Document:

exv10w1

 

Exhibit 10.1

AGREEMENT AND PLAN OF MERGER

     THIS AGREEMENT AND PLAN OF MERGER is dated as of May 19, 2006, and is by and among ELECTRIC
CITY CORP., a Delaware corporation (“ELC”), PARKE ACQUISITION LLC, a California limited
liability company (“Acquisition”), Parke P.A.N.D.A. CORPORATION, a California corporation
(“Parke”), and Daniel Parke, an individual (the “Stockholder”).

W I T N E S S E T H:

     WHEREAS, ELC desires to acquire Parke by means of a transaction which is described in Section
368 of the Internal Revenue Code of 1986, as amended and accorded tax-free treatment thereunder
except to the extent otherwise required in respect of cash consideration; and

     WHEREAS, in order to consummate the transactions contemplated herein, Acquisition has been
formed and Parke will be merged with and into Acquisition (with Acquisition as the surviving
entity), upon and subject to the terms as further specified in this Agreement; and

     WHEREAS, the Stockholder is the sole stockholder of Parke and is agreeable to such acquisition
on and subject to the terms of this Agreement;

     NOW, THEREFORE, the parties hereto agree as follows:

ARTICLE 1  —  MERGER

     1.1 Merger. Upon due satisfaction or waiver of all the conditions precedent set forth
herein, at the Effective Date (as defined below), Parke shall be merged with and into Acquisition
on the terms and conditions set forth in this Agreement and as permitted by and in accordance with
the California General Corporation Law (the “General Corporation Law”) and the Beverly
Killea Limited Liability Company Act (the “Limited Liability Company Act”). Thereupon, the
separate existence of Parke shall terminate and Acquisition, as the surviving entity (the
“Surviving Entity”), shall continue to exist under and be governed by the Limited Liability
Company Act, with its Articles of Organization and its Operating Agreement as in effect at the
Effective Date to remain unchanged, unless and until amended subsequent thereto, except that

     (a) the Articles of Organization and Operating Agreement of the Surviving Entity shall
contain provisions with respect to exculpation from liability, indemnification and
advancement of expenses that are at least as favorable to the present and former directors
and officers of Parke as the corresponding provisions set forth in the Articles of
Incorporation and By-Laws of Parke as of the date of this Agreement; and

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     (b) pursuant to the Certificate of Merger (as defined below), the name of Acquisition
shall be changed to “Parke P.A.N.D.A. Company, LLC.”

The merger of Parke with and into Acquisition as herein provided is referred to as the
“Merger”.

     1.2 Filing of Certificate of Merger. Upon the Closing (as defined below), ELC,
Acquisition and Parke will cause the Certificate of Merger in the form agreed upon by the parties
hereto (the “Certificate of Merger”) to be executed, acknowledged and filed with the
Secretary of State of the State of California as provided in Section 1113 of the California
Corporations Code, and the Surviving Entity shall thereafter cause a copy of the Certificate of
Merger, certified by the Secretary of State of California, to be recorded in all required or
appropriate offices and jurisdictions, and in the offices of such public officials within and
without the State of California as may be required by law.

     1.3 Effective Date of Merger. The Merger shall become effective immediately upon the
filing of the Certificate of Merger with the Secretary of State of the State of California. The
date and time of such effectiveness is herein referred to as the “Effective Date”.

     1.4 Managers. From and after the Effective Date, the managers of the Surviving Entity
shall consist of the individuals identified on Schedule 1.4 attached hereto until replaced
in accordance with the Surviving Entity’s Articles of Organization and Operating Agreement.

     1.5 Officers. From and after the Effective Date, the officers of the Surviving Entity
shall consist of the individuals identified on Schedule 1.5 attached hereto until replaced
in accordance with the Surviving Entity’s Operating Agreement.

     1.6 Effect of Merger on Equity Ownership of Constituents.

     (a) Acquisition Stock. In connection with the Merger, each membership interest of
Acquisition outstanding as of the Effective Date shall remain unchanged as a membership interest of
the Surviving Entity.

     (b) Parke Stock. Upon the Effective Date, each share of capital stock of Parke of any
class issued and outstanding as of the Effective Date, by virtue of the Merger and without any
action on the part of the holder thereof, shall automatically be converted into the right to
receive a pro rata portion, based on the total number of shares of capital stock of Parke
outstanding as of the Effective Date, of (x) the Cash Consideration (as defined below), and (y)
the ELC Stock Consideration (as defined below).

     (c) Definitions. For purposes of this Agreement, the following terms shall have the
following meanings:

“Cash Consideration” means an amount equal to $3,000,000 less the aggregate amount
(if any) distributed to the Stockholder pursuant to Section 6.3(h)(z).

“Common Stock” means the common stock of ELC, par value $0.0001 per share.

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“ELC Stock Consideration” means that number of shares of Common Stock which has an
equivalent value of $5,000,000, valuing each such share at the Offering Price (subject to
the restrictions hereinafter described).

“Offering Price” means the Common Stock per share purchase price paid by the
purchasers under the Rights Offering.

“Rights Offering” means a transaction pursuant to which ELC raises not less than
$15,000,000 of equity capital through a rights offering, private placement of securities or
other issuance of ELC capital securities.

     1.7 Legend. Each certificate evidencing any shares of ELC Common Stock issued to the
Stockholder pursuant to this Agreement shall bear the following legend:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THESE SECURITIES MAY NOT BE OFFERED, SOLD,
PLEDGED, TRANSFERRED OR HYPOTHECATED OR OTHERWISE ASSIGNED IN THE ABSENCE OF SUCH
REGISTRATION OR AN OPINION OF COUNSEL, SATISFACTORY TO ELECTRIC CITY CORP., THAT
THERE IS AN AVAILABLE EXEMPTION FROM REGISTRATION.

The legend set forth above shall be removed and ELC shall promptly issue a certificate without such
legend, if: (i) such shares are registered for resale under the Securities Act of 1933, as amended
(the “Securities Act”); (ii) in connection with a sale transaction, the Stockholder
provides ELC with an opinion of counsel reasonably acceptable to ELC to the effect that a public
sale, assignment or transfer of such shares of Common Stock may be made without registration under
the Securities Act; or (iii) the Stockholder provides ELC with reasonable assurances that such
shares of Common Stock have been or are being sold pursuant to Rule 144.

     1.8 Registration; Listing. By a date which is not later than the date which is one
(1) year and thirty (30) days after the Effective Date, ELC will file with the Securities and
Exchange Commission (“SEC”) a registration statement under the Securities Act on Form S-3
(together with all amendments and supplements thereto, the “S-3 Registration Statement”)
covering all of the shares of Common Stock issued by ELC pursuant to Section 1.6 (the shares of
common stock which are required to be included under the S-3 Registration Statement are herein
referred to as the “Registrable Stock”), and will apply or take other action to have all
such shares of Registrable Stock listed on the principal exchange upon which shares of the Common
Stock are then publicly traded. ELC shall use reasonable efforts to have such S-3 Registration
Statement declared effective as promptly thereafter as possible, and shall maintain the
effectiveness of the S-3 Registration Statement until the earlier of (a) the date on which all
shares of the Registrable Stock covered by the S-3 Registration Statement have been sold by the
Stockholder, or (b) the 30 month anniversary of the date upon which the S-3 Registration Statement
is declared effective. ELC shall bear all of the fees and expenses (other than underwriting or
sales discounts and commissions incurred by the Stockholder) related to such registration,
including (a) the cost of

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providing a reasonable number of copies of the applicable prospectus, as the same may be
amended, to the Stockholder to permit sales under the S-3 Registration Statement and (b) the
reasonable fees and expenses of one special counsel to the Stockholder (not to exceed $10,000) in
connection with the review and filing of the S-3 Registration Statement.

ARTICLE 2  —  CLOSING

     2.1 The Closing. The closing of the transactions provided for in this Agreement (the
“Closing”) shall be held in the offices of Schwartz Cooper Chartered, 180 North LaSalle,
Chicago, Illinois 60601, counsel for ELC and Acquisition, at 10:00 a.m. local time on the fifth
business day after each condition described in Articles 8 and 9 is satisfied (or irrevocably waived
by the parties entitled to the benefit thereof), or at such other time and place as soon thereafter
as such conditions are satisfied (or waived) as shall be mutually agreed upon by the parties (the
date upon which Closing occurs is herein referred to as the “Closing Date”).

     2.2 Closing Deliveries.

     (a) Cash and Stock Deliverable to Stockholder At Closing. Upon filing of the
Certificate of Merger, ELC shall cause to be delivered to the Stockholder (a) by wire transfer to
an account designated by the Stockholder or other acceptable payment means, an amount equal to the
estimated amount of the Cash Consideration determined as provided in Section 1.7 hereof, and (b)
one or more stock certificates representing the Stock Consideration, registered in the name of the
Stockholder.

     (b) Other Deliveries. The parties hereto shall execute and deliver to each other the
agreements, instruments and documents described in Articles 8 and 9 hereof.

ARTICLE 3  —  CERTAIN EFFECTS OF MERGER

     3.1 Effect of Merger. Upon and after the Effective Date, the separate existence of
Parke shall cease and shall be merged into Acquisition, with Acquisition as the “Surviving
Entity” possessing all rights, privileges, immunities and franchises of a public or a private
nature of each of the constituent entities; and all property, real, personal and mixed and all
debts due on whatever account, including subscriptions to shares and all other choses in action,
and all and every other interest of or belonging to or due to each of the constituent entities
shall be taken and deemed to be transferred to and vested in the Surviving Entity without further
act or deed; and the title to any real estate or any interest therein, vested in any of the
constituent entities shall not revert to or be in any way impaired by reason of the Merger
contemplated herein. The Surviving Entity shall, after the Effective Date, be responsible for all
the liabilities and obligations of each of the constituent entities (but without prejudice to the
rights of Acquisition and ELC arising due to a breach by Parke or the Stockholder of a
representation, warranty or covenant contained in this Agreement), and any claim existing, or
action or proceeding pending by or against any of such constituent entities may be prosecuted or
defended by the Surviving Entity as if such Merger had not taken place. Neither the rights of
creditors nor any liens upon the property of any of the constituent entities shall be impaired by
the Merger contemplated herein.

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     3.2 Further Assurances. If at any time after the Effective Date, the Surviving Entity
shall consider or be advised that any further deeds, assignments or assurances in law or any other
things are necessary, desirable or proper:

	 	(a)	 	to perfect, confirm, or record or otherwise vest, in Acquisition the title to
any property or rights of the constituent corporations acquired or to be acquired by
reason of, or as a result of the Merger; or
	 
	 	(b)	 	otherwise to carry out the purpose of this Agreement

other than any amendment of this Agreement or any other agreement or document executed by Parke in
connection with the Contemplated Transactions (as such term is defined in Section 4.2(b)), then
Acquisition, and its officers and managers, for and on behalf of Parke or Acquisition, shall and
will execute and deliver all such deeds, assignments, instruments and assurances in law and do all
other things necessary, desirable or proper to vest, perfect or confirm title to such property or
rights in the Surviving Entity and otherwise to carry out the purposes of this Agreement, and the
officers and directors of the Surviving Entity are severally fully authorized in their respective
names thereof or otherwise to take any and all such actions.

ARTICLE 4  —  REPRESENTATIONS AND WARRANTIES OF PARKE AND THE STOCKHOLDER

Parke and the Stockholder hereby jointly and severally represent and warrant to ELC and Acquisition
as follows, which representations and warranties shall survive Closing hereunder to the extent set
forth in Article 11 hereof:

     4.1 Organization; Good Standing; Ownership. Parke is duly organized and validly
existing and in good standing under the laws of the State of California, with full corporate power
and authority to conduct its business as it is now being conducted and to own or use the properties
and assets that it purports to own or use and to enter into and perform its obligations under this
Agreement and any other instrument, document or agreement to be executed and delivered by Parke
hereunder. The Stockholder is the sole stockholder and director of Parke and no other person or
entity holds any options, warrants, convertible securities or other rights to acquire any
securities of or assets or properties of Parke or any of the ownership of Parke.

     4.2 Enforceability; Authority; No Conflict.

     (a) This Agreement constitutes the legal, valid and binding obligation of Parke and the
Stockholder, enforceable against each of them in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and similar
laws affecting creditors’ rights generally and by general principles of equity. Parke and the
Stockholder each have the right, power and authority to execute and deliver this Agreement and to
perform its or his obligations under this Agreement, and such action by Parke has been duly
authorized by all necessary action by Parke’s stockholders and board of directors.

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     (b) Neither the execution and delivery of this Agreement nor the consummation or performance
of any of the transactions on the part of Parke and the Stockholder contemplated hereby (the
“Contemplated Transactions”) by Parke and the Stockholder, as applicable, will, directly or
indirectly:

     (i) breach any provision of the articles of incorporation, by-laws or other governing
document (the “Governing Documents”) of Parke or any resolution adopted by the
stockholders or directors of Parke;

     (ii) breach or conflict with any federal, state or local law (including case law),
statute, ordinance, code or regulation (collectively, “Legal Requirements”)
applicable to Parke or the Stockholder or give any governmental body or agency the right to
challenge or seek to prevent any of the Contemplated Transactions or to exercise any remedy
or obtain any relief under any Legal Requirement or under any order, injunction, judgment,
decree, ruling, assessment or arbitration award (collectively, “Orders”) to which
Parke or the Stockholder, or any of Parke’s assets, is subject; or

     (iii) contravene, conflict with or result in a violation or breach of any of the terms
or requirements of any governmental authorization, permit or license that is held by Parke
or the Stockholder.

     (c) Except as set forth in Schedule 4.2 attached hereto, neither Parke nor the
Stockholder is required to give any notice to or obtain any consent from any person or entity in
connection with its or his execution and delivery of this Agreement or the consummation or
performance by it or him of any of the Contemplated Transactions.

     4.3 Financial Statements; Absence of Undisclosed Liabilities.

     (a) Parke and the Stockholder have delivered to ELC and Acquisition the following financial
statements:

	 	(i)	 	Parke’s unaudited annual statements of income and cash flows for the fiscal
year ended December 31, 2005 and the audited balance sheets as at December 31, 2004 and
2005 (the “Annual Financial Statements”); and
	 
	 	(ii)	 	Parke’s unaudited statements of income and cash flows for the most recently
ended calendar quarter and year-to-date, and the related unaudited balance sheet as at
the last calendar day of such calendar quarter and the then-current date (the
“Interim Financial Statements”).

All such financial statements have been prepared by Parke in accordance with its books of account
and financial records. Such financial statements present the financial condition and the results
of operations of Parke as at the respective dates thereof and for the periods referred to in such
financial statements, except that the Interim Financial Statements omit footnote disclosure and are
subject to normal year-end adjustments, and except that such financial statements have

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been prepared on a tax basis and may have items that are not in accordance with generally accepted
accounting principles.

     (b) Parke has no material liabilities which are not reflected as accruals on the balance sheet
as of March 31, 2006 which is part of the Interim Financial Statements (the “March 31 Balance
Sheet”), other than (i) ordinary course liabilities for wages and benefits, trade payables,
utilities and similar items incurred in the ordinary course of the Business (none of which are for
torts or breach of contract or product liability claims) incurred since March 31, 2006, (ii)
liabilities under any agreements, contracts, commitments, licenses or leases which have arisen in
the ordinary course of business (none of which relates to a material breach of contract or any tort
claim), (iii) liabilities for taxes for the period after March 31, 2006, and (iv) items which are
described on Schedule 4.3 attached hereto or any other Schedule to this Agreement.
Notwithstanding the foregoing, this Section 4.3(b) shall not be deemed a representation and
warranty with respect to the absence of liabilities that would be required to be disclosed to ELC
pursuant to any other section of this Agreement, it being understood and agreed that the specific
representations and warranties applicable to any liabilities under another section of this
Agreement, including, without limitation, any “knowledge” or “materiality” qualifiers, are intended
to be the only representations and warranties made with respect to any such liabilities.

     4.4 Subsidiaries and Qualification. Except as set forth on Schedule 4.4,
Parke does not have any subsidiaries and does own or hold any interest in any partnership,
proprietorship, corporation or other business entity. Parke and the Stockholder have delivered to
ELC complete copies of (a) the Articles of Incorporation of Parke and all amendments thereto, and
(b) the By-laws of Parke as currently in effect. Parke is duly qualified to do business as a
foreign corporation and is in good standing in each state and jurisdiction in which such licensing
or qualification is required, except where the failure to so qualify or be licensed to do business
could not reasonably be expected to have a material adverse effect on the business, assets,
financial condition or prospects of Parke (a “Material Adverse Effect”).

     4.5 Affiliate Transactions. Except as described in Schedule 4.5 attached
hereto, as of the date hereof and since December 31, 2005, neither the Stockholder nor any
Affiliate (as defined below) is or has been indebted to, or is or has been a creditor of, or a
guarantor of any obligation of or a party to any contract, agreement, license, option, commitment
or other arrangement, written or oral, express or implied, with Parke. For purposes of this
Agreement, an “Affiliate” means any director of Parke, any spouse or family member
(including parents, in-laws, children, step-children, siblings, grandchildren and nieces and
nephews) of the Stockholder, or any corporation, partnership or other entity in which the
Stockholder (or the spouse of the Stockholder or any such member of the Stockholder’s family) has
any equity or ownership interest of five percent (5%) or more in the aggregate.

     4.6 Governmental Authorizations. All permits, licenses and other governmental
authorizations (“Governmental Authorizations”) necessary for the operation of Parke’s
business have been obtained and are in full force and effect, except where the failure to have done
so could not reasonably be expected to have a Material Adverse Effect. Schedule 4.6
attached hereto contains an accurate list of each Governmental Authorization held by Parke or that

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otherwise relates to its business. Each such permit or license is valid and in full force and
effect, and no event has occurred or circumstance exists that may (with or without notice or lapse
of time) constitute or result directly or indirectly in a violation of or a failure to comply with
any term or requirement of any such Governmental Authorization, or result directly or indirectly in
the revocation, withdrawal, suspension, cancellation or termination of, or any modification to, any
such Governmental Authorization. Neither Parke nor the Stockholder has received, at any time since
December 31, 2004, any notice or other communication (whether oral or written) from any
governmental body regarding any actual, alleged, possible or potential violation of or failure to
comply with any term or requirement of any Governmental Authorization, or any actual, proposed,
possible or potential revocation, withdrawal, suspension, cancellation, termination of or
modification to any Governmental Authorization. All applications required to have been filed for
the renewal of the Governmental Authorizations and all other filings required to have been made
with respect thereto have been duly filed on a timely basis with the appropriate governmental
bodies.

     4.7 Warranty and Product Liability. No claims or demands have been made against Parke
alleging injury to individuals or property as a result of the ownership, possession or use of any
product manufactured or sold by Parke. All products sold by Parke prior to the Closing Date and
all work in process produced by Parke prior to the Closing Date have been, are and will be of good
quality, merchantable and in compliance in all material respects with the requirements of the
respective purchase orders and agreements under which such goods have been, are or are to be sold,
except to the extent that reserves have been created and are reflected in the March 31 Balance
Sheet for warranty claims and/or product liability claims.

     4.8 Assets.

     (a) Schedule 4.8(a) contains a true and correct legal description and street address
for each parcel of real property leased by Parke as lessee (the “Leased Real Property”) and
a description of each item of personal property which is leased by Parke as lessee (the “Leased
Personal Property”). All of the applicable leases relating to the Leased Real Property and the
Leased Personal Property are also listed on Schedule 4.8(a) (the “Leases”) and true
and complete copies of each of the Leases have been provided to ELC.

     (b) Except as otherwise disclosed on Schedule 4.8(b) attached hereto:

     (i) all the assets of Parke are either (i) owned free and clear of all security
interests, mortgages, pledges, liens, conditional sales agreements, leases, encumbrances or
charges of any nature whatsoever, or (ii) leased by Parke as lessee under the Leases;

     (ii) neither Parke nor any other party to any Lease is in default thereunder in any
material respect and there are no defenses or offsets by either party thereto against the
other, and the consummation of the Contemplated Transaction will not affect or impair the
terms, validity or enforceability thereof or require the consent of any party thereto;

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     (iii) none of the Leased Real Property is subject to any leasehold interest or tenancy
or other right to use or occupancy held by or in favor of any person or entity other than
Parke;

     (iv) to the best knowledge of Parke and the Stockholder, Parke’s use of the Leased Real
Property as it has been used in connection with the operation of its business is in
compliance with all applicable zoning and other Legal Requirements;

     (v) the assets of Parke, including those that are leased under the Leases, include all
assets and properties, real and personal, tangible and intangible, of every kind and
description used or held for use in connection with its business and operations and are in
good operating condition and repair (with the exception of normal wear and tear) and, to the
best knowledge of Parke and the Stockholder, are free from defects other than such minor
defects as do not interfere with the continued use thereof in conduct of normal operations;
and

     (vi) none of the operations of Parke carried on at the Leased Real Property encroach
upon any adjacent real property and no notice or other communication to the effect that any
such encroachment has occurred or is existing has been received by Parke or the Stockholder.

     4.9 Contracts. Schedule 4.9 attached hereto contains a complete listing of
each of the following to which Parke is a party or which relates to its business or assets (other
than the Leases):

     (a) any contract for the purchase of inventory, materials or supplies or equipment or
any capital item involving an obligation of more than $5,000 individually or $25,000 in the
aggregate;

     (b) any contract not made in the ordinary and usual course of business involving an
obligation of more than $1,000;

     (c) any contract with any labor union or other labor organization;

     (d) any pension plans, bonus, deferred or incentive compensation, profit sharing plans,
retirement plans, health care plans, life or disability insurance, vacation and paid
holiday, termination or severance pay, executive compensation or other agreements or
arrangements providing for employee remuneration or benefits (collectively, “Employee
Plans”) to which Parke is a party or by which Parke is bound;

     (e) any written agreement for the employment of any individual on a full-time,
part-time, consulting or other basis or relating to the present or future compensation or
other benefits available to any person or any transaction between any person and Parke;

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     (f) any licenses, permits or franchises relating to Parke’s business;

     (g) any dealer or distributor agreement;

     (h) any sales agency or advertising contract;

     (i) any contract, agreement or document regarding any lien, pledge, security interest
or other encumbrance upon any assets of Parke;

     (j) contracts with customers (except for purchase orders placed by customers in the
ordinary course of business);

     (k) any contract pursuant to which Parke made or will make loans or has or will have
incurred debts or become a guarantor or surety or pledged its credit on or otherwise become
responsible with respect to any undertaking of another;

     (l) distributor or sales agency or advertising contract which is not terminable by
Parke without penalty upon notice of 30 days or less;

     (m) contract not terminable by Parke without penalty within 30 days from the date of
this Agreement which involves an unperformed commitment in excess of, or goods or services
having a value in excess of, $5,000 individually or $25,000 in the aggregate (excluding any
contracts covered by any other subsection of this Section 4.9);

     (n) any contract involving any restrictions relating to Parke or its business with
respect to (i) the geographical area of operations, scope or type of business of Parke or
(ii) confidentiality; and

     (o) any other contract or agreement, either written or oral, which is material to Parke
or its business.

     As used in this Agreement, “contract” means any contract, lease, agreement,
arrangement, commitment or understanding, written or oral, expressed or implied. The items which
are required to be listed on Schedule 4.9, taken together with the Leases, are sometimes
collectively referred to herein as the “Material Contracts”.

     To the best knowledge of Parke and the Stockholder, Parke has performed all material
obligations required to be performed by it prior to the date hereof, and Parke is not in material
default, under any of the Material Contracts. To the best knowledge of Parke and the Stockholder,
none of the other parties to any of the Material Contracts is in default thereunder. No notice of
default or noncompliance with the terms thereof or of termination thereof has been received by
Parke or the Stockholder. Neither Parke nor the Stockholder has knowledge of any basis to believe
that any other party to any of the Material Contracts is likely to default thereunder or is likely
to issue any notice of default or termination thereunder.

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     4.10 Litigation; Compliance with Law.

     (a) Except for the matters listed on Schedule 4.10 attached hereto, there have not
been and are no actions, suits or proceedings pending or, to the best knowledge of Parke and the
Stockholder, threatened relating to Parke or its business before or by any court or federal, state,
municipal or other governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign.

     (b) To the best knowledge of Parke and the Stockholder, Parke is and has been at all times in
compliance in all material respects with all applicable Legal Requirements applicable to Parke or
its business. Neither Parke nor the Stockholder has any knowledge of any basis for any claim for
compensation or damage or other relief against Parke or its business for any violation of any Legal
Requirement. All notices received by Parke or the Stockholder regarding alleged non-compliance
with any Legal Requirement, and orders, writs, injunctions, decrees and arbitration decisions in
respect of non-compliance with any Legal Requirements, are listed on Schedule 4.10 and
copies of such notices, orders, writs, injunctions, decrees and arbitration decisions have been
made available to ELC and Acquisition; provided, however, that this representation and
warranty shall not be deemed to encompass matters involving compliance with applicable Legal
Requirements where one or more other specific representations are made in Article 4 of this
Agreement that cover applicable Legal Requirements with respect to a specific topic (whether or not
the term “Legal Requirements” is used in such representation and warranty) including, without
limitation, Taxes, employee benefits, labor and employment matters and Environmental Laws.

     (c) Other than matters disclosed on Schedule 4.10 attached hereto, since December 31,
2005 there have not been and are not now any actions, suits, investigations or proceedings pending
or, to the knowledge of Parke and the Stockholder, threatened against Parke or any of its
subsidiaries before any court, arbitrator or administrative or governmental body that (a) seek to
enjoin or otherwise prevent the consummation of the Contemplated Transactions or (b) materially and
adversely affect, or as to which there is a reasonable possibility of an adverse decision that
would materially and adversely affect, either individually or collectively, the business or
financial condition of Parke and its subsidiaries taken as a whole.

     (d) Neither Parke nor any of its subsidiaries is in violation of any judgment, order, writ,
injunction, decree, rule or regulation of any court or governmental department, commission, board,
bureau, agency or instrumentality, the violation of which reasonably could be expected to, either
individually or collectively, materially and adversely affect the business or financial condition
of Parke and its subsidiaries taken as a whole.

     4.11 Taxes. All federal, state, county, local and foreign tax returns, reports and
declarations of estimated tax or estimated tax deposit forms required to be filed by Parke have
been duly filed, or are being contested in good faith pursuant to appropriate proceedings. Parke
has paid all Taxes (as defined below) which have become due and has paid all installments of
estimated Taxes due, except to the extent any such Taxes are being contested in good faith pursuant
to appropriate proceedings. All Taxes and other assessments and levies which Parke is required by
law to withhold or to collect have been duly withheld and collected, and have been paid over to the
proper governmental authorities or are held by Parke in separate bank accounts

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for such payment, or are being contested in good faith pursuant to appropriate proceedings.
All Tax disputes or contests are described on Schedule 4.11 hereto. Parke has adequate
reserves on the Interim Statements for the payment of all Taxes of any kind, whether disputed or
not, and whether accrued, due, absolute, contingent or otherwise, which were or which may be
payable by Parke for any periods or fiscal years ending on or prior to the date of the Interim
Statements, including all Taxes imposed before or after the Effective Date which are attributable
to any such period or fiscal year. Except as disclosed on Schedule 4.11 attached hereto,
where such returns and reports have not been audited and either approved or settled, there has not
been any waiver or extension of any applicable statute of limitations, and Parke has not received
any notice of deficiency or adjustment, and complete copies of such returns or reports have been
furnished to ELC and Acquisition. Any disputes or contests by Parke regarding Taxes will not have
a Material Adverse Effect. “Tax” or “Taxes” means all taxes, levies, imposts,
fees, duties and other like charges of any nature whatsoever imposed by a governmental authority
responsible for the imposition of any such tax, including, without limiting the generality of the
foregoing, all income, sales, use, ad valorem, stamp, transfer, payroll, franchise and intangible
taxes and fees of any nature upon properties or assets, whether tangible or intangible, or upon
income, receipts, payrolls, transactions, net worth, capital, investment or franchise, together
with any and all additions thereto and penalties and interest payable with respect thereto or to
any assessment or collection thereof.

     4.12 Employee Relations. Except as shown on Schedule 4.12 attached hereto,
there are no labor disputes, grievances, notices or other proceedings pending or, to the best
knowledge of Parke and the Stockholder, threatened with respect to Parke or its business, nor to
the knowledge of Parke and the Stockholder does a basis exist for any such dispute or grievance.
Schedule 4.12 attached hereto lists all employees of Parke and their respective salaries or
hourly rates and describes generally all benefits which they are provided. Schedule 4.12
also lists all directors and officers of Parke and the titles or positions of key employees.

     4.13 Banks, Powers of Attorney. Schedule 4.13 attached hereto is a correct
and complete list setting forth the name of each bank in which Parke has an account or safe deposit
box, the name of each person authorized to draw thereon or to have access thereto, and the name of
each person holding a power of attorney from Parke.

     4.14 Indebtedness. Schedule 4.14 attached hereto is a correct and complete
list of all instruments, agreements or arrangements pursuant to which Parke has borrowed any money,
incurred any indebtedness or established any line of credit or letter of credit which is currently
outstanding and which represents a liability or potential liability of Parke. True and complete
copies of all such written instruments, agreements or arrangements have previously been delivered
to ELC and Acquisition.

     4.15 Insurance. Schedule 4.15 attached hereto is a list and brief description
of all policies of insurance (showing the name of carrier and type of insurance) held by or on
behalf of Parke. Parke has its buildings, plants, properties and operations, including but not
limited to machinery, equipment and inventories, adequately insured against loss or damage by fire
and all other hazards and risks of the character usually insured against by persons operating
similar

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businesses and properties in the area where Parke’s business activities are conducted under
valid and enforceable policies issued by insurers of recognized responsibility. Such insurance
coverage will be continued in full force and effect to the Closing Date. Parke has not been
refused any insurance by an insurance carrier to which it has applied for insurance during the past
three years. To the best knowledge of Parke and the Stockholder, Parke is in compliance in all
material respects with all applicable requirements of its insurance carriers.

     4.16 Patents, Trademarks, Etc. Schedule 4.16 attached hereto sets forth a
correct and complete list of all copyrights, patents, trademarks, trade names, service marks,
processes, inventions, and formulae applied for, issued to or owned by Parke, or under which Parke
is licensed or franchised or which Parke licenses to others, all of which are valid, in good
standing and uncontested. Parke possesses all copyrights, patents, inventions, formulae, processes
(secret or otherwise), trademarks, trade names and service marks necessary to conduct Parke’s
business as presently conducted. Parke has not received any notice with respect to any alleged
infringement or unlawful use of any copyright, patent, trademark, trade name, service mark,
process, invention or formula or other intangible property right owned by others. Except as
disclosed on Schedule 4.16 attached hereto, no shareholder, director, officer or employee
or Affiliate of Parke has any interest in any such copyright, patent, trade name, trademark,
service mark, process, invention or formula. Parke has not granted any outstanding licenses or
other rights to any copyright, patent, invention, formula, process, trademark, trade name or
service mark listed on Schedule 4.16.

     4.17 Accounts Payable. The accounts payable reflected on the balance sheet contained
in the Interim Statements were complete and were actual and bona fide accounts payable which rose
in the ordinary and usual course of the business.

     4.18 Accounts Receivable. The accounts receivable and unbilled work in process of
Parke, as reflected in the Interim Statements, were actual and bona fide accounts receivable and
unbilled work in process which arose in the ordinary and usual course of the business, represent
valid obligations due to Parke, and, to the best knowledge of Parke, not subject to defenses or
set-off claims, except to the extent reflected in the allowance for doubtful accounts on such
balance sheet.

     4.19 Inventory. No inventory is held by Parke on consignment from any other person or
entity or is held by any other person or entity on consignment for Parke. The inventory held by
Parke is usable or saleable in the ordinary course of business except for obsolete inventory not
reflected on the Interim Statements. The finished goods included in inventory comply in all
material respects with Parke’s specifications therefore and any related purchase orders or purchase
agreements. All raw materials and work-in-process included in inventory are items which are used in
making the finished goods of the Parke’s business.

     4.20 No Material Adverse Change. Since December 31, 2005, Parke has conducted itself
and its business only in the ordinary course consistent with past practices and, except as set
forth in Schedule 4.20 attached hereto, there has not been any:

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     (a) damage to or destruction or loss of any material asset, whether or not covered by
insurance;

     (b) entry into, termination of or receipt of notice of termination of any Material
Contract;

     (c) sale (other than sales of inventory in the ordinary course of business), lease or
other disposition of any assets or properties of Parke having a book value of more than
$5,000 individually or $25,000 in the aggregate;

     (d) indication by any customer or supplier of dissatisfaction regarding its
relationship with Parke or any intention to discontinue or change the terms of its
relationship with Parke or its business;

     (e) material change in the accounting methods used by Parke;

     (f) material defects in any products or services which Parke has manufactured or sold,
or any claim made or threatened to be made asserting any product liability or warranty
liability of Parke or any facts or basis which could reasonably be construed to raise
product liability or recall or warranty liability concerns with respect to products or
services which Parke has manufactured or sold; or

     (g) other event constituting, or which may reasonably be expected to cause, a Material
Adverse Effect.

     4.21 Employee Benefits. Except for the matters disclosed on Schedule 4.21
attached hereto, as to which true and complete copies of all relevant plans, agreements, insurance
policies, and other documentation have been furnished by Parke and the Stockholder to ELC and
Acquisition, Parke has no pension plans or employee welfare benefit plans (as such terms are
defined in the Employment Retirement Income Security Act of 1974, as amended, (“ERISA”)).
There is no material pending or threatened proceeding or governmental action relating to any
Employee Plan (as defined in Section 4.9(d)), nor, to the best knowledge of Parke and the
Stockholder, is there any basis for any such proceeding or action.

     4.22 Environmental Warranties.

     (a) Parke and the Stockholder have provided to Acquisition and ELC prior to the date hereof
copies of all environmental audits, assessments or occupational health studies and all analyses of
any groundwater, soil, air or asbestos samples taken with respect to any real estate used in
Parke’s business by, or at the direction of, Parke or the Stockholder or any of their employees or
counsel, or any governmental agency (collectively, the “Environmental Audits”), and copies
of all written communications between Parke or the Stockholder and any environmental agencies
regarding any such real estate.

     (b) Parke and the Stockholder have provided to Acquisition and ELC prior to the date

- 14 -

 

hereof copies of all Occupational Safety and Health Administration claims made against Parke
or its business.

     (c) To the knowledge of Parke and the Stockholder, there is no radioactive material located on
any of the real property used or owned by Parke.

     (d) Other than as disclosed in the Environmental Audits or as set forth on Schedule
4.22 attached hereto, Parke has operated in compliance in all material respects with all
applicable Environmental Laws (as hereinafter defined), no investigation, administrative order or
notice, consent, order and agreement, litigation, settlement or environmental claim or lien with
respect to Hazardous Materials or ACMs (as such terms are hereinafter defined) is proposed,
threatened or in existence with respect to Parke or any real property used or owned by Parke or
with respect to any off-site waste disposal to which waste relating to the operations of Parke has
been taken. None of Parke’s operations have contaminated any real property owned or used by Parke,
or any adjacent real property, with Hazardous Materials. None of the real property owned or used
by Parke is or has been used for the storage, disposal or processing of, or was the site of any
release of, Hazardous Materials in violation of any Environmental Laws.

     (e) The term “Environmental Laws” shall mean the Federal Clean Air Act, Federal Water
Pollution Control Act, Resource Conservation and Recovery Act, Solid Waste Disposal Act, Toxic
Substance Control Act and Comprehensive Environmental Response, Compensation and Liability Act, and
any other federal, state or local laws, regulations or other requirements regulating or otherwise
concerning Hazardous Materials or the environment. The term “Hazardous Material(s)” shall
mean any hazardous, toxic or dangerous substance, pollutant, contaminant, waste or other material
regulated under Environmental Laws; ACMs; oil and petroleum products and natural gas, natural gas
liquids, liquefied natural gas, and synthetic gas usable for fuel; chemicals subject to the OSHA
Hazard Communication Standard; and industrial process and pollution control wastes whether or not
hazardous within the meaning of the Federal Resource Conversation and Recovery Act.

     4.23 Brokers or Finders. Neither Parke nor the Stockholder has incurred any
obligation or liability, contingent or otherwise, for brokerage or finders’ fees or agents’
commissions or other similar payments in connection with the consummation of the Contemplated
Transactions.

     4.24 No Misleading Statements or Omissions. No representation or warranty made by
Parke or the Stockholder in this Agreement, and no statement made by or on behalf of either Parke
or the Stockholder in any certificate, document, exhibit or schedule expressly required to be
furnished hereunder, contains or will contain any untrue statement of a fact or omits or will omit
to state any fact necessary to make such representation or warranty or statement, in light of the
circumstances under which such representation, warranty or statement was made, not misleading to a
prospective purchaser of Parke.

     4.25 No Registration. Parke and the Stockholder understand that when issued at Closing
the Shares will not have been registered under the Securities Act of 1933 (the “Securities 

- 15 -

 

Act”), as amended, by reason of a specific exemption from the registration provisions
of the Securities Act, the availability of which depends upon, among other things, the bona fide
nature of the investment intent and the accuracy of Stockholder’s representations and warranties as
expressed herein or otherwise made pursuant hereto.

     4.26 Investment. The Stockholder will be acquiring the Shares for his own account for
investment, not as a nominee or agent, and not with a view to, or for resale in connection with,
any distribution thereof, nor with any present intention of selling, granting any participation in,
or otherwise distributing the same, and the Stockholder does not have any contract, undertaking,
agreement or arrangement with any person or entity to sell, transfer or grant participation to such
person or entity or to any third person or entity with respect to any of the Shares. The
Stockholder is an “accredited investor” as defined in Regulation D, Rule 501(a) under the
Securities Act and shall submit to ELC such further assurances of such status as may be reasonably
requested by ELC.

     4.27 Experience. The Stockholder acknowledges that he has such knowledge and
experience in financial, tax and business matters as to enable him to evaluate the merits and risks
of investment in ELC and the Shares and to make an informed investment decision with respect
thereto and can protect his own interests.

     4.28 Access to ELC Information. Parke and the Stockholder have had an opportunity to
ask questions of, and receive answers from, the officers of ELC concerning this Agreement, the
exhibits and schedules attached hereto and the Contemplated Transactions, as well as ELC’s
business, management and financial affairs, which questions were answered to the satisfaction of
Parke and the Stockholder. The Stockholder acknowledges that he is also a director of ELC, has
reviewed the Commission Documents (as defined in Section 5.7) and has received all the information
he considers necessary or appropriate for deciding whether to acquire the Shares.

     4.29 Speculative Nature of Investment. Parke and the Stockholder understand and
acknowledge that an investment in ELC is highly speculative and involves substantial risks, as is
disclosed in certain of the Commission Documents. The Stockholder can bear the economic risk of
such investment and is able, without materially impairing his financial condition, to hold the
Shares for an indefinite period of time and to suffer a complete loss of his investment.

     4.30 Residency. The residency of Stockholder, and Parke’s principal place of
business, are each in California.

ARTICLE 5  —  REPRESENTATIONS AND WARRANTIES OF ELC

     ELC hereby represents and warrants to Parke and the Stockholder as follows:

     5.1 Incorporation. ELC is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and is duly qualified as a foreign entity and in
good standing under the laws of each jurisdiction where its ownership, lease or operation of
property or the conduct of its business requires such qualification, other than in such
jurisdictions

- 16 -

 

where the failure to be so qualified and in good standing could not be reasonably expected to
have a material adverse effect on the business or financial condition of ELC and its subsidiaries
taken as a whole, with the requisite power and authority to perform its obligations under this
Agreement, to consummate the Contemplated Transactions and to conduct its business as currently
conducted. Acquisition is a wholly owned subsidiary of ELC. Acquisition is a limited liability
company duly organized, validly existing and in good standing under the laws of the State of
California, with the requisite power and authority to perform its obligations under this Agreement
and to consummate the Contemplated Transactions on its part.

     5.2 No Defaults; Compliance with Law. Except as is disclosed on Schedule 5.2
attached hereto, neither the execution and delivery of this Agreement nor the consummation of the
Contemplated Transactions by ELC is an event which, of itself or with the giving of notice or the
passage of time or both, constitutes a violation of or will conflict with or result in a breach of
or default under the terms, conditions or provisions of any judgment, law or regulation to which
ELC is subject, or of ELC’s Certificate of Incorporation or By-laws, or any contract, agreement or
instrument to which ELC is a party or by which it is bound. ELC is in compliance with all
applicable laws, statutes, regulations, orders, writs, injunctions and decrees of any court or
federal, state, municipal or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, and any applicable arbitration decisions, relating to ELC,
except where the failure to be in such compliance could not reasonably be expected to have a
material adverse effect on the business or financial condition of ELC and its subsidiaries taken as
a whole. Acquisition is a newly formed entity with no prior activities or business. Neither the
execution and delivery of this Agreement by Acquisition nor the consummation of the Contemplated
Transactions by Acquisition is an event which, of itself or with the giving of notice or the
passage of time or both, constitutes a violation of or will conflict with or result in a breach of
or default under the terms, conditions or provisions of any judgment, law or regulation to which
Acquisition is subject, or of Acquisition’s Articles of Organization or limited liability company
agreement, or any contract, agreement or instrument to which Acquisition is a party or by which it
is bound.

     5.3 Corporate Action. Except for obtaining the consent of the holders of ELC’s Series
E Convertible Preferred Stock, which will be obtained prior to Closing, and subject to compliance
with the condition precedent set forth in Section 9.12 below, all corporate actions and proceedings
necessary to be taken by or on the part of ELC to authorize the execution, delivery and performance
of this Agreement by ELC and Acquisition have been duly and validly taken. This Agreement has been
duly and validly authorized, executed and delivered by ELC and by Acquisition and constitutes a
valid and binding agreement of each of them, enforceable in accordance with and subject to its
terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and similar laws affecting creditors’ rights generally and by general principles of
equity.

     5.4 Brokers. There is no broker or finder or similar person who would have any valid
claim against Parke or the Stockholder for a fee or brokerage commission in connection with this
Agreement or the Contemplated Transactions as a result of any agreement, understanding or action by
ELC or Acquisition.

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     5.5 ELC Capital Structure. ELC currently has 200 million shares of common stock
authorized and 5 million shares of preferred stock authorized. As of the date hereof, 51,297,120
shares of common stock of ELC are issued and outstanding, and 232,613 shares of ELC’s Series E
Convertible Preferred Stock are issued and outstanding, and all such issued and outstanding shares
of common stock and Series E Convertible Preferred Stock have been duly authorized and are fully
paid and non-assessable. As of the date hereof, ELC has outstanding options, warrants and
convertible notes which, if fully exercised on the date hereof would result in the issuance of
33,017,114 additional shares of common stock.

     5.6 ELC Common Stock. The Shares of Common Stock to be issued to the Stockholder
pursuant to the Merger are duly authorized and, when issued to the Stockholder pursuant to
consummation of the Merger and the terms of this Agreement, will be validly issued, fully paid and
nonassessable and free of all liens, encumbrances and restrictions imposed by law (other than
restrictions upon transfer imposed generally by applicable securities laws) and subject to no
preemptive rights, co-sale rights, rights of first refusal or similar rights in favor of other
persons or entities which have not been waived. Assuming the accuracy of the representations of
Parke and the Stockholder in this Agreement and any investor questionnaire to be delivered to ELC
by the Stockholder, neither the execution and delivery of this Agreement nor the consummation of
the Contemplated Transactions is an event which, of itself or with the giving of notice or the
passage of time or both, constitutes a violation of or will conflict with or result in a breach of
or default under the terms, conditions or provisions of any judgment, law or regulation to which
ELC is subject, or ELC’s Certificate of Incorporation or By-laws, or any contract, agreement or
instrument to which ELC is a party or by which it is bound and upon consummation of the Merger in
accordance herewith, the ELC Common Stock issuable to the Stockholder hereunder will be issued in
compliance with all applicable federal and state securities laws. The registration rights granted
to the Stockholder pursuant to this Agreement do not conflict with and will not cause a breach of
any existing registration rights agreement or other agreement to which ELC is a party.

     5.7 SEC Filings and Reports. Since December 31, 2004, ELC has filed all reports,
schedules, forms, statements and other documents (the “Commission Documents”) required to
be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). As of their respective dates, the Commission
Documents complied in all material respects with the requirements of the Exchange Act and the
rules and regulations of the Commission promulgated thereunder applicable to the Commission
Documents. Each Commission Document does not as of the date hereof contain an untrue statement of
a material fact or omit to state a material fact required to be stated therein or necessary in
order to make the statements therein in light of the circumstances in which they were made not
misleading.

     5.8 Absence of Certain Events. Since December 31, 2005, neither ELC nor any of its
subsidiaries has sustained any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute
or court or governmental action, order or decree.

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     5.9 Litigation; Compliance with Law.

     (a) Except for the matters listed on Schedule 5.9 attached hereto or disclosed in the
Commission Documents, there have not been and are no actions, suits or proceedings pending or, to
the best knowledge of ELC, threatened relating to ELC or its business before or by any court or
federal, state, municipal or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign.

     (b) To the best knowledge of ELC, ELC is and has been at all times in compliance in all
material respects with all applicable Legal Requirements applicable to ELC or its business. ELC
does not have any knowledge of any basis for any claim for compensation or damage or other relief
against ELC or its business for any violation of any Legal Requirement. All notices received by
ELC regarding alleged non-compliance with any Legal Requirement, and any orders, writs,
injunctions, decrees and arbitration decisions in respect of non-compliance with any Legal
Requirement, are listed on Schedule 5.9 and copies of such notices, orders, writs,
injunctions, decrees and arbitration decisions have been made available to Parke and the
Stockholder; provided, however, that this representation and warranty shall not be deemed
to encompass matters involving compliance with applicable Legal Requirements where one or more
other specific representations are made in Article 5 of this Agreement that cover applicable Legal
Requirements with respect to a specific topic (whether or not the term “Legal Requirements” is used
in such representation and warranty).

     (c) Other than matters disclosed in the Commission Documents or on Schedule 5.9
attached hereto, since December 31, 2005 there have not been and are not now any actions, suits,
investigations or proceedings pending or, to the knowledge of ELC, threatened against ELC or any of
its subsidiaries before any court, arbitrator or administrative or governmental body that (a) seek
to enjoin or otherwise prevent the consummation of the Contemplated Transactions or (b) materially
and adversely affect, or as to which there is a reasonable possibility of an adverse decision that
would materially and adversely affect, either individually or collectively, the business or
financial condition of ELC and its subsidiaries taken as a whole.

     (d) Neither ELC nor any of its subsidiaries is in violation of any judgment, order, writ,
injunction, decree, rule or regulation of any court or governmental department, commission, board,
bureau, agency or instrumentality, the violation of which reasonably could be expected to, either
individually or collectively, materially and adversely affect the business or financial condition
of ELC and its subsidiaries taken as a whole.

     5.10 No Misleading Statements or Omissions. No representation or warranty made by ELC
in this Agreement, and no statement made by or on behalf of ELC in any certificate, document,
exhibit or schedule expressly required to be furnished hereunder, contains or will contain any
untrue statement of a fact or omits or will omit to state any fact necessary to make such
representation or warranty or statement, in light of the circumstances under which such
representation, warranty or statement was made, not misleading to a prospective purchaser of
capital stock of ELC.

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     5.11 Acknowledgement Regarding Transaction. ELC represents that it has had an
adequate opportunity to perform an independent investigation of Parke. ELC acknowledges that it
has been given reasonable access to Parke’s books and records, including the Material Contracts.
ELC further represents that in making the decision to enter into this Agreement, it has relied
solely on its own independent investigation, the representations and warranties and covenants of
Parke and the Stockholder set forth in this Agreement, and ELC’s own assessment of the past,
current and future business requirements of Parke’s business. Accordingly, ELC acknowledges,
represents and warrants that, except as expressly set forth in this Agreement, neither Parke nor
the Stockholder has made, and ELC has not relied upon, any representations or warranties of any
nature whatsoever. As of the date hereof, ELC is not aware of any breach of any representation and
warranty made by Parke and the Stockholder in Article 4 of this Agreement.

ARTICLE 6  —  COVENANTS OF PARKE AND THE STOCKHOLDER

     Parke and the Stockholder, jointly and severally, covenant and agree with ELC and Acquisition
that from the date hereof through and including the Closing Date:

     6.1 Full Access and Financials. ELC and its authorized representatives will have full
access during normal business hours, upon reasonable notice to Parke, to all properties, books,
records, contracts and documents of Parke or relating to Parke’s current and former employees,
customers and suppliers, and shall be allowed to inspect and cause tests to be made of the assets
and facilities of Parke through the Closing Date. Any such investigation or testing shall be
conducted in such a manner so as to not unreasonably interfere with the conduct of Parke’s business
operations. Further, ELC shall indemnify and hold harmless Parke and the Stockholder if any such
testing causes damage to the Leased Real Property or any of Parke’s personal property or adversely
impacts the conduct of Parke’s business operations (excluding any adverse impact with respect to
ELC’s willingness to proceed under this Agreement). ELC shall deliver to Parke and the Stockholder
copies of any reports relating to or arising out of any environmental testing conducted by ELC.
Parke will make available to ELC and such authorized representatives all information with respect
to the affairs and business of Parke as ELC may reasonably request. Nothing contained in this
Section 6.1, nor the exercise by ELC of its rights hereunder, will relieve Parke or the Stockholder
from or limit any liability which may arise out of any breach of any representation, warranty,
covenant or agreement of Parke or the Stockholder contained in this Agreement.

     Parke, within 5 days after completion thereof, will provide ELC with copies of internally
prepared balance sheets and operating statements related to Parke for each monthly accounting
period between the date of this Agreement and the Closing Date.

     6.2 Conduct of Business. Parke will carry on its business, in the ordinary course and
in the same manner as such business has been carried on heretofore, and Parke will (a) use its best
efforts to do all things necessary to preserve the assets and properties of Parke, (ii) maintain
and keep its tangible assets in good repair, working order and condition, and from time to time
make all needful and proper repairs, renewals and replacements, (iii) perform on a timely basis

- 20 -

 

all lawful obligations to be performed by it pursuant to the terms of each agreement,
contract, undertaking or commitment by which it is bound, and (iv) pay all Taxes which become due
and all installments of estimated Taxes which become due, except to the extent any such Taxes are
contested in good faith pursuant to appropriate proceedings.

     6.3 Other Action. Without the prior written consent of ELC, Parke will not:

     (a) issue, sell, purchase or redeem, or grant options to purchase or otherwise agree to
sell, purchase or redeem, any shares of capital stock or any other securities of Parke, and
on the date of this Agreement, Parke will close its stock transfer books and will not prior
to the Closing record the transfer of any shares of capital stock of Parke;

     (b) consent to or permit any amendment of Parke’s Articles of Incorporation or by-laws;

     (c) consent to or permit Parke to prepay any liability for borrowed money;

     (d) enter into any new line or type of business;

     (e) permit Parke to pay any obligation or liability, other than obligations and
liabilities reflected in the Interim Statements or incurred since March 31, 2006 in the
ordinary course of business;

     (f) permit Parke to enter into or modify any contract of the type described in Section
4.9 hereof;

     (g) permit Parke to pay any bonus to or increase the compensation payable to or any
other benefits of any employee of Parke;

     (h) permit or consent to declaring or distribution by Parke of any dividend to the
Stockholder; provided, however, that (x) Parke shall be permitted to make and the
Stockholder shall be permitted to accept and receive dividends and/or distributions equal to
the aggregate actual federal and state income tax of Parke allocable to the Stockholder as
taxable income due to his ownership of Parke and its election as an S corporation of the
Internal Revenue Code of 1986, as amended, and (y) to the extent not distributed prior
thereto, Parke shall pay to the Stockholder, immediately prior to Closing, a promissory
note, bearing interest at the applicable federal rate, the principal amount of which shall
be the difference between (1) the actual federal and state income tax of Parke allocable to
the Stockholder for the period January 1, 2006 through the Effective Date (which amount
shall pass through and be taxable to the Stockholder for the short S year by reason of the
election by Parke as an S corporation) and (2) the amount of estimated taxes for such income
which was distributed by Parke to the Stockholder prior to the Effective Date, which
promissory note shall be due and payable no later than April 1, 2007, and (z) to the extent
that the same has not been distributed prior to the date of this Agreement, Parke shall be
permitted to make and the Stockholder shall be permitted to

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accept and receive dividends and/or distributions equal to the aggregate actual federal
and state income of Parke for 2005 allocable to the Stockholder as 2005 taxable income due
to his ownership of Parke and its election as an S corporation;

     (i) permit Parke to enter into any contract or commitment, incur any liability,
absolute or contingent, waive any right or enter into any other transaction, not (A) in the
ordinary course of business and of the scope and magnitude heretofore entered into, and/or
(B) in an amount greater than $5,000 individually or $25,000 in the aggregate (except
inventory, materials or supplies purchased in the ordinary course of business at market
prices and in reasonable quantities, or the sale of products to customers, in the ordinary
course of business); provided, however, that this clause (i) shall not prohibit
Parke from borrowing funds to fund a distribution or dividend to the
Stockholder which is
permitted under clause (h) immediately preceding;

     (j) permit Parke to modify any Material Contract, except in the ordinary course of
business;

     (k) permit Parke to sell (except for sales from inventory in the ordinary course of
business), transfer, mortgage, pledge or subject any of its assets to any lien or
encumbrance not currently imposed on such asset;

     (l) permit Parke to enter into any transaction not in the ordinary course of business;
or

     (m) take any action after the date hereof, the reasonably foreseeable result of which
would be to cause any representation or warranty of Parke or the Stockholder contained in
this Agreement to be or become inaccurate.

     6.4 Organization, Good Will. Parke will preserve Parke’s business organizations
intact, will retain its present key employees, and will use its best efforts to preserve the good
will of its suppliers, customers and others having business relations with Parke.

     6.5 Consents to Leases, Contracts. With respect to each lease, license, contract or
other agreement or instrument which, by its terms, will be breached by the consummation of the
Merger as contemplated hereby unless the consent of the other party thereto is obtained, at no cost
to ELC or Acquisition, Parke and the Stockholder will use its best efforts to obtain or cause to be
obtained such consent, without thereby affecting or impairing the terms or the validity or
enforceability thereof. Schedule 4.2 sets forth a listing of each such lease, contract or
other agreement or instrument.

     6.6 Representations and Warranties. Parke and the Stockholder shall give written
notice to ELC promptly upon the occurrence of or becoming aware of: (i) the impending or threatened
occurrence of any event which would cause, or would have caused had such event occurred or been
known to Parke or the Stockholder prior to the date hereof, any of their representations or
warranties contained in this Agreement to be untrue when made or to be

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untrue if made as of the Closing Date, (ii) any material adverse development in the condition
(financial or otherwise), operations or prospects of Parke and (iii) the failure of any condition
precedent to any party’s obligation to consummate the Contemplated Transactions.

     6.7 Notice of Proceedings. Parke and the Stockholder will promptly notify ELC in
writing upon becoming aware of any order or decree or any complaint (or threat thereof) praying for
an order or decree restraining or enjoining the consummation of this Agreement or the Contemplated
Transactions, or upon receiving any notice from any person, firm or corporation or any governmental
department, court, agency or commission of his or its intention to institute an investigation into,
or institute a suit or proceeding to restrain or enjoin the consummation of, this Agreement or such
transactions, or to nullify or render ineffective this Agreement or such transactions if
consummated.

     6.8 Corporate Action. To the extent within its control and subject to the provisions
of this Agreement, Parke and the Stockholder will take all necessary corporate and other action
required to carry out the Contemplated Transactions on their part.

     6.9 Amendments and Supplements to Schedules. From and after the date hereof and prior
to the Closing, Parke and the Stockholder will promptly furnish to ELC and Acquisition supplements
or amendments to the Schedules attached hereto with respect to any matter hereafter arising which,
if existing or occurring at the date of this Agreement, would have been required to be set forth or
described in the Schedules. The written approval by ELC of each such supplement or amendment shall
be a condition precedent to the performance of ELC’s obligations hereunder, provided,
however, that ELC’s approval shall not be unreasonably withheld. In the event that ELC approves in
writing any supplement or amendment to a schedule and consummates the transactions contemplated
hereby, ELC shall have no right to claim that such supplement or amendment constitutes a breach of
a representation or warranty under this Agreement.

ARTICLE 7  —  COVENANTS OF ELC AND ACQUISITION PENDING THE CLOSING DATE

     ELC and Acquisition, jointly and severally, hereby covenant and agree that from the date
hereof through and including the Closing Date:

     7.1 Representations and Warranties. ELC shall give written notice to Parke and the
Stockholder promptly upon the occurrence of or becoming aware of: (i) the impending or threatened
occurrence of any event which would cause, or would have caused had such event occurred or been
known to ELC prior to the date hereof, any of the representations and warranties of ELC and
Acquisition contained in this Agreement to be untrue when made or to be untrue if made as of the
Closing Date, (ii) any adverse development in the condition (financial or otherwise) or operations
of ELC, and (iii) the failure of any condition precedent to any party’s obligation to consummate
the Contemplated Transactions.

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     7.2 Notice of Proceedings. ELC will promptly notify Parke and the Stockholder in
writing upon becoming aware of any order or decree or any complaint (or threat thereof) praying for
an order or decree restraining or enjoining the consummation of this Agreement or the Contemplated
Transactions, or upon receiving any notice from any person, firm or corporation or any governmental
department, court, agency or commission of his or its intention to institute an investigation into,
or institute a suit or proceeding to restrain or enjoin the consummation of, this Agreement or such
transactions, or to nullify or render ineffective this Agreement or such transactions if
consummated.

     7.3 Corporate Action. To the extent within their reasonable control and subject to
the provisions of this Agreement, ELC and Acquisition will take all necessary corporate, limited
liability company and other action required to carry out the Contemplated Transactions.

     7.4 Updated Schedules. On the Closing Date, ELC will furnish Parke and the
Stockholder with any revised schedules which may be necessary to make accurate and current as of
the Closing Date each of the representations and warranties of ELC and Acquisition contained in
this Agreement; provided, however, that such action by the ELC shall not be deemed to cure
any breach of any provision hereof or any representation or warranty which was materially incorrect
when made.

     7.5 Cooperation with Parke. Prior to the Closing Date, ELC shall cooperate with Parke
in obtaining any necessary consents to the Contemplated Transactions and in seeking the release of
the Stockholder from his guaranties of Parke’s line of credit and credit card debt of Parke.

ARTICLE 8  —  CONDITIONS TO THE OBLIGATIONS OF PARKE AND THE STOCKHOLDER

     The obligations of Parke and the Stockholder to consummate the Merger under this Agreement are
subject to the fulfillment or waiver of the following conditions prior to or at the Closing Date:

     8.1 Representations and Warranties. The representations and warranties of ELC and
Acquisition set forth in this Agreement and in any certificate, document, exhibit or schedule
expressly required to be furnished by them hereunder shall have been true and accurate in all
material respects as of the date when made, shall be deemed to be made again on and as of the
Closing Date and shall then be true and accurate in all material respects.

     8.2 Compliance With Covenants. ELC and Acquisition shall have performed and complied
with each and every covenant and agreement required by this Agreement to be performed or complied
with by them prior to or at the Closing Date;

     8.3 Absence of Litigation. There shall be no litigation pending or threatened (nor
shall any basis exist for any such litigation) against or involving Parke, the Stockholder, ELC or
Acquisition or their respective businesses, assets or facilities, which has, or if decided
adversely

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would be reasonably likely to have, a material adverse effect, either individually or in the
aggregate, on the financial condition, business, assets, facilities, properties or prospects of
Parke, ELC or Acquisition, or upon the ability of the parties hereto to conclude the Contemplated
Transactions, or seeking to enjoin or prevent consummation of the Contemplated Transactions.

     8.4 Closing Deliveries. ELC and Acquisition shall have provided each of the following
documents:

     (a) a certificate of the manager of Acquisition certifying, as complete and accurate as
of the Closing Date, attached copies of the Articles of Organization and Operating Agreement
of Acquisition, certifying and attaching all requisite resolutions of Acquisition’s members
and managers approving the execution and delivery of this Agreement and the consummation of
the Contemplated Transactions and certifying to the incumbency and signatures of the
representatives of Acquisition executing this Agreement and any other document relating to
the Contemplated Transactions;

     (b) a certificate of the corporate secretary of ELC certifying, as complete and
accurate as of the Closing Date, attached copies of the Certificate of Incorporation and
By-laws of ELC, certifying and attaching all requisite resolutions of ELC’s board of
directors approving the execution and delivery of this Agreement and the consummation of the
Contemplated Transactions and certifying to the incumbency and signatures of the
representatives of ELC executing this Agreement and any other document relating to the
Contemplated Transactions;

     (c) a certificate of an officer of ELC confirming the due satisfaction of the
conditions set forth in Sections 8.1 and 8.2;

     (d) an opinion of counsel to ELC and Acquisition in form and substance reasonably
satisfactory to Parke and the Stockholder; and

     (e) an extension to Parke’s current lease for the Leased Real Property in form and
substance satisfactory to the Stockholder, executed by the owner/lessor of such Leased Real
Property;

     (f) a fairness opinion from an investment banking firm to be selected by ELC, dated
within two (2) business days prior to Closing, to the effect that, as of such date, the
Contemplated Transactions are fair, from a financial point of view, to ELC;

     (g) an employment agreement of Daniel W. Parke in form and substance satisfactory to
Mr. Parke, executed by Parke or the Surviving Entity;

     (h) a stock option agreement granting to Daniel W. Parke options to purchase 700,000
shares of ELC common stock in form and substance satisfactory to Mr. Parke, executed by ELC;
and

- 25 -

 

     (i) such other documents as Parke and the Stockholder may reasonably request in
connection with the Contemplated Transactions.

     8.5 Consents to Leases, Contracts. ELC shall have obtained consents reasonably
satisfactory to Parke and the Stockholder with respect to each of the matters listed on
Schedule 5.2.

     8.6 Additional Capital. ELC shall have successfully raised not less than $15,000,000
of equity capital through a rights offering, private placement of securities or other issuance of
securities.

     8.7 No Material Adverse Effect. There shall not have occurred any event or
circumstance which could reasonably be expected to have a material adverse effect on the business
or financial condition of ELC and its subsidiaries, taken as a whole.

     8.8 Conversion of Series E Preferred Stock. All of ELC’s outstanding shares of Series
E Convertible Preferred Stock shall have been redeemed or shall have been converted into shares of
ELC common stock, or shall be subject to binding agreements to convert in form and substance
reasonably satisfactory to ELC.

     8.9 Repayment of Convertible Debt. ELC shall have repaid all indebtedness to third
parties that entitle such third parties to convert all or a portion of such indebtedness into
equity in ELC; or all such indebtedness shall have been converted into shares of ELC common stock.

     8.10 Stockholder Approval. ELC’s stockholders shall have duly approved the issuance
of ELC common stock in connection with the Contemplated Transactions in accordance with applicable
laws and regulatory requirements.

     8.11 Release from Guaranties. The Stockholder shall have obtained release from his
guaranties of Parke’s line of credit and credit card debt of Parke (or Parke shall have paid off
and terminated such line of credit and credit card debt).

ARTICLE 9  —  CONDITIONS TO THE OBLIGATIONS OF ELC AND ACQUISITION

     The obligations of ELC and Acquisition under this Agreement are subject to the fulfillment or
waiver of the following conditions prior to or at the Closing Date:

     9.1 Representations and Warranties. Each of the representations and warranties of
Parke and the Stockholder set forth in this Agreement or in any certificate, document, exhibit or
schedule expressly required to be furnished by them hereunder shall have been true and accurate in
all material respects as of the date when made, shall be deemed to be made again on and as of the
Closing Date and shall then be true and accurate in all material respects.

     9.2 Compliance With Covenants. Parke and the Stockholder shall have performed

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and complied with each and every covenant and agreement required by this Agreement to be
performed or complied with by them prior to or at the Closing Date.

     9.3 Absence of Litigation. There shall be no litigation pending or threatened (nor
shall any basis exist for any such litigation) against or involving Parke, the Stockholder, ELC or
Acquisition or their respective businesses, assets or facilities, which has, or if decided
adversely would be reasonably likely to have, a material adverse effect, either individually or in
the aggregate, on the financial condition, business, assets, facilities, properties or prospects of
Parke, ELC or Acquisition, or upon the ability of the parties hereto to conclude the Contemplated
Transactions, or seeking to enjoin or prevent consummation of the Contemplated Transaction.

     9.4 Closing Deliveries. Parke and the Stockholder shall have provided each of the
following documents:

     (a) an extension to Parke’s current lease of the Leased Real Property in form and
substance satisfactory to ELC, executed by the owner/lessor of such Leased Real Property;

     (b) releases of any liens, security interests and other encumbrances affecting Parke,
its assets or any of the outstanding capital stock of Parke;

     (c) a certificate of the corporate secretary of Parke certifying, as complete and
accurate as of the Closing Date, attached copies of the Articles of Incorporation and
by-laws of Parke, certifying and attaching all requisite resolutions of Parke’s board of
directors and stockholders approving the execution and delivery of this Agreement and the
consummation of the Contemplated Transactions and certifying to the incumbency and
signatures of the officers of Parke executing this Agreement and any other document relating
to the Contemplated Transactions;

     (d) a certificate of an officer of Parke and the Stockholder confirming the due
satisfaction of the conditions set forth in Sections 9.1 and 9.2;

     (e) an opinion of counsel to Parke and the Stockholder in form and substance reasonably
satisfactory to ELC;

     (f) a fairness opinion from an investment banking firm to be selected by ELC, dated
within two (2) business days prior to Closing, to the effect that, as of such date, the
Contemplated Transactions are fair, from a financial point of view, to ELC;

     (g) an employment, non-competition, non-solicitation and non-disclosure agreement of
Daniel W. Parke in form and substance satisfactory to ELC, executed by Mr. Parke; and

     (h) such other documents as ELC may reasonably request in connection with the
Contemplated Transactions.

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     9.5 Delivery of Audited Financial Statements. Parke shall have provided to ELC
financial statements for Parke for the fiscal years ended December 31, 2004 and 2005, audited by
BDO Seidman LLP and otherwise complying with the requirements of the SEC (including requirements of
Regulation S-X) and BDO Seidman LLP shall have provided to ELC a written consent to the use of such
audited financial statements in ELC’s filings with the SEC under the Securities Act and the
Exchange Act.

     9.6 Consents to Leases, Contracts. Parke and the Stockholder shall have obtained
consents reasonably satisfactory to ELC with respect to each of the leases, licenses, contracts and
other agreements and instruments which are referred to on Schedule 4.2.

     9.7 No Material Adverse Effect. There shall not have occurred any event or
circumstance which could reasonably be expected to have a Material Adverse Effect.

     9.8 Due Diligence. ELC shall have satisfactorily completed, in its sole discretion,
financial, operational, legal, tax, environmental, compensation, benefits and accounting due
diligence regarding Parke.

     9.9 Board Approval. The board of directors of ELC shall have approved the
Contemplated Transactions subsequent to the issuance of the fairness opinion required pursuant to
9.4(f).

     9.10 Additional Capital. ELC shall have successfully raised not less than $15,000,000
of equity capital through a rights offering, private placement of securities or other issuance of
securities.

     9.11 Conversion of Series E Preferred Stock. All of ELC’s outstanding shares of
Series E Convertible Preferred Stock shall have been redeemed or shall have been converted into
shares of ELC common stock, or shall be subject to binding agreements to convert in form and
substance reasonably satisfactory to ELC.

     9.12 Repayment of Convertible Debt. ELC shall have repaid all indebtedness to third
parties that entitle such third parties to convert all or a portion of such indebtedness into
equity in ELC; or all such indebtedness shall have been converted into shares of ELC common stock.

     9.13 Stockholder Approval. If required by law or the rules of any national securities
exchange upon which ELC’s common stock is listed as of the Closing Date, ELC’s stockholders shall
have duly approved the issuance of ELC common stock in connection with the Contemplated
Transactions.

ARTICLE 10  —  TERMINATION

     10.1 Termination. This Agreement may be terminated at any time prior to the Closing
Date upon the happening of the following:

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	 	(a)	 	by execution of written consent to such termination by each of Parke, the
Stockholder and ELC;
	 
	 	(b)	 	by ELC if any condition in Article 9 remains not satisfied on July 15, 2006;
	 
	 	(c)	 	by Parke and the Stockholder if any condition in Article 8 remains not
satisfied on July 15, 2006.

Any party seeking to exercise a right to termination pursuant to this Section shall give each other
party written notice thereof stating the reasons therefore.

     10.2 Effect of Termination. If this Agreement is terminated pursuant to Section 10.1
no party hereto shall have any liability or further obligation to any other party to this Agreement
except that any termination shall be without prejudice to the rights of any party hereto arising
out of a breach by the other party of any representation, warranty, covenant or agreement contained
in this Agreement existing as of the date of such termination.

ARTICLE 11  —  INDEMNIFICATION

     11.1 Survival. The several representations, warranties, covenants and agreements of
the parties made pursuant to this Agreement shall be deemed to be made on and as of the date of
this Agreement and on and as of the Closing Date, shall survive the Closing Date and shall not
expire until the date which is two (2) years after the Closing Date.

     11.2 Indemnification of ELC. The Stockholder agrees to indemnify and hold ELC, its
officers, directors, shareholders, employees, attorneys, accountants and agents (each, an “ELC
Indemnified Party”) harmless from and against any and all damages, claims, losses, expenses,
costs, obligations, and liabilities including, without limiting the generality of the foregoing,
liabilities for reasonable attorneys’ fees (“Loss and Expense”), incurred or suffered by an
ELC Indemnified Party arising out of, relating to or resulting from any of the following:

	 	(a)	 	any breach of or any inaccuracy in any representation or warranty made by Parke
or the Stockholder pursuant to this Agreement;
	 
	 	(b)	 	any breach of or failure by Parke or the Stockholder to perform any covenant or
obligation of either of them set forth in or contemplated by this Agreement;
	 
	 	(c)	 	any warranty or other claim pertaining to products produced or service
performed by Parke (including any predecessor companies) on or before the Closing Date,
except to the extent either (i) recovered pursuant to an insurance policy obtained by
Parke, or (ii) reserved against as a liability in Parke’s balance sheet as of the last
day of the month most recently ended prior to the Closing Date, prepared in accordance
with generally accepted accounting principles and provided to ELC prior to Closing (the
“Most Recent Balance Sheet”);

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	 	(d)	 	the use, operation or ownership of any of the assets of Parke or the business
or operation of the business of Parke on or prior to the Closing Date, except to the
extent either (i) recovered pursuant to an insurance policy obtained by Parke, or (ii)
reserved against as a liability in the Most Recent Balance Sheet;
	 
	 	(e)	 	any litigation, pending suit, claim, proceeding or cause of action against
Parke with respect to events or actions prior to the Closing Date, whether now or
existing or hereafter brought, except to the extent either (i) recovered pursuant to an
insurance policy obtained by Parke, or (ii) reserved against as a liability in the Most
Recent Balance Sheet; and
	 
	 	(f)	 	any claims by or liabilities with respect to any employee of Parke regarding
his or her employment or termination of employment by Parke on or prior to the Closing
Date, including, but not limited to, any and all liabilities arising out of any
accidents illness or other events which occurred on or prior to the Closing Date,
except to the extent either (i) recovered pursuant to an insurance policy obtained by
Parke, or (ii) reserved against as a liability in the Most Recent Balance Sheet.

     11.3 Indemnification of Parke and the Stockholder. ELC and Acquisition agree to
indemnify and hold Parke, its officers, directors, shareholders (including the Stockholder),
employees, attorneys, accountants and agents (each, a “Parke Indemnified Party”) harmless
from and against any and Loss and Expense incurred or suffered by a Parke ELC Indemnified Party
arising out of, relating to or resulting from any of the following:

	 	(a)	 	any breach of or any inaccuracy in any representation or warranty made by ELC
or Acquisition pursuant to this Agreement;
	 
	 	(b)	 	any breach of or failure by ELC or Acquisition to perform any covenant or
obligation of either of them set forth in or contemplated by this Agreement;

     11.4 Notice of Claims; Procedure for Indemnification.

     (a) If an ELC Indemnified Party or a Parke Indemnified Party (in either case, an
“Indemnified Party”) believes that it has suffered or incurred any Loss and Expense, such
Indemnified Party shall notify the party obligated to provide indemnification (the
“Indemnifying Party”) in writing describing such Loss and Expense, the amount thereof, if
known, and the method of computation of such Loss and Expense, all with reasonable particularity
and containing a reference to the provisions of this Agreement in respect of which such Loss and
Expense shall have occurred. If any action at law or suit in equity is instituted by a third party
with respect to which an Indemnified Party intends to claim any liability or expense as Loss and
Expense under this Article 11, such Indemnified Party shall promptly notify the Indemnifying Party
of such action or suit. Notwithstanding the foregoing, the right to indemnification hereunder
shall not be affected by any failure of an Indemnified Party to give such notice or delay by an
Indemnified Party in giving such notice unless, and then only to the extent that, the

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rights and remedies of the Indemnifying Party shall have been materially prejudiced as a
result of the failure to give, or delay in giving, such notice.

     (b) If such indemnity shall arise from the claim of a third party, the Indemnified Party shall
permit the Indemnifying Party to assume the defense of any such claim and any litigation resulting
from such claim with counsel satisfactory to the Indemnified Party but at the Indemnifying Party’s
expense. Failure by the Indemnifying Party to notify an Indemnified Party of its election to
defend any such claim or action by a third party within thirty (30) days after notice thereof shall
have been given to the Indemnifying Party shall be deemed a waiver of the right of the Indemnifying
Party to defend such claim or action. If a third party claim or proceeding requires a response
sooner than the thirty (30) day period required for the Indemnifying Party to respond to the
Indemnified Party, the Indemnified Party shall timely respond to the third party claim in a manner
preserving all rights and denying any liability. Indemnifying Party shall not be deemed to have
waived its rights to control defense of the claim hereunder if Indemnifying Party shall within the
thirty (30) day period notify the Indemnified Party that the Indemnifying Party will take control
of the defense of such claim.

     (c) If the Indemnifying Party assumes the defense of such claim or litigation resulting
therefrom, then counsel selected by the Indemnifying Party shall be subject to approval by the
Indemnified Party (not to be unreasonably withheld). The obligations of the Indemnifying Party as
to such claim shall include taking all steps necessary in the defense or settlement of such claim
or litigation and holding the Indemnified Party harmless from and against any and all Losses or
Expenses caused by or arising out of any settlement approved by the Indemnified Party or any
judgment in connection with such claim or litigation. The Indemnifying Party shall keep the
Indemnified Party fully informed of the status of such claims and litigation. The Indemnifying
Party shall not, in the defense of such claim or any litigation resulting therefrom, consent to
entry of any judgment (other than a judgment of dismissal on the merits without costs) except with
the written consent of the Indemnified Party, not to be unreasonably withheld, or enter into any
settlement (except with the written consent of the Indemnified Party, not to be unreasonably
withheld) which does not include as an unconditional term thereof the giving by the claimant or a
plaintiff of a release of the Indemnified Party from all liability in respect of such claim or
which acts as an admission of a violation of any law, rule, regulation, ordinance, policy or order.
Anything in this Article 11 to the contrary notwithstanding, the Indemnified Party may, with
counsel of its choice and at its expense, participate in the defense of any such claim or
litigation.

     (d) If the Indemnifying Party shall not assume the defense of any such claim by a third party
or litigation resulting therefrom after receipt of notice from such Indemnified Party in accordance
herewith, the Indemnified Party may defend against such claim or litigation in such manner as it
reasonably deems appropriate, and unless there shall be deposited with the Indemnified Party a sum
in cash, letter of credit or bond, equal to the total amount demanded in such claim or litigation
plus the Indemnified Party’s reasonable estimate of the costs of defending the same, the
Indemnified Party may settle such claim or litigation on such terms as it may reasonably deem
appropriate. The Indemnified Party shall inform the Indemnifying Party of the status of such claim
or litigation from time to time upon the Indemnifying Party’s request,

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and, prior to settling such claim or litigation, the Indemnified Party shall advise the
Indemnifying Party of the terms, provisions and conditions of any proposed settlement;
provided, however, that the Indemnifying Party will not have any rights to accept,
decline or modify the proposed settlement, nor to direct the Indemnified Party to do any of the
foregoing. The Indemnifying Party shall promptly reimburse the Indemnified Party for the amount of
such settlement and for all other Losses and Expenses reasonably incurred by the Indemnified Party
in connection with the defense against or settlement of such claim or litigation. The terms of
such settlement shall be binding upon the Indemnifying Party and the Indemnifying Party shall not
have any right to challenge such settlement.

     (e) If the Indemnified Party refuses to consent, whether reasonably or unreasonably, to any
settlement recommended by the Indemnifying Party then the Indemnifying Party shall be relieved of
its obligation to provide a defense and the Indemnifying Party’s monetary liability for any
settlement or judgment shall not exceed either the amount for which the matter could have been
settled or the Indemnifying Party’s maximum liability, whichever is less. Notwithstanding anything
to the contrary herein, without the consent of the Indemnified Party, the Indemnifying Party may
settle or compromise any action, claim or proceeding or consent to entry of judgment with respect
to any such action, claim or proceeding that requires solely the payment of money damages by the
Indemnifying Party and that includes as an unconditional term thereof the release by the claimant
or the plaintiff of the Indemnified Party from all liability in respect of such action, claim or
proceeding.

     (f) The Indemnifying Party shall promptly pay to the third party the amount of any final and
unappealable judgment rendered with respect to any claim by such third party in litigation and
shall reimburse the Indemnified Party and for all other Losses and Expenses reasonably incurred by
the Indemnified Party in connection with the defense against such claim or litigation, whether or
not resulting from, arising out of, or incurred with respect to, the act of a third party.

     (g) Any payment pursuant to this Section 11.4 shall be made not later than thirty (30) days
after receipt by the Indemnifying Party of written notice from the Indemnified Party stating the
amount thereof and the indemnity payment requested. Any payment not made when due shall bear
interest at a rate per annum equal to the Prime Rate plus 3% per annum for each day until paid.
“Prime Rate” means the rate of interest as reported in The Wall Street Journal from
time to time, changing as and when the Prime Rate changes.

     11.5 Limitations on Indemnification.

     (a) Notwithstanding anything herein to the contrary, the Stockholder shall not be obligated to
pay any amounts to an Indemnified Party until the aggregate amount which the Stockholder would have
been obligated to pay for all indemnity claims but for this Section 11.5 equals $80,000, and at
such time the Stockholder shall be obligated to pay all amounts for indemnification then owing by
him (but only for amounts in excess of the $80,000 deductible) up to the aggregate amount of
$1,000,000 (the “Cap”), except that such limitation shall not apply to

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any claims for indemnification arising from the fraudulent acts or omissions of the
Stockholder. No claim for indemnification may be made by an Indemnified Party under this Article
11 at any time after the date that is the 24 month anniversary of the Closing Date.

     (b) The ELC Indemnified Parties shall not have the right to make a claim for indemnification
for a breach of a representation or warranty hereunder to the extent that ELC had actual knowledge
prior to Closing that such representation and warranty or covenant is in breach (excluding, for
this purpose, any knowledge of Parke, who is a director of ELC) and ELC consummates the
transactions contemplated hereby despite the known breach. In such event, ELC shall be deemed to
have waived its rights to make a claim under this Agreement.

     (c) ELC shall be responsible for determining whether the operation of the business by
Acquisition after the Closing is in compliance with applicable Legal Requirements, including,
without limitation, whether ELC has obtained all authorizations necessary to operate the Business,
including without limitation, all Governmental Authorizations, including without limitation,
qualifications for doing business in other states. If Parke operated in violation of any
applicable Legal Requirements prior to the Closing Date, the Stockholder’s liability to ELC for
Loss and Expense shall be limited to Loss and Expense relating to or arising out of Parke’s
violation of applicable Legal Requirements prior to the Closing Date and the Stockholder shall not
be responsible for Loss and Expense arising from Acquisition’s violations of applicable Legal
Requirements after the Closing Date.

     (d) Parke and the Stockholder shall have no obligation to indemnify the ELC Indemnified
Parties pursuant to Section 11.2 to the extent that the Loss and Expense claimed by ELC are already
taken into account as reserves for liabilities in the determination of Closing Net Book Value.

     (e) In connection with ELC’s investigation of Parke, certain projections and certain business
plan information for succeeding fiscal years have been made available to ELC. ELC acknowledges
that there are uncertainties inherent in attempting to make such projections and other forecasts
and plans, that ELC is familiar with such uncertainties, that ELC is taking full responsibility for
making its own evaluation of the adequacy and accuracy of all projections and other forecasts and
plans so furnished to it, and that ELC shall not have any claim against the Stockholder or any
officers, directors or employees of Parke with respect thereto and no representations or warranties
are made by the Stockholder with respect to such projections, forecasts and plans.

     11.6 Specific Performance. Notwithstanding anything else herein contained, Parke and
the Stockholder agree that, in addition to any other available remedies at law or in equity for
breach or threatened breach of this Agreement, Acquisition and ELC shall be entitled to specific
performance against Parke and the Stockholder and the existence of any claim or cause of action
Acquisition or ELC may have will not constitute a defense thereto.

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     11.7 Expenses of Enforcement. If any legal action or any arbitration or other
proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute,
breach, default, or misrepresentation in connection with any of the provisions of this Agreement,
the successful or substantially prevailing party shall be entitled to recover reasonable attorneys’
fees and other costs incurred in that action or proceeding, in addition to any other relief to
which it or they may be entitled.

     11.8 Sole Remedies. The remedies provided for in this Article 11 are exclusive and
shall be in lieu of all other remedies for breach of this Agreement, including , without
limitation, for breaches of the representations, warranties, covenants and agreements hereunder;
provided, however, that the foregoing clause of this sentence shall not be deemed a waiver
by any party of any right to specific performance or any remedy arising by reason of any claim of
fraud with the respect to this Agreement; ELC acknowledges and agrees that, by agreeing to the
exclusive remedies under Article 11, ELC has no rights against the Stockholder in his capacity as a
director, officer or employee of Parke prior to the Closing Date, or in his capacity as a trustee,
fiduciary or administrator of the [Parke employee benefit and/or welfare plans] prior to the
Closing Date.

ARTICLE 12  —  CONFIDENTIALITY

     12.1 Definition of Confidential Information. As used in this Article 12, the term
“Confidential Information” includes any and all of the following information of Parke or the
Stockholder or Acquisition or ELC that has been or may hereafter be disclosed in any form, whether
in writing, orally, electronically or otherwise, or otherwise made available by observation,
inspection or otherwise by either party (Acquisition or ELC on the one hand or Parke or the
Stockholder on the other hand) (each, a “Disclosing Party”) to the other party or its
agents, counsel or representatives (a “Receiving Party”):

     (i) all information that is a trade secret under applicable trade secret or other law;

     (ii) all information concerning product specifications, data, know-how, formulae,
compositions, processes, designs, sketches, photographs, graphs, drawings, samples,
inventions and ideas, past, current and planned research and development, current and
planned manufacturing or distribution methods and processes, customer lists, current and
anticipated customer requirements, price lists, market studies, business plans, computer
hardware, computer software and database technologies, systems, structures and
architectures;

     (iii) all information concerning the business and affairs of the Disclosing Party
(which includes historical and current financial statements, financial projections and
budgets, tax returns and accountants’ materials, historical, current and projected sales,
capital spending budgets and plans, business plans, strategic plans, marketing and
advertising plans, publications, client and customer lists and files, contracts, the names
and backgrounds of key personnel and personnel training techniques and materials,

- 34 -

 

however documented), and all information obtained from review of the Disclosing Party’s
documents or property or discussions with the Disclosing Party regardless of the form of the
communication; and

     (vi) all notes, analyses, compilations, studies, summaries and other material prepared
by the Receiving Party to the extent containing or based, in whole or in part, upon any
information included in the foregoing.

     12.2 Restricted Use of Confidential Information. Each Receiving Party acknowledges
the confidential and proprietary nature of the Confidential Information of the Disclosing Party and
agrees that such Confidential Information (i) shall be kept confidential by the Receiving Party;
(ii) shall not be used for any reason or purpose other than to evaluate and consummate the
Contemplated Transactions, and (iii) without limiting the foregoing, shall not be disclosed by the
Receiving Party to any Person, except in each case as otherwise expressly permitted by the terms of
this Agreement or with the prior written consent of the Stockholder (with respect to Confidential
Information of Parke or the Stockholder) or an authorized representative of ELC with respect to
Confidential Information of Acquisition or ELC. Each of Acquisition and ELC and Parke and the
Stockholder shall disclose the Confidential Information of the other party only to its
representatives who require such information for the purpose of evaluating the Contemplated
Transactions and are informed of the obligations of this Article 12 with respect to such
information. Each of Acquisition, ELC, Parke and the Stockholder shall enforce the terms of this
Article 12 as to its or his respective representatives, take such action to the extent necessary to
cause its or his representatives to comply with the terms and conditions of this Article 12, and be
responsible and liable for any breach of the provisions of this Article 12 by it or him or its or
his representatives.

     12.3 Exceptions. Section 12.2 does not apply to that part of the Confidential
Information of a Disclosing Party that a Receiving Party demonstrates (a) was, is or becomes
generally available to the public other than as a result of a breach of this Article 12 by the
Receiving Party or its agents, counsel or representatives; (b) was or is developed by the Receiving
Party independently of and without reference to any Confidential Information of the Disclosing
Party; or (c) was, is or becomes available to the Receiving Party on a nonconfidential basis from a
Third Party not bound by a confidentiality agreement or any legal, fiduciary or other obligation
restricting disclosure.

     Notwithstanding anything herein to the contrary, any party may disclose to any and all
Persons, without limitation of any kind, the tax treatment and tax structure of the transactions
contemplated by this Agreement and all materials that are provided to it (including any opinions or
other tax analyses) that are provided to it relating to such tax treatment and tax structure. The
preceding sentence is intended to cause the transactions contemplated hereby not to be treated as
having been offered under conditions of confidentiality for purposes of Section 1.6011-4(b)(3) (or
any successor provision) of the United States Treasury Regulations promulgated under Section 6011
of the United States Internal Revenue Code of 1986, as amended, and shall be construed in a manner
consistent with such purpose.

- 35 -

 

     12.4 Legal Proceedings. If a Receiving Party becomes compelled in any legal
proceeding or is requested by a governmental body or authority having regulatory jurisdiction over
the Contemplated Transactions or such party to make any disclosure that is prohibited or otherwise
constrained by this Article 12, that Receiving Party shall provide the Disclosing Party with prompt
notice of such compulsion or request so that it may seek an appropriate protective order or other
appropriate remedy or waive compliance with the provisions of this Article 12. In the absence of a
protective order or other remedy, the Receiving Party may disclose that portion (and only that
portion) of the Confidential Information of the Disclosing Party that, based upon advice of the
Receiving Party’s counsel, the Receiving Party is legally compelled to disclose or that has been
requested by such Governmental Body, provided, however, that the Receiving Party shall use
reasonable efforts to obtain reliable assurance that confidential treatment will be accorded by any
Person to whom any Confidential Information is so disclosed. The provisions of this Section 12.4
do not apply to any Proceedings between the parties to this Agreement or with respect to disclosure
authorized under the second paragraph of Section 12.3.

     12.5 Return or Destruction of Confidential Information. If this Agreement is
terminated, each Receiving Party shall return all Confidential Information of the Disclosing Party
or shall destroy any Confidential Information not returned and certify all such destruction in
writing to the Disclosing Party, provided, however, that the Receiving Party may retain a
list that contains general descriptions of the information it has returned or destroyed to
facilitate the resolution of any controversies after the Disclosing Party’s Confidential
Information is returned.

     12.6 Attorney Client Privilege. A Disclosing Party is not waiving, and will not be
deemed to have waived or diminished, any of its attorney work product protections, attorney-client
privileges or similar protections and privileges as a result of disclosing its Confidential
Information (including Confidential Information related to pending or threatened litigation) to the
Receiving Party, regardless of whether such Disclosing Party has asserted, or is or may be entitled
to assert, such privileges and protections. The parties (a) share a common legal and commercial
interest in all of the Disclosing Party’s Confidential Information that is subject to such
privileges and protections; (b) are or may become joint defendants in Proceedings to which the
Disclosing Party’s Confidential Information covered by such protections and privileges relates; (c)
intend that such privileges and protections remain intact should either party become subject to any
actual or threatened Proceeding to which the Disclosing Party’s Confidential Information covered by
such protections and privileges relates; and (d) intend that after the Closing the Receiving Party
shall have the right to assert such protections and privileges. No Receiving Party shall admit,
claim or contend, in Proceedings involving either party or otherwise, that any Disclosing Party
waived any of its attorney work-product protections, attorney-client privileges or similar
protections and privileges with respect to any information, documents or other material not
disclosed to a Receiving Party due to the Disclosing Party disclosing its Confidential Information
(including Confidential Information related to pending or threatened litigation) to the Receiving
Party.

- 36 -

 

ARTICLE 13  —  MISCELLANEOUS

     13.1 Expenses. Parke and the Stockholder shall bear their expenses, and ELC and
Acquisition shall bear their expenses, incurred in connection with the Contemplated Transactions,
including without limitation, accounting and legal fees incurred in connection herewith. The costs
and expenses of BDO Seidman LLP’s audit of Parke shall be the responsibility of ELC.

     13.2 Assignments. This Agreement shall not be assigned by any party hereto without
the prior written consent of each other party.

     13.3 Severability. If any provision of any of this Agreement is determined to be
illegal, invalid or enforceable, such provision shall be fully severable and the remaining
provisions shall remain in full force and effect and shall be construed without giving effect to
the illegal, invalid or unenforceable provisions.

     13.4 Notices. All notices, demands and other communications which may or are required
to be given hereunder or with respect hereto shall be in writing, shall be given either by personal
delivery or by recognized overnight delivery service, and shall be deemed to have been given or
made when personally delivered, addressed as follows:

	 	 	 
	If to ELC or Acquisition:

	 	Electric City Corp.
	 

	 	1280 Landmeier Road
	 

	 	Elk Grove Village, Illinois 60007
	 

	 	Attn: Jeffrey Mistarz, CFO
	 

	 	Phone: (847) 437-1666
	 

	 	Fax: (847) 437-4969
	 
	 	 
	with a copy to:

	 	Schwartz Cooper Chartered
	 

	 	180 North LaSalle, Suite 2700
	 

	 	Chicago, Illinois 60601
	 

	 	Attention: Andrew H. Connor, Esq.
	 

	 	Phone: (312) 845-5118
	 

	 	Fax: (312) 264-2427
	 
	 	 
	If to Parke or the Stockholder:

	 	Parke P.A.N.D.A. Corporation
	 

	 	                                                            
	 

	 	                                                            
	 

	 	Attn: Daniel W. Parke
	 

	 	Phone:                                                             
	 

	 	Fax:                                                                  
	 
	 	 
	with a copy to:

	 	Rodi, Pollock, Pettker, Galbraith & Cahill
	 

	 	444 South Flower Street, Suite 1700
	 

	 	Los Angeles, CA 90071-2901
	 

	 	Attn: Elizabeth B. Blakely
	 

	 	Phone: (213) 895-4900
	 

	 	Fax: (213) 895-4921

- 37 -

 

No notice, request, demand, instruction, or other document to be given hereunder to any party shall
be effective for any purpose unless personally delivered, or delivered by commercial overnight
delivery service, or sent by certified or registered mail, return receipt requested, to the
appropriate address, or transmitted by telecopier to the number provided herein. Notices that are
mailed shall be deemed to have been given on the third day following deposit of same in any United
States Post Office mailbox in the state to which the notice is addressed or on the fourth day
following deposit in any such post office box other than in the state to which the notice is
addressed, postage prepaid, addressed as set forth herein. Notices sent via commercial overnight
delivery service shall be deemed to have been given the next business day after deposit with the
commercial delivery service. Notices that are transmitted via telecopier shall be deemed to have
been given the business day transmitted, if transmitted before 3:00 p.m. recipient’s time, and on
the next business day, if transmitted after 3:00 p.m. recipient’s time, as evidenced by a
telecopier confirmation of successful transmission. The addresses and telecopier numbers for the
purposes of this paragraph may be changed by giving written notice of such change in the manner
herein provided for giving notice.

     13.5 Captions. The captions and headings of Articles and Sections of this Agreement
are for convenience only and shall not control or affect the meaning or construction of any of the
provisions of this Agreement.

     13.6 Law Governing. This Agreement shall be governed by, construed, and enforced in
accordance with the laws of the State of California, notwithstanding any conflict of law provision
to the contrary.

     13.7 Arbitration. In the event of any dispute, disagreement or controversy arising
under this Agreement or any other written agreements entered into in connection herewith (a
“Dispute”), and after written notice of the dispute as provided in Section 11.4 above, the
relevant parties shall attempt in good faith to resolve the Dispute by negotiations. If for any
reason the Dispute in not resolved within thirty (30) days after delivery of the original notice of
the Dispute, any party may serve on the other relevant parties a written demand for arbitration of
the Dispute. Thereafter, such Dispute shall be subject to binding arbitration in Los Angeles
County, California, as arbitrated in accordance with the then current Commercial Arbitration Rules
of the American Arbitration Association before one neutral arbitrator. Any party may apply to the
arbitrator seeking injunctive relief until the arbitration award is rendered or the controversy is
otherwise resolved. Without waiving any remedy under this Agreement, any party may also seek from
any court having jurisdiction any interim or provisional relief that is necessary to protect the
rights or property of that party, pending the establishment of the arbitral tribunal (or pending
the arbitral tribunal’s determination of the merits of the controversy). In the event of any such
Dispute, none of the parties shall directly or indirectly reveal, report, publish or disclose any
information relating to such Dispute to any person, firm or corporation not expressly authorized by
the other party or parties to receive such information or use such information or assist any other
person in doing so, except to comply with actual legal obligations of such party, or unless

- 38 -

 

such disclosure is directly related to an arbitration proceeding as provided herein,
including, but not limited to, the prosecution or defense of any claim in such arbitration. Except
as the parties may otherwise agree in writing, the arbitrator shall be licensed to practice law in
any U.S. state and experienced in corporate and contract law, and the arbitrator shall be required
to decide each claim in accordance with applicable law and to set forth in writing the award and a
summary of those facts considered by the arbitrator to be material to the decision. This agreement
to arbitrate shall be enforceable under the Uniform Arbitration Act. Any court of competent
jurisdiction may confirm, or enter a judgment upon, any arbitration award issued pursuant to this
Section 13.7. The costs and expenses of the arbitration (excluding attorneys’ fees) shall be paid
by the non-prevailing party or as otherwise equitably allocated between the parties by the
arbitrator.

     13.8 Waiver of Provisions. The terms, agreements, covenants, representations,
warranties and conditions of this Agreement may be waived only by a written instrument executed by
the party waiving compliance. The failure of any party at any time or times to require performance
of any provision of this Agreement shall in no manner affect the right at a later date to enforce
the same. No waiver by any party of any condition or the breach of any provision, term, agreement,
covenant, representation or warranty contained in this Agreement in :any one or more instances
shall be deemed to be or construed as a further or continuing waiver of any such condition or of
the breach of any other provision, term, agreement, covenant, representation or warranty.

     13.9 Counterparts. This Agreement may be executed in several counterparts, and all
counterparts so executed shall constitute one agreement, binding on all of the parties hereto,
notwithstanding that all the parties are not signatory to the original or the same counterpart. It
shall not be necessary in making proof of this Agreement to produce or account for more than one
such counterpart for each of the parties hereto. Delivery by facsimile by any of the parties
hereto of an executed counterpart of this Agreement shall be effective as an original executed
counterpart hereof and shall be deemed a representation that an original executed counterpart
hereof will be delivered.

     13.10 Entire Agreement. This Agreement constitutes the entire agreement among the
parties and supersedes and cancels any and all prior agreements between them relating to the
subject matter hereof, and may not be amended except in a writing signed by the party to be bound.
After the Closing Date, neither this Agreement nor any other agreement or document executed by
Parke in connection with the Contemplated Transactions may be amended or terminated or any
provision thereof waived without the written consent of the Stockholder.

     13.11 No Third Party Rights. Nothing expressed or referred to in this Agreement will
be construed to give any person or entity other than the parties to this Agreement any legal or
equitable right, remedy or claim under or with respect to this Agreement or any provision of this
Agreement.

- 39 -

 

     13.12 Additional Agreement. Prior to the Closing Date, ELC and the Stockholder shall
agree upon the number of stock options which ELC will grant to key employees of the Surviving
Entity and the identities of the grantees of such options.

[Balance of page intentionally left blank; signature page follows.]

- 40 -

 

     IN WITNESS WHEREOF, the parties have caused this Agreement And Plan of Merger to be duly
executed by their duly authorized officers, all as of the day and year first above written.

	 	 	 	 	 
	 	 	ELECTRIC CITY CORP.
	 
	 	 	 	 
	 

	 	By:
	 	/s/ David Asplund
	 

	 	 	 	 
	 

	 	Name:
	 	David Asplund
	 

	 	Title:
	 	Chief Executive Officer
	 
	 	 	 	 
	 	 	PARKE ACQUISITION, LLC
	 
	 	 	 	 
	 

	 	By:
	 	/s/ Jeffrey Mistarz
	 

	 	 	 	 
	 

	 	Name:
	 	Jeffrey Mistarz
	 

	 	Title:
	 	Manager
	 
	 	 	 	 
	 	 	PARKE P.A.N.D.A. CORPORATION
	 
	 	 	 	 
	 

	 	By:
	 	/s/ Daniel Parke
	 

	 	 	 	 
	 

	 	Name:
	 	Daniel Parke
	 

	 	Title:
	 	President
	 
	 	 	 	 
	 	 	/s/ Daniel Parke
	 	 	 
	 	 	DANIEL W. PARKE

- 41 -

 

LISTING OF EXHIBITS AND SCHEDULES

	 	 	 
	Schedule 4.2

	 	Required Notices and Consents
	Schedule 4.3

	 	Liabilities
	Schedule 4.4

	 	Subsidiaries, Partnerships, Other Investments
	Schedule 4.5

	 	Affiliate Transactions
	Schedule 4.6

	 	Governmental Authorizations
	Schedule 4.8(a)

	 	Leased Real Property Information
	Schedule 4.8(b)

	 	Encumbrances, Defaults, Etc.
	Schedule 4.9

	 	Material Contracts
	Schedule 4.10

	 	Litigation; Compliance With Law
	Schedule 4.11

	 	Taxes
	Schedule 4.12

	 	Labor Disputes; Employees
	Schedule 4.13

	 	Powers of Attorney
	Schedule 4.14

	 	Indebtedness
	Schedule 4.15

	 	Insurance
	Schedule 4.16

	 	Intellectual Property
	Schedule 4.20

	 	Adverse Changes Since December 31, 2005
	Schedule 4.21

	 	Employee Benefits
	Schedule 4.22

	 	Environmental Matters
	Schedule 5.9

	 	ELC Litigation & Compliance With Law

- 42 -<PAGE>

                                                                    Exhibit 10.1

                               COVENANT NOT TO SUE
                            AND SETTLEMENT AGREEMENT

     This Covenant Not to Sue and Settlement Agreement ("the Agreement") is
entered into this 16th day of May, 2006 by and between Avondale Mills,
Inc. ("Avondale") and Factory Mutual Insurance Company ("Factory Mutual").
Avondale and Factory Mutual are collectively referred to herein as the "Parties"
and individually as a "Party."

     WHEREAS, Factory Mutual issued to Avondale a policy of insurance for the
period from September 1, 2004 to September 1, 2005, Policy No. JB275 ("the
Policy"), which Policy insured specified property of Avondale at various
locations identified in the Schedule of Locations which forms a part of the
policy (referred to herein as the "insured location"), and also insured
Avondale's business income loss, all under the terms, conditions, definitions,
exclusions and endorsements contained in the Policy; and

     WHEREAS, on or about January 6, 2005, a train operated by Norfolk Southern
Corporation and/or Norfolk Southern Railway Company (hereinafter collectively
"Norfolk Southern") derailed on Avondale's property, releasing chlorine into the
environment and causing damage to Avondale's property at some of the insured
locations referenced in the Policy (referred to herein as the "Norfolk Southern
Derailment"); and

     WHEREAS, Factory Mutual has, as of the date of execution of this Agreement,
paid Avondale one hundred fifteen million and 00/100 dollars ($115,000,000.00)
in advance payments for the insured loss resulting from the Norfolk Southern
Derailment (referred to herein as the "Advance Payments"); and

     WHEREAS, Avondale intends to make and has already made additional claims
under the Policy for damages to Avondale's property and for business income loss
arising from the Norfolk Southern Derailment (referred to herein as "Additional
Claims"); and

<PAGE>

     WHEREAS, Avondale retained counsel immediately after the Norfolk Southern
Derailment, has been represented by counsel throughout the adjustment process
and settlement negotiations, and was represented by counsel at the time of
settlement; and

     WHEREAS, Avondale and Factory Mutual retained and relied upon experts and
consultants throughout the adjustment process and settlement negotiations; and

     WHEREAS, Avondale and Factory Mutual dispute the scope and measure of
insured damages from the Norfolk Southern Derailment; and

     WHEREAS, Factory Mutual requested additional information, documents, and
testing in accordance with the terms of the Policy, but has not yet received all
of said information, documents, and testing; and

     WHEREAS, Avondale maintains that insured and uninsured damage to its
property and Avondale's business income loss is ongoing and has not been fully
measured and quantified as of the date of this settlement and that Avondale has
sustained other uninsured loss; and

     WHEREAS, the Parties have already expended significant time and money in
the investigation and resolution of this matter, and the Parties wish to forego
any additional costs and resolve the disputes among themselves; and

     WHEREAS, Avondale and Factory Mutual reached a negotiated settlement and
executed a Memorandum of Understanding Regarding the Terms of Settlement on May
11, 2006 (referred to herein as the "Memorandum of Understanding"), attached
hereto, the terms of which are incorporated herein by reference; and

     WHEREAS, the Parties acknowledge that the negotiated settlement reflected
in both the Memorandum of Understanding and this Agreement was reached in good
faith and at the conclusion of arms length negotiations; and

                                      -2-

<PAGE>

     WHEREAS, Avondale and Factory Mutual desire to compromise, settle and
resolve the Additional Claims, as well as all claims, demands, disputes, and
obligations pending between them and/or which have been or could have been
asserted by one against the other pursuant to the terms of the Policy or
relating in any way to the Norfolk Southern Derailment, this being the intent
and purpose of the Agreement; and

     WHEREAS, Avondale intends to settle with Factory Mutual only, and Avondale
specifically intends to preserve its rights to continue to pursue its claims
against Norfolk Southern, all related parties and affiliates of Norfolk
Southern, and all other persons or entities, other than Factory Mutual, who may
be legally responsible for damages resulting from the Norfolk Southern
Derailment, and Factory Mutual intends to preserve its rights, to the extent it
has such rights independent of Avondale, to pursue Norfolk Southern, all related
parties and affiliates of Norfolk Southern, and all other persons or entities,
other than Avondale, who may be legally responsible for the damages resulting
from the Norfolk Southern Derailment; and

     WHEREAS, Avondale and Factory Mutual recognize and agree that the terms of
this Agreement and any payments called for hereunder shall not constitute an
admission by Avondale or Factory Mutual of Avondale's insured or uninsured loss;
and

     NOW, THEREFORE, in consideration of the mutual covenants herein, the
recitals set forth above and for other good and valuable consideration, the
sufficiency and adequacy of which is acknowledged by all Parties and with the
intent to be legally bound, the Parties to this Agreement agree as follows:

1.   INCORPORATION OF RECITALS AND DEFINITIONS.

     The Parties to this Agreement represent, warrant, and agree that the
recitals appearing above are true and correct to the best of each Party's
knowledge and such recitals are

                                      -3-

<PAGE>

incorporated herein by this reference. For purposes of this Agreement, all
references to Avondale and Factory Mutual shall also include their respective
predecessors, successors, assigns, affiliates, subsidiaries, re-insurers,
adjusters, agents, parents, creditors, bondholders, directors, officers,
trustees in bankruptcy, receivers, employees, representatives, stockholders,
general and limited partners, partners, sister corporations, and/or divisions.

2.   CAPACITY TO EXECUTE.

     Each Party to this Agreement represents and warrants that it is legally
viable and competent to enter into this Agreement, is not currently under the
protection of the bankruptcy courts of the United States, is relying on
independent judgment and has not been influenced, pressured or coerced to any
extent in making this Agreement by any representation or statement made by any
other Party, and that the individuals executing this Agreement on its behalf are
authorized to do so.

3.   CONSIDERATION AND PAYMENT.

     In accordance with the Memorandum of Understanding, Avondale and Factory
Mutual agree to the total sum of two hundred and fifteen million and 00/100
dollars ($215,000,000.00) to completely and finally resolve all Avondale claims
against only Factory Mutual arising from or related in any way to the Norfolk
Southern Derailment, including all claims under the Policy and any other claims
against Factory Mutual; to end the adjustment investigation and process; and
discharge Avondale from further response to the Policy adjustment, proof and
appraisal requirements.

     In consideration of the Covenant Not to Sue and following promises, Factory
Mutual agrees to pay Avondale a total of two hundred and fifteen million and
00/100 dollars ($215,000,000.00). Of this amount, one hundred and fifteen
million and 00/100 dollars

                                      -4-

<PAGE>

($115,000,000.00) was previously paid to Avondale as Advance Payments. The
remaining one hundred million and 00/100 dollars ($100,000,000.00) shall be paid
to Avondale by wire transfer as were the Advance Payments on or before May 25,
2006, provided that the Parties execute this Agreement in accordance with the
Memorandum of Understanding.

     As additional consideration, Factory Mutual agrees to forego its rights
under the Policy concerning the investigation and measure of the Additional
Claims, including its rights to require Avondale to submit a Proof of Loss; seek
appraisal of any differences regarding the measure or amount of loss; obtain
additional documents and information pursuant to the "Requirements In Case of
Loss" provision of the Policy; conduct examinations under oath; and require
Avondale to comply with the requirements in the "Valuation" provision of the
Policy. Avondale is permitted to expend or apply the proceeds of this settlement
as Avondale determines is appropriate in its sole discretion.

     It is expressly agreed, intended, and understood by the Parties that the
above-referenced consideration is received in full settlement, accord, and
satisfaction of any and all claims, damages (known and unknown), losses (known
and unknown), expenses (known and unknown), rights, demands, actions, suits, and
causes of action (including, but not limited to, bad faith or punitive or
extra-contractual damages claims) that Avondale has, may have had, or may claim
in the future to have against Factory Mutual arising out of the Norfolk Southern
Derailment and the Policy. It is specifically agreed that the above-referenced
consideration paid by Factory Mutual to Avondale is an accord and satisfaction
as to the obligations of Factory Mutual only, and Avondale reserves all rights
to continue to pursue its claims against Norfolk Southern, all related parties
and affiliates of Norfolk Southern, and all other persons or entities who may be
legally responsible for damages resulting from the Norfolk Southern Derailment.
Upon the execution of

                                      -5-

<PAGE>

this Agreement, Avondale will submit subrogation receipts in a form mutually
agreed upon by the parties for all payments made by Factory Mutual.

4.   COVENANT NOT TO SUE.

     In exchange for the consideration paid hereunder and referred to herein,
Avondale hereby covenants and agrees not to file or initiate any type of action
or proceeding at law or in equity, or any proceeding of any description,
including but not limited to appraisal or arbitration, against Factory Mutual
related to any claims, demands, causes of action (including, but not limited to,
bad faith or punitive or extra-contractual damages claims), suits, damages
(known and unknown), losses (known and unknown), and expenses (known and
unknown), arising from the Norfolk Southern Derailment or the Policy. In
addition, Avondale will not ask any other person or entity to initiate such a
proceeding or suit on its behalf. It is the intent of this covenant not to sue
to preserve the right of Avondale to pursue its claims against Norfolk Southern,
its related parties and affiliates, and all other persons or entities who may be
legally responsible for damages resulting from the Norfolk Southern Derailment
(other than Factory Mutual).

5.   RECOVERY ACTION.

     The Parties hereby agree that this Agreement shall not impact or otherwise
affect in any way any claims that have been or could be asserted by Avondale or
Factory Mutual in the action against Norfolk Southern and all others who may be
responsible for the damages resulting from the Norfolk Southern Derailment or
any future action against any person that may be responsible for damages
resulting from the Norfolk Southern Derailment except as provided in the
sections numbered three (3) and four (4) of this Agreement. The Parties further
agree to abide by the terms of the Memorandum of Understanding ("MOU") executed
on May 11, 2006, specifically including, but not limited to, the terms and
provisions of the Recovery Action section of the

                                      -6-

<PAGE>

MOU pertaining to the apportionment of recoveries, which MOU is incorporated
herein by reference.

6.   WARRANTY REGARDING UNKNOWN CLAIMS, INJURIES, AND DAMAGES.

     Avondale warrants and represents that the extent of damages sustained by
Avondale may be unknown, as Avondale maintains that insured and uninsured
damages to its property and Avondale's business income loss is ongoing and that
Avondale has sustained other uninsured loss, and Avondale understands, agrees,
and warrants that the Covenant Not to Sue contained herein extends to all
unknown or unanticipated claims and damages Avondale could assert against
Factory Mutual pursuant to the terms of the Policy and as a result of the
Norfolk Southern Derailment, as well as to those claims and damages that are now
known or disclosed, apprehended, or anticipated.

7.   SETTLEMENT AUTHORITY.

     The Parties represent and warrant that they have taken all necessary
corporate, legislative, legal, and other action to duly approve the making and
performance of this Agreement and that no further action or approval is
necessary. Upon execution of this Agreement, Avondale will provide to Factory
Mutual a copy of the resolution of its Board of Directors approving the amount
and terms of the settlement, as well as the relevant portions of minutes of the
meeting in which the Agreement is adopted.

8.   INDEMNIFICATION.

     Avondale represents and warrants that no lien holder has any rights with
respect to any of the payments made hereunder. Avondale agrees to defend at its
cost, indemnify, and hold harmless Factory Mutual against any claim from any
other person or entity seeking all or any portion of the proceeds to be paid by
Factory Mutual as contemplated by this settlement. Except

                                      -7-

<PAGE>

for this limited indemnity obligation, Avondale shall have no obligation to
defend at its cost, indemnify, or hold harmless Factory Mutual against any
claim, damages, or costs from any other person or entity for any act or omission
by Factory Mutual. Factory Mutual shall have no obligation to defend at its
cost, indemnify, or hold harmless Avondale against any claim, damages, or costs
from any other person or entity for any act or omission by Avondale.

9.   NO ADMISSION OF LIABILITY.

     This Agreement evidences a compromise settlement of disputed claims entered
into in order to avoid further dispute and litigation. It is expressly
understood and agreed by the Parties hereto that neither the making of this
Agreement, the making of any payment by any Party, nor any other action taken by
any Party pursuant to this Agreement shall be construed as an admission by any
Party of responsibility or liability to any other Party.

10.  COMPLETE AGREEMENT.

     The Parties hereto understand and agree that this Agreement, and the
Memorandum of Understanding incorporated by reference herein, contains their
entire understanding concerning the matters herein contained and that there are
no other agreements, whether oral or written, regarding the same. The Parties to
this Agreement acknowledge and agree that this Agreement shall not be subject to
any claim of mistake of fact or any claim of fraud. The terms of this Agreement
are contractual and not a mere recital and merge all prior discussions,
agreements and transactions of all kinds pertaining to the matters discussed in
this Agreement. All of the undersigned have had ample opportunity to investigate
all of the matters covered in this Agreement and to receive the advice of
counsel. This Agreement is made without any reliance on any statement, promise,
inducement or consideration not recited herein. This Agreement may not be
waived, changed, modified, discharged or terminated except as provided herein or
except

                                      -8-

<PAGE>

by a writing signed by the Party against whom such waiver, change, modification,
discharge or termination is sought to be enforced. If any section of this
Agreement shall for any reason be or become invalid or unenforceable, it shall
not affect the remaining provisions of this Agreement which shall remain in full
force and effect.

11.  REPRESENTATION OF COMPREHENSION OF DOCUMENT.

     In entering this Agreement, the Parties represent that they have relied
upon the advice of their attorneys, who are the attorneys of their own choosing,
concerning the legal consequences of this Agreement; that the terms of this
Agreement have been completely read and explained to the Parties by their
attorneys; that the terms of this Agreement are fully understood and voluntarily
accepted by the Parties; and the Parties unconditionally accept this Agreement
and acknowledge that this Agreement is mutual and binding upon all Parties
hereto regardless of the extent of damages allegedly suffered by any of the
Parties.

12.  SUCCESSORS IN INTEREST.

     This Agreement shall be binding upon and inure to the benefit of the
Parties hereto, jointly and severally, as well as to the past, present and
future executors, administrators, agents, employees, adjusters, directors,
officers, stockholders, servants, attorneys, affiliated persons and entities,
predecessors in interest, successors in interest, assigns regardless of form,
creditors, bondholders, trustees in bankruptcy or otherwise, receivers, general
and limited partners, partners, sister corporations, divisions, subsidiaries,
parents, re-insurers, and any other representative or entity acting on behalf
of, pursuant to or by virtue of the rights of each.

13.  CONSTRUCTION OF THIS AGREEMENT.

     The Parties agree that they have each participated in the drafting of this
Agreement, and that, as a result, this Agreement shall not be construed in favor
of or against any party hereto.

                                      -9-

<PAGE>

14.  GOVERNING LAWS.

     This Agreement shall be construed and interpreted in accordance with the
laws of the State of Georgia.

15.  EFFECTIVENESS.

     This Agreement shall become effective immediately upon execution by the
Parties.

16.  EXECUTION IN COUNTERPARTS.

     This Agreement may be executed in several counterparts, separate signature
pages for each Party, each which shall be deemed an original, but all of which
taken together shall be deemed to constitute one and the same instrument.

17.  HEADINGS AND CAPTIONS.

     The headings and captions used in this Agreement are for convenience of
reference only, and shall in no way define, limit, expand or otherwise affect
the meaning or construction of any provision of this Agreement.

     IN WITNESS WHEREOF, the parties to this Agreement have caused this document
to be signed in their respective names by their duly authorized representative
and approved by their attorneys.

                                        AVONDALE MILLS, INC.

                                        By:    /s/ Stephen Felker
                                            ------------------------------------
                                        Title: Chief Executive Officer &
                                               Chairman of the Board
                                               ---------------------------------

                                        Print Name: Stephen Felker, Sr.
                                        Title: Chief Executive Officer,
                                               Chairman of Board of Directors

ATTESTATION:

                                      -10-

<PAGE>
     On the 16th day of May, 2006, before me came Stephen Felker, to me known,
who, being by me duly sworn, did depose and say that he resides in High Shoals,
Georgia, that he is the Chairman and CEO of Avondale Mills, Inc., the
corporation described in, and which executed, the foregoing instrument, that he
knows the seal of the said corporation; that the seal affixed to said instrument
is the Corporate Seal, that it was so affixed by authority from the Board of
Directors of said corporation; and that he signed his name thereto with like
authority.

                                        /s/ Leigh Ann Mansmann   (Seal)
                                        -------------------------------
                                        Print Name: Leigh Ann Mansmann
                                                    -------------------
                                        Title: Assistant Secretary
                                               ------------------------

Sworn to and Subscribed before me
this 16th day of May, 2006.

/s/ Lynn D. Atha
-------------------------------------
Notary Public

                                      -11-

<PAGE>

                                        FACTORY MUTUAL INSURANCE COMPANY

                                        By: /s/ Dennis M. Corrigan
                                            ------------------------------------
                                        Title:  VP Central Div. Claims Mgr.
                                               ---------------------------------

                                        Print Name: Dennis Corrigan
                                        Title: Vice President, Central Division
                                               Claims Manager

ATTESTATION:

     On the 16 day of May, 2006, before me came Dennis M. Corrigan, to me known,
who, being by me duly sworn, did depose and say that he resides in Illinois,
that he is the Vice President, Central Division Claims Manager of Factory Mutual
Insurance Company, the corporation described in, and which executed, the
foregoing instrument, that he knows the seal of the said corporation; that the
seal affixed to said instrument is the Corporate Seal, that it was so affixed by
authority from the Board of Directors of said corporation; and that he signed
his name thereto with like authority.

                                                                          (Seal)
                                        ----------------------------------
                                        Print Name: Annette Pope
                                                    ----------------------------
                                        Title:
                                               ---------------------------------
Sworn to and Subscribed before me
this 16 day of May, 2006.

/s/ Annette Pope
-------------------------------------
Notary Public

                                      -12-
<PAGE>

                          MEMORANDUM OF UNDERSTANDING
                         REGARDING TERMS OF SETTLEMENT

     This Memorandum of Understanding ("MOU") is made and entered into by and
between Factory Mutual Insurance Company ("Factory Mutual") and Avondale Mills,
Inc. ("Avondale"). Avondale and Factory Mutual agree to the total sum of
$215,000,000 to completely and finally resolve all Avondale claims against
Factory Mutual arising from or related in any way to the January 6, 2005 train
derailment and chlorine release ("the Incident"), including claims under Policy
JB275 ("the Policy") and any other claims and to end the adjustment
investigation and process and discharge Avondale from further response to the
Policy adjustment, proof and appraisal requirements. Of this amount, one hundred
fifteen million and 00/100 dollars ($115,000,000) has already been paid by
Factory Mutual. The full consideration will not be paid until the parties have
drafted, agreed upon, and executed a final Covenant Not to Sue and Settlement
Agreement ("Settlement Agreement"). Subject to the execution of the Settlement
Agreement within 5 days of this MOU, the remaining dollars will be paid by
Factory Mutual in the following manner: $100,000,000 will be paid by May 25
(Factory Mutual will use best efforts to pay by May 22) but after the execution
of the Settlement Agreement. The parties are obligated to execute a Settlement
Agreement within 5 days of this MOU.

     It is expressly agreed, intended, and understood by the parties that the
above-referenced consideration is received in full settlement, accord, and
satisfaction of any and all claims, damages (known and unknown), rights, demands
and causes of action (including, but not limited to, bad faith or punitive or
extra-contractual damages claims) that Avondale has, may have had, or may claim
in the future to have against Factory Mutual its directors, officers, employees,
agents, affiliates, subsidiaries and parents, arising out of the January 6, 2005
train derailment and chlorine release. Avondale will execute subrogation
receipts for all Factory Mutual payments. Avondale warrants that there are no
liens on this recovery or loss payees entitled to be identified for these
payments.

     At the time the Covenant Not to Sue and Settlement Agreement is executed,
Avondale will provide Factory Mutual a copy of the resolution of its Board of
Directors approving this settlement and its terms and the relevant part of the
minutes of the meeting at which it was adopted.

     AFFIRMATIONS OF FACT - In conjunction with this settlement, Factory Mutual
and Avondale hereby acknowledge the following:

     A.   Avondale retained counsel immediately after the Insured event, has
          been represented by counsel throughout the adjustment process and
          settlement negotiations, and was represented by counsel at the time of
          settlement.

     B.   The Parties retained and relied upon experts and consultants.

     C.   The settlement was reached in good faith after arms length
          negotiations by the Parties.

     D.   The Parties dispute the scope and measure of insured damages from the
          Incident;

<PAGE>

     E.   The settlement is intended to compromise and settle disputed claims
          arising out of the Incident. This settlement is a compromise of
          Avondale's claim under the Policy. Factory Mutual's current loss
          measure will be sent to counsel for Avondale. This agreement does not
          constitute an admission by Avondale or Factory Mutual of Avondale's
          insured or uninsured loss.

     F.   In exchange for this settlement, Factory Mutual is foregoing certain
          rights under the Policy concerning its investigation and measure of
          the claims, including, its rights to:

          1.   require Avondale to submit a Proof of Loss;

          2.   seek appraisal of any differences regarding the measure or amount
               of loss;

          3.   obtain documents pursuant to the "Requirements In Case of Loss"
               provision;

          4.   require Avondale to comply with the requirements in the
               "Valuation" provision; and

          5.   conduct examinations under oath.

     G.   Factory Mutual agrees that Avondale has the right to expend or apply
          the proceeds of this settlement as Avondale determines is appropriate
          in its sole discretion.

     H.   Nothing in this MOU shall be deemed a release of any claims asserted
          by Avondale or Factory Mutual against Norfolk Southern or other
          parties to the Recovery action.

     RECOVERY ACTION - Avondale is pursuing a lawsuit against Norfolk Southern
and others for all losses from the Incident and punitive damage claims of the
("Recovery action"). The Parties agree that Avondale can continue to pursue its
claim for uninsured losses, including compensatory damages and punitive damages,
against Norfolk Southern and others in the Recovery action and Factory Mutual
can pursue its subrogation claim against Norfolk Southern and others in the
Recovery action. The Parties will agree to apportion recoveries for any joint
settlement or lump sum recovery as set forth below.

     In the event the court denies Factory Mutual's Motion to Intervene,
Avondale shall agree upon entry of the Order denying Factory Mutual's Motion to
Intervene that Factory Mutual's selected counsel will be added as counsel of
record to represent Factory Mutual's subrogated interest in the Recovery action.
Factory Mutual shall also have the right to control its subrogated interest as
part of the Recovery Action.

     A.   Authority to Settle Recovery Action - Both Avondale and Factory Mutual
          shall have the right to separately settle their respective claims in
          the Recovery action and will do so in a manner that does not
          materially prejudice the ability of the non-settling party to proceed
          with said litigation. In the event of settlement by one Party, the
          settling party will cooperate with the remaining plaintiff or party in
          making files, evidence, experts and other witnesses reasonably
          available to the remaining plaintiff or party to pursue its recovery
          claims at the expense of the nonsettling party. The parties agree that
          the recovery distribution in the event of joint settlement and the
          recovery distribution in the event of jury verdict will not apply if
          either party exercises its right to independently settle its portion
          of the Recovery action.

     B.   Recovery Distribution in the Event of a Joint Settlement - If Avondale
          and Factory Mutual jointly settle their claims in the Recovery action,
          the parties hereby agree that the

                                       -2-
<PAGE>

          first $ 215 million of the settlement shall be considered compensatory
          damages. Subject to this agreement, any funds recovered in a joint
          settlement will be allocated as follows:

          1.   Avondale will receive first dollars to reimburse for its
               deductible and for its uninsured losses up to $ 5 million;

          2.   Factory Mutual will receive the next dollars until it is
               reimbursed $100,000,000 for loss payments under the insurance
               policy;

          3.   Avondale will receive the next dollars for its uninsured loss up
               to an additional $10,000,000.

          4.   Factory Mutual will receive the next dollars until it is
               reimbursed in full for loss payments under the insurance policy
               and pursuant to this MOU.

          5.   After Factory Mutual is compensated per B(4), Avondale will
               receive all additional amounts, including any punitive damages
               recovered by way of settlement.

     C.   Recovery Distribution in the Event of a Jury Verdict - Avondale and
          Factory Mutual agree that they will submit and support a jury verdict
          form that permits the jury to issue separate damages awards to
          Avondale and Factory Mutual for their respective claims. Avondale and
          Factory Mutual shall retain any separate damages awarded to them
          respectively. If Avondale and Factory Mutual collect on a verdict in
          the recovery action which does not separately allocate the Parties'
          respective claims, any amounts awarded by the jury, entered as a
          judgment, and collected by the parties on the judgment will be
          allocated as follows:

          1.   Avondale will receive first dollars awarded as compensatory
               damages to reimburse for its deductible and for its uninsured
               losses up to $5 million;

          2.   Factory Mutual will receive the next dollars awarded as
               compensatory damages until it is reimbursed $100,000,000 for loss
               payments under the insurance policy and pursuant to this
               settlement made to Avondale;

          3.   Avondale will receive the next dollars awarded as compensatory
               damages for its uninsured losses up to an additional $10,000,000;

          4.   Factory Mutual will receive the next dollars awarded as
               compensatory damages until it is reimbursed in full for loss
               payments under the insurance policy and pursuant to this MOU;

          5.   After Factory Mutual is compensated per C(4), Avondale will
               receive all additional amounts awarded as compensatory damages
               and Avondale will receive all amounts awarded as punitive
               damages.

     D.   Recovery Action Expenses - Recovery action expenses include all fees
          and costs incurred for consultants and experts retained by either
          Avondale or Factory Mutual in the Recovery action (not any consultant
          or expert fees on the adjustment issues). Recovery action expenses
          also include: costs of court reporters and deposition transcripts,
          costs of computer support services for document production, document
          copying costs, travel

                                       -3-

<PAGE>

          expenses and related fees provided to witnesses, and expert expenses.
          Finally, Recovery action expenses shall not include any expenses,
          costs or fees relating to the submission or adjustment of the claim
          under the insurance policy, the salary or time incurred by an employee
          of the parties to assist in prosecuting the Recovery action, nor shall
          it include any attorneys' fees and related expenses (including direct
          travel costs) incurred by Avondale or Factory Mutual in the Recovery
          action.

          All Recovery action expenses incurred from the date upon which this
          agreement is executed until the conclusion of the litigation by
          Avondale and/or Factory Mutual shall be split between Avondale and
          Factory Mutual on a 50/50 basis and shall be paid upon receipt of a
          statement with necessary supporting back-up from counsel for
          Avondale/Factory Mutual. Upon completion of the Recovery action by
          Avondale and/or Factory Mutual, Avondale and Factory Mutual shall
          adjust these litigation expense obligations on a pro-rata basis based
          upon the allocation of the full recovery (compensatory and
          punitives) to each party. In the event of settlement by either Party,
          the settling party will be obligated to their 50% of the Recovery
          action expenses as defined in this Agreement up to the date of the
          settlement and will have no other obligation for Recovery action
          expenses.

          In the event of dispute as to application of this provision concerning
          Recovery action expenses, the Parties agree to enter binding
          arbitration pursuant to AAA rules.

     SUCCESSORS IN INTEREST - The terms of this settlement shall be binding upon
Avondale and Factory Mutual and each of their respective successors in interest
and assigns.

     APPLICABLE LAW - This Agreement will be construed in accordance with the
law of the State of Georgia in which the Policy was delivered.

     Signatures on following page.

                                       -4-

<PAGE>

     The Parties to this MOU have caused this document to be signed in their
respective names by their duly authorized representative and approved by their
attorneys.

Factory Mutual Insurance Company        Avondale Mills, Inc.

/s/ Dennis Corrigan                     /s/ Stephen Felker
-------------------------------------   ----------------------------------------
Dennis Corrigan                         Stephen Felker, Sr.
Vice President                          Chief Executive Officer
Central Division Claims Manager         Chairman of Board of Directors

Robins, Kaplan, Miller & Ciresi LLP     King & Spalding LLP
Attorneys for Factory Mutual            Attorneys for Avondale Mills, Inc.
Insurance Company

By: /s/ William H. Stanhope             By: /s/ Michael. C. Russ
    ---------------------------------       ------------------------------------

DATE: May 11, 2006

                                      -5-

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