Exhibit 10.8

 

[FORM OF SECURED CONVERTIBLE NOTE]

 

[INCLUDE IF SECURITY IS A RESTRICTED SECURITY — NEITHER THE ISSUANCE AND SALE OF
THE SECURITIES REPRESENTED BY THIS NOTE NOR THE SECURITIES INTO WHICH THIS NOTE
ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS.

 

THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN
THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A
GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
(II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. THE HOLDER OF
THIS NOTE WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER
OF THIS NOTE OF THE RESALE RESTRICTIONS REFERRED TO IN THE FOREGOING SENTENCE.
THE INDENTURE GOVERNING THIS NOTE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO
REFUSE TO REGISTER THE TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING
RESTRICTION.

 

NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH
A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
NOTE AND THE SECURITIES INTO WHICH THIS NOTE IS CONVERTIBLE. [INCLUDE IF
SECURITY IS NOT A GLOBAL SECURITY — ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY
REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 18(a) HEREOF.
THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES
ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE
FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.]

 

[INCLUDE IF SECURITY IS A GLOBAL SECURITY — THIS NOTE IS A GLOBAL SECURITY
WITHIN THE MEANING OF THE INDENTURE REFERRED TO HEREIN AND IS REGISTERED IN THE
NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS NOTE MAY NOT BE EXCHANGED IN
WHOLE OR IN PART FOR A NOTE REGISTERED, AND NO TRANSFER OF THIS NOTE IN WHOLE OR
IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY
OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE
INDENTURE.

 

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF [THE
BANK OF NEW YORK (“BNY”), A NEW YORK BANKING CORPORATION,] [THE DEPOSITORY TRUST
COMPANY (“DTC”), A

 

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NEW YORK CORPORATION,] TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF
[THE BANK OF NEW YORK, AS INITIAL DEPOSITARY] [CEDE & CO.] OR IN SUCH OTHER NAME
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF [BNY] [DTC] (AND ANY PAYMENT
IS MADE TO [THE BANK OF NEW YORK] [CEDE & CO.] OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF [BNY] [DTC]), ANY TRANSFER, PLEDGE
OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL IN AS
MUCH AS THE REGISTERED OWNER HEREOF, [THE BANK OF NEW YORK, AS INITIAL
DEPOSITARY] [CEDE & CO.], HAS AN INTEREST HEREIN.]

 

THIS NOTE AND THE RIGHTS AND OBLIGATIONS EVIDENCED HEREBY, THE LIENS AND
SECURITY INTERESTS SECURING THE INDEBTEDNESS AND OTHER OBLIGATIONS INCURRED OR
ARISING UNDER OR EVIDENCED BY THIS NOTE AND THE RIGHTS AND OBLIGATIONS EVIDENCED
HEREBY WITH RESPECT TO SUCH LIENS ARE SUBORDINATE IN THE MANNER AND TO THE
EXTENT SET FORTH IN THAT CERTAIN AMENDED AND RESTATED SUBORDINATION AGREEMENT
(AS THE SAME MAY BE AMENDED OR OTHERWISE MODIFIED FROM TIME TO TIME PURSUANT TO
THE TERMS THEREOF, THE “SUBORDINATION AGREEMENT”), DATED AS OF JANUARY 14, 2005,
AMONG THE BANK OF NEW YORK, ACTING AS TRUSTEE (THE “TRUSTEE”) TO HOLDERS OF THE
“SECURITIES” (AS DEFINED IN THE INDENTURE, DATED AS OF JANUARY 14, 2005, AMONG
THE TRUSTEE AND THE WET SEAL, INC.), S.A.C. CAPITAL ASSOCIATES, LLC, A LIMITED
LIABILITY COMPANY ORGANIZED UNDER THE LAWS OF ANGUILLA (“SAC”), AND CERTAIN
OTHER HOLDERS OF INDEBTEDNESS IDENTIFIED ON THE SIGNATURE PAGES THERETO, THE WET
SEAL, INC., A DELAWARE CORPORATION, (THE “LEAD BORROWER”), AND FLEET RETAIL
GROUP, INC., ACTING AS AGENT, TO THE INDEBTEDNESS AND THE LIENS AND SECURITY
INTERESTS SECURING INDEBTEDNESS (INCLUDING INTEREST) OWED BY THE COMPANIES
PURSUANT TO THAT CERTAIN AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF
SEPTEMBER 22, 2004 (THE “FIRST LIEN CREDIT AGREEMENT”) AMONG THE LEAD BORROWER,
THE WET SEAL RETAIL, INC., A DELAWARE CORPORATION (“WET SEAL RETAIL”), WET SEAL
CATALOG, INC., A DELAWARE CORPORATION (“WET SEAL CATALOG” AND, COLLECTIVELY WITH
WET SEAL RETAIL AND THE LEAD BORROWER, THE “COMPANIES”), WET SEAL GC, INC., A
VIRGINIA CORPORATION (THE “FACILITY GUARANTOR”), AND FLEET RETAIL GROUP, INC.
(“AGENT”), BACK BAY CAPITAL FUNDING, LLC, AS TERM LENDER, THE LENDERS FROM TIME
TO TIME PARTY THERETO AND FLEET NATIONAL BANK, AS ISSUING LENDER, AND CERTAIN
GUARANTEES OF THE INDEBTEDNESS EVIDENCED THEREBY, AS SUCH FIRST LIEN CREDIT
AGREEMENT AND SUCH GUARANTEES HAVE BEEN AND HEREAFTER MAY BE AMENDED, RESTATED,
SUPPLEMENTED OR OTHERWISE MODIFIED FROM TIME TO TIME AS PERMITTED UNDER THE
SUBORDINATION AGREEMENT AND TO THE LIENS AND SECURITY INTERESTS SECURING
INDEBTEDNESS REFINANCING THE INDEBTEDNESS UNDER SUCH AGREEMENTS AS

 

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PERMITTED BY THE SUBORDINATION AGREEMENT; AND EACH HOLDER OF THIS NOTE, BY ITS
ACCEPTANCE HEREOF, IRREVOCABLY AGREES TO BE BOUND BY THE PROVISIONS OF THE
SUBORDINATION AGREEMENT APPLICABLE TO THE “SUBORDINATING CREDITORS” (AS SUCH
TERM IS DEFINED IN THE SUBORDINATION AGREEMENT), AS IF SUCH HOLDER WERE A
SUBORDINATING CREDITOR FOR ALL PURPOSES OF THE SUBORDINATION AGREEMENT.

 

THIS NOTE AND THE RIGHTS AND OBLIGATIONS EVIDENCED HEREBY, THE LIENS AND
SECURITY INTERESTS SECURING THE INDEBTEDNESS AND OTHER OBLIGATIONS INCURRED OR
ARISING UNDER OR EVIDENCED BY THIS NOTE AND THE RIGHTS AND OBLIGATIONS EVIDENCED
HEREBY WITH RESPECT TO SUCH LIENS ARE SUBORDINATE IN THE MANNER AND TO THE
EXTENT SET FORTH IN THAT CERTAIN BRIDGE SUBORDINATION AGREEMENT (AS THE SAME MAY
BE AMENDED OR OTHERWISE MODIFIED FROM TIME TO TIME PURSUANT TO THE TERMS
THEREOF, THE “BRIDGE SUBORDINATION AGREEMENT”), DATED AS OF JANUARY 14, 2005
AMONG THE BANK OF NEW YORK, ACTING AS TRUSTEE (THE “TRUSTEE”) AND COLLATERAL
AGENT (THE “COLLATERAL AGENT”) TO THE HOLDERS OF THE “SECURITIES” (AS DEFINED IN
THE INDENTURE, DATED AS OF JANUARY 14, 2005, AMONG THE TRUSTEE AND THE WET SEAL,
INC.), CERTAIN OTHER HOLDERS OF INDEBTEDNESS IDENTIFIED ON THE SIGNATURE PAGES
THERETO, THE WET SEAL, INC., A DELAWARE CORPORATION, (THE “LEAD BORROWER”), AND
S.A.C., ACTING AS AGENT, TO THE INDEBTEDNESS AND THE LIENS AND SECURITY
INTERESTS SECURING INDEBTEDNESS (INCLUDING INTEREST) OWED BY THE BORROWERS
PURSUANT TO THAT CERTAIN BRIDGE CREDIT AGREEMENT DATED AS OF NOVEMBER 9, 2004
(AS THE SAME MAY BE AMENDED OR OTHERWISE MODIFIED FROM TIME TO TIME PURSUANT TO
THE TERMS THEREOF, THE “BRIDGE CREDIT AGREEMENT”) AMONG THE LEAD BORROWER, THE
WET SEAL RETAIL, WET SEAL CATALOG, (COLLECTIVELY, WITH WET SEAL RETAIL AND THE
LEAD BORROWER, THE “BORROWERS”), WET SEAL GC, INC., A VIRGINIA CORPORATION (THE
“FACILITY GUARANTOR”), AND S.A.C. CAPITAL ASSOCIATES, L.L.C. (“AGENT”), AND THE
LENDERS FROM TIME TO TIME PARTY THERETO, AND CERTAIN GUARANTEES OF THE
INDEBTEDNESS EVIDENCED THEREBY, AS SUCH BRIDGE CREDIT AGREEMENT AND SUCH
GUARANTEES HAVE BEEN AND HEREAFTER MAY BE AMENDED, RESTATED, SUPPLEMENTED OR
OTHERWISE MODIFIED FROM TIME TO TIME AS PERMITTED UNDER THE BRIDGE SUBORDINATION
AGREEMENT AND TO THE LIENS AND SECURITY INTERESTS SECURING INDEBTEDNESS
REFINANCING THE INDEBTEDNESS UNDER SUCH AGREEMENTS AS PERMITTED BY THE BRIDGE
SUBORDINATION AGREEMENT; AND EACH HOLDER OF THIS NOTE, BY ITS ACCEPTANCE HEREOF,
IRREVOCABLY AGREES TO BE BOUND BY THE PROVISIONS OF THE BRIDGE SUBORDINATION
AGREEMENT APPLICABLE TO THE “SUBORDINATING CREDITORS” (AS SUCH TERM IS DEFINED
IN THE BRIDGE SUBORDINATION AGREEMENT), AS IF SUCH HOLDER WERE A SUBORDINATING
CREDITOR FOR ALL PURPOSES OF THE BRIDGE SUBORDINATION AGREEMENT.

 

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THE WET SEAL, INC.

 

SECURED CONVERTIBLE NOTE

 

CUSIP NO. [            ]1

 

Issuance Date: January     , 2005   Principal: U.S. $                    

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1 To be completed upon issuance to the Depositary.

 

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FOR VALUE RECEIVED, The Wet Seal, Inc., a Delaware corporation (the “Company”),
hereby promises to pay to the order of [                            ] or its
registered assigns (“Holder”) the amount set out above as the Principal (as
defined below) [INCLUDE IF NOTE IS A GLOBAL SECURITY—(which amount may from time
to time be increased or decreased by adjustments made on the records of the
Initial Depositary or the Trustee, as custodian for the Depositary, in
accordance with the rules and procedures of the Initial Depositary or the
Depositary, as applicable)] 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, conversion, redemption or otherwise (in each case in
accordance with the terms hereof). This Convertible Note (including all
Convertible Notes issued in exchange, transfer or replacement hereof, this
“Note”) is one of a duly authorized issue of Convertible Notes (collectively,
the “Notes” and such other Secured Convertible Notes, the “Other Notes”) issued
from time to time pursuant to the Indenture (as defined below). The terms of
this Note include those stated in the Indenture and all indentures supplemental
thereto, those made part of the Indenture by reference to the Trust Indenture
Act of 1939, as amended (“TIA”) and those set forth in this Note. This Note is
subject to all such terms and the Holder is referred to the Indenture and the
TIA for a statement of all such terms. Certain capitalized terms are defined in
Section 27.

 

(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, in accordance with the
terms of the Indenture. The “Maturity Date” shall be January 14, 2012, as may be
extended at the option of the Majority Holders (i) in the event that, and for so
long as, an Event of Default (as defined in Section 4(a)) shall have occurred
and be continuing or any event shall have occurred and be continuing which with
the passage of time and the failure to cure would result in an Event of Default
and (ii) through the date that is ten days after the consummation of a Change of
Control in the event that a Change of Control is publicly announced or a Change
of Control Notice (as defined in Section 5) is delivered prior to the Maturity
Date.

 

(2) INTEREST; INTEREST RATE. Interest on this Note shall commence accruing on
the Issuance Date and shall be computed on the basis of a 365-day year and
actual days elapsed and shall be payable in arrears on the last day of each
calendar year and on the Maturity Date during the period beginning on the
Issuance Date and ending on, and including, the Maturity Date (each, an
“Interest Date”) with the first Interest Date being December 31, 2005. If any
Interest Date is not a Business Day, Interest shall be paid on the next Business
Day immediately succeeding the applicable Interest Date. Interest shall be
payable on each Interest Date in cash; provided, however, all or any portion of
the Interest due on each Interest Date shall be capitalized on and as of such
Interest Date by adding it to the outstanding Principal on this Note
(“Capitalized Interest”) unless the Company delivers written notice to the
Trustee, no more than five (5) or less than two (2) Business Days prior to such
Interest Date, that it shall pay, and in fact does pay, all or such portion of
Interest due on such Interest Date in cash. 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

 

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in the preceding sentence shall cease to be effective as of the date of such
cure; provided that the Interest as calculated at such increased rate during the
continuance of such Event of Default shall continue to apply to the extent
relating to the days after the occurrence of such Event of Default through and
including the date of cure of such Event of Default.

 

(3) CONVERSION OF NOTES. This Note shall be convertible into shares of Class A
common stock of the Company, par value $.10 per share (the “Common Stock”), on
the terms and conditions set forth in this Section 3.

 

(a) Conversion Right. Subject to the provisions of Section 3(d), at any time or
times on or after the Issuance Date until the close of business on the Business
Day prior to the Maturity Date, the Holder shall be entitled to convert any
portion of the outstanding and unpaid Conversion Amount (as defined below) in
multiples of $1,000 principal amount into fully paid and nonassessable shares of
Common Stock in accordance with Section 3(c), at the Conversion Rate (as defined
below). The Company shall not issue any fraction of a share of Common Stock upon
any conversion. If the issuance would result in the issuance of a fraction of a
share of Common Stock, the Company shall round such fraction of a share of
Common Stock up to the nearest whole share, or, at the option of the Company,
the Company may pay cash to the Holder for the value of any fractional share,
based on the Closing Bid Price as of the applicable Conversion Date. The Company
shall pay any and all taxes that may be payable with respect to the issuance and
delivery of Common Stock upon conversion of any Conversion Amount; provided,
however, that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issue or delivery of shares
of Common Stock in a name other than that of the Holder and no such issue or
delivery to a Person other than the Holder shall be made unless and until the
Person requesting such issue and delivery has paid to the Company the amount of
any such tax or has established, to the satisfaction of the Company, that such
tax has been paid.

 

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

 

(i) “Conversion Amount” means the sum of (A) the portion of the Principal to be
converted, 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.

 

(ii) “Conversion Price” means, as of any Conversion Date (as defined below) or
other date of determination, $1.50, subject to adjustment as provided herein.

 

(c) Mechanics of Conversion.

 

(i) Optional Conversion. To convert any Conversion Amount into shares of Common
Stock on any date (a “Conversion Date”), the Holder shall (A) transmit by
facsimile (or otherwise deliver), to the Trustee, and the Trustee shall have
received, on or prior to 5:00 p.m., New York Time, on such date, a copy of an
executed notice of conversion in the form attached hereto as Exhibit I (the
“Conversion Notice”) and (B) if required by Section

 

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3(c)(iii), surrender this Note to the Trustee, as soon as practicable on or
following such date (or an indemnification undertaking with respect to this Note
in the case of its loss, theft or destruction). Notwithstanding the foregoing,
in the case this Note is a Global Security (as defined in the Indenture), a
beneficial owner of an interest in such security must complete, or cause to be
completed, (I) during such time as the Initial Depositary is the Holder of this
Note, a copy of the Conversion Notice (in the form attached hereto as Exhibit I)
and deliver a copy of such executed notice to the Initial Depositary or (II)
during such time the Depositary is the Holder of this Note, the appropriate
instruction form for conversion (such form, also for purposes of this Note, a
“Conversion Notice”) pursuant to the Depositary’s book-entry conversion program,
and deliver, or cause to be delivered, by book-entry delivery an interest in
such Global Security, all in accordance with the rules and procedures of the
Depositary. On or before the close of business on the second Business Day
following the date of receipt of a Conversion Notice (the “Share Delivery
Date”), the Company shall (X) provided the Company’s transfer agent is
participating in The Depository Trust Company’s (“DTC”) Fast Automated
Securities Transfer Program, cause its transfer agent to 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 (Y) if such transfer agent is not
participating in DTC’s Fast Automated Securities Transfer Program, execute, and
shall deliver, to the address as specified in the Conversion Notice, a
certificate, registered in the name of the holder or its designee, for the
number of shares of Common Stock to which the holder shall be entitled. If this
Note is required to be physically surrendered for conversion pursuant to the
terms of the Indenture and the outstanding Principal of this Note is greater
than the Principal portion of the Conversion Amount being converted, then the
Company shall execute, and shall cause the Trustee to authenticate and deliver,
at the Company’s expense, to the Holder a new Note (in accordance with the
provisions of the Indenture) representing the outstanding Principal not
converted. The Person or Persons entitled to receive the shares of Common Stock
issuable upon a conversion of this Note shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on the Conversion Date.

 

(ii) Company’s Failure to Timely Convert. If the Company shall (either directly
or through its transfer agent) fail to issue a certificate to the Holder or
credit the Holder’s balance account with DTC for the number of shares of Common
Stock to which the Holder is entitled upon conversion of any Conversion Amount
on or prior to the date which is five Business Days after the Conversion Date (a
“Conversion Failure”), then (A) the Company shall pay damages to the Holder for
each date of such Conversion Failure in an amount equal to 1.5% of the product
of (I) the sum of the number of shares of Common Stock not issued to the Holder
on or prior to the Share Delivery Date and to which the Holder is entitled, and
(II) the Closing Sale Price of the Common Stock on the Share Delivery Date and
(B) the Holder, upon written notice to the Company, may void its Conversion
Notice with respect to, and retain or have returned, as the case may be, any
portion of this Note that has not been converted pursuant to such Conversion
Notice; provided that the voiding of a Conversion Notice shall not affect the
Company’s obligations to make any payments which have accrued prior to the date
of such notice pursuant to this Section 3(c)(ii) or otherwise. In addition to
the foregoing, if within three (3) Trading Days after the Trustee’s receipt of
the facsimile copy of a Conversion Notice the Company shall fail to execute, and
shall fail to cause its transfer agent to deliver, a certificate to the Holder
or credit the Holder’s balance account with DTC for the number of shares of
Common Stock to which the Holder is entitled upon such Holder’s conversion of
any Conversion Amount,

 

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and if on or after such Trading Day a holder purchases (in an open market
transaction or otherwise) Common Stock to deliver in satisfaction of a sale by
the holder of Common Stock issuable upon such conversion that the holder
anticipated receiving from the Company (a “Buy-In”), then the Company shall,
within three 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 shares of
Common Stock so purchased (the “Buy-In Price”), at which point the Company’s
obligation to deliver such certificate (and to issue such Common Stock) shall
terminate, or (ii) promptly honor its obligation to issue 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 Bid
Price on the Conversion Date.

 

(iii) Book-Entry. [INCLUDE IF SECURITY IS A PHYSICAL SECURITY. Notwithstanding
anything to the contrary set forth herein, upon conversion of any portion of
this Note in accordance with the terms hereof, the Holder shall not be required
to physically surrender this Note to the Company unless such surrender is
required by the terms of the Indenture. Following any such conversion 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.] [INCLUDE IF SECURITY
IS A GLOBAL SECURITY. In the event of a deposit or withdrawal of an interest in
this Note, including an exchange, transfer, redemption or conversion of this
Note in part only, the Initial Depositary or the Trustee, as custodian of the
Depositary, shall make an adjustment on its records to reflect such deposit or
withdrawal in accordance with the rules and procedures of the Depositary.]

 

(iv) Pro Rata Conversion. In the event that the Trustee receives a Conversion
Notice from more than one holder of Notes for the same Conversion Date and the
Company can convert some, but not all, of such portions of the Notes submitted
for conversion, the Company, subject to Section 3(d), shall convert from each
holder of Notes electing to have Notes converted on such date a pro rata amount
(in such denominations and multiples thereof set forth in the Indenture) of such
holder’s portion of its Notes submitted for conversion based on the principal
amount of Notes submitted for conversion on such date by such holder relative to
the aggregate principal amount of all Notes submitted for conversion on such
date.

 

(d) Limitations on Conversions. The Company shall not effect any conversion of
this Note, and any holder shall not have the right to convert any portion of
this Note pursuant to Section 3(a), to the extent that after giving effect to
such conversion, such holder (together with its affiliates) would beneficially
own in excess of 9.99% (the “Conversion Limitation”) of the number of shares of
Common Stock outstanding immediately after giving effect to such conversion. For
purposes of the foregoing sentence, the number of shares of Common Stock
beneficially owned by the holder and its affiliates shall include the number of
shares of Common Stock issuable upon conversion of this Note with respect to
which the determination of such sentence is being made, but shall exclude the
number of shares of Common Stock which would be issuable upon (A) conversion of
the remaining, nonconverted portion of this Note beneficially owned by the
holder or any of its affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any warrants) subject to a limitation on
conversion or exercise

 

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analogous to the limitation contained herein beneficially owned by the holder or
any of its affiliates. Except as set forth in the preceding sentence, for
purposes of this Section 3(d), beneficial ownership shall be calculated in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended. For purposes of this Section 3(d), in determining the number of
outstanding shares of Common Stock, the holder may rely on the number of
outstanding shares of Common Stock as reflected in (x) the Company’s most recent
Form 10-K, 10-Q or Form 8-K, as the case may be (y) a more recent public
announcement by the Company or (z) any other notice by the Company or its
transfer agent setting forth the number of shares of Common Stock outstanding.
For any reason at any time, upon the written or oral request of the Holder, the
Company shall within one Business Day confirm orally and in writing to the
Holder the number of shares of Common Stock then outstanding. In any case, the
number of outstanding shares of Common Stock shall be determined after giving
effect to the conversion or exercise of securities of the Company, including
this Note, by the holder or its affiliates since the date as of which such
number of outstanding shares of Common Stock was reported. By written notice to
the Company, any holder may increase or decrease the Conversion Limitation to
any other percentage specified in such notice but such percentage shall not be
in excess of 9.99%; provided that (i) any such increase will not be effective
until the 61st day after such notice is delivered to the Company, and (ii) any
such increase or decrease will apply only to the holder sending such notice and
not to any other holder of Notes.

 

(4) RIGHTS UPON EVENT OF DEFAULT.

 

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

 

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

 

(ii) the suspension from trading or failure of the Common Stock to be listed on
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;

 

(iii) the Company’s (A) failure to cure a Conversion Failure by delivery of the
required number of shares of Common Stock within ten (10) Business Days after
the applicable Conversion Date or (B) notice, written or oral, to any Holder or
holder of the Notes, including by way of public announcement or through any of
its agents, at any time, of its

 

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intention not to comply with a request for conversion of any Notes into shares
of Common Stock that is tendered in accordance with the provisions of the Notes;

 

(iv) at any time following the tenth (10th) consecutive Business Day that a
holder’s Authorized Share Allocation is less than the number of shares of Common
Stock that the holder would be entitled to receive upon a conversion of the full
Conversion Amount of any Note (without regard to any limitations on conversion
set forth in Section 3(d) or otherwise);

 

(v) the Company’s failure to pay to the Holder any amount of Principal, Interest
(if not capitalized), Late Charges or other amounts when and as due under this
Note or any other Transaction Document (as defined in the Securities Purchase
Agreement) or any other agreement, document, certificate or other instrument
delivered in connection with the transactions contemplated hereby and thereby to
which the Holder is a party, except, in the case of a failure to pay Interest,
Late Charges and such other amounts (other than Principal) when and as due, in
which case only if such failure continues for a period of at least three (3)
Business Days;

 

(vi) (A) any of the Company or any of its Subsidiaries shall fail to make any
payment (whether of principal or interest and regardless of amount) in respect
of any Material Indebtedness when and as the same shall become due and payable
(after giving effect to the expiration of any grace or cure period set forth
therein) or (B) any event or condition occurs that results in any Material
Indebtedness becoming due prior to its scheduled maturity or that enables or
permits (after giving effect to the expiration of any grace or cure period set
forth therein) the holder or holders of any such Material Indebtedness or any
trustee or agent on its or their behalf to cause any such Material Indebtedness
to become due, or to require the prepayment, repurchase, redemption or
defeasance thereof, prior to its scheduled maturity;

 

(vii) 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;

 

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

 

(ix) a final judgment or judgments for the payment of money are rendered against
the Company or any of its Subsidiaries or any settlements requiring payment of
money by the Company or any of its Subsidiaries aggregating in excess of
$1,000,000 and, in the case of judgments, which judgments are not, within 60
days after the entry thereof, bonded, discharged or stayed pending appeal, or
are not discharged within 60 days after the expiration of such stay; provided,
however, that any judgment or settlement which is covered by insurance or

 

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an indemnity from a credit worthy party shall not be included in calculating the
$1,000,000 amount set forth above so long as the Company provides to the
Trustee, on behalf of the Holder, a written statement from such insurer or
indemnity provider (which written statement shall be reasonably satisfactory to
the Majority Holders) to the effect that such judgment or settlement is covered
by insurance or an indemnity and the Company will receive the proceeds of such
insurance or indemnity within 30 days of the issuance of such judgment or
execution of such settlement;

 

(x) any representation or warranty made by the Company in any Transaction
Document shall have been incorrect in a material way when made;

 

(xi) the Company breaches any covenant or other term or condition of any
Transaction Document (other than covenants, terms or conditions, the breach of
which constitutes an “Event of Default” under any other subsection of this
Section 4(a)), except, in the case of a breach of a covenant which is curable,
only if such breach continues for a period of at least fifteen (15) consecutive
days; or

 

(xii) any breach or failure in any respect to comply with Section 14 of this
Note.

 

(b) Redemption Right. Within 30 days of the Trustee’s receipt of the Officers’
Certificate (as defined in the Indenture) specified in Section 10.04 of the
Indenture stating that an Event of Default has occurred, the Trustee shall
deliver written notice of the occurrence of the Event of Default specified in
such Officers’ Certificate (an “Event of Default Notice”) to the Holder. At any
time after the earlier of (i) the Holder’s receipt of an Event of Default Notice
and (ii) the holders becoming aware of an Event of Default, the 25% Holders may
require the Company to redeem all or any portion of the Notes owned by the
holders voting for such redemption by delivering written notice thereof (the
“Event of Default Redemption Notice”) to the Company and the Trustee. The Notes
subject to redemption by the Company pursuant to this Section 4(b) shall be
redeemed by the Company at a price equal to the greater of (i) the product of
(x) the Conversion Amount to be redeemed and (y) the Redemption Premium and (ii)
the product of (A) the Conversion Rate with respect to such Conversion Amount in
effect at such time as the 25% Holders deliver an Event of Default Redemption
Notice and (B) the Closing Sale Price of the Common Stock on the date
immediately preceding such Event of Default (the “Event of Default Redemption
Price”). Redemptions required by this Section 4(b) shall be made in accordance
with the provisions of Section 11 and any applicable provisions of the
Indenture. Notwithstanding the foregoing, the Majority Holders may, in
accordance with Section 5.02(b) of the Indenture, rescind and annul any Event of
Default Redemption Notice delivered pursuant to this Section prior to the
applicable Event of Default Redemption Date (as defined in Section 11).

 

(5) RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.

 

(a) Assumption. The Company shall not enter into or be party to a Fundamental
Transaction unless (i) the Successor Entity assumes in writing all of the
obligations

 

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of the Company under this Note and, to the extent still in effect, the other
Transaction Documents, the Subordination Agreement and the Bridge Subordination
Agreement, in accordance with the provisions of this Section 5(a) pursuant to
written agreements in form and substance satisfactory to the Majority Holders
and approved by the Majority 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, (ii) the Successor Entity is a publicly traded
corporation whose common stock is quoted on or listed for trading on an Eligible
Market and (iii) the Company complies with Sections 8.01(c) – (e) of the
Indenture. Upon the consummation 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. 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 this Note at any time
after the consummation of the Fundamental Transaction, in lieu of the shares of
the Company’s Common Stock (or other securities, cash, assets or other property)
purchasable upon the conversion or redemption of the Notes prior to such
Fundamental Transaction, such shares of stock, securities, cash, assets or any
other property whatsoever (including warrants or other purchase or subscription
rights) which the Holder would have been entitled to receive upon the happening
of such Fundamental Transaction had this Note been converted immediately prior
to such Fundamental Transaction, as adjusted in accordance with the provisions
of this Note. 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 this Note.

 

(b) Redemption Right. No sooner than 15 days nor later than 10 days prior to the
consummation of a Change of Control, but not prior to the public announcement of
such Change of Control, the Company shall deliver written notice thereof to the
Trustee and the Holder, or shall cause the Trustee, at the expense of the
Company, to deliver such notice to the Holder as provided by Section 1.06 of the
Indenture (a “Change of Control Notice”). The Change of Control Notice shall
contain the information required by Section 11.03 of the Indenture. At any time
during the period beginning after the Holder’s receipt of a Change of Control
Notice and ending on the date of the consummation of such Change of Control (or,
in the event a Change of Control Notice is not delivered at least 10 days prior
to a Change of Control, at any time on or after the date which is 10 days prior
to a Change of Control and ending 10 days after the consummation of such Change
of Control), the Holder may require the Company to redeem all or any portion of
this Note by delivering written notice thereof (“Change of Control Redemption
Notice” and, collectively with any Event of Default Redemption Notice, the
“Redemption Notices” and individually, a “Redemption Notice”) to the Company,
which Change of Control Redemption Notice shall indicate the Conversion Amount
the Holder is electing to redeem. The portion of this Note subject to redemption
pursuant to this Section 5 shall be redeemed by the Company at a price equal to
the greater of (i) the product of (x) the Conversion Amount being redeemed and
(y) the quotient determined by dividing (A) the Closing

 

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Sale Price of the Common Stock on the Business Day on which the first public
announcement of such proposed Change of Control is made by (B) the Conversion
Price and (ii) 125% of the Conversion Amount being redeemed (the “Change of
Control Redemption Price”). Redemptions required by this Section 5 shall be made
in accordance with the provisions of Section 11 and Article XI of the Indenture
and shall have priority to payments to shareholders in connection with a Change
of Control.

 

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

 

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

 

(b) Other Corporate Events. In addition to and not in substitution for any other
rights hereunder, prior to the consummation of any Fundamental Transaction
pursuant to which holders of shares of Common Stock are entitled to receive
securities or other assets with respect to or in exchange for shares of Common
Stock (a “Corporate Event”), the Company shall make appropriate provision to
insure that the Holder will thereafter have the right to receive upon a
conversion of this Note, (i) in addition to the shares of Common Stock
receivable upon such conversion, such securities or other assets to which the
Holder would have been entitled with respect to such shares of Common Stock had
such shares of Common Stock been held by the Holder upon the consummation of
such Corporate Event (without taking into account any limitations or
restrictions on the convertibility of this Note) or (ii) in lieu of the shares
of Common Stock otherwise receivable upon such conversion, such securities or
other assets received by the holders of shares of Common Stock in connection
with the consummation of such Corporate Event in such amounts as the Holder
would have been entitled to receive had this Note initially been issued with
conversion rights for the form of such consideration (as opposed to shares of
Common Stock) at a conversion rate for such consideration commensurate with the
Conversion Rate. Provision made pursuant to the preceding sentence shall be in a
form and substance satisfactory to the Majority Holders. The provisions of this
Section shall apply similarly and equally to successive Corporate Events and
shall be applied without regard to any limitations on the conversion or
redemption of this Note.

 

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(7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES. The Conversion Price shall be
adjusted from time to time by the Company in accordance with Section 13.02 of
the Indenture.

 

(8) SECURITY. This Note and the Other Notes are secured to the extent and in the
manner set forth in the Security Documents (as defined in the Indenture) and
subject to the Subordination Agreement and the Bridge Subordination Agreement.

 

(9) 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.

 

(10) RESERVATION OF AUTHORIZED SHARES.

 

(a) Reservation. The Company initially shall reserve out of its authorized and
unissued Common Stock a number of shares of Common Stock for each of the Notes
equal to 130% of the Conversion Rate with respect to the Conversion Amount of
each such Note as of the Issuance Date. So long as any of the Notes 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 Notes, 130% of the number of shares
of Common Stock as shall from time to time be necessary to effect the conversion
of all of the Notes then outstanding; provided that at no time shall the number
of shares of Common Stock so reserved be less than the number of shares required
to be reserved of the previous sentence (without regard to any limitations on
conversions) (the “Required Reserve Amount”). The initial number of shares of
Common Stock reserved for conversions of the Notes and each increase in the
number of shares so reserved shall be allocated pro rata among the holders of
the Notes based on the principal amount of the Notes held by each holder at the
Closing (as defined in the Securities Purchase Agreement) or increase in the
number of reserved shares, as the case may be (the “Authorized Share
Allocation”). In the event that a holder shall sell or otherwise transfer any of
such holder’s Notes, each transferee shall be allocated a pro rata portion of
such holder’s Authorized Share Allocation. Any shares of Common Stock reserved
and allocated to any Person which ceases to hold any Notes shall be allocated to
the remaining holders of Notes, pro rata based on the principal amount of the
Notes then held by such holders.

 

(b) Insufficient Authorized Shares. If at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and
unreserved shares of Common Stock to satisfy its obligation to reserve for
issuance upon conversion of the Notes at least a number of shares of Common
Stock equal to the Required Reserve Amount (an “Authorized Share Failure”), then
the Company shall immediately take all action necessary to increase the
Company’s authorized shares of Common Stock to an amount sufficient to allow the
Company to reserve the Required Reserve Amount for the Notes then outstanding.
Without limiting the generality of the foregoing sentence, as soon as
practicable after the date of the occurrence of an Authorized Share Failure, but
in no event later than 60 days after the

 

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occurrence of such Authorized Share Failure, the Company shall hold a meeting of
its shareholders for the approval of an increase in the number of authorized
shares of Common Stock. In connection with such meeting, the Company shall
provide each shareholder with a proxy statement and shall use its best efforts
to solicit its shareholders’ approval of such increase in authorized shares of
Common Stock and to cause its board of directors to recommend to the
shareholders that they approve such proposal.

 

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(11) HOLDER’S REDEMPTIONS. The Company shall deliver the applicable Event of
Default Redemption Price to the Holder within five Business Days after the
Company’s receipt of the Holder’s Event of Default Redemption Notice (the “Event
of Default Redemption Date”) in accordance with any applicable terms of the
Indenture. If the Holder has submitted a Change of Control Redemption Notice in
accordance with Section 5(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 Business Days after the Company’s receipt
of such notice otherwise and in accordance with any applicable terms of the
Indenture. In the event of a redemption of less than all of the Conversion
Amount of this Note, the Company shall execute, and shall cause the Trustee to
authenticate and deliver, to the Holder a new Note (in accordance with the terms
of the Indenture) 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 Conversion 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 Conversion Amount, (y) the Company shall immediately return this
Note, or shall execute, and shall cause the Trustee to authenticate and deliver,
a new Note (in accordance with the terms of the Indenture) to the Holder
representing such Conversion Amount and (z) the Conversion Price of this Note or
such new Notes shall be adjusted to the lesser of (A) the Conversion Price as in
effect on the date on which the Redemption Notice is voided and (B) the lowest
Closing Bid Price during the period beginning on and including the date on which
the Redemption Notice is delivered to the Company and ending on and including
the date on which the Redemption Notice is voided. The Holder’s delivery of a
notice voiding a Redemption Notice and exercise of its rights following such
notice shall not affect the Company’s obligations to make any payments of Late
Charges which have accrued prior to the date of such notice with respect to the
Conversion Amount subject to such notice.

 

(12) RESTRICTION ON REDEMPTION AND CASH DIVIDENDS. Until all of the Notes have
been converted, 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 Majority Holders.

 

(13) VOTING RIGHTS. The Holder shall have no voting rights as the holder of this
Note, except as required by law, including but not limited to the General
Corporate Law of the State of Delaware, and as expressly provided in this Note
and in the Indenture.

 

(14) COVENANTS.

 

(a) Rank. All payments due under this Note (a) shall rank pari passu with all
Other Notes, (b) shall rank subordinate to the “Senior Debt” as defined in the
Subordination Agreement and the “Senior Debt” as defined in the Bridge
Subordination Agreement, in accordance with and subject to the terms of the
Subordination Agreement and the

 

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Bridge Subordination Agreement, respectively and (c) shall be senior to all
other Indebtedness (as defined in the Securities Purchase Agreement) of the
Company and its Subsidiaries.

 

(b) Incurrence of Indebtedness. So long as this Note is outstanding, the Company
shall not, and the Company shall not permit any of its Subsidiaries to, directly
or indirectly, incur or guarantee, assume or suffer to exist any Indebtedness,
other than (i) the Indebtedness evidenced by this Note and the Other Notes and
(ii) Permitted Indebtedness. The Company shall not, and shall not permit any
Subsidiary to, incur, create, issue, assume or guarantee any Indebtedness that
is contractually subordinate in right of payment to any other Indebtedness of
the Company other than the Existing Senior Indebtedness unless such Indebtedness
is also contractually subordinated in right of payment to the Notes on
substantially similar terms. No Guarantor will incur, create, issue, assume or
guarantee any Indebtedness that is contractually subordinate in right of payment
to any other Indebtedness of such Guarantor other than Existing Senior
Indebtedness unless such Indebtedness is also contractually subordinated in
right of payment to such Guarantor’s Guarantee on substantially similar terms.
For purposes of the foregoing, no Indebtedness shall be deemed to be
subordinated in right of payment to any other Indebtedness of the Company or any
Guarantor, as applicable, solely by virtue of being unsecured or by virtue of
the fact that the holders of any secured Indebtedness have entered into
intercreditor agreements giving one or more of such holders priority over the
other holders in the collateral held by them.

 

(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 (other than the Existing Senior 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.

 

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

 

(16) CHANGES OR AMENDMENTS TO THIS NOTE. This Note shall only be changed or
amended in accordance with Article IX of the Indenture.

 

(17) TRANSFER. This Note may be offered, sold, assigned or transferred by the
Holder without the consent of the Company, subject only to the provisions of
Section 2(f) of the Securities Purchase Agreement and the provisions of the
Indenture.

 

(18) REISSUANCE OF THIS NOTE.

 

(a) Transfer. If this Note is to be transferred, such transfer shall be made in
accordance with the terms and conditions of the Indenture. The Holder and any
assignee, by acceptance of this Note, acknowledge and agree that following
conversion or redemption of any portion of this Note, the outstanding Principal
represented by this Note may be less than the Principal stated on the face of
this Note.

 

(b) Lost, Stolen or Mutilated Note. Upon loss, theft, destruction or mutilation
of this Note, a new Note shall be delivered in accordance with the terms and
conditions of the Indenture.

 

(c) Note Exchangeable for Different Denominations. This Note is exchangeable,
upon the surrender by the Holder (in accordance with the terms of the
Indenture), for a new Note or Notes, issued in the denominations and multiples
thereof set forth in the Indenture, representing 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. The issuance of any new Notes shall be made in
accordance with the terms and conditions of the Indenture.

 

(19) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE
RELIEF. Subject to the terms of the Indenture or the remedies provided in this
Note shall be cumulative and in addition to all other remedies available under
this Note, the Indenture and 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, conversion
and the like (and the computation thereof) shall be the amounts to be received
by the Holder and shall not, except as provided in the Subordination Agreement,
the Bridge Subordination Agreement or otherwise 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

 

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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.

 

(20) 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.

 

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

 

(22) 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.

 

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(23) 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 the
terms of the Indenture.

 

(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 accordance with the
terms of the Indenture. Any amount of Principal or other amounts due under the
Transaction Documents, other than Interest and other amounts for which a late
charge or penalty is otherwise provided in the relevant Transaction Document in
respect thereof, 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 18% per annum from the date such amount was due until the
same is paid in full (“Late Charge”).

 

(24) CANCELLATION. This Note shall be cancelled in accordance with the terms and
conditions of the Indenture.

 

(25) 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, the
Indenture and the Securities Purchase Agreement.

 

(26) GOVERNING LAW. All questions concerning the construction, validity,
enforcement and interpretation 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.

 

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

 

(a) “Bloomberg” means Bloomberg Financial Markets.

 

(b) “Bridge Subordination Agreement” means the Subordination Agreement, dated as
of January 14, 2005 (as amended, modified, supplemented or restated and in
effect from time to time), entered into between S.A.C. Capital Associates, LLC,
as agent on behalf of itself and the other Lenders (as defined therein), the
Lenders, the Trustee, the Collateral Agent, and the Company.

 

(c) “Business Day” means any day other than Saturday, Sunday or other day on
which commercial banks in The City of New York are authorized or required by law
to remain closed.

 

(d) “Change of Control” means any Fundamental Transaction other than (A) a
Fundamental Transaction in which holders of the Company’s voting power
immediately prior to the Fundamental Transaction continue after the Fundamental
Transaction to hold publicly traded securities and, directly or indirectly, the
voting power of the surviving entity or

 

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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.

 

(e) “Closing Bid Price” and “Closing Sale Price” means, for any security as of
any date, the last closing bid price and last closing trade price, respectively,
for such security on the Principal Market, as reported by Bloomberg, or, if the
Principal Market begins to operate on an extended hours basis and does not
designate the closing bid price or the closing trade price, as the case may be,
then the last bid price or last trade price, respectively, of such security
prior to 4:00p.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, then 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
determined by the Company or the Board of Directors in good faith. All such
determinations to be appropriately adjusted for any stock dividend, stock split,
stock combination or other similar transaction during the applicable calculation
period.

 

(f) “Closing Date” shall have the meaning set forth in the Securities Purchase
Agreement, which date is the date the Company initially issued Notes pursuant to
the terms of the Securities Purchase Agreement.

 

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

 

(h) “Depositary” shall have the meaning specified in the Indenture.

 

(i) “Eligible Market” means the Principal Market, The New York Stock Exchange,
Inc., the American Stock Exchange or The Nasdaq SmallCap Market.

 

(j) “Existing Senior Indebtedness” means the Indebtedness of the Company and its
Subsidiaries at any time outstanding under the (i) Amended and Restated Credit
Agreement (as amended, modified, supplemented or restated and in effect from
time to time, the “Senior Credit Agreement”), dated as of September 22, 2004,
among the Company, certain affiliates of the Company (together with the Company,
the “Borrowers”), Wet Seal GC, Inc. (the “Guarantor”), Fleet Retail Group, Inc.,
Fleet National Bank (together with Fleet Retail Group, Inc., the “Revolving
Credit Lenders”) and Back Bay Capital Funding LLC, including any refinancing or
replacement thereof (ii) the Credit Agreement (as amended, modified,
supplemented or restated and in effect from time to time, the “Bridge Credit
Agreement”),

 

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dated as of November 9, 2004, among S.A.C. Capital Associates, LLC, as
administrative agent and collateral agent, the Lenders from time to time party
thereto and the Company, The Wet Seal Retail, Inc., and Wet Seal Catalog, Inc.,
as borrowers, and Wet Seal GC, Inc., as facility guarantor.

 

(k) “Fundamental Transaction” means that 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 to make a purchase, tender or exchange offer that
is accepted by the holders of more than the 50% of the outstanding shares of
Common Stock (not including any shares of 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), 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 Common Stock or a percentage of the
outstanding shares of Class B Common Stock representing voting control over the
Company (not including any shares of 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 stock purchase agreement or other business
combination), (v) changed the members constituting its Board of Directors such
that the individuals who constituted the Board of Directors on the Closing Date
or other governing body of the Company (together with any new directors whose
election to such Board of Directors or whose nomination for election by the
stockholders of the Company was approved by a vote of 662/3% of the directors
then still in office who were either directors on the Closing Date or whose
election or nomination for election was previously so approved), cease for any
reason to constitute a majority of such Board of Directors then in office, or
(vi) reorganize, recapitalize or reclassify its Common Stock.

 

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

 

(m) “Guarantee” shall have the meaning specified in the Indenture.

 

(n) “Guarantor” shall have the meaning specified in the Indenture.

 

(o) “Hedging Agreement” means any interest rate protection agreement, interest
rate swap agreement, interest rate cap agreement, interest rate collar
agreement, foreign currency exchange agreement, commodity price protection
agreement, or other interest or currency exchange rate or commodity price
hedging arrangement designed to hedge against fluctuations in interest rates or
foreign exchange rates.

 

(p) “holder” means a Person who is an owner of beneficial interests in any
Global Security.

 

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(q) “Indenture” means the Indenture dated as of January 14, 2005 between the
Company and The Bank of New York, as Trustee and Collateral Agent, under which
the Notes are issued and outstanding.

 

(r) “Initial Depositary” shall have the meaning specified in the Indenture.

 

(s) “Interest Rate” means 3.76%, subject to adjustment pursuant to Section 2.

 

(t) “Majority Holders” means the holders of a majority in aggregate principal
amount of the Notes then outstanding.

 

(u) “Material Indebtedness” means Indebtedness (other than this Note and the
Other Notes, if any) of the Company or any one or more of its Subsidiaries in an
aggregate principal amount exceeding $5,000,000. For purposes of determining the
amount of Material Indebtedness at any time, the “principal amount” of the
obligations in respect of any Hedging Agreement at such time shall be the
maximum aggregate amount that the Company and/or one or more of its Subsidiaries
would be required to pay if such Hedging Agreement were terminated at that time.

 

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

 

(w) “Parent Entity” of a Person means an entity that, directly or indirectly,
controls the applicable Person and whose common stock or equivalent equity
security is 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.

 

(x) “Permitted Indebtedness” means the Existing Senior Indebtedness and any
other Indebtedness expressly permitted under the Senior Credit Agreement and the
Bridge Credit Agreement.

 

(y) “Permitted Liens” means any “Permitted Encumbrance” under the Senior Credit
Agreement the Liens in favor of Fleet Retail Group, Inc., as agent under the
Senior Credit Agreement (or any successor agent appointed thereunder) and the
Liens under the Bridge Credit Agreement.

 

(z) “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.

 

(aa) “Principal” means the Principal Amount as set forth on the face of this
Note as such amount may be reduced by any conversions, redemptions or otherwise
pursuant hereto; provided, however, that with respect to any Principal Amount of
this Note accelerated or redeemed pursuant to the Indenture, the Principal
Amount shall also include the amount of any Capitalized Interest thereon. For
the avoidance of doubt, any Capitalized Interest relating to any

 

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Principal Amount that is converted or paid at Stated Maturity pursuant to the
Indenture shall be extinguished as of the date of such conversion or payment.

 

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

 

(cc) “Purchasers” shall have the meaning specified in the Indenture.

 

(dd) “Redemption Premium” means (i) in the case of the Events of Default
described in Section 4(a)(i) - (vii) and (x) - (xii), 125% or (ii) in the case
of the Events of Default described in Section 4(a)(viii) and (ix), 100%.

 

(ee) “Registration Rights Agreement” means the Amended and Restated Registration
Rights Agreement, dated as of December 13, 2004, by and among the Company and
certain other parties thereto relating to, among other things, the registration
of the resale of the Common Stock issuable upon conversion of the Notes and
exercise of the Warrants, as the same may be amended or modified from time to
time in accordance with the terms thereof.

 

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

 

(gg) “Securities Purchase Agreement” means the Amended and Restated Securities
Purchase Agreement, dated as of December 13, 2004, by and among the Company and
certain other parties thereto pursuant to which the Company issued the Notes, as
the same may be amended or modified from time to time in accordance with the
terms thereof.

 

(hh) “Subordination Agreement” means that certain Amended and Restated
Subordination Agreement (as the same may be amended or otherwise modified from
time to time pursuant to the terms thereof), dated as of January 14, 2005, among
the Purchasers, the Trustee, the Collateral Agent, the Company and Fleet Retail
Group, Inc.

 

(ii) “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 stock or equivalent equity security
is quoted or listed for trading on an Eligible Market, Successor Entity shall
mean such Person’s Parent Entity.

 

(jj) “25% Holders” means the holders of at least 25% in aggregate principal
amount of the Notes then outstanding.

 

(kk) “Trading Day” means any day on which the Common Stock are 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 are then traded; provided that
“Trading Day” shall not include any day on which the Common Stock are scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock are 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 4:00p.m., New York Time).

 

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(ll) “Trustee” means the Trustee or such other office or agency designated by
the Company pursuant to the terms of the Indenture governing the Notes with
notice provided to the Holders where Securities may be presented for conversion.

 

(mm) “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.

 

[Signature Page Follows]

 

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

 

THE WET SEAL, INC.

By:        

Name:

   

Title:

 

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                                , as Trustee, certifies that this is one of the
Securities referred to in the within-mentioned Indenture.

 

Date:

     

                                         , as Trustee

           

By:

                   

Authorized Signatory

 

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EXHIBIT I

 

THE WET SEAL, INC.

CONVERSION NOTICE

 

Reference is made to the Convertible Note (the “Note”) issued to [The Bank of
New York as Initial Depositary]2 [the undersigned]3 by The Wet Seal, Inc. (the
“Company”). In accordance with and pursuant to the Indenture, the undersigned
[as a holder of a beneficial interest in the Note]4 hereby elects to convert the
Conversion Amount (as defined in the Note) of the Note indicated below into
shares of Class A Common Stock, par value $.10 per share (the “Common Stock”),
as of the date specified below.

 

Date of Conversion: 

   

Aggregate Conversion Amount to be converted:     

 

Please confirm the following information:

 

Conversion Price:     

Number of shares of Common Stock to be issued:    

 

Notwithstanding anything to the contrary contained herein, this Conversion
Notice shall constitute a representation by the holder submitting this
Conversion Notice that, after giving effect to the conversion provided for in
this Conversion Notice, such holder (together with its affiliates) will not have
beneficial ownership (together with the beneficial ownership of such Person’s
affiliates) of a number of shares of Common Stock which exceeds the Conversion
Limitation.

 

Please issue the Common Stock into which the Conversion Amount specified above
is being converted in the following name and to the following address:

 

Issue to:           

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2 Include for Global Security registered to The Bank of New York.

 

3 Include for Physical Securities.

 

4 Include for Global Security registered to The Bank of New York.

 

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Facsimile Number:      

Authorization:      

By:      

Title:      

Dated:      

Account Number:       (if electronic book entry transfer)

Transaction Code Number:       (if electronic book entry transfer)