Document:

exv10w1

 

Exhibit 10.1

AMENDED STOCK PURCHASE AGREEMENT

     This Amended STOCK PURCHASE AGREEMENT (this “Agreement”), is made and entered into as of
August 29, 2006, by and between VIRCO MFG. CORPORATION, a Delaware corporation (the “Company”), and
the purchasers listed on the signature page of this Agreement (each a “Purchaser” and collectively
the “Purchasers”).

     WHEREAS, the Company and the Purchasers entered into certain Stock Purchase Agreements dated
as of June 26, 2006 (the “Prior Agreements”) whereby the Company agreed to issue and sell, and the
Purchasers agreed to purchase and pay for, an aggregate of 60,246 shares of the Company’s Common
Stock, par value $.01 per share (the “Shares”); and

     WHEREAS, pricing for the Shares in the Prior Agreement was based upon a ten (10) day measuring
period that had been negotiated a few weeks prior to the date of the Prior Agreement by third party
investors; and

     WHEREAS, following discussions with the American Stock Exchange (the “Amex”) in connection
with the Company’s application to list the Shares on the Amex, it was mutually agreed that the ten
(10) day measuring period to calculate the fair market value of the Shares was inappropriate and
should relate instead to the June 26, 2006 date of the Stock Purchase Agreements, rather than to
the date of the Company’s agreement with its third party investors; and

     WHEREAS, the Company and the Purchasers have mutually agreed to reprice the Shares based upon
the June 26, 2006 date of the Prior Agreement.

     NOW THEREFORE, the parties hereto agree that the Prior Agreements are hereby cancelled and
rescinded, and the entire continuing understanding and agreement of the Company and the Purchasers
with respect to sale and purchase of the Shares is as set forth in this Stock Purchase Agreement.

1. AGREEMENT TO SELL AND PURCHASE THE SHARES

     1.1 PURCHASE AND SALE

     Subject to the terms and conditions of this Agreement, the Purchasers hereby agree to purchase
(severally and not jointly), and the Company hereby agrees to sell and issue to the Purchasers, at
the Closing (as defined below) the respective number of Shares, as are set forth on Schedule A to
this Agreement, and each Purchaser agrees to purchase and pay for that number of the Shares as is
indicated next to his/her name on Schedule A.

     1.2. DELIVERIES AT CLOSING

     (a) Completion of the purchase and sale of the Shares (the “Closing”) shall occur at the
offices of Gibson, Dunn & Crutcher LLP, counsel to the Company, at 2029 Century Park East, 40th
Floor, Los Angeles, California, at 11:00 a.m. local time on September 31, 2006, or such other time
and date as may be agreed by the parties (the “Closing Date”).

     (b) At the Closing, the Company shall issue and deliver to each Purchaser a stock certificate
registered in the name of such Purchaser representing the number of Shares purchased by such
Purchaser as set forth on Schedule A hereto. Each stock certificate shall bear an appropriate
legend referring to the fact that the Shares are being sold in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities
Act”) and Rule 506 under the Securities Act, as applicable.

 

 

     (c) At the Closing each Purchaser shall pay to the Company readily available funds in the
respective amount committed as set forth opposite his name on Schedule A (collectively in the
aggregate, the “Purchase Price”).

2. PURCHASE PRICE

     The Purchase Price for the Shares deliverable by the Company to the Purchasers at Closing
shall be $5.02 for each of the Shares purchased, which was the average daily closing price for
shares of the Company’s Common Stock on the American Stock Exchange (“Amex”) during a ten (10) day
measuring period prior to the date of the Prior Agreement.

3. CONDITIONS TO CLOSING

     (a) The Company’s obligation to complete the sale of the Shares shall be subject to its
receipt on the Closing Date of funds in the full amount of the Purchase Price in payment for the
Shares.

     (b) The Purchasers’ obligation to pay for the Shares shall be subject to their receipt of the
following items on the Closing Date:

     (i) Stock certificates representing the Shares in form satisfactory to the Purchasers;

     (ii) Warrant certificates in the form attached hereto as Schedule B (the “Warrants”)
representing the Purchasers’ right to acquire 25% of the number of Shares being purchased on
the Closing Date (the “Warrant Shares”) over a five year period at an exercise price of
$5.60 per share during the first three (3) years following the Closing Date and of $6.06 per
share during the fourth (4th) and fifth (5th) years following the Closing Date; and

     (iii) Evidence of listing of the Shares on the Amex.

4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY

     The Company hereby represents and warrants to the Purchasers as follows:

     4.1 ORGANIZATION, STANDING AND QUALIFICATION

     The Company has been duly incorporated and is validly existing as a corporation in good
standing under the laws of the State of Delaware. The Company has the corporate power and
authority to own, lease and operate its properties and to conduct its business as currently
conducted and to enter into and perform its obligations under this Agreement. The Company is duly
qualified as a foreign corporation to transact business and is in good standing in any other
jurisdiction in which such qualification is required, whether by reason of the ownership or leasing
of property or the conduct of business, except where the failure to so qualify would not, singly or
in the aggregate, have a material adverse effect on the financial condition or the earnings or
assets of the Company.

     4.2 DUE EXECUTION, DELIVERY AND PERFORMANCE

     (a) This Agreement has been duly executed and delivered by the Company and constitutes a valid
and binding obligation of the Company, enforceable against the Company in accordance with its
terms.

     (b) The execution, delivery and performance of this Agreement and the consummation of the
transactions contemplated in this Agreement and the fulfillment of the terms of this Agreement (i)
have been duly authorized by all necessary corporate action on the part of the Company; (ii) will
not conflict with or constitute a breach of, or default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant
to, any contract, indenture, mortgage, loan agreement, note, lease, sublease, voting agreement,
voting trust or other agreement to which the Company is a party or by which it may be bound, or to
which any of the property or assets of the Company is subject; (iii) will not trigger anti-dilution
rights

 

 

or other rights to acquire additional equity securities of the Company; and (iv) will not
result in any violation of the provisions of the certificate of incorporation or bylaws of the
Company or any applicable statute, law, rule, regulation or order.

     4.3 ISSUANCE, SALE AND DELIVERY OF THE SHARES

     (a) The Shares have been duly authorized for issuance and sale pursuant to this Agreement,
and, when issued and delivered by the Company pursuant to this Agreement against payment by the
Purchasers of the Purchase Price, they will be validly issued and fully paid and nonassessable and
free and clear of all pledges, liens and encumbrances.

     (b) Issuance of the Shares is not subject to preemptive or other similar rights. No further
approval or authority of the stockholders or the Board of Directors of the Company will be required
for the issuance and sale of the Shares as contemplated in this Agreement.

     (c) Subject to the accuracy of the Purchasers’ representations and warranties in Section 5 of
this Agreement, the offer, sale, and issuance of the Shares in conformity with the terms of this
Agreement constitutes a transaction exempt from the registration requirements of Section 5 of the
Securities Act.

     4.4 CAPITALIZATION

     (a) The authorized capital stock of the Company consists of twenty five million (25,000,000)
shares of Common Stock and three million (3,000,000) shares of Preferred Stock.

     (b) As of July 6, 2006, the issued and outstanding capital stock of the Company consisted of
fourteen million three hundred twenty two thousand fifty one (14,322,051) shares of Common Stock.
No shares of preferred stock are issued and outstanding. The shares of issued and outstanding
Common Stock of the Company have been duly authorized and validly issued, are fully paid and
nonassessable and have not been issued in violation of any preemptive or other similar rights.

     (c) The Company has reserved, and has available for future issuance, an aggregate of 686,559
shares of Common Stock under the Company’s stock option plan (i) for issuance of shares upon the
exercise of stock options granted or available for future grant and (ii) for issuance of shares of
restricted stock. With the exception of the foregoing, there are no outstanding subscriptions,
options, warrants, convertible or exchangeable securities or other rights granted by the Company to
purchase shares of Common Stock or other securities of the Company, and there are no commitments,
plans or arrangements to issue any shares of Common Stock or any security convertible into or
exchangeable for Common Stock.

     4.5 FINANCIAL STATEMENTS

     The January 31, 2006 financial statements of the Company filed with the Securities and
Exchange Commission (“SEC”) as part of the Company’s Form 10-K dated April 13, 2006 present fairly
the financial position of the Company as of the dates indicated and the results of the Company’s
operations for the periods specified. These financial statements have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis and any supporting
schedules included with the financial statements present fairly the information stated in the
financial statements. The financial and statistical data set forth in the Company’s Form 10-K
referred to above were prepared on an accounting basis consistent with such financial statements.

     4.6 NO MATERIAL CHANGE

     Since July 6, 2006,

     (a) there has been no material adverse change in the financial condition or in the earnings or
assets of the Company, whether or not arising in the ordinary course of business;

 

 

     (b) there have been no transactions entered into by the Company other than those in the
ordinary course of business which are material with respect to the Company;

     (c) there has been no issuance of additional shares of the Company’s Common Stock;

     (d) there has been no dividend or distribution of any kind declared, paid or made by the
Company on its Common Stock; and

     (e) the Company has incurred no material liabilities or material contingent obligations.

     4.7 USE OF PROCEEDS

     The Company intends to use the proceeds from sale of the Shares for working capital and other
general corporate purposes.

     4.8 NO DEFAULTS

     The Company is not in violation of its certificate of incorporation or bylaws or in material
default in the performance or observance of any obligation, agreement, covenant or condition
contained in any material contract, indenture, mortgage, loan agreement, note, lease, sublease,
voting agreement, voting trust, or other material agreement to which the Company is a party or by
which it may be bound, or to which any of the property or assets of the Company is subject.

     4.9 NO ACTIONS

     There is no action, suit or proceeding before or by any court or governmental agency or body,
domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against the
Company which, singly or in the aggregate, would result in any material adverse change in the
financial condition or in the earnings or business prospects of the Company, or which, singly or in
the aggregate, might materially and adversely affect the properties or assets of the Company or
which might materially and adversely affect the consummation of this Agreement, nor, to the best
knowledge of the Company, is there any reasonable basis therefor. The Company is not in default
with respect to any judgment, order or decree of any court or governmental agency or
instrumentality which, singly or in the aggregate, would have a material adverse effect on the
assets, properties or business of the Company.

     4.10 CONTRACTS

     All of the contracts filed with the SEC as part of the Company Documents are in full force and
effect on the date hereof, except for contracts the termination or expiration of which would not,
singly or in the aggregate, have a material adverse effect on the business, properties or assets of
the Company. Neither the Company nor, to the best knowledge of the Company, any other party is in
material breach of or default under any such contracts. The Company is in full compliance with all
covenants, financial or otherwise, contained within its loan agreements and the Company has not
received any correspondence from any of its lenders questioning or otherwise relating to the
Company’s compliance with any such covenants.

     4.11 ENVIRONMENTAL MATTERS

     Except as would not, singly or in the aggregate, reasonably be expected to have a material
adverse effect on the financial condition or the earnings or assets of the Company,

     (a) the Company is in compliance with all applicable Environmental Laws (as defined below);

     (b) the Company has all permits, authorizations and approvals required under any applicable
Environmental Laws and is in compliance with the requirements of such permits authorizations and
approvals; and

 

 

     (c) there are no pending or, to the best knowledge of the Company, threatened Environmental
Claims (as defined below) against the Company.

     For purposes of this Agreement, the following terms shall have the following meanings:
“Environmental Law” means any United States (or other applicable jurisdiction’s) Federal, state,
local or municipal statute, law, rule, regulation, ordinance, code, policy or rule of common law
and any judicial or administrative interpretation thereof, including any judicial or administrative
order, consent decree or judgment, relating to the environment, health, safety or any chemical,
material or substance, exposure to which is prohibited, limited or regulated by any governmental
authority. “Environmental Claims” means any and all administrative, regulatory or judicial
actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation,
investigations or proceedings relating in any way to any Environmental Law.

     4.12 LABOR MATTERS

     No labor dispute with the employees of the Company exists or, to the best knowledge of the
Company, is threatened. To the best knowledge of the Company, no management level or other
significant employee has indicated that he or she intends to terminate his or her employment with
the Company and the Company has no plans to terminate any management level or other significant
employee.

     4.13 PROPERTIES

     The Company has good and marketable title to its properties, free and clear of any material
security interests, mortgages, pledges, liens, charges, encumbrances and claims of record, except
for the lien on substantially all of the assets and properties of the Company held by Wells Fargo
Bank. The properties of the Company are, in the aggregate, in good repair (reasonable wear and
tear excepted) and suitable for their respective uses. All real property held under lease by the
Company is held under valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the conduct of the business of the Company. The Company owns or
leases all such properties as are necessary to its business or operations as now conducted.

     4.14 INTELLECTUAL PROPERTY

     (a) The Company owns or is licensed to use all patents, patent applications, inventions,
trademarks, trade names, applications for registration of trademarks, service marks, service mark
applications, copyrights, know-how, manufacturing processes, formulae, trade secrets, licenses and
rights in any thereof and any other intangible property and assets that are material to the
business of the Company as now conducted and as proposed to be conducted (in this Agreement called
the “Proprietary Rights”).

     (b) The Company does not have any knowledge of, and the Company has not given or received any
notice of, any pending conflicts with or infringement of the rights of others with respect to any
Proprietary Rights or with respect to any license of Proprietary Rights which are material to the
business of the Company.

     (c) No action, suit, arbitration, or legal, administrative or other proceeding, or
investigation is pending, or, to the best knowledge of the Company, threatened, which involves any
Proprietary Rights, nor, to the best knowledge of the Company, is there any reasonable basis
therefor.

     (d) The Company is not subject to any judgment, order, writ, injunction or decree of any court
or any Federal, state, local, foreign or other governmental department, commission or board,
domestic or foreign, or any arbitrator, and has not entered into or is not a party to any contract
which restricts or impairs the use of any such Proprietary Rights in a manner which would have a
material adverse effect on the use of any of the Proprietary Rights.

     (e) The Company has not received written notice of any pending conflict with or infringement
upon any third-party proprietary rights.

 

 

     (f) The Company has not entered into any consent, indemnification, forbearance to sue or
settlement agreement with respect to Proprietary Rights. No claims have been asserted by any
person with respect to the validity of the Company’s ownership or right to use the Proprietary
Rights and, to the best knowledge of the Company, there is no reasonable basis for any such claim
to be successful.

     (g) The Company has complied, in all material respects, with its obligations relating to the
protection of the Proprietary Rights which are material to the business of the Company pursuant to
licenses.

     (h) To the best knowledge of the Company, no person is infringing on or violating the
Proprietary Rights.

     4.15 PERMITS

     The Company possesses and is operating in compliance with, all material licenses,
certificates, consents, approvals and permits from all state, federal, foreign and other regulatory
agencies or bodies necessary to conduct the businesses now operated by it, and the Company has not
received any notice of proceedings relating to revocation or modification of any such permit or any
circumstance which would lead it to believe that such proceedings are reasonably likely which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would
materially and adversely affect the financial condition or the earnings, assets or business
prospects of the Company.

     4.16 TAXES

     The Company has filed all tax returns required to be filed, which returns are true and correct
in all material respects, and the Company is not in default in the payment of any taxes, including
penalties and interest, assessments and fees, shown thereon due or otherwise assessed, other than
those being contested in good faith and for which adequate reserves have been provided or those
currently payable without interest which were payable pursuant to said returns or any assessments
with respect thereto.

     4.17 COMPLIANCE

     The Company has conducted, and is conducting, its business in compliance with all applicable
Federal, state, local and foreign statutes, laws, rules and regulations, except where the failure
to do so would not, singly or in the aggregate, have a material adverse effect on the financial
condition, earnings or assets, of the Company.

     4.18 INSURANCE

     The Company maintains insurance of the type and in the amount that the Company reasonably
believes is adequate for its business, including, but not limited to, insurance covering all real
and personal property owned or leased by the Company against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against by similarly situated companies, all of
which insurance is in full force and effect.

     4.19 GOVERNMENTAL/ REGULATORY CONSENTS

     No registration, authorization, approval, qualification or consent with or required by any
court or governmental/ regulatory authority or agency is necessary in connection with the execution
and delivery of this Agreement or the offering, issuance or sale of the Shares under this
Agreement, except for the filings disclosed in this Agreement to be made with the SEC and the Amex.

     4.20 SECURITIES AND EXCHANGE COMMISSION FILINGS

     (a) The Company has timely filed with the SEC all documents required to be filed by the
Company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

 

     (b) The information contained in the following documents (the “Company Documents”), is true
and correct in all material respects as of their respective filing dates and as of the date of this
Agreement:

	 	(i)	 	the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2006; and
	 
	 	(ii)	 	the Company’s Proxy Statement for its 2006 Annual Meeting of Stockholders.

     (c) As of their respective filing dates, the Company Documents complied in all material
respects with the requirements of the Exchange Act and the rules and regulations of the SEC
thereunder, and none of the Company Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to make the statements
made therein, in light of the circumstances in which they were made, not misleading.

     4.21 NO INTEGRATED OFFERING

     Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf,
has directly or indirectly made any offers or sales in any security or solicited any offers to buy
any security under circumstances that would require registration under the Securities Act of the
issuance of the Shares to the Purchasers. The issuance of the Shares to the Purchasers will not be
integrated with any other issuance of the Company’s securities (past, current or future) for
purposes of the Securities Act or any applicable rules of the Amex. The Company will not make any
offers or sales of any security that would cause the offering of the Shares to be integrated with
any other offering of securities by the Company for purposes of any registration requirements under
the Securities Act or any applicable rules of the Amex.

     4.22 NO MANIPULATION OF STOCK

     The Company has not taken, and will not take, any action that might reasonably be expected to
cause or result in unlawful manipulation of the price of the Common Stock to facilitate the sale of
the Shares.

     4.23 RELATED PARTY TRANSACTIONS

     Except (a) as disclosed in the Company’s Form 10-K dated April 13, 2006, and (b) as set forth
in the Virtue Family Agreement, the Company does not have any oral or written contracts,
arrangements or other agreements with any officer, director or 5% or greater stockholder of the
Company or any affiliate of any such person.

5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASERS

     5.1 SECURITIES LAW REPRESENTATIONS AND WARRANTIES

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

     (a) Such Purchaser has a preexisting business relationship with the Company and by reason of
his business or financial experience has the capacity to protect his own interests in connection
with purchase of the Shares.

     (b) Such Purchaser is an “accredited investor” within the meaning of Rule 501 of Regulation D
promulgated under the Securities Act and is knowledgeable, sophisticated and experienced in making,
and is qualified to make, decisions with respect to investments in shares representing an
investment decision like that involved in the purchase of the Shares, including investments in
securities issued by the Company. Such Purchaser has requested, received, reviewed and considered
all information deems relevant in making an informed decision to purchase the Shares.

     (c) Such Purchaser is acquiring the Shares for his own account for investment only and, except
as contemplated by this Agreement, has no present intention of distributing any of the Shares nor
any arrangement or

 

 

understanding with any other persons regarding the distribution of such Shares within the
meaning of Section 2(11) of the Securities Act, other than as contemplated in Section 7 of this
Agreement.

     (d) Such Purchaser has, in connection with its decision to purchase the Shares, relied solely
upon the representations and warranties of the Company contained in this Agreement, review of the
Company Documents and his own due diligence examination of the Company.

     (e) Such Purchaser acknowledges that an investment in the Shares is a speculative investment
and has a high degree of risk. Such Purchaser acknowledges that he has had the opportunity to
obtain and review all information from the Company necessary to make a reasonably informed
investment decision and he has had all questions asked of the Company answered to his reasonable
satisfaction. Such Purchaser is able to bear the economic risk of an investment in the Shares.

     5.2 DUE EXECUTION, DELIVERY AND PERFORMANCE

     This Agreement has been duly executed and delivered by such Purchaser and constitutes a valid
and binding obligation of such Purchaser, enforceable against such Purchaser in accordance with its
terms.

     5.3 RESALES OF SHARES

     (a) Such Purchaser will not make any sale of the Shares without satisfying the requirements of
the Securities Act and the Rules and Regulations, including, in the event of any resale under the
Registration Statement, the prospectus delivery requirements under the Securities Act, and such
Purchaser acknowledges and agrees that such Shares are not transferable on the books of the Company
pursuant to a resale under the Registration Statement unless the stock certificate submitted to the
Company’s transfer agent evidencing the Shares is accompanied by a certificate from such Purchaser
to the effect that (i) the Shares have been sold in accordance with the Registration Statement and
(ii) the requirement of delivering a current prospectus has been satisfied.

     (b) Such Purchaser will notify the Company promptly of the sale of any of the Shares, other
than sales pursuant to a Registration Statement contemplated in Section 7 of this Agreement or
sales upon termination of the transfer restrictions pursuant to Section 7 of this Agreement.

6. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.

     Notwithstanding any investigation made by any party to this Agreement, all covenants,
agreements, representations and warranties made by the Company and the Purchasers in this Agreement
shall survive the execution of this Agreement, the delivery to the Purchasers of the Shares being
purchased and the payment therefor.

7. EXPENSES

     Except as otherwise expressly provided in this Agreement, the Company and the Purchasers shall
each pay their own respective fees and expenses (including, without limitation, the fees of any
attorneys, accountants or others engaged by such party) incurred in connection with the
preparation, negotiation, execution and performance of this Agreement and the transactions
contemplated hereby whether or not the transactions contemplated hereby are consummated.

8. ENTIRE AGREEMENT

     This Agreement constitutes the complete and exclusive statement of the terms of the agreement
between the Company and the Purchasers with respect to sale and purchase of the Shares and
supersedes all prior agreements, understandings, promises, and arrangements, oral or written,
between the parties with respect to the subject matter hereof.

 

 

9. NOTICES

     All notices, requests, consents and other communications under this Agreement shall be in
writing, shall be mailed by first-class registered or certified airmail, confirmed facsimile or
nationally recognized overnight express courier postage prepaid, and shall be delivered as
addressed as follows:

     (a) if to the Company, to:

Virco Mfg. Corporation

2027 Harpers Way

Torrance, CA 90501

Attn: Chief Executive Officer

or to such other person at such other place as the Company shall designate to the Purchaser in
writing; and

     (b) if to any Purchaser, at its address as set forth on the signature page hereto, or at such
other address or addresses as may have been furnished to the Company in writing.

     Notice shall be deemed effectively given upon confirmation of receipt by facsimile, one
business day after deposit with such overnight courier or three days after deposit of such
registered or certified airmail with the U.S. Postal Service, as applicable.

10. MODIFICATION; AMENDMENT

     This Agreement may not be modified or amended except pursuant to an instrument in writing
signed by the Company and the Purchasers.

11. HEADINGS

     The headings of the various sections of this Agreement have been inserted for convenience of
reference only and shall not be deemed to be part of this Agreement.

12. SEVERABILITY

     If any provision contained in this Agreement should be held to be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the remaining provisions
contained in this Agreement shall not in any way be affected or impaired thereby.

13. GOVERNING LAW

     This Agreement shall be governed by and construed in accordance with the laws of the state of
California and the federal law of the United States of America.

14. COUNTERPARTS

     This Agreement is being executed in two or more counterparts, each of which shall constitute
an original, but all of which, when taken together, shall constitute but one instrument, and shall
become effective when one or more counterparts have been signed by the party to this Agreement and
delivered to the other parties.

[Signature Page Follows]

 

 

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

	 	 	 	 	 
	VIRCO MFG. CORPORATION	 	 
	 
	 	 	 	 
	By:
	 	/s/ Robert E. Dose 	 	 
	 

	 	 

Robert E. Dose
	 	 
	Its:

	 	Vice President Finance	 	 

	 	 	 
	The “Purchasers”
	 	 
	 
	 	 
	/s/ Steve Presley 
	 	 
	 

Steve Presley

	 	 
	 
	 	 
	/s/ Ed Gyenes 
	 	 
	 

Ed Gyenes

	 	 
	 
	 	 
	/s/ Nick Wilson 
	 	 
	 

Nick Wilson

	 	 
	 
	 	 
	/s/ Scotty Bell 
	 	 
	 

Scotty Bell

	 	 
	 
	 	 
	/s/ Patty Quinones 
	 	 
	 

Patty Quinones

	 	 
	 
	 	 
	/s/ Eric Nordstrom 
	 	 
	 

Eric Nordstrom

	 	 
	 
	 	 
	/s/ Larry Maddox 
	 	 
	 

Larry Maddox

	 	 
	 
	 	 
	/s/ James Simms 
	 	 
	 

James Simms

	 	 
	 
	 	 
	/s/ Bassey Yau 
	 	 
	 

Bassey Yau

	 	 
	 
	 	 
	/s/ Robert Virtue 
	 	 
	 

Robert Virtue

	 	 
	 
	 	 
	/s/ Doug Virtue 
	 	 
	 

Doug Virtue

	 	 
	 
	 	 
	/s/ Evan Gruber 
	 	 
	 

Evan Gruber

	 	 

 

 

Schedule A

	 	 	 	 	 	 	 	 	 
	 	 	No. of Shares and	 	Share Purchase
	Name and Address of Purchaser	 	Warrants Purchased	 	Price
	Steve Presley
	 	 	996	 	 	$	4,999.92	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	249	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Ed Gyenes
	 	 	929	 	 	$	4,663.58	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	232	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Nick Wilson
	 	 	2,787	 	 	$	13,990.74	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	697	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Scotty Bell
	 	 	1,992	 	 	$	9,999.84	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	498	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Patty Quinones
	 	 	398	 	 	$	1,997.96	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	100	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	 	 	 	 	 	 

 

 

Schedule A

	 	 	 	 	 	 	 	 	 
	 	 	No. of Shares and	 	Share Purchase
	Name and Address of Purchaser	 	Warrants Purchased	 	Price
	Eric Nordstrom
	 	 	7,968	 	 	$	39,999.36	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	1,992	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Larry Maddox
	 	 	3,300	 	 	$	16,566.00	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	825	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	James Simms
	 	 	1,998	 	 	$	10,029.96	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	500	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Bassey Yau
	 	 	4,000	 	 	$	20,080.00	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	1,000	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Robert Virtue
	 	 	5,000	 	 	$	25,100.00	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	1,250	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Doug Virtue
	 	 	8,576	 	 	$	43,051.52	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	2,114	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	 	 	 	 	 	 

 

 

Schedule A

	 	 	 	 	 	 	 	 	 
	 	 	No. of Shares and	 	Share Purchase
	Name and Address of Purchaser	 	Warrants Purchased	 	Price
	Evan Gruber
	 	 	19,511	 	 	$	97,945.22	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	4,878	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	                                             
	 	 	 	 	 	 	 	 

 

 

Schedule B

FORM OF WARRANT AGREEMENT

     THIS WARRANT AND THE UNDERLYING COMMON STOCK MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT.

     This certifies that, for good and valuable consideration, receipt of which is hereby
acknowledged,                                                              (the “Holder”) is entitled to purchase, subject to
the terms and conditions of this Warrant, from Virco Mfg. Corporation, a Delaware corporation (the
“Company”), an aggregate of                                          (                    ) fully paid and nonassessable shares of
the common stock, $.01 par value per share (the “Common Stock”), of the Company during the period
commencing on the date of this Warrant and ending at 5:00 p.m. California time five (5) years from
such date (the “Expiration Date”), at which time this Warrant will expire and become void unless
earlier terminated as provided herein. The shares of Common Stock of the Company for which this
Warrant is exercisable, as may be adjusted from time to time pursuant to the terms hereof, are
hereinafter referred to as the “Warrant Shares”.

     1. Exercise Price. The exercise price for the Warrant Shares shall be $6.02 per share
during the first three (3) years from the date of this Warrant and $6.53 per share during the two
(2) years preceding the Expiration Date. The prevailing exercise price is subject to adjustment
pursuant to the terms hereof (such price, as adjusted from time to time, is hereinafter referred to
as the “Exercise Price”).

     2. Exercise and Payment. This Warrant may be exercised, in whole or in part, from
time to time by the Holder prior to the Expiration Date by surrender to the Company, at the
principal executive offices of the Company, of this Warrant and the Notice of Exercise attached
hereto duly completed and executed by the Holder, together with payment in the amount obtained by
multiplying the Exercise Price then in effect by the number of Warrant Shares being purchased as
designated in the Notice of Exercise. In no event, however, shall this Warrant be exercised with
respect to less than 5,000 Warrant Shares (unless it is exercised for a lesser number representing
all of the remaining warrants owned by the Holder). Payment shall be made in readily available,
same day funds.

     3. Reservation of Shares. The Company shall at all times reserve for issuance and
delivery upon exercise of this Warrant such number of shares of its Common Stock from time to time
issuable as Warrant Shares. All such Warrant Shares shall be duly authorized, and when issued upon
such exercise, shall be validly issued, fully paid and non-assessable, free and clear of all liens,
security interests, charges and other encumbrances or restrictions on sale and free and clear of
all preemptive rights.

     4. Delivery of Stock Certificates. Promptly following the exercise, in whole or in
part, of this Warrant, the Company shall issue in the name of, and deliver to, the Holder a
certificate or certificates for the number of fully paid and nonassessable Warrant Shares which the
Holder shall have requested and paid for pursuant to the Notice of Exercise. If this Warrant is
exercised in part, the Company shall deliver to the Holder a new Warrant for the unexercised
portion of the Warrant Shares at the time of delivery of the stock certificate or certificates
evidencing the Warrant Shares.

     5. No Fractional Shares. No fractional Warrant Shares shall be issued upon exercise
of this Warrant. If upon any exercise of this Warrant a fraction of a share results, the Company
will pay the Holder the difference between the cash value of the fractional share and the portion
of the Exercise Price allocable to the fractional share.

     6. Charges, Taxes and Expenses. The Company shall pay all transfer taxes or other
incidental charges, if any, in connection with the issuance of the Warrant Shares to the Holder.

     7. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this
Warrant, and in case of loss, theft or

 

 

Schedule B

destruction, of indemnity or security reasonably satisfactory to the Company, and upon
reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and
cancellation of this Warrant, if mutilated, the Company shall make and deliver a new replacement
Warrant and dated as of such cancellation, in lieu of this Warrant.

     8. Saturdays, Sundays, Holidays. If the last or appointed day for the taking of any
action or the expiration of any right required or granted herein shall be a Saturday or a Sunday or
shall be a legal holiday, then such action may be taken or such right may be exercised on the next
succeeding weekday that is not a legal holiday.

     9. Adjustment of Exercise Price and Number of Shares. The Exercise Price and the
number of Warrant Shares purchasable upon exercise of this Warrant shall be subject to adjustment
from time to time as follows:

          (a) Subdivisions, Combinations and Other Issuances. If the Company shall at any time
prior to the Expiration Date subdivide its shares of Common Stock by split-up or otherwise, or
combine its shares of Common Stock, then the number of Warrant Shares as to which this Warrant is
exercisable as of the date of such subdivision, split-up or combination shall be proportionately
increased in the case of a subdivision, or proportionately decreased in the case of a combination.
Appropriate, corresponding adjustment shall also be made to the Exercise Price so that the
aggregate purchase price payable for the total number of Warrant Shares purchasable under this
Warrant as of such date remains the same.

          (b) Stock Dividend. If at any time the Company declares a dividend or other
distribution on its Common Stock payable in Common Stock or Convertible Securities without payment
of any consideration by the then-existing stockholders for the additional shares of Common Stock or
the Convertible Securities (including the additional shares of Common Stock issuable pursuant to
the terms thereof), then the number of Warrant Shares as to which this Warrant may be exercised
shall be increased as of the record date for determining which holders of Common Stock shall be
entitled to receive such dividend, in proportion to the increase in the number of outstanding
shares (and shares of Common Stock issuable pursuant to the terms of the Convertible Securities) of
Common Stock as a result of such dividend, and the Exercise Price shall be adjusted so that the
aggregate amount payable for the purchase of all the Warrant Shares issuable hereunder immediately
after the record date (or on the date of such distribution, if applicable) for such dividend shall
equal the aggregate amount so payable immediately before such record date. As used herein,
“Convertible Securities” means evidences of indebtedness, shares of stock or other securities,
which are convertible into, exchangeable for, with or without payment of additional consideration,
shares of Common Stock, either immediately or upon the arrival of a specified date or the happening
of a specified event or both.

          (c) Other Distributions. If at any time after the date hereof the Company distributes
to its stockholders, other than as part of its dissolution or liquidation or the winding up of its
affairs, any shares of its Common Stock, any evidence of indebtedness or any of its assets (other
than cash, Common Stock or Convertible Securities), then the Company may, at its option, either (i)
decrease the Exercise Price of this Warrant by an appropriate amount based upon the value
distributed on each share of Common Stock as determined in good faith by the Company’s Board of
Directors or (ii) provide by resolution of the Company’s Board of Directors that on exercise of
this Warrant, the Holder hereof shall thereafter be entitled to receive, in addition to the Warrant
Shares otherwise receivable on exercise hereof, the number of shares or other securities or
property which would have been received had this Warrant at the time been exercised.

          (d) Merger. If at any time after the date hereof there shall be a merger or
consolidation of the Company with or into another corporation when the Company is not the surviving
corporation, then the Holder shall thereafter be entitled to receive upon exercise of this Warrant,
during the period specified herein and upon payment of the aggregate Exercise Price then in effect,
the number of shares or other securities or property of the successor corporation resulting from
such merger or consolidation, which would have been received by the Holder for the Warrant Shares
had this Warrant been exercised at such time.

          (e) Reclassification. If at any time after the date hereof there shall be a change or
reclassification of the securities as to which purchase rights under this Warrant exist into the
same or a different number of securities of any other class or classes, then the Holder shall
thereafter be entitled to receive upon

 

 

Schedule B

exercise of this Warrant, during the period specified herein and upon payment of the Exercise
Price then in effect, the number of shares or other securities or property resulting from such
change or reclassification, which would have been received by Holder for the Warrant Shares had
this Warrant been exercised at such time.

     10. Notice of Adjustments; Notices. Whenever the Exercise Price or number or kind of
securities purchasable hereunder is adjusted pursuant to Section 9 hereof, the Company shall
execute and deliver to the Holder a certificate setting forth, in reasonable detail, the event
requiring the adjustment, the amount of the adjustment, the method by which such adjustment was
calculated and the Exercise Price and number of and kind of securities purchasable hereunder after
giving effect to such adjustment, and shall cause a copy of such certificate to be mailed (by first
class mail, postage prepaid) to the Holder.

     11. Rights As Stockholder; Notice to Holders. Nothing contained in this Warrant shall
be construed as conferring upon the Holder the right to vote or to receive dividends or to consent
or to receive notice as a stockholder in respect of any meeting of stockholders for the election of
directors of the Company or of any other matter, or any rights whatsoever as stockholders of the
Company. The Company shall notify the Holder by registered mail if at any time prior to the
expiration or exercise in full of the Warrant, any of the following events occur:

          (a) a dissolution, liquidation or winding up of the Company shall be submitted to the
stockholders of the Company for approval; or

          (b) a capital reorganization or reclassification of the Common Stock (other than a subdivision
or combination of the outstanding Common Stock and other than a change in the par value of the
Common Stock) or any consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing corporation and that does not
result in any reclassification or change of Common Stock outstanding) or in the case of any sale or
conveyance to another corporation of the property of the Company as an entirety or substantially as
an entirety; or

          (c) a taking by the Company of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any dividend (other than a
cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive any other rights.

This notice to Holder shall be given simultaneously with the giving of notice to holders of Common
Stock. Such notice shall specify the record date or the date of closing the stock transfer books,
as the case may be. Failure to provide such notice will not affect the validity of any action
taken in connection with such dividend, distribution or subscription rights, or proposed merger,
consolidation, sale, conveyance, dissolution, liquidation or winding up.

     12. Restricted Securities. The Holder understands, confirms and acknowledges that
this Warrant and the Warrant Shares constitute “restricted securities” under the federal securities
laws inasmuch as they are, or will be, acquired directly from the Company in transactions not
involving a public offering and accordingly may not, under applicable laws and regulations, be
resold or transferred without registration under the Securities Act of 1933, as amended (the “1933
Act”) or availability of an applicable exemption from such registration. The Holder further
acknowledges that a securities legend substantially similar to that on the first page hereof shall
be placed on any Warrant Shares issued to the Holder upon exercise of this Warrant.

     13. Certification of Investment Purpose. The Holder covenants and agrees that at any
time that this Warrant is exercised, in whole or in part, and as a condition thereto, a written
certification of investment intent shall be delivered to the Company by the Holder.

     14. Disposition of Warrant and Warrant Shares; Transfer of Warrant. This Warrant and
any Warrant Shares purchased hereunder may not be sold, transferred, assigned, pledged or
hypothecated (any such action, a “Transfer”) by the Holder except in compliance with this
Agreement. The Company shall not be required (i) to transfer on its books this Warrant or any
Warrant Shares which have been Transferred in violation of the provisions of this Agreement or (ii)
to treat as the owner of the Warrant or the Warrant Shares or otherwise to accord voting or

 

 

Schedule B

dividend rights to any transferee to whom this Warrant or the Warrant Shares have been
Transferred in contravention of the terms of this Warrant. This Warrant may be divided or
combined, upon request to the Company by the Holder, into a certificate or certificates
representing the right to purchase the same aggregate number of Warrant Shares. If at the time of a
Transfer, a registration statement is not in effect to register the Warrant Shares, the Company may
require the Holder to make such representations, and may place such legends on certificates
representing this Warrant, as may be reasonably required in the opinion of counsel to the Company
to permit a Transfer without such registration.

     15. Miscellaneous.

          (a) Construction. Unless the context indicates otherwise, the term “Holder” shall
include any successor transferee or transferees of this Warrant, and the term “Warrant” shall
include any and all warrants outstanding pursuant to this Agreement, including those evidenced by
one or more instruments or certificates issued upon division, exchange, substitution or transfer
pursuant to Section 14.

          (b) Restrictions. By receipt of this Warrant, the Holder is making the same
investment representations with respect to the acquisition of this Warrant as the Holder is
required to make upon the exercise of this Warrant and acquisition of the Warrant Shares. The
Company acknowledges that the Holder may transfer some of these securities to accredited investors
in valid private placements exempt from the registration requirements of the 1933 Act, provided
that, if requested by the Company, the Holder shall furnish a legal opinion concerning the Transfer
in form and substance reasonably satisfactory to the Company.

          (c) Notices. Unless otherwise provided, any notice required or permitted under this
Warrant shall be given in writing and shall be deemed effectively given upon personal delivery to
the party to be notified or three days following deposit with the United States Post Office, by
registered or certified mail, postage prepaid and addressed to the party to be notified (or one (1)
day following timely deposit with a reputable overnight courier with next day delivery
instructions), or upon confirmation of receipt by the sender of any notice by facsimile
transmission, at the address indicated below or at such other address as such party may designate
by ten days’ advance written notice to the other party.

	 	 	 	 	 
	To Holder:
	 	 	 	 
	 

	 	                                        
	 	 
	 

	 	                                        	 	 
	 

	 	                                        	 	 
	 

	 	                                        	 	 
	 

	 	                                        	 	 
	 
	 	 	 	 
	To the Company:

	 	Virco Mfg. Corporation	 	 
	 

	 	2027 Harper’s Way	 	 
	 

	 	Torrance, CA 90501	 	 
	 

	 	Attention: CEO	 	 

          (d) Governing Law. This Warrant shall be governed by and construed under the laws of
the State of California as applied to agreements among California residents entered into and to be
performed entirely within California.

          (e) Severability. If one or more provisions of this Warrant are held to be
unenforceable under applicable law, such provision shall be excluded from this Warrant and the
balance of the Warrant shall be interpreted as if such provision were so excluded and the balance
shall be enforceable in accordance with its terms.

          (f) Entire Agreement. This Warrant constitutes the entire agreement and understanding
of the parties hereto with respect to the subject matter hereof, and supersedes all prior and
contemporaneous agreements and understandings, whether oral or written, between the parties hereto
with respect to the subject matter hereof.

 

 

Schedule B

          (g) Binding Effect. This Warrant and the various rights and obligations arising
hereunder shall inure to the benefit of and be binding upon the Company and its successors and
assigns, and Holder and its successors and assigns.

          (h) Waiver; Consent. This Warrant may not be changed, amended, terminated, augmented,
rescinded or discharged (other than by performance), in whole or in part, except by a writing
executed by the parties hereto, and no waiver of any of the provisions or conditions of this
Warrant or any of the rights of a party hereto shall be effective or binding unless such waiver
shall be in writing and signed by the party claimed to have given or consented thereto.

          (i) Counterparts. This Warrant is being executed in two or more counterparts, each of
which shall constitute an original.

     IN WITNESS WHEREOF, the parties hereto have executed this Warrant effective as of the date
hereof.

	 	 	 	 	 	 	 
	 	 	THE COMPANY:	 	 
	 
	 	 	 	 	 	 
	 	 	VIRCO MFG. CORPORATION	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 

Robert E. Dose
	 	 
	 

	 	Its:
	 	Vice President Finance	 	 
	 
	 	 	 	 	 	 
	 	 	THE HOLDER:	 	 
	 
	 	 	 	 	 	 
	 	 	                                        	 	 
	 
	 	 	 	 	 	 
	 	 	DATED: August 29, 2006	 	 

 

 

Schedule B

NOTICE OF EXERCISE

To: VIRCO MFG. CORPORATION

     1. The
undersigned hereby elects to purchase                      shares of Common Stock, $.01 par value
per Share (“Warrant Shares”) of Virco Mfg. Corporation, a Delaware corporation (the “Company”)
pursuant to the terms of the attached Warrant, and tenders herewith payment of the exercise price
pursuant to the terms of the Warrant.

     2. Please issue certificates representing the Warrant Shares purchased hereunder in the names
and addresses and in the denominations indicated below.

     3. Please issue a new Warrant for the unexercised portion of the attached Warrant, if any, in
the name of the undersigned.

 

Issuee Information:exv10w1

 

Exhibit 10.1

NOTE PURCHASE AGREEMENT

     THIS NOTE PURCHASE AGREEMENT (this “Agreement”) is made and entered into as of the
5th day of December, 2006 by and between Save the World Air, Inc., a Nevada corporation
(the “Issuer”) and Morale Orchards, LLC, a limited liability company organized under the laws of
the State of Oregon (the “Purchaser”), with reference to the following:

RECITALS

     A. Purchaser desires to purchase from Issuer and Issuer desires to sell to Purchaser certain
of Issuer’s Convertible Promissory Notes in the aggregate face amount of $1,225,000, in the form of
Exhibit A attached hereto (individually, a “Note” and collectively, the “Notes”) and Stock
Purchase Warrants, each to purchase up to a certain number of shares of the common stock (the
“Common Stock”) of the Issuer equal to 50% of the number of shares initially issuable on conversion
of the Notes, in the form of Exhibit B attached hereto (individually, the “Warrants” and
collectively with the Notes, the “Securities”).

     B. Issuer’s sale of the Securities to the Purchaser will be made in reliance upon the
provisions of Section 4(2) under the Securities Act of 1933, as amended (the “Securities Act”),
Rule 506 of Regulation D promulgated by the Securities and Exchange Commission (the “SEC”)
thereunder, and other applicable rules and regulations of the SEC and/or upon such other exemption
from the registration requirements of the Securities Act as may be available with respect to the
transactions contemplated hereby.

     C. At any time when any amount of principal or interest of the Notes shall be outstanding,
such unpaid amounts shall be convertible into shares of the Issuer’s Common Stock at a price per
share equal to the closing price of a share of the Issuer’s common stock on the trading day prior
to each Closing, as defined herein (the “Conversion Price”).

     D. The Warrants shall be issued at the same time each Note is issued to the Purchaser
hereunder and shall exercisable at the same price as the Conversion Price (the “Exercise Price”),
for such number of shares equal to 50% of result obtained by dividing (i) the face amount of the
Notes issued simultaneously with the Warrant by (ii) the Conversion Price (the “Exercisable
Amount”).

AGREEMENT

     NOW THEREFORE, in consideration of the foregoing recitals, which shall be considered an
integral part of this Agreement, the covenants and agreements set forth

 

 

hereafter, and other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the Purchaser and the Issuer hereby agree as follows

     1. Purchase of the Notes and Warrants. On the terms and subject to the conditions set
forth in this Agreement, the Purchaser shall purchase from the Issuer and the Issuer shall sell to
the Purchaser the Securities.

     2. Purchaser’s Representations, Warranties and Covenants. In order to induce the
Issuer to sell and issue the Securities to the Purchaser under one or more exemptions from
registration under the Securities Act, the Purchaser represents and warrants to the Issuer, and
covenants with the Issuer, that:

          (a) The Purchaser is a limited liability company, duly organized, validly existing and in good
standing in the State of Oregon.

          (b) (i) The Purchaser has the requisite power and authority to enter into and perform this
Agreement, and each of the other agreements entered into by the parties hereto in connection with
the transactions contemplated by this Agreement (collectively, the “Transaction Documents”), and to
purchase the Securities in accordance with the terms hereof and thereof.

               (ii) The execution and delivery of the Transaction Documents by the Purchaser and the
consummation by it of the transactions contemplated thereby have been duly and validly authorized
by the Purchaser’s organizational documents and no further consent or authorization is required by
the Purchaser, its Managing Members or by any other person. Leodis Matthews owns 100% of the
equity interest in the Purchaser.

               (iii) The Transaction Documents have been duly and validly executed and delivered by the
Purchaser.

               (iv) The Transaction Documents, and each of them, constitutes the valid and binding obligation
of the Purchaser enforceable against the Purchaser in accordance with their respective terms,
except as such enforceability may be limited by general principles of equity or applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of creditors’ rights and remedies.

          (c) The execution, delivery and performance of the Transaction Documents by the Purchaser and
the consummation by the Purchaser of the transactions contemplated thereby will not conflict with
or constitute a default under any agreement or instrument to which the Purchaser is a party or
under any organizational documents of the Purchaser.

          (d) The Purchaser is acquiring the Securities for investment for its own account, and not with
a view toward distribution thereof, and with no present intention of dividing its interest with
others or reselling or otherwise transferring or disposing all or

 

 

any portion of either the Notes or Warrants. The undersigned has not offered or sold a
participation in this purchase of either the Notes or Warrants, and will not offer or sell any
interest therein. The Purchaser further acknowledges that it does not have in mind any sale of
either the Notes or Warrants currently or after the passage of a fixed or determinable period of
time or upon the occurrence or non-occurrence of any predetermined events or consequence; and that
it has no present or contemplated agreement, undertaking, arrangement, obligation, indebtedness or
commitment providing for or which is likely to compel a disposition of either the Notes or Warrants
and is not aware of any circumstances presently in existence that are likely in the future to
prompt a disposition thereof.

          (e) The Purchaser acknowledges that the Securities have been offered to it in direct
communication between itself and the Issuer or through registered broker-dealers who are members of
the National Association of Securities Dealers, Inc. and not through any advertisement of any kind.

          (f) The Purchaser acknowledges that the Issuer has given it access to all information relating
to the Issuer’s business that it has requested. The Purchaser has reviewed all materials relating
to the Issuer’s business, finance and operations which it has requested and the Purchaser has
reviewed all of such materials as the Purchaser, in the Purchaser’s sole and absolute discretion
shall have deemed necessary or desirable... The Purchaser has had an opportunity to discuss the
business, management and financial affairs of the Issuer with the Issuer’s management.
Specifically but not by way of limitation, the Purchaser acknowledges the Company’s publicly
available filings made periodically with the SEC, which filings are
available at www.sec.gov and
which filings the Purchaser acknowledges reviewing or having had the opportunity of reviewing.

          (g) The Purchaser acknowledges that it has, by reason of its business and financial
experience, such knowledge, sophistication and experience in financial and business matters and in
making investment decisions of this type that it is capable of (i) evaluating the merits and risks
of an investment in the Securities and making an informed investment decision I connection
therewith; (ii) protecting its own interest; and (iii) bearing the economic risk of such investment
for an indefinite period of time for Securities which are not transferable or freely tradable.
Based on the foregoing, the undersigned hereby agrees to indemnify the Company thereof and to hold
each of such persons and entities, and the officers, directors and employees thereof harmless
against all liability, costs or expenses (including reasonable attorneys’ fees) arising by reason
of or in connection with any misrepresentation or any breach of such warranties of the undersigned,
or arising as a result of the sale or distribution of the Securities or the Common Stock issuable
upon conversion of the Notes or exercise of the Warrants, by the undersigned in violation of the
Securities Act, the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or any other
applicable law, either federal or state. This subscription and the representations and warranties
contained herein shall be binding upon the heirs, legal representatives, successors and assigns of
the Purchaser

 

 

          (h) The Purchaser is familiar with the definition of an “accredited investor” as that term is
defined in Rule 501(a) of Regulation D of the Securities Act and represents and warrants to the
Issuer that it is an accredited investor as so defined.

          (i) During the term of this Agreement and the other Transaction Documents, the Purchaser will
comply with the provisions of Section 9 of the Exchange Act, and the rules and regulations
promulgated thereunder, with respect to transactions involving the Common Stock. During the term of
this Agreement and the other Transaction Documents, the Purchaser agrees not to sell the Issuer’s
Common Stock short or engage in any hedging transactions in the Company’s Common Stock, either
directly or indirectly, through its affiliates, principals, agents or advisors.

          (j) The Purchaser is aware of the restrictions of transferability of both the Notes and the
Warrants, and the shares of Common Stock issuable upon conversion of the Notes or exercise of the
Warrants, and further understands and acknowledges that any certificates evidencing the Notes, the
Warrants or the shares of Common Stock issuable upon conversion of the Notes or exercise of the
Warrants will bear the legends in substantially the following form:

THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR QUALIFIED FOR SALE UNDER ANY STATE SECURITIES LAWS
(COLLECTIVELY, “SECURITIES LAWS”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED
UNLESS REGISTERED OR QUALIFIED FOR SALE UNDER ALL APPLICABLE SECURITIES LAWS OR UNLESS, IN
THE OPINION OF COUNSEL SATISFACTORY TO THE ISSUER, IN FORM AND SUBSTANCE SATISFACTORY TO
THE ISSUER, ANY SUCH OFFER, SALE OR OTHER TRANSFER IS EXEMPT FROM THE REGISTRATION OR
QUALIFICATION REQUIREMENTS OF SUCH SECURITIES LAWS.

          (k) The Purchaser understands and acknowledges that following the purchase of the Notes, the
Warrants and any shares of Common Stock issuable upon conversion of the Notes or exercise of the
Warrants, each may only be disposed of pursuant to either (i) an effective registration statement
under the Securities Act or (ii) an exemption from the registration requirements of the Securities
Act.

          (l) The Purchaser understands and acknowledges that the Issuer has neither filed such a
registration statement with the SEC or any state authorities nor agreed to do so, nor contemplates
doing so in the future for the transactions contemplated by this Agreement or the other Transaction
Documents, and in the absence of such a registration statement or exemption, the undersigned may
have to hold the Notes, the Warrants and any shares of Common Stock issuable upon conversion of the
Notes or exercise of the Warrants, indefinitely and may be unable to liquidate any of them in case
of an emergency.

          (m) The Purchaser is purchasing the Notes and Warrants, and will acquire any shares of Common
Stock issuable upon conversion of the Notes or exercise of the

 

 

Warrants, for its own account for investment purposes and not with a view towards distribution and
agrees to resell or otherwise dispose of any of the Notes or the Warrants, or any shares of Common
Stock issuable upon conversion of the Notes or exercise of the Warrants, in accordance with the
registration provisions of the Securities Act (or pursuant to an exemption from such registration
provisions).

          (n) The Purchaser is not and will not be required to be registered as a “dealer” under the
Exchange Act, either as a result of its execution and performance of its obligations under this
Agreement or otherwise.

          (p) The Purchaser understands that it is liable for its own tax liabilities and has obtained
no tax advice from the Issuer in connection with the purchase of the Securities..

          (q) The Purchaser is duly licensed as a mortgage broker under the laws of the State of
California and, accordingly, the imputed interest rate on the Notes does not and will not violate
the provisions of the Constitution of the State of California relating to usury or any other law,
rule, regulation or provision relating to the maximum interest which may be charged in connection
with any of the transactions contemplated by this Agreement.

     3. Issuer’s Representations, Warranties and Covenants. The Issuer represents and
warrants to the Purchaser that:

          (a) The Issuer is a corporation duly organized and validly existing in good standing under the
laws of the State of Nevada, and has the requisite corporate power and authorization to own its
properties and to carry on its business as now being conducted.

          (b) (i) The Issuer has the requisite corporate power and authority to enter into and perform
this Agreement, and each of the other agreements entered into by the parties hereto in connection
with the transactions contemplated by the Transaction Documents, and to issue the Notes and
Warrants in accordance with the terms hereof and thereof.

               (ii) the execution and delivery of the Transaction Documents by the Issuer and the
consummation by it of the transactions contemplated hereby and thereby, including without
limitation the reservation for issuance and the issuance of the Notes and Warrants pursuant to this
Agreement, have been duly and validly authorized by the Issuer’s Board of Directors and no further
consent or authorization is required by the Issuer, its Board of Directors, or its shareholders.

               (iii) The Transaction Documents have been duly and validly executed and delivered by the
Issuer.

               (iv) The Transaction Documents, and each of them, constitutes the valid and binding obligation
of the Issuer enforceable against the Issuer in accordance

 

 

with their respective terms, except as such enforceability may be limited by general principles of
equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar
laws relating to, or affecting generally, the enforcement of creditors’ rights and remedies.

          (c) The execution, delivery and performance of the Transaction Documents by the Issuer and the
consummation by the Issuer of the transactions contemplated thereby will not conflict with or
constitute a default under any agreement or instrument to which the Issuer is a party or under any
organizational documents of the Purchaser.

     4. Multiple
Closings and Deliverables.

          (a) On each of December 5, 2006 and January 10, 2007 there shall be a closing (each, a
“Closing” and collectively, the “Closings”) at which:

               (i) the Purchaser shall deliver to the Issuer immediately available funds, by bank or
cashier’s check, or wire transfer, in the amount of $500,000.00; and

               (ii) the Issuer shall deliver to the Purchaser (x) a Note, in the face amount of $612,500 and
(y) a Warrant to purchase the Exercisable Amount of the Issuer’s Common Stock at the Exercise
Price.

     5. Registration
Rights. If (i) the Purchaser converts any portion of the Notes or exercises
any portion of the Warrants and for so long as shares of the Issuer’s Common Stock received thereby
are restricted securities (the “Restricted Securities”) under the Securities Act of 1933, as
amended (the “Securities Act”) and (ii) during such period the Issuer proposes to file a
registration statement under the Securities Act with respect to an offering for its own account of
any class of its equity securities (other than a registration statement on Form S-4, or any
successor form, a registration statement on Form S-8, or any successor form, or any other
registration statement relating solely to employee benefit plans or filed in connection with an
exchange offer, a transaction to which Rule 145, or any successor provision under the Securities
Act applies or an offering of securities solely to the Issuer’s existing shareholders), then the
Issuer shall give written notice of such proposed filing to the Purchaser no later than 20 business
days before the anticipated filing date, and such notice shall offer the Purchaser the opportunity
to register such number of shares of Restricted Stock as the Purchaser may request. If the
Purchaser desires to have Restricted Stock included in such registration statement shall so advise
the Issuer in writing within 10 business days after the date on which the Issuer’s notice is so
given, setting forth the number of shares of Restricted Stock for which registration is requested.
If the Issuer’s offering is to be an underwritten offering, the Issuer shall, subject to the
further provisions of this Agreement, use its reasonable best efforts to cause the managing
underwriter or underwriters to permit the Purchaser’s Restricted Stock requested to be included in
the registration for such offering to include such Restricted Stock in such offering on the same
terms and conditions as any similar securities of the Issuer included therein. The right of the
Purchaser to registration pursuant to this Section 5 in connection with an underwritten offering by
the Issuer shall,

 

 

unless the Issuer otherwise assents, be conditioned upon such Purchaser’s participation as a seller
in such underwritten offering and its execution of an underwriting agreement with the managing
underwriter or underwriters selected by the Issuer. Notwithstanding the foregoing, if (i) in the
case of an underwritten offering, and either the managing underwriter or underwriters or the
Issuer’s Board of Directors, believes in good faith or (ii) in the case of an offering not
underwritten, the Issuer’s Board of Directors, determines in good faith that the success of the
offering would be materially and adversely affected by inclusion of the Restricted Stock requested
to be included, then the number of shares of Restricted Stock to be registered and offered for the
account of the Purchaser shall be reduced to the extent necessary to reduce or entirely eliminate
the total amount of securities to be included in such offering to the amount recommended by either
such managing underwriter or underwriters or by the Issuer’s Board of Directors, as the case may be
(provided that if securities are being registered and offered for the account of other persons or
entities in addition to the Issuer, such reduction shall not be proportionally greater than any
similar reductions imposed on such other persons or entities). Any Restricted Stock excluded from
an underwriting shall, if applicable, be withdrawn from registration and shall not, without the
consent of the Issuer, be transferred in a public distribution prior to the earlier of 120 days (or
such other shorter period of time as the managing underwriter may require) after the effective date
of the registration statement or 120 days after the date the Purchasers of such Restricted Stock
are notified of such exclusion.

     6. Miscellaneous.

          (a) Except as to the first $10,000 of legal fees and expenses incurred by the Purchaser in
connection with the execution, delivery and the consummation of the transactions contemplated by
this Agreement, which expenses shall be paid by the Issuer, each party shall pay the fees and
expenses of its own advisers, counsel, accountants and other experts, if any, and all other
expenses incurred by such party incident to the negotiation, preparation, execution, delivery and
performance of the Transactions Documents.

          (b) This Agreement may be executed in two or more identical counterparts, all of which shall
be considered one and the same agreement and shall become effective when counterparts have been
signed by each party and delivered to the other party; provided that a facsimile signature shall be
considered due execution and shall be binding upon the signatory thereto with the same force and
effect as if the signature were an original signature.

          (c) The headings of this Agreement are for convenience of reference and shall not form part
of, or affect the interpretation of, this Agreement. Whenever required by the context of this
Agreement, the singular shall include the plural and neutral shall include the masculine and
feminine.

          (d) If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction,
such invalidity or unenforceability shall not affect the validity or

 

 

enforceability of the remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.

          (e) This Agreement is the final agreement between the Purchaser and the Issuer with respect to
the terms and conditions set forth herein, and, the terms of this Agreement may not be contradicted
by evidence of prior, contemporaneous, or subsequent oral agreements of the parties. No provision
of this Agreement may be amended other than by an instrument in writing signed by the Purchaser and
the Issuer or, and no provision hereof may be waived other than by an instrument in writing signed
by the party against whom enforcement is sought.

          (f) Any notices or other communications required or permitted to be given under the terms of
this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the sending party); or
(iii) one (1) day after deposit with a nationally recognized overnight delivery service, in each
case properly addressed to the party to receive the same. The addresses and facsimile numbers for
such communications shall be:

If to the Issuer:

Save the World Air, Inc.

5125 Lankershim Blvd.

North Hollywood, CA 91601

Telephone: (818) 487-8000

Facsimile: (818) 487-8003

with a copy to:

Lance Jon Kimmel, Esq.

SEC Law Firm

11693 San Vicente Boulevard

Suite 357

Los Angeles, CA 90049

Telephone: (310) 557-3059

Facsimile: (310) 388-1320

If to the Purchaser:

Morale Orchards, LLC

Attn: J. Alexander, Manager

17048 SE River Road

Portland, Oregon 97267

 

 

with a copy to:

Leodis Matthews, Esq.

Matthews & Partners

4322 Wilshire Blvd., Ste 200

Los Angeles, CA 90010

Tele: (323) 930-5690

Fax: (323) 930-5693

Each party shall provide five (5) days prior written notice to the other party of any change in
address or facsimile number.

          (g) This Agreement may not be assigned.

          (h) This Agreement is intended for the benefit of the parties hereto and is not for the
benefit of, nor may any provision hereof be enforced by, any other person.

          (i) The representations and warranties of the Purchaser and the Issuer contained herein shall
survive each of the Closings and the termination of this Agreement and the other Transaction
Documents.

          (j) The Purchaser and the Issuer shall consult with each other in issuing any press releases
or otherwise making public statements with respect to the transactions contemplated hereby and no
party shall issue any such press release or otherwise make any such public statement without the
prior consent of the other party, which consent shall not be unreasonably withheld or delayed,
except that no prior consent shall be required if such disclosure is required by law or the rules
and regulations of the SEC, in which such case the disclosing party shall provide the other party
with prior notice of such public statement.

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

          (l) The language used in this Agreement will be deemed to be the language chosen by the
parties to express their mutual intent, and no rules of strict construction will be applied against
any party, as the parties mutually agree that each has had a full and fair opportunity to review
this Agreement and the other Transaction Documents and seek the advice of counsel on it and them.

          (m) The Purchaser and the Issuer each shall have all rights and remedies set forth in this
Agreement and all rights and remedies which such holders have been granted at any time under any
other agreement or contract and all of the rights which the Purchaser has by law. Any person having
any rights under any provision of this

 

 

Agreement shall be entitled to enforce such rights specifically (without posting a bond or other
security), to recover damages by reason of any default or breach of any provision of this
Agreement, including the recovery of reasonable attorneys fees and costs, and to exercise all other
rights granted by law.

          (n) This Agreement and the other Transaction Documents shall be construed and governed by the
laws of the State of California with respect to agreements wholly performed therein, and without
regard to the doctrine known as conflicts of law.

     IN WITNESS WHEREOF the Purchaser and the Issuer have executed this Agreement as of the date
first above written.

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	THE PURCHASER	 	 	 	THE ISSUER
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	MORALE ORCHARDS, LLC	 	 	 	SAVE THE WORLD AIR, INC.
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	By:

	 	/s/ Jacqueline Alexander
	 	 	 	By:
	 	/s/ Eugene E. Eichler	 	 	 	 	 	 
	 

	 	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	Jacqueline Alexander
	 	 	 	 	 	Eugene E. Eichler	 	 	 	 	 	 
	 

	 	Its: Manager
	 	 	 	 	 	Its: Chief Financial Officer	 	 	 	 	 	 

 

 

EXHIBIT A

FORM OF CONVERTIBLE NOTE

THE SECURITIES EVIDENCED BY THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR QUALIFIED FOR SALE UNDER ANY STATE SECURITIES LAWS (COLLECTIVELY, “SECURITIES
LAWS”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS REGISTERED OR QUALIFIED FOR
SALE UNDER ALL APPLICABLE SECURITIES LAWS OR UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO THE
ISSUER, IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER, ANY SUCH OFFER, SALE OR OTHER TRANSFER IS
EXEMPT FROM THE REGISTRATION OR QUALIFICATION REQUIREMENTS OF SUCH SECURITIES LAWS.

			
	 	 	 
	$612,500.00
	 	                            
	 
	 	“Issuance Date”

     FOR VALUE RECEIVED, SAVE THE WORLD AIR, INC., a corporation organized under the laws of the
state of Nevada (the “Company”), promises to pay to the order of “Investor”, as that term is
defined on the Acknowledgement and Acceptance page of this Note (hereafter, together with any
subsequent holder hereof, called “Holder”), at “Investor’s Address”, as that term is set forth on
such page or at such other place as Holder may direct, the “Subscription Amount”, noted above (the
“Loan”), payable in full on the first anniversary of the date hereof (the “Maturity Date”).

     The Company agrees to make payments to the order of the Holder in an amount equal to $3,750
per month on the 1st day of each calendar month hereunder commencing on the
1st day of January, 2007 and continuing on the first day of each calendar month
thereafter until the Maturity Date, at which time all sums outstanding and unpaid hereunder shall
be due and payable in full. If this Note is not paid in full on or prior to the Maturity Date the
remaining balance shall be increased by 10% as an initial penalty, and the Company shall pay 2.5%
per month, compounded daily and prorated for partial months, for each month until all sums due
hereunder are paid in full.

     Payments of both principal and interest will be made in immediately available funds in lawful
money of the United States of America to the Holder at the Investor’s Address.

     The Note is subject to the following additional provisions:

     1. The Company shall be entitled to withhold from all payments of principal and/or interest of
this Note any amounts required to be withheld under the applicable provisions of the U.S. Internal
Revenue Code of 1986, as amended, or other applicable laws at the time of such payments.

 

 

     2. This Note has been issued subject to representations, warranties and covenants of the
original Holder hereof and may be transferred or exchanged only in compliance with the Securities
Act of 1933, as amended, and applicable state and other securities laws.. Prior to the due
presentment for such transfer of this Note, the Company and any agent of the Company may treat the
person in whose name this Note is duly registered on the Company’s Note register as the owner
hereof for the purpose of receiving payment as herein provided and all other purposes, whether or
not this Note is overdue, and neither the Company nor any such agent shall be affected by notice to
the contrary. The transferee shall be bound, as the original Holder by the same representations and
terms described herein and under the Agreement.

     3. The Holder or Company may, at such Holder’s option, at any time on or after the
90th day prior to the Maturity Date convert the principal amount of this Note or any
portion thereof, and any interest accrued and unpaid thereon (the “Conversion Amount”), into a
number shares of fully paid and nonassessable Common Stock of the Company (the “Conversion Shares”)
pursuant to the following formula: the Conversion Amount divided by                                          (as the same may
be adjusted from time to time pursuant to the provisions of this Note, the “Conversion Price”).
The Holder may exercise the right to convert all or any portion of the Conversion Amount by
delivering to the Company (i) an executed and completed notice of conversion in the form attached
to this Note (the “Notice of Conversion”) to the Company and (ii) this Note. The business day on
which a Notice of Conversion and this Note are delivered to the Company in accordance with the
provisions hereof shall be deemed a “Conversion Date”. The Company will transmit the certificates
representing Conversion Shares issuable upon such conversion of this Note (together with the
certificates representing the amount of this Note not so converted) to the Holder via express
courier within ten Business Days after the Conversion Date. No fractional shares shall be issued
upon conversion of this Note. The amount of any of the Conversion Amount which is less than a
whole share of Common Stock shall be paid to the Holder in cash. The conversion of this Note may
require that the Company amend its charter to increase the number of common shares authorized and
therefore, the conversion may not take place prior to the Company’s completion of that process. Any
delay due to such circumstance shall not be an event of default under this Note. Company shall
promptly take action to affect such amendments to its charter.

     4. The principal amount of this Note, and any accrued interest thereon, shall be reduced as
per that principal amount indicated on the Notice of Conversion upon the proper receipt by the
Holder of such Conversion Shares due upon such Notice of Conversion.

     5. The number of Conversion Shares shall be adjusted as follows:

          a. If the Company shall at any time after the Issuance Date subdivide its outstanding shares
of Common Stock into a greater number of shares of Common Stock, the number of Conversion Shares in
effect immediately prior to such subdivision shall be proportionately increased, and conversely, in
case the outstanding shares of Common Stock shall be combined into a smaller number of shares of
Common Stock, the

 

 

Conversion Price in effect immediately prior to such combination shall be proportionately
reduced.

          b. If the Company shall at any time or from time to time after the Issuance Date makes, or
fixes a record date for the determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in additional shares of Common Stock, then and in each such
event the number of Conversion Shares issuable upon conversion of this Note shall be
proportionately increased; provided, however, that if such record date is fixed and such dividend
is not fully paid, or if such distribution is not fully made on the date fixed therefor, the number
of Conversion Shares shall be recomputed to reflect that such dividend was not fully paid or that
such distribution was not fully made.

          c. If Company at any time or from time to time after the Issuance Date makes, or fixes a
record date for the determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in securities of Company other than shares of Common Stock, then and in
each such event provision shall be made so that Holder shall receive upon exercise of the
conversion right of this Note, in addition to the number of shares of Common Stock receivable
thereupon, the amount of securities of Company which Holder would have received had the Conversion
Amount of this Note been exercised on the date of such event and had it thereafter, during the
period from the date of such event to and including the date of conversion or purchase, retained
such securities receivable during such period.

          d. If the Common Stock issuable upon the conversion of this Note or option to purchase is
changed into the same or a different number of shares of any class or classes of stock, whether by
recapitalization, reclassification or otherwise (other than a transaction described elsewhere in
Section 5 of this Note), then, and in any such event, each Holder shall have the right thereafter,
upon conversion of this Note or purchase pursuant to option to receive the kind and amount of stock
and other securities and property receivable upon such reorganization or other change, in an amount
equal to the amount that Holder would have been entitled to had it immediately prior to such
reorganization, reclassification or change converted this Note, but only to the extent this Note is
actually converted, all subject to further adjustment as provided herein.

     6. No provision of this Note shall alter or impair the obligation of the Company, which is
absolute and unconditional, upon an Event of Default (as defined below), to pay the principal of,
and interest on this Note at the place, time, and rate, and in the coin or currency herein
prescribed.

     7. Events of Default. Each of the following occurrences is hereby defined as an “Event of
Default”:

Nonpayment. The Company shall fail to make any payment of principal,
interest, or other amounts payable hereunder when and as due; or

 

 

Dissolutions, etc. The Company or any subsidiary shall fail to comply with
any provision concerning its existence or any prohibition against dissolution,
liquidation, merger, consolidation or sale of assets; or

Noncompliance with this Agreement. The Company shall fail to comply in any
material respect with any provision hereof, which failure does not otherwise
constitute an Event of Default; or

Insolvency. The institution of bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings for relief under any bankruptcy
law or any law for the relief of debtors shall be instituted by or against
Company, which proceedings shall not have been vacated by appropriate court
order within sixty (60) days of such institution.

     If one or more “Events of Default” shall occur, then, or at any time thereafter, and
in each and every such case, unless such Event of Default shall have been waived in writing
by the Holder (which waiver shall not be deemed to be a waiver of any subsequent default)
or cured as provided herein, at the option of the Holder, and in the Holder’s sole
discretion, the Holder may elect to consider this Note (and all interest through such date)
immediately due and payable. In order to so elect, the Holder must deliver written notice
of the election and the amount due to the Company via certified mail, return receipt
requested, at the Company’s address as set forth herein (or any other address provided to
the Holder), and thereafter the Company shall have ten (10) business days upon receipt to
cure the Event of Default or pay this Note, or convert the amount due on the Note pursuant
to the conversion formula set forth above.

     8. In case any provision of this Note is held by a court of competent jurisdiction to be
excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather
than voided, if possible, so that it is enforceable to the maximum extent possible, and the
validity and enforceability of the remaining provisions of this Note will not in any way be
affected or impaired thereby.

     9. This Note does not entitle the Holder hereof to any voting rights or other rights as a
shareholder of the Issuer prior to the conversion into Common Stock thereof, except as provided by
applicable law. If, however, at the time of the surrender of this Note and conversion the Holder
hereof shall be entitled to convert this Note, the Conversion Shares so issued shall be and be
deemed to be issued to such holder as the record owner of such shares as of the close of business
on the Conversion Date.

     10. The Holder shall pay all issue and transfer taxes and other incidental expenses in respect
of the issuance of certificates for Conversion Shares upon the conversion of this Note, and such
certificates shall be issued in the name of the Holder of this Note.

 

 

     11. This Note does not entitle the Holder to any voting rights or other rights as a
stockholder of the Company prior to the exercise hereof.

     12. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Note, and in case of loss, theft or destruction of this Note,
upon delivery of an indemnity agreement or security reasonably satisfactory in form and amount to
the Company or, in the case of any such mutilation, upon surrender and cancellation of such Note,
and upon reimbursement to the Company of all reasonable expenses incidental thereto, the Company
will make and deliver to the Holder, in lieu thereof, a new Note in substantially identical form
and dated as of such cancellation.

     13. If the last or appointed day for the taking of any action or the expiration of any right
required or granted herein shall be a Saturday or a Sunday or shall be a legal holiday in the
United States or the State of California, then such action may be taken or such right may be
exercised on the next succeeding business day.

     14. (a) This Note shall be governed by and construed in accordance with the laws of the State
of California applicable to contracts made and to be performed wholly within such state.

          (b) Except as otherwise provided herein, any notice or demand which, by the provisions hereof,
is required or which may be given to or served upon the parties hereto shall be in writing and, if
by telegram, telecopy or telex, shall be deemed to have been validly served, given or delivered
when sent, if by personal delivery, shall be deemed to have been validly served, given or delivered
upon actual delivery and, if mailed, shall be deemed to have been validly served, given or
delivered three (3) business days after deposit in the United States mails, as registered or
certified mail, with proper postage prepaid and addressed to the party or parties to be notified.

          (c) The Holder acknowledges that the Conversion Shares acquired upon the exercise of this Note
may have restrictions upon its resale imposed by state and federal securities laws.

          (d) With regard to any power, remedy or right provided herein or otherwise available to any
party hereunder (i) no waiver or extension of time shall be effective unless expressly contained in
a writing signed by the waiving party; and (ii) no alteration, modification or impairment shall be
implied by reason of any previous waiver, extension of time, delay or omission in exercise, or
other indulgence.

[remainder of page intentionally left blank]

 

 

          (e) This Note constitutes the Company’s and Holder’s entire agreement with respect to the
subject matter hereof and supersedes all agreements, representations, warranties, statements,
promises and understandings, whether oral or written, with respect to the subject matter hereof.
This Note may not be amended, altered or modified except by a writing signed by the Company and the
Holder.

     IN WITNESS WHEREOF, the Issuer has caused this Convertible Note to be duly executed by an
officer thereunto duly authorized.

	 	 	 	 	 	 	 
	SAVE THE WORLD AIR, INC.	 	 
	 
	 	 	 	 	 	 
	By
	 	 	 	 	 	 
	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	Title:	 	 	 	 

	 	 	 	 	 
	ACKNOWLEDGED AND ACCEPTED:	 	 
	 
	 	 	 	 
	MORALE ORCHARDS, LLC	 	 
	Investor Address:

	 	17048 SE River Road, Portland, Oregon 97267	 	 
	 
	 	 	 	 
	Investor Signature:
	 	 	 	 
	 

	 	 

	 	 

 

 

NOTICE OF EXERCISE OF CONVERSION RIGHT 

TO: SAVE THE WORLD AIR, INC.

     (1) The undersigned
hereby elects to convert $                                         of the attached Note into            
                              shares of Common Stock (the “Shares”) of Save the World Air, Inc. pursuant to the
terms of the attached Note.

     (2) Please issue a certificate or certificates representing the Shares in the name of the
undersigned or in such other name as is specified below:

	 	 	 	 	 
	 
	 	 	 	 
	 

	 	 	 	 
	 

	 	(Print Name)
	 	 
	 
	 	 	 	 
	 

	 	Address:	 	 
	 
	 	 	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	 	 	 

     (3) The undersigned confirms that the Shares are being acquired for the account of the
undersigned for investment only and not with a view to, or for resale in connection with, the
distribution thereof and that the undersigned has no present intention of distributing or selling
the Shares.

     (4) The undersigned accepts such shares subject to the restrictions on transfer set forth in
the attached Note.

	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 
	(Date)
	 	 	 	 	(Signature)	 	 
	 
	 	 	 	 	 	 	 	 
	 
	 

	 	 	 	 	 	(Print Name)	 	 

 

 

EXHIBIT B

FORM OF STOCK PURCHASE WARRANT

THIS WARRANT AND ANY SHARES ISSUED UPON ITS EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE “ACT”), AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH VIEW TO, OR
IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION OF ANY SHARES
ISSUED UPON EXERCISE HEREOF MAY BE AFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED
THERETO OR AN OPINION OF COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE ACT THE TRANSFER OF THIS WARRANT IS RESTRICTED AS SET FORTH
HEREIN.

			
	 	 	 
	No. _____
	 	______________, 2006

SAVE THE WORLD AIR, INC.

WARRANT TO PURCHASE COMMON STOCK

VOID AFTER 5:00 P.M. P.S.T. ON ___________, 2011

     THIS CERTIFIES that, for the value received, MORALE ORCHARDS, LLC (the “Holder”) is entitled,
upon the terms and subject to the conditions hereinafter set forth, at any time on or after 180
days following the date of this Warrant and on or prior to 5:00 p.m. P.S.T. on the fifth
anniversary of the date of this Warrant (the “Expiration Time”), but not thereafter, to subscribe
for and purchase, from SAVE THE WORLD AIR, INC., a Nevada corporation (the “Company”), up to
____________ (______) shares of the Company’s Common Stock (the “Shares”) at a purchase price per
share equal to $_______ (the “Exercise Price”).

     1. Exercise of Warrant.

          (a) The purchase rights represented by this Warrant are exercisable by the Holder, in whole or
in part, at any time after the date hereof and before the Expiration Time by the surrender of this
Warrant and the Notice of Exercise annexed hereto duly executed at the office of the Company, in
North Hollywood, California (or such other office or agency of the Company as it may designate by
notice in writing to the Holder at the address of the Holder appearing on the books of the
Company), and upon payment of an amount equal to the aggregate Exercise Price for the number of
Shares thereby purchased (by cash or by check or certified bank check payable to the order of the
Company in an amount equal to the purchase price of the shares thereby purchased); whereupon the
Holder shall be entitled to receive a stock certificate representing the number of Shares so
purchased. The Company agrees that if at the time of the surrender of this Warrant and purchase of
the Shares, the Holder shall be entitled to exercise this Warrant, the Shares so purchased shall be
and be deemed to be issued to such holder as

 

 

the record owner of such Shares as of the close of business on the date on which this Warrant
shall have been exercised as aforesaid.

          Upon partial exercise of this Warrant, the Holder shall be entitled to receive from the
Company a new Warrant in substantially identical form for the purchase of that number of Shares as
to which this Warrant shall not have been exercised. Certificates for Shares purchased hereunder
shall be delivered to the Holder within a reasonable time after the date on which this Warrant
shall have been exercised as aforesaid.

     2. No Fractional Shares or Scrip. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant. With respect to any fraction
of a share called for upon the exercise of this Warrant, an amount equal to such fraction
multiplied by the then current fair market value at which each Share may be purchased hereunder
shall be paid in cash to the Holder.

          (a) For purposes of this Section 2, the fair market value of the Shares shall mean the average
closing price of a share of the Company’s Common Stock on a national stock exchange on which the
Common Stock is listed at the time of exercise on the last business day prior to the date of
exercise of this Warrant pursuant to Section l or, if the Company’s Common Stock is not so listed,
the fair market value of the Common Stock (without regard to the restrictions on transfer or number
of Shares) as determined in good faith by the Company’s Board of Directors.

     3. Charges, Taxes and Expenses. The Holder shall pay all issue and transfer taxes and
other incidental expenses in respect of the issuance of certificates for Shares upon the exercise
of this Warrant, and such certificates shall be issued in the name of the Holder of this Warrant.

     4. No Rights as a Stockholder. This Warrant does not entitle the Holder to any voting
rights or other rights as a stockholder of the Company prior to the exercise hereof.

     5. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this
Warrant, and in case of loss, theft or destruction of this Warrant, upon delivery of an indemnity
agreement or security reasonably satisfactory in form and amount to the Company or, in the case of
any such mutilation, upon surrender and cancellation of such Warrant, and upon reimbursement to the
Company of all reasonable expenses incidental thereto, the Company will make and deliver to the
Holder, in lieu thereof, a new Warrant in substantially identical form and dated as of such
cancellation.

     6. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of
any action or the expiration of any right required or granted herein shall be a Saturday or a
Sunday or shall be a legal holiday in the United States or the State of California, then such
action may be taken or such right may be exercised on the next succeeding business.

 

 

     7. Merger, Reclassification, etc.

          (a) Merger, etc. If at any time the Company proposes (A) the acquisition of the
Company by another entity by means of any transaction or series of related transactions (including,
without limitation, any reorganization, merger, consolidation or stock issuance) that results in
the transfer of fifty percent (50%) or more of the then outstanding voting power of the Company; or
(B) a sale of all or substantially all of the assets of the Company, then the Company shall give
the Holder ten (10) days notice of the proposed effective date of the transaction. If, in the case
of such acquisition of the Company, and the Warrant has not been exercised by the effective date of
the transaction, this Warrant shall be exercisable into the kind and number of shares of stock or
other securities or property of the Company or of the entity resulting from such merger or
acquisition to which such Holder would have been entitled if immediately prior to such acquisition
or merger, it had exercised this Warrant. The provisions of this Section 7(a) shall similarly apply
to successive consolidations, mergers, sales or conveyances.

          (b) Reclassification, etc. If the Company at any time shall, by subdivision,
combination or reclassification of securities or otherwise, change any of the securities to which
purchase rights under this Warrant exist into the same or a different number of securities of any
class or classes, this Warrant shall thereafter be to acquire such number and kind of securities as
would have been issuable as the result of such change with respect to the securities which were
subject to the purchase rights under this Warrant immediately prior to such subdivision,
combination, reclassification or other change. If the Shares are subdivided or combined into a
greater or smaller number of Shares, the Exercise Price under this Warrant shall be proportionately
reduced in case of subdivision of shares or proportionately increased in the case of combination of
shares, in both cases by the ratio which the total number of Shares to be outstanding immediately
after such event bears to the total number of Shares outstanding immediately prior to such event.

          (c) Cash Distributions. No adjustment on account of cash dividends or interest on the
Shares or other securities purchasable hereunder will be made to the Exercise Price under this
Warrant.

     8. Restrictions on Transfer.

          (a) Restrictions on Transfer of Shares. In no event will the Holder make a disposition
of this Warrant or the Shares unless and until, if requested by the Company, it shall have
furnished the Company with an opinion of counsel satisfactory to the Company and its counsel to the
effect that appropriate action necessary for compliance with the Securities Act of 1933, as amended
(the “Act”) relating to sale of an unregistered security has been taken. Notwithstanding the
foregoing, the restrictions imposed upon the transferability of the Shares shall terminate as to
any particular Share when (i) such security shall have been sold without registration in compliance
with Rule 144 under the Act, or (ii) a letter shall have been issued to the Holder at its request
by the staff of the Securities and Exchange Commission or a ruling shall have been issued to the
Holder at its request by such Commission stating that no action shall be recommended by such staff

 

 

or taken by such Commission, as the case may be, if such security is transferred without
registration under the Act in accordance with the conditions set forth in such letter or ruling and
such letter or ruling specifies that no subsequent restrictions on transfer are required, or (iii)
such security shall have been registered under the Act and sold by the Holder thereof in accordance
with such registration.

          (b) Subject to the provisions of Section 8(a) hereof, this Warrant and all rights hereunder
are transferable, in whole or in part, upon surrender of the Warrant with a properly executed
assignment at the principal office of the Company.

          (c) Restrictive Legends. The stock certificates representing the Shares and any
securities of the Company issued with respect thereto shall be imprinted with legends restricting
transfer except in compliance with the terms hereof and with applicable federal and state
securities laws.

     9. Miscellaneous.

          (a) Governing Law. This Warrant shall be governed by and construed in accordance with
the laws of the State of California applicable to contracts made and to be performed wholly within
such state.

          (b) Restrictions. The Holder acknowledges that the Shares acquired upon the exercise
of this Warrant may have restrictions upon its resale imposed by state and federal securities laws.

          (c) Waivers Strictly Construed. With regard to any power, remedy or right provided
herein or otherwise available to any party hereunder (i) no waiver or extension of time shall be
effective unless expressly contained in a writing signed by the waiving party; and (ii) no
alteration, modification or impairment shall be implied by reason of any previous waiver, extension
of time, delay or omission in exercise, or other indulgence.

[remainder of page intentionally left blank]

 

 

          (d) Complete Agreement and Modifications. This Warrant constitutes the Company’s and
Holder’s entire agreement with respect to the subject matter hereof and supersedes all agreements,
representations, warranties, statements, promises and understandings, whether oral or written, with
respect to the subject matter hereof. This Warrant may not be amended, altered or modified except
by a writing signed by the Company and the Holder of this Warrant.

     IN WITNESS WHEREOF, SAVE THE WORLD AIR, INC. has caused this Warrant to be executed by its
duly authorized representative dated as of the date first set forth above.

	 	 	 	 	 
	 	SAVE THE WORLD AIR, INC.

5125 Lankershim Boulevard

North Hollywood, CA 91601

 	 
	 	By:  	 	 
	 	 	 	 
	 	 	 	 

 

 

NOTICE OF EXERCISE

	TO:	 	SAVE THE WORLD AIR, INC., a Nevada corporation

     (1) The undersigned hereby elects to purchase                                          shares of Common Stock (the
“Shares”) of Save the World Air, Inc. pursuant to the terms of the attached Warrant, and tenders
herewith payment of the purchase price in full, together with all applicable transfer taxes, if
any.

     (2) Please issue a certificate or certificates representing the Shares in the name of the
undersigned or in such other name as is specified below:

	 	 	 
	 
	 
	(Print Name)
	 
	 
	Address:
	 
	 
	 
	 
	 
	 

     (3) The undersigned confirms that he is an “accredited investor” as defined by Rule 501(a)
under the Securities Act of 1933, as amended, at the time of execution of this Notice.

     (4) The undersigned confirms that the Shares are being acquired for the account of the
undersigned for investment only and not with a view to, or for resale in connection with, the
distribution thereof and that the undersigned has no present intention of distributing or selling
the Shares.

     (5) The undersigned accepts such Shares subject to the restrictions on transfer set forth in
the attached Warrant.

	 	 	 	 	 	 
	Date:
	 	 	 	 
	 

	 	 	 	(Signature)
	 
	 
	 	 	 	 
	 

	 	 	 	(Print Name)

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