Exhibit 10.1
SECURITIES PURCHASE AGREEMENT
     SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of November 20,
2007, by and among TXCO Resources Inc., a Delaware corporation, with
headquarters located at 777 E. Sonterra Blvd., Suite 350, San Antonio, Texas
78258 (the “Company”), and the investors listed on the Schedule of Buyers
attached hereto (individually, a “Buyer” and collectively, the “Buyers”).
     WHEREAS:
     A. The Company and each Buyer is executing and delivering this Agreement in
reliance upon the exemption from securities registration afforded by
Section 4(2) of the Securities Act of 1933, as amended (the “1933 Act”), and
Rule 506 of Regulation D (“Regulation D”) as promulgated by the United States
Securities and Exchange Commission (the “SEC”) under the 1933 Act.
     B. The Company has authorized a new series of convertible preferred stock
of the Company designated as Series C 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 A, which Series C Preferred Stock shall be convertible into the
Company’s common stock, par value $0.01 per share (the “Common Stock”), in
accordance with the terms of the Certificate of Designations.
     C. Each Buyer wishes to purchase, and the Company wishes to sell, upon the
terms and conditions stated in this Agreement, at the Initial Closing (as
defined below) that aggregate number of shares of Series C Convertible Preferred
Stock set forth opposite such Buyer’s name in column (3) on the Schedule of
Buyers (which aggregate number for all Buyers shall be 55,000) (the “Initial
Preferred Shares”) (as converted, collectively, the “Initial Conversion
Shares”).
     D. Subject to the terms and conditions set forth in this Agreement, the
Buyers shall have the right to participate in Additional Closings (as defined
below) in order to purchase, and require the Company to sell up to that
aggregate number of shares of Series C Preferred Stock set forth opposite such
Buyer’s name in column (4) on the Schedule of Buyers (which aggregate number for
all Buyers shall not exceed 25,000) (the “Additional Preferred Shares”, together
with the Initial Preferred Shares, the “Preferred Shares”) (as converted,
collectively, the “Additional Conversion Shares”, together with the Initial
Conversion Shares, the “Conversion Shares”).
     E. Contemporaneously with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement,
substantially in the form attached hereto as Exhibit B (the “Registration Rights
Agreement”), pursuant to which the Company has agreed to provide certain
registration rights with respect to the Registrable Securities (as defined in
the Registration Rights Agreement), under the 1933 Act and the rules and
regulations promulgated thereunder, and applicable state securities laws.

 

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     F. The Preferred Shares may be entitled to dividends, which at the option
of the Company, subject to certain conditions, may be paid in shares of Common
Stock (the “Dividend Shares”).
     G. The Preferred Shares, the Conversion Shares and the Dividend Shares are
collectively referred to herein as the “Securities”.
     NOW, THEREFORE, the Company and each Buyer hereby agree as follows:
     1. PURCHASE AND SALE OF PREFERRED SHARES.
          (a) Purchase of Preferred Shares.
               (i) Initial Preferred Shares. 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), the number of Initial Preferred Shares as is set forth opposite such
Buyer’s name in column (3) on the Schedule of Buyers (the “Initial Closing”).
               (ii) Additional Preferred Shares. Subject to the satisfaction (or
waiver) of the conditions set forth in Sections 1(c), 6(b) and 7(b) below, the
Company shall issue and sell to each Buyer electing to participate in such
Additional Closing pursuant to Section 1(c) below, and each such Buyer
severally, but not jointly, agrees to purchase from the Company on such
Additional Closing Date (as defined below), up to the number of Additional
Preferred Shares as is set forth opposite such Buyer’s name in column (4) on the
Schedule of Buyers (each, an “Additional Closing”).
               (iii) Closing. The Initial Closing and the Additional Closings
are each referred to in this Agreement as a “Closing”. Each Closing shall occur
on the applicable Closing Date at the offices of Schulte Roth & Zabel LLP, 919
Third Avenue, New York, New York 10022.
               (iv) Purchase Price. The purchase price for each Buyer of the
Initial Preferred Shares to be purchased by each such Buyer at the Initial
Closing shall be the amount set forth opposite such Buyer’s name in column
(5) of the Schedule of Buyers (the “Initial Purchase Price”). Each Buyer shall
pay $1,000 for each Preferred Share to be purchased by such Buyer at each
Additional Closing (the “Additional Purchase Price”, and together with the
Initial Purchase Price, the “Purchase Price”).
          (b) Initial Closing Date. The date and time of the Initial Closing
(the “Initial Closing Date”) shall be 10:00 a.m., New York City Time, on the
date hereof after notification of satisfaction (or waiver) of the conditions to
the Initial Closing set forth in Sections 6(a) and 7(a) below (or such later
date as is mutually agreed to by the Company and each Buyer).
          (c) Additional Closing Date. The date and time of the Additional
Closings (each an “Additional Closing Date,” and together with the Initial
Closing Date, each a “Closing Date” and collectively, the “Closing Dates”) shall
be 10:00 a.m., New York City time, on the date specified in the applicable
Additional Closing Notice (as defined below), subject to

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satisfaction (or waiver) of the conditions to Additional Closing set forth in
Sections 6(b) and 7(b) and the conditions contained in this Section 1(c) (or
such later date as is mutually agreed to by the Company and the applicable
Buyer). Subject to the requirements of Sections 6(b) and 7(b) and the conditions
contained in this Section 1(c), each Buyer may purchase (provided that such
Buyer was a Buyer under this Agreement on the date hereof and such Buyer holds
all of the Preferred Shares purchased hereunder at the time of such Additional
Closing), at such Buyer’s option, Additional Preferred Shares by delivering
written notice to the Company (an “Additional Closing Notice”) at any time
during the period beginning after the date hereof and ending on the date one
hundred and twenty (120) days after the Initial Closing Date (the “Additional
Closing Expiration Date”), which Additional Closing Expiration Date may be
extended at the option of the Company to a date not later than one hundred and
eighty (180) days after the Initial Closing Date. The Additional Closing Notice
shall be delivered at least ten (10) Business Days prior to the applicable
Additional Closing Date set forth in such Additional Closing Notice. An
Additional Closing Notice shall set forth (i) the number of Additional Preferred
Shares to be purchased by such Buyer at the Additional Closing, which number of
shares shall not exceed the number of Additional Preferred Shares as is set
forth opposite such Buyer’s name in column (4) on the Schedule of Buyers,
(ii) the aggregate Additional Purchase Price for the Additional Preferred Shares
to be purchased and (iii) the proposed Additional Closing Date. 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.
          (d) Form of Payment. On the Initial Closing Date, each Buyer shall pay
the Initial Purchase Price to the Company for the Initial Preferred Shares to be
issued and sold to such Buyer at the Initial Closing by wire transfer of
immediately available funds for such Initial Purchase Price in accordance with
the Company’s written wire instructions (less, in the case of Capital Ventures
International (“Capital Ventures”), a Buyer, the amounts withheld pursuant to
Section 4(g)). On each Additional Closing Date, each Buyer shall pay the
Additional Purchase Price to the Company for the Additional Preferred Shares to
be issued and sold to such Buyer at such Additional Closing by wire transfer of
immediately available funds for such Additional Purchase Price in accordance
with the Company’s written wire instructions. At each Closing, the Company shall
deliver to each Buyer the Preferred Shares (in such numbers as such Buyer shall
request) which such Buyer is then purchasing duly executed on behalf of the
Company and registered in the name of such Buyer or its designee.
     2. BUYER’S REPRESENTATIONS AND WARRANTIES.
          Each Buyer represents and warrants with respect to only itself that:
          (a) 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
Preferred Shares, (ii) upon conversion of the Preferred Shares will acquire the
Conversion Shares and (iii) will acquire the Dividend Shares in each case, in
the ordinary course of

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business 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 and such Buyer does not have a
present arrangement to effect any distribution of the Securities to or through
any person or entity; provided, however, that by making the representations
herein, such Buyer does not agree to hold any of the Securities for any minimum
or other specific term and reserves the right to dispose of the Securities at
any time in accordance with or pursuant to a registration statement or an
exemption under the 1933 Act. Such Buyer is acquiring the Securities hereunder
in the ordinary course of its business. Such Buyer does not presently have any
agreement or understanding, directly or indirectly, with any Person to
distribute any of the Securities.
          (c) Accredited Investor Status. Such Buyer is an “accredited investor”
as that term is defined in Rule 501(a) of Regulation D.
          (d) Reliance on Exemptions. Such Buyer understands that the Securities
are being offered and sold to it in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying in part upon the truth and accuracy of, and such
Buyer’s compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire the Securities.
          (e) Information. Such Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
which have been requested by such Buyer. Such Buyer and its advisors, if any,
have been afforded the opportunity to ask questions of the Company. Neither such
inquiries nor any other due diligence investigations conducted by such Buyer or
its advisors, if any, or its representatives shall modify, amend or affect such
Buyer’s right to rely on the Company’s representations and warranties contained
herein. Such Buyer understands that its investment in the Securities involves a
high degree of risk. Such Buyer has sought such accounting, legal and tax advice
from Persons other than the Company as it has considered necessary to make an
informed investment decision with respect to its acquisition of the Securities.
In addition, such Buyer acknowledges that, in connection with the Closing, the
Company is entering into the transactions set forth in Schedule 2(e) and that
the Buyer has been afforded the opportunity to ask questions of the Company
regarding the same.
          (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

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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.
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 and such pledge of Securities shall not be deemed to be a transfer,
sale or assignment of the Securities hereunder, and no Buyer effecting a pledge
of Securities shall be required to provide the Company with any notice thereof
or otherwise make any delivery to the Company pursuant to this Agreement or any
other Transaction Document (as defined in Section 3(b)), including, without
limitation, this Section 2(g).
          (h) Legends. Such Buyer understands that the certificates or other
instruments representing the Preferred Shares and, until such time as the resale
of the Conversion Shares have been registered under the 1933 Act as contemplated
by the Registration Rights Agreement, the stock certificates representing the
Conversion 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] 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 OR (II) UNLESS
SOLD PURSUANT TO RULE 144K OR RULE 144A 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.

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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 or issue to such holder by electronic delivery at the applicable balance
account at The Depository Trust Company (“DTC”), 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 or Rule 144A. The Company shall be responsible for the fees of its
transfer agent and all DTC fees associated with such issuance.
          (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, 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.
          (l) Certain Trading Activities. Other than with respect to this
Agreement and the transactions contemplated herein, since the time that such
Buyer was first contacted by the Company, the Agents (as defined below) or any
other Person regarding this investment in the Company, neither the Buyer nor any
Affiliate (as defined by Rule 405 promulgated pursuant to the 1933 Act) of such
Buyer which (x) had knowledge of the transactions contemplated hereby, (y) has
or shares discretion relating to such Buyer’s investments or trading or
information concerning such Buyer’s investments and (z) is subject to such
Buyer’s review or input concerning such Affiliate’s investments or trading
(collectively, “Trading Affiliates”) has directly or indirectly, nor has any
Person acting on behalf of or pursuant to any understanding with such Buyer or
Trading Affiliate, effected or agreed to effect any transactions in the
securities of the Company. Such Buyer hereby covenants and agrees not

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to, and shall cause its Trading Affiliates not to, engage, directly or
indirectly, in any transactions in the securities of the Company or involving
the Company’s securities during the period from the date hereof until such time
as (i) the transactions contemplated by this Agreement are first publicly
announced as described in Section 4(i) hereof or (ii) this Agreement is
terminated in full pursuant to Section 8 hereof.
     3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
          The Company represents and warrants to each of the Buyers that:
          (a) Organization and Qualification. Each of the Company and its
Subsidiaries (as defined below) 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 reasonably be expected to have a Material Adverse Effect. As used in
this Agreement, “Material Adverse Effect” means any material adverse effect on
the business, properties, assets, operations, results of operations, condition
(financial or otherwise) of the Company or its Subsidiaries taken as a whole on
a consolidated basis, 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. The Company has no
significant subsidiaries (as such term is defined in Rule 1-02 of Regulation S-X
promulgated by the SEC) other than those listed on Schedule 3(a) (collectively,
the “Subsidiaries").
          (b) Authorization; Enforcement; Validity. The Company has the
requisite power and authority to enter into and perform its obligations under
this Agreement, the Certificate of Designations, the Registration Rights
Agreement, the Irrevocable Transfer Agent Instructions (as defined in
Section 5(b)), each of the Lock-Up Agreements and each of the other agreements
entered into by the parties hereto in connection with the transactions
contemplated by this Agreement (collectively, the “Transaction Documents”) and
to issue the Securities in accordance with the terms hereof and thereof. The
execution and delivery of the Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby,
including, without limitation, the issuance of the Preferred Shares and the
reservation for issuance and the issuance of the Conversion Shares issuable upon
conversion of the Preferred Shares and the reservation for issuance and the
issuance of the Dividend Shares issuable with respect to the Preferred Shares,
have been duly authorized by the Company’s board of directors and (other than
the filing with the SEC of a Form D and one or more Registration Statements in
accordance with the requirements of the Registration Rights Agreement and any
other filings as may be required by any state securities agencies or by the
Principal Market (as defined below)), no further filing, consent, or
authorization is required by the Company, its board of directors or its
stockholders. This Agreement and the other Transaction Documents of even date
herewith have been duly executed and delivered by the Company, and constitute
the legal, valid and binding

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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. The Certificate of
Designations in the form attached hereto as Exhibit A has been filed with the
Secretary of State of the State of Delaware and is in full force and effect,
enforceable against the Company in accordance with its terms and has not been
amended.
          (c) Issuance of Securities. The Preferred Shares 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 applicable
Closing, a number of shares of Common Stock shall have been duly authorized and
reserved for issuance which equals 110% of the sum of (i) the maximum number of
shares of Common Stock issuable upon conversion of the Preferred Shares and
(ii) the maximum number of Dividend Shares issuable pursuant to the terms of the
Certificate of Designations, issuable at such Closing and issued at any prior
Closing (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
and that all dividends will be issued in the form of Dividend Shares for a
period of three (3) years at an assumed value of the Weighted Average Price as
of the Initial Closing Date). Upon issuance or conversion in accordance with the
Certificate of Designations, the Conversion Shares and the Dividend Shares 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 accuracy of the representations and warranties of the Buyers in
this Agreement, the offer and issuance by the Company of the Securities is
exempt from registration under the 1933 Act.
          (d) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby (including, without limitation, the
issuance of the Preferred Shares and the Dividend Shares and reservation for
issuance of the Conversion Shares and the Dividend Shares) will not (i) result
in a violation of the Certificate of Incorporation (as defined in Section 3(r))
of the Company or any certificate of incorporation, certificate of formation,
any certificate of designations or other constituent document of any of its
Subsidiaries, any capital stock of the Company or Bylaws (as defined in
Section 3(r)) or any of its Subsidiaries bylaws or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its Subsidiaries is a party, or
(iii) result in a violation of any law, rule, regulation, order, judgment or
decree (including federal and state securities laws and regulations and the
rules and regulations of The NASDAQ Global Select 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, which with regard to subsections (ii) and (iii) would reasonably be
expected to cause a Material Adverse Effect.

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          (e) Consents. Subject to the receipt of Stockholder Approval, the
Company is not required to obtain any consent, authorization or order of, or
make any filing or registration with, any court, governmental agency or any
regulatory or self-regulatory agency or any other Person in order for it to
execute, deliver or perform any of its obligations under or contemplated by the
Transaction Documents, in each case in accordance with the terms hereof or
thereof. All consents, authorizations, orders, filings and registrations which
the Company is required to obtain pursuant to the preceding sentence have been
obtained or effected on or prior to the Closing Date, and the Company and its
Subsidiaries are unaware of any facts or circumstances which might prevent the
Company from obtaining or effecting any of the registration, application or
filings pursuant to the preceding sentence. The Company is not in violation of
the requirements of the Principal Market and has no knowledge of any facts that
would reasonably lead to delisting or suspension of the Common Stock in the
foreseeable future.
          (f) Acknowledgment Regarding Buyer’s Purchase of Securities. The
Company acknowledges and agrees that each Buyer is acting solely in the capacity
of arm’s length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby and that no Buyer is (i) an officer
or director of the Company, (ii) to the knowledge of the Company, 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 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 Agents’ 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
Lazard Freres & Co. LLC, BMO Capital Markets and Scotia Capital Inc. as
placement agents (the “Agents”) in connection with the sale of the Securities.
Other than the Agents, the Company has not engaged any placement agent or other
agent in connection with the sale of the Securities.
          (h) No Integrated Offering. Except as set forth on Schedule 3(h), none
of the Company, its Subsidiaries, any of their affiliates, and any Person acting
on their behalf

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has, directly or indirectly, made any offers or sales of any security or
solicited any offers to buy any security, under circumstances that would require
registration of any of the Securities under the 1933 Act or cause this offering
of the Securities to be integrated with prior offerings by the Company for
purposes of the 1933 Act or any applicable stockholder approval provisions,
including, without limitation, under the rules and regulations of any exchange
or automated quotation system on which any of the securities of the Company are
listed or designated. None of the Company, its Subsidiaries, their affiliates
and any Person acting on their behalf will take any action or steps referred to
in the preceding sentence that would require registration of any of the
Securities under the 1933 Act or cause the offering of the Securities to be
integrated with other offerings.
          (i) Dilutive Effect. The Company understands and acknowledges that the
number of Conversion Shares issuable upon conversion of the Preferred Shares
will increase in certain circumstances. The Company further acknowledges that
its obligation to issue Conversion Shares upon conversion of the Preferred
Shares and the Dividend Shares in accordance with this Agreement and the
Certificate of Designations is absolute and unconditional regardless of the
dilutive effect that such issuance may have on the ownership interests of other
stockholders of the Company.
          (j) Application of Takeover Protections; Rights Agreement. The Company
and its board of directors have taken all necessary action, if any, in order to
render inapplicable any control share acquisition, business combination, poison
pill (including any distribution under a rights agreement) or other similar
anti-takeover provision under the Certificate of Incorporation or any
certificates of designations or the laws of the jurisdiction of its formation or
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. Except as disclosed in the SEC Documents and Schedule 3(j), the
Company has not adopted a stockholder rights plan or similar arrangement
relating to accumulations of beneficial ownership of Common Stock or a change in
control of the Company.
          (k) SEC Documents; Financial Statements. Except as disclosed on
Schedule 3(k), during the two (2) years prior to the date hereof, the Company
has timely 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

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all material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto as in effect as of the
time of filing. Such financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied, during the
periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto, or (ii) in the case of unaudited interim
statements, to the extent they may exclude footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments).
          (l) Absence of Certain Changes. Except as disclosed in the SEC
Documents, since December 31, 2006 there has been no Material Adverse Effect.
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
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.
No event, liability, development or circumstance has occurred or exists, or is
contemplated to occur with respect to the Company, its Subsidiaries or their
respective business, properties, prospects, operations or financial condition,
that would be required to be disclosed by the Company under applicable
securities laws on a registration statement on Form S-1 filed with the SEC
relating to an issuance and sale by the Company of its Common Stock and which
has not been publicly announced.
          (n) Conduct of Business; Regulatory Permits. Neither the Company nor
its Subsidiaries is in violation of any term of or in default under its
Certificate of Incorporation, the Certificate of Designations, the Existing
Certificate of Designations (as defined below), any other certificate of
designation, preferences or rights of any other outstanding series of preferred
stock of the Company or Bylaws or their organizational charter or certificate of
incorporation or bylaws, respectively. Neither the Company nor any of its
Subsidiaries is in violation of any judgment, decree or order or any statute,
ordinance, rule or regulation applicable to the Company or its Subsidiaries, and
neither the Company nor any of its Subsidiaries will conduct its business in
violation of any of the foregoing, except in all cases for possible violations
which would not, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect. Without limiting the generality of the
foregoing,

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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 or its predecessor, (ii) trading in the Common Stock has not
been suspended by the SEC or the Principal Market and (iii) the Company has
received no communication, written or oral, from the SEC or the Principal Market
regarding the suspension or delisting of the Common Stock from the Principal
Market. The Company and its Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate regulatory authorities
necessary to conduct their respective businesses, except where the failure to
possess such certificates, authorizations or permits would not have,
individually or in the aggregate, a Material Adverse Effect, and neither the
Company nor any such Subsidiary has received any notice of proceedings relating
to the revocation or modification of any such certificate, authorization or
permit.
          (o) Foreign Corrupt Practices. Neither the Company nor any of its
Subsidiaries nor any director, officer, agent, employee or other Person acting
on behalf of the Company or any of its Subsidiaries has, in the course of its
actions for, or on behalf of, the Company or any of its Subsidiaries (i) used
any corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity; (ii) made any direct or
indirect unlawful payment to any foreign or domestic government official or
employee from corporate funds; (iii) violated or is in violation of any
provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or
(iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or
other unlawful payment to any foreign or domestic government official or
employee.
          (p) Sarbanes-Oxley Act. The Company is in material compliance with any
and all applicable requirements of the Sarbanes-Oxley Act of 2002 that are
effective as of the date hereof, and any and all applicable rules and
regulations promulgated by the SEC thereunder that are effective as of the date
hereof.
          (q) Transactions With Affiliates. Except as disclosed in the SEC
Documents, none of the officers or directors 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 or director or, to the actual 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 (i) 100,000,000 shares of Common Stock,
of which as of the date hereof, 34,162,119 are issued and outstanding and
2,235,462 shares are reserved for issuance pursuant to securities granted or
that may be granted that are (other than the Preferred Shares) exercisable or
exchangeable for, or convertible into, shares of Common Stock and
(ii) 10,000,000 shares of Preferred Stock none of which, as of the date hereof,
are

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issued and outstanding. All of such outstanding 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 capital stock is subject
to preemptive rights or any other similar rights or any liens or encumbrances
suffered or permitted by the Company; (ii) except as disclosed in the SEC
Documents, 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
capital stock 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 capital stock 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
capital stock of the Company or any of its Subsidiaries; (iii) 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); (iv) 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; (v) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities; (vi) except as disclosed in the SEC Documents, 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. Included in the SEC Documents are true, correct and complete copies of
the Company’s Certificate of Incorporation, as amended and as in effect on the
date hereof (the “Certificate of Incorporation”), and the Company’s Bylaws, as
amended and as in effect on the date hereof (the “Bylaws”), and the terms of all
securities convertible into, or exercisable or exchangeable for, shares of
Common Stock and the material rights of the holders thereof in respect thereto.
          (s) Indebtedness and Other Contracts. Except as disclosed in the SEC
Documents, neither the Company nor any of its Subsidiaries (i) has any
outstanding Indebtedness (as defined below) involving payment obligations of the
Company in excess of $1,000,000 (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. For purposes of this Agreement: (x)
“Indebtedness” of any Person means, without duplication (A) all indebtedness for
borrowed money, (B) all obligations issued, undertaken or assumed as the
deferred purchase price of property or services (including, without limitation,
“capital leases” in accordance with

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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 disclosed in the SEC Documents,
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, which if determined
adversely to the Company or any of its Subsidiaries would, or would reasonably
be expected to, have a Material Adverse Effect.
          (u) Insurance. The Company and each of its Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company and its Subsidiaries are
engaged. Neither the Company nor any such Subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such
Subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not have a Material Adverse Effect.
          (v) Employee Relations. (i) Neither the Company nor any of its
Subsidiaries is a party to any collective bargaining agreement or employs any
member of a

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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 would not, or would not reasonably be expected
to, have a Material Adverse Effect or is otherwise disclosed in the SEC
Documents, the Company and its Subsidiaries have defensible title to all real
property and good and marketable title to all personal property owned by them,
in each case free and clear of all liens, encumbrances and defects. Except as
would not, or would not reasonable be expected to, have a Material Adverse
Effect or is otherwise disclosed in the SEC Documents, 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.
          (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, original works of authorship, trade secrets and other
intellectual property rights and all applications related thereto (“Intellectual
Property Rights”) necessary to conduct their respective businesses as now
conducted. None of the Company’s or its Subsidiaries’ Intellectual Property
Rights have expired, terminated or been abandoned, or are expected to expire,
terminate or be abandoned, within one year 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. 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

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of any such permit, license or approval where, in each of the foregoing clauses
(i), (ii) and (iii), the failure to so comply could be reasonably expected to
have, individually or in the aggregate, a Material Adverse Effect. The term
“Environmental Laws” means all federal, state, local or foreign laws relating to
pollution or protection of human health or the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or subsurface
strata), including, without limitation, laws relating to emissions, discharges,
releases or threatened releases of chemicals, pollutants, contaminants, or toxic
or hazardous substances or wastes (collectively, “Hazardous Materials”) into the
environment, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous Materials,
as well as all authorizations, codes, decrees, demands or demand letters,
injunctions, judgments, licenses, notices or notice letters, orders, permits,
plans or regulations issued, entered, promulgated or approved thereunder.
          (z) Subsidiary Rights. Except as disclosed in Schedule 3(z), the
Company or one of its Subsidiaries has the unrestricted right to vote, and
(subject to limitations imposed by applicable law) to receive dividends and
distributions on, all capital securities of its Subsidiaries as owned by the
Company or such Subsidiary.
          (aa) Tax Status. The Company and each of its Subsidiaries (i) has made
or filed all foreign, federal and state income and all other tax returns,
reports and declarations required by any jurisdiction to which it is subject,
(ii) has paid all taxes and other governmental assessments and charges that are
material in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set aside
on its books provision reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations
apply. There are no unpaid taxes in any material amount claimed to be due by the
taxing authority of any jurisdiction, and the officers of the Company know of no
basis for any such claim.
          (bb) Internal Accounting and Disclosure Controls. The Company and each
of its Subsidiaries maintain a system of internal accounting controls sufficient
to provide reasonable assurance that (i) transactions are executed in accordance
with management’s general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
and liability accountability, (iii) access to assets or incurrence of
liabilities is permitted only in accordance with management’s general or
specific authorization and (iv) the recorded accountability for assets and
liabilities is compared with the existing assets and liabilities at reasonable
intervals and appropriate action is taken with respect to any difference. The
Company maintains disclosure controls and procedures (as such term is defined in
Rule 13a-14 under the 1934 Act) that are effective in ensuring that information
required to be disclosed by the Company in the reports that it files or submits
under the 1934 Act is recorded, processed, summarized and reported, within the
time periods specified in the rules and forms of the SEC, including, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
1934 Act is accumulated and communicated to the Company’s management, including
its principal executive officer or officers and its principal financial officer
or officers, as appropriate, to allow timely decisions regarding required
disclosure. During the twelve months prior to the date hereof, neither the
Company nor any

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of its Subsidiaries has 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 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 (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 the Company or to hold the Securities for any specified
term; (ii) that any Buyer, and counterparties 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
counterparty 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 Dividend Shares deliverable with respect to
Securities are being determined and (b) such hedging and/or trading activities,
if any, can reduce the value of the existing stockholders’ equity interest in
the Company both at and after the time the hedging and/or trading activities are
being conducted. The Company acknowledges that such aforementioned hedging
and/or trading activities do not constitute a breach of this Agreement, the
Certificate of Designations or any of the documents executed in connection
herewith.
          (gg) Manipulation of Price. The Company has not, and to its knowledge
no one acting on its behalf has, (i) taken, directly or indirectly, any action
designed to cause or to result in the stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or paid any compensation for
soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay
to

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any person any compensation for soliciting another to purchase any other
securities of the Company.
          (hh) U.S. Real Property Holding Corporation. The Company is not, has
never been, and so long as any Preferred Shares remain outstanding, shall not
become, 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 any Buyer’s request.
          (ii) Bank Holding Company Act. Neither the Company nor any of its
Subsidiaries is subject to the Bank Holding Company Act of 1956, as amended (the
“BHCA”) and to regulation by the Board of Governors of the Federal Reserve
System (the “Federal Reserve”). Neither the Company nor any of its Subsidiaries
or affiliates owns or controls, directly or indirectly, five percent (5%) or
more of the outstanding shares of any class of voting securities or twenty-five
percent (25%) or more of the total equity of a bank or any equity that is
subject to the BHCA and to regulation by the Federal Reserve. Neither the
Company nor any of its Subsidiaries or affiliates exercises a controlling
influence over the management or policies of a bank or any entity that is
subject to the BHCA and to regulation by the Federal Reserve.
          (jj) Form S-3 Eligibility. The Company is eligible to register the
Conversion Shares for resale by the Buyers using Form S-3 promulgated under the
1933 Act.
          (kk) Disclosure. The Company confirms that neither it nor any other
Person acting on its behalf has provided any of the Buyers or their agents or
counsel with any information that constitutes or could reasonably be expected to
constitute material, nonpublic information. The Company understands and confirms
that each of the Buyers will rely on the foregoing representations in effecting
transactions in securities of the Company. All disclosures provided by the
Company to the Buyers in the Transaction Documents and the Schedules to this
Agreement regarding the Company and its Subsidiaries, their business and the
transactions contemplated hereby, are true and correct and do not contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements made therein, in 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 light of the circumstances
under which they are made, not misleading. No event or circumstance has occurred
or information exists with respect to the Company or any of its Subsidiaries or
either of their respective businesses, properties, prospects, operations or
financial conditions, which, under applicable law, rule or regulation, requires
public disclosure or announcement by the Company but which has not been so
publicly announced or disclosed.
     4. COVENANTS.
               (a) Reasonable Best Efforts. Each party shall use its reasonable
best efforts timely to satisfy each of the covenants and conditions to be
satisfied by it as provided in Sections 4, 6 and 7 of this Agreement.

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          (b) Form D and Blue Sky. The Company agrees to file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof to each Buyer promptly after such filing. The Company shall, on or
before the Closing Date, take such action as the Company shall reasonably
determine is necessary in order to obtain an exemption for or to qualify the
Securities for sale to the Buyers at the Closing pursuant to this Agreement
under applicable securities or “Blue Sky” laws of the states of the United
States (or to obtain an exemption from such qualification), and shall provide
evidence of any such action so taken to the Buyers on or prior to the Closing
Date. The Company shall make all filings and reports relating to the offer and
sale of the Securities required under applicable securities or “Blue Sky” laws
of the states of the United States following the Closing Date.
          (c) Reporting Status. Until the date on which the Buyers shall have
sold all the Conversion Shares and the Dividend Shares and none of the Preferred
Shares 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 (except to the extent that the Company has complied with its
obligations under the Certificate of Designations in connection with (i) a
reorganization of the Company or a merger or consolidation of the Company with
or into another entity or (ii) an event that is deemed a “liquidation event”
pursuant to the Certificate of Designations) even if the 1934 Act or the rules
and regulations thereunder would no longer require or otherwise permit such
termination.
          (d) Use of Proceeds. The Company shall use the proceeds from the sale
of the Securities for general corporate and for working capital purposes, but
not for (A) except as set forth in Schedule 4(d), repayment of any outstanding
Indebtedness of the Company or any of its Subsidiaries or (B) redemption or
repurchase of any of its or its Subsidiaries’ equity securities.
          (e) Financial Information. The Company agrees to send the following to
each Investor (as defined in the Registration Rights Agreement) during the
Reporting Period (i) unless the following are filed with the SEC through EDGAR
and are available to the public through the EDGAR system, within one
(1) Business Day after the filing thereof with the SEC, a copy of its Annual
Reports and Quarterly Reports on Form 10-K, 10-KSB, 10-Q or 10-QSB, any interim
reports or any consolidated balance sheets, income statements, stockholders’
equity statements and/or cash flow statements for any period other than annual,
any Current Reports on Form 8-K and any registration statements (other than on
Form S-8) or amendments filed pursuant to the 1933 Act, (ii) within four
(4) Business Days of the release thereof, facsimile or e-mail copies of all
press releases issued by the Company or any of its Subsidiaries, unless the same
are filed with the SEC through EDGAR and available to the public through EDGAR
within such time, and (iii) copies of any notices and other information made
available or given to the stockholders of the Company generally, within four
(4) Business Days of the making available or giving thereof to the stockholders,
unless such notice and other information is filed with the SEC through EDGAR and
available to the public through EDGAR within such time.
          (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

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securities exchange and automated quotation system, if any, upon which the
Common Stock is then listed (subject to official notice of issuance) and shall
use its reasonable best efforts to maintain such listing of all Registrable
Securities from time to time issuable under the terms of the Transaction
Documents. The Company shall use its reasonable best efforts to maintain the
Common Stock’s authorization for quotation on an Eligible 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 an Eligible Market. The Company shall pay all fees and expenses in connection
with satisfying its obligations under this Section 4(f).
          (g) Fees. The Company shall reimburse Capital Ventures, or its
designee(s) (in addition to any other expense amounts paid to any Buyer prior to
the date of this Agreement) for all reasonable costs and expenses incurred in
connection with the transactions contemplated by the Transaction Documents
(including all reasonable legal fees and disbursements in connection therewith,
documentation and implementation of the transactions contemplated by the
Transaction Documents and due diligence expenses in connection therewith), in an
amount not to exceed $50,000, which amount may be withheld by such Buyer from
its Initial Purchase Price at the Initial Closing or paid by the Company upon
termination of this Agreement. The Company shall be responsible for the payment
of any placement agent’s fees or commissions, 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 or commissions payable to the Agents. 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.
Except as otherwise set forth in the Transaction Documents, each party to this
Agreement shall bear its own expenses in connection with the sale of the
Securities to the Buyers.
          (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 9:30 a.m., New York City time, on the first Business Day following the
date of this Agreement, the Company shall issue a press release disclosing all
of the material terms of the Transactions Documents. On or before 5:30 p.m., New
York City time, on the first Business Day following the date of this Agreement,
the Company shall file a Current Report on Form 8-K describing the terms of the
transactions contemplated by the Transaction Documents in the form required by
the 1934 Act and attaching the material Transaction Documents (including,
without limitation, this Agreement (and all schedules to this Agreement), the
form

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of Certificate of Designations and the form of the Registration Rights
Agreement) as exhibits to such filing (including all attachments, the “Initial
8-K Filing”). On or before 9:30 a.m., New York City Time, on the first Business
Day following each Additional Closing Date, the Company shall file a Current
Report on Form 8-K with the SEC describing the transaction consummated on such
date (the “Additional 8-K Filing,” and together with the Initial 8-K Filing, the
“8-K Filings”). From and after the filing of the Initial 8-K Filing with the
SEC, no Buyer shall be in possession of any material, nonpublic information
received from the Company, any of its Subsidiaries or any of its respective
officers, directors, employees or agents, that is not disclosed in the Initial
8-K Filing. The Company shall not, and shall cause each of its Subsidiaries and
its and each of their respective officers, directors, employees and agents, not
to, provide any Buyer with any material, nonpublic information regarding the
Company or any of its Subsidiaries from and after the filing of the Initial 8-K
Filing with the SEC without the express written consent of such Buyer or as may
be required under the terms of the Transaction Documents. If a Buyer has, or
believes it has, received any such material, nonpublic information regarding the
Company or any of its Subsidiaries from the Company or any Subsidiary, it may
provide the Company with written notice thereof. If the Company agrees, in its
reasonable determination, that such information is material and nonpublic, the
Company shall, within five (5) Trading Days (as defined in the Certificate of
Designations) of receipt of such notice, make public disclosure of such
material, nonpublic information. 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
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 or
affiliates shall disclose the name of such Buyer in any filing, announcement,
release or otherwise, unless such disclosure is required by law, regulation or
the Principal Market (except to the extent that such names appear in this
Agreement or the other Transaction Documents or the Registration Statement
required to be filed with the SEC).
          (j) Additional Preferred Shares; Variable Securities; Dilutive
Issuances.  So long as any Buyer or Buyers beneficially owns in the aggregate
more than 10% of the Preferred Shares purchased pursuant to this Agreement, the
Company will not, without the prior written consent of Buyers holding at least
two-thirds of the Preferred Shares, issue any shares of 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. For so long as any Preferred Shares remain outstanding, the
Company shall not, in any manner, issue or sell any rights, warrants or options
to subscribe for or purchase Common Stock or directly or indirectly convertible
into or exchangeable or exercisable for Common Stock at a 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

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Shares are convertible. For so long as any Preferred Shares remain outstanding,
the Company shall not, in any manner, enter into or affect any Dilutive Issuance
(as such term is defined in the Certificate of Designations) if the effect of
such Dilutive Issuance is to cause the Company to be required to issue upon
conversion of any Preferred Shares any shares of Common Stock in excess of that
number of shares of Common Stock which the Company may issue upon conversion of
the Preferred Shares without breaching the Company’s obligations under the rules
or regulations of the Principal Market (without giving effect to the Exchange
Cap provisions set forth in the Certificate of Designations). Notwithstanding
anything to the contrary in this section, the Company shall be permitted to
enter into the transactions described in Schedule 2(e).
          (k) Corporate Existence. So long as any Buyer beneficially owns any
Securities, the Company shall maintain its corporate existence and shall not
sell all or substantially all of the Company’s assets and 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.
          (l) 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 110% of the sum of (i) 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) and (ii) the maximum number of
Dividend Shares issuable pursuant to the terms of the Certificate of
Designations.
          (m) 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.
          (n) Additional Registration Statements. Except as set forth on
Schedule 4(n), until the date that is forty-five (45) calendar days after the
earlier of (i) the Effective Date and (ii) the last day of the Registration
Period (each as defined in the Registration Rights Agreement) (the “Trigger
Date”), the Company shall not file a registration statement under the 1933 Act
relating to securities that are not the Securities.
          (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.

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               (3) “Common Stock Equivalents” means, collectively, Options and
Convertible Securities.
               (ii) From the date hereof until 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 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”);
provided that the foregoing shall not apply to any Subsequent Placement which
does not have the right to have any of its securities registered for resale.
               (iii) From the date hereof until the earlier of (i) the second
anniversary of the Initial Closing and (ii) the time that no Preferred Shares
are outstanding, the Company will not, directly or indirectly, effect any
Subsequent Placement unless the Company shall have first complied with this
Section 4(o)(iii).
               (1) The Company shall deliver to each Buyer an irrevocable
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 (subject to the Buyer’s prior agreement
to maintain confidentiality of such Offer Notice), which Offer Notice shall
(w) identify and describe the Offered Securities, (x) describe the price (which
price may be expressed as a formula) 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 (except with respect to an underwritten offering of
Offered Securities or a similar offering in which the price of such Offered
Securities is determined on or about the Closing Date of such offering, in which
case the Company may provide the underwriter’s proposed range of prices in
satisfaction of this clause (x) in the Offer Notice) (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 50% 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”),
which process shall be repeated until the Buyers shall have an opportunity to
subscribe for any remaining Undersubscription Amount.
               (2) To accept an Offer, in whole or in part, such Buyer must
deliver a written notice to the Company prior to the end of the tenth (10th)
Business Day after such Buyer’s receipt of the Offer Notice (the “Offer
Period”), setting forth the portion of such Buyer’s Basic Amount that such Buyer
elects to purchase and, if such Buyer shall elect to purchase all of its Basic
Amount, the Undersubscription Amount, if

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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 it deems reasonably necessary.
               (3) The Company shall have fifteen (15) Business Days from the
expiration of the Offer Period above to offer, issue, sell or exchange all or
any part of such Offered Securities as to which a Notice of Acceptance has not
been given by the Buyers (the “Refused Securities”), but only to the offerees
described in the Offer Notice (if so described therein) and only upon terms and
conditions (including, without limitation, unit prices and interest rates) that
are not more favorable to the acquiring person or persons or less favorable to
the Company than those set forth in the Offer Notice.
               (4) In the event the Company shall propose to sell less than all
the Refused Securities (any such sale to be in the manner and on the terms
specified in Section 4(o)(iii)(3) above), then each Buyer may, at its sole
option and in its sole discretion, reduce the number or amount of the Offered
Securities specified in its Notice 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, upon the terms and
conditions specified in the Offer. Notwithstanding anything to the contrary
contained in this Agreement, if the Company does not consummate the closing of
the issuance, sale or exchange of all or less than all of the Refused
Securities, within fifteen (15) Business Days of the expiration of the Offer
Period, the Company shall issue to the Buyers, the number or amount of Offered
Securities specified in the Notices of Acceptance, upon the terms and conditions

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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 in
form and substance as agreed between the Company and the third party purchasers
of the Offered Securities.
               (6) Any Offered Securities not acquired by the Buyers or other
persons in accordance with Section 4(o)(iii)(2) above may not be issued, sold or
exchanged until they are again offered to the Buyers under the procedures
specified in this Agreement.
               (7) 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 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 fifteen
(15th) Business Day following delivery of the Offer Notice. If by the fifteenth
(15th) Business Day following delivery of the Offer Notice 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 to the Buyers in any
60 day period. Each Buyer expressly agrees that the Company’s compliance with
this Section 4(o)(iii) shall not be deemed a breach of Section 4(i) of this
Agreement by the Company.
               (8) 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) or in
connection with the issuance of the securities listed on Schedule 4(o).
          (p) Restriction on Redemption and Cash Dividends. So long as any
Preferred Shares are outstanding, the Company shall not, directly or indirectly,
redeem, or declare or pay any cash dividend or distribution on, the Common Stock
without the prior express written consent of the holders of Preferred Shares
representing not less than two-thirds of the aggregate number of the then
outstanding Preferred Shares. Notwithstanding the foregoing, no consent of the
holders of Preferred Shares shall be required in connection with (i) the
repurchase by the Company of its capital stock deemed to occur upon the cashless
exercise of stock options or warrants if such repurchased capital stock
represents a portion of the exercise price of such options or warrants, (ii) the
repurchase by the Company of its capital stock necessary to enable the Company
to pay withholding taxes incurred by an employee upon the vesting of restricted
capital stock granted to such employee in connection with a stock incentive
plan, or (iii) the Company for the repurchase, retirement or other acquisition
or retirement for value of capital stock of the Company held by any future,
present

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or former director, officer, member of management, employee or consultant of the
Company or the Subsidiaries (or the estate, family members, spouse or former
spouse of any of the foregoing); provided, however, that the aggregate amount of
payments made under clause (iii) does not exceed in any calendar year $250,000
(with unused amounts in any calendar year being carried over to the two
succeeding calendar years) and no payments shall be permitted pursuant to clause
(iii) if a Triggering Event under the Certificate of Designations has occurred
and the Company has not satisfied its obligations to the holders of Preferred
Shares under the Certificate of Designations in connection therewith.
          (q) No Waiver of Lock-Up Agreements. The Company shall not amend,
waive or modify any provision of any of the Lock-Up Agreements (as defined
below).
          (r) Stockholder Approval. The Company shall provide each stockholder
entitled to vote at the next annual meeting of stockholders of the Company (the
“Stockholder Meeting”), which shall be promptly called and held not later than
June 1, 2008 (the “Stockholder Meeting Deadline”), a proxy statement,
substantially in the form which has been previously reviewed by the Buyers and a
counsel of their choice, soliciting each such stockholder’s affirmative vote at
the Stockholder Meeting for approval of resolutions (“Stockholder Resolutions”)
providing for the Company’s issuance of all of the Securities as described in
the Transaction Documents in accordance with applicable law and the rules and
regulations of the Principal Market (such affirmative approval being referred to
herein as the “Stockholder Approval”), and the Company shall use its reasonable
best efforts to solicit its stockholders’ approval of such resolutions and to
cause the Board of Directors of the Company to recommend to the stockholders
that they approve such resolutions. The Company shall be obligated to seek to
obtain the Stockholder Approval by the Stockholder Meeting Deadline. If, despite
the Company’s reasonable best efforts the Stockholder Approval is not obtained
on or prior to the Stockholder Meeting Deadline, the Company shall cause an
additional Stockholder Meeting to be held each twelve month period thereafter
until such Stockholder Approval is obtained, provided that if the Board of
Directors of the Company does not recommend to the stockholders that they
approve the Stockholder Resolutions at any such Stockholder Meeting and the
Stockholder Approval is not obtained, or the Preferred Shares are no longer
outstanding, the Company shall cause an additional Stockholder Meeting to be
held each calendar quarter thereafter until such Stockholder Approval is
obtained.
          (s) Consolidated Leverage Ratio. So long as any Preferred Shares
remain outstanding, the Company shall not incur any Indebtedness that could
cause the Consolidated Leverage Ratio (as defined in the Senior Indebtedness
Agreements (as defined in the Certificate of Designations) as in effect as of
the date hereof) to exceed 3.65 to 1.00.
          (t) Compliance With Existing Agreements. So long as any Preferred
Shares remain outstanding, the Company shall not permit to exist any default
under, redemption of or acceleration prior to maturity of any secured
Indebtedness of the Company or any of its Subsidiaries. The Company shall use
its reasonable best efforts to obtain the waiver and consent of the lenders
under the Senior Indebtedness Agreements to the transactions contemplated hereby
and pursuant to the other Transaction Documents within thirty (30) calendar days
of the Initial Closing Date.

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     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 in
which the Company shall record the name and address of the Person in whose name
the Preferred Shares 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 the
number of Dividend Shares issuable with respect to the Preferred Shares held by
such Person. The Company shall keep the register open and available at all times
during business hours for inspection of any Buyer or its legal representatives.
          (b) Transfer Agent Instructions. The Company shall issue irrevocable
instructions to its transfer agent, and any subsequent transfer agent, to issue
certificates or credit shares to the applicable balance accounts at DTC,
registered in the name of each Buyer or its respective nominee(s), for the
Conversion Shares in such amounts as specified from time to time by each Buyer
to the Company upon conversion of the Preferred Shares in the form of Exhibit C
attached hereto (the “Irrevocable Transfer Agent Instructions”). The Company
warrants that no instruction other than the Irrevocable Transfer Agent
Instructions referred to in this Section 5(b), and stop transfer instructions to
give effect to Section 2(g) hereof, will be given by the Company to its transfer
agent with respect to the Securities, and that the Securities shall otherwise be
freely transferable on the books and records of the Company, as applicable, and
to the extent provided in this Agreement and the other Transaction Documents. If
a Buyer effects a sale, assignment or transfer of the Securities in accordance
with Section 2(g), the Company shall permit the transfer and shall promptly
instruct its transfer agent to issue one or more certificates or credit shares
to the applicable balance accounts at DTC in such name and in such denominations
as specified by such Buyer to effect such sale, transfer or assignment. In the
event that such sale, assignment or transfer involves Conversion Shares 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 Date. The obligation of the Company hereunder to
issue and sell the Initial Preferred Shares 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:

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               (i) Such Buyer shall have executed each of the Transaction
Documents to which it is a party and delivered the same to the Company.
               (ii) Such Buyer and each other Buyer shall have delivered to the
Company the Initial Purchase Price (less, in the case of Capital Ventures, the
amounts withheld pursuant to Section 4(g)) for the Preferred Shares 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 respects 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, which shall be true and correct as
of such specified date), and such Buyer shall have performed, satisfied and
complied in all 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.
          (b) Additional Closing Date. The obligation of the Company hereunder
to issue and sell the Additional 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 for the Additional Preferred Shares being
purchased by such Buyer at such 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 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, which shall be true and correct
as of such specified date), and such Buyer shall have performed, satisfied and
complied in all 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.
     7. CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE.
          (a) Initial Closing Date. The obligation of each Buyer hereunder to
purchase the Initial Preferred Shares 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 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 Initial Preferred Shares
(in such

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numbers as is set forth across from such Buyer’s name in column (3) 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 Winstead PC,
the Company’s outside counsel, dated as of the Initial Closing Date, in
substantially the form of Exhibit D attached hereto.
               (iii) The Company shall have delivered to such Buyer a copy of
the Irrevocable Transfer Agent Instructions, in the form of Exhibit C attached
hereto, which instructions shall have been delivered to and acknowledged in
writing by the Company’s transfer agent.
               (iv) The representations and warranties of the Company shall be
true and correct in all material respects (except for those representations and
warranties that are qualified by materiality or Material Adverse Effect, which
shall be true and correct in all respects) 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, which shall be true and correct
as of such specified date) and the Company shall have performed, satisfied and
complied in all material 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 E.
               (v) The Company shall have delivered to such Buyer a letter from
the Company’s transfer agent certifying the number of shares of Common Stock
outstanding as of a date within five days of the Initial Closing Date.
               (vi) 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 suspension by the SEC or the Principal Market have
been threatened, as of the Initial Closing Date, either (A) in writing by the
SEC or the Principal Market or (B) by falling below the minimum maintenance
requirements of the Principal Market.
               (vii) The Company shall have obtained all governmental,
regulatory or third party consents and approvals, if any, necessary for the sale
of the Securities.
               (viii) The Certificate of Designations in the form attached
hereto as Exhibit A shall have been filed with the Secretary of State of the
State of Delaware and shall be in full force and effect, enforceable against the
Company in accordance with its terms and shall not have been amended.
               (ix) Such Buyer shall have received lock-up agreements in the
form attached hereto as Exhibit G (the “Lock-Up Agreements”), duly executed and
delivered by each of James E. Sigmon, Jeff Bookout, Robert R. Thomae, M. Frank
Russell, Gary Grinsfelder, P. Mark Stark and the Company.

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          (b) Additional Closing Date. The obligation of each Buyer hereunder to
purchase the Additional 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 the Additional Preferred Shares (in such numbers as such Buyer shall
request) being purchased by such Buyer at the Additional Closing pursuant to
this Agreement.
               (ii) The representations and warranties of the Company shall be
true and correct in all material respects (except for those representations and
warranties that are qualified by materiality or Material Adverse Effect, which
shall be true and correct in all 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, which shall be
true and correct as of such specified date) and the Company shall have
performed, satisfied and complied in all material 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 in the form attached hereto as Exhibit E.
               (iii) 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 Date, by the SEC or the Principal Market from trading on the
Principal Market nor shall suspension by the SEC or the Principal Market have
been threatened, as of the Additional Closing Date, either (A) in writing by the
SEC or the Principal Market or (B) by falling below the minimum maintenance
requirements of the Principal Market.
               (iv) The Company shall have obtained all governmental, regulatory
or third party consents and approvals, if any, necessary for the sale of the
Securities.
               (v) The Certificate of Designations in the form attached hereto
as Exhibit A shall have been filed with the Secretary of State of the State of
Delaware and shall be in full force and effect, enforceable against the Company
in accordance with its terms and shall not have been amended.
     8. TERMINATION.
          In the event that the Initial Closing shall not have occurred with
respect to a Buyer on or before five (5) Business Days from the date hereof due
to the Company’s or such Buyer’s failure to satisfy the conditions set forth in
Sections 6 and 7 above (and the nonbreaching party’s failure to waive such
unsatisfied condition(s)), the nonbreaching party shall have the option to
terminate this Agreement with respect to such breaching party at the close of
business on such date without liability of any party to any other party;
provided, however, if this

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Agreement is terminated pursuant to this Section 8, the Company shall remain
obligated to reimburse the non-breaching Buyers for the expenses described in
Section 4(g) above.
     9. MISCELLANEOUS.
          (a) Governing Law; Jurisdiction; Jury Trial. All questions concerning
the construction, validity, enforcement and interpretation of this Agreement
shall be governed by the internal laws of the State of New York, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of New York or any other jurisdictions) that would cause the application
of the laws of any jurisdictions other than the State of New York. Each party
hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof by
certified mail to each 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 is prohibited by
law or otherwise determined to be invalid or unenforceable by a court of
competent jurisdiction, the provision that would otherwise be prohibited,
invalid or unenforceable shall be deemed amended to apply to the broadest extent
that it would be valid and enforceable, and the invalidity or unenforceability
of such provision shall not affect the validity of the remaining provisions of
this Agreement so long as this Agreement as so modified continues to express,
without material change, the original intentions of the parties as to the
subject matter hereof and the prohibited nature, invalidity or unenforceability
of the provision(s) in question does not substantially impair the respective
expectations or reciprocal obligations of the parties or the practical
realization of the benefits that would otherwise be conferred upon the parties.

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The parties will endeavor in good faith negotiations to replace the prohibited,
invalid or unenforceable provision(s) with a valid provision(s), the effect of
which comes as close as possible to that of the prohibited, invalid or
unenforceable provision(s).
          (e) Entire Agreement; Amendments. Except as set forth on
Schedule 9(e), this Agreement and the other Transaction Documents supersede all
other prior oral or written agreements between the Buyers, the Company, their
Affiliates and Persons acting on their behalf with respect to the matters
discussed herein, and this Agreement, the other Transaction Documents and the
instruments referenced herein and therein contain the entire understanding of
the parties with respect to the matters covered herein and therein and, except
as specifically set forth herein or therein, neither the Company nor any Buyer
makes any representation, warranty, covenant or undertaking with respect to such
matters. No provision of this Agreement may be amended other than by an
instrument in writing signed by the Company and the holders of at least
two-thirds 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, except with the express
written consent of each holder so excluded. Except as set forth on
Schedule 9(e), no consideration shall be offered or paid to any Person to amend
or consent to a waiver or modification of any provision of any of the
Transaction Documents unless the same consideration also is offered to all
holders of Preferred Shares. Except as set forth on Schedule 9(e), 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:
TXCO Resources Inc.
777 E. Sonterra Blvd., Suite 350
San Antonio, Texas 78258
Telephone: (210) 679-2429
Facsimile: (210) 496-3232
Attention: M. Frank Russell, Vice President and General Counsel

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With a copy (for informational purposes only) to:
Winstead PC
401 Congress Avenue, Suite 2100
Austin, TX 78701
Telephone: (512) 370-2800
Facsimile: (512) 370-2850
Attention: J. Rowland Cook
If to the Transfer Agent:
American Stock Transfer & Trust Co.
59 Maiden Lane
New York, NY 10038
Telephone: (718) 921-8206
Facsimile: (718) 921-8336
Attention: Carlos Pinto, Vice President
If to a Buyer, to its address and facsimile number set forth on the Schedule of
Buyers, with copies to such Buyer’s representatives as set forth on the Schedule
of Buyers,
with a copy (for informational purposes only) to:
Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York 10022
Telephone: (212) 756-2000
Facsimile: (212) 593-5955
Attention: Eleazer N. Klein, Esq.
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 the Buyers of the Preferred Shares. The Company shall not assign this
Agreement or any rights or obligations hereunder without the prior written
consent of the holders of at least two-thirds 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).

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A Buyer may assign some or all of its rights hereunder in connection with
transfer of any of its Securities as is otherwise permitted by this Agreement
without the consent of the Company, in which event such assignee shall be deemed
to be a Buyer hereunder with respect to such assigned rights.
          (h) No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person.
          (i) Survival. Unless this Agreement is terminated under Section 8, the
representations and warranties of the Company and the Buyers contained in
Sections 2 and 3 and the agreements and covenants set forth in Sections 4, 5 and
9 shall survive the Closing and the delivery and conversion of Securities, as
applicable. Each Buyer shall be responsible only for its own representations,
warranties, agreements and covenants hereunder.
          (j) Further Assurances. Each party shall do and perform, or cause to
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
any other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
          (k) Indemnification. In consideration of each Buyer’s execution and
delivery of the Transaction Documents and acquiring the Securities thereunder
and in addition to all of the Company’s other obligations under the Transaction
Documents, the Company shall defend, protect, indemnify and hold harmless each
Buyer and each other holder of the Securities and all of their stockholders,
partners, members, officers, directors, employees and direct or indirect
investors and any of the foregoing Persons’ agents or other representatives
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the “Indemnitees”),
as incurred, 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, or (iii) 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,

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the mechanics and procedures with respect to the rights and obligations under
this Section 9(k) shall be the same as those set forth in Section 6 of the
Registration Rights Agreement.
          (l) No Strict Construction. The language used in this Agreement will
be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
          (m) Remedies. Each Buyer and each holder of the Securities shall have
all rights and remedies set forth in the Transaction Documents and all rights
and remedies which such holders have been granted at any time under any other
agreement or contract and all of the rights which such holders have under any
law. Any Person having any rights under any provision of this Agreement shall be
entitled to enforce such rights specifically (without posting a bond or other
security), to recover damages by reason of any breach of any provision of this
Agreement and to exercise all other rights granted by law. Furthermore, the
Company recognizes that in the event that it fails to perform, observe, or
discharge any or all of its obligations under the Transaction Documents, any
remedy at law may prove to be inadequate relief to the Buyers. The Company
therefore agrees that the Buyers shall be entitled to seek temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages and without posting a bond or other security.
          (n) Rescission and Withdrawal Right. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Buyer exercises a right, election, demand or
option under a Transaction Document and the Company does not timely perform its
related obligations within the periods therein provided, then such Buyer may
rescind or withdraw, in its sole discretion from time to time upon written
notice to the Company, any relevant notice, demand or election in whole or in
part without prejudice to its future actions and rights.
          (o) Payment Set Aside. To the extent that the Company makes a payment
or payments to the Buyers hereunder or pursuant to any of the other Transaction
Documents or the Buyers enforce or exercise their rights hereunder or
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a trustee,
receiver or any other Person under any law (including, without limitation, any
bankruptcy law, foreign, state or federal law, common law or equitable cause of
action), then to the extent of any such restoration the obligation or part
thereof originally intended to be satisfied shall be revived and continued in
full force and effect as if such payment had not been made or such enforcement
or setoff had not occurred.
          (p) Independent Nature of Buyers’ Obligations and Rights. The
obligations of each Buyer under any Transaction Document are several and not
joint with the obligations of any other Buyer, and no Buyer shall be responsible
in any way for the performance of the obligations of any other Buyer under any
Transaction Document. Nothing contained herein or in any other Transaction
Document, and no action taken by any Buyer pursuant hereto or thereto, shall be
deemed to constitute the Buyers as a partnership, an association, a joint
venture or any other kind of entity, or create a presumption that the Buyers are
in any way

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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, and the
Company will not assert any such claim, 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:

TXCO RESOURCES INC.
      By:           Name:           Title:        

 

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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:     

 

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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:

      By:           Name:           Title:        

 

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SCHEDULE OF BUYERS

 

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EXHIBITS
Exhibit A       Form of Certificate of Designations
Exhibit B       Form of Registration Rights Agreement
Exhibit C       Form of Irrevocable Transfer Agent Instructions
Exhibit D       Form of Outside Company Counsel Opinion
Exhibit E       Form of Secretary’s Certificate
Exhibit F       Form of Officer’s Certificate
Exhibit G       Form of Lock-Up Agreement

 

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SCHEDULES
Schedule 2(e) — Information
Schedule 3(a) — List of Subsidiaries
Schedule 3(h) — No Integrated Offering
Schedule 3(j) — Stockholder Rights Plan
Schedule 3(k) — SEC Documents
Schedule 3(r) — Equity Capitalization
Schedule 3(z) — Subsidiary Rights
Schedule 4(d) — Use of Proceeds
Schedule 4(j) — Additional Rights, Warrants and Options; Dilutive Issuances
Schedule 4(n) — Additional Registration Statements
Schedule 4(o) — Additional Issuances of Securities
Schedule 9(e) — Entire Agreement; Amendments