Document:

exv10w1

Exhibit 10.1

PREFERRED STOCK PURCHASE AGREEMENT

     THIS PREFERRED STOCK PURCHASE AGREEMENT (“Agreement”) dated as of the 11th day of June, 2008,
is entered into by and between Home Solutions of America, Inc., a Delaware corporation (the
“Company”), and EvenFlow Funding, LLC, a New Jersey limited liability company (the “Purchaser”).

WITNESSETH:

     WHEREAS, the Company desires equity capital in order to carry on its business and the
Purchaser is willing to provide certain equity capital by (i) purchasing 100,000 shares of Series C
Convertible Preferred Stock of the Company as is more particularly described in Exhibit A
(“Preferred Stock”), at a purchase price of $10.00 per share, and (ii) agreeing, subject to the
terms and condition hereof, to purchase additional shares of Preferred Stock in the future at a
purchase price of $10.00 per share, all on the terms and conditions set forth herein;

     WHEREAS, in connection with the Purchaser’s purchase of the Preferred Stock, the Company will
deliver certain warrants to Purchaser according to the terms and conditions hereof;

     WHEREAS, the terms pursuant to which the Purchaser is investing in the Preferred Stock and
receiving the warrants were considered by an ad hoc financing committee of the Board of Directors
of the Company consisting solely of disinterested directors, which committee recommended approval
to the Board, whereupon the terms were considered and approved by the Board of Directors of the
Company with the manager of the Purchaser (who is the Chairman of such Board) and CEO Frank
Fradella not participating; and

     WHEREAS, the terms of the Preferred Stock will be established pursuant to and governed by the
Certificate of Designation in the form attached hereto as Exhibit A, which has been filed
with the State of Delaware on the date hereof (the “Certificate of Designation”).

     NOW THEREFORE, in consideration of the premises and the mutual agreements set forth herein,
and intending to be legally bound hereby, the parties hereto agree as follows:

     I. Purchase and Sale; Initial Closing and Subsequent Closings.

          1.1 Purchase and Sale. Subject to the terms and conditions set forth in this
Agreement, (i) at the Initial Closing (as hereinafter defined) the Purchaser shall purchase from
the Company and the Company shall issue, sell and deliver to the Purchaser, 100,000 shares of
Preferred Stock, for a purchase price of $10.00 per share, or an aggregate of $1,000,000 payable in
cash, and (ii) at each Subsequent Closing (as hereinafter defined) the Purchaser shall, subject to
the terms and conditions hereof, purchase from the Company and the Company shall issue, sell and
deliver to the Purchaser, a minimum of 10,000 shares of Preferred Stock, or a greater amount as
determined by the Company (subject to the limits set forth below and provided that

 

 

the maximum number of shares of Preferred Stock purchased by the Purchaser at all such Subsequent
Closings shall be 250,000), for a purchase price of $10.00 per share. Notwithstanding the
foregoing, without the consent of the Purchaser (which may be withheld in its sole and absolute
discretion), (a) Subsequent Closings may be held no more frequently than once per fifteen day
period commencing on the date hereof, and (b) Purchaser will not be obligated to purchase more than
50,000 shares of Preferred Stock at any Subsequent Closing; provided, however, that
at the first Subsequent Closing, the Company may request that the Purchaser purchase up to 100,000
shares of Preferred Stock. The parties agree and acknowledge that the number of shares of
Preferred Stock to be purchased at Subsequent Closings, and the purchase price per share thereof,
shall be adjusted from and after the date hereof to account for any stock splits, reclassifications
or other similar events.

          1.2 Warrants. The Company shall issue and deliver to the Purchaser, (i) at the
Initial Closing, warrants (the “Warrants”) in the form attached hereto as Exhibit B to
purchase 2,000,000 shares of the Company’s Common Stock (the “Warrant Shares”) for $0.01 per share,
and (ii) at each Subsequent Closing, Warrants (in the form attached hereto as Exhibit C,
but modified to reflect the number of Warrants to be issued in connection with such Subsequent
Closing) to purchase a number of Warrant Shares equal to 20 times the number of shares of Preferred
Stock that the Purchaser purchases from the Company at such Subsequent Closing.

          1.3 Advisory Fee. The Company shall pay to the Purchaser at the Initial Closing an
advisory fee of $50,000 (the “Advisory Fee”), which shall be netted by the Purchaser from the
purchase price for the Preferred Stock.

          1.4 Initial Closing. The consummation of the transactions referred to in Sections
1.1(i), 1.2(i) and 1.3 shall constitute the initial closing (the “Initial Closing”). The Initial
Closing shall take place as of the date hereinabove set forth and such date is referred to herein
as the “Initial Closing Date.” The Initial Closing shall take place via telecopier, electronic or
overnight mail as the Purchaser and the Company may agree. At the Initial Closing, (i) the Company
shall deliver to the Purchaser certificates evidencing 100,000 shares of Preferred Stock and
Warrants evidencing 2,000,000 Warrant Shares, with such certificates and Warrants registered in the
name of such Purchaser and legended as provided herein and the other documents specified in Article
IV, and (ii) the Purchaser shall deliver to the Company $950,000, which represents payment in full
of the purchase price for such Preferred Stock and the Warrant Shares, net of the $50,000 Advisory
Fees, in immediately available funds.

          1.5 Subsequent Closings. Each consummation of the transactions referred to in
Sections 1.1(ii) and 1.2(ii) shall constitute a subsequent closing (each a “Subsequent Closing”).
The Company shall provide the Purchaser with two business days prior written notice (each, a
“Written Notice”) of its intent to consummate a Subsequent Closing (such Written Notice shall
include the number of shares of Preferred Stock and Warrants that the Company will issue to the
Purchaser, and the purchase price to be delivered by the Purchaser (which, with respect to the
Warrants and purchase price, shall be calculated pursuant to the terms and conditions of this
Agreement) at such Subsequent Closing), provided that such Written Notice

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shall be provided to the Purchaser five business days in advance of a Subsequent Closing if the
Company is requesting that the Purchaser purchase more than 50,000 shares of Preferred Stock at
such Subsequent Closing. Each Subsequent Closing shall take place (subject to the terms and
conditions hereof) as of the date that is five business days after the date that a Written Notice
is delivered to the Purchaser and each such date is referred to herein as a “Subsequent Closing
Date.” Each Subsequent Closing shall take place via telecopier, electronic or overnight mail as
the Purchaser and the Company may agree. At each Subsequent Closing, (i) the Company shall deliver
to the Purchaser certificates evidencing the number shares of Preferred Stock and Warrants
specified in the relevant Written Notice, with such certificates and Warrants registered in the
name of the Purchaser and legended as provided herein and the other documents specified in Article
IV, and (ii) the Purchaser shall deliver to the Company the purchase price specified in the
relevant Written Notice, which shall represent payment in full of the purchase price for such
Preferred Stock and Warrant Shares.

          1.6 Use of Proceeds. All funds representing Purchaser’s investment in the Company
shall be utilized to satisfy the Company’s obligations under the Forbearance Agreement (as
hereinafter defined) and to fund the Company’s working capital needs.

     II. Representations and Warranties of the Company.

          The Company hereby represents, warrants and covenants to the Purchaser as follows:

          2.1 Organization, Good Standing and Qualification. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of Delaware. The
Company has all requisite corporate power and authority and holds all licenses, permits and other
required authorizations from governmental authorities necessary to own its properties and assets
and to conduct its businesses as presently conducted. The Company is duly qualified to do business
as a foreign corporation and is in good standing in each jurisdiction in which the failure to so
qualify would have a material adverse effect on the business, operations or financial condition of
the Company. True and complete copies of the Company’s Certificate of Incorporation, as amended
(the “Certificate of Incorporation”), and its bylaws, as presently in effect, have been made
available to the Purchaser.

          2.2 Capitalization.

               As of the date hereof, the authorized capital stock of the Company consists of 100,000,000
shares of common stock, of which 50,700,850 shares are issued and outstanding, and 999,880 shares
of preferred stock, of which no shares are issued and outstanding. Except for (i) the Company’s
stock options plans and employee stock purchase plans, and (ii) the Company’s issuance of equity to
Frank Fradella pursuant to the Employment Agreement between the Company and Frank Fradella, or the
Company’s issuance of equity to the Company’s lender or lenders pursuant to that certain Amendment
No 1 dated June 4, 2008 (the “Forbearance Amendment”) (which amends that certain Forbearance
Agreement dated February

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6, 2008 among the Company and the lender parties thereto (the “Original Forbearance Agreement” and,
together with the Forbearance Amendment, the “Forbearance Agreement”)), each to be executed
concurrently with this Agreement, there are no agreements or obligations on the part of the Company
as of the date hereof to issue any common stock, preferred stock or other equity-linked securities,
whether through options, warrants or otherwise. The shares of Preferred Stock and the Warrants
which are being issued and sold hereunder have been duly and validly authorized and, when issued,
sold and delivered in accordance with the terms hereof for the consideration provided for herein,
will be validly issued, fully paid and nonassessable and will be free of restrictions on transfer
other than restrictions on transfer under applicable federal and state securities laws. The shares
of Common Stock issuable upon conversion of the Preferred Stock have been duly and validly
authorized and, upon conversion of the Preferred Stock as provided in the Certificate of
Designation will be validly issued, fully paid and nonassessable and will be free of restrictions
on transfer other than restrictions on transfer under applicable federal and state securities laws.
The shares of Common Stock issuable upon exercise of the Warrants have been duly and validly
authorized and upon exercise of the Warrants as provided therein will be validly issued, fully paid
and nonassessable and will be free of restrictions on transfer other than restrictions on transfers
under applicable federal and state securities laws. No further approval or authorization of the
stockholders or the directors of the Company is required for the issuance and sale of the Preferred
Stock or the Warrants as contemplated herein or the issuance of shares of Common Stock upon
conversion of the Preferred Stock or upon exercise of the Warrants. The Company shall, at all
times, reserve and keep available out of its authorized but unissued shares of Common Stock, solely
for the purpose of effecting the conversion of the Preferred Stock and the exercise of the
Warrants, such number of shares of Common Stock as shall from time to time be sufficient to effect
the conversion of all shares of Preferred Stock and the exercise of all of the Warrants.

          2.3 Authorization, Validity and Enforceability. The Company has all requisite
corporate power and authority to enter into this Agreement, and to carry out the transactions
contemplated hereby. The execution, delivery and performance by the Company of this Agreement, and
the consummation of the transactions contemplated hereby have been duly authorized and approved by
all necessary corporate action. The execution, delivery and performance of this Agreement, the
issuance of the Preferred Stock and the Warrants hereunder and the issuance of the shares of Common
Stock upon conversion of the Preferred Stock and upon exercise of the Warrants will not, (a)
violate any material provision of law, or (b) conflict with, or result in a breach of any of the
terms of, or constitute a default under, the Company’s Certificate of Incorporation, its bylaws or
any material agreement, instrument or other restriction to which the Company is a party or by which
the Company or any of its properties or assets is bound. This Agreement, when executed, will
constitute the legal, valid and binding obligations of the Company, enforceable against it in
accordance with its terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws and subject to general principles of equity
(regardless of whether such enforceability is considered in a proceeding in equity or at law) and
except as to the indemnification provisions contained herein or in the documents executed in
connection herewith are limited by applicable laws and principles of public policy.

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          2.4 Government Consents, etc. No consent, approval or authorization of, or
declaration, registration or filing with, any person, entity or governmental authority on the part
of the Company is required for the valid execution, delivery and performance of this Agreement, or
the valid consummation of the transactions contemplated hereby, except for filing the Certificate
of Designation with the Secretary of State of the State of Delaware. There is no injunction,
order, decree, ruling or charge in effect preventing the performance of this Agreement or the
consummation of the transactions contemplated hereby.

          2.5 Securities Laws. Subject to the truth and accuracy the Purchaser’s
representations and warranties set forth in Article III hereof, the offer, sale and issuance of the
Preferred Stock and the Warrants, and the issuance of the shares of Common Stock upon conversion of
the Preferred Stock and upon exercise of the Warrants, as provided in this Agreement, is and is
intended to be: (i) exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) thereof (or in the case of conversion of the Preferred Stock or “cashless” exercise of
the Warrants, Section 3(a)(9)), and (ii) registered, qualified or exempt from the registration or
qualification requirements of applicable state securities laws. Neither the Company nor, to the
Company’s knowledge, anyone acting on its behalf has taken or hereafter will take any action that
would cause the loss of such exemptions.

          2.6 Disclosure. No representation or warranty by the Company contained in this
Agreement or any certificate or other instrument referred to herein or otherwise furnished or to be
furnished to the Purchaser by the Company with respect to the transactions contemplated hereby,
contains any untrue statement of a material fact or omits or will omit to state any material fact
which is necessary in order to make the statements contained herein or therein, not misleading in
light of the circumstances in which they were made. There is no fact known to the Company relating
to the business, affairs, operations, condition or prospects of the Company which materially
adversely affects the same and which has not been disclosed to the Purchaser.

     III. Representations and Warranties of the Purchaser.

          The Purchaser hereby represents, warrants and covenants to the Company as follows:

          3.1 Experience; Risk. The Purchaser has such knowledge and experience in financial
and business matters that the Purchaser is capable of evaluating the merits and risks of the
purchase of the Preferred Stock and the Warrants pursuant to this Agreement and of protecting the
Purchaser’s interests in connection therewith. The Purchaser is able to fend for itself in the
transactions contemplated by this Agreement and has the ability to bear the economic risk of the
investment, including complete loss of the investment. The Purchaser is experienced in evaluating
and investing in new companies such as the Company, including, without limitation, the Company’s
industry and competition.

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          3.2 Investment. The Purchaser is acquiring the Preferred Stock and the Warrants for
investment for its own account, not as a nominee or agent, and not with a view to, or for resale in
connection with, any distribution thereof in violation of any federal or state securities laws,
subject, however, to the disposition of the Purchaser’s property being at all times within its
control, and the Purchaser has no present intention of selling, granting any participation in, or
otherwise distributing the same. The Purchaser understands that the shares of Preferred Stock and
the Warrants have not been registered under the Securities Act by reason of a specific exemption
from the registration provisions of the Securities Act which depends upon, among other things, the
bona fide nature of the investment intent and the truth and accuracy of the Purchaser’s
representations as expressed herein.

          3.3 Restricted Securities. The Purchaser understands that the shares of Preferred
Stock and the shares of Common Stock issuable upon conversion of the shares of Preferred Stock and
the Warrants and the shares of Common Stock issuable upon exercise thereof will be “restricted
securities” under the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and applicable
regulations such securities may be resold without registration under the Securities Act only in
certain limited circumstances. The Purchaser acknowledges that the securities must be held
indefinitely unless subsequently registered under the Securities Act or an exemption from such
registration is available.

          3.4 Access to Data. The Purchaser has had an opportunity to discuss the Company’s
business, management and financial affairs with the Company’s management and the opportunity to
review the Company’s facilities and has received all information requested from the Company
regarding the investment in the Company.

          3.5 Further Limitations on Disposition. Neither the Preferred Stock or the Common
Stock issuable upon conversion thereof or the Warrants or the Common Stock issuable thereof have
been registered under the Securities Act of 1933, as amended (the “Act”), or any state securities
laws. Therefore, in order, among other things, to insure compliance with the Act, notwithstanding
anything else in this Agreement, the Certificate of Designation or the Warrants to contrary, the
Purchaser, including any successive transferee, agrees as follows:

The Purchaser shall not sell, assign, transfer, pledge, hypothecate, mortgage, encumber or dispose
of all or any portion of the Preferred Stock or the Common Stock issuable upon conversion thereof
or the Warrants or the Common Stock issuable therefrom. Notwithstanding the foregoing, the
Purchaser may transfer all or any portion of the Preferred Stock or the Common Stock issuable upon
conversion thereof or the Warrants or the Common Stock issuable thereof (a) as part of a registered
public offering of the Company’s securities or pursuant to Rule 144 under the Act, (b) by pledge
that creates a mere security interest in all or any portion of the Preferred Stock or the Common
Stock issuable upon conversion thereof or the Warrants or the Common Stock issuable therefrom,
provided that the pledgee thereof agrees in writing in advance to be bound by and comply with all
applicable provisions this Agreement, the Certificate of Designation or the Warrants to the same
extent as if it were the Holder making

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such pledge, (c) to any member of the Purchaser, or to any siblings, ancestors, descendants or
spouse of any member of the Purchaser, or any custodian or trustee for the account of such member
or the account of such siblings, ancestors, descendants or spouse of such member (or any
combination of the foregoing), or (d) to an affiliate or partner of the Purchaser, provided, in
each such case (other than a transfer under clause (a) above) a transferee shall receive and hold
all or any portion of the Preferred Stock or the Common Stock issuable upon conversion thereof or
the Warrants or the Common Stock issuable therefrom subject to the provisions of this Agreement,
the Certificate of Designation or the Warrants and there shall be no further transfer except in
accordance herewith or therewith. No party will avoid the provisions of this Agreement, the
Certificate of Designation or the Warrants by making one or more transfers to an affiliate of such
party and then disposing of all or any portion of such party’s interest in such affiliate;
provided, however, that in any event, the Preferred Stock or the Common Stock issuable upon
conversion thereof or the Warrants or the Common Stock issuable therefrom may not (other than in
connection with the matters described in Section 3.5(a) through Section 3.5(d) (inclusive)) be sold
or transferred in the absence of registration under the Act unless the Company receives an opinion
of counsel reasonably acceptable to it stating that such sale or transfer is exempt from the
registration and prospectus delivery requirements of the Act. For the avoidance of doubt, the
Company acknowledges that a disposition made in reliance upon Rule 144 will not require an opinion
of counsel.

          3.6 Legends. It is understood that each certificate representing the Preferred Stock
purchased pursuant hereto, and the shares of Common Stock issuable upon conversion of such
Preferred Stock and the Warrants and the shares of Common Stock issuable upon exercise thereof, and
any securities issued in respect thereof or exchange therefor shall bear legends in the following
forms (in addition to any legend required under applicable state securities laws or other
agreement):

“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED (OTHER THAN IN
RELIANCE UPON RULE 144 PROMULGATED UNDER SUCH ACT) IN THE ABSENCE OF SUCH
REGISTRATION UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT.”

          3.7 Accredited Investor. The Purchaser is an “accredited investor” within the meaning
of Rule 501 under the Securities Act.

          3.8 Ownership. All of the equity interests of the Purchaser are, as of the date
hereof, beneficially owned by Michael J. McGrath, Jr.

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     IV. Conditions to the Purchaser’s Obligations at Closing.

          The obligations of the Purchaser under Article I of this Agreement are subject to the
fulfillment, or the waiver by the Purchaser of the following conditions on or before the Initial
Closing Date and each Subsequent Closing Date, as applicable:

          4.1 Representations and Warranties; Covenants and Agreements. The representations and
warranties of the Company set forth in Article II hereof shall be true and correct in all material
respects as of the Initial Closing Date and each Subsequent Closing Date, as applicable, and the
Company shall have complied in all material respects with all covenants and agreements set forth
herein and in any documents executed or delivered in connection herewith (including, without
limitation, with respect to any previously issued Preferred Stock and/or Warrants), and satisfied
in all material respects all conditions on its part to be performed or satisfied on or prior to the
Initial Closing or a Subsequent Closing, as applicable.

          4.2 Certificates and Documents. The Company shall have delivered to the Purchaser:

               (a) On or prior to the Initial Closing, evidence that the lenders party to the Company’s
Credit Agreement shall have consented to the issuance of the Preferred Stock, Warrants and shares
of Common Stock into which such Preferred Stock may be converted and for which such Warrants may be
exercised;

               (b) On or prior to the Initial Closing and each Subsequent Closing, a certificate executed by
an authorized officer of the Company to the effect that each of the conditions specified in Section
4.1 and Section 4.2 (as applicable) has been satisfied; and

               (c) On or prior to the Initial Closing and each Subsequent Closing, such other documentation
as the Purchaser shall reasonably have requested regarding the transactions contemplated hereby.

     V. Conditions to the Company’s Obligations at Closing.

          The obligations of the Company under Article I of this Agreement are subject to fulfillment,
or the waiver by the Company, on or before the Closing Date and each Subsequent Closing Date, as
applicable, of each of the following:

          5.1 Representations and Warranties; Covenants. The representations and warranties of
the Purchaser set forth in Article III hereof shall be true and correct in all material respects on
and as of the date hereof and as of the Initial Closing Date or as of a Subsequent Closing Date, as
applicable, and the Purchaser shall have performed and complied in all material respects with all
agreements and conditions on its part to be performed or complied with on or prior to the Initial
Closing or a Subsequent Closing, as applicable.

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     VI. Registration Rights. The Company covenants and agrees with the Purchaser as
follows:

          6.1 Definitions. For purposes of this Section 6:

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

               (b) The term “Holder” means any person owning or having the right to acquire Registrable
Securities or any assignee thereof.

               (c) The term “1934 Act” means the Securities Exchange Act of 1934, as amended.

               (d) The term “register,” “registered,” and “registration” refer to a registration effected by
preparing and filing a registration statement or similar document in compliance with the Act, and
the declaration or ordering of effectiveness of such registration statement or document.

               (e) The term “Registrable Securities” means the Common Stock issuable or issued to Holders
upon conversion of the Preferred Stock or upon exercise of the Warrants. The number of shares of
“Registrable Securities” outstanding shall be determined by the number of shares of Common Stock
outstanding that are, and the number of shares of Common Stock issuable pursuant to then
exercisable or convertible securities that are, Registrable Securities.

                    (i) The term “SEC” shall mean the Securities and Exchange Commission.

          6.2 Request for Registration.

               (a) Subject to the conditions of this Section 6.2, if the Company shall receive at any time a
written request from the Holders of a majority of the Registrable Securities then outstanding (the
“Initiating Holders”), that the Company file a registration statement under the Act covering the
registration of Registrable Securities, then the Company shall, within twenty (20) days of the
receipt thereof, give written notice of such request to all Holders, and subject to the limitations
of this Section 6.2, use all commercially reasonable efforts to effect, as soon as practicable, the
registration under the Act of all Registrable Securities that the Holders request to be registered
in a written request received by the Company within twenty (20) days of the mailing of the
Company’s notice pursuant to this Section 6.2(a).

               (b) If the Initiating Holders intend to distribute the Registrable Securities covered by their
request by means of an underwriting, they shall so advise the Company as a part of their request
made pursuant to this Section 6.2 and the Company shall include such information in the written
notice referred to in Section 6.2(a). In such event the

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right of any Holder to include its Registrable Securities in such registration shall be conditioned
upon such Holder’s participation in such underwriting and the inclusion of such Holder’s
Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in
interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall enter into an underwriting
agreement in customary form with the underwriter or underwriters selected for such underwriting by
the Company (which underwriter or underwriters shall be reasonably acceptable to a majority of the
Holders proposing to distribute securities through such underwriting). Notwithstanding any other
provision of this Section 6.2, if the underwriter advises the Company that marketing factors
require a limitation of the number of securities underwritten (including Registrable Securities),
then the Company shall so advise all Holders of Registrable Securities that would otherwise be
underwritten pursuant hereto, and the number of shares that may be included in the underwriting
shall be allocated to the Holders of such Registrable Securities on a pro rata basis based on the
number of Registrable Securities held by all such Holders (including the Initiating Holders). Any
Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from the
registration.

               (c) The Company shall not be required to effect a registration pursuant to this Section 6.2:

                    (i) in any particular jurisdiction in which the Company would be required to execute a general
consent to service of process in effecting such registration, unless the Company is already subject
to service in such jurisdiction and except as may be required under the Act; or

                    (ii) after the Company has effected three (3) registrations pursuant to this Section 6.2, and
such registrations have been declared or ordered effective; or

                    (iii) during the period starting with the date sixty (60) days prior to the Company’s good
faith estimate of the date of the filing of, and ending on a date one hundred eighty (180) days
following the effective date of, a Company-initiated registration subject to Section 6.3 below,
provided that the Company is actively employing in good faith all reasonable efforts to cause such
registration statement to become effective; or

                    (iv) if the Company shall furnish to Holders requesting a registration statement pursuant to
this Section 6.2, a certificate stating that in the good faith judgment of the Board of Directors
of the Company, it would be seriously detrimental to the Company and its stockholders for such
registration statement to be effected at such time, in which event the Company shall have the right
to defer such filing for a period of not more than one hundred twenty (120) days after receipt of
the request of the Initiating Holders, provided that such right to delay a request shall be
exercised by the Company not more than once in any twelve (12)-month period.

          6.3 Company Registration.

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               (a) If (but without any obligation to do so) the Company proposes to register (including for
this purpose a registration effected by the Company for stockholders other than the Holders) any of
its stock or other securities under the Act in connection with the public offering of such
securities (other than a registration relating solely to the sale of securities to participants in
a Company stock plan, a registration relating to a corporate reorganization or other transaction
under Rule 145 of the Act, a registration on any form that does not include substantially the same
information as would be required to be included in a registration statement covering the sale of
the Registrable Securities, or a registration in which the only Common Stock being registered is
Common Stock issuable upon conversion of debt securities that are also being registered), the
Company shall, at such time, promptly give each Holder written notice of such registration. Upon
the written request of each Holder given within twenty (20) days after mailing of such notice by
the Company in accordance herewith, the Company shall, subject to the provisions of Section 6.3(c),
use all commercially reasonable efforts to cause to be registered under the Act all of the
Registrable Securities that each such Holder has requested to be registered.

               (b) Right to Terminate Registration. The Company shall have the right to terminate or
withdraw any registration initiated by it under this Section 6.3 prior to the effectiveness of such
registration whether or not any Holder has elected to include securities in such registration. The
expenses of such withdrawn registration shall be borne by the Company in accordance with Section
6.6 hereof.

               (c) Underwriting Requirements. In connection with any offering involving an
underwriting of shares of the Company’s capital stock, the Company shall not be required under this
Section 6.3 to include any of the Holders’ securities in such underwriting unless they accept the
terms of the underwriting as agreed upon between the Company and the underwriters selected by it
(or by other persons entitled to select the underwriters) and enter into an underwriting agreement
in customary form with an underwriter or underwriters selected by the Company, and then only in
such quantity as the underwriters determine in their sole discretion will not jeopardize the
success of the offering by the Company. If the total amount of securities, including Registrable
Securities, requested by stockholders to be included in such offering exceeds the amount of
securities sold other than by the Company that the underwriters determine in their sole discretion
is compatible with the success of the offering, then the Company shall be required to include in
the offering only that number of such securities, including Registrable Securities, that the
underwriters determine in their sole discretion will not jeopardize the success of the offering
(the securities so included to be apportioned pro rata among the selling Holders according to the
total amount of securities entitled to be included therein owned by each selling Holder or in such
other proportions as shall mutually be agreed to by such selling Holders), but in no event shall
any shares being sold by a stockholder exercising a demand registration right similar to that
granted in Section 6.2 be excluded from such offering. For purposes of the preceding parenthetical
concerning apportionment, for any selling stockholder that is a Holder of Registrable Securities
and that is a partnership or corporation, the partners, retired partners and stockholders of such
Holder, or the estates and family members of

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any such partners and retired partners and any trusts for the benefit of any of the foregoing
persons shall be deemed to be a single “selling Holder,” and any pro rata reduction with respect to
such “selling Holder” shall be based upon the aggregate amount of Registrable Securities owned by
all such related entities and individuals.

          6.4 Obligations of the Company. Whenever required under this Section 6 to effect the
registration of any Registrable Securities, the Company shall, as expeditiously as reasonably
possible:

               (a) prepare and file with the SEC a registration statement with respect to such Registrable
Securities and use commercially reasonable efforts to cause such registration statement to become
effective, and, upon the request of the Holders of a majority of the Registrable Securities
registered thereunder, use commercially reasonable efforts to keep such registration statement
effective for a period of up to one hundred eighty (180) days or, if earlier, until the
distribution contemplated in the Registration Statement has been completed;

               (b) prepare and file with the SEC such amendments and supplements to such registration
statement and the prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the Act with respect to the disposition of all
securities covered by such registration statement;

               (c) furnish to the Holders such numbers of copies of a prospectus, including a preliminary
prospectus, in conformity with the requirements of the Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable Securities owned by them;

               (d) use commercially reasonable efforts to register and qualify the securities covered by such
registration statement under such other securities or Blue Sky laws of such jurisdictions as shall
be reasonably requested by the Holders, provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to file a general
consent to service of process in any such states or jurisdictions;

               (e) in the event of any underwritten public offering, enter into and perform its obligations
under an underwriting agreement, in usual and customary form, with the managing underwriter of such
offering;

               (f) notify each Holder of Registrable Securities covered by such registration statement at any
time when a prospectus relating thereto is required to be delivered under the Act or the happening
of any event as a result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not misleading in the
light of the circumstances then existing;

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               (g) cause all such Registrable Securities registered pursuant hereunder to be listed on each
securities exchange on which similar securities issued by the Company are then listed; and

               (h) provide a transfer agent and registrar for all Registrable Securities registered pursuant
hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the
effective date of such registration.

          6.5 Information from Holder. It shall be a condition precedent to the obligations of
the Company to take any action pursuant to this Section 6 with respect to the Registrable
Securities of any selling Holder that such Holder shall furnish to the Company such information
regarding itself, the Registrable Securities held by it, and the intended method of disposition of
such securities as shall be required to effect the registration of such Holder’s Registrable
Securities.

          6.6 Expenses of Registration. All expenses other than underwriting discounts and
commissions incurred in connection with registrations, filings or qualifications pursuant to
Sections 6.2 and 6.3, including (without limitation) all registration, filing and qualification
fees, printers’ and accounting fees, fees and disbursements of counsel for the Company and the
reasonable fees and disbursements of one counsel for the selling Holders shall be borne by the
Company.

          6.7 Delay of Registration. No Holder shall have any right to obtain or seek an
injunction restraining or otherwise delaying any such registration as the result of any controversy
that might arise with respect to the interpretation or implementation of this Section 6.

          6.8 Indemnification. In the event any Registrable Securities are included in a
registration statement under this Section 6:

               (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder,
the partners or officers, directors and stockholders of each Holder, legal counsel and accountants
for each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any,
who controls such Holder or underwriter within the meaning of the Act or the 1934 Act, against any
losses, claims, damages or liabilities (joint or several) to which they may become subject under
the Act, the 1934 Act or any state securities laws, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a “Violation”): (i) any untrue statement or
alleged untrue statement of a material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any amendments or supplements
thereto, (ii) the omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading, or (iii) any violation
or alleged violation by the Company of the Act, the 1934 Act, any state securities laws or any rule
or regulation promulgated under the Act, the 1934 Act or any state securities laws; and the Company
will reimburse each such Holder, underwriter or

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controlling person for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action; provided, however,
that the indemnity agreement contained in this subsection 6.8(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Company (which consent shall not be unreasonably withheld or delayed),
nor shall the Company be liable in any such case for any such loss, claim, damage, liability or
action to the extent that it arises out of or is based upon a Violation that occurs in reliance
upon and in conformity with written information furnished expressly for use in connection with such
registration by any such Holder, underwriter or controlling person.

               (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the
Company, each of its directors, each of its officers who has signed the registration statement,
each person, if any, who controls the Company within the meaning of the Act, legal counsel and
accountants for the Company, any underwriter, any other Holder selling securities in such
registration statement and any controlling person of any such underwriter or other Holder, against
any losses, claims, damages or liabilities (joint or several) to which any of the foregoing persons
may become subject, under the Act, the 1934 Act or any state securities laws, insofar as such
losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based
upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs
in reliance upon and in conformity with written information furnished by such Holder expressly for
use in connection with such registration; and each such Holder will reimburse any person intended
to be indemnified pursuant to this subsection 6.8, for any legal or other expenses reasonably
incurred by such person in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained in this subsection
6.8 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Holder (which consent shall not be
unreasonably withheld or delayed), provided that in no event shall any indemnity under this
subsection 6.8 exceed the net proceeds from the offering received by such Holder.

               (c) Promptly after receipt by an indemnified party under this Section 6.8 of notice of the
commencement of any action (including any governmental action), such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party under this Section 6.8,
deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying
party shall have the right to participate in, and, to the extent the indemnifying party so desires,
jointly with any other indemnifying party similarly noticed, to assume the defense thereof with
counsel mutually satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties that may be represented without conflict by one
counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the counsel retained by
the indemnifying party would be inappropriate due to actual or potential differing interests
between such indemnified party and any other party represented by such counsel in such proceeding.
The failure to deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if

-14-

 

prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party
under this Section 6.8, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party otherwise than under
this Section 6.8.

               (d) If the indemnification provided for in this Section 6.8 is held by a court of competent
jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim,
damage or expense referred to herein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified
party as a result of such loss, liability, claim, damage or expense in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the one hand and of the
indemnified party on the other in connection with the statements or omissions that resulted in such
loss, liability, claim, damage or expense, as well as any other relevant equitable considerations.
The relative fault of the indemnifying party and of the indemnified party shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the indemnifying party
or by the indemnified party and the parties’ relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.

               (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and
contribution contained in the underwriting agreement entered into in connection with the
underwritten public offering are in conflict with the foregoing provisions, the provisions in the
underwriting agreement shall control.

               (f) The obligations of the Company and Holders under this Section 6.8 shall survive the
completion of any offering of Registrable Securities in a registration statement under this Section
6, and otherwise.

     VII. Miscellaneous.

          7.1 Indemnification. The Company shall indemnify and hold harmless the Purchaser, its
affiliates, managers and members and their respective successors and assigns from and against and
in respect of all claims, costs, losses, liabilities, obligations, fines, penalties, awards,
damages and expenses (including, without limitation, reasonable attorneys’ fees) arising out of or
resulting from any breach by the Company of any representation, warranty, covenant or agreement of
the Company contained in this Agreement.

          7.2 Expenses. Each party hereto shall bear its own costs and expenses that it incurs
with respect to the negotiation, execution, delivery and performance of this Agreement and the
transactions contemplated hereby, except that, the Company shall promptly reimburse the Purchaser
for legal expenses of the Purchaser and its managers and members related to (a) the negotiation of
this Agreement and the other documents relating hereto and (b) the Initial Closing and each
Subsequent Closing.

-15-

 

          7.3 Notices. All notices, requests, consents and other communications hereunder shall
be in writing and shall be deemed given (a) on the day of delivery, if delivered personally, (b)
three (3) business days following being mailed by certified or registered mail, postage prepaid,
return-receipt requested (as evidenced by the transmittal receipt), or (c) one (1) day after
deposited with a nationally recognized overnight delivery service for next day delivery, in each
instance (as applicable) addressed to the Company or the Purchaser at the addresses set forth on
the signature pages hereto. The Company and the Purchaser may change their addresses for notice
from time to time by providing notice thereof in compliance with this Section 7.3.

          7.4 Integration; Amendments and Waiver. This Agreement, together with the documents
referenced herein and attached hereto, and such other documents as may be issued pursuant to the
terms hereof from time to time, embodies the entire agreement and understanding between the parties
hereto and supersedes all prior agreements and understandings relating to the subject matter hereof
(provided, however, that for the avoidance of doubt, (a) the Indemnity Agreement between the
Company and the Purchaser dated March 18, 2008 (the “Indemnity Agreement”) is unaffected by this
Agreement, (b) the Indemnity Agreement remains in full force and effect, and (c) all rights under
this Agreement are cumulative to those provided in the Indemnity Agreement). Any term of this
Agreement may be amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or prospectively), with the written
consent of the Company and the Purchaser. No waivers of or exceptions to any term, condition or
provision of this Agreement, in any one or more instances, shall be deemed to be, or construed as,
a further or continuing waiver of any such term, condition or provision.

          7.5 Finder’s Fees.

               (a) The Company (i) represents and warrants that it has retained no finder, agent or broker in
connection with the transactions contemplated by this Agreement, and (ii) hereby agrees to
indemnify and hold harmless the Purchaser of and from any liability for any commission or
compensation in the nature of a finder’s fee to any broker or other person or firm (and the costs
and expenses of defending against such liability or asserted liability) for which the Company or
any of its employees or representatives is responsible.

               (b) The Purchaser (i) represents and warrants that it has retained no finder or broker in
connection with the transactions contemplated by this Agreement, and (ii) hereby agrees to
indemnify and to hold harmless the Company of and from any liability for any commission or
compensation in the nature of a finder’s fee to any broker or other person or firm (and the costs
and expenses of defending against such liability or asserted liability) for which such Purchaser or
any of such Purchaser’s employees or representatives, is responsible.

          7.6 Severability. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provisions of this
Agreement.

-16-

 

          7.7 Governing Law. This Agreement shall be construed and enforced in accordance with
the laws of the State of New York regardless of the laws that might otherwise govern under
applicable principles of conflicts of law thereof.

          7.8 Successors and Assigns. The terms and conditions of this Agreement shall be
binding upon, and inure to the benefit of, the respective representatives, successors and assigns
of the parties hereto, except that the Purchaser may not, without the consent of the Company,
assign its rights under this Agreement other than in connection with its transfers of the Preferred
Stock and/or Warrant Shares (or in each instance, with respect to Common Stock issued in connection
therewith) as contemplated in Section 3.5(c) and Section 3.5(d).

          7.9 Exhibits and Headings; Days. Each Exhibit to this Agreement is made a part of
this Agreement as though set forth in full herein. The headings in this Agreement are for
convenience of reference only, and shall not limit or otherwise affect the meaning hereof. As used
herein “days” shall mean calendar days and “business days” shall mean any day other than a
Saturday, a Sunday or a day on which banks in New York, New York are authorized or obligated by law
or executive order to close.

          7.10 Counterparts. This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute one and the same
instrument.

          7.11 Further Assurances. The Company shall, at the request of the Purchaser or its
representatives, successors and/or assigns, take such actions as may be necessary to (a) effect the
transactions contemplated by this Agreement, and/or (b) facilitate (as and when applicable) the
removal of any restrictive legends on the Preferred Stock, Warrants and, with respect to each, any
Common Stock issued in connection therewith.

          7.12 Remedies Cumulative; Construction. The parties acknowledge and agree that all
rights and remedies under this Agreement, the Warrants and the Certificate of Designation are
cumulative to one another and to any other rights and remedies available at law or in equity. This
Agreement, the Warrants and the Certificate of Designation shall be deemed to have been jointly
drafted by the Company and the Purchaser and shall not be construed against any person as the
drafter hereof or thereof.

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     IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the day and year
written above.

	 	 	 	 	 
	 	HOME SOLUTIONS OF AMERICA, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	Frank Fradella 	 
	 	 	Title:  	President and Chief Executive Officer 	 
	 
	 	Address for Notice:

1500 Dragon Street, Suite B

Dallas, Texas 75207

 	 
	 
	 	EVENFLOW FUNDING, LLC

 	 
	 	By:  	 	 
	 	 	Name:  	Michael McGrath 	 
	 	 	Title:  	Manager 	 
	 
	 	Address for Notice:

15 Hemlock Drive

North Caldwell, New Jersey 079

 	 
	 	 	 
	 	 	 
	 	 	 
	 

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EXHIBIT A

Form of Certificate of Designation

 

 

CERTIFICATE OF DESIGNATION

OF THE RELATIVE RIGHTS AND PREFERENCES

OF

THE SERIES C CONVERTIBLE PREFERRED STOCK OF

HOME SOLUTIONS OF AMERICA, INC.

     The undersigned, the Chief Executive Officer of Home Solutions of America, Inc., a Delaware
corporation (the “Company”), in accordance with the provisions of the Delaware General Corporation
Law, does hereby certify that, pursuant to the authority conferred upon the Board of Directors of
the Company (the “Board of Directors”) by the Certificate of Incorporation of the Company (the
“Certificate of Incorporation”), the following resolution creating a series of Series C Convertible
Preferred Stock, was duly adopted as of June 11, 2008:

     RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of
Directors by provisions of the Certificate of Incorporation, a series of Preferred Stock of the
Company be created and that the designation and amount thereof and the powers, preferences and
relative, participating, optional or other special rights of the shares of such series, and
qualifications, limitations or restrictions thereof are as follows:

     1. Designation and Rank.

     The designation of such series of the Preferred Stock shall be the Series C Convertible
Preferred Stock, par value $.001 per share (the “Series C Preferred Stock”), and the number of
shares so designated shall be three hundred and fifty thousand (350,000) shares. The Board of
Directors may, subject to the terms hereof, increase or decrease the number of Series C Preferred
Stock hereafter, so long as the number of shares of Series C Preferred Stock shall not fall below
the number of shares of such series then outstanding. The Series C Preferred Stock shall, with
respect to dividend rights and rights on liquidation, dissolution and winding-up, rank senior to
all other classes or series of stock, equity or equity-linked securities of the Company (the
“Junior Stock”).

     2. Dividends.

          (a) Payment of Dividends. From and after the date of the issuance (the “Issuance
Date”) of any shares of Series C Preferred Stock, the holders of shares of Series C Preferred Stock
shall receive with respect to each share of Series C Preferred Stock, out of funds legally
available for the payment of dividends, a cumulative dividend (the “Dividend Payment”) in an amount
equal to the greater of (x) dividends at a rate of thirteen percent (13%) per annum based on the
Liquidation Preference Amount (as defined in Section 4 hereof), and (y) dividends that would have
accrued with respect to such share of Series C Preferred Stock during the applicable Dividend
Period (as defined below) if the holder of such share had converted such share into Common Stock
immediately prior to the record date of any dividend declared on the Common Stock in such Dividend
Period. Any Dividend Payment referred to in clause (y) above shall be deemed to have accrued with
respect to a share of Series C Preferred Stock as of the last day of the applicable Dividend
Period. Dividend Payments on a share of Series C Preferred Stock shall accrue and shall be
cumulative whether or not declared from the date of issue of such share of Series C Preferred Stock
and shall be paid by the Company quarterly in arrears (to the

 

 

extent funds are legally available therefor) on the first of July, October, January and April
(each such quarterly period, a “Dividend Period”) in cash or, at the option of a holder of the
Series C Preferred Stock, in shares of Common Stock, in an amount equal to the quotient of (i) the
Dividend Payment divided by (ii) the Conversion Price (as defined in Section 5(c) hereof). The
Dividend Payment shall accrue from day to day, whether or not earned or declared, and shall be
cumulative. In the case of shares of Series C Preferred Stock outstanding for less than a full
year, dividends shall be pro rated based on the portion of each year during which such shares are
outstanding. The Company shall be under no obligation to pay any such dividends to the extent that
funds are not legally available therefor. Dividends on the Series C Preferred Stock are prior and
in preference to any declaration or payment of any dividend or distribution (as defined below) on
any shares of Junior Stock.

          (b) So long as any shares of Series C Preferred Stock are outstanding, the Company shall not
declare, pay or set apart for payment any dividend or make any distribution on any Junior Stock
(other than dividends or distributions payable in shares of Common Stock), unless at the time of
such dividend or distribution the Company shall have paid all accrued and unpaid dividends on the
outstanding shares of Series C Preferred Stock.

          (c) In the event of a dissolution, liquidation or winding up of the Company pursuant to
Section 4, all accrued and unpaid dividends on the Series C Preferred Stock shall be payable on the
day immediately preceding the date of payment of the preferential amount to the holders of Series C
Preferred Stock. In the event of a Conversion Failure Redemption pursuant to Section 9, all
accrued and unpaid dividends on the Series C Preferred Stock shall, at the election of the holder,
be payable on the day immediately preceding the date of such redemption. In the event of a
conversion pursuant to Section 5(a), all accrued and unpaid dividends on the Series C Preferred
Stock being converted shall, at the election of the holder, be payable on the day immediately
preceding the Conversion Date (as defined in Section 5(b)(i)).

          (d) For purposes hereof, unless the context otherwise requires, “distribution” shall mean the
transfer of cash or property without consideration, whether by way of dividend or otherwise,
payable other than in shares of Common Stock or other equity securities of the Company, or the
purchase or redemption of shares of the Company (other than redemptions set forth in Section 8
below or upon the cashless exercise of options held by employees or consultants as of the date
hereof) for cash or property.

     3. Voting Rights.

          (a) Class Voting Rights. The Series C Preferred Stock shall have the following class
voting rights (in addition to the voting rights set forth in Section 3(b) hereof). So long as any
shares of the Series C Preferred Stock remain outstanding, the Company shall not, without the
affirmative vote or consent of the holders of at least 75% of the shares of the Series C Preferred
Stock outstanding at the time, given in person or by proxy, either in writing or at a meeting: (i)
authorize, create, issue or increase the authorized or issued amount of any class or series of
stock, including but not limited to the issuance of any shares of previously authorized Common
Stock or Preferred Stock, whether or not ranking senior to the Series C Preferred Stock with
respect to dividends and/or the distribution of assets on liquidation, dissolution or winding up;
(ii) amend, alter or repeal the provisions of the Series C Preferred Stock, whether by merger,

2

 

consolidation or otherwise, so as to adversely affect any right, preference, privilege or
voting power of the Series C Preferred Stock; (iii) repurchase, redeem or pay dividends on, shares
of the Company’s Junior Stock; (iv) amend the Certificate of Incorporation or By-Laws of the
Company so as to adversely any right, preference, privilege or voting power of the Series C
Preferred Stock; (v) effect any distribution with respect to Junior Stock; (vi) reclassify the
Company’s outstanding securities; or (vii) issue any securities senior to or on parity with the
Series C Preferred Stock.

          (b) General Voting Rights. In addition to the transactions upon which the Series C
Preferred Stock shall be entitled to vote separately as a class pursuant to Section 3(a) above, and
to such other voting rights as the holders of Series C Preferred Stock are entitled under Delaware
law, each holder of outstanding shares of Series C Preferred Stock shall be entitled to cast the
number of votes equal to the number of whole shares of Common Stock into which the shares of Series
C Preferred Stock held by such holder are convertible as of the record date for determining
stockholders entitled to vote on such matter.

     4. Liquidation Preference.

          (a) In the event of the liquidation, dissolution or winding up of the affairs of the Company,
whether voluntary or involuntary, the holders of shares of the Series C Preferred Stock then
outstanding shall be entitled to receive, out of the assets of the Company available for
distribution to its stockholders, and before any payment shall be made or any assets distributed to
the holders of the Common Stock or any other Junior Stock an amount per share (the “Liquidation
Preference Amount”) equal to any accrued and unpaid dividends attributable to such share plus the
greater of (i) $10.00 per share of the Series C Preferred Stock (subject to appropriate adjustment
in the event of any stock dividend, stock split, combination or other similar recapitalization
affecting the number of such shares issued and outstanding), or (ii) the per share amount that
holders of Series C Preferred Stock would have received if all of such holders had converted their
shares of Series C Preferred Stock into Common Stock immediately prior to such liquidation,
dissolution or winding up. If the assets of the Company are not sufficient to pay in full the
Liquidation Preference Amount, then all of said assets will be distributed among the holders of the
Series C Preferred Stock ratably in accordance with the respective amounts that would be payable on
such shares if all amounts payable thereon were paid in full. The liquidation payment with respect
to each outstanding fractional share of Series C Preferred Stock shall be equal to a ratably
proportionate amount of the liquidation payment with respect to each outstanding share of Series C
Preferred Stock. All payments for which this Section 4(a) provides shall be in cash, property
(valued at its fair market value as determined by an independent appraiser reasonably acceptable to
the holders of a majority of the Series C Preferred Stock) or a combination thereof. For the
avoidance of doubt, no cash shall be paid or distributed to holders of Junior Stock unless each
holder of the outstanding shares of Series C Preferred Stock has been paid in cash the full
Liquidation Preference Amount to which such holder is entitled as provided herein. After payment
of the full Liquidation Preference Amount, such holders of shares of Series C Preferred Stock will
not be entitled to any further participation as such in any distribution of the assets of the
Company.

          (b) A consolidation or merger of the Company with or into any other entity, or a sale of all
or substantially all of the assets of the Company, or the effectuation by the Company

3

 

of a transaction or series of related transactions in which more than 50% of the voting shares
of the Company is disposed of or conveyed, shall be deemed to be a liquidation, dissolution, or
winding up within the meaning of this Section 4 and referred to herein as a “Deemed Liquidation
Event”), subject to the rights of the holders to receive the greater of the Applicable Redemption
Price per Share (as defined below) or the Liquidation Preference Amount per share, unless elected
otherwise by the holders of greater than 75% of the then outstanding shares of Series C Preferred
Stock voting together as a single class. Subject to a holder’s rights in this Certificate of
Designation, in the event of the merger or consolidation of the Company with or into another entity
that does not constitute a Deemed Liquidation Event (including, without limitation, by election of
the holders), the Series C Preferred Stock shall maintain its relative powers, designations and
preferences provided for herein and no merger or consolidation shall result inconsistent therewith.

          (c) The Company shall not have the power to effect a Deemed Liquidation Event unless, in
connection with such deemed Liquidation Event, the Company adopts a plan of distribution that is in
accordance with applicable law and in form and substance satisfactory to the holders of greater
than 75% of the then outstanding shares of Series C Preferred Stock, voting together as a single
class, providing that the consideration received for such Deemed Liquidation Event, and any other
assets of the Company, be distributed to the Company’s stockholders in accordance with Section 4(a)
and Section 4(b) above by effecting a dissolution of the Company under the Delaware General
Corporation Law, a redemption of the Company’s capital stock or other means of distribution
approved by the holders of greater than 75% of the then outstanding shares of the Series C
Preferred Stock, voting together as a single class.

          (d) Written notice of any voluntary or involuntary liquidation, dissolution, winding up of the
affairs or Deemed Liquidation Event of the Company, stating a payment date and the place where the
distributable amounts shall be payable, shall be given, no less than forty-five (45) days prior to
the date of the consummation of such event, to the holders of record of the Series C Preferred
Stock.

     5. Conversion; Additional Issues. The holder of Series C Preferred Stock shall have
the following conversion rights (the “Conversion Rights”):

          (a) Right to Convert. At any time on or after the Issuance Date, the holder of any
such shares of Series C Preferred Stock may, at such holder’s option, elect to convert (a
“Conversion”) all or any portion of the shares of Series C Preferred Stock held by such person into
a number of fully paid and nonassessable shares of Common Stock equal to the quotient of (i) the
Liquidation Preference Amount of the shares of Series C Preferred Stock being converted (which, to
the extent that the holder elects to be paid accrued dividends in cash as contemplated by Section
2(c), shall exclude such accrued dividends) divided by (ii) the Conversion Price (as defined in
Section 5(c) below) then in effect as of the date of the delivery by such holder of its notice of
election to convert. In the event of a notice of redemption of any shares of Series C Preferred
Stock pursuant to Section 8 hereof, the Conversion Rights of the shares designated for redemption
shall terminate at the close of business on the last full day preceding the date fixed for
redemption (which, in the connection with any redemption by the Company pursuant to Section 8(a),
shall not be earlier than forty-five (45) days after the Company has given the notice provided for
in this Section 5(a)), unless the redemption price is not paid on such redemption

4

 

date, in which case the Conversion Rights for such shares shall continue until such price is
paid in full. In the event of a liquidation, dissolution winding up or Deemed Liquidation Event of
the Company, the Conversion Rights shall terminate at the close of business on the last full day
preceding the date fixed for the payment of any such amounts distributable on such event to the
holders of Series C Preferred Stock. In the event of a redemption or liquidation, dissolution,
winding up or Deemed Liquidation Event, the Company shall provide to each holder of shares of
Series C Preferred Stock notice of such redemption or liquidation, dissolution, winding up or
Deemed Liquidation Event, which notice shall (i) be sent at least forty-five (45) days prior to the
termination of the Conversion Rights and (ii) state the applicable Redemption Date (as hereinafter
defined) and the Applicable Redemption Price (as hereinafter defined) that will be paid or
distributed on such redemption or liquidation, dissolution, winding up or Deemed Liquidation Event,
as the case may be.

          (b) Mechanics of Conversion. The Conversion of Series C Preferred Stock shall be
conducted in the following manner:

               (i) Holder’s Delivery Requirements. To convert Series C Preferred Stock into full
shares of Common Stock on any date (the “Conversion Date”), the holder thereof shall (A) transmit
by facsimile (or otherwise deliver), for receipt on or prior to 5:00 p.m., New York time on such
date, a copy of a fully executed notice of conversion in the form attached hereto as Exhibit
I (the “Conversion Notice”), to the Company, and (B) surrender to a common carrier for delivery
to the Company as soon as practicable following such Conversion Date but in no event later than
three (3) business days after such date the original certificates representing the shares of Series
C Preferred Stock being converted (or an indemnification undertaking with respect to such shares in
the case of their loss, theft or destruction) (the “Preferred Stock Certificates”) and the
originally executed Conversion Notice.

               (ii) Company’s Response. Upon receipt by the Company of a facsimile copy of a
Conversion Notice, the Company shall immediately send, via facsimile, a confirmation of receipt of
such Conversion Notice to such holder. Upon receipt by the Company of a copy of the fully executed
Conversion Notice, the Company or its designated transfer agent (the “Transfer Agent”), as
applicable, shall, within three (3) business days following the date of receipt by the Company of
the fully executed Conversion Notice (so long as the applicable Preferred Stock Certificates and
original Conversion Notice are received by the Company on or before such third business day), issue
and deliver to the Depository Trust Company (“DTC”) account on the Holder’s behalf via the Deposit
Withdrawal Agent Commission System (“DWAC”) as specified in the Conversion Notice, registered in
the name of the holder or its designee, for the number of shares of Common Stock to which the
holder shall be entitled. If the number of shares of Preferred Stock represented by the Preferred
Stock Certificate(s) submitted for conversion is greater than the number of shares of Series C
Preferred Stock being converted, then the Company shall, as soon as practicable and in no event
later than three (3) business days after receipt of the Preferred Stock Certificate(s) and at the
Company’s expense, issue and deliver to the holder a new Preferred Stock Certificate representing
the number of shares of Series C Preferred Stock not converted.

               (iii) Dispute Resolution. In the case of a dispute as to the arithmetic calculation
of the number of shares of Common Stock to be issued upon conversion, the

5

 

Company shall (or, if applicable, cause its Transfer Agent to) promptly issue to the holder
the number of shares of Common Stock that is not disputed and shall submit the arithmetic
calculations to the holder via facsimile as soon as possible, but in no event later than two (2)
business days after receipt of such holder’s Conversion Notice. If such holder and the Company are
unable to agree upon the arithmetic calculation of the number of shares of Common Stock to be
issued upon such conversion within one (1) business day of such disputed arithmetic calculation
being submitted to the holder, then the Company shall within one (1) business day submit via
facsimile the disputed arithmetic calculation of the number of shares of Common Stock to be issued
upon such conversion to the Company’s independent, outside accountant. The Company shall cause the
accountant to perform the calculations and notify the Company and the holder of the results no
later than seventy-two (72) hours from the time it receives the disputed calculations. Such
accountant’s calculation shall be binding upon all parties absent manifest error. The reasonable
expenses of such accountant in making such determination shall be paid by the Company, in the event
the holder’s calculation was correct, or by the holder, in the event the Company’s calculation was
correct, or equally by the Company and the holder in the event that neither the Company’s or the
holder’s calculation was correct. The period of time in which the Company is required to effect
conversions or redemptions under this Certificate of Designation shall be tolled with respect to
the subject conversion or redemption pending resolution of any dispute by the Company made in good
faith and in accordance with this Section 5(b)(iii).

               (iv) Record Holder. The person or persons entitled to receive the shares of Common
Stock issuable upon a conversion of the Series C Preferred Stock shall be treated for all purposes
as the record holder or holders of such shares of Common Stock on the Conversion Date.

               (v) Company’s Failure to Timely Convert. If within three (3) business days of the
Company’s receipt of an executed copy of the Conversion Notice (so long as the applicable Preferred
Stock Certificates and original Conversion Notice are received by the Company on or before such
third business day) (the “Share Delivery Period”) the Transfer Agent shall fail to issue and
deliver to a holder the number of shares of Common Stock to which such holder is entitled upon such
holder’s conversion of the Series C Preferred Stock or to issue a new Preferred Stock Certificate
representing the number of shares of Series C Preferred Stock to which such holder is entitled
pursuant to Section 5(b)(ii) (a “Conversion Failure”), in addition to all other available remedies
which such holder may pursue hereunder and under the Preferred Stock Purchase Agreement (the
“Purchase Agreement”) between the Company and the initial holder of the Series C Preferred Stock
dated as of the date hereof (including indemnification pursuant to the terms thereof), the Company
shall pay additional damages to such holder on each business day after such third (3rd) business
day that such conversion is not timely effected in an amount equal to 0.5% of (A) the sum of the
number of shares of Common Stock not issued to the holder on a timely basis pursuant to Section
5(b)(ii) and to which such holder is entitled and, in the event the Company has failed to deliver a
Preferred Stock Certificate to the holder on a timely basis pursuant to Section 5(b)(ii), the
number of shares of Common Stock issuable upon conversion of the shares of Series C Preferred Stock
represented by such Preferred Stock Certificate, as of the last possible date which the Company
could have issued such Preferred Stock Certificate to such holder without violating Section
5(b)(ii), times (B) the Closing Bid Price (as hereinafter defined) of the Common Stock on the last
possible date

6

 

which the Company could have issued such Common Stock and such Preferred Stock Certificate, as
the case may be, to such holder without violating Section 5(b)(ii). For the purposes hereof,
“Closing Bid Price” means the last closing bid price per share on the registered national stock
exchange on which the security is then listed, or if there is no such price on such date, then the
closing bid price on such exchange on the date nearest preceding such date, or if such security is
not listed on a registered national stock exchange, the closing bid price for a share of such
security in the over the counter market, as reported by the OTC Bulletin Board or in the National
Quotation Bureau Incorporated (or similar organization or agency succeeding to its function of
reporting prices) at the close of business on such date. If the Closing Bid Price cannot be
calculated for such security on such date on any of the foregoing bases, the Closing Bid Price of
such security on such date shall be the fair market value as mutually determined by the Company and
the holders of 75% of the outstanding shares of the Series C Preferred Stock. If the Company fails
to pay the additional damages set forth in this Section 5(b)(v) within five (5) business days of
the date incurred, then such payments shall bear interest at the rate of 2.0% per month (pro rated
for partial months) until such payments are made.

          (c) Conversion Price.

               (i) The term “Conversion Price” shall mean $1.00 per share, subject to adjustment under
Section 5(d) hereof. Notwithstanding any adjustment hereunder, at no time (other than adjustments
pursuant to Section 5(d)(i)) shall the Conversion Price be greater than $1.00 per share.

               (ii) Notwithstanding the foregoing to the contrary, if during any period (a “Black-out
Period”), a holder of Series C Preferred Stock is unable to trade any Common Stock issued or
issuable upon conversion of the Series C Preferred Stock immediately due to the postponement of
filing or delay or suspension of effectiveness of a registration statement or because the Company
has otherwise informed such holder of Series C Preferred Stock that an existing prospectus cannot
be used at that time in the sale or transfer of such Common Stock (provided that such postponement,
delay, suspension or fact that the prospectus cannot be used is not due to factors solely within
the control of the holder of Series C Preferred Stock or due to the Company exercising its rights
under Section VI of that certain Purchase Agreement, such holder of Series C Preferred Stock shall
have the option but not the obligation on any Conversion Date within ten (10) trading days
following the expiration of the Black-out Period of using the Conversion Price applicable on such
Conversion Date or any Conversion Price selected by such holder of Series C Preferred Stock that
would have been applicable had such Conversion Date been at any earlier time during the Black-out
Period or within the ten (10) trading days thereafter.

          (d) Adjustments of Conversion Price.

               (i) Adjustments for Stock Splits and Combinations. If the Company shall at any time
or from time to time after the Issuance Date, effect a stock split of the outstanding Common Stock,
the Conversion Price shall be proportionately decreased. If the Company shall at any time or from
time to time after the Issuance Date, combine the outstanding shares of Common Stock, the
Conversion Price shall be proportionately increased. Any

7

 

adjustments under this Section 5(d)(i) shall be effective at the close of business on the date
the stock split or combination becomes effective.

               (ii) Adjustments for Certain Dividends and Distributions. If the Company shall at any
time or from time to time after the Issuance Date, make or issue or set a record date for the
determination of holders of Common Stock entitled to receive a dividend or other distribution
payable in shares of Common Stock, then, and in each event, the Conversion Price shall be decreased
as of the time of such issuance or, in the event such record date shall have been fixed, as of the
close of business on such record date, by multiplying the Conversion Price then in effect by a
fraction:

	 	(1)	 	the numerator of
which shall be the total number of shares of Common
Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such
record date; and
	 
	 	(2)	 	the denominator
of which shall be the total number of shares of Common
Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such
record date plus the number of shares of Common Stock
issuable in payment of such dividend or distribution.

               (iii) Adjustment for Other Dividends and Distributions. If the Company shall at any
time or from time to time after the Issuance Date, make or issue or set a record date for the
determination of holders of Common Stock entitled to receive a dividend or other distribution
payable in securities of the Company other than shares of Common Stock, then, and in each event, an
appropriate revision to the applicable Conversion Price shall be made and provision shall be made
(by adjustments of the Conversion Price or otherwise) so that the holders of Series C Preferred
Stock shall receive upon conversions thereof, in addition to the number of shares of Common Stock
receivable thereon, the number of securities of the Company which they would have received had
their Series C Preferred Stock been converted into Common Stock on the date of such event and had
thereafter, during the period from the date of such event to and including the Conversion Date,
retained such securities (together with any distributions payable thereon during such period),
giving application to all adjustments called for during such period under this Section 5(d)(iii)
with respect to the rights of the holders of the Series C Preferred Stock; provided, however, that
if such record date shall have been fixed and such dividend is not fully paid or if such
distribution is not fully made on the date fixed therefor, the Conversion Price shall be adjusted
pursuant to this paragraph as of the time of actual payment of such dividends or distributions; and
provided further, however, that no such adjustment shall be made if the holders of
Series C Preferred Stock simultaneously receive (i) a dividend or other distribution of shares of
Common Stock in a number equal to the number of shares of Common Stock as they would have received
if all outstanding shares of Series C Preferred Stock had been converted into Common Stock on the
date of such event or (ii) a dividend or other distribution of shares of Series C Preferred Stock
which are convertible, as of the date of such event, into such number of shares of Common Stock as
is equal to the number of additional shares of Common Stock being issued with respect to each share
of Common Stock in such dividend or distribution.

8

 

               (iv) Adjustments for Reclassification, Exchange or Substitution. If the Common Stock
issuable upon conversion of the Series C Preferred Stock at any time or from time to time after the
Issuance Date shall be changed to the same or different number of shares of any class or classes of
stock, whether by reclassification, exchange, substitution or otherwise (other than by way of a
stock split or combination of shares or stock dividends provided for in Sections 5(d)(i), (ii) and
(iii), or a reorganization, merger, consolidation, or sale of assets provided for in Section
5(d)(v)), then, and in each event, an appropriate revision to the Conversion Price shall be made
and provisions shall be made (by adjustments of the Conversion Price or otherwise) so that the
holder of each share of Series C Preferred Stock shall have the right thereafter to convert such
share of Series C Preferred Stock into the kind and amount of shares of stock and other securities
receivable upon reclassification, exchange, substitution or other change, by holders of the number
of shares of Common Stock into which such share of Series C Preferred Stock might have been
converted immediately prior to such reclassification, exchange, substitution or other change, all
subject to further adjustment as provided herein.

               (v) Adjustments for Reorganization, Merger, Consolidation or Sales of Assets. Subject
to the provisions of Section 4, if at any time or from time to time after the Issuance Date there
shall be a capital reorganization of the Company (other than by way of a stock split or combination
of shares or stock dividends or distributions provided for in Section 5(d)(i), (ii) and (iii), or a
reclassification, exchange or substitution of shares provided for in Section 5(d)(iv)), or a merger
or consolidation of the Company with or into another corporation where the holders of outstanding
voting securities prior to such merger or consolidation do not own over 50% of the outstanding
voting securities of the merged or consolidated entity, immediately after such merger or
consolidation, or the sale of all or substantially all of the Company’s properties or assets to any
other person (an “Organic Change”), then as a part of such Organic Change an appropriate revision
to the Conversion Price shall be made if necessary and provision shall be made if necessary (by
adjustments of the Conversion Price or otherwise) so that the holder of each share of Series C
Preferred Stock shall have the right thereafter to convert such share of Series C Preferred Stock
into the kind and amount of shares of stock and other securities or property of the Company or any
successor corporation resulting from Organic Change. In any such case, appropriate adjustment
shall be made in the application of the provisions of this Section 5(d)(v) with respect to the
rights of the holders of the Series C Preferred Stock after the Organic Change to the end that the
provisions of this Section 5(d)(v) (including any adjustment in the Conversion Price then in effect
and the number of shares of stock or other securities deliverable upon conversion of the Series C
Preferred Stock) shall be applied after that event in as nearly an equivalent manner as may be
practicable.

               (vi) Adjustments for Issuance of Additional Shares of Common Stock.

                    (A) In the event the Company, shall, at any time, from time to time, issue or sell any
additional shares of Common Stock (other than as provided in the foregoing subsections (i) through
(v) of this Section 5(d)) (the “Additional Shares of Common Stock”), at a price per share less than
the Conversion Price, or without consideration, the Conversion Price then in effect upon each such
issuance shall be adjusted to that price (rounded to the nearest cent) determined by multiplying
the Conversion Price by a fraction:

9

 

	 	(1)	 	the numerator of
which shall be equal to the sum of (A) the number of shares of Common Stock outstanding immediately prior to
the issuance of such Additional Shares of Common Stock
plus (B) the number of shares of Common Stock (rounded
to the nearest whole share) which the aggregate
consideration for the total number of such Additional
Shares of Common Stock so issued would purchase at a
price per share equal to the then Conversion Price, and
	 
	 	(2)	 	the denominator
of which shall be equal to the number of shares of
Common Stock outstanding immediately after the issuance
of such Additional Shares of Common Stock.

No adjustment of the number of shares of Common Stock shall be made under paragraph (A) of Section
5(d)(vi) upon the issuance of any Additional Shares of Common Stock which are issued pursuant to
the exercise of any warrants or other subscription or purchase rights or pursuant to the exercise
of any conversion or exchange rights in any Common Stock Equivalents (as defined below), if any
such adjustment shall previously have been made upon the issuance of such warrants or other rights
or upon the issuance of such Common Stock Equivalents (or upon the issuance of any warrant or other
rights therefore) pursuant to Section 5(d)(vii).

               (vii) Issuance of Common Stock Equivalents. If the Company, at any time after the
Issuance Date, shall issue any securities convertible into or exchangeable for, directly or
indirectly, Common Stock (“Convertible Securities”), other than the Series C Preferred Stock, or
any rights or warrants or options to purchase any such Common Stock or Convertible Securities,
shall be issued or sold (collectively, the “Common Stock Equivalents”) and the aggregate of the
price per share for which Additional Shares of Common Stock may be issuable thereafter pursuant to
such Common Stock Equivalent, plus the consideration received by the Company for issuance of such
Common Stock Equivalent divided by the number of shares of Common Stock issuable pursuant to such
Common Stock Equivalent (the “Aggregate Per Common Share Price”) shall be less than the Conversion
Price, or if, after any such issuance of Common Stock Equivalents, the price per share for which
Additional Shares of Common Stock may be issuable thereafter is amended or adjusted, and such price
as so amended or adjusted shall make the Aggregate Per Common Share Price be less than Conversion
Price in effect at the time of such amendment or adjustment, then the Conversion Price then in
effect shall be adjusted pursuant to Section (5)(d)(vi) above assuming that all Additional Shares
of Common Stock have been issued pursuant to the Convertible Securities or Common Stock Equivalents
for a purchase price equal to the Aggregate Per Common Share Price. No adjustment of the
Conversion Price shall be made under this subsection (vii) upon the issuance of any Convertible
Security which is issued pursuant to the exercise of any warrants or other subscription or purchase
rights therefore, if any adjustment shall previously have been made to the exercise price of such
warrants then in effect upon the issuance of such warrants or other rights pursuant to this
subsection (vii). No adjustment shall be made to the Conversion Price upon the issuance of Common
Stock pursuant to the exercise, conversion or exchange of any

10

 

Convertible Security or Common Stock Equivalent where an adjustment to the Conversion Price
was made as a result of the issuance or purchase of any Convertible Security or Common Stock

               (viii) Consideration for Stock. In case any shares of Common Stock or Convertible
Securities other than the Series C Preferred Stock, or any rights or warrants or options to
purchase any such Common Stock or Convertible Securities, shall be issued or sold:

	 	(1)	 	in connection
with any merger or consolidation in which the Company is
the surviving corporation (other than any consolidation
or merger in which the previously outstanding shares of
Common Stock of the Company shall be changed to or
exchanged for the stock or other securities of another
corporation), the amount of consideration therefore
shall be, deemed to be the fair value, as determined
reasonably and in good faith by the Board of Directors
of the Company, of such portion of the assets and
business of the nonsurviving corporation as such Board
may determine to be attributable to such shares of
Common Stock, Convertible Securities, rights or warrants
or options, as the case may be; or
	 
	 	(2)	 	in the event of
any consolidation or merger of the Company in which the
Company is not the surviving corporation or in which the
previously outstanding shares of Common Stock of the
Company shall be changed into or exchanged for the stock
or other securities of another corporation, or in the
event of any sale of all or substantially all of the
assets of the Company for stock or other securities of
any corporation, the Company shall be deemed to have
issued a number of shares of its Common Stock for stock
or securities or other property of the other corporation
computed on the basis of the actual exchange ratio on
which the transaction was predicated, and for a
consideration equal to the fair market value on the date
of such transaction of all such stock or securities or
other property of the other corporation. If any such
calculation results in adjustment of the applicable
Conversion Price, or the number of shares of Common
Stock issuable upon conversion of the Series C Preferred
Stock, the determination of the applicable Conversion
Price or the number of shares of Common Stock issuable
upon conversion of the Series C Preferred Stock
immediately prior to such

11

 

	 	 	 	merger, consolidation or sale, shall be made after
giving effect to such adjustment of the number of shares of Common Stock issuable upon conversion of
the Series C Preferred Stock. In the event any
consideration received by the Company for any
securities consists of property other than cash, the
fair market value thereof at the time of issuance or
as otherwise applicable shall be as determined in
good faith by the Board of Directors of the Company.
In the event Common Stock is issued with other shares
or securities or other assets of the Company for
consideration which covers both, the consideration
computed as provided in this Section (5)(d)(viii)
shall be allocated among such securities and assets
as determined in good faith by the Board of Directors
of the Company.

               (ix) Record Date. In case the Company shall take record of the holders of its Common
Stock or any other Preferred Stock for the purpose of entitling them to subscribe for or purchase
Common Stock or Convertible Securities, then the date of the issue or sale of the shares of Common
Stock shall be deemed to be such record date.

               (x) Certain Issues Excepted. Anything herein to the contrary notwithstanding, the
Company shall not be required to make any adjustment to the Conversion Price upon (i) the Company’s
issuance of any Additional Shares of Common Stock in connection with the acquisition of another
business by the Company by merger, purchase of substantially all of the assets of such other
business or other reorganization, in each instance under arrangements approved by the Board of
Directors, (ii) the Company’s issuance of equity to Frank Fradella pursuant to the Employment
Agreement between the Company and Frank Fradella, or the Company’s issuance of equity to the
Company’s lender or lenders pursuant to that certain Amendment No. 1 dated June ___, 2008 which
amends that certain the Forbearance Agreement among the Company and the lender parties thereto,
each to be executed concurrently with this Certificate of Designation, (iii) the Company’s issuance
of Common Stock, or the issuance or grants of options to purchase Common Stock, pursuant to the
Company’s stock option plans and employee stock purchase plans as they now exist, (iv) any
issuances of warrants issued pursuant to the Purchase Agreement, and (v) the payment of any
dividends on the Series C Preferred Stock.

          (e) No Impairment. The Company shall not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed hereunder by the Company,
but will at all times in good faith, assist in the carrying out of all the provisions of this
Certificate of Designation and in the taking of all such action as may be necessary or appropriate
in order to protect the Conversion Rights of the holders of the Series C Preferred Stock against
impairment. In the event a holder shall elect to convert any shares of Series C Preferred Stock as
provided herein, the Company cannot refuse conversion based on any claim that such holder or

12

 

any one associated or affiliated with such holder has been engaged in any violation of law,
unless, an injunction from a court, on notice, restraining and/or adjoining conversion of all or of
said shares of Series C Preferred Stock shall have been issued and the Company posts a surety bond
for the benefit of such holder in an amount equal to 130% of the Liquidation Preference Amount of
the Series C Preferred Stock such holder has elected to convert, which bond shall remain in effect
until the completion of arbitration/litigation of the dispute and the proceeds of which shall be
payable to such holder in the event it obtains judgment.

          (f) Certificates as to Adjustments. Upon occurrence of each adjustment or
readjustment of the Conversion Price or number of shares of Common Stock issuable upon conversion
of the Series C Preferred Stock pursuant to this Section 5, the Company at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to
each holder of such Series C Preferred Stock a certificate setting forth such adjustment and
readjustment, showing in detail the facts upon which such adjustment or readjustment is based. The
Company shall, within three (3) days of a written request of the holder of Series C Preferred
Stock, at any time, furnish or cause to be furnished to such holder a certificate setting forth all
adjustments and readjustments, the Conversion Price in effect at the time, and the number of shares
of Common Stock and the amount, if any, of other securities or property which at the time would be
received upon the conversion of a share of such Series C Preferred Stock. Notwithstanding the
foregoing, the Company shall not be obligated to deliver a certificate unless such certificate
would reflect an increase or decrease of at least one percent (1%) of the Conversion Price for the
last certificate issued by the Company pursuant to this Section 5(f), provided that the Company
provides notice to the holder (within the three (3) day time period) of such fact.

          (g) Issue Taxes. The Company shall pay any and all issue and other taxes, excluding
federal, state or local income taxes, that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of shares of Series C Preferred Stock pursuant thereto;
provided, however, that the Company shall not be obligated to pay any transfer
taxes resulting from any transfer requested by any holder in connection with any such conversion.

          (h) Notices. Unless otherwise provided herein, all notices and other communications
hereunder shall be in writing and shall be deemed given (a) on the day of delivery, if delivered
personally, (b) three (3) business days following being mailed by certified or registered mail,
postage prepaid, return-receipt requested, or (c) one (1) day after deposited with a nationally
recognized overnight delivery service for next day delivery, in each instance (as applicable)
addressed to the Company at its principal place of business or to the holder of record at its
address appearing on the books of the Company. The Company and the holders of the Series C
Preferred Stock may change their addresses for notice from time to time upon notice in compliance
with this Section 5(h). The Company will give written notice to each holder of Series C Preferred
Stock at least forty-five (45) days prior to the date on which the Company closes its books or
takes a record (I) with respect to any dividend or distribution upon the Common Stock, (II) with
respect to any pro rata subscription offer to holders of Common Stock or (III) for determining
rights to vote with respect to any Organic Change, Deemed Liquidation Event, dissolution,
liquidation or winding-up and in no event shall such notice be provided to such holder prior to
such information being made known to the public. The Company will also give

13

 

written notice to each holder of Series C Preferred Stock at least forty-five (45) days prior
to the date on which any Organic Change, Deemed Liquidation Event, dissolution, liquidation or
winding-up will take place and in no event shall such notice be provided to such holder prior to
such information being made known to the public.

          (i) Fractional Shares. No fractional shares of Common Stock shall be issued upon
conversion of the Series C Preferred Stock. In lieu of any fractional shares to which the holder
would otherwise be entitled, the Company shall pay cash equal to the product of such fraction
multiplied by the average of the Closing Bid Prices of the Common Stock for the five (5)
consecutive trading immediately preceding the Conversion Date.

          (j) Reservation of Common Stock. The Company shall, so long as any shares of Series C
Preferred Stock are outstanding, reserve and keep available out of its authorized and unissued
Common Stock, solely for the purpose of effecting the conversion of the Series C Preferred Stock,
such number of shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all of the Series C Preferred Stock then outstanding; provided that the
number of shares of Common Stock so reserved shall at no time be less than 120% of the number of
shares of Common Stock for which the shares of Series C Preferred Stock are at any time
convertible. The initial number of shares of Common Stock reserved for conversions of the Series C
Preferred Stock and each increase in the number of shares so reserved shall be allocated pro rata
among the holders of the Series C Preferred Stock based on the number of shares of Series C
Preferred Stock held by each holder of record at the time of issuance of the Series C Preferred
Stock or increase in the number of reserved shares, as the case may be. In the event a holder
shall sell or otherwise transfer any of such holder’s shares of Series C Preferred Stock, each
transferee shall be allocated a pro rata portion of the number of reserved shares of Common Stock
reserved for such transferor. Any shares of Common Stock reserved and which remain allocated to
any person or entity which does not hold any shares of Series C Preferred Stock shall be allocated
to the remaining holders of Series C Preferred Stock, pro rata based on the number of shares of
Series C Preferred Stock then held by such holder.

          (k) Retirement of Series C Preferred Stock. Conversion of Series C Preferred Stock
shall be deemed to have been effected on the applicable Conversion Date. Upon conversion of only a
portion of the number of shares of Series C Preferred Stock represented by a certificate
surrendered for conversion, the Company shall issue and deliver to such holder at the expense of
the Company, a new certificate covering the number of shares of Series C Preferred Stock
representing the unconverted portion of the certificate so surrendered as required by Section
5(b)(ii).

          (l) Regulatory Compliance. If any shares of Common Stock to be reserved for the
purpose of conversion of Series C Preferred Stock require registration or listing with or approval
of any governmental authority, stock exchange or other regulatory body under any federal or state
law or regulation or otherwise before such shares may be validly issued or delivered upon
conversion, the Company shall, at its sole cost and expense, in good faith and as expeditiously as
possible, endeavor to secure such registration, listing or approval, as the case may be.

14

 

     6. No Preemptive Rights. Except as provided in Section 5 hereof and in the Purchase
Agreement, no holder of the Series C Preferred Stock shall be entitled to rights to subscribe for,
purchase or receive any part of any new or additional shares of any class, whether now or
hereinafter authorized, or of bonds or debentures, or other evidences of indebtedness convertible
into or exchangeable for shares of any class, but all such new or additional shares of any class,
or any bond, debentures or other evidences of indebtedness convertible into or exchangeable for
shares, may be issued and disposed of, subject to the terms of this Certificate of Designation, by
the Board of Directors on such terms and for such consideration (to the extent permitted by law),
and to such person or persons as the Board of Directors may deem advisable.

     7. Intentionally Omitted.

     8. Redemption.

          (a) Redemption by the Company. Except as set forth in this Section 8(a), the Company
shall not have the right to call or redeem at any time all or any shares of Series C Preferred
Stock. Shares of Series C Preferred Stock may be redeemed by the Company, at any time (subject to
the terms and conditions of this Certificate of Designation), in whole or in part out of funds
lawfully available therefore. The price per share price for any redemption pursuant to this
Section 8 shall be equal to $12.50 per share (subject to appropriate adjustment in the event of any
stock dividend, stock split, combination or other similar recapitalization affecting the number of
such shares issued and outstanding), plus the amount of aggregate dividends accrued but unpaid
thereon, whether or not declared, together with any other dividends declared but unpaid thereon
(collectively, with respect to a holder, the “Applicable Redemption Price”, and with respect to
each share of Series C Preferred Stock held by such holder, the “Applicable Redemption Price Per
Share”). For the avoidance of doubt, in the event of any proposed redemption by the Company
pursuant to this Section 8(a), the Company shall provide the holders of the Series C Preferred
Stock with the notice required pursuant to Section 5(a) and permit such holders to convert such
Series C Preferred Stock (or a portion thereof) for a minimum period of forty-five (45) days from
the date that the Company gives such notice.

          (b) Redemption Option by Holder. In addition to all other rights of holders of Series
C Preferred Stock contain herein, simultaneously with the occurrence of a Major Transaction (as
defined below), after a Triggering Event (as defined below), or at any time after June ___, 2013,
each holder shall have the right, at such holder’s option, to require the Company to redeem for
cash all or a portion of such holder’s shares of Series C Preferred Stock at a price per share of
Series C Preferred Stock equal to the Applicable Redemption Price Per Share. At the option of the
holder of the Series C Preferred Stock, the Company shall pay the Applicable Redemption Price in
shares of Common Stock based on the Conversion Price then in effect on the date preceding the date
of delivery of the applicable notice of redemption.

          (c) Certain Defined Terms. For the purposes of this Section 8:

     (i) a “Major Transaction” shall be deemed to have occurred at such time as any
one of the following events: (A) the consolidation, merger or other business
combination of the Company with or into another entity, (B) the sale or transfer of
more than 50% of the Company’s assets in one or a related series of

15

 

transactions, or (C) the closing of a purchase, tender or exchange offer made
to the holders of more than 50% of the outstanding shares of Common Stock.

     (ii) a “Triggering Event” shall be deemed to have occurred at such time as any
of the following events:

     (A) the Company’s notice to any holder of Series C Preferred Stock,
including by way of public announcement, at any time, of its inability to
comply (including for any of the reasons described in Section 9) or its
intention not to comply with proper requests for conversion of any Series C
Preferred Stock into shares of Common Stock;

     (B) the Company’s failure to comply with a Conversion Notice tendered
in accordance with the provisions of this Certificate of Designation within
ten (10) business days after the receipt by the Company of the Conversion
Notice and the Preferred Stock Certificates; or

     (C) the Company breaches any representation, warranty, covenant or
other term or condition of the Purchase Agreement, the Warrants issued
pursuant to the Purchase Agreement, this Certificate of Designation, the
Certificate of Incorporation, or any other agreement, document, certificate
or other instrument delivered in connection with the transactions
contemplated by the Purchase Agreement, the Warrants issued pursuant to the
Purchase Agreement, or this Certificate of Designation; provided, however,
that in the case of a breach of a covenant which is curable, such breach
shall not constitute a Triggering Event if such breach is cured with 5 days
of the earlier of (i) the Company becoming aware of such breach or (ii)
receiving notice thereof.

          (d) Mechanics of Redemption Other Than Upon a Major Transaction or Triggering Event.
In the event of a redemption by the Company pursuant to Section 8(a), the Company notify the
holders of the Series C Preferred Stock pursuant to Section 5(a) hereof. In the event of a
redemption by a holder on or after June ___, 2013 other than in connection with a Major Transaction
or Triggering Event, the holder(s) initiating the redemption shall provide the Company with written
notice of the redemption not less than 20 days prior to the applicable date of redemption, which
such date shall be specified in such notice (the “Redemption Date”). Such notice shall indicate
the number of shares of Series C Preferred Stock that the party is electing to redeem or have
redeemed, as the case may be. The Company shall redeem such Series C Preferred Stock for the
Applicable Redemption Price on such Redemption Date.

          (e) Mechanics of Redemption at Option of Holder Upon Major Transaction. No sooner
than fifteen (15) days nor later than ten (10) days prior to the consummation of a Major
Transaction, but not prior to the public announcement of such Major Transaction, the Company shall
deliver written notice (“Notice of Major Transaction”) to each holder of Series C Preferred Stock.
At any time after receipt of a Notice of Major Transaction (or, in the event a Notice of Major
Transaction is not delivered at least ten (10) days prior to a Major Transaction,

16

 

at any time within ten (10) days prior to a Major Transaction), any holder of Series C
Preferred Stock then outstanding may require the Company to redeem, effective immediately prior to
the consummation of such Major Transaction, all of the holder’s Series C Preferred Stock then
outstanding by delivering written notice thereof (“Notice of Redemption at Option of Holder Upon
Major Transaction”) to the Company, which Notice of Redemption at Option of Holder Upon Major
Transaction shall indicate the number of shares of Series C Preferred Stock that such holder is
electing to redeem. The Company shall redeem such Series C Preferred Stock for the Applicable
Redemption Price within three (3) days of receipt of the Notice of Redemption at Option Of Holder
Upon Major Transaction, which shall be considered as the applicable Redemption Date for purposes
hereof.

          (f) Mechanics of Redemption at Option of Holder Upon Triggering Event. Within one (1)
day after the occurrence of a Triggering Event, the Company shall deliver written notice thereof
via facsimile and overnight courier (“Notice of Triggering Event”) to each holder of Series C
Preferred Stock. At any time after the earlier of a holder’s receipt of a Notice of Triggering
Event and such holder becoming aware of a Triggering Event, any holder of Series C Preferred Stock
then outstanding may require the Company to redeem all of the Series C Preferred Stock by
delivering written notice thereof (“Notice of Redemption at Option of Holder Upon Triggering
Event”) to the Company, which Notice of Redemption at Option of Holder Upon Triggering Event shall
indicate the number of shares of Series C Preferred Stock that such holder is electing to redeem.
The Company shall redeem such Series C Preferred Stock for the Applicable Redemption Price within
three (3) days of receipt of the Notice of Redemption at Option Of Holder Upon Triggering Event,
which shall be considered as the applicable Redemption Date for purposes hereof.

          (g) Surrender of Certificates; Payment. On or before the applicable Redemption Date,
each holder of shares of Series C Preferred Stock to be redeemed on such Redemption Date, unless
such holder has exercised his, her or its right to convert such shares as provided in Section
5 hereof, shall surrender the certificate or certificates representing such shares to the
Company, in the manner and at the place designated in the applicable notice (or at the Company’s
principal business offices, if not so noted), and thereupon the Applicable Redemption Price for
such shares shall be payable to the order of the person whose name appears on such certificate or
certificates as the owner thereof, and each surrendered certificate shall be cancelled and retired.
In the event less than all of the shares of Series C Preferred Stock represented by a certificate
are redeemed, a new certificate representing the unredeemed shares of Series C Preferred Stock
shall promptly be issued to such holder.

          (h) Rights Subsequent to Redemption. If the applicable redemption notice shall have
been duly given, and if on the applicable Redemption Date the Applicable Redemption Price payable
upon redemption of the shares of Series C Preferred Stock to be redeemed on such Redemption Date is
paid or tendered for payment or deposited with an independent payment agent so as to be available
therefor, then notwithstanding that the certificates evidencing any of the shares of Series C
Preferred Stock so called for redemption shall not have been surrendered, dividends with respect to
such shares of Series C Preferred Stock shall cease to accrue after such Redemption Date and all
rights with respect to such shares shall forthwith after the Redemption Date terminate, except for
the right of the holders to receive

17

 

the Applicable Redemption Price without interest upon surrender of their certificate or
certificates therefor.

          (i) Redeemed or Otherwise Acquired Shares. Any shares of Series C Preferred Stock
which are redeemed or otherwise acquired by the Company or any of its subsidiaries shall be
automatically and immediately cancelled and shall not be reissued, sold or transferred. Neither
the Company nor any of its subsidiaries may exercise any voting or other rights granted to the
holders of Series C Preferred Stock following redemption.

          (j) Option to Receive Consideration other than Cash. In connection with any
redemption contemplated by this Section 8, a holder of Series C Preferred Stock shall have the
option to receive some or all of the consideration therefor in shares of Common Stock. If a holder
elects to receive some or all of such consideration in Common Stock, the number of shares of Common
Stock received shall be derived by taking the Applicable Redemption Price (or portion thereof as
designated by the holder) and dividing such amount by the Conversion Price.

          (k) Related Matters. If the Company is unable to redeem all of the Series C Preferred
Stock to be redeemed, the Company shall redeem an amount from each holder of Series C Preferred
Stock being redeemed equal to such holder’s pro-rata amount (based on the number of shares of
Series C Preferred Stock held by such holder relative to the number of shares of Series C Preferred
Stock outstanding) of all Series C Preferred Stock being redeemed. If the Company shall fail to
redeem all of the Series C Preferred Stock submitted for redemption (other than pursuant to a
dispute as to the arithmetic calculation of the Applicable Redemption Price), in addition to any
remedy such holder of Series C Preferred Stock may have under this Certificate of Designation and
the Purchase Agreement, the Applicable Redemption Price payable in respect of such unredeemed
Series C Preferred Stock shall bear interest at the rate of 1.0% per month (prorated for partial
months) until paid in full. Until the Company pays such unpaid Applicable Redemption Price in full
to a holder of shares of Series C Preferred Stock submitted for redemption, such holder shall have
the option (the “Void Optional Redemption Option”) to, in lieu of redemption, require the Company
to promptly return to such holder(s) all of the shares of Series C Preferred Stock that were
submitted for redemption by such holder(s) under this Section 8 and for which the Applicable
Redemption Price has not been paid, by sending written notice thereof to the Company (the “Void
Optional Redemption Notice”). Upon the Company’s receipt of such Void Optional Redemption
Notice(s) and prior to payment of the full Applicable Redemption Price to such holder, (i) the
notice(s) of redemption shall be null and void with respect to those shares of Series C Preferred
Stock submitted for redemption and for which the Applicable Redemption Price has not been paid,
(ii) the Company shall immediately return any Series C Preferred Stock submitted to the Company by
each holder for redemption and for which the Applicable Redemption Price has not been paid and
(iii) the Conversion Price of such returned shares of Series C Preferred Stock shall be adjusted to
the lesser of (A) the Conversion Price and (B) the lowest Closing Bid Price during the period
beginning on the date on which the notice of redemption is delivered and ending on the date on
which the Void Option Redemption Notice(s) is delivered to the Company; provided that no
adjustment shall be made if such adjustment would result in an increase of the Conversion Price
then in effect. A holder’s delivery of a Void Optional Redemption Notice and exercise of its
rights following such notice shall not affect the Company’s obligations to make any payments

18

 

which have accrued prior to the date of such notice. For the avoidance of doubt, payments
provided for in this Section 8 shall have priority to payments to other stockholders in connection
with a Major Transaction.

     9. Inability to Fully Convert.

          (a) Holder’s Option if Company Cannot Fully Convert. If, upon the Company’s receipt
of a Conversion Notice, the Company cannot issue shares of Common Stock registered for resale under
the registration statement providing for the resale of the shares of Common Stock issuable upon
conversion of the Series C Preferred Stock (the “Registration Statement”) for any reason,
including, without limitation, because the Company (w) does not have a sufficient number of shares
of Common Stock authorized and available, (x) is otherwise prohibited by applicable law or by the
rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Company or its securities from issuing all of the Common
Stock which is to be issued to a holder of Series C Preferred Stock pursuant to a Conversion Notice
or (y) fails to have a sufficient number of shares of Common Stock registered for resale under the
Registration Statement, then the Company shall issue as many shares of Common Stock as it is able
to issue in accordance with such holder’s Conversion Notice and pursuant to Section 5(b)(ii) above
and, with respect to the unconverted Series C Preferred Stock, the holder, solely at such holder’s
option, can elect, within five (5) business days after receipt of notice from the Company thereof
to:

               (i) require the Company to redeem from such holder those Series C Preferred Stock for which
the Company is unable to issue Common Stock in accordance with such holder’s Conversion Notice
(“Conversion Failure Redemption”) at a price per share equal to Applicable Redemption Price per
Share or, at such holder’s option, in shares of Common Stock, based upon the Conversion Price then
in effect on the day preceding the date of delivery of such holder’s election to the Company;

               (ii) require the Company to issue restricted shares of Common Stock in accordance with such
holder’s Conversion Notice and pursuant to Section 5(b)(ii) above; and/or

               (iii) void its Conversion Notice and retain or have returned, as the case may be, the shares
of Series C Preferred Stock that were to be converted pursuant to such holder’s Conversion Notice
(provided that a holder’s voiding its Conversion Notice shall not affect the Company’s obligations
to make any payments which have accrued prior to the date of such notice).

In the event a Holder shall elect to convert any shares of Series C Preferred Stock as provided
herein, the Company cannot refuse conversion based on any claim that such Holder or any one
associated or affiliated with such Holder has been engaged in any violation of law, violation of an
agreement to which such Holder is a party or for any reason whatsoever, unless, an injunction from
a court, on notice, restraining and or adjoining conversion of all or of said shares of Series C
Preferred Stock shall have been issued and the Company posts a surety bond for the benefit of such
Holder in an amount equal to 130% of the amount of shares of Series C Preferred Stock the Holder
has elected to convert, which bond shall remain in effect until the completion of

19

 

arbitration/litigation of the dispute and the proceeds of which shall be payable to such Holder in
the event it obtains judgment.

          (b) Mechanics of Fulfilling Holder’s Election. The Company shall immediately send via
facsimile to a holder of Series C Preferred Stock, upon receipt of a facsimile copy of a Conversion
Notice from such holder which cannot be fully satisfied as described in Section 9(a) above, a
notice of the Company’s inability to fully satisfy such holder’s Conversion Notice (the “Inability
to Fully Convert Notice”). Such Inability to Fully Convert Notice shall indicate (i) the reason
why the Company is unable to fully satisfy such holder’s Conversion Notice, (ii) the number of
Series C Preferred Stock which cannot be converted and (iii) the Applicable Redemption Price. Such
holder shall notify the Company of its election pursuant to Section 9(a) above by delivering
written notice via facsimile to the Company (“Notice in Response to Inability to Convert”).

          (c) Payment of Redemption Price. If such holder shall elect to have its shares
redeemed pursuant to Section 9(a)(i) above, the Company shall pay the Applicable Redemption Price
to such holder within three (3) days of the Company’s receipt of the holder’s Notice in Response to
Inability to Convert, provided that prior to the Company’s receipt of the holder’s Notice
in Response to Inability to Convert the Company has not delivered a notice to such holder stating,
to the satisfaction of the holder, that the event or condition resulting in the Conversion Failure
Redemption has been cured and all Conversion Shares issuable to such holder can and will be
delivered to the holder in accordance with the terms of Section 5(b). If the Company shall fail to
pay the applicable Applicable Redemption Price to such holder on a timely basis as described in
this Section 9(c) (other than pursuant to a dispute as to the determination of the arithmetic
calculation of the Applicable Redemption Price), in addition to any remedy such holder of Series C
Preferred Stock may have under this Certificate of Designation and the Purchase Agreement, such
unpaid amount shall bear interest at the rate of 2.0% per month (prorated for partial months) until
paid in full. Until the full Applicable Redemption Price is paid in full to such holder, such
holder may (i) void the Conversion Failure Redemption with respect to those Series C Preferred
Stock for which the full Applicable Redemption Price has not been paid, (ii) receive back such
Series C Preferred Stock, and (iii) require that the Conversion Price of such returned Series C
Preferred Stock be adjusted to the lesser of (A) the Conversion Price and (B) the lowest Closing
Bid Price during the period beginning on the Conversion Date and ending on the date the holder
voided the Conversion Failure Redemption; provided that no adjustment shall be made if such
adjustment would result in an increase of the Conversion Price then in effect.

          (d) Pro-rata Conversion and Redemption. In the event the Company receives a
Conversion Notice from more than one holder of Series C Preferred Stock on the same day and the
Company can convert and redeem some, but not all, of the Series C Preferred Stock pursuant to this
Section 9, the Company shall convert and redeem from each holder of Series C Preferred Stock
electing to have Series C Preferred Stock converted and redeemed at such time an amount equal to
such holder’s pro-rata amount (based on the number shares of Series C Preferred Stock held by such
holder relative to the number shares of Series C Preferred Stock outstanding) of all shares of
Series C Preferred Stock being converted and redeemed at such time.

20

 

     10. Vote to Change the Terms of or Issue Preferred Stock. The affirmative vote at a
meeting duly called for such purpose or the written consent without a meeting, of the holders of
not less than 75% of the then outstanding shares of Series C Preferred Stock, shall be required (a)
for any change to this Certificate of Designation or the Certificate of Incorporation which would
amend, alter, change or repeal any of the powers, designations, preferences and rights of the
Series C Preferred Stock or (b) for the issuance of shares of any series of preferred stock other
than pursuant to the Purchase Agreement.

     11. Lost or Stolen Certificates. Upon receipt by the Company of evidence of, or an
affidavit as to, the loss, theft, destruction or mutilation of any Preferred Stock Certificates
representing the shares of Series C Preferred Stock, upon surrender and cancellation of the
Preferred Stock Certificate(s), the Company shall execute and deliver new preferred stock
certificate(s) of like tenor and date; provided, however, the Company shall not be
obligated to re-issue Preferred Stock Certificates if the holder contemporaneously requests the
Company to convert such shares of Series C Preferred Stock into Common Stock.

     12. Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief.
The remedies provided in this Certificate of Designation shall be cumulative and in addition to all
other remedies available under this Certificate of Designation, at law or in equity (including a
decree of specific performance and/or other injunctive relief), no remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy and nothing herein
shall limit a holder’s right to pursue actual damages for any failure by the Company to comply with
the terms of this Certificate of Designation. The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the holders of the Series C Preferred Stock
and that the remedy at law for any such breach may be inadequate. The Company therefore agrees
that, in the event of any such breach or threatened breach, the holders of the Series C Preferred
Stock shall be entitled, in addition to all other available remedies, to an injunction restraining
any breach, without the necessity of showing economic loss and without any bond or other security
being required.

     13. Specific Shall Not Limit General; Construction. No specific provision contained
in this Certificate of Designation shall limit or modify any more general provision contained
herein. This Certificate of Designation shall be deemed to be jointly drafted by the Company and
all initial purchasers of the Series C Preferred Stock and shall not be construed against any
person as the drafter hereof.

     14. Failure or Indulgence Not Waiver. No failure or delay on the part of a holder of
Series C Preferred Stock in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege
preclude other or further exercise thereof or of any other right, power or privilege.

21

 

     IN WITNESS WHEREOF, the undersigned has executed and subscribed this Certificate and does
affirm the foregoing as true this ___ day of June, 2008.

	 	 	 	 	 
	 	HOME SOLUTIONS OF AMERICA, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	Frank Fradella 	 
	 	 	Title:  	President and Chief Executive Officer 	 
	 

22

 

EXHIBIT I

HOME SOLUTIONS OF AMERICA, INC.

CONVERSION NOTICE

     Reference is made to the Certificate of Designation of the Relative Rights and Preferences of
the Series C Preferred Stock of Home Solutions of America, Inc. (the “Certificate of Designation”).
In accordance with and pursuant to the Certificate of Designation, the undersigned hereby elects
to convert the number of shares of Series C Preferred Stock, par value $.001 per share (the
“Preferred Shares”), of Home Solutions of America, Inc., a Delaware corporation (the “Company”),
indicated below into shares of Common Stock, par value $.001 per share (the “Common Stock”), of the
Company, by tendering the stock certificate(s) representing the share(s) of Preferred Shares
specified below as of the date specified below.

Date of Conversion:

Number of Preferred Shares to be converted:

Stock certificate no(s). of Preferred Shares to be converted:

The Common Stock have been/are to be sold pursuant to the registration statement providing for the
resale of the shares of Common Stock issuable upon conversion of the Series C Preferred Stock:

	 	 	 
	YES o
	 	NO o

We hereby request that the Company confirm the following information:

Conversion Price:

Number of shares of Common Stock to be issued:

Number of shares of Common Stock beneficially owned or deemed beneficially owned by the Holder on
the Date of Conversion:                                         

Please issue the Common Stock into which the Preferred Shares are being converted and, if
applicable, any check drawn on an account of the Company in the following name and to the following
address:

Issue to:

Facsimile Number:

Authorization:

By:

Title:

Dated:

 

 

EXHIBIT B

Form of Warrant for Initial Grant

 

 

THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
OFFERED, SOLD OR TRANSFERRED (OTHER THAN IN RELIANCE UPON RULE 144 PROMULGATED UNDER SUCH ACT) IN
THE ABSENCE OF A REGISTRATION UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF
SUCH ACT.

HOME SOLUTIONS OF AMERICA, INC.

Right to Purchase 2,000,000 Shares

(Subject to Adjustment)

Warrant for Common Stock

     Home Solutions of America, Inc. (hereinafter referred to as the “Company”), a Delaware
corporation, hereby certifies that, for value received,

EvenFlow Funding, LLC

or registered assigns (the “Holder”), is entitled to purchase from the Company at any time or from
time to time during the Exercise Period (as hereinafter defined) an aggregate of 2,000,000 fully
paid and nonassessable shares (the “Warrant Shares”), subject to adjustment as provided below, of
the Common Stock, $0.001 par value per share (the “Stock” or “Common Stock”) of the Company, on
the payment therefore of the aggregate exercise price which shall be $0.01 per share (the “Exercise
Price per Share”) multiplied by the number of shares to be issued (the “Exercise Price”), upon the
surrender of this Warrant duly signed by the registered Holder hereof at the time of exercise,
accompanied by payment of the Exercise Price, upon the terms and subject to the conditions
hereinafter set forth.

     The Warrant represented hereby is delivered pursuant to and is subject to that certain
Preferred Stock Purchase Agreement dated as of June 11, 2008, by and between the Company and the
Holder hereof (the “Agreement”) pursuant to which the Holder has purchased 100,000 shares of Series
C Convertible Preferred Stock, as may be adjusted from time to time pursuant to the Certificate of
Designation (the “Preferred Stock”). Capitalized terms used herein without definition shall have
the meanings set forth in the Agreement.

     EXERCISE OF WARRANT. (a) 1,000,000 (subject to adjustment in the case of any stock
split, reclassification of other similar event) of the Warrant Shares will be exercisable

 

 

at any
time from and after the issuance of this Warrant, and (b) 1,000,000 (subject to adjustment in the
case of any stock split, reclassification of other similar event) of the Warrant Shares (the “2009
Warrant Shares”) will be exercisable at any time on or after June 11, 2009 (the “Exercise Period”).
Notwithstanding the foregoing, (i) if not earlier exercised, all Warrant Shares shall expire at
5:00 p.m. on June 11, 2014, and (ii) in the event the Company redeems the Preferred Stock purchased
in connection with the issuance of this Warrant, then without further
action by the Holder or the Company, ten (10) of the unexercised 2009 Warrant Shares for every one
(1) share of Preferred Stock (subject to adjustment in the case of any stock split,
reclassification of other similar event) redeemed, or if a lesser amount of 2009 Warrant Shares
remain unexercised at the time of such redemption, all remaining unexercised 2009 Warrant Shares
presented hereby, shall expire.

     In the event of a proposed Change of Control, the Company shall give the Holder ten (10) days
prior notice of the proposed closing date of the Change of Control and, to the extent the Warrant
has not been exercised by such date, then this Warrant shall terminate. “Change of Control” shall
mean (x) the acquisition of the Company by another entity by means of any transaction or series of
related transactions (including, without limitation, any merger, consolidation or other form of
reorganization in which outstanding shares of the Company are exchanged for securities or other
consideration issued, or caused to be issued, by the acquiring entity or its subsidiary, but
excluding any transaction effected primarily for the purpose of changing the Company’s jurisdiction
of incorporation), unless the Company’s stockholders of record as constituted immediately prior to
such transaction or series of related transactions will, immediately after such transaction or
series of related transactions hold at least a majority of the voting power of the surviving or
acquiring entity or (y) a sale of all or substantially all of the assets of the Company.

     Subject to the foregoing restrictions, during the Exercise Period this Warrant may be
exercised, in whole or in part, as follows:

     A. Exercise for Cash. The Holder may, at its option, elect to exercise this Warrant,
in whole or in part and at any time or from time to time during the Exercise Period, by
surrendering this Warrant, with the Exercise of Warrant and Declaration appended hereto duly
executed by or on behalf of the Holder, at the principal office of the Company, or at such other
office or agency as the Company may designate, accompanied by payment in full, in lawful money of
the United States, of the Exercise Price payable in respect of the number of shares of Stock
purchased upon such exercise.

     B. Cashless Exercise.

          (i) The Holder may, at its option, elect to exercise this Warrant, in whole or in part and at
any time or from time to time during the Exercise Period, on a cashless basis, by surrendering this
Warrant, with the Exercise of Warrant and Declaration appended

-2-

 

hereto duly executed by or on behalf
of the Holder, at the principal office of the Company, or at such other office or agency as the
Company may designate, by canceling a portion of this Warrant in payment of the Exercise Price
payable in respect of the number of shares of Stock purchased upon such exercise. In the event of
an exercise pursuant to this subsection B, the number of shares of Stock issued to the Holder shall
be determined according to the following formula:

	 	 	 
	X=

	 	                             Y(A-B)

                                 A
	 
	 	 
	Where X=

	 	the number of shares of Stock that shall be issued to
the Holder;
	 
	 	 
	Y=

	 	the number of shares of Stock for which this Warrant is
being exercised (which shall include both the number of
shares of Stock issued to the Holder and the number of
shares of Stock subject to the portion of the Warrant
being cancelled in payment of the Exercise Price);
	 
	 	 
	A=

	 	the Fair Market Value (as calculated pursuant to the
terms set forth below) of one share of Common Stock; and
	 
	 	 
	B=

	 	the Exercise Price per Share.

          (ii) The Fair Market Value per share of Common Stock shall be determined as follows:

               (1) If the Common Stock is listed on a national securities exchange, the Nasdaq National
Market, another nationally recognized trading system or on the over the counter market, as of the
Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the average of
the high and low reported sale prices per share of Common Stock thereon on the trading day
immediately preceding the Exercise Date (provided that if no such price is reported on such
day, then on the date nearest preceding such date).

               (2) If the Common Stock is not listed on a national securities exchange, the Nasdaq National
Market, another nationally recognized trading system or on the over the counter market as of the
Exercise Date, the Fair Market Value per share of Common Stock shall be determined in good faith by
the Board of Directors of the Company, subject to the approval of the Holder. If the parties
hereto cannot reach agreement, then the cashless exercise option shall not be available to the
Holder.

     DELIVERY OF STOCK CERTIFICATE UPON EXERCISE. As soon as practicable after the
exercise of this Warrant and payment of the Exercise Price (which payment shall be deemed to have
occurred when funds are immediately available to the Company), and in

-3-

 

no event more than three (3)
days thereafter, the Company will cause to be issued in the name of and delivered to the registered
Holder hereof or its assigns, or such Holder’s nominee or nominees, a certificate or certificates
for the number of full shares of Stock of the Company to which such Holder shall be entitled upon
such exercise (and in the case of a partial exercise, a Warrant of like tenor for the unexercised
portion remaining subject to exercise prior to the expiration of the Exercise Period set forth
herein). For all corporate purposes, such certificate or certificates shall be deemed to have been
issued and such Holder or such Holder’s designee to be named therein shall be deemed to have become
a holder of record of such shares of Stock as of the date the duly executed exercise form pursuant
to this Warrant, together with full payment of the Exercise Price, is received by the Company as
aforesaid. No fraction of a share or scrip certificate for such fraction shall be issued upon the
exercise of this Warrant; in lieu thereof, the Company will pay or cause to be paid to such Holder
cash equal to a like fraction at the prevailing fair market price for such share as determined in
good faith by the Company.

     FAILURE OF EXERCISE. If within three (3) business days of a Holder’s exercise of this
Warrant (in whole or in part) and payment of the Exercise Price (the “Stock Delivery Period”) the
Company shall fail to issue and deliver to such Holder the number of shares of Stock to which such
Holder is entitled upon such exercise or to issue a new Warrant representing the number shares
remaining after a partial exercise as contemplated above (an
“Exercise Failure”), in addition to all other available remedies which such Holder may pursue
hereunder, under the Agreement, at law and in equity, the Company shall pay additional damages to
such Holder on each business day after such third (3rd) business day that such exercise is not
timely effected in an amount equal to 0.5% of (A) the sum of the number of shares of Stock not
issued to the Holder on a timely basis and to which such holder is entitled and, in the event the
Company has failed to deliver a new Warrant to the Holder, the number of shares of Stock issuable
upon exercise of such new Warrant, as of the last possible date which the Company could have issued
such new Warrant to such Holder, times (B) the Closing Bid Price (as hereinafter defined) of the
Stock on the last possible date which the Company could have issued such Stock and such new
Warrant, as the case may be, to such Holder. For the purposes hereof, “Closing Bid Price” means
the last closing bid price per share on the registered national stock exchange on which the
security is then listed, or if there is no such price on such date, then the closing bid price on
such exchange on the date nearest preceding such date, or if such security is not listed on a
registered national stock exchange, the closing bid price for a share of such security in the over
the counter market, as reported by the OTC Bulletin Board or in the National Quotation Bureau
Incorporated (or similar organization or agency succeeding to its function of reporting prices) at
the close of business on such date. If the Closing Bid Price cannot be calculated for such
security on such date on any of the foregoing bases, the Closing Bid Price of such security on such
date shall be the fair market value as mutually determined by the Company and the Holder. If the
Company fails to pay the additional damages set forth above within five (5) business days of the
date incurred, then such payments shall bear interest at the rate of 2.0% per month (pro rated for
partial months) until such payments are made.

-4-

 

     ANTI-DILUTION PROVISIONS. A. Certain Dividends and Distributions. In the
event that a dividend or other distribution shall be declared upon the Stock of the Company payable
in shares of said stock, then, in each event, the number of shares of Stock covered by this Warrant
shall be adjusted by adding thereto the number of shares which would have been distributable
thereon if such shares had been outstanding on the date fixed for determining the stockholders
entitled to receive such stock dividend or other distribution.

     B. Other Dividends and Distributions. In the event that a dividend or other
distribution shall be declared upon the Stock of the Company payable in securities of the Company
other than Stock, then, and in each event, the Holder shall receive upon exercise hereof, in
addition to the number of shares of Stock issuable hereunder, the kind and amount of securities of
the Company, cash or other property which the Registered Holder would have been entitled to receive
had this Warrant been exercised on the date of such event and had the Registered Holder thereafter,
during the period from the date of such event to and including the date that this warrant is
exercised in full, retained any such securities receivable during such period, giving application
to all adjustments called for during such period under this Section with respect to the rights of
the Holder.

     C. Stock Splits and Combinations. If the Company shall at any time or from time to
time after the date hereof, effect a stock split of the outstanding shares of Stock, the number of
shares of Stock covered by this Warrant shall be proportionately increased. If the Company shall
at any time or from time to time after the Issuance Date, combine the outstanding shares of Stock,
the number of shares of Stock covered by this Warrant shall be proportionately decreased. Any
adjustments under this subsection C shall be effective at the close of business on the date the
stock split or combination becomes effective.

     D. Reorganizations, Consolidations, Mergers. Except as otherwise set forth herein, in
the event that the outstanding shares of Stock of the Company shall be changed into or exchanged
for a different number or kind of shares of stock or other securities of the Company or of another
corporation, whether through reorganization, recapitalization, stock split-up, combination of
shares, merger or consolidation, then upon exercise of this Warrant there shall be substituted for
the shares of Stock covered by this Warrant, the number and kind of shares of stock or other
securities which would have been substituted therefor if such shares had been outstanding on the
date fixed for determining the stockholders entitled to receive such changed or substituted stock
or other securities.

     E. Other Changes. In the event there shall be any change, other than specified above,
in the number or kind of outstanding shares of Stock of the Company or of any stock or other
securities into which such Stock shall be changed or for which it shall have been exchanged, then
if such change equitably requires an adjustment in the number or kind of shares covered by this
Warrant, such adjustment shall be made by the Company and shall be effective and binding for all
purposes on this Warrant.

-5-

 

     F. Notice of Adjustments. Whenever the number of Warrant Shares or number or kind of
securities or other property purchasable upon the exercise of this Warrant is adjusted, as herein
provided, the Company shall give notice thereof to the Holder, which notice shall state the number
of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant
after such adjustment, setting forth a brief statement of the facts requiring such adjustment and
setting forth the computation by which such adjustment was made.

     REGISTRATION RIGHTS. Upon exercise, the shares of Stock issuable upon exercise of
this Warrant shall be deemed to be Registrable Securities under Section VI of the Agreement, as
such may be amended from time to time.

     LOST, STOLEN, DESTROYED OR MUTILATED WARRANT. Upon receipt by the Company of evidence
satisfactory (in the exercise of reasonable discretion) to it of the ownership of and the loss,
theft or destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction)
of indemnity satisfactory (in the exercise or reasonable discretion) to it, and (in the case of
mutilation) upon the surrender and cancellation thereof, the Company will issue and deliver, in
lieu thereof, a new Warrant of like tenor.

     TRANSFER AND TRANSFER RESTRICTIONS. A. Owner of Warrant. The Company may
deem and treat the person in whose name this Warrant is registered as the Holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone other than the
Company) for all purposes and shall not be affected by any notice to the contrary, until
presentation of this Warrant for registration of transfer as provided below.

     B. Transfer of Warrant. The Company agrees to maintain, at its then principal place
of business, books for the registration of the Warrant and transfers thereof, and, subject to the
provisions of subsections C and D below, this Warrant and all rights hereunder are transferable, in
whole or in part, on said books at said office, upon surrender of this Warrant at said office,
together with a written assignment of this Warrant duly executed by the Holder hereof or his duly
authorized agent or attorney and funds sufficient to pay any transfer taxes payable upon the making
of such transfer. Upon such surrender and payment the Company shall
execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the
denominations specified in such instrument of assignment, and this Warrant shall promptly be
canceled.

     C. Restrictions on Exercise and Transfer. Neither this Warrant nor the shares of
Stock issuable upon exercise of this Warrant have been registered under the Securities Act of
1933, as amended (the “Act”) or any state securities laws. Therefore, in order, among other
things, to insure compliance with the Act, notwithstanding anything else in the Warrant to
contrary, the Holder of this Warrant, including any successive Holder, agrees by accepting this

-6-

 

Warrant as follows: No Holder shall sell, assign, transfer, pledge, hypothecate, mortgage, encumber
or dispose of all or any portion of this Warrant (or any of the shares of Stock which may be issued
upon the exercise hereof). Notwithstanding the foregoing, a Holder may transfer all or any portion
of this Warrant (or any of the shares of Stock which may be issued upon the exercise hereof) (i) as
part of a registered public offering of the Company’s securities or pursuant to Rule 144 under the
Act, (ii) by pledge that creates a mere security interest in all or any portion of this Warrant (or
any of the shares of Stock which may be issued upon the exercise hereof), provided that the pledgee
thereof agrees in writing in advance to be bound by and comply with all applicable provisions of
this Warrant to the same extent as if it were the Holder making such pledge, (iii) to any member of
the Holder, or to any siblings, ancestors, descendants or spouse of any member of the Holder, or
any custodian or trustee for the account of such member or the account of such siblings, ancestors,
descendants or spouse of such member (or any combination of the foregoing), or (iv) to an affiliate
or a partner of Holder, provided, in each such case (other than a transfer under clause (i) above)
a transferee shall receive and hold all or any portion of this Warrant (or any of the shares of
Stock which may be issued upon the exercise hereof) subject to the provisions of this Warrant and
there shall be no further transfer except in accordance herewith. No party will avoid the
provisions of this Warrant by making one or more transfers to an affiliate of such party and then
disposing of all or any portion of such party’s interest in such affiliate; provided, however, that
in any event, this Warrant and the Stock issuable herefrom may not (other than in connection with
the matters described in sub-sections C(i)-(iv) above (inclusive)) be sold or transferred in the
absence of registration under the Act unless the Company receives an opinion of counsel reasonably
acceptable to it stating that such sale or transfer is exempt from the registration and prospectus
delivery requirements of said Act. For the avoidance of doubt, the Company acknowledges that a
disposition made in reliance upon Rule 144 will not require an opinion of counsel.

     D. Legend on Shares. Each certificate for shares of Stock issued upon exercise of
this Warrant, unless at the time of exercise such shares are registered under the Act, shall bear
substantially the following legend (and any additional legend required under the Act or otherwise):

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AS AMENDED AND MAY NOT BE OFFERED, SOLD, OR TRANSFERRED
(OTHER THAN IN RELIANCE UPON RULE 144 PROMULGATED UNDER SUCH ACT), EXCEPT (I)
PURSUANT TO A REGISTRATION STATEMENT EFFECTIVE UNDER THE ACT, OR (II) PURSUANT TO AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT.

     Any certificate issued at any time in exchange or substitution for any certificate bearing
such legend (except a new certificate issued upon completion of a public distribution pursuant to a
registration statement under the Act of the securities represented thereby) shall also

-7-

 

bear such
legend if, in the reasonable opinion of counsel for the Company, the securities represented thereby
are legally required to be subject to the transfer restrictions contained in this Warrant. The
exercise and transfer restriction provisions of this Warrant shall be binding upon all subsequent
Holders of the Warrant.

     COVENANTS. The Company covenants that, so long as this Warrant is exercisable, it
will reserve from its authorized and unissued Stock a sufficient number of shares to provide for
the delivery of stock pursuant to the exercise of this Warrant. The Company further covenants that
all shares of Stock which shall be so deliverable upon exercise of this Warrant shall be duly and
validly issued and fully paid and nonassessable.

     MISCELLANEOUS. This Warrant does not confer upon the Holder any rights of a
stockholder of the Company, including, without limitation, any right to vote or to consent to or
receive notice as a stockholder of the Company.

-8-

 

     HEADINGS. The headings in this Warrant are for purposes of reference only, and shall
not limit or otherwise affect the meaning hereof.

	 	 	 	 	 
	Dated: June ___, 2008 	HOME SOLUTIONS OF AMERICA, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 

-9-

 

	 	 	 	 	 

EXERCISE OF WARRANT AND DECLARATION

To: Home Solutions of America, Inc.

     The undersigned Holder hereby exercises the right to purchase                                shares of
Common Stock of Home Solutions of America, Inc., a Delaware corporation (the “Company”) and
delivers to the Company herewith the Exercise Price.

     The undersigned declares and represents to the Company that the intention of this exercise is
to acquire the aforementioned shares for investment only and not for resale or with a view to the
distribution thereof, except as the same may be made in compliance with all applicable securities
laws. The undersigned has been advised that the shares being issued to the undersigned are not
being registered under the Securities Act of 1933 (the “Act”) on the grounds that this transaction
is exempt under the Act as not involving any public offering. As a result of not being registered
under the Act, the undersigned has been advised that the shares may not be sold or offered for sale
(other than in reliance upon Rule 144 promulgated under such Act) in the absence of an effective
registration statement as to the securities under the Act and any applicable state securities acts
or the availability of an exemption from the registration requirements under the Act and any
applicable state securities acts.

     You will kindly forward a certificate or certificates for the shares purchased hereby and, if
such shares shall not include all of the shares provided in this Warrant, a new Warrant of like
tenor and date for the balance of the shares issuable thereunder shall be delivered to the
undersigned at the address set forth below.

	 	 	 	 	 	 	 	 	 
	Date:
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	 	 	Name of Holder	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	By:	 	 	 	 
	 

	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	Address:	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 

-10-

 

EXHIBIT C

Form of Warrant for Subsequent Grants

 

 

THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
OFFERED, SOLD OR TRANSFERRED (OTHER THAN IN RELIANCE UPON RULE 144 PROMULGATED UNDER SUCH ACT) IN
THE ABSENCE OF A REGISTRATION UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF
SUCH ACT.

HOME SOLUTIONS OF AMERICA, INC.

Right to Purchase                      Shares

(Subject to Adjustment)

Warrant for Common Stock

     Home Solutions of America, Inc. (hereinafter referred to as the “Company”), a Delaware
corporation, hereby certifies that, for value received,

EvenFlow Funding, LLC

or registered assigns (the “Holder”), is entitled to purchase from the Company at any time or from
time to time during the Exercise Period (as hereinafter defined) an aggregate of                      fully
paid and nonassessable shares (the “Warrant Shares”), subject to adjustment as provided below, of
the Common Stock, $0.001 par value per share (the “Stock” or “Common Stock”) of the Company, on
the payment therefore of the aggregate exercise price which shall be $0.01 per share (the “Exercise
Price per Share”) multiplied by the number of shares to be issued (the “Exercise Price”), upon the
surrender of this Warrant duly signed by the registered Holder hereof at the time of exercise,
accompanied by payment of the Exercise Price, upon the terms and subject to the conditions
hereinafter set forth.

     The Warrant represented hereby is delivered pursuant to and is subject to that certain
Preferred Stock Purchase Agreement dated as of June 11, 2008, by and between the Company and the
Holder hereof (the “Agreement”) pursuant to which the Holder has purchased                      shares of
Series C Convertible Preferred Stock in connection with a Subsequent Closing, as may be adjusted from time to time pursuant to the
Certificate of Designation (the “Preferred Stock”). Capitalized terms used herein without
definition shall have the meanings set forth in the Agreement.

     EXERCISE OF WARRANT. (a)                     
[Number equal to half of total Warrant Shares above] (subject to adjustment in the case of any stock
split, reclassification of other similar event) of the Warrant Shares will be exercisable

 

 

at any time from and after the issuance of this Warrant, and (b)                     
[Number equal to half of total Warrant Shares above] (subject to adjustment
in the case of any stock split, reclassification of other similar event) of the Warrant Shares (the
“20      Warrant Shares”) will be exercisable at any time on or after                , 20      (the “Exercise
Period”) [Date will be one (1) year from date of issuance]. Notwithstanding the foregoing, (i) if not earlier exercised, all Warrant Shares shall
expire at 5:00 p.m. on                , 20      [Date will be six (6) years from the date of issuance], and (ii) in the event the Company redeems the Preferred Stock
purchased in connection with the issuance of this Warrant, then without further action by the
Holder or the Company, ten (10) of the unexercised 20      Warrant Shares for every one (1) share of
Preferred Stock (subject to adjustment in the case of any stock split, reclassification of other
similar event) redeemed, or if a lesser amount of 20      Warrant Shares remain unexercised at the
time of such redemption, all remaining unexercised 20      Warrant Shares presented hereby, shall
expire.

     In the event of a proposed Change of Control, the Company shall give the Holder ten (10) days
prior notice of the proposed closing date of the Change of Control and, to the extent the Warrant
has not been exercised by such date, then this Warrant shall terminate. “Change of Control” shall
mean (x) the acquisition of the Company by another entity by means of any transaction or series of
related transactions (including, without limitation, any merger, consolidation or other form of
reorganization in which outstanding shares of the Company are exchanged for securities or other
consideration issued, or caused to be issued, by the acquiring entity or its subsidiary, but
excluding any transaction effected primarily for the purpose of changing the Company’s jurisdiction
of incorporation), unless the Company’s stockholders of record as constituted immediately prior to
such transaction or series of related transactions will, immediately after such transaction or
series of related transactions hold at least a majority of the voting power of the surviving or
acquiring entity or (y) a sale of all or substantially all of the assets of the Company.

     Subject to the foregoing restrictions, during the Exercise Period this Warrant may be
exercised, in whole or in part, as follows:

     A. Exercise for Cash. The Holder may, at its option, elect to exercise this Warrant,
in whole or in part and at any time or from time to time during the Exercise Period, by
surrendering this Warrant, with the Exercise of Warrant and Declaration appended hereto duly
executed by or on behalf of the Holder, at the principal office of the Company, or at such other
office or agency as the Company may designate, accompanied by payment in full, in lawful money of
the United States, of the Exercise Price payable in respect of the number of shares of Stock
purchased upon such exercise.

     B. Cashless Exercise.

          (i) The Holder may, at its option, elect to exercise this Warrant, in whole or in part and at
any time or from time to time during the Exercise Period, on a cashless basis, by surrendering this
Warrant, with the Exercise of Warrant and Declaration appended

-2-

 

hereto duly executed by or on behalf of the Holder, at the principal office of the Company, or at
such other office or agency as the Company may designate, by canceling a portion of this Warrant in
payment of the Exercise Price payable in respect of the number of shares of Stock purchased upon
such exercise. In the event of an exercise pursuant to this subsection B, the number of shares of
Stock issued to the Holder shall be determined according to the following formula:

	 	 	 	 
	X=

	 	Y(A-B)
	 

	 	 
	 

	 	A

	 	 	 
	Where X=

	 	the number of shares of Stock that shall be issued to the Holder;
	 
	 	 
	Y=

	 	the number of shares of Stock for which this Warrant is being
exercised (which shall include both the number of shares of Stock
issued to the Holder and the number of shares of Stock subject to
the portion of the Warrant being cancelled in payment of the
Exercise Price);
	 
	 	 
	A=

	 	the Fair Market Value (as calculated pursuant to the terms set
forth below) of one share of Common Stock; and
	 
	 	 
	B=

	 	the Exercise Price per Share.

          (ii) The Fair Market Value per share of Common Stock shall be determined as follows:

               (1) If the Common Stock is listed on a national securities exchange, the Nasdaq National
Market, another nationally recognized trading system or on the over the counter market, as of the
Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the average of
the high and low reported sale prices per share of Common Stock thereon on the trading day
immediately preceding the Exercise Date (provided that if no such price is reported on such
day, then on the date nearest preceding such date).

               (2) If the Common Stock is not listed on a national securities exchange, the Nasdaq National
Market, another nationally recognized trading system or on the over the counter market as of the
Exercise Date, the Fair Market Value per share of Common Stock shall be determined in good faith by
the Board of Directors of the Company, subject to the approval of the Holder. If the parties
hereto cannot reach agreement, then the cashless exercise option shall not be available to the
Holder.

     DELIVERY OF STOCK CERTIFICATE UPON EXERCISE. As soon as practicable after the
exercise of this Warrant and payment of the Exercise Price (which payment shall be deemed to have
occurred when funds are immediately available to the Company), and in

-3-

 

no event more than three (3) days thereafter, the Company will cause to be issued in the name of
and delivered to the registered Holder hereof or its assigns, or such Holder’s nominee or nominees,
a certificate or certificates for the number of full shares of Stock of the Company to which such
Holder shall be entitled upon such exercise (and in the case of a partial exercise, a Warrant of
like tenor for the unexercised portion remaining subject to exercise prior to the expiration of the
Exercise Period set forth herein). For all corporate purposes, such certificate or certificates
shall be deemed to have been issued and such Holder or such Holder’s designee to be named therein
shall be deemed to have become a holder of record of such shares of Stock as of the date the duly
executed exercise form pursuant to this Warrant, together with full payment of the Exercise Price,
is received by the Company as aforesaid. No fraction of a share or scrip certificate for such
fraction shall be issued upon the exercise of this Warrant; in lieu thereof, the Company will pay
or cause to be paid to such Holder cash equal to a like fraction at the prevailing fair market
price for such share as determined in good faith by the Company.

     FAILURE OF EXERCISE. If within three (3) business days of a Holder’s exercise of this
Warrant (in whole or in part) and payment of the Exercise Price (the “Stock Delivery Period”) the
Company shall fail to issue and deliver to such Holder the number of shares of Stock to which such
Holder is entitled upon such exercise or to issue a new Warrant representing the number shares
remaining after a partial exercise as contemplated above (an “Exercise Failure”), in addition to
all other available remedies which such Holder may pursue hereunder, under the Agreement, at law
and in equity, the Company shall pay additional damages to such Holder on each business day after
such third (3rd) business day that such exercise is not timely effected in an amount equal to 0.5%
of (A) the sum of the number of shares of Stock not issued to the Holder on a timely basis and to
which such holder is entitled and, in the event the Company has failed to deliver a new Warrant to
the Holder, the number of shares of Stock issuable upon exercise of such new Warrant, as of the
last possible date which the Company could have issued such new Warrant to such Holder, times (B)
the Closing Bid Price (as hereinafter defined) of the Stock on the last possible date which the
Company could have issued such Stock and such new Warrant, as the case may be, to such Holder. For
the purposes hereof, “Closing Bid Price” means the last closing bid price per share on the
registered national stock exchange on which the security is then listed, or if there is no such
price on such date, then the closing bid price on such exchange on the date nearest preceding such
date, or if such security is not listed on a registered national stock exchange, the closing bid
price for a share of such security in the over the counter market, as reported by the OTC Bulletin
Board or in the National Quotation Bureau Incorporated (or similar organization or agency
succeeding to its function of reporting prices) at the close of business on such date. If the
Closing Bid Price cannot be calculated for such security on such date on any of the foregoing
bases, the Closing Bid Price of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder. If the Company fails to pay the additional
damages set forth above within five (5) business days of the date incurred, then such payments
shall bear interest at the rate of 2.0% per month (pro rated for partial months) until such
payments are made.

-4-

 

     ANTI-DILUTION PROVISIONS. A. Certain Dividends and Distributions. In the
event that a dividend or other distribution shall be declared upon the Stock of the Company payable
in shares of said stock, then, in each event, the number of shares of Stock covered by this Warrant
shall be adjusted by adding thereto the number of shares which would have been distributable
thereon if such shares had been outstanding on the date fixed for determining the stockholders
entitled to receive such stock dividend or other distribution.

     B. Other Dividends and Distributions. In the event that a dividend or other
distribution shall be declared upon the Stock of the Company payable in securities of the Company
other than Stock, then, and in each event, the Holder shall receive upon exercise hereof, in
addition to the number of shares of Stock issuable hereunder, the kind and amount of securities of
the Company, cash or other property which the Registered Holder would have been entitled to receive
had this Warrant been exercised on the date of such event and had the Registered Holder thereafter,
during the period from the date of such event to and including the date that this warrant is
exercised in full, retained any such securities receivable during such period, giving application
to all adjustments called for during such period under this Section with respect to the rights of
the Holder.

     C. Stock Splits and Combinations. If the Company shall at any time or from time to
time after the date hereof, effect a stock split of the outstanding shares of Stock, the number of
shares of Stock covered by this Warrant shall be proportionately increased. If the Company shall
at any time or from time to time after the Issuance Date, combine the outstanding shares of Stock,
the number of shares of Stock covered by this Warrant shall be proportionately decreased. Any
adjustments under this subsection C shall be effective at the close of business on the date the
stock split or combination becomes effective.

     D. Reorganizations, Consolidations, Mergers. Except as otherwise set forth herein, in
the event that the outstanding shares of Stock of the Company shall be changed into or exchanged
for a different number or kind of shares of stock or other securities of the Company or of another
corporation, whether through reorganization, recapitalization, stock split-up, combination of
shares, merger or consolidation, then upon exercise of this Warrant there shall be substituted for
the shares of Stock covered by this Warrant, the number and kind of shares of stock or other
securities which would have been substituted therefor if such shares had been outstanding on the
date fixed for determining the stockholders entitled to receive such changed or substituted stock
or other securities.

     E. Other Changes. In the event there shall be any change, other than specified above,
in the number or kind of outstanding shares of Stock of the Company or of any stock or other
securities into which such Stock shall be changed or for which it shall have been exchanged, then
if such change equitably requires an adjustment in the number or kind of shares covered by this
Warrant, such adjustment shall be made by the Company and shall be effective and binding for all
purposes on this Warrant.

-5-

 

     F. Notice of Adjustments. Whenever the number of Warrant Shares or number or kind of
securities or other property purchasable upon the exercise of this Warrant is adjusted, as herein
provided, the Company shall give notice thereof to the Holder, which notice shall state the number
of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant
after such adjustment, setting forth a brief statement of the facts requiring such adjustment and
setting forth the computation by which such adjustment was made.

     REGISTRATION RIGHTS. Upon exercise, the shares of Stock issuable upon exercise of
this Warrant shall be deemed to be Registrable Securities under Section VI of the Agreement, as
such may be amended from time to time.

     LOST, STOLEN, DESTROYED OR MUTILATED WARRANT. Upon receipt by the Company of evidence
satisfactory (in the exercise of reasonable discretion) to it of the ownership of and the loss,
theft or destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction)
of indemnity satisfactory (in the exercise or reasonable discretion) to it, and (in the case of
mutilation) upon the surrender and cancellation thereof, the Company will issue and deliver, in
lieu thereof, a new Warrant of like tenor.

     TRANSFER AND TRANSFER RESTRICTIONS. A. Owner of Warrant. The Company may
deem and treat the person in whose name this Warrant is registered as the Holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone other than the
Company) for all purposes and shall not be affected by any notice to the contrary, until
presentation of this Warrant for registration of transfer as provided below.

     B. Transfer of Warrant. The Company agrees to maintain, at its then principal place
of business, books for the registration of the Warrant and transfers thereof, and, subject to the
provisions of subsections C and D below, this Warrant and all rights hereunder are transferable, in
whole or in part, on said books at said office, upon surrender of this Warrant at said office,
together with a written assignment of this Warrant duly executed by the Holder hereof or his duly
authorized agent or attorney and funds sufficient to pay any transfer taxes payable upon the making
of such transfer. Upon such surrender and payment the Company shall execute and deliver a new
Warrant or Warrants in the name of the assignee or assignees and in the denominations specified in
such instrument of assignment, and this Warrant shall promptly be canceled.

     C. Restrictions on Exercise and Transfer. Neither this Warrant nor the shares of
Stock issuable upon exercise of this Warrant have been registered under the Securities Act of
1933, as amended (the “Act”) or any state securities laws. Therefore, in order, among other
things, to insure compliance with the Act, notwithstanding anything else in the Warrant to
contrary, the Holder of this Warrant, including any successive Holder, agrees by accepting this

-6-

 

Warrant as follows: No Holder shall sell, assign, transfer, pledge, hypothecate, mortgage, encumber
or dispose of all or any portion of this Warrant (or any of the shares of Stock which may be issued
upon the exercise hereof). Notwithstanding the foregoing, a Holder may transfer all or any portion
of this Warrant (or any of the shares of Stock which may be issued upon the exercise hereof) (i) as
part of a registered public offering of the Company’s securities or pursuant to Rule 144 under the
Act, (ii) by pledge that creates a mere security interest in all or any portion of this Warrant (or
any of the shares of Stock which may be issued upon the exercise hereof), provided that the pledgee
thereof agrees in writing in advance to be bound by and comply with all applicable provisions of
this Warrant to the same extent as if it were the Holder making such pledge, (iii) to any member of
the Holder, or to any siblings, ancestors, descendants or spouse of any member of the Holder, or
any custodian or trustee for the account of such member or the account of such siblings, ancestors,
descendants or spouse of such member (or any combination of the foregoing), or (iv) to an affiliate
or a partner of Holder, provided, in each such case (other than a transfer under clause (i) above)
a transferee shall receive and hold all or any portion of this Warrant (or any of the shares of
Stock which may be issued upon the exercise hereof) subject to the provisions of this Warrant and
there shall be no further transfer except in accordance herewith. No party will avoid the
provisions of this Warrant by making one or more transfers to an affiliate of such party and then
disposing of all or any portion of such party’s interest in such affiliate; provided, however, that
in any event, this Warrant and the Stock issuable herefrom may not (other than in connection with
the matters described in sub-sections C(i)-(iv) above (inclusive)) be sold or transferred in the
absence of registration under the Act unless the Company receives an opinion of counsel reasonably
acceptable to it stating that such sale or transfer is exempt from the registration and prospectus
delivery requirements of said Act. For the avoidance of doubt, the Company acknowledges that a
disposition made in reliance upon Rule 144 will not require an opinion of counsel.

     D. Legend on Shares. Each certificate for shares of Stock issued upon exercise of
this Warrant, unless at the time of exercise such shares are registered under the Act, shall bear
substantially the following legend (and any additional legend required under the Act or otherwise):

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AS AMENDED AND MAY NOT BE OFFERED, SOLD, OR TRANSFERRED
(OTHER THAN IN RELIANCE UPON RULE 144 PROMULGATED UNDER SUCH ACT), EXCEPT (I)
PURSUANT TO A REGISTRATION STATEMENT EFFECTIVE UNDER THE ACT, OR (II) PURSUANT TO AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT.

     Any certificate issued at any time in exchange or substitution for any certificate bearing
such legend (except a new certificate issued upon completion of a public distribution pursuant to a
registration statement under the Act of the securities represented thereby) shall also

-7-

 

bear such legend if, in the reasonable opinion of counsel for the Company, the securities
represented thereby are legally required to be subject to the transfer restrictions contained in
this Warrant. The exercise and transfer restriction provisions of this Warrant shall be binding
upon all subsequent Holders of the Warrant.

     COVENANTS. The Company covenants that, so long as this Warrant is exercisable, it
will reserve from its authorized and unissued Stock a sufficient number of shares to provide for
the delivery of stock pursuant to the exercise of this Warrant. The Company further covenants that
all shares of Stock which shall be so deliverable upon exercise of this Warrant shall be duly and
validly issued and fully paid and nonassessable.

     MISCELLANEOUS. This Warrant does not confer upon the Holder any rights of a
stockholder of the Company, including, without limitation, any right to vote or to consent to or
receive notice as a stockholder of the Company.

-8-

 

     HEADINGS. The headings in this Warrant are for purposes of reference only, and shall
not limit or otherwise affect the meaning hereof.

	 	 	 	 	 
	Dated: ___________ 	HOME SOLUTIONS OF AMERICA, INC.

 	 
	 	By:  	
 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 

-9-

 

EXERCISE OF WARRANT AND DECLARATION

To: Home Solutions of America, Inc.

     The
undersigned Holder hereby exercises the right to purchase ________________ shares of
Common Stock of Home Solutions of America, Inc., a Delaware corporation (the “Company”) and
delivers to the Company herewith the Exercise Price.

     The undersigned declares and represents to the Company that the intention of this exercise is
to acquire the aforementioned shares for investment only and not for resale or with a view to the
distribution thereof, except as the same may be made in compliance with all applicable securities
laws. The undersigned has been advised that the shares being issued to the undersigned are not
being registered under the Securities Act of 1933 (the “Act”) on the grounds that this transaction
is exempt under the Act as not involving any public offering. As a result of not being registered
under the Act, the undersigned has been advised that the shares may not be sold or offered for sale
(other than in reliance upon Rule 144 promulgated under such Act) in the absence of an effective
registration statement as to the securities under the Act and any applicable state securities acts
or the availability of an exemption from the registration requirements under the Act and any
applicable state securities acts.

     You will kindly forward a certificate or certificates for the shares purchased hereby and, if
such shares shall not include all of the shares provided in this Warrant, a new Warrant of like
tenor and date for the balance of the shares issuable thereunder shall be delivered to the
undersigned at the address set forth below.

	 	 	 	 	 
	 Date:                 
               	  	 
	 	Name of Holder 	 
	 
	 	 	 
	 	By:  	 	 
	 	 	 
	 	Address: 	 
	 	 	 	 
	 	 	 
	 	 	 
	 	 	 
	 

-10-exv10w1

Exhibit 10.1

EXECUTION COPY

STANDARD DEFINITIONS

     “Account Intermediary” shall have the meaning specified in the preamble to the
Indenture.

     “Accumulation Interval” shall have the meaning specified in the definition of “Cash
Accumulation Event”.

     “ACH Form” shall mean the ACH authorization form executed by Obligors substantially in
the form attached as Exhibit C to the Transfer Agreement.

     “Act” shall have the meaning specified in Section 1.4 of the Indenture.

     “Additional Servicing Compensation” shall mean any late fees related to late payments
on the Timeshare Loans, any non-sufficient funds fees, any processing fees and any Liquidation
Expenses collected by the Servicer and any unpaid out-of-pocket expenses incurred by the Servicer
during the related Due Period.

     “Adjusted Note Balance” shall equal, for any Class of Notes, the Outstanding Note
Balance of such Class of Notes immediately prior to such Payment Date, less any Note Balance
Write-Down Amounts as of such Payment Date; provided, however, to the extent that for purposes of
consents, approvals, voting or other similar act of the Noteholders under any of the Transaction
Documents, “Adjusted Note Balance” shall exclude Notes which are held by Silverleaf or any
Affiliate thereof.

     “Adverse Claim” shall mean any claim of ownership or any lien, security interest,
title retention, trust or other charge or encumbrance, or other type of preferential arrangement
having the effect or purpose of creating a lien or security interest, other than the interests
created under the Indenture in favor of the Indenture Trustee and the Noteholders.

     “Affiliate” shall mean any Person: (a) which directly or indirectly controls, or is
controlled by, or is under common control with such Person; (b) which directly or indirectly
beneficially owns or holds five percent (5%) or more of the voting stock of such Person; or (c) for
which five percent (5%) or more of the voting stock of which is directly or indirectly beneficially
owned or held by such Person. The term “control” means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise.

     “Aggregate Initial Note Balance” is equal to the sum of the Initial Note Balances for
all Classes of Notes.

     “Aggregate Loan Balance” means the sum of the Loan Balances for all Timeshare Loans
(except Defaulted Timeshare Loans).

     “Aggregate Outstanding Note Balance” is equal to the sum of the Outstanding Note
Balances for all Classes of Notes.

 

 

     “Assignment of Mortgage” shall mean, with respect to a Mortgage Loan, a written
assignment of one or more Mortgages from the related Originator or Seller to the Indenture Trustee,
for the benefit of the Noteholders, relating to one or more Timeshare Loans in recordable form, and
signed by an Authorized Officer of all necessary parties, sufficient under the laws of the
jurisdiction wherein the related Timeshare Property is located to give record notice of a transfer
of such Mortgage and its proceeds to the Indenture Trustee.

     “Association” shall mean the timeshare owners’ association responsible for managing a
Resort.

     “Assumption Date” shall have the meaning specified in the Backup Servicing Agreement.

     “Authorized Officer” shall mean, with respect to any corporation, limited liability
company or partnership, the Chairman of the Board, the President, any Vice President, the
Secretary, the Treasurer, any Assistant Secretary, any Assistant Treasurer, Managing Member and
each other officer of such corporation or limited liability company or the general partner of such
partnership specifically authorized in resolutions of the Board of Directors of such corporation or
managing member of such limited liability company to sign agreements, instruments or other
documents in connection with the Transaction Documents on behalf of such corporation, limited
liability company or partnership, as the case may be.

     “Available Funds” shall mean for any Payment Date, (A) all funds on deposit in the
Collection Account after making all transfers and deposits required from (i) the Lockbox Account
pursuant to the Lockbox Agreement, (ii) the General Reserve Account pursuant to Section 3.2(b) of
the Indenture, (iii) the Originator or the Servicer, as the case may be, pursuant to Section 4.5 of
the Indenture, and (iv) the Servicer pursuant to the Indenture, plus (B) all investment earnings on
funds on deposit in the Collection Account from the immediately preceding Payment Date through such
Payment Date, less (C) amounts on deposit in the Collection Account related to collections related
to any Due Periods subsequent to the Due Period related to such Payment Date, less (D) any
Additional Servicing Compensation on deposit in the Collection Account.

     “Backup Servicer” shall mean Wells Fargo Bank, National Association, a national
association, and its permitted successors and assigns.

     “Backup Servicing Agreement” shall mean the backup servicing agreement, dated as of
June 1, 2008, by and among the Issuer, the Servicer, the Backup Servicer and the Indenture Trustee,
as the same may be amended, supplemented or otherwise modified from time to time.

     “Backup Servicing Fee” shall on each Payment Date be equal to the greater of (i)
$2,500 or (ii) the product of one-twelfth of 0.04% and the Aggregate Loan Balance as of the first
day of the related Due Period.

     “Bankruptcy Code” shall mean the federal Bankruptcy Code, as amended (Title 11 of the
United States Code).

     “Benefit Plan” shall mean (A) an “employee benefit plan” as defined in Section 3(3) of
ERISA that is subject to Title I, Part 4 of ERISA, (B) a “plan” as defined in Section 4975(e)(1)

2

 

of the Code, (C) an entity whose underlying assets are deemed to include “plan assets” of any
of the foregoing under United States Department of Labor Regulation §2510.3-101 (as modified by
Section 3(42) of ERISA), by reason of investment by an employee benefit plan or plan in such entity
or (D) a plan that is subject to Similar Law.

     “Benefit Plan Investor” shall mean (A) an “employee benefit plan” within the meaning
of Section 3(3) of ERISA that is subject to ERISA, (B) any “plan” described in Section 4975(e)(1)
of the Code or (C) any entity whose underlying assets include “plan assets” of any of the foregoing
by reason of an employee benefits plan’s or other plan’s investment in such entity.

     “Book-Entry Note” shall mean a beneficial interest in the Notes, ownership and
transfers of which shall be made through book-entries by the Depository.

     “Business Day” shall mean any day other than (i) a Saturday, a Sunday, or (ii) a day
on which banking institutions in New York City, Wilmington, Delaware, the State of Texas, the city
in which the Servicer is located or the city in which the Corporate Trust Office of the Indenture
Trustee is located are authorized or obligated by law or executive order to be closed.

     “Cash Accumulation Event” shall exist on any Determination Date, if (i) the Three
Month Rolling Average of Serviced Timeshare Loan Delinquency Ratios exceeds 10.0% or (ii) the
Cumulative Default Level as of the last day of any Due Period specified below exceeds the following
parameters (each indicated 3-Due Period interval, an “Accumulation Interval”):

	 	 	 	 	 
	Due Period	 	Cumulative Default Level %
	1-3
	 	 	1.18	%
	4-6
	 	 	4.07	%
	7-9
	 	 	6.80	%
	10-12
	 	 	8.81	%
	13-15
	 	 	10.46	%
	16-18
	 	 	12.36	%
	19-21
	 	 	14.21	%
	22-24
	 	 	15.32	%
	25-27
	 	 	16.21	%
	28-30
	 	 	17.05	%
	31-33
	 	 	18.07	%
	34-36
	 	 	18.71	%
	37-39
	 	 	19.16	%
	40-42
	 	 	19.51	%
	43 and thereafter
	 	 	19.60	%

     The Cash Accumulation Event described in clause (i) above will continue until, on the last day
of each of the two Due Periods immediately following the Due Period during which such

3

 

Cash Accumulation Event occurred, the Three Month Rolling Average of Serviced Timeshare Loan
Delinquency Ratios does not exceed 10.0%. The Cash Accumulation Event described in clause (ii)
above shall be deemed to be continuing until, on the last Business Day of each of the two
Accumulation Intervals immediately following the Accumulation Interval during which such Cash
Accumulation Event occurred, the Cumulative Default Level remains below the limits described above.

     “Cede & Co.” shall mean the initial registered holder of the Notes, acting as nominee
of The Depository Trust Company.

     “Class” shall mean, as the context may require, any of the Class A Notes, Class B
Notes, Class C Notes, Class D Notes, Class E Notes, Class F Notes or Class G Notes.

     “Class A Notes” shall have the meaning specified in the Recitals of the Issuer in the
Indenture.

     “Class A Principal Distribution Amount” shall mean, with respect to any Payment Date,
the Principal Distribution Amount payable to the Holders of the Class A Notes on such Payment Date.

     “Class B Notes” shall have the meaning specified in the Recitals of the Issuer in the
Indenture.

     “Class B Principal Distribution Amount” shall mean, with respect to any Payment Date,
the Principal Distribution Amount payable to the Holders of the Class B Notes on such Payment Date.

     “Class C Notes” shall have the meaning specified in the Recitals of the Issuer in the
Indenture.

     “Class C Principal Distribution Amount” shall mean, with respect to any Payment Date,
the Principal Distribution Amount payable to the Holders of the Class C Notes on such Payment Date.

     “Class D Notes” shall have the meaning specified in the Recitals of the Issuer in the
Indenture.

     “Class D Principal Distribution Amount” shall mean, with respect to any Payment Date,
the Principal Distribution Amount payable to the Holders of the Class D Notes on such Payment Date.

     “Class E Notes” shall have the meaning specified in the Recitals of the Issuer in the
Indenture.

     “Class E Principal Distribution Amount” shall mean, with respect to any Payment Date,
the Principal Distribution Amount payable to the Holders of the Class E Notes on such Payment Date.

4

 

     “Class F Notes” shall have the meaning specified in the Recitals of the Issuer in the
Indenture.

     “Class F Principal Distribution Amount” shall mean, with respect to any Payment Date,
the Principal Distribution Amount payable to the Holders of the Class F Notes on such Payment Date.

     “Class G Notes” shall have the meaning specified in the Recitals of the Issuer in the
Indenture.

     “Class G Principal Distribution Amount” shall mean, with respect to any Payment Date,
the Principal Distribution Amount payable to the Holders of the Class G Notes on such Payment Date.

     “Clearstream” shall mean Clearstream Banking, société anonyme, a limited liability
company organized under the laws of Luxembourg.

     “Closing Date” shall mean June 6, 2008.

     “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time and
any successor statute, together with the rules and regulations thereunder.

     “Collateral” shall have the meaning specified in the Granting Clause of the Indenture.

     “Collateral Liquidation Distribution Amount Shortfall” shall have the meaning
specified in Section 1, paragraph (iv) of the Guaranty.

     “Collateral Liquidation Event” shall have the meaning specified in Section 6.6(b) of
the Indenture.

     “Collection Account” shall mean the account established and maintained by the
Indenture Trustee pursuant to Section 3.2(a) of the Indenture.

     “Collection Policy” shall mean the collection policies of the initial servicer in
effect on the Closing Date, as may be amended from time to time in accordance with the Servicing
Standard.

     “Completed Unit” shall mean a Unit at a Resort which has been fully constructed and
furnished, has received a valid permanent certificate of occupancy (if required under applicable
laws, rules or regulations), is ready for occupancy and is subject to a time share declaration.

     “Confidential Information” means information obtained by any Noteholder including,
without limitation, the Preliminary Confidential Offering Circular dated May 29, 2008 or the
Confidential Offering Circular dated June 5, 2008 related to the Notes and the Transaction
Documents, that is proprietary in nature and that was clearly marked or labeled as being
confidential information of the Issuer, the Servicer or their Affiliates, provided that such term
does not include information that (a) was publicly known or otherwise known to the Noteholder prior
to the time of such disclosure, (b) subsequently becomes, publicly known through no act or

5

 

omission by such Noteholder or any Person acting on its behalf, (c) otherwise becomes known to
the Noteholder other than through disclosure by the Issuer, the Servicer or their Affiliates, (d)
any other public disclosure authorized by the Issuer or the Servicer, the U.S. Federal income tax
treatment of the offering of the notes and any fact that may be relevant to understanding the tax
treatment (the “Tax Structure”) and all materials of any kind (including opinions or other tax
analyses) that are provided to the Issuer, the Initial Purchaser and each prospective investor
relating to such tax treatment and Tax Structure.

     “Confidential Offering Circular” shall mean the confidential offering circular dated
June 5, 2008 related to the Notes and Transaction Documents.

     “Continued Errors” shall have the meaning specified in Section 5.4 of the Indenture.

     “Contribute” shall have the meaning specified in Section 2(a) of the Transfer
Agreement.

     “Contribution” shall have the meaning specified in Section 2(a) of the Transfer
Agreement.

     “Controlling Person” shall mean a person (other than a Benefit Plan Investor) that has
discretionary authority or control with respect to the assets of the Issuer, or who provides
investment advice for a fee (direct or indirect) with respect to such assets, or any affiliate of
such a person.

     “Corporate Trust Office” shall mean the office of the Indenture Trustee located in the
State of Minnesota, which office is at the address set forth in Section 13.3 of the Indenture.

     “Credit Policy” shall mean the credit and underwriting policies of the Originator in
effect on the Closing Date.

     “Cumulative Default Level” shall mean for any date, an amount equal to the sum of the
Loan Balances of all Timeshare Loans that became Defaulted Timeshare Loans since the Cut-Off Date
(less the Loan Balances of Defaulted Timeshare Loans that subsequently became current prior to such
date of determination which are still subject to the lien of the Indenture at such time), divided
by the Cut-Off Date Aggregate Loan Balance (expressed as a percentage).

     “Custodial Agreement” shall mean the custodial agreement, dated as of June 1, 2008 by
and among the Issuer, the Servicer, the Backup Servicer, the Indenture Trustee and Custodian, as
the same may be amended, supplemented or otherwise modified from time to time providing for the
custody and maintenance of the Timeshare Loan Files relating to the Timeshare Loans.

     “Custodian” shall mean Wells Fargo Bank, National Association, a national banking
association, or its permitted successors and assigns.

     “Custodian Fees” shall mean for each Payment Date, the fee payable by the Issuer to
the Custodian in accordance with the Custodial Agreement.

6

 

     “Cut-Off Date” shall mean, with respect to (i) the Initial Timeshare Loans, the
Initial Cut-Off Date, and (ii) any Qualified Substitute Timeshare Loan, the related Subsequent
Cut-Off Date.

     “Cut-Off Date Aggregate Loan Balance” shall mean the aggregate of the Loan Balances,
as of the Initial Cut-Off Date, of all Timeshare Loans pledged pursuant to the Indenture on the
Closing Date.

     “Cut-Off Date Loan Balance” shall mean the Loan Balance of a Timeshare Loan on the
related Cut-Off Date.

     “Default” shall mean an event which, but for the passage of time, would constitute an
Event of Default under the Indenture.

     “Default Acceleration Event” shall have the meaning specified in Section 6.6(b) of the
Indenture.

     “Default Level” means, for any Due Period, the sum of the outstanding principal
balances due under or in respect of all Timeshare Loans that became Defaulted Loans during such Due
Period and have not been repurchased or substituted by the last day of such Due Period (less the
Loan Balances of Defaulted Timeshare Loans that subsequently became current during such Due Period
which are still subject to the lien of the Indenture at such time), divided by the Aggregate Loan
Balance on the first day of such Due Period.

     “Default Purchase Price” shall be equal to the greater of (i) the fair market value of
such Default Timeshare Loan as determined by the Originator in its commercially reasonable judgment
or (ii) fifteen percent (15%) of the original acquisition price paid for the Timeshare Property by
the Obligor under such Defaulted Timeshare Loan, as limited by the Optional Purchase Limit.

     “Defaulted Timeshare Loan” is any Timeshare Loan for which any of the earliest
following events may have occurred: (i) the Servicer has commenced cancellation or forfeiture
actions on the related Timeshare Loan after collection efforts have failed in accordance with its
credit and collection policies, (ii) as of the last day of any Due Period, all or part of a
scheduled payment under the Timeshare Loan is more than 120 days delinquent from the due date, or
(iii) the Servicer obtains actual knowledge that a bankruptcy event has occurred with respect to
the related Obligor.

     “Defective Timeshare Loan” shall have the meaning specified in Section 4.5 of the
Indenture.

     “Deferred Interest Amount” shall mean, with respect to a Class of Notes and a Payment
Date, the sum of (i) interest accrued at the related Note Rate during the related Interest Accrual
Period on such Note Balance Write-Down Amounts applied in respect of such Class and (ii) any unpaid
Deferred Interest Amounts from any prior Payment Date, together with interest thereon at the
applicable Note Rate from the date any such Note Balance Write-Down Amount was applied in respect
of such Class, to the extent permitted by law.

7

 

     “Definitive Note” shall have the meaning specified in Section 2.2 of the Indenture.

     “Delinquent Timeshare Loan” means, with respect to any Timeshare Loan as of any date,
a Timeshare Loan under which all or part of a scheduled payment is 31 or more days delinquent from
the due date and which is not a Defaulted Timeshare Loan.

     “Depository” shall mean an organization registered as a “clearing agency” pursuant to
Section 17A of the Exchange Act. The initial Depository shall be The Depository Trust Company.

     “Depository Agreement” shall mean the letter of representations dated as of June 5,
2008, by and among the Issuer, the Indenture Trustee and the Depository.

     “Depository Participant” shall mean a broker, dealer, bank, other financial
institution or other Person for whom from time to time a Depository effects book-entry transfers
and pledges securities deposited with the Depository.

     “Determination Date” shall mean, with respect to a Payment Date, the day that is five
Business Days prior to such Payment Date.

     “Direction Letter” shall have the meaning set forth in the Escrow Agreement.

     “DTC” shall mean The Depository Trust Company, and its permitted successors and
assigns.

     “Due Period” shall mean with respect to any Payment Date, the immediately preceding
calendar month; for the Initial Payment Date, the period from and including April 24, 2008 to May
31, 2008.

     “Eligible Bank Account” shall mean a segregated account, which may be an account
maintained with the Indenture Trustee, which is either (a) maintained with a depositary institution
or trust company whose long-term unsecured debt obligations are rated at least “A” by Fitch and
“A2” by Moody’s and whose short-term unsecured obligations are rated at least “A-1” by Fitch and
“P-1” by Moody’s; or (b) a trust account or similar account maintained at the corporate trust
department of the Indenture Trustee.

     “Eligible Investments” shall mean one or more of the following:

     (a) obligations of, or guaranteed as to timely payment of principal and interest by,
the United States or any agency or instrumentality thereof when such obligations are backed
by the full faith and credit of the United States;

     (b) federal funds, certificates of deposit, time deposits and bankers’ acceptances,
each of which shall not have an original maturity of more than 90 days, of any depository
institution or trust company incorporated under the laws of the United States or any state;
provided that the long-term unsecured debt obligations of such depository institution or
trust company at the date of acquisition thereof have been rated

8

 

no lower than “A2” by Moody’s; and provided, further, that the short-term obligations
of such depository institution or trust company shall be rated “A-1+” by S&P;

     (c) commercial paper or commercial paper funds (having original maturities of not more
than 90 days) of any corporation incorporated under the laws of the United States or any
state thereof; provided that any such commercial paper or commercial paper funds shall be
rated in the highest short-term rating category by each Rating Agency;

     (d) any no-load money market fund rated (including money market funds managed or
advised by the Indenture Trustee or an Affiliate thereof) “AAAm/AAAm-G” or higher by S&P;
provided that, Eligible Investment obligations purchased from funds in the Eligible Bank
Accounts shall include only such or securities that either may be redeemed daily or mature
no later than the Business Day next preceding the next Payment Date;

     (e) demand and time deposits in, certificates of deposit of, bankers’ acceptances
issued by, or federal funds sold by any depository institution or trust company (including
the Indenture Trustee or any Affiliate of the Indenture Trustee, acting in its commercial
capacity) incorporated under the laws of the United States of America or any State thereof
and subject to supervision and examination by federal and/or state authorities, so long as,
at the time of such investment, the commercial paper or other short-term deposits of such
depository institution or trust company are rated at least P-1 by Moody’s and at least A-1
by S&P;

and provided, further, that (i) no instrument shall be an Eligible Investment if such instrument
evidences a right to receive only interest payments with respect to the obligations underlying such
instrument, and (ii) no Eligible Investment may be purchased at a price in excess of par. Eligible
Investments may include those Eligible Investments with respect to which the Indenture Trustee or
an Affiliate thereof provides services.

     “Eligible Timeshare Loan” shall mean a Timeshare Loan which meets all of the criteria
set forth in Schedule I of the Transfer Agreement and Schedule I of the Loan Sale
Agreement.

     “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

     “Errors” shall have the meaning specified in Section 5.4 of the Indenture.

     “Escrow Agent” shall mean Chicago Title Insurance Company.

     “Escrow Agreement” shall mean the escrow and closing agreement, dated as of June 1,
2008, by and among the Servicer, the Issuer, the Indenture Trustee, the Custodian, and the Escrow
Agent, as the same may be amended or supplemented from time to time.

     “Euroclear” shall mean Euroclear Bank S.A./N.V., as operator of the Euroclear System,
or its successor in such capacity.

     “Event of Default” shall have the meaning specified in Section 6.1 of the Indenture.

9

 

     “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

     “Finance Agreement” shall mean a purchase and finance agreement between an Obligor and
the Originator pursuant to which such Obligor finances the purchase of Oak N’ Spruce Certificates.

     “Fitch” shall mean Fitch Ratings, a subsidiary of Fitch, Inc.

     “Force Majeure Event” shall mean the occurrence at a single Resort of damage to over
25% of the Units as the result of a fire, hurricane, earthquake, flood, tornado, landslide, tsunami
and/or impact event.

     “Force Majeure Loan” shall mean a Timeshare Loan that has been the subject of a Force
Majeure Event.

     “Force Majeure Purchase Limit” shall mean, with respect to the purchase of a Force
Majeure Loan by the Originator, on any date, (x) 10% of the Cut-Off Date Aggregate Loan Balance
less (y) the aggregate Loan Balances of the Force Majeure Loans previously purchased by the
Originator.

     “Force Majeure Purchase Price” shall mean the fair market value of a Force Majeure
Loan as determined by the Originator in its commercially reasonable judgment.

     “Foreclosure Properties” shall have the meaning specified in Section 5.3(b) of the
Indenture.

     “General Reserve Account” shall mean the account maintained by the Indenture Trustee
pursuant to Section 3.2(b) of the Indenture.

     “General Reserve Account Initial Deposit” shall mean an amount equal to 5.00% of the
Aggregate Loan Balance as of the Initial Cut-Off Date.

     “General Reserve Account Required Balance” shall mean the lesser of (I) (a) if no Cash
Accumulation Event has occurred and is continuing, the greater of (x) 3.00% of the Cut-Off Date
Aggregate Loan Balance or (y) 7.50% of the Aggregate Loan Balance at such time and (b) if a Cash
Accumulation Event has occurred and is continuing, the greater of (x) 5.00% of the Cut-Off Date
Aggregate Loan Balance or (y) the product of (i) the Aggregate Loan Balance as of the last day of
the immediately preceding Due Period and (ii) 20.00% and (II) the Outstanding Note Balance on such
Payment Date after the distributions of principal in respect of the Notes on such Payment Date.

     “Global Note” shall have the meaning specified in Section 2.2 of the Indenture.

     “Governmental Authority” shall mean any nation or government, any state or other
political subdivision thereof and any entity exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government.

     “Guarantor” shall mean Silverleaf in its capacity as guarantor under the Guaranty.

10

 

     “Guaranty” shall mean the guaranty, dated as of June 1, 2008, issued by the Guarantor.

     “Grant” shall mean to grant, bargain, convey, assign, transfer, mortgage, pledge,
create and grant a security interest in and right of set-off against, deposit, set over and
confirm.

     “Highest Lawful Rate” shall have the meaning specified in Section 3 of the Transfer
Agreement and Section 3 of the Loan Sale Agreement, as applicable.

     “Holder” or “Noteholder” shall mean a holder of a Class A Note, a Class B
Note, a Class C Note, a Class D Note, a Class E Note, a Class F Note or a Class G Note.

     “Indebtedness” means, with respect to any Person at any time, (a) indebtedness or
liability of such Person for borrowed money whether or not evidenced by bonds, debentures, notes or
other instruments, or for the deferred purchase price of property or services (including trade
obligations); (b) obligations of such Person as lessee under leases which should be, in accordance
with generally accepted accounting principles, recorded as capital leases; (c) current liabilities
of such Person in respect of unfunded vested benefits under plans covered by Title IV of ERISA; (d)
obligations issued for or liabilities incurred on the account of such Person; (e) obligations or
liabilities of such Person arising under acceptance facilities; (f) obligations of such Person
under any guarantees, endorsements (other than for collection or deposit in the ordinary course of
business) and other contingent obligations to purchase, to provide funds for payment, to supply
funds to invest in any Person or otherwise to assure a creditor against loss; (g) obligations of
such Person secured by any lien on property or assets of such Person, whether or not the
obligations have been assumed by such Person; or (h) obligations of such Person under any interest
rate or currency exchange agreement.

     “Indemnified Amounts” shall have the meaning specified in Section 8 of the Transfer
Agreement and Section 8 of the Loan Sale Agreement, as applicable.

     “Indemnified Parties” shall have the meaning specified in Section 8 of the Transfer
Agreement and Section 8 of the Loan Sale Agreement, as applicable.

     “Indenture” shall mean the indenture, dated as of June 1, 2008, by and among the
Issuer, the Servicer, the Backup Servicer and the Indenture Trustee.

     “Indenture Trustee” shall mean Wells Fargo Bank, National Association, a national
banking association, not in its individual capacity but solely as Indenture Trustee under the
Indenture, and any successor as set forth in Section 7.9 of the Indenture.

     “Indenture Trustee Fee” shall mean for each Payment Date, the product of one-twelfth
and $6,000.

     “Initial Cut-Off Date” shall mean the close of business on April 23, 2008.

     “Initial Note Balance” shall mean with respect to the Class A Notes, the Class B
Notes, the Class C Notes, the Class D Notes, the Class E Notes, the Class F Notes and the Class G
Notes, $45,292,000, $15,634,000, $22,411,000, $9,326,000, $8,655,000 $8,521,000 and $5,569,000,
respectively.

11

 

     “Initial Payment Date” shall mean the Payment Date occurring in June, 2008.

     “Initial Purchaser” shall mean UBS Securities LLC.

     “Intended Tax Characterization” shall have the meaning specified in Section 4.2(b) of
the Indenture.

     “Interest Accrual Period” shall mean with respect to any Payment Date the preceding
calendar month.

     “Interest Distribution Amount” shall equal, for a Class of Notes and on any Payment
Date, the sum of (i) interest accrued during the related Interest Accrual Period at the related
Note Rate on the Outstanding Note Balance of such Class of Notes immediately prior to such Payment
Date (or, if any Note Balance Write-Down Amounts have been applied to such Class of Notes, the
Adjusted Note Balance of such Class of Notes) and (ii) the amount of unpaid Interest Distribution
Amounts from prior Payment Dates for such Class of Notes, plus, to the extent permitted by
applicable law, interest on such unpaid amount at the related Note Rate. The Interest Distribution
Amount shall be calculated on the basis of a 360-day year consisting of twelve 30-day months.

     “Interest Expense” means the aggregate consolidated expense of Silverleaf and its
consolidated subsidiaries for interest on Indebtedness, including, without limitation, amortization
of original issue discount, incurrence fees (to the extent included in interest expense), the
interest portion of any deferred payment obligation and the interest component of any capital lease
obligation.

     “Investment Company Act” shall have the meaning set forth in Section 2(l) of the Note
Purchase Agreement.

     “Issuer” shall mean Silverleaf Finance VI, LLC, a limited liability company formed
under the laws of the State of Delaware.

     “Issuer Order” shall mean a written order or request delivered to the Indenture
Trustee and signed in the name of the Issuer by an Authorized Officer of the Issuer.

     “Knowledge” shall mean (a) as to any natural Person, the actual awareness of the fact,
event or circumstance at issue or receipt of notification by proper delivery of such fact, event or
circumstance and (b) as to any Person that is not a natural Person, the actual awareness of the
fact, event or circumstance at issue by a Responsible Officer of such Person or receipt, by a
Responsible Officer of such Person, of notification by proper delivery of such fact, event or
circumstance.

     “Lien” shall mean any mortgage, pledge, hypothecation, assignment for security,
security interest, claim, participation, encumbrance, levy, lien or charge.

     “Limited Liability Company Agreement” shall mean the amended and restated limited
liability company agreement of the Issuer, dated as of June 2, 2008 and effective as of April 3,
2008.

12

 

     “Liquidation” means with respect to any Timeshare Loan, the sale or compulsory
disposition of the related Timeshare Property, following foreclosure, forfeiture or other
enforcement action or the taking of a deed-in-lieu of foreclosure, to a Person other than the
Servicer or an Affiliate thereof, except in accordance with Section 5.3(b)(iv) of the Indenture.

     “Liquidation Expenses” shall mean, with respect to a Defaulted Timeshare Loan, as of
any date of determination, any out-of-pocket expenses (exclusive of overhead expenses) incurred by
the Servicer in connection with the performance of its obligations under Section 5.3(b) in the
Indenture, including, but not limited to, (i) any foreclosure or forfeiture and other repossession
expenses incurred with respect to such Timeshare Loan, (ii) actual commissions and marketing and
sales expenses incurred by the Servicer with respect to the liquidation of the related Timeshare
Property and (iii) any other fees and expenses reasonably applied or allocated in the ordinary
course of business with respect to the Liquidation of such Defaulted Timeshare Loan (including any
assessed and unpaid Association fees and real estate taxes).

     “Liquidation Proceeds” means with respect to the Liquidation of any Timeshare Loan,
the amounts actually received by the Servicer in connection with such Liquidation.

     “Loan Balance” shall mean, for any date of determination, the outstanding principal
balance due under or in respect of a Timeshare Loan (including a Defaulted Timeshare Loan).

     “Loan Sale Agreement” shall mean the loan sale agreement, dated as of June 1, 2008, by
and among Silverleaf Finance IV, LLC, the Servicer and the Issuer pursuant to which certain of the
Timeshare Loans are transferred to the Issuer.

     “Lockbox Account” shall mean the account maintained on behalf of the Indenture Trustee
by the Lockbox Bank pursuant to the Lockbox Agreement, which shall be a non-interest bearing
account.

     “Lockbox Agreement” shall mean the Blocked Account Control Agreement, dated as of May
19, 2008, by and among the Lockbox Processor, the Issuer, the Servicer and the Indenture Trustee,
as such agreement may be amended, supplemented or otherwise modified from time to time in
accordance with the terms thereof, unless the Indenture Trustee shall cease to be a party
thereunder, or such agreement shall be terminated in accordance with its terms, in which event
“Lockbox Agreement” shall mean such other agreement, in form and substance acceptable to
the Indenture Trustee, among the Servicer, the Issuer, the Lockbox Processor and any other
appropriate parties.

     “Lockbox Bank” means as of any date a depository institution named by the Servicer and
acceptable to the Indenture Trustee at which each Lockbox Account is established and maintained as
of such date.

     “Lockbox Fee” shall mean on each Payment Date, the fee payable by the Issuer to the
Lockbox Bank in accordance with the Lockbox Agreement.

     “Lockbox Processor” shall mean JPMorgan Chase Bank, N.A., a national banking
association, and its successors and assigns.

13

 

     “Management Agreement” shall mean that certain Management Agreement between the
Managing Entity and each Association, dated as of March 28, 1990, as amended from time to time.

     “Managing Entity” shall mean Silverleaf Club, a Texas not-for-profit corporation, in
its capacity as manager for all Associations.

     “Misdirected Deposits” shall mean such payments that have been deposited to the
Collection Account in error.

     “Monthly Servicer Report” shall have the meaning specified in Section 5.5 of the
Indenture.

     “Moody’s” shall mean Moody’s Investors Service, Inc.

     “Mortgage” shall mean, with respect to a Mortgage Loan, any purchase money mortgage,
deed of trust, purchase money deed of trust or mortgage deed creating a first lien on a Timeshare
Property to secure debt granted by an Obligor to the Originator with respect to the purchase of
such Timeshare Property and otherwise encumbering the related Timeshare Property to secure payments
or other obligations under such Timeshare Loan.

     “Mortgage Loan” shall mean a Timeshare Loan originated by the Originator and evidenced
by a Mortgage Note and secured by a first Mortgage on a fractional fee simple timeshare interest in
a Unit.

     “Mortgage Note” shall mean, with respect to a Mortgage Loan, the original, executed
promissory note evidencing the indebtedness of an Obligor under a Mortgage Loan, together with any
rider, addendum or amendment thereto, or any renewal, substitution or replacement of such note.

     “Net Liquidation Proceeds” shall mean with respect to a Liquidation, the positive
difference between Liquidation Proceeds and Liquidation Expenses.

     “Non-Sequential Distribution Amount Shortfall” shall have the meaning specified in
Section 1, paragraph (ii) of the Guaranty.

     “Note Balance Write-Down Amount” shall mean with respect to any Payment Date, an
amount equal to the excess, if any, of the Aggregate Outstanding Note Balance (immediately after
the distribution of Available Funds on such Payment Date) over the sum of (A) the Aggregate Loan
Balance as of the end of the Due Period related to such Payment Date and (B) amounts on deposit in
the General Reserve Account, if any.

     “Note Owner” shall mean, with respect to a Book-Entry Note, the Person who is the
beneficial owner of such Book-Entry Note, as reflected on the books of the Depository or on the
books of a Person maintaining an account with such Depository (directly or as an indirect
participant, in accordance with the rules of such Depository).

14

 

     “Note Purchase Agreement” shall mean that certain note purchase agreement dated May
30, 2008 by and among the Initial Purchaser, Silverleaf, the Issuer, and Merrill Lynch, Pierce,
Fenner & Smith Incorporated.

     “Note Rate” shall mean with respect to the Class A Notes, the Class B Notes, the Class
C Notes, the Class D Notes, the Class E Notes, the Class F Notes and the Class G Notes, 6.222%,
7.708%, 8.000%, 8.000%, 8.000%, 8.000% and 8.000% respectively.

     “Note Register” shall have the meaning specified in Section 2.4(a) of the Indenture.

     “Note Registrar” shall have the meaning specified in Section 2.4(a) of the Indenture.

     “Noteholder” shall mean any holder of a Note of any Class.

     “Notes” shall mean, collectively, the Class A Notes, the Class B Notes, the Class C
Notes, the Class D Notes, the Class E Notes, the Class F Notes and the Class G Notes.

     “Oak N’ Spruce Loan” shall mean a Timeshare Loan relating to the Oak N’ Spruce Resort
and evidenced by a Finance Agreement.

     “Oak N’ Spruce Certificate” shall mean a certificate of beneficial interest in Oak N’
Spruce Resort Trust which entitles the owner thereof the right to use and occupy a specifically
designated Unit at a fixed period of time each year at the Oak N’ Spruce Resort.

     “Oak N’ Spruce Financing Statement” means, with respect to an Oak N’ Spruce Loan, a
UCC financing statement (UCC-1) in recordable form which (i) names as “debtor” the Obligor on the
underlying Oak N’ Spruce Loan, (ii) names Silverleaf as “secured party/assignor,” (iii) names as
“secured party/assignee” the Indenture Trustee for the benefit of the Noteholders and (iv) is
sufficient under applicable laws to give record notice of the pledge of such Oak N’ Spruce Loan and
its proceeds to the Indenture Trustee and its assigns.

     “Oak N’ Spruce Financing Statement Amendment” means, with respect to an Oak N’ Spruce
Loan, a UCC financing statement amendment (UCC-3) in recordable form which (i) amends the initial
UCC financing statement filed with respect to such Oak N’ Spruce Loan to evidence the assignment of
the loan to the Indenture Trustee for the benefit of the Noteholders as “secured party/assignee,”
(ii) names the Prior Secured Party as “assignor,” (iii) names the Obligor on the underlying Oak N’
Spruce Loan as “debtor,” and (iv) is sufficient under applicable laws to give record notice of a
transfer of such Oak N’ Spruce Loan and its proceeds to the Indenture Trustee and its assigns.

     “Oak N’ Spruce Resort” shall mean the timeshare resort and related facilities located
in Lee, Massachusetts and operated by the Originator.

     “Oak N’ Spruce Resort Trust” shall mean the trust established under the Oak N’ Spruce
Trust Agreement.

     “Oak N’ Spruce Trust Agreement” shall mean, collectively, that certain Sixth Amended
and Restated Declaration of Trust of Oak N’ Spruce Resort Trust, dated as of September 20,

15

 

2004, as amended, restated or otherwise modified from time to time, together with all other
agreements, documents and instruments governing the operation of the Oak N’ Spruce Resort Trust,
including without limitation, the Time Share Supplement to the Sixth Amended and Restated
Declaration of Trust of Oak N’ Spruce Resort Trust, dated September 20, 2004 and the Recreation and
Use Easement, dated September 20, 2000, as any such documents may be amended, restated or otherwise
modified from time to time.

     “Oak N’ Spruce Trustee” shall mean Silverleaf Berkshires, Inc., a Texas corporation,
in its capacity as trustee under the Oak N’ Spruce Trust Agreement, and its permitted successors
and assigns.

     “Obligor” shall mean the related obligor under a Timeshare Loan.

     “Officer’s Certificate” shall mean a certificate executed by a Responsible Officer of
the related party.

     “Opinion of Counsel” shall mean a written opinion of counsel, in each case acceptable
to the addressees thereof.

     “Optional Purchase Limit” shall mean, on any date, an amount equal to (x) 20% of the
Cut-Off Date Aggregate Loan Balance less (y) the aggregate Loan Balances (as of the related
purchase dates) of all Defaulted Timeshare Loans previously purchased by the Originator and the
Servicer pursuant to the Transfer Agreement.

     “Optional Redemption Date” shall mean the first date in which the Aggregate
Outstanding Note Balance is less than or equal to 10% of the Aggregate Initial Note Balance of all
Classes of Notes.

     “Optional Substitution Limit” shall mean, on any date, an amount equal to (x) 10% of
the Cut-Off Date Aggregate Loan Balance less (y) the aggregate Loan Balances (as of the related
substitution dates) of all Defaulted Timeshare Loans previously substituted by the Originator and
the Servicer pursuant to the Transfer Agreement.

     “Originator” shall mean Silverleaf Resorts, Inc., in its capacity as the originator of
the Timeshare Loans.

     “Orlando Breeze Management Agreement” shall mean that certain Management Agreement
between the Originator and the Association of the Orlando Breeze Resort, dated as of January 13,
2005, as amended from time to time.

     “Outstanding” shall mean, with respect to the Notes, as of any date of determination,
all Notes theretofore authenticated and delivered under the Indenture except:

     (a) Notes theretofore canceled by the Indenture Trustee or delivered to the Indenture
Trustee for cancellation;

16

 

     (b) Notes or portions thereof for whose payment money in the necessary amount has been
theretofore irrevocably deposited with the Indenture Trustee in trust for the holders of
such Notes; and

     (c) Notes in exchange for or in lieu of other Notes, which other Notes have been
authenticated and delivered pursuant to the Indenture unless proof satisfactory to the
Indenture Trustee is presented that any such Notes are held by a Person in whose hands the
Note is a valid obligation; provided; however, that in determining whether the holders of
the requisite percentage of the Outstanding Note Balance of the Notes have given any
request, demand, authorization, direction, notice, consent, or waiver hereunder, Notes owned
by the Issuer or any Affiliate of the Issuer shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Indenture Trustee shall be protected in
relying upon any such request, demand, authorization, direction, notice, consent, or waiver,
only Notes that a Responsible Officer of the Indenture Trustee actually has notice are so
owned shall be so disregarded.

     “Outstanding Note Balance” shall mean as of any date of determination and Class of
Notes, the Initial Note Balance of such Class of Notes less the sum of Principal Distribution
Amounts actually distributed to the Holders of such Class of Notes as of such date; provided,
however, to the extent that for purposes of consents, approvals, voting or other similar act of the
Noteholders under any of the Transaction Documents, “Outstanding Note Balance” shall exclude Notes
which are held by Silverleaf or any Affiliate thereof.

     “Paydown Letter” shall have the meaning set forth in the Escrow Agreement.

     “Paying Agent” shall mean any Person authorized under the Indenture to make the
distributions required under Section 3.4 of the Indenture, which such Person initially shall be the
Indenture Trustee.

     “Payment Date” shall mean the 15th day of each month, or, if such date is
not a Business Day, then the next succeeding Business Day, commencing on the Initial Payment Date.

     “Payment Default Event” shall have occurred if (i) each Class of Notes shall become
due and payable pursuant to Section 6.2(a) of the Indenture or (ii) each Class of Notes shall
otherwise become due and payable following an Event of Default under the Indenture and the
Aggregate Loan Balance of the Timeshare Loans is less than the Aggregate Outstanding Note Balance
as a result of a default on one or more of the Timeshare Loans.

     “Percentage Interest” shall mean, with respect to any Class of Notes as of any date of
determination, the quotient, expressed as a percentage, the numerator of which is the Adjusted Note
Balance of such Class of Notes and the denominator of which is the Aggregate Loan Balance. The
initial Percentage Interest with respect to the Class A Notes, the Class B Notes, the Class C
Notes, the Class D Notes, the Class E Notes, the Class F Notes and the Class G Notes is equal to
approximately 33.75%, 11.65%, 16.70%, 6.95%, 6.45%, 6.35% and 4.15%, respectively.

     “Permitted Liens” shall mean (a) with respect to Timeshare Loans included in the
Collateral, Liens for state, municipal or other local taxes if such taxes shall not at the time be
due

17

 

and payable, (ii) Liens in favor of the Issuer created pursuant to the Transaction Documents,
and (iii) Liens in favor of the Indenture Trustee created pursuant to the Indenture; (b) with
respect to the related Timeshare Property, materialmen’s, warehousemen’s, mechanic’s and other
Liens arising by operation of law in the ordinary course of business for sums not due, (ii) Liens
for state, municipal or other local taxes if such taxes shall not at the time be due and payable,
(iii) Liens in favor of the Issuer pursuant to the Transfer Agreement and the Loan Sale Agreement
and (iv) the Obligor’s interest in the Timeshare Property under the Timeshare Loan whether pursuant
to the Oak N’ Spruce Trust Agreement or otherwise; and (c) with respect to Timeshare Loans and
Related Security included in the Collateral, any and all rights of the Beneficiaries and the Other
Beneficiaries referred to in the Oak N’ Spruce Trust Agreement under the Oak N’ Spruce Trust
Agreement.

     “Person” means an individual, general partnership, limited partnership, limited
liability partnership, corporation, business trust, joint stock company, limited liability company,
trust, unincorporated association, joint venture, Issuer, Governmental Authority, or other entity
of whatever nature.

     “Predecessor Servicer Work Product” shall have the meaning specified in Section 5.4(b)
of the Indenture.

     “Preliminary Confidential Offering Circular” shall mean the preliminary confidential
offering circular dated May 29, 2008 related to the Notes and Transaction Documents.

     “Prior Secured Party” shall have the meaning set forth in the Escrow and Closing
Agreement.

     “Principal Distribution Amount” shall equal for any Payment Date and Class of Notes,
the sum of the following:

	 	(i)	 	the product of (a) such Class’ Percentage Interest and (b) the amount of
principal collected in respect of each Timeshare Loan during the related Due Period
(including, but not limited to, principal in respect of scheduled payments, partial
prepayments, prepayments in full, liquidations, Substitution Shortfall Amounts, Default
Purchase Prices, Force Majeure Purchase Prices and Repurchase Prices, if any, but
excluding principal received in respect of Timeshare Loans that became Defaulted
Timeshare Loans during prior Due Periods) or, if the Cut-Off Date for a Timeshare Loan
shall have occurred during the related Due Period, the amount of principal collected in
respect of such Timeshare Loan after such Cut-Off Date;
	 
	 	(ii)	 	the product of (a) such Class’ Percentage Interest and (b) the aggregate Loan
Balance of all Timeshare Loans which became Defaulted Timeshare Loans during the
related Due Period, less the principal portion, of Default Purchase Prices paid in
respect of Defaulted Timeshare Loans during the related Due Period; and
	 
	 	(iii)	 	any unpaid Principal Distribution Amounts for such Class from prior Payment
Dates.

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     “Prorata Payment Event” shall exist (a) if (i) on a Determination Date during the
first seven Due Periods, the Default Level exceeds 0.75% or (ii) on a Determination Date after the
seventh Due Period, the average of the Default Levels for the three most recently ended Due Periods
exceeds 1.50% or (b) so long as the Servicer has not opted to redeem the Notes on the Payment Date
occurring on or after the 60th day following the Optional Redemption Date; provided, however, that
a Prorata Payment Event shall not exist on any Determination Date on which a Sequential Pay Event
or a Default Acceleration Event exists. A Prorata Payment Event occurring as a result of clause
(a)(i) above, during the first seven Due Periods shall continue until the later of (a) the end of
the seventh Due Period and (b) the date on which the Default Level is below 1.50% for three
consecutive Due Periods. A Prorata Payment Event occurring as a result of clause (a)(ii) above
shall continue until the Default Level is below 1.50% for three consecutive Due Periods. A Prorata
Payment Event occurring as a result of clause (b) above shall continue until the Notes have been
paid in full.

     “Qualified Substitute Timeshare Loan” shall mean a Timeshare Loan (i) that, when
aggregated with other Qualified Substitute Timeshare Loans being substituted on such Transfer Date,
has a Loan Balance, after application of all payments of principal due and received during or prior
to the month of substitution, not in excess of the Loan Balance of the Timeshare Loan being
substituted on the related Transfer Date, (ii) that complies, as of the related Transfer Date, with
each of the representations and warranties contained in the Transfer Agreement or the Loan Sale
Agreement, as applicable, including that such Qualified Substitute Timeshare Loan is an Eligible
Timeshare Loan, (iii) that shall not cause the weighted average coupon rate of the Timeshare Loans,
after such substitution, to be less than the weighted average coupon rate of the Timeshare Loans as
of the immediately preceding Determination Date, (iv) that shall not cause the weighted average
FICO score of the Timeshare Loans, after such substitution, to be less than the weighted average
FICO score of the Timeshare Loans as of the immediately preceding Determination Date, (v) that
shall not cause the weighted average months of seasoning on the Timeshare Loans, after such
substitution, to be less than 11 months, (vi) that does not have a stated maturity greater than 12
months prior to the Stated Maturity and (vii) with respect to Qualified Substitute Timeshare Loans
which are being substituted for Defaulted Timeshare Loans, (A) that either (I) has a FICO score
greater than or equal to 675 or (II) has a FICO score greater than or equal to 650 and has at least
12 months of seasoning; and (B) for Qualified Substitute Timeshare Loans substituted during the
first seven Due Periods (I) such Qualified Substitute Timeshare Loans have a weighted average
remaining term to maturity of at least 72 months and (II) each such Qualified Substitute Timeshare
Loan has a remaining term to maturity of at least 36 months.

     “Rating Agency” shall mean S&P.

     “Rating Agency Confirmation” shall mean a written confirmation from the Rating Agency
that the specified action therein shall not cause the then existing rating on any of the Notes to
be negatively qualified, lowered or withdrawn.

     “Receivables” means the payments required to be made pursuant to a Timeshare Loan.

     “Record Date” shall mean, with respect to any Payment Date (except for the Initial
Payment Date), the close of business on the last Business Day of the calendar month

19

 

immediately preceding the month such Payment Date occurs. With respect to the Initial Payment
Date, the Record Date will be the Closing Date.

     “Redemption Date” shall mean with respect to the redemption of the Notes on or after
the Optional Redemption Date, the date fixed pursuant to Section 10.1 of the Indenture.

     “Redemption Price” shall mean, with respect to each Class of Notes, the sum of the
Outstanding Note Balance of such Class of Notes, together with interest accrued thereon at the
applicable Note Rate up to and including the Redemption Date.

     “Regulation S Global Note” shall have the meaning set forth in Section 2.2 of the
Indenture.

     “Related Security” shall mean with respect to any Timeshare Loan, (i) all of the
Issuer’s interest in the Timeshare Property arising under or in connection with the related
Mortgage, Financing Agreement, Oak N’ Spruce Certificate and the related Timeshare Loan Files, (ii)
all other security interests or liens and property subject thereto from time to time purporting to
secure payment of such Timeshare Loan, together with all mortgages, assignments and financing
statements signed by an Obligor describing any collateral securing such Timeshare Loan, (iii) all
guarantees, insurance and other agreements or arrangements of whatever character from time to time
supporting or securing payment of such Timeshare Loan, and (iv) all other security and books,
records and computer tapes relating to the foregoing.

     “Repurchase Price” shall mean with respect to any Timeshare Loan to be purchased by
the Originator pursuant to the Transfer Agreement or the Servicer pursuant to the Loan Sale
Agreement, an amount equal to the Loan Balance of such Timeshare Loan as of the date of such
purchase or repurchase, together with all accrued and unpaid interest on such Timeshare Loan at the
related Timeshare Loan Rate to, but not including, the due date in the then current Due Period.

     “Request for Release” shall be a request for release of Timeshare Loan Files in the
form required by the Custodial Agreement.

     “Required Payments” shall mean each of the items described in (i) through (xii) of
Section 3.4(a) of the Indenture.

     “Reservation System” shall mean the centralized reservation system for all Resorts.

     “Resort” shall mean any of the following resorts: Holly Lake Resort, The Villages and
Lake O’ The Wood Resorts, Piney Shores Resort, Timber Creek Resort, Fox River Resort, Apple
Mountain Resort, Ozark Mountain Resort, Holiday Hills Resort, Oak N’ Spruce Resort, Silverleaf’s
Seaside Resort, Hill Country Resort and Orlando Breeze Resort.

     “Responsible Officer” shall mean (a) when used with respect to the Indenture Trustee,
any officer assigned to the Corporate Trust Office, including any Managing Director, Vice
President, Assistant Vice President, Secretary, Assistant Secretary, Assistant Treasurer, any trust
officer or any other officer such Person customarily performing functions similar to those
performed by any of the above designated officers, and also, with respect to a particular matter,

20

 

any other officer to whom such matter is referred because of such officer’s knowledge of and
familiarity with the particular subject; (b) when used with respect to the Servicer, the Chief
Financial Officer, a Vice President, an Assistant Vice President, the Chief Accounting Officer or
the Secretary of the Servicer; and (c) with respect to any other Person, the chairman of the board,
chief financial officer, the president, a vice president, the treasurer, an assistant treasurer,
the secretary, an assistant secretary, the controller, general partner, trustee or the manager of
such Person.

     “Restricted Period” shall mean the 40-day period prescribed by Regulation S under the
Securities Act commencing on the later of (a) the date upon which Notes are first offered to
Persons other than the Initial Purchaser and any other distributor (as such term is described in
Regulation S) of the Notes and (b) the Closing Date.

     “Rule 144A Global Note” shall have the meaning specified in Section 2.2 of the
Indenture.

     “S&P” shall mean Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.

     “Schedule of Timeshare Loans” shall mean the list of Timeshare Loans delivered
pursuant to the Transfer Agreement and the Loan Sale Agreement, as amended from time to time to
reflect repurchases, substitutions and Qualified Substitute Timeshare Loans conveyed pursuant to
the terms of the Indenture, the Transfer Agreement and the Loan Sale Agreement, which list shall
set forth the following information with respect to each Timeshare Loan as of the related Cut-Off
Date, as applicable, in numbered columns:

	 	1	 	Name of Obligor
	 
	 	2	 	Unit Ref/Loan Number
	 
	 	3	 	Interest Rate Per Annum
	 
	 	4	 	Date of Timeshare Loan Origination
	 
	 	5	 	Maturity
	 
	 	6	 	Sales Price
	 
	 	7	 	Monthly Payment
	 
	 	8	 	Original Loan Balance
	 
	 	9	 	Original Term
	 
	 	10	 	Outstanding Loan Balance
	 
	 	11	 	Down Payment
	 
	 	12	 	First Payment Date
	 
	 	13	 	Zip Code
	 
	 	14	 	Unit/Week
	 
	 	15	 	Resort Name

     “Securities Act” shall mean the Securities Act of 1933, as amended.

     “Securitization Custodian” shall have the meaning specified the second “whereas”
clause in the Transfer Agreement and the second “whereas” clause in the Loan Sale Agreement.

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     “Securitization Indenture” shall have the meaning specified the second “whereas”
clause in the Transfer Agreement and the second “whereas” clause in the Loan Sale Agreement.

     “Securitization Indenture Trustee” shall have the meaning specified the second
“whereas” clause in the Transfer Agreement and the second “whereas” clause in the Loan Sale
Agreement.

     “Securitization Servicer” shall have the meaning specified the second “whereas” clause
in the Transfer Agreement.

     “Sell” shall have the meaning set forth in the Transfer Agreement and the Loan Sale
Agreement, as applicable.

     “Seller” shall mean Silverleaf Resorts, Inc. under the Transfer Agreement and
Silverleaf Finance IV, LLC under the Loan Sale Agreement, as applicable.

     “Sequential Distribution Amount Shortfall” shall have the meaning specified in Section
1, paragraph (iii) of the Guaranty.

     “Sequential Pay Event” shall exist on any Determination Date if the Cumulative Default
Level as of the last day of any Due Period specified below exceeds the following parameters:

	 	 	 	 	 
	Due Period	 	Cumulative Default Level %
	1-3
	 	 	1.26	%
	4-6
	 	 	4.39	%
	7-9
	 	 	7.36	%
	10-12
	 	 	9.55	%
	13-15
	 	 	11.34	%
	16-18
	 	 	13.39	%
	19-21
	 	 	15.40	%
	22-24
	 	 	16.59	%
	25-27
	 	 	17.56	%
	28-30
	 	 	18.47	%
	31-33
	 	 	19.58	%
	34-36
	 	 	20.27	%
	37-39
	 	 	20.75	%
	40-42
	 	 	21.13	%
	43 and thereafter
	 	 	21.23	%

     “Servicer” shall mean Silverleaf in its capacity as servicer under the Indenture, the
Backup Servicing Agreement and the Custodial Agreement, and its permitted successors and assigns.

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     “Servicer Event of Default” shall have the meaning specified in Section 5.4 of the
Indenture.

     “Servicer Termination Costs” shall mean any extraordinary out-of-pocket expenses
incurred by the successor servicer associated with the transfer of servicing.

     “Servicing Fee” shall mean for any Payment Date, the product of (i) one-twelfth of
1.75% and (ii) the Aggregate Loan Balance as of the first day of the related Due Period.

     “Servicing Officer” shall mean those officers of the Servicer involved in, or
responsible for, the administration and servicing of the Timeshare Loans, as identified on the list
of Servicing Officers furnished by the Servicer to the Indenture Trustee and the Noteholders from
time to time.

     “Servicing Standard” shall mean, with respect to the Servicer a servicing standard
which complies with applicable law, the terms of the respective Timeshare Loans and, to the extent
consistent with the foregoing, in accordance with the customary and usual procedures employed by it
with respect to comparable assets that the servicer services for itself or its Affiliates (and if
Silverleaf is no longer the Servicer, in accordance with the customary standard of prudent
servicers of loans secured by timeshare interests similar to the Timeshare Properties, employed by
it when servicing loans for third parties), but without regard for (i) any relationship that it or
any of its Affiliates may have with the related Obligor, and (ii) its right to receive compensation
for its services hereunder or with respect to any particular transaction.

     “Silverleaf” shall mean Silverleaf Resorts, Inc., a Texas corporation.

     “Silverleaf Loans” shall mean the Timeshare Loans conveyed by Silverleaf to the Issuer
pursuant to the Transfer Agreement.

     “Silverleaf Serviced Timeshare Loan” means any timeshare loan (including any Timeshare
Loan conveyed to the Issuer pursuant to the Transfer Agreement or the Loan Sale Agreement) serviced
by Silverleaf or an Affiliate thereof for the benefit of the Noteholders, for Silverleaf’s own
account, or for the accounts of any and all third parties.

     “Similar Law” shall mean a provision of federal, state or local law that is
substantially similar to the prohibited transaction rules under Title I, Part 4 of ERISA or Section
4975 of the Code.

     “Stated Maturity” shall mean the Payment Date occurring in March 2020.

     “Subsequent Cut-Off Date” shall mean with respect to any Transfer Date, (i) the close
of business on the last day of the Due Period immediately preceding such Transfer Date or (ii) such
other date designated by the Servicer.

     “Substitution Shortfall Amount” shall mean with respect to any Transfer Date, an
amount equal to the excess of the aggregate Loan Balances of the substituted Timeshare Loans over
the aggregate Loan Balances of the Qualified Substitute Timeshare Loans.

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     “Temporary Regulation S Global Note” shall have the meaning specified in Section 2.2
of the Indenture.

     “Three Month Rolling Average of Timeshare Loan Delinquency Ratios” means, as of any
date of determination, a fraction (expressed as a percentage), the numerator of which is the
quotient of (A) the sum of the Aggregate Loan Balance of all Timeshare Loans which were Delinquent
Timeshare Loans as of the last day of each of the three most recently ended Due Periods, divided by
(B) 3, and the denominator of which is the quotient of (C) the sum of the Aggregate Loan Balance of
all Timeshare Loans as of the last day of each of the three most recently ended Due Periods,
divided by (D) 3.

     “Timeshare Declaration” shall mean the declaration or other document recorded in the
real estate records of the applicable municipality or government office where a Resort is located
for the purpose of creating and governing the rights of owners of Timeshare Properties related
thereto, as it may be in effect from time to time.

     “Timeshare Loan” shall mean a Mortgage Loan, Oak N’ Spruce Loan or a Qualified
Substitute Timeshare Loan subject to the lien of the Indenture. As used in the Transaction
Documents, the term “Timeshare Loan” shall include the related Mortgage Note, Mortgage, the Finance
Agreement and other Related Security contained in the related Timeshare Loan Documents.

     “Timeshare Loan Acquisition Price” shall mean with respect to any Timeshare Loan, an
amount equal to the Loan Balance of such Timeshare Loan plus accrued and unpaid interest thereon up
to and including the Initial Cut-Off Date.

     “Timeshare Loan Documents” shall mean with respect to each Timeshare Loan and each
Obligor, the related (i) Timeshare Loan Files, and (ii) Timeshare Loan Servicing Files.

     “Timeshare Loan File(s)” shall mean, with respect to a Timeshare Loan, the Timeshare
Loan and all documents related to such Timeshare Loan, including:

	 	1.	 	a Contract for Sale (copy), which includes Truth in Lending Disclosure,
	 
	 	2.	 	a Note (original),
	 
	 	3.	 	an Allonge (copy) (or more than one Allonge that when taken together) shall
show the transfer of title as set forth in the Custodial Agreement,
	 
	 	4.	 	for a post-July 2004 Oak N’ Spruce Loan – Oak N’ Spruce Resort Certificate of
Beneficial Interest (original),
	 
	 	5.	 	one of the following: (a) for a Mortgage Loan – a Deed of Trust, Deed to Secure
Debt or Mortgage with Property Description Addendum (original or file-stamped or
certified copy), (b) for an Oak N’ Spruce Loan (pre-July 2004) – a Mortgage and
Assignment of Beneficial Interest with Property Description Addendum (original or
file-stamped or certified copy) or (c) for an Oak N’ Spruce Loan

24

 

	 	 	 	(post-July 2004) – an Assignment of Beneficial Interest with Property Description
Addendum (not recorded or acknowledged),
	 
	 	6.	 	any assumption agreement, refinancing agreement, or general warranty deed
evidencing a transfer of title, if any, (copy),
	 
	 	7.	 	in the case of Timeshare Loans purchased by the Issuer from Silverleaf Resorts,
Inc., an original mortgagee title insurance policy or mater policy referencing such
Timeshare Loan and covering Silverleaf Finance VI, LLC, and its successors and assigns
(which shall be delivered by the Escrow Agent to the Custodian within 90 days of the
Closing Date or related Transfer Date),
	 
	 	8.	 	in the case of Timeshare Loans purchased by Issuer from Silverleaf Finance IV,
LLC, an original mortgagee title insurance policy or master policy referencing such
Timeshare Loan and covering Silverleaf Finance VI, LLC, and its successors and assigns
(which shall be delivered by the Escrow Agent to the Custodian within 90 days of the
related Funding Date),
	 
	 	9.	 	an original of each guarantee, assumption, modification, substitution
agreement, deferment letter, or other document, if any, which relates to the related
Timeshare Loan (or copy thereof certified by an officer of the related originator to be
a true and correct copy), and which shall cover both the Note and/or the Contract for
Sale, and
	 
	 	10.	 	all related finance applications executed and delivered by the related Obligor
with respect to the purchase of a Timeshare Property.

     “Timeshare Loan Rate” shall mean with respect to any Timeshare Loan, the specified
coupon rate thereon.

     “Timeshare Loan Servicing Files” shall mean with respect to each Timeshare Loan and
each Obligor, the portion of the Timeshare Loan Files necessary for the Servicer to service such
Timeshare Loan including but not limited to (i) the original truth-in-lending disclosure statement
executed by such Obligor, as applicable, (ii) all writings pursuant to which such Timeshare Loan
arises or which evidences such Timeshare Loan and not delivered to the Custodian, (iii) all papers
and computerized records customarily maintained by the Servicer in servicing timeshare loans
comparable to the Timeshare Loans in accordance with the Servicing Standard and (iv) each Timeshare
Program Consumer Document and Timeshare Program Governing Document, if applicable, related to the
applicable Timeshare Property.

     “Timeshare Program” shall mean the program under which (1) an Obligor has purchased a
Timeshare Property and (2) an Obligor shares in the expenses associated with the operation and
management of such program.

     “Timeshare Program Consumer Documents” shall mean, as applicable, the Finance
Agreement, Mortgage Note, Mortgage or certificate of beneficial interest, credit disclosures,
rescission right notices, final subdivision public reports/prospectuses/public offering statements,
the Timeshare Project exchange affiliation agreement and other documents, disclosures and

25

 

advertising materials used or to be used by an Originator in connection with the sale of
Timeshare Properties.

     “Timeshare Program Governing Documents” shall mean the articles of organization or
articles of incorporation of each Association, the rules and regulations of each Association, the
Timeshare Program management contract between each Association and a management company, and any
subsidy agreement by which the Originator is obligated to subsidize shortfalls in the budget of a
Timeshare Program in lieu of paying assessments, as they may be from time to time in effect and all
amendments, modifications and restatements of any of the foregoing.

     “Timeshare Property” shall mean (i) with respect to a Mortgage Loan, a fractional fee
simple timeshare interest in a Unit in a Resort entitling the related Obligor to the use and
occupancy of a Unit at the Resort for a specified period of time each year or every other year in
perpetuity and (ii) with respect to an Oak N’ Spruce Loan, a certificate of beneficial interest in
the Oak N’ Spruce Resort Trust entitling the related Obligor to the use and occupancy of a
specifically designed Unit at such Resort for a fixed period of time each year in perpetuity.

     “Title Commitment” shall have the meaning set forth in the Escrow Agreement.

     “Title Policy” shall have the meaning set forth in the Escrow Agreement.

     “Transaction Documents” shall mean the Indenture, the Transfer Agreement, the Loan
Sale Agreement, the Lockbox Agreement, the Backup Servicing Agreement, the Custodial Agreement, the
Escrow Agreement, the Note Purchase Agreement, the Guaranty and all other agreements, documents or
instruments delivered in connection with the transactions contemplated thereby.

     “Transfer Agreement” shall mean the transfer agreement, dated as of June 1, 2008,
between the Originator and the Issuer pursuant to which certain of the Timeshare Loans are
transferred to the Issuer.

     “Transfer Date” shall mean the date on which the Originator substitutes one or more
Timeshare Loans in accordance with Section 4.5 of the Indenture.

     “Transferred Assets” shall mean collectively, the Timeshare Loans (including the
Qualified Substitute Timeshare Loans), Timeshare Properties, Mortgage Note, any Related Security
and other conveyed property related thereto and additional collateral.

     “Treasury Regulations” shall mean the regulations, included proposed or temporary
regulations, promulgated under the Code. References herein to specific provisions of proposed or
temporary regulations shall include analogous provisions of final Treasury Regulations or other
successor Treasury Regulations.

     “Trust Accounts” shall mean collectively, the Lockbox Account, the Collection Account
and the General Reserve Account.

     “UCC” means the Uniform Commercial Code as in effect in the relevant jurisdiction, as
amended from time to time.

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     “Unit(s)”: One individual air-space residential unit, cabin, villa, cottage or
townhome within a Resort, together with all furniture, fixtures and furnishings therein, and
together with any and all interests in common elements appurtenant thereto, as provided in the
related Timeshare Program Governing Documents.

     “Upgraded Timeshare Loan” shall mean a Timeshare Loan for which the related Obligor
has elected to purchase a new upgraded timeshare property.

27

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