EXHIBIT 14
Calim Private Equity, LLC
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August 14, 2002
Chapeau, Inc.
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Re: Loan from Calim Private Equity, LLC to Chapeau, Inc.
Gentlemen:
Subject to and on the terms and conditions specified in this
letter loan agreement (this "Agreement"), Calim Private Equity,
LLC or its assigns ("Calim") hereby agrees to make a loan (the
"Loan") to Chapeau, Inc., a Utah corporation (the "Company"), an
amount up to $500,000 (the "Maximum Credit Amount"). The Loan
shall be on the following terms and conditions.
1. Loan. The Loan shall be represented by the Company's
promissory note (the "Note") in the form attached as Exhibit 1 to
this Agreement.
2. Drawings. Drawings by the Company under the Note shall
be made by the Company furnishing to Calim in writing a request
for draw (each a "Request") substantially in the form attached as
Exhibit 2 to this Agreement. Unless Calim otherwise agrees, the
Company agrees to make only one Request each calendar month.
Each Request shall (i) state in reasonable detail the purpose for
which the draw is being requested; (ii) include a projected
budget for the month to which the Request pertains, providing in
reasonable detail the Company's expected uses of funds advanced
pursuant to the Request and other applicable financial
projections for such month; (iii) state that the Company is in
conformity with the terms and provisions of each of the
Transaction Documents (as hereinafter defined) and that no Event
of Default (as hereinafter defined) or event which, with the
passage of time or the provision of notice or both, would
constitute an Event of Default, has occurred and is continuing;
and (iv) state that the representations and warranties of the
Company contained in the Transaction Documents are true and
correct as of the date of the Request. Upon being provided a
Request conforming with the conditions stated in this Section,
Calim shall either (A) advance the amount of the draw specified
in the Request conforming to the foregoing requirements within
five business days following receipt of the Request or (B) inform
the Company that Calim has declined to make the draw because the
Request was not in conformity with the foregoing requirements,
specifying the nature of the nonconformity.
Chapeau, Inc.
August 20, 2002
Page 2
3. Security. The Loan shall be secured by a first lien
security interest in and to all of the Company's assets, real and
personal, tangible and intangible, and wheresoever located, on
the terms and conditions specified in a security agreement (the
"Security Agreement") between the Company and Calim in the form
attached as Exhibit 3 to this Agreement.
4. Placement. In further consideration for making the
Loan, the Company hereby designates Calim as its exclusive agent
to place or cause to be placed a convertible bond issue in a
principal amount not to exceed $1,500,000 (the "Placement") on
terms and conditions reasonably satisfactory to Calim and the
Company which shall include, without limitation, those summarized
in Exhibit 4 to this Agreement. To the extent not inconsistent
with this Agreement, the terms and conditions of the Financial
Advisory Agreement dated July 2002 between the Company and Calim
(the "Advisory Agreement") shall govern the rights and
obligations of the parties with respect to the Placement.
5. Conversion. At any time prior to the later of (i) the
stated maturity date of the Note (the "Maturity Date") or (ii)
the date of payment in full of the Note, Calim may, but shall not
be obligated to, elect to convert all or a portion of the Loan
into convertible bonds of the Company on terms and conditions
reasonably satisfactory to Calim and the Company which shall
include, without limitation, those summarized in Exhibit 5 to
this Agreement.
6. Stock Options. In further consideration for the making
of the Loan, on the Closing Date (as hereinafter defined), the
Company will execute and deliver to Calim a stock option
agreement (the "Option Agreement") in the form attached as
Exhibit 6 to this Agreement, pursuant to which Calim shall have
the right to purchase up to 1,000,000 shares of the common stock
of the Company at a price per share of $0.10 during the period
from the Closing Date to the fifth anniversary of the Closing
Date.
7. Closing. The contemporaneous making of the Loan and
consummation of the other transactions contemplated by this
Agreement (the "Closing") shall occur on August 21, 2002 or such
other date as may be mutually agreed by the parties (the "Closing
Date"). At the Closing:
(a) The Company shall:
(i) execute and deliver to Calim one or more
counterparts of (A) the Note, (B) the Security Agreement and
all such UCC financing statements, mortgages, assignments
and other documents and instruments that may be reasonably
required and requested by Calim in order to perfect its
security interests granted thereunder (such documents,
collectively with the Security Agreement, being the
"Security Documents"), (C) the Option Agreement, (D) a
subordination agreement in form and substance reasonably
satisfactory to Calim pursuant
Chapeau, Inc.
August 20, 2002
Page 3
to which certain prior creditors of the Company expressly
agree to subordinate their liens and security interests to
the liens of the Security Documents, and (E) such other documents,
certificates, instruments and other agreements as Calim may
reasonably request in connection with the Loan and the
transactions contemplated hereby;
(ii) furnish Calim with evidence satisfactory to it
that the execution, delivery and performance of this
Agreement by the Company has received all necessary
corporate approvals;
(iii) provide Calim with written evidence from
Deutz Corporation ("Deutz") of the commitment of Deutz to an
exclusive contract with the Company subject to no material
conditions precedent or restrictions other than the payment
by the Company to Deutz for up to ten engines; and
(iv) do all such things, take all such actions, execute
all such documents and instruments and otherwise as Calim
may reasonably request in connection with the Loan, the
perfection of the security interests granted it under the
Security Documents and all transactions contemplated hereby.
(b) Calim shall, upon satisfaction of all conditions
precedent specified in (a) above, advance the proceeds of the
Loan up to the Maximum Credit Amount to or at the direction of
the Company in accordance with the provisions of Section 2 above.
8. Representations and Warranties. Except as set forth in
the Schedule of Exceptions attached as Exhibit 8 to this
Agreement, the Company represents and warrants to Calim as
follows:
(a) The Company (i) is duly organized, validly existing and
in good standing as a corporation under the laws of the State of
Utah; (ii) has the power, authority and legal right to own or
lease and operate its property and to conduct the business in
which it is currently engaged; and (iii) is in compliance with
all requirements of applicable law except to the extent that the
failure to comply therewith could not, in the aggregate, have a
material adverse effect on the business, operations, property or
financial or other condition of the Company and could not
materially adversely affect the ability of the Company to perform
its obligations under this Agreement, the Note, the Security
Agreement and the other Security Documents and the Option
Agreement (collectively, the "Transaction Documents").
(b) The authorized capital of the Company consists of (i)
325,000,000 shares of common stock, par value $0.001 each (the
"Common Stock"), of which there are currently 12,429,950 issued
and outstanding, and (ii) 5,000,000 of preferred stock, par value
$0.001 each (the "Preferred Stock"),
Chapeau, Inc.
August 20, 2002
Page 4
of which none are currently outstanding. All issued shares of
Common Stock are validly issued, fully paid and non-assessable.
There are no options, warrants or other rights to acquire any
shares of Common Stock or Preferred Stock outstanding.
(c) The Company has the power, authority and legal right to
make, deliver and perform each of the Transaction Documents and
to borrow hereunder and has taken all necessary action to
authorize the Loan and other transactions contemplated hereby on
the terms and conditions of this Agreement and to authorize the
execution, delivery and performance of this Agreement and each of
the other Transaction Documents. No consent of any other person
(including security holders and creditors of the Company), and no
authorization of, notice to, or other act by or in respect of any
governmental authority, is required in connection with the Loan
or with the execution, delivery, performance, validity or
enforceability of this Agreement or any other Transaction
Document. This Agreement and each other Transaction Document
have been duly executed and delivered on behalf of the Company
and each constitutes a legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its
terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting the enforcement of creditors' rights generally.
(d) The execution, delivery and performance of this
Agreement and the other Transaction Documents, and the use of the
proceeds of the Loan, will not violate any requirement of
applicable law or any contractual obligation of the Company, and
will not result in, or require, the creation or imposition of any
lien, charge or encumbrance (other than those created pursuant to
the Security Documents) on any of the Company's properties or
revenues.
(e) No litigation, investigation or proceeding of or before
any arbitrator or governmental authority is pending or, to the
knowledge of the Company, threatened against the Company or any
of its properties or revenues (i) with respect to this Agreement
or any other Transaction Document or any of the transactions
contemplated hereby or thereby, or (ii) which, if adversely
determined, would have a material adverse effect on the business,
operations, property or financial or other condition of the
Company.
(f) The Company is not in default under or with respect to
any contractual obligation in any respect which could be
materially adverse to the business, operations, property or
financial or other condition of the Company, or which could
materially adversely affect the ability of the Company to perform
its obligations under this Agreement or any other Transaction
Document.
(g) The Company has good title to all property described in
the Security Documents, and none of such property is, or upon the
consummation of this Agreement will be, as the case may be,
subject to any lien, charge or encumbrance except pursuant to the
Security Documents.
Chapeau, Inc.
August 20, 2002
Page 5
(h) No contractual obligation of the Company and no
requirement of law materially adversely affects, or insofar as
the Company may reasonably foresee may so affect, the business,
operations, property or financial or other condition of the
Company.
(i) The Company has filed or caused to be filed all tax
returns which to the knowledge of the Company are required to be
filed, and they have paid all taxes shown to be due and payable
on said returns or on any assessments made against them or
assessed against any properties owned by the Company and all
other taxes, fees or other charges imposed on it by any
governmental authority (other than those the amount or validity
of which is currently being contested in good faith by
appropriate proceedings and with respect to which reserves in
conformity with generally accepted accounting principles have
been provided on the books of the Company, as the case may be);
and no tax liens have been filed and, to the knowledge of the
Company, no claims are being asserted with respect to any such
taxes, fees or other charges.
(j) The Company has made all filings as and when required
of it under the United States Securities Exchange Act of 1934, as
amended (the "1934 Act"). All such filings, including without
limitation the Company's Quarterly Report on Form 10-QSB, filed
with the United States Securities Exchange Commission (the
"Commission") on May 10, 2002 (the "Recent Report"), are complete
and accurate in all material respects when filed and do not and
did not contain any untrue statement of a material fact or omit
any fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
Since the date of the Recent Report, there have been no
developments or events with respect to the Company which could be
materially adverse to the business, operations, property or
financial or other condition of the Company, or which could
materially adversely affect the ability of the Company to perform
its obligations under this Agreement or any other Transaction
Document.
9. Negative Covenants. The Company covenants and agrees
to and with Calim that, until the Note is paid in full and all
other obligations of the Company to Calim under this Agreement,
the Note and the Security Documents have been fully performed in
accordance with their terms that the Company will not, without
the prior written consent of Calim given in its reasonable
discretion (i) issue or commit or agree to issue any securities
of any kind, including without limitation notes, debentures or
Common Stock, other than as may be provided under Sections 5 and
6 above and in connection with the Placement, except for (A)
stock options approved by the Company's Board of Directors (the
"Board") and granted to officers, directors, employees and
consultants of the Company, (B) equity securities issued to
vendors or strategic partners in connection with the provision of
services to the Company approved by the Board, (C) the incurrence
of short-term debt in an aggregate amount not to exceed $50,000
which is approved by the Board and expressly subordinate to the
Loan; provided that in the case of (A) and (B) the aggregate
amount of securities issued or issuable thereunder does not
exceed five percent of the sum of (x) the current shares of
Chapeau, Inc.
August 20, 2002
Page 6
Common Stock outstanding on the date of this Agreement and (y)
the outstanding options, rights and warrants described in Item B
of the Schedule of Exceptions; (ii) place, agree to place or
allow to be placed any lien, charge or other encumbrance against
any of its assets; (iii) merge into, consolidate with or enter
into any similar transaction with any other person; (iv) sell,
transfer, convey or otherwise dispose of, or so agree to sell,
transfer, convey or dispose of, all or any material portion of
its assets; or (v) fail to perform its obligations under this
Agreement and the other Transaction Documents.
10. Affirmative Covenants. The Company covenants to and
with Calim that, until the Note is paid in full and all other
obligations of the Company to Calim under this Agreement, the
Note and the Security Documents have been fully performed in
accordance with their terms that the Company will (i) comply in
all material respects with all applicable requirements of law;
(ii) provide Calim and its attorneys, accountants, consultants
and contractors with access to all such corporate information
regarding the Company, its business, assets and finances as Calim
may reasonably require to (A) protect its interest hereunder and
under the other Transaction Documents and (B) perform the
services contemplated by Section 4 above with respect to the
Placement ; (iii) make all filings with the Commission under the
1934 Act as and when required under the 1934 Act or under the
regulations promulgated thereunder; (iv) provide Calim with
contemporaneous notice of all notices sent to the Company's
holders and copies of all notices and filings made with the
Commission and with any other federal or state agencies of
appropriate jurisdiction; and (v) provide Calim with reasonable
prior notice of any meetings of, or actions contemplated by, the
Company's Board of Directors.
11. Certain Special Agreements. In addition to its other
covenants and agreements contained in this Agreement and the
other Transaction Agreements, the Company hereby agrees that,
unless the prior written consent of Calim is given, which consent
may be withheld or given in its sole discretion (i) no amount of
the Loan shall be used by the Company to pay any indebtedness of
the Company; (ii) on or prior to the Maturity Date, all
outstanding convertible securities of the Company, a true and
complete list of which is provided on Exhibit 11(ii) to this
Agreement, shall either (A) be converted into shares of Common
Stock at a price per share at not less than $0.25 or (B) have the
respective maturity dates thereof extended on terms and
conditions reasonably acceptable to Calim; and (iii) the Company
shall cause those certain management employees and members of the
Board of Directors of the Company described on Exhibit 11(iii) to
this Agreement (the "Management") to defer their existing levels
of compensation, as listed opposite their respective names on
Exhibit 11(iii), to the Maturity Date; provided that in the event
that, prior to the Maturity Date (A) the Company records two
successive months of Positive Cash Flow (as hereinafter defined)
and (B) the Company has demonstrated to the satisfaction of Calim
that it possesses an amount, and has irrevocably escrowed for
payment to Calim of such amount, sufficient to pay the Loan in
full on the Maturity Date, then the compensation of the
Management shall be restored to the original levels
Chapeau, Inc.
August 20, 2002
Page 7
specified on Exhibit 11(iii) and the Company shall, to the extent
resources are reasonably available therefor, pay in full all deferred
compensation to the Management on a schedule mutually acceptable
to the Company, the Management and Calim. For purposes of this
Agreement, "Positive Cash Flow" shall mean, for any month, cash
receipts less (x) cash disbursements and (y) the amount of the
Management compensation deferred for the month.
12. Defaults. It shall be an event of default (each, an
"Event of Default") hereunder if (i) the Company fails to make
any payment of principal of or interest on the Note as and when
due and, other than with respect to required payments on the
Maturity Date, the continuation thereof for a period of five
days; (ii) any representation or warranty of the Company made
herein or in any other Transaction Document proves to have been
untrue or misleading in any material respect when made; (iii) the
Company fails to perform any of its obligations contained in this
Agreement or in any other Transaction Document and the
continuation thereof for a period of 30 days without cure;
provided that if any such event is not reasonably subject to cure
within 30 days, then such 30-day period shall not be applicable;
(iv) the Company is in default under the terms of any other
Transaction Document and, other than with respect to a default in
the payment of money, the continuation thereof for a period of 30
days without cure; provided that if any such event is not
reasonably subject to cure within 30 days, then such 30-day
period shall not be applicable; (v) the Company shall have failed
to perform any terms, conditions, covenants or warranties of any
other material agreements, notes, security agreements, guaranties
or other documents or obligations between it and any other
person, and such failure shall continue beyond any applicable
grace or cure period and the other party thereto has not waived,
deferred or otherwise forgiven the applicable breach; (vi) the
Company shall (A) commence any case, proceeding or other action
relating to it in bankruptcy or seek reorganization, liquidation,
dissolution, winding-up, arrangement, composition, readjustment
of debt or other similar act or law of any jurisdiction, domestic
or foreign, now or hereafter existing, (B) apply for a receiver,
custodian or trustee of it or for all or a substantial part of
its property (C) or make an assignment for the benefit of
creditors; or (vii) any case, proceeding or other action against
the Company shall be commenced in bankruptcy or shall seek
reorganization, liquidation, dissolution, winding-up,
arrangement, composition or readjustment of its debts, or any
other relief, under any bankruptcy, insolvency, reorganization,
liquidation, dissolution, arrangement, composition, readjustment
of debt or other similar act or law of any jurisdiction, domestic
or foreign, now or hereafter existing; or a receiver, custodian
or trustee of the Company or for all or a substantial part of its
property shall be appointed; or a warrant of attachment,
execution or distraint, or similar process, shall be issued
against any substantial part of the property of the Company; and
in each such case such condition shall continue for a period of
30 days undismissed, undischarged or unbonded.
13. Remedies. Upon the occurrence of any Event of Default,
Calim shall have the right to exercise or take any one or more of
the following remedies or actions:
Chapeau, Inc.
August 20, 2002
Page 8
(a) Declare the Loan (with accrued interest thereon) and
all other amounts owing under this Agreement, the Note and any
other Security Document to be due and payable forthwith,
whereupon the same shall immediately become due and payable,
without presentment, demand, protest, notice of intent to
accelerate, notice of acceleration, or other notice of any kind,
all of which are hereby expressly waived, except as otherwise
expressly provided herein;
(b) Pursue all remedies as may be available under the terms
of any Security Document, or as may otherwise be provided under
the Uniform Commercial Code, including without limitation
foreclosure of the liens, mortgages and security interests
created under the Security Documents;
(c) By suit for damages or injunction, or other suit,
action or proceeding at law or in equity, enforce all rights of
Calim under this Agreement and the other Transaction Documents,
including without limitation foreclosure, sale and repossession
rights under the terms of any applicable Security Document;
(d) By action or suit in equity, enjoin any acts or things
that may be unlawful or in violation of the rights of Calim; and
(e) In addition, pursue any and all remedies or rights
provided by law or at equity.
14. Non-Exclusive Remedies. No remedy provided for herein
or in any other Transaction Document is intended to be exclusive
of any other remedy, except to the extent otherwise expressly
provided, and each and every such remedy shall be cumulative. No
failure to exercise and no delay in exercising, on the part of
Calim, any right, power or privilege hereunder, shall operate as
a waiver thereof; nor shall any single or partial exercise of any
other right, power or privilege. The rights and remedies
provided herein and in the Security Documents are cumulative and
not exclusive of any rights or remedies provided by law.
15. Amendments. No amendment, supplement, waiver or
modification to this Agreement or any other Transaction Document
shall be effective unless it is in writing and signed by the
Company and Calim.
16. Notices. All notices, requests and demands to or upon
the respective parties hereto shall be effective and shall be
deemed to have been duly given or made, unless otherwise
expressly provided herein, when deposited in the mail, postage
prepaid, or when made by hand delivery or recognized commercial
overnight delivery ser vice and addressed:
Chapeau, Inc.
August 20, 2002
Page 9
If to the Company: Chapeau, Inc.
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with a copy to: T. ▇▇▇▇ ▇▇▇▇▇, Esq.
Manatt, ▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, LLP
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If to Calim: Calim Private Equity, LLC
P. O. ▇▇▇ ▇▇▇▇
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Attention: ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
with a copy to: ▇▇▇▇ ▇. ▇▇▇▇▇▇, Esq.
▇▇▇▇▇▇ - ▇▇▇▇▇▇▇▇▇▇, LLP
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Addresses to which notices shall be sent may be changed by
providing each party with notice of the change in address in the
method provided above.
17. Survival of Representation and Warranties. All
representations and warranties made by the Company in this
Agreement and in any other Transaction Document or certificate or
statement delivered pursuant hereto or in connection with the
Loan or the other transactions contemplated hereby shall survive
the execution and delivery of this Agreement, the Closing and the
delivery of the Note and the Security Documents.
18. Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns, except that the Company
may not assign or transfer any of its rights or obligations under
this Agreement without the prior written consent of Calim, and
any such attempted assignment or transfer shall be void and of no
force and effect.
19. Counterparts. This Agreement may be executed by the
parties on any number of separate counterparts; and all of the
counterparts taken together shall be deemed to constitute one and
the same instrument. Additionally, a facsimile counterpart of
this Agreement shall have the same effect as an originally
executed counterpart.
Chapeau, Inc.
August 20, 2002
Page 10
20. Governing Law. This Agreement, and the rights and
obligations of the parties under this Agreement shall be governed
by, and construed and interpreted in accordance with, the laws of
the State of Delaware (without reference to the choice of law
provisions of state law) except with respect to matters of law
concerning the internal corporate affairs of any corporate entity
which is a party to or the subject of this Agreement, and as to
those matters the law of the jurisdiction under which the
respective entity derives its powers shall govern.
21. Severability. If any section, clause or provision of
this Agreement is ruled invalid or unenforceable by a court of
competent jurisdiction, the invalidity or unenforceability
thereof shall not affect any of the remaining sections, clauses
or provisions hereof or thereof, and this Agreement shall
continue in full force and effect as if such invalid or
unenforceable provision had not been contained therein.
22. Payment of Fees and Expenses. The Company agrees to
pay Calim a placement fee equal to $50,000 simultaneously with
the Closing; provided that at its election, the Company may defer
payment of $37,500 of such fee until the first to occur of (i)
Positive Cash Flow or (ii) October 31, 2002. Further, in the
event the Closing occurs, the Company agrees to pay all of
Calim's reasonable legal and other fees incurred in connection
with the negotiation, execution and delivery and performance of
this Agreement and the other Transaction Documents, which the
Company hereby authorizes Calim to include within and deduct from
the amount of any one or more Requests made hereunder.
23. Entire Agreement. This Agreement, the Note, the
Security Agreement, the Option Agreement, the Advisory Agreement
and the other Transaction Documents constitute the entire
agreement of the parties with respect to the subject matter
hereof and thereof, and supercede, merge or render void any and
all prior agreements or understandings between the parties, oral
or written, with respect to the subject matter hereof and
thereof.
[Remainder of Page Intentionally Left Blank]
Chapeau, Inc.
August 20, 2002
Page 11
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered as of August 14, 2002.
CHAPEAU, INC.
By: /s/ ▇▇▇ ▇. ▇▇▇▇▇▇▇▇
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Authorized Officer
CALIM PRIVATE EQUITY, LLC
By: /s/ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
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Managing Director
EXHIBIT 1
Form of Note
PROMISSORY NOTE
Aspen, Colorado August 14, 2002 $500,000.00
For value received, on or before February 1, 2003 the
undersigned (the "Borrower") promises to pay to the order of
Calim Private Equity, LLC, a Delaware limited liability company
(the "Payee"), at its office in Aspen, Colorado, the sum of FIVE
HUNDRED THOUSAND AND NO/100 ($500,000.00), or so much thereof as
shall be advanced, in legal tender money of the United States,
with interest thereon from the date of advance until default or
maturity at a per annum rate equal to 12 percent. Interest shall
be computed on the basis of a year of 360 days, consisting of 12
months of 30 days each, but to the extent such computation of
interest might cause the rate of interest borne by this Note to
exceed the Maximum Rate (as hereinafter defined), such interest
shall be computed on the basis of a 365 day or 366 day year, as
the case may be.
All past due principal and interest on this Note shall bear
interest after maturity (whether by acceleration or otherwise)
until paid at an interest rate per annum which, from day to day,
shall be equal to the lesser of (i) the Maximum Rate or (ii) the
rate of 18 percent per annum.
Accrued interest on this Note shall be payable quarterly,
commencing on November 1, 2002, with the next payment on February
1, 2003 when, together with all principal hereon, all remaining
accrued and unpaid interest hereon shall be due at maturity. The
Borrower may prepay all or any part of this Note at anytime
without penalty with five days prior written notice to the Payee.
THIS LOAN IS PAYABLE IN FULL AT MATURITY. THE BORROWER MUST
REPAY THE ENTIRE PRINCIPAL BALANCE OF THE LOAN AND UNPAID
INTEREST THEN DUE. THE PAYEE IS UNDER NO OBLIGATION TO REFINANCE
THE LOAN AT THAT TIME. THE BORROWER WILL, THEREFORE, BE REQUIRED
TO MAKE PAYMENT OUT OF OTHER ASSETS THAT THE BORROWER MAY OWN, OR
THE BORROWER WILL HAVE TO FIND ANOTHER LENDER, WHICH MAY BE, IF
BOTH PARTIES SO AGREE AT SUCH TIME, THE PAYEE, WILLING TO LEND
THE BORROWER THE MONEY. IF THE BORROWER REFINANCES THIS LOAN AT
MATURITY, THE BORROWER MAY HAVE TO PAY SOME OR ALL OF THE CLOSING
COSTS NORMALLY ASSOCIATED WITH A NEW LOAN EVEN IF THE BORROWER
OBTAINS REFINANCING FROM THE PAYEE.
It is understood and agreed that failure to pay any amount
on this Note when due shall at the election of the Payee mature
without notice, demand or presentment, the entire principal
balance of this Note then unpaid. If the Payee requires the
services of an attorney to enforce the payment of this Note, or
if this Note is collected through any law suit, probate,
bankruptcy or other judicial proceeding, the Borrower agrees to
pay the Payee all court costs, reasonable attorney's fees and
expenses, and other collection costs incurred by the Payee.
The extension of time of payment of any amount due hereon,
or this entire Note, at any time or times shall not operate to
release the security for this obligation or any person liable
hereon in any manner. All makers, signers, guarantors, sureties
and endorsers severally waive (to the extent
permitted by law) diligence, demand, notice, presentment, notice
of intention to accelerate, notice of acceleration, protest and
notice of dishonor. Failure of the Payee to exercise any right
given to it hereunder shall not be deemed laches or a waiver thereof,
but any such right shall be exercised by the Payee at any time after
default by any person hereon and against any security or person
liable hereon.
The Borrower and the Payee intend to conform strictly to the
applicable federal or state usury laws now or hereafter in force
with respect to this Note. To such end (i) the aggregate of all
interest and other charges constituting interest under such
applicable usury laws and contracted for, chargeable or
receivable under all documents and instruments now or hereafter
executed in connection with this Note shall never exceed the
maximum amount of interest, nor produce a rate in excess of the
maximum contract rate of interest that the Payee is authorized to
charge the Borrower under such applicable usury laws (the
"Maximum Rate"); (ii) if any excess interest is provided for, it
shall be deemed a mistake, and the excess shall, at the option of
the Payee, either be refunded to the Borrower or credited on the
unpaid principal balance of this Note, and this Note shall be
automatically reformed to permit for only the collection of
interest computed at the Maximum Rate; (iii) in determining the
maximum amount of interest that the Payee may charge to the
Borrower, all interest shall be amortized, prorated, allocated
and spread over the entire term of this Note to the full extent
permitted by applicable federal or state law; and (iv) in the
event that this Note is prepaid or the maturity is accelerated,
unearned interest shall be cancelled and, if theretofore paid,
shall at the option of the Payee, either be refunded to the
Borrower or credited on the unpaid balance of this Note.
This is the Note referred to in, and is entitled to the
rights and benefits of, a Security Agreement and Letter Loan
Agreement each dated as of the date hereof between the Borrower
and the Payee, and is entitled to the benefits and terms thereof,
each of which are incorporated herein by this reference.
This Note shall be governed by and construed in accordance
with the applicable laws of the State of Delaware and the laws of
the United States of America applicable to transactions in the
State of Delaware.
CHAPEAU, INC.
By: /s/ ▇▇▇ ▇. ▇▇▇▇▇▇▇▇
-----------------------
Authorized Officer
2
EXHIBIT 2
Form of Request
BORROWING REQUEST
CHAPEAU, INC. a Utah corporation (the "Company"), hereby
makes this request for a borrowing (the "Request") to Calim
Private Equity, LLC, a Delaware limited liability company
("Calim"), pursuant to the terms and provisions of a Letter Loan
Agreement between the Company and Calim dated August 14, 2002
(the "Agreement").
1. Definitions. Unless otherwise defined or the context
otherwise requires, capitalized terms used in this Request shall
have the meanings assigned them in the Agreement.
2. Amount. The Company hereby requests an advance on the
Loan (the "Advance") by Calim pursuant to the Agreement in the
amount of $______________. The Company requests the Advance by
made on or before __________________ (which date is no sooner
than five days from the date of this Request), by transmission of
immediately available funds by wire to the Company's account in
accordance with othe wiring instructions attached to this Request
OR o the wiring instructions last furnished by the Company to
Calim.
3. Purposes. The purposes for which the Advance is being
requested are:__________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
4. Budget. Attached to this Request is a budget for the
month to which this Request pertains, providing in reasonable
detail the Company's expected uses of funds advanced pursuant to
this Request and other applicable financial projections for such
month.
5. Representations. The Company represents and warrants to
Calim that (i) the Company is in conformity with the terms and
provisions of each of the Transaction Documents and no Event of
Default or event which, with the passage of time or the provision
of notice or both, would constitute an Event of Default, has
occurred and is continuing, and (ii) the representations and
warranties of the Company contained in the Transaction Documents
are true and correct in all material respects as of the date of
this Request.
DATED:________, 2002
CHAPEAU, INC.
By:____________________________
Authorized Officer
EXHIBIT 3
Security Agreement
SECURITY AGREEMENT
THIS SECURITY AGREEMENT is made and entered into as of
August 14, 2002, by and between CHAPEAU, INC., a Utah corporation
(the "Debtor"), and CALIM PRIVATE EQUITY, LLC, a Delaware limited
liability company (the "Secured Party").
RECITALS
WHEREAS, the Secured Party and the Debtor have entered into
a letter loan agreement dated as of the date hereof (the "Loan
Agreement"), pursuant to which the Secured Party may make a loan
to the Debtor in an amount not to exceed $500,000 (the "Loan");
and
WHEREAS, as a condition to making the Loan, the Secured
Party has required that the Debtor grant it a lien and security
interest in and to all of the Debtor's properties and assets (as
hereinafter more particularly defined, the "Collateral") on the
terms provided herein,
NOW, THEREFORE, in consideration of the foregoing and the
mutual terms and provisions contained herein, the parties hereto
agree as follows:
1. Defined Terms. All terms used herein which are defined
in Article 1 or Article 9 of the UCC shall have the meanings
assigned them therein unless otherwise defined in this Agreement.
All references to the plural herein shall also mean the singular
and to the singular shall also mean the plural. All references
to any Person shall include its successors and assigns. Unless
otherwise specified, the words "hereof," "herein," "hereunder,"
"this Agreement" and words of similar import shall refer to this
Agreement as a whole and not any particular provision of this
Agreement and as this Agreement now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or
replaced. Any accounting term used herein, unless otherwise
defined in this Agreement, shall have the meaning customarily
given to such term in accordance with GAAP. For purposes of this
Agreement, unless otherwise defined or the context otherwise
requires, capitalized terms used herein shall have the meanings
assigned them in the Loan Agreement or the respective meanings
given to them below:
"Collateral" means those properties and assets of the Debtor
securing the repayment of the Obligations, as more particularly
described in Section 2 below.
"Event of Default" means any of the events described in
Section 8 below.
"GAAP" means generally accepted accounting principles in the
United States, consistently applied.
"Obligations" means any and all obligations, liabilities and
indebtedness of every kind, nature and description owing by the
Debtor to the Secured Party, including (i) principal, interest,
charges, fees, costs and expenses, however evidenced, whether as
principal, surety, endorser, guarantor or otherwise, whether
arising under the Note, the Loan Agreement, this Agreement or
otherwise, whether now existing or hereafter arising, whether
arising before, during or after the
initial or any renewal term of the Note, the Loan Agreement or
this Agreement or after the commencement of any case with respect
to the Debtor under the United States Bankruptcy Code or any
similar statute (including without limitation the payment of
interest and other amounts which would accrue and become due but
for the commencement of such case), whether direct or indirect,
absolute or contingent, joint or several, due or not due, primary
or secondary, liquidated or unliquidated, secured or unsecured,
and however acquired by the Secured Party, and (ii) the strict
performance and observance of each and every provision of the
Loan Agreement, this Agreement and each of the other Transaction
Documents.
"Obligor" means any other guarantor, endorser, acceptor,
surety or other person liable on or with respect to the
Obligations or who is the owner of any property which is security
for the Obligations, other than the Debtor.
"Person" means any individual, sole proprietorship,
partnership, corporation, business trust, unincorporated
association, joint stock corporation, trust, joint venture or
other entity or any government or any agency or instrumentality
or political subdivision thereof.
"Records" means all of the Debtor's present and future books
of account of every kind or nature, purchase and sale agreements,
invoices, ledger cards, bills of lading and other shipping
evidence, statements, correspondence, memoranda, credit files and
other data relating to the Collateral or any account debtor,
together with the tapes, disks, diskettes and other data and
software storage media and devices, file cabinets or containers
in or on which the foregoing are stored, including without
limitation any rights of the Debtor with respect to the foregoing
maintained with or by any other Person.
"State" means the State of Delaware.
"UCC" means the Uniform Commercial Code of the State, as
amended, or, as applicable, the Uniform Commercial Code of any
other state in which Collateral is located or pursuant to the
laws of which is subject.
2. Grant of Security Interest. To secure payment and
performance of all Obligations, the Debtor hereby grants to the
Secured Party a continuing security interest in, a lien upon, and
a right of set off against, and hereby assigns to the Secured
Party as security, all of the Debtor's assets, both tangible and
intangible, including without limitation the Records, all
accounts receivable, accounts, chattel paper, documents, choses
in action, instruments, promissory notes, general intangibles,
inventories, goods-in-process, goods-in-transit, equipment,
furniture, furnishings, patent registrations, trade names and
fixtures, and any other property of the Debtor whatsoever,
whether now owned or hereafter acquired or existing, and wherever
located (collectively, the "Collateral"), and all products and
proceeds of the foregoing, in any form, whether from sale,
disposition or otherwise, including without limitation insurance
proceeds and any claims against third parties for loss or damage
to or destruction of any or all of the foregoing.
3. Representations and Warranties. The Debtor represents
and warrants unto the Secured Party, with respect to itself and
the Collateral, as follows:
2
(a) All of the Collateral is and shall be kept at the
address specified for the Debtor in Section 16 of the Loan
Agreement, which address is also the chief place of business and
chief executive office of the Debtor and the office where the
Debtor keeps and maintains the Records;
(b) Except for the security interests created by this
Agreement and the other Transaction Documents and except as
described in the Schedule of Exceptions attached as Exhibit 8 to
the Loan Agreement, the Debtor is the legal and beneficial owner
of the Collateral free and clear of any lien, security interest,
option or other charge or encumbrance whatsoever, and no other
financing statement or similar document used to perfect and
preserve a security interest under the laws of any jurisdiction
(a "Financing Statement") covering all or any part of the
Collateral is on file in any recording office, except such as may
have been filed in favor of the Secured Party relating to this
Agreement or, if applicable, for which fully executed and record
able complete releases of which have been delivered to or at the
direction of the Secured Party contemporaneously herewith;
(c) The Debtor has exclusive possession and control of the
Collateral;
(d) This Agreement creates a valid and perfected security
interest in the Collateral, securing the payment and performance
of the Obligations, and all the Debtor will use its best efforts
in cooperating with the Secured Party to ensure that all filings
and other actions necessary or desirable to perfect and protect
such security interest will be taken;
(e) No consent of any other person or entity and no
authorization, approval or other action by, and no notice to or
filing with, any governmental authority or regulatory body is
required (i) for the grant by the Debtor of the security interest
granted hereby or for the execution, delivery or performance of
this Agreement or any other Transaction Document by the Debtor;
(ii) for the perfection or maintenance of the pledge, assignment
and security interest created hereby (including the first
priority nature of this pledge, assignment and security
interest); or (iii) for the exercise by the Secured Party of the
rights provided for in this Agreement or the remedies in respect
of the Collateral pursuant to this Agreement or the other
Transaction Documents; and
(f) There are no conditions precedent to the effectiveness
of this Agreement that have not been satisfied or waived by the
Debtor.
4. Other Assurances. In connection with the execution and
delivery hereof:
(a) The Debtor agrees that from time to time, at the
expense of the Debtor, the Debtor will promptly execute and
deliver all further instruments and documents, and take all
further action, that may be reasonably necessary or reasonably
desirable, or that the Secured Party may reasonably request, in
order to perfect and protect the security interest granted or
purported to be granted hereby or to enable the Secured Party to
exercise and enforce its rights and remedies hereunder with
respect to the Collateral. Without limiting the generality of
the foregoing, upon request by the Secured Party, the Debtor will
execute and file such Financing Statements or continuation
statements, mortgages, assignments, proofs of interest,
collateral assignments and amendments thereto, and such other
instruments or notices, as may be reasonably necessary or
reasonably desirable, or as the Secured Party may reasonably
request, in order to perfect and preserve the pledge, assignment
and security interest granted or purported to be granted hereby.
3
(b) The Debtor hereby authorizes the Secured Party to file
one or more Financing Statements or continuation statements, and
amendments thereto, relating to all or any part of the Collateral
without the signature of the Debtors where permitted by law. A
photocopy or other reproduction of this Agreement or any
Financing Statement covering the Collateral or any part thereof
shall be sufficient as a Financing Statement where permitted by
law.
5. Requirements With Respect to Collateral. With respect
to the Collateral, the Debtor hereby covenants and agrees that,
until all Obligations have been fully satisfied:
(a) Unless the Secured Party otherwise agrees in writing,
the Debtor shall keep the Collateral at the place specified in
Section 3(a) above;
(b) The Debtor shall pay promptly when due all property and
other taxes, assessments and governmental charges or levies
imposed upon, and all claims against the Collateral;
(c) The Debtor will keep the Collateral in good order and
repair and will not waste or destroy the Collateral or any part
thereof;
(d) The Debtor will not use the Collateral in violation of
any statute or ordinance and the Secured Party will have the
right to examine and inspect Collateral at any reasonable time.
(e) Except for the sale of inventory and the collection of
accounts in the ordinary course of business, the Debtor will not,
without the prior written consent of the Secured Party, sell,
contract to sell, lease, encumber or dispose of the Collateral or
any interest therein; and
(f) The Debtor shall, at its own expense, maintain
insurance with respect to the Collateral in such amounts and
against such risks as is customarily carried by companies engaged
in similar businesses and shall cause the Secured Party to be
named under such polices as an additional insured or loss payee;
6. Secured Party May Perform. Upon the failure or refusal
of the Debtor to perform any agreement or obligation contained
herein as and when required, following the passage of a
reasonable period of time (which shall, except to the extent
otherwise expressly provided herein, in no event exceed ten days)
after provision of notice from the Secured Party, the Secured
Party may perform, or cause performance of, such agreement or
obligation, and the reasonable expenses of the Secured Party
incurred in connection therewith shall be payable by the Debtor
pursuant to Section 10 below.
7. Secured Party's Duties. The powers conferred on the
Secured Party hereunder are solely to protect its interest in the
Collateral and shall not impose any duty upon the Secured Party
to exercise any such powers. The Secured Party shall have no
duty as to any of the Collateral, or as to the taking of any
necessary steps to preserve rights against prior parties or any
other rights pertaining to any of the Collateral. The Secured
Party shall be deemed to have exercised reasonable care in the
custody and preservation of any of the Collateral which may come
into its possession if any such of the Collateral is accorded
treatment substantially equal to that which the Secured Party
accords its own property.
4
8. Event of Default. It shall be an Event of Default
hereunder if an "Event of Default," within the meaning of the
Loan Agreement, occurs and is continuing.
9. Remedies. If an Event of Default exists and is
continuing, in addition to any other remedies that may be
available at law or in equity:
(a) The Secured Party may exercise in respect of the
Collateral, in addition to other rights and remedies provided for
herein, in any of the other Loan Documents or otherwise available
to the Secured Party, all the rights and remedies of a secured
party on default under the UCC and also may (i) require the
Debtor to, and the Debtor hereby agrees that the Debtor will at
the Debtor's expense and upon request of the Secured Party
forthwith, assemble all or part of the Collateral as directed by
the Secured Party and make the Collateral available to the
Secured Party at a place to be designated by the Secured Party
which is reasonably convenient to both parties, and (ii) without
notice except as specified below, sell the Collateral or any part
thereof in one or more parcels at public or private sale, at the
Secured Party's offices or elsewhere, for cash, on credit or for
future delivery, and upon such other terms as the Secured Party
may deem commercially reasonable. The Debtor agrees that, to the
extent notice of sale shall be required by law, at least ten
days' notice to the Debtor of the time and place of any public
sale or the time after which any private sale is to be made shall
constitute reasonable notification. The Secured Party shall not
be obligated to make any sale of the Collateral regardless
whether a notice of sale has been given. The Secured Party may
adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale
may, without further notice, be made at the time and place to
which it was so adjourned;
(b) The Secured Party may notify account debtors to pay any
accounts owed to the Debtor to or at the direction of the Secured
Party; and the Secured Party may notify any other parties to
leases, contracts or other arrangements with the Debtor that
constitute Collateral hereunder of the Secured Party's rights
hereunder and therein;
(c) All cash proceeds received by the Secured Party in
respect of any sale of, collection from, or other realization
upon all or any part of the Collateral may, in the discretion of
the Secured Party, be held by the Secured Party as collateral
for, and/or then or at any time thereafter be applied (after
payment of any amounts payable to the Secured Party pursuant to
Section 10 below) in whole or in part by the Secured Party in
payment of the Obligations. Any surplus of such cash or cash
proceeds held by the Secured Party and remaining after payment in
full of all the Obligations shall be paid over to the Debtor or
to whomsoever may be lawfully entitled to receive such surplus;
and
(d) All payments received by the Debtor under or in
connection with any of the Collateral shall be received in trust
for the benefit of the Secured Party, shall be segregated from
other funds of the Debtor and shall be forthwith paid over to the
Secured Party in the same form as so received.
10. Indemnity And Expenses.
The Debtor agrees to indemnify the Secured Party from and
against any and all claims, losses and liabilities (including
reasonable attorneys' fees), and will upon demand pay to the
Secured Party the amount of any and all reasonable expenses,
including the reasonable fees and expenses of its counsel and of
any experts and agents, which the Secured Party may incur as a
5
result of the occurrence of a default by the Debtor in the
payment or performance of the Obligations in connection with
(i) the custody, preservation, use or operation of, or the sale
of, collection from, or other realization upon, any of the
Collateral; (ii) the exercise or enforcement of any of the rights
of the Secured Party hereunder; or (iii) the failure by the
Debtor to perform or observe any of the provisions hereof or of
any of the other Transaction Documents.
11. Security Interest Absolute. The Debtor waives any
right to require the Secured Party (i) to proceed against any
other Person in respect of the Obligations rather than the
Debtor; (ii) to proceed against or exhaust the Collateral or any
other security or collateral granted by the Debtor; or (iii) to
pursue any other remedy in the Secured Party's power whatsoever.
All rights of the Secured Party and the pledge, assignment and
security interest hereunder, and all obligations of the Debtor
hereunder, shall be absolute and unconditional, irrespective of
(A) any lack of validity or enforceability of this Agreement or
any other Transaction Document or any other agreement or
instrument relating thereto; (B) any change in the time, manner
or place of payment of, or in any other term of, all or any of
the Obligations, or any other amendment or waiver of or any
consent to any departure from the terms and provisions of this
Agreement or any other Transaction Document, including without
limitation any increase in the Obligations resulting from the
extension of additional credit to the Debtor in respect of the
Obligations, or otherwise; (C) any taking, exchange, release or
non-perfection of any other collateral, for all or any part of
the Obligations; (D) any manner of application of the Collateral,
or proceeds thereof, to all or any of the Obligations, or any
manner of sale or other disposition of any of the Collateral for
all or any of the Obligations or any other assets of the Debtor
or any Obligor in respect of the Obligations; (E) any change,
restructuring or termination of the corporate structure or
existence of any Obligor in respect of the Obligations; or
(F) any other circumstance which might otherwise constitute a
defense available to, or a discharge of, any Obligor in respect
of the Obligations.
12. Amendments, Consents And Waivers. No amendment to this
Agreement shall be valid or enforceable unless made in writing
signed by each party hereto, and no waiver of any provision of
this Agreement, and no consent to any departure by the Debtor
herefrom, shall be effective unless given or made in writing and
signed by the Secured Party; and then such waiver or consent
shall be effective only in the specific instance and for the
specific purpose for which given.
13. Notices. Any notice, request or other communication
required or permitted to be given hereunder shall be given in the
manner provided for in Section 16 of the Loan Agreement.
14. Continuing Security Interest. This Agreement shall
create a continuing security interest covering the Collateral and
shall (i) remain in full force and effect until the payment in
full of the Obligations and all other amounts payable under this
Agreement or under any other Security Document; (ii) be binding
upon the Debtor, its successors and assigns; and (iii) inure to
the benefit of, and be enforceable by the Secured Party and its
respective successors, transferees and assigns. Upon the later
of the payment in full of the Obligations and all other amounts
payable under this Agreement, the Note, the Loan Agreement and
the other Security Documents, the security interest granted
hereby shall terminate and all rights to the Collateral shall
revert to the Debtor. Upon any such termination, the Secured
Party, at the Debtor's expense, shall execute and deliver to the
Debtor such documents as the Debtor shall reasonably request to
evidence such termination.
6
15. Governing Law; Terms. This Agreement shall be governed
by and construed in accordance with the laws of the State of Delaware,
except to the extent that the validity or perfection of the security
interest hereunder, or remedies hereunder, in respect of any particular
Collateral are required to or may at the election of the Secured Party,
be governed by the laws of a jurisdiction other than the State of
Delaware.
16. Counterparts. This Agreement may be executed in any
number of counterparts, each of which when so executed and
delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument.
EXECUTED as of August 14, 2002.
CHAPEAU, INC.
By: /s/ ▇▇▇ ▇. ▇▇▇▇▇▇▇▇
----------------------------
Authorized Officer
CALIM PRIVATE EQUITY, LLC
By: /s/ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
----------------------------
Managing Director
7
EXHIBIT 4
Terms of Placement
1. Securities. Five year convertible, interest bearing
bonds.
2. Maximum Amount. $1,500,000.
3. Authorized Denominations. Each bond shall be in
denominations of $1,000, and each such denomination
shall constitute one "bond" for purposes of conversion.
4. Interest. Interest shall accrue at the rate of ten
percent per annum and be payable semiannually,
commencing with the first day of the fifth month
following the consummation of the Placement.
5. Optional Redemption. Bonds not redeemable at the
option of the Company for two years following
consummation of the Placement.
6. Conversion. Each bond will be convertible, in whole or
in part at the option of the holder, into 2,000 units,
each unit comprised of (i) one share of Common Stock
and (ii) one warrant to purchase a share of Common
Stock at $1.00 per share, with each warrant to expire
two years from the date of issue.
7. Conversion Reset. The conversion price of the bonds
will be subject to annual reset to provide for a 20
percent per annum increase in benefit to the holders.
8. Registration Rights. Common Stock received upon
conversion and exercise of warrants to have
registration rights pursuant to a customary
registration rights agreement.
9. Anti-Dilution. The conversion price and warrant
exercise price will be subject to customary anti-
dilution provisions.
10. Failure to Agree. In the event that the Company does
not agree to the terms and provisions of the documents
and instruments governing the Placement, other than to
the extent such terms are provided in this Exhibit 4,
and provided that such failure to agree is reasonable
under the circumstances, then the Company shall be free
to seek alternative financing with third parties on
such terms as it may determine; provided further that
in such event the Company shall continue to observe its
obligations hereunder and under the Advisory Agreement.
EXHIBIT 5
Terms of Bonds
1. Securities. Five year convertible, interest bearing
bonds.
2. Maximum Amount. $500,000.
3. Authorized Denominations. Each bond shall be in
denominations of $1,000, and each such denomination
shall constitute one "bond" for purposes of conversion.
4. Interest. Interest shall accrue at the rate of 12
percent per annum and be payable semiannually,
commencing with the first day of the fifth month
following conversion.
5. Optional Redemption. Bonds not redeemable at the
option of the Company for two years following
conversion.
6. Conversion. Each bond will be convertible, in whole or
in part at the option of the holder, into 6,667 units,
each unit comprised of (i) one share of Common Stock
and (ii) one warrant to purchase a share of Common
Stock at $0.25 per share, with each warrant to expire
two years from the date of issue.
7. Conversion Reset. The conversion price of the bonds
will be subject to annual reset to provide for a 20
percent per annum increase in benefit to the holders.
8. Registration Rights. Common Stock received upon
conversion and exercise of warrants to have
registration rights pursuant to a customary
registration rights agreement.
9. Anti-Dilution. The conversion price and warrant
exercise price will be subject to customary anti-
dilution provision.
EXHIBIT 6
Option Agreement
STOCK OPTION AGREEMENT
by and between
CHAPEAU, INC.
and
Calim Private Equity, LLC
Dated as of August 14, 2002
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement") is made and entered
into as of August 14, 2002 by and between CHAPEAU, INC., a Utah
corporation (the "Company"), and CALIM PRIVATE EQUITY, LLC, a
Delaware limited liability company (the "Optionee").
RECITALS
WHEREAS, the Optionee and the Company have entered into a
Letter Loan Agreement dated as of the date hereof (the "Loan
Agreement"), pursuant to which the Optionee has agreed to make
the Company a loan on the terms and conditions described therein;
and
WHEREAS, as a condition of its agreement to enter into the
Loan Agreement the Optionee has required the Company to issue to
it stock options on the basis specified herein; and
WHEREAS, the Company and the Optionee each desire to agree
upon the following terms and conditions for the grant to the
Optionee of an option to acquire an amount of the Company's
Common Stock, par value US $0.001 each (the "Common Stock"),
NOW, THEREFORE, in consideration of the foregoing and the
mutual terms and provisions contained herein, the parties hereto
agree as follows:
1. Definitions.
Unless otherwise defined or the context otherwise requires,
capitalized terms used in this Agreement shall have the meanings
assigned them in the Loan Agreement.
2. Grant of Option.
The Company hereby grants to the Optionee, on the terms and
conditions hereinafter provided, (the "Option") to purchase up to
1,000,000 shares (each a "Share") of Common Stock (the "Option
Stock"), subject to adjustment pursuant to Section 13 below.
3. Purchase Price.
The purchase price for the Option Stock is US $0.10 per
Share, subject to adjustment pursuant to Section 13 below (the
"Exercise Price"), which the Board of Directors of the Company
(the "Board") has determined is a fair price for the Option Stock
on the date hereof, taking into account all circumstances,
including without limitation the Optionee's agreement to make the
Loan on the conditions specified in the Loan Agreement.
4. Option Term.
The Option shall be exercisable at any time during the period
commencing on the date of this Agreement and ending on the day
immediately preceding the fifth anniversary date of this Agreement
(the "Option Period"). Following the end of the Option
Period, the Option will terminate without further act or deed,
subject to earlier termination as provided in this Agreement.
5. Transferability.
(a) This Agreement, and any rights hereunder, may not be
assigned or transferred by the Optionee except as provided herein
and in accordance with and subject to the provisions of the
United States Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder (the "1933 Act"). Any
purported assignment or transfer made other than in accordance
with this Section 5 shall be null and void and of no force and
effect.
(b) An assignment or transfer of this Agreement, and any
rights hereunder (each a "Transfer") may be made only upon
receipt by the Company of (i) notice of the proposed Transfer and
(ii) if reasonably requested by the Company, an opinion of
counsel reasonably satisfactory to the Company that (A) the
transferee is a person to whom this Agreement may be Transferred
without registration under the Act and (B) such Transfer will not
violate any applicable law or governmental rule or regulation,
including without limitation the Act and any other applicable
federal or state securities law.
(c) Any Transfer permitted hereunder shall be made by
surrender of this Agreement to the Company at its principal
office with an assignment form duly executed and funds sufficient
to pay any applicable transfer tax. In such event the Company
shall, without charge, execute and deliver a new Agreement in the
name of the transferee named in such assignment in the amount so
Transferred, and this Agreement shall be promptly canceled;
provided that in the event that the Optionee shall Transfer this
Agreement and the Option in part, a new Agreement evidencing the
portion of the Option remaining and not so Transferred shall be
issued in the name of the Optionee.
6. Exercise of Option.
(a) The Option shall be exercisable, in whole or in part, by
surrender of this Agreement to the Company at its principal
office, together with written notice, delivered in person or by
certified mail to the Secretary of the Company, which shall:
(I) state the election to exercise the Option, the number of
Shares in respect of which it is being exercised and the
address and tax identification number of the Optionee; and
(ii) be signed by the Optionee, or if the Option is being
exercised by any person or persons other than the Optionee in
compliance with Section 5 above, be signed by the permitted
transferee.
(b) The Optionee shall, together with the notice required by
(a) above, tender, in cash or by certified or bank cashier's
check, payment in full to the Company at its office of the amount
of the Exercise Price for the number of Shares with respect to
which the Option is then being exercised.
2
(c) The Company shall cause Shares to be delivered to or at
the direction of the Optionee as soon as practicable following
payment by the Optionee.
(d) In the event that the Optionee shall exercise the Option
in part, a new Agreement evidencing the portion of the Option
remaining and not so exercised shall be issued in the name of the
Optionee.
7. Optionee's Rights as Shareholder.
The Optionee shall have no rights as a shareholder with
respect to any Option Stock until the date of the exercise of the
Option and the delivery of the Shares.
8. Acquisition for Own Account.
The Optionee hereby represents and warrants to the Company
that the Option Stock to be issued and delivered to the Optionee
pursuant to this Agreement shall be acquired by the Optionee for
investment for the Optionee's own account and not with a view to,
or for, sale or other distribution thereof, and that the Optionee
has no present intention to sell or otherwise distribute any
Option Stock to be issued or delivered to the Optionee pursuant
to this Agreement, except in a manner which will not violate the
provisions of any applicable federal or state securities laws,
rules or regulations.
9. Benefits of Agreement.
This Agreement shall inure to the benefit of and be binding
upon each successor of the Company. All obligations imposed upon
the Optionee and all rights granted to or for the benefit of the
Company under this Agreement shall be binding upon the Optionee's
successors and permitted assigns.
10. Company's Obligations.
The Company shall (i) at all times during the term of the
Option maintain or otherwise reserve and keep available, or cause
the Company to so reserve and keep available, such number of
Shares as will be sufficient to satisfy the requirements of this
Agreement; (ii) pay all original issue and transfer taxes with
respect to the issue and transfer to the Optionee of Option Stock
pursuant to the Option and all other fees and expenses
necessarily incurred by the Company in connection therewith; and
(iii) from time to time use its best efforts to comply with all
laws and regulations which, in the opinion of counsel for the
Company, shall be applicable thereto.
11. Extension and Renewal of Options.
The Board may extend or renew the Option beyond the Option
Period as specified in this Agreement, or accept the surrender of
the Option (to the extent not theretofore exercised).
3
12. No Obligation to Exercise Options.
The granting of the Option shall impose no obligation upon
the Optionee to exercise the Option.
13. Adjustments to Shares.
(a) If outstanding shares of Common Stock shall be subdivided
into a greater number of shares or a dividend in Common Stock
shall be paid in respect of Common Stock, the Exercise Price in
effect immediately prior to such subdivision or at the record
date of such dividend shall simultaneously with the effectiveness
of such subdivision or immediately after the record date of such
dividend be proportionately reduced. If outstanding shares of
Common Stock shall be combined into a smaller number of shares,
the Exercise Price in effect immediately prior to such
combination shall, simultaneously with the effectiveness of such
combination, be proportionately increased. When any adjustment
is required to be made in the Exercise Price, the number of
shares of Common Stock purchasable upon the exercise of the
Option shall be changed to the number determined by dividing (i)
an amount equal to the number of shares issuable upon the
exercise of the Option immediately prior to such adjustment,
multiplied by the Exercise Price in effect immediately prior to
such adjustment, by (ii) the Exercise Price in effect immediately
after such adjustment.
(b) When any adjustment is required to be made in the number
of shares of Common Stock purchasable hereunder or the Exercise
Price pursuant to this Section 13, the Company shall promptly
provide the Optionee with a certificate setting forth (i) a brief
statement of the facts requiring such adjustment; (ii) the
Exercise Price after such adjustment; and (iii) the kind and
amount of stock or other securities or property into which the
Option shall be exercisable after such adjustment.
(c) The Company shall not, by amendment of its Articles of
Incorporation or through a reorganization, 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 or provisions of
this Agreement, but shall at all times in good faith assist in
carrying out all the provisions of this Section 13 and in taking
all such actions as may be necessary or appropriate to protect
the Optionee's rights under this Section 13 against impairment.
14. Loss, Theft, Destruction or Mutilation.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation
of this Agreement and, in the case of less, theft or destruction,
of indemnity or security reasonably satisfactory to it, and upon
reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of this
Agreement if mutilated, the Company will make and deliver a new
Agreement identical in tenor and date in lieu of this Agreement.
4
15. Construction.
This Agreement shall be construed in accordance with, and
shall be governed by, the laws of the State of Delaware, except
to the extent that the laws of the State of Utah might govern the
corporate affairs of the Company.
16. Waiver.
No waiver by any party hereto of any breach of any covenant,
condition or agreement hereof on the part of the parties hereto
to be kept and performed shall be considered to constitute a
waiver of any other covenant, condition or provision, or of any
subsequent breach thereof.
17. Severability.
In the event any court of competent jurisdiction shall
declare any portion of this Agreement to be invalid, the
remainder of this Agreement shall not be invalidated thereby, but
shall remain in full force and effect.
18. Notices.
Unless otherwise provided in this Agreement, no notice,
consent, approval waiver or other communication which may be or
is required or permitted to be given under this Agreement shall
be effective unless given in accordance with Section 16 of the
Loan Agreement.
19. Gender and Number.
Whenever the context thereof requires, references in this
Agreement to the singular number shall include the plural and
vice versa, and words denoting gender shall be construed to
include the masculine, feminine and neuter.
20. Amendment.
All subsequent changes and modifications to this Agreement,
to be valid, shall be by written instrument executed by the
Company and the Optionee, except as otherwise specifically set
forth herein.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the Company and the Optionee have caused
this Agreement to be executed as of the day and year first above
written.
CHAPEAU, INC.
By: /s/ ▇▇▇ ▇. ▇▇▇▇▇▇▇▇
---------------------------
Authorized Officer
CALIM PRIVATE EQUITY, LLC
By: /s/ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
---------------------------
Managing Director
6
EXHIBIT 8
Schedule of Exceptions
SCHEDULE OF EXCEPTIONS
In connection with that certain Loan Agreement dated as of
August 14, 2002 (the "Loan Agreement") by and between Chapeau,
Inc., a Utah corporation (the "Company") and Calim Private Equity,
LLC ("Calim"), the Company hereby delivers this Schedule of
Exceptions to the Company's representations and warranties given
in the Loan Agreement. The section numbers in this Schedule
correspond to the section numbers in the Loan Agreement;
provided, however, that any information disclosed herein under
any section number shall be deemed to be disclosed and
incorporated in any other section of the Loan Agreement where
such disclosure clearly applies to such other section on its
face. Capitalized terms used but not defined herein shall have
the same meanings given them in the Loan Agreement.
Section 8(a). No exceptions.
Section 8(b). The Company has issued convertible notes and stock
options as follows:
1. The Company has issued secured convertible promissory notes
(the "Notes") in an aggregate principal amount of approximately
$830,000. The Notes convert, at the option of each holder, into
Common Stock at a conversion price of $0.25 per share. In
addition, each holder of a Note is entitled to receive additional
shares of Common Stock pursuant to a Second Amendment and
Forbearance Agreement (the "Second Amendment") to be entered into
by the Company and each noteholder on or prior to the Closing
Date. The maximum aggregate number of shares of Common Stock
issuable to the holders of Notes pursuant to the Second Amendment
is approximately 830,000 shares.
2. The Company has reserved 3 million shares for issuance upon
exercise of stock options and there are currently options for 2.3
million shares of Common Stock outstanding.
Section 8(c). The holders of the Notes currently have a first
priority perfected lien on substantially all of the Company's
assets. The Company, Calim and each holder of a Note will enter
into a subordination agreement prior to the Closing pursuant to
which the lien granted to holders of the Notes will be
subordinated to the lien granted to Calim in connection with the
Loan issued under the Loan Agreement.
Section 8(d). No exceptions.
Section 8(e). The Company has received a collection notice
regarding its past due account with ▇▇▇▇▇▇▇ Publications in the
approximate amount of $10,707.
Section 8(f). Notes in the principal amount of $810,000 are
currently due and payable in full. The Company is entering into
a Second Amendment and Forbearance Agreement with each noteholder
pursuant to which the maturity date of each Note will be extended
to one day after the maturity date of the Calim Note, to be
effective on or prior to the Closing.
Section 8(g). The Company has granted a security interest in all
its assets to holders of the Notes. See Section 8(b) above.
This lien will be subordinated to the lien granted to Calim under
1
the Loan Agreement pursuant to the terms of a subordination
agreement to be entered into by Calim and the holders of such
Notes prior to the Closing.
Section 8(h). Upon execution of the Second Amendment and
Forbearance Agreement, all principal and accrued interest under
the Notes will be due and payable one day after the maturity date
of the Calim Note. In the event that the Company is unable to
repay the Notes on such date, the holders of such Notes may
(subject to the provisions of any applicable subordination
agreement) demand payment and enforce their security interest in
the Company's assets. See Section 8(g) above.
Section 8(i). No exceptions.
Section 8(j). No exceptions.
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EXHIBIT 11(ii)
Outstanding Convertible Securities
Holders of Convertible Notes Original Date of
Principal Note
Amount of
Note
------------------------------ --------- ----------
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ $ 10,000 05/02/02
▇▇▇▇/▇▇▇▇▇ ▇▇▇▇ $ 50,000 12/17/01
Eagle Lake, Inc. $ 50,000 09/10/01
$ 50,000 11/16/01
H. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ $ 100,000 6/10/01
$ 75,000 11/16/01
▇▇▇▇▇ ▇▇▇▇▇ $ 80,000 06/10/01
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ $ 75,000 09/10/01
$ 75,000 11/16/01
▇▇▇▇▇▇ ▇. ▇▇▇▇▇ $ 10,000 06/25/01
▇▇▇▇▇▇/▇▇▇▇▇▇▇▇ ▇▇▇▇ $ 75,000 11/16/01
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ $ 20,000 06/10/01
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ $ 50,000 03/ /02
▇▇▇▇▇▇/▇▇▇▇▇ ▇▇▇▇▇ Foundation $ 100,000 03/05/02
▇▇▇▇▇ ▇. ▇▇▇▇▇▇ $ 10,000 05/03/02
TOTAL: $ 830,000
EXHIBIT 11(iii)
Management Compensation
Name Title Current Deferral Amount
Compensation
-----------------------------------------------------------------------------
▇▇▇ ▇. ▇▇▇▇▇▇▇▇ Chief Executive $175,000 30%
Officer and Director
▇▇▇▇▇▇ ▇. ▇▇▇▇ President, Chief $150,000 30%
Operating Officer
and Director
▇▇▇▇▇▇ ▇. ▇▇▇▇ Director (1) 30%
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ Director (1) 30%
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ Director (1) 30%
(1) Each outside director is paid (i) a retainer fee of $1,000 per month,
(ii) an additional fee of $1,000 for each director meeting attended and
(iii) a fee of $500 for each Board committee meeting attended. The aggregate
monthly fees payable to each outside director will be paid $1,000 in cash and
the balance as a deferred stock payment. Currently, all compensation payable
to outside directors is being deferred and accrued until the Company has
sufficient cash resources.