Exhibit 10.2
AMENDED AND RESTATED SENIOR SECURED NOTE
THE ISSUANCE AND SALE OF THE SECURITY REPRESENTED BY THIS NOTE HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITY MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR
ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITY UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF
COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.
NOTWITHSTANDING THE FOREGOING, THE SECURITY MAY BE PLEDGED IN CONNECTION WITH A
BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITY.
Hythiam, Inc.
Amended and Restated Senior Secured Note

     
Issuance Date: January 18, 2007
  Original Principal Amount: U.S. $5,000,000.00
Amendment Date: July 31, 2008
   

     FOR VALUE RECEIVED, Hythiam, Inc., a Delaware corporation (the “Company”),
hereby promises to pay to the order of HIGHBRIDGE INTERNATIONAL LLC or
registered assigns (“Holder”) the amount set out above as the Original Principal
Amount (as reduced pursuant to the terms hereof pursuant to redemption or
otherwise, the “Principal”) when due, whether upon the Maturity Date (as defined
below), acceleration, redemption or otherwise (in each case in accordance with
the terms hereof) and to pay interest (“Interest”) on any outstanding Principal
at a rate per annum equal to the Interest Rate (as defined below), from the date
set out above as the Issuance Date (the “Issuance Date”) until the same becomes
due and payable, whether upon an Interest Date (as defined below), the Maturity
Date, acceleration, redemption or otherwise (in each case in accordance with the
terms hereof). This Amended and Restated Senior Secured Note (including all
Senior Secured Notes issued in exchange, transfer or replacement hereof, this
“Note” and, to the extent any Principal amount of this Note is transferred, such
other Senior Secured Notes issued in connection with such transfer, the “Other
Notes”) amends, supplements, modifies and completely restates and supersedes the
Senior Secured Note, with an original issuance date January 18, 2007, issued by
the Company to the Holder in the original principal amount of $10,000,000.00,
but shall not, except as specifically amended hereby or as set forth in the
Securities Purchase Agreement, constitute a release, satisfaction or novation of
any of the obligations under any other Transaction Document (as defined in the
Securities Purchase Agreement). This Amended and Restated Senior Secured Note is
the Amended and Restated Senior Secured Note issued pursuant to the Amendment
and Exchange Agreement, dated as of July 31, 2008 (the “Amendment Agreement”).
Certain capitalized terms are defined in Section 24.

 

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

 

     (1) MATURITY. On the Maturity Date, the Company shall pay to the Holder an
amount in cash representing all outstanding Principal, accrued and unpaid
Interest and accrued and unpaid Late Charges, if any. The “Maturity Date” shall
be January 15, 2010.
     (2) INTEREST; INTEREST RATE. (a) Interest on this Note shall commence
accruing on the Issuance Date and shall be computed on the basis of a 365-day
year and actual days elapsed and shall be payable quarterly in arrears on
January 15, April 15, July 15 and October 15 of each year (each, an “Interest
Date” and the period between successive Interest Dates, an “Interest Period”)
with the first Interest Date being April 15, 2007. Interest shall be payable on
each Interest Date, to the record holder of this Note on the applicable Interest
Date, in cash.
          (b) From and after the occurrence of an Event of Default, the Interest
Rate shall be increased to fifteen percent (15%). In the event that such Event
of Default is subsequently cured, the adjustment referred to in the preceding
sentence shall cease to be effective as of the date of such cure; provided that
the Interest as calculated at such increased rate during the continuance of such
Event of Default shall continue to apply to the extent relating to the days
after the occurrence of such Event of Default through and including the date of
cure of such Event of Default.
     (3) RIGHTS UPON EVENT OF DEFAULT.
          (a) Event of Default. Each of the following events shall constitute an
“Event of Default”:
          (i) the Company’s failure to pay to the Holder any amount of Principal
(including, without limitation, any redemption payments), Interest, Late Charges
or other amounts when and as due under this Note or any other Transaction
Document (as defined in the Securities Purchase Agreement), except, in the case
of a failure to pay Interest and Late Charges when and as due, in which case
only if such failure continues for a period of at least three (3) Business Days;
          (ii) any default under, redemption of or acceleration prior to
maturity of any Indebtedness of the Company or any of its Subsidiaries (as
defined in Section 3(a) of the Securities Purchase Agreement), in excess of
$500,000, individually or in the aggregate, other than with respect to any Other
Notes;
          (iii) the Company or any of its Subsidiaries, pursuant to or within
the meaning of Title 11, U.S. Code, or any similar Federal, foreign or state law
for the relief of debtors (collectively, “Bankruptcy Law”), (A) commences a
voluntary case, (B) consents to the entry of an order for relief against it in
an involuntary case, (C) consents to the appointment of a receiver, trustee,
assignee, liquidator or similar official (a “Custodian”), (D) makes a general
assignment for the benefit of its creditors or (E) admits in writing that it is
generally unable to pay its debts as they become due;
          (iv) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that (A) is for relief against the Company or any of its

- 2 -

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

 

Subsidiaries in an involuntary case, (B) appoints a Custodian of the Company or
any of its Subsidiaries or (C) orders the liquidation of the Company or any of
its Subsidiaries;
          (v) a final judgment or judgments for the payment of money aggregating
in excess of $500,000 are rendered against the Company or any of its
Subsidiaries and which judgments are not, within seventy-five (75) days after
the entry thereof, bonded, discharged or stayed pending appeal, or are not
discharged within seventy-five (75) days after the expiration of such stay;
provided, however, that any judgment which is covered by insurance or an
indemnity from a credit worthy party shall not be included in calculating the
$500,000 amount set forth above so long as the Company provides the Holder a
written statement from such insurer or indemnity provider (which written
statement shall be reasonably satisfactory to the Holder) to the effect that
such judgment is covered by insurance or an indemnity and the Company will
receive the proceeds of such insurance or indemnity within thirty (30) days of
the issuance of such judgment or the Company is contending, reasonably and in
good faith, that such judgment is covered by insurance or indemnity, and is
seeking a determination to such effect;
          (vi) the Company materially breaches any representation, warranty,
covenant or other term or condition of any Transaction Document, except, in the
case of a breach of a covenant which is curable, only if such breach continues
for a period of at least ten (10) consecutive Business Days;
          (vii) any breach or failure in any respect to comply with Section 10
of this Note; or
          (viii) any Event of Default (as defined in the Other Notes) occurs
with respect to any Other Notes.
          (b) Redemption Right. Upon the occurrence of an Event of Default with
respect to this Note or any Other Note, the Company shall within one
(1) Business Day deliver written notice thereof via facsimile and overnight
courier (an “Event of Default Notice”) to the Holder. At any time after the
earlier of the Holder’s receipt of an Event of Default Notice and the Holder
becoming aware of an Event of Default, the Holder may require the Company to
redeem all or any portion of this Note by delivering written notice thereof (the
“Event of Default Redemption Notice”) to the Company, which Event of Default
Redemption Notice shall indicate the portion of this Note the Holder is electing
to redeem. Each portion of this Note subject to redemption by the Company
pursuant to this Section 3(b) shall be redeemed by the Company at a price equal
to the Outstanding Amount (the “Event of Default Redemption Price”). Redemptions
required by this Section 3(b) shall be made in accordance with the provisions of
Section 8. To the extent redemptions required by this Section 3(b) are deemed or
determined by a court of competent jurisdiction to be prepayments of the Note by
the Company, such redemptions shall be deemed to be voluntary prepayments.
     (4) RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.

- 3 -

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

 

          (a) Assumption. The Company shall not enter into or be party to a
Fundamental Transaction unless the Successor Entity assumes in writing all of
the obligations of the Company under this Note 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 Notes in exchange for such
Notes a security of the Successor Entity evidenced by a written instrument
substantially similar in form and substance to the Notes, including, without
limitation, having a principal amount and interest rate equal to the principal
amounts and the interest rates of the Notes held by such holder and having
similar ranking to the Notes, and satisfactory to the Required Holders. 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 Note 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 Note
with the same effect as if such Successor Entity had been named as the Company
herein. The provisions of this Section shall apply similarly and equally to
successive Fundamental Transactions.
          (b) Redemption Right. 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 Holder (a
“Change of Control Notice”). At any time during the period beginning after the
Holder’s receipt of a Change of Control Notice and ending twenty (20) Trading
Days after the consummation of such Change of Control, the Holder may require
the Company to redeem all or any portion of this Note by delivering written
notice thereof (“Change of Control Redemption Notice”) to the Company, which
Change of Control Redemption Notice shall indicate the Outstanding Amount the
Holder is electing to redeem. The portion of this Note subject to redemption
pursuant to this Section 4 shall be redeemed by the Company in cash at a price
equal to the product of (i) the applicable Company Redemption Premium and
(ii) the Outstanding Amount of this Note being redeemed (the “Change of Control
Redemption Price”). For the avoidance of doubt, the applicable date of
determination for purposes of determining the applicable Company Redemption
Premium shall be the date of consummation of the Change of Control. Redemptions
required by this Section 4 shall be made in accordance with the provisions of
Section 8 and shall have priority to payments to shareholders in connection with
a Change of Control. To the extent redemptions required by this Section 4(b) are
deemed or determined by a court of competent jurisdiction to be prepayments of
the Note by the Company, such redemptions shall be deemed to be voluntary
prepayments.
     (5) REDEMPTIONS BY THE COMPANY.
          (a) Company Optional Redemption. The Company shall have the right at
any time to redeem all or any portion of the Outstanding Amount of this Note (a
“Company Optional Redemption”). The portion of this Note subject to redemption
pursuant to this Section 5 shall be redeemed by the Company in cash at a price
equal to the product of (i) the applicable Company Redemption Premium and
(ii) the Outstanding Amount of this Note being redeemed (the “Company Optional
Redemption Price”). The Company may exercise its

- 4 -

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

 

redemption right under this Section 5 by delivering a written notice thereof by
confirmed facsimile and overnight courier to all, but not less than all, of the
holders of the Notes (the “Company Optional Redemption Notice” and the date such
notice is delivered to all the holders is referred to as the “Company Optional
Redemption Notice Date”). A Company Optional Redemption Notice shall be
irrevocable. Each Company Optional Redemption Notice shall state (A) the date on
which the Company Optional Redemption shall occur (the “Company Optional
Redemption Date”) which date shall be not less than five (5) Business Days nor
more than ten (10) Business Days after the Company Optional Redemption Notice
Date and (B) the aggregate Principal of the Notes which the Company has elected
to be subject to such Company Optional Redemption from all of the holders of the
Notes pursuant to this Section 5 (and analogous provisions under the Other
Notes) on the Company Optional Redemption Date. Redemptions made pursuant to
this Section 5(a) shall be made in accordance with Section 8. To the extent
redemptions required by this Section 5(a) are deemed or determined by a court of
competent jurisdiction to be prepayments of the Note by the Company, such
redemptions shall be deemed to be voluntary prepayments. The parties hereto
agree that in the event of the Company’s redemption of any portion of the Note
under this Section 5(a), 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 5(a) 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.
          (b) Company Redemption with Margin Loan Proceeds. If the Company
obtains and draws upon a loan (the “Margin Loan”) against the ARS held by the
Company which Margin Loan is (i) secured by a first priority Lien on such ARS
and (ii) in an aggregate principal amount exceeding fifty-percent (50%) of the
face amount of such ARS, then the Company shall be required to use all of the
proceeds of the Margin Loan in excess of such fifty-percent (50%) of the face
amount (the “Excess Margin Loan Proceeds”) to redeem (the “Margin Loan
Redemption”) all or a portion of this Note (the “Margin Loan Redemption
Amount”). Contemporaneously with the public announcement of obtaining such
Margin Loan or, if the obtaining of such Margin Loan is not required to be
publicly disclosed under the Securities Act of 1934 Act, as amended (the “1934
Act”), no later than the date such Margin Loan is obtained and drawn upon, the
Company shall deliver a written notice (the “Margin Loan Redemption Notice”) by
confirmed facsimile and overnight courier to the Holder of the Notes (A) stating
that that the Company has obtained, or will obtain, a Margin Loan secured by a
first priority Lien on the ARS, (B) the aggregate amount of the Margin Loan and
the face amount of such ARS, (C) that the Company will use the Excess Margin
Loan Proceeds to redeem a corresponding Outstanding Amount of the Notes and
(D) the date on which such redemption shall occur which shall be no later than
five (5) Business Days following the date the proceeds of the Margin Loan are
delivered to or drawn down by the Company (the “Margin Loan Redemption Date”).
The portion of this Note subject to redemption pursuant to this Section 5(b)
shall be redeemed by the Company in cash at a price equal to 110% of the Margin
Loan Redemption Amount (the “Company Optional Redemption Price”). Redemptions
made pursuant to this Section 5(b) shall be made in accordance with Section 8.
          (c) Pro Rata Redemption Requirement. If the Company elects to cause a
Company Optional Redemption pursuant to Section 5(a), then it must
simultaneously take the

- 5 -

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

 

same action with respect to the Other Notes. If (i) the Company elects to cause
a Company Optional Redemption pursuant to Section 5(a) (or similar provisions
under the Other Notes) with respect to less than all of the principal amount of
the Notes then outstanding or (ii) the Excess Margin Loan Proceeds with respect
to any Margin Loan Redemption are insufficient to allow for redemption of all of
the principal amount of the Notes then outstanding, then the Company shall
require redemption of a Principal amount from the Holder and each holder of the
Other Notes equal to the product of (A) the aggregate principal amount of Notes
which the Company has elected to cause to be redeemed pursuant to Section 5(a)
or the applicable Excess Margin Loan Proceeds, as the case may be, multiplied by
(B) the fraction, the numerator of which is the sum of the initial principal
amount of Notes purchased by such holder and the denominator of which is the
initial principal amounts of Notes purchased by all holders holding outstanding
Notes (such fraction with respect to each holder is referred to as its
“Redemption Allocation Percentage”, and such amount with respect to each holder
is referred to as its “Pro Rata Redemption Amount”); provided that in the event
that the initial holder of any Notes has sold or otherwise transferred any of
such holder’s Notes, the transferee shall be allocated a pro rata portion of
such holder’s Redemption Allocation Percentage and Pro Rata Redemption Amount.
     (6) HOLDER’S RIGHT OF OPTIONAL REDEMPTION. (a) Redemption Upon Strategic
Transaction. Contemporaneously with the public announcement of any Strategic
Transaction set forth in the attached Schedule, or, if such Strategic
Transaction is not required to be publicly disclosed under the 1934 Act, no
later than the consummation thereof, the Company shall deliver written notice
thereof via facsimile and overnight courier to the Holder (a “Strategic
Transaction Notice”) stating (i) the effective date, or proposed effective date,
as applicable, of such Strategic Transaction and (ii) the Net Proceeds received,
or to be received, as applicable, from such Strategic Transaction. At any time
after the receipt of any Strategic Transaction Notice, the Holder shall have the
right, in its sole discretion, to require that the Company to redeem all or any
portion of the Outstanding Amount of this Note up to an amount equal the
Strategic Transaction Available Redemption Amount (a “Strategic Transaction
Redemption”) by delivering written notice thereof to the Company (a “Strategic
Transaction Redemption Notice”), which Strategic Transaction Redemption Notice
shall indicate the Outstanding Amount the Holder is electing to have redeemed
(the “Strategic Transaction Redemption Amount”) on the Strategic Transaction
Redemption Date (as defined in Section 8). The portion of this Note subject to
redemption pursuant to this Section 6(a) shall be redeemed by the Company in
cash at a price equal to 105% of the Strategic Transaction Redemption Amount (a
“Strategic Transaction Redemption Price”). In the event that following any
Strategic Transaction Redemption Date the Company or a Subsidiary receives
additional Net Proceeds (such as deferred compensation) relating to a Strategic
Transaction, the Company shall provide a Strategic Transaction Notice to the
Holder in accordance with this Section 6(a) describing the nature and amount of
such additional Net Proceeds and the Holder shall have the right to required the
Company to redeem all or any portion of this Note pursuant to this
Section 11(a).
          (b) Redemption After July 18, 2009 or Joint Venture Transaction. At
any time and from time to time (i) after July 18, 2009 and (ii) following the
consummation of a Joint Venture Transaction as set forth in the attached
Schedule, the Holder shall have the right (the “Holder Optional Redemption
Right”), in its sole discretion, to require that the Company redeem all or any
portion of the Outstanding Amount of this Note. Contemporaneously with the
public announcement of any Joint Venture Transaction or, if such

- 6 -

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

 

Joint Venture Transaction is not required to be publicly disclosed under the
1934 Act, no later than the consummation thereof, the Company shall deliver
written notice thereof via facsimile and overnight courier to the Holder stating
(i) the effective date, or proposed effective date, as applicable, of such Joint
Venture Transaction and (ii) a brief summary of the Joint Venture Transaction,
including, the cash value of such transaction. The Holder shall exercise the
Holder Optional Redemption Right by delivering a written notice thereof to the
Company (a “Holder Optional Redemption Notice”), which notice shall indicate the
Outstanding Amount the Holder is electing to have redeemed (the “Holder Optional
Redemption Amount”) on the Holder Optional Redemption Date (as defined in
Section 8). The portion of this Note subject to redemption pursuant to this
Section 6(b) shall be redeemed by the Company in cash at a price equal to 110%
of the Holder Optional Redemption Amount (a “Holder Optional Redemption Price”).
          (c) Generally. Redemptions required by this Section 6 shall be made in
accordance with the provisions of Section 8. To the extent redemptions required
by this Section 6 are deemed or determined by a court of competent jurisdiction
to be prepayments of the Note by the Company, such redemptions shall be deemed
to be voluntary prepayments. The parties hereto agree that in the event of the
Company’s redemption of any portion of the Note under this Section 6, 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 6 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.
     (7) NONCIRCUMVENTION. The Company hereby covenants and agrees that the
Company will not, by amendment of its Certificate of Incorporation, Bylaws or
through any reorganization, transfer of assets, consolidation, merger, scheme of
arrangement, dissolution, issue or sale of securities, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Note, and will at all times in good faith carry out all of the
provisions of this Note and take all action as may be required to protect the
rights of the Holder of this Note.
     (8) REDEMPTIONS.
          (a) Mechanics. The Company shall deliver the applicable Event of
Default Redemption Price to the Holder within five (5) Business Days after the
Company’s receipt of the Holder’s Event of Default Redemption Notice. If the
Holder has submitted a Change of Control Redemption Notice in accordance with
Section 4(b), the Company shall deliver the applicable Change of Control
Redemption Price to the Holder concurrently with the consummation of such Change
of Control if such notice is received prior to the consummation of such Change
of Control and within five (5) Business Days after the Company’s receipt of such
notice otherwise. If the Company has delivered a Company Optional Redemption
Notice in accordance with Section 5, the Company shall deliver the Company
Optional Redemption Price to the Holder on the Company Optional Redemption Date.
The Company shall deliver the applicable Margin Loan Redemption Price to the
Holder on the applicable Margin Loan Redemption Date. If the Holder has
submitted a Strategic Transaction Redemption Notice or a

- 7 -

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

 

Holder Optional Redemption Notice as applicable, in accordance with Section 6,
the Company shall deliver the applicable Strategic Transaction Redemption Notice
or the applicable Holder Optional Redemption Price, as the case may be, to the
Holder within fifteen (15) Business Days (the “Strategic Transaction Redemption
Date” or “Holder Optional Redemption Date”, respectively) after the Company’s
receipt of such notice. In the event of a redemption of less than all of the
Outstanding Amount of this Note, the Company shall promptly cause to be issued
and delivered to the Holder a new Note (in accordance with Section 14(d))
representing the outstanding Principal which has not been redeemed. In the event
that the Company does not pay the Redemption Price to the Holder within the time
period required, at any time thereafter and until the Company pays such unpaid
Redemption Price in full, the Holder shall have the option, in lieu of
redemption, to require the Company to promptly return to the Holder all or any
portion of this Note representing the Outstanding Amount that was submitted for
redemption and for which the applicable Redemption Price (together with any Late
Charges thereon) has not been paid. Upon the Company’s receipt of such notice,
(x) the Redemption Notice shall be null and void with respect to such
Outstanding Amount, and (y) the Company shall immediately return this Note, or
issue a new Note (in accordance with Section 14(d)) to the Holder representing
such Outstanding Amount. The Holder’s delivery of a notice voiding a Redemption
Notice and exercise of its rights following such notice shall not affect the
Company’s obligations to make any payments of Late Charges which have accrued
prior to the date of such notice with respect to the Outstanding Amount subject
to such notice.
          (b) Redemption by Other Holders. Upon the Company’s receipt of notice
from any of the holders of the Other Notes for redemption or repayment as a
result of an event or occurrence substantially similar to the events or
occurrences described in Section 3(b), Section 4(b) or Section 6 (each, an
“Other Redemption Notice”), the Company shall immediately, but no later than one
(1) Business Day of its receipt thereof, forward to the Holder by facsimile a
copy of such notice. If the Company receives a Redemption Notice and one or more
Other Redemption Notices, during the period beginning on and including the date
which is three (3) Business Days prior to the Company’s receipt of the Holder’s
Redemption Notice and ending on and including the date which is three Business
Days after the Company’s receipt of the Holder’s Redemption Notice and the
Company is unable to redeem all principal, interest and other amounts designated
in such Redemption Notice and such Other Redemption Notices received during such
seven (7) Business Day period, then the Company shall redeem a pro rata amount
from each holder of the Notes (including the Holder) based on the principal
amount of the Notes submitted for redemption pursuant to such Redemption Notice
and such Other Redemption Notices received by the Company during such seven (7)
Business Day period.
     (9) SECURITY. This Note and the Other Notes are secured to the extent and
the manner set forth in the Security Documents (as defined in the Securities
Purchase Agreement).
     (10) COVENANTS.
          (a) Rank. All payments due under this Note (a) shall rank pari passu
with all Other Notes and (b) shall be senior to all other Indebtedness of the
Company and its Subsidiaries.

- 8 -

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

 

          (b) Incurrence of Indebtedness. So long as this Note is outstanding,
the Company shall not, and the Company shall not permit any of its Subsidiaries
to, directly or indirectly, incur or guarantee, assume or suffer to exist any
Indebtedness, other than (i) the Indebtedness evidenced by this Note and the
Other Notes and (ii) other Permitted Indebtedness.
          (c) Existence of Liens. So long as this Note is outstanding, the
Company shall not, and the Company shall not permit any of its Subsidiaries to,
directly or indirectly, allow or suffer to exist any mortgage, lien, pledge,
charge, security interest or other encumbrance upon or in any property or assets
(including accounts and contract rights) owned by the Company or any of its
Subsidiaries (collectively, “Liens”) other than Permitted Liens.
          (d) Restricted Payments. The Company shall not, and the Company shall
not permit any of its Subsidiaries to, directly or indirectly, redeem, defease,
repurchase, repay or make any payments in respect of, by the payment of cash or
cash equivalents (in whole or in part, whether by way of open market purchases,
tender offers, private transactions or otherwise), all or any portion of any
Permitted Indebtedness, whether by way of payment in respect of principal of (or
premium, if any) or interest on, such Indebtedness if at the time such payment
is due or is otherwise made or, after giving effect to such payment, an event
constituting, or that with the passage of time and without being cured would
constitute, an Event of Default has occurred and is continuing; provided that
notwithstanding the foregoing, no principal (or any portion thereof) of any
Subordinated Indebtedness may be paid (whether upon maturity, redemption,
acceleration or otherwise) so long as this Note is outstanding. Notwithstanding
the foregoing, the Company may, during the occurrence of an Event of Default,
continue to make regularly scheduled payments of principal and interest (but not
prepayments or payments upon acceleration) (i) on leases or other financing of
equipment acquired or held by the Company or any of its Subsidiaries, and (ii)
pursuant to clauses (B) and (G) of the definition of Permitted Indebtedness.
          (e) Restriction on Redemption and Cash Dividends. Until all of the
Notes have been redeemed or otherwise satisfied in accordance with their terms,
the Company shall not, directly or indirectly, redeem, repurchase or declare or
pay any cash dividend or distribution on its capital stock without the prior
express written consent of the Required Holders.
          (f) Post-Closing Collateral Matters.
               (i) Within twenty (20) Business Days following the Closing Date,
the Company shall deliver to the Collateral Agent an account control agreement
for each account set forth in Schedule IV to the Security Agreement, in form and
substance reasonably satisfactory to the Collateral Agent, including, without
limitation, that the occurrence of any Event of Default set forth in Sections
3(a)(i), 3(a)(ii), 3(a)(iii) and 3(a)(iv) will provide the Collateral Agent with
the right to exercise control over such account in accordance with the terms of
such account control agreement, duly executed by the Company and the depositary
bank in which such account is maintained.

- 9 -

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

 

               (ii) Prior to opening any other account that would have otherwise
been required to disclosed on Schedule IV to the Security Agreement, the Company
shall deliver to the Collateral Agent an account control agreement in form and
substance reasonably satisfactory to the Collateral Agent, including, without
limitation, that the occurrence of any Event of Default set forth in Sections
3(a)(i), 3(a)(ii), 3(a)(iii) and 3(a)(iv) will provide the Collateral Agent with
the right to exercise control over such account in accordance with the terms of
such account control agreement, duly executed by the Company and the depositary
bank in which such account is maintained.
               (iii) Notwithstanding anything to the contrary in this
Section 10(f), if an Event of Default occurs under Section 3(a)(i) due to the
failure of the Company to either (A) pay Interest by the end of the applicable
cure period in Section 3(a)(i) or (B) pay the Holder Optional Redemption Price
on the Holder Optional Redemption Date, the Collateral Agent shall only have the
right to exercise control over any accounts subject to an account control
agreement after such time as the Company receives notice of the Company’s
failure to make any such payment and such failure to make payment continues for
a period of at least two (2) Business Days after such notice.
     (11) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote at
a meeting duly called for such purpose or the written consent without a meeting
of the Required Holders shall be required for any change or amendment to this
Note or the Other Notes.
     (12) TRANSFER. This Note may be offered, sold, assigned or transferred by
the Holder without the consent of the Company.
     (13) REGISTRATION. The Company shall maintain a register (the “Register”)
for the recordation of the names and addresses of the holders of each Note and
the principal amount of the Notes held by such holders (the “Registered Notes”).
The entries in the Register shall be conclusive and binding for all purposes
absent manifest error. The Company and the holders of the Notes shall treat each
Person whose name is recorded in the Register as the owner of a Note for all
purposes, including, without limitation, the right to receive payments of
principal and interest hereunder, notwithstanding notice to the contrary. A
Registered Note may be assigned or sold in whole or in part only by registration
of such assignment or sale on the Register. Upon its receipt of a request to
assign or sell all or part of any Registered Note by a Holder, the Company shall
record the information contained therein in the Register and issue one or more
new Registered Notes in the same aggregate principal amount as the principal
amount of the surrendered Registered Note to the designated assignee or
transferee pursuant to Section 14.
     (14) REISSUANCE OF THIS NOTE.
          (a) Transfer. If this Note is to be transferred, the Holder shall
surrender this Note to the Company, whereupon the Company will forthwith issue
and deliver upon the order of the Holder a new Note (in accordance with
Section 14(d)), registered as the Holder may request, representing the
outstanding Principal being transferred by the Holder and, if less then the
entire outstanding Principal is being transferred, a new Note (in accordance
with Section 14(d)) to the Holder representing the outstanding Principal not
being transferred.

- 10 -

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

 

The Holder and any assignee, by acceptance of this Note, acknowledge and agree
that, by reason of the provisions of this Section 14(a), following redemption of
any portion of this Note, the outstanding Principal represented by this Note may
be less than the Principal stated on the face of this Note.
          (b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of this Note, and, in the case of loss, theft or destruction, of
any indemnification undertaking by the Holder to the Company in customary form
and, in the case of mutilation, upon surrender and cancellation of this Note,
the Company shall execute and deliver to the Holder a new Note (in accordance
with Section 14(d)) representing the outstanding Principal.
          (c) Note Exchangeable for Different Denominations. This Note is
exchangeable, upon the surrender hereof by the Holder at the principal office of
the Company, for a new Note or Notes (in accordance with Section 14(d) and in
principal amounts of at least $100,000) representing in the aggregate the
outstanding Principal of this Note, and each such new Note will represent such
portion of such outstanding Principal as is designated by the Holder at the time
of such surrender.
          (d) Issuance of New Notes. Whenever the Company is required to issue a
new Note pursuant to the terms of this Note, such new Note (i) shall be of like
tenor with this Note, (ii) shall represent, as indicated on the face of such new
Note, the Principal remaining outstanding (or in the case of a new Note being
issued pursuant to Section 14(a) or Section 14(c), the Principal designated by
the Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued Interest and
Late Charges on the Principal and Interest of this Note, from the Issuance Date.
     (15) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND
INJUNCTIVE RELIEF. The remedies provided in this Note shall be cumulative and in
addition to all other remedies available under this Note and any of the other
Transaction Documents at law or in equity (including a decree of specific
performance and/or other injunctive relief), and nothing herein shall limit the
Holder’s right to pursue actual and consequential damages for any failure by the
Company to comply with the terms of this Note. Amounts set forth or provided for
herein with respect to payments, redemption and the like (and the computation
thereof) shall be the amounts to be received by the Holder and shall not, except
as expressly provided herein, be subject to any other obligation of the Company
(or the performance thereof). The Company acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach or threatened breach, the Holder
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.

- 11 -

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

 

     (16) PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note
is placed in the hands of an attorney for collection or enforcement or is
collected or enforced through any legal proceeding or the Holder otherwise takes
action to collect amounts due under this Note or to enforce the provisions of
this Note or (b) there occurs any bankruptcy, reorganization, receivership of
the Company or other proceedings affecting Company creditors’ rights and
involving a claim under this Note, then the Company shall pay the costs incurred
by the Holder for such collection, enforcement or action or in connection with
such bankruptcy, reorganization, receivership or other proceeding, including,
but not limited to, attorneys’ fees and disbursements.
     (17) CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly
drafted by the Company and all the Holders and shall not be construed against
any person as the drafter hereof. The headings of this Note are for convenience
of reference and shall not form part of, or affect the interpretation of, this
Note.
     (18) FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of
the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privilege.
     (19) DISPUTE RESOLUTION. In the case of a dispute as to the determination
of the arithmetic calculation of any Redemption Price, the Company shall submit
the disputed determinations or arithmetic calculations via facsimile within one
(1) Business Day of receipt of the Redemption Notice or other event giving rise
to such dispute, as the case may be, to the Holder. If the Holder and the
Company are unable to agree upon such determination or calculation within one
(1) Business Day of such disputed determination or arithmetic calculation being
submitted to the Holder, then the Company shall, within one (1) Business Day
submit via facsimile the disputed arithmetic calculation of any Redemption Price
to the Company’s independent, outside accountant. The Company, at the Company’s
expense, shall cause the investment bank or the accountant, as the case may be,
to perform the determinations or calculations and notify the Company and the
Holder of the results no later than five (5) Business Days from the time it
receives the disputed determinations or calculations. Such investment bank’s or
accountant’s determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error.
     (20) NOTICES; PAYMENTS.
          (a) Notices. Whenever notice is required to be given under this Note,
unless otherwise provided herein, such notice shall be given in accordance with
Section 9(f) of the Securities Purchase Agreement. The Company shall provide the
Holder with prompt written notice of all actions taken pursuant to this Note,
including in reasonable detail a description of such action and the reason
therefore.
          (b) Payments. Whenever any payment of cash is to be made by the
Company to any Person pursuant to this Note, such payment shall be made in
lawful money of the United States of America by a check drawn on the account of
the Company and sent via overnight courier service to such Person at such
address as previously provided to the

- 12 -

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

 

Company in writing (which address, in the case of each of the Holders, shall
initially be as set forth on the Schedule of Buyers attached to the Securities
Purchase Agreement); provided that the Holder may elect to receive a payment of
cash via wire transfer of immediately available funds by providing the Company
with prior written notice setting out such request and the Holder’s wire
transfer instructions. Whenever any amount expressed to be due by the terms of
this Note is due on any day which is not a Business Day, the same shall instead
be due on the next succeeding day which is a Business Day and, in the case of
any Interest Date which is not the date on which this Note is paid in full, the
extension of the due date thereof shall not be taken into account for purposes
of determining the amount of Interest due on such date. Any amount of Principal
or other amounts due under the Transaction Documents, which is not paid when due
shall result in a late charge being incurred and payable by the Company in an
amount equal to interest on such amount at the rate of fifteen percent (15%) per
annum from the date such amount was due until the same is paid in full (“Late
Charge”).
     (21) CANCELLATION. After all Principal, accrued Interest and other amounts
at any time owed on this Note has been paid in full, this Note shall
automatically be deemed canceled, shall be surrendered to the Company for
cancellation and shall not be reissued.
     (22) WAIVER OF NOTICE. To the extent permitted by law, the Company hereby
waives demand, notice, protest and all other demands and notices in connection
with the delivery, acceptance, performance, default or enforcement of this Note
and the Securities Purchase Agreement.
     (23) GOVERNING LAW; JURISDICTION; JURY TRIAL. This Note shall be construed
and enforced in accordance with, and all questions concerning the construction,
validity, interpretation and performance of this Note shall be governed by, the
internal laws of the State of New York, without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York. The Company hereby irrevocably
submits to the non-exclusive jurisdiction of the state and federal courts
sitting in The City of New York, Borough of Manhattan, for the adjudication of
any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, that such suit, action
or proceeding is brought in an inconvenient forum or that the venue of such
suit, action or proceeding is improper. The Company hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof to such party at the
address it set forth on the signature page hereto and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law. In the event that any provision of this
Note is invalid or unenforceable under any applicable statute or rule of law,
then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform with such statute or
rule of law. Any such provision which may prove invalid or unenforceable under
any law shall not affect the validity or enforceability of any other provision
of this Note. Nothing contained herein shall be deemed or operate to preclude
the Holder from bringing suit or taking other legal action against the Company
in any other jurisdiction to collect on the Company’s

- 13 -

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

 

obligations to the Holder, to realize on any collateral or any other security
for such obligations, or to enforce a judgment or other court ruling in favor of
the Holder. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND
AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE
HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION
CONTEMPLATED HEREBY.
     (24) CERTAIN DEFINITIONS. For purposes of this Note, the following terms
shall have the following meanings:
          (a) “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.
          (b) “Change of Control” means any Fundamental Transaction other than
(i) any reorganization, recapitalization or reclassification of the Common Stock
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 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 (ii) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company.
          (c) “Company Redemption Premium” means, for any date of determination,
110%.
          (d) “Contingent Obligation” means, as to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto.
          (e) “Fundamental Transaction” means that (A) the Company shall,
directly or indirectly, in one or more related transactions, (i) consolidate or
merge with or into (whether or not the Company is the surviving corporation)
another Person, or (ii) sell, assign, transfer, convey or otherwise dispose of
all or substantially all of the properties or assets of the Company to another
Person, or (iii) allow another Person or Persons to make a purchase, tender or
exchange offer that is accepted by the holders of more than the 50% of the
outstanding shares of Voting Stock (not including any shares of Voting Stock
held by the Person or Persons making or party to, or associated or affiliated
with the Person or Persons making or party to, such purchase, tender or exchange
offer), or (iv) consummate a stock 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 either the outstanding shares of

- 14 -

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

 

Voting Stock (not including any shares of Voting 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 stock purchase agreement or other business
combination), or (v) reorganize, recapitalize or reclassify its Common Stock, or
(B) 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.
          (f) “GAAP” means United States generally accepted accounting
principles, consistently applied.
          (g) “Indebtedness” of any Person means, without duplication (i) all
indebtedness for borrowed money, (ii) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services, including
(without limitation) “capital leases” in accordance with generally accepted
accounting principles (other than trade payables entered into in the ordinary
course of business), (iii) all reimbursement or payment obligations with respect
to letters of credit, surety bonds and other similar instruments, (iv) all
obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (v) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (vi) all monetary obligations under any
leasing or similar arrangement which, in connection with generally accepted
accounting principles, consistently applied for the periods covered thereby, is
classified as a capital lease, (vii) all indebtedness referred to in clauses
(i) through (vi) above secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any Person,
even though the Person which owns such assets or property has not assumed or
become liable for the payment of such indebtedness, and (viii) all Contingent
Obligations in respect of indebtedness or obligations of others of the kinds
referred to in clauses (i) through (vii) above.
          (h) “Interest Rate” means the Prime Rate as of the first (1st)
Business Day of each Interest Period plus two and one-half percent (2.5%).
          (i) “Net Proceeds” means, with respect to any Strategic Transaction,
an amount equal to: (A) the sum of cash payments and cash equivalents received
by the Company or any of its wholly-owned Subsidiaries from such Strategic
Transaction (including any cash or cash equivalents received by way of deferred
payment pursuant to, or by monetization of, a note receivable or otherwise, but
only as and when so received), minus (B) any reasonable direct out-of-pocket
actual and estimated professional fees and other costs or expenses incurred in
connection with such Strategic Transaction, including (1) income or gains taxes
paid or payable by the seller as a result of any gain recognized in connection
with such Strategic Transaction during the tax period the sale occurs (after
taking into account any available tax

- 15 -

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

 

credits or deductions and any tax-sharing arrangements) and (2) payment of the
outstanding principal amount of, premium or penalty, if any, and interest on
(x) any Indebtedness that is secured by a Lien on the stock or assets subject to
such Strategic Transaction or (y) in the case of a sale of a Subsidiary or the
Company’s interest in a Subsidiary, any Indebtedness owed by such Subsidiary,
which, in the case of each of clause (x) and (y), is required to be repaid under
the terms thereof as a result of such Strategic Transaction.
          (j) “Outstanding Amount” means the sum of (A) the portion of the
Principal to be redeemed or otherwise with respect to which this determination
is being made, (B) accrued and unpaid Interest with respect to such Principal
and (C) accrued and unpaid Late Charges with respect to such Principal and
Interest.
          (k) “Permitted Indebtedness” means (A) Indebtedness of the Company set
forth on Schedule 3(s) to the Securities Purchase Agreement, (B) Indebtedness
incurred by the Company in connection with installment commitments of the
Company to fund unrestricted research grants and pilot studies, substantially
consistent with the Company’s current practices over a specific period of time,
(C) Indebtedness incurred by the Company in connection with letters of credit
now or hereinafter provided by the Company in the ordinary course of its
business to unaffiliated third-party landlords as security deposits pursuant to
real property leases, (D) guarantees by the Company of any Indebtedness incurred
by a Subsidiary in connection with real property lease obligations with
unaffiliated third-party landlords which do not in an aggregate exceed $500,000,
(E) Indebtedness incurred by any individual Subsidiary in the form of a line of
credit with a nationally recognized commercial bank, which Indebtedness shall
not provide at any time for (1) a guarantee by, or any other recourse to, the
Company or any other Subsidiary and (2) the issuance of any equity or equity
equivalent securities, including without limitation any debt, preferred stock or
other instrument or security that is, at any time during its life and under any
circumstances, convertible into or exchangeable or exercisable for shares of
Common Stock or Common Stock Equivalents (as defined in the Securities Purchase
Agreement) of the Company to such bank in connection therewith, (F) unsecured
Indebtedness incurred by the Company that is made expressly subordinate in right
of payment to the Indebtedness evidenced by this Note, as reflected in a written
agreement acceptable to the Holder and approved by the Holder in writing, and
which Indebtedness does not provide at any time for (1) the payment, prepayment,
repayment, repurchase or defeasance, directly or indirectly, of any principal or
premium, if any, thereon until ninety-one (91) days after the Maturity Date or
later and (2) total interest and fees at a rate in excess of the Interest Rate
hereunder (the “Subordinated Indebtedness”), (G) financing of insurance
premiums, (H) Indebtedness secured by Permitted Liens, (I) extensions,
refinancings and renewals of any items of Permitted Indebtedness, provided that
the principal amount is not increased or the terms modified to impose more
burdensome terms upon the Company or its Subsidiary, as the case may be,
(J) Indebtedness evidenced by this Note and the Other Notes, (K) guarantees by
Company of Indebtedness of its Subsidiaries, up to an aggregate amount of US
$1,000,000.00 and (L) loans secured by ARS, which may provide for first-priority
Liens in favor of the grantor of such loans, provided that Holder shall retain a
second position Lien on the ARS.
          (l) “Permitted Liens” means (i) Liens set forth on Schedule 3(w) to
the Securities Purchase Agreement, (ii) any Lien for taxes not yet due or
delinquent or being

- 16 -

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

 

contested in good faith by appropriate proceedings for which adequate reserves
have been established in accordance with GAAP, (iii) any statutory Lien arising
in the ordinary course of business by operation of law with respect to a
liability that is not yet due or delinquent, (iv) any Lien created by operation
of law, such as materialmen’s liens, mechanics’ liens and other similar liens,
arising in the ordinary course of business with respect to a liability that is
not yet due or delinquent or that are being contested in good faith by
appropriate proceedings, (v) Liens securing the Company’s obligations under the
Notes, (vi) Liens (A) upon or in any equipment acquired or held by the Company
or any of its Subsidiaries to secure the purchase price of such equipment or
indebtedness incurred solely for the purpose of financing the acquisition or
lease of such equipment, or (B) existing on such equipment at the time of its
acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment,
(vii) Liens incurred in connection with the extension, renewal or refinancing of
the indebtedness secured by Liens of the type described in clauses (i) and
(vi) above, provided that any extension, renewal or replacement Lien shall be
limited to the property encumbered by the existing Lien and the principal amount
of the Indebtedness being extended, renewed or refinanced does not increase,
(viii) Liens securing the Company’s obligations under this Note and the Other
Notes; (ix) leases or subleases and licenses and sublicenses granted to others
in the ordinary course of the Company’s business, not interfering in any
material respect with the business of the Company and its Subsidiaries taken as
a whole, (x) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payments of custom duties in connection with the
importation of goods (xi) Liens arising from judgments, decrees or attachments
in circumstances not constituting an Event of Default under Section 3(a)(v) and
(xii) Liens securing Permitted Indebtedness.
          (m) “Person” means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization, any other entity and a government or any department or agency
thereof.
          (n) “Prime Rate” shall mean as of a particular date, the prime rate of
interest as published on that date in The Wall Street Journal (Eastern Edition),
and generally defined therein as “the base rate on corporate loans posted by at
least 75% of the nation’s 30 largest banks.” If The Wall Street Journal is not
published on a date for which the Prime Rate must be determined, the Prime Rate
shall be the prime rate published in The Wall Street Journal on the
nearest-preceding date on which The Wall Street Journal was published.
          (o) “Principal Market” means The NASDAQ Global Market.
          (p) “Redemption Notices” means, collectively, the Event of Default
Redemption Notices, the Strategic Transaction Redemption Notice, the Change of
Control Redemption Notices, the Company Optional Redemption Notices and the
Holder Optional Redemption Notices and, each of the foregoing, individually, a
Redemption Notice.
          (q) “Redemption Prices” means, collectively, the Event of Default
Redemption Price, the Change of Control Redemption Price, the Company Optional
Redemption Price, the Strategic Transaction Redemption Price and the Holder
Optional Redemption Price and, each of the foregoing, individually, a Redemption
Price.

- 17 -

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

 

          (r) “Required Holders” means the holders of Notes representing at
least a majority of the aggregate principal amount of the Notes then
outstanding.
          (s) “SEC” means the United States Securities and Exchange Commission.
          (t) “Securities Purchase Agreement” means that certain securities
purchase agreement dated January 17, 2007 by and among the Company and the
initial holders of the Notes pursuant to which the Company issued the Notes.
          (u) “Security Agreement” shall have the meaning ascribed to it in the
Securities Purchase Agreement.
          (v) “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.
          (w) “Voting Stock” of a Person means capital stock of such Person of
the class or classes pursuant to which the holders thereof have the general
voting power to elect, or the general power to appoint, at least a majority of
the board of directors, managers or trustees of such Person (irrespective of
whether or not at the time capital stock of any other class or classes shall
have or might have voting power by reason of the happening of any contingency).
     (25) DISCLOSURE. Upon receipt or delivery by the Company of any notice in
accordance with the terms of this Note, 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 shall indicate to the Holder contemporaneously with delivery of such
notice, and in the absence of any such indication, the Holder 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.
[Signature Page Follows]

- 18 -

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

 

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

            HYTHIAM, INC.
      By:           Name:           Title: