EXHIBIT 10.3

 

[FORM OF CONTINGENT CONVERTIBLE SUBORDINATED NOTE]

 

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID
ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED
BY THE SECURITIES.  ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE
TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 19(a) HEREOF.  THE
PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES
ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE
FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.

 

CONTINGENT CONVERTIBLE SUBORDINATED NOTE

 

Issuance Date: June 10, 2004

 

Principal: U.S. $            

 

FOR VALUE RECEIVED, EPIQ SYSTEMS, INC., a Missouri corporation (the “Company”),
hereby promises to pay to the order of [RIVERVIEW GROUP, LLC][SMITHFIELD
FIDUCIARY LLC][OMICRON MASTER TRUST] or registered assigns (“Holder”) the amount
set out above as the Principal (as reduced pursuant to the terms hereof pursuant
to redemption, conversion or otherwise, the “Principal”) when due, whether upon
the Maturity Date (as defined below), acceleration, redemption or otherwise (in
each case in accordance with the terms hereof) and to pay interest (“Interest”)
on any outstanding Principal at the rate of 4.00% per annum, subject to periodic
adjustment pursuant to Section 2 (the “Interest Rate”), from the date set out
above as the Issuance Date (the “Issuance Date”) until the same becomes due and
payable, whether upon an Interest Date (as defined below), the Maturity Date,
acceleration, conversion, redemption or otherwise (in each case in accordance
with the terms hereof).  This Contingent Convertible Subordinated Note
(including all Contingent Convertible Subordinated Notes issued in exchange,
transfer or replacement hereof, this “Note”) is one of an issue of Contingent
Convertible Subordinated Notes (collectively, the “Notes” and such other
Contingent Convertible Subordinated Notes, the “Other Notes”) issued on the
Issuance Date pursuant to the Securities Purchase Agreement (as defined below). 
Certain capitalized terms are defined in Section 29.

 

(1)                                  MATURITY.  On the Maturity Date, the Holder
shall surrender this Note to the Company and the Company shall pay to the Holder
an amount in cash representing all outstanding Principal, accrued and unpaid
Interest and accrued and unpaid Late Charges, if any.  The “Original Maturity
Date” shall be June 15, 2007, as may be extended in accordance with Section 8
hereof or as extended at the option of the Holder (i) in the event that, and for
so long as, an Event of Default (as

 

1

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

 

defined in Section 4(a)) shall have occurred and be continuing or any event
shall have occurred and be continuing which with the passage of time and the
failure to cure would result in an Event of Default and (ii) through the date
that is ten days after the consummation of a Change of Control (as defined in
Section 5(a)) in the event that a Change of Control is publicly announced or a
Change of Control Notice (as defined in Section 5(a)) is delivered prior to the
Maturity Date (as may be extended, the “Maturity Date”).

 

(2)                                  INTEREST; INTEREST RATE.  Interest on this
Note shall commence accruing on the Issuance Date and shall be computed on the
basis of a 365-day year and actual days elapsed and shall be payable in arrears
on the first day of each Calendar Quarter and on the Maturity Date during the
period beginning on the Issuance Date and ending on, and including, the Maturity
Date (each, an “Interest Date”) with the first Interest Date being July 1,
2004.  Interest shall be payable on each Interest Date in cash.  From and after
the occurrence of an Event of Default, the Interest Rate shall be increased to
11%.  In the event that such Event of Default is subsequently cured, the
adjustment referred to in the preceding sentence shall cease to be effective as
of the date of such cure; provided that the Interest as calculated at such
increased rate during the continuance of such Event of Default shall continue to
apply to the extent relating to the days after the occurrence of such Event of
Default through and including the date of cure of such Event of Default.

 

(3)                                  CONVERSION OF NOTES.  This Note shall be
convertible into shares of the Company’s common stock, par value $0.01 per share
(the “Common Stock”), on the terms and conditions set forth in this Section 3.

 

(a)                                  Conversion Right.  (i)  Subject to the
provisions of Section 3(d), at any time or times on or after the Issuance Date,
the Holder shall be entitled to convert any portion of the outstanding and
unpaid Conversion Amount (as defined below) in increments of at least $100,000
of Principal (or such lesser amount if such amount represents the remaining
Principal amount) into fully paid and nonassessable shares of Common Stock in
accordance with Section 3(c), at the Conversion Rate (as defined below).  The
Company shall not issue any fraction of a share of Common Stock upon any
conversion.  If the issuance would result in the issuance of a fraction of a
share of Common Stock, the Company shall round such fraction of a share of
Common Stock up to the nearest whole share.  The Company shall pay any and all
transfer, stamp or similar taxes that may be payable with respect to the
issuance and delivery of Common Stock upon conversion of any Conversion Amount.

 

(b)                                 Conversion Rate.  The number of shares of
Common Stock issuable upon conversion of any Conversion Amount pursuant to
Section 3(a) shall be determined by dividing (x) such Conversion Amount by (y)
the Conversion Price (as defined below) (the “Conversion Rate”).

 

(i)                                     “Conversion Amount” means the portion of
the Principal to be converted, redeemed or otherwise with respect to which this
determination is being made.

 

(ii)                                  “Conversion Price” means, as of any
Conversion Date (as defined below) or other date of determination, and subject
to adjustment as provided herein, $17.50.

 

(c)                                  Mechanics of Conversion.

 

(i)                                     Optional Conversion.  To convert any
Conversion Amount into shares of Common Stock on any date (a “Conversion Date”),
the Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt
on or prior to 4:59 p.m., New York Time, on such date, a copy of a duly executed
and completed notice of conversion in good order in the form

 

2

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

 

attached hereto as Exhibit I (the “Conversion Notice”) to the Company and (B) if
required by Section 3(c)(iii), surrender this Note to a common carrier for
delivery to the Company as soon as practicable on or following such date (or an
indemnification undertaking in form and substance reasonably acceptable to the
Company with respect to this Note in the case of its loss, theft or
destruction).  On or before the first Business Day following the date of receipt
of a Conversion Notice, the Company shall transmit by facsimile a confirmation
of receipt of such Conversion Notice to the Holder and the Company’s transfer
agent (the “Transfer Agent”).  On or before the third Business Day following the
date of receipt of a Conversion Notice (the “Share Delivery Date”), the Company
shall (X) credit such aggregate number of shares of Common Stock to which the
Holder shall be entitled to the Holder’s or its designee’s balance account with
Depository Trust Company (“DTC”) through its Deposit Withdrawal Agent Commission
system or (Y) if the Transfer Agent is not participating in DTC Fast Automated
Securities Transfer Program, 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 of Common Stock to which the Holder shall
be entitled.  If this Note is physically surrendered for conversion as required
by Section 3(c)(iii) and the outstanding Principal of this Note is greater than
the Principal portion of the Conversion Amount being converted, then the Company
shall as soon as practicable and in no event later than three Business Days
after receipt of this Note and at its own expense, issue and deliver to the
holder a new Note (in accordance with Section 19(d)) representing the
outstanding Principal not converted.  The Person or Persons entitled to receive
the shares of Common Stock issuable upon a conversion of this Note shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on the Conversion Date.

 

(ii)                                  Company’s Failure to Timely Convert.  If
the Company shall fail to issue a certificate to the Holder or credit the
Holder’s balance account with DTC for the number of shares of Common Stock to
which the Holder is entitled upon conversion of any Conversion Amount on or
prior to the date which is three Trading Days after the Conversion Date, and if
after such third Trading Day the Holder purchases (in an open market transaction
or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the
Holder of the shares of Common Stock that the Holder anticipated receiving from
the Company pursuant hereto (a “Buy-In”), then the Company shall, within three
Trading Days after the Holder’s request and in the Holder’s discretion, either
(i) pay cash to the Holder in an amount equal to the Holder’s total purchase
price (including brokerage commissions, if any) for the shares of Common Stock
so purchased (the “Buy-In Price”), at which point the Company’s obligation to
deliver such certificate (and to issue such Common Stock) shall terminate, or
(ii) promptly honor its obligation to deliver to the Holder a certificate or
certificates representing such Common Stock and pay cash to the Holder in an
amount equal to the excess (if any) of the Buy-In Price over the product of (A)
such number of shares of Common Stock, times (B) the Closing Sale Price on the
date of the event giving rise to the Company’s obligation to deliver such
certificate.  If the Company shall fail to issue a certificate to the Holder or
credit the Holder’s balance account with DTC for the number of shares of Common
Stock to which the Holder is entitled upon conversion of any Conversion Amount
on or prior to the date which is five Business Days after the Conversion Date (a
“Conversion Failure”), then (A) the Company shall pay damages to the Holder for
each date of such Conversion Failure in an amount equal to 1.0% of the product
of (I) the sum of the number of shares of Common Stock not issued to the Holder
on or prior to the Share Delivery Date and to which the Holder is entitled, and
(II) the Closing Sale Price of the Common Stock on the Share Delivery Date and
(B) 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 such Conversion
Notice; provided that the

 

3

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

 

voiding of a Conversion Notice shall not affect the Company’s obligations to
make any payments which have accrued prior to the date of such notice pursuant
to this Section 3(c)(ii) or otherwise.

 

(iii)                               Book-Entry. Notwithstanding anything to the
contrary set forth herein, upon conversion of any portion of this Note in
accordance with the terms hereof, the Holder shall not be required to physically
surrender this Note to the Company unless (A) the full Conversion Amount
represented by this Note is being converted or (B) the Holder has provided the
Company with prior written notice (which notice may be included in a Conversion
Notice) requesting physical surrender and reissue of this Note.  The Holder and
the Company shall maintain records showing the Principal, Interest and Late
Charges converted and the dates of such conversions or shall use such other
method, reasonably satisfactory to the Holder and the Company, so as not to
require physical surrender of this Note upon conversion.

 

(iv)                              Pro Rata Conversion; Disputes.  In the event
that the Company receives a Conversion Notice from more than one holder of Notes
for the same Conversion Date and the Company can convert some, but not all, of
such portions of the Notes submitted for conversion, the Company, subject to
Section 3(d), shall convert from each holder of Notes electing to have Notes
converted on such date a pro rata amount of such holder’s portion of its Notes
submitted for conversion based on the principal amount of Notes submitted for
conversion on such date by such holder relative to the aggregate principal
amount of all Notes submitted for conversion on such date.  In the event of a
dispute as to the number of shares of Common Stock issuable to the Holder in
connection with a conversion of this Note, the Company shall issue to the Holder
the number of shares of Common Stock not in dispute and resolve such dispute in
accordance with Section 24.

 

(d)                                 Limitations on Conversions.

 

(i)                                     Beneficial Ownership.  The Company shall
not effect any conversion of this Note, and the Holder of this Note shall not
have the right to convert any portion of this Note pursuant to Section 3(a), to
the extent that after giving effect to such conversion, the Holder (together
with the Holder’s affiliates) would beneficially own in excess of 9.99% of the
number of shares of Common Stock outstanding immediately after giving effect to
such conversion.  For purposes of the foregoing sentence, the number of shares
of Common Stock beneficially owned by the Holder and its affiliates shall
include the number of shares of Common Stock issuable upon conversion of this
Note with respect to which the determination of such sentence is being made, but
shall exclude the number of shares of Common Stock which would be issuable upon
(A) conversion of the remaining, nonconverted portion of this Note beneficially
owned by the Holder or any of its affiliates and (B) exercise or conversion of
the unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any Other Notes or warrants) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its affiliates.  Except as set
forth in the preceding sentence, for purposes of this Section 3(d)(i),
beneficial ownership shall be calculated in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended.  For purposes of this
Section 3(d)(i), in determining the number of outstanding shares of Common
Stock, the Holder may rely on the number of outstanding shares of Common Stock
as reflected in (x) the Company’s most recent Form 10-Q or Form 10-K, (y) a more
recent public announcement by the Company or (z) any other notice by the Company
or the Transfer Agent setting forth the number of shares of Common Stock
outstanding.  For any reason at any time, upon the written or oral request of
the Holder, the Company shall within one Business Day confirm orally and in
writing to the Holder the number of shares of Common Stock then outstanding.  In
any case, the number of outstanding shares of Common Stock shall be determined
after giving effect to the

 

4

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

 

conversion or exercise of securities of the Company, including this Note, by the
Holder or its affiliates since the date as of which such number of outstanding
shares of Common Stock was reported.

 

(ii)                                  Principal Market Regulation.  The Company
shall not be obligated to issue any shares of Common Stock upon conversion of
this Note if the issuance of such shares of Common Stock would exceed that
number of shares of Common Stock which the Company may issue upon conversion of
the Notes without breaching the Company’s obligations under the rules or
regulations of the Principal Market (the “Exchange Cap”), except that such
limitation shall not apply in the event that the Company (A) obtains the
approval of its stockholders as required by the applicable rules of the
Principal Market for issuances of Common Stock in excess of such amount or (B)
obtains a written opinion from outside counsel to the Company that such approval
is not required, which opinion shall be reasonably satisfactory to the holders
of the Notes representing at least a majority of the principal amounts of the
Notes then outstanding.  Until such approval or written opinion is obtained, no
purchaser of the Notes pursuant to the Securities Purchase Agreement (the
“Purchasers”) shall be issued, upon conversion of Notes, shares of Common Stock
in an amount greater than the product of the Exchange Cap multiplied by a
fraction, the numerator of which is the principal amount of Notes issued to such
Purchaser pursuant to the Securities Purchase Agreement on the Issuance Date and
the denominator of which is the aggregate principal amount of all Notes issued
to the Purchasers pursuant to the Securities Purchase Agreement on the Issuance
Date (with respect to each Purchaser, the “Exchange Cap Allocation”).  In the
event that any Purchaser shall sell or otherwise transfer any of such
Purchaser’s Notes, the transferee shall be allocated a pro rata portion of such
Purchaser’s Exchange Cap Allocation, and the restrictions of the prior sentence
shall apply to such transferee with respect to the portion of the Exchange Cap
Allocation allocated to such transferee.  In the event that any holder of Notes
shall convert all of such holder’s Notes into a number of shares of Common Stock
which, in the aggregate, is less than such holder’s Exchange Cap Allocation,
then the difference between such holder’s Exchange Cap Allocation and the number
of shares of Common Stock actually issued to such holder shall be allocated to
the respective Exchange Cap Allocations of the remaining holders of Notes on a
pro rata basis in proportion to the aggregate principal amount of the Notes then
held by each such holder.

 

(iii)                               Contingent Convertibility.  Notwithstanding
the foregoing, this Note shall only be convertible: (v) during the period
commencing on the Issuance Date and terminating on January 14, 2005, at any time
after the arithmetic average of the Weighted Average Price of the Common Stock
equals or exceeds 110% of the then applicable Conversion Price for ten (10)
consecutive Trading Days; (w) from and after January 15, 2005, if the Weighted
Average Price of the Common Stock equals or exceeds 110% of the then applicable
Conversion Price on any five (5) consecutive Trading Days during any calendar
year; (x) from and after the Issuance Date, if the Weighted Average Price of the
Common Stock is less than $10.75 (the “Minimum Price”) (subject to adjustment as
provided herein) on any five (5) consecutive Trading Days; (y) if there shall
have occurred (A) the public announcement of a pending, proposed or intended
Change of Control that has not been abandoned, terminated or consummated, (B) an
Event of Default or (C) an event that with the passage of time or giving of
notice, and assuming it were not cured, would constitute an Event of Default; or
(z) upon receipt of a Mandatory Conversion Notice.

 

5

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

 

(4)                                  RIGHTS UPON EVENT OF DEFAULT.

 

(a)                                  Event of Default.  Each of the following
events shall constitute an “Event of Default”:

 

(i)                                     the failure of the applicable
Registration Statement required to be filed pursuant to the Registration Rights
Agreement to be declared effective by the SEC on or prior to the date that is 60
days after the applicable Effectiveness Deadline (as defined in the Registration
Rights Agreement), or, while the applicable Registration Statement is required
to be maintained effective pursuant to the terms of the Registration Rights
Agreement, the effectiveness of the applicable Registration Statement lapses for
any reason (including, without limitation, the issuance of a stop order) or is
unavailable to any holder of the Notes for sale of all of such holder’s
Registrable Securities (as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights Agreement, and such lapse
or unavailability continues for a period of 10 consecutive Trading Days or for
more than an aggregate of 30 Trading Days in any 365-day period (other than days
during an Allowable Grace Period (as defined in the Registration Rights
Agreement));

 

(ii)                                  the suspension from trading or failure of
the Common Stock to be listed on the Principal Market or The New York Stock
Exchange, Inc. for a period of five consecutive Trading Days or for more than an
aggregate of seven Trading Days in any 365-day period;

 

(iii)                               the Company’s (A) failure to cure a
Conversion Failure by delivery of the required number of shares of Common Stock
within ten (10) Business Days after the applicable Conversion Date or (B)
notice, written or oral, to any holder of the Notes, including by way of public
announcement or through any of its agents, at any time, of its intention not to
comply with a request for conversion of any Notes into shares of Common Stock
that is tendered in accordance with the provisions of the Notes;

 

(iv)                              at any time following the tenth consecutive
Business Day that the Holder’s Authorized Share Allocation is less than the
number of shares of Common Stock that the Holder would be entitled to receive
upon a conversion of the full Conversion Amount of this Note (without regard to
any limitations on conversion set forth in Section 3(d) or otherwise);

 

(v)                                 the Company’s failure to pay to the Holder
any amount of Principal, Interest, Late Charges or other amounts when and as due
under this Note, the Securities Purchase Agreement, the Registration Rights
Agreement or any other agreement, document, certificate or other instrument
delivered in connection with the transactions contemplated hereby and thereby to
which the Holder is a party, except, in the case of a failure to pay Interest,
Late Charges or amount other than Principal when and as due, in which case only
if such failure continues for a period of at least five Business Days;

 

(vi)                              any default under or acceleration prior to
maturity of any Indebtedness (as defined below) of the Company or any of its
Subsidiaries (as defined in Section 3(a) of the Securities Purchase Agreement)
with an unpaid principal amount in excess of $1,000,000 at the time of such
acceleration other than with respect to any Other Notes; provided that in the
case of a payment default of such Indebtedness, such default is not cured within
applicable cure periods; further provided that in the case of a non-payment
default of such Indebtedness that has not resulted in an acceleration of such
Indebtedness prior to its maturity, only upon acceleration of such Indebtedness;

 

6

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

 

(vii)                           the Company or any of its Subsidiaries, pursuant
to or within the meaning of Title 11, U.S. Code, or any similar Federal or state
law for the relief of debtors (collectively, “Bankruptcy Law”), (A) commences a
voluntary case, (B) consents to the entry of an order for relief against it in
an involuntary case, (C) consents to the appointment of a receiver, trustee,
assignee, liquidator or similar official (a “Custodian”),  (D) makes a general
assignment for the benefit of its creditors or (E) admits in writing that it is
generally unable to pay its debts as they become due;

 

(viii)                        a court of competent jurisdiction enters an order
or decree under any Bankruptcy Law that (A) is for relief against the Company or
any of its Subsidiaries in an involuntary case, (B) appoints a Custodian of the
Company or any of its Subsidiaries or (C) orders the liquidation of the Company
or any of its Subsidiaries;

 

(ix)                                a final judgment or judgments for the
payment of money aggregating in excess of $1,000,000 are rendered against the
Company or any of its Subsidiaries and which judgments are not, within 60 days
after the entry thereof, bonded, discharged or stayed pending appeal, or are not
discharged within 60 days after the expiration of such stay; provided, however,
that any judgment which is covered by insurance or an indemnity from a credit
worthy party shall not be included in calculating the $1,000,000 amount set
forth above so long as the Company provides the Holder a written statement from
such insurer or indemnity provider (which written statement shall be reasonably
satisfactory to the Holder) to the effect that such judgment is covered by
insurance or an indemnity and the Company will receive the proceeds of such
insurance or indemnity within 30 days of the issuance of such judgment;

 

(x)                                   the Company materially breaches any
representation, warranty, covenant or other term or condition of the Securities
Purchase Agreement, the Registration Rights Agreement, this Note, the Other
Notes, or any other agreement, document, certificate or other instrument
delivered in connection with the transactions contemplated thereby and hereby to
which the Holder is a party, except, in the case of a breach of a covenant or
other term or condition which is curable, only if such breach continues for a
period of at least ten (10) consecutive Business Days;

 

(xi)                                any breach or failure in any respect to
comply with Section 15 of this Note;

 

(xii)                             any Event of Default (as defined in the Other
Notes) occurs with respect to any Other Notes; or

 

(xiii)                          either of (x) the Total Debt to Total
Capitalization Ratio shall exceed .55:1.00 or (y) the Total Debt to EBITDA Ratio
shall exceed 3.50:1.00.

 

(b)                                 Redemption Right.  Promptly after the
occurrence of an Event of Default with respect to this Note or any Other Note,
the Company shall deliver written notice thereof via facsimile and overnight
courier (an “Event of Default Notice”) to the Holder.  At any time after the
earlier of the Holder’s receipt of an Event of Default Notice and the Holder
becoming aware of an Event of Default, the Holder may require the Company to
redeem all or any portion of this Note by delivering written notice thereof (the
“Event of Default Redemption Notice”) to the Company, which Event of Default
Redemption Notice shall indicate the portion of this Note the Holder is electing
to redeem.  Each portion of this Note subject to redemption by the Company
pursuant to this Section 4(b) shall be redeemed by the Company at a price equal
to the greater of (i) the product of (x) the Conversion Amount to be redeemed
and (y) the Redemption Premium and (ii) the product of (A) the Conversion Rate
with respect to such Conversion Amount in effect at such time as the Holder
delivers an Event of Default Redemption Notice and (B) the Closing Sale Price of
the Common Stock on the date immediately preceding such Event of

 

7

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

 

Default (the “Event of Default Redemption Price”).  Redemptions required by this
Section 4(b) shall be made in accordance with the provisions of Section 12.

 

(5)                                  RIGHTS UPON CHANGE OF CONTROL.

 

(a)                                  Change of Control.  Each of the following
events shall constitute a “Change of Control”:

 

(i)                                     the consolidation, merger or other
business combination (including, without limitation, a reorganization or
recapitalization) of the Company with or into another Person (other than (A) a
consolidation, merger, stock transaction or other business combination
(including, without limitation, reorganization or recapitalization) in which
holders of the Company’s voting power immediately prior to the transaction
continue after the transaction to hold, directly or indirectly, the voting power
of the surviving entity or entities necessary to elect 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
(any of the foregoing (A) and (B), a “Surviving Change”));

 

(ii)                                  the sale or transfer of all or
substantially all of the Company’s assets; or

 

(iii)                               a purchase, tender or exchange offer made to
and accepted by the holders of more than the 50% of the outstanding shares of
Common Stock.

 

No sooner than 15 days nor later than 10 days prior to the consummation of a
Change of Control, but not prior to the public announcement of such Change of
Control, the Company shall deliver written notice thereof via facsimile and
overnight courier to the Holder (a “Change of Control Notice”).

 

(b)                                 Assumption.  Prior to the consummation of
any Change of Control, the Company will secure from any Person purchasing the
Company’s assets or Common Stock or any successor resulting from such Change of
Control (in each case, an “Acquiring Entity”) a written agreement (in form and
substance satisfactory to the holders of Notes representing at least a majority
of the aggregate principal amount of the Notes then outstanding) to deliver to
each holder of Notes in exchange for such Notes, a security of the Acquiring
Entity evidenced by a written instrument substantially similar in form and
substance to the Notes, including, without limitation, having a principal amount
and interest rate equal to the principal amounts and the interest rates of the
Notes held by such holder, and satisfactory to the holders of Notes representing
at least a majority of the principal amount of the Notes then outstanding.  In
the event that an Acquiring Entity is directly or indirectly controlled by a
company or entity whose common stock or similar equity interest is listed,
designated or quoted on a securities exchange or trading market, the holders of
Notes representing at least a majority of the aggregate principal amount of the
Notes then outstanding may elect to treat such Person as the Acquiring Entity
for purposes of this Section 5(b).  In the event of a Surviving Change, the
entity resulting from or succeeding to the Company in such Surviving Change
shall assume the obligations under the Notes on the same terms and conditions as
the Notes and having a principal amount and interest rate equal to the principal
amounts and the interest rates of the Notes.

 

(c)                                  Redemption Right.  At any time during the
period beginning after the Holder’s receipt of a Change of Control Notice and
ending on the date of the consummation of such Change of Control (or, in the
event a Change of Control Notice is not delivered at least 10 days prior to a
Change of Control, at any time on or after the date which is 10 days prior to a
Change of Control and ending 10 days after the consummation of such Change of
Control), the Holder may require the Company

 

8

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

 

to redeem all or any portion of this Note by delivering written notice thereof
(“Change of Control Redemption Notice”) to the Company, which Change of Control
Redemption Notice shall indicate the Conversion Amount the Holder is electing to
redeem; provided, however, that the Company shall not be under any obligation to
redeem all or any portion of this Note or to deliver the applicable Change of
Control Redemption Price unless and until the applicable Change of Control is
consummated.  The portion of this Note subject to redemption pursuant to this
Section 5(c) shall be redeemed by the Company at a price equal to the greater of
(i) the product of (x) the Conversion Amount being redeemed and (y) the quotient
determined by dividing (A) the Closing Sale Price of the Common Stock
immediately following the public announcement of such proposed Change of Control
by (B) the Conversion Price and (ii) 110% of the Conversion Amount being
redeemed (the “Change of Control Redemption Price”).  Redemptions required by
this Section 5(c) shall be made in accordance with the provisions of Section 12
and shall have priority to payments to stockholders in connection with a Change
of Control.

 

(6)                                  RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND
OTHER CORPORATE EVENTS.

 

(a)                                  Purchase Rights.  If at any time the
Company grants, issues or sells any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property pro rata to the all or
substantially all record holders of Common Stock (the “Purchase Rights”), then
the Holder will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which the Holder could have
acquired if the Holder had held the number of shares of Common Stock acquirable
upon complete conversion of this Note (without taking into account any
limitations or restrictions on the convertibility of this Note) immediately
before the date on which a record is taken for the grant, issuance or sale of
such Purchase Rights, or, if no such record is taken, the date as of which the
record holders of Common Stock are to be determined for the grant, issue or sale
of such Purchase Rights.

 

(b)                                 Other Corporate Events. Prior to the
consummation of any recapitalization, reorganization, consolidation, merger,
spin-off or other business combination (other than a Change of Control) pursuant
to which all or substantially all holders of Common Stock are entitled to
receive securities or other assets with respect to or in exchange for Common
Stock (a “Corporate Event”), the Company shall make appropriate provision to
insure that the Holder will thereafter have the right to receive upon a
conversion of this Note, (i) in addition to the shares of Common Stock
receivable upon such conversion, such securities or other assets to which the
Holder would have been entitled with respect to such shares of Common Stock had
such shares of Common Stock been held by the Holder upon the consummation of
such Corporate Event or (ii) in lieu of the shares of Common Stock otherwise
receivable upon such conversion, such securities or other assets received by the
holders of Common Stock in connection with the consummation of such Corporate
Event in such amounts as the Holder would have been entitled to receive had this
Note initially been issued with conversion rights for the form of such
consideration (as opposed to shares of Common Stock) at a conversion rate for
such consideration commensurate with the Conversion Rate.  Provision made
pursuant to the preceding sentence shall be in a form and substance satisfactory
to the holders of Notes representing at least a majority of the aggregate
principal amount of the Notes then outstanding.

 

(7)                                  RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

 

(a)                                  Adjustment of Conversion Price and Minimum
Price upon Subdivision or Combination of Common Stock.  If the Company at any
time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Conversion Price and Minimum Price in effect
immediately prior to such subdivision will be proportionately reduced.  If the
Company at any time combines (by combination, reverse stock split or otherwise)
one or more classes of its outstanding shares of Common Stock into a

 

9

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

 

smaller number of shares, the Conversion Price and Minimum Price in effect
immediately prior to such combination will be proportionately increased.

 

(b)                                 Other Events.  If any event occurs of the
type contemplated by the provisions of this Section 7 but not expressly provided
for by such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity features),
then the Company’s Board of Directors will make an appropriate adjustment in the
Conversion Price and Minimum Price so as to protect the rights of the Holder
under this Note; provided that no such adjustment will increase the Conversion
Price or Minimum Price as otherwise determined pursuant to this Section 7.

 

(8)                                  EXTENSION OF MATURITY DATE AT HOLDER’S
OPTION.  The holders of Notes representing at least a majority of the aggregate
principal amount of the Notes then outstanding shall have the right, in their
sole discretion, to require that the Original Maturity Date of all then
outstanding Notes be extended for a period not to exceed three years from the
Original Maturity Date, without the action of any other Person, by delivering
written notice thereof (a “Holder Maturity Date Extension Notice”) to the
Company at any time prior to the Original Maturity Date, which Holder Maturity
Date Extension Notice shall indicate the Maturity Date, as so extended, of this
Note.  Within two Business Days of receipt of a Holder Maturity Date Extension
Notice, the Company shall inform all other holders of Notes that such a notice
has been received by the Company.

 

(9)                                  COMPANY’S RIGHT OF MANDATORY CONVERSION AND
OPTIONAL REDEMPTION.  (a) Mandatory Conversion.  If at any time from and after
June 10, 2007, the Weighted Average Price of the Common Stock exceeds 200% of
the Conversion Price as of the Issuance Date (subject to appropriate adjustments
for stock splits, stock dividends, stock combinations and other similar
transactions after the Issuance Date) for each of any 20 consecutive Trading
Days (the “Mandatory Conversion Measuring Period”) and the Conditions to
Mandatory Conversion (as set forth in Section 9(c)) are satisfied or waived in
writing by the Holder, the Company shall have the right to require the Holder to
convert all or any such portion of the Conversion Amount of this Note designated
in the Mandatory Conversion Notice into fully paid, validly issued and
nonassessable shares of Common Stock in accordance with Section 3(c) hereof at
the Conversion Rate as of the Mandatory Conversion Date (as defined below) (a
“Mandatory Conversion”).  The Company may exercise its right to require
conversion under this Section 9(a) by delivering within not more than two
Trading Days following the end of such Mandatory Conversion Measuring Period a
written notice thereof by facsimile and overnight courier to all, but not less
than all, of the holders of Notes and the Transfer Agent (the “Mandatory
Conversion Notice” and the date all of the holders received such notice (or are
deemed to have received such notice in accordance with Section 9(f) of the
Securities Purchase Agreement) is referred to as the “Mandatory Conversion
Notice Date”).  The Mandatory Conversion Notice shall be irrevocable.

 

(b)                                 Pro Rata Conversion Requirement.  If the
Company elects to cause a conversion of all or any portion of the Conversion
Amount of this Note pursuant to Section 9(a), then it must simultaneously take
the same action with respect to the Other Notes.  If the Company elects to cause
the conversion of this Note pursuant to Section 9(a) (or similar provisions
under the Other Notes) with respect to less than all of the Conversion Amounts
of the Notes then outstanding, then the Company shall require conversion of a
Conversion Amount from each of the holders of the Notes equal to the product of
(I) the aggregate Conversion Amount of Notes which the Company has elected to
cause to be converted pursuant to Section 9(a), multiplied by (II) the fraction,
the numerator of which is the sum of the aggregate principal amount of the Notes
purchased by such holder pursuant to the Securities Purchase Agreement and the
denominator of which is the sum of the aggregate principal amount of the Notes
and purchased by all holders pursuant to the Securities Purchase Agreement (such
fraction with respect to each holder is referred to as its “Allocation
Percentage,” and such amount with respect to each holder is

 

10

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

 

referred to as its “Pro Rata Conversion Amount”).  In the event that the initial
holder of any Notes shall sell or otherwise transfer any of such holder’s Notes,
the transferee shall be allocated a pro rata portion of such holder’s Allocation
Percentage.  The Mandatory Conversion Notice shall state (i) the Trading Day
selected for the Mandatory Conversion in accordance with Section 9(a), which
Trading Day shall be at least 15 Business Days but not more than 60 Business
Days following the Mandatory Conversion Notice Date (the “Mandatory Conversion
Date”), (ii) the aggregate Conversion Amount of the Notes which the Company has
elected to be subject to mandatory conversion from all of the holders of the
Notes pursuant to this Section 9 (and analogous provisions under the Other
Notes), (iii) each holder’s Pro Rata Conversion Amount of the Conversion Amount
of the Notes the Company has elected to cause to be converted pursuant to this
Section 9 (and analogous provisions under the Other Notes) and (iv) the number
of shares of Common Stock to be issued to such Holder as of the Mandatory
Conversion Date.  All Conversion Amounts converted by the Holder after the
Mandatory Conversion Notice Date shall reduce the Conversion Amount of this Note
required to be converted on the Mandatory Conversion Date.  If the Company has
elected a Mandatory Conversion, the mechanics of conversion set forth in
Section 3(c) shall apply, to the extent applicable, as if the Company and the
Transfer Agent had received from the Holder on the Mandatory Conversion Date a
Conversion Notice with respect to the Conversion Amount being converted pursuant
to the Mandatory Conversion.

 

(c)                                  Conditions to Mandatory Conversion.  For
purposes of this Section 9, “Conditions to Mandatory Conversion” means the
following conditions: (i) during the period beginning on the date that is three
months prior to the Mandatory Conversion Date and ending on and including the
Mandatory Conversion Date, the Company shall have delivered shares of Common
Stock upon any conversion of Conversion Amounts on a timely basis as set forth
in Section 3(c)(i); provided, however, that the Company shall be deemed to have
satisfied the conditions set forth in this clause (i) if on not more than two
occasions prior to the delivery of the Company’s Mandatory Conversion Notice the
Company has failed to meet the requirements set forth in Section 3(c)(i) hereof
by no more than three days; (ii) on each day during the period beginning on the
date that is six months prior to the Mandatory Conversion Date and ending on and
including the Mandatory Conversion Date (the “Notice Measuring Period”), the
Common Stock shall be listed on the Principal Market or The New York Stock
Exchange, Inc. and delisting or suspension by such market or exchange shall not
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; (iii) during the period beginning on the first Trading Day of the
Notice Measuring Period and ending on and including the Mandatory Conversion
Date, there shall not have occurred (x) the public announcement of a pending,
proposed or intended Change of Control which has not been abandoned, terminated
or consummated, (y) an Event of Default or (z) an event that with the passage of
time or giving of notice, and assuming it were not cured, would constitute an
Event of Default if such event has not been cured prior to the Mandatory
Conversion Notice Date; (iv) on each day of the period beginning on the date of
delivery of the Mandatory Conversion Notice and ending on the Mandatory
Conversion Date either (x) the Registration Statement or Registration Statements
required pursuant to the Registration Rights Agreement shall be effective and
available for the sale for all of the Registrable Securities in accordance with
the terms of the Registration Rights Agreement or (y) all shares of Common Stock
issuable upon conversion of the Notes shall be eligible for sale without
restriction and without the need for registration under any applicable federal
or state securities laws; and (v) on each day of the period beginning on the
Mandatory Conversion Date and ending thirty (30) Trading Days thereafter either
(x) the Registration Statements required pursuant to the Registration Rights
Agreement shall be expected to be effective and available for the sale of at
least all of the Registrable Securities in accordance with the terms of the
Registration Rights Agreement or (y) all shares of Common Stock issuable upon
conversion of the Notes shall be eligible for sale without restriction and
without the need for registration under any applicable federal or state
securities laws.

 

11

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

 

(d)                                 Limitations.  If the Company is unable to
deliver Conversion Shares pursuant to a Mandatory Conversion under this
Section 9 (such undeliverable Conversion Shares, the “Blocked Shares”) as a
result of the provisions of Section 3(d)(i) hereof, then notwithstanding the
provisions of Section 3(d)(i) hereof Company shall be entitled to deliver the
Blocked Shares (without being subject to any conditions hereunder including the
Conditions to Mandatory Conversion and the provisions of Section 3(d)(i) hereof)
ninety (90) days after the Mandatory Conversion Date.  The Holder shall inform
the Company of the number of Blocked Shares applicable to such Holder within one
Business Day after the Mandatory Conversion Notice Date.  If the Company
receives no written notice from the Holder of the number of Blocked Shares
applicable to such Holder by the end of the Business Day after the Mandatory
Conversion Notice Date, the Company may conclusively conclude that there are no
Blocked Shares for such Holder.

 

(e)                                  Company Optional Redemption Right.

 

(i)                                     Company Optional Redemption.  If at any
time from and after the aggregate Principal amount of the then outstanding Notes
is equal to or less than $6,000,000, the Conditions to Company Redemption (as
set forth below) are satisfied or waived in writing by the Holder, the Company
shall have the right to redeem all but not less than all Notes then outstanding
(a “Company Optional Redemption”).  The Company may exercise its right of
redemption under this Section 9(e)(i) by delivering a written notice thereof by
facsimile and overnight courier to all of the holders of Notes and the Transfer
Agent (the “Company Optional Redemption Notice”).  The Company Optional
Redemption Notice shall be irrevocable.  This Note shall be redeemed by the
Company pursuant to this Section 9(e)(i) at a price equal to 110% of the
Conversion Amount (the “Company Optional Redemption Price”).  Notwithstanding
the foregoing, the Holder may continue to convert this Note into Common Stock
pursuant to Section 3(a) on or prior to the date immediately preceding the
Company Optional Redemption Date.  Redemptions required by this Section 9(e)
shall be made in accordance with the provisions of Section 12.

 

(ii)                                  Company Optional Redemption Notice.  If
the Company elects to cause a redemption of all of the Conversion Amount of this
Note pursuant to Section 9(e)(i), then it must simultaneously take the similar
action with respect to the Other Notes.  The Company Optional Redemption Notice
shall state (A) the Trading Day selected for the Company Optional Redemption in
accordance with Section 9(e)(i), which Trading Day shall be at least 20 Business
Days but not more than 60 Business Days following the Company Optional
Redemption Notice Date (the “Company Optional Redemption Date”), (B) that all
outstanding Notes have been called for optional redemption pursuant to this
Section 9(e) (and analogous provisions under the Other Notes), and (C) the
Company Optional Redemption Price to be paid to such Holder as of the Company
Optional Redemption Date.  All Conversion Amounts converted by the Holder after
delivery of the Company Optional Redemption Notice Date shall reduce the
Conversion Amount of this Note required to be redeemed on the Company Optional
Redemption Date.

 

(iii)                               Conditions to Company Redemption.  For
purposes of this Section 9(e), “Conditions to Company Redemption” means the
Conditions to Mandatory Conversion with the term “Mandatory Conversion Notice”
being replaced by “Company Optional Redemption Notice” and the term “Mandatory
Conversion Date” being replaced by “Company Optional Redemption Date”.

 

(10)                            NONCIRCUMVENTION.  The Company hereby covenants
and agrees that the Company will not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of this
Note, and will at all

 

12

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

 

times in good faith carry out all of the provisions of this Note and take all
action as may be required to protect the rights of the Holder of this Note.

 

(11)                            RESERVATION OF AUTHORIZED SHARES.

 

(a)                                  Reservation.  The Company shall initially
reserve out of its authorized and unissued Common Stock a number of shares of
Common Stock for each of the Notes equal to 100% of the Conversion Rate with
respect to the Conversion Amount of each such Note as of the Issuance Date. 
Thereafter, the Company, so long as any of the Notes are outstanding, shall take
all action necessary to reserve and keep available out of its authorized and
unissued Common Stock, solely for the purpose of effecting the conversion of the
Notes, 100% of the number of shares of Common Stock as shall from time to time
be necessary to effect the conversion of all of the Notes then outstanding;
provided that at no time shall the number of shares of Common Stock so reserved
be less than the number of shares required to be reserved by the previous
sentence (without regard to any limitations on conversions) (the “Required
Reserve Amount”).  The initial number of shares of Common Stock reserved for
conversions of the Notes and each increase in the number of shares so reserved
shall be allocated pro rata among the holders of the Notes based on the
principal amount of the Notes held by each holder at the time of Issuance Date
or increase in the number of reserved shares, as the case may be (the
“Authorized Share Allocation”).  In the event that a holder shall sell or
otherwise transfer any of such holder’s Notes, each transferee shall be
allocated a pro rata portion of such holder’s Authorized Share Allocation.  Any
shares of Common Stock reserved and allocated to any Person which ceases to hold
any Notes shall be allocated to the remaining holders of Notes, pro rata based
on the principal amount of the Notes then held by such holders.

 

(b)                                 Insufficient Authorized Shares.  If at any
time while any of the Notes remain outstanding the Company does not have a
sufficient number of authorized and unreserved shares of Common Stock to satisfy
its obligation to reserve for issuance upon conversion of the Notes at least a
number of shares of Common Stock equal to the Required Reserve Amount (an
“Authorized Share Failure”), then the Company shall as soon as practicable take
all action reasonably necessary to increase the Company’s authorized shares of
Common Stock to an amount sufficient to allow the Company to reserve the
Required Reserve Amount for the Notes then outstanding.  Without limiting the
generality of the foregoing sentence, as soon as practicable after the date of
the occurrence of an Authorized Share Failure, but in no event later than 60
days after the occurrence of such Authorized Share Failure, the Company shall
hold a meeting of its stockholders for the approval of an increase in the number
of authorized shares of Common Stock.  In connection with such meeting, the
Company shall provide each stockholder with a proxy statement and shall use its
best efforts to solicit its stockholders’ approval of such increase in
authorized shares of Common Stock and to cause its board of directors to
recommend to the stockholders that they approve such proposal.

 

(12)                            HOLDER’S REDEMPTIONS.

 

(a)                                  Mechanics.  In the event that the Holder
has sent an Event of Default Redemption Notice or a Change of Control Redemption
Notice to the Company pursuant to Section 4(b) or Section 5(c), or has received
a Company Optional Redemption Notice pursuant to Section 9(b), then the Holder
shall promptly after receipt of the applicable Redemption Price submit this Note
to the Company (each, a “Redemption Notice”).  The Company shall deliver the
applicable Event of Default Redemption Price to the Holder within five Business
Days after the Company’s receipt of the Holder’s Event of Default Redemption
Notice.  If the Holder has submitted a Change of Control Redemption Notice in
accordance with Section 5(c), the Company shall deliver the applicable Change of
Control Redemption Price to the Holder concurrently with the consummation of
such Change of Control if such notice is received prior to the consummation of
such Change of Control and within five Business Days

 

13

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

 

after the Company’s receipt of such notice otherwise.  The Company shall deliver
the Company Optional Redemption Amount to the Holder on the Company Optional
Redemption Date.  In the event of a redemption of less than all of the
Conversion Amount of this Note, the Company shall promptly cause to be issued
and delivered to the Holder a new Note (in accordance with Section 19(d))
representing the outstanding Principal which has not been redeemed.  In the
event that the Company does not pay the Event of Default Redemption Price, the
Change of Control Redemption Price or the Company Optional Redemption Price
(each, the “Redemption Price”), as applicable, to the Holder (or deliver any
Common Stock to be issued pursuant to a Redemption Notice) within the time
period required, at any time thereafter and until the Company pays such unpaid
Redemption Price (and issues any Common Stock required pursuant to a Redemption
Notice) in full, the Holder shall have the option, in lieu of redemption, to
require the Company to promptly return to the Holder all or any portion of this
Note representing the Conversion Amount that was submitted for redemption and
for which the applicable Redemption Price (or any Common Stock required to be
issued pursuant to a Redemption Notice) (together with any Late Charges thereon)
has not been paid.  Upon the Company’s receipt of such notice, (x) the
Redemption Notice shall be null and void with respect to such Conversion Amount,
(y) the Company shall immediately return this Note, or issue a new Note (in
accordance with Section 19(d)) to the Holder representing such Conversion Amount
and (z) the Conversion Price of this Note or such new Notes shall be adjusted to
the lesser of (A) the Conversion Price as in effect on the date on which the
Redemption Notice is voided and (B) the lowest Closing Bid Price during the
period beginning on and including the date on which the Redemption Notice is
delivered to the Company and ending on and including the date on which the
Redemption Notice is voided.  The Holder’s delivery of a notice voiding a
Redemption Notice and exercise of its rights following such notice shall not
affect the Company’s obligations to make any payments of Late Charges which have
accrued prior to the date of such notice with respect to the Conversion Amount
subject to such notice.

 

(b)                                 Redemption by Other Holders.  Upon the
Company’s receipt of notice from any of the holders of the Other Notes for
redemption or repayment as a result of an event or occurrence substantially
similar to the events or occurrences described in Section 4(b) or Section 5(c)
or the Company’s delivery of a Company Optional Redemption Notice pursuant to
Section 9(e) (each, an “Other Redemption Notice”), the Company shall immediately
forward to the Holder by facsimile a copy of such notice.  If the Company
receives a Redemption Notice and one or more Other Redemption Notices during the
seven Business Day period beginning on and including the date which is three
Business Days prior to the Company’s receipt of the Holder’s Redemption Notice
and ending on and including the date which is three Business Days after the
Company’s receipt of the Holder’s Redemption Notice and the Company is unable to
redeem all principal, interest and other amounts designated in such Redemption
Notice and such Other Redemption Notices received during such seven Business Day
period, then the Company shall redeem a pro rata amount from each holder of the
Notes (including the Holder) based on the principal amount of the Notes
submitted for redemption pursuant to such Redemption Notice and such Other
Redemption Notices received by the Company during such seven Business Day
period.

 

(13)                            [INTENTIONALLY OMITTED]

 

(14)                            VOTING RIGHTS.  The Holder shall have no voting
rights as the holder of this Note, except as required by law, including but not
limited to the General and Business Corporation Law of Missouri, and as
expressly provided in this Note.

 

14

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

 

(15)                            RANK; ADDITIONAL INDEBTEDNESS; LIENS.

 

(A)                                  RANK.                  ALL PAYMENTS DUE
UNDER THIS NOTE (A) SHALL RANK PARI PASSU WITH ALL OTHER NOTES AND (B) SHALL BE
SENIOR TO ALL OTHER INDEBTEDNESS OF THE COMPANY AND ITS SUBSIDIARIES, OTHER THAN
PERMITTED INDEBTEDNESS (AS DEFINED BELOW).

 

(B)                                 INCURRENCE OF INDEBTEDNESS.  SO LONG AS THIS
NOTE IS OUTSTANDING, THE COMPANY SHALL NOT, AND THE COMPANY SHALL NOT PERMIT ANY
OF ITS SUBSIDIARIES TO, DIRECTLY OR INDIRECTLY, INCUR OR GUARANTEE, ASSUME OR
SUFFER TO EXIST ANY INDEBTEDNESS, OTHER THAN (I) THE INDEBTEDNESS EVIDENCED BY
THIS NOTE AND THE OTHER NOTES AND (II) PERMITTED INDEBTEDNESS.  AS USED HEREIN,
“PERMITTED INDEBTEDNESS” MEANS (A) SENIOR INDEBTEDNESS; AND (B) PERMITTED
SUBORDINATED INDEBTEDNESS.

 

(C)                                  EXISTENCE OF LIENS.  SO LONG AS THIS NOTE
IS OUTSTANDING, THE COMPANY SHALL NOT, AND THE COMPANY SHALL NOT PERMIT ANY OF
ITS SUBSIDIARIES TO, DIRECTLY OR INDIRECTLY, ALLOW OR SUFFER TO EXIST ANY
MORTGAGE, LIEN, PLEDGE, CHARGE, SECURITY INTEREST OR OTHER ENCUMBRANCE UPON OR
IN ANY PROPERTY OR ASSETS (INCLUDING ACCOUNTS AND CONTRACT RIGHTS) OWNED BY THE
COMPANY OR ANY OF ITS SUBSIDIARIES (COLLECTIVELY, “LIENS”) OTHER THAN PERMITTED
LIENS.  AS USED HEREIN, “PERMITTED LIENS” MEANS (I) LIENS INCURRED TO SECURE
SENIOR INDEBTEDNESS, (II) LIENS ON FIXED OR CAPITAL ASSETS ACQUIRED, CONSTRUCTED
OR IMPROVED BY THE COMPANY OR ANY SUBSIDIARY, TO THE EXTENT OF INDEBTEDNESS
INCURRED WITHIN THIRTY DAYS FOR SUCH ACQUISITION, CONSTRUCTION OR IMPROVEMENT
AND INCURRED WITHIN THIRTY DAYS OF SUCH ACQUISITION, CONSTRUCTION OR
IMPROVEMENT, (III) PURCHASE MONEY LIENS, (IV) CARRIERS’, WAREHOUSEMEN’S,
MECHANICS’, MATERIALMEN’S, REPAIRMEN’S AND OTHER SIMILAR LIENS IMPOSED BY LAW,
SO LONG AS PAYMENT ON SUCH LINES IS NOT MORE THAN 30 DAYS PAST DUE, OR (V) OTHER
LIENS PERMITTED BY THE COMPANY’S SENIOR CREDIT AGREEMENT IN EXISTENCE ON THE
DATE HEREOF AS FILED AS AN EXHIBIT TO THE COMPANY’S CURRENT REPORT ON FORM 8-K
FILED WITH THE SEC ON FEBRUARY 13, 2004, AND WITHOUT GIVING EFFECT TO FUTURE
AMENDMENTS TO OR THE TERMINATION OF THE CREDIT AGREEMENT.

 

(D)                                 RESTRICTED PAYMENTS.  THE COMPANY SHALL NOT,
AND THE COMPANY SHALL NOT PERMIT ANY OF ITS SUBSIDIARIES TO, DIRECTLY OR
INDIRECTLY, REDEEM, DEFEASE, REPURCHASE, REPAY OR MAKE ANY PAYMENTS IN RESPECT
OF, BY THE PAYMENT OF CASH OR CASH EQUIVALENTS (IN WHOLE OR IN PART, WHETHER BY
WAY OF OPEN MARKET PURCHASES, TENDER OFFERS, PRIVATE TRANSACTIONS OR OTHERWISE),
ALL OR ANY PORTION OF ANY INDEBTEDNESS, OTHER THAN SENIOR INDEBTEDNESS OR PARI
PASSU INDEBTEDNESS, WHETHER BY WAY OF PAYMENT IN RESPECT OF PRINCIPAL OF (OR
PREMIUM, IF ANY) OR INTEREST ON, SUCH INDEBTEDNESS IF AT THE TIME SUCH PAYMENT
IS DUE OR IS OTHERWISE MADE OR, AFTER GIVING EFFECT TO SUCH PAYMENT, AN EVENT
CONSTITUTING, OR THAT WITH THE PASSAGE OF TIME AND WITHOUT BEING CURED WOULD
CONSTITUTE, AN EVENT OF DEFAULT HAS OCCURRED AND IS CONTINUING.

 

(16)                            PARTICIPATION.  The Holder, as the holder of
this Note, shall be entitled to such dividends paid and distributions made to
the holders of Common Stock to the same extent as if the Holder had converted
this Note into Common Stock (without regard to any limitations on conversion
herein or elsewhere) and had held such shares of Common Stock on the record date
for such dividends and distributions.  Payments under the preceding sentence
shall be made concurrently with the dividend or distribution to the holders of
Common Stock.

 

(17)                            VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. 
The affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting, of the holders of Notes representing not less than a
majority of the aggregate principal amount of the then outstanding Notes, shall
be required for any change or amendment to this Note or the Other Notes provided
such change or amendment is consented to by the Company, which such consent may
be granted in the sole discretion of the Company.  Any change or amendment to
this Note or the Other Notes so approved upon

 

15

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

 

written notice by the Company of such change or amendment shall be binding upon
the Holder and holders, present and future, of this Note and the Other Notes
without regard to whether the terms of such change or amendment are reflected in
this Note or the Other Notes.

 

(18)                            TRANSFER.  This Note may be offered, sold,
assigned or transferred by the Holder without the consent of the Company,
subject only to the provisions of Section 2(f) of the Securities Purchase
Agreement, provided that this Note may be offered, sold, assigned or transferred
only in Principal amounts of $3,000,000 (or the entire remaining Principal
amount if less) or increments of $100,000 in excess thereof..

 

(19)                            REISSUANCE OF THIS NOTE.

 

(a)                                  Transfer.  If this Note is to be
transferred, the Holder shall surrender this Note to the Company, whereupon the
Company will forthwith issue and deliver upon the order of the Holder a new Note
(in accordance with Section 19(d)), registered as the Holder may request,
representing the outstanding Principal being transferred by the Holder and, if
less then the entire outstanding Principal is being transferred, a new Note (in
accordance with Section 19(d)) to the Holder representing the outstanding
Principal not being transferred.  The Holder and any assignee, by acceptance of
this Note, acknowledge and agree that, by reason of the provisions of
Section 3(c)(iii) and this Section 19(a), following conversion or redemption of
any portion of this Note, the outstanding Principal represented by this Note may
be less than the Principal stated on the face of this Note.

 

(b)                                 Lost, Stolen or Mutilated Note.  Upon
receipt by the Company of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of this Note, and, in the case of loss,
theft or destruction, of any indemnification undertaking by the Holder to the
Company in customary form and, in the case of mutilation, upon surrender and
cancellation of this Note, the Company shall execute and deliver to the Holder a
new Note (in accordance with Section 19(d)) representing the outstanding
Principal.

 

(c)                                  Note Exchangeable for Different
Denominations.  This Note is exchangeable, upon the surrender hereof by the
Holder at the principal office of the Company, for a new Note or Notes (in
accordance with Section 19(d) and in principal amounts of at least $100,000)
representing in the aggregate the outstanding Principal of this Note, and each
such new Note will represent such portion of such outstanding Principal as is
designated by the Holder at the time of such surrender.

 

(d)                                 Issuance of New Notes.  Whenever the Company
is required to issue a new Note pursuant to the terms of this Note, such new
Note (i) shall be of like tenor with this Note, (ii) shall represent, as
indicated on the face of such new Note, the Principal remaining outstanding (or
in the case of a new Note being issued pursuant to Section 19(a) or
Section 19(c), the Principal designated by the Holder which, when added to the
principal represented by the other new Notes issued in connection with such
issuance, does not exceed the Principal remaining outstanding under this Note
immediately prior to such issuance of new Notes), (iii) shall have an issuance
date, as indicated on the face of such new Note, which is the same as the
Issuance Date of this Note, (iv) shall have the same rights and conditions as
this Note, and (v) shall represent accrued Interest and Late Charges on the
Principal and Interest of this Note, from the Issuance Date.

 

16

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

 

(20)                            REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS,
BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in this Note shall be
cumulative and in addition to all other remedies available under this Note, the
Securities Purchase Agreement and the Registration Rights Agreement, at law or
in equity (including a decree of specific performance and/or other injunctive
relief), and nothing herein shall limit the Holder’s right to pursue actual and
consequential damages for any failure by the Company to comply with the terms of
this Note.  Amounts set forth or provided for herein with respect to payments,
conversion and the like (and the computation thereof) shall be the amounts to be
received by the Holder and shall not, except as expressly provided herein, be
subject to any other obligation of the Company (or the performance thereof). 
The Company acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the Holder and that the remedy at law for any such
breach may be inadequate.  The Company therefore agrees that, in the event of
any such breach or threatened breach, the Holder shall be entitled, in addition
to all other available remedies, to an injunction restraining any breach,
without the necessity of showing economic loss and without any bond or other
security being required.

 

(21)                            PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER
COSTS.  If (a) this Note is placed in the hands of an attorney for collection or
enforcement or is collected or enforced through any legal proceeding or the
Holder otherwise takes action to collect amounts due under this Note or to
enforce the provisions of this Note or (b) there occurs any bankruptcy,
reorganization, receivership of the Company or other proceedings affecting
Company creditors’ rights and involving a claim under this Note, then the
Company shall pay the costs incurred by the Holder for such collection,
enforcement or action or in connection with such bankruptcy, reorganization,
receivership or other proceeding, including, but not limited to, attorneys’ fees
and disbursements.

 

(22)                            CONSTRUCTION; HEADINGS.  This Note shall be
deemed to be jointly drafted by the Company and all the Purchasers and shall not
be construed against any person as the drafter hereof.  The headings of this
Note are for convenience of reference and shall not form part of, or affect the
interpretation of, this Note.

 

(23)                            FAILURE OR INDULGENCE NOT WAIVER.  No failure or
delay on the part of the Holder in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege.

 

(24)                            DISPUTE RESOLUTION.  In the case of a dispute as
to the determination of the Redemption Price or the arithmetic calculation of
the Conversion Rate or the Redemption Price, the Company shall submit the
disputed determinations or arithmetic calculations via facsimile within one
Business Day of receipt of the Conversion Notice or Redemption Notice or other
event giving rise to such dispute, as the case may be, to the Holder.  If the
Holder and the Company are unable to agree upon such determination or
calculation within one Business Day of such disputed determination or arithmetic
calculation being submitted to the Holder, then the Company shall, within one
Business Day submit via facsimile (a) the disputed determination of the Closing
Bid Price or the Closing Sale Price to an independent, reputable investment bank
selected by the Company and approved by the Holder or (b) the disputed
arithmetic calculation of the Conversion Rate or the Redemption Price to the
Company’s independent, outside accountant.  The Company, at the Company’s
expense, shall cause 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 five 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.

 

17

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

 

(25)                            NOTICES; PAYMENTS.

 

(a)                                  Notices.  Whenever notice is required to be
given under this Note, unless otherwise provided herein, such notice shall be
given in accordance with Section 9(f) of the Securities Purchase Agreement.  The
Company shall provide the Holder with prompt written notice of all actions taken
pursuant to this Note, including in reasonable detail a description of such
action and the reason therefore.  Without limiting the generality of the
foregoing, the Company will give written notice to the Holder (i) immediately
upon any adjustment of the Conversion Price, setting forth in reasonable detail,
and certifying, the calculation of such adjustment and (ii) at least twenty (20)
days prior to the date on which the Company closes its books or takes a record
(A) with respect to any dividend or distribution upon the Common Stock, (B) with
respect to any pro rata subscription offer to holders of Common Stock or (C) for
determining rights to vote with respect to any Change of Control, dissolution or
liquidation, provided in each case that such information shall be made known to
the public prior to or in conjunction with such notice being provided to the
Holder.  Notwithstanding the foregoing, Section 4(i) of the Securities Purchase
Agreement shall apply to all notices given pursuant to this Note.

 

(b)                                 Payments.  Whenever any payment of cash is
to be made by the Company to any Person pursuant to this Note, such payment
shall be made in lawful money of the United States of America by a check drawn
on the account of the Company and sent via overnight courier service to such
Person at such address as previously provided to the Company in writing (which
address, in the case of each of the Purchasers, shall initially be as set forth
on the Schedule of Buyers attached to the Securities Purchase Agreement);
provided that the Holder may elect to receive a payment of cash via wire
transfer to a U.S. bank or the domestic branch of a foreign bank of immediately
available funds by providing the Company with prior written notice setting out
such request and the Holder’s wire transfer instructions.  Whenever any amount
expressed to be due by the terms of this Note is due on any day which is not a
Business Day, the same shall instead be due on the next succeeding day which is
a Business Day and, in the case of any Interest Date which is not the date on
which this Note is paid in full, the extension of the due date thereof shall not
be taken into account for purposes of determining the amount of Interest due on
such date.  Any amount of Principal or other amounts due under the Transaction
Documents (as defined in the Securities Purchase Agreement) which is not paid
when due shall result in a late charge being incurred and payable by the Company
in an amount equal to interest on such amount at the rate of 15% per annum from
the date such amount was due until the same is paid in full (“Late Charge”).

 

(26)                            CANCELLATION.  After all Principal, accrued
Interest and other amounts at any time owed on this Note has been paid in full,
this Note shall automatically be deemed canceled, shall be surrendered to the
Company for cancellation and shall not be reissued.

 

(27)                            WAIVER OF NOTICE.  To the extent permitted by
law, the Company hereby waives demand, notice, protest and all other demands and
notices in connection with the delivery, acceptance, performance, default or
enforcement of this Note and the Securities Purchase Agreement.

 

(28)                            GOVERNING LAW.  This Note shall be construed and
enforced in accordance with, and all questions concerning the construction,
validity, interpretation and performance of this Note shall be governed by, the
internal laws of the State of New York, without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York.

 

18

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

 

(29)                            CERTAIN DEFINITIONS.  For purposes of this Note,
the following terms shall have the following meanings:

 

(a)                                  “Approved Stock Plan” means any employee
benefit, option or incentive plan which has been approved by the Board of
Directors of the Company, pursuant to which the Company’s securities may be
issued to any employee, consultant, officer or director for services provided to
the Company.

 

(b)                                 “Bloomberg” means Bloomberg Financial
Markets.

 

(c)                                  “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.

 

(d)                                 “Calendar Quarter” means each of: the period
beginning on and including January 1 and ending on and including March 31; the
period beginning on and including April 1 and ending on and including June 30;
the period beginning on and including July 1 and ending on and including
September 30; and the period beginning on and including October 1 and ending on
and including December 31.

 

(e)                                  “Closing Bid Price” and “Closing Sale
Price” means, for any security as of any date, the last closing bid price and
last closing trade price, respectively, for such security on the Principal
Market, as reported by Bloomberg, or, if the Principal Market begins to operate
on an extended hours basis and does not designate the closing bid price or the
closing trade price, as the case may be, then the last bid price or last trade
price, respectively, of such security prior to 4:00:00 p.m., New York Time, as
reported by Bloomberg, or, if the Principal Market is not the principal
securities exchange or trading market for such security, the last closing bid
price or last trade price, respectively, of such security on the principal
securities exchange or trading market where such security is listed or traded as
reported by Bloomberg, or if the foregoing do not apply, the last closing bid
price or last trade price, respectively, of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by Bloomberg, or, if no closing bid price or last trade price,
respectively, is reported for such security by Bloomberg, the average of the bid
prices, or the ask prices, respectively, of any market makers for such security
as reported in the “pink sheets” by Pink Sheets LLC (formerly the National
Quotation Bureau, Inc.).  If the Closing Bid Price or the Closing Sale Price
cannot be calculated for a security on a particular date on any of the foregoing
bases, the Closing Bid Price or the Closing Sale Price, as the case may be, of
such security on such date shall be the fair market value as mutually determined
by the Company and the Holder.  If the Company and the Holder are unable to
agree upon the fair market value of such security, then such dispute shall be
resolved pursuant to Section 24.  All such determinations to be appropriately
adjusted for any stock dividend, stock split, stock combination or other similar
transaction during the applicable calculation period.

 

(f)                                    “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.

 

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

 

19

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

 

(h)                                 “EBITDA” means, for any four Calendar
Quarter period for any Person, the net income (or net loss) of such Person and
its consolidated Subsidiaries, determined in accordance with GAAP, plus (i) any
provision for (or less any benefit from) income taxes, (ii) any deduction for
interest expense, net of interest income (iii) depreciation and amortization
expense, (iv) the non-cash portion of compensation expense related to the grant
of stock options, restricted stock, and stock appreciation rights, (v) any other
components of net income (or net loss) which are non-cash and will not convert
to cash prior to the final maturity of this Note, and (vi) costs, fees and
expenses incurred in connection with any acquisition transaction, and as
adjusted for the following items (to the extent that they are reflected in net
income or net loss): elimination of: (v) any net income (or net loss) from
discontinued operations as determined in accordance with GAAP (w) all
extraordinary gains and losses determined in accordance with GAAP, (x) gains and
losses from sales or dispositions of property and equipment or other fixed
assets, (y) all non-recurring income and expense items not incurred in the
ordinary course of business to the extent included in the determination of net
income for the relevant determination period and (z) foreign currency
transaction gains and losses, to the extent included in the determination of net
income for the relevant determination period; provided, however, that if, during
the four Calendar Quarter period for which the EBITDA of a Person is being
calculated, such Person has completed an acquisition of an on-going business (a
“Target”), the EBITDA of such Person shall be recalculated to include the EBITDA
of such Target as if such acquisition (including any acquisition completed prior
to the date of this Note but within the applicable period for which EBITDA is
being calculated) had been completed on the first day of the relevant measuring
period.  To the extent applicable, all determinations of the components of
EBITDA shall be derived from the Company’s then most recently filed Annual
Report on Form 10-K or Quarterly Report on Form 10-Q, as applicable.

 

(i)                                     “Excluded Securities” means any shares
of Common Stock issued or issuable: (i) in connection with any Approved Stock
Plan; (ii) upon conversion of the Notes and the Other Notes; and (iii) upon
conversion of any Options or Convertible Securities which are outstanding on the
day immediately preceding the Issuance Date, provided that the terms of such
Options or Convertible Securities are not amended, modified or changed on or
after the Issuance Date.

 

(j)                                     “GAAP” means United States generally
accepted accounting principles, consistently applied.

 

(k)                                  “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 trade payables entered into in the ordinary course of business), (C)
all reimbursement or payment obligations with respect to letters of credit,
surety bonds and other similar instruments, (D) all obligations evidenced by
notes, bonds, debentures 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 monetary obligations under any leasing or similar
arrangement which, in connection with generally accepted accounting principles,
consistently applied for the periods covered thereby, is classified as a capital
lease, (G) off-balance sheet liabilities retained in connection with asset
securitization programs, synthetic leases, sale and leaseback transactions or
other similar obligations arising with respect to any other transaction which is
the functional equivalent of or takes the place of borrowing but which does not
constitute a liability on the consolidated balance sheet of such Person and its
subsidiaries, and (H) all indebtedness referred to in clauses (A) through (G)
above secured by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) any mortgage, lien, pledge,
charge, security interest or other encumbrance upon or in any property or assets
(including accounts and

 

20

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

 

contract rights) owned by any Person, even though the Person which owns such
assets or property has not assumed or become liable for the payment of such
indebtedness, and (I) all Contingent Obligations in respect of indebtedness or
obligations of others of the kinds referred to in clauses (A) through (H) above.

 

(l)                                     “Issuance Date” means June 10, 2004.

 

(m)                               “Options” means any rights, warrants or
options to subscribe for or purchase Common Stock or Convertible Securities.

 

(n)                                 “Permitted Subordinated Indebtedness” means
Indebtedness that (x) is made expressly subordinate in right of payment to the
Indebtedness evidenced by this Note and the Other Notes on terms reasonably
satisfactory to the holders of Notes representing not less than a majority of
the aggregate principal amount of the then outstanding Notes and (y) does not
provide at any time for the payment, prepayment, repayment, repurchase or
defeasance, directly or indirectly, of any principal or premium, if any, thereon
until at least 91 days after the Maturity Date.

 

(o)                                 “Person” means an individual, a limited
liability company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization, any other entity and a government or any department
or agency thereof.

 

(p)                                 “Principal Market” means the Nasdaq National
Market.

 

(q)                                 “Redemption Premium” means (i) in the case
of the Events of Default described in Section 4(a)(i) - (vi) and (ix) - (xiii),
120% or (ii) in the case of the Events of Default described in Section 4(a)(vii)
- (viii), 100%.

 

(r)                                    “Registration Rights Agreement” means
that certain registration rights agreement between the Company and the initial
holders of the Notes relating to the registration of the resale of the shares of
Common Stock issuable upon conversion of the Notes.

 

(s)                                  “SEC” means the United States Securities
and Exchange Commission.

 

(t)                                    “Securities Purchase Agreement” means
that certain securities purchase agreement between the Company and the initial
holders of the Notes pursuant to which the Company issued the Notes.

 

(u)                                 “Senior Indebtedness” means the principal of
(and premium, if any), interest on, and all fees and other amounts (including,
without limitation, any reasonable costs, enforcement expenses (including
reasonable legal fees and disbursements), collateral protection expenses and
other reimbursement or indemnity obligations relating thereto) payable under the
agreements or instruments evidencing, any unaffiliated, third-party Indebtedness
of the Company and its Subsidiaries, whether now existing or hereafter arising
(together with any renewals, refundings, refinancings or other extensions
thereof), which is not made expressly subordinate in right of payment to the
Indebtedness evidenced by this Note and the Other Notes, provided that the
aggregate amount of such Senior Indebtedness (taking into account the maximum
amounts which may be advanced under the loan documents evidencing such Senior
Indebtedness) does not as of the date on which such Senior Indebtedness is
incurred exceed the product of (i) 2.5 and (ii) EBITDA (the “Senior Indebtedness
Cap”).  Without limitation of the generality of the foregoing and subject to the
Senior Indebtedness Cap, Senior Indebtedness shall include the obligations of
the Company to its current senior secured lender, LaSalle Bank, N.A. and any
participants with LaSalle Bank, N.A. in such Indebtedness (the “Senior Bank
Obligations”), and the Senior Bank Obligations are designated as Senior
Indebtedness.  The Company

 

21

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

 

may from time to time designate by written notice to the Holder the obligations,
in addition to the Senior Bank Obligations, which constitute Senior
Indebtedness, and, provided that, at the time that the Senior Indebtedness is
incurred (or a commitment to lend any Senior Indebtedness is made), the
aggregate Senior Indebtedness of the Company does not exceed the Senior
Indebtedness Cap, Senior Indebtedness so designated shall continue to be Senior
Indebtedness notwithstanding any subsequent decline in the Company’s EBITDA.

 

(v)                                 “Total Capitalization” means, at any time,
the sum of (i) the sum of all amounts (without duplication) which, in accordance
with GAAP, would be included in the Company’s stockholders’ equity (excluding
unrealized gains or losses pursuant to GAAP) as required to be reported in the
Company’s then most recent consolidated balance sheet, (ii) Total Debt and (iii)
the cumulative (subsequent to issuance of this Note) non-cash portion of
compensation expense related to the grant of stock options, restricted stock,
and stock appreciation rights.

 

(w)                               “Total Debt” means, on any date, the
outstanding principal amount of all Indebtedness of the Company and its
Subsidiaries of the type referred to in clauses (A), (C), (D), (F) and (G) of
the definition of “Indebtedness” along with any Contingent Obligation in respect
of any of the foregoing.

 

(x)                                   “Total Debt to EBITDA Ratio” means, as of
the last day of any Calendar Quarter, the ratio of (i) Total Debt outstanding on
such day to (ii) EBITDA on such day.

 

(y)                                 “Total Debt to Total Capitalization Ratio”
means, as of the last day of any Calendar Quarter, the ratio of (i) Total Debt
outstanding on such day to (ii) Total Capitalization on such day.

 

(z)                                   “Trading Day” means any day on which the
Common Stock is traded on the Principal Market, or, if the Principal Market is
not the principal trading market for the Common Stock, then on the principal
securities exchange or securities market on which the Common Stock is then
traded; provided that “Trading Day” shall not include any day on which the
Common Stock is scheduled to trade on such exchange or market for less than 4.5
hours or any day that the Common Stock is suspended from trading during the
final hour of trading on such exchange or market (or if such exchange or market
does not designate in advance the closing time of trading on such exchange or
market, then during the hour ending at 4:00:00 p.m., New York Time).

 

(aa)                            “Weighted Average Price” means, for any security
as of any date, the dollar volume-weighted average price for such security on
the Principal Market during the period beginning at 9:30:01 a.m., New York Time
(or such other time as the Principal Market publicly announces is the official
open of trading), and ending at 4:00:00 p.m., New York Time (or such other time
as the 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 9:30:01 a.m., New York Time (or
such other time as such market publicly announces is the official open of
trading), and ending at 4:00:00 p.m., New York Time (or such other time as such
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 Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.).  If the Weighted Average Price cannot be
calculated for a security on a particular 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 Holder.  If the
Company and the Holder

 

22

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

 

are unable to agree upon the fair market value of such security, then such
dispute shall be resolved pursuant to Section 24.  All such determinations to be
appropriately adjusted for any stock dividend, stock split, stock combination or
other similar transaction during the applicable calculation period.

 

[Signature Page Follows]

 

23

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

 

IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of
the Issuance Date set out above.

 

 

EPIQ SYSTEMS, INC.

 

 

 

 

 

By:

 

 

 

 

Name:

Tom W. Olofson

 

 

Title:

Chief Executive Officer

 

24

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

 

EXHIBIT I

 

EPIQ SYSTEMS, INC.

CONVERSION NOTICE

 

Reference is made to the Contingent Convertible Subordinated Note (the “Note”)
issued to the undersigned by EPIQ Systems, Inc. (the “Company”).  In accordance
with and pursuant to the Note, the undersigned hereby elects to convert the
Conversion Amount (as defined in the Note) of the Note indicated below into
shares Common Stock, par value $0.01 per share, of the Company (the “Common
Stock”) as of the date specified below.

 

Date of Conversion:

 

Aggregate Conversion Amount to be converted:

 

The undersigned hereby certifies to the Company that the Company’s conversion of
the amount set forth above in accordance with Section 3(a) of the Note will not
directly result in the undersigned (together with the undersigned’s affiliates)
beneficially owning in excess of 9.99% of the number of shares of Common Stock
outstanding immediately after giving effect to such conversion, calculated in
accordance with Section 3(d)(i) of the Note.

 

Please confirm the following information:

 

Conversion Price: 

 

Number of shares of Common Stock to be issued:

 

Please issue the Common Stock into which the Note is being converted in the
following name and to the following address:

 

Name/Address for Issuance:

 

 

 

U.S. Tax Identification Number, if applicable:

 

Broker/Dealer Information for DWAC:

 

Brokerage Name & DTC Participant #

 

Settlement Date                   Broker Contact                          Phone
#                   

 

Facsimile Number:

 

Authorization:

 

 

By:

 

 

Title:

 

 

Dated:

 

 

25

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

 

Account Number:

  (if electronic DWAC/book entry transfer)

 

Transaction Code Number:

  (if electronic DWAC/book entry transfer)

 

26

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

 

CONVERSION ACKNOWLEDGMENT

 

&

 

TRANSFER AGENT INSTRUCTION

 

The Company hereby acknowledges this Conversion Notice and hereby directs Wells
Fargo Shareowner Services to issue the above indicated number of shares of
Common Stock in accordance with the Transfer Agent Instructions dated June 10,
2004 from the Company and acknowledged and agreed to by Wells Fargo Shareowner
Services.

 

 

EPIQ SYSTEMS, INC.

 

 

 

 

 

By:

 

 

 

Name:

 

Title:

 

27

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