EXHIBIT 10.2

 

FORM OF SENIOR SUBORDINATED CONVERTIBLE NOTE

 

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

 

MAXWELL TECHNOLOGIES, INC.

 

SENIOR SUBORDINATED CONVERTIBLE NOTE

 

Issuance Date: December 20, 2005

   Principal: U.S. $ 25,000,000.00

 

FOR VALUE RECEIVED, Maxwell Technologies, Inc., a Delaware corporation (the
“Company”), hereby promises to pay to the order of CASTLERIGG MASTER INVESTMENTS
LTD. or registered assigns (“Holder”) the amount set out above as the Principal
(as reduced pursuant to the terms hereof pursuant to redemption, conversion or
otherwise, the “Principal”) when due, whether upon the Maturity Date (as defined
below), on any Installment Date with respect to the Installment Amount due on
such Installment Date (each, as defined herein), 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 equal to the sum of (i) the
Federal Funds Rate and (ii) 1.125% per annum (the “Interest Rate”), from the
date set out above as the Issuance Date (the “Issuance Date”) until the same
becomes due and payable, whether upon an Interest Date (as defined below), any
Installment Date or, the Maturity Date, acceleration, conversion, redemption or
otherwise (in each case in accordance with the terms hereof). This Senior
Subordinated Convertible Note (including all Senior Subordinated Convertible
Notes issued in exchange, transfer or replacement hereof, this “Note”) is one of
an issue of Senior Subordinated Convertible Notes issued pursuant to the
Securities Purchase Agreement (as defined below) on the Closing Date
(collectively, the “Notes” and such other

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Senior Subordinated Convertible Notes, the “Other Notes”). Certain capitalized
terms used herein are defined in Section 29.

 

(1) PAYMENTS OF PRINCIPAL. On each Installment Date, the Company shall pay to
the Holder an amount equal to the Installment Amount due on such Installment
Date in accordance with Section 8. The “Maturity Date” shall be December 20,
2009, as may be extended at the option of the Holder (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, (ii) through the date that is ten (10) 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(b)) is
delivered prior to the Maturity Date and (iii) in accordance with Section 8(d).

 

(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 for each Payment Quarter on
the first day of the succeeding Payment Quarter 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 April 1, 2006. Interest
shall be payable on each Interest Date, to the record holder of this Note on the
applicable Interest Date, and to the extent that any Principal amount of this
Note is converted prior to such Interest Date, accrued and unpaid Interest with
respect to such converted Principal amount and accrued and unpaid Late Charges
with respect to such Principal and Interest shall be paid through the Conversion
Date (as defined below) on the next succeeding Interest Date to the record
holder of this Note on the applicable Conversion Date, in cash (“Cash Interest”)
or, at the option of the Company, in shares of Common Stock (“Interest Shares”)
or a combination thereof, provided that the Interest which accrued during any
period may be payable in Interest Shares if, and only if, the Company delivers
written notice (each, an “Interest Election Notice”) of such election to each
holder of the Notes on or prior to the sixth (6th) Trading Day prior to the
Interest Date (each, an “Interest Notice Due Date”). Each Interest Election
Notice must specify the amount of Interest that shall be paid as Cash Interest,
if any, and the amount of Interest that shall be paid in Interest Shares.
Interest to be paid on an Interest Date in Interest Shares shall be paid in a
number of fully paid and nonassessable shares (rounded to the nearest whole
share in accordance with Section 3(a)) of Common Stock equal to the quotient of
(a) the amount of Interest payable on such Interest Date less any Cash Interest
paid divided by (b) the Interest Conversion Price in effect on the applicable
Interest Date. If any Interest Shares are to be paid on an Interest Date, then
the Company shall (X) provided that the Company’s transfer agent (the “Transfer
Agent”) is participating in the Depository Trust Company (“DTC”) Fast Automated
Securities Transfer Program and such action is not prohibited by applicable law
or regulation or any applicable policy of DTC, credit such aggregate number of
Interest Shares 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 the foregoing shall not apply, issue and deliver on
the applicable Interest Date, to the address set forth in the register
maintained by the Company for such purpose pursuant to the Securities Purchase
Agreement or to such address as specified by the Holder in writing to the
Company at least three Business Days prior to the applicable Interest Date, a
certificate, registered in the name of the Holder or its designee, for the
number of Interest Shares to which

 

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the Holder shall be entitled. Notwithstanding the foregoing, the Company shall
not be entitled to pay Interest in Interest Shares and shall be required to pay
such Interest in cash as Cash Interest on the applicable Interest Date if,
unless consented to in writing by the Holder, during the period commencing on
the applicable Interest Notice Due Date through the applicable Interest Date the
Equity Conditions have not been satisfied. Prior to the payment of Interest on
an Interest Date, Interest on this Note shall accrue at the Interest Rate. Upon
the occurrence and during the continuance of an Event of Default, the Interest
Rate shall be increased to ten percent (10%). 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 and unpaid 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. The Company shall pay any
and all transfer, stamp and similar taxes that may be payable with respect to
the issuance and delivery of Interest Shares; provided that the Company shall
not be required to pay any tax that may be payable in respect of any issuance of
Interest Shares to any Person other than the Holder.

 

(3) CONVERSION OF NOTES. This Note shall be convertible into shares of the
Company’s common stock, par value $0.10 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, the Holder shall be entitled to convert any
portion of the outstanding and unpaid Conversion Amount (as defined below) into
fully paid and nonassessable shares of Common Stock in accordance with
Section 3(c), at the Conversion Rate (as defined below). The Company shall not
issue any fraction of a share of Common Stock upon any conversion. If the
issuance would result in the issuance of a fraction of a share of Common Stock,
the Company shall round such fraction of a share of Common Stock up to the
nearest whole share. The Company shall pay any and all transfer, stamp and
similar taxes that may be payable with respect to the issuance and delivery of
Common Stock upon conversion of any Conversion Amount.

 

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

 

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

 

(ii) “Conversion Price” means, as of any Conversion Date (as defined below) or
other date of determination, $19.00, 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

 

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by facsimile (or otherwise deliver), for receipt on or prior to 11:59 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”) to the Company and (B) if
required by Section 3(c)(iii), surrender this Note to a common carrier for
delivery to the Company as soon as practicable on or following such date (or an
indemnification undertaking with respect to this Note in the case of its loss,
theft or destruction). On or before the second (2nd) Business Day following the
date of receipt of a Conversion Notice, the Company shall transmit by facsimile
a confirmation of receipt of such Conversion Notice to the Holder and the
Transfer Agent. On or before the third Business Day following the date of
receipt of a Conversion Notice (the “Share Delivery Date”), the Company shall
(X) provided that the Transfer Agent is participating in the DTC Fast Automated
Securities Transfer Program, credit such aggregate number of shares of Common
Stock to which the Holder shall be entitled to the Holder’s or its designee’s
balance account with DTC through its Deposit Withdrawal Agent Commission system
or (Y) if the Transfer Agent is not participating in the DTC Fast Automated
Securities Transfer Program, issue and deliver to the address as specified in
the Conversion Notice, a certificate, registered in the name of the Holder or
its designee, for the number of shares of Common Stock to which the Holder shall
be entitled. If this Note is physically surrendered for conversion as required
by Section 3(c)(iii) and the outstanding Principal of this Note is greater than
the Principal portion of the Conversion Amount being converted, then the Company
shall as soon as practicable and in no event later than five (5) Business Days
after receipt of this Note and at its own expense, issue and deliver to the
holder a new Note (in accordance with Section 19(d)) representing the
outstanding Principal not converted. Subject to compliance with relevant
transfer restrictions, 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. In the event of a partial conversion of this Note pursuant
hereto, the principal amount converted shall be deducted from the Installment
Amounts relating to the Installment Dates as set forth in the Conversion Notice.

 

(ii) Company’s Failure to Timely Convert. If within three (3) Trading Days after
the Company’s receipt of the facsimile copy of a Conversion Notice the Company
shall fail to issue and deliver a certificate to 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 (a “Conversion Failure”), and if on or after such Trading Day the 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 (3) Business Days after the Holder’s
request and in the Holder’s discretion and after delivery by such Holder to the
Company of evidence reasonably satisfactory to the Company and not unreasonably
burdensome to the Holder of such purchase and sale by such Holder, either
(i) pay cash to the Holder in an amount equal to the Holder’s total purchase
price (including brokerage commissions, if any) for the shares of Common Stock
so purchased (the “Buy-In Price”), at which point the Company’s obligation to
deliver such certificate (and to issue such Common Stock) shall terminate, or
(ii) promptly honor its obligation to deliver to the Holder a certificate or
certificates representing such Common Stock and pay cash to the Holder in an
amount equal to the excess (if any) of the Buy-In Price over the product of
(A) such number of shares of Common Stock, times (B) the Closing Bid Price on
the Conversion Date.

 

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(iii) Book-Entry. Notwithstanding anything to the contrary set forth herein,
upon conversion of any portion of this Note in accordance with the terms hereof,
the Holder shall not be required to physically surrender this Note to the
Company unless (A) the full Conversion Amount represented by this Note is being
converted or (B) the Holder has provided the Company with prior written notice
(which notice may be included in a Conversion Notice) requesting reissuance of
this Note upon physical surrender of this Note. The Holder and the Company shall
maintain records showing the Principal, Interest and Late Charges converted and
the dates of such conversions or shall use such other reasonably satisfactory
method so as not to require physical surrender of this Note upon conversion.
Notwithstanding anything in this Note to the contrary, the Company shall be
entitled to treat the registered holder of this Note as such appears in its
records, as the owner of this Note for all purposes; provided that such records
are kept current using a reasonably satisfactory and customary method intended
for such purpose.

 

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

 

(d) Limitations on Conversions.

 

(i) Beneficial Ownership. The Company shall not effect any conversion of this
Note, and the Holder of this Note shall not have the right to convert any
portion of this Note pursuant to Section 3(a), to the extent that after giving
effect to such conversion, the Holder (together with the Holder’s affiliates)
would beneficially own in excess of 4.99% (the “Maximum Percentage”) of the
number of shares of Common Stock outstanding immediately after giving effect to
such conversion. For purposes of the foregoing sentence, the number of shares of
Common Stock beneficially owned by the Holder and its affiliates shall include
the number of shares of Common Stock issuable upon conversion of this Note with
respect to which the determination of such sentence is being made, but shall
exclude the number of shares of Common Stock which would be issuable upon
(A) conversion of the remaining, nonconverted portion of this Note beneficially
owned by the Holder or any of its affiliates and (B) exercise or conversion of
the unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any Other Notes or warrants) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its affiliates. Except as set
forth in the preceding sentence, for purposes of this Section 3(d)(i),
beneficial ownership shall be calculated in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended (the “1934 Act”). For purposes of
this Section 3(d)(i), in determining the number of outstanding shares of Common
Stock, the Holder may rely on the number of outstanding shares of Common Stock
as reflected in (x) the Company’s most recent Form 10-Q or Form 8-K, as the case
may be (y) a more recent public announcement by

 

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the Company or (z) any other notice by the Company or the Transfer Agent setting
forth the number of shares of Common Stock 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. For purposes hereof, the
Company may rely on the representations of the Buyer set forth on the applicable
Conversion Notices. By written notice to the Company, the Holder may increase or
decrease the Maximum Percentage to any other percentage not in excess of 9.99%
specified in such notice; provided that (i) any such increase will not be
effective until the sixty-first (61st) day after such notice is delivered to the
Company, and (ii) any such increase or decrease will apply only to the Holder
and not to any other holder of Notes.

 

(ii) Principal Market Regulation. At all times, irrespective of whether the
Company is listed on the Principal Market, the Company shall not be obligated to
issue any shares of Common Stock upon conversion of this Note if the issuance of
such shares of Common Stock would exceed the aggregate number of shares of
Common Stock which the Company may issue upon conversion or exercise or
otherwise, as applicable, of the Notes and Warrants without breaching the rules
or regulations of the Principal Market as if the Company were regulated by such
rules or regulations (the “Exchange Cap”), except that such limitation shall not
apply in the event that the Company (A) obtains the approval of its stockholders
as required by the applicable rules of the Principal Market for issuances of
Common Stock in excess of such amount or (B) obtains a written opinion from
outside counsel to the Company that such approval is not required, which opinion
shall be reasonably satisfactory to the Required Holders. Until such approval or
written opinion is obtained, no purchaser of the Notes pursuant to the
Securities Purchase Agreement (the “Purchasers”) shall be issued in the
aggregate, upon conversion or exercise or otherwise, as applicable, of Notes or
Warrants, shares of Common Stock in an amount greater than the product of the
Exchange Cap multiplied by a fraction, the numerator of which is the principal
amount of Notes issued to the Purchasers pursuant to the Securities Purchase
Agreement on the Closing Date and the denominator of which is the aggregate
principal amount of all Notes issued to the Purchasers pursuant to the
Securities Purchase Agreement on the Closing Date (with respect to each
Purchaser, the “Exchange Cap Allocation”). In the event that any Purchaser shall
sell or otherwise transfer any of such Purchaser’s Notes, the transferee, if a
registered Holder of such Notes, shall be allocated a pro rata portion of such
Purchaser’s Exchange Cap Allocation, and the restrictions of the prior sentence
shall apply to such transferee with respect to the portion of the Exchange Cap
Allocation allocated to such transferee. In the event that any holder of Notes
shall convert all of such holder’s Notes into a number of shares of Common Stock
which, in the aggregate, is less than such holder’s Exchange Cap Allocation,
then the difference between such holder’s Exchange Cap Allocation and the number
of shares of Common Stock actually issued to such holder shall be allocated to
the respective Exchange Cap Allocations of the remaining registered holders of
Notes on a pro rata basis in proportion to the aggregate principal amount of the
Notes then held by each such holder. To the extent required by the Principal
Market, the provisions of the Exchange Cap shall be modified to comply with the
applicable rules and regulations of the Principal Market, provided that any such
changes shall not, in the Holder’s reasonable discretion, materially change the
terms of the transaction contemplated hereby.

 

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(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 ninety (90) 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 ten (10) consecutive days or for more than an
aggregate of thirty (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 days or for more than an
aggregate of ten (10) 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) written notice to any holder of the Notes
or public announcement, at any time, of its intention not to comply with a
request for conversion of any Notes into shares of Common Stock that is tendered
in accordance with the provisions of the Notes, other than pursuant to
Section 3(d);

 

(iv) at any time following the ninetieth (90th) day that the Company fails to
have a sufficient number of authorized shares of Common Stock available to
satisfy its obligations for issuance upon conversion of the full Conversion
Amount of this Note (without regard to any limitations on conversion set forth
in Section 3(d) or otherwise);

 

(v) the Company’s failure to pay to the Holder any amount of Principal,
Interest, Late Charges or other amounts when and as due under this Note
(including, without limitation, the Company’s failure to pay any redemption
payments or amounts hereunder), 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 fifteen (15) Business Days;

 

(vi) the failure to pay when due or any acceleration prior to maturity of any
Indebtedness (as defined in Section 3(s) of the Securities Purchase Agreement)
of the Company or any of its Subsidiaries (as defined in Section 3(a) of the
Securities Purchase Agreement) in an aggregate amount of $500,000 or greater at
any one time other than with respect to any Other Notes;

 

(vii) the Company or any of its Material Subsidiaries (as defined in SEC
Regulation S-X), pursuant to or within the meaning of Title 11, U.S. Code, or
any similar

 

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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 Material
Subsidiaries in an involuntary case, (B) appoints a Custodian of the Company or
any of its Material Subsidiaries or (C) orders the liquidation of the Company or
any of its Material Subsidiaries;

 

(ix) a final judgment or judgments for the payment of money aggregating in
excess of $1,000,000 are rendered against the Company or any of its Subsidiaries
and which judgments are not, within sixty (60) days after the entry thereof,
bonded, discharged or stayed pending appeal, or are not discharged within sixty
(60) days after the expiration of such stay; provided, however, that any
judgment which is covered by insurance or an indemnity from a credit worthy
party shall not be included in calculating the $1,000,000 amount set forth
above;

 

(x) the Company breaches any representation, warranty, covenant or other term or
condition of any Transaction Document and such breach constitutes, individually
or in the aggregate, a Material Adverse Effect; provided, however, that in the
case of a breach of a covenant or other term or condition of any Transaction
Document which is curable, only if such breach continues for a period of at
least ten (10) consecutive Business Days;

 

(xi) any breach or failure in any material respect to comply with either of
Sections 8 or 15 of this Note; provided that any such failure to comply with
(i) any provision of Section 8 or Sections 15(a)-(d) of this Note shall
constitute an Event of Default only after the continuance of such failure for
ten (10) Business Days after notice by the Holder thereof and (ii) any provision
of Section 15(e) of this Note shall constitute an Event of Default only after
the continuance of such failure for twenty (20) Business Days after notice by
the Holder thereof.

 

(b) Redemption Right. Promptly after the occurrence of an Event of Default with
respect to this Note or any Other Note, the Company shall deliver written notice
thereof via facsimile and overnight courier (an “Event of Default Notice”) to
the Holder. At any time after the earlier of the Holder’s receipt of an Event of
Default Notice and the Holder becoming aware of an Event of Default, the Holder
may require the Company to redeem all or any portion of this Note by delivering
written notice thereof (the “Event of Default Redemption Notice”) to the
Company, which Event of Default Redemption Notice shall indicate the portion of
this Note the Holder is electing to redeem. Each portion of this Note subject to
redemption by the Company pursuant to this Section 4(b) shall be redeemed by the
Company at a price equal to the greater of (i) the product of (x) the sum of the
Conversion Amount to be redeemed together with accrued and unpaid Interest with
respect to such Conversion Amount and accrued and unpaid Late Charges with
respect to such Conversion Amount and Interest and (y) the Redemption Premium
and (ii) the product of (A) the Conversion Rate with respect to such sum of the
Conversion Amount together with accrued and unpaid Interest with respect to such
Conversion Amount and accrued and unpaid Late Charges with respect to such
Conversion

 

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Amount and Interest in effect at such time as the Holder delivers an Event of
Default Redemption Notice and (B) the Closing Sale Price of the Common Stock on
the date immediately preceding such Event of Default (the “Event of Default
Redemption Price”). Redemptions required by this Section 4(b) shall be made in
accordance with the provisions of Section 13. In the event of a partial
redemption of this Note pursuant hereto, the principal amount redeemed shall be
deducted from the Installment Amounts relating to the applicable Installment
Dates as set forth in the Event of Default Redemption Notice.

 

(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 of the Company under this Note and the other Transaction Documents
in accordance with the provisions of this Section 5(a), 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
(ii) the Successor Entity is a publicly traded corporation whose common stock is
quoted on or listed for trading on an Eligible Market (a “Public Successor
Entity”). 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. 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 the publicly traded common stock (or its
equivalent) of the Successor Entity, 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. If at the time known to the Company, no sooner than
fifteen (15) days nor later than ten (10) days prior to the consummation of a
Change of Control, but in any event 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 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
ten (10) days prior to a Change of Control, at any time on or after such Change
of Control and ending ten (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 after receipt by the Company of such notice and promptly after (or
upon, in the case of such notice delivered prior to the Change of Control)

 

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consummation of the Change of Control by delivering written notice thereof
(“Change of Control Redemption Notice”) to the Company, which Change of Control
Redemption Notice shall indicate the Conversion Amount the Holder is electing to
redeem. 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 Change of Control Premium of the sum of the
Conversion Amount being redeemed together with accrued and unpaid Interest with
respect to such Conversion Amount and accrued and unpaid Late Charges with
respect to such Conversion Amount and Interest and (y) the quotient determined
by dividing (A) the Closing Sale Price of the Common Stock immediately following
the public announcement of such proposed Change of Control by (B) the Conversion
Price and (ii) the Change of Control Premium of the sum of the Conversion Amount
being redeemed together with accrued and unpaid Interest with respect to such
Conversion Amount and accrued and unpaid Late Charges with respect to such
Conversion Amount and Interest (the “Change of Control Redemption Price”).
Redemptions required by this Section 5 shall be made in accordance with the
provisions of Section 13 and shall have priority to payments to stockholders in
connection with a Change of Control. Notwithstanding anything to the contrary in
this Section 5, but subject to Section 3(d), until the Change of Control
Redemption Price (together with any interest thereon) is paid in full, the
Conversion Amount submitted for redemption under this Section 5(c) (together
with any interest thereon) may be converted, in whole or in part, by the Holder
into Common Stock pursuant to Section 3. In the event of a partial redemption of
this Note pursuant hereto, the principal amount redeemed shall be deducted from
the Installment Amounts relating to the applicable Installment Dates as set
forth in the Change of Control Redemption Notice.

 

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

 

(a) Purchase Rights. If at any time (the “Purchase Right Date”) the Company
grants, issues or sells any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property pro rata to the 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. Notwithstanding any provision of this Section 6(a) to the contrary, in
the event that the Weighted Average Price of the Common Stock equals or exceeds
150% of the applicable Conversion Price for each of the twenty (20) consecutive
Trading Days immediately preceding a Purchase Right Date, then this Section 6(a)
shall not apply to such Purchase Right.

 

(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

 

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such conversion, if applicable, 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. 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.

 

(7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

 

(a) Adjustment of Conversion Price upon Issuance of Common Stock. If at any time
after the Subscription Date, the Company issues or sells, or in accordance with
this Section 7(a) is deemed to have issued or sold, any shares of Common Stock
(including the issuance or sale of shares of Common Stock owned or held by or
for the account of the Company, but excluding shares of Common Stock deemed to
have been issued or sold by the Company in connection with any Excluded
Security) for a consideration per share (the “New Securities Issuance Price”)
less than a price (the “Applicable Price”) equal to Conversion Price in effect
immediately prior to such issue or sale (the foregoing a “Dilutive Issuance”),
then immediately after such Dilutive Issuance, the Conversion Price then in
effect shall be reduced to an amount (rounded to the nearest cent) equal to the
product of (A) the Conversion Price in effect immediately prior to such Dilutive
Issuance and (B) the quotient determined by dividing (1) the sum of (I) the
product derived by multiplying the Conversion Price in effect immediately prior
to such Dilutive Issuance and the number of shares of Common Stock Deemed
Outstanding immediately prior to such Dilutive Issuance plus (II) the
consideration, if any, received by the Company upon such Dilutive Issuance, by
(2) the product derived by multiplying (I) the Conversion Price in effect
immediately prior to such Dilutive Issuance by (II) the number of shares of
Common Stock Deemed Outstanding immediately after such Dilutive Issuance. For
purposes of determining the adjusted Conversion Price under this Section 7(a),
the following shall be applicable:

 

(i) Issuance of Options. If the Company in any manner grants or sells any
Options and the lowest price per share for which one share of Common Stock is
issuable upon the exercise of any such Option or upon conversion or exchange or
exercise of any Convertible Securities issuable upon exercise of such Option is
less than the Applicable Price, then such share of Common Stock shall be deemed
to be outstanding and to have been issued and sold by the Company at the time of
the granting or sale of such Option for such price per share. For purposes of
this Section 7(a)(i), the “lowest price per share for which one share of Common
Stock is issuable upon the exercise of any such Option or upon conversion or
exchange or exercise of any Convertible Securities issuable upon exercise of
such Option” shall be equal to the sum of the lowest amounts of consideration
(if any) received or receivable by the Company with respect to any one share of
Common Stock upon granting or sale of the Option,

 

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upon exercise of the Option and upon conversion or exchange or exercise of any
Convertible Security issuable upon exercise of such Option. No further
adjustment of the Conversion Price shall be made upon the actual issuance of
such Common Stock or of such Convertible Securities upon the exercise of such
Options or upon the actual issuance of such Common Stock upon conversion or
exchange or exercise of such Convertible Securities.

 

(ii) Issuance of Convertible Securities. If the Company in any manner issues or
sells any Convertible Securities and the lowest price per share for which one
share of Common Stock is issuable upon such conversion or exchange or exercise
thereof is less than the Applicable Price, then such share of Common Stock shall
be deemed to be outstanding and to have been issued and sold by the Company at
the time of the issuance of sale of such Convertible Securities for such price
per share. For the purposes of this Section 7(a)(ii), the “price per share for
which one share of Common Stock is issuable upon such conversion or exchange or
exercise” shall be equal to the sum of the lowest amounts of consideration (if
any) received or receivable by the Company with respect to any one share of
Common Stock upon the issuance or sale of the Convertible Security and upon the
conversion or exchange or exercise of such Convertible Security. No further
adjustment of the Conversion Price shall be made upon the actual issuance of
such Common Stock upon conversion or exchange or exercise of such Convertible
Securities, and if any such issue or sale of such Convertible Securities is made
upon exercise of any Options for which adjustment of the Conversion Price had
been or are to be made pursuant to other provisions of this Section 7(a), no
further adjustment of the Conversion Price shall be made by reason of such issue
or sale.

 

(iii) Change in Option Price or Rate of Conversion. If the purchase price
provided for in any Options, the additional consideration, if any, payable upon
the issue, conversion, exchange or exercise of any Convertible Securities, or
the rate at which any Convertible Securities are convertible into or
exchangeable or exercisable for Common Stock changes at any time, the Conversion
Price in effect at the time of such change shall be adjusted to the Conversion
Price which would have been in effect at such time had such Options or
Convertible Securities provided for such changed purchase price, additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold. For purposes of this Section 7(a)(iii), if
the terms of any Option or Convertible Security that was outstanding as of the
Subscription Date are changed in the manner described in the immediately
preceding sentence, then such Option or Convertible Security and the Common
Stock deemed issuable upon exercise, conversion or exchange thereof shall be
deemed to have been issued as of the date of such change. No adjustment shall be
made if such adjustment would result in an increase of the Conversion Price then
in effect.

 

(iv) Calculation of Consideration Received. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options will be deemed to
have been issued for a consideration of $.01. If any Common Stock, Options or
Convertible Securities are issued or sold or deemed to have been issued or sold
for cash, the

 

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consideration received therefor will be deemed to be the net amount received by
the Company therefor. If any Common Stock, Options or Convertible Securities are
issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Company will be the fair value of
such consideration, except where such consideration consists of securities, in
which case the amount of consideration received by the Company will be the
Closing Sale Price of such securities on the date of receipt. If any Common
Stock, Options or Convertible Securities are issued to the owners of the
non-surviving entity in connection with any merger in which the Company is the
surviving entity, the amount of consideration therefor will be deemed to be the
fair value of such portion of the net assets and business of the non-surviving
entity as is attributable to such Common Stock, Options or Convertible
Securities, as the case may be. The fair value of any consideration other than
cash or securities will be determined jointly by the Company and the Required
Holders. If such parties are unable to reach agreement within ten (10) days
after the occurrence of an event requiring valuation (the “Valuation Event”),
the fair value of such consideration will be determined within five (5) Business
Days after the tenth (10th) day following the Valuation Event by an independent,
reputable appraiser jointly selected by the Company and the Required Holders.
The determination of such appraiser shall be deemed binding upon all parties
absent manifest error and the fees and expenses of such appraiser shall be borne
by the Company.

 

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

 

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

 

(8) COMPANY INSTALLMENT CONVERSION OR REDEMPTION.

 

(a) General. On each applicable Installment Date, the Company shall pay to the
Holder of this Note the Installment Amount as of such Installment Date by the
combination of any of the following, but subject to and in accordance with the
terms of this Section 8, (i) provided that during the period commencing with the
Company Installment Notice (as defined below) through the applicable Installment
Date, the Equity Conditions have been

 

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satisfied (or waived in writing by the Holder), requiring the conversion of a
portion of the applicable Installment Amount, in whole or in part, in accordance
with this Section 8 (a “Company Conversion”), and/or (ii) redeeming the
applicable Installment Amount, in whole or in part, in accordance with this
Section 8 (a “Company Redemption”); provided that all of the outstanding
applicable Installment Amount as of each such Installment Date must be converted
and/or redeemed by the Company on the applicable Installment Date, subject to
the provisions of this Section 8. Notwithstanding the foregoing, the Company may
not effect a Company Conversion under this Section (i) in excess of 10% of the
aggregate dollar trading volume (as reported on Bloomberg) of the Common Stock
on the Principal Market over the forty (40) consecutive Trading Day period prior
to the applicable Installment Notice Due Date or (ii) so long as the approval of
the stockholder’s of the Company has not been obtained for the issuance of the
shares relating to the Notes, including Interest Shares, and the Warrants in
accordance with the rules of the Principal Market, if the issuance of the shares
of Common Stock pursuant to such Company Conversion would cause the Maximum
Installment Share Number to be exceeded. On or prior to the date which is the
tenth (10th) Trading Day prior to each Installment Date (each, an “Installment
Notice Due Date”), the Company shall deliver written notice (each, a “Company
Installment Notice”), to the Holder which Company Installment Notice shall state
(i) the portion, if any, of the applicable Installment Amount which the Company
elects to convert pursuant to a Company Conversion, which amount when added to
the Company Redemption Amount must equal the applicable Installment Amount (the
“Company Conversion Amount”), (ii) the portion, if any, of the applicable
Installment Amount which the Company elects to redeem pursuant to a Company
Redemption (the “Company Redemption Amount”), which amount when added to the
Company Conversion Amount must equal the applicable Installment Amount and
(iii) if the Company has elected, in whole or in part, a Company Conversion,
then the Company Installment Notice shall certify that the Equity Conditions
have been satisfied as of the date of the Company Installment Notice. Each
Company Installment Notice shall be irrevocable. If the Company does not timely
deliver a Company Installment Notice in accordance with this Section 8, then the
Company shall be deemed to have delivered an irrevocable Company Installment
Notice electing a Company Conversion and shall be deemed to have certified that
the Equity Conditions in connection with any such conversion have been
satisfied. Except as expressly provided in this Section 8(a), the Company shall
redeem and convert the applicable Installment Amount of this Note pursuant to
this Section 8 and the corresponding Installment Amounts of the Other Notes
pursuant to the corresponding provisions of the Other Notes in the same ratio of
the Installment Amount being redeemed and converted hereunder. The Company
Redemption Amount shall be redeemed in accordance with Section 8(b) and the
Company Conversion Amount (whether set forth in the Company Installment Notice
or by operation of this Section 8) shall be converted in accordance with
Section 8(c).

 

(b) Mechanics of Company Redemption. If the Company elects a Company Redemption
in accordance with Section 8(a), then the Company Redemption Amount, if any,
which is to be paid to the Holder on the applicable Installment Date shall be
redeemed by the Company on such Installment Date, and the Company shall pay to
the Holder on such Installment Date, by wire transfer of immediately available
funds, an amount in cash (the “Company Installment Redemption Price”) equal to
100% of the Company Redemption Amount. If the Company fails to redeem the
Company Redemption Amount on the applicable Installment Date by payment of the
Company Installment Redemption Price on such date, then at the option of the
Holder designated in writing to the Company (any such designation,

 

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“Conversion Notice” for purposes of this Note), the Holder may require the
Company to convert all or any part of the Company Redemption Amount at the
Company Conversion Price. Conversions required by this Section 8(b) shall be
made in accordance with the provisions of Section 3(c). Notwithstanding anything
to the contrary in this Section 8(b), but subject to Section 3(d), until the
Company Installment Redemption Price (together with any interest thereon) is
paid in full, the Company Redemption Amount (together with any interest thereon)
may be converted, in whole or in part, by the Holder into Common Stock pursuant
to Section 3. In the event the Holder elects to convert all or any portion of
the Company Redemption Amount prior to the applicable Installment Date as set
forth in the immediately preceding sentence, the Company Redemption Amount so
converted shall be deducted from the Installment Amounts relating to the
applicable Installment Dates as set forth in the applicable Conversion Notice.

 

(c) Mechanics of Company Conversion. Subject to Section 3(d), if the Company
delivers a Company Installment Notice and elects, or is deemed to have elected,
in whole or in part, a Company Conversion in accordance with Section 8(a), then
the applicable Company Conversion Amount, if any, which remains outstanding
shall be converted as of the applicable Installment Date by converting on such
Installment Date such Company Conversion Amount at the Company Conversion Price;
provided that the Equity Conditions have been satisfied (or waived in writing by
the Holder) on such Installment Date. If the Equity Conditions are not satisfied
(or waived in writing by the Holder) on such Installment Date, then at the
option of the Holder designated in writing to the Company, the Holder may
require the Company to do any one or more of the following: (i) the Company
shall redeem all or any part designated by the Holder of the unconverted Company
Conversion Amount (such designated amount is referred to as the “First
Redemption Amount”) on such Installment Date and the Company shall pay to the
Holder on such Installment Date, by wire transfer of immediately available
funds, an amount in cash equal to such First Redemption Amount, or (ii) the
Company Conversion shall be null and void with respect to all or any part
designated by the Holder of the unconverted Company Conversion Amount and the
Holder shall be entitled to all the rights of a holder of this Note with respect
to such amount of the Company Conversion Amount; provided, however, that the
Conversion Price for such unconverted Company Conversion Amount shall thereafter
be adjusted to equal the lesser of (A) the Company Conversion Price as in effect
on the date on which the Holder voided the Company Conversion and (B) the
Company Conversion Price as in effect on the date on which the Holder delivers a
Conversion Notice relating thereto. If the Company fails to redeem any First
Redemption Amount on or before the applicable Installment Date by payment of
such amount on the applicable Installment Date, then the Holder shall have the
rights set forth in Section 13(a) as if the Company failed to pay the applicable
Company Redemption Price and all other rights under this Note (including,
without limitation, such failure constituting an Event of Default described in
Section 4(a)(xi)). Notwithstanding anything to the contrary in this
Section 8(c), but subject to 3(d), until the Company delivers Common Stock
representing the Company Conversion Amount to the Holder, the Company Conversion
Amount may be converted by the Holder into Common Stock pursuant to Section 3.
In the event that the Holder elects to convert the Company Conversion Amount
prior to the applicable Installment Date as set forth in the immediately
preceding sentence, the Company Conversion Amount so converted shall be deducted
from the Installment Amounts relating to the applicable Installment Dates as set
forth in the applicable Conversion Notice.

 

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(d) Deferred Installment Amount. Notwithstanding any provision of this Section 8
to the contrary, the Holder may, at its option and in its sole discretion,
deliver a notice to the Company at least ten (10) Trading Days prior to any
applicable Installment Date electing to have all or any portion of the
Installment Amount payable on such Installment Date deferred (such amount, the
“Deferral Amount”). Any notice delivered by either the Holder or the Company
pursuant to this Section 8(d) shall set forth (A) the Deferral Amount and
(B) the date such Deferral Amount shall now be payable, which date shall be a
date selected by such Holder not to exceed twenty four (24) months from the date
of the original Installment Date.

 

(e) Cancellation of Installment Amount. Notwithstanding any provision of this
Section 8 to the contrary, in the event that the Weighted Average Price of the
Common Stock equals or exceeds 115% of the applicable Conversion Price for each
of the five (5) consecutive Trading Days immediately preceding the Installment
Notice Due Date, then the Installment Amount payable on such Installment Date
shall be deferred to the Maturity Date.

 

(9) COMPANY’S RIGHT OF MANDATORY CONVERSION.

 

(a) Mandatory Conversion. If at any time from and after the eighteen (18) month
anniversary of the Effective Date (as defined in the Registration Rights
Agreement) (the “Mandatory Conversion Eligibility Date”), (i) the Closing Sale
Price of the Common Stock for each Trading Day of any twenty (20) consecutive
Trading Day period following the applicable Mandatory Conversion Eligibility
Date (the “Mandatory Conversion Measuring Period”) equals or exceeds either
(x) 135% (the “First Conversion Threshold”) or (y) 175% (the “Second Conversion
Threshold”) of the Conversion Price on the Closing Date (subject to appropriate
adjustments for stock splits, stock dividends, stock combinations and other
similar transactions after the Subscription Date) and (ii) the Equity Conditions
shall have been satisfied (or waived in writing by the Holder) during the period
commencing on the Mandatory Conversion Notice Date through the applicable
Mandatory Conversion Date (each, as defined below), the Company shall have the
right to require the Holder to convert (1) if the First Conversion Threshold has
been met, up to the First Conversion Threshold Conversion Amount or (2) if the
Second Conversion Threshold has been met, all, but not less than all, of the
Conversion Amount then remaining under this Note, in each case as designated in
the Mandatory Conversion Notice (as defined below) into fully paid, validly
issued and nonassessable shares of Common Stock in accordance with Section 3(c)
hereof at the Conversion Rate as of the Mandatory Conversion Date (as defined
below) (a “Mandatory Conversion”). The Company may exercise its right to require
conversion under this Section 9(a) by delivering within not more than five
(5) Trading Days following the end of such Mandatory Conversion Measuring Period
a written notice thereof by facsimile and overnight courier to all, but not less
than all, of the holders of Notes and the Transfer Agent (the “Mandatory
Conversion Notice” and the date all of the holders received such notice by
facsimile is referred to as the “Mandatory Conversion Notice Date”). The
Mandatory Conversion Notice shall be irrevocable. The Mandatory Conversion
Notice shall state (i) the Trading Day selected for the Mandatory Conversion in
accordance with Section 9(a), which Trading Day shall be at least twenty
(20) Business Days but not more than sixty (60) Business Days following the
Mandatory Conversion Notice Date (the “Mandatory Conversion Date”), (ii) the
aggregate Conversion Amount, including any applicable First Conversion Threshold
Conversion Amount, of the Notes subject to mandatory conversion from the Holder
and all of the holders of the Notes pursuant to this Section 9 (and

 

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analogous provisions under the Other Notes) and (iii) the number of shares of
Common Stock to be issued to such Holder on the Mandatory Conversion Date.
Notwithstanding the foregoing, the Company may only effect one Mandatory
Conversion with respect to the First Conversion Threshold and one Mandatory
Conversion with respect to the Second Conversion Threshold. Any shares of Common
Stock delivered in connection with a Mandatory Conversion hereunder shall be
accompanied by any accrued and unpaid Interest with respect to such Conversion
Amount subject to such Mandatory Conversion and accrued and unpaid Late Charges
with respect to such Conversion Amount and Interest.

 

(b) Pro Rata Conversion Requirement. If the Company elects to cause a conversion
of any Conversion Amount of this Note pursuant to Section 9(a), then it must
simultaneously take the same action in the same proportion with respect to the
Other Notes. All Conversion Amounts converted by the Holder after the Mandatory
Conversion Notice Date shall reduce the Conversion Amount of this Note required
to be converted on the Mandatory Conversion Date. If the Company has elected a
Mandatory Conversion, the mechanics of conversion set forth in Section 3(c)
shall apply, to the extent applicable, as if the Company and the Transfer Agent
had received from the Holder on the Mandatory Conversion Date a Conversion
Notice with respect to the Conversion Amount being converted pursuant to the
Mandatory Conversion.

 

(10) HOLDER’S RIGHT OF OPTIONAL REDEMPTION. In the event that after the Issuance
Date the Company consummates any Designated Asset Sale (each date of such
consummation, an “Optional Redemption Date”), the Holder shall have the right,
in its sole discretion, to require that the Company redeem (each a “Holder
Optional Redemption”) all or any part of the Principal amount of this Note, but
not in excess of the Holder’s Pro Rata Amount of the Designated Sales Proceeds,
plus accrued and unpaid Interest with respect to such Principal and accrued and
unpaid Late Charges with respect to such Principal and Interest (the “Optional
Redemption Amount”) by delivering written notice thereof (a “Holder Optional
Redemption Notice” and, collectively with the Event of Default Redemption Notice
and the Change of Control Redemption Notice, the “Redemption Notices” and each a
“Redemption Notice”) to the Company no later than ten Business Days after the
filing by the Company with the Securities and Exchange Commission of the
applicable Holder Optional Redemption Date Filing (as defined below). The Holder
Optional Redemption Notice shall indicate the amount of the applicable Optional
Redemption Amount the Holder is electing to have redeemed on such Optional
Redemption Exercise Date (the “Holder Optional Redemption Amount”) and the date
of such redemption (the “Optional Redemption Exercise Date”); provided, however,
that such Optional Redemption Exercise Date shall not be less than ten
(10) Business Days after the date of delivery of such Holder Optional Redemption
Notice. The Company shall apply the Optional Redemption Amount to the extent
required to pay the Holder Optional Redemption Amount in cash on the Optional
Redemption Exercise Date, with such amount being attributed first to the
reduction of Interest and Late Payments owing on this Note, and then to the
repayment of Principal on this Note. The portion of this Note subject to
redemption pursuant to this Section 10 shall be redeemed by the Company in cash
on the applicable Optional Redemption Date at a price equal to the Holder
Optional Redemption Amount being redeemed (the “Holder Optional Redemption
Price” and, collectively with the Event of Default Redemption Price, the Change
of Control Redemption Price and the Company Installment Redemption Price, the
“Redemption Prices” and, each a “Redemption Price”). On the fourth

 

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(4th) Business Day following the occurrence of any Optional Redemption Date, the
Company shall file a Current Report on Form 8-K describing the terms of such
Designated Asset Sale in the form required by the 1934 Act and that this Note is
subject to a Holder Optional Redemption (including all attachments, the “Holder
Optional Redemption Date Filing”). Notwithstanding any other provision contained
in this Section 10, the Company and its Subsidiaries shall have the right to
sell, convey, or otherwise transfer any assets or properties (i) not
constituting any part of the Microelectronics Business Unit or the High Voltage
Capacitor Business Unit, or (ii) constituting any part, or the entirety, of the
Small Cell Ultracapacitor Production Line, in each case without complying with
the provisions of this Section 10.

 

(11) 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 for the purpose of, avoiding or seeking 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 that is
required hereunder to protect the rights of the Holder of this Note.

 

(12) RESERVATION OF AUTHORIZED SHARES.

 

(a) Reservation. The Company shall initially reserve out of its authorized and
unissued Common Stock a number of shares of Common Stock for each of the Notes
equal to 120% 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, 120% 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 pursuant to Sections 2 and 3; provided that
at no time shall the number of shares of Common Stock so reserved be less than
the number of shares required to be reserved by the previous sentence (without
regard to any limitations on conversions) (the “Required Reserve Amount”). The
initial number of shares of Common Stock reserved for conversions of the Notes
and each increase in the number of shares so reserved shall be allocated pro
rata among the holders of the Notes based on the principal amount of the Notes
held by each holder at the 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 that is a
registered Holder of Notes 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

 

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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 ninety (90) days after the
occurrence of such Authorized Share Failure, the Company shall hold a meeting of
its stockholders for the approval of an increase in the number of authorized
shares of Common Stock. In connection with such meeting, the Company shall
provide each stockholder with a proxy statement.

 

(13) HOLDER’S REDEMPTIONS.

 

(a) Mechanics. The Company shall deliver the applicable Event of Default
Redemption Price to the Holder within five Business Days after the Company’s
receipt of the Holder’s Event of Default Redemption Notice. If the Holder has
submitted a Change of Control Redemption Notice in accordance with Section 5(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. The Company shall deliver the applicable Company Installment
Redemption Price to the Holder on the applicable Installment Date. In the event
of a redemption of less than all of the Conversion Amount of this Note, the
Company shall promptly cause to be issued and delivered to the Holder a new Note
(in accordance with Section 19(d)) representing the outstanding Principal which
has not been redeemed. In the event that the Company does not pay the applicable
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 applicable Redemption Notice
shall be null and void with respect to such Conversion Amount, (y) the Company
shall immediately return this Note, or issue a new Note (in accordance with
Section 19(d)) to the Holder representing the sum of such Conversion Amount to
be redeemed together with accrued and unpaid Interest with respect to such
Conversion Amount and accrued and unpaid Late Charges with respect to such
Conversion Amount and Interest 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 applicable Redemption Notice is voided and
(B) the lowest Closing Bid Price of the Common Stock during the period beginning
on and including the date on which the applicable Redemption Notice is delivered
to the Company and ending on and including the date on which the applicable
Redemption Notice is voided. The Holder’s delivery of a notice voiding a
Redemption Notice and exercise of its rights following such notice shall not
affect the Company’s obligations to make any payments of Late Charges which have
accrued prior to the date of such notice with respect to the Conversion Amount
subject to such notice.

 

(b) Redemption by Other Holders. Upon the Company’s receipt of notice from any
of the holders of the Other Notes for redemption or repayment as a result of an
event or occurrence substantially similar to the events or occurrences described
in Section 4(b), Section 5(b) or Section 10 (each, an “Other Redemption
Notice”), the Company shall

 

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immediately forward to the Holder by facsimile a copy of such notice. If the
Company receives a Redemption Notice and one or more Other Redemption Notices,
during the seven (7) Business Day 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
(3) 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 Business Day period.

 

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

 

(15) 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,
other than Senior Indebtedness. The Holder of this Note, and each Person holding
this Note, whether upon original issue or upon registration of transfer,
assignment or exchange hereof, agrees for the benefit of all holders of Senior
Indebtedness, whether outstanding on the date of this Note or thereafter
incurred, and such agreement shall be a continuing offer to all holders of
Senior Indebtedness, that the payment of all amounts, expenses, fees, principal,
premium, interest, Late Charges and any and all other obligations of any kind of
the Company owed in connection with this Note shall be subordinated to the prior
payment in full in cash of all amounts owing in connection with such Senior
Indebtedness. No payment shall be made with respect to this Note in the event of
any failure of the Company to make any scheduled payment on Senior Indebtedness,
unless and until such failure is cured or waived. In the event that a default
under such Senior Indebtedness entitling the holder thereof to accelerate the
scheduled payment of such Senior Indebtedness exists (other than a payment
default described in the immediately preceding sentence), the holder of this
Note shall not be entitled to payment hereunder for a period of 179 days after
notice thereof to such holder or until such default is cured or waived. If,
during such period, the Holder of this Note shall receive any property or assets
from the Company or any of its controlled affiliates, such property or assets
shall be held by the Holder hereof in trust for the benefit of holders of Senior
Indebtedness. The holders of Senior Indebtedness shall not have the right to
deliver more than one such notice in any 12-month period and shall not be
entitled to deliver more than one notice by virtue of the same facts giving rise
to such default. Nothing in this paragraph shall prevent the existence or
occurrence of an Event of Default that would otherwise exist or occur under this
Note by virtue of such nonpayment or otherwise, or the Holder’s other rights as
against the Company (which failure shall also be publicly disclosed in
conjunction with such certification).

 

(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

 

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indirectly, incur, guarantee or assume any Indebtedness, other than (i) the
Indebtedness evidenced by this Note and the Other Notes and (ii) Permitted
Indebtedness.

 

(c) Existence of Liens. So long as this Note is outstanding, other than
Permitted Liens, 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”), to the extent such
Lien is upon or in a material portion of (x) the Company’s property and assets
or (y) the property and assets of the Company and its Subsidiaries taken as a
whole on a consolidated basis; unless, all payment obligations under the Notes
are secured on an equal and ratable basis as the obligations secured by such
Lien until such time as such obligations are no longer secured by a Lien.

 

(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 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.

 

(e) Net Cash Balance.

 

(i) So long as this Note is outstanding, the Company shall at all times maintain
a Net Cash Balance in excess of $8,000,000.

 

(ii) From and after the three (3) month anniversary of the Issuance Date and for
so long as this Note is outstanding, if the Company fails (a “Failure Date”) to
maintain a Net Cash Balance in excess of $10,000,000 (the “Net Cash Balance
Test”), the Company promptly shall provide to the Holder a certification,
executed on behalf of the Company by the Chief Financial Officer of the Company,
as to the amount of the Net Cash Balance as of the Failure Date, and publicly
disclose (on a Current Report on Form 8-K or otherwise) if such is material
non-public information (the date of such certification and public announcement,
the “Disclosure Date”). On the Disclosure Date, the Company shall also obtain a
letter of credit from a financial institution reasonably satisfactory to Holders
of a majority in principal amount of the Notes outstanding on such date (the
“Majority Holders”) in the amount of $8,000,000 for the benefit, pro rata by
principal amount outstanding, of the Holders in the event of any failure by the
Company to make a payment owed under this Note.

 

(iii) The Company shall use reasonable best efforts to announce its operating
results (the “Operating Results”) for each Fiscal Quarter no later than the
forty-fifth (45th) day after the end of each Fiscal Quarter or, with respect to
the last Fiscal Quarter, the ninetieth (90th) day after such quarter (the
“Announcement Date”). On the Announcement Date, the Company shall provide to the
Holders a certification, executed on behalf of the

 

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Company by the Chief Financial Officer of the Company, certifying that the
Company has either (x) satisfied the Net Cash Balance Test at all times
throughout such Fiscal Quarter or (y) failed to satisfy the Net Cash Balance
Test at one or more times during such Fiscal Quarter, specifying such days or
periods, as applicable, and whether such failure is continuing (which failure
shall also be publicly disclosed in conjunction with such certification).

 

(16) PARTICIPATION. In lieu of a change to the Conversion Price addressed
elsewhere in this Note (each, an “Conversion Price Adjustment”, and the date of
such Conversion Price Adjustment, the “Conversion Price Adjustment Date”), the
Holder, as the holder of this Note, shall be entitled to receive such dividends
paid and distributions made generally to all the holders of Common Stock to the
same extent as if the Holder had so 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.
Notwithstanding any provision of this Section 16 to the contrary, in the event
that the Weighted Average Price of the Common Stock equals or exceeds 150% of
the applicable Conversion Price for each of the twenty (20) consecutive Trading
Days immediately preceding a Conversion Price Adjustment Date, then this
Section 16 shall not apply to such Conversion Price Adjustment.

 

(17) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. In addition to the written
consent of the Company, 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.

 

(18) TRANSFER. This Note and any shares of Common Stock issued upon conversion
of 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.

 

(19) REISSUANCE OF THIS NOTE.

 

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

 

(b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Note, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the Holder to the Company in customary form and,
in the case of mutilation, upon surrender and

 

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cancellation of this Note, the Company shall execute and deliver to the Holder a
new Note (in accordance with Section 19(d)) representing the outstanding
Principal.

 

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

 

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

 

(20) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE
RELIEF. The remedies provided in this Note shall be cumulative and in addition
to all other remedies available under this Note 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, conversion and the like (and the computation thereof) shall
be the amounts to be received by the Holder and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach or threatened breach, the Holder
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.

 

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

 

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

 

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

 

(24) DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Closing Bid Price, the Closing Sale Price or the Weighted Average Price or the
arithmetic calculation of the Conversion Rate or the Redemption Price, the
Company shall submit the disputed determinations or arithmetic calculations via
facsimile within one (1) Business Day of receipt, or deemed receipt, of the
Conversion Notice or Redemption Notice or other event giving rise to such
dispute, as the case may be, to the Holder. If the Holder and the Company are
unable to agree upon such determination or calculation within one (1) Business
Day of such disputed determination or arithmetic calculation being submitted to
the Holder, then the Company shall, within one Business Day submit via facsimile
(a) the disputed determination of the Closing Bid Price, the Closing Sale Price
or the Weighted Average Price to an independent, reputable investment bank
selected by the Company and approved by the Holder or (b) the disputed
arithmetic calculation of the Conversion Rate or the Redemption Price to the
Company’s independent, outside accountant. The Company, at the Company’s
expense, shall direct 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 ten (10) 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.

 

(25) NOTICES; PAYMENTS.

 

(a) Notices. Whenever notice is required to be given under this Note, unless
otherwise provided herein, such notice shall be given in accordance with
Section 10(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
therefor. Without limiting the generality of the foregoing, the Company will
give written notice to the Holder (i) promptly upon any adjustment of the
Conversion Price, setting forth in reasonable detail, and certifying, the
calculation of such adjustment and (ii) at least twenty (20) days prior to the
date on which the Company closes its books or takes a record (A) with respect to
any dividend or distribution upon the Common Stock, (B) with respect to any pro
rata subscription offer to holders of Common Stock or (C) for determining rights
to vote with respect to any Fundamental Transaction, dissolution or liquidation,
provided in each case that such information shall be made known to the public
prior to or in conjunction with such notice being provided to the Holder.

 

(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

 

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the United States of America by a check drawn on the account of the Company and
sent via overnight courier service to such Person at such address as previously
provided to the Company in writing (which address, in the case of each of the
Purchasers, shall initially be as set forth on the Schedule of Buyers attached
to the Securities Purchase Agreement); provided that the Holder may elect to
receive a payment of cash via wire transfer 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, other than Interest, 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 eleven percent (11)% per annum from the
date such amount was due until the same is paid in full (“Late Charge”).

 

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

 

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

 

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

 

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

 

(a) “Additional Investment Rights” has the meaning ascribed to such term in the
Securities Purchase Agreement and shall include additional investment rights
issued in exchange therefor.

 

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

 

(c) “Bloomberg” means Bloomberg Financial Markets.

 

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(d) “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.

 

(e) “Change of Control” means any Fundamental Transaction other than (i) any
reorganization, recapitalization or reclassification of the Common Shares in
which a majority of 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, (ii) pursuant to a migratory merger effected solely for the purpose of
changing the jurisdiction of incorporation of the Company or (iii) in the event
of a Change of Control involving consideration paid to holders of the Company’s
Common Stock, the consideration per share of the Company’s Common Stock to be
received by the holders thereof is greater (as to amounts other than cash, as
determined reasonably and in good faith by the Board of Directors of the
Company) than the product of the (x) Change of Control Premium and
(y) Conversion Price then in effect.

 

(f) “Change of Control Premium” means 115%; provided that and for as long as the
Senior Indebtedness Exception has been satisfied, 110%.

 

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

 

(h) “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.

 

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(i) “Common Stock Deemed Outstanding” shall mean, at any given time, the number
of shares of Common Stock actually outstanding at such time, plus (i) the number
of shares of Common Stock deemed to be outstanding pursuant to Sections 7(a)(i)
and 7(a)(ii) hereof regardless of whether the Options or Convertible Securities
are actually exercisable at such time and (ii) plus the number of shares of
Common Stock underlying Options or Convertible Securities issued pursuant to the
Approved Stock Plans that are actually exercisable or convertible at such time
at an exercise price or conversion price that is less than or equal to the per
share fair market value of such underlying shares of Common Stock, but excluding
any shares of Common Stock owned or held by or for the account of the Company or
issuable upon conversion of the Notes or the Other Notes.

 

(j) “Company Conversion Price” means, the lower of (i) that price which shall be
computed as 90% of the arithmetic average of the Weighted Average Price of the
Common Stock on each of the five (5) consecutive Trading Days immediately
preceding the applicable Installment Date (each such period, a “Company
Conversion Measuring Period”) and (ii) the applicable Conversion Price. All such
determinations to be appropriately adjusted for any stock split, stock dividend,
stock combination or other similar transaction that proportionately decreases or
increases the Common Stock the applicable such Company Conversion Measuring
Period.

 

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

 

(l) “Designated Asset Sale” means (A) the sale by the Company or its
Subsidiaries of assets, in one transaction or in a series of related
transactions, constituting substantially as an entirety either (i) the
Microelectronics Business Unit or (ii) the High Voltage Capacitor Business Unit
and (B) the sale, conveyance, or other transfer of any assets with a net book
value as reflected on the Company’s most recent consolidated financial
statements as of the Subscription Date in excess of $1 million which assets are
used in either the Microelectronics Business Unit or the High Voltage Capacitor
Business Unit, to any other Person, or to operations of the Company other than
the Microelectronics Business Unit or the High Voltage Capacitor Business Unit
(except for dispositions of such assets in the event the Company determines in
good faith that such assets are obsolete or of no further meaningful use to such
businesses).

 

(m) “Designated Sales Proceeds” means (x) in the case of a Designated Asset Sale
to a Person other than the Company or a Subsidiary of the Company (a “Third
Party Designated Asset Sale”), the aggregate proceeds (net of any fees, which
fees are not in excess of reasonable and customary amounts) (in cash or
equivalent value, as determined in good faith by the Board of Directors of the
Company if non-cash) received by the Company from the Designated Asset Sale (the
“Third Party Value”) or (y) in the case of a Designated Asset Sale to or within
the Company or a Subsidiary of the Company (an “IntraCompany Designated Asset
Sale”), the book value of the assets subject of such Designated Asset Sale as
then reflected on the Company’s most recent consolidated financial statements
prepared in accordance with GAAP (the “IntraCompany Value”) or (z) in the case
of a Third Party Designated Asset Sale of assets originally subject to an
IntraCompany Designated Asset Sale, the difference between the IntraCompany
Value and the Third Party Value.

 

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

 

(o) “Equity Conditions” means that each of the following conditions is
satisfied: (i) on each day during the period beginning six (6) month prior to
the applicable date of determination and ending on and including the applicable
date of determination (the “Equity Conditions Measuring Period”), either (x) the
Registration Statement filed pursuant to the Registration Rights Agreement shall
be effective and available for the resale of no less than 120% of the remaining
Registrable Securities in accordance with the terms of the Registration Rights
Agreement and there shall not have been any Grace Periods (as defined in the
Registration Rights Agreement) or (y) all shares of Common Stock issuable upon
conversion of the Notes and exercise of the Warrants shall be eligible for sale
without restriction and without the need for registration under any applicable
federal or state securities laws; (ii) on each day during the Equity Conditions
Measuring Period, the Common Stock is designated for quotation on the Principal
Market and shall not have been suspended from trading on such exchange or market
(other than suspensions of not more than two (2) days and occurring prior to the
applicable date of determination due to business announcements by the Company)
nor shall delisting or suspension by such exchange or market been threatened or
pending either (A) in writing by such exchange or market or (B) by falling below
the then effective minimum listing maintenance requirements of such exchange or
market; (iii) during the one (1) year period ending on and including the date
immediately preceding the applicable date of determination, the Company shall
have delivered Conversion Shares upon conversion of the Notes and Warrant Shares
upon exercise of the Warrants to the holders on a timely basis as set forth in
Section 2(c)(ii) hereof (and analogous provisions under the Other Notes) and
Sections 2(a) of the Warrants upon exercise of the Warrants; (iv) any applicable
shares of Common Stock to be issued in connection with the event requiring
determination may be issued in full without violating Section 3(d) hereof and
the rules or regulations of the Principal Market; (v) the Company shall not have
failed to timely make any payments within five (5) Business Days of when such
payment is due under this Note; (vi) during the Equity Conditions Measuring
Period, there shall not have occurred either (A) the public announcement of a
pending, proposed or intended Fundamental Transaction which has not been
abandoned, terminated or consummated, or (B) an Event of Default or (vii) an
event that with the passage of time or giving of notice would constitute an
Event of Default; (viii) the Company shall have no knowledge of any fact that
would cause (x) the Registration Statements required pursuant to the
Registration Rights Agreement not to be effective and available for the resale
of no less than 120% of the remaining Registrable Securities in accordance with
the terms of the Registration Rights Agreement or (y) any shares of Common Stock
issuable upon conversion of the Notes and shares of Common Stock issuable upon
exercise of the Warrants not to be eligible for sale without restriction
pursuant to Rule 144(k) and any applicable state securities laws; and (ix) the
Company otherwise shall have been in material compliance with and shall not have
materially breached any provision, covenant, representation or warranty of any
Transaction Document resulting in individually or in the aggregate, a Material
Adverse Effect.

 

(p) “Excluded Securities” means any Common Stock issued or issuable: (i) in
connection with any Approved Stock Plan; (ii) upon conversion of the Notes or
the exercise of the Warrants; (iii) pursuant to a bona fide firm commitment
underwritten public offering with a nationally recognized underwriter which
generates gross proceeds to the

 

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Company in excess of $30,000,000 (other than an “at-the-market offering” as
defined in Rule 415(a)(4) under the 1933 Act and “equity lines”); (iv) in
connection with the payment of any Interest Shares on the Notes; (v) in
connection with any acquisition by the Company, whether through an acquisition
of stock or a merger of any business, assets or technologies the primary purpose
of which is not to raise equity capital; (vi) securities issued in connection
with corporate partnering transactions on terms approved by the Board of
Directors of the Company and the primary purpose of which is not to raise equity
capital and (vii) upon conversion of any Options or Convertible Securities which
are outstanding on the day immediately preceding the Subscription Date, provided
that the terms of such Options or Convertible Securities are not amended,
modified or changed in any manner adverse to the Holder on or after the
Subscription Date.

 

(q) “Federal Funds Rate” means, as determined on the Issue Date and each
subsequent Interest Date for each Payment Quarter commencing on such date, the
rate per annum (rounded up to the nearest 1/16th of 1%) equal to weighted
average of the rates on overnight federal funds transactions with members of the
Federal Reserve System arranged by federal funds brokers, as published on the
immediately preceding Trading Day by the Federal Reserve Bank of New York.

 

(r) “First Conversion Threshold Conversion Amount” means an amount equal to
(x) 50% of the Conversion Amount of this Note on the Issuance Date minus (y) the
aggregate Conversion Amount of this Note converted or redeemed pursuant to the
terms of this Note.

 

(s) “Fiscal Quarter” means each of the fiscal quarters adopted by the Company
for financial reporting purposes that correspond to the Company’s fiscal year
that ends on December 31, or such other fiscal quarter adopted by the Company
for financial reporting purposes in accordance with GAAP.

 

(t) “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 such number of holders of outstanding shares of Common Stock
resulting in such Person (together with any affiliates of such Person) holding
more than the 50% of the outstanding Common Stock of the Company following 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 resulting in such other Person (together with any affiliates of
such person) holding more than the 50% of the outstanding Common Stock of the
Company following such stock purchase agreement or other business combination,
or (v) reorganize, recapitalize or reclassify its Common Stock.

 

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

 

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(v) “High Voltage Capacitor Business Unit” means the Company’s high voltage
(“HV”) capacitor business, which as of the Subscription Date is located as a
unit within the Company’s leased facility in Rossens, Switzerland, which is
devoted to the development, manufacture and marketing of CONDIS® brand (and any
successor thereto or replacement thereof) high-voltage coupling and grading
capacitors and capacitive voltage dividers used in electric utility
infrastructure and other installations involving transport, distribution and
measurement of high-voltage electrical energy, including the CONDIS® trademark,
capital equipment used to manufacture HV products, inventory related to HV
products and intellectual property associated with HV products.

 

(w) “Holder Pro Rata Amount” means a fraction (i) the numerator of which is the
lesser of the Principal amount outstanding as of the relevant measurement date
the Principal amount of this Note on the Issuance Date and (ii) the denominator
of which is the lesser of the aggregate principal amount of all Notes issued to
the initial purchasers pursuant to the Securities Purchase Agreement on the
Issuance Date and the Principal amount outstanding as of the relevant measuring
date of all such Notes.

 

(x) “Installment Amount” means with respect to any Installment Date, the lesser
of (A) the product of (i) $2,777,777.78, multiplied by (ii) Holder Pro Rata
Amount and (B) the Principal amount (plus the sum of any accrued and unpaid
Interest with respect to such Principal amount and accrued and unpaid Late
Charges with respect to such Principal amount and Interest any accrued and
unpaid interest thereon) under this Note as of such Installment Date, as any
such Installment Amount may be reduced pursuant to the terms of this Note,
whether upon conversion, redemption or otherwise. For the avoidance of doubt,
any accrued and unpaid interest which may be paid pursuant to this definition
shall be deducted from the total interest to be paid on any subsequent Interest
Payment Date. In the event the Holder shall sell or otherwise transfer any
portion of this Note, the transferee shall be allocated a pro rata portion of
the each unpaid Installment Amount hereunder.

 

(y) “Installment Date” means each of the following dates: (i) December 20, 2007,
(ii) March 20, 2008, (iii) June 20, 2008, (iv) September 20, 2008,
(v) December 20, 2008, (vi) March 20, 2009, (vii) June 20, 2009,
(viii) September 20, 2009, (ix) December 20, 2009, and (x) any other Installment
Date scheduled by the Holder in connection with a Deferral Amount pursuant to
Section 8(d) hereof.

 

(z) “Interest Conversion Price” means, with respect to any Interest Date, that
price which shall be computed as 95% of the arithmetic average of the Weighted
Average Price of the Common Stock on each of the five (5) consecutive Trading
Days immediately preceding the applicable Interest Date (each, an “Interest
Measuring Period”). All such determinations to be appropriately adjusted for any
stock split, stock dividend, stock combination or other similar transaction
during such period.

 

(aa) “Maximum Installment Share Number” means 50% of the number of shares of
Common Stock resulting from the following formula: (i) 20% of the number of
shares of Common Stock outstanding on the Issuance Date; minus (ii) the
aggregate number of shares of Common Stock issued as Interest Shares on all
Notes, upon conversion (including any Company Conversions) of any Notes and upon
exercise of any Warrants; minus (iii) the

 

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aggregate number of shares of Common Stock issuable upon conversion of any
outstanding Notes at the then applicable Conversion Price (without regard to any
limitations on the conversion of the Notes) and upon exercise of any outstanding
Warrants at the ten applicable Exercise Price (as defined in the Warrants)(
without regard to any limitations on the exercise of the Warrants).

 

(bb) “Measuring Period” means any of the Interest Measuring Period or Company
Conversion Measuring Period, as applicable.

 

(cc) “Microelectronics Business Unit” means the Company’s microelectronics
(“ME”) business unit, which as of the Subscription Date is located as a unit
within the Company’s leased facility in San Diego, California, which is devoted
to the development, manufacture and marketing of nuclear event detectors,
radiation-mitigated microelectronic components and single board computers used
principally in the space and satellite industry, including the Rad-Pak® and
Xray-Pak® component shielding trademarks, LPT™ latchup protection trademark,
capital equipment used to manufacture ME products, inventory and intellectual
property associated with ME products and ME customer lists (and any successors
thereto or replacement thereof).

 

(dd) “Net Cash Balance” means, at any date, (i) an amount equal to the aggregate
amount of cash, cash equivalents (including cash collateralizing the Letter of
Credit and not including other restricted cash) and marketable securities,
consisting of corporate bonds, commercial paper and medium-term notes, as shown
or reflected in the notes to the Company’s consolidated balance sheet as at such
date (x) as reflected in the SEC Documents as of the Issuance Date and as
reflected in the most recent audited financials of the Company and in conformity
with the characterizations made by the Company in such audited financials or
(y) provided such amounts are in compliance with the Company’s investment policy
as of the Issuance Date minus (ii) the unpaid principal balance of any
Indebtedness for borrowed money (excluding Indebtedness under the Notes and any
Senior Indebtedness).

 

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

 

(ff) “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.

 

(gg) “Payment Quarter” means each of: the period beginning on and including
December 1 and ending on and including February 28 (or 29); the period beginning
on and including March 1 and ending on and including May 31; the period
beginning on and including June 1 and ending on and including August 31; and the
period beginning on and including September 1 and ending on and including
November 30.

 

(hh) “Permitted Indebtedness” means (A) Senior Indebtedness not to exceed $5
million principal amount in the aggregate at any one time outstanding (provided
that

 

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notwithstanding the foregoing there shall be no limit on the Company’s ability
to incur Senior Indebtedness, if and so long as the Senior Indebtedness
Exception has been satisfied); (B) 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 three percent (3%) over the greater of the Interest
Rate and the rate for U.S. treasury notes with comparable maturity per annum;
(C) Indebtedness existing as of the Issuance Date and set forth in Section 3(s)
of the Schedule of Exceptions; (D) Indebtedness issued in exchange for, or the
net proceeds of which are used to extend, refund, renew, refinance, defease or
replace Permitted Indebtedness; (E) intercompany Indebtedness among the Company
and its Subsidiaries, provided that if issued by the Company, the intercompany
Indebtedness is subordinated in right of payment to the Notes, provided,
however, that (i) such extension, refund, renewal, refinancing, defeasance or
replacement is pursuant to terms that are not materially less favorable to the
Company and its Subsidiaries than the terms of the Indebtedness being extended,
refinanced or modified and (ii) after giving effect to such extension, refund,
renewal, refinancing, defeasance or replacement, the amount of such Indebtedness
is not greater than the amount of Indebtedness outstanding immediately prior to
such refund, renewal, refinancing, defeasance or replacement; (F) hedging
obligations that are incurred for the purpose of fixing or hedging interest rate
risk with respect to any floating and/or fixed rate Permitted Indebtedness;
(G) Indebtedness of a Person or business existing at the time such Person or
business was acquired by the Company or any of its Subsidiaries, provided that
such acquisition is not prohibited hereunder and such Indebtedness was not
incurred in contemplation of such acquisition and has no recourse to the
Company’s and its Subsidiaries’ existing assets and properties; and
(H) Indebtedness incurred solely in respect of bankers acceptances, letters of
credit and performance bonds (to the extent that such incurrence does not result
in the incurrence of any obligation to repay any obligation relating to borrowed
money or other Indebtedness), all in the ordinary course of business in amounts
and for the purposes customary in the Company’s industry.

 

(ii) “Permitted Liens” means:

 

(i) any Lien for taxes, assessments or governmental charges or claims not yet
due or delinquent or being contested in good faith by appropriate proceedings
for which adequate reserves have been established in accordance with GAAP;

 

(ii) 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

 

(iii) any Lien imposed by law or created by operation of law, including, without
limitation, materialmen’s mechanics’, landlords’, carriers’, warehousemen’s,
suppliers’ and vendors’ Liens, Liens for master’s and crew’s wages 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;

 

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(iv) Liens incurred or deposits and pledges made in connection with
(1) obligations incurred in respect of workers’ compensation, unemployment
insurance or other forms of governmental insurance or benefits or legislation,
(2) the performance of letters of credits, bids, tenders, leases, contracts
(other than for the payment of money) and statutory obligations or
(3) obligations on surety or appeal bonds, but only to the extent such deposits
or pledges are made or otherwise arise in the ordinary course of business and
secure obligations not past due;

 

(v) reservations, exceptions, encroachments, rights-of-way, covenants,
conditions, easements, restrictions and similar encumbrances or charges on real
property and minor irregularities in the title thereto that do not (i) secure
obligations for the payment of money or (ii) materially impair the value of such
property or its use by the Company or any of its Subsidiaries in the normal
conduct of such Person’s business;

 

(vi) any Lien incurred to secure Senior Indebtedness;

 

(vii) Liens securing the Company’s obligations under the Notes;

 

(viii) Liens in favors of the Company or any of its Subsidiaries;

 

(ix) Liens on property, shares of stock or Indebtedness or other assets of a
Person existing at the time such Person is merged with or into or consolidated
with the Company or any of its Subsidiaries or otherwise acquired by the Company
or its Subsidiaries, provided that such merger or consolidation is not
prohibited hereunder and such Liens were not incurred in contemplation of such
merger or consolidation and do not extend to any assets other than those of the
Person merged into or consolidated with the Company or any of its Subsidiaries;

 

(x) Liens on property existing at the time of acquisition thereof by the Company
or any of its Subsidiaries, provided that such acquisition is not prohibited
hereunder and such Liens were not incurred in contemplation of such acquisition
and do not extend to property or assets of the Company or its Subsidiaries
existing immediately prior to such acquisition;

 

(xi) Liens existing on the date hereof and either (x) described on Schedule
29(ii) hereto or (y) with a value of less than $100,000 individually and
$500,000 in the aggregate;

 

(xii) Liens to secure any extension, renewal, refinancing or refunding (or
successive extensions, renewals, refinancings or refundings), in whole or in
part, of any Indebtedness secured by Liens referred to in the foregoing clauses
(vi), (ix), (x) and (xii) hereof; provided that such Liens do not extend to any
other property of the Company or any of its Subsidiaries and the principal
amount of the Indebtedness secured by such Lien is not increased;

 

(xiii) judgment Liens not giving rise to an Event of Default so long as such
Liens are adequately bonded and any appropriate legal proceedings that may have
been initiated for the review of such judgment, decree or order shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;

 

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(xiv) Liens securing hedging obligations permitted to be incurred pursuant to
clause (F) of the definition of Permitted Indebtedness;

 

(xv) Liens upon specific items of inventory or other goods and proceeds of any
Person securing such Person’s obligations in respect of banker’s acceptances
issued or credited for the account of such Person to facilitate the purchase,
shipment or storage of such inventory or goods;

 

(xvi) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to such
letters of credit and products and proceeds thereof;

 

(xvii) Liens arising out of consignment or similar arrangements for the sale of
goods in the ordinary course of business,

 

(xviii) Liens in favor of customs and revenue authorities arising as a matter of
law to secure payment of customs duties in connection with the importation of
goods;

 

(xix) Liens on assets leased to the Company or any of its Subsidiaries if such
lease is properly classified as an operating lease in accordance with GAAP;

 

(xx) Liens with respect to conditional sale or other title retention agreements
and any leases in the nature thereof, provided any such Lien with respect to
conditional sales or other title retention agreements encumbers only property
and accretions thereto (and proceeds arising from the disposition thereof) which
are subject to such conditional sale or other title retention agreement or lease
in the nature thereof;

 

(xxi) leases and subleases of, and licenses and sub-licenses with respect to,
property where the Company or any of its Subsidiaries is the lessor or licensor
(or sublessor or sublicensor), provided that such leases, subleases, licenses
and sublicenses do not in the aggregate materially interfere with the business
of the Company and its Subsidiaries taken as a whole; and

 

(xxii) Liens securing Indebtedness permitted to be incurred pursuant to clause
(D) of the definition of Permitted Indebtedness, provided that such Liens do not
extend to any other property of the Company or its Subsidiaries and the
principal amount of the Indebtedness secured by such Lien is not increased.

 

(jj) “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.

 

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

 

(ll) “Redemption Premium” means (i) in the case of the Events of Default
described in Section 4(a)(i) through and including Section 4(a)(iv), 115% until
December 20, 2007, 110% thereafter until December 20, 2008, and 105% thereafter
until final

 

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maturity of the Note; (ii) in the case of the Events of Default described in
Section 4(a)(v), (vi),(ix) – (xi): 110% until December 20, 2006, 107% thereafter
until December 20, 2007, 105% thereafter until December 20, 2008, and 103%
thereafter until final maturity of the Note; or (iii) in the case of the Events
of Default described in Section 4(a)(vii) - (viii), 100%.

 

(mm) “Registration Rights Agreement” means that certain registration rights
agreement dated as of the Subscription Date by and among the Company and the
initial holders of the Notes 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.

 

(nn) “Required Holders” means the holders of Notes representing at least a
majority of the aggregate principal amount of the Notes then outstanding.

 

(oo) “Small Cell Ultracapacitor Production Line” means the Company’s small cell
ultracapacitor production line, which as of the Subscription Date is located
within the Company’s leased facility in San Diego, California, and consisting of
certain capital equipment used primarily to prepare carbon cloth electrode
material and to assemble, impregnate, seal, test and label the Company’s PC5 and
PC10 ultracapacitor products.

 

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

 

(qq) “Securities Purchase Agreement” means that certain securities purchase
agreement dated as of the Subscription Date by and among the Company and the
initial holders of the Notes pursuant to which the Company issued the Notes.

 

(rr) “Senior Indebtedness” means the principal of (and premium, if any),
interest (including any interest accruing subsequent to the commencement of any
bankruptcy or similar proceeding, whether or not a claim for post-petition
interest is an allowable claim in such proceeding) on, and all fees and other
amounts (including, without limitation, any reasonable out-of-pocket costs,
enforcement expenses (including reasonable out-of-pocket legal fees and
disbursements), collateral protection expenses and other reimbursement or
indemnity obligations relating thereto and all reimbursement or payment
obligations with respect to letters of credit) payable by Company under or in
connection with any Indebtedness (including any deferrals, renewals, extensions,
refinancing, amendments, reclassifications or supplements thereto) of the
Company which by its terms expressly does not provide that it ranks pari passu
or junior in right of payment to the Notes. Senior Indebtedness shall not,
however, include the Notes, or any Indebtedness of the Company to any Subsidiary
of the Company.

 

(ss) “Senior Indebtedness Exception” means that at any time after December 20,
2009, (i) if and for so long as no Event of Default shall have occurred and be
continuing nor 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,
(ii) less than $5 million of Notes shall be outstanding pursuant to deferrals in
accordance with Section 8(d) of the Notes and (iii) the Company shall have
incurred at least $50 million in additional Senior Indebtedness.

 

(tt) “Subscription Date” means December 20, 2005.

 

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(uu) “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.

 

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

 

(ww) “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.

 

(xx) “Weighted Average Price” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during
the period beginning at 9:30:01 a.m., New York Time (or such other time as the
Principal Market publicly announces is the official open of trading), and ending
at 4:00:00 p.m., New York Time (or such other time as the Principal Market
publicly announces is the official close of trading) as reported by Bloomberg
through its “Volume at Price” functions, or, if the foregoing does not apply,
the dollar volume-weighted average price of such security in the
over-the-counter market on the electronic bulletin board for such security
during the period beginning at 9:30:01 a.m., New York Time (or such other time
as such market publicly announces is the official open of trading), and ending
at 4:00:00 p.m., New York Time (or such other time as such market publicly
announces is the official close of trading) as reported by Bloomberg, or, if no
dollar volume-weighted average price is reported for such security by Bloomberg
for such hours, the average of the highest closing bid price and the lowest
closing ask price of any of the market makers for such security as reported in
the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau,
Inc.). If the Weighted Average Price cannot be calculated for a security on a
particular date on any of the foregoing bases, the Weighted Average Price of
such security on such date shall be the fair market value as mutually determined
by the Company and the Holder. If the Company and the Holder are unable to agree
upon the fair market value of such security, then such dispute shall be resolved
pursuant to Section 24. All such determinations to be appropriately adjusted for
any stock dividend, stock split, stock combination or other similar transaction
during the applicable calculation period.

 

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(30) 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 comply with the disclosure requirements under the federal securities laws.

 

[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.

 

MAXWELL TECHNOLOGIES, INC. By:  

/s/ Richard Balanson

   

Richard Balanson

   

Chief Executive Officer

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

EXHIBIT I

 

MAXWELL TECHNOLOGIES, INC.

CONVERSION NOTICE

 

Reference is made to the Senior Subordinated Convertible Note (the “Note”)
issued to the undersigned by Maxwell Technologies, Inc. (the “Company”). In
accordance with and pursuant to the Note, the undersigned hereby elects to
convert the Conversion Amount (as defined in the Note) of the Note indicated
below into shares of Common Stock par value $0.10 per share (the “Common Stock”)
of the Company, 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 of the Note 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
maximum percentage of the total outstanding shares of Common Stock as determined
pursuant to the provisions of Section 3(d) of the Note.

 

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

 

Issue to:                     

Facsimile Number:       

Authorization:       

By:  

    

Title:  

    

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

Dated:       

Account Number:  

    

(if electronic book entry transfer)

Transaction Code Number:  

    

(if electronic book entry transfer)

Installment Amounts to be reduced and amount of reduction:     

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

 

ACKNOWLEDGMENT

 

The Company hereby acknowledges this Conversion Notice and hereby directs Mellon
Investor Services to issue the above indicated number of shares of Common Stock
in accordance with the Transfer Agent Instructions dated December 20, 2005 from
the Company and acknowledged and agreed to by Mellon Investor Services.

 

MAXWELL TECHNOLOGIES, INC. By:        

Name:

   

Title: