Company has no right, but under certain circumstances may have an obligation, to make payments of principal of this Note in cash prior to the Maturity Date (as defined in Section 3(a)).  Whenever any amount expressed to be due by the terms of this Note is due on any day that is not a Business Day (as defined in Section 3(a)), the same shall instead be due on the next succeeding day that is a Business Day (unless in the case of interest, such next succeeding Business Day would be in the following calendar month, in which case such payment will be made on the immediately preceding Business Day).  Each capitalized term used herein, and not otherwise defined, shall have the meaning ascribed thereto in the Securities Purchase Agreement.

 

3.              Definitions .

 

(a)            Certain Defined Terms .  For purposes of this Note, the following terms shall have the following meanings:

 

“ € ” means Euros.

 

“ £ ” means Pound Sterling.

 

“ 3-Month LIBOR Rate ” means the London Interbank Offered Rate of LIBOR with respect to a three-month period for deposits of Dollars as reported by Bloomberg Financial Markets (or any successor thereto, “ Bloomberg ”) at approximately 10:00 a.m. (New York City time) through its “LIBOR Rates” function (accessed by typing “LR” [GO] on a Bloomberg terminal, and looking at the row entitled “3 MONTH” and under the column entitled “DOLLAR LIBOR”) (or such other page as may replace that page on that service, or such other service as may be selected jointly by the Company and the holders of at least a majority of the aggregate principal amount of the Notes then Outstanding).  If such rate appears on the Bloomberg LIBOR Rates page on any date of determination of the 3-Month LIBOR Rate (a “ LIBOR Determination Date ”), the 3-Month LIBOR Rate for such date of determination will be such rate.  If on any LIBOR Determination Date such rate does not appear on the Bloomberg LIBOR Rates page, the Company and such holders of the Notes will jointly request each of four major reference banks in the London interbank market, as selected jointly by the Company and the holders of at least a majority of the aggregate principal amount of the Notes then Outstanding, to provide the Company with its offered quotation for United States dollar deposits for the upcoming three-month period, to prime banks in the London interbank market at approximately 4:00 p.m., London time on any such LIBOR Determination Date and in a principal amount that is representative for a single transaction in Dollars in such market at such time.  If at least two reference banks provide the Company with offered quotations, 3-Month LIBOR Rate on such LIBOR Determination Date will be the arithmetic mean of all such quotations.  If on such LIBOR Determination Date fewer than two of the reference banks provide the Company with offered quotations, 3-Month LIBOR Rate on such LIBOR Determination Date will be the arithmetic mean of the offered per annum rates that three major banks in New York City selected jointly by the Company and the holders of at least a majority of the aggregate principal amount of the Notes then Outstanding quote at approximately 11:00 A.M. in New York City on such LIBOR Determination Date for three-month Dollar loans to leading European banks, in a principal amount that is representative for a single transaction in Dollars in such market at such time.  If these New York City quotes are not available, then the 3-Month LIBOR

 

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Rate determined on such LIBOR Determination Date will continue to be the 3-Month LIBOR Rate as then currently in effect on such LIBOR Determination Date.

 

“ Affiliate ” has the meaning ascribed to such term in Rule 12b-2 of the General Rules and Regulations under the 1934 Act; provided , that for purposes of this Note no holder hereof shall be deemed an Affiliate of the Company by virtue of holding this Note.

 

“ Allocation Percentage ” means, with respect to each holder of Notes as of the date of any determination, a fraction of which the numerator is the aggregate principal amount of the Notes held by such holder on such date, and of which the denominator is the aggregate principal amount of the Notes Outstanding on such date.

 

“ Applicable Interest Rate ” initially shall mean the per annum interest rate equal to the sum of (a) the 3-Month LIBOR Rate in effect on the LIBOR Determination Date that is two Business Days preceding the Issuance Date and (b) six percent (6.00%); provided , however , that on each Interest Payment Date, such rate shall be adjusted to the per annum interest rate equal to the sum of (a) the 3-Month LIBOR Rate in effect on the LIBOR Determination Date that is two Business Days preceding such Interest Payment Date and (b) six percent (6.00%).  Each Applicable Interest Rate will be applicable as of and after the Interest Payment Date to which it relates to, but not including, the next succeeding Interest Payment Date.

 

“ Approved Stock Plan ” means any employee benefit plan that has been approved by the board of directors and stockholders of the Company prior to the date of the Securities Purchase Agreement and listed on Schedule 3(c)  thereto, pursuant to which the Company’s securities may be issued to any employee, officer or director for services provided to the Company.

 

“ Business Day ” means any day other than Saturday, Sunday or other day on which commercial banks in the city of New York are authorized or required by law to remain closed; provided that if such date is a LIBOR Determination Date, it shall also be a day on which banks in London, England are open for dealings in U.S. Dollars in the London Interbank Market.

 

“ Capital Lease Obligation ” means, as to any Person, any obligation that is required to be classified and accounted for as a capital lease on a balance sheet of such Person prepared in accordance with GAAP and the amount of such obligation shall be the capitalized amount thereof, determined in accordance with GAAP.

 

“ Capital Expenditures ” means for any period, with respect to any Person, the aggregate of all expenditures by such Person and its Subsidiaries for the acquisition or leasing (pursuant to a capital lease) of fixed or capital assets or additions to equipment (including replacements, capitalized repairs and improvements during such period) that should be capitalized under GAAP on a consolidated balance sheet of such Person and its Subsidiaries.

 

“ Change of Control ” means (i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company (including, for the avoidance of doubt, the sale of all or substantially all of the assets of the Company’s Subsidiaries in the aggregate) to any Person or group of related Persons (as

 

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defined in Section 13(d) of the Securities Exchange Act of 1934, as amended (the “ 1934 Act ”), (ii) the approval by the holders of the Company’s capital stock of any plan or proposal to effect the liquidation, dissolution or winding up of the Company, (iii) any Person or group of related Persons (other than Permitted Holders) shall become the beneficial owner (as defined in Rule 13d-3 under the 1934 Act) of the outstanding Shares representing more than 50% of the aggregate voting power of all classes of the voting securities of the Company or (iv) the consolidation, merger or other business combination of the Company with or into another Person (other than (A) a consolidation, merger or other business combination in which holders of the Company’s voting power immediately prior to the transaction continue after the transaction to hold, directly or indirectly, a majority of the combined voting power of the surviving entity or entities entitled to vote generally for the election of a majority of the members of the board of directors (or their equivalent if other than a corporation) of such entity or entities, or (B) pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of the Company).

 

“ Common Stock ” means (A) the Company’s common stock, $0.001 par value per share, and (B) any capital stock resulting from a reclassification of such common stock.

 

“ Contingent Obligation ” means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any 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 such liability 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.

 

“ Conversion Amount ” means either (A) in the case of a conversion pursuant to Section 4, the sum of (1) the Principal to be converted, redeemed or otherwise with respect to which the determination is being made and (2) the Interest Amount with respect to the amount referred to in the immediately preceding clause (1), or (B) in the case of an Interest Conversion (as defined in Section 8), the Interest Conversion Amount.

 

“ Conversion Price ” means, as of any Conversion Date or other date of determination, the Fixed Conversion Price; provided that for purposes of an Interest Conversion pursuant to Section 8, the Conversion Price shall mean 93% of the Weighted Average Price of the Common Stock on each of the five (5) Trading Days ending on the Trading Day immediately preceding the Interest Conversion Date applicable to any such Interest Conversion for which such determination is being made.

 

“ Convertible Securities ” means any stock or securities (other than Options) directly or indirectly convertible into or exchangeable or exercisable for Shares.

 

“ Default ” means any event or circumstance that is, or with the giving of notice or lapse of time or both, would be an Event of Default.

 

“ Dollars ” or “ $ ” means United States Dollars.

 

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“ Eurosilicone Agreement ” means that certain Agreement for the Sale and Purchase of the Shares of Laboratories Eurosilicone SA, dated May 17, 2004, by and among the Company and the sellers named therein, which agreement has not been amended, supplemented or otherwise modified since such date.

 

“ Excluded Taxes ” means, with respect to the Holder, or any other recipient of payment to be made by or on account of any obligations of the Company or any of its Subsidiaries under the Notes, the Securities Purchase Agreement or under any other Transaction Document, (A) income or franchise taxes imposed on (or measured by) its net income by the United States of America or any other jurisdiction under the laws of which such recipient is organized, its principal offices are located, it is resident for tax purposes or to which it has a connection giving rise to such taxes other than by reason of the transactions contemplated by this Agreement, including the holding of the Notes, and enforcing its rights thereunder (B) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which the Holder or recipient is treated as doing business, (C) any Taxes imposed by reason of a Holder or recipient failing to provide forms or certifications it is legally able to provide that would reduce or eliminate such Taxes and that are reasonably requested by the Company.

 

“ Exempted Issuances ” means (A) Shares issued or deemed to have been issued by the Company pursuant to an Approved Stock Plan; (B) Shares issued or deemed to have been issued upon the conversion, exchange or exercise of any Option or Convertible Security outstanding on the date prior to the Issuance Date and set forth in Schedule 3(c)  to the Securities Purchase Agreement, provided that the terms of such Option or Convertible Security are not amended or otherwise modified on or after the date of the Securities Purchase Agreement, and provided that the conversion price, exchange price, exercise price or other purchase price is not reduced, adjusted or otherwise modified and the number of Shares issued or issuable is not increased (whether by operation of, or in accordance with, the relevant governing documents or otherwise) on or after the date of the Securities Purchase Agreement; and (C) Shares issued or deemed to have been issued by the Company upon conversion of the Notes or exercise of the Warrants.

 

“ Fixed Conversion Price ” means, as of any Conversion Date or other date of determination, $4.00, subject to adjustment as provided herein.

 

“ Forced Conversion ” means an Interest Conversion or a Company Conversion, as applicable.

 

“ Forced Conversion Date ” means an Interest Conversion Date or a Company Conversion Date, as applicable.

 

“ Forced Conversion Notice ” means an Interest Conversion Notice or a Company Conversion Notice, as applicable.

“ Forced Conversion Notice Date ” means an Interest Conversion Notice Date or a Company Conversion Notice Date, as applicable.

 

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“ Fundamental Conditions ” when used in reference to a Forced Conversion, means, as of any date of determination, (i) a Registration Statement shall have been effective for at least forty-five (45) days prior to such date and shall continue to be effective and available for the sale of not less than 150% of the Registrable Securities issuable upon conversion of all of the outstanding Notes and exercise of all of the outstanding Warrants, in accordance with the Registration Rights Agreement, and no Grace Period (as defined in the Registration Rights Agreement) applicable to such Registration Statement shall be in effect nor shall there have been any Grace Period which is not an Allowable Grace Period (as defined in the Registration Rights Agreement) applicable to such Registration Statement; (ii) with respect to any Interest Conversion, the aggregate Interest Conversion Amount of all the Notes shall not exceed fifteen (15%) of the product of (A) the arithmetic average of the daily dollar trading volume (as reported by Bloomberg) of the Common Stock on its Principal Market over the twenty (20) consecutive Trading Days ending on and including the date that is immediately preceding the Interest Conversion Notice Date, multiplied by (B) the number of expected Trading Days during the Interest Conversion Period to which the Interest Conversion Notice relates, as set forth therein; (iii) on each day during the period beginning forty-five (45) days prior to the Forced Conversion Notice Date and ending on and including the applicable Forced Conversion Date, the Common Stock shall be listed on the American Stock Exchange or another nationally recognized stock exchange or quoted on The NASDAQ Stock Market, Inc. (“ NASDAQ ”) and the Common Stock shall not have been suspended from trading on any such market or exchange nor shall delisting or suspension by any such market or exchange have been threatened either (A) in writing by such market or exchange or (B) by falling below the minimum listing maintenance requirements of such market or exchange; (iv) during the period beginning on and including the Issuance Date and ending on and including the Forced Conversion Date, there shall not have occurred either (x) the public announcement of a pending, proposed or intended Change of Control that has not been abandoned, terminated or consummated and publicly disclosed as such at least twenty (20) Trading Days prior to the Forced Conversion Date or (y) any other Triggering Event (as defined in Section 5(c)) or an Event of Default (as defined in Section 13(a)); (v) during the period beginning on the Issuance Date and ending on and including the Forced Conversion Date, the Company shall have delivered Shares upon conversion of the Notes and upon exercise of the Warrants on a timely basis as set forth in Section 4(c)(ii) of the Notes and Section 3(a) of the Warrants; (vi) on each day during the period beginning ninety (90) days prior to the Forced Conversion Notice Date and ending on and including the applicable Forced Conversion Date, the Company and its Subsidiaries otherwise shall have been in material compliance with in all respects and shall not have materially breached or been in breach of any provision or covenant of the Notes or any other Transaction Documents; and (vii) the Company shall have obtained all requisite approvals (if any) of its stockholders for the issuance of the Shares to the holders of the Notes and the Warrants.

 

“ GAAP ” means United States generally accepted accounting principles.

 

“ Governmental Authority ” means the government of any nation, state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing.

 

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“ Guarantee and Collateral Agreement ” means that certain Guarantee and Collateral Agreement among the Company, certain of its Subsidiaries (the “ Guarantors ”) and the Collateral Agent (as defined in the Securities Purchase Agreement) pursuant to which (i) the Company and the Guarantors have granted the holders of the Notes a first priority security interest, subject to Permitted Liens, in the collateral described therein and (ii) the Guarantors have guaranteed for the benefit of the holders of the Notes, the obligations of the Company under this Note and the other Transaction Documents as the same may be amended, supplemented or otherwise modified from time to time.

 

“ Indebtedness ” of any Person means, without duplication (A) all indebtedness for borrowed money, (B) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than unsecured account trade payables that are (i) entered into or incurred in the ordinary course of the Company’s and its Subsidiaries’ business, (ii) on terms that require full payment within ninety (90) days, (iii) not unpaid in excess of fifteen (15) days beyond invoice due date or are being contested in good faith and as to which such reserve as is required by GAAP has been made and (iv) not exceeding at any one time an aggregate among the Company and its Subsidiaries of $500,000), (C) all reimbursement or payment obligations with respect to letters of credit, banker’s acceptances, surety bonds and other similar instruments, (D) all obligations evidenced by notes, bonds, debentures, redeemable capital stock or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses, (E) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to any property or assets acquired with the proceeds of such indebtedness (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property), (F) all Capital Lease Obligations, (G) all indebtedness referred to in clauses (A) through (F) above secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in any property or assets (including accounts and contract rights) owned by any Person, even though the Person that owns such assets or property has not assumed or become liable for the payment of such indebtedness and (H) all Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (A) through (G) above.

 

“ Indemnified Taxes ” means Taxes other than Excluded Taxes.

 

“ Interest Amount ” means, with respect to any Principal, all accrued and unpaid Interest (including any Default Interest as defined in Section 8(a)) on such Principal through and including such date of determination.

 

“ Interest Payment Date ” means (i) September 30 and March 31 of each year (or if such date is not a Business Day, the immediately preceding Business Day), beginning with September 30, 2006, (ii) the Maturity Date and (iii) each other date on which any Principal of this Note is paid in accordance with the terms of this Note.

 

“ Issuance Date ” means the original date of issuance of this Note pursuant to the Securities Purchase Agreement, regardless of any exchange or replacement hereof.

 

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“ Liens ” means, with respect to any asset, any mortgage, lien, pledge, hypothecation, charge, security interest, encumbrance or adverse claim of any kind and any restrictive covenant, condition, restriction or exception of any kind that has the practical effect of creating a mortgage, lien, pledge, hypothecation, charge, security interest, encumbrance or adverse claim of any kind (including any of the foregoing created by, arising under or evidenced by any conditional sale or other title retention agreement, the interest of a lessor with respect to a Capital Lease Obligation, or any financing lease having substantially the same economic effect as any of the foregoing).

 

“ Maturity Date ” means March 31, 2011.

 

“ New Securities ” means any authorized but unissued securities of the Company other than (i) Exempted Issuances; (ii) securities issued pursuant to the acquisition of another Person by the Company or its Subsidiaries by merger, purchase of all or substantially all of the assets of such Person or other transaction whereby the Company shall become directly or indirectly the owner of more than 50% of the aggregate voting power of all classes of the voting securities of such Person; (iii) shares of Common Stock or Preferred Stock issued pursuant to any pro rata stock split or stock dividend; and (iv) shares of Common Stock or Preferred Stock issued pursuant to a Qualified Public Offering.

 

“ Options ” means any rights, warrants or options to subscribe for or purchase Shares or Convertible Securities.

 

“ Other Notes ” means all of the senior secured convertible notes, other than this Note, that have been issued by the Company pursuant to the Securities Purchase Agreement and all notes issued in exchange therefor or replacement thereof.

 

“ Outstanding ” when used with reference to the Notes, means, as of any date of determination, any Note, or portion thereof (a) which is held by any Person other than the Company or its Affiliates and (b) for which all principal and other amounts due thereunder have not been repaid in full by the Company.

 

“ Permitted Holders ” means the Donald K. McGhan, Jim J. McGhan, Nikki M. Pomeroy and 1991 III Equity Performance II, LP and their respective Affiliates.

 

“ Permitted Lien ” means (a)  Liens created by the Security Documents; (b) Liens existing on the date of this Agreement not otherwise described in any other clause of this definition and set forth on Schedule 3(bb) to the Securities Purchase Agreement; (c) Liens for taxes, assessments or other governmental charges not at the time due and payable so long as the Company and its Subsidiaries maintain adequate reserves in accordance with GAAP in respect of such taxes and charges; (d) statutory liens of landlords and Liens arising in the ordinary course of business in favor of carriers, warehousemen, mechanics, suppliers, repairmen and materialmen, or other similar Liens imposed by law, which remain payable without penalty or which are being contested in good faith by appropriate proceedings diligently prosecuted, which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto, and in each case for which adequate reserves in accordance with GAAP are being maintained; (e) Liens arising in the ordinary course of business in connection with worker’s compensation,

 

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unemployment compensation, unemployment insurance and other types of social security (excluding Liens arising under ERISA); (f) attachments, appeal bonds (and cash collateral securing such bonds), judgments and other similar Liens, for sums not exceeding $500,000 in the aggregate for the Company and its Subsidiaries, arising in connection with court proceedings, provided that the execution or other enforcement of such Liens is effectively stayed; (g) easements, rights of way, restrictions, minor defects or irregularities in title and other similar Liens arising in the ordinary course of business and not materially detracting from the value of the property subject thereto and not interfering in any material respect with the ordinary conduct of the business of the Company or any Subsidiary; (h) Liens arising solely by virtue of any statutory or common law provision relating to banker’s liens, rights of set-off or similar rights and remedies and burdening only deposit accounts or other funds maintained with a creditor depository institution, provided that no such deposit account is a dedicated cash collateral account or is subject to restrictions against access by the depositor in excess of those set forth by regulations promulgated by the Board of Governors of the Federal Reserve System and no such deposit account is intended by the Company or any Subsidiary to provide collateral to the depository institution; and (i) Liens, including capital leases, solely securing tangible personal property material to the business that has been purchased through the incurrence of Indebtedness in an amount not to exceed $250,000 at any one time outstanding.

 

“ Person ” means any individual, firm, corporation, partnership, limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, Governmental Authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity.

 

“ Principal ” means the outstanding principal amount of this Note as of any date of determination.

 

“ Principal Market ” means, with respect to the Common Stock or any other security, the principal securities exchange or trading market for the Common Stock or such other security.

 

“ promptly ” shall mean as soon as reasonably possible, and in any event within two (2) Business Days.

 

“ Qualified Public Offering ” means a bona fide firm commitment underwritten public offering of the Company’s equity securities pursuant to an effective registration statement under the 1933 Act, and in which the underwriting is lead managed by an internationally recognized investment banking firm (which has been approved by the holders of Notes representing at least a majority of the aggregate principal amount of the Notes then Outstanding) in which the net price per share (after deduction of underwriting discounts and commissions) is equal to or greater than $8.00 (subject to adjustments for stock splits, stock dividends, combinations, reclassifications and other events) and which results in gross proceeds of at least $75,000,000.

 

“ Registrable Securities ” for purposes of this Note means Shares issued or issuable upon conversion of the Notes and exercise of the Warrants, and any shares of capital stock issued or issuable with respect to such Shares as a result of any stock split, stock dividend,

 

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recapitalization, exchange or similar event or otherwise, without regard to any limitations on conversions of the Notes or exercise of the Warrants.

 

“ Registration Rights Agreement ” means that certain Registration Rights Agreement, dated as of April 26, 2006, among the Company and the initial holders of the Notes relating to the filing of registration statements covering, among other things, the resale of the Registrable Securities, as such agreement may be amended from time to time as provided in such agreement.

 

“ Registration Statement ” means a registration statement or registration statements filed under the 1933 Act pursuant to the Registration Rights Agreement covering the resale of the Registrable Securities.

 

“ SEC ” means the United States Securities and Exchange Commission, or any successor thereto.

 

“ Security Documents ” means the Guarantee and Collateral Agreement and any other agreements, documents and instruments executed concurrently herewith or at any time hereafter pursuant to which the Company, its Subsidiaries or any other Person either (i) guarantees payment or performance of all or any portion of the obligations hereunder or under any other instruments delivered in connection with the transactions contemplated hereby and by the Securities Purchase Agreement and/or (ii) provides, as security for all or any portion of such obligations, a Lien on any of its assets in favor of the Holder, as any or all of the same may be amended, supplemented, restated or otherwise modified from time to time.

 

“ Shares ” means shares of Common Stock.

 

“ Subsidiary ” means any entity in which the Company, directly or indirectly, owns twenty percent (20%) or more of the outstanding capital stock, equity or similar interests or voting power of such entity as of the date of the execution of the Securities Purchase Agreement or at any time thereafter.

 

“ Taxes ” means any federal, state, provincial, county, local, foreign and other taxes (including, without limitation, income, profits, windfall profits, alternative, minimum, accumulated earnings, personal holding company, capital stock, premium, estimated, excise, sales, use, occupancy, gross receipts, franchise, ad valorem, severance, capital levy, production, transfer, withholding, employment, unemployment compensation, payroll and property taxes, import duties and other governmental charges and assessments), whether or not measured in whole or in part by net income, and including deficiencies, interest, additions to tax or interest, and penalties with respect thereto.

 

“ Trading Day ” means any day on which the Common Stock is traded on its Principal Market; provided that “Trading Day” shall not include any day on which the Principal Market is open for trading for less than 4.5 hours.

 

“ Warrants ” means the warrants issued to the original buyers of the Notes pursuant to the Securities Purchase Agreement and all warrants issued in exchange or substitution therefor or replacement thereof.

 

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“ Weighted Average Price ” means, for any security as of any date, the dollar volume-weighted average price for such security on its Principal Market during the period beginning at 9:30 a.m. New York City time (or such other time as its Principal Market publicly announces is the official open of trading) and ending at 4:00 p.m. New York City time (or such other time as its Principal Market publicly announces is the official close of trading) as reported by Bloomberg through its “Volume at Price” functions, or if the foregoing does not apply, the dollar volume-weighted average price of such security in the over-the-counter market on the electronic bulletin board for such security during the period beginning at 9:30 a.m. New York City time (or such other time as such over-the-counter market publicly announces is the official open of trading), and ending at 4:00 p.m. New York City time (or such other time as such over-the-counter market publicly announces is the official close of trading) as reported by Bloomberg, or, if no dollar volume-weighted average price is reported for such security by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as reported in the “pink sheets” by the National Quotation Bureau, Inc.  If the Weighted Average Price cannot be calculated for such security on such date on any of the foregoing bases, the Weighted Average Price of such security on such date shall be the fair market value as mutually determined by the Company and the holders of Notes representing at least a majority of the aggregate principal amount of the Notes then Outstanding as to which such determination is being made.  If the Company and the holders of the Notes representing at least a majority of the aggregate principal amount of the Notes then Outstanding as to which such determination is being made are unable to agree upon the fair market value of the Common Stock, then such dispute shall be resolved pursuant to Section 4(c)(iii) below with the term “Weighted Average Price” being substituted for the term “Conversion Price.”  All such determinations shall be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction during any period during which the Weighted Average Price is being determined.

 

4.              Conversion of this Note .  This Note shall be converted into Shares on the terms and conditions set forth in this Section 4.

 

(a)            Conversion at Option of the Holder .  Subject to the provisions of Section 7, at any time or times on or after the Issuance Date, the Holder shall be entitled to convert all or any part of the Principal (and the Interest Amount relating thereto) into fully paid and nonassessable Shares in accordance with this Section 4, at the Conversion Rate (as defined in Section 4(b)).  The Company shall not issue any fraction of a Share upon any conversion.  If the issuance would result in the issuance of a fraction of a Share, then the Company shall round such fraction of a Share up or down to the nearest whole share (with 0.5 rounded up).  If any Principal remains outstanding on the Maturity Date, then all such Principal (and the Interest Amount relating thereto) shall be repaid as of such date in accordance with Section 4(c)(vii).

 

(b)            Conversion Rate .  The number of Shares issuable upon a conversion of any portion of this Note pursuant to Section 4 shall be determined according to the following formula (the “ Conversion Rate ”):

 

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C onversion Amount
Conversion Price

 

(c)            Mechanics of Conversion .  The conversion of this Note shall be conducted in the following manner:

 

(i)             Holder’s Delivery Requirements .  To convert a Conversion Amount into Shares on any date (the “ Conversion Date ”), the Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m. New York City time on such date, a copy of an executed conversion notice in the form attached hereto as Exhibit I (the “ Conversion Notice ”) to the Company (attention:  Corporate Secretary) and (B) if required by Section 4(c)(viii), surrender to a common carrier for delivery to the Company, no later than three (3) Business Days after the Conversion Date, the original Note being converted (or an indemnification undertaking reasonably acceptable to the Company with respect to this Note in the case of its loss, theft or destruction).  Such Conversion Notice shall specify whether and in what amounts the Conversion Amount relates to (i) a conversion at the election of the Holder pursuant to Section 4(a) at the Fixed Conversion Price, (ii) an Interest Conversion pursuant to Section 8 or (iii) a Company Conversion pursuant to Section 9, and any such conversion shall be applied as so specified.

 

(ii)            Company’s Response .  Upon receipt by the Company of a copy of a Conversion Notice, the Company (I) shall promptly send, via facsimile, a confirmation of receipt of such Conversion Notice to the Holder and the Company’s designated transfer agent (the “ Transfer Agent ”), which confirmation shall constitute an instruction to the Transfer Agent to process such Conversion Notice in accordance with the terms herein and (II) on or before the second (2 ^nd ) Business Day following the date of receipt by the Company of such Conversion Notice (the “ Share Delivery Date ”) (A)  provided that the Transfer Agent is participating in The Depository Trust Company (“ DTC ”) Fast Automated Securities Transfer Program and provided that the Holder is eligible to receive Shares through DTC, credit such aggregate number of Shares to which the Holder shall be entitled to the Holder’s or its designee’s balance account with DTC through its Deposit Withdrawal Agent Commission system, or (B) if the foregoing shall not apply, issue and deliver to the address as specified in the Conversion Notice, a certificate, registered in the name of the Holder or its designee, for the number of Shares to which the Holder shall be entitled.  If this Note is submitted for conversion, as may be required by Section 4(c)(viii), and the Principal represented by this Note is greater than the Principal being converted, then the Company shall, as soon as practicable and in no event later than three (3) Business Days after receipt of this Note (the “ Note Delivery Date ”) and at its own expense, issue and deliver to the Holder a new Note representing the Principal not converted and cancel this Note.

 

(iii)           Dispute Resolution .  In the case of a dispute as to the determination of the Conversion Price or the arithmetic calculation of the Conversion Rate, the Company shall instruct the Transfer Agent to issue to the Holder the Shares representing the number of Shares that is not disputed and shall transmit an explanation of the disputed determinations or arithmetic calculations to the Holder via facsimile within two (2) Business Days of receipt of the Holder’s Conversion Notice or other date of determination.  If the Holder and the Company are unable to agree upon the determination of the Conversion Price or arithmetic calculation of the Conversion Rate within one (1) Business Day of such disputed determination or arithmetic calculation being transmitted to the Holder, then the Company shall promptly (and in any event within two (2) Business Days) submit via facsimile (A) the disputed

 

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determination of the Conversion Price to an independent, reputable investment banking firm agreed to by the Company and the holders of the Notes representing at least a majority of the aggregate principal amounts of the Notes then Outstanding as to which such determination is being made, or (B) the disputed arithmetic calculation of the Conversion Rate to the Company’s independent, outside accountant, as the case may be.  The Company shall direct the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the Holder of the results no later than two (2) Business Days from the time it receives the disputed determinations or calculations.  Such investment bank’s or accountant’s determination or calculation, as the case may be, shall be binding upon all parties absent demonstrable error.  The costs and expenses of the investment bank or accountant engaged pursuant to this Section 4(e)(iii) shall be borne by the Company.

 

(iv)           Record Holder .  The Person or Persons entitled to receive the Shares issuable upon a conversion of this Note shall be treated for all purposes as the legal and record holder or holders of such Shares on the Conversion Date.

 

(v)            Company’s Failure to Timely Convert .

 

(A)           Cash Damages .  If within three (3) Business Days after the Company’s receipt of the facsimile copy of a Conversion Notice the Company shall fail to issue and deliver a certificate to the Holder for, or credit the Holder’s or its designee’s balance account with DTC with, the number of Shares to which the Holder is entitled upon the Holder’s conversion of any Conversion Amount, or if the Company fails to issue and deliver a new Note representing the Principal to which such Holder is entitled on or before the Note Delivery Date pursuant to Section 4(c)(ii), then in addition to all other available remedies that the Holder may pursue hereunder and under the Securities Purchase Agreement (including indemnification pursuant to Section 8 thereof or at law or in equity), the Company shall pay additional damages to the Holder for each day after the Share Delivery Date such conversion is not timely effected and/or each day after the Note Delivery Date such Note is not delivered in an amount equal to 0.5% of the sum of (a) in the event the Company has failed to issue and deliver or credit the Shares to the Holder on or prior to the Share Delivery Date, the product of (I) the number of Shares not issued to the Holder or its designee on or prior to the Share Delivery Date and to which the Holder is entitled and (II) the Weighted Average Price of the Common Stock on the Share Delivery Date (such product is referred to herein as the “ Share Product Amount ”) and (b) in the event the Company has failed to deliver a Note to the Holder on or prior to the Note Delivery Date, the product of (y) the number of Shares issuable upon conversion of the Principal represented by the Note as of the Note Delivery Date and (z) the Weighted Average Price of the Common Stock on the Note Delivery Date (such product is referred to herein as the “ Note Product Amount ”); provided that in no event shall cash damages accrue pursuant to this Section 4(c)(v)(A) with respect to the Share Product Amount or the Note Product Amount during the period, if any, in which the Conversion Price or the arithmetic calculation of the Conversion Rate is subject to a bona fide dispute that is subject to and being resolved pursuant to, and in compliance with the time periods and other provisions of, the dispute resolution provisions of Section 4(c)(iii), provided that the Shares and/or the Note are delivered to the Holder within two (2) Business Days of the resolution of such bona fide dispute.  Alternatively, subject to

 

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Section 4(c)(iii), at the election of the Holder made in the Holder’s sole discretion, the Company shall pay to the Holder, in lieu of the additional damages referred to in the preceding sentence (but in addition to all other available remedies that the Holder may pursue hereunder and under the Securities Purchase Agreement (including indemnification pursuant to Section 8 thereof or at law or in equity)), 120% of the amount by which (A) the Holder’s total purchase price (including brokerage commissions, if any) for the Shares purchased to make delivery in satisfaction of a sale by the Holder of the Shares to which the Holder is entitled but has not received upon a conversion exceeds (B) the net proceeds received by the Holder from the sale of the Shares to which the Holder is entitled but has not received upon such conversion.  If the Company fails to pay the additional damages set forth in this Section 4(c)(v)(A) within five (5) Business Days of the date incurred, then the Holder entitled to such payments shall have the right at any time, so long as the Company continues to fail to make such payments, to require the Company, upon written notice, to promptly issue, in lieu of such cash damages, the number of Shares equal to the quotient of (X) the aggregate amount of the damages payments described herein divided by (Y) the Conversion Price in effect on such Conversion Date as specified by the Holder in the Conversion Notice.

 

(B)            Notice of Void Conversion; Adjustment to Conversion Price .  If for any reason the Holder has not received all of the Shares prior to the tenth (10th) Business Day after the Share Delivery Date with respect to a conversion of this Note, other than due to the pendency of a dispute being resolved in accordance with Section 4(c)(iii) (a “ Conversion Failure ”), then the Holder, upon written notice to the Company, may void its Conversion Notice with respect to, and retain or have returned, as the case may be, any portion of this Note that has not been converted pursuant to the Holder’s Conversion Notice; provided that the voiding of the Holder’s Conversion Notice shall not affect the Company’s obligations to make any payments that have accrued prior to the date of such notice pursuant to Section 4(c)(v)(A) or otherwise.

 

(C)            Redemption .  In the event of a Conversion Failure, the Holder, upon written notice to the Company, may require that the Company redeem, in accordance with Section 5, all of the Principal, including the Principal previously submitted for conversion and with respect to which the Company has not delivered Shares; provided that the Holder shall not be entitled to require redemption of any Principal pursuant to this clause (C) solely as a result of a Conversion Failure caused by any Principal being the subject of a bona fide dispute that is subject to and being resolved pursuant to, and in compliance with the time periods and other provisions of, the dispute resolution provisions of Section 4(c)(iii), provided the Shares are delivered to the Holder promptly following the resolution of such bona fide dispute.

 

(vi)           Pro Rata Conversion .  In the event the Company receives a Conversion Notice from more than one holder of the Notes for the same Conversion Date and the Company can convert some, but not all, of such Notes, then, subject to Section 7, the Company shall convert from each holder of the Notes electing to have Notes converted at such time a pro rata amount of such holder’s Note submitted for conversion based on the principal amount of the Note submitted for conversion on such date by such holder relative to the aggregate principal amount of the Notes submitted for conversion on such date.

 

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(vii)          Mechanics of Maturity Date Repayment .  If any Principal remains outstanding on the Maturity Date, then the Holder shall surrender this Note, duly endorsed for cancellation, to the Company, and such Principal shall be repaid by the Company as of the Maturity Date by payment on the Maturity Date to the Holder of an amount equal to the sum of (A) 100% of such Principal plus (B) the Interest Amount with respect to such Principal.

 

(viii)         Book-Entry .  Notwithstanding anything to the contrary set forth herein, upon conversion or redemption of this Note in accordance with the terms hereof, the Holder shall not be required to physically surrender this Note to the Company unless all of the Principal is being converted or redeemed.  The Holder and the Company shall each maintain records showing the Principal converted or redeemed and the dates of such conversions or redemptions or shall use such other method, reasonably satisfactory to the other, so as not to require physical surrender of this Note upon each such conversion or redemption.  In the event of any dispute or discrepancy, such records of the Company establishing the Principal to which the Holder is entitled shall be controlling and determinative in the absence of demonstrable error.  Notwithstanding the foregoing, if this Note is converted or redeemed as aforesaid, the Holder may not transfer this Note unless the Holder first physically surrenders this Note to the Company, whereupon the Company will forthwith issue and deliver upon the order of the Holder a new Note of like tenor, registered as the Holder may request, representing in the aggregate the remaining Principal represented by this Note.  The Holder and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion or redemption of any portion of this Note, the Principal of this Note may be less than the principal amount stated on the face hereof.

 

(d)            Taxes .  The Company shall pay any and all Taxes (excluding income taxes, franchise taxes or other taxes levied on gross earnings, profits or the like of the Holder) that may be payable with respect to the issuance and delivery of Shares upon the conversion of this Note.

 

(e)            Adjustments to Fixed Conversion Price .  The Fixed Conversion Price, and the number and type of securities to be received upon conversion of this Note, shall be adjusted from time to time as provided in this Section 4(e).

 

(i)             In the event that the Company shall at any time or from time to time, on or after the Issuance Date and prior to the conversion of this Note, (A) pay a dividend or make a distribution payable in Shares on any class of shares of capital stock of the Company, (B) subdivide its outstanding Shares into a greater number of shares, (C) combine its outstanding Shares into a smaller number of shares or (D) issue any shares of capital stock by reclassification of its Shares, the Fixed Conversion Price in effect at the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such dividend or distribution or at the opening of business on the day following the day on which such subdivision, combination or reclassification becomes effective, as the case may be, shall be adjusted so that the holder of any Notes thereafter surrendered for conversion shall be entitled to receive the number of Shares that such holder would have owned or have been entitled to receive after the happening of any of the events described above had such Notes been converted immediately prior to the record date in the case of a dividend or distribution or the effective date in the case of a subdivision, combination or reclassification.  An adjustment made pursuant to

 

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this Section 4(e)(i) shall become effective immediately upon the opening of business on the day next following the record date (subject to Section 4(e)(viii) below) in the case of a dividend or distribution and shall become effective immediately upon the opening of business on the day next following the effective date in the case of a subdivision, combination or reclassification.

 

(ii)            In the event that the Company shall at any time or from time to time, on or after the Issuance Date and prior to the conversion of this Note, (A) issue Shares, Convertible Securities, or Options entitling the recipient thereof to subscribe for or purchase Shares, at a price per share or (B) amend or otherwise modify the terms of any Convertible Securities or Options to a price per share (such issuance, subscription or purchase price or amended or modified price being referred to as the “ New Issue Price ”), in either case, less than the Fixed Conversion Price then in effect, then the Fixed Conversion Price in effect at the opening of business on the day next following such issuance shall be adjusted to equal the New Issue Price.  Such adjustment shall become effective immediately upon the opening of business on the day next following such issuance.  In determining whether any Shares are issued or issuable, or Convertible Securities or Options entitle the holders of Notes to subscribe for or purchase Shares at less than such Fixed Conversion Price, there shall be taken into account any consideration received by the Company upon issuance of any such securities, the conversion of any such Convertible Securities and upon exercise of such Options the value of such consideration, if other than cash, to be determined in good faith by the board of directors of the Company (the “ Board of Directors ”) in the exercise of their fiduciary duty, with the concurrence of the holders of at least a majority of the aggregate principal amount of the Notes then Outstanding.  Notwithstanding the foregoing or any other provision herein to the contrary, no adjustment to the Fixed Conversion Price will be required as a result of any Exempted Issuance.

 

(iii)           In case the Company shall at any time or from time to time, on or after the Issuance Date and prior to conversion of this Note, distribute to all holders of Shares (including any such distribution made in connection with a merger or consolidation in which the Company is the resulting or surviving Person and the Common Stock is not changed or exchanged) cash, evidences of indebtedness of the Company, any Subsidiary or another issuer, securities of the Company (including Convertible Securities), any Subsidiary or another issuer or other assets (excluding dividends payable in Shares for which adjustment is made under another paragraph of this Section 4(e) and any distribution in connection with an Exempted Issuance) or Options to subscribe for or purchase of any of the foregoing, then , and in each such case, the Fixed Conversion Price then in effect shall be adjusted (and any other appropriate actions shall be taken by the Company) by multiplying the Fixed Conversion Price in effect immediately prior to the date of such distribution by a fraction (x) the numerator of which shall be the Weighted Average Price of the Common Stock for the five (5) consecutive Trading Days immediately prior to the date of distribution less the then fair market value (as determined by the Board of Directors in the exercise of their fiduciary duties with the concurrence of the holders of at least a majority of the aggregate principal amount of the Notes then Outstanding) of the portion of the cash, evidences of indebtedness, securities or other assets so distributed or of such Options to subscribe applicable to one Share and (y) the denominator of which shall be the Weighted Average Price of the Common Stock for the five (5) consecutive Trading Days immediately prior to the date of distribution (but such fraction shall not be greater than one).  Such adjustment shall be made whenever any such distribution is made and shall become effective retroactively to a

 

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date immediately following the close of business on the record date for the determination of stockholders entitled to receive such distribution.

 

(iv)           In the event that the Company shall at any time or from time to time, on or after the Issuance Date and prior to the conversion of this Note, make a payment of cash or other consideration to the holders of Shares in respect of a tender offer or exchange offer, other than an odd-lot offer, and the value of the sum of (i) the aggregate cash and other consideration paid for such Shares, and (ii) any other consent or other fees paid to holders of Shares in respect of such tender offer or exchange offer expressed as an amount per share of Common Stock validly tendered or exchanged pursuant to such tender offer or exchange offer, exceeds the Weighted Average Price of the Common Stock on the Trading Day immediately prior to the date any such tender offer or exchange offer is first publicly announced (the “ Announcement Date ”), then the Fixed Conversion Price shall be adjusted in accordance with the formula:

 

R’ = R x      O’ x P   

 F + (P x O)

 

For purposes of the foregoing formula:

 

R = the Fixed Conversion Price in effect at the expiration time of the tender offer or exchange offer that is the subject of this Section 4(e)(iv) (the “ Expiration Time ”);

 

R’ = the Fixed Conversion Price in effect immediately after the Expiration Time;

 

F = the fair market value (as determined by the Board of Directors in the exercise of their fiduciary duties with the concurrence of the holders of at least a majority of the aggregate principal amount of the Notes then Outstanding) of the aggregate value of all cash and any other consideration paid or payable for Shares validly tendered or exchanged (including any consent or other fees) and not withdrawn prior to the Expiration Time (the “ Purchased Shares ”);

 

O = the number of Shares outstanding immediately after the Expiration Time less any Purchased Shares;

 

O’ = the number of Shares outstanding immediately after the Expiration Time, plus any Purchased Shares; and

 

P = the Weighted Average Price of the Common Stock on the Trading Day next succeeding the Announcement Date.

 

Such decrease, if any, shall become effective immediately upon the opening of business on the day next following the Expiration Time.  In the event that the Company is obligated to purchase shares pursuant to any tender offer, but the Company is prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Fixed Conversion Price shall again be adjusted to the Fixed Conversion Price that would then be in effect if such tender

 

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or exchange offer had not been made.  If the application of this Section 4(e)(iv) to any tender or exchange offer would result in an increase in the