Document:

Exhibit 10.9

CONVERSION AGREEMENT

This
Conversion Agreement is dated as of May 26, 2006 (the “Conversion
Agreement”) by and between the parties set forth on the signature page hereto
(the “Lenders”), and Small World Kids, Inc., a Nevada corporation (the “Company”),
with reference to the following:

A.            The Lenders have loaned to the
Company the aggregate principal amount of $1,500,000 (the “Loan Amount”)
pursuant to the issuance of 10% Convertible Debentures due September 30,
2008, all of which is currently outstanding.

B.            The Company is selling to investors
shares of Class A-1 Convertible Preferred Stock (the “Class A-1
Shares”) with the powers, designation, preferences and relative rights of such
class substantially as set forth on Exhibit A attached hereto.

C.            It is a condition to the closing of
the sale of the Class A-1 Shares that the Loan Amount be converted
into 1,363,500 Class A-1 Shares.

D.            The Lenders are willing to agree to
such conversion on the terms and conditions set forth herein.

NOW
THEREFORE, the parties hereto agree as follows:

1.             Conversion.  Upon the terms and conditions set forth
herein, the Lenders hereby agree to convert all of the Loan Amount into
1,363,500 shares of Class A-1 Shares.

2.             The conversion of the Loan Amount set forth in Section 1
above is conditioned upon the following:

(a)           at least $2,000,000
in gross proceeds from the sale of the Class A-1 Shares shall have
been received;

(b)           the holders of the
Company’s outstanding indebtedness for borrowed money in the aggregate principal
amount of $3,000,000 (exclusive of indebtedness owed to Laurus Master Fund
Ltd., St. Cloud Capital Partners L.P., Horizon Financial Services Group USA and
Eddy Goldwasser) shall have converted such indebtedness into 2,727,278 Class A-1
Shares;

(c)           the outstanding
indebtedness owed to St. Cloud in the principal amount of $2,500,000 shall
have been restructured as follows:

(1)           the Company shall
prepay $50,000

(2)           the remaining
principal amount shall be evidenced by two notes. The first note in the
principal amount of $200,000 will be for twelve months with monthly
amortization payments at a 10% interest rate. The second note will be for
$2,250,000 with interest at 10% per annum, interest only payable on June 30,
2006 and September 15, 2006. Commencing September 16, 2006, payments
will be interest only each month through September 15, 2008 and commencing
October 15, 2008, monthly amortization payments (based

 

on a five-year
amortization) with all interest plus unpaid principal due on September 15,
2011. The second note will be convertible into shares of the Common Stock of
the Company at $4.00 per share (subject to adjustment);

(d)           the Company shall
have amended its Articles of Incorporation to increase the authorized shares of
Preferred Stock to 15,000,000 of which 12,000,000 shares shall be designated Class A-1
Convertible Preferred Stock; and

(e)           SWT, LLC shall have
converted all of the 2,500,000 shares of the Class A Convertible Stock
which it owns into 4,897,261 Class A-1 Shares.

IN
WITNESS WHEREOF, the Lenders and the Company have caused this Conversion
Agreement to be executed as of the date first written above.

	
  

  	
  Small World Kids, Inc.

  
	
   

  	
  By

  	
   

  
	
   

  	
   

  	
  Debra Fine, Chief Executive Officer

  
	
   

  	
  LENDERS:

  
	
   

  	
  Gamma Opportunity
  Capital Partners, LP, Class A 

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Boshida Capital Master
  Fund LP 

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Gamma Opportunity
  Capital Partners, LP, Class C 

  
	
   

  	
  By:

  	
   

  

 

 2

 

EXHIBIT A

SMALL WORLD KIDS,
INC.

CERTIFICATE OF DESIGNATION
OF THE

CLASS A-1 CONVERTIBLE PREFERRED STOCK

Pursuant to Section 78.195
of the General

Corporation Law of the
State of Nevada

Small
World Kids, Inc., a corporation organized and existing under the laws of
the State of Nevada (the “Corporation”), hereby certifies that the following
resolution was duly adopted by the Board of Directors of the Corporation by
unanimous written consent effective May 26, 2006:

RESOLVED,
that, Article 3 of the Amended Articles of Incorporation, creates and
authorizes up to 15,000,000 shares of preferred stock (the “Preferred Stock”),
of which there are no shares currently issued and outstanding. The Company has
previously issued 2,500,000 shares of Class A Convertible Preferred Stock
which, concurrently with the filing of this Certificate of Designation
pertaining to Class A-1 Convertible Preferred Stock, are being
converted into such Class A-1 Convertible Preferred Stock pursuant
to the filing of an amendment to Certificate of Designation of the Class A
Convertible Preferred Stock and will no longer be outstanding. Accordingly, as
of the date hereof, there are 15,000,000 shares of Preferred Stock which have
the status of authorized but unissued shares that are available for issuance.

RESOLVED
FURTHER, the Board of Directors of the Corporation hereby establishes a series
of Class A-1 Convertible Preferred Stock to consist of 12,000,000
shares, and hereby fixes the powers, designation, preferences and relative
participating, optional and other rights of such series of Class A-1
Convertible Preferred Stock, and the qualifications, limitations and
restrictions thereof, as follows:

1.             Designation.

(a)           The designation of the series
of Class A-1 Convertible Preferred Stock created by this resolution
shall be “Class A-1 Convertible Preferred Stock” (hereinafter called
the “Class A-1 Preferred Stock”).

(b)           All shares of Class A-1
Preferred Stock shall be identical with each other in all respects.

2.             Liquidation
Rights.

(a)           General.  In the event of any liquidation, dissolution
or winding up, whether voluntary or involuntary, holders of each share of Class A-1
Preferred Stock shall be entitled to be paid out of the assets or surplus funds
of the Corporation legally available for distribution to holders of the
Corporation’s capital stock of all classes (whether such assets are

 

capital,
surplus, or earnings) before any sums shall be paid or any assets or surplus
funds distributed among the holders of Common Stock or to the holders of any
series of Preferred Stock which may be junior in right of preference to Class A-1
Preferred Stock, an amount equal to $1.65 per share (as adjusted for any stock
dividend, combination or splits with respect to such shares) of Class A-1
Preferred Stock plus any cumulative and or accrued and unpaid dividends thereon
(the “Stated Value”). After payment to the holders of the Class A-1
Preferred Stock of the amount set forth in this Section 2(a), the
remaining assets and funds of the Corporation legally available for
distribution, if any, shall be distributed among the holders of the Common
Stock and the Class A-1 Preferred Stock in proportion to the shares
of Common Stock then held by them and the shares of Common Stock which they
have a right to acquire upon conversion of the shares of the Class A-1
Preferred Stock held by them.

(b)           Distributions Other than Cash.
Whenever the distribution provided for in this Section 2 shall be paid in
property other than cash, the value of such distribution shall be the fair
market value of such property as determined in good faith by the Board of
Directors of the Corporation. In each such case, the holders of the Class A-1
Preferred Stock shall be entitled to a proportionate share of any such
distribution in accordance with the provisions hereof.

If
the assets of the Corporation shall be insufficient to permit the payment in
full to holders of the Class A-1 Preferred Stock of the preferential
amount set forth in this Section 2, then the entire assets of the
Corporation available for such distribution shall be distributed ratably among
the holders of the Class A-1 Preferred Stock in accordance with the
aggregate liquidation preference of the shares of Class A-1
Preferred Stock held by each of them.

The
sale, lease or exchange (for cash, shares of stock, securities or other
consideration) of all or substantially all the property and assets of the
Corporation, or the merger, consolidation or reorganization of the Corporation
into or with any other corporation, or the merger or consolidation of any other
corporation into or with the Corporation or any other transaction or series of
related transactions, in each case where the shareholders of the Corporation do
not continue to hold the majority of the voting power after such merger,
consolidation or reorganization, shall be deemed to be a liquidation for the
purposes of this section.

3.             Conversion.

The
holders of Class A-1 Preferred Stock shall have conversion rights as
follows:

(a)           Right to Convert.
Each share of Class A-1 Preferred Stock shall be convertible, at the
option of the holder thereof, at any time after the date of issuance of such
share, at the office of the Corporation or any transfer agent for the Class A-1
Preferred Stock, into such number of fully paid and non-assessable shares of
Common Stock as is determined by dividing the purchase price ($1.10) of one
share of Class A-1 Preferred Stock by the Conversion Price (the “Conversion
Price”) at the time in effect for a share Class A-1 Preferred Stock.
The Conversion Price per share of Class A-1 Preferred Stock
initially shall be $1.10, subject to adjustment from time to time as provided
below.

(b)           Intentionally
Deleted.

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(c)           Mechanics of
Conversion.  No fractional shares of
Common Stock shall be issued upon conversion of the Class A-1
Preferred Stock. In lieu of any fractional shares to which the holder would
otherwise be entitled, the Corporation shall pay cash equal to such fraction
multiplied by the then applicable Conversion Price of the Class A-1
Preferred Stock. Before any holder of Class A-1 Preferred Stock
shall be entitled to convert the same into shares of Common Stock pursuant to Section 3(a),
such holder shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or of any transfer agent for the Class A-1
Preferred Stock, and shall give written notice by mail, postage prepaid, to the
Corporation at its principal corporate office, of the election to convert the
same, and such conversion shall be deemed to have been made immediately prior
to the close of business on the date of such surrender of the shares of Class A-1
Preferred Stock to be converted. The Corporation shall, as soon as practicable
thereafter, issue and deliver to such address as the holder may direct, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled. The Corporation shall pay all documentary,
stamp, transfer or other transactional taxes attributable to the issuance or
delivery of shares of Common Stock upon conversion of any shares of Class A-1
Preferred Stock; provided that the Corporation shall not be required to
pay any taxes which may be payable in respect of any transfer involved in the
issuance or delivery of any certificate for such shares in a name other than
that of the holder of the shares of Preferred Stock in respect of which such
shares are being issued.

(d)           Status of Converted
Stock.  In the event any shares of Class A-1
Preferred Stock shall be converted pursuant to this Section 3, the shares
so converted shall be canceled and shall not be reissued as Class A-1
Preferred Stock by the Corporation. All such shares shall upon their
cancellation become authorized but unissued shares of Preferred Stock and may
be reissued as part of a new series of Preferred Stock to be created by
resolution or resolutions of the board of directors, subject to the conditions
and restrictions on issuance set forth herein.

(e)           Certain
Adjustments and Distributions.

(i)            Adjustments for
Subdivisions or Combinations of Common Stock. In the event the outstanding
shares of Common Stock shall be subdivided by stock split, stock dividend or
otherwise, into a greater number of shares of Common Stock, the Conversion
Price of each share of Class A-1 Preferred Stock then in effect
shall, concurrently with the effectiveness of such subdivision, be
proportionately decreased. In the event the outstanding shares of Common Stock
shall be combined or consolidated into a lesser number of shares of Common
Stock, the Conversion Price of each share of Class A-1 Preferred
Stock then in effect shall, concurrently with the effectiveness of such
combination or consolidation, be proportionately increased.

(ii)           Stock Dividends
and Other Distributions. In the event the Corporation makes, or fixes a
record date for the determination of holders of Common Stock entitled to
receive, any distribution (excluding repurchases of securities by the
Corporation not made on a pro rata basis) payable in property or in securities
of the Corporation other than shares of Common Stock, and other than as
otherwise adjusted for in this Section 3 or as provided for in Section 1
in connection with a dividend, then and in each such event the holders of Class A-1
Preferred Stock shall receive, at the time of such distribution, the amount of
property or the

 A-3
 

 

number of
securities of the Corporation that they would have received had their Class A-1
Preferred Stock been converted into Common Stock on the date of such event.

(iii)          Reorganizations,
Recapitalizations, Reclassifications or Similar Events. If the Common Stock
shall be changed into the same or a different number of shares of any other
class or classes of stock or other securities or property, whether by capital
reorganization, recapitalization, reclassification or otherwise, then each
share of Class A-1 Preferred Stock shall thereafter be convertible
into the number of shares of stock or other securities or property to which a
holder of the number of shares of Common Stock of the Corporation deliverable
upon conversion of such shares of Class A-1 Preferred Stock shall
have been entitled upon such reorganization, recapitalization,
reclassification, merger, consolidation or other event.

(iv)          Adjustments for
Diluting Issues. In addition to the adjustment of the Conversion Prices
provided above, the Conversion Price of the Class A-1 Preferred
Stock shall be subject to further adjustment from time to time as follows:

(A)          Special Definitions.

(1)           “Options” shall mean rights, options
or warrants to subscribe for, purchase or otherwise acquire either Common Stock
or Convertible Securities.

(2)           “Original Issue Date” shall mean the
date on which the first share of Class A-1 Preferred Stock was first
issued.

(3)           “Convertible Securities” shall mean
securities convertible into or exchangeable for Common Stock, either directly
or indirectly, including the Class A-1 Preferred Stock.

(4)           “Additional Shares of Common Stock”
shall mean all shares of Common Stock issued (or, pursuant to Section 3(e)(iv)(C) deemed
to be issued) by the Corporation after the Original Issue Date.

(B)           No Adjustment of Conversion Price.
No adjustment in the Conversion Price shall be made pursuant to Section 3(e)(iv)(D) unless
the consideration per share for an Additional Share of Common Stock issued (or,
pursuant to Section 3(e)(iv)(C), deemed to be issued) by the Corporation
is less than the Conversion Price in effect on the date of, and immediately
prior to, such issue, and provided that any such adjustment shall not have the
effect of increasing the Conversion Price to an amount which exceeds the
Conversion Price existing immediately prior to such adjustment.

(C)           Deemed Issuance of Additional
Shares of Common Stock. Except as otherwise provided in Section 3(e)(iv)(A) or
3(e)(iv)(B), in the event the Corporation at any time or from time to time
after the Original Issue Date shall issue any Options or Convertible Securities
or shall fix a record date for the determination of any holders of any class of
securities entitled to receive any such Options or Convertible Securities, then
the maximum number of shares (as set forth in the instrument relating thereto
without regard to any provisions contained therein for a subsequent adjustment
of such number) of Common Stock issuable upon

 A-4
 

 

the exercise of such
Options or, in the case of Convertible Securities and Options therefor, the
conversion or exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common Stock issued as of the time of such issue or, in
case such a record date shall have been fixed, as of the close of business on
such record date, provided that in any such case in which additional shares of
Common Stock are deemed to be issued:

(1)           no further adjustment in the
Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;

(2)           if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase or decrease in the consideration payable to the Corporation, or
increase or decrease in the number of shares of Common Stock issuable, upon the
exercise, conversion or exchange thereof, the Conversion Price computed upon
the original issue thereof or upon the occurrence of a record date with respect
thereto, and any subsequent adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed to reflect such increase
or decrease;

(3)           upon the expiration of any such
Options or any rights of conversion or exchange under such Convertible
Securities which shall not have been exercised, the Conversion Price computed
upon the original issue thereof or upon the occurrence of a record date with
respect thereto, and any subsequent adjustments based thereon, shall, upon such
expiration, be recomputed as if:

(i)            in
the case of Convertible Securities or Options for Common Stock, the only
Additional Shares of Common Stock issued were shares of Common Stock, if any,
actually issued upon the exercise of such Options or the conversion or exchange
of such Convertible Securities, and the consideration received therefor was the
consideration actually received by the Corporation for the issue of all such
Options, whether or not exercised, plus the consideration actually received by
the Corporation upon such exercise, or for the issue of all such Convertible
Securities, whether or not converted or exchanged, plus the additional
consideration, if any, actually received by the Corporation upon such
conversion or exchange; and

(ii)           in
the case of Options for Convertible Securities, only the Convertible
Securities, if any, actually issued upon the exercise thereof were issued at
the time of issue of such Options and the consideration received by the
Corporation for the Additional Shares of Common Stock deemed to have been then
issued was the consideration actually received by the Corporation for the issue
of all such Options, whether or not exercised, plus the consideration deemed to
have been received by the Corporation upon the issue of the Convertible
Securities with respect to which such Options were actually exercised;

(4)           no readjustment pursuant to Section 3(e)(iv)(C)(2) or
(3) above shall have the effect of increasing the Conversion Price to an
amount which exceeds the Conversion Price existing immediately prior to the
original adjustment with respect to the issuance of such Options or Convertible
Securities, as adjusted for any Additional Shares of

 A-5
 

 

Common Stock issued (or,
pursuant to Section 3(e)(iv)(C), deemed to be issued) between such
original adjustment date and such readjustment date; and

(5)           in the case of any Option or
Convertible Security with respect to which the maximum number of shares of
Common Stock issuable upon exercise or conversion or exchange thereof is not
determinable, the adjustment to the Conversion Price, if any, shall be
initially made based on the minimum number of such shares with a subsequent
adjustment once the maximum number of such shares becomes determinable.

(D)          Adjustment of Conversion Price Upon
Issuance of Additional Shares of Common Stock. Subject to the limitation
set forth in Section 3(e)(iv)(B), above, except for Options issued
pursuant to the Company’s stock option or compensation plans and Additional
Shares of Common Stock issued pursuant to the conversion or exercise of
Convertible Securities outstanding as of the date hereof, if Additional Shares
of Common Stock are issued (or, pursuant to Section 3(e)(iv)(C), deemed to
be issued) for a consideration per share (computed on an as-converted to Common
Stock basis) less than the Conversion Price in effect on the date of, and
immediately prior to, such issue, then and in such event, such Conversion Price
shall be reduced, concurrently with such issue, to a price (rounded to the
nearest cent) determined by multiplying such Conversion Price by a fraction, (x) the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of shares of Common Stock which
the aggregate consideration received by the Corporation for the total number of
Additional Shares of Common Stock so issued would purchase at such Conversion
Price, and (y) the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issue plus the number of
such Additional Shares of Common Stock so issued. For the purposes of this Section 3(e)(iv)(D),
all shares of Common Stock issuable upon exercise of outstanding Options, upon
conversion of outstanding Convertible Securities and upon conversion of
Convertible Securities following exercise of outstanding Options therefor,
shall be deemed to be outstanding, and immediately after any Additional Shares
of Common Stock are deemed issued pursuant to Section 3(e)(iv)(C), such
Additional Shares of Common Stock shall be deemed to be outstanding.

(E)           Determination of Consideration.
For purposes of this Section 3(e)(iv), the consideration received by the
Corporation for any Additional Shares of Common Stock issued (or, pursuant to Section 3(e)(iv)(C),
deemed to be issued) shall be computed as follows:

(1)           Cash and Property. Such
consideration shall:

(i)            insofar
as it consists of cash, be computed at the aggregate amount of cash received by
the Corporation after deducting any commissions paid by the Corporation with
respect to such issuance, but without deduction of any expenses payable by the
Corporation;

(ii)           insofar
as it consists of property other than cash, be computed at the fair market
value thereof at the time of such issuance, as determined in good faith by the
Board of Directors of the Corporation; and

 A-6

 

(iii)          if
Additional Shares of Common Stock are issued (or, pursuant to
Section 3(e)(iv)(C), deemed to be issued) together with other shares or
securities or other assets of the Corporation for consideration which covers
both, be the proportion of such consideration so received, computed as provided
in clauses (i) and (ii) above, as determined in good faith by the Board of
Directors of the Corporation.

(2)           Options and
Convertible Securities.  The
consideration received by the Corporation for Additional Shares of Common Stock
deemed to have been issued pursuant to Section 3(e)(iv)(C), relating to
Options and Convertible Securities, shall be the sum of (x) the total
amount, if any, received or receivable by the Corporation as consideration for
the issue of such Options or Convertible Securities, plus (y) the minimum
aggregate amount of additional consideration (as set forth in the instruments
relating thereto, without regard to any provision contained therein for a
subsequent adjustment of such consideration) payable to the Corporation upon
the exercise of such Options or the conversion or exchange of such Convertible
Securities, or in the case of Options for Convertible Securities, the exercise
of such Options for Convertible Securities and the conversion or exchange of
such Convertible Securities.

(f)            Certificate as
to Adjustments. Upon the occurrence of each adjustment or readjustment of
the Conversion Price pursuant to this Section 3, the Corporation at its
expense shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and furnish to each holder of Class A-1
Preferred Stock to which such adjustment pertains a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Class A-1 Preferred Stock,
furnish or cause to be furnished to such holder a like certificate setting
forth (i) such adjustments and readjustments, (ii) the Conversion
Prices at the time in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of such holder’s Class A-1 Preferred
Stock.

(g)           No Impairment.
The Corporation will not, through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 3 and in the taking of all such action
as may be necessary or appropriate in order to protect the conversion rights of
the holders of Class A-1 Preferred Stock against impairment. This
provision shall not restrict the Corporation’s right to amend its Amended
Articles of Incorporation with the requisite shareholder consent.

(h)           Notices of Record
Date. In the event of any taking by the Corporation of a record of the
holders of any class of securities for the purpose of determining the holders
thereof who are entitled to receive any dividend or other distribution, any
right to subscribe for, purchase or otherwise acquire any shares of stock of
any class or any other securities or property or to receive any other right,
the Corporation shall mail to each holder of Class A-1 Preferred
Stock at least twenty (20) days prior to such record date, a notice specifying
the date on which any such 

 A-7
 

 

record is to be taken for the purpose of such dividend
or distribution or right, and the amount and character of such dividend,
distribution or right.

(i)            Reservation of
Stock Issuable Upon Conversion. The Corporation shall at all times reserve
and keep available out of its authorized but unissued shares of Common Stock
solely for the purpose of effecting the conversion of the shares of Class A-1
Preferred Stock such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding shares of Class A-1
Preferred Stock and if at any time the number of authorized but unissued shares
of Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of Class A-1 Preferred Stock, the Corporation
will take such corporate action as may be necessary to increase its authorized
but unissued shares of Common Stock to such number of shares as shall be
sufficient for such purpose.

(j)            Notices. Any
notice required by the provisions of this Section 3 to be given to any
holder of Class A-1 Preferred Stock shall be deemed given if
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at such holder’s address appearing on the Corporation’s books.

4.             Covenants. The
Corporation is prohibited from taking any actions to amend or repeal any
provision of, or add any provision to, the Corporation’s Amended Articles of
Incorporation, Bylaws or this Certificate of Designation, if such action would
change adversely the preferences, rights, privileges or powers of, or
restrictions provided for the benefit of, the Class A-1 Preferred.

5.             Dividends.

(a)           The holders
of the outstanding Class A-1 Preferred Stock shall be entitled to
receive, out of funds legally available therefore, cumulative dividends at the
annual rate of 6% per annum of the per share purchase price ($1.10) of the
Class A-1 Preferred Stock. Such dividends shall be payable in shares
of the Company’s Class A-1 Preferred Stock quarterly, on the
fifteenth day of October, January, April and July (each of such dates
being a “Dividend Payment Date”) commencing on the date of issuance, and shall
be pro-rated for the first such quarterly period if the same is less than 91
(ninety-one) days. All shares of common stock shall be valued at the Fair
Market Value thereof.  As used herein
Fair Market Value shall mean in the case of stock on a given date, the average
of the closing bid prices for the Company’s common stock for the ten trading
days immediately preceding the Dividend Payment Date. Such dividends shall
accrue on each such share commencing on the date of issue, and shall accrue
from day to day, whether or not earned or declared. Such dividends shall be
cumulative so that if such dividends in respect of any previous quarterly
dividend period shall not have been paid on, the deficiency shall be fully paid
on or declared and set apart for such shares before the Corporation makes any
distribution (as hereinafter defined) to the holders of Common Stock. Accrued
but unpaid dividends shall not bear interest. “Distribution” in this
section 5 means the transfer of cash or property without consideration,
whether by way of  dividend or otherwise
(except a dividend in shares of the Corporation) or the purchase or redemption
of shares of the Corporation for cash or property (except for an exchange of
shares of the Corporation or shares acquired by the Corporation from employees
pursuant to the terms of any employee incentive plan, agreement or arrangement)
including any such transfer, purchase or redemption by a

 A-8
 

 

subsidiary of the Corporation. The time of any
distribution by way of dividend shall be the date of declaration thereof and
the time of any distribution by purchase or redemption of shares shall be the
day cash or property is transferred by the Corporation, whether or not pursuant
to a contract of an earlier date; provided that where a negotiable debt
security is issued in exchange for shares the time of the distribution is the
date when the Corporation acquires the shares in such exchange. The Board of
Directors may fix a record date for the determination of holders of Class A-1
Preferred Stock entitled to receive payment of a dividend declared thereon,
which record date shall be no more than sixty (60) days.

(b)           In addition to the dividends
specified in subparagraph (a) above, if dividends are declared or paid on
the Common Stock, then such dividends shall be declared and paid pro rata on the Common Stock and the Class A-1
Preferred Stock, treating each share of Class A-1 Preferred Stock as
the greatest whole number of shares of Common Stock then issuable upon
conversion thereof pursuant to Section 3 above.

(c)           If full cash dividends are not
paid or made available to the holders of all outstanding shares of Class A-1
Preferred Stock, and funds available shall be insufficient to permit payment in
full in cash to all such holders of the preferential amounts to which they are
then entitled, the entire amount available for payment of cash dividends shall
be distributed among the holders of the Class A-1 Preferred Stock
ratably in proportion to the full amount to which they would otherwise be
respectively entitled, and any remainder not paid in cash to the holders of the
Class A-1 Preferred Stock shall cumulate as provided in
subparagraph 5(d) below.

(d)           Dividends shall be paid to the
holders of record of the Preferred Stock as their names appear on the share
register of the Corporation upon a liquidation, dissolution or winding up
pursuant to Section 2 above. If, on any dividend payment date, the holders
of the Class A-1 Preferred Stock shall not have received the full
dividends provided for in the other provisions of this Section 5, then
such dividends shall cumulate, whether or not earned or declared, with
additional dividends thereon for each succeeding full dividend period during
which such dividends shall remain unpaid. Unpaid dividends for any period less
than a full dividend period shall cumulate on a day-to-day basis and shall be
computed on the basis of a 360-day year.

6.             Voting Rights.

(a)           General. Each
holder of shares of Class A-1 Preferred Stock shall be entitled to
the number of votes equal to the number of shares of Common Stock into which
the Class A-1 Preferred Stock could be converted and shall have
voting rights and powers equal to the voting rights and powers of the Common
Stock

(b)           Approval by
Holders of Class A-1 Preferred Stock. The Corporation shall not,
without first obtaining the approval of the holders of a majority of the then
outstanding shares of Class A-1 Preferred Stock:

(i)            Amend, waive or
repeal any provision of, or add any provision to, the Corporation’s Amendment
Articles of Incorporation or Bylaws if such action would

 A-9
 

 

adversely alter or change in any way in any material
respect the rights, preferences, privileges, or restrictions of the Class A-1
Preferred Stock;

(ii)           Issue any
Additional Shares of Common Stock, except in connection with or pursuant to (x) an
equity financing of not less that $10,000,000 for capital raising purposes,
provided that the majority of such financing is provided by investors who are
not shareholders of the Company at the time of such financing (a “Qualified
Financing”); (y) a debt financing that does not require a series vote
under subsection (v) below; (z) an acquisition or merger
approved by a majority of the Board of Directors where part or all of the
consideration for such acquisition or merger is paid in capital stock of the
Company; (xx) Options issued in connection with the Company’s stock option
or stock compensation plans; or (yy) the exercise or conversion of
Convertible Securities outstanding as of the date hereof.

(iii)          Authorize, create
and/or issue any class or series of equity or equity-linked securities that is
senior to the Class A-1 Preferred Stock in any respect whether by
reclassification or otherwise;

(iv)          Pay, declare or set
aside for payment any dividends or distributions on or pursuant to the
redemption of any capital stock of the Company except as set forth in Section 5
above;

(v)           Authorize, create
and/or issue any debt securities in one transaction or series of related
transactions in the aggregate amount in excess of $10,000,000 other than in
connection with the Company’s credit facilities with Laurus Master Fund Ltd. as
such facilities may exist from time to time;

(vi)          Alter the authorized
number of the Company’s board of directors, other than (i) increases to
give an investor in a Qualified Financing a board seat or (ii) increases
to give a board seat to a shareholder who has acquired Preferred Stock or
Common Stock in connection with a merger or acquisition which is valued at
least $30,000,000 and that does not require a vote under subsection (ii) above;

(vii)         Effect any
consolidation, sale or merger of the Company or other transaction in which
control of the Company is transferred except for transactions in which the Class A-1
Preferred Stock will receive at least the Stated Value multiplied by the number
of shares of Class A-1 Preferred Stock than outstanding in cash or
registered and freely tradable securities valued at the fair market value;

(viii)        Alter, amend or
change any of the provisions of this Certificate of Designation; and

(ix)           Redeem, repurchase
or declare a dividend with respect to any security of the Corporation, except
that the Corporation may repurchase shares of its capital stock issued pursuant
to the Corporation’s stock compensation plans.

(c)           Election of
Director. The holders of a majority of the outstanding shares of Class A-1
Preferred Stock shall have the right voting as a class to elect one member of
the Company’s board of directors (the “Preferred Director”), including to fill
a vacancy as to the

 A-10
 

 

Preferred Director. Any Preferred Director may be
removed, with or without cause, by the affirmative vote of the holders of a
majority of the then outstanding shares of Class A-1 Preferred
Stock.

(d)           Expiration of
Voting Rights. The provisions of paragraph (b), subsections (ii)-(vi) and
paragraph (c) of this Section 6 shall no longer be in force and
effect at such time as the aggregate Stated Value of the shares of Class A-1
Preferred Stock outstanding is less than $250,000.

 A-11Exhibit 10.3

Execution Copy

 

ESCROW
AGREEMENT

 

This ESCROW AGREEMENT
(this “Agreement”) is entered into as of November 15, 2005 (the “Closing
Date”), by and among EPIQ Systems, Inc., a Missouri corporation (“Buyer”),
Ajuta International Pty. Ltd., an Australian Company as Trustee of Hypatia
Trust, a trust created under the laws of Victoria, Australia (“Indemnifying
Shareholder”), and Wells Fargo Bank, N.A. (the “Escrow Agent”).

 

WHEREAS, the Indemnifying
Shareholder is the sole shareholder of nMatrix, Inc., a Delaware
corporation (“nMatrix U.S.”) and of nMatrix Australia Pty. Ltd., an Australian
company (“nMatrix Australia”), and nMatrix Australia is in turn the sole
shareholder of nMatrix Ltd., a company registered in England and Wales (“nMatrix
U.K.”, and together with nMatrix U.S. and nMatrix Australia U.K. are herein
collectively called the “Company”);

 

WHEREAS, the Indemnifying
Shareholder desires to sell to Buyer, and Buyer desires to purchase from the
Indemnifying Shareholder, all of the issued and outstanding shares of capital
stock of nMatrix U.S. and of nMatrix Australia, all on the terms and subject to
the conditions set forth in the Stock Purchase Agreement between the
Indemnifying Shareholder and Buyer dated the date hereof (as amended from time
to time, the “Stock Purchase Agreement”);

 

WHEREAS, as a condition
to the consummation of the acquisition and pursuant to the Stock Purchase
Agreement, the Indemnifying Shareholder has agreed that on the date hereof,
245,700 shares of common stock of Buyer that the Indemnifying Shareholder
received, consisting of 20% of the Share Consideration (as defined in the Stock
Purchase Agreement) shall be placed in escrow for a period of time after the
Closing Date, in order to secure the performance of the indemnity obligation of
the Indemnifying Shareholder under the Stock Purchase Agreement; and

 

WHEREAS, the parties
hereto desire to establish the terms and conditions pursuant to which such
escrow account will be established and maintained.

 

NOW, THEREFORE, the parties
hereto hereby agree as follows:

 

ARTICLE I

ESCROW SHARES

 

1.1           Consent
of Escrow

 

The Indemnifying Shareholder and Buyer hereby, and by
virtue of its approval of the Stock Purchase Agreement, agrees to:  (a) the establishment of this escrow to
secure the Indemnifying Shareholder’s indemnification obligations under the
Stock Purchase Agreement in the manner set forth herein and (b) all of the
other terms, conditions and limitations contained in this Agreement.

 

 

1.2           Delivery;
Escrow Fund

 

As soon as practicable after the execution of this
Agreement, Buyer shall cause its stock transfer agent to deliver to the Escrow
Agent a stock certificate registered in the name of the Escrow Agent
representing an aggregate of 245,700 shares of common stock of Buyer, par value
$0.01 per share, (the “Escrow Shares”). The Escrow Agent will acknowledge
receipt of the Escrow Shares and the Escrow Agent agrees to hold the Escrow
Shares in an escrow account (the “Escrow Account”), subject to the terms and
conditions of this Agreement (the Escrow Shares and any cash, property,
securities or other proceeds arising from the sale, conversion or exchange of,
the Escrow Shares, including any Escrow Cash, and any non-cash distributions on
or with respect to the Escrow Shares are collectively referred to herein as the
“Escrow Fund”). For the purpose of this Agreement, Escrow Cash shall mean the
gross proceeds from sales of the Escrow Shares, less all reasonable brokerage
commissions and charges and any other fees and expenses arising directly from
the sale of such Escrow Shares, but not reduced by any taxes arising from such
sale, plus any interest or dividends earned with respect to such Escrow Cash. All
cash dividends on the Escrow Shares and all earnings on the Escrow Cash shall
be paid over by the Escrow Agent to the Indemnifying Shareholder no less often
than once per calendar quarter.

 

1.3           Receipt;
Escrow Account

 

The Escrow Agent hereby agrees (i) to accept
delivery of the Escrow Shares and (ii) to hold the Escrow Shares in the Escrow
Account in accordance with the terms and conditions of this Agreement and for
the uses and purposes stated herein. In no event shall any part of the
Escrow Shares be commingled with any other securities held by the Escrow Agent
or any of its parents, subsidiaries or affiliates. The Escrow Agent shall,
promptly following the end of each calendar month, send to the Indemnifying
Shareholder and Buyer with respect to the Escrow Shares a statement of holdings
and transactions in form and substance customarily provided to clients. It
is the intention of the Indemnifying Shareholder that the Escrow Account shall
not be subject to any lien or attachment by any creditor of the Indemnifying
Shareholder and shall be used solely for the purposes set forth in this Agreement.
The Escrow Shares and any amounts in the Escrow Account shall not be used by
the Escrow Agent to offset any obligations that either the Indemnifying
Shareholder or Buyer might have to the Escrow Agent or any of its affiliates,
whether under this Agreement or under any other agreement or arrangement in any
other capacity, nor shall the Escrow Agent have any lien or claim upon the
Escrow Fund in any form whatsoever.

 

1.4           Dividends,
Etc.

 

Any securities distributed in respect of or in
exchange for any of the Escrow Shares, whether by way of stock dividends, stock
splits or otherwise, shall be issued in the name of the Escrow Agent or its
nominee, and shall be delivered to the Escrow Agent, who shall hold such
securities in the Escrow Account. Such securities shall be considered Escrow
Shares for purposes hereof. 

 

2

 

1.5           Voting
of Shares

 

All voting rights with respect to the Escrow Shares
shall be exercised by the Indemnifying Shareholder, by delivering written
voting instructions to the Escrow Agent. The Indemnifying Shareholder shall
have the authority to instruct the Escrow Agent whether or not to accept any
tender or exchange offers with respect to the Escrow Shares. The Escrow Agent
shall forward to the Indemnifying Shareholder all proxy statements, reports,
and tender and exchange offer materials received by it with respect to the
Escrow Shares. The Escrow Agent will then vote or tender the Escrow Shares in
accordance with such written instructions. In the absence of such written
instructions, the Escrow Agent shall not vote or cause the voting of such
shares.

 

1.6           Transferability;
Sale

 

(a)           Transferability.
The Indemnifying Shareholder shall not sell, pledge, assign, or transfer  (including by operation of law) or otherwise
dispose of, its interest in the Escrow Fund, directly or indirectly, or subject
its interest in the Escrow Fund to a transaction which would have the same
effect, or subject its interest in the Escrow Fund to any swap, hedge or other
arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of the Escrow Fund, in cash or otherwise, so long as
such Escrow Fund is held by the Escrow Agent hereunder.

 

(b)           Sales
of Escrow Shares. Subject to Section 1.5 above, the Escrow Agent shall
have no authority to sell or dispose of any Escrow Shares unless pursuant to
and in accordance with, joint written instructions from Buyer and the
Indemnifying Shareholder.

 

1.7           Manner
of Sale

 

The Escrow Agent shall have no responsibility in
connection with such sale other than to make delivery of the Escrow Shares to
the brokerage firm selected by Buyer and the Indemnifying Shareholder (or, if
Buyer and the Indemnifying Shareholder do not designate a brokerage firm, then
to the brokerage firm selected by the Escrow Agent), with its delivery
instructions and any special instructions provided by the Buyer and the
Indemnifying Shareholder, and to receive and deposit the Escrow Cash arising
from such sale into the Escrow Account. The Escrow Agent shall have no duty or
obligation to determine or accomplish compliance with any applicable transfer
restrictions; and it shall be the sole obligation of the party directing such
sale to take any remaining actions, and to provide or deliver any necessary
instruments or opinions (at its expense) necessary to comply with applicable
transfer restrictions or applicable securities laws. The Escrow Agent shall
have no liability for any actions or omissions of any such brokerage firm, and
shall have no liability for the price or execution achieved. Without limiting
the generality of the foregoing, the Indemnifying Shareholder expressly
acknowledges that (a) the Escrow Shares that are the subject of a sale may be
sent to a transfer agent to be reissued in saleable form, (b) the Escrow
Shares may contain or be subject to transfer restrictions that may limit
their marketability and impose restrictions upon the number or types of
purchasers to whom they can be offered or sold, and (c) the Escrow Agent
shall have no liability for any failure or delay (or any price change during
any such delay) on the part of Buyer, the Indemnifying Shareholder or any
transfer agent, or caused by any necessary registration or

 

3

 

delivery procedures, or compliance with any applicable transfer
restrictions involved in the transfer of such Escrow Shares.

 

ARTICLE II

DISBURSEMENTS

 

2.1           Disbursements
Upon Joint Instructions

 

The Escrow Agent will disburse the Escrow Fund, or any
portion thereof only in accordance with (a) a written instrument delivered
to the Escrow Agent that is executed by both Buyer and the Indemnifying
Shareholder and that instructs the Escrow Agent as to the disbursement of some
or all of the Escrow Fund or (b) the provisions of Sections 2.2, 2.3 or
2.4.

 

2.2           Disbursements
upon Receipt of Final Determination

 

If either the Indemnifying Shareholder or Buyer
delivers to the Escrow Agent and the other party hereto a final notice of the
claim for indemnification and the amount of Losses related thereto (the “Final
Determination Notice”), together with a copy of an order of a court of
competent jurisdiction providing for the disbursement of Escrow Fund (each an “Order”)
and a certificate, signed by an officer of Buyer or the trustee of the
Indemnifying Shareholder (as applicable), stating that such order is not
subject to appeal, or that the appeal period with respect to such order has
elapsed and no appeal has been taken, together with a written certification that
a copy of the Order has been delivered to the parties involved, then the Escrow
Agent shall disburse the Escrow Fund, or any portion thereof, in accordance
with the Order within the 10 business days following the Escrow Agent’s receipt
of the Order, such certificate and certification of delivery. The Escrow Agent
shall send for overnight delivery a copy of the Order to the non-delivering
party at the address set forth in Section 5.7.

 

2.3           Disbursements
Following Termination Date

 

Within 3 business days after May 15, 2007 (the “Termination
Date”), the Escrow Agent shall release to the Indemnifying Shareholder all of
the Escrow Fund; provided that, if Buyer has on or before the Termination Date
delivered to the Escrow Agent a written notice that (i) Buyer has
previously delivered to the Indemnifying Shareholder one or more Claim Notices (as defined in the Stock Purchase Agreement), (ii) the
claim or claims covered thereby have not been resolved either by agreement of
Buyer and the Indemnifying Shareholder or by a final, non-appealable order of a
court of competent jurisdiction, and (iii) specifying the claim amount(s)
covered in the unresolved Claim Notice or Notices, then the Escrow Agent shall
retain in the Escrow Fund Escrow Cash and such number of Escrow Shares as
together have an aggregate Fair Market Value (as defined in Section 3.1(a))
equal to 100% of the claim amount covered
by the unresolved Claim Notice or Claim
Notices and establish a new Termination Date. If Buyer has delivered to the
Escrow Agent a written notice in accordance with the proviso in the preceding
sentence, Buyer may direct the Escrow Agent to sell all Escrow Shares
retained in the Escrow Account without further consent or action by the
Indemnifying Shareholder.

 

4

 

2.4           Method
of Disbursement

 

Disbursements to the Indemnifying Shareholder shall be
made by courier delivery of stock certificates and/or checks to the
Indemnifying Shareholder at its address shown in Section 5.7 (or such other
address as may be provided in writing to the Escrow Agent by the
Indemnifying Shareholder).

 

ARTICLE III

VALUATION; INVESTMENT OF ESCROW CASH

 

3.1           Valuation;
Investment of Escrow Cash

 

(a)           Valuation
of Escrow Shares. For purposes of this Agreement, the “Fair Market Value”
of any Escrow Shares shall equal the average closing price per share of Buyer’s
common stock on NASDAQ for the five-day period ending on the day prior to the
date on which the indemnification claim was “finally determined”. For purposes
of this Section 3.1(a), the date on which an indemnification claim was “finally
determined” shall mean (i) in the case of Section 2.1, the payment
date stated in the joint written instructions, (ii) the case of Section 2.2,
the payment date stated in the Final Determination Notice, and (iii) in
the case of Section 2.3, the Termination Date. The value of Escrow Cash
shall be face value of such Escrow Cash. For the purposes of any disbursement
of Escrow Shares, the number of Escrow Shares required to satisfy a claim with
respect to the Escrow Account shall be rounded to the nearest whole share of
common stock of Buyer. The Buyer and the Indemnifying Shareholder agree that
the Escrow Agent shall have no responsibility for determining, or reporting,
the Fair Market Value of the Escrow Shares.

 

(b)           Permitted
Investments of Escrow Cash. Escrow Cash shall be invested by the Escrow
Agent, to the extent permitted by law and as directed by the Indemnifying
Shareholder, in (i) obligations issued or guaranteed by the United States
of America or any agency or instrumentality thereof, (ii) obligations
(including certificates of deposit and bankers’ acceptances) of domestic
commercial banks which at the date of their last public reporting had total
assets in excess of $500,000,000, (iii) commercial paper rated at least A-1
or P-1 or, if not rated, issued by companies having outstanding debt rated at
least AA or Aa and (iv) money market mutual funds invested exclusively in
some or all of the securities described in the foregoing clauses (i), (ii) and
(iii). Absent receipt of specific written investment instructions from the
Buyer or Indemnifying Shareholder, the Escrow Agent shall have no obligation or
duty to invest (or otherwise pay interest on) the Escrow Cash; provided,
however, that in the event the Escrow Agent shall not have received such
written investment instruction, the Escrow Agent shall be authorized to invest
any of the Escrow Cash in the Wells Fargo Advantage Government Money Market
Fund until such investment instruction is received. All earnings received from
the investment of the Escrow Cash shall be credited to, and shall become a part of,
the Escrow Fund (and any losses on such investments shall be debited to the
Escrow Fund). The Escrow Agent shall have no liability for any investment
losses, including without limitation any market loss on any investment
liquidated prior to maturity in order to make a payment required hereunder. The
investments in the Wells Fargo Advantage Fund are not obligations of, or endorsed
or guaranteed by, the Escrow Agent or its Affiliates and are not insured by the
Federal Deposit Insurance Corporation. The Escrow Agent serves as advisor,
custodian, and transfer

 

5

 

agent for the Wells Fargo Advantage Fund and will be
paid, and its affiliates may be paid, fees for services to the Wells Fargo
Advantage Fund and those fees may include processing organization fees. The
Escrow Agent will have the right to liquidate any investments of the Escrow
Fund held by the Escrow Agent hereunder in order to provide funds necessary to
make required payments hereunder.

 

(c)           Tax
Reporting. The parties hereto agree that, for tax reporting purposes, all
interest or other income earned from the investment of any Escrow Cash or any
portion thereof in any tax year shall be reported as allocated to the
Indemnifying Shareholder.

 

ARTICLE IV

ESCROW AGENT

 

4.1           Appointment

 

The Indemnifying Shareholder and Buyer hereby appoint
the Escrow Agent to serve as the escrow agent hereunder, and the Escrow Agent
hereby accepts such appointment and agrees to perform all duties which are
expressly set forth in this Agreement.

 

4.2           Fees
and Expenses of Escrow Agent

 

Buyer and the Indemnifying Shareholder shall each (a) pay
one-half of the fees of the Escrow Agent for the services to be rendered by the
Escrow Agent hereunder, which are set forth on Attachment A hereto, and (b) reimburse
the Escrow Agent for one-half of its reasonable expenses (including reasonable
attorney’s fees and expenses) incurred in connection with the preparation and
performance of its duties under this Agreement; provided that any fees and
expenses relating to any sale of Escrow Shares pursuant to Section 1.6
shall be promptly paid in full by the Indemnifying Shareholder and shall be
deducted from the gross proceeds of such sale of Escrow Shares. In the event of
any material change in the fees charged by the Escrow Agent, the Escrow Agent
shall notify the Indemnifying Shareholder and Buyer in writing of such change
as soon as practicable after the Escrow Agent is made aware of the change. The
Escrow Agent may withhold its unpaid fees and expenses from any final
disbursement from the Escrow Fund.

 

4.3           Limitation
of Escrow Agent’s Duties and Liabilities.

 

(a)           Limitation
on Liability. The Escrow Agent shall not be responsible for determining or
compelling compliance with the Stock Purchase Agreement and shall not be bound
by or incur any liability with respect to any other agreement or understanding
to which the Escrow Agent is not a party, including the Stock Purchase
Agreement. The Escrow Agent shall be obligated only for the performance of such
duties as are expressly and specifically set forth in this Agreement on its part to
be performed, which are ministerial (and shall not be construed to be
fiduciary) in nature, and no implied duties or obligations of any kind shall be
read into this Agreement against or on the part of the Escrow Agent. The
Escrow Agent shall incur no liability with respect to any action taken or
suffered by it in reliance upon any notice, direction, instruction, consent,
statement or other documents believed by it to be genuine and duly authorized,
nor for other action or inaction except its own willful misconduct or gross
negligence. In all questions arising under the Agreement, the Escrow Agent may rely
on the advice of counsel, and the Escrow Agent shall not be liable to anyone
for anything done, omitted

 

6

 

or suffered in good faith by the Escrow Agent based on such advice. The
Escrow Agent shall not be required to take any action hereunder involving any
expense unless the payment of such expense is made or provided for in a manner
reasonably satisfactory to it. In no event shall the Escrow Agent be liable for
indirect, punitive, special or consequential damages.

 

(b)           Sales
of Escrow Shares. In connection with any sale of Escrow Shares pursuant to Section 1.6
of this Agreement, the Escrow Agent shall be entitled to receive and rely upon,
prior to taking action in that regard, written direction from the Buyer and the
Indemnifying Shareholder as to the manner and method to be undertaken in
carrying out such sale, including, without limitation written direction (1) identifying
the number of Escrow Shares to be sold, (2) requesting the Escrow Agent to
use a brokerage firm identified by the Buyer and the Indemnifying Shareholder
therein, or requesting the Escrow Agent to use its affiliated brokerage
service, and (3) setting forth any necessary or special instructions with
respect to the sale (including any stop loss or minimum price per share
instruction); and the Indemnifying Shareholder shall execute and deliver any
instruments reasonably required by the Buyer or the Escrow Agent in order to
carry out such sale or liquidation.

 

4.4           No
Security Interest

 

The Indemnifying Shareholder warrants to and agrees
with Buyer and the Escrow Agent that, unless otherwise expressly set forth in
this Agreement, there is no security interest in the Escrow Fund, Escrow
Account or any part thereof created by it or in respect of any of its
obligations or liabilities. The Indemnifying Shareholder knows of no financing
statement under the Uniform Commercial Code, which is on file in any
jurisdiction claiming a security interest in or describing (whether
specifically or generally) the Escrow Fund, the Escrow Account or any part thereof.

 

4.5           Indemnification

 

Indemnifying Shareholder and Buyer hereby agree to
jointly and severally indemnify the Escrow Agent for, and to hold it harmless
against any fee, cost, loss, liability or expense arising out of or in
connection with this Agreement and carrying out its duties hereunder,
including, without limitation, attorneys’ fees and expenses and the costs and
expenses of investigating or defending itself against any claim of liability,
except in those cases where the Escrow Agent has been guilty of gross
negligence or willful misconduct; provided, that, without limiting the
foregoing, the Indemnifying Shareholder, on the one hand, and Buyer on the
other hand, agree between themselves that each shall pay one half of such
amounts. This right of indemnification shall survive the termination of this
Agreement and the resignation or removal of the Escrow Agent.

 

4.6           Tax
Indemnification

 

The Indemnifying Shareholder shall assume and promptly
pay when and as due any and all obligations imposed now or hereafter by any
applicable tax law, rule or regulation with respect to any payment or
disbursement of the Escrow Fund, each and every sale, exchange or conversion of
the Escrow Shares and dividends or distributions with respect to the Escrow
Shares, any distribution of the Escrow Shares or performance of any other
activity under this

 

7

 

Agreement. The Indemnifying Shareholder also agrees to instruct the
Escrow Agent in writing with respect to the Escrow Agent’s responsibility for
withholding and other taxes, assessments or other governmental charges, and to
instruct the Escrow Agent with respect to any certifications and governmental
reporting that may be required under any laws or regulations that may be
applicable in connection with its acting as the Escrow Agent under this
Agreement. The foregoing indemnification and agreement to hold harmless shall survive
the termination of this Agreement. Indemnifying Shareholder and Buyer will
provide a completed IRS Form W-9 or W-8 to the Escrow Agent upon the
signing of this Escrow Agreement. The Escrow Agent will report to the Internal Revenue Service, as of each
calendar year-end, and to Indemnifying Shareholder all income earned from the
investment of any sum held in the Acquisition Fund against Indemnifying
Shareholder, whether or not said income has been distributed during such year,
as and to the extent required by law under the provisions of the Internal
Revenue Code of 1986, as amended, and the regulations promulgated thereunder
(the “Code”). Any tax returns required to be prepared and filed will be
prepared and filed by Indemnifying Shareholder with the Internal Revenue
Service in all years income is earned, whether or not income is received or
distributed in any particular tax year, and Escrow Agent will have no
responsibility for the preparation and/or filing or any tax return with respect
to any income earned by the Acquisition Fund. The Indemnifying Shareholder is
required to prepare and file any and all income or other tax returns applicable
to the Acquisition Fund with the Internal Revenue Service and all required
state and local departments of revenue in all years income is earned in any
particular tax year as and to the extent required under the provisions of the
Code. Any taxes payable on income earned from the investment of any sums held
in the Escrow Fund will be the responsibility of Indemnifying Shareholder,
whether or not the income was distributed by the Escrow Agent during any
particular year as and to the extent required under the provisions of the Code.

 

4.7           Successor
Escrow Agent

 

In the event the Escrow Agent becomes unavailable or
unwilling to continue in its capacity herewith, the Escrow Agent may resign
and be discharged from its duties or obligations hereunder by delivering a
resignation to the parties to this Agreement, not less than 60 days prior to
the date when such resignation shall take effect. Buyer may appoint a
successor Escrow Agent so long as such successor is a bank with assets of at
least $500,000,000, and may appoint any other successor Escrow Agent with
the consent of the Indemnifying Shareholder, which shall not be unreasonably
withheld or delayed. If, within such notice period, Buyer provides to the
Escrow Agent written instructions with respect to the appointment of a
successor Escrow Agent and directions for the transfer of any Escrow Shares
then held by the Escrow Agent to such successor, the Escrow Agent shall act in
accordance with such instructions and promptly transfer such Escrow Shares to
such designated successor. If no successor Escrow Agent is named as provided in
this Section 4.7 prior to the date on which the resignation of the Escrow
Agent is to properly take effect, the Escrow Agent may apply to a court of
competent jurisdiction for appointment of a successor Escrow Agent.

 

4.8           Investment

 

The Escrow Agent is hereby authorized, in making or
disposing of any investment permitted by this Agreement, or in carrying out any
sale of the Escrow Fund permitted by this Agreement, to deal with itself (in
its individual capacity) or with any one or more of its affiliates,

 

8

 

whether it or such affiliate is acting as a subagent of the Escrow
Agent or for any third person or dealing as principal for its own account.

 

4.9           Action
by Escrow Agent

 

Notwithstanding any term in this Agreement to the
contrary, in no instance shall the Escrow Agent be required or obligated to
distribute any Escrow Fund (or take other action that may be called for
hereunder to be taken by the Escrow Agent) sooner than two (2) business
days after (i) it has received the applicable documents required under
this Agreement in good form, or (ii) passage of the applicable time
period, as the case may be.

 

ARTICLE V

OTHER PROVISIONS

 

5.1           Representation
and Warranties of Indemnifying Shareholder and Buyer

 

Each of Indemnifying Shareholder and Buyer hereby
represents and warrants (a) that this Agreement has been duly authorized,
executed and delivered on its behalf and constitutes its legal, valid and
binding obligation and (b) that the execution, delivery and performance of
this Agreement by each of Indemnifying Shareholder and Buyer does not and will
not violate any applicable law or regulation.

 

5.2           Termination

 

This Agreement shall terminate upon the disbursement
by the Escrow Agent of the Escrow Fund in accordance with this Agreement;
provided that the provisions of Sections 4.2, 4.5 and 4.6 shall survive
such termination.

 

5.3           Entire
Agreement

 

This Agreement constitutes the entire agreement among
the parties with respect to the subject matter hereof and supersedes any prior
understandings, agreements or representations by or among the parties, written
or oral, with respect to the subject matter hereof.

 

5.4           Succession
and Assignment

 

This Agreement shall be binding upon and inure to the
benefit of the parties named herein and their respective successors and permitted
assigns. 

 

5.5           Counterparts
and Facsimile Signature

 

This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument. This Agreement may be
executed by facsimile signature. Signatures by facsimile shall be deemed to be
their original signatures for all purposes.

 

9

 

5.6           Headings

 

The section headings contained in this Agreement
are inserted for convenience only and shall not affect in any way the meaning
or interpretation of this Agreement.

 

5.7           Notices

 

All notices and other communications given or made
pursuant to this Agreement shall be in writing and shall be deemed to have been
duly given or made (i) five business days after being sent by registered
or certified mail, return receipt requested, (ii) upon delivery, if hand
delivered, (iii) one business day after being sent by prepaid overnight
courier with guaranteed delivery, with a record of receipt, or (iv) upon
transmission with confirmed delivery if sent by cable, telegram, facsimile or
telecopy, to the parties at the following addresses (or at such other addresses
as shall be specified by the parties by like notice):

 

If to Buyer:

 

EPIQ Systems, Inc.

501 Kansas Avenue

Kansas City, KS
66105

Attention: General
Counsel

Telephone:    (913)
621-9500

Telecopy:      (913)
621-7281

E-mail: 
colofson@epiqsystems.com

 

Copy to:

 

Kirkland &
Ellis LLP

200 East Randolph
Drive

Chicago, Illinois
60602

Attention:  Richard W. Porter, P.C.

Telephone:    (312)
861-2000

Telecopy:      (312)
861-2200

E-mail:  rporter@kirland.com

 

If to Indemnifying
Shareholder:

 

Ajuta
International Pty. Ltd.,

as Trustee of
Hypatia Trust

c/o Wedlake Bell

52 Bedford Road

London WC1R 4LR

Attention:      Barry
Wetherill

Telephone:    (44)(207)
395-3100

Telecopy:      (44)(207)
395-3100

E-mail:  bwetherall@wedlakebell.com

 

10

 

With a Copy to:

 

Wormser, Kiely,
Galef & Jacobs LLP

825 Third Avenue

New York, NY 10022

Attention:      Keith
M. Pinter, Esq.

Telephone:    (212)
687-4900

Telecopy:      (212)
687-5703

E-mail:  kpinter@wkgj.com

 

If to the Escrow Agent:

 

Wells Fargo Bank,
N.A. Escrow Agent

Attn:  Corporate Trust & Escrow Services

One Ward Parkway, Suite 330

Kansas City, Missouri  64112

Attention:  Kenneth Dotson

Telephone:    (816)
931-5746

Telecopy:      (816)
753-5311

E-mail:  kenneth.dotson@wellsfargo.com and
dane.lee@wellsfargo.com

 

Any party may give any notice, instruction or
other communication hereunder using any other means, but no such notice,
instruction or other communication shall be deemed to have been duly given
unless and until it actually is received by the party to whom it is intended. Any
party may change the address to which notices, instructions, or other
communications hereunder are to be delivered by giving the other parties notice
in the manner set forth in this Section 5.7.

 

5.8           Amendments
and Waivers

 

This Agreement may be amended only with the
written consent of Buyer, the Escrow Agent and the Indemnifying Shareholder. No
waiver of any right or remedy hereunder shall be valid unless the same shall be
in writing and signed by the party giving such waiver. No waiver by any party
with respect to any condition, default or breach of covenant hereunder shall be
deemed to extend to any prior or subsequent condition, default or breach of
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.

 

5.9           Governing
Law and Submission to Jurisdiction

 

THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE LAWS
THAT MIGHT BE APPLICABLE UNDER CONFLICTS OF LAWS PRINCIPLES.

 

Each of the parties
hereto hereby irrevocably and unconditionally submits, for itself and its
property, to the exclusive jurisdiction of any New York state court, or Federal
court of the United States of America, sitting in New York, New York, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement or the

 

11

 

agreements
delivered in connection herewith or the transactions contemplated hereby or
thereby or for recognition or enforcement of any judgment relating thereto, and
each of the parties hereby irrevocably and unconditionally (i) agrees not
to commence any such action or proceeding except in such courts, (ii) agrees
that any claim in respect of any such action or proceeding may be heard
and determined in such New York state court or, to the extent permitted by law,
in such Federal court, (iii) waives, to the fullest extent it may legally
and effectively do so, any objection which it may now or hereafter have to
the laying of venue of any such action or proceeding in any such New York state
or Federal court, and (iv) waives, to the fullest extent permitted by law,
the defense of an inconvenient forum to the maintenance of such action or
proceeding in any such New York state or Federal court. Each of the parties
hereto agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law. Each party to this Agreement
irrevocably consents to service of process in the manner provided for notices
in Section 5.7. Nothing in this Agreement will affect the right of any
party to this Agreement to serve process in any other manner permitted by law.

 

5.10         Force
Majeure

 

The Escrow Agent shall not be responsible for delays
or failures in performance resulting from acts beyond its control. Such acts
shall include but not be limited to acts of God, strikes, lockouts, riots, acts
of war, epidemics, governmental regulations superimposed after the fact, fire,
communication line failures, computer viruses, power failures, earthquakes or
other disasters.

 

5.11         Dispute
Resolution

 

It is understood and agreed that, should any dispute
arise with respect to the delivery, ownership, right of possession, and/or
disposition of the Escrow Fund, or should any claim be made upon the Escrow
Agent or the Escrow Fund by a third party, the Escrow Agent upon receipt of
notice of such dispute or claim is authorized and shall be entitled (at its
sole option and election) to retain in its possession without liability to
anyone, all or any of said Escrow Fund until such dispute shall have been
settled either by the mutual written agreement of the parties involved or by a
final order, decree or judgment of a court in the United States of America, the
time for perfection of an appeal of such order, decree or judgment having
expired. The Escrow Agent may, but shall be under no duty whatsoever to,
institute or defend any legal proceedings that relate to the Escrow Fund.

 

*              *              *              *

 

12

 

IN WITNESS WHEREOF, the
parties have duly executed this Agreement as of the day and year first above
written.

 

	
   

  	
  EPIQ
  SYSTEMS, INC.

  
	
   

  	
  “Buyer”:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/  Christopher
  E. Olofson

  
	
   

  	
  Christopher E. Olofson,

  
	
   

  	
  President and Chief Operating
  Officer

  
	
   

  	
   

  
	
   

  	
  AJUTA
  INTERNATIONAL PTY. LTD., as

  Trustee of Hypatia Trust

  “Indemnifying Shareholder”:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/  Ira B.
  Stechel

  
	
   

  	
   Ira B. Stechel, Attorney In Fact

  
	
   

  	
   

  
	
   

  	
  WELLS
  FARGO BANK, N.A.

  “Escrow
  Agent”

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/  Dane A.
  Lee

  
	
   

  	
   Dane A. Lee, Vice President

  

 

 

[Signature page to Escrow Agreement]

 

 

ATTACHMENT
A

 

Escrow
Agent Fees

 

	
  Acceptance Fee

  	
   

  	
  $500

  

Our acceptance fee covers
the review, acceptance and assumption of all responsibilities and duties as
Escrow Agent, participation in document conferences, establishing records and
accounts, receipt of funds, and consultation with counsel.

 

	
  Annual Escrow Agent Fee

  	
   

  	
  $5,000

  

This
annual fee includes the normal day-to-day administration of the issue performed
in accordance with the Escrow Agreement, maintenance of all administrative
records, and the duties and functions associated with the Escrow Agent. Our
annual administration fee is billed annually in advance for any year or part thereof.
The first annual fee is due at closing.

 

	
  Stock Sale Transactions

  	
   

  	
  $500

  

In
the event of the sale of Escrow Shares per 1.6(b) of the Escrow Agreement,
this fee will be charged per sale to sale proceeds.

 

	
  Disbursements upon Receipt of Final
  Determination

  	
   

  	
  $1,000

  

 

	
  Out-of-Pocket Expenses

  	
   

  	
  None Anticipated

  

The
Trustee does not typically charge for out-of-pocket expenses but we reserve the
right to charge for significant, unanticipated out-of-pocket expenses incurred
in connection with the acceptance of the Escrow Agent appointment and annual
administration. Any out-of-pocket expenses incurred by us will be billed at
cost. These items may include, but are not be limited to, legal costs,
travel expenses, courier services, etc.

 

	
  Investments

  	
   

  	
  Included

  

Wells
Fargo does not charge transaction fees for cash investments nor do we charge
sweep fees for investment of funds in the Wells Fargo Money Market Fund family.

 

Guaranteed Investment Contracts or Forward Delivery Agreements   (If any)

In
the event we are asked to administer a guaranteed Investment contract or
forward purchase agreement an annual fee of $750 will be charged. This fee
includes the set-up, review and maintenance of any STANDARD investment
agreement or similar instrument. The investment activities included in this fee
assume there will be no more than one (1) draw on the instrument per month.
Fees for NON-STANDARD agreements such as repurchase/swap/hedge agreements or
for investment funds held outside the bank (such as CAMP or LAIF) will be
negotiated separately.

 

Extraordinary Services

Fees
indicated in this schedule are based upon services rendered in accordance
with established procedures and during normal business hours. Unusual or
extraordinary services, such as those

 

 

provided
upon an Event of Default, are subject to additional charges based on the duties,
responsibilities, and other factors involved. Fees for services not
specifically set forth in this schedule will be determined by appraisal. Such
services may include, but not be limited to, additional responsibilities
and services incurred in connection with amendments or extensions of the
governing documents, unusual cash and/or investment transactions, calculations,
reports or notices, or in case of litigation.

 

Customized Services

Customized services can be
provided as needed. Additional fees will be assessed as out-of-pocket expenses
for performing non-standard services such as generating specialized reports,
arbitrage calculations provided by third parties, default administration,
custody services, etc. Additional fees may be assessed for excessive
administration time or other duties required as mandated by future laws or
regulatory agencies. Fees will be determined commensurate with the type of
service and the time and responsibility involved.

 

This Fee Schedule is based
upon the assumptions listed below which pertain to the responsibilities and
risks involved in Wells Fargo Bank, N.A. undertaking the roles of Escrow Agent.
These assumptions are based on information provided to us as of the date of
this Fee Schedule. Our fees are subject to review and acceptance of the final
documents. Should any of the assumptions, duties or responsibilities change, we
reserve the right to affirm, modify or rescind our proposal.

 

PRICING NOTES AND ASSUMPTIONS

 

•      All interest and investment earnings will be credited to the Escrow
Account, including interest earned on money market funds. No additional fees
are debited against earnings.

 

•      No investment transaction fees are charged for investing in sweep
vehicles or individual securities. Wells Fargo Brokerage Services Inc., a
full-service brokerage company, is available for investment purchases,
including commercial paper.

 

•      There will be no charge for the first twenty-four (24) wires. Additional
wires will be $25 each.

 

•      Should any transaction fail to close through no fault of Wells Fargo
Bank, N.A., all or a portion of our acceptance fee, as well as legal and
out-of-pocket expenses incurred by Wells Fargo Bank, N.A., may be due and
payable.

 

Billings
over 30 days past due are subject to a 1.5 % late fee.

 

Wells
Fargo Bank, N.A.

 

By:
Dane A. Lee on November 10, 2005

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