Exhibit 10.5

ARTICLES OF AMENDMENT

As adopted by the Board of Directors of the Company on
                                 and by a majority of the shareholders of the
Company pursuant to an action taken at a meeting of such shareholders on
                        , 2007, the number of votes cast being sufficient for
approval

AMENDED AND RESTATED

CERTIFICATE OF DESIGNATIONS OF

DEVCON INTERNATIONAL CORP.

Devcon International Corp. (the “Company”), a corporation organized and existing
under the Florida Business Corporation Act (the “FBCA”), does hereby certify
that, pursuant to authority conferred upon the Board of Directors of the Company
by the Certificate of Incorporation, as amended, of the Company, and pursuant to
Section 607.1006 of the FBCA, the Board of Directors of the Company (a) is
authorized to issue preferred stock, par value $0.10 per share, of the Company
(“Preferred Stock”) in one or more series and to designate the powers,
preferences, relative rights, qualifications, limitations and restrictions
relating to the shares of each such series, and (b) has adopted resolutions
(i) designating forty-five thousand (45,000) shares of the Company’s previously
authorized Preferred Stock as “Series A Convertible Preferred Stock,” par value
$0.10 per share (the “Preferred Shares”), and (ii) providing for the
designations, powers, preferences and relative, optional or other rights, and
the qualifications, limitations or restrictions thereof, as follows:

RESOLVED, that the Company is authorized to issue up to forty-five thousand
(45,000) shares of Series A Convertible Preferred Stock, par value $0.10 per
share, which shall have the following designations, powers, preferences,
relative rights, qualifications, limitations and restrictions (with certain
defined terms set forth in Section 2(a) below):

(1) Dividends. The holders of the Preferred Shares (each, a “Holder” and
collectively, the “Holders”) shall be entitled to receive dividends
(“Dividends”) payable on the Stated Value (as defined below) of such Preferred
Share at the Dividend Rate (as defined below). Dividends on the Preferred Shares
shall commence accruing on the Initial Issuance Date and shall be computed on
the basis of a 360-day year consisting of twelve 30-day months and shall be
payable in arrears for each Calendar Quarter on the first day of the succeeding
Calendar Quarter during the period beginning on the Initial Issuance Date and
ending on, and including, the Maturity Date and shall be due and payable on each
Conversion Date by inclusion in the applicable Conversion Amount (as defined
below) (each, an “Dividend Date”) with the first Dividend Date being April 1,
2006. Prior to the payment of Dividends on a Dividend Date, Dividends on the
Preferred Shares shall accrue at the Dividend Rate. If a Dividend Date is not a
Business Day (as defined below), then the Dividend shall be due and payable on
the Business Day immediately following such Dividend Date. Dividends shall be
payable, at the option of the Company, either (I) by adding such Dividends to
the Stated Value of each Preferred Share as of such Dividend Date (the
“Capitalized Dividends”) or (II) in cash, provided that the Dividends which
accrued during any period shall be payable as Capitalized Dividends only if the
Company indicates that the Dividend will be paid in Capitalized

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Dividends in the Dividend Notice (as defined below). At least twenty-five
(25) Trading Days prior to the applicable Dividend Date (the “Dividend Notice
Date”), the Company shall provide written notice (the “Dividend Notice”) to each
Holder of Preferred Shares either indicating that the Dividend is to be paid in
Capitalized Dividends or confirming that the Dividend shall be paid in cash.

(2) Conversion of Preferred Shares. Preferred Shares shall be convertible into
shares of Common Stock on the terms and conditions set forth in this Section 2.

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

(i) “Additional Amount” means, on a per Preferred Share basis, the product of
(x) the result of the following formula: (Dividend Rate)(N/360) and (y) the
Stated Value.

(ii) “Approved Share Plan” means any employee benefit 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, officer, consultant or
director for services provided to the Company.

(iii) “Bloomberg” means Bloomberg Financial Markets.

(iv) “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.

(v) “Calendar Quarter” means each of the following periods: 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.

(vi) “CapitalSource Credit Agreements” means (i) that certain Credit Agreement,
dated November 10, 2005, by and among the Devcon Security Holdings, Inc., Devcon
Security Services Corp., Coastal Security Company, Coastal Security Systems,
Inc., Central One, Inc. and CapitalSource Finance LLC, as amended from time to
time, (ii) that certain Guaranty, dated as of November 10, 2005, by the Company
to and for the benefit of CapitalSource Finance LLC and (iii) any agreements
relating to the foregoing.

(vii) “Change of Control” means any Fundamental Transaction other than (A) any
reorganization, recapitalization or reclassification in which holders of the
Company’s voting power immediately prior to such reorganization,
recapitalization or reclassification continue after such reorganization,
recapitalization or reclassification to hold publicly traded securities

 

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and, 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.

(viii) “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 Required
Holders. 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 2(d)(vii). All such determinations to be appropriately adjusted for any
share dividend, share split, share combination or other similar transaction
during the applicable calculation period.

(ix) “Common Stock” means the common stock of the Company, par value $0.10 per
share.

(x) “Common Stock Deemed Outstanding” means, at any given time, the number of
shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock deemed to be outstanding pursuant to Sections 2(f)(i)(A)
and 2(f)(i)(B) hereof regardless of whether the Options or Convertible
Securities are actually exercisable at such time, but excluding any shares of
Common Stock owned or held by or for the account of the Company or issuable upon
conversion of the Preferred Shares.

 

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(xi) “Conversion Amount” means the sum of (1) the Additional Amount and (2) the
Stated Value.

(xii) “Conversion Price” means, with respect to the Preferred Shares, as of any
Conversion Date or other date of determination, $6.75, subject to adjustment as
provided herein.

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

(xiv) “Conversion Shares” means any shares of Common Stock issued or issuable
upon conversion of the Preferred Shares.

(xv) “Default Conversion Price” means as of any date of determination, the
product of (x) 90% and (y) the lowest Closing Bid Price during the three
(3) Trading Days ending on and including such date of determination.

(xvi) “Dividend Rate” means (x) ten percent (10.0%) per annum and (y) for the
period from and after the occurrence of a Triggering Event through such time
that such Triggering Event is cured, the fifteen percent (15%) per annum.

(xvii) “Eligible Market” means the Principal Market, NYSE, The NASDAQ Global
Select Market, The NASDAQ Global Market, The NASDAQ Capital Market, or The
American Stock Exchange.

(xviii) “Equity Conditions” means: (i) on each day during the period beginning
ninety-five (95) days prior to the applicable date of determination and ending
on and including the applicable date of determination (the “Equity Conditions
Measuring Period”), either (x) any Registration Statement (as defined in the
Registration Rights Agreement, the “Registration Statement”) required to be
filed pursuant to the Registration Rights Agreement shall be effective and
available for the resale of all of the Registrable Securities to the extent
required by and in accordance with the terms of the Registration Rights
Agreement and there shall not have been any Grace Periods (as defined in the
Registration Rights Agreement) or (y) all shares of Common Stock issuable upon
conversion of the Preferred Shares and the exercise of Warrants shall be
eligible for sale without restriction and without the need for registration
under any applicable federal or state securities laws; (ii) on each day during
the Equity Conditions Measuring Period, the Common Stock is designated for
quotation on the Principal Market and shall not have been suspended from trading
on such exchange or market (other than suspensions of not more than two days and
occurring prior to the applicable date of determination due to business

 

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announcements by the Company) nor shall proceedings for such delisting or
suspension by such exchange or market have been commenced threatened or pending
either (A) in writing by such exchange or market (other than with respect to
those issues set forth on the Company’s Current Report on Form 8-K, dated as of
January 25, 2006) or (B) by falling below the minimum listing maintenance
requirements of such exchange or market; (iii) on each day during the Equity
Conditions Measuring Period, the Company shall have delivered Conversion Shares
upon conversion of the Preferred Shares and Common Stock upon exercise of the
Warrants to the Holders on a timely basis as set forth in Section 2(c)(ii)
hereof and Section 1(a) of the Warrants; (iv) any applicable shares of Common
Stock to be issued in connection with the event requiring determination may be
issued in full without violating Section 5 hereof, Section 14 hereof or the
rules or regulations of the applicable Principal Market; (v) during the Equity
Conditions Measuring Period, the Company shall not have failed to timely make
any payments within five (5) Business Days of when such payment is due pursuant
to any Transaction Document (as defined in the Securities Purchase Agreement);
(vi) during the Equity Conditions Measuring Period, there shall not have
occurred either (A) the public announcement of a pending, proposed or intended
Fundamental Transaction which has not been abandoned, terminated or consummated
or (B) a Triggering Event or an event that with the passage of time or giving of
notice would constitute a Triggering Event; (vii) the Company shall have no
knowledge of any fact that would cause (x) the Registration Statements required
pursuant to the Registration Rights Agreement not to be effective and available
for the resale of at least all of the Registrable Securities in accordance with
the terms of the Registration Rights Agreement or (y) any shares of Common Stock
issuable upon conversion of the Preferred Shares and shares of Common Stock
issuable upon exercise of the Warrants not to be eligible for sale without
restriction pursuant to Rule 144(k) and any applicable state securities laws;
(viii) with respect to any Company Installment Conversion or Mandatory
Conversion (collectively, the “Forced Conversions”) or any Company Installment
Redemption, Mandatory Redemption or Mandatory Maturity Redemption (collectively,
the “Forced Redemptions”), the number of Conversion Shares issuable upon
conversion of the Preferred Shares being converted or redeemed (assuming a
conversion immediately prior to such Forced Redemption Date) in such Forced
Conversion or Forced Redemption, respectively, from any Holder of Preferred
Shares shall not exceed the sum of (I) the number of Conversion Shares issuable
upon conversion of the Preferred Shares eligible for sale without restriction by
such holder pursuant to Rule 144 (as defined in the Securities Purchase
Agreement) as of such applicable date of determination and (II) the number of
Conversion Shares registered on an effective Registration Statement and
available for resale thereunder as of such applicable date of determination
(such equity condition, the “Forced Redemption/Conversion Condition”); and
(ix) the Company otherwise shall have been in material compliance with and shall
not have materially breached any provision, covenant, representation or warranty
of any Transaction Document.

 

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(xix) “Excluded Securities” means any Common Stock issued or deemed to be issued
in accordance with Section 2(f) hereof by the Company: (A) in connection with an
Approved Share Plan; (B) upon issuance of the Preferred Shares or, upon
conversion of the Preferred Shares or upon exercise of the Warrants;
(C) pursuant to a bona fide underwritten public offering at a price per share of
Common Stock not less than the Conversion Price in effect at the time of such
offering with a nationally recognized underwriter which generates gross proceeds
to the Company of at least $15,000,000 (other than an “at-the-market offering”
as defined in Rule 415(a)(4) under the 1933 Act and “equity lines”); (D) issued
upon exercise of Options or Convertible Securities which are outstanding on the
date immediately preceding the Subscription Date, provided that such issuance of
Common Stock upon exercise of such Options or Convertible Securities is made
pursuant to the terms of such Options or Convertible Securities in effect on the
date immediately preceding the Subscription Date and such Options or Convertible
Securities are not amended after the date immediately preceding the Subscription
Date; and (E) issued in connection with any share split, share dividend,
recapitalization or similar transaction by the Company for which adjustment is
made pursuant to Section 2(f)(ii).

(xx) “Forced Redemption Date” means, as applicable, the Installment Date,
Maturity Date, or Mandatory Redemption Date

(xxi) “Forced Redemption Notice Date” means, as applicable, (A) the earlier to
occur of (x) the Installment Notice Due Date and (y) the Installment Notice
Date, (B) the earlier to occur of (x) the Maturity Date Notice Due Date and
(y) the Maturity Date Notice Date, or (C) the Notice of Mandatory Redemption
Date.

(xxii) “Forced Redemption Price” means, as applicable, the Company Installment
Redemption Price, Maturity Date Redemption Price, or Mandatory Redemption Price.

(xxiii) “Forced Redemption Market Price” means the greater of (A) the arithmetic
average of the Weighted Average Price of the Common Stock on each of the three
(3) consecutive Trading Days immediately preceding (but not including) the
applicable Forced Redemption Notice Date and (B) the arithmetic average of the
Weighted Average Price of the Common Stock on each of the three (3) consecutive
Trading Days immediately preceding (but not including) the applicable Forced
Redemption Date.

 

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(xxiv) “Fundamental Transaction” means that (i) the Company shall, directly or
indirectly, in one or more related transactions, (A) consolidate or merge with
or into (whether or not the Company is the surviving corporation) another
Person, or (B) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of the Company to another Person,
or (C) allow another Person to make a purchase, tender or exchange offer that is
accepted by the holders of more than the 50% of the outstanding Common Stock
(not including any Common Stock held by the Person or Persons making or party
to, or associated or affiliated with the Persons making or party to, such
purchase, tender or exchange offer), (D) consummate a share purchase agreement
or other business combination (including, without limitation, a reorganization,
recapitalization, spin-off or scheme of arrangement) with another Person whereby
such other Person acquires more than the 50% of the outstanding shares of Common
Stock (not including any Common Stock held by the other Person or other Persons
making or party to, or associated or affiliated with the other Persons making or
party to, such share purchase agreement or other business combination), or
(E) reorganize, recapitalize or reclassify its Common Stock or (ii) any “person”
or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of
the Exchange Act) is or shall become the “beneficial owner” (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 50% of the issued and
outstanding Common Stock or the aggregate ordinary voting power represented by
issued and outstanding Common Stock.

(xxv) “Holder Pro Rata Amount” means a fraction (i) the numerator of which is
the number of Preferred Shares issued to such Holder on the Initial Issuance
Date and (ii) the denominator of which is the number of Preferred Shares issued
on the Initial Issuance Date.

(xxvi) “Indebtedness” shall have the meaning as set forth in the Securities
Purchase Agreement.

(xxvii) “Initial Issuance Date” means October 20, 2006.

(xxviii) “Installment Date” means each of the following dates: (i) the fourth
anniversary of the Initial Issuance Date, (ii) the fifth anniversary of the
Initial Issuance Date and (iii) the sixth anniversary of the Initial Issuance
Date; provided, however, that in the event the Company fails to meet the Equity
Conditions on any such Installment Date, then as to each Holder that does not
waive such failure on such Installment Date, an additional Installment Date
shall occur six months after such Installment Date (each, an “Additional
Installment Date”).

(xxix) “Installment Amount” means with respect to each Holder as of any
Installment Date, a number of Preferred Shares equal to the lesser of (A) the
product of (i) 15,000, multiplied by (ii) the applicable Holder Pro Rata Amount
and

 

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(B) the number of Preferred Shares held by such Holder as of such Installment
Date, as any such Installment Amount may be reduced pursuant to the terms of
this Note, whether upon conversion, redemption or otherwise provided, however,
that in the event the Company fails to meet the Equity Conditions on any
Installment Date, then as to each Holder that does not waive such failure on
such Installment Date, the Installment Amount for the next succeeding
Installment Date shall equal the sum of (i) the Installment Amount for such
Installment Date and (ii) any Installment Amounts not previously redeemed on an
Installment Date due to such failure; provided, further that the Installment
Amount for any Additional Installment Date shall equal the Installment Amount
for the immediately preceding Installment Date. In the event the Holder shall
sell or otherwise transfer any Preferred Shares, the transferee shall be
allocated a pro rata portion of the each unpaid Installment Amount hereunder.

(xxx) “Leverage Ratio” means as of any date, (1) (x) the Net Indebtedness on
such date plus (y) the Stated Value of any outstanding Preferred Shares on such
date, divided by (2) RMR as of such date. “RMR” for such purposes shall have the
meaning as set forth in the CapitalSource Credit Agreement, solely as in effect
as of the Initial Issuance Date, and shall apply even after such CapitalSource
Credit Agreement terminates.

(xxxi) “Liquidation Event” means the voluntary or involuntary liquidation,
dissolution or winding up of the Company or such Subsidiaries the assets of
which constitute all or substantially all of the business of the Company and its
Subsidiaries taken as a whole, in a single transaction or series of
transactions.

(xxxii) “Market Capitalization” means the product of (x) the number of shares of
Common Stock as reported as outstanding on the Company’s most recent Form 8-K,
Form 10-Q, Form 10-QSB, Form 10-K or Form 10-KSB, as the case may be, filed with
the SEC and (y) the lowest Closing Sale Price during the Limitation Measuring
Period.

(xxxiii) “Maturity Date” means, with respect to a Preferred Share, the sixth
anniversary of the Initial Issuance Date, unless extended pursuant to
Section 2(d)(viii).

(xxxiv) “N” means the number of days from, but excluding, the last Dividend Date
with respect to which dividends have been paid by the Company on the applicable
Preferred Share, or the Initial Issuance Date if no Dividend Date has occurred,
through and including the Conversion Date or other date of determination for
such Preferred Share, as the case may be, for which such determination is being
made.

 

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(xxxv) “Net Indebtedness” means an amount equal to (a) Indebtedness minus
(b) cash and cash equivalents and certificates of deposits, each as determined
in accordance with GAAP consistent with past practices, which practices were in
place at the Company as of the close of business on the day immediately prior to
the Subscription Date.

(xxxvi) “NYSE” means The New York Stock Exchange, Inc.

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

(xxxviii) “Parent Entity” of a Person means an entity that, directly or
indirectly, controls the applicable Person and whose common shares or equivalent
equity security are quoted or listed on an Eligible Market, or, if there is more
than one such Person or Parent Entity, the Person or Parent Entity with the
largest public market capitalization as of the date of consummation of the
Fundamental Transaction.

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

(xl) “Principal Market” means the Nasdaq Global Market.

(xli) “Registration Rights Agreement” means that certain amended and restated
registration rights agreement, dated May ___, 2007, by and among the Company and
the initial Holders of the Preferred Shares relating to the filing of a
registration statement covering the resale of the Common Stock issuable upon
conversion of the Preferred Shares and exercise of the Warrants, as such
agreement may be amended from time to time as provided in such agreement.

(xlii) “Required Holders” means the Holders of Preferred Shares representing at
least a majority of the aggregate Preferred Shares then outstanding.

(xliii) “SEC” means the Securities and Exchange Commission.

(xliv) “Securities Purchase Agreement” means that certain amended and restated
securities purchase agreement by and among the Company and the initial Holders,
dated as of May     , 2007, as such agreement further may be amended from time
to time as provided in such agreement.

(xlv) “Senior Management” means Richard C. Rochon, Robert Farenhem and Robert
Schiller (collectively, the “Initial Officers”) and Royal Palm Capital Partners,
Ltd. and any of the following officers of the Company (or their equivalent)
(1) the Chairman of the Company’s Board of Directors, (2) Chief Executive
Officer, (3) President, (4) Chief

 

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Financial Officer, (5) President – Construction and Materials Division;
provided, however such Initial Officers shall not be deemed a member of Senior
Management hereunder following the termination of employment of such Initial
Officer.

(xlvi) “Stated Value” means, for any date of determination, the sum of
(i) $1,000 plus (ii) any Capitalized Dividends on such Preferred Share.

(xlvii) “Stock Dividend Rate” means, with respect to any Dividend Date, that
price which shall be computed as 90% of the arithmetic average of the Weighted
Average Price of the Common Stock on each of the twenty (20) consecutive trading
days immediately preceding (but not including) such Dividend Date. All such
determinations to be appropriately adjusted for any stock split, stock dividend,
stock combination or other similar transaction during such period.

(xlviii) “Subscription Date” means February 10, 2006.

(xlix) “Subsidiaries” has the meaning set forth in the Securities Purchase
Agreement.

(l) “Successor Entity” means the Person, which may be the Company, formed by,
resulting from or surviving any Fundamental Transaction or the Person with which
such Fundamental Transaction shall have been made, provided that if such Person
is not a publicly traded entity whose common shares or equivalent equity
security are quoted or listed for trading on an Eligible Market, Successor
Entity shall mean such Person’s Parent Entity.

(li) “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).

(lii) “Warrants” has the meaning ascribed to such term in the Securities
Purchase Agreement, and shall include all warrants issued in exchange therefor
or replacement thereof.

 

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(liii) “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 City Time, and ending at
4:00:00 p.m., New York City Time, as reported by Bloomberg through its “Volume
at Price” function 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 City Time, and ending at 4:00:00 p.m., New York City
Time, 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 such security on such date on any of the foregoing
bases, the Weighted Average Price of such security on such date shall be the
fair market value as mutually determined by the Company and the Required
Holders. If the Company and the Required Holders are unable to agree upon the
fair market value of such security, then such dispute shall be resolved pursuant
to Section 2(d)(iii) below with the term “Weighted Average Price” being
substituted for the term “Closing Sale Price.” All such determinations shall be
appropriately adjusted for any share dividend, share split or other similar
transaction during such period.

(b) Holder’s Conversion Right. Subject to the provisions of Section 5 and
Section 14, at any time or times on or after the Initial Issuance Date, any
Holder shall be entitled to convert any whole number of Preferred Shares, plus
the amount of any accrued but unpaid Dividends per Preferred Share then
remaining, into fully paid and nonassessable shares of Common Stock in
accordance with Section 2(d) at the Conversion Rate (as defined below).

(c) Conversion. The number of shares of Common Stock issuable upon conversion of
each Preferred Share pursuant to Section 2(b) shall be determined according to
the following formula (the “Conversion Rate”):

Conversion Amount

Conversion Price

No fractional shares of Common Stock are to be issued upon the conversion of any
Preferred Share, but rather the number of shares of Common Stock to be issued
shall be rounded to the nearest whole number.

(d) Mechanics of Conversion. The conversion of Preferred Shares shall be
conducted in the following manner:

(i) Holder’s Delivery Requirements. To convert Preferred Shares into shares of
Common Stock on any date (the “Conversion Date”), the Holder shall (A) transmit
by facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m., New
York City Time, on such date, a copy of a properly completed notice of
conversion executed by the registered Holder of the Preferred Shares subject to
such conversion in the form attached hereto as Exhibit I (the “Conversion
Notice”) to the Company and the Company’s designated transfer agent (the
“Transfer Agent”) and (B) if required by Section 2(d)(viii), surrender to a
common carrier for delivery to the Company as soon as practicable following such
date the original certificates representing the Preferred Shares being converted
(or compliance with the procedures set forth in Section 16) (the “Preferred
Share Certificates”).

 

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(ii) Company’s Response. Upon receipt by the Company of copy of a Conversion
Notice, the Company shall as soon as practicable, but in any event within two
(2) Business Days, send, via facsimile, a confirmation of receipt of such
Conversion Notice to such Holder and the Transfer Agent, which confirmation
shall constitute an instruction to the Transfer Agent to process such Conversion
Notice in accordance with the terms herein. On or before the third
(3rd) Business Day following the date of receipt by the Company of such
Conversion Notice (the “Share Delivery Date”), the Company shall (A) provided
the Transfer Agent is participating in Depository Trust Company (“DTC”) Fast
Automated Securities Transfer Program, 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 DTC through its Deposit Withdrawal Agent
Commission system, or (B) if the Transfer Agent is not participating in the 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 the number of Preferred Shares represented by the
Preferred Share Certificate(s) submitted for conversion, as may be required
pursuant to Section 2(d)(viii), is greater than the number of Preferred Shares
being converted, then the Company shall, as soon as practicable and in no event
later than fifth (5) Business Days after receipt of the Preferred Share
Certificate(s) (the “Preferred Share Delivery Date”) and at its own expense,
issue and deliver to the Holder a new Preferred Share Certificate representing
the number of Preferred Shares not converted.

(iii) Dispute Resolution. In the case of a dispute as to the determination of
the Closing Sale Price or the arithmetic calculation of the Conversion Rate, the
Company shall instruct the Transfer Agent to issue to the Holder the number of
shares of Common Stock that is not disputed and shall transmit an explanation of
the disputed determinations or arithmetic calculations to the Holder via
facsimile within three (3) Business Day of receipt of such Holder’s Conversion
Notice or

 

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other date of determination. If such Holder and the Company are unable to agree
upon the determination of the Closing Sale Price or arithmetic calculation of
the Conversion Rate within two (2) Business Days of such disputed determination
or arithmetic calculation being transmitted to the Holder, then the Company
shall within ten (10) Business Day submit via facsimile (A) the disputed
determination of the Closing Sale Price to an independent, reputable investment
bank selected by the Company and approved by the Required Holders or (B) the
disputed arithmetic calculation of the Conversion Rate to the Company’s
independent, outside accountant. The Company shall cause, at the Company’s
expense, the investment bank or the accountant, as the case may be, to perform
the determinations or calculations and notify the Company and the Holders of the
results no later than two (2) Business Days from the time it receives the
disputed determinations or calculations. Such investment bank’s or accountant’s
determination or calculation, as the case may be, shall be binding upon all
parties absent error.

(iv) Miscellaneous; Record Holder. The Person or Persons entitled to receive the
Common Stock issuable upon a conversion of Preferred Shares shall be treated for
all purposes as the record holder or holders of such Common Stock on the
Conversion Date. In the event of a conversion of Preferred Shares pursuant
hereto, the number of Preferred Shares converted shall be deducted from the
Installment Amounts relating to the Installment Dates as set forth in the
Conversion Notice.

(v) Company’s Failure to Timely Convert.

(A) Cash Damages. If (I) within three (3) Trading Days after the Company’s
receipt of the facsimile copy of a Conversion Notice the Company shall fail to
credit a Holder’s balance account with DTC or issue and deliver a certificate to
such Holder for the number of shares of Common Stock to which such Holder is
entitled upon such Holder’s conversion of Preferred Shares (a “Conversion
Failure”) or (II) within three (3) Trading Days of the Company’s receipt of a
Preferred Share Certificate the Company shall fail to issue and deliver a new
Preferred Share Certificate representing the number of Preferred Shares to which
such Holder is entitled pursuant to Section 2(d)(ii), then in addition to all
other available remedies which such holder may pursue hereunder and under the
Securities Purchase Agreement (including indemnification pursuant to
Section 9(k) thereof), the Company shall pay additional damages to such Holder
for each day after the Share Delivery Date that such conversion is not timely
effected and/or each day after the Preferred Share Delivery Date that such
Preferred Share Certificate is not delivered 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

 

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Holder on or prior to the Share Delivery Date and to which such Holder is
entitled as set forth in the applicable Conversion Notice and, in the event the
Company has failed to deliver a Preferred Share Certificate to the Holder on or
prior to the Preferred Share Delivery Date, the number of shares of Common Stock
issuable upon conversion of the Preferred Shares represented by such Preferred
Share Certificate as of the Preferred Share Delivery Date and (II) the Closing
Sale Price of the Common Stock on the Share Delivery Date, in the case of the
failure to deliver Common Stock, or the Preferred Share Delivery Date, in the
case of failure to deliver a Preferred Share Certificate. If the Company fails
to pay the additional damages set forth in this Section 2(d)(v) within five
(5) Business Days of the date incurred, then the Holder entitled to such
payments shall have the right at any time, so long as the Company continues to
fail to make such payments, to require the Company, upon written notice, to
immediately issue, in lieu of such cash damages, the number of shares of Common
Stock equal to the quotient of (X) the aggregate amount of the damages payments
described herein divided by (Y) the Conversion Price in effect on such
Conversion Date as specified by the Holder in the Conversion Notice. In addition
to the foregoing, if within three (3) Business Days after the Company’s receipt
of the facsimile copy of a Conversion Notice the Company shall fail to issue and
deliver a certificate to a Holder or credit such Holder’s balance account with
DTC for the number of shares of Common Stock to which such Holder is entitled
upon such Holder’s conversion of Preferred Shares, and if on or after such
Business Day the Holder purchases (in an open market transaction or in another
bona fide transaction) Common Stock to deliver in satisfaction of a sale by the
Holder of the Common Stock issuable upon such conversion that the Holder
anticipated receiving from the Company (a “Buy-In”), then the Company shall,
within three (3) Business 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 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 Conversion Date.

(B) Void Conversion Notice; Adjustment of Conversion Price. If for any reason a
Holder has not received all of the Common Stock to which such Holder is entitled
prior to the fifth (5th) Business Day after the Share Delivery

 

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Date with respect to a conversion of Preferred Shares, then the Holder, upon
written notice to the Company, with a copy to the Transfer Agent, may void its
Conversion Notice with respect to, and retain or have returned, as the case may
be, any Preferred Shares that have not been converted pursuant to such Holder’s
Conversion Notice; provided that the voiding of a Holder’s Conversion Notice
shall not effect the Company’s obligations to make any payments which have
accrued prior to the date of such notice pursuant to Section 2(d)(v)(A) or
otherwise. Thereafter, the Conversion Price of any Preferred Shares returned or
retained by the Holder for failure to timely convert shall be adjusted to the
lesser of (I) the Conversion Price relating to the voided Conversion Notice and
(II) the lowest Weighted Average Price of the Common Stock during the period
beginning on the Conversion Date and ending on the date such Holder voided the
Conversion Notice, subject to further adjustment as provided in this Certificate
of Designations.

(vi) Pro Rata Conversion; Disputes. Subject to Section 14, in the event the
Company receives a Conversion Notice from more than one Holder for the same
Conversion Date and the Company can convert some, but not all, of such Preferred
Shares, the Company shall convert from each Holder electing to have Preferred
Shares converted at such time a pro rata amount of such Holder’s Preferred
Shares submitted for conversion based on the number of Preferred Shares
submitted for conversion on such date by such Holder relative to the number of
Preferred Shares submitted for conversion on such date. In the event of a
dispute as to the number of shares of Common Stock issuable to a Holder in
connection with a conversion of Preferred Shares, the Company shall issue to
such Holder the number of shares of Common Stock not in dispute and resolve such
dispute in accordance with Section 2(d)(iii).

(vii) Installment Payments.

(A) Company Installment Redemption. On each applicable Installment Date,
provided that during the period commencing with the Company Installment Notice
(as defined below) through the applicable Installment Date, the Equity
Conditions have been satisfied (or waived in writing by the applicable Holder),
the Company shall pay to each Holder the Installment Amount as of such
Installment Date by redeeming the applicable Installment Amount, in whole or in
part, in accordance with this Section (a “Company Installment Redemption”). On
or prior to the date which is the tenth (10th) Trading Day prior to each
Installment Date (each, an “Installment Notice Due Date” and the date such
notice is received by the applicable Holder, the “Installment Notice Date”), the
Company shall

 

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deliver written notice (each, a “Company Installment Notice”), to each Holder
which Company Installment Notice shall state the applicable Installment Amount
of such Holder which the Company shall redeem pursuant to a Company Installment
Redemption (the “Company Installment Redemption Amount”) and the Company
Installment Notice shall certify that the Equity Conditions have been satisfied
as of the date of the Company Installment Notice. If the Equity Conditions are
not satisfied as of the Installment Notice Due Date, the Installment Notice Due
Date shall indicate that unless the Holder waives the Equity Conditions, the
applicable Company Installment Redemption shall not occur. If the Equity
Conditions were satisfied as of the Installment Notice Due Date but the Equity
Conditions are no longer satisfied at any time prior to the applicable
Installment Date, the Company shall provide each Holder a subsequent notice to
that effect indicating that unless the Holder waives the Equity Conditions, the
applicable Company Installment Redemption shall not occur. Except as expressly
provided in this Section, the Company shall redeem from each Holder such
Holder’s applicable Installment Amount pursuant to this Section.

(B) Mechanics of Company Installment Redemption. The Company Installment
Redemption Amount which is to be paid to each Holder on the applicable
Installment Date shall be redeemed by the Company on such Installment Date, and
the Company shall pay to the Holder on such Installment Date, by wire transfer
of immediately available funds, an amount in cash (the “Company Installment
Redemption Price”) equal to the sum of (x) the Stated Value of the Preferred
Shares being redeemed and (y) any accrued and unpaid Dividends with respect to
such Preferred Shares. Notwithstanding anything to the contrary in this Section,
but subject to Section 14, until the Company Installment Redemption Price is
paid in full, the Company Installment Redemption Amount may be converted, in
whole or in part, by any Holder into Common Stock pursuant to Section 2(d). In
the event a Holder elects to convert all or any portion of the Company
Installment Redemption Amount prior to the applicable Installment Date as set
forth in the immediately preceding sentence, the Company Installment Redemption
Amount so converted shall be deducted from the Installment Amounts relating to
the applicable Installment Dates as set forth in the applicable Conversion
Notice.

(viii) Mandatory Redemption at Maturity. If any Preferred Shares remains
outstanding on the Maturity Date, and the Equity Conditions have been satisfied
(as indicated in a notice from the Company to the Holders delivered thirty
(30) Trading Days prior to the Maturity Date (such date, the “Maturity Date
Notice Due Date”, and the date such notice

 

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is received by the applicable Holder, the “Maturity Date Notice Date”) or waived
by the applicable Holder, the Company shall redeem such Preferred Shares (the
“Mandatory Maturity Redemption”) in cash in an amount equal to the outstanding
Conversion Amount for such Preferred Shares (the “Maturity Date Redemption
Price”). The Company shall pay the Maturity Date Redemption Price on the
Maturity Date by wire transfer of immediately available funds to an account
designated in writing by such Holder. If the Company fails to redeem all of the
Preferred Shares outstanding on the Maturity Date by payment of the Maturity
Date Redemption Price for each such Preferred Share, then in addition to any
remedy such Holder may have under any Transaction Document, (I) the applicable
Maturity Date Redemption Price payable in respect of such unredeemed Preferred
Shares shall bear interest at the rate of 1.5% per month, prorated for partial
months, until paid in full, and (II) any Holder shall have the option to require
the Company to convert any or all of such Holder’s Preferred Shares and for
which the Maturity Date Redemption Price (together with any interest thereon)
has not been paid into (on a per Preferred Share basis) shares of Common Stock
equal to the number which results from dividing the Maturity Date Redemption
Price (together with any interest thereon) by the Default Conversion Price. If
the Company has failed to pay the Maturity Date Redemption Price in a timely
manner as described above, then the Maturity Date shall be automatically
extended for any Preferred Shares until the date the Holders receive such shares
of Common Stock or Maturity Date Redemption Price and shall be further extended
for any Preferred Shares for as long as (A) the conversion of such Preferred
Shares would violate the provisions of Section 5, (B) a Triggering Event or an
event that with the passage of time or giving of notice would constitute a
Triggering Event shall have occurred and be continuing or (C) the Equity
Conditions have not been satisfied (or waived by the applicable Holder).

(ix) Book-Entry. Notwithstanding anything to the contrary set forth herein, upon
conversion of Preferred Shares in accordance with the terms hereof, any Holder
thereof shall not be required to physically surrender the certificate
representing the Preferred Shares to the Company unless (A) the full or
remaining number of Preferred Shares represented by the certificate are being
converted or (B) such Holder has provided the Company with prior written notice
(which notice may be included in a Conversion Notice) requesting reissuance of
Preferred Shares upon physical surrender of any Preferred Shares. The Holders
and the Company shall maintain records showing the number of Preferred Shares so
converted and the dates of such conversions or shall use such other method,
reasonably satisfactory to the Holders and the Company, so as not to require
physical surrender of the certificate representing the Preferred Shares upon
each such conversion. In the event of any dispute or discrepancy, such records
of the Company establishing the number of Preferred

 

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Shares to which the record holder is entitled shall be controlling and
determinative in the absence of manifest error. Notwithstanding the foregoing,
if Preferred Shares represented by a certificate are converted as aforesaid, a
Holder may not transfer the certificate representing the Preferred Shares unless
such Holder first physically surrenders the certificate representing the
Preferred Shares to the Company, whereupon the Company will forthwith issue and
deliver upon the order of such Holder a new certificate of like tenor,
registered as such Holder may request, representing in the aggregate the
remaining number of Preferred Shares represented by such certificate. A Holder
and any assignee, by acceptance of a certificate, acknowledge and agree that, by
reason of the provisions of this paragraph, following conversion of any
Preferred Shares, the number of Preferred Shares represented by such certificate
may be less than the number of Preferred Shares stated on the face thereof. Each
certificate for Preferred Shares shall bear the following legend:

ANY TRANSFEREE OF THIS CERTIFICATE SHOULD CAREFULLY REVIEW THE TERMS OF THE
COMPANY’S CERTIFICATE OF DESIGNATIONS RELATING TO THE PREFERRED SHARES
REPRESENTED BY THIS CERTIFICATE, INCLUDING SECTION 2(d)(ix) THEREOF. THE NUMBER
OF PREFERRED SHARES REPRESENTED BY THIS CERTIFICATE MAY BE LESS THAN THE NUMBER
OF PREFERRED SHARES STATED ON THE FACE HEREOF PURSUANT TO SECTION 2(d)(ix) OF
THE CERTIFICATE OF DESIGNATIONS RELATING TO THE PREFERRED SHARES REPRESENTED BY
THIS CERTIFICATE.

(e) Taxes. The Company shall pay any and all documentary, stamp, transfer (but
only in respect of the registered holder thereof) and other similar taxes that
may be payable with respect to the issuance and delivery of Common Stock upon
the conversion of Preferred Shares.

(f) Adjustments to Conversion Price. The Conversion Price will be subject to
adjustment from time to time as provided in this Section 2(f).

(i) Adjustment of Conversion Price upon Issuance of Common Stock. If and
whenever on or after the Subscription Date, the Company issues or sells, or in
accordance with this Section 2(f) is deemed to have issued or sold, any shares
of Common Stock (including the issuance or sale of shares of Common Stock owned
or held by or for the account of the Company but excluding Excluded Securities)
for a consideration per share (the “New Securities Issuance Price”) less than a
price (the “Applicable Price”) equal to the Conversion Price in effect
immediately prior to such time (a “Dilutive

 

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Issuance”), then immediately after such issue or sale, the Conversion Price then
in effect shall be reduced to an amount equal to the product of (x) the
Conversion Price in effect immediately prior to such Dilutive Issuance and
(y) the quotient of (1) the sum of (I) the product of the Applicable Price and
the number of shares of Common Stock Deemed Outstanding immediately prior to
such Dilutive Issuance and (II) the consideration, if any, received by the
Company upon such Dilutive Issuance, divided by (2) the product of (I) the
Applicable Price multiplied by (II) the number of shares of Common Stock Deemed
Outstanding immediately after such Dilutive Issuance. For purposes of
determining the adjusted Conversion Price under this Section 2(f)(i), the
following shall be applicable:

(A) Issuance of Options. If the Company in any manner grants or sells any
Options and the lowest price per share for which one share of Common Stock is
issuable upon the exercise of any such Option or upon conversion, exchange or
exercise of any Convertible Securities issuable upon exercise of such Option is
less than the Applicable Price, then such share of Common Stock shall be deemed
to be outstanding and to have been issued and sold by the Company at the time of
the granting or sale of such Option for such price per share. For purposes of
this Section 2(f)(i)(A), the “lowest price per share for which one share of
Common Stock is issuable upon the exercise of any such Option or upon
conversion, exchange or exercise of any Convertible Securities issuable upon
exercise of such Option” shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to any
one share of Common Stock upon granting or sale of the Option, upon exercise of
the Option and upon conversion, exchange or exercise of any Convertible Security
issuable upon exercise of such Option. No further adjustment of the Conversion
Price shall be made upon the actual issuance of such Common Stock or of such
Convertible Securities upon the exercise of such Options or upon the actual
issuance of such Common Stock upon conversion, exchange or exercise of such
Convertible Securities.

(B) Issuance of Convertible Securities. If the Company in any manner issues or
sells any Convertible Securities and the lowest price per share for which one
share of Common Stock is issuable upon such conversion, exchange or exercise
thereof is less than the Applicable Price, then such Common Stock shall be
deemed to be outstanding and to have been issued and sold by the Company at the
time of the issuance of sale of such Convertible Securities for such price per
share. For the purposes of this Section 2(f)(i)(B), the “lowest price per share
for which one share of

 

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Common Stock is issuable upon such conversion, exchange or exercise” shall be
equal to the sum of the lowest amounts of consideration (if any) received or
receivable by the Company with respect to any one share of Common Stock upon the
issuance or sale of the Convertible Security and upon the conversion, exchange
or exercise of such Convertible Security. No further adjustment of the
Conversion Price shall be made upon the actual issuance of such Common Stock
upon conversion, exchange or exercise of such Convertible Securities, and if any
such issue or sale of such Convertible Securities is made upon exercise of any
Options for which adjustment of the Conversion Price had been or are to be made
pursuant to other provisions of this Section 2(f)(i), no further adjustment of
the Conversion Price shall be made by reason of such issue or sale.

(C) Change in Option Price or Rate of Conversion. If the purchase or exercise
price provided for in any Options, the additional consideration, if any, payable
upon the issue, conversion, exchange or exercise of any Convertible Securities,
or the rate at which any Convertible Securities are convertible into or
exchangeable or exercisable for Common Stock changes at any time, the Conversion
Price in effect at the time of such change shall be adjusted to the Conversion
Price which would have been in effect at such time had such Options or
Convertible Securities provided for such changed purchase price, additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold. For purposes of this Section 2(f)(i)(C), if
the terms of any Option or Convertible Security that was outstanding as of the
date of issuance of the Preferred Shares are changed in the manner described in
the immediately preceding sentence, then such Option or Convertible Security and
the Common Stock deemed issuable upon exercise, conversion or exchange thereof
shall be deemed to have been issued as of the date of such change. No adjustment
shall be made if such adjustment would result in an increase of the Conversion
Price then in effect.

(D) Calculation of Consideration Received. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options will be deemed to
have been issued for a consideration of $0.01. If any Common Stock, Options or
Convertible Securities are issued or sold or deemed to have been issued or sold
for cash, the consideration received therefor will be deemed to be the gross
amount received by the Company therefor. If any Common Stock, Options or
Convertible Securities are issued or sold for a consideration other than

 

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cash, the amount of the consideration other than cash received by the Company
will be the fair value of such consideration, except where such consideration
consists of marketable securities, in which case the amount of consideration
received by the Company will be the arithmetic average of the Closing Sale
Prices of such securities during the ten (10) consecutive Trading Days ending on
the date of receipt of such securities. The fair value of any consideration
other than cash or securities will be determined jointly by the Company and the
Required Holders. If such parties are unable to reach agreement within ten
(10) days after the occurrence of an event requiring valuation (the “Valuation
Event”), the fair value of such consideration will be determined within five
(5) Business Days after the tenth (10th) day following the Valuation Event by an
independent, reputable appraiser selected by the Company and the Required
Holders. The determination of such appraiser shall be deemed binding upon all
parties absent manifest error and the fees and expenses of such appraiser shall
be borne by the Company.

(E) Record Date. If the Company takes a record of the holders of Common Stock
for the purpose of entitling them (I) to receive a dividend or other
distribution payable in Common Stock, Options or Convertible Securities or (II)
to subscribe for or purchase Common Stock, Options or Convertible Securities,
then such record date will be deemed to be the date of the issue or sale of the
Common Stock deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date of the granting of
such right of subscription or purchase, as the case may be.

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

(iii) Other Events. If any event occurs of the type contemplated by the
provisions of this Section 2(f) but not expressly provided for by such
provisions (including, without limitation, the granting of share appreciation
rights, phantom share rights or other rights with equity features), then the
Company’s Board of Directors will make an appropriate adjustment in

 

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the Conversion Price so as to protect the rights of the Holders; provided that
no such adjustment will increase the Conversion Price as otherwise determined
pursuant to this Section 2(f).

(iv) Notices.

(A) Within three (3) Business days of any adjustment of the Conversion Price
pursuant to this Section 2(f), the Company will give written notice thereof to
each Holder, setting forth in reasonable detail, and certifying, the calculation
of such adjustment. In the case of a dispute as to the determination of such
adjustment, then such dispute shall be resolved in accordance with the
procedures set forth in Section 2(d)(iii).

(B) The Company will give written notice to each Holder at least ten
(10) Business Days prior to the date on which the Company closes its books or
takes a record (I) with respect to any dividend or distribution upon the Common
Stock, (II) with respect to any pro rata subscription offer to holders of Common
Stock or (III) for determining rights to vote with respect to any Fundamental
Transaction or Liquidation Event, provided that such information shall be made
known to the public prior to or in conjunction with such notice being provided
to such Holder.

(C) The Company will also give written notice to each Holder at least ten
(10) Business Days prior to the date on which any Fundamental Transaction or
Liquidation Event will take place, provided that such information shall be made
known to the public prior to or in conjunction with such notice being provided
to such Holder.

 

  (3) Redemption at Option of Holders.

(a) Triggering Event. A “Triggering Event” shall be deemed to have occurred at
such time as any of the following events:

(i) the Leverage Ratio exceeds the ratios specified in Section 13;

(ii) the failure of the applicable Registration Statement to be declared
effective by the SEC on or prior to the date that is sixty (60) days after the
applicable Effectiveness Deadline (as defined in the Registration Rights
Agreement);

(iii) while the Registration Statement is required to be maintained effective
pursuant to the terms of the Registration Rights Agreement, the effectiveness of
the Registration Statement lapses for any reason (including, without limitation,
the issuance of a stop order) or is unavailable to the Holder for sale of all of
the Registrable Securities in accordance with the

 

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terms of the Registration Rights Agreement, and such lapse or unavailability
continues for a period of five (5) consecutive Trading Days or for more than an
aggregate of ten (10) days in any 365-day period (excluding days during an
Allowable Grace Period (as defined in the Registration Rights Agreement));

(iv) the suspension from trading or failure of the Common Stock to be listed on
an Eligible Market for a period of five (5) consecutive Trading Days or for more
than an aggregate of ten (10) Trading Days in any 365-day period;

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

(vi) at any time following the tenth (10th) consecutive Business Day that a
Holder’s Authorized Share Allocation is less than the number of shares of Common
Stock that such Holder would be entitled to receive upon a conversion of the
full Conversion Amount of the Preferred Shares (without regard to any
limitations on conversion set forth in Section 5 or otherwise);

(vii) the Company’s failure to pay to the Holder any amounts when and as due
pursuant to this Certificate of Designations or any other Transaction Document
(as defined in the Securities Purchase Agreement);

(viii) the entry by a court having jurisdiction in the premises of (i) a decree
or order for relief in respect of the Company or any Subsidiary of a voluntary
case or proceeding under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or (ii) a decree or order adjudging the
Company or any Subsidiary as bankrupt or insolvent, or approving as properly
filed a petition seeking reorganization, arrangement, adjustment or composition
of or in respect of the Company or any Subsidiary under any applicable Federal
or State law or (iii) appointing a custodian, receiver, liquidator, assignee,
trustee, sequestrator or other similar official of the Company or any Subsidiary
or of any substantial part of its property, or ordering the winding up or
liquidation of its affairs, and the continuance of any such decree or order for
relief or any such other decree or order unstayed and in effect for a period of
60 consecutive days;

 

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(ix) the commencement by the Company or any Subsidiary of a voluntary case or
proceeding under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or of any other case or proceeding to be
adjudicated a bankrupt or insolvent, or the consent by it to the entry of a
decree or order for relief in respect of the Company or any Subsidiary in an
involuntary case or proceeding under any applicable Federal or State bankruptcy,
insolvency, reorganization or other similar law or to the commencement of any
bankruptcy or insolvency case or proceeding against it, or the filing by it of a
petition or answer or consent seeking reorganization or relief under any
applicable Federal or State law, or the consent by it to the filing of such
petition or to the appointment of or taking possession by a custodian, receiver,
liquidator, assignee, trustee, sequestrator or other similar official of the
Company or any Subsidiary or of any substantial part of its property, or the
making by it of an assignment for the benefit of creditors, or the admission by
it in writing of its inability to pay its debts generally as they become due, or
the taking of corporate action by the Company or any Subsidiary in furtherance
of any such action;

(x) any event of default occurs with respect to any Indebtedness, including
borrowings under any of the CapitalSource Credit Agreements and any applicable
grace periods in such Indebtedness with respect to such event of default shall
have expired; provided, however, that with respect to any event of default under
a CapitalSource Credit Agreement that is not a payment default, only after
acceleration of such loan pursuant to such CapitalSource Credit Agreement; or

(xi) the Company breaches any representation, warranty, covenant or other term
or condition herein or in any Transaction Document (as defined in the Securities
Purchase Agreement) and such breach constitutes, individually or in the
aggregate, a Material Adverse Effect (as defined in the Securities Purchase
Agreement); provided, however, that in the case of a breach of a covenant or
other term or condition herein or in any Transaction Document which is curable,
only if such breach remains uncured for a period of at least ten
(10) consecutive Business Days after receipt of notice from any Holder of such
breach.

(b) Redemption Option Upon Triggering Event or Put Date.

(i) In addition to all other rights of the Holders contained herein, after a
Triggering Event, the Required Holders shall have the right to require the
Company to redeem all or a portion of the Preferred Shares at a price per
Preferred Share equal to the greater of 115% of (x) the Conversion Amount and
(y) the product of (A) the Conversion Rate in effect at such time as such Holder
delivers a Notice of Redemption at Option of Holder (as defined below) and
(B) the Closing Sale Price of the Common Stock on the Trading Day immediately
preceding such Triggering Event (the “Triggering Redemption Price”).

 

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(ii) In addition to all other rights of the Holders contained herein, at any
time on May 11, 2009 (the “Put Date”), each Holder shall have the right, at such
Holder’s option, to require the Company to redeem all or a portion of such
Holder’s Preferred Shares at a price per Preferred Share equal to the
outstanding Conversion Amount for such Preferred Shares (the “Put Redemption
Price”, and together with the Triggering Redemption Price, the “Redemption
Price”) .

(c) Mechanics of Redemption at Option of Buyer.

(i) Within two (2) Business Days after the occurrence of a qualifying Triggering
Event, the Company shall deliver written notice thereof via facsimile and
overnight courier (“Notice of Triggering Event”) to each Holder.

(ii) At any time after (i) the earlier of a Holder’s receipt of a Notice of
Triggering Event and such Holder becoming aware of a Triggering Event or
(ii) the Put Date, any Holder of Preferred Shares then outstanding may require
the Company to redeem up to all of such Holder’s Preferred Shares by delivering
written notice thereof via facsimile and overnight courier (“Notice of
Redemption at Option of Holder”) to the Company, which Notice of Redemption at
Option of Holder shall indicate the number of Preferred Shares that such Holder
is electing to redeem. In the event of a partial redemption of Preferred Shares
pursuant hereto, the Conversion Amount shall be deducted from the Installment
Amounts relating to the applicable Installment Dates as set forth in the Notice
of Redemption at Option of Holder.

(d) Payment of Redemption Price. Upon the Company’s receipt of a Notice(s) of
Redemption at Option of Buyer from any Holder, the Company shall within one
(1) Business Day of such receipt notify each Holder by facsimile of the
Company’s receipt of such notice(s). The Company shall deliver on the fifth
(5th) Business Day after the Company’s receipt of the first Notice of Redemption
at Option of Holder the applicable Redemption Price to all Holders that deliver
a Notice of Redemption at Option of Holder prior to the fifth (5th) Business Day
after the Company’s receipt of the first Notice of Redemption at Option of
Holder; provided that, if required by Section 2(d)(ix), a Holder’s Preferred
Share Certificates shall have been delivered to the Transfer Agent. To the
extent redemptions required by this Section 3 are deemed or determined by a
court of competent jurisdiction to be prepayments of the Preferred Shares by the
Company, such redemptions shall be deemed to be voluntary prepayments. If the
Company is unable to redeem all of the Preferred Shares submitted for
redemption, the Company shall (i) redeem a pro rata amount from each Holder
based on the number of Preferred Shares submitted for redemption by such

 

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Holder relative to the total number of Preferred Shares submitted for redemption
by all Holders and (ii) in addition to any remedy such Holder may have under
this Certificate of Designation and the Securities Purchase Agreement, pay to
each Holder interest at the rate of 1.5% per month (prorated for partial months)
in respect of each unredeemed Preferred Share until paid in full. The Holders
and Company agree that in the event of the Company’s redemption of any Preferred
Shares under this Section 3, the Holders’ damages would be uncertain and
difficult to estimate because of the parties’ inability to predict future
interest rates and the uncertainty of the availability of a suitable substitute
investment opportunity for the Holders. Accordingly, any redemption premium due
under this Section 3 is intended by the parties to be, and shall be deemed, a
reasonable estimate of the Holders’ actual loss of its investment opportunity
and not as a penalty.

(e) Void Redemption. In the event that the Company does not pay the Redemption
Price within the time period set forth in Section 3(d), at any time thereafter
and until the Company pays such unpaid applicable Redemption Price in full, a
Holder shall have the option to, in lieu of redemption, require the Company to
promptly return to such Holder any or all of the Preferred Shares that were
submitted for redemption by such Holder under this Section 3 and for which the
applicable Redemption Price (together with any interest thereon) has not been
paid, by sending written notice thereof to the Company via facsimile (the “Void
Optional Redemption Notice”). Upon the Company’s receipt of such Void Optional
Redemption Notice, (i) the Notice of Redemption at Option of Holder shall be
null and void with respect to those Preferred Shares subject to the Void
Optional Redemption Notice, (ii) the Company shall immediately return any
Preferred Shares subject to the Void Optional Redemption Notice, and (iii) the
Conversion Price of such returned Preferred Shares shall be adjusted to the
lesser of (A) the Conversion Price as in effect on the date on which the Void
Optional Redemption Notice is delivered to the Company and (B) the lowest
Weighted Average Price of the Common Stock during the period beginning on the
date on which the Notice of Redemption at Option of Holder is delivered to the
Company and ending on the date on which the Void Optional Redemption Notice is
delivered to the Company.

(f) Disputes; Miscellaneous. In the event of a dispute as to the determination
of the arithmetic calculation of the Redemption Price, such dispute shall be
resolved pursuant to Section 2(d)(iii) above with the term “Redemption Price”
being substituted for the term “Conversion Rate”. A Holder’s delivery of a Void
Optional Redemption Notice and exercise of its rights following such notice
shall not effect the Company’s obligations to make any payments which have
accrued prior to the date of such notice. In the event of a redemption pursuant
to this Section 3 of less than all of the Preferred Shares represented by a
particular Preferred Share Certificate, the Company shall promptly cause to be
issued and delivered to the Holder of such Preferred Shares a Preferred Share
Certificate representing the remaining Preferred Shares which have not been
redeemed, if necessary.

 

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  (4) Other Rights of Holders.

(a) Assumption. The Company shall not enter into or be party to a Fundamental
Transaction unless (i) the Successor Entity assumes in writing (with the
purchase of at least a majority of the outstanding shares of the Company’s
Common Stock automatically constituting an assumption in writing) all of the
obligations of the Company under this Certificate of Designations and the other
Transaction Documents in accordance with the provisions of this Section 4(a)
pursuant to written agreements in form and substance satisfactory to the
Required Holders and approved by the Required Holders prior to such Fundamental
Transaction, including agreements to deliver to each holder of Preferred Shares
in exchange for such Preferred Shares a security of the Successor Entity
evidenced by a written instrument substantially similar in form and substance to
this Certificate of Designations, including, without limitation, having a stated
value and dividend rate equal to the stated value and dividend rate of the
Preferred Shares held by such holder and having similar ranking to the Preferred
Shares, and satisfactory to the Required Holders and (ii) the Successor Entity
(including its Parent Entity) is a publicly traded corporation whose common
shares are quoted on or listed for trading on an Eligible Market. Upon the
occurrence of any Fundamental Transaction, the Successor Entity shall succeed
to, and be substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Certificate of Designations referring to the
“Company” shall refer instead to the Successor Entity), and may exercise every
right and power of the Company and shall assume all of the obligations of the
Company under this Certificate of Designations with the same effect as if such
Successor Entity had been named as the Company herein. Upon consummation of the
Fundamental Transaction, the Successor Entity shall deliver to the Holder
confirmation that there shall be issued upon conversion or redemption of the
Preferred Shares at any time after the consummation of the Fundamental
Transaction, in lieu of the Common Stock (or other securities, cash, assets or
other property) purchasable upon the conversion or redemption of the Preferred
Shares prior to such Fundamental Transaction, such publicly traded common shares
(or their equivalent) of the Successor Entity, as adjusted in accordance with
the provisions of this Certificate of Designations. The provisions of this
Section shall apply similarly and equally to successive Fundamental Transactions
and shall be applied without regard to any limitations on the conversion or
redemption of the Preferred Shares. Notwithstanding the foregoing, this
Section 4(a) shall not apply to the Preferred Shares of a Holder upon the
Company’s delivery of a Notice of Mandatory Redemption to such Holder in
connection with a Cash Change of Control Event (as defined below).

(b) Purchase Rights. If at any time the Company grants, issues or sells any
Options, Convertible Securities or rights to purchase shares, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the “Purchase Rights”), then the Holders will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which such Holder could have acquired if such Holder had held
the number of shares of Common

 

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Stock acquirable upon complete conversion of the Preferred Shares (without
taking into account any limitations or restrictions on the convertibility of the
Preferred Shares) 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.

(c) Limitations on Senior Management Securities. The Company shall not permit
any of its Senior Management to sell or transfer, directly or indirectly, any
Common Stock, Option, Convertible Security or any other instrument convertible
into or exercisable or exchangeable for Common Stock, or to convert or exercise
any such convertible or exercisable instrument (except as may be issued pursuant
to the terms of an Approved Share Plan) beneficially owned by such Person,
unless (i) the Required Holders shall have executed a written consent to such
sale, transfer or exercise or (ii) the Weighted Average Price of the Common
Stock shall have equaled or exceeded 175% of the initial Conversion Price
(subject to appropriate adjustments for stock splits, stock dividends, stock
combinations and other similar transactions after the Subscription Date) for
each of the sixty (60) consecutive Trading Days’ (the “Limitation Measuring
Period”) prior to the date of such sale, transfer or exercise (the “Senior
Management Limitation”). Notwithstanding the foregoing, the Senior Management
Limitation shall not apply to such sale, transfer or exercise if either (x) the
Market Capitalization of the Company exceeds $200 million on the date of such
sale, transfer or exercise or (ii) the average daily trading volume as reported
by Bloomberg of the Company’s Common Stock on the Principal Market during the
Limitation Measuring Period exceeds 50,000 shares. Notwithstanding anything
stated herein to the contrary, the Securities may be pledged by Senior
Management in connection with a bona fide margin account or other loan or
financing arrangement secured by the Securities and such pledge of Securities
(or resulting foreclosure on such Securities by such lender) shall not be deemed
to be a transfer, sale or assignment of the Securities hereunder, and Senior
Management shall not be required to provide the Holder with any notice thereof
or otherwise make any delivery to the Holder pursuant to this Agreement or any
other Transaction Document.

(5) Limitation on Beneficial Ownership. The Company shall not effect and shall
have no obligation to effect any conversion of Preferred Shares, and no Holder
shall have the right to convert any Preferred Shares, to the extent that after
giving effect to such conversion, such conversion shall cause the beneficial
owner of such shares (together with such Person’s affiliates) to have acquired,
through conversion of Preferred Shares or otherwise, beneficial ownership of a
number of shares of Common Stock that exceeds 9.99% (or, in the case of each of
Castlerigg Master Investments Ltd. and CapitalSource Finance LLC, 4.99%)
(“Maximum Percentage”) of the number of shares of Common Stock outstanding
immediately after giving effect to such conversion. Likewise, the Company shall
not give effect to any voting rights of the Preferred Shares, and any Holder
shall not have the right to exercise voting rights with respect to any Preferred
Shares pursuant hereto, to the extent that giving effect to such voting rights
would cause such Holder (together with its affiliates) to be deemed to
beneficially own in excess of the Maximum Percentage of the number of shares of
Common Stock outstanding immediately after giving effect to such exercise of
voting rights. For purposes of the foregoing

 

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sentence, the number of shares of Common Stock beneficially owned by a Person
and its affiliates shall include the number of shares of Common Stock issuable
upon conversion of the Preferred Shares 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
Preferred Shares beneficially owned by such Person or any of its affiliates and
(B) exercise or conversion of the unexercised or unconverted portion of any
other securities of the Company (including, without limitation, any warrants)
subject to a limitation on conversion or exercise analogous to the limitation
contained herein beneficially owned by such Person or any of its affiliates.
Except as set forth in the preceding sentence, for purposes of this Section 5,
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 5, in
determining the number of outstanding shares of Common Stock, a Holder may rely
on the number of outstanding shares of Common Stock as reflected in (1) the
Company’s most recent Form 8-K, Form 10-Q, Form 10-QSB, Form 10-K or Form 10-KSB
as the case may be, (2) a more recent public announcement by the Company, or
(3) any other notice by the Company or its transfer agent setting forth the
number of shares of Common Stock outstanding. Upon the written request of any
Holder, the Company shall promptly, but in no event later than two (2) Business
Days following the receipt of such notice, confirm orally and in writing to any
such 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 conversions of Preferred Shares by such Holder and its
affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. By written notice to the Company, the Holder may
increase or decrease the Maximum Percentage to any other percentage not in
excess of 9.99% specified in such notice; provided that (i) any such increase
will not be effective until the sixty-first (61st) day after such notice is
delivered to the Company, and (ii) any such increase or decrease will apply only
to the Holder and not to any other Holder.

 

  (6) Authorized Shares.

(a) Reservation. The Company shall have sufficient authorized and unissued
shares of Common Stock for each of the Preferred Shares equal to 120% of the sum
of (i) the number of shares of Common Stock necessary to effect the conversion
at the Conversion Rate with respect to the Conversion Amount of each such
Preferred Share as of the Initial Issuance Date, and (ii) the number of shares
of Common Stock necessary to effect the exercise of all of the Warrants. So long
as any of the Preferred Shares are outstanding, the Company 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
Preferred Shares, the number of shares of Common Stock as shall from time to
time be necessary to effect the conversion of all of the Preferred Shares then
outstanding; provided that at no time shall the number of shares of Common Stock
so available be less than the number of shares required to be reserved by the
previous sentence (without regard to any limitations on conversions) (the
“Required Amount”). The initial number of shares of Common Stock reserved for
conversions of the Preferred Shares and each increase in the number of shares so
reserved shall be allocated pro rata among the Holders based on the number of
Preferred Shares held by each Holder at the time of issuance of the Preferred
Shares or increase in the number of reserved shares, as the case may be (the
“Authorized

 

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Share Allocation”). In the event a Holder shall sell or otherwise transfer any
of such Holder’s Preferred Shares, each transferee shall be allocated a pro rata
portion of the number of reserved shares of Common Stock reserved for such
transferor. Any Common Stock reserved and allocated to any Person which ceases
to hold any Preferred Shares shall be allocated to the remaining Holders of
Preferred Shares, pro rata based on the number of Preferred Shares then held by
such Holders.

(b) Insufficient Authorized Shares. If at any time while any of the Preferred
Shares remain outstanding the Company does not have a sufficient number of
authorized and unissued shares of Common Stock to satisfy its obligation to have
available for issuance upon conversion of the Preferred Shares at least a number
of shares of Common Stock equal to the Required Amount (an “Authorized Share
Failure”), then the Company shall as promptly as practicable take all action
necessary to increase the Company’s authorized Common Stock to an amount
sufficient to allow the Company to have available the Required Amount for the
Preferred Shares then outstanding.

(7) Voting Rights. Subject to Section 5 and the Maximum Percentage, each Holder
shall be entitled to the whole number of votes equal to the number of shares of
Common Stock into which such holder’s Preferred Shares would be convertible on
the record date for the vote or consent of stockholders, and shall otherwise
have voting rights and powers equal to the voting rights and powers of the
Common Stock. Each Holder shall be entitled to receive the same prior notice of
any stockholders’ meeting as is provided to the holders of Common Stock in
accordance with the bylaws of the Company, as well as prior notice of all
stockholder actions to be taken by legally available means in lieu of a meeting
and shall vote as a class with the holders of Common Stock on all matters except
those matters required by law or by the terms hereof to be submitted to a class
vote of the Holders of Preferred Shares, in which case the Holders of Preferred
Shares only shall vote as a separate class.

(8) Change of Control Redemption Right. So long as Holders (and their
transferees) continue to hold in the aggregate at least 25% of the aggregate
number of Preferred Shares purchased on the Initial Issuance Date (such Holders,
the “Eligible Holders”), no sooner than fifteen (15) days nor later than ten
(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 Eligible Holders (a
“Change of Control Notice”). At any time during the period (the “Change of
Control Period”) beginning after a Holder’s receipt of a Change of Control
Notice and ending on the date that is twenty (20) Trading Days after the
consummation of such Change of Control, such Eligible Holder may require the
Company to redeem all or any portion of such Holder’s Preferred Shares 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. Any Preferred Shares subject to
redemption pursuant to this Section 8 shall be redeemed by the Company in cash
at a price equal to the greater of (i) the product (x) the sum of the Conversion
Amount being redeemed together with any accrued but unpaid Dividends per
Preferred Share 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) 115% of the sum
of the Conversion Amount being redeemed together with any accrued but unpaid
Dividends per Preferred Share (the “Change of Control Redemption Price”).

 

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The Company shall make payment of the Change of Control Redemption Price
concurrently with the consummation of such Change of Control if such a Change of
Control Redemption Notice is received prior to the consummation of such Change
of Control and within five (5) Trading Days after the Company’s receipt of such
notice otherwise (the “Change of Control Redemption Date”). To the extent
redemptions required by this Section 8 are deemed or determined by a court of
competent jurisdiction to be prepayments of the Preferred Shares by the Company,
such redemptions shall be deemed to be voluntary prepayments. Notwithstanding
anything to the contrary in this Section 8, until the Change of Control
Redemption Price (together with any interest thereon) is paid in full, the
Conversion Amount submitted for redemption under this Section 8 may be
converted, in whole or in part, by the Holder into shares of Common Stock, or in
the event the Conversion Date is after the consummation of the Change of
Control, shares or equity interests of the Successor Entity substantially
equivalent to the Company’s Common Stock pursuant to Section 2(c)(i). The
parties hereto agree that in the event of the Company’s redemption of any
portion of the Note under this Section 8, the Holder’s damages would be
uncertain and difficult to estimate because of the parties’ inability to predict
future interest rates and the uncertainty of the availability of a suitable
substitute investment opportunity for the Holder. Accordingly, any redemption
premium due under this Section 8 is intended by the parties to be, and shall be
deemed, a reasonable estimate of the Holder’s actual loss of its investment
opportunity and not as a penalty. In the event that the Company does not pay the
Change of Control Redemption Price on the Change of Control Redemption Date,
then the Holder shall have the right to void the redemption pursuant to
Section 3(e) with the term “Change of Control Redemption Price” being
substituted for “Redemption Price” and “Change of Control Redemption Notice”
being substituted for “Notice of Redemption at Option of Holder”. In the event
of a partial redemption of Preferred Shares pursuant hereto, the Conversion
Amount redeemed shall be deducted from the Installment Amounts relating to the
applicable Installment Dates as set forth in the Change of Control Redemption
Notice.

(9) COMPANY’S RIGHT OF MANDATORY CONVERSION OR REDEMPTION

(a) Mandatory Conversion. If at any time after the second anniversary of the
Initial Issuance Date (the “Mandatory Conversion Eligibility Date”), (i) the
Weighted Average Price of the Common Stock equals or exceeds 175% of the initial
Conversion Price (subject to appropriate adjustments for stock splits, stock
dividends, stock combinations and other similar transactions after the
Subscription Date) for each of any sixty (60) consecutive Trading Days following
the Mandatory Conversion Eligibility Date (the “Mandatory Conversion Measuring
Period”) and (ii) the Equity Conditions shall have been satisfied or waived in
writing by the Holder on each day during the period commencing on the Mandatory
Conversion Notice Date and ending on the Mandatory Conversion Date (each, as
defined below), the Company shall have the right to require the Holder to
convert up to all of the Conversion Amount then remaining 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) on one occasion by
delivering within not more than two (2) 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 Preferred
Shares and the Transfer Agent (the

 

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“Mandatory Conversion Notice” and the date all of the holders received such
notice by facsimile is referred to as the “Mandatory Conversion Notice Date”).
The Mandatory Conversion Notice shall be irrevocable. 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 twenty
(20) Business Days but not more than sixty (60) Business Days following the
Mandatory Conversion Notice Date (the “Mandatory Conversion Date”), (ii) the
number of Preferred Shares of such Holder subject to the Mandatory Conversion,
(iii) the aggregate Conversion Amount of the Preferred Shares subject to
Mandatory Conversion from all of the holders of the Preferred Shares pursuant to
this Section 9 and (iv) the number of shares of Common Stock to be issued to
such Holder on the Mandatory Conversion Date.

(b) Mandatory Redemption. In addition to all other rights of the Company
contained herein, (x) at any time on or after May 11, 2009 (the “Call Date”) if
the Equity Conditions shall have been satisfied or waived in writing by the
Required Holders from and including the Notice of Mandatory Redemption Date (as
defined below) through and including the Mandatory Redemption Date (as defined
below), the Company shall have the right, at the Company’s option, to redeem (a
“Mandatory Call Redemption”) all, but not less than all, of the Preferred Shares
at a price per Preferred Share equal the outstanding Conversion Amount for such
Preferred Share (the “Call Redemption Price”) and (y) upon the occurrence of a
Change of Control of the Company with aggregate consideration to be paid to the
holders of capital stock of the Company solely consisting of cash (a “Cash
Change of Control Event”), the Company shall have the right, at the Company’s
option, to redeem (a “Mandatory Cash Change of Control Redemption”, and together
with the Mandatory Call Redemption, a “Mandatory Redemption”) all, but not less
than all, of the Preferred Shares at a price per Preferred Share in cash equal
to the greater of (i) the product (x) the sum of the Conversion Amount being
redeemed together with any accrued but unpaid Dividends per Preferred Share 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) 115% of the sum of the Conversion
Amount being redeemed together with any accrued but unpaid Dividends per
Preferred Share (the “Mandatory Cash Change of Control Redemption Price”, and
together with the Call Redemption Price, the “Mandatory Redemption Price”)

(i) Mechanics of Mandatory Redemption. At any time after the Call Date or upon a
Cash Change of Control Event, the Company may redeem all of the outstanding
Preferred Shares by delivering written notice thereof via facsimile and
overnight courier (“Notice of Mandatory Redemption”) to the Holders, which
Notice of Mandatory Redemption shall indicate the date of such redemption (the
“Mandatory Redemption Date”) and the applicable Mandatory Redemption Price (the
date of such Notice, the “Notice of Mandatory Redemption Date”). The Notice of
Mandatory Redemption shall state (i) the Trading Day selected for the Mandatory
Redemption in accordance with Section 9(b), which Trading Day shall be at least
twenty (20) Business Days but not more than sixty (60) Business Days following
the Notice of Mandatory Redemption Date (the “Mandatory Redemption Date”),
(ii) the number of Preferred Shares of such Holder subject to the Mandatory
Redemption, (ii) the aggregate Conversion Amount of the Preferred Shares subject
to Mandatory Redemption from all of the holders of the Preferred Shares pursuant
to this Section 9 and (iv) the number of shares of Common Stock to be issued to
such Holder on the Mandatory Redemption Date.

 

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(iii) Disputes; Miscellaneous. In the event of a dispute as to the determination
of the arithmetic calculation of the Call Redemption Price, such dispute shall
be resolved pursuant to Section 2(d)(iii) above with the term “Call Redemption
Price” being substituted for the term “Conversion Rate”.

(c) Pro Rata Conversion and Redemption Requirements.

(i) If the Company elects to cause a conversion of any Conversion Amount of
Preferred Shares pursuant to Section 9(a) or any redemption of Preferred Shares
pursuant to Section 9(b), then it must simultaneously take the same action in
the same proportion with respect to all Preferred Shares.

(ii) All Conversion Amounts converted by the Holder after the Mandatory
Conversion Notice Date shall reduce the Conversion Amount 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 2(d)
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.

(10) Liquidation, Dissolution, Winding-Up. In the event of a Liquidation Event,
the Holders shall be entitled to receive in cash out of the assets of the
Company, whether from capital or from earnings available for distribution to its
shareholders (the “Liquidation Funds”), before any amount shall be paid to the
holders of any of the capital shares of the Company of any class junior in rank
to the Preferred Shares in respect of the preferences as to distributions and
payments on the liquidation, dissolution and winding up of the Company, an
amount per Preferred Share equal to the Conversion Amount; provided that, if the
Liquidation Funds are insufficient to pay the full amount due to the Holders and
holders of shares of other classes or series of preferred shares of the Company
that are of equal rank with the Preferred Shares as to payments of Liquidation
Funds (the “Pari Passu Shares”), then each Holder and Pari Passu Shares shall
receive a percentage of the Liquidation Funds equal to the full amount of
Liquidation Funds payable to such Holder as a liquidation preference, in
accordance with their respective certificate of designations (or equivalent), as
a percentage of the full amount of Liquidation Funds payable to all holders of
Preferred Shares and Pari Passu Shares. To the extent necessary, the Company
shall cause such actions to be taken by any of its Subsidiaries so as to enable,
to the maximum extent permitted by law, the proceeds of a Liquidation Event to
be distributed to the Holders in accordance with this Section. All the
preferential amounts to be paid to the Holders under this Section shall be paid
or set apart for payment before the payment or setting apart for payment of any
amount for, or the distribution of any Liquidation Funds of the Company to the
holders of shares of other classes or series of preferred shares of the Company
junior in rank to the Preferred Shares in connection with a Liquidation Event as
to which this Section applies. The purchase or redemption by the Company of
shares of any class, in any manner permitted by law, shall not, for the purposes
hereof, be regarded as a Liquidation Event.

 

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(11) Preferred Rank. All Common Stock shall be of junior rank to all Preferred
Shares with respect to the preferences as to dividends, distributions and
payments upon the liquidation, dissolution and winding up of the Company. The
rights of the Common Stock shall be subject to the preferences and relative
rights of the Preferred Shares. Without the prior express written consent of the
Required Holders, the Company shall not hereafter authorize or issue additional
or other capital shares that is of senior or pari-passu rank to the Preferred
Shares in respect of the preferences as to distributions and payments upon the
liquidation, dissolution and winding up of the Company. The Company shall be
permitted to issue preferred shares that are junior in rank to the Preferred
Shares in respect of the preferences as to distributions and payments upon the
liquidation, dissolution and winding up of the Company, provided that the
maturity date (or any other date requiring redemption or repayment of such
preferred shares) of any such junior preferred shares are not on or before the
Maturity Date. In the event of the merger or consolidation of the Company with
or into another corporation, the Preferred Shares shall maintain their relative
powers, designations and preferences provided for herein (except that the
Preferred Shares may be pari passu with, but not junior to, any capital shares
of the successor entity) and no merger shall result inconsistent therewith.

(12) Participation. The Holders shall, as holders of Preferred Shares, be
entitled to such dividends paid and distributions made to the holders of Common
Stock to the same extent as if such Holders had converted the Preferred Shares
into Common Stock (without regard to any limitations on conversion herein or
elsewhere) and had held such 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.

(13) Leverage Ratio Test. Beginning June 30, 2008, so long as any Preferred
Shares remain outstanding, the Company shall not allow the Leverage Ratio to
exceed 38.0x.

(14) Limitation on Number of Conversion Shares. Notwithstanding anything to the
contrary contained herein, the Company shall not be obligated to issue any
shares of Common Stock upon conversion of the Preferred Shares or exercise of
the Warrants if the issuance of such Common Stock would exceed that number of
shares of Common Stock which the Company may issue upon conversion of the
Preferred Shares 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 shareholders as required by the applicable rules of the
Principal Market (or any successor rule or regulation) 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 Required Holders. Until such approval or
written opinion is obtained, no purchaser of Preferred Shares pursuant to the
Securities Purchase Agreement (the “Purchasers”) shall be issued, in the
aggregate, upon conversion of Preferred Shares or exercise of the Warrants,
shares of Common Stock in an amount greater than the product of (i) the Exchange
Cap amount multiplied by (ii) a fraction, the numerator of which is the number
of Preferred Shares issued to such Purchaser pursuant to the Securities Purchase
Agreement on the Initial Issuance Date and the denominator of which is the
aggregate amount of all the Preferred Shares issued to the Purchasers pursuant
to the Securities Purchase Agreement on the Initial

 

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Issuance Date (the “Exchange Cap Allocation”). In the event that any Purchaser
shall sell or otherwise transfer any of such Purchaser’s Preferred Shares, the
transferee shall be allocated a pro rata portion of such Purchaser’s Exchange
Cap Allocation. In the event that any Holder shall convert all of such Holder’s
Preferred Shares 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 on a pro rata basis
in proportion to the number of Preferred Shares then held by each such Holder.

(15) Vote to Change the Terms of or Issue Preferred Shares. In addition to any
other rights provided by law, except where the vote or written consent of the
holders of a greater number of shares is required by law or by another provision
of the Certificate of Incorporation, without first obtaining the affirmative
vote at a meeting duly called for such purpose or the written consent without a
meeting of the Required Holders, voting together as a single class, the Company
shall not: (u) amend or repeal any provision of, or add any provision to, the
Articles of Incorporation or bylaws, or file any certificate of designations or
articles of amendment of any series of preferred shares, if such action would
adversely alter or change the preferences, rights, privileges or powers of, or
restrictions provided for the benefit of the Preferred Shares, regardless of
whether any such action shall be by means of amendment to the Articles of
Incorporation or by merger, consolidation or otherwise; (v) increase or decrease
(other than by conversion) the authorized number of shares of the Preferred
Shares; (w) create or authorize (by reclassification or otherwise) any new class
or series of shares that has a preference over or is on a parity with the
Preferred Shares with respect to dividends or the distribution of assets on the
liquidation, dissolution or winding up of the Company; (x) purchase, repurchase
or redeem any shares of Common Stock (other than pursuant to equity incentive
agreements with employees giving the Company the right to repurchase shares upon
the termination of services); (y) pay dividends or make any other distribution
on the Common Stock; or (z) whether or not prohibited by the terms of the
Preferred Shares, circumvent a right of the Preferred Shares.

(16) Lost or Stolen Certificates. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of any Preferred Share Certificates representing the Preferred
Shares, and, in the case of loss, theft or destruction, of an indemnification
undertaking by the Holder to the Company in customary form and, in the case of
mutilation, upon surrender and cancellation of the Preferred Share
Certificate(s), the Company shall execute and deliver new Preferred Share
Certificate(s) of like tenor and date; provided, however, the Company shall not
be obligated to re-issue Preferred Share Certificates if the Holder
contemporaneously requests the Company to convert such Preferred Shares into
shares of Common Stock.

(17) Remedies, Characterizations, Other Obligations, Breaches and Injunctive
Relief. The remedies provided in this Certificate of Designations shall be
cumulative and in addition to all other remedies available under this
Certificate of Designations, at law or in equity (including a decree of specific
performance and/or other injunctive relief). No remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy.
Nothing herein shall limit a Holder’s right to pursue actual damages for any
failure by the Company to comply with the terms of this Certificate of
Designations. The Company covenants to

 

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each Holder that there shall be no characterization concerning this instrument
other than as expressly provided herein. 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 thereof 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 Holders
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
Holders 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.

(18) Construction. This Certificate of Designations shall be deemed to be
jointly drafted by the Company and all Buyers and shall not be construed against
any person as the drafter hereof.

(19) Failure or Indulgence Not Waiver. No failure or delay on the part of a
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.

(20) Notice. Whenever notice is required to be given under this Certificate of
Designations, unless otherwise provided herein, such notice shall be given in
accordance with Section 9(f) of the Securities Purchase Agreement (provided that
if the Preferred Shares are not held by a Buyer (as defined in the Securities
Purchase Agreement) then substituting the words “holder of Securities” for the
word “Buyer”).

(21) Transfer of Preferred Shares. A Holder may assign some or all of the
Preferred Shares and the accompanying rights hereunder held by such Holder
without the consent of the Company; provided that such assignment is in
compliance with applicable securities laws.

(22) Preferred Share Register. The Company shall maintain at its principal
executive offices (or such other office or agency of the Company as it may
designate by notice to the Holders), a register for the Preferred Shares, in
which the Company shall record the name and address of the persons in whose name
the Preferred Shares have been issued, as well as the name and address of each
transferee. The Company may treat the person in whose name any Preferred Share
is registered on the register as the owner and holder thereof for all purposes,
notwithstanding any notice to the contrary, but in all events recognizing any
properly made transfers.

(23) Shareholder Matters. Any shareholder action, approval or consent required,
desired or otherwise sought by the Company pursuant to the rules and regulations
of the Principal Market, the Florida General Corporation Act, this Certificate
of Designation or otherwise with respect to the issuance of the Preferred Shares
or the Common Stock issuable upon conversion thereof or the issuance of any
Warrants and the Common Stock issuable upon exercise thereof may be effected by
written consent of the Company’s shareholders or at a duly called meeting of the
Company’s shareholders, all in accordance with the applicable rules and
regulations of

 

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the Principal Market and the Florida General Corporation Act. This provision is
intended to comply with the applicable sections of the Florida General
Corporation Act permitting shareholder action, approval and consent affected by
written consent in lieu of a meeting.

(24) Involuntary Bankruptcy. So long as the CapitalSource Credit Agreements
remains outstanding, no holder of Preferred Shares shall institute proceedings
to have the Company adjudicated bankrupt or insolvent, or consent to the
institution of bankruptcy or insolvency proceedings against the Company.

(25) Disclosure. Upon receipt or delivery by the Company of any notice in
accordance with the terms of this Certificate of Designations, unless the
Company has in good faith determined that the matters relating to such notice do
not constitute material, nonpublic information relating to the Company or its
Subsidiaries, the Company shall within one (1) Business Day after any such
receipt or delivery publicly disclose such material, nonpublic information on a
Current Report on Form 8-K or otherwise. In the event that the Company believes
that a notice contains material, nonpublic information relating to the Company
or its Subsidiaries, the Company so shall indicate to the Holders
contemporaneously with delivery of such notice, and in the absence of any such
indication, the Holders shall be allowed to presume that all matters relating to
such notice do not constitute material, nonpublic information relating to the
Company or its Subsidiaries.

(26) FORCED REDEMPTION EQUITY CONDITION WAIVER. Notwithstanding anything in this
Certificate of Designations to the contrary, to the extent the Company desires
to effect a Forced Redemption of a number of Preferred Shares (the “Forced
Redemption Preferred Shares”) that would result in the Company failing to
satisfy the Forced Redemption/Conversion Condition for any Holder, and the
Company satisfies the following conditions, the Forced Redemption/Conversion
Condition shall automatically be waived by such Holder solely with respect to
such Forced Redemption:

(a) the Equity Conditions (other than the Forced Redemption/Conversion
Condition) and any other conditions to such Forced Redemption set forth herein
shall be satisfied as of each day throughout the period commencing on the Forced
Redemption Notice Date and ending on the Forced Redemption Date; and

(b) if the applicable Forced Redemption Market Price exceeds the Conversion
Price in effect as of the Forced Redemption Date, in addition to the applicable
Forced Redemption Price payable to such Holder, the Company shall pay in cash to
such Holder on such Forced Redemption Date, by wire transfer of immediately
available funds in accordance with instructions of the Holder delivered to the
Company on or prior to such Forced Redemption Date, a make-whole amount equal to
the difference of (I) the product of (x) the number of Conversion Shares
issuable upon conversion of the Forced Redemption Preferred Shares at the
Conversion Price in effect as of the Forced Redemption Date (without regard to
any limitations on conversion set forth herein) and (y) the Forced Redemption
Market Price and (II) the product of (x) the number of Conversion Shares
issuable upon conversion of the Forced Redemption Preferred Shares at the
Conversion Price in effect as of the Forced Redemption Date (without regard to
any limitations on conversion set forth herein) and (y) the Conversion Price in
effect as of the Forced Redemption Date.

* * * * *

 

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IN WITNESS WHEREOF, the Company has caused this Certificate of Designations to
be signed by Richard C. Rochon, its Acting Chief Executive Officer and
President, as of the      day of                     , 2007

 

DEVCON INTERNATIONAL CORP. By:  

 

Name:   Title:  

 

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EXHIBIT I

DEVCON INTERNATIONAL CORP. CONVERSION NOTICE

Reference is made to the Certificate of Designations of Series A Convertible
Preferred Shares of Devcon International Corp. (the “Certificate of
Designations”). In accordance with and pursuant to the Certificate of
Designations, the undersigned hereby elects to convert the number of shares of
Series A Convertible Preferred Shares, par value $0.10 per share (the “Preferred
Shares”), of Devcon International Corp., a Florida corporation (the “Company”),
indicated below into shares of Common Stock, par value $0.10 per share (the
“Common Stock”), of the Company, as of the date specified below.

 

Date of Conversion:                                      
                                        
                                        
                                        
                                                    

Number of Preferred Shares to be
converted:                                      
                                        
                                        
                                             

Share certificate no(s). of Preferred Shares to be
converted:                                      
                                        
                                                         

Tax ID Number (If applicable):                                      
                                        
                                        
                                                                      

Please confirm the following information:                                      
                                        
                                        
                                                            

Conversion Price:                                       
                                        
                                        
                                        
                                                       

Number of shares of Common Stock to be
issued:                                       
                                        
                                                                           

Please issue the Common Stock into which the Preferred Shares are being
converted in the following name and to the following address:

 

Issue to:                                       
                                                                 

 

                                                                               
                                        

 

Address:                                     
                                                                  

 

Telephone Number:                                       
                                           

 

Facsimile Number:                                       
                                            

 

Authorization:                                    
                                                        

 

By:                                      
                                                                           

 

Title:                                     
                                                                         

 

Dated:                                     
                                                                      

 

Account Number (if electronic book entry
transfer):                                      
                                        
                                                                    

Transaction Code Number (if electronic book entry
transfer):                                      
                                        
                                                   

Installment Amounts to be reduced and amount of
reduction:                                      
                                        
                                                   

 

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[NOTE TO HOLDER — THIS FORM MUST BE SENT CONCURRENTLY TO TRANSFER AGENT]

 

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ACKNOWLEDGMENT

The Company hereby acknowledges this Conversion Notice and hereby directs
Registrar and Transfer Company to issue the above-indicated number of shares of
Common Stock in accordance with the Irrevocable Transfer Agent Instructions
dated March     , 2006 from the Company and acknowledged and agreed to by
Registrar and Transfer Company.

 

DEVCON INTERNATIONAL CORP. By:  

 

Name:   Title:  

 

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