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    AGREEMENT
      AND PLAN OF MERGER

    
 

     

    BY
      AND AMONG

     

    U.S.
      DRY CLEANING CORPORATION,

    

    CLEANERS
      CLUB, INC.,

    

    CLEANERS
      CLUB ACQUISITION SUB, INC.,

     

     

    AND

     

     

    RIAZ
      CHAUTHANI

     

    
 

    December
      21, 2006

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    TABLE
      OF CONTENTS

     

    
      	 	 	 	 	
              Page

            
	
              ARTICLE
                I DEFINITIONS

            	 	
              2

            
	
              Section
                1.1

            	 	
              Defined
                Terms

            	 	
              2

            
	 	 	 	 	 
	
              ARTICLE
                II THE MERGER

            	 	
              7

            
	
              Section
                2.1

            	 	
              The
                Merger

            	 	
              7

            
	
              Section
                2.2

            	 	
              Closing

            	 	
              7

            
	
              Section
                2.3

            	 	
              Effective
                Time

            	 	
              8

            
	
              Section
                2.4

            	 	
              Effect
                of the Merger

            	 	
              8

            
	
              Section
                2.5

            	 	
              Articles
                of Incorporation; Bylaws

            	 	
              8

            
	
              Section
                2.6

            	 	
              Directors;
                Officers

            	 	
              8

            
	
              Section
                2.7

            	 	
              Effect
                on Capital Stock

            	 	
              9

            
	
              Section
                2.8

            	 	
              Exchange
                of Certificates

            	 	
              9

            
	
              Section
                2.9

            	 	
              No
                Further Ownership Rights in Company Common Stock

            	 	
              9

            
	
              Section
                2.10

            	 	
              Lost,
                Stolen or Destroyed Certificates

            	 	
              9

            
	
              Section
                2.11

            	 	
              Taking
                of Necessary Action; Further Action

            	 	
              10

            
	
              Section
                2.12

            	 	
              Adjustments

            	 	
              10

            
	 	 	 	 	
               

            
	
              ARTICLE
                III REPRESENTATIONS AND WARRANTIES OF COMPANY

            	 	
              10

            
	
              Section
                3.1

            	 	
              Organization,
                Standing and Power

            	 	
              11

            
	
              Section
                3.2

            	 	
              Subsidiaries

            	 	
              11

            
	
              Section
                3.3

            	 	
              Capitalization;
                Title to the Shares

            	 	
              11

            
	
              Section
                3.4

            	 	
              Authority

            	 	
              12

            
	
              Section
                3.5

            	 	
              Financial
                Statements

            	 	
              12

            
	
              Section
                3.6

            	 	
              Absence
                of Certain Changes

            	 	
              13

            
	
              Section
                3.7

            	 	
              Absence
                of Undisclosed Liabilities

            	 	
              15

            
	
              Section
                3.8

            	 	
              Litigation

            	 	
              15

            
	
              Section
                3.9

            	 	
              Restrictions
                on Business Activities

            	 	
              15

            
	
              Section
                3.10

            	 	
              Governmental
                Authorization

            	 	
              15

            
	
              Section
                3.11

            	 	
              Takeover
                Statutes

            	 	
              15

            
	
              Section
                3.12

            	 	
              Title
                to Property

            	 	
              16

            
	
              Section
                3.13

            	 	
              Intellectual
                Property

            	 	
              16

            
	
              Section
                3.14

            	 	
              Environmental
                Matters

            	 	
              18

            

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
      	
              Section
                3.15

            	 	
              Taxes

            	 	
              20

            
	
              Section
                3.16

            	 	
              Employee
                Benefit Plans

            	 	
              23

            
	
              Section
                3.17

            	 	
              Employee
                Matters

            	 	
              25

            
	
              Section
                3.18

            	 	
              Interested
                Party Transactions

            	 	
              27

            
	
              Section
                3.19

            	 	
              Leased
                Property

            	 	
              28

            
	
              Section
                3.20

            	 	
              Insurance

            	 	
              28

            
	
              Section
                3.21

            	 	
              Compliance
                With Laws

            	 	
              29

            
	
              Section
                3.22

            	 	
              Minute
                Books

            	 	
              29

            
	
              Section
                3.23

            	 	
              Internal
                Controls

            	 	
              29

            
	
              Section
                3.24

            	 	
              Complete
                Copies of Materials

            	 	
              29

            
	
              Section
                3.25

            	 	
              Brokers'
                and Finders' Fees

            	 	
              30

            
	
              Section
                3.26

            	 	
              Board
                Approval

            	 	
              30

            
	
              Section
                3.27

            	 	
              Customers
                and Suppliers

            	 	
              30

            
	
              Section
                3.28

            	 	
              Material
                Contracts

            	 	
              30

            
	
              Section
                3.29

            	 	
              No
                Breach of Material Contracts

            	 	
              32

            
	
              Section
                3.30

            	 	
              Third
                Party Consents

            	 	
              32

            
	
              Section
                3.31

            	 	
              Accounts
                Receivable and Payable

            	 	
              32

            
	
              Section
                3.32

            	 	
              Inventory

            	 	
              32

            
	
              Section
                3.33

            	 	
              Propriety
                of Past Payments

            	 	
              33

            
	
              Section
                3.34

            	 	
              Representations
                Complete

            	 	
              33

            
	 	 	 	 	
               

            
	
              ARTICLE
                IV REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER
                SUB

            	 	
              34

            
	
              Section
                4.1

            	 	
              Organization,
                Standing and Power

            	 	
              34

            
	
              Section
                4.2

            	 	
              Authority

            	 	
              34

            
	
              Section
                4.3

            	 	
              Brokers’
                and Finders’ Fees

            	 	
              35

            
	
              Section
                4.4

            	 	
              Board
                Approval

            	 	
              35

            
	 	 	 	 	
               

            
	
              ARTICLE
                V CONDUCT PRIOR TO THE CLOSING DATE

            	 	
              35

            
	
              Section
                5.1

            	 	
              Conduct
                of Business of the Company

            	 	
              35

            
	
              Section
                5.2

            	 	
              Restriction
                on Conduct of Business of the Company

            	 	
              35

            
	
              Section
                5.3

            	 	
              No
                Solicitation

            	 	
              38

            
	
              Section
                5.4

            	 	
              Further
                Information

            	 	
              39

            
	 	 	 	 	
               

            
	
              ARTICLE
                VI ADDITIONAL AGREEMENTS

            	 	
              40

            
	
              Section
                6.1

            	 	
              Public
                Disclosure

            	 	
              40

            

    

     

    
      
        
        

      

      
        ii

        
          

        

      

      
        
        

      

    

     

    
      	
              Section
                6.2

            	 	
              Consents;
                Cooperation

            	 	
              40

            
	
              Section
                6.3

            	 	
              Legal
                Requirements

            	 	
              40

            
	
              Section
                6.4

            	 	
              Best
                Efforts and Further Assurances

            	 	
              41

            
	
              Section
                6.5

            	 	
              Termination
                of Plans

            	 	
              41

            
	
              Section
                6.6

            	 	
              Tax
                Certificate

            	 	
              41

            
	
              Section
                6.7

            	 	
              Withholding

            	 	
              41

            
	
              Section
                6.8

            	 	
              Payment
                of Certain Indebtedness

            	 	
              42

            
	
              Section
                6.9

            	 	
              Company
                Disclosure Schedule

            	 	
              42

            
	 	 	 	 	
               

            
	
              ARTICLE
                VII CONDITIONS TO THE CLOSING

            	 	
              42

            
	
              Section
                7.1

            	 	
              Conditions
                to Obligations of Each Party to Effect the Merger

            	 	
              42

            
	
              Section
                7.2

            	 	
              Additional
                Conditions to Obligations of the Company

            	 	
              43

            
	
              Section
                7.3

            	 	
              Additional
                Conditions to the Obligations of Parent and Merger Sub

            	 	
              43

            
	
              Section
                7.4

            	 	
              Frustration
                of Conditions

            	 	
              45

            
	 	 	 	 	
               

            
	
              ARTICLE
                VIII TERMINATION, AMENDMENT AND WAIVER

            	 	
              46

            
	
              Section
                8.1

            	 	
              Termination

            	 	
              46

            
	
              Section
                8.2

            	 	
              Effect
                of Termination

            	 	
              47

            
	
              Section
                8.3

            	 	
              Expenses

            	 	
              47

            
	
              Section
                8.4

            	 	
              Amendment

            	 	
              47

            
	
              Section
                8.5

            	 	
              Extension;
                Waiver

            	 	
              47

            
	 	 	 	 	
               

            
	
              ARTICLE
                IX INDEMNIFICATION

            	 	
              48

            
	
              Section
                9.1

            	 	
              Indemnification

            	 	
              48

            
	
              Section
                9.2

            	 	
              Claims;
                Resolution of Conflicts; Arbitration

            	 	
              49

            
	
              Section
                9.3

            	 	
              Third-Party
                Claims

            	 	
              50

            
	
              Section
                9.4

            	 	
              No
                Right of Contribution

            	 	
              50

            
	 	 	 	 	
               

            
	
              ARTICLE
                X GENERAL PROVISIONS

            	 	
              51

            
	
              Section
                10.1

            	 	
              Survival

            	 	
              51

            
	
              Section
                10.2

            	 	
              Notices

            	 	
              51

            
	
              Section
                10.3

            	 	
              Interpretation

            	 	
              52

            
	
              Section
                10.4

            	 	
              Counterparts

            	 	
              53

            
	
              Section
                10.5

            	 	
              Entire
                Agreement; Nonassignability; Parties in Interest

            	 	
              53

            
	
              Section
                10.6

            	 	
              Severability

            	 	
              53

            
	
              Section
                10.7

            	 	
              Governing
                Law

            	 	
              53

            
	
              Section
                10.8

            	 	
              Rules
                of Construction

            	 	
              54

            

    

     

    
      
        
        

      

      
        iii

        
          

        

      

      
        
        

      

    

     

    
      	
              Section
                10.9

            	 	
              Specific
                Performance

            	 	
              54

            
	
              Section
                10.10

            	 	
              Descriptive
                Headings

            	 	
              54

            
	
              Section
                10.11

            	 	
              Force
                Majeure

            	 	
              54

            
	
              Section
                10.12

            	 	
              Attorneys’
                Fees

            	 	
              54

            

    

     

    EXHIBITS
      

    

    
      	
              Exhibit
                A

            	 	
              Form
                of Agreement of Merger

            
	
              Exhibit
                B

            	 	
              Form
                of Articles of Incorporation of the Surviving
                Corporation

            
	
              Exhibit
                C

            	 	
              Form
                of Bylaws of the Surviving Corporation

            
	
              Exhibit
                D

            	 	
              Form
                of Company Counsel Legal Opinion

            
	
              Exhibit
                E

            	 	
              Form
                of Non-Compete Agreement

            
	
              Exhibit
                F

            	 	
              Form
                of Consulting Agreement

            
	
              Exhibit
                G

            	 	
              Form
                of Registration Rights Agreement

            

    

     

    COMPANY
      DISCLOSURE SCHEDULES

     

    
      
        
        

      

      
        iv

        
          

        

      

      
        
        

      

    

     

    AGREEMENT
      AND PLAN OF MERGER 

     

    This
      AGREEMENT AND PLAN OF MERGER (this “Agreement”),
      dated
      as of December 21, 2006, by and among U.S. Dry Cleaning Corporation, a
      Delaware corporation (“Parent”),
      Cleaners Club Acquisition Sub, Inc., a California corporation and a wholly
      owned
      subsidiary of Parent (“Merger
      Sub”),
      Cleaners Club, Inc., a California corporation (the “Company”),
      and,
      solely for the purposes of ARTICLE
      IX
      and
ARTICLE
      X
      of this
      Agreement, Riaz Chauthani, the sole shareholder of the Company (“Sole
      Shareholder”).

     

    RECITALS

     

    WHEREAS,
      the Board of Directors of each of Parent, Merger Sub and the Company has
      adopted, and deems it advisable and in the best interests of its respective
      shareholders to consummate, the merger (the “Merger”)
      of the
      Company with and into Merger Sub, upon the terms and subject to the conditions
      set forth herein; and

     

    WHEREAS,
      the Board of Directors of each of Parent, Merger Sub and the Company has
      unanimously adopted this Agreement and the transactions contemplated hereby,
      including the Merger, in accordance with the provisions of the General
      Corporation Law of the State of California (“California
      Law”)
      and
      upon the terms and subject to the conditions set forth herein; and

     

    WHEREAS,
      the Board of Directors of the Company has unanimously determined that the
      consideration to be paid to the Sole Shareholder is fair to the Sole Shareholder
      and has resolved to recommend to the Sole Shareholder the approval of this
      Agreement and the Merger and the other transactions contemplated hereby upon
      the
      terms and subject to the conditions set forth herein; and

     

    WHEREAS,
      concurrently with the execution of this Agreement, and as a condition and
      inducement to Parent’s willingness to enter into this Agreement, the Sole
      Shareholder has approved this Agreement, the Agreement of Merger, the Merger
      and
      the other transactions contemplated hereby in accordance with California Law;
      and

     

    WHEREAS,
      the sole shareholder of Merger Sub has approved this Agreement, the Agreement
      of
      Merger and the Merger and the other transactions contemplated hereby in
      accordance with the provisions of California Law.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    NOW,
      THEREFORE, in consideration of the covenants and representations set forth
      herein, and for other good and valuable consideration, the parties hereto agree
      as follows:

     

    ARTICLE
      I

     

    DEFINITIONS

     

    Section
      1.1  Defined
      Terms 

     

    As
      used
      herein, the terms below shall have the following meanings. Any of such terms,
      unless the context otherwise requires, may be used in the singular or plural,
      depending upon the reference.

     

    “401(k)
      Plan”
has
      the
      meaning set forth in Section
      6.5.

     

    “Acquisition
      Transaction”
means
      any transaction or series of related transactions involving: (i) the sale,
      license, disposition or acquisition of all or a material portion of the business
      or assets of the Company; (ii) the sale, issuance, grant, disposition or
      acquisition of (A) the Company Common Stock or other equity security of the
      Company, (B) any option, call, warrant or right (whether or not immediately
      exercisable) to acquire any Company Common Stock or other equity security of
      the
      Company, or (C) any security, instrument or obligation that is or may
      become convertible into or exchangeable for any Company Common Stock or other
      equity security of the Company; or (iii) any merger, consolidation,
      business combination, tender offer, share exchange, reorganization or similar
      transaction involving the Company; provided,
      however,
      the
      Merger and the other transactions contemplated by this Agreement will not be
      deemed an Acquisition Transaction in any case.

     

    “Agreement”
has
      the
      meaning set forth in the preamble.

     

    “Agreement
      of Merger”
has
      the
      meaning set forth in Section
      2.3.

     

    “Annual
      Financial Statements”
means
      the audited balance sheet of the Company at December 31, 2005 and December
      31,
      2006, together with the related statements of income, shareholders’ equity and
      cash flows, including the notes thereto.

     

    “Audit”
means
      any audit, assessment of Taxes, other examination by any Tax Authority, or
      any
      administrative or judicial proceeding or appeal of such proceeding relating
      to
      Taxes.

     

    “Business
      Day”
means
      any day that is not a Saturday, Sunday, or other day on which banks are required
      or authorized by Law to be closed in California.

     

    “California
      Law”
has
      the
      meaning set forth in the recitals.

     

    “Closing”
has
      the
      meaning set forth in Section
      2.2.

     

    “Closing
      Balance Sheet”
means
      the unaudited balance sheet of the Company as at the close of business on the
      day prior to the Closing Date, including the notes thereto.

     

    “Closing
      Date”
has
      the
      meaning set forth in Section
      2.2.

     

    “Closing
      Statement”
has
      the
      meaning set forth in Section
      2.12(a).

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    “COBRA”
has
      the
      meaning set forth in Section
      3.17(d).

     

    “Code”
      means
      the
      Internal Revenue Code of 1986, as amended, and the rules and regulations
      promulgated thereunder.

     

    “Company”
has
      the
      meaning set forth in the preamble.

     

    “Company
      Articles”
means
      the Articles of Incorporation of the Company as in effect on the date
      hereof.

     

    “Company
      Authorization”
has
      the
      meaning set forth in Section
      3.10.

     

    “Company
      Board”
has
      the
      meaning set forth in Section
      2.6.

     

    “Company
      Bylaws”
means
      the Bylaws of the Company as in effect on the date hereof.

     

    “Company
      Certificate”
means
      a
      certificate or certificates representing shares of Company Common
      Stock.

     

    “Company Common
      Stock”
means
      all shares of common stock, par value $1.00 per share, of the
      Company.

     

    “Company
      Debt”
means
      all Indebtedness of the Company.

     

    “Company
      Disclosure Schedule”
      has
      the
      meaning set forth in ARTICLE III.

     

    “Company
      Employee Plans”
has
      the
      meaning set forth in Section 3.16(a).

     

    “Company
      Financial Statements”
means
      the Annual Financial Statements of the Company, the Interim Financial Statement
      and the Monthly Financial Statements.

     

    “Company
      Intellectual Property”
means
      the Intellectual Property used in or necessary for the conduct of the business
      of the Company as currently conducted and as currently proposed to be
      conducted.

     

    “Company
      Owned Intellectual Property”
means
      any Company Intellectual Property (including all of the intellectual property
      set forth in Section 3.13(b)
      of the
      Company Disclosure Schedule) which the Company represents herein to Parent
      is
      owned by the Company.

     

    “Company
      Subsidiary”
means
      any corporation, association, business entity, partnership, limited liability
      company or other entity of which the Company, either alone or together with
      one
      or more such entities, (i) directly or indirectly owns or controls securities
      or
      other interests representing more than fifty (50%) of the voting power of such
      entity, or (ii) is entitled, by contract or otherwise, to elect, appoint or
      designate directors constituting a majority of the members of such entity’s
      board of directors or other governing body.

     

    “Confidential
      Information”
has
      the
      meaning set forth in Section
      3.13(f).

     

    “Damages”
has
      the
      meaning set forth in Section
      9.1(a).

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    “Dollars”
or
      “$”
means
      the lawful currency of the United States of America.

     

    “Effective
      Time”
has
      the
      meaning set forth in Section
      2.3.

     

    “Environmental
      Claim”
has
      the
      meaning set forth in Section
      3.14(f)(1).

     

    “Environmental
      Laws”
has
      the
      meaning set forth in Section
      3.14(f)(2).

     

    “ERISA”
has
      the
      meaning set forth in Section
      3.16(a).

     

    “ERISA
      Affiliate”
has
      the
      meaning set forth in Section
      3.16(a).

     

    “Exchange
      Ratio”
has
      the
      meaning set forth in Section
      2.7(a).

     

    “Final
      Date”
has
      the
      meaning set forth in Section
      8.1(b).

     

    “Financial
      Statements”
means
      the Annual Financial Statements, the Interim Financial Statements and the
      Monthly Financial Statements.

     

    “GAAP”
means
      the United States generally accepted accounting principles.

     

    “Governmental
      Entity”
means
      any arbitrator, court, agency, commission, tribunal, nation, government, any
      state or other political subdivision thereof and any entity exercising or
      entitled to exercise executive, legislative, judicial, regulatory, taxing or
      administrative power or authority of any nature whatsoever, in each case,
      whether foreign or domestic.

     

    “Indebtedness”
means
      (i) all indebtedness for borrowed money or for the deferred purchase price
      of property or services (other than current liabilities incurred in the ordinary
      course of business and payable in accordance with customary practices),
      (ii) any other indebtedness that is evidenced by a note, bond, debenture or
      similar instrument, (iii) all obligations under financing leases,
      (iv) all obligations in respect of acceptances issued or created,
      (v) all liabilities secured by any Lien on any property and (vi) all
      guarantee obligations.

     

    “Indemnitee”
has
      the
      meaning set forth in Section 9.2(a).

     

    “Indemnitor”
has
      the
      meaning set forth in Section 9.2(a).

     

    “Intellectual
      Property”
means
      all patents, trademarks, trade names, service marks, Internet domain names,
      copyrights, and any applications therefor, trade secrets, know-how, technology,
      inventions (whether patentable or unpatentable and whether or not reduced to
      practice), algorithms, processes, computer software programs or applications
      (in
      source code and/or object code form), databases, schematics, designs and
      tangible or intangible proprietary information or material.

     

    “Interim
      Balance Sheet”
means
      the unaudited balance sheet of the Company as at September 30, 2006,
      including the notes thereto. 

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    “Interim
      Financial Statements”
means
      the Interim Balance Sheet and the related statements of income, shareholders’
equity and cash flows of the Company for the nine (9) months ended September
      30,
      2006, including the notes thereto.

     

    “IRS”
means
      the Internal Revenue Service.

     

    “Knowledge”
means
      (i) with respect to any natural person, the actual knowledge of such person
      after due and diligent inquiry, or (ii) with respect to the Company, Parent
      or
      Merger Sub the actual knowledge of such party’s directors and officers or other
      management-level personnel having responsibility for the matters represented
      after due and diligent inquiry. Notwithstanding the foregoing, the Company
      shall
      not be deemed to have Knowledge of a particular fact if and only if, Brian
      Walker (a) actually knows of such fact or event, (b) fails to discose such
      fact
      or event on the Company Disclosure Schedule, if required, and (c) no other
      director, officer or other management level personnel having responsibility
      for
      the matters represented has actual knowledge of such fact or event after due
      and
      diligent inquiry.

     

    “Law”
or
      “Laws”
has
      the
      meaning set forth in Section
      3.21.

     

    “Lease
      Agreements”
has
      the
      meaning set forth in Section
      3.19.

     

    “Lien”
means,
      with respect to any asset (including any security), any mortgage, lien, pledge,
      charge, security interest, encumbrance or restriction of any kind in respect
      of
      such asset; provided,
      however,
      that
      the term “Lien” shall not include (i) statutory liens for Taxes, which are not
      yet due and payable or are being contested in good faith by appropriate
      proceedings and disclosed in Section
      3.16
      of the
      Company Disclosure Schedule, (ii) statutory or common law liens to secure
      landlords, lessors or renters under leases or rental agreements confined to
      the
      premises rented, (iii) deposits or pledges made in connection with, or to secure
      payment of, workers’ compensation, unemployment insurance, old age pension or
      other social security programs mandated under applicable Laws, (iv) statutory
      or
      common law liens in favor of carriers, warehousemen, mechanics to secure claims
      for labor, materials or supplies incurred in the ordinary course of business
      and
      (x) not yet delinquent or (y) being contested in good faith and other like
      liens, and (v) restrictions on transfer of securities imposed by applicable
      state and federal securities laws.

     

    “Material
      Adverse Effect”
means,
      with respect to any entity or group of entities, any event, change or effect
      that (x) is, or is reasonably expected to be, materially adverse to the
      condition (financial or otherwise), properties, assets (including intangible
      assets), prospects, liabilities, business, operations or results of operations
      of such entity and its subsidiaries, taken as a whole; or (y) would prevent
      or
      materially alter or delay any of the transactions contemplated by this
      Agreement.

     

    “Material
      Contracts”
has
      the
      meaning set forth in Section
      3.28.

     

    “Materials
      of Environmental Concern”
has
      the
      meaning set forth in Section 3.14(f)(3).

     

    “Merger”
has
      the
      meaning set forth in the recitals.

     

    “Merger
      Sub”
has
      the
      meaning set forth in the preamble.

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    “Merger
      Shares”
has
      the
      meaning set forth in Section
      2.7(a).

     

    “Monthly
      Financial Statements”
means
      the unaudited balance sheets of the Company for each fiscal month completed
      prior to the Closing Date, beginning with the month ended September 30,
      2006 and the related statements of income, shareholders’ equity and cash flows
      for the monthly periods then ended.

     

    “Net
      Working Capital”
means
      the (x) cash less (y) total current accounts payable based on Company’s existing
      terms, in each case, as of the close of business on the day before the Closing
      Date.

     

    “Officer’s
      Certificate”
has
      the
      meaning set forth in Section 9.2(a).

     

    “Parent”
has
      the
      meaning set forth in the preamble.

     

    “Parent Common
      Stock”
means
      all shares of common stock, par value $0.001
      per
      share, of Parent.

     

    “Purchaser
      Damages”
has
      the
      meaning set forth in Section
      9.1(a).

     

    “Representatives”
means
      officers, directors, employees, attorneys, accountants, advisors, agents,
      distributors, licensees, shareholders, subsidiaries and lenders of a
      party.

     

    “Secretary
      of State”
has
      the
      meaning set forth in Section
      2.3.

     

    “Seller
      Damages”
has
      the
      meaning set forth in Section
      9.1(b).

     

    “Sole
      Shareholder”
      has
      the
      meaning set forth in the preamble.

     

    “Superior
      Offer”
means
      an unsolicited, bona fide written offer made by a third party to acquire,
      directly or indirectly, pursuant to a tender offer, exchange offer, merger,
      consolidation or other business combination, all or substantially all of the
      assets of the Company or a majority of the total outstanding voting securities
      of the Company, on terms that the Company Board has in good faith concluded
      (after the receipt of advice of its outside legal counsel and its financial
      adviser), taking into account, among other things, all legal, financial,
      regulatory and other aspects of the offer and the person making the offer,
      including the likelihood of consummation, to be more favorable, from a financial
      point of view, to the Sole Shareholder than the terms of the
      Merger.

     

    “Store
      EBITDA”
means
      the Company’s EBITDA less the Company headquarters general and administrative
      expenses calculated in accordance with GAAP and consistent with industry
      standards.

     

    “Surviving
      Corporation”
has
      the
      meaning set forth in Section
      2.1.

     

    “Tax”
or
      “Taxes”
means
      all United States federal, state, local and foreign taxes, and other assessments
      of a similar nature including, without limitation: (i) taxes or other charges
      on
      or with respect to income, franchises, windfall or other profits, gross
      receipts, profits, sales, use, capital stock, payroll, employment, social
      security, workers’ compensation, unemployment compensation or net worth;
      (ii) taxes or other charges in the nature of excise, withholding,
ad valorem,
      stamp,
      transfer, value added or gains taxes; (iii) license, registration and
      documentation fees; and (iv) customs duties, tariffs and similar charges,
      in each case, whether imposed directly or through withholding, and including
      any
      interest, additions to tax, or penalties applicable thereto.

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

     

    “Tax
      Authority”
means
      the IRS and any other national, regional, state, municipal, foreign or other
      governmental or regulatory authority or administrative body responsible for
      the
      administration of any Taxes.

     

    “Tax
      Return”
means
      all United States federal, state, local and foreign tax returns, declarations,
      statements, reports, schedules, forms and information returns or other documents
      and any amendments thereto required to be filed with a Tax
      Authority.

     

    “Third
      Party Claim”
has
      the
      meaning set forth in Section
      9.3.

     

    “Transaction
      Expenses”
has
      the
      meaning set forth in Section
      8.3.

     

    “Treasury
      Regulations”
has
      the
      meaning set forth in Section
      3.17(b).

     

    “Voting
      Debt”
has
      the
      meaning set forth in Section
      3.3(b).

     

    “WARN
      Act”
means
      the Worker Adjustment and Retraining Notification Act.

     

    ARTICLE
      II

     

    THE
      MERGER

     

    Section
      2.1  The
      Merger

     

    At
      the
      Effective Time and subject to and upon the terms and conditions of this
      Agreement and the applicable provisions of California Law, the Company shall
      be
      merged with and into Merger Sub, the separate corporate existence of the Company
      shall cease and Merger Sub shall continue as the surviving corporation and
      a
      wholly owned subsidiary of Parent. Merger Sub, as the surviving corporation
      after the Merger, is hereinafter referred to as the “Surviving
      Corporation.”
      

     

    Section
      2.2  Closing

     

    The
      closing of the Merger (the “Closing”)
      shall
      take place at 10:00 a.m. Pacific time, on a date to be specified by the parties,
      which shall be no later than three (3) Business Days after satisfaction or
      waiver of all of the conditions set forth in ARTICLE VII
      of this
      Agreement (other than conditions which can be satisfied only by the delivery
      of
      certificates or other documents at the Closing) (the “Closing
      Date”)
      at the
      offices of Greenberg Traurig, LLP, located at 650 Town Center Drive, Suite
      1700,
      Costa Mesa, California, unless another time, date or place is agreed to by
      the
      parties hereto. Each of the parties hereto acknowledges that it is their
      intention that the Closing occur (subject to the terms and conditions of this
      Agreement) as soon as practicable following the satisfaction or waiver of the
      conditions set forth in ARTICLE VII.

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

     

    Section
      2.3  Effective
      Time

     

    Upon
      the
      terms and subject to the conditions set forth in this Agreement, at the Closing,
      the parties hereto shall file the agreement of merger in the form attached
      hereto as Exhibit
      A
      (the
“Agreement
      of Merger”)
      and
      the officers’ certificates of the Company and Merger Sub, in each case, in such
      forms as are required by California Law with the Secretary of State of the
      State
      of California (the “Secretary
      of State”),
      whereupon the Company shall be merged with and into Merger Sub, which shall
      survive the Merger, pursuant to the provisions of California Law. The parties
      hereto shall make all other filings, recordings or publications required by
      California Law in connection with the Merger. The Merger shall become effective
      upon the filing of the Agreement of Merger with the Secretary of State pursuant
      to California Law or at such later time as shall be agreed upon by the parties
      and specified in the Agreement of Merger (the “Effective
      Time”).

     

    Section
      2.4  Effect
      of the Merger

     

    From
      and
      after the Effective Time, the effect of the Merger shall be as provided in
      this
      Agreement and the applicable provisions of California Law.

     

    Section
      2.5  Articles
      of Incorporation; Bylaws

     

    (a)  Immediately
      after the Effective Time, the articles of incorporation of the Surviving
      Corporation shall be the articles of incorporation of Merger Sub as in effect
      immediately prior to the Effective Time and as set forth in Exhibit
      B
      to this
      Agreement, and such articles of incorporation shall be the articles of
      incorporation of the Surviving Corporation until thereafter amended as provided
      by Law and such articles of incorporation.

     

    (b)  Immediately
      after the Effective Time, the bylaws of the Surviving Corporation shall be
      the
      bylaws of Merger Sub as in effect immediately prior to the Effective Time and
      as
      set forth in Exhibit
      C
      to this
      Agreement, and such bylaws shall be the bylaws of the Surviving Corporation
      until thereafter amended as provided by Law and such bylaws.

     

    Section
      2.6  Directors;
      Officers

     

    (a)  Immediately
      after the Effective Time, the directors of Merger Sub at the Effective Time
      shall be the directors of the Surviving Corporation until the earlier of their
      resignation or removal or until their respective successors are duly elected
      and
      qualified, as the case may be. In furtherance thereof, the Company shall secure,
      effective at the Effective Time, resignations of all of its incumbent directors
      (the “Company
      Board”),
      and
      the Company shall take all actions available to the Company to cause the
      directors of Merger Sub to be so elected or appointed at the Effective Time.
      

     

    (b)  Immediately
      after the Effective Time, the officers of Merger Sub at the Effective Time
      shall
      be the officers of the Surviving Corporation until the earlier of their
      resignation or removal or until their respective successors are duly
      appointed.

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

    Section
      2.7  Effect
      on Capital Stock

     

    (a)  Conversion
      of Stock.
      Each
      share of Company Common Stock issued and outstanding immediately prior to the
      Effective Time, other than shares of Company Common Stock to be canceled
      pursuant to Section
      2.7(c),
      shall
      be converted into the right to receive 780 (the “Exchange Ratio”) fully paid and
      nonassessable shares of Parent Common Stock (collectively, the “Merger
      Shares”);
      provided, that in no event shall the number of shares of Parent Common Stock
      issuable in accordance with this section exceed 780,000 shares.

     

    (b)  Capital
      Stock of Merger Sub.
      As of
      the Effective Time, by virtue of the Merger and without any action on the part
      of any of the parties hereto or any holder of securities of Merger Sub, each
      share of common stock, par value $0.01 per share, of Merger Sub issued and
      outstanding immediately prior to the Effective Time shall be converted into
      and
      exchanged for one validly issued, fully paid and nonassessable share of common
      stock of the Surviving Corporation. Each stock certificate of Merger Sub
      evidencing ownership of any such shares of common stock shall evidence ownership
      of such shares of capital stock of the Surviving Corporation.

     

    (c)  Cancellation
      of Company Common Stock Owned by Parent.
      As of
      the Effective Time, by virtue of the Merger and without any action on the part
      of any of the parties hereto, all shares of Company Common Stock that are owned
      by Parent or by any direct or indirect wholly owned subsidiary of Parent
      immediately prior to the Effective Time shall be canceled and extinguished
      without any conversion thereof.

     

    Section
      2.8  Exchange
      of Certificates

     

    At
      the
      Closing, the Sole Shareholder shall surrender the Company Certificate(s) held
      by
      him, together with a duly completed and validly executed letter of transmittal
      in such form as Parent may reasonably request, and, as soon as practicable
      following the Closing, Parent shall deliver the Merger Shares to the Sole
      Shareholder, and the Company Certificate so surrendered shall forthwith be
      canceled. 

     

    Section
      2.9  No
      Further Ownership Rights in Company Common Stock

     

    At
      the
      Effective Time, the stock transfer books of the Company shall be closed and
      thereafter there shall be no further registration of transfers of any shares
      of
      Company Common Stock on the records of the Company.

     

    Section
      2.10  Lost,
      Stolen or Destroyed Certificates

     

    In
      the
      event that any Company Certificates shall have been lost, stolen or destroyed,
      Parent shall cause to be paid in exchange for such lost, stolen or destroyed
      Company Certificates, upon the making of an affidavit of that fact by the Sole
      Shareholder, such payment of Parent Common Stock as may be required pursuant
      to
      this ARTICLE
      II;
      provided,
      however,
      that
      Parent may, in its discretion and as a condition precedent to the issuance
      thereof, require the Sole Shareholder to deliver a bond in such sum as it may
      reasonably direct as indemnity against any claim that may be made against Parent
      or the Surviving Corporation with respect to the Company Certificates alleged
      to
      have been lost, stolen or destroyed.

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    Section
      2.11  Taking
      of Necessary Action; Further Action

     

    If,
      at
      any time after the Effective Time, any further action is necessary or desirable
      to carry out the purposes of this Agreement and to vest the Surviving
      Corporation with full right, title and possession to all assets, property,
      rights, privileges, powers and franchises of the Company, the officers and
      directors of Parent, the Company and the Surviving Corporation are fully
      authorized in the name of their respective corporations to take, and will take,
      all such lawful and necessary action, so long as such action is not inconsistent
      with this Agreement.

     

    Section
      2.12  Adjustments

     

    (a)  On
      the
      day prior to the Closing Date, the Company shall deliver to Parent a statement
      (the “Closing
      Statement”)
      in
      form and substance reasonably satisfactory to Parent setting forth the Net
      Working Capital, Store EBITDA, Company Revenues and Company Debt as of the
      Closing Date. No later than two (2) Business Days prior to Closing, the Company
      shall deliver to Parent a draft Closing Statement setting forth the Company’s
      best estimate of the Net Working Capital, Store EBITDA, Company Revenues and
      Company Debt as of the Closing Date.

     

    (b)  In
      the
      event the Net Working Capital as set forth in the Closing Statement is less
      than
      One Dollar ($1.00), the Sole Shareholder shall pay to Parent an amount equal
      to
      the amount by which Net Working Capital Amount is less than One Dollar
      ($1.00).

     

    (c)  In
      the
      event the Company Debt as set forth in the Closing Statement is greater than
      Eight-Hundred Thousand Dollars ($800,000), the Sole Shareholder shall pay to
      Parent an amount equal to the amount by which the Company Debt is greater than
      Eight-Hundred Thousand Dollars ($800,000).

     

    ARTICLE
      III

     

    REPRESENTATIONS
      AND WARRANTIES OF COMPANY

     

    Any
      reference to any event, change, condition or effect being “material” with
      respect to any entity or group of entities means any event, change, condition
      or
      effect which (i) is or would reasonably be expected to be material to the
      condition (financial or otherwise), properties, assets (including intangible
      assets), prospects, liabilities, business, operations or results of operations
      of such entity or group of entities, taken as a whole or (ii) would or
      would reasonably be expected to prevent or materially alter or delay any of
      the
      transactions contemplated by this Agreement. 

     

    Each
      statement contained in any certificate signed by an officer of the Company
      and
      delivered to Parent pursuant to Section 7.3(b)
      shall
      constitute a representation and warranty hereunder by the Company to Parent
      as
      to the matters covered thereby.

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    Except
      as
      disclosed in that section of the document to be delivered by the Company to
      Parent after the execution and delivery of this Agreement (the “Company
      Disclosure Schedule”)
      corresponding to the Section of this Agreement to which the following
      representations or warranties pertain, the Company represents and warrants
      to
      Parent as of the Closing Date as follows: 

     

    Section
      3.1  Organization,
      Standing and Power

     

    The
      Company is a corporation duly organized, validly existing and in good standing
      under the Laws of the State of California. The Company has the requisite
      corporate power to own its properties and to carry on its business as now being
      conducted and as currently proposed to be conducted and is duly qualified to
      do
      business and is in good standing in each jurisdiction in which the failure
      to be
      so qualified and in good standing would or would reasonably be expected to
      have
      a Material Adverse Effect on the Company. The Company has delivered a true
      and
      correct copy of the Company Articles and Company Bylaws, each as amended to
      date
      and as currently in effect, to Parent. The Company is not in violation of any
      of
      the provisions of the Company Articles or Company Bylaws. 

     

    Section
      3.2  Subsidiaries

     

    The
      Company does not directly or indirectly own any equity or similar interest
      in,
      or any interest convertible or exchangeable or exercisable for any equity or
      similar interest in, any corporation, association, partnership, joint venture,
      limited liability company, business association or other entity.

     

    Section
      3.3  Capitalization;
      Title to the Shares

     

    (a)  The
      authorized capital stock
      of the
      Company consists of (i) 1,000,000 shares of Common Stock. Since inception,
      the Company has never authorized the issuance of any preferred stock, option
      plan, warrants or other securities exercisable or convertible into capital
      stock
      of the Company. As of the date hereof, 1,000 shares of Company Common Stock
      are
      issued and outstanding and all outstanding shares of Company Common Stock are
      issued to the Sole Shareholder. All of the outstanding shares of Company Common
      Stock are duly authorized, validly issued, fully paid and
      non-assessable.

     

    (b)  Except
      as
      set forth above, as of the date hereof and, as of the Closing (i) there are
      no shares of capital stock or any other securities of the Company authorized,
      issued or outstanding; (ii) there are no existing options, warrants, calls,
      preemptive rights, Indebtedness having general voting rights or debt convertible
      into securities having such rights (“Voting
      Debt”)
      or
      subscriptions or other rights, agreements, arrangements or commitments of any
      character (including any shareholder rights plan or similar plan commonly
      referred to as a “poison pill”), relating to the issued or unissued capital
      stock of the Company obligating the Company to issue, transfer or sell or cause
      to be issued, transferred or sold any shares of capital stock or Voting Debt
      of,
      or other equity interest in, the Company or securities convertible into or
      exchangeable for such shares or equity interests, or obligating the Company
      to
      make any payment linked to the value of the Company Common Stock or the sale
      price of the Company, or obligating the Company to grant, extend or enter into
      any such option, warrant, call, subscription or other right, agreement,
      arrangement or commitment; and (iii) there are no outstanding contractual
      obligations of the Company to repurchase, redeem or otherwise acquire the Common
      Stock, or other capital stock of the Company or to provide funds to make any
      investment (in the form of a loan, capital contribution or otherwise) in any
      other entity.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    (c)  There
      are
      no voting trusts or other agreements or understandings to which the Company
      is a
      party with respect to the voting of the Company Common Stock.

     

    Section
      3.4  Authority

     

    The
      Company has the requisite corporate power and authority to enter into this
      Agreement and to consummate the transactions contemplated hereby. The execution
      and delivery of this Agreement and the consummation of the transactions
      contemplated hereby have been duly authorized by all necessary corporate action
      on the part of the Company. This Agreement has been duly executed and delivered
      by the Company and constitutes the valid and binding obligations of the Company
      enforceable against the Company in accordance with its terms, except to the
      extent that enforceability may be limited by the effect, if any, of any
      applicable bankruptcy, reorganization, insolvency, moratorium or other Laws
      affecting the enforcement of creditors' rights generally or any general
      principles of equity, regardless of whether such enforceability is considered
      in
      a proceeding at law or in equity. Neither the execution and delivery by the
      Company of this Agreement nor the consummation of the transactions contemplated
      hereby will conflict with, or result in any breach or violation of, or default
      under (with or without notice or lapse of time, or both), or give rise to a
      right of termination, cancellation or acceleration of any obligation or loss
      of
      any benefit under (i) any provision of the Company Articles or the Company
      Bylaws, (ii) any contract, agreement, license or understanding to which the
      Company is a party or to which any of its properties or assets are bound or
      (iii) any Law applicable to the Company, or any of its properties or
      assets, except, in the case of clauses (ii) and (iii) above, any such conflicts,
      breaches, violations, defaults, rights or losses which could not, individually
      or in the aggregate, have a Material Adverse Effect on the Company. No notice
      to, filing with, and no permit, authorization, consent or approval of, any
      Governmental Entity, or any other person is necessary for the execution and
      delivery of this Agreement by the Company or, except for the filing and
      recordation of the Agreement of Merger in accordance with the requirements
      of
      California Law, the consummation of the transactions contemplated by this
      Agreement.

     

    Section
      3.5  Financial
      Statements

     

    Attached
      hereto as Section
      3.5
      of the
      Company Disclosure Schedule are true and correct copies of the Financial
      Statements. The Financial Statements have been prepared in accordance with
      the
      Company’s past practice and fairly present in all material respects the
      financial position as at such dates and the results of operations and cash
      flows
      for such periods of the Company. As of the Closing, the Closing Balance Sheet
      has been prepared in accordance with the Company’s past practice and fairly
      presents in all material respects the financial position of the Company as
      at
      the day before the Closing Date.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    Section
      3.6  Absence
      of Certain Changes

     

    Except
      as
      and to the extent set forth in the Financial Statements, from the date of the
      Interim Balance Sheet to the date of this Agreement, the Company has conducted
      its business in the ordinary course consistent with past practice and has not:
      

     

    (a)  suffered
      any Material Adverse Effect;

     

    (b)  incurred
      any liabilities or obligations (absolute, accrued, contingent or otherwise),
      except for non-material items incurred in the ordinary course of business,
      consistent with past practice or Transaction Expenses, that have been paid
      by
      the Company, or increased, or experienced any change in any assumptions
      underlying or methods of calculating, any bad debt, contingency or other
      reserves;

     

    (c)  paid,
      discharged or satisfied any claims, liabilities or obligations (absolute,
      accrued, contingent or otherwise) other than the payment, discharge or
      satisfaction in the ordinary course of business, consistent with past practice,
      of liabilities and obligations reflected or reserved against in the Interim
      Balance Sheet or incurred in the ordinary course of business, consistent with
      past practice;

     

    (d)  initiated
      or settled any litigation;

     

    (e)  permitted
      or allowed any of its properties or assets (real, personal or mixed, tangible
      or
      intangible) to be subjected to any Liens;

     

    (f)  written
      down the value of any inventory or written off as uncollectible any notes or
      accounts receivable, except for immaterial write-downs and write-offs in the
      ordinary course of business, consistent with past practice;

     

    (g)  cancelled
      any debts or waived any claims or rights of substantial value;

     

    (h)  sold,
      transferred, or otherwise disposed of any of its properties or assets (real,
      personal or mixed, tangible or intangible), except in the ordinary course of
      business, consistent with past practice;

     

    (i)  granted
      or acquired, agreed to grant to or acquire from any person or entity any
      licenses of Intellectual Property, abandoned, disposed of or permitted to lapse
      any rights to the use of any Intellectual Property, or disposed of or disclosed
      to any person other than representatives of Parent any trade secret, formula,
      process or know-how or other Intellectual Property not theretofore a matter
      of
      public knowledge;

     

    (j)  increased
      in any manner (including acceleration or funding provisions) the compensation
      or
      benefits of any current or former director, officer, employee or consultant
      of
      the Company (including any such increase pursuant to any bonus, pension, profit
      sharing, incentive compensation or other plan, policy, program, agreement,
      arrangement or commitment) or increased in any manner (including acceleration
      or
      funding provisions) the compensation or benefits payable or to become payable
      to
      any current or former director, officer, employee or consultant of the Company,
      except, in the case of employees other than officers of the Company, for such
      increases in compensation or benefits made in the ordinary course of business,
      consistent with past practice;

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

    (k)  adopted,
      entered into or amended any bonus, pension, profit sharing, incentive
      compensation, employment, consulting, severance, termination, deferred
      compensation or other plan, program, policy, agreement, arrangement or
      commitment, other than as required pursuant to applicable Law, or made any
      change in any change in control, severance or termination plan, policy,
      practice, program, agreement or arrangement;

     

    (l)  entered
      into or amended any Material Contract;

     

    (m)  entered
      into any operating lease or operating license for property or
      assets;

     

    (n)  made
      capital expenditures or commitments or acquired any property, plant and
      equipment that would be treated as a capital expenditure in accordance with
      GAAP
      consistently applied for a cost in excess of an aggregate amount of Ten Thousand
      Dollars ($10,000);

     

    (o)  declared,
      paid or set aside for payment any dividend or other distribution in respect
      of
      its capital stock or redeemed, purchased or otherwise acquired, directly or
      indirectly, any shares of capital stock or other securities of the
      Company;

     

    (p)  made
      or
      changed an election in respect of Taxes, adopted or changed any accounting
      method in respect of Taxes, failed to file, on a timely basis, with the
      appropriate Tax Authorities, all Tax Returns required to be filed for taxable
      periods ending on or before the Closing Date and due on or prior to the Closing
      Date, which such Tax Returns shall be true in all material respects, correct
      and
      complete, or failed to pay or remit, on a timely basis, any Taxes required
      to be
      paid, amended any Tax Return, entered into any closing agreement, settled or
      consented to any claim or assessment in respect of Taxes, consented to any
      extension or waiver of the statutory period of limitations applicable to any
      claim or assessment in respect of Taxes, or other made any Tax payments outside
      of the ordinary course of business;

     

    (q)  paid,
      loaned or advanced any amount to, or sold, transferred or leased any properties
      or assets (real, personal or mixed, tangible or intangible) to, or entered
      into
      any agreement or arrangement with, any of its employees, officers, directors
      or
      shareholders or any affiliate or associate of any of its employees, officers,
      directors or shareholders (except for directors' fees and compensation to
      officers at rates not inconsistent with the Company's past practice in
      connection with business related travel or other expenses incurred on behalf
      of
      the Company) and advances to employees; or 

     

    (r)  agreed,
      whether in writing or otherwise, to take any action described in this
Section 3.6.

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    Section
      3.7  Absence
      of Undisclosed Liabilities

     

    Except
      (i) as disclosed on the Interim Balance Sheet, (ii) for liabilities
      and obligations incurred in the ordinary course of business and consistent
      with
      past practice since the date of the Interim Balance Sheet, and
      (iii) Transaction Expenses that have been paid by the Company, the Company
      does not have any liabilities (whether contingent or absolute, direct or
      indirect, known or unknown to the Company or matured or unmatured or otherwise)
      that would be required by GAAP consistently applied to be reflected on a balance
      sheet of the Company (including the notes thereto). There are no off balance
      sheet arrangements to which the Company is a party or otherwise involving the
      Company. Except as set forth in Section 3.7
      of the
      Company Disclosure Schedule, the Company does not have any
      Indebtedness.

     

    Section
      3.8  Litigation

     

    There
      is
      no private or governmental action, suit, proceeding, inquiry, claim, arbitration
      or investigation pending before any agency, court or tribunal, foreign or
      domestic, or, to the Knowledge of the Company, threatened against the Company,
      any of its properties or any of its officers or directors (in their capacities
      as such), or which questions or challenges the validity of this Agreement or
      any
      of the transactions contemplated hereby; and to the Knowledge of the Company,
      there is no valid basis for any such action, suit, proceeding, claim,
      arbitration or investigation. There is no judgment, decree or order against
      the
      Company, or any of its directors or officers (in their capacities as such),
      that
      could prevent, enjoin, or materially alter or delay any of the transactions
      contemplated by this Agreement. The Company does not have any litigation pending
      against any other party.

     

    Section
      3.9  Restrictions
      on Business Activities

     

    There
      is
      no agreement, judgment, injunction, order or decree binding upon the Company
      which has or could reasonably be expected to have the effect of prohibiting
      or
      impairing any current business practice of the Company, any acquisition of
      property by the Company or the conduct of business by the Company as currently
      conducted or as currently proposed to be conducted.

     

    Section
      3.10  Governmental
      Authorization

     

    The
      Company has obtained all federal, state, county, local or foreign governmental
      consents, licenses, permits, grants, or other authorizations of a Governmental
      Entity (i) pursuant to which the Company currently operates or holds (or
      currently proposes to operate or hold) any interest in any of its properties
      or
      (ii) that is required for the operation of the business of the Company or
      the holding of any such interest ((i) and (ii) are herein collectively called
      “Company
      Authorizations”).
      The
      Company has complied in all respects with all such Company Authorizations,
      and
      all Company Authorizations are in full force and effect.

     

    Section
      3.11  Takeover
      Statutes

     

    The
      Company Board has taken all actions so that any restrictions in any “fair
      price,” “control share acquisition” or other similar Law, will not apply to
      Parent or Merger Sub with respect to the Merger, including the execution,
      delivery or performance of this Agreement and the consummation of the Merger
      and
      the other transactions contemplated hereby. 

     

    
      
        
        

      

      
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    Section
      3.12  Title
      to Property

     

    The
      Company has good and marketable title to all of its properties, interests in
      properties and assets that it purports to own (tangible and intangible),
      including all the properties and assets reflected on the Interim Balance Sheet
      or acquired after the date of the Interim Balance Sheet (except for properties,
      interests in properties and assets having an aggregate book value not in excess
      of Ten Thousand Dollars ($10,000) sold or otherwise disposed of since the date
      of the Interim Balance Sheet in the ordinary course of business, consistent
      with
      past practice), free and clear of all Liens. The property and equipment of
      the
      Company that are used in the operations of business are in good operating
      condition and repair, subject to normal wear and tear, are adequate for the
      uses
      to which they are being put and have been maintained and serviced in accordance
      with prudent practice and in material compliance with all applicable Laws.
      For
      purposes of this Section 3.12
      only,
      the terms “property” and “assets” do not include Intellectual Property.

     

    Section
      3.13  Intellectual
      Property

     

    (a)  The
      Company owns or is licensed to use all Company Intellectual Property. The
      Company Owned Intellectual Property and the conduct of the business of the
      Company has not violated, infringed or misappropriated, do not violate, infringe
      or misappropriate, and, to the Knowledge of the Company, will not violate,
      infringe or misappropriate, in the ordinary course of business as currently
      conducted and as currently proposed to be conducted, any Intellectual Property
      of a third party, any right to privacy or publicity, or any applicable Laws
      regulating unfair competition or trade practices. 

     

    (b)  Section
      3.13(b)
      of the
      Company Disclosure Schedule sets forth a complete and accurate listing of all
      patents and patent applications, all registered trademarks, service marks,
      and
      trade names and applications therefor, all registered Internet domain names
      and
      applications therefor, and all registered copyrights and copyright applications
      owned or purported to be owned by the Company, including the jurisdictions
      in
      which each such Intellectual Property right subsists, has been issued or
      registered or in which any application for such issuance and registration has
      been filed. All Company Owned Intellectual Property is solely owned by the
      Company free and clear of all Liens, and the Company is listed in the records
      of
      the appropriate United States, state or foreign agency as the sole owner of
      record for each issued patent, and each registered trademark, service mark,
      trade name, Internet domain name and copyright, and applications therefor,
      listed in Section 3.13(b)
      of the
      Company Disclosure Schedule. The Company has not received any written notice
      or
      claim challenging the Company's ownership of any of the Company Owned
      Intellectual Property or suggesting that any other person has any claim of
      legal
      beneficial ownership thereto. There are no extant forbearances to sue, consents,
      settlement agreements, judgments, orders or similar litigation-related,
inter
      partes
      or
      adversarial-related, or government-imposed obligations to which the Company
      is a
      party or is otherwise bound, that (i) restrict the rights of the Company to
      use, transfer, license or enforce any of its Intellectual Property rights;
      (ii) restrict the conduct of the business of the Company in order to
      accommodate a third party's Intellectual Property rights; or (iii) grant
      any third party any right with respect to any Company Intellectual Property
      rights.

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

     

    (c)  All
      issued patents, registered trademarks, registered copyrights, registered trade
      names, registered service marks and registered Internet domain names set forth
      in Section 3.13(b)
      of the
      Company Disclosure Schedule are valid and enforceable, have not expired or
      been
      canceled or abandoned, and are not subject to any pending or, to the Company's
      Knowledge, threatened judicial or administrative proceeding involving the
      validity, enforceability or scope thereof. To the Knowledge of the Company,
      no
      person is infringing, misappropriating or otherwise violating any Company Owned
      Intellectual Property or Intellectual Property exclusively licensed to the
      Company. The Company has not: (i) received any written notice of any claim
      of infringement or misappropriation by the Company of any Intellectual Property
      right of any person; (ii) been sued in any suit, action or proceeding which
      involves a claim of infringement or misappropriation by the Company of any
      Intellectual Property right of any person; (iii) brought any action, suit
      or proceeding for infringement or misappropriation of Intellectual Property
      or
      breach of any license or agreement involving Intellectual Property against
      any
      person; (iv) delegated, assigned or otherwise transferred any right to
      bring a claim or suit against any person for infringement or misappropriation
      of
      Company Intellectual Property; or (v) entered into any agreement to
      indemnify any person against any charge of infringement or misappropriation
      of
      any Intellectual Property in response to an actual or suspected threat of
      infringement or misappropriation; and, with respect to (ii) and (iii) above,
      no
      such suit, action or proceeding has been threatened.

     

    (d)  The
      Company is not a party to or bound by any agreement containing any covenant
      (i)
      limiting the right of the Company to engage or compete in any line of business
      or to compete with any person, (ii) granting to any person any exclusive
      rights or sublicensing rights, (iii) providing “most favored nations” clauses to
      any person, or (iv) which otherwise adversely affects or would reasonably
      be expected to adversely affect the right of the Company to sell, distribute
      or
      manufacture any Company products or Company Intellectual Property or to purchase
      or otherwise obtain any software, components, parts or subassemblies.

     

    (e)  Section
      3.13(f)
      of the
      Company Disclosure Schedule lists all computer software that is owned, licensed,
      leased or otherwise used in the business of the Company (“Company
      Software”),
      other
      than commercially available, off-the-shelf software with an acquisition cost
      of
      less than Five Hundred Dollars ($500), and identifies which is owned, licensed,
      leased or otherwise used, as the case may be.

     

    (f)  The
      Company has taken reasonable measures consistent with industry practice to
      protect and preserve the confidentiality of all trade secrets owned, used,
      appropriated or disclosed by the Company and not otherwise protected by patents
      or copyright (“Confidential
      Information”).
      All
      use, disclosure or appropriation of Confidential Information owned by the
      Company by or to a third party has been pursuant to the terms of an agreement
      or
      other legal obligation between the Company, on the one hand, and such third
      party, on the other hand, pursuant to which the third party undertakes to
      protect and not disclose such Confidential Information. All use, disclosure
      or
      appropriation by the Company of Confidential Information not owned by the
      Company has been pursuant to the terms of a written agreement between the
      Company and the owner of such Confidential Information, or is otherwise lawful.
      Neither the Company or any person under the control of the Company has
      materially breached any confidentiality agreements that such person is subject
      to, and, to the Knowledge of the Company, no other party to any such
      confidentiality agreement is in material breach thereof.

     

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

     

    (g)  No
      current or former shareholder, member, partner, director, officer or employee
      of
      the Company or any of its predecessors in interest will, after the consummation
      of the Merger, own or retain any rights in, to, or under any of the Company
      Intellectual Property.

     

    (h)  The
      Company has at all times complied in all material respects with all applicable
      legal requirements relating to privacy, data protection and the collection
      and
      use of personal information gathered or accessed in the course of the operations
      of the Company. The Company has at all times complied in all material respects
      with all rules, policies and procedures established by the Company from time
      to
      time with respect to the foregoing. No claims are pending and, to the Knowledge
      of the Company, no claims have been asserted or threatened against the Company
      or are likely to be asserted or threatened against the Company by any person
      or
      entity alleging a violation of such person's or entity's privacy, personal
      or
      confidentiality rights under any such Laws, policies or procedures. The
      consummation of the Merger will not breach or otherwise cause any violation
      of
      any such Laws, policies or procedures.

     

    (i)  With
      respect to all personal information described in Section 3.13(h),
      the
      Company has taken all steps reasonably necessary (including, without limitation,
      implementing and monitoring compliance with measures with respect to technical
      and physical security) to protect the information in a manner consistent with
      the Laws, policies or procedures referred to in Section
      3.13(h).
      There
      has been no unauthorized access to or other misuse of that
      information.

     

    Section
      3.14  Environmental
      Matters

     

    (a)  The
      Company is in full compliance with all Environmental Laws, which compliance
      includes, but is not limited to, the possession by the Company of all permits
      and other governmental authorizations required under all Environmental Laws,
      and
      compliance with the terms and conditions thereof. The Company has not received
      any communication (written or oral), whether from a Governmental Entity,
      citizens group, employee or otherwise, that alleges that the Company is not
      in
      such full compliance, and there are no circumstances that may prevent or
      interfere with such full compliance in the future. All permits and other
      governmental authorizations currently held by the Company pursuant to all
      Environmental Laws are identified in Section
      3.14
      of the
      Company Disclosure Schedule. 

     

    (b)  There
      is
      no Environmental Claim pending or, to the Company's Knowledge, threatened
      against the Company or against any person or entity whose liability for any
      Environmental Claim the Company has retained or assumed either contractually
      or
      by operation of law.

     

    (c)  There
      are
      no past or present actions, activities, circumstances, conditions, events or
      incidents, including, without limitation, the release, emission, discharge,
      presence or disposal of any Material of Environmental Concern, that could form
      the basis of any Environmental Claim against the Company or against any person
      or entity whose liability for any Environmental Claim the Company has retained
      or assumed either contractually or by operation of law, or otherwise result
      in
      any costs or liabilities under Environmental Law.

     

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

     

    (d)  Without
      in any way limiting the generality of the foregoing, (i) all on-site and
      off-site locations where the Company has stored, disposed or arranged for the
      disposal of Materials of Environmental Concern are identified in Section
      3.14(d)(i)
      of the
      Company Disclosure Schedule, (ii) all underground storage tanks, and the
      capacity and contents of such tanks, located on any property owned, leased,
      operated or used by the Company are identified in Section
      3.14(d)(ii)
      of the
      Company Disclosure Schedule, (iii) except as set forth in Section
      3.14(d)(iii)
      of the
      Company Disclosure Schedule, there is no asbestos contained in or forming part
      of any building, building component, structure or office space owned by the
      Company or by any affiliate of the Company or Sole Shareholder, (iv) except
      as
      set forth in Section
      3.14(d)(iv)
      of the
      Company Disclosure Schedule, to the Knowledge of the Company, there is no
      asbestos contained in or forming part of any building, building component,
      structure or office space leased, operated or used by the Company and (v) except
      as set forth in Section
      3.14(d)(v)
      of the
      Company Disclosure Schedule, no polychlorinated biphenyls or polychlorinated
      biphenyl-containing items are used or stored at any property owned, leased,
      operated or used by the Company.

     

    (e)  The
      Company has provided to Parent all written assessments, reports, data, results
      of investigations or Audits, and other information that is in the possession
      of
      or reasonably available to the Company regarding environmental matters
      pertaining to or the environmental condition of the business of the Company
      or
      the compliance (or noncompliance) by the Company with any Environmental
      Laws.

     

    (f)  The
      Company is not required by virtue of the transactions set forth herein and
      contemplated hereby, or as a condition to the effectiveness of any transactions
      contemplated hereby, (i) to perform a site assessment for Materials of
      Environmental Concern, (ii) to remove or remediate Materials of
      Environmental Concern, (iii) to give notice to or receive approval from any
      Governmental Entity pursuant to any Environmental Law, or (iv) to record or
      deliver to any person or entity any disclosure document or statement pertaining
      to environmental matters.

     

    For
      purposes of this Agreement:

     

    (1)  “Environmental
      Claim” means any claim, action, cause of action, suit, proceeding,
      investigation, order, demand or notice (written or oral) by any person or entity
      alleging potential liability (including, without limitation, potential liability
      for investigatory costs, cleanup costs, governmental response costs, natural
      resources damages, property damages, personal injuries, or penalties) arising
      out of, based on or resulting from (a) the presence, or release into the
      environment, of, or exposure to, any Material of Environmental Concern at any
      location, whether or not owned or operated by the Company or (b) circumstances
      forming the basis of any violation, or alleged violation, of any Environmental
      Law.

     

    (2)  “Environmental
      Laws” means all federal, state, local and foreign laws, regulations, ordinances,
      requirements of governmental authorities, and common law in effect as of the
      date hereof, relating to pollution or protection of human health or the
      environment (including, without limitation, ambient air, surface water, ground
      water, land surface or subsurface strata, and natural resources), including,
      without limitation, Laws relating to (i) emissions, discharges, releases or
      threatened releases of, or exposure to, Materials of Environmental Concern,
      (ii)
      the manufacture, processing, distribution, use, treatment, storage, disposal,
      transport or handling of Materials of Environmental Concern, (iii)
      recordkeeping, notification, disclosure and reporting requirements regarding
      Materials of Environmental Concern, and (iv) endangered or threatened species
      of
      fish, wildlife and plant and the management or use of natural
      resources.

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

     

    (3)  “Materials
      of Environmental Concern” means chemicals, pollutants, contaminants, wastes,
      toxic substances, hazardous substances, petroleum and petroleum products,
      asbestos or asbestos-containing materials or products, polychlorinated
      biphenyls, lead or lead-based paints or materials, radon, fungus, mold,
      mycotoxins or other substances that may have an adverse effect on human health
      or the environment.

     

    Section
      3.15  Taxes

     

    (a)  The
      Company has filed all Tax Returns required to be filed by it, and all such
      Tax
      Returns were true, complete and correct in all material respects. All Taxes
      required to be paid by the Company have been timely paid other than those (i)
      currently payable without penalty or interest, or (ii) being contested in good
      faith by appropriate proceedings and for which, in the case of both clauses
      (i)
      and (ii), adequate reserves have been established on the books and records
      of
      the Company in accordance with the Company’s past practice.
      The
      Company does not have any liability for unpaid Taxes accruing after the date
      of
      the Interim Balance Sheets other than unpaid Taxes arising in the ordinary
      course of business.

     

    (b)  There
      are
      no Liens for Taxes upon any property or assets of the Company.

     

    (c)  
      The
      Company has not made any change in accounting methods, received a ruling from
      any taxing authority or signed an agreement with respect thereto or signed
      any
      closing agreement with respect to any Tax year.

     

    (d)  The
      Company has complied in all respects with all applicable Laws, rules and
      regulations relating to the payment and withholding of Taxes (including
      withholding of Taxes pursuant to Sections 1441 and 1442 of the Code or similar
      provisions under any foreign Laws) and has, within the time and the manner
      prescribed by Law, withheld and paid over to the proper taxing authorities
      all
      amounts required to be so withheld and paid over under applicable
      Laws.

     

    (e)  The
      Company is not required to include in income any adjustment pursuant to Section
      481(a) of the Code by reason of any voluntary change in accounting method (nor
      has any Governmental Entity proposed in writing any such adjustment or change
      of
      accounting method).

     

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

     

    (f)  No
      Audits
      are presently pending with regard to any Taxes or Tax Returns of the Company
      and
      a list of all Audits commenced or completed with respect to the Company with
      respect to taxable periods ending after January 1, 1999 is set forth in
Section 3.15(f)
      of the
      Company Disclosure Schedule. No written notification has been received by the
      Company that such an Audit is pending or threatened with respect to any Taxes
      due from or with respect to or attributable to the Company or any Tax Return
      filed by or with respect to the Company.

     

    (g)  All
      Tax
      deficiencies that have been claimed, proposed or asserted against the Company
      have been fully paid or finally settled, and no issue has been raised in any
      examination by any taxing authority that, by application of similar principles,
      could reasonably be expected to result in the proposal or assertion of a Tax
      deficiency for another year not so examined.

     

    (h)  There
      are
      no outstanding requests, agreements, consents or waivers to extend the statutory
      period of limitations applicable to the assessment of any Taxes or deficiencies
      against the Company.

     

    (i)  No
      power
      of attorney has been granted by or with respect to the Company with respect
      to
      any matter relating to Taxes.

     

    (j)  The
      Company is not a party to, is not bound by or has any obligation under any
      Tax
      sharing agreement, Tax indemnification, or Tax allocation agreement or similar
      agreement, contract or arrangement, and the Company does not have any potential
      liability or obligation to any person as a result of, or pursuant to, any such
      agreement, contract or arrangement.

     

    (k)  The
      Company is not a party to any agreement, plan, contract or arrangement (whether
      oral or in writing) that could result, separately or in the aggregate, in the
      payment of any “excess parachute payments” within the meaning of Section 280G of
      the Code.

     

    (l)  The
      deductibility of compensation paid by the Company will not be limited by Section
      162(m) of the Code.

     

    (m)  All
      transactions that could give rise to an understatement of the federal income
      tax
      liability of the Company within the meaning of Section 6662(d) of the Code
      are
      adequately disclosed on Tax Returns in accordance with Section 6662(d)(2)(B)
      of
      the Code if there is or was no substantial authority for the treatment giving
      rise to such understatement.

     

    (n)  The
      Company is not and has not been a U.S. real property holding company (as defined
      in Section 897(c)(2) of the Code) during the applicable period specified in
      Section 897(c)(1)(A)(ii) of the Code.

     

    (o)  There
      are
      no unresolved questions or claims concerning Tax liability of the
      Company.

     

    (p)  Other
      than any Tax Returns that have not yet been required to be filed, the Company
      has made available to Parent true, correct and complete copies of the United
      States federal income Tax Return and any state, local or foreign Tax Return
      for
      the Company for any jurisdiction for each of the taxable periods ended
      December 31, 2001 through December 31, 2005. 

     

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

     

    (q)  The
      net
      operating loss and credit carryovers, if any, available to the Company, and
      their expiration dates, is set forth in the Disclosure Schedule. As of the
      date
      of this Agreement, none of such net operating loss and credit carryovers are
      subject to the limitations imposed by Sections 382, 383 or 384 of the Code
      (or
      any predecessor thereto) or otherwise.

     

    (r)  Section
      3.15(r)
      of the
      Disclosure Schedule sets forth (i) all elections with respect to Taxes made
      by
      the Company and (ii) all foreign, state and local jurisdictions in which the
      Company is or has been subject to Tax and each type of Tax payable in such
      jurisdiction during the taxable year ending December 31, 2005.

     

    (s)  The
      Company has delivered or made available to Parent complete and accurate copies
      of each of (i) all Audit reports, letter rulings, technical advice memoranda
      and
      similar documents issued by a Governmental Entity relating to the United States
      or foreign Taxes due from or with respect to the Company, (ii) all closing
      agreements entered into by the Company with any Taxing Authority existing on
      the
      date hereof and (iii) copies of any correspondence to any Tax
      Authority.

     

    (t)  The
      Company does not have any liability with respect to income, franchise or similar
      Taxes relating to the operation of the Company prior to the date of the Interim
      Balance Sheet in excess of the amounts that are accrued with respect thereto
      and
      are reflected in the Interim Financial Statements, and since the date of the
      Interim Balance Sheets, the Company has not incurred any liability for Taxes,
      except with respect to operations in the ordinary course of business after
      the
      date of the Interim Balance Sheets. All Taxes owed and due by the Company
      relating to operations on or prior to the date of the Interim Balance Sheets
      (whether or not shown on any Tax Return) have been paid on a timely
      basis.

     

    (u)  The
      Company has not received written notice of any claim made by an authority in
      a
      jurisdiction where the Company does not file Tax Returns, that the Company
      is or
      may be subject to taxation by that jurisdiction.

     

    (v)  
      No
      taxing authority is asserting or, to the Company's Knowledge, threatening to
      assert a claim against the Company under or as a result of Section 482 of the
      Code or any similar provision Law.

     

    (w)  The
      Company has not been a member of any affiliated group within the meaning of
      Section 1504(a) of the Code, or any similar affiliated or consolidated group
      for
      tax purposes under state, local or foreign Law (other than a group the common
      parent of which is the Company), or has any liability for Taxes of any person
      (other than the Company) under Treasury Regulation Section 1.1502-6 or any
      similar provision of state, local or foreign Law as a transferee or successor,
      by contract or otherwise.

     

    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

    

     

    (x)  The
      Company has not distributed stock of another entity, or has had its stock
      distributed by another entity, in a transaction that was purported or intended
      to be governed in whole or in part by Section 355 or Section 361 of the Code.
      

     

    (y)  The
      Company has not engaged in any reportable transactions that were required to
      be
      disclosed pursuant to Section 1.6011-4 of the Code. 

     

    (z)  The
      Company has delivered or made available to Parent a copy of all of the Company's
      tax returns and other records and workpapers related to Taxes, which include
      information that would allow Parent to determine: (i) a complete list of the
      types of Tax Returns being filed by the Company in each taxing jurisdiction,
      (ii) the year of the commencement of the filing of each such type of Tax Return
      in each jurisdiction, (iii) all closed years with respect to each such type
      of
      Tax Return filed in each jurisdiction, (iv) all material Tax elections filed
      in
      each jurisdiction by the Company, (v) the tax basis of the assets of the
      Company, (vi) any deferred intercompany gain with respect to the transactions
      to
      which the Company has been a party, (vii) the accumulated earnings and profits
      and any loss carryovers of the Company and (viii) deferred income
      taxes.

     

    (aa)  The
      Company is registered with the relevant Tax Authority for Tax
      purposes.

     

    Section
      3.16  Employee
      Benefit Plans

     

    (a)  Section
      3.16(a)
      of the
      Company Disclosure Schedule lists, with respect to the Company and any trade
      or
      business (whether or not incorporated) which is treated as a single employer
      with the Company (an “ERISA
      Affiliate”)
      within
      the meaning of Section 414(b), (c), (m) or (o) of the Code, (i) all employee
      benefit plans (as defined in Section 3(3) of the Employee Retirement Income
      Security Act of 1974, as amended (“ERISA”)),
      (ii)
      each loan to any current or former non-officer employee, officer or director
      and
      any stock option, stock purchase, phantom stock, stock appreciation right,
      equity based award, supplemental retirement, severance, termination, change
      in
      control, sabbatical, medical, dental, vision care, disability, employee
      relocation, cafeteria benefit (Code Section 125) or dependent care (Code Section
      129), life insurance or accident insurance plans, programs or arrangements,
      (iii) all bonus, pension, profit sharing, savings, deferred compensation or
      incentive plans, programs, policies, agreements or arrangements, (iv) other
      fringe, welfare or employee benefit plans, programs, policies, agreements or
      arrangements, and (v) any current or former employment or, consulting,
      retention, executive compensation or severance agreements or arrangements,
      written or otherwise, for the benefit of, or relating to, any present or former
      employee, consultant or director of the Company with respect to which the
      Company or any ERISA Affiliate could have any liability (together, the
“Company
      Employee Plans”).

     

    (b)  The
      Company has made available to Parent a copy of each of the Company Employee
      Plans and related material plan documents (including trust documents, insurance
      policies or contracts, employee booklets, summary plan descriptions, summary
      of
      material modifications, prospectuses and other authorizing documents) and has,
      with respect to each Company Employee Plan that is subject to ERISA reporting
      requirements, made available copies of the Form 5500 reports (including all
      applicable schedules) filed for the last three (3) plan years. Any Company
      Employee Plan intended to be qualified under Section 401(a) of the Code has
      either obtained from the IRS a favorable determination letter as to its
      qualified status under the Code, or the expiration of the requisite period
      under
      applicable regulations promulgated by the IRS under the Code (“Treasury
      Regulations”)
      or IRS
      pronouncements in which to apply for such determination letter and to make
      any
      amendments necessary to obtain a favorable determination has not occurred or
      has
      been established under a standardized prototype plan for which an IRS opinion
      letter has been obtained by the plan sponsor and is valid and sufficient as
      to
      the adopting employer. The Company has also furnished or made available to
      Parent the most recent IRS determination, notification, advisory, or opinion
      letter issued with respect to each such Company Employee Plan, and, to the
      Company's Knowledge, nothing has occurred since the issuance of each such letter
      that could reasonably be expected to cause the loss of the tax-qualified status
      of any Company Employee Plan subject to Section 401(a) of the Code.

     

    
      
        
        

      

      
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    (c)  None
      of
      the Company Employee Plans promises or provides retiree medical or other retiree
      welfare benefits to any person, except as required by applicable Law. There
      has
      been no non-exempt “prohibited transaction,” as such term is defined in Section
      406 of ERISA and Section 4975 of the Code, with respect to any Company Employee
      Plan. Each Company Employee Plan has been administered in accordance with its
      terms and in compliance with the requirements prescribed by any and all
      applicable statutes, rules and regulations (including ERISA, the Code and any
      and all applicable federal or state securities laws). Neither the Company nor
      any of its ERISA Affiliates is subject to any liability or penalty under
      Sections 4976 through 4980 of the Code or Title I of ERISA with respect to
      any
      of the Company Employee Plans. All contributions required to be made by the
      Company or any of its ERISA Affiliates to any Company Employee Plan have been
      made on or before their due dates. With respect to each Company Employee Plan,
      no “reportable event” within the meaning of Section 4043 of ERISA (excluding any
      such event for which the thirty (30) day notice requirement has been waived
      under the regulations to Section 4043 of ERISA) nor any event described in
      Section 4062, 4063 or 4041 or ERISA has occurred. Each Company Employee Plan
      can
      be amended, terminated or otherwise discontinued after the Closing Date in
      accordance with its terms, without liability to Parent (other than ordinary
      administrative expenses typically incurred in a termination event). With respect
      to each Company Employee Plan subject to ERISA as either an employee pension
      plan within the meaning of Section 3(2) of ERISA or an employee welfare benefit
      plan within the meaning of Section 3(1) of ERISA, the Company has prepared
      in
      good faith and timely filed all requisite governmental reports (which, to the
      Company's Knowledge, were true and correct as of the date filed). No suit,
      administrative proceeding, action or other litigation has been brought or is
      pending, or, to the Knowledge of the Company, is threatened, against or with
      respect to any such Company Employee Plan, including any Audit or inquiry by
      the
      IRS, United States Department of Labor, the United States Securities and
      Exchange Commission or any other Governmental Entity, other than requests for
      payments in the ordinary course or requests for qualified domestic relations
      orders. 

     

    (d)  With
      respect to each Company Employee Plan, the Company has complied with (i) the
      applicable health care continuation and notice provisions of the Consolidated
      Omnibus Budget Reconciliation Act of 1985 (“COBRA”)
      and
      the regulations (including proposed regulations) thereunder, (ii) the applicable
      requirements of the Family Medical and Leave Act of 1993 and the regulations
      thereunder and (iii) the applicable requirements of the Health Insurance
      Portability and Accountability Act of 1996 and the regulations (including
      proposed regulations) thereunder.

     

    
      
        
        

      

      
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    (e)  Neither
      the execution and delivery of this Agreement nor the consummation of the
      transactions contemplated hereby, by themselves or in conjunction with any
      other
      agreements, events or occurrences will (i) entitle any current or former
      employee, director or other service provider of the Company or any ERISA
      Affiliates to severance benefits or any other payment, except as expressly
      provided in this Agreement, (ii)  increase any benefits otherwise payable
      by the Company or (iii) accelerate the time of payment or vesting of Company
      Options or any benefit, or increase the amount of compensation due any such
      employee, director or service provider.

     

    (f)  There
      has
      been no amendment to, written interpretation or announcement (whether or not
      written) by the Company or any ERISA Affiliates relating to, or change in
      participation or coverage under, any Company Employee Plan which would increase
      the expense of maintaining such Company Employee Plan above the level of expense
      incurred with respect to that Company Employee Plan for the most recent fiscal
      year included in the Financial Statements.

     

    (g)  The
      Company does not maintain, sponsor, participate in or contribute to, nor has
      it
      ever maintained, established, sponsored, participated in, or contributed to,
      any
      pension plan (within the meaning of Section 3(2) of ERISA) which is subject
      to
      Section 302 of ERISA, Title IV of ERISA or Section 412 of the Code.

     

    (h)  Neither
      the Company nor any of its ERISA Affiliates is a party to, or has made any
      contribution to or otherwise incurred any obligation to contribute to, any
      “multi-employer plan” as defined in Section 3(37) of ERISA. 

     

    (i)  Neither
      the Company nor any ERISA Affiliate is obligated to make any parachute payments
      as such term is defined in Section 280G of the Code, and neither is a party
      to
      any agreement that under certain circumstances is reasonably likely to obligate
      it, or any successor in interest, to make any parachute payments that will
      not
      be deductible under Section 280G of the Code. Neither the Company nor any ERISA
      Affiliate is obligated to make reimbursement or gross-up payments to any person
      in respect to excess parachute payments.

     

    (j)  No
      amounts paid by the Company by any Company Employee Plan would fail to be
      deductible under Sections 404 or 404A of the Code.

     

    Section
      3.17  Employee
      Matters

     

    (a)  The
      Company
      is and
      has been in material compliance with all currently applicable Laws and
      regulations respecting employment, discrimination in employment, terms and
      conditions of employment, termination of employment, wages, hours, occupational
      safety and health, employee whistle-blowing, immigration, employee privacy,
      employment practices and classification of employees, consultants and
      independent contractors, and are not engaged in any unfair labor practice,
      as
      defined in the National Labor Relations Act or other applicable
      Law.

     

    
      
        
        

      

      
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    (b)  The
      Company has withheld all amounts required by Law or by agreement to be withheld
      from the wages, salaries, and other payments to employees or consultants; and
      is
      not liable for any arrears of wages or any taxes or any penalty for failure
      to
      comply with any of the foregoing. The Company is not liable for any payment
      to
      any trust or other fund or to any governmental or administrative authority,
      with
      respect to unemployment compensation benefits, social security or other benefits
      or obligations for employees (other than routine payments to be made in the
      normal course of business, consistent with past practice). There are no pending
      claims against the Company under any workers compensation plan or policy or
      for
      long term disability. 

     

    (c)  There
      are
      no charges, complaints or controversies pending or, to the Knowledge of the
      Company, threatened, between the Company and any of its employees, former
      employees, consultants, independent contractors or applicants which charges,
      complaints or controversies have resulted or could reasonably be expected to
      result in an action, suit, proceeding, claim, grievance, arbitration or
      investigation before any Governmental Entity. The Company has not received
      notice, nor to the Company's Knowledge does any Governmental Entity responsible
      for the enforcement of labor or employment Laws intend to conduct an
      investigation with respect to the Company, and no such investigation is in
      progress. 

     

    (d)  Since
      the
      enactment of the WARN Act, (i) the Company has not effectuated a “plant closing”
(as defined in the WARN Act) affecting any site of employment or one or more
      facilities or operating units within any site of employment or facility of
      the
      Company, (ii) there has not occurred a “mass layoff” (as defined in the WARN
      Act) affecting any site of employment or facility of the Company, (iii) the
      Company has not been affected by any transaction or engaged in layoffs or
      employment terminations sufficient in number to trigger application of any
      similar Law and (iv) none of the Company's employees has suffered an “employment
      loss” (as defined in the WARN Act) during the six (6) month period prior to the
      date hereof. 

     

    (e)  The
      Company is not a party to any collective bargaining agreement or similar
      agreement with any labor organization or work council, or work rules or
      practices agreed to with any labor organization, work council or employee
      association applicable to employees of the Company. None of the employees of
      the
      Company are represented by any labor organization or work council and, to the
      Company's Knowledge, there have been no union or work council organizing
      activities or proceedings among any of its employees, nor does any question
      concerning representation exist concerning such employees. 

     

    (f)  There
      is
      no labor strike, dispute, corporate campaign, slowdown, stoppage or lockout
      actually pending, or to the Knowledge of the Company, threatened against or
      affecting the Company and during the last three (3) years there has not been
      any
      such action.

     

    (g)  All
      personnel policies and procedures applicable to employees of the Company are
      in
      writing. There are no personnel manuals, handbooks, policies, rules or
      procedures applicable to employees of the Company, other than those set forth
      in
Section
      3.17(g)
      of the
      Company Disclosure Schedule, true and complete copies of which have heretofore
      been made available to Parent.

     

    
      
        
        

      

      
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    (h)  To
      the
      Company's Knowledge, no employees of the Company are in violation of any term
      of
      any employment contract, invention assignment agreement, patent disclosure
      agreement, non-competition agreement, non-solicitation agreement, or any
      restrictive covenant to a former employer relating to the right of any such
      employee to be employed by the Company because of the nature of the business
      conducted by the Company or to the use of trade secrets or proprietary
      information of others. 

     

    (i)  Section
      3.17(i)
      of the
      Company Disclosure Schedule sets forth a true and complete list of (i) the
      names
      and current salaries of all employees, directors and elected and appointed
      officers of the Company, and the family relationships, if any, among such
      persons and (ii) all group insurance programs in effect for employees of the
      Company. The Company is not in default with respect to any of its obligations
      referred to in the preceding sentence. No key employees or officers of the
      Company have given notice to the Company, nor does the Company have Knowledge,
      that any such key employee or officer intends to terminate his or her employment
      with the Company.

     

    (j)  The
      Company does not have any (i) existing service or other agreements with any
      officers or employees of the Company which subject to legal requirements cannot
      be fairly terminated by three (3) months' notice or less without giving rise
      to
      a claim for damages or compensation; (ii) liability for compensation to
      ex-employees; (iii) obligation to re-instate or re-employ any ex-officer or
      ex-employee of the Company; (iv) knowledge of grounds for dismissal of any
      employee of the Company; (v) policy, practice or obligation regarding redundancy
      payments to employees which is more generous than the applicable award(s) or
      legislation; or (vi) industrial agreement or enterprise agreement (whether
      registered or not) or plans to introduce any such agreement, that applies to
      any
      employee or officer of the Company. 

     

    (k)  Except
      as
      set forth on the Company Disclosure Schedule, no person has any agreement with
      the Company under which that person acts as an independent contractor,
      consultant, or in a similar capacity for the Company whether on a full time
      or a
      part time or retainer basis or otherwise.

     

    Section
      3.18  Interested
      Party Transactions

     

    The
      Company is not indebted to any director, officer, employee, consultant or
      shareholder of the Company (except for current amounts due as normal salaries
      and bonuses and in reimbursement of ordinary expenses), and no such person
      is
      indebted to the Company. No
      officer, director or shareholder of the Company owns or holds, directly or
      indirectly, any interest in (excepting holdings solely for passive investment
      purposes of securities of publicly held and traded entities constituting less
      than five percent (5%) of the equity of any such entity), or is an officer,
      director, employee or consultant of any person that is, a competitor, lessor,
      lessee, customer or supplier of the Company or
      which
      conducts a business similar to any business conducted by the Company. No
      officer, director or shareholder of the Company (a)
      owns
      or holds, directly or indirectly, in whole or in part, any Company Intellectual
      Property, (b) has any claim, charge, action or cause of action against the
      Company, except for claims for reasonable unreimbursed travel or entertainment
      expenses, accrued vacation pay or accrued benefits under any employee benefit
      plan existing on the date hereof, (c) has made, on behalf of the Company, any
      payment or commitment to pay any commission, fee or other amount to, or to
      purchase or obtain or otherwise contract to purchase or obtain any goods or
      services from, any other person of which any officer, director or shareholder
      of
      the Company (or, to the Knowledge of the Company, a relative of any of the
      foregoing) is a partner or shareholder (except holdings solely for passive
      investment purposes of securities of publicly held and traded entities
      constituting less than five percent (5%) of the equity of any such entity)
      or
      (d) has any material interest in any property, real or personal, tangible or
      intangible, used in or pertaining to the business of the Company.

     

    
      
        
        

      

      
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    Section
      3.19  Leased
      Property

     

    Section
      3.19
      of the
      Company Disclosure Schedule sets forth a complete list of the real property
      leased by the Company and
      a
      description of the terms of each lease (the “Lease
      Agreements”).
      Each
      Lease Agreement is valid, binding and enforceable in accordance with its terms
      and the Company has a valid and binding leasehold interest in, and enjoys
      peaceful possession of, the real property described in Section
      3.19
      of the
      Disclosure Schedule. The Company does not lease any real property other than
      the
      real property subject to the Lease Agreements. There are no disputes, oral
      agreements, or forbearance programs in effect as to the Lease Agreements. There
      are no existing defaults by the Company under any Lease Agreement, and no event
      has occurred that (with the giving of notice, lapse of time or both) would
      constitute a default by the Company under any Lease Agreement. The Company
      has
      not assigned, transferred, conveyed, mortgaged, deeded in trust, or encumbered
      any interest in the leasehold or any of its rights under any Lease Agreement,
      and the leasehold estate created by each such lease is free and clear of all
      Liens. The Company is not engaged in any negotiation for the reviewing of the
      rent payable under any Lease Agreement. The Company does not own any real
      property.

     

    Section
      3.20  Insurance

     

    The
      Company has policies of insurance and bonds of the type and in the amounts
      customarily carried by persons conducting businesses or owning assets similar
      to
      those of the Company. Section
      3.20(i) of
      the Company Disclosure Schedule contains a complete list of the policies and
      contracts of insurance maintained by the Company other than employee benefit
      plans listed on Section
      3.16
      of the
      Company Disclosure Schedule. All such policies and bonds are in full force
      and
      effect, all premiums due and payable to date under all such policies and bonds
      have been paid and the Company is otherwise in compliance with the terms of
      such
      policies and bonds. There is no claim pending under any such policies or bonds
      as to which coverage has been questioned, denied or disputed by the underwriters
      of such policies or bonds. The Company has not received any notice of
      cancellation or non-renewal of any such policies or bonds from any of its
      insurance carriers, nor to the Company's Knowledge, is the termination of any
      such policies or bonds threatened. The Company has not received any notice
      from
      any of its insurance carriers that any insurance premiums will be increased
      in
      the future or that any insurance coverage presently provided will not be
      available to the Company in the future on substantially the same terms as now
      in
      effect. Except as disclosed on Section
      3.20(ii)
      of the
      Company Disclosure Schedule, none of such policies or bonds provides for any
      retrospective premium adjustment, experience-based liability or loss sharing
      arrangement affecting the Company.

     

    
      
        
        

      

      
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    Section
      3.21  Compliance
      With Laws

     

    The
      Company has complied in a timely manner and in all material respects with all
      statutes, laws, codes, ordinances, regulations, rules, orders, judgments, writs,
      injunctions, acts, guidelines, policies, directions or decrees of any
      Governmental Entity, whether or not having the force of law (“Law”
or
      “Laws”)
      that
      affect the business, properties or assets of the Company, and no notice, charge,
      claim, action or assertion has been received by the Company or to the Company's
      Knowledge, has been filed, commenced or threatened against the
      Company alleging
      any violation of any of the foregoing. The Company has not at any time received
      any notice or direction from any Governmental Entity challenging or questioning
      the legal right of the Company to design, market, offer or sell any of its
      products or services or the use of its assets in the present manner or style
      thereof.

     

    Section
      3.22  Minute
      Books

     

    The
      minute books of the Company made available to Parent contain a complete and
      accurate summary of all meetings of directors and shareholders and all actions
      by written consent since the time of incorporation of the Company, through
      the
      date of this Agreement, and reflect all transactions and other corporate actions
      referred to in such minutes accurately in all material respects.

     

    Section
      3.23  Internal
      Controls

     

    The
      Company (i) makes and keeps accurate books and records that fairly reflect
      the
      transactions and dispositions of assets of the Company and (ii) maintains
      internal accounting controls which provide reasonable assurance that (a)
      transactions are recorded as necessary to permit preparation of its financial
      statements in accordance with the Company’s past practice, (b) receipts and
      expenditures are made only in accordance with general or specific authorizations
      of management and directors of the Company, (c) access to its assets is
      permitted only in accordance with general or specific authorizations of
      management and directors of the Company, and (d) the reported accounting for
      its
      assets and liabilities is compared with existing assets and liabilities at
      reasonable intervals.

     

    Section
      3.24  Complete
      Copies of Materials

     

    The
      Company has delivered to Parent, or made available for Parent to review,
      complete copies of each document which has been requested by Parent, its counsel
      and other advisors in connection with their legal and accounting review of
      the
      Company, including, without limitation, (i) the Company Articles and Company
      Bylaws as amended to date and as currently in effect, (ii) all material permits,
      orders, and consents issued by any regulatory agency with respect to the
      Company, or any securities of the Company, and all applications for such
      permits, orders, and consents, (iii) agreements relating to Intellectual
      Property, and (iv) the stock transfer books of the Company setting forth all
      transfers of any capital stock, in each case, as currently in
      effect.

     

    
      
        
        

      

      
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    Section
      3.25  Brokers'
      and Finders' Fees

     

    The
      Company has not incurred, nor will it incur, directly or indirectly, any
      liability for brokerage or finders' fees or agents' commissions or investment
      bankers' fees or any similar charges in connection with this Agreement or any
      transaction contemplated hereby.

     

    Section
      3.26  Board
      Approval

     

    The
      Company Board has unanimously (i) adopted and approved this Agreement and the
      Merger, (ii) determined that the transactions contemplated herein and therein
      are advisable and in the best interests of the shareholders of the Company
      and
      on terms that are fair to such shareholders and (iii) resolved to recommend
      that
      the shareholders of the Company approve this Agreement and the Merger, and
      none
      of the aforesaid actions by the Company Board has been amended, rescinded or
      modified. 

     

    Section
      3.27  Customers
      and Suppliers

     

    No
      customer which individually accounted for five percent (5%) or more of the
      Company's gross revenues during the twelve (12) month period preceding the
      date
      hereof, and no supplier of the Company has canceled or otherwise terminated,
      or
      communicated any threat to the Company to cancel or otherwise terminate its
      relationship with the Company, or has decreased materially its services or
      supplies to the Company in the case of any such supplier, or its usage of the
      services or products of the Company in the case of any such customer, and to
      the
      Company's Knowledge, no such supplier or customer intends to cancel or otherwise
      terminate its relationship with the Company or to decrease materially its
      services or supplies to the Company or its usage of the services or products
      of
      the Company.

     

    Section
      3.28  Material
      Contracts

     

    Except
      for the contracts and agreements described in Section
      3.28
      of the
      Company Disclosure Schedule (the “Material
      Contracts”),
      the
      Company is not a party to or bound by any material contract, including without
      limitation:

     

    (a)  any
      distributor, sales, advertising, agency or manufacturer's representative
      contract;

     

    (b)  any
      continuing contract for the purchase of materials, supplies, equipment or
      services involving in the case of any such contract more than Twenty Five
      Thousand Dollars ($25,000) over the life of the contract;

     

    (c)  any
      contract, commitment or agreement relating to the acquisition by the Company
      of
      any assets of a substantial nature, operating business or capital stock of
      any
      other person, the participation in a joint venture or similar arrangement with
      any other person or the making of any other investment in any other
      person;

     

    (d)  any
      contract or commitment granting exclusive marketing or distribution or other
      exclusive rights;

     

    
      
        
        

      

      
        30

        
          

        

      

      
        
        

      

    

     

    (e)  any
      contract, commitment, offer or proposal made by or binding upon the Company
      to
      any customer or potential customer for the sale of products or services having
      a
      value of more than Ten Thousand Dollars ($10,000) in a twelve (12) month
      period;

     

    (f)  any
      contract that expires or may be renewed at the option of any person other than
      the Company so as to expire more than one (1) year after the date of this
      Agreement;

     

    (g)  any
      contract or commitment requiring the Company to sell or otherwise provide
      current or future products or services, or to provide support for any current
      or
      future products or services, in each case, for any period expiring more than
      six
      (6) months from the date hereof;

     

    (h)  any
      trust
      indenture, mortgage, promissory note, loan agreement or other contract or
      instrument for the borrowing of money, any currency exchange, commodities or
      other hedging arrangement or any leasing transaction of the type required to
      be
      capitalized in accordance with GAAP consistently applied;

     

    (i)  any
      contract or commitment for capital expenditures in excess of Twenty Five
      Thousand Dollars ($25,000) in the aggregate;

     

    (j)  any
      contract or commitment limiting the freedom of the Company to engage in any
      line
      of business or to compete with any other person;

     

    (k)  any
      contract purporting to impose confidentiality or nondisclosure obligations
      on
      the Company;

     

    (l)  any
      contract involving the lease of real property;

     

    (m)  any
      contract for the lease of any machinery, equipment, motor vehicles, office
      furniture, fixtures or other personal property;

     

    (n)  any
      employment agreement or any other agreement that contains any severance or
      termination pay liabilities or obligations;

     

    (o)  any
      contract with any shareholder, officer, director, affiliate or associate of
      the
      Company, or any family member thereof except the grant of Company
      Options;

     

    (p)  any
      collective bargaining agreement, labor contract or similar agreement governing
      any employee of the Company; or

     

    (q)  any
      agreement of guarantee, support, indemnification, assumption or endorsement
      of,
      or any similar contract or commitment with respect to, the obligations,
      liabilities (whether accrued, absolute, contingent or otherwise) or indebtedness
      of any other person.

     

    
      
        
        

      

      
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    Section
      3.29  No
      Breach of Material Contracts

     

    All
      Material Contracts are in written form. The Company has performed in all
      material respects its obligations under and is entitled to all benefits under
      all Material Contracts, and to the Knowledge of the Company, is not alleged
      to
      be in default in respect of any Material Contract. Each of the Material
      Contracts is in full force and effect, and there exists no default or event
      of
      default or event, occurrence, condition or act, with respect to the Company
      or,
      to the Knowledge of the Company, with respect to the other contracting party,
      which, with the giving of notice, the lapse of time or the happening of any
      other event or conditions, would reasonably be expected to become a default
      or
      event of default under the terms of any Material Contract. True, correct and
      complete copies of all Material Contracts have been delivered or made available
      to Parent.

     

    Section
      3.30  Third
      Party Consents

     

    Section
      3.30
      of the
      Company Disclosure Schedule lists all contracts and agreements to which the
      Company is a party or by which its properties or assets are bound that require
      a
      novation, waiver, consent or approval, as the case may be, in connection with
      the consummation of the transactions contemplated by this
      Agreement.

     

    Section
      3.31  Accounts
      Receivable and Payable

     

    Subject
      to any reserves set forth in the Interim Balance Sheet, all accounts receivable
      of the Company shown on the Interim Balance Sheet and, as of the Closing Date,
      all accounts receivable of the Company shown on the Closing Balance Sheet,
      are
      valid receivables subject to no setoffs or counterclaims, represent and will
      represent bona fide claims against debtors for sales and other charges, and
      are
      not subject to discount except for normal cash and immaterial trade discounts.
      The amount carried for doubtful accounts and allowances disclosed in the Interim
      Balance Sheet are sufficient to provide for any losses which may be sustained
      on
      realization of the receivables. The amounts carried as reserves for expenses,
      including, without limitation, all expenses for services rendered and goods
      purchased, and warranty claims on the Interim Balance Sheets are sufficient
      for
      the payment of (i) expenses incurred prior to the Closing Date, other than
      Transaction Expenses (ii) current warranty claims and (iii) warranty claims
      which arise prior to twelve (12) months from the date of the Interim Balance
      Sheet. There are no unpaid invoices or bills representing amounts alleged to
      be
      owed by the Company, or other alleged obligations of the Company, which the
      Company has disputed or determined to dispute or refuse to pay.

     

    Section
      3.32  Inventory

     

    The
      inventories of the Company, whether shown on the Interim Balance Sheet or
      thereafter acquired by the Company, consist of items of a quantity and quality
      usable or salable in the ordinary course of business, consistent with past
      practice. Since the date of the Interim Balance Sheet, the Company has continued
      to replenish inventories in a normal and customary manner consistent with past
      practices. The Company has not received written or oral notice that it will
      experience in the foreseeable future any material difficulty in obtaining,
      in
      the desired quantity and quality and at a reasonable price and upon reasonable
      terms and conditions, the raw materials, supplies or component products required
      for the manufacture, assembly or production of its products. The values at
      which
      inventories are carried reflect the inventory valuation policy of the Company,
      which is in accordance with the Company’s past practice. As of the date hereof,
      the Company's inventory on hand and commitments to purchase inventory do not
      exceed, in the aggregate, an amount greater than Twenty Thousand Dollars
      ($20,000).

     

    
      
        
        

      

      
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    Section
      3.33  Propriety
      of Past Payments

     

    (a)  No
      unrecorded fund or asset of the Company has been established for any purpose,
      (b) no accumulation or use of corporate funds of the Company has been made
      without being properly accounted for in the books and records of the Company,
      (c) no payment has been made by or on behalf of the Company with the
      understanding that any part of such payment is to be used for any purpose other
      than that described in the documents supporting such payment and (d) none of
      the
      Company, any director, officer, employee or agent of the Company or any other
      person associated with or acting for or on behalf of the Company has, directly
      or indirectly, made any illegal contribution, gift, bribe, rebate, payoff,
      influence payment, kickback or other payment to any person, private or public,
      regardless of form, whether in money, property or services, (i) to obtain
      favorable treatment for any Company Shareholder, the Company, or any affiliate
      of the Company in securing business, (ii) to pay for favorable treatment for
      business secured for any Company Shareholder, the Company or any affiliate
      of
      the Company, (iii) to obtain special concessions, or for special concessions
      already obtained, for or in respect of any Company Shareholder, the Company,
      or
      any affiliate of the Company or (iv) otherwise for the benefit of any
      Company Shareholder, the Company, or any affiliate of the Company in violation
      of any federal, state, local, municipal, foreign, international, multinational
      or other administrative order, constitution, Law, ordinance, principle of common
      law, regulation, statute, or treaty (including existing site plan approvals,
      zoning or subdivision regulations or urban redevelopment plans relating to
      real
      property). None of the Company, or any current director, officer, agent,
      employee or other person acting on behalf of the Company, has (i) used funds
      for
      unlawful contributions, gifts, entertainment or other unlawful expenses related
      to political activity or (ii) accepted or received any unlawful contribution,
      payment, gift, kickback, expenditure or other item of value.

     

    Section
      3.34  Representations
      Complete

     

    None
      of
      the representations or warranties made by the Company herein or in any Schedule
      hereto, including the Company Disclosure Schedule, or certificate furnished
      by
      the Company pursuant to this Agreement, when all such documents are read
      together in their entirety, contains or will contain at the Closing Date any
      untrue statement of a material fact, or omits or will omit at the Closing Date
      to state any material fact necessary in order to make the statements contained
      herein or therein, in the light of the circumstances under which made, not
      misleading. The Company has not failed to disclose to Parent herein or in the
      Company Disclosure Schedule any facts material to the business, results of
      operations, assets, liabilities, financial condition or prospects of the
      Company.

     

    
      
        
        

      

      
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    ARTICLE
      IV

     

    REPRESENTATIONS
      AND WARRANTIES OF PARENT
      AND MERGER SUB

     

    Parent
      and Merger Sub jointly and severally represent and warrant to the Company as
      follows: 

     

    Section
      4.1    Organization,
      Standing and Power

     

    Each
      of
      Parent and Merger Sub are a corporation duly organized, validly existing and
      in
      good standing under the Laws of the State of California. Each of Parent and
      Merger Sub have the requisite corporate power to own their properties and to
      carry on their business as now being conducted and as currently proposed to
      be
      conducted and are duly qualified to do business and are in good standing in
      each
      jurisdiction in which the failure to be so qualified and in good standing would
      or would reasonably be expected to have a Material Adverse Effect on Parent
      or
      Merger Sub. Neither Parent nor Merger Sub is in violation of any of the
      provisions of their respective Articles of Incorporation or Bylaws.

     

    Section
      4.2    Authority

     

    Each
      of
      Parent and Merger Sub has the requisite corporate power and authority to enter
      into this Agreement and to consummate the transactions contemplated hereby.
      The
      execution and delivery of this Agreement and the consummation of the
      transactions contemplated hereby have been duly authorized by all necessary
      corporate action on the part of Parent and Merger Sub. This Agreement has been
      duly executed and delivered by Parent and Merger Sub and constitutes the valid
      and binding obligations of Parent and Merger Sub enforceable against Parent
      and
      Merger Sub in accordance with its terms, except to the extent that
      enforceability may be limited by the effect, if any, of any applicable
      bankruptcy, reorganization, insolvency, moratorium or other Laws affecting
      the
      enforcement of creditors’ rights generally or any general principles of equity,
      regardless of whether such enforceability is considered in a proceeding at
      law
      or in equity. Neither the execution and delivery by Parent or Merger Sub of
      this
      Agreement nor the consummation of the transactions contemplated hereby will
      conflict with, or result in any breach or violation of, or default under (with
      or without notice or lapse of time, or both) or give rise to a right of
      termination, cancellation or obligation or loss of any benefit under (i)
      any provision of the Articles of Incorporation or Bylaws, or other equivalent
      charter documents, as applicable, of Parent or Merger Sub, (ii) any mortgage,
      indenture, lease, contract, agreement, instrument or understanding to which
      Parent or Merger Sub is a party or to which any of its properties or assets
      is
      bound or (iii) any Law applicable to either Parent or Merger Sub or any of
      their respective properties or assets, except, in the case of clauses (ii)
      and
      (iii) above, any such conflicts, breaches, violations, defaults, rights or
      losses, which would not, individually or in the aggregate, prevent or materially
      and adversely delay the consummation by Parent or Merger Sub of the transactions
      contemplated by this Agreement. No notice to, filing with, and no permit,
      authorization, consent or approval of, any Governmental Entity, or any other
      person is necessary for the execution and delivery of this Agreement by Parent
      or Merger Sub or, except for the filing and recordation of the Agreement of
      Merger in accordance with the requirements of California Law, the consummation
      of the transactions contemplated by this Agreement. No approval by the
      shareholders of Parent is required for the transactions contemplated by this
      Agreement.

     

    
      
        
        

      

      
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    Section
      4.3    Brokers’
      and Finders’ Fees

     

    Parent
      and Merger Sub have not incurred, nor will either incur, directly or indirectly,
      any liability for brokerage or finders’ fees or agents’ commissions or
      investment bankers’ fees or any similar charges in connection with this
      Agreement or any transaction contemplated hereby.

     

    Section
      4.4    Board
      Approval

     

    The
      Board
      of Directors of each of Parent and Merger Sub have adopted and approved this
      Agreement and the transactions contemplated hereby.

     

    ARTICLE
      V

     

    CONDUCT
      PRIOR TO THE CLOSING DATE

     

    Section
      5.1   Conduct
      of Business of the Company.

     

    Except
      as
      contemplated by this Agreement or as set forth in Section
      5.1
      of the
      Company Disclosure Schedule, during the period from the date of this Agreement
      and continuing until the earlier of the termination of this Agreement or the
      Effective Time, the Company shall, except to the extent expressly contemplated
      by this Agreement or as consented to in writing by Parent: (i) carry on its
      business in the usual, regular and ordinary course in substantially the same
      manner as heretofore conducted and (ii) use all reasonable best efforts
      consistent with past practice and policies to (x) preserve its present business
      organizations, keep available the services of its present officers and employees
      and preserve its relationships with customers, suppliers, distributors,
      licensors, licensees, and others having business dealings with it,
      (y) preserve and protect its owned and leased properties and (z) conduct
      its business in material compliance with all applicable Laws. The Company shall
      promptly notify Parent of any event or occurrence not in the ordinary course
      of
      its business, consistent with past practice, and of any event which could have
      a
      Material Adverse Effect on the Company.

     

    Section
      5.2   Restriction
      on Conduct of Business of the Company.

     

    During
      the period from the date of this Agreement and continuing until the earlier
      of
      the termination of this Agreement or the Effective Time, except as set forth
      in
Section
      5.2
      of the
      Company Disclosure Schedule or except as expressly contemplated by this
      Agreement, the Company shall not do or cause any of the following, without
      the
      prior written consent of Parent which shall not be unreasonably
      withheld:

     

    (a) Charter
      Documents.
      Cause
      any amendments to the Company Articles or the Company Bylaws or organize any
      subsidiary or acquire any capital stock or other securities, or equity or
      ownership interest in the business, of any other person;

     

    
      
        
        

      

      
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    (b) Dividends;
      Changes in Capital Stock.
      Declare, set aside or pay any dividends on or make any other distributions
      (whether in cash, stock or property) in respect of any Company Common Stock,
      or
      split, combine or reclassify any Company Common Stock or issue or authorize
      the
      issuance of any other securities in respect of, in lieu of or in substitution
      for shares of Company Common Stock, or repurchase or otherwise acquire, directly
      or indirectly, any shares of Company Common Stock;

     

    (c) Issuance
      of Securities.
      Issue,
      deliver or sell or authorize or propose the issuance, delivery or sale of,
      or
      purchase or propose the purchase of, any shares of Company Common Stock or
      securities convertible into, or subscriptions, rights, warrants or options
      to
      acquire, or other agreements or commitments of any character obligating it
      to
      issue any such shares or other convertible securities, other than the issuance
      of shares of Company Common Stock pursuant to the exercise of Company Options
      outstanding as of the date of this Agreement;

     

    (d) Stock
      Option Plans.
      Accelerate, amend or change the period of exercisability or vesting of any
      Company stock options, other rights granted under or restrictions applicable
      to
      Company option plans or authorize cash payments in exchange for any Company
      stock options or other rights granted under any Company option
      plan.

     

    (e) Indebtedness.
      Incur
      any Indebtedness, guarantee any such Indebtedness, issue or sell any debt
      securities or guarantee any debt securities of others;

     

    (f) Liens.
      Mortgage, pledge or encumber any assets;

     

    (g) Acquisitions.
      Acquire
      or agree to acquire by merging or consolidating with, or by purchasing a
      substantial portion of the assets of, or by any other manner, any business
      or
      any corporation, partnership, association or other business organization or
      division thereof, or otherwise acquire or agree to acquire any assets, except,
      in each such case, which are immaterial and are in the ordinary course of the
      Company’s business, consistent with past practice;

     

    (h) Dispositions.
      Sell,
      lease, license or otherwise dispose of or encumber any of its properties or
      assets, individually or in the aggregate, material to its business except sales
      of inventory in the ordinary course of business, consistent with past practice;
      

     

    (i) Leases.
      Terminate, amend or enter into any lease with respect to real or personal
      property;

     

    (j) Payment
      of Obligations.
      Pay,
      discharge or satisfy any claim, liability or obligation (absolute, accrued,
      asserted or unasserted, contingent or otherwise) arising other than in the
      ordinary course of business other than the payment, discharge or satisfaction
      of
      liabilities reflected or reserved against in the Interim Balance Sheet and
      other
      than Transaction Expenses;

     

    (k) Accounts
      Payable and Accounts Receivable. 
      Except in the ordinary course of business, take any action reasonably likely
      to
      (i) accelerate the payment of customer accounts receivable (including by
      shortening payment terms, providing incentives for early payment or otherwise),
      or (ii) delay the payment on accounts payable to suppliers, vendors or
      others;

     

    
      
        
        

      

      
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    (l) Capital
      Expenditures.
      Make
      any capital expenditures, capital additions or capital improvements in excess
      of
      Twenty-Five Thousand Dollars ($25,000) individually or in excess of Fifty
      Thousand Dollars ($50,000) in the aggregate;

     

    (m) Termination
      or Waiver.
      Terminate or waive any material right;

     

    (n) Employees;
      Employee Benefit Plans; New Hires; Pay Increases.
      Adopt,
      amend, fund or accelerate payment under any employee benefit, incentive
      compensation, fringe benefit, retention, stock purchase, option, or other equity
      based plan, program, policy, agreement or arrangement, or hire any new employee,
      terminate any key employee, pay any special bonus or special remuneration to
      any
      current or former employee, consultant or director, or increase the salaries,
      wage rates or other benefits or compensation of any of its current or former
      employees, consultants or directors or enter into a collective bargaining
      agreement, trade union agreement or similar agreement or arrangement under
      which
      any employee or consultant would be subject or would otherwise receive any
      benefit;

     

    (o) Severance
      Arrangements.
      Grant
      any severance, change in control or termination pay (i) to any current or former
      director, consultant or officer or (ii) to any other current or former employee;
      

     

    (p) Contracts.
      Enter
      into any contract or commitment (including the issuance or acceptance of any
      purchase order) with a value exceeding Ten Thousand Dollars ($10,000), or
      violate, amend or otherwise modify or waive any of the terms of any of its
      contracts;

     

    (q) Intellectual
      Property.
      Transfer to any person or entity any rights to Company Intellectual Property
      other than pursuant to non-exclusive license arrangements in the ordinary course
      of business, consistent with past practice, or abandon, permit to lapse or
      otherwise dispose of any Company Intellectual Property or make any material
      change in any Company Intellectual Property;

     

    (r) Exclusive
      Rights.
      Enter
      into or amend any agreements pursuant to which any other party is granted
      exclusive marketing or distribution or other exclusive rights of any type or
      scope with respect to any of the Company’s products or technology;

     

    (s) Litigation.
      Initiate or settle any litigation except for the commencement of legal action
      (i) in such cases where the Company in good faith determines that failure to
      commence suit would result in the material impairment of a valuable aspect
      of
      its business, provided that it consults with Parent prior to the commencement
      of
      such a suit, or (ii) for a breach of this Agreement; 

     

    (t) Insurance.
      Fail to
      keep in full force and effect the Company’s current insurance policies or other
      comparable insurance affecting the business of the Company, or reduce the amount
      of any insurance coverage provided by existing insurance policies;

     

    
      
        
        

      

      
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    (u) Taxes.
      Make or
      change any material election in respect of Taxes, adopt or change any accounting
      method in respect of Taxes, file any material Tax Return other than in the
      ordinary course of business consistent with past practice and other than those
      for which extensions have been received as set forth in the Company Disclosure
      Schedule or any amendment to a material Tax Return, enter into any closing
      agreement, settle any claim or assessment in respect of Taxes, or consent to
      any
      extension or waiver of the statutory period of limitations applicable to any
      claim or assessment in respect of Taxes;

     

    (v) Accounting
      Policies and Procedures.
      Make
      any material change to its accounting methods, principles, policies, procedures
      or practices;

     

    (w) Revaluation.
      Revalue
      any of its assets, including writing down the value of inventory or writing
      off
      notes or accounts receivable other than in the ordinary course of business,
      consistent with past practice; or

     

    (x) Other.
      Agree
      in writing or otherwise to take any of the actions described in this
Section
      5.2.

     

    During
      the period from the date of this Agreement and continuing until the earlier
      of
      the termination of this Agreement or the Effective Time, the Company will notify
      Parent in writing not less than five (5) days prior to making any material
      personnel changes.

     

    Section
      5.3   No
      Solicitation.

     

    (a) Until
      the
      earlier of the Effective Time or the termination of this Agreement, the Company
      and the officers, directors, employees or other agents of the Company will
      not,
      directly or indirectly (i) initiate, solicit or encourage (including, without
      limitation, by way of furnishing information), or take any action to facilitate
      any inquiry or the making of, any offer or proposal which constitutes or is
      reasonably likely to lead to any Acquisition Transaction, (ii) propose,
      enter into or participate in negotiations or discussions with, or provide any
      information or data to, any person (other than Parent, Merger Sub or any of
      their respective affiliates or representatives) relating to any Acquisition
      Transaction, (iii) make or authorize any statement, recommendation or
      solicitation in support of, or approve, any Acquisition Transaction or (iv)
      enter into any letter of intent or similar document or any contract, agreement
      or commitment contemplating or otherwise relating to any Acquisition Transaction
      or transaction contemplated thereby. Upon execution of this Agreement, the
      Company will immediately cease any existing activities, discussions or
      negotiations with any parties conducted heretofore with respect to any of the
      foregoing. The Company will promptly notify Parent after receipt after the
      date
      of this Agreement of any proposal for an Acquisition Transaction or any notice
      that any person is considering an Acquisition Transaction or any request for
      information relating to the Company or for access to the properties, books
      or
      records of the Company by any person that has advised the Company that it may
      be
      considering, or has proposed, an Acquisition Transaction and will keep Parent
      timely informed of the status and details of any such Acquisition Transaction
      notice, request or any correspondence or communications related thereto and
      shall provide Parent with a true and complete copy of such Acquisition
      Transaction notice or request or correspondence or communications related
      thereto, if it is in writing, or a written summary thereof (which shall include
      the identity of the person considering or proposing such Acquisition Transaction
      and the material terms thereof), if it is not in writing. Neither the Company
      Board nor any committee thereof shall (x) withdraw or modify, or propose to
      withdraw or modify, in a manner adverse to Parent or Merger Sub, the approval
      or
      recommendation by the Company Board or any such committee of this Agreement
      or
      the Merger, or (y) approve or recommend, or propose to approve or recommend,
      any
      Acquisition Transaction or (z) enter into any agreement with respect to any
      Acquisition Transaction.

     

    
      
        
        

      

      
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    Section
      5.4   Further
      Information.

     

    (a) The
      Company shall afford Parent and its accountants, counsel and other
      representatives, reasonable access during normal business hours during the
      period prior to the Closing to (i) all of the properties, books, contracts,
      commitments and records, patent application files and personnel of the Company
      and (ii) all other information concerning the business of the Company, their
      respective properties and personnel as Parent may reasonably request.

     

    (b) Subject
      to compliance with applicable Laws, from the date hereof until Closing, the
      Company shall confer on a regular and frequent basis with one or more
      representatives of Parent to report operational matters of materiality and
      the
      general status of ongoing operations.

     

    (c) No
      information or Knowledge obtained in any investigation pursuant to this
Section
      5.4
      shall
      affect or be deemed to modify any representation or warranty contained in this
      Agreement or the conditions to the obligations of the parties to consummate
      the
      transactions contemplated hereby.

     

    (d) The
      Company shall give prompt notice to Parent upon learning of (a) the
      occurrence or non-occurrence of any event whose occurrence or non-occurrence,
      as
      the case may be, would reasonably be likely to cause either (i) any
      representation or warranty of the Company contained in this Agreement to be
      untrue or inaccurate in any material respect at the date hereof or at the
      Closing or (ii) any condition set forth in ARTICLE
      VII
      to be
      unsatisfied at the Closing Date (except to the extent it refers to a specific
      date) and (b) any material failure of the Company or Parent to comply with
      or
      satisfy any covenant, condition or agreement to be complied with or satisfied
      by
      it hereunder; provided,
      however,
      that
      the delivery of any notice pursuant to this Section
      5.4(d)
      shall
      not limit or otherwise affect the remedies available hereunder to the party
      receiving such notice or the representations or warranties of the parties hereto
      or the conditions to the obligations of the parties hereto.

     

    (e) As
      soon
      as such information becomes available, and in any event not later than thirty
      (30) days after the end of each fiscal month, the Company shall provide to
      Parent an unaudited balance sheet as of the end of such month and the related
      statements of results of operations and statements of cash flows for such period
      together with a list of the ages and amounts of all accounts and notes due
      and
      uncollected as of the end of such month. Notwithstanding the foregoing, the
      Company agrees to provide to Parent and its accountants, counsel and other
      representatives copies of the Company’s internal financial statements promptly
      upon request.

     

    
      
        
        

      

      
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    ARTICLE
      VI

     

    ADDITIONAL
      AGREEMENTS

     

    Section
      6.1   Public
      Disclosure.

     

    (a) Parent
      and the Company shall, prior to Closing, consult with each other before issuing
      or authorizing any press release or any other public statement or making (or
      authorizing) any other disclosure to any third party (whether or not in response
      to an inquiry) regarding the existence or terms of this Agreement and the
      transactions contemplated hereby, and, prior to the Closing, neither shall
      (or
      permit any of their respective subsidiaries, representatives or advisors to)
      issue any such press release or make any such statement or disclosure without
      the prior written approval of the other, except as may be required by applicable
      Law or by obligations pursuant to any listing agreement with any national
      securities exchange, in which case the disclosing party shall provide to the
      other party such advance notice as is reasonable under the circumstances prior
      to the making of, and shall consult with the other party regarding the form
      of,
      any such required disclosure. Notwithstanding the foregoing, Parent and the
      Company may reveal the existence and terms of this Agreement to their respective
      representatives and advisors (a) who need to know the terms of this Agreement
      for the purpose of evaluating the Merger, (b) who are informed of the
      confidential nature of the Agreement and (c) who agree to act in accordance
      with
      the terms of this Section
      6.1.

     

    (b) The
      Sole
      Shareholder shall not, prior to or following the Closing, issue any press
      release, make any other public statement or make any other disclosure to any
      third party (whether or not in response to an inquiry) regarding the existence
      and terms of this Agreement and the transactions contemplated hereby without
      the
      prior written approval of Parent. Notwithstanding the foregoing, the Sole
      Shareholder may reveal the existence and terms of this Agreement to their
      respective representatives and advisors (a) who need to know the terms of this
      Agreement for the purpose of evaluating the Merger, (b) who are informed of
      the
      confidential nature of the Agreement and (c) who agree to act in accordance
      with
      the terms of this Section
      6.1.

     

    Section
      6.2   Consents;
      Cooperation

     

    Each
      of
      Parent and the Company shall promptly apply for or otherwise seek, and use
      its
      reasonable best efforts to obtain, all consents, waivers and approvals required
      to be obtained by it for the consummation of the transactions contemplated
      hereby. 

     

    Section
      6.3   Legal
      Requirements

     

    Subject
      to the terms and conditions herein provided, each of Parent, Merger Sub and
      the
      Company will, and Parent will cause its subsidiaries to, take all reasonable
      actions necessary to comply in all material respects promptly with all legal
      requirements which may be imposed on it with respect to the consummation of
      the
      transactions contemplated by this Agreement and will take all reasonable actions
      necessary to obtain (and will cooperate with the other parties hereto in
      obtaining) any consent, approval, order or authorization of, or any
      registration, declaration or filing with, any Governmental Entity or other
      person, required to be obtained or made by it in connection with the taking
      of
      any action contemplated by this Agreement. 

     

    
      
        
        

      

      
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    Section
      6.4   Best
      Efforts and Further Assurances

     

    Prior
      to
      the Closing, upon the terms and subject to the conditions of this Agreement,
      Parent, Merger Sub and the Company agree to use best efforts to take, or cause
      to be taken, all actions, and to do, or cause to be done, all things necessary,
      proper or advisable (subject to any applicable Laws) to consummate and make
      effective the Merger as promptly as practicable including, but not limited
      to,
      the satisfaction of the other parties’ conditions to Closing.

     

    Section
      6.5   Termination
      of Plans

     

    Prior
      to
      the Effective Time, the Company shall adopt resolutions to terminate the
      Company’s Company 401(k) plan (the “401(k) Plan”) immediately prior to the
      Closing. Parent shall receive from the Company evidence that the Company Board
      has adopted resolutions to terminate the 401(k) Plan (the form and substance
      of
      which resolutions shall be subject to review and approval of Parent, which
      approval will not be unreasonably withheld or delayed), effective as of the
      day
      immediately preceding the Closing Date but contingent on the Closing. Parent
      shall permit each employee of the Company who participates in Parent’s 401(k)
      plan following the Effective Time and who has received an eligible rollover
      distribution (as defined in Section 402(c)(4) of the Code) from the 401(k)
      Plan
      to roll such eligible rollover distribution, into an account under Parent’s
      401(k) plan. 

     

    Section
      6.6   Tax
      Certificate

     

    The
      Company shall, prior to the Closing Date, provide Parent with a properly
      executed FIRPTA certificate, substantially in the form agreed to by the parties
      hereto, which states that shares of capital stock of the Company do not
      constitute “United States real property interests” under Section 897(c) of the
      Code, for purposes of satisfying Parent’s obligations under Treasury Regulation
      Section 1.1445-2(c)(3). In addition, simultaneously with delivery of such
      Notification Letter, the Company shall have provided to Parent, as agent for
      the
      Company, a form of notice to the IRS in accordance with the requirements of
      Treasury Regulation Section 1.897-2(h)(2) and in the customary form along
      with written authorization for Parent to deliver such notice form to the IRS
      on
      behalf of the Company upon the Closing of the Merger.

     

    Section
      6.7   Withholding

     

    Notwithstanding
      anything herein to the contrary, Parent shall be entitled to deduct and withhold
      from the consideration otherwise payable pursuant to this Agreement to any
      shareholder such amounts as the Company or Parent has determined is required
      to
      be deducted and withheld with respect to any of the transactions under any
      provision of United States federal, state, local or foreign tax Law. To the
      extent that amounts are so withheld, such withheld amounts shall be treated
      for
      all purposes of this Agreement as having been paid to the shareholder in respect
      of which such deduction and withholding was made.

     

    
      
        
        

      

      
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    Section
      6.8   Payment
      of Certain Indebtedness. Following
      the Closing, the Surviving Corporation shall perform all of its obligations
      relating to the Company’s loans and leases that are personally guaranteed by
      Sole Shareholder and set forth on Schedule 6.8 (collectively, the “Company
      Agreements”). If the Surviving Corporation defaults under any of the Company
      Agreements and such default is not cured in accordance with such agreement,
      at
      Sole Shareholder’s sole and absolute discretion, upon written notice to Parent
      and without releasing Parent from any obligation under such Company Agreement,
      Sole Shareholder may make, perform, observe, take or do the same in such manner
      and to such extent as Sole Shareholder may deem necessary to protect his
      interest in such agreement as provided in this Section 6.8. In furtherance
      of the foregoing rights, the Surviving Corporation does hereby irrevocably
      appoint the Sole Shareholder, the true and lawful attorney-in-fact of the
      Surviving Corporation with full power of substitution, for it and in its name
      (i) to make any payment which Parent is obligated to make under such
      agreement (ii) to ask, demand, collect, or receive in lieu of the Surviving
      Corporation, all rents, issues, profits, avails, distributions, income, an
      payment draws of the Surviving Corporation.
      Any
      default under the Company Agreements which is not cured in accordance with
      such
      agreement shall be a material breach of this Section and this Agreement.
      Notwithstanding anything herein to the contrary, Parent and Merger Sub will
      indemnify and hold harmless Sole Shareholder from and against any Seller Damages
      arising out of a breach of Section 6.8 of the Agreement as well as any
      other liability under any third party guaranty, however arising, up to maximum
      amount of the total obligations under the Company Agreements as of the
      Closing.

     

    Section
      6.9   Company
      Disclosure Schedule. As
      soon
      as practicable following the date hereof, the Company shall deliver to Parent
      the Company Disclosure Schedule. Prior to the Closing, if any event, condition,
      fact or circumstance that is required to be disclosed on the Company Disclosure
      Schedule prior to the Closing would require a change to the Company Disclosure
      Schedule if the Company Disclosure Schedule were dated as of the date of the
      occurrence, existence or discovery of such event, condition, fact or
      circumstance, then the Company shall promptly deliver to Parent an update to
      the
      Company Disclosure Schedule specifying such change and shall use its best
      efforts to remedy same, as applicable.

     

    ARTICLE
      VII

     

    CONDITIONS
      TO THE CLOSING

     

    Section
      7.1   Conditions
      to Obligations of Each Party to Effect the Merger

     

    The
      respective obligations of each party to this Agreement to consummate and effect
      the Merger and the transactions contemplated hereby shall be subject to the
      satisfaction at or prior to the Effective Time of each of the following
      conditions, any of which may be waived, in writing, by agreement of all the
      parties hereto:

     

    (a) Shareholder
      Approval.
      This
      Agreement, the Agreement of Merger and the Merger shall have been approved
      by
      the requisite vote of the Sole Shareholder.

     

    (b) No
      Injunctions or Restraints; Illegality.
      No
      temporary restraining order, preliminary or permanent injunction or other order
      issued by any court of competent jurisdiction or other legal or regulatory
      restraint or prohibition preventing the consummation of the Merger shall be
      in
      effect, nor shall any proceeding brought by an administrative agency or
      commission or other Governmental Entity or instrumentality, domestic or foreign,
      seeking any of the foregoing be pending; nor shall there be any action taken,
      or
      any statute, rule, regulation or order enacted, entered or enforced, which
      makes
      the consummation of the Merger illegal. In the event an injunction or other
      order shall have been issued, each party agrees to use its reasonable efforts
      to
      have such injunction or other order lifted.

     

    
      
        
        

      

      
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    (c) Governmental
      Approval.
      Parent,
      the Company and their respective subsidiaries shall have timely obtained from
      each Governmental Entity all approvals, waivers and consents, if any, necessary
      for consummation of, or in connection with, the several transactions
      contemplated hereby.

     

    Section
      7.2   Additional
      Conditions to Obligations of the Company

     

    The
      obligations of the Company to consummate and effect the Merger and the
      transactions contemplated hereby shall be subject to the satisfaction at or
      prior to the Effective Time of each of the following conditions, any of which
      may be waived, in writing, by the Company:

     

    (a) Representations,
      Warranties and Covenants.
      The
      representations and warranties of Parent and Merger Sub in this Agreement shall
      be true and correct in all material respects (except for such representations
      and warranties that are qualified by their terms by a reference to materiality
      or Material Adverse Effect which representations and warranties as so qualified
      shall be true in all respects) on and as of the Effective Time as though such
      representations and warranties were made on and as of such time (except for
      such
      representations and warranties which speak as of a particular time which
      representations and warranties need be true and correct only as of such time)
      and Parent and Merger Sub shall each have performed and complied in all material
      respects with all covenants, obligations and conditions of this Agreement
      required to be performed and complied with by them as of the Effective
      Time.

     

    (b) Certificate
      of Parent.
      The
      Company shall have received from Parent an officer’s certificate certifying to
      the fulfillment of the conditions specified in Section 7.2(a).

     

    
      
        Section
          7.3  Additional
          Conditions to the Obligations of Parent and Merger
          Sub

      

    

     

    The
      obligations of Parent and Merger Sub to consummate and effect the Merger and
      the
      transactions contemplated hereby shall be subject to the satisfaction at or
      prior to the Effective Time of each of the following conditions, any of which
      may be waived, in writing, by Parent or Merger Sub: 

     

    (a) Representations,
      Warranties and Covenants.
      The
      representations and warranties of the Company in this Agreement shall be true
      and correct in all material respects (except for such representations and
      warranties that are qualified by their terms by a reference to materiality
      or
      Material Adverse Effect which representations and warranties as so qualified
      shall be true in all respects) on and as of the Closing Date as though such
      representations and warranties were made on and as of such date (except for
      such
      representations and warranties which speak as of a particular time which
      representations and warranties need be true and correct only as of such time)
      and the Company shall in all material respects have performed and complied
      with
      all covenants, obligations and conditions of this Agreement required to be
      performed and complied with by it as of the Effective Time.

     

    
      
        
        

      

      
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    (b) Certificate
      of the Company.
      Parent
      shall have received a certificate of the Company executed by an officer
      certifying fulfillment of the conditions set forth in Section
      7.3(a),
      Section
      7.3(c),
      Section
      7.3(e),
      and
Sections
      7.3(g)-(o).

     

    (c) Third
      Party Consents.
      Parent
      shall have been furnished with evidence reasonably satisfactory to Parent of
      the
      consent or approval of those persons whose consent or approval shall be required
      for the Company (i) to consummate the transactions contemplated hereby and
      (ii) to comply with and perform all of the Company’s obligations as
      contemplated hereby. 

     

    (d) Legal
      Opinion.
      Parent
      shall have received a legal opinion from Best Best & Kreiger LLP, legal
      counsel to the Company, in substantially the form of Exhibit D
      attached
      to this Agreement and with customary qualifications and
      limitations.

     

    (e) No
      Material Adverse Changes.
      There
      shall not have occurred any material adverse change in the condition (financial
      or otherwise), properties and assets (including intangible assets), liabilities,
      business, operations, results of operations or prospects of the Company;
provided,
      however,
      that
      for purposes of determining whether there shall have been any such material
      adverse change, any adverse change that results from the taking of any action,
      or the failure to act, as required by this Agreement shall be disregarded.
      

     

    (f) Resignation
      of Officers and Directors.
      The
      officers and directors of the Company in office immediately prior to the
      Effective Time shall have resigned as officers and directors of the Company,
      effective as of the Effective Time, and Parent shall have received letters
      of
      resignation in form and substance satisfactory to Parent from such persons.
      

     

    (g) Dissenting
      Shares.
      Holders
      of Common Stock representing a minimum of ninety percent (90%) of the aggregate
      number of shares of Company Common Stock outstanding shall have voted in favor
      of the Merger or waived their appraisal rights under California
      Law.

     

    (h) Closing
      Statement.
      The
      Company shall have delivered to Parent the Closing Statement pursuant to
Section
      2.8(a)
      hereof
      in form and substance reasonably satisfactory to Parent.

     

    (i) Termination
      of 401(k) Plan.
      The
      401(k) Plan shall have been terminated.

     

    (j) Tax
      Certificates.
      The
      Company shall have provided Parent with the properly executed certificates
      pursuant to Section 6.6.
      

     

    
      
        
        

      

      
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    (k) Non-Compete
      Agreement.
      The
      Sole Shareholder shall have delivered to Parent an executed non-compete
      agreement effective upon the Closing in the form of Exhibit
      E
      attached
      to this Agreement.

     

    (l) Employment
      Offer Letters.
      Key
      employees to be mutually agreeable between the parties shall each have delivered
      to Parent an executed offer letter of employment from Merger Sub, with
      employment effective immediately following the Effective Time.

     

    (m) Consulting
      Agreement.
      Abdul
      R. Chauthani shall have delivered to Parent an executed consulting agreement
      effective upon the Closing in the form of Exhibit
      F
      attached
      to this Agreement.

     

    (n) Registration
      Rights Agreement.
      The
      Sole Shareholder shall have delivered to Parent an executed registration rights
      agreement in the form of Exhibit
      G
      attached
      to this Agreement.

     

    (o) Closing
      Balance Sheet.
      The
      Company shall have delivered to Parent the Closing Balance Sheet in form and
      substance reasonably satisfactory to Parent.

     

    (p) Closing
      Statement.
      The
      Company shall have delivered to Parent the Closing Statement in form and
      substance reasonably satisfactory to Parent.

     

    (q) Company
      Revenues.
      The
      Company revenues calculated in accordance with GAAP based on the seasonalized
      annual run-rates determined in accordance with industry standards for the period
      commencing on August 1, 2006 through and including September 30, 2006 shall
      be Three Million Dollars ($3,000,000).

     

    (r) Store
      EBITDA.
      The
      Store EBITDA based on the seasonalized annual run-rates determined in accordance
      with industry standards for the period commencing on August 1, 2006 through
      and
      including September 30, 2006 shall be Five Hundred Forty Thousand Dollars
      ($540,000).

     

    (s) Transaction
      Expenses.
      The
      Company shall have provided Parent with evidence reasonably satisfactory to
      Parent that the Company has paid in full all Transaction Expenses incurred
      by
      the Company.

     

    (t) Company
      Disclosure Schedule.
      The
      Company shall have provided Parent with the Company Disclosure
      Schedule.

     

    Section
      7.4   Frustration
      of Conditions

     

    Neither
      Parent nor the Company may rely on the failure of any condition set forth in
      this ARTICLE
      VII
      to be
      satisfied if such failure was caused by such party’s failure to comply with or
      perform any of its covenants or obligations set forth in this Agreement.

     

    
      
        
        

      

      
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    ARTICLE
      VIII

     

    TERMINATION,
      AMENDMENT AND WAIVER

     

    Section
      8.1   Termination

     

    At
      any
      time prior to the Effective Time, whether before or after approval of the
      matters presented in connection with the Merger to the Sole Shareholder, this
      Agreement may be terminated:

     

    (a) by
      mutual
      consent of Parent and the Company;

     

    (b) by
      either
      Parent or the Company, if the Closing shall not have occurred on or before
      such
      date that is sixty (60) days following the date hereof (the “Final
      Date”);
      provided
      that the
      right to terminate this Agreement under this Section
      8.1(b)
      shall
      not be available to any party whose action or failure to act has been the cause
      of or resulted in the failure of the Merger to occur on or before such date
      and
      such action or failure to act constitutes a breach of this
      Agreement;

     

    (c) by
      Parent, if the Company shall breach any representation, warranty, obligation
      or
      agreement hereunder such that the conditions set forth in Section
      7.3(a)
      would be
      incapable of being satisfied by the Final Date, and such breach shall not have
      been cured, or by its nature cannot be cured, within ten (10) days of receipt
      by
      the Company of written notice of such breach; provided
      that
      Parent has not breached any of its representations, warranties, obligations
      or
      agreements hereunder;

     

    (d) by
      the
      Company, if Parent or Merger Sub shall breach any representation, warranty,
      obligation or agreement hereunder, such that the conditions set forth in
Section
      7.2(a)
      would be
      incapable of being satisfied by the Final Date, and such breach shall not have
      been cured, or by its nature cannot be cured, within ten (10) days following
      receipt by Parent of written notice of such breach; provided
      that the
      Company has not breached any of its representations, warranties, obligations
      or
      agreements hereunder;

     

    (e) by
      Parent, if Sole Shareholder has not approved and adopted this Agreement and
      the
      transactions contemplated hereby within the period set forth in Section
      5.4(a);
      and

     

    (f) by
      Parent, Merger Sub or the Company if any permanent injunction or other order
      of
      a court or other competent authority preventing the consummation of the Merger
      shall have become final and nonappealable;

     

    (g) by
      Parent, if any material adverse change in the condition (financial or
      otherwise), properties and assets (including intangible assets), liabilities,
      business, operations, results of operations or prospects of the Company has
      occurred since the date hereof; provided,
      however,
      that
      for purposes of determining whether there shall have been any such material
      adverse change, any adverse change that results from the taking of any action,
      or the failure to act, as required by this Agreement shall be disregarded;
      and

     

    
      
        
        

      

      
        46

        
          

        

      

      
        
        

      

    

     

    (h) by
      Parent, if the Company Disclosure Schedule contains any event, condition, fact
      or circumstance that is not satisfactory to Parent, in its sole and absolute
      discretion.

     

    Section
      8.2   Effect
      of Termination

     

    In
      the
      event of termination of this Agreement as provided in Section
      8.1,
      this
      Agreement shall forthwith become void, and except as provided in Section
      8.3,
      there
      shall be no liability or obligation on the part of Parent, Merger Sub or the
      Company or their respective officers, directors, shareholders, shareholders
      or
      affiliates, except to the extent that such termination results from fraud;
      provided
      that the
      provisions of Section
      6.1
      (Public
      Disclosure), this Section
      8.2,
      Section
      8.3
      (Expenses) and ARTICLE
      IX
      shall
      remain in full force and effect and survive any termination of this Agreement.
      

     

    Section
      8.3   Expenses

     

    Whether
      or not the Merger is consummated, all costs and expenses arising out of,
      relating to or incidental to the discussion, evaluation, negotiation and
      documentation of this Agreement and the transactions contemplated hereby and
      thereby (including, without limitation, reasonable fees and expenses of legal
      counsel and financial advisors and accountants, if any) (in the aggregate,
      “Transaction
      Expenses”),
      shall
      be paid by the party incurring such expense; it being understood that all such
      costs and expenses incurred by the Company shall be paid by the Company in
      cash
      prior to the Closing, and shall in no event be borne by Parent, the Surviving
      Corporation or Merger Sub.

     

    Section
      8.4   Amendment

     

    The
      parties hereto may cause this Agreement to be amended at any time by execution
      of an instrument in writing signed on behalf of each of the parties hereto,
      except as otherwise required by Law.

     

    Section
      8.5   Extension;
      Waiver

     

    Any
      party
      hereto may, subject to Section
      8.4
      and to
      the extent legally allowed, (i) extend the time for the performance of any
      of the obligations or other acts of the other parties hereto, (ii) waive
      any inaccuracies in the representations and warranties made to such party
      contained herein or in any document delivered pursuant hereto and
      (iii) waive compliance with any of the agreements or conditions for the
      benefit of such party contained herein. Any such extension or waiver by any
      party hereto shall not operate or be construed as a further or continuing
      extension or waiver. Any agreement on the part of a party hereto to any such
      extension or waiver shall be valid only if set forth in an instrument in writing
      signed on behalf of such party.

     

    
      
        
        

      

      
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    ARTICLE
      IX

     

    INDEMNIFICATION

     

    Section
      9.1   Indemnification

     

    (a) Indemnification
      by Sole Shareholder.
      The
      Sole Shareholder will indemnify and hold harmless Parent and its affiliates
      (including the Surviving Corporation) and their Representatives, from and
      against any and all losses, costs, damages, liabilities, Taxes and expenses
      (including, without limitation, reasonable legal fees and expenses)
      (collectively, “Purchaser
      Damages”)
      arising out of or relating to (i) any misrepresentation or breach of, or default
      in connection with, any of the representations, warranties, covenants and
      agreements given or made by the Company in this Agreement, as modified by the
      Company Disclosure Schedule, or in any exhibit or schedule to, or certificate
      delivered in connection with, this Agreement or (ii) any inaccuracy contained
      in
      the Closing Statement.
      Subject
      to the following sentence, in no event shall the obligations of the Sole
      Shareholder to provide indemnification pursuant to this Section 9.1(a)
      exceed
      an amount equal to Five-Hundred Fifty Thousand Dollars ($550,000). The right
      of
      Parent and its affiliates (including the Surviving Corporation) and their
      Representatives to obtain indemnification pursuant to this Section
      9.1(a)
      shall be
      the exclusive remedy for any breach by the Company of the terms of this
      Agreement, other than (i) actions for specific performance pursuant to
Section
      10.9,
      (ii)
      Purchaser Damages arising out of or relating to fraud, willful misrepresentation
      or intentional breach, and (iii) offsets against any amounts payable to the
      Sole
      Shareholder pursuant to Section
      2.12.
      The
      right to indemnification, payment of Purchaser Damages or other remedy will
      not
      be affected by any investigation conducted with respect to, or any Knowledge
      acquired (or capable of being acquired) at any time, whether before or after
      the
      execution and delivery of this Agreement or the Closing Date, with respect
      to
      the accuracy or inaccuracy of or compliance with, any representation, warranty,
      covenant or agreement made by the Company or any other matter. The waiver of
      any
      condition based on the accuracy of any such representation or warranty, or
      on
      the performance of or compliance with any such covenant or agreement, will
      not
      affect the right to indemnification, payment of Purchaser Damages, or any other
      remedy based on any such representation, warranty, covenant or agreement. Parent
      shall be entitled to offset an amount equal in value to the full amount of
      all
      Purchaser Damages from any and all amounts Parent is obligated to pay Sole
      Shareholder other than amounts Parent is obligated to pay Sole Shareholder
      pursuant to that certain employment agreement between Sole Shareholder and
      Parent dated as of the date hereof. In determining the amount of any Purchaser
      Damages attributable to such breach, any materiality standard contained in
      a
      representation, warranty or covenant of the Company shall be
      disregarded.

     

    (b) Indemnification
      by Parent and Merger Sub.
      Parent
      and Merger Sub will indemnify and hold harmless Sole Shareholder from and
      against any and all losses, costs, damages, liabilities, Taxes and expenses
      (including, without limitation, reasonable legal fees and expenses)
      (collectively, “Seller
      Damages”)
      arising out of or relating to (i) any misrepresentation or breach of, or default
      in connection with, any of the representations, warranties, covenants and
      agreements given or made by Parent or Merger Sub in this Agreement, or in any
      exhibit or schedule to, or certificate delivered in connection with this
      Agreement.
      Subject
      to the following sentence, in no event shall the obligations of Parent or Merger
      Sub to provide indemnification pursuant to this Section 9.1(b)
      exceed
      an amount equal to Five-Hundred Fifty Thousand Dollars ($550,000).
      Notwithstanding the foregoing, Parent and Merger Sub will indemnify and hold
      harmless Sole Shareholder from and against any Seller Damages arising out of
      a
      breach of Section 6.8
      of the
      Agreement as well as any other liability under any third party guaranty, however
      arising, up to a maximum amount of the total obligations under the Company
      Agreements as of the Closing. The right of Sole Shareholder to obtain
      indemnification pursuant to this Section 9.1(b)
      shall be
      the exclusive remedy for any breach by Parent or Merger Sub of the terms of
      this
      Agreement, other than (i) actions for specific performance pursuant to
Section 10.9,
      or
      (ii) Seller Damages arising out of or relating to fraud, willful
      misrepresentation or intentional breach. The right to indemnification, payment
      of Seller Damages or other remedy will not be affected by any investigation
      conducted with respect to, or any Knowledge acquired (or capable of being
      acquired) at any time, whether before or after the execution and delivery of
      this Agreement or the Closing Date, with respect to the accuracy or inaccuracy
      of or compliance with, any representation, warranty, covenant or agreement
      made
      by Parent or Merger Sub or any other matter. The waiver of any condition based
      on the accuracy of any such representation or warranty, or on the performance
      of
      or compliance with any such covenant or agreement, will not affect the right
      to
      indemnification, payment of Seller Damages, or any other remedy based on any
      such representation, warranty, covenant or agreement.

     

    
      
        
        

      

      
        48

        
          

        

      

      
        
        

      

    

     

    (c) Payments.
      Any
      indemnification payment paid pursuant to this ARTICLE IX
      shall be
      treated as an adjustment to the purchase price.

     

    Section
      9.2   Claims;
      Resolution of Conflicts; Arbitration

     

    (a) In
      the
      event that a party entitled to indemnification hereunder (“Indemnitee”) seeks to
      exercise its rights to obtain indemnification for Damages under Section 9.1,
      Indemnitee shall deliver to the party obligated to indemnify Indemnitee
      (“Indemnitor”) a written notice specifying in reasonable detail the nature of
      the claim for which indemnification is being sought and the amount of Damages
      (each, an “Officer’s Certificate”). Such amount shall become payable within ten
      (10) Business Days of receipt of the Officer’s Certificate. Indemnitor shall
      have the right to object to one or more of the claims set forth in any Officer’s
      Certificate delivered by Indemnitee by serving written notice thereof within
      fifteen (15) Business Days following the delivery of such Officer’s Certificate,
      which notice shall specify in reasonable detail the basis for such objection.
      In
      the event that Indemnitor does not object to a claim in accordance with the
      preceding sentence by the close of business on the fifteenth (15th) Business
      Day
      following receipt by Indemnitee of the Officer’s Certificate, Indemnitor shall
      be deemed to have accepted and agreed to the claim set forth in such Officer’s
      Certificate, and shall be precluded from raising any objection thereto following
      such date.

     

    (b) In
      case
      Indemnitor shall so object in writing to any claim or claims by Indemnitee
      made
      in any Officer’s Certificate, Indemnitee shall have fifteen (15) days after
      receipt of an objection by Indemnitor to respond thereto in a written statement.
      If after such fifteen (15) day period there remains a dispute as to any claims,
      Indemnitee and Indemnitor shall attempt in good faith for sixty (60) days to
      agree upon the rights of the respective parties with respect to each of such
      claims. If Indemnitee and Indemnitor should so agree, the claims set forth
      in
      such Officer’s Certificate shall be modified as necessary to reflect such
      agreement.

     

    
      
        
        

      

      
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    (c) If
      no
      such agreement can be reached after good faith negotiation, either Indemnitee
      or
      Indemnitor may, by written notice to the other, demand arbitration of the matter
      unless the amount of the damage or loss is at issue in pending litigation with
      a
      third party, in which event arbitration shall not be commenced until such amount
      is ascertained or both parties agree to arbitration; and in either such event
      the matter shall be settled by arbitration conducted by three arbitrators.
      Within twenty (20) days after such written notice is sent, Indemnitee and
      Indemnitor shall each select one arbitrator, and the two arbitrators so selected
      shall select a third arbitrator. The decision of the arbitrators as to the
      validity and amount of any claim in such Officer’s Certificate shall be binding
      and conclusive upon the parties to this Agreement.

     

    (d) Judgment
      upon any award rendered by the arbitrators may be entered in any court having
      jurisdiction. Any such arbitration shall be held in Orange County, California
      under the commercial rules then in effect of the American Arbitration
      Association. All costs and expenses (including attorneys’ fees and expenses)
      incurred in connection with any such arbitration shall be paid by the party
      incurring such expense. The fees and expenses of each arbitrator and the
      administrative fee of the American Arbitration Association shall be allocated
      by
      the arbitrator or arbitrators, as the case may be (or, if not so allocated,
      shall be borne equally by Indemnitee and Indemnitor).

     

    Section
      9.3   Third-Party
      Claims

     

    In
      the
      event that Indemnitee becomes aware of a third-party claim which Indemnitee
      believes give rise to indemnification under this ARTICLE
      IX
      (a
“Third
      Party Claim”),
      Indemnitee shall promptly notify Indemnitor of such Third Party Claim;
provided,
      however,
      that
      the failure to give prompt notice shall not affect the indemnification provided
      hereunder except to the extent Indemnitor has been actually prejudiced as a
      result of such failure. The notice of Third Party Claim shall include, based
      on
      the information then available to Indemnitee, a summary in reasonable detail
      of
      the basis for the claim and a reasonable estimate of the Damages. Indemnitor
      shall be entitled, at its own expense, to participate therein; provided,
      however,
      Indemnitee shall have full control over the litigation, including settlement
      and
      compromise thereof; provided,
      further
      that any
      such settlement shall not be determinative of the existence of or amount of
      Damages relating to such claim, except with the consent of Indemnitor, which
      consent shall not be unreasonably withheld or delayed and which consent shall
      be
      deemed to have been given unless Indemnitor shall have objected within thirty
      (30) days after a written request for such consent by Indemnitee. In the event
      that Sole Shareholder has consented to any settlement of a Third Party Claim,
      the Sole Shareholder shall not have any power or authority to object under
      Section
      9.4
      or any
      other provision of this ARTICLE IX
      to any
      claim by an Parent or Merger Sub for offset against the amounts payable to
      Sole
      Shareholder or for indemnity in the amount of such settlement (including,
      without limitation, pursuant to Section
      9.4).

     

    Section
      9.4   No
      Right of Contribution

     

    Sole
      Shareholder shall not make any claim for contribution from the Company or the
      Surviving Corporation with respect to any indemnity claims arising under or
      in
      connection with this Agreement to the extent that the Company, Surviving
      Corporation or any Indemnified Person is entitled to indemnification hereunder
      for such claim, and the Sole Shareholder hereby waives any such right of
      contribution from the Company or the Surviving Corporation it has or may have
      in
      the future. 

     

    
      
        
        

      

      
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    ARTICLE
      X

     

    GENERAL
      PROVISIONS

     

    Section
      10.1   Survival

     

    The
      representations, warranties, covenants and agreements of the Company contained
      in this Agreement as modified by the Company Disclosure Schedule or any exhibit
      or schedule or certificate delivered pursuant to this Agreement shall survive
      until the twenty-four (24) month anniversary of the Closing Date, except with
      respect to the matters set forth in Sections
      3.3
      (Capitalization, Title to Shares), 3.12
      (Title
      to Property), 3.14
      (Environmental Matters) and 3.16
      (Taxes),
      which shall survive until expiry of the applicable statute of limitations,
      except for those certain covenants and agreements (such as those relating to
      the
      right to indemnification) that call for action after the Effective Time, which
      survive indefinitely. In no case shall the termination of the representations,
      warranties, covenants and agreements affect any claim for misrepresentation
      or
      breach thereof or default thereunder if written notice of such
      misrepresentation, breach or default is given to the Sole Shareholder (including
      under Section 9.3)
      prior
      to such termination.

     

    Section
      10.2   Notices

     

    All
      notices and other communications hereunder shall be in writing and shall be
      deemed received (i) on the date of delivery if delivered personally and/or
      by messenger service, (ii) on the date of confirmation of receipt of
      transmission by facsimile (or, the first Business Day following such receipt
      if
      (a) the date is not a Business Day or (b) confirmation of receipt is given
      after
      5:00 p.m., California Time) or (iii) on the date of confirmation of receipt
      if delivered by a nationally recognized courier service (or, the first Business
      Day following such receipt if (a) the date is not a Business Day or (b)
      confirmation of receipt is given after 5:00 p.m., California Time), to the
      parties at the following address or facsimile numbers (or at such other address
      or facsimile number for a party as shall be specified by like notice):

     

    
      	
            	(a)	
              if
                to Parent or the Surviving Corporation,
                to:

            

    

     

    U.S.
      Dry
      Cleaning Corporation

    125
      Tahquitz Canyon, Suite 203

    Palm
      Springs, CA 92262

    Attention: Robert
      Y.
      Lee, CEO

    Facsimile
      No.: (310)
      226-8553

     

    
      
        
        

      

      
        51

        
          

        

      

      
        
        

      

    

     

    with
      a
      copy to (not notice):

     

    Greenberg
      Traurig, LLP

    650
      Town
      Center Drive, Suite 1700

    Costa
      Mesa, California 92626

    Attention: John
      J.
      Giovannone, Esq.

    Facsimile
      No.: (714)
      708-6547

     

    
      	
            	(b)	
              if
                to the Company prior to the Closing,
                to:

            

    

     

    Cleaners
      Club, Inc.

    11660
      Sterling Ave.

    Riverside,
      CA 92503

    Attention:
       Riaz
      Chauthani

    Facsimile
      No.: (951)
      509-6934

     

    with
      a
      copy to (not notice):

     

    Best
      Best
& Krieger LLP

    3750
      University Ave.

    Riverside,
      CA 92501

    Attention:
       George
      Reyes, Esq.

    Facsimile
      No.: (951)
      686-3083

     

    
      	
            	(c)	
              if
                to the Sole Shareholder, to:

            

    

     

    Riaz
      Chauthani

    11711
      Collett Ave #1722

    Riverside,
      CA 92505

    Facsimile
      No.: (951)
      509-6934

     

    with
      a
      copy to (not notice):

     

    Best
      Best
& Krieger LLP

    3750
      University Ave.

    Riverside,
      CA 92501

    Attention:
       George
      Reyes, Esq.

    Facsimile
      No.: (951)
      686-3083

     

    Section
      10.3   Interpretation

     

    When
      a
      reference is made in this Agreement to Exhibits, such reference shall be to
      an
      Exhibit to this Agreement unless otherwise indicated. The words “include,”
“includes” and “including” when used herein shall be deemed in each case to be
      followed by the words “without limitation.” The phrase “made available” in this
      Agreement means that the information referred to has been made available if
      requested by the party to whom such information is to be made available. The
      phrases “the date of this Agreement”, “the date hereof”, and terms of similar
      import, unless the context otherwise requires, shall be deemed to refer to
      December 21, 2006. The table of contents and headings contained in this
      Agreement are for reference purposes only and shall not affect in any way the
      meaning or interpretation of this Agreement.

     

    
      
        
        

      

      
        52

        
          

        

      

      
        
        

      

    

     

    Section
      10.4   Counterparts

     

    This
      Agreement may be executed in one or more counterparts, all of which shall be
      considered one and the same agreement and shall become effective when one or
      more counterparts have been signed by each of the parties and delivered to
      the
      other parties, it being understood that all parties need not sign the same
      counterpart. 

     

    Section
      10.5   Entire
      Agreement; Nonassignability; Parties in Interest

     

    This
      Agreement and the certificates, documents and instruments and other agreements
      specifically referred to herein or delivered pursuant hereto, including the
      Exhibits, the Schedules, including the Company Disclosure Schedule (a)
      constitute the entire agreement among the parties with respect to the subject
      matter hereof and supersede all prior agreements and understandings, both
      written and oral, among the parties with respect to the subject matter hereof,
      (b) except by operation of the Merger, shall not be assigned by operation
      of law or otherwise except as otherwise specifically provided, and (c) shall
      be
      binding upon and inure to the benefit of the parties hereto and their respective
      successors and permitted assigns. Except with respect to the right to receive
      payments by Sole Shareholder in accordance with the terms of this Agreement,
      nothing in this Agreement shall create or be deemed to create any third party
      beneficiary rights in any person or entity not a party to this
      Agreement.

     

    Section
      10.6   Severability

     

    In
      the
      event that any provision of this Agreement, or the application thereof, becomes
      or is declared by a court of competent jurisdiction to be illegal, void or
      unenforceable, the remainder of this Agreement will continue in full force
      and
      effect and the application of such provision to other persons or circumstances
      will be interpreted so as reasonably to effect the intent of the parties hereto.
      The parties further agree to replace such void or unenforceable provision of
      this Agreement with a valid and enforceable provision that will achieve, to
      the
      extent possible, the economic, business and other purposes of such void or
      unenforceable provision.

     

    Section
      10.7   Governing
      Law

     

    This
      Agreement shall be governed by and construed in accordance with the Laws of
      the
      State of California without reference to such state’s principles of conflicts of
      law. Each of the parties hereto irrevocably consents to the exclusive
      jurisdiction of any court located within the State of California, in connection
      with any matter based upon or arising out of this Agreement or the matters
      contemplated herein, and agrees that process may be served upon them in any
      manner authorized by the Laws of the State of California for such persons and
      waives and covenants not to assert or plead any objection which they might
      otherwise have to such jurisdiction and such process.

     

    
      
        
        

      

      
        53

        
          

        

      

      
        
        

      

    

     

    Section
      10.8   Rules
      of Construction

     

    The
      parties hereto agree that they have been represented by counsel during the
      negotiation, preparation and execution of this Agreement and, therefore, waive
      the application of any law, regulation, holding or rule of construction
      providing that ambiguities in an agreement or other document will be construed
      against the party drafting such agreement or document.

     

    Section
      10.9   Specific
      Performance

     

    The
      parties hereto agree that if any of the provisions of this Agreement were not
      performed in accordance with their specific terms or were otherwise breached,
      irreparable damage would occur, no adequate remedy at law would exist and
      damages would be difficult to determine, and that the parties shall be entitled
      to specific performance of the terms hereof, in addition to any other remedy
      at
      law or equity. 

     

    Section
      10.10   Descriptive
      Headings

     

    The
      descriptive headings herein are inserted for convenience only and are not
      intended to be part of or to affect the meaning or interpretation of this
      Agreement. 

     

    Section
      10.11   Force
      Majeure

     

    No
      party
      shall be deemed to fail to perform its obligations or respond to any notice
      on a
      timely basis if its failure results solely from the following causes beyond
      its
      reasonable control, specifically: war, terrorism, strikes, natural disaster
      or
      acts of God. Any delay resulting directly from any of said causes shall extend
      accordingly the time to perform or respond by the length of the delay. For
      avoidance of doubt, the foregoing shall in no event relieve any party of its
      obligations hereunder or permit a party to fail to respond to notice beyond
      the
      extension described in the preceding sentence.

     

    Section
      10.12   Attorneys’
      Fees

     

    Should
      any party hereto institute any action or proceeding in court or otherwise to
      enforce any provision hereof or for damages by reason of alleged breach of
      any
      provision of this Agreement, the prevailing party shall be entitled to receive
      from the non-prevailing party such reasonable out of pocket expenses (including
      attorneys’ fees and expenses) incurred by the prevailing party in connection
      with any such action or proceeding.

     

    [Signature
      page follows]

     

    
      
        
        

      

      
        54

        
          

        

      

      
        
        

      

    

    IN
      WITNESS WHEREOF, the Company, Parent, Merger Sub, and the Sole Shareholder
      have
      executed and delivered this Agreement or have caused this Agreement to be
      executed and delivered by their respective officers thereunto duly authorized,
      all as of the date first written above.

     

    
      	 	 	 	 
	
              U.S.
                Dry Cleaning Corporation

            	 	 	
              Cleaners
                Club Acquisition Sub, Inc.

            
	 	 	 	 
	 	 	 	 
	
              By:
                /s/ Robert Y. Lee

            	 	 	
              By:
                /s/ Robert Y. Lee

            
	
              
                

              

              Name:
                Robert Y. Lee

            	 	 	
              
                

              

              Name:
                Robert Y. Lee

            
	
              Title:
                Chief Executive Officer

            	 	 	
              Title: President

            

    

     

    
      	 	 	 	 
	
              Cleaners
                Club, Inc.

            	 	 	
              Sole
                Shareholder

            
	 	 	 	 
	 	 	 	 
	By:
              /s/ Riaz
              Chauthani	 	 	By:
              /s/ Riaz
              Chauthani
	
              
                

              

              Name: Riaz
                Chauthani

            	 	 	
              
                

              

              Riaz
                Chauthani

            
	
              Title: President

            	 	 	 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    EXHIBIT
      A

     

    AGREEMENT
      OF MERGER

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    EXHIBIT
      B

     

    FORM
      OF ARTICLES OF INCORPORATION

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    EXHIBIT
      C

     

    FORM
      OF BYLAWS

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    EXHIBIT
      D

     

    FORM
      OF COMPANY COUNSEL LEGAL OPINION

    
       

      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    EXHIBIT
      E

     

    FORM
      OF NON-COMPETE AGREEMENT

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    EXHIBIT
      F

     

    FORM
      OF CONSULTING AGREEMENT

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    EXHIBIT
      G

     

    FORM
      OF REGISTRATION RIGHTS AGREEMENTCONFIDENTIAL

     

    THIS
      SUBSCRIPTION IS EXECUTED IN RELIANCE UPON THE EXEMPTION PROVIDED BY SECTION
      4(2)
      THE SECURITIES ACT OF 1933 (THE “SECURITIES
      ACT”)
      AND
      REGULATION D, RULE 506 FOR TRANSACTIONS NOT INVOLVING A PUBLIC OFFERING UNDER
      THE SECURITIES ACT. THIS OFFERING IS BEING MADE ONLY TO ACCREDITED
      INVESpTORS.

     

      
        

      

    

     

    SUBSCRIPTION
      FOR SERIES A CONVERTIBLE DEBENTURE

     

    
      

    

     

    THIS
      SUBSCRIPTION (this
      “Subscription”)
      has
      been executed by the undersigned (“Purchaser”)
      in
      connection with the purchase of a Series A Convertible Debenture in the amount
      set forth on the signature page of this Subscription (the “Debenture”),
      due
      and payable by U.S. Dry Cleaning Corporation, a Delaware corporation (the
“Corporation”),
      in
      accordance with the terms of Exhibit
      A.
      This
      Subscription will be accepted by the Corporation as part of a private placement
      consisting of (1) a series of Series A Convertible Debentures (hereinafter
      referred to collectively as the “Debentures”)
      having
      an aggregate, principal amount not to exceed Three Million Nine Hundred Thousand
      Dollars ($3,900,000), and (2) common stock of the Corporation in the amount
      of
      16,666 shares for every $100,000 of Subscription Funds (defined below) paid.
      As
      used herein, the term “Unit”
shall
      mean (1) a Debenture, and (2) 16,666 shares of common stock of the Corporation
      for every $100,000 of Subscription Funds paid. The offer and sale of the Units
      being subscribed for pursuant to this Subscription have not been registered
      under the Securities Act. The offer of the Units and, if this Subscription
      is
      accepted by the Corporation, the sale of the Units to Purchaser, is being made
      in reliance upon Rule 506 of Regulation D, promulgated under Section 4(2) of
      the
      Securities Act. (All dollar amounts in this Subscription are expressed in U.S.
      Dollars).

     

    The
      undersigned Purchaser is:

     

    NAME:
      _____________________________          

     

    ADDRESS:
      _____________________________        

     

    if
      applicable, a company organized under the laws of ______________

     

    ARTICLE
      1

    SUBSCRIPTION

     

    1.1  Purchase
      of Unit.
      Purchaser desires to subscribe for and agrees to purchase the Debenture payable
      to Purchaser on or before twelve months following the date of the note, with
      no
      interest, payable according to the terms and conditions set forth in
Exhibit
      A
      to this
      Subscription, and the number of shares of common stock within the Unit as set
      forth on the signature page. The Debenture shall be convertible into shares
      of
      the Corporation’s common stock, in accordance with the terms of Exhibit
      A.
      The
      shares of common stock of the Corporation that may be issued upon conversion
      of
      the Debenture shall hereinafter be referred to as the “Common
      Stock.”
Upon
      acceptance of this Subscription, the Corporation shall execute and deliver
      to
      Purchaser the Debenture evidencing the indebtedness in the form attached as
      Exhibit
      A.
      The
      subscription price set forth on the signature page (the “Subscription
      Funds”)
      shall
      be paid by Purchaser by delivery of Purchaser’s check to the Corporation
      concurrently with the execution of this Subscription. The Corporation shall
      negotiate Purchaser’s check into an interest bearing account and hold same in
      escrow until this Subscription is accepted. Purchaser understands the
      Corporation has the right to reject all or any part of this Subscription in
      its
      sole discretion.

     

    1.2  Minimum;
      Maximum Subscription.
      For
      this Subscription to be effective, a minimum dollar amount of no less than
      $1,000,000 must be raised from the sale of the Units. Until this minimum amount
      is reached, all funds raised in this Subscription will be held in escrow by
      the
      Corporation. Should the minimum amount not be reached in the Offering, all
      monies will be promptly returned to Purchasers along with accrued interest,
      if
      any. The maximum dollar amount which may be raised through this Subscription
      is
      $3,000,000.00. The maximum principal amount of all of the Debentures in the
      aggregate will be $3,900,000. Any offers by Purchasers to participate in this
      Subscription after the maximum dollar amount is raised will be refused by the
      Corporation. 

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

       

    

    1.3  Use
      of
      Proceeds.
      The
      Units are issued by the Corporation to provide working capital for the
      Corporation and consummation of the Corporation’s acquisition of other assets
      and businesses, in the Corporation's sole and absolute discretion. 

     

    ARTICLE
      2

    PURCHASER’S
      REPRESENTATIONS, WARRANTIES AND CERTIFICATIONS

     

    2.1  Accredited
      Investor. 
      Purchaser acknowledges and understands that the offer and sale of the Units
      has
      not been registered under the Securities Act of 1933, or the securities laws
      of
      any state, and that the Units are being offered and sold to Purchaser by the
      Corporation under the exemption from registration provided by Rule 506 of
      Regulation D, promulgated under Section 4(2) of the Securities Act of 1933,
      and
      consequently, the Corporation’s issuance of the Units to Purchaser is based on
      Purchaser’s representation that Purchaser is an “accredited investor” as defined
      under Regulation D. But for Purchaser qualifying as an “accredited investor,”
the Corporation would not issue the Units to Purchaser. Accordingly, Purchaser
      represents, warrants and certifies to the Corporation that Purchaser is an
      “accredited investor” under Regulation D of the Securities Act of 1933. The
      following information is requested to enable the Corporation to make that
      determination as to Purchaser's investment. Individual Purchasers must answer
      every question applicable to the Purchaser. The person making the investment
      decision on behalf of a non-individual investor should answer the applicable
      questions below as well, unless otherwise indicated. The Purchaser represents
      and warrants to the Corporation and to its agents and employees that the
      information provided below is accurate and complete in all
      respects.

    

      
        	 	
                (a)

              	
                Name
                  (individuals only): 
                  ______________________________________________________

              

      

       

      
        	
                 

              	
                 

              	
                Age
                  (individuals
                  only): ___________________________________________________

              

      

       

      
        	
                 

              	
                 

              	
                Marital
                  Status (individuals
                  only): ___________________________________________

              

      

       

      
        	
                 

              	
                 

              	
                Social
                  Security Number or Taxpayer Identification
                  Number: ________________________

              

      

       

      
        	
                 

              	
                 (b)

              	
                Home
                  Address (individuals
                  only): _______________________________________________

              
	 	 	 
	 	 	________________________________________________________________ 

      

       

      
        	
                 

              	
                 
                  (c)

              	
                Business
                  Name: _____________________________________________________________

              

      

       

      
        	
                 

              	
                 

              	
                Nature
                  of
                  Business: _____________________________________________________

              

      

       

      
        	
                 

              	
                 

              	
                Position/Title: _______________________________________________________

              

      

       

      
        	
                 

              	
                 

              	
                Length
                  of Time in
                  Position: ______________________________________________

              

      

       

      
        	
                 

              	
                 

              	
                Business
                  Address: ____________________________________________________

              

      

      

      
        	
                 

              	
                 

              	
                __________________________________________________________

              

      

       

      
        	
                 

              	
                 

              	
                Business
                  Telephone
                  Number: ___________________________________________

              

      

       

      
        	
                 

              	
                 (d)

              	
                Send
                  Correspondence to:

              

      

       

      
        	
                 

              	
                 

              	
                Home
                  (individuals only): _____ Business:
                  _______

              

      

      

      
        
           

        

        
          2

          
            

          

        

        
           

        

      

    

     

    
      	
            	 (e)	In which state does
              the
              Purchaser currently:

      	 	 	 

      	 	 	(1) Maintain
              primary residence (individuals
              only)? _______________________________

      	 	 	 

      	 	 	(2) Maintain
              secondary residences, if any (individuals
              only)? _______________________

      	 	 	 

      	 	 	(3) Vote
              (individuals
              only)? ________________________________________________

      	 	 	 

      	 	 	(4) File
              income tax returns?
              ________________________________________________

      	 	 	 

      	 	 	(5) Maintain
              a driver's license (individuals
              only)? ________________________________

       

    

    (f) List
      any
      information the Purchaser believes is relevant in showing that he or she is
      able
      to evaluate adequately the risks and merits of this investment or has knowledge
      and experience in financial or business matters:

     

       

        
          

        

         

        
          

        

         

        
          

        

        
        

      

    

     

      
    

    (g) Indicate
      whether the Purchaser has had or currently has a business relationship with
      the
      Corporation or any of its officers, directors or controlling persons. Please
      describe such relationship, if any. Please indicate if there has not been or
      is
      not presently such a relationship. 

     

    

     

    
      
 

      

    

     

    
      
   

    (h) Please
      check the appropriate description:

     

    (1) I
      have
      such knowledge and experience in financial and business matters generally and
      in
      securities investments in particular such that I am capable of evaluating the
      merits and risks of my investment in the Shares and of making an important
      investment decision, and do not wish to utilize a professional advisor in
      connection with evaluating the merits and risks of this investment.
      ____

     

    (2) I
      do not
      feel comfortable evaluating the merits and risks of my investment in the Shares
      and making an important investment decision, and do wish to utilize a
      professional advisor in connection with evaluating the merits and risks of
      this
      transaction. I understand the Corporation may require additional information
      with respect to my investment advisor and I agree to provide any and all such
      information. ____

     

    (i) I
      am an
      accredited investor within the meaning of Regulation D promulgated under
      the Act and hereby initial the specific category or categories of accredited
      investor applicable to the undersigned: 

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

       

    

    A
      THROUGH
L
      ARE
      APPLICABLE TO NON-INDIVIDUALS (Please INITIAL applicable blanks):

     

    A.
      _____     
The
      Purchaser is a bank as defined in Section 3(a)(2) of the Act acting in its
      individual or fiduciary capacity.

     

    B.
      _____      
      Purchaser is a savings and loan association or other institution as defined
      in
      Section 3(a)(5)(A) of the Act acting in its individual or fiduciary
      capacity. 

     

    C.
      _____       The
      Purchaser is a broker or dealer registered pursuant to Section 15 of the
      Securities Exchange Act of 1934. 

     

    D.
      _____     The
      Purchaser is an insurance company as defined in Section 2(13) of the Act.

     

    E.
      _____       The
      Purchaser is an investment company registered under the Investment Company
      Act
      of 1940 or a business development company as defined in Section 2(a)(48) of
      the Act.

     

    F.
      _____       The
      Purchaser is a 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.

     

    G.
      _____       The
      Purchaser is an employee benefit plan within the meaning of Title I of ERISA
      and
      (i) the investment decision is made by a plan fiduciary, as defined in
      Section 3(21) of ERISA, which is either a bank, savings and loan
      association, insurance company or registered investment advisor, or
      (ii) the employee benefit plan has total assets over $5,000,000, or
      (iii) the employee benefit plan is self-directed and its investment
      decisions are made solely by persons who meet one or more of the criteria set
      out in this Section 4(j). 

     

    H.
      _____      
The
      Purchaser is a plan established and maintained by a state, its political
      subdivisions, or any agency or instrumentality of a state or its political
      subdivisions for the benefit of its employees, and such plan has assets in
      excess of $5,000,000.

     

    I.
      _____       
 The
      Purchaser is a private business development company as defined in
      Section 202(a)(22) of the Investment Advisers Act of 1940.

     

    J.
      _____       The
      Purchaser is an organization described in Section 501(c)(3) of the Code,
      corporation, Massachusetts or similar business trust, or partnership, not formed
      for the specific purpose of acquiring the Units or Common Stock, with total
      assets in excess of $5,000,000. 

     

    K.
      _____              The
      Purchaser is a trust with total assets in excess of $5,000,000, that was not
      formed for the specific purpose of purchasing the Units or Common Stock and
      whose purchase is directed by a person who has such knowledge and experience
      in
      financial and business mattes that he is capable of evaluating the merits and
      risks of investing in the Corporation. 

     

    L.
      _____   The
      Purchaser is an entity in which all of the equity owners meet one or more of
      the
      criteria set out in this Section 4(j). If no other category applies, a separate
      questionnaire covering the criteria set forth in this Section 4(j) must be
      completed by each such equity owner. 

     

    M
      THROUGH
P
      ARE
      APPLICABLE TO INDIVIDUALS (Please INITIAL applicable blanks): 

     

    M.
      _____    The
      Purchaser is a director or executive officer of the Corporation. 

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

       

    

    N.
      _____       The
      Purchaser is a natural person and has a net worth, either alone or with the
      Purchaser's spouse, of more than $1,000,000. 

     

    O.
      _____       The
      Purchaser is a natural person and had income in excess of $200,000 during each
      of the previous two years and reasonably expects to have income in excess of
      $200,000 during the current year. 

     

    P.
      _____
 
The
      Purchaser had joint income with Purchaser's spouse in excess of $300,000 during
      each of the previous two years and reasonably expects to have joint income
      in
      excess of $300,000 during the current year.

     

    (j) I
      DO NOT
      meet any of the categories listed in subsection (i) above and am therefore
      NOT
      an accredited investor within the meaning of Regulation D promulgated under
      the Act. ____

     

    A
      Purchaser initialing only certain categories may be required to provide
      additional information to the Corporation in order to determine whether he
      meets
      the suitability standards of the Offering of the Shares. 

     

    In
      furnishing the above information, the Purchaser acknowledges that the
      Corporation will be relying on it in determining (among other things) whether
      there are reasonable grounds to believe that the Purchaser qualifies as an
      accredited investor under Section 4(2) of, and Rule 506 promulgated under,
      the Act for the purposes of the proposed investment.

     

    2.2  Financial
      Suitability.
      Purchaser also represents and warrants to the Corporation that
      Purchaser:

     

    (a)  if
      an
      individual, has the financial ability to bear the economic risk of the
      investment for an indefinite period of time, has adequate means of providing
      for
      Purchaser’s current needs and contingencies and has no need for liquidity in the
      investment;

     

    (b)  if
      a
      fiduciary, the person or entity for whom Purchaser is purchasing the Units
      is
      able to bear the substantial economic risk of the investment and can afford
      a
      complete loss of such investment;

     

    (c)  has
      relied on the independent investigation of the Corporation by Purchaser’s own
      tax and legal advisors, with respect to this Subscription and the nature and
      effect of any investment in the Units; acknowledges and confirms that the Units
      were not offered to Purchaser by means of any general solicitation or general
      advertising by the Corporation or any person acting on its behalf, including,
      but not limited to: (i) any advertisement, article, notice or other
      communication published in any newspaper, magazine or similar media or broadcast
      over television or radio; or (ii) any seminar or meeting to which Purchaser
      was
      invited by any general solicitation or general advertising; 

     

    (d)  has
      received and read in its entirety the Debenture attached as Exhibit A to this
      Subscription;

     

    (e)  has
      evaluated the risks of investing in the Corporation;

     

    (f)  has
      been
      given the opportunity (i) to ask questions of and receive answers from the
      Corporation management concerning the business of the Corporation and the terms
      of the Debenture; and (ii) to obtain additional information necessary to verify
      the accuracy of the information provided to or received by Purchaser in
      connection with the evaluation of an investment in the Units and Common Stock;
      and (iii) has investigated the Corporation’s business, management and financial
      condition and has been given the opportunity to have access to such other
      financial and other information about the Corporation and its management as
      Purchaser has deemed necessary or desirable to reach an informed and
      knowledgeable decision with respect to the purchase of the Units and Common
      Stock;

     

    (g)  has
      a
      residence address or has a principal place of business at the address set forth
      below;

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

       

    

    (h)  understands
      that the Corporation has made no representations whatsoever regarding the tax
      consequences, if any, associated with an investment in the Units; understands
      that an investment in the Corporation involves certain risks and that Purchaser
      understands those risks;

     

    (i)  is
      subscribing solely for Purchaser’s own account, for investment purposes only,
      and not for the purpose of resale, distribution, subdivision or
      fractionalization, and no other person has a direct or indirect beneficial
      interest in the Units has either: 

     

    (i)  a
      preexisting personal relationship or business contacts with the Corporation
      and/or its officers and directors of a nature and duration such as would enable
      a reasonably prudent individual to be aware of the character, business acumen
      and general business and financial circumstances of the person with whom such
      relationship exists, or

     

    (ii)  by
      reason
      of Purchaser’s business or financial experience or that of Purchaser’s
      professional advisers who are unaffiliated with and who are not compensated
      by
      the Corporation or any affiliate or selling agent of the Corporation, directly
      or indirectly, has the capacity to protect Purchaser’s own interest in
      connection with an investment in the Units; is experienced in evaluating and
      in
      other closely-held corporations, is knowledgeable in business and financial
      matters generally and is capable of evaluating the merits and risks of an
      investment in the Corporation; and

     

    (j)  affirms
      that all of the representations, warranties and covenants of Purchaser given
      by
      Purchaser to the Corporation in this Subscription and otherwise (i) are true,
      correct and complete in all respects; (ii) have been made with the intent that
      they be relied upon by the Corporation in determining Purchaser’s suitability as
      a purchaser of the Units; and (iii) shall survive Purchaser’s acquisition of the
      Units.

     

    2.3  No
      Registration.
      Purchaser understands, represents, warrants and agrees that the offer and sale
      of the Units and Common Stock have not been registered under the Securities
      Act
      of 1933 or any applicable “Blue Sky” laws and shall not be offered for sale,
      sold, delivered after sale, pledged, hypothecated, transferred, or subsequently
      disposed of by Purchaser and must be held indefinitely, unless they are
      subsequently registered under the Securities Act of 1933 or the Corporation
      receives an opinion of qualified counsel satisfactory to the Corporation that
      an
      exemption from such registration is available. Purchaser understands that any
      certificate or other instrument evidencing the Units and Common Stock shall
      bear
      a conspicuous legend or legends to the foregoing effect. As a result of the
      above restrictions, Purchaser understands and agrees that the investment in
      the
      Units and Common Stock is not liquid and that Purchaser may have to bear the
      economic risk of purchase for an indefinite period of time.

     

    2.4  Joint
      and Several.
      If more
      than one person is signing this Subscription, each of them makes every
      representation, warranty and covenant set forth in this Subscription on a joint
      and several basis. 

     

    2.5  Authority.
      If
      Purchaser is a partnership, corporation, trust, limited liability company or
      other entity, Purchaser represents and warrants that the individual signing
      on
      behalf of Purchaser has the authority to do so, the entity involved has the
      legal right and power and all authority and approval to execute and deliver
      this
      Subscription and all necessary documents in connection with an investment in
      the
      Units and Common Stock. Purchaser represents that it has not been formed for
      the
      specific purpose of acquiring the Units or Common Stock.

     

    2.6  Disclosure.
      Purchaser has received and reviewed the Corporation's public reports filed
      with
      the Securities and Exchange Commission pursuant to the Securities and Exchange
      Act of 1934 over the last twelve months, including the Corporation's Form 10-KSB
      for the year ended September 30, 2006.

     

    ARTICLE
      3

    DEBENTURE
      AND STOCK CERTIFICATES

     

    3.1  Subject
      to the accuracy of Purchaser’s representations and warranties set forth above,
      upon (i) the execution and delivery of this Subscription by Purchaser; (ii)
      the
      receipt by the Corporation of the Subscription Funds; and (iii) the acceptance
      of all or part of the Subscription by the Corporation, the Corporation shall
      issue the Units to Purchaser representing the subscriptions accepted. Any
      Subscription Funds not accepted by the Corporation will be refunded to Purchaser
      by the Corporation’s return of Purchaser’s check. The Debenture and common stock
      certificates issued to Purchaser shall bear the following legend conditions:
      

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

       

    

    The
      securities represented by this certificate have not been registered under the
      Securities Act of 1933, as amended (the “Act”), or the securities laws of any
      state, and may not be offered, sold, transferred, pledged, hypothecated or
      otherwise disposed of except pursuant to (i) an effective registration statement
      under the Act and any applicable state laws, or valid exception thereto, or
      (ii)
      an available exemption to registration under the Act; provided that (a) to
      the
      extent applicable, such transfer is in accordance with Rule 144 under the Act
      (or any similar rule under the Act relating to the disposition of securities),
      and (b) an opinion of counsel, reasonably satisfactory to counsel to the issuer,
      that an exemption from registration under the Act and applicable state law,
      is
      available. 

     

    ARTICLE
      4

    PURCHASER’S
      COVENANTS

     

    4.1  No
      Transfer.
      Purchaser shall not transfer, assign, pledge, hypothecate, encumber or in any
      way dispose of the Unit or any right or interest in the Unit, including any
      Debenture, common stock issued therewith or Common Stock issued upon conversion
      of the Debenture, whether voluntarily or by operation of law, by gift or
      otherwise, without complying with the Securities Act and any applicable state
      securities law.

     

    4.2  Compliance
      with Securities Act.
      Each
      Purchaser shall acknowledge that the Units and Common Stock have not been
      registered under the Securities Act of 1933 or any other applicable securities
      laws, by reason of their issuance in a transaction that does not require
      registration thereunder (based in part on the accuracy of the representations
      and warranties of the Purchasers contained in the Subscription Agreement),
      and
      that the securities must be held indefinitely unless a subsequent disposition
      is
      registered as required or is exempt from such registration. Each Purchaser
      shall
      acknowledge that the Securities and Exchange Commission currently takes the
      position that coverage of short sales of shares of the Corporation’s common
      stock “against the box” prior to the effective date of a Registration Statement
      for the sale of the Common Stock is a violation of Section 5 of the Securities
      Act of 1933, as set forth in Item 65, Section 5 under Section A, of the Manual
      of Publicly Available Telephone Interpretations, dated July 1997, compiled
      by
      the Office of Chief Counsel, Division of Corporation Finance of the Securities
      and Exchange Commission. Accordingly, each Purchaser shall agree not to use
      any
      of the Common Stock to cover any short sales made prior to the effective date
      of
      such a registration statement or the date on which the shares are permitted
      to
      be sold under Rule 144, as promulgated by the Securities and Exchange
      Commission.

     

    4.3  Indemnity
      and Release.
      Purchaser hereby agrees to indemnify, defend and hold harmless the Corporation,
      its officers, directors, employees and agents against any and all loss,
      liability, claim, damage and expense, including, but not limited to, any and
      all
      attorneys fees, costs and expenses incurred in connection with or arising out
      of
      the investigation, preparation or defense against any litigation commenced
      or
      threatened or any claim whatsoever arising out of or in connection with a breach
      of any representation or warranty or failure to fulfill any obligation of
      Purchaser, whether contained in this Subscription or in any other document
      furnished by Purchaser in connection with the Purchase of the Units

     

    ARTICLE
      5

    GENERAL
      PROVISIONS

     

    5.1  Notices.
      All
      notices, requests, demands and other communications required or permitted under
      this Subscription shall be in writing and shall be deemed duly given and
      received (i) on the date of delivery if personally delivered or if delivered
      by
      telegram or facsimile with electronic confirmation of receipt, (ii) on the
      day
      specified for delivery if sent by nationally recognized overnight courier
      service (e.g.,
      UPS,
      Federal Express, etc.), or (iii) three (3) business days after depositing with
      the United States Postal Service if mailed by certified mail, postage prepaid,
      return receipt requested, to the parties at their addresses set forth on the
      signature page of this Subscription, or such other address as may be designated
      from time to time in writing by any party to all other parties. 

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

       

    

    5.2  Effect
      of Headings, Schedules and Exhibits.
      The
      subject headings of the paragraphs of this Subscription are included for
      purposes of convenience only and shall not affect the construction or
      interpretation of any of its provisions. All schedules and exhibits to this
      Subscription are incorporated into and made part of this Subscription as if
      set
      forth in their entirety in this Subscription. 

     

    5.3  Amendment
      and Waiver.
      No
      provision of this Subscription may be altered, amended or repealed in whole
      or
      in part other than by the written consent of all the parties to this
      Subscription. No waiver shall be binding unless executed in writing by the
      party
      granting the waiver. Neither the failure nor delay on the part of any party
      to
      exercise any right, remedy, power, privilege or provision under this
      Subscription shall operate as a waiver of such right, remedy, power, privilege
      or provision. Waiver of any right, remedy, power, privilege or provision under
      this Subscription shall not be deemed or constitute a waiver of any other right,
      remedy, power, privilege or provision under this Subscription, whether or not
      similar, nor shall such waiver constitute a continuing waiver. 

     

    5.4  Assignment.
      Neither
      party shall have the right to assign or delegate any rights or obligations
      under
      this Subscription without the prior written consent of the other
      party.

     

    5.5  Successors
      and Assigns.
      Subject
      to the restrictions on assignment under paragraph 5.4, this Subscription shall
      be binding upon and inure to the benefit of the parties and their respective
      heirs, beneficiaries, legal representatives, successors and
      assigns.

     

    5.6  Governing
      Law and Venue.
      This
      agreement and the Debenture shall be governed by and construed in accordance
      with the laws of the State of California, without regard to principles of
      conflicts of law. The Corporation and Purchaser each irrevocably and
      unconditionally:

     

    (a)  submit
      to
      the nonexclusive jurisdiction of the Federal and state courts for the Central
      District of California and County of Orange, California, respectively, for
      any
      legal proceeding arising out of or in connection with this Subscription or
      the
      Debenture;

     

    (b)  agree
      that service of process in any legal proceeding may be effected by mailing
      a
      copy thereof by registered or certified mail, postage prepaid, to its address
      set forth in this Subscription or at such other address as may be provided
      by
      the parties for such purpose; and

     

    (c)  waive,
      to
      the maximum extent permitted by law, any right it may have to claim or recover
      in any legal proceeding any special, exemplary, punitive or consequential
      damages.

     

    5.7  Severability.
      Each
      provision of this Subscription is independent, separate and divisible, and
      in
      the event any provision of this Subscription is found by the final order of
      an
      arbitrator or a court of competent jurisdiction to be invalid, unenforceable
      or
      in contravention of any applicable federal or state law or regulation, such
      provision shall be deemed not to be a part of this Subscription and shall not
      affect the validity or enforceability of the remaining provisions. Nothing
      contained in this Subscription shall be construed so as to require the
      commission of any acts contrary to law, and wherever there is a conflict between
      any provision of this Subscription and any present or future law or regulation,
      such provision shall be limited to the extent necessary to make it comply with
      such law or regulation.

     

    5.8  Further
      Assurances.
      The
      parties shall execute such other and further instruments and documents and
      shall
      take such further action as may be reasonably required to implement and carry
      out this Subscription.

     

    5.9  Entire
      Agreement.
      This
      agreement together with related agreements referred to in this Subscription
      and
      executed concurrently with this Subscription represent the entire agreement
      between the parties with respect to the subject matter set forth in this
      Subscription and supersede all prior and contemporaneous oral and written
      agreements, communications, representations, commitments or understandings
      of
      the parties.

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

       

    

    5.10  Counterparts.
      This
      agreement may be executed in any number of counterparts by original or facsimile
      signature, and each such counterpart shall be deemed to be an original
      instrument as to the party whose signature appears on such counterpart, and
      all
      of which together shall constitute one and the same instrument.

     

    5.11  Time.
      Time is
      of the essence under this Subscription.

     

    IN
      WITNESS WHEREOF, the undersigned has subscribed to this Subscription as of
      the
      date set forth below.

     

    [signature
      begins on next page]

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

    PURCHASER:

    

      
        	 	 	 	 
	
                Print
                  or Type Name of Purchaser(s)

              	 	
                Date

              	 
	 	 	 	 
	 	 	 	 
	
                Signature

              	 	
                SSN
                  or Taxpayer Identification Number

              	 

      

    

     

    SUBSCRIPTION
      FUNDS:
      $___________ PRINCIPAL
      BALANCE OF DEBENTURE: $__________

     

    COMMON
      STOCK _______________

     

    Please
      print or type information below exactly as you wish it to appear in the records
      of the Corporation:

    

    Name
      and
      capacity in which subscription is made:

    _______________________________________________________________________________________

    _______________________________________________________________________________________

    

    Name
      of
      Purchaser’s Spouse and Social Security Number (if applicable):

    

    _______________________________________________________________________________________

    Name

    _______________________________________________________________________________________

    SSN

    

    Residence
      address of Individual Purchaser:

    

    _______________________________________________________________________________________

    Street

    _______________________________________________________________________________________

    City   State    Zip
      Code

    

    Telephone
      Number: _____________________   E-mail
      ______________________________

    

    Business
      address, if not an individual or if different from Residence
      address:

    _______________________________________________________________________________________

    Street

    _______________________________________________________________________________________

    City   State    Zip
      Code

    

    Telephone
      Number: __________________ 
      E-mail
      ______________________________

    

    Alternate
      Address:

    _______________________________________________________________________________________

    Street

    _______________________________________________________________________________________

    City   State    Zip
      Code

    

    Telephone
      Number: _____________________  
      E-mail
      ______________________________

    

    Notices
      to be sent to: o
      Residence o
      Business o
      Alternate

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    Acceptance
      of Subscription

     

    Principal
      Balance of Debenture to be   U.S.
      DRY
      CLEANING CORPORATION

    Issued:

    

      
        	 	 	 	 
	$ ____________	
                 By:

              	 	 
	 	 	
                Robert
                  Y. Lee

              	 
	 	
                Its:

              	 	 

      

    

     

Date:
  December _, 2006

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

    Exhibit
      A

     

    Form
      Series A Convertible Debenture

     

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

     

    SERIES
      A CONVERTIBLE DEBENTURE

    

      
        	 	 	 	 
	US
                $________________	 	 	Palm Springs,
                California
	 	 	 	December
                4,
                2006

      

    

     

    U.S.
      Dry
      Cleaning Corporation, a Delaware corporation (the “Company”),
      for
      value received, hereby promises to pay to the order of ______________
      (the
      “Holder”),
      the
      sum of ____________________ Dollars ($_____________) plus interest thereon
      in
      lawful currency of the United States of America. Payment for all amounts due
      hereunder shall be made by December 3, 2007 (the “Maturity
      Date”).
      

     

    1.  No
      Interest.
      No
      interest shall accrue on the principal balance of this Series A Convertible
      Debenture (this "Note").

     

    2.  Late
      Fee.
      If the
      principal amount of this Note is not paid in full or converted by Holder
      pursuant to Section 5
      below,
      on or before the Maturity Date, then the Company shall pay to Holder, in
      addition to the principal balance hereunder, five percent (5%) of the principal,
      unpaid balance of this Note on the Maturity Date.

     

    3.  Security
      Agreement as Security.
      This
      Note is secured by, among other things, a Security Agreement of even date
      herewith (the “Security
      Agreement”)
      executed by each of Company and its subsidiaries, as debtor, in favor of an
      agent of Holder, as secured party, which encumbers all of the assets of the
      Company (the “Collateral”).
      The
      Company will cause each of its current operating subsidiaries (as defined below)
      to execute the Security Agreements. The “Operating
      Subsidiaries”
are
      USDCC CVR Merger Sub, LLC, a California limited liability company, and Enivel,
      Inc. Once this Note has been paid in full, all of the foregoing security
      interests will be released with respect to the holder hereof.

     

    4.  Prepayment.
      This
      Note may be prepaid at any time without penalty upon delivering at least
      forty-five (45) days advance written notice to Holder.

     

    5.  Conversion
      into Common Stock.

     

    
      5.1  Voluntary
        Conversion.
        At the
        Holder’s option, any portion of this Note (including the principal and any
        accrued interest) may be converted into fully-paid and nonassessable shares
        of
        Common Stock of the Company at the Conversion Price specified
        below.

    

     

    
      5.2  Conversion
        Procedure.
        At any
        time prior to the Maturity Date, the Holder may notify the Company in writing
        that it intends to convert the Note. Such notification shall be accompanied
        by
        the original of the Note. The Company shall, as soon as practicable, issue
        and
        deliver to the Holder of this Note a certificate in the name of the Holder
        for
        the number of shares of the Common Stock to which the Holder of this Note
        shall
        be entitled. Such conversion shall be deemed to have been made as of the
        date of
        such surrender of the Notes, and the person or persons entitled to receive
        the
        Common Stock issuable upon such conversion shall be treated for all purposes
        as
        the record holder or holders of such Common Stock on such
        date.

    

     

    
      
         

      

      
        Exhibit
          A
          - Page 2

        
          

        

      

      
         

      

    

     

    
      5.3  Mechanics
        and Effect of Conversion.
        No
        fractional shares of capital stock shall be issued upon conversion of this
        Note.
        In lieu of the Company issuing any fractional shares to the Holder upon the
        conversion of this Note, the Company shall pay to the Holder the amount of
        outstanding principal and interest that is not so converted. Upon conversion
        of
        this Note, the Company shall be forever released from all its obligations
        and
        liabilities under this Note, except that the Company shall be obligated to
        pay
        the Holder, within ten (10) days after the date of such conversion, any interest
        accrued and unpaid or unconverted to and including the date of such conversion,
        and no more.

    

     

    
      	5.4  	
              Conversion
                Price.

            

    

     

    
      5.4.1  Definitions.
        For
        purposes of this Note, the following terms shall have the meanings set forth
        below:

    

     

    
      (1)  "Common
        Stock"
        shall
        mean the common stock of the Company.

    

     

    
      (2)  "Common
        Stock Equivalents"
        shall
        mean Convertible Securities and rights entitling the holder thereof to receive,
        directly or indirectly, additional shares of Common Stock without the payment
        of
        any consideration by such holder for such additional shares of Common Stock
        or
        Common Stock Equivalents.

    

     

    
      (3)  "Conversion
        Price"
        shall
        mean the price, determined pursuant to this Section 5.4,
        at
        which shares of Common Stock shall be deliverable upon conversion of this
        Note.

    

     

    (4)  "Convertible
      Securities"
      shall
      mean any indebtedness or shares of stock convertible into or exchangeable for
      Common Stock, including this Note.

     

    
      (5)  "Current
        Conversion Price"
        shall
        mean the Conversion Price immediately before the occurrence of any event,
        which,
        pursuant to this Section 5.4,
        causes
        an adjustment to the Conversion Price.

    

     

    
      (6)  "Options"
        shall
        mean any rights, warrants or options to subscribe for or purchase Common
        Stock
        or Convertible Securities.

    

     

    
      5.4.2  Initial
        Conversion Price.
        The
        initial Conversion Price shall be $3.00 per share of Common Stock. The
        Conversion Price shall be subject to adjustment from time to time in certain
        instances as hereinafter provided.

    

     

    
      5.4.3  Adjustments
        to Conversion Price.
        Subject
        to 5.4.1(4)
        below,
        the Conversion Price in effect from time to time shall be subject to adjustment
        in certain cases as follows:

    

     

    
      (1)  Stock
        Splits; Dividends; Distributions and Combinations.
        If the
        Company at any time or from time to time after the date of this Note fixes
        a
        record date for the effectuation of a split or subdivision of the outstanding
        shares of Common Stock or the determination of holders of Common Stock entitled
        to receive a dividend or other distribution payable in additional shares
        of
        Common Stock or Common Stock Equivalents, then, following such record date
        (or
        the date of such dividend, distribution, split or subdivision if no record
        date
        is fixed), the Conversion Price shall be appropriately decreased so that
        the
        number of shares of Common Stock issuable on conversion of this Note shall
        be
        increased in proportion to such increase in the number of outstanding shares
        of
        Common Stock (including for this purpose, Common Stock Equivalents). If the
        number of shares of Common Stock outstanding at any time after the date of
        this
        Note is decreased by a combination of the outstanding shares of Common Stock,
        then, following the record date of such combination, the Conversion Price
        shall
        be appropriately increased so that the number of shares of Common Stock issuable
        on conversion of this Note shall be decreased in proportion to such decrease
        in
        the number of outstanding shares of Common Stock.

    

     

    
      
         

      

      
        Exhibit A -
          Page
          3

        
          

        

      

      
         

      

    

     

    
      (2)  Recapitalizations.
        If at
        any time or from time to time there shall be a recapitalization of the Common
        Stock (other than a subdivision, combination or merger, sale of the voting
        stock
        of the Company or a sale of assets transaction provided for elsewhere in
        this
        Section 5.4.3),
        provision shall be made so that the holder of this Note shall thereafter
        be
        entitled to receive upon conversion of this Note the number of shares of
        stock
        or other securities or property of the Company or otherwise, to which a holder
        of the number of shares of Common Stock of the Company which the Holder is
        then
        entitled to receive upon conversion of this Note would have been entitled
        to on
        such recapitalization. In any such case, appropriate adjustment shall be
        made in
        the application of the provisions of this Section 5.4.3
        with
        respect to the rights of the holder of this Note after the recapitalization
        to
        the end that the provisions of this Section 5.4.3
        (including adjustment of the Conversion Price then in effect and the number
        of
        shares purchasable upon conversion of this Note) shall be applicable after
        that
        event in as nearly an equivalent manner as may be
        practicable.

    

     

    
      (3)  Successive
        Changes.
        The
        provisions of this Section shall similarly apply to successive issuances,
        sales,
        dividends or other distributions, subdivisions and combinations on or of
        the
        Common Stock after the date of this Note.

    

     

    
      (4)  No
        Impairment.
        The
        Company will not, by amendment of its Certificate of Incorporation or through
        any reorganization, recapitalization, transfer of assets, consolidation,
        merger,
        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 to be observed
        or performed hereunder by the Company, but will at all times in good faith
        assist in the carrying out of all the provisions of this Section 5.4.3
        and in
        the taking of all such action as may be necessary or appropriate in order
        to
        protect the conversion rights of the holder of this Note against
        impairment.

    

     

    
      (5)  Excluded
        Events.
        Notwithstanding any other provision in this Section 5.4.3
        which is
        inconsistent with or contrary to the terms of this paragraph (8), the Conversion
        Price shall not be adjusted by virtue of (a) the issuance of securities in
        connection with acquisition transactions, (b) the issuance of securities to
        financial institutions, suppliers or lessors in connection with commercial
        credit arrangements, equipment financings or similar transactions, or
        (c) conversion of the Note.

    

     

    
      
         

      

      
        Exhibit A -
          Page
          4

        
          

        

      

      
         

      

    

    (6)  Certificate
      as to Adjustments.
      Upon
      the occurrence of each adjustment or readjustment of the Conversion Price
      pursuant to this Section 5.4.3,
      the
      Company, at its expense and upon request by the holder of this Note, shall
      compute such adjustment or readjustment in accordance with the terms hereof
      and
      prepare and furnish to the holder of this Note a certificate setting forth
      such
      adjustment or readjustment and showing in reasonable detail the facts upon
      which
      such adjustment or readjustment is based. The Company shall, upon the written
      request at any time of the holder of this Note, furnish or cause to be furnished
      to such holder a like certificate setting forth (a) such adjustment and
      readjustment, (b) the Current Conversion Price, and (c) the number of shares
      of
      Common Stock and the amount, if any, of other property which at the time would
      be received upon the conversion of this Note.

     

    
      5.4.4  Business
        Combination, Merger; Sale of Company.
        After
        the date of this Note, in the event of any proposed business combination,
        consolidation or merger of the Company with or into another corporation (other
        than a business combination, consolidation or merger in which the Company
        is the
        continuing corporation and which does not result in any reclassification
        of, or
        change in, the outstanding shares of Common Stock), in the event of any proposed
        sale or transfer to another corporation of all or substantially all of the
        assets of the Company, or in the event of any proposed sale of more than
        fifty
        percent (50%) of the voting stock or equity securities of the Company, the
        holder of this Note may, upon delivery of this Note and election pursuant
        to
        Section 5.2.
        above,
        have this Note treated for all purposes as if it had been converted into
        Common
        Stock on the earlier of (a) the record date, if any, for voting by holders
        of
        Common Stock on such event, and (b) the date of such event.

    

     

    
      5.5  Reservation
        of Stock Issuable Upon Conversion.
        The
        Company shall ensure that it has at all times available out of its authorized
        but unissued shares of capital stock a sufficient number of shares of stock
        so
        that this Note can be converted into Common Stock, if the Holder elects to
        do
        so.

    

     

    6.  Assignment.
      The
      rights and obligations of the Company and the Holder of this Note shall be
      binding upon and benefit the successors, assigns, heirs, administrators and
      transferees of the parties. The Holder of this Note may transfer or assign
      its
      rights herein, but only in accordance with the Securities Act of 1933, as now
      or
      hereinafter amended, and any applicable state securities laws, and by delivering
      to the Company an opinion of legal counsel, in form and substance reasonably
      acceptable to the Company, stating that such transfer or assignment complies
      with the Securities Act of 1933 and applicable state securities
      laws.

     

    7.  Due
      on
      Sale/Encumbrance.
      The
      Security Agreement provides in part: 

     

    Without
      the prior written consent of Secured Party, Debtor shall not
      (a)
      directly
      or indirectly sell, transfer, convey, mortgage, pledge, or assign any interest
      in the Collateral or any part thereof (including any ownership interest in
      Debtor);
      or
      (b) further
      encumber, alienate, grant a lien or grant any other interest in the Collateral
      or any part thereof, whether voluntarily or involuntarily.

     

    “[T]ransfer”
shall
      include the sale, transfer, conveyance, mortgage, pledge, or assignment of
      a
      legal or beneficial ownership interest in the Collateral. “Transfer” shall not
      include the leasing or subleasing of any portion of the Collateral, or the
      sale
      of Collateral in the ordinary course of business.

     

    
      
         

      

      
        Exhibit A -
          Page
          5

        
          

        

      

      
         

      

       

    

    8.  Waiver
      and Amendment.
      The
      provisions of this Note may only be amended, waived or modified upon the written
      consent of the Company and the Holder.

     

    9.  Notices.
      Any
      notice required or permitted to be given under this Note shall be in writing
      and
      either shall be mailed by certified mail, postage prepaid, return receipt
      requested, or sent by overnight courier service, or personally delivered to
      a
      representative of the receiving party, or sent by telecopy. Notices shall
      mailed, sent, delivered, addressed as follows or to such other address as a
      party may designate by proper notice hereunder:

    

      
        	 	
                If
                  to the Holder:

              	
                 

              	 
	 	 	
                 

              	 
	 	 	
                 

              	 
	 	 	
                Attn.:_____________

              	 
	 	 	
                Facsimile:
                  __________

              	 
	 	 	 	 
	 	 	
                with
                  a copy to:

              	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	
                Attn.:
                  ___________

              	 
	 	 	
                Facsimile:
                  ________

              	 
	 	 	 	 
	 	 	 	 
	 	
                If
                  to the Company:

              	
                U.S.
                  Dry Cleaning Corporation

              	 
	 	 	
                125
                  E. Tahquitz Canyon, Suite 203

              	 
	 	 	
                Palm
                  Springs, CA 92262

              	 
	 	 	
                Attn:
                  Robbie Y. Lee

              	 
	 	 	
                Facsimile:
                  (310) 226-8553

              	 
	 	 	 	 
	 	 	
                With
                  a copy to:

                 

              	 
	 	 	
                Greenburg
                  Traurig

              	 
	 	 	
                650
                  Town Center Drive

              	 
	 	 	
                Suite
                  1700

              	 
	 	 	
                Costa
                  Mesa, CA 92626

              	 
	 	 	
                Attn:
                  John Giovannone

              	 
	 	 	
                Facsimile:
                  714-708-6501

              	 

      

    

     

    Any
      communication so addressed and mailed shall be deemed to be given on the
      earliest of (a) when actually delivered, (b) on the first business day
      after deposit with an overnight courier service, or (c) on the third business
      day after deposit in the United States mail, postage prepaid, in each case
      to
      the address of the intended addressee, and any communication so delivered in
      person shall be deemed to be given when receipted for by, or actually received
      by, Holder or the Company, as the case may be. If given by telecopy, a notice
      shall be deemed given and received when the telecopy is transmitted to the
      party’s telecopy number and confirmation of complete receipt is received by the
      transmitting party during normal business hours or on the next business day
      if
      not confirmed during normal business hours. Any party may designate a change
      of
      address by written notice to the other by giving at least ten (10) days prior
      written notice of such change of address. 

     

    
      
         

      

      
        Exhibit A -
          Page
          6

        
          

        

      

      
         

      

       

    

    10.  No
      Shareholder Rights.
      Nothing
      contained in this Note shall be construed as conferring upon the Holder or
      any
      other person the right to vote or to consent or to receive notice as a
      shareholder in respect of meetings of shareholders for the election of directors
      of the Company or any other matters or any rights whatsoever as a shareholder
      of
      the Company.

     

    11.  Governing
      Law.
      This
      Note shall be governed by and construed in accordance with the laws of the
      State
      of California; provided, however, that if any California law or laws require
      or
      permit the laws of any other jurisdiction to be applied in any proceeding,
      such
      California law or laws shall be disregarded with the effect that the remaining
      laws of the State of California shall nonetheless be applied.

     

    12.  Heading:
      References.
      All
      headings used herein are used for convenience only and shall not be used to
      construe or interpret this Note.

     

    13.  Compliance
      with Usury Laws.
      It is
      the intention of the parties to conform to applicable laws, and all agreements
      between the Company and Holder, whether now existing or hereafter arising,
      are
      hereby expressly limited so that in no event shall the amount paid or agreed
      to
      be paid to Holder, or collected by Holder, for the use, forbearance or detention
      of the money lent hereunder or otherwise, exceed the maximum amount permissible
      under applicable laws. If under any circumstances fulfillment of any provision
      hereof or of the Security Agreement or any other security document, at the
      time
      performance of such provision shall be due, shall involve exceeding the limit
      of
      validity prescribed by law, then the obligation to be fulfilled shall be reduced
      to the limit of such validity; and if the Holder shall ever receive an amount
      deemed interest, by applicable law, which would exceed the highest lawful rate,
      such amount that would be excessive interest under applicable laws shall be
      applied to the reduction of the principal amount owing hereunder or to other
      indebtedness and not to the payment of interest, or if such excessive interest
      exceeds the unpaid principal amount and other indebtedness, the excess shall
      be
      deemed to have been a payment made by mistake and shall be refunded to the
      Company.

     

    14.  Severability.
      In case
      any provision of this Note shall be invalid, illegal, or unenforceable, it
      shall, to the extent practicable, be modified so as to make it valid, legal
      and
      enforceable and to retain as nearly as practicable the intent of the parties;
      and the validity, legality, and enforceability of the remaining provisions
      shall
      not in any way be affected or impaired thereby.

     

    
      
         

      

      
        Exhibit A -
          Page
          7

        
          

        

      

      
         

      

    

     

    IN
      WITNESS WHEREOF, the Company has caused this Note to be issued on the date
      first
      written above.

    
      	
               

            	 	 
	 	
              U.S.
                Dry Cleaning Corporation,

              a
                Delaware corporation

            
	 
 	 
 	 
 
	 	By:  	 
	 	
              
Robert
              Y. Lee
	 	Title:
              ________________________

    

    
      

    
      
         

      

      
        Exhibit A -
          Page
          8

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