Document:

exv10w4

 

[FORM OF WARRANT]

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES
INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE 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 (WHICH
COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A
UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A
BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

CASH SYSTEMS, INC.

Warrant To Purchase Common Stock

Warrant No.:                     

Number of Shares of Common Stock:                     

Date of Issuance:                     , 2006 (“Issuance Date”)

     Cash Systems, Inc., a Delaware corporation (the “Company”), hereby certifies that, for good
and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, [PORTSIDE
GROWTH AND OPPORTUNITY FUND] [OTHER BUYERS], the registered holder hereof or its permitted assigns
(the “Holder”), is entitled, subject to the terms set forth below, to purchase from the Company, at
the Exercise Price (as defined below) then in effect, upon surrender of this Warrant to Purchase
Common Stock (including any Warrants to Purchase Common Stock issued in exchange, transfer or
replacement hereof, the “Warrant”), at any time or times on or after the date hereof but not after
11:59 p.m., New York time, on the Expiration Date (as defined below), [           ] ([          
])1 fully paid nonassessable shares of Common Stock (as defined below) (the “Warrant
Shares”). This Warrant is one of the Warrants to purchase Common Stock (the “SPA Warrants”) issued
pursuant to Section 1 of that certain Securities Purchase Agreement, dated as of October 6, 2006
(the “Subscription Date”), by and among the Company and the investors (the “Buyers”) referred to
therein (the “Securities Purchase Agreement”). Except as otherwise defined herein, capitalized
terms in this Warrant shall have the meanings set forth in Section 14.

 

			
	1	 	Insert number equal to (x) 12.5% of the
principal amount of Notes issued to Holder pursuant to the Securities Purchase
Agreement divided by (y) the Conversion Price

 

 

          1. EXERCISE OF WARRANT.

               (a) Mechanics of Exercise. Subject to the terms and conditions hereof
(including, without limitation, the limitations set forth in Section 1(f)), this Warrant may
be exercised by the Holder on any day on or after the date hereof, in whole or in part, by (i)
delivery of a written notice, in the form attached hereto as Exhibit A (the “Exercise
Notice”), of the Holder’s election to exercise this Warrant and (ii) (A) payment to the
Company of an amount equal to the applicable Exercise Price multiplied by the number of
Warrant Shares as to which this Warrant is being exercised (the “Aggregate Exercise Price”) in
cash or by wire transfer of immediately available funds or (B) by notifying the Company that
this Warrant is being exercised pursuant to a Cashless Exercise (as defined in Section 1(d)).
The Holder shall not be required to deliver the original Warrant in order to effect an
exercise hereunder. Execution and delivery of the Exercise Notice with respect to less than
all of the Warrant Shares shall have the same effect as cancellation of the original Warrant
and issuance of a new Warrant evidencing the right to purchase the remaining number of Warrant
Shares. On or before the second (2nd) Business Day following the date on which the
Company has received each of the Exercise Notice and the Aggregate Exercise Price (or notice
of a Cashless Exercise) (the “Exercise Delivery Documents”), the Company shall transmit by
facsimile an acknowledgment of confirmation of receipt of the Exercise Delivery Documents to
the Holder and the Company’s transfer agent (the “Transfer Agent”). On or before the third
(3rd) Trading Day following the date on which the Company has received all of the
Exercise Delivery Documents (the “Share Delivery Date”), the Company shall (X) provided that
the Transfer Agent is participating in The Depository Trust Company (“DTC”) Fast Automated
Securities Transfer Program, upon the request of the Holder, credit such aggregate number of
Warrant Shares to which the Holder is entitled pursuant to such exercise to the Holder’s or
its designee’s balance account with DTC through its Deposit Withdrawal Agent Commission
system, or (Y) if the Transfer Agent is not participating in the DTC Fast Automated Securities
Transfer Program, issue and dispatch by overnight courier to the address as specified in the
Exercise Notice, a certificate, registered in the Company’s share register in the name of the
Holder or its designee, for the number of shares of Common Stock to which the Holder is
entitled pursuant to such exercise. Upon delivery of the Exercise Delivery Documents, the
Holder shall be deemed for all corporate purposes to have become the holder of record of the
Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date
such Warrant Shares are credited to the Holder’s DTC account or the date of delivery of the
certificates evidencing such Warrant Shares, as the case may be. If this Warrant is submitted
in connection with any exercise pursuant to this Section 1(a) and the number of Warrant Shares
represented by this Warrant submitted for exercise is greater than the number of Warrant
Shares being acquired upon an exercise, then the Company shall as soon as practicable and in
no event later than three (3) Business Days after any exercise and at its own expense, issue a
new Warrant (in accordance with Section 7(d)) representing the right to purchase the number of
Warrant Shares purchasable immediately prior to such exercise under this Warrant, less the
number of Warrant Shares with respect to which this Warrant is exercised. No fractional
shares of Common Stock are to be issued upon the exercise of this Warrant, but rather the
number of shares of Common Stock to be issued shall be rounded up to the nearest whole number.
The Company shall
pay any and all taxes which may be payable with respect to the issuance and delivery of
Warrant Shares upon exercise of this Warrant.

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               (b) Exercise Price. For purposes of this Warrant, “Exercise Price” means Eight
Dollars ($8.00), subject to adjustment as provided herein.

               (c) Company’s Failure to Timely Deliver Securities. If the Company shall fail
for any reason or for no reason to issue to the Holder within five (5) Business Days of
receipt of the Exercise Delivery Documents, a certificate for the number of shares of Common
Stock to which the Holder is entitled and register such shares of Common Stock on the
Company’s share register or to credit the Holder’s balance account with DTC for such number of
shares of Common Stock to which the Holder is entitled upon the Holder’s exercise of this
Warrant, then, in addition to all other remedies available to the Holder, the Company shall
pay in cash to the Holder on each day after such fifth (5th) Business Day that the
issuance of such shares of Common Stock is not timely effected an amount equal to 1.0% of the
product of (A) the sum of the number of shares of Common Stock not issued to the Holder on a
timely basis and to which the Holder is entitled and (B) the Weighted Average Price of the
shares of Common Stock on the Trading Day immediately preceding the last possible date which
the Company could have issued such shares of Common Stock to the Holder without violating
Section 1(a). In addition to the foregoing, if within three (3) Trading Days after the
Company’s receipt of the facsimile copy of a Exercise Notice the Company shall fail to issue
and deliver a certificate to the Holder and register such shares of Common Stock on the
Company’s share register or credit the Holder’s balance account with DTC for the number of
shares of Common Stock to which the Holder is entitled upon the Holder’s exercise hereunder,
and if on or after such Trading Day the Holder purchases (in an open market transaction or
otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of shares
of Common Stock issuable upon such exercise that the Holder anticipated receiving from the
Company (a “Buy-In”), then the Company shall, within five (5) Business Days after the Holder’s
request and in the Holder’s discretion, either (i) pay cash to the Holder in an amount equal
to the Holder’s total purchase price (including brokerage commissions, if any) for the shares
of Common Stock so purchased (the “Buy-In Price”), at which point the Company’s obligation to
deliver such certificate (and to issue such Warrant Shares) shall terminate, or (ii) promptly
honor its obligation to deliver to the Holder a certificate or certificates representing such
Warrant Shares and pay cash to the Holder in an amount equal to the excess (if any) of the
Buy-In Price over the product of (A) such number of shares of Common Stock, times (B) the
Weighted Average Price on the date of exercise.

               (d) Cashless Exercise. Notwithstanding anything contained herein to the
contrary, if a registration statement covering the resale of the Warrant Shares that are the
subject of the Exercise Notice by the Holder pursuant to the 1933 Act (the “Unavailable
Warrant Shares”) is not available for the resale of such Unavailable Warrant Shares, the
Holder may, in its sole discretion, exercise this Warrant in whole or in part and, in lieu of
making the cash payment otherwise contemplated to be made to the Company upon such exercise in
payment of the Aggregate Exercise Price, elect instead to

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receive upon such exercise the “Net
Number” of shares of Common Stock determined according to the following formula (a “Cashless
Exercise”):

	 	 	 	 	 
	 

	 	Net Number = 
	(A x B) - (A x C)	 
	 

	 	 	           B	 
	 
	 

	 	For purposes of the foregoing formula:

	 	 	 	A= the total number of shares with respect to which
this Warrant is then being exercised.
	 
	 	 	 	B= the Weighted Average Price of the shares of Common
Stock (as reported by Bloomberg) on the date immediately preceding
the date of the Exercise Notice.
	 
	 	 	 	C= the Exercise Price then in effect for
the applicable Warrant Shares at the time of such
exercise.

               (e) Disputes. In the case of a dispute as to the determination of the Exercise
Price or the arithmetic calculation of the Warrant Shares, the Company shall promptly issue to
the Holder the number of Warrant Shares that are not disputed and resolve such dispute in
accordance with Section 12.

               (f) Limitations on Exercises; Beneficial Ownership.

(i) The Company shall not effect the exercise of this Warrant, and the
Holder shall not have the right to exercise this Warrant, to the extent that
after giving effect to such exercise, such Person (together with such
Person’s affiliates) would beneficially own in excess of 4.99% the “Maximum
Percentage”) of the shares of Common Stock outstanding immediately after
giving effect to such exercise. For purposes of the foregoing sentence, the
aggregate number of shares of Common Stock beneficially owned by such Person
and its affiliates shall include the number of shares of Common Stock
issuable upon exercise of this Warrant with respect to which the
determination of such sentence is being made, but shall exclude shares of
Common Stock which would be issuable upon (x) exercise of the remaining,
unexercised portion of this Warrant beneficially owned by such Person and
its affiliates and (y) exercise or conversion of the unexercised or
unconverted portion of any other securities of the Company beneficially
owned by such Person and its affiliates (including, without limitation, any
convertible notes or convertible preferred stock or warrants) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein. Except as set forth in the preceding sentence, for purposes of this
paragraph, beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended. For

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purposes of this Warrant, in determining the number of outstanding shares of
Common Stock, the Holder may rely on the number of outstanding shares of
Common Stock as reflected in (1) the Company’s most recent Form 10-K, Form
10-KSB, Form 10-Q, Form 10-QSB, Current Report on
Form 8-K or other public filing with the Securities and Exchange Commission
(“SEC”) as the case may be, (2) a more recent public announcement by the
Company or (3) any other notice by the Company or the Transfer Agent setting
forth the number of shares of Common Stock outstanding. For any reason at
any time, upon the written or oral request of the Holder, the Company shall
within two (2) Business Days confirm orally and in writing to the Holder the
number of shares of Common Stock then outstanding. In any case, the number
of outstanding shares of Common Stock shall be determined after giving
effect to the conversion or exercise of securities of the Company by the
Holder and its affiliates since the date as of which such number of
outstanding shares of Common Stock was reported. By written notice to the
Company, the Holder may from time to time increase or decrease the Maximum
Percentage to any other percentage not in excess of 9.99% specified in such
notice; provided that any such increase will not be effective until the
sixty-first (61st) day after such notice is delivered to the
Company.

(ii) Principal Market Regulation. The Company shall not be
obligated to issue any shares of Common Stock upon exercise of this Warrant
and the Holder shall not have the right to receive upon exercise of this
Warrant any shares of Common Stock, if the issuance of such shares of Common
Stock would exceed the aggregate number of shares of Common Stock which the
Company may issue upon exercise of this Warrant (including, as applicable,
any shares of Common Stock issued upon conversion of the SPA Securities)
without breaching the Company’s obligations under the rules or regulations
of the Principal Market (the “Exchange Cap”), except that such limitation
shall not apply in the event that the Company (A) obtains the approval of
its stockholders as required by the applicable rules of the Principal Market
for issuances of shares of Common Stock in excess of such amount or (B)
obtains a written opinion from outside counsel to the Company that such
approval is not required, which opinion shall be reasonably satisfactory to
the Required Holders. Until such approval or written opinion is obtained,
no Holder shall be issued, upon exercise or conversion, as applicable, of
any SPA Warrants or SPA Securities, shares of Common Stock in an amount
greater than the product of the Exchange Cap multiplied by a fraction, the
numerator of which is the total number of shares of Common Stock issued to
such Holder pursuant to the Securities Purchase Agreement on the Issuance
Date and the denominator of which is the aggregate number of shares of
Common Stock issued to the Holders pursuant to the Securities Purchase
Agreement on the Issuance Date (with respect to each Holder, the “Exchange
Cap Allocation”). In the event that any Holder shall sell or otherwise
transfer 

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any of such Holder’s SPA Warrants, the transferee shall be
allocated a pro rata portion of such Holder’s Exchange Cap Allocation, and
the restrictions of the prior sentence shall apply to such transferee with
respect to the portion of the Exchange Cap Allocation allocated to such
transferee. In the event that any Holder of SPA Warrants shall exercise all
of such
Holder’s SPA Warrants into a number of shares of Common Stock which, in the
aggregate, is less than such Holder’s Exchange Cap Allocation, then the
difference between such Holder’s Exchange Cap Allocation and the number of
shares of Common Stock actually issued to such Holder shall be allocated to
the respective Exchange Cap Allocations of the remaining Holders of SPA
Warrants on a pro rata basis in proportion to the shares of Common Stock
underlying the SPA Warrants then held by each such Holder. In the event
that the Company is prohibited from issuing any Warrant Shares for which an
Exercise Notice has been received as a result of the operation of this
Section 1(f)(ii), the Company shall pay cash in exchange for cancellation of
such Warrant Shares, at a price per Warrant Share equal to the difference
between the Closing Sale Price and the Exercise Price as of the date of the
attempted exercise.

               (g) Insufficient Authorized Shares. If at any time while this Warrant remain
outstanding the Company does not have a sufficient number of authorized and unreserved shares
of Common Stock to satisfy its obligation to reserve for issuance upon exercise of this
Warrant at least a number of shares of Common Stock equal to 130% (the “Required Reserve
Amount”) of the number of shares of Common Stock as shall from time to time be necessary to
effect the exercise of all of this Warrant then outstanding (an “Authorized Share Failure”),
then the Company shall immediately take all action necessary to increase the Company’s
authorized shares of Common Stock to an amount sufficient to allow the Company to reserve the
Required Reserve Amount for this Warrant then outstanding. Without limiting the generality of
the foregoing sentence, as soon as practicable after the date of the occurrence of an
Authorized Share Failure, but in no event later than ninety (90) days after the occurrence of
such Authorized Share Failure, the Company shall hold a meeting of its stockholders for the
approval of an increase in the number of authorized shares of Common Stock. In connection
with such meeting, the Company shall provide each stockholder with a proxy statement and shall
use its best efforts to solicit its stockholders’ approval of such increase in authorized
shares of Common Stock and to cause its board of directors to recommend to the stockholders
that they approve such proposal.

          2. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The Exercise Price and
the number of Warrant Shares shall be adjusted from time to time as follows:

               (a) Adjustment upon Issuance of shares of Common Stock. If and whenever on or
after the Subscription Date and through the first anniversary of the Issuance Date, the
Company issues or sells, or in accordance with this Section 2 is deemed to have issued or
sold, any shares of Common Stock (including the issuance or sale of

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shares of Common Stock
owned or held by or for the account of the Company, but excluding shares of Common Stock
deemed to have been issued by the Company in connection with any Excluded Securities (as
defined in the SPA Securities) for a consideration per share (the “New Issuance Price”) less
than a price (the “Applicable Price”) equal to the Exercise Price in effect immediately prior
to such issue or sale or deemed issuance or sale (the foregoing a “Dilutive Issuance”), then
immediately after
such Dilutive Issuance, the Exercise Price then in effect shall be reduced to an amount
equal to the New Issuance Price. In the event of any Dilutive Issuance after the first
anniversary of the Issuance Date, then immediately after such Dilutive Issuance, the Exercise
Price then in effect shall be reduced to an amount equal to the product of (A) the Exercise
Price in effect immediately prior to such Dilutive Issuance and (B) the quotient determined by
dividing (1) the sum of (I) the product derived by multiplying the Exercise Price in effect
immediately prior to such Dilutive Issuance and the number of shares of Common Stock Deemed
Outstanding immediately prior to such Dilutive Issuance plus (II) the consideration, if any,
received by the Company upon such Dilutive Issuance, by (2) the product derived by multiplying
(I) the Exercise Price in effect immediately prior to such Dilutive Issuance by (II) the
number of shares of Common Stock Deemed Outstanding immediately after such Dilutive Issuance.
Upon each such adjustment of the Exercise Price hereunder, the number of Warrant Shares shall
be adjusted to the number of shares of Common Stock determined by multiplying the Exercise
Price in effect immediately prior to such adjustment by the number of Warrant Shares
acquirable upon exercise of this Warrant immediately prior to such adjustment and dividing the
product thereof by the Exercise Price resulting from such adjustment. For purposes of
determining the adjusted Exercise Price under this Section 2(a), the following shall be
applicable:

(i) Issuance of Options. If the Company in any manner grants
any Options and the lowest price per share for which one share of Common
Stock is issuable upon the exercise of any such Option or upon conversion,
exercise or exchange of any Convertible Securities issuable upon exercise of
any such Option is less than the Applicable Price, then such share of Common
Stock shall be deemed to be outstanding and to have been issued and sold by
the Company at the time of the granting or sale of such Option for such
price per share. For purposes of this Section 2(a)(i), the “lowest price
per share for which one share of Common Stock is issuable upon exercise of
such Options or upon conversion, exercise or exchange of such Convertible
Securities issuable upon exercise of any such Option” shall be equal to the
sum of the lowest amounts of consideration (if any) received or receivable
by the Company with respect to any one share of Common Stock upon the
granting or sale of the Option, upon exercise of the Option and upon
conversion, exercise or exchange of any Convertible Security issuable upon
exercise of such Option. No further adjustment of the Exercise Price or
number of Warrant Shares shall be made upon the actual issuance of such
shares of Common Stock or of such Convertible Securities upon the exercise
of such Options or upon the actual issuance of such shares of Common Stock
upon conversion, exercise or exchange of such Convertible Securities.

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(ii) Issuance of Convertible Securities. If the Company in any
manner issues or sells any Convertible Securities and the lowest price per
share for which one share of Common Stock is issuable upon the conversion,
exercise or exchange thereof is less than the Applicable Price, then such
share of Common Stock shall be deemed to be outstanding and to have been
issued and sold by the Company at the time of the issuance or sale of
such Convertible Securities for such price per share. For the purposes of
this Section 2(a)(ii), the “lowest price per share for which one share of
Common Stock is issuable upon the conversion, exercise or exchange thereof”
shall be equal to the sum of the lowest amounts of consideration (if any)
received or receivable by the Company with respect to one share of Common
Stock upon the issuance or sale of the Convertible Security and upon
conversion, exercise or exchange of such Convertible Security. No further
adjustment of the Exercise Price or number of Warrant Shares shall be made
upon the actual issuance of such shares of Common Stock upon conversion,
exercise or exchange of such Convertible Securities, and if any such issue
or sale of such Convertible Securities is made upon exercise of any Options
for which adjustment of this Warrant has been or is to be made pursuant to
other provisions of this Section 2(a), no further adjustment of the Exercise
Price or number of Warrant Shares shall be made by reason of such issue or
sale.

(iii) Change in Option Price or Rate of Conversion. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the issue, conversion, exercise or exchange of any
Convertible Securities, or the rate at which any Convertible Securities are
convertible into or exercisable or exchangeable for shares of Common Stock
increases or decreases at any time, the Exercise Price and the number of
Warrant Shares in effect at the time of such increase or decrease shall be
adjusted to the Exercise Price and the number of Warrant Shares which would
have been in effect at such time had such Options or Convertible Securities
provided for such increased or decreased purchase price, additional
consideration or increased or decreased conversion rate, as the case may be,
at the time initially granted, issued or sold. For purposes of this Section
2(a)(iii), if the terms of any Option or Convertible Security that was
outstanding as of the date of issuance of this Warrant are increased or
decreased in the manner described in the immediately preceding sentence,
then such Option or Convertible Security and the shares of Common Stock
deemed issuable upon exercise, conversion or exchange thereof shall be
deemed to have been issued as of the date of such increase or decrease. No
adjustment pursuant to this Section 2(a) shall be made if such adjustment
would result in an increase of the Exercise Price then in effect or a
decrease in the number of Warrant Shares.

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(iv) Calculation of Consideration Received. In case any Option
is issued in connection with the issue or sale of other securities of the
Company, together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the
Options will be deemed to have been issued for a consideration of $0.01. If
any shares of Common Stock, Options or Convertible Securities are issued or
sold or deemed to have been issued or sold for cash, the consideration
received therefor will be deemed to be the net amount
received by the Company therefor. If any shares of Common Stock, Options or
Convertible Securities are issued or sold for a consideration other than
cash, the amount of such consideration received by the Company will be the
fair value of such consideration, except where such consideration consists
of securities, in which case the amount of consideration received by the
Company will be the Weighted Average Price of such security on the date of
receipt. If any shares of Common Stock, Options or Convertible Securities
are issued to the owners of the non-surviving entity in connection with any
merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion
of the net assets and business of the non-surviving entity as is
attributable to such shares of Common Stock, Options or Convertible
Securities, as the case may be. The fair value of any consideration other
than cash or securities will be determined jointly by the Company and the
Required Holders. If such parties are unable to reach agreement within ten
(10) days after the occurrence of an event requiring valuation (the
“Valuation Event”), the fair value of such consideration will be determined
within five (5) Business Days after the tenth (10th) day
following the Valuation Event by an independent, reputable appraiser jointly
selected by the Company and the Required Holders. The determination of such
appraiser shall be final and binding upon all parties absent manifest error
and the fees and expenses of such appraiser shall be borne by the Company.

(v) Record Date. If the Company takes a record of the holders
of shares of Common Stock for the purpose of entitling them (A) to receive a
dividend or other distribution payable in shares of Common Stock, Options or
in Convertible Securities or (B) to subscribe for or purchase shares of
Common Stock, Options or Convertible Securities, then such record date will
be deemed to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such dividend or
the making of such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be.

               (b) Adjustment upon Subdivision or Combination of Common Stock. If the Company
at any time on or after the Subscription Date subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its

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outstanding shares of Common Stock
into a greater number of shares, the Exercise Price in effect immediately prior to such
subdivision will be proportionately reduced and the number of Warrant Shares will be
proportionately increased. If the Company at any time on or after the Subscription Date
combines (by combination, reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in
effect immediately prior to such combination will be proportionately increased and the number
of Warrant Shares will be proportionately decreased. Any adjustment under this Section 2(b)
shall become effective at the close of business on the date the subdivision or combination
becomes effective.

               (c) Other Events. If any event occurs of the type contemplated by the provisions
of this Section 2 but not expressly provided for by such provisions (including, without
limitation, the granting of stock appreciation rights, phantom stock rights or other rights
with equity features), then the Company’s Board of Directors will make an appropriate
adjustment in the Exercise Price and the number of Warrant Shares so as to protect the rights
of the Holder; provided that no such adjustment pursuant to this Section 2(c) will increase
the Exercise Price or decrease the number of Warrant Shares as otherwise determined pursuant
to this Section 2.

               (d) De Minimis Adjustments. No adjustment in the Conversion Price shall be required
unless such adjustment would require an increase or decrease of at least $0.01 in such price;
provided, however, that any adjustment which by reason of this Section 7(d) is not required to
be made shall be carried forward and taken into account in any subsequent adjustments under
this Section 7. All calculations under this Section 7 shall be made by the Company in good
faith and shall be made to the nearest cent or to the nearest one hundredth of a share, as
applicable. No adjustment need be made for a change in the par value or no par value of the
Company’s Common Stock.

          3. RIGHTS UPON DISTRIBUTION OF ASSETS. If the Company shall declare or make any
dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares
of Common Stock, by way of return of capital or otherwise (including, without limitation, any
distribution of cash, stock or other securities, property or options by way of a dividend, spin
off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction)
(a “Distribution”), at any time after the issuance of this Warrant, then, in each such case:

               (a) any Exercise Price in effect immediately prior to the close of business on the record
date fixed for the determination of holders of shares of Common Stock entitled to receive the
Distribution shall be reduced, effective as of the close of business on such record date, to a
price determined by multiplying such Exercise Price by a fraction of which (i) the numerator
shall be the Weighted Average Price of the shares of Common Stock on the Trading Day
immediately preceding such record date minus the value of the Distribution (as determined in
good faith by the Company’s Board of Directors) applicable to one share of Common Stock, and
(ii) the denominator shall be the Weighted Average Price of the shares of Common Stock on the
Trading Day immediately preceding such record date; and

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               (b) the number of Warrant Shares shall be increased to a number of shares equal to the
number of shares of Common Stock obtainable immediately prior to the close of business on the
record date fixed for the determination of holders of shares of Common Stock entitled to
receive the Distribution multiplied by the reciprocal of the fraction set forth in the
immediately preceding paragraph (a); provided that in the event that the Distribution is of
shares of Common Stock (or common stock) (“Other Shares of Common Stock”) of a company whose
common shares are traded on a national securities exchange or a national automated quotation
system, then the Holder may elect to receive a warrant to purchase Other Shares of Common
Stock in lieu of an increase in the number of Warrant Shares, the terms of which shall be
identical to those of this Warrant, except that
such warrant shall be exercisable into the number of shares of Other Shares of Common
Stock that would have been payable to the Holder pursuant to the Distribution had the Holder
exercised this Warrant immediately prior to such record date and with an aggregate exercise
price equal to the product of the amount by which the exercise price of this Warrant was
decreased with respect to the Distribution pursuant to the terms of the immediately preceding
paragraph (a) and the number of Warrant Shares calculated in accordance with the first part of
this paragraph (b).

          4. PURCHASE RIGHTS; FUNDAMENTAL TRANSACTIONS.

               (a) Purchase Rights. In addition to any adjustments pursuant to Section 2 above,
if at any time the Company grants, issues or sells any Options, Convertible Securities or
rights to purchase stock, warrants, securities or other property pro rata to the record
holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will
be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if the Holder had held the number of
shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to
any limitations on the exercise of this Warrant) immediately before the date on which a record
is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is
taken, the date as of which the record holders of shares of Common Stock are to be determined
for the grant, issue or sale of such Purchase Rights.

               (b) Fundamental Transactions. The Company shall not enter into or be party to a
Fundamental Transaction unless (i) the Successor Entity assumes in writing all of the
obligations of the Company under this Warrant and the other Transaction Documents in
accordance with the provisions of this Section (4)(b) pursuant to written agreements in form
and substance satisfactory to the Required Holders and approved by the Required Holders prior
to such Fundamental Transaction, including agreements to deliver to each holder of the SPA
Warrants in exchange for such Warrants a security of the Successor Entity evidenced by a
written instrument substantially similar in form and substance to this Warrant, including,
without limitation, an adjusted exercise price equal to the value for the shares of Common
Stock reflected by the terms of such Fundamental Transaction, and exercisable for a
corresponding number of shares of capital stock equivalent to the shares of Common Stock
acquirable and receivable upon exercise of this Warrant (without regard to any limitations on
the exercise of this Warrant) prior to such

 - 11 - 

 

Fundamental Transaction, and satisfactory to the
Required Holders and (ii) the Successor Entity (including its Parent Entity) is a publicly
traded corporation whose common stock is quoted on or listed for trading on an Eligible
Market. Upon the occurrence of any Fundamental Transaction, the Successor Entity shall
succeed to, and be substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Warrant referring to the “Company” shall refer instead to
the Successor Entity), and may exercise every right and power of the Company and shall assume
all of the obligations of the Company under this Warrant with the same effect as if such
Successor Entity had been named as the Company herein. Upon consummation of the Fundamental
Transaction, the Successor Entity shall deliver to the Holder confirmation that there shall be
issued upon exercise of this Warrant at any time after the consummation of the Fundamental
Transaction, in lieu of the shares of the Common Stock (or other securities, cash, assets
or other property) issuable upon the exercise of the Warrant prior to such Fundamental
Transaction, such shares of the publicly traded Common Stock (or its equivalent) of the
Successor Entity (including its Parent Entity) which the Holder would have been entitled to
receive upon the happening of such Fundamental Transaction had this Warrant been converted
immediately prior to such Fundamental Transaction, as adjusted in accordance with the
provisions of this Warrant. In addition to and not in substitution for any other rights
hereunder, prior to the consummation of any Fundamental Transaction pursuant to which holders
of shares of Common Stock are entitled to receive securities or other assets with respect to
or in exchange for shares of Common Stock (a “Corporate Event”), the Company shall make
appropriate provision to insure that the Holder will thereafter have the right to receive upon
an exercise of this Warrant at any time after the consummation of the Fundamental Transaction
but prior to the Expiration Date, in lieu of the shares of the Common Stock (or other
securities, cash, assets or other property) issuable upon the exercise of this Warrant prior
to such Fundamental Transaction, such shares of stock, securities, cash, assets or any other
property whatsoever (including warrants or other purchase or subscription rights) which the
Holder would have been entitled to receive upon the happening of such Fundamental Transaction
had this Warrant been exercised immediately prior to such Fundamental Transaction. Provision
made pursuant to the preceding sentence shall be in a form and substance reasonably
satisfactory to the Holder. The provisions of this Section shall apply similarly and equally
to successive Fundamental Transactions and Corporate Events and shall be applied without
regard to any limitations on the exercise of this Warrant.

               (c) Notwithstanding the foregoing, in the event of a Fundamental Transaction, at the
request of the Holder delivered before the forty-fifth (45th) day after the
consummation of such Fundamental Transaction, the Company (or the Successor Entity) shall
purchase this Warrant from the Holder by paying to the Holder, within ten (10) Business Days
after such request (or, if later, on the effective date of the Fundamental Transaction), cash
in an amount equal to the Black Scholes value of the remaining unexercised portion of this
Warrant on the date of such Fundamental Transaction calculated using the Black Scholes Option
Pricing Model.

 - 12 - 

 

          5. NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company will
not, by amendment of its Certificate of Incorporation, Bylaws or through any
reorganization,
transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of
securities, or any other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of this Warrant, and will at all times in good faith carry out all the provisions
of this Warrant and take all action as may be required to protect the rights of the Holder.
Without limiting the generality of the foregoing, the Company (i) shall not increase the par value
of any shares of Common Stock receivable upon the exercise of this Warrant above the Exercise Price
then in effect, (ii) shall take all such actions as may be necessary or appropriate in order that
the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon
the exercise of this Warrant and (iii) shall, so long as any of the SPA Warrants are outstanding,
take all action necessary to reserve and keep available out of its authorized and unissued shares
of Common Stock, solely for the purpose of effecting the exercise of the SPA Warrants, 130% of the
number of shares of Common Stock as shall from
time to time be necessary to effect the exercise of the SPA Warrants then outstanding (without
regard to any limitations on exercise.

          6. WARRANT HOLDER NOT DEEMED A STOCKHOLDER. Except as otherwise specifically provided
herein, the Holder, solely in such Person’s capacity as a holder of this Warrant, shall not be
entitled to vote or receive dividends or be deemed the holder of share capital of the Company for
any purpose, nor shall anything contained in this Warrant be construed to confer upon the Holder,
solely in such Person’s capacity as the Holder of this Warrant, any of the rights of a shareholder
of the Company or any right to vote, give or withhold consent to any corporate action (whether any
reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or
otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise,
prior to the issuance to the Holder of the Warrant Shares which such Person is then entitled to
receive upon the due exercise of this Warrant. In addition, nothing contained in this Warrant
shall be construed as imposing any liabilities on the Holder to purchase any securities (upon
exercise of this Warrant or otherwise) or as a shareholder of the Company, whether such liabilities
are asserted by the Company or by creditors of the Company. Notwithstanding this Section 6, the
Company shall provide the Holder with copies of the same notices and other information given to the
shareholders of the Company generally, contemporaneously with the giving thereof to the
shareholders.

          7. REISSUANCE OF WARRANTS.

               (a) Transfer of Warrant. If this Warrant is to be transferred, the Holder shall
surrender this Warrant to the Company, whereupon the Company will forthwith issue and deliver
upon the order of the Holder a new Warrant (in accordance with Section 7(d)), registered as
the Holder may request, representing the right to purchase the number of Warrant Shares being
transferred by the Holder and, if less than the total number of Warrant Shares then underlying
this Warrant is being transferred, a new Warrant (in accordance with Section 7(d)) to the
Holder representing the right to purchase the number of Warrant Shares not being transferred.

               (b) Lost, Stolen or Mutilated Warrant. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this
Warrant, and, in the case of loss, theft or destruction, of any

 - 13 - 

 

indemnification undertaking by
the Holder to the Company in customary form and, in the case of mutilation, upon surrender and
cancellation of this Warrant, the Company shall execute and deliver to the Holder a new
Warrant (in accordance with Section 7(d)) representing the right to purchase the Warrant
Shares then underlying this Warrant.

               (c) Exchangeable for Multiple Warrants. This Warrant is exchangeable, upon the
surrender hereof by the Holder at the principal office of the Company, for a new Warrant or
Warrants (in accordance with Section 7(d)) representing in the aggregate the right to purchase
the number of Warrant Shares then underlying this Warrant, and each such new Warrant will
represent the right to purchase such portion of such Warrant Shares as is designated by the
Holder at the time of such surrender; provided, however, that no Warrants for fractional
shares of Common Stock shall be given.

               (d) Issuance of New Warrants. Whenever the Company is required to issue a new
Warrant pursuant to the terms of this Warrant, such new Warrant (i) shall be of like tenor
with this Warrant, (ii) shall represent, as indicated on the face of such new Warrant, the
right to purchase the Warrant Shares then underlying this Warrant (or in the case of a new
Warrant being issued pursuant to Section 7(a) or Section 7(c), the Warrant Shares designated
by the Holder which, when added to the number of shares of Common Stock underlying the other
new Warrants issued in connection with such issuance, does not exceed the number of Warrant
Shares then underlying this Warrant), (iii) shall have an issuance date, as indicated on the
face of such new Warrant which is the same as the Issuance Date, and (iv) shall have the same
rights and conditions as this Warrant.

          8. NOTICES. Whenever notice is required to be given under this Warrant, unless
otherwise provided herein, such notice shall be given in accordance with Section 9(f) of the
Securities Purchase Agreement. The Company shall provide the Holder with prompt written notice of
all actions taken pursuant to this Warrant, including in reasonable detail a description of such
action and the reason therefore. Without limiting the generality of the foregoing, the Company
will give written notice to the Holder (i) immediately upon any adjustment of the Exercise Price,
setting forth in reasonable detail, and certifying, the calculation of such adjustment and (ii) at
least fifteen (15) days prior to the date on which the Company closes its books or takes a record
(A) with respect to any dividend or distribution upon the shares of
Common Stock, (B) with respect to any grants, issuances or sales of any Options, Convertible
Securities or rights to purchase stock, warrants, securities or other property to holders of shares
of Common Stock (other than Excluded Securities) or (C) for determining rights to vote with respect
to any Fundamental Transaction, dissolution or liquidation, provided in each case that such
information shall be made known to the public prior to or in conjunction with such notice being
provided to the Holder.

          9. AMENDMENT AND WAIVER. Except as otherwise provided herein, the provisions of this
Warrant may be amended and the Company may take any action herein prohibited, or omit to perform
any act herein required to be performed by it, only if the Company has obtained the written consent
of the Required Holders; provided that no such action may increase the exercise price of any SPA
Warrant or decrease the number of shares or class of stock obtainable upon exercise of any SPA
Warrant without the written consent of the Holder. No such amendment shall be effective to the
extent that it applies to less than all of the holders of the SPA Warrants then outstanding.

 - 14 - 

 

           10. GOVERNING LAW. This Warrant shall be governed by and construed and enforced in
accordance with, and all questions concerning the construction, validity, interpretation and
performance of this Warrant 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.

 - 15 - 

 

           11. CONSTRUCTION; HEADINGS. This Warrant shall be deemed to be jointly drafted by the
Company and all the Buyers and shall not be construed against any person as the drafter hereof.
The headings of this Warrant are for convenience of reference and shall not form part of, or affect
the interpretation of, this Warrant.

          12. DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Exercise Price or the arithmetic calculation of the Warrant Shares, the Company shall submit the
disputed determinations or arithmetic calculations via facsimile within two (2) Business Days of
receipt of the Exercise Notice giving rise to such dispute, as the case may be, to the Holder. If
the Holder and the Company are unable to agree upon such determination or calculation of the
Exercise Price or the Warrant Shares within three Business Days of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall, within two (2)
Business Days submit via facsimile (a) the disputed determination of the Exercise Price to an
independent, reputable investment bank selected by the Company and approved by the Holder or (b)
the disputed arithmetic calculation of the Warrant Shares to the Company’s independent, outside
accountant. The Company shall cause at its expense the investment bank or the accountant, as the
case may be, to perform the determinations or calculations and notify the Company and the Holder of
the results no later than ten Business Days from the time it receives the disputed determinations
or calculations. Such investment bank’s or accountant’s determination or calculation, as the case
may be, shall be binding upon all parties absent demonstrable error.

          13. REMEDIES, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies
provided in this Warrant shall be cumulative and in addition to all other
remedies available under this Warrant and the other Transaction Documents, at law or in equity
(including a decree of specific performance and/or other injunctive relief), and nothing herein
shall limit the right of the Holder right to pursue actual damages for any failure by the Company
to comply with the terms of this Warrant. The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any
such breach may be inadequate. The Company therefore agrees that, in the event of any such breach
or threatened breach, the holder of this Warrant shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach, without the necessity of showing
economic loss and without any bond or other security being required.

               (a) TRANSFER. This Warrant may be offered for sale, sold, transferred or assigned
without the consent of the Company, except as may otherwise be required by Section 2(f) of the
Securities Purchase Agreement.

          14. CERTAIN DEFINITIONS. For purposes of this Warrant, the following terms shall have
the following meanings:

               (a) “1933 Act” means the Securities Act of 1933, as amended.

               (b) “Bloomberg” means Bloomberg Financial Markets.

 - 16 - 

 

               (c) “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) “Closing Sale Price” means, for any security as of any date, the last closing trade
price for such security on the Principal Market, as reported by Bloomberg, or, if the
Principal Market begins to operate on an extended hours basis and does not designate the
closing trade price then the last trade price of such security prior to 4:00:00 p.m., New York
time, as reported by Bloomberg, or, if the Principal Market is not the principal securities
exchange or trading market for such security, the last trade price of such security on the
principal securities exchange or trading market where such security is listed or traded as
reported by Bloomberg, or if the foregoing do not apply, the last trade price of such security
in the over-the-counter market on the electronic bulletin board for such security as reported
by Bloomberg, or, if no last trade price is reported for such security by Bloomberg, the
average of the bid prices, or the ask prices, respectively, of any market makers for such
security as reported in the “pink sheets” by Pink Sheets LLC (formerly the National Quotation
Bureau, Inc.). If the Closing Sale Price cannot be calculated for a security on a particular
date on any of the foregoing bases, the the Closing Sale Price of such security on such date
shall be the fair market value as mutually determined by the Company and the Holder. If the
Company and the Holder are unable to agree upon the fair market value of such security, then
such dispute shall be resolved pursuant to Section 12. All such determinations to be
appropriately adjusted for any stock dividend, stock split, stock combination or other similar
transaction during the applicable calculation period.

               (e) “Common Stock” means (i) the Company’s shares of Common Stock, par value $0.001 per
share, and (ii) any share capital into which such Common Stock shall have been changed or any
share capital resulting from a reclassification of such Common Stock.

               (f) “Common Stock Deemed Outstanding” means, at any given time, the number of shares of
Common Stock actually outstanding at such time, plus the number of shares of Common Stock
deemed to be outstanding pursuant to Sections 2(a)(i) and 2(a)(ii) hereof regardless of
whether the Options or Convertible Securities are actually exercisable at such time, but
excluding any shares of Common Stock owned or held by or for the account of the Company or
issuable upon exercise of the SPA Warrants.

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

               (h) “Eligible Market” means the Principal Market, The New York Stock Exchange, Inc., The
NASDAQ Global Select Market or The NASDAQ Capital Market.

 - 17 - 

 

               (i) “Expiration Date” means the date sixty (60) months after the Issuance Date or, if
such date falls on a day other than a Business Day or on which trading does not take place on
the Principal Market (a “Holiday”), the next date that is not a Holiday.

               (j) “Fundamental Transaction” means that the Company shall, directly or indirectly, in
one or more related transactions, (i) consolidate or merge with or into (whether or not the
Company is the surviving corporation) another Person or Persons, if the holders of the Voting
Stock (not including any shares of Voting Stock held by the Person or Persons making or party
to, or associated or affiliated with the Persons making or party to, such consolidation or
merger) immediately prior to such consolidation or merger shall hold or have the right to
direct the voting of less than 50% of the Voting Stock or such voting securities of such other
surviving Person immediately following such transaction, or (ii) sell, assign, transfer,
convey or otherwise dispose of all or substantially all of the properties or assets of the
Company to another Person, or (iii) allow another Person to make a purchase, tender or
exchange offer that is accepted by the holders of more than the 50% of the outstanding shares
of Voting Stock (not including any shares of Voting Stock held by the Person or Persons making
or party to, or associated or affiliated with the Persons making or party to, such purchase,
tender or exchange offer), or (iv) consummate a stock purchase agreement or other business
combination (including, without limitation, a reorganization, recapitalization, spin-off or
scheme of arrangement) with another Person whereby such other Person acquires more than the
50% of the outstanding shares of Voting Stock (not including any shares of Voting Stock held
by the other Person or other Persons making or party to, or associated or affiliated with the
other Persons making or party to, such stock purchase agreement or other business
combination), (v) reorganize, recapitalize or reclassify its Common Stock or (vi) any “person”
or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended)
is or shall become the “beneficial owner” (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended), directly or indirectly, of 50% of the aggregate ordinary
voting power represented by issued and outstanding Common Stock.

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

               (l) “Parent Entity” of a Person means an entity that, directly or indirectly, controls
the applicable Person and whose common stock or equivalent equity security is quoted or listed
on an Eligible Market, or, if there is more than one such Person or Parent Entity, the Person
or Parent Entity with the largest public market capitalization as of the date of consummation
of the Fundamental Transaction.

               (m) “Person” means an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization, any other entity and a
government or any department or agency thereof.

               (n) “Principal Market” means The NASDAQ Global Market.

 - 18 - 

 

               (o) “Required Holders” means the holders of the SPA Warrants representing at least
two-thirds of shares of Common Stock underlying the SPA Warrants then outstanding.

               (p) “SPA Securities” means the Notes issued pursuant to the Securities Purchase
Agreement.

               (q) “Successor Entity” means the Person (or, if so elected by the Required Holders, the
Parent Entity) formed by, resulting from or surviving any Fundamental Transaction or the
Person (or, if so elected by the Required Holders, the Parent Entity) with which such
Fundamental Transaction shall have been entered into.

               (r) “Trading Day” means any day on which the Common Stock are traded on the Principal
Market, or, if the Principal Market is not the principal trading market for the Common Stock,
then on the principal securities exchange or securities market on which the Common Stock are
then traded; provided that “Trading Day” shall not include any day on which the Common Stock
are scheduled to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock are suspended from trading during the final hour of trading on such exchange or
market (or if such exchange or market does not designate in advance the closing time of
trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York
time).

               (s) “Voting Stock” of a Person means capital stock of such Person of the class or classes
pursuant to which the holders thereof have the general voting power to elect, or the general
power to appoint, at least a majority of the board of directors, managers or trustees of such
Person (irrespective of whether or not at the time capital stock of any other class or classes
shall have or might have voting power by reason of the happening of any contingency).

               (t) “Weighted Average Price” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during the period
beginning at 9:30:01 a.m., New York City time, and ending at 4:00:00 p.m., New York City time,
as reported by Bloomberg through its “Volume at Price” function or, if the foregoing does not
apply, the dollar volume-weighted average price of such security in the over-the-counter
market on the electronic bulletin board for such security during the period beginning at
9:30:01 a.m., New York City time, and ending at 4:00:00 p.m., New York City time, as reported
by Bloomberg, or, if no dollar volume-weighted average price is reported for such security by
Bloomberg for such hours, the average of the highest closing bid price and the lowest closing
ask price of any of the market makers for such security as reported in the “pink sheets” by
Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Weighted Average Price
cannot be calculated for such security on such date on any of the foregoing bases, the
Weighted Average Price of such security on such date shall be the fair market value as
mutually determined by the Company and the Required Holders. If the Company and the Required
Holders are unable to agree upon the fair market value of the such security, then such dispute
shall be resolved pursuant to Section 12 with the term “Weighted Average Price”

 - 19 - 

 

being
substituted for the term “Exercise Price.” All such determinations shall be appropriately
adjusted for any share dividend, share split or other similar transaction during such period.

[Signature Page Follows]

 

 

     IN WITNESS WHEREOF, the Company has caused this Warrant to Purchase Common Stock to be duly
executed as of the Issuance Date set out above.

	 	 	 	 	 
	 	CASH SYSTEMS, INC.

 	 
	 	By:  	
 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 

 

 

EXHIBIT A

EXERCISE NOTICE

TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS

WARRANT TO PURCHASE COMMON STOCK

CASH SYSTEMS, INC.

     The undersigned holder hereby exercises the right to purchase                      of the shares
of Common Stock (“Warrant Shares”) of Cash Systems, Inc., a Delaware corporation (the “Company”),
evidenced by the attached Warrant to Purchase Common Stock (the “Warrant”). Capitalized terms used
herein and not otherwise defined shall have the respective meanings set forth in the Warrant.

     1. Form of Exercise Price. The Holder intends that payment of the Exercise Price shall be
made as:

	 	 	 	                     a “Cash Exercise” with respect to                                          Warrant
Shares; and/or
	 
	 	 	 	                     a “Cashless Exercise” with respect to                                          Warrant
Shares.

     2. Payment of Exercise Price. In the event that the holder has elected a Cash Exercise with
respect to some or all of the Warrant Shares to be issued pursuant hereto, the holder shall pay the
Aggregate Exercise Price in the sum of $                                         to the Company in accordance with the
terms of the Warrant.

     3. Delivery of Warrant Shares. The Company shall deliver to the holder                      Warrant
Shares in accordance with the terms of the Warrant.

Date:                                          __, ______

                                                                                

Name of Registered Holder

	 	 	 	 	 
	By:
	 	 	 	 
	 

	 	 

Name:
	 	 
	 

	 	Title:	 	 

 

 

ACKNOWLEDGMENT

     The Company hereby acknowledges this Exercise Notice and hereby directs American Registrar &
Transfer Co. to issue the above indicated number of shares of Common Stock in accordance with the
Transfer Agent Instructions dated October 6, 2006 from the Company and acknowledged and agreed to
by American Registrar & Transfer Co.

	 	 	 	 	 
	 	CASH SYSTEMS, INC.

 	 
	 	By:  	
 	 
	 	 	Name:  	 	 
	 	 	Title:exv10w1

 

Exhibit 10.1

	 	 	 
	 

	 	Name:                                         
	 
	 	 
	 

	 	Copy No.:                                         

CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM

MBI Financial Inc.

$1,200,000

 

Senior Secured Notes

MINIMUM SUBSCRIPTION: $25,000

     MBI Financial, Inc., a Nevada corporation (the “Company” or “MBIF”), hereby offers up to
$1,200,000 of its Senior Secured Notes (the “Notes”) on the terms provided in this confidential
private placement memorandum (this “Memorandum”). MBIF is building a mortgage banking / brokerage
business via an acquisition strategy, as a result of the market environment and industry
consolidation opportunity. MBIF’s strategy is designed to not only expand the mortgage broker
businesses by setting up and receiving mortgage brokers’ loans in its mortgage banking operation,
but also to grow these businesses with proven marketing programs, better and faster loan approvals,
and the introduction of new and expanded loan programs, as well as overlooked opportunities to
leverage acquired business unit synergies.

     The Notes will be sold only to a limited number of accredited investors (as defined under
applicable federal and state securities laws). Qualified investors (as defined herein) may purchase
Notes under the terms set forth in this Memorandum. Brokers, dealers or sales agents may be used,
in which case commissions will be paid for the offer or sale of the Notes, as set forth herein.

     The offer and sale of the Notes offered hereby has not been registered or qualified under the
Securities Act of 1933, as amended, or the securities laws of any state or other jurisdiction.
Instead, the Notes is being offered and sold in reliance upon exemptions from the requirement for
such registration and qualification for private offerings. The sale, transfer, pledge,
hypothecation or other disposition of the Notes or an interest therein may not be accomplished
except in accordance with the registration requirements of the Securities Act of 1933, as amended,
and applicable state securities laws. Prior to transfer, compliance with such requirements shall be
demonstrated by an opinion of counsel satisfactory to us to the effect that such registration or
qualification is not required.

     The minimum subscription for an investor is $25,000. Persons subscribing for the minimum
amount of Notes may also subscribe for additional Notes. The Company’s Common Stock is currently
quoted on the NASD Over-The-Counter Bulletin Board (the “Bulletin Board”) under the symbol
“MBIF.OB.” The closing price as reported by the Bulletin Board for the Company’s Common Stock on
September 10, 2006 was $0.26 per share.

 

     An investment in the Company and the Notes involves a significant risk of loss. See “Risk
Factors” (beginning on page 6) for information that should be considered by prospective investors.

     This Memorandum has not been filed with, reviewed, or approved by the Securities and Exchange
Commission. Neither the Securities and Exchange Commission, any state securities commission, nor
any other governmental authority has approved or disapproved of the Notes or determined if this
Memorandum is truthful, accurate, or complete. Any representation to the contrary is a criminal offense. This
Memorandum does not constitute an offer to sell, or a solicitation of an offer to buy, the Notes in
any state or other jurisdiction in which such an offer or solicitation is unlawful.

     The date of this Confidential Private Placement Memorandum is September 11, 2006.

 

     The terms, “MBIF”, “Company”, “we”, “our”, and “us” refer to MBI Financial, Inc. unless the
context suggests otherwise. The terms “you” and “your” refer to a prospective investor. The term
“Common Stock” means MBIF’s common stock, par value $0.0167 per share. The term “Preferred Stock”
means MBIF’s preferred stock, par value $0.10 per share.

     Please read this Memorandum carefully. It describes the Company and its financial condition
and business.

     Neither the delivery of this Memorandum nor the sale of the Notes means that information
contained in this Memorandum is correct or complete after the date of this Memorandum. This
document is not an offer to sell or solicitation of an offer to buy the Notes in any circumstances
under which the offer or solicitation is unlawful.

FOR RESIDENTS OF ALL STATES

     THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND ARE BEING OFFERED AND SOLD IN RELIANCE ON
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS. THE SECURITIES ARE SUBJECT
TO RESTRICTION ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER SAID ACT AND SUCH LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS
SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN
INDEFINITE PERIOD OF TIME. THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR OTHER REGULATORY AUTHORITY, NOR HAVE
ANY OF THE FOREGOING
AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THIS
CONFIDENTIAL OFFERING MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

[Remainder of Page Intentionally Left Blank]

ii

 

IMPORTANT NOTICES

     THIS CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM IS SUBMITTED IN CONNECTION WITH THE PRIVATE
PLACEMENT OF SENIOR SECURED NOTES OF AND BY MBI FINANCIAL, INC. AND MAY NOT BE REPRODUCED OR USED
FOR ANY OTHER PURPOSE. ANY PERSON WHO ACCEPTS DELIVERY OF THIS MEMORANDUM AGREES TO HOLD THIS
MEMORANDUM IN CONFIDENCE AND, IF THAT PERSON ELECTS NOT TO INVEST IN THE COMPANY, TO EITHER DESTROY
OR RETURN THIS MEMORANDUM ALONG WITH ALL DOCUMENTS RELATED TO THIS OFFERING AND/OR THE COMPANY.
THIS MEMORANDUM SUPERCEDES AND REPLACES ANY AND ALL OTHER MATERIAL AND/OR INFORMATION PROVIDED BY
OR ON BEHALF OF THE COMPANY TO THE PROSPECTIVE INVESTOR WITH RESPECT TO THIS OFFERING, THE NOTES,
AND/OR THE COMPANY. THIS MEMORANDUM IS FOR THE EXCLUSIVE USE OF THE PROSPECTIVE INVESTOR WHOSE
NAME APPEARS ON THE COVER OF THIS MEMORANDUM AND IS NOT TO BE SHOWN TO ANY PERSON OTHER THAN
THE FINANCIAL OR LEGAL ADVISERS OF SUCH PROSPECTIVE INVESTOR. REPRODUCTION OR DISTRIBUTION OF THIS
MEMORANDUM, IN FULL OR IN PART, AND THE DISCLOSURE OF ANY OF ITS CONTENTS, IS OTHERWISE PROHIBITED.
THIS MEMORANDUM CONSTITUTES AN OFFER ONLY IF A PROSPECTIVE INVESTOR NAME AND MEMORANDUM
IDENTIFICATION COPY NUMBER APPEAR IN THE APPROPRIATE SPACES PROVIDED FOR ON THE COVER OF THIS
MEMORANDUM AND SUCH PROSPECTIVE INVESTOR RESIDES IN A JURISDICTION IN WHICH SUCH AN OFFER IS LEGAL,
AND AN OFFER IS MADE ONLY TO THE PROSPECTIVE INVESTOR NAMED.

     PROSPECTIVE INVESTORS MUST NOT CONSTRUE THE CONTENTS OF THIS MEMORANDUM OR ANY PRIOR OR
SUBSEQUENT COMMUNICATION FROM THE COMPANY, OR ITS RESPECTIVE OFFICERS, AGENTS OR AFFILIATES, OR ANY
PERSON ASSOCIATED WITH THIS OFFERING AS LEGAL, FINANCIAL, TAX, OR INVESTMENT ADVICE. EACH INVESTOR
SHOULD CONSULT HIS OWN PERSONAL LEGAL COUNSEL, BUSINESS AND/OR TAX ADVISER AS TO LEGAL, TAX,
FINANCIAL, AND RELATED MATTERS CONCERNING THE INVESTMENT DESCRIBED HEREIN AND ITS SUITABILITY FOR
SUCH PERSON. THE INFORMATION CONTAINED HEREIN HAS BEEN OBTAINED FROM SOURCES DEEMED RELIABLE, BUT
NO REPRESENTATION OR WARRANTY IS MADE AS TO ITS ACCURACY OR COMPLETENESS.

     THE DESCRIBED INVESTMENT INVOLVES SUBSTANTIAL RISKS INCLUDING: (i) SIGNIFICANT RESTRICTIONS ON
THE TRANSFERABILITY OF THE SECURITIES OFFERED HEREBY; (ii) POSSIBLE RISK OF LOSS OF ENTIRE
INVESTMENT; AND (iii) UNCERTAINTY ABOUT COMMERCIAL ACCEPTANCE OF THE COMPANY’S PRODUCTS AND
SERVICES.

     THIS OFFERING IS SUBJECT TO WITHDRAWAL, CANCELLATION OR MODIFICATION BY THE COMPANY WITHOUT
NOTICE. THE COMPANY RESERVES THE RIGHT, IN ITS SOLE DISCRETION, TO REJECT ANY SUBSCRIPTION IN WHOLE
OR IN PART FOR ANY REASON (OR FOR NO REASON) AND TO ALLOT TO ANY SUBSCRIBER LESS THAN THE AMOUNT OF
NOTES SUBSCRIBED FOR.

     OFFICERS AND DIRECTORS OF THE COMPANY AND THEIR AFFILIATES MAY PURCHASE SENIOR SECURED NOTES
PURSUANT TO THIS OFFERING.

     THE OFFERING PRICE OF THE SENIOR SECURED NOTES HAS BEEN DETERMINED BY THE COMPANY AND DOES NOT
NECESSARILY BEAR ANY RELATIONSHIP TO THE ASSETS, BOOK VALUE OR POTENTIAL EARNINGS OF THE COMPANY.

     THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION TO ANYONE IN ANY STATE OR OTHER
JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED. ACCEPTANCE OF A PROSPECTIVE
INVESTOR’S SUBSCRIPTION FOR NOTES SHALL BE MADE ONLY AFTER THE COMPANY DETERMINES THAT A
PROSPECTIVE INVESTOR SATISFIES THE REQUIREMENTS FOR AN EXEMPTION FROM REGISTRATION AND INVESTOR
SUITABILITY STANDARDS.

iii

 

     AN INVESTOR’S EXECUTION OF A SUBSCRIPTION AGREEMENT CONSTITUTES AN UNCONDITIONAL
OBLIGATION TO PURCHASE THE SUBJECT SECURITIES. THE COMPANY RESERVES THE RIGHT TO REJECT ANY
SUBSCRIPTION FOR ANY REASON. NO SALE WILL BE DEEMED TO HAVE OCCURRED UNTIL THE COMPANY HAS
ACCEPTED AN INVESTOR’S SUBSCRIPTION. PAYMENTS FOR UNACCEPTED SUBSCRIPTIONS WILL BE PROMPTLY
REFUNDED WITHOUT INTEREST OR DEDUCTION.

     EACH INVESTOR UNDERSTANDS OR HAS BEEN ADVISED OF THE RISK FACTORS
ASSOCIATED WITH THIS INVESTMENT. EACH INVESTOR WILL BE REQUIRED TO WARRANT AND REPRESENT TO
THE COMPANY, IN WRITING IN THE SUBSCRIPTION DOCUMENTS, THAT SUCH INVESTOR IS PURCHASING THE NOTES
FOR INVESTMENT AND NOT WITH A VIEW TOWARD RESALE.

     THIS MEMORANDUM SHOULD BE TREATED AS CONFIDENTIAL. ANY REPRODUCTION OR DISTRIBUTION OF THIS
MEMORANDUM, IN WHOLE OR IN PART, OR THE DISSEMINATION OF ANY OF ITS CONTENTS WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMPANY OR THE PLACEMENT AGENT IS PROHIBITED.

     THE COMPANY HAS AGREED TO MAKE AVAILABLE PRIOR TO THE CONSUMMATION OF THE TRANSACTIONS, THE
OPPORTUNITY TO ASK QUESTIONS OF, AND RECEIVE ANSWERS FROM, IT OR ANY PERSON ACTING ON ITS BEHALF
CONCERNING THE TERMS AND CONDITIONS OF THIS OFFERING, AND TO OBTAIN ANY ADDITIONAL INFORMATION, TO
THE EXTENT THEY POSSESS SUCH INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE EFFORT OR EXPENSE,
NECESSARY TO VERIFY THE ACCURACY OF THE INFORMATION SET FORTH HEREIN. ALL DOCUMENTS REFERENCED IN
THIS MEMORANDUM BUT NOT ATTACHED AS EXHIBITS SHALL BE AVAILABLE FOR INSPECTION BY ANY PROSPECTIVE
INVESTOR AT THE OFFICES OF THE COMPANY.

     THE OBLIGATIONS OF THE PARTIES REGARDING THE TRANSACTIONS CONTEMPLATED HEREIN ARE SET FORTH
AND WILL BE GOVERNED BY THE DOCUMENTS INCLUDED AS EXHIBITS AND/OR DESCRIBED HEREIN, AND ALL OF THE
STATEMENTS AND INFORMATION CONTAINED IN THIS MEMORANDUM ARE QUALIFIED IN THEIR ENTIRETY BY SUCH
DOCUMENTS. CONSEQUENTLY, YOU ARE URGED TO READ CAREFULLY THE DOCUMENTS INCLUDED AND/OR DESCRIBED
HEREIN.

     NO OFFERING LITERATURE OR ADVERTISING IN ANY FORM WILL BE EMPLOYED IN THE OFFERING OF THE
DESCRIBED NOTES, EXCEPT FOR THIS MEMORANDUM OR SUBSEQUENT AMENDMENTS OR SUPPLEMENTS. EXCEPT AS
DISCUSSED HEREIN, NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT
CONTAINED IN THIS MEMORANDUM. NEITHER THE DELIVERY OF THIS MEMORANDUM NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE MATTERS
DISCUSSED SINCE THE DATE HEREOF.

     WHEN USED IN THIS OFFERING MEMORANDUM, THE WORDS “MAY,” “WILL,” “EXPECT,” “ANTICIPATE,”
“CONTINUE,” “ESTIMATES,” “PROJECT,” “INTEND” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD–LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 REGARDING EVENTS, CONDITIONS AND FINANCIAL
TRENDS THAT MAY AFFECT THE COMPANY’S FUTURE PLANS OF OPERATIONS, BUSINESS STRATEGY, OPERATING
RESULTS AND FINANCIAL POSITION. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY FORWARD–LOOKING
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND
THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INCLUDED WITHIN THE FORWARD–LOOKING STATEMENTS
AS A RESULT OF VARIOUS FACTORS. SEE “RISK FACTORS” AND “AFFILIATES AND POTENTIAL CONFLICTS OF
INTEREST.”

     THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION IN WHICH AN
OFFER OR SOLICITATION IS NOT AUTHORIZED.

iv

 

FOR CALIFORNIA RESIDENTS

     THE SALE OF THE SECURITIES THAT ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE QUALIFICATION IS
UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102 OR
25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON THE QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
CALIFORNIA RESIDENTS WILL BE REQUIRED TO COMPLETE A PURCHASER QUESTIONNAIRE WITH RESPECT TO THEIR
INVESTMENTS HEREIN.

FOR CONNECTICUT RESIDENTS

     THE BANKING COMMISSIONER OF THE STATE OF CONNECTICUT HAS NOT PASSED IN ANY WAY UPON THE MERITS
OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR TRANSACTION.
THE SECURITIES OFFERED HEREIN HAVE NOT BEEN REGISTERED UNDER SECTION 36b-16 OF THE CONNECTICUT
SECURITIES LAW AND BUSINESS OPPORTUNITY INVESTMENT ACT (THE “CONNECTICUT ACT”) AND, THEREFORE,
CANNOT BE RESOLD UNLESS THEY ARE REGISTERED UNDER THE CONNECTICUT ACT OR UNLESS AN EXEMPTION FROM
REGISTRATION IS AVAILABLE.

FOR FLORIDA RESIDENTS

     THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE FLORIDA SECURITIES ACT IN RELIANCE UPON
EXEMPTION PROVISIONS CONTAINED THEREIN. §517.061(11)(a)(5) OF THE FLORIDA SECURITIES AND INVESTOR
PROTECTION ACT (THE “FLORIDA ACT”) PROVIDES THAT WHEN SALES ARE MADE TO FIVE OR MORE PERSONS IN
THIS STATE, ANY PURCHASER OF SECURITIES IN FLORIDA WHICH ARE EXEMPTED FROM REGISTRATION UNDER
§517.061(11) OF THE FLORIDA ACT MAY WITHDRAW HIS SUBSCRIPTION AGREEMENT AND RECEIVE A FULL REFUND
OF ALL MONIES PAID, WITHIN THREE BUSINESS DAYS AFTER HE TENDERS CONSIDERATION FOR SUCH SECURITIES.
THEREFORE, ANY FLORIDA RESIDENT WHO PURCHASES SECURITIES IS ENTITLED TO EXERCISE THE FOREGOING
STATUTORY RESCISSION RIGHT WITHIN THREE BUSINESS DAYS AFTER TENDERING CONSIDERATION FOR THE
INVESTMENT PACKAGES BY TELEPHONE, TELEGRAM, OR LETTER NOTICE TO THE COMPANY AT THE ADDRESS OR
TELEPHONE NUMBER PRINTED ON THE COVER PAGE OF THIS MEMORANDUM. ANY TELEGRAM OR LETTERS SHOULD BE
SENT OR POSTMARKED PRIOR TO THE END OF THE THIRD BUSINESS DAY. A LETTER SHOULD BE MAILED BY
CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO ENSURE ITS RECEIPT AND, TO EVIDENCE THE TIME OF
MAILING. ANY ORAL REQUESTS SHOULD BE CONFIRMED IN WRITING.

FOR NEW JERSEY RESIDENTS

     THE SECURITIES HAVE NOT BEEN FILED WITH OR REVIEWED BY THE BUREAU OF SECURITIES OR THE BUREAU
CHIEF OF THE STATE OF NEW JERSEY NOR HAS THE BUREAU CHIEF PASSED IN ANY WAY UPON THE MERITS OR
QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY SECURITY OR TRANSACTION.

FOR NEW YORK RESIDENTS

     THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE NEW YORK FRAUDULENT PRACTICES ACT BY REASON
OF SPECIFIC EXEMPTIONS THEREUNDER RELATING TO THE LIMITED AVAILABILITY OF THE OFFERING. THE
SECURITIES CANNOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF TO ANY PERSON OR ENTITY UNLESS
SUBSEQUENTLY REGISTERED UNDER THE NEW YORK FRAUDULENT PRACTICES ACT, IF SUCH REGISTRATION IS
REQUIRED. THIS MEMORANDUM HAS NOT BEEN
REVIEWED BY THE ATTORNEY GENERAL PRIOR TO ITS ISSUANCE AND USE. THE ATTORNEY GENERAL OF THE
STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO
THE CONTRARY IS

v

 

UNLAWFUL. THIS PRIVATE OFFERING MEMORANDUM DOES NOT CONTAIN AN UNTRUE STATEMENT OF A MATERIAL
FACT OR OMIT TO STATE A MATERIAL FACT NECESSARY TO MAKE THE STATEMENTS MADE IN LIGHT OF THE
CIRCUMSTANCES UNDER WHICH THEY ARE MADE, NOT MISLEADING. IT CONTAINS A FAIR SUMMARY OF THE MATERIAL
TERMS OF DOCUMENTS PURPORTED TO BE SUMMARIZED HEREIN.

FOR PENNSYLVANIA RESIDENTS

     IF YOU HAVE ACCEPTED AN OFFER TO PURCHASE THESE SECURITIES AND HAVE RECEIVED A WRITTEN NOTICE
EXPLAINING YOUR RIGHT TO WITHDRAW YOUR ACCEPTANCE PURSUANT TO SECTION 207(m)(2) OF THE PENNSYLVANIA
SECURITIES ACT OF 1972, YOU MAY ELECT, WITHIN TWO BUSINESS DAYS FROM THE DATE OF RECEIPT BY THE
ISSUER OF YOUR BINDING CONTRACT OF PURCHASE OR, IN THE CASE OF A TRANSACTION IN WHICH THERE IS NO
BINDING CONTRACT OF PURCHASE, WITHIN TWO BUSINESS DAYS AFTER YOU MAKE THE INITIAL PAYMENT FOR THE
SECURITIES BEING OFFERED, TO WITHDRAW YOUR ACCEPTANCE AND RECEIVE A FULL REFUND OF ALL MONIES PAID
BY YOU. YOUR WITHDRAWAL OF ACCEPTANCE WILL BE WITHOUT ANY FURTHER LIABILITY TO ANY PERSON. TO
ACCOMPLISH THIS WITHDRAWAL, YOU NEED ONLY SEND A WRITTEN NOTICE (INCLUDING A NOTICE BY FACSIMILE OR
ELECTRONIC MAIL) TO THE ISSUER (OR PLACEMENT AGENT IF ONE IS LISTED ON THE FRONT PAGE OF THE
OFFERING MEMORANDUM) INDICATING YOUR INTENTION TO WITHDRAW.

FOR TEXAS RESIDENTS

     THE INTERESTS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR THE TEXAS SECURITIES ACT BY
REASON OF SPECIFIC EXEMPTIONS THEREUNDER RELATING TO THE LIMITED AVAILABILITY OF THE OFFERING. THE
INTERESTS CANNOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF TO ANY PERSON OR ENTITY UNLESS
SUBSEQUENTLY REGISTERED UNDER THE SECURITIES ACT OR THE TEXAS SECURITIES ACT, IF SUCH REGISTRATION
IS REQUIRED, OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.

vi

 

SUMMARY

     The following is a summary of certain selected information about the Company, but it does not
contain all of the information you may need to make an investment decision. For a more detailed
description of the information referenced in this Summary, you should carefully review this
Memorandum. This Memorandum describes in detail numerous aspects of the Offering that are material
to investors, including those summarized below. This Memorandum, with its exhibits and supporting
documents, must be read in their entirety by prospective investors. The following summary is
qualified in its entirety by reference to the full text of this Memorandum, including its exhibits
and supporting documents. The Notes offered hereby involve a high degree of risk.
Prospective investors should carefully consider the information below under “Risk Factors.”

     The Company files annual, quarterly and current reports, proxy and information statements, and
other information with the SEC. Investors may read and copy any of these reports, statements and
other information at the SEC’s public reference room located at 450 Fifth Street, N.W., Washington,
D.C. 20549.
Investors should call the SEC at 1-800-SEC-0330 for further information on the public
reference room. The reports, statements, and other information filed by the Company with the SEC
are also available free at the SEC’s web site at
http://www.sec.gov.

Company / Opportunity

     MBI Financial, Inc., a Nevada corporation (the “Company” or “MBIF”), is a holding company that
is building a mortgage banking / brokerage business via an acquisition strategy, as a result of the
market environment and industry consolidation opportunity. MBIF began this strategy in May 2005 and
plans to acquire selected national mortgage brokers and consolidate them into its mortgage banking
operation, thus creating a much larger entity that can be sold to an established strategic or
financial services firm.

Market Opportunity

     The Company believes a consolidation opportunity exists in the mortgage brokerage sector given
the current market environment. The Company believes mortgage brokers are currently under extensive
consumer pressure to also become a mortgage banking operation to keep pace with a fast moving and
constantly changing mortgage lending environment. Increasingly, mortgage brokers must compete with
mortgage banking operations that approve and close loans quicker, because they control the funding
of their loans. Moreover, mortgage brokers must now disclose to customers how much money they make
on each loan due to recent federal guidelines, where mortgage banking operations are not required
to make this disclosure. Additionally, mortgage banking operations require large capital reserves
to operate. Given that the industry is extensively regulated, MBIF provides a solution to the
mortgage brokers that are having difficulty keeping up with the industry pressures.

Mortgage Banking / Brokerage Operations

     In order to capitalize on the market opportunity, MBIF intends to streamline the back office
operations of the acquired entities, and create a value added organization that can provide banking
and brokerage services to its target market. Additionally, MBIF plans to leverage the retail home
mortgage transactions into the sale of financial services, including insurance and banking.

     MBIF’s strategy is to not only expand the mortgage broker businesses by receiving mortgage
brokers’ loans in its mortgage banking operation, but also to grow these businesses with marketing
programs, better and faster loan approvals, the introduction of new, and expanded loan programs.

     The Company’s executives are industry and business savvy, and have extensive experience in
setting up and running acquisitions. This knowledge and operational efficiency allows for both a
smooth integration into the parent and the efficient, effective creation of new marketing
opportunities.

Acquisition Strategy

	 	•	 	Traditional Mortgage Broker Operations
	 
	 	•	 	Internet Mortgage Originations
	 
	 	•	 	High-End Mortgage Capabilities
	 
	 	•	 	Specialty Niches (e.g. ethnic markets)
	 
	 	•	 	“Direct to the Consumer Approach”

     The Company specializes in non-traditional solicitations, including broadcast e-mails,
newspaper advertising, direct mail, and apartment-owner to homeowner programs that the Company
believes could be replicated in similar demographic markets.

     Mortgage brokers do not receive all the revenue available on a loan closing because they do
not close the loan in their own name using their own funds. A banking operation, however, closes
loans in its
own name, using

1

 

its own funds, and receives the revenue generated in excess of the premiums paid to brokers.
In addition, mortgage bankers earn fees associated with each loan that brokers do not earn. When
the Company acquires a mortgage broker, the mortgage banking operation generally receives immediate
incremental revenue streams over and above the revenue already generated by the mortgage broker on
the loan transaction.

     With an Internet presence, the Company plans to expand into the property and casualty
insurance business by leveraging mortgage originations into additional insurance leads. This
opportunity should allow the Company to explore the opportunity to capture insurance, and other
future, complementary financial services businesses.

2

 

THE OFFERING

	 	 	 	 	 
	Securities:	 	Senior Secured Notes
	 
	 	 	 	 
	Amount:	 	$1,200,000
	 
	 	 	 	 
	Minimum Subscription:	 	$25,000 minimum face value Notes
	 
	 	 	 	 
	Interest Rate:	 	13% per annum
	 
	 	 	 	 
	Maturity Date:	 	Earlier of either October 31, 2007 or within 5 (five) business days after the
closing of at least $5,000,000 of gross proceeds from one or more offerings of
the Company’s debt or equity securities.
	 
	 	 	 	 
	Events of Default:	 	If any of the following events occur (an ‘Event of Default’), the entire unpaid
principal amount of, and accrued and unpaid interest on, this Notes, shall
immediately be due and payable, at the election of the holder, and the holder
shall be entitled to all legal and equitable remedies available:
	 
	 	 	 	 
	 

	 	•
	 	the Company failing to redeem Notes when due pursuant to the terms and
conditions under which the Notes are issued or otherwise failing to pay
interest, costs, charges, expenses or other sum whatsoever in accordance
with the terms and conditions of the final Note Purchase Agreement;
and/or
	 
	 	 	 	 
	 

	 	•
	 	any material statement, representation, warranty or confirmation of the
Company in the final Note Purchase Agreement being found to be incorrect
or untrue; and/or
	 
	 	 	 	 
	 

	 	•
	 	there is a material change in ownership, senior operating management
and/or control of the Company; and/or
	 
	 	 	 	 
	 

	 	•
	 	any material adverse change which prejudicially and materially alters the
Note holder’s interest; and/or
	 
	 	 	 	 
	 

	 	•
	 	the Company’s failure to register the underlying shares in the Offering,
which is more fully described under the section of this summary entitled
Registration Rights.
	 
	 	 	 	 
	Event of Default Consequences:	 	Upon any occurrence of default, the interest rate will be increased to a penalty
rate of 18% until such time as the event of default has been cured in its entirety,
and the Note Holders will be entitled to receive additional warrants in an amount
equal to 25% of the original warrants issued hereunder, for each 180 day period
the Company remains in default. Upon any occurrence of default, the holder
shall have the right, at the holder’s option, to convert this Note into shares of
Common Stock of the Company at an initial conversion price of $0.20 per share.
	 
	 	 	 	 
	Liquidation Preference:	 	In the event of any liquidation, dissolution or winding up of the Company, the
holders of the Notes shall be entitled to receive proceeds in preference to the
holders of the Common Stock.
	 
	 	 	 	 
	Right of Redemption:	 	The Company shall have the right to redeem any or all outstanding Notes in its
sole discretion anytime after the Closing Date with 3 (three) business days
advance notice. The redemption price shall be the face amount redeemed plus
any accrued and unpaid interest.
	 
	 	 	 	 
	Warrants:	 	Each investor shall receive a stock purchase warrant (the “Warrant”) entitling
the holder to purchase a number of shares of the Company’s Common Stock
equal to 120% of the number of shares of Common Stock into which the Notes
are convertible. The Warrant will be exercisable on a cash exercise basis and
the shares underlying the Warrant will have “piggy-back” registration rights.
The Warrant is exercisable at an initial price equal to $0.40. The Warrant
survives for a period of five years from the date when it is issued.

3

 

	 	 	 	 	 
	Protective Provisions:	 	For so long as the Notes remain outstanding, the consent of the holders of a
majority of the Notes outstanding shall be required for any action that (i) alters
or changes the rights, preferences or privileges of the Notes, (ii) creates (by
reclassification or otherwise) any new class or series of shares having rights,
preferences or privileges senior to the Notes, or (iii) amends or waives any
provision of the Company’s Articles of Incorporation or Bylaws in a manner
which materially adversely affects the holders of the Notes, or results in the
payment or declaration of any dividend on any shares of Common or Preferred
Stock.
	 
	 	 	 	 
	Registration Rights:	 	Promptly, but no later than 120 days following the Closing Date, the Company
shall use commercially reasonable to file a registration statement with the
United States Securities and Exchange Commission (“SEC”) to register the
shares of the Company’s common stock into which the Notes are convertible
and for which the Warrants may be exercised. The Company shall use
commercially reasonable efforts to ensure that such registration statement is
declared effective within 150 days after filing. In the event the registration
statement is not declared effective within 150 days after filing, the Company
shall redeem the entire outstanding Notes plus accrued and unpaid interest. In
the event Company has not fully completed this redemption within 30 days after
the expiration of the 150-day period, Company shall be deemed to be in default
under the terms of the Notes, and will be subject to the default consequences
described above.
	 
	 	 	 	 
	Information:	 	The Company will agree to provide all holders of the outstanding Notes with
copies of the Company’s annual and quarterly reports filed with the Securities
and Exchange Commission (the “SEC”) and all other such documents and
information as required by the Securities Exchange Act of 1934, as amended
(the “Exchange Act”).
	 
	 	 	 	 
	Investor Suitability
Standards:	 	This Offering is made solely to “accredited investors,” as defined in Rule 501 of
Regulation D promulgated under the Securities Act.
	 
	 	 	 	 
	Use of Proceeds:	 	Expansion, working capital and general corporate purposes. See “Use of
Proceeds.”
	 
	 	 	 	 
	Closing:	 	One or more closings with the final closing expected to occur on or before
September 30, 2006, unless extended at the sole discretion of the Company.
	 
	 	 	 	 
	Conditions:	 	The Offering is subject to certain conditions, including subscription of the
minimum offering condition. See “Plan of Distribution.”
	 
	 	 	 	 
	Subscription Agreement:	 	The purchase of the Notes will be made pursuant to a Subscription Agreement
and Note Purchase Agreement, which will require, among other provisions,
registration rights, appropriate representations and warranties of the subscriber
to the Company, covenants of the Company reflecting the provisions set forth
herein and other typical covenants and appropriate conditions of closing,
including qualification of the Notes under applicable Blue Sky laws. See “Plan
of Distribution.”
	 
	 	 	 	 
	Transfer Restriction:	 	None of the Notes offered hereby may be sold, pledged or otherwise transferred
by the original purchaser without the prior written consent of the Company,
which will not be unreasonably withheld.
	 
	 	 	 	 
	Expenses:	 	The Company will bear all of the expenses of the Company in connection with
this Offering.

4

 

	 	 	 	 	 
	Oversubscription Allowance:	 	The Company agrees to accept up to an additional 25% (twenty-five percent)
oversubscription to the proposed $1,200,000 Bridge Note Offering.
	 
	 	 	 	 
	Affiliates and Potential
Conflicts of Interest:	 	Significant potential conflicts of interest exist in the proposed structure and
operation of the Company, particularly with respect to the involvement of Bruce
Hall, the CEO of RGAmerica Inc. (a stakeholder in the Company) who also
serves as a Board Member of MBIF. Although we do not currently anticipate
that these conflicts will materially adversely affect the business of the Company
and although we intend to examine these conflicts of interest from time to time,
we have not established any formal procedures to address or resolve any
conflicts of interest. We cannot give you any assurance or guarantee that any
conflict of interest will not have material adverse consequences for the
Company or you.
	 
	 	 	 	 
	 	 	Affiliates of the Company and principals of the Company will likely act in
various capacities for, and may have direct or indirect interests in, the Company.
Affiliates of the Company and principals of the Company may be officers,
directors, employees, creditors, guarantors, and/or stockholders (or other interest
holders) of the Company. In addition, the Company may utilize other
management, brokerage, and other services provided by principals of the
Company and/or one or more affiliates of principals of the Company. Interests,
relationships, and services involving any affiliate(s) of the Company are
expected to be sold, maintained, and provided, respectively, on commercially
reasonable terms and rates, but may result in conflicts of interest between the
Company and such affiliate(s).
	 
	 	 	 	 
	High Risk:	 	This Offering involves a high degree of risk, and the Notes should not be
purchased by investors who cannot afford the loss of their entire investment.
Prospective investors are advised to consult their own professional advisors as to
legal, financial, tax, accounting and other matters relating to the purchase of
Notes. See “Risk Factors.”

5

 

FORWARD-LOOKING STATEMENTS

     This Memorandum includes “forward looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended (the “Securities
Act”) and Section 21E of the Securities and
Exchange Act of 1934, as amended (the “Exchange Act”) which can be identified by the use of words
such as “intend,” “anticipate,” “believe,” “estimate,” “project,” “expect” or other similar
statements. These statements discuss future expectations, contain projections of results of
operations or of financial condition, or state other “forward-looking” information. All statements
other than statements of historical information provided herein are forward looking and may contain
information about financial results, economic conditions, trends and known uncertainties. We
caution you that actual results could differ materially from those expected by us, depending on the
outcome of certain factors, including those factors discussed in the section of this Memorandum
entitled “Risk Factors.” You are further cautioned not to place undue reliance on these forward
looking statements, which speak only as of the date of this Memorandum. We do not undertake to
update publicly any forward-looking statements for any reason, even if new information becomes
available or other events occur in the future, including, without limitation, changes in our
business strategy or planned capital expenditures, or to reflect the occurrence of unanticipated
events. We believe our forward-looking statements are within the safe harbor provided by the
Exchange Act. When considering these statements, you should keep in mind the risk factors described
below and other cautionary statements contained in this Memorandum.

RISK FACTORS

     You should carefully consider the following risk factors and other information in this
Memorandum before deciding to invest in the Notes. If any of these risks occur, our business,
results of operations and financial condition could be adversely affected. This could cause the
trading price of our Common Stock to decline, and you might lose part or all of your investment.

     The Notes and Warrants offered hereby are highly speculative, involving a high degree of risk,
and should not be purchased by persons who cannot afford the loss of their entire investment. Each
prospective investor should consider carefully the business, securities laws and other risks
summarized in this Memorandum and the rest of the disclosure information, and should consult his,
her, or its own legal, tax and financial advisors with respect thereto. In particular, investors
should carefully review the risk factors of this Memorandum.

     This Memorandum contains, in addition to historical information, forward-looking statements
that involve risks and uncertainties. The Company’s actual results could differ materially from
those described in this Memorandum. Factors that could cause or contribute to such differences
include those discussed below, as well as those discussed elsewhere in this Memorandum.
Accordingly, you should carefully consider the risks described below and elsewhere in this
Memorandum before making an investment decision.

     If any of the following risks occur, our business, financial condition or results of
operations could be materially harmed. The risks and uncertainties described below are not the only
ones facing the Company. Additional risks and uncertainties not presently known to the Company or
that the Company currently deems immaterial may also impair its business operations or financial
condition. You should consider carefully the following factors, in addition to the other
information concerning the Company and its business, before purchasing the Notes.

NOTICE AND RISKS RELATING TO FORWARD-LOOKING STATEMENTS

     Information provided concerning this Offering and the Company and its business contains
forward-looking statements, which reflect management’s current view with respect to future events
and the Company’s performance. Such forward-looking statements include statements with respect to
the development of the Company’s business, the commencement of revenue, market size and acceptance
for the Company’s products and services and the Company’s future, revenues and earnings, marketing
and sales strategies, business operations and the prospects and possible terms of future debt and
equity financings for the Company. These forward-looking statements are subject to certain risks
and uncertainties, including, but not limited to, acceptance of the Company’s products and
services, ability to compete with existing and new products and services, the ability to price our
products and services competitively, our ability to attract additional capital, the establishment
of an effective marketing plan, and the other risks identified herein. Due to such uncertainties
and the risk factors set forth herein, you are cautioned not to place undue reliance upon such
forward-looking statements.

6

 

Risks Related to Our Business

WE MAY NOT HAVE ADEQUATE CASH TO FUND OUR OPERATIONS.

     Our business operations require continued access to adequate cash to fund, purchase and make
mortgage loans, to pay interest on, and repay, our debts and to pay general and administrative
expenses. While the Company does not presently securitize its loans or accept risk on
non-performance after the first few months, our vendors require certain levels of capitalization to
obtain competitive pricing and execution. An equity shortage, among other things, could reduce the
availability of warehouse credit lines to finance first mortgage loans, home equity loans and high
loan-to-value loans prior to their sale. We currently have three warehouse lines totaling $14
Million. As of December 31, 2005, we had accessed approximately $1 Million of those lines. We are
currently dependent on our Warehouse Lines to fund, purchase and make mortgage loans before we sell
them. If we successfully increase loan production, we will need increasingly larger amounts of cash
for our operations. We may also need additional financing to complete subsequent phases of our
business plan. Additional financing will likely cause dilution to our stockholders and could
involve the issuance of securities with rights senior to the outstanding shares. There is no
assurance that such funds will be sufficient, that the financing will be available on terms
acceptable to us. Any inability to raise necessary capital will have a material adverse effect on
our ability to meet our projections, deadlines and goals and will have a material adverse effect on
our revenues and net income.

OUR LACK OF OPERATING HISTORY MAKES EVALUATION OF OUR BUSINESS DIFFICULT.

     MBI Mortgage Inc. was formed in 2005. It is an early stage development company and has is no
meaningful historical financial or other information available. From inception in May 05, 2005, the
Company had $1,081,625 in revenue and a net loss of $2,905,075. The stockholders’ deficit as of
September 30, 2005 amounted to $2,526,712. In addition, the early stage of development means that
we may have less insight into how market and technology trends may affect our business. If we are
not able to develop our business, we will not be able to achieve our goals and could suffer
economic loss or collapse, in which case you may lose your entire investment.

CHANGES IN INTEREST RATES MAY HARM OUR RESULTS OF OPERATIONS.

     Our results of operations are likely to be harmed during any period of unexpected or rapid
changes in interest rates. For example, a substantial or sustained increase in interest rates would
increase our borrowing costs and reduce the volume of mortgage loans that we expect. Since our
overhead costs remain fixed, this would result in a decrease in our earnings. Interest rate
fluctuations may reduce the spread between the interest rates on our borrowings and the interest
rates on our mortgage loans and thereby reduce our earnings. In addition, a decline in long-term or
short-term interest rates could increase the prepayment rate.

AN ECONOMIC SLOWDOWN OR RECESSION COULD REDUCE THE DEMAND FOR OUR MORTGAGE LOANS AND HARM OUR OPERATING RESULTS.

     Our earnings depend to a large degree on the continued demand for mortgage loans. An economic
slowdown would curtail that demand and reduce our revenues and earnings. Foreclosures and resulting
losses generally increase during economic slowdowns or recessions. Periods of economic slowdown or
recession may also reduce real estate values, limiting the home equity available to borrowers.

FAILURE TO RENEW OR OBTAIN ADEQUATE FUNDING UNDER WAREHOUSE FACILITIES AND REPURCHASE AGREEMENTS
MAY HARM OUR LENDING OPERATIONS.

     We depend on our warehouse lines of credit to fund our loan production. If we are unable to
obtain warehouse funding, we may not be able to produce enough loans to operate profitably. We
would then seek out other sources of liquidity, but additional financing may not be available on
favorable terms, or at all. If we are not successful in maintaining or replacing existing financing
or obtaining additional financing, it would hurt our revenues and earnings.

7

 

AN INTERRUPTION OR REDUCTION IN THE SECURITIZATION AND WHOLE LOAN MARKETS WOULD HURT OUR
FINANCIAL PERFORMANCE.

     In order for us to continue our mortgage loan origination and purchase operations, we must be
able to sell the mortgage loans we make in the securitization and whole loan markets. We use the
cash proceeds from these sales to pay down our warehouse and repurchase facilities and make new
mortgage loans. The value of our mortgage loans depends on a number of factors, including general
economic conditions, interest rates and governmental regulations. In addition, we rely on
institutional purchasers, such as investment banks, financial institutions and other mortgage
lenders, to purchase our mortgage loans in the whole loan market and the bonds issued in
securitization transactions. We cannot be sure that the purchasers will be willing to purchase
mortgage loans on satisfactory terms or that the market for such loans will continue. Adverse
changes in the securitization and whole loan markets may adversely affect our ability to securitize
or sell our mortgage loans for acceptable prices within a reasonable period of time, which would
hurt our earnings.

IF WE ARE UNABLE TO SELL A SIGNIFICANT PORTION OF OUR MORTGAGE LOANS ON AT LEAST A QUARTERLY BASIS,
OUR EARNINGS WOULD DECREASE.

     We earn part of our income on our mortgage loans when they are sold. Our strategy is to sell
all of the mortgage loans. However, market and other considerations could affect the timing of the
sale of our mortgage loans. If we are not able to sell all of the mortgage loans that we make
during the quarter in which the loans are made, we would likely not be profitable for that quarter.

WE MAY BE REQUIRED TO REPURCHASE MORTGAGE LOANS OR INDEMNIFY INVESTORS IF WE BREACH REPRESENTATIONS
AND WARRANTIES OR IF THE BORROWER DEFAULTS, WHICH WOULD HURT OUR EARNINGS.

     We make representations and warranties to the purchasers of our mortgage loans regarding
compliance with laws, regulations and program standards and the accuracy of information. We are
required under agreements governing our securitization transactions and whole loan sales to
repurchase or replace mortgage loans which do not conform to the representations and warranties we
make at the time of sale. Also, we may be obligated, in certain whole loan sales, to buy back
mortgage loans if the borrower defaults on the first payment of principal and interest due. Such
repurchase obligations could hurt our earnings and have a material adverse effect on our financial
position.

IF WE ARE UNABLE TO COMPLY WITH MORTGAGE BANKING RULES AND REGULATIONS, OUR ABILITY TO MAKE
MORTGAGE LOANS MAY BE RESTRICTED, WHICH WOULD HURT OUR EARNINGS.

     Our operations are subject to extensive regulation, supervision and licensing by federal,
state and local governmental authorities. Our operations are also subject to various laws,
regulations and judicial and administrative decisions. These rules and regulations, among other
things, impose licensing obligations on us, establish eligibility criteria for mortgage loans,
prohibit discrimination, govern inspections and appraisals of properties and credit reports on
mortgage loan applicants, regulate collection, foreclosure and claims handling, investment and
interest payments on escrow balances and payment features, mandate certain disclosures and notices
to borrowers and, in some cases, fix maximum interest rates, fees and mortgage loan amounts.
Failure to comply with these requirements can lead to loss of approved status, certain rights of
rescission for mortgage loans, class action lawsuits and administrative enforcement actions.

     The Real Estate Settlement Procedures Act (“RESPA”) governs the procedures pertaining to the
settlement of residential real estate in the United States. From time to time changes in the
regulatory format are proposed to limit fees chargeable by third party mortgage originators. The
Company is unable to predict what effect, if any, changes to RESPA may have on the Company’s
earnings.

     Because our business is highly regulated, the laws, rules and regulations applicable to us are
subject to regular modification and change. There are currently proposed various laws, rules and
regulations which, if adopted, could negatively impact our operations and our earnings.

8

 

CHANGES IN THE MORTGAGE INTEREST DEDUCTION COULD DECREASE OUR LOAN PRODUCTION AND HURT OUR
FINANCIAL PERFORMANCE.

     Members of Congress and government officials have from time-to-time suggested the elimination
of the mortgage interest deduction for federal income tax purposes, either entirely or in part,
based on borrower income, type of loan or principal amount. Because many of our mortgage loans are
made to borrowers for the purpose of consolidating consumer debt or financing other consumer needs,
the competitive advantages of tax deductible interest, when compared with alternative sources of
financing, could be eliminated or seriously impaired by this change. Accordingly, the reduction or
elimination of these tax benefits could have a material adverse effect on the demand for mortgage
loans of the kind offered by us.

OUR TRADE NAMES AND INTELLECTUAL PROPERTY ARE NOT PROTECTED.

     We currently have no trademarks or similar protections for our trade names, trade dress, trade
secrets or intellectual property that would preclude or inhibit competitors from entering our
market. Further, legal standards relating to the validity, enforceability and scope of protection
of intellectual property rights are uncertain and still evolving. We cannot assure that our
business activities will not infringe the proprietary rights of others or that such other parties
will not assert infringement claims against us. Any claims or resultant litigation could subject us
to significant liability for damages and could result in invalidation of our property rights and,
even if not meritorious, could be time consuming and expensive to defend and could result in the
diversion of management time and attention. Any of these events could impact our business, causing
additional cost to protect our intellectual property or to defend against claims.

WE RELY ON OUR ABILITY TO SELL THE LOANS WE GENERATE AND ANY REDUCTION IN THE MARKET FOR OUR LOANS
WOULD ADVERSELY AFFECT OUR OPERATIONS. RISKS RELATED TO THE SALE OF LOANS.

     We are increasingly relying on selling loans in securitization transactions to generate cash.
As a major part of our strategic initiatives, we intend to generate positive cash flow mainly by
selling loans to institutional purchasers in the secondary market.

The value of, and markets for, selling our loans are dependent on, among other things:

	 	(1)	 	the willingness of banks, thrifts and other institutional purchasers to acquire
mortgage and home equity loans;
	 
	 	(2)	 	the premiums over the principal amount of these loans that institutional purchasers
are willing to pay; and
	 
	 	(3)	 	the resale market for our loans.

     The markets also are affected by more general factors, including general economic conditions,
interest rates and government regulations. These factors currently affect, and may continue to
affect, our ability to sell loans in the secondary market for acceptable prices within reasonable
time frames. A reduction in the secondary market for first mortgage loans, home equity loans and
high loan-to-value loans would hurt our ability to sell loans in the secondary market as well as
our liquidity and future loan production. We cannot predict whether the liquidity of the secondary
market will continue to diminish in the future.

OUR INDUSTRY IS HIGHLY COMPETITIVE, WHICH MAY ADVERSELY AFFECT OUR ABILITY TO GROW OUR CUSTOMER
BASE AND GENERATE SALES.

     The target markets for the products we are developing are competitive. We expect competition
from numerous companies in each of the markets in which we intend to participate. Our competition
consists of numerous well funded competitors such as banks, national mortgage companies, national
real estate brokerage companies and even some broker dealers.

     Many of our competitors are more established, benefit from greater market recognition and have
substantially greater financial, development, manufacturing and marketing resources. In addition,
there are a variety of competing technologies currently in the market and under development, any
one of which could achieve manufacturing costs per watt lower than our manufacturing technology.

9

 

WE MAY NEVER BE ABLE TO OBTAIN PROFITABILITY

     We will need to generate significant revenues to obtain profitability. We may never obtain
profitability. If revenues grow more slowly than anticipated, or if operating expenses exceed our
expectations or cannot be adjusted accordingly, our business, results of operations, and financial
condition could be materially adversely affected.

WE HAVE A LIMITED OPERATING HISTORY AND FACE SIGNIFICANT RISKS AND CHALLENGES IN BUILDING OUR
BUSINESS

     As a result of our limited operating history, we may need to expand operational, financial,
and administrative systems and control procedures to enable us to further train and manage our
employees and coordinate the efforts of our underwriting, accounting, finance, marketing, and
operations departments. There can be no assurance that we will be able to successfully expand our
systems or procedures or continue to operate if a downturn in the mortgage business occurs or at
all. We also have no significant historical basis to assess how we will respond to competitive,
economic, regulatory, or technological challenges. Our business and prospects must be considered in
light of the risks and uncertainties frequently encountered by companies in the early stages of
development, particularly companies like ours, which operate in new and rapidly developing
industries and marketplaces. Our failure to address these risks and uncertainties could materially
impact our results of operations and financial condition.

IF WE ARE UNABLE TO MANAGE OUR RECENT GROWTH, OUR BUSINESS COULD BE ADVERSELY AFFECTED

     We have and continue to experience significant growth, which has placed a strain on our
resources and will continue to do so in the future. Our failure to manage this growth effectively
could adversely affect
our business. We may not be successful in managing or expanding our operations or maintaining
adequate management, financial and operating systems and controls.

THE TERMINATION OF ONE OR MORE OF OUR MORTGAGE FUNDING SOURCES WOULD ADVERSELY AFFECT OUR BUSINESS

     We depend on a third party source to fund our mortgage loan activities through the warehouse
credit facility they provide. We also depend on investor table funds to finance portions of our
mortgage loan inventory pending ultimate sale to mortgage loan purchasers. If either of these
financing sources becomes unavailable, our business would be adversely affected. Under our
agreements with each of these lenders, we make extensive representations, warranties and various
operating and financial covenants. A material breach of these representations, warranties or
covenants on either or both lines could result in the termination of our agreements and an
obligation to repay all amounts outstanding at the time of termination.

OUR OPERATING RESULTS MAY BE NEGATIVELY IMPACTED BY SIGNIFICANT FLUCTUATIONS IN INTEREST RATES

     Mortgage companies, in general, and our future operating results, specifically, may be
materially adversely impacted by fluctuations in interest rates. There can be no assurances that
during future periods of rising interest rates that we will not experience a decline in consumers
using our services due to shrinking credit demand. Conversely, during periods of robust credit
demand, typically associated with falling interest rates, lenders may have less incentive to use
our services. Either of these events could reduce our revenue. We cannot assess the effects of
interest rates on our business over a broad range of interest rate environments.

OUR ABILITY TO ENGAGE IN PROFITABLE SECONDARY SALES OF LOANS MAY ALSO BE ADVERSELY AFFECTED BY
INCREASES IN INTEREST RATES

     The mortgage loan purchase commitments we obtain are contingent upon our delivery of the
relevant loans to the purchasers within specified periods. To the extent that we are unable to
deliver the loans within the specified periods and interest rates increase during those periods, we
may experience no gain or even a loss on the sale of these loans. In addition, any increase in
interest rates will increase the cost of maintaining our warehouse and repurchase lines of credit
on which we depend to fund the loans we originate. The interest direct margin earned on loans
held-for-sale significantly benefited from the spread between long-term and short-term interest
rates during 2001 and in 2002. We do not expect the same level of benefit from interest rate
spreads in a normal market.

10

 

WE DO NOT HAVE A HEDGING STRATEGY AND MAY NOT BE ABLE TO MANAGE THE RISK OF LOSSES CAUSED BY
FLUCTUATIONS IN INTEREST RATES

     Many of our competitors attempt to manage interest rate risk exposure related to mortgage loan
approvals through hedging transactions using a combination of forward sales of mortgage-backed
securities and forward whole-loan sales to fix the sales price of loans they expect to fund. We
have no experience administering a hedging program and have not implemented a hedging program to
manage the risk of loss due to fluctuations in interest rates. A sharp decrease in interest rates
over a short period may cause customers who have interest rates on mortgages committed through us
to either delay closing their loans or refinance with another lender. If this occurs in significant
numbers, it may have an adverse effect on our business and our results of operations.

WE MAY BE LIMITED OR RESTRICTED BY LAWS GENERALLY APPLICABLE TO OUR BUSINESS AND THE MORTGAGE
INDUSTRY

     We face a level of regulatory risk. Until the laws, rules, and regulations governing our
business are
clarified, any company providing loan-related services will face compliance uncertainty. The
applicability of existing or future referral fee prohibitions to the compensation provisions of fee
advertising, marketing, distribution, and rental arrangements used by mortgage brokers and mortgage
banking companies like us may have the effect of reducing the types and amounts of fees that we may
charge or pay in connection with real estate loan products.

     For example, RESPA and related regulations generally prohibit the payment or receipt of fees
or any other item of value for the referral of a real estate-secured loan to a loan broker or
lender. RESPA and the related regulations also prohibit fee shares or splits or unearned fees in
connection with the provision of residential real estate settlement services, including mortgage
brokerage and lending services. Notwithstanding these prohibitions, RESPA permits payments for
goods or facilities furnished or for services actually performed, so long as those payments bear a
reasonable relationship to the market value of the goods, facilities or services provided. Failure
to comply with RESPA may result in, among other things, administrative enforcement actions, class
action lawsuits, cease and desist orders and civil and criminal liability. Our mortgage products
are residential real estate secured loans subject to these provisions of RESPA. Consequently, our
relationships with real estate brokers, lenders, distribution partners, affiliates and other
companies are subject to RESPA’s prohibitions on payment or receipt of referral fees for referrals
and for unearned fees or fee splits. We believe that we have structured these relationships to
comply with RESPA. The applicability of RESPA’s referral fee and fee splitting prohibitions to
these types of relationships, however, is unclear and the appropriate regulatory agency has
provided limited guidance to date on the subject. RESPA and the Debt Collection Practices Act also
subject us to filing an annual report with HUD. Although we believe that we are in substantial
compliance with such regulations, the failure to succeed in our RESPA compliance program would have
a severe adverse effect on our business.

     There can be no assurance that we will maintain compliance with these requirements in the
future without additional expenses, or that more restrictive local, state, or federal laws, rules
and regulations will not be adopted or that existing laws and regulations will not be interpreted
in a more restrictive manner, which would make compliance more difficult, more expensive, or
impossible for us.

FAILURE TO COMPLY WITH LAWS GOVERNING OUR SERVICES OR MATERIAL CHANGES IN THE REGULATORY
ENVIRONMENT RELATING TO MORTGAGE COMPANIES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS

     Our loan products and services and other business relationships in which we operate
essentially as a mortgage broker are subject to extensive regulation by various federal and state
governmental authorities. Because of uncertainties as to the applicability of some of these laws
and regulations to our business, and considering our business has evolved and expanded in a
relatively short period of time, we may not always have been, and may not always be, in compliance
with applicable federal and state laws and regulations. Failure to comply with the laws and
regulatory requirements of federal and state regulatory authorities may result in, among other
things, revocation of required licenses or registrations, termination of contracts without
compensation, loss of exempt status, indemnification liability to lenders and others doing business
with us, administrative enforcement actions and fines, class action lawsuits, cease and desist
orders, and civil and criminal liability. The occurrence of one or more of these events could
materially adversely affect our business and results of operations.

11

 

MANY STATES REQUIRE US TO OBTAIN AND MAINTAIN LICENSES TO OFFER MANY OF OUR PRODUCTS AND WE
ARE NOT LICENSED TO OFFER ALL OF OUR PRODUCTS IN EVERY STATE.

     Many, but not all, states require licenses to solicit or broker to residents of those states
loans secured by residential mortgages. We are currently neither licensed nor able to accept credit
requests for all loan products in every state. We are not currently accepting credit requests for
loan products from residents of states in which we are not licensed to provide those products or
are exempt from licensing. In many of the states in which we are licensed, we are subject to
examination by regulators. In addition, we are required to obtain real estate broker licenses,
additional mortgage broker licenses and individual customer
care department personnel licenses in numerous states. Failure to obtain these licenses and
approvals could prevent us from receiving fees from the real estate agent referral and mortgage
services programs we offer and may subject us to the types of fines, forfeitures and litigation
discussed above.

IF OUR LENDERS FAIL TO PRODUCE REQUIRED DOCUMENTS FOR EXAMINATION BY STATE REGULATORS, WE MAY BE
SUBJECT TO FINES, FORFEITURES AND THE REVOCATION OF REQUIRED LICENSES

     Many of the states in which we maintain licenses require us to collect various loan documents
and produce the documents for examination by state regulators. We cannot assure that the measures
we have taken to obtain and provide loan documents will be sufficient. Failure to produce required
documents for examination could result in fines and forfeitures of the type described above as well
as the revocation of our licenses to operate in key states, resulting in a material adverse affect
on our business, results of operation and financial conditions.

BECAUSE SOME STATE REGULATIONS IMPOSE FILING OBLIGATIONS ON SOME OF OUR LARGEST STOCKHOLDERS AND
CUSTOMERS, IF ANY OF THESE PARTIES FAIL TO COMPLY WITH THESE FILING OBLIGATIONS, WE MAY BE UNABLE
TO OBTAIN OR MAINTAIN NECESSARY LICENSES IN THESE STATES FOR REASONS BEYOND OUR CONTROL

     Regulations promulgated by some states may impose compliance obligations on any person who
acquires 10% or more of our common stock, including requiring that person to periodically file
financial and other personal and business information with those state regulators. If any person
acquires 10% or more of our common stock and refuses or fails to comply with these requirements, we
may not be able to obtain a license and existing licensing arrangements in particular states may be
jeopardized. The inability to obtain, or the loss of, required licenses could have a material
adverse effect on our operations or financial condition. The parties conducting business with us,
such as lenders, similarly may be subject to federal and state regulation. These parties act as
independent contractors and not as our agents in their solicitations and transactions with
consumers. Consequently, we cannot ensure that these entities will comply with applicable laws and
regulations at all times. Failure on the part of a lender to comply with these laws or regulations
could result in, among other things, claims of vicarious liability or a negative impact on our
reputation. The occurrence of one or more of these events could materially adversely affect our
business, results of operation and financial condition.

WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY

     The mortgage brokerage and banking industries are extremely fragmented and the barriers to
entry have traditionally been very low. We face strong competition in the mortgage loan industry,
principally from other mortgage companies, commercial banks and, to a lesser degree, credit unions
and insurance companies. Many of our existing and potential competitors are well established and
have significantly greater financial, marketing, and other resources than we do. Many of these
competitors already maintain a significant number of offices in the areas in which we conduct our
operations. Increased competition for mortgage loans from other mortgage brokers and bankers may
result in a decrease in the volume of mortgage loans originated by us. If we are unable to compete
effectively, our business, results of operations, and financial condition could be materially and
adversely affected. We also compete with the retail or consumer direct divisions of the large,
national mortgage lenders such as Chase Manhattan Mortgage, Countrywide Home Loans, Washington
Mutual, and Wells Fargo Mortgage.

12

 

UNCERTAINTY WITH RESPECT TO THE TIME IT TAKES TO CLOSE MORTGAGE LOANS CAN LEAD TO
UNPREDICTABLE REVENUE AND PROFITABILITY

     The time between the date an application for a mortgage loan is received from a customer and
the date the loan closes can be lengthy and unpredictable. The loan application and approval
process is often delayed due to factors over which we have little or no control, including the
timing of the customer’s
decision to commit to an available interest rate, the close of escrow date for purchase loans,
the timeliness of appraisals and the adequacy of the customer’s own disclosure documentation.
Purchase mortgage loans generally take longer to close than refinance loans as they are tied to the
close of the property sale escrow date. This uncertain timetable can have a direct impact on our
revenue and profitability for any given period. We may expend substantial funds and management
resources supporting the loan completion process and never generate revenue from closed loans.
Therefore, our results of operations for a particular period may be adversely affected if the
mortgage loans applied for during that period do not close in a timely manner or at all.

OUR QUARTERLY OPERATING RESULTS ARE VULNERABLE TO SIGNIFICANT FLUCTUATIONS AND SEASONALITY AND ARE
NOT AN INDICATION OF OUR FUTURE RESULTS

     Our quarterly operating results may fluctuate significantly in the future due to a variety of
factors that affect our revenue or expenses in any particular quarter, and investors should not
rely on the results for any period as an indication of future performance. Our quarterly results
will fluctuate in part based on the demand for and supply of consumer loans, which are a function
of seasonal demand and fluctuations in interest rates and related economic factors, all of which
are outside of our control. These temporary fluctuations could adversely affect our business. If
revenue falls below our expectations in any quarter and we are unable to quickly reduce our
spending in response, our operating results would be lower than expected.

     In addition, we expect that as our business matures we will experience seasonal fluctuations
in our operating results due to fluctuations in consumer demand during the year, particularly for
mortgage loans. For example, home buying behavior is seasonal. Typically there are a greater number
of mortgage closings in the second and third quarters of a year as compared to the first and fourth
quarters. Because of our limited operating history, it has not been possible for us to assess the
impact of seasonal effects on our business.

WE DEPEND ON THE TIMELY AND COMPETENT SERVICES OF VARIOUS COMPANIES INVOLVED IN THE MORTGAGE
PROCESS; IF THESE COMPANIES FAIL TO TIMELY AND COMPETENTLY DELIVER THESE SERVICES, OUR BUSINESS AND
REPUTATION WILL BE DIRECTLY AND ADVERSELY AFFECTED

     We rely on other companies to perform services related to the loan underwriting process,
including appraisals, credit reporting and title searches. Any interruptions or delays in the
provision of these services may cause delays in the processing and closing of loans for our
customers. If we are unsuccessful in managing the timely delivery of these services we will likely
experience increased customer dissatisfaction and our business and reputation could be adversely
affected.

CONTINUED TERRORIST ATTACKS, CONTINUED WAR, OR OTHER CIVIL DISTURBANCES COULD LEAD TO FURTHER
ECONOMIC INSTABILITY AND DEPRESS OUR STOCK PRICE OR OTHERWISE ADVERSELY AFFECT OUR BUSINESS

     On September 11, 2001, the United States was the target of terrorist attacks of unprecedented
scope. The United States is currently engaged in war with Iraq. These attacks and this war have
caused instability in the global financial markets and contributed to the volatility of the stock
prices of many United States publicly traded companies. In the future, there may be armed
hostilities, continued war, further acts of terrorism and civil disturbances in the United States
or elsewhere, which may further contribute to economic instability in the United States.
Additionally, such disturbances could have a material adverse effect on our business, financial
condition and operating results.

13

 

Risks Related to Investing in Our Securities

WE DO NOT INTEND TO SEEK QUALIFICATION FOR THE SECURITIES IN ANY STATES AND MAY
BE UNABLE TO OBTAIN QUALIFICATION IN ANY EVENT. IF EXEMPTIONS ARE UNAVAILABLE, YOU MAY BE UNABLE TO
RESELL YOUR SECURITIES.

     We do not intend to seek qualification for sale of the securities in any states. Instead, we
will file certain information in a qualified manual and will rely on exemptions provided by such
qualification and otherwise. To sell the securities in the public market, the securities must be
qualified for sale or exempt from qualification in the states in which the selling stockholders or
proposed purchasers reside. We intend to rely on exemptions from state securities registrations
requirements insofar as is practicable, but exemptions may not be available in all states. Further,
if we seek qualification there is no assurance that the states will approve. We may or may not
apply for qualification in particular jurisdictions and make no representations or undertakings to
effect “blue sky” clearance for any particular state. Selling securities holders must contact the
Company or their own counsel to determine if sales are permitted in any given jurisdiction. Should
we not obtain exemptions or qualification in these states you will be unable to resell your shares
in those states.

BECAUSE OUR STOCK IS CONSIDERED A PENNY STOCK ANY INVESTMENT IN OUR STOCK IS CONSIDERED TO BE
A HIGH-RISK INVESTMENT AND IS SUBJECT TO RESTRICTIONS ON MARKETABILITY.

     Our Shares are “penny stocks” within the definition of that term as contained in the
Securities Exchange Act of 1934. Penny stocks are generally equity securities with a price of less
than $5.00. Our shares will then be subject to rules that impose sales practice and disclosure
requirements on certain broker-dealers who engage in certain transactions involving a penny stock.
These rules impose restrictions on the marketability of the common stock and may affect its market
value.

FUTURE SALES OR THE POTENTIAL FOR FUTURE SALES OF SHARES OF OUR COMMON STOCK MAY CAUSE THE TRADING
PRICE OF OUR COMMON STOCK AND PUBLIC WARRANTS, IF ANY, TO DECLINE AND COULD IMPAIR OUR ABILITY TO
RAISE CAPITAL THROUGH SUBSEQUENT EQUITY OFFERINGS.

     Sales of a substantial number of shares of our common stock or other securities in the public
markets, or the perception that these sales may occur, could cause the market price of our common
stock or other securities to decline and could materially impair our ability to raise capital
through the sale of additional securities.

IF WE DO NOT MAINTAIN AN EFFECTIVE REGISTRATION STATEMENT OR COMPLY WITH APPLICABLE STATE
SECURITIES LAWS, YOU MAY NOT BE ABLE TO EXERCISE THE COMMON STOCK PURCHASE WARRANTS.

     In order for you to be able to exercise the Common Stock Purchase Warrants, the shares of our
common stock to be issued to you upon exercise of the warrants must be covered by an effective and
current registration statement and qualify or be exempt under the securities laws of the state or
other jurisdiction in which the shares are to be resold. We cannot assure you that we will continue
to maintain a current registration statement relating to the shares of our common stock underlying
the warrants or that an exemption from registration or qualification will be available throughout
their term. This may have an adverse effect on demand for the public warrants and the prices that
can be obtained from reselling them.

14

 

Risks Related to the Offering

BEST EFFORTS OFFERING.

     The Notes and Warrants are being offered on a “best efforts-any and all” basis. No person has
agreed to purchase any of the Notes and Warrants offered hereby. No assurance can be given that
all, or even a substantial portion, of the Notes and Warrants will be sold in this Offering. If
only a small number
of Notes and Warrants are sold, the Company’s ability to accomplish its business objectives would
be materially and adversely affected. See “Use of Proceeds.”

ARBITRARY CONVERSION PRICE OF THE NOTES.

     The conversion price of the Notes offered hereby was arbitrarily determined by the Company and
bears no relationship to earnings, asset values, book value or any other recognized criteria of
value.

INVESTORS WILL INCUR IMMEDIATE AND SUBSTANTIAL ECONOMIC DILUTION.

     The offering price of the securities offered hereby is higher than the net tangible book value
per share of Common Stock. Because prior purchasers of Common Stock paid less than the offering
price of the securities offered hereby, purchasers of the Notes and Warrants will be subject to
immediate and substantial dilution in the net tangible book value attributable to the Common Stock.

NO REGISTRATION UNDER APPLICABLE SECURITIES LAWS.

     The Notes and Warrants have not been registered under the Securities Act or applicable state
securities laws, and the Warrants and shares of Notes may not be traded freely, until they are
dully registered by the Company as fully described under Registration Rights section on page [4] of
this Memorandum. The Offering described in this Memorandum is being made in reliance upon an
exemption from registration with the SEC as provided by Rule 506 of Regulation D promulgated under
the Securities Act, Section 4(2) of the Securities Act or Regulation S promulgated under the
Securities Act, and similar provisions under applicable state laws which provide exemptions from
the securities registration and qualification provisions for private offerings. No regulatory
authority or other disinterested entity has reviewed or passed upon the fairness of the disclosure
of risks and tax consequences inherent in such investment or the other terms of this Offering.
Prospective investors should be aware that they do not have all of the protection afforded by
applicable federal and state securities laws to investors in registered or qualified offerings or
offerings which receive merit review by the applicable regulatory bodies. Investors must therefore
judge for themselves or with the assistance of their advisors the adequacy of the disclosures and
the fairness of the other terms of this Offering.

LIMITED TRANSFERABILITY AND MARKETABILITY OF THE SECURITIES.

     Each prospective investor must represent to the Company in his, her, or its Subscription
Agreement that he, she, or it will be acquiring Notes and Warrants solely for his, her, or its own
account, for investment purposes only, and not with a view to, or for resale in connection with,
any distribution thereof. It is unlawful to consummate a sale or transfer of the Notes and
Warrants, or any interest therein to, or receive any consideration from, any person except as
provided by an exemption or by compliance with the registration provisions of the Securities Act.
See “Plan of Distribution.”

     The Shares when issued upon conversion of the Notes or exercise of the Warrants will be
classified as “restricted” securities under Rule 144 promulgated under the Securities Act and will
bear Rule 144 restrictive legends unless and until the Company has had a registration statement
declared effective by the Securities and Exchange Commission (see “Description of Securities –
Description of the Notes”); carry a minimum one-year holding period from the date of issuance; and
be subject to certain limitations on public resale. Such Rule 144 restrictive legends may be
removed from securities held by non-affiliates following a two-year holding period in accordance
with Rule 144(k) under certain circumstances, but the ability of such security holders effectively
to publicly resell such Shares issuable upon conversion of the Notes or exercise of the Warrants
may be limited. A public market for the Notes and Warrants does not exist at this time and is not
expected to develop in the future. For these reasons, the right and the opportunity to transfer the
Notes and Warrants is also limited. See “Description of Securities – Description of the Notes.”

15

 

NEED FOR ADDITIONAL FINANCING.

     The Company requires additional financing beyond the maximum proceeds that may be raised in
this Offering, in order to sustain its operations, expand its business and implement its business
plan over the next two years. In particular, the Company’s ability to redeem the Notes on the
Maturity Date is dependent upon raising additional debt or equity. Although management is in
discussions to arrange for one or more such financings, the Company cannot assure you that it will
successfully negotiate or obtain such additional financing, or that it will obtain financing on
acceptable or favorable terms. There are no guaranteed commitments in place for such financings at
this time; however, the Company believes that some of the terms of any such subsequent financing
may be more favorable than the terms of this Offering.

     The Company expects that any commitments for additional financings will be in the form of
“best efforts” financings. In addition, the Company expects that at least some of the terms of any
additional “bridge” or “permanent” financing will be more favorable to investors than the terms of
this Offering. The Company’s ability to obtain additional capital depends on market conditions, the
economy and others factors, many of which are outside the Company’s control. If the Company does
not obtain adequate financing or such financing is not available on acceptable or favorable terms,
the Company’s ability to finance its expansion, develop or enhance services or products or respond
to competitive pressures would be significantly limited. In addition, such failure could prevent
the Company from being able to redeem the Notes upon the Maturity Date. The Company’s failure to
secure necessary financing would likely have a material adverse effect on its business, prospects,
financial condition and results of operations.

BROAD DISCRETION IN THE USE OF PROCEEDS.

     Management of the Company will have broad discretion in allocating the net proceeds of the
Offering, which creates uncertainty for stockholders and could adversely affect the Company’s
financial condition and future results of operations. See “Use of Proceeds”.

TAX RISKS.

     There may be tax consequences to investors in this Offering with respect to interest earned on
the Notes, repayment of the principal amount of the Notes, exercise of the Warrants in this
Offering and sale of the shares of the Company’s common stock into which the Notes or Warrants may
be converted or exercisable. THIS MEMORANDUM DOES NOT CONTAIN ANY TAX ADVICE WITH RESPECT TO AN
INVESTMENT IN THIS OFFERING. IT IS THE OBLIGATION OF EACH INVESTOR TO DETERMINE HIS, HER, OR ITS
INDIVIDUAL TAX CONSEQUENCES UNDER THE LAWS OF THEIR RESPECTIVE COUNTRY OR COUNTRIES OF TAXATION,
AND ALL TAXING AUTHORITIES THEREIN, TO WHICH THEY MAY BE SUBJECT.

16

 

BUSINESS

Background – Industry Statistics

The size of the US market per annum breaks down as follows:

	 	 	 
	Purchase Market

	 	$1,585 Billion USD
	Refinance Market

	 	$1,270 Billion USD
	Home Equity Market

	 	$370 Billion USD
	Total Consumer Lending Market:

	 	$3,225 Trillion

 

Source: Mortgage Bankers Association of America, 2005.

Parameters that help define US market growth capacity are:

	 	 	 
	Total Available US Home Equity

	 	$8.8 Trillion USD
	Total US Mortgage Debt Outstanding

	 	$8.3 Trillion USD
	Total US Value of Homes:

	 	$17.1 Trillion USD

 

Source: Federal Reserve, NASDAQ & NYSE.

Additional favorable domestic industry characteristics include the following:

	 	o	 	Despite growing concerns over the pace of development, housing construction over the
next 10 years is anticipated to exceed that of the previous 10 years. According to State
of the Nations Housing, Harvard University, 2004, the total number of new homes expected
to be built between 2005 and 2015 is 18.5 million to 19.5 million residences.
	 
	 	o	 	Automation has accelerated loan & mortgage approvals, lowered costs, and expanded
access to credit. Multiple mortgage products with different amortizations lengths, loan
terms, and repayment privileges have helped to keep many more consumers in the market.
	 
	 	o	 	There are in excess of 40,000 Small & Medium Mortgage Brokers across the US.
	 
	 	o	 	Licensing is State issued & controlled, and can take 6 to 9 months to obtain.
	 
	 	o	 	There are in excess of 300,000 Small & Medium Mortgage Broker financial advisors in the US.
	 
	 	o	 	73% of all mortgage originations in the US are through a mortgage broker.
	 
	 	o	 	Consolidation among mortgage originators is not an uncommon strategy in the US. For
example, in the first quarter of 2004, the 25 largest mortgage originators controlled 76%
of the market, up from just 39% in 1995.

Mortgage Banking Operations

Mortgage banking generally involves the origination or purchase of single-family mortgage loans for
sale in the secondary mortgage market.

The secondary mortgage market and its evolution have been significantly influenced by a few
government-sponsored enterprises: Federal National Mortgage Association (commonly referred to as
“Fannie Mae”), Federal Home Loan Mortgage Corporation (commonly referred to as “Freddie Mac”), and
one government agency, Government National Mortgage Association (commonly referred to as “Ginnie
Mae”).

Mortgage bankers sell their loans to loan investor companies or directly to Fannie Mae and Freddie
Mac either as whole loans or — more typically — as pools of loans used to collateralize
mortgage-backed securities issued or guaranteed by these entities. Similarly, mortgage bankers can
issue mortgage-backed securities collateralized by pools of loans that are guaranteed by Ginnie
Mae. In order to arrange these sales or obtain these guarantees, the mortgage banker must
underwrite its loans to conform to standards established by Fannie Mae and Freddie Mac, or

17

 

by the Federal Housing Administration, in the case of Ginnie Mae. The loans that the Company
originates are first mortgages secured by single-family residences (defined as one to four unit
dwellings).

The Company feels mortgage brokers are currently under a lot of consumer pressure to also become a
banking operation to keep pace with a fast moving and constantly changing mortgage lending
environment. In increasing numbers, mortgage brokers today must compete with mortgage banking
operations that approve and close loans quicker, because they control the funding of their loans.
Moreover, mortgage brokers must now disclose to its customers how much money they are making on
each loan due to recent Federal Guidelines, where mortgage banking operations are not required to
make this disclosure.

Mortgage banking operations, however, require large capital reserves in order to operate, and the
industry is also regulated.

MBIF’s strategy not only expands the mortgage broker businesses by setting up and receiving
mortgage brokers’ loans in its mortgage banking operation, but also grows these businesses with
proven marketing programs, better and faster loan approvals, the introduction of new, and expanded
loan programs.

The Company’s executives have extensive experience in setting up and running successful mortgage
banking operations. As evidenced in its successful acquisitions to date, this knowledge and
operational efficiency allows for both a smooth integration into the parent and the efficient,
effective creation of new marketing opportunities.

Acquisition Strategy

The Company’s acquisition strategy is to aggressively buy complementary brokers to put into its
banking operation, by rolling these acquisitions into the parent. The Company’s model calls for the
acquisition of four mortgage companies a year.

Target acquisitions for the Company will be located in Texas and the Southwestern states, plus
Florida; however, the Company also plans to be licensed in at least the following five- (5) sizable
US markets in 2006: namely, New York, Pennsylvania, Ohio, Illinois, and California.

To provide an overview of the synergistic potential of the Company the following is a snapshot of
MBIF’s diversified business portfolio identified as a result of its proven acquisition strategy:

	1.	 	Traditional Mortgage Broker Operations – There are approximately 44,000 small to
medium sized mortgage brokers from whom the majority of consumers transact mortgage
purchases in their local market.
Typically, these brick and mortar establishments do the most efficient job of guiding
consumers through the mortgage process. In addition to servicing their established
customers, these operations may call on local real estate agents, builders, etc. who have
first contact with ready consumers in their area; however, traditional mortgage brokers,
generally, fail to offer a compelling value proposition beyond commission splits,
semi-organized training, and marketing support. MBIF has a unique approach to grow sales,
reduce expenses, expand product offerings, and increase leverage with lenders to seize the
opportunities in this segment of the market.
	 
	2.	 	Internet Mortgage Originations – Internet mortgage originations are becoming a
growing trend in the US, as consumers become more comfortable with Internet driven
mortgage transactions: e.g., LendingTree.com, Ditech.com, and eLoan.com. Although margins
usually range around 50%, and have lower closing ratios & sales revenues, this model
serves a unique, growing customer segment, drives strong brand awareness, and allows MBIF
to take a “clicks and bricks” approach to the market to expand its product, service, and
delivery platforms.
	 
	3.	 	High-End Mortgage Capabilities – With this capability, the company can recruit the
best talent in the industry with high grade customers and established books of business.
This ability allows the company to bring on seasoned loan officers with favorable
commission splits who can significantly impact production.
While revenues are not as high, profits are about the same as the traditional mortgage
operation.
	 
	4.	 	Specialty Niches – Illustrating the Company’s strategy to make acquisitions with
untapped, hidden potential, MBIF has identified several opportunities to immediately
leverage this business model with

18

 

	 	 	 	several lenders/ investors of high rise condominiums, who are seeking a joint venture
partner to provide mortgage banking capabilities on warrantable and non-warrantable condos
along the East Coast. Part of the parent’s strategy is to seize opportunities like this, as
they are identified in the marketplace, and duplicate these opportunities in other areas of
the country.
	 
	 	5.	 	“Direct to the Consumer Approach -” According to a study conducted by a team of
researchers headed by Georgetown University, home mortgage applicants with low income
and/or less-than-perfect credit pay lower financing costs when they obtain their mortgages
through brokers rather
than lenders. This rapidly expanding operation does about 50% low grade paper, and 50%
refinanced equity, primarily to Hispanics throughout South Texas. The company specializes
in proven non-traditional solicitations, including broadcast
e-mails, newspaper
advertising, direct mail, apartment-owner to homeowner programs, etc. that could similarly
be replicated in similar demographic markets.

Valuing Mortgage Banking Acquisitions

MBI Mortgage, Inc. will acquire mortgage brokers by paying some cash and the rest in equity in its
public parent. This payment may average about 20% in cash (half on closing and half in nine months)
and 80% in some combination of public parent stock, and/or a three-year note.

Established publicly traded companies in the mortgage banking industry are currently trading at
estimated Price to Earnings (PE) ratios around 10. Growth oriented companies can get a PE Ratio of
12x to 15x. Hence, these acquisitions are estimated to immediately add significant stockholder
value (market capitalization) to the Company.

Targeted acquisitions will have between $75 million and $300 million in annual loan volume with a
close look at the last six months of volume to adjust for any refinance activity in 2003 — 2004.

Maximizing Value

Besides rolling up mortgage brokers at a discount, the Company is able to enhance the value of
these acquisitions from the following activities:

	 	1.	 	Mortgage brokers do not receive all the revenue available on a loan closing because
they do not close the loan in their own name, using their own funds nationally. This
creates an acquisition opportunity for our mortgage banking operation. A banking operation
closes loans in its own name, using its own funds, and receives the additional revenue
over the premiums paid to brokers. These premiums are the most profitable part of the
mortgage transaction. In addition, mortgage bankers earn fees associated with each loan
that brokers don’t earn. When the Company acquires a mortgage broker, the banking
operation receives immediate incremental revenue streams over and above the revenue
already generated by the mortgage broker on the loan transaction.
	 
	 	 	 	The Company’s loans will be underwritten through a banking operation to be established at
three- (3) regional banking hubs. These banking entities will underwrite, close, and fund
approximately 75% of these loans, using a warehouse line of credit or loan investor table
funds, and then promptly sell the loans into the secondary capital markets.

19

 

All the current indications are that interest rates will remain steady with slight, possible
increases. The Company will hedge all bundling amounts, as appropriate, for the proper time
periods to minimize this risk.

The servicing portfolio is a primary asset and source of steady income to large mortgage banks. The
Company will eventually establish a loan servicing arrangement where it will subcontract the
servicing to a third party sub-servicing entity.

In capturing the banking portion of loan originations, additional profits accrue to the Company as
a result of the following synergies:

	 	(a.)	 	 Immediately increasing broker profitability by integrating the Company’s banking
capabilities. The Company will pick up to an extra point from “A” paper loans, and up to two
points on “sub- prime” loans. The company estimates that 80% of its loans will be
“A” loans, and 20% “sub-prime,” and that the majority of its loans will go
through the banking operation.

	 
	 	(b.)	 	 Earning significantly more money, as a result of having greater loan volume through
acquisitions — by selling larger “loan commitments” in the secondary market (selling its
own mortgage pools to institutional loan investors: i.e., Fannie Mae, Ginnie Mae, and
Freddie Mac.) By realizing additional premiums from newly acquired mortgage brokers, the
Company will be creating larger packages to sell into the secondary market.

	 
	 	(c.)	 	 Earning the entire mortgage banking fee, including borrower paid points and
additional revenue from the added volume, which is currently being paid to third
parties.

	 
	 	(d.)	 	 Creating for the mortgage broker a competitive advantage by providing additional tools
to their selling package. For instance, acquisitions will be able to offer exclusive
financing, warranty packages, credit wraps, and better pricing service from the banking
operation.
(This is very similar to what the large franchise operators are able to
add to their franchises.)

	 
	 	(e.)	 	 Buying companies for lower multiple of earning, when the industry standard P/E ratio is
much higher earning for publicly held mortgage banking companies.

20

 

	 	2.	 	Utilizing the Company’s marketing knowledge to increase business at both the
acquisition and corporate level. For example, the Company will implement a plan for
maximizing prospect conversion and new product offerings, which may include training
acquisitions to do in-house mortgage centers (ABAs) in its marketing area.
	 
	 	 	 	One way the Company will distinguish itself from large mortgage companies is by
establishing on -site relationships with select real estate brokers and builders directly
in their offices. The Company’s on -site real estate/builder office strategy allows it to
capture mortgage loan business generated by the home buyers of these real estate
brokers/builders and provide the convenience of instant access to on-site mortgage loan
services with immediate pre-qualification. Each of these real estate brokers/builders is
selected using volume criteria and quality standards developed by our management.

	 	 	 	In addition to this niche, the Company plans to expand this partnership marketing concept
to include media outlets (primarily radio), car dealers, and others that will produce a
growing source of leads. These leads will be processed in a central call center also
located in Dallas, Texas.
	 
	 	3.	 	Helping the acquisition realize overlooked opportunities. The Company targets
acquisitions with hidden value above and beyond the favorable purchase price of the
acquisition. For instance, in addition to helping one unit quickly expand its Hispanic
business, with the purchase of a Hispanic mortgage broker, within 90 days, the Company
anticipates folding an operation doing an annual $ 5,000,000 in revenue that will also
give the parent a presence in the lucrative CA market. In another case, six months after
its first acquisition, consolidation of another area broker gave the Company better local
presence, while also reducing fixed branch costs alone by roughly 20%.

With regard to identifying the hidden value of targeted acquisitions, the Company looks at a
business along five strategic dimensions: industry, competition, customers, resources, and
product/service offerings. These dimensions raise interesting questions that help unlock a
business’ market potential. These questions include the following:

	 	(a)	 	How can industry conditions be transcended? Most brokers take their industry’s
conditions as given, and set their strategy accordingly. MBIF looks for ways to break
through those self-
imposed boundaries by leveraging a broker’s current potential in the marketplace.
	 
	 	(b)	 	How is the company’s strategic focus relative to the competition limiting its
potential? Most brokers identify competitor strengths and weaknesses and position
themselves based on those advantages, competing for incremental market share, when letting
competitors set the parameters of strategic thinking should not be the benchmark.

21

 

	 	(c)	 	How is the business’ segmentation and customization of its customer base limiting? Most
brokers target specific “differences” that customers value, when they should be looking at
“commonalities” customers value.
	 
	 	(d)	 	How can a business leverage its existing capabilities and resources? Often a broker is
constrained by its existing resources. MBIF asks what the broker’s potential would be if
different resources and/or capabilities were introduced.
	 
	 	(e)	 	How do the broker’s product and service offerings restrain the company’s revenue and profit
potential?
MBIF’s objective is to maximize the value of these offerings by looking at the total
solution customers seek – even if that means looking beyond the industry’s traditional
offerings, which brings us to the “big idea !”

Beyond the Company’s achievable objectives for revenue, profitability, market share, and customer
service, MBIF has an end game for leveraging the success of its business plan. We call it “the big
idea !”

“The Big Idea”

Based on our professional observations of the market, the long-term opportunity in the mortgage
banker/broker industry lies in the relationship with the customer. This long-term opportunity,
which fits perfectly with MBIF’s exit strategy, can be viewed from two perspectives: the customer,
and the broker.

Most customers value their personal relationship with, and the level of trust in their mortgage
broker. Customer attitudes are, generally, very positive with respect mortgage brokers educating
them about the process, the manner in which their transaction was handled, and how quickly they are
able to get the best possible rate from several available options. In fact, research has identified
that customers value the recommendation of a mortgage broker above that of a financial planner,
real estate person, and banker.

From the broker’s perspective, there is a concern for distinguishing themselves in the marketplace,
maximizing customer revenues, and how income can be earned after the customer closes on his/her
loan.

MBIF will further distinguish itself in the market place by providing their partners special
product loan packages and a special homeowner warranty with a guaranteed five- (5) year buy back.
The Company will have a special new product on an exclusive basis that will guarantee a sub prime
loan through an insurance credit wrap feature. These programs will help distinguish the Company in
the competitive market, attract partners, and secure more loans. The Company anticipates sub prime
loans to be 20% of its monthly volume (of roughly $894 million, in year one). Home warranty
penetration will depend on the builder/realtor ABA mix, but the company believes it will be able to
achieve 1% of loan volume, plus homeowner’s insurance @ 33%.

Another possible solution lies in the area of lead generation. In addition to opportunities
possible with an Internet presence, the Company plans to also expand into the property and casualty
insurance business by leveraging mortgage originations into additional insurance leads. This
opportunity will allow the Company to explore the opportunity to capture insurance, and other
future, complementary businesses.

The Company has already created a strategic alliance with RG America, a public entity that will
provide access to several key property and casualty insurance products. The Company’s call center
will close about 30% of the loans coming into the center. All of the borrowers closing with the
Company will be provided the opportunity to be exposed to the full gamut of RG America’s offerings.
All these products offerings, of course, will produce revenue for the company. In addition, in the
call center, those leads that do not convert into loans will also be provided to RG America for
potential insurance selling opportunities. Assuming a closing rate of 30%, the Company feels it
would be able to start an insurance entity as early as Year 2. For many obvious reasons, the
Insurance Model nicely complements a Mortgage Banking Model. Add a third model, Financial Services,
and the big picture begins to emerge.

This convergence is clearly happening in these industries today: for example, in the insurance
industry, Allstate & State Farm have established banking entities; in the banking industry,
national banks like Washington Mutual, Wells Fargo, Bank of America, et. al. are absorbing sizable
players in financial services, as well as mortgage originators.

22

 

Brokers like Merrill Lynch have plotted a similar course by targeting indirect competitors. And
even in our industry this trend is being mirrored: in 2005, for instance, Countrywide Mortgage
became the third largest bank in Dallas, Texas.

What eventually happens in business is that competitors imitate each other. MBIF believes the
mortgage origination industry is still in the early stages of the consolidation of diversified
financial services companies, which it believes will ultimately be centered on the powerful
mortgage origination relationship.

The Company is beginning to look across buyer groups to understand how its value curve can be
altered by focusing on an overlooked set of complementary customer needs.

Because there is a strong emotional bond between a mortgage broker and his/her customer, because
purchasing a home is the biggest financial purchase most individual will make, and because of the
timing of real estate purchases an individual makes during one’s lifetime, MBIF believes consumer
research will validate the opportunity of fulfilling a customer’s financial service needs by a
local mortgage broker, which, coincidentally, satisfies the mortgage broker’s dilemma/desire for a
multi-sale channel strategy that includes explosive revenue sharing and referrals opportunities.
This concept is the “big idea.”

Conclusion

MBIF has already identified a number of potential acquisitions that could result in an annualized
loan volume of nearly $895 Million with revenues of approximately $26 Million and EBITDA of almost
$4 Million in the first full year of operation.

Wholesale loan production has become a major source of income for mortgage bankers, fueled by the
increase in the number of small originators (i.e. mortgage brokers) who do not have funding and
secondary marketing capability. For the Company’s growth strategy as a wholesale mortgage banker,
there are tremendous opportunities for expansion by simply acquiring mortgage brokers, placing loan
officers in real estate offices, and hiring experienced independent loan officers currently working
for competing mortgage brokers.

MBIF’s strategy not only expands broker’ businesses by setting up and receiving brokers’ loans into
its banking operation, but also grows these businesses with proven marketing programs, better &
faster loan approvals, the introduction of new, and expanded loan programs, as well as overlooked
opportunities to leverage acquired business unit synergies.

The Company’s executives have considerable experience in setting up and running successful mortgage
banking operations. As evidenced in its successful acquisitions to date, this knowledge and
operational efficiency allows for both a smooth integration into the parent and the efficient,
effective creation of new marketing opportunities.

Upon reaching $1.5 to $2 billion in loan volume, MBIF believes its exit strategy will be complete
— as the Company would be a consolidation play in the banking, insurance and/or financial services
industries.

23

 

Management

	 	 	 
	Name	 	Position
	Patrick McGeeney

	 	Chief Executive Officer, MBI Financial Inc., Board Member
	Gary Gill

	 	Chief Financial Officer, MBI Financial Inc.
	John M. Farkas

	 	President, MBI Mortgage Inc.
	Greg Block

	 	Executive Vice President of Operations
	Eric Conner

	 	Vice President Sales and Marketing
	Larry D. Weisinger

	 	Director of Sales
	Seamus Donohoe

	 	Director of Sales
	W. Scott Sears

	 	Director of Sales
	William R. Miertschin

	 	Board Member
	Richard M. Hewitt

	 	Board Member
	Bruce A. Hall

	 	Board Member

Executive Officers

Patrick McGeeney – Chief Executive Officer, MBI Financial Inc., Board Member

     Mr. McGeeney’s background includes senior management, entrepreneurial ownership, investment/
finance, and franchise development, marketing & advertising with several national companies.

     Mr. McGeeney served as CEO for 4 years of Availent Financial, which was the parent owner of
Availent Mortgage (AM). AM was a 10 state mortgage operation that specialized in mortgage joint
venture for real estate agencies and homebuilders. This company grew from concept into operations
in over 10 states. The mortgage operation was a full HUD eagle and established a complete mortgage
banking operation with Central Mortgage banking operation located in Dallas, Texas. The company had
3 regional sales groups and a national marketing program.

     Prior to Availent, Mr. McGeeney was with REALTEC Real Estate Corporation where he was the COO.
REALTEC was a real estate franchise that had a mortgage component to its operation. In addition to
the operational and sales responsibilities, he also developed the strategy for the development of
REALTEC’s brand identity and mortgage operation. REALTEC was a pioneer company that developed the
concept of providing real estate agencies the opportunity to participate in the joint venture
mortgage operation that satisfied all the RESPA requirements for this endeavor. Mr. McGeeney
started this operation and developed its national program into 12 states with regional sales
operation.

     In addition he has worked at Young and Rubicam in their special bank marketing division and
has consulted on a variety of national clients. His work on developing and expanding national
brands covers a wide scope of assignments including Clorox, Clorox II, Maxwell House, Uncle Ben’s
Rice, National Oats Company, Albertson’s Supermarket, Coca-Cola’s Treesweet Awake Brand,
Southwestern Bell, Popeye’s Chicken Franchise, Aamco Franchise, and several regional real estate
brands.

     Mr. McGeeney has also done extensive work in developing programs that have had great success
with the Hispanic market. He has been a consultant in this area for over 15 years. Mr. McGeeney’s
national Hispanic promotional work with Clorox included community- oriented Hispanic programs that
were aimed at the most impactful grass roots level. He has extensive strategic analysis, Hispanic
marketing, and research experience and program coordination.

     Mr. McGeeney is a member of the Board of Directors of Home Solutions of America, Inc., a
Delaware corporation listed on the American Stock Exchange under the symbol “HOM.” Mr. McGeeney is
also the Chairman of the Audit Committee and a member of the Compensation Committee of Home
Solutions of America, Inc.

     Patrick McGeeney graduated from Southern Methodist University, and did graduate work at Our
Lady of the Lake University in San Antonio, Texas. He currently serves on the Associate Board of
the SMU Cox School of Business in Dallas.

24

 

Gary Gill – Chief Financial Officer, MBI Financial Inc.

     Gary Gill, CPA, JD, has over 21 years of business and financial experience in a variety of
industries at both the Private and Public level. He has been a partner at Tatum for the past 4
years where he
has worked with many varied clients. While at Tatum, Mr. Gill has held positions as CFO for a
private real estate investment company that acquired and rehabilitated distressed residential
properties and a security company that provides products to special police agencies and police
forces around the world. He has also had performed numerous consulting assignments including
creating financial budgets, system analysis, interim CFO assignments with public and private
companies, preparing financial models for fund raising purposes in both the equity and credit
markets, and working on public company bankruptcies. Assignments have been in a variety of
industries ranging from technology to oil and gas production.

     Prior to Tatum, Mr. Gill worked as a corporate financial consultant providing interim CFO
services to clients in ASP (application service provider) technology in both the private and public
markets. From the mid to late 90’s Mr. Gill worked for a boutique investment bank in San Antonio
that provided private capital, debt financing, sales and acquisitions services, and financial
advice to private and public companies, wealthy individuals, and institutional investors in a
variety of markets throughout the Southwest United States. Mr. Gill also worked for five years for
a private equity group in St. Louis specializing in financing start-up ventures, and mezzanine
financing for small-cap companies.

     Mr. Gill began his career at Coopers & Lybrand as a tax professional. He worked there for four
years primarily working on tax research and corporate partnership tax compliance.

John M. Farkas – President, MBI Mortgage Inc.

     Mr. Farkas has successfully advanced throughout his twenty-five year career in the mortgage
banking industry. Beginning with American National Bank as a Branch Manager in a suburb of Chicago
to executive positions including three stops as President of national mortgage bankers from Chicago
to Dallas, his consistent achievements in efficiently managing customer relations, employee
relations, budget controls, profit and loss responsibilities, quality control, productivity and
achieving company goals have been unparalleled. Added to these are his knowledge and understanding
of secondary marketing and multi-million dollar warehouse lines of credit that have made him known
nationally for his reputation of overseeing clean and profitable lines with his warehouse lenders.

     Mr. Farkas spent the last twenty years in senior management positions with industry leaders,
such as Regional Vice President at Household Bank, Senior Loan Officer and Branch Manager at Crest
Savings and Loans, Regional Vice President at Loan America Financial Corp. and Executive Vice
President at First Home Mortgage. Most recently, Mr. Farkas has been developing and growing small
and medium size mortgage brokerage companies into efficient and profitable business.

Greg Block – Executive Vice President of Operations

     Mr. Block’s professional background includes 20 years of senior management positions in
operations, logistics and customer service, as well as extensive experience in process improvement.
Prior to joining MBI Mortgage Inc., Mr. Block was Chief Operating Officer at Northland Funding
Group, a mortgage banker and broker in Austin, TX. Mr. Block has also held multiple senior
management positions at Point One Telecommunications, CenturyTel Telecommunications, IPC
Technologies, and Dell Computer. While at Dell Computer, Mr. Block created the infrastructure and
processes for the creation of Dell Ware, the software and peripherals division of Dell Computer.
Mr. Block also served as Managing Crew Chief in the US Air Force for 5 years.

Eric Conner – Vice President of Sales and Marketing

     Eric Conner’s Professional background includes 14 years of service management positions in
mortgage banking. Eric has extensive knowledge of originating Conventional, conforming and non-
conforming FHA and VA loans. Eric also possesses experience in marketing, account development and
training of Loan Officers. Mr. Conner owned and operated his own Mortgage Brokerage Net Branch
prior to joining M.B.I. Mr. Conner was educated at Southwest Texas State University, were he
studied Finance and Marketing.

25

 

Larry D. Weisinger – Director of Sales

     Mr. Weisinger was the owner of one of the acquisition companies which MBI Mortgage Inc.
purchased. He has successfully advanced throughout his 10 year mortgage history as a proven sales
person and sales leader. He started his career as a loan officer and continually achieved
recognition for his efforts. Throughout his career he has been a top producer and trained a group
of sales people to achieve some of the same goals as him. His leadership and ability to work with
customers SATISFY their needs and grow an aggressive sales staff to the same success level as
himself.

Seamus Donohoe – Director of Sales

     Mr. Donohoe was the owner of one of the acquisition companies which MBI Mortgage Inc.
purchased. He has successfully advanced throughout his 8 year mortgage industry as a proven sales
person and sales leader. Within his first year of business, Seamus successfully closed a million
dollars in production. Seamus has successfully increased his volume every year including this one.
Seamus over the years has trained and mentored many loan officers to also become successful.

W. Scott Sears – Director of Sales

     Mr. Sears was the owner of one of the acquisition companies which MBI Mortgage Inc. purchased.
He has spent his entire career in banking and finance. After receiving his MBA in Finance from the
University of St.Thomas in Houston, he became the Branch Manager of Industry Federal Credit Union.
After two years with the Joe Meyers Automotive Group in Houston as their Finance Manager, he found
his career in the mortgage industry.

     Scott has over thirteen years of experience as a mortgage broker. Overseeing the daily
operations, Scott has developed training material and quality procedures that have allowed his
staff to flourish. From the beginning as a small one-office startup, he has built and manages a
yearly loan volume of $200M from multiple offices with over 30 employees. He has recently formed a
relationship with Choice Homes, a regional builder, and is looking to build on that relationship.
His hands-on management style also keeps him actively engaged as a loan officer, so that he may
stay in touch with the day-to-day needs of his staff.

26

 

Board of Directors

William R. Miertschin

     Dallas, Texas is an oil and gas consultant with offices in Dallas, Texas. A 1972 graduate of
the University of Texas at Austin, with a BA in Mathematics, he completed additional courses in
petroleum engineering at the University of Texas of the Permian Basin in 1978. Beginning his oil
and gas career in 1975, Miertschin served as an Engineer with the Baroid Division of NL Industries
in Odessa, Texas. From 1977 to 1979, Mr. Miertschin was Drilling Supervisor for Gulf Oil
Exploration and Production, being the first trainee to complete Gulf Oil’s drilling and production
engineering training program. Thereafter, he was employed with Mesa Petroleum (1979-1985) as
Corporate Supervisor of Regulatory and Safety in Amarillo, Texas, and as Drilling Supervisor and
Senior Drilling Engineer in Midland and Amarillo, Texas, managing Mesa’s corporate drilling and
completion operations for all of the Permian Basin Division, Texas Panhandle and Kansas.

Richard M. Hewitt

     Trophy Club, Texas is a sole practitioner attorney specializing in securities law with offices
in Trophy Club. A native of Michigan, he is a 1958 graduate of Grinnell College, Grinnell, Iowa,
with an AB degree in Political Science. Mr. Hewitt holds a LLB degree from Southern Methodist
University, School of Law, Dallas, Texas (1963). He is licensed to practice law in Texas and in
various federal district courts and before the U.S. Supreme Court (1967).

Bruce A. Hall

     Mr. Hall , CFO of RG America, Inc. (OTCBB: RGMI) is a senior financial executive with
extensive experience as a CFO and in related financial management positions in the real estate
development, energy, consulting and manufacturing industries. He has held senior level positions at
Recognition Equipment, Inc., Harris Adacom Corporation and Probex Corporation. He has also been a
senior financial and management consultant, multi-family housing developer and began his career in
public accounting with Arthur Young & Company, a predecessor of Ernst & Young LLP. Mr. Hall holds
both CPA (Certified Public Accountant) and CMA (Certified Management Accountant) designations and
is a graduate of the University of Texas at Austin. Mr. Hall is the Chair of RG America’s Audit
Committee.

27

 

SELECTED FINANCIAL DATA

     The following selected financial data is obtained from the Company’s Form 10-QSB filed with
the Securities and Exchange Commission for the quarterly period ended June 30, 2006. This financial
data should be read together with Management’s Discussion and Analysis or Plan of Operations and
the Financial Statements and the accompanying Notes to Financial Statements included in the
attached Form 10-QSB and elsewhere in this Memorandum.

MBI FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	 	 	 	 	 	 	 	 	 
	 	 	June 30	 	September 30
	 	 	2006	 	2005
	 	 	 
	ASSETS

	Current Assets
	 	 	 	 	 	 	 	 
	Cash
	 	 	73,382	 	 	 	68,918	 
	Accounts receivable
	 	 	131,553	 	 	 	70,433	 
	Prepaid expenses
	 	 	—	 	 	 	8,133	 
	Deferred debt issue cost
	 	 	23,338	 	 	 	334,246	 
	 	 	 
	 
	 	 	 	 	 	 	 	 
	Total Current Assets
	 	 	228,273	 	 	 	481,730	 
	Office and Computer Equip, Net
	 	 	385,342	 	 	 	265,874	 
	Other Assets
	 	 	 	 	 	 	 	 
	Investment In Subsidiary
	 	 	8,381,897	 	 	 	—	 
	Goodwill
	 	 	6,344,933	 	 	 	2,023,161	 
	Other
	 	 	27,919	 	 	 	5,976	 
	 	 	 
	 
	 	 	 	 	 	 	 	 
	Total Assets
	 	 	15,368,364	 	 	 	2,776,741	 
	 	 	 
	 
	 	 	 	 	 	 	 	 
	LIABILITIES AND STOCKHOLDERS’ EQUITY

	Current Liabilities
	 	 	 	 	 	 	 	 
	Accounts payable
	 	 	397,630	 	 	 	216,751	 
	Notes payable
	 	 	3,015,641	 	 	 	559,379	 
	Accrued liabilities
	 	 	966,398	 	 	 	176,056	 
	Accounts payable-related parties
	 	 	706,843	 	 	 	552,149	 
	 	 	 
	 
	 	 	 	 	 	 	 	 
	Total Current Liabilities
	 	 	5,086,511	 	 	 	1,504,335	 
	Unissued Common Stock
	 	 	3,500,488	 	 	 	2,649,168	 
	Unissued Preferred Stock
	 	 	1,150,000	 	 	 	1,150,000	 
	Stockholders’ Equity
	 	 	 	 	 	 	 	 
	Preferred stock, par value $.10 per share 1,000,000 shares authorized, none issued
	 	 	—	 	 	 	—	 
	Common stock, $.0167 par value,100,000,000 shares authorized, 10,595,920 shares
issued and outstanding
	 	 	1,359,035	 	 	 	1,335,323	 
	Additional paid-in-capital
	 	 	9,764,224	 	 	 	(922,461	)
	Accumulated earnings (deficit)
	 	 	(5,491,894	)	 	 	(2,939,574	)
	 	 	 
	 
	 	 	 	 	 	 	 	 
	Total Stockholders’ Equity
	 	 	5,631,365	 	 	 	(2,526,712	)
	Total Liabilities and Stockholders’ Equity
	 	 	15,368,364	 	 	 	2,776,791	 
	 	 	 

See accompanying notes to consolidated financial statements in the Company’s Form 10-QSB filed for the quarterly period ended June 30, 2006.

28

 

MBI FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Quarters Ended

	 	 	 	 	 	 	 	 	 
	 	 	2006	 	2005
	 	 	June 30	 	June 30
	Operating Activities
	 	 	 	 	 	 	 	 
	Net Income (Loss)
	 	 	(886,742	)	 	 	(71,377	)
	Adjustments to reconcile Income to Cash Depreciation
	 	 	13,500	 	 	 	5,700	 
	Interest Expense from issuance of warrants
	 	 	339,395	 	 	 	27,800	 
	Common stock issued in payment for operating expenses
	 	 	—	 	 	 	11,247	 
	Cash provided (used) by operating assets and liabilities
	 	 	(533,847	)	 	 	(26,630	)
	 	 	 
	 
	 	 	 	 	 	 	 	 
	Accounts receivable
	 	 	2,496	 	 	 	—	 
	Prepaid expenses
	 	 	—	 	 	 	—	 
	Other Assets
	 	 	(11,062	)	 	 	—	 
	Accounts payable
	 	 	200,779	 	 	 	102,857	 
	Accounts Payable — Related Parties
	 	 	11,513	 	 	 	 	 
	Accrued liabilities
	 	 	637,837	 	 	 	—	 
	 	 	 
	 
	 	 	 	 	 	 	 	 
	Cash provided (used) by operating activities
	 	 	307,715	 	 	 	76,227	 
	 	 	 
	 
	 	 	 	 	 	 	 	 
	Investing Activities
	 	 	 	 	 	 	 	 
	Purchase of equipment
	 	 	—	 	 	 	—	 
	Goodwill
	 	 	765,606	 	 	 	—	 
	Financial Payouts
	 	 	—	 	 	 	25,000	 
	 	 	 
	 
	 	 	 	 	 	 	 	 
	Cash Used in Investing Activities
	 	 	765,606	 	 	 	25,000	 
	 	 	 
	 
	 	 	 	 	 	 	 	 
	Financing Activities
	 	 	 	 	 	 	 	 
	Proceeds from note payable
	 	 	480,000	 	 	 	—	 
	Stock Sales
	 	 	—	 	 	 	—	 
	Preferred Dividend
	 	 	—	 	 	 	—	 
	 	 	 
	 
	 	 	 	 	 	 	 	 
	Cash provided by financing activities
	 	 	480,000	 	 	 	—	 
	 	 	 
	 
	 	 	 	 	 	 	 	 
	Net Increase (decrease) in Cash
	 	 	22,109	 	 	 	51,227	 
	Cash Balance, Beginning of Period
	 	 	51,273	 	 	 	2,691	 
	 	 	 
	 
	 	 	 	 	 	 	 	 
	Cash Balance, End of Period
	 	 	73,382	 	 	 	53,918	 
	 	 	 
	 
	 	 	 	 	 	 	 	 
	Supplemental Cash Flow Information
	 	 	 	 	 	 	 	 
	Interest Paid
	 	 	 	 	 	 	 	 
	Income Taxes
	 	 	 	 	 	 	 	 
	Supplemental Schedule of Non-Cash
	 	 	 	 	 	 	 	 
	Investing and Financing Activities
	 	 	 	 	 	 	 	 
	Preferred Stock Converted to Common Stock
	 	 	—	 	 	 	(60,000	)
	Common Stock Issued in coversion of Preferred Stock
	 	 	—	 	 	 	10,020	 
	Change in Additional paid-in-capital due to Conversion of Preferred Stock
	 	 	—	 	 	 	49,980	 
	Net Assets acquired in purchase of Subsidiary (Acquisition)
	 	 	(64,500	)	 	 	(102,816	)
	Goodwill Acquired in Purchase of Subsidiary (Acquisition)
	 	 	(3,389,997	)	 	 	(897,184	)
	Stock issued in Purchase of Subsidiary (Acquisition)
	 	 	1,700,000	 	 	 	740,000	 
	Notes Payable issued in purchase of Subsidiary (Acquisition)
	 	 	1,754,347	 	 	 	260,000	 
	Issuance of warrants and Common Stock in purchase of Subsidiary
(Acquisition)
	 	 	—	 	 	 	90,450	 
	Discounted Notes Payable
	 	 	—	 	 	 	(90,450	)

See accompanying notes to consolidated financial statements in the Company’s Form 10-QSB filed for the quarterly period ended March 31, 2006.

29

 

MBI FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Quarters Ended

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Three Months Ended	 	Nine Months Ended
	 	 	June 30	 	June 30
	 	 	2006	 	2005	 	2006	 	2005
	Revenues
	 	 	1,718,277	 	 	 	565,543	 	 	 	4,236,203	 	 	 	565,543	 
	Cost of revenues
	 	 	1,409,785	 	 	 	379,579	 	 	 	3,451,968	 	 	 	379,579	 
	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Gross Profit
	 	 	308,492	 	 	 	185,964	 	 	 	784,235	 	 	 	185,964	 
	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Operating Expenses
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Compensations
	 	 	100,537	 	 	 	54,392	 	 	 	186,968	 	 	 	54,392	 
	General and Administrative
	 	 	659,675	 	 	 	166,316	 	 	 	1,795,660	 	 	 	166,316	 
	Depreciation
	 	 	13,500	 	 	 	5,700	 	 	 	34,378	 	 	 	5,700	 
	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total Operational Expenses
	 	 	773,712	 	 	 	226,408	 	 	 	2,017,006	 	 	 	226,408	 
	Income (Loss) from operations
	 	 	(465,220	)	 	 	(40,444	)	 	 	(1,232,770	)	 	 	(40,444	)
	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Interest
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Income
	 	 	725	 	 	 	517	 	 	 	725	 	 	 	517	 
	Expense *
	 	 	422,246	 	 	 	31,450	 	 	 	2,470,274	 	 	 	31,450	 
	Income (Loss) before taxes
	 	 	(886,742	)	 	 	(71,377	)	 	 	(3,702,319	)	 	 	(71,377	)
	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Income taxes
	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net Income (Loss)
	 	 	(886,742	)	 	 	(71,377	)	 	 	(3,702,319	)	 	 	(71,377	)
	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Pro Forma Income (Loss) Per Share
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Basic
	 	 	(0.08	)	 	 	(0.03	)	 	 	(0.35	)	 	 	(0.03	)
	Diluted
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Weighted Average Number of Common
Shares (Basic and Diluted)
	 	 	10,595,920	 	 	 	2,792,938	 	 	 	10,595,920	 	 	 	2,792,938	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

See accompanying notes to consolidated financial statements in the Company’s Form 10-QSB filed for the quarterly period ended June 30, 2006.

LIQUIDITY AND CAPITAL RESOURCES

     Information regarding the Company’s liquidity and financial resources is contained under
“Management’s Discussion and Analysis or Plan of Operation” in the Quarterly Report on Form 10-QSB
filed for the quarterly period ended June 30, 2006, a copy of which accompanies this Memorandum.

30

 

USE OF PROCEEDS

     The Company is seeking to raise up to $1,200,000 through the private offering of the Notes and
Warrants in this Offering. The Offering is made on a “best efforts” basis. The minimum amount
required to conduct a closing is $250,000.

     The proceeds of this Offering, after deducting offering expenses, will be used principally for
general corporate and working capital purposes and for acquiring mortgage brokerage business and
repaying of loans associated with recently completed acquisitions. Pending the application of the
proceeds to the above uses, the Company will hold the proceeds as cash in the Company’s operating
bank accounts or invest the proceeds in short-term U.S. government securities.

     The Company believes that the maximum net proceeds from this Offering, together with cash on
hand, will be sufficient to fund working capital requirements for approximately six months after
the completion of this Offering. If less than the maximum amount is raised in this Offering, the
net proceeds will last for a shorter period of time, the Company will have to modify or curtail
certain proposed uses of proceeds, or both.

     The foregoing are only estimates of the type and amount of expenditures for which the proceeds
of the offering will be used. The use of net proceeds from the offering may vary significantly from
what is stated above. The Company reserves the right to change the actual use of the proceeds of
the offering, if we believe, in our sole discretion, our business or our affairs so dictate.

     Spencer Clarke LLC (“Spencer Clarke”) is engaged as the exclusive placement agent for this
offering. For acting as agent, Spencer Clarke shall receive from the Company the following
compensation: (i) 8% of the gross proceeds raised in this offering; (ii) warrants exercisable to
purchase shares of Common Stock of MBIF in an amount equal to 10% of the number of shares issuable
upon conversion or exercise of securities sold in this offering, at an exercise price per Warrant
Share equal to $0.40.

31

 

DESCRIPTION OF SECURITIES

Description of the Notes

     The Notes are senior secured obligations of the Company to repay the holder the principal
amount of his or her Note, together with any and all accrued and unpaid interest at a rate of 13%
per annum, on or before the Maturity Date. The Notes are redeemable upon the Maturity Date.
Interest will accrue monthly and is expected to be paid quarterly on the Notes.

     The Notes may be converted upon any Event of Default by the holder (a “Voluntary Conversion”)
by giving written notice to the Company. A holder may, at his or her option, convert accrued and
unpaid interest on the Notes as well as the principal amount of the Notes. A holder may convert
all, or any portion, of the amount due and owing on his or her Note in one or more Voluntary
Conversions. Upon the giving of notice of a Voluntary Conversion, a holder’s right to be repaid
that portion of the Note, together with any accrued and unpaid interest, will cease and such
holder’s sole right shall be to receive the number of Shares to which he or she is entitled by
dividing the aggregate dollar amount to be converted by then applicable conversion price.

     Promptly, but no later than 120 days following the Closing Date, the Company shall use
commercially reasonable efforts to file a registration statement with the SEC to register the
shares of the Company’s common stock into which the Notes is convertible and for which the Warrants
may be exercised. The Company shall use commercially reasonable efforts to ensure that such
registration statement is declared effective within 150 days after filing. In the event the
registration statement is not declared effective within 150 days after filing, the Company shall
redeem the entire outstanding Notes plus accrued and unpaid interest. In the event Company has not
fully completed this redemption within 30 days after the expiration of the 150-day period, Company
shall be deemed to be in default under the terms of the Notes, and will be subject to the default
consequences described elsewhere in this Memorandum.

     The Notes are subordinated obligations of the Company and rights to receive or retain payments
pursuant to the terms and conditions of the Notes may be subordinated under certain conditions as
more fully described in the form of Note, a copy of which accompanies this Memorandum.

Description of Common Stock and Warrants

     Our articles of incorporation, as amended, currently authorize 100,000,000 shares of Common
Stock, $0.0167 par value, and 1,000,000 shares of Preferred Stock, $0.10 par value. As of June 30,
2006, 10,595,920 shares of our Common Stock were issued and outstanding, and there were outstanding
options and warrants to purchase an additional 10,920,209 shares of our Common Stock.

     Holders of Common Stock vote as a single class together on all matters submitted to a vote of
stockholders, with each share of Common Stock entitled to one vote, except as otherwise provided by
law.

     Holders of Common Stock are not entitled to pre-emptive or subscription rights.

     The transfer agent for the shares of the Common Stock is Karen Lee. The address of the
transfer agent is 104 Fossil Court, Springtown, Texas 76082.

     Each Warrant offered hereby entitles the holder to purchase a number of shares of the
Company’s Common Stock equal to 120% of the number of shares of Common Stock into which the Notes
are convertible. The Warrant is exercisable at an initial price equal to $0.40 per share. The
Warrant will be exercisable until 5 p.m. Eastern Standard Time for a period of 5 (five) years from
the date when it is issued.

     The Warrants may be exercised by surrendering the warrant certificates evidencing the Warrants
to be exercised with the accompanying form of election to purchase, together with payment of the
aggregate exercise price in cash.

     The Warrant will be exercisable on a cash exercise basis and will have “piggy-back”
registration rights. In addition, the Warrants have the registration rights described in
“Description of Securities – Description of the Notes.”

32

 

     The holders of the Warrants have no right to vote on matters submitted to our stockholders and
have no right to receive any dividends which may be declared on our Common Stock. The holders of
the Warrants will not be entitled to share in our assets in the event of liquidation, dissolution
or the winding up of the Company. If a bankruptcy or reorganization is commenced by or against the
Company, a bankruptcy court may hold that unexercised Warrants are executory contracts which may be
subject to rejection by us, and the holders of the Warrants may, even if sufficient funds are
available, receive nothing or less than they would have been entitled to if they had exercised
their Warrants prior to the commencement of any such bankruptcy case.

PLAN OF DISTRIBUTION

Terms of the Offering

     The Company is seeking to raise up to $1,200,000 (not including over-subscriptions) through
the private offering of the Notes and Warrants. The minimum purchase requirement in this Offering
is $25,000. The minimum amount required to conduct a closing is $250,000.

     The Company reserves the right to add to, supplement or amend all or any part of the
disclosure information at any time and undertakes no obligation to provide the recipient with
access to any additional information. Prospective investors who do not wish to subscribe to
purchase the Notes and Warrants or whose subscription is rejected are requested to return promptly
this Memorandum without retaining any copies to the Company.

     The Company has the sole and absolute right to accept or reject any subscription, in whole or
in part. Subscription Agreements are not binding upon the Company until accepted. To the extent
that any subscription is rejected, the related amount tendered with such subscription shall be
refunded to the subscriber without interest or deduction.

     Additional information regarding the terms of this Offering is contained under “The Offering”
in the forepart of this Memorandum.

Eligibility and Investor Suitability

     This offering is being made in reliance on exemptions from the registration and qualification
requirements of the Securities Act and applicable state securities laws. The Company will accept
subscriptions for the Notes and Warrants only from persons who are “accredited investors” as that
term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act.

     THIS OFFERING IS MADE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES
ACT, FOR OFFERS AND SALES OF SECURITIES THAT DO NOT INVOLVE A PUBLIC OFFERING. EACH INVESTOR WILL
BE REQUIRED TO REPRESENT THAT THE NOTES AND
WARRANTS ARE BEING ACQUIRED FOR THE INVESTOR’S OWN ACCOUNT, AND NOT FOR THE ACCOUNT OF OTHERS, FOR
INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TO THE SALE OR DISTRIBUTION THEREOF IN WHOLE OR IN
PART. THE SPECULATIVE NATURE OF THE
COMPANY’S BUSINESS, TOGETHER WITH THE LACK OF LIQUIDITY OF THE NOTES AND
WARRANTS, AND THE SHARES INTO WHICH THE NOTES MAY BE CONVERTED AND FOR WHICH THE WARRANTS MAY BE
EXERCISED, MAKES THE PURCHASE OF THE NOTES AND
WARRANTS SUITABLE ONLY FOR INVESTORS WHO HAVE ADEQUATE FINANCIAL MEANS AND WHO CAN AFFORD THE TOTAL
LOSS OF THEIR INVESTMENT. ACCORDINGLY, INVESTORS WILL BE REQUIRED TO MAKE CERTAIN REPRESENTATIONS
AS TO THEIR NET WORTH, INCOME AND ABILITY TO BEAR THE LOSS OF THEIR INVESTMENT.

     THE SUITABILITY STANDARDS DISCUSSED BELOW REPRESENT MINIMUM SUITABILITY STANDARDS FOR
PROSPECTIVE INVESTORS. PROSPECTIVE INVESTORS ARE ENCOURAGED TO CONSULT THEIR OWN INVESTMENT OR TAX
ADVISERS, ACCOUNTANTS, LEGAL COUNSEL OR

33

 

OTHER ADVISERS TO DETERMINE WHETHER AN INVESTMENT IN THE SHARES AND WARRANTS IS APPROPRIATE. SEE
“RISK FACTORS” IN THE MEMORANDUM.

     An investment in the Notes and Warrants is designed for sophisticated investors who have
business and financial experience and acumen, either individually or together with their purchaser
representatives, such that they are capable of evaluating the merits and risks of an investment in
the Company and of protecting their interests in the transaction.

     The Notes and Warrants will only be sold within the United States to “accredited investors” as
that term is defined herein below.

     Among other things, investors will have to represent that they are acquiring the Notes and
Warrants for their own account, for investment only, and not with a view toward the resale or
distribution thereof, that they are aware the Notes and Warrants have not been registered, and the
Shares issuable upon conversion of the Notes or exercise of the Warrants will not be registered,
under the Securities Act or under applicable state securities laws, and that their transfer rights
may be restricted by the Securities Act and applicable state securities laws, and that there is an
absence of a market for the Notes and Warrants.

     Accredited Investor is defined by Rule 501(a) of Regulation D as:

     1. Any bank as defined in section 3(a)(2) of the Act whether acting in its individual or
fiduciary capacity; insurance company as defined in section 2(13) of the Act; investment company
registered under the Investment Company Act of 1940 or a business development company as defined in
section 2(a)(48) of that Act; Small Business Investment Company licensed by the U.S. Small Business
Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; employee
benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974,
if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such Act,
which is either a bank, insurance company, or registered investment adviser, or if the employee
benefit plan has total assets in excess of $5,000,000;

     2. Any private business development company as defined in section 202(a)(22) of
the
Investment Advisers Act of 1940;

     3. Any organization described in Section 501(c)(3) of the Internal Revenue Code with total
assets in excess of $5,000,000;

     4. Any director, executive officer, or general partner of the issuer of the securities being
offered or sold, or any director, executive officer, or general partner of a general partner of
that issuer;

     5. Any natural person whose individual net worth, or joint net worth with that person’s
spouse, at the time of his or her purchase exceeds $1,000,000;

     6. Any natural person who had an individual income in excess of $200,000 in each of the two
most recent years and who reasonably expects an income in excess of $200,000 in the current year
or joint income with that person’s spouse in excess of $300,000 in each of those years and who
reasonably expects
reaching the same income level in the current year; and

     7. Any entity in which all of the equity owners are Accredited Investors under
paragraph (a)
(1), (2), (3), (4), (6), or (7) of Rule 501.

     THIS MEMORANDUM SHALL NOT CONSTITUTE AN OFFER TO SELL TO, OR A SOLICITATION OF AN OFFER TO BUY
FROM, ANY PERSON WHO DOES NOT MEET THE SUITABILITY STANDARDS SET FORTH ABOVE AND IN THE
SUBSCRIPTION AGREEMENT.

Subscription Procedures

     Upon request by a prospective investor, the Company will deliver a volume of the documents
(the “Subscription Documents”), that a prospective investor will be required to complete and
execute in order to be considered as a purchaser of our Notes. The Subscription Documents will
consist of, among other possible documents, a Subscription Agreement, a Note Purchase Agreement and
a Confidential Purchaser Questionnaire that will require a prospective investor to certify, among
other things, that (i) the prospective investor is an accredited

34

 

investor; (ii) the prospective investor’s total investment in our Notes will not represent more
than ten percent of the prospective investor’s net worth; and (iii) any Notes to be purchased by
the prospective investor will be purchased for the prospective investor’s own account, for
investment and not with a view to resale or distribution thereof.

     If the prospective investor determines to purchase Notes offered hereby, the prospective
investor must return to us the prospective investor’s copy of the Subscription Documents) each of
which shall have been duly completed and signed. At that time, the prospective investor must also
remit by certified check or wire transfer (to an escrow account specified by us) an amount equal to
the purchase price of the Notes that the prospective investor wishes to purchase.

     We will review the Subscription Documents and determine whether to accept the subscriptions
proposed thereby. If a subscription is accepted, we will so notify the prospective investor and the
purchase price will remain deposited in escrow at a bank until the closing for the subscribed
Notes. If the subscription is not accepted, the Company will so notify the prospective investor and
will return the prospective investor’s funds, as soon as practicable. Funds held in escrow will not
bear interest. We may, in our sole discretion, reduce each prospective investor’s requested number
of Notes by any amount without any prior notice to or consent by any prospective investor. In this
event, each prospective investor’s funds in excess of the purchase price for Notes issued to the
investor will be returned as soon as practicable following the closing date.

     We may agree to hold more than one closing with respect to the Notes offered hereby. There
will be no minimum aggregate number of Notes required to be sold at the initial closing or any
subsequent closing. The initial closing and any subsequent closings will be held at times and
places and on dates selected by us and any Placement Agent, provided that no closing will be held
after September 30, 2006, unless this Offering is extended by us as permitted herein.

Closing Conditions

     Each prospective investor will not be deemed to have purchased any Notes until such time as
all of the following conditions to closing have occurred: (i) the purchase price for the Notes has
been delivered to us; and (ii) closing documents in form and substance satisfactory to us and our
counsel have been executed and delivered.

35

 

AVAILABLE INFORMATION

     The Company undertakes, to the extent practical, to make available to every prospective
investor or its representative(s) during the course of this Offering the opportunity to ask
questions relating to the terms and conditions of this Offering, and to obtain information
necessary to verify the accuracy of the information made available to such investor or its
representative(s).

     Prior to making an investment decision, prospective investors should carefully review and
consider all the disclosure information, including without limitation the contents of this
Memorandum. Prospective investors are urged to make arrangements to inspect any books, records,
contracts, or instruments referred to in this Memorandum and any other data relating thereto in
advance of the termination of this Offering. Designated representatives of the Company will be
available to discuss with prospective investors and their representatives any information,
financial and otherwise, necessary to formulate a well informed investment decision.

     The Company subject to the informational requirements of the Exchange Act, which requires the
Company to file reports, proxy statements and other information with the SEC. Such reports, proxy
statements and other information may be inspected at public reference facilities of the SEC at
Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549. Copies of such material can be
obtained from the Public Reference Room of the SEC at Judiciary Plaza, 450 Fifth Street N.W.,
Washington, D.C. 20549 at prescribed rates. You may obtain information about the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. Because we file documents
electronically with the SEC, you may also obtain this information by visiting the SEC’s Internet
website at http://www.sec.gov.

36

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