requests to be included therein relating
to the sale and distribution of Registrable Securities, including, without
limitation, information with respect to the number of Registrable

 

9

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Securities being offered or sold, the purchase price being paid therefor and any
other terms of the offering of the Registrable Securities to be sold in such
offering; (ii) make all required filings of such prospectus supplement or
post-effective amendment after being notified of the matters to be incorporated
in such prospectus supplement or post-effective amendment; and (iii) supplement
or make amendments to any Registration Statement if reasonably requested by an
Investor holding any Registrable Securities.

 

n. The Company shall use its best efforts to cause the Registrable Securities
covered by a Registration Statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary to consummate the
disposition of such Registrable Securities.

 

o. The Company shall make generally available to its security holders as soon as
practical, but not later than one hundred five(105) days after the close of the
period covered thereby, an earnings statement (in form complying with, and in
the manner provided by, the provisions of Rule 158 under the 1933 Act) covering
a twelve-month period beginning not later than the first day of the Company’s
fiscal quarter next following the effective date of the Registration Statement.

 

p. The Company shall otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC in connection with any registration
hereunder.

 

q. Within two (2) Business Days after a Registration Statement which covers
Registrable Securities is ordered effective by the SEC, the Company shall
deliver, and shall cause legal counsel for the Company to deliver, to the
transfer agent for such Registrable Securities (with copies to the Investors
whose Registrable Securities are included in such Registration Statement)
confirmation that such Registration Statement has been declared effective by the
SEC in the form attached hereto as Exhibit A.

 

r. Notwithstanding anything to the contrary herein, at any time after the
Registration Statement has been declared effective by the SEC, the Company may
delay the disclosure of material, non-public information concerning the Company
the disclosure of which at the time is not, in the good faith opinion of the
Board of Directors of the Company, in the best interest of the Company and, in
the opinion of counsel to the Company, otherwise required (a “Grace Period”);
provided, that the Company shall promptly (i) notify the Investors in writing of
the existence of material, non-public information giving rise to a Grace Period
(provided that in each notice the Company will not disclose the content of such
material, non-public information to the Investors) and the date on which the
Grace Period will begin, and (ii) notify the Investors in writing of the date on
which the Grace Period ends; and, provided further, that no Grace Period shall
exceed twenty (20) consecutive days and during any three hundred sixty five
(365) day period such Grace Periods shall not exceed an aggregate of sixty
(60) days and the first day of any Grace Period must be at least five
(5) trading days after the last day of any prior Grace Period (each, an
“Allowable Grace Period”). For purposes of determining the length of a Grace
Period above, the Grace Period shall begin on and include the date the Investors
receive the notice referred to in clause (i) and shall end on and include the
later of the date the Investors receive the notice referred to in clause
(ii) and the date referred to in such notice. The provisions of Section 3(g)
hereof shall not be applicable

 

10

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during the period of any Allowable Grace Period. Upon expiration of the Grace
Period, the Company shall again be bound by the first sentence of Section 3(f)
with respect to the information giving rise thereto unless such material,
non-public information is no longer applicable. Notwithstanding anything to the
contrary, the Company shall cause its transfer agent to deliver unlegended
shares of Common Stock to a transferee of an Investor in accordance with the
terms of the Securities Purchase Agreement in connection with any sale of
Registrable Securities with respect to which an Investor has entered into a
contract for sale, and delivered a copy of the prospectus included as part of
the applicable Registration Statement, prior to the Investor’s receipt of the
notice of a Grace Period and for which the Investor has not yet settled.

 

4. Obligations of the Investors.

 

a. At least five (5) Business Days prior to the first anticipated filing date of
a Registration Statement, the Company shall notify each Investor in writing of
the information the Company requires from each such Investor if such Investor
elects to have any of such Investor’s Registrable Securities included in such
Registration Statement. It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this Agreement with respect
to the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it, as shall be reasonably required to effect and maintain
the effectiveness of the registration of such Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request.

 

b. Each Investor, by such Investor’s acceptance of the Registrable Securities,
agrees to cooperate with the Company as reasonably requested by the Company in
connection with the preparation and filing of any Registration Statement
hereunder, unless such Investor has notified the Company in writing of such
Investor’s election to exclude all of such Investor’s Registrable Securities
from such Registration Statement.

 

c. Each Investor agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 3(g) or the first
sentence of 3(f), such Investor will immediately discontinue disposition of
Registrable Securities pursuant to any Registration Statement(s) covering such
Registrable Securities until such Investor’s receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(g) or the first
sentence of 3(f) or receipt of notice that no supplement or amendment is
required. Notwithstanding anything to the contrary, the Company shall cause its
transfer agent to deliver unlegended shares of Common Stock to a transferee of
an Investor in accordance with the terms of the Securities Purchase Agreement in
connection with any sale of Registrable Securities with respect to which an
Investor has entered into a contract for sale prior to the Investor’s receipt of
a notice from the Company of the happening of any event of the kind described in
Section 3(g) or the first sentence of 3(f) and for which the Investor has not
yet settled.

 

11

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d. Each Investor covenants and agrees that it will comply with the prospectus
delivery requirements of the 1933 Act as applicable to it in connection with
sales of Registrable Securities pursuant to the Registration Statement.

 

5. Expenses of Registration.

 

All reasonable expenses, other than underwriting discounts and commissions,
incurred in connection with registrations, filings or qualifications pursuant to
Sections 2 and 3, including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees, and fees and disbursements of
counsel for the Company shall be paid by the Company. The Company shall also
reimburse the Investors for the fees and disbursements of Legal Counsel in
connection with registration, filing or qualification pursuant to Sections 2 and
3 of this Agreement which amount shall be limited to $15,000.

 

6. Indemnification.

 

In the event any Registrable Securities are included in a Registration Statement
under this Agreement:

 

a. To the fullest extent permitted by law, the Company will, and hereby does,
indemnify, hold harmless and defend each Investor, the directors, officers,
members, partners, employees, agents, representatives of, and each Person, if
any, who controls any Investor within the meaning of the 1933 Act or the 1934
Act (each, an “Indemnified Person”), against any losses, claims, damages,
liabilities, judgments, fines, penalties, charges, costs, reasonable attorneys’
fees, amounts paid in settlement or expenses, joint or several, (collectively,
“Claims”) incurred in investigating, preparing or defending any action, claim,
suit, inquiry, proceeding, investigation or appeal taken from the foregoing by
or before any court or governmental, administrative or other regulatory agency,
body or the SEC, whether pending or threatened, whether or not an indemnified
party is or may be a party thereto (“Indemnified Damages”), to which any of them
may become subject insofar as such Claims (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement of a material fact in a
Registration Statement or any post-effective amendment thereto or in any filing
made in connection with the qualification of the offering under the securities
or other “blue sky” laws of any jurisdiction in which Registrable Securities are
offered (“Blue Sky Filing”), or the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) any untrue statement or alleged untrue statement of
a material fact contained in any preliminary prospectus if used prior to the
effective date of such Registration Statement, or contained in the final
prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading, (iii) any violation or alleged violation by the Company of
the 1933 Act, the 1934 Act, any other law, including, without limitation, any
state securities law, or any rule or regulation thereunder relating to the offer
or sale of the Registrable Securities pursuant to a Registration Statement or
(iv) any violation of this Agreement (the matters in the foregoing clauses
(i) through (iv) being, collectively, “Violations”). Subject to Section 6(c),
the

 

12

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Company shall reimburse the Indemnified Persons, promptly as such expenses are
incurred and are due and payable, for any reasonable legal fees or other
reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(a): (i) shall
not apply to a Claim by an Indemnified Person arising out of or based upon a
Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company by such Indemnified Person for such
Indemnified Person expressly for use in connection with the preparation of the
Registration Statement or any such amendment thereof or supplement thereto;
(ii) shall not be available to the extent such Claim is based on a failure of
the Investor to deliver or to cause to be delivered the prospectus made
available by the Company, including a corrected prospectus, if such prospectus
or corrected prospectus was timely made available by the Company pursuant to
Section 3(d); and (iii) shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of the
Company, which consent shall not be unreasonably withheld or delayed. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Indemnified Person and shall survive the transfer of
the Registrable Securities by the Investors pursuant to Section 9.

 

b. In connection with any Registration Statement in which an Investor is
participating, each such Investor agrees to severally and not jointly indemnify,
hold harmless and defend, to the same extent and in the same manner as is set
forth in Section 6(a), the Company, each of its directors, each of its officers
who signs the Registration Statement and each Person, if any, who controls the
Company within the meaning of the 1933 Act or the 1934 Act (each, an
“Indemnified Party”), against any Claim or Indemnified Damages to which any of
them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar
as such Claim or Indemnified Damages arise out of or are based upon any
Violation, in each case to the extent, and only to the extent, that such
Violation occurs in reliance upon and in conformity with written information
furnished to the Company by such Investor expressly for use in connection with
such Registration Statement; and, subject to Section 6(c), such Investor will
reimburse any legal or other expenses reasonably incurred by an Indemnified
Party in connection with investigating or defending any such Claim; provided,
however, that the indemnity agreement contained in this Section 6(b) and the
agreement with respect to contribution contained in Section 7 shall not apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of such Investor, which consent shall not be
unreasonably withheld or delayed; provided, further, however, that the Investor
shall be liable under this Section 6(b) for only that amount of a Claim or
Indemnified Damages as does not exceed the net proceeds to such Investor as a
result of the sale of Registrable Securities pursuant to such Registration
Statement. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of such Indemnified Party and shall
survive the transfer of the Registrable Securities by the Investors pursuant to
Section 9. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(b) with respect to any
preliminary prospectus shall not inure to the benefit of any Indemnified Party
if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected on a timely basis in the prospectus, as
then amended or supplemented.

 

13

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c. Promptly after receipt by an Indemnified Person or Indemnified Party under
this Section 6 of notice of the commencement of any action or proceeding
(including any governmental action or proceeding) involving a Claim, such
Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is
to be made against any indemnifying party under this Section 6, deliver to the
indemnifying party a written notice of the commencement thereof, and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnified Person or
the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses of not more than one counsel for all such
Indemnified Person or Indemnified Party to be paid by the indemnifying party,
if, in the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding; provided further,
that the indemnifying party shall not be responsible for the reasonable fees and
expenses of more than one (1) separate legal counsel for all such Indemnified
Person or Indemnified Party. In the case of an Indemnified Person, legal counsel
referred to in the immediately preceding sentence shall be selected by the
Investors holding at least a majority in interest of the Registrable Securities
included in the Registration Statement to which the Claim relates. The
Indemnified Party or Indemnified Person shall cooperate reasonably with the
indemnifying party in connection with any negotiation or defense of any such
action or Claim by the indemnifying party and shall furnish to the indemnifying
party all information reasonably available to the Indemnified Party or
Indemnified Person which relates to such action or Claim. The indemnifying party
shall keep the Indemnified Party or Indemnified Person fully apprised at all
times as to the status of the defense or any settlement negotiations with
respect thereto. No indemnifying party shall be liable for any settlement of any
action, claim or proceeding effected without its prior written consent,
provided, however, that the indemnifying party shall not unreasonably withhold,
delay or condition its consent. No indemnifying party shall, without the prior
written consent of the Indemnified Party or Indemnified Person, consent to entry
of any judgment or enter into any settlement or other compromise which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party or Indemnified Person of a release from all liability
in respect to such Claim or litigation. Following indemnification as provided
for hereunder, the indemnifying party shall be subrogated to all rights of the
Indemnified Party or Indemnified Person with respect to all third parties, firms
or corporations relating to the matter for which indemnification has been made.
The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Person or Indemnified
Party under this Section 6, except to the extent that the indemnifying party is
prejudiced in its ability to defend such action.

 

d. No Person involved in the sale of Registrable Securities who is guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) in connection with such sale shall be entitled to
indemnification from any Person involved in such sale of Registrable Securities
who is not guilty of fraudulent misrepresentation.

 

14

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e. The indemnification required by this Section 6 shall be made by periodic
payments of the amount thereof during the course of the investigation or
defense, as and when bills are received or Indemnified Damages are incurred.

 

f. The indemnity agreements contained herein shall be in addition to (i) any
cause of action or similar right of the Indemnified Party or Indemnified Person
against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.

 

7. Contribution.

 

To the extent any indemnification by an indemnifying party is prohibited or
limited by law, the indemnifying party agrees to make the maximum contribution
with respect to any amounts for which it would otherwise be liable under
Section 6 to the fullest extent permitted by law; provided, however, that:
(i) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6 of this Agreement, (ii) no Person involved in the sale of Registrable
Securities which Person is guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) in connection with such sale shall be
entitled to contribution from any Person involved in such sale of Registrable
Securities who was not guilty of fraudulent misrepresentation; and
(iii) contribution by any seller of Registrable Securities shall be limited in
amount to the net amount of proceeds received by such seller from the sale of
such Registrable Securities pursuant to such Registration Statement.

 

8. Reports Under the 1934 Act.

 

With a view to making available to the Investors the benefits of Rule 144
promulgated under the 1933 Act or any other similar rule or regulation of the
SEC that may at any time permit the Investors to sell securities of the Company
to the public without registration (“Rule 144”), the Company agrees to:

 

a. make and keep public information available, as those terms are understood and
defined in Rule 144;

 

b. file with the SEC in a timely manner all reports and other documents required
of the Company under the 1933 Act and the 1934 Act so long as the Company
remains subject to such requirements (it being understood that nothing herein
shall limit the Company’s obligations under Section 4(c) of the Securities
Purchase Agreement) and the filing of such reports and other documents is
required for the applicable provisions of Rule 144; and

 

c. furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company, if
true, that it has complied with the reporting requirements of Rule 144, the 1933
Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report
of the Company and such other reports and documents so filed by the Company, and
(iii) such other information as may be reasonably requested to permit the
Investors to sell such securities pursuant to Rule 144 without registration.

 

15

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9. Assignment of Registration Rights.

 

The rights under this Agreement shall be automatically assignable by the
Investors to any transferee of all or any portion of such Investor’s Registrable
Securities if: (i) the Investor agrees in writing with the transferee or
assignee to assign such rights, and a copy of such agreement is furnished to the
Company within a reasonable time after such assignment; (ii) the Company is,
within a reasonable time after such transfer or assignment, furnished with
written notice of (a) the name and address of such transferee or assignee, and
(b) the securities with respect to which such registration rights are being
transferred or assigned; (iii) immediately following such transfer or assignment
the further disposition of such securities by the transferee or assignee is
restricted under the 1933 Act and applicable state securities laws; (iv) at or
before the time the Company receives the written notice contemplated by clause
(ii) of this sentence the transferee or assignee agrees in writing with the
Company to be bound by all of the provisions contained herein; (v) such transfer
shall have been made in accordance with the applicable requirements of the
Securities Purchase Agreement; and (vi) such transfer shall have been conducted
in accordance with all applicable federal and state securities laws.

 

10. Amendment of Registration Rights.

 

Provisions of this Agreement may be amended and the observance thereof may be
waived (either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Required
Holders; provided, however, that any such amendment or waiver that would have an
adverse and disproportionate effect on any Investor must be approved by such
Investor. Any amendment or waiver effected in accordance with this Section 10
shall be binding upon each Investor and the Company. No such amendment shall be
effective to the extent that it applies to less than all of the holders of the
Registrable Securities. No consideration shall be offered or paid to any Person
to amend or consent to a waiver or modification of any provision of any of this
Agreement unless the same consideration also is offered to all of the parties to
this Agreement.

 

11. Miscellaneous.

 

a. A Person is deemed to be a holder of Registrable Securities whenever such
Person owns or is deemed to own of record such Registrable Securities. If the
Company receives conflicting instructions, notices or elections from two or more
Persons with respect to the same Registrable Securities, the Company shall act
upon the basis of instructions, notice or election received from such record
owner of such Registrable Securities.

 

16

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

 

If to the Company:

 

Devcon International Corp.

595 South Federal Highway

    

Suite 500

    

Boca Raton, Florida 33432

    

Telephone:

   (561) 955-7300

Facsimile:

   (561) 955-7333

Attention:

   Stephen J. Ruzika

 

With a copy (for informational purposes only) to:

 

Greenberg Traurig, P.A.

1221 Brickell Avenue

    

Miami, Florida 33131

    

Telephone:

   (305) 579-0756

Facsimile:

   (305) 961-5756

Attention:

   Robert L. Grossman, Esq.

 

If to the Transfer Agent:

 

Registrar and Transfer Company

    

10 Commerce Drive

    

Cranford, NJ 07016

    

Telephone:

   (908) 497-2300

Facsimile:

   (908) 497-2310

Attention:

   Michael Jones

 

If to Legal Counsel:

 

Schulte Roth & Zabel LLP

    

919 Third Avenue

    

New York, New York 10022

    

Telephone:

   (212) 756-2000

Facsimile:

   (212) 593-5955

Attention:

   Eleazer N. Klein, Esq.

 

If to a Buyer, to its address and facsimile number set forth on the Schedule of
Buyers attached hereto, with copies to such Buyer’s representatives as set forth
on the Schedule of Buyers, or to such other address and/or facsimile number
and/or to the attention of such other Person as the recipient party has
specified by written notice given to each other party five (5) days prior to the
effectiveness of such change. Written confirmation of receipt (A) given by the
recipient of such notice, consent, waiver or other communication,
(B) mechanically or electronically generated by the sender’s facsimile machine
containing the time, date, recipient facsimile number and an image of the first
page of such transmission or (C) provided by a courier or overnight courier
service shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a

 

17

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

nationally recognized overnight delivery service in accordance with clause (i),
(ii) or (iii) above, respectively.

 

c. Failure of any party to exercise any right or remedy under this Agreement or
otherwise, or delay by a party in exercising such right or remedy, shall not
operate as a waiver thereof.

 

d. All questions concerning the construction, validity, enforcement and
interpretation of this Agreement shall be governed by the internal laws of the
State of New York, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of New York or any other jurisdictions)
that would cause the application of the laws of any jurisdictions other than the
State of New York. Each party hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in The City of New York,
Borough of Manhattan, for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
If any provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND
AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE
HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY
TRANSACTION CONTEMPLATED HEREBY.

 

e. This Agreement, the other Transaction Documents (as defined in the Securities
Purchase Agreement) and the instruments referenced herein and therein constitute
the entire agreement among the parties hereto with respect to the subject matter
hereof and thereof. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein and therein. This
Agreement, the other Transaction Documents and the instruments referenced herein
and therein supersede all prior agreements and understandings among the parties
hereto with respect to the subject matter hereof and thereof.

 

f. Subject to the requirements of Section 9, this Agreement shall inure to the
benefit of and be binding upon the permitted successors and assigns of each of
the parties hereto.

 

g. The headings in this Agreement are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof.

 

18

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h. This Agreement may be executed in identical counterparts, each of which shall
be deemed an original but all of which shall constitute one and the same
agreement. This Agreement, once executed by a party, may be delivered to the
other party hereto by facsimile transmission of a copy of this Agreement bearing
the signature of the party so delivering this Agreement.

 

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

 

j. All consents and other determinations required to be made by the Investors
pursuant to this Agreement shall be made, unless otherwise specified in this
Agreement, by the Required Holders.

 

k. The language used in this Agreement will be deemed to be the language chosen
by the parties to express their mutual intent and no rules of strict
construction will be applied against any party.

 

l. This Agreement is intended for the benefit of the parties hereto and their
respective permitted successors and assigns, and is not for the benefit of, nor
may any provision hereof be enforced by, any other Person.

 

m. The obligations of each Investor hereunder are several and not joint with the
obligations of any other Investor, and no provision of this Agreement is
intended to confer any obligations on any Investor vis-à-vis any other Investor.
Nothing contained herein, and no action taken by any Investor pursuant hereto,
shall be deemed to constitute the Investors as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Investors are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated herein.

 

* * * * * *

 

19

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

 

COMPANY: DEVCON INTERNATIONAL CORP. By:        

Name:

   

Title:

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

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

 

BUYERS: STEELHEAD INVESTMENTS LTD. By:        

Name:

   

Title:

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

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

 

BUYERS: CASTLERIGG MASTER INVESTMENTS, LTD. By:        

Name:

   

Title:

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

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

 

CS EQUITY II LLC By:        

Name:

   

Title:

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

SCHEDULE OF BUYERS

 

Buyer

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

  

Buyer Address
and Facsimile Number

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

  

Buyer’s Representative’s Address
and Facsimile Number

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

Steelhead Investments Ltd.

  

c/o HBK Investments L.P.

300 Crescent Court, Suite 700

Dallas, TX 75201

Attn: Legal (PP)

Telephone: 214-758-6107

Facsimile: 214-758-1207

  

Schulte Roth & Zabel LLP

919 Third Avenue

New York, NY 10022

Attn: Eleazer Klein, Esq.

Facsimile: (212) 593-5955

Telephone: (212) 756-2000

Castlerigg Master Investments Ltd.

  

c/o Sandell Asset Management

40 West 57th St

26th Floor

New York, NY 10019

Attention: Cem Hacioglu / Matthew Pliskin

Fax: 212-603-5710

Telephone: 212-603-5700

Residence: British Virgin Islands

  

McDermott Will & Emery LLP

340 Madison Avenue

New York, New York 10017

Attention: Stephen Older, Esq.

Facsimile: (212) 547-5444

Telephone: (212) 547-5649

CS Equity II LLC

  

c/o CapitalSource Finance, LLC

4445 Willard Avenue, 12th Floor

Chevy Chase, Maryland 20815

Attention: HSB, Portfolio Manager

Telephone: (301) 841-2700

Fax: (301) 841-2360

  

Katten Muchin Rosenman LLP

525 West Monroe Street

Chicago, Ill. 60661

Attention: Jeffrey L. Elegant,

Esq. and Mark R. Grossman, Esq.

Facsimile: (312) 577-4408

Telephone: (312) 902-5200

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

EXHIBIT A

 

FORM OF NOTICE OF EFFECTIVENESS

OF REGISTRATION STATEMENT

 

[Transfer Agent]

[Address]

Attention:

 

  Re: Devcon International Corp.

 

Ladies and Gentlemen:

 

[We are][I am] counsel to Devcon International Corp., a Florida corporation (the
“Company”), and have represented the Company in connection with that certain
Securities Purchase Agreement (the “Securities Purchase Agreement”) entered into
by and among the Company and the buyers named therein (collectively, the
“Holders”) pursuant to which the Company issued to the Holders preferred shares
(the “Preferred Shares”) convertible into the Company’s common stock, $0.10 par
value (the “Common Stock”), warrants exercisable for shares of Common Stock (the
“Warrants”). Pursuant to the Securities Purchase Agreement, the Company also has
entered into a Registration Rights Agreement with the Holders (the “Registration
Rights Agreement”) pursuant to which the Company agreed, among other things, to
register the Registrable Securities (as defined in the Registration Rights
Agreement), including the shares of Common Stock issuable upon conversion of the
Preferred Shares and the shares of Common Stock issuable upon exercise of the
Warrants, under the Securities Act of 1933, as amended (the “1933 Act”). In
connection with the Company’s obligations under the Registration Rights
Agreement, on ____________ ___, 200_, the Company filed a Registration Statement
on Form S-3 (File No. 333-_____________) (the “Registration Statement”) with the
Securities and Exchange Commission (the “SEC”) relating to the Registrable
Securities which names each of the Holders as a selling shareholder thereunder.

 

In connection with the foregoing, [we][I] advise you that a member of the SEC’s
staff has advised [us][me] by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and [we][I] have no
knowledge, after telephonic inquiry of a member of the SEC’s staff, that any
stop order suspending its effectiveness has been issued or that any proceedings
for that purpose are pending before, or threatened by, the SEC and the
Registrable Securities are available for resale under the 1933 Act pursuant to
the Registration Statement.

 

1

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Unless we inform you otherwise, this letter shall serve as our standing opinion
to you that the shares of Common Stock are freely transferable by the Holders
pursuant to the Registration Statement. You need not require further letters
from us to effect any future legend-free issuance or reissuance of shares of
Common Stock to the Holders as contemplated by the Company’s Irrevocable
Transfer Agent Instructions dated February __, 2006.

 

Very truly yours,

[ISSUER’S COUNSEL]

By:    

 

CC: [LIST NAMES OF HOLDERS]

 

2

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EXHIBIT B

 

SELLING SHAREHOLDERS

 

The shares of Common Stock being offered by the selling shareholders are
issuable upon conversion of the convertible preferred shares, upon exercise of
the warrants and in payment of certain dividend requirements as set forth in the
Certificate of Designation. For additional information regarding the issuance of
those convertible preferred shares and warrants, see “Private Placement of
Convertible Preferred Shares and Warrants” above. We are registering the shares
of Common Stock in order to permit the selling shareholders to offer the shares
for resale from time to time. Except for the ownership of the preferred shares
and warrants issued pursuant to the Securities Purchase Agreement, the selling
shareholders have not had any material relationship with us within the past
three years.

 

The table below lists the selling shareholders and other information regarding
the beneficial ownership of the shares of Common Stock by each of the selling
shareholders. The second column lists the number of shares of Common Stock
beneficially owned by each selling shareholder, based on its ownership of the
convertible preferred shares and warrants, as of ________, 200_, assuming
conversion of all convertible preferred shares and exercise of the warrants held
by the selling shareholders on that date, without regard to any limitations on
conversions or exercise.

 

The third column lists the shares of Common Stock being offered by this
prospectus by the selling shareholders.

 

In accordance with the terms of a registration rights agreement with the selling
shareholders, this prospectus generally covers the resale of at least 120%, of
the sum of (i) the number of shares of Common Stock issuable upon conversion of
the convertible preferred shares (and the dividends accrued and payable
thereunder) as of the trading day immediately preceding the date the
registration statement is initially filed with the SEC, (ii) the number of
shares of Common Stock issuable upon payment of the dividend shares as of the
trading day immediately preceding the date the registration statement is
initially filed with the SEC assuming that all of the Preferred Shares remain
outstanding through the Mandatory Date (as defined in the Certificate of
Designations) and (iii) the number of shares of Common Stock issuable upon
exercise of the related warrants as of the trading day immediately preceding the
date the registration statement is initially filed with the SEC. Because the
conversion price of the convertible preferred shares and the exercise price of
the warrants may be adjusted, the number of shares that will actually be issued
may be more or less than the number of shares being offered by this prospectus.
The fourth column assumes the sale of all of the shares offered by the selling
shareholders pursuant to this prospectus.

 

Under the terms of the certificate of designations and the warrants, a selling
shareholder may not convert the preferred shares or exercise the warrants to the
extent such conversion or exercise would cause such selling shareholder,
together with its affiliates, to beneficially own a number of shares of Common
Stock which would exceed 9.99% or 4.99% as applicable of our then outstanding
shares of Common Stock following such conversion or exercise, excluding for
purposes of such determination shares of Common Stock issuable upon conversion
of the convertible preferred shares which have not been converted and upon
exercise of the warrants which have not been exercised. The number of shares in
the second column does not reflect this limitation. The selling shareholders may
sell all, some or none of their shares in this offering. See “Plan of
Distribution.”

 

3

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

Name of Selling Stockholder

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

   Number of Shares of
Common Stock Owned
Prior to Offering

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

   Maximum Number of Shares
of Common Stock to be Sold
Pursuant to this Prospectus

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

   Number of Shares of
Common Stock Owned
After Offering

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

Steelhead Investments Ltd. (1)

             0

Castlerigg Master Investments Ltd. (2)

             0

CS Equity II LLC (3)

              

 

(1) HBK Investments L.P. may be deemed to have sole voting and sole dispositive
power over the securities pursuant to an Investment Management Agreement between
HBK Investments L.P. and Steelhead Investments Ltd. Additionally, the following
individuals may be deemed to have control over HBK Investments L.P.: Kenneth M.
Hirsh, Laurence H. Lebowitz, William E. Rose, David C. Haley and Jamiel A.
Akhtar. Steelhead Investments Ltd. is an affiliate of a registered broker-dealer
and has represented to the Company that it acquired the securities in the
ordinary course of business and, at the time of the purchase of the securities,
had no agreements or understandings, directly or indirectly, with any person to
distribute the securities.

 

(2) Sandell Asset Management Corp. is the investment manager of Castlerigg
Master Investment Ltd. (“Castlerigg”) and has shared voting and dispositive
power over the securities owned by Castlerigg. Sandell Asset Management Corp.
and Thomas E. Sandell, its sole shareholder, disclaim beneficial ownership of
the securities owned by Castlerigg.

 

(3) CapitalSource Finance LLC may be deemed to have sole voting and sole
dispositive power over the securities pursuant to its relationship with CS
Equity II LLC. Additionally Keith Reuben may be deemed to have control over
CapitalSource. Keith Reuben disclaims beneficial ownership of the securities
owned by CapitalSource.

 

1

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

PLAN OF DISTRIBUTION

 

We are registering the shares of Common Stock issuable upon conversion of the
convertible preferred shares, upon exercise of the warrants and in payment of
certain dividend requirements to permit the resale of these shares of Common
Stock by the holders of the convertible preferred shares and warrants from time
to time after the date of this prospectus. We will not receive any of the
proceeds from the sale by the selling shareholders of the shares of Common
Stock. We will bear all fees and expenses incident to our obligation to register
the shares of Common Stock.

 

The selling shareholders may sell all or a portion of the shares of Common Stock
beneficially owned by them and offered hereby from time to time directly or
through one or more underwriters, broker-dealers or agents. If the shares of
Common Stock are sold through underwriters or broker-dealers, the selling
shareholders will be responsible for underwriting discounts or commissions or
agent’s commissions. The shares of Common Stock may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of the
sale, at varying prices determined at the time of sale, or at negotiated prices.
These sales may be effected in transactions, which may involve crosses or block
transactions,

 

  •   on any national securities exchange or quotation service on which the
securities may be listed or quoted at the time of sale;

 

  •   in the over-the-counter market;

 

  •   in transactions otherwise than on these exchanges or systems or in the
over-the-counter market;

 

  •   through the writing of options, whether such options are listed on an
options exchange or otherwise;

 

  •   ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;

 

  •   block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;

 

  •   purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;

 

  •   an exchange distribution in accordance with the rules of the applicable
exchange;

 

  •   privately negotiated transactions;

 

  •   short sales;

 

  •   sales pursuant to Rule 144;

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

  •   broker-dealers may agree with the selling securityholders to sell a
specified number of such shares at a stipulated price per share;

 

  •   a combination of any such methods of sale; and

 

  •   any other method permitted pursuant to applicable law.

 

If the selling shareholders effect such transactions by selling shares of Common
Stock to or through underwriters, broker-dealers or agents, such underwriters,
broker-dealers or agents may receive commissions in the form of discounts,
concessions or commissions from the selling shareholders or commissions from
purchasers of the shares of Common Stock for whom they may act as agent or to
whom they may sell as principal (which discounts, concessions or commissions as
to particular underwriters, broker-dealers or agents may be in excess of those
customary in the types of transactions involved). In connection with sales of
the shares of Common Stock or otherwise, the selling shareholders may enter into
hedging transactions with broker-dealers, which may in turn engage in short
sales of the shares of Common Stock in the course of hedging in positions they
assume. The selling shareholders may also sell shares of Common Stock short and
deliver shares of Common Stock covered by this prospectus to close out short
positions and to return borrowed shares in connection with such short sales. The
selling shareholders may also loan or pledge shares of Common Stock to
broker-dealers that in turn may sell such shares.

 

The selling shareholders may pledge or grant a security interest in some or all
of the convertible preferred shares or warrants or shares of Common Stock owned
by them and, if they default in the performance of their secured obligations,
the pledgees or secured parties may offer and sell the shares of Common Stock
from time to time pursuant to this prospectus or any amendment to this
prospectus under Rule 424(b)(3) or other applicable provision of the Securities
Act of 1933, as amended, amending, if necessary, the list of selling
shareholders to include the pledgee, transferee or other successors in interest
as selling shareholders under this prospectus. The selling shareholders also may
transfer and donate the shares of Common Stock in other circumstances in which
case the transferees, donees, pledgees or other successors in interest will be
the selling beneficial owners for purposes of this prospectus.

 

The selling shareholders and any broker-dealer participating in the distribution
of the shares of Common Stock may be deemed to be “underwriters” within the
meaning of the Securities Act, and any commission paid, or any discounts or
concessions allowed to, any such broker-dealer may be deemed to be underwriting
commissions or discounts under the Securities Act. At the time a particular
offering of the shares of Common Stock is made, a prospectus supplement, if
required, will be distributed which will set forth the aggregate amount of
shares of Common Stock being offered and the terms of the offering, including
the name or names of any broker-dealers or agents, any discounts, commissions
and other terms constituting compensation from the selling shareholders and any
discounts, commissions or concessions allowed or reallowed or paid to
broker-dealers.

 

Under the securities laws of some states, the shares of Common Stock may be sold
in such states only through registered or licensed brokers or dealers. In
addition, in some states the shares of Common Stock may not be sold unless such
shares have been registered or qualified

 

2

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

for sale in such state or an exemption from registration or qualification is
available and is complied with.

 

There can be no assurance that any selling shareholder will sell any or all of
the shares of Common Stock registered pursuant to the shelf registration
statement, of which this prospectus forms a part.

 

The selling shareholders and any other person participating in such distribution
will be subject to applicable provisions of the Securities Exchange Act of 1934,
as amended, and the rules and regulations thereunder, including, without
limitation, Regulation M of the Exchange Act, which may limit the timing of
purchases and sales of any of the shares of Common Stock by the selling
shareholders and any other participating person. Regulation M may also restrict
the ability of any person engaged in the distribution of the shares of Common
Stock to engage in market-making activities with respect to the shares of Common
Stock. All of the foregoing may affect the marketability of the shares of Common
Stock and the ability of any person or entity to engage in market-making
activities with respect to the shares of Common Stock.

 

We will pay all expenses of the registration of the shares of Common Stock
pursuant to the registration rights agreement, estimated to be $[        ] in
total, including, without limitation, Securities and Exchange Commission filing
fees and expenses of compliance with state securities or “blue sky” laws;
provided, however, that a selling shareholder will pay all underwriting
discounts and selling commissions, if any. We will indemnify the selling
shareholders against liabilities, including some liabilities under the
Securities Act, in accordance with the registration rights agreements, or the
selling shareholders will be entitled to contribution. We may be indemnified by
the selling shareholders against civil liabilities, including liabilities under
the Securities Act, that may arise from any written information furnished to us
by the selling shareholder specifically for use in this prospectus, in
accordance with the related registration rights agreements, or we may be
entitled to contribution.

 

Once sold under the shelf registration statement, of which this prospectus forms
a part, the shares of Common Stock will be freely tradable in the hands of
persons other than our affiliates.

 

3