NOTE AND WARRANT PURCHASE AGREEMENT

 

 

                                                                   EXHIBIT 10.20

 

                            ADVANCED AESTHETICS, INC.

 

                        ANUSHKA PBG ACQUISITION SUB, LLC

 

                        ANUSHKA BOCA ACQUISITION SUB, LLC

 

                         WILD HARE ACQUISITION SUB, LLC

 

                              DISCHINO CORPORATION

 

                                 ADVANCED K, LLC

 

                       NOTE AND WARRANT PURCHASE AGREEMENT

 

         THIS NOTE AND WARRANT PURCHASE AGREEMENT (this "Agreement") is made and

entered into as of March 31, 2004,   by and among   Advanced   Aesthetics,   Inc., a

Delaware   corporation   (the "Parent") and each of Anushka PBG   Acquisition   Sub,

LLC,   a   Delaware   limited   liability   company   ("Anushka   PBG"),   Anushka   Boca

Acquisition Sub, LLC, a Delaware limited   liability   company   ("Anushka   Boca"),

Wild Hare Acquisition Sub, LLC, a Delaware limited liability company ("Wild Hare

Acquisition"),   DiSchino Corporation,   a Florida corporation   ("DiSchino"),   and

Advanced K, LLC, a Delaware   limited   liability   company   ("Advanced K, LLC" and

each of Advanced K, LLC,   Anushka PBG,   Anushka Boca, Wild Hare   Acquisition and

DiSchino being herein called a   "Co-Borrower"),   Technology   Investment   Capital

Corp., as Collateral Agent (in such capacity,   the "Collateral   Agent") and each

of those   persons and entities,   severally and not jointly,   whose names are set

forth on the   Schedule   of   Purchasers   attached   hereto   as   Schedule   I (which

entities and any successors thereto are hereinafter   collectively referred to as

the "Purchasers" and each individually as a "Purchaser").

 

                                    RECITALS

 

         WHEREAS,   the Co-Borrowers   and the Guarantors   (other than the Parent)

are direct or indirect wholly owned Subsidiaries of the Parent;

 

         WHEREAS,   the Obligors seek   financing,   and the   Purchasers   desire to

provide   such   financing   and to   purchase   from   the   Co-Borrowers   of   secured

promissory   notes and from the Parent of   warrants,   for an   aggregate   purchase

price of Ten Million Dollars ($10,000,000);

 

         WHEREAS,   the proceeds   will be used to finance (a) payment of interest

on the secured promissory notes for a two year period, (b) payment of $4,000,000

representing   the cash   portion of the purchase   price under the GK   Acquisition

Documents and (c) general corporate purposes.

 

         NOW   THEREFORE,   in   consideration   of the   foregoing   recitals and the

mutual promises hereinafter set forth, the parties hereto agree as follows:

 

                                       -1-

 

<PAGE>

 

         1. DEFINITIONS.

 

         When used in this   Agreement,   the following terms have the meaning set

forth the below (such meanings being equally applicable to both the singular and

plural forms of the terms defined):

 

         "Additional Equity   Contribution"   shall mean at least $8,000,000 gross

cash   proceeds   from the sale of shares of Series D Preferred   Stock,   par value

$0.01 per share,   of the Parent pursuant to the Securities   Purchase   Agreement,

dated November 4, 2003, between L Capital and the Parent or a similarly situated

investor reasonably acceptable to the Purchaser.

 

         "Affiliate",   as applied to any Person, means any other Person directly

or indirectly   controlling,   controlled by, or under common   control with,   that

Person.   For   the   purposes   of   this   definition,   "control"   (including,   with

correlative meanings, the terms "controlling", "controlled by" and "under common

control   with"),   as applied to any Person,   means the   possession,   directly or

indirectly,   of the power to direct or cause the direction of the management and

policies of that Person,   whether through the ownership of voting   securities or

by contract or otherwise. For purposes of this definition, (a) a Person shall be

deemed to be   "controlled   by" a Person if such   Person   possesses,   directly or

indirectly,   power to vote 10% or more of the securities   having ordinary voting

power for the election of directors   of such Person,   provided   that in no event

shall any   Obligor   be deemed   to be   controlled   by TICC,   (b)   members   of the

immediate family of a Person shall be deemed to be Affiliates of such Person and

(c) members of the board of   directors   or board of managers or similar   body of

the   Parent   and of the   Co-Borrowers   and each   Obligor   shall be   deemed to be

Affiliates of the Obligors.

 

         "Amortization   Date" shall have the meaning assigned thereto in Section

2.2.

 

         "Amortization   Payment"   shall   have the   meaning   assigned   thereto in

Section 2.2.

 

         "Anushka Boca" shall have the meaning given to it in the recitals,.

 

         "Anushka PBG" shall have the meaning given to it in the recitals.

 

         "Anushka   Seller Note" shall mean the   subordinated   promissory note in

the principal amount of $400,000,   dated November 25, 2003, delivered by Anushka

PBG in connection   with the Asset   Contribution   and Exchange   Agreement,   dated

November 4, 2003,   among the Parent,   Anushka PBG, Lord & Foursight,   LLC, d/b/a

Anushka Spa and Sanctuary,   Janice Worth,   Ana Blau, Ford H. Malmin and Anushka,

Inc. and shall include such note as restructured pursuant to Section 5.21.

 

         "Benefit   Arrangement"   shall   have the   meaning   assigned   thereto   in

Section 3.20.

 

         "Balance Sheet" has the meaning assigned thereto in Section 3.12(a).

 

         "Business Day" means any day other than a Saturday, Sunday or any other

day on which   commercial   banks in New York, New York are authorized or required

to close.

 

         "Capital Expenditures" means, for any period, additions to property and

equipment   and other   capital   expenditures   of the Parent and its   Subsidiaries

which, in conformity with GAAP,

 

                                        -2-

 

<PAGE>

 

are included as   "additions   to property,   plant or   equipment" or similar items

which   would be   reflected   in the   consolidated   statement   of cash flow of the

Parent,   including   without   limitation,   property and   equipment   which are the

subject of Capital Leases.

 

         "Capital Lease" means any lease (or other agreement conveying the right

to use property) the   obligations of which are required to be capitalized on the

balance sheet of a Person in accordance with GAAP.

 

         "Capital   Units"   means   (i)   with   respect   to any   Person   that   is a

corporation, any and all shares, interests,   participations or other equivalents

(however   designated   and   whether   voting or   nonvoting)   of   corporate   stock,

including each class of common stock and preferred stock of such Person and (ii)

with   respect   to any   Person   that is not a   corporation,   any and all   general

partnership,   limited partnership,   membership or other equity interests of such

Person.

 

         "Cash"   means   money,   currency   or a credit   balance   in any demand or

deposit account.

 

         "Cash   Equivalents"   means,   as   at   any   date   of   determination,   (i)

marketable   securities (a) issued or directly and unconditionally   guaranteed as

to interest and   principal by the   government of the United States of America or

(b) issued by any agency of the United   States of   America   the   obligations   of

which are backed by the full faith and credit of the United   States of   America,

in each case maturing within one year after such date;   (ii)   marketable   direct

obligations issued by any state of the United States of America or any political

subdivision   of any such state or any public   instrumentality   thereof,   in each

case   maturing   within one year after such date and   having,   at the time of the

acquisition   thereof,   a rating   of at least   A-1 from S&P or at least   P-1 from

Moody's;   (iii) commercial paper maturing no more than one year from the date of

creation thereof and having, at the time of the acquisition thereof, a rating of

at least A-1 from S&P or at least P-1 from   Moody's;   and (iv)   certificates   of

deposit or   bankers'   acceptances   maturing   within one year after such date and

issued or accepted by any Purchaser or by any commercial   bank   organized   under

the laws of the United States of America or any state thereof or the District of

Columbia   that (a) is at   least   "adequately   capitalized"   (as   defined   in the

regulations of its primary Federal banking regulator) and (b) has Tier 1 capital

(as defined in such regulations) of not less than $100,000,000.

 

         "CERCLA" shall mean the Comprehensive Environmental Response,

Compensation, and Liability Act (42 U.S.C. 9601 et seq.), as amended from time

to time, and any successor statute thereto.

 

          "Change of Control" means,   at any time,   after the date hereof (i) any

Person or any   Persons   acting   together   that would   constitute   a "group"   for

purposes of Section   13(d) under the Exchange   Act, or any   successor   provision

thereto,   excluding   the Founders   and/or the Existing   Investor,   shall acquire

beneficial   ownership   (within the meaning of Rule 13d-3 under the Exchange Act,

or any   successor   provision   thereto)   in a single   transaction   or a series of

related   transactions,   of more than 50% of the   aggregate   voting   power of the

Parent   or any   Obligor;   or (ii)   the   Parent   or any   Obligor   merges   into or

consolidates   with any other Person,   or any Person merges into or   consolidates

with the Parent or any Obligor,   except in each case any merger or consolidation

permitted   under this   Agreement;   or (iii) any Obligor   sells or transfers   its

assets, as an entirety or substantially as an entirety, to another Person except

in a sale or transfer to another

 

                                        -3-

 

<PAGE>

 

Obligor expressly   permitted by this Agreement;   or (iv) any "change of control"

or   similar   event   under   any   loan   agreement,   mortgage,   indenture   or other

agreement   relating to any   Indebtedness   shall   occur or (iv) the Parent   shall

cease to own free of all Liens   (other   than under the   Security   Agreement   and

Permitted Liens) all the outstanding Capital Units directly or indirectly of all

other Obligors, including the Co-Borrowers; or (v) the Existing Investors in the

aggregate   fail to own at least 90% of the Capital   Units of the Parent that the

Existing Investors owned in the aggregate on the Closing Date.

 

         "Closing" shall have the meaning assigned thereto in Section 2.3(c).

 

         "Closing   Date"   shall   have the   meaning   assigned   thereto in Section

2.3(c).

 

         "Closing Date Commitment Fee" shall have the meaning   assigned   thereto

in Section 2.4.

 

         "Co-Borrowers" shall have the meaning assigned thereto in the preamble.

 

         "Co-Borrowers' Percentage" has the meaning specified in Section 6.4(d).

 

         "Collateral   Agent"   means   the   Person,   initially   TICC,   serving   as

Collateral Agent pursuant to Section 11.8.

 

         "Collateral and Guarantee Requirement" shall mean means the requirement

that:

 

                  (a) the   Collateral   Agent shall have   received   (i) from each

           Obligor a counterpart of each of the Guaranty, the Security Agreement

           and   the   Indemnity,   Subrogation   and   Contribution   Agreement   duly

           executed and   delivered on behalf of such Obligor (ii) in the case of

           any   Person   that   becomes   an   Obligor   after the   Closing   Date,   a

           supplement to each such document, in the form specified therein, duly

            executed and delivered on behalf of such Obligor;

 

                  (b) all outstanding Capital Units owned by or on behalf of any

           Obligor shall have been pledged   pursuant to the Security   Agreement,

           and the Collateral   Agent shall have received   certificates   or other

           instruments   representing all such Capital Units, together with stock

           powers or other instruments of transfer with respect thereto endorsed

           in blank;

 

                  (c) each promissory   note   evidencing any   Indebtedness of any

           Obligor   to any   Obligor   shall   have been   pledged   pursuant   to the

           Security   Agreement and the Collateral   Agent shall have received all

           such   promissory   notes,   together with   instruments of transfer with

           respect thereto endorsed in blank;

 

                  (d)   all   documents    and    instruments,    including    Uniform

           Commercial Code financing   statements,   required by law or reasonably

            requested by the Collateral Agent to be filed, registered or recorded

           to create the Liens intended to be created by the Security   Documents

           and   perfect   such   Liens to the   extent   required   by,   and with the

           priority required by, the Security Documents,   shall have been filed,

           registered   or   recorded or   delivered   to the   Collateral   Agent for

           filing, registration or recording;

 

                                       -4-

 

<PAGE>

 

                   (e) subject to the Collateral Exception,   the Collateral Agent

           shall have   received,   if applicable (i)   counterparts   of a Mortgage

           with respect to any real property owned by such Obligor duly executed

           and delivered by the record owner of such Mortgaged Property,   (ii) a

           policy   or   policies   of   title   insurance   issued   by   a   nationally

           recognized   title   insurance   company   insuring the Lien of each such

           Mortgage as a valid first Lien on the   mortgaged   property   described

           therein,   free of any   other   Liens   (other   than   Permitted   Liens),

           together with such   endorsements,   coinsurance and reinsurance as the

           Collateral Agent or the Majority   Purchasers may reasonably   request,

           and (iii) such surveys,   abstracts,   appraisals,   legal   opinions and

           other   documents as the Collateral   Agent or the Majority   Purchasers

           may reasonably request with respect to any such mortgage or mortgaged

           property;

 

                  (f) subject to the Collateral Exception,   the Collateral Agent

           shall have received,   after the Closing,   the GK Acquisition Date, or

           closing date of any other   Permitted   Acquisition,   as applicable,   a

           Landlord   Agreement   with respect to any real   property   leased by an

           Obligor, duly executed and delivered by such Landlord; and

 

                  (g) each Loan Party shall have obtained all material   consents

           and approvals   required to be obtained by it in   connection   with the

           execution   and   delivery of all   Security   Documents to which it is a

           party, the performance of its obligations thereunder and the granting

            by it of the Liens thereunder.

 

         "Collateral   Exception" means with respect to any requirement   relating

to Collateral to be satisfied by a particular date, that such requirement   shall

be construed only to require the applicable Obligor to use reasonable efforts to

comply with such requirement and such Obligor shall not be required to undertake

any such efforts prior to the Closing Date, the GK Acquisition   Date, or closing

date of any other Permitted Acquisition, as applicable.

 

         "Common Units" has the meaning assigned thereto in Section 3.2.

 

         "Company   Intellectual   Property" has the meaning   assigned   thereto in

Section 3.21(a).

 

         "Consolidated   EBITDA" means, for any period,   Consolidated Net Income,

plus (i) to the extent deducted determining   Consolidated Net Income, the sum of

(A) Consolidated Interest Expense, (B) provisions for corporate taxes, (C) total

depreciation   expense,   (D) total amortization   expense,   and (E) other non-cash

items reducing   Consolidated Net Income   (including,   if applicable,   management

ownership   allocation charge and,   non-cash deferred   compensation and including

management   fees to the extent such fees are   accrued and not paid),   minus (ii)

the sum of (A) other non-cash items   (increasing   Consolidated   Net Income,   (B)

management   fees to the   extent   such fees are paid in cash but were   accrued in

prior periods,   and (C) non-recurring   items that may not be extraordinary items

in nature   but which the   parties   may agree in good   faith are   excludable   for

purposes of calculating Consolidated EBITDA). All the foregoing categories shall

be determined in accordance with GAAP applied on a consistent basis.

 

         "Consolidated Interest Expense" means, for any period, the consolidated

gross interest expense of the Parent   determined in accordance with GAAP applied

on a consistent basis.

 

                                       -5-

 

<PAGE>

 

         "Consolidated Net Income" means, for any period, the net income (or net

loss) of the   Parent on a   consolidated   basis   for such   period   determined   in

accordance with GAAP applied on a consistent basis.

 

         "Consolidated Senior Debt" means, as at any date of determination,   the

aggregate   principal   amount of all Senior   Debt of the Parent   determined   on a

consolidated basis in accordance with GAAP.

 

         "Consolidated   Senior   Debt   Ratio"   shall   mean,   as of   any   date   of

determination,   the ratio of (a) Senior Debt as of such date to (b) Consolidated

EBITDA for the four fiscal quarters ending on such date.

 

         "Consolidated   Total Debt" means, as at any date of determination,   the

aggregate   principal   amount of all   Indebtedness of the Parent   determined on a

consolidated   basis in accordance with GAAP,   excluding the Seller Notes,   the L

Capital Note, the GK Acquisition Note and the KCO Note.

 

         "Cosmo Seller Note" means the secured   subordinated   promissory note in

the principal amount of $1,300,000,   dated June 30, 2003,   delivered by Advanced

Aesthetics,   LLC,   as   reduced to a   principal   outstanding   amount of   $500,000

because of payments received as evidenced by the   Acknowledgment   dated December

2, 2003,   in connection   with the Amended and Restated   Stock   Contribution   and

Exchange   Agreement,   dated   as of May 29,   2003,   among   the   Parent,   Advanced

Aesthetics,   the Cosmo   DiSchino   Living   Trust Dated July 9, 2002,   as the sole

shareholder of DiSchino   Corporation,   and Cosmo DiSchino and shall include such

note as restructured pursuant to Section 5.21.

 

         "Default"   means an Event of Default   or an event   that with   notice or

lapse of time   specified   in Section   9.1 both   would,   unless   cured or waived,

become an Event of Default.

 

         "DiSchino" shall have the meaning given to it in the recitals.

 

         "Disclosure   Schedule" has the meaning   assigned   thereto in the second

sentence of Section 3.

 

          "Earnings   Forecast"   has the   meaning   assigned   thereto   in   Section

3.12(c)   and, for clarity,   the Earnings   Forecast   does not include any updates

thereof provided pursuant to Section 5.15(d).

 

         "Environmental   Law" shall mean the Resource   Conservation and Recovery

Act ("RCRA"),   CERCLA, the Superfund   Amendments and Reauthorization Act of 1986

("SARA"),   the Federal   Clean Water Act,   the Federal   Clean Air Act,   the Toxic

Substances   Control Act, or any state or local statute,   regulation,   ordinance,

order or decree relating to health, safety or the environment.

 

         "Escrow Account" means the Account No. 1933150 of Advanced   Aesthetics,

LLC (as nominee of the Co-Borrowers) at Fidelity Federal Bank & Trust, West Palm

Beach,   Florida,

 

 

                                       -6-

 

<PAGE>

 

which is subject to a control   agreement   blocking   all access to funds   therein

without the prior written consent of TICC.

 

         "Escrow   Account   Control   Agreement"   means   an   agreement   among   the

Co-Borrowers,   the   Escrow   Bank   and TICC   providing   blocking   control   of the

disposition of funds in the Escrow Account to TICC.

 

         "Escrow   Bank" means   Fidelity   Federal Bank & Trust,   West Palm Beach,

Florida.

 

         "Event of Default" has the meaning assigned thereto in Section 9.1.

 

         "Exchange Act" means the Securities Exchange Act of 1934, as amended.

 

          "Existing Investors" means,   collectively,   Seapine   Investments,   LLC,

Lipman Family Limited Partnership,   Andrew D. Lipman, Richard Rakowski,   DeBiasi

Family Limited Partnership,   Clarice Webb, Catherine M. Kidd Grantor Trust, Cara

E. Kidd   Trust,   Thomas C. Kidd   Trust,   Sand   Dollar   Partners,   L.P.,   Jessica

Effress,   Claudine   Singer,   Darrin   Prescott,   Michael Paley,   Daniel   Witcher,

Patricia   Mackey,   Joseph Crace,   David   Jordan,   Robyn   Collins,   and L Capital

Management SAS.

 

         "Financial   Statements"   has the   meaning   assigned   thereto in Section

3.12(d).

 

         "Five Year Rate" shall mean, as of any specified date, the yield of the

5-year   United   States   Treasury   Note with a maturity date closest to the fifth

anniversary of the specified date, rounded upwards to the nearest 1/100th of 1%.

The Five   Year   Rate   shall be   determined   by TICC and any such   determination,

absent manifest error, shall be final and conclusive.

 

         "GAAP" means those   generally   accepted   accounting   principles   in the

United States of America, as in effect from time to time; provided, however, for

purposes   of   computing    financial   covenants   GAAP   means   generally   accepted

accounting   principles   in the   United   States of America in effect on March 31,

2004. If any changes in accounting   principles from those in effect on March 31,

2004,   are   hereafter    occasioned   by   promulgation    of   rules,    regulations,

pronouncements   or   opinions   by or are   otherwise   required   by   the   Financial

Accounting   Standards   Board   or the   American   Institute   of   Certified   Public

Accountants (or successors thereto or agencies with similar functions),   and any

of such changes   results in a change in the method of calculation of, or affects

the results of such calculation of, any of the financial covenants, standards or

terms found herein,   then the parties   hereto agree to enter into and diligently

pursue   negotiations   in order to amend such financial   covenants,   standards or

terms so as to equitably reflect such changes,   with the desired result that the

parties shall be in substantially the same position from an economic   standpoint

with respect to the matters covered thereby after the adoption or implementation

of such change as before the implementation or adoption of such change.

 

         "GK Acquisition" means the acquisition of the Target Business.

 

         "GK Acquisition Company" shall have the meaning assigned thereto in the

recitals.

 

                                       -7-

 

<PAGE>

 

          "GK Acquisition Conditions" shall mean all of the following conditions:

 

                  (a) the GK Acquisition shall satisfy all of the conditions set

           forth in clauses   (a)   through   (f) of the   definition   of   Permitted

           Acquisition,   provided that the Collateral and Guarantee   Requirement

           shall be satisfied on or prior to the date of   consummation of the GK

           Acquisition except to the extent subject to the Collateral Exceptions

           or as otherwise agreed by the Purchasers in writing;

 

                  (b) the aggregate   consideration payable by the Obligors shall

           consist   of (i) no   more   than   $4,000,000   of   cash   payable   by any

           Obligor,   subject to   adjustments,   acceptable   to the   Purchasers in

           their sole   discretion,   set forth in the GK   Acquisition   Documents,

           (ii) the GK Acquisition Note and (iii) Capital Units of the Parent;

 

                  (c) the   representations   and   warranties in Section 3 of this

           Agreement   shall be true   and   correct   after   giving   effect   to the

           consummation of the GK Acquisition except as otherwise set forth in a

           certificate of the Co-Borrowers   delivered at least five (5) Business

            Days' prior the date of   consummation   of the GK Acquisition and such

           exceptions shall be acceptable to the Purchasers;

 

                  (d) the GK Acquisition   Documents are reasonably   satisfactory

           to the Purchasers; and

 

                  (e)   the   GK    Acquisition    shall    have    been    consummated

           substantially   in   accordance   with the   terms of the GK   Acquisition

           Documents   on or before 5:00 p.m.,   New York time,   on   December   31,

           2004.

 

         "GK   Acquisition   Documents"   means the asset purchase   agreement to be

entered into between GK Acquisition,   the Parent,   Advanced K, the GK Seller and

the   owners   of the GK   Seller,   and   all   documents,   agreements,   certificates

executed and delivered in connection therewith.

 

         "GK Acquisition Note" means the unsecured subordinated   promissory note

to be   issued by the   Parent   to the GK   Seller   in an   amount   not in excess of

$1,000,000   aggregate   principal   amount in connection   with the GK Acquisition,

which   note shall be   either:   (i)   substantially   in   accordance   with the form

furnished to the Purchasers on or before the Closing Date; or (ii) acceptable to

the   Purchaser in their sole   discretion   and which shall   satisfy the Permitted

Financing Conditions.

 

         "GK Reserve Amount" has the meaning assigned thereto in Section 2.4.

 

         "GK Seller" means Georgette Klinger, Inc.

 

         "Governmental   Authority" means any federal, state, municipal,   foreign

or other a   government,   governmental   department,   commission,   board,   bureau,

agency or instrumentality, or any private or public court or tribunal.

 

                                       -8-

 

<PAGE>

 

         "Guarantee" as applied to any Person, shall mean any direct or indirect

liability,   contingent   or   otherwise,   of that Person:   (i) with respect to any

underlying   Indebtedness,   lease, dividend or other obligation of another Person

if the primary purpose or intent of the Person incurring such liability,   or the

primary effect thereof, is to provide assurance to the obligee of such liability

that the underlying   Indebtedness,   lease,   dividend or other obligation will be

paid or   discharged,   or that any agreements   relating   thereto will be complied

with,   or that the holders of such   liability   will be protected (in whole or in

part)   against   loss with   respect   thereto;   (ii) with respect to any letter of

credit   issued   for the   account of that   Person or as to which   that   Person is

otherwise   liable for   reimbursement   of   drawings;   or (iii)   under any foreign

exchange   contract,   currency swap   agreement,   interest rate swap   agreement or

other   similar   agreement   or   arrangement   designed   to alter the risks of that

Person   arising   from    fluctuations   in   currency   values   or   interest   rates.

Guarantees shall include (a) the direct or indirect guaranty, endorsement (other

than for collection or deposit in the ordinary   course of business),   co-making,

discounting with recourse or sale with recourse by such Person of the obligation

of   another,   (b) the   obligation   to make   take-or-pay   or similar   payments if

required   regardless   of   nonperformance   by any other   party or   parties   to an

agreement, or to maintain working capital or equity capital of such other Person

or otherwise to maintain the net worth or solvency of such other Person, (c) any

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

purchase,   repurchase   or   otherwise   acquire   such   obligation   or any property

constituting security therefor, to provide funds for the payment or discharge of

such obligation or to maintain the solvency,   financial condition or any balance

sheet item or level of income of another,   and (d)   otherwise   to assure or hold

harmless   the owner of such   obligation   against   loss in respect   thereof.   The

amount   of any   Guarantee   shall be equal to the   amount   of the   obligation   so

guaranteed or otherwise   supported or, if not a fixed and determined amount, the

maximum amount so guaranteed.

 

         "Guarantor"   means   each of the   Parent   and each   existing   and future

Subsidiary of the Parent (other than the Co-Borrowers), but shall, in any event,

include (a) Anushka PBG, LLC, a Delaware limited liability company,   (b) Anushka

Boca, LLC, a Delaware limited liability company,   (c) Wild Hare, LLC, a Delaware

limited   liability   company,   (d)   Advanced   Aesthetics   Sub,   Inc.,   a Delaware

corporation,   and (e) Advanced   Aesthetics,   LLC, a Delaware   limited   liability

company.

 

         "Guaranty Agreement" mean the Guaranty Agreement, dated as of March 31,

2004, by the Guarantors in favor of the Collateral   Agent for the benefit of the

Purchasers, as amended,   supplemented,   restated or otherwise modified from time

to time.

 

         "Hazardous   Materials"   shall mean (i) any   "hazardous   substance",   as

defined by CERCLA,   (ii) any "hazardous   waste",   as defined by RCRA,   (iii) any

petroleum product, or (iv) any pollutant or contaminant or hazardous,   dangerous

or toxic chemical, material or substance regulated by any Environmental Laws.

 

         "Hedging Agreement" means any interest rate swap, collar, cap, floor or

forward rate agreement or other agreement regarding the hedging of interest rate

risk exposure   executed in connection with hedging the interest rate exposure of

any Person and any confirming letter executed pursuant to such agreement, all as

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

 

                                       -9-

 

<PAGE>

 

         "Indebtedness" means, without duplication,   as to any Person or Persons

(a) indebtedness for borrowed money; (b) indebtedness for the deferred   purchase

price of property or services; (c) indebtedness evidenced by bonds,   debentures,

notes or other similar instruments; (d) obligations and liabilities secured by a

Lien,   other than a Permitted Lien, upon property owned by such Person,   whether

or not owing by such   Person and even   though   such   Person   has not   assumed or

become liable for the payment thereof;   (e) obligations and liabilities directly

or indirectly   Guaranteed by such Person; (f) obligations or liabilities created

or   arising   under any   conditional   sales   contract   or other   title   retention

agreement with respect to property used and/or acquired by such Person;   (g) net

liabilities   of such   Person   under   Hedging   Agreements   and   foreign   currency

exchange   agreements,   as   calculated   on a basis   satisfactory   to the Majority

Purchasers and in accordance with accepted practice; (h) all obligations of such

Person in respect of bankers' acceptances and (i) all obligations, contingent or

otherwise of such Person as an account   party or applicant in respect of letters

of credit.

 

         "Intellectual   Property"   means all (i)   trademarks   and service marks,

logos, trade dress, product configurations, trade names and other indications of

origin,   applications or   registrations   in any   jurisdiction   pertaining to the

foregoing and all goodwill associated therewith; (ii) inventions (whether or not

patentable),   discoveries,   improvements,   ideas, know-how, formula methodology,

research and development,   business   methods,   processes,   technology,   software

(including password   unprotected   interpretive code or source code, object code,

development documentation, programming tools, drawings, specifications and data)

and   applications   or patents in any   jurisdiction   pertaining to the foregoing,

including re-issues, continuations, divisions,   continuations-in-part,   renewals

or extensions;   (iii) trade secrets,   including confidential information and the

right   in any   jurisdiction   to   limit   the   use   or   disclosure   thereof;   (iv)

copyrights   in   writings,    designs,    software,   mask   works   or   other   works,

applications   or   registrations   in any   jurisdiction   for the foregoing and all

moral rights related thereto;   (v) database rights; (vi) Internet Web sites, Web

pages, domain names and applications and registrations   pertaining thereto;   and

(vii) all rights under agreements relating to the foregoing.

 

         "Interest   Rate   Adjustment   Date"   shall mean March 31,   2006 and each

annual anniversary of such date thereafter.

 

         "Investment"   means, for any Person:   (a) the acquisition   (whether for

cash,   property,   services or securities or otherwise) of capital stock,   bonds,

notes, debentures,   partnership or other ownership interests or other securities

of any other Person or any   agreement to make any such   acquisition   (including,

without   limitation,   any "short sale" or any sale of any   securities   at a time

when such securities are not owned by the Person   entering into such sale);   (b)

the making of any deposit   with, or advance,   loan or other   extension of credit

to, any other Person   (including   the purchase of property   from another   Person

subject to an   understanding   or agreement,   contingent or otherwise,   to resell

such property to such Person), but excluding any such advance, loan or extension

of credit   having a term not   exceeding 90 days arising in   connection   with the

sale of inventory or supplies by such Person in the ordinary course of business;

(c) the entering into of any guarantee of, or other   contingent   obligation with

respect to,   Indebtedness   or other   liability   of any other Person and (without

duplication)   any amount   committed   to be   advanced,   lent or   extended to such

Person; or (d) the entering into of any Hedging Agreement.

 

                                      -10-

 

<PAGE>

 

         "KCO Note" means the Parent's unsecured   Promissory Note dated June 30,

2003   issued   in   favor   of   Kidd &   Company,   LLC in the   principal   amount   of

$5,905,085.82   and shall include such note as   restructured   pursuant to Section

5.21.

 

         "L Capital" means FCPR L Capital   represented   by L Capital   Management

SAS.

 

         "L Capital Note" means the Parent's Subordinated Convertible Promissory

Note in the   principal   amount of   $13,300,000,   dated June 30, 2003,   issued in

favor of L Capital, as amended on the Closing Date.

 

         "Landlord Agreement" means an agreement reasonably   satisfactory to the

Collateral   Agent   between   the   Collateral   Agent and the   owner   and   landlord

("owner") of any real estate leased by the Parent or any Subsidiary   pursuant to

which (i) such owner agrees to give the Collateral   Agent   reasonable   access to

the leased properties in order to permit the exercise of remedies by the Lenders

with respect to Collateral   located therein (including rights of removal upon an

Event of   Default)   and (ii) if the   leasehold   interest   of the   Parent   or any

Subsidiary is subject to a Mortgage,   such owner   recognizes and consents to the

Lien of the   Collateral   Agent   pursuant   to such   Mortgage   and   agrees   to the

exercise of rights and   remedies by the Lenders   with   respect to the   leasehold

interest upon and during the continuance of an Event of Default.

 

         "Lien"   means   any lien,   mortgage,   deed of   trust,   pledge,   security

interest,   charge or encumbrance of any kind (including any conditional   sale or

other   title   retention   agreement,   any   lease in the   nature   thereof   and any

agreement to give any of the foregoing).

 

         "Listed Intellectual   Property" shall have the meaning assigned thereto

in Section 3.21(b).

 

         "Majority   Purchasers"   means at any given time the Purchasers   holding

more than fifty percent (50%) of the then   outstanding   principal   amount of the

Notes.

 

         "Management    Fee   Agreements"    means   (i)   the   Consulting    Services

Agreement,   dated   November 4, 2003,   between L Capital   Management   SAS and the

Parent,   and (ii) the   Advisory   Services   Agreement,   dated   November   4, 2003,

between Kidd & Company, LLC and the Parent.

 

         "Material   Adverse   Effect" means a material   adverse effect on (i) the

business,   properties,   assets,   liabilities,   prospects,   profits,   results   of

operations   or   condition   (financial   or   otherwise)   of   the   Parent   and   its

Subsidiaries,   taken as a whole or (ii) the ability of the   Co-Borrowers   or any

other Obligor to perform its obligations under any of the Transaction Documents.

 

         "Material Agreement" shall have the meaning assigned thereto in Section

3.15(a).

 

         "Maturity   Date"   shall have the   meaning   assigned   thereto in Section

2.2(b).

 

         "Moody's"   means   Moody's   Investors   Services,   Inc. and any successor

entity.

 

         "Mortgage"   means a mortgage,   deed of trust,   assignment of leases and

rents,   leasehold   mortgage or other   security   document   granting a Lien on any

Mortgaged Property to secure the

 

                                      -11-

 

<PAGE>

 

Obligations.   Each   Mortgage   shall   be in the   form   satisfactory   in form   and

substance to the Collateral Agent.

 

         "Mortgaged    Property"    means,    each   parcel   of   real   property   and

improvements thereto with respect to which a Mortgage is granted in favor of the

Collateral Agent for the benefit of the Purchasers pursuant to Section 5.20.

 

          "Obligations"   means   all   principal,    interest   (including   interest

accrued   after the filing of a bankruptcy or similar   petition   whether or not a

claim therefor is enforceable), fees, expenses and indemnities payable from time

to time by any Obligor   under the   Transaction   Documents,   including   indemnity

payments and reimbursements under Section 11.

 

         "Obligors" means, collectively, the Co-Borrowers and the Guarantors.

 

         "Officer" means, with respect to any Person,   the Chairman of the Board

of Directors,   the Chief Executive Officer,   the President,   any Vice President,

the Chief Financial Officer, the Treasurer, the Controller,   or the Secretary of

such Person,   or any other officer   designated by the Board of Directors of such

Person serving in a similar capacity.

 

         "Officers'   Certificate"   means a certificate   signed by any Officer of

the Parent and the Co-Borrowers.

 

         "Organizational   Documents" has the meaning assigned thereto in Section

3.1(a).

 

         "Parent" has the meaning assigned to it in the preamble.

 

         "Permitted   Acquisition"   shall   mean any   acquisition   (by   merger   or

otherwise) by any Co-Borrower of all or substantially   all the assets of, or all

the Capital Units in, a Person or individual operation location (e.g., salon) of

a Person or division or line of business of a Person,   if (a) immediately   after

giving effect thereto, no Default has occurred and is continuing or would result

therefrom,   (b) such acquired Person or business is   predominately   engaged in a

Related   Business and is organized under a state of the United States,   (c) each

Subsidiary resulting from such acquisition (and which survives such acquisition)

shall be an Obligor and all the Capital Units of each such   Subsidiary   shall be

owned   directly by the Parent or a Co-Borrower   or a Subsidiary of a Co-Borrower

and shall,   within five Business Days after such acquisition,   have been pledged

pursuant to the Security Agreement, (d) the Collateral and Guarantee Requirement

shall,   within five Business Days after such   acquisition,   have been   satisfied

with respect to each such Subsidiary, (e) the Parent and the Co-Borrowers are in

compliance,   on a pro   forma   basis   after   giving   effect   to such   acquisition

(without   giving   effect to operating   expense   reductions),   with the financial

covenants   set forth in   Section 7, to the extent   then   applicable,   as if such

acquisition   had   occurred on the first day of the   relevant   period for testing

compliance; (f) the Co-Borrowers have delivered to the Collateral Agent at least

5 Business Days prior to consummation of such acquisition a general   description

thereof, the date of proposed consummation of such acquisition,   copies of final

forms of the   acquisition   documents and an officer's   certificate to the effect

set forth in   clauses   (a),   (b),   (c),   (d) and (e)   above,   together   with all

relevant financial   information for the Person or assets acquired and reasonably

detailed calculations demonstrating satisfaction of the requirement set forth in

clause (e) above, and (g) (i) if the acquisition (by merger or

 

                                      -12-

 

<PAGE>

 

otherwise)   requires   payment   of   consideration   (including   (i)   consideration

consisting of cash,   notes, fair market value of assets and fair market value of

Capital   Units and (ii)   consideration   payable at or after   closing,   including

"earn-outs")   of   $5,000,000 or more by one or more Obligors in the aggregate of

all or substantially all the assets of, or all the Capital Units in, a Person or

division or line of business of a Person, the Purchasers shall have approved the

Permitted   Acquisition   in   writing.   The   GK   Acquisition   shall   constitute   a

Permitted Acquisition only if the GK Acquisition Conditions are satisfied.

 

         "Permitted Affiliate Transactions" means any of the following:

 

                  (a)   reasonable   fees and   compensation   paid to and indemnity

           provided on behalf of, officers, directors, employees, consultants or

           agents of the Parent or any of its Subsidiaries as determined in good

           faith by the Parent's Board of Directors or senior management;

 

                  (b)   transactions   between   or among the Parent and its wholly

           owned    Subsidiaries    or   between   or   among    such    wholly    owned

           Subsidiaries;   provided   that   such   transactions   are not   otherwise

           prohibited under this Agreement and such   Subsidiaries are Guarantors

           or Co-Borrowers; and

 

                  (c) any   agreement as in effect as of the Closing Date, as set

           forth on Schedule   3.15(a)   hereto,   or any amendment   thereto or any

           transaction contemplated thereby (including pursuant to any amendment

           thereto) or in any replacement   agreement thereto so long as any such

            amendment or replacement agreement is not more disadvantageous to the

           Purchasers in any material respect than the original   agreement as in

           effect on the Closing Date.

 

         "Permitted Distributions" shall mean:

 

                   (a) cash payments   after the first   anniversary of the Closing

           Date on any Management Agreement as in effect on the Closing Date;

 

                  (b) cash   payments of   regularly   scheduled   interest on the L

           Capital Note;   provided that such cash payments do not exceed,   if no

           additional equity contributions are made in accordance therewith, the

           required   cash   payments   thereunder as in effect on the Closing Date

           (i.e., 2% per annum) or, if L Capital purchases the Investor Series D

           Shares   from the Parent in   accordance   with (and as defined in) that

           certain   Securities   Purchase   Agreement dated as of November 4, 2003

           between the Parent and L Capital,   the required cash   payments   under

           the L Capital Note as in effect as of such purchase (i.e.,   3.23% per

           annum);

 

                  (c) cash payments of regularly   scheduled   interest   under the

           Anushka   Seller   Note and the Cosmo   Seller Note not to exceed 5% per

           annum;

 

                  (d) cash payments after the second   anniversary of the Closing

           Date of   regularly   scheduled   interest   accruing   after   the   second

           anniversary   of the   Closing   Date not to exceed 5% per annum on each

           Subordinated Note; and

 

                                      -13-

 

<PAGE>

 

                  (e) as for each   Obligor   (other   than the   Parent)   that is a

           "pass-through"   tax   entity   for   United   States   federal   income tax

           purposes,   distributions   declared   and paid by such   Obligor   to its

           members,   or which could have been declared and paid by such Obligor,

           in an amount not to exceed the amount of state and federal income tax

           paid or to be paid by such Obligor's members on taxable income earned

           by such   Obligor   and   attributable   to such   Obligor's   members as a

           result of such Obligor's "pass-through" tax status.

 

          "Permitted Financing Conditions" means with respect to any Indebtedness

of an Obligor that such Indebtedness (a) is subordinated to the final payment in

full in cash of the Obligations of such Obligor under the Transaction   Documents

on terms   acceptable to the   Purchasers in their sole   discretion,   (b) does not

require any payment of   principal,   interest or other   amount,   whether   through

mandatory prepayment,   scheduled amortization,   mandatory repurchase or offer to

purchase or otherwise,   prior to 120 days after the Maturity   Date, (c) does not

permit   acceleration   of the maturity   thereof or the   enforcement of any remedy

thereunder while the Obligations remain outstanding and (d) is unsecured and (e)

does not contain any provisions in conflict with the Transaction Documents.

 

         "Permitted Indebtedness" means and includes:

 

                  (a) Indebtedness to the Purchasers hereunder;

 

                  (b) Indebtedness   existing on the date hereof and set forth on

           the Schedule   attached hereto as Schedule II (prior to any amendment,

           modifications,   extensions   thereof or supplements   thereto after the

           date   hereof),   provided   that the Seller Notes shall not   constitute

           Permitted    Indebtedness    from   and   after   May   30,    2004    unless

           restructured in accordance with Section 5.21;

 

                  (c) Indebtedness   evidenced by the Subordinated Five-Year Note

           which may be issued   pursuant to Section 3.1(b) of the L Capital Note

           provided   that   such    Indebtedness   is   subject   to   standstill   and

           subordination   provisions at least as favorable to the   Purchasers as

           those contained in the L Capital Note;

 

                  (d) Indebtedness   consisting of the Subordinated   Notes issued

           by the Parent Notes; and

 

                  (e)   Indebtedness    incurred   by   the   Obligors    pursuant   to

           equipment financing; provided, that the Obligors shall at the time of

           such   incurrence be in compliance   with its financial   covenants on a

           pro forma basis and the   aggregate   outstanding   principal   amount of

           such Indebtedness does not exceed $400,000 at any time.

 

         "Permitted   Investments"   means:   (a) direct   obligations of the United

States of America,   or of any agency   thereof,   or obligations   guaranteed as to

principal   and   interest   by the   United   States of   America,   or of any   agency

thereof,   in   either   case   maturing   not   more   than 90 days   from   the date of

acquisition   thereof;   (b)   certificates   of deposit issued by any bank or trust

company   organized   under the laws of the United   States of America or any State

thereof   and   having   capital,    surplus   and   undivided   profits   of   at   least

$500,000,000,   maturing   not more   than 90 days   from   the   date of   acquisition

thereof; and (c) commercial paper rated A-1 or better or P-1 by S&P or

 

                                      -14-

 

<PAGE>

 

Moody's,   respectively,   maturing   not   more   than   90   days   from   the   date of

acquisition   thereof;   in each   case so long as the   same   (x)   provide   for the

payment of principal and interest (and not   principal   alone or interest   alone)

and (y) are not subject to any contingency regarding the payment of principal or

interest.

 

         "Permitted Liens" means:

 

                  (a) Liens imposed by law for taxes that are not yet due or are

           being contested in compliance with Section 5.10;

 

                  (b)   carriers',   warehousemen's,    mechanics',   materialmen's,

           repairmen's   and other   like   Liens   imposed   by law,   arising in the

           ordinary   course of business   and securing   obligations   that are not

           overdue   by more   than 30 days or that are   being   contested   in good

           faith and by appropriate proceedings;

 

                  (c)   pledges   and   deposits   made in the   ordinary   course   of

           business   in   compliance   with   workers'   compensation,   unemployment

            insurance and other social security laws or regulations;

 

                  (d)   deposits   to   secure   the   performance   of   bids,    trade

           contracts,   leases,   statutory obligations,   surety and appeal bonds,

           performance   bonds and other   obligations   of a like nature,   in each

           case in the ordinary course of business; and

 

                  (e) easements, zoning restrictions,   rights-of-way and similar

           encumbrances   on   real   property   imposed   by law or   arising   in the

           ordinary    course   of   business   that   do   not   secure   any   monetary

           obligations   and do not   materially   detract   from   the   value of the

           affected   property or interfere with the ordinary conduct of business

            of the Parent or any of its Subsidiaries;

 

                  (f)   Liens   to   secure    Indebtedness    consisting   solely   of

           Permitted   Indebtedness   of the type   described   in clause (b) of the

           definition   thereof and which is described on Schedule   II-B attached

           hereto;    provided   that   Liens   under   this   clause   (f)   shall   not

           constitute Permitted Liens from and after May 30, 2004;

 

                  (g)   Liens   to   secure    Indebtedness    consisting   solely   of

           Permitted   Indebtedness   of the type   described   in clause (e) of the

           definition thereof secured solely by the equipment purchased with the

           proceeds   of such   Indebtedness,   provided   that such Liens shall not

            secure Indebtedness permitted by such clause (e);

 

                  (h) Liens in favor of the   Purchasers   and/or   their agents as

           are   contemplated   hereunder   and/or   under   any of   the   Transaction

           Documents; and

 

provided   that the term   "Permitted   Liens"   other   than   those set forth   under

clauses (f) and (g) and (h) shall not include any Lien securing Indebtedness.

 

         "Person"   shall be   construed   in the   broadest   sense   and   means   and

includes any natural person,   a partnership,   a corporation,   an association,   a

joint stock company, a limited liability

 

                                      -15-

 

<PAGE>

 

company,   a trust, a joint venture,   an   unincorporated   organization   and other

entity or Governmental Authority.

 

         "Plan" has the meaning assigned thereto in Section 3.2.

 

         "Preferred Units" has the meaning assigned thereto in Section 3.2.

 

         "Proprietary   Software"   shall   have the   meaning   assigned   thereto in

Section 3.22.

 

          "Purchaser's Percentage" has the meaning specified in Section 6.4(d).

 

         "Quarterly   Interest   Payment   Date"   shall   mean   the last day of each

March, June, September and December, commencing June 30, 2004.

 

         "Quarterly    Perfection    Certificate    Update"   means   a   certificate,

substantially in the form of Exhibit G hereto, of an Officer of the Parent.

 

          "Related   Businesses"   shall   have the   meaning   assigned   thereto   in

Section 6.7.

 

         "Registration Rights Agreement" shall have the meaning assigned thereto

in Section 2.3(b).

 

         "Related Business" has the meaning assigned thereto in Section 6.7.

 

         "Restricted   Payment"   has the   meaning   assigned   thereto   in   Section

6.5(a).

 

         "Securities Act" means the Securities Act of 1933, as amended.

 

         "Subordinated   Note" means each of the Anushka   Seller Note,   the Cosmo

Seller Note, the KCO Note (including any such note as   restructured   pursuant to

Section 5.21), and any other promissory note of the Parent meeting the Permitted

Financing Conditions.

 

          "Security   Agreement" means the Pledge and Security Agreement dated as

of March 31, 2004 by the Parent, the Co-Borrowers and the Guarantors in favor of

the Collateral Agent, as amended,   supplemented,   restated or otherwise modified

from time to time.

 

         "Security Documents" means the Security Agreement, the Pledge Agreement

and any other   document,   agreement or instrument   delivered in connection   with

this Agreement creating a Lien on any assets of the Obligors.

 

         "Seller   Notes"   means (i) the   Anushka   Seller Note and (ii) the Cosmo

Seller Note.

 

          "Senior Debt" shall mean the Notes.

 

         "Senior   Secured   Interest   Expense"   shall mean,   for any period,   all

interest   expense for such period on Senior Debt,   all as computed in accordance

with GAAP.

 

                                      -16-

 

<PAGE>

 

         "Series A Preferred   Units" means Series A Preferred   Units,   par value

$0.01 per share of the Parent.

 

         "Series B Preferred   Units" means Series B Preferred   Units,   par value

$0.01 per share of the Parent.

 

         "Series C Preferred   Units" means Series C Preferred   Units,   par value

$0.01 per share of the Parent.

 

         "Series E Preferred   Units" means Series E Preferred   Units,   par value

$0.01 per share of the Parent.

 

         "Shareholders   Agreement"   shall have the meaning   assigned   thereto in

Section 2.3(b).

 

         "Specified Amount" has the meaning specified in Section 6.4(d).

 

         "S&P"   means   Standard   & Poor's   Ratings   Services   and any   successor

entity.

 

         "Subsidiary"   means, with respect to any Person, (i) any corporation of

which the   outstanding   Capital   Units   having at least a majority   of the votes

entitled to be cast in the election of directors   under   ordinary   circumstances

shall at the time be owned,   directly or   indirectly,   by such Person,   (ii) any

other   Person   (other   than a   partnership)   of which at least a majority of the

voting   interest   under   ordinary   circumstances   is at the   time,   directly   or

indirectly,   owned by such Person or (iii) any   partnership (a) the sole general

partner or the managing   general partner of which is such Person or a Subsidiary

of such Person or (b) the only general   partners of which are such Person or one

or more Subsidiaries of such Person (or any combination thereof).

 

         "Target   Business"   shall mean   substantially   all the assets of the GK

Seller consisting generally of the assets listed on Schedule 1.1 pursuant to the

GK Acquisition Documents.

 

         "Test Period" has the meaning specified in Section 6.4(d).

 

         "TICC" means Technology Investment Capital Corp. and its successors and

assigns.

 

         "Transaction   Documents"   means   this   Agreement,   the   Escrow   Account

Control   Agreement,   the Shareholders   Agreement,   the Security   Agreement,   the

Notes, the Warrants,   the Registration Rights Agreement,   the Guaranty Agreement

and all other documents executed or delivered by the Parent, the Co-Borrowers or

any other Obligor in connection with the transaction contemplated herein.

 

         "Unit" shall mean an individual operating location of an Obligor.

 

         "Unit   Depreciation   and   Amortization"   shall   mean,   for any   period,

depreciation and amortization attributable to a Unit in accordance with GAAP.

 

          "Unit   EBITDAR"   shall   mean,   for any   period,   the sum of Unit Level

Contribution   plus   Unit   Depreciation   and   Amortization   plus   Unit   Occupancy

Expense, in each case, for such period.

 

                                      -17-

 

<PAGE>

 

         "Unit Fixed Charge Ratio" shall mean, for any period,   the ratio of (a)

Unit EBITDAR to (b) Unit Fixed Charges, in each case, for such period.

 

         "Unit   Fixed   Charges"   shall   mean,   for any   period,   Senior   Secured

Interest Expense plus Unit Occupancy Expense, in each case, for such period.

 

         "Unit Level   Contribution"   shall mean, for any period,   the net income

attributable to a Unit in accordance with GAAP, excluding interest and taxes.

 

         "Unit Occupancy   Expense" shall mean, for any period,   the total of all

rent (including all payments under Capital Leases),   property maintenance,   real

estate taxes and similar realty-related payments attributable to a Unit for such

period.

 

          "Warrant" shall have the meaning assigned thereto in Section 2.3(a).

 

         "Warrant   Units"   means the Common   Units into which the   Warrants   are

convertible.

 

         "Wild Hare" shall have the meaning given to it in the recitals.

 

         "Works" shall have the meaning assigned thereto in Section 3.22.

 

This Agreement contains covenants,   representations and warranties and events of

default that are applicable to Obligors,   including Obligors not a party to this

Agreement. The Co-Borrowers shall be bound by all such provisions, including the

effects of a failure of any   Obligor   not a party to this   Agreement,   to comply

with such provisions.   To the extent a covenant or agreement is applicable to an

Obligor not a party   hereto,   the   Co-Borrowers   and Parent   agree to cause such

Person to comply with such covenant or agreement,   whether or not the ability to

do so is in the control of the Co-Borrowers or the Parent.

 

         2. PURCHASE AND SALE OF NOTES AND WARRANTS.

 

               2.1   Sale   and   Issuance   of   Notes.   Subject   to the   terms   and

conditions hereof, the Co-Borrowers   jointly and severally agree agrees to issue

and sell to each   Purchaser   on the Closing   Date (as defined   below),   and each

Purchaser hereby agrees,   severally and not jointly,   to purchase for face value

on the Closing Date a senior secured   promissory   note   containing the terms and

conditions set forth herein and in the form of note attached hereto as Exhibit A

(each a "Note"   and   collectively,   the   "Notes"),   payable to the order of such

Purchaser in the principal   amount   specified   opposite such Purchaser's name on

Schedule I attached   hereto.   The aggregate   principal   amount of all such Notes

issued on the Closing Date shall be Ten Million Dollars ($10,000,000).

 

               2.2 Notes.

 

                   -----

 

                    (a)   Security.    Each   Note   and   the    obligations   of   the

Co-Borrowers and the Guarantors under the Transaction Documents shall be secured

in accordance with the terms of a Pledge and Security Agreement, a form of which

is set forth as Exhibit B hereto   (the   "Security   Agreement"),   which   shall be

executed and delivered by the parties thereto at the

 

                                       -18-

 

<PAGE>

 

Closing,   and pursuant to which the Parent,   the Co-Borrowers and each Guarantor

will grant the Purchasers a security   interest in all of such Person's   tangible

and intangible assets and property.

 

                    (b) Maturity Date. The entire unpaid principal amount of the

Notes and any accrued and unpaid   interest   thereon   shall be due and payable on

the fifth   anniversary of the Closing Date,   i.e., March 31, 2009 (the "Maturity

Date"),   unless such amounts become due and payable earlier upon acceleration in

accordance with the terms hereof or otherwise.

 

                    (c) Intentionally Omitted.

 

                        ---------------------

 

                    (d) Interest.

 

                        --------

 

                         (i) Interest. The outstanding principal amount of each

 

Note (i)   shall   bear   interest   at a rate per   annum   equal to   twelve   percent

(12.00%) during the period   commencing on the date of issuance and continuing to

and including the first Interest Rate Adjustment   Date,   which interest shall be

payable in arrears on the last day of each Quarterly   Interest Payment Date, and

(ii) shall bear interest from and including each Interest Rate   Adjustment   Date

to but not including the next Interest Rate   Adjustment Date at a rate per annum

equal   9.00% plus the Five Year Rate;   provided,   that (X) in no event shall the

stated   interest   rate,   as adjusted   pursuant to this clause (d)(i) but without

regard to the effect of the method of   computation   in clause   (d)(iii) below or

additional   interest   payable under clause (d)(ii) below, be greater than 14.00%

per annum or less than 11.00% per annum and (Y) in no event shall any adjustment

on any Interest Rate   Adjustment   Date increase the stated interest rate then in

effect   by more   than   1.00%.   Interest   shall be   payable   in   arrears   on each

Quarterly Interest Payment Date, on the date of each prepayment as to the amount

prepaid and on the Maturity Date.

 

                        (ii) Post-Default Interest. Notwithstanding clause (i)

 

above,   upon the occurrence and during the   continuance of any Event of Default,

the outstanding principal amount on each Note shall bear interest on each day at

a rate per annum equal to twelve   percent   (12.00%) plus the then Five Year Rate

in effect for such day.   Interest   payable   under this clause   (d)(ii)   shall be

payable on demand therefor.

 

                        (iii) Computation. All computations of interest payable

 

hereunder   shall be on the basis of a 360 day year   consisting   of twelve 30-day

months and actual days elapsed in the period of which such interest is payable.

 

               2.3 Issuance of Warrants.

 

                   --------------------

 

                    (a) Subject to the terms and   conditions of this   Agreement,

the Parent hereby agrees to issue and sell to each Purchaser at the Closing,   as

part of its inducement to purchase the Note, a warrant   entitling such Purchaser

to purchase such number of Common Units specified opposite such Purchaser's name

on Schedule I at an exercise   price of $0.01 per Common Unit, and containing the

same additional terms and conditions,   and with the same exercise   features,   as

set forth in the form of warrant attached hereto as Exhibit C   (individually,   a

"Warrant," collectively, the "Warrants").

 

                                      -19-

 

<PAGE>

 

                    (b) Each   Purchaser   shall be granted   certain   registration

rights with respect to the Common Units   issuable upon exercise of the Warrants,

in accordance with the terms of the   Registration   Rights   Agreement,   a form of

which is set forth as Exhibit D hereto (the   "Registration   Rights   Agreement"),

which shall be executed   and   delivered   by the parties   thereto at the Closing.

Each   Purchaser   and   the   Parent   shall   become   a   party   to the   Shareholders

Agreement,   a form of which is set forth as Exhibit H hereto (the   "Shareholders

Agreement").

 

               2.4 Closing; Escrow Arrangements. The closing of the purchase and

sale of the Notes and Warrants to the Purchasers hereunder (the "Closing") shall

take place at the offices of Willkie Farr & Gallagher   LLP, 787 Seventh   Avenue,

New York, NY, at 10:00 A.M. on March 31, 2004 (the "Closing   Date"),   or at such

other time and place as the Parent, the Co-Borrowers and the Purchasers mutually

agree upon orally or in writing.   At the   Closing,   (a) the   Co-Borrowers   shall

deliverer to each Purchaser a Note, pursuant to Section 2.1(a), representing the

principal amount specified opposite such Purchaser's name on Schedule I attached

hereto,   (b) the Parent shall deliver to each   Purchaser a Warrant,   pursuant to

Section 2.3, to purchase   such number of Common Units   specified   opposite   such

Purchaser's name on Schedule I attached hereto and such Purchaser shall cause to

be delivered   the purchase   price for the Notes and the Warrants to be purchased

by such   Purchaser   set forth   opposite   such   Purchaser's   name on   Schedule   I

attached hereto by wire transfer   immediately   available funds (i) in the amount

of   $3,600,000   to the account of Advanced   Aesthetics,   LLC (as nominee for the

Co-Borrowers)   (Account No.   1891002) at the Escrow Bank,   (ii) in the amount of

$2,400,000 to the Escrow   Account,   and (iii) in the amount of $4,000,000 to the

Escrow Account (the "GK Reserve Amount"), and (c) the Co-Borrowers shall deliver

to each   Purchaser   by wire   transfer   of   immediately   available   funds to such

Purchaser's   account, a commitment fee equal to 2.00% of the aggregate principal

amount of the Notes less the GK Reserve Amount (i.e., $120,000), which fee shall

be fully earned and   non-refundable   (the "Closing Date Commitment   Fee").   Upon

release of the GK Reserve   Amount to the   Co-Borrowers   on the GK Escrow Release

Date,   the   Co-Borrowers   shall   deliver to each   Purchaser by wire   transfer of

immediately   available funds to such Purchaser's account, a commitment fee equal

to 2.00% of the GK   Reserve   Amount   (i.e.,   $80,000),   which fee shall be fully

earned and non-refundable

 

                   The   funds   in   the   Escrow    Account    shall   be   subject   to

disbursement only with the prior written consent of TICC and may be disbursed by

TICC to TICC upon any of the following circumstances:

 

                  (a) during the continuance of any Event of Default, all or any

         portion of the Escrow Funds may be disbursed   to the   Purchasers   to be

         applied to the   payment of the   Obligations,   first,   to the payment or

         reimbursement of any fees, expenses or indemnity payments payable under

         any of the Transaction Documents,   second, to the payment of any unpaid

         interest or premium in respect of the Notes,   third,   to the payment of

         the   principal   of the Notes and   fourth,   to the   payment of any other

         Obligations;

 

                  (b) on any   date   on   which   any   payment   of   interest   on or

         premium,   if any,   is payable   (including   any date after   payment   was

         originally   due if not made on such   date)   with   respect to the Notes,

         such portion of the Escrow Funds as is necessary to make such   payment,

         in each case without consent from any Obligor and

 

                                      -20-

 

<PAGE>

 

                  (c) (i) if the GK Acquisition   Conditions   have been satisfied

         on or before   December 31,   2004,   as   determined   in good faith by the

         Collateral   Agent,   the GK Reserve   Amount shall be   transferred on the

         date of   consummation   of the GK   Acquisition   by   wire of   immediately

         available funds to the account of GK Acquisition specified by it to the

         Purchasers,   and (ii) if the GK   Acquisition   Conditions   have not been

         satisfied on or before   December 31, 2004,   as determined in good faith

         by the Collateral   Agent, the GK Reserve Amount shall be applied at any

         time   thereafter   selected   by   the   Collateral   Agent   as a   mandatory

         prepayment of the Notes pursuant to Section 2.5(b).

 

                  Funds in the Escrow   Account   shall be invested   in   Permitted

Investments   selected by the Collateral Agent but the Collateral Agent shall not

be   liable   under   any   circumstances   for any   losses   resulting   from any such

investments   or in the   event   that a higher   rate of   return   might   have   been

obtained   from   selection   of   investments   other   than   those   selected   by the

Collateral Agent. In addition, upon any prepayment of the principal of, premium,

if any,   and interest on the Notes in full,   together   with payment of all other

Obligations   then due,   the   Collateral   Agent will   direct   the Escrow   Bank to

release all remaining funds to the account specified by the   Co-Borrowers.   Upon

any prepayment of less than the entire principal amount of the Notes, so long as

no Default or Event of Default   shall have   occurred and be   continuing,   at the

request of the   Co-Borrowers the Collateral Agent will direct the Escrow Bank to

release such portion of the remaining   funds in the Escrow Account as is not, in

the good faith   determination of the Collateral Agent,   necessary to provide for

the timely   payment of interest on the remaining   principal   amount of the Notes

or, if prior to the GK Escrow   Release   Date,   for the release of the GK Reserve

Amount.

 

                  The   Co-Borrowers   agree and, by execution and delivery of the

Guarantee,   each   Guarantor   agrees that the accounts to which the proceeds from

the Notes were wired pursuant to the first   paragraph of this Section 2.4 are in

the name of Advanced   Aesthetics,   LLC solely as nominee for the Parent,   to the

extent such funds are   ultimately   determined   to be   allocable   to the purchase

price of the Warrant, and as nominee for the Co-Borrowers,   to the extent of the

remaining funds (including, for clarity, all funds wired to the Escrow Account).

 

               2.5 Prepayment.

 

                   ----------

 

                    (a) Optional   Prepayment.   The   Co-Borrowers   may prepay the

Notes in aggregate   multiples of $500,000,   provided   that,   with respect to any

voluntary   prepayments   made by the   Co-Borrowers   (and as   provided   in Section

9.2(d)), the Co-Borrowers shall pay a premium on the amount of principal prepaid

of (i)   12.00%   with   respect   to any   prepayment   made on or prior to the first

anniversary of the Closing Date,   (ii) 6.00% with respect to any prepayment made

after the first   anniversary   of the Closing   Date and on or prior to the second

anniversary   of the Closing   Date and (iii) 0% at any time   thereafter,   plus in

each case accrued and unpaid   interest on the amount of any   principal   prepaid.

The   Co-Borrowers   shall pay to each holder of a Note a pro rata   portion of the

aggregate   amount   paid under this clause (a) based on the   respective   original

principal   amounts of the Notes.   Notwithstanding   the foregoing,   if TICC shall

transfer   all or a portion of the Notes to a Person   other than an   Affiliate of

TICC, the Co-Borrowers shall be entitled to prepay the portion of the Note to be

transferred without payment of the foregoing premium provided such prepayment is

made within sixty (60) days after the earlier of (i) notice

 

                                      -21-

 

<PAGE>

 

from TICC to the   Co-Borrowers   of the   intent of TICC to   transfer   the Note or

portion thereof,   which notice shall specify the proposed   transferee,   and (ii)

the actual date of transfer of the Note or portion thereof.

 

                    (b)   Mandatory    Prepayment;    Repurchase   of   Warrant.   The

Co-Borrowers   shall   prepay   the   Notes in an amount   equal to the net   proceeds

received by any Obligor   (whether   or not such funds are made   available   to the

Co-Borrowers) upon the occurrence of any of the following events:

 

                        (i) any public offering;

 

                         (ii) any incurrence of bank or similar Indebtedness of

 

any Obligor (other than Indebtedness permitted under this Agreement); or

 

                        (iii) any proceeds from insurance proceeds in excess of

 

an aggregate of $500,000 during the term of the Notes; and

 

                        (iv) any proceeds from sales or other dispositions

 

outside the   ordinary   course of business (it being   understood   that nothing in

this Section 2.5(b) shall authorize any sale or other   disposition not expressly

permitted by Section 6.6);

 

                        (v) any proceeds constituting indemnity payments under

 

the GK Acquisition Documents in excess of $250,000 in the aggregate.

 

In addition,   the Co-Borrowers   shall prepay the Notes in an amount (i) equal to

the GK Reserve Amount in the event the Acquisition   Conditions are not satisfied

on or prior to 5:00 p.m., New York time, on December 31, 2004 and (ii) specified

by Section 6.4(d) at the time specified therein..

 

               2.6 Application of Payments.   All payments   hereunder shall first

be   applied   to costs and   expenses,   then to   interest   and then to   principal,

including any premium payable in connection with such prepayment.

 

               2.7 Payments Generally.

 

                    ------------------

 

                    (a) All payments   hereunder and under each other Transaction

Document to any Purchaser shall be made in the lawful money of the United States

of   America,   in   immediately   available   funds and   without   set-off,   defense,

deduction   or   counterclaim   to the   account   of such   Purchaser   most   recently

designated to the Parent by such Purchaser for such purpose.

 

                    (b) If the due   date of any   payment   under   this   Agreement

would   otherwise   fall on a day that is not a Business   Day,   such date shall be

extended to the next succeeding   Business Day, and interest shall be payable for

any principal so extended for the period of such extension.

 

                                      -22-

 

<PAGE>

 

                     (c) The   Co-Borrowers   shall   pay   accrued   interest   on the

principal amount of any Note prepaid or repaid.

 

               2.8 Pro Rata   Sharing.   If any   Purchaser   shall   obtain from the

Co-Borrowers   or any   Guarantor   payment of any   principal of or interest on any

Note owing to it or   payment of any other   amount   under this   Agreement   or any

other Transaction Document or the Guaranty Agreement through the exercise of any

right of set-off,   banker's lien or   counterclaim or similar right or otherwise,

and, as a result of such payment,   such Purchaser   shall have received a greater

percentage   of the   principal of or interest on the Notes or such other   amounts

then due hereunder or thereunder   by the   Co-Borrowers   or any Guarantor to such

Purchaser than the percentage received by any other Purchaser, it shall promptly

purchase from such other Purchasers   participations in (or, if and to the extent

specified   by such   Purchaser,   direct   interests   in) the   Notes or such   other

amounts,   respectively,   owing to such   other   Purchasers   (or in   interest   due

thereon,   as the case may be) in such amounts,   and make such other   adjustments

from   time to time as shall   be   equitable,   to the end that all the   Purchasers

shall share the benefit of such excess   payment (net of any expenses that may be

incurred by such Purchaser in obtaining or preserving   such excess   payment) pro

rata in accordance with the unpaid   principal of and/or interest on the Notes or

such other amounts,   respectively,   owing to each of the Purchasers. To such end

all the Purchasers shall make appropriate   adjustments   among themselves (by the

resale of participations sold or otherwise) if such payment is rescinded or must

otherwise be restored.

 

               2.9 Set-off.   Each   Co-Borrower   agrees that, in addition to (and

without   limitation   of) any right of set-off,   banker's lien or   counterclaim a

Purchaser may otherwise have,   each Purchaser   shall be entitled,   at its option

(to the   fullest   extent   permitted   by law),   to set off and apply any   deposit

(general   or   special,    time   or   demand,    provisional   or   final),   or   other

indebtedness, held by it for the credit or account of such Co-Borrower at any of

its offices,   in any   currency,   against any   principal of or interest on any of

such Purchaser's Notes or any other amount payable to such Purchaser   hereunder,

that is not   paid   when   due   (regardless   of   whether   such   deposit   or   other

indebtedness is then due to such   Co-Borrower),   in which case it shall promptly

notify such   Co-Borrower and the other   Purchasers   thereof,   provided that such

Purchaser's failure to give such notice shall not affect the validity thereof.

 

               2.10 Transfer of the Notes and Warrants.

                    ----------------------------------

 

                    (a) Except as otherwise   provided   herein,   a Purchaser   may

transfer   its Notes and   Warrants in whole or in part without the consent of the

Parent,   any Obligor or any other   Purchasers   in   accordance   with this Section

2.10,   provided,   however,   that so long as no Default or Event of Default shall

have occurred and be continuing the Purchaser shall give the Parent at least ten

(10) Business Days prior notice prior to   transferring   the Notes or Warrants to

another Person other than to an Affiliate of the Purchaser.

 

                    (b) Upon   surrender of any Note at the   principal   executive

office of the   Parent or the office of any   paying   agent   located in the United

States   designated by the Parent on behalf of the   Co-Borrowers for registration

of transfer or exchange   (and in the case of a   surrender   for   registration   of

transfer,   accompanied by a written   instrument of transfer duly executed by the

registered   holder of such Note or such   holder's   attorney   duly   authorized in

writing and   accompanied   by the address for notices of each   transferee of such

Note or part

 

                                      -23-

 

<PAGE>

 

thereof),   the   Co-Borrowers   shall   execute and deliver   (within five   Business

Days), at the Co-Borrowers'   expense (except as provided below), one or more new

Notes (as requested by the holder thereof) in exchange therefor, in an aggregate

principal amount equal to the unpaid   principal amount of the surrendered   Note.

Each such new Note shall be payable to such Person as such   holder may   request.

Each   such new Note   shall be   dated   and bear   interest   from the date to which

interest shall have been paid on the   surrendered   Note or dated the date of the

surrendered   Note if no interest shall have been paid thereon.   The Co-Borrowers

may require   payment by such holder or transferee   of a sum   sufficient to cover

any stamp tax or governmental   charge imposed in respect of any such transfer of

Notes.   Notes shall not be transferred in   denominations   of less than $500,000,

provided that if necessary to enable the registration of transfer by a holder of

its entire   holding   of Notes,   one Note may be in a   denomination   of less than

$500,000. Any transferee, by its acceptance of a Note registered in its name (or

the name of its nominee),   shall be deemed to have made the   representations set

forth in Section 4.

 

                    (c) Upon   surrender of any Warrant (or Warrant Units) at the

principal   executive   office of the Parent or the office of any agent located in

the United   States   designated   by the Parent for   registration   of   transfer or

conversion   (and in the   case   of a   surrender   for   registration   of   transfer,

accompanied by a written   instrument of transfer duly executed by the registered

holder of such Warrant or such holder's   attorney duly authorized in writing and

accompanied   by the address for notices of each   transferee   of such   Warrant or

Warrant Units or part   thereof),   the Parent shall   execute and deliver   (within

five Business Days), at the Parent's expense (except as provided below),   one or

more new Warrants or certificates   evidencing the Warrant Units (as requested by

the   holder   thereof)   in   exchange   therefor,   convertible,   in the case of the

transfer of a Warrant, into an aggregate principal amount of Warrant Units equal

to   the   amount   of   Warrant   Units   into   which   the   surrendered   Warrant   was

convertible;   provided,   however, that in no event shall the Parent be obligated

to issue a new Warrant   exercisable   for fewer than 50,000   Warrant Units or the

remaining Units held by the Purchaser. Each such new Warrant or Warrant Unit, as

the case may be, shall be in the name of such Person as such holder may request.

The Parent may require   payment by such holder or transferee of a sum sufficient

to cover any stamp tax or   governmental   charge   imposed   in respect of any such

transfer of Warrants or Warrant Units.   Any   transferee,   by its acceptance of a

Warrant or Warrant   Units   registered   in its name (or the name of its nominee),

shall be deemed to have made the representations set forth in Section 4.

 

                    (d) For all transfers of Notes or Warrants   contemplated   by

this Section   2.10,   and   notwithstanding   anything to the contrary   herein,   no

transfer of a Note or Warrant   shall be   permitted   unless the (i) Parent   shall

have   received an opinion or opinions of counsel   (obtained at the   transferor's

expense),   to the effect that (A) the proposed   transfer may be effected without

registration   under the Securities Act and any applicable   state securities laws

and (B) the   proposed   transfer   will not cause the   Parent to become a publicly

traded   partnership   within the meaning of Section 7704 of the Internal   Revenue

Code,   and (ii) the   transferee   thereof   agrees in   writing   to be bound by the

restrictions set forth in this clause (c);   provided,   however,   that the Parent

may,   in its   sole   discretion,   waive   some   or all of   these   requirements   in

connection with any proposed transfer.

 

                                      -24-

 

<PAGE>

 

               2.11 Nature of Obligations of Co-Borrowers. The Obligations shall

constitute   the   joint   and   several   obligations   of   the   Co-Borrowers.    Such

Obligations are absolute and unconditional. Each Co-Borrower waives all defenses

available   to a surety   other than the   defense of full and final   payment.   The

provisions   of   Sections   2(e),   3,   4, 5 and 6 of the   Guaranty   Agreement   are

incorporated   herein by   reference   with each   Co-Borrower   being   treated   as a

guarantor of the obligation of each other Co-Borrower.

 

         3. REPRESENTATIONS AND WARRANTIES OF OBLIGORS

 

                  In order to induce the Purchasers to enter into this Agreement

and   consummate   the   transactions   contemplated   hereby,   the   Parent   and   the

Co-Borrowers   jointly and severally make to the   Purchasers the   representations

and warranties   contained in this Section 3. Such representations and warranties

are subject to the   qualifications   and   exceptions   set forth in the disclosure

schedule   delivered to the   Purchasers in connection   herewith (the   "Disclosure

Schedule").   References to the knowledge or awareness of the Obligors are deemed

to include the actual knowledge of any officer or director of the Parent and the

Co-Borrowers after due inquiry.

 

               3.1 Organization.

 

                   ------------

 

                    (a) The   Parent is a   corporation   duly   organized,   validly

existing and in good standing under the laws of the State of Delaware.   DiSchino

is a corporation duly organized, validly existing and in good standing under the

laws of the State of   Florida.   Each other   Co-Borrower   is a limited   liability

company,   respectively,   duly organized,   validly   existing and in good standing

under the laws of the State of   Delaware.   Each other   Guarantor is a company or

corporation   duly organized and validly existing in good standing under the laws

of the State of   Delaware.   Attached   hereto as Exhibit E are true and   complete

copies   of the   Certificate   of   Formation   and the   Limited   Liability   Company

Operating   Agreement and, if applicable,   bylaws, of the Parent, the Co-Borrower

and each   other   and each   Obligor,   each as   amended   through   the date   hereof

(collectively,   the "Organizational   Documents"), and no Obligor is in violation

of any term thereof.

 

                    (b) Each Obligor has all   requisite   power and authority and

has all necessary   approvals,   licenses,   permits and   authorization   to own its

properties   and to carry   on its   business   as now   conducted   and as   presently

contemplated   to be   conducted   except   where   the   failure   to   have   any   such

approvals,   licenses,   permits and authorizations would not result in a Material

Adverse   Effect.   Each Obligor has all requisite   power and authority to execute

and deliver the Transaction   Documents and to perform its obligations   hereunder

and thereunder.

 

                    (c) Each   Obligor   has   filed   all   necessary   documents   to

qualify to do business as a foreign   corporation in, and each Obligor is in good

standing   under,   the laws of each   jurisdiction   in which   the   conduct   of the

Parent's business as now conducted and as presently contemplated to be conducted

or the nature of the property   owned requires such   qualification,   except where

the failure to so qualify would not have a Material Adverse Effect.

 

               3.2   Capitalization.   All of the issued and   outstanding   Capital

Units of the Parent have been duly   authorized   and validly issued and are owned

by the Parent.   All the issued

 

 

                                      -25-

 

<PAGE>

 

and outstanding   Capital Units of each Obligor (other than the Parent) have been

duly authorized and validly issued and are owned by another Obligor.   All of the

outstanding Capital Units and warrants of the Parent have been validly issued in

compliance   with   applicable   state   and   federal    securities   laws.   Upon   the

consummation   of the   transactions   contemplated   hereby and effective as of the

Closing,   the authorized capital of the Parent will consist of 30,000,000 shares

of common stock ("Common   Units"),   and (b) 1,000,000   shares of preferred stock

("Preferred   Units").    There   are   no   declared   but   unpaid   distributions   or

undeclared   distribution   arrearages   on any   Common   Units of the   Parent,   any

Co-Borrower   or any other   Obligor.   Immediately   prior to giving   effect to the

consummation of the transactions   contemplated by this Agreement, the only units

of the Parent issued and   outstanding   and reserved for issuance or committed to

be issued will be as follows:

 

                    (a)   9,265,003   Common   Units,   duly and validly   issued and

     outstanding;

 

                    (b) 4,700 Series A Preferred   Units duly and validly   issued

     and   outstanding,   and 235,000 shares of Common Units reserved for issuance

     upon conversion of the Series A Preferred Units;

 

                    (c) 1,900 Series B Preferred   Units duly and validly   issued

     and outstanding,;

 

                    (d) 1,300 Series C Preferred   Units duly and validly   issued

     and   outstanding,   and 130,000 shares of Common Units reserved for issuance

     upon conversion of the Series C Preferred Units;

 

                    (e)   Zero (0)   Series D   Preferred   Units   duly and   validly

     issued and   outstanding,   and 3,678,559 shares of Common Units reserved for

     issuance upon conversion of the Series D Preferred Units;

 

                    (f) 500 Series E Preferred Units duly and validly issued and

     outstanding,   and 25,000 shares of Common Units   reserved for issuance upon

     conversion of the Series E Preferred Units;

 

                    (g)   5,966,444   Common   Units   reserved   for   issuance   upon

     conversion of the L Capital Note;

 

                    (h)   545,000    Common   Units    reserved   for   issuance   upon

     conversion of the warrants issued prior to the date hereof;

 

                    (i)   2,000,000   Common Units are   authorized by the Parent's

     stock incentive plan (the "Plan");   total options granted under the Plan as

     of the   Closing   cover   1,590,000   Common   Units;   of which   total   options

     exercised cover 0 Common Units, and hence,   unexercised options outstanding

     as of the Closing   cover   1,590,000   Common Units (Common Units issued upon

     exercise of the options have been included in (a) above); and

 

                    (j) in addition to the above, Schedule 3.2 hereto contains a

     complete   and   accurate   list of   each   other   right,   warrant,   option   or

     agreement   (including any convertible   security) to acquire any Common Unit

     from the Parent.

 

                                      -26-

 

<PAGE>

 

               3.3 Obligor Proceedings, etc. All company or corporate actions of

each Obligor necessary for the   authorization,   execution,   and delivery of this

Agreement and the Transaction   Documents,   the performance of all obligations of

each Obligor   hereunder   and   thereunder,   and the   authorization,   issuance (or

reservation   for   issuance),   and   delivery of the Notes,   the   Warrants and the

Warrant Units (the Warrants and Warrant Units being herein   collectively   called

the   "Securities")   have been taken or will be taken prior to the Closing.   This

Agreement,   the Transaction Documents, the Notes and the Warrants constitute the

valid and legally binding obligations of the Obligor party thereto,   enforceable

in accordance with their respective   terms,   except as limited by (a) applicable

bankruptcy,   insolvency,   reorganization,   moratorium, and other laws of general