exv10w1



 




Exhibit 10.1




SECURITIES PURCHASE AGREEMENT




     SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of November 20, 2007, by and among
TXCO Resources Inc., a Delaware corporation, with headquarters located at 777 E. Sonterra Blvd.,
Suite 350, San Antonio, Texas 78258 (the “Company”), and the investors listed on the Schedule of
Buyers attached hereto (individually, a “Buyer” and collectively, the “Buyers”).



     WHEREAS:



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



     B. The Company has authorized a new series of convertible preferred stock of the Company
designated as Series C Convertible Preferred Stock, the terms of which are set forth in the
certificate of designation for such series of preferred stock (the “Certificate of Designations”)
in the form attached hereto as Exhibit A, which Series C Preferred Stock shall be
convertible into the Company’s common stock, par value $0.01 per share (the “Common Stock”), in
accordance with the terms of the Certificate of Designations.



     C. Each Buyer wishes to purchase, and the Company wishes to sell, upon the terms and
conditions stated in this Agreement, at the Initial Closing (as defined below) that aggregate
number of shares of Series C Convertible Preferred Stock set forth opposite such Buyer’s name in
column (3) on the Schedule of Buyers (which aggregate number for all Buyers shall be 55,000) (the
“Initial Preferred Shares”) (as converted, collectively, the “Initial Conversion Shares”).



     D. Subject to the terms and conditions set forth in this Agreement, the Buyers shall have the
right to participate in Additional Closings (as defined below) in order to purchase, and require
the Company to sell up to that aggregate number of shares of Series C Preferred Stock set forth
opposite such Buyer’s name in column (4) on the Schedule of Buyers (which aggregate number for all
Buyers shall not exceed 25,000) (the “Additional Preferred Shares”, together with the Initial
Preferred Shares, the “Preferred Shares”) (as converted, collectively, the “Additional Conversion
Shares”, together with the Initial Conversion Shares, the “Conversion Shares”).



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



 









 





     F. The Preferred Shares may be entitled to dividends, which at the option of the Company,
subject to certain conditions, may be paid in shares of Common Stock (the “Dividend Shares”).



     G. The Preferred Shares, the Conversion Shares and the Dividend Shares are collectively
referred to herein as the “Securities”.



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



     1. PURCHASE AND SALE OF PREFERRED SHARES.



          (a) Purchase of Preferred Shares.




               (i) Initial Preferred Shares. Subject to the satisfaction (or waiver) of the
conditions set forth in Sections 6(a) and 7(a) below, the Company shall issue and sell to each
Buyer, and each Buyer severally, but not jointly, agrees to purchase from the Company on the
Initial Closing Date (as defined below), the number of Initial Preferred Shares as is set forth
opposite such Buyer’s name in column (3) on the Schedule of Buyers (the “Initial Closing”).



               (ii) Additional Preferred Shares. Subject to the satisfaction (or waiver) of the
conditions set forth in Sections 1(c), 6(b) and 7(b) below, the Company shall issue and sell to
each Buyer electing to participate in such Additional Closing pursuant to Section 1(c) below, and
each such Buyer severally, but not jointly, agrees to purchase from the Company on such Additional
Closing Date (as defined below), up to the number of Additional Preferred Shares as is set forth
opposite such Buyer’s name in column (4) on the Schedule of Buyers (each, an “Additional Closing”).



               (iii) Closing. The Initial Closing and the Additional Closings are each referred to
in this Agreement as a “Closing”. Each Closing shall occur on the applicable Closing Date at the
offices of Schulte Roth & Zabel LLP, 919 Third Avenue, New York, New York 10022.



               (iv) Purchase Price. The purchase price for each Buyer of the Initial Preferred
Shares to be purchased by each such Buyer at the Initial Closing shall be the amount set forth
opposite such Buyer’s name in column (5) of the Schedule of Buyers (the “Initial Purchase Price”).
Each Buyer shall pay $1,000 for each Preferred Share to be purchased by such Buyer at each
Additional Closing (the “Additional Purchase Price”, and together with the Initial Purchase Price,
the “Purchase Price”).



          (b) Initial Closing Date. The date and time of the Initial Closing (the “Initial
Closing Date”) shall be 10:00 a.m., New York City Time, on the date hereof after notification of
satisfaction (or waiver) of the conditions to the Initial Closing set forth in Sections 6(a) and
7(a) below (or such later date as is mutually agreed to by the Company and each Buyer).




          (c) Additional Closing Date. The date and time of the Additional Closings (each an
“Additional Closing Date,” and together with the Initial Closing Date, each a “Closing Date” and
collectively, the “Closing Dates”) shall be 10:00 a.m., New York City time, on the date specified
in the applicable Additional Closing Notice (as defined below), subject to



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satisfaction (or waiver) of the conditions to Additional Closing set forth in Sections 6(b)
and 7(b) and the conditions contained in this Section 1(c) (or such later date as is mutually
agreed to by the Company and the applicable Buyer). Subject to the requirements of Sections 6(b)
and 7(b) and the conditions contained in this Section 1(c), each Buyer may purchase (provided that
such Buyer was a Buyer under this Agreement on the date hereof and such Buyer holds all of the
Preferred Shares purchased hereunder at the time of such Additional Closing), at such Buyer’s
option, Additional Preferred Shares by delivering written notice to the Company (an “Additional
Closing Notice”) at any time during the period beginning after the date hereof and ending on the
date one hundred and twenty (120) days after the Initial Closing Date (the “Additional Closing
Expiration Date”), which Additional Closing Expiration Date may be extended at the option of the
Company to a date not later than one hundred and eighty (180) days after the Initial Closing Date.
The Additional Closing Notice shall be delivered at least ten (10) Business Days prior to the
applicable Additional Closing Date set forth in such Additional Closing Notice. An Additional
Closing Notice shall set forth (i) the number of Additional Preferred Shares to be purchased by
such Buyer at the Additional Closing, which number of shares shall not exceed the number of
Additional Preferred Shares as is set forth opposite such Buyer’s name in column (4) on the
Schedule of Buyers, (ii) the aggregate Additional Purchase Price for the Additional Preferred
Shares to be purchased and (iii) the proposed Additional Closing Date. As used herein, “Business
Day” means any day other than Saturday, Sunday or other day on which commercial banks in The City
of New York are authorized or required by law to remain closed.




          (d) Form of Payment. On the Initial Closing Date, each Buyer shall pay the Initial
Purchase Price to the Company for the Initial Preferred Shares to be issued and sold to such Buyer
at the Initial Closing by wire transfer of immediately available funds for such Initial Purchase
Price in accordance with the Company’s written wire instructions (less, in the case of Capital
Ventures International (“Capital Ventures”), a Buyer, the amounts withheld pursuant to Section
4(g)). On each Additional Closing Date, each Buyer shall pay the Additional Purchase Price to the
Company for the Additional Preferred Shares to be issued and sold to such Buyer at such Additional
Closing by wire transfer of immediately available funds for such Additional Purchase Price in
accordance with the Company’s written wire instructions. At each Closing, the Company shall
deliver to each Buyer the Preferred Shares (in such numbers as such Buyer shall request) which such
Buyer is then purchasing duly executed on behalf of the Company and registered in the name of such
Buyer or its designee.




     2. BUYER’S REPRESENTATIONS AND WARRANTIES.



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





          (a) Organization; Authority. Such Buyer is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its organization with the
requisite power and authority to enter into and to consummate the transactions contemplated by
the Transaction Documents (as defined below) to which it is a party and otherwise to carry out
its obligations hereunder and thereunder.




          (b) No Public Sale or Distribution. Such Buyer is (i) acquiring the Preferred
Shares, (ii) upon conversion of the Preferred Shares will acquire the Conversion Shares and (iii)
will acquire the Dividend Shares in each case, in the ordinary course of



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business for its own account and not with a view towards, or for resale in connection with,
the public sale or distribution thereof, except pursuant to sales registered or exempted under
the 1933 Act and such Buyer does not have a present arrangement to effect any distribution of the
Securities to or through any person or entity; provided, however, that by making
the representations herein, such Buyer does not agree to hold any of the Securities for any
minimum or other specific term and reserves the right to dispose of the Securities at any time in
accordance with or pursuant to a registration statement or an exemption under the 1933 Act. Such
Buyer is acquiring the Securities hereunder in the ordinary course of its business. Such Buyer
does not presently have any agreement or understanding, directly or indirectly, with any Person
to distribute any of the Securities.




          (c) Accredited Investor Status. Such Buyer is an “accredited investor” as that term
is defined in Rule 501(a) of Regulation D.




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




          (e) Information. Such Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and materials relating
to the offer and sale of the Securities which have been requested by such Buyer. Such Buyer and
its advisors, if any, have been afforded the opportunity to ask questions of the Company.
Neither such inquiries nor any other due diligence investigations conducted by such Buyer or its
advisors, if any, or its representatives shall modify, amend or affect such Buyer’s right to rely
on the Company’s representations and warranties contained herein. Such Buyer understands that
its investment in the Securities involves a high degree of risk. Such Buyer has sought such
accounting, legal and tax advice from Persons other than the Company as it has considered
necessary to make an informed investment decision with respect to its acquisition of the
Securities. In addition, such Buyer acknowledges that, in connection with the Closing, the
Company is entering into the transactions set forth in Schedule 2(e) and that the Buyer
has been afforded the opportunity to ask questions of the Company regarding the same.




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




          (g) Transfer or Resale. Such Buyer understands that except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not being registered
under the 1933 Act or any state securities laws, and may not be offered for sale, sold, assigned
or transferred unless (A) subsequently registered thereunder, (B) such Buyer



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shall have delivered to the Company an opinion of counsel, in a generally acceptable form,
to the effect that such Securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, or (C) such Buyer provides the
Company with reasonable assurance that such Securities can be sold, assigned or transferred
pursuant to Rule 144 or Rule 144A promulgated under the 1933 Act, as amended, (or a successor
rule thereto) (collectively, “Rule 144”); (ii) any sale of the Securities made in reliance on
Rule 144 may be made only in accordance with the terms of Rule 144 and further, if Rule 144 is
not applicable, any resale of the Securities under circumstances in which the seller (or the
Person (as defined in Section 3(s)) through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the 1933 Act) may require compliance with some other
exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (iii)
neither the Company nor any other Person is under any obligation to register the Securities under
the 1933 Act or any state securities laws or to comply with the terms and conditions of any
exemption thereunder. Notwithstanding the foregoing, the Securities may be pledged in connection
with a bona fide margin account or other loan or financing arrangement secured by the Securities
and such pledge of Securities shall not be deemed to be a transfer, sale or assignment of the
Securities hereunder, and no Buyer effecting a pledge of Securities shall be required to provide
the Company with any notice thereof or otherwise make any delivery to the Company pursuant to
this Agreement or any other Transaction Document (as defined in Section 3(b)), including, without
limitation, this Section 2(g).




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




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



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The legend set forth above shall be removed and the Company shall issue a certificate without such
legend to the holder of the Securities upon which it is stamped or issue to such holder by
electronic delivery at the applicable balance account at The Depository Trust Company (“DTC”), if,
unless otherwise required by state securities laws, (i) such Securities are registered for resale
under the 1933 Act, (ii) in connection with a sale, assignment or other transfer, such holder
provides the Company with an opinion of counsel, in a generally acceptable form, to the effect that
such sale, assignment or transfer of the Securities may be made without registration under the
applicable requirements of the 1933 Act, or (iii) such holder provides the Company with reasonable
assurance that the Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule
144A. The Company shall be responsible for the fees of its transfer agent and all DTC fees
associated with such issuance.





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




          (j) No Conflicts. The execution, delivery and performance by such Buyer of this
Agreement and the Registration Rights Agreement and the consummation by such Buyer of the
transactions contemplated hereby and thereby will not (i) result in a violation of the
organizational documents of such Buyer or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture
or instrument to which such Buyer is a party, or (iii) result in a violation of any law, rule,
regulation, order, judgment or decree (including federal and state securities laws) applicable
to such Buyer, except in the case of clauses (ii) and (iii) above, for such conflicts, defaults,
rights or violations which would not, individually or in the aggregate, reasonably be expected to
have a material adverse effect on the ability of such Buyer to perform its obligations hereunder.




          (k) Residency. Such Buyer is a resident of that jurisdiction specified below its
address on the Schedule of Buyers.




          (l) Certain Trading Activities. Other than with respect to this Agreement and the
transactions contemplated herein, since the time that such Buyer was first contacted by the
Company, the Agents (as defined below) or any other Person regarding this investment in the
Company, neither the Buyer nor any Affiliate (as defined by Rule 405 promulgated pursuant to the
1933 Act) of such Buyer which (x) had knowledge of the transactions contemplated hereby, (y) has
or shares discretion relating to such Buyer’s investments or trading or information concerning
such Buyer’s investments and (z) is subject to such Buyer’s review or input concerning such
Affiliate’s investments or trading (collectively, “Trading Affiliates”) has directly or
indirectly, nor has any Person acting on behalf of or pursuant to any understanding with such
Buyer or Trading Affiliate, effected or agreed to effect any transactions in the securities of
the Company. Such Buyer hereby covenants and agrees not



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to, and shall cause its Trading Affiliates not to, engage, directly or indirectly, in any
transactions in the securities of the Company or involving the Company’s securities during the
period from the date hereof until such time as (i) the transactions contemplated by this
Agreement are first publicly announced as described in Section 4(i) hereof or (ii) this Agreement
is terminated in full pursuant to Section 8 hereof.



     3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.



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





          (a) Organization and Qualification. Each of the Company and its Subsidiaries (as
defined below) are entities duly organized and validly existing and in good standing under the
laws of the jurisdiction in which they are formed, and have the requisite power and authorization
to own their properties and to carry on their business as now being conducted. Each of the
Company and its Subsidiaries is duly qualified as a foreign entity to do business and is in good
standing in every jurisdiction in which its ownership of property or the nature of the business
conducted by it makes such qualification necessary, except to the extent that the failure to be
so qualified or be in good standing would not reasonably be expected to have a Material Adverse
Effect. As used in this Agreement, “Material Adverse Effect” means any material adverse effect
on the business, properties, assets, operations, results of operations, condition (financial or
otherwise) of the Company or its Subsidiaries taken as a whole on a consolidated basis, or on
the transactions contemplated hereby or in the other Transaction Documents or by the agreements
and instruments to be entered into in connection herewith or therewith, or on the authority or
ability of the Company to perform its obligations under the Transaction Documents. The Company
has no significant subsidiaries (as such term is defined in Rule 1-02 of Regulation S-X
promulgated by the SEC) other than those listed on Schedule 3(a) (collectively, the
“Subsidiaries").




          (b) Authorization; Enforcement; Validity. The Company has the requisite power and
authority to enter into and perform its obligations under this Agreement, the Certificate of
Designations, the Registration Rights Agreement, the Irrevocable Transfer Agent Instructions (as
defined in Section 5(b)), each of the Lock-Up Agreements and each of the other agreements entered
into by the parties hereto in connection with the transactions contemplated by this Agreement
(collectively, the “Transaction Documents”) and to issue the Securities in accordance with the
terms hereof and thereof. The execution and delivery of the Transaction Documents by the Company
and the consummation by the Company of the transactions contemplated hereby and thereby,
including, without limitation, the issuance of the Preferred Shares and the reservation for
issuance and the issuance of the Conversion Shares issuable upon conversion of the Preferred
Shares and the reservation for issuance and the issuance of the Dividend Shares issuable with
respect to the Preferred Shares, have been duly authorized by the Company’s board of directors
and (other than the filing with the SEC of a Form D and one or more Registration Statements in
accordance with the requirements of the Registration Rights Agreement and any other filings as
may be required by any state securities agencies or by the Principal Market (as defined below)),
no further filing, consent, or authorization is required by the Company, its board of directors
or its stockholders. This Agreement and the other Transaction Documents of even date herewith
have been duly executed and delivered by the Company, and constitute the legal, valid and binding



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obligations of the Company, enforceable against the Company in accordance with their
respective terms, except as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally, the enforcement of applicable creditors’ rights and
remedies. The Certificate of Designations in the form attached hereto as Exhibit A has
been filed with the Secretary of State of the State of Delaware and is in full force and effect,
enforceable against the Company in accordance with its terms and has not been amended.




          (c) Issuance of Securities. The Preferred Shares are duly authorized and upon
issuance in accordance with the terms of the Transaction Documents shall be free from all taxes,
liens and charges with respect to the issue thereof, and the Preferred Shares shall be entitled
to the rights and preferences set forth in the Certificate of Designations. As of the applicable
Closing, a number of shares of Common Stock shall have been duly authorized and reserved for
issuance which equals 110% of the sum of (i) the maximum number of shares of Common Stock
issuable upon conversion of the Preferred Shares and (ii) the maximum number of Dividend Shares
issuable pursuant to the terms of the Certificate of Designations, issuable at such Closing and
issued at any prior Closing (assuming for purposes hereof, that the Preferred Shares are
convertible at the Conversion Price and without taking into account any limitations on the
conversion of the Preferred Shares set forth in the Certificate of Designations and that all
dividends will be issued in the form of Dividend Shares for a period of three (3) years at an
assumed value of the Weighted Average Price as of the Initial Closing Date). Upon issuance or
conversion in accordance with the Certificate of Designations, the Conversion Shares and the
Dividend Shares will be validly issued, fully paid and nonassessable and free from all preemptive
or similar rights, taxes, liens and charges with respect to the issue thereof, with the holders
being entitled to all rights accorded to a holder of Common Stock. Subject to the accuracy of
the representations and warranties of the Buyers in this Agreement, the offer and issuance by the
Company of the Securities is exempt from registration under the 1933 Act.




          (d) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the transactions contemplated
hereby and thereby (including, without limitation, the issuance of the Preferred Shares and the
Dividend Shares and reservation for issuance of the Conversion Shares and the Dividend Shares)
will not (i) result in a violation of the Certificate of Incorporation (as defined in Section
3(r)) of the Company or any certificate of incorporation, certificate of formation, any
certificate of designations or other constituent document of any of its Subsidiaries, any capital
stock of the Company or Bylaws (as defined in Section 3(r)) or any of its Subsidiaries bylaws or
(ii) conflict with, or constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which the Company or
any of its Subsidiaries is a party, or (iii) result in a violation of any law, rule, regulation,
order, judgment or decree (including federal and state securities laws and regulations and the
rules and regulations of The NASDAQ Global Select Market (the “Principal Market”)) applicable to
the Company or any of its Subsidiaries or by which any property or asset of the Company or any of
its Subsidiaries is bound or affected, which with regard to subsections (ii) and (iii) would
reasonably be expected to cause a Material Adverse Effect.



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          (e) Consents. Subject to the receipt of Stockholder Approval, the Company is not
required to obtain any consent, authorization or order of, or make any filing or registration
with, any court, governmental agency or any regulatory or self-regulatory agency or any other
Person in order for it to execute, deliver or perform any of its obligations under or
contemplated by the Transaction Documents, in each case in accordance with the terms hereof or
thereof. All consents, authorizations, orders, filings and registrations which the Company is
required to obtain pursuant to the preceding sentence have been obtained or effected on or prior
to the Closing Date, and the Company and its Subsidiaries are unaware of any facts or
circumstances which might prevent the Company from obtaining or effecting any of the
registration, application or filings pursuant to the preceding sentence. The Company is not in
violation of the requirements of the Principal Market and has no knowledge of any facts that
would reasonably lead to delisting or suspension of the Common Stock in the foreseeable future.




          (f) Acknowledgment Regarding Buyer’s Purchase of Securities. The Company
acknowledges and agrees that each Buyer is acting solely in the capacity of arm’s length
purchaser with respect to the Transaction Documents and the transactions contemplated hereby and
thereby and that no Buyer is (i) an officer or director of the Company, (ii) to the knowledge of
the Company, an “affiliate” of the Company or any of its Subsidiaries (as defined in Rule 144) or
(iii) to the knowledge of the Company, a “beneficial owner” of more than 10% of the shares of
Common Stock (as defined for purposes of Rule 13d-3 of the Securities Exchange Act of 1934, as
amended (the “1934 Act”)). The Company further acknowledges that no Buyer is acting as a
financial advisor or fiduciary of the Company or any of its Subsidiaries (or in any similar
capacity) with respect to the Transaction Documents and the transactions contemplated hereby and
thereby, and any advice given by a Buyer or any of its representatives or agents in connection
with the Transaction Documents and the transactions contemplated hereby and thereby is merely
incidental to such Buyer’s purchase of the Securities. The Company further represents to each
Buyer that the Company’s decision to enter into the Transaction Documents has been based solely
on the independent evaluation by the Company and its representatives.




          (g) No General Solicitation; Placement Agents’ Fees. Neither the Company, nor any
of its Subsidiaries or affiliates, nor any Person acting on its or their behalf, has engaged in
any form of general solicitation or general advertising (within the meaning of Regulation D) in
connection with the offer or sale of the Securities. The Company shall be responsible for the
payment of any placement agent’s fees, financial advisory fees, or brokers’ commissions (other
than for persons engaged by any Buyer or its investment advisor) relating to or arising out of
the transactions contemplated hereby. The Company shall pay, and hold each Buyer harmless
against, any liability, loss or expense (including, without limitation, attorney’s fees and
out-of-pocket expenses) arising in connection with any such claim. The Company acknowledges that
it has engaged Lazard Freres & Co. LLC, BMO Capital Markets and Scotia Capital Inc. as placement
agents (the “Agents”) in connection with the sale of the Securities. Other than the Agents, the
Company has not engaged any placement agent or other agent in connection with the sale of the
Securities.




          (h) No Integrated Offering. Except as set forth on Schedule 3(h), none of the
Company, its Subsidiaries, any of their affiliates, and any Person acting on their behalf



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has, directly or indirectly, made any offers or sales of any security or solicited any
offers to buy any security, under circumstances that would require registration of any of the
Securities under the 1933 Act or cause this offering of the Securities to be integrated with
prior offerings by the Company for purposes of the 1933 Act or any applicable stockholder
approval provisions, including, without limitation, under the rules and regulations of any
exchange or automated quotation system on which any of the securities of the Company are listed
or designated. None of the Company, its Subsidiaries, their affiliates and any Person acting on
their behalf will take any action or steps referred to in the preceding sentence that would
require registration of any of the Securities under the 1933 Act or cause the offering of the
Securities to be integrated with other offerings.




          (i) Dilutive Effect. The Company understands and acknowledges that the number of
Conversion Shares issuable upon conversion of the Preferred Shares will increase in certain
circumstances. The Company further acknowledges that its obligation to issue Conversion Shares
upon conversion of the Preferred Shares and the Dividend Shares in accordance with this Agreement
and the Certificate of Designations is absolute and unconditional regardless of the dilutive
effect that such issuance may have on the ownership interests of other stockholders of the
Company.




          (j) Application of Takeover Protections; Rights Agreement. The Company and its
board of directors have taken all necessary action, if any, in order to render inapplicable any
control share acquisition, business combination, poison pill (including any distribution under a
rights agreement) or other similar anti-takeover provision under the Certificate of Incorporation
or any certificates of designations or the laws of the jurisdiction of its formation or
incorporation which is or could become applicable to any Buyer as a result of the transactions
contemplated by this Agreement, including, without limitation, the Company’s issuance of the
Securities and any Buyer’s ownership of the Securities. Except as disclosed in the SEC Documents
and Schedule 3(j), the Company has not adopted a stockholder rights plan or similar arrangement
relating to accumulations of beneficial ownership of Common Stock or a change in control of the
Company.




          (k) SEC Documents; Financial Statements. Except as disclosed on Schedule 3(k),
during the two (2) years prior to the date hereof, the Company has timely filed all reports,
schedules, forms, statements and other documents required to be filed by it with the SEC pursuant
to the reporting requirements of the 1934 Act (all of the foregoing filed prior to the date
hereof and all exhibits included therein and financial statements, notes and schedules thereto
and documents incorporated by reference therein being hereinafter referred to as the “SEC
Documents”). The Company has delivered to the Buyers or their respective representatives true,
correct and complete copies of each of the SEC Documents not available on the EDGAR system that
have been requested by each Buyer. As of their respective dates, the SEC Documents complied in
all material respects with the requirements of the 1934 Act and the rules and regulations of the
SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the
time they were filed with the SEC, contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were made, not misleading.
As of their respective dates, the financial statements of the Company included in the SEC
Documents complied as to form in



- 10 -









 







all material respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto as in effect as of the time of filing. Such
financial statements have been prepared in accordance with generally accepted accounting
principles, consistently applied, during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited
interim statements, to the extent they may exclude footnotes or may be condensed or summary
statements) and fairly present in all material respects the financial position of the Company as
of the dates thereof and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit adjustments).




          (l) Absence of Certain Changes. Except as disclosed in the SEC Documents, since
December 31, 2006 there has been no Material Adverse Effect. Neither the Company nor any of its
Subsidiaries has taken any steps to seek protection pursuant to any bankruptcy law nor does the
Company have any knowledge or reason to believe that its creditors intend to initiate involuntary
bankruptcy proceedings or any actual knowledge of any fact which would reasonably lead a creditor
to do so. The Company and its Subsidiaries, individually and on a consolidated basis, are not as
of the date hereof, and after giving effect to the transactions contemplated hereby to occur at
the Closing will not, be Insolvent (as defined below). For purposes of this Section 3(l),
“Insolvent” means, with respect to any Person (as defined in Section 3(s)) (i) the present fair
saleable value of such Person’s assets is less than the amount required to pay such Person’s
total Indebtedness (as defined in Section 3(s)), (ii) such Person is unable to pay its debts and
liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute
and matured, (iii) such Person intends to incur or believes that it will incur debts that would
be beyond its ability to pay as such debts mature or (iv) such Person has unreasonably small
capital with which to conduct the business in which it is engaged as such business is now
conducted and is proposed to be conducted.




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




          (n) Conduct of Business; Regulatory Permits. Neither the Company nor its
Subsidiaries is in violation of any term of or in default under its Certificate of Incorporation,
the Certificate of Designations, the Existing Certificate of Designations (as defined below), any
other certificate of designation, preferences or rights of any other outstanding series of
preferred stock of the Company or Bylaws or their organizational charter or certificate of
incorporation or bylaws, respectively. Neither the Company nor any of its Subsidiaries is in
violation of any judgment, decree or order or any statute, ordinance, rule or regulation
applicable to the Company or its Subsidiaries, and neither the Company nor any of its
Subsidiaries will conduct its business in violation of any of the foregoing, except in all cases
for possible violations which would not, individually or in the aggregate, reasonably be expected
to have a Material Adverse Effect. Without limiting the generality of the foregoing,



- 11 -









 







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




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




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




          (q) Transactions With Affiliates. Except as disclosed in the SEC Documents, none of
the officers or directors of the Company or any of its Subsidiaries is presently a party to any
transaction with the Company or any of its Subsidiaries (other than for ordinary course services
as employees, officers or directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any such officer or director or,
to the actual knowledge of the Company or any of its Subsidiaries, any corporation, partnership,
trust or other entity in which any such officer, director, or employee has a substantial interest
or is an officer, director, trustee or partner.




          (r) Equity Capitalization. As of the date hereof, the authorized capital stock of
the Company consists of (i) 100,000,000 shares of Common Stock, of which as of the date hereof,
34,162,119 are issued and outstanding and 2,235,462 shares are reserved for issuance pursuant to
securities granted or that may be granted that are (other than the Preferred Shares) exercisable
or exchangeable for, or convertible into, shares of Common Stock and (ii) 10,000,000 shares of
Preferred Stock none of which, as of the date hereof, are



- 12 -









 







issued and outstanding. All of such outstanding shares have been, or upon issuance will be,
validly issued and are fully paid and nonassessable. Except as set forth on Schedule
3(r): (i) none of the Company’s capital stock is subject to preemptive rights or any other
similar rights or any liens or encumbrances suffered or permitted by the Company; (ii) except as
disclosed in the SEC Documents, there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or securities or
rights convertible into, or exercisable or exchangeable for, any capital stock of the Company or
any of its Subsidiaries, or contracts, commitments, understandings or arrangements by which the
Company or any of its Subsidiaries is or may become bound to issue additional capital stock of
the Company or any of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities or rights convertible into,
or exercisable or exchangeable for, any capital stock of the Company or any of its Subsidiaries;
(iii) there are no agreements or arrangements under which the Company or any of its Subsidiaries
is obligated to register the sale of any of their securities under the 1933 Act (except pursuant
to the Registration Rights Agreement); (iv) there are no outstanding securities or instruments of
the Company or any of its Subsidiaries which contain any redemption or similar provisions, and
there are no contracts, commitments, understandings or arrangements by which the Company or any
of its Subsidiaries is or may become bound to redeem a security of the Company or any of its
Subsidiaries; (v) there are no securities or instruments containing anti-dilution or similar
provisions that will be triggered by the issuance of the Securities; (vi) except as disclosed in
the SEC Documents, the Company does not have any stock appreciation rights or “phantom stock”
plans or agreements or any similar plan or agreement; and (vii) the Company and its Subsidiaries
have no liabilities or obligations required to be disclosed in the SEC Documents but not so
disclosed in the SEC Documents, other than those incurred in the ordinary course of the Company’s
or its Subsidiaries’ respective businesses and which, individually or in the aggregate, do not or
would not have a Material Adverse Effect. Included in the SEC Documents are true, correct and
complete copies of the Company’s Certificate of Incorporation, as amended and as in effect on the
date hereof (the “Certificate of Incorporation”), and the Company’s Bylaws, as amended and as in
effect on the date hereof (the “Bylaws”), and the terms of all securities convertible into, or
exercisable or exchangeable for, shares of Common Stock and the material rights of the holders
thereof in respect thereto.




          (s) Indebtedness and Other Contracts. Except as disclosed in the SEC Documents,
neither the Company nor any of its Subsidiaries (i) has any outstanding Indebtedness (as defined
below) involving payment obligations of the Company in excess of $1,000,000 (ii) is a party to
any contract, agreement or instrument, the violation of which, or default under which, by the
other party(ies) to such contract, agreement or instrument could reasonably be expected to result
in a Material Adverse Effect, (iii) is in violation of any term of or in default under any
contract, agreement or instrument relating to any Indebtedness, except where such violations and
defaults would not result, individually or in the aggregate, in a Material Adverse Effect, or
(iv) is a party to any contract, agreement or instrument relating to any Indebtedness, the
performance of which, in the judgment of the Company’s officers, has or is expected to have a
Material Adverse Effect. For purposes of this Agreement: (x) “Indebtedness” of any Person
means, without duplication (A) all indebtedness for borrowed money, (B) all obligations issued,
undertaken or assumed as the deferred purchase price of property or services (including, without
limitation, “capital leases” in accordance with



- 13 -









 







generally accepted accounting principles) (other than trade payables entered into in the
ordinary course of business), (C) all reimbursement or payment obligations with respect to
letters of credit, surety bonds and other similar instruments, (D) all obligations evidenced by
notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in
connection with the acquisition of property, assets or businesses, (E) all indebtedness created
or arising under any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with the proceeds of
such indebtedness (even though the rights and remedies of the seller or bank under such agreement
in the event of default are limited to repossession or sale of such property), (F) all monetary
obligations under any leasing or similar arrangement which, in connection with generally accepted
accounting principles, consistently applied for the periods covered thereby, is classified as a
capital lease, (G) all indebtedness referred to in clauses (A) through (F) above secured by (or
for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be
secured by) any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in
any property or assets (including accounts and contract rights) owned by any Person, even though
the Person which owns such assets or property has not assumed or become liable for the payment of
such indebtedness, and (H) all Contingent Obligations in respect of indebtedness or obligations
of others of the kinds referred to in clauses (A) through (G) above; (y) “Contingent Obligation”
means, as to any Person, any direct or indirect liability, contingent or otherwise, of that
Person with respect to any indebtedness, lease, dividend or other obligation of another Person if
the primary purpose or intent of the Person incurring such liability, or the primary effect
thereof, is to provide assurance to the obligee of such liability that such liability will be
paid or discharged, or that any agreements relating thereto will be complied with, or that the
holders of such liability will be protected (in whole or in part) against loss with respect
thereto; and (z) “Person” means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization and a government or any
department or agency thereof.




          (t) Absence of Litigation. Except as disclosed in the SEC Documents, there is no
action, suit, proceeding, inquiry or investigation before or by the Principal Market, any court,
public board, government agency, self-regulatory organization or body pending or, to the
knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries,
which if determined adversely to the Company or any of its Subsidiaries would, or would
reasonably be expected to, have a Material Adverse Effect.




          (u) Insurance. The Company and each of its Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such amounts as
management of the Company believes to be prudent and customary in the businesses in which the
Company and its Subsidiaries are engaged. Neither the Company nor any such Subsidiary has been
refused any insurance coverage sought or applied for and neither the Company nor any such
Subsidiary has any reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from similar insurers as
may be necessary to continue its business at a cost that would not have a Material Adverse
Effect.




          (v) Employee Relations. (i) Neither the Company nor any of its Subsidiaries is a
party to any collective bargaining agreement or employs any member of a



- 14 -









 







union. The Company and its Subsidiaries believe that their relations with their employees
are good. No executive officer of the Company or any of its Subsidiaries (as defined in Rule
501(f) of the 1933 Act) has notified the Company or any such Subsidiary that such officer intends
to leave the Company or any such Subsidiary or otherwise terminate such officer’s employment with
the Company or any such Subsidiary. No executive officer of the Company or any of its
Subsidiaries is, or is now expected to be, in violation of any material term of any employment
contract, confidentiality, disclosure or proprietary information agreement, non-competition
agreement, or any other contract or agreement or any restrictive covenant, and the continued
employment of each such executive officer does not subject the Company or any of its Subsidiaries
to any liability with respect to any of the foregoing matters.



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




          (w) Title. Except as would not, or would not reasonably be expected to, have a
Material Adverse Effect or is otherwise disclosed in the SEC Documents, the Company and its
Subsidiaries have defensible title to all real property and good and marketable title to all
personal property owned by them, in each case free and clear of all liens, encumbrances and
defects. Except as would not, or would not reasonable be expected to, have a Material Adverse
Effect or is otherwise disclosed in the SEC Documents, any real property and facilities held
under lease by the Company or any of its Subsidiaries are held by them under valid, subsisting
and enforceable leases.




          (x) Intellectual Property Rights. The Company and its Subsidiaries own or possess
adequate rights or licenses to use all trademarks, trade names, service marks, service mark
registrations, service names, patents, patent rights, copyrights, inventions, licenses,
approvals, governmental authorizations, original works of authorship, trade secrets and other
intellectual property rights and all applications related thereto (“Intellectual Property
Rights”) necessary to conduct their respective businesses as now conducted. None of the
Company’s or its Subsidiaries’ Intellectual Property Rights have expired, terminated or been
abandoned, or are expected to expire, terminate or be abandoned, within one year from the date of
this Agreement. The Company does not have any knowledge of any infringement by the Company or
any of its Subsidiaries of Intellectual Property Rights of others. There is no claim, action or
proceeding being made or brought, or to the knowledge of the Company, being threatened, against
the Company or any of its Subsidiaries regarding its Intellectual Property Rights. The Company
is unaware of any facts or circumstances which might give rise to any of the foregoing
infringements or claims, actions or proceedings. The Company and its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value of all of their
Intellectual Property Rights.




          (y) Environmental Laws. The Company and its Subsidiaries (i) are in compliance with
any and all Environmental Laws (as hereinafter defined), (ii) have received all permits, licenses
or other approvals required of them under applicable Environmental Laws to conduct their
respective businesses and (iii) are in compliance with all terms and conditions



- 15 -









 







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




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




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




          (bb) Internal Accounting and Disclosure Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management’s general or specific
authorizations, (ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to maintain asset and
liability accountability, (iii) access to assets or incurrence of liabilities is permitted only
in accordance with management’s general or specific authorization and (iv) the recorded
accountability for assets and liabilities is compared with the existing assets and liabilities at
reasonable intervals and appropriate action is taken with respect to any difference. The Company
maintains disclosure controls and procedures (as such term is defined in Rule 13a-14 under the
1934 Act) that are effective in ensuring that information required to be disclosed by the Company
in the reports that it files or submits under the 1934 Act is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the SEC, including, without
limitation, controls and procedures designed to ensure that information required to be disclosed
by the Company in the reports that it files or submits under the 1934 Act is accumulated and
communicated to the Company’s management, including its principal executive officer or officers
and its principal financial officer or officers, as appropriate, to allow timely decisions
regarding required disclosure. During the twelve months prior to the date hereof, neither the
Company nor any



- 16 -









 







of its Subsidiaries has received any notice or correspondence from any accountant relating
to any potential material weakness in any part of the system of internal accounting controls of
the Company or any of its Subsidiaries.




          (cc) Off Balance Sheet Arrangements. There is no transaction, arrangement, or other
relationship between the Company and an unconsolidated or other off balance sheet entity that is
required to be disclosed by the Company in its 1934 Act filings and is not so disclosed or that
otherwise would be reasonably likely to have a Material Adverse Effect.




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




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




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




          (gg) Manipulation of Price. The Company has not, and to its knowledge no one acting
on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result
in the stabilization or manipulation of the price of any security of the Company to facilitate
the sale or resale of any of the Securities, (ii) sold, bid for, purchased, or paid any
compensation for soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay
to



- 17 -









 







any person any compensation for soliciting another to purchase any other securities of the
Company.




          (hh) U.S. Real Property Holding Corporation. The Company is not, has never been,
and so long as any Preferred Shares remain outstanding, shall not become, a U.S. real property
holding corporation within the meaning of Section 897 of the Internal Revenue Code of 1986, as
amended, and the Company shall so certify upon any Buyer’s request.




          (ii) Bank Holding Company Act. Neither the Company nor any of its Subsidiaries is
subject to the Bank Holding Company Act of 1956, as amended (the “BHCA”) and to regulation by the
Board of Governors of the Federal Reserve System (the “Federal Reserve”). Neither the Company
nor any of its Subsidiaries or affiliates owns or controls, directly or indirectly, five percent
(5%) or more of the outstanding shares of any class of voting securities or twenty-five percent
(25%) or more of the total equity of a bank or any equity that is subject to the BHCA and to
regulation by the Federal Reserve. Neither the Company nor any of its Subsidiaries or affiliates
exercises a controlling influence over the management or policies of a bank or any entity that is
subject to the BHCA and to regulation by the Federal Reserve.




          (jj) Form S-3 Eligibility. The Company is eligible to register the Conversion
Shares for resale by the Buyers using Form S-3 promulgated under the 1933 Act.




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



     4. COVENANTS.



               (a) Reasonable Best Efforts. Each party shall use its reasonable best efforts
timely to satisfy each of the covenants and conditions to be satisfied by it as provided in
Sections 4, 6 and 7 of this Agreement.



- 18 -









 






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




          (c) Reporting Status. Until the date on which the Buyers shall have sold all the
Conversion Shares and the Dividend Shares and none of the Preferred Shares is outstanding (the
“Reporting Period”), the Company shall timely file all reports required to be filed with the SEC
pursuant to the 1934 Act, and the Company shall not terminate its status as an issuer required to
file reports under the 1934 Act (except to the extent that the Company has complied with its
obligations under the Certificate of Designations in connection with (i) a reorganization of the
Company or a merger or consolidation of the Company with or into another entity or (ii) an event
that is deemed a “liquidation event” pursuant to the Certificate of Designations) even if the
1934 Act or the rules and regulations thereunder would no longer require or otherwise permit such
termination.




          (d) Use of Proceeds. The Company shall use the proceeds from the sale of the
Securities for general corporate and for working capital purposes, but not for (A) except as set
forth in Schedule 4(d), repayment of any outstanding Indebtedness of the Company or any of its
Subsidiaries or (B) redemption or repurchase of any of its or its Subsidiaries’ equity
securities.




          (e) Financial Information. The Company agrees to send the following to each
Investor (as defined in the Registration Rights Agreement) during the Reporting Period (i) unless
the following are filed with the SEC through EDGAR and are available to the public through the
EDGAR system, within one (1) Business Day after the filing thereof with the SEC, a copy of its
Annual Reports and Quarterly Reports on Form 10-K, 10-KSB, 10-Q or 10-QSB, any interim reports or
any consolidated balance sheets, income statements, stockholders’ equity statements and/or cash
flow statements for any period other than annual, any Current Reports on Form 8-K and any
registration statements (other than on Form S-8) or amendments filed pursuant to the 1933 Act,
(ii) within four (4) Business Days of the release thereof, facsimile or e-mail copies of all
press releases issued by the Company or any of its Subsidiaries, unless the same are filed with
the SEC through EDGAR and available to the public through EDGAR within such time, and (iii)
copies of any notices and other information made available or given to the stockholders of the
Company generally, within four (4) Business Days of the making available or giving thereof to the
stockholders, unless such notice and other information is filed with the SEC through EDGAR and
available to the public through EDGAR within such time.




          (f) Listing. The Company shall promptly secure the listing of all of the
Registrable Securities (as defined in the Registration Rights Agreement) upon each national



- 19 -









 







securities exchange and automated quotation system, if any, upon which the Common Stock is
then listed (subject to official notice of issuance) and shall use its reasonable best efforts to
maintain such listing of all Registrable Securities from time to time issuable under the terms of
the Transaction Documents. The Company shall use its reasonable best efforts to maintain the
Common Stock’s authorization for quotation on an Eligible Market. Neither the Company nor any of
its Subsidiaries shall take any action which would be reasonably expected to result in the
delisting or suspension of the Common Stock on an Eligible Market. The Company shall pay all
fees and expenses in connection with satisfying its obligations under this Section 4(f).




          (g) Fees. The Company shall reimburse Capital Ventures, or its designee(s) (in
addition to any other expense amounts paid to any Buyer prior to the date of this Agreement) for
all reasonable costs and expenses incurred in connection with the transactions contemplated by
the Transaction Documents (including all reasonable legal fees and disbursements in connection
therewith, documentation and implementation of the transactions contemplated by the Transaction
Documents and due diligence expenses in connection therewith), in an amount not to exceed
$50,000, which amount may be withheld by such Buyer from its Initial Purchase Price at the
Initial Closing or paid by the Company upon termination of this Agreement. The Company shall be
responsible for the payment of any placement agent’s fees or commissions, financial advisory
fees, or broker’s commissions (other than for Persons engaged by any Buyer) relating to or
arising out of the transactions contemplated hereby, including, without limitation, any fees or
commissions payable to the Agents. The Company shall pay, and hold each Buyer harmless against,
any liability, loss or expense (including, without limitation, reasonable attorney’s fees and
out-of-pocket expenses) arising in connection with any claim relating to any such payment.
Except as otherwise set forth in the Transaction Documents, each party to this Agreement shall
bear its own expenses in connection with the sale of the Securities to the Buyers.




          (h) Pledge of Securities. The Company acknowledges and agrees that the Securities
may be pledged by an Investor (as defined in the Registration Rights Agreement) in connection
with a bona fide margin agreement or other loan or financing arrangement that is secured by the
Securities. The pledge of Securities shall not be deemed to be a transfer, sale or assignment of
the Securities hereunder, and no Investor effecting a pledge of Securities shall be required to
provide the Company with any notice thereof or otherwise make any delivery to the Company
pursuant to this Agreement or any other Transaction Document. The Company hereby agrees to
execute and deliver such documentation as a pledgee of the Securities may reasonably request in
connection with a pledge of the Securities to such pledgee by an Investor.




          (i) Disclosure of Transactions and Other Material Information. On or before 9:30
a.m., New York City time, on the first Business Day following the date of this Agreement, the
Company shall issue a press release disclosing all of the material terms of the Transactions
Documents. On or before 5:30 p.m., New York City time, on the first Business Day following the
date of this Agreement, the Company shall file a Current Report on Form 8-K describing the terms
of the transactions contemplated by the Transaction Documents in the form required by the 1934
Act and attaching the material Transaction Documents (including, without limitation, this
Agreement (and all schedules to this Agreement), the form



- 20 -









 







of Certificate of Designations and the form of the Registration Rights Agreement) as
exhibits to such filing (including all attachments, the “Initial 8-K Filing”). On or before 9:30
a.m., New York City Time, on the first Business Day following each Additional Closing Date, the
Company shall file a Current Report on Form 8-K with the SEC describing the transaction
consummated on such date (the “Additional 8-K Filing,” and together with the Initial 8-K Filing,
the “8-K Filings”). From and after the filing of the Initial 8-K Filing with the SEC, no Buyer
shall be in possession of any material, nonpublic information received from the Company, any of
its Subsidiaries or any of its respective officers, directors, employees or agents, that is not
disclosed in the Initial 8-K Filing. The Company shall not, and shall cause each of its
Subsidiaries and its and each of their respective officers, directors, employees and agents, not
to, provide any Buyer with any material, nonpublic information regarding the Company or any of
its Subsidiaries from and after the filing of the Initial 8-K Filing with the SEC without the
express written consent of such Buyer or as may be required under the terms of the Transaction
Documents. If a Buyer has, or believes it has, received any such material, nonpublic information
regarding the Company or any of its Subsidiaries from the Company or any Subsidiary, it may
provide the Company with written notice thereof. If the Company agrees, in its reasonable
determination, that such information is material and nonpublic, the Company shall, within five
(5) Trading Days (as defined in the Certificate of Designations) of receipt of such notice, make
public disclosure of such material, nonpublic information. Subject to the foregoing, neither the
Company, its Subsidiaries nor any Buyer shall issue any press releases or any other public
statements with respect to the transactions contemplated hereby; provided,
however, that the Company shall be entitled, without the prior approval of any Buyer, to
make any press release or other public disclosure with respect to such transactions (i) in
substantial conformity with the 8-K Filings and contemporaneously therewith and (ii) as is
required by applicable law and regulations (provided that in the case of clause (i) each Buyer
shall be consulted by the Company in connection with any such press release or other public
disclosure prior to its release). Without the prior written consent of any applicable Buyer,
neither the Company nor any of its Subsidiaries or affiliates shall disclose the name of such
Buyer in any filing, announcement, release or otherwise, unless such disclosure is required by
law, regulation or the Principal Market (except to the extent that such names appear in this
Agreement or the other Transaction Documents or the Registration Statement required to be filed
with the SEC).




          (j) Additional Preferred Shares; Variable Securities; Dilutive Issuances.  So long
as any Buyer or Buyers beneficially owns in the aggregate more than 10% of the Preferred Shares
purchased pursuant to this Agreement, the Company will not, without the prior written consent of
Buyers holding at least two-thirds of the Preferred Shares, issue any shares of Preferred Shares
(other than to the Buyers as contemplated hereby) and the Company shall not issue any other
securities that would cause a breach or default under the Certificate of Designations. For so
long as any Preferred Shares remain outstanding, the Company shall not, in any manner, issue or
sell any rights, warrants or options to subscribe for or purchase Common Stock or directly or
indirectly convertible into or exchangeable or exercisable for Common Stock at a conversion,
exchange or exercise price which varies or may vary after issuance with the market price of the
Common Stock, including by way of one or more reset(s) to any fixed price unless the conversion,
exchange or exercise price of any such security cannot be less than the then applicable
Conversion Price (as defined in the Certificate of Designations) with respect to the Common Stock
into which any Preferred



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Shares are convertible. For so long as any Preferred Shares remain outstanding, the Company
shall not, in any manner, enter into or affect any Dilutive Issuance (as such term is defined in
the Certificate of Designations) if the effect of such Dilutive Issuance is to cause the Company
to be required to issue upon conversion of any Preferred Shares any shares of Common Stock in
excess of that number of shares of Common Stock which the Company may issue upon conversion of
the Preferred Shares without breaching the Company’s obligations under the rules or regulations
of the Principal Market (without giving effect to the Exchange Cap provisions set forth in the
Certificate of Designations). Notwithstanding anything to the contrary in this section, the
Company shall be permitted to enter into the transactions described in Schedule 2(e).




          (k) Corporate Existence. So long as any Buyer beneficially owns any Securities, the
Company shall maintain its corporate existence and shall not sell all or substantially all of the
Company’s assets and shall not be party to any Fundamental Transaction (as defined in the
Certificate of Designations) unless the Company is in compliance with the applicable provisions
governing Fundamental Transactions set forth in the Certificate of Designations.




          (l) Reservation of Shares. The Company shall take all action necessary to at all
times have authorized, and reserved for the purpose of issuance, no less than 110% of the sum of
(i) the maximum number of shares of Common Stock issuable upon conversion of the Preferred Shares
(assuming for purposes hereof, that the Preferred Shares are convertible at the Conversion Price
and without taking into account any limitations on the conversion of the Preferred Shares set
forth in the Certificate of Designations) and (ii) the maximum number of Dividend Shares issuable
pursuant to the terms of the Certificate of Designations.




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




          (n) Additional Registration Statements. Except as set forth on Schedule
4(n), until the date that is forty-five (45) calendar days after the earlier of (i) the
Effective Date and (ii) the last day of the Registration Period (each as defined in the
Registration Rights Agreement) (the “Trigger Date”), the Company shall not file a registration
statement under the 1933 Act relating to securities that are not the Securities.




          (o) Additional Issuances of Securities.



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




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




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



- 22 -









 






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



               (ii) From the date hereof until the Trigger Date, the Company will not, directly or
indirectly, offer, sell, grant any option to purchase, or otherwise dispose of (or announce any
offer, sale, grant or any option to purchase or other disposition of) any of its or its
Subsidiaries’ equity or equity equivalent securities, including without limitation any debt,
preferred stock or other instrument or security that is, at any time during its life and under any
circumstances, convertible into or exchangeable or exercisable for shares of Common Stock or Common
Stock Equivalents (any such offer, sale, grant, disposition or announcement being referred to as a
“Subsequent Placement”); provided that the foregoing shall not apply to any Subsequent Placement
which does not have the right to have any of its securities registered for resale.



               (iii) From the date hereof until the earlier of (i) the second anniversary of the Initial
Closing and (ii) the time that no Preferred Shares are outstanding, the Company will not, directly
or indirectly, effect any Subsequent Placement unless the Company shall have first complied with
this Section 4(o)(iii).




               (1) The Company shall deliver to each Buyer an irrevocable written notice (the “Offer
Notice”) of any proposed or intended issuance or sale or exchange (the “Offer”) of the
securities being offered (the “Offered Securities”) in a Subsequent Placement (subject to
the Buyer’s prior agreement to maintain confidentiality of such Offer Notice), which Offer
Notice shall (w) identify and describe the Offered Securities, (x) describe the price (which
price may be expressed as a formula) and other terms upon which they are to be issued, sold
or exchanged, and the number or amount of the Offered Securities to be issued, sold or
exchanged (except with respect to an underwritten offering of Offered Securities or a
similar offering in which the price of such Offered Securities is determined on or about the
Closing Date of such offering, in which case the Company may provide the underwriter’s
proposed range of prices in satisfaction of this clause (x) in the Offer Notice)
(y) identify the persons or entities (if known) to which or with which the Offered
Securities are to be offered, issued, sold or exchanged and (z) offer to issue and sell to
or exchange with such Buyers 50% of the Offered Securities, allocated among such Buyers (a)
based on such Buyer’s pro rata portion of the aggregate number of Preferred Shares purchased
hereunder (the “Basic Amount”), and (b) with respect to each Buyer that elects to purchase
its Basic Amount, any additional portion of the Offered Securities attributable to the Basic
Amounts of other Buyers as such Buyer shall indicate it will purchase or acquire should the
other Buyers subscribe for less than their Basic Amounts (the “Undersubscription Amount”),
which process shall be repeated until the Buyers shall have an opportunity to subscribe for
any remaining Undersubscription Amount.




               (2) To accept an Offer, in whole or in part, such Buyer must deliver a written notice
to the Company prior to the end of the tenth (10th) Business Day after such
Buyer’s receipt of the Offer Notice (the “Offer Period”), setting forth the portion of such
Buyer’s Basic Amount that such Buyer elects to purchase and, if such Buyer shall elect to
purchase all of its Basic Amount, the Undersubscription Amount, if



- 23 -









 







any, that such Buyer elects to purchase (in either case, the “Notice of Acceptance”).
If the Basic Amounts subscribed for by all Buyers are less than the total of all of the
Basic Amounts, then each Buyer who has set forth an Undersubscription Amount in its Notice
of Acceptance shall be entitled to purchase, in addition to the Basic Amounts subscribed
for, the Undersubscription Amount it has subscribed for; provided, however,
that if the Undersubscription Amounts subscribed for exceed the difference between the total
of all the Basic Amounts and the Basic Amounts subscribed for (the “Available
Undersubscription Amount”), each Buyer who has subscribed for any Undersubscription Amount
shall be entitled to purchase only that portion of the Available Undersubscription Amount as
the Basic Amount of such Buyer bears to the total Basic Amounts of all Buyers that have
subscribed for Undersubscription Amounts, subject to rounding by the Company to the extent
it deems reasonably necessary.




               (3) The Company shall have fifteen (15) Business Days from the expiration of the Offer
Period above to offer, issue, sell or exchange all or any part of such Offered Securities as
to which a Notice of Acceptance has not been given by the Buyers (the “Refused Securities”),
but only to the offerees described in the Offer Notice (if so described therein) and only
upon terms and conditions (including, without limitation, unit prices and interest rates)
that are not more favorable to the acquiring person or persons or less favorable to the
Company than those set forth in the Offer Notice.




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




               (5) Upon the closing of the issuance, sale or exchange of all or less than all of the
Refused Securities, the Buyers shall acquire from the Company, and the Company shall issue
to the Buyers, the number or amount of Offered Securities specified in the Notices of
Acceptance, upon the terms and conditions specified in the Offer. Notwithstanding anything
to the contrary contained in this Agreement, if the Company does not consummate the closing
of the issuance, sale or exchange of all or less than all of the Refused Securities, within
fifteen (15) Business Days of the expiration of the Offer Period, the Company shall issue to
the Buyers, the number or amount of Offered Securities specified in the Notices of
Acceptance, upon the terms and conditions



- 24 -









 







specified in the Offer. The purchase by the Buyers of any Offered Securities is
subject in all cases to the preparation, execution and delivery by the Company and the
Buyers of a purchase agreement relating to such Offered Securities in form and substance as
agreed between the Company and the third party purchasers of the Offered Securities.




               (6) Any Offered Securities not acquired by the Buyers or other persons in accordance
with Section 4(o)(iii)(2) above may not be issued, sold or exchanged until they are again
offered to the Buyers under the procedures specified in this Agreement.




               (7) Notwithstanding anything to the contrary in this Section 4(o) and unless otherwise
agreed to by the Buyers, the Company shall either confirm in writing to the Buyers that the
transaction with respect to the Subsequent Placement has been abandoned or shall publicly
disclose its intention to issue the Offered Securities, in either case in such a manner such
that the Buyers will not be in possession of material non-public information, by the fifteen
(15th) Business Day following delivery of the Offer Notice. If by the fifteenth
(15th) Business Day following delivery of the Offer Notice no public disclosure
regarding a transaction with respect to the Offered Securities has been made, and no notice
regarding the abandonment of such transaction has been received by the Buyers, such
transaction shall be deemed to have been abandoned and the Buyers shall not be deemed to be
in possession of any material, non-public information with respect to the Company. Should
the Company decide to pursue such transaction with respect to the Offered Securities, the
Company shall provide each Buyer with another Offer Notice and each Buyer will again have
the right of participation set forth in this Section 4(o)(iii). The Company shall not be
permitted to deliver more than one such Offer Notice to the Buyers in any 60 day period.
Each Buyer expressly agrees that the Company’s compliance with this Section 4(o)(iii) shall
not be deemed a breach of Section 4(i) of this Agreement by the Company.




               (8) The restrictions contained in subsections (ii) and (iii) of this Section 4(o) shall
not apply in connection with the issuance of any Excluded Securities (as defined in the
Certificate of Designations) or in connection with the issuance of the securities listed on
Schedule 4(o).




          (p) Restriction on Redemption and Cash Dividends. So long as any Preferred Shares
are outstanding, the Company shall not, directly or indirectly, redeem, or declare or pay any
cash dividend or distribution on, the Common Stock without the prior express written consent of
the holders of Preferred Shares representing not less than two-thirds of the aggregate number of
the then outstanding Preferred Shares. Notwithstanding the foregoing, no consent of the holders
of Preferred Shares shall be required in connection with (i) the repurchase by the Company of its
capital stock deemed to occur upon the cashless exercise of stock options or warrants if such
repurchased capital stock represents a portion of the exercise price of such options or warrants,
(ii) the repurchase by the Company of its capital stock necessary to enable the Company to pay
withholding taxes incurred by an employee upon the vesting of restricted capital stock granted to
such employee in connection with a stock incentive plan, or (iii) the Company for the repurchase,
retirement or other acquisition or retirement for value of capital stock of the Company held by
any future, present



- 25 -









 







or former director, officer, member of management, employee or consultant of the Company or
the Subsidiaries (or the estate, family members, spouse or former spouse of any of the
foregoing); provided, however, that the aggregate amount of payments made under clause (iii) does
not exceed in any calendar year $250,000 (with unused amounts in any calendar year being carried
over to the two succeeding calendar years) and no payments shall be permitted pursuant to clause
(iii) if a Triggering Event under the Certificate of Designations has occurred and the Company
has not satisfied its obligations to the holders of Preferred Shares under the Certificate of
Designations in connection therewith.




          (q) No Waiver of Lock-Up Agreements. The Company shall not amend, waive or modify
any provision of any of the Lock-Up Agreements (as defined below).




          (r) Stockholder Approval. The Company shall provide each stockholder entitled to
vote at the next annual meeting of stockholders of the Company (the “Stockholder Meeting”), which
shall be promptly called and held not later than June 1, 2008 (the “Stockholder Meeting
Deadline”), a proxy statement, substantially in the form which has been previously reviewed by
the Buyers and a counsel of their choice, soliciting each such stockholder’s affirmative vote at
the Stockholder Meeting for approval of resolutions (“Stockholder Resolutions”) providing for the
Company’s issuance of all of the Securities as described in the Transaction Documents in
accordance with applicable law and the rules and regulations of the Principal Market (such
affirmative approval being referred to herein as the “Stockholder Approval”), and the Company
shall use its reasonable best efforts to solicit its stockholders’ approval of such resolutions
and to cause the Board of Directors of the Company to recommend to the stockholders that they
approve such resolutions. The Company shall be obligated to seek to obtain the Stockholder
Approval by the Stockholder Meeting Deadline. If, despite the Company’s reasonable best efforts
the Stockholder Approval is not obtained on or prior to the Stockholder Meeting Deadline, the
Company shall cause an additional Stockholder Meeting to be held each twelve month period
thereafter until such Stockholder Approval is obtained, provided that if the Board of Directors
of the Company does not recommend to the stockholders that they approve the Stockholder
Resolutions at any such Stockholder Meeting and the Stockholder Approval is not obtained, or the
Preferred Shares are no longer outstanding, the Company shall cause an additional Stockholder
Meeting to be held each calendar quarter thereafter until such Stockholder Approval is obtained.




          (s) Consolidated Leverage Ratio. So long as any Preferred Shares remain
outstanding, the Company shall not incur any Indebtedness that could cause the Consolidated
Leverage Ratio (as defined in the Senior Indebtedness Agreements (as defined in the Certificate
of Designations) as in effect as of the date hereof) to exceed 3.65 to 1.00.




          (t) Compliance With Existing Agreements. So long as any Preferred Shares remain
outstanding, the Company shall not permit to exist any default under, redemption of or
acceleration prior to maturity of any secured Indebtedness of the Company or any of its
Subsidiaries. The Company shall use its reasonable best efforts to obtain the waiver and consent
of the lenders under the Senior Indebtedness Agreements to the transactions contemplated hereby
and pursuant to the other Transaction Documents within thirty (30) calendar days of the Initial
Closing Date.



- 26 -









 





     5. REGISTER; TRANSFER AGENT INSTRUCTIONS.




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




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



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




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



- 27 -









 





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



               (ii) Such Buyer and each other Buyer shall have delivered to the Company the Initial Purchase
Price (less, in the case of Capital Ventures, the amounts withheld pursuant to Section 4(g)) for
the Preferred Shares being purchased by such Buyer at the Initial Closing by wire transfer of
immediately available funds pursuant to the wire instructions provided by the Company.



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




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



               (i) Such Buyer and each other Buyer shall have delivered to the Company the Additional
Purchase Price for the Additional Preferred Shares being purchased by such Buyer at such Additional
Closing by wire transfer of immediately available funds pursuant to the wire instructions provided
by the Company.



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



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




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



               (i) The Company shall have duly executed and delivered to such Buyer (A) each of the
Transaction Documents and (B) the Initial Preferred Shares (in such



- 28 -









 







numbers as is set forth across from such Buyer’s name in column (3) of the Schedule of Buyers)
being purchased by such Buyer at the Initial Closing pursuant to this Agreement.



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



               (iii) The Company shall have delivered to such Buyer a copy of the Irrevocable Transfer Agent
Instructions, in the form of Exhibit C attached hereto, which instructions shall have been
delivered to and acknowledged in writing by the Company’s transfer agent.



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



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



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



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



               (viii) The Certificate of Designations in the form attached hereto as Exhibit A shall
have been filed with the Secretary of State of the State of Delaware and shall be in full force and
effect, enforceable against the Company in accordance with its terms and shall not have been
amended.



               (ix) Such Buyer shall have received lock-up agreements in the form attached hereto as
Exhibit G (the “Lock-Up Agreements”), duly executed and delivered by each of James E.
Sigmon, Jeff Bookout, Robert R. Thomae, M. Frank Russell, Gary Grinsfelder, P. Mark Stark and the
Company.



- 29 -









 






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



               (i) The Company shall have duly executed and delivered to such Buyer the Additional Preferred
Shares (in such numbers as such Buyer shall request) being purchased by such Buyer at the
Additional Closing pursuant to this Agreement.



               (ii) The representations and warranties of the Company shall be true and correct in all
material respects (except for those representations and warranties that are qualified by
materiality or Material Adverse Effect, which shall be true and correct in all respects) as of the
date when made and as of the Additional Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date, which shall be true and correct as
of such specified date) and the Company shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by the Company at or prior to the Additional
Closing Date. Such Buyer shall have received a certificate, executed by the Chief Executive
Officer of the Company, dated as of the Additional Closing Date, to the foregoing effect and in the
form attached hereto as Exhibit E.



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



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



               (v) The Certificate of Designations in the form attached hereto as Exhibit A shall
have been filed with the Secretary of State of the State of Delaware and shall be in full force and
effect, enforceable against the Company in accordance with its terms and shall not have been
amended.



     8. TERMINATION.



          In the event that the Initial Closing shall not have occurred with respect to a Buyer on or
before five (5) Business Days from the date hereof due to the Company’s or such Buyer’s failure to
satisfy the conditions set forth in Sections 6 and 7 above (and the nonbreaching party’s failure to
waive such unsatisfied condition(s)), the nonbreaching party shall have the option to terminate
this Agreement with respect to such breaching party at the close of business on such date without
liability of any party to any other party; provided, however, if this



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Agreement is terminated pursuant to this Section 8, the Company shall remain obligated to
reimburse the non-breaching Buyers for the expenses described in Section 4(g) above.



     9. MISCELLANEOUS.




          (a) Governing Law; Jurisdiction; Jury Trial. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall be governed by the
internal laws of the State of New York, without giving effect to any choice of law or conflict of
law provision or rule (whether of the State of New York or any other jurisdictions) that would
cause the application of the laws of any jurisdictions other than the State of New York. Each
party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts
sitting in the City of New York, Borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of any such court,
that such suit, action or proceeding is brought in an inconvenient forum or that the venue of
such suit, action or proceeding is improper. Each party hereby irrevocably waives personal
service of process and consents to process being served in any such suit, action or proceeding by
mailing a copy thereof by certified mail to each party at the address for such notices to it
under this Agreement and agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to limit in any way any
right to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY
RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE
HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED
HEREBY.




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




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




          (d) Severability. If any provision of this Agreement is prohibited by law or
otherwise determined to be invalid or unenforceable by a court of competent jurisdiction, the
provision that would otherwise be prohibited, invalid or unenforceable shall be deemed amended to
apply to the broadest extent that it would be valid and enforceable, and the invalidity or
unenforceability of such provision shall not affect the validity of the remaining provisions of
this Agreement so long as this Agreement as so modified continues to express, without material
change, the original intentions of the parties as to the subject matter hereof and the prohibited
nature, invalidity or unenforceability of the provision(s) in question does not substantially
impair the respective expectations or reciprocal obligations of the parties or the practical
realization of the benefits that would otherwise be conferred upon the parties.



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The parties will endeavor in good faith negotiations to replace the prohibited, invalid or
unenforceable provision(s) with a valid provision(s), the effect of which comes as close as
possible to that of the prohibited, invalid or unenforceable provision(s).




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




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


If to the Company:



TXCO Resources Inc.

777 E. Sonterra Blvd., Suite 350

San Antonio, Texas 78258

Telephone: (210) 679-2429

Facsimile: (210) 496-3232

Attention: M. Frank Russell, Vice President and General Counsel




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With a copy (for informational purposes only) to:



Winstead PC

401 Congress Avenue, Suite 2100

Austin, TX 78701

Telephone: (512) 370-2800

Facsimile: (512) 370-2850

Attention: J. Rowland Cook



If to the Transfer Agent:



American Stock Transfer & Trust Co.

59 Maiden Lane

New York, NY 10038

Telephone: (718) 921-8206

Facsimile: (718) 921-8336

Attention: Carlos Pinto, Vice President



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



with a copy (for informational purposes only) to:



Schulte Roth & Zabel LLP

919 Third Avenue

New York, New York 10022

Telephone: (212) 756-2000

Facsimile: (212) 593-5955

Attention: Eleazer N. Klein, Esq.



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





          (g) Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns, including the Buyers of the
Preferred Shares. The Company shall not assign this Agreement or any rights or obligations
hereunder without the prior written consent of the holders of at least two-thirds of the
aggregate number of Registrable Securities issued and issuable hereunder, including by way of a
Fundamental Transaction (unless the Company is in compliance with the applicable provisions
governing Fundamental Transactions set forth in the Certificate of Designations).



- 33 -









 







A Buyer may assign some or all of its rights hereunder in connection with transfer of any of
its Securities as is otherwise permitted by this Agreement without the consent of the Company, in
which event such assignee shall be deemed to be a Buyer hereunder with respect to such assigned
rights.




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




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




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




          (k) Indemnification. In consideration of each Buyer’s execution and delivery of the
Transaction Documents and acquiring the Securities thereunder and in addition to all of the
Company’s other obligations under the Transaction Documents, the Company shall defend, protect,
indemnify and hold harmless each Buyer and each other holder of the Securities and all of their
stockholders, partners, members, officers, directors, employees and direct or indirect investors
and any of the foregoing Persons’ agents or other representatives (including, without limitation,
those retained in connection with the transactions contemplated by this Agreement) (collectively,
the “Indemnitees”), as incurred, from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys’ fees and disbursements
(the “Indemnified Liabilities”), incurred by any Indemnitee as a result of, or arising out of, or
relating to (a) any misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents, (b) any breach of any covenant, agreement or obligation of
the Company contained in the Transaction Documents or (c) any cause of action, suit or claim
brought or made against such Indemnitee by a third party (including for these purposes a
derivative action brought on behalf of the Company) and arising out of or resulting from (i) the
execution, delivery, performance or enforcement of the Transaction Documents or any other
certificate, instrument or document contemplated hereby or thereby, (ii) any transaction financed
or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuance
of the Securities, or (iii) the status of such Buyer or holder of the Securities as an investor
in the Company pursuant to the transactions contemplated by the Transaction Documents. To the
extent that the foregoing undertaking by the Company may be unenforceable for any reason, the
Company shall make the maximum contribution to the payment and satisfaction of each of the
Indemnified Liabilities which is permissible under applicable law. Except as otherwise set forth
herein,



- 34 -









 







the mechanics and procedures with respect to the rights and obligations under this Section
9(k) shall be the same as those set forth in Section 6 of the Registration Rights Agreement.




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




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




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




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




          (p) Independent Nature of Buyers’ Obligations and Rights. The obligations of each
Buyer under any Transaction Document are several and not joint with the obligations of any other
Buyer, and no Buyer shall be responsible in any way for the performance of the obligations of any
other Buyer under any Transaction Document. Nothing contained herein or in any other Transaction
Document, and no action taken by any Buyer pursuant hereto or thereto, shall be deemed to
constitute the Buyers as a partnership, an association, a joint venture or any other kind of
entity, or create a presumption that the Buyers are in any way



- 35 -









 







acting in concert or as a group with respect to such obligations or the transactions
contemplated by the Transaction Documents and the Company acknowledges that the Buyers are not
acting in concert or as a group, and the Company will not assert any such claim, with respect to
such obligations or the transactions contemplated by the Transaction Documents. Each Buyer
confirms that it has independently participated in the negotiation of the transaction
contemplated hereby with the advice of its own counsel and advisors. Each Buyer shall be
entitled to independently protect and enforce its rights, including, without limitation, the
rights arising out of this Agreement or out of any other Transaction Documents, and it shall not
be necessary for any other Buyer to be joined as an additional party in any proceeding for such
purpose.



[Signature Page Follows]





- 36 -









 








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



	 	 	 	 	 
	 	COMPANY:



TXCO RESOURCES INC.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 



 









 







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



	 	 	 	 	 
	 	BUYERS: 	 
	 



 









 







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



	 	 	 	 	 
	 	BUYERS:



 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 




 









 








SCHEDULE OF BUYERS



 









 








EXHIBITS




Exhibit A       Form of Certificate of Designations

Exhibit B       Form of Registration Rights Agreement

Exhibit C       Form of Irrevocable Transfer Agent Instructions

Exhibit D       Form of Outside Company Counsel Opinion

Exhibit E       Form of Secretary’s Certificate

Exhibit F       Form of Officer’s Certificate

Exhibit G       Form of Lock-Up Agreement




 









 





SCHEDULES




Schedule 2(e) — Information

Schedule 3(a) — List of Subsidiaries

Schedule 3(h) — No Integrated Offering

Schedule 3(j)  — Stockholder Rights Plan

Schedule 3(k) — SEC Documents

Schedule 3(r) — Equity Capitalization

Schedule 3(z) — Subsidiary Rights

Schedule 4(d) — Use of Proceeds

Schedule 4(j)  — Additional Rights, Warrants and Options; Dilutive Issuances

Schedule 4(n) — Additional Registration Statements

Schedule 4(o) — Additional Issuances of Securities

Schedule 9(e) — Entire Agreement; Amendments