Document:

Edgewater/Epic - Note and Preferred Stock Purchase Agreement (2/02)

EXHIBIT 4.27

 

NOTE AND PREFERRED

STOCK PURCHASE AGREEMENT

 

DATED

APRIL       , 2002

 

AMONG

 

EPICEDGE, INC.,

 

EDGEWATER PRIVATE

EQUITY FUND III, L.P.

 

AND

 

CERTAIN OTHER PARTIES

NAMED HEREIN

 

 

TABLE OF CONTENTS

 

	

  SECTION 1.

  	

   

  	

  DEFINITIONS

  
	

   

  	

  1.1

  	

  Certain Definitions

  
	

   

  	

   

  	

   

  
	

  SECTION 2.

  	

   

  	

  PURCHASE OF INVESTOR PREFERRED STOCK AND

  THE NOTES

  
	

   

  	

  2.1

  	

  Authorization of the Preferred Stock

  
	

   

  	

  2.2

  	

  Purchase and Sale of each of the Investor

  Preferred Stock and the Notes

  
	

   

  	

  2.3

  	

  Use of Purchase Price Loans

  
	

   

  	

  2.4

  	

  The

  Closing

  
	

   

  	

  2.5

  	

  Loan Term; Interest; Repayment; Prepayment

  
	

   

  	

  2.6

  	

  Secured Obligation

  
	

   

  	

  2.7

  	

  Conversion

  
	

   

  	

  2.8

  	

  Satisfaction in Full

  
	

   

  	

   

  	

   

  
	

  SECTION 3.

  	

   

  	

  REPRESENTATIONS AND WARRANTIES OF THE

  COMPANY

  
	

   

  	

  3.1

  	

  Organization and Qualification

  
	

   

  	

  3.2

  	

  Corporate

  Power

  
	

   

  	

  3.3

  	

  Subsidiaries and Investments

  
	

   

  	

  3.4

  	

  Authorization, Governmental Approvals

  
	

   

  	

  3.5

  	

  Capital

  Stock

  
	

   

  	

  3.6

  	

  Conflict with Other Instruments

  
	

   

  	

  3.7

  	

  Validity and Binding Effect

  
	

   

  	

  3.8

  	

  Capitalization

  
	

   

  	

  3.9

  	

  Compliance with Instruments

  
	

   

  	

  3.10

  	

  Brokerage

  
	

   

  	

  3.11

  	

  Litigation

  
	

   

  	

  3.12

  	

  Employee Benefit Plans

  
	

   

  	

  3.13

  	

  Compliance with Laws; Certain Operations

  
	

   

  	

  3.14

  	

  Financial Statements

  
	

   

  	

  3.15

  	

  Absence of Undisclosed Liabilities

  
	

   

  	

  3.16

  	

  Assets

  
	

   

  	

  3.17

  	

  Tax

  Matters

  
	

   

  	

  3.18

  	

  Absence of Material Adverse Change

  
	

   

  	

  3.19

  	

  Absence of Certain Developments

  
	

   

  	

  3.20

  	

  Contracts

  
	

   

  	

  3.21

  	

  Proprietary Rights

  
	

   

  	

  3.22

  	

  Insurance

  
	

   

  	

  3.23

  	

  Disclosure Schedule

  
	

   

  	

  3.24

  	

  Extent of Offering

  
	

   

  	

  3.25

  	

  Dividends

  
	

   

  	

  3.26

  	

  Registration Rights

  
	

   

  	

  3.27

  	

  Illegal

  Payments

  
	

   

  	

  3.28

  	

  Related Party Transactions

  
							

 

i

 

	

   

  	

  3.29

  	

  Disclosure

  
	

   

  	

   

  	

   

  
	

  SECTION 4.

  	

   

  	

  PURCHASER’S INVESTMENT REPRESENTATIONS

  
	

   

  	

   

  	

   

  
	

  SECTION 5.

  	

   

  	

  CONDITIONS PRECEDENT

  
	

   

  	

  5.1

  	

  Conditions Precedent to Second Debt Closing

  
	

   

  	

  5.2

  	

  Conditions Precedent to Equity Closing

  
	

   

  	

   

  	

   

  
	

  SECTION 6.

  	

   

  	

  COVENANTS

  
	

   

  	

  6.1

  	

  Affirmative Covenants

  
	

   

  	

  6.2

  	

  Reporting Requirements

  
	

   

  	

  6.3

  	

  Negative Covenants

  
	

   

  	

  6.4

  	

  Tax Treatment of Dividends

  
	

   

  	

  6.5

  	

  Use of Proceeds; Payments to Shareholders

  
	

   

  	

  6.6

  	

  Inspection

  Rights

  
	

   

  	

  6.7

  	

  AMEX

  Listing

  
	

   

  	

  6.8

  	

  Increase of Authorized Shares of Common

  Stock and Preferred Stock

  
	

   

  	

   

  	

   

  
	

  SECTION 7.

  	

   

  	

  EVENTS OF DEFAULT

  
	

   

  	

  7.1

  	

  Events

  of Default

  
	

   

  	

  7.2

  	

  Remedies on Default

  
	

   

  	

   

  	

   

  
	

  SECTION 8.

  	

   

  	

  AGENT

  
	

   

  	

  8.1

  	

  Appointment and Authorization

  
	

   

  	

  8.2

  	

  Delegation of Duties

  
	

   

  	

  8.3

  	

  Liability of Agent

  
	

   

  	

  8.4

  	

  Reliance

  by Agent

  
	

   

  	

  8.5

  	

  Notice of Default

  
	

   

  	

  8.6

  	

  Credit

  Decision

  
	

   

  	

  8.7

  	

  Indemnification

  
	

   

  	

  8.8

  	

  Agent in Individual Capacity

  
	

   

  	

  8.9

  	

  Successor

  Agent

  
	

   

  	

  8.10

  	

  Collateral Matters

  
	

   

  	

   

  	

   

  
	

  SECTION 9.

  	

   

  	

  MISCELLANEOUS

  
	

   

  	

  9.1

  	

  Benefit of Agreement, Assignment

  
	

   

  	

  9.2

  	

  Right to Conduct Activities

  
	

   

  	

  9.3

  	

  Notices

  
	

   

  	

  9.4

  	

  Choice

  of Law

  
	

   

  	

  9.5

  	

  Entire

  Agreement

  
	

   

  	

  9.6

  	

  No Implied Waivers; Cumulative Remedies;

  Writing Required

  
	

   

  	

  9.7

  	

  Reimbursement of Expenses

  
	

   

  	

  9.8

  	

  Survival

  
	

   

  	

  9.9

  	

  Waivers of the Company/Personal

  Jurisdiction

  
	

   

  	

  9.10

  	

  Herein,

  etc

  
							

 

ii

 

	

   

  	

  9.11

  	

  Severability

  
	

   

  	

  9.12

  	

  Headings

  
	

   

  	

  9.13

  	

  Counterparts

  

 

iii

 

EPICEDGE, INC.

 

NOTE AND PREFERRED

STOCK PURCHASE AGREEMENT

 

THIS NOTE AND

PREFERRED STOCK PURCHASE AGREEMENT (this “Agreement”) is made as of

April     , 2002, among EpicEdge, Inc., a Texas

corporation (“Company”), Edgewater Private Equity Fund III, L.P., a

Delaware limited partnership (“Edgewater”), Fleck T.I.M.E. Fund, L.P., a

Connecticut limited partnership (“TIME”), John Paul DeJoria, an

individual (“DeJoria”), Patrick Loche, an individual (“Loche”)

and certain other Persons (as defined herein) that may become a party hereto

from time to time in accordance with Section 2.4 hereof, if any

(Edgewater, TIME, DeJoria, Loche and such other Persons are sometimes referred

to herein collectively as the “Purchasers” and individually as a “Purchaser”).  Each of Edgewater and TIME, in its capacity

as a holder of the Convertible Debt (as defined below) shall from time to time

be referred to herein as an “Investor” and collectively as the “Investors”.  Each of Loche, DeJoria, Edgewater, TIME and

certain other Persons (as defined herein) that may become a party hereto from

time to time in accordance with Section 2.4 hereof, if any, in his or

its capacity as a lender of a portion of the Maximum Loan Amount (as defined

below) shall from time to time be referred to herein as a “Lender” and

collectively as the “Lenders.” 

Edgewater, acting in its capacity as agent on behalf of the Lenders

shall, from time to time be referred to herein as “Agent”.

 

WHEREAS, the

Company, Edgewater and TIME are parties to that certain Convertible Bridge Loan

Agreement dated as of July 21, 2000, pursuant to which the Company

borrowed an aggregate principal amount of $3,750,000 from Edgewater (plus all

accrued but unpaid interest thereon) and an aggregate principal amount of

$1,250,000 from TIME (plus all accrued but unpaid interest thereon)

(collectively the “July Debt”), of which the entire amounts are still

outstanding;

 

WHEREAS,

pursuant to that certain Convertible Note dated December 1, 2000, the Company

borrowed an aggregate principal amount of $1,000,000 from TIME (plus all

accrued but unpaid interest thereon) (the “December Debt”; and, together

with the July Debt, the “Convertible Debt”).

 

WHEREAS, the

Lenders are willing, pursuant to the terms and conditions of this Agreement, to

provide the Company with certain loans as fully described in Section 2.2

below, which loans (the “Loans”) shall be convertible into securities of

the Company on the terms and subject to the conditions set forth herein; and

 

WHEREAS, to

induce the Lenders to make the Loans, the Principal Shareholders (as defined

herein) have agreed to the forfeiture of a certain number of shares of Common

Stock owned by the Principal Shareholders, and the Investors and the Company

have agreed that the Convertible Debt shall be converted into securities of the

Company on the terms and subject to the conditions set forth herein.

 

NOW,

THEREFORE, the parties hereto agree as follows:

 

 

Section 1.               Definitions.

 

1.1           Certain

Definitions.  In addition to

other terms defined elsewhere in this Agreement, the following terms shall have

the meanings set forth below:

 

“Affiliate”

means as to any Person (a) any Person which directly, or indirectly

through one or more intermediaries, controls, is controlled by, or is under

common control with such Person;  (b) any Person who is a

director or officer (i) of such Person, or (ii) of any Person

described in clause (a) above; or (c) any Person who is related

to a Person described in clauses (a) or (b) above by blood or

marriage.  For purposes of this definition, “control” shall include

the ownership of 10% or more of the voting securities of such Person.

 

“Agent”

shall have the meaning specified in the Preamble to this Agreement.

 

“AMEX”

means the American Stock Exchange.

 

“Annual

Meeting” means the next annual meeting of the shareholders of the Company.

 

“Articles”

means the Articles of Incorporation of the Company, as may be amended or

restated from time to time.

 

“Bonus Plan”

means that certain Employee Bonus Plan approved by the Board of Directors of

the Company on April     , 2002, a copy of which is

attached hereto as Exhibit D, which Bonus Plan shall not become

effective until the Equity Closing has been consummated.

 

“Capitalized

Lease” means a lease under which the obligations of the lessee would, in

accordance with GAAP consistently applied, be included in determining total

liabilities as shown on the liability side of a balance sheet of the lessee.

 

“Certificates”

means, collectively, the Series A Certificate and the Series B

Certificate.

 

“Code”

shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations

of any governmental agency or authority, as from time to time in effect,

promulgated thereunder.

 

“Common

Stock” means the Company’s common stock, $.01 par value per share, which is

the publicly-traded class of capital stock listed on AMEX.

 

“Conversion

Stock” shall mean any Common Stock issuable or issued upon conversion of

the Preferred Stock.

 

“Contingent

Obligations,” as applied to any Person, shall mean, without duplication,

any direct or indirect liability, contingent or otherwise, of that Person

(a) with respect to any Indebtedness, lease, dividend or other obligation

of another if the primary purpose or intent thereof by the Person incurring the

Contingent Obligation is to provide assurance to the obligee of such obligation

of another that such obligation of another will be paid or discharged, or that

any agreements relating thereto will be complied with, or that the holders of

such obligation will be protected (in whole or in part) against loss in respect

thereof, (b) with respect to the

 

2

 

Indebtedness of any partnership

or joint venture of which such Person is a partner or joint venture or

(c) with respect to any letter of credit issued for the account of that

Person or as to which that Person is otherwise liable for reimbursement of

drawings.  Contingent Obligations shall include (i) the direct

or indirect guaranty, endorsement (other than for collection or deposit in the

ordinary course of business), co-making, discounting with recourse, or sale

with recourse by such Person of the obligation of another and (ii) any

liability of such Person for the obligations of another through any agreement

(contingent or otherwise) (x) to purchase, repurchase or otherwise acquire

such obligation or any security therefor, or to provide funds for the payment

or discharge of such obligation (whether in the form of loans, advances, stock

purchases, capital contributions or otherwise), (y) to maintain the

solvency or any balance sheet item, level of income or financial condition of

another or (z) to make take-or-pay or similar payments if required

regardless of non-performance by any other party or parties to an

agreement.  The amount of any Contingent Obligation shall be equal to

the amount of the obligation to the extent so guaranteed or otherwise

supported.

 

“Disclosure

Schedule” shall mean the Disclosure Schedule attached as Exhibit A

hereto and made a part hereof.

 

“Employee

Benefit Plan” shall mean any employee benefit plan as defined in Section 3(3)

of ERISA, whether or not terminated, to which the Company or any of its

Affiliates (other than individual Affiliates) contributes, has an obligation to

contribute or with respect to which any such Person has any actual or potential

liability.

 

“ERISA”

shall mean the Employee Retirement Income Security Act of 1974, as the same may

be amended from time to time, and the rules and regulations of any governmental

agency or authority, as from time to time in effect, promulgated thereunder.

 

“ERISA

Affiliate” as applied to any Person, shall mean any trade or business

(whether or not incorporated) which is a member of a group of which that Person

is a member and which is under common control within the meaning of Section 414

of the Code and the regulations promulgated and rulings issued thereunder.

 

“Events of

Default” shall have the meaning specified in Section 7.1 of

this Agreement.

 

“Financial

Statements” shall have the meaning specified in Section 3.14 of

this Agreement.

 

“Fiscal

Year” shall mean the twelve (12) month period ending on

December 31 of each calendar year.

 

“GAAP”

shall mean generally accepted accounting principles, consistently applied.

 

“Including

(or includes)” and words to the same or similar effect shall be interpreted

and construed to mean including without limitation (or includes without

limitation).

 

“Indebtedness”

means at a particular time, without duplication, (i) any indebtedness for

borrowed money or issued in substitution for or exchange of indebtedness for

borrowed money, (ii) any indebtedness evidenced by any note, bond,

debenture or other debt security, (iii) any

 

3

 

indebtedness for the deferred

purchase price of property or services with respect to which a Person is

liable, contingently or otherwise, as obligor or otherwise (other than trade

payables and other current liabilities incurred in the ordinary course of

business that are not more than one hundred twenty (120) days past

due), (iv) any Contingent Obligations, (v) any obligations under

Capitalized Leases with respect to which a Person is liable, contingently or

otherwise, as obligor, guarantor or otherwise, or with respect to which

obligations a Person assures a creditor against loss, (vi) any

indebtedness secured by a Lien on a Person’s assets and (vii) any

unsatisfied obligation for “withdrawal liability” (as such term is defined

under ERISA) to a Multiemployer Plan as such terms are defined under ERISA.

 

“Investor

Preferred Stock” shall mean the shares of Series A Stock issued to the

Investors hereunder.

 

“IRS”

means the United States Internal Revenue Service.

 

“Latest

Balance Sheet” shall have the meaning specified in Section 3.14

of this Agreement.

 

“Letter

Agreement” means that certain letter agreement of even date herewith, by and

among the Company, Edgewater and TIME.

 

“Lien”

shall mean any security interest, pledge, bailment (in the nature of a pledge

or for purposes of security), mortgage, deed of trust, the grant of a power to

confess judgment, conditional sales and title retention agreement (including

any lease in the nature thereof), charge, encumbrance or other similar

arrangement or interest in real or personal property, other than licenses of

Proprietary Rights.

 

“Material

Adverse Effect” shall mean a material adverse effect on the financial

condition, business, operating results, operations, business prospects or

property of the Company.

 

“Multiemployer

Plan” has the meaning set forth in Section 3(37) of ERISA.

 

“Nour-Omid

Convertible Note” shall mean that certain Convertible Note dated

December 1, 2000, made by the Company in favor of Bahram Nour-Omid in the

original principal amount of $500,000.

 

“Note”

and “Notes” shall have the meaning specified in Section 2.2(b)

of the Agreement.

 

“Original

Series B Purchase Price” is equal to $0.75 per share.

 

“Person”

shall mean any individual, corporation, partnership, company, limited liability

company, joint venture, association, bank, business trust or other entity,

whether or not legal entities, or any governmental entity or agency or

political subdivision thereof.

 

“Principal

Shareholders” means Carl Rose, Charles Leaver and Kelly Knake.

 

“Preferred

Stock” shall mean collectively the Series A Stock and Series B

Stock.

 

4

 

“Proprietary

Rights” shall mean all patents, patent applications, patent disclosures,

inventions (whether or not patentable and whether or not reduced to practice),

and any reissues, continuations, continuations-in-part, divisions, extensions

or reexaminations thereof; trademarks, service marks, trade dress, logos, trade

names, corporate names (including the use of the current corporate name and

trade names and all translations, adaptations, derivations and combinations of

the foregoing) and the goodwill associated therewith; copyrights and copyright

works; mask works; all registrations, applications and renewals for any of the

foregoing; all trade secrets, confidential information, ideas, formulae,

compositions, know-how, manufacturing and production processes and techniques,

research and development information (including drawings, specifications,

designs, plans, proposals, technical data, financial, business and marketing

plans, and customer and supplier lists and related information); Software

(including data, data bases and documentation); all other proprietary rights;

all copies and tangible embodiments of the foregoing (in whatever form or

medium); and all income, royalties, damages and payments due or payable

(including damages and payments for past or future infringements or

misappropriation thereof), the right to sue and recover for past or future

infringements or misappropriation thereof and any and all corresponding rights

that, now or hereafter, may be secured throughout the world.

 

“Purchaser

Majority” mean, collectively, the holders of at least fifty-one

percent (51%) of the issued and outstanding Series A Stock (or the holders

of at least fifty-one percent (51%) of the outstanding Convertible Debt if

more than half of the original principal amount of the Convertible Debt has not

been converted for any reason) and the holders of at least fifty-one

percent (51%) of the issued and outstanding Series B Stock (or the holders

of at least fifty-one percent (51%) of the outstanding Loans if more than half of

the original principal amount of the Loans has not been converted for any

reason).

 

“Purchaser

Representatives” means the members of the Board of Directors of the Company

designated in accordance with Sections 1.2(a)(i)(A) and (B) of the Voting

Agreement.

 

“Registration

Agreement” shall mean the Registration Rights Agreement dated as of

February 18, 2000, as amended by that certain Registration Rights

Agreement dated as of September 29, 2000, and as further amended by that

certain Amendment to Registration Agreement of even date herewith, among the

Company, Purchasers and certain other parties named therein.

 

“Required

Lenders” shall mean the holder or holders of at least a majority of the

aggregate principal amount of the Notes from time to time outstanding.

 

“Rose

Convertible Notes” shall mean that certain (a) Convertible Note dated

November 1, 2000 made by the Company in favor of Carl Rose in the original

principal amount of $500,000 and (b) Convertible Note dated November 7, 2000

made by the Company in favor of Carl Rose in the original principal amount of

$400,000, as each was amended on August 31, 2001 and further amended as

required by Section 5.1(h) hereof.

 

“Securities”

shall mean any debt or equity securities of the Company or Subsidiary, whether

now or hereafter authorized, and any instrument convertible into or

exchangeable for Securities or a Security.  The term “Security” shall

mean any one of the Securities.

 

5

 

“Securities

Act” shall mean the Securities Act of 1933, as amended from time to time,

and any rules or regulations promulgated thereunder.

 

“Security

Agreement” means that certain Security Agreement of even date herewith,

between the Company and Agent, in form and substance acceptable to Agent, as

may be amended, restated or otherwise modified from time to time.

 

“September Purchase

Agreement” means that certain Stock Purchase Agreement dated as of

September 29, 2000, by and among the Company, Edgewater and TIME.

 

“Series A

Certificate” shall mean the statement or resolutions containing the rights,

preferences and designations of the Series A Stock attached hereto as Exhibit

E.

 

“Series A

Stock” shall mean the Series A Convertible Preferred Stock, $0.01 par

value per share, of the Company.

 

“Series B

Certificate” shall mean the statement or resolutions containing the rights,

preferences and designations of the Series B Stock attached hereto as Exhibit

F.

 

“Series B

Stock” shall mean the Series B Convertible Preferred Stock, $0.01 par

value per share, of the Company.

 

“Shareholders’

Agreement” shall mean the Amended and Restated Shareholders’ Agreement

dated as of July 21, 2000, as may be amended, restated or otherwise modified

from time to time.

 

“Software”

shall mean all software products developed or owned by the Company as of the

date of Closing as described in Schedule 3.21 of the Disclosure

Schedule, including all enhancements, versions, releases and updates of such

products as of Closing, and any other software products of the Company in

development or in which the Company has any interest as of the Closing,

regardless of the product’s stage of development.

 

“Stock

Purchase” shall mean any redemption, acquisition or other retirement of

capital stock of the Company (including preferred stock, if any) or of

warrants, rights or other options to purchase such stock, other than upon

conversion thereof into or exchange thereof for other shares of the Company’s

capital stock which is not preferred stock that is or will be redeemable at the

option of the holder thereof.

 

“Stock

Option Plan” means, collectively, (a) the Company’s 1999 Employee Stock

Option Plan approved by the Board in February of 1999 and ratified by the Board

on April      2002, as may be amended, restated or

otherwise modified from time to time by the Board of Directors including the

affirmative vote or consent of the Purchaser Representatives, and (b) the

Company’s 2002 Stock Option Plan approved by the Board on April

     2002, as may be amended, restated or otherwise

modified from time to time by the Board of Directors including the affirmative

vote or consent of the Purchaser Representatives.

 

“Stock

Purchase Plan” means the Company’s 2000 Employee Stock Purchase Plan

approved by the Board on May 25, 2000.

 

6

 

“Subsidiary”

of any Person shall mean any other Person of which the outstanding capital

stock, membership interest or other equity interest possessing a majority of

the voting power in the election of directors (otherwise than as the result of

a default) is owned or controlled by such corporation directly or indirectly

through one or more Subsidiaries.

 

“Tax”

or “Taxes” shall mean all federal, foreign, state, county, local or

other taxes, charges, fees, levies or other assessments of any nature

whatsoever, including, without limitation, any federal income, alternative

minimum tax, gross receipts, excise, real or personal property, sales,

value-added, withholding, social security, payroll, employment, severance,

stamp, documentary, gains, environmental, retirement, unemployment, occupation,

use, advalorem, service, net worth, franchise, transfer and recording taxes,

imposed by any federal, state, local or foreign taxing authority, and shall

include all interest, penalties and additions imposed with respect to such

amounts.

 

“Tax

Returns” shall mean all returns, reports, information statements or other

documents (including, without limitation, elections, declarations, disclosures,

schedules, estimates, information, and amended returns) provided to or filed or

required to be provided to or filed with any taxing authority relating to

Taxes.

 

“Trade

Secrets” shall mean all licenses, processes, algorithms, formulae, designs,

methods, trade secrets, inventories, proprietary or technical information, and

data covering or embodied in any Software or other assets owned by the Company

or used in the conduct of its business.

 

“Trademark

and License Security Agreement” means that certain Trademark and License

Security Agreement of even date herewith, between the Company and Agent, as may

be amended, restated or otherwise modified from time to time.

 

“Transaction

Documents” shall mean this Agreement, the Letter Agreement, the

Registration Agreement, the Shareholder Agreement, the Voting Agreement, the Articles,

the Notes, the Security Agreement, the Trademark and License Security

Agreement, and the Amended Employment Agreements.

 

“Voting

Agreement” shall mean that certain Voting Agreement of even date herewith

among Carl Rose, Edgewater, TIME, DeJoria, Jenta Rose, Kelly Knake, Charles

Leaver, Gerald Allen and certain other Persons that may become a party thereto

from time to time in accordance with Section 2.4 hereof, if any, as may be

amended or modified from time to time.

 

Section 2.               Purchase of Investor Preferred

Stock and the Notes.

 

2.1           Authorization of the Preferred Stock.  The Company proposes to designate, authorize

and create the following series of its preferred

stock:  (a) Series A Stock, consisting of 10,000,000 shares

and having the designation, powers, preferences and rights and the

qualifications, limitations or restrictions thereof set forth in the

Series A Certificate, which Series A Certificate shall become part of the

Articles as filed with the Secretary of State of Texas or the terms thereof

shall be incorporated into an amended and restated Articles, in either case, to

be filed with the Secretary of State of Texas immediately following the receipt

of shareholder approval in accordance with Section 6.8 hereof; and

(b) Series B Stock, consisting of 10,000,000

 

7

 

shares and

having the designations, powers, preferences and rights and the qualifications,

limitations or restrictions thereof set forth in the Series B Certificate,

which Series B Certificate shall become part of the Articles, in either case,

to be filed with the Secretary of State of Texas or the terms thereof shall be

incorporated into an amended and restated Articles as filed with the Secretary

of State of Texas immediately following the receipt of shareholder approval in

accordance with Section 6.8 hereof.

 

2.2           Purchase and Sale of each of the

Investor Preferred Stock and the Notes.

 

(a)           At the Equity

Closing (as defined below), the Company shall sell to Investors and, subject to

the terms and conditions set forth herein, and relying upon the

representations, warranties and covenants of the Company set forth herein,

Investors shall purchase from the Company for a price of $0.75 per share (as

paid by the cancellation of the Convertible Debt as described in Section

2.4(b) hereof), the number of shares of the Investor Preferred Stock set

forth opposite such Investor’s name on Exhibit B attached hereto

and made a part hereof.

 

(b)           At the Initial Debt

Closing (as defined below), each of TIME, DeJoria and  Loche, made loans to the Company in the aggregate principal

amount of One Million Fifty Thousand Dollars ($1,050,000) in the amounts set

forth opposite each such Lender’s name on Schedule 1 attached hereto and

made a part hereof (the “Initial Debt”). 

At the Interim Debt Closing (as defined below), Edgewater made a loan to

the Company in the aggregate principal amount set forth opposite Edgewater’s

name on Schedule 1 attached hereto (the “Interim Debt”).  Subject to the terms and conditions set

forth in this Agreement, (i) at the Second Debt Closing (as defined

below), each of the Lenders named on Schedule 1.a attached hereto and

made a part hereof shall, severally but not jointly, loan the Company the

additional amounts set forth on Schedule 1.a opposite such Lender’s

name, and (ii) at one or more Subsequent Closings (as defined below), any

of the Lenders and/or any other Person acceptable to the Company may, at its or

their sole discretion, make loans to the Company; provided, however, the loans

made at the Initial Debt Closing, the Interim Debt Closing, the Second Debt

Closing and all Subsequent Closings shall not exceed the aggregate amount of

Four Million Five Hundred Thousand Dollars ($4,500,000) (the aggregate amount

of the Loans made at the Initial Debt Closing, the Interim Debt Closing and

pursuant to clauses (i) and (ii) above shall collectively be referred to as the

“Maximum Loan Amount”); provided, that the transactions described in

this clause (ii) shall not be deemed to be a commitment by any Lender or

such other Persons to make loans to the Company (it being understood that if

any Lender elects to provide any additional funds to the Company (whether at a

Subsequent Closing or otherwise) such Lender and the Company shall negotiate

mutually agreeable terms and conditions related thereto).  The Loans made by the Lenders, other than

TIME, DeJoria, Loche and Edgewater, pursuant to clauses (i) and (ii) above will

be evidenced by Convertible Secured Promissory Notes, each of which will be

substantially in the form attached hereto as Exhibit C (individually, a

“Second Debt Closing Note” and collectively, the “Second Debt Closing

Notes”).  At the Second Debt

Closing, the additional Loans made by TIME, DeJoria, Loche and Edgewater, if

any, will be evidenced by and the notes representing the Initial Debt and the

Interim Debt will be replaced with Substitute Secured Convertible Promissory

Notes, each of which will be substantially in the form attached hereto as Exhibit

C-1 (individually, a “Substitute Note” and collectively, the “Substitute

Notes”; and, together with the Second Debt Closing Notes, each,

individually, a “Note” and collectively, the

 

8

 

“Notes”).  Each Loan made by a Lender and/or any other

Person acceptable to the Company shall be for the minimum principal amount of

One Hundred Thousand Dollars ($100,000). 

The original principal amount of each Lender’s Loan is set forth

opposite such Lender’s name on Schedule 1 and/or 1.a, as may be amended

from time to time to reflect any additional Lenders and the amounts of the

Lenders’ or such additional Lenders’ Loan(s) pursuant to any Subsequent

Closing.

 

2.3           Use of Purchase Price Loans.  The Purchase Price (as defined below) and the

proceeds of the Loans shall be used by the Company solely for working capital

requirements and for the payment of ordinary course trade payables and not to

further reduce the principal portion of any Indebtedness or to make any

payments to any shareholders or Affiliates of the Company, other than: (a)

$300,000 to Bahram Nour-Omid in connection with the amendment to the Nour-Omid

Convertible Note, which amendment shall be on terms reasonably satisfactory to

the Required Lenders; (b) payment of approximately $6,400 per month of accrued

and unpaid interest expense pursuant to the terms of the Rose Convertible

Notes; (c) as otherwise approved by the Board of Directors including the

affirmative vote or consent of the Purchaser Representatives; and (d) payment

of the proceeds invested by any purchaser at one or more Subsequent Closings,

which proceeds may, at Edgewater’s sole discretion, be used solely to pay

$600,000 of the outstanding principal amount of the Substitute Note issued to

Edgewater hereunder (“Edgewater Special Debt”), plus any accrued interest

thereon, until such time as the Edgewater Special Debt, plus accrued interest

thereon, has been paid in full or otherwise converted in accordance with Section

2.7 hereof, after which time, any remaining proceeds shall be used for any

other purpose set forth in this Section 2.3.

 

2.4           The Closing.

 

(a)           The closing of the

sale and purchase of the notes representing the Initial Debt (the “Initial

Debt Closing”) occurred on June 21, 2001. The closing of the sale and

purchase of the note representing the Interim Debt (the “Interim Debt

Closing”) occurred on March 5, 2002. 

The initial closing of the sale and purchase of the Notes, shall be held

at 1:00 p.m. at the offices of Vedder, Price, Kaufman & Kammholz, 222 N.

LaSalle Street, Suite 2600, Chicago, Illinois 60601 on the date hereof (the “Second

Debt Closing”).  Additional sales

and purchases of the Notes may occur after the date hereof; provided, that, to

the extent any additional funding is made on or after the completion of the

Equity Closing, such funding shall be made in exchange for the purchase of

shares of Series B Stock at a price per share equal to the Original Series B

Purchase Price (each a “Subsequent Closing” and, together the “Subsequent

Closings”).  Any Person that is not

already a party to this Agreement, the Voting Agreement or the Registration

Agreement on the date hereof that purchases a Note or shares of Series B Stock

upon the terms and conditions herein at a Subsequent Closing shall become a

party hereto and thereto by executing a joinder agreement, in form and

substance satisfactory to Agent, and shall have the rights and obligations of a

Lender and/or a Purchaser hereunder, a Shareholder or Series B Holder

thereunder, as the case may be.

 

(b)           The closing of the

sale and purchase of the Investor Preferred Stock shall be held at 1:00 p.m. at

the offices of Vedder, Price, Kaufman & Kammholz, 222 N. LaSalle Street,

Suite 2600, Chicago, Illinois 60601, no later than the second business day

following the day on which the last of the conditions set forth in Section 5.2

shall have been fulfilled (the

 

9

 

“Equity

Closing”).  At the Equity Closing,

the Company shall deliver to each Investor stock certificate(s) and other

applicable instruments evidencing the Investor Preferred Stock to be purchased

by each Investor, issued in the name of each applicable Investor, upon payment

therefor by cancellation of the Convertible Debt in the aggregate amount of

$6,000,000 plus all accrued but unpaid interest thereon (the “Purchase Price”).  The Investor Preferred Stock to be purchased

hereunder shall be allocated among the Investors as set forth on Exhibit B

attached hereto and made a part hereof (which Exhibit B shall be completed

and delivered to the Investors on the date of the Equity Closing and shall be

acceptable to the Investors in their sole discretion).  Furthermore, at the Equity Closing, each

Investor agrees to return to the Company all of the original executed notes representing

the Convertible Debt marked “Canceled”. 

In addition, each Investor hereby consents to and agrees that all loan

documents and other instruments representing the Convertible Debt shall

terminate and be null and void as of the Equity Closing.

 

2.5           Loan Term; Interest; Repayment;

Prepayment.  Each Note shall be

due and payable in full on  April

    , 2003 (the “Repayment Date”) unless otherwise

payable earlier in accordance with the terms of such Note.  In addition to any accrued but unpaid

interest on the Initial Debt and Interim Debt that has been incorporated into

the Substitute Notes and deemed indebtedness thereunder, interest on the unpaid

principal balance of each Note (such unpaid principal balance is referred to as

the “Outstanding Principal Balance”) will accrue from the date such Note

was issued until the conversion of such Notes pursuant to Section 2.7

hereof or full payment of the Outstanding Balance (as defined below) at the

rate of eight percent (8%) per annum, calculated on the basis of a

360 day year and actual days elapsed. 

Upon the occurrence of an Event of Default (as defined herein) (after

giving effect to any applicable grace periods), the interest on the Outstanding

Principal Balance of each Note will accrue from the date of such default until

such time as such default is cured in a manner that is reasonably acceptable to

the Lenders at a rate per annum equal to three percent (3%) plus the

interest rate then in effect.  The

Company will repay the Outstanding Principal Balance of each Note plus all

interest accrued thereon (the “Outstanding Balance”) no later than the

Repayment Date.  The Outstanding

Principal Balance payable to each Lender hereunder may not be prepaid prior to

the Repayment Date without the consent of such Lender in its sole and absolute

discretion.

 

2.6           Secured Obligation.  The Company shall enter into and deliver to Agent (i) the

Security Agreement and (ii) the Trademark and License Security Agreement,

pursuant to which the obligations of the Company under this Agreement and the

Notes, excluding any obligations relating to the Investor Preferred Stock,

shall be secured by a perfected security interest in all of the Company’s

assets and the Company shall deliver one or more UCC-1 financing statements to

perfect the security interest granted under such Security Agreement as required

by Agent.

 

2.7           Conversion. 

At the Equity Closing, the Outstanding Balance payable to each Lender

shall be converted by each Lender into shares of Series B Stock at a

conversion price equal to the Original Series B Purchase Price, other than

the unpaid portion of the Edgewater Special Debt, plus accrued interest

thereon, which amount shall, in the sole discretion of Edgewater, be either (a)

repaid in accordance with the terms of the applicable Substitute Note, or (b)

at any time on or after the Equity Closing, but prior to the Repayment Date, be

converted into shares of Series B Stock at a conversion price equal to the

Original Series B Purchase Price.

 

10

 

2.8           Satisfaction

in Full.  The conversion of any

portion of the Outstanding Balance pursuant to the terms hereof shall be deemed

payment and satisfaction in full of the Company’s obligations under the

applicable Notes with respect to such converted amounts; provided, however,

that the representations, warranties, covenants, and agreements made herein and

in the Transaction Documents shall survive any such conversion as set forth in Section

9.8 hereof; provided, however, the Security Agreement and the Trademark and

License Security Agreement shall terminate upon the full payment or conversion

of the entire Outstanding Balance.

 

Section 3.               Representations

and Warranties of the Company.

 

The Company

hereby makes the following representations and warranties to the Purchasers as

of the date hereof and as of the date of the Equity Closing, which

representations and warranties shall survive the execution and delivery of this

Agreement as set forth in Section 9.8 hereof, the issuance of the Preferred Stock,

the Conversion Stock and the Notes hereunder.

 

3.1           Organization and Qualification.  The Company is a corporation duly organized,

validly existing and in good standing under the laws of the State of

Texas.  The Company has all licenses,

permits and authorizations necessary to own its properties and to carry on its

businesses as now being conducted and as presently proposed to be conducted and

is duly qualified to do business as a foreign corporation in each state or

country, if any, in which failure to qualify would have a Material Adverse

Effect.  The Company has provided the

Purchasers with true and correct copies of its Articles and Bylaws.

 

3.2           Corporate Power.  Except as set forth on Schedule 3.2 of the Disclosure

Schedule and subject to Section 6.8 below, the Company has the

requisite corporate power and authority to execute, deliver and carry out the

Transaction Documents and all other instruments, documents and agreements

contemplated or required by the provisions of any of the Transaction Documents

to be executed, delivered or carried out by the Company hereunder.  The Company has all requisite corporate

power and authority under the laws of its jurisdiction of incorporation to own

and operate its properties and to carry on its businesses as now conducted and

as presently proposed to be conducted.

 

3.3           Subsidiaries and Investments.  Except as set forth on Schedule 3.3

of the Disclosure Schedule, the Company does not own or hold any rights to

acquire any shares of stock, membership interest or any security or interest in

any other Person, and the Company has never had a Subsidiary.

 

3.4           Authorization, Governmental

Approvals.  Except as set forth

on Schedule 3.4 of the Disclosure Schedule and subject to the actions

described in Section 6.8 below, the execution and delivery of this

Agreement, the issuance of the Preferred Stock, the issuance of the Conversion

Stock, the issuance of the Notes, the execution and delivery of the other

Transaction Documents and all other instruments, documents and agreements

contemplated or required by the provisions hereof or thereof to be executed and

delivered by the Company and the consummation by the Company of the

transactions herein and therein contemplated to be consummated by the Company

have each been duly authorized by all necessary corporate action on the part of

the Company.  Except for filings

necessary for the sale of the Investor Preferred Stock, the Notes, the

Preferred Stock issuable upon the conversion of the Notes and the

 

11

 

Conversion

Stock to qualify for certain exemptions from the registration requirements

under state blue sky laws and federal securities laws and shareholder approval

described in Section 6.8, no authorization, consent, approval, license

or exemption of, and no registration, qualification, designation, declaration

or filing with, any court or governmental department, commission, board,

bureau, agency or instrumentality, domestic or foreign, and no vote,

authorization, consent or approval of shareholders of the Company, is or was

necessary for (a) the valid execution and delivery of this Agreement by

the Company, (b) the execution, issuance and delivery of the Preferred

Stock, the issuance of the Conversion Stock and the issuance of the Notes

hereunder, (c) the execution and delivery by the Company of the other

Transaction Documents and all other instruments, documents and agreements

contemplated or required by the provisions hereof or thereof and to be executed

and delivered by the Company, or (d) the consummation by the Company of

the transactions herein and therein contemplated to be consummated by the

Company.

 

3.5           Capital Stock. 

The Preferred Stock that is being purchased by Purchasers hereunder,

when issued, sold, and delivered in accordance with the terms of this Agreement

for the consideration expressed herein, will be duly and validly issued, fully

paid, and nonassessable, and will be free of restrictions on transfer other

than restrictions on transfer under the applicable state and federal securities

laws and pursuant to the Shareholders’ Agreement.  On or prior to the Equity Closing, the Conversion Stock being

purchased under this Agreement will be duly and validly reserved for issuance,

and upon issuance thereof will be duly and validly issued, fully paid, and

nonassessable, and except for restrictions pursuant to the Shareholders’

Agreement, will be free of restrictions on transfer other than the restrictions

on transfer under the applicable state and federal securities laws.

 

3.6           Conflict with Other Instruments.  Except as set forth on Schedule 3.6

of the Disclosure Schedule, neither the execution and delivery by the Company

of the Transaction Documents or the other instruments, documents and agreements

contemplated or required hereby or thereby, nor the consummation of the

transactions herein or therein contemplated to be consummated by the Company,

nor compliance by the Company with the terms, conditions and provisions hereof

or thereof, shall conflict with or result in a breach of any of the terms,

conditions or provisions of the Articles or the Bylaws of the Company, or any

law or any regulation, order, writ, injunction or decree of any court or

governmental instrumentality or any agreement or instrument to which the

Company is a party or by which it or any of its respective properties is bound

or constitute a default thereunder or result in the creation or imposition of

any Lien, except for those Liens being created by or granted pursuant to the

Transaction Documents.  The three-year

moratorium on certain business combinations as set forth in Section 13.03 of

the Texas Business Corporation Act is inapplicable to the transactions

contemplated herein.

 

3.7           Validity and Binding Effect.  Except as set forth on Schedule 3.7

of the Disclosure Schedule, the Transaction Documents which the Company is

required to execute and all other instruments and agreements contemplated

hereby or thereby to which the Company is a party have been duly and validly

executed and delivered by the Company and constitute legal, valid and binding

obligations of the Company, and all such obligations of the Company are

enforceable in accordance with their respective terms.

 

12

 

3.8           Capitalization.

 

(a)           As of the date of

this Agreement, the authorized capital stock of the Company consists of

(i) 50,000,000 shares of Common Stock, of which at the time of (and after

giving effect to) the Second Debt Closing [18,272,583] shares are issued and

outstanding, and (ii) 5,000,000 shares of preferred stock of the Company

none of which are issued and outstanding. 

All of the outstanding shares of capital stock of the Company are

validly issued, fully paid and nonassessable and are owned of record or

beneficially by the Company’s shareholders. 

Except as set forth on Schedule 3.8.a (which Schedule 3.8.a

sets forth a list of the shareholders of record and holders of subscriptions,

warrants, options, convertible securities and other rights to purchase or

otherwise acquire equity Securities of the Company and the number of shares,

options, warrants each such holder holds (after giving effect to the Second

Debt Closing)), there are not outstanding any shares of stock, securities,

rights or options convertible or exchangeable into or exercisable for any

shares of the Company’s capital stock, stock appreciation rights or phantom

stock, nor is the Company under any obligation (contingent or otherwise) to

redeem or otherwise acquire any shares of its capital stock or any securities,

rights or options to acquire such capital stock, stock appreciation rights or

phantom stock.

 

(b)           After giving effect

to the Equity Closing, except as set forth set forth on Schedule 3.8.b

(which Schedule 3.8.b shall be completed and attached hereto immediately

prior to the Equity Closing and shall set forth a list of the shareholders of

record and holders of subscriptions, warrants, options, convertible securities

and other rights to purchase or otherwise acquire equity Securities of the

Company and the number of shares, options, warrants each such holder holds

(after giving effect to the Equity Closing)), there are not outstanding any

shares of stock, securities, rights or options convertible or exchangeable into

or exercisable for any shares of the Company’s capital stock, stock

appreciation rights or phantom stock, nor is the Company under any obligation

(contingent or otherwise) to redeem or otherwise acquire any shares of its

capital stock or any securities, rights or options to acquire such capital

stock, stock appreciation rights or phantom stock.

 

(c)           There are no

statutory or contractual shareholders preemptive rights with respect to any

shares of capital stock of the Company. 

The Company has not violated and will not violate any applicable federal

or state securities laws in connection with the offer, sale or issuance of the

Preferred Stock, the Conversion Stock and the Notes and such issuances, offers,

or sales do not require registration of such Securities under the Securities

Act or any applicable state securities laws.  Except as set forth on Schedule 3.8.c

of the Disclosure Schedule, and for the Shareholders’ Agreement, the Voting

Agreement and the Registration Agreement, to the Company’s knowledge,

there are no agreements between the Company’s shareholders (or any one or more

of them) with respect to the voting or transfer of the Company’s capital

stock or with respect to any other aspect of the Company’s affairs.

 

3.9           Compliance with Instruments.  Except as set forth on Schedule 3.9

of the Disclosure Schedule, the Company is not in violation of any term of

(a) the Articles or the Bylaws or (b) any agreement, instrument,

contract or commitment to which it is a party or by which it may be bound,

except for (i) such violations of agreements, instruments, contracts or

commitments which individually and in the aggregate do not result in a Material

Adverse Effect, and (ii) certain matters related to agreements with AMEX.

 

13

 

3.10         Brokerage. 

There are no claims for brokerage commissions, finders’ fees or similar

compensation in connection with the transactions contemplated by this Agreement

based on any arrangement or agreement binding upon the Company.  The Company shall pay, and hold Purchasers

harmless against, any liability, loss or expense (including reasonable

attorneys’ fees and out-of-pocket expenses) arising in connection with any

claim.

 

3.11         Litigation.  Except as set forth on Schedule 3.11

of the Disclosure Schedule, there are no actions, suits or proceedings pending

or, to the Company’s knowledge, threatened against or affecting the Company or

its business or assets, before any court or governmental department, agency or

instrumentality, domestic or foreign.  The

foregoing includes, without limitation, any action, suit, proceeding, or

investigation pending or currently threatened involving the prior employment of

any of the Company’s employees, their use in connection with the Company’s

business of any information or techniques allegedly proprietary to any of their

former employers, their obligations under any agreements with prior employers,

or negotiations by the Company with potential backers of, or investors in, the

Company or its proposed business.  The

Company is not a party to or, to the best of its knowledge, named in or subject

to any order, writ, injunction, or decree of any court, governmental agency, or

instrumentality.  There is no action,

suit, proceeding or investigation by the Company currently pending or that the

Company currently intends to initiate, except as set forth on Schedule 3.11

of the Disclosure Schedules.

 

3.12         Employee Benefit Plans.  Schedule 3.12 of the Disclosure

Schedule contains a list of all Employee Benefit Plans maintained by Company

and/or any ERISA Affiliate or to which the Company or any ERISA Affiliate

contributes or is or was obligated to contribute.  Each Employee Benefit Plan that is intended to be a qualified

plan under Section 401(a) of the Code is a standardized prototype

plan that meets the requirements for qualification under Section 401(a)

of the Code, except to the extent that such requirements may be satisfied by

adopting any necessary amendments issued by the prototype plan sponsor prior to

the current expiration of the remedial amendment period under Section 401(b)

of the Code.

 

(a)           As applicable with

respect to each Employee Benefit Plan, the Company has delivered to the

Purchasers or made available, true and complete copies of (1) each

Employee Benefit Plan, including all amendments thereto, (2) all trust

documents, investment management contracts, custodial agreements and insurance

contracts relating thereto, (3) the current summary plan description and

each summary of material modifications thereto, (4) the most recent annual

report (Form 5500 and all schedules thereto) filed with the Internal

Revenue Service (“IRS”), the most recent IRS determination letter and

each currently pending application to the IRS for a determination letter, and

(5) all records, notices and filings concerning IRS or Department of Labor

audits or investigations.

 

(b)           Except as set forth

on Schedule 3.12 the Disclosure Schedule:

 

(1)           all

accrued contributions and other payments to be made by the Company or any ERISA

Affiliate to any Employee Benefit Plan through the date of the Latest Balance

Sheet have been made or reserves adequate therefor have been set aside and

reflected on the Latest Balance Sheet;

 

14

 

(2)           neither

the Company nor any ERISA Affiliate has any liability on account of any failure

to make contributions to any Employee Benefit Plan.  The Employee

Benefit Plans have in all material respects been maintained and administered in

accordance with the documents governing them and the laws and regulations

applicable to them (including, without limitation, rules and regulations of the

Department of Labor and the IRS under ERISA and the Code);

 

(3)           there

are no outstanding liabilities of any Employee Benefit Plan other than

liabilities for benefits to be paid to participants and beneficiaries in the

ordinary course of business;

 

(4)           there

is no pending litigation or, to the best knowledge of the Company, any overtly

threatened litigation or pending claim, that involves any of the Employee

Benefit Plans.  No prohibited transaction

has occurred with respect to any Employee Benefit Plan;

 

(5)           none

of the Employee Benefit Plans is or ever has been subject to Title IV of

ERISA or Section 412 of the Code.  Neither the Company

nor any ERISA Affiliate is or ever has been required to contribute to an

Employee Benefit Plan that is a Multiemployer Plan;

 

(6)           except

to the extent required by ERISA, none of the Employee Benefit Plans provides

for (or has ever provided for) medical or health care or other welfare benefits

for any former employee, officer, member, manager or director of the Company or

any ERISA Affiliate (or any of their beneficiaries); and

 

(7)           the

transactions contemplated by this Agreement will not entitle any employee to

any severance benefit under the terms of any Employee Benefit Plan or any

personnel or employment policy of the Company or any ERISA Affiliate.  None of the Employee Benefit Plans contains

any change in control or other provisions which would cause an increase or

acceleration of benefits or benefit entitlements to participants or their

beneficiaries, or an increase in liability of the Company as a result of the

transactions contemplated by this Agreement or any related action thereafter.

 

3.13         Compliance with Laws; Certain

Operations.  Except as set forth

in Schedule 3.13 of the Disclosure Schedule, the Company and its

officers, directors, agents and employees have substantially complied with all

applicable laws and regulations of foreign, federal, state and local

governments and all agencies thereof which affect the business, operations,

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

Company in any material respect or to which the Company may otherwise be

subject, and no claims have been filed against the Company alleging a violation

of, or liability or responsibility under, any such law or regulation which have

not been heretofore settled.  In

particular, but without limiting the generality of the foregoing, the Company

has obtained and substantially complied with all health and safety and other

governmental permits necessary for its operation, and the Company has not

violated or received a notice or charge asserting any violation of, or

liability or responsibility under, any environmental law or the Immigration

Reform and Control Act of 1986, or any other local, state or federal acts

(including rules and regulations thereunder) regulating, otherwise affecting or

 

15

 

relating to

the employment of aliens, employee or public hpealth and safety or employment

discrimination.

 

3.14         Financial Statements.  The Company has delivered to Purchasers

(a) the audited balance sheet and related statements of income and cash

flows for the year ended December 31, 2000, (b) the unaudited balance

sheet and related statements of income and cash flows for the year ended

December 31, 2001, and (c) the unaudited balance sheet of the Company

as of January 31, 2002 or the most recent date through which it has been

completed (the “Latest Balance Sheet”), and the related statements of

income and cash flows for the month ended January 31, 2002 or the most

recent date through which it has been completed (collectively, the “Financial

Statements”).  Each of the foregoing

Financial Statements (including in all cases the notes thereto, if any) is

accurate and complete in all material respects, is consistent with the books

and records of the Company (which, in turn, are accurate and complete in all

material respects), fairly presents the financial condition of the Company as

at their respective dates and the results of operations and cash flow for the

periods covered thereby, and has been prepared in accordance with GAAP, subject

to the lack of footnote disclosure and year end adjustments.

 

3.15         Absence of Undisclosed Liabilities.  The Company does not have any obligations or

liability (whether accrued, known to the Company, whether due or to become due

and regardless of when asserted) arising out of transactions entered into on or

prior to the date hereof, or any action or inaction on or prior to the date

hereof, or any state of facts existing on or prior to the date hereof other

than (a) liabilities or obligations set forth on the Latest Balance Sheet

(including any notes thereto), (b) liabilities which have arisen after the

date of the Latest Balance Sheet in the ordinary course of business (none of

which is a liability resulting from breach of contract, breach of warranty,

tort, infringement, claim or lawsuit), or (c) as set forth on Schedule 3.15

of the Disclosure Schedule.

 

3.16         Assets.  Except

as set forth on Schedule 3.16 of the Disclosure Schedule, the

Company has good and indefeasible title to, or has a valid leasehold interest

in, or has a valid license to use, the tangible properties and assets used by

it, located on its premises or shown on the Latest Balance Sheet or acquired

thereafter (except for properties and assets disposed of in the ordinary course

of business since the date of the Latest Balance Sheet), free and clear of all

Liens, except for Liens disclosed on the Latest Balance Sheet (including any

notes thereto) and Liens for current property Taxes not yet due and

payable.  The Company’s tangible assets

are in good operating condition, ordinary wear and tear excepted, and are fit

for use in the ordinary course of business. 

The Company owns, or has a valid leasehold interest in, or has a valid

license to use, all tangible assets necessary for the conduct of its business

as presently conducted and as presently proposed to be conducted.

 

16

 

3.17         Tax Matters.  Except as set forth on Schedule 3.17

of the Disclosure Schedule, the Company has filed or properly extended all Tax

Returns required to be filed by it and all such Tax Returns are true and

accurate in all material respects. 

Except as set forth on Schedule 3.17 of the Disclosure

Schedule, the Company has paid all sales, use, income, payroll, excise and

other Taxes owed by it and withheld and paid over all Taxes which it is

obligated to withhold from amounts owing to any employee, creditor, customer or

third party; the Company has not waived any statute of limitations with respect

to Taxes or agreed to any extension of time with respect to a Tax assessment or

deficiency; and there are no pending federal or state Tax audits being

conducted with respect to the Company and there are no material unresolved

questions or claims concerning the Company’s Tax liability.  The Company has never had any Tax deficiency

proposed or assessed against it and has not executed any waiver of any statute

of limitations on the assessment or collection of any Tax or governmental

charge.  Except as set forth on Schedule 3.17,

to the best knowledge of the Company, none of the Company’s Tax Returns and

none of its state income or franchise Tax Returns or sales or use Tax Returns

has ever been audited by governmental authorities.  Since the date of the Financial Statements, the Company has made

adequate provisions on its books to account for all Taxes, assessments, and

governmental charges with respect to its business, properties, and operations

for such period.  The Company has

withheld or collected from each payment to each of its employees, the amount of

all Taxes, including, but not limited to, federal income Taxes, Federal Insurance

Contribution Act Taxes and Federal Unemployment Tax Act Taxes required to be

withheld or collected therefrom, and has paid the same to the proper Tax

receiving officers or authorized depositaries.

 

3.18         Absence of Material Adverse Change.  Since the date of the Latest Balance Sheet,

there has been no material adverse change in the business, operations,

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

Company.

 

3.19         Absence of Certain Developments.  Except as set forth on Schedule 3.19

of the Disclosure Schedule, since the date of the Latest Balance Sheet, the

Company has not:

 

(a)           borrowed any amount

or incurred or become subject to any liabilities, except current liabilities

incurred in the ordinary course of business and liabilities under contracts

entered into in the ordinary course of business;

 

(b)           discharged or

satisfied any Lien or paid any liabilities, other than current liabilities paid

in the ordinary course of business;

 

(c)           declared or made any

payment or distribution of cash or other property to its shareholders with

respect to its capital stock, or purchased or redeemed any shares of its

capital stock;

 

(d)           mortgaged, pledged

or subjected to any Lien any of its material assets, except Liens for current

property Taxes not yet due and payable;

 

(e)           sold, assigned or

transferred any of its assets, except in the ordinary course of business, or

canceled without fair consideration any debts or claims owing to or held by it;

 

17

 

(f)            sold, assigned, transferred, abandoned or permitted to

lapse any licenses or permits or any portion thereof, or any Proprietary Rights

or other intangible assets, or (except as necessary to conduct its ongoing

operations) disclosed any proprietary confidential information to any Person;

 

(g)           made or granted any

bonus or any wage or salary increase to any employee (except in the ordinary

course of business consistent with past practices), former employee or retiree

or group of employees, former employees or retirees or made or granted any

increase in any Employee Benefit Plan or arrangement, or amended or terminated

any existing Employee Benefit Plan or arrangement or adopted any new Employee

Benefit Plan or arrangement;

 

(h)           made any capital

expenditures or commitments therefor that aggregate in excess of $5,000;

 

(i)            made any loans or

advances to any Persons (other than de minimis employee loans or advances not

exceeding $5,000 in the aggregate to any employee) or become subject to any

Contingent Obligations;

 

(j)            suffered any

material extraordinary losses or waived any rights of material value, whether

or not in the ordinary course of business or consistent with past practice;

 

(k)           entered into any

other material transaction including any employment agreement;

 

(l)            received notice

that there has been a loss of, or material order cancellation by, any customer

of the Company;

 

(m)          agreed to any change

to a material contract arrangement by which the Company or its assets is bound

or subject;

 

(n)           suffered any damage,

destruction or loss, whether or not covered by insurance that has had a

Material Adverse Effect;

 

(o)           suffered any other

event or condition of any character that has had a Material Adverse Effect or,

to the best knowledge of the Company, might have a Material Adverse Effect; or

 

(p)           changed its

accounting principles or practices or the method of recording transactions

involving accounts receivable and inventory.

 

3.20         Contracts. 

Except as set forth on Schedule 3.20 of the Disclosure Schedule,

(a) the Company has in all material respects performed all the obligations

required to be performed by it and is not in receipt of any written claim of

default under any lease, contract, commitment or other agreement material to

the Company to which it is a party; (b) no event has occurred which with

the passage of time or the giving of notice or both would result in a breach or

default under any lease, contract, instrument or other agreement material to

the Company to which it is a party; (c) no contract or commitment material

to the Company has been breached in

 

18

 

any material

respect or canceled by the other party since the date of the Latest Balance

Sheet; (d) the Company is not a party to any contract which has had or may

have a Material Adverse Effect; (e) since the date of the Latest Balance

Sheet, no material customer or supplier has notified the Company that it will

stop or decrease in any material respect the rate of business done with the

Company; and (f) all material contracts of the Company have been provided

to the Purchasers.  The Bonus Plan to be

delivered to the Purchasers at the Second Debt Closing pursuant to Section

5.1 herein shall be a true and correct copy and represent the only bonus

rights that the employees of the Company are entitled to upon a Liquidity Event

(as defined in the Articles).

 

3.21         Proprietary Rights.

 

(a)           Schedule 3.21

of the Disclosure Schedule hereto contains a complete and accurate list as of

the date hereof of all patented and registered Proprietary Rights owned by the

Company (including, but not limited to, Software, and all pending patent

applications and applications for the registration of other Proprietary Rights

owned or filed by the Company).  Schedule 3.21

of the Disclosure Schedule also contains a complete and accurate list of all

licenses and other rights granted by the Company to any third party with

respect to the Proprietary Rights and material licenses and other rights

granted by any third party to the Company.  Except as set forth on Schedule 3.21

of the Disclosure Schedule, (i) the Company owns and possesses all right,

title and interest in and to, or has a valid and enforceable license to use,

all of the Proprietary Rights necessary for the operation of the business of

the Company as currently conducted or as currently proposed to be conducted;

(ii) no claim by any third party contesting the validity, enforceability,

use or ownership of any Proprietary Rights has been made, is currently outstanding

or, to the best of the Company’s knowledge, is threatened, and to the best of

the Company’s knowledge, there are no grounds for any such claim;

(iii) the loss or expiration of any Proprietary Right or related group of

Proprietary Rights is not threatened, pending or reasonably foreseeable;

(iv) the Company has not received any notices of, nor is it aware of any

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

or conflict with, any third party with respect to the Proprietary Rights, nor

has the Company received any claims of infringement or misappropriation of or

other conflict with any intellectual property rights of any third party;

(v) to its knowledge after diligent inquiry, the Company has not

infringed, misappropriated or otherwise conflicted with any intellectual

property rights of any third parties, nor is it aware of any infringement,

misappropriation or conflict which will occur as a result of the continued

operation of the business of the Company as currently conducted or as currently

proposed to be conducted; and (vi) the Company has made all necessary

filings and recordations and has paid all required fees and Taxes to record and

maintain its ownership of the patented or registered Proprietary Rights in the

United States Patent and Trademark Office and the United States Copyright

Office.

 

(b)           Except as set forth

on Schedule 3.21 of the Disclosure Schedule, (i) the Company

has good, sole and marketable title to all copyrights in and to the Software

free and clear of any Liens, and such copyrights are not being challenged in

any way; and (ii) no person or entity has any right of renewal, reversion, or

termination with respect to any copyrights owned by the Company or any rights

under any such copyrights.

 

19

 

(c)           All of the Trade

Secrets are embodied in the Software or other assets owned by the Company

(other than general business knowledge not typically reduced to a written

form), and there is no other tangible expression of the Trade Secrets by the

Company. The Company has taken all reasonable security measures to protect the

secrecy, confidentiality, and the value of the Trade Secrets, and any other

persons who have knowledge of or access to information relating to the Trade

Secrets have been put on notice and, if appropriate, have entered into

agreements that the Trade Secrets are proprietary to the Company and are not to

be divulged or misused.  All of the

Trade Secrets are presently valid and protectable, are not part of the public

domain, and, to the knowledge of the Company, have not been used, divulged, or

appropriated for the benefit of any Persons other than the Company or to the

detriment of the Company.

 

(d)           All authors of the

Software or any other Person or entity who participated in the development of

the Software or any portion thereof or performed any work related to the

Software are collectively referred to as the “Software Authors”.  Each Software Author (with the exception of

independent contractors) made his contribution to the Software within the scope

of employment with the Company, as a “work made for hire,” and was directed or

engaged by the Company (as the case may be) to work on the Software.  The Software Authors who are independent

contractors have assigned all of their respective right, title and interest in

and to the Software to the Company. 

Except as set forth on Schedule 3.21 of the Disclosure

Schedule, the Software and every portion thereof are an original creation of

the Software Authors and do not contain any source code or portions of source

code (including any “canned program”) created by any parties other than the

Software Authors.  To the knowledge of

the Company, the Company has not, by any of its acts or omissions, or by acts

or omissions of its Affiliates, directors, officers, employees, agents, or

representatives caused any of its Proprietary Rights, including Software,

copyrights, trademarks, and Trade Secrets to be transferred, materially

distributed, or adversely affected to any material extent.

 

(e)           The Company is not

aware that any of its employees is obligated under any contract (including

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

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

agency, that would interfere with the use of such employee’s best efforts to

promote the interests of the Company or that would conflict with the Company’s

business as proposed to be conducted. 

Neither the execution nor delivery of this Agreement, nor the carrying

on of the Company’s business by the employees of the Company, nor the conduct

of the Company’s business as proposed, will conflict with or result in a breach

of the terms, conditions, or provisions of, or constitute a default under, any

contract, covenant, or instrument under which any of such employees is now

obligated.  The Company does not believe

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

persons it currently intends to hire) made prior to their employment by the

Company.

 

3.22         Insurance. 

The insurance coverage of the Company is customary for corporations of

similar size engaged in similar lines of business and is proper to cover the

Company’s properties, assets and business.  Each insurance policy

maintained by the Company with respect to its properties, assets and businesses

is in full force and effect as of the date hereof and shall remain in full

force and effect following the date hereof. 

The Company is not in default with respect to its obligations under any

insurance policy maintained by it.

 

20

 

3.23         Disclosure Schedule.  Any references to “Schedule” herein or a

Disclosure Schedule shall be deemed to refer to a part of the Disclosure

Schedule which (a) has been certified as true and correct by the Company,

(b) has been delivered to Purchasers in connection with the execution of

this Agreement and (c) describes in reasonable detail all exceptions to

the representations and warranties of the Company.

 

3.24         Extent of Offering.  Neither the Company nor any agent acting on its behalf has sold

or offered to sell any or all of the Preferred Stock, the Conversion Stock, the

Notes or any similar securities so as to bring the issuance or sale of the

Preferred Stock, the Conversion Stock or the Notes pursuant to this Agreement

and the Transaction Documents within the provisions of Section 5 of

the Securities Act, and neither the Company nor any agent acting on its behalf

will offer or sell the Preferred Stock, the Conversion Stock, the Notes or any

similar securities so as to bring the issuance or sale of the Preferred Stock,

the Conversion Stock or the Notes pursuant to this Agreement and the

Transaction Documents within such provisions.

 

3.25         Dividends. 

The Company has taken no action which would require or permit it to

treat the Common Stock or Preferred Stock as other than equity or dividends on

its books or federal, state or local income Tax Returns.

 

3.26         Registration Rights.  Except for rights existing pursuant to the

Registration Agreement contemplated hereby and except as set forth on Schedule 3.26

of the Disclosure Schedule, no holder of any Security will have any right to

require the registration thereof (or of Securities receivable upon the exercise

or conversion thereof) under the Securities Act or the right to include such

Security (or any Security receivable upon the exercise or conversion thereof)

in a registration statement filed by the Company under the Securities Act.

 

3.27         Illegal Payments.  The Company has never made any illegal payment of any kind,

directly or indirectly, including, without limitation, payments, gifts or

gratuities, to the United States or any foreign national, state or local

government officials, employees or agents.

 

3.28         Related Party Transactions.  Except as set forth on Schedule 3.28

of the Disclosure Schedule:

 

(a)           No employee, officer

or director of the Company, no Affiliate of any employee, officer or director

of the Company, and no member of the immediate family of any employee, officer

or director of the Company is indebted to the Company;

 

(b)           The Company is not

indebted, and is not committed to make loans or extend or guarantee credit, to

any employee, officer or director of the Company, or any Affiliate of any

employee, officer or director of the Company, or any member of the immediate

family of any employee, officer or director of the Company; and

 

(c)           No Affiliate of the

Company, officer or director and no member of the immediate family of any

Affiliate of the Company, officer or director is interested, directly or

indirectly, in any agreement, contract, commitment or transaction with the

Company, except for any employment agreement entered into in the ordinary

course of business.  To the best of the

Company’s knowledge, no employee and no member of the immediate family of any

employee

 

21

 

is interested,

directly or indirectly, in any material contract with the Company, except for

any employment agreement entered into in the ordinary course of business.

 

3.29         Disclosure. 

Neither this Agreement, nor the Disclosure Schedule, nor any of the

other Transaction Documents furnished to the Purchasers by the Company at the

time of the execution and delivery of this Agreement and the Equity Closing

contains any untrue statement of a material fact or omits to state a material

fact necessary in order to make the statements contained herein and therein not

misleading.  There is no fact known to

the Company (other than general conditions which are a matter of public

knowledge) which has had or is reasonably likely to have a Material Adverse

Effect which has not been set forth in this Agreement or in the other

agreements, documents, certificates and statements furnished in writing to the

Purchasers prior to or on the date hereof in connection with the transactions

contemplated hereby.

 

Section 4.               Purchaser’s

Investment Representations. 

Each Purchaser hereby, severally and not jointly, represents and

warrants to the Company that:

 

(a)           Purchaser is

acquiring shares of Preferred Stock, Conversion Stock and/or the Notes

purchased hereunder or acquired pursuant hereto for his or its own account with

the present intention of holding such securities for purposes of investment,

and that he or it has no intention of selling such securities in a public

distribution in violation of the federal securities laws or any applicable

state securities laws; provided that nothing contained herein shall prevent

Purchasers and subsequent holders of such shares of Preferred Stock, Conversion

Stock and Notes from transferring such securities in compliance with federal

and state securities laws.  Each

certificate or instrument representing Preferred Stock and the Conversion Stock

shall be imprinted with the legend stating that such Securities are not

registered securities under the Securities Act and that the transfer of such

Securities is therefore restricted;

 

(b)           Such Purchaser has

been furnished any and all material relating to the Company and the shares of

Preferred Stock, the Conversion Stock and the Notes which he or it has

requested and has been afforded the opportunity to obtain any additional

information necessary to evaluate such Purchaser’s participation in the

transactions contemplated by this Agreement;

 

(c)           Such Purchaser,

either alone or with his or its financial advisor(s), has the necessary

knowledge and experience in financial and business matters as to be able to

evaluate the merits and risks of such Purchaser’s participation in the

transactions contemplated by this Agreement; and

 

(d)           Such Purchaser

qualifies as an “accredited Purchaser” as defined in Rule 501 of

Regulation D promulgated under the Securities Act of 1933, as amended.

 

Section 5.               Conditions

Precedent.

 

5.1           Conditions Precedent to Second Debt

Closing.  The obligation of the

Lenders to make the Loans is subject to the conditions set forth below:

 

(a)           The representations

and warranties contained in this Agreement shall be true and correct as of the

Second Debt Closing, and the Company shall have performed all

 

22

 

obligations

that are to be performed hereunder and under the Transaction Documents on or

before the Second Debt Closing.

 

(b)           The Principal

Shareholders shall have in the aggregate returned to treasury of the Company at

least 10,317,311 shares of Common Stock pursuant to an agreement acceptable to

the Purchasers (which agreement shall provide that Carl Rose’s equity ownership

shall not at any time exceed 10% of the equity of the Company on a fully

diluted basis).

 

(c)           Jeff Sexton

shall have forfeited or returned for cancellation of all of the stock options

that he held immediately prior to Initial Debt Closing which such stock options

represented the right to purchase 450,000 shares of Common Stock pursuant to an

agreement acceptable to the Purchasers.

 

(d)           Carl Rose shall have

unconditionally waived all rights, title and interest, including, without

limitation, any security interest, that he may have prior to the Second Debt

Closing in the assets of the Company.

 

(e)           MRA Systems, Inc., a

Colorado corporation d/b/a GE Access (“GE Access”), shall have entered

into a Subordination Agreement with the Lenders, on terms satisfactory to the

Agent.

 

(f)            Carl

Rose shall have forfeited for cancellation of all of the warrants and shares of

Common Stock which have been issued upon exercise of such warrants that he held

immediately prior to Second Debt Closing.

 

(g)           Rose shall have

canceled that certain Convertible Note dated November 17, 2000 in the principal

amount of $100,000 and all indebtedness represented thereby.

 

(h)           The Rose Convertible

Notes shall have been amended upon terms reasonably satisfactory to the

Lenders.

 

(i)            TIME shall have

forfeited for cancellation of all of the warrants and shares of Common Stock

which have been issued upon exercise of such warrants that he held immediately

prior to Second Debt Closing.

 

(j)            The Company shall

have in place directors’ and officers’ liability insurance acceptable to the

Lenders and corporate indemnification to the fullest extent permitted by law.

 

(k)           The Company shall

have entered into amended employment agreements or employment agreements with

each of the employees listed on Schedule 2 attached hereto on terms

reasonably acceptable to the Lenders and the Company’s Board of Directors (the

“Amended Employment Agreements”).

 

(l)            There shall have

been delivered evidence (satisfactory to the Lenders) of termination of that

certain Shareholders’ Agreement dated September 29, 2000, by and among the

Company and certain shareholders named therein.

 

23

 

(m)          There shall have been

delivered evidence (satisfactory to the Lenders) of (i) termination of that

certain Memorandum of Terms dated as of June 21, 2001, as amended, by and among

the Company, TIME, DeJoria and Loche, and (ii) the release of any security

interest granted by the Company to TIME, DeJoria and Loche pursuant to such

Memorandum of Terms.

 

(n)           There shall be

delivered to the Lenders at the Second Debt Closing:

 

(i)            A

legal opinion of Gray Cary Ware & Freidenrich, L.L.P. (“Gray Cary”),

counsel to the Company, with respect to, among other things, the due

authorization and enforceability of the Transaction Documents and the validity

of the security interest granted pursuant to the terms of the Security

Agreement and the perfection thereof, in form and substance satisfactory to the

Lenders and their counsel;

 

(ii)           Duly

completed and executed copies of the Transaction Documents executed by all

applicable parties;

 

(iii)          Certified

copies of all documents and resolutions evidencing (A) the approval by the

requisite number of disinterested members of the Company’s Board of Directors

approving the actions to be taken by the Company with respect to the Transaction

Documents, the Bonus Plan and the issuance of Preferred Stock, the Conversion

Stock and the Notes, (B) the approval by the requisite number of

disinterested members of the Company’s Board of Directors of an amendment or

amendment and restatement of the Articles providing for (1) the increase of the

number of shares of Common Stock authorized for issuance from 50,000,000 to

100,000,000, (2) the authorization of 10,000,000 shares of Series A Stock and

10,000,000 shares of Series B Stock, and (3) the Certificates forming a part of

the Articles or the terms thereof being otherwise incorporated therein, (C) the

approval by the Company’s Board of Directors of setting the number of directors

at eight (8), and (D) the submission of the actions described in clause (B)

above and such other actions requiring shareholder approval in connection with

the transactions contemplated herein to the shareholders for their approval;

 

(iv)          Certified

correct and complete copies of (A) the Articles from the Secretary of

State of Texas, and (B) the Bylaws, from the Secretary of the Company in

each case and to the extent applicable, as validly amended to reflect the

adoption of any amendments required to effectuate the terms of this Agreement

or the Voting Agreement;

 

(v)           Good

standing certificates for the jurisdiction of incorporation of the Company and

for each jurisdiction in which the Company is qualified to do business;

 

(vi)          UCC-1

financing statements filed in such jurisdictions as Agent and the Lenders shall

deem necessary to perfect Agent’s security interests in the property of the

Company;

 

(vii)         The

Bonus Plan on terms reasonably acceptable to the Lenders and the Board of

Directors of the Company;

 

24

 

(viii)        The

Company’s 2002 Stock Option Plan on terms reasonably acceptable to the Lenders

and the Board of Directors of the Company;

 

(ix)           Certificate

of Insurance for the Company’s directors’ and officers’ liability insurance;

 

(x)            A

certificate of an executive officer of the Company certifying the Company’s

receipt of the original executed stock certificates, options agreements, notes,

warrants, security agreements, UCC-1 financing statements (or to the extent

such financing statements have been filed with the appropriate jurisdictions,

the corresponding UCC-3 termination statements) or such other documents or

instruments which are being converted, forfeited or replaced pursuant to the

terms of Sections 2.2(b),  5.1(b), 5.1(c), 5.1(d), 5.1(f),

5.1(g) and 5.1(i) and marked “Canceled” (other than any UCC-3

termination statements), and containing a copy thereof.

 

(xi)           Such

other instruments, documents and certificates as the Lenders may reasonably

require.

 

(o)           There shall be

delivered to Edgewater and TIME at the Second Debt Closing:

 

(i)            Certified

copies of all documents and resolutions evidencing corporate action taken by

the Company with respect to the Transaction Documents (as defined in the

September Purchase Agreement) and the issuance of Investor Common Stock

(as defined in the September Purchase Agreement) to Edgewater and TIME, in

form and substance satisfactory to Edgewater and TIME and their counsel;

 

(ii)           Stock

certificates in the name of each Edgewater and TIME evidencing the shares of

Investor Common Stock purchased under the September Purchase Agreement;

and

 

(iii)          Such

other instruments, documents and certificates as Edgewater and TIME may

reasonably require.

 

5.2           Conditions Precedent to Equity

Closing.  The obligation of the

Investors to purchase or convert into the Preferred Stock in accordance with Section

2.2(a) at the Equity Closing and the obligation of the Lenders to convert

their Loans in accordance with Section 2.7 at the Equity Closing are

subject to the conditions set forth below:

 

(a)           The representations

and warranties contained in this Agreement shall be true and correct as of the

Equity Closing, and the Company shall have performed all obligations that are

to be performed hereunder and under the Transaction Documents on or before the

Equity Closing;

 

(b)           The loan agreements,

notes and other documents or instruments that represent the Convertible Debt

and the Loans including, without limitation, the original executed Notes, notes

representing the Convertible Debt, security agreements, UCC-1 financing

statements, and all rights granted thereunder shall be terminated and deemed

null and void

 

25

 

immediately

upon the conversion of the amounts underlying such instruments at the Equity

Closing; provided, however, that if and to the extent that the Edgewater

Special Debt, plus accrued interest thereon, has not been paid in full on or

prior to the date of the Equity Closing or has not otherwise been converted

into shares of Series B Stock in accordance with Section 2.7 above, the

Substitute Note issued to Edgewater shall remain in full force and effect and

all agreements, documents and instruments securing such debt (and perfecting

such security interest) shall remain in full force and effect.

 

(c)           There shall be

delivered to the Purchasers at the Equity Closing:

 

(i)            A

legal opinion of Gray Cary, counsel to the Company, with respect to, among

other things, the valid authorization of the Preferred Stock in accordance with

the terms set forth in the Certificates and the valid issuance of the Preferred

Stock at the Equity Closing, in form and substance satisfactory to the

Purchasers and their counsel;

 

(ii)           Certified

copies of all documents and resolutions evidencing approval by the Company’s

shareholders of (A) the issuance of Preferred Stock and the Conversion

Stock, (B) an amendment or amendment and restatement of the Articles

providing for (1) the increase of the number of shares of Common Stock

authorized for issuance from 50,000,000 to 100,000,000, (2) the authorization of

10,000,000 shares of Series A Stock and 10,000,000 shares of Series B Stock,

and (3) the rights, preferences and privileges of the Series A Stock and Series

B Stock as set forth in the Certificates, and (C) any other matters related to

the transactions contemplated hereby for which AMEX requires shareholder

approval;

 

(iii)          Certified

correct and complete copies of (A) the Articles (as validly amended or

amended and restated to (1) reflect the adoption of Certificates or the terms

thereof in form and substance acceptable to the Purchasers, (2) reflect the

increase of the number of shares of Common Stock authorized for issuance from

50,000,000 to 100,000,000, and (3) reflect the authorization of 10,000,000

shares of Series A Stock and 10,000,000 of Series B Stock, from the Secretary

of State of Texas, and (B) the Bylaws, from the Secretary of the Company

in each case, and to the extent applicable, as validly amended to reflect the

adoption of any amendments required to effectuate the terms of this Agreement or

the Voting Agreement;

 

(iv)          Good

standing certificates for the jurisdiction of incorporation of the Company and

for each jurisdiction in which the Company is qualified to do business;

 

(v)           The

documents or instruments which are being terminated pursuant to the terms of Sections

5.2(b) marked “Canceled” (other than any UCC-3 termination statements).

 

(vi)          Stock

certificates in the name of each Purchaser evidencing the shares of Preferred

Stock purchased hereunder.

 

26

 

(vii)         A

certificate executed by an executive officer of the Company to the effect that

each of the conditions specified above in Sections 5.2(a)-(c) are

satisfied in all respects.

 

(viii)        Such

other instruments, documents and certificates as the Purchasers may reasonably

require.

 

Section 6.               Covenants.

 

6.1           Affirmative Covenants.  The Company covenants that so long as (i)

any shares of Preferred Stock issued hereunder are outstanding, (ii) the

Purchasers or their Affiliates own of record or beneficially at least 500,000

shares of Conversion Stock, or (iii) the Lenders hold any portion of the

outstanding principal amount of the Notes, the Company shall:

 

(a)           Preservation of

Corporate Existence, etc.  Preserve

and maintain its corporate existence, rights, franchises and privileges in the

jurisdiction of its incorporation, and qualify and remain qualified as a

foreign corporation in each jurisdiction in which failure to qualify would have

a Material Adverse Effect.

 

(b)           Payment of Taxes.  Pay and discharge all Taxes, assessments and

governmental charges or levies imposed upon it or upon its income or profits,

or upon any properties belonging to it, prior to the date on which penalties

attach thereto, and all lawful claims which, if unpaid, would become a Lien

upon any properties of the Company; provided that the Company shall not be

required to pay any such Tax, assessment, charge, levy or claim which it is

contesting in good faith and by proper proceedings and for which such reserves

or other provisions as may be required by GAAP shall have been made and

recorded.

 

(c)           Maintenance of Insurance.  Maintain (i) insurance on its properties and businesses with

reputable insurance companies in such amounts, of such types and covering such

casualties, risks and contingencies as is ordinarily carried by companies

engaged in similar businesses and owning similar properties in the same general

areas in which the Company operates, and (ii) directors’ and officers’

liability insurance in the amount of $10,000,000, each payable by the Company.

 

(d)           Maintenance of

Properties and Assets.  Maintain and

preserve all of its properties which are necessary for the proper conduct of

its business in good working order and condition, ordinary wear and tear

excepted, and all of its other assets (including Proprietary Rights) in

accordance with past custom and practice.

 

(e)           Keeping of

Records and Books of Account.  Keep

adequate records and books of account, in which complete entries shall be made

in accordance with GAAP, reflecting all financial transactions of the Company.

 

(f)            Visitation

Rights.  At any time and from time to time during

normal business hours and with prior notice, permit any Purchaser or any agent

or representative of such Purchaser to examine and make copies of and abstracts

from the records and books of account of, and to visit the properties of the

Company and to discuss the affairs, finances and accounts of the Company with

any of the Company’s officers or directors and the Company’s independent

 

27

 

accountants

(and the delivery of an executed copy of this Agreement to such accountants

shall constitute the Company’s consent to such discussions); provided, however,

that if an Event of Default occurs, no Purchaser or any agent or representative

of such Purchaser will be required to give notice and the Purchasers may

exercise their rights under this Section 6.1(f) at any time.

 

(g)           Compliance with

Laws.  Substantially comply with the

applicable requirements of all laws, rules, regulations and orders of any

governmental authority (including, without limitation, ERISA and the Code and

the rules, regulations and orders promulgated thereunder), the violation of

which would have a Material Adverse Effect.

 

(h)           Related Documents.  Keep, observe and comply with all of its

covenants and obligations which are set forth in the Transaction Documents or

other agreement or instrument delivered in connection therewith so long as such

covenants and obligations are in force and effect.

 

(i)            Board of

Directors.  Take all necessary and

desirable actions within its control in order to cause and to continue to cause

compliance with the provisions of Section 1.2(a) of the Voting

Agreement with respect to the Board of Directors of the Company.

 

(j)            Payment of

Indebtedness, Etc.  The Company

shall and shall cause each Subsidiary to faithfully observe, perform and

discharge in all material respects all the material covenants, conditions and

obligations including, without limitation, payment obligations which are

imposed on it by any and all material indentures, agreements, or other

instruments securing or evidencing Indebtedness or pursuant to which

Indebtedness is issued or shall cure any non-performance or default prior to

the date the creditor accelerates the payment of the Indebtedness or commences

proceedings to collect the Indebtedness, and not permit the occurrence or

continuance of any act or omission which is or under the provisions thereof may

be declared to be a material default thereunder (after the expiration of all

applicable cure periods), unless such default (other than a default in payment

of principal or interest) or the right to declare a default on account of such

act or omission is waived pursuant to the provisions thereof; provided, however,

that neither the Company nor any Subsidiary shall be required to make any

payment or to take any other action by reason of this Section 6.1(j)

at any time while it shall be currently contesting in good faith by appropriate

proceedings its obligations to make such payment or to take such action, if the

Company shall have set aside on its books reserves (segregated or classified to

the extent required by GAAP) deemed by it adequate with respect thereto.

 

(k)           Blue Sky.  The Company shall timely make any and all

filings necessary (whether before or after the Equity Closing) in connection

with the offer, issuance and sale and/or transfer of the Preferred Stock, the

Conversion Stock and the Notes to be purchased pursuant to this Agreement under

the securities or blue sky laws of any jurisdiction, in which such filing is

required by law.

 

(l)            Unrelated

Business Taxable Income.  The

Company shall maintain its status as a C corporation and shall not wholly own

any Subsidiary which would subject the Purchasers to Unrelated Business Taxable

Income as defined in Section 512 of the Code.

 

28

 

(m)          Other Board

Matters.

 

(i)            The

Company shall reimburse each director of the Company at each meeting of the

Board of Directors of the Company for his reasonable out-of-pocket expenses in

attending such meeting including a reasonable mileage allowance.

 

(ii)           The

Company agrees that it shall cause the Board of Directors of the Company to

meet no less frequently than monthly.

 

(iii)          The

Company shall at all times maintain directors and officers insurance coverage

and provide for indemnification of all of the directors and officers under its

Articles and By-Laws.

 

(iv)          The

Company shall cause the Board of Directors of the Company to maintain a

compensation committee authorized and elected pursuant to applicable By-Laws

and resolutions, which shall consist of three (3) members of the Board of

Directors of the Company as follows: (i) the July Representatives (as such term

is defined in the Voting Agreement); and (ii) the current Chief Executive

Officer of the Company (the “CEO”).  The

compensation committee shall vote on, and approve by majority vote, the

compensation of all officers and key employees, except that the CEO shall not

vote on his compensation, the adoption of Company benefit plans and adoption of

and grants under stock option plans or any other plan to issue securities,

options or warrants of the Company, other than issuances of securities, options

or warrants to officers or directors of the Company which issuances shall be

approved by the Board of Directors of the Company.

 

(v)           Each

member of the Board of Directors of the Company shall be deemed an intended

third party beneficiary of the provisions contained in clauses (i) and (iii) of

this Section 6.1(m).

 

6.2           Reporting Requirements.  The Company covenants that so long as any

shares of Preferred Stock or Conversion Stock issued hereunder are outstanding

or so long as the Lenders hold any portion of the outstanding principal amount

of the Notes, and if the Company is no longer subject to the reporting

requirements of the federal securities laws, or if the applicable report is not

publicly disclosed, it shall furnish to Purchasers, unless waived in writing by

the Purchaser Representatives:

 

(a)           Annual Budget.  At least thirty (30) days prior to the

end of each Fiscal Year, an annual budget approved by the Board of Directors of

the Company, prepared on a quarterly and annual basis for the Company for each

succeeding Fiscal Year (displaying anticipated statements of income and cash

flows and balance sheets); and within thirty (30) days after any

quarterly period in which there is a material adverse deviation from the annual

budget, a certificate from the Company’s President explaining the deviation and

what actions the Company has taken and proposes to take with respect thereto.

 

(b)           Financial

Statements.  Financial statements

and information to Purchasers on behalf of itself and any Subsidiaries as

follows:

 

(i)            Monthly

Statements.  Within

thirty (30) days after the end of each month during each Fiscal Year

of the Company, a copy of the unaudited financial

 

29

 

statements of the Company, consisting of a balance sheet as of the

close of such month and related statements of income and cash flows for such

month and from the beginning of such Fiscal Year to the end of such month,

prepared in accordance with GAAP on a consistent basis, subject to the lack of

footnote disclosure and year end adjustments.

 

(ii)           Quarterly Statements.  Within forty-five (45) days after

the end of each quarter during each Fiscal Year of the Company, a copy of the

unaudited financial statements of the Company, consisting of a balance sheet as

of the close of such quarter and related statements of income and cash flows

for such quarter and from the beginning of such Fiscal Year to the end of such

quarter, prepared in accordance with GAAP on a consistent basis, subject to the

lack of footnote disclosure and year end adjustments.

 

(iii)          Annual

Statement.  As soon as available and

in any event within one hundred twenty (120) days after the end of

each Fiscal Year of the Company, a copy of its annual report, audited by

nationally recognized independent certified public accountants and acceptable

to the Purchasers, including balance sheet and related statements of income,

cash flows and shareholders equity of the Company for such Fiscal Year, with

comparative figures for the preceding Fiscal Year, prepared in accordance with

GAAP on a consistent basis.

 

(c)           Notices of

Litigation.  Promptly after the

commencement thereof (but in no event later than five (5) days),

notice of all actions, suits and proceedings with an amount in controversy of

$50,000 or more before any court or governmental department, commission, board,

bureau, agency or instrumentality, domestic or foreign.

 

(d)           Notices of

Adverse Judgments.  Promptly after

the institution thereof  (but in no event later than

five (5) days), notice of all adverse judgments of $50,000 or more

entered by any court or governmental department, commission, board, bureau,

agency or instrumentality, domestic or foreign, against the Company, such

notice to include the exact dollar amount of any such adverse judgment as well

as any other estimated adverse economic impact on the Company.

 

(e)           Material Adverse

Changes.  Promptly after the

occurrence thereof (but in no event later than five (5) days), notice

of (i) all events, conditions, acts, facts and omissions (except general

conditions which are a matter of public knowledge) which may reasonably be

expected to have any Material Adverse Effect and (ii) any noncompliance by

the Company under any material contracts to which the Company is bound.

 

(f)            Federal

Securities Laws.  Any such

information (and consents) regarding the Company in order to fulfill their

respective obligations under the federal securities laws.

 

(g)           Other Information.  Such other information respecting the

business, properties, condition or operations of the Company as the Purchasers

may from time to time reasonably request.

 

(h)           Board Materials.  Copies of all Board of Directors materials

at least forty-eight (48) hours prior to each meeting of the Board of

Directors of the Company.

 

30

 

6.3           Negative Covenants.  The Company covenants that so long as (i)

any shares of Preferred Stock issued hereunder are outstanding, (ii) the

Purchasers or their Affiliates own of record or beneficially at least 500,000

shares of Conversion Stock, or (iii) the Lenders hold any portion of the

outstanding principal amount of the Notes, neither it nor any Subsidiary shall,

without the prior written consent of the Purchaser Representatives:

 

(a)           Amendments or

Changes in Bylaws or Articles of Incorporation.  Except in accordance with Section 6.8 hereof, amend,

modify or supplement in any material way, the Company’s Bylaws or the Articles,

including without limitation, any amendments that (i) alter or change the

rights, preferences or privileges of the Preferred Stock or any other class of

capital stock; (ii) increase the number of authorized shares of Preferred

Stock or Common Stock; or (iii) create a new class of shares of capital

stock of the Company having rights, preferences, or privileges equivalent or

senior to the Preferred Stock.

 

(b)           Issuance of

Capital Stock.   Issue shares

of any class of stock including, without limitation, issuances under the Stock

Purchase Plan, other than the Preferred Stock or Conversion Stock to the

Purchasers, issuances under the Stock Option Plan and issuances upon the

exercise of any convertible securities disclosed in Schedule 3.8.a of

the Disclosure Schedule.

 

(c)           Dividends.  Directly or indirectly make, declare or pay

any dividends or other distributions on its capital stock in cash or in

property to any class of stock of the Company (other than dividends payable on

the Preferred Stock).

 

(d)           Acquisitions;

Sale of Assets; Merger; Consolidation; Reorganization; Liquidation, Etc.  Acquire any interest in any business

(whether by a purchase of assets, purchase of stock, merger, or otherwise);

enter into an agreement providing for a plan of exchange, merger or

consolidation with or into any other entity; enter into any joint venture, partnership

or plan of reorganization (except for strategic alliances entered into in the

ordinary course of business which do not involve (i) capital

contributions, exchanges or contributions of equity or assets, or

(ii) transactions violating any other provision of Section 6.3

hereof); sell, assign, lease, transfer or otherwise dispose of any substantial

portion of its capital assets; recapitalize; become a member in a limited

liability company or otherwise acquire an equity interest in another Person; or

liquidate.

 

(e)           Change of Control.  Authorize or permit the sale of voting

capital stock (whether by the Company or any shareholder thereof) permitting

the holder thereof to control fifty-one percent (51%) of the voting rights

of the Company or any Subsidiary.

 

(f)            Redemption of

Stock.  Make or incur any liability

to make any Stock Purchase (other than pursuant to (i) equity incentive

agreements with employees and service providers giving the Company the right to

repurchase shares of the Company’s capital stock upon termination of employment

or services, (ii) the Articles and (iii) this Agreement), or other

acquisition of shares of the Company’s capital stock or any payments with

respect to stock appreciation rights or similar rights.

 

31

 

(g)           Change of

Business.  Enter into the ownership,

active management of operation of any business other than the ownership and

operation of the business of the Company conducted as of the date hereof, or

make any material change in the Company’s current business.

 

(h)           Directors.  Increase the number of directors of the

Company.

 

(i)            Liabilities. 

Become liable for, or make any payments with respect to, any

liabilities, Indebtedness or obligations, other than (i) trade payables to

non-Affiliates incurred in the ordinary course of business, and (ii)

Indebtedness disclosed to the Purchasers in writing prior to the date hereof.

 

(j)            Capital

Expenditures.  Make any capital

expenditures that in the aggregate exceed One Hundred Thousand Dollars

($100,000) in any Fiscal Year.

 

(k)           Transactions with

Affiliates.  Enter into any

transaction with any of its Affiliates, except on arm-length terms and approved

by the disinterested members of the Board of Directors of the Company or as

otherwise provided in this Agreement.

 

(l)            Investments.  Make any investments of excess cash, except

for (i) direct obligations of the United States of America or of any state

thereof, (ii) prime commercial paper, (iii) certificates of deposit

issued by any commercial bank having capital and surplus in excess of

$500,000,000 and (iv) money market funds of nationally recognized

institutions investing solely in obligations described in clauses (i), (ii) and

(iii) above, in each case due within one year from the date of purchase.

 

(m)          Fiscal Year.  Change its Fiscal Year from one ending on

December 31.

 

(n)           Bonus Plan.  Amend, modify or supplement in any material

way,  the Bonus Plan, including, without

limitation, any amendments that increases the value of the bonus pool.  Enter into or create any agreement other

than the Bonus Plan that grants employees of the Company the right to receive

bonuses upon the occurrence of a Liquidity Event (as defined in the Articles).

 

6.4           Tax Treatment of Dividends.  So long as any share of Preferred Stock is

outstanding, the Company shall:

 

(a)           Treat the shares of

Preferred Stock and Common Stock as capital stock and not as Indebtedness, and

treat the dividends paid (or accrued) with respect to the shares of Preferred

and Common Stock as distributions within the meaning of Section 301

of the Code, and not as interest;

 

(b)           Not take any action

which could reasonably be expected by it (i) to require or permit the

Company to treat the dividends paid with respect to the Preferred Stock or

Common Stock as interest for any purpose, (ii) to cause the Preferred

Stock or Common Stock to be treated as Indebtedness for purposes of Section 385

of the Code or any successor provision of the Code and the regulations

promulgated thereunder, or (iii) to cause the dividends received deduction

under Section 243 of the Code (the “Dividends Received Deduction”)

to cease to be

 

32

 

available, in

whole or in part, with respect to dividends on the Preferred Stock or Common

Stock;

 

(c)           Without limiting the

generality of the foregoing Subsection (b), (i) not claim a deduction

for dividends paid on the Preferred Stock or Common Stock whether as interest

or otherwise, in any Tax Returns, claim for refund or other submission to the

IRS, and (ii) unless required to do so by GAAP, not treat the Preferred

Stock or Common Stock other than as equity capital or the dividends paid

thereon other than as dividends paid on capital in any report to shareholders

or any governmental body having jurisdiction over the Company or otherwise;

 

(d)           Not exercise any

option or election that may at any time be available under the Code or

otherwise to deduct all or part of any dividend paid with respect to the shares

of Preferred Stock or Common Stock if so doing would increase the amount of

such dividend includable for federal, state or local income Tax purposes in the

income of any corporate holder of shares of Preferred Stock or Common Stock; or

 

(e)           At the request of

any corporate holder of Preferred Stock or Common Stock, join with such holder

in the submission to the IRS of a request for a ruling that dividends paid on

the Preferred Stock or Common Stock will be eligible for the Dividends Received

Deduction for Tax purposes.  In

addition, the Company shall cooperate with and support any corporate holder in

any litigation, appeal or other proceeding challenging or contesting any

ruling, technical advice, finding or determination of the IRS that dividends

paid on the Preferred Stock or Common Stock are to be treated as Indebtedness

for purposes of the Code or are not eligible for the Dividends Received

Deduction.  The cooperation and support

required of the Company by the preceding sentence shall be at the expense of

such corporate holder, except that the Company will pay all fees and expenses

(whether incurred by it or a corporate holder) in connection with any such

submission, litigation, appeal or other proceeding necessitated or caused by a

breach by the Company of its covenants contained in this Section 6.4.

 

6.5           Use of Proceeds; Payments to

Shareholders.  The Company will

use the proceeds of the Loans solely for the purposes set forth in Section 2.3,

and, except as set forth therein, the Company will not make any payments to any

shareholders or affiliates of the Company other than payments for salary and

reimbursable business expenses to shareholders of the Company who are also

employees or former employees of the Company.

 

6.6           Inspection Rights.  Agent and any person Agent may designate shall have the right to

review all books and records, reports, accounts and other financial documents

of the Company and to copy the same and to make excerpts therefrom, all at such

reasonable times and as often as Agent may reasonably request, upon prior notice

to the Company, so long as such review and copying does not unreasonably

interfere with the business of the Company.

 

6.7           AMEX Listing. 

The Company shall cause the approval of the listing on the AMEX of the

shares of Investor Common Stock (as defined in the September Purchase

Agreement) issued to Edgewater and TIME pursuant to the September Purchase

Agreement and the shares of Conversion Stock issuable to the Purchasers

pursuant to this Agreement, unless the Company’s Common Stock has been delisted

from the AMEX prior to such date.

 

33

 

6.8           Increase of Authorized Shares of

Common Stock and Preferred Stock.  The Company shall call to order the Annual Meeting on or prior to

May 31, 2002; provided, however, such date shall be extended to June 30, 2002

if the SEC or AMEX provides any comments to the preliminary proxy materials

filed by the Company in connection with the Annual Meeting, for the purpose,

among other things, of approving an amendment or amendment and restatement of

the Articles providing for (a) an increase of the number of share of

Common Stock authorized to be issued from 50,000,000 shares to 100,000,000,

(b) the authorization of 10,000,000 shares of Series A Stock and

10,000,000 of Series B Stock, (c) the rights, preferences and privileges of the

Series A Stock and Series B Stock as set forth in the Certificates, and (d) all

other matters related to the transactions contemplated hereby for which

shareholder approval is required. On the next business day after the approval

of such amendment or amendment or restatement of the Articles by the

shareholders, the Company shall immediately file such amendment or amendment

and restatement of the Articles, which shall contain the Certificates or the

terms thereof, with the Secretary of State of Texas.

 

6.9           Reservation of Securities.  Prior to the Equity Closing, the Company

shall take all actions and shall file all documents, including, without

limitation, amendments to the Articles, in necessary to reserve a sufficient

quantity of shares of Preferred Stock into which the Notes and Convertible Debt

are convertible and a sufficient quantity of shares of Common Stock into which

such Preferred Stock is convertible.

 

Section 7.               Events of Default.

 

7.1           Events of Default.  If any of the following events (each is herein referred to as an

“Event of Default”) occur:

 

(a)           default or breach

shall occur in the performance of or compliance with any covenant contained

herein, other than the covenants contained in Sections 6.7 and 6.8

above, which shall continue uncured for more than thirty (30) days

after written notice of such default shall have been provided by Purchasers or

any subsequent holders of the Preferred Stock, Conversion Stock or Notes;

provided, however, that such thirty (30) days period shall be extended to

ninety (90) days if the default or breach is curable and the Company

is diligently attempting to effect such cure in the case of a default or breach

of the covenants contained in Sections 6.1(c), 6.1(d), 6.1(e)

and 6.1(g) above;

 

(b)           the failure of the

Company to elect the Purchaser Representatives or the failure to properly

register the Conversion Stock as provided in the Registration Agreement;

 

(c)           a breach or default

of any of the Company’s representations, warranties, covenants and agreements

under the Transaction Documents (which continues beyond the expiration of any

applicable cure period), other than those referred to in clause (b) above;

 

(d)           if any

representation or warranty to any Purchaser made in writing by the Company in

this Agreement, any Transaction Document or in any agreement, certificate,

report, financial statement or instrument to be delivered to any Purchaser

pursuant hereto or to the Transaction Documents and which was prepared by a director,

officer, employee, agent or

 

34

 

representative

of the Company and delivered to such Purchaser, shall prove to have been false

or inaccurate in any material respect on the date as of which it was made;

 

(e)           a receiver,

conservator, custodian, liquidator or trustee of the Company or any of its

Subsidiaries or of all or any of the property of any of them, is appointed by

court order and such order remains in effect for more than

sixty (60) days; or an order for relief is entered under the federal

bankruptcy laws with respect to the Company or any of its Subsidiaries; or any

of the material property of any of them is sequestered by court order and such

order remains in effect for more than sixty (60) days; or a petition

is filed against the Company or any of its Subsidiaries under the bankruptcy,

reorganization, arrangement, insolvency, readjustment of debt, dissolution or

liquidation law of any jurisdiction, whether now or hereafter in effect, and is

not dismissed within sixty (60) days after such filing;

 

(f)            The Company or any

of its Subsidiaries files a petition in voluntary bankruptcy or seeking relief

under any provision of any bankruptcy, reorganization, arrangement, insolvency,

readjustment of debt, dissolution or liquidation law of any jurisdiction,

whether now or hereafter in effect, or consents to the filing of any petition

against it under any such law;

 

(g)           The Company or any

of its Subsidiaries makes an assignment for the benefit of its creditors, or

admits in writing its inability to pay its debts generally as they become due,

or consents to the appointment of a receiver, conservator, custodian,

liquidator or trustee of the Company or any of its subsidiaries, or of all or

any part of the property of any of them;

 

(h)           final judgment for

the payment of money which, individually or in the aggregate exceeds Two

Hundred Fifty Thousand Dollars ($250,000) (in addition to any judgment for

the payment of money of up to Two Hundred Fifty Thousand Dollars ($250,000) in

connection with the current litigation between the Company and Sun

Microsystems, Inc. (Cause No. 2001-18882, in the 280th Judicial

District of Harris County, Texas)) shall be rendered by a court of record

against the Company or any of its Subsidiaries, and the Company or such

Subsidiary shall not (i) discharge the same (by insurance or otherwise) or

provide for its discharge in accordance with its terms or (ii) procure a

stay of execution thereof within sixty (60) days from the date of

entry thereof and within said period of sixty (60) days, or such

longer period during which execution of such judgment shall have been stayed,

appeal therefrom and cause the execution thereof to be stayed during such

appeal;

 

(i)            any default

relating (i) to the making of the payment of the principal of or interest

on any Indebtedness of the Company or any of its Subsidiaries for borrowed

money, or (ii) to any indenture, agreement or other instrument under which

any Indebtedness of the Company or any of its Subsidiaries for borrowed money

is or may be issued, which, in the case of the Indebtedness described in

subsections (i)(i) and/or (i)(ii) (without duplication) individually or in the

aggregate exceeds One Hundred Fifty Thousand Dollars ($150,000) and which

(A) results in the acceleration of the maturity of such Indebtedness of

the Company or any of its Subsidiaries outstanding thereunder or

(B) results in such creditor or creditors exercising any of the remedies

available to it/them against the Company, or any collateral in which the

creditor or creditors has/have a lien or security interest relating to such

Indebtedness; and

 

35

 

(j)            The Company fails

to pay any amounts due hereunder or under any Note when due;

 

(k)           All of the

conditions set forth in Section 5.2 hereof have not occurred and the

Equity Closing has not been completed on or prior to May 31, 2002 or June 30,

2002, if and to the extent the date set forth in Section 6.8 has been extended

to June 30, 2002.

 

then, when any Event of Default

has occurred and shall be continuing, and unless consent of the Purchaser

Majority and the Agent, as applicable, at the time has been obtained waiving

such Event of Default in writing, Purchasers shall have all available rights in

law or in equity or as may be available pursuant to this Agreement.

 

7.2           Remedies on Default.

 

(a)           If an Event of

Default shall have occurred pursuant to Section 7.1, Purchasers

shall be entitled to, in addition to the rights specified in Section 7.1,

proceed to protect and enforce any or all other rights, powers and remedies of

such Purchasers by an action at law, suit in equity or other appropriate

proceeding, whether for the specific performance of any covenant contained

herein or any of the other Transaction Documents and, or for an injunction

against a violation of any of the terms hereof or thereof, or in aid of the

exercise of any right, power or remedy granted hereby or thereby or available

at law, in equity, by statute or otherwise.

 

(b)           No right, power or

remedy conferred hereby or by ownership of the Preferred Stock, the Conversion

Stock or the Notes or under any of the other Transaction Documents, or now or

hereafter available at law, in equity, by statute or otherwise shall be

exclusive of any other right, power or remedy referred to herein or therein or

now or hereafter available at law, in equity, by statute or otherwise, but all

rights, powers and remedies of Purchasers shall be cumulative and not

alternative.

 

(c)           If

an Event of Default shall have occurred pursuant to Section 7.1(j),

Agent shall, in its sole discretion, declare all of the liabilities under the

Notes, this Agreement, and the other Transaction Documents due and payable,

whereupon all such liabilities shall become immediately due and payable.

 

Section 8.               Agent.

 

8.1           Appointment and Authorization.  Each Lender hereby irrevocably appoints,

designates and authorizes Agent to take such action on its behalf under the

provisions of this Agreement and each other Transaction Document and to

exercise such powers and perform such duties as are expressly delegated to it

by the terms of this Agreement or any other Transaction Document, together with

such powers as are reasonably incidental thereto.  Notwithstanding any provision to the contrary contained elsewhere

in this Agreement or in any other Transaction Document, Agent shall not have

any duty or responsibility except those expressly set forth herein, nor shall

Agent have or be deemed to have any fiduciary relationship with any Lender, and

no implied covenants, functions, responsibilities, duties, obligations or

liabilities shall be read into this Agreement or any other Transaction Document

or otherwise exist against Agent.

 

36

 

8.2           Delegation of Duties.  Agent may execute any of its duties under

this Agreement or any other Transaction Document by or through agents,

employees or attorneys-in-fact and shall be entitled to advice of counsel

concerning all matters pertaining to such duties.  Agent shall not be responsible for the negligence or misconduct of

any agent or attorney-in-fact that it selects with reasonable care.

 

8.3           Liability of Agent.  None of Agent nor any of its directors, officers, employees or

agents shall (i) be liable for any action taken or omitted to be taken by

any of them under or in connection with this Agreement or any other Transaction

Document or the transactions contemplated hereby (except for its own gross

negligence or willful misconduct), or (ii) be responsible in any manner to

any of the Lenders for any recital, statement, representation or warranty made

by the Company or any officer thereof, contained in this Agreement or in any

other Transaction Document, or in any certificate, report, statement or other

document referred to or provided for in, or received by Agent under or in

connection with, this Agreement or any other Transaction Document, or the

validity, effectiveness, genuineness, enforceability or sufficiency of this

Agreement or any other Transaction Document, or for any failure of the Company

or any other party to any Transaction Document to perform its obligations

hereunder or thereunder.  Agent shall

not be under any obligation to any Lender to ascertain or to inquire as to the

observance or performance of any of the agreements contained in, or conditions

of, this Agreement or any other Transaction Document, or to inspect the

properties, books or records of the Company.

 

8.4           Reliance by Agent.  Agent shall be entitled to rely, and shall be fully protected in

relying, upon any writing, resolution, notice, consent, certificate, affidavit,

letter, telegram, facsimile, telex or telephone message, statement or other

document or conversation believed by it to be genuine and correct and to have

been signed, sent or made by the proper Person or Persons, and upon advice and

statements of legal counsel (including counsel to the Company), independent

accountants and other experts selected by Agent.  Agent shall be fully justified in failing or refusing to take any

action under this Agreement or any other Transaction Document unless it shall

first receive such advice or concurrence of the Required Lenders as it deems

appropriate and, if it so requests, confirmation from the Lenders of their

obligation to indemnify Agent against any and all liability and expense which

may be incurred by it by reason of taking or continuing to take any such

action.  Agent shall in all cases be

fully protected in acting, or in refraining from acting, under this Agreement

or any other Transaction Document in accordance with a request or consent of

the Required Lenders and such request and any action taken or failure to act

pursuant thereto shall be binding upon all of the Lenders.

 

8.5           Notice of Default.  Agent shall not be deemed to have knowledge or notice of the

occurrence of any Event of Default, unless Agent shall have received written

notice from a Lender or the Company referring to this Agreement, describing

such Event of Default and stating that such notice is a “notice of default”.  Agent shall take such action with respect to

such Event of Default as may be reasonably requested by the Required Lenders in

accordance with the terms hereof; provided that unless and until Agent

has received any such request, Agent may (but shall not be obligated to) take

such action, or refrain from taking such action, with respect to such Event of

Default as it shall deem advisable or in the best interest of the Lenders.

 

37

 

8.6           Credit Decision.  Each Lender acknowledges that Agent has not made any

representation or warranty to it, and that no act by Agent hereafter taken,

including any review of the affairs of the Company, shall be deemed to

constitute any representation or warranty by Agent to any Lender.  Each Lender represents to Agent that it has,

independently and without reliance upon Agent and based on such documents and

information as it has deemed appropriate, made its own appraisal of and

investigation into the business, prospects, operations, property, financial and

other condition and creditworthiness of the Company, and made its own decision

to enter into this Agreement and to extend credit to the Company

hereunder.  Each Lender also represents

that it will, independently and without reliance upon Agent and based on such

documents and information as it shall deem appropriate at the time, continue to

make its own credit analysis, appraisals and decisions in taking or not taking

action under this Agreement and the other Transaction Documents, and to make

such investigations as it deems necessary to inform itself as to the business,

prospects, operations, property, financial and other condition and

creditworthiness of the Company.  Except

for notices, reports and other documents expressly herein required to be

furnished to the Lenders by Agent, Agent shall not have any duty or

responsibility to provide any Lender with any credit or other information

concerning the business, prospects, operations, property, financial or other

condition or creditworthiness of the Company which may come into the possession

of Agent.

 

8.7           Indemnification.  Whether or not the transactions contemplated hereby are

consummated, the Lenders shall indemnify upon demand Agent and its directors,

officers, employees and agents (to the extent not reimbursed by or on behalf of

the Company and without limiting the obligation of the Company to do so), pro

rata, from and against any and all loss and expense of any kind incurred by

Agent; provided, however, that no Lender shall be liable for any such payment

to any Person resulting from such Person’s gross negligence or willful

misconduct.  Without limitation of the

foregoing, each Lender shall reimburse Agent upon demand for its ratable share

of any costs or out-of-pocket expenses (including, without limitation,  attorney fees and travel costs) incurred by

Agent in connection with the preparation, execution, delivery, administration,

modification, amendment or enforcement (whether through negotiations, legal

proceedings or otherwise) of, or legal advice in respect of rights or

responsibilities under, this Agreement, any other Transaction Document, or any

document contemplated by or referred to herein, to the extent that Agent is not

reimbursed for such expenses by or on behalf of the Company.  The undertaking in this Section shall

survive repayment of the Loans, cancellation of the Notes, any foreclosure

under, or modification, release or discharge of, any or all of the Transaction  Documents, termination of this Agreement and

the resignation or replacement of Agent.

 

8.8           Agent in Individual Capacity.  Agent and its affiliates may make loans

to,  acquire equity interests in and

generally engage in any kind of lending, trust, financial advisory, investment,

underwriting or other business with the Company as though Agent were not Agent

hereunder and without notice to or consent of the Lenders.  The Lenders acknowledge that, pursuant to

such activities, Agent may receive information regarding the Company (including

information that may be subject to confidentiality obligations in favor of the

Company) and acknowledge that Agent shall be under no obligation to provide

such information to them.  With respect

to their Loans (if any),  Agent and its

affiliates shall have the same rights and powers under this Agreement as any

other Lender and may exercise the same as though it were not

 

38

 

Agent, and the

terms “Lender” and “Lenders” include Agent and its affiliates, to the extent

applicable, in their individual capacities.

 

8.9           Successor

Agent.  Agent may resign as

Agent upon 30 days’ notice to the Lenders. 

If Agent resigns under this Agreement, the Required Lenders shall, with

(so long as no Event of Default exists) the consent of the Company (which shall

not be unreasonably withheld or delayed), appoint from among the Lenders a

successor agent for the Lenders.  If no

successor agent is appointed prior to the effective date of the resignation of

Agent, Agent may appoint, after consulting with the Lenders and the Company, a

successor agent from among the Lenders. 

Upon the acceptance of its appointment as successor agent hereunder,

such successor agent shall succeed to all the rights, powers and duties of the

retiring Agent and the term “Agent” shall mean such successor agent, and the

retiring Agent’s appointment, powers and duties as Agent shall be terminated.

After any retiring Agent’s resignation hereunder as Agent, the provisions of

this Section 8 shall inure to its benefit as to any actions taken

or omitted to be taken by it while it was Agent under this Agreement.  If no successor agent has accepted

appointment as Agent by the date which is 30 days following a retiring Agent’s

notice of resignation, the retiring Agent’s resignation shall nevertheless

thereupon become effective and the Lenders shall perform all of the duties of

Agent hereunder until such time, if any, as the Required Lenders appoint a

successor agent as provided for above.

 

8.10         Collateral Matters.  The Lenders irrevocably authorize Agent, at

its option and in its discretion, (a) to release any Lien granted to or

held by Agent hereunder or under any Transaction Document; or (b) to

subordinate its interest in any collateral to any holder of a Lien on such

collateral permitted hereunder.  Upon

request by Agent at any time, the Lenders will confirm in writing Agent’s

authority to release, or subordinate its interest in, particular types or items

of collateral pursuant to this Section.

 

Section 9.               Miscellaneous.

 

9.1           Benefit of Agreement, Assignment.  This Agreement shall be binding upon and

inure to the benefit of the Company and Purchasers and their respective

successors and assigns, heirs, executors and personal representative, as

applicable, except that the Company shall not have the right to assign any of

its rights under this Agreement without the prior written consent of

Purchasers.  Notwithstanding the

foregoing, the rights of the Purchasers set forth herein shall inure to the

benefit of the Purchasers and their transferees including, but not limited to,

“Permitted Transferees” (as such term is defined in the Registration

Agreement).

 

9.2           Right to Conduct Activities.  The Company and each of Edgewater and TIME

(Edgewater and TIME shall be referred to in this Section 9.2

collectively as the “VC Investors” and individually as a “VC Investor”)

hereby acknowledge that some or all of the VC Investors’ investments in

numerous companies, may be competitive with the Company’s business.  No VC Investor shall be liable for any claim

arising out of, or based upon, (i) the investment by any VC Investor in

any Person competitive to the Company, or (ii) actions taken by any

partner, officer or other representative of any VC Investor to assist any such

competitive company, whether or not such action was taken as a board member of

such competitive company, or otherwise, and whether or not such action has a

detrimental effect on the Company.

 

39

 

9.3           Notices.  Any

and all notices or other communications required or permitted to be delivered

hereunder shall be deemed properly delivered if (a) delivered personally,

(b) mailed by first class, registered or certified mail, return receipt

requested, postage prepaid, (c) sent by next-day or overnight mail or

delivery or (d) sent by telecopy or telegram, to the parties as set forth

below:

 

	

  If to Edgewater:

  	

   

  	

   

  	

  If to the

  Company:

  	

   

  
	

   

  	

   

  	

   

  	

   

  	

   

  
	

   

  	

  Edgewater Private Equity Fund III, L.P.

  900 North Michigan Avenue

  14th Floor

  Chicago, Illinois  60611

  Attn:  Ryan Satterfield

  Telecopy:  (312) 649-8649

   

  	

   

  	

   

  	

  EpicEdge,

  Inc.

  5508 Hwy.

  290 West

  Suite 300

  Austin,

  Texas 78735

  Attn:  Richard Carter, President

  Telecopy:  (512) 261-3349

   

  	 

	

   

  	

   

  	

   

  	

   

  	

   

  	 

	

  With a copy to:

  	

   

  	

   

  	

  With a copy

  to:

  	

   

  	 

	

   

  	

   

  	

   

  	

   

  	

   

  	 

	

   

  	

   

  Michael A. Nemeroff, Esq.

  Vedder, Price, Kaufman & Kammholz

  222 North LaSalle Street, Suite 2600

  Chicago, Illinois  60601-1003

  Telecopy:  (312) 609-5005

  	

   

  	

   

  	

  Paul E.

  Hurdlow, Esq.

  Gray Cary

  Ware & Freidenrich,

  L.L.P.

  1221 S.

  Mopac Expressway

  Suite 400

  Austin,

  Texas 78746

  Telecopy:  (512 ) 454-7001

  	 

	

   

  	

   

  	

   

  	

   

  	

   

  	 

	

  If to TIME:

  	

   

  	

   

  	

  If to Loche:

  	

   

  
	

   

  	

   

  	

   

  	

   

  	

   

  
	

   

  	

  Fleck

  T.I.M.E. Fund, LP

  289

  Greenwich Avenue

  Greenwich,

  CT  06830

  Attn:

  Kathryn Fleck

  Telecopy:

  (203) 422-2170

  	

   

  	

   

  	

   

  Patrick

  Loche

  c/o Ray and

  Associates

  Arne Ray

  5100

  Westheimer, Suite 115

  Houston,

  Texas 77056

  Telecopy:  (713) 627-7110

  
	

   

  	

   

  	

   

  	

   

  	

   

  
	

  If to

  DeJoria:

  	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  	

   

  
	

   

  	

  Mr. John

  Paul DeJoria

  P.O. Box

  3454 D

  Las Vegas,

  Nevada 89133

  Telecopy:  (310) 248-2831

  	

   

  	

   

  	

   

  
																		

 

Any party may change the name

and address of the designee to whom notice shall be sent by giving written

notice of such change to the other party.

 

9.4           Choice of Law. 

This Agreement shall be governed by and construed in accordance with the

laws of Illinois, applicable to agreements made and to be performed entirely

within such State.

 

40

 

9.5           Entire Agreement.  This Agreement and the Transaction Documents embody the entire

agreement and understanding between the Company and Purchasers and the final

expression thereof and supersede any and all prior agreements and understandings,

written or oral, formal or informal, between the Company and Purchasers

relating to the subject matter hereof and thereof.  No extensions, changes, modifications or amendments whatsoever

shall be made or claimed by any party hereto, and no notices of any extension,

change, modification or amendment made or claimed by a party hereto shall have

any force and effect whatsoever unless the same shall be endorsed in writing

and fully signed by the Company and the Purchaser Majority.

 

9.6           No Implied Waivers; Cumulative

Remedies; Writing Required.  No

delay or failure of the Purchasers in exercising any right, power or remedy

hereunder shall affect or operate as a waiver thereof, nor shall any single or

partial exercise thereof or any abandonment or discontinuance of steps to

enforce such a right, power or remedy preclude any further exercise thereof or

of any other right, power or remedy. 

The rights and remedies hereunder of the Purchasers are cumulative and

not exclusive of any rights or remedies which it would otherwise have.  Any waiver, permit, consent or approval of

any kind or character on the part of the Purchasers of any breach or default

under this Agreement or any such waiver of any provision or condition of this

Agreement must be in writing and shall be effective only to the extent in such

writing specifically set forth.

 

9.7           Reimbursement of Expenses.  The Company shall at the Second Debt Closing

or upon demand by Edgewater, reimburse costs and expenses to Edgewater for past

and current reasonable fees and expenses including, without limitation, legal

fees in the amount of $100,000; provided, that Edgewater’s Note is in the

principal amount of at least $1,000,000. 

In addition, the Company shall upon demand by any Purchaser pay all of

such Purchaser’s reasonable costs and expenses, including, without limitation,

due diligence expenses, travel expenses and legal fees, incurred in connection

with the continuing relationship of such Purchaser with the Company after the

date hereof.

 

9.8           Survival.  All

representations, warranties, covenants and agreements  of the Company contained herein or made in writing in connection

herewith shall survive indefinitely the execution and delivery of this

Agreement and the issuance of the Preferred Stock, the Conversion Stock and the

Notes.

 

9.9           Waivers of

the Company/Personal Jurisdiction.

 

(a)           EXCLUSIVE

JURISDICTION.  THE PURCHASERS AND

THE COMPANY  AGREE THAT ALL ACTIONS TO

ENFORCE THIS AGREEMENT AND ALL DISPUTES AMONG OR BETWEEN THEM ARISING OUT OF,

CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG

OR BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT AND THE TRANSACTION

DOCUMENTS, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL

BE RESOLVED ONLY BY A COURT LOCATED IN COOK COUNTY, ILLINOIS, AND THE COMPANY

HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF SUCH COURT.

 

41

 

(b)           WAIVERS

OF THE COMPANY.  THE COMPANY HEREBY

WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL

SUCH SERVICE OF PROCESS BE MADE BY REGISTERED MAIL DIRECTED TO THE COMPANY AT

ITS ADDRESS SET FORTH IN SECTION 9.3 OF THIS AGREEMENT, AND SERVICE

SO MADE SHALL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT THEREOF.  THE COMPANY HEREBY WAIVES ITS RIGHTS TO A

JURY TRIAL,  ANY OBJECTION BASED ON FORUM

NON CONVENIENS AND ANY OBJECTION TO VENUE IN COOK COUNTY, ILLINOIS IN

CONNECTION WITH ANY CLAIM OR CAUSE OF ACTION TO ENFORCE THIS AGREEMENT OR BASED

UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTION DOCUMENTS OR

ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN OR THEREIN, INCLUDING, WITHOUT

LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER

COMMON LAW OR STATUTORY CLAIMS.  THE COMPANY

AGREES THAT COOK COUNTY, ILLINOIS IS A REASONABLY CONVENIENT FORUM TO RESOLVE

ANY DISPUTE BETWEEN THE COMPANY AND THE PURCHASERS.  THE COMPANY REPRESENTS THAT IT HAS REVIEWED THIS WAIVER AND

KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION

WITH LEGAL COUNSEL.  IN THE EVENT OF

LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO

A TRIAL BY THE COURT.  NOTHING IN THIS SECTION

9.9 SHALL AFFECT THE RIGHT OF THE PURCHASERS TO SERVE LEGAL PROCESS IN ANY

OTHER MANNER PERMITTED BY LAW.

 

(c)           OTHER

JURISDICTIONS.  THE COMPANY AGREES

THAT THE PURCHASERS SHALL HAVE THE RIGHT TO PROCEED AGAINST THE COMPANY IN A

COURT IN ANY LOCATION TO ENABLE THE PURCHASERS TO ENFORCE A JUDGMENT OR OTHER

COURT ORDER ENTERED IN FAVOR OF THE PURCHASERS.  THE COMPANY WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE

LOCATION OF THE COURT IN WHICH THE PURCHASER HAS COMMENCED A PROCEEDING

DESCRIBED IN THIS SECTION 9.9.

 

9.10         Herein, etc. 

Words such as “herein,” “hereunder,” “hereof” and the like shall be

deemed to refer to this Agreement as a whole and not to any particular document

or Article, Section or other portion of a document.

 

9.11         Severability. 

Whenever possible, each provision of this Agreement shall be interpreted

in such manner as to be effective and valid under applicable law, but if any

provision of this Agreement is held to be prohibited by or invalid under

applicable law in any jurisdiction, such provision shall be ineffective only to

the extent of such prohibition or invalidity, without invalidating any other

provision of this Agreement.

 

9.12         Headings. 

Section and subsection headings in this Agreement are included for

convenience of reference only and shall not constitute a part of this Agreement

for any other purpose.

 

42

 

9.13         Counterparts. 

This Agreement may be executed in any number of counterparts and by

either party hereto on separate counterparts, each of which, when so executed

and delivered, shall be an original, but all such counterparts shall together

constitute one and the same instrument. 

One or more counterparts of this Agreement may be delivered by

facsimile, with the intention that delivery by such means shall have the same

effect as delivery of an original counterpart thereof.

 

[SIGNATURE PAGE FOLLOWS]

 

43

 

Note and Preferred

Stock Purchase Agreement Signature Page

 

IN WITNESS

WHEREOF, the parties hereto have executed this Note and Preferred Stock

Purchase Agreement on the date first written above.

 

	

  EPICEDGE,

  INC.,

  a Texas corporation d/b/a EpicEdge

  	

  FLECK

  T.I.M.E. FUND, LP, a Connecticut limited partnership

  
	

   

  	

   

  
	

  By: 

  	

   

  	

   

  	

  By: 

  	

   

  
	

  Its:

  	

  President

  	

   

  	

  Its:  

  	

  Managing

  Partner

  
	

   

  	

   

  
	

   

  	

   

  
	

  EDGEWATER

  PRIVATE EQUITY FUND III, L.P. 

  	

   

  
	

   

  	

  John Paul DeJoria

  
	

   

  	

   

  
	

  By:

  	

  Edgewater

  III Management, L.P.

  	

   

  
	

  Its:

  	

  General

  Partner

  	

   

  
	

   

  	

   

  
	

  By:

  	

  Gordon

  Management, Inc.

  	

  Arne Ray, as

  Trustee for Patrick Loche

  
	

  Its:

  	

  General

  Partner

  	

   

  
	

   

  	

   

  
	

  By:

  	

   

  	

   

  	

   

  
	

  Its:

  	

   

  	

   

  	

   

  
							

 

 

EXHIBIT A

 

DISCLOSURE SCHEDULE

 

(See attached)

 

A-1

 

 

EXHIBIT b

 

	

  Purchaser

  	

   

  	

  Convertible Debt

  	

   

  	

  # of Shares

  	

   

  	

  Class of Shares

  
	

  Edgewater

  	

   

  	

   

  	

   

  	

   

  	

   

  	

  Series A 

  Preferred Stock

  
	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  
	

  TIME

  	

   

  	

   

  	

   

  	

   

  	

   

  	

  Series A 

  Preferred Stock

  
	

  TOTAL:

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  

 

B-1

 

EXHIBIT C

 

Form of Convertible Secured Promissory Note

 

(See Attached)

 

C-1

 

EXHIBIT C-1

 

Form of Substitute Convertible Promissory Note

 

(See Attached)

 

C-1

 

EXHIBIT D

 

Bonus Plan

 

(See Attached)

 

D-1

 

EXHIBIT E

 

SERIES A CERTIFICATE

 

(See Attached)

 

E-1

 

EXHIBIT F

 

SERIES B CERTIFICATE

 

(See Attached)

 

F-1

 

SCHEDULE 1

 

	

  Lender

  	

   

  	

  Initial Debt Principal Amount

  	

   

  
	

  TIME

  	

   

  	

  $

  	

  400,000

  	

   

  
	

  DeJoria

  	

   

  	

  $

  	

  400,000

  	

   

  
	

  Loche

  	

   

  	

  $

  	

  250,000

  	

   

  
	

  TOTAL

  	

   

  	

  $

  	

  1,050,000

  	

   

  

 

	

   

  	

   

  	

  Interim Debt Principal Amount

  	

   

  
	

  Edgewater

  	

   

  	

  $

  	

  860,000

  	

   

  
					

 

S-1

 

SCHEDULE 1.a

 

	

  Lender

  	

   

  	

  Principal Amount

  	

   

  
	

  Edgewater

  	

   

  	

  $

  	

  740,000.00

  	

   

  
	

   

  	

   

  	

   

  	

   

  	

   

  
	

  TOTAL

  	

   

  	

  $

  	

  740,000.00

  	

   

  

 

S-1.a

SCHEDULE 2

 

Employees

 

David Hardacker

Patricia Bell

Peter Covert

Sam Dipaola

Robert Brian Cohan

Jean Albert

Peter Davis

Mark Slosberg

Richard Carter

 

S-2Edgewater/Epic - Edgewater Substitute Note

Exhibit 4.28

 

THIS

SUBSTITUTE CONVERTIBLE SECURED PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER

THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES

LAWS.  THIS NOTE MAY NOT BE SOLD,

OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE

REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT AND APPLICABLE STATE

SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO EPICEDGE,

INC. THAT SUCH REGISTRATION IS NOT REQUIRED.

 

SUBSTITUTE CONVERTIBLE SECURED PROMISSORY NOTE

 

	

  $1,600,000

  	

  Chicago, Illinois

  April      , 2002

  

 

FOR VALUE RECEIVED, EpicEdge, Inc.,

a Texas corporation (the “Company”), promises to pay to the order of

Edgewater Private Equity Fund III, L.P., a Delaware limited partnership (“Holder”),

the principal sum of One Million Six Hundred Thousand Dollars ($1,600,000), and

to pay interest on the outstand principal balance of this  Substitute Convertible Promissory Note (this

“Note”) in accordance with Section 3 of this Note.  This Note is delivered in connection with

that certain Note and Preferred Stock Purchase Agreement of even date herewith

(as may be amended, restated or otherwise modified from time to time, the “Purchase

Agreement”) between the Company, the Holder and certain other parties named

therein.  Capitalized terms not

otherwise defined herein shall have the meanings set forth in the Purchase

Agreement.

 

1.             Maturity.  To the extent not previously converted in

accordance with the Purchase Agreement, the Company shall repay the outstanding

principal balance of this Note and interest accrued thereon in full on

April       , 2003 (the “Maturity

Date”).  All payments received shall

be applied first against costs of collection (if any), then against accrued and

unpaid interest on this Note, then against the outstanding principal balance of

this Note.

 

2.             Interest.  Interest shall begin to accrue on the

outstanding principal balance of this Note commencing on the date hereof and

continuing until repayment of this Note in full at the rate of eight percent

(8%) per annum calculated on the basis of a 360 day year and actual days

elapsed.  However, upon the occurrence

of a Default (as defined herein) the interest on the outstanding principal

balance of this Note will accrue from the date of such Default until such time

as such Default is cured in a manner that is acceptable to the Holder at a rate

per annum equal to three percent (3%) plus

the interest rate then in effect.

 

3.             Prepayment;

Acceleration.  The outstanding

principal balance and all accrued interest payable to Holder hereunder may not

be prepaid without the consent of Holder in its sole and absolute

discretion.  All prepayments so

permitted by Holder shall be applied in the order provided in Section 1.  The outstanding principal balance of this Note

is subject to acceleration as set forth in Section 7.2 of the Purchase

Agreement.  Following any such

 

 

acceleration,

Holder may pursue any and all legal or equitable remedies that are available to

it.

 

4.             Conversion.  This Note may be convertible into certain

securities of the Company in accordance with Section 2.7 of the Purchase

Agreement.

 

5.             Default.  The Company will be deemed to be in default

(“Default”) hereunder upon the occurrence of any “Event of Default”

described in Section 7.1 of the Purchase Agreement, and Holder shall have

all rights and remedies available to it upon any such Default as described

therein or in this Note.

 

6.             Miscellaneous.

 

(a)           The Company hereby waives

presentment, demand, protest, notice of dishonor, diligence and all other

notices, any release or discharge arising from any extension of time, discharge

of a prior party, or other cause of release or discharge other than actual

payment in full hereof.

 

(b)           Holder shall not be deemed, by any

act or omission, to have waived any of its rights or remedies hereunder unless

such waiver is in writing and signed by Holder and then only to the extent

specifically set forth in such writing. 

A waiver with reference to one event shall not be construed as

continuing or as a bar to or waiver of any right or remedy as to a subsequent

event.  No delay or omission of Holder

to exercise any right, whether before or after a Default hereunder, shall

impair any such right or shall be construed to be a waiver of any right or

Default, and the acceptance at any time by Holder of any past-due amount shall

not be deemed to be a waiver of the right to require prompt payment when due of

any other amounts then or thereafter due and payable.

 

(c)           Time is of the essence hereof.  Upon any Default hereunder, Holder may

exercise all rights and remedies provided for herein or in the Purchase

Agreement and by law or equity, including, but not limited to, the right to

immediate payment in full of this Note.

 

(d)           The remedies of Holder as provided

herein or in the Purchase Agreement, or any one or more of them, in law or at

equity, shall be cumulative and concurrent, and may be pursued singularly,

successively or together at Holder’s sole discretion, and may be exercised as

often as occasion therefor shall occur.

 

(e)           It is expressly agreed that if this

Note is referred to any attorney or if suit is brought to collect or interpret

this Note or any part hereof or to enforce or protect any rights conferred upon

Holder by this Note or any other document evidencing or securing this Note,

then the Company covenants and agrees to pay all reasonable costs, including

attorneys’ fees, incurred by Holder in connection therewith.

 

(f)            If any provisions of this Note would

require the Company to pay interest hereon at a rate exceeding the highest rate

allowed by applicable law, the Company shall

 

 

instead pay interest

under this Note at the highest rate permitted by applicable law.

 

(g)           This Note shall be governed by and

construed in accordance with the laws of the State of Illinois without giving

effect to any choice or conflict of law provision or law that would cause the

application of the laws of any other jurisdiction other than the State of

Illinois.

 

(h)           This Note is issued in substitution

for but not in payment of that certain Substitute Secured Promissory Note dated

as of March 5, 2002 (the “Prior Note”), in the original principal amount of

Eight Hundred Sixty Thousand Dollars ($860,000) and does not and shall not be

deemed to constitute a novation thereof. 

Such Prior Note shall be of no further force and effect upon the

execution of this Note; provided, however, that the outstanding amount of

principal and interest under the Prior Note as of the date of this Note is

hereby deemed indebtedness evidenced by this Note and incorporated herein by

this reference.

 

IN WITNESS WHEREOF, the Company has executed this Substitute

Convertible Secured Promissory Note as of the date first above written.

 

	

   

  	

  EPICEDGE, INC., a Texas corporation

  	

   

  
	

   

  	

   

  	

   

  
	

   

  	

  By:

  	

   

  	

   

  
	

   

  	

   

  	

  Name:

  	

   

  	

   

  
	

   

  	

   

  	

  Title:

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