exv10w3






Exhibit
10.3




EXECUTION COPY




SERIES A PREFERRED STOCK PURCHASE AGREEMENT

Dated as of March 14, 2007

by and among

XStream Systems, Inc.

and

the Investors named herein









 









 











	 	 	 	 	 
	ARTICLE I DEFINITIONS AND INTERPRETATION
	 	 	1	 
	1.1. Definitions
	 	 	1	 
	1.2. Interpretation
	 	 	7	 
	1.3. Accounting Principles
	 	 	9	 
	ARTICLE II AUTHORIZATION AND SALE OF SERIES A PREFERRED SHARES; CLOSING
	 	 	9	 
	2.1. Authorization of the Series A Preferred Shares
	 	 	9	 
	2.2. Purchase and Sale of Series A Preferred Stock
	 	 	9	 
	2.3. Closings
	 	 	9	 
	2.4. Delivery of Series A Preferred Shares; Payment of Purchase Price
	 	 	10	 
	2.5. Debentures
	 	 	10	 
	ARTICLE III CONDITIONS OF THE INVESTORS’ OBLIGATIONS
	 	 	11	 
	3.1. First Closing
	 	 	11	 
	3.2. Second Closing
	 	 	13	 
	3.3. Waiver
	 	 	15	 
	3.4. Default by an Investor
	 	 	15	 
	ARTICLE IV CONDITIONS OF THE COMPANY’S OBLIGATIONS
	 	 	16	 
	4.1. First Closing
	 	 	16	 
	4.2. Second Closing
	 	 	16	 
	4.3. Waiver
	 	 	17	 
	ARTICLE V COVENANTS
	 	 	17	 
	5.1. Financial Statements and Other Information
	 	 	17	 
	5.2. Inspection Rights
	 	 	18	 
	5.3. Fiscal Year
	 	 	19	 
	5.4. Insurance
	 	 	19	 
	5.5. Tax Matters
	 	 	19	 
	5.6. Payment of Indebtedness
	 	 	19	 
	5.7. Compliance With Laws; Obligations
	 	 	19	 
	5.8. Preservation of Corporate Existence and Property
	 	 	19	 
	5.9. Directors’ Expenses and Indemnity
	 	 	20	 
	5.10. Board of Directors
	 	 	20	 
	5.11. Board of Directors of Subsidiaries; Audit and Compensation Committees
	 	 	20	 
	5.12. Use of Proceeds
	 	 	20	 
	5.13. Regulatory Compliance Cooperation
	 	 	21	 
	5.14. Reservation of Common Stock
	 	 	21	 
	5.15. Certain Insurance Coverage
	 	 	21	 
	5.16. Shareholders Agreement
	 	 	22	 
	5.17. Termination of Covenants
	 	 	22	 
	ARTICLE VI TRANSFER OF RESTRICTED SECURITIES
	 	 	22	 
	6.1. General Provisions
	 	 	22	 
	6.2. Rule 144A
	 	 	22	 
	6.3. Legend
	 	 	22	 
	6.4. Legend Removal
	 	 	22	 
	ARTICLE VII REPRESENTATIONS AND WARRANTIES OF THE COMPANY
	 	 	23	 
	7.1. Organization, Qualifications and Corporate Power
	 	 	23	 
	7.2. Authorization; No Conflicts
	 	 	23	 






 









 






	 	 	 	 	 
	7.3. Subsidiaries and Investments
	 	 	24	 
	7.4. Authorized Capital Stock
	 	 	24	 
	7.5. Financial Statements
	 	 	26	 
	7.6. Absence of Undisclosed Liabilities
	 	 	26	 
	7.7. No Material Adverse Effect
	 	 	26	 
	7.8. Events Subsequent to the Date of the Latest Balance Sheet
	 	 	26	 
	7.9. Title to Properties; Leasehold Interests
	 	 	28	 
	7.10. Tax Matters
	 	 	28	 
	7.11. Contracts and Commitments
	 	 	29	 
	7.12. Intellectual Property Rights
	 	 	30	 
	7.13. Compliance with Laws; Litigation
	 	 	31	 
	7.14. Brokers
	 	 	32	 
	7.15. Governmental Approvals; No Registration
	 	 	32	 
	7.16. Insurance
	 	 	32	 
	7.17. Employees
	 	 	32	 
	7.18. Officers
	 	 	33	 
	7.19. ERISA
	 	 	33	 
	7.20. Environmental Matters
	 	 	34	 
	7.21. Related-Party Transactions
	 	 	34	 
	7.22. Accounts Receivable
	 	 	34	 
	7.23. Investment Company
	 	 	35	 
	7.24. Real Property Holding Corporation
	 	 	35	 
	7.25. Projections
	 	 	35	 
	7.26. Disclosure
	 	 	35	 
	ARTICLE VIII REPRESENTATIONS AND WARRANTIES OF EACH INVESTOR
	 	 	35	 
	8.1. Organization
	 	 	35	 
	8.2. Authorization
	 	 	36	 
	8.3. Brokers
	 	 	36	 
	8.4. Investment Representations.
	 	 	36	 
	8.5. Residence
	 	 	37	 
	8.6. Reliance on Projections
	 	 	37	 
	8.7. No Knowledge of Breach
	 	 	37	 
	ARTICLE IX MISCELLANEOUS
	 	 	37	 
	9.1. Survival of Representations and Warranties
	 	 	37	 
	9.2. Amendments and Waivers
	 	 	38	 
	9.3. Successors and Assigns
	 	 	38	 
	9.4. Remedies
	 	 	38	 
	9.5. Indemnification
	 	 	38	 
	9.6. Severability
	 	 	39	 
	9.7. Notices
	 	 	39	 
	9.8. Governing Law
	 	 	39	 
	9.9. Submission to Jurisdiction; Waiver of Jury Trial
	 	 	39	 
	9.10. Attorneys’ Fees
	 	 	40	 
	9.11. Execution in Counterparts
	 	 	40	 
	9.12. Transaction Expenses
	 	 	40	 
	9.13. GY&S
	 	 	40	 
	9.14. Entire Agreement
	 	 	41	 











 









 











APPENDICES




	 	 	 
	Appendix I

	 	Names of Investors and Respective Amounts of Series A
Preferred Shares Being Purchased
	Appendix II

	 	Notice Information for each Investor
	Appendix III

	 	List of Debenture Holders
	Appendix IV

	 	MRI Phase 2 Testing
	 
	 	 
	EXHIBITS
	 	 
	 
	 	 
	Exhibit A

	 	Certificate of Designations
	Exhibit B

	 	By-laws of the Company
	Exhibit C

	 	Form of Registration Rights Agreement
	Exhibit D

	 	Form of Shareholders Agreement
	Exhibit E

	 	By-law Provisions re: Required Board Approvals
	Exhibit F

	 	Form of Indemnification Agreement
	Exhibit G

	 	Form of Legal Opinion of GY&S, Outside Counsel to the
Company, to be delivered at the First Closing
	Exhibit H

	 	Form of Legal Opinion of GY&S, Outside Counsel to the
Company, to be delivered at the Second Closing
	 
	 	 
	SCHEDULES
	 	 
	 
	 	 
	Disclosure

	 	Exceptions to Representations and Warranties
	7.1(a)

	 	Foreign Qualifications
	7.2

	 	Authorization; No Conflicts
	7.4

	 	Capitalization
	7.5

	 	Financial Statements
	7.6

	 	Absence of Undisclosed Liabilities
	7.7

	 	No Material Adverse Effect
	7.8

	 	Operations Since Latest Balance Sheet Date
	7.9

	 	Properties
	7.11(a)

	 	Contracts and Commitments
	7.12

	 	Intellectual Property Rights
	7.13

	 	Compliance with Laws
	7.18

	 	Officers
	7.19

	 	ERISA
	7.20

	 	Environmental Matters
	7.21

	 	Related-Party Transactions
	7.25

	 	Projections
	7.26

	 	Disclosure







-iv-











 





 SERIES A PREFERRED STOCK PURCHASE AGREEMENT




          SERIES A PREFERRED STOCK PURCHASE AGREEMENT (this “Agreement”), dated as of March 14, 2007, by
and among XStream Systems, Inc., a Delaware corporation (the “Company”), and each of the Investors
listed in Appendix I hereto (collectively, the “Investors”).



RECITALS




          WHEREAS, the Company desires to issue and sell to the Investors, and the Investors desire to
purchase from the Company, an aggregate of up to 2,250,000 shares of the authorized and unissued
shares of Series A Redeemable Convertible Preferred Stock, $.0001 par value per share, of the
Company (the “Series A Preferred Stock”), which shares of Series A Preferred Stock are convertible
into shares of Common Stock, $.0001 par value per share, of the Company (the “Common Stock”), with
the shares of Series A Preferred Stock and the shares of Common Stock into which they are
convertible to have the respective rights, preferences and privileges specified in the Certificate
of Designations, the form of which is attached as Exhibit A hereto (the “Certificate of
Designations”), all on the terms and subject to the conditions set forth herein; and



          WHEREAS, the Investors require, as a condition to their willingness to enter into this
Agreement, that the Company enter into a Registration Rights Agreement in the form of Exhibit
C attached hereto and a Shareholders Agreement in the form of Exhibit D attached
hereto, concurrently with the execution and delivery of this Agreement.



          NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties,
covenants and agreements contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:



ARTICLE I




DEFINITIONS AND INTERPRETATION




          1.1. Definitions. For the purposes of this Agreement, the following terms have the
meanings specified or referred to in this Section 1.1:



          “Additional Preferred Stock” means a series of preferred stock of the Company having a
dividend, liquidation and redemption preference prior to the Series A Preferred Stock, but
otherwise having the same terms and provisions as the Series A Preferred Stock and voting with the
shares of Series A Preferred Stock and Conversion Common Shares, voting as a single class on a
common share equivalent basis.



          “Additional Preferred Shares” means shares of Additional Preferred Stock issued under the
circumstances contemplated by Section 3.4.



          “Affiliate” means, with respect to any particular Person, any other Person that directly or
indirectly controls, is controlled by or is under common control with such particular



 









 







Person. For the purpose of this definition, “control” means the possession, directly or
indirectly, of the power to direct the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.



          “Agreement” has the meaning set forth in the first paragraph of this Agreement.



          “Board” means the Board of the Directors of the Company.



          “Business Plan” means the Company’s Business Plan dated November 3, 2006, a copy of which has
been provided to each Investor.



          “By-laws” means the Company’s By-laws in effect as of the date hereof, a copy of which is
attached hereto as Exhibit B.



          “CERCLA” means the Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. §§ 9601 et seq.



          “Certificate of Designations” has the meaning set forth in the Recitals.



          “Certificate of Incorporation” means the Certificate of Incorporation, as amended (after
giving effect to the filing of the Certificate of Designations with the Delaware Secretary of
State), of the Company.



          “Closings” has the meaning set forth in Section 2.3.



          “Code” means the Internal Revenue Code of 1986, as amended, and any reference to any
particular Code section shall be interpreted to include any revision of or successor to that
section regardless of how numbered or classified.



          “Common Stock” has the meaning set forth in the Recitals.



          “Company” has the meaning set forth in the first paragraph of this Agreement.



          “Contract” means all contracts, agreements, commitments, understandings and arrangements,
whether written or oral.



          “Conversion Common Shares” means (i) the Common Stock issued or issuable upon conversion or
redemption of the Series A Preferred Shares and (ii) any Common Stock issued or issuable with
respect to the securities referred to in clause (i) above by way of stock dividend or stock split
or in connection with a combination of shares, recapitalization, merger, consolidation or other
reincorporation. For purposes of this Agreement, any Person who holds Series A Preferred Shares
shall be deemed to be the holder of the Conversion Common Shares obtainable upon conversion of the
Series A Preferred Shares, regardless of any restriction or limitation on the conversion of the
Series A Preferred Shares, such Conversion Common Shares shall be deemed to be in existence, and
such Person shall be entitled to exercise the rights of a holder of Conversion Common Shares
hereunder. As to any particular Conversion Common Shares, such shares shall cease to be Conversion
Common Shares when they have been (x) effectively registered under the Securities Act and disposed
of in accordance with the registration



2









 







statement covering them, (y) distributed to the public through a broker, dealer or market
maker pursuant to Rule 144 under the Securities Act (or any similar provision then in force) or (z)
repurchased by the Company. In the event that the Company shall issue any Additional Preferred
Shares under the circumstances contemplated in Section 3.4, then the term “Conversion
Common Shares,” as used herein (except Sections 3.1, 3.2 and 9.2, where
this sentence shall not apply), shall also include (1) Common Stock issued or issuable upon
conversion or redemption of the Additional Preferred Shares and (2) any Common Stock issued or
issuable with respect to the securities referred to in clause (1) above by way of stock dividend or
stock split or in connection with a combination of shares, recapitalization, merger, consolidation
or other reincorporation.



          “Court Order” means any judgment, order, award or decree of any foreign, federal, state, local
or other court or tribunal and any award in any arbitration proceeding.



          “Defaulted Shares” has the meaning set forth in Section 3.4.



          “Environmental Laws” means all Requirements of Laws derived from or relating to all federal,
state and local laws or regulations relating to or addressing the environment, health or safety,
including CERCLA, OSHA and RCRA and any state equivalent thereof.



          “ERISA” has the meaning set forth in Section 7.19.



          “Event of Noncompliance” has the meaning set forth in the Certificate of Designations.



          “First Closing” has the meaning set forth in Section 2.3.



          “First Closing Date” has the meaning set forth in Section 2.3.



          “GAAP” means United States generally accepted accounting principles, consistently applied
(except for any change required by GAAP).



          “Governmental Authority” means any foreign, federal, state, local or other government,
governmental, statutory or administrative authority or regulatory body or any court, tribunal or
judicial or arbitral body.



          “GY&S” means Gunster, Yoakley & Stewart, P.A.



          “Indebtedness” means, with respect to any Person at any date, without duplication: (i) all
obligations of such Person for borrowed money or in respect of loans or advances; (ii) all
obligations of such Person evidenced by bonds, debentures, notes or other similar instruments;
(iii) all obligations in respect of letters of credit, whether or not drawn, and bankers’
acceptances issued for the account of such Person; (iv) all interest rate or currency caps,
collars, swaps or other similar protection agreements of such Person (valued on a market quotation
basis); (v) any indebtedness for the deferred purchase price of property or services with respect
to which a Person is liable, contingently or otherwise, as obligor or otherwise (other than trade
payables and other current liabilities incurred in the ordinary course of business consistent



3









 







with past practice which are not more than 120 days past due, unless the same are being
contested in good faith by actions approved by the Board of Directors (including at least one of
the Investor Directors) and with respect to which the Company has set aside adequate reserves
therefor in accordance with GAAP); (vi) any commitment by which a Person assures a creditor against
loss (including contingent reimbursement obligations with respect to letters of credit); (vii) any
obligations under leases that are required to be capitalized in accordance with GAAP; (viii) any
indebtedness secured by a Lien on a Person’s assets; or (ix) any guarantee or other contingent
obligation (including obligations to repurchase, reimburse or keep well) in respect of the items
set forth in the foregoing clauses (i) through (viii).



          “Indemnified Liabilities” has the meaning set forth in Section 9.5.



          “Indemnitees” has the meaning set forth in Section 9.5.



          “Intellectual Property Rights” means all (i) patents, patent applications, patent disclosures
and inventions, (ii) trademarks, service marks, trade dress, trade names, URL’s, logos and
corporate names and registrations and applications for registration thereof, together with all of
the goodwill associated therewith, (iii) copyrights (registered or unregistered) and copyrightable
works and registrations and applications for registration thereof, (iv) mask works and
registrations and applications for registration thereof, (v) computer software, data, data bases
and documentation thereof, (vi) trade secrets and other confidential information (including ideas,
formulas, compositions, inventions (whether patentable or unpatentable and whether or not reduced
to practice), know-how, manufacturing and production processes and techniques, research and
development information, drawings, specifications, designs, plans, proposals, technical data,
copyrightable works, financial and marketing plans and customer and supplier lists and
information), (vii) other intellectual property rights and (viii) copies and tangible embodiments
thereof (in whatever form or medium).



          “Investment,” as applied to any Person, means (i) any direct or indirect purchase or other
acquisition by such Person of any notes, obligations, instruments, stock, securities or ownership
interest (including partnership interests, membership interests and joint venture interests) of any
other Person, and (ii) any capital contribution by such Person to any other Person.



          “Investor Directors” shall have the meaning set forth in the Shareholders Agreement.



          “Investors” has the meaning set forth in the first paragraph of this Agreement.



          “IRS” means the United States Internal Revenue Service.



          “Knowledge” or “aware” means (i) the actual knowledge or awareness of Brian Mayo and (ii) the
knowledge that such person should have after reasonable investigation in the performance of such
person’s duties.



          “Latest Balance Sheet” has the meaning set forth in Section 7.5.



4









 





          “Liens” means any mortgage, pledge, security interest, encumbrance, lien, claim or charge of
any kind (including any conditional sale or other title retention agreement or lease in the nature
thereof), any sale of receivables with recourse against the Company or any Affiliate, any filing or
agreement to file a financing statement as debtor under the Uniform Commercial Code or any similar
statute other than to reflect ownership by a third party of property leased to the Company under a
lease which is not in the nature of a conditional sale or title retention agreement, or any
subordination arrangement in favor of another Person (other than any subordination arising in the
ordinary course of business).



          “Material Adverse Effect” means an adverse effect of $100,000 or more on the condition
(financial or otherwise), operating results, business, prospects, assets, operations, employee
relations or customer or supplier relations of the Company and its Subsidiaries, taken as a whole;
provided, however, that no change, circumstance, effect, event or fact shall be
deemed to be a Material Adverse Effect to the extent that it is caused by the execution or public
announcement of this Agreement or the transactions contemplated hereby.



          “Material Contracts” has the meaning set forth in Section 7.11(b).



          “Non-Participating Investor” has the meaning set forth in Section 3.3.



          “OSHA” means the Occupational Safety and Health Act, 29 U.S.C. §§ 651 et seq.



          “Party” means any of the Company and the Investors.



          “Permitted Liens” means (i) liens with respect to Taxes not yet due and payable or which are
being contested in good faith by appropriate proceedings and for which appropriate reserves have
been established in accordance with GAAP, (ii) mechanics’, materialmen’s or contractors’ liens or
encumbrances or any similar lien or restriction and (iii) easements, rights-of-way, restrictions
and other similar charges and encumbrances not interfering with the ordinary conduct of the
business of the Company.



          “Person” means an individual, a partnership, a corporation, a limited liability company, an
association, a joint stock company, a trust, a joint venture, an unincorporated organization, a
governmental entity or any department, agency or political subdivision thereof or any other entity.



          “Projections” has the meaning set forth in Section 7.25.



          “Purchase Price” has the meaning set forth in Section 2.4(b).



          “Qualified IPO” has the meaning set forth in the Certificate of Designations.



          “RCRA” means the Resource Conservation and Recovery Act, 42 U.S.C. §§ 6901 et
seq., and the rules and regulations promulgated thereunder.



          “Registration Rights Agreement” means that certain Registration Rights Agreement dated the
date hereof among the Company and the Investors, the form of which is attached hereto as
Exhibit C.



5









 





          “Regulatory Problem” has the meaning set forth in Section 5.13(b).



          “Requesting Investor” has the meaning set forth in Section 5.13(a).



          “Requirements of Laws” means any foreign, federal, state and local laws, statutes,
regulations, rules, codes, ordinances, orders or requirements enacted, adopted, issued or
promulgated by any Governmental Authority (including those pertaining to electrical, building,
zoning, subdivision, land use, environmental and occupational safety and health requirements) or
common law.



          “Restricted Securities” means (i) the Series A Preferred Stock issued hereunder, (ii) the
Common Stock issued upon conversion or redemption of Series A Preferred Stock and (iii) any
securities issued with respect to the securities referred to in clauses (i) or (ii) above by way of
a stock dividend or stock split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reincorporation. As to any particular Restricted Securities, such
securities shall cease to be Restricted Securities when they have been (a) effectively registered
under the Securities Act and disposed of in accordance with the registration statement covering
them, (b) distributed to the public through a broker, dealer or market maker pursuant to Rule 144
(or any similar provision then in force) under the Securities Act or become eligible for sale
pursuant to Rule 144(k) (or any similar provision then in force) under the Securities Act or (c)
otherwise transferred and new certificates for them not bearing the Securities Act legend
prescribed by Section 6.3 have been delivered by the Company in accordance with Section
6.4. Whenever any particular securities cease to be Restricted Securities, the holder thereof
shall be entitled to receive from the Company, without being charged therefor by the Company, new
securities of like tenor not bearing a Securities Act legend of the character prescribed by
Section 6.3.



          “Schedule” means any schedule attached to this Agreement.



          “SEC” means the United States Securities and Exchange Commission, including any governmental
authority or agency succeeding to the functions thereof.



          “Second Closing” has the meaning set forth in Section 2.3.



          “Second Closing Date” has the meaning set forth in Section 2.3.



          “Securities Act” means the Securities Act of 1933.



          “Securities Exchange Act” means the Securities Exchange Act of 1934.



          “Series A Preferred Shares” has the meaning set forth in Section 2.1.



          “Series A Preferred Stock” has the meaning set forth in the Recitals.



          “Shareholders Agreement” means that certain Shareholders Agreement dated the date hereof among
the Company, the Investors and the other parties thereto, the form of which is attached hereto as
Exhibit D.



6









 





          “Subsidiary” means, with respect to any Person, any corporation, limited liability company,
partnership, association or other business entity of which (i) if a corporation, a majority of the
total voting power of shares of stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited liability company,
partnership, association or other business entity, a majority of the partnership or other similar
ownership interest thereof is at the time owned or controlled, directly or indirectly, by any
Person or one or more of the other Subsidiaries of that Person or a combination thereof. For
purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a
limited liability company, partnership, association or other business entity if such Person or
Persons shall be allocated a majority of the gains or losses of such limited liability company,
partnership, association or other business entity or shall be or control (or have the power to
control) a managing director, manager or general partner of such limited liability company,
partnership, association or other business entity.



          “Tax” (and, with correlative meaning, “Taxes” and “Taxable”) means:




     (i) any federal, state, local or foreign net income, gross income, gross receipts,
windfall profit, severance, property, production, sales, use, license, excise, franchise,
employment, payroll, withholding, alternative or add-on minimum, ad valorem, value-added,
transfer, stamp, or environmental tax, or any other tax, custom, duty, governmental fee or
other like assessment or charge of any kind whatsoever, together with any interest or
penalty, addition to tax or additional amount imposed by any Governmental Authority; and




     (ii) any liability of the Company for the payment of amounts with respect to payments
of a type described in clause (i) as a result of any obligation of the Company under any Tax
sharing or indemnity arrangement.



          “Tax Return” means any return, report or similar statement required to be filed with respect
to any Tax (including any attached schedules), including any information return, claim for refund,
amended return or declaration of estimated Tax.



          “Transaction Documents” means the Shareholders Agreement, the Registration Rights Agreement
and each of the other agreements, documents and instruments expressly contemplated hereby and
thereby.



          “XT250” means the Company’s XT250 Material Identification System product.



          1.2. Interpretation. (a) As used in this Agreement and each Transaction Document,
unless the context clearly indicates otherwise:




     (i) words used in the singular include the plural and words in the plural include the
singular;




     (ii) reference to any Person includes such Person’s successors and assigns, but only if
such successors and assigns are permitted by this Agreement or such other



7









 







Transaction Document, and reference to a Person in a particular capacity excludes such
Person in any other capacity;




     (iii) reference to any gender includes the other gender;




     (iv) whenever the words “include,” “includes” or “including” are used in this Agreement
or any Transaction Document, they shall be deemed to be followed by the words “without
limitation” or “but not limited to” or words of similar import;




     (v) reference to any Article, Section, Exhibit or Schedule means such Article or
Section of, or such Exhibit or Schedule to, this Agreement, as the case may be, and
references in any Section or definition to any clause means such clause of such Section or
definition;




     (vi) the words “herein,” “hereunder,” “hereof,” “hereto” and words of similar import
shall be deemed references to this Agreement as a whole and not to any particular Section or
other provision hereof;




     (vii) reference to any agreement, instrument or other document means such agreement,
instrument or other document as amended, supplemented and modified from time to time to the
extent permitted by the provisions thereof and by this Agreement;




     (viii) reference to any law (including statutes and ordinances) means such law
(including all rules and regulations promulgated thereunder) as amended, modified, codified
or reenacted, in whole or in part, and in effect at the time of determining compliance or
applicability, and reference to any particular provision of any law shall be interpreted to
include any revision of or successor to that provision regardless of how numbered or
classified;




     (ix) relative to the determination of any period of time, “from” means “from and
including,” “to” means “to but excluding” and “through” means “through and including”;




     (x) in the event of any conflict between the provisions of the body of this Agreement
and the Exhibits or Schedules hereto, the provisions of the body of this Agreement shall
control; and




     (xi) the titles to Articles and headings of Sections contained in this Agreement have
been inserted for convenience of reference only and shall not be deemed to be a part of or
to affect the meaning or interpretation of this Agreement.



          (b) This Agreement and each of the Transaction Documents were negotiated by the Parties with
the benefit of legal representation, and no rule of construction or interpretation otherwise
requiring this Agreement or any of the Transaction Documents to be construed or interpreted against
any Party shall apply to any construction or interpretation hereof. Subject to Section
9.6, this Agreement shall be interpreted and construed to the maximum extent possible so as to
uphold the enforceability of each of the terms and provisions hereof, it being understood and
acknowledged that this Agreement was entered into by the Parties after



8









 







substantial negotiations and with full awareness by the Parties of the terms and provisions
hereof and the consequences thereof.



          1.3. Accounting Principles. The classification, character and amount of all assets,
liabilities, capital accounts and reserves and of all items of income and expense to be determined,
and any consolidation or other accounting computation to be made, and the interpretation of any
definition containing any financial term, pursuant to this Agreement shall be determined and made
in accordance with GAAP.



ARTICLE II




AUTHORIZATION AND SALE OF SERIES A PREFERRED SHARES; CLOSING




          2.1. Authorization of the Series A Preferred Shares. Prior to the First Closing, the
Company shall authorize (a) the issuance and sale to the Investors of an aggregate of up to
2,250,000 shares of Series A Preferred Stock (the “Series A Preferred Shares”) having the rights
and preferences set forth in Exhibit A attached hereto, and (b) the reservation for
issuance of 2,250,000 shares of Common Stock upon conversion or redemption of the Series A
Preferred Shares.



          2.2. Purchase and Sale of Series A Preferred Stock. Subject to the terms and the
conditions set forth herein, and in reliance upon the representations and warranties of the Company
and an Investor set forth herein or in any certificate or other document delivered pursuant hereto,
the Company shall issue, sell and deliver to such Investor, free and clear of all Liens (except as
set forth in the Registration Rights Agreement and the Shareholders Agreement), and such Investor
shall purchase (a) at the First Closing the number of Series A Preferred Shares set opposite such
Investor’s name in the column labeled “Series A Preferred Shares to be purchased at the First
Closing” in Appendix I from the Company at a purchase price of $3.7999696 per share and (b)
at the Second Closing the number of Series A Preferred Shares set opposite such Investor’s name in
the column labeled “Series A Preferred Shares to be purchased at the Second Closing” in
Appendix I from the Company at a purchase price of $3.7999696 per share. The Series A
Preferred Shares shall accrue dividends from the date of issuance.



          2.3. Closings. The closing of the purchase and sale of the Series A Preferred Shares
shall be consummated in two separate closings (together, the “Closings”). The first closing shall
take place at the offices of GY&S, 777 South Flagler Drive, Suite 500-East, West Palm Beach,
Florida at 10:00 a.m., local time, on the date of this Agreement, or at such other place or time or
on such other date as shall be agreed to by the Company and the Investors (the “First Closing”).
The second closing shall take place at the offices of GY&S, 777 South Flagler Drive, Suite
500-East, West Palm Beach, Florida at 10:00 a.m., local time, not less than forty-five (45) days
following the satisfaction or waiver of the closing conditions set forth in Section 3.2, or
at such other place or time or on such other date as shall be agreed to by the Company and the
Investors, but in any event not later than August 15, 2007 (the “Second Closing”). The time and
date on which the First Closing is actually held is sometimes referred to herein as the “First
Closing Date” and the time and date on which the Second Closing is actually held is sometimes
referred to herein as the “Second Closing Date.”



9









 





          2.4. Delivery of Series A Preferred Shares; Payment of Purchase Price. (a) Subject
to satisfaction or waiver of the conditions set forth in Article IV, at the relevant
Closing, the Company shall issue and deliver to each Investor purchasing Series A Preferred Shares,
free and clear of all Liens (except as set forth in the Registration Rights Agreement and the
Shareholders Agreement), a stock certificate, duly executed by the Company and registered in the
Company’s stock ledger in the name of such Investor or such Investor’s nominee, evidencing (i) all
of the Series A Preferred Shares being purchased by such Investor at the First Closing and (ii) all
of the Series A Preferred Shares being purchased by such Investor at the Second Closing.



          (b) Subject to satisfaction or waiver of the conditions set forth in Article III, as
payment in full for the Series A Preferred Shares being purchased by an Investor under this
Agreement, and against delivery of the stock certificate therefor as described in subparagraph (a)
above, such Investor shall deliver (i) at the First Closing the amount set opposite such Investor’s
name in the column labeled “Purchase Price for Series A Preferred Shares to be purchased at the
First Closing” in Appendix I hereto to the account of the Company by wire transfer of
immediately payable funds, check or, if specified on Appendix I hereto, exchange of
outstanding promissory notes issued by the Company (the sum of such amounts being referred to as
the “First Purchase Price”) and (ii) subject to Section 3.3, at the Second Closing the
amount set opposite such Investor’s name in the column labeled “Purchase Price for Series A
Preferred Shares to be purchased at the Second Closing” in Appendix I hereto to the account
of the Company by wire transfer of immediately payable funds, check or, if specified on
Appendix I hereto, exchange of outstanding promissory notes issued by the Company (the sum
of such amounts being referred to as the “Second Purchase Price” and, together with the First
Purchase Price, the “Purchase Price”), it being understood that not more than $325,000 (plus
interest thereon) of the Purchase Price may be in the form of the exchange of outstanding
promissory notes issued by the Company.



          2.5. Debentures. Subject to the conditions of this Section 2.5, the Parties
have agreed that Persons listed in Appendix III (each, a “Debenture Holder”) may become
parties to this Agreement as “Investors” for the purpose of purchasing Series A Preferred Shares at
the Second Closing on the terms, and subject to the conditions, specified in this Agreement. The
Company shall provide written notice to each Debenture Holder, at such Debenture Holder’s address
listed in Appendix III, as to (i) the date scheduled for the Second Closing, (ii) the
opportunity for such Debenture Holder to become a party to this Agreement as an “Investor” in
accordance with this Section and (iii) the manner and deadline for accepting such opportunity (as
described in the next sentence), which notice shall include a copy of the agreement described in
the next sentence. If any such Debenture Holder shall determine to become a party to this
Agreement as an “Investor,” then such Debenture Holder shall, at least five business days prior to
the scheduled date for the Second Closing, deliver to the Company and to special counsel for the
Investors an agreement wherein such Debenture Holder (1) shall agree to observe and to be bound by,
and to be entitled to the rights provided by, this Agreement as if such Debenture Holder were named
herein originally as an “Investor,” (2) shall confirm the aggregate consideration to be paid by
such Person for Series A Preferred Shares at the Second Closing, which consideration shall be paid
by tendering an equivalent principal amount of the debentures identified opposite such Person’s
name in Appendix III, together with such number of warrants as is associated with the
tendered principal amount of debentures (with each $5,000 aggregate principal amount of debentures
being associated with warrants to acquire 1,000 shares of



10









 







Common Stock), (3) shall confirm such Person’s agreement to deliver the agreed portion of the
tendered principal amount of the debentures and associated warrants at the Second Closing against
the delivery of the Series A Preferred Shares and (4) shall make the representations contained in
Article VIII. Notwithstanding the foregoing, the ability of the Debenture Holders to
become a party to this Agreement shall be limited to no more than $600,000 aggregate principal
amount of debentures of all such Debenture Holders so electing to participate, with the right of
the Company in its sole discretion to allocate among such Debenture Holders as necessary in order
to meet such limitation.



ARTICLE III




CONDITIONS OF THE INVESTORS’ OBLIGATIONS




          3.1. First Closing. The obligation of an Investor to purchase Series A Preferred
Shares at the First Closing is subject to the fulfillment to the satisfaction of such Investor at
or prior to the First Closing of each of the following conditions:



          (a) Each of the representations and warranties of the Company contained in Article VII
shall be true, correct and complete on and as of the First Closing Date as though then made.



          (b) All covenants, agreements and conditions contained in this Agreement to be performed or
complied with by the Company on or prior to the First Closing Date shall have been performed or
complied with.



          (c) On or prior to the First Closing Date, any authorizations, consents, approvals or permits
of any Governmental Authority that are required by law in connection with the lawful sale and
issuance of the Series A Preferred Shares, and the consummation of the transactions contemplated by
this Agreement and each of the Transaction Documents, shall have been duly obtained by the Company
and shall be effective on and as of the First Closing Date, except for any notice filings pursuant
to Regulation D under the Securities Act and pursuant to applicable state securities laws not
required to be made on or prior to the First Closing Date.



          (d) On or prior to the First Closing Date, the Company shall have delivered to special counsel
to the Investors copies of all consents and approvals of third parties required under all Contracts
to which the Company is a party or by which the Company or any of its assets or properties is
affected in connection with the execution, delivery or performance by the Company of this
Agreement, the Transaction Documents or any of the other agreements or documents contemplated
hereby (including waivers of all preemptive rights and rights of first refusal).



          (e) [Intentionally omitted.]



          (f) Effective as of the First Closing, the number of directors constituting the entire Board
of Directors of the Company shall have been fixed at no more than seven (7), and shall consist of
Brian Mayo, Thomas Cook, Doug Mello, Doug Frye, Vincent DeTurris, Robert Kennedy and Geoffrey
Stringer.



11









 





          (g) Such Investor shall have received the satisfactory review, by patent counsel selected by
the Investors, of the Intellectual Property Rights underlying the XT250.



          (h) Each other Investor shall have fulfilled its obligations to deliver its respective portion
of the First Purchase Price required to be delivered by it at the First Closing and to otherwise
close its investment in the Series A Preferred Stock.



          (i) The Company shall have delivered to special counsel to the Investors each of the
following:




     (i) Copy of the Certificate of Incorporation certified as of a recent date by the
Secretary of State of the State of Delaware;




     (ii) Certificate of good standing and certificate of status of the Company, as
applicable, issued as of a recent date by the Secretary of State of the States of Delaware
and Florida;




     (iii) Certificate of the Chief Executive Officer or the President of the Company, dated
the First Closing Date, to the effect that the conditions specified in Sections
3.1(a) through 3.1(f) have been satisfied fully;




     (iv) Certificate of the Secretary or an Assistant Secretary of the Company, dated the
First Closing Date, in form and substance reasonably satisfactory to special counsel to the
Investors, as to: (i) no amendments to the Certificate of Incorporation since the date of
certification referenced in subparagraph (i) above; (ii) the By-laws (which shall include
the provisions set forth in Exhibit E); (iii) the resolutions duly adopted by the
Board authorizing and approving, as appropriate, the execution, delivery and performance of
this Agreement and each of the Transaction Documents to which the Company is a party and the
transactions contemplated hereby and thereby, including the issuance, sale and delivery of
the Series A Preferred Shares and the reservation for issuance of the Conversion Common
Shares; (iv) resolutions duly adopted by the shareholders of the Company approving the
Certificate of Incorporation; and (v) the incumbency and signatures of the officers of the
Company authorized to execute and deliver this Agreement and any of the Transaction
Documents to which the Company is a party;




     (v) Indemnification Agreements in the form attached hereto as Exhibit F between
the Company and each member of the Board of Directors, including Robert Kennedy and Geoffrey
Stringer;




     (vi) Legal opinion of GY&S, outside counsel for the Company, dated the First Closing
Date, addressed to the Investors and in the form attached hereto as Exhibit G;




     (vii) Registration Rights Agreement, duly executed by the Company;




     (viii) Shareholders Agreement, duly executed by the Company, the Investors and the
holders of at least 75% of the outstanding shares of Common Stock of the Company (including
the directors, senior managers and founders of the Company) (for



12









 







purposes of determining such 75%, the Series A Preferred Shares issuable at the First
Closing shall be treated as the number of shares of Common Stock into which such shares may
be converted); and




     (ix) such other documents, instruments, approvals or opinions relating to the
transactions contemplated by this Agreement as the Investors or the Investors’ special
counsel may reasonably request.



          3.2. Second Closing. The obligation of an Investor to purchase Series A Preferred
Shares at the Second Closing is subject to the fulfillment to the satisfaction of such Investor at
or prior to the Second Closing of each of the following conditions:



          (a) Each of the representations and warranties of the Company contained in Article VII
shall be true, correct and complete in all material respects on and as of the Second Closing Date
as though then made, except for such representations and warranties which expressly speak as of a
certain date, which representations and warranties shall be true, correct and complete in all
material respects as of the date specified;



          (b) All covenants, agreements and conditions contained in this Agreement to be performed or
complied with by the Company on or prior to, or in connection with, the Second Closing Date shall
have been performed or complied with;



          (c) No Event of Noncompliance (as defined in the Certificate of Designations), or event which
with notice or lapse of time or both would constitute such an event, shall have occurred;



          (d) Since the date of the most recent financial statements provided to the Investors pursuant
to Section 5.1 of this Agreement, there shall not have been any effect, change or
development that, individually or in the aggregate with such other effects, changes or
developments, has had, or could reasonably be expected to have, a Material Adverse Effect;



          (e) The Company shall have performed and operated its business in accordance with the Business
Plan, and in addition shall have satisfied the following milestones:




     (i) At least eight (8) protoype units of the XT250 shall have been manufactured and
built by the Company and/or its third party manufacturer, Kimball Electronics Group, Inc.;




     (ii) At least three (3) field test units of the XT250 shall have been installed and in
operation at major distributors and/or customers, including the U.S. Drug Enforcement
Agency, Intelligent Decisions and Remetronix;




     (iii) Final, operable versions of the mechanical, hardware and software designs of the
XT250 production unit shall have been formally released by the Company and delivered to
Kimball Electronics Group, Inc.;




     (iv) The Company shall have obtained a certification relating to the XT250 from
Underwriters Laboratories, Inc.;



13









 






     (v) The Company shall have obtained necessary approval relating to the XT250 from the
Federal Communications Commission;




     (vi) The Company shall have established contractual relationships with at least eight
(8) distributors for the XT250, and shall have delivered copies of such contracts to the
Investors or their special counsel;




     (vii) The Company shall have developed and deployed a customer field service team
reasonably capable of supporting the number of XT250 production units sold and delivered to
customers, or reasonably anticipated to be sold and delivered to customers by December 31,
2007;




     (viii) The Company shall have sold and delivered to customers not fewer than 10
production units of the XT250, each at a price not materially less than that set forth in
the Business Plan;




     (ix) The Company shall have received a signed contract or purchase order, sold and
received the deposit for not fewer than 40 production units of the XT250 (including any
units described in paragraph (viii) above), each at a price not materially less than
that set forth in the Business Plan;




     (x) The Company shall have received bona-fide commitments from customers or prospective
customers for the purchase of not fewer than 60 production units of the XT250 (including any
units described in paragraphs (viii) and (ix) above), which commitments the
Company in good-faith expects will result in signed contracts or purchase orders, each unit
at a price not materially less than that set forth in the Business Plan




     (xi) completion of the planned MRI Phase 2 testing in a manner that satisfies the
objectives set forth in Appendix IV attached hereto; and



          (f) The Company shall have delivered to special counsel to the Investors each of the
following:




     (i) Copy of the Certificate of Incorporation certified as of a recent date by the
Secretary of State of the State of Delaware;




     (ii) Certificates of good standing and certificate of status of the Company, as
applicable, issued as of a recent date by the Secretary of State of the States of Delaware
and Florida;




     (iii) Certificate of the Chief Executive Officer or the President of the Company, dated
the Second Closing Date, to the effect that the conditions specified in Sections
3.2(a) through 3.2(e) have been satisfied fully;




     (iv) Certificate of the Secretary or an Assistant Secretary of the Company, dated the
Second Closing Date, in form and substance reasonably satisfactory to special counsel to the
Investors, as to: (i) no amendments to the Certificate of Incorporation



14









 







since the date of certification referenced in subparagraph (i) above; (ii) the By-laws;
and (iii) the resolutions duly adopted by the Board authorizing and approving, as
appropriate, the execution, delivery and performance of this Agreement and each of the
Transaction Documents to which the Company is a party and the transactions contemplated
hereby and thereby, including the issuance, sale and delivery of the Series A Preferred
Shares and the reservation for issuance of the Conversion Common Shares;




     (v) Legal opinion of GY&S, outside counsel for the Company, dated the Second Closing
Date, addressed to the Investors and substantially in the form attached hereto as
Exhibit H; and




     (vi) such other documents, instruments, approvals or opinions relating to the
transactions contemplated by this Agreement as the Investors or the Investors’ special
counsel may reasonably request.



          3.3. Waiver. (a) Any condition specified in this Article III may be waived
by an Investor if consented to in writing by such Investor; provided, however, that
in the event that an Investor declines to waive a condition specified in this Article III
(a “Non-Participating Investor”), the Company and the remaining Investors may elect to proceed with
the First Closing or the Second Closing, as the case may be, with the aggregate number of Series A
Preferred Shares purchased and sold on the First Closing Date or the Second Closing Date, as the
case may be, being reduced by the number of Series A Preferred Shares that otherwise would have
been purchased by the Non-Participating Investor, as set forth on Appendix I hereto;
provided that the remaining Investors may, in their sole discretion, elect to purchase, pro
rata or otherwise, the Series A Preferred Shares that otherwise would have been purchased by the
Non-Participating Investor; and the Non-Participating Investor shall be deemed removed from this
Agreement and all other Transaction Agreements, if such non-participation occurs at the First
Closing, and the Non-Participating Investor shall be deemed removed from the Second Closing, if
such non-participation only occurs at the Second Closing.



          (b) In the event that (i) either or both of the conditions specified in Sections
3.1(a) or 3.1(b) is waived in writing by an Investor in connection with the First
Closing or (ii) either or both of the conditions specified in Sections 3.2(a) or
3.2(b) is waived in writing by an Investor in connection with the Second Closing, such
waiver shall serve as a waiver of such Investor’s (but not any other Investor’s) rights or remedies
against the Company for any claims or losses based solely on such waived condition not being
satisfied at the applicable Closing, but shall not constitute a waiver by such Investor of any
rights or remedies accruing to such Investor thereafter.



          3.4. Default by an Investor. If:




     (a) all of the conditions set forth in Section 3.2 have been satisfied in full
by the Company and




     (b) one or more Investors defaults in its or their obligation to purchase the Series A
Preferred Shares for which it or they are obligated to purchase at the Second Closing under
this Agreement (the “Defaulted Shares”), as a result of which the



15









 







Company will not receive at least $2,000,000 of gross proceeds from the sale of Series
A Preferred Shares at the Second Closing,


then the non-defaulting Investors may, in their sole discretion, elect to purchase, pro rata or
otherwise, any or all of the Defaulted Shares in such amounts as may be agreed upon among the
remaining Investors and the time for the Second Closing shall be extended in order to accommodate
any changes in the number of Series A Preferred Shares to be purchased. No such election by the
non-defaulting Investors to purchase any portion of the Defaulted Shares shall relieve any
defaulting Investor from any claim for damages as a result of such Investor’s default. If, after
the election by the remaining Investors to purchase any of the Defaulted Shares, the Company will
not receive at least $2,000,000 of gross proceeds from the sale of Series A Preferred Stock at the
Second Closing, then, (i) the Company shall proceed with the Second Closing and issue the number of
Series A Preferred Shares (including any Defaulted Shares) that the non-defaulting Investors have
agreed to purchase at the Second Closing and (ii) the Company may seek to raise an amount equal to
the difference between (x) $2,000,000 and (y) the gross proceeds received from the sale of the
Series A Preferred Stock at the Second Closing by issuing equity securities on or prior to December
15, 2007; provided that if such equity securities have terms (including all related
agreements) more favorable than the Series A Preferred Shares (to the extent allowed in the
Certificate of Designations), then the Company shall offer the non-defaulting Investors the
opportunity (which shall be made in writing and shall be held open for at least 30 days (or such
shorter period as the non-defaulting Investors shall agree)) to purchase such securities.




ARTICLE IV




CONDITIONS OF THE COMPANY’S OBLIGATIONS




          4.1. First Closing. The obligation of the Company to issue, sell and deliver the
Series A Preferred Shares at the First Closing is subject to the fulfillment to the reasonable
satisfaction of the Company at or prior to the First Closing of each of the following conditions:



          (a) Each of the representations and warranties of the Investors contained in Article
VIII shall be true, correct and complete on and as of the First Closing Date as though then
made.



          (b) The Investors shall have delivered to the Company each of the following:




     (i) the First Purchase Price in accordance with Section 2.4;




     (ii) Registration Rights Agreement, duly executed by each Investor; and




     (iii) Shareholders Agreement, duly executed by each Investor.



          4.2. Second Closing. The obligation of the Company to issue, sell and deliver the
Series A Preferred Shares at the Second Closing is subject to the fulfillment to the reasonable
satisfaction of the Company at or prior to the Second Closing of the following condition:



16









 





          (a) Except as provided in Section 3.4, the Investors shall have delivered the Second
Purchase Price in accordance with Section 2.4; and



          (b) Each of the representations and warranties of the Investors contained in Article
VIII shall be true, correct and complete in all material respects on and as of the Second
Closing Date as though then made, except for such representations and warranties which expressly
speak as of a certain date, which representations and warranties shall be true, correct and
complete in all material respects as of the date specified.



          4.3. Waiver. Any condition specified in this Article IV may be waived if
consented to in writing by the Company.



ARTICLE V




COVENANTS




          5.1. Financial Statements and Other Information. (a) The Company shall deliver to the
Investors and each other holder of Series A Preferred Shares or Conversion Common Shares:




     (i) as soon as available but in any event within 30 days after the end of each monthly
accounting period in each fiscal year (other than the third monthly accounting period in
each fiscal quarter), unaudited statements of income and cash flows of the Company for such
monthly period and for the period from the beginning of the fiscal year to the end of such
month, and an unaudited balance sheet of the Company as of the end of such monthly period,
setting forth in each case comparisons to the Company’s annual budget and to the
corresponding period in the preceding fiscal year, and all such statements shall be prepared
in accordance with GAAP, subject to the absence of footnote disclosures and to normal
year-end adjustments, and shall be certified by the Company’s Chief Financial Officer;




     (ii) as soon as available but in any event within 45 days after the end of each fiscal
quarter in each fiscal year (other than the fourth fiscal quarter of each year), unaudited
statements of income and cash flows of the Company for such fiscal quarter and for the
period from the beginning of the fiscal year to the end of such fiscal quarter, and an
unaudited balance sheet of the Company as of the end of such fiscal quarter, setting forth
in each case comparisons to the Company’s annual budget and to the corresponding period in
the preceding fiscal year, and all such statements shall be prepared in accordance with
GAAP, subject to the absence of footnote disclosures and to normal year-end adjustments, and
shall be certified by the Company’s Chief Financial Officer;




     (iii) as soon as available but in any event within 90 days after the end of each fiscal
year, audited statements of income and cash flows of the Company for such fiscal year, and
an audited balance sheet of the Company as of the end of such fiscal year prepared in
accordance with GAAP, and accompanied by, with respect to the consolidated portions of such
statements, an opinion of an independent accounting firm



17









 







of recognized regional standing selected by the Board and reasonably acceptable to a
majority of the Investors, together with comparisons to the Company’s annual budget and to
the preceding fiscal year;




     (iv) accompanying the financial statements referred to in subparagraphs (ii) and (iii),
an officer’s certificate stating that there is no event in existence that, with notice or
the passage of time or both, might become an Event of Noncompliance or, if any such event
exists, specifying the nature and period of existence thereof and what actions the Company
has taken or has proposed to take with respect thereto;




     (v) promptly upon receipt thereof, any additional reports, management letters or other
detailed information concerning significant aspects of the Company’s operations or financial
affairs given to the Company by its independent accountants (and not otherwise contained in
other materials provided hereunder); and




     (vi) within 10 days after transmission thereof, copies of all financial statements,
proxy statements, reports and any other general written communications that the Company
sends to its shareholders and copies of all press releases and other statements made
available generally by the Company to the public concerning material developments in the
Company’s business and not otherwise posted on the Company’s external website;


provided that any Investor or holder of Series A Preferred Shares or Conversion Common
Shares shall be entitled to provide notice to the Company that it elects not to receive copies of
the financial statements and other documentation referred to in this Section 5.1(a); and
provided further that the Company shall be entitled to satisfy its obligations under this
Section 5.1(a) through electronic delivery of the financial statements and other
documentation referred to in this Section 5.1(a) or by making such information available
through a password-protected website.




          (b) Each of the financial statements referred to in subparagraphs (i), (iii) and (iv) shall
fairly present in all material respects the financial condition of the Company as of the dates and
for the periods stated therein, subject in the case of the unaudited financial statements to
changes resulting from normal year-end adjustments (none of which would, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect).



          5.2. Inspection Rights. The Company shall permit each holder of Series A Preferred
Shares or Conversion Common Shares or its representative, upon reasonable notice and during normal
business hours and at such other times as such holder may reasonably request, to (i) visit and
inspect any of the properties of the Company and its Subsidiaries, (ii) examine the corporate and
financial records of the Company and its Subsidiaries and make copies thereof or extracts therefrom
(subject to the obligations set forth in Section 7.5 of the Shareholders Agreement) and
(iii) discuss the affairs, finances and accounts of the Company and its Subsidiaries with the
directors, officers and auditors of the Company (it being agreed that this provision shall
constitute permission by the Company granted to such auditors to discuss the affairs, finances and
accounts of the Company and its Subsidiaries with such holder in accordance with the terms hereof).



18









 





          5.3. Fiscal Year. The Company shall maintain, and shall cause each of its
Subsidiaries to maintain, a fiscal year ending on December 31.



          5.4. Insurance. The Company shall, and shall cause each of its Subsidiaries to,
maintain or cause to be maintained with nationally recognized insurers, insurance with respect to
its properties and businesses and the properties and businesses of its Subsidiaries against loss or
damage as may be required by law or as is customary for companies similarly situated and which
reflects the Company’s reasonable and good-faith business judgment as to the types and amounts of
insurance that should be carried in light of conditions in the insurance industry, and upon request
provide a holder of Series A Preferred Shares or Conversion Common Shares with evidence of the
same. The insurance coverage of the Company and its Subsidiaries shall be evaluated annually by
the Board.



          5.5. Tax Matters. The Company will, and will cause each of its Subsidiaries to, pay
or cause to be paid all Taxes levied upon any of its properties or assets or those of its
Subsidiaries or in respect of its or their respective franchises, businesses, income or profits
before the same become delinquent, except (i) that (unless and until foreclosure, sale or other
similar proceedings shall have been commenced) no such charge need be paid if being contested in
good faith and by appropriate proceedings promptly initiated and diligently conducted if (x) such
reserve or other appropriate provision, if any, as shall be required by sound accounting practice
shall have been made therefor, and (y) no property or assets are in imminent danger of forfeiture
and (ii) for such failures to pay or cause to pay which, individually or in the aggregate, could
not reasonably be expected to have a Material Adverse Effect. The Company will withhold all
amounts for Taxes required to be withheld by it under Requirements of Law. The Company will treat
the Series A Preferred Shares and the Conversion Common Shares as stock of the Company for federal,
state and local income tax purposes (except to the extent different treatment were to be required
by law).



          5.6. Payment of Indebtedness. The Company shall, and cause each of its Subsidiaries
to, pay all Indebtedness of the Company and each of its Subsidiaries aggregating at least $100,000
as and when the same shall become due and payable (subject to any applicable grace periods).



          5.7. Compliance With Laws; Obligations. The Company shall, and shall cause each of
its Subsidiaries to, comply with all applicable Requirements of Laws and with all contracts and
agreements to which it is a party or shall become a party the violation of which Requirements of
Laws, contracts or agreements, individually or in the aggregate, could reasonably be expected to
have a Material Adverse Effect, and the Company shall perform, and shall cause each of its
Subsidiaries to perform, all obligations which it has or shall incur, the violation or lack of
performance of which, individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect.



          5.8. Preservation of Corporate Existence and Property. The Company shall, and shall
cause each of its Subsidiaries to, preserve and maintain (i) its corporate existence, (ii) its
rights, franchises and privileges and (iii) all its assets and properties in adequate working order
and condition, with the exception of (x) ordinary wear and tear, (y) casualty losses covered by
insurance or where the failure to be so fully covered did not constitute a breach of Section
5.4
and (z) as otherwise approved by the Board.



19









 





          5.9. Directors’ Expenses and Indemnity. The Company shall (i) reimburse each of its
directors who is elected as a director solely or in part by the holders of Series A Preferred
Shares and Conversion Common Shares for the reasonable out-of-pocket expenses incurred by such
director in attending meetings of the Board or any committee thereof and (ii) enter into an
Indemnification Agreement with each such director substantially in the form of Exhibit G.



          5.10. Board of Directors. The Company shall hold meetings, in person or via telephone
conference call, or any combination thereof as permitted by the By-laws, of its Board not less
often than once each fiscal quarter.



          5.11. Board of Directors of Subsidiaries; Audit and Compensation Committees. (a) The
Company shall cause the Board of Directors of each Subsidiary of the Company to be the same as the
Board, in accordance with the terms of the Shareholders Agreement.



          (b) If the Board establishes and maintains an audit committee, such audit committee shall have
delegated to it all power of the Board to carry out the customary duties of an audit committee.
Any such audit committee shall be composed of three members, including one Investor Director (who
shall be designated by the Investors holding a majority of the outstanding Series A Preferred
Shares and the Conversion Common Shares, voting as a single class on a common share equivalent
basis), unless otherwise determined by the Board, including a majority of the Investor Directors.



          (c) The Board shall establish and maintain a compensation committee which shall recommend to
the Board for its approval the compensation of the senior management of the Company and each
Subsidiary of the Company (including any stock option grants, bonus levels and all other decisions
relating to the administration of any stock option or bonus agreement or program). The
compensation committee shall be composed of three members, including one Investor Director (who
shall be designated by the Investors holding a majority of the outstanding Series A Preferred
Shares and the Conversion Common Shares, voting as a single class on a common share equivalent
basis), unless otherwise determined by the Board, including a majority of the Investor Directors.



          5.12. Use of Proceeds. The Company shall use the proceeds of the sale of the Series A
Preferred Shares to provide for the repayment of indebtedness and other general corporate purposes;
provided that (i) any repayment of indebtedness due to Affiliates shall not exceed $450,000 and
(ii) the Company shall repay its indebtedness due to James J. Lowrey (or an entity controlled by
such individual) in an aggregate principal amount of $50,000 (plus interest thereon). The Company
agrees that it shall not, and it shall not permit any of its Subsidiaries to, use, directly or
indirectly, any of the proceeds from the sale of the Series A Preferred Shares for the purpose,
whether immediate, incidental or ultimate, of “purchasing or carrying margin stock” within the
meaning of Regulations G, U and X of the Board of Governors of the Federal Reserve System, as
amended from time to time.



20









 





          5.13. Regulatory Compliance Cooperation.



          (a) If any Investor determines that it has a Regulatory Problem, the Company shall take all
such actions as are reasonably requested by such Investor (a “Requesting Investor”) in order to (i)
effectuate and facilitate any transfer by such Investor of any securities of the Company then held
by such Investor, (ii) permit such Investor (or any Affiliate of such Investor) to exchange all or
any portion of the voting equity then held by such Investor on a share-for-share basis for shares
of a class of nonvoting equity of the Company, which nonvoting equity shall be identical in all
respects to such voting equity, except that such nonvoting equity shall be convertible into voting
equity on such terms as are requested by such Investor in light of regulatory considerations then
prevailing, and (iii) amend this Agreement, the Certificate of Incorporation and other related
agreements to effectuate and reflect the foregoing. Such actions may include:




     (i) entering into such additional agreements as are requested by such Investor to
permit any Person(s) designated by such Investor to exercise any voting power that is
relinquished by such Investor upon any exchange of Common Stock for nonvoting common stock
of the Company; and




     (ii) entering into such additional agreements, adopting such amendments to the
Certificate of Incorporation and By-laws and taking such additional actions as are
reasonably requested by such Investor in order to effectuate the intent of the foregoing.



          (b) For purposes of this Agreement, a “Regulatory Problem” means any set of facts or
circumstances wherein it has been asserted by any governmental regulatory agency (or any Investor
believes that there is a substantial risk of such assertion) that such Investor and its Affiliates
are not entitled to hold, or exercise any significant right with respect to, the Series A Preferred
Shares or the Conversion Common Shares. The Requesting Investor shall pay all expenses and costs,
including the Company’s reasonable expenses and costs, incurred in connection with a Regulatory
Problem.



          5.14. Reservation of Common Stock. The Company shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for the purpose of
issuance upon the conversion or redemption of the Series A Preferred Shares, such number of shares
of Common Stock issuable upon the conversion or redemption of all outstanding Series A Preferred
Shares. All shares of Common Stock which are so issuable shall, when issued, be duly and validly
issued, fully paid and nonassessable and free from all Taxes and Liens other than those created by
the holder of such shares of Common Stock.



          5.15. Certain Insurance Coverage. (a) The Company shall at all times maintain in
full force and effect the key-man life insurance policies on the lives of each of Brian Mayo and
William Mayo in an aggregate face amount of not less than $1,000,000 for each such policy, and the
Company shall at all times be named as the beneficiary under each such policy.



          (b) (i) As promptly as practicable after the First Closing (but in any event within 15 days
after the First Closing Date), the Company will submit an application to obtain a



21









 







directors and officers insurance and indemnification policy providing coverage in amounts
deemed appropriate by a majority of the independent directors of the Board.




     (ii) The Company shall use its best efforts to obtain, as promptly as practicable after
the First Closing (but in any event within 60 days after the First Closing Date), such
directors and officers insurance and indemnification policy.



          5.16. Shareholders Agreement. The Company agrees to cause each Person who acquires
shares of capital stock of the Corporation after the date hereof to execute a joinder to the
Shareholders Agreement in which such Person agrees to be bound by all of the terms and conditions
of the Shareholders Agreement.



          5.17. Termination of Covenants. The covenants set forth in this Article V
shall terminate and be of no further force or effect (a) as to a holder of Series A Preferred
Shares or Conversion Common Shares, if such holder (together with its Affiliates) holds an
aggregate of less than 6,575 Series A Preferred Shares and Conversion Common Shares (as adjusted to
reflect stock splits, stock dividends, stock combinations, recapitalizations and like occurrences)
and (b) as to all holders of Series A Preferred Shares or Conversion Common Shares, upon the
consummation of a Qualified IPO, provided that if the Company is no longer required to file
periodic reports under the Securities Exchange Act, the covenants set forth in this Article
V will again become effective.



ARTICLE VI




TRANSFER OF RESTRICTED SECURITIES




          6.1. General Provisions. Restricted Securities are transferable only pursuant to (a)
public offerings registered under the Securities Act, (b) Rule 144 or Rule 144A of the SEC (or any
similar rule or rules then in force) if such rule is available and (c) any other legally available
means of transfer (including, if applicable, in accordance with the terms of the Shareholders
Agreement), which may include an opinion of counsel reasonably satisfactory to the Company of the
legality of such transfer. Notwithstanding the foregoing, the Restricted Securities are subject to
certain restrictions on transfer as set forth in the Shareholders Agreement.



          6.2. Rule 144A. Upon the request of any Investor, the Company shall promptly supply
to such Investor or its prospective transferees all information regarding the Company required to
be delivered in connection with a transfer pursuant to Rule 144 or Rule 144A under the Securities
Act.



          6.3. Legend. Each certificate or instrument representing Restricted Securities shall
be imprinted with a legend, among other legends, in substantially the form required by Section
7.4 of the Shareholders Agreement.



          6.4. Legend Removal. If any Restricted Securities become eligible for sale pursuant
to Rule 144(k) under the Securities Act, the Company shall, upon the request of the holder of such
Restricted Securities, remove the legend set forth in Section 7.4 of the Shareholders
Agreement from the certificates for such Restricted Securities.



22









 





ARTICLE VII




REPRESENTATIONS AND WARRANTIES OF THE COMPANY




          As an inducement to the Investors to enter into this Agreement and to purchase the Series A
Preferred Shares, and except as set forth on the Disclosure Schedule attached hereto specifically
identifying the Section of this Article VII to which such exception relates (which in each
case shall constitute the sole representation and warranty as to which such exception shall apply),
the Company hereby represents and warrants to the Investors and agrees as follows:



          7.1. Organization, Qualifications and Corporate Power. (a) The Company and each of
its Subsidiaries is a corporation duly organized, validly existing and in good standing under the
laws of the State of its organization. The Company and each of its Subsidiaries has full legal and
corporate power and authority to own or lease and to operate and use its properties and assets and
to carry on its business as now conducted and as proposed to be conducted by it. The Company and
each of its Subsidiaries is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction in which the business it is conducting, or the operation, ownership
or leasing of its properties, makes such qualification necessary, other than in such jurisdictions
where the failure to be so qualified, individually or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect. Schedule 7.1(a) sets forth for the Company and
each of its Subsidiaries their respective states of incorporation and the other jurisdictions in
which they are qualified to do business as a foreign corporation. No other jurisdiction has
demanded, requested or otherwise indicated that the Company or any of its Subsidiaries is required
to so qualify.



          (b) The Company has full legal and corporate power and authority (i) to execute, deliver and
perform this Agreement and each of the Transaction Documents, (ii) to issue, sell and deliver the
Series A Preferred Shares and the Conversion Common Shares and (iii) to carry out fully and perform
its obligations under the terms hereof and thereof.



          (c) True and complete copies of the certificate of incorporation, as amended to date, of the
by-laws, as amended to date, and of the minute books and stock ledger of the Company and each of
its Subsidiaries have been delivered to the Investors (or to counsel for the Investors). The
Company and each of its Subsidiaries are in compliance in all material respects with all of the
terms and provisions of their respective organizational documents. The Company has made available
to the Investors complete and accurate copies of all (i) minute books of the Company and each of
its Subsidiaries and (ii) resolutions adopted by the directors and shareholders since the
organization of the Company and each of its Subsidiaries, as the case may be. The stock ledgers of
the Company and each of its Subsidiaries are complete and accurate in all respects.



          7.2. Authorization; No Conflicts. (a) Except as set forth in Schedule 7.2,
the execution, delivery and performance of this Agreement and each of the Transaction Documents,
and the issuance, sale and delivery of the Series A Preferred Shares and the Conversion Common
Shares, have been duly authorized and approved by all requisite corporate action of the Company.
This Agreement has been duly authorized, executed and delivered by the Company and (assuming the
due execution and delivery hereof by each of the Investors) is the valid and



23









 







binding obligation of the Company enforceable in accordance with its terms, and each of the
Transaction Documents to which the Company is a party has been duly authorized by the Company and,
upon execution and delivery by the Company and (assuming the due execution and delivery thereof by
each of the other parties thereto), will be a valid and binding obligation of the Company
enforceable in accordance with its respective terms, in each case subject to (i) bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the enforcement thereof or
by general equitable principles, (ii) laws relating to the availability of specific performance,
injunctive relief or other equitable remedies and (iii) to the extent any indemnification
provisions may be limited by applicable federal or state securities laws.



          (b) Except as set forth in Schedule 7.2, neither the execution and delivery of this
Agreement or any of the Transaction Documents or the consummation of any of the transactions
contemplated hereby or thereby nor compliance with or fulfillment of the terms, conditions and
provisions hereof or thereof will:




     (i) conflict with, result in a breach of the terms, conditions or provisions of, or
constitute a default, an event of default or an event creating rights of acceleration,
termination or cancellation or a loss of rights under, or result in the creation or
imposition of any Lien upon any of the assets or properties of the Company or any of its
Subsidiaries, under (A) their respective organizational documents, (B) any note, instrument,
contract, agreement, mortgage, lease, license, franchise, permit or other authorization,
right, restriction or obligation to which the Company or any of its Subsidiaries is a party
or any of their respective assets or properties is subject or by which the Company or any of
its Subsidiaries is bound, (C) any Court Order to which the Company or any of its
Subsidiaries is a party or any of their respective assets or properties is subject or by
which the Company or any of its Subsidiaries is bound, or (D) any Requirements of Laws
affecting the Company, any of its Subsidiaries or any of their respective assets or
properties, except for, in the case of this clause (D), any matters that, individually or in
the aggregate, could not reasonably be expected to have a Material Adverse Effect; or




     (ii) require the approval, consent, authorization or act of, or the making by the
Company or any of its Subsidiaries of any declaration, filing or registration with, any
Person, except for any notice filings required to be made pursuant to Regulation D under the
Securities Act and pursuant to applicable state securities laws.



          7.3. Subsidiaries and Investments. The Company does not have and never has had any
Subsidiaries. The Company does not, directly or indirectly, (i) own of record or beneficially or
hold the right to acquire any outstanding voting securities or other equity interests in any Person
or (ii) control or direct the operations of any Person.



          7.4. Authorized Capital Stock. (a) As of the First Closing, the authorized capital
stock of the Company consists solely of (i) ten million (10,000,000) shares of Common Stock, of
which 1,696,284 shares are issued and outstanding; and (ii) three million (3,000,000) shares of
preferred stock, $.0001 par value per share, of which 2,250,000 shares have been designated as
Series A Preferred Shares and 962,101 shares are issued and outstanding. The Company has reserved
for issuance (x) sufficient shares of Common Stock for issuance upon



24









 







conversion or redemption of all outstanding or authorized Series A Preferred Shares and (y)
2,100,00 shares of Common Stock upon exercise of options pursuant to its 2004 Stock Option
Incentive Plan. Immediately after the First Closing, the capitalization of the Company shall be as
set forth in the Capitalization Schedule attached to Schedule 7.4, which Capitalization
Schedule and Schedule 7.4 (i) reflects the capitalization of the Company both on an actual
shares outstanding basis and on a fully diluted basis assuming conversion of all convertible
securities and the exercise of all outstanding options and warrants and all options reserved for
future grant under any stock option plans and (ii) sets forth (A) each outstanding option, warrant
or other right to purchase shares of capital stock of the Company or any of its Subsidiaries and
(B) for each such option, warrant or right, the holder thereof, the date of grant, the exercise
price and the number of shares subject thereto.



          (b) Except as set forth in Schedule 7.4, no Person is entitled to any pre-emptive
right or right of first refusal with respect to the issuance of any Series A Preferred Shares,
except as contemplated by the Shareholders Agreement. There are no outstanding pre-emptive rights,
options, warrants, conversion rights, agreements or other rights to purchase any of the authorized
but unissued capital stock of the Company or any of its Subsidiaries or any securities convertible
or exchangeable into any capital stock of the Company or any of its Subsidiaries, other than (i)
those issued, reserved or committed to be issued pursuant to this Agreement, (ii) those
contemplated by the Shareholders Agreement and (iii) those set forth in the Capitalization
Schedule.



          (c) Neither the Company nor any of its Subsidiaries is a party to any agreement with the
holder of any of its securities that requires the Company or any of its Subsidiaries to purchase
any of such securities from their holder under any circumstances, except for the redemption rights
of the Series A Preferred Shares contemplated by the Certificate of Incorporation.



          (d) Except as set forth in the Shareholders Agreement or the Certificate of Incorporation,
neither the Company nor any of its Subsidiaries is a party or subject to any agreement or
understanding, and neither the Company nor any of its Subsidiaries has received any written notice
of any agreement or understanding between any Persons, that affects or relates to the voting or
giving of written consents with respect to any of the capital stock of the Company or any of its
Subsidiaries.



          (e) All outstanding securities of the Company and each of its Subsidiaries were issued in
compliance with all federal and state securities laws.



          (f) Neither the Company nor any of its Subsidiaries has registered any securities under the
Securities Act or the Securities Exchange Act. Except as provided in the Registration Rights
Agreement, neither the Company nor any of its Subsidiaries is presently under any obligation or has
granted any rights to register any of its securities under the Securities Act.



          (g) The Series A Preferred Shares, when issued, sold and delivered in accordance with the
terms of this Agreement, will be duly and validly issued, fully paid, non-assessable and free and
clear of all Liens except any created by or through the holder thereof, and



25









 







will be free of restrictions on transfer other than restrictions on transfer under this
Agreement and the Shareholders Agreement and under applicable state and federal securities laws,
and will be issued in compliance with all state and federal securities laws.



          (h) The Conversion Common Shares issuable upon conversion or redemption of the Series A
Preferred Shares have been duly and validly reserved for issuance and, upon issuance in accordance
with the conversion or redemption provisions of the Series A Preferred Shares, will be duly and
validly issued, fully paid, non-assessable and free and clear of all Liens except any created by or
through the holder thereof, and will be free of restrictions on transfer other than restrictions on
transfer under this Agreement and the Shareholders Agreement and under applicable state and federal
securities laws, and will be issued in compliance with all state and federal securities laws then
in effect.



          7.5. Financial Statements. Schedule 7.5 contains the unaudited balance sheet
of the Company as of December 31, 2006 (the “Latest Balance Sheet”) and the related statements of
income and cash flow (or the equivalent) for the twelve-month period then ended. Each of the
foregoing financial statements has been prepared in accordance with GAAP. The foregoing financial
statements present fairly the consolidated financial position, results of operations and cash flows
of the Company and its Subsidiaries as of December 31, 2006 and for the year then ended.



          7.6. Absence of Undisclosed Liabilities. Except as set forth in Schedule 7.6,
neither the Company nor any of its Subsidiaries is subject to any liability (including unasserted
claims), whether known or unknown, whether absolute, contingent, accrued or otherwise, that is not
shown or which is in excess of amounts shown or reserved for in the Latest Balance Sheet, other
than liabilities reasonably incurred after the date of the Latest Balance Sheet in the ordinary
course of business consistent with past practice.



          7.7. No Material Adverse Effect. Except as set forth in Schedule 7.7, since
the date of the Latest Balance Sheet, there has not been any effect, change or development that,
individually or in the aggregate with such other effects, changes or developments, has had, or
could reasonably be expected to have, a Material Adverse Effect.



          7.8. Events Subsequent to the Date of the Latest Balance Sheet. Except as set forth
in Schedule 7.8 or as contemplated by the terms of this Agreement or the Transaction
Documents, since the date of the Latest Balance Sheet, the Company and each of its Subsidiaries
have conducted their respective businesses only in the ordinary course of business consistent with
past practice and, without limiting the generality of the foregoing, neither the Company nor any of
its Subsidiaries has:




     (a) issued any notes or other debt securities or any equity securities or any
securities convertible, exchangeable or exercisable into any equity securities (except in
connection with the transactions contemplated hereby), or borrowed any amount or incurred or
become subject to any liabilities, except current liabilities incurred in the ordinary
course of business consistent with past practice;



26









 






     (b) discharged or satisfied any Lien or incurred or paid any obligation or liability
(including the settlement of any claims and litigation against the Company or any of its
Subsidiaries), other than current liabilities shown on the Latest Balance Sheet and current
liabilities incurred since the date of the Latest Balance Sheet in the ordinary course of
business consistent with past practice;




     (c) declared or made any payment or distribution of cash or other property to its
shareholders with respect to its capital stock or purchased or redeemed any shares of its
capital stock (including any warrants, options or other rights to acquire its capital
stock);




     (d) mortgaged or pledged any of its properties or assets or subjected them to any Lien,
except Permitted Liens;




     (e) sold, assigned, transferred or otherwise disposed of any of its tangible assets,
except in the ordinary course of business consistent with past practice, or canceled any
debts owed to or claims held by the Company or any of its Subsidiaries (including the
settlement of any claims or litigation);




     (f) sold, assigned, transferred or otherwise disposed of, or granted any license with
respect to, any patents or patent applications, trademarks, service marks, trade names,
corporate names, copyrights or copyright registrations, trade secrets or other intangible
assets;




     (g) acquired any real property or undertaken or committed to undertake capital
expenditures exceeding $50,000 in the aggregate;




     (h) delayed or accelerated payment of any account payable or other liability of the
Company or any of its Subsidiaries beyond or in advance of its due date or the date when
such liability would have been paid in the ordinary course of business consistent with past
practice;




     (i) made any change in any compensation payable to any officer or employee of the
Company or any of its Subsidiaries or in any profit-sharing, bonus, incentive, deferred
compensation, insurance, pension, retirement, medical, hospital, disability, welfare or
other benefits made available to officers or employees of the Company or any of its
Subsidiaries;




     (j) except as required by GAAP, made any change in the accounting principles and
practices used by the Company from those applied in the preparation of the Latest Balance
Sheet and the related statements of income and cash flow for the period ended on the date of
the Latest Balance Sheet;




     (k) made any loans or advances to, guarantees for the benefit of, or any Investments
in, any Person in excess of $25,000 in the aggregate;




     (l) taken any steps to incorporate, form or establish any Subsidiary; or



27









 






     (m) entered into or become committed to enter into any other material transaction other
than in the ordinary course of business consistent with past practice.



          7.9. Title to Properties; Leasehold Interests. Except as set forth in Schedule
7.9:



          (a) The Company or its Subsidiaries has good and marketable title to the assets and properties
reflected on the Latest Balance Sheet or acquired since the date of the Latest Balance Sheet (other
than properties and assets disposed of in the ordinary course of business consistent with past
practice since the date of the Latest Balance Sheet), and all such properties and assets of the
Company or its Subsidiaries are free and clear of all Liens (other than Permitted Liens).



          (b) Each lease under which the Company or any of its Subsidiaries is a lessee of any property,
real or personal, is a valid and subsisting agreement with respect to the Company or its
Subsidiaries, as the case may be, and, to the Knowledge of the Company, with respect to the other
parties thereto, without any material default of the Company or any of its Subsidiaries thereunder
and, to the Knowledge of the Company, without any material default thereunder of any other party
thereto.



          (c) The Company or its Subsidiaries owns, or has a valid leasehold interest in, all the assets
or properties used in, or necessary for, the conduct of its respective business as presently
conducted.



          7.10. Tax Matters. (a) (i) The Company and each of its Subsidiaries has timely filed
all Tax Returns required to be filed by it; (ii) all such Tax Returns are complete and accurate in
all material respects, disclose all Taxes required to be paid by the Company or any of its
Subsidiaries for the periods covered thereby and have been prepared in compliance with all
applicable laws and regulations; (iii) the Company or its Subsidiaries has timely paid all Taxes
(whether or not shown on such Tax Returns) due and owing by it and has withheld and paid over to
the appropriate taxing authority all Taxes which it is required by law to withhold or to collect
for payment from amounts paid or owing to any employee, shareholder, creditor or other third party;
(iv) neither the Company nor any of its Subsidiaries has waived or been requested to waive any
statute of limitations in respect of Taxes which waiver is currently in effect; (v) neither the
Company nor any of its Subsidiaries is currently the beneficiary of any extension of time within
which to file any Tax Return; (vi) there is no action, suit, investigation, audit, claim or
assessment pending or, to the Knowledge of the Company, proposed or threatened with respect to
Taxes of the Company or any of its Subsidiaries, and no information related to Tax matters has been
requested by any foreign, federal, state or local taxing authority; (vii) there are no Liens for
Taxes upon the assets or properties of the Company or any of its Subsidiaries except Liens relating
to current Taxes not yet due; (viii) there are no material unresolved questions or claims
concerning the Company’s or any of its Subsidiaries’ Tax liability; and (ix) the Company is not and
has not been an S corporation.



          (b) Neither the Company nor any of its Subsidiaries is liable for the Taxes of another Person
in a material amount (i) under Treasury Regulation § 1.1502-6 (or comparable provisions of state,
local or foreign law), (ii) as a transferee or successor, (iii) by contract or



28









 







indemnity or (iv) otherwise. Neither the Company nor any of its Subsidiaries is a party to
any Tax sharing or indemnity agreements. Neither the Company nor any of its Subsidiaries has been
a member of any affiliated group as defined in Section 1504 of the Code that has filed a
consolidated return for federal income tax purposes (or any similar group under state, local or
foreign law). Neither the Company nor any of its Subsidiaries has made any payments, is obligated
to make payments or is a party to an agreement that could obligate it to make any payments that
would not be deductible under Section 280G of the Code.



          7.11. Contracts and Commitments. (a) Except as expressly contemplated by this
Agreement or as set forth in Schedule 7.11(a), neither the Company nor any of its
Subsidiaries is a party to or bound by any:




     (i) Contract for the employment of any officer, individual employee or other Person or
Contract relating to loans to officers, directors or Affiliates;




     (ii) Contract under which the Company or any of its Subsidiaries has advanced, loaned
or extended credit to any other Person amounts that in the aggregate exceed $10,000;




     (iii) Contract that provides for, or relates to, the incurrence by the Company or any
of its Subsidiaries of debt for borrowed money, other Indebtedness or the mortgaging,
pledging or otherwise placing a Lien on any material asset or material group of assets of
the Company or any of its Subsidiaries;




     (iv) Contract that provides for a guarantee of any obligation of any Person or provides
that the Company or any of its Subsidiaries must assume or become liable for any
Indebtedness of any Person;




     (v) Contract under which the Company or any of its Subsidiaries is lessee of or holds
or operates any property, real or personal, owned by any other Person;




     (vi) Contract under which the Company or any of its Subsidiaries is lessor of or
permits any third party to hold or operate any property, real or personal, owned or
controlled by the Company or any of its Subsidiaries;




     (vii) assignment, license, indemnification or agreement with respect to any intangible
property (including any Intellectual Property Rights);




     (viii) sales, distribution or franchise Contract;




     (ix) Contract that is not terminable by the Company or any of its Subsidiaries upon
less than 30 days notice without penalty and that involves consideration in excess of
$25,000 in any twelve-month period;




     (x) Contract that prohibits the Company or any of its Subsidiaries from freely engaging
in any business or competing anywhere in the world; or



29









 






     (xi) any other Contract that is material to the Company’s or any of its Subsidiaries’
operations or business prospects as currently contemplated.



          (b) Each of the Contracts listed in Schedule 7.11(a) (collectively, the “Material
Contracts”) constitutes a valid and binding obligation of the Company or, if applicable, one of its
Subsidiaries and, to the Knowledge of the Company, of each other party thereto and is in full force
and effect and (except for those Material Contracts that by their terms will expire prior to the
applicable Closing Date or are otherwise terminated prior to the applicable Closing Date in
accordance with the provisions hereof) will continue in full force and effect after the Closings,
in each case without breaching the terms thereof or resulting in the forfeiture or impairment of
any rights thereunder and without the consent, approval or act of, or the making of any filing
with, any other party. The Company and, if applicable, its Subsidiaries, have fulfilled and
performed their material obligations under each Material Contract, and neither the Company nor any
of its Subsidiaries is in, or alleged to be in, default under or breach of, nor is there or is
there alleged to be any basis for termination of, any Material Contract, and to the Knowledge of
the Company no other party to any of the Material Contracts has breached or defaulted thereunder,
and no event has occurred and no condition or state of facts exists that, with the passage of time
or the giving of notice or both, would constitute such a default or breach by the Company, any of
its Subsidiaries or, to the Knowledge of the Company, by any such other party. Neither the Company
nor any of its Subsidiaries has any present expectation or intention of not fully performing all
its obligations under each Material Contract, and the Company does not have Knowledge of any
anticipated breach by any other party to any Material Contract.



          (c) The Company has made available to the Investors a complete and correct copy of each of the
written Material Contracts and an accurate description of the material terms of each of the oral
Material Contracts.



          7.12. Intellectual Property Rights. (a) Schedule 7.12 contains a complete
and accurate list of all material (i) patented or registered Intellectual Property Rights owned or
used by the Company or any of its Subsidiaries, (ii) pending patent applications and applications
for registrations of other Intellectual Property Rights filed by the Company or any of its
Subsidiaries, (iii) unregistered trade names and corporate names owned or used by the Company or
any of its Subsidiaries and (iv) unregistered trademarks, service marks, copyrights, mask works and
computer software owned or used by the Company or any of its Subsidiaries, other than “off the
shelf” computer software. Schedule 7.12 also contains a complete and accurate list of all
exclusive licenses granted by the Company or any of its Subsidiaries to any third party with
respect to any Intellectual Property Rights and all licenses and other rights granted by any third
party to the Company or any of its Subsidiaries with respect to any Intellectual Property Rights,
in each case identifying the subject Intellectual Property Rights. Except as set forth on
Schedule 7.12, the Company or its Subsidiaries owns all right, title and interest to, or
has the right to use pursuant to a valid license, all Intellectual Property Rights necessary for
the operation of the business of the Company and its Subsidiaries as presently conducted and as
presently proposed to be conducted, free and clear of all Liens. Except as set forth on
Schedule 7.12, the loss or expiration of any Intellectual Property Right or related group
of Intellectual Property Rights owned or used by the Company or any of its Subsidiaries has not
had, and is not reasonably expected to have, a Material Adverse Effect, and no such loss or
expiration is threatened, pending or reasonably foreseeable.



30









 





          (b) Except as set forth in Schedule 7.12, (i) there have been no claims made against
the Company or any of its Subsidiaries asserting the invalidity, misuse or unenforceability of any
of the Intellectual Property Rights listed in Schedule 7.12, and, to the Knowledge of the
Company, there are no grounds for the same; (ii) neither the Company nor any of its Subsidiaries
has received any written notices of, and, to the Knowledge of the Company, there is not a
reasonable likelihood of, any infringement or misappropriation by, or conflict with, any third
party with respect to such Intellectual Property Rights (including any demand or request that the
Company or any of its Subsidiaries license any rights from a third party); (iii) the conduct of the
Company’s and its Subsidiaries’ business has not infringed, misappropriated or conflicted with and
does not infringe, misappropriate or conflict with any Intellectual Property Rights of other
Persons; and (iv) to the Knowledge of the Company, the Intellectual Property Rights owned by or
licensed to the Company or any of its Subsidiaries have not been infringed, misappropriated or
conflicted by other Persons. The transactions contemplated by this Agreement will not have, and
are not reasonably expected to have, a Material Adverse Effect on the Company’s or its
Subsidiaries’ right, title and interest in and to the Intellectual Property Rights listed in
Schedule 7.12.



          7.13. Compliance with Laws; Litigation. Except (i) for the matters covered by the
representations set forth in Sections 7.12, 7.15, 7.19, 7.20 and
7.23, as to which the representations in Sections 7.13(a) and (b) shall
not apply, and (ii) as set forth in Schedule 7.13:



          (a) The assets of the Company and its Subsidiaries and their uses comply with all applicable
Requirements of Laws and Court Orders, except where the failure to do so could not be reasonably
expected to have a Material Adverse Effect.



          (b) The Company and its Subsidiaries have complied with all Requirements of Laws and Court
Orders that are applicable to their respective assets or businesses, except where the failure to do
so could not be reasonably expected to have a Material Adverse Effect.



          (c) The Company and its Subsidiaries own, hold or possess all necessary permits, licenses,
franchises and other authorizations from a Governmental Authority required to conduct their
respective businesses substantially as conducted presently, except where the failure to do so could
not be reasonably expected to have a Material Adverse Effect; and neither the Company nor any of
its Subsidiaries is in default in any material respect under any such permit, license, franchise or
other authorization.



          (d) There are no civil, criminal, administrative or regulatory lawsuits, claims, suits,
proceedings, arbitrations or investigations pending or, to the Knowledge of the Company, threatened
against the Company or any of its Subsidiaries or affecting in any material respect its or their
properties or assets nor, to the Knowledge of the Company, is there any basis for any of the same,
and there are no lawsuits, claims or proceedings pending or threatened in which the Company or any
of its Subsidiaries is the plaintiff or claimant.



          (e) There are no civil, criminal, administrative or regulatory lawsuits, claims, suits,
proceedings, arbitrations or investigations pending or, to the Knowledge of the Company, threatened
against the executive officers of the Company or any of its Subsidiaries by reason of the past
employment relationship of any such officer.



31









 





          (f) To the Knowledge of the Company, no legislative or regulatory proposal or other proposal
for any change in any Requirement of Law, in each case which is specifically focused on the
industries in which the Company or any of its Subsidiaries operates, is pending which, if adopted,
could adversely affect the Company’s or its Subsidiaries ability to conduct their respective
businesses as currently conducted or planned to be conducted.



          7.14. Brokers. Neither the Company nor any of its Subsidiaries has any Contract with
any broker, finder or similar agent with respect to the transactions contemplated by this Agreement
for which the Company or any of its Subsidiaries shall have any liability or responsibility to such
broker, finder or similar agent.



          7.15. Governmental Approvals; No Registration. (a) Subject to the accuracy of the
representations and warranties of the Investors set forth in Article VIII, no permit,
consent, approval or authorization of, or registration or filing with, any Governmental Authority
is or will be required in connection with the execution, delivery and performance by the Company of
this Agreement or any of the Transaction Documents, or the issuance, sale and delivery of the
Series A Preferred Shares or the reservation for issuance of the Conversion Common Shares, or the
consummation by the Company of any other transactions contemplated hereby or thereby, other than
with respect to the Registration Rights Agreement, the registration of the shares covered thereby
with the SEC and filings pursuant to Regulation D under the Securities Act and state securities
laws.



          (b) Without limiting the generality of the foregoing, none of the Company, any director,
officer or employee of the Company prior to the date of either Closing or, to the Knowledge of the
Company, any other Person acting on its behalf has taken or will take any other action (including,
without limitation, any offer, issuance or sale of any security of the Company) under circumstances
which might require the integration of such security with the Series A Preferred Shares under the
Securities Act, in any such case so as to subject the offering, issuance or sale of any of the
Series A Preferred Shares to the registration provisions of the Securities Act.



          7.16. Insurance. The Company and its Subsidiaries have in full force and effect fire
and casualty insurance policies, with extended coverage, sufficient in amount (subject to
reasonable deductibles) to allow each of them to replace any of its properties that might be
damaged or destroyed. Neither the Company nor any of its Subsidiaries has any self-insurance or
co-insurance programs.



          7.17. Employees. To the Knowledge of the Company, no executive officer or key
employee of the Company or any of its Subsidiaries or any group of employees of the Company or any
of its Subsidiaries has any plans to terminate employment with the Company or any of its
Subsidiaries. The Company and each of its Subsidiaries has complied in all material respects with
all laws relating to the employment of labor (including provisions relating to wages, hours, equal
opportunity, collective bargaining and the payment of social security and other Taxes, and the
Employee Retirement Income Security Act of 1974, as amended (“ERISA”)), and, to the Knowledge of
the Company, neither the Company nor any of its Subsidiaries has any labor relations problems
(including any union organizational activities, threatened or actual strikes or work stoppages or
grievances). Neither the Company nor any of



32









 







its Subsidiaries is a party to or bound by any collective bargaining agreement or any other
Contract with any labor union. None of the Company, any of its Subsidiaries or, to the Knowledge
of the Company, any of its or their employees is subject to any noncompete, nondisclosure,
confidentiality, employment, consulting or similar agreements, affecting or in conflict with the
present business activities of the Company or any of its Subsidiaries.



          7.18. Officers. Set forth in Schedule 7.18 is a list of the names of the
officers of the Company, together with the title or job classification of each such person and the
total compensation paid or anticipated to be paid to each such person by the Company and its
Subsidiaries for services rendered in 2006. Except as set forth in Schedule 7.18, none of
such persons has an employment agreement or understanding, whether oral or written, with the
Company or any of its Subsidiaries. True and complete copies of each employment agreement set
forth in Schedule 7.18 have been provided to the Investors.



          7.19. ERISA. Except as set forth in Schedule 7.19:



          (a) Multiemployer Plans. The Company does not have any obligation, and has never been
required, to contribute to (or any other liability, including current or potential withdrawal
liability, with respect to) any “multiemployer plan” (as defined in Section 3(37) of ERISA).



          (b) Retiree Welfare Plans. The Company does not maintain or have any obligation to
contribute to (or any other liability with respect to) any plan or arrangement, whether or not
terminated, which provides medical, health, life insurance or other welfare-type benefits for
current or future retired or terminated employees (except for limited continued medical benefit
coverage required to be provided under Section 4980B of the Code or as required under applicable
state law).



          (c) Defined Benefit Plans. The Company does not maintain, contribute to or have any
liability under (or with respect to) any employee plan that is a tax-qualified “defined benefit
plan” (as defined in Section 3(35) of ERISA), whether or not terminated.



          (d) Defined Contribution Plans. The Company does not maintain, contribute to or have
any liability under (or with respect to) any employee plan that is a tax-qualified “defined
contribution plan” (as defined in Section 3(34) of ERISA), whether or not terminated.



          (e) Other Plans. The Company does not maintain, contribute to or have any liability
under (or with respect to) any plan or arrangement providing benefits to current or former
employees, including any bonus plan, profit sharing, stock option, employee stock purchase or other
plan or arrangement providing for deferred or other compensation, employee health or other welfare
benefit plan or other arrangement, or severance agreements, programs, policies or arrangements,
whether or not terminated and whether or not subject to ERISA.



          (f) Unfunded Liability. No employee benefit plan maintained by the Company or to
which the Company has an obligation to contribute, or with respect to which the Company has any
other liability, has any material unfunded liability.



33









 





          (g) Plan Qualification and Compliance. None of the employee benefit plans set forth
in Schedule 7.19 is intended to be qualified under Section 401(a) of the Code. Each
employee benefit plan set forth in Schedule 7.19 and all related trusts, insurance
contracts and funds have been maintained, funded and administered in material compliance with their
respective terms and with all applicable laws.



          (h) The Company. For purposes of this Section 7.19, the term “Company”
includes all entities under common control with the Company pursuant to Section 414(b) or (c) of
the Code.



          7.20. Environmental Matters. Except as set forth in Schedule 7.20: (a) the
operations of the Company and each of its Subsidiaries comply with all applicable Environmental
Laws, except where the failure to do so could not be reasonably expected to have a Material Adverse
Effect; (b) neither the Company nor any of its Subsidiaries is or has been subject to any judicial
or administrative proceeding, Court Order or settlement alleging or addressing a violation of or
liability under any Environmental Law; (c) no material quantity of hazardous wastes, substances or
materials or oil or petroleum products have been generated, transported, used, disposed, stored or
treated by the Company or any of its Subsidiaries; and (d) no material quantity of hazardous
wastes, substances or materials or oil or petroleum products has been released, discharged,
disposed, transported, placed or otherwise caused by the Company or any of its Subsidiaries to
enter the soil or water in, under or upon any real property owned, leased or operated by the
Company or any of its Subsidiaries.



          7.21. Related-Party Transactions. Except (i) for the Transaction Agreements and (ii)
as set forth in Schedule 7.21, no employee, officer, shareholder or director of the Company
or any of its Subsidiaries, or member of his or her immediate family, or any corporation,
partnership, trust or other entity in which any such person owns any beneficial interest or is an
officer, director, trustee, partner or holder of more than 5% of the outstanding capital stock
thereof, is indebted to the Company or any of its Subsidiaries, nor is the Company or any of its
Subsidiaries indebted (or committed to make loans or extend or guarantee credit) to any of such
persons, other than, with respect to officers or other employees of the Company or its
Subsidiaries, for (a) payment of salary for services rendered, (b) reimbursement for reasonable
expenses incurred on behalf of the Company or its Subsidiaries and (c) other standard employee
benefits made generally available to all employees. To the Knowledge of the Company, none of such
persons has any direct or indirect ownership interest in any Person with which the Company or any
of its Subsidiaries is affiliated or with which the Company or any of its Subsidiaries has a
business relationship, or any Person that competes with the Company or any of its Subsidiaries,
except employees, officers, shareholders or directors of the Company or its Subsidiaries and
members of their immediate families who own 5% or less of the outstanding capital stock of any
publicly traded company. To the Knowledge of the Company, no officer, shareholder or director of
the Company or any of its Subsidiaries, or any member of his or her immediate family, is, directly
or indirectly, a party to any material Contract with the Company or any of its Subsidiaries (other
than such Contracts as relate to any such person’s employment or ownership of capital stock of the
Company).



          7.22. Accounts Receivable. All accounts receivable of the Company and its
Subsidiaries are valid, genuine and subsisting and have arisen from bona fide transactions in the



34









 







ordinary course of business or other arm’s-length transactions. The Company’s allowance for
doubtful accounts as reflected in the financial statements set forth in Schedule 7.5 is
reasonable in accordance with GAAP as in effect for the periods to which such financial statements
relate.



          7.23. Investment Company. The Company is not 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, nor is the Company,
directly or indirectly, controlled by or acting on behalf of any Person that is an “investment
company” within the meaning of such act.



          7.24. Real Property Holding Corporation. The Company is not a “United States real
property holding corporation” within the meaning of Section 897(c)(2) of the Code and any
regulations promulgated thereunder.



          7.25. Projections. The projections which have been provided to the Investors and
which are attached hereto as Schedule 7.25 (the “Projections”) were prepared by the Company
based on reasonable assumptions of fact and opinion as to future events at the time the Projections
were prepared. Except as set forth in Schedule 7.25, as of the date hereof, no facts have
come to the attention of any of the officers of the Company which would, in their reasonable
opinion, require the Company to revise or amplify the assumptions underlying the Projections and
other estimates or the conclusions derived therefrom. Notwithstanding the foregoing, the Company
makes no representation or warranty that the Projections will actually be realized.



          7.26. Disclosure. Except as set forth in Schedule 7.26, to the Knowledge of
the Company, none of the representations or warranties of the Company contained herein, none of the
information contained in the Schedules referred to in this Article VII, and none of the
other written information or documents furnished to any Investor or any of its representatives by
the Company or its representatives in connection with the transactions contemplated by this
Agreement, when taken as a whole, contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading in any material respect. There is no fact
that the Company has not disclosed to the Investors in writing and of which, to the Knowledge of
the Company, has had, or could reasonably be expected to have, a Material Adverse Effect.



ARTICLE VIII




REPRESENTATIONS AND WARRANTIES OF EACH INVESTOR




          As an inducement to the Company to enter into this Agreement and to issue and sell the Series
A Preferred Shares, each Investor, severally and not jointly, hereby represents and warrants to the
Company as to himself, herself or itself only and agrees as follows:



          8.1. Organization. If such Investor is not an individual, such Investor is duly
organized, validly existing and in good standing under the laws of the jurisdiction of such
Investor’s organization, with all requisite power and authority to own, lease and operate its
properties and to carry on its respective businesses as now owned, leased and operated.



35









 





          8.2. Authorization. The execution, delivery and performance of this Agreement and
each of the Transaction Documents to which such Investor is a party have been duly authorized and
approved by such Investor. This Agreement has been duly executed and delivered by such Investor
and (assuming the due execution and delivery hereof by each of the other parties hereto) is the
valid and binding obligation of such Investor enforceable against such Investor in accordance with
its terms, and each of the Transaction Documents to which such Investor is a party has been duly
authorized by such Investor and, upon execution and delivery by such Investor (assuming the due
execution and delivery thereof by each of the other parties thereto), will be a legal, valid and
binding obligation of such Investor enforceable against such Investor in accordance with its
respective terms, in each case subject to (i) bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting the enforcement thereof or by general equitable principles, (ii) laws
relating to the availability of specific performance, injunctive relief or other equitable remedies
and (iii) to the extent any indemnification provisions may be limited by applicable federal or
state securities laws.



          8.3. Brokers. Such Investor has no Contract with any broker, finder or similar agent
with respect to the transactions contemplated by this Agreement for which such Investor shall have
any liability or responsibility.



          8.4. Investment Representations.



          (a) Such Investor acknowledges that it has been furnished with such documents, materials and
information as such Investor deems necessary or appropriate for evaluating an investment in the
Company. Such Investor further acknowledges that it: (i) has had the opportunity to ask questions
of, and receive answers from, the directors and officers of the Company, and Persons acting on the
Company’s behalf, concerning the terms and conditions of the offering of the Series A Preferred
Shares; (ii) has knowledge and experience in financial and business matters so as to be capable of
evaluating and understanding the merits and risks of an investment in the Company; and (iii) is
able to bear the economic risk of its investment in the Company and the Series A Preferred Shares
and Conversion Common Shares in that such Investor can afford to hold the Series A Preferred Shares
and Conversion Common Shares for an indefinite period and can afford a complete loss of its
investment in the Company. Notwithstanding the foregoing, it is agreed and understood by the
Parties that the acknowledgements made in this Section 8.4(a) shall not be construed to
limit or modify in any way the representations and warranties of the Company contained in
Article VII or the right of any Investor to rely on such representations and warranties.



          (b) Such Investor represents that it is acquiring the Restricted Securities purchased
hereunder for its own account, not as a nominee or agent, with the present intention of holding
such securities for purposes of investment, and that it has no present intention of selling such
securities in a public distribution in violation of the federal securities laws or any applicable
state securities laws; provided, that nothing contained herein shall prevent such Investor
and subsequent holders of Restricted Securities from transferring such securities in compliance
with the provisions of Article VI.



36









 





          (c) Such Investor is an “accredited investor” as such term is defined in Rule 501(a) of
Regulation D under the Securities Act.



          (d) Such Investor understands that the Restricted Securities being sold hereby have not been
registered under the Securities Act, or applicable state securities laws, and are being issued in
reliance on exemptions for private offerings contained in Section 4(2) of the Securities Act and
the provisions of Regulation D promulgated thereunder and in reliance on exemptions from the
registration requirements of certain state securities laws, on the basis that the Restricted
Securities will be sold to a limited number of accredited investors. Because the Restricted
Securities have not been registered under the Securities Act or applicable state securities laws,
the Restricted Securities may not be re-offered or resold except through a valid and effective
registration statement or pursuant to a valid exemption from the registration requirements under
the Securities Act and applicable state securities laws, and with the delivery of an opinion of
counsel to such effect reasonably satisfactory to the Company.



          8.5. Residence. If such Investor is an individual, such Investor resides in the state
or province identified in the address of such Investor set forth on Appendix II; if such
Investor is a partnership, corporation, limited liability company or other entity, then the office
or offices of such Investor’s principal place of business is located at the addresses or addresses
of such Investor set forth on Appendix II.



          8.6. Reliance on Projections. In connection with such Investor’s investigation of the
Company, such Investor has received the Projections set forth in Schedule 7.25. Subject to
the representations and warranties of the Company in Section 7.25, such Investor
acknowledges and agrees that (i) there are uncertainties inherent in attempting to make the
Projections, (ii) such Investor is familiar with such uncertainties, (iii) such Investor is relying
on its own evaluation of the adequacy of the Projections and (iv) the Company makes no
representation or warranty that the Projections will actually be realized.



          8.7. No Knowledge of Breach. Such Investor does not have any actual knowledge of: (i)
as of the First Closing, any misrepresentation or breach of warranty made by the Company in this
Agreement; or (ii) as of the Second Closing, any misrepresentation or breach of warranty, or any
breach of any covenant, made by the Company in this Agreement.



ARTICLE IX




MISCELLANEOUS




          9.1. Survival of Representations and Warranties. All representations and warranties
contained herein or made in writing by any Party in connection herewith will survive the execution
and delivery of this Agreement and the consummation of the transactions contemplated hereby;
provided, however, that: (i) the representations and warranties contained in
Sections 7.5 through 7.8 (inclusive), 7.11, 7.13, 7.15
through 7.18 (inclusive), and 7.21 through 7.26 (inclusive) shall expire on
August 31, 2008; and (ii) the representations and warranties contained in Sections 7.10,
7.19 and 7.20 shall expire upon the expiration of the applicable statute of
limitations for claims related to the matters discussed in those Sections.



37









 





          9.2. Amendments and Waivers. Except as otherwise expressly provided herein, the
provisions of this Agreement may be amended, modified or waived only if the Company shall have
obtained the written consent of the holders of at a majority of the outstanding Series A Preferred
Shares and Conversion Common Shares voting as a single class on a common share equivalent basis.
No course of dealing between the Company and any holder of any Series A Preferred Shares or
Conversion Common Shares or any delay in exercising any rights hereunder or under the Certificate
of Incorporation will operate as a waiver of any rights of any such holders. For purposes of this
Agreement, Series A Preferred Shares held by the Company will not be deemed to be outstanding.



          9.3. Successors and Assigns. Except as otherwise expressly provided herein, all
covenants and agreements contained in this Agreement by or on behalf of any of the Parties will
bind and inure to the benefit of the respective successors and permitted assigns of the Parties,
whether so expressed or not. In addition, the provisions of this Agreement which are for the
benefit of the Investors or holders of Series A Preferred Shares or Conversion Common Shares are
also for the benefit of, and enforceable by, any subsequent holders of any portion of such Series A
Preferred Shares or Conversion Common Shares.



          9.4. Remedies. Each holder of any Series A Preferred Share or Conversion Common Share
shall have all rights and remedies set forth in this Agreement, the Certificate of Incorporation
and any other agreement or contract that grants rights and remedies to such holders, and all rights
that 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.



          9.5. Indemnification. In consideration of each Investor’s execution and delivery of
this Agreement and acquisition of the Series A Preferred Shares and in addition to all of the
Company’s other obligations under this Agreement, the Company shall defend, protect, indemnify and
hold harmless each Investor and each other holder of Series A Preferred Shares and Conversion
Common Shares and all of their partners, officers, directors, employees and agents (including those
retained in connection with the transactions contemplated by this Agreement) (collectively, the
“Indemnitees”) from and against any and all losses, costs, penalties, fees, liabilities, damages,
expenses, reasonable attorneys’ fees and disbursements, and interest (the “Indemnified
Liabilities”), incurred by the Indemnitees as a result of, or arising out of, or relating to any
third party actions, causes of action, suits, claims, investigations or proceedings relating to
such Person being a shareholder of the Company (or a partner, officer, director, employee or agent
of such shareholder); provided, however, that (a) the Company shall not be required
to indemnify and hold harmless an Indemnitee under this Section 9.5 to the extent that such
Indemnified Liabilities arise from a violation of any Requirements of Laws by such Indemnitee and
(b) the rights afforded to an Indemnitee under this Section 9.5 are not cumulative with any
other indemnification rights expressly conferred on such Indemnitee under any other Transaction
Document or any other agreement between the Company and such Indemnitee. To the extent that the
foregoing undertakings 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
that is permissible under applicable law.



38









 





          9.6. Severability. Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law and in such a way as
to, as closely as possible, achieve the intended economic effect of such provision and this
Agreement as a whole, but if any provision contained herein is, for any reason, held to be invalid,
illegal or unenforceable in any respect, such provision shall be ineffective to the extent, but
only to the extent, of such invalidity, illegality or unenforceability without invalidating the
remainder of such provision or any other provisions hereof, unless such a construction would be
unreasonable.



          9.7. Notices. All notices or other communications required or permitted hereunder
shall be in writing and shall be deemed given or delivered (a) when delivered personally, (b) if
transmitted by facsimile when confirmation of transmission is received, (c) if sent by registered
or certified mail, postage prepaid, return receipt requested, three business days after mailing or
(d) if sent by reputable overnight courier service, one business day after delivery to such
service; and shall be addressed as follows:



          If to the Company, to:


XStream Systems, Inc.

3873 39th Square

Vero Beach, FL 32960

Attention: Chief Executive Officer

Facsimile: 772-257-0179




          with a copy to:


Gunster, Yoakley & Stewart, P.A.

777 South Flagler Drive

Suite 500-East

West Palm Beach, FL 33401

Attention: David G. Bates, Esq.

Facsimile: 561-655-5677




          If to any Investor, to such Investor’s address as set forth in Appendix II
hereto.



          9.8. Governing Law. This Agreement and the appendices, exhibits and schedules hereto
shall be governed by, and construed in accordance with, the laws of the State of Florida, without
giving effect to any choice of law or conflict of law rules or provisions (whether of the State of
Florida or any other jurisdiction) that would cause the application of the laws of any jurisdiction
other than the State of Florida. In furtherance of the foregoing, the internal law of the State of
Florida shall control the interpretation and construction of this Agreement (and all schedules and
exhibits hereto), even though under that jurisdiction’s choice of law or conflict of law analysis,
the substantive law of some other jurisdiction would ordinarily apply.



          9.9. Submission to Jurisdiction; Waiver of Jury Trial. (a) Each of the Parties
hereby irrevocably submits in any suit, action or proceeding arising out of or related to this
Agreement or any of the Transaction Documents, or any of the transactions contemplated



39









 







hereby or thereby, to the exclusive jurisdiction of the United States District Court for the
Southern District of Florida and the jurisdiction of any court of the State of Florida located in
St. Lucie County, Florida, and, to the extent permissible by law, waives any and all claims and
objections that any such court is an inconvenient forum.



          (b) EACH OF THE PARTIES HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY DISPUTE,
WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, BETWEEN OR AMONG ANY OF THE PARTIES ARISING OUT OF
OR RELATED TO THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY OF THE TRANSACTION DOCUMENTS,
OR ANY OTHER INSTRUMENT OR DOCUMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THEREWITH. ANY
PARTY MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF THE PARTIES TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.



          9.10. Attorneys’ Fees. If any action or suit based upon or arising out of any actual
or alleged breach by any Party of any representation, warranty or agreement in this Agreement, the
prevailing party shall be entitled to recover its reasonable attorneys’ fees and expenses of such
action or suit from the losing party, in addition to any other relief ordered by the court.



          9.11. Execution in Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be considered an original instrument, but all of which together
will be considered one and the same agreement, and will become binding when one or more
counterparts have been signed by and delivered to each of the Parties.



          9.12. Transaction Expenses. Irrespective of whether either Closing is consummated,
the Company shall pay all costs and expenses that it incurs in connection with the negotiation,
execution, delivery and performance of this Agreement and the transactions contemplated hereby. If
either Closing is consummated, the Company shall, at each Closing, reimburse the Investors for
their due diligence expenses and reasonable fees and expenses of Sidley Austin LLP, special legal
counsel to the Investors, provided that the Company shall not be obligated to reimburse the
Investors for due diligence expenses in excess of an aggregate of $15,000 incurred in connection
with both Closings, for the fees and expenses of Sidley Austin LLP in excess of an aggregate of
$50,000 or for the fees and expenses of Fitch, Even, Tabin & Flannery in excess of an aggregate of
$22,000. In addition, the Company shall reimburse the Investors for reasonable legal expenses
incurred in connection with any amendment of, or waiver or consent requested under, this Agreement
or any Transaction Document, except for waivers, amendments or consents (a) not originally
requested by the Company and (b) not involving a change to or modification of any of the Company’s
obligations, covenants or agreements hereunder.



          9.13. Gunster Yoakley Represents the Company. Each of the Investors hereby agrees and
acknowledges that GY&S hereby renders advice and counsel solely to the Company. Each of the
Investors hereby agrees and acknowledges that GY&S has not represented any of the Investors in
connection with this Agreement and the Transaction Documents or any other agreement contemplated by
the Transaction Documents or the



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transactions contemplated by or in connection to this Agreement or the Transaction Documents
thereunder, and that EACH OF THE INVESTORS HAS BEEN AND IS HEREBY ADVISED TO RETAIN INDEPENDENT
COUNSEL to advise each one of them regarding this Agreement and the Transaction Documents and any
other agreement contemplated by this Agreement and the Transaction Documents. Each of the
Investors hereby waives, releases and relinquishes any claim against GY&S or any of its
shareholders, employees or agents from any conflict of interest arising from this Agreement, the
Transaction Documents or the transactions contemplated in this Agreement or the Transaction
Documents or any other agreement contemplated by this Agreement or the Transaction Documents.



          9.14. Entire Agreement. This Agreement and the appendices, exhibits and schedules
referred to herein, the Transaction Documents and the other documents delivered pursuant hereto
contain the entire understanding of the Parties with regard to the subject matter contained herein
or therein, and supersede all prior agreements, understandings or letters of intent between or
among any of the Parties, including any Summary of Terms discussed or distributed between the
Company and any Investor.



[Remainder of page intentionally left blank; signature pages follow.]





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          IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed the day and year
first above written.



	 	 	 	 	 
	 	XSTREAM SYSTEMS, INC.

 	 
	 	By:  	/s/ Brian T. Mayo	 
	 	 	Name:  	Brian T. Mayo	 
	 	 	Title:  	President and CEO	 
	 




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