NOTE AND WARRANT PURCHASE AGREEMENT

 

                       NOTE AND WARRANT PURCHASE AGREEMENT

 

      THIS NOTE AND WARRANT PURCHASE AGREEMENT, dated as of January 14, 2005

(this "AGREEMENT"), is entered into by and between VITROTECH CORPORATION, a

Nevada corporation (the "COMPANY"), and VITROBIRTH, LLC, a Delaware limited

liability company (the "INVESTOR").

 

                                    RECITALS

 

      A. On the terms and subject to the conditions set forth herein, the

Investor is willing to purchase from the Company, and the Company is willing to

sell to the Investor, up to four secured, convertible promissory notes in the

aggregate principal amount of three million dollars ($3,000,000), together with

related warrants to acquire shares of the Company's capital stock.

 

      B. Capitalized terms not otherwise defined in Section 12(p) of this

Agreement shall have the meaning set forth in the form of secured, convertible

promissory note attached hereto as EXHIBIT A.

 

                                    AGREEMENT

 

      NOW, THEREFORE, in consideration of the foregoing recitals and the

representations, warranties, covenants and conditions set forth below, the

parties hereto, intending to be legally bound, agree as follows:

 

      1. THE LOAN, NOTES AND WARRANTS.

 

            (a) Loan and Notes. On the terms and subject to the conditions of

this Agreement, the Investor agrees to make a loan to the Company in an

aggregate principal amount of up to three million dollars ($3,000,000) as

follows:

 

                  (i) The Company agrees to issue and sell to the Investor, and,

subject to the terms and conditions of this Agreement, the Investor agrees to

purchase from the Company, a secured, convertible promissory note in the form of

EXHIBIT A hereto in the principal amount of $1,500,000 (the "INITIAL NOTE");

 

                  (ii) The Company agrees to issue and sell to the Investor,

and, subject to the terms and conditions of this Agreement, the Investor agrees

to purchase from the Company, a secured, convertible promissory note in the form

of EXHIBIT A hereto in the principal amount of $500,000 (the "SECOND NOTE");

 

                  (iii) The Company agrees to issue and sell to the Investor,

and, subject to the terms and conditions of this Agreement, the Investor agrees

to purchase from the Company, a secured, convertible promissory note in the form

of EXHIBIT A hereto in the principal amount of $500,000 (the "THIRD NOTE"); and

 

<PAGE>

 

                  (iv) The Company agrees to issue and sell to the Investor,

and, subject to the terms and conditions of this Agreement, the Investor agrees

to purchase from the Company, a secured, convertible promissory note in the form

of EXHIBIT A hereto in the principal amount of $500,000 (the "FOURTH NOTE").

 

            (b) Warrant. In consideration for the purchase by the Investor of

each of the Notes, the Company will issue to the Investor warrants in the form

attached hereto as EXHIBIT B as follows (collectively, "WARRANTS"): (i) at the

Initial Closing, Warrants to purchase 3,625,000 shares of Common Stock at the

Warrant Price ("INITIAL Warrant"), (ii) at the Second Closing, Warrants to

purchase 1,208,333 shares of Common Stock at the Warrant Price ("SECOND

WARRANT"), (iii) at the Third Closing, Warrants to purchase 1,208,333 shares of

Common Stock at the Warrant Price ("THIRD WARRANT"), and (iv) at the Fourth

Closing, Warrants to purchase 1,208,334 shares of Common Stock. at the Warrant

Price ("FOURTH WARRANT").

 

            (c) Delivery.

 

                  (i) The sale and purchase of the Initial Note and Initial

Warrant shall take place at a closing (the "INITIAL CLOSING") to be held at such

place and time as the Company and the Investor may determine (the "INITIAL

CLOSING DATE"). At the Initial Closing, the Company will deliver to the Investor

the Initial Note, Initial Warrant and a Registration Rights Agreement against

receipt by the Company of $1,500,000. The Initial Note and Warrant will be

registered in the Investor's name in the Company's records.

 

                  (ii) The sale and purchase of the Second Note and Second

Warrant shall take place at a closing (the "SECOND CLOSING") to be held at such

place and time as the Company and the Investor may determine (the "SECOND

CLOSING DATE"). At the Second Closing, the Company will deliver to the Investor

the Second Note, Second Warrant and a Registration Rights Agreement against

receipt by the Company of $500,000. The Second Note will be registered in the

Investor's name in the Company's records.

 

                  (iii) The sale and purchase of the Third Note and Third

Warrant shall take place at a closing (the "THIRD CLOSING") to be held at such

place and time as the Company and the Investor may determine (the "THIRD CLOSING

Date"). At the Third Closing, the Company will deliver to the Investor the Third

Note, Third Warrant and a Registration Rights Agreement against receipt by the

Company of $500,000. The Third Note will be registered in the Investor's name in

the Company's records.

 

                  (iv) The sale and purchase of the Fourth Note and Fourth

Warrant shall take place at a closing (the "FOURTH CLOSING") to be held at such

place and time as the Company and the Investor may determine (the "FOURTH

CLOSING DATE"). At the Fourth Closing, the Company will deliver to the Investor

the Fourth Note, Fourth Warrant and a Registration Rights Agreement against

receipt by the Company of $500,000. The Fourth Note will be registered in the

Investor's name in the Company's records.

 

 

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            At any time, and from time to time, the Investor may, at its sole

and exclusive option, convert all or any part of the principal and accrued

interest outstanding under any or all of the Notes into fully paid and

nonassessable shares of Common Stock of the Company at a conversion price per

share of Common Stock equal to $0.12, subject to adjustment as provided in

Section 8 of the Notes.

 

            (d) Use of Proceeds. The Company shall use the proceeds of the sale

and issuance of the Notes only for the purposes set forth on SCHEDULE 1 to this

Agreement. Except as set forth on SCHEDULE 1 to this Agreement, no portion of

such proceeds shall be used to pay or redeem all or any portion of any

Indebtedness of the Company or any Subsidiary existing as of the Initial Closing

Date.

 

            (e) Payments. The Company will make all cash payments due under the

Notes in immediately available funds by 11:00 a.m. pacific time on the date such

payment is due in the manner and at the address for such purpose specified below

the Investor's name on the signature page hereto, or at such other address as

the Investor or other registered holder of the applicable Note may from time to

time direct in writing.

 

            (f) No Original Issue Discount. The Company and the Investor

acknowledge and agree that the Warrant sold to the Investor in connection

herewith is part of an investment unit, which includes the Initial Note, within

the meaning of Section 1273(c)(2) of the Internal Revenue Code of 1986, as

amended ("IRC"). As of the Initial Closing Date, the Company and the Investor

further agree that as between the Company and the Investor, the fair market

value of the right to buy one share of Common Stock under the terms as set forth

in the Warrant purchased on the Initial Closing Date is equal to $0.001 and

that, pursuant to Treas. Reg. Section 1.1273-2(h), a portion of the issue price

of the investment unit (such amount being equal to $0.001 multiplied by the

number of shares of Common Stock issuable upon exercise of such Warrant) will be

allocable to such Warrant and the balance shall be allocable to the Initial Note

purchased on the Initial Closing Date. The Company and the Investor agree to

prepare their federal income tax returns in a manner consistent with the

foregoing agreement and, pursuant to Treas. Reg. Section 1.1273, the original

issue discount on the Initial Note shall be considered to be zero.

 

      2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents

and warrants to the Investor that, except as set forth on a Schedule of

Exceptions (the "SCHEDULE OF EXCEPTIONS") furnished to the Investor prior to

execution hereof and attached hereto as SCHEDULE 2 specifically identifying the

relevant subparagraph hereof, which exceptions shall be deemed to be

representations and warranties as if made hereunder:

 

            (a) Organization, Good Standing and Qualification. The Company is a

corporation duly organized, validly existing and in good standing under the laws

of the State of Nevada. The Company is duly qualified to transact business and

is in good standing in each jurisdiction in which such qualification is

required. The Company has all required power and authority necessary to own and

operate its property, to carry on its business as now conducted and presently

proposed to be conducted and to carry out the transactions contemplated by this

Agreement.

 

 

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<PAGE>

 

            (b) Capitalization.

 

                  (i) The authorized capital stock of the Company consists of

500,000,000 shares of Common Stock, par value $0.001 per share. There are

outstanding 158,720,389 shares of Common Stock and the Company has no other

shares of capital stock outstanding. All of the outstanding shares of capital

stock of the Company have been duly authorized, validly issued and are fully

paid and nonassessable and were issued in compliance with all applicable state

and federal laws concerning the issuance of securities.

 

                  (ii) Except as set forth on the Schedule of Exceptions: (A)

there are no outstanding options, warrants, rights to subscribe for, calls or

commitments of any character whatsoever relating to, or securities or rights

convertible into or exercisable or exchangeable for, any shares of capital stock

of the Company, or arrangements by which the Company is or may become bound to

issue additional shares of capital stock, nor are any such issuances or

arrangements contemplated other than pursuant to the Company's 2004 Consultant

Stock Plan, (B) there are no agreements or arrangements under which the Company

is obligated to register the sale of any of its securities under the Securities

Act and (C) the Company has no obligations (contingent or otherwise) to

purchase, redeem or otherwise acquire any of its equity securities or any

interests therein or to pay any dividend or make any distribution in respect

thereof. The Company is not a party or subject to any agreement or understanding

between any Person which affects or relates to the voting or giving of written

consents concerning any security or by a director of the Company.

 

                  (iii) The Company has furnished to the Issuer true and correct

copies of the Company's Organizational Documents as in effect on the date

hereof. The Company is not in violation of any provision of its Organizational

Documents. None of the Securities is subject to preemptive rights or any other

similar rights of the stockholders of the Company.

 

            (c) Subsidiaries. Other than as specified in paragraph 2(c) of the

Schedule of Exceptions, neither the Company nor any of its Subsidiaries

presently owns or controls, directly or indirectly, or holds any rights to

acquire, any interest in any other corporation, association or other business

entity nor has the Company or any of its Subsidiaries ever held such interest.

Neither the Company nor its Subsidiaries is a participant in any joint venture,

partnership or similar arrangement nor has the Company or any of its

Subsidiaries ever been a participant in any such arrangement. Each of the

Company's Subsidiaries is duly organized and existing under the laws of its

jurisdiction of organization and is in good standing under such laws. None of

the Company's Subsidiaries owns or leases property or engages in any activity in

any jurisdiction that might require its qualification to do business as a

foreign corporation.

 

            (d) Authorization. All corporate action on the part of each of the

Company and its Subsidiaries, and their respective officers, directors and

stockholders necessary for the authorization, execution and delivery of each of

the Transaction Documents to which it is a party, the performance of all

obligations of each of the Company and its Subsidiaries hereunder and

thereunder, the sale and issuance (or reservation for issuance) of the Notes and

Warrant being sold hereunder and the Common Stock issuable upon conversion of

the Notes and Warrant has been taken or will be taken prior to the Initial

Closing. The Transaction Documents to which each of the Company and/or its

Subsidiaries is a party constitute valid and legally binding obligations of the

Company and/or its Subsidiaries, enforceable in accordance with their respective

terms. The Company's board of directors has determined in its good faith

business judgment that the issuance of the Notes and the Warrant hereunder and

the consummation of the other transactions contemplated by the Transaction

Documents are in the best interest of the Company and its stockholders.

 

 

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<PAGE>

 

             (e) Mining Companies. To the best of the Company's Knowledge, (i)

each of the Mining Companies is duly organized and existing under the laws of

its jurisdiction of organization and is in good standing under such laws (ii)

each of the Mining Companies is qualified to do business as a foreign entity and

is in good standing in each jurisdiction where owns property or conducts

business, (iii) all company action on the part of each of the Mining Companies,

and their respective officers, managers and members necessary for the

authorization, execution and delivery of the Mine Security Agreements, the

performance of all obligations of each of the Mining Companies thereunder, has

been taken or will be taken prior to the Initial Closing, (iv) the Mine Security

Agreements constitute valid and legally binding obligations of the Mining

Companies, enforceable in accordance with their respective terms, and (v) each

of the Mining Companies' respective have determined in its good faith business

judgment that the execution and delivery of the Mine Security Agreement are in

the best interest of the Mining Companies.

 

            (f) Valid Issuance of Notes, Warrant and Common Stock. The Notes and

Warrant that are being purchased by the Investor hereunder, when issued, sold

and delivered in accordance with the terms of this Agreement for the

consideration expressed herein, will be duly and validly issued and will be free

of restrictions on transfer, other than restrictions on transfer under

applicable state and federal securities laws. The Common Stock issuable upon

conversion of the Notes and the exercise of the Warrant has been duly and

validly reserved for issuance and, upon issuance, will be duly and validly

issued, fully paid and nonassessable and will be free of restrictions on

transfer, other than restrictions under applicable state and federal securities

laws.

 

            (g) Governmental Consents. No consent, approval, order or

authorization of, or registration, qualification, designation, declaration or

filing with, any federal, state or local governmental authority on the part of

the Company or any of its Subsidiaries is required in connection with the

consummation of the transactions contemplated by this Agreement, except for such

filings required pursuant to applicable federal and state securities laws, which

filings will be effected within the required statutory period.

 

            (h) Offering. Subject in part to the truth and accuracy of the

Investor's representations set forth in SECTION 3 of this Agreement, the offer,

sale and issuance of the Notes and Warrant as contemplated by this Agreement are

exempt from the registration requirements of the Securities Act and the

qualification or registration requirements of the applicable blue sky laws.

Neither the Company nor any authorized agent acting on its behalf will take any

action hereafter that would cause the loss of such exemptions.

 

            (i) Litigation. There is no action, suit, proceeding or

investigation pending or currently threatened against the Company or any of its

Subsidiaries (or, to the best of the Company's knowledge, threatened against or

affecting any of the officers, directors or employees of the Company or any of

its Subsidiaries with respect to their businesses or proposed business

activities) that questions the validity of this Agreement or the other

Transaction Documents or the right of the

 

 

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<PAGE>

 

Company or any of its Subsidiaries to enter into such agreements or to

consummate the transactions contemplated hereby, or that might result, either

individually or in the aggregate, in any material adverse changes in the

business, assets or condition of the Company or any of its Subsidiaries,

financially or otherwise, or any change in the current equity ownership of the

Company or any of its Subsidiaries nor is the Company or any of its Subsidiaries

aware that there is any basis for the foregoing. The foregoing includes, without

limitation, actions, suits, proceedings or investigations pending or threatened

(or any basis therefor known to the Company) involving the prior employment of

any of the Company's or any of its Subsidiaries' employees, their use in

connection with the Company's or any of its Subsidiaries' business of any

information or techniques allegedly proprietary to any of their former employers

or their obligations under any agreements with prior employers. Neither the

Company nor any of its Subsidiaries is a party or subject to the provisions of

any order, writ, injunction, judgment or decree of any court or government

agency or instrumentality. Neither the Company nor any of its Subsidiaries has

received any opinion or memorandum or legal advice from legal counsel to the

effect that it is exposed, from a legal standpoint, to any liability or

disadvantage which may be material to its business. There is no action, suit,

proceeding or investigation by the Company or any of its Subsidiaries currently

pending or that the Company or any of its Subsidiaries intends to initiate.

 

            (j) Patents and Trademarks. The Schedule of Exceptions contains a

complete and accurate list of all (i) patented or registered Intellectual

Property Rights owned or used by the Company, or any of its Subsidiaries (ii)

pending patent applications and applications for registrations of other

Intellectual Property Rights filed by the Company or any of its Subsidiaries and

(iii) unregistered trade names and corporate names owned or used by the Company

or any of its Subsidiaries. Paragraph 2(j) of the Schedule of Exceptions also

contains a complete and accurate list of all licenses and other rights granted

by the Company or any of its Subsidiaries to any third party with respect to any

Intellectual Property Rights and all licenses and other rights granted by any

third party to the Company or any of its Subsidiaries with respect to any

Intellectual Property Rights, in each case identifying the subject Intellectual

Property Rights but not including licenses arising from the purchase of "off the

shelf" or other standard products. Each of the Company and its Subsidiaries owns

all right, title and interest in and to all of the Intellectual Property Rights

listed in paragraph 2(j) of the Schedule of Exceptions free and clear of

Encumbrances. Each of the Company and its Subsidiaries owns all right, title and

interest in and to all of the Intellectual Property Rights free and clear of all

Encumbrances. Each of the Company and its Subsidiaries owns all right, title and

interest to, or has the right to use pursuant to a valid license, all

Intellectual Property Rights necessary for the operation of the business of the

Company or any of its Subsidiaries as presently conducted and as presently

proposed to be conducted, free and clear of all Encumbrances. Each of the

Company and its Subsidiaries has taken all necessary and desirable actions to

maintain and protect the Intellectual Property Rights that it owns. To the best

of the Company's knowledge, the owners of any Intellectual Property Rights

licensed to the Company or any of its Subsidiaries have taken all necessary and

desirable actions to maintain and protect the Intellectual Property Rights that

are subject to such licenses. There have been no claims made against the Company

or any of its Subsidiaries asserting the invalidity, misuse or unenforceability

of any of such Intellectual Property Rights, and to the best of the Company's

knowledge, there are no valid grounds for the same. Neither the Company nor any

of its Subsidiaries has received any notices of, and is not aware of any facts

which indicate a likelihood of, any infringement or misappropriation by, or

conflict with, any third party with respect to such Intellectual Property Rights

(including, without limitation, any

 

 

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<PAGE>

 

demand or request that the Company or any of its Subsidiaries license any rights

from a third party). To the best of the Company's knowledge, the conduct of the

Company's or any of its Subsidiaries' business has not infringed,

misappropriated or conflicted with and does not infringe, misappropriate or

conflict with any Intellectual Property Rights of others, nor would any future

conduct as presently contemplated infringe, misappropriate or conflict with any

Intellectual Property Rights of others. To the best of the Company's knowledge,

the Intellectual Property Rights owned by or licensed to the Company or any of

its Subsidiaries have not been infringed, misappropriated or conflicted by

others. The transactions contemplated by this Agreement shall have no adverse

effect on the Company's or any of its Subsidiaries' right, title and interest in

and to the Intellectual Property Rights. To the best of the Company's knowledge

after due inquiry, none of its employees is obligated under any contract

(including licenses, covenants or commitments of any nature) or other agreement,

or subject to any judgment, decree or order of any court or administrative

agency, that would interfere with the use of his or her best efforts to promote

the interests of the Company or any of its Subsidiaries or that would conflict

with the Company's or any of its Subsidiaries' business as presently conducted

and as presently proposed to be conducted. Neither the execution of this

Agreement nor the transactions contemplated by this Agreement nor the carrying

on of the Company's or any of its Subsidiaries' business by the employees of the

Company or any of its Subsidiaries, nor the conduct of the Company's or any of

its Subsidiaries' business as presently proposed to be conducted, will conflict

with or result in a breach of the terms, conditions or provisions of, or

constitute a default under, any contract, covenant or instrument under which any

of such employees is now obligated. The Company does not believe it is or will

be necessary to use any inventions of any of its employees (or people it

currently intends to hire) made prior to their employment by the Company or any

of its Subsidiaries, except for inventions that have been assigned or licensed

to the Company as of the date hereof.

 

            (k) Compliance with Other Instruments.

 

                  (i) To the best of the Company's Knowledge, (A) each of the

Company and its Subsidiaries is not in violation of or default under any

provision of its Organizational Documents or of any instrument, judgment, order,

writ, decree or contract to which it is a party or by which it is bound, or of

any provision of any federal or state statute, rule or regulation applicable to

the Company and its Subsidiaries, and (B) the execution, delivery and

performance of the Transaction Documents to which the Company or any of its

Subsidiaries is a party and the consummation of the transactions contemplated

hereby or thereby will not result in any such violation, or be in conflict with

or constitute, with or without the passage of time or giving of notice, either a

default under any such provision, instrument, judgment, order, writ, decree or

contract or an event that results in the creation of any Encumbrance upon any

assets of the Company or any of its Subsidiaries or the suspension, revocation,

impairment, forfeiture or nonrenewal of any permit, license, authorization or

approval applicable to the Company or its Subsidiaries, their respective

business or operations or any of their respective assets or properties. No

default or Event of Default has occurred under any of the Transaction Documents.

 

                  (ii) Each of the Mining Companies is not in violation of or

default under any provision of its Organizational Documents or of any

instrument, judgment, order, writ, decree or contract to which it is a party or

by which it is bound, or of any provision of any federal or state statute, rule

or regulation applicable to the Mining Companies. The execution, delivery and

performance of the Mine Security Agreement to which any of the Mining Companies

is a party and the consummation of the transactions contemplated hereby or

thereby will not result in any such violation, or be in conflict with or

constitute, with or without the passage of time or giving of notice, either a

default under any such provision, instrument, judgment, order, writ, decree or

contract or an event that results in the creation of any Encumbrance upon any

assets of the Mining Companies or the suspension, revocation, impairment,

forfeiture or nonrenewal of any permit, license, authorization or approval

applicable to Mining Companies, their respective business or operations or any

of their respective assets or properties.

 

 

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<PAGE>

 

            (l) Agreements; Action.

 

                  (i) There are no agreements, understandings, instruments,

contracts, proposed transactions, judgments, orders, writs or decrees to which

the Company or any of its Subsidiaries is a party or by which it is bound that

may involve (A) obligations (contingent or otherwise) of, or payments to, the

Company or any of its Subsidiaries in excess of $100,000, other than obligations

of, or payments to, the Company or any of its Subsidiaries arising from purchase

or sale agreements entered into in the Ordinary Course of Business, (B) the

license of any patent, copyright, trade secret or other proprietary right to or

from the Company or any of its Subsidiaries, other than licenses arising from

the purchase of "off the shelf" or other standard products, (C) provisions

restricting or affecting the development, manufacture or distribution of the

products of any of the Company or its Subsidiaries, (D) a warranty with respect

to its products sold, other than in the Ordinary Course of Business, or (E)

indemnification by the Company or any of its Subsidiaries with respect to

infringements of proprietary rights.

 

                  (ii) Neither the Company nor any of its Subsidiaries has (A)

declared or paid any dividends or authorized or made any distribution upon or

with respect to any class or series of its capital stock, (B) incurred any

indebtedness for money borrowed or any other liabilities individually in excess

of $50,000 (other than as specified in the Schedule of Exceptions) or, in the

case of indebtedness and/or liabilities individually less than $50,000, in

excess of $100,000 in the aggregate, (C) made any loans or advances to any

Person, other than ordinary advances for travel expenses, or (D) sold, exchanged

or otherwise disposed of any of its assets or rights, other than the sale of its

inventory in the Ordinary Course of Business.

 

                  (iii) For the purposes of subsections (i) and (ii) immediately

above, all indebtedness, liabilities, agreements, understandings, instruments,

contracts and proposed transactions involving the same Person or entity

(including Persons the Company or any of its Subsidiaries has reason to believe

are affiliated therewith) shall be aggregated for the purpose of meeting the

individual minimum dollar amounts of such subsections.

 

                  (iv) All of the contracts, agreements and instruments set

forth on the Schedule of Exceptions are valid, binding and enforceable in

accordance with their respective terms. Each of the Company and its Subsidiaries

has performed all material obligations required to be performed by it and is not

in default under or in breach of nor in receipt of any claim of default or

breach under any contract, agreement or instrument and neither the Company nor

any of its Subsidiaries has any present expectation or intention of not fully

performing all such obligations. No event has occurred which with the passage of

time or the giving of notice or both would result in a default, breach or event

of noncompliance by the Company or any of its Subsidiaries under any contract,

agreement or instrument. The Company has no knowledge of any breach or

anticipated breach by the other parties to any contract, agreement, instrument

or commitment.

 

 

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                   (v) The Company Records contain a true and correct copy of

each of the written instruments, plans, contracts and agreements and an accurate

description of each of the oral arrangements, contracts and agreements that are

referred to in the Company Records, together with all amendments, waivers or

other changes thereto.

 

                  (vi) Neither the Company nor any of its Subsidiaries is a

party to and is not bound by any contract, agreement or instrument, or subject

to any restriction under its Organizational Documents, that adversely affects

its business as now conducted or as proposed to be conducted, its properties or

its financial condition.

 

                  (vii) Neither the Company nor any of its Subsidiaries has

engaged in the past three (3) months in any discussion (i) with any

representative of any corporation or corporations regarding the consolidation or

merger of the Company or any of its Subsidiaries with or into any such

corporation or corporations, (ii) with any corporation, partnership, association

or other business entity or any individual regarding the sale, conveyance or

disposition of all or substantially all of the assets of the Company or any of

its Subsidiaries or a transaction or series of related transactions in which

more than fifty percent (50%) of the voting power of the Company or any of its

Subsidiaries is disposed of, or (iii) regarding any other form of acquisition,

liquidation, dissolution or winding up of the Company or any of its

Subsidiaries.

 

            (m) Related-Party Transactions. No employee, stockholder, officer or

director of the Company (or any of its Subsidiaries) or member of his or her

Family is indebted to the Company (or any of its Subsidiaries), nor is the

Company (or any of its Subsidiaries) indebted (or committed to make loans or

extend or guarantee credit) to any of them. To the best of the Company's

knowledge, none of such Persons has any direct or indirect ownership interest in

any firm or corporation with which the Company (or any of its Subsidiaries) is

affiliated or with which the Company (or any of its Subsidiaries) has a business

relationship, or any firm or corporation that competes with the Company (or any

of its Subsidiaries), except that employees, stockholders, officers or directors

of the Company (or any of its Subsidiaries) and members of their Families may

own stock in publicly traded companies that may compete with the Company (or any

of its Subsidiaries). No officer, director, manager or member of the Family of

any officer, director or manager of the Company (or any of its Subsidiaries) is

directly or indirectly interested in any Material Contract with the Company (or

any of its Subsidiaries).

 

            (n) Financial Statements. The Company has delivered or caused to be

delivered to the Investor audited consolidated balance sheets and audited

consolidated statements of income and retained earnings and cash flows of the

Company and each of its Subsidiaries, as applicable, as of December 31, 2003

(the "DELIVERED FINANCIAL STATEMENTS"). The Schedule of Exceptions sets forth an

unaudited consolidated balance sheet of the Company and its Subsidiaries, as

applicable, as of September 30, 2004 and unaudited consolidated statements of

income of the Company and its Subsidiaries, as applicable, for the nine months

ended September 30, 2004 (the "FINANCIAL STATEMENTS"). The Delivered Financial

Statements were prepared in conformity with GAAP applied

 

 

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<PAGE>

 

on a consistent basis (except as may be indicated in the notes thereto) and

present fairly, in all material respects, the financial position and the results

of operations of the Company and its Subsidiaries, as applicable, as of the

dates, and for the periods, referred to therein. The Financial Statements were

prepared in conformity with GAAP applied on a consistent basis (except for the

lack of footnote disclosure) and present fairly, in all material respects, the

financial position and the results of operations of the Company and its

Subsidiaries, as applicable, as of the dates, and for the periods, referred to

therein.

 

            (o) SEC Documents. Within the 18-month period immediately preceding

the date hereof, the Company has made all filings with the SEC required under

the Exchange Act or the Securities Act. The Company has previously made

available to Investor complete and accurate copies, as amended or supplemented

through the date hereof, of the following forms filed with the SEC: (i) Form

10-QSB under the Exchange Act for the period ended September 30, 2004, (ii) Form

10-KSB under the Exchange Act for the fiscal year ended December 31, 2003, and

(iii) each Form 8-K filed by the Company during fiscal years 2003 and 2004 (such

reports are collectively referred to herein as the "COMPANY REPORTS"). As of

their respective dates, the Company Reports did not contain any untrue statement

of a material fact or omit to state a material fact required to be stated

therein or necessary to make the statements therein, in light of the

circumstances under which they were made, not misleading. The audited financial

statements and unaudited interim financial statements of the Company included in

the Company Reports (i) comply as to form in all material respects with

applicable accounting requirements and published rules and regulations of the

SEC with respect thereto, (ii) have been prepared in accordance with GAAP

applied on a consistent basis throughout the periods covered thereby (except as

may be indicated therein or in the notes thereto, and in the case of quarterly

financial statements, as permitted by Form 10-QSB under the Exchange Act), and

(iii) fairly presented in all material respects (subject, in the case of the

unaudited interim financial statements, to normal, year-end audit adjustments,

none of which will be material) the consolidated financial condition, results of

operations and cash flows of the Company as of the respective dates thereof and

for the periods referred to therein.

 

            (p) Changes. Since September 30, 2004, there has not been:

 

                  (i) any adverse change in the assets, liabilities, financial

condition or operating results of the Company and/or its Subsidiaries from that

reflected in the Company's Form 10-QSB under the Exchange Act for the period

ended September 30, 2004;

 

                  (ii) any damage, destruction or loss, whether or not covered

by insurance, materially and adversely affecting the assets, properties,

financial condition, operating results or business of the Company or any of its

Subsidiaries;

 

                  (iii) any waiver by the Company or any of its Subsidiaries of

a valuable right or of a debt owed to it;

 

                  (iv) any satisfaction or discharge of any Encumbrance or

payment of any obligation by the Company or any of its Subsidiaries;

 

 

                                       10

<PAGE>

 

                  (v) any change or amendment to a Material Contract or

arrangement by which the Company or any of its Subsidiaries or any of their

respective assets or properties is bound or subject;

 

                  (vi) any change in any compensation arrangement or agreement

with any employee of the Company or Subsidiaries;

 

                  (vii) any sale, assignment or transfer of any patents or

patent applications, trademarks or trademark applications, service marks, trade

names, corporate names, copyrights or copyright registrations, trade secrets or

other intangible assets, or disclosure of any proprietary confidential

information to any Person;

 

                  (viii) any resignation or termination of employment of any key

officer of the Company or any of its Subsidiaries; and the Company, to the best

of its knowledge, does not know of the impending resignation or termination of

employment of any such officer;

 

                   (ix) any declaration, payment, setting aside or other

distribution of cash or other property to its stockholders with respect to its

capital stock or other equity securities (including without limitation, any

warrants, options or other rights to acquire its capital stock or other equity

securities);

 

                  (x) any Encumbrance created by, or transfer of a security

interest in, the Company or any of its Subsidiaries, with respect to any of its

properties or assets, except liens for taxes not yet due or payable;

 

                  (xi) receipt of notice that there has been a loss of, or order

cancellation by, any major customer of the Company or any of its Subsidiaries;

 

                  (xii) made capital expenditures or commitments therefor that

aggregate in excess of $50,000;

 

                  (xiii) made any loans or advances to, guarantees for the

benefit of, or any investments in, any Person (including but not limited to any

of the Company's or any of its Subsidiaries' employees, officers or directors,

or any members of their immediate families), corporation, partnership, joint

venture or other entity;

 

                  (xiv) to the best of the Company's knowledge, any other event

or condition of any character that might materially and adversely affect the

assets, properties, financial condition, operating results or business of the

Company or any of its Subsidiaries; or

 

                  (xv) any agreement or commitment by the Company or any of its

Subsidiaries to do any of the things described in this Section (p).

 

            (q) Tax Returns. Except as set forth on the Schedule of Exceptions,

(i) each of the Company and its Subsidiaries has timely filed all Tax returns

(federal, state and local) required to be filed by it and all Taxes, assessments

and other government charges imposed upon the Company or any of its

Subsidiaries, or upon any of the assets, income or franchises of the Company or

any of

 

 

                                       11

<PAGE>

 

its Subsidiaries, have been timely paid or, if not yet payable, are adequately

accrued on each of the Company's and its Subsidiaries' books and records; (ii)

there are no actual or proposed Tax deficiencies, assessments or adjustments

with respect to the Company or any of its Subsidiaries or any assets or

operations of the Company or any of its Subsidiaries; (iii) no consent has been

given with respect to the Company or any of its Subsidiaries to extend the time

in which any Tax may be assessed or collected by any taxing authority; (iv)

there are no ongoing or pending Tax audits by any taxing authority against the

Company or any of its Subsidiaries; (v) the Company has never filed a consent

relating to any assets or property pursuant to Section 341(f) of the Code,

relating to collapsible corporations; and (vi) none of the assets or income

items of the Company or any of its Subsidiaries has been or potentially is

subject to Tax under Code Section 1374 (or any corresponding provision of state,

local or foreign law).

 

            (r) Permits. Each of the Company and its Subsidiaries has all

franchises, permits, licenses and any similar authority necessary for the

conduct of its business, and the Company believes it can obtain, without undue

burden or expense, any similar authority for the conduct of its or any of the

Subsidiaries' business as planned to be conducted. Neither the Company nor any

of the Subsidiaries is in default in any material respect under any of such

franchises, permits, licenses or other similar authority.

 

            (s) Environmental and Safety Laws. Each of the Company and its

Subsidiaries, the operation of their respective businesses and any real property

that the Company or any of the Subsidiaries owns or has owned, leases or has

leased or otherwise occupies or uses or has occupied or used (the "PREMISES")

are, to the best of the Company's knowledge, in compliance with all applicable

Environmental Laws and orders or directives of any governmental authorities

having jurisdiction under such Environmental Laws. The Company has not received

any citation, directive, letter or other communication, written or oral, or any

notice of any proceeding, claim or lawsuit, from any Person arising out of the

ownership or occupation of the Premises, or the conduct of its operations, and

the Company is not aware of any basis therefor. To the best of the Company's

knowledge, no material expenditures are or will be required to comply with any

Environmental Laws.

 

            (t) Registration Rights. Except as provided in the Schedule of

Exceptions, the Company has not granted or agreed to grant any registration

rights, including piggyback rights, to any Person or entity.

 

            (u) Title to Property and Assets. The Company and its Subsidiaries

have good and marketable title to their respective properties and assets,

including the properties and assets reflected in the most recent audited balance

sheet of the Company or purported to have been acquired by the Company or any

Subsidiary after said date (except as sold or otherwise disposed of in the

Ordinary Course of Business), in each case free and clear of Encumbrances. All

leases of the Company and its Subsidiaries are valid and subsisting and are in

full force and effect in all material respects. Neither the Company nor any of

its Subsidiaries owns any real property and none of them is in material breach

of any real property lease.

 

            (v) Insurance. Each of the Company and its Subsidiaries has in full

force and effect fire and casualty insurance policies, with extended coverage,

sufficient in amount (subject to

 

 

                                       12

<PAGE>

 

reasonable deductibles) to allow it to replace any of its properties that might

be damaged or destroyed. Each of the Company and its Subsidiaries has in full

force and effect products liability and errors and omissions insurance in

amounts customary for companies similarly situated. Neither the Company nor any

of its Subsidiaries is in default with respect to its obligations under any

insurance policy maintained by it, and neither the Company nor any of the

Subsidiaries has been denied insurance coverage. The Company and its

Subsidiaries shall pay all insurance premiums payable by them. The Company has

directors' and officers' liability insurance policies (primary and excess) that

are in full force and effect for an aggregate of $10 million of coverage.

 

            (w) Employee Benefit Plans. (i) neither the Company nor any

Subsidiary has employee benefit plans (as defined in Section 3(3) of ERISA);

(ii) the Company and each Subsidiary does not now, or has it ever, maintained,

established, sponsored, participated in, or contributed to, any pension plan

within the meaning of Section 3(2) of ERISA which is subject to Title IV of

ERISA or Section 412 of the Internal Revenue Code of 1986, as amended; and (iii)

at no time has the Company or any Subsidiary contributed to or been requested to

contribute to any multiemployer plan as defined in Section 3(37) of ERISA.

 

            (x) Employee Relations.

 

                  (i) All material bonus, deferred compensation, pension,

retirement, profit-sharing, thrift, savings, employee stock ownership, stock

bonus, stock purchase, restricted stock plan, stock option or award plan, health

and medical insurance plans, life insurance and disability insurance plans,

other material employee benefit plans, contracts or arrangements which cover

multiple employees of the Company or the Subsidiaries including, but not limited

to, "employee benefit plans" within the meaning of ERISA (collectively, the

"Employee Benefit Plans"), are listed in paragraph 2(x)(i) of the Schedule of

Exceptions. No Employee Benefit Plans are or were collectively bargained for or

have terms requiring assumption of any guarantee by the Investor.

 

                  (ii) There have been no violations of ERISA or the Code by the

Company or any of the Subsidiaries relating to any Employee Benefit Plan. Each

of the Company and its Subsidiaries has timely filed all documents, notes and

reports (including IRS Form 5500) for each such Employee Benefit Plan with all

applicable governmental authorities and has timely furnished all required

documents to the participants or beneficiaries of each such Employee Benefit

Plans.

 

                  (iii) The Company and its Subsidiaries have operated and

administered all plans, programs and arrangements providing compensation and

benefits to employees materially in accordance with their terms and applicable

laws.

 

                  (iv) The Company and its Subsidiaries are not delinquent in

payments to any of their employees for any wages, salaries, commissions, bonuses

or other direct compensation for any services performed through the date hereof.

The Company and its Subsidiaries are in compliance with all applicable federal

and state laws, rules and regulations respecting employment, employment

practices, labor, terms and conditions of employment and wages and hours, except

for either immaterial instances of noncompliance or instances of noncompliance

of which the Company is unaware. Neither the Company nor any Subsidiary is party

to any collective bargaining agreement. There is no labor strike, dispute,

slowdown or stoppage actually pending or, to the knowledge of the Company,

threatened against or involving the Company or any Subsidiary.

 

 

                                        13

<PAGE>

 

                  (v) No director, officer or other employee of the Company or

any Subsidiary will become entitled to any retirement, severance or similar

benefit or enhanced or accelerated benefit (including any acceleration of

vesting or lapse of repurchase rights or obligations with respect to any

Employee Benefit Plan) solely as a result of the transactions contemplated in

this Agreement; and no payment made or to be made to any current or former

employee or director of the Company or any of its Affiliates by reason of the

transactions contemplated hereby (whether alone or in connection with any other

event, including, but not limited to, a termination of employment) will

constitute an "excess parachute payment" within the meaning of Section 280G of

the Code.

 

                  (vi) The Company and each of its Subsidiaries (A) has withheld

all amounts required by law or agreement to be withheld from wages, salaries and

other payments to its employees and former employees or has remedied any failure

to do so, (B) is not liable for any arrearages of wages and (iii) is not liable

for Taxes or penalties for failure to withhold or pay wages when due. There are

no complaints pending or, to the Company's knowledge, threatened before any

governmental authority alleging unfair labor practices or unlawful

discrimination nor, to the Company's knowledge, is there any basis for any such

claim. There are no existing or, to the Company's knowledge, threatened labor

strikes, disputes, grievances, controversies or other labor troubles affecting

the Company or any of its Subsidiaries.

 

                  (vii) Each employee and consultant or independent contractor

of the Company or any of its Subsidiaries whose material duties include the

development of products or Intellectual Property Rights, and each former

employee and consultant or independent contractor whose material duties included

the development of products or Intellectual Property Rights, has entered into

and executed an invention assignment and confidentiality agreement or an

employment or consulting agreement containing terms with respect to invention

assignments and confidentiality.

 

            (y) Brokers. There is no investment banker, broker, finder,

financial advisor or other Person which has been retained by or is authorized to

act on behalf of the Company or any of its Subsidiaries who might be entitled to

any fee or commission in connection with the transactions contemplated by this

Agreement or the other Transaction Documents.

 

            (z) Foreign Corrupt Practices Act. Neither the Company nor any

Subsidiary, director, officer, agent, employee or other Person acting on behalf

of the Company or any Subsidiary has, in the course of his, her or its actions

for, or on behalf of, the Company or any Subsidiary, offered or made, directly

or indirectly through any other Person, any payments of anything of value (in

the form of a contribution, gift, entertainment or other expense), to (a) any

Person employed by, or acting in an official capacity on behalf of, any

governmental agency, department or instrumentality, or (b) any foreign or

domestic government official, political party or official of such party, or any

candidate for political office or employee thereof. Neither the Company, any

Subsidiary, nor any director, officer, agent, employee or other Person acting on

behalf of the Company or any Subsidiary has violated or is in violation of any

provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended, or made

any bribe, rebate, payoff, influence payment, kickback or unlawful payment to

any foreign or domestic government or political party official, employee,

appointee or candidate.

 

 

                                       14

<PAGE>

 

            (aa) Manufacturing and Marketing Rights. Neither the Company nor any

of its Subsidiaries has granted rights to manufacture, produce, assemble,

license, market or sell its products to any Person and is not bound by any

agreement that affects the Company's or its Subsidiaries' exclusive right to

develop, manufacture, assemble, distribute, market or sell its products.

 

            (bb) Returns and Complaints. Neither the Company nor any of its

Subsidiaries has received any customer complaints concerning its products, nor

has it had its products returned by a purchaser thereof, that taken together

would constitute a Material Adverse Effect.

 

            (cc) Status under Certain Statutes. Neither the Company nor any

Subsidiary is subject to regulation under the Investment Company Act of 1940, as

amended, the Public Utility Holding Company Act of 1935, as amended, the

Interstate Commerce Act, as amended, or the Federal Power Act, as amended.

 

            (dd) Existing Indebtedness. The Schedule of Exceptions sets forth a

complete and correct list of all outstanding Indebtedness of the Company and its

Subsidiaries as of the Initial Closing Date (and as of each subsequent Closing,

as applicable), since which date there has been no material change in the

amounts, interest rates, sinking funds, installment payments or maturities of

the Indebtedness of the Company or its Subsidiaries. Neither the Company nor any

Subsidiary is in default and no waiver of default is currently in effect, in the

payment of any principal or interest on any Indebtedness of the Company or such

Subsidiary and no event or condition exists with respect to any Indebtedness of

the Company or any Subsidiary that would permit (or that with notice or the

lapse of time, or both, would permit) one or more Persons to cause such

Indebtedness to become due and payable before its stated maturity or before its

regularly scheduled dates of payment. Except as set forth on the Schedule of

Exceptions, since September 30, 2004, neither the Company nor any of the

Subsidiaries has incurred any liabilities of any kind, character and

description, whether accrued, absolute, secured or unsecured, contingent or

otherwise of a kind that would have been required to be disclosed on the

Financial Statements if they were dated as of the date hereof other than (i)

liabilities incurred in the Ordinary Course of Business subsequent to the date

of the Financial Statements and (ii) obligations under contracts and commitments

incurred in the ordinary course of business and not required under GAAP to be

reflected in the Financial Statements. (ee) No Material Adverse Effect. No event

has occurred and no condition exists which could reasonably be expected to have

a Material Adverse Effect since September 30, 2004.

 

            (ff) Registration Rights. Except as set forth in the Registration

Rights Agreement and those registration rights specified on the Schedule of

Exceptions, the Company has not agreed to grant to any Person any rights

(including piggyback registration rights) to have any securities of the Company

registered with the SEC under the Securities Act or with any other governmental

authority.

 

 

                                       15

<PAGE>

 

            (gg) Anti-Dilution and Other Shares(i) . The issuance of the Note,

Warrant or any of the other securities contemplated by the Transaction Documents

will not result in the triggering of any anti-dilution or similar rights

contained in any options, warrants, debentures or other securities or agreements

of the Company.

 

            (hh) Poison Pill Provisions. Neither the Company nor its

Subsidiaries has a stockholder rights plan. None of the acquisition of the Note,

the Warrant or any of the of the other securities contemplated by the

Transaction Documents nor the deemed beneficial ownership of shares of any of

the securities contemplated by the Transaction Documents prior to, or the

acquisition of such shares pursuant to, the conversion of Note or the exercise

of the Warrant will in any event under any circumstance trigger the poison pill

provisions of any other or subsequently adopted plan or agreement, or a

substantially similar occurrence under any successor or similar plan.

 

            (ii) No Preemptive Rights . Except as set forth in this Agreement,

no Person has any right of first refusal, any right of first offer, any right of

co-sale, any preemptive right or any similar rights in connection with the

issuance of any of the Notes or Warrant (or any securities issued in connection

with the conversion of any of the Notes or exercise of the Warrant), or the

issuance of any other securities by the Company, other than pursuant to the

Transaction Documents.

 

            (jj) No Voting Rights. There are no agreements to which the Company

is a party with respect to the voting or transfer of any securities of the

Company other than the Transaction Documents or as set forth in the Company's

articles of incorporation, as amended or restated.

 

            (kk) Acknowledgment Regarding the Purchase of the Securities. The

Company acknowledges and agrees that the Investor and its agents, employees,

attorneys and affiliates are not acting as a financial advisor or fiduciary of

the Company (or in any similar capacity) with respect to this Agreement or the

transactions contemplated hereby, and the relationship between the Company and

the Investor is "arms length" and that, except for the representations and

warranties of the Investor under this Agreement, any statement made by the

Investor or any of its representatives, employees, attorneys, affiliates or

agents in connection with this Agreement and the transactions contemplated

hereby is not advice or a recommendation and is merely incidental to the

Investor's purchase of Securities and has not been relied upon by the Company,

its officers or directors in any way. The Company further represents to the

Investor that the Company's decision to enter into this Agreement has been based

solely on an independent evaluation by the Company and its representatives.

 

            (ll) Representations and Warranties Incorporated from the Security

Documents. As of the Applicable Closing Date, each of the representations and

warranties made in the Security Documents by the Company or any of its

Subsidiaries or, to the best of the Company's Knowledge, any of the Mining

Companies is true and correct in all material respects, and such representations

and warranties are hereby incorporated herein by reference with the same effect

as though set forth in their entirety herein, as qualified therein.

 

            (mm) No Default. No Event of Default has occurred and is continuing

and neither the Company nor any of its Subsidiaries is in default under or with

respect to any Material Contract, agreement, lease or other instrument to which

it is a party or by which its property is bound or affected.

 

 

                                       16

<PAGE>

 

            (nn) Absence of Certain Changes. Except as set forth in the Company

Reports, since September 30, 2004, the businesses and operations of the Company

and each of its Subsidiaries have been conducted in the Ordinary Course of

Business consistent with past practice and there has not been or occurred any

event or condition which, individually or in the aggregate, has had or is

reasonably likely to have a Material Adverse Effect.

 

            (oo) Disclosure. The Company has fully provided Investor with all

the information that Investor has requested for deciding whether to purchase the

Notes and Warrant and all information that the Company believes is reasonably

necessary to enable Investor to make such decision. Neither this Agreement

(including all the exhibits and schedules hereto) nor any other statements or

certificates made or deliv