Memorandum of Terms for Series B-1 Preferred Stock Investment between Edgewater Private Equity Fund III, L.P. and EpicEdge, Inc.

Summary

This memorandum outlines the proposed terms for Edgewater Private Equity Fund III, L.P. to provide additional investment to EpicEdge, Inc. Edgewater will offer $500,000 in new debt, convert $1,600,000 in existing debt, and provide a $1,000,000 bank guaranty in exchange for Series B-1 Preferred Stock and related warrants. The Series B-1 Preferred Stock will have a senior liquidation preference and conversion rights. The agreement is non-binding and subject to further negotiation and due diligence, with final terms to be set in definitive agreements.

EX-4.58 12 d01266exv4w58.txt MEMORANDUM OF TERMS FOR SERIES B-1 PREFERRED STOCK EXHIBIT 4.58 September 20, 2002 Mr. Richard Carter Mr. Robert Jensen Chief Executive Officer Chief Financial Office and Chief Operating Office EpicEdge, Inc. EpicEdge, Inc. 5508 Highway 290 West 5508 Highway 290 West Suite 300 Suite 300 Austin, Texas 78735 Austin, Texas 78735 Dear Richard and Bob: The following letter outlines the terms under which Edgewater Private Equity Fund III, L.P ("Edgewater") will consider providing an additional investment in EpicEdge, Inc. (the "Company"). Since the beginning of 2002, Edgewater has funded $2,600,000 under various convertible secured promissory notes. Edgewater is obligated under the Note and Preferred Stock Purchase Agreement and other transaction documents and amendments to those documents (the "April Documents") executed in April, 2002 to convert $1,000,000 plus accured interest to Series B Convertible Preferred Stock ("Series B Stock") at a point in the future that is determined by Edgewater and the Company. The term sheet below outlines the terms under which Edgewater would consider providing an additional $500,000 in debt/equity to the Company and a guaranty to a financial institution to assist with the establishment of a senior secured line of credit for the Company. The newly funded debt will be combined with $1,600,000 plus accrued interest funded under previous secured promissory notes that would be convertible into a Series B-1 Preferred Stock instrument that will have a 3.5x liquidation preference. The Series B-1 liquidation preference will be senior to any other series of preferred stock. In exchange for Edgewater's $1,000,000 guarantee of bank debt, Edgewater will receive warrants that will be convertible into Series B-1 Preferred Stock at a face value of $1,000,000. Effectively, Edgewater would receive warrants for Series B-1 Preferred Stock equal to a direct investment of $1,000,000 for its $1,000,000 guarantee of bank debt. Upon full conversion by Edgewater, the Series B-1 Preferred Stock will total $3,100,000 plus any accrued interest from the $2,100,000 in secured notes. Newly Funded Debt $ 500,000 Previously Funded Debt $1,600,000 Warrants from Guaranty $1,000,000 ---------- Total Series B-1 $3,100,000 (plus accrued interest) Edgewater will agree to convert its existing debt governed by the April Documents to Series A Convertible Preferred Stock and Series B Convertible Preferred Stock shortly following the funding of the additional capital and the establishment of the secured line of credit. The Company agrees to pay all legal and other fees currently outstanding to Edgewater and those incurred during this transaction at the Closing of this transaction. It is understood that this Term Sheet constitutes a statement of the Parties present mutual intentions with respect to the proposed transactions and does not contain all matters upon which agreement must be reached in order for the transactions to be completed. No legally binding agreements or obligations of any party are created by this Memorandum and any contemplated financing is subject to due diligence by the prospective investors. A binding commitment with respect to the transactions will result only from the negotiation, execution and delivery of the definitive Note and Preferred Stock Purchase Agreement (and related documents, instruments and agreements). I. TERMS A. CONVERTIBLE SECURED BRIDGE LOAN TYPE OF SECURITIES: Convertible Secured Bridge Promissory Notes (collectively, the "Notes") LENDERS: Edgewater CLOSING: As soon as practicable (the "Closing Date") LOAN AMOUNT: $500,000 INTEREST: 8% per annum MATURITY: 1 year LOAN CONVERSION: The outstanding balance of the Loan Amount plus all accrued interest plus $1,600,000 plus accrued interest previously funded under various convertible secured promissory notes, shall be converted into shares of Series B-1 Convertible Preferred Stock, $0.01 par value ("Series B-1 Stock"), with a stated value equal to the debt plus accrued interest converted (the "Original Series B-1 Purchase Price"). The date on which the principal and interest underlying the Loan shall be converted into Series B Stock shall be referred to as the "B-1 Conversion Date." 2 BANK GUARANTY: Edgewater shall provide a $1,000,000 guaranty to assist the Company in establishing a secured line of credit. In exchange for the guaranty, Edgewater will receive warrants ("Series B-1 Warrants") for Series B-1 Stock equal to the face value of the guaranty. BONUS POOL: The Bonus Pool as established per the April Documents will remain in place and will be amended to include consideration of the Series B-1 Stock. SECURITY INTEREST: The Notes shall be secured by a perfected lien on all of the Company's assets subordinate only to the senior secured lender. NOTE AND PREFERRED STOCK PURCHASE The Loan shall be made AGREEMENT: pursuant to a Note and Preferred Stock Purchase Agreement (and other documents, instruments and agreements delivered in connection therewith including, without limitation, security agreements and collateral assignments) reasonably acceptable to the Company and the Lenders, which agreement shall contain, among other things, appropriate representations and warranties and covenants of the Company and appropriate conditions to closing, the terms of which shall be substantially the same as the terms in the April Documents. II. PREFERRED STOCK The Company shall prepare and file with the Texas Secretary of State (on or before the Conversion Date) a Certificate of Designation authorizing the Series B-1 Stock having the following rights, preferences and privileges as part of the Restated Articles: PREFERENCE: In the event of any Liquidity Event (as defined in the Memorandum of Terms), the proceeds therefrom shall be distributed as follows: 3 The holders of the Series B-1 Stock will be entitled to receive: (a) senior to the holders of the Series A Convertible Preferred Stock and Series B Stock and in preference to Common Stock, an amount equal to three and one-half (3.5) times the Original Series B-1 Purchase Price per share (the "Series B-1 Preference") and a ratable share of the distribution of assets and property with the holders of Common Stock at a conversion price of $0.75 per share, or (b) a ratable share of the distribution of assets and property with the holders of Common Stock, participating on an as converted basis at $0.25 per share. CONVERSION: The holders of the Series B-1 Stock will have the right to convert shares of Series B-1 Stock, at the option of each holder thereof, at any time, into shares of Common Stock at a conversion price equal to one share of Common Stock for each $0.25 of stated value if the holders of the Series B-1 Stock elect not to take the Series B-1 Preference. If the holders of the Series B-1 Stock take the Series B-1 Preference, the conversion price will be $0.75 per share. The total number of shares of Common Stock into which such shares may be converted initially will be determined by dividing the aggregate Original Series B-1 Purchase Price paid plus accrued interest plus Series B-1 Warrants, by the Conversion Price. The initial Conversion Price for the Series B-1 Stock will be $0.25 or $0.75 (if the holders of the Series B-1 Stock take the Series B-1 Preference), as the case may be. The Conversion Price for the Series B-1 Stock will be subject to adjustment as provided below. AUTOMATIC CONVERSION: All of the Series B-1 Stock will be automatically converted into Common Stock, at the then applicable Conversion Price, in the event that the holders of at least 2/3 of the Series B-1 Stock originally issued have converted or consent to the conversion to Common Stock. 4 ANTIDILUTION PROTECTION: The Conversion Price of the Series B-1 Stock will be subject to adjustment to prevent dilution in the event that the Company issues additional equity securities (other than Excluded Securities (as defined below)) at a purchase price less than the applicable Conversion Price. The Conversion Price will be adjusted on a weighted average basis. The Conversion Price will also be subject to proportional adjustment for stock splits, stock dividends, recapitalizations and the like. Excluded Securities shall mean (a) shares issued upon the exercise of stock options that are granted under the Company's current Stock Option Plan and Stock Purchase Plan, as such plans are amended from time to time upon the approval of the Board of Directors, (b) shares issued for use as consideration in connection with mergers with or acquisitions of unaffiliated entities that are approved by the Board, and (b) shares issuable upon the conversion of the Series A Stock and Series B Stock and the Series B-1 Stock. VOTING RIGHTS: The holders of the Series B-1 Stock will have a right to that number of votes equal to the number of shares of Common Stock issuable upon conversion of such stock. 5 REGISTRATION RIGHTS: (1) Compulsory Registration. The holders of a majority of the Series B-1 Stock (or Common Stock issued upon conversion thereof) will have the right to require the Company to file one long form registration statement annually and two registration statements annually on Form S-3 if such form is available, with respect to the Common Stock issued upon the conversion of the Series B-1 Stock (the "Registrable Shares"), and the Company shall take all necessary actions to cause such registration statements to become effective as soon thereafter as is permissible by the SEC. The Company shall keep such registration statements current and effective until such time as each such holder can freely trade such shares without restriction under the Federal securities laws. (2) Piggy-Back Registration. The holders of the Registrable Shares shall be entitled to "piggy-back" registration rights on registrations by the Company for its own account, subject to the right of the Company and its underwriters to reduce the number of shares proposed to be registered in view of market conditions. (3) Expenses. The Company shall bear all expenses of the registrations and offerings (exclusive of underwriting discounts and commissions or fees of counsel of a selling shareholder). CLOSING CONDITIONS: The conversion of the Loan and the issuance of the Series B-1 Stock is conditioned upon the Lenders satisfactorily completing commercial and legal due diligence, as well as the execution of agreements, instruments, forms and documents deemed necessary by the Lenders and the Lenders' legal counsel. Additionally, the following events will occur prior to funding by the Lenders: 6 1. All employment contracts will need to be amended to the reflect two months of severance. 2. Unanimous approval by the Board of Directors of the Company of the transactions contemplated herein and by the definitive legal documentation to be entered into in connection herewith, including, without limitation, as may be required to make inapplicable to the Lenders the three-year moratorium on certain business combinations as set forth in the Texas "Business Combination Law." 3. Agreement with GE Access with respect to secured debt and repayment thereof satisfactory to the Lenders. 4. Compliance by the Company with all applicable securities and corporate laws. 5. Establishment of a bank line of credit satisfactory to Edgewater. [SIGNATURE PAGE FOLLOWS] 7 IN WITNESS WHEREOF, the Parties hereto have executed this Term Sheet as of the 22nd day of September, 2002. EPICEDGE, INC., a Texas corporation By: /s/ Richard Carter ------------------------------------ Its: Chief Executive Officer EDGEWATER PRIVATE EQUITY FUND III, L.P. By: Edgewater III Management, L.P. Its: General Partner By: Gordon Management, Inc. Its: General Partner By: /s/ Mark McManigal ------------------------------------ Its: VP ------------------------------------ 8