Unassociated Document


    

      EXECUTION COPY

      


      SIDE
LETTER


       

      Reference is made to that certain
Preferred Stock Purchase Agreement dated as of February 27, 2009 among Paradigm
Holdings, Inc. (the “Company”), Hale Capital
Partners, LP (“HCP”) and
the other Purchasers party thereto (the “Purchase
Agreement”).  Capitalized terms used but not defined herein
shall have the meanings given to them in the Purchase Agreement.

       

      1.           Pursuant
to the Certificate of Designations, at any time that (x) an aggregate of not
less than fifteen percent (15%) of the Company’s Series A-1 Senior Preferred
Stock (the “Preferred
Shares”) purchased on the Closing Date are outstanding, (y) Warrants to
purchase an aggregate of not less than twenty percent (20%) of the Underlying
Shares issuable pursuant to all Warrants on the Closing Date are outstanding, or
(z) the original holders of the Preferred Shares and/or their transferee(s), in
the aggregate, own not less than fifteen percent (15%) of the Common Stock
issuable upon exercise of all Warrants on the Closing Date, the holders of a
majority of the then outstanding Preferred Shares (the “Majority Holders”) shall have
the exclusive right, voting separately as a class, to elect (A) two (2)
directors to the Board of Directors of the Company (the “Board”), and (B) until the
Amendment Date, two (2) observers, and, from and after the Amendment Date, one
(1) observer, to the Board; provided that upon the election of the Majority
Holders such observer(s) shall be automatically appointed to the Board as a
director (such two (2) directors in accordance with clause (A) and, upon the
Majority Holders’ election in accordance with clause (B), such one (1) or two
(2) director(s), as applicable, collectively, the “Series A-1
Directors”).  If, at any time from and after the Amendment
Date, the Majority Holders elect to convert the observer to a Series A-1
Director pursuant to clause (B) above and there are greater than four (4)
directors on the Board at such time, the Majority Holders shall remove a
director (other than a Series A-1 Director) from the Board such that after the
conversion pursuant to clause (B) the Board shall consist of five (5)
directors.  If the Majority Holders makes such election prior to the
Amendment Date, the number of directors on the Board after such conversion shall
be seven (7) until the Amendment Date, upon which the Majority Holders shall
remove two (2) directors (including one (1) Series A-1 Director if there are
four (4) Series A-1 Directors at such time, but otherwise, other than any Series
A-1 Directors) such that the Board shall consist of five (5)
directors.  Unless otherwise determined by HCP, it is hereby agreed
that these rights of the Majority Holders under the Certificate of Designations
shall be vested in and exercisable only by HCP.

       

      2.           Pursuant
to the Certificate of Designations, at any time that (x) an aggregate of fifteen
percent (15%) or less of the Preferred Shares purchased on the Closing Date are
outstanding, (y) Warrants to purchase an aggregate of less than twenty percent
(20%) of the Underlying Shares issuable pursuant to all Warrants on the Closing
Date are outstanding, and (z) the holders of the Preferred Shares and/or their
transferee(s), in the aggregate, own less than fifteen percent (15%) of the
Common Stock issuable upon exercise of all Warrants on the Closing Date, then
the Majority Holders shall have the exclusive right, voting separately as a
class, to elect (A) one (1) Series A-1 Director to the Board, and (B) one (1)
observer to the Board.  Unless otherwise determined by HCP, it is
hereby agreed that these rights of the Majority Holders under the Certificate of
Designations shall be vested in and exercisable only by HCP.


      
        
           


        

        
           


          
            

          

        

        
           


        

      

       

      3.           Any
vacancy in the position of any Series A-1 Director may be filled only by
the holders of the Series A-1 Preferred Stock.  Any Series A-1
Director may, during his or her term of office, be removed at any time, with or
without cause, by and only by the Majority Holders.  Any vacancy
created by such removal may also be filled by the Majority
Holders.  Unless otherwise determined by HCP, it is hereby agreed that
these rights of the Majority Holders under the Certificate of Designations shall
be vested in and exercisable only by HCP.

       

      4.           Subject
to the fiduciary duties of the Board under applicable law, the Company will
include the Series A-1 Directors as the Company’s nominees for election as
directors at each annual or special meeting of stockholders or action by written
consent of stockholders at which directors will be elected.

       

      5.           The
membership of all committees of the Board shall be reassigned, subject to HCP’s
reasonable approval, upon the Closing.  Provided that the Series A-1
Directors meet the applicable membership requirements of the Commission and the
Trading Market (if applicable), the Board shall elect the Series A-1 Directors
to all committees of the Board requested by HCP.  The Company shall
provide the same compensation and rights and benefits of indemnity to the Series
A-1 Directors as are provided to other non-employee directors of the
Company.  The Series A-1 Directors may resign from the Board at any
time without notice.  In the event that any Series A-1 Director shall
cease to serve as a director of the Company for any reason, at the discretion of
HCP, the Board shall fill the vacancy resulting therefrom with another Series
A-1 Director designated by HCP that is reasonably acceptable to the Board, it
being understood, subject to the fiduciary duties of the Board under applicable
law, that any senior professional of HCP or any of its Affiliates shall be
acceptable to the Board .

       

      6.  Prior
to being converted into a Series A-1 Director, any observer appointed by HCP in
accordance with clause (B) of Sections 1 or 2 above
shall be allowed to attend all meetings of the Board in a non-voting capacity,
and in connection with each such Board observer’s attendance, the Company shall
give such Board observer copies of all notices, minutes, consents and other
materials, financial or otherwise, which the Company provides to the Board prior
to any such meeting.  HCP shall provide the Company with written
notice identifying any individuals who shall exercise Board observation rights
on behalf of HCP from time to time.  Effective upon execution and
delivery of this letter agreement, HCP hereby initially appoints Alice
Lee as a Board observer.  The Company agrees that if any of the
Purchasers or the Board observer so requests, neither the Company nor any other
person acting on its behalf will provide such Purchaser or its agents (including
any Board observer) or counsel with any information that the Company believes
constitutes material non-public information.

       

      This Side
Letter shall be governed by and construed in accordance with the laws of the
State of New York and each of the parties hereto irrevocably consents to the
exclusive jurisdiction of all courts, federal and state, located in the City of
New York for the adjudication of any dispute arising hereunder.  This
Side Letter may not be amended or waived except in writing, by a document
executed by the Company and HCP.

       

      This Side
Letter may be executed in two (2) or more counterparts, together constituting
one (1) agreement, and may be executed by facsimile, having the same force as if
originally executed.


      
        
           


        

        
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      IN WITNESS WHEREOF, each of the
Purchasers has entered into this Side Letter as of February 27,
2009.

      


      
        
          
            
              
                
                  
                    	
                            Hale
      Capital Partners, LP

                          
	 
      	 
      
	 
      	 
      
	
                            By:

                          	
                            /s/Martin Hale Jr.

                          
	
                            Name:  Martin
      Hale Jr.

                          
	
                            Title:
      CEO

                          
	 
      	 
      
	 
      	 
      
	
                            EREF
      PARA, LLC

                          
	 
      	 
      
	
                            By:

                          	
                            Hale
      Fund Management, LLC

                          
	 
      	
                             its
      Managing Member

                          
	 
      	 
      
	
                            By:

                          	
                            /s/Martin
      Hale Jr.

                          
	
                            Name:  Martin
      Hale Jr.

                          
	
                            Title:  CEO

                          
	 
      	 
      
	 
      	 
      
	
                            Acknowledged
      and agreed by the Company:

                          
	 
      	 
      
	 
      	 
      
	
                            Paradigm
      Holdings, Inc.

                          
	 
      	 
      
	 
      	 
      
	
                            By:

                          	
                            /s/Peter
      B. LaMontagne

                          
	
                            Name:  Peter
      B. LaMontagne

                          
	
                            Title:  President
      and Chief Executive Officer

                          
	 
      	 
      
	
                            Date:  February
      27,
2009

                          


                  

                

              

            

          

        

      


      
        
           


        

        
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