Exhibit 10.3
PREFERRED STOCK PURCHASE AGREEMENT
     THIS PREFERRED STOCK PURCHASE AGREEMENT (“Agreement”) dated as of the 3rd
day of July, 2008, is entered into by and between Home Solutions of America,
Inc., a Delaware corporation (the “Company”), and the entities listed on
Schedule 1 hereto (each, a “Purchaser” and collectively, the “Purchasers”).
WITNESSETH:
     WHEREAS, the Company desires equity capital in order to carry on its
business and the Purchasers are willing to provide certain equity capital by
purchasing an aggregate of 150,000 shares of Series C-2 Convertible Preferred
Stock of the Company as is more particularly described in Exhibit A (“Preferred
Stock”), at a purchase price of $10.00 per share;
     WHEREAS, in connection with the Purchasers’ purchase of the Preferred
Stock, the Company will deliver certain warrants to Purchasers according to the
terms and conditions hereof;
     WHEREAS, the terms pursuant to which the Purchasers are investing in the
Preferred Stock and receiving the warrants were considered by an ad hoc
financing committee of the Board of Directors of the Company consisting solely
of disinterested directors, which committee recommended approval to the Board,
whereupon the terms were considered and approved by the Board of Directors of
the Company with the manager of the Purchaser (who is the Chairman of such
Board) and Charles McCusker, a Board member not participating; and
     WHEREAS, the terms of the Preferred Stock will be established pursuant to
and governed by the Amended and Restated Certificate of Designation in the form
attached hereto as Exhibit A, which will be filed with the State of Delaware on
the date hereof (the “Amended and Restated Certificate of Designation”), which
will amend and restate the Certificate of Designation filed on the date hereof
(the “Certificate of Designation”) designating the Company’s Series C Preferred
Stock purchased pursuant to the Preferred Stock Purchase Agreement dated as of
June 11, 2008 between the Company and EvenFlow Funding, LLC.
     NOW THEREFORE, in consideration of the premises and the mutual agreements
set forth herein, and intending to be legally bound hereby, the parties hereto
agree as follows:
     I. Purchase and Sale; Closing.
          1.1 Purchase and Sale. Subject to the terms and conditions set forth
in this Agreement, at the Closing (as hereinafter defined) the Purchasers shall
purchase from the Company and the Company shall issue, sell and deliver to the
Purchasers, an aggregate of 150,000 shares of Preferred Stock, for a purchase
price of $10.00 per share, or an aggregate of $1,500,000 payable in cash, in the
amounts per Purchaser set forth on Schedule 1 hereto.

 

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          1.2 Warrants. The Company shall issue and deliver to each Purchaser,
at the Closing, warrants (the “Warrants”) in the form attached hereto as
Exhibit B to purchase an aggregate of 3,000,000 shares of the Company’s Common
Stock (the “Warrant Shares”) for $0.01 per share, to be delivered in the amounts
per Purchaser set forth on Schedule 1 hereto.
          1.3 Closing. The consummation of the transactions referred to in
Sections 1.1 and 1.2 shall constitute the closing (the “Closing”). The Closing
shall take place as of the date hereinabove set forth and such date is referred
to herein as the “Closing Date.” The Closing shall take place via telecopier,
electronic or overnight mail as the Purchasers and the Company may agree. As
promptly as practicable following the Closing, (i) the Company shall deliver to
the Purchasers certificates evidencing an aggregate of 150,000 shares of
Preferred Stock and Warrants evidencing and aggregate 3,000,000 Warrant Shares,
in the amounts per Purchaser set forth on Schedule 1 hereto, with such
certificates and Warrants registered in the name of such Purchasers and legended
as provided herein and the other documents specified in Article IV.
          1.4 Use of Proceeds. All funds representing Purchasers’ investment in
the Company shall be utilized to satisfy the Company’s obligations under the
Forbearance Agreement (as hereinafter defined).
     II. Representations and Warranties of the Company.
          The Company hereby represents, warrants and covenants to the Purchaser
as follows:
          2.1 Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Company has all requisite corporate power and
authority and holds all licenses, permits and other required authorizations from
governmental authorities necessary to own its properties and assets and to
conduct its businesses as presently conducted. The Company is duly qualified to
do business as a foreign corporation and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on the business, operations or financial condition of the Company. True
and complete copies of the Company’s Certificate of Incorporation, as amended
(the “Certificate of Incorporation”), and its bylaws, as presently in effect,
have been made available to the Purchaser.
          2.2 Capitalization.
               As of the date hereof, the authorized capital stock of the
Company consists of 100,000,000 shares of common stock, of which 50,700,850
shares are issued and outstanding, and 999,880 shares of preferred stock, of
which 350,000 shares are issued and outstanding. In addition, the Company has
issued warrants to purchase 7,000,000 shares of common stock. Except for (i) the
Company’s stock options plans and employee stock purchase plans, and (ii) the
Company’s issuance of equity to Frank Fradella pursuant to the Employment
Agreement

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between the Company and Frank Fradella, (iii) the Company’s issuance of equity
to the Company’s lender or lenders pursuant to that certain Amendment No. 2
thereto dated July 3, 2008 (the “Forbearance Amendment”) (which amends that
certain Forbearance Agreement dated February 6, 2008 among the Company and the
lender parties thereto, as amended by Amendment No. 1 thereto dated June 4, 2008
(the “Original Forbearance Agreement” and, together with the Forbearance
Amendment, the “Forbearance Agreement”), (iv) the Preferred Stock Purchase
Agreement dated the date hereof between the Company and EvenFlow Funding, LLC,
and (v) the Company’s issuance of equity to the Purchaser pursuant to the equity
commitment letter between the Company, the Purchaser and Texas Capital Bank (as
administrative agent) dated July 1, 2008, there are no agreements or obligations
on the part of the Company as of the date hereof to issue any common stock,
preferred stock or other equity-linked securities, whether through options,
warrants or otherwise. The shares of Preferred Stock and the Warrants which are
being issued and sold hereunder have been duly and validly authorized and, when
issued, sold and delivered in accordance with the terms hereof for the
consideration provided for herein, will be validly issued, fully paid and
nonassessable and will be free of restrictions on transfer other than
restrictions on transfer under applicable federal and state securities laws. The
shares of Common Stock issuable upon conversion of the Preferred Stock have been
duly and validly authorized and, upon conversion of the Preferred Stock as
provided in the Amended and Restated Certificate of Designation will be validly
issued, fully paid and nonassessable and will be free of restrictions on
transfer other than restrictions on transfer under applicable federal and state
securities laws. The shares of Common Stock issuable upon exercise of the
Warrants have been duly and validly authorized and upon exercise of the Warrants
as provided therein will be validly issued, fully paid and nonassessable and
will be free of restrictions on transfer other than restrictions on transfers
under applicable federal and state securities laws. No further approval or
authorization of the stockholders or the directors of the Company is required
for the issuance and sale of the Preferred Stock or the Warrants as contemplated
herein or the issuance of shares of Common Stock upon conversion of the
Preferred Stock or upon exercise of the Warrants. The Company shall, at all
times, reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the conversion of the
Preferred Stock and the exercise of the Warrants, such number of shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all shares of Preferred Stock and the exercise of all of the Warrants.
          2.3 Authorization, Validity and Enforceability. The Company has all
requisite corporate power and authority to enter into this Agreement, and to
carry out the transactions contemplated hereby. The execution, delivery and
performance by the Company of this Agreement, and the consummation of the
transactions contemplated hereby have been duly authorized and approved by all
necessary corporate action. The execution, delivery and performance of this
Agreement, the issuance of the Preferred Stock and the Warrants hereunder and
the issuance of the shares of Common Stock upon conversion of the Preferred
Stock and upon exercise of the Warrants will not, (a) violate any material
provision of law, or (b) conflict with, or result in a breach of any of the
terms of, or constitute a default under, the Company’s Certificate of
Incorporation, its bylaws or any material agreement, instrument or other
restriction to which the Company is a party or by which the Company or any of
its properties or assets is

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bound. This Agreement, when executed, will constitute the legal, valid and
binding obligations of the Company, enforceable against it in accordance with
its terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws and subject to general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law) and except as to the indemnification
provisions contained herein or in the documents executed in connection herewith
are limited by applicable laws and principles of public policy.
          2.4 Government Consents, etc. Except for the consent required pursuant
to the Certificate of Designation for the issuance of the Series C-2 Preferred
Stock as contemplated by this Agreement and the Preferred Stock Purchase
Agreement dated as of the date hereof between the Company and EvenFlow Funding,
LLC, no consent, approval or authorization of, or declaration, registration or
filing with, any person, entity or governmental authority on the part of the
Company is required for the valid execution, delivery and performance of this
Agreement, or the valid consummation of the transactions contemplated hereby,
except for filing the Amended and Restated Certificate of Designation with the
Secretary of State of the State of Delaware. There is no injunction, order,
decree, ruling or charge in effect preventing the performance of this Agreement
or the consummation of the transactions contemplated hereby.
          2.5 Securities Laws. Subject to the truth and accuracy each Purchasers
representations and warranties set forth in Article III hereof, the offer, sale
and issuance of the Preferred Stock and the Warrants, and the issuance of the
shares of Common Stock upon conversion of the Preferred Stock and upon exercise
of the Warrants, as provided in this Agreement, is and is intended to be:
(i) exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) thereof (or in the case of conversion of the Preferred Stock or
“cashless” exercise of the Warrants, Section 3(a)(9)), and (ii) registered,
qualified or exempt from the registration or qualification requirements of
applicable state securities laws. Neither the Company nor, to the Company’s
knowledge, anyone acting on its behalf has taken or hereafter will take any
action that would cause the loss of such exemptions.
          2.6 Disclosure. No representation or warranty by the Company contained
in this Agreement or any certificate or other instrument referred to herein or
otherwise furnished or to be furnished to the Purchasers by the Company with
respect to the transactions contemplated hereby, contains any untrue statement
of a material fact or omits or will omit to state any material fact which is
necessary in order to make the statements contained herein or therein, not
misleading in light of the circumstances in which they were made. There is no
fact known to the Company relating to the business, affairs, operations,
condition or prospects of the Company which materially adversely affects the
same and which has not been disclosed to the Purchasers.
     III. Representations and Warranties of each Purchaser.
          Each Purchaser hereby represents, warrants and covenants to the
Company as follows:

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          3.1 Experience; Risk. Such Purchaser has such knowledge and experience
in financial and business matters that such Purchaser is capable of evaluating
the merits and risks of the purchase of the Preferred Stock and the Warrants
pursuant to this Agreement and of protecting such Purchaser’s interests in
connection therewith. Such Purchaser is able to fend for itself in the
transactions contemplated by this Agreement and has the ability to bear the
economic risk of the investment, including complete loss of the investment. Such
Purchaser is experienced in evaluating and investing in new companies such as
the Company, including, without limitation, the Company’s industry and
competition.
          3.2 Investment. Such Purchaser is acquiring the Preferred Stock and
the Warrants for investment for its own account, not as a nominee or agent, and
not with a view to, or for resale in connection with, any distribution thereof
in violation of any federal or state securities laws, subject, however, to the
disposition of such Purchaser’s property being at all times within its control,
and such Purchaser has no present intention of selling, granting any
participation in, or otherwise distributing the same. Such Purchaser understands
that the shares of Preferred Stock and the Warrants have not been registered
under the Securities Act by reason of a specific exemption from the registration
provisions of the Securities Act which depends upon, among other things, the
bona fide nature of the investment intent and the truth and accuracy of such
Purchaser’s representations as expressed herein.
          3.3 Restricted Securities. Such Purchaser understands that the shares
of Preferred Stock and the shares of Common Stock issuable upon conversion of
the shares of Preferred Stock and the Warrants and the shares of Common Stock
issuable upon exercise thereof will be “restricted securities” under the federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act only in certain limited circumstances. Such Purchaser
acknowledges that the securities must be held indefinitely unless subsequently
registered under the Securities Act or an exemption from such registration is
available.
          3.4 Access to Data. Such Purchaser has had an opportunity to discuss
the Company’s business, management and financial affairs with the Company’s
management and the opportunity to review the Company’s facilities and has
received all information requested from the Company regarding the investment in
the Company.
          3.5 Further Limitations on Disposition. Neither the Preferred Stock or
the Common Stock issuable upon conversion thereof or the Warrants or the Common
Stock issuable thereof have been registered under the Securities Act of 1933, as
amended (the “Act”), or any state securities laws. Therefore, in order, among
other things, to insure compliance with the Act, notwithstanding anything else
in this Agreement, the Amended and Restated Certificate of Designation or the
Warrants to contrary, such Purchaser, including any successive transferee,
agrees as follows:

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Such Purchaser shall not sell, assign, transfer, pledge, hypothecate, mortgage,
encumber or dispose of all or any portion of the Preferred Stock or the Common
Stock issuable upon conversion thereof or the Warrants or the Common Stock
issuable therefrom. Notwithstanding the foregoing, such Purchaser may transfer
all or any portion of the Preferred Stock or the Common Stock issuable upon
conversion thereof or the Warrants or the Common Stock issuable thereof (a) as
part of a registered public offering of the Company’s securities or pursuant to
Rule 144 under the Act, (b) by pledge that creates a mere security interest in
all or any portion of the Preferred Stock or the Common Stock issuable upon
conversion thereof or the Warrants or the Common Stock issuable therefrom,
provided that the pledgee thereof agrees in writing in advance to be bound by
and comply with all applicable provisions this Agreement, the Amended and
Restated Certificate of Designation or the Warrants to the same extent as if it
were the Holder making such pledge, (c) to any member of such Purchaser, or to
any siblings, ancestors, descendants or spouse of any member of such Purchaser,
or any custodian or trustee for the account of such member or the account of
such siblings, ancestors, descendants or spouse of such member (or any
combination of the foregoing), or (d) to an affiliate or partner of such
Purchaser, provided, in each such case (other than a transfer under clause (a)
above) a transferee shall receive and hold all or any portion of the Preferred
Stock or the Common Stock issuable upon conversion thereof or the Warrants or
the Common Stock issuable therefrom subject to the provisions of this Agreement,
the Amended and Restated Certificate of Designation or the Warrants and there
shall be no further transfer except in accordance herewith or therewith. No
party will avoid the provisions of this Agreement, the Amended and Restated
Certificate of Designation or the Warrants by making one or more transfers to an
affiliate of such party and then disposing of all or any portion of such party’s
interest in such affiliate; provided, however, that in any event, the Preferred
Stock or the Common Stock issuable upon conversion thereof or the Warrants or
the Common Stock issuable therefrom may not (other than in connection with the
matters described in Section 3.5(a) through Section 3.5(d) (inclusive)) be sold
or transferred in the absence of registration under the Act unless the Company
receives an opinion of counsel reasonably acceptable to it stating that such
sale or transfer is exempt from the registration and prospectus delivery
requirements of the Act. For the avoidance of doubt, the Company acknowledges
that a disposition made in reliance upon Rule 144 will not require an opinion of
counsel.
          3.6 Legends. It is understood that each certificate representing the
Preferred Stock purchased pursuant hereto, and the shares of Common Stock
issuable upon conversion of such Preferred Stock and the Warrants and the shares
of Common Stock issuable upon exercise thereof, and any securities issued in
respect thereof or exchange therefor shall bear legends in the following forms
(in addition to any legend required under applicable state securities laws or
other agreement):
“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED (OTHER THAN IN RELIANCE
UPON RULE 144 PROMULGATED UNDER SUCH ACT) IN THE ABSENCE OF SUCH REGISTRATION
UNLESS THE

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COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT
SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT.”
          3.7 Accredited Investor. Such Purchaser is an “accredited investor”
within the meaning of Rule 501 under the Securities Act.
     IV. Conditions to the Purchasers’ Obligations at Closing.
          The obligations of the Purchasers under Article I of this Agreement
are subject to the fulfillment, or the waiver by the Purchasers of the following
conditions on or before the Closing Date:
          4.1 Representations and Warranties; Covenants and Agreements. The
representations and warranties of the Company set forth in Article II hereof
shall be true and correct in all material respects as of the Closing Date, and
the Company shall have complied in all material respects with all covenants and
agreements set forth herein and in any documents executed or delivered in
connection herewith (including, without limitation, with respect to any
previously issued Preferred Stock and/or Warrants), and satisfied in all
material respects all conditions on its part to be performed or satisfied on or
prior to the Closing.
          4.2 Certificates and Documents. The Company shall have delivered to
each Purchaser:
               (a) On or prior to the Closing, a certificate executed by an
authorized officer of the Company to the effect that each of the conditions
specified in Section 4.1 and Section 4.2 (as applicable) has been satisfied; and
               (b) On or prior to the Closing, such other documentation as the
Purchasers shall reasonably have requested regarding the transactions
contemplated hereby.
     V. Conditions to the Company’s Obligations at Closing.
          The obligations of the Company under Article I of this Agreement are
subject to fulfillment, or the waiver by the Company, on or before the Closing
of each of the following:
          5.1 Representations and Warranties; Covenants. The representations and
warranties of each Purchaser set forth in Article III hereof shall be true and
correct in all material respects on and as of the date hereof and as of the
Closing Date, and each Purchaser shall have performed and complied in all
material respects with all agreements and conditions on its part to be performed
or complied with on or prior to the Closing.

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     VI. Registration Rights. The Company covenants and agrees with each
Purchaser as follows:
          6.1 Definitions. For purposes of this Section 6:
               (a) The term “Act” means the Securities Act of 1933, as amended.
               (b) The term “Holder” means any person owning or having the right
to acquire Registrable Securities or any assignee thereof.
               (c) The term “1934 Act” means the Securities Exchange Act of
1934, as amended.
               (d) The term “register,” “registered,” and “registration” refer
to a registration effected by preparing and filing a registration statement or
similar document in compliance with the Act, and the declaration or ordering of
effectiveness of such registration statement or document.
               (e) The term “Registrable Securities” means the Common Stock
issuable or issued to Holders upon conversion of the Preferred Stock or upon
exercise of the Warrants. The number of shares of “Registrable Securities”
outstanding shall be determined by the number of shares of Common Stock
outstanding that are, and the number of shares of Common Stock issuable pursuant
to then exercisable or convertible securities that are, Registrable Securities.
                    (i) The term “SEC” shall mean the Securities and Exchange
Commission.
          6.2 Request for Registration.
               (a) Subject to the conditions of this Section 6.2, if the Company
shall receive at any time a written request from the Holders of a majority of
the Registrable Securities then outstanding (the “Initiating Holders”), that the
Company file a registration statement under the Act covering the registration of
Registrable Securities, then the Company shall, within twenty (20) days of the
receipt thereof, give written notice of such request to all Holders, and subject
to the limitations of this Section 6.2, use all commercially reasonable efforts
to effect, as soon as practicable, the registration under the Act of all
Registrable Securities that the Holders request to be registered in a written
request received by the Company within twenty (20) days of the mailing of the
Company’s notice pursuant to this Section 6.2(a).
               (b) If the Initiating Holders intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
this Section 6.2 and the Company shall include such information in the written
notice referred to in Section 6.2(a). In such event the

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right of any Holder to include its Registrable Securities in such registration
shall be conditioned upon such Holder’s participation in such underwriting and
the inclusion of such Holder’s Registrable Securities in the underwriting
(unless otherwise mutually agreed by a majority in interest of the Initiating
Holders and such Holder) to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company (which underwriter or underwriters
shall be reasonably acceptable to a majority of the Holders proposing to
distribute securities through such underwriting). Notwithstanding any other
provision of this Section 6.2, if the underwriter advises the Company that
marketing factors require a limitation of the number of securities underwritten
(including Registrable Securities), then the Company shall so advise all Holders
of Registrable Securities that would otherwise be underwritten pursuant hereto,
and the number of shares that may be included in the underwriting shall be
allocated to the Holders of such Registrable Securities on a pro rata basis
based on the number of Registrable Securities held by all such Holders
(including the Initiating Holders). Any Registrable Securities excluded or
withdrawn from such underwriting shall be withdrawn from the registration.
               (c) The Company shall not be required to effect a registration
pursuant to this Section 6.2:
                    (i) in any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, unless the Company is already subject to service in
such jurisdiction and except as may be required under the Act; or
                    (ii) after the Company has effected three (3) registrations
pursuant to this Section 6.2, and such registrations have been declared or
ordered effective; or
                    (iii) during the period starting with the date sixty
(60) days prior to the Company’s good faith estimate of the date of the filing
of, and ending on a date one hundred eighty (180) days following the effective
date of, a Company-initiated registration subject to Section 6.3 below, provided
that the Company is actively employing in good faith all reasonable efforts to
cause such registration statement to become effective; or
                    (iv) if the Company shall furnish to Holders requesting a
registration statement pursuant to this Section 6.2, a certificate stating that
in the good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its stockholders for such registration
statement to be effected at such time, in which event the Company shall have the
right to defer such filing for a period of not more than one hundred twenty
(120) days after receipt of the request of the Initiating Holders, provided that
such right to delay a request shall be exercised by the Company not more than
once in any twelve (12)-month period.
          6.3 Company Registration.

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               (a) If (but without any obligation to do so) the Company proposes
to register (including for this purpose a registration effected by the Company
for stockholders other than the Holders) any of its stock or other securities
under the Act in connection with the public offering of such securities (other
than a registration relating solely to the sale of securities to participants in
a Company stock plan, a registration relating to a corporate reorganization or
other transaction under Rule 145 of the Act, a registration on any form that
does not include substantially the same information as would be required to be
included in a registration statement covering the sale of the Registrable
Securities, or a registration in which the only Common Stock being registered is
Common Stock issuable upon conversion of debt securities that are also being
registered), the Company shall, at such time, promptly give each Holder written
notice of such registration. Upon the written request of each Holder given
within twenty (20) days after mailing of such notice by the Company in
accordance herewith, the Company shall, subject to the provisions of
Section 6.3(c), use all commercially reasonable efforts to cause to be
registered under the Act all of the Registrable Securities that each such Holder
has requested to be registered.
               (b) Right to Terminate Registration. The Company shall have the
right to terminate or withdraw any registration initiated by it under this
Section 6.3 prior to the effectiveness of such registration whether or not any
Holder has elected to include securities in such registration. The expenses of
such withdrawn registration shall be borne by the Company in accordance with
Section 6.6 hereof.
               (c) Underwriting Requirements. In connection with any offering
involving an underwriting of shares of the Company’s capital stock, the Company
shall not be required under this Section 6.3 to include any of the Holders’
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters) and enter into an
underwriting agreement in customary form with an underwriter or underwriters
selected by the Company, and then only in such quantity as the underwriters
determine in their sole discretion will not jeopardize the success of the
offering by the Company. If the total amount of securities, including
Registrable Securities, requested by stockholders to be included in such
offering exceeds the amount of securities sold other than by the Company that
the underwriters determine in their sole discretion is compatible with the
success of the offering, then the Company shall be required to include in the
offering only that number of such securities, including Registrable Securities,
that the underwriters determine in their sole discretion will not jeopardize the
success of the offering (the securities so included to be apportioned pro rata
among the selling Holders according to the total amount of securities entitled
to be included therein owned by each selling Holder or in such other proportions
as shall mutually be agreed to by such selling Holders), but in no event shall
any shares being sold by a stockholder exercising a demand registration right
similar to that granted in Section 6.2 be excluded from such offering. For
purposes of the preceding parenthetical concerning apportionment, for any
selling stockholder that is a Holder of Registrable Securities and that is a
partnership or corporation, the partners, retired partners and stockholders of
such Holder, or the estates and family members of

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any such partners and retired partners and any trusts for the benefit of any of
the foregoing persons shall be deemed to be a single “selling Holder,” and any
pro rata reduction with respect to such “selling Holder” shall be based upon the
aggregate amount of Registrable Securities owned by all such related entities
and individuals.
          6.4 Obligations of the Company. Whenever required under this Section 6
to effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
               (a) prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use commercially reasonable efforts
to cause such registration statement to become effective, and, upon the request
of the Holders of a majority of the Registrable Securities registered
thereunder, use commercially reasonable efforts to keep such registration
statement effective for a period of up to one hundred eighty (180) days or, if
earlier, until the distribution contemplated in the Registration Statement has
been completed;
               (b) prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement;
               (c) furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them;
               (d) use commercially reasonable efforts to register and qualify
the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holders, provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions;
               (e) in the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering;
               (f) notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act or the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing;

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               (g) cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed; and
               (h) provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
          6.5 Information from Holder. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 6 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder’s Registrable
Securities.
          6.6 Expenses of Registration. All expenses other than underwriting
discounts and commissions incurred in connection with registrations, filings or
qualifications pursuant to Sections 6.2 and 6.3, including (without limitation)
all registration, filing and qualification fees, printers’ and accounting fees,
fees and disbursements of counsel for the Company and the reasonable fees and
disbursements of one counsel for the selling Holders shall be borne by the
Company.
          6.7 Delay of Registration. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 6.
          6.8 Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 6:
               (a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, the partners or officers, directors and
stockholders of each Holder, legal counsel and accountants for each Holder, any
underwriter (as defined in the Act) for such Holder and each person, if any, who
controls such Holder or underwriter within the meaning of the Act or the 1934
Act, against any losses, claims, damages or liabilities (joint or several) to
which they may become subject under the Act, the 1934 Act or any state
securities laws, insofar as such losses, claims, damages, or liabilities (or
actions in respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a “Violation”): (i) any untrue
statement or alleged untrue statement of a material fact contained in such
registration statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, (ii) the omission or
alleged omission to state therein a material fact required to be stated therein,
or necessary to make the statements therein not misleading, or (iii) any
violation or alleged violation by the Company of the Act, the 1934 Act, any
state securities laws or any rule or regulation promulgated under the Act, the
1934 Act or any state securities laws; and the Company will reimburse each such
Holder, underwriter or

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controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained
in this subsection 6.8(a) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Company (which consent shall not be unreasonably
withheld or delayed), nor shall the Company be liable in any such case for any
such loss, claim, damage, liability or action to the extent that it arises out
of or is based upon a Violation that occurs in reliance upon and in conformity
with written information furnished expressly for use in connection with such
registration by any such Holder, underwriter or controlling person.
               (b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Act, legal counsel and
accountants for the Company, any underwriter, any other Holder selling
securities in such registration statement and any controlling person of any such
underwriter or other Holder, against any losses, claims, damages or liabilities
(joint or several) to which any of the foregoing persons may become subject,
under the Act, the 1934 Act or any state securities laws, insofar as such
losses, claims, damages or liabilities (or actions in respect thereto) arise out
of or are based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder expressly for use in connection
with such registration; and each such Holder will reimburse any person intended
to be indemnified pursuant to this subsection 6.8, for any legal or other
expenses reasonably incurred by such person in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the indemnity agreement contained in this subsection 6.8 shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Holder (which consent
shall not be unreasonably withheld or delayed), provided that in no event shall
any indemnity under this subsection 6.8 exceed the net proceeds from the
offering received by such Holder.
               (c) Promptly after receipt by an indemnified party under this
Section 6.8 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 6.8, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties that may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if

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prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this
Section 6.8, but the omission so to deliver written notice to the indemnifying
party will not relieve it of any liability that it may have to any indemnified
party otherwise than under this Section 6.8.
               (d) If the indemnification provided for in this Section 6.8 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage or expense referred to
herein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage or expense, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties’ relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
               (e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
               (f) The obligations of the Company and Holders under this
Section 6.8 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 6, and otherwise.
     VII. Miscellaneous.
          7.1 Indemnification. The Company shall indemnify and hold harmless the
Purchasers, their affiliates, managers and members and their respective
successors and assigns from and against and in respect of all claims, costs,
losses, liabilities, obligations, fines, penalties, awards, damages and expenses
(including, without limitation, reasonable attorneys’ fees) arising out of or
resulting from any breach by the Company of any representation, warranty,
covenant or agreement of the Company contained in this Agreement.
          7.2 Expenses. Each party hereto shall bear its own costs and expenses
that it incurs with respect to the negotiation, execution, delivery and
performance of this Agreement and the transactions contemplated hereby, except
that, the Company shall promptly reimburse the Purchaser for legal expenses of
the Purchasers and its managers and members related to (a) the negotiation of
this Agreement and the other documents relating hereto and (b) the Closing.

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          7.3 Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed given (a) on the day of
delivery, if delivered personally, (b) three (3) business days following being
mailed by certified or registered mail, postage prepaid, return-receipt
requested (as evidenced by the transmittal receipt), or (c) one (1) day after
deposited with a nationally recognized overnight delivery service for next day
delivery, in each instance (as applicable) addressed to the Company or the
Purchasers at the addresses set forth on the signature pages hereto. The Company
and the Purchasers may change their addresses for notice from time to time by
providing notice thereof in compliance with this Section 7.3.
          7.4 Integration; Amendments and Waiver. This Agreement, together with
the documents referenced herein and attached hereto, and such other documents as
may be issued pursuant to the terms hereof from time to time, embodies the
entire agreement and understanding between the parties hereto and supersedes all
prior agreements and understandings relating to the subject matter hereof. Any
term of this Agreement may be amended and the observance of any term of this
Agreement may be waived (either generally or in a particular instance and either
retroactively or prospectively), with the written consent of the Company and the
Purchasers. No waivers of or exceptions to any term, condition or provision of
this Agreement, in any one or more instances, shall be deemed to be, or
construed as, a further or continuing waiver of any such term, condition or
provision.
          7.5 Finder’s Fees.
               (a) The Company (i) represents and warrants that it has retained
no finder, agent or broker in connection with the transactions contemplated by
this Agreement, and (ii) hereby agrees to indemnify and hold harmless the
Purchasers of and from any liability for any commission or compensation in the
nature of a finder’s fee to any broker or other person or firm (and the costs
and expenses of defending against such liability or asserted liability) for
which the Company or any of its employees or representatives is responsible.
               (b) Each Purchaser (i) represents and warrants that it has
retained no finder or broker in connection with the transactions contemplated by
this Agreement, and (ii) hereby agrees to indemnify and to hold harmless the
Company of and from any liability for any commission or compensation in the
nature of a finder’s fee to any broker or other person or firm (and the costs
and expenses of defending against such liability or asserted liability) for
which such Purchaser or any of such Purchaser’s employees or representatives, is
responsible.
          7.6 Severability. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement.
          7.7 Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of New York regardless of the laws that
might otherwise govern under applicable principles of conflicts of law thereof.

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          7.8 Successors and Assigns. The terms and conditions of this Agreement
shall be binding upon, and inure to the benefit of, the respective
representatives, successors and assigns of the parties hereto, except that the
Purchaser may not, without the consent of the Company, assign its rights under
this Agreement other than in connection with its transfers of the Preferred
Stock and/or Warrant Shares (or in each instance, with respect to Common Stock
issued in connection therewith) as contemplated in Section 3.5(c) and
Section 3.5(d).
          7.9 Exhibits and Headings; Days. Each Exhibit to this Agreement is
made a part of this Agreement as though set forth in full herein. The headings
in this Agreement are for convenience of reference only, and shall not limit or
otherwise affect the meaning hereof. As used herein “days” shall mean calendar
days and “business days” shall mean any day other than a Saturday, a Sunday or a
day on which banks in New York, New York are authorized or obligated by law or
executive order to close.
          7.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
          7.11 Further Assurances. The Company shall, at the request of the
Purchaser or its representatives, successors and/or assigns, take such actions
as may be necessary to (a) effect the transactions contemplated by this
Agreement, and/or (b) facilitate (as and when applicable) the removal of any
restrictive legends on the Preferred Stock, Warrants and, with respect to each,
any Common Stock issued in connection therewith.
          7.12 Remedies Cumulative; Construction. The parties acknowledge and
agree that all rights and remedies under this Agreement, the Warrants and the
Amended and Restated Certificate of Designation are cumulative to one another
and to any other rights and remedies available at law or in equity. This
Agreement, the Warrants and the Amended and Restated Certificate of Designation
shall be deemed to have been jointly drafted by the Company and the Purchasers
and shall not be construed against any person as the drafter hereof or thereof.

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     IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
day and year written above.

            HOME SOLUTIONS OF AMERICA, INC.
      By:           Name:   Frank Fradella        Title:   President and Chief
Executive Officer         Address for Notice:

1500 Dragon Street, Suite B
Dallas, Texas 75207        MT TRADING LLC
      By:           Name:           Title:         Address for Notice:
530 Silas Deane Highway, Suite 130,
Wethersfield, Connecticut 06109                         Sondra Beit       
Address for Notice:
530 Silas Deane Highway, Suite 130,
Wethersfield, Connecticut 06109     

Signature Page to Beit Purchase Agreement

 

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Schedule 1

                              Series C-2         Purchaser   Preferred Stock  
Warrant Shares   Purchase Price
MT Trading LLC
    100,000       2,000,000     $ 1,000,000  
Sondra Beit
    50,000       1,000,000     $ 500,000  

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EXHIBIT A
Form of Amended and Restated Certificate of Designation

 

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AMENDED AND RESTATED
CERTIFICATE OF DESIGNATION
OF THE RELATIVE RIGHTS AND PREFERENCES
OF
THE SERIES C CONVERTIBLE PREFERRED STOCK
OF
HOME SOLUTIONS OF AMERICA, INC.
     The undersigned, the Chief Executive Officer of Home Solutions of America,
Inc., a Delaware corporation (the “Company”), in accordance with the provisions
of the Delaware General Corporation Law, does hereby certify that, pursuant to
the authority conferred upon the Board of Directors of the Company (the “Board
of Directors”) by the Certificate of Incorporation of the Company (the
“Certificate of Incorporation”), the following resolution modifying an existing
series of Series C Convertible Preferred Stock, was duly adopted as of July 3,
2008:
     WHEREAS, on June 11, 2008, the Board of Directors approved the filing of a
Certificate of Designation (the “Original Certificate of Designation”) to
designate three hundred and fifty thousand (350,000) shares of Preferred Stock
as Series C Convertible Preferred Stock;
     WHEREAS, three hundred and fifty thousand (350,000) shares of such Series C
Convertible Preferred Stock were purchased pursuant to a Preferred Stock
Purchase Agreement dated as of June 11, 2008 between the Company and the
purchaser party thereto;
     WHEREAS, as of the date hereof, the Original Certificate of Designation has
not been filed with the Secretary of State of the State of Delaware;
     WHEREAS, the Company will file the Original Certificate of Designation
prior to filing this Amended Restated Certificate of Designation, and this
Amended and Restated Certificate of Designation will amend and restate such
Original Certificate of Designation;
     WHEREAS, the Board of Directors has approved the exchange of the three
hundred and fifty thousand (350,000) shares of Series C Convertible Preferred
Stock purchased pursuant to the aforementioned Preferred Stock Purchase
Agreement for an equal number of shares of Series C-1 Convertible Preferred
Stock (as such Series C-1 Convertible Preferred Stock is more particularly
described herein);
     NOW, THEREFORE, BE IT:
     RESOLVED, that pursuant to the authority expressly granted to and vested in
the Board of Directors by provisions of the Certificate of Incorporation, a
series of Preferred Stock of the Company be created and that the designation and
amount thereof and the powers, preferences and relative, participating, optional
or other special rights of the shares of such series, and qualifications,
limitations or restrictions thereof are as follows:
     1. Designation and Rank.

 

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     The designation of such series of the Preferred Stock shall be (i) the
Series C-1 Convertible Preferred Stock, par value $.001 per share (the
“Series C-1 Preferred Stock”), and the number of shares so designated shall be
six hundred (600,000) shares, and (ii) the Series C-2 Convertible Preferred
Stock, par value $.001 per share (the “Series C-2 Preferred Stock” and, together
with the Series C-1 Preferred Stock, the “Series C Preferred Stock”), and the
number of shares so designated shall be three hundred thousand (300,000) shares.
The Board of Directors may, subject to the terms hereof, increase or decrease
the number of Series C Preferred Stock hereafter, so long as the number of
shares of Series C Preferred Stock shall not fall below the number of shares of
such series then outstanding. The Series C Preferred Stock shall, with respect
to dividend rights and rights on liquidation, dissolution and winding-up, rank
senior to all other classes or series of stock, equity or equity-linked
securities of the Company (the “Junior Stock”).
     2. Dividends.
          (a) Payment of Dividends. From and after the date of the issuance (the
“Issuance Date”) of any shares of Series C Preferred Stock, the holders of
shares of Series C Preferred Stock shall receive with respect to each share of
Series C Preferred Stock, out of funds legally available for the payment of
dividends, a cumulative dividend (the “Dividend Payment”) in an amount equal to
the greater of (x) dividends at a rate of thirteen percent (13%) per annum based
on the Liquidation Preference Amount (as defined in Section 4 hereof), and
(y) dividends that would have accrued with respect to such share of Series C
Preferred Stock during the applicable Dividend Period (as defined below) if the
holder of such share had converted such share into Common Stock immediately
prior to the record date of any dividend declared on the Common Stock in such
Dividend Period. Any Dividend Payment referred to in clause (y) above shall be
deemed to have accrued with respect to a share of Series C Preferred Stock as of
the last day of the applicable Dividend Period. Dividend Payments on a share of
Series C Preferred Stock shall accrue and shall be cumulative whether or not
declared from the date of issue of such share of Series C Preferred Stock and
shall be paid by the Company quarterly in arrears (to the extent funds are
legally available therefor) on the first of July, October, January and April
(each such quarterly period, a “Dividend Period”) in cash or, at the option of a
holder of the Series C Preferred Stock, in shares of Common Stock, in an amount
equal to the quotient of (i) the Dividend Payment divided by (ii) the Conversion
Price (as defined in Section 5(c) hereof). The Dividend Payment shall accrue
from day to day, whether or not earned or declared, and shall be cumulative. In
the case of shares of Series C Preferred Stock outstanding for less than a full
year, dividends shall be pro rated based on the portion of each year during
which such shares are outstanding. The Company shall be under no obligation to
pay any such dividends to the extent that funds are not legally available
therefor. Dividends on the Series C Preferred Stock are prior and in preference
to any declaration or payment of any dividend or distribution (as defined below)
on any shares of Junior Stock.
          (b) So long as any shares of Series C Preferred Stock are outstanding,
the Company shall not declare, pay or set apart for payment any dividend or make
any distribution on any Junior Stock (other than dividends or distributions
payable in shares of Common Stock), unless at the time of such dividend or
distribution the Company shall have paid all accrued and unpaid dividends on the
outstanding shares of Series C Preferred Stock.

2

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          (c) In the event of a dissolution, liquidation or winding up of the
Company pursuant to Section 4, all accrued and unpaid dividends on the Series C
Preferred Stock shall be payable on the day immediately preceding the date of
payment of the preferential amount to the holders of Series C Preferred Stock.
In the event of a Conversion Failure Redemption pursuant to Section 9, all
accrued and unpaid dividends on the Series C Preferred Stock shall, at the
election of the holder, be payable on the day immediately preceding the date of
such redemption. In the event of a conversion pursuant to Section 5(a), all
accrued and unpaid dividends on the Series C Preferred Stock being converted
shall, at the election of the holder, be payable on the day immediately
preceding the Conversion Date (as defined in Section 5(b)(i)).
          (d) For purposes hereof, unless the context otherwise requires,
“distribution” shall mean the transfer of cash or property without
consideration, whether by way of dividend or otherwise, payable other than in
shares of Common Stock or other equity securities of the Company, or the
purchase or redemption of shares of the Company (other than redemptions set
forth in Section 8 below or upon the cashless exercise of options held by
employees or consultants as of the date hereof) for cash or property.
     3. Voting Rights.
          (a) Class Voting Rights. The Series C Preferred Stock shall have the
following class voting rights (in addition to the voting rights set forth in
Section 3(b) hereof). So long as any shares of the Series C Preferred Stock
remain outstanding, the Company shall not, without the affirmative vote or
consent of the holders of at least 51% of the shares of the Series C Preferred
Stock outstanding at the time, given in person or by proxy, either in writing or
at a meeting: (i) authorize, create, issue or increase the authorized or issued
amount of any class or series of stock, including but not limited to the
issuance of any shares of previously authorized Common Stock or Preferred Stock,
whether or not ranking senior to the Series C Preferred Stock with respect to
dividends and/or the distribution of assets on liquidation, dissolution or
winding up; (ii) amend, alter or repeal the provisions of the Series C Preferred
Stock, whether by merger, consolidation or otherwise, so as to adversely affect
any right, preference, privilege or voting power of the Series C Preferred
Stock; (iii) repurchase, redeem or pay dividends on, shares of the Company’s
Junior Stock; (iv) amend the Certificate of Incorporation or By-Laws of the
Company so as to adversely any right, preference, privilege or voting power of
the Series C Preferred Stock; (v) effect any distribution with respect to Junior
Stock; (vi) reclassify the Company’s outstanding securities; or (vii) issue any
securities senior to or on parity with the Series C Preferred Stock.
          (b) General Voting Rights. In addition to the transactions upon which
the Series C Preferred Stock shall be entitled to vote separately as a class
pursuant to Section 3(a) above, and to such other voting rights as the holders
of Series C Preferred Stock are entitled under Delaware law, each holder of
outstanding shares of Series C Preferred Stock shall be entitled to cast the
number of votes equal to the number of whole shares of Common Stock into which
the shares of Series C Preferred Stock held by such holder are convertible as of
the record date for determining stockholders entitled to vote on such matter.
     4. Liquidation Preference.

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          (a) In the event of the liquidation, dissolution or winding up of the
affairs of the Company, whether voluntary or involuntary, the holders of shares
of the Series C Preferred Stock then outstanding shall be entitled to receive,
out of the assets of the Company available for distribution to its stockholders,
and before any payment shall be made or any assets distributed to the holders of
the Common Stock or any other Junior Stock an amount per share (the “Liquidation
Preference Amount”) equal to any accrued and unpaid dividends attributable to
such share plus the greater of (i) $10.00 per share of the Series C Preferred
Stock (subject to appropriate adjustment in the event of any stock dividend,
stock split, combination or other similar recapitalization affecting the number
of such shares issued and outstanding), or (ii) the per share amount that
holders of Series C Preferred Stock would have received if all of such holders
had converted their shares of Series C Preferred Stock into Common Stock
immediately prior to such liquidation, dissolution or winding up. If the assets
of the Company are not sufficient to pay in full the Liquidation Preference
Amount, then all of said assets will be distributed among the holders of the
Series C Preferred Stock ratably in accordance with the respective amounts that
would be payable on such shares if all amounts payable thereon were paid in
full. The liquidation payment with respect to each outstanding fractional share
of Series C Preferred Stock shall be equal to a ratably proportionate amount of
the liquidation payment with respect to each outstanding share of Series C
Preferred Stock. All payments for which this Section 4(a) provides shall be in
cash, property (valued at its fair market value as determined by an independent
appraiser reasonably acceptable to the holders of a majority of the Series C
Preferred Stock) or a combination thereof. For the avoidance of doubt, no cash
shall be paid or distributed to holders of Junior Stock unless each holder of
the outstanding shares of Series C Preferred Stock has been paid in cash the
full Liquidation Preference Amount to which such holder is entitled as provided
herein. After payment of the full Liquidation Preference Amount, such holders of
shares of Series C Preferred Stock will not be entitled to any further
participation as such in any distribution of the assets of the Company.
          (b) A consolidation or merger of the Company with or into any other
entity, or a sale of all or substantially all of the assets of the Company, or
the effectuation by the Company of a transaction or series of related
transactions in which more than 50% of the voting shares of the Company is
disposed of or conveyed, shall be deemed to be a liquidation, dissolution, or
winding up within the meaning of this Section 4 and referred to herein as a
“Deemed Liquidation Event”), subject to the rights of the holders to receive the
greater of the Applicable Redemption Price per Share (as defined below) or the
Liquidation Preference Amount per share, unless elected otherwise by the holders
of greater than 51% of the then outstanding shares of Series C Preferred Stock
voting together as a single class. Subject to a holder’s rights in this
Certificate of Designation, in the event of the merger or consolidation of the
Company with or into another entity that does not constitute a Deemed
Liquidation Event (including, without limitation, by election of the holders),
the Series C Preferred Stock shall maintain its relative powers, designations
and preferences provided for herein and no merger or consolidation shall result
inconsistent therewith.
          (c) The Company shall not have the power to effect a Deemed
Liquidation Event unless, in connection with such deemed Liquidation Event, the
Company adopts a plan of distribution that is in accordance with applicable law
and in form and substance satisfactory to the holders of greater than 51% of the
then outstanding shares of Series C Preferred Stock, voting together as a single
class, providing that the consideration received for such Deemed

4

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Liquidation Event, and any other assets of the Company, be distributed to the
Company’s stockholders in accordance with Section 4(a) and Section 4(b) above by
effecting a dissolution of the Company under the Delaware General Corporation
Law, a redemption of the Company’s capital stock or other means of distribution
approved by the holders of greater than 51% of the then outstanding shares of
the Series C Preferred Stock, voting together as a single class.
          (d) Written notice of any voluntary or involuntary liquidation,
dissolution, winding up of the affairs or Deemed Liquidation Event of the
Company, stating a payment date and the place where the distributable amounts
shall be payable, shall be given, no less than forty-five (45) days prior to the
date of the consummation of such event, to the holders of record of the Series C
Preferred Stock.
     5. Conversion; Additional Issues. The holder of Series C Preferred Stock
shall have the following conversion rights (the “Conversion Rights”):
          (a) Right to Convert. At any time on or after the Issuance Date, the
holder of any such shares of Series C Preferred Stock may, at such holder’s
option, elect to convert (a “Conversion”) all or any portion of the shares of
Series C Preferred Stock held by such person into a number of fully paid and
nonassessable shares of Common Stock equal to the quotient of (i) the
Liquidation Preference Amount of the shares of Series C Preferred Stock being
converted (which, to the extent that the holder elects to be paid accrued
dividends in cash as contemplated by Section 2(c), shall exclude such accrued
dividends) divided by (ii) the Conversion Price (as defined in Section 5(c)
below) then in effect as of the date of the delivery by such holder of its
notice of election to convert. In the event of a notice of redemption of any
shares of Series C Preferred Stock pursuant to Section 8 hereof, the Conversion
Rights of the shares designated for redemption shall terminate at the close of
business on the last full day preceding the date fixed for redemption (which, in
the connection with any redemption by the Company pursuant to Section 8(a),
shall not be earlier than forty-five (45) days after the Company has given the
notice provided for in this Section 5(a)), unless the redemption price is not
paid on such redemption date, in which case the Conversion Rights for such
shares shall continue until such price is paid in full. In the event of a
liquidation, dissolution winding up or Deemed Liquidation Event of the Company,
the Conversion Rights shall terminate at the close of business on the last full
day preceding the date fixed for the payment of any such amounts distributable
on such event to the holders of Series C Preferred Stock. In the event of a
redemption or liquidation, dissolution, winding up or Deemed Liquidation Event,
the Company shall provide to each holder of shares of Series C Preferred Stock
notice of such redemption or liquidation, dissolution, winding up or Deemed
Liquidation Event, which notice shall (i) be sent at least forty-five (45) days
prior to the termination of the Conversion Rights and (ii) state the applicable
Redemption Date (as hereinafter defined) and the Applicable Redemption Price (as
hereinafter defined) that will be paid or distributed on such redemption or
liquidation, dissolution, winding up or Deemed Liquidation Event, as the case
may be.
          (b) Mechanics of Conversion. The Conversion of Series C Preferred
Stock shall be conducted in the following manner:
               (i) Holder’s Delivery Requirements. To convert Series C Preferred
Stock into full shares of Common Stock on any date (the “Conversion Date”), the
holder

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thereof shall (A) transmit by facsimile (or otherwise deliver), for receipt on
or prior to 5:00 p.m., New York time on such date, a copy of a fully executed
notice of conversion in the form attached hereto as Exhibit I (the “Conversion
Notice”), to the Company, and (B) surrender to a common carrier for delivery to
the Company as soon as practicable following such Conversion Date but in no
event later than three (3) business days after such date the original
certificates representing the shares of Series C Preferred Stock being converted
(or an indemnification undertaking with respect to such shares in the case of
their loss, theft or destruction) (the “Preferred Stock Certificates”) and the
originally executed Conversion Notice.
               (ii) Company’s Response. Upon receipt by the Company of a
facsimile copy of a Conversion Notice, the Company shall immediately send, via
facsimile, a confirmation of receipt of such Conversion Notice to such holder.
Upon receipt by the Company of a copy of the fully executed Conversion Notice,
the Company or its designated transfer agent (the “Transfer Agent”), as
applicable, shall, within three (3) business days following the date of receipt
by the Company of the fully executed Conversion Notice (so long as the
applicable Preferred Stock Certificates and original Conversion Notice are
received by the Company on or before such third business day), issue and deliver
to the Depository Trust Company (“DTC”) account on the Holder’s behalf via the
Deposit Withdrawal Agent Commission System (“DWAC”) as specified in the
Conversion Notice, registered in the name of the holder or its designee, for the
number of shares of Common Stock to which the holder shall be entitled. If the
number of shares of Preferred Stock represented by the Preferred Stock
Certificate(s) submitted for conversion is greater than the number of shares of
Series C Preferred Stock being converted, then the Company shall, as soon as
practicable and in no event later than three (3) business days after receipt of
the Preferred Stock Certificate(s) and at the Company’s expense, issue and
deliver to the holder a new Preferred Stock Certificate representing the number
of shares of Series C Preferred Stock not converted.
               (iii) Dispute Resolution. In the case of a dispute as to the
arithmetic calculation of the number of shares of Common Stock to be issued upon
conversion, the Company shall (or, if applicable, cause its Transfer Agent to)
promptly issue to the holder the number of shares of Common Stock that is not
disputed and shall submit the arithmetic calculations to the holder via
facsimile as soon as possible, but in no event later than two (2) business days
after receipt of such holder’s Conversion Notice. If such holder and the Company
are unable to agree upon the arithmetic calculation of the number of shares of
Common Stock to be issued upon such conversion within one (1) business day of
such disputed arithmetic calculation being submitted to the holder, then the
Company shall within one (1) business day submit via facsimile the disputed
arithmetic calculation of the number of shares of Common Stock to be issued upon
such conversion to the Company’s independent, outside accountant. The Company
shall cause the accountant to perform the calculations and notify the Company
and the holder of the results no later than seventy-two (72) hours from the time
it receives the disputed calculations. Such accountant’s calculation shall be
binding upon all parties absent manifest error. The reasonable expenses of such
accountant in making such determination shall be paid by the Company, in the
event the holder’s calculation was correct, or by the holder, in the event the
Company’s calculation was correct, or equally by the Company and the holder in
the event that neither the Company’s or the holder’s calculation was correct.
The period of time in which the Company is required to effect conversions or
redemptions under this Certificate of Designation shall be tolled with respect
to the subject conversion or redemption pending

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resolution of any dispute by the Company made in good faith and in accordance
with this Section 5(b)(iii).
               (iv) Record Holder. The person or persons entitled to receive the
shares of Common Stock issuable upon a conversion of the Series C Preferred
Stock shall be treated for all purposes as the record holder or holders of such
shares of Common Stock on the Conversion Date.
               (v) Company’s Failure to Timely Convert. If within three
(3) business days of the Company’s receipt of an executed copy of the Conversion
Notice (so long as the applicable Preferred Stock Certificates and original
Conversion Notice are received by the Company on or before such third business
day) (the “Share Delivery Period”) the Transfer Agent shall fail to issue and
deliver to a holder the number of shares of Common Stock to which such holder is
entitled upon such holder’s conversion of the Series C Preferred Stock or to
issue a new Preferred Stock Certificate representing the number of shares of
Series C Preferred Stock to which such holder is entitled pursuant to
Section 5(b)(ii) (a “Conversion Failure”), in addition to all other available
remedies which such holder may pursue hereunder and under the Preferred Stock
Purchase Agreement dated as of June 11, 2008 and the Preferred Stock Purchase
Agreements dated July 3, 2008 for an aggregate of 300,000 shares of Series C-2
Preferred Stock (each a “Purchase Agreement” and collectively, the “Purchase
Agreement”), between the Company and the holders of the Series C Preferred Stock
(including indemnification pursuant to the terms thereof), the Company shall pay
additional damages to such holder on each business day after such third (3rd)
business day that such conversion is not timely effected in an amount equal to
0.5% of (A) the sum of the number of shares of Common Stock not issued to the
holder on a timely basis pursuant to Section 5(b)(ii) and to which such holder
is entitled and, in the event the Company has failed to deliver a Preferred
Stock Certificate to the holder on a timely basis pursuant to Section 5(b)(ii),
the number of shares of Common Stock issuable upon conversion of the shares of
Series C Preferred Stock represented by such Preferred Stock Certificate, as of
the last possible date which the Company could have issued such Preferred Stock
Certificate to such holder without violating Section 5(b)(ii), times (B) the
Closing Bid Price (as hereinafter defined) of the Common Stock on the last
possible date which the Company could have issued such Common Stock and such
Preferred Stock Certificate, as the case may be, to such holder without
violating Section 5(b)(ii). For the purposes hereof, “Closing Bid Price” means
the last closing bid price per share on the registered national stock exchange
on which the security is then listed, or if there is no such price on such date,
then the closing bid price on such exchange on the date nearest preceding such
date, or if such security is not listed on a registered national stock exchange,
the closing bid price for a share of such security in the over the counter
market, as reported by the OTC Bulletin Board or in the National Quotation
Bureau Incorporated (or similar organization or agency succeeding to its
function of reporting prices) at the close of business on such date. If the
Closing Bid Price cannot be calculated for such security on such date on any of
the foregoing bases, the Closing Bid Price of such security on such date shall
be the fair market value as mutually determined by the Company and the holders
of 51% of the outstanding shares of the Series C Preferred Stock. If the Company
fails to pay the additional damages set forth in this Section 5(b)(v) within
five (5) business days of the date incurred, then such payments shall bear
interest at the rate of 2.0% per month (pro rated for partial months) until such
payments are made.

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          (c) Conversion Price.
               (i) The term “Conversion Price” shall mean $1.00 per share,
subject to adjustment under Section 5(d) hereof. Notwithstanding any adjustment
hereunder, at no time (other than adjustments pursuant to Section 5(d)(i)) shall
the Conversion Price be greater than $1.00 per share.
               (ii) Notwithstanding the foregoing to the contrary, if during any
period (a “Black-out Period”), a holder of Series C Preferred Stock is unable to
trade any Common Stock issued or issuable upon conversion of the Series C
Preferred Stock immediately due to the postponement of filing or delay or
suspension of effectiveness of a registration statement or because the Company
has otherwise informed such holder of Series C Preferred Stock that an existing
prospectus cannot be used at that time in the sale or transfer of such Common
Stock (provided that such postponement, delay, suspension or fact that the
prospectus cannot be used is not due to factors solely within the control of the
holder of Series C Preferred Stock or due to the Company exercising its rights
under Section VI of the applicable Purchase Agreement, such holder of Series C
Preferred Stock shall have the option but not the obligation on any Conversion
Date within ten (10) trading days following the expiration of the Black-out
Period of using the Conversion Price applicable on such Conversion Date or any
Conversion Price selected by such holder of Series C Preferred Stock that would
have been applicable had such Conversion Date been at any earlier time during
the Black-out Period or within the ten (10) trading days thereafter.
          (d) Adjustments of Conversion Price.
               (i) Adjustments for Stock Splits and Combinations. If the Company
shall at any time or from time to time after the Issuance Date, effect a stock
split of the outstanding Common Stock, the Conversion Price shall be
proportionately decreased. If the Company shall at any time or from time to time
after the Issuance Date, combine the outstanding shares of Common Stock, the
Conversion Price shall be proportionately increased. Any adjustments under this
Section 5(d)(i) shall be effective at the close of business on the date the
stock split or combination becomes effective.
               (ii) Adjustments for Certain Dividends and Distributions. If the
Company shall at any time or from time to time after the Issuance Date, make or
issue or set a record date for the determination of holders of Common Stock
entitled to receive a dividend or other distribution payable in shares of Common
Stock, then, and in each event, the Conversion Price shall be decreased as of
the time of such issuance or, in the event such record date shall have been
fixed, as of the close of business on such record date, by multiplying the
Conversion Price then in effect by a fraction:

  (1)   the numerator of which shall be the total number of shares of Common
Stock issued and outstanding immediately prior to the time of such issuance or
the close of business on such record date; and

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  (2)   the denominator of which shall be the total number of shares of Common
Stock issued and outstanding immediately prior to the time of such issuance or
the close of business on such record date plus the number of shares of Common
Stock issuable in payment of such dividend or distribution.

               (iii) Adjustment for Other Dividends and Distributions. If the
Company shall at any time or from time to time after the Issuance Date, make or
issue or set a record date for the determination of holders of Common Stock
entitled to receive a dividend or other distribution payable in securities of
the Company other than shares of Common Stock, then, and in each event, an
appropriate revision to the applicable Conversion Price shall be made and
provision shall be made (by adjustments of the Conversion Price or otherwise) so
that the holders of Series C Preferred Stock shall receive upon conversions
thereof, in addition to the number of shares of Common Stock receivable thereon,
the number of securities of the Company which they would have received had their
Series C Preferred Stock been converted into Common Stock on the date of such
event and had thereafter, during the period from the date of such event to and
including the Conversion Date, retained such securities (together with any
distributions payable thereon during such period), giving application to all
adjustments called for during such period under this Section 5(d)(iii) with
respect to the rights of the holders of the Series C Preferred Stock; provided,
however, that if such record date shall have been fixed and such dividend is not
fully paid or if such distribution is not fully made on the date fixed therefor,
the Conversion Price shall be adjusted pursuant to this paragraph as of the time
of actual payment of such dividends or distributions; and provided further,
however, that no such adjustment shall be made if the holders of Series C
Preferred Stock simultaneously receive (i) a dividend or other distribution of
shares of Common Stock in a number equal to the number of shares of Common Stock
as they would have received if all outstanding shares of Series C Preferred
Stock had been converted into Common Stock on the date of such event or (ii) a
dividend or other distribution of shares of Series C Preferred Stock which are
convertible, as of the date of such event, into such number of shares of Common
Stock as is equal to the number of additional shares of Common Stock being
issued with respect to each share of Common Stock in such dividend or
distribution.
               (iv) Adjustments for Reclassification, Exchange or Substitution.
If the Common Stock issuable upon conversion of the Series C Preferred Stock at
any time or from time to time after the Issuance Date shall be changed to the
same or different number of shares of any class or classes of stock, whether by
reclassification, exchange, substitution or otherwise (other than by way of a
stock split or combination of shares or stock dividends provided for in
Sections 5(d)(i), (ii) and (iii), or a reorganization, merger, consolidation, or
sale of assets provided for in Section 5(d)(v)), then, and in each event, an
appropriate revision to the Conversion Price shall be made and provisions shall
be made (by adjustments of the Conversion Price or otherwise) so that the holder
of each share of Series C Preferred Stock shall have the right thereafter to
convert such share of Series C Preferred Stock into the kind and amount of
shares of stock and other securities receivable upon reclassification, exchange,
substitution or other change, by holders of the number of shares of Common Stock
into which such share of Series C Preferred Stock might have been converted
immediately prior to such reclassification, exchange, substitution or other
change, all subject to further adjustment as provided herein.

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               (v) Adjustments for Reorganization, Merger, Consolidation or
Sales of Assets. Subject to the provisions of Section 4, if at any time or from
time to time after the Issuance Date there shall be a capital reorganization of
the Company (other than by way of a stock split or combination of shares or
stock dividends or distributions provided for in Section 5(d)(i), (ii) and
(iii), or a reclassification, exchange or substitution of shares provided for in
Section 5(d)(iv)), or a merger or consolidation of the Company with or into
another corporation where the holders of outstanding voting securities prior to
such merger or consolidation do not own over 50% of the outstanding voting
securities of the merged or consolidated entity, immediately after such merger
or consolidation, or the sale of all or substantially all of the Company’s
properties or assets to any other person (an “Organic Change”), then as a part
of such Organic Change an appropriate revision to the Conversion Price shall be
made if necessary and provision shall be made if necessary (by adjustments of
the Conversion Price or otherwise) so that the holder of each share of Series C
Preferred Stock shall have the right thereafter to convert such share of
Series C Preferred Stock into the kind and amount of shares of stock and other
securities or property of the Company or any successor corporation resulting
from Organic Change. In any such case, appropriate adjustment shall be made in
the application of the provisions of this Section 5(d)(v) with respect to the
rights of the holders of the Series C Preferred Stock after the Organic Change
to the end that the provisions of this Section 5(d)(v) (including any adjustment
in the Conversion Price then in effect and the number of shares of stock or
other securities deliverable upon conversion of the Series C Preferred Stock)
shall be applied after that event in as nearly an equivalent manner as may be
practicable.
               (vi) Adjustments for Issuance of Additional Shares of Common
Stock.
                    (A) In the event the Company, shall, at any time, from time
to time, issue or sell any additional shares of Common Stock (other than as
provided in the foregoing subsections (i) through (v) of this Section 5(d)) (the
“Additional Shares of Common Stock”), at a price per share less than the
Conversion Price, or without consideration, the Conversion Price then in effect
upon each such issuance shall be adjusted to that price (rounded to the nearest
cent) determined by multiplying the Conversion Price by a fraction:

  (1)   the numerator of which shall be equal to the sum of (A) the number of
shares of Common Stock outstanding immediately prior to the issuance of such
Additional Shares of Common Stock plus (B) the number of shares of Common Stock
(rounded to the nearest whole share) which the aggregate consideration for the
total number of such Additional Shares of Common Stock so issued would purchase
at a price per share equal to the then Conversion Price, and     (2)   the
denominator of which shall be equal to the number of shares of Common Stock
outstanding immediately after the issuance of such Additional Shares of Common
Stock.

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No adjustment of the number of shares of Common Stock shall be made under
paragraph (A) of Section 5(d)(vi) upon the issuance of any Additional Shares of
Common Stock which are issued pursuant to the exercise of any warrants or other
subscription or purchase rights or pursuant to the exercise of any conversion or
exchange rights in any Common Stock Equivalents (as defined below), if any such
adjustment shall previously have been made upon the issuance of such warrants or
other rights or upon the issuance of such Common Stock Equivalents (or upon the
issuance of any warrant or other rights therefore) pursuant to
Section 5(d)(vii).
               (vii) Issuance of Common Stock Equivalents. If the Company, at
any time after the Issuance Date, shall issue any securities convertible into or
exchangeable for, directly or indirectly, Common Stock (“Convertible
Securities”), other than the Series C Preferred Stock, or any rights or warrants
or options to purchase any such Common Stock or Convertible Securities, shall be
issued or sold (collectively, the “Common Stock Equivalents”) and the aggregate
of the price per share for which Additional Shares of Common Stock may be
issuable thereafter pursuant to such Common Stock Equivalent, plus the
consideration received by the Company for issuance of such Common Stock
Equivalent divided by the number of shares of Common Stock issuable pursuant to
such Common Stock Equivalent (the “Aggregate Per Common Share Price”) shall be
less than the Conversion Price, or if, after any such issuance of Common Stock
Equivalents, the price per share for which Additional Shares of Common Stock may
be issuable thereafter is amended or adjusted, and such price as so amended or
adjusted shall make the Aggregate Per Common Share Price be less than Conversion
Price in effect at the time of such amendment or adjustment, then the Conversion
Price then in effect shall be adjusted pursuant to Section (5)(d)(vi) above
assuming that all Additional Shares of Common Stock have been issued pursuant to
the Convertible Securities or Common Stock Equivalents for a purchase price
equal to the Aggregate Per Common Share Price. No adjustment of the Conversion
Price shall be made under this subsection (vii) upon the issuance of any
Convertible Security which is issued pursuant to the exercise of any warrants or
other subscription or purchase rights therefore, if any adjustment shall
previously have been made to the exercise price of such warrants then in effect
upon the issuance of such warrants or other rights pursuant to this subsection
(vii). No adjustment shall be made to the Conversion Price upon the issuance of
Common Stock pursuant to the exercise, conversion or exchange of any Convertible
Security or Common Stock Equivalent where an adjustment to the Conversion Price
was made as a result of the issuance or purchase of any Convertible Security or
Common Stock
               (viii) Consideration for Stock. In case any shares of Common
Stock or Convertible Securities other than the Series C Preferred Stock, or any
rights or warrants or options to purchase any such Common Stock or Convertible
Securities, shall be issued or sold:

  (1)   in connection with any merger or consolidation in which the Company is
the surviving corporation (other than any consolidation or merger in which the
previously outstanding shares of Common Stock of the Company shall be changed to
or exchanged for the stock or other securities of another corporation), the
amount of consideration therefore shall be, deemed to be the fair value, as
determined reasonably and in good faith by the Board of

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      Directors of the Company, of such portion of the assets and business of
the nonsurviving corporation as such Board may determine to be attributable to
such shares of Common Stock, Convertible Securities, rights or warrants or
options, as the case may be; or     (2)   in the event of any consolidation or
merger of the Company in which the Company is not the surviving corporation or
in which the previously outstanding shares of Common Stock of the Company shall
be changed into or exchanged for the stock or other securities of another
corporation, or in the event of any sale of all or substantially all of the
assets of the Company for stock or other securities of any corporation, the
Company shall be deemed to have issued a number of shares of its Common Stock
for stock or securities or other property of the other corporation computed on
the basis of the actual exchange ratio on which the transaction was predicated,
and for a consideration equal to the fair market value on the date of such
transaction of all such stock or securities or other property of the other
corporation. If any such calculation results in adjustment of the applicable
Conversion Price, or the number of shares of Common Stock issuable upon
conversion of the Series C Preferred Stock, the determination of the applicable
Conversion Price or the number of shares of Common Stock issuable upon
conversion of the Series C Preferred Stock immediately prior to such merger,
consolidation or sale, shall be made after giving effect to such adjustment of
the number of shares of Common Stock issuable upon conversion of the Series C
Preferred Stock. In the event any consideration received by the Company for any
securities consists of property other than cash, the fair market value thereof
at the time of issuance or as otherwise applicable shall be as determined in
good faith by the Board of Directors of the Company. In the event Common Stock
is issued with other shares or securities or other assets of the Company for
consideration which covers both, the consideration computed as provided in this
Section (5)(d)(viii) shall be allocated among such securities and assets as
determined in good faith by the Board of Directors of the Company.

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               (ix) Record Date. In case the Company shall take record of the
holders of its Common Stock or any other Preferred Stock for the purpose of
entitling them to subscribe for or purchase Common Stock or Convertible
Securities, then the date of the issue or sale of the shares of Common Stock
shall be deemed to be such record date.
               (x) Certain Issues Excepted. Anything herein to the contrary
notwithstanding, the Company shall not be required to make any adjustment to the
Conversion Price upon (i) the Company’s issuance of any Additional Shares of
Common Stock in connection with the acquisition of another business by the
Company by merger, purchase of substantially all of the assets of such other
business or other reorganization, in each instance under arrangements approved
by the Board of Directors, (ii) the Company’s issuance of equity to Frank
Fradella pursuant to the Employment Agreement between the Company and Frank
Fradella, or the Company’s issuance of equity to the Company’s lender or lenders
pursuant to that certain Forbearance Agreement dated as of February 6, 2008
among the Company and the lender parties thereto, as amended by Amendment No. 1
thereto dated June 4, 2008 and Amendment No. 2 thereto dated as of July 3, 2008
among the Company and the lender parties thereto, (iii) the Company’s issuance
of Common Stock, or the issuance or grants of options to purchase Common Stock,
pursuant to the Company’s stock option plans and employee stock purchase plans
as they now exist, (iv) any issuances of warrants issued pursuant to the
applicable Purchase Agreements, and (v) the payment of any dividends on the
Series C Preferred Stock.
          (e) No Impairment. The Company shall not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but will at all
times in good faith, assist in the carrying out of all the provisions of this
Certificate of Designation and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series C Preferred Stock against impairment. In the event a
holder shall elect to convert any shares of Series C Preferred Stock as provided
herein, the Company cannot refuse conversion based on any claim that such holder
or any one associated or affiliated with such holder has been engaged in any
violation of law, unless, an injunction from a court, on notice, restraining
and/or adjoining conversion of all or of said shares of Series C Preferred Stock
shall have been issued and the Company posts a surety bond for the benefit of
such holder in an amount equal to 130% of the Liquidation Preference Amount of
the Series C Preferred Stock such holder has elected to convert, which bond
shall remain in effect until the completion of arbitration/litigation of the
dispute and the proceeds of which shall be payable to such holder in the event
it obtains judgment.
          (f) Certificates as to Adjustments. Upon occurrence of each adjustment
or readjustment of the Conversion Price or number of shares of Common Stock
issuable upon conversion of the Series C Preferred Stock pursuant to this
Section 5, the Company at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
such Series C Preferred Stock a certificate setting forth such adjustment and
readjustment, showing in detail the facts upon which such adjustment or
readjustment is based. The Company shall, within three (3) days of a written
request of the holder of Series C Preferred Stock, at any time, furnish or cause
to be furnished to such holder a certificate setting forth all adjustments and
readjustments, the Conversion Price in effect at the time, and the

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number of shares of Common Stock and the amount, if any, of other securities or
property which at the time would be received upon the conversion of a share of
such Series C Preferred Stock. Notwithstanding the foregoing, the Company shall
not be obligated to deliver a certificate unless such certificate would reflect
an increase or decrease of at least one percent (1%) of the Conversion Price for
the last certificate issued by the Company pursuant to this Section 5(f),
provided that the Company provides notice to the holder (within the three
(3) day time period) of such fact.
          (g) Issue Taxes. The Company shall pay any and all issue and other
taxes, excluding federal, state or local income taxes, that may be payable in
respect of any issue or delivery of shares of Common Stock on conversion of
shares of Series C Preferred Stock pursuant thereto; provided, however, that the
Company shall not be obligated to pay any transfer taxes resulting from any
transfer requested by any holder in connection with any such conversion.
          (h) Notices. Unless otherwise provided herein, all notices and other
communications hereunder shall be in writing and shall be deemed given (a) on
the day of delivery, if delivered personally, (b) three (3) business days
following being mailed by certified or registered mail, postage prepaid,
return-receipt requested, or (c) one (1) day after deposited with a nationally
recognized overnight delivery service for next day delivery, in each instance
(as applicable) addressed to the Company at its principal place of business or
to the holder of record at its address appearing on the books of the Company.
The Company and the holders of the Series C Preferred Stock may change their
addresses for notice from time to time upon notice in compliance with this
Section 5(h). The Company will give written notice to each holder of Series C
Preferred Stock at least forty-five (45) days prior to the date on which the
Company closes its books or takes a record (I) with respect to any dividend or
distribution upon the Common Stock, (II) with respect to any pro rata
subscription offer to holders of Common Stock or (III) for determining rights to
vote with respect to any Organic Change, Deemed Liquidation Event, dissolution,
liquidation or winding-up and in no event shall such notice be provided to such
holder prior to such information being made known to the public. The Company
will also give written notice to each holder of Series C Preferred Stock at
least forty-five (45) days prior to the date on which any Organic Change, Deemed
Liquidation Event, dissolution, liquidation or winding-up will take place and in
no event shall such notice be provided to such holder prior to such information
being made known to the public.
          (i) Fractional Shares. No fractional shares of Common Stock shall be
issued upon conversion of the Series C Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled, the Company
shall pay cash equal to the product of such fraction multiplied by the average
of the Closing Bid Prices of the Common Stock for the five (5) consecutive
trading immediately preceding the Conversion Date.
          (j) Reservation of Common Stock. The Company shall, so long as any
shares of Series C Preferred Stock are outstanding, reserve and keep available
out of its authorized and unissued Common Stock, solely for the purpose of
effecting the conversion of the Series C Preferred Stock, such number of shares
of Common Stock as shall from time to time be sufficient to effect the
conversion of all of the Series C Preferred Stock then outstanding; provided
that the number of shares of Common Stock so reserved shall at no time be less
than

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120% of the number of shares of Common Stock for which the shares of Series C
Preferred Stock are at any time convertible. The initial number of shares of
Common Stock reserved for conversions of the Series C Preferred Stock and each
increase in the number of shares so reserved shall be allocated pro rata among
the holders of the Series C Preferred Stock based on the number of shares of
Series C Preferred Stock held by each holder of record at the time of issuance
of the Series C Preferred Stock or increase in the number of reserved shares, as
the case may be. In the event a holder shall sell or otherwise transfer any of
such holder’s shares of Series C Preferred Stock, each transferee shall be
allocated a pro rata portion of the number of reserved shares of Common Stock
reserved for such transferor. Any shares of Common Stock reserved and which
remain allocated to any person or entity which does not hold any shares of
Series C Preferred Stock shall be allocated to the remaining holders of Series C
Preferred Stock, pro rata based on the number of shares of Series C Preferred
Stock then held by such holder.
          (k) Retirement of Series C Preferred Stock. Conversion of Series C
Preferred Stock shall be deemed to have been effected on the applicable
Conversion Date. Upon conversion of only a portion of the number of shares of
Series C Preferred Stock represented by a certificate surrendered for
conversion, the Company shall issue and deliver to such holder at the expense of
the Company, a new certificate covering the number of shares of Series C
Preferred Stock representing the unconverted portion of the certificate so
surrendered as required by Section 5(b)(ii).
          (l) Regulatory Compliance. If any shares of Common Stock to be
reserved for the purpose of conversion of Series C Preferred Stock require
registration or listing with or approval of any governmental authority, stock
exchange or other regulatory body under any federal or state law or regulation
or otherwise before such shares may be validly issued or delivered upon
conversion, the Company shall, at its sole cost and expense, in good faith and
as expeditiously as possible, endeavor to secure such registration, listing or
approval, as the case may be.
     6. No Preemptive Rights. Except as provided in Section 5 hereof and in the
Purchase Agreements, no holder of the Series C Preferred Stock shall be entitled
to rights to subscribe for, purchase or receive any part of any new or
additional shares of any class, whether now or hereinafter authorized, or of
bonds or debentures, or other evidences of indebtedness convertible into or
exchangeable for shares of any class, but all such new or additional shares of
any class, or any bond, debentures or other evidences of indebtedness
convertible into or exchangeable for shares, may be issued and disposed of,
subject to the terms of this Certificate of Designation, by the Board of
Directors on such terms and for such consideration (to the extent permitted by
law), and to such person or persons as the Board of Directors may deem
advisable.
     7. Intentionally Omitted.
     8. Redemption.
          (a) Redemption by the Company. Except as set forth in this
Section 8(a), the Company shall not have the right to call or redeem at any time
all or any shares of Series C Preferred Stock. Shares of Series C Preferred
Stock may be redeemed by the Company, at any time (subject to the terms and
conditions of this Certificate of Designation), in whole or in part

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out of funds lawfully available therefore. The price per share price for any
redemption pursuant to this Section 8 shall be equal to $12.50 per share
(subject to appropriate adjustment in the event of any stock dividend, stock
split, combination or other similar recapitalization affecting the number of
such shares issued and outstanding), plus the amount of aggregate dividends
accrued but unpaid thereon, whether or not declared, together with any other
dividends declared but unpaid thereon (collectively, with respect to a holder,
the “Applicable Redemption Price”, and with respect to each share of Series C
Preferred Stock held by such holder, the “Applicable Redemption Price Per
Share”), provided that any shares of the Series C-2 Preferred Stock may be
redeemed by the Company within 90 days of the issuance thereof for a price equal
to $11.00 per share, (subject to appropriate adjustment in the event of any
stock dividend, stock split, combination or other similar recapitalization
affecting the number of such shares issued and outstanding), plus the amount of
aggregate dividends accrued but unpaid thereon, whether or not declared,
together with any other dividends declared but unpaid thereon. For the avoidance
of doubt, in the event of any proposed redemption by the Company pursuant to
this Section 8(a), the Company shall provide the holders of the Series C
Preferred Stock with the notice required pursuant to Section 5(a) and permit
such holders to convert such Series C Preferred Stock (or a portion thereof) for
a minimum period of forty-five (45) days from the date that the Company gives
such notice.
          (b) Redemption Option by Holder. In addition to all other rights of
holders of Series C Preferred Stock contain herein, simultaneously with the
occurrence of a Major Transaction (as defined below), after a Triggering Event
(as defined below), or at any time after June 15, 2013, each holder shall have
the right, at such holder’s option, to require the Company to redeem for cash
all or a portion of such holder’s shares of Series C Preferred Stock at a price
per share of Series C Preferred Stock equal to the Applicable Redemption Price
Per Share. At the option of the holder of the Series C Preferred Stock, the
Company shall pay the Applicable Redemption Price in shares of Common Stock
based on the Conversion Price then in effect on the date preceding the date of
delivery of the applicable notice of redemption.
          (c) Certain Defined Terms. For the purposes of this Section 8:
          (i) a “Major Transaction” shall be deemed to have occurred at such
time as any one of the following events: (A) the consolidation, merger or other
business combination of the Company with or into another entity, (B) the sale or
transfer of more than 50% of the Company’s assets in one or a related series of
transactions, or (C) the closing of a purchase, tender or exchange offer made to
the holders of more than 50% of the outstanding shares of Common Stock.
          (ii) a “Triggering Event” shall be deemed to have occurred at such
time as any of the following events:
     (A) the Company’s notice to any holder of Series C Preferred Stock,
including by way of public announcement, at any time, of its inability to comply
(including for any of the reasons described in Section 9) or its intention not
to comply with proper requests for conversion of any Series C Preferred Stock
into shares of Common Stock;

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     (B) the Company’s failure to comply with a Conversion Notice tendered in
accordance with the provisions of this Certificate of Designation within ten
(10) business days after the receipt by the Company of the Conversion Notice and
the Preferred Stock Certificates; or
     (C) the Company breaches any representation, warranty, covenant or other
term or condition of the Purchase Agreements, the Warrants issued pursuant to
the Purchase Agreements, this Certificate of Designation, the Certificate of
Incorporation, or any other agreement, document, certificate or other instrument
delivered in connection with the transactions contemplated by the Purchase
Agreements, the Warrants issued pursuant to the Purchase Agreements, or this
Certificate of Designation; provided, however, that in the case of a breach of a
covenant which is curable, such breach shall not constitute a Triggering Event
if such breach is cured with 5 days of the earlier of (i) the Company becoming
aware of such breach or (ii) receiving notice thereof.
          (d) Mechanics of Redemption Other Than Upon a Major Transaction or
Triggering Event. In the event of a redemption by the Company pursuant to
Section 8(a), the Company notify the holders of the Series C Preferred Stock
pursuant to Section 5(a) hereof. In the event of a redemption by a holder on or
after June 15, 2013 other than in connection with a Major Transaction or
Triggering Event, the holder(s) initiating the redemption shall provide the
Company with written notice of the redemption not less than 20 days prior to the
applicable date of redemption, which such date shall be specified in such notice
(the “Redemption Date”). Such notice shall indicate the number of shares of
Series C Preferred Stock that the party is electing to redeem or have redeemed,
as the case may be. The Company shall redeem such Series C Preferred Stock for
the Applicable Redemption Price on such Redemption Date.
          (e) Mechanics of Redemption at Option of Holder Upon Major
Transaction. No sooner than fifteen (15) days nor later than ten (10) days prior
to the consummation of a Major Transaction, but not prior to the public
announcement of such Major Transaction, the Company shall deliver written notice
(“Notice of Major Transaction”) to each holder of Series C Preferred Stock. At
any time after receipt of a Notice of Major Transaction (or, in the event a
Notice of Major Transaction is not delivered at least ten (10) days prior to a
Major Transaction, at any time within ten (10) days prior to a Major
Transaction), any holder of Series C Preferred Stock then outstanding may
require the Company to redeem, effective immediately prior to the consummation
of such Major Transaction, all of the holder’s Series C Preferred Stock then
outstanding by delivering written notice thereof (“Notice of Redemption at
Option of Holder Upon Major Transaction”) to the Company, which Notice of
Redemption at Option of Holder Upon Major Transaction shall indicate the number
of shares of Series C Preferred Stock that such holder is electing to redeem.
The Company shall redeem such Series C Preferred Stock for the Applicable
Redemption Price within three (3) days of receipt of the Notice of Redemption at
Option Of Holder Upon Major Transaction, which shall be considered as the
applicable Redemption Date for purposes hereof.

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          (f) Mechanics of Redemption at Option of Holder Upon Triggering Event.
Within one (1) day after the occurrence of a Triggering Event, the Company shall
deliver written notice thereof via facsimile and overnight courier (“Notice of
Triggering Event”) to each holder of Series C Preferred Stock. At any time after
the earlier of a holder’s receipt of a Notice of Triggering Event and such
holder becoming aware of a Triggering Event, any holder of Series C Preferred
Stock then outstanding may require the Company to redeem all of the Series C
Preferred Stock by delivering written notice thereof (“Notice of Redemption at
Option of Holder Upon Triggering Event”) to the Company, which Notice of
Redemption at Option of Holder Upon Triggering Event shall indicate the number
of shares of Series C Preferred Stock that such holder is electing to redeem.
The Company shall redeem such Series C Preferred Stock for the Applicable
Redemption Price within three (3) days of receipt of the Notice of Redemption at
Option Of Holder Upon Triggering Event, which shall be considered as the
applicable Redemption Date for purposes hereof.
          (g) Surrender of Certificates; Payment. On or before the applicable
Redemption Date, each holder of shares of Series C Preferred Stock to be
redeemed on such Redemption Date, unless such holder has exercised his, her or
its right to convert such shares as provided in Section 5 hereof, shall
surrender the certificate or certificates representing such shares to the
Company, in the manner and at the place designated in the applicable notice (or
at the Company’s principal business offices, if not so noted), and thereupon the
Applicable Redemption Price for such shares shall be payable to the order of the
person whose name appears on such certificate or certificates as the owner
thereof, and each surrendered certificate shall be cancelled and retired. In the
event less than all of the shares of Series C Preferred Stock represented by a
certificate are redeemed, a new certificate representing the unredeemed shares
of Series C Preferred Stock shall promptly be issued to such holder.
          (h) Rights Subsequent to Redemption. If the applicable redemption
notice shall have been duly given, and if on the applicable Redemption Date the
Applicable Redemption Price payable upon redemption of the shares of Series C
Preferred Stock to be redeemed on such Redemption Date is paid or tendered for
payment or deposited with an independent payment agent so as to be available
therefor, then notwithstanding that the certificates evidencing any of the
shares of Series C Preferred Stock so called for redemption shall not have been
surrendered, dividends with respect to such shares of Series C Preferred Stock
shall cease to accrue after such Redemption Date and all rights with respect to
such shares shall forthwith after the Redemption Date terminate, except for the
right of the holders to receive the Applicable Redemption Price without interest
upon surrender of their certificate or certificates therefor.
          (i) Redeemed or Otherwise Acquired Shares. Any shares of Series C
Preferred Stock which are redeemed or otherwise acquired by the Company or any
of its subsidiaries shall be automatically and immediately cancelled and shall
not be reissued, sold or transferred. Neither the Company nor any of its
subsidiaries may exercise any voting or other rights granted to the holders of
Series C Preferred Stock following redemption.
          (j) Option to Receive Consideration other than Cash. In connection
with any redemption contemplated by this Section 8, a holder of Series C
Preferred Stock shall have the option to receive some or all of the
consideration therefor in shares of Common Stock. If a

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holder elects to receive some or all of such consideration in Common Stock, the
number of shares of Common Stock received shall be derived by taking the
Applicable Redemption Price (or portion thereof as designated by the holder) and
dividing such amount by the Conversion Price.
          (k) Related Matters. If the Company is unable to redeem all of the
Series C Preferred Stock to be redeemed, the Company shall redeem an amount from
each holder of Series C Preferred Stock being redeemed equal to such holder’s
pro-rata amount (based on the number of shares of Series C Preferred Stock held
by such holder relative to the number of shares of Series C Preferred Stock
outstanding) of all Series C Preferred Stock being redeemed; provided that, in
the event of any redemption of Series C Preferred Stock within 90 days of the
date hereof, the shares of Series C-2 Preferred Stock shall be redeemed from
each holder pro-rata prior to the redemption of any shares of Series C-1
Preferred Stock. If the Company shall fail to redeem all of the Series C
Preferred Stock submitted for redemption (other than pursuant to a dispute as to
the arithmetic calculation of the Applicable Redemption Price), in addition to
any remedy such holder of Series C Preferred Stock may have under this
Certificate of Designation and such holder’s applicable Purchase Agreement, the
Applicable Redemption Price payable in respect of such unredeemed Series C
Preferred Stock shall bear interest at the rate of 1.0% per month (prorated for
partial months) until paid in full. Until the Company pays such unpaid
Applicable Redemption Price in full to a holder of shares of Series C Preferred
Stock submitted for redemption, such holder shall have the option (the “Void
Optional Redemption Option”) to, in lieu of redemption, require the Company to
promptly return to such holder(s) all of the shares of Series C Preferred Stock
that were submitted for redemption by such holder(s) under this Section 8 and
for which the Applicable Redemption Price has not been paid, by sending written
notice thereof to the Company (the “Void Optional Redemption Notice”). Upon the
Company’s receipt of such Void Optional Redemption Notice(s) and prior to
payment of the full Applicable Redemption Price to such holder, (i) the
notice(s) of redemption shall be null and void with respect to those shares of
Series C Preferred Stock submitted for redemption and for which the Applicable
Redemption Price has not been paid, (ii) the Company shall immediately return
any Series C Preferred Stock submitted to the Company by each such holder for
redemption and for which the Applicable Redemption Price has not been paid and
(iii) the Conversion Price of such returned shares of Series C Preferred Stock
shall be adjusted to the lesser of (A) the Conversion Price and (B) the lowest
Closing Bid Price during the period beginning on the date on which the notice of
redemption is delivered and ending on the date on which the Void Option
Redemption Notice(s) is delivered to the Company; provided that no adjustment
shall be made if such adjustment would result in an increase of the Conversion
Price then in effect. A holder’s delivery of a Void Optional Redemption Notice
and exercise of its rights following such notice shall not affect the Company’s
obligations to make any payments which have accrued prior to the date of such
notice. For the avoidance of doubt, payments provided for in this Section 8
shall have priority to payments to other stockholders in connection with a Major
Transaction.
     9. Inability to Fully Convert.
          (a) Holder’s Option if Company Cannot Fully Convert. If, upon the
Company’s receipt of a Conversion Notice, the Company cannot issue shares of
Common Stock registered for resale under the registration statement providing
for the resale of the shares of

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Common Stock issuable upon conversion of the Series C Preferred Stock (the
“Registration Statement”) for any reason, including, without limitation, because
the Company (w) does not have a sufficient number of shares of Common Stock
authorized and available, (x) is otherwise prohibited by applicable law or by
the rules or regulations of any stock exchange, interdealer quotation system or
other self-regulatory organization with jurisdiction over the Company or its
securities from issuing all of the Common Stock which is to be issued to a
holder of Series C Preferred Stock pursuant to a Conversion Notice or (y) fails
to have a sufficient number of shares of Common Stock registered for resale
under the Registration Statement, then the Company shall issue as many shares of
Common Stock as it is able to issue in accordance with such holder’s Conversion
Notice and pursuant to Section 5(b)(ii) above and, with respect to the
unconverted Series C Preferred Stock, the holder, solely at such holder’s
option, can elect, within five (5) business days after receipt of notice from
the Company thereof to:
               (i) require the Company to redeem from such holder those Series C
Preferred Stock for which the Company is unable to issue Common Stock in
accordance with such holder’s Conversion Notice (“Conversion Failure
Redemption”) at a price per share equal to Applicable Redemption Price per Share
or, at such holder’s option, in shares of Common Stock, based upon the
Conversion Price then in effect on the day preceding the date of delivery of
such holder’s election to the Company;
               (ii) require the Company to issue restricted shares of Common
Stock in accordance with such holder’s Conversion Notice and pursuant to
Section 5(b)(ii) above; and/or
               (iii) void its Conversion Notice and retain or have returned, as
the case may be, the shares of Series C Preferred Stock that were to be
converted pursuant to such holder’s Conversion Notice (provided that a holder’s
voiding its Conversion Notice shall not affect the Company’s obligations to make
any payments which have accrued prior to the date of such notice).
In the event a holder shall elect to convert any shares of Series C Preferred
Stock as provided herein, the Company cannot refuse conversion based on any
claim that such holder or any one associated or affiliated with such holder has
been engaged in any violation of law, violation of an agreement to which such
holder is a party or for any reason whatsoever, unless, an injunction from a
court, on notice, restraining and or enjoining conversion of all or part of said
shares of Series C Preferred Stock shall have been issued and the Company posts
a surety bond for the benefit of such holder in an amount equal to 130% of the
amount of shares of Series C Preferred Stock the holder has elected to convert,
which bond shall remain in effect until the completion of arbitration/litigation
of the dispute and the proceeds of which shall be payable to such holder in the
event it obtains judgment.
          (b) Mechanics of Fulfilling Holder’s Election. The Company shall
immediately send via facsimile to a holder of Series C Preferred Stock, upon
receipt of a facsimile copy of a Conversion Notice from such holder which cannot
be fully satisfied as described in Section 9(a) above, a notice of the Company’s
inability to fully satisfy such holder’s Conversion Notice (the “Inability to
Fully Convert Notice”). Such Inability to Fully Convert Notice shall indicate
(i) the reason why the Company is unable to fully satisfy such holder’s

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Conversion Notice, (ii) the number of Series C Preferred Stock which cannot be
converted and (iii) the Applicable Redemption Price. Such holder shall notify
the Company of its election pursuant to Section 9(a) above by delivering written
notice via facsimile to the Company (“Notice in Response to Inability to
Convert”).
          (c) Payment of Redemption Price. If such holder shall elect to have
its shares redeemed pursuant to Section 9(a)(i) above, the Company shall pay the
Applicable Redemption Price to such holder within three (3) days of the
Company’s receipt of the holder’s Notice in Response to Inability to Convert,
provided that prior to the Company’s receipt of the holder’s Notice in Response
to Inability to Convert the Company has not delivered a notice to such holder
stating, to the satisfaction of the holder, that the event or condition
resulting in the Conversion Failure Redemption has been cured and all Conversion
Shares issuable to such holder can and will be delivered to the holder in
accordance with the terms of Section 5(b). If the Company shall fail to pay the
applicable Applicable Redemption Price to such holder on a timely basis as
described in this Section 9(c) (other than pursuant to a dispute as to the
determination of the arithmetic calculation of the Applicable Redemption Price),
in addition to any remedy such holder of Series C Preferred Stock may have under
this Certificate of Designation and such holder’s applicable Purchase Agreement,
such unpaid amount shall bear interest at the rate of 2.0% per month (prorated
for partial months) until paid in full. Until the full Applicable Redemption
Price is paid in full to such holder, such holder may (i) void the Conversion
Failure Redemption with respect to those Series C Preferred Stock for which the
full Applicable Redemption Price has not been paid, (ii) receive back such
Series C Preferred Stock, and (iii) require that the Conversion Price of such
returned Series C Preferred Stock be adjusted to the lesser of (A) the
Conversion Price and (B) the lowest Closing Bid Price during the period
beginning on the Conversion Date and ending on the date the holder voided the
Conversion Failure Redemption; provided that no adjustment shall be made if such
adjustment would result in an increase of the Conversion Price then in effect.
          (d) Pro-rata Conversion and Redemption. In the event the Company
receives a Conversion Notice from more than one holder of Series C Preferred
Stock on the same day and the Company can convert and redeem some, but not all,
of the Series C Preferred Stock pursuant to this Section 9, the Company shall
convert and redeem from each holder of Series C Preferred Stock electing to have
Series C Preferred Stock converted and redeemed at such time an amount equal to
such holder’s pro-rata amount (based on the number shares of Series C Preferred
Stock held by such holder relative to the number shares of Series C Preferred
Stock outstanding) of all shares of Series C Preferred Stock being converted and
redeemed at such time.
     10. Vote to Change the Terms of or Issue Preferred Stock. The affirmative
vote at a meeting duly called for such purpose or the written consent without a
meeting, of the holders of not less than 51% of the then outstanding shares of
Series C Preferred Stock, shall be required (a) for any change to this
Certificate of Designation or the Certificate of Incorporation which would
amend, alter, change or repeal any of the powers, designations, preferences and
rights of the Series C Preferred Stock or (b) for the issuance of shares of any
series of preferred stock other than pursuant to the Purchase Agreements.
     11. Lost or Stolen Certificates. Upon receipt by the Company of evidence
of, or an affidavit as to, the loss, theft, destruction or mutilation of any
Preferred Stock Certificates

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representing the shares of Series C Preferred Stock, upon surrender and
cancellation of the Preferred Stock Certificate(s), the Company shall execute
and deliver new preferred stock certificate(s) of like tenor and date; provided,
however, the Company shall not be obligated to re-issue Preferred Stock
Certificates if the holder contemporaneously requests the Company to convert
such shares of Series C Preferred Stock into Common Stock.
     12. Remedies, Characterizations, Other Obligations, Breaches and Injunctive
Relief. The remedies provided in this Certificate of Designation shall be
cumulative and in addition to all other remedies available under this
Certificate of Designation, at law or in equity (including a decree of specific
performance and/or other injunctive relief), no remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy and
nothing herein shall limit a holder’s right to pursue actual damages for any
failure by the Company to comply with the terms of this Certificate of
Designation. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the holders of the Series C Preferred
Stock and that the remedy at law for any such breach may be inadequate. The
Company therefore agrees that, in the event of any such breach or threatened
breach, the holders (or any one or more of them) of the Series C Preferred Stock
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.
     13. Specific Shall Not Limit General; Construction. No specific provision
contained in this Certificate of Designation shall limit or modify any more
general provision contained herein. This Certificate of Designation shall be
deemed to be jointly drafted by the Company and all purchasers of the Series C
Preferred Stock and shall not be construed against any person as the drafter
hereof.
     14. Failure or Indulgence Not Waiver. No failure or delay on the part of a
holder of Series C Preferred Stock in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege.
[Signature Page Follows.]

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     IN WITNESS WHEREOF, the undersigned has executed and subscribed this
Certificate and does affirm the foregoing as true this 3rd day of July, 2008.

            HOME SOLUTIONS OF AMERICA, INC.
      By:           Name:   Frank Fradella        Title:   President and Chief
Executive Officer     

 

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EXHIBIT I
HOME SOLUTIONS OF AMERICA, INC.
CONVERSION NOTICE
     Reference is made to the Amended and Restated Certificate of Designation of
the Relative Rights and Preferences of the Series C Preferred Stock of Home
Solutions of America, Inc. (the “Certificate of Designation”). In accordance
with and pursuant to the Certificate of Designation, the undersigned hereby
elects to convert the number and type of shares of Series C Preferred Stock, par
value $.001 per share (the “Preferred Shares”), of Home Solutions of America,
Inc., a Delaware corporation (the “Company”), indicated below into shares of
Common Stock, par value $.001 per share (the “Common Stock”), of the Company, by
tendering the stock certificate(s) representing the share(s) of Preferred Shares
specified below as of the date specified below.
Date of Conversion:
Number of Preferred Shares to be converted:
Stock certificate no(s). of Preferred Shares to be converted:
The Common Stock have been/are to be sold pursuant to the registration statement
providing for the resale of the shares of Common Stock issuable upon conversion
of the Series C Preferred Stock:

      YES         NO      

We hereby request that the Company confirm the following information:
Conversion Price:
Number of shares of Common Stock to be issued:
Number of shares of Common Stock beneficially owned or deemed beneficially owned
by the Holder on the Date of Conversion:
                                        
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue to:
Facsimile Number:
Authorization:
By:
Title:
Dated:

 

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EXHIBIT B
Form of Warrant

 

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THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED (OTHER THAN IN RELIANCE
UPON RULE 144 PROMULGATED UNDER SUCH ACT) IN THE ABSENCE OF A REGISTRATION
UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS
OF SUCH ACT.
HOME SOLUTIONS OF AMERICA, INC.
Right to Purchase 2,000,000 Shares
(Subject to Adjustment)
Warrant for Common Stock
          Home Solutions of America, Inc. (hereinafter referred to as the
“Company”), a Delaware corporation, hereby certifies that, for value received,
MT TRADING LLC
or registered assigns (the “Holder”), is entitled to purchase from the Company
at any time or from time to time during the Exercise Period (as hereinafter
defined) an aggregate of 2,000,000 fully paid and nonassessable shares (the
“Warrant Shares”), subject to adjustment as provided below, of the Common Stock,
$0.001 par value per share (the “Stock” or “Common Stock”) of the Company, on
the payment therefore of the aggregate exercise price which shall be $0.01 per
share (the “Exercise Price per Share”) multiplied by the number of shares to be
issued (the “Exercise Price”), upon the surrender of this Warrant duly signed by
the registered Holder hereof at the time of exercise, accompanied by payment of
the Exercise Price, upon the terms and subject to the conditions hereinafter set
forth.
          The Warrant represented hereby is delivered pursuant to and is subject
to that certain Preferred Stock Purchase Agreement dated as of July 3, 2008, by
and between the Company and the Holder hereof (the “Agreement”) pursuant to
which the Holder has purchased 100,000 shares of Series C-2 Convertible
Preferred Stock, as may be adjusted from time to time pursuant to the
Certificate of Designation (the “Preferred Stock”). Capitalized terms used
herein without definition shall have the meanings set forth in the Agreement.
          EXERCISE OF WARRANT. (a) 1,000,000 (subject to adjustment in the case
of any stock split, reclassification of other similar event) of the Warrant
Shares will be exercisable

 

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at any time after 90 days from the date hereof (the “2008 Warrant Shares”), and
(b) 1,000,000 (subject to adjustment in the case of any stock split,
reclassification of other similar event) of the Warrant Shares (the “2009
Warrant Shares”) will be exercisable at any time on or after July 3, 2009 (each
such period, as applicable, the “Exercise Period”). Notwithstanding the
foregoing, (i) if not earlier exercised, all Warrant Shares shall expire at 5:00
p.m. on July 3, 2014, (ii) in the event the Company redeems any of the Preferred
Stock purchased in connection with the issuance of this Warrant within 90 days
of the date hereof, then without further action by the Holder or the Company,
fifteen (15) of the 2009 Warrant Shares for every one (1) share of Preferred
Stock (subject to adjustment in the case of any stock split, reclassification of
other similar event) redeemed shall expire (or, if the 2009 Warrant Shares have
all been expired or if less than fifteen (15) of such shares remain unexpired,
the 2008 Warrant Shares shall expire such that the total Warrant Shares that
expire per share of Preferred Stock is equal to fifteen (15)), and (iii) in the
event the Company redeems the Preferred Stock purchased in connection with the
issuance of this Warrant after 90 days of the date hereof, then without further
action by the Holder or the Company, ten (10) of the unexercised 2009 Warrant
Shares for every one (1) share of Preferred Stock (subject to adjustment in the
case of any stock split, reclassification of other similar event) redeemed, or
if a lesser amount of 2009 Warrant Shares remain unexercised at the time of such
redemption, all remaining unexercised 2009 Warrant Shares presented hereby,
shall expire. For the avoidance of doubt, no 2008 Warrant Shares shall expire
pursuant to clause (iii) of this paragraph.
          In the event of a proposed Change of Control, the Company shall give
the Holder ten (10) days prior notice of the proposed closing date of the Change
of Control and, to the extent the Warrant has not been exercised by such date,
then this Warrant shall terminate. “Change of Control” shall mean (x) the
acquisition of the Company by another entity by means of any transaction or
series of related transactions (including, without limitation, any merger,
consolidation or other form of reorganization in which outstanding shares of the
Company are exchanged for securities or other consideration issued, or caused to
be issued, by the acquiring entity or its subsidiary, but excluding any
transaction effected primarily for the purpose of changing the Company’s
jurisdiction of incorporation), unless the Company’s stockholders of record as
constituted immediately prior to such transaction or series of related
transactions will, immediately after such transaction or series of related
transactions hold at least a majority of the voting power of the surviving or
acquiring entity or (y) a sale of all or substantially all of the assets of the
Company.
          Subject to the foregoing restrictions, during the Exercise Period this
Warrant may be exercised, in whole or in part, as follows:
          A. Exercise for Cash. The Holder may, at its option, elect to exercise
this Warrant, in whole or in part and at any time or from time to time during
the Exercise Period, by surrendering this Warrant, with the Exercise of Warrant
and Declaration appended hereto duly executed by or on behalf of the Holder, at
the principal office of the Company, or at such other

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office or agency as the Company may designate, accompanied by payment in full,
in lawful money of the United States, of the Exercise Price payable in respect
of the number of shares of Stock purchased upon such exercise.
          B. Cashless Exercise.
               (i) The Holder may, at its option, elect to exercise this
Warrant, in whole or in part and at any time or from time to time during the
Exercise Period, on a cashless basis, by surrendering this Warrant, with the
Exercise of Warrant and Declaration appended hereto duly executed by or on
behalf of the Holder, at the principal office of the Company, or at such other
office or agency as the Company may designate, by canceling a portion of this
Warrant in payment of the Exercise Price payable in respect of the number of
shares of Stock purchased upon such exercise. In the event of an exercise
pursuant to this subsection B, the number of shares of Stock issued to the
Holder shall be determined according to the following formula:

     
X=
  Y(A-B)
     A
 
   
Where X=
  the number of shares of Stock that shall be issued to the Holder;
 
   
Y=
  the number of shares of Stock for which this Warrant is being exercised (which
shall include both the number of shares of Stock issued to the Holder and the
number of shares of Stock subject to the portion of the Warrant being cancelled
in payment of the Exercise Price);
 
   
A=
  the Fair Market Value (as calculated pursuant to the terms set forth below) of
one share of Common Stock; and
 
   
B=
  the Exercise Price per Share.

               (ii) The Fair Market Value per share of Common Stock shall be
determined as follows:
                    (1) If the Common Stock is listed on a national securities
exchange, the Nasdaq National Market, another nationally recognized trading
system or on the over the counter market, as of the Exercise Date, the Fair
Market Value per share of Common Stock shall be deemed to be the average of the
high and low reported sale prices per share of Common Stock thereon on the
trading day immediately preceding the Exercise Date (provided that if no such
price is reported on such day, then on the date nearest preceding such date).

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                    (2) If the Common Stock is not listed on a national
securities exchange, the Nasdaq National Market, another nationally recognized
trading system or on the over the counter market as of the Exercise Date, the
Fair Market Value per share of Common Stock shall be determined in good faith by
the Board of Directors of the Company, subject to the approval of the Holder. If
the parties hereto cannot reach agreement, then the cashless exercise option
shall not be available to the Holder.
          DELIVERY OF STOCK CERTIFICATE UPON EXERCISE. As soon as practicable
after the exercise of this Warrant and payment of the Exercise Price (which
payment shall be deemed to have occurred when funds are immediately available to
the Company), and in no event more than three (3) days thereafter, the Company
will cause to be issued in the name of and delivered to the registered Holder
hereof or its assigns, or such Holder’s nominee or nominees, a certificate or
certificates for the number of full shares of Stock of the Company to which such
Holder shall be entitled upon such exercise (and in the case of a partial
exercise, a Warrant of like tenor for the unexercised portion remaining subject
to exercise prior to the expiration of the Exercise Period set forth herein).
For all corporate purposes, such certificate or certificates shall be deemed to
have been issued and such Holder or such Holder’s designee to be named therein
shall be deemed to have become a holder of record of such shares of Stock as of
the date the duly executed exercise form pursuant to this Warrant, together with
full payment of the Exercise Price, is received by the Company as aforesaid. No
fraction of a share or scrip certificate for such fraction shall be issued upon
the exercise of this Warrant; in lieu thereof, the Company will pay or cause to
be paid to such Holder cash equal to a like fraction at the prevailing fair
market price for such share as determined in good faith by the Company.
          FAILURE OF EXERCISE. If within three (3) business days of a Holder’s
exercise of this Warrant (in whole or in part) and payment of the Exercise Price
(the “Stock Delivery Period”) the Company shall fail to issue and deliver to
such Holder the number of shares of Stock to which such Holder is entitled upon
such exercise or to issue a new Warrant representing the number shares remaining
after a partial exercise as contemplated above (an “Exercise Failure”), in
addition to all other available remedies which such Holder may pursue hereunder,
under the Agreement, at law and in equity, the Company shall pay additional
damages to such Holder on each business day after such third (3rd) business day
that such exercise is not timely effected in an amount equal to 0.5% of (A) the
sum of the number of shares of Stock not issued to the Holder on a timely basis
and to which such holder is entitled and, in the event the Company has failed to
deliver a new Warrant to the Holder, the number of shares of Stock issuable upon
exercise of such new Warrant, as of the last possible date which the Company
could have issued such new Warrant to such Holder, times (B) the Closing Bid
Price (as hereinafter defined) of the Stock on the last possible date which the
Company could have issued such Stock and such new Warrant, as the case may be,
to such Holder. For the purposes hereof, “Closing Bid Price” means the last
closing bid price per share on the registered national stock exchange on which
the security is then listed, or if there is no such price on such date, then the
closing bid price on such exchange on the date nearest preceding such date, or
if

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such security is not listed on a registered national stock exchange, the closing
bid price for a share of such security in the over the counter market, as
reported by the OTC Bulletin Board or in the National Quotation Bureau
Incorporated (or similar organization or agency succeeding to its function of
reporting prices) at the close of business on such date. If the Closing Bid
Price cannot be calculated for such security on such date on any of the
foregoing bases, the Closing Bid Price of such security on such date shall be
the fair market value as mutually determined by the Company and the Holder. If
the Company fails to pay the additional damages set forth above within five
(5) business days of the date incurred, then such payments shall bear interest
at the rate of 2.0% per month (pro rated for partial months) until such payments
are made.
          ANTI-DILUTION PROVISIONS. A. Certain Dividends and Distributions. In
the event that a dividend or other distribution shall be declared upon the Stock
of the Company payable in shares of said stock, then, in each event, the number
of shares of Stock covered by this Warrant shall be adjusted by adding thereto
the number of shares which would have been distributable thereon if such shares
had been outstanding on the date fixed for determining the stockholders entitled
to receive such stock dividend or other distribution.
          B. Other Dividends and Distributions. In the event that a dividend or
other distribution shall be declared upon the Stock of the Company payable in
securities of the Company other than Stock, then, and in each event, the Holder
shall receive upon exercise hereof, in addition to the number of shares of Stock
issuable hereunder, the kind and amount of securities of the Company, cash or
other property which the Registered Holder would have been entitled to receive
had this Warrant been exercised on the date of such event and had the Registered
Holder thereafter, during the period from the date of such event to and
including the date that this warrant is exercised in full, retained any such
securities receivable during such period, giving application to all adjustments
called for during such period under this Section with respect to the rights of
the Holder.
          C. Stock Splits and Combinations. If the Company shall at any time or
from time to time after the date hereof, effect a stock split of the outstanding
shares of Stock, the number of shares of Stock covered by this Warrant shall be
proportionately increased. If the Company shall at any time or from time to time
after the Issuance Date, combine the outstanding shares of Stock, the number of
shares of Stock covered by this Warrant shall be proportionately decreased. Any
adjustments under this subsection C shall be effective at the close of business
on the date the stock split or combination becomes effective.
          D. Reorganizations, Consolidations, Mergers. Except as otherwise set
forth herein, in the event that the outstanding shares of Stock of the Company
shall be changed into or exchanged for a different number or kind of shares of
stock or other securities of the Company or of another corporation, whether
through reorganization, recapitalization, stock split-up, combination of shares,
merger or consolidation, then upon exercise of this Warrant there shall be
substituted for the shares of Stock covered by this Warrant, the number and kind
of shares of

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stock or other securities which would have been substituted therefor if such
shares had been outstanding on the date fixed for determining the stockholders
entitled to receive such changed or substituted stock or other securities.
          E. Other Changes. In the event there shall be any change, other than
specified above, in the number or kind of outstanding shares of Stock of the
Company or of any stock or other securities into which such Stock shall be
changed or for which it shall have been exchanged, then if such change equitably
requires an adjustment in the number or kind of shares covered by this Warrant,
such adjustment shall be made by the Company and shall be effective and binding
for all purposes on this Warrant.
          F. Notice of Adjustments. Whenever the number of Warrant Shares or
number or kind of securities or other property purchasable upon the exercise of
this Warrant is adjusted, as herein provided, the Company shall give notice
thereof to the Holder, which notice shall state the number of Warrant Shares
(and other securities or property) purchasable upon the exercise of this Warrant
after such adjustment, setting forth a brief statement of the facts requiring
such adjustment and setting forth the computation by which such adjustment was
made.
          REGISTRATION RIGHTS. Upon exercise, the shares of Stock issuable upon
exercise of this Warrant shall be deemed to be Registrable Securities under
Section VI of the Agreement, as such may be amended from time to time.
          LOST, STOLEN, DESTROYED OR MUTILATED WARRANT. Upon receipt by the
Company of evidence satisfactory (in the exercise of reasonable discretion) to
it of the ownership of and the loss, theft or destruction or mutilation of this
Warrant, and (in the case of loss, theft or destruction) of indemnity
satisfactory (in the exercise or reasonable discretion) to it, and (in the case
of mutilation) upon the surrender and cancellation thereof, the Company will
issue and deliver, in lieu thereof, a new Warrant of like tenor.
          TRANSFER AND TRANSFER RESTRICTIONS. A. Owner of Warrant. The Company
may deem and treat the person in whose name this Warrant is registered as the
Holder and owner hereof (notwithstanding any notations of ownership or writing
hereon made by anyone other than the Company) for all purposes and shall not be
affected by any notice to the contrary, until presentation of this Warrant for
registration of transfer as provided below.
          B. Transfer of Warrant. The Company agrees to maintain, at its then
principal place of business, books for the registration of the Warrant and
transfers thereof, and, subject to the provisions of subsections C and D below,
this Warrant and all rights hereunder are transferable, in whole or in part, on
said books at said office, upon surrender of this Warrant at said office,
together with a written assignment of this Warrant duly executed by the Holder
hereof or his duly authorized agent or attorney and funds sufficient to pay any
transfer taxes

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payable upon the making of such transfer. Upon such surrender and payment the
Company shall execute and deliver a new Warrant or Warrants in the name of the
assignee or assignees and in the denominations specified in such instrument of
assignment, and this Warrant shall promptly be canceled.
          C. Restrictions on Exercise and Transfer. Neither this Warrant nor the
shares of Stock issuable upon exercise of this Warrant have been registered
under the Securities Act of 1933, as amended (the “Act”) or any state securities
laws. Therefore, in order, among other things, to insure compliance with the
Act, notwithstanding anything else in the Warrant to contrary, the Holder of
this Warrant, including any successive Holder, agrees by accepting this Warrant
as follows: No Holder shall sell, assign, transfer, pledge, hypothecate,
mortgage, encumber or dispose of all or any portion of this Warrant (or any of
the shares of Stock which may be issued upon the exercise hereof).
Notwithstanding the foregoing, a Holder may transfer all or any portion of this
Warrant (or any of the shares of Stock which may be issued upon the exercise
hereof) (i) as part of a registered public offering of the Company’s securities
or pursuant to Rule 144 under the Act, (ii) by pledge that creates a mere
security interest in all or any portion of this Warrant (or any of the shares of
Stock which may be issued upon the exercise hereof), provided that the pledgee
thereof agrees in writing in advance to be bound by and comply with all
applicable provisions of this Warrant to the same extent as if it were the
Holder making such pledge, (iii) to any member of the Holder, or to any
siblings, ancestors, descendants or spouse of any member of the Holder, or any
custodian or trustee for the account of such member or the account of such
siblings, ancestors, descendants or spouse of such member (or any combination of
the foregoing), or (iv) to an affiliate or a partner of Holder, provided, in
each such case (other than a transfer under clause (i) above) a transferee shall
receive and hold all or any portion of this Warrant (or any of the shares of
Stock which may be issued upon the exercise hereof) subject to the provisions of
this Warrant and there shall be no further transfer except in accordance
herewith. No party will avoid the provisions of this Warrant by making one or
more transfers to an affiliate of such party and then disposing of all or any
portion of such party’s interest in such affiliate; provided, however, that in
any event, this Warrant and the Stock issuable herefrom may not (other than in
connection with the matters described in sub-sections C(i)-(iv) above
(inclusive)) be sold or transferred in the absence of registration under the Act
unless the Company receives an opinion of counsel reasonably acceptable to it
stating that such sale or transfer is exempt from the registration and
prospectus delivery requirements of said Act. For the avoidance of doubt, the
Company acknowledges that a disposition made in reliance upon Rule 144 will not
require an opinion of counsel.
          D. Legend on Shares. Each certificate for shares of Stock issued upon
exercise of this Warrant, unless at the time of exercise such shares are
registered under the Act, shall bear substantially the following legend (and any
additional legend required under the Act or otherwise):

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“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AS AMENDED AND MAY NOT BE OFFERED, SOLD, OR TRANSFERRED
(OTHER THAN IN RELIANCE UPON RULE 144 PROMULGATED UNDER SUCH ACT), EXCEPT (I)
PURSUANT TO A REGISTRATION STATEMENT EFFECTIVE UNDER THE ACT, OR (II) PURSUANT
TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT.
          Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution pursuant to a registration statement under the Act of
the securities represented thereby) shall also bear such legend if, in the
reasonable opinion of counsel for the Company, the securities represented
thereby are legally required to be subject to the transfer restrictions
contained in this Warrant. The exercise and transfer restriction provisions of
this Warrant shall be binding upon all subsequent Holders of the Warrant.
          COVENANTS. The Company covenants that, so long as this Warrant is
exercisable, it will reserve from its authorized and unissued Stock a sufficient
number of shares to provide for the delivery of stock pursuant to the exercise
of this Warrant. The Company further covenants that all shares of Stock which
shall be so deliverable upon exercise of this Warrant shall be duly and validly
issued and fully paid and nonassessable.
          MISCELLANEOUS. This Warrant does not confer upon the Holder any rights
of a stockholder of the Company, including, without limitation, any right to
vote or to consent to or receive notice as a stockholder of the Company.

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          HEADINGS. The headings in this Warrant are for purposes of reference
only, and shall not limit or otherwise affect the meaning hereof.

          Dated: July 3, 2008  HOME SOLUTIONS OF AMERICA, INC.
      By:           Name:   Frank Fradella        Title:   President and Chief
Executive Officer   

Signature Page to MT Trading Warrant

 

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EXERCISE OF WARRANT AND DECLARATION
To: Home Solutions of America, Inc.
          The undersigned Holder hereby exercises the right to purchase
                     shares of Common Stock of Home Solutions of America, Inc.,
a Delaware corporation (the “Company”) and delivers to the Company herewith the
Exercise Price.
          The undersigned declares and represents to the Company that the
intention of this exercise is to acquire the aforementioned shares for
investment only and not for resale or with a view to the distribution thereof,
except as the same may be made in compliance with all applicable securities
laws. The undersigned has been advised that the shares being issued to the
undersigned are not being registered under the Securities Act of 1933 (the
“Act”) on the grounds that this transaction is exempt under the Act as not
involving any public offering. As a result of not being registered under the
Act, the undersigned has been advised that the shares may not be sold or offered
for sale (other than in reliance upon Rule 144 promulgated under such Act) in
the absence of an effective registration statement as to the securities under
the Act and any applicable state securities acts or the availability of an
exemption from the registration requirements under the Act and any applicable
state securities acts.
     You will kindly forward a certificate or certificates for the shares
purchased hereby and, if such shares shall not include all of the shares
provided in this Warrant, a new Warrant of like tenor and date for the balance
of the shares issuable thereunder shall be delivered to the undersigned at the
address set forth below.

          Date:                                 Name of Holder
      By:                 Address:                                     

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THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED (OTHER THAN IN RELIANCE
UPON RULE 144 PROMULGATED UNDER SUCH ACT) IN THE ABSENCE OF A REGISTRATION
UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS
OF SUCH ACT.
HOME SOLUTIONS OF AMERICA, INC.
Right to Purchase 1,000,000 Shares
(Subject to Adjustment)
Warrant for Common Stock
          Home Solutions of America, Inc. (hereinafter referred to as the
“Company”), a Delaware corporation, hereby certifies that, for value received,
SONDRA BEIT
or registered assigns (the “Holder”), is entitled to purchase from the Company
at any time or from time to time during the Exercise Period (as hereinafter
defined) an aggregate of 1,000,000 fully paid and nonassessable shares (the
“Warrant Shares”), subject to adjustment as provided below, of the Common Stock,
$0.001 par value per share (the “Stock” or “Common Stock”) of the Company, on
the payment therefore of the aggregate exercise price which shall be $0.01 per
share (the “Exercise Price per Share”) multiplied by the number of shares to be
issued (the “Exercise Price”), upon the surrender of this Warrant duly signed by
the registered Holder hereof at the time of exercise, accompanied by payment of
the Exercise Price, upon the terms and subject to the conditions hereinafter set
forth.
          The Warrant represented hereby is delivered pursuant to and is subject
to that certain Preferred Stock Purchase Agreement dated as of July 3, 2008, by
and between the Company and the Holder hereof (the “Agreement”) pursuant to
which the Holder has purchased 50,000 shares of Series C-2 Convertible Preferred
Stock, as may be adjusted from time to time pursuant to the Certificate of
Designation (the “Preferred Stock”). Capitalized terms used herein without
definition shall have the meanings set forth in the Agreement.
          EXERCISE OF WARRANT. (a) 500,000 (subject to adjustment in the case of
any stock split, reclassification of other similar event) of the Warrant Shares
will be exercisable

 

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at any time after 90 days from the date hereof (the “2008 Warrant Shares”), and
(b) 500,000 (subject to adjustment in the case of any stock split,
reclassification of other similar event) of the Warrant Shares (the “2009
Warrant Shares”) will be exercisable at any time on or after July 3, 2009 (each
such period, as applicable, the “Exercise Period”). Notwithstanding the
foregoing, (i) if not earlier exercised, all Warrant Shares shall expire at 5:00
p.m. on July 3, 2014, (ii) in the event the Company redeems any of the Preferred
Stock purchased in connection with the issuance of this Warrant within 90 days
of the date hereof, then without further action by the Holder or the Company,
fifteen (15) of the 2009 Warrant Shares for every one (1) share of Preferred
Stock (subject to adjustment in the case of any stock split, reclassification of
other similar event) redeemed shall expire (or, if the 2009 Warrant Shares have
all been expired or if less than fifteen (15) of such shares remain unexpired,
the 2008 Warrant Shares shall expire such that the total Warrant Shares that
expire per share of Preferred Stock is equal to fifteen (15)), and (iii) in the
event the Company redeems the Preferred Stock purchased in connection with the
issuance of this Warrant after 90 days of the date hereof, then without further
action by the Holder or the Company, ten (10) of the unexercised 2009 Warrant
Shares for every one (1) share of Preferred Stock (subject to adjustment in the
case of any stock split, reclassification of other similar event) redeemed, or
if a lesser amount of 2009 Warrant Shares remain unexercised at the time of such
redemption, all remaining unexercised 2009 Warrant Shares presented hereby,
shall expire. For the avoidance of doubt, no 2008 Warrant Shares shall expire
pursuant to clause (iii) of this paragraph.
          In the event of a proposed Change of Control, the Company shall give
the Holder ten (10) days prior notice of the proposed closing date of the Change
of Control and, to the extent the Warrant has not been exercised by such date,
then this Warrant shall terminate. “Change of Control” shall mean (x) the
acquisition of the Company by another entity by means of any transaction or
series of related transactions (including, without limitation, any merger,
consolidation or other form of reorganization in which outstanding shares of the
Company are exchanged for securities or other consideration issued, or caused to
be issued, by the acquiring entity or its subsidiary, but excluding any
transaction effected primarily for the purpose of changing the Company’s
jurisdiction of incorporation), unless the Company’s stockholders of record as
constituted immediately prior to such transaction or series of related
transactions will, immediately after such transaction or series of related
transactions hold at least a majority of the voting power of the surviving or
acquiring entity or (y) a sale of all or substantially all of the assets of the
Company.
          Subject to the foregoing restrictions, during the Exercise Period this
Warrant may be exercised, in whole or in part, as follows:
          A. Exercise for Cash. The Holder may, at its option, elect to exercise
this Warrant, in whole or in part and at any time or from time to time during
the Exercise Period, by surrendering this Warrant, with the Exercise of Warrant
and Declaration appended hereto duly executed by or on behalf of the Holder, at
the principal office of the Company, or at such other

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office or agency as the Company may designate, accompanied by payment in full,
in lawful money of the United States, of the Exercise Price payable in respect
of the number of shares of Stock purchased upon such exercise.
          B. Cashless Exercise.
               (i) The Holder may, at its option, elect to exercise this
Warrant, in whole or in part and at any time or from time to time during the
Exercise Period, on a cashless basis, by surrendering this Warrant, with the
Exercise of Warrant and Declaration appended hereto duly executed by or on
behalf of the Holder, at the principal office of the Company, or at such other
office or agency as the Company may designate, by canceling a portion of this
Warrant in payment of the Exercise Price payable in respect of the number of
shares of Stock purchased upon such exercise. In the event of an exercise
pursuant to this subsection B, the number of shares of Stock issued to the
Holder shall be determined according to the following formula:

     
X=
  Y(A-B)
     A
 
   
Where X=
  the number of shares of Stock that shall be issued to the Holder;
 
   
Y=
  the number of shares of Stock for which this Warrant is being exercised (which
shall include both the number of shares of Stock issued to the Holder and the
number of shares of Stock subject to the portion of the Warrant being cancelled
in payment of the Exercise Price);
 
   
A=
  the Fair Market Value (as calculated pursuant to the terms set forth below) of
one share of Common Stock; and
 
   
B=
  the Exercise Price per Share.

               (ii) The Fair Market Value per share of Common Stock shall be
determined as follows:
                    (1) If the Common Stock is listed on a national securities
exchange, the Nasdaq National Market, another nationally recognized trading
system or on the over the counter market, as of the Exercise Date, the Fair
Market Value per share of Common Stock shall be deemed to be the average of the
high and low reported sale prices per share of Common Stock thereon on the
trading day immediately preceding the Exercise Date (provided that if no such
price is reported on such day, then on the date nearest preceding such date).

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                    (2) If the Common Stock is not listed on a national
securities exchange, the Nasdaq National Market, another nationally recognized
trading system or on the over the counter market as of the Exercise Date, the
Fair Market Value per share of Common Stock shall be determined in good faith by
the Board of Directors of the Company, subject to the approval of the Holder. If
the parties hereto cannot reach agreement, then the cashless exercise option
shall not be available to the Holder.
          DELIVERY OF STOCK CERTIFICATE UPON EXERCISE. As soon as practicable
after the exercise of this Warrant and payment of the Exercise Price (which
payment shall be deemed to have occurred when funds are immediately available to
the Company), and in no event more than three (3) days thereafter, the Company
will cause to be issued in the name of and delivered to the registered Holder
hereof or its assigns, or such Holder’s nominee or nominees, a certificate or
certificates for the number of full shares of Stock of the Company to which such
Holder shall be entitled upon such exercise (and in the case of a partial
exercise, a Warrant of like tenor for the unexercised portion remaining subject
to exercise prior to the expiration of the Exercise Period set forth herein).
For all corporate purposes, such certificate or certificates shall be deemed to
have been issued and such Holder or such Holder’s designee to be named therein
shall be deemed to have become a holder of record of such shares of Stock as of
the date the duly executed exercise form pursuant to this Warrant, together with
full payment of the Exercise Price, is received by the Company as aforesaid. No
fraction of a share or scrip certificate for such fraction shall be issued upon
the exercise of this Warrant; in lieu thereof, the Company will pay or cause to
be paid to such Holder cash equal to a like fraction at the prevailing fair
market price for such share as determined in good faith by the Company.
          FAILURE OF EXERCISE. If within three (3) business days of a Holder’s
exercise of this Warrant (in whole or in part) and payment of the Exercise Price
(the “Stock Delivery Period”) the Company shall fail to issue and deliver to
such Holder the number of shares of Stock to which such Holder is entitled upon
such exercise or to issue a new Warrant representing the number shares remaining
after a partial exercise as contemplated above (an “Exercise Failure”), in
addition to all other available remedies which such Holder may pursue hereunder,
under the Agreement, at law and in equity, the Company shall pay additional
damages to such Holder on each business day after such third (3rd) business day
that such exercise is not timely effected in an amount equal to 0.5% of (A) the
sum of the number of shares of Stock not issued to the Holder on a timely basis
and to which such holder is entitled and, in the event the Company has failed to
deliver a new Warrant to the Holder, the number of shares of Stock issuable upon
exercise of such new Warrant, as of the last possible date which the Company
could have issued such new Warrant to such Holder, times (B) the Closing Bid
Price (as hereinafter defined) of the Stock on the last possible date which the
Company could have issued such Stock and such new Warrant, as the case may be,
to such Holder. For the purposes hereof, “Closing Bid Price” means the last
closing bid price per share on the registered national stock exchange on which
the security is then listed, or if there is no such price on such date, then the
closing bid price on such exchange on the date nearest preceding such date, or
if

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such security is not listed on a registered national stock exchange, the closing
bid price for a share of such security in the over the counter market, as
reported by the OTC Bulletin Board or in the National Quotation Bureau
Incorporated (or similar organization or agency succeeding to its function of
reporting prices) at the close of business on such date. If the Closing Bid
Price cannot be calculated for such security on such date on any of the
foregoing bases, the Closing Bid Price of such security on such date shall be
the fair market value as mutually determined by the Company and the Holder. If
the Company fails to pay the additional damages set forth above within five
(5) business days of the date incurred, then such payments shall bear interest
at the rate of 2.0% per month (pro rated for partial months) until such payments
are made.
          ANTI-DILUTION PROVISIONS. A. Certain Dividends and Distributions. In
the event that a dividend or other distribution shall be declared upon the Stock
of the Company payable in shares of said stock, then, in each event, the number
of shares of Stock covered by this Warrant shall be adjusted by adding thereto
the number of shares which would have been distributable thereon if such shares
had been outstanding on the date fixed for determining the stockholders entitled
to receive such stock dividend or other distribution.
          B. Other Dividends and Distributions. In the event that a dividend or
other distribution shall be declared upon the Stock of the Company payable in
securities of the Company other than Stock, then, and in each event, the Holder
shall receive upon exercise hereof, in addition to the number of shares of Stock
issuable hereunder, the kind and amount of securities of the Company, cash or
other property which the Registered Holder would have been entitled to receive
had this Warrant been exercised on the date of such event and had the Registered
Holder thereafter, during the period from the date of such event to and
including the date that this warrant is exercised in full, retained any such
securities receivable during such period, giving application to all adjustments
called for during such period under this Section with respect to the rights of
the Holder.
          C. Stock Splits and Combinations. If the Company shall at any time or
from time to time after the date hereof, effect a stock split of the outstanding
shares of Stock, the number of shares of Stock covered by this Warrant shall be
proportionately increased. If the Company shall at any time or from time to time
after the Issuance Date, combine the outstanding shares of Stock, the number of
shares of Stock covered by this Warrant shall be proportionately decreased. Any
adjustments under this subsection C shall be effective at the close of business
on the date the stock split or combination becomes effective.
          D. Reorganizations, Consolidations, Mergers. Except as otherwise set
forth herein, in the event that the outstanding shares of Stock of the Company
shall be changed into or exchanged for a different number or kind of shares of
stock or other securities of the Company or of another corporation, whether
through reorganization, recapitalization, stock split-up, combination of shares,
merger or consolidation, then upon exercise of this Warrant there shall be
substituted for the shares of Stock covered by this Warrant, the number and kind
of shares of

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stock or other securities which would have been substituted therefor if such
shares had been outstanding on the date fixed for determining the stockholders
entitled to receive such changed or substituted stock or other securities.
          E. Other Changes. In the event there shall be any change, other than
specified above, in the number or kind of outstanding shares of Stock of the
Company or of any stock or other securities into which such Stock shall be
changed or for which it shall have been exchanged, then if such change equitably
requires an adjustment in the number or kind of shares covered by this Warrant,
such adjustment shall be made by the Company and shall be effective and binding
for all purposes on this Warrant.
          F. Notice of Adjustments. Whenever the number of Warrant Shares or
number or kind of securities or other property purchasable upon the exercise of
this Warrant is adjusted, as herein provided, the Company shall give notice
thereof to the Holder, which notice shall state the number of Warrant Shares
(and other securities or property) purchasable upon the exercise of this Warrant
after such adjustment, setting forth a brief statement of the facts requiring
such adjustment and setting forth the computation by which such adjustment was
made.
          REGISTRATION RIGHTS. Upon exercise, the shares of Stock issuable upon
exercise of this Warrant shall be deemed to be Registrable Securities under
Section VI of the Agreement, as such may be amended from time to time.
          LOST, STOLEN, DESTROYED OR MUTILATED WARRANT. Upon receipt by the
Company of evidence satisfactory (in the exercise of reasonable discretion) to
it of the ownership of and the loss, theft or destruction or mutilation of this
Warrant, and (in the case of loss, theft or destruction) of indemnity
satisfactory (in the exercise or reasonable discretion) to it, and (in the case
of mutilation) upon the surrender and cancellation thereof, the Company will
issue and deliver, in lieu thereof, a new Warrant of like tenor.
          TRANSFER AND TRANSFER RESTRICTIONS. A. Owner of Warrant. The Company
may deem and treat the person in whose name this Warrant is registered as the
Holder and owner hereof (notwithstanding any notations of ownership or writing
hereon made by anyone other than the Company) for all purposes and shall not be
affected by any notice to the contrary, until presentation of this Warrant for
registration of transfer as provided below.
          B. Transfer of Warrant. The Company agrees to maintain, at its then
principal place of business, books for the registration of the Warrant and
transfers thereof, and, subject to the provisions of subsections C and D below,
this Warrant and all rights hereunder are transferable, in whole or in part, on
said books at said office, upon surrender of this Warrant at said office,
together with a written assignment of this Warrant duly executed by the Holder
hereof or his duly authorized agent or attorney and funds sufficient to pay any
transfer taxes

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payable upon the making of such transfer. Upon such surrender and payment the
Company shall execute and deliver a new Warrant or Warrants in the name of the
assignee or assignees and in the denominations specified in such instrument of
assignment, and this Warrant shall promptly be canceled.
          C. Restrictions on Exercise and Transfer. Neither this Warrant nor the
shares of Stock issuable upon exercise of this Warrant have been registered
under the Securities Act of 1933, as amended (the “Act”) or any state securities
laws. Therefore, in order, among other things, to insure compliance with the
Act, notwithstanding anything else in the Warrant to contrary, the Holder of
this Warrant, including any successive Holder, agrees by accepting this Warrant
as follows: No Holder shall sell, assign, transfer, pledge, hypothecate,
mortgage, encumber or dispose of all or any portion of this Warrant (or any of
the shares of Stock which may be issued upon the exercise hereof).
Notwithstanding the foregoing, a Holder may transfer all or any portion of this
Warrant (or any of the shares of Stock which may be issued upon the exercise
hereof) (i) as part of a registered public offering of the Company’s securities
or pursuant to Rule 144 under the Act, (ii) by pledge that creates a mere
security interest in all or any portion of this Warrant (or any of the shares of
Stock which may be issued upon the exercise hereof), provided that the pledgee
thereof agrees in writing in advance to be bound by and comply with all
applicable provisions of this Warrant to the same extent as if it were the
Holder making such pledge, (iii) to any member of the Holder, or to any
siblings, ancestors, descendants or spouse of any member of the Holder, or any
custodian or trustee for the account of such member or the account of such
siblings, ancestors, descendants or spouse of such member (or any combination of
the foregoing), or (iv) to an affiliate or a partner of Holder, provided, in
each such case (other than a transfer under clause (i) above) a transferee shall
receive and hold all or any portion of this Warrant (or any of the shares of
Stock which may be issued upon the exercise hereof) subject to the provisions of
this Warrant and there shall be no further transfer except in accordance
herewith. No party will avoid the provisions of this Warrant by making one or
more transfers to an affiliate of such party and then disposing of all or any
portion of such party’s interest in such affiliate; provided, however, that in
any event, this Warrant and the Stock issuable herefrom may not (other than in
connection with the matters described in sub-sections C(i)-(iv) above
(inclusive)) be sold or transferred in the absence of registration under the Act
unless the Company receives an opinion of counsel reasonably acceptable to it
stating that such sale or transfer is exempt from the registration and
prospectus delivery requirements of said Act. For the avoidance of doubt, the
Company acknowledges that a disposition made in reliance upon Rule 144 will not
require an opinion of counsel.
          D. Legend on Shares. Each certificate for shares of Stock issued upon
exercise of this Warrant, unless at the time of exercise such shares are
registered under the Act, shall bear substantially the following legend (and any
additional legend required under the Act or otherwise):

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“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AS AMENDED AND MAY NOT BE OFFERED, SOLD, OR TRANSFERRED
(OTHER THAN IN RELIANCE UPON RULE 144 PROMULGATED UNDER SUCH ACT), EXCEPT (I)
PURSUANT TO A REGISTRATION STATEMENT EFFECTIVE UNDER THE ACT, OR (II) PURSUANT
TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT.
          Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution pursuant to a registration statement under the Act of
the securities represented thereby) shall also bear such legend if, in the
reasonable opinion of counsel for the Company, the securities represented
thereby are legally required to be subject to the transfer restrictions
contained in this Warrant. The exercise and transfer restriction provisions of
this Warrant shall be binding upon all subsequent Holders of the Warrant.
          COVENANTS. The Company covenants that, so long as this Warrant is
exercisable, it will reserve from its authorized and unissued Stock a sufficient
number of shares to provide for the delivery of stock pursuant to the exercise
of this Warrant. The Company further covenants that all shares of Stock which
shall be so deliverable upon exercise of this Warrant shall be duly and validly
issued and fully paid and nonassessable.
          MISCELLANEOUS. This Warrant does not confer upon the Holder any rights
of a stockholder of the Company, including, without limitation, any right to
vote or to consent to or receive notice as a stockholder of the Company.

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          HEADINGS. The headings in this Warrant are for purposes of reference
only, and shall not limit or otherwise affect the meaning hereof.

          Dated: July 3, 2008  HOME SOLUTIONS OF AMERICA, INC.
      By:           Name:   Frank Fradella        Title:   President and Chief
Executive Officer   

Signature Page to Sondra Beit Warrant

 

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EXERCISE OF WARRANT AND DECLARATION
To: Home Solutions of America, Inc.
          The undersigned Holder hereby exercises the right to purchase
                     shares of Common Stock of Home Solutions of America, Inc.,
a Delaware corporation (the “Company”) and delivers to the Company herewith the
Exercise Price.
          The undersigned declares and represents to the Company that the
intention of this exercise is to acquire the aforementioned shares for
investment only and not for resale or with a view to the distribution thereof,
except as the same may be made in compliance with all applicable securities
laws. The undersigned has been advised that the shares being issued to the
undersigned are not being registered under the Securities Act of 1933 (the
“Act”) on the grounds that this transaction is exempt under the Act as not
involving any public offering. As a result of not being registered under the
Act, the undersigned has been advised that the shares may not be sold or offered
for sale (other than in reliance upon Rule 144 promulgated under such Act) in
the absence of an effective registration statement as to the securities under
the Act and any applicable state securities acts or the availability of an
exemption from the registration requirements under the Act and any applicable
state securities acts.
          You will kindly forward a certificate or certificates for the shares
purchased hereby and, if such shares shall not include all of the shares
provided in this Warrant, a new Warrant of like tenor and date for the balance
of the shares issuable thereunder shall be delivered to the undersigned at the
address set forth below.

          Date:                                                    Name of
Holder
      By:           Address:                           

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