**Exhibit 10.17**

 

**NOTE AND WARRANT PURCHASE AGREEMENT**

** **

**BY AND AMONG**

** **

**ISI DETENTION CONTRACTING GROUP, INC.,**

** **

**WILLIAM BLAIR MEZZANINE CAPITAL FUND III, L.P.**

** **

**AND**

** **

**THE GUARANTORS FROM TIME TO TIME PARTIES HERETO**

** **

**DATED AS OF OCTOBER 22, 2004**

** **

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** **

**TABLE OF CONTENTS**

 
| ** ** | ** **                                                     | **Page** |
|------------|----------------------------------------------------------------|----------|
|       |                                                           |     |
| 1.         | DEFINITIONS                                                    | 1        |
|       |                                                           |     |   |   |
|       | 1.1                                                            |     | Definitions | 1 |
|       |                                                           |     |   |   |
|       | 1.2                                                            |     | Accounting Principles | 15 |
|       |                                                           |     |   |   |
|       | 1.3                                                            |     | Rules of Construction | 15 |
|       |                                                           |     |   |   |
| 2.         | AUTHORIZATION AND CLOSING                                      | 16       |
|       |                                                           |     |   |   |
|       | 2.1                                                            |     | Authorization of the Securities | 16 |
|       |                                                           |     |   |   |
|       | 2.2                                                            |     | Purchase and Sale of the Securities | 16 |
|       |                                                           |     |   |   |
|       | 2.3                                                            |     | The Closing | 16 |
|       |                                                           |     |   |   |
| 3.         | CONDITIONS OF THE PURCHASER’S  OBLIGATIONS AT THE CLOSING | 16       |
|       |                                                           |     |   |   |
|       | 3.1                                                            |     | Representations and Warranties; Covenants; No Event  of Default | 16 |
|       |                                                           |     |   |   |
|       | 3.2                                                            |     | Stockholders’ Agreement | 16 |
|       |                                                           |     |   |   |
|       | 3.3                                                            |     | Securities Law Compliance | 17 |
|       |                                                           |     |   |   |
|       | 3.4                                                            |     | Senior Loan Agreement | 17 |
|       |                                                           |     |   |   |
|       | 3.5                                                            |     | Senior Subordination Agreement | 17 |
|       |                                                           |     |   |   |
|       | 3.6                                                            |     | Reorganization | 17 |
|       |                                                           |     |   |   |
|       | 3.7                                                            |     | Bonding Transaction | 17 |
|       |                                                           |     |   |   |
|       | 3.8                                                            |     | No Material Adverse Change | 17 |
|       |                                                           |     |   |   |
|       | 3.9                                                            |     | Opinion of the Company’s Counsel; Other Opinions and  Documents | 17 |
|       |                                                           |     |   |   |
|       | 3.10                                                           |     | Closing Documents | 18 |
|       |                                                           |     |   |   |
|       | 3.11                                                           |     | Proceedings | 18 |
|       |                                                           |     |   |   |
|       | 3.12                                                           |     | Expenses | 19 |
|       |                                                           |     |   |   |
|       | 3.13                                                           |     | Due Diligence | 19 |
|       |                                                           |     |   |   |
|       | 3.14                                                           |     | Investment Fee | 19 |
|       |                                                           |     |   |   |
|       | 3.15                                                           |     | Compliance with Applicable Laws | 19 |
|       |                                                           |     |   |   |
|       | 3.16                                                           |     | Waiver | 19 |
|       |                                                           |     |   |   |
|       | 3.17                                                           |     | Use of Proceeds | 19 |
|       |                                                           |     |   |   |
| 4.         | COVENANTS                                                      | 19       |
|       |                                                           |     |   |   |
|       | 4.1                                                            |     | Financial Statements and Other Information | 19 |
|       |                                                           |     |   |   |
|       | 4.2                                                            |     | Inspection of Property | 24 |
|       |                                                           |     |   |   |
|       | 4.3                                                            |     | Board Meetings | 24 |
|       |                                                           |     |   |   |
|       | 4.4                                                            |     | Investor Protection; Investment Opportunities | 25 |

 

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** **
|   | 4.5                                              |   | Restrictive Covenants                                        | 26     |
|--------|--------------------------------------------------|--------|--------------------------------------------------------------|--------|
|   |                                             |   |                                                         |   |
|   | 4.6                                              |   | Affirmative Covenants                                        | 31     |
|   |                                             |   |                                                         |   |
|   | 4.7                                              |   | Financial Covenants                                          | 35     |
|   |                                             |   |                                                         |   |
|   | 4.8                                              |   | Covenants Related to ISI*MCS and Green Wing                  | 35     |
|   |                                             |   |                                                         |   |
| 5.     | REPRESENTATIONS AND WARRANTIES  OF THE COMPANY   | 36     |
|   |                                             |   |                                                         |   |
|   | 5.1                                              |   | Organization, Qualifications, Authority and  Corporate Power | 36     |
|   |                                             |   |                                                         |   |
|   | 5.2                                              |   | Subsidiaries                                                 | 36     |
|   |                                             |   |                                                         |   |
|   | 5.3                                              |   | Authorization of Agreements, Etc                             | 36     |
|   |                                             |   |                                                         |   |
|   | 5.4                                              |   | Validity                                                     | 37     |
|   |                                             |   |                                                         |   |
|   | 5.5                                              |   | Authorized Capital Stock                                     | 37     |
|   |                                             |   |                                                         |   |
|   | 5.6                                              |   | Solvency                                                     | 38     |
|   |                                             |   |                                                         |   |
|   | 5.7                                              |   | Assets                                                       | 38     |
|   |                                             |   |                                                         |   |
|   | 5.8                                              |   | Tax Matters                                                  | 38     |
|   |                                             |   |                                                         |   |
|   | 5.9                                              |   | Contracts and Commitments                                    | 39     |
|   |                                             |   |                                                         |   |
|   | 5.10                                             |   | Litigation, Etc                                              | 40     |
|   |                                             |   |                                                         |   |
|   | 5.11                                             |   | Brokerage                                                    | 40     |
|   |                                             |   |                                                         |   |
|   | 5.12                                             |   | Insurance                                                    | 40     |
|   |                                             |   |                                                         |   |
|   | 5.13                                             |   | Employees                                                    | 41     |
|   |                                             |   |                                                         |   |
|   | 5.14                                             |   | Environmental and Safety Matters                             | 41     |
|   |                                             |   |                                                         |   |
|   | 5.15                                             |   | Plans                                                        | 42     |
|   |                                             |   |                                                         |   |
|   | 5.16                                             |   | Affiliated Transactions                                      | 43     |
|   |                                             |   |                                                         |   |
|   | 5.17                                             |   | Other Agreement Representations                              | 43     |
|   |                                             |   |                                                         |   |
| 6.     | REPRESENTATIONS AND WARRANTIES  OF THE PURCHASER | 43     |
|   |                                             |   |                                                         |   |
|   | 6.1                                              |   | Organization and Good Standing                               | 43     |
|   |                                             |   |                                                         |   |
|   | 6.2                                              |   | Authorization; Power                                         | 43     |
|   |                                             |   |                                                         |   |
|   | 6.3                                              |   | Validity                                                     | 44     |
|   |                                             |   |                                                         |   |
|   | 6.4                                              |   | Accredited Investor                                          | 44     |
|   |                                             |   |                                                         |   |
|   | 6.5                                              |   | Purchase for Own Account; Acknowledgment of Risk             | 44     |
|   |                                             |   |                                                         |   |
|   | 6.6                                              |   | No Violation                                                 | 44     |
|   |                                             |   |                                                         |   |
| 7.     | EVENTS OF DEFAULT                                | 44     |
|   |                                             |   |                                                         |   |
|   | 7.1                                              |   | Definition                                                   | 44     |

 

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|   | 7.2            |   | Consequences of Events of Default                                            | 47     |
|--------|----------------|--------|------------------------------------------------------------------------------|--------|
|   |           |   |                                                                         |   |
| 8.     | THE GUARANTIES | 48     |
|   |           |   |                                                                         |   |
|   | 8.1            |   | Guaranty Unconditional                                                       | 48     |
|   |           |   |                                                                         |   |
|   | 8.2            |   | Discharge Only upon Payment in Full; Reinstatement  in Certain Circumstances | 49     |
|   |           |   |                                                                         |   |
|   | 8.3            |   | Waivers                                                                      | 49     |
|   |           |   |                                                                         |   |
|   | 8.4            |   | Limit on Recovery                                                            | 50     |
|   |           |   |                                                                         |   |
|   | 8.5            |   | Stay of Acceleration                                                         | 50     |
|   |           |   |                                                                         |   |
|   | 8.6            |   | Benefit to Guarantors                                                        | 50     |
|   |           |   |                                                                         |   |
|   | 8.7            |   | Guarantor Covenants                                                          | 50     |
|   |           |   |                                                                         |   |
| 9.     | MISCELLANEOUS  | 50     |
|   |           |   |                                                                         |   |
|   | 9.1            |   | Expenses                                                                     | 50     |
|   |           |   |                                                                         |   |
|   | 9.2            |   | Remedies                                                                     | 51     |
|   |           |   |                                                                         |   |
|   | 9.3            |   | Amendments and Waivers                                                       | 51     |
|   |           |   |                                                                         |   |
|   | 9.4            |   | Survival of Agreement; Indemnities                                           | 52     |
|   |           |   |                                                                         |   |
|   | 9.5            |   | No Setoffs, Etc                                                              | 52     |
|   |           |   |                                                                         |   |
|   | 9.6            |   | Successors and Assigns                                                       | 52     |
|   |           |   |                                                                         |   |
|   | 9.7            |   | Severability                                                                 | 52     |
|   |           |   |                                                                         |   |
|   | 9.8            |   | Counterparts                                                                 | 52     |
|   |           |   |                                                                         |   |
|   | 9.9            |   | Descriptive Headings                                                         | 53     |
|   |           |   |                                                                         |   |
|   | 9.10           |   | Governing Law                                                                | 53     |
|   |           |   |                                                                         |   |
|   | 9.11           |   | Notices                                                                      | 53     |
|   |           |   |                                                                         |   |
|   | 9.12           |   | Consideration for Securities; Treatment of Fees                              | 54     |
|   |           |   |                                                                         |   |
|   | 9.13           |   | No Strict Construction                                                       | 54     |
|   |           |   |                                                                         |   |
|   | 9.14           |   | Complete Agreement                                                           | 54     |
|   |           |   |                                                                         |   |
|   | 9.15           |   | Indemnification                                                              | 54     |
|   |           |   |                                                                         |   |
|   | 9.16           |   | Payment Set Aside                                                            | 57     |
|   |           |   |                                                                         |   |
|   | 9.17           |   | Jurisdiction and Venue                                                       | 57     |
|   |           |   |                                                                         |   |
|   | 9.18           |   | WAIVER OF RIGHT TO JURY TRIAL                                                | 58     |
|   |           |   |                                                                         |   |
|   | 9.19           |   | Certain Waivers                                                              | 58     |
|   |           |   |                                                                         |   |
|   | 9.20           |   | Transfer Restrictions                                                        | 58     |

 

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**LIST OF EXHIBITS**

** **

Exhibit A– Form Note

Exhibit B– Form of Warrant

Exhibit C– Stockholders’ Agreement

 

**LIST OF SCHEDULES**

** **

AffiliatedTransactions Schedule

AssetsSchedule

BrokerageSchedule

CapitalizationSchedule

ContractsSchedule 

ConstructionContracts Schedule

EmployeesSchedule

EnvironmentalSchedule

Feesand Expenses Schedule

IndebtednessSchedule 

InsuranceSchedule

ISIMCS Schedule

LitigationSchedule

PermittedEncumbrances Schedule

ReorganizationSchedule

RestrictedBusiness Schedule

TaxesSchedule

Useof Proceeds Schedule

 

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**NOTE AND WARRANT PURCHASE AGREEMENT**

** **

THIS NOTE AND WARRANT PURCHASE AGREEMENT is enteredinto as of October 22, 2004 (this “Agreement”), by and among ISIDetention Contracting Group, Inc., a Delaware corporation (the “Company”),the Guarantors from time to time parties hereto for purposes of Section 8hereof, and William Blair Mezzanine Capital Fund III, L.P., a Delawarelimited partnership (the “Purchaser”).

 

The parties hereto agree as follows:

 

1.                                       Definitions.

 

1.1                                 Definitions. For purposes of this Agreement, the following terms have the meaningsset forth below:

 

“Accounting Changes” means:  (a) changes in accounting principlesrequired by GAAP and implemented by the Company or any of its Subsidiaries; (b) changesin accounting principles recommended by the Company’s certified publicaccountants and implemented by the Company; and (c) changes in thecarrying value of the Company’ or any of its Subsidiaries’ assets, liabilitiesor equity accounts resulting from (i) the application of purchase accountingprinciples (A.P.B. 16 and/or 17 and EITF 88-16 and FASB 109) to the RelatedTransactions.

 

**“**Affiliate” shall mean any Person (a) that directly orindirectly through one or more intermediaries controls, is controlled by, or isunder common control with, the Company, (b) that beneficially owns orholds five percent (5%) or more of the voting control or Capital Stock of theCompany, or (c) five percent (5%) or more of the voting control or CapitalStock of which is beneficially owned or held by the Company; provided, however,that the term “Affiliate” shall specifically exclude the Purchaser and anyAffiliate of the Purchaser and the ISI Affiliates.

 

“Board” means the board of directors (orcomparable governing body) of a Person.

 

“Business Day” means any day other than aSaturday, Sunday or public holiday under the laws of the State of Illinois orother day on which banking institutions are authorized or obligated to close inChicago, Illinois.

 

“Bonus Plan” means the ISI DetentionContracting Group, Inc. Executive Bonus Plan approved and effective as of October 22,2004.

 

“Capital Expenditures” means, with respect toany period, the aggregate of all expenditures (whether paid in cash or accruedas liabilities and including expenditures for Capital Lease Obligations) by theCompany and its Subsidiaries during such period that are required by GAAP,consistently applied, to be included in or reflected by the property, plant andequipment or similar fixed asset accounts (or intangible accounts subject toamortization) on the balance sheet of the Company and its Subsidiaries.

 

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“Capital Lease” means, with respect to anyPerson, any lease of any property (whether real, personal or mixed) by suchPerson as lessee that, in accordance with GAAP, would be required to beclassified and accounted for as a capital lease on a balance sheet of suchPerson.

 

“Capital Lease Obligation” means, with respectto any Capital Lease of any Person, the amount of the obligation of the lesseethereunder that, in accordance with GAAP, would appear on a balance sheet ofsuch lessee in respect of such Capital Lease.

 

“Capital Stock” shall mean (a) in the caseof a corporation, voting capital stock; (b) in the case of a partnership,voting partnership interests (whether general or limited); (c) in the caseof a limited liability company, voting membership or similar interests; or (d) votingequity interests, in the case of any other Person.

 

“Cash Equivalents” means:  (a) marketable securities (i) issuedor directly and unconditionally guaranteed as to interest and principal by theUnited States government, or (ii) issued by any agency of the UnitedStates government the obligations of which are backed by the full faith andcredit of the United States, in each case maturing within one (1) yearafter acquisition thereof; (b) marketable direct obligations issued by anystate of the United States of America or any political subdivision of any suchstate or any public instrumentality thereof, in each case maturing within one (1) yearafter acquisition thereof and having, at the time of acquisition, a rating ofat least A-1 from S&P or at least P-1 from Moody’s; (c) commercialpaper maturing no more than one (1) year from the date of acquisition and,at the time of acquisition, having a rating of at least A-1 from S&P or atleast P-1 from Moody’s; (d) certificates of deposit or bankers’acceptances issued or accepted by any financial institution or by anycommercial bank organized under the laws of the United States of America or anystate thereof or the District of Columbia that is at least (i) “adequatelycapitalized” (as defined in the regulations of its primary Federal bankingregulator) and (ii) has Tier 1 capital (as defined in such regulations) ofnot less than $250,000,000, in each case maturing within one (1) yearafter issuance or acceptance thereof; and (e) shares of any money marketmutual or similar funds that (i) has substantially all of its assetsinvested continuously in the types of investments referred to in clauses (a) through(d) above, (ii) has net assets of not less than $500,000,000, and (iii) hasthe highest rating obtainable from either S&P or Moody’s.

 

“CERCLA” shall mean the ComprehensiveEnvironmental Response, Compensation and Liability Act, 42 U.S.C. §§ 9601 *et seq*.

 

“Change In Control” means (a) any eventwhereby the Company ceases to own and control 100%, directly or indirectlythrough one or more Subsidiaries, of the economic and voting rights associatedwith all of the outstanding Capital Stock of any of its Subsidiaries; (b) asale, transfer or other disposition of all or substantially all of the assetsof the Company or any of its Subsidiaries in any transaction or series oftransactions; or (c) any recapitalization, reorganization,reclassification, merger, consolidation or exchange to which the Company is aparty and as a result of which any other Person or Persons or its or theirAffiliates (other than the owners of the Capital Stock of the Company, andholders of rights to acquire Capital Stock of the Company, as of the datehereof) owns a majority of the Capital Stock of the Company possessing 

 

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the voting power (underordinary circumstances) to elect a majority of the members of the Board of theCompany.

 

“Charges” means all federal, state, county,city, municipal, local, foreign or other governmental premiums and otheramounts (including premiums and other amounts owed to the PBGC at the time dueand payable), levies, assessments, charges, liens, claims or encumbrances uponor relating to (a) the Collateral (as defined in the Senior LoanDocuments); (b) the Senior Debt; (c) the employees, payroll, incomeor gross receipts of the Company; (d) the Company’s ownership or use ofany properties or other assets; or (e) any other aspect of the Company’sbusiness.

 

“Charter Documents” shall mean Articles ofIncorporation, Certificate of Incorporation, certificate of limitedpartnership, certificate of limited liability company, charter or analogousorganic instrument filed with the appropriate Governmental Authority, includingall amendments and supplements thereto.

 

“Closing Date” means October 22, 2004.

 

“Code” means the Internal Revenue Code of 1986,as amended, and any reference to any particular Code section shall be interpretedto include any revision of or successor to that section regardless of hownumbered or classified.

 

“Common Stock” means the common stock of theCompany, $1.00 par value per share.

 

“Compliance Certificate” shall mean theCompliance Certificate or similar report required to be provided by the Companyto the Senior Lender pursuant to the Loan and Security Agreement.

 

“Consolidated Entity” means, collectively, theCompany and its Subsidiaries that are consolidated for financial reportingpurposes.

 

“Consolidated Net Income” means, for anyPerson, the consolidated net income of such Person during the measuring period,determined in accordance with GAAP, excluding the following:  (a) the income (or deficit) of anyPerson accrued prior to the date it became a Subsidiary of, or was merged orconsolidated into, such Person; (b) the income (or deficit) of any Person(other than a Subsidiary) in which such Person has an ownership interest exceptto the extent any such income has actually been received by such Person or anyof its Subsidiaries in the form of cash dividends or distributions; (c) theundistributed earnings of any Subsidiary of such Person to the extent that thedeclaration or payment of dividends or similar distributions by such Subsidiaryis not at the time permitted by the terms of any contractual obligation orrequirement of law applicable to such Subsidiary; (d) any restoration toincome of any contingency reserve, except to the extent that provision for suchreserve was made out of income accrued during such period; (e) any netgain attributable to the write-up of any asset; (f) any net gain from thecollection of the proceeds of life insurance policies; (g) any net gainarising from the acquisition of any securities, or the extinguishment of anyIndebtedness, of such Person or any of its Subsidiaries; (h) in the caseof a successor to such Person or any of its Subsidiaries by consolidation ormerger or as a transferee of its assets, any earnings of such successor priorto 

 

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such consolidation,merger or transfer of assets; and (i) any deferred credit representing theexcess of equity in any Subsidiary of such Person at the date of acquisition ofsuch Subsidiary over the cost to such Person of the investment in suchSubsidiary.

 

“Contingent Obligation” means, as applied toany Person, any direct or indirect liability of that Person:  (a) with respect to Indebtednessguaranteed by any Person and with respect to any Indebtedness, lease, dividend orother obligation of another Person if the purpose or intent of the Personincurring such liability, or the effect thereof, is to provide assurance to theobligee of such liability that such liability will be paid or discharged, orthat any agreements relating thereto will be complied with, or that the holdersof such liability will be protected (in whole or in part) against loss withrespect thereto; (b) with respect to any letter of credit issued for theaccount of that Person or as to which that Person is otherwise liable forreimbursement of drawings; (c) under any foreign exchange contract,currency swap agreement, interest rate swap agreement or other similaragreement or arrangement designed to alter the risks of that Person arisingfrom fluctuations in currency values or interest rates; (d) any agreement,contract or transaction involving commodity options or future contracts; (e) tomake take-or-pay or similar payments if required regardless of nonperformanceby any other party or parties to an agreement; or (f) pursuant to anyagreement to purchase, repurchase or otherwise acquire any obligation or anyproperty constituting security therefor, to provide funds for the payment ordischarge of such obligation or to maintain the solvency, financial conditionor any balance sheet item or level of income of another.  The amount of any Contingent Obligation shallbe equal to the amount of the obligation so guaranteed or otherwise supportedor, if not a fixed and determined amount, the maximum amount so guaranteed.

 

“Contractual Obligations” means, as applied toany Person, any indenture, mortgage, deed of trust, contract, undertaking,agreement or other instrument to which that Person is a party or by which it orany of its properties is bound or to which it or any of its properties issubject.

 

“Controlled Group” means all members of acontrolled group of corporations and all members of a controlled group oftrades or businesses (whether or not incorporated) under common control which,together with the Company, are treated as a single employer under Section 414of the Code or Section 4001 of ERISA.

 

“Current Interest” shall have the meaningassigned to such term in the Note.

 

“Domestic Subsidiary” means, with respect toany Person, a Subsidiary of such Person, which Subsidiary is incorporated orotherwise organized under the laws of a State of the United States of America.

 

“EBITDA” means, for any period ofdetermination, the Consolidated Net Income of the Company and its Subsidiariesbefore deductions for Taxes, Interest Expense, depreciation, amortization andother mutually agreed upon non-cash items, calculated prior to (a) anygains or losses on the sale of assets (other than the sale of Inventory in theordinary course of business), (b) extraordinary gains and losses, and (c) non-recurringitems approved by the Purchaser.

 

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“Employee Benefit Plans” means, as to anyPerson, any pension, retirement, Capital Stock option, Capital Stock purchase,Capital Stock award, Capital Stock appreciation rights, savings or profitsharing plan, program, arrangement or agreement (including trust agreements andinsurance contracts implementing such plans, programs, arrangements oragreements), or any deferred compensation, consulting, bonus incentivecompensation, group insurance, severance or termination pay, welfare oremployee benefit plan, program, arrangement or agreement, relating to employeesor former employees of such Person or any of its Subsidiaries.

 

“Employment Agreements” means those certainEmployment Agreements between Detention Contracting Group, Ltd., a Texaslimited partnership and Subsidiary of the Company, and each of Samuel C.Youngblood, Donald J. Carr, Michael R. Sweet, Mark S. McDonaldand Timothy N. Moxon, each dated as of the date hereof.

 

“Environmental Laws” means all applicablefederal, state, local and foreign laws, statutes, ordinances, codes, rules,standards and regulations, now or hereafter in effect, and any applicablejudicial or administrative interpretation thereof, including any applicablejudicial or administrative order, consent decree, order or judgment, imposingliability or standards of conduct for or relating to the regulation andprotection of human health, safety, the environment and natural resources(including ambient air, surface water, groundwater, wetlands, land surface orsubsurface strata, wildlife, aquatic species and vegetation).  Environmental Laws include CERCLA; theHazardous Materials Transportation Authorization Act of 1994 (49 U.S.C. §§ 5101et seq.); the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. §§136 et seq.); the Solid Waste Disposal Act (42 U.S.C. §§ 6901 et seq.); theToxic Substance Control Act (15 U.S.C. §§ 2601 et seq.); the Clean Air Act (42U.S.C. §§ 7401 et seq.); the Federal Water Pollution Control Act (33 U.S.C. §§1251 et seq.); the Occupational Safety and Health Act (29 U.S.C. §§ 651 etseq.); and the Safe Drinking Water Act (42 U.S.C. §§ 300(f) et seq.), andany and all regulations promulgated thereunder, and all analogous state, localand foreign counterparts or equivalents and any transfer of ownershipnotification or approval statutes.

 

“Environmental Liabilities” means, with respectto any Person, all liabilities, obligations, responsibilities, response,remedial and removal costs, investigation and feasibility study costs, capitalcosts, operation and maintenance costs, losses, damages, punitive damages,property damages, natural resource damages, consequential damages, treble damages,costs and expenses (including all reasonable fees, disbursements and expensesof counsel, experts and consultants), fines, penalties, sanctions and interestincurred as a result of or related to any claim, suit, action, investigation,proceeding or demand by any Person, whether based in contract, tort, implied orexpress warranty, strict liability, criminal or civil statute or common lawrelating to Hazardous Materials, including any arising under or related to anyEnvironmental Laws, Environmental Permits, or in connection with any Release orthreatened Release or presence of a Hazardous Material whether on, at, in,under, from or about or in the vicinity of any real or personal property.

 

“Environmental Permits” means all permits,licenses, authorizations, certificates, approvals or registrations required byany Governmental Authority under any Environmental Laws.

 

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“Equipment” means all “equipment,” as such termis defined in the UCC, now owned or hereafter acquired by the Company, whereverlocated and, in any event, including all of the Company’s machinery andequipment, and all products and proceeds thereof and insurance proceeds withrespect thereto.

 

“ERISA” means the Employee Retirement IncomeSecurity Act of 1974, as amended from time to time, and regulations promulgatedthereunder.

 

“ERISA Affiliate” means any trade or business(whether or not incorporated) that, together with the Company, are treated as asingle employer within the meaning of §§ 414(b), (c), (m) or (o) ofthe Code.

 

“ERISA Event” means, with respect to theCompany or any ERISA Affiliate, (a) any event described in Section 4043(c) ofERISA with respect to a Title IV Plan; (b) the withdrawal of the Companyor ERISA Affiliate from a Title IV Plan subject to Section 4063 of ERISAduring a plan year in which it was a substantial employer, as defined in Section 4001(a)(2) ofERISA; (c) the complete or partial withdrawal of the Company or any ERISAAffiliate from any Multiemployer Plan; (d) the filing of a notice ofintent to terminate a Title IV Plan or the treatment of a plan amendment as atermination under Section 4041 of ERISA; (e) the institution ofproceedings to terminate a Title IV Plan or Multiemployer Plan by the PBGC; (f) thefailure by the Company or ERISA Affiliate to make when due requiredcontributions to a Multiemployer Plan or Title IV Plan unless such failure iscured within 30 days; (g) any other event or condition that mightreasonably be expected to constitute grounds under Section 4042 of ERISAfor the termination of, or the appointment of a trustee to administer, anyTitle IV Plan or Multiemployer Plan or for the imposition of liability under Section 4069or 4212(c) of ERISA; (h) the termination of a Multiemployer Planunder Section 4041A of ERISA or the reorganization or insolvency of aMultiemployer Plan under Section 4241 or 4245 of ERISA; or (i) theloss of a Qualified Plan’s qualification or Tax exempt status; or (j) thetermination of a Plan described in Section 4064 of ERISA.

 

“Fees” means any and all fees payable to theSenior Lender pursuant to the Senior Loan Documents or to the Purchaserpursuant to this Agreement and the other Transaction Documents.

 

“Financial Statements” means the consolidatedand consolidating income statements, statements of cash flows and balancesheets of the Company and its Subsidiaries delivered in accordance with Section 4.1.

 

“Fiscal Year” means each annual accountingperiod of the Company ending on December 31.

 

“Fixed Charge Coverage Ratio” means the ratioof the Company’s (i) EBITDA minus non-financed Capital Expendituresto (ii) Fixed Charges.

 

“Fixed Charges” shall mean for any period,without duplication, scheduled payments of principal during the applicableperiod with respect to all Indebtedness of the Company and its Subsidiaries, ona consolidated basis, for borrowed money, plus scheduled payments ofprincipal during the applicable period with respect to all Capital LeaseObligations 

 

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of the Company and itsSubsidiaries, on a consolidated basis, plus actual payments of cashinterest during the applicable period with respect to all Indebtedness of theCompany and its Subsidiaries, on a consolidated basis, for borrowed money includingCapital Lease Obligations, plus payments during the applicable period inrespect of cash income or franchise taxes of the Company and its Subsidiaries,on a consolidated basis.

 

“Fixtures” means all “fixtures” as such term isdefined in the UCC, now owned or hereafter acquired by the Company.

 

“Foreign Subsidiary” means, with respect to anyPerson, a Subsidiary of such Person, which Subsidiary is not a DomesticSubsidiary.

 

“Funded Debt” means, with respect to anyPerson, without duplication, all Indebtedness for borrowed money evidenced bynotes, bonds, debentures, or similar evidences of Indebtedness and that by itsterms matures more than one (1) year from, or is directly or indirectlyrenewable or extendible at such Person’s option under a revolving credit orsimilar agreement obligating the lender or lenders to extend credit over aperiod of more than one (1) year from the date of creation thereof, andspecifically including Capital Lease Obligations, current maturities of longterm debt, revolving credit and short term debt extendible beyond one (1) yearat the option of the debtor, and also including the Senior Debt and theObligations.

 

“GAAP” means generally accepted accountingprinciples as promulgated by the Financial Accounting Standards Board, as ineffect from time to time (subject to the provisions of Section 1.2hereof).

 

“Governing Documents” shall mean the CharterDocuments and Organizational Documents of a Person.

 

“Governmental Authority” means any nation orgovernment, any state or other political subdivision thereof, any central bank(or similar monetary or regulatory authority) thereof, any entity exercisingexecutive, legislative, judicial, regulatory or administrative functions of orpertaining to government, and any corporation or other entity owned orcontrolled, through Capital Stock or capital ownership or otherwise, by any ofthe foregoing.

 

“Green Wing****Lease”means that certain First Fully Restated Commercial Lease Agreement, executed asof October 22, 2004, to be effective February 1, 2004, by and betweenthe Company and Green Wing Management, Ltd., as amended, restated, supplementedor otherwise modified from time to time, pursuant to which the Company leasesthe premises located at 12903 Delivery Drive and 12918 Delivery Drive, SanAntonio, Texas.  “Green Wing Documents”means the Green Wing Lease and any and all other documents pursuant to theGreen Wing Lease.

 

“Guarantors” means ISI Detention ContractingGroup, Ltd., a Texas limited partnership, ISI Detention Contracting Group, Inc.,a Texas corporation, ISI Detention****ContractingGroup, Inc., a California corporation, ISI Detention Contracting Group, Inc.,a New Mexico corporation, ISI Detention Systems, Inc., a Texascorporation, ISI Detention Systems,****Ltd.,a Texas limited partnership, Metroplex Control Systems, Inc., a Texascorporation, ISI Controls, Ltd., a Texas limited partnership, MetroplexCommercial Fire and Security Alarms, 

 

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Inc., a Texascorporation, and MCFSA, Ltd., a Texas limited partnership, each a Subsidiary ofthe Company.

 

“Hazardous Material” means all or any of thefollowing:  (a) substances that aredefined or listed in, or otherwise classified pursuant to, any EnvironmentalLaws or regulations as “hazardous substances,” “hazardous materials,” “hazardouswastes,” “toxic substances” or any other formulation intended to define, listor classify substances by reason of deleterious properties such asignitability, corrosivity, reactivity, carcinogenicity, or toxicity; (b) oil,petroleum or petroleum derived substances, natural gas, natural gas liquids orsynthetic gas and drilling fluids, produced waters and other wastes associatedwith the exploration, development or production of crude oil, natural gas orgeothermal resources; (c) any flammable substances or explosives or anyradioactive materials; and (d) asbestos in any form or electricalequipment which contains any oil or dielectric fluid containing polychlorinatedbiphenyls.

 

“Indebtedness” means, with respect to anyPerson, without duplication (a) all indebtedness of such Person forborrowed money or for the deferred purchase price of property payment for whichis deferred six (6) months or more, but excluding obligations to tradecreditors incurred in the ordinary course of business that are unsecured andnot overdue by more than six (6) months unless being contested in goodfaith; (b) all reimbursement and other obligations with respect to lettersof credit, bankers’ acceptances and surety bonds, whether or not matured; (c) allobligations evidenced by notes, bonds, debentures or similar instruments; (d) allindebtedness created or arising under any conditional sale or other titleretention agreement with respect to property acquired by such Person (eventhough the rights and remedies of the seller or lender under such agreement inthe event of default are limited to repossession or sale of such property); (e) allCapital Lease Obligations and the present value of future rental payments underall synthetic leases; (f) all obligations of such Person under commoditypurchase or option agreements or other commodity price hedging arrangements, ineach case whether contingent or matured; (g) all obligations of suchPerson under any foreign exchange contract, currency swap agreement, interestrate swap, cap or collar agreement or other similar agreement or arrangementdesigned to alter the risks of that Person arising from fluctuations incurrency values or interest rates, in each case whether contingent or matured; (h) allIndebtedness referred to above secured by (or for which the holder of suchIndebtedness has an existing right, contingent or otherwise, to be secured by)any Lien upon or in property or other assets (including accounts and contractrights) owned by such Person, even though such Person has not assumed or becomeliable for the payment of such Indebtedness; and (i) “earnouts” andsimilar payment obligations.

 

“Intangible Assets” means all intangible assets(determined in conformity with GAAP) including, without limitation, goodwill,Intellectual Property Rights, licenses, organizational costs, deferred amounts,covenants not to compete, unearned income and restricted funds.

 

“Intellectual Property Rights” means all (a) patents,patent applications, patent disclosures and inventions; (b) trademarks,service marks, trade dress, trade names, logos and corporate names andregistrations and applications for registration thereof together with all ofthe goodwill associated therewith; (c) copyrights (registered orunregistered) and copyrightable works and registrations and applications forregistration thereof; (d) mask works and 

 

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registrations andapplications for registration thereof; (e) computer software, data,databases and documentation thereof; (f) trade secrets and otherconfidential information (including, without limitation, ideas, formulas,compositions, inventions (whether patentable or unpatentable and whether or notreduced to practice), know-how, manufacturing and production processes andtechniques, research and development information, drawings, specifications,designs, technical data, copyrightable works and customer and supplier listsand information); (g) other intellectual property rights; and (h) copiesand tangible embodiments thereof (in whatever form or medium).

 

“Interest Expense” means interest expense(whether cash or non-cash) deducted in the determination of consolidated netincome in accordance with GAAP, including interest expense with respect to anyFunded Debt and interest expense that has been capitalized, less, in each caseonly to the extent included in the determination of interest expense theamortization of capitalized fees and expenses incurred with respect to the RelatedTransactions, amortization of any original discount attributable to any FundedDebt or warrants, and interest paid in kind.

 

“Inventory” means any “inventory,” as such termis defined in the UCC, now owned or hereafter acquired by the Company, whereverlocated, including inventory, merchandise, goods and other personal propertythat are held by or on behalf of the Company for sale or lease or are furnishedor are to be furnished under a contract of service, or that constitute rawmaterials, work in process, finished goods, returned goods, supplies ormaterials of any kind, nature or description used or consumed or to be used orconsumed in the Company’s business or in the processing, production, packaging,promotion, delivery or shipping of the same, including all supplies andembedded software.

 

“Investment” as applied to any Person means (a) anydirect or indirect purchase or other acquisition by such Person of any notes,obligations, instruments, Capital Stock, securities, assets or ownership interest(including partnership interests and joint venture interests) of any otherPerson or (b) any capital contribution by such Person to any other Person.

 

“IPO” means a firm commitment underwritteninitial public offering and sale of Common Stock pursuant to an effectiveregistration statement under the Securities Act.

 

“IRS” means the United States Internal RevenueService.

 

“ISI Affiliates” means ISI Ltd. and ISI GP.

 

“ISI GP” means ISI*MCS GP, Inc. a Texascorporation and the general partner of ISI Ltd.

 

“ISI Ltd.” means ISI*MCS, Ltd., a Texas limitedpartnership.

 

“ISI MCS Documents” means those documentsidentified on the ISI MCS Schedule attached hereto.

 

“ISI MCS Transaction” means (a) theformation of each of the ISI Affiliates, (b) the assignment, transfer,contribution, sale or other disposition by Samuel C. Youngblood andDonald J. Carr of certain assets of the Company distributed to thempursuant to the Reorganization Documents and (c) the grant to the Companyby Messrs. Carr and Youngblood 

 

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of an option to acquire,in the aggregate, a thirty percent (30%) interest in ISI Ltd. (the “StarcoWarrant”).

 

“Latest Balance Sheet” means the unauditedconsolidated balance sheet of the Company and its Subsidiaries as of September 30,2004.

 

“Lien” means any mortgage or deed of trust,pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim,security interest or encumbrance, easement or preference, priority or othersecurity agreement or preferential arrangement of any kind or nature whatsoever(including any lease or title retention agreement, any financing lease havingsubstantially the same economic effect as any of the foregoing, and the filingof, or agreement to give, any financing statement perfecting a securityinterest under the UCC or comparable law of any jurisdiction).

 

“Loan and Security Agreement” means thatcertain Loan and Security Agreement of even date herewith, by and among theCompany, the Senior Lender and the Guarantors, as the same may be amended,restated or otherwise modified from time to time in accordance with its termsand consistent with the terms of the Senior Subordination Agreement.

 

“Majority Holders” means the holders of amajority of the outstanding principal amount of the Note and the holders of amajority of the Warrant Stock (on an as-converted basis).

 

“Master Subcontract Agreements” means,collectively, that certain (a) Master Subcontract, by and between ISI Ltd.and ISI Detention Contracting Group, Inc., a Texas corporation, (b) MasterSubcontract, by and between ISI Ltd. and MCFSA, Ltd., a Texas limitedpartnership, and (c) Master Subcontract, by and between ISI Ltd. and ISIControls, Ltd., a Texas limited partnership, each effective as of September 30,2004.

 

“Material Adverse Effect” means a materialadverse effect on (a) the business, assets, operations, or condition,financial or otherwise, of the Company and its Subsidiaries considered as awhole; (b) the Company’s ability to pay any of the Obligations inaccordance with the terms of this Agreement, the Note and the Warrant; or (c) thePurchaser’s rights and remedies under this Agreement and the other TransactionDocuments.

 

“Multiemployer Plan” means a multiemployerplan, as defined in Section 4001(a)(3) of ERISA, to which the Companyor any member of the Controlled Group may have any liability.

 

“Note” means that certain Senior SubordinatedPromissory Note dated October 22, 2004, in the aggregate originalprincipal amount of Fifteen Million Three Hundred Thousand Dollars($15,300,000), made payable by the Company in favor of the Purchaser, insubstantially the form as set forth in Exhibit A attached hereto,with appropriate insertions, as may be amended, restated, substituted, replacedor otherwise modified from time to time.

 

“Obligations” means all loans, advances, debts,liabilities and obligations, for the performance of covenants, tasks or dutiesor for payment of monetary amounts (whether or not such performance is thenrequired or contingent, or such amounts are liquidated or 

 

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determinable), includingany and all of the obligations of the Company or any of its Subsidiaries withrespect to the repayment or the performance, when due, of any obligation(monetary or otherwise) of such respective party arising under or in connectionwith this Agreement, the Note, the Warrant or any other document delivered inconnection therewith, and all covenants and duties regarding such amounts, ofany kind or nature, present or future, whether or not evidenced by any note,agreement or other instrument, arising under this Agreement or any of the otherTransaction Documents.  This termincludes all principal, interest (including all interest that accrues after thecommencement of any case or proceeding by or against the Company in bankruptcy,whether or not allowed in such case or proceeding), Fees, Charges, expenses,attorneys’ fees and any other sum chargeable to the Company under thisAgreement or any of the other Transaction Documents.

 

“Option Plan” shall mean that certain 2004Stock Incentive Plan of ISI Detention Contracting Group, Inc. (a Delawarecorporation) dated October 22, 2004.

 

“Organizational Documents” shall mean theby-laws, partnership agreement, operating agreement or analogous instrumentgoverning the respective operations of the Company and its Subsidiariesincluding, without limitation, the Stockholders’ Agreement, and including allamendments and supplements, respectively, thereto.

 

“PBGC” means the Pension Benefit GuarantyCorporation and any entity succeeding to any or all of its functions underERISA.

 

“Pension Plan” means a “pension plan”, as suchterm is defined in Section 3(2) of ERISA, which is subject to TitleIV of ERISA (other than a Multiemployer Plan), and to which the Company or anymember of the Controlled Group may have any liability, including any liabilityby reason of having been a substantial employer within the meaning of Section 4063of ERISA at any time during the preceding five (5) years, or by reason ofbeing deemed to be a contributing sponsor under Section 4069 of ERISA.

 

“Permitted Encumbrances” means the following: (a) Liensfor Taxes or assessments or other governmental Charges not yet delinquent orbeing contested in good faith through appropriate proceedings; (b) pledgesor deposits of money securing statutory obligations under workmen’scompensation, unemployment insurance, social security or public liability lawsor similar legislation (excluding Liens under ERISA); (c) pledges ordeposits of money securing bids, tenders, contracts (other than contracts forthe payment of money) or leases to which the Company is a party as lessee madein the ordinary course of business; (d) inchoate and unperfected workers’,mechanics’ or similar liens arising in the ordinary course of business, so longas such Liens attach only to Equipment, Fixtures and/or Real Estate; (e) carriers’,warehousemen’s, suppliers’ or other similar possessory liens arising in theordinary course of business, so long as such Liens attach only to Inventory; (f) depositssecuring, or in lieu of, surety, appeal or customs bonds in proceedings towhich the Company is a party; (g) any attachment or judgment lien notconstituting an Event of Default under Section 7; (h) zoningrestrictions, building costs, easements, licenses, or other restrictions orencumbrances on the use of any Real Estate or other minor irregularities intitle (including leasehold title) thereto, so long as the same do notmaterially impair the use, value, or marketability of such Real Estate; (i) Liensin favor of the Senior Lender; (j) Liens existing on the date hereof whichLiens are set 

 

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forth on the PermittedEncumbrances Schedule; and (k) Liens securing Indebtedness permittedby clause (c) of the definition of Permitted Indebtedness, provided thatthe Liens attach only to the assets financed by such Indebtedness.

 

“PermittedIndebtedness” means:

 

(a)           the Obligations;

 

(b)           the Senior Debt;

 

(c)           Indebtedness not to exceed $600,000in the aggregate at any time outstanding secured by purchase money Liens orincurred with respect to Capital Leases;

 

(d)           Indebtedness identified on theIndebtedness Schedule,

 

(e)           unsecured Indebtedness to trade creditorsincurred in the ordinary course of business;

 

(f)            Indebtedness secured by PermittedEncumbrances;

 

(g)           operating lease obligations requiringpayments not to exceed $500,000 in the aggregate for the Company and itsSubsidiaries during any Fiscal Year of the Company; and

 

(h)           intercompany Indebtedness.

 

“Permitted Investments” means Investments bythe Company and its Subsidiaries in Cash Equivalents.

 

“Person” means an individual, a partnership, acorporation, a limited liability company, an association, a joint stockcompany, a trust, a joint venture, an unincorporated organization and agovernmental entity or any department, agency or political subdivision thereof.

 

“Plan” means, at any time, an “employee benefitplan,” as defined in Section 3(3) of ERISA, that the Company or anyERISA Affiliate maintains, contributes to or has an obligation to contribute toon behalf of participants who are or were employed by the Company.

 

“Potential Event of Default” means any event oroccurrence which, with the passage of time or the giving of notice or both,would constitute an Event of Default.

 

“Qualified Plan” means a Pension Plan that isintended to be Tax-qualified under §401(a) of the Code.

 

“Real Estate” means real property owned,leased, subleased, or used by the Company or any of its Subsidiaries listed inthe Real Estate Schedule.

 

“Related Transactions” means the initialborrowing under the Loan and Security Agreement on the Closing Date, theissuance of the Note and the Warrant, the Reorganization, 

 

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the ISI MCS Transaction,payment of all Fees, costs and expenses associated with all of the foregoingand the execution and delivery of all of the Related Transactions Documents.

 

“Related Transaction Documents” means theSenior Loan Documents, the TransactionDocuments, the Reorganization Documents and all other agreements orinstruments executed in connection with the Related Transactions.

 

“Release” means any release, threatenedrelease, spill, emission, leaking, pumping, pouring, emitting, emptying,escape, injection, deposit, disposal, discharge, dispersal, dumping, leachingor migration of Hazardous Material in the indoor or outdoor environment,including the movement of Hazardous Material through or in the air, soil,surface water, ground water or property.

 

“Reorganization” means the recapitalization andreorganization of the Company pursuant to the Reorganization Documents, and thedistribution by the Company to its stockholders of an aggregate amount not toexceed Seventeen Million Dollars ($17,000,000).

 

“Reorganization Documents” means thosedocuments identified on the Reorganization Schedule attached hereto

 

“Restricted Payment” means (a) thedeclaration or payment of any dividend or the incurrence of any liability tomake any other payment or distribution of cash or other property or assets inrespect of Capital Stock; (b) any payment on account of the purchase,redemption, defeasance, sinking fund or other retirement of the Company’sCapital Stock or any other payment or distribution made in respect thereof,either directly or indirectly; (c) any payment or prepayment of principalof, premium, if any, or interest, fees or other charges on or with respect to,and any redemption, purchase, retirement, defeasance, sinking fund or similarpayment and any claim for rescission with respect to, any Indebtedness otherthan the Permitted Indebtedness; (d) any payment made to redeem, purchase,repurchase or retire, or to obtain the surrender of, any outstanding warrants,options or other rights to acquire Capital Stock of the Company now orhereafter outstanding; (e) any payment of a claim for the rescission ofthe purchase or sale of, or for material damages arising from the purchase orsale of, any shares of the Company’s Capital Stock or of a claim forreimbursement, indemnification or contribution arising out of or related to anysuch claim for damages or rescission; (f) any payment, loan, contribution,or other transfer of funds or other property to any stockholder of the Companyother than payment of compensation in the ordinary course of business tostockholders who are employees of the Company and advances or reimbursement forreasonable out-of-pocket expenses incurred or to be incurred by such employeeson behalf of the Company (including, without limitation, moving, entertainmentand travel expenses); and (g) any payment of management fees (or otherfees of a similar nature) or out-of-pocket expenses in connection therewith bythe Company to any stockholder of the Company or any Affiliate of the Companyor such stockholder.

 

“Securities” means, collectively, the Note andthe Warrant.

 

“Securities Act” means the Securities Act of1933, as amended, or any similar federal law then in force.

 

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“Securities and Exchange Commission” includesany governmental body or agency succeeding to the functions thereof.

 

“Securities Exchange Act” means the SecuritiesExchange Act of 1934, as amended, or any similar federal law then in force.

 

“Senior Debt” means all obligations by theSenior Lender under the Senior Loan Documents, to the extent permitted underthe Senior Subordination Agreement.

 

“Senior Lender” means LaSalle Bank NationalAssociation, a national banking association, and its successors and assigns.

 

“Senior Leverage Ratio” means the ratio of theCompany’s (i) aggregate Indebtedness (excluding Indebtedness subordinatedto Senior Lender in writing) to (ii) EBITDA.

 

“Senior Loan Documents” means the Loan andSecurity Agreement and the related agreements, documents and instruments amongthe Senior Lender, the Company and the Guarantors, as such agreements are ineffect at the Closing and as may be amended, restated, modified or waived fromtime to time in accordance with the provisions of the applicable Senior LoanDocument in a manner consistent with the terms of the Senior SubordinationAgreement.

 

“Senior Subordination Agreement” means thatcertain Subordination Agreement dated the date hereof by and among the Company,the Purchaser and the Senior Lender, in form and substance acceptable to thePurchaser, as may be amended, restated, supplemented or otherwise modified fromtime to time.

 

“Shares” shall mean certificated oruncertificated instruments or denominations that represent the ownership of theCapital Stock of a Person.

 

“Stockholders’ Agreement” has the meaning setforth in Section 3.2.

 

“Subsidiary”shall mean any Person of which more than fifty percent (50%) of the outstandingCapital Stock having ordinary voting power to elect a majority of the Board ofsuch Person (irrespective of whether at the time Capital Stock of any otherclass of such Person shall have or might have voting power by reason of thehappening of any contingency) is at the time, directly or indirectly, owned bythe Company, or any corporation, partnership, joint venture or limitedliability company of which more than fifty percent (50%) of the outstandingCapital Stock having voting power to control such Person is at the time, directlyor indirectly, owned by the Company or any partnership of which the Company isa general partner.  Unless the contextotherwise requires, each reference to a Subsidiary shall be a reference to aSubsidiary of the Company.

 

“Tax” or “Taxes” means federal, state,county, local, foreign or other income, gross receipts, ad valorem, franchise,profits, sales or use, transfer, registration, excise, utility, environmental,communications, real or personal property, capital stock, license, payroll,wage or other withholding, employment, social security, severance, stamp,occupation, alternative or add-on minimum, estimated and other taxes of anykind whatsoever (including, without 

 

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limitation, deficiencies,penalties, additions to tax, and interest attributable thereto) whetherdisputed or not.

 

“Tax Return” means any return, informationreport or filing with respect to Taxes, including any schedules attachedthereto and including any amendment thereof.

 

“Transaction Documents” means this Agreement,the Note, the Warrant, the Stockholders’ Agreement, the Senior SubordinationAgreement, the ISI MCS Documents to which the Company is a party and all otherdocuments, instruments and agreements executed by or on behalf of the Companyand delivered in connection herewith or at any time hereafter to or for thePurchaser or any transferee of the Purchaser, all as amended, restated,supplemented or modified from time to time.

 

“UCC” means the Uniform Commercial Code, as thesame may, from time to time, be enacted and in effect in the State of Illinois.

 

“Warrant” means that certain Common StockPurchase Warrant, dated the date hereof, issued by the Company in favor of thePurchaser to acquire, in the aggregate, up to thirty percent (30.00%) of theCapital Stock of the Company, on a fully diluted basis, in substantially theform as set forth in Exhibit B attached hereto, as amended,modified, supplemented or restated from time to time.

 

“Warrant Stock” shall have the meaning ascribedto such term in the Warrant.

 

“Wholly-Owned Subsidiary” means, with respectto any Person, a Subsidiary of which all of the outstanding Capital Stock orother ownership interests are owned by such Person or another Wholly-OwnedSubsidiary of such Person.

 

1.2                                 Accounting Principles. The classification, character and amount of all assets, liabilities,capital accounts and reserves and of all items of income and expense to bedetermined, and any consolidation or other accounting computation to be made,and the interpretation of any definition containing any financial term,pursuant to this Agreement shall be determined and made in accordance with GAAPconsistently applied.

 

1.3                                 Rules of Construction. The words “herein,” “hereof” and “hereunder” and other words of similarimport refer to this Agreement and not to any particular section, subsection orclause contained in this Agreement.  Thewords “including” and “include” and other words of similar import shall bedeemed to be followed by the phrase “without limitation” and shall not belimited by any enumeration or otherwise. Wherever from the context it appears appropriate, each term stated ineither the singular or plural shall include the singular and the plural, andpronouns stated in the masculine, feminine or neuter gender shall include themasculine, the feminine and the neuter.

 

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2.                                       Authorization and Closing.

 

2.1                                 Authorization of the Securities. The Company shall authorize theissuance and sale of the Note and the Warrant.

 

2.2                                 Purchase and Sale of the Securities.

 

(a)                                  At the Closing, the Company shall selland issue to the Purchaser and, subject to the terms and conditions set forthherein, the Purchaser shall purchase from the Company, the Note at an aggregatepurchase price equal to $15,300,000.

 

(b)                                 At the Closing, the Company shall selland issue to the Purchaser and, subject to the terms and conditions set forthherein, the Purchaser shall purchase from the Company, the Warrant at an aggregatepurchase price equal to $210,000.

 

2.3                                 The Closing. The closing of the purchase and sale of the Securities (the “Closing”)shall take place at the offices of Vedder, Price, Kaufman & Kammholz,P.C., at 10:00 a.m. on October 22, 2004 (the “Closing Date”),or at such other place or on such other date as may be mutually agreeable tothe Company and the Purchaser.  At theClosing, (a) the Company shall deliver to the Purchaser the Note, payableto the order of the Purchaser, and (b) the Company shall deliver to thePurchaser the Warrant registered in the Purchaser’s name; upon payment by thePurchaser, in the aggregate, of Fifteen Million Three Hundred Thousand Dollars($15,300,000), by wire transfer of immediately available funds to account(s) specifiedin writing by the Company to the Purchaser at least two (2) BusinessDays prior to the Closing.

 

3.                                       Conditions of the Purchaser’s Obligationsat the Closing.

 

The obligation of the Purchaser to purchase and payfor the Securities at the Closing is subject to the fulfillment as of theClosing of the following conditions to the satisfaction of the Purchaser in itssole discretion:

 

3.1                                 Representations and Warranties;Covenants; No Event of Default.  Therepresentations and warranties contained in Section 5 hereof shallbe true and correct at and as of the Closing as though then made; the Companyshall have performed all of the covenants required to be performed by ithereunder and under the other documents, agreements and instruments executed inconnection herewith that are to be complied with or performed by the Company,on or prior to the Closing; and there shall not exist any state of facts thatwould constitute an Event of Default or Potential Event of Default under thisAgreement.

 

3.2                                 Stockholders’ Agreement. The Company, the Purchaser and certain other Persons shall have enteredinto a Stockholders’ Agreement, in substantially the form set forth in Exhibit Cattached hereto (as may be amended, restated or 

 

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otherwise modified from time to time, the “Stockholders’ Agreement”),and the Stockholders’ Agreement shall be in full force and effect as of theClosing.

 

3.3                                 Securities Law Compliance. The Company shall have made all filings under all applicable federal andstate securities laws necessary to consummate the issuance of the Securitiespursuant to this Agreement in compliance with such laws.

 

3.4                                 Senior Loan Agreement. The Company, the Guarantors and the Senior Lender shall have enteredinto the Loan and Security Agreement providing for, among other financialaccommodations to the Company, a revolving credit facility in an aggregateamount of (a) Four Million Five Hundred Thousand Dollars ($4,500,000)during the period from the initial disbursement of funds until the Companydelivers to the Senior Lender audited financial statements for the year ending December 31,2004 and documentation verifying compliance with the financial covenantscontained in the Loan and Security Agreement for the period ending December 31,2004 and (b) Six Million Dollars ($6,000,000) thereafter.  At Closing, the Company shall have minimumavailability under the Loan and Security Agreement in the amount of FiveHundred Thousand Dollars ($500,000).

 

3.5                                 Senior Subordination Agreement. The Purchaser, the Senior Lender and the Company shall have executed anddelivered the Senior Subordination Agreement.

 

3.6                                 Reorganization. On or prior to the Closing Date, the Company shall have consummated theReorganization and, pursuant to the terms of the Reorganization Documents, theownership of the Capital Stock of the Company shall be as set forth on the CapitalizationSchedule.

 

3.7                                 Bonding Transaction. The appropriate parties shall have executed and delivered the ISI MCSDocuments.

 

3.8                                 No Material Adverse Change. Since the date of the Latest Balance Sheet, there shall have been nochange in the financial condition, operating results, assets, operations,business prospects, employee relations or customer or supplier relations of theCompany or its Subsidiaries or their respective Affiliates which would have aMaterial Adverse Effect.

 

3.9                                 Opinion of the Company’s Counsel; OtherOpinions and Documents.  The Purchaser shall havereceived from each of Akin, Gump, Strauss, Hauer & Feld, L.L.P., andYoungblood & Associates, counsel for the Company, an opinion, whichshall be addressed to the Purchaser, dated the date of the Closing and in formand substance satisfactory to the Purchaser. In addition, all certificates, opinions and letters delivered inconnection with the Loan and Security Agreement and the Reorganization shall beaddressed to the Purchaser or accompanied by or contain a written authorizationfrom the Person delivering such certificate, opinion or letter stating that thePurchaser may rely on such document as though it were addressed to it.

 

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3.10         Closing Documents. The Company shall have, or shall cause to be, delivered to the Purchaserall of the following documents in form and substance reasonably satisfactory tothe Purchaser:

 

(a)           the Note, duly completed and executed bythe Company;

 

(b)           the Warrant, duly completed and executedby the Company;

 

(c)           an officer’s certificate, dated the dateof the Closing, stating that the conditions specified in Sections 2and 3 have been fully satisfied;

 

(d)           certified copies of the resolutions dulyadopted by the Board of the Company and the Guarantors authorizing theexecution, delivery and performance of the following documents and/or transactionsto which it is a party:  the Senior LoanDocuments, the Senior Subordination Agreement and each of the other agreementscontemplated, respectively, thereby; this Agreement, the other TransactionDocuments and each of the other agreements contemplated hereby and thereby; theissuance and sale of the Securities; and the consummation of all othertransactions contemplated by this Agreement;

 

(e)           certified copies of the GoverningDocuments of the Company and each of its Subsidiaries, each as in effect at theClosing;

 

(f)            certified copies of the ReorganizationDocuments, the ISI MCS Documents and the Senior Loan Documents, each as ineffect at the Closing;

 

(g)           fully executed copies of the EmploymentAgreements;

 

(h)           certified copies of the Bonus Plan andthe Option Plan and any and all grant letters or similar documents issued toany Person pursuant to the Option Plan;

 

(i)            copies of all third party andgovernmental consents, approvals and filings required in connection with theconsummation of the transactions hereunder (including all blue sky law filingsand waivers of all preemptive rights and rights of first refusal); and

 

(j)            such other documents relating to thetransactions contemplated by this Agreement as the Purchaser or their counselmay reasonably request.

 

3.11         Proceedings. All corporate and other proceedings taken or required to be taken by theCompany in connection with the transactions contemplated hereby to beconsummated at or prior to the Closing and all documents incident thereto shallbe satisfactory in form and substance to the Purchaser and its counsel.

 

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3.12                           Expenses.  At the Closing, the Company shall havereimbursed the Purchaser for, and shall have paid to certain other Persons, thefees and expenses as provided in Section 9.1 hereof.

 

3.13                           DueDiligence.  The Purchaser shall besatisfied in its sole discretion with the results of its legal, accounting,business and other due diligence investigation and review of the Company andits Subsidiaries.

 

3.14                           InvestmentFee.  The Company shall have paid tothe Purchaser an investment fee in the amount of $175,000, by wire transfer ofimmediately available funds to an account specified in writing by thePurchaser, which amount represents the balance of the investment fee of$250,000 due to the Purchaser at Closing.

 

3.15                           Compliancewith Applicable Laws.  The issuanceand sale of the Securities by the Company hereunder and the consummation of thetransactions contemplated by the Transaction Documents shall not be prohibitedby any applicable law or governmental rule or regulation and shall notsubject the Company to any penalty, liability, or other onerous condition underor pursuant to any applicable law or governmental rule or regulation, andthe issuance and sale of the Securities hereunder shall be permitted by laws, rules andregulations of the jurisdictions and Governmental Authorities and agencies towhich the Company is subject.

 

3.16                           Waiver.  Any condition specified in this Section 3may be waived if consented to by the Purchaser; provided that no such waivershall be effective against the Purchaser unless it is set forth in a writingexecuted by the Purchaser.

 

3.17                           Useof Proceeds.  The Company shall haveprovided to the Purchaser a Use of Proceeds Schedule summarizing, inreasonable detail, the flow of funds as a result of the consummation of thetransactions contemplated by the Transaction Documents.

 

4.                                       Covenants.  Except as otherwise specifically provided inthis Section 4, the Company shall comply with the followingcovenants so long as all or any portion of the Note and/or the Warrant remainsoutstanding.

 

4.1                                 FinancialStatements and Other Information. The Company shall maintain, and cause each of its Subsidiaries tomaintain, a system of accounting established and administered in accordancewith sound business practices to permit preparation of Financial Statements inconformity with GAAP (it being understood that monthly Financial Statements arenot required to have footnote disclosures). The Company will deliver each of the Financial Statements and other reportsdescribed below to the Purchaser.

 

(a)                                  FinancialStatements.  The Company shalldeliver to the Purchaser the following financial statements, all of which shallbe prepared in accordance with GAAP consistently applied and subject to yearend adjustments (i) no later than thirty (30) days after each calendar month, copies of internallyprepared consolidated financial statements, including, 

 

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without limitation, balance sheets and statements of income, retainedearnings and cash flow of the Company and its Subsidiaries, certified by theChief Financial Officer of the Company prepared on a consolidated andconsolidating basis; (ii) no later than thirty (30) days after the end of each of the first three quarters ofthe Company’s Fiscal Year, copies of internally prepared financial statementsincluding, without limitation, balance sheets, statements of income, retainedearnings, cash flows and reconciliation of surplus, certified by the ChiefFinancial Officer of the Company and (iii) no later than ninety (90) days after the end of each ofthe Company’s Fiscal Years, audited annual financial statements prepared on aconsolidated and consolidating basis with an unqualified opinion by independentcertified public accountants selected by the Company and reasonablysatisfactory to the Purchaser, which financial statements shall be accompaniedby copies of any management letters sent to the Company by such accountants.

 

(b)                                 MonthlyReports.  As soon as available and inany event (i) within thirty (30) days after the end of each month(including the last month of the Company’s Fiscal Year), the Company willdeliver: (A) a detailed trial balance of the Company’s accounts and thoseof its Subsidiaries, separately identifying all bonded accounts receivable andall other accounts, aged per invoice date, in form and substance reasonablysatisfying to the Purchaser including, without limitation, the names andaddresses of all debtors of the Company and its Subsidiaries, (B) asummary and detail of accounts payable, including a listing of any held checksand (C) a work-in-progress report setting forth the status of all on-goingprojects, including reasonable identification of all contracts pursuant towhich the Company or any of its Subsidiaries is then providing goods andservices, the percentage of completion of the project or projects which are thesubject of such contracts, the costs incurred to date and the total expectedcost of such contract, and such other information regarding the Company’s orany of its Subsidiaries’ work-in-progress as the Purchaser may reasonablyrequest; and (ii) as soon as available and in any event within thirty (30)days after the end of each month (including the last month of the Company’ andits Subsidiaries’ Fiscal Year), the Company will deliver the general ledgerinventory account balance and a perpetual inventory report.

 

(c)                                  Accountants’Reports.  Promptly upon receiptthereof, the Company will deliver copies of all significant reports submittedby the Company’s firm of certified public accountants in connection with eachannual, interim or special audit or review of any type of the FinancialStatements or related internal control systems of the Company or itsSubsidiaries made by such accountants, including any comment letter submittedby such accountants to management in connection with their services.

 

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(d)                                 ManagementReport.  Together with each deliveryof Financial Statements of the Company and its Subsidiaries pursuant to Section 4.1(a),the Company will deliver a management report (i) describing the operationsand financial condition of the Company and its Subsidiaries for the month thenended and the portion of the current Fiscal Year then elapsed (or for theFiscal Year then ended in the case of year-end financials) and (ii) discussingthe reasons for any significant variations. The information above shall be presented in reasonable detail and shallbe certified by the chief financial officer of the Company to the effect thatsuch information fairly presents the results of operations and financialcondition of the Company and its Subsidiaries as at the dates and for theperiods indicated.

 

(e)                                  Projectionsand Annual Budget.  As soon aspracticable and in any event no later than thirty (30) days prior to thebeginning of each of the Company’s Fiscal Years, the Company will deliver tothe Purchaser projections and an annual budget, prepared on a monthly andannual basis, for the Company and its Subsidiaries for the succeeding FiscalYear.

 

(f)                                    Explanationof Budget and Projections.  Inconjunction with the delivery of the annual presentation of projections orbudget referred to in Section 4.1(e) above, the Company shalldeliver a letter signed by the CEO or President of the Company and by theTreasurer or Chief Financial Officer of the Company, describing, comparing andanalyzing, in detail, all changes and developments between the anticipatedfinancial results included in such projections or budget and the prior FiscalYear financial statements of the Company.

 

(g)                                 SECFilings and Press Releases.  After anIPO and promptly upon their becoming available, the Company will deliver copiesof (i) all Financial Statements, reports, notices and proxy statementssent or made available by the Company or any of its Subsidiaries to theirstockholders, (ii) all regular and periodic reports and all registrationstatements and prospectuses, if any, filed by the Company or any of itsSubsidiaries with any securities exchange or with the Securities and ExchangeCommission, any other Governmental Authority or any private regulatoryauthority, and (iii) all press releases and other statements madeavailable by the Company or any of its Subsidiaries to the public concerningdevelopments in the business of any such Person.

 

(h)                                 Eventsof Default, Etc.  Promptly upon anyofficer of the Company obtaining knowledge of any of the following events orconditions, the Company shall deliver copies of all notices given or receivedby the Company or any of its Subsidiaries with respect to any such event orcondition and a certificate of the Company’s chief executive officer specifyingthe nature and period of existence of such event or condition and what actionCompany or any of its Subsidiaries has taken, is taking and proposes to takewith respect thereto:  (i) anycondition or event that 

 

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constitutes, or which could reasonably be expected to result in theoccurrence of, an Event of Default or Potential Event of Default; (ii) anynotice that any Person has given to the Company or any of its Subsidiaries orany other action taken with respect to a claimed default, breach or violationunder the Loan and Security Agreement or any other material agreement to whichthe Company or any of its Subsidiaries is a party; or (iii) any default orevent of default with respect to any Indebtedness of the Company or any of itsSubsidiaries.

 

(i)                                     Litigation.  Promptly upon any officer of the Companyobtaining knowledge of (i) the institution of any action, charge, claim,demand, suit, proceeding, petition, governmental investigation, Tax audit orarbitration now pending or, to the best knowledge of the Company after dueinquiry, threatened against or affecting the Company or any of its Subsidiariesor any property of the Company or any of its Subsidiaries (“Litigation”)not previously disclosed by the Company to the Purchaser or (ii) anymaterial development in any action, suit, proceeding, governmentalinvestigation or arbitration at any time pending against or adversely affectingthe Company or any property of the Company which, in the case of each ofclauses (i) and (ii) could reasonably be expected to have a MaterialAdverse Effect, the Company will promptly give notice thereof to the Purchaserand provide such other information as may be reasonably available to theCompany to enable the Purchaser and their counsel to evaluate such matter.

 

(j)                                     Noticeof Corporate and other Changes.  TheCompany shall provide prompt written notice of (i) all jurisdictions inwhich the Company becomes qualified after the Closing Date to transactbusiness, (ii) any change after the Closing Date in the authorized andissued Capital Stock of the Company or any of its Subsidiaries or any amendmentto their Governing Documents, (iii) any Subsidiary created or acquired bythe Company or any of its Subsidiaries after the Closing Date, such notice, ineach case, to identify the applicable jurisdictions, capital structures orSubsidiaries, as applicable, and (iv) any other event that occurs afterthe Closing Date which would cause any of the representations and warranties inSection 5 of this Agreement or in any other Transaction Document tobe untrue or misleading in any material respect in light of the circumstancesin which they were made.  The foregoingnotice requirement shall not be construed to constitute consent by thePurchaser to any transaction referred to above which is not expressly permittedby the terms of this Agreement.

 

(k)                                  ComplianceCertificate.  Together with eachdelivery of Financial Statements of the Company and its Subsidiaries pursuantto Sections 4.1(a) and (b), the Company will deliver afully and properly completed Compliance Certificate signed by each of theCompany’s chief executive officer and chief financial officer.

 

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(l)                                     Taxes.  The Company shall provide prompt writtennotice of (i) the execution or filing with the IRS or any otherGovernmental Authority of any agreement or other document extending, or havingthe effect of extending, the period for assessment or collection of any Chargesby the Company or any of its Subsidiaries and (ii) any agreement by theCompany or any of its Subsidiaries or request directed to the Company or any ofits Subsidiaries to make any adjustment under Code §481(a), by reason of achange in accounting method or otherwise, which could reasonably be expected tohave a Material Adverse Effect.  Nothingin this Section 4.1(l) shall require the Company to givewritten notice or to be otherwise restricted from extending the due date in thenormal course of business and in accordance with applicable laws for the filingof any tax return.

 

(m)                               PensionPlan.  The Company shall provideprompt written notice of (i) the institution of any steps by any member ofthe Controlled Group or any other Person to terminate any Pension Plan, (ii) thefailure of any member of the Controlled Group to make a required contributionto any Pension Plan (if such failure is sufficient to give rise to a Lien underSection 302(f) of ERISA) or to any Multiemployer Plan, (iii) thetaking of any action with respect to a Pension Plan which might reasonably beexpected to result in the requirement that the Company furnish a bond or othersecurity to the PBGC or such Pension Plan, (iv) the occurrence of anyevent with respect to any Pension Plan or Multiemployer Plan which mightreasonably be expected to result in the incurrence by any member of theControlled Group of any material liability, fine or penalty (including anyclaim or demand for withdrawal liability or partial withdrawal from anyMultiemployer Plan), (v) any material increase in the contingent liabilityof the Company with respect to any post-retirement welfare plan benefit, or (vi) anynotice that any Multiemployer Plan is in reorganization, that increasedcontributions may be required to avoid a reduction in plan benefits or theimposition of an excise Tax, that any such plan is or has been funded at a rateless than that required under Section 412 of the Code, that any such planis or may be terminated, or that any such plan is or may become insolvent.

 

(n)                                 Insurance.The Company shall provide prompt written notice of any cancellation (unlessreplaced by a materially similar policy) or material change in any insurancemaintained by the Company or any of its Subsidiaries.

 

(o)                                 EnvironmentalClaim.  The Company shall provideprompt written notice of any other event (including (i) any violation ofany Environmental Law or the assertion of any Environmental Liabilities or (ii) theenactment or effectiveness of any law, rule, or regulation) which mightreasonably be expected to have a Material Adverse Effect.

 

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(p)                                 SeniorLender Reports.  The Company shallpromptly provide copies of any month-end collateral reports, copies of anystatements, reports, certificates, disclosures and any other informationdelivered to the Senior Lender under the terms of the Loan and Security Agreement,including the Compliance Certificate, not otherwise required to be delivered tothe Purchaser hereunder.

 

(q)                                 MaterialSupplier.  The Company shall provideprompt written notice of any information received by the Company, whetherwritten or oral, that any material supplier intends to cease, materially andnegatively alter or decrease the rate of business done with the Company,together with a copy of any written notice received from such supplier.

 

(r)                                    OtherInformation.  With reasonablepromptness, the Company will deliver such other information and data withrespect to the Company or any of its Subsidiaries as from time to time may bereasonably requested by the Purchaser.

 

For purposes of this Agreement, all accounting termsnot otherwise defined herein shall have the meanings assigned to such terms inconformity with GAAP.  FinancialStatements furnished to the Purchaser pursuant to this Section 4.1or any other section (unless specifically indicated otherwise) shall beprepared in accordance with GAAP as in effect at the time of such preparation;provided that no Accounting Change shall affect financial covenants, standardsor terms in this Agreement; provided further that the Company shall preparefootnotes to the Financial Statements required to be delivered hereunder thatshow the differences between the Financial Statements delivered (which reflectsuch Accounting Changes) and the basis for calculating financial covenantcompliance (without reflecting such Accounting Changes).  All such adjustments described in clause (c) ofthe definition of the term Accounting Changes resulting from expenditures madesubsequent to the Closing Date (including capitalization of costs and expensesor payment of pre-Closing Date liabilities) shall be treated as expenses in theperiod the expenditures are made.

 

4.2                                 Inspectionof Property.  The Company shall, atits expense, permit any representatives designated by the Purchaser, duringnormal business hours and at such other times as the Purchaser may reasonablyrequest, to (a) visit and inspect any of the properties of the Companyand/or its Subsidiaries; (b) examine the corporate and financial recordsof the Company and/or its Subsidiaries and make copies thereof or extractstherefrom; and (c) discuss the affairs, finances and accounts of any suchPersons with the directors, officers, key employees and independent accountantsof the Company and/or its Subsidiaries, as the case may be.  The presentation of an executed copy of thisAgreement by the Purchaser to the independent accountants of the Company or anyof its Subsidiaries, as the case may be, shall constitute such Person’spermission to its independent accountants to participate in discussions withthe Purchaser.

 

4.3                                 BoardMeetings.  The Company shall holdmeetings of its Board no less frequently than quarterly, unless otherwiseagreed to by the Purchaser Designee 

 

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(as defined below).  ThePurchaser shall be notified of the time, place and purpose of each meeting ofthe Board of the Company (the “Company Board”) and the Board of theCompany’s Subsidiaries (the “Subsidiary Boards”).  Pursuant to the Stockholders’ Agreement, aslong as the Purchaser, together with its transferees, holds, or is deemed tohold, at least ten percent (10%) of the Common Stock, on a fully-diluted basis,the Purchaser shall have the right to designate one Person who the Company andthe holders of its Common Stock shall agree to nominate and vote to elect as amember of the Company Board and each Subsidiary Board (the “PurchaserDesignee”) and one Person who shall have observation rights with respect toall meetings of the Company Board and any Subsidiary Boards (the “PurchaserObserver”).  The Purchaser Observershall have the right to attend each meeting of the Company Board and eachSubsidiary Board and all committees, respectively, thereof, and the PurchaserDesignee shall be appointed to each committee of the Company Board and eachSubsidiary Board.  The Company Board andeach Subsidiary Board shall give the Purchaser notice of each meeting of itsBoard and the committee thereof at the same time and in the same manner asnotices given to the members of its Board (which notice shall be promptlyconfirmed in writing).  The PurchaserDesignee and the Purchaser Observer shall be entitled to receive all writtenmaterials and other information given to members of the Company Board and theSubsidiary Boards in connection with such meetings at the same time suchmaterials and information are given to all other members of such Boards.  The Company shall reimburse the PurchaserDesignee and the Purchaser Observer for reasonable out-of-pocket expenses inconnection with attending such Person’s Board and committee meetings.  The Company agrees to take any and allactions necessary to effectuate the intent of the foregoing provisions of this Section 4.3.

 

4.4                                 InvestorProtection; Investment Opportunities.

 

(a)                                  Inconnection with any Change In Control or similar transaction undercircumstances where the Purchaser or any transferee thereof continues to holdthe Warrant or any portion thereof, the Company shall make, or cause to bemade, available to the Purchaser and/or such transferee all economic benefitsin a manner that treats the Purchaser and/or such transferee equitably withrespect to all other equityholders of Company. In this regard, the Company agrees to structure any Change In Control orsimilar transaction, under circumstances where any Purchaser or any transfereethereof continues to hold the Warrant or any portion thereof, in order to treatall equityholders, including the Purchaser and/or such holder, in a fair andequitable manner and such transaction structure shall not include disguisedpurchase price components payable to any equityholder in the form of paymentsallocated to covenants not to compete, consulting payments and the like, exceptfor employment agreements or similar agreements providing for reasonable “armslength” levels of compensation to such equityholder in return for futureservices to be rendered to the acquirer subsequent to a Change In Control.

 

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(b)                                 Asa further material inducement to the Purchaser to enter into the transactionscontemplated by this Agreement and to purchase the Securities, the Companyagrees that, notwithstanding anything to the contrary contained in itsCertificate of Incorporation as in effect on the date hereof or as hereafteramended, modified or restated, to the extent the Company becomes aware of anybusiness or investment opportunities in or related to, or with operationsrelated to, the business of the Company or its Subsidiaries which the Companyor any of its Subsidiaries or Affiliates is interested in pursuing other thanthrough the Company or its Subsidiaries, the Company shall, and shall cause itsSubsidiaries and Affiliates to, provide the Purchaser with reasonable advancenotice of, and the ability to participate in, such business or investmentopportunity on the same terms as the Company and/or its Subsidiaries and theirrespective Affiliates.

 

4.5                                 RestrictiveCovenants.  Except as otherwisespecifically provided in this Section 4.5, the Company shall complywith the following covenants so long as all or any portion of the Note and/orthe Warrant remains outstanding:

 

(a)                                  Indebtedness.  The Company shall not and shall not cause orpermit its Subsidiaries directly or indirectly to create, incur, assume, orotherwise become or remain directly or indirectly liable with respect to anyIndebtedness (other than pursuant to a Contingent Obligation permitted under Section 4.5(d))except for Permitted Indebtedness.

 

(b)                                 Liensand Related Matters.

 

(i)                                     NoLiens.  The Company shall not andshall not cause or permit its Subsidiaries to directly or indirectly create,incur, assume or permit to exist any Lien on or with respect to any property orasset of the Company or any such Subsidiary, whether now owned or hereafteracquired, or any income or profits therefrom, except Permitted Encumbrances.

 

(ii)                                  NoNegative Pledges.  The Company shallnot, and shall not cause or permit its Subsidiaries to directly or indirectlyenter into or assume any agreement (other than this Agreement and the SeniorLoan Documents) prohibiting the creation or assumption of any Lien upon itsproperties or assets, whether now owned or hereafter acquired.

 

(iii)                               Restrictions onDistributions.  Except forrestrictions of the type referred to in clauses (A) through (D) belowor provided herein or in the Senior Loan Documents, the Company shall not andshall not cause or permit its Subsidiaries to directly or indirectly create orotherwise cause or suffer to exist or become effective any consensualencumbrance or restriction of any kind on the ability of 

 

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the Company or any such Subsidiary to: (A) pay dividends or makeany other distribution on any of its Capital Stock; (B) pay anyIndebtedness owed to the Company or any other Subsidiary; (C) make loansor advances to the Company or any other Subsidiary; or (D) transfer any ofits property or assets to the Company or any other Subsidiary.

 

(c)                                  Investments.  The Company shall not and shall not cause orpermit its Subsidiaries to directly or indirectly make or own any Investment inany Person except for Permitted Investments.

 

(d)                                 ContingentObligations.  The Company shall notand shall not cause or permit its Subsidiaries to directly or indirectly createor become or be liable with respect to any Contingent Obligation except:

 

(i)            Letter ofCredit Obligations (as defined in the Loan and Security Agreement);

 

(ii)           thoseincurred by the Subsidiaries acting in their capacities as Guarantors under theSenior Loan Documents and the Transaction Documents;

 

(iii)          thoseresulting from endorsement of negotiable instruments for collection in theordinary course of business;

 

(iv)          thoseincurred in the ordinary course of business with respect to surety and appealbonds, performance and return-of-money bonds and other similar obligations notexceeding at any time outstanding $100,000 in aggregate liability;

 

(v)           thoseincurred with respect to Permitted Indebtedness provided that any suchContingent Obligation is subordinated to the Obligations to the same extent asthe Indebtedness to which it relates is subordinated to the Obligations; and

 

(vi)          payment ofthe Put Price (as defined in the Warrant).

 

(e)                                  RestrictedPayments.  The Company shall not andshall not cause or permit its Subsidiaries to directly or indirectly declare,order, pay, make or set apart any sum for any Restricted Payment, except (i) inconnection with the Reorganization, the Company shall be permitted todistribute up to $17,000,000 to its stockholders on the Closing Date, or duringthe five (5) Business Day period thereafter, in accordance with theterms of the Reorganization Documents, (ii) for management fees paid amongthe Company and its Subsidiaries in a manner which is substantially consistentwith prior practices, (iii) for loans (up to $50,000 in the aggregate atany time outstanding), (iv) pursuant to the terms, or in 

 

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connection with the exercise of, the Warrant, and (v) as otherwisespecifically provided herein.

 

(f)                                    Restrictionon Fundamental Changes.  Other thanPermitted Investments, the Company shall not and shall not cause or permit itsSubsidiaries to directly or indirectly:  (i) amend,modify or waive any term or provision of its Governing Documents unlessrequired by law; (ii) enter into any Change In Control transaction on orprior to October 22, 2006; (iii) liquidate, wind up or dissolveitself (or suffer any liquidation or dissolution); or (iv) acquire bypurchase or otherwise all or any substantial part of the business or assets ofany other Person.

 

(g)                                 Disposalof Assets.  The Company shall not andshall not cause or permit its Subsidiaries to directly or indirectly convey,sell, lease, sublease, transfer or otherwise dispose of, or grant any Person anoption to acquire, in one transaction or a series of related transactions, anyof its property, business or assets, whether now owned or hereafter acquired,except for (i) sales of Inventory in good faith to customers for fairvalue in the ordinary course of business, (ii) dispositions of obsoleteEquipment not used or useful in the business and (iii) PermittedEncumbrances.

 

(h)                                 Transactionswith Affiliates.  The Company shallnot and shall not cause or permit its Subsidiaries to directly or indirectlyenter into or permit to exist any transaction (including the purchase, sale,lease or exchange of any property or the rendering of any management,consulting, investment banking, advisory or other similar services) with anyAffiliate or with any director, officer, manager, representative, agent oremployee of the Company, except (i) as set forth on the AffiliatedTransactions Schedule; (ii) transactions in the ordinary course of andpursuant to the reasonable requirements of the business of the Company or anyof its Subsidiaries and upon fair and reasonable terms which are fullydisclosed to the Purchaser, are no less favorable to the Company or any of itsSubsidiaries than would be obtained in a comparable arm’s length transactionwith a Person that is not an Affiliate and are approved by the Company (and/orSubsidiary) Board including the affirmative vote of the Purchaser Designee; (iii) foreach of the employees party to the Employment Agreements, payment of reasonablecompensation to officers and employees for services actually rendered to theCompany or any of its Subsidiaries and reasonable out-of-pocket expensesincurred by them on behalf of the Company or any of its Subsidiaries; (iv) paymentof the compensation and other amounts pursuant to the terms of the EmploymentAgreements; (v) the Green Wing Lease, which may not be amended, restated,substituted, replaced or otherwise modified without the consent of thePurchaser; (vi) payments made pursuant to the Bonus Plan; and (vii) grantsmade under or pursuant to the Option Plan.

 

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(i)                                     Directors’Fees.  The Company shall not, andshall not cause any of its Subsidiaries to, pay fees to any Person to act as adirector of the Company or any Subsidiary, except fees payable to independentdirectors of the Company Board, which fees shall not exceed $50,000 in theaggregate during any Fiscal Year of the Company.

 

(j)                                     Conductof Business.  The Company shall notand shall not cause or permit its Subsidiaries to directly or indirectly engagein any business other than businesses currently conducted and those of the typedescribed on the Restricted Business Schedule.

 

(k)                                  ChangesRelating to Indebtedness.  TheCompany shall not and shall not cause or permit its Subsidiaries to directly orindirectly change or amend, modify or waive any provision of (i) the Loanand Security Agreement, except as permitted under the Senior SubordinationAgreement, or (ii) any material provision of its other Indebtedness.

 

(l)                                     FiscalYear.  The Company shall not changeits Fiscal Year or permit any of its Subsidiaries to change their respectivefiscal years.

 

(m)                               PressRelease; Public Offering Materials. The Company agrees that neither it nor its Subsidiaries or Affiliateswill in the future issue any press releases or other public disclosure,including any prospectus, proxy statement or other materials filed with anyGovernmental Authority relating to a public offering of the Capital Stock ofthe Company, using the name of the Purchaser or its Affiliates or referring tothis Agreement, the other Transaction Documents or the Related TransactionDocuments without the prior written consent of the Purchaser unless (and onlyto the extent that) the Company or its Subsidiary or Affiliate is required todo so under law and then, in any event, the Company or its Subsidiary orAffiliate will notify the Purchaser before issuing such press release or otherpublic disclosure.  The Company consentsto the publication by the Purchaser of a tombstone or similar advertisingmaterial relating to the financing transactions contemplated by this Agreementfollowing consummation of the transactions contemplated hereby.  The Purchaser shall provide a draft of anysuch tombstone or similar advertising material to the Company for review and commentprior to the publication thereof.

 

(n)                                 Subsidiaries.  The Company shall not and shall not cause orpermit its Subsidiaries to directly or indirectly establish, create or acquireany new Subsidiary.

 

(o)                                 HazardousMaterials.  The Company shall not andshall not cause or permit its Subsidiaries to cause or permit a Release of anyHazardous Material on, at, in, under, above, to, from or about any of the RealEstate where such Release would (i) violate in any respect, or form thebasis for any Environmental Liabilities to the Company or any of itsSubsidiaries 

 

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under, any Environmental Laws or Environmental Permits or (ii) otherwiseadversely impact the value or marketability of any of the Real Estate or anyother property or assets of the Company, other than such violations orEnvironmental Liabilities to the Company or its Subsidiaries that could notreasonably be expected to have a Material Adverse Effect.

 

(p)                                 ERISA.  The Company shall not and shall not cause orpermit any ERISA Affiliate to, cause or permit to occur an ERISA Event to theextent such ERISA Event could reasonably be expected to have a Material AdverseEffect.

 

(q)                                 SaleLeasebacks.  The Company shall notand shall not cause or permit any of its Subsidiaries to engage in any saleleaseback, synthetic lease or similar transaction involving any of its or theirassets.

 

(r)                                    Changesto Material Contracts.  The Companyshall not and shall not cause or permit any of its Subsidiaries to change oramend the terms of any material contract in any respect, including the MasterSubcontract Agreements.

 

(s)                                  Prepaymentsof Other Indebtedness.  Except asotherwise specifically provided in this Agreement, the Company shall not,directly or indirectly, voluntarily purchase, redeem, defease or prepay anyprincipal of, premium, if any, interest or other amount payable in respect ofany Indebtedness, other than (i) the Obligations or (ii) the SeniorDebt if and to the extent required by the Loan and Security Agreement and/orpermitted by the Senior Subordination Agreement.

 

(t)                                    Useof Proceeds; Margin Securities.  TheCompany shall not, nor shall the Company permit any of its Subsidiaries to, useany proceeds from the sale of the Note and the Warrant hereunder, directly orindirectly, for the purposes of purchasing or carrying any “margin securities”within the meaning of Regulation T promulgated by the Board of Governorsof the Federal Reserve Board, or for the purpose of arranging for the extensionof credit secured, directly or indirectly, in whole or in part by collateralthat includes any “margin securities.”

 

(u)                                 Management;Compensation.  The Company shall not,nor shall the Company permit any of its Subsidiaries to, without the priorapproval of the Company Board (including the affirmative vote or consent of thePurchaser Designee), (x) increase the compensation paid to any officer,key employee or consultant in excess of, as applicable, (i) historicalincreases in such compensation consistent with the past practices of theCompany, (ii) the amounts provided for in the Employment Agreements, or (iii) theamounts payable under the Bonus Plan, or (y) terminate the employment ofany executive or key employee.

 

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(v)                                 OfficeLocations.  The Company shall not,nor shall the Company permit any of its Subsidiaries to, collectively open morethan one (1) new office location during any Fiscal Year.

 

4.6                                 AffirmativeCovenants.  Except as otherwisespecifically provided in this Section 4.6, the Company shall complywith the following covenants so long as all or any portion of the Note and/orthe Warrant remains outstanding:

 

(a)                                  Preservationof Corporate Existence, Etc.  Causeto be done all things necessary (i) to maintain, preserve and renew itscorporate existence, rights, franchises, privileges, qualifications and alllicenses, authorizations and permits necessary to the conduct of its businessesand (ii) for its employees to maintain, preserve and review all licenses,authorizations and permits necessary to the conduct of its businesses.

 

(b)                                 Maintenanceof Properties.  Maintain and keep itsproperties in good repair, working order and condition (ordinary wear, tear andobsolescence excepted).

 

(c)                                  TaxMatters. Pay and discharge when payable all Taxes, assessments and Chargesimposed upon its properties or upon it or its income or profits (in each casebefore the same becomes delinquent and before penalties accrue thereon) and allclaims for labor, materials or supplies which if unpaid would by law become a Lienupon any of its property, unless and to the extent that the same are beingcontested in good faith; provided, however, this Section 4.6(c) shallnot preclude the Company or its Subsidiaries from contesting any Taxes or otherpayments, if they are being diligently contested in good faith in a mannerwhich stays enforcement thereof and if appropriate expense provisions have beenrecorded in conformity with GAAP.

 

(d)                                 Compliancewith Laws and Contractual Obligations. The Company will, (i) comply with and shall cause each of itsSubsidiaries to comply with (A) the requirements of all applicable laws,rules, regulations and orders of any Governmental Authority (including, withoutlimitation, laws, rules, regulations and orders relating to Taxes, employer andemployee contributions, securities, employee retirement and welfare benefits,environmental protection matters and employee health and safety) as now ineffect and which may be imposed in the future in all jurisdictions in which theCompany or its Subsidiaries is now doing business or may hereafter be doingbusiness and (B) the obligations, covenants and conditions contained inall Contractual Obligations of the Company or any of its Subsidiaries, otherthan those laws, rules, regulations, orders and provisions of such ContractualObligations the noncompliance with which could not be reasonably expected tohave, either individually or in the aggregate, a Material Adverse Effect; and (ii) maintainor obtain, and shall cause each of its Subsidiaries and each of its employeesto maintain or 

 

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obtain, all licenses, qualifications and permits now held or hereafterrequired to be held by the Company or any of its Subsidiaries, for which theloss, suspension, revocation or failure to obtain or renew, could reasonably beexpected to have, either individually or in the aggregate, a Material AdverseEffect.  This Section 4.6(d) shallnot preclude the Company or its Subsidiaries from contesting any Taxes or otherpayments, if they are being diligently contested in good faith in a mannerwhich stays enforcement thereof and if appropriate expense provisions have beenrecorded in conformity with GAAP.

 

(e)                                  EnvironmentalMatters.  The Company shall and shallcause each of its Subsidiaries to: (i) conduct its operations and keep andmaintain its Real Estate in compliance with all Environmental Laws andEnvironmental Permits other than noncompliance that could not reasonably beexpected to have a Material Adverse Effect; (ii) implement any and allinvestigation, remediation, removal and response actions that are appropriateor necessary to comply with Environmental Laws and Environmental Permitspertaining to the presence, generation, treatment, storage, use, disposal,transportation or Release of any Hazardous Material on, at, in, under, above,to or from any of its Real Estate; (iii) notify the Purchaser promptlyafter the Company or any of its Subsidiaries becomes aware of any violation ofEnvironmental Laws or Environmental Permits or any Release on, at, in, under,above, to, from or about any Real Estate that is reasonably likely to result inEnvironmental Liabilities to the Company or its Subsidiaries; and (iv) promptlyforward to the Purchaser a copy of any order, notice, request for informationor any communication or report received by the Company or any of itsSubsidiaries in connection with any such violation or Release or any othermatter relating to any Environmental Laws or Environmental Permits that couldreasonably be expected to result in Environmental Liabilities to the Company orany of its Subsidiaries, in each case whether or not the EnvironmentalProtection Agency or any Governmental Authority has taken or threatened anyaction in connection with any such violation, Release or other matter.  If the Purchaser at any time has a reasonablebasis to believe that there may be a violation of any Environmental Laws orEnvironmental Permits by the Company or any Person under its control or anyEnvironmental Liability arising thereunder, or a Release of Hazardous Materialson, at, in, under, above, to, from or about any of its Real Estate, that, ineach case, could reasonably be expected to have a Material Adverse Effect, thenthe Company and its Subsidiaries shall, upon the Purchaser’s written request (A) causethe performance of such environmental audits including subsurface sampling ofsoil and groundwater, and preparation of such environmental reports, at theCompany’s expense, as the Purchaser may from time to time reasonably request,which shall be conducted by reputable environmental consulting firms reasonablyacceptable to the Purchaser and shall be in form and substance reasonablyacceptable to the Purchaser, and (B) permit the Purchaser or itsrepresentatives to have 

 

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access to all Real Estate for the purpose of conducting suchenvironmental audits and testing as the Purchaser deems appropriate, includingsubsurface sampling of soil and groundwater. The Company shall reimburse the Purchaser for the costs of such auditsand tests and the same will constitute a part of the Obligations.

 

(f)                                    Maintenanceof Insurance.  (i) Apply forand/or continue in force with responsible insurance companies adequateinsurance covering risks of such types and covering casualties, risks andcontingencies of such types and in such amounts as are customary for entitiesof similar size engaged in similar lines of business, but in no eventmaterially less than such amounts that were maintained as of the Closing; and (ii) withinthirty (30) days of the Closing Date, the Company shall be named asbeneficiary under life insurance policies in the name of each of Samuel C.Youngblood and Donald J. Carr in the amount of $2,000,000 and $1,000,000,respectively.

 

(g)                                 Booksand Records.  Maintain proper booksof record and account which present fairly and accurately its financialcondition and results of operations and make provisions on its FinancialStatements for all such proper reserves as in each case are required inaccordance with GAAP consistently applied.

 

(h)                                 EmployeeBenefit Plans.  (i) Maintain,and cause each Subsidiary to maintain, each Pension Plan in compliance with allapplicable requirements of law and regulations, (ii) not permit, or permitany member of the Controlled Group to permit, any condition to exist inconnection with any Pension Plan, which might constitute grounds for the PBGCto institute proceedings to have such Pension Plan terminated or a trusteeappointed to administer such Pension Plan, and (iii) not engage in, permitto exist or occur, and not permit any member of the Controlled Group to engagein, permit to exist or occur, any other condition, event or transaction withrespect to any such Employee Benefit Plan which would be reasonably likely toresult in the incurrence by the Company or any of its Subsidiaries of anymaterial liability, fine or penalty.

 

(i)                                     Compliancewith Agreements.  The Company shallperform and observe all of its obligations, and shall cause each of itsSubsidiaries (including in their capacities as Guarantors) to perform andobserve all of their respective obligations, to each holder of all or anyportion of the Note, and all of their respective obligations to each holder ofall or any portion of the Warrant and/or Warrant Stock, set forth in (i) itsOrganizational Documents; (ii) the Warrant; (iii) the Note; and (iv) theother Related Transaction Documents.

 

(j)                                     CapitalStock.  The Company shall at alltimes reserve and keep available out of its authorized but unissued shares ofCommon Stock, solely for the 

 

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purpose of issuance upon any exercise of the Warrant, such number ofshares of Common Stock issuable upon the exercise of the Warrant.  All shares of Common Stock which are soissuable shall, when issued, be duly and validly issued, fully paid andnonassessable and free from all Taxes and Liens.  The Company and, if applicable, the Purchaserand any transferees, shall take all such actions as may be necessary to assurethat all such shares of Common Stock may be so issued without violation of anyapplicable law or governmental regulation or any requirements of any domesticsecurities exchange upon which shares of Common Stock may be listed.

 

(k)                                  IntellectualProperty Rights.  The Company shall,and shall cause each of its Subsidiaries to, possess and maintain allIntellectual Property Rights necessary to the conduct of their respectivebusinesses and own all right, title and interest in and to, or have a validlicense for, all such Intellectual Property Rights.  Neither the Company nor any of itsSubsidiaries shall take any action, or fail to take any action, which wouldresult in the invalidity, abandonment, misuse or unenforceability of suchIntellectual Property Rights or which would infringe upon or misappropriate anyrights of other Persons to the extent that such action or failure to act wouldhave a Material Adverse Effect.

 

(l)                                     D&OInsurance.  Within thirty (30)days of the Closing Date, the Company shall obtain and thereafter maintaindirectors’ and officers’ liability insurance policies or binders related tosuch policies in form and substance reasonably satisfactory to the Purchaser.

 

(m)                               SecuritiesLaw Compliance.  The Company shalltimely make all filings under all applicable federal and state securities lawsnecessary in connection with the issuance of the Securities pursuant to thisAgreement, if any.

 

(n)                                 OptionPlan Matters.  The Company shallmaintain the Option Plan and make any grants under the Option Plan inaccordance with the terms thereof.  TheCompany shall not, and shall cause its Subsidiaries not to, amend, modify orchange any material term or provision of the Option Plan, including pursuant toany grant or similar letter issued thereunder or pursuant thereto, without theprior written approval of the Purchaser

 

(o)                                 BondingFacility.  The Company shall use itsbest efforts, as soon as practicable following the Closing, to secure a bondingfinancing line, similar to the bonding facility that the Company and itsSubsidiaries had in place prior to the Closing, that will allow the Company andits Subsidiaries to provide bonds for bonded contracts.  The terms of such bonding financing lineshall be reasonably satisfactory to the Purchaser.

 

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4.7                                 FinancialCovenants.  So long as (i) anyportion of the principal amount of the Note remains outstanding or (ii) thePurchaser, together with any of its transferees, holds, or is deemed to hold,at least ten percent (10%) of the Common Stock on a fully diluted basis, theCompany covenants and agrees that it shall and shall cause each of itsSubsidiaries to perform and comply with, all covenants in this Section 4.7applicable to such Person.

 

(a)                                  CapitalExpenditure Limits.  The Company andits Subsidiaries, on a consolidated basis, shall not make Capital Expendituresduring any Fiscal Year in excess of $600,000, in the aggregate.

 

(b)                                 MinimumFixed Charge Coverage Ratio.  TheCompany and its Subsidiaries shall have, on a consolidated basis at the end ofeach month, a Fixed Charge Coverage Ratio for the 12-month period then ended ofnot less than 1.00 to 1.00; provided, however, that in the event the FixedCharge Coverage Ratio at the end of any month is at or between .90 to 1.00 and..99 to 1.00, the Company shall have the option (the “Coverage Option”),exercisable one (1) time during the term of this Agreement, to accruethe Current Interest and default interest due and payable under the Note “inkind” for two (2) successive quarterly periods prior to any Event ofDefault being declared by the Purchaser hereunder.

 

(c)                                  SeniorLeverage Ratio.  The Company and itsSubsidiaries on a consolidated basis shall have, at the end of each month, aSenior Leverage Ratio as of the last day of such month and for the 12-monthperiod then ended, of not more than 2.00 to 1.00; provided, however, that inthe event (i) the Senior Leverage Ratio at the end of any month is at orbetween 2.01 to 1.00 and 2.50 to 1.00, and (ii) the Company has notexercised the Coverage Option, the Company shall have the option, exercisableone (1) time during the term of this Agreement, to accrue the CurrentInterest and default interest due under the Note “in kind” for two (2) successivequarterly periods prior to any Event of Default being declared by the Purchaserhereunder.

 

(d)                                 Notwithstandinganything to the contrary contained in clauses (b) and (c) above, uponan Event of Default under Section 7.1(g), the Purchaser shall haveall of the rights and remedies contained herein.

 

4.8                                 CovenantsRelated to ISI*MCS and Green Wing. The Company (a) shall, and shallcause each of its Subsidiaries to, immediately provide to the Purchaser a copyof each notice received pursuant to the ISI MCS Documents and the Green WingDocuments; (b) shall not, and shall not cause or permit any of itsSubsidiaries to, change or amend the terms of any of the ISI MCS Documents orthe Green Wing Documents; and (c) shall, and shall cause each of its Subsidiariesto, immediately notify the Purchaser of any breach or termination of any of theISI MCS Documents or the Green Wing Documents.

 

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5.                                       Representationsand Warranties of the Company.

 

As a material inducement to the Purchaser to enterinto this Agreement and purchase the Securities hereunder, the Company herebyrepresents and warrants to the Purchaser as follows:

 

5.1                                 Organization,Qualifications, Authority and Corporate Power.

 

(a)                                  TheCompany is a corporation duly incorporated, validly existing and in goodstanding under the laws of the State of Delaware and is duly licensed orqualified and in good standing as a foreign corporation in each jurisdiction inwhich the nature of the business conducted by it or the nature of the RealEstate owned or leased by it requires such licensing or qualification unlessand to the extent that the failure to be so licensed or qualified or to be insuch good standing would not have a Material Adverse Effect.

 

(b)                                 TheCompany has all requisite corporate power and authority and all licenses,permits and authorizations necessary to own and hold its properties and tocarry on its business as now conducted and as proposed to be conducted, and theCompany has the corporate power and authority to execute, deliver and performthe Transaction Documents to which it is a party.  The Company is in full compliance with all ofthe terms and provisions of its Governing Documents.

 

5.2                                 Subsidiaries.  Each Subsidiary is duly organized, validlyexisting and in good standing (if applicable) under the laws of thejurisdiction in which it is incorporated or organized, as the case may be, withnone being a Foreign Subsidiary, has full and adequate power to own or leaseits property and assets and carry on its business as now conducted, and is dulylicensed or qualified and in good standing in each jurisdiction in which thenature of the business conducted by it or the nature of the Real Estate ownedor leased by it requires such licensing or qualification unless and to theextent that the failure to be so licensed or qualified or to be in such goodstanding would not have a Material Adverse Effect.  All of the outstanding shares of CapitalStock or comparable equity interests of each Subsidiary are validly issued andoutstanding and fully paid and nonassessable and all such shares or otherequity interests owned by the Company or a Subsidiary are owned, beneficiallyand of record, by the Company or such Subsidiary free and clear of all Liens, otherthan Liens in favor of the Senior Lender that are held subject to the SeniorSubordination Agreement.  There are nooutstanding commitments or other obligations of the Company or any Subsidiaryto issue, and no options, warrants or other rights of any Person to acquire,any shares of any class of Capital Stock or other comparable equity interestsof any Subsidiary.

 

5.3                                 Authorizationof Agreements, Etc.  The execution,delivery and performance by each of the Company and the Subsidiaries of theTransaction Documents to which it is a party and the issuance, sale anddelivery of the Note and the Warrant by the 

 

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Company (a) have been duly authorized by all requisite corporateor partnership action and (b) will not (i) violate any provision oflaw, any order of any court or other Governmental Authority, its GoverningDocuments, any material provision of any material indenture, agreement or otherinstrument to which it is a party or bound, or any of its properties or assetsis bound, or (ii) result in a breach of or constitute (with due notice orlapse of time or both) a default under any such order, indenture, agreement orother instrument, or (iii) result in the creation or imposition of anyLien of any nature whatsoever upon any of its properties or assets.

 

5.4                                 Validity.  This Agreement has been duly executed anddelivered by the Company and constitutes its legal, valid and bindingobligation, enforceable against it in accordance with its terms (except as thesame may be limited by applicable bankruptcy, insolvency, reorganization,moratorium or similar laws relating to or affecting creditors’ rights generallyor by general equitable principles, regardless or whether such enforceabilityis considered in a proceeding at law or in equity).  The Note, the Warrant, the Stockholders’Agreement, the Senior Subordination Agreement and the other TransactionDocuments to be executed by the Company, when executed and delivered inaccordance with this Agreement, will constitute legal, valid and bindingobligations of the Company, enforceable in accordance with their respectiveterms (except as the same may be limited by applicable bankruptcy, insolvency,reorganization, moratorium or similar laws relating to or affecting creditors’rights generally or by general equitable principles, regardless or whether suchenforceability is considered in a proceeding at law or in equity).

 

5.5                                 AuthorizedCapital Stock.

 

(a)                                  Theauthorized Capital Stock of the Company consists of 3,000 shares of CommonStock, 104.9064 shares of which are validly issued and outstanding, fully paidand nonassessable.  The stockholders ofrecord and holders of subscriptions, warrants, options, convertible securitiesand other rights (contingent or otherwise) to purchase or otherwise acquireCapital Stock of the Company and the number of shares of Capital Stock, otherequity securities, and the number of such subscriptions, warrants, options,convertible securities and other such rights held by each, are as set forth inthe attached Capitalization Schedule.

 

(b)                                 Exceptas set forth in the attached Capitalization Schedule and pursuantto the terms and conditions of this Agreement, (i) no Person owns ofrecord or is known to the Company to own beneficially any share of CapitalStock or other equity securities of the Company, (ii) no subscription,warrant, option, convertible security, or other right (contingent orother) to purchase or otherwise acquire from the Company Capital Stock ofthe Company is authorized or outstanding and (iii) there is no commitmentby the Company to issue shares, subscriptions, warrants, options, convertiblesecurities, or other such rights or to distribute to holders of any of itsCapital Stock any evidence of Indebtedness or assets.  Except as provided 

 

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for in this Agreement, its Governing Documents, the TransactionDocuments, or as set forth in the attached Capitalization Schedule, theCompany has no obligation (contingent or otherwise) to purchase, redeem orotherwise acquire any of its Capital Stock or any interest therein or to payany dividend or make any other distribution in respect thereof.  There are no voting trusts or agreements, stockholders’agreements, pledge agreements, buy-sell agreements, rights of first refusal,preemptive rights or proxies relating to any securities of the Company or anyof its Subsidiaries, other than the Stockholders’ Agreement and votingagreement contained therein, included in the Transaction Documents.  All of the outstanding securities of theCompany were issued in compliance with all applicable federal and statesecurities laws.  Except as set forth inthe attached Capitalization Schedule, the Company has no direct orindirect Subsidiaries.

 

5.6                                 Solvency.  From and after the date of this Agreement,the Loan and Security Agreement, the transactions contemplated herein andtherein, and the Reorganization, the Company and its Subsidiaries:  (a) owns and will continue to own assetsthe fair market value of which are greater than the total amount of itsliabilities (including contingent liabilities); (b) has and will continueto have capital that is not unreasonably small in relation to its business aspresently conducted or any contemplated or undertaken transaction; and (c) doesnot intend to and will not incur and does not believe that it will incur debtsbeyond its ability to pay such debts as they become due.

 

5.7                                 Assets.  Except as set forth on the attached AssetsSchedule, the Company has good and marketable title to, or a validleasehold interest in, the properties and assets (including Real Estate) usedby it, located on its premises or shown on the Latest Balance Sheet or acquiredthereafter, free and clear of all Liens, except for properties and assetsdisposed of in the ordinary course of business since the date of the LatestBalance Sheet and except for Permitted Encumbrances.  Except as described on the Assets Schedule,the Company’ and its Subsidiaries’ buildings, equipment and other tangibleassets are in good operating condition and are fit for use in the ordinarycourse of business. The Company owns, or has a valid leasehold interest in, allassets necessary for the conduct of its businesses as presently conducted andas presently proposed to be conducted

 

5.8                                 TaxMatters.

 

(a)                                  Exceptas set forth on the attached Taxes Schedule: each Consolidated Entityhas filed all Tax Returns which it is required to file under applicable lawsand regulations; all such Tax Returns are complete and correct and have beenprepared in compliance with all applicable laws and regulations; eachConsolidated Entity has paid all Taxes due and owing by it (whether or not suchTaxes are required to be shown on a Tax Return) and has withheld and paid overto the appropriate Taxing authority all Taxes which it is required to withholdfrom amounts paid or owing to any 

 

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employee, equityholder, creditor or other third party unless contestingin good faith pursuant to appropriate proceedings; no Consolidated Entity haswaived any statute of limitations with respect to any Taxes or agreed to anyextension of time with respect to any Tax assessment or deficiency; the accrualfor Taxes on the Latest Balance Sheet would be adequate to pay all Taxliabilities of each Consolidated Entity if its current Tax year were treated asending on the date of the Latest Balance Sheet (excluding any amount recordedwhich is attributable solely to timing differences between book and Tax income);since the date of the Latest Balance Sheet, no Consolidated Entity has incurredany liability for Taxes other than in the ordinary course of business; theassessment of any additional Taxes for periods for which Tax Returns have beenfiled by each Consolidated Entity is not expected to exceed the recordedliability therefor on the Latest Balance Sheet (excluding any amount recordedwhich is attributable solely to timing differences between book and Taxincome); the federal income Tax Returns of each Consolidated Entity has beenaudited and closed for all Tax years through 1998; no foreign, federal, stateor local Tax audits or administrative or judicial proceedings are pending or,to the knowledge of the Company, being conducted with respect to any ConsolidatedEntity, no information related to Tax matters has been requested by anyforeign, federal, state or local Taxing authority and no written noticeindicating an intent to open an audit or other review has been received by theCompany from any foreign, federal, state or local Taxing authority; and thereare no unresolved questions or claims concerning the Tax liability of anyConsolidated Entity.

 

(b)                                 NoConsolidated Entity has made an election under §341(f) of the Code.  No Consolidated Entity is liable for theTaxes of another Person that is not a Subsidiary in an amount under (i) TreasuryRegulation §1.1502-6 (or comparable provisions of state, local or foreign law),(ii) as a transferee or successor, (iii) by contract or indemnity, or(iv) otherwise.  No ConsolidatedEntity is a party to any Tax sharing agreement. Each Consolidated Entity hasdisclosed on its federal income Tax Returns any position taken for whichsubstantial authority (within the meaning of Code §6662(d)(2)(B)(i)) did notexist at the time the Tax Return was filed. No Consolidated Entity has made any payments, is obligated to makepayments or is a party to an agreement that could obligate it to make anypayments that would not be deductible under Code §280G.

 

5.9                                 Contractsand Commitments.  Except as disclosedon the Contracts Schedule, all of the Company’s and its Subsidiaries’contracts are valid, binding and enforceable in accordance with theirrespective terms, except where any failure or failures thereof would not,considered in the aggregate, have a Material Adverse Effect.  The Company and each of its Subsidiaries hasperformed all obligations required to be performed by it under such contractsand is not in default under or in breach of nor in receipt of any claim ofdefault or breach under any such contract; no event has occurred which, withthe passage of time or the giving of 

 

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notice or both, would result in a default, breach or event ofnoncompliance by the Company or any of its Subsidiaries under any suchcontract; none of the Company nor any of its Subsidiaries has any presentexpectation or intention of not fully performing all such obligations; none ofthe Company nor any of its Subsidiaries has knowledge of any breach oranticipated breach by the other parties to any such contract; and none of theCompany nor any of its Subsidiaries is a party to any contract or commitmentrequiring it to purchase or sell goods or services or lease property above orbelow (as the case may be) prevailing market prices and rates.  The Construction Contracts Schedulesets forth (i) a complete and accurate list of all construction contracts,agreements or commitments, outstanding as of the date hereof, by which theCompany and its Subsidiaries are bound and (ii) identifies the percentageof completion or performance for each such contract as of the date hereof.

 

5.10                           Litigation,Etc.  Except as set forth on theattached Litigation Schedule, there are no actions, suits, proceedings,orders, investigations or claims pending or, to the best of the Company’sknowledge, threatened against or affecting the Company or any of itsSubsidiaries (or pending, or, to the best of the Company’s knowledge,threatened against or affecting any of the officers, directors, managers oremployees of the Company or any of its Subsidiaries with respect to theirbusinesses or proposed business activities on behalf of the Company or any ofits Subsidiaries), or pending or threatened by the Company or any of its Subsidiariesagainst any third party, at law or in equity, or before or by any governmentaldepartment, commission, board, bureau, agency or instrumentality (including,without limitation, any actions, suits, proceedings or investigations withrespect to the transactions contemplated by this Agreement); neither theCompany nor any of its Subsidiaries is subject to any arbitration proceedingsunder collective bargaining agreements or otherwise or, any governmentalinvestigations or inquiries (including, without limitation, inquiries as to thequalification to hold or receive any license or permit); and, to the best ofthe Company’s knowledge, there is no basis for any of the foregoing. Neitherthe Company nor any of its Subsidiaries is subject to any judgment, order ordecree of any court or other governmental agency, and neither Company nor anyof its Subsidiaries has received any opinion or memorandum or legal advice fromlegal counsel to the effect that it is exposed, from a legal standpoint, to anyliability or disadvantage.

 

5.11                           Brokerage.  Except as set forth on the attached BrokerageSchedule, there are no claims for brokerage commissions, finders’ fees orsimilar compensation in connection with the transactions contemplated by thisAgreement based on any arrangement or agreement binding upon the Company or anyof its Subsidiaries.  The Company shallpay, and shall hold the Purchaser harmless against, any liability, loss orexpense (including, without limitation, reasonable attorneys’ fees andout-of-pocket expenses) arising in connection with any such claim.

 

5.12                           Insurance.  The attached Insurance Schedule containsa description of each insurance policy maintained by the Company or any of itsSubsidiaries with respect to its properties, assets and businesses, and eachsuch policy is in full 

 

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force and effect as of the Closing Date. Neither the Company nor any ofits Subsidiaries is in default in any material respect with respect to itsobligations under any insurance policy maintained by it, and neither Companynor any of its Subsidiaries has been denied insurance coverage. The insurancecoverage of the Company and its Subsidiaries is customary for entities ofsimilar size engaged in similar lines of business. Except as set forth on the InsuranceSchedule, the Company and its Subsidiaries do not have any self-insuranceor co-insurance programs, and the reserves set forth on the Latest BalanceSheet are adequate to cover all anticipated liabilities with respect to anysuch self-insurance or co-insurance programs.

 

5.13                           Employees.  Except as set forth on the attached EmployeesSchedule, the Company is not aware that any executive or key employee ofthe Company or any of its Subsidiaries or any group of employees of the Companyor any of its Subsidiaries has any plans to terminate employment with theCompany or any of its Subsidiaries.  TheCompany and each of its Subsidiaries has complied with all laws relating to theemployment of labor (including, without limitation, provisions thereof relatingto wages, hours, equal opportunity, collective bargaining and the payment ofsocial security and other Taxes), and the Company is not aware that the Companyor any of its Subsidiaries has any labor relations problems (including, withoutlimitation, any union organization activities, threatened or actual strikes orwork stoppages or material grievances). Except as set forth on the attached Employee Schedule, neitherthe Company nor any of its Subsidiaries nor, to the best of the Company’sknowledge, any of their employees is subject to any noncompete, nondisclosure,confidentiality, employment, consulting or similar agreements relating to,affecting or in conflict with the present or proposed business activities ofthe Company or any of its Subsidiaries. Salaries and bonuses payable or to bepaid to each employee during the Company’s 2004 Fiscal Year are set forth onthe attached Employees Schedule.

 

5.14                           Environmentaland Safety Matters.

 

(a)                                  Exceptas set forth on the attached Environmental Schedule, the Company and itsSubsidiaries have complied with and are currently in compliance with allEnvironmental Laws, and neither the Company nor any of its Subsidiaries hasreceived any oral or written notice, regarding any liabilities (whetheraccrued, absolute, contingent, unliquidated or otherwise) or any corrective,investigatory or remedial obligations arising under Environmental Laws whichhave not been corrected and which relate to the Company or any of itsSubsidiaries or any of their properties or facilities.  Without limiting the generality of theforegoing, the Company and its Subsidiaries have obtained and complied with,and are currently in compliance with, all Environmental Permits that may berequired pursuant to any Environmental Law for the occupancy of theirproperties or facilities or the operation of their businesses.  A list of all such Environmental Permits isset forth on the attached Environmental Schedule.  Neither this Agreement nor the consummationof the

 

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transactions contemplated by this Agreement shall impose anyobligations on the Company or any of its Subsidiaries or otherwise for siteinvestigation or cleanup, or notification to or consent of any GovernmentalAuthorities or third parties under any Environmental Laws (including, withoutlimitation, any so called “transaction-triggered” or “responsible propertytransfer” laws and regulations). None of the following exists in violation ofEnvironmental Laws at any property or facility owned, occupied or operated bythe Company or any of its Subsidiaries:

 

(i)            undergroundstorage tanks or surface impoundments;

 

(ii)           asbestos-containingmaterials in any form or condition; or

 

(iii)          materials or equipment containingpolychlorinated biphenyls.

 

(b)           NeitherCompany nor any of its Subsidiaries has treated, stored, disposed of, arrangedfor or permitted the disposal of, transported, handled or Released anysubstance (including, without limitation, any Hazardous Material) or owned,occupied or operated any facility or property, so as to give rise toliabilities of the Company or any of its Subsidiaries for response costs,natural resource damages or attorneys fees pursuant to CERCLA, or any otherEnvironmental Law.

 

(c)           Withoutlimiting the generality of the foregoing, no facts, events or conditionsrelating to the past or present properties, facilities or operations of theCompany or its Subsidiaries shall prevent, hinder or limit continued compliancewith Environmental Laws, give rise to any corrective, investigatory or remedialobligations pursuant to Environmental Laws or any other liabilities (whetheraccrued, absolute, contingent, unliquidated or otherwise) pursuant toEnvironmental Laws (including, without limitation, those liabilities relatingto onsite or offsite Releases or threatened Releases of Hazardous Materials,personal injury, property damage or natural resources damage).

 

(d)           Neitherthe Company nor any of its Subsidiaries has, either expressly or by operationof law, assumed or undertaken any liability or corrective, investigatory orremedial obligation of any other Person relating to any Environmental Laws.

 

(e)           Neitherthe Company nor any of its Subsidiaries has received notice of or is subject toany Environmental Liabilities.  No Lien,whether recorded or unrecorded, in favor of any Governmental Authority,relating to any liability of the Company or any of its Subsidiaries arisingunder any Environmental Laws has attached to any property leased or operated bythe Company or any of its Subsidiaries.

 

5.15         Plans.    Nofact, including, but not limited to, any “Reportable Event,” as that term isdefined in Section 4043 of ERISA, exists in connection with any PensionPlan 

 

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of the Company or any of its Subsidiaries which might constitutegrounds for termination of any such Pension Plan by the PBGC or for theappointment by the appropriate United States District Court of a Trustee toadminister any such Pension Plan.  No “ProhibitedTransaction” within the meaning of Section 406 of ERISA exists or willexist upon the execution or delivery of this Agreement or the performance bythe parties hereto of their respective duties and obligations hereunder.  The Company agrees to do all acts, includingbut not limited to contributions, necessary to maintain compliance with ERISAand agrees not to terminate any such Pension Plan in a manner or do or fail todo any act which could result in the imposition of a Lien on any property ofthe Company or its Subsidiaries pursuant to Section 406B of ERISA.  Neither the Company nor its Subsidiaries hasincurred withdrawal liability under a Multiemployer Plan.

 

5.16         AffiliatedTransactions.  Except as set forth onthe attached Affiliated Transactions Schedule, no officer, director,employee, manager, holder of Capital Stock or Affiliate of the Company or anyof its Subsidiaries, or any individual related by blood, marriage or adoptionto any such individual, or any entity in which any such Person or individualowns any beneficial interest, is a party to any agreement, contract,commitment, side letter or transaction with the Company or any of itsSubsidiaries or has any interest in any property used by the Company or any ofits Subsidiaries.

 

5.17         OtherAgreement Representations.  Therepresentations and warranties (and the disclosure schedules thereto) made bythe Company and the Guarantors in the Loan and Security Agreement, theReorganization Documents and the ISI MCS Documents are true and correct in allmaterial respects as of the date hereof, and are hereby incorporated in full bythis reference and shall be deemed to have been made to (and for the benefitof) the Purchaser in this Agreement. True and correct copies of the final disclosure schedules referenced inand/or attached to the Loan and Security Agreement, the ReorganizationDocuments and the ISI MCS Documents have been delivered to the Purchaser.

 

6.             Representationsand Warranties of the Purchaser.

 

As a material inducement to the Company to enter intothis Agreement and sell the Securities hereunder, the Purchaser herebyrepresents and warrants to the Company as follows:

 

6.1           Organizationand Good Standing.  It is a limitedpartnership, duly organized, validly existing and in good standing under thelaws of the State of Delaware and has all requisite power and authority tocarry on its business as now conducted.

 

6.2           Authorization;Power.  The execution and delivery byit of, and the performance by it under, the Transaction Documents to which itis a party and the purchase of the Note and the Warrant issued in favor of ithave been duly authorized by all requisite action, and it has the full right,power and authority to enter into, and perform its obligations under, theTransaction Documents to which it is a party.

 

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6.3           Validity.  This Agreement has been duly executed anddelivered by it and constitutes its valid and binding obligation, enforceableagainst it in accordance with its terms, except as the same may be limited byapplicable bankruptcy, insolvency, reorganization, moratorium or similar lawsrelating to or affecting creditors’ rights generally or by general equitableprinciples, regardless of whether such enforceability is considered in aproceeding in equity or at law.

 

6.4           AccreditedInvestor.  It is an “accreditedinvestor” as such term is defined in Rule 501 of Regulation D underthe Securities Act.

 

6.5           Purchasefor Own Account; Acknowledgment of Risk. It is acquiring the Securities for its own account without the presentintention of resale or distribution.  Itacknowledges that it may not resell or otherwise transfer such Securitieswithout an effective registration statement or exemption therefrom under federaland applicable state securities laws, and that it may have to hold itsinvestment for an indefinite amount of time. It further acknowledges that the purchase of the Securities is a riskyinvestment and that it may lose its entire investment hereby.

 

6.6           NoViolation. The execution, delivery and performance by the Purchaser of thisAgreement and the other Transaction Documents to which it is a party, and theconsummation of the transactions contemplated hereby and thereby, do not andshall not (a) conflict with or result in any breach of any of theprovisions of, (b) constitute a default under or result in a violation of,or (c) require any authorization, consent, approval, exemption or otheraction by or notice to any Governmental Authority under the provisions of, thePurchaser’s Governing Documents or any law to which the Purchaser is subject.

 

7.             Events of Default.

 

7.1           Definition.  An “Event of Default” shall be deemed to haveoccurred for purposes of this Agreement if:

 

(a)           theCompany fails to pay when due and payable (whether at maturity or otherwise) (i) thefull amount of interest then accrued on the Note within three (3) BusinessDays of the date such interest is due, or (ii) the full amount of anyprincipal payment (together with any applicable premium) on the Note;

 

(b)           the Company or any ofits Subsidiaries:

 

(i)            breachesor fails to perform or observe any of the covenants and obligations describedin Section 4.1 of this Agreement and such breach or failurecontinues for at least forty-five (45) days; or

 

(ii)           breachesor fails to perform or observe any of the covenants and obligations describedin Section 4.2 or 4.6 of this Agreement and such breach orfailure continues for at least thirty (30) days; or

 

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(iii)          breaches or fails to perform or observe anyof the covenants, obligations or other provisions contained in the Note andsuch breach or failure continues for at least thirty (30) days; or

 

(iv)          breachesor fails to perform or observe any of the covenants, obligations or other provisionscontained in the Warrant or in Sections 4.4, 4.54.7or 4.8 of this Agreement; or

 

(v)           breachesor fails to perform or observe any of the covenants, obligations or otherprovisions contained herein (other than as described above), or contained inany other instrument delivered pursuant hereto or thereto and such breach orfailure continues for at least thirty (30) days after notice thereof from thePurchaser;

 

(c)           anyrepresentation, warranty or information contained herein or required to be furnishedto the holder of the Note or the Warrant pursuant to this Agreement, or anywriting furnished by or on behalf of the Company to the holder of the Noteand/or the Warrant, is false or misleading on the date made or furnished;

 

(d)           theCompany or any of its Subsidiaries makes an assignment for the benefit ofcreditors or admits in writing its inability to pay its debts generally as theybecome due; or an order, judgment, decree or injunction is entered adjudicatingthe Company or any of its Subsidiaries bankrupt or insolvent or an order,judgment, decree or injunction is entered against the Company or any of itsSubsidiaries, requiring the dissolution or split up of the Company or any ofits Subsidiaries or preventing the Company or any of its Subsidiaries fromconducting all or any material part of its business; or any order for reliefwith respect to the Company or any of its Subsidiaries is entered under theFederal Bankruptcy Code; the Company or any of its Subsidiaries petitions orapplies to any tribunal for the appointment of a custodian, trustee, assignee,receiver, liquidator or sequestrator (or similar official) of the Company orany of its Subsidiaries, of any substantial part of the assets of the Companyor any of its Subsidiaries, or for the winding up or liquidation of the Companyor any of its Subsidiaries’ affairs, or commences any proceeding (other than aproceeding for the voluntary liquidation and dissolution of any of itsSubsidiaries) relating to the Company or any of its Subsidiaries under anybankruptcy reorganization, arrangement, insolvency, readjustment of debt,dissolution, liquidation or similar law of any jurisdiction now or hereafter ineffect; or any such petition or application is filed, or any such proceeding iscommenced, against the Company or any of its Subsidiaries and either (i) theCompany or any Subsidiary by any act approves thereof, consents thereto oracquiescence therein or (ii) such petition, application or proceeding isnot dismissed within sixty (60) days;

 

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(e)           anymoney judgment, writ or warrant of attachment, or similar process involving anamount in the aggregate at any time in excess of $110,000 (in any case notadequately covered by insurance as to which the insurance company hasacknowledged coverage) is entered or filed against the Company or any of itsSubsidiaries or any of their respective assets and remains undischarged,unvacated, unbonded or unstayed for a period of thirty (30) days, but inany event not later than ten** **(10) daysprior to the date of any proposed sale thereunder;

 

(f)            theCompany or any of its Subsidiaries defaults (i) in payment of any amountsunder any indenture, loan agreement or other instrument under which anyevidence of Indebtedness of the Company or any of its Subsidiaries has been orhereafter may be issued (other than the Senior Debt) and such default could, inthe Purchaser’s sole judgment, have a Material Adverse Effect, or (ii) incompliance with the terms, covenants or other provisions of any such indenture,loan agreement or other instrument, and the effect of such default incompliance is to permit the acceleration of the stated maturity of suchIndebtedness (whether or not actually accelerated) or (in the case of demand obligations)results in demand for payment of such Indebtedness and such acceleration ordemand could, in the Purchaser’s sole judgment, have a Material Adverse Effect;

 

(g)           thepayment of any portion of the Senior Debt is accelerated by the holders thereof;

 

(h)           theCompany shall breach or fail to perform or observe any of the covenants,obligations or provisions contained in Section 4.3 hereof or in theStockholders’ Agreement;

 

(i)            (i) thereshall have been any amendment to or termination of the Green Wing Lease, or (ii) anyparty to the Green Wing Lease shall have breached****or otherwise failed to perform or observe any of thecovenants, obligations or provisions contained therein;

 

(j)            (i) thereshall have been any amendment to or termination of (A) any of the MasterSubcontractor Agreements or (B) any of the ISI MCS Documents or (ii) aparty to any of the ISI MCS Documents (other than Purchaser) or any of theMaster Subcontractor Agreements shall have breached****or otherwise failed to perform or observe any of thecovenants, obligations or provisions contained, respectively, therein;

 

(k)           the Companyor any other party to any Affiliate transaction shall have breached****or otherwise failed to perform or observeany of the covenants, obligations or provisions related thereto;

 

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(l)            thedissolution of the Company or any Guarantor which is a partnership, limitedliability company, corporation or other entity without reconstitution withinsixty (60) days of such dissolution;

 

(m)          theinstitution in any court of a criminal proceeding against the Company or anyGuarantor, or the indictment of the Company or any Guarantor for any felonywhich, if adversely determined, could have a Material Adverse Effect;

 

(n)           there shalloccur any event which, in the Purchaser’s reasonable judgment, could have aMaterial Adverse Effect;

 

(o)           thereshall occur a Change In Control or IPO; or

 

(p)           anyprovision of this Agreement, the Note or the Warrant affecting the ability ofthe Company or any Guarantor to pay or perform its obligations hereunder orthereunder shall cease to be in full force and effect or shall be declared tobe null and void by a court of competent jurisdiction.

 

The foregoing shall constitute Events of Defaultwhatever the reason or cause for any such Event of Default and whether it isvoluntary or involuntary or is effected by operation of law or pursuant to anyjudgment, decree or order of any court or any order, rule or regulation ofany administrative or Governmental Authority.

 

7.2           Consequences ofEvents of Default.

 

(a)           Ifany Event of Default has occurred, the Current Interest on the Note shallincrease immediately by two (2) percentage points to thirteen andfifty-eight hundreths percent (13.58%). Any increase of the Current Interest resulting from the operation ofthis subparagraph shall terminate as of the close of business on the date onwhich no Event of Default exists (subject to subsequent increases pursuant tothis subparagraph).

 

(b)           Ifan Event of Default of the type described in Section 7.1(d) hasoccurred, then the aggregate principal amount of the Note (together with allaccrued and unpaid interest thereon and all other amounts due and payable withrespect thereto) shall become immediately due and payable without any action onthe part of the holders of the Note, and the Company shall immediately pay tothe holders of the Note all amounts due and payable with respect to the Note.

 

(c)           Ifany Event of Default has occurred and is continuing, then each holder of theNote may declare all or any portion of the outstanding principal amount of itsNote (together with all accrued and unpaid interest thereon and all otheramounts due and payable with respect thereto) to be immediately due and payableand may demand immediate payment of all or any portion of the outstandingprincipal amount of such Note (together with all such other amounts then dueand payable) owned by such holder.

 

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(d)           Eachholder of the Note shall also have any other rights which such holder may beafforded under any Related Transaction Document from time to time and any otherrights which such holder may have pursuant to applicable law.

 

8.             TheGuaranties.  To induce the Purchaserto purchase the Securities described herein and in consideration of benefitsexpected to accrue to each Guarantor and for other good and valuableconsideration, each Guarantor hereby unconditionally and irrevocablyguarantees, jointly and severally, to the Purchaser and each other holder ofthe Securities, the due and punctual payment of all present and futureObligations, including the due and punctual payment of principal of andinterest on the Note and Obligations with respect to the Warrant and/or WarrantStock, as and when the same shall become due and payable, whether at statedmaturity, by acceleration or otherwise, according to the terms hereof andthereof.  In case of failure by theCompany punctually to pay any Obligations, each Guarantor herebyunconditionally and jointly and severally agrees to make such payment or tocause such payment to be made punctually as and when the same shall become dueand payable, whether at stated maturity, by acceleration or otherwise, and asif such payment were made by the Company.

 

8.1           GuarantyUnconditional.  The obligations ofeach Guarantor as a guarantor under this Section 8 and with respectto the Transaction Documents shall be unconditional and absolute and, withoutlimiting the generality of the foregoing, shall not be released, discharged orotherwise affected by:

 

(a)           anyextension, renewal, settlement, compromise, waiver or release in respect of anyobligation of the Company or of any other Guarantor under this Agreement or anyother Transaction Document or by operation of law or otherwise;

 

(b)           anymodification or amendment of or supplement to this Agreement or any otherTransaction Document;

 

(c)           anychange in the corporate existence, structure or ownership of, or anyinsolvency, bankruptcy, reorganization or other similar proceeding affecting,the Company, any other Guarantor, or any of their respective assets, or anyresulting release or discharge of any obligation of the Company or of any otherGuarantor contained in any Transaction Document;

 

(d)           theexistence of any claim, set-off or other rights which the Guarantor may have atany time against the Purchaser, any holder of the Note, any holder of theWarrant or any other Person, whether or not arising in connection herewith;

 

(e)           anyfailure to assert, or any assertion of, any claim or demand or any exercise of,or failure to exercise, any rights or remedies against the Company, any otherGuarantor or any other Person;

 

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(f)            anyapplication of any sums by whomsoever paid or howsoever realized to anyobligation of the Company, regardless of what obligations of the Company remainunpaid;

 

(g)           anyinvalidity or unenforceability, relating to or against the Company or any otherGuarantor for any reason, of this Agreement or of any other TransactionDocument or any provision of applicable law or regulation purporting toprohibit the payment by the Company or any other Guarantor of the principal ofor interest on the Note or the sale of Warrant Stock upon the exercise of the Warrantor any other amount payable by them under the Transaction Documents; or

 

(h)           anyother act or omission to act or delay of any kind by the Purchaser, any holderof the Note, any holder of the Warrant or any other Person or any othercircumstance whatsoever that might, but for the provisions of this paragraph,constitute a legal or equitable discharge of the obligations of the Guarantorsunder the Transaction Documents.

 

8.2           DischargeOnly upon Payment in Full; Reinstatement in Certain Circumstances.  Each Guarantor’s obligations under this Section 8shall remain in full force and effect until the principal of and interest onthe Note has been paid and satisfied in full in cash, the Warrant has been “put”or exercised and all other Obligations shall have been paid and satisfied infull in cash.  If at any time any paymentof the principal of or interest on the Note or any other amount payable by theCompany under any of the Transaction Documents is rescinded or must beotherwise restored or returned upon the insolvency, bankruptcy orreorganization of the Company or of any Guarantor, or otherwise, each Guarantor’sobligations under this Section 8 with respect to such payment shallbe reinstated at such time as though such payment had become due but had notbeen made at such time.

 

8.3           Waivers.

 

(a)           General.  Each Guarantor irrevocably waives acceptancehereof, presentment, demand, protest and any notice not provided for herein, aswell as any requirement that at any time any action be taken by the Purchaser,any holder of the Note, any holder of the Warrant or any other Person againstthe Company, another Guarantor or any other Person.

 

(b)           Subrogationand Contribution.  Each Guarantorhereby agrees not to exercise or enforce any right of exoneration, contribution,reimbursement, recourse or subrogation available to such Guarantor against anyPerson liable for payment of the Obligations, or as to any security therefor,unless and until the full amount owing on the Obligations has been paid; andthe payment by such Guarantor of any amount pursuant to any of the TransactionDocuments on account of credit extended to the Company shall not in any wayentitle such Guarantor to any right, title or interest (whether by way ofsubrogation or otherwise) in and to any of the 

 

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Obligations or any proceeds thereof or any security therefor unless anduntil the full amount owing on the Obligations has been paid.

 

8.4           Limiton Recovery.  Notwithstanding anyother provision hereof, the right of recovery against each Guarantor under thisSection 8 shall not (to the extent required by or as may benecessary or desirable to ensure the enforceability against such Guarantor ofits obligations hereunder or thereunder in accordance with the laws of thejurisdiction of its incorporation or where it carries on business) exceed (x) theamount which would render such Guarantor’s obligations under this Section 8void or voidable under applicable law, including without limitation fraudulentconveyance law minus (y)  $1.00.

 

8.5           Stayof Acceleration.  If acceleration ofthe time for payment of any amount payable by the Company under this Agreementor any other Transaction Document is stayed upon the insolvency, bankruptcy orreorganization of the Company, all such amounts otherwise subject toacceleration under the terms of this Agreement or the other TransactionDocuments shall nonetheless be payable jointly and severally by the Guarantorshereunder forthwith on demand by the Purchaser.

 

8.6           Benefitto Guarantors.  All of the Guarantorsthat are engaged in business are engaged in related businesses and integratedto such an extent that the financial strength and flexibility of each suchGuarantor has a direct impact on the success of each other such Guarantor.  Each Guarantor will derive substantial directand indirect benefit from the extension of credit hereunder.

 

8.7           GuarantorCovenants.  Each Guarantor shall takesuch action as the Company is required by this Agreement to cause such Guarantorto take, and shall refrain from taking such action as the Company is requiredby this Agreement to prohibit such Guarantor from taking.

 

9.             Miscellaneous.

 

9.1           Expenses.  The Company shall pay, indemnify, defend andhold the Purchaser harmless from and against liability for the payment of, andreimburse the Purchaser on demand as and when incurred from and against, (a) allreasonable out-of-pocket costs and expenses incurred by it in connection withthe due diligence review of the Company, the preparation, negotiation andexecution of the Transaction Documents and the consummation of all of thetransactions contemplated hereby and thereby (including, without limitation,all reasonable fees and expenses of legal counsel, environmental consultantsand accountants), which costs and expenses shall be payable at the Closing (orimmediately upon demand by the Purchaser if not paid at the Closing for anyreason), all of the foregoing to be capped at Two Hundred Thousand Dollars($200,000); (b) all reasonable fees and expenses incurred with respect toany amendments or waivers (whether or not the same become effective) under orin respect of each of the Transaction Documents, the Governing Documents of theCompany and/or its 

 

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Subsidiaries and the other agreements and instruments contemplatedhereby and thereby (including, without limitation, in connection with anyproposed merger, sale or recapitalization of or involving the Company and/orits Subsidiaries); (c) all recording and filing fees and stamp and otherTaxes which may be payable in respect of the execution and delivery of thisAgreement or the issuance, delivery or acquisition of any of the Securities; (d) thefees and expenses incurred with respect to the interpretation and enforcementof the rights granted under each of the Transaction Documents, the GoverningDocuments of the Company and the agreements or instruments contemplated herebyand thereby (including, but not limited to, costs of collection); and (e) allreasonable costs and expenses, due diligence expenses, travel expenses andlegal fees incurred by the Purchaser, in connection with their continuingrelationship with the Company and its Subsidiaries after the date hereofincluding, without limitation, reimbursement of costs and expenses pursuant to Sections 4.2and 4.3 hereof.  If the Companyfails to pay when due any amounts due the Purchaser or fails to comply with anyof its obligations pursuant to this Agreement or any other agreement, documentor instrument executed or delivered in connection herewith, the Company shallupon demand by the Purchaser, pay to the Purchaser such further amounts asshall be sufficient to cover the reasonable cost and expense (including, butnot limited to, reasonable attorneys’ fees) incurred by or on behalf of thePurchaser in collecting all such amounts due or in otherwise enforcing thePurchaser’s rights and remedies hereunder. The Company also agrees to pay to the Purchaser all reasonable costs andexpenses incurred by them, including reasonable compensation to their attorneysfor all services rendered, in connection with the investigation of any Event ofDefault and enforcement of their rights hereunder. The Company shall also paythose fees and expenses set forth on the Fees and Expenses Schedule.

 

9.2           Remedies.  Each holder of Securities shall have allrights and remedies set forth, as applicable, in this Agreement, theSecurities, the Stockholders’ Agreement and the Governing Documents (to theextent applicable to the Securities or holders thereof) of the Company and allrights and remedies which such holders have been granted at any time under anyother Transaction Document currently in force. No remedy hereunder or thereunder conferred is intended to be exclusiveof any other remedy, and each and every such remedy shall be cumulative andshall be in addition to every other remedy given hereunder or thereunder or nowor hereafter existing at law or in equity or by statute or otherwise.  Any Person having any rights under anyprovision of this Agreement shall be entitled to enforce such rightsspecifically (without posting a bond or other security), to recover damages byreason of any breach of any provision of this Agreement and to exercise allother rights granted at law or in equity.

 

9.3           Amendmentsand Waivers.  The provisions of thisAgreement may not be amended or waived and the Company may not take any actionherein prohibited, or omit to perform any act herein required to be performedby it, without the prior written consent of the Company and Majority Holders; provided,however, that any amendment or amendments that lower the interest rateor lengthen the 

 

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amortization schedule of the Note shall require the unanimous writtenconsent of the holders of the outstanding principal amount of the Note.

 

9.4           Survivalof Agreement; Indemnities.  Allcovenants, agreements, representations and warranties contained in thisAgreement (including the schedules hereto), the Warrant and the Note, orconcurrently with or hereafter made in writing by the Company in connectionherewith or therewith, shall survive the execution and delivery of thisAgreement and the consummation of the transactions contemplated hereby, regardlessof any investigation made by the Purchaser or on their behalf.  In addition, notwithstanding the payment orrepayment of all amounts pursuant to this Agreement, the Warrant or the Note,the obligations of the Company pursuant to Sections 9.1, 9.15,9.16, 9.17, 9.18, 9.19 and 9.20 shallsurvive indefinitely.

 

9.5           NoSetoffs, Etc.  All payments hereunderand under the Note and the Warrant shall be made by the Company without setoff,offset, deduction or counterclaim, free and clear of all Taxes, levies,imports, duties, fees and charges, and without any withholding, restriction orconditions imposed by any Governmental Authority.  If the Company shall be required by any lawto deduct, setoff or withhold any amount from or in respect of any payment tothe Purchaser hereunder or under the Note or the Warrant, then the amount sopayable to the Purchaser shall be increased as may be necessary so that, aftermaking all required deductions, setoffs and withholdings, the Purchaser shallreceive an amount equal to the sum it would have received had no suchdeductions, setoffs or withholding been made.

 

9.6           Successorsand Assigns.  Except as otherwiseexpressly provided herein, all representations, warranties, covenants andagreements contained in this Agreement by or on behalf of any of the partieshereto shall bind and inure to the benefit of the respective successors andassigns of the parties hereto whether or not so expressed.  In addition, and whether or not any expressassignment has been made, the provisions of this Agreement which are for thePurchaser’ benefit as purchasers or holders of the Securities or Warrant Stockare also for the benefit of, and enforceable by, any subsequent holder of suchSecurities or such Warrant Stock.

 

9.7           Severability.  Whenever possible, each provision of thisAgreement shall be interpreted in such manner as to be effective and validunder applicable law, but if any provision of this Agreement is held to beprohibited by or invalid under applicable law, such provision shall beineffective only to the extent of such prohibition or invalidity, withoutinvalidating the remainder of this Agreement.

 

9.8           Counterparts.  This Agreement may be executed incounterparts, either one of which need not contain the signatures of more thanone party, but both such counterparts taken together shall constitute one andthe same Agreement.

 

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9.9           DescriptiveHeadings.  The descriptive headingsof this Agreement are inserted for convenience only and do not constitute asubstantive part of this Agreement.

 

9.10         GoverningLaw.  The law of the State ofIllinois shall govern all issues and questions concerning the relative rightsand obligations of the parties and all issues and questions concerning theconstruction, validity, enforcement and interpretation of this Agreement andthe exhibits and schedules hereto shall be construed in accordance with thelaws of the State of Illinois, without giving effect to any choice of law orconflict of law rules or provisions (whether of the State of Illinois orany other jurisdiction) that would cause the application of the laws of anyjurisdiction other than the State of Illinois. In furtherance of the foregoing, the internal law of the State ofIllinois shall control the interpretation and construction of this Agreement(and all schedules and exhibits hereto), even though under that jurisdiction’schoice of law or conflict of law analysis, the substantive law of some otherjurisdiction would ordinarily apply.

 

9.11         Notices.  All notices, demands or other communicationsto be given or delivered under or by reason of the provisions of this Agreementshall be in writing and shall be deemed to have been given when deliveredpersonally to the recipient, sent to the recipient by reputable overnightcourier service (charges prepaid) or mailed to the recipient by certified orregistered mail, return receipt requested and postage prepaid.  Such notices, demands and other communicationsshall be sent to the parties hereto at their respective addresses indicatedbelow:

 

If to the Purchaser:

 

William BlairMezzanine Capital Fund III, L.P.c/o Merit Capital Partners303 West Madison Street, Suite 2100 Chicago, IL 60606 Attention:  Mr. David M.Jones

 

with a copy to:

 

Vedder, Price,Kaufman & Kammholz, P.C.222 North LaSalle StreetSuite 2400Chicago, Illinois 60601-1003Attention:  Michael A. Nemeroff, Esq.

 

If to the Company:

 

ISI DetentionContracting Group, Inc.12903 Delivery DriveSan Antonio, TX 78247Telephone: 210-495-5245FAX: 210-495-5613Attention:  Samuel C. Youngblood, CEO

 

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with copies to:

 

Akin Gump Strauss Hauer & Feld LLP300 Convent Street Suite 1500 San Antonio, Texas 78205-3732Attention: Alan Schoenbaum, Esq.

 

Youngblood &Associates400 West 15th Street, Suite 808Austin, Texas 78701Telephone: 512 474-7054FAX: 512 474-5605Attention: D. Hull Youngblood, Esq.

 

or to such other address or to the attentionof such other person as the recipient party has specified by prior writtennotice to the sending party.

 

9.12         Considerationfor Securities; Treatment of Fees. The Purchaser and the Company acknowledge and agree that the fair marketvalue of the Warrant is $210,000.  ThePurchaser and the Company shall file their respective federal, state and localTax returns in a manner which is consistent with such fair market value figuresand shall not take any action or position (whether in preparation of Taxreturns, financial statements or otherwise) which is inconsistent with any ofthe above.

 

9.13         NoStrict Construction.  The partieshereto have participated jointly in the negotiation and drafting of thisAgreement.  In the event an ambiguity orquestion of intent or interpretation arises, this Agreement shall be construedas if drafted jointly by the parties hereto, and no presumption or burden ofproof shall arise favoring or disfavoring any party by virtue of the authorshipof any of the provisions of this Agreement.

 

9.14         CompleteAgreement.  This Agreement, theSenior Subordination Agreement and the applicable Related Transaction Documentsembody the complete agreement and understanding among the parties and supersedeany prior agreements or representations by or among the parties, written ororal, which may have related to the subject matter hereof in any way.

 

9.15         Indemnification.

 

(a)           Inconsideration of the Purchaser’s execution and delivery of this Agreement andacquiring the Securities hereunder and in addition to all of the Company’sother obligations under this Agreement and in addition to all other rights andremedies available at law or in equity, the Company shall defend, protect andindemnify the Purchaser and each other holder the Securities and all of theirrespective officers, directors, stockholders, partners, members, Affiliates,direct or indirect owners, employees, agents, representatives, successors andassigns (including, without 

 

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limitation, those retained in connection with the transactionscontemplated by this Agreement) (collectively, the “Indemnified Parties”),and save and hold each of them harmless against, and pay on behalf of orreimburse such party on demand as and when incurred from and against any andall actions, causes of action, suits, claims, losses (including diminutions invalue and consequential damages), out-of-pocket costs, penalties, fees,liabilities and damages, and expenses in connection therewith (irrespective ofwhether any such Indemnified Party is a party to the action for whichindemnification hereunder is sought), including, without limitation, reasonableattorneys’ fees and disbursements, interest and penalties and all amounts paidin investigation, defense or settlement of any of the foregoing and claimsrelating to any of the foregoing (the “Indemnified Liabilities”),incurred by the Indemnified Parties or any of them as a result of, or arisingout of, or relating to (a) any transaction financed or to be financed inwhole or in part, directly or indirectly, with the proceeds of the issuance ofthe Securities; or (b) the execution, delivery, performance or enforcementof this Agreement and any other instrument, document or agreement executedpursuant hereto by any of the Indemnified Parties, except to the extent anysuch Indemnified Liabilities are caused by the particular Indemnified Party’sgross negligence or willful misconduct. To the extent that the foregoing undertaking by the Company may beunenforceable for any reason, the Company shall make the maximum contributionto the payment and satisfaction of each of the Indemnified Liabilities which ispermissible under applicable law.

 

(b)           Withoutlimiting the generality of the indemnity set out in Section 9.15(a) above,the Company shall defend, protect, indemnify and hold harmless the Purchaserand all other Indemnified Parties from and against any and all actions, causesof action, suits, losses, liabilities, damages, injuries, penalties, fees,costs, expenses and claims of any and every kind whatsoever paid, incurred orsuffered by, or asserted against, the Purchaser or any other Indemnified Partyfor, with respect to, or as a direct or indirect result of, the past, presentor future environmental condition of any property owned, operated or used bythe Company or any of its Subsidiaries, their predecessors or successors or ofany offsite treatment, storage or disposal location associated therewith,including, without limitation, the presence on or under, or the Release, orthreatened Release into, onto or from, any such property or location of anytoxic, chemical or Hazardous Materials (including, without limitation, anylosses, liabilities, damages, injuries, penalties, fees, costs, expenses orclaims asserted or arising under CERCLA, any so-called “Superfund” or “Superlien”law, or any other applicable federal, state, local or foreign statute, law,ordinance, code, rule, regulation, order or decree regulating, relating to orimposing liability or standards on conduct concerning, any toxic, chemical orHazardous Materials).

 

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(c)           Inthe event that any Indemnified Party is made a defendant in or party to anyaction or proceeding, judicial or administrative, instituted by any third partyfor any Indemnified Liabilities (any such third party action or proceedingbeing referred to as a “Third Party Claim”), the Indemnified Party shallgive the Company written notice thereof as soon as practicable after becomingaware of such Third Party Claim.  Thefailure to give such notice shall not affect any Indemnified Party’s ability toseek reimbursement for Indemnified Liabilities, unless such failure hasmaterially and adversely affected the Company’s ability to defend successfullya Third Party Claim.  The Company shallbe entitled to contest and defend such Third Party Claim; provided, that it (i) hasa reasonable basis for concluding that such defense may be successful and (ii) diligentlycontests and defends such Third Party Claim. Notice of the intention so to contest and defend shall be given by theCompany to the Indemnified Party within twenty (20) Business Days after theIndemnified Party’s notice of such Third Party Claim (but, in all events, atleast five (5) business days prior to the date that an answer to such ThirdParty Claim is due to be filed).  Suchcontest and defense shall be conducted by reputable attorneys employed by theCompany.  The Indemnified Party shall beentitled at any time, at its own cost and expense (which expense shall notconstitute an Indemnified Liability unless the Indemnified Party reasonablydetermines that the Company is not adequately representing or, because of aconflict of interest, may not adequately represent, any interests of suchIndemnified Party), to participate in such contest and defense and to berepresented by attorneys of its or their own choosing.  If the Indemnified Party elects toparticipate in such defense, the Indemnified Party shall cooperate with theCompany in the conduct of such defense. In no event shall the Company be responsible for the expense of morethan one counsel for the Indemnified Parties. Neither the Indemnified Party nor the Company may concede, settle orcompromise any Third Party Claim without the consent of the other party, whichconsent shall not be unreasonably withheld or delayed.  Notwithstanding the foregoing, in the eventthe Company fails or is not entitled to contest and defend a claim, theIndemnified Party shall be entitled to contest, defend and settle such ThirdParty Claim at the expense of the Company.

 

(d)           Inthe event any Indemnified Party should have a direct claim against the Companythat does not involve a Third Party Claim (a “Direct Claim”), theIndemnified Party shall deliver a notice of such Direct Claim with reasonablepromptness to the Company.  If theCompany notifies the Indemnified Party that it does not dispute the DirectClaim described in such notice or fails to notify the Indemnified Party withinforty-five (45) days after delivery of such notice by the Indemnified Partywhether the Company disputes the Direct Claim described in such notice, theIndemnified Liabilities in the amount specified in the Indemnified Party’snotice shall be conclusively deemed a liability of the Company, and the Companyshall pay the amount of such Indemnified Liabilities to the 

 

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Indemnified Party on demand in accordance with the terms hereof.  If the Company gives notice to theIndemnified Party that it disputes the Direct Claim, the Indemnified Party maypursue whatever legal remedies may be available to enforce its rights underthis Agreement.

 

9.16         PaymentSet Aside.  To the extent that theCompany makes a payment or payments to the Purchaser hereunder or under theNote or the Warrant, or the Purchaser enforce their rights or exercise theirright of setoff hereunder or thereunder, and such payment or payments or theproceeds of such enforcement or setoff or any part thereof are subsequentlyinvalidated, declared to be fraudulent or preferential, set aside, recoveredfrom, disgorged by or are required to be refunded, repaid or otherwise restoredto the Company, a trustee, receiver or any other Person under any law(including, without limitation, any bankruptcy law, state or federal law, commonlaw or equitable cause of action), then to the extent of any such restorationthe obligation or part thereof originally intended to be satisfied shall berevived and continued in full force and effect as if such payment had not beenmade or such enforcement or setoff had not occurred.

 

9.17         Jurisdictionand Venue.  Each of the parties (a) submitsto the jurisdiction of any state or federal court sitting in Chicago, Illinoisin any legal suit, action or proceeding arising out of or relating to thisAgreement, the Note, the Warrant or any other Transaction Document, (b) agreesthat all claims in respect of the action or proceeding may be heard ordetermined in any such court and (c) agrees not to bring any action orproceeding arising out of or relating to this Agreement, the Note, the Warrantor any other Transaction Document in any other court.  Each of the parties waives any defense ofinconvenient forum to the maintenance of any action or proceeding so broughtand waives any bond, surety or other security that might be required of anyother party with respect thereto.  Anyparty may make service on any other party by sending or delivering a copy ofthe process to the party to be served at the address and in the manner providedfor the giving of notices in Section 8.11.  Each party agrees that a final judgment inany action or proceeding so brought shall be conclusive and may be enforced bysuit on the judgment or in any other manner provided by law.  Nothing herein shall affect the right toserve process in any other manner permitted by law or shall limit the right ofthe Purchaser to bring proceedings against the Company in the courts of anyother jurisdiction.  To the extentprovided by law, should the Company, after being so served, fail to appear oranswer to any summons, complaint, process or papers so served within the numberof days prescribed by law after the mailing thereof, the Company shall bedeemed in default and an order and/or judgment may be entered by the courtagainst the Company, as demanded or prayed for in such summons, complaint,process or papers.  The exclusive choiceof forum for Company set forth in this Section 9.17 shall not bedeemed to preclude the enforcement by the Purchaser or the holders of the Noteor the Warrant of any judgment obtained in any other forum or the taking by thePurchaser or any holders of the Note or the Warrant of any action to enforcethe same in any other appropriate jurisdiction, and Company hereby waives theright to collaterally attack any such judgment or action.

 

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9.18         WAIVEROF RIGHT TO JURY TRIAL.  THE COMPANY,THE PURCHASER, THE HOLDERS OF THE NOTE AND THE HOLDERS OF THE WARRANT HEREBYWAIVE, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TRIAL BY JURY IN ANYLITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OFTHIS AGREEMENT, THE NOTE OR THE WARRANT OR THE VALIDITY, PROTECTION,INTERPRETATION, COLLECTION OR ENFORCEMENT RESPECTIVELY, THEREOF.  THE COMPANY AGREES THAT THIS SECTION 9.18IS A SPECIFIC AND MATERIAL ASPECT OF THIS AGREEMENT AND ACKNOWLEDGE THAT THEPURCHASER WOULD NOT PURCHASE THE SECURITIES HEREUNDER IF THIS SECTION 9.18WERE NOT PART OF THIS AGREEMENT.

 

9.19         CertainWaivers.  The Company hereby waivesdiligence, presentment, protest and demand and notice of protest and demand,dishonor and nonpayment of the Note, and expressly agrees that the Note, or anypayment thereunder, may be extended from time to time and that the holdersthereof may accept security for the Note or release security for the Note, allwithout in any way affecting the liability of the Company thereunder.

 

9.20         TransferRestrictions.  The Securitiesacquired pursuant hereto are subject to the applicable transfer restrictionscontained herein, in the Note, the Warrant and the Stockholders’ Agreement, asthe case may be.

 

***[SIGNATUREPAGE FOLLOWS]***

 

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***Note and Warrant Purchase Agreement SignaturePage***

 

IN WITNESS WHEREOF, the parties hereto have executedthis Note and Warrant Purchase Agreement on the date first written above.

 
| COMPANY:                                 | PURCHASER:                                             |
|------------------------------------------|--------------------------------------------------------|
|                                     |                                                   |
| ISI  DETENTION CONTRACTING GROUP,   INC. | WILLIAM  BLAIR MEZZANINE   CAPITAL FUND III, L.P. |
|                                     |                                                   |
| By :                                     |                                                   |   | By: | William  Blair Mezzanine Capital |
| Name:                                    |                                                   |   |   | Partners III,  L.L.C. |
| Title:                                   |                                                   |   |   | its General  Partner |
|                                     |                                                   |
|                                     | By:                                                    |   |
|                                     | Name: David  M. Jones                                  |
|                                     | Its:  Managing Director                                |
|                                          |                                                        |  |  |  |  |  |  |

 

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| DETENTION  CONTRACTING GROUP,   LTD., a Texas limited partnership  |   | ISI  DETENTION CONTRACTING   GROUP, INC., a Texas corporation      |
|--------------------------------------------------------------------|--------|--------------------------------------------------------------------|
|                                                               |   |                                                               |
|                                                               |   |                                                               |
| By: ISI  Detention Contracting Group, Inc.,                   |   | By:                                                                |   |
| a Texas  corporation                                               |   | Name:                                                              |   |
| its General  Partner                                               |   | Title:                                                             |   |
|                                                               |   |                                                               |
| By :                                                               |   |                                                               |   |
| Name :                                                             |   |                                                               |   |
| Title:                                                             |   |                                                               |   |
|                                                               |   |                                                               |
| ISI  DETENTION CONTRACTING GROUP,   INC., a California corporation |   | ISI  DETENTION CONTRACTING   GROUP, INC., a New Mexico corporation |
|                                                               |   |                                                               |
|                                                               |   |                                                               |
| By :                                                               |   |                                                               | By: |   |
| Name :                                                             |   |                                                               | Name: |   |
| Title:                                                             |   |                                                               | Title: |   |
|                                                               |   |                                                               |
| ISI  DETENTION SYSTEMS, INC., a Texas   corporation                |   | ISI SYSTEMS,  LTD., a Texas limited   partnership                  |
|                                                               |   |                                                               |
|                                                               |   |                                                               |
| By :                                                               |   |                                                               | By: ISI Detention  Systems, Inc., a Texas |
| Name :                                                             |   |                                                               | corporation |
| Title:                                                             |   |                                                               | its General  Partner |
|                                                               |   |                                                               |
|                                                               |   | By:                                                                |   |
|                                                               |   | Name:                                                              |   |
|                                                               |   | Title:                                                             |   |
|                                                               |   |                                                               |
| METROPLEX  CONTROL SYSTEMS, INC.,   a Texas corporation            |   | ISI  CONTROLS, LTD., a Texas limited   partnership                 |
|                                                               |   |                                                               |
|                                                               |   |                                                               |
| By :                                                               |   |                                                               | By: Metroplex  Control Systems, Inc.,  |
| Name :                                                             |   |                                                               | a Texas  corporation |
| Title:                                                             |   |                                                               | its General  Partner |
|                                                               |   |                                                               |
|                                                               |   | By:                                                                |   |
|                                                               |   | Name:                                                              |   |
|                                                               |   | Title:                                                             |   |
|                                                                    |        |                                                                    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| METROPLEX  COMMERCIAL FIRE AND  |   | MCFSA, LTD.,  a Texas limited partnership        |
|---------------------------------|--------|--------------------------------------------------|
| SECURITY  ALARMS, INC., a Texas |   |                                             |
| corporation                     |   |                                             |
|                            |   | By:  Metroplex Commercial Fire and               |
|                            |   | Security  Alarms, Inc., a Texas corporation |
| By :                            |   |                                             | its General  Partner |
| Name :                          |   |                                             |   |
| Title:                          |   |                                             | By: |   |
|                            |   |                                             | Name: |   |
|                            |   |                                             | Title: |   |
|                                 |        |                                                  |  |  |  |  |  |  |

 

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**EXHIBIT A**

** **

**Form Note**

 

(See Attached)

 

A-1

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**EXHIBIT B**

** **

**Form of Warrant**

 

(See Attached)

 

B-1

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**EXHIBIT C**

** **

**Stockholders’ Agreement**

** **

(See attached)

 

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