SENIOR NOTE AND WARRANT CONVERSION AGREEMENT
 
This SENIOR NOTE AND WARRANT CONVERSION AGREEMENT (this “Agreement”), dated as
of February 28, 2005, is entered into by and among CSQ Holding Company, a
Delaware corporation (“Newco”), Cardiac Science, Inc., a Delaware corporation
(“CSI”), and those purchasers whose names are listed on the signature pages
hereto (each, a “Purchaser” and collectively, the “Purchasers”).
 
RECITALS
 
WHEREAS, pursuant to that certain Senior Note and Warrant Purchase Agreement,
dated as of May 29, 2002, as amended July 1, 2003, as further amended March 15,
2004, as amended again January 28, 2005 (the “Purchase Agreement”), by and among
CSI and the Purchasers, the Purchasers purchased from CSI senior notes in the
aggregate principal amount of fifty million dollars ($50,000,000) (the “Senior
Notes”) and warrants to purchase an aggregate of 13,438,599 shares of CSI common
stock (the “Warrants”);
 
WHEREAS, in connection with the issuance of the Senior Notes, (i) CSI, its
subsidiaries and the Purchasers entered into that certain Security Agreement,
dated as of May 30, 2002 (the “Security Agreement”), (ii) CSI, the Purchasers,
and other signatories thereto entered into that certain Registration Rights
Agreement, dated as of May 30, 2002, as amended and restated on July 20, 2004,
as further amended and restated in accordance with Section 8 below (the
“Registration Rights Agreement”), and (iii) CSI’s subsidiaries each entered into
those certain Guaranties, dated as of May 30, 2002, in favor of the Purchasers
(each a “Guaranty,” collectively, the “Guaranties,” and referred to collectively
with the Security Agreement as the “Ancillary Agreements”);
 
WHEREAS, each Purchaser currently owns all right, title and interest to the
Senior Note in the principal amount set forth by such Purchaser’s name on
Exhibit A and currently owns all right, title and interest to the Warrants set
forth by such Purchaser’s name on Exhibit B;
 
WHEREAS, CSI, Newco, Quinton Cardiology Systems, Inc., a Delaware corporation
(“Quinton”), Rhythm Acquisition Corporation, a Delaware corporation and
wholly-owned subsidiary of Newco (“Quinton Merger Sub”), and Heart Acquisition
Corporation, a Delaware corporation and wholly-owned subsidiary of Newco (“CSI
Merger Sub”), have entered into that certain Agreement and Plan of Merger, dated
of even date herewith (the “Merger Agreement”), pursuant to which, among other
things, Quinton Merger Sub will merge with and into Quinton, and Quinton will
thereafter merge with and into Newco, with Newco being the surviving
corporation, and CSI Merger Sub will merge with and into CSI, with CSI surviving
as a wholly-owned subsidiary of Newco (collectively, the “Mergers”); and
 
WHEREAS, the Purchasers, CSI and Newco desire to cancel the Senior Notes and
Warrants in connection with the Merger in exchange for certain consideration as
set forth in this Agreement.
 
 

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AGREEMENT
 
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth
and for good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereby agree as follows:
 
1.  Definitions. Capitalized terms used herein but not defined herein shall have
the meanings ascribed to such terms in the Merger Agreement, a true and complete
copy of which has been delivered to the Purchasers on the date hereof.
 
“Accreted Value” shall mean the adjusted issue price (within the meaning of
Section 1272 of the Internal Revenue Code, as amended in 1986) plus any accrued
unpaid interest not included therein.
 
2.  Cancellation of Senior Notes and Warrants. The Purchasers hereby agree and
acknowledge that concurrently with the Effective Time (the “Conversion Time”),
each Senior Note and Warrant held by the Purchasers shall be automatically
cancelled and terminated and shall be converted into the right to receive the
Senior Note and Warrant Consideration (as defined in Section 3 below) payable
with respect to such Senior Notes and Warrants (the “Note and Warrant
Conversion”).
 
3.  Senior Note and Warrant Consideration. The consideration to which the
Purchasers shall be entitled as a result of the cancellation and termination of
the Senior Notes and Warrants, and the releases and waivers set forth in this
Agreement, shall consist of the following: (i) an aggregate of twenty million
dollars ($20,000,000), payable by Newco in cash immediately following the
Conversion Time, in the amounts set forth by each Purchaser’s name on Exhibit C
hereto (the “Cash Payment”), in exchange for each Purchaser’s pro rata portion
of Senior Notes in an aggregate amount equal to twenty million dollars
($20,000,000) of the Accreted Value of the Senior Notes and (ii) such number of
shares of Newco common stock (rounded down to the nearest whole share) as is
determined by multiplying (A) the quotient obtained by dividing Fifty-Three
Million Seven Hundred Fifty Thousand Dollars ($53,750,000) by the closing sales
price per share for CSI common stock as reported on the Nasdaq National Market
on the trading date immediately preceding the date of this Agreement, which is
$1.89, by (B) the Cardiac Exchange Ratio, as set forth by each Purchaser’s name
on Exhibit D hereto (the “Shares” and, collectively with the “Cash Payment,” the
“Senior Note and Warrant Consideration”). A portion of the Shares received by
the Purchasers under (ii) above in an amount equal to the Accreted Value of the
Senior Notes minus cash paid under (i) above shall be received in exchange for
the Senior Notes and the balance of such Shares shall be received in exchange
for the Warrants. The parties hereto hereby agree that for all purposes the
Senior Note and Warrant Consideration (including the entire Cash Payment) will
be allocated to the Senior Notes up to the Accreted Value of the Senior Notes,
with any remaining consideration allocated to the Warrants. The Shares shall be
issued to the Purchasers concurrently with shares of Newco common stock to be
issued at the Conversion Time to the former stockholders of CSI.
 
4.  Closing; Closing Conditions. The closing of the Note and Warrant Conversion
(the “Closing”) shall occur concurrently with, and subject to the occurrence of,
the Effective Time; provided, that unless otherwise agreed to in writing by the
Purchasers holding a majority of the outstanding principal amount of Senior
Notes, the Closing shall not occur prior to July 31, 2005. The Closing shall be
further conditioned upon the following:
 
 
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(a) the applicable waiting period(s) under the HSR Act with respect to the Note
and Warrant Conversion, if applicable, shall have expired or been terminated;
and
 
(b) the Merger Agreement shall not have been amended, modified or waived in any
manner that adversely affects the rights and obligations of the Purchasers
without the consent of the Purchasers holding a majority of the outstanding
principal amount of the Senior Notes.
 
5.  Releases; Waivers; Acknowledgments.
 
(a) The Purchasers, on behalf of themselves, and on behalf of all predecessors,
successors, assigns, representatives or agents of the Purchasers, to the fullest
extent permitted by law, hereby acknowledge that the Senior Note and Warrant
Consideration is in full satisfaction of any and all rights the Purchasers may
have with respect to the Senior Notes and Warrants, including the right to
demand or receive payment for all unpaid principal and any accrued and unpaid
interest under the Senior Notes (other than the Senior Note and Warrant
Consideration) and the right to purchase shares of CSI common stock under the
Warrants and, solely in their respective capacities as holders of the Senior
Notes or holders of the Warrants, effective solely upon full receipt by the
Purchasers of the Senior Note and Warrant Consideration, hereby release CSI,
Newco and their respective successors and assigns (collectively, the “Purchaser
Releasees”), from any and all obligations they would otherwise have with respect
to the Senior Notes and Warrants (other than with respect to any obligations
arising under this Agreement or the Registration Rights Agreement) (the
“Purchaser Released Claims”). The Purchasers acknowledge that they have been
advised by legal counsel and have read and understand and waive the protections
of Section 1542 of the California Civil Code, which provides as follows:
 
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF
KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
 
(b) Effective solely upon delivery of the original Senior Notes and Warrants to
CSI for cancellation and termination against payment of the Senior Note and
Warrant Consideration, Newco and CSI, on behalf of themselves, and on behalf of
all predecessors, successors, assigns, representatives or agents, to the fullest
extent permitted by law, hereby release each of the Purchasers and their
respective successors and assigns (collectively, the “Company Releasees”), from
any and all obligations they would otherwise have relating to their investment
in CSI (other than with respect to any obligations arising under this Agreement
or the Registration Rights Agreement) (the “Company Released Claims”).
 
(c) Each of the parties hereto acknowledges that it may hereafter discover facts
in addition to, or different from, those which it now knows or believes to be
true with respect to the subject matter of this Agreement, the Purchaser
Released Claims and the Company Released Claims, as applicable, but that
notwithstanding the foregoing, it is its intention that this release, upon
becoming effective, operate to fully, finally, completely and forever settle and
release each Purchaser Releasee and Company Releasee, as applicable, from each,
every and all of the Purchaser Released Claims and the Company Released Claims,
as applicable, and that in furtherance of such intention, the releases herein
given shall be and remain in effect as full and complete releases,
notwithstanding the discovery or existence of any such additional or different
facts.
 
 
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(d) The Purchasers warrant and represent to each other that as to any Purchaser
Released Claim, the Purchaser releasing same is the sole and absolute owner
thereof, free and clear of all other rights and interests therein and has the
right, ability and sole power to release such Purchaser Released Claims.
 
(e) The Purchasers agree to hold harmless and indemnify the Purchaser Releasees
from any liability or claim asserted by a Purchaser or any of their Affiliates
against a Purchaser Releasee which is based on a claim which the Purchasers
purported to release hereunder. Each of CSI and Newco agrees to hold harmless
and indemnify the Company Releasees from any liability or claim asserted by CSI
or Newco or any of their Affiliates against a Company Releasee which is based on
a claim which the CSI and Newco purported to release hereunder.
 
(f) Each Purchaser hereby acknowledges, agrees and gives its consent that there
shall be no price-based anti-dilution adjustments as a result of the
transactions contemplated by this Agreement or the Merger Agreement to any
warrants held by it.
 
6.  Right to Designate Director. After the Conversion Time, so long as the
Purchasers continue to beneficially own at least 10% of Newco’s outstanding
capital stock, calculated in accordance with Rule 13d-3 of the Securities
Exchange Act of 1934, as amended, the Purchasers shall have the right, but not
the obligation, to designate one director (the “Purchaser Designee”) for
election to Newco’s Board of Directors and Newco shall cause such Purchaser
Designee to be nominated for election at any meeting of stockholders at which
directors in the class of which such Designee is a member are being voted upon.
 
7.  Termination of Transaction Documents. The Purchasers hereby agree and
acknowledge that by virtue of and conditioned upon the consummation of the
Mergers (and payment of the Senior Note and Warrant Consideration), as of the
Effective Time, the Purchase Agreement and the Ancillary Agreements shall be
automatically terminated and shall be of no further force or effect, and the
Purchasers authorize CSI, Newco or any of its respective representatives to file
(at the expense of CSI or Newco) any documents necessary to effect such
termination.
 
8.  Amended and Restated Registration Rights Agreement. Concurrently with the
execution of this Agreement, the Purchasers and CSI shall enter into a Second
Amended and Restated Registration Rights Agreement among CSI and the investors
party thereto, in the form attached hereto as Exhibit E. The Second Amended and
Restated Registration Rights Agreement shall be effective immediately prior to
the Effective Time. In accordance with Section 7.2 of the Second Amended and
Restated Rights Agreement, upon the Effective Time, Newco hereby agrees to
assume the rights and obligations of CSI thereunder.
 
9.  Delivery of Senior Notes and Warrants. As of the Conversion Time, the
Purchasers shall deliver the original Senior Notes and Warrants to Newco for
cancellation and termination, together with such instruments as may be
reasonably requested by CSI or Newco to terminate the Purchasers’ security
interest under the Security Agreement, against payment of the Senior Note and
Warrant Consideration.
 
10.  Representations and Warranties; Covenants.
 
(a) Each Purchaser, severally and not jointly, hereby represents and warrants to
CSI and Newco that (i) it is the true and lawful owner of each Senior Note set
forth on Exhibit A and each Warrant set forth on Exhibit B, and (ii) each Senior
Note set forth on Exhibit A and each Warrant set forth on Exhibit B is free and
clear of all liens, restrictions, charges, adverse claims and encumbrances
whatsoever (other than under state and federal securities laws). Additionally,
subject to expiration of the applicable waiting period(s) under the HSR Act, if
any, each Purchaser, severally and not jointly, hereby makes the representations
and warranties with respect to the Shares and this Agreement as previously made
with respect to the Senior Notes and Warrants and the Purchase Agreement,
respectively, in Section 3 of the Purchase Agreement.
 
 
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(b) CSI and Newco, severally and not jointly, hereby represents and warrants to
the Purchasers that (i) such Person is duly organized, validly existing and in
good standing under the laws of the jurisdiction of its organization, (ii) such
Person has the right, power and authority to enter into, execute, deliver and
perform its obligations under this Agreement and its directors, members,
managers, officers or agents executing and delivering this Agreement are duly
authorized to do so, (iii) this Agreement has been duly and validly executed and
delivered and constitutes the legal, valid and binding obligation of such
Person, enforceable in accordance with its terms except as enforceability may be
limited by bankruptcy, insolvency, fraudulent conveyance or similar laws
affecting creditors’ rights generally and general principles of equity
(regardless of whether the application of such principles is considered in a
proceeding in equity or at law), (iv) the execution, delivery and performance by
such Person of this Agreement will not violate the organizational documents of
such Person, (v) the execution, delivery and performance by such Person of this
Agreement has been duly authorized by all requisite organizational action on the
part of such Person and do not and will not violate, contravene or constitute a
default under any law or any order of any court, governmental authority or
arbitrator, in each case where such violation, contravention or default,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect, and (vi) no authorization, approval or consent of, and
no filing or registration with, any court, governmental authority or third
Person is or will be necessary for the execution, delivery or performance by
such Person of this Agreement or the validity or enforceability thereof, except
for such approvals which will have been obtained prior to the Closing or will
not have been required to be obtained prior to the Closing.
 
(c) To the extent applicable, each party hereto agrees to make an appropriate
filing of a Notification and Report Form pursuant to the HSR Act with respect to
the Note and Warrant Conversion as promptly as practicable following the
determination that such a filing is applicable and to supply as promptly as
practicable any additional information and documentary material that may be
requested pursuant to the HSR Act and to take all other actions necessary to
cause the expiration or termination of the applicable waiting periods under the
HSR Act as soon as practicable.
 
11.  Further Assurances. Each party hereto will, upon request of another party
hereto, execute and deliver any additional documents reasonably requested by
such requesting party as may be necessary or desirable to consummate the
transactions contemplated hereby.
 
12.  Miscellaneous. No provision of this Agreement may be amended, modified,
waived or discharged unless such amendment, waiver, modification or discharge is
agreed to in writing signed by Newco, CSI and the Purchasers holding a majority
of the outstanding principal amount of the Senior Notes. The headings contained
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. This Agreement, the Merger
Agreement and the Registration Rights Agreement constitute the entire agreements
with respect to the subject matter hereof and supercede all prior agreements and
undertakings, both written and oral, among the parties, or of any of them, with
respect to the subject matter hereof, and, except as otherwise expressly
provided herein, it is not intended to confer upon any other person any rights
or remedies hereunder. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to contracts
executed and to be performed in the state. This Agreement may be executed in one
or more counterparts (including by facsimile), and by the different parties
hereto in separate counterparts, each of which when executed shall be deemed to
be an original, but all of which taken together shall constitute one and the
same agreement.
 
 
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13.  Termination. Each party’s obligations under this Agreement are subject to,
and contingent upon, consummation of the Mergers. In the event that the Merger
Agreement is terminated, the parties hereto shall have no further obligations
with respect to this Agreement. Either party may terminate this Agreement if the
Effective Time shall not have taken place by December 31, 2005, in which case
the parties hereto shall have no further obligations with respect to this
Agreement.
 
14.  Fees and Expenses. Each party hereto shall bear the cost of its own fees
and expenses incurred in connection with the transactions contemplated by this
Agreement and the Merger Agreement, including, but not limited to, its legal
fees and disbursements; provided, however, that CSI (i) shall reimburse the
Purchasers for any filing fees under the HSR Act and (ii) shall reimburse the
Purchasers for any filing fees incurred in connection with Sections 7 and 9 of
this Agreement and up to an aggregate of $5,000 in legal fees related thereto.
 
 
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IN WITNESS WHEREOF, the undersigned have executed this Senior Note and Warrant
Conversion Agreement as of the date first written above.
 

        NEWCO       CSQ Holding Company   
   
   
  By:   /s/ John R. Hinson  

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  Its: Chief Executive Officer

 

        CSI       Cardiac Science, Inc.   
   
   
  By:   /s/ Raymond W. Cohen  

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  Its: CEO

 

        PURCHASERS       Perseus Acquisition/Recapitalization Fund, L.L.C.   
   
   
  By:   /s/ Ray E. Newton III  

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  Its: Managing Director

 

        Perseus Market Opportunity Fund, L.P.  
   
   
  By:   /s/ Ray E. Newton III  

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  Its: Managing Director

 

        Cardiac Science Co-Investment, L.P.  
   
   
  By:   /s/ Ray E. Newton III  

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  Its: Managing Director

 
 
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Exhibit A
 
Senior Notes

Name
 
Note No.
 
Principal Amount
         
Perseus Acquisition/Recapitalization Fund, L.L.C.
 
N-1
 
$21,788,285
Perseus Market Opportunity Fund, L.P.
 
N-2
 
20,279,237
Cardiac Science Co-Investment, L.P.
 
N-3
 
7,932,478
Total:
     
$50,000,000

 

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Exhibit B
 
Warrants

Name
 
Warrant No.
 
Shares
         
Perseus Acquisition/Recapitalization Fund, L.L.C.
 
W-1
 
4,357,657
Perseus Market Opportunity Fund, L.P.
 
W-2
 
4,055,847
Cardiac Science Co-Investment, L.P.
 
W-3
 
1,586,496
Perseus Acquisition/Recapitalization Fund, L.L.C.
 
W-4
 
1,318,911
Perseus Market Opportunity Fund, L.P.
 
W-5
 
1,227,564
Cardiac Science Co-Investment, L.P.
 
W-6
 
480,177
Perseus Acquisition/Recapitalization Fund, L.L.C.
 
W-7
 
179,526
Perseus Market Opportunity Fund, L.P.
 
W-8
 
167,086
Cardiac Science Co-Investment, L.P.
 
W-9
 
65,335
Total:
     
13,438,599

 

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Exhibit C
 
Cash Payment Amount

Name
 
Cash Payment Amount
     
Perseus Acquisition/Recapitalization Fund, L.L.C.
 
$8,715,314
Perseus Market Opportunity Fund, L.P.
 
8,111,695
Cardiac Science Co-Investment, L.P.
 
3,172,991
Total:
 
$20,000,000

 

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Exhibit D
 
Number of Shares

Name
 
Number of Shares
     
Perseus Acquisition/Recapitalization Fund, L.L.C.
 
1,239,281
Perseus Market Opportunity Fund, L.P.
 
1,153,448
Cardiac Science Co-Investment, L.P.
 
451,186
Total:
 
2,843,915

 

 

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