exv10w1



 







Exhibit 10.1




SECURITIES PURCHASE AGREEMENT




     SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of April 4, 2006, by and among
Touchstone Resources USA Inc., a Delaware corporation, with headquarters located at 1600 Smith
Street, Suite 5100, Houston, Texas 77002 (the “Company”), and the investors listed on the Schedule
of Buyers attached hereto (individually, a “Buyer” and collectively, the “Buyers”).



     WHEREAS:



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



     B. The Company has authorized a new series of senior convertible notes of the Company, which
Notes shall be convertible into the Company’s common stock, $0.001 par value per share (the “Common
Stock”), in accordance with the terms of the Notes.



     C. Each Buyer wishes to purchase, and the Company wishes to sell, upon the terms and
conditions stated in this Agreement, (i) the aggregate principal amount of $22,000,000 in Notes, in
substantially the form attached hereto as Exhibit A (the “Notes”), in individual amounts as
set forth opposite such Buyer’s name in column (3) on the Schedule of Buyers (which aggregate
amount for all Buyers shall be $22,000,000) (as converted, collectively, the “Conversion Shares”),
(ii) warrants, in substantially the form attached hereto as Exhibit B-1 (the “Series A
Warrants”), to acquire that number of shares of Common Stock set forth opposite such Buyer’s name
in column (4) on the Schedule of Buyers and (iii) warrants in substantially the form attached
hereto as Exhibit B-2 (the “Series B Warrants”) to acquire that number of shares of Common Stock
set forth opposite such Buyer’s name in column (5) on the Schedule of Buyers (collectively with the
Series A Warrants, the “Warrants”) (as exercised, collectively, the “Warrant Shares”).



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



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



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



     1. PURCHASE AND SALE OF NOTES AND WARRANTS.



 









 





          (a) Amount. Subject to the satisfaction (or waiver) of the conditions set forth in
Sections 6 and 7 below, the Company shall issue and sell to each Buyer, and each Buyer severally,
but not jointly, agrees to purchase from the Company on the Closing Date (as defined below), a
principal amount of Notes, as is set forth opposite such Buyer’s name in column (3) on the Schedule
of Buyers, along with Series A Warrants to acquire that number of Warrant Shares as is set forth
opposite such Buyer’s name in column (4) on the Schedule of Buyers and Series B Warrants to acquire
that number of Warrant Shares as is set forth opposite such Buyer’s name in column (5) on the
Schedule of Buyers.




          (b) Closing. The closing (the “Closing”) of the purchase of the Notes and the
Warrants by the Buyers shall occur at the offices of Schulte Roth & Zabel LLP, 919 Third Avenue,
New York, New York 10022. The date and time of the Closing (the “Closing Date”) shall be 10:00
a.m., New York City Time, on the date hereof, subject to notification of satisfaction (or waiver)
of the conditions to the Closing set forth in Sections 6 and 7 below (or such later date as is
mutually agreed to by the Company and each Buyer).




          (c) Purchase Price. The purchase price for each Buyer (the “Purchase Price”) of the
Notes and related Warrants to be purchased by each Buyer at the Closing shall be equal to $1.00 for
each $1.00 of principal amount of Notes being purchased by such Buyer at the Closing.




          (d) Form of Payment. On the Closing Date, (A) each Buyer shall pay its aggregate
Purchase Price to the Company for the Notes and the Warrants to be issued and sold to such Buyer at
the Closing, by wire transfer of immediately available funds in accordance with the Company’s
written wire instructions, and (B) the Company shall deliver to each Buyer the Notes (in the
principal amounts as such Buyer shall have requested prior to the Closing) which such Buyer is then
purchasing along with the Warrants (in the amounts as such Buyer shall have requested prior to the
Closing) such Buyer is purchasing, duly executed on behalf of the Company and registered in the
name of such Buyer or its designee.




     2. BUYER’S REPRESENTATIONS AND WARRANTIES.



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




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




          (b) Accredited Investor Status. Such Buyer is an “accredited investor” as





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that term is defined in Rule 501(a) of Regulation D.




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




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




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




          (f) Transfer or Resale. Such Buyer understands that except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not being registered under
the 1933 Act or any state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (A) subsequently registered thereunder, or (B) such Buyer provides the Company
with reasonable assurance that such Securities can be sold, assigned or transferred pursuant to
Rule 144 or Rule 144A promulgated under the 1933 Act, as amended, (or a successor rule thereto)
(collectively, “Rule 144”); (ii) any sale of the Securities made in reliance on Rule 144 may be
made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any
resale of the Securities under circumstances in which the seller (or the Person (as defined in
Section 3(s)) through whom the sale is made) may be deemed to be an underwriter (as that term is
defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the
rules and regulations of the SEC thereunder; and (iii) neither the Company nor any other Person is
under any obligation to register the Securities under the 1933 Act or any state securities laws or
to comply with the terms and conditions of any exemption thereunder. The Securities may be pledged
(as long as such pledge is in compliance with the 1933 Act) in connection with a bona fide margin
account or other loan or financing arrangement secured by the Securities and such pledge of
Securities shall not be deemed to be a transfer, sale or assignment of the Securities hereunder,
and no Buyer effecting a pledge of Securities shall be required to provide the Company with any
notice thereof or otherwise make any delivery to the Company pursuant to this Agreement or any
other




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Transaction Document (as defined in Section 3(b)), including, without limitation, this Section
2(f).




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





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


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




          (h) Validity; Enforcement. This Agreement and the Registration Rights Agreement to
which such Buyer is a party have been duly and validly authorized, executed and delivered on behalf
of such Buyer and shall constitute the legal, valid and binding obligations of such Buyer
enforceable against such Buyer in accordance with their respective terms, except as such
enforceability may be limited by general principles of equity or to applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or
affecting generally, the enforcement of applicable creditors’ rights and remedies.




          (i) No Conflicts. The execution, delivery and performance by such Buyer




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of this Agreement and the Registration Rights Agreement to which such Buyer is a party and the
consummation by such Buyer of the transactions contemplated hereby and thereby will not (i) result
in a violation of the organizational documents of such Buyer or (ii) conflict with, or constitute a
default (or an event which with notice or lapse of time or both would become a default) under, or
give to others any rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which such Buyer is a party, or (iii) result in a violation
of any law, rule, regulation, order, judgment or decree (including federal and state securities
laws) applicable to such Buyer, except in the case of clauses (ii) and (iii) above, for such
conflicts, defaults, rights or violations which would not, individually or in the aggregate,
reasonably be expected to have a material adverse effect on the ability of such Buyer to perform
its obligations hereunder.




          (j) Residency. Such Buyer is incorporated or formed in the jurisdiction specified
below its address on the Schedule of Buyers and is resident for state securities laws purposes at
the address indicated on the Schedule of Buyers.




     3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.



     The Company represents and warrants to each of the Buyers that:



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




          (b)  Authorization; Enforcement; Validity. The Company has the requisite power and
authority to enter into and perform its obligations under this Agreement, the Notes, the Warrants,
the Registration Rights Agreement, the Irrevocable Transfer Agent Instructions (as defined in
Section 5(b)), and each of the other agreements entered into by the parties hereto in connection
with the transactions contemplated by this Agreement (collectively, the “Transaction Documents”)
and to issue the Securities in accordance with the terms hereof and thereof. The execution and
delivery of the Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby, including, without limitation, the issuance of the
Notes, the reservation for issuance and the issuance of




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the Conversion Shares issuable upon conversion of the Notes, the issuance of the Warrants and
the reservation for issuance and issuance of the Warrant Shares issuable upon exercise of the
Warrants, have been duly authorized by the Company’s Board of Directors and (other than the filing
with the SEC of one or more Registration Statements in accordance with the requirements of the
Registration Rights Agreement) no further filing, consent, or authorization is required by the
Company, its Board of Directors or its stockholders. This Agreement and the other Transaction
Documents of even date herewith have been duly executed and delivered by the Company, and
constitute the legal, valid and binding obligations of the Company, enforceable against the Company
in accordance with their respective terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
or similar laws relating to, or affecting generally, the enforcement of applicable creditors’
rights and remedies.




          (c) Issuance of Securities. The issuance of the Notes and the Warrants are duly
authorized and are free from all taxes, liens and charges with respect to the issue thereof. As of
the Closing, the Company shall have reserved from its duly authorized capital stock all of the
available shares of Common Stock for issuance upon conversion of the Notes and exercise of the
Warrants, which amount shall be sufficient to convert no less than 100% of the Notes at the initial
Conversion Price and 100% of the Warrants at the initial Exercise Price, other than the Warrant
Shares underlying the Series B Warrants. From and after the Capital Increase, the Company shall
have reserved from its duly authorized capital stock not less than the sum of (i) 130% of the
maximum number of shares of Common Stock issuable upon conversion of the Notes (assuming for
purposes hereof, that the Notes are convertible at the Conversion Price and without taking into
account any limitations on the conversion of the Notes set forth in the Notes) and (ii) 130% of the
maximum number of shares of Common Stock issuable upon exercise of the Warrants (without taking
into account any limitations on the exercise of the Warrants set forth in the Warrants). Upon
issuance or conversion in accordance with the Notes or exercise in accordance with the Warrants, as
the case may be, the Conversion Shares and the Warrant Shares, respectively, will be validly
issued, fully paid and nonassessable and free from all preemptive or similar rights, taxes, liens
and charges with respect to the issue thereof, with the holders being entitled to all rights
accorded to a holder of Common Stock. The offer and issuance by the Company of the Securities is
exempt from registration under the 1933 Act.




          (d) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the transactions contemplated
hereby and thereby (including, without limitation, the issuance of the Notes and the Warrants and
the reservation for issuance and of the Conversion Shares and the Warrant Shares) will not (i)
result in a violation of the Certificate of Incorporation (as defined in Section 3(r)) of the
Company or any of its Subsidiaries, any capital stock of the Company or Bylaws (as defined in
Section 3(r)) of the Company or any of its Subsidiaries or (ii) except as set forth on Schedule
3(d), conflict with, or constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any
of its Subsidiaries is a party, or (iii) result in a violation of any law, rule, regulation, order,
judgment or decree (including federal and state securities laws and regulations and the rules and
regulations of the NASD’s OTC Bulletin Board (the “Principal Market”)) applicable to the Company or
any of its Subsidiaries or by




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which any property or asset of the Company or any of its Subsidiaries is bound or affected.




          (e) Consents. Neither the Company nor any of its Subsidiaries is required to obtain
any consent, authorization or order of, or make any filing or registration with, any court,
governmental agency or any regulatory or self-regulatory agency or any other Person in order for it
to execute, deliver or perform any of its obligations under or contemplated by the Transaction
Documents, in each case in accordance with the terms hereof or thereof. All consents,
authorizations, orders, filings and registrations which the Company is required to obtain pursuant
to the preceding sentence have been obtained or effected on or prior to the Closing Date, and the
Company and its Subsidiaries are unaware of any facts or circumstances which might prevent the
Company from obtaining or effecting any of the registration, application or filings pursuant to the
preceding sentence. The Company is not in violation of the listing requirements of the Principal
Market and has no knowledge of any facts which would reasonably lead to delisting or suspension of
the Common Stock in the foreseeable future.




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




          (g) No General Solicitation; Placement Agent’s Fees. Neither the Company, nor any of
its Subsidiaries or affiliates, nor, to the Company’s knowledge, any Person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising (within the meaning
of Regulation D) in connection with the offer or sale of the Securities.




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




          (i) Dilutive Effect. The Company understands and acknowledges that the number of
Conversion Shares issuable upon conversion of the Notes, and, the Warrant Shares




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issuable upon exercise of the Warrants, will increase in certain circumstances. The Company
further acknowledges that its obligation to issue Conversion Shares upon conversion of the Notes in
accordance with this Agreement and the Notes and its obligation to issue the Warrant Shares upon
exercise of the Warrants in accordance with this Agreement and the Warrants is, in each case,
absolute and unconditional regardless of the dilutive effect that such issuance may have on the
ownership interests of other stockholders of the Company.




          (j) Application of Takeover Protections; Rights Agreement. The Company and its board
of directors have taken all necessary action, if any, in order to render inapplicable any control
share acquisition, business combination, poison pill (including any distribution under a rights
agreement) or other similar anti-takeover provision under the Certificate of Incorporation or the
laws of the jurisdiction of its formation which is or could become applicable to any Buyer as a
result of the transactions contemplated by this Agreement, including, without limitation, the
Company’s issuance of the Securities and any Buyer’s ownership of the Securities. The Company has
not adopted a stockholder rights plan or similar arrangement relating to accumulations of
beneficial ownership of Common Stock or a change in control of the Company.




          (k) SEC Documents; Financial Statements. Except as set forth on Schedule
3(k), during the two (2) years prior to the date hereof, the Company has filed all reports,
schedules, forms, statements and other documents required to be filed by it with the SEC pursuant
to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “1934 Act”)
(all of the foregoing filed prior to the date hereof and all exhibits included therein and
financial statements, notes and schedules thereto and documents incorporated by reference therein
being hereinafter referred to as the “SEC Documents”). The Company has delivered to the Buyers or
their respective representatives true, correct and complete copies of the SEC Documents not
available on the EDGAR system if such SEC Documents have been requested in writing by Buyers. As
of their respective dates and subject to the Company’s current status as being non-compliant with
Section 404 of the Sarbanes-Oxley Act of 2002 relating to internal controls and procedures as set
forth on the Company’s quarterly report on Form 10-QSB for the period ended September 30, 2005
filed on November 14, 2005 (the “Section 404 Deficiency”), the SEC Documents complied in all
material respects with the requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time
they were filed with the SEC, contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading. As of their
respective dates and subject to the Section 404 Deficiency, the financial statements of the Company
included in the SEC Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with respect thereto.
Such financial statements have been prepared in accordance with generally accepted accounting
principles, consistently applied, during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited
interim statements, to the extent they may exclude footnotes or may be condensed or summary
statements) and fairly present in all material respects the financial position of the Company as of
the dates thereof and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit adjustments).




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          (l) Absence of Certain Changes. Except as disclosed in Schedule 3(l), since
the date of the Company’s most recent audited financial statements contained in a Form 10-K, there
has been no material adverse change and no material adverse development in the business, assets,
properties, operations, condition (financial or otherwise), results of operations or prospects of
the Company. Except as disclosed in Schedule 3(l), since the date of the Company’s most
recent audited financial statements contained in a Form 10-K, neither the Company nor any of its
Subsidiaries has (i) declared or paid any dividends, (ii) sold any assets, individually or in the
aggregate, in excess of $100,000 outside of the ordinary course of business or (iii) except as set
forth in Schedule 3(l) (which shall list capital expenditures for each oil field by
category), had capital expenditures, individually or in the aggregate, in excess of $100,000.
Neither Company nor any of its Subsidiaries has taken any steps to seek protection pursuant to any
bankruptcy law nor does the Company have any knowledge or reason to believe that its creditors
intend to initiate involuntary bankruptcy proceedings or any actual knowledge of any fact which
would reasonably lead a creditor to do so. The Company and its Subsidiaries, individually and on a
consolidated basis, are not as of the date hereof, and after giving effect to the transactions
contemplated hereby to occur at the Closing, will not be Insolvent (as defined below). For
purposes of this Section 3(l), “Insolvent” means (i) the present fair saleable value of the
Company’s assets is less than the amount required to pay the Company’s total Indebtedness (as
defined in Section 3(s)), (ii) the Company is unable to pay its debts and liabilities,
subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured,
(iii) the Company intends to incur or believes that it will incur debts that would be beyond its
ability to pay as such debts mature or (iv) the Company has unreasonably small capital with which
to conduct the business in which it is engaged as such business is now conducted and is proposed to
be conducted.




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




          (n) Conduct of Business; Regulatory Permits. Neither the Company nor its Subsidiaries
is in violation of any term of or in default under its Certificate of Incorporation or Bylaws or
their organizational charter or certificate of incorporation or bylaws, respectively. Neither the
Company nor any of its Subsidiaries is in violation of any judgment, decree or order or any
statute, ordinance, rule or regulation applicable to the Company or its Subsidiaries, and neither
the Company nor any of its Subsidiaries will conduct its business in violation of any of the
foregoing, except for possible violations which would not, individually or in the aggregate, have a
Material Adverse Effect. Without limiting the generality of the foregoing, the Company is not in
violation of any of the rules, regulations or requirements of the Principal Market and, other than
the pending investigation by the SEC relating to the Common Stock and certain affiliates of the
Company and the related subpoena received by the Company from the SEC in connection therewith as
set forth on the Company’s quarterly report on Form 10-QSB for the period ended September 30, 2005
filed on November 14, 2005 (the “SEC Investigation”), has no knowledge of any facts or
circumstances that would reasonably lead to delisting or




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suspension of the Common Stock by the Principal Market in the foreseeable future. During the
two (2) years prior to the date hereof, (i) the Common Stock has been designated for quotation on
the Principal Market, (ii) trading in the Common Stock has not been suspended by the SEC or the
Principal Market and (iii) the Company has received no communication, written or oral, from the SEC
or the Principal Market regarding the suspension or delisting of the Common Stock from the
Principal Market. The Company and its Subsidiaries possess all certificates, authorizations and
permits issued by the appropriate regulatory authorities necessary to conduct their respective
businesses, except where the failure to possess such certificates, authorizations or permits would
not have, individually or in the aggregate, a Material Adverse Effect, and neither the Company nor
any such Subsidiary has received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit.




          (o) Foreign Corrupt Practices. Neither the Company nor any of its Subsidiaries nor
any director, officer, agent, employee or other Person acting on behalf of the Company or any of
its Subsidiaries has, in the course of its actions for, or on behalf of, the Company or any of its
Subsidiaries (i) used any corporate funds for any unlawful contribution, gift, entertainment or
other unlawful expenses relating to political activity; (ii) made any direct or indirect unlawful
payment to any foreign or domestic government official or employee from corporate funds; (iii)
violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as
amended; or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or other
unlawful payment to any foreign or domestic government official or employee.




          (p) Sarbanes-Oxley Act. Except as disclosed in Schedule 3(p), the Company is
in compliance with any and all requirements of the Sarbanes-Oxley Act of 2002 that are effective as
of the date hereof and applicable to the Company, and any and all applicable rules and regulations
promulgated by the SEC thereunder that are effective as of the date hereof.




          (q)  Transactions With Affiliates. Except as set forth in the SEC Documents filed at
least ten days prior to the date hereof and other than the grant of stock options disclosed on
Schedule 3(q), none of the officers, directors or employees of the Company or any of its
Subsidiaries is presently a party to any transaction with the Company or any of its Subsidiaries
(other than for ordinary course services as employees, officers or directors), including any
contract, agreement or other arrangement providing for the furnishing of services to or by,
providing for rental of real or personal property to or from, or otherwise requiring payments to or
from any such officer, director or employee or, to the knowledge of the Company or any of its
Subsidiaries, any corporation, partnership, trust or other entity in which any such officer,
director, or employee has a substantial interest or is an officer, director, trustee or partner.




          (r) Equity Capitalization. As of the date hereof, the authorized capital stock of the
Company consists of 150,000,000 shares of Common Stock, of which as of the date hereof, 79,188,709
are issued and outstanding, 5,367,540 shares are reserved for issuance pursuant to the Company’s
stock option and purchase plans and 30,297,188 shares are reserved for issuance pursuant to
securities (other than the Warrants and the Notes) exercisable or exchangeable for, or convertible
into, shares of Common Stock and 5,000,000 shares of preferred stock, par value $.001 per share, of
which as of the date hereof, 710,063 are issued and outstanding. All of such outstanding
shares have been, or upon issuance will be, validly




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issued and are fully paid and nonassessable. Except as disclosed in Schedule 3(r):
(i) none of the Company’s share capital is subject to preemptive rights or any other similar rights
or any liens or encumbrances suffered or permitted by the Company; (ii) there are no outstanding
options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, or exercisable or exchangeable for, any
share capital of the Company or any of its Subsidiaries, or contracts, commitments, understandings
or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue
additional share capital of the Company or any of its Subsidiaries or options, warrants, scrip,
rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities
or rights convertible into, or exercisable or exchangeable for, any share capital of the Company or
any of its Subsidiaries; (iii) there are no outstanding debt securities, notes, credit agreements,
credit facilities or other agreements, documents or instruments evidencing Indebtedness (as defined
in Section 3(s)) of the Company or any of its Subsidiaries or by which the Company or any of its
Subsidiaries is or may become bound; (iv) there are no financing statements securing obligations in
any material amounts, either singly or in the aggregate, filed in connection with the Company or
any of its Subsidiaries, except for standard memoranda of Joint Operating Agreements and Financing
Statements in counties in which the Company is operating; (v) there are no agreements or
arrangements under which the Company or any of its Subsidiaries is obligated to register the sale
of any of their securities under the 1933 Act (except pursuant to the Registration Rights
Agreement); (vi) there are no outstanding securities or instruments of the Company or any of its
Subsidiaries which contain any redemption or similar provisions, and there are no contracts,
commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or
may become bound to redeem a security of the Company or any of its Subsidiaries; (vii) there are no
securities or instruments containing anti-dilution or similar provisions that will be triggered by
the issuance of the Securities; (viii) the Company does not have any stock appreciation rights or
“phantom stock” plans or agreements or any similar plan or agreement; and (ix) the Company and its
Subsidiaries have no liabilities or obligations required to be disclosed in the SEC Documents but
not so disclosed in the SEC Documents, other than those incurred in the ordinary course of the
Company’s or its Subsidiaries’ respective businesses and which, individually or in the aggregate,
do not or would not have a Material Adverse Effect. The Company has furnished to the Buyer true,
correct and complete copies of the Company’s Certificate of Incorporation, as amended and as in
effect on the date hereof (the “Certificate of Incorporation”), and the Company’s Bylaws, as
amended and as in effect on the date hereof (the “Bylaws”), and the terms of all securities
convertible into, or exercisable or exchangeable for, shares of Common Stock and the material
rights of the holders thereof in respect thereto.




          (s) Indebtedness and Other Contracts. Except as disclosed in Schedule 3(s),
neither the Company nor any of its Subsidiaries (i) has any outstanding Indebtedness (as defined
below), (ii) is a party to any contract, agreement or instrument, the violation of which, or
default under which, by the other party(ies) to such contract, agreement or instrument would result
in a Material Adverse Effect, (iii) is in violation of any term of or in default under any
contract, agreement or instrument relating to any Indebtedness, except where such violations and
defaults would not result, individually or in the aggregate, in a Material Adverse Effect, or (iv)
is a party to any contract, agreement or instrument relating to any Indebtedness, the performance
of which, in the judgment of the Company’s officers, has or is expected to have a Material Adverse
Effect. Schedule 3(s) provides a detailed description of the material terms of




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any such outstanding Indebtedness. For purposes of this Agreement: (x) “Indebtedness” of any
Person means, without duplication (A) all indebtedness for borrowed money, (B) all obligations
issued, undertaken or assumed as the deferred purchase price of property or services, including
(without limitation) “capital leases” in accordance with generally accepted accounting principles
(other than trade payables entered into in the ordinary course of business), (C) all reimbursement
or payment obligations with respect to letters of credit, surety bonds and other similar
instruments, (D) all obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition of property, assets
or businesses, (E) all indebtedness created or arising under any conditional sale or other title
retention agreement, or incurred as financing, in either case with respect to any property or
assets acquired with the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to repossession or sale of
such property), (F) all monetary obligations under any leasing or similar arrangement which, in
connection with generally accepted accounting principles, consistently applied for the periods
covered thereby, is classified as a capital lease, (G) all indebtedness referred to in clauses (A)
through (F) above secured by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any mortgage, lien, pledge, charge, security interest or
other encumbrance upon or in any property or assets (including accounts and contract rights) owned
by any Person, even though the Person which owns such assets or property has not assumed or become
liable for the payment of such indebtedness, and (H) all Contingent Obligations in respect of
indebtedness or obligations of others of the kinds referred to in clauses (A) through (G) above,
except that ordinary course trade payables will not be considered Indebtedness for purposes of this
Section 3(s); (y) “Contingent Obligation” means, as to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to any indebtedness, lease,
dividend or other obligation of another Person if the primary purpose or intent of the Person
incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of
such liability that such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be protected (in whole or
in part) against loss with respect thereto; and (z) “Person” means an individual, a limited
liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.




          (t) Absence of Litigation. Except for the SEC Investigation and as set forth in
Schedule 3(t), there is no action, suit, proceeding, inquiry or investigation before or by
the Principal Market, any court, public board, government agency, self-regulatory organization or
body pending or, to the knowledge of the Company, threatened against or affecting the Company or
any of its Subsidiaries, the Common Stock or any of the Company’s Subsidiaries or any of the
Company’s or its Subsidiaries’ officers or directors that would have a Material Adverse Effect.




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




-12-









 







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




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




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



          (w) Title. Except as set forth on Schedule 3(w), the Company and its
Subsidiaries have good and marketable title in fee simple to all real property and good and
marketable title to all personal property owned by them which is material to the business of the
Company and its Subsidiaries, in each case free and clear of all liens, encumbrances and defects
where failure to have such title would cause a Material Adverse Effect and, except that this is
limited to the Company’s knowledge with respect to title in fee simple for oil and gas leasehold
interests. Any real property and facilities held under lease by the Company or any of its
Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions
as are not material and do not interfere with the use made and proposed to be made of such property
and buildings by the Company and its Subsidiaries.




          (x) Intellectual Property Rights. The Company and its Subsidiaries own or possess
adequate rights or licenses to use all trademarks, trade names, service marks, service mark
registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals,
governmental authorizations, trade secrets and other intellectual property rights (“Intellectual
Property Rights”) necessary to conduct their respective businesses as now conducted. Except as set
forth in Schedule 3(x), none of the Company’s Intellectual Property Rights have expired or
terminated, or are expected to expire or terminate, within three years from the date of this
Agreement. The Company does not have any knowledge of any infringement by the Company or its
Subsidiaries of Intellectual Property Rights of others. There is no claim, action or proceeding
being made or brought, or to the knowledge of the Company, being threatened, against the Company or
any of its Subsidiaries regarding its Intellectual Property Rights. Neither the Company nor any of
its Subsidiaries is unaware of




-13-









 







any facts or circumstances which might give rise to any of the foregoing infringements or
claims, actions or proceedings. The Company and its Subsidiaries have taken reasonable security
measures to protect the secrecy, confidentiality and value of all of their Intellectual Property
Rights.




          (y) Environmental Laws. To the Company’s knowledge, the Company and its Subsidiaries
(i) are in compliance with any and all Environmental Laws (as hereinafter defined), (ii) have
received all permits, licenses or other approvals required of them under applicable Environmental
Laws to conduct their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval where, in each of the foregoing clauses (i),
(ii) and (iii), the failure to so comply could be reasonably expected to have, individually or in
the aggregate, a Material Adverse Effect. The term “Environmental Laws” means all federal, state,
local or foreign laws relating to pollution or protection of human health or the environment
(including, without limitation, ambient air, surface water, groundwater, land surface or subsurface
strata), including, without limitation, laws relating to emissions, discharges, releases or
threatened releases of chemicals, pollutants, contaminants, or toxic or hazardous substances or
wastes (collectively, “Hazardous Materials”) into the environment, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters,
injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations
issued, entered, promulgated or approved thereunder.




          (z) Subsidiary Rights. Except as set forth in Schedule 3(z), the Company or
one of its Subsidiaries has the unrestricted right to vote, and (subject to limitations imposed by
applicable law) to receive dividends and distributions on, all capital securities of its
Subsidiaries as owned by the Company or such Subsidiary.




          (aa) Tax Status. The Company and each of its Subsidiaries (i) has made or filed all
foreign, federal and state income and all other tax returns, reports and declarations required by
any jurisdiction to which it is subject, (ii) has paid all taxes and other governmental assessments
and charges that are material in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set aside on its books
provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to
which such returns, reports or declarations apply. There are no unpaid taxes in any material
amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.




          (bb) Internal Accounting and Disclosure Controls. Except for the Section 404
Deficiency, the Company and each of its Subsidiaries maintain a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management’s general or specific authorizations, (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset and liability accountability, (iii) access to assets or
incurrence of liabilities is permitted only in accordance with management’s general or specific
authorization and (iv) the recorded accountability for assets and liabilities is compared with the
existing assets and liabilities at reasonable intervals and appropriate action is taken




-14-









 







with respect to any difference. The Company maintains disclosure controls and procedures (as
such term is defined in Rule 13a-14 under the 1934 Act) that are effective in ensuring that
information required to be disclosed by the Company in the reports that it files or submits under
the 1934 Act is recorded, processed, summarized and reported, within the time periods specified in
the rules and forms of the SEC, including, without limitation, controls and procedures designed in
to ensure that information required to be disclosed by the Company in the reports that it files or
submits under the 1934 Act is accumulated and communicated to the Company’s management, including
its principal executive officer or officers and its principal financial officer or officers, as
appropriate, to allow timely decisions regarding required disclosure.




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




          (dd) Ranking of Notes. No Indebtedness of the Company is senior to or ranks pari
passu with the Notes in right of payment, whether with respect of payment of redemptions, interest,
damages or upon liquidation or dissolution or otherwise.




          (ee) Acknowledgement Regarding Buyers’ Trading Activity. It is understood and
acknowledged by the Company (i) that none of the Buyers have been asked to agree, nor has any Buyer
agreed, to desist from purchasing or selling, long and/or short, securities of the Company, or
“derivative” securities based on securities issued by the Company or to hold the Securities for any
specified term; (ii) that any Buyer, and counter parties in “derivative” transactions to which any
such Buyer is a party, directly or indirectly, presently may have a “short” position in the Common
Stock, and (iii) that each Buyer shall not be deemed to have any affiliation with or control over
any arm’s length counter-party in any “derivative” transaction. The Company and the Company
further understand and acknowledge that one or more Buyers may engage in hedging and/or trading
activities at various times during the period that the Securities are outstanding, including,
without limitation, during the periods that the value of the Conversion Shares and the Warrant
Shares deliverable with respect to Securities are being determined and (b) such hedging and/or
trading activities, if any, can reduce the value of the existing stockholders’ equity interest in
the Company both at and after the time the hedging and/or trading activities are being conducted.
The Company acknowledges that such aforementioned hedging and/or trading activities do not
constitute a breach of this Agreement, the Notes, the Warrants or any of the documents executed in
connection herewith.




          (ff) Form S-1 Eligibility. The Company is eligible to register the Conversion Shares
and the Warrant Shares for resale by the Buyers using Form S-1 promulgated under the 1933 Act.




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




-15-









 








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




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




          (jj) Disclosure. The Company confirms that neither it nor any other Person acting on
its behalf has provided any of the Buyers or their agents or counsel with any information that
constitutes or could reasonably be expected to constitute material, nonpublic information. The
Company understands and confirms that each of the Buyers will rely on the foregoing representations
in effecting transactions in the Securities. All disclosure provided to the Buyers regarding the
Company, its business and the transactions contemplated hereby, including the Schedules to this
Agreement, furnished by or on behalf of the Company is true and correct and does not contain any
untrue statement of a material fact or omit to state any material fact necessary in order to make
the statements made therein, in the light of the circumstances under which they were made, not
misleading. Each press release issued by the Company or its Subsidiaries during the twelve (12)
months preceding the date of this Agreement did not at the time of release contain any untrue
statement of a material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the circumstances under which
they were made, not misleading. No event or circumstance has occurred or information exists with
respect to the Company or any of its Subsidiaries or its or their business, properties, prospects,
operations or financial conditions, which, under applicable law, rule or regulation, requires
public disclosure or announcement by the Company but which has not been so publicly announced or
disclosed.




     4. COVENANTS.



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




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




-16-









 







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




          (c) Reporting Status. Until the date on which the Investors (as defined in the
Registration Rights Agreement) shall have sold more than eighty percent (80%) of the Conversion
Shares and Warrant Shares and none of the Notes or Warrants is outstanding (the “Reporting
Period”), the Company shall file all reports required to be filed with the SEC pursuant to the 1934
Act, and the Company shall not terminate its status as an issuer required to file reports under the
1934 Act even if the 1934 Act or the rules and regulations thereunder would otherwise permit such
termination.




          (d) Use of Proceeds. The Company will use the proceeds from the sale of the
Securities (i) to repay its 12% secured convertible promissory note, dated March 23, 2004, by and
between the Company and Trident Growth Fund, L.P. in the principal amount of $2,100,000 (the
“Trident Note”) plus accrued interest not in excess of $20,000, (ii) to repay its 12% convertible
promissory note, dated November 18, 2004, by and between the Company and DDH Resources II Limited
(“DDH II”) in the principal amount of $1,000,000 (the “DDH II Note”) and (iii) for general
corporate purposes, and not for (A) repayment of any outstanding Indebtedness of the Company or any
of its Subsidiaries or (B) redemption or repurchase of any of its or its Subsidiaries’ equity
securities.




          (e) Financial Information. The Company agrees to send the following to each Investor
(as defined in the Registration Rights Agreement) during the Reporting Period (i) unless the
following are filed with the SEC through EDGAR and are available to the public through the EDGAR
system, within one (1) Business Day after the filing thereof with the SEC, a copy of its Annual
Reports on Form 10-K or 10-KSB, its Quarterly Reports on Form 10-Q or Form 10-QSB, any Current
Reports on Form 8-K and any registration statements (other than on Form S-8) or amendments filed
pursuant to the 1933 Act, (ii) on the same day as the release thereof, facsimile or e-mailed copies
of all press releases issued by the Company or any of its Subsidiaries, and (iii) copies of any
notices and other information made available or given to the stockholders of the Company generally,
contemporaneously with the making available or giving thereof to the stockholders. As used herein
“Business Day” means any other day other than a Saturday, Sunday, or other day on which commercial
banks in The City of New York are authorized or required by law to remain closed.




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




-17-









 








          (g) Fees. The Company shall reimburse Kings Road Holdings II LLC (a Buyer) or its
designee(s) (in addition to any other expense amounts paid to any Buyer prior to the date of this
Agreement) for all reasonable costs and expenses incurred in connection with the transactions
contemplated by the Transaction Documents (including all reasonable legal fees and disbursements in
connection therewith, documentation and implementation of the transactions contemplated by the
Transaction Documents and due diligence in connection therewith) in an amount not to exceed
$100,000, without the Company’s prior approval which amount shall be withheld by such Buyer from
its Purchase Price at the Closing. The Company acknowledges that it has only engaged First Albany
Capital as placement agent (the “Agent”) in connection with the sale of the Securities. The
Company shall be responsible for the payment of any placement agent’s fees, financial advisory
fees, or broker’s commissions (other than for Persons engaged by any Buyer) relating to or arising
out of the transactions contemplated hereby, including, without limitation, any fees payable to the
Agent. The Company shall pay, and hold each Buyer harmless against, any liability, loss or expense
(including, without limitation, reasonable attorney’s fees and out-of-pocket expenses) arising in
connection with any claim relating to any such payment.




          (h) Pledge of Securities. The Company acknowledges and agrees that the Securities may
be pledged by an Investor (as defined in the Registration Rights Agreement) in connection with a
bona fide margin agreement or other loan or financing arrangement that is secured by the
Securities. The pledge of Securities shall not be deemed to be a transfer, sale or assignment of
the Securities hereunder, and no Investor effecting a pledge of Securities shall be required to
provide the Company with any notice thereof or otherwise make any delivery to the Company pursuant
to this Agreement or any other Transaction Document, including, without limitation, Section 2(f)
hereof; provided that an Investor and its pledgee shall be required to comply with the provisions
of Section 2(f) hereof in order to effect a sale, transfer or assignment of Securities to such
pledgee. The Company hereby agrees to execute and deliver such documentation as a pledgee of the
Securities may reasonably request in connection with a pledge of the Securities to such pledgee by
an Investor.




          (i) Disclosure of Transactions and Other Material Information. On or before 9:00
a.m., New York time, on the first Business Day following the date of this Agreement, the Company
shall issue a press release reasonably acceptable to the Buyers disclosing all material terms of
the transactions contemplated hereby and the Company shall file a Current Report on Form 8-K
describing the terms of the transactions contemplated by the Transaction Documents in the form
required by the 1934 Act and attaching the material Transaction Documents (including, without
limitation, this Agreement (and all schedules to this Agreement), the form of each of the Notes,
the forms of Warrants and the Registration Rights Agreement) as exhibits to such filing (including
all attachments, the “8-K Filing”). From and after the filing of the 8-K Filing with the SEC, no
Buyer shall be in possession of any material, nonpublic information received from the Company or
any of its Subsidiaries, or any of their respective officers, directors, employees or agents, that
is not disclosed in the 8-K Filing. Unless otherwise required by the Transaction Documents, the
Company shall not, and shall cause each of its Subsidiaries and its and each of their respective
officers, directors, employees and agents, not to, provide any Buyer with any material, nonpublic
information regarding the Company or any of its Subsidiaries from and after the filing of the 8-K
Filing with the SEC without the express written consent of such Buyer. In the event a Buyer
becomes aware of




-18-









 







material, nonpublic information, such Buyer shall inform the Company of such information. The
Company shall promptly make a public disclosure, in the form of a press release, public
advertisement or otherwise, of such material, nonpublic information in a form mutually agreeable to
both such Buyer and the Company. Subject to the foregoing, neither the Company, its Subsidiaries
nor any Buyer shall issue any press releases or any other public statements with respect to the
transactions contemplated hereby; provided, however, that the Company shall be
entitled, without the prior approval of any Buyer, to make any press release or other public
disclosure with respect to such transactions (i) in substantial conformity with the 8-K Filing and
contemporaneously therewith and (ii) as is required by applicable law and regulations (provided
that in the case of clause (i) each Buyer shall be consulted by the Company in connection with any
such press release or other public disclosure prior to its release). Without the prior written
consent of any applicable Buyer, neither the Company nor any of its Subsidiaries shall disclose the
name of any Buyer in any filing, announcement, release or otherwise.




          (j) Restriction on Redemption and Cash Dividends. So long as any Notes are
outstanding, the Company shall not, directly or indirectly, redeem, or declare or pay any cash
dividend or distribution on, the Common Stock without the prior express written consent of the
holders of Notes representing not less than a majority of the aggregate principal amount of the
then outstanding Notes.




          (k) Additional Notes; Variable Securities; Dilutive Issuances. So long as any Buyer
beneficially owns any Securities, the Company will not issue any Notes (other than to the Buyers as
contemplated hereby) and the Company shall not issue any other securities that would cause a breach
or default under the Notes. For so long as any Notes or Warrants remain outstanding, the Company
shall not, in any manner, issue or sell any rights, warrants or options to subscribe for or
purchase Common Stock or directly or indirectly convertible into or exchangeable or exercisable for
Common Stock at a price which varies or may vary after issuance with the market price of the Common
Stock, including by way of one or more reset(s) to any fixed price unless the conversion, exchange
or exercise price of any such security cannot be less than the then applicable Conversion Price (as
defined in the Notes) with respect to the Common Stock into which any Note is convertible or the
then applicable Exercise Price (as defined in the Warrants) with respect to the Common Stock into
which any Warrant is exercisable. For purposes of clarification, this does not prohibit the
issuance of securities with customary “weighted average” or “full ratchet” anti-dilution
adjustments which adjust a fixed conversion or exercise price of securities sold by the Company in
the future. For so long as any Notes or Warrants remain outstanding, the Company shall not, in any
manner, enter into or affect any Dilutive Issuance (as defined in the Notes) if the effect of such
Dilutive Issuance is to cause the Company to be required to issue upon conversion of any Note or
exercise of any Warrant any shares of Common Stock in excess of that number of shares of Common
Stock which the Company has authorized and reserved for purposes of such conversions or exercises
or which the Company may issue upon conversion of the Notes and exercise of the Warrants without
breaching the Company’s obligations under the rules or regulations of the Principal Market.




          (l) Corporate Existence. So long as any Buyer beneficially owns any Securities, the
Company shall not be party to any Fundamental Transaction (as defined in the




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Notes) unless the Company is in compliance with the applicable provisions governing
Fundamental Transactions set forth in the Notes and the Warrants.




          (m) Incurrence of Liens. So long as any Notes are outstanding, the Company shall not,
directly or indirectly, allow or suffer to exist any Lien, other than Permitted Liens (as defined
in the Notes), upon any property or assets (including accounts and contract rights) owned by the
Company except as may be created by memoranda of Joint Operating Agreements.




          (n) Reservation of Shares. The Company shall take all action necessary to at all
times have authorized, and reserved for the purpose of issuance, no less than the number of shares
of Common Stock issuable upon conversion of all of the Notes and shares of Common Stock issuable
upon exercise of the Warrants, as is set forth in Section 3(c).




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




          (p) Additional Issuances of Securities.




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




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




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




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



               (ii) From the date hereof until 30 days after the Effective Date (as defined in the
Registration Rights Agreement) the Company will not, directly or indirectly, file any registration
statement with the SEC other than the Registration Statement (as defined in the Registration Rights
Agreement). From the date hereof until 30 days after the Effective Date, the Company will not,
directly or indirectly, offer, sell, grant any option to purchase, or otherwise dispose of (or
announce any offer, sale, grant or any option to purchase or other disposition of) any of its or
its Subsidiaries’ equity or equity equivalent securities, including without limitation any debt,
preferred stock or other instrument or security that is, at any time during its life and under any
circumstances, convertible into or exchangeable or exercisable for shares of Common Stock or Common
Stock Equivalents (any such offer, sale, grant, disposition or announcement being referred to as a
“Subsequent Placement”).



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               (iii) From the Effective Date until the date no Notes are outstanding, the Company will not,
directly or indirectly, effect any Subsequent Placement unless the Company shall have first
complied with this Section 4(p)(iii).




                    (1) The Company shall deliver to each Buyer a written notice (the “Offer Notice”) of
any proposed or intended issuance or sale or exchange (the “Offer”) of the securities being
offered (the “Offered Securities”) in a Subsequent Placement, which Offer Notice shall (w)
identify and describe the Offered Securities, (x) describe the price and other terms upon
which they are to be issued, sold or exchanged, and the number or amount of the Offered
Securities to be issued, sold or exchanged, (y) identify the persons or entities (if known)
to which or with which the Offered Securities are to be offered, issued, sold or exchanged
and (z) offer to issue and sell to or exchange with such Buyers at least 80% of the first
$25 million of Offered Securities in any Subsequent Placement and at least 50% of any
additional Offered Securities in such Subsequent Placement over $25 million, allocated among
such Buyers (a) based on such Buyer’s pro rata portion of the aggregate principal amount of
Notes purchased hereunder (the “Basic Amount”), and (b) with respect to each Buyer that
elects to purchase its Basic Amount, any additional portion of the Offered Securities
attributable to the Basic Amounts of other Buyers as such Buyer shall indicate it will
purchase or acquire should the other Buyers subscribe for less than their Basic Amounts (the
“Undersubscription Amount”).




                    (2) To accept an Offer, in whole or in part, such Buyer must deliver a written notice
to the Company prior to the end of the tenth (10th) Business Day after such
Buyer’s receipt of the Offer Notice (the “Offer Period”), setting forth the portion of such
Buyer’s Basic Amount that such Buyer elects to purchase and, if such Buyer shall elect to
purchase all of its Basic Amount, the Undersubscription Amount, if any, that such Buyer
elects to purchase (in either case, the “Notice of Acceptance”). If the Basic Amounts
subscribed for by all Buyers are less than the total of all of the Basic Amounts, then each
Buyer who has set forth an Undersubscription Amount in its Notice of Acceptance shall be
entitled to purchase, in addition to the Basic Amounts subscribed for, the Undersubscription
Amount it has subscribed for; provided, however, that if the
Undersubscription Amounts subscribed for exceed the difference between the total of all the
Basic Amounts and the Basic Amounts subscribed for (the “Available Undersubscription
Amount”), each Buyer who has subscribed for any Undersubscription Amount shall be entitled
to purchase only that portion of the Available Undersubscription Amount as the Basic Amount
of such Buyer bears to the total Basic Amounts of all Buyers that have subscribed for
Undersubscription Amounts, subject to rounding by the Company to the extent its deems
reasonably necessary.




                    (3) The Company shall have five (5) Business Days from the expiration of the Offer
Period above to offer, issue, sell or exchange all or any part of such Offered Securities as
to which a Notice of Acceptance has not been given by the Buyers (the “Refused Securities”),
but only to the offerees described in the Offer Notice (if so described therein) and only
upon terms and conditions (including, without limitation, unit prices and interest rates)
that are not more favorable to the acquiring



-21-









 






person or persons or less favorable to the Company than those set forth in the Offer
Notice.




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




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




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



               (iv) The restrictions contained in subsections (ii) and (iii) of this Section 4(p) shall not
apply in connection with the issuance of any Excluded Securities (as defined in the Notes).



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




-22-









 







Common Stock (the “Capital Increase” and such affirmative approval being referred to herein as
the “Stockholder Approval”), and the Company shall use its commercially reasonable best efforts to
solicit its stockholders’ approval of such resolutions and to cause the Board of Directors of the
Company to recommend to the stockholders that they approve such resolutions. The Company shall be
obligated to use its commercially reasonable best efforts to obtain the Stockholder Approval by the
Stockholder Meeting Deadline. If, despite the Company’s commercially reasonable best efforts the
Stockholder Approval is not obtained on or prior to the Stockholder Meeting Deadline, the Company
shall seek Stockholder Approval at all regularly scheduled annual meetings of stockholders of the
Company until such Stockholder Approval is obtained.




     5. REGISTER; TRANSFER AGENT INSTRUCTIONS.



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




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




-23-









 







remedies, to an order and/or injunction restraining any breach and requiring immediate
issuance and transfer, without the necessity of showing economic loss and without any bond or other
security being required.




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



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




               (i) Such Buyer shall have executed each of the Transaction Documents to which it is a party
and delivered the same to the Company.



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



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



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



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




               (i) The Company shall have executed and delivered to such Buyer (A) each of the Transaction
Documents and (B) the Notes (in such principal amounts as such Buyer shall have requested prior to
the Closing) and the related Warrants (in such amounts as such Buyer shall have requested prior to
the Closing) being purchased by such Buyer at the Closing pursuant to this Agreement.



               (ii) Such Buyer shall have received the opinion of Winstead, the Company’s outside counsel,
dated as of the Closing Date, in substantially the form of Exhibit E attached hereto.



               (iii) The Company shall have delivered to such Buyer a copy of the Irrevocable Transfer Agent
Instructions, in the form of Exhibit D attached hereto, which




-24-










 






instructions shall have been delivered to and acknowledged in writing by the Company’s
transfer agent.




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



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



               (vi) The Company shall have delivered to such Buyer a certified copy of the Certificate of
Incorporation as certified by the Secretary of State of the State of Delaware within ten (10) days
of the Closing Date.



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



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



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



               (x) The Common Stock (I) shall be designated for quotation or listed on the Principal Market
and (II) shall not have been suspended, as of the Closing Date, by the SEC or the Principal Market
from trading on the Principal Market nor shall suspension by the SEC or the Principal Market have
been threatened, as of the Closing Date, either (A) in writing by the SEC or the Principal Market
or (B) by falling below the minimum listing maintenance requirements of the Principal Market.



               (xi) Voting Agreement. The Company shall have entered into the Voting Agreement,
substantially in the form attached hereto as Exhibit H, executed by the Company and Roger
Abel, Stephen P. Harrington and Stephen C. Haynes (the “Voting Agreement”).



-25-









 





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



               (xiii) Roger Abel and Stephen C. Haynes shall have entered into Lock-Up Agreements
substantially in the form attached hereto as Exhibit I-1 (the “Lock-Up Agreement”).



               (xiv) Stephen P. Harrington shall have entered into a Lock-Up Agreement substantially in the
form attached hereto as Exhibit I-2 (the “Harrington Lock-Up Agreement”).



               (xv) On or prior to the Closing, the Company shall have delivered to the Buyer a pay-off
letter in form and substance satisfactory to the Buyer from Trident Growth Fund, L.P. and
simultaneously with the Closing, the Company shall have repaid in full, the Trident Note.



               (xvi) On or prior to the Closing, the Company shall have delivered to the Buyer a pay-off
letter in form and substance satisfactory to the Buyer from DDH II and simultaneously with the
Closing, the Company shall have repaid in full, the DDH II Note.



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



     8. TERMINATION. In the event that the Closing shall not have occurred with respect to
a Buyer on or before five (5) Business Days from the date hereof due to the Company’s or such
Buyer’s failure to satisfy the conditions set forth in Sections 6 and 7 above (and the nonbreaching
party’s failure to waive such unsatisfied condition(s)), the nonbreaching party shall have the
option to terminate this Agreement with respect to such breaching party at the close of business on
such date without liability of any party to any other party; provided, however, this if this
Agreement is terminated pursuant to this Section 8, the Company shall remain obligated to reimburse
the non-breaching Buyers for the expenses described in Section 4(g) above.



9. MISCELLANEOUS.




          (a) Governing Law; Jurisdiction; Jury Trial. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall be governed by the
internal laws of the State of New York, without giving effect to any choice of law or conflict of
law provision or rule (whether of the State of New York or any other jurisdictions) that would
cause the application of the laws of any jurisdictions other than the State of New York. Each
party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts
sitting in The City of New York, Borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding,
any claim that it is not personally subject to the jurisdiction of any such court, that such suit,
action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. Each party hereby irrevocably waives personal




-26-









 







service of process and consents to process being served in any such suit, action or proceeding
by mailing a copy thereof to such party at the address for such notices to it under this Agreement
and agrees that such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND
AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION
WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.




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




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




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




          (e) Entire Agreement; Amendments. This Agreement and the other Transaction Documents
supersede all other prior oral or written agreements between the Buyers, the Company, their
Affiliates and Persons acting on their behalf with respect to the matters discussed herein, and
this Agreement, the other Transaction Documents and the instruments referenced herein and therein
contain the entire understanding of the parties with respect to the matters covered herein and
therein and, except as specifically set forth herein or therein, neither the Company nor any Buyer
makes any representation, warranty, covenant or undertaking with respect to such matters. No
provision of this Agreement may be amended other than by an instrument in writing signed by the
Company and the holders of at least a majority of the aggregate number of Registrable Securities
issued and issuable hereunder, and any amendment to this Agreement made in conformity with the
provisions of this Section 9(e) shall be binding on all Buyers and holders of Securities, as
applicable. No provision hereof may be waived other than by an instrument in writing signed by the
party against whom enforcement is sought. No such amendment shall be effective to the extent that
it applies to less than all of the holders of the applicable Securities then outstanding. No
consideration shall be offered or paid to any Person to amend or consent to a waiver or
modification of any provision of any of the Transaction Documents unless the same consideration
also is offered to all of the parties to the Transaction Documents, holders of Notes or holders of
the Warrants, as the case may be. The Company has not, directly or indirectly, made any agreements
with any Buyers relating to the terms or conditions of the transactions contemplated by the
Transaction Documents except as set forth in the Transaction Documents. Without limiting the
foregoing, the Company confirms that, except as set forth in this Agreement, no Buyer has made any




-27-









 




commitment or promise or has any other obligation to provide any financing to the Company or
otherwise.




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




               If to the Company:


Touchstone Resources USA, Inc.

1600 Smith Street,

Houston, TX 77002

Telephone: (713) 784-1113

Facsimile: (713) 785-8530

Attention: Roger Abel




               With a copy (for informational purposes only) to:


Winstead

600 Town One Center

1450 Lake Robbins Drive

The Woodlands, TX 77380

Telephone: (281) 681-5900

Facsimile: (281) 681-5901

Attention: Paul Aubert




               If to the Transfer Agent:


StockTrans, Inc

44 West Lancaster Avenue

Ardmore, PA 19003

Telephone: 610-649-7300

Facsimile: 610-649-7302

Attention: Bob Winterle



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




               with a copy (for informational purposes only) to:


Schulte Roth & Zabel LLP

919 Third Avenue

New York, New York 10022

Telephone: (212) 756-2000




-28-









 







Facsimile: (212) 593-5955

Attention: Eleazer N. Klein, Esq.



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




          (g) Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns, including any purchasers of the
Notes or the Warrants. The Company shall not assign this Agreement or any rights or obligations
hereunder without the prior written consent of the holders of at least a majority of the aggregate
number of Registrable Securities issued and issuable hereunder, including by way of a Fundamental
Transaction (unless the Company is in compliance with the applicable provisions governing
Fundamental Transactions set forth in the Notes and the Warrants). A Buyer may assign some or all
of its rights hereunder (other than the rights set forth in Section 4(p)(iii)) in connection with
transfer of any of its Securities without the consent of the Company, in which event such assignee
shall be deemed to be a Buyer hereunder with respect to such assigned rights.




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




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




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




          (k) Indemnification. In consideration of each Buyer’s execution and delivery of the
Transaction Documents and acquiring the Securities thereunder and in addition to all of the
Company’s other obligations under the Transaction Documents, the Company shall defend, protect,
indemnify and hold harmless each Buyer and each other holder of the Securities and all of their
stockholders, partners, members, officers, directors, employees and direct or indirect investors
and any of the foregoing Persons’ agents or other representatives (including, without limitation,
those retained in connection with the transactions contemplated by this Agreement)




-29-









 




(collectively, the “Indemnitees”) from and against any and all actions, causes of action,
suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys’ fees and disbursements
(the “Indemnified Liabilities”), incurred by any Indemnitee as a result of, or arising out of, or
relating to (a) any misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, instrument or document contemplated
hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained
in the Transaction Documents or any other certificate, instrument or document contemplated hereby
or thereby or (c) any cause of action, suit or claim brought or made against such Indemnitee by a
third party (including for these purposes a derivative action brought on behalf of the Company) and
arising out of or resulting from (i) the execution, delivery, performance or enforcement of the
Transaction Documents or any other certificate, instrument or document contemplated hereby or
thereby, (ii) any transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, (iii) any disclosure made by such
Buyer pursuant to Section 4(i), or (iv) the status of such Buyer or holder of the Securities as an
investor in the Company pursuant to the transactions contemplated by the Transaction Documents. To
the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the
Company shall make the maximum contribution to the payment and satisfaction of each of the
Indemnified Liabilities which is permissible under applicable law. Except as otherwise set forth
herein, the mechanics and procedures with respect to the rights and obligations under this Section
9(k) shall be the same as those set forth in Section 6 of the Registration Rights Agreement.
Notwithstanding anything to the contrary contained herein, the indemnification agreement contained
in this Section 9(k) shall not apply to a claim by any Indemnitee arising out of or based upon an
Indemnified Liability which occurs in reliance upon and in conformity with information furnished in
writing to the Company by such Indemnitee in connection with this Agreement.




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




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




          (n) Rescission and Withdrawal Right. Notwithstanding anything to the

-30-









 








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




          (o) Payment Set Aside. To the extent that the Company makes a payment or payments to
the Buyers hereunder or pursuant to any of the other Transaction Documents or the Buyers enforce or
exercise their rights hereunder or thereunder, and such payment or payments or the proceeds of such
enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent
or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or
otherwise restored to the Company, a trustee, receiver or any other Person under any law
(including, without limitation, any bankruptcy law, foreign, state or federal law, common law or
equitable cause of action), then to the extent of any such restoration the obligation or part
thereof originally intended to be satisfied shall be revived and continued in full force and effect
as if such payment had not been made or such enforcement or setoff had not occurred.




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




[Signature Page Follows]




-31-









 





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



	 	 	 	 	 	 	 	 	 
	 	 	COMPANY:	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	TOUCHSTONE RESOURCES USA, INC.	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	/s/ Roger Abel	 	 	 	 
	 	 	 	 	 	 	 
	 

	 	 	 	Name: Roger Abel
	 

	 	 	 	Title:   Chairman and Chief Executive Officer






 









 






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



	 	 	 	 	 	 	 	 	 
	 	 	BUYERS:	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	KINGS ROAD HOLDINGS II LLC	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	/s/ Erik M. W. Caspersen	 	 	 	 
	 	 	 	 	 	 	 
	 

	 	 	 	Name: Erik M. W. Caspersen
	 

	 	 	 	Title:   Authorized
Signatory






 









 





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



	 	 	 	 	 	 	 
	 	 	CAPITAL VENTURES
	 	 	INTERNATIONAL
	 
	 	 	 	 	 	 
	 

	 	By: Heights Capital Management Inc.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Martin Kobinger	 	 
	 

	 	 	 	 

	 	 
	 

	 	 	 	Name: Martin Kobinger	 	 
	 

	 	 	 	Title:   Authorized Signatory	 	 






 









 





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



	 	 	 	 	 	 	 
	 	 	SF CAPITAL PARTNERS LTD.
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Brian H. Davidson	 	 
	 

	 	 	 	 

	 	 
	 

	 	 	 	Name: Brian H. Davidson	 	 
	 

	 	 	 	Title:   Authorized Signatory	 	 






 









 





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



	 	 	 	 	 	 	 
	 	 	RHP MASTER FUND, LTD
	 
	 	 	 	 	 	 
	 

	 	By:
	 	Rock Hill Investment Management, L.P.	 	 
	 

	 	By:
	 	RHP General Partner, LLC	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Keith Marlowe	 	 
	 	 	 	 	   
	 

	 	 	 	Name: Keith Marlowe	 	 
	 

	 	 	 	Title:   Authorized Signatory	 	 







 









 








SCHEDULE OF BUYERS




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







 









 





EXHIBITS




	 	 	 
	Exhibit A

	 	Form of Notes
	Exhibit B-1

	 	Form of Series A Warrants
	Exhibit B-2

	 	Form of Series B Warrants
	Exhibit C

	 	Registration Rights Agreement
	Exhibit D

	 	Irrevocable Transfer Agent Instructions
	Exhibit E

	 	Form of Outside Company Counsel Opinion
	Exhibit F

	 	Form of Secretary’s Certificate
	Exhibit G

	 	Form of Officer’s Certificate
	Exhibit H

	 	Voting Agreement
	Exhibit I-1

	 	Lock-Up Agreement
	Exhibit I-2

	 	Harrington Lock-Up Agreement






SCHEDULES




	 	 	 
	Schedule 3(a)

	 	Subsidiaries
	Schedule 3(d)

	 	No Conflicts
	Schedule 3(k)

	 	SEC Documents; Financial Statements
	Schedule 3(l)

	 	Absence of Certain Changes
	Schedule 3 (p)

	 	Sarbanes-Oxley Act
	Schedule 3(q)

	 	Transactions with Affiliates
	Schedule 3(r)

	 	Capitalization
	Schedule 3(s)

	 	Indebtedness and Other Contracts
	Schedule 3(t)

	 	Litigation
	Schedule 3(w)

	 	Title
	Schedule 3(x)

	 	Intellectual Property
	Schedule 3(z)

	 	Subsidiary Rights
	Schedule 3(dd)

	 	Ranking of Notes