Exhibit 10.1 to CapSource Financial, Inc. Form 8-K/A Amendment 1 dated May 1, 2005








Exhibit 10.1  


	
 


	






CAPSOURCE FINANCIAL, INC.


SECURITIES PURCHASE AGREEMENT


May 1, 2006


	
 


	












	
 

	
 

	
 

	
 


	
TABLE OF CONTENTS


	
 

	
 

	
 

	
 


	
 

	
 

	
 

	
Page


	
 

	
 

	
 

	
 


	
SECTION 1 

	
PURCHASE AND SALE OF SECURITIES 

	
1


	
 

	
1.1

	
Sale and
  Issuance of Securities

	
1


	
 

	
1.2

	
The Closing

	
1


	
SECTION 2 

	
DELIVERIES 

	
1


	
 

	
2.1

	
Closing
  Deliveries

	
1


	
SECTION 3 

	
THE COMPANY’S
REPRESENTATIONS AND WARRANTIES 

	
2


	
 

	
3.1

	
Organization
  and Standing

	
2


	
 

	
3.2

	
Corporate
  Power

	
2


	
 

	
3.3

	
Subsidiaries

	
2


	
 

	
3.4

	
Capitalization

	
2


	
 

	
3.5

	
Financial
  Statements; Accounts Receivable

	
3


	
 

	
3.6

	
Changes

	
4


	
 

	
3.7

	
Material
  Obligations

	
5


	
 

	
3.8

	
Material
  Contracts

	
5


	
 

	
3.9

	
Intellectual
  Property

	
7


	
 

	
3.10

	
Title to
  Properties and Assets

	
8


	
 

	
3.11

	
No Defaults

	
8


	
 

	
3.12

	
Compliance
  with Other Instruments

	
8


	
 

	
3.13

	
Litigation

	
8


	
 

	
3.14

	
Tax Returns
  and Payments

	
8


	
 

	
3.15

	
Employees

	
9


	
 

	
3.16

	
Related
  Party Obligations

	
9


	
 

	
3.17

	
Environmental
  and Safety Laws

	
9


	
 

	
3.18

	
Condition of
  Properties

	
10


	
 

	
3.19

	
Licenses

	
10


	
 

	
3.20

	
Insurance

	
10


	
 

	
3.21

	
Consent

	
10


	
 

	
3.22

	
Offering

	
10


	
 

	
3.23

	
Brokers or
  Finders

	
10


	
 

	
3.24

	
No Market
  Manipulation

	
10


	
 

	
3.25

	
Reporting
  Company

	
11


	
 

	
3.26

	
Information
  Concerning Company

	
11


	
 

	
3.27

	
Stop
  Transfer Order

	
11


	
 

	
3.28

	
No
  Integrated Offering

	
11


	
 

	
3.29

	
No General
  Solicitation

	
11


	
 

	
3.30

	
Listing

	
11


	
 

	
3.31

	
Correctness
  of Representations

	
11


	
 

	
3.32

	
Disclosure

	
12


	
SECTION 4 

	
THE INVESTOR’S
REPRESENTATIONS AND WARRANTIES 

	
12


	
 

	
4.1

	
No
  Registration

	
12


	
 

	
4.2

	
Investment
  Intent

	
12


	
 

	
4.3

	
Investment
  Experience

	
12


	
 

	
4.4

	
Speculative
  Nature of Investment

	
12


	
 

	
4.5

	
Access to
  Data and Documentation

	
12


	
 

	
4.6

	
Accredited
  Investor

	
13





i






	
 

	
 

	
 

	
 


	
TABLE OF CONTENTS


	
(continued)


	
 

	
 

	
 

	
 


	
 

	
 

	
 

	
Page


	
 

	
 

	
 

	
 


	
 

	
4.7

	
Residency

	
13


	
 

	
4.8

	
Rule 144

	
13


	
 

	
4.9

	
Authorization

	
13


	
 

	
4.10

	
Further
  Limitations on Disposition

	
13


	
 

	
4.11

	
Legend;
  Restriction on Transfer

	
14


	
 

	
4.12

	
Warrant
  Legend

	
14


	
SECTION 5 

	
COVENANTS OF
THE COMPANY 

	
15


	
 

	
5.1

	
Stop Orders

	
15


	
 

	
5.2

	
Listing

	
15


	
 

	
5.3

	
Market
  Regulations

	
15


	
 

	
5.4

	
Reporting
  Requirements

	
15


	
 

	
5.5

	
Use of
  Proceeds

	
15


	
 

	
5.6

	
Reservation
  of Common Stock

	
16


	
 

	
5.7

	
Designation
  of Board Members

	
16


	
 

	
5.8

	
Taxes

	
16


	
 

	
5.9

	
Insurance

	
16


	
 

	
5.10

	
Books and
  Records

	
16


	
 

	
5.11

	
Governmental
  Authorities

	
16


	
 

	
5.12

	
Intellectual
  Property

	
16


	
 

	
5.13

	
Properties

	
16


	
 

	
5.14

	
Correctness
  of Representations

	
16


	
SECTION 6 

	
INVESTOR’S
CLOSING CONDITIONS 

	
17


	
 

	
6.1

	
Representations
  and Warranties

	
17


	
 

	
6.2

	
Covenants

	
17


	
 

	
6.3

	
Blue Sky

	
17


	
 

	
6.4

	
Due
  Diligence

	
17


	
 

	
6.5

	
Convertible
  Debt

	
17


	
 

	
6.6

	
Registration
  Rights Agreement

	
17


	
 

	
6.7

	
Voting
  Agreement

	
17


	
 

	
6.8

	
Reservation
  of Shares of Conversion Stock

	
17


	
 

	
6.9

	
Payment of
  Fees

	
17


	
 

	
6.10

	
Intentionally
  Omitted

	
17


	
 

	
6.11

	
Compliance
  Certificate

	
17


	
 

	
6.12

	
Legal
  Opinion

	
18


	
 

	
6.13

	
Secretary’s
  Certificate; Amendment to Bylaws

	
18


	
 

	
6.14

	
Consents;
  Permits and Waivers

	
18


	
 

	
6.15

	
Proceedings
  and Documents

	
18


	
SECTION 7 

	
THE COMPANY’S
CLOSING CONDITIONS 

	
18


	
 

	
7.1

	
Representations
  and Warranties

	
18


	
 

	
7.2

	
Covenants

	
18


	
 

	
7.3

	
Compliance
  with Securities Laws

	
18


	
 

	
7.4

	
Registration
  Rights Agreement

	
18


	
 

	
7.5

	
Intentionally
  Omitted

	
18


	
 

	
7.6

	
Consents and
  Waivers

	
18


	
 

	
7.7

	
Proceedings
  and Documents

	
18





ii






	
 

	
 

	
 

	
 


	
TABLE OF CONTENTS


	
(continued)


	
 

	
 

	
 

	
 


	
 

	
 

	
 

	
Page


	
 

	
 

	
 

	
 


	
SECTION 8 

	
MISCELLANEOUS 

	
19


	
 

	
8.1

	
Opinion

	
19


	
 

	
8.2

	
Amendment

	
19


	
 

	
8.3

	
Notices

	
19


	
 

	
8.4

	
Payment of
  Fees; Option

	
20


	
 

	
8.5

	
Governing
  Law

	
20


	
 

	
8.6

	
Survival

	
20


	
 

	
8.7

	
Successors
  and Assigns

	
20


	
 

	
8.8

	
Entire
  Agreement

	
20


	
 

	
8.9

	
Delays or
  Omissions

	
21


	
 

	
8.10

	
Severability

	
21


	
 

	
8.11

	
Titles and
  Subtitles

	
21


	
 

	
8.12

	
Counterparts

	
21


	
 

	
8.13

	
Facsimile
  Execution and Delivery

	
21


	
 

	
8.14

	
Jurisdiction
  and Venue

	
21


	
 

	
8.15

	
Further
  Assurances

	
21


	
 

	
8.16

	
Construction

	
21





iii






EXHIBITS


	
 

	
 


	
A

	
Schedule of
  Investors


	
B

	
Form of
  Warrant


	
C

	
Form of
  Registration Rights Agreement


	
D

	
Form of
  Voting Agreement and Irrevocable Proxy


	
E

	
Wire
  Transfer Instructions


	
F

	
Form of
  Compliance Certificate


	
G

	
Form of
  Legal Opinion


	
H

	
Form of
  Secretary’s Certificate





SCHEDULES


	
 

	
 


	
3.3

	
Subsidiaries
  


	
3.4(e)

	
Warrants,
  options or other rights to acquire stock


	
3.5(a)

	
Financial
  Statements; Off balance sheet transactions


	
3.6(g)

	
Material
  changes in compensation


	
3.6(l)

	
Debts or
  other obligations


	
3.6(n)

	
Share
  issuance


	
3.8(a)

	
Material
  Contracts


	
3.8(c)

	
Affiliates
  arrangements


	
3.9(a)

	
Intellectual
  Property Agreements


	
3.15

	
Employment
  Matters


	
3.16

	
Debts owed
  to Affiliates


	
3.19

	
Licenses,
  Permits, etc.


	
3.23

	
Broker


	
3.25

	
SEC 12 month
  filing exceptions 


	
3.26

	
Material
  Adverse Changes





iv






CapSource Financial, Inc.


SECURITIES PURCHASE AGREEMENT


This
Securities Purchase Agreement (this “Agreement”),
dated May 1, 2006 (the “Effective
Date”), is executed by and between CapSource Financial, Inc., a
Colorado corporation (the “Company”), and
the entity listed on the Schedule of Investors attached as Exhibit A
(the “Investor”). The
Company and the Investor are each individually referred to in this Agreement as
a “Party,” and are
collectively referred to in this Agreement as the “Parties.”


SECTION 1


Purchase and Sale of Securities


          1.1
Sale and Issuance of Securities.
Subject to the terms and conditions of this Agreement, the Investor agrees to
purchase at the Closing (as defined in Section 1.2), and the Company
agrees to sell and issue to the Investor at the Closing, 2,500,000 shares of
the Company’s Common Stock, $.01 par value per share (the “Shares”) and a warrant, in the form
attached as Exhibit B (the “Warrant”),
to purchase 2,500,000 shares of Common Stock at an exercise price of $.90 per
share (the “Warrant Shares”)
for a purchase price of$.40per Share and Warrant, for the aggregate
purchase price of $1,000,000 (the “Purchase Price”). Such Shares together
with the Warrants, are collectively referred to herein as the “Securities”.


          1.2
The Closing. The closing of
the purchase and sale of the Securities described herein shall take place at
the offices of Whitebox Advisors, LLC, 3033 Excelsior Boulevard, Suite 300,
Minneapolis, Minnesota 55416, at 8:30 a.m., Minneapolis time, on May 1,
2006 (the “Closing”), or at
such other place or different time or day as may be mutually acceptable to the
Investor and the Company.


SECTION 2


Deliveries


          2.1
Closing Deliveries.


               (a)
At the Closing, the Investor will deliver to the Company (i) an executed
counterpart signature page to this Agreement; (ii) executed counterpart
signature page to the Registration Rights Agreement dated as of the Effective
Date by and among the Company, Randolph M. Pentel and the Investors listed on
Exhibit A thereto in the form attached hereto as Exhibit C (the “Registration Rights Agreement”);
and (iii) payment of the Purchase Price for the Securities purchased by
the Investor at such Closing by (A) certified check payable to the
Company; or (B) wire transfer of immediately available funds to the bank
account designated on the wire transfer instructions set forth on Exhibit D.
This Agreement and the Registration Rights Agreement, together with the
exhibits, Schedule of Exceptions (as defined below), and all other documents
required to be delivered in connection herewith and therewith, shall be
referred to collectively as the “Transaction
Agreements.”






SECTION 3


The Company’s Representations and Warranties


Except as set
forth on the schedules delivered separately to the Investor in connection with
this Agreement (the “Schedules”),
the Company represents and warrants to the Investor as of the Effective Date as
follows:


          3.1
Organization and Standing. The
Company is a corporation duly organized and existing under, and by virtue of,
the laws of the State of Colorado and is in good standing under such laws. The
Company has the requisite corporate power and authority to own and operate the
Company’s properties and assets, and to carry on the Company’s business as
presently conducted. The Company is presently qualified to do business as a
foreign corporation in each jurisdiction where the failure to be so qualified
would have a Material Adverse Effect. No proceeding has been instituted in any
jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority or qualification. “Material Adverse Effect” shall mean any event,
happening, occurrence or development that, individually or in the aggregate,
whether or not arising in the ordinary course of business, could reasonably be
expected to have a material adverse effect on the Company’s business,
operations, properties, prospects, assets, liabilities or condition (financial
or otherwise). 


          3.2 Corporate Power. The
Company has all requisite legal and corporate power and authority to execute
and deliver the Transaction Agreements, to sell and issue the Securities in
accordance with this Agreement, to issue Warrant Shares issuable upon exercise
of the Warrants, and to carry out and perform the Company’s obligations under the
terms of the Transaction Agreements. The Transaction Agreements have been duly
authorized, executed and delivered by the Company and are valid and binding
agreements enforceable in accordance with their terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors’ rights generally.


          3.3
Subsidiaries. Except as set
forth on Schedule 3.3, the Company does not own or control, directly or
indirectly, any interest in any corporation, partnership, limited liability
company, association, or other business entity.


          3.4 Capitalization. 


               (a)
The Company’s authorized capital stock consists of 100,000,000 shares of
undesignated stock, of which 12,378,657 shares of Common Stock, par value $.01
per share, were issued and outstanding as of March 27, 2006. 


               (b)
The outstanding shares of the Company’s Common Stock are duly authorized,
validly issued, fully paid, and non-assessable.


               (c)
The Company has reserved:


                    (i)
2,875,000 shares of Common Stock for issuance pursuant to this Agreement;


                    (ii)
2,875,000 shares of Common Stock for issuance upon exercise of the Warrant issued
pursuant to this Agreement;


2






                    (iii)
550,000 shares of Common Stock for issuance to employees, directors, consultants, and advisors pursuant to the Company’s 2001
Stock Option Plan under which no options to purchase shares of Common Stock are issued and outstanding as of the Effective Date;



                    (iv)
937,334 shares of Common Stock for issuance in connection with discretionary warrants that have been issued and are outstanding as of the Effective Date; and


                    (v)
4,359,328 shares of Common Stock for issuance in connection with the shares and warrant that will be issued to Mr. Pentel as a
result of the conversion by him of his outstanding notes pursuant to Section 6.5 hereof; 


               (d) The Shares, when
issued, delivered and paid for in compliance with the provisions of this Agreement, will be validly issued, fully paid and
non-assessable. The Warrant Shares issuable upon exercise of the Warrants have been duly and validly reserved and, when issued in
compliance with the provisions of this Agreement, the Warrant, and applicable law, will be validly issued, fully paid, and
non-assessable. The Shares and Warrant Shares will be free of any liens or encumbrances, other than any liens or encumbrances
created by or imposed upon the Investor; provided, however, that the Shares and Warrant Shares are subject to transfer
restrictions under state and/or federal securities laws and as set forth in the Transaction Agreements. The Shares and Warrant
Shares are not subject to any preemptive rights or first refusal rights. Neither the offer nor issuance of the Securities
constitutes an event under any anti-dilution provisions of any securities issued or issuable by the Company which will either
increase the number of shares issuable pursuant to such provisions or decrease the consideration per share to be received by the
Company pursuant to such provisions.


               (e) Except as set forth
on Schedule 3.4(e), there are no outstanding agreements or preemptive or similar rights affecting the Company’s
capital stock and no outstanding rights, warrants or options to acquire, or instruments convertible into or exchangeable for, or
agreements or understandings with respect to the sale or issuance of any shares of capital stock of the Company.


               (f) There are no
shareholder agreements, voting agreements, proxy rights or other similar agreements with respect to the Company’s Common
Stock to which the Company is a party or between or among any of the Company’s shareholders.


          3.5 Financial Statements; Accounts
Receivable. 


               (a) The Company’s:
(i) Form 10-KSB for the year ended December 31, 2005, as filed with the Securities and Exchange Commission (the
“SEC”) on March 30, 2006; and (ii) unaudited balance sheet, statements of operations, shareholders’
equity and cash flow as of and for the three months ended March 31, 2006 (the “Balance Sheet Date”),
complete and correct copies of which are attached hereto as Schedule 3.5(a) (collectively, the “Financial
Statements”), present fairly the financial position of the Company as of such dates and the results of operations for
the periods covered thereby (subject, in the case of the interim financial statements, to year-end audit adjustments) and have
been prepared in accordance with generally accepted accounting principles consistently applied (“GAAP”), except
as to the absence of footnotes thereto. Specifically, but not by way of limitation, (x) the balance sheets or notes thereto
disclose all of the debts, liabilities and obligations of any nature of the Company properly accrued at December 31, 2005 and
at the Balance Sheet Date which, individually or in the aggregate, are material and which in accordance with GAAP would be
required to be disclosed in such balance sheets, and the omission of which would, in the aggregate, have a Material Adverse Effect
on the Company; (y) except as set forth on Schedule 3.5(a), the Company does not have any off-balance sheet arrangements or
transactions; and (z) the Financial Statements include appropriate reserves for all taxes and other liabilities accrued at such
date but not yet payable. 


3






               (b) All accounts
receivable of the Company referenced in the Financial Statements (except such accounts receivable as have been collected since
such date) are valid and enforceable claims, and the goods and services sold and delivered which gave rise to such accounts were
sold and delivered in conformity with the applicable purchase orders, payor contracts, agreements and specifications. Such
accounts receivable are subject to no valid defense or offsets. The Company’s uncollectible accounts will not exceed the
reserves for doubtful accounts.


          3.6 Changes. Since the Balance Sheet
Date, the Company has not:


               (a) suffered any change
in the Company’s assets, liabilities, financial condition, or operating results, except for changes in the ordinary course of
business, none of which have had a Material Adverse Effect;


               (b) suffered any damage,
destruction, or loss (whether or not covered by insurance) that, in any case or in the aggregate, have had a Material Adverse
Effect;


               (c) agreed to waive or
actually waived any valuable right or any material debt owed to the Company;


               (d) suffered any change
or amendment to any agreement by which the Company or any of the Company’s assets or properties are bound or subject, except
to the extent that any such change or amendment has not had, or will not likely have, a Material Adverse Effect;


               (e) made any loans to
the Company’s employees, officers or directors, or to any members of their respective immediate families, other than travel
advances and other advances made in the ordinary course of the Company’s business;


               (f) received any Company
officer’s resignation or terminated any Company officer;


               (g) except as set forth
on Schedule 3.6(g), made any material change in any compensation arrangement or agreement with any employee;


               (h) made any declaration
or payment of any dividend or other distribution;


               (i) received notice or
become aware that the Company has lost a customer or that any Company customer has canceled a material order, which loss or
cancellation would constitute a Material Adverse Effect; or


               (j) suffered any change
or amendment to any agreement relating to a change in the contingent obligations of the Company;


               (k) received notice of
any labor organization activity related to the Company;


               (l) except as set forth
on Schedule 3.6(l), incurred any debt obligation or liability, including any debts assumed or guaranteed by the Company,
except those for immaterial amounts and for current liabilities incurred in the ordinary course of business;


               (m) made any sale,
assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets;


4






               (n) except as set forth
on Schedule 3.6(n), issued or sold any partnership interests, shares of capital stock or other securities or granted any
options, warrants or other purchase rights with respect thereto other than as contemplated by this Agreement;


               (o) suffered any other
event or condition of any character that has had, or could be reasonably expected to have, a Material Adverse Effect;
or


               (p) made any arrangement
or commitment by the Company to do any of the acts described in (a) through (o) above.


          3.7 Material Obligations. The Company
has no liabilities or obligations (whether absolute, accrued, contingent or otherwise), except for such liabilities or obligations
specifically reflected in balance sheets in the Financial Statements and current liabilities incurred in the ordinary course of
business since the Balance Sheet Date, which are not, either in any individual case or in the aggregate, material to the
Company.


          3.8 Material Contracts.


               (a) Set forth on
Schedule 3.8(a) is a detailed list of the Company’s bona fide and existing contracts that, individually or in the aggregate,
are material to the business, properties, prospects, assets, liabilities or condition (financial or otherwise) of the Company
(except as in Section 3.8(a)(ii)) (“Material Contracts”), specifically referring to this Section 3.8
and identifying such contracts in accordance with the following subsections:


                    (i)
each license or franchise agreement, either as licensor or licensee or franchisor or franchisee, including any related to
intellectual property, or distributor, dealership or sales agency contract, agreement or understanding;


                    (ii)
a true and complete description of all real properties owned by the Company;


                    (iii)
each indenture, lease, sublease, license or other instrument under which the Company claims or holds a leasehold interest in real
property (including any agreement related to the purchase or sale of such assets);


                    (iv)
each lease of personal property involving payments remaining to or from the Company in excess of $10,000;


                    (v)
each collective bargaining agreement, employment agreement, consulting agreement, noncompetition agreement, nondisclosure
agreement, inventions assignment agreement, executive compensation plan, profit sharing plan, bonus plan, restricted stock award
agreement, deferred compensation agreement, employee pension retirement plan, employee benefit stock option, stock awards or stock
purchase plan, buy-sell agreement and any other employee or shareholder agreements or employee benefit plans, entered into or
adopted by the Company;


                    (vi)
each bank account (or account with other financial institutions) maintained by the Company, together with the persons authorized
to make withdrawals from such account;


5






                    (vii)
the name of each employee of the Company whose salary exceeds $50,000 per year and the remuneration currently payable (including
bonus or commission arrangements) to each such employee;


                    (viii)
the name, amount and vesting schedule of each employee, officer, director or consultant granted stock options, warrants or other
similar rights;


                    (ix)
each partnership, joint venture, alliance or other similar agreement or arrangement with another entity;


                    (x)
each promissory note, indenture, mortgage, loan agreement, guaranty, security agreement, pledge or similar agreement with any
lender;


                    (xi)
each agreement granting voting rights, registration rights, first negotiating
rights or preemptive rights to a third party; and


                    (xii)
each material product development, research, manufacturing, marketing, sales
distribution or supply agreement, warranty or indemnification agreement,
purchase agreement, royalty agreement, product, patent or trademark licensing
or assignment agreement and any other material contract entered into by the
Company or by which the Company is bound.


               (b)
The Company is not in default or, but for the giving of notice or passage of
time would be in default, under any Material Contract.


               (c)
Except as set forth on Schedule 3.8(c), there are no agreements,
understandings or proposed transactions between the Company and any of its
officers, directors, affiliates or any affiliate thereof.


               (d)
There are no agreements, instruments, contracts, judgments, orders, writs or
decrees to which the Company is a party or by which it is bound which may
involve (i) obligations of, or payments to, the Company in excess of
$10,000 (other than obligations of, or payments to, the Company arising from
purchase or sale agreements entered into in the ordinary course of business),
(ii) the transfer or license of any patent, copyright, trade secret or
other proprietary right to or from the Company (other than licenses arising
from the purchase of “off the shelf products”), (iii) provisions
restricting the development, manufacture or distribution of the Company’s
products or services, or (iv) indemnification by the Company with respect
to infringements of proprietary rights (other than indemnification obligations
arising from purchase or sale of goods and services or license agreements entered
into in the ordinary course of business).


               (e)
The Company has not (i) declared or paid any dividends, or authorized or
made any distribution upon or with respect to any class or Series of its
capital stock, (ii) incurred or guaranteed any indebtedness for money
borrowed or any other liabilities (other than with respect to indebtedness and
other obligations incurred in the ordinary course of business or as
specifically disclosed in the Financial Statements) individually in excess of
$10,000 or, in the case of indebtedness and/or liabilities individually less
than $10,000, in excess of $20,000in
the aggregate, (iii) made any loans or advances to any person, other than
ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise
disposed of any of its assets or rights, other than the sale of its inventory
in the ordinary course of business.


               (f)
For the purposes of subsections (d) and (e) above, all indebtedness,
liabilities, agreements, understandings, instruments, contracts and proposed
transactions involving the same person


6






or entity
(including persons or entities the Company has reason to believe are affiliated
therewith) shall be aggregated for the purpose of meeting the individual
minimum dollar amounts of such subsections.


          3.9
Intellectual Property.


               (a)
The Company owns or possesses sufficient legal rights to all trademarks,
service marks, trade names, patents, copyrights, trade secrets, licenses
(software or otherwise), information, processes, and similar proprietary rights
(collectively, “Intellectual Property”)
necessary to the Company’s business as presently conducted. The Company has no
knowledge nor has it received notice that the conduct of the Company’s business
as presently conducted materially conflicts with or infringes the Intellectual
Property Rights of others. Except for agreements with the Company’s own
employees or consultants listed in Schedule 3.9(a) and Material
Contracts for standard end-user license agreements, and for support/maintenance
agreements and agreements entered in the ordinary course of the Company’s
business, there are no material outstanding options, licenses, or agreements
relating to the foregoing, and the Company is not bound by or a party to any
material options, licenses, or agreements with respect to the Intellectual
Property of any other person or entity. The Company has not received any
written communication alleging that the Company has violated any of the
Intellectual Property of any other person or entity. The Company is not
obligated to make any payments by way of royalties, fees, or otherwise to any
owner of, licensor of, or claimant to any Intellectual Property with respect to
the use of such Intellectual Property in connection with the conduct of the
Company’s business as presently conducted. There are no material agreements,
understandings, instruments, contracts, judgments, orders, or decrees to which
the Company is a party or by which the Company is bound that involve
indemnification by the Company with respect to Intellectual Property
infringements (other than indemnification obligations arising from purchase or
sale of goods and services or license and other agreements entered into in the
ordinary course of business).


               (b)
No employee is obligated under any contract or other agreement, or subject to
any judgment, decree, or order of any court or administrative agency, that
would materially interfere with the use of such employee’s best efforts to
promote the Company’s interests or that would conflict with the Company’s
business as presently conducted. Neither the execution nor delivery of this
Agreement, nor the Company employees’ conduct of the Company’s business, nor
the Company’s conduct of the Company’s business as presently conducted, will
conflict with or result in a breach of the terms, conditions, or provisions of,
or constitute a default under, any contract, covenant, or instrument under
which any of such employees is now obligated. The Company does not believe that
it is or will be necessary to use any inventions of any of the Company’s
employees made before their employment by the Company.


               (c)
Each Company employee has executed a confidential information, non-competition
and invention assignment agreement, substantially in the form(s) made available
to the Investor (each, a “Confidentiality
Agreement”). No employee has excluded from such employee’s
Confidentiality Agreement any works or inventions that were made by such
employee before such employee’s employment with the Company and that are also
relevant to the Company’s business as currently conducted or as proposed to be
conducted. Each Company consultant who has had access to the Company’s
intellectual property has entered into an agreement containing appropriate
confidentiality, non-competition and invention assignment provisions.


          3.10
Title to Properties and Assets.
The Company has good and marketable title to the Company’s properties and
assets, and the Company has good title to all of the Company’s leasehold
interests, in each case subject to no material mortgage, pledge, lien, lease,
or encumbrance, except for (a) liens for current taxes not yet due and
payable, (b) liens imposed by law and incurred in the ordinary course of
business for obligations not past due, (c) liens in respect of pledges or
deposits under workers’


7






compensation
laws or similar legislation, and (d) possible minor liens, encumbrances,
and title defects that do not in any case have a Material Adverse Effect on the
value of the property subject thereto or have a Material Adverse Effect on the
Company’s operations and that have not arisen other than in the ordinary course
of the Company’s business.


          3.11
No Defaults. Neither the
Company nor any of its subsidiaries is in violation of its Articles of
Incorporation or Bylaws. Neither the Company nor any of its subsidiaries is (i)
in default under or in violation of any other agreement or instrument to which
it is a party or by which it or any of its properties are bound or affected,
which default or violation would have a Material Adverse Effect on the Company,
(ii) in default with respect to any order of any court, arbitrator or
governmental body or subject to or party to any order of any court or governmental
authority arising out of any action, suit or proceeding under any statute or
other law respecting antitrust, monopoly, restraint of trade, unfair
competition or similar matters, or (iii) in violation of any statute, rule or
regulation of any governmental authority which violation would have a Material
Adverse Effect on the Company.


          3.12
Compliance with Other Instruments.
The Company’s execution, delivery, and performance of and compliance with
the Transaction Agreements and the Company’s issuance of the Securities and, if
exercised, the Warrant Shares issuable upon exercise of the Warrants, will not
result in any violation of, or conflict with, or constitute a default under,
the Articles of Incorporation or Bylaws, each as amended to date, or any of the
Company’s agreements, nor result in the creation of any mortgage, pledge, lien,
or encumbrance upon any of the Company’s properties or assets.


          3.13
Litigation. There is no
action, suit, proceeding or investigation pending or currently threatened in
writing against the Company that questions the validity of this Agreement, the
other Transaction Agreements, any Material Contracts or the right of the
Company to enter into any of such agreements, or to consummate the transactions
contemplated hereby or thereby, or which could be expected to result, either
individually or in the aggregate, in any Material Adverse Effect or any change
in the current equity ownership of the Company, nor is the Company aware that
there is any basis for any of the foregoing. The foregoing includes, without
limitation, actions pending or threatened, either verbally or in writing,
involving the prior employment of any of the Company’s employees, their use in
connection with the Company’s business of any information or techniques
allegedly proprietary to any of their former employers, or their obligations
under any agreements with prior employers. The Company is not a party or
subject to the provisions of any order, writ, injunction, judgment or decree of
any court or government agency or instrumentality. There is no action, suit,
proceeding or investigation by the Company currently pending or which the
Company intends to initiate.


          3.14
Tax Returns and Payments. The
Company has filed with appropriate federal, state, and local governmental
agencies all tax returns that the Company is required to file. All taxes shown
to be due and payable on such returns, any assessments imposed, and all other
taxes due and payable by the Company have been paid or will be paid before the
time they become delinquent. The Company has not been advised in writing or
otherwise become aware (a) that any of the Company’s tax returns have been
or are being audited as of the Effective Date or (b) of any deficiency in
assessment or proposed judgment with respect to the Company’s federal, state,
or local taxes.


          3.15
Employees.


               (a)
The Company has no collective bargaining agreements with any of its employees.
There is no labor union organizing activity pending or threatened with respect
to the Company. No employee of the Company, nor any consultant with whom the
Company has contracted, is in violation of any term of any employment contract,
proprietary information and invention assignment agreement or any other agreement
relating to the right of any such individual to be employed by, or to 


8






contract with,
the Company because of the nature of the business to be conducted by the
Company; and the continued employment by the Company of its present employees,
and the performance of the Company’s contracts with its independent
contractors, will not result in any such violation. The Company has not
received any notice alleging that any such violation has occurred. Except as
set forth on Schedule 3.15, no employee of the Company has been granted
the right to continued employment by the Company or to any material
compensation following termination of employment with the Company. The Company
is not aware that any officer, key employee or group of employees intends to
terminate his, her or their employment with the Company, nor does the Company
have a present intention to terminate the employment of any officer, key
employee or group of employees.


               (b)
Each officer and key employee of the Company is currently devoting one hundred
percent (100%) of his or her business time to the conduct of the business of
the Company. The Company is not aware that any officer or key employee of the
Company is planning to work less than full time at the Company in the future.
No officer or key employee is currently working or, to the Company’s knowledge,
plans to work for a competitive enterprise, whether or not such officer or key
employee is or will be compensated by such enterprise, and all officers and key
employees have signed and are subject to noncompetition agreements in
connection with their employment by the Company.


          3.16
Related Party Obligations. Except
as set forth on Schedule 3.16, no Company employee, officer, director or
shareholder, and no immediate family member of any Company employee, officer,
director, or shareholder, is indebted to the Company, nor is the Company
indebted (or committed to make loans or extend or guarantee credit) to any of
such persons other than (a) for payment of salary for services rendered,
(b) reimbursement for reasonable expenses incurred on the Company’s
behalf, and/or (c) for other standard employee benefits made generally
available to all employees (including stock option agreements outstanding under
any stock option plan approved by the Company’s Board of Directors and stock
purchase agreements approved by the Company’s Board of Directors). None of such
persons have any direct or indirect ownership interest in any firm or
corporation with which the Company is affiliated or with which the Company has
a business relationship or in any firm or corporation that competes with the
Company, except in connection with the ownership of stock in publicly-traded
companies. No Company employee, officer, director, or stockholder, nor any
their immediate family members, is, directly or indirectly, interested in any
Material Contract with the Company (other than such Material Contracts that
relate to any such person’s ownership of Company capital stock or other Company
securities).


          3.17
Environmental and Safety Laws. The
Company is not in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety, and no
expenditures are or are reasonably anticipated to be required in order to
comply with any such existing statute, law or regulation. During the period
that the Company has owned or leased its properties and facilities,
(i) there have been no disposals, releases or threatened releases of
Hazardous Materials (as defined below) by the Company on, from or under such
properties or facilities, and (ii) other than normal office products and
cleaning supplies, it has not used, generated, manufactured or stored on, under
or about such properties or facilities or transported to or from such properties
or facilities any Hazardous Materials. For purposes of this Section, the terms “disposal,”
“release” and “threatened release” shall have the definitions assigned thereto
by the Comprehensive Environmental Response, Compensation and Liability Act of
1980, 42 U.S.C. Section 9601, et seq. as
amended (“CERCLA”). For the
purposes of this Section, “Hazardous
Materials” shall mean any hazardous or toxic substance, material
or waste, which is regulated under, or defined as a “hazardous substance,” “pollutant,”
“contaminant,” “toxic chemical,” “hazardous material,” “toxic substance” or “hazardous
chemical” under (1) CERCLA; (2) the Emergency Planning and Community
Right-to-Know Act, 42 U.S.C. Section 11001, et
seq.; (3) the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, et seq.; (4) the
Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq.; (5) the Occupational Safety and Health Act of
1970, 29


9






U.S.C. Section
651, et seq.; (6) regulations
promulgated under any of the above statutes; or (7) any applicable state
or local statute, ordinance, rule or regulation that has a scope or purpose
similar to those statutes identified above.


          3.18
Condition of Properties. The
offices and material equipment, inventory and other assets of the Company have
been kept in reasonable condition and repair in the ordinary course of
business, are reasonably fit and suitable for the purposes for which they are
being used and are believed by the Company to conform in all material respects
with applicable ordinances, regulations and laws.


          3.19
Licenses. The Company
possesses from the appropriate agency, commission, board and government body
and authority, whether state, local, federal or foreign, all licenses, permits,
authorizations, approvals, franchises and rights which (i) are necessary
for it to engage in the business currently conducted by it, and (ii) if
not possessed by the Company, would have a Material Adverse Effect. A list of
all material licenses, permits, approvals and similar rights currently in
effect is set forth on Schedule 3.19.


          3.20
Insurance. The Company has
in full force and effect fire and casualty insurance policies and insurance
against other hazards, risks, and liabilities to persons and property to the
extent and in the manner customary for similarly situated companies in similar
businesses, and such insurance policies have been issued by financially sound,
duly licensed and reputable insurers. 


          3.21
Consent. Other than the
declaration of effectiveness by the SEC of any registration statement required
to be filed pursuant to the Registration Rights Agreement, no consent,
approval, authorization or order of any court, governmental agency or body or
arbitrator having jurisdiction over the Company, or any of its affiliates, the
NASD, OTC Bulletin Board or the Company’s shareholders is required for
execution of the Transaction Agreements, including, without limitation the
issuance and sale of the Securities and the performance of the Company’s
obligations under the Transaction Agreements.


          3.22
Offering. Subject in part
to the accuracy of the Investor’s representations and warranties in
Section 4, the offer, sale, and issuance of the Securities in compliance
with the terms of this Agreement constitute transactions exempt from the
registration requirements of Section 5 of the Securities Act of 1933, as
amended (the “Securities Act”),
and all applicable state securities laws. Neither the Company nor any agent on
its behalf has solicited or will solicit any offers to sell or has offered to
sell or will offer to sell all or any part of the Securities to any person or
persons so as to bring the sale of such Securities by the Company within the
registration provisions of the Securities Act or any applicable state
securities laws.


          3.23
Brokers or Finders. Except
as set forth on Schedule 3.23, the Company has not engaged any brokers,
finders, or agents, and the Investor has not incurred, and will not incur,
directly or indirectly, as a result of any action taken by the Company, any
liability for brokerage or finders’ fees or agents’ commissions or any similar
charges in connection with the Transaction Agreements. 


          3.24
No Market Manipulation. The
Company has not taken, and will not take, directly or indirectly, any action
designed to, or that might reasonably be expected to, cause or result in
stabilization or manipulation of the price of the common stock of the Company
to facilitate the sale or resale of the Securities or affect the price at which
the Securities may be issued.


          3.25
Reporting Company. The
Company is a publicly-held company subject to reporting obligations pursuant to
Sections 15(d) and 13 of the Securities Exchange Act of 1934 (the “Exchange Act”) and has a class of common
stock registered pursuant to Section 12(g) of the Exchange Act. The Company’s
Common Stock is listed on the OTC Bulletin Board. Pursuant to the provisions of
the


10






Exchange Act,
the Company has timely filed all reports and other materials required to be
filed thereunder with the Securities and Exchange Commission (together with any
and all filings made under the Securities Act, the “SEC Filings”) during the preceding twelve months except as
set forth on Schedule 3.25 hereto.


          3.26
Information Concerning Company.
The Company’s SEC Filings contain all material information relating to the
Company and its operations and financial condition as of their respective dates
which information is required to be disclosed therein. Since the Balance Sheet
Date and except as stated in Schedule 3.26, there has been no
material adverse change in the Company’s business, financial condition or
affairs that has not been disclosed in an SEC Filings as required by the
Exchange Act, not disclosed in the SEC Filings. The SEC Filings do not contain
any untrue statement of a material fact or omit to state a material fact in
light of the circumstances when made required to be stated therein or necessary
to make the statements therein not misleading.


          3.27
Stop Transfer Order. The
Securities are restricted securities as of the date of this Agreement. The
Company will not issue any stop transfer order or other order impeding the sale
and delivery of the Securities, except as may be required by federal securities
laws, in which case the Company will promptly provide written notice of such
stop order with an explanation of the basis for such stop order to the Investor
as provided below in Section 5.1.


          3.28
No Integrated Offering.
Neither the Company, nor any of its affiliates, nor any person acting on its or
their behalf, has directly or indirectly made any offers or sales of any
security or solicited any offers to buy any security under circumstances that
would cause the offering of the Securities pursuant to this Agreement to be
integrated with prior offerings by the Company for purposes of the Securities
Act or any applicable stockholder approval provisions, including, without
limitation, under the rules and regulations of OTC Bulletin Board nor will the
Company or any of its affiliates or subsidiaries take any action or steps that
would cause the offering of the Securities to be integrated with other
offerings. The Company has not conducted and will not conduct any offering
other than the transactions contemplated hereby that will be integrated with
the issuance of the Securities.


          3.29
No General Solicitation. Neither
the Company, nor any of its affiliates or any person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D under the Securities Act) in connection
with the offer or sale of the Securities.


          3.30
Listing. The Company’s
Common Stock is quoted on, and listed for trading on the OTC Bulletin Board.
The Company has not received any oral or written notice that its Common Stock
will be delisted from the OTC Bulletin Board or that the Common Stock does not
meet all requirements for the continuation of such listing, and the Company is
not aware of any event or circumstance that will or may cause the Company’s
Common Stock to be delisted from the OTC Bulletin Board.


          3.31
Correctness of Representations.
The Company represents that the foregoing representations and warranties are
true and correct as of the date hereof, and, unless the Company otherwise
notifies the Investor in writing prior to the Closing Date, shall be true and
correct as of the Closing Date.


          3.32
Disclosure. To the best
knowledge of the Company, the Company has made available to the Investor, all
the information that the Investor has requested for deciding whether to
purchase the Securities. Neither the Transaction Agreements nor any other
documents or certificates delivered in connection with this Agreement, which
shall include the Company’s SEC Filings, when taken as a whole, contains any
untrue statement of a material fact or omits to state a material fact necessary
to make the 


11






statements
contained herein or therein not misleading in light of the circumstances under
which they were made.


SECTION 4


The Investor’s Representations and Warranties


As a material
inducement to the Company to enter into this Agreement and consummate the
transactions contemplated hereby, the Investor hereby makes to the Company the
representations and warranties contained in this Section 4.


          4.1
No Registration. The
Investor understands and expressly acknowledges that the Securities have not
been, and will not be, registered under the Securities Act in reliance on a
specific exemption from the Securities Act’s registration provisions, the
availability of which depends upon, among other things, the bona fide nature of
the investment intent and the accuracy of the Investor’s representations as
expressed in this Agreement or otherwise made pursuant to this Agreement.


          4.2
Investment Intent. The
Investor is acquiring the Securities for investment for the Investor’s own
account, not as a nominee or agent, and not with the view to, or for resale in
connection with, any distribution of the Securities.


          4.3
Investment Experience. The
Investor (or the Investor’s purchaser representative, within the meaning of
Regulation D, Rule 501 (h) promulgated by the SEC), has substantial experience
in evaluating and investing in private placement transactions of securities in
companies similar to the Company so that the Investor or such purchaser
representative is capable of evaluating the merits and risks of the Investor’s
investment in the Company and has the capacity to protect the Investor’s own
interests. The Investor has received, carefully reviewed and understands the
terms and conditions set forth in this Agreement and the other Transaction
Agreements which contains the financial statements of the Company and other
information important to an investment in the Company.


          4.4
Speculative Nature of Investment.
The Investor understands and expressly acknowledges that the Investor’s
investment in the Company is speculative and entails a substantial degree of
risk and the Investor is in a position to lose the entire amount of the
Investor’s investment.


          4.5
Access to Data and Documentation.
The Investor acknowledges that it has reviewed this Agreement, along with
the Exhibits and Schedules attached hereto, and the other Transaction
Agreements and made its own investigation of the Company, its business,
personnel and prospects; has had an opportunity to discuss the Company’s
business, management, and financial affairs with the Company’s management and
the terms of this investment. The Investor has also had an opportunity to ask
questions of the Company’s officers, which questions were answered to the
Investor’s full satisfaction, and obtain such additional information and
documents as the Investor considers necessary or advisable in order to form a
decision concerning an investment in the Company. This Section 4.5 does
not limit or modify the Company’s representations and warranties contained in
Section 3 or the Investor’s right to rely on the Company’s representations
and warranties.


          4.6
Accredited Investor. The
Investor is an “accredited investor” within the meaning of Regulation D, Rule
501 (a), promulgated by the Securities and Exchange Commission.


          4.7
Residency. The Investor’s
place and state of residency, or, in the case of a partnership, corporation, or
other entity, such entity’s principal place of business, is correctly set forth
on Exhibit A.


12






          4.8
Rule 144. Investor
acknowledges and agrees that the Shares, and, if issued, the Warrant Shares are
“restricted securities” as defined in Rule 144 promulgated under the Securities
Act, as in effect from time to time, and must be held indefinitely unless they
are subsequently registered under the Securities Act or an exemption from such
registration is available. Investor has been advised or is aware of the
provisions of Rule 144, which permits limited resale of shares purchased in a
private placement subject to the satisfaction of certain conditions, including,
among other things: the availability of certain current public information
about the Company, the resale occurring following the required holding period
under Rule 144 and the number of shares being sold during any three-month
period not exceeding specified limitations.


          4.9
Authorization.


               (a)
The Investor has all requisite power and authority to execute and deliver the
Transaction Agreements, to purchase the Securities under this Agreement, and to
carry out and perform the Investor’s obligations under the terms of the
Transaction Agreements. All action required by the Investor for the
authorization, execution, delivery, and performance of the Transaction
Agreements, and the performance of all of the Investor’s obligations under the
Transaction Agreements, has been taken.


               (b)
The Transaction Agreements, when executed and delivered by the Investor, will
constitute the Investor’s valid and legally binding obligations, enforceable in
accordance with their terms except: (i) to the extent that the indemnification
provisions contained in the Registration Rights Agreement may be limited by
applicable law and public policy principles, (ii) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, and other laws of general
application affecting enforcement of creditors’ rights generally, and
(iii) as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies or by general
equity principles.


          4.10
Further Limitations on Disposition.
The Investor hereby acknowledges and agrees to be bound by the transfer
restrictions associated with the Securities set forth in the Registration
Rights Agreement. In addition, the Investor hereby acknowledges and agrees as
follows:


               (a)
Without in any way limiting the representations and warranties set forth
elsewhere in this Section 4 or any covenants set forth in this Agreement,
the Investor agrees not to make any disposition of all or any portion of the
Securities unless and until (i) there is then in effect a registration
statement under the Securities Act covering such proposed disposition and such
disposition is made in accordance with such registration statement or
(ii) the Investor will have notified the Company of the proposed disposition
and, if reasonably requested by and at the sole expense of the Company, the
Investor will have furnished the Company with an opinion of counsel, reasonably
satisfactory to the Company, that such disposition will be exempt from
registration under the Securities Act.


               (b)
Notwithstanding the foregoing subsection, no such registration statement or
opinion of counsel will be necessary for a transfer by the Investor:


                    (i)
to a fund, partnership, limited liability company, or other entity that is
affiliated with the transferring Investor;


                    (ii)
to a partner or member (or retired partner or member) of the transferring
Investor, or to the estate of any such partner or member (or retired partner or
member);


                    (iii)
to the transferring Investor’s spouse, siblings, lineal descendants, or
ancestors by gift, will, or intestate succession; or


13






                    (iv)
in compliance with Rule 144(k) (or any successor provision) of the Securities
Act so long as the Company is furnished with satisfactory evidence of full
compliance with Rule 144(k) (or any successor provision); provided, however,
that, in the case of Section 4.10(b)(i), Section 4.10(b)(ii), or Section 4.10
(b)(iii), the transferee agrees in writing to be subject to the terms of this
Agreement and other Transaction Agreements to the same extent as if such
transferee were an original Investor under this Agreement; provided, further,
however, that any proposed purchaser, assignee, transferee or pledgee be an “accredited
investor” and that the Securities have been held for twelve months from the
date of the Closing and applicable to any such Securities. The Investor will
cause any proposed purchaser, assignee, transferee, or pledgee of any
Securities held by the Investor to take and hold such securities subject to the
provisions and upon the conditions of this Agreement. The Investor consents to
the Company’s making a notation on the Company’s records and giving
instructions to any transfer agent for the Company’s capital stock to implement
the transfer restrictions established in this Agreement.


          4.11
Legend; Restriction on Transfer.
The Investor understands and agrees that the certificates evidencing the Shares
and Warrant Shares, or any other securities issued in respect thereof upon any
stock split, stock dividend, recapitalization, merger, consolidation, or
similar event, will bear the legend required by the Transaction Agreements, and
federal and state securities laws, including the following: 


	
 

	
 


	
 

	
“THE SHARES
  REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
  ACT OF 1933, AS AMENDED, OR UNDER STATE SECURITIES LAWS. THESE SHARES MAY NOT
  BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
  EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR LAWS OR AN OPINION OF
  COUNSEL REASONABLY SATISFACTORY TO CAPSOURCE FINANCIAL, INC. THAT SUCH
  REGISTRATION IS NOT REQUIRED.”





          4.12
Warrant Legend. The
Warrants shall bear the following legend:


	
 

	
 


	
 

	
“THIS
  WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
  BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER STATE
  SECURITIES LAW. THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF
  THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
  THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER
  SAID ACT OR LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
  CAPSOURCE FINANCIAL, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”





SECTION 5


Covenants of the Company


The Company
covenants and agrees with the Investor as follows:


          5.1
Stop Orders. The Company
will advise the Investor, promptly after it receives notice of issuance by the
SEC, any state securities commission or any other regulatory authority, of any
stop order or of any order preventing or suspending any offering of any
securities of the Company, or of the suspension of the qualification of the
Common Stock of the Company for offering or sale in any 


14






jurisdiction,
or the initiation of any proceeding for any such purpose, and such notice shall
include an explanation of the basis for any such order, suspension or
proceeding.


          5.2
Listing. The Company shall
promptly secure the listing of the Shares and Warrant Shares issuable upon
exercise of the Warrants on the OTC Bulletin Board (subject to official notice
of issuance) and shall maintain such listing so long as any of the Shares,
Warrant or Warrant Shares are held by the Investor. The Company will maintain
the listing of its Common Stock on the OTC Bulletin Board or, in the
alternative, a national securities exchange or automated quotation system, such
as the NASDAQ SmallCap Market or American Stock Exchange, and will comply in all
respects with the Company’s reporting, filing and other obligations under the
bylaws or rules of the National Association of Securities Dealers, Inc. (“NASD”) and the
OTC Bulletin Board. The Company will provide the Investor with copies of all
notices it receives notifying the Company of the threatened or actual delisting
of the Common Stock from the OTC Bulletin Board provided the provisions of such
information to the Investor would not violate the provisions of Regulation FD
under the Securities Act.


          5.3
Market Regulations. The
Company shall notify the SEC, NASD, the OTC Bulletin Board and applicable state
authorities, in accordance with their requirements, if any, of the transactions
contemplated by the Transaction Agreements, and shall take all other necessary
action and proceedings as may be required and permitted by applicable law, rule
and regulation, for the legal and valid issuance of the Securities to the
Investor and promptly provide copies thereof to the Investor.


          5.4
Reporting Requirements. From
the Closing Date and until three (3) years following the earlier of the
expiration or exercise of the Warrants, the Company will (i) cause its Common
Stock to continue to be registered under Sections 12(b) or 12(g) of the
Exchange Act, (ii) comply in all respects with its reporting and filing
obligations under the Exchange Act, (iii) comply with all reporting
requirements that is applicable to an issuer with a class of Shares registered
pursuant to Section 12(g) of the Exchange Act, and (iv) comply with all
requirements related to the registration statement filed with the SEC covering
the Shares and Warrant Shares under the terms of the Registration Rights
Agreement (the “Registration Statement”). The Company will use its best efforts
not to take any action or file any document (whether or not permitted by the
Securities Act or the Exchange Act or the rules thereunder) to terminate or
suspend such registration or to terminate or suspend its reporting and filing
obligations under said Acts so long as any of the Shares, Warrants or Warrant
Shares are held by the Investor. 


          5.5
Use of Proceeds. The
Company shall use the proceeds from this offer and sale of the Securities for
the acquisition of Prime Time Equipment, Inc. and for general corporate
purposes; provided, however, that at no time may the Company utilize such
proceeds for payment of or reduction of any indebtedness of the Company,
whether now existing or hereinafter incurred. 


          5.6
Reservation of Common Stock.
The Company shall reserve from its authorized but unissued Common Stock, for as
long as the Warrants remain outstanding, one share of Common Stock for each
Warrant Share issuable from time-to-time upon exercise of the Warrants.


          5.7 Designation of Board Member.
The Company agrees to enter into and deliver to the Investor a Voting Agreement
and Irrevocable Proxy, in the form attached hereto as Exhibit D,
pursuant to which the Company shall cause to be nominated for, and Randolph
Pentel agrees to vote all of the Common Stock beneficially owned by him in
favor of, the election of one (1) individual to be designated from time to time
by the Investor as a member of the Company’s Board of Directors (the “Designated
Director”), to serve until such time as the Investor no longer hold any of the
Shares, Warrants or Warrant Shares. The Company also agrees that, within
fifteen (15) days following the Closing, it shall undertake to cause its Board
of Directors to perform all steps necessary (including, if appropriate, an
action to increase the size of the board to create a directorship vacancy as
permitted by Section 3.11 of the


15






Company’s
Bylaws), to appoint the Designated Director to serve as a director of the
Company until the Company’s next annual meeting of shareholders or until his or
her successor is duly elected and qualified.


          5.8
Taxes. The Company will
promptly pay and discharge, or cause to be paid and discharged, when due and
payable, all lawful taxes, assessments and governmental charges or levies
imposed upon the income, profits, property or business of the Company;
provided, however, that any such tax, assessment, charge or levy need not be
paid if the validity thereof shall currently be contested in good faith by
appropriate proceedings and if the Company shall have set aside on its books
adequate reserves with respect thereto, except that the Company will pay all
such contested taxes, assessments, charges or levies immediately upon the
commencement of proceedings to foreclose any lien which may have attached as
security therefore.


          5.9
Insurance. The Company will
keep its assets which are of an insurable character insured by financially
sound, duly licensed and reputable insurers against loss or damage by fire,
explosion and other risks customarily insured against by companies in the
Company’s line of business and not in any event less than 100% of the insurable
value of the property insured; and the Company will maintain, with financially
sound, duly licensed and reputable insurers, insurance against other hazards
and risks and liability to persons and property to the extent and in the manner
customary for companies in similar businesses similarly situated and to the
extent available on commercially reasonable terms.


          5.10
Books and Records. The
Company will keep true records and books of account in which full, true and
correct entries will be made of all dealings or transactions in relation to its
business and affairs in accordance with generally accepted accounting principles
applied on a consistent basis.


          5.11
Governmental Authorities. The
Company shall duly observe and conform to all applicable requirements of
governmental or quasi-governmental authorities relating to the conduct of its
business or to its properties or assets.


          5.12
Intellectual Property. The
Company shall maintain in full force and effect its corporate existence, rights
and franchises and all licenses and other rights to use intellectual property
owned or possessed by it and reasonably deemed to be necessary to the conduct
of its business.


          5.13
Properties. The Company
will keep its properties in good repair, working order and condition,
reasonable wear and tear excepted, and from time to time make all needful and
proper repairs, renewals, replacements, additions and improvements thereto; and
the Company will at all times comply with each provision of all leases to which
it is a party or under which it occupies property if the breach of such
provision could reasonably be expected to have a material adverse effect


          5.14
Correctness of Representations.
The Company represents that the foregoing representations and warranties
are true and correct as of the date hereof and, unless the Company otherwise
notifies the Investor prior to the Closing Date (as hereinafter defined), shall
be true and correct as of the Closing Date.


SECTION 6


Investor’s Closing Conditions


The Investor’s
obligation to purchase the Securities at a Closing is subject to the
fulfillment, on or before such Closing, of each of the following conditions,
unless waived by such Investor:


16






          6.1
Representations and Warranties.
The representations and warranties made by the Company in Section 3
(as modified by the disclosures on the Schedule of Exceptions which may be
updated from time to time in connection with the Closing) will be true and
correct in all respects as of the Closing.


          6.2
Covenants. All covenants,
agreements, and conditions contained in this Agreement to be performed by the
Company on or before the Closing will have been performed or complied with in
all material respects on or before such Closing.


          6.3
Blue Sky. The Company will
have received all necessary Blue Sky law permits and qualifications, or have
available corresponding exemptions, as required by any state for the offer and
sale of the Shares and the Common Stock issuable upon conversion of the Shares.


          6.4
Due Diligence. The Investor will have completed, as
determined in its sole discretion, the Investor’s legal and financing due
diligence review of the Company, and such review will have been determined by
the Investor to be satisfactory. 


          6.5
Convertible Debt. The
Company’s outstanding indebtedness owed to Randolph M. Pentel together with all
accrued but unpaid interest thereon, which totals $871,865.89 as of May 1,
2006, will have converted into shares and warrants to purchase shares of the
Company’s Common Stock at the same price per share and warrant paid by the
Investor for the purchase of Shares and Warrants hereby, and the Investor will
have received satisfactory evidence thereof; provided that such shares and
warrant shares received by Randolph M. Pentel upon the completion of the
foregoing conversion shall be subject to and entitled to the benefits of the
Registration Rights Agreement, in the form attached hereto as Exhibit C,
to the same extent as the Investor’s Shares and Warrant Shares, and Randolph M.
Pentel shall be party to such Registration Rights Agreement. 


          6.6 Registration Rights Agreement. The
Company, Randolph M. Pentel and the Investor will have executed and delivered
the Registration Rights Agreement in the form attached as Exhibit C,
which shall be in a form acceptable to the Investor in its sole discretion.


          6.7 Voting Agreement. The
Company, Randolph M. Pentel and the Investor will have executed and delivered
the Voting Agreement and Irrevocable Proxy in the form attached as Exhibit C,
which shall be in a form acceptable to the Investor in its sole discretion.


          6.8
Reservation of Shares of Conversion Stock.
The Shares and Warrant Shares shall have been duly authorized and reserved
for issuance.


          6.9
Payment of Fees. All fees
required to be paid at the Closing under Section 8.4 shall have been paid.


          6.10
[Intentionally Omitted]


          6.11
Compliance Certificate. The
Company will have delivered to counsel for the Investor, a certificate,
executed on the Company’s behalf by the Company’s Chief Financial Officer, in
substantially the form attached as Exhibit F, certifying the
satisfaction of the closing conditions listed in Section 6.1 and
Section 6.2.


          6.12
Legal Opinion. The Investor
will have received from the Company’s legal counsel a legal opinion, dated as
of the Effective Date, in substantially the form attached as Exhibit G.


17






          6.13
Secretary’s Certificate. The
Company will have delivered to counsel for the Investor, a certificate,
executed on the Company’s behalf by the Company’s Secretary, in substantially
the form attached as Exhibit H. 


          6.14
Consents; Permits and Waivers. The
Company shall have obtained any and all consents, authorizations, permits and
waivers necessary or appropriate for consummation of the transactions
contemplated by this Agreement and the other Transaction Agreements.


          6.15
Proceedings and Documents. The
Investor’s counsel will have reasonably approved (a) all proceedings
undertaken in connection with the transactions contemplated by the Transaction
Agreements and (b) all documents and instruments incident to such
proceedings.


SECTION 7


The Company’s Closing Conditions


The Company’s
obligation to sell and issue the Securities at the Closing is subject to the
fulfillment on or before the Closing of the following conditions, unless waived
by the Company:


          7.1
Representations and Warranties.
The representations and warranties contained in Section 4 of the
Investor at the Closing will be true and correct when made and will be true and
correct as of the date of such Closing.


          7.2
Covenants. All covenants,
agreements, and conditions contained in the Transaction Agreements to be
performed by Investor on or before the Closing will have been performed or
complied with in all material respects as of the Closing.


          7.3
Compliance with Securities Laws.
The Company will be satisfied that the offer and sale of the Securities
will be qualified or exempt from registration or qualification under all
applicable federal and state securities laws.


          7.4
Registration Rights Agreement. The
Company, Randolph M. Pentel and the Investor will have executed and delivered
the Registration Rights Agreement in the form attached as Exhibit C. 


          7.5
[Intentionally Omitted]


          7.6
Consents and Waivers. The
Company will have received any and all consents, permits, and waivers necessary
or appropriate for consummating the transactions contemplated by the
Transaction Agreements.


          7.7
Proceedings and Documents. The
Company’s counsel will have reasonably approved (a) all corporate
proceedings and other proceedings undertaken in connection with the
transactions contemplated by the Transaction Agreements at the Closing, and
(b) all documents and instruments incident to such proceedings.


18






SECTION 8


Miscellaneous


          8.1 Opinion. The offer and
sale of the Securities is being made pursuant to the exemption from the
registration provisions of the Securities Act of 1933, as amended, afforded by
Rule 506 of Regulation D promulgated thereunder. On the Closing Date, the
Company will provide an opinion reasonably acceptable to the Investor from the
Company’s legal counsel opining on the availability of the Regulation D
exemption as it relates to the offer and issuance of the Securities. A form of
the legal opinion is annexed hereto as Exhibit G. The Company will
provide, at the Company’s expense, such other legal opinions in the future as
are reasonably necessary for the exercise of the Warrants.


          8.2
Amendment. Except as
expressly provided in this Agreement, neither this Agreement nor any term of
this Agreement may be amended, waived, discharged, or terminated other than by
a written instrument referencing this Agreement and signed by the Company and
the Investor. 


          8.3
Notices. All notices and
other communications required or permitted under this Agreement or under any
other Transaction Agreement will be in writing and will be mailed by registered
or certified mail, postage prepaid, sent by facsimile, sent by electronic mail,
or otherwise delivered by hand or by messenger addressed: 


               (a)
if to the Company, to:


	
 

	
 

	
 


	
 

	
CapSource
  Financial, Inc.

	
CapSource
  Financial, Inc.


	
 

	
2305 Canyon
  Boulevard

	
1729 Donegal
  Drive


	
 

	
Suite 103

	
Woodbury, MN
  55125


	
 

	
Boulder, CO
  80302

	
Attn: Steven
  Reichert, Secretary


	
 

	
Attn: Fred
  C. Boethling, CEO

	
Facsimile
  number: (651) 578-6614


	
 

	
Facsimile
  number: (303) 245-0521

	
 


	
 

	
 

	
 


	
 

	
with a copy
  by facsimile only to:

	
 


	
 

	
 

	
 


	
 

	
Rider
  Bennett LLP

	
 


	
 

	
33 South 6th
  St.

	
 


	
 

	
Minneapolis,
  MN 55402

	
 


	
 

	
Attn: David
  B. Dean

	
 


	
 

	
Facsimile
  number: (612) 337-7616

	
 





               (b)
if to the Investor, to the name, address and telecopy number set forth on Exhibit
A for the Investor.


               (c)
Each such notice or other communication will, for all purposes of this
Agreement and the other Transaction Agreements, be treated as effective or
having been given when delivered if delivered personally, or, if sent by mail,
at the earlier of its receipt or 72 hours after such communication has been
deposited in a regularly maintained receptacle for the deposit of the United
States mail, addressed and mailed as specified above or, if sent by facsimile,
upon confirmation of facsimile transfer or, if sent by electronic mail, when
directed to the electronic mail address set forth on Exhibit A.


19






          8.4
Payment of Fees; Option.


               (a)
Legal Fees of Investor. The
Company shall pay to legal counsel for the Investor all legal fees and expenses
incurred by the Investor and its advisors, Whitebox Advisors, LLC (“Whitebox Advisors”), in connection with
this Agreement, the other Transaction Agreements and the Registration
Statement, including but not limited to any and all fees and expenses related
to due diligence or other matters relating to or arising out of any of the
foregoing.


               (b)
Origination Fee; Option to Purchase
Additional Securities. 


                    (i)
The Company will pay to Whitebox Advisors an origination fee
equal to two percent (2%) of the Purchase Price for the Securities sold
pursuant to this Agreement (“Origination Fee”).
The Origination Fee shall be paid to Whitebox Advisors on the Closing Date by
wire transfer to the account so designated by Whitebox Advisors. 


                    (ii)
For a period of 180 days from the Closing
Date, the Investor will have the option, in its sole discretion, to subscribe
for and purchase from the Company an additional 375,000 Shares at a purchase
price of $.40 per share and a Warrant to purchase 375,000 Warrant Shares with
an exercise price of $.90 per share. Upon subscription for and purchase of such
additional Shares and Warrants, the Company will issue and deliver to the
Investor, certificates representing the Shares along with a Warrant for the
purchase of such Warrant Shares in form of attached hereto as Exhibit B.


               (c)
Indemnification for Fees.
The Company on the one hand, and the Investor on the other hand, agree to
indemnify the other against and hold the other harmless from any and all
liabilities to any other persons claiming brokerage commissions, finder’s fees
or other similar payments, except as specified in Section 8.4(b) above, on
account of services purported to have been rendered on behalf of the
indemnifying party in connection with this Agreement or the transactions
contemplated hereby and arising out of such party’s actions. Except as set
forth in Section 8.4(b) or on Schedule 3.23, the Company represents
that there are no other parties entitled to receive fees, commissions, or
similar payments in connection with this Agreement.


          8.5
Governing Law. This
Agreement will be governed in all respects by the internal laws of the State of
Minnesota as applied to agreements entered into among Minnesota residents to be
performed entirely within Minnesota, without regard to Minnesota
conflicts-of-law principles.


          8.6
Survival. The
representations, warranties, covenants, and agreements made in this Agreement
will survive any investigation made by any Party and the closing of the
transactions contemplated by this Agreement.


          8.7
Successors and Assigns. This
Agreement, and any and all rights, duties, and obligations under this
Agreement, will not be assigned, transferred, delegated, or sublicensed by any
Party without the other Party’s prior written consent. Any attempt by any Party
without such prior written consent to assign, transfer, delegate, or sublicense
any rights, duties, or obligations that arise under this Agreement will be
void. Subject to the foregoing and except as otherwise provided in this
Agreement, the provisions of this Agreement will inure to the benefit of, and
be binding upon, the Parties’ respective successors, assigns, heirs, executors,
and administrators.


          8.8
Entire Agreement. The
Transaction Agreements constitute the full and entire understanding and
agreement between the Parties with regard to the subject matter hereof and
thereof, and no Party will be liable or bound to any other Party in any manner
with regard to the subject matter hereof


20






or thereof by
any warranties, representations, or covenants, in each case except as
specifically set forth in the Transaction Agreements.


          8.9
Delays or Omissions. Except
as expressly provided in this Agreement, no delay or omission to exercise any
right, power, or remedy accruing to any Party upon any breach or default of any
other Party under this Agreement will impair any such right, power, or remedy
of such non-defaulting Party, nor will such delay or omission be construed to
be a waiver of any such breach or default, or an acquiescence in such breach or
default, or of or in any similar breach or default subsequently occurring, nor
will any waiver of any single breach or default be deemed a waiver of any other
previous or subsequent breach or default. Any waiver, permit, consent, or
approval of any kind or character on the part of any Party of any breach or
default under this Agreement, or any waiver on the part of any Party of any
provisions or conditions of this Agreement, must be in writing and will be
effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
Party, will be cumulative and not alternative.


          8.10
Severability. Unless
otherwise expressly provided in this Agreement, each Investor’s rights under
this Agreement and under the other Transaction Agreements are several rights,
not rights jointly held with any of the other Investors. If any provision of
this Agreement becomes or is declared by a court of competent jurisdiction to
be illegal, unenforceable, or void, then this Agreement will continue in full
force and effect without such illegal, unenforceable, or void provision, and
the Parties agree to negotiate, in good faith, a legal and enforceable
substitute provision which most nearly effects the Parties’ intent in entering
into this Agreement as expressed in this Agreement.


          8.11
Titles and Subtitles. The
titles and subtitles used in this Agreement are used for convenience only and
are not to be considered in construing or interpreting this Agreement. All
references in this Agreement to sections, paragraphs, exhibits, and schedules
will, unless otherwise provided, refer to sections and paragraphs of this
Agreement and exhibits and schedules attached to this Agreement.


          8.12
Counterparts. This
Agreement may be executed in any number of counterparts, each of which will be
enforceable against the Parties actually executing such counterparts, and all
of which together will constitute one instrument.


          8.13
Facsimile Execution and Delivery.
A facsimile or other reproduction of this Agreement and/or the other
Transaction Agreements may be executed by one or more Parties, and an executed
copy of this Agreement and/or the other Transaction Agreements may be delivered
by one or more Parties by facsimile or similar electronic transmission device
pursuant to which the signature of or on behalf of such Party can be seen, and
such execution and delivery will be considered valid, binding, and effective
for all purposes. At any Party’s request, all Parties agree to execute an
original of this Agreement and/or any other Transaction Agreements as well as
any facsimile or other reproduction hereof and/or thereof.


          8.14
Jurisdiction and Venue. With
respect to any disputes arising out of or related to this Agreement or to any
other Transaction Agreement, the Parties consent to the exclusive jurisdiction
of, and venue in, the state courts in Hennepin County, Minnesota (or, in the
event of exclusive federal jurisdiction, the federal courts of the District of
Minnesota).


          8.15
Further Assurances. Each
Party agrees to execute and deliver, by the proper exercise of such Party’s
corporate, limited liability company, partnership, or other powers, all such
other and additional instruments and documents and do all such other acts and
things as may be necessary to more fully perform this Agreement.


21






          8.16
Construction. The Parties
have participated jointly in negotiating and drafting this Agreement and the
other Transaction Agreements. If any ambiguity, question of intent, or question
of interpretation arises with respect to this Agreement or any other
Transaction Agreement, then this Agreement or that other Transaction Agreement
will be construed as if drafted jointly by the Parties, and no presumption or
burden of proof will arise favoring or disfavoring any Party by virtue of the
authorship of any of the provisions of this Agreement or of any other
Transaction Agreement. As used in this Agreement and in the other Transaction
Agreements, the word “including” means “including, without limitation.”


[signature page follows]


22






The Parties
have executed this Securities Purchase Agreement as of the Effective Date.


	
 

	
 

	
 


	
 

	
CAPSOURCE FINANCIAL, INC.,


	
 

	
 


	
 

	
By:

	
 

	
 

	
 

	



	
 

	
 

	
Steven
  Reichert


	
 

	
 

	
Vice
  President and Secretary


	
 

	
 

	
 


	
 

	
INVESTOR:


	
 

	
 


	
 

	
WHITEBOX INTERMARKET PARTNERS L.P.


	
 

	
 


	
 

	
By:

	
 

	
 

	
 

	



	
 

	
 

	
Jonathan D.
  Wood


	
 

	
 

	
Chief
  Financial Officer





23






EXHIBIT
A


Schedule
of Investor


	
Investors

	
 

	
Securities Being Acquired

	
 

	
Purchase Price


	


	
 

	


	
 

	




	
Whitebox Intermarket Partners L.P.

	
 

	
2,500,000 Shares and a
  warrant to purchase 2,500,000 Shares

	
 

	
$1,000,000


	
3033
  Excelsior Boulevard, Suite 300

	
 

	
 

	
 

	
 


	
Minneapolis,
  Minnesota 55416 

	
 

	
 

	
 

	
 


	
Attn:
  Jonathan Wood

	
 

	
 

	
 

	
 


	
Facsimile
  number: (612) 253-6151

	
 

	
 

	
 

	
 





A-1






EXHIBIT
B


Form
of Warrant



See Exhibit 4.3 to this Current Report on Form 8-K/A.



B-1






EXHIBIT
C


Form
of Registration Rights Agreement



See Exhibit 4.1 to this Current Report on Form 8-K/A.



C-1






EXHIBIT
D


Form
of Voting Agreement and Irrevocable Proxy



See Exhibit 4.2 to this Current Report on Form 8-K/A.



D-1






EXHIBIT
E


Wire
Transfer Instructions * 







	 *  	 Portions
of this document have been omitted pursuant to a request for confidential treatment. Such
material has been filed separately with the Securities and Exchange Commission.  














E-1








EXHIBIT
F


Form
of Compliance Certificate


(attached)














F-1










CAPSOURCE FINANCIAL, INC.


COMPLIANCE CERTIFICATE


 


This Compliance Certificate is delivered pursuant to Section 6.11 of that certain Securities Purchase Agreement dated as of May 1, 2006 (the “Agreement”) by and among CapSource Financial, Inc., a Colorado corporation (the “Company”) and the Investor listed on Exhibit A to the Agreement.  Unless otherwise defined herein, capitalized terms used herein have the meaning ascribed to them in the Agreement.


The undersigned hereby certifies that:


1.           The representations and warranties set forth in Section 3 of the Agreement (as modified by the disclosures on the Schedule of Exceptions)  are true and correct in all respects at and as of the date hereof.  


2.           The Company has performed or complied in all respects with all of the covenants, agreements and conditions required to be performed by it under the Agreement as of the date hereof.


3.           The Agreement and other Transaction Agreements to which the Company is a party have been duly executed and delivered on behalf of the Company by Steven Reichert, as Vice President and Secretary of the Company, who was duly elected or appointed, qualified and authorized to act in such capacity at the time of the execution and delivery thereof. 


 





	
            
 Dated:  
 	
            May 1, 2006
 	
             
 	
             
 	
              
 
	
             
 	
             
 	
             
 	
            Steven J. Kutcher

Chief Financial Officer
 





 





-1-









EXHIBIT A




 



WRITTEN ACTION


OF THE 


BOARD OF DIRECTORS


OF


CAPSOURCE FINANCIAL, INC.


 



Pursuant to the provisions of Colorado Statutes Section 7-108-202, the undersigned, being all of the members of the Board of Directors of CapSource Financial, Inc., a Colorado corporation (the “Company”), do hereby authorize, consent to and approve the following actions and resolutions by and on behalf of the Board of Directors of the Company in lieu of holding a meeting:



 



WHEREAS, the Board of Directors (“Board”) has deemed it advisable and in the best interest of the Company to take the following actions: (1) enter into a Securities Purchase Agreement for the investment of capital into the Company in return for issuance of Common Stock and Warrants to purchase Common Stock of the Company to Whitebox Intermarket Partners, L.P., (“Whitebox”) and Pandora Select Partners, L.P., (“Pandora”) (collectively, “Investors”); (2) as a condition to the foregoing to convert debt of the Company owed to and held in the name of Randolph M. Pentel including all principal and accrued interest in the amount of $871,865.89 at the conversion price of $0.40 per share into 2,179,664 shares of common stock; (3) to register the Common Stock issued to the Investors, underlying the Warrants and issued to Randolph M.
Pentel as a result of the debt conversion under the Securities and Exchange Act; (4) to approve a floor-planning financing; with Navistar: and (5) to approve the proposed purchase of assets from  Prime Time Equipment, Inc. by CapSource Equipment Company, Inc., the Company’s wholly-owned subsidiary; 



 



NOW THEREFORE, BE IT: RESOLVED, that the actions of the directors and officers of the Company in preparing for, negotiating and completing the Securities Purchase Agreement and related documents substantially in the form attached hereto as Exhibit A are hereby in all respects approved, ratified and confirmed, and the Board hereby authorizes and reserves for issuance 5,750,000 shares of the Company’s Common Stock to the Investors at a purchase price of $0.40 per share (the “Shares”) and warrants (the “Warrants”), to purchase an additional 5,750,000 shares of Common Stock at an exercise price of $.90 per share (the “Warrant Shares”); 



 



FURTHER RESOLVED, that for a period of 180 days from the Closing date, the Company grants to the Investors the option to subscribe for and purchase from the Company, and the Company hereby authorizes and reserves for issuance an additional 750,000 Shares at a purchase price of $.40 per share and Warrants to purchase an additional 750,000 Warrant Shares at an exercise price of $.90 per share; 



 



FURTHER RESOLVED, that debt of the Company owed to and held in the name of Randolph M. Pentel, including all principal and accrued interest in the amount of $871,865.89 be converted at the conversion price of $0.40 per share into 2,179,664 shares of Common Stock of the Company (“Pentel Shares”);



 



 









 




FURTHER RESOLVED, that a registration statement covering the Shares, Warrant Shares and Pentel Shares be filed with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended, to enable the resale of such shares on the Over-the- Counter Bulletin Board; 



 



FURTHER RESOLVED, that the Navistar floor-planning financing as presented to the Board and attached as Exhibit B is hereby approved, ratified and confirmed; 



 



FURTHER RESOLVED, that the proposed purchase of assets from Prime Time Equipment, Inc., a California corporation, by CapSource Equipment Company, Inc., the Company’s wholly-owned subsidiary; on the terms presented to the Board and attached as Exhibit C is hereby approved, ratified and confirmed; 



 



FURTHER RESOLVED, that each officer of the Company is hereby authorized to take all such other actions including the execution and delivery of all documents and making all arrangements for the completion of any and all documentation and the payment of all fees, as shall in the good faith judgment of such officers be necessary or appropriate to finalize and give effect to the foregoing transactions;



 



FURTHER RESOLVED, that all actions taken by the officers of the Company prior to the date hereof in connection with preparing for, negotiating and completing of the actions referenced herein and all related documents are hereby approved, ratified and confirmed in all respects; 



 



FURTHER RESOLVED, that this Written Action may be executed in one or more counterparts, the effect being a combination of each merged into a single document. 



 



[Signatures on Following Page]



 


 








2









 




The foregoing actions and resolutions are hereby adopted by and on behalf of the Board of Directors of the Company effective as of the April 21, 2006, in lieu of holding a meeting of the Board of Directors for these purposes.



 






	
            /s/ Fred C. Boethling
 	
            
 	
            
 
	
            Fred C. Boethling
 	
            
 	
            
 






 


 






	
            /s/ Lynch Grattan
 	
            
 	
            
 
	
            Lynch Grattan
 	
            
 	
            
 






 


 






	
            /s/ Wayne Hoovestal
 	
            
 	
            
 
	
            Wayne Hoovestol
 	
            
 	
            
 






 


 






	
            /s/ Randolph M. Pentel
 	
            
 	
            
 
	
            Randolph M. Pentel
 	
            
 	
            
 






 


 






	
            /s/ Steven E. Reichert
 	
            
 	
            
 
	
            Steven E. Reichert
 	
            
 	
            
 






 


 


 


3


 











EXHIBIT
B





See Exhibit 3.2 to CapSource’s Registration Statement on Form SB-2 filed October 7, 2002, as
amended by CapSource’s Amendment No. 1 to Form SB-2 filed December 9, 2002.












 









EXHIBIT
G


Form
of Legal Opinion


(attached)











G-1








David B. Dean


(612) 340-8916


dbdean@riderlaw.com


 


May 1, 2006


 





	
            Whitebox Intermarket Partners, L.P.

3033 Excelsior Boulevard

Suite 300

Minneapolis, MN 55416
 	
            Pandora Select Partners L.P.

3033 Excelsior Boulevard

Suite 300

Minneapolis, MN 55416
 





 





	
             
 	
            Re:
 	
            Securities Purchase Agreement (the "Agreement") dated as of May 1, 2006, by and among CapSource Financial, Inc., a Colorado corporation ("CapSource"), 
 






Ladies and Gentlemen:


We have acted as counsel to CapSource in connection with the Agreement.  In this connection, we have examined the Agreement, and the following documents, all of which are dated as of May 1, 2006 (collectively referred to as the "Documents"):





	
            1.
 	
            Warrant Agreement among CapSource and the Investors (as defined in the Agreement);
 









	
            2.
 	
            Registration Rights Agreement executed among CapSource, the Investors and Randolph M. Pentel; and
 









	
            3.
 	
            Voting Agreement and Irrevocable Proxy among CapSource, the Investors and Randolph M. Pentel (“Voting Agreement”). 
 






In addition, we have examined the Articles of Incorporation and By-Laws, as amended to the date hereof, of CapSource, and resolutions adopted by the Board of Directors of CapSource pertaining to authorization of those transactions contemplated by the Documents, and have made such further investigation and examined such further documents as we deemed necessary to render opinions on the matters hereinafter set forth.  This Opinion Letter is being delivered to you pursuant to Section 8.1 of the Agreement.  Except as otherwise indicated herein, capitalized terms used in this Opinion Letter are defined as set forth in the Agreement or the Accord as that term is defined below.


Assumptions


In rendering the opinions contained herein we have assumed:


1.           That the Investors are a limited partnerships duly organized, existing and in good standing under the laws of the jurisdiction of their formation, with the power to carry on their 


 








RIDER BENNETT, LLP


Whitebox Intermarket Partners, L.P.


May 1, 2006


Page 2


 


businesses, to enter into the Documents and to consummate the transactions contemplated by the Documents.





	
             
 	
            2.
 	
            The Documents were duly authorized by the Investors.
 





3.           That the Investors will enforce their rights under the Documents in a commercially reasonable manner.


4.           The genuineness of signatures other than the signature(s) of CapSource and Pentel, the authenticity and completeness of all items submitted to us as originals, the conformity with originals of all items submitted to us as copies and the authenticity and completeness of such copies, the correctness and due authorization of all certifications or statements reviewed by us of public officials, and the due recording or filing of the Documents, if any, in accordance with applicable laws.


5.           To the extent that the obligations of the CapSource may be dependent upon such matters, we have assumed for purposes of this Opinion, the capacity of all natural persons and, other than with respect to CapSource and Pentel, that each additional party to the agreements and contracts referred to herein other than a natural person is duly formed, validly existing and in good standing under the laws of its jurisdiction of formation; that each such other party other than a natural person has the requisite corporate or other organizational power and authority to perform its obligations under such agreements and contracts, as applicable; and that such agreements and contracts have been duly authorized, executed and delivered by, and each of them constitutes the legally valid and binding
obligation of, such other parties including natural persons, as applicable, enforceable against such other parties in accordance with their respective terms;


6.           To the extent that the laws of any other jurisdictions may govern the transactions contemplated by the Documents, we have assumed that the laws of such other jurisdictions are identical to the laws of the State of Minnesota; and


7.           That none of the parties to the Documents is or has been a party to any fraud or illegality affecting any of the transactions provided for therein and that each of said parties has entered into such transactions in good faith and without notice of any adverse claim.


Qualifications


The opinions expressed hereinafter are subject to the following qualifications:


1.            Certain rights, remedies and waivers provided in the Documents (including, but not limited to, rights and remedies of "self help," waivers of notice or rights provided to CapSource by statute, or availability of equitable remedies and defenses generally) may be unenforceable under the laws of the State of Minnesota.  Similarly, the enforceability of the Documents may be subject to generally applicable rules of law that limit or affect the 


 









RIDER BENNETT, LLP


Whitebox Intermarket Partners, L.P.


May 1, 2006


Page 3


 


enforcement of any provision under circumstances which would:  (i) cause a substantial forfeiture or penalty on the burdened party, (ii) purport to require waiver of the obligations of good faith, fair dealing, reasonableness or diligence, (iii) grant a creditor the right to use force or cause a breach of the peace in the enforcement of rights, (iv) release, exculpate or exempt a party from, or require indemnification for, liability for its own action or inaction involving gross negligence, recklessness, willful misconduct or unlawful conduct, (v) entitle a party to recovery of attorneys' fees and other costs of enforcement, (vi) not discharge a guarantor, in the absence of a waiver or consent, to the extent that action by a creditor may impair the value of collateral securing the guaranteed obligations, or may materially modify the guaranteed obligations, to the detriment of the guarantor, (vii) violate
public policy or otherwise be unconscionable as a matter of law; or (viii) the effect of state and federal bankruptcy and insolvency laws and equitable principles relating to or limiting the rights of creditors generally.  However, the foregoing limitations should not, to our knowledge, substantially interfere with the practical realization of the benefits expressed in the Documents, except for the economic consequences of any procedural delay which may result from such laws and excluding the qualification described in clause (viii) above.


2.            We express no opinion as to matters governed by any laws other than the present laws of the State of Minnesota and applicable federal laws.


3.           Unless otherwise indicated, the opinions set forth are as of the date hereof and we disclaim any undertaking or obligation to advise you of changes which may hereafter be brought to our attention.  The opinions set forth herein are limited to those expressly stated and no other opinions should be implied.


4.           The opinions set forth herein are expressed solely for the benefit of the Investors their affiliates, successors and assigns, and no other party shall be entitled to rely upon such opinions.


5.           This Opinion Letter is governed by, and shall be interpreted in accordance with, the Legal Opinion Accord (the "Accord") of the American Bar Association Section of Business Law (1991).  As a consequence, it is subject to a number of qualifications, exceptions, definitions, limitations on coverage and other limitations, all as more particularly described in the Accord, and this opinion letter should be read in conjunction therewith. 


6.           As to matters of fact bearing upon the opinion set forth below, we have, with your consent, relied upon, and have not independently verified the accuracy of, the representations, warranties and other statements of all parties contained in the Documents  and other documents contemplated therein.  We have also relied on such certificates of governmental officials as we deemed appropriate.  In rendering such opinions, we have additionally relied on those assumptions described and set forth in the Accord.  Whenever reference is made to "our knowledge", it is limited to the "Actual Knowledge" of the "Primary Lawyer", David B. Dean, 


 







RIDER BENNETT, LLP


Whitebox Intermarket Partners, L.P.


May 1, 2006


Page 4


 


Esq., as those terms are defined in the Accord and without having conducted an independent investigation.  


7.            Without limiting the generality of the foregoing, we express no opinion herein as to the enforceability or recognition of any (i) provision which purports to establish evidentiary standards; (ii) provision purporting to waive or establish jurisdiction, venue, service of process, the right to a jury trial or statutes of limitations; or (iii) provision for cumulative remedies to the extent compensating the party entitled thereto in excess of the actual loss suffered by such party.


8.            No opinion is expressed herein in any respect as to (i) the statutes and ordinances, administrative decisions and the rules and regulations of counties, towns, municipalities and special political subdivisions; (ii) environmental laws and regulations; (iii) health and safety laws and regulations; (iv) fraudulent conveyance or fraudulent transfer laws; (v) defenses based on absence or inadequacy of consideration; (vi) patent, trademark, copyright and other intellectual property laws; (vii) tax laws and regulations; (viii) labor laws and regulations; and (ix) laws and regulations of or relating to the Board of Governors of the Federal Reserve System and the Comptroller of the Currency or otherwise governing banks.


9.            We express no opinion as to the enforceability of any provisions for late charges or default interest to the extent that such charges and interest would be considered penalties under general principles of contract law.


10.         We express no opinion herein as to compliance or the effect of non-compliance by any correspondent, agent or the Investors with any laws or regulations applicable to them or any of them in connection with the transactions described in the Documents.


Opinions


Based upon and subject to the foregoing, we are of the opinion that:


1.            CapSource is duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Colorado.


2.            CapSource has corporate power and authority to conduct its business as described in the Agreement and to enter into and perform its obligations under the Agreement, the Warrant Agreement, the Voting Agreement and the Registration Rights Agreement.


3.            CapSource is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business.


4.           The authorized, issued and outstanding capital stock of CapSource (including the Common Stock) conform to the respective descriptions thereof set forth in the Agreement.  All of the outstanding shares of Common Stock have been duly authorized and validly issued, are 


 







RIDER BENNETT, LLP


Whitebox Intermarket Partners, L.P.


May 1, 2006


Page 5


 


fully paid and nonassessable and have been issued in compliance with the registration and qualification requirements of federal and state securities laws or were issued pursuant to an available exemption from the registration and qualification requirements of applicable federal and state securities laws.  The form of stock certificate used to evidence the Common Stock is in due and proper form and complies with all applicable requirements of the Articles of Incorporation and Bylaws of CapSource and the Colorado Business Corporation Act (“CBCA”).  The description of CapSource’s stock option plans or other compensation arrangements, and the options or other rights granted and exercised thereunder, set forth in the Agreement accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights.


5.            No stockholder of CapSource or any other person has any preemptive right, right of first refusal or other similar right to subscribe for or purchase securities of CapSource arising (a) by operation of the Articles of Incorporation or Bylaws of CapSource or the CBCA or (b) to our best knowledge, otherwise.


6.           The Agreement, the Warrant Agreements, the Voting Agreement and the Registration Rights Agreement have been duly authorized, executed and delivered by, and are valid and binding agreements of, CapSource, enforceable in accordance with their terms, except as rights to indemnification thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors’ rights generally or by general equitable principles.


7.           The Common Stock and Warrant Shares to be purchased from CapSource under the Agreement and the Warrant Agreements have been duly authorized for issuance and sale pursuant to the Agreement and the Warrant Agreements and, when issued and delivered by CapSource pursuant to payment of the consideration set forth in the Agreements or Warrant Agreements, will be validly issued, fully paid and nonassessable. 


8.            No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental agency, is required for CapSource’s execution, delivery and performance of the Agreement, Voting Agreement or the Registration Rights Agreement, and consummation of the transactions contemplated thereby, except such as have been obtained from or are required under the Securities Act of 1933, as amended, applicable state securities or blue sky laws, the OTC Bulletin Board and the National Association of Securities Dealers, Inc.


9.           The execution and delivery of the Agreement, the Warrant Agreements, Voting Agreement and the Registration Rights Agreement, by CapSource and the performance by CapSource of its obligations thereunder (a) have been duly authorized by all necessary corporate action on the part of CapSource; (b) will not result in any violation of the provisions of the Articles of Incorporation or Bylaws of CapSource; (c) will not constitute a breach of, or a default under, or result in the creation or imposition of, any lien, charge or encumbrance upon any 


 







RIDER BENNETT, LLP


Whitebox Intermarket Partners, L.P.


May 1, 2006


Page 6


 


property or assets of CapSource pursuant to, to our best knowledge any existing instrument or agreement of CapSource; or (d) to our best knowledge, will not result in any violation of any law, administrative regulation or administrative or court decree applicable to CapSource.


10.         CapSource is not, and after receipt of payment for the Common Stock or Warrant Shares will not be, an “investment company” within the meaning of the Investment Company Act of 1940, as amended.


11.         To our best knowledge, CapSource is not in violation of its Articles of Incorporation or Bylaws or any law, administrative regulation or administrative or court decree applicable to CapSource and is not in default in the performance or observance of any obligation, agreement, covenant or condition contained in any material existing instrument or agreement.


The opinions expressed above are also subject to those exclusions and qualifications described and set forth in the Accord.


In rendering our opinions herein, we have made no investigation of the financial condition or credit of any party and this Opinion Letter should not be regarded in any way as a representation with respect thereto. Our opinions are as of the date hereof and we have no responsibility to update this opinion for events and circumstances occurring after the date hereof or as to facts relating to prior events which are subsequently brought to our attention.  We disavow any undertaking or obligation to advise you of any changes in law. This Opinion Letter is provided to you and is solely for your benefit in connection with the Documents.  It may not be relied upon by any other person, or duplicated or disclosed, without our prior written consent.


 





	
             
 	
             
 	
            Very truly yours,
 
	
             
 	
             
 	
             
 
	
             
 	
             
 	
            Rider, Bennett LLP
 
	
             
 	
             
 	
             
 
	
              
 	
             
 	
             
 	
            By:
 	
            
 /s/ David B. Dean
 
	
             
 	
             
 	
             
 	
            David B. Dean
 
					


            


 



DBD/mbk



 








EXHIBIT H


Form of Secretary’s Certificate


(attached)








H-1









CAPSOURCE FINANCIAL, INC.


SECRETARY’S CERTIFICATE


 


This Secretary’s Certificate is delivered pursuant to Section 6.13 of that certain Securities Purchase Agreement dated as of May 1, 2006 (the “Agreement”) by and among CapSource Financial, Inc., a Colorado corporation (the “Company”) and the Investor listed on Exhibit A to the Agreement.  Unless otherwise defined herein, capitalized terms used herein have the meaning ascribed to them in the Agreement.


The undersigned hereby certifies that:


1.           Attached hereto as Exhibit A are true, correct and complete copies of the resolutions duly adopted by the Board of Directors of the Company on April 21, 2006, authorizing the execution, delivery and performance by the Company of the Agreement and the other Transaction Agreements to which the Company is a party and the consummation of all the transactions contemplated thereby.  Such resolutions have not been amended or rescinded since the date thereof.  


2.           Attached hereto as Exhibit B is a true, correct and complete copy of the Company’s Bylaws.  The Bylaws have been duly adopted and have not been modified, amended or rescinded since the date thereof. 


 





	
            
 Dated:  
 	
            May 1, 2006
 	
             
 	
             
 	
              
 
	
             
 	
             
 	
             
 	
            Steve Reichert, Secretary
 







 


-1-













Schedule 3.3


CapSource Financial, Inc. Subsidiaries


 


 





	
             

Name
 	
             

Jurisdiction of Incorporation
 	
             

Ownership
 
	
             

Capsource Equipment Company, Inc. (D/b/a Prime Time Trailers
 	
             

Nevada
 	
             

100%
 
	
             

Remolques y Sistemas de Aliados de Transportacion, S.A. de C.V. (d/b/a RESALTA)1
 	
             

United Mexican States
 	
             

100%2
 
	
             

Rentas Y Remolques de Mexico, S.A. de C.V. (d/b/a REMEX)1 
 	
             

United Mexican States

 
 	
             

100%2
 
	
             

Opciones Integrales de Arrendamiento, S.A. de C.V. 1
 	
             

United Mexican States
 	
             

100%2
 





 


 


 


 


 


 


 


_________________________


          
1 As is customary in Mexico, the operating companies REMEX and RESALTA have an associated service
company, Opciones Integrales de Arrendamiento, S.A.de C.V., that employs all of the personnel who perform services for the
operating companies. The service company invoices the operating companies for the total personnel costs incurred on a monthly
basis. This operating structure, which is common business practice in Mexico, is done as part of a financial and tax planning tool
to limit certain personnel costs and related tax liabilities. 


          
2 See Schedule 3.16


 


 


 


 














Schedule 3.4 (e)


 


Outstanding Warrants


 





	
             

CapSource Financial,  Inc. Warrantholder Ledger
  
	
             

Certificate No.
 	
             

Date of Issue
 	
             

No. of Shares
 	
             

Expiration Date
 	
             

Exercise

Price
 	
             

Certificate issued to:
 	
             

Comments
 
	
             

011B
 	
             

4/24/01
 	
             

20,000
 	
             

5/1/06
 	
             

$5.00
 	
             

Gary and Patricia Dolphus

7881 Pebble Beach Court

Lake Worth, Florida 33467
 	
             

Issued as part of capital contribution 
 
	
             

012W
 	
             

6/1/01
 	
             

20,000
 	
             

6/1/06
 	
             

$1.10
 	
             

Steven J. Kutcher

2305 Canyon Boulevard

Suite 103

Boulder, Colorado 80302
 	
             

Issued as compensation
 
	
             

013W
 	
             

7/1/01
 	
             

125,000

 
 	
             

7/1/06
 	
             

$1.10
 	
             

Randolph M. Pentel

815 Deer Trail Court

St. Paul, Minnesota 55118
 	
             

Issued as compensation for service on the Board of Directors
 
	
             

014W
 	
             

4/1/02
 	
             

50,000
 	
             

4/1/07
 	
             

$1.30
 	
             

Randolph M. Pentel

815 Deer Trail Court

St. Paul, Minnesota 55118
 	
             

Issued for 2001 Board participation
 
	
             

015W
 	
             

4/1/02
 	
             

25,000
 	
             

4/1/07
 	
             

$1.30
 	
             

Steven E. Reichert

1927 Donegal Drive

Woodbury, Minnesota 55125
 	
             

Issued for 2001 Board participation
 
	
             

016W
 	
             

4/1/02
 	
             

25,000
 	
             

4/1/07
 	
             

$1.30
 	
             

Fred C. Boethling

2305 Canyon Boulevard

Suite 103

Boulder, Colorado 80302
 	
             

Issued for 2001 Board participation
 





 


 





	
            Page 1  
 	
            Last Updated - January 3, 2006
 















	
             

CapSource Financial,  Inc. Warrantholder Ledger
  
	
             

Certificate No.
 	
             

Date of Issue
 	
             

No. of Shares
 	
             

Expiration Date
 	
             

Exercise

Price
 	
             

Certificate issued to:
 	
             

Comments
 
	
             

017W
 	
             

4/1/02
 	
             

25,000
 	
             

4/1/07
 	
             

$1.30
 	
             

Lynch Gratten                 

Rentas y Remolques de Mexico S.A. de C. V.

Varsovia No. 44, Piso 11 

Col. Juarz

Mexico, D.F.,  06600
 	
             

Issued for 2001 Board participation
 
	
             

018W
 	
             

12/31/02
 	
             

50,000
 	
             

12/31/07
 	
             

$1.75
 	
             

Randolph M. Pentel

815 Deer Trail Court

St. Paul, Minnesota 55118
 	
             

Issued for 2002 Board participation
 
	
             

019W
 	
             

12/31/02
 	
             

25,000
 	
             

12/31/07
 	
             

$1.75
 	
             

Fred C. Boethling

2305 Canyon Boulevard

Suite 103

Boulder, Colorado 80302
 	
             

Issued for 2002 Board participation
 
	
             

020W
 	
             

12/31/02
 	
             

25,000
 	
             

12/31/07
 	
             

$1.75
 	
             

Steven E. Reichert

1927 Donegal Drive

Woodbury, Minnesota 55125
 	
             

Issued for 2002 Board participation
 
	
             

021W
 	
             

12/31/02
 	
             

25,000
 	
             

12/31/07
 	
             

$1.75
 	
             

Lynch Gratten                 

Rentas y Remolques de Mexico S.A. de C. V.

Varsovia No. 44, Piso 11 

Col. Juarz

Mexico, D.F.,  06600
 	
             

Issued for 2002 Board participation
 
	
             

022W
 	
             

12/31/02
 	
             

25,000
 	
             

12/31/07
 	
             

$1.75
 	
             

Steven J. Kutcher

2305 Canyon Boulevard

Suite 103

Boulder, Colorado 80302
 	
             

Issued for 2002 Board participation
 
	
             

023W
 	
             

08/29/03
 	
             

34,834
 	
             

08/29/07
 	
             

$2.45
 	
             

Public Securities Inc.

300 North Argonne Rd.

Suite 202

Spokane, WA 99212
 	
             

Issued as part of Underwriting Compensation 
Note: Warrants cannot be exercised prior to 8/29/04
 





 


 





	
            Page 2  
 	
            Last Updated - January 3, 2006
 

















	
             

CapSource Financial,  Inc. Warrantholder Ledger
  
	
             

Certificate No.
 	
             

Date of Issue
 	
             

No. of Shares
 	
             

Expiration Date
 	
             

Exercise

Price
 	
             

Certificate issued to:
 	
             

Comments
 
	
             

024W
 	
             

12/31/03
 	
             

25,000
 	
             

12/31/08
 	
             

$1.75
 	
             

Fred C. Boethling

2305 Canyon Boulevard

Suite 103

Boulder, Colorado 80302
 	
             

Issued for 2003 Board participation
 
	
             

025W
 	
             

12/31/03
 	
             

25,000
 	
             

12/31/08
 	
             

$1.75
 	
             

Steven E. Reichert

1927 Donegal Drive

Woodbury, Minnesota 55125
 	
             

Issued for 2003 Board participation
 
	
             

026W
 	
             

12/31/03
 	
             

25,000
 	
             

12/31/08
 	
             

$1.75
 	
             

Lynch Gratten                 

Rentas y Remolques de Mexico S.A. de C. V.

Varsovia No. 44, Piso 11 

Col. Juarz

Mexico, D.F.,  06600
 	
             

Issued for 2003 Board participation
 
	
             

027W
 	
             

12/31/03
 	
             

50,000
 	
             

12/31/08
 	
             

$1.75
 	
             

Randolph M. Pentel

815 Deer Trail Court

St. Paul, Minnesota 55118
 	
             

Issued for 2003 Board participation
 
	
             

028W
 	
             

12/31/03
 	
             

25,000
 	
             

12/31/08
 	
             

$1.75
 	
             

Steven J. Kutcher

2305 Canyon Boulevard

Suite 103

Boulder, Colorado 80302
 	
             

Issued for 2003 Board participation
 
	
             

029W
 	
             

12/31/04
 	
             

25,000
 	
             

12/31/09
 	
             

$.80
 	
             

Fred C. Boethling

2305 Canyon Boulevard

Suite 103

Boulder, Colorado 80302
 	
             

Issued for 2004 Board participation
 
	
             

030W
 	
             

12/31/04
 	
             

25,000
 	
             

12/31/09
 	
             

$.80
 	
             

Lynch Gratten                 

Rentas y Remolques de Mexico S.A. de C. V.

Varsovia No. 44, Piso 11 

Col. Juarz

Mexico, D.F.,  06600
 	
             

Issued for 2004 Board participation
 
	
             

031W
 	
             

12/31/04
 	
             

50,000
 	
             

12/31/09
 	
             

$.80
 	
             

Randolph M. Pentel

815 Deer Trail Court

St. Paul, Minnesota 55118
 	
             

Issued for 2004 Board participation
 





 


 





	
            Page 3  
 	
            Last Updated - January 3, 2006
 

















	
             

CapSource Financial,  Inc. Warrantholder Ledger
  
	
             

Certificate No.
 	
             

Date of Issue
 	
             

No. of Shares
 	
             

Expiration Date
 	
             

Exercise

Price
 	
             

Certificate issued to:
 	
             

Comments
 
	
             

032W
 	
             

12/31/04
 	
             

25,000
 	
             

12/31/09
 	
             

$.80
 	
             

Steven E. Reichert

1927 Donegal Drive

Woodbury, Minnesota 55125
 	
             

Issued for 2004 Board participation
 
	
             

033W
 	
             

12/31/04
 	
             

12,500
 	
             

12/31/09
 	
             

$.80
 	
             

Steven J. Kutcher

2305 Canyon Boulevard

Suite 103

Boulder, Colorado 80302
 	
             

Issued for 2004 Board participation (1⁄2 year)
 
	
             

034W
 	
             

1/3/06
 	
             

25,000
 	
             

1/3/11
 	
             

$.70
 	
             

Fred C. Boethling

2305 Canyon Boulevard

Suite 103

Boulder, Colorado 80302
 	
             

Issued for 2005 Board participation
 
	
             

035W
 	
             

1/3/06
 	
             

25,000
 	
             

1/3/11
 	
             

$.70
 	
             

Lynch Gratten                 

Rentas y Remolques de Mexico S.A. de C. V.

Varsovia No. 44, Piso 11 

Col. Juarz

Mexico, D.F.,  06600
 	
             

Issued for 2005 Board participation
 
	
             

036W
 	
             

1/3/06
 	
             

50,000
 	
             

1/3/11
 	
             

$.70
 	
             

Randolph M. Pentel

815 Deer Trail Court

St. Paul, Minnesota 55118
 	
             

Issued for 2005 Board participation
 
	
             

037W
 	
             

1/3/06
 	
             

25,000
 	
             

1/3/11
 	
             

$.70
 	
             

Steven E. Reichert

1927 Donegal Drive

Woodbury, Minnesota 55125
 	
             

Issued for 2005 Board participation
 
	
             

038W
 	
             

1/3/06
 	
             

50,000
 	
             

1/3/11
 	
             

$.70
 	
             

Wayne Hoovestol
 	
             

Issued for 2005 Board participation

 

 
 
	
             

 
 	
             

 
 	
             

937,334
 	
             

 
 	
             

 
 	
             

 
 	
             

 
 





 


 


 





	
            Page 4  
 	
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Right/Obligation to Convert Debt to Equity


 


As of May 1, 2006, the Company is indebted to Randolph M. Pentel in the amount of $871,865.89, such amount includes accrued interest to that date. 


 


As a condition of the proposed Whitebox Advisors, LLC investment in the Company, Mr. Pentel will convert that entire amount into common stock of the Company on the same terms and conditions as set forth in Whitebox Stock Purchase Agreement. Accordingly, Mr. Pentel will convert the debt into common stock at $.40 per shares, or 2,179,664 shares. In addition, Mr. Pentel will receive warrants to purchase 2,179,664 shares of the Company’s common stock at a price of $.90 per share. The warrants will expire in 2011.  Shares resulting from Pentel’s conversion will be registered as part of the registration obligation undertaken by the Company in connection with the Whitebox investment.

















	
            Page 5  
 	
            Last Updated - January 3, 2006
 


















Schedule 3.5(a) 


 


 




	1.  	Attached
is Capsource’s Form 10-KSB for 2005 as filed with the SEC.*







	2.  	Attached
are unaudited condensed, consolidated financial statements for Capsource as of March 31,
2006. 







	* 	See
Form 10-KSB (as filed March 30, 2006, commission file no. 1-31730)

























Part I - Financial Information PRELIMINARY


 



Item 1. Unaudited Condensed, Consolidated Financial Statements 


 



CAPSOURCE FINANCIAL, INC. AND SUBSIDIARIES


Preliminary


Unaudited Condensed Consolidated Balance Sheets


 





	
             
 	
             
 	
            March 31,
 2006
 	
             
 	
            December 31,
 2005
 	
             
 
	
            Assets
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 
	
            Current assets:
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 
	
            Cash and cash equivalents
 	
             
 	
            $
 	
            178,705 
 	
             
 	
            $
 	
            612,790 
 	
             
 
	
            Rents and accounts receivable, net
 	
             
 	
             
 	
            1,953,445 
 	
             
 	
             
 	
            795,812 
 	
             
 
	
            Mexican value added taxes receivable
 	
             
 	
             
 	
            342,806 
 	
             
 	
             
 	
            10,237 
 	
             
 
	
            Inventory
 	
             
 	
             
 	
            3,754,725 
 	
             
 	
             
 	
            1,193,701 
 	
             
 
	
            Advances to vendors
 	
             
 	
             
 	
            361,452 
 	
             
 	
             
 	
            891,256 
 	
             
 
	
            Prepaid insurance and other current assets
 	
             
 	
             
 	
            31,279 
 	
             
 	
             
 	
            123,278 
 	
             
 
	
            Total current assets
 	
             
 	
             
 	
            6,622,412 
 	
             
 	
             
 	
            3,627,074 
 	
             
 
	
            Property and equipment, net
 	
             
 	
             
 	
            1,293,918 
 	
             
 	
             
 	
            1,269,752 
 	
             
 
	
            Other assets
 	
             
 	
             
 	
            148,263 
 	
             
 	
             
 	
            155,584 
 	
             
 
	
            Total assets
 	
             
 	
            $
 	
            8,064,593 
 	
             
 	
            $
 	
            5,052,410 
 	
             
 
	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 
	
            Liabilities and Stockholders’ Equity
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 
	
            Current liabilities:
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 
	
            Accounts payable and accrued expenses
 	
             
 	
            $
 	
            3,885,472 
 	
             
 	
            $
 	
            532,582 
 	
             
 
	
            Deposits and advance payments
 	
             
 	
             
 	
            285,362 
 	
             
 	
             
 	
            702,069 
 	
             
 
	
            Notes payable
 	
             
 	
             
 	
            2,115,243 
 	
             
 	
             
 	
            2,126,209 
 	
             
 
	
            Payable to stockholder
 	
             
 	
             
 	
            880,474 
 	
             
 	
             
 	
            832,705 
 	
             
 
	
            Total current liabilities
 	
             
 	
             
 	
            7,166,551 
 	
             
 	
             
 	
            4,193,565 
 	
             
 
	
            Long-term debt, including payable to stockholder
 	
             
 	
             
 	
            598,640 
 	
             
 	
             
 	
            342,000 
 	
             
 
	
            Total liabilities
 	
             
 	
             
 	
            7,765,191 
 	
             
 	
             
 	
            4,535,565 
 	
             
 
	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 
	
            Stockholders’ equity:
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 
	
            Common stock
 	
             
 	
             
 	
            123,787 
 	
             
 	
             
 	
            123,787 
 	
             
 
	
            Additional paid-in capital
 	
             
 	
             
 	
            11,722,403 
 	
             
 	
             
 	
            11,722,403 
 	
             
 
	
            Accumulated deficit
 	
             
 	
             
 	
            (11,546,788
 	
            )
 	
             
 	
            (11,329,345
 	
            )
 
	
            Total stockholders’ equity
 	
             
 	
             
 	
            299,402 
 	
             
 	
             
 	
            516,845 
 	
             
 
	
            Commitments and contingencies
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 
	
            Total liabilities and stockholders’ equity
 	
             
 	
            $
 	
            8,064,593 
 	
             
 	
            $
 	
            5,052,410 
 	
             
 





 


See accompanying notes to unaudited condensed consolidated financial statements.


 

















CAPSOURCE FINANCIAL, INC. AND SUBSIDIARIES


 


Unaudited Condensed Consolidated Statements of Operations


 





	
             
 	
             
 	
            THREE MONTHS ENDED
 	
             
 
	
             
 	
             
 	
            March 31,
 2006
 	
             
 	
            March 31,
 2005
 	
             
 
	
            Net sales and rental income
 	
             
 	
            $
 	
            5,494,718 
 	
             
 	
            $
 	
            3,175,518 
 	
             
 
	
            Cost of sales and operating leases
 	
             
 	
             
 	
            (5,024,771
 	
            )
 	
             
 	
            (2,928,316
 	
            )
 
	
            Selling, general and administrative
 	
             
 	
             
 	
            (544,166
 	
            )
 	
             
 	
            (531,192
 	
            )
 
	
            Operating loss
 	
             
 	
             
 	
            (74,219
 	
            )
 	
             
 	
            (283,990
 	
            )
 
	
            Interest, net
 	
             
 	
             
 	
            (91,755
 	
            )
 	
             
 	
            (419,489
 	
            )
 
	
            Other income (expense), net 
 	
             
 	
             
 	
            (29,421
 	
            )
 	
             
 	
            (9,844
 	
            )
 
	
            Loss before income taxes
 	
             
 	
             
 	
            (195,395
 	
            )
 	
             
 	
            (713,323
 	
            )
 
	
            Income taxes
 	
             
 	
             
 	
            (22,048
 	
            )
 	
             
 	
            (11,384
 	
            )
 
	
            Net loss
 	
             
 	
            $
 	
            (217,443
 	
            )
 	
            $
 	
            (724,707
 	
            )
 
	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 
	
            Net loss per basic and diluted share
 	
             
 	
            $
 	
            (0.02
 	
            )
 	
            $
 	
            (0.07
 	
            )
 
	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 
	
            Weighted-average shares outstanding, basic and diluted
 	
             
 	
             
 	
            12,378,657 
 	
             
 	
             
 	
            10,487,189 
 	
             
 





 


See accompanying notes to unaudited condensed consolidated financial statements.


 








 

 





CAPSOURCE FINANCIAL, INC. AND SUBSIDIARIES


 


Notes to Unaudited Condensed Consolidated Financial Statements


 


(1)  Nature of Operations CapSource Financial, Inc. (CapSource or the Company) is a U.S. corporation with its principal place of business in Boulder, Colorado. CapSource is a holding company that sells and leases dry van and refrigerated truck trailers through its wholly owned Mexican operating subsidiaries. The Company operates in one segment, the leasing and selling of trailers, and all operations currently are in Mexico. 


 


(2)  Basis of presentation The accompanying unaudited condensed consolidated financial statements include the accounts of CapSource and its wholly owned subsidiaries. All intercompany balances have been eliminated in consolidation. In the opinion of Company management, the accompanying unaudited condensed, consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments, except as noted elsewhere in the notes to the condensed consolidated financial statements) necessary to present fairly the financial position of the Company as of March 31, 2006, and the results of operations and cash flows for the interim periods presented. These statements are condensed and, therefore, do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. The statements should be read in
conjunction with the consolidated financial statements and footnotes included in the Company’s annual report on Form 10-KSB for the year ended December 31, 2005. The results of operations for the three months ended March 31, 2006, are not necessarily indicative of the results to be expected for the full year.



















The financial statements of the Company’s Mexican subsidiaries are reported in the local currency, the Mexican peso. However, as substantially all sales and leases are denominated in U.S. dollars, as well as generally all other activities, the functional currency is designated as the U.S. dollar. Those transactions denominated in the local currency are remeasured into the U.S. dollar, creating foreign exchange gains and losses that are included in other income (expense).


 


(3)  Liquidity Since its inception, the Company has generated losses from operations, and as of March 31, 2006, had an accumulated deficit of $11,546,788 and a working capital deficit of $554,139. 


 


The Company currently is negotiating with third party investors to supply additional debt/equity funding, although no financing agreements have been completed. In addition, the Company’s Chairman and largest stockholder has expressed his willingness and ability to continue to financially support the Company, at least through March 31, 2007 if needed, by way of additional debt and/or equity contributions. 


 


Management believes that the cash on hand at March 31, 2006, together with cash expected to be received from a private equity placement in 2006 and cash expected to be generated by operations, will provide sufficient operational funds for the next twelve months, and satisfy obligations as they become due. If the Company experiences occasional cash short-falls, management expects to cover them with funds provided by the Company’s Chairman.


 


(4)  Recognition of revenue from equipment sales Revenue generated by the sale of trailer and semi-trailer equipment is recorded at the time the title to the equipment legally transfers to the buyer, provided the Company has evidence of an arrangement, the sale price is fixed or determinable and collectibility is probable. 


 


(5)  Equipment leasing The Company’s leases are classified as operating leases for all of the Company’s leases and for all lease activity, as the lease contracts do not transfer substantially all of the benefits and risks of ownership of the equipment to the lessee and, accordingly, do not satisfy the criteria to be recognized as capital leases. In determining whether or not a lease qualifies as a capital lease, the Company must consider the estimated value of the equipment at lease termination or residual value. 


 


Leasing revenue consists principally of monthly rentals and related charges due from lessees. Leasing revenue is                 recognized ratably over the lease term. Deposits and advance rental payments are recorded as a liability until repaid or earned by the Company. Operating lease terms range from month-to-month rentals to five years. Initial direct costs (IDC) are capitalized and amortized over the lease term in proportion to the recognition of rental income. At March 31, 2006, the Company had no capitalizes IDC. Depreciation expense and amortization of IDC are recorded as direct costs of trailers under operating leases in the accompanying consolidated statements of operations on a straight-line basis over the estimated useful life of the equipment. Residual values are estimated at lease inception equal to the estimated fair value of the equipment following termination of the initial lease (which in
certain circumstances includes anticipated re-lease proceeds) as determined by the Company. In estimating such values, the Company considers various information and circumstances regarding the equipment and the lessee. Actual results could differ significantly from initial estimates, which could in turn result in impairment or other charges in future periods.


 


(6)  Comprehensive income (loss) Comprehensive income (loss) includes all changes in stockholders’ equity (net assets) from non-owner sources during the reporting period. Since inception, the Company’s comprehensive loss has been the same as its net loss.


 


(7)  Common stock issuance   On February 18, 2005, the Company’s majority stockholder converted a Company note of $1,100,000 into 1,375,000 shares of Company common stock at the conversion price of $0.80 per share, pursuant to the terms of the convertible note. The March 31, 2005 consolidated statement of operations includes a charge of $353,100 to interest expense that represents the amortization of the beneficial conversion feature discount in connection with the convertible stockholder note. 


















For the three months ended March 31, 2006 and 2005, the Company did not issue any stock-based awards. Therefore, there is no pro forma stock-based compensation disclosure presented herein. All stock-based awards granted in previous periods were fully vested as of the issuance date, except for warrants to purchase 34,834 shares of Company common stock at $2.45 per share, which vested to the holder on August 29, 2004. 


 


(8)  Earnings per share The following summarizes the weighted-average common shares issued and outstanding for the three months ended March 31, 2006 and 2005:


 




	
             
 	
             
 	
            2005
 	
             
 	
            2004
 	
             
 
	
            Common and common equivalent shares outstanding-beginning of period
 	
             
 	
            12,378,657 
 	
             
 	
            9,860,800 
 	
             
 
	
            Common shares issued for conversion of debt
 	
             
 	
            —
 	
             
 	
            1,375,000 
 	
             
 
	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 
	
            Common and common equivalent shares outstanding - end of period
 	
             
 	
            12,378,657 
 	
             
 	
            11,235,800 
 	
             
 
	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 
	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 
	
            Historical common equivalent shares outstanding - beginning of period
 	
             
 	
            12,378,657 
 	
             
 	
            9,860,800 
 	
             
 
	
            Weighted average common shares issued during period
 	
             
 	
            —
 	
             
 	
            626,389 
 	
             
 
	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 
	
            Weighted average common shares outstanding - basic and diluted
 	
             
 	
            12,378,657 
 	
             
 	
            10,487,189 
 	
             
 





 


Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted loss per share is computed by dividing net loss by the weighted average number of common shares outstanding increased for potentially dilutive common shares outstanding during the period. The dilutive effect of equity instruments is calculated using the treasury stock method.


 


Warrants to purchase 937,334 and 887,334 common shares as of March 31, 2006 and 2005, respectively, were excluded from the treasury stock calculation because they were anti-dilutive due to the Company’s net losses.


 


(9)  Supplemental balance sheet information






	
             
 	
             
 	
            March 31
 2006
 	
             
 	
            December 31,
 2005
 	
             
 
	
            Rents and accounts receivable, net:
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 
	
            Rents and accounts receivable 
 	
             
 	
            $
 	
            1,966,010
 	
             
 	
            $
 	
            808,377
 	
             
 
	
            Allowance for doubtful accounts
 	
             
 	
             
 	
            (12,565)
 	
             
 	
             
 	
            (12,565)
 	
             
 
	
            Total rents and accounts receivable, net
 	
             
 	
            $
 	
            1,953,445 
 	
             
 	
            $
 	
            795,812
 	
             
 
	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 
	
            Property and equipment, net:
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 	
             
 
	
            Trailer and semi-trailer equipment
 	
             
 	
            $
 	
            2,147,648
 	
             
 	
            $
 	
            2,057,285
 	
             
 
	
            Vehicles
 	
             
 	
             
 	
            48,110
 	
             
 	
             
 	
            68,230
 	
             
 
	
            Furniture and computer equipment
 	
             
 	
             
 	
            142,480
 	
             
 	
             
 	
            140,557
 	
             
 
	
             
 	
             
 	
             
 	
            2,338,238
 	
             
 	
             
 	
            2,266,072
 	
             
 
	
            Accumulated depreciation
 	
             
 	
             
 	
            (1,044,320)
 	
             
 	
             
 	
            (996,320) 
 	
             
 
	
            Total property and equipment, net
 	
             
 	
            $
 	
            1,293,918
 	
             
 	
            $
 	
            1,269,752
 	
             
 





 



(10)  Commitments As of March 31, 2006, the Company had committed to purchase an additional 145 trailers from Hyundai Translead, at a total purchase price of approximately $3,612,622, towards which the Company had made a down payment of $361,452.


 















Schedule 3.6(g)


Compensation


 


Effective as of the closing of the Prime Time Trailers acquisition the base salaries for the named  individuals will be as follows:


 





	
             
 	
            Fred C. Boethling
 	
            $195,000
 





 





	
             
 	
            Steven J. Kutcher
 	
            $172,000
 





 





	
             
 	
            Steve E. Reichert
 	
            $163,000
 




























Schedule 3.6(l) 


 


 


As part of our Dealer Agreement with Hyundai, they grant us a credit facility of $1,000,000 to purchase Hyundai trailers. The amount of the facility that we use varies daily as trailers are delivered (both from Hyundai and to our customers). As of April 15, 2006 the amount drawn down on the facility was $926,000.



























Schedule 3.6(n)


 





	
            1.
 	
            See listing of outstanding common stock purchase warrants in Schedule 3.4(e).
 


































Schedule 3.8


Material Contracts


 


1.          Dealer Agreement
between CapSource Financial, Inc and its subsidiary RESALTA on one hand and Hyundai Translead on the other covering the sale of
Hyundai trailers and parts Mexico.


 


2.          Floor Plan Financing Agreement between Capsource Equipment Company, Inc and Navistar Financial Corporation.


 


3.          Asset Purchase Agreement between Capsource Equipment Company, Inc and Prime Time Trailers, Inc. (pending)


 


4.          Loan Agreement between Marshall Bank and CapSource Financial, Inc.


 


5.          Dealer Agreement between Capsource Equipment Company, Inc. and Hyundai Translead covering the State of California. (pending)


 


6.          Facilities lease in Mexico City.


 


7.          California facilities lease between CapSource Equipment Company, Inc. and Ken and Marjorie Moore et al. (pending)


 


8.          Dealer Agreement between CapSource Financial, Inc. and Fontaine Trailers covering the sale of beverage trailers in Mexico.


 


9.          Employment Agreement between CapSource Financial, Inc and Fred C. Boethling.


 


10.         Employment Agreement between CapSource Financial, Inc and Steven E. Reichert.


 


11.         Employment Agreement between CapSource Financial, Inc. and Steven J. Kutcher


 


12.         Employment Agreement between CapSource Financial, Inc. and Lynch Grattan.


 


13.         2001 CapSource Financial, Inc. Stock Option Plan


 


14.         Promissory Note of CapSource Financial, Inc. payable to Joyce Birch.


 


15.         Promissory Note of CapSource Financial, Inc. payable to Irwin Pentel.


 


16.         Promissory Note of CapSource Financial, Inc. payable to Gary and Pat Dolphus.


 


17.         Promissory Note of CapSource Financial, Inc. payable to Church of the Risen Messiah.


 



18.         Promissory Note of CapSource Financial, Inc. payable to Nicole Kutcher.












19.         Promissory Note of CapSource Financial, Inc. payable to Anthony Kutcher.


 


20.         Bank Account in the name of Capsource Equipment Company, Inc. at San Jose National Bank, One North Market Street, San Jose, CA 95113. Steven J.. Kutcher, Fred Boethling Marge Lundry and Linda Hoffman are authorized to make withdrawals.    


 


21.         Bank Account in the name of CapSource Financial, Inc at Associated Bank, NA, 740 Marquette, Minneapolis, MN 55402. Steven J. Kutcher, Fred C. Boethling and Randolph M. Pentel are authorized to make withdrawals. 


 


22.         Bank Account in the name of CapSource Financial, Inc. at U.S. Bank 601 2nd Avenue South Minneapolis, MN 55402. Fred C. Boethling, Steven J. Kutcher and Randolph M. Pentel are authorized to make withdrawals.


 


23.         Bank Accounts in the name of Remolques y Sistemas Aliados de Transportacion, S.A. de C. V. (RESALTA) at BBVA Bancomer Sucrsal Cuautitlan Glorieta, Guillermo Gonzalez Camarena Loc 2, Parque Industrial Camatla, 54730 Cuautitlan Izcalli, Edo. de Mexico. Lynch Grattan, Alejandro Sanchez and Carlos Legaspi are authorized to make withdrawals.


 


24.         Bank Accounts in the name of Remolques y Sistemas Aliados de Transportacion, S.A. de C. V. (RESALTA) at HSBC Liverpool, Varsovia esquina Liverpool, Zona Rosa. Lynch Grattan, Alejandro Sanchez and Carlos Legaspi are authorized to make withdrawals.


 


25.         Bank Account in the name of Remolques y Sistemas Aliados de Transportacion, S.A. de C. V. (RESALTA) at Banamex Sucursal Santa Cecilia, Av. Santa Cecilia, 54140 Tlalnepantla, Edo. de Mexico. Lynch Grattan, Alejandro Sanchez and Carlos Legaspi are authorized to make withdrawals.


 


26.         Bank Accounts in the name of Rentas y Remolques de Mexico, S.A. de C.V. (REMEX) at Banamex Sucursal Santa Cecilia, Av. Santa Cecilia, 54140 Tlalnepantla, Edo. de Mexico. Lynch Grattan and Alejandro Sanchez are authorized to make withdrawals.


 


27.         Bank Account in the name of  Rentas y Remolques de Mexico, S.A. de C.V. (REMEX) at Santander Serfin Sucursal Isabel, Paseo de la Reforma 211, Sucursal Santander 35. Lynch Grattan and Alejandro Sanchez are authorized to make withdrawals.


 


28.         Bank Accounts in the name of Opciones Integrales de Arrendamiento, S.A. de C. V. at Banamex Sucursal Santa Cecilia, Av. Santa Cecilia, 54140 Tlalnepantla, Edo. de Mexico. Lynch Grattan, Alejandro Sanchez and Carlos Legaspi are authorized to make withdrawals.


 


29.         Amendment No. 1 to the Employment Agreement between CapSource Financial, Inc. and Fred C. Boethling limiting severance pay, extending termination date and adding non-compete and non-disclosure provisions.


 



30.         Amendment No. 1 to the Employment Agreement between CapSource Financial, Inc. and Steven E. Reichert limiting severance pay, extending termination date and adding non-compete and non-disclosure provisions.












31.         See Footnote 1 in Schedule 3.3 for a discussion of the contractual relationship between REMEX and RESALTA and the service company.


 


32.         Benefit Plan for Mexican employees: All employees are provided health insurance. We also comply with government mandated benefits which are paid vacation, Christmas bonus of two weeks salary, and severance payment. 


 


33.         Randolph M. Pentel has pledged 1,000,000 shares of common stock of the Company owned by him to secure the $1,000,000 credit facility with Hyundai. See Schedule 3.6(l).


 


34.         See attachment for a description of the leases held by REMEX.

























Schedule 3.8( c ) 


Affiliate Arrangements, Contracts and Agreements


 





	
            1.
 	
            See Schedule 3.4(e) regarding Pentel’s obligation to convert debt to equity.
 


































Schedule 3.9


Intellectual Property


 


None.
































Schedule 3.15


Employment Matters


 





	
             
 	
            1.
 	
            Boethling Employment Agreement*, as amended by Amendment # 1** (attached).
 









	
             
 	
            2.
 	
            Reichert Employment Agreement***, as amended by Amendment #1**** (attached).
 









	
             
 	
            3.
 	
            Kutcher Employment Agreement*****, as amended by Amendment #1****** (attached).
 






 


*  As filed with the SEC on CapSource’s Registration Statement on Form SB-2 filed October 7, 2002, as amended by CapSource’s Amendment No. 1 to Form SB-2 filed December 9, 2002.


**  As filed with the SEC on CapSource’s Registration Statement on Form SB-2 filed on October 5, 2006.


***  As filed with the SEC on CapSource’s Registration Statement on Form SB-2 filed October 7, 2002, as amended by CapSource’s Amendment No. 1 to Form SB-2 filed December 9, 2002.


****   As filed with the SEC on CapSource’s Registration Statement on Form SB-2 filed on October 5, 2006.


*****  As filed with the SEC on CapSource’s Form 8-K filed January 11, 2006.


******  As filed with the SEC on CapSource’s Registration Statement on Form SB-2 filed on October 5, 2006.


 


 















Schedule 3.16


Related Party Obligations


 


1.          Lynch Grattan owns one (1) share of each of the Mexican subsidiary companies to comply with Mexican legal requirements. See Schedule 3.3.

































Schedule 3.19


Permits and Licenses


 


1.          The following permits and licenses are either complete or in various stages of completion in connection with the Company’s acquisition of Prime Time Trailers, Inc.:


 


a)    Registration of fictitious name with San Bernardino County, California


 


b)    Vehicle Dealer License, State of California


 


c)    Employer Identification number, State of California


 


d)    Taxpayer Identification number, State of California


 


e)    US Federal Excise Tax registration 


 


f)    Seller’s Permit, State of California


 


2.          RESALTA has the following permits and licenses:


 


a)    Tax Identification from Secretaria de Hacienda y Credito Publico


 


b)    Foreign Investment Permit from Secretaria de Economia


 


c)    Export/Import License from Secretaria de Hacienda y Credito Publico


 


d)    License for Business Operations from Ayuntamiento de Tlalnepantla (City)


 


e)    General Business License from Secretaria de Economia


 


 


REMEX has the following permits and licenses:


 


a)    Tax Identification from Secretaria de Hacienda y Credito Publico


 


b)    Foreign Investment Permit from Secretaria de Economia


 


c)    Export/Import from Secretaria de Hacienda y Credito Publico


 


d)    General Business License from Secretaria de Economia


 


e)    Permit for Leasing from Secretaria de Comunicaciones y Transportes 












Service Company (Opciones)  has the following permits and licenses:


 


a)    Tax Identification from Secretaria de Hacienda y Credito Publico


 


b)    Foreign Investment Permit from Secretaria de Economia General Business License from Secretaria de Economia


 


c)    Social Security Tax Authorization from Instituto Mexicano del Seguro Social & Infonavit


 


d)    Local Payroll Tax License from Ayuntamiento de Tlalnepantla (City)





























Schedule 3.23


 


On June 21, 2005, the Company entered into an agreement with Keane Securities Co., Inc. whereby Keane is to act as a placement agent for the $2 million minimum and $3 million maximum of the Company’s securities. That agreement requires the Company to pay a fee of 10% of the cash raised and to grant to Keane an option to purchase 500,000 shares of the Company’s common stock at a 20% premium to the price paid by an investor they secured ($.48) and warrants to purchase 500,000 shares of the Company’s common stock for a period of five years at an exercise price twenty percent higher that to be paid by an investor, or $1.08. The Warrants expire five (5) years from the date of the cash payment to Keane. 





























Schedule 3.25


SEC Filings Exceptions


 


None.
















Schedule 3.26


Material Adverse Changes


 


Since the Balance Sheet Date there has been no material adverse change in the Company’s business, financial condition or affairs.