case 1:08-cv-03263 document30 filed 09/15/2008...

Case 1:08-cv-03263 Document 30 Filed 09/15/2008 of 40

IN THE UNITED STATES DISTRICT COURTFOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

CRESTVIEW CAPITAL MASTER, LLP,MIDSUMMER INVESTMENT, LTD.,KAUAI PARTNERS, L.P., on behalf ofThemselves and all others similarlysituated,

v.Plaintiffs,

DUANE MARTIN, an individual; MARCFRY, an individual; JOHN LEVY, anindividual, and UNIVERSAL FOOD &BEVERAGE COMPANY, INC., a Nevadacorporation,

Defendants.

Case No.: 08-CV-03263Honorable Charles C. Kocoras

AMENDED COMPLAINT

Plaintiffs, CRESTVIEW CAPITAL MASTER, LLP ("Crestview"),

MIDSUMMER INVESTMENT, LTD. ("Midsummer"), and KAUAI PARTNERS, L.P.

("Kauai") by and through their attorneys, Touhy, Touhy, Buehler & Williams,

hereby file their complaint against Duane Martin, an individual; Marc Fry, an

individual; and John Levy, an individual, and Universal Food & Beverage

Company, Inc. and state as follows:

I. NATURE OF THE COMPLAINT

1. Plaintiffs bring this action under the Securities Exchange Act of

1934 on behalf of all persons who purchased or acquired preferred stock

issued by Universal Food & Beverage Company, Inc. ("Universal") on or about

February 16, 2006 (the "Class Period") in an offering in which approximately


$20 million of this preferred stock was sold. The preferred stock was sold

pursuant to a Confidential Information Memorandum, Exhibit A hereto.

Plaintiffs contend that the sale of this preferred stock was improperly and

fraudulently made by Defendants who are former officers and directors of

Universal.

2. From at least June of 2005 through June of 2006, Defendants, in

connection with the sale of these securities, misrepresented the financial

condition of the company and mislead investors about the primary use of

proceeds from the sale of the preferred stock and other securities issued by

Universal in an attempt to inflate stock price and give the impression that

Universal was a viable company when, in fact, it was insolvent. In addition,

during the period prior to the offering and sale of the preferred stock,

Defendants grossly and fraudulently misused company funds for personal use

and intended to use the capital raised in the preferred stock offering to hide

their defalcations and to divert additional capital for their personal use. The

preferred stock of Plaintiffs and the Class is now worth next to nothing and

Universal was forced to file a Chapter 11 Bankruptcy as a result of the officer

and director Defendants' fraudulent activities.

ALLEGATIONS COMMON TO ALL COUNTS

II. THE PARTIES

3. a. Plaintiff Crestview purchased 3,000 shares of stock in the

offering of Series A Preferred Stock of Universal Food & Beverage Co. at $1,000

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per share , as described in the Company's 8-K for the period ending February

15, 2006 and in the Confidential Information Memorandum (Exhibit A).

b. Plaintiff MidSummer purchased 3,000 shares of stock in the


per share , as described in the Company's 8-K for the period ending February


c. Plaintiff Kauai purchased 2,500 shares of stock in the


per share, as described in the Company's 8-K for the period ending February


4. a. Defendant Universal, a debtor in bankruptcy, is a Nevada

Corporation formed on August 20, 1996, under the name "Hayoton Company

Incorporated." Universal filed reports with the Securities and Exchange

Commission, and is subject to the Securities Exchange act of 1934. Universal

was the issuer of the Series A Preferred Stock purchased by Plaintiffs and the

Class alleged herein.

b. After several name changes, Hayoton became "Cardinal

Minerals , Inc." on March 2, 2005, Cardinal Minerals eventually became

"Universal Food & Beverage Company," as more fully described below.

c. As stated in Universal's Form 1OKSB for the period ending

12/31/05, on September 28, 2004, Cardinal Minerals entered into a Share

Purchase agreement and Plan of Reorganization, (the "Reorganization

Agreement") with Universal Food & Beverage Company, a Delaware corporation

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("Universal Delaware") and its shareholders, which provided that shareholders

and owners of Cardinal Minerals receive approximately nine (9%) percent of

Universal Food & Beverage in a reverse stock split (the "Share Exchange").

d. On March 2, 2005, as a result of the Share Exchange and

other transactions contemplated by the Reorganization Agreement, including a

reverse acquisition, Universal Delaware became a wholly owned subsidiary of

Cardinal Minerals, and Cardinal Minerals amended its Articles of Incorporation

and changed its name to "Universal Food & Beverage Company."

e. Universal provided a variety of beverage bottling services to

branded beverage companies and private label customers. In addition,

Universal developed its own brand of beverage products and provided turn key

solutions for product development including bottle design labels, formula

development and collateral materials.

f. On April 2, 2006, August Liguori became Universal's Chief

Financial and Administrative Officer. In June of 2006, Liguori assumed the

position of Chief Executive Officer and Secretary of the company. On June 8,

2006, Universal issued a Form 8-K Report and a press release indicating that,

by letter dated June 6, 2006, Defendant Martin resigned his position as the

Chief Executive Officer of Universal and reported that it was investigating

certain of Martin's financial transactions. The 8-K and press release also

announced that the Company would issue a restatement of its financial

statements for fiscal year ended December 31, 2005 caused by "erroneously

excluding 1,200,000 common shares scheduled to be issued from the average

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common shares outstanding." On or about August 21, 2007, Mr. Liguori

executed a Certificate of Resolution (the "Resolution") declaring that it was the

judgment of the Board of Directors that Universal should file a voluntary

petition for relief pursuant to Chapter 11 of Title 11 of the United States

Bankruptcy Code. Prior to the decision to file for protection under Chapter 11

of the Bankruptcy Code, Universal's headquarters were located at 3830

Commerce Drive, St. Charles, Illinois 60174.

5. On March 5, 2005, following the Share Exchange, Defendant

Duane N. Martin ("Martin") became a Director of Universal and assumed the

titles of Chairman of the Board and Chief Executive Officer. Prior to assuming

these positions, Martin was a Director, Chairman of the Board of Directors,

and Chief Executive Officer of Universal Delaware.

6. Also following the Share Exchange , Defendant Mark Fry ("Fry")

assumed the position as Director and President of Universal. Before assuming

these positions, Fry had been a Director, President and Chief Operating Officer

of Universal Delaware.

7. Defendant John F. Levy was appointed interim Chief Financial

Officer and Secretary on November 28, 2005.

II. JURISDICTION AND VENUE

8. Plaintiffs' claims are brought pursuant to Sections 10(b) and 20(a)

of the Exchange Act, 15 U.S.C. § 78j(b) and 78t(a), and Rule lOb-5

promulgated thereunder, 17 C.F.R. § 240.lOb-5.

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9. The Court has jurisdiction over the subject matter of this action

under Section 27 of the Exchange Act, 15 U.S.C. § 78aa, and 28 U.S.C. § 1331.

This Court has supplemental jurisdiction under 28 U.S.C. §1367 for the

common law claims of fraud, negligent misrepresentation and breach of

fiduciary duty.

10. Venue is proper in this District under Section 27 of the Exchange

Act, 15 U. S.C. § 78aa and 28 U. S.C. § 1391(b). Universal maintained its

principal executive offices in this District and many of the acts and

transactions alleged herein, including the preparation and dissemination of

statements containing materially false and misleading information and

omissions of material fact, occurred in substantial part in this District.

11. In connection with the acts, conduct, and other wrongs alleged in

this Complaint, Defendants directly or indirectly used the means and

instrumentalities of interstate commerce, including the United States mails,

interstate telephone communications, and the facilities of the national

securities exchange, to orchestrate their fraud.

III. BACKGROUND FACTS

A. Issuance of False Press Releases and Other Misrepresentationsin Securities Filings

12. In the spring of 2005, Universal's stock price was declining and

highly volatile. From early June, through September 2005, in an attempt to

increase Universal's stock price, Martin misrepresented Universal's financial

condition by issuing false press releases, misrepresenting information and

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omitting facts concerning the financial condition of Universal in the company's

SEC filings.

False Press Releases

13. In an attempt to inflate the price of Universal's stock, from early

June through September 2005, Martin caused the following false press releases

to be issued:

a. June 7, 2005, entitled "Initial Orders Top $10 Million," statingthat, "Expansion plans are underway to increase its currentproduction facilities tenfold with capacity of 17 million cases overthe next 12 months," with the addition of the "gallon packagingand high speed lines to be completed in Q-3 of 2005..." when infact orders did not top $10 million and the Company lacked therevenue to expand its production facilities;

b. June 23, 2005, entitled "Universal Food and Beverage LaunchingHealthful Drink Line," introducing a new company-owned brandline, Frost20TM, slated for delivery July 5, 2005 when, in fact, nosuch brand line was introduced in July, 2005;

c. June 27, 2005, stating that Universal's hot fill line wasoperational, adding over an eight million case capacity annually,translating to $22 million in potential additional revenue; when infact its hot fill line was not operational;

d. July 5, 2005, entitled "Universal Food and Beverage EnlistsNational Food Brokers," describing a favorable businesspartnership with three leading national food brokers when, in fact,Universal did not have a contractual relationship with thesebrokers;

e. August 23, 2005, describing a new high pilot plant facility in St.Charles, Illinois when, in fact, it had no such facility at that time;and

f. September 2, 2005, touting Universal as "creating a buzz on theOTC Bulletin Board" with "some of the most recognized brands inthe world dying to do business with Universal" when, in fact,Universal did not have sufficient business to be a profitablebusiness.

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Case 1 : 08-cv-03263 Document 30 Filed 09/15/2008 of 40

14. From June through September 2005, Martin and Fry knew or were

reckless in not knowing that the information contained in the press releases

was false, misleading, or otherwise incorrect, yet they still ordered them to be

sent. Martin and Fry failed to issue any additional releases or filings to correct

the aforementioned misstatements.

15. In this same time period, Martin also made a number of false

statements relating to the misuse of corporate funds through Universal's SEC

filings. Martin represented in Universal's Form 10-Q for the quarterly period

ended June 30, 2005 that "Based on their evaluation, our principal executive

officer and principal financial officer have concluded that [Universal's] controls

and procedures were effective as of June 30, 2005."

16. Martin knew or was reckless in not knowing that the information

contained in the June 30, 2005 10-Q was false, misleading, or otherwise

incorrect, yet he failed to issue any additional releases or filings to correct it.

17. In fact, Universal's operations and quality at this time were sub-

par and the equipment was running poorly.

The Fraudulent S-8 Stock Program

18. Additionally, Martin represented in Universal's Form 10-Q for the

quarterly period ended September 30, 2005 that:

"[s]ubsequent to the end of the quarter, on October 18, 2005, theCompany registered 3,250,000 shares and issued 2,412,500shares of common stock via an S-8 registration form to be used topay consultants for future services." Further, Martin representedthat "This equity compensation is one of the ways that theCompany is using non-cash means to pay for required services toconserve cash."

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contained in the September 30, 2005 10-Q was false, misleading, or otherwise

incorrect, yet he failed to issue any additional releases or filings to correct it.

20. In fact , Martin knew all along that the S-8 program was improper

because he intended to use, and in fact did use, the S-8 program to raise

capital and repay promoters for past efforts to raise capital for the company,

instead of merely using it as represented as a non-cash means to pay

consultants in the future and to conserve cash.

21. In July, 2005, the Defendants began to explore the possibility of

issuing additional shares of stock under an S-8 exemption.

22. The S-8 exemption allows companies to issue shares to employees,

consultants, and/or advisors of the company under the company's stock

incentive program. However, in order to qualify to receive such stock, the

consultants and/or advisors cannot have any influence over the price of the

stock or to any person that assists or otherwise renders services to the

company relating to the raising of money for the company. The rules of the S-8

exemption do not allow shares to be issued to an individual for work done in

the past.

23. On October 18, 2005, Universal filed documents with the SEC

registering 3,250,000 shares of Universal stock to be used to compensate

outside consultants (S-8 Stock).

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24. Pursuant to the registration documents as limited by federal

securities law, none of the S-8 stock was to be used to promote Universal's

stock or to raise capital.

25. Between July 22, 2005 and October 19, 2005, Universal's outside

General Counsel Carl Neumann met with Martin to discuss the use of S-8

stock. On September 27, 2005, Neumann circulated final consulting

agreements that included a specific provision (paragraph 4 of Rider B-1) stating

that none of the S-8 stock should be used for "capital raising" or "stock

promotion."

26. However, on or about October 19, 2005, Universal improperly

issued stock to twelve different stock promoters and/or individuals involved in

raising capital for Universal. These people included:

Name Number of shares Value Date

William Buzogany 100,000 shares $105,000 10/19/05

Tom Clay 150,000 shares $157,000 10/19/05

Geoffery Eiten 100,000 shares $105,000 10/19/05

Matt Kohovec 100,000 shares $315,000 10/19/05

John Mathues 300,000 shares $105,000 10/19/05

Keith Miller 10,000 shares $10,500 10/19/05

Robert Munro 300,000 shares $315,000 10/19/05

Sandra Redfield 25,000 shares $ 26,500 10/19/05

Daniel Seifer 25,000 shares $ 26,500 10/19/05

Patricia Shull 180,000 shares $189,000 10/19/05

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Gary Trump 300,000 shares $315,000 10/19/05

Darryl Uselton 50,000 shares $52,000 10/19/05

27. In addition to those individuals, Universal improperly issued S-8

stock to other individuals who do not appear to have contributed any goods or

services to Universal. These individuals include:


John Dusek 100,000 shares $105,000 10/19/05

Norman Duval 100,000 shares $105,000 10/19/05

David Gray 25,000 shares $26,250 10/19/05

David Gray 75,000 shares $57,750 2/10/06

Frank Petrosino 100,000 shares $105,000 10/19/05

Ray Singletary 100,000 shares $105,000 10/19/05

Randy Trau 100,000 shares $105,000 10/19/05

Robert Wadington 12,500 shares $13,125 10/19/05

Robert Wadington 37,500 shares $28,875 02/10/06

28. Two individuals appear to have improperly received S-8 stock for

preexisting Universal debt obligations. These individuals include:


Keneth Bain 85,000 shares $89,250 10/19/05

Hilton Kahn 50,000 shares $52,500 10/19/05

29. The total number of ineligible shares issued by Universal under the

S-8 stock program was 2,575,000 shares worth a total of $2,630,250 at the

time they were issued.

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30. After the improper issuance of shares in October of 2005,

Defendants continued to make representations concerning the financial

condition of Universal, this time in connection with a securities purchase

agreement.

False Statements in the Universal Food & Beverage 8-K for the PeriodEnding February 15, 2006

31. On February 15, 2006, Universal entered into a Securities

Purchase Agreement (Exhibit B hereto) with fourteen accredited investors,

including Plaintiffs, as stated in Universal's 8-K for the period ending on the

same date . The board of directors designated a series of 30,000 shares to be

issued as a single series to be known as "Series A Convertible Preferred Stock"

(the "Series A Preferred Stock") out of the total authorized number of

25,000,000 shares of Universal's preferred stock.

32. On February 17, 2006, under the Purchase Agreement, Universal

sold and issued 20,204 shares of the Series A Preferred stock, with each share

initially convertible into 1,000 shares of Universal's common stock, $.01 par

value per share (the "Common Stock"), and related warrants the "Warrants," in

exchange for aggregate gross proceeds of $20,204,000.

33. The Warrant gave the holder the right to acquire one share of

Common Stock for every two shares of Common Stock initially underlying the

shares of Series A Preferred Stock purchased. The Warrants were exercisable

initially at $0.70 per share of Common Stock, subject to adjustment, for five

years.

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34. In the "Representations and Warranties of the Company" section of

Universal's February 15, 2006 8-K relating to the Purchase Agreement and in

comparable or identical language in the Securities Purchase Agreement, Martin

made a number of false, misleading, or otherwise incorrect statements,

including the following:

a. (k) SEC Documents: Financial Statements . "During the two (2)years prior to the date hereof, the Company has filed all reports,schedules, forms, statements and other documents required to befiled with the SEC pursuant to the reporting requirements of the1934 Act ... As of their respective dates, the SEC Documentscomplied in all material respects with the requirements of the 1934Act and the rules and regulations of the SEC promulgatedthereunder applicable to the SEC Documents, and none of the SECDocuments, at the time they were filed with the SEC, containedany untrue statement of a material fact or omitted to state amaterial fact required to be stated therein or necessary in order tomake the statements therein, in the light of the circumstancesunder which they were made, not misleading." ...

b. (1) Absence of Certain Changes . "Except as disclosed in Section3(1), since the date of the Company's most recent financialstatements contained in a Form 10-QSB, there has been nomaterial adverse change and no material adverse development inthe business, assets, properties, operations, condition (financial orotherwise), results of operations or prospects of the Company." ...

c. (m) No Undisclosed Events, Liabilities, Developments orCircumstances . "No event, liability, development or circumstanceshas occurred or exists, or is contemplated to occur with respect tothe Company, its Subsidiaries or their respective business,properties, prospects, operations or financial condition, that wouldbe required to be disclosed by the Company under applicablesecurities laws on a registration statement on Form S-1 filed withthe SEC relating to an issuance and sale by the Company of itsCommon Stock and which has not been publicly announced."

d. (n) Conduct of Business: Regulatory Permits . "Neither theCompany nor its Subsidiaries is in violation of any term of or indefault under its preferred stock of the Company or Bylaws or theirorganizational charter or certificate of incorporation or bylaws,respectively ... the Company is not in violation of any of the rules,

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regulations or requirements of the Principal Market and has noknowledge of any facts or circumstances that would reasonablylead to delisting or suspension of the Common Stock by thePrincipal Market in the foreseeable future."

e. (q) Transaction With Affiliates . "...none of the officers, directors oremployees of the Company is presently a party to any transactionwith the Company or any of its Subsidiaries ... including anycontract, agreement or other arrangement providing for thefurnishing of services to or by, providing for rental of real orpersonal property from, or otherwise requiring payments to or fromany such officer, director or employee or, to the knowledge of theCompany, any corporation, partnership, trust or other entity inwhich any such officer, director, or employee has a substantialinterest or is an officer, director, trustee or partner."

f. (cc) Internal Accounting and Disclosure Controls . "The Companymaintains a system of internal accounting controls sufficient toprovide reasonable assurance ... The Company maintainsdisclosure controls and procedures (as such term is defined inRule 13a-14a under the 1934 Act) that are designed to ensure thatinformation required to be disclosed by the Company in the reportsthat it files or submits under the 1934 Act is recorded, processed,summarized and reported ... to allow timely decisions regardingrequired disclosure."

g. (gg) Manipulation of Price . "The Company has not, and to itsknowledge no one acting on its behalf has, (i) taken, directly orindirectly, any action designed to cause or to result in thestabilization or manipulation of the price of any security of theCompany to facilitate the sale or resale of any of the Securities, (ii)other than the Agent, sold, bid for, purchased, or paid anycompensation for soliciting purchases of, any of the Securities, or(iii) other than the Agent, paid or agreed to pay to any person anycompensation for soliciting another to purchase any othersecurities of the Company."

h. (ii) Disclosure . "...All disclosure provided to the Buyers regardingthe Company ... is true and correct and does not contain anyuntrue statement of material fact or omit to state any material factnecessary in order to make the statements made therein, in thelight of the circumstances under which they were made, notmisleading. Each press release issued by the Company during thetwelve (12) months preceding the date of this Agreement did not atthe time of release contain any untrue statement of material fact oromit to state a material fact required to be stated therein or

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necessary in order to make the statements therein, in the light ofthe circumstances under which they are made, not misleading. Noevent or circumstance has occurred or information exists withrespect to the Company or any of its Subsidiaries or its or theirbusiness, properties, prospects, operations or financial conditions,which, under applicable law, rule or regulation, requires publicdisclosure or announcement by the company but which has notbeen so publicly announced or disclosed."


contained in the "Representations and Warranties of the Company" section of

Universal's February 15, 2006 8-K and of the Securities Purchase Agreement

was false, misleading, or otherwise incorrect, and failed to do anything to

correct it.

36. These statements were false or misleading because the Company's

SEC filings did not present a true picture of the Company's financial condition.

The 8-K failed to disclose that even with the funds raised through the sale of

the Series A preferred stock, the Company would still lack sufficient capital to

reach profitability in the foreseeable future or to increase its capacity and sales

in the manner described in the sales materials supplied by the Company. The

statements in the 8-K were false and misleading because they failed to disclose

that corporate funds were being spent on Martin's personal business matters

and that the Company lacked the necessary controls to prevent this spending.

The statements in the 8-K were false and misleading because they failed to take

into account the effect of the S-8 stock program on the market price for the

Company's common stock.

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37. In the "Covenants" section of Universal's February 15, 2006 8-K

and in the Securities Purchase Agreement, Martin made yet another false,

misleading, or otherwise incorrect statement relating to the use of proceeds

from the February 17, 2006 stock sale. Section 4(d) under "Covenants" states

that:

"The Company will use the proceeds from the sale of theSecurities as set forth on Schedule 4(d) and not for, exceptas specifically set forth on Schedule 4(d), (A) repayment ofany outstanding Indebtedness of the Company or any of itsSubsidiaries or (B) redemption or repurchase of any of its orits Subsidiaries' equity securities."


contained in the "Covenants" section of Universal's February 15, 2006 8-K was

false, misleading, or otherwise incorrect, and failed to do anything to correct it.

39. After the fraudulent and improper sale of stock, Defendants

Martin, Levy, and Fry fraudulently and improperly used funds from the

February 17, 2006 sale, along with other company funds, for personal use.

Defendants Martin , Levy, and Fry continued to misrepresent and omit facts

concerning the use of the sale proceeds and the financial condition of

Universal.

Misuse of Corporate Funds

40. Almost simultaneously with the implementation of the Securities

Purchase Agreement, Defendant Martin began to misuse corporate funds

through various improper payments and other transfers.

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41. Martin used funds raised in the offering of Series A Preferred Stock

to benefit the First Midland States Bank in Effingham, Illinois which had

contacts going back to Martin's father and his personal businesses.

42. In addition to working for Universal, Duane Martin owned two Sav-

A-Lot Stores in Morris and Plano Illinois . Martin also used Midland States

Bank in Effingham Illinois as the corporate bank for the Sav-A-Lot stores. On

or about January 3, 2006 , just prior to the offering of the Series A Preferred

Stock, Martin caused $75,000 to be wired directly from Universal's account to

Supervalu (parent of Sav-A-Lot). Martin justified the transaction by referencing

it as a "Slotting Fees for USFB product." Martin wired or otherwise transferred

money to his Sav-A-Lot stores directly from Universal's corporate accounts at

First Midland States Bank and later at Harris Bank. Martin used Universal to

pay expenses of his Save-A-Lot stores by instructing Universal's accountants to

issue checks in January and February of 2006 to pay over $ 125,000 in Save-A-

Lot expenses.

43. From August 12, 2005 until at least May 5, 2006, Martin

continued to debit Universal's bank accounts and credit the account of his Sav-

A-Lot stores and other accounts controlled by him, thereby causing Universal

to fund operations of his personal business. The following is a graph outlining

Martin's various debits of Universal's accounts and the corresponding credits

to those same accounts:

Account TransactionDate Description Description

8/12/05 Midland Transfer to

Debit CreditAmount Amount

$1,059.00

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States Bank DNM MorrisOperating

Transfer from8/15/05 DNM Morris $1 , 059.008/18/05 Midland Transfer to $ 10,413.26

States Bank DNM MorrisOperating

Transfer from8/19/05 DNM Morris $10,413.26

9/1/05 Midland Transfer to $7,364.90States Bank DNM MorrisOperating


9/8/05 Midland Transfer to $2,154.17States Bank DNM MorrisOperating


1/17/06 Midland Transfer to $ 10,856.99States Bank DNM MorrisOperating

Transfer from

1/18/06 DNM Morris $10 , 856.99

1/11/06 Midland Transfer to $ 18,686.13States Bank DNMOperating

Transfer from

1/12/06 DNM $ 18.686.13

1/23/06 Midland Transfer to $43,777.47States Bank DNMOperating

Transfer from1/24/06 DNM $43,777.47

2/27/06 Midland Duane Martin $46,471.69States BankOperating

Bank Deposit3/1/06,Repayment ofWire from

3/l/06 February $46,471.693/21/06 Midland Duane Martin $44,076.55

States Bank

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Case 1 : 08-cv-03263 Document 30 Filed 09/15/2008 of 40

Operating3/30/06 Duane Martin $49,561.50

Deposit 2checks from

5/5/06 DNM $93,638.05

Martin blamed the majority of these transactions on "bank errors ," but later

admitted taking money, stating that it was to cover Sav-A-Lot expenses.

44. From Universal's inception, Martin flew private jets for both

personal and business travel. Between June of 2005 and May of 2006, Martin

improperly charged Universal for approximately $490,000 for personal aviation

expenses.

45. Martin also caused Universal's accounting department to

improperly issue other checks directly to him personally for purported

"expenses" and "salary." On January 3, 2006, Martin instructed Universal's

accounting department to issue a check in the amount of $50,000 directly to

him personally and an additional wire transfer was made to Martin's personal

account in the amount of $150,000. Martin never provided any expense

reports of other back-up to justify the $200,000 payments. On or about March

1, 2006, Martin instructed Universal's accounting department to wire, to him

personally, $240,705.23, despite the fact that Martin's contract only called for

him to make $125,000 until such time as Universal's sales hit $4,000,000. On

March 3, 2006 upon Martin's direction, Universal wired $15,979.28 to Duane

Martin's personal account. Additional improper wire transfers were made

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directly to Martin's personal bank account on March 23, 2006 and again on

April 4, 2006 in the amounts of $8,015.00 and $4,000 respectively.

46. Martin also instructed Universal's accountants to pay personal

expenses that were not included in Martin's employment contract. On April

21, 2006, Martin also used Universal funds to pay his personal attorney Robert

N. Wadington $75,020. 00 despite the fact that Universal's General Counsel was

not aware of any work Wadington had ever performed for Universal.

47. Martin resigned his position as the Chief Executive Officer of

Universal at a meeting of the Board of Directors on June 1, 2006. By letter

dated June 6, 2006, Martin resigned his position as a Director as well.

48. Fry resigned his position as President of Universal by Agreement

dated August 9, 2006 and agreed to step down as an employee of Universal as

of December 31, 2006. From August 2, 2006 to December 31, 2006, Fry was

treated as an employee of the company on administrative leave.

False Statements Contained in the Confidential Information Memorandum

49. In late 2005, the Company retained Illington Capital to prepare a

private placement memorandum to sell its preferred stock. Martin and Fry

provided the information used in this Confidential Information Memorandum.

50. The Confidential Information Memorandum stated that out of the

proceeds of the offering, $9 million was to be used to purchase the plant,

property and equipment of an operating aseptic (non-refrigerated and packing

in sterile environment) processing and packaging facility in Savannah, Georgia

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and $5.6 million was to be used to expand existing manufacturing capacity by

installing a high speed production line in Hillsville, Virginia.

51. Page 19 of the Confidential Information Memorandum describes

the Company's intent to expand the manufacturing operation in Virginia:

At the Company's existing Virginia manufacturing facility, theCompany intends to install a high-speed production line inaddition to moving the existing line to the same facility to achievelabor efficiencies. The Company believes that the combination ofthese efforts will result in a per case savings of up to $0.40, or upto $4 million margin contribution (assuming high-speedutilization). The Company also believes that the addition of a high-speed line will result in increased capacity of approximately 10million cases per year.

The Company believes that as UFBV expands the Virginia facilityfor both volume and capability, they will be able to utilize theCompany's contacts in the retail markets to offer a wide selectionof private label products, in addition to waters. These productsinclude teas, juices, health, and nutritional products. UFBV iscurrently producing products for a big box retailer and currentlyhas commitments for substantial growth in high margin teas andnutritional products. Upon completion of the Savannahacquisition with low acid capabilities, UFBV will be able to offer amultitude of higher margin products to the private label usersincluding: dairy, soy, rice based products, dairy based nutritionalproducts, soups, sauces, etc. which to management's knowledgeno one else is offering at this time.

Expansion of the Company's high speed hot-fill capabilities willallow UFBV to offer a greater amount of higher margin products.

52. In early 2006, Martin and Fry flew Robert Hoyt of Crestview,

Michel Amsalem of MidSummer and Julian Allen of Kauai to Hillsville , Virginia

to view a new "leased facility" which they represented was going to replace

Universal's warehouse and manufacturing facilities in Independence, Virginia.

Hoyt, Amsalem and Allen were shown equipment being moved to the Hillsville

facility from the Company's Independence facilities which Martin and Fry

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represented was "state of the art" equipment in good working condition which,

after consolidation of the two Independence operations and the purchase of

additional equipment, would vastly improve the Company's capacity. Despite

Martin and Fry's representations that the Company was spending $5.6 million

of the proceeds from the preferred stock offering to expand and equip the

Hillsville, Virginia facility, Martin and Fry had no intention of making such an

investment and, in fact, no such investment was ever made. After the

Company filed for bankruptcy, Plaintiffs learned that the equipment shown to

them was not "state of the art" but was, in fact , obsolete equipment in poor

working condition.

53. Martin and Fry also took Hoyt, Amsalem and Allen to view the

Savannah, Georgia facility which Universal was planning on purchasing with

$9 million of the funds raised in the preferred stock offering. As represented in

the Confidential Information Memorandum, Martin and Fry showed them the

equipment already in place at the Savannah plant and told them that it was

"state of the art" equipment which would provide the Company with a unique

opportunity to compete in a high growth packaging market for which only a few

companies possessed the equipment and technology. Hoyt, Amsalem and Allen

were told that the facility and equipment were valued at $12.3 million and that,

using the revenue to be raised in the proposed preferred stock offering, the

Company could purchase them for $9 million. After the Company filed for

bankruptcy and the Savannah facility was being sold, it was discovered that

the representations of value were grossly overstated. The equipment at the

22


Savannah facility was sold through the bankruptcy proceeding for far less than

the purchase price. In addition, the projections for revenues to be generated by

the Savannah facility were inaccurate because in making calculations of the

profitability of the Savannah facility the Defendants grossly understated the

cost of goods sold.

54. In addition to misrepresenting its intention to expand the

Company's existing facilities at Hillsville, Virginia and the value of the plant

and equipment in Savannah, Georgia, the Confidential Information

Memorandum, at pages 25-26, misrepresented that the Company had an

extensive customer base and that it had several contracts signed with new

customers which would bring in approximately $14 million in revenue in the

first year.

55. In addition, the Memorandum (at page 26) misrepresented that it

had several customers for whom final contract documents were "in process,"

which would add approximately $16 million in revenue in the first year. The

business which allegedly was "in process" never materialized.

56. The Memorandum (at page 26) also misrepresented that it had

several contracts "in negotiations" which would generate an estimated $52.5

million in revenue in the first year.

57. The information relating to signed customer contracts was false

because no such contracts had been signed and none of the companies listed

in the Memorandum ever did business with the Company. Similarly, none of

the companies listed under "Final Contract Documents in Process" or "Contract

23


in Negotiations" would ever realistically have a contractual relationship with

Universal and none of these contracts were ever signed.

58. Instead of using the $5.6 million of the offering proceeds intended

to be spent on the expansion of the capacity of the Virginia facility for the

purpose intended , these funds were used to pay the existing debt because

Universal had no customer base and no income stream to overcome its

overwhelming debt. In addition, approximately $ 2 million of the offering

proceeds were used to pay salaries of Martin and Fry and were diverted to pay

for Martin's extravagant use of private aircraft and to fund his personal

obligations as described above.

59. Prior to the offering Plaintiffs determined that Universal would

need to raise approximately $26 million in the offering in order to reach a break

even point with respect to profitability. Hoyt, Amsalem and Allen called Levy

and asked whether the proposed offering would raise sufficient capital to

accomplish the goals set forth in the Confidential Information Memorandum.

Levy, who knew or should have known that that amounts Plaintiffs and other

investors were agreeing to invest in the Company was insufficient, nevertheless

told Plaintiffs that the Company could survive on the amounts being invested.

60. Notwithstanding the fact that the investments being made by

Plaintiffs and the other investors purchasing the Class A Preferred Stock was

insufficient to properly fund the program described in the Confidential

Information Memorandum , upon the recommendations of Martin and Fry, Levy

approved a gross overpayment of $1.4 million to Illington Capital as its fee for

24


preparing the Confidential Information Memorandum. Levy also approved

payments to Martin for salary and personal expenses described herein

notwithstanding the fact that there was insufficient capital raised in the

offering. Because the funds being raised were not sufficient to pay for the

program outlined in the Confidential Information Memorandum, Defendants

should have cancelled the offering.

61. Within two months of the offering, the Universal was insolvent.

V. PLAINTIFFS' CLASS ACTION ALLEGATIONS

62. Plaintiffs bring this action as a class action pursuant to Federal

Rule of Civil Procedure 23(a) and (b)(3) on behalf of a Class consisting of all

persons who purchased or acquired preferred stock issued by Universal on or

about February 16, 2006 (the "Class Period") in an offering in which

approximately $20 million of this preferred stock was sold. Excluded from the

Class are Defendants and members of their immediate families and their legal

representatives, heirs, successors, or assigns.

63. The members of the Class are so numerous and geographically

diverse that joinder of all members is impracticable. In the Class Period,

fourteen persons or entities purchased Series A Preferred Stock of Universal

who may be notified of the pendency of this action by mail, using a form of

notice customarily used in securities class actions.

64. Plaintiffs are members of the Class and their claims are typical of

the claims of the members of the Class because all members of the Class are

25


similarly affected by Defendants' wrongful conduct in violation of the federal

securities laws.

65. Plaintiffs' interests are coincident with, and are not antagonistic to,

the other Class Members. Plaintiffs will fairly and adequately protect the

interests of the members of the Class. Plaintiffs have retained counsel

competent and experienced in the prosecution of securities and class action

litigation.

66. Common questions of law and fact exist as to all members of the

Class and predominate over any questions solely affecting individual members

of the Class. Among the questions of law and fact common to the Class are the

following:

(a) whether Defendants' actions as alleged herein violated the

federal securities laws;

(b) whether statements made by Defendants to the investing

public during the Class Period misrepresented material facts about the

business, prospects, operations, and management of Universal; and

(c) the extent to which the members of the Class have sustained

damages and the proper measure of damages.

67. A class action is superior to all other available methods for the fair

and efficient adjudication of this controversy. The class is readily definable and

ascertainable. Prosecution as a class action will eliminate the possibility of

separate actions by individual members of the Class and the risk of

inconsistent or varying adjudications establishing incompatible standards of

26


conduct for defendants. Joinder of all members is impracticable. There will be

no difficulty in the management of this action as a class action.

No Safe Harbor

68. The statutory safe harbor provided for forward-looking statements

under certain circumstances does not apply to the allegedly false statements

and omissions pleaded in this Complaint. Many of the specific statements

pleaded herein were not identified as "forward-looking statements" when made

or to the extent there were any forward-looking statements, there were no

meaningful cautionary statements identifying important factors that could

cause actual results to differ materially from those in the purportedly forward-

looking statements. Alternatively, to the extent that the statutory safe harbor

does apply to any forward-looking statements pleaded herein, Defendants are

liable for those false forward-looking statements because at the time each of

those forward-looking statements was made, the particular speaker knew that

the particular forward-looking statement was false, or the forward-looking

statement was authorized or approved by them in their capacity as officers and

directors of Universal and they knew that those statements were false when

made.

COUNT I

Violation of Section 10(b) ofThe Exchange Act and Rule 1 Ob-5

Promulgated Thereunder Against All Defendants

69. Plaintiffs repeat and reallege each allegation contained above as if

fully set forth herein.

27


70. During the Class Period, Defendants carried out a plan, scheme,

and course of conduct that was intended to and throughout the Class Period

did (a) deceive the investing public, including Plaintiffs and the other Class

members, as alleged herein, and (b) cause Plaintiffs and the other members of

the Class to purchase Universal's securities at artificially inflated prices. In

furtherance of the unlawful scheme, plan, and course of conduct, Defendants

took the actions set forth herein.

71. Defendants (a) employed devices, schemes, and artifices to

defraud; (b) made untrue statements of material fact or omitted to state

material facts necessary to make the statements not misleading; and (c)

engaged in acts, practices , and a course of business that operated as a fraud

and deceit on the purchasers of Universal's Series A Preferred Stock in an effort

to maintain artificially high market prices in violation of Section 10(b) of the

Exchange Act and Rule lOb-5. All Defendants are sued either as primary

participants in the wrongful and illegal conduct charged herein or as

controlling persons as alleged below.

72. Defendants, individually and in concert, directly and indirectly, by

the use, means, or instrumentalities of interstate commerce or of the mails,

engaged and participated in a continuous course of conduct to conceal adverse

material information about Universal's financial well-being, business

relationships, and prospects, as specified herein.

73. Defendants employed devices, schemes, and artifices to defraud

while in possession of material adverse non-public information and engaged in

28


acts, practices, and a course of conduct as alleged herein in an effort to assure

investors of Universal's value, performance, and continued substantial growth,

which included the making of, or the participation in the making of, untrue

statements of material fact and omitting to state material facts necessary in

order to make the statements made about Universal and its business

operations and future prospects not misleading in light of the circumstances

under which they were made , and engaged in transactions, practices, and a

course of business that operated as a fraud and deceit on the purchasers of

Universal's Series A Preferred Stock during the Class Period.

74. Defendant's primary liability and controlling person liability arises

from the following facts: (a) prior to, during and after the Class Period,

Defendants were high-level executives and directors at Universal and were

members of the Company's management team or had control thereof; (b)

Defendants, by virtue of their responsibilities and activities as officers and

directors of the Company were privy to and participated in the creation,

development , and reporting of the Company's internal budgets, plans,

projections, and reports; (c) Defendants enjoyed significant personal contact

and access to other members of the Company's management team, internal

reports, and other data and information about the Company's finances,

operations, and sales at all relevant times; and (d) Defendants were aware of

the Company's dissemination of information to the investing public that they

knew or recklessly disregarded was materially false and misleading.

29


75. Defendants had actual knowledge of the misrepresentations and

omissions of material facts set forth herein or acted with reckless disregard for

the truth in that they failed to ascertain and disclose such facts, even though

such facts were available to them. Defendants' material misrepresentations and

omissions were done knowingly or recklessly and for the purpose of concealing

Universal's financial well-being, business relationships, and prospects from the

investing public and supporting the artificially inflated price of its securities.

As demonstrated by Defendants' overstatements and misstatements of the

Company's financial well-being and prospects prior to and after the sale of

Universal's Series A Preferred Stock, Defendants, if they did not have actual

knowledge of the misrepresentations and omissions alleged, were reckless in

failing to obtain such knowledge by deliberately refraining from taking those

steps necessary to discover whether those statements were false or misleading.

76. As a result of the dissemination of the materially false and

misleading information and failure to disclose material facts, as set forth

herein, the market price of Universal securities was artificially inflated during

the Class Period. In ignorance of the fact that the market price of Universal's

Series A Preferred Stock was artificially inflated, and relying directly or

indirectly on the false and misleading statements made by Defendants, or upon

the integrity of the market in which Universal's securities traded, or in the

absence of material adverse information that was known to or recklessly

disregarded by Defendants but not disclosed in public statements by

Defendants during the Class Period, Plaintiffs and the other members of the

30


Class acquired Universal's Series A Preferred Stock at artificially inflated prices

and were damaged thereby.

77. At the time of the misrepresentations and omissions alleged herein,

Plaintiffs and the other members of the Class were ignorant of their falsity and

believed them to be true. Had Plaintiffs and the other members of the Class

and the marketplace known the truth regarding Universal's financial condition

and prospects, Plaintiffs and other members of the Class would not have

purchased or otherwise acquired their Universal Series A Preferred Stock, or, if

they had acquired such securities during the Class Period, they would not have

done so at the artificially inflated prices that they paid.

78. Based on the allegations contained herein, Defendants have

violated Section 10(b) of the Exchange Act and Rule lOb-5 promulgated

thereunder.

79. As a direct and proximate result of Defendants' wrongful conduct,

Plaintiffs and the other members of the Class suffered damages in connection

with their purchases of Universal's Series A Preferred Stock during the Class

Period.

80. This action was filed within two years of discovery of the fraud and

within five years of Plaintiffs' purchases of securities giving rise to the cause of

action.

31


COUNT II

Violation of Section 20(a) ofThe Exchange Act Against the Individual Defendants



82. Defendants acted as controlling persons of Universal within the

meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of

their high-level positions, ownership and contractual rights, participation in or

awareness of the Company's operations , and intimate knowledge of the false

financial statements filed by the Company with the SEC and disseminated to

the investing public, Defendants had the power to influence and control and

did influence and control, directly or indirectly, the decision-making of the

Company, including the content and dissemination of the various statements

that Plaintiffs contend were false and misleading. Defendants were provided

with or had unlimited access to copies of the Company's reports, press

releases, public filings, and other statements alleged by Plaintiffs to be

misleading prior to or shortly after those statements were issued and had the

ability to prevent the issuance of the statements or cause the statements to be

corrected.

83. In particular, Defendants had direct and supervisory involvement

in the day-to-day operations of the Company and, therefore, are presumed to

have had the power to control or influence the particular transactions giving

rise to the securities violations as alleged herein.

32


84. As set forth above, Defendants each violated Section 10(b) and

Rule lOb-5 by their acts and omissions as alleged in this Complaint. By virtue

of their positions as a controlling person, Defendants are liable pursuant to

Section 20(a) of the Exchange Act. As a direct and proximate result of

Defendants' wrongful conduct, Plaintiffs and other members of the Class

suffered damages in connection with their purchases of Universal's Series A

Preferred Stock during the Class Period.

85. This action was filed within two years of discovery of the fraud and

within five years of Plaintiffs' purchases of securities giving rise to the cause of

action.

COUNT III

Fraud



87. As more specifically set forth above, the individual Defendants

misrepresented or omitted to disclose material facts relating to the financial

viability of Universal and whether the offering would allow the Company to

become profitable. The individual Defendants also misrepresented or omitted

to disclose the intended uses of the proceeds of the offering of the Series A

Preferred Stock.

88. The individual Defendants knew that their misrepresentations

were false when made and knew their misrepresentations and the omissions of

fact which were kept from Plaintiffs and the Class were of material facts. The

33


individual Defendants intentionally made these misrepresentations and

intentionally failed to disclose material facts to Plaintiffs in connection with the

sale of the Series A Preferred Stock.

89. The individual Defendants' false representations and omissions

were made with the intent of inducing Plaintiffs and members of the Class to

purchase shares of Universal's Series A Preferred Stock.

90. Plaintiffs and the Class reasonably relied upon Defendants' false

representations and material omissions to their detriment. Plaintiffs invested

in Universal Preferred Stock based upon the representations that the capital

being raised would help the Company expand its operations and become

profitable. Had Plaintiffs and the Class known the truth - that Defendants had

no intention of using the proceeds from the sale of the Series A Preferred Stock

for the purposes set forth in the Confidential Information Memorandum - they

would not have purchased their shares of Universal's Series A Preferred Stock.

91. As a result of the individual Defendants' conduct, Plaintiffs have

been damaged and their shares of Series A Preferred Stock are worthless.

COUNT IV

Negligent Misrepresentation



93. As more specifically alleged above, Defendants made the following

misrepresentations in connection with their press releases, SEC filings,

marketing and sales materials:

34


a. That Universal intended to use $5.6 million of the proceeds

of the sale of the Series A Preferred Stock to expand the Company's

manufacturing capacity in Virginia;

b. That the equipment used by Universal in the Independence,

Virginia facility was in good working order and was "state of the art;"

c. That the equipment to be used by Universal in the

Savannah, Georgia facility was of sufficient quality it would increase the

Company's revenue growth;

d. That the customer base, both present and those customers

for whom contracts were "in process," indicated that Universal would raise

between $16 million and $52.5 million in the first year of operation.

e. That the funds being raised in the offering were sufficient to

enable the Company to "break even" during its first year of operation.

94. In addition, Defendants omitted to disclose the following material

facts:

a. That funds were being diverted from the offering and being

used to pay salaries to Martin and Fry and a large fee to Illington Capital for its

role in the offering.

b. That funds were being diverted from the offering to pay

Martin's personal expenses.

95. To the extent the individual Defendants' misrepresentations were

unintentional, Plaintiffs were harmed because Defendant negligently and

35


carelessly misrepresented the true financial condition of the company and the

intended uses of the funds raised in the offering.

96. The individual Defendants made the misrepresentations of

material fact or omitted to state material facts as reflected above in the course

of their business, profession or employment in which they had a pecuniary

interest.

97. The information containing the misrepresentations and omissions

described above was made by Defendants for the guidance of Plaintiffs in

making their investments and Defendants negligently and carelessly induced

Plaintiffs into purchasing shares of Series A Preferred Stock..

98. Plaintiffs justifiably relied upon the misinformation being supplied

by Defendants and relied on Defendants to truthfully disclose all material facts

pertaining to the transaction.

99. Defendants failed to exercise reasonable care or competence in

obtaining or communicating the information containing material

misrepresentations or omissions of material facts as described above.

Defendants aided and abetted one another in negligently and carelessly making

misrepresentations as to the financial condition of Universal. Defendants

should have known that the information being provided to Plaintiffs and the

Class was false and/or that they were omitting to disclose material facts to

Plaintiffs in order to induce them to invest.

100. Plaintiffs' reliance on the material misrepresentations or omissions

of material facts described above was a substantial factor in causing their

36


pecuniary losses from their purchases of Universal Food & Beverage Company.

Series A Preferred Stock.

COUNT V

Breach of Fiduciary Duty



102. Following the sale of the Series A Preferred Stock to Plaintiffs and

the Class, the individual Defendants owed Plaintiffs and the Class fiduciary

duties, including duties of candor, disclosure and loyalty.

103. The individual Defendants breached their duties of candor and

disclosure by failing to inform Plaintiffs and the Class that they were not using

the proceeds from the Series A Preferred Stock for the purposes set forth in the

Confidential Information Memorandum or that funds were being diverted from

the offering to pay salaries to Martin and Fry and to pay Martin's personal

expenses as described above.

104. Defendants Martin and Fry breached their duties of loyalty by

diverting funds from the offering to pay salaries for which they were not

entitled.

105. Defendant Martin breached his duty of loyalty by diverting funds

from the offering to pay his personal expenses.

106. As a result of the breaches of fiduciary duty by the individual

Defendants, the investment by Plaintiffs and the Class in the Series A Preferred

37


Stock of Universal has become worthless and Plaintiffs and the Class have

been injured.

WHEREFORE, Plaintiffs prays for relief and judgment, as follows:

(a) A determination that this action is a proper class action under

Rule 23 of the Federal Rules of Civil Procedure;

(b) An award of compensatory damages in favor of Plaintiffs and the

other Class members against all Defendants, jointly and severally, for all

damages sustained as a result of Defendants' wrongdoing, in an amount to be

proven at trial, including interest thereon;

(c) An award to Plaintiffs and the Class of their reasonable costs and

expenses incurred in this action, including counsel fees and expert fees; and

(d) Such other and further relief as the Court may deem just and

proper.

JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

Dated: September 15, 2008

s/ Robert E. Williams

One of Plaintiffs' Attorneys

Terrence BuehlerRobert E. WilliamsTouhy, Touhy, Buehler & Williams LLP55 W. Wacker Drive, Suite 1400Chicago, Illinois 60601Telephone: (312) 372-2209Facsimile: (312) 456-3838

38

Case 1:08-cv-03263 Document 30

Allan SteyerBryan KreftSteyer, Lowenthal, Boodrookas,Alvarez & Smith LLPOne California Street, Suite 300San Francisco, CA 94111Telephone: (415) 421-3400

Filed 09/15/2008 of 40

39


SERVICE OF DOCUMENTS BY ELECTRONIC MEANS

The undersigned hereby certifies that on September 15, 2008, he causedthe foregoing document to be filed with the Clerk of the United States DistrictCourt for the Northern District of Illinois, Eastern Division, by using itsElectronic Case Filing System which will send a Notice of Electronic Filing to allcounsel of record.

The undersigned also certifies that on the above date he caused theforegoing document to be mailed by United States Postal Service to the followingnon-Filing Users:

(Not Applicable)

/s/ Robert E. WilliamsTOUHY, TOUHY, BUEHLER & WILLIAMS.

Attorney for Plaintiffs

55 W. Wacker DriveSuite 1400Chicago, Illinois 60601Phone: (312) 372-2209Fax: (312) 456-3838Email: [email protected]

Case 1:08-cv-03263 Document 30-2 Filed 09/15/2008 Page 1 of 41

EXHIBIT A


CONFIDENTIAL INFORMATIONMEMORANDUM

UNIVERSALFOOD & BEVF-RAGE COMPANY

I L L I N G T O N C R P I T A L

0I1 in! RIC PiCYu a k70WT"

Case 1 : 08-cv-03263 Document 30-2 Filed 09/15/2008 Page 3 of 41

IMPORTANT INFORMATION CONCERNING THIS

MEMORANDUM

Copy No:

Issued To:

This private placement memorandum has been prepared on a confidential basis solely for thebenefit of selected accredited investors in connection with this private placement. By acceptance ofthis private placement memorandum, each offeree expressly agrees and acknowledges that he orshe must treat the information contained herein as strictly confidential and agrees to use suchinformation for the sole purpose of evaluating a possible investment in the shares offered pursuantto this private placement memorandum and for no other purpose. The reproduction ordistribution of this private placement memorandum, in whole or in part, or the disclosure of any ofits contents without the Company's prior written consent is prohibited.

The memorandum does not constitute an offer to sell to, or a solicitation of an offer to buy from,anyone in any state or in any other jurisdiction in which such an offer or solicitation is notauthorized.

Each prospective investor must comply with all laws and regulations applicable to it in force inany jurisdiction in which it purchases, offers or sells the securities or possesses this memorandumand must obtain any consent, approval or permission required to be obtained by it for thepurchase, offer or sale by it of the securities under the laws and regulations applicable to it in forcein any jurisdiction to which it is subject or in which it makes such purchases, offers or sales, andneither the Company nor the placement agent shall have any responsibility therefor.

Except as otherwise indicated, this memorandum speaks as of the date hereof. Neither thedelivery of this memorandum nor any sale made hereunder shall, under any circumstances, createan implication that there has been no change in the affairs of the Company after the date hereof.

The information presented herein was prepared by the Company and obtained from sourcesbelieved to be reliable and is being furnished solely for use by prospective investors in connectionwith this offering. Distribution of this memorandum to any person other than such prospectiveinvestors and those persons retained to advise such prospective investors with respect thereto isunauthorized, and any reproduction of this memorandum or related documents, in whole or inpart, is prohibited. Each prospective investor agrees that, if so requested, such prospectiveinvestor will return this memorandum and all other documents received in connection with thisoffering if such prospective investor does not purchase any of the securities or if the offering isterminated.

No person has been authorized to give any information or to make any representations inconnection with the offering made hereby other than the information and representationscontained in this memorandum, and, if given or made, such other information or representationsmust not be relied upon as having been authorized by the Company.

This memorandum does not purport to be all-inclusive or contain all information that aprospective investor may desire in investigating the Company. Each prospective investor mustrely on his or her own examination of the Company and the terms of the offering, including themerits and risks involved in making an investment decision with respect to the securities. Thecontents of this memorandum should not be construed by prospective investors as investment, taxor legal advice. Prior to making an investment decision regarding the securities, a prospectiveinvestor should consult his or her own counsel, accountants and other advisors and carefullyreview and consider this entire memorandum.


0

The Company will provide investors, prior to the sale of securities offered hereby, with theopportunity to ask questions of, and receive answers from, its representatives concerning the termsand conditions of the offering and to obtain any additional information which the Companypossesses or can acquire without unreasonable effort or expense.

Each purchaser of the securities will be required to enter into a purchase agreement and otherdocuments with the Company in order to make an investment. In the event that any of the terms,conditions or other provisions of that agreement are inconsistent with, or contrary to, thedescription or terms in this memorandum, such agreement and other documents shall control.

While the information in this memorandum is believed to be accurate, the Company disclaims anyand all liability, express or implied, contained herein, or for omissions from this memorandum orany other written or oral communication transmitted to any interested party in the course ofevaluating the offering. It is the responsibility of the investor to perform its due diligence and todetermine the appropriateness of any investment in the Company. All of the Company'srepresentations and warranties will be contained in the agreements and other documents referredto in the prior paragraph. The Company will make available to each prospective investor theopportunity to ask questions of, and receive answers from, us concerning the terms and conditionsof the offering and to obtain any additional information that each such investors may request. TheCompany reserves the right to require any such investor to sign a confidentiality agreement that issatisfactory to it before it answers such questions or discloses any such additional information.This offering is subject to withdrawal, cancellation or modification without notice. The Companyreserves the absolute right to select the investors to whom the securities will be sold.

MARKET AND INDUSTRY DATA

This memorandum includes certain information obtained from trade and statistical services andpublications, and from other sources. Although the Company has obtained this information fromsources management believes to be reliable, they have not independently verified this informationand there can be no assurance as to its accuracy.

FORWARD-LOOKING STATEMENTS

This memorandum contains certain forward-looking statements with respect to the financialcondition, results of operations and business of the Company, including, without limitation,statements concerning the Company's strategic plans, the anticipated growth of the market for theCompany's products, anticipated expenditures, the need for additional funds and other events andcircumstances described in terms of the Company's expectations or intentions. Use of the words"anticipates," "believes," "estimates," "expects," "intends," "plans" and similar expressions herein areintended to identify forward-looking statements. Such forward-looking statements involve knownand unknown risks, uncertainties and other factors that may cause actual results to differmaterially from those expressed or implied by such forward-looking statements. Such factorsinclude, but are not limited to, the Company's limited operating history, uncertainties in themarket for the Company's products and other common business and market risks. All of theseforward-looking statements are based on estimates and assumptions made by management of theCompany which, although believed to be reasonable, are inherently uncertain. Therefore, unduereliance should not be placed upon such estimates and statements. No assurance can be given thatany of such estimates or statements will be realized and it is likely that actual results will differmaterially from those contemplated by such forward-looking statements.

TRADEMARKS

This private placement memorandum may contain tradenames, trademarks and service marks of

other companies.

ll


0

ADDITIONAL INFORMATION

All communications or inquiries relating to this memorandum or to a possibletransaction involving the company should be directed as follows:

ILLINGTON CAPITAL

117 East 55th Street, Suite 201New York, NY 10022Fax: (212) 331-7858

44 Montgomery St., Suite 3450

San Francisco, CA 94104

Fax: (415) 398-1023

Don Hubbard(212) 331-7829

[email protected]

Thomas P. O'Shea(212) 331-7820

[email protected]

Robert Strawbridge Andrew S. Zamfotis Jennie Flannery(415) 398-1015 (212) 331-7825 (415) 398-1013

rstrawbridge@illingtoncapital .com azamfotis@illingtoncapital .com [email protected]

iu

Case 1:08-cv-03263 Document 30-2

0

Filed 09/15/2008 Page 6 of 41

PAGE

I. EXECUTIVE SUMMARY.

A. OVERVIEW ............................................................................................................................................. 1

B. OPPORTUNITY ..................................................................................................................................... .. 2

C. STRATEGY ............................................................................................................................................ .. 3

D. INVESTMENT HIGHLIGHTS ................................................................................................................. .. 4

E. SOURCES AND USES ............................................................................................................................ .. 7

F. PRO FORMA BALANCE SHEET ............................................................................................................ .. 8

G. FINANCIAL PROJECTIONS - COMBINED ............................................................................................. .. 9

H. FINANCIAL PROJECTIONS - UFBV STANDALONE ............................................................................. 10

I. FINANCIAL PROJECTIONS - SAVANNAH FACILITY ONLY .................................................................. 11

II. INDUSTRY OVERVIEW.......................................................................................................................12

A. OVERVIEW OF BOTTLED WATER INDUSTRY ....................................................................................... 12

B. PRIVATE LABEL BEVERAGE MARKET .................................................................................................. 13

C. VOLUME GROWTH IN BEVERAGE MARKET ........................................................................................ 15

D. ASEPTIC BEVERAGE INDUSTRY / TETRA-PAK .................................................................................... 15

III. UFBV COMPANY OVERVIEW .........................................................................................................17

A. OvERVIEW ........................................................................................................................................... 17

B. OPPORTUNITY ..................................................................................................................................... 18

C. STRATEGY ............................................................................................................................................ 19

D. MANUFACTURING .............................................................................................................................. 23

E. CUSTOMERS......................................................................................................................................... 25

F. COMPETITION ..................................................................................................................................... 27

G. INTERNATIONAL OPPORTUNITIES ...................................................................................................... 27

H. INTELLECTUAL PROPERTY .................................................................................................................. 27

IV. MANAGEMENT TEAM ...................................................................................................................... 29

V. HISTORICAL FINANCIALS ............................................................................................................... 33

A. HISTORICAL INCOME STATEMENT ..................................................................................................... 33

B. HISTORICAL BALANCE SHEET ............................................................................................................ 34

VI. APPENDICES ........................................................................................................................................35

A. ASSET LIST........................................................................................................................................... 35

iv


0

I. EXECUTIVE SUMMARY

A. OVERVIEW

Established in July 2004, Universal Food and Beverage (OTC BB: UFBV.OB)

(UFBV or the "Company") is a manufacturer of co-packed, private label and

branded beverage products. UFBV is led by Duane Martin, former president of

IGA, the world's largest network of retail grocery stores. The Company has an

established manufacturing facility and a sales pipeline of an estimated $30 million

($14mm in contract another $15mm expected to go to contract) and is in

negotiations for contracts in excess of $60 million (based on customer projections).

Nearly half of the non-carbonated beverage market is owned by five or six majormanufacturers leaving the remaining half of the market highly-fragmented andwithout reliable and efficient manufacturing and distribution sources. Tocapitalize on this void, UFBV was established as a turnkey provider for "shelf-stable" or non-refrigerated beverage products with full service capabilitiesincluding formula development, package design, marketing, production,distribution and logistics for any shelf stable beverage products.

The Company is presently operating processing and packaging systems forbottled water as well as value-added products such as teas, juices, juice blends,vitamin fortified waters, health drinks, and isotonics, all in either glass bottles orPET (polyethylene terephthalate, a plastic resin and a form of polyester) bottles.As part of the manufacturing process, the Company intends to utilizes a patent-pending proprietary technology in its production line creating significant marginenhancement for UFBV and its customers by allowing the customer to use a lesssubstantial bottle for its hot-fill product and allows UFBV to increase the capacityand speed of its production line. Lastly, the Company has identified anacquisition where it will also be able to produce shelf-stable milks, soy and ricebeverages through the acquisition of an aseptic (shelf-stable in sterileenvironment) packing facility.

The Company began its sales efforts in 2Q 2005 and has since focused ondeveloping its sales pipeline. The Company is projecting 2006 sales of $67.8million and net profits of $4.6 million. For 2007, the Company projects sales of$104.1 million and net profits of $11.0 million. As a result of current ordersexceeding current plant capacity, a substantial portion of the proceeds from thisoffering will be used to expand plant capacity to meet rising demand.

Executive Summary 1


B. OPPORTUNITY

While the Company primarily focuses on providing processing and packagingservices to brand owners and private label solutions for retailers, it simultaneouslystrives to expand its own higher margin Company-owned brands. Managementis not aware of any other contract packaging company which has the capability toproduce multiple beverage products (hot-fill, cold blend and aseptic) for nationaland international markets from a single supply source and with such a full serviceoffering. UFBV intends to exploit this advantage by offering the ability to producemultiple beverages and provide customers with a wide range of services, inaddition to manufacturing, including product design, product development,packaging, marketing and distribution. This mix of products and servicesprovides customers with an economically appealing platform which translatesinto a competitive advantage for UFBV.

To date, the Company largely focused on establishing the manufacturingoperation and developing the sales pipeline. As a result, UFBV is nowrecognizing rapid sales growth and customer inquiries. Expanding theproduction capacity at its existing facility offers significant opportunity for theCompany; over the past four months alone, the Company was unable to accept$12 million in sales that it was unable to fulfill due to current capacity constraints.

Lastly, the Company has identified an opportunity to be one of the feworganizations with the ability to produce beverages in an aseptic (sterile)environment. Tetra-Pak, the leader in aseptic packaging, has extremely stringentrequirements and certifications for companies that fill product with its container.The Company's experience, relationships and qualifications have presented anopportunity to acquire a facility with this capability. The Company believes thereis significant demand for this type of beverage (which includes shelf-stable milks,soy and rice beverages, and protein drinks, etc.) relative to the capacity andbelieves that the ability to offer this along with its existing business will translateinto significant additional revenue opportunities.

Executive Summary 2


Maximum Annual Capacity

(Cases(Yr) Sales

Existing Facilities 11,619,437 $63,182,213

Incremental Capacity w/ Expansion 23,568,615 $95,060,631

Total Capacity w/ Expansion 35,188,052 $158,242,844

Savannah Acquisition 25,390,000 $124,756,000

Total Capacity w/ Acquisition 60,578,052 $282,998,844

C. STRATEGY

To accomplish these goals, UFBV has identified these key strategic initiatives:

• Increase capacity and operating efficiency by completing the developmentof the high-speed line in the existing Virginia facility and add additionalhigher margin hot-fill capabilities.

• Add additional product capabilities such as shelf-stable milks and highprotein drinks with the acquisition of the aseptic packaging facility inSavannah.

• Leverage the Company's proprietary processing technology to increase the

efficiency of certain production lines and offer high margin products to its

customers.

• Diversify and increase revenues by adding additional private-labelsolutions and Company-owned brands to the product mix.

• Continue to expand with other acquisitions and by entering new marketsacross the country and overseas.

Executive Summary 3


D. INVESTMENT HIGHLIGHTS

High Growth Industry

The Company focuses on some of the fastest growing segments of the liquidrefreshment beverage industry including, bottled water, teas, sport drinks andshelf-stable juices. Consumers are continuing their shift away from carbonatedsoft drinks (CSDs) to waters and other non-carbonated beverages; a recent studyindicates 54% of consumers are shifting from CSD to water. UFBV is alsotargeting the private label segment for retailers who continue to see theopportunity in offering competitive products to some of the largest volumebeverage segments in their stores.

Comprehensive Service Offering - Turnkey Solution for Brands

In addition to manufacturing and co-packing, UFBV offers a complete valueadded service package to brands and private label customers. The ability todevelop, manufacture and distribute a wide variety of beverage products acrossseveral different processes is unique to UFBV. By efficiently loading a shippingunit with higher margin product, the customer reaps significant economic benefit.The national and international clients, with multiple products, no longer need tocontract with several packers to get all of their beverage products.

Manufacturing Expertise with Proprietary Technology

UFBV has the unique ability to manufacture virtually all shelf-stable beverageproducts. The Company's vast understanding of cold-fill, hot-fill and asepticprocesses, assures customers UFBV will meet the demands for new products, meetsales schedules, and meet product quality requirements.

The Company has filed for a patent on a bottle sterilization process that ispresently being installed on its hot-fill system. The process lessens the requiredtemperature in the hot-fill process; this creates savings by requiring a lesssubstantial bottle than currently used in the process. Companies such as Coca-Cola, Pepsi, and others have contacted the Company to discuss possiblydeveloping new products using the technology, packaging existing products withthe technology, or licensing this technology.

Executive Summary 4


Strong Projected Financial Performance

The Company has been focusing its efforts on leveraging its industry contacts,proprietary technology and turnkey solution to grow sales . UFBV's currentpipeline includes approximately $30 million in sales ($14 million in contract andanother $15 million expected to go to contract) as well as $60 million of sales innegotiation for contracts.

The Company projects 2006 sales of $67.8 million and net profits of $4.6 million.For 2007, the Company projects sales of $104.1 million and net profits of $11.0million.

Product Development Expertise

UFBV operates a complete product development system that can simulate plantproduction quality, which can provide the client with product samples for qualitytesting, market testing, and actual sales samples, all prior to making largeproduction runs typical for the industry. The product development system allowssales, marketing, manufacturing and the customer to work as a cohesive team. Asa result, product development costs and time to market are significantly reduced.

Growing Portfolio of High-Quality Private Label Solutions

In addition to its co-packing business, the Company has a growing portfolio ofhigher margin private-label and Company-owned brands. UFBV is constantlyimproving and producing proprietary products that can provide a competitivealternative to name brand products for retailers. SPORT2OTM, FROST2OTM and,Olde DominionTM are good examples of Company-owned brands that offercustomers alternatives to GatoradeTM, Fruit2OTM and all of the various teascurrently available.

Products are manufactured from a water source that has been ranked among thetop 10 in the world through historical taste testing.

Highly Experienced Management Team with Deep Industry Relationships

UFBV has assembled a powerful management team with varying fields ofexpertise; product development, manufacturing, marketing and distribution.With a sustained history of creating and marketing brands, the management team

Executive Summary 5


brings a network of relationships with retailers, extensive experience indeveloping manufacturing facilities, and a strong reputation in the liquid food andbeverage segment.

The team has long-standing relationships with co-packaging clients, retail clientsand private label clients as well as the experience to identify strategic acquisitions,locate equipment and develop new technologies. Additionally, the Company isunique in its access to a recognized FDA process authority (Dr. Charles Sizer) withGrade-A dairy certification. These relationships have already provided forsignificant sales growth to date and increasing amounts of domestic andinternational opportunities as evidenced by the growing sales pipeline.

Executive Summary 6


E. SOURCES AND USES

$ in millions

SOURCES USES

New Preferred Investment $18.9 Acquisition of Savannah Facility $9.0

Bridge Roll-in $3.3 Expansion of Existing VA Facility $5.6

Bridge Buying Power $0.3 Bridge Roll-in $3.3

Bridge Buying Power $0.3

Working Capital $0.9

Transaction Costs $1.9

Repayment of Debt $1.5

Total Sources $22.5 Total Uses $22.5

Executive Summary 7


F. PRO FORMA BALANCE SHEET

ASSETS 9/30/2005

CURRENT ASSETS

Cash 38,452

Total Current Assets 793,289

Net P,P&E 7,670,351

Total Other Assets 2,254,984

Total Assets $10,718,624

LIABILITIES AND STOCKHOLDERS ' EQUIT Y

CURRENT LIABILITIES

Short-term debt 1,787,774

Total Current Liabilities 4,751,716

LONG-TERM LIABILITIES

Long-term debt, less current portion 2,423,085

Total Liabilities 7,549,801

STOCKHOLDERS' EQUITY

Convertible Preferred 0

Total Stockholder;' Equity 3,168,823

Total Liabilities and Stockholders' Equity $10,718,624

Bridge Pro-Forma for PIPE Pro Forma for

Adjustments Bridge Adjustments PIPE

1,200,000 1,238,452 925,000(l) 2,163,452

1,993,289 2,918,289

7,670,351 14,600,000 p> 72,270,351

2,254,984 2,254,984

$11,918,624 $27,443,624

(150,000) 1,637,774 (1,500,000) 137,774

(1,900,000) 2,701,716 1,201,716

2,423,085 2,423,085

3,250,000 3,250,000 17,025,000 (3) 20,275,000

6,418,823 23,443,823

$11,918,624 $27,443,624

(1) Excess working capital.

(2) Purchase of Savannah fa' cility and expansion of the VA plant.

(3) Convertible preferred issuance and bridge roll-in, net of transaction costs and bridge buying power.

Executive Summary 8


G. FINANCIAL PROJECTIONS - COMBINED

The following projections have been developed after careful consideration using the mostcurrent customer data available. These results assume a successful capital raise, thesubsequent completion of the manufacturing capacity expansion previously started aswell as the acquisition of the aseptic packaging facility in Savannah, GA. Based on theseassumptions the Company believes these results are achievable.

2006 2007 2008

Total Case Volume 16,825,977 21,608,105 26,252,250

Net Revenue $67,832,499 $104,073,033 $169,741,380

Growth % N/A 53.4% 63.1 %

COGS ($41,792,194) ($56,363,371) ($75,646,844)

Variable Contribution $26,040,304 $47,709,662 $94,094,535

Margin % 38.4% 45.8% 55.4%

Direct Operating Expenses ($12,549,536) ($20,126,740) ($34,427,691)

Gross Margin $13,490,769 $27,582,922 $59,666,844

% 19.9% 26.5% 35.2%

5, G & A ($7,428,526) ($10,400,329) ($15,870,038)

Operating Income $6,062,242 $17,182,593 $43,796,806

% 8.9% 16.5% 25.8%

Interest/Other Expense ($1,293,726) ($1,529,491) ($1,112,264)

Provisions for Taxes ($150,995) ($4,612,454) ($11,616,004)

Net Profit $4,617,522 $11,040,649 $31,068,537

% 6.8% 10.6% 18.3%

Executive Summary 9


H. FINANCIAL PROJECTIONS - UFBV STANDALONE

The following projections have been developed by the Company based the existingcurrent pipeline and management's projections.

2006 2007 2008

Total Case Volume

Revenue

Water

Flavored Waters

Hot Fill Co-Pack

Hot Fill-Branded

Distribution

Marketing/Fees/Slotting

Net Revenue

Growth %

12,289,920 15,670,410 18,340,969

$16,916,708 $17,983,817 $20,582,909

$6,799,237 $8,227,810 $9,075,617

$17,492,332 $26,307,653 $30,529,201

$7,081,250 $15,737,377 $28,114,885

$6,239,634 $7,695,551 $9,984,625

($1,310,128) ($1,793,237) ($2,203,618)

$53,219,033 $74,158,971 $96,083,619

N/A 39.3% 29.6 %

COGS ($39,158,454) ($52,213,022) ($67,064,027)


Margin % 26.4% 29.6% 30.2 %

Direct Operating Expenses ($4,624,510) ($6,322,470) ($6,818,357)

Gross Margin $9,436,070 $15,623,479 $22,201,235

% 17.7% 21.1% 23.1%

5, G & A ($4,256,377) ($5,151,306) ($5,818,194)

Operating Income $5,179,693 $10,472,173 $16,383,041

% 9.7% 14.1% 17.1%

Interest/Other Expense ($843,378) ($488,211) ($155,186)

Provisions for Taxes $0 ($2,833,110) ($4,564,062)

Net Profit $4,336,315 $7,150,852 $11,663,793

% 8.1% 9.6% 12.1%

Executive Summary 10


I. FINANCIAL PROJECTIONS - SAVANNAH FACILITY ONLY

The following projections are for the aseptic beverage packing facility only. TheCompany has based these projections on the existing customer base in the Savannahfacility as well as the Company's own sales forecast.

2006 2007 2008

Total Case Volume

Revenue

Asceptic Brick

Asceptic Bottle/Bag

Plant Trials

Handling Charges

Warehouse Charges

Total Revenue

Growth %

4,536,057 5,937,695 7,911,280

$13,472,089 $17,813,086 $23,733,841

$723,450 $11,578,506 $49,265,250

$78,734 $105,052 $140,346

$47,800 $59,767 $75,324

$291,393 $357,651 $442,999

$14,613,466 $29,914,062 $73,657,760

N/A 104.7% 146.2%

COGS $ (2,633,741) $ (4,150,349) $ (8,582,817)


Margin % 82.0% 86.1% 88.3 %

Direct Operating Expenses $ (7,925,026) $ (13,804,270) $ (27,609,334)

Gross Margin $4,054,699 $11,959,443 $37,465,609

% 27.7% 40.0% 50.9 %

5, G & A $ (3,172,149) $ (5,249,023) $ (10,051,844)

Operating Income $882,549 $6,710,421 $27,413,765

% 6.0% 22.4% 37.2%

Interest/Other Expense $ (450,348) $ (1,041,280) $ (957,078)

Provisions for Taxes $ (150,995) $ (1,779,344) $ (7,051,942)

Net Profit $281,207 $3,889,797 $19,404,745

% 1.9% 13.0% 26.3%

Executive Summary 11


II . INDUSTRY OVERVIEW

A. OVERVIEW OF BOTTLED WATER INDUSTRY

In almost all positive attributes, bottled water's image is considerably better thanthat of either regular or diet carbonated soft drinks (CSDs). According to aconsumer research study conducted by Morgan Stanley in 2005, 67% of people saythey are trying to drink more water because it is healthy. Consumers who aredrinking less regular cola are more than twice as likely to shift to bottled water asthey are to shift to diet CSDs.

Consumption Shift Awav From Colas in the Past 6 Months

Drinking Less Regular Cola

50%46%

40%

30% 21%

20%

10%

0%

Drinking more Drinking more

diet cola bottled water

Drinking Less Diet Cola

60%54%

50%

40%

30%

20% 10%

10%

0%

Drinking more Drinking more

regular cola bottled water

General Shifts in Beverage Consumption in the Last 6 Months

Regular CSD Diet CSD Bottled Water40%

30%

Drinking more in20%

Past 6 Months 10%

0%

Drinking Less in -10%

Past 6 Months-20%

-30%Net More/Less

Source: Morgan Stanley Consumer Research, June 2005

Industry Overview 12

(12%) (2%) +24%


Bottled water continues to win incremental consumption across all age groups,with many of those gains coming at the expense of diet and regular CSDs. 18-24year olds have the highest CSD penetration, but they also have the highest bottledwater penetration and are 2x more likely to be increasing water consumption thanCSD. The data below illustrates these points:

Shifts in Consum

Total 18-24 25-34 35-44 45-54 55-65

Regular Colas

Drinking More 10% 23% 11% 10% 5% 1%

Drinking the Same 29% 24% 34% 32% 30% 24%Drinking Less 22% 22% 25% 21% 21% 21%

Rarely Consumed 39% 30% 30% 38% 45% 54%

Net More/(Less) -12% 1% -14% -11% -16% -20%

Diet Colas

Drinking More 12% 15% 14% 14% 8% 12%

Drinking the Same 29% 17% 28% 31% 34% 33%Drinking Less 14% 12% 16% 14% 16% 13%Rarely Consumed 44% 56% 42% 42% 41% 41%

Net More/(Less) -2% 3% -2% 0% -8% -1%

Water

Drinking More 35% 48% 38% 32% 31% 30%Drinking the Same 41% 33% 38% 46% 43% 39%Drinking Less 9% 10% 13% 7% 9% 7%Rarely Consumed 15% 9% 12% 14% 17% 25%

Net More/(Less) 26% 38% 25% 25% 22% 23%Source: Morgan Stanley Consumer Research, June 2005

B. PRIVATE LABEL BEVERAGE MARKET

Private label products exist in every beverage category in the U.S., but theamount of private label volume is highest in the following categories: milk,bottled water, and fruit beverages. These large beverage categories tend tohave substantial private label volume and retailers know the demand for thesecategories is sufficient to merit their entry.

Retailer per square foot profitability demands a greater share for private label.While the economic basis has been well known, the expanding emulationcapabilities of companies like UFBV, as well as the consolidation of retailers,are driving the trend. At the Consumer Analyst Group of NY 2005



conference, Kellogg ascribed its private-label share gains over the past 12months to private-label expansion at just 4 of its 48 major grocery customers.More companies are likely to follow this trend and need the services of UFBVto meet this rising demand. In a recent study cited by the Food Institute, itwas determined that 62% of private-label products contributed to the averageretailer's bottom line, compared with 56% of branded products. For thesereasons, the Company believes that each category of the profit-optimizedsupermarket will increasingly feature 2-4 leading brands (for maximumvelocity) and private label (maximum margin) across every category andevery square foot of selling space.

In particular, ACNielsen highlighted the emergence of premium "branded"private-label products, which offer consumers a quality private-label choice aswell as provide retailers an additional selling point for their stores.Nontraditional categories such as drinking yogurt and energy drinks areexperiencing rapid private-label sales growth due to this premiumphenomenon.

40.0% 38.0%

35.0% 33.0%

n Private Label Growth30.0%

0 Manufacturer Brand Growth

25.0%20.0% 20.0%

20.0% 117-0-16.0%

15.0% 13.0% 13.0%

.9%10.0% 7.0%

4.0%5.0% 2.0%

0 0%.

Drinking Sport Energy Baby Food Complete Cooking Oil Flavored Milk

Yogurt Drinks Ready Meals Drinks

Private Label Shares of Supermarket Sales

(Unit Sales)25.0%

22.5%

20.0%

17.5%

15.0%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005E

Source: Wall Street Research



C. VOLUME GROWTH IN BEVERAGE MARKET

US Liquid Refreshment Beverage Historic and Projected Volume Growth

Volume Volume CAGR

Share ('04) 1999-2004 2004-2009ECSDs 67.0% 0.6% -1.5%

Chilled Juices 8.0% -1.7% 0.9%Teas 3.0% 1.2% 5.0%

Shelf-Stable Juices 5.0% 3.8% 5.0%Sports Drinks 4.0% 11.8% 13.0%

Water 12.0% 24.3% 15.0%Source: Beverage Digest

YTD Volume Growth, US Supermarkets

Still Water

Sport Drinks

RTD Coffee

RTD Tea

RFG OJ

SS Juices

CSDs

Source: Morgan Stanley Consumer Research, June 2005

D. ASEPTIC BEVERAGE INDUSTRY/ TETRA-PAK

Aseptic beverage processing has been long-dominated by Sweden-basedTetra-Pak. Since it introduced the Tetra Brick, the company has grown tobecome the world's largest supplier of cartons and bottles for milk, soup, fruitjuices, and other liquid products. Tetra-Pak also manufactures machineryused for food packaging. It also designs and manufactures key processingequipment, such as homogenizers, mixing and standardization units, heatexchangers, system and plant components. It focuses on five food categories;dairy, cheese, beverage, prepared food and ice cream.

In September 1961, Tetra-Pak introduced the first aseptic filling machine forbacteria-free milk. Aseptic packaging removes the need for usingpreservatives to extend shelf life.


(5.0%) 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%


Aseptic processing involves heating the product to a high temperature in a

closed system for a few seconds, then force cooling it to room temperature.

The process generally results in less loss of taste and nutrients compared to

the traditional pasteurization and canning methods. Aseptic packaging is a

method of transferring the product into pre-sterilized packages in a sterile

environment.

Aseptic lines are growing in popularity because they enable firms to dive intohealth trends by allowing drinks to be made without preservatives and with ahigh juice content. They also help firms to add value to products by fortifyingdrinks with vitamins and minerals.

Tetra-Pak's unique brick-shaped packaging also has appeal to brands andretailers due to its stand out appearance on shelves. Frost & Sullivan reportedthat food packaging manufacturers are responding to the consumer andregulatory trends by not only focusing on developing economic and effectivepackages for protecting the food products, but also on the aesthetic value ofthe packages.



III . UFBV COMPANY OVERVIEW

A. OVERVIEW

UFBV aims to become a leading national and international manufacturer ofprivate-label, branded and co-packed beverage products. In 2005, the Companyacquired the assets of the former Grayson Springs Water Company, a nationalbottled water manufacturer. Led by Duane Martin, former President of IGANorth America ($22 billion food and beverage distributor), UFBV has assembled ahighly-effective management team with years of manufacturing, marketing anddistribution experience at large food and beverage corporations to execute itsstrategy and achieve significant growth.

The non-carbonated beverage market is highly-fragmented and without reliableand efficient manufacturing and distribution sources. To capitalize on that void,UFBV was established as a complete solution provider of non-refrigerated (shelf-stable) beverage products with full service capabilities. The Company is presentlyoperating processing and packaging systems for bottled water as well as othervalue-added products such as teas, juices, juice blends, vitamin fortified waters,health drinks, and isotonics, all in either glass bottles or PET bottles. TheCompany distinguishes itself from other market participants by offering a fullsuite of services from formula development and package design to marketing,distribution and logistics.

Revenues are currently generated from three primary sources; the sale of contractpackaging services to brand owners, the manufacturing of private label solutionsto retailers, and the manufacturing of Company-owned brands. Additionalproduct lines such as high protein drinks and low calorie shelf-stable milkproducts will be introduced with the funds from this financing. Initially, co-packing and private label solutions will continue to dominate the revenue modeluntil Company-owned brands with higher margins are introduced and acceptedin the marketplace.

During fiscal year 2005 management largely focused on establishing themanufacturing operation and developing the sales pipeline which has grown inexcess of $60 million (based on customer estimates) as a result of managingrelationships with retailers and brands. The proceeds of this financing will serve,in part, to increase capacity to meet this rapidly growing demand. The Company,over the past four months alone, was unable to accept certain orders (over $12million in contract value) due to capacity constraints. All of which highlight the

UFBV Company Overview 17


increasing demand for the Company's proprietary manufacturing processes andturnkey private label solutions.

B. OPPORTUNITY

The Company has identified an opportunity to simultaneously expand its private-label solutions to retailers while growing its existing business. UFBV is one ofmany companies able to produce water or flavored waters; however, theCompany is unique in that it has the experience to produce a wide variety of otherbeverage products utilizing proprietary thermal processing techniques andoffering this turnkey solution to brands seeking product differentiation andexpansion, all from a single provider. These patent-pending techniques offercustomers the ability to use containers with a lower total gram weight for theirbeverages which many brand owners are eager to do to increase their margins.

An opportunity exists to increase the private-label solutions business to retailers.An increasing amount of big-box and other retailers are seeking private labelproducts for their stores to compete with some of the other existing brands. Suchretailers turn to the Company for their expertise in providing the completesolution from product development to manufacturing and logistics. Further, theCompany has identified an opportunity to be one of the only companies that canalso offer packing services for water and teas as well as other shelf stable drinkssuch as high protein / diet drinks, soy and rice milks, as well as other "low acid"beverages. This can be accomplished with the acquisition of the aseptic facility(Tetra-Pak) in Savannah, GA. Based on extensive experience in the retail andprivate label sectors, the Company also believes there is an untapped private labelmarket for such shelf-stable low acid beverages that has not been exploited due tothe limited existing capacity for facilities with this capability.

Finally, the Company's core co-packing business can also be grown substantiallythrough the completion of certain enhancements in its existing production facilityin Virginia. The Company has been unable to accept orders worth over $12million as a result of these capacity constraints. As such, the Company intends touse a substantial portion of the proceeds from this offering to add an additionalhigh speed hot-fill line and expand an existing cold fill line which is already inprogress.



C. STRATEGY

To accomplish its goals and exploit this opportunity, the Company seeks to:

Expand Its Existing Manufacturing Operation in Virginia

r r'

da

At the Company's existing Virginiamanufacturing facility, the Companyintends to install a high-speed productionline in addition to moving the existingline to the same facility to achieve laborefficiencies. The Company believes thatthe combination of these efforts willresult in a per case savings of up to $0.40,or up to $4 million margin contribution(assuming high-speed utilization). TheCompany also believes that the additionof a high-speed line will result inincreased capacity of approximately 10million cases per year.

The Company believes that as UFBV expands the Virginia facility for both volumeand capability, they will be able to utilize the Company's contacts in the retailmarkets to offer a wide selection of private label products, in addition to waters.These products include teas, juices, health, and nutritional products. UFBV iscurrently producing products for a big box retailer and currently hascommitments for substantial growth in high margin teas and nutritional products.Upon completion of the Savannah acquisition with low acid capabilities, UFBVwill be able to offer a multitude of higher margin products to the private labelusers including: dairy, soy, rice based products, dairy based nutritional products,soups, sauces, etc. which to management's knowledge no one else is offering atthis time.

Expansion of the Company's high speed hot-fill capabilities will allow UFBV tooffer a greater amount of higher margin products. The table below summarizesthe Company's margins on its various products:



UFBV Product Contribution

Cold Hot

Water Blend Fill

Selling Price per Bottle $0.125 $0.180 $0.370

Cost per Bottle $0.100 $0.090 $0.180

Contribution per Bottle $0.025 $0.090 $0.190

Contribution per Case $0.600 $2.160 $4.560

Aseptic Aseptic Aseptic

Co-Pack Pvt-Label Branded

Selling Price (27 count case) $2.75 - $4.50 $9.55 - $11.30 $12.80 - $17.80

Cost per 27 count case $0.00 $6.80 $6.80 - $7.90

Contribution $2.75 - $4.50 $2.75 - $4.50 $6.00 - $9.90

Example of typical low-acid meal replacement beverage

Acquire CNP Facility in Savannah, GA

UFBV has reached a tentative agreement to

acquire the Savannah, GA assets of

California Natural Products, Inc. (CNP).

The Savannah assets include the plant,

property and equipment of an operating

aseptic (non-refrigerated and packing in

sterile environment) processing and

packaging facility, providing packaging

services of Grade-A dairy, soy milks, rice

milks, meal replacements and juice

products. Only a handful of aseptic

manufacturing plants operate in the U.S. but

there are many brands utilizing the aseptic

packaging system.



Below is a summary of the Savannah transaction:

Land & Building (appraised value) $4,900,000

Equipment Book Value $7,400,000

Total $12,300,000

Asking Price $9,000,000 (1)

(1) The Company has negotiated a $3.5 million seller note as part of this transaction

Leverage Proprietary Manufacturing Process

The Company has developed a patent-pending process whereby it has the abilityto produce hot-fill product with a bottle that has a total gram weight less thanwhat current traditional hot-fill processes use today. An opportunity exists forisotonic brands that use the hot-fill process (sport drinks such as Gatorade,Powerade, etc.) to utilize this process and increase their per bottle margins. Thisprocess also allows UFBV to increase its hot-fill output which may increaseproduction line utilization.

Additionally, this patent-pending process facilitates the manufacture of dairy, soy,and rice products in aseptic PET bottles, which is presently an expensive and costlimiting packaging process. This unique process coupled with the Savannahoperation, an aseptic bottle filling system, and UFBV's experience and relationshipwith the FDA, will put UFBV in the sole position of being able to provide shelfstable, low acid products in a PET bottle, at an economical cost. The Companybelieves the demand for this capability represents a significant opportunity.



Introduce New Private-Label and Company-Owned Products

The Company presently produces a number of products that are either co-packedfor others or produced as a Company-owned brand . The Company also has manyproducts in development that may be released in the near future. In addition,several companies have asked UFBV to assist in the development of new ormodified products such as teas, isotonics, and energy drinks.

Current co-packed products in the pipeline include: Vitazest, Pink2O, W20

(vitamin enhanced beverages); Archer Farms Teas, Archer Farms Health

Beverages (private label, starting in Q4 2005); The Republic of Teas, Kalahari Tea,

(starting in Q4 2005); QBlast (isotonic); Z-Power, Kid Fuel (children-targeted

beverage); JP Longenberry (starting in Q1 2006); and ACT Teas (exports starting

Q2 2006).

Current portfolio of Company-owned products include SPORT2OTM Sport and

Energy Drink, FROST2OTM Flavored Water, Olde DominionTM Tea, Cold

MountainTM Spring Water, Grayson SpringsTM Spring Water, Crazy BlastTM and

Cool BlastTM (children-targeted beverages), Ocean Paradise'rM Fruit Punch, and

Jennifer GuccP . Additionally, the Company is entering into an agreement with

Dark DogTM energy drink.

Dark DogTM is the second leading brand behind Red Bu11TM in Europe. Theagreement provides for the licensing of the brand to UFBV for the U.S. and a rightof first refusal for Canada, Central and South America. The Company will begindeveloping markets, with little cost of entry, with product imported from Austria,then begin manufacture in the U.S. once volumes require it. No upfront chargesor expenses are required for the license, the license fee will be paid through thesales of products. Both the Company and Dark Dog have agreed to jointly buildan advertising reserve from the sales of the products.



D. MANUFACTURING

s^.^

SARI

............................................................................................ :xx

........................................................................ .



other is used for the production of hot-fill products. The Hillsville plant currentlyhouses raw material and finished goods ready for distribution. A portion of theproceeds from this offering will be used to further develop the Hillsville facility.In addition to its current operations, this facility will also house the partiallyacquired high speed cold-fill line and gallon production line yet to be installedand commissioned.

The existing capacity of the plant and operation (at present time efficiencies) isapproximately 968,000 cases per month per three-shift of operation. The tablebelow summarizes total current capacity as well as capacity assuming thecompletion of expansion already in progress.

A P,

Vim i :. x ..x.. ....

r.'



Maximum

Annual

Capacity (l)

Existing Facility

Cold Blend/Water 2,854,807Hot-Fill Line 8,764,630

11,619,437

Proposed Expansion

Maximum

Potential

Sales

$4,809,780$58,372,433

$63,182,213

High Speed Cold Blend/Water Line 10,058,332 $16,946,278Gallon Line 4,745,654 $19,741,920

2nd Hot-Fill Line 8,764,630 $58,372,43323,568,615 $95,060,631

Total Capacity w/ Expansion 35,188,052 $158,242,844

Savannah Acquisition

Aseptic Brick 16,800,000 $49,896,000Aseptic Bag-in-Box (units) 490,000 $1,960,000

Aseptic Bottle 8,100,000 $72,900,00025,390,000 $124,756,000

Total Capacity w/ Acquisition 60,578,052 $282,998,844

(1) Cases per year

E. CUSTOMERS

The Company's primary focus is on U.S. markets for value-added shelf stablebeverage products. UFBV is working on projects with national retailers andprojects in Europe and Asia on an opportunistic basis. Companies such as CocaCola, Pepsico, Nestle SA, and Ocean Spray have contacted the Company, and/orits associates, to work with them in the development of new products, and theimprovement of existing products.

UFBV has established relationships with some of the largest national brokers and

distributors. Target customers are large brokers and distributors that sell direct to

the highly visible national retail market. Using this network, UFBV has gained

exposure at Target, Costco, Meijer, CMDA, Rite Aid, Walgreens, Kerr Drugs,

Medic Drugs, Drug Emporium, all convenience stores, Super Value, Sav-A-Lot,

Value City, Dollar General, Family Dollar, Dollar Tree and several food

distributors such as Sysco and US Foods. These contacts have yet to be completely



exploited as the company needs to expand capacity to handle the businessavailable through these resources.

Many new customer orders are in various stages of development with anestimated contract value of over $90 million (does not include any contracts fromthe proposed acquisition in Savannah). The robust pipeline below summarizesthese contracts which should contribute to the significant volume growth:

Product Est. Cases Estimated Production

Client Description in Yr 1 Revenue Start

Contracts Signed

Health Food Co Private label tea 450,000 $5,413,000 Q4 2005Health Food Co Private label health 450,000 $4,725,000 Q4 2005Retailer Branded tea 240,000 $204,000 Q4 2005Health Food Co Women's health 150,000 $607,000 Q4 2005Energy Drink Co Children's low calorie 66,000 $269,000 Q4 2005Multi-Brand Bev. Co. Energy drinks, teas 175,000 $1,470,000 Q1 2006Sport Drink Co. Isotonic - export 150,000 $930,000 Q4 2005Sport Drink Co. Isotonic 80,000 $308,000 Q1 2006

1,761,000 $13,926,000

Final Contract Documents In Process

Popular Tea Co. Branded tea 210,000 $850,000 Q1 2006Retailer Private label lemonade 25,000 $187,000 Q1 2006Bottled Water Co. Branded waters 750,000 $4,200,000 Q1 2006Health Food Co Private label sport 175,000 $1,181,000 Q1 2006Big-Box Retailer Private label sport 1,448,000 $9,125,000 Q1 2006Beverage Co. Vitamin waters 240,000 $360,000 Q4 2005

2,848,000 $15,903,000

Contract In Negotiations

Large Nat'l Brand Branded beverages 5,000,000 $32,500,000 Q4 2006Large Discount Club Private label teas, juice 1,572,000 $14,860,000 Q2 2006Popular Juice Co. Juices 100,000 $386,000 Q1 2006Popular Juice Co. Teas 208,000 $360,000 Q1 2006Large Nat'l Brand Branded teas, juices 750,000 $4,387,000 Q2 2006

7,630,000 $52,493,000

UFBC Brand Sales In Negotiations

Retailer Sport2o 1,086,000 $6,409,000 Q1 2006Big-Box Retailer Frost2o 786,240 $4,088,000 Q1 2006Popular Energy Drink Co. Energy drink 35,000 $735,000 Q1 2006

1,907,240 $11,232,000

Grand Total 14,146,240 $93,554,000



F. COMPETITION

According to Manufacturing News, Inc., there are approximately 484 bottlingplants throughout the United States. The vast majority are Coca-Cola, Pepsi, andDr. Pepper/ 7-Up plants. There are also a large number of dairy-only plants. Thebalance is comprised of regional plants that specialize in hot or cold fill lines. TheCompany believes there are no existing competitors with a similar full range ofproduct process and design capability. In addition, the majority of hot fill capacityis used producing dedicated brands which limit the ability of most these plants tocontract pack and/or introduce new products, thus creating an opportunity forUFBV.

G. INTERNATIONAL OPPORTUNITIES

The Company is in discussions regarding several international opportunities:

• UFBV has a letter of intent to sublicense the Gucci label to Asia and theSouth Pacific. Definitive agreements are being drafted.

• UFBV is near an agreement to produce and export an energy drink to Asiasponsored by an NBA athlete

• The Company is currently bidding on Sport2O and other products for theSouth Africa and Russia markets.

• UFBV is negotiating a letter of intent to partner in a manufacturing facilityin India. The Indian Government is willing to provide financial incentivesfor this facility which would produce waters, teas, and shelf-stable milkproducts.

H. INTELLECTUAL PROPERTY

The Company has filed for a patent on a bottle sterilization process that ispresently being installed on its hot-fill system. The Company has proven thetechnology in the pilot plant and is ready to move the process into practicalapplication. The process allows for savings in the hot-fill process by lessening therequired hot-fill temperature therefore allowing for a less substantial bottle thanpresently required . At this time, UFBV is interviewing multiple bottle suppliers to



determine which supplier will be the most advantageous to work with. Theoverall savings from using this process could exceed $1.44 per 24 count case.

This technology will allow the Company to become more competitive with its ownproducts in addition to exploiting additional lucrative opportunities such as co-packing with this technology, and/or licensing this technology to hot-fill userslike Pepsi, Coke, Nestle, with which the Company is already in discussions.



IV. MANAGEMENT TEAM

Name Position

Duane N. Martin Chairman of the Board and CEO

Marc R. Fry President and COO

John Levy Interim CFO

Ralph M. Passino Senior VP of Mergers, Acquisitions & Joint Ventures

Dr. Charles Sizer Director of International Process Development

Associates (a division of UFBV)

Joseph Balistreri VP of Marketing

Duane N. Martin - Chairman and CEO

Mr. Martin began his retail career in 1988 as Non Foods Sales Executive for

J.M Jones Division of SUPERVALU in Champaign, Illinois. In 1989, Mr.

Martin joined Wetterau and worked in the company's management-training

program for Shop-N-Save, now a division of SUPERVALU in St . Louis. In

1994, he was transferred back to the J.M . Jones Division in a turnaround

management position as Director of Transition Stores.

In 1997 he entered the IGA organization as Vice President of Retail

Operations, IGA USA. Continuing with his professional successes, he was

quickly promoted to President of IGA's USA operations . In 1999, Mr. Martin

was promoted to Executive Vice President IGA Inc, and President of IGA

North America. During Mr. Martins watch, IGA successfully implemented

new retail standards, increased worldwide store count by 31 % and retail sales

from $16 billion to $22 billion annually.

Mr. Martin received his Bachelor's Degree in Business Administration fromSangamon State University.

Marc R. Fry - President and COO

Mr. Fry began his career in food processing and packaging businessmanagement in 1984 as Technical Manager for Tetra Pak, the multi-billiondollar international leader in food processing and packaging systems. In 1990,Mr. Fry then became President & CEO of White Knight Packaging Corp., the

Management 29


most advanced fluid food processing and packaging operation in the U.S. atthat time.

After negotiating the sale of White Knight to Parmalat SpA., Mr. Fry served asthe Vice President of Operations for Parmalat, the then $5 billion multi-national dairy and food giant, from 1993 - 1996.

Mr. Fry is a frequent speaker and presenter of new systems to the Food andDrug Administration and Departments of Agriculture in various states. Hehas held positions on the National Food Processors Association committees,including processing and packaging technical committees.

Mr. Fry graduated from Ball State University, with a Bachelor of Science

Degree in Industrial Engineering Technology in 1981. Mr. Fry has also been

awarded a certificate in processing and packaging systems from the Cheshire

School of Agriculture, in Nantwitch, England.

John Levy - Interim CFO

John F. Levy is the CEO and principal consultant for Board Advisory Services.Mr. Levy has 28 years of progressive financial, accounting and businessexperience, including having served as chief financial officer of both publicand private companies for over 13 years. Mr. Levy was most recently ViceChairman and Chief Financial Officer of MediaBay, Inc. a NASDAQ companyfor the past 7 years. He resigned following a $35 million preferred stockoffering in March 2005. While at MediaBay, the company completed sixacquisitions and raised over $150 million.

Mr. Levy is a Certified Public Accountant with nine years' experience with thenational public accounting firms of Ernst & Young, Laventhol & Horwath andGrant Thornton. Mr. Levy is a graduate of the Wharton School of theUniversity of Pennsylvania and received his MBA from St. Joseph's Universityin Philadelphia.

Ralph M. Passing - Senior VP of Mergers, Acquisitions & Joint Ventures

Mr. Passino's career began in 1976 at Rockwell International in several

positions in divisional and corporate operations . In 1980, Mr. Passino moved

to the Signal Companies as Manager of the Wheelabrator Air Pollution

Control division and was quickly promoted to Group Controller of six

Management 30


divisions generating $175 million in revenues. In 1984, Mr. Passino was

promoted to Vice President of Finance with full financial responsibility for the

company's 6,000 employees generating $500 million in sales.

In 1985, upon the merger of Signal Companies with Allied, Mr. Passino and

other executives spun off a division of Allied Signal which became the General

Chemical Group, Inc. In 1999, Mr. Passino became the Vice President and

General Manager of GenTek, Inc with full P&L responsibility of this $270

million automotive products group where he achieved a 34% increase in pre-

tax income. In 2002, Mr. Passino accepted the CFO position with American

Household, Inc., formerly Sunbeam Corporation, to restructure the financial

position of this $2 billion consumer products company, at the time emerging

from Chapter 11.

Mr. Passino obtained his B.S. in Chemistry from Duke University in 1973 and

his M.B.A. from the University of Cincinnati in 1976.

Dr. Charles Sizer - Director of International Process Development Associates (a

division of UFBV)

Dr. Sizer has over 30 years of awards and accomplishments in industry,research, and education focusing in the food and beverage disciplines. Hisaccomplishments include both a Masters Degree and Ph.D. in Food Scienceand Nutrition from Colorado State University. Dr. Sizer's undergraduatestudies included a Bachelor of Science Degree in Chemistry, with aMathematics minor from the University of Nebraska. He currently holds aposition as Research Professor at the Illinois Institute of Technology.

Dr. Sizer was Director of the National Center for Food Safety and Technology

at Illinois Institute of Technology; and as an associate of Tetra Pak USA, held

positions as General Manager of the Research Center, Director of Product

Development, and Manager of Research and Aseptic Technology.

Additionally, Dr. Sizer has been the President of Food Research Laboratories,

Inc.; Section Manager at Frito-Lay Inc.; Senior Research Scientist for Frito-Lay

Inc.; and a Graduate Research Assistant in the Department of Food Science

and Nutrition at Colorado State University.

Dr. Sizer is world renowned in his expertise in fluid food processing andpackaging systems. He presently holds four patents in Ultra Violetsterilization technology. Dr. Sizer is an expert in the effects to product qualityas a result of UV, Ozone, and sterile filtration, and consults as a process

Management 31


authority with the FDA. Dr. Sizer continues his teaching, research, anddevelopment work at his state-of-the-art pilot plant and laboratory at IllinoisInstitute of Technology.

Dr. Sizer has held substantial professional positions and affiliations with the

National Science Foundation, National Food Processors Association, Food

Processor's Institute, Institute of Food Technology, Dairy and Food Industry

Suppliers Association, Editorial Board of the Journal of Packaging

Technology, and the Institute of Thermal Processing Specialists. Dr. Sizer has

recently received the FDA Center for Food Safety and Applied Nutrition

Director's Special Citation Award, and the Chicago Section of the Institute of

Food Technologists Achievement Award for Outstanding Achievement in

Food Science.

To further illustrate his achievements: Dr. Sizer has been awarded 33 researchgrants; he has been published 110 times with various articles, tradepublications, professional presentations; and Dr. Sizer holds 14 patentsrelating to food product processing and packaging techniques.

Joseph C. Balistreri - VP of Marketing

Mr. Balistreri has been involved in advertising, marketing, and new productdevelopment for over 26 years. He has developed cross-promotional andad/marketing programs for national food accounts including IGA, Shurfine,Federated Foods, Coca Cola, Lever Brothers, Nabisco, Smuckers, Anheuser-Busch, Hershey, Purina, Welch's, Kelloggs, Tyson, Nestle, and General Mills.

As Creative Director for IGA, Inc. from 1998-2001, Mr. Balistreri developed a

unified corporate look, corporate slogan and advertising campaign for the

corporation . He created advertising programs that tied-in with many of the

major food corporations throughout the country . Prior to IGA, Mr. Balistreri

served as the president of IMPACT Marketing in Madison, Wisconsin from

1990-1997. From 2002-2004, Mr. Balistreri operated a consulting group, JCB &

Associates . His expertise is in the creation of sales and marketing

opportunities for new companies by designing product lines and establishing

markets in which to sell branded products.

Management 32

Case 1 : 08-cv-03263 Document 30-2 Filed 09/15/2008 Page 39 of 41

V. HISTORICAL FINANCIALS

A. HISTORICAL INCOME STATEMENT

Three 7/19/2004 Nine months

ended to ended

9/30/2005 9/30/2004 9/30/2005

Net Sales $486,716 $118,680 $859,703

Cost of Goods Sold 1,095,406 160,021 1,980,174

Gross Deficit (608,690) (41,341) (1,120,471)

Operating ExpensesSelling expenses 41,466 7,303 126,633

Office and administrative expenses 521,332 88,927 1,867,152

Total Operating Expenses 562,798 96,230 1,993,785

Loss from Operations (1,171,488) (137,571) (3,114,256)

Other ExpenseInterest expense 82,804 373 149,343Other expense 2,162 180 5,300

Total Other Expense 84,966 553 154,643

Loss Before Income Taxes (1,256,454) (138,124) (3,268,800)

Provision for Income Taxes

Net Loss (1,256,454) (138,124) (3,268,800)

Basic and Diluted Net Loss per (0.04) (0.01) (0.11)

Weighted Average Common Shares 30,860,491 17,898,493 28,677,037

Historical Financials 33


B. HISTORICAL BALANCE SHEET

ASSETS 9/30/2005 12/31/2004

CURRENT ASSETS

Cash 38,452 243,161

Trade and other receivables, net 282,705 4,093

Inventories 406,284 161,294

Prepaid expenses 65,848 7,821

Total Current Assets 793,289 416,369

Net P,P&E 7,670,351 1,274,470

OTHER ASSETS

Deposits, note receivable and sundry 326,054 476,336

Intangibles and water rights 1,928,930

Total Other Assets 2,254,984 476,336

Total Assets -Fl-0,7_18-,62-41 $2,167,175

LIABILITIES AND


CURRENT LIABILITIES

Short-term debt 1,787,774 62,769

Current portion of long-term debt 61,300 -

Accounts payable 1,860,758 109,426

Accrued expenses 936,739 551,309

Deferred Revenue 105,145

Total Current Liabilities 4,751,716 723,504

LONG-TERM LIABILITIES

Long-term debt, less current portion 2,423,085 -

Other long-term liabilities 375,000 -

Total Long-Term Liabilities 2,798,085 -

Total Liabilities 7,549,801 723,504


Common stock 308,642 23,138

Paid in Capital 8,705,725 4,860,458

Paid in Capital- Warrants 803,280 -

Accumulated Deficit (6,648,824) (3,379,925)

Note Receivable - Stockholder - (60,000)

Total Stockholders' Equity 3,168,823 1,443,671

Total Liabilities and Stockholders' Equity $10,718,624 $2,167,175

Historical Financials 34


VI. APPENDICES

A. ASSET LIST

EstimatedValue

Production and warehouse (16,000 sq. ft.) $720,000 (a)630 acres of land $3,732,000 (b)Production equipment $560,000 (c)Water rights $22,932,000 (d)

$27,944,000

(a) The value of production and warehouse equals value of the buildings with similar finishes

(b) The land values are presented as raw land, based upon an appraisal October 2004

(c) The value is based upon a March 2005 equipment appraisal by Loeb Equipment & Appraisal Company, Chicago, IL

(d) The value of water rights is estimated at 70% of well capacity, over a ten (10) year period, at $0.025 per gallon sale value

Bulk sale/transfer of water capacity would increase water value to approximately $27,331,000 over the same period

Appendices 35


EXHIBIT B


SECURITIES PURCHASE AGREEMENT

SECURITIES PURCHASE AGREEMENT (the "Agreement "), dated as of February

15, 2006, by and among Universal Food & Beverage Company, a Nevada corporation, with

headquarters located at 3830 Commerce Drive, St. Charles. Illinois 60174 (the "Company"), and

the investors listed on the Schedule of Buyers attached hereto (individually , a "Buyer" and

collectively, the "Buyers").

WHEREAS:

A. The Company and each Buyer is executing and delivering this Agreement inreliance upon the exemption from securities registration afforded by Section 4(2) of theSecurities Act of 1933, as amended (the "1933 Act"), and Rule 506 of Regulation D(" Regulation D") as promulgated by the United States Securities and Exchange Commission(the "SEC") under the 1933 Act.

B. The Company has authorized a new series of convertible preferred shares of theCompany designated as Series A Convertible Preferred Stock, the terms of which are set forth inthe certificate of designations for such series of preferred shares (the "Certificate ofDesignations ") in the form attached hereto as Exhibit A (together with any convertible preferredshares issued in replacement thereof in accordance with the terms thereof, the "PreferredShares "), which Preferred Shares shall be convertible into the Company's common stock, $0.01par value per share (the "Common Stock"), in accordance with the terms of the Certificate ofDesignations.

C. Each Buyer wishes to purchase, and the Company wishes to sell, upon the termsand conditions stated in this Agreement, (i) that aggregate number of Preferred Shares set forthopposite such Buyer's name in column (3) on the Schedule of Buyers (which aggregate numberfor all Buyers shall be 20,704 (as converted, collectively, the "Conversion Shares ") and (ii)Warrants in substantially the form attached hereto as Exhibit B (the "Warrants"), to acquire thatnumber of shares of Common Stock (as exercised, collectively, the "Warrant Shares" ) set forthopposite such Buyer's name in column (4) on the Schedule of Buyers.

D. The Preferred Shares may be entitled to dividends, which at the option of theCompany. subject to certain conditions, may be paid in shares of Common Stock (the "DividendShares").

E. Contemporaneously with the execution and delivery of this Agreement, theparties hereto are executing and delivering a Registration Rights Agreement, substantially in theform attached hereto as Exhibit C (the "Registration Rights Agreement"), pursuant to whichthe Company has agreed to provide certain registration rights with respect to the RegistrableSecurities (as defined in the Registration Rights Agreement) under the 1933 Act and the rulesand regulations promulgated thereunder, and applicable state securities laws.

F. The Preferred Shares, the Conversion Shares, the Dividend Shares, the Warrantsand the Warrant Shares are collectively are referred to herein as the "Securities".

10050698.14


G. The Company will consummate, contemporaneously with the Closing, the

transactions contemplated by the Savannah Purchase Agreement (as defined below).

NOW, THEREFORE. the Company and each Buyer hereby agree as follows:

1. PURCHASE AND SALE OF PREFERRED SHARES AND WARRANTS.

(a) Preferred Shares and Warrants . Subject to the satisfaction (or waiver) of

the conditions set forth in Sections 6 and 7 below, the Company shall issue and sell to each

Buyer. and each Buyer severally, but not jointly, agrees to purchase from the Company on the

Closing Date (as defined below). the number of Preferred Shares as is set forth opposite such

Buyer's name in column (3) on the Schedule of Buyers, along with Warrants to acquire that

number of Warrant Shares as is set forth opposite such Buyer's name in column (4) on theSchedule of Buyers.

(b) Closing . The closing (the "Closing") of the purchase of the PreferredShares and the Warrants by the Buyers shall occur at the offices of Schulte Roth & Zabel LLP,919 Third Avenue, New York, New York 10022. The date and time of the Closing (the"Closing Date") shall be 10:00 a.m., New York City Time, on the date hereof, subject tonotification of satisfaction (or waiver) of the conditions to the Closing set forth in Sections 6 and7 below (or such later date as is mutually agreed to by the Company and each Buyer).

(c) Purchase Price . The aggregate purchase price for the Preferred Shares andthe Warrants to be purchased by each Buyer (the "Purchase Price") shal I be the amount set forthopposite such Buyer's name in column (5) on the Schedule of Buyers. Each Buyer shall payS1,000 for each Preferred Share and related Warrants to be purchased by such Buyer at theClosing.

(d) Form of Payment . On the Closing Date, (A) each Buyer shall pay itsportion of the Purchase Price to the Company for the Preferred Shares and the Warrants to beissued and sold to such Buyer at the Closing, (i) by wire transfer of immediately available fundsin accordance with the Company's written wire instructions or (ii) by exchange of theExchangeable Notes (as defined below) pursuant to the terms thereof, and (B) the Company shalldeliver to each Buyer the number of Preferred Shares as is set forth opposite such Buyer's namein column (3) on the Schedule of Buyers, along with the Warrants exercisable for the number ofshares of Common Stock as is set forth opposite such Buyer's name in column (4) on theSchedule of Buyers. each duly executed on behalf of the Company and registered in the name ofsuch Buyer or its designee.

2. BUYER'S REPRESENTATIONS AND WARRANTIES.

Each Buyer represents and warrants with respect to only itself that:

(a) Organization; Authority . Such Buyer is an entity duly organized, validlyexisting and in good standing under the laws of the jurisdiction of its organization with therequisite power and authority to enter into and to consummate the transactions contemplated bythe Transaction Documents (as defined below) to which it is a party and otherwise to carry outits obligations hereunder and thereunder.

10050698.14 2


(b) No Public Sale or Distribution . Such Buyer (i) is acquiring the Preferred

Shares and the Warrants (ii) upon conversion of the Preferred Shares will acquire the Conversion

Shares and (ii) upon exercise of the Warrants will acquire the Warrant Shares, in each case, for

its own account and not with a view towards. or for resale in connection with, the public sale or

distribution thereof, except pursuant to sales registered or exempted under the 1933 Act:

provided. however, that by making the representations herein, such Buyer does not agree to hold

any of the Securities for any minimum or other specific term and reserves the right to dispose of

the Securities at any time in accordance with or pursuant to a registration statement or an

exemption under the 1933 Act. Such Buyer is acquiring the Securities hereunder in the ordinary

course of its business. Such Buyer does not presently have any agreement or understanding,

directly or indirectly, with any Person to distribute any of the Securities.

(c) Accredited Investor Status . Such Buyer is an "accredited investor" as that

term is defined in Rule 501(a) of Regulation D.

(d) Reliance on Exemptions . Such Buyer understands that the Securities are

being offered and sold to it in reliance on specific exemptions from the registration requirements

of United States federal and state securities laws and that the Company is relying in part upon thetruth and accuracy of. and such Buyer's compliance with, the representations, warranties,agreements. acknowledgments and understandings of such Buyer set forth herein in order todetermine the availability of such exemptions and the eligibility of such Buyer to acquire theSecurities.

(e) Information . Such Buyer and its advisors, if any, have been furnishedwith all materials relating to the business, finances and operations of the Company and materialsrelating to the offer and sale of the Securities which have been requested by such Buyer. SuchBuyer and its advisors, if any, have been afforded the opportunity to ask questions of theCompany. Neither such inquiries nor any other due diligence investigations conducted by suchBuyer or its advisors. if any, or its representatives shall modify, amend or affect such Buyer'sright to rely on the Company's representations and warranties contained herein. Such Buyerunderstands that its investment in the Securities involves a high degree of risk. Such Buyer hassought such accounting, legal and tax advice as it has considered necessary to make an informedinvestment decision with respect to its acquisition of the Securities.

(f) No Governmental Review . Such Buyer understands that no United Statesfederal or state agency or any other government or governmental agency has passed on or madeany recommendation or endorsement of the Securities or the fairness or suitability of theinvestment in the Securities nor have such authorities passed upon or endorsed the merits of theoffering of the Securities.

(g) Transfer or Resale . Such Buyer understands that except as provided in the

Registration Rights Agreement : ( i) the Securities have not been and are not being registeredunder the 1933 Act or any state securities laws, and may not be offered for sale, sold , assigned ortransferred unless (A) subsequently registered thereunder , ( B) such Buyer shall have delivered tothe Company an opinion of counsel , by counsel reasonably acceptable to the Company and inform and substance reasonably satisfactory to the Company , to the effect that such Securities tobe sold , assigned or transferred may be sold, assigned or transferred pursuant to an exemption

l oo5OE9s.14 3


from such registration , or (C) such Buyer provides the Company with reasonable assurance that

such Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule 144Apromulgated under the 1933 Act, as amended , ( or a successor rule thereto) (collectively, "Rule

144"); (ii ) any sale of the Securities made in reliance on Rule 144 may be made only inaccordance with the terms of Rule 144 and further , if Rule 144 is not applicable, any resale of theSecurities under circumstances in which the seller (or the Person (as defined in Section 3(s))through whom the sale is made) may be deemed to be an underwriter (as that terrn is defined inthe 1933 Act) may require compliance with some other exemption under the 1933 Act or therJles and regulations of the SEC thereunder : and (iii ) neither the Company nor any other Personis under any obligation to register the Securities under the 1933 Act or any state securities lawsor to comply with the terms and conditions of any exemption thereunder . The Securities may bepledged pursuant to an available exemption from registration under the 1933 Act in connectionwith a bona fide margin account or other loan or financing arrangement secured by the Securitiesand such pledge of Securities shall not be deemed to be a transfer, sale or assignment of theSecurities hereunder, and no Buyer effecting a pledge of Securities shall be required to providethe Company with any notice thereof or otherwise make any delivery to the Company pursuantto this Agreement or any other Transaction Document (as defined in Section 3(b)), including,without limitation . this Section 2(g).

(h) Legends . Such Buyer understands that the certificates or otherinstruments representing the Preferred Shares and the Warrants and, until such time as the resaleof the Conversion Shares and the Warrant Shares have been registered under the 1933 Act ascontemplated by the Registration Rights Agreement, the stock certificates representing theConversion Shares and the Warrant Shares, except as set forth below, shall bear any legend asrequired by the "blue sky" laws of any state and a restrictive legend in substantially the followingform (and a stop-transfer order may be placed against transfer of such stock certificates):

[NEITHER THE ISSUANCE AND SALE OF THE SECURITIESREPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTOWHICH THESE SECURITIES ARE [CONVERTIBLE] [EXERCISABLE]HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATEHAVE NOT BEEN] REGISTERED UNDER THE SECURITIES ACT OF 1933,AS AMENDED. OR APPLICABLE STATE SECURITIES LAWS. THESECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERREDOR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVEREGISTRATION STATEMENT FOR THE SECURITIES UNDER THESECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATESECURITIES LAWS, OR (B) AN OPINION OF COUNSEL, IN AGENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOTREQUIRED UNDER SAID ACT AND APPLICABLE STATE SECURITIESLAWS OR (I1) UNLESS SOLD PURSUANT TO RULE 144(K) UNDER SAIDACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAYBE PLEDGED PURSUANT TO AN AVAILABLE EXEMPTION FROMREGISTRATION UNDER THE 1933 ACT IN CONNECTION WITH A BONAFIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCINGARRANGEMENT SECURED BY THE SECURITIES.

to°. -';;98. t4 4


The legend set forth above shall be removed and the Company shall issue a certificate without

such legend to the holder of the Securities upon which it is stamped, if, unless otherwise required

by state securities laws, (i) such Securities are registered for resale under the 1933 Act, (ii) in

connection with a sale, assignment or other transfer, such holder provides the Company with an

opinicn of counsel, by counsel reasonably acceptable to the Company and in form and substance

reasonably satisfactory to the Company, to the effect that such sale, assignment or transfer of the

Securities may be made without registration under the applicable requirements of the 1933 Act,

or (iii) such holder provides the Company with reasonable assurance that the Securities can be

sold. assigned or transferred pursuant to Rule 144(k).

(i) Validity: Enforcement . This Agreement and the Registration Rights

Agreement to which such Buyer is a party have been duly and validly authorized, executed and

delivered on behalf of such Buyer and shall constitute the legal, valid and binding obligations of

such Buyer enforceable against such Buyer in accordance with their respective terms, except as

such enforceability may be limited by general principles of equity or to applicable bankruptcy,

insolvency. reorganization, moratorium, liquidation and other similar laws relating to, oraffecting generally, the enforcement of applicable creditors' rights and remedies.

0) No Conflicts . The execution, delivery and performance by such Buyer ofthis Agreement and the Registration Rights Agreement to which such Buyer is a party and theconsummation by such Buyer of the transactions contemplated hereby and thereby will not (i)result in a violation of the organizational documents of such Buyer or (ii) conflict with, orconstitute a default (or as event which with notice or lapse of time or both would become adefault) under, or give to others any rights of termination, amendment, acceleration orcancellation of, any agreement, indenture or instrument to which such Buyer is a party, or (iii)result in a violation of any law, rule, regulation, order, judgment or decree (including federal andstate securities laws) applicable to such Buyer, except in the case of clauses (ii) and (iii) above,for such conflicts, defaults, rights or violations which would not, individually or in the aggregate,reasonably be expected to have a material adverse effect on the ability of such Buyer to performits obligations hereunder.

(k) Residency . Such Buyer is a resident of that jurisdiction specified belowits address on the Schedule of Buyers.

3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

The Company represents and warrants to each of the Buyers that:

(a) Organization and Qualification . The Company and its "Subsidiaries"(which for purposes of this Agreement means any entity in which the Company, directly orindirectly. owns capital stock or holds an equity or similar interest) are entities duly organizedand validly existing i.. good standing under the laws of the jurisdiction in which they are formed,and have the requisite power and authorization to own their properties and to carry on theirbusiness as now being conducted. Each of the Company and its Subsidiaries is duly qualified asa foreign entity to do business and is in good standing in every jurisdiction in which itsownership of property or the nature of the business conducted by it makes such qualificationnecessary. except to the extent that the failure to be so qualified or be in good standing would not

10050698.14 5


have a Mate :al Adverse Effect. As used in this Agreement, "Material Adverse Effect" means

any material adverse effect on the business, properties, assets, operations , results of operations,

condition (financial or otherwise ) or prospects of the Company and its Subsidiaries , taken as a

whole, or on the transactions contemplated hereby and by the other Transaction Documents or by

the agreements and instruments to be entered into in connection herewith or therewith, or on the

authority or ability of the Company to perform its obligations under the Transaction Documents.

The Company has no Subsidiaries , except as set forth on Schedule 3(a) .

(b) Authorization; Enforcement; Validity . The Company has the requisite

corporate power and authority to enter into and perform its obligations under this Agreement, the

Certificate of Designations, the Warrants. the Registration Rights Agreement, the Irrevocable

Transfer Agent Instructions (as defined in Section 5(b)), and each of the other agreementsentered into by the parties hereto in connection with the transactions contemplated by this

Agreement (collectively, the "Transaction Documents ") and to issue the Securities inaccordance with the terms hereof and thereof. The execution and delivery of the TransactionDocuments by the Company and the consummation by the Company of the transactionscontemplated hereby and thereby, including, without limitation, the issuance of the PreferredShares, the reservation for issuance and the issuance of the Conversion Shares issuable uponconversion of the Preferred Shares. the reservation for issuance and the issuance of the DividendShares issuable with respect to the Preferred Shares, the issuance of the Warrants and thereservation for issuance and issuance of the Warrant Shares issuable upon exercise of theWarrants, have been duly authorized by the Company's Board of Directors and (other than thefiling with the SEC of one or more Registration Statements in accordance with the requirementsof the Registration Rights Agreement and any other filings as may be required by any statesecurities agencies) no further filing. consent. or authorization is required by the Company, itsBoard of Directors or its stockholders. This Agreement and the other Transaction Documents ofeven date herewith have been duly executed and delivered by the Company, and constitute thelegal, valid and binding obligations of the Company, enforceable against the Company inaccordance with their respective terms, except as such enforceability may be limited by generalprinciples of equity or applicable bankruptcy, insolvency, reorganization, moratorium,liquidation or similar laws relating to, or affecting generally, the enforcement of applicablecreditors' rights and remedies and except as rights to indemnification and to contribution may belimited by federal or state securities law. The Certificate of Designations in the form attachedhereto as Exhibit ?_ has been filed with the Secretary of State of the State of Nevada and is infull force and effect, enforceable against the Company in accordance with its terms and has notbeen amended.

(c) Issuance of Securities . The issuance of the Preferred Shares and theWarrants are duly authorized and upon issuance in accordance with the terms of the TransactionDocuments shall be free from all taxes, liens and charges with respect to the issue thereof, andthe Preferred Shares shall be entitled to the rights and preferences set forth in the Certificate ofDesignations. As of the Closing, the Company shall have reserved from its duly authorizedcapital stock not less than all of its available authorized shares of Common Stock not otherwisereserved for issuance, and shall. on the Business Day immediately following the earlier of theStockholder Approval and the Stockholder Approval Deadline, authorize and reserve forissuance such additional shares of Common Stock such that there shall be reserved from theCompany's capital stock not less than the sum of (i) 125% of the maximum number of shares of

10050698.14 6


Common Stock issuable upon conversion of the Preferred Shares (assuming for purposes hereof,that the Preferred Shares are convertible at the Conversion Price and without taking into accountany limitatio==s on the conversion of the Preferred Shares set forth in the Certificate ofDesignations). (ii) 125% of the maximum number of shares of Common Stock issuable upon

exercise of the Warrants (without taking into account any limitations on the exercise of theWarrants set forth in the Warrants) and (iii) 100% of the maximum number of shares ofCommon Stock issuable as Dividend Shares with respect to the Preferred Shares as of theTrading Day immediately prior to the applicable date of determination. Upon issuance orconversion in accordance with the Certificate of Designations or exercise in accordance with theWarrants. as the case may be. the Conversion Shares, the Dividend Shares and the WarrantShares, respectively, will be validly issued, fully paid and nonassessable and free from allpreemptive or similar rights, taxes, liens and charges with respect to the issue thereof, with theholders being entitled to all rights accorded to a holder of Common Stock. Subject to therepresentations and warranties of the Buyers in this Agreement, the offer and issuance by theCompany of the Securities is exempt from registration under the 1933 Act.

(d) No Conflicts . The execution, delivery and performance of the Transaction

Documents by the Company and the consummation by the Company of the transactionscontemplated hereby and thereby (including, without limitation, the issuance of the Preferred

Shares, the Warrants, and reservation for issuance of the Conversion Shares, the Warrant Sharesand the Dividend Shares) will not (i) result in a violation of the Certificate of Incorporation (asdefined in Section 3(r)) of the Company or any of its Subsidiaries or the Certificate ofDesignations of the Company, or the Bylaws (as defined in Section 3(r)) or (ii) conflict with, orconstitute a default (or an event which with notice or lapse of time or both would become adefault) under, or give to others any rights of termination, amendment, acceleration orcancellation of any agreement. indenture or instrument to which the Company or any of itsSubsidiaries is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment ordecree (including federal and state securities laws and regulations and the rules and regulationsof the OTC Bulletin Board (the "Principal Market") applicable to the Company or any of itsSubsidiaries or by which any property or asset of the Company or any of its Subsidiaries isbound or affected excepi, in the case of clause (ii) or (iii) above, to the extent such conflict,default, termination right or violation would not reasonably be expected to have a MaterialAdverse Effect.

(e) Consents . Except as set forth in Schedule 3(e), the Company is notrequired to obtain any consent, authorization or order of, or make any filing or registration with,any court, governmental agency or any regulatory or self-regulatory agency or any other Personis order for it to execute, deliver or perform any of its obligations under or contemplated by theTransaction Documents. in each case in accordance with the terms hereof or thereof. Allconsents, authorizations, orders, filings and registrations which the Company is required toobtain pursuant to the preceding sentence have been obtained or effected on or prior to theClosing Date, and the Company and its Subsidiaries are unaware of any facts or circumstanceswhich mig:_t prevent th-: Company from obtaining or effecting any of the registration, applicationor filings pursuant to the preceding sentence. The Company is not in violation of therequirements of the Principal Market and has no knowledge of any facts which would reasonablylead to delisting or suspension of the Common Stock in the foreseeable future.

1005 0698. 14.7


(f) Acknowledgment Regarding Buyer's Purchase of Securities . The

Compa-iy acknowledges and agrees that each Buyer is acting solely in the capacity of arm's

length purchaser with respect to the Transaction Documents and the transactions contemplated

hereby and thereby and that no Buyer is (i) an officer or director of the Company, (ii) an

"affiliate" of the Company (as defined in Rule 144) or (iii) to the knowledge of the Company, a"beneficial owner" of more than 10% of the shares of Common Stock (as defined for purposes ofRule 13d-3 of the Securities Exchange Act of 1934, as amended (the "1934 Act")). TheCompany further acknowledges that no Buyer is acting as a financial advisor or fiduciary of theCompany (or in any similar capacity) with respect to the Transaction Documents and thetransactions contemplated hereby and thereby, and any advice given by a Buyer or any of itsrepresentatives or agents in connection with the Transaction Documents and the transactionscontemplated hereby and thereby is merely incidental to such Buyer's purchase of the Securities.The Company further represents to each Buyer that the Company's decision to enter into theTransaction Documents has been based solely on the independent evaluation by the Companyand its representatives.

(g) No General Solicitation; Placement Agent's Fees . Neither the Company,nor any of its affiliates, nor any Person acting on its or their behalf, has engaged in any forni ofgeneral solicitation or general advertising (within the meaning of Regulation D) in connectionwith the offer or sale of the Securities. The Company shall be responsible for the payment ofany placement agent's fees. financial advisory fees, or brokers' commissions (other than forpersons engaged by any Buyer or its investment advisor) relating to or arising out of thetransactions contemplated hereby. The Company shall pay, and hold each Buyer harmlessagainst, any liability, loss or expense (including, without limitation, attorney's fees and out-of-pocket expenses) arising in connection with any such claim. The Company acknowledges that ithas engaged Illington Capital Inc. as placement agent (the "Agent") in connection with the saleof the Securities. Other than the Agent, the Company has not engaged any placement agent orother agent in connection with the sale of the Securities.

(h) No Integrated Offering . None of the Company, its Subsidiaries, any oftheir affiliates. and any Person acting on their behalf has. directly or indirectly, made any offersor sales of any security or solicited any offers to buy any security, under circumstances thatwould require registration of any of the Securities under the 1933 Act or cause this offering ofthe Securities to be integrated with prior offerings by the Company for purposes of the 1933 Actor any applicable stockholder approval provisions, including, without limitation, under the rulesand regulations of any exchange or automated quotation system on which any of the securities ofthe Company are listed or designated. None of the Company, its Subsidiaries, their affiliates andany Person actir on their behalf will take any action or steps referred to in the precedingsentence that would require registration of any of the Securities under the 1933 Act or cause theoffering of the Securities to be integrated with other offerings.

10 Dilutive Effect . The Company understands and acknowledges that thenumber of Conversion Shares issuable upon conversion of the Preferred Shares, the number ofDividend Shares issuable with respect to the Preferred Shares and the Warrant Shares issuableupon exercis- o.- the Warrants, will increase in certain circumstances. The Company furtheracknov.'edges that its obligation to issue Conversion Shares upon conversion of the PreferredShares in accordance with this Agreement and the Certificate of Designations and its obligation

10050698.14 8


to issue the Warrant Shares upon exercise of the Warrants in accordance with this Agreement

and the Warrants is, in each case. absolute and unconditional regardless of the dilutive effect thatsuch issuance may have on the ownership interests of other stockholders of the Company.

0) Application of Takeover Protections; Rights Agreement . The Companyand its Board of Directors have taken all necessary action, if any, in order to render inapplicableany poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision which is or could become applicable to any Buyer as a result of thetransactions contemplated by this Agreement, including, without limitation, the Company'sissuance of the Securities and any Buyer's ownership of the Securities. The Company has notadopted a stockholder rights plan or similar arrangement relating to accumulations of beneficialownership of Common Stock or a change in control of the Company.

(k) SEC Documents; Financial Statements . During the two (2) years prior tothe date hereof, the Company has filed all reports, schedules, forms, statements and otherdocuments required to be filed by it with the SEC pursuant to the reporting requirements of the1934 Act (all of the foregoing filed prior to the date hereof and all exhibits included therein andfinancial statements, notes and schedules thereto and documents incorporated by referencetherein being hereinafter referred to as the "SEC Documents "). The Company has delivered tothe Buyers or their respective representatives true, correct and complete copies of each of theSEC Documents not available on the EDGAR system that have been requested by each Buyer.As of their respective dates, the SEC Documents complied in all material respects with therequirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunderapplicable to the SEC Documents, and none of the SEC Documents, at the time they were filedwith the SEC, contained any untrue statement of a material fact or omitted to state a material factrequired to be stated therein or necessary in order to make the statements therein, in the light ofthe circumstances under which they were made, not misleading. As of their respective dates, thefinancial statements of the Company included in the SEC Documents complied as to form in allmaterial respects with applicable accounting requirements and the published rules andregulations of the SEC with respect thereto as in effect as of the time of filing. Such financialstatements have been prepared in accordance with generally accepted accounting principles,consistently applied, during the periods involved (except (i) as may be otherwise indicated insuch fmancial statements or the notes thereto, or (ii) in the case of unaudited interim statements,to the extent they may exclude footnotes or may be condensed or summary statements) and fairlypresent in all material respects the financial position of the Company as of the dates thereof andthe results of its operations and cash flows for the periods then ended (subject, in the case ofunaudited statements- to normal year-end audit adjustments).

(1) Absence of Certain Changes . Except as disclosed in Section 3(1), since thedate of the Company's most recent financial statements contained in a Form 10-QSB, there hasbeen no materia'^ adverse change and no material adverse development in the business, assets,properties. operations, condition (financial or otherwise), results of operations or prospects of theCompany. Except as disclosed in Schedule 3(l) , since the date of the Company's most recentfinancials statements contained in a Form 10-QSB, the Company has not (i) declared or paid anydividends, Jii) sold any assets. individually or in the aggregate, in excess of $50,000 outside ofthe ordinary course of business or (iii) had capital expenditures, individually or in the aggregate,in excess of S50,000. The Company has not taken any steps to seek protection pursuant to any

100=069814 9


bankruptcy law nor does the Company have any knowledge or reason to believe that its creditorsintend to initiate involuntary bankruptcy proceedings or any actual knowledge of any fact whichwould reasonably lead a creditor to do so. The Company is not as of the date hereof, and aftergiving effect to the transactions contemplated hereby to occur at the Closing, will not beInsolvent (as defined below). For purposes of this Section 3(1), "Insolvent " means (i) the presentfair saleable value of the Company' s assets is less than the amount required to pay the Company'stotal Indebtedness (as defined in Section 3(s)), (ii) the Company is unable to pay its debts andliabilities, subordinated, contingent or otherwise, as such debts and liabilities become absoluteand matured. (iii) the Company intends to incur or believes that it will incur debts that would bebeyond its ability to pay as such debts mature or (iv) the Company has unreasonably smallcapital with which to conduct the business in which it is engaged as such business is nowconducted and is proposed to be conducted.

(m) No Undisclosed Events, Liabilities, Developments or Circumstances . Noevent, liability, development or circumstance has occurred or exists, or is contemplated to occurwith respect to the Company, its Subsidiaries or their respective business, properties, prospects,operations or financial condition, that would be required to be disclosed by the Company underapplicable securities laws on a registration statement on Form S-I filed with the SEC relating toan issuance and sale by the Company of its Common Stock and which has not been publiclyannounced.

(n) Conduct of Business; Regulatory Pen-nits . Neither the Company nor itsSubsidiaries is in violation of any teen of or in default under its Certificate of Incorporation, theCertificate of Designations, any other certificate of designation, preferences or rights of anyother outstanding series of preferred stock of the Company or Bylaws or their organizationalcharter or certificate of incorporation or bylaws, respectively. Neither the Company nor any of itsSubsidiaries is in violation of any judgment, decree or order or any statute, ordinance, rule orregulation applicable to the Company or its Subsidiaries, and neither the Company nor any of itsSubsidiaries will conduct its business in violation of any of the foregoing, except in all cases forpossible violations which would not. individually or in the aggregate, have a Material AdverseEffect. Without limiting the generality of the foregoing, the Company is not in violation of anyof the rules, regulations or requirements of the Principal Market and has no knowledge of anyfacts or circumstances that would reasonably lead to delisting or suspension of the CommonStock by the Principal Market in the foreseeable future. During the two (2) years prior to thedate hereof (i) the Common Stock has been designated for quotation on the Principal Market,(ii) trading in the Common Stock has not been suspended by the SEC or the Principal Marketand (iii) the Company has received no communication, written or oral, from the SEC or thePrinci;-al Market regarding the suspension or delisting of the Common Stock from the PrincipalMarket. Th-- Company and its Subsidiaries possess all certificates, authorizations and permitsissued ny the appopriate regulatory authorities necessary to conduct their respective businesses,except where the failure to possess such certificates, authorizations or permits would not have,individually or in Lne aggregate, a Material Adverse Effect, and neither the Company nor anysuch Subsidiary has received any notice of proceedings relating to the revocation or modificationo'any such certificate, authorization or permit.

(o) Foreign Corrupt Practices . Neither the Company nor any of itsSubsidiaries nor any dir-etor, officer, agent. employee or other Person acting on behalf of the

1007 06S2.1= 10


Company or any of its Subsidiaries has. in the course of its actions for, or on behalf of, theCompany (i) used any corporate funds for any unlawful contribution, gift, entertainment or otherunlawful expenses relating to political activity; (ii) made any direct or indirect unlawful paymentto any foreign or domestic government official or employee from corporate funds; (iii) violatedor is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, asamended: or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or otherunlawful na-wnent to any foreign or domestic government official or employee.

(p) Sarbanes-Oxley . The Company is in compliance with any and allapplicable requirements of the Sarbanes-Oxley Act of 2002 that are effective as of the datehereof. and any and all applicable rules and regulations promulgated by the SEC thereunder thatare effective as of the date hereof, except where such noncompliance would not have,individually or in the aggregate. a Material Adverse Effect.

(q) Transactions With Affiliates . Except as set forth in the SEC Documentsfiled at least ten days prior to the date hereof and other than disclosed on Schedule 3(g) , none ofthe officers, directors or employees of the Company is presently a party to any transaction withthe Company or any of its Subsidiaries (other than for ordinary course services as employees,o ficers or directors), including any contract. agreement or other arrangement providing for thefurnishing of services to or by, providing for rental of real or personal property to or from, orotherwise requiring payments to or from any such officer. director or employee or, to theknowledge of the Company, any corporation. partnership. trust or other entity in which any suchofficer. director, or employee has a substantial interest or is an officer, director, trustee orpartner.

O Equity Capitalization . As of the date hereof, the authorized capital stock

of the Company consists of (i) 100.000,000 shares of Common Stock and (ii) 25,000,000 shares

of preferred stock. 50.01 par value. As of the date of this Agreement, the capitalization of the

Company is as set forth on Schedule 3(r) to this Agreement, which is specifically incorporated

herein by this reference. Other than as set forth in Schedule 3(r) to this Agreement, there are no

other shares of capital stock of the Company issued, outstanding or reserved for issuance

pursuant to securities (other than the Preferred Shares and the Warrants) exercisable or

exchangeable for, or convertible into, shares of Common Stock. All of such outstanding shares

have been. or upon issuance will be. validly issued and are fully paid and nonassessable. Except

as disclosed in Schedule 3(r) : (i) none of the Company's share capital is subject to preemptive

rights or any other similar rights or any liens or encumbrances suffered or permitted by the

Company; (ii) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or

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

exercisable or exchangeable for. any share capital of the Company or any of its Subsidiaries, or

contacts. commitments. understandings or arrangements by which the Company or any of itsSubsidiaries is or may become bound to issue additional share capital of the Company or any ofits Subsidiaries or options, warrants. scrip, rights to subscribe to, calls or commitments of anycharacter whatsoever relating to. or securities or rights convertible into, or exercisable orexchangeable for, any share capital of the Company or any of its Subsidiaries; (iii) there are nooutstanding debt s°cari-L:es. notes, credit agreements, credit facilities or other agreements,documents or instrument, evidencing Indebtedness of the Company or any of its Subsidiaries orby which the Company or any of its Subsidiaries is or may become bound: (iv) there are no

10050698.14 11


financing statements securing obligations in any material amounts, either singly or in theaggregate, riled in connection with the Company or any of its Subsidiaries; (v) there are noagreements or arrangements under which the Company or any of its Subsidiaries is obligated toregister the sale of any of their securities under the 1933 Act (except the Registration RightsAgreement): (vi) there are no outstanding securities or instruments of the Company or any of itsSubsidiaries which contain any redemption or similar provisions, and there are no contracts,commitments, understandings or arrangements by which the Company or any of its Subsidiariesis or may become bound to redeem a security of the Company or any of its Subsidiaries; (vii)there are no securities or instruments containing anti-dilution or similar provisions that will betriggered by the issuance of the Securities; (viii) the Company does not have any stockappreciation rights or "phantom stock" plans or agreements or any similar plan or agreement; and(ix) the Company and its Subsidiaries have no liabilities or obligations required to be disclosedin the SEC Documents but not so disclosed in the SEC Documents, other than those incurred inthe ordinary course of the Company's or its Subsidiaries' respective businesses and which.individually or in the aggregate, do not or would not have a Material Adverse Effect. TheCompany has furnished to the Buyer true. correct and complete copies of the Company'sCertificate of Incorporation, as amended and as in effect on the date hereof (the "Certificate ofIncorporation ") and the Company's Bylaws. as amended and as in effect on the date hereof (the"Bylaws "). and the terms of all securities convertible into, or exercisable or exchangeable for,shares of Common Stock and the material rights of the holders thereof in respect thereto.

(s) Indebtedness and Other Contracts . Except as set forth on Schedule 3(s),neither the Company nor any of its Subsidiaries (i) has any outstanding Indebtedness (as definedbelow). (ii) is in violation of any term of or in default under any contract, agreement orinstrument relating to any Indebtedness, except where such violations and defaults would notresult, individually or in the aggregate, in a Material Adverse Effect, or (iii) is a party to anycontract, agreement or instrument relating to any Indebtedness, the performance of which, in thejudgment of the Company's officers, has or is expected to have a Material Adverse Effect.Schedule 3(s) provides a detailed description of the material terms of any such outstandingIndebtedness. For purposes of this Agreement: ( x) "Indebtedness " of any Person means,without duplication (A) all indebtedness for borrowed money, (B) all obligations issued,undertaken or assumed as the deferred purchase price of property or services (including, withoutlimitation, "capital leases" in accordance with generally accepted accounting principals) (otherthan trade payables entered into in the ordinary course of business), (C) all reimbursement orpayment obligations with respect to letters of credit, surety bonds and other similar instruments,(D) all obligations evidenced by notes, bonds, debentures or similar instruments, includingobligations so evidenced incurred in connection with the acquisition of property, assets orbusinesses. (E) all indebtedness created or arising under any conditional sale or other titleretention agreement, or incurred as financing, in either case with respect to any property or assetsacquired with the proceeds of such indebtedness (even though the rights and remedies of theseller or bank under such agreement in the event of default are limited to repossession or sale ofsuch property), (F) all monetary obligations under any leasing or similar arrangement which, inconnection with generally accepted accounting principles, consistently applied for the periodscovered thereby, :s classified as a capital lease, (G) all indebtedness referred to in clauses (A)through (F) above secured by (or for which the holder of such Indebtedness has an existing right,contingent or otherwise, to be secured by) any mortgage, lien, pledge, charge, security interest orother er_--umbrance upor_ or in any property or assets (including accounts and contract rights)

10050698.14 12


owned by any Person, even though the Person which owns such assets or property has not

assumed or become liable for the payment of such indebtedness, and (H) all Contingent

Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses

(A) through (C) above: (y) "Contingent Obligation " means, as to any Person, any direct or

indirect liability, contingent or otherwise, of that Person with respect to any indebtedness, lease,

dividend or other obligation of another Person if the primary purpose or intent of the Person

incurring such liability. or the primary effect thereof, is to provide assurance to the obligee of

such liability that such liability will be paid or discharged, or that any agreements relating thereto

will be comp:ied with, or that the holders of such liability will be protected (in whole or in part)

against loss with respect thereto; and (z) " Person " means an individual, a limited liability

company; a partnership. a joint venture, a corporation, a trust, an unincorporated organization

and a government or any department or agency thereof.

(t) Absence of Litigation . There is no action, suit, proceeding, inquiry or

investigation before of by the Principal Market, any court, public board, government agency,self-regula-iorv organization or body pending or, to the knowledge of the Company, threatenedagainst or affecting the Company. the Common Stock or any of the Company's Subsidiaries orany of the Company's or its Subsidiaries' officers or directors, that could, individually or in theaggregate, reaF onably be expected to result in a Material Adverse Effect.

(u) Insurance . The Company and each of its Subsidiaries are insured byinsurers of recognized financial responsibility against such losses and risks and in such amountsas management of the Company believes to be prudent and customary in the businesses in whichthe Company and its Subsidiaries are engaged. Neither the Company nor any such Subsidiaryhas been refused any insurance coverage sought or applied for and neither the Company nor anysuch Subsidiary has any reason to believe that it will not be able to renew its existing insurancecoverage as and when sucin coverage expires or to obtain similar coverage from similar insurersas may be necessary to continue its business at a cost that would not have a Material AdverseEffect.

(v) Employee Relations . (i) Neither Company nor any of its Subsidiaries is a

party to any collective bargaining agreement or employs any member of a union. The Company

and its Subsidiaries believe that their relations with their employees are good. Except as set forth

on Schedule 3(v), no executive officer of the Company or any of its Subsidiaries (as defined in

Rule 50i(f) of the 1933 Act) has notified the Company or any such Subsidiary that such officer

intends to leave the Company or any such Subsidiary or otherwise terminate such officer's

errpoyme-it with the Company or any such Subsidiary. No executive officer of the Company or

any of its Subsidiaries, to the knowledge of the Company or any such Subsidiary, is, or is nowexpected to be, in violation of any material tern of any employment contract, confidentiality,

disclosure or proprietary information agreement, non-competition agreement, or any othercontract or agreement or any restrictive covenant, and the continued employment of each suchexecutive officer does not subject the Company or any such Subsidiary to any liability withrespect to any of the foregoing matters.

(ii) The Company and its Subsidiaries are in compliance with allfederal, state local and foreign laws and regulations respecting labor, employment andemployment practices and benefits , terms and conditions of employment and wages and hours,

10050698.1413


except where failure to be in compliance would not, either individually or in the aggregate,

reasonably be expected to result in a Material Adverse Effect.

(w) Title . Except as set forth in Schedule 3(w), the Company and itsSubsidiaries have good and marketable title in fee simple to all real property and good andmarketable title to all personal property owned by them which is material to the business of theCompany and its Subsidiaries, in each case free and clear of all liens, encumbrances and defectsexcept such as do not materially affect the value of such property and do not interfere with the

use mace and proposed to be made of such property by the Company and any of its Subsidiaries.Any real property and facilities held under lease by the Company and any of its Subsidiaries areheld by them under valid, subsisting and enforceable leases with such exceptions as are notmaterial and do not interfere with the use made and proposed to be made of such property andbuildings by the Company and its Subsidiaries.

(x) intellectual Property Rights . The Company and its Subsidiaries own orpossess adequate rights or licenses to use all trademarks. trade names, service marks, servicemark registrations. service names. patents. patent rights, copyrights, inventions, licenses,approvals, governmental authorizations. trade secrets and other intellectual property rights("Intellectual Proper- Rights") necessary to conduct their respective businesses as nowconducted except where the failure to so own or possess would not reasonably be expected toresult in a Material Adverse Effect. None of the Company's Intellectual Property Rights haveexpired or terminated, or are expected to expire or terminate, within three years from the date ofthis Agreement. The Company does not have any knowledge of any infringement by theCompany or its Subsidiaries of Intellectual Property Rights of others. There is no claim, actionor proceeding being made or brought, or to the knowledge of the Company, being threatened,against the Company or its Subsidiaries regarding its Intellectual Property Rights. The Companyis unaware of any facts or circumstances which might give rise to any of the foregoinginfringements or claims, actions or proceedings. The Company and its Subsidiaries have takenreasonable security measures to protect the secrecy, confidentiality and value of all of theirintellectual properties.

(y) Environmental Laws . The Company and its Subsidiaries (i) are incompliance with any and all Environmental Laws (as hereinafter defined). (ii) have received allper-nits, licenses or other approvals required of them under applicable Environmental Laws toconduct their respective businesses and (iii) are in compliance with all terms and conditions ofany such perrlii, license or approval where. in each of the foregoing clauses (i), (ii) and (iii), thefailure to so comply could be reasonably expected to have. individually or in the aggregate, aMat.-rial Adverse Effect. The term " Environmental Laws" means all federal, state, local orforeign laws relating to pollution or protection of human health or the environment (including,without limitation, ambient air. surface water, groundwater, land surface or subsurface strata),including, without limitation, laws relating to emissions, discharges, releases or threatenedreleases of chemicals. pollutants, contaminants, or toxic or hazardous substances or wastes(collectively, " Hizarucus Materials ") into the environment, or otherwise relating to themanufacture, processing, distribution, use, treatment, storage, disposal, transport or handling ofHazardous Materia.is. as well as all authorizations, codes, decrees, demands or demand letters,injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulationsissued. entered, proms :gated or approved thereunder.

10fl5o69s.1A 14


(z) Subsidiary Rights . The Company or one of its Subsidiaries has theunrestricted right to vote, and (subject to limitations imposed by applicable law) to receivedividends and distributions on, all capital securities of its Subsidiaries as owned by the Companyor such Subsidiary.

(aa) Investment Company Status . The Company is not, and uponconsummation of the sale of the Securities will not be. an "investment company," a companycontrolled by an "investment company" or an "affiliated person" of, or "promoter" or "principalunderwriter" for, an "investment company" as such terms are defined in the Investment CompanyAct of 1940.. as amended.

(bb) Tax Status . The Company and each of its Subsidiaries (i) has made orfiled all foreign. Canadian, federal and state income and all other tax returns. reports anddeclarations required by any jurisdiction to which it is subject, (ii) has paid all taxes and othergovernmental assessments and charges that are material in amount, shown or determined to bedue on such returns, reports and declarations, except those being contested in good faith and (iii)has set aside on its books provision reasonably adequate for the payment of all taxes for periodssubsequent to the periods to which such returns, reports or declarations apply. There are nounpaid taxes in any material amount claimed to be due by the taxing authority of anyjurisdiction. and the officers of the Company know of no basis for any such claim.

(cc) Internal Accounting and Disclosure Controls . The Company maintains asystem of internal accounting controls sufficient to provide reasonable assurance that (i)transactions are executed in accordance with management's general or specific authorizations,(ii) transactions are recorded as necessary to permit preparation of financial statements inconformity with generally accepted accounting principles and to maintain asset and liabilityaccountability. (iii) access to assets or incurrence of liabilities is permitted only in accordancewith management's general or specific authorization and (iv) the recorded accountability forassets and liabilities is compared with the existing assets and liabilities at reasonable intervalsand appropriate action is taken with respect to any difference. The Company maintainsdisclosure controls and procedures (as such term is defined in Rule 13a-14 under the 1934 Act)that are des; fined to ensure that information required to be disclosed by the Company in thereports that it files or submits under the 1934 Act is recorded, processed, summarized andreported. within the time periods specified in the rules and forms of the SEC, including, withoutlimitation, controls and procedures designed in to ensure that information required to bedisclosed by the Company in the reports that it files or submits under the 1934 Act isaccumulated and communicated to the Company's management, including its principal executiveofficer or officers and its principal financial officer or officers, as appropriate, to allow timelydecisions regarding required disclosure. During the twelve months prior to the date hereofneither the Company no, any of its Subsidiaries have received any notice or correspondencefrom any accountant relating to any potential material weakness in any part of the system ofinterna: accounting controls of the Company or any of its Subsidiaries.

(c:d) Off Balance Sheet Arrangements . There is no transaction, arrangement, orother relad:onship bete -een the Company and an unconsolidated or other off balance sheet entitythat is required to be disclosed by the Company in its 1934 Act filings and is not so disclosed orthat otherwise woald be reasonably likely to have a Material Adverse Effect.

10050698.14 11


(ee) Transfer Taxes . On the Closing Date, all stock transfer or other taxes(other than income or similar taxes) which are required to be paid in connection with the sale andtransfer of the Securities to be sold to each Buyer hereunder will be, or will have been, fully paid

or provided for by the Company, and all laws imposing such taxes will be or will have beencomplied with.

(ff) 'registration Eligibility. The Company is eligible to register theConversion Shares, the Dividend Shares and the Warrant Shares for resale by the Buyers usingForm SB-2 promulgated under the 1933 Act.

(gg) Manipulation of Price . The Company has not, and to its knowledge noone acting on its behalf has, (i) taken, directly or indirectly, any action designed to cause or toresult in the stabilization or manipulation of the price of any security of the Company to facilitatethe sale or resale of any of the Securities. (ii) other than the Agent, sold, bid for, purchased, orpaid any compensation for soliciting purchases of, any of the Securities, or (iii) other than theAgent. paid or agreed to pay to any person any compensation for soliciting another to purchaseany other securities of the Company.

(hh) Acknowledgement Regarding Buyers' Trading Activity . It is understoodand acknowledged by the Company (i) that, except as set forth in Section 4(r), none of theBuyers have been asked by the Company or its Subsidiaries to agree, nor has any Buyer agreedwith the Company or its Subsidiaries, to desist from purchasing or selling, long and/or short,securities of the Company. or "derivative" securities based on securities issued by the Companyor to hold the Securities for any specified term; (ii) that any Buyer, and counter parties in"derivative" transactions to which any such Buyer is a party, directly or indirectly, presently mayhave a "short" position in the Common Stock, and (iii) that each Buyer shall not be deemed tohave any affiliation with or control over any arm's length counter party in any "derivative"transaction. The Company further understands and acknowledges that, except as restricted bythe provisions of Section 4(r), one or more Buyers may engage in hedging and/or tradingactivities at various times during the period that the Securities are outstanding, including, withoutlimitation, du,'Ing the periods that the value of the Conversion Shares and the Warrant Sharesdeliverable with respect to Securities are being determined and such hedging and/or tradingactivities, if any, can reduce the value of the existing Shareholders' equity interest in theCompany both at and after the time the hedging and/or trading activities are being conducted.The Company acknowledges that, except if in violation of Section 4(r), such aforementionedhedging and/or trading activities do not constitute a breach of this Agreement, the Certificate ofDesignations, the Warrants or any of the documents executed in connection herewith.

(ii) Disclosure . Except for information that will be disclosed in a periodicreport on Form 8-K to be filed in accordance with the provisions of Section 4(i), the Companyconfirms that neither it ..or any other Person acting on its behalf has provided any of the Buyersor their agents or counsel with any information that constitutes or could reasonably be expectedto constitute material, nonpublic information. The Company understands and confirms that eachof the Buyers will rely on the foregoing representations in effecting transactions in securities ofthe Company. All disclosure provided to the Buyers regarding the Company, its business andthe transactions contemplated hereby, including the Schedules to this Agreement, furnished by oron behalf of the Company is true and correct and does not contain any untrue statement of a

1 CO5ou)8.14 16


material fact or omit to state any material fact necessary in order to make the statements madetherein. in the light of the circumstances under which they were made, not misleading. Eachpress release issued by the Company during the twelve (12) months preceding the date of thisAgreement did not at the time of release contain any untrue statement of a material fact or omitto state a material fact required to be stated therein or necessary in order to make the statementstherein, in the light of the circumstances under which they are made, not misleading. No eventor circumstance has occurred or information exists with respect to the Company or any of itsSubsidiaries or its or their business, properties, prospects, operations or financial conditions,which, under applicable law, rule or regulation, requires public disclosure or announcement bythe Company but which has not been so publicly announced or disclosed.

4. COVENANTS.

(a) 5est Efforts . Each party shall use its best efforts timely to satisfy each ofthe conditions to be satisfied by it as provided in Sections 6 and 7 of this Agreement.

(b) Form D and Blue Sky. The Company agrees to file a Form D with respectto the Securities as required under Regulation D and to provide a copy thereof to each Buyerpromptly after such filing. The Company shall, on or before the Closing Date, take such actionas the Company shall reasonably determine is necessary in order to obtain an exemption for or toqualify the Securities for sale to the Buyers at the Closing pursuant to this Agreement underapplicable securities or "Blue Sky" laws of the states of the United States (or to obtain anexemption from such qualification), and shall provide evidence of any such action so taken to theBuyers on or prior to the Closing Date. The Company shall make all filings and reports relatingto the offr and sale of the Securities required under applicable securities or "Blue Sky" laws ofthe states of the United States following the Closing Date.

(c) Reporting Status . Until the date on which (i) the Investors (as defined inthe Registration Righis Agreement) shall have sold all the Conversion Shares, Dividend Sharesand Warrant Shares, and (ii) none of the Preferred Shares or Warrants is outstanding (the"Reporting Period"), the Company shall file all reports required to be filed with the SECpursuant to the 1934 Act, and the Company shall not terminate its status as an issuer required tofile reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunderwould otherwise permit such termination.

(d) Use of Proceeds . The Company will use the proceeds from the sale of theSecurities as set forth on Schedule 4(d) . and not for, except as specifically set forth on Schedule4(d). (A) repayment of any outstanding Indebtedness of the Company or any of its Subsidiariesor (B) redemption or repurchase of any of its or its Subsidiaries' equity securities.

(e) Financial Information . The Company agrees to send the following to eachlnv stor (as defined in the Registration Rights Agreement) during the Reporting Period (i) unless

follow*ng are filed with the SEC through EDGAR and are available to the public through theEDGAR system, within one (I) Business Day after the filing thereof with the SEC, a copy of itsAnnual Reports on Form 10-K or 10-KSB, any interim reports or any consolidated balancesheets, income statements, stockholders' equity statements and/or cash flow statements for anyperiod other than a_=aal, any Current Reports on Form 8-K and any registration statements or

1005069814 17


amendments filed pursuant to the 1933 Act, (ii) on the same day as the release thereof, facsimileor e-mailed copies of all press releases issued by the Company or any of its Subsidiaries, and (iii)copies of any notices and other information made available or given to the stockholders of theCompany generally, contemporaneously with the making available or giving thereof to thestockholders.

(f) Listin . The Company shall promptly secure the listing of all of theRegistrable Securities (as defined in the Registration Rights Agreement) upon each nationalsecurities exchange and automated quotation system, if any, upon which the Common Stock isthen listed (subject to official notice of issuance) and shall maintain such listing of allRegistrable Securities from time to time issuable under the terms of the Transaction Documents.The Company shall maintain the authorization for quotation of the Common Stock on thePrincipal Market. Neither the Company nor any of its Subsidiaries shall take any action whichwould be reasonably expected to result in the delisting or suspension of the Common Stock onthe Principal Market. The Company shall pay all fees and expenses in connection with satisfyingits obligations under this Section 4(f).

(g) Fees . The Company shall reimburse Magnetar Financial LLC or itsdesignee(s) (in addition to any other expense amounts paid to any Buyer prior to the date of thisAgreement) for all reasonable costs and expenses, not to exceed $85,000, incurred in connectionwith the transactions contemplated by the Transaction Documents (including all reasonable legalfees and disbursements :n connection therewith. documentation and implementation of thetransactions contemplated by the Transaction Documents and due diligence in connectiontherewith), which amount shall be non-accountable and withheld by Magnetar Capital Master

Fund, Ltd. from its Purchase Price at the Closing. The Company shall be responsible for the

payment cf an;- placement agent's fees, financial advisory fees, or broker's commissions (otherthan for Persons engaged by any Buyer) relating to or arising out of the transactions

contemplated hereby, including, without limitation, any fees payable to the Agent. The

Company shall pay. and hold each Buyer harmless against, any liability, loss or expense

(including. without limitation, reasonable attorney's fees and out-of-pocket expenses) arising in

connection with any claim relating to any such payment.

(h) Pledge of Securities . The Company acknowledges and agrees that the

Securities may be pledged pLrsuant to an available exemption from registration under the 1933

Act by an Investor (as defined in the Registration Rights Agreement) in connection with a bona

fide margin ageer.?en: or other loan or financing arrangement that is secured by the Securities.

The pledge of Securities shall not be deemed to be a transfer, sale or assignment of the Securities

hereunder, and :o Investor effecting a pledge of Securities shall be required to provide the

Company with any notice thereof or otherwise make any delivery to the Company pursuant tothis Agreement or ar.y other Transaction Document, including, without limitation, Section 2(g)

hereof, provides that an Investor and its pledgee shall be required to comply with the provisionsof Section 2(g) he:-;;of in order to effect a sale, transfer or assignment of Securities to suchpledgee. The Company :ic:eby agrees to execute and deliver such documentation as a pledgee of

the Securities may reasonably request in connection with a pledge of the Securities to suchpledgee by an Investor.

1005 X698.:4 18


(i) Disclosure of Transactions and Other Material Information . On or before8:30 a.m.. New York Time, on the first Business Day following the date of this Agreement, theCompany shall fi!e a Current Report on Form 8-K describing the terms of the transactionscontemplated by the Transaction Documents in the form required by the 1934 Act and attachingthe material Transaction Documents (including, without limitation, this Agreement (and allschedules to this Agreement), the form of Certificate of Designations, the form of Warrant andthe Registration Rights Agreement) (including all attachments, the "8-K Filing"). From andafter the filing of the 8-K Filing with the SEC. the Company shall have disclosed any materialnonpublic information delivered to the Buyers by the Company or any of its Subsidiaries, or anyof their respective officers, directors. employees or agents. The Company shall not. and shallcause each of its Subsidiaries and its and each of their respective officers, directors, employeesand agents, no, to, provide any Buyer with any material. nonpublic information regarding theCompany or any of its Subsidiaries from and after the date of this Agreement without the expresswritten consent of such Buyer. In the event of a breach of the foregoing covenant by theCompany. or any of its Subsidiaries, or any of its or their respective officers, directors,employees and agents. in addition to any other remedy provided herein or in the TransactionDocuments, a Buyer shall have the right to make a public disclosure, in the form of a pressrelease, public advertisement or otherwise. of such material, nonpublic information without theprior approval by the Company, its Subsidiaries, or any of its or their respective officers,directors, employees or agents. No Buyer shall have any liability to the Company, itsSubsidiaries. or any o its or their respective officers, directors, employees, stockholders oragents. for any such disclosure. Subject to the foregoing, neither the Company, its Subsidiariesnor any Buyer shall issue any press releases or any other public statements with respect to thetransactions contemplated hereby; provided , however , that the Company shall be entitled,without the prior approval of any Buyer, to make any press release or other public disclosurewith respect to such transactions (i) in substantial conformity with the 8-K Filing andcontemporaneously therewith and (ii) as is required by applicable law and regulations (providedthat in the case of clause (i) each Buyer shall be consulted by the Company in connection withany such press release or other public disclosure prior to its release). Without the prior writtenconsent of ary applicable Buyer, the Company shall not disclose the name of any Buyer in anyfiling. announcement, release or otherwise.

(;) Rest_iction on Redemption and Cash Dividends; Additional RegistrationStatements . So long as any Preferred Shares are outstanding. the Company shall not, directly orindirectly. redeem. or declare or pay any cash dividend or distribution on, the Common Stockwithout the prior express written consent of the holders of Preferred Shares representing not lessthan a majority of the aggregate number of the then outstanding Preferred Shares. Until theEffective Date of the last Registration Statement required to be filed pursuant to the RegistrationRights Agreement, the Company shall not file a registration statement under the 1933 Actrelating to securities that are not the Securities, other than as required by the Registration RightsAgreemert dated as of December 30, 2005 to which the Company is a party.

(k) Additional Preferred Shares; Variable Securities; Dilutive Issuances . Solong as aay Buyer ber.cficially owns any Securities, the Company will not, without the priorwritten consent o Buyers holding a majority of the Preferred Shares, issue any Preferred Shares(other than to the Buyers as contemplated hereby or under the Certificate of Designations) andthe Compan" shall not issue any other securities that would cause a breach or default under the

0050698.1419


Certificate of Designation s or the Warrants . From and after the date of this Agreement , and forso long as any Preferred Shares or Warrants remain outstanding , the Company shall not, in anymanner, issue or sell any rights , warrants or options to subscribe for or purchase Common Stockor securities dire:tly or indirectly convertible into or exchangeable or exercisable for CommonStock at a conversion , exchange or exercise price which varies or may vary after issuance withthe market pric ^ of the Common Stock , including by way of one or more reset ( s) to any fixedprice unless the conversion , exchange or exercise price of any such security cannot be less thanthe then applicable Conversion Price (as defined in the Certificate of Designations ) with respectto the Common Stock into which any Preferred Shares are convertible or the then applicableExercise Price ( as defined in the Warrants) with respect to the Common Stock into which anyWarrant is exercisable . For purposes of clarification , this does not prohibit ( i) the issuance ofsecurities with customary " weighted average " or "full ratchet " anti-dilution adjustments whichadjust a fixed conversion or exercise price of securities sold by the Company in the future or (ii)the issuance of any securities under the terms and conditions of any rights . warrants, options orsecurities of the Company issued and outstanding as of the date of this Agreement ; provided thatnone of such rights. options or securities are modified or amended . For so long as any PreferredShares or Warrants remain outstanding , the Company shall not . in any manner, enter into oraffect any dilutive _ ssuance if the effect of such dilutive issuance is to cause the Company to berequired to issue 'upon conversion of any Preferred Shares or exercise of any Warrant any sharesof Common Stock in excess of that number of shares of Common Stock which the Companymay issue upon conversion of the Preferred Shares and exercise of the Warrants withoutbreaching the Compaiy's obligations under the rules or regulations of the Principal Market.

(1) Corporate Existence . So long as any Buyer beneficially owns anySecurities. the Company shall not be party to any Fundamental Transaction (as defined in theCertificate of Designations) unless the Company is in compliance with the applicable provisionsgoverning Fundamental Transactions set forth in the Certificate of Designations and theWarrants.

(m) Reservation of Shares . The Company shall take all action necessary to atall times have autho,:zed, and reserved for the purpose of issuance, no less than the sum of(1) 125% of the number of shares of Common Stock issuable upon conversion of the issued andoutstanding Preie_red Shares, (2) 100% of the number of Dividend Shares issuable pursuant tothe terms of the Preferred Shares as of the Trading Day immediately prior to the applicable dateof determinate-)n and (3) 125% of the number of shares of Common Stock issuable upon exerciseof the issued and outstanding Warrants: provided, that the parties acknowledge that the numberof shares of Common Stock authorized on the date hereof are, and, on the Closing Date, will be,less than the amount required to satisfy the requirements of this Section 4(m); provided , further ,that the Company hereby covenants and agrees to call a meeting of stockholders on or prior toMay 15. 2006 (the "Situckho"_der Approval Deadline") to increase the number of authorizedshares of Common Stock to 300,000,000 (the "Stockholder Approval").

(n) Conduct of Business . The business of the Company and its Subsidiariesshall not be conducted in violation of any law, ordinance or regulation of any governmentalentity, except where -uch violations would not result, either individually or in the aggregate, in aMaterial Adverse Effect.

1000698.14 20


(o) Additional Issuances of Securities .

(i) For purposes of this Section 4(o). the following definitions

shall apply.

(1) "Convertible Securities " means any stock or securities(other than Options) convertible into or exercisable or exchangeable for shares ofCommon Stock.

(2) "Options" means any rights, warrants or options tosubscribe for or purchase shares of Common Stock or Convertible Securities.

(3) "Common Stock Equivalents " means, collectively,Options and Convertible Securities.

(ii) The Company will not, directly or indirectly, (A) from the datehereof until two hundred seventy (270) days after the Effective Date of the last RegistrationStatement recuired to be filed pursuant to the Registration Rights Agreement, file anyregistration statement with the SEC other than the Registration Statement (as defined in theRegistration Rights Agreement). a registration statement on Form S-8 pursuant to the 1933 Actto register shares of Co=on Stock issuable pursuant to the Stock Option Program or theRegistration Statement contemplated pursuant to the Registration Rights Agreement dated as ofDecember 30, 2005 or,(B) from and after the date hereof until the Effective Date of the lastRegistration Statement required to be filed pursuant to the registration statement, directly orindirectly, offer, sell, grant any option to purchase, or otherwise dispose of (or announce anyoffer, sale, grant or any option to purchase or other disposition of) any of its or its Subsidiaries'equity or equity equivalent securities, including without limitation any debt, preferred stock orother instrument or security that is. at any time during its life and under any circumstances,convertible into or exchangeable or exercisable for shares of Common Stock or Common StockEquivalents (any such offer, sale. grant, disposition or announcement being referred to as a" Subsequent Placer. ert").

(iii) The Company will not, directly or indirectly, effect anySubsequent Placement unless the Company shall have first complied with this Section 4(o)(iii).

(1) The Company shall deliver to each Buyer that owns, at

such Lime, at ?east 50% of the Securities that such Buyer purchased at the Closing

(including th-, Securities into which such Preferred Shares and Warrants are convertible

or exert sab!e into). a written notice (the "Offer Notice") of any proposed or intended

issuar.:° o- sale or exchange (the "Offer") of the securities being offered (the "Offered

Secu=-:-_es") in a Subsequent Placement, which Offer Notice shall (w) identify anddescribe the Offered Securities. (x) describe the price and other terms upon which theyare to be issued, sold or exchanged, and the number or amount of the Offered Securitiesto b-^ issued, sold or exchanged, (y) identify the persons or entities (if known) to which orwith w',ich the Offered Securities are to be offered, issued, sold or exchanged and (z)offer to issue and sell to or exchange with such eligible Buyers all of the OfferedSecurities, al'.ocated among such eligible Buyers (a) based on such Buyer's pro rata

1005C.198.14 21


portion of the aggregate number of Preferred Shares purchased hereunder by all sucheligible Buyers (the "Basic Amount "). and (b) with respect to each eligible Buyer thatelects to purchase its Basic Amount. any additional portion of the Offered Securitiesattributable to the Basic Amounts of other eligible Buyers as such eligible Buyer shallindicate it will purchase or acquire should the other eligible Buyers subscribe for lessthan their Basic Amounts (the "Undersubscription Amount").

(2) To accept an Offer, in whole or in part, such eliible Buyermust deliver a wwritten notice to the Company prior to the end of the fifth (5t ) BusinessDay after such eligible Buyer's receipt of the Offer Notice (the "Offer Period "), settingforth the portion of such eligible Buyer's Basic Amount that such eligible Buyer elects topurchase and, if such eligible Buyer shall elect to purchase all of its Basic Amount, theUndersubscription Amount. if any, that such eligible Buyer elects to purchase (in eithercase. the "Nc.ice of Acceptance "). If the Basic Amounts subscribed for by all eligibleBuyers are less than the total of all of the Basic Amounts, then each eligible Buyer whohas set forth an Undersubscription Amount in its Notice of Acceptance shall be entitled topurchase, in addition to the Basic Amounts subscribed for, the UndersubscriptionAmour' 't has subscribed for: provided , however , that if the Undersubscription Amountssubscribed for exceed the difference between the total of all the Basic Amounts and theBasic Amounts subscribed for (the "Available Undersubscription Amount"), eacheligible Buyer who has subscribed for any Undersubscription Amount shall be entitled topurchase only that portion of the Available Undersubscription Amount as the BasicAmount of sucin eligible Buyer bears to the total Basic Amounts of all eligible Buyersthat have subscribed for Undersubscription Amounts, subject to rounding by theCompany to the extent its deems reasonably necessary.

(3) The Company shall have five (5) Business Days from theexpiration of the Offer Period above to offer, issue, sell or exchange all or any part ofsuch 3ffered Securities as to which a Notice of Acceptance has not been given by theBuyers (-,he " R-fLsed Securities "), but only to the offerees described in the Offer Notice(if so described therein) and only upon terms and conditions (including, withoutlimitation, unit prices and interest rates) that are not more favorable to the acquiringperson or persons oc less favorable to the Company than those set forth in the OfferNotice.

(4) In the event the Company shall propose to sell less than all

the Refused SecLrities (any such sale to be in the manner and on the terms specified in

Section 4(o)(:ii)(3) above), then each Buyer may, at its sole option and in its sole

discretion, reduce the number or amount of the Offered Securities specified in its Notice

of Acceptance to an amount that shall be not less than the number or amount of theOffe-ed Securities that such Buyer elected to purchase pursuant to Section 4(o)(iii)(2)above multiplied by a fraction, (i) the numerator of which shall be the number or amountof Offered Securities the Company actually proposes to issue, sell or exchange (includingOffer-d Secu «ies to be issued or sold to Buyers pursuant to Section 4(o)(iii)(3) aboveprior to such reduction) and (ii) the denominator of which shall be the original amount ofthe Oqered Secur:`ies. In the event that any Buyer so elects to reduce the number oramount of Cffere^ Securities specified in its Notice of Acceptance, the Company may not

10050698.14 22


issue, sell or exchange more than the reduced number or amount of the Offered Securitiesunless and until such securities have again been offered to the Buyers in accordance withSection 4(o)(iii)(1) above.

(5) Upon the closing of the issuance, sale or exchange of all orless than all of the Refused Securities, the Buyers shall acquire from the Company, andthe Company shall issue to the Buyers, the number or amount of Offered Securitiesspecified in the Notices of Acceptance, as reduced pursuant to Section 4(o)(iii)(3) aboveif the Buyers have so elected, upon the terms and conditions specified in the Offer. Thepurchase by the Buyers of any Offered Securities is subject in all cases to the preparation,execution and delivery by the Company and the Buyers of a purchase agreement relatingto such Offered Securities reasonably satisfactory in form and substance to the Buyersand their respective counsel.

(6) Any Offered Securities not acquired by the Buyers or otherpersons in accoruance with Section 4(o)(iii)(3) above may not be issued, sold orexchanged until they are again offered to the Buyers under the procedures specified inthis Aareernen:.

(iv) The restrictions contained in subsections (ii) and (iii) of thisSection 4(o) shall no apply in connection with the issuance of any Excluded Securities (asdefined in the Certificate of Designations).

(p) Appointment of CFO . Not later than 90 days after the Closing Date, theCompany shall have appointed a chief financial officer (other than John Levy) reasonablyacceptable to Magnetar Capital Master Fund, Ltd.

(q) Investor Relations Firm . Not later than 120 days after the Closing Date,the Company shall have hired an investor relations firm reasonably acceptable to MagnetarCapital Master Fund, Ltd.

(r) Restrictions on Short Sales . Until the earlier of the first Effective Dateand the 50% Effectiveness Deadline (as such terms are defined in the Registration RightsAgreement), each Buyer hereby agrees not to enter into any Short Sales with respect to theCommon Stock of the Company. As used herein, "Short Sales" shall have the meaning ascribedto such term in Ru.-- 3b-3 of the Exchange Act and Rule 200 promulgated under Regulation SI-1Ounder the Exchange Act.

(s) Incurrence of Indebtedness . Until such time as the Buyers hold less than20% of the RegJstrable Securities (as defined in the Registration Rights Agreement), theCompany shall not. and the Company shall not permit any of its Subsidiaries to, directly orindirectly, incur or guarantee, assume or suffer to exist any Indebtedness other than as providedin Schedule 3(s) hereto or as contemplated in Schedule 4(s) hereto.

5. REGISTER; TRANSFER AGENT INSTRUCTIONS.

(a) Register. The Company shall maintain at its principal executive offices(or such other office or agency of the Company as it may designate by notice to each holder of

100506')8.14 23


Securities), a register for the Preferred Shares and the Warrants in which the Company shall

record the name and add:ess of the Person in whose name the Preferred Shares and the Warrants

have been issued (including the name and address of each transferee), the number of Preferred

Shares held by such Person, the number of Conversion Shares issuable upon conversion of the

Preferred Shares and Warrant Shares issuable upon exercise of the Warrants held by such

Person. The Company shall keep the register open and available at all times during businesshours for inspection of any Buyer or its legal representatives.

(b) Transfer Agent Instructions . The Company shall issue irrevocableinstructions to its transfer agent. and any subsequent transfer agent, to issue certificates or credit

shares to the applicable balance accounts at The Depository Trust Company ("DTC"), registeredin the name of e ch Buyer or its respective nominee(s), for the Conversion Shares, and theWarrant Shares in such amounts as specified from time to time by each Buyer to the Companyupon conversion of the Preferred Shares or exercise of the Warrants in the form of Exhibit Dattached hereto (the "Irrevocable Transfer Agent Instructions "). The Company warrants thatno instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section5(b), and stop transfer instructions to give effect to Section 2(g) hereof will be given by theCompany to its transfer agent with respect to the Securities, and that the Securities shallotherwise be freely transferable on the books and records of the Company, as applicable, and tothe extent provided in this Agreement and the other Transaction Documents. If a Buyer effects asale, assignment or transfer of the Securities in accordance with Section 2(g), the Company shallpermit the transfer and shall promptly instruct its transfer agent to issue one or more certificatesor credit shares to the applicable balance accounts at DTC in such name and in suchdenominations as specified by such Buyer to effect such sale, transfer or assignment. In theevent that such sale. assignment or transfer involves Conversion Shares and Warrant Shares sold,assigned or transferred pursuant to an effective registration statement or pursuant to Rule 144,the transfer agent shall issue such Securities to the Buyer, assignee or transferee, as the case maybe, without any restrictive legend. The Company acknowledges that a breach by it of itsobligatiogs hereunder will cause irreparable harm to a Buyer. Accordingly, the Companyacknowledge. that the remedy at law for a breach of its obligations under this Section 5(b) willbe inadequate and agrees, in the event of a breach or threatened breach by the Company of theprovisions of this Section 5(b), that a Buyer shall be entitled, in addition to all other availableremedies, to an order anc'or injunction restraining any breach and requiring immediate issuanceand transfer, witflout the necessity of showing economic loss and without any bond or othersecurity being required.

6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.

(a) The obligation of the Company hereunder to issue and sell the PreferredShares and the related Warrants to each Buyer at the Closing is subject to the satisfaction, at orbefore the Closing Date, of each of the following conditions, provided that these conditions arefor the Company's sole benefit and may be waived by the Company at any time in its solediscretion by providir.g each Buyer with prior written notice thereof-

(i) Such Buyer shall have executed each of the TransactionDocuments tc which it is a party and delivered the same to the Company.

10050698.14 24


(ii) Such Buyer and each other Buyer shall have delivered to theCompany the Purchase Price (less, in the case of Magnetar Capital Master Fund, Ltd., theamount withheld pursuant to Section 4(g)) for the Preferred Shares and the related Warrantsbeing purchased by such Buyer at the Closing (i) by wire transfer of immediately available fieldspursuant to the wire instructions provided by the Company or (ii) by exchange of the outstandingprincipal and interest of he Exchangeable Notes pursuant to the terms thereof.

(iii) The representations and warranties of such Buyer shall be true andcorrect in all material respects as of the date when made and as of the Closing Date as thoughmade at that ;ime kexcept for representations and warranties that speak as of a specific date), andsuch Buyer shall have performed. satisfied and complied in all material respects with thecovenants, agreements and conditions required by this Agreement to be performed, satisfied orcomplied with by such Buyer at or prior to the Closing Date.

7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCI-LASE.

(a' The obligation of each Buyer hereunder to purchase the Preferred Sharesand the related Warrants at the Closing is subject to the satisfaction, at or before the ClosingDate, of each of the fo'__owing conditions. provided that these conditions are for each Buyer'ssole benefit and may be waived by such Buyer at any time in its sole discretion by providing theCompany with prior written notice thereof-

(i) The Company shall have executed and delivered to such Buyer

(A) each of the Transaction Documents and (B) the number of Preferred Shares as is set forth

across from such Buyer's name in column (3) of the Schedule of Buyers and the related Warrants

for that number of snares of Common Stock as is set forth across from such Buyer's name in

column (4) of the Schedule of Buyers being purchased by such Buyer at the Closing pursuant to

this Agreement.

(ii) Such Buyer shall have received the opinion of Holland & Knight,LLP. the Company's outside counsel, dated as of the Closing Date, in substantially the form ofExhibit E attached her.to.

(iii) The Company shall have delivered to such Buyer a copy of the

Irrevocable Transfer Agent Instructions, in the form of Exhibit D attached hereto, which

Listructions shall have been delivered to and acknowledged in writing by the Company's transfer

agent.

(iv) The Company shall have delivered to such Buyer a certificateevidencing the formation and good standing of the Company and each of its Subsidiaries by theSecretary of State (or equivalent) in its jurisdiction of formation as of a date within ten (10) daysof the Closing Dat°.

(v) The Company shall have delivered to such Buyer a certificateevidencing the Company's qualification as a foreign corporation and good standing issued by theSecretary of State (or comparable office) of each jurisdiction in which the Company conductsbusiness and is required to so qualify, as of a date within 10 days of the Closing Date.

I eo5o698.1425


(vi) The Company shall have delivered to such Buyer a certified copy

of the Ceftificate of Incorporation as certified by the Secretary of State of the State of Nevada

within ten (10) days of the Closing Date.

(vii) The Company shall have delivered to such Buyer a certificate,

executed by the Secretary of the Company and dated as of the Closing Date, as to (i) theresolutions consistent with Section 3(b) as adopted by the Company's Board of Directors in a

form reasonably acceptable to such Buyer, (ii) the Certificate of Incorporation and (iii) theBylaws. each as in effect at the Closing, in the form attached hereto as Exhibit F .

(viii) The representations and warranties of the Company shall be trueand correct as of the date when made and as of the Closing Date as though made at that time(except for representations and warranties that speak as of a specific date) and the Company shallhave performed, satisfied and complied in all respects with the covenants, agreements andconditions required by the Transaction Documents to be performed, satisfied or complied withby the Company at or prior to the Closing Date. Such Buyer shall have received a certificate,executed by the Chief Executive Officer of the Company. dated as of the Closing Date, to theforegoing effect and as to such other matters as may be reasonably requested by such Buyer inthe form attached hereto as Exhibit G .

(,x) The Company shall have delivered to such Buyer a letter from theCompany's transfer agent certifying the number of shares of Common Stock outstanding as of adate within five days of the Closing Date.

(x) The Common Stock (1) shall be designated for quotation or listedon the Principal Ma:ket and (II) shall not have been suspended, as of the Closing Date, by theSEC or the Principal Market from trading on the Principal Market nor shall suspension by theSEC or the Principal Market have been threatened, as of the Closing Date, either (A) in writingby the SEC or the Principal Market or (B) by falling below the minimum maintenancerequirements of the Principal Market.

(xi) The Company shall have obtained all governmental, regulatory orthird party consents and approvals, if any, necessary for the sale of the Securities.

(xii) The Certificate of Designations in the form attached hereto asExhibit A shall have been filed with the Secretary of State of the State of Nevada and shall be infull force and effect. enforceable against the Company in accordance with its terms and shall nothave been amended.

(xiii) The Company. contemporaneously with the Closing, shall haveconsummated the transactions contemplated by the Asset Purchase Agreement dated as ofFebruary 16. 2006 by and among the Company and California Natural Products, Inc. (the"Savannah PL_ ci <se A reer_:ent") in the form attached hereto as Exhibit H.

(xiv) The Board of Directors of the Company shall have authorized aformal stock option t rog_ am (the "Stock Option Program") on terms acceptable to the Buyers.

10050698.14 26


(xv) The Company shall have taken all necessary action to authorize thedesignation of one member of the board of directors of the Company by Magnetar CapitalMaster Fund, Ltd., such that at any time that Magnetar Capital Master Fund, Ltd. continues toown any Preferred Shares. it shall have the right, by written request to the Company, to designate

a representative, chosen by it in its sole discretion, to the board of directors of the Company

(xvi) The Company and Duane N. Martin, Marc R. Fry, Ralph M.Passino, Joseph Balistreri, Charles Sizer, Newlin Martin and Bruce Neviaser shall have executedand delivered to the Buyers a Voting Agreement in the form attached hereto as Exhibit I .

(xvii) The Company shall have delivered a duly executed lock-upagreement from each of Duane N. Martin and Marc R. Fry, each in the form attached hereto asExhibit J .

(xviii) The Company shall have delivered to such Buyer such otherdocuments relating to the transactions contemplated by this Agreement as such Buyer or itscounsel may reasonably request.

8. TERM'NATION. In the event that the Closing shall not have occurred withrespect to a Buyer on or before five (5) Business Days from the date hereof due to theCompany's or such BL.yer's failure to satisfy the conditions set forth in Sections 6 and 7 above(and the nonbreaching party's failure to waive such unsatisfied condition(s)), the nonbreachingparty shall have the option to terminate this Agreement with respect to such breaching party atthe close of business on such date without liability of any party to any other party; provided,however. if this Agreement is terminated pursuant to this Section 8, the Company shall remainobligated to reimburse the non-breaching Buyers for the expenses described in Section 4(g)above.

9. MISCELLANEOUS.

(a) Governing Law; Jurisdiction, Jury Trial . All questions concerning theconstruction, validity, enforcement and interpretation of this Agreement shall be governed by theinternal laws of the State of New York. without giving effect to any choice of law or conflict oflaw provision or rule (whether of the State of New York or any other jurisdictions) that wouldcause the appication of the laws of any jurisdictions other than the State of New York. Eachparty hereby 'Irrevocably submits to the exclusive jurisdiction of the state and federal courtssitting in The City of New York, Borough of Manhattan, for the adjudication of any disputehereunder or 'n connection herewith or with any transaction contemplated hereby or discussedherein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding,any claim that it is not personally subject to the jurisdiction of any such court, that such suit,action or proceeding is brought in an inconvenient forum or that the venue of such suit, action orproceeding is improper. Each party hereby irrevocably waives personal service of process andconsents to process being served in any such suit, action or proceeding by mailing a copy thereofto such party at Lne address for such notices to it under this Agreement and agrees that suchservice shall constitute good and sufficient service of process and notice thereof. Nothingcontained herein shay: be deemed to limit in any way any right to serve process in any mannerpermitted by law. E,_C t! PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT

10050698.14 27


MAY HAVE, A17D AGREES NOT TO REQUEST, A JURY TRIAL FOR TILEADJUDICATION O!' ANY DISPUTE HEREUNDER OR IN CONNECTION WITH ORARISING OUT OF :": 'S AGREEMENT OR ANY TRANSACTION CONTEMPLATEDHEREBY.

(b) Counterparts . This Agreement may be executed in two or more identicalcounterparts, all of which shall be considered one and the same agreement and shall becomeeffective 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 uponthe signatory thereto with the same force and effect as if the signature were an original, not afacsimile signature.

(c) headings . The headings of this Agreement are for convenience ofreference and shall not form part of. or affect the interpretation of, this Agreement.

(d) Severability . If any provision of this Agreement shall be invalid orunenforceable in any jurisdiction. such invalidity or unenforceability shall not affect the validityor enforceability of the remainder of this Agreement in that jurisdiction or the validity orenforceability of any provision of this Agreement in any other jurisdiction.

(e) Entire Agreement; Amendments . This Agreement and the other

Transaction Documents supersede all other prior oral or written agreements between the Buyers,

the Company, their Affiliates and Persons acting on their behalf with respect to the matters

discussed herein. and this Agreement, the other Transaction Documents and the instruments

referenced herein and therein contain the entire understanding of the parties with respect to the

matters covered herein and therein and, except as specifically set forth herein or therein, neither

the Company nor any Buyer makes any representation, warranty, covenant or undertaking with

respect to such matters. No provision of this Agreement may be amended other than by an

instrument in writing signed by the Company and the holders of at least a majority of the

Preferred Shares issued and issuable hereunder. and any amendment to this Agreement made in

conformity with the provisions of this Section 9(e) shall be binding on all Buyers and holders of

Securities, as applicable. No provision hereof may be waived other than by an instrument in

writing signed by the party against whom enforcement is sought. No such amendment shall be

effective to the extent that it applies to less than all of the holders of the Preferred Shares then

outsta.ding. No consideration shall be offered or paid to any Person to amend or consent to a

waiver or modification of any provision of any of the Transaction Documents unless the same

consideration also is of*z red to all of the parties to the Transaction Documents. holders of

Preferred Shares or holders of the Warrants, as the case may be. The Company has not, directly

or indirectly, made any agreements with any Buyers relating to the terms or conditions of the

transactions contemplated by the Transaction Documents except as set forth in the Transaction

Documents. Without limiting the foregoing, the Company confirms that, except as set forth inthis Agreement, no Buyer has made any commitment or promise or has any other obligation toprovide any I: nancing to tLe Company or otherwise.

(f) Notices . Any notices, consents, waivers or other communications requiredor permitted to be given under the terms of this Agreement must be in writing and will bedeemed to have been delivered: (i) upon receipt, when delivered personally: (ii) upon receipt,

10050698.14 28


when sent by facsimile (provided confirmation of transmission is mechanically or electronicallygenerated and kept on file by the sending party); or (iii) one Business Day after deposit with anovernight courier service, _n each case properly addressed to the party to receive the same. Theaddresses and facsimile numbers for such communications shall be:

If to the Company:

Universal Food & Beverage Company3830 Commerce Drive,St. Charles, Illinois 60174Telephone: (630) 584-8670Facsimile: (630) 584-8674Attention: Chief Executive Officer

With a copy (for informational purposes only) to:

Holland & Knight, LLP131 S. Dearborn, 301h FloorChicago, IL 60603Telephone: (312) 263-3600Facsimile: (312) 578-6666Attention: Carl Neumann, Esq.

li to the Transfer Agent:

Interwest Transfer Co., Inc.1981 East 4800 South, Suite 100Salt Lake City, UT 84117Telephone: (801) 272-9294Facsimile: (801) 277-3147Attention: Melina Orth

If to a Buyer. to its address and facsimile number set forth on the Schedule of Buyers, withcopies to such Buyer's representatives as set forth on the Schedule of Buyers,

with a copy (for informational purposes only) to:

Schulte Roth & Zabel LLP919 Third AvenueNew York, New York 10022Telephone: (212) 756-2000Facsimile: (212) 593-5955Attention: Eleazer N. Klein, Esq.

or to such other address and/or facsimile number and/or to the attention of such other Person asthe recipient party has specified by written notice given to each other party five (5) days prior tothe effectiveness of such change. Written confirmation of receipt (A) given by the recipient of

10050698.14 29


such notice, consent, waiver or other communication, (B) mechanically or electronically

generated by the sender's facsimile machine containing the time, date. recipient facsimile numberand an image of the first page of such transmission or (C) provided by an overnight courierservice shall be rebut,-able evidence of personal service, receipt by facsimile or receipt from anovernight courier service in accordance with clause (i), (ii) or (iii) above, respectively.

(g) Successors and Assigns . This Agreement shall be binding upon and inure

to the benefit of the parties and their respective successors and assigns, including any purchasersof the Preferred Shares or the Warrants. The Company shall not assign this Agreement or anyrights or obligations hereunder without the prior written consent of the holders of at least amajority of the aggregate number of Registrable Securities issued and issuable hereunder,including by way of ^. Fundamental Transaction (unless the Company is in compliance with theapplicable provisions governing Fundamental Transactions set forth in the Certificate ofDesignations and the Warrants). A Buyer may assign some or all of its rights hereunder inconnection with transfer of any of its Securities without the consent of the Company, in whichevent such assiglee shall be deemed to be a Buyer hereunder with respect to such assignedrights.

(h) No Third Party Beneficiaries . This Agreement is intended for the benefitof the parties hereto and their respective permitted successors and assigns, and, except as setforth in Section 9(k' below. is not for the benefit of, nor may any provision hereof be enforcedby, any other Person.

(i) Survival . Unless this Agreement is terminated under Section 8, therepresentations aia warranties of the Company and the Buyers contained in Sections 2 and 3 andthe agreements and covenants set forth in Sections 4, 5 and 9 shall survive the Closing. EachBuyer shall be responsible only for its own representations, warranties, agreements andcovenants hereunder.

(j) Further Assurances . Each party shall do and perform, or cause to be doneand performed, all such further acts and things, and shall execute and deliver all such otheragreements, certificates, instruments and documents, as any other party may reasonably requestin order to carry out the intent and accomplish the purposes of this Agreement and theconsummation of the transactions contemplated hereby.

(1:) Indemnification . In consideration of each Buyer's execution and deliveryof the Transaction Documents and acquiring the Securities thereunder and in addition to all ofthe Company's other obligations under the Transaction Documents, the Company shall defend,protect, indemnify and hold harmless each Buyer and each other holder of the Securities and allof their stockholders, partners, members, officers, directors, employees and direct or indirectinvestors and any of the foregoing Persons' agents or other representatives (including, withoutlimitation, those retaintd in connection with the transactions contemplated by this Agreement)(collectively. the "a.noemnitees ") from and against any and all actions, causes of action, suits,claims. losses, costs, penalties, fees, liabilities and damages, and expenses in connectiontherewith (irrespective of whether any such Indemnitee is a party to the action for whichindemnification hereunder is sought), and including reasonable attorneys' fees and disbursements(the "Indemnified Liaoilities "), incurred by any Indemnitee as a result of, or arising out of, or

10050698.1430


relating to (a) any misrepresentation or breach of any representation or warranty made by theCompany in the Transaction Documents or any other certificate, instrument or documentcontemplated hereby cr thereby. (b) any breach of any covenant, agreement or obligation of theCompany contained in the Transaction Documents or any other certificate, instrument ordocument contemplated hereby or thereby or (c) any cause of action, suit or claim brought ormade against such Indemnitee by a third party (including for these purposes a derivative actionbrought on behalf of the Company) and arising out of or resulting from (i) the execution,delivery. performance or enforcement of the Transaction Documents or any other certificate,instrument or document contemplated hereby or thereby, (ii) any transaction financed or to befinanced in whole or in part. directly or indirectly, with the proceeds of the issuance of theSecurities. (iii) any disclosure made by such Buyer pursuant to Section 4(i), or (iv) the status ofsuch Buyer or holder of the Securities as an investor in the Company pursuant to the transactionscontemplated by the Transaction Documents. To the extent that the foregoing undertaking bythe Company may be cnenforceable for any reason, the Company shall make the maximumcontribution to the payment and satisfaction of each of the Indemnified Liabilities which ispermissible under applicable law. Except as otherwise set forth herein, the mechanics andprocedures with respect to the rights and obligations under this Section 9(1) shall be the same asthose set forth in Section o of the Registration Rights Agreement.

(1) No Strict Construction . The language used in this Agreement will bedeemed to be the language chosen by the parties to express their mutual intent, and no rules ofstrict construction will be applied against any party.

(m) Remedies . Each Buyer and each holder of the Securities shall have allrights and remedies set forth in the Transaction Documents and all rights and remedies whichsuch holders have been granted at any time under any other agreement or contract and all of therights which such holders have under any law. Any Person having any rights under anyprovision of this Agreement shall be entitled to enforce such rights specifically (without postinga bond or other security), to recover damages by reason of any breach of any provision of thisAgreement and to exercise all other rights granted by law. Furthermore, the Companyrecognizes that in the event that it fails to perform, observe, or discharge any or all of itsobligations under the Transaction Documents, any remedy at law may prove to be inadequaterelief to the Buyers. The Company therefore agrees that the Buyers shall be entitled to seektemporary and permanent injunctive relief in any such case without the necessity of provingactual damages and without posting a bond or other security.

(r.) Payment Set Aside . To the extent that the Company makes a payment orpayments to the Buyers hereunder or pursuant to any of the other Transaction Documents or theBuyers enforce or e::ercise their rights hereunder or thereunder, and such payment or paymentsor the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated,declared to be fraudulent or preferential. set aside, recovered from, disgorged by or are requiredto be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any otherPerson under any law (including, without limitation, any bankruptcy law, foreign, state or federallaw, common law or equitable cause of action), then to the extent of any such restoration theobligation or part thereof originally intended to be satisfied shall be revived and continued in fullforce and effect as if such payment had not been made or such enforcement or setoff had notoccurred.

10050698.14 31


(o) Independent Nature of Buyers' Obligations and Rights . The obligations ofeach Buyer under any Transaction Document are several and not joint withthe obligations of anyother Buyer, and no Buyer shall be responsible in any way for the performance of the obligationsof any other Buyer under any Transaction Document. Nothing contained herein or in any otherTransaction Document, and no action taken by any Buyer pursuant hereto or thereto, shall bedeemed to constitute the Buyers as a partnership, an association, a joint venture or any other kindof entity, or create a presumption that the Buyers are in any way acting in concert or as a groupwith respect to such obligations or the transactions contemplated by the Transaction Documentsand the Company acknowledges that the Buyers are not acting in concert or as a group withrespect to such obligations or the transactions contemplated by the Transaction Documents.Each Buyer confirms that it has independently participated in the negotiation of the transactioncontemplated hereby with the advice of its own counsel and advisors. Each Buyer shall beentitled to independently protect and enforce its rights, including, without limitation, the rightsarising out of this Agreement or out of any other Transaction Documents. and it shall not benecessary for any other Buyer to be joined as an additional party in any proceeding for suchpurpose.

[Signature Page Follows]

10050698.14 32


IN WITNESS WHEREOF, each Buyer and the Company have caused their respective

signature page to this Securities Purchase Agreement to be duly executed as of the date first

written above.

COMPANY:

UNIVERSAL FOOD & BEVERAGE COMPANY

By:Name: Duane N. MartinTitle: Chief Executive Officer


IN WITNESS WHEREOF. each Buyer and the Company have caused their respectivesignature page to this Securities Purchase Agreement to be duly executed as of the date firstwritten above

BUYERS:

CRESTVIEW CAPITAL MASTER, L.L.C.

By:Its:


IN WITNESS WHEREOF, each Buyer and the Company have caused their respective

signature page to this Securities Purchase Agreement to be duly executed as of the date first

written above

BUYERS:

MIDSUMMER INVESTMENT, LTD.

By:Its:


IN WITNESS WHEREOF, each Buyer and the Company have caused their

respective signature page to this Securities Purchase Agreement to be duly executed as of the

date first written above.

BUYERS:

KAUAI PARTNERS, L.P.

By:Its: