**Exhibit 10.35**

 

**NEITHER THEISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THESECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTEREDUNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNEDIN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THESECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINIONOF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIREDUNDER SAID ACT. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMSOF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 19(a) HEREOF. THEPRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIESISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ONTHE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.**

 

**CONVERTIBLE SUBORDINATED NOTE**

 
| Issuance Date:  December 28, 2007 |   | Principal: U.S.  $[                     ] |
|----------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|

 

**FOR VALUE RECEIVED,** LIQUIDMETAL TECHNOLOGIES, INC., a Delaware corporation (the **“Company”**), hereby promises to pay to theorder of [INSERT HOLDER] or registered assigns (**“Holder”**) the amount set out above as the Principal (asreduced pursuant to the terms hereof pursuant to redemption, conversion orotherwise, the **“Principal”**) whendue, whether upon the Maturity Date (as defined below), acceleration,redemption or otherwise (in each case in accordance with the terms hereof) andto pay interest (**“Interest”**) onany outstanding Principal at the rate of interest as determined pursuant to Section 2,from the date set out above as the Issuance Date (the **“Original Date”**) until the same becomes dueand payable, whether upon an Interest Date (as defined below), the Maturity Date,acceleration, conversion, redemption or otherwise (in each case in accordancewith the terms hereof). This Convertible Subordinated Note (including allConvertible Subordinated Notes issued in exchange, transfer or replacementhereof, this **“Note”**) is one of anissue of Convertible Subordinated Notes (collectively, the **“Notes”** and such other ConvertibleSubordinated Notes, the **“Other Notes”**)issued on the Issuance Date pursuant to the Securities Purchase Agreement (asdefined below). Certain capitalized terms are defined in Section 29.

 

(1)                                  MATURITY AND AMORTIZATION PAYMENTS.

 

(a)                                  Payment on Maturity. On January 3, 2010 (the **“Maturity Date”**), the Holder shallsurrender this Note to the Company and the Company shall pay to the Holder anamount in cash representing all outstanding Principal and accrued and unpaidInterest, and following receipt of such payment, the Holder shall mark thisNote as “Cancelled” and shall surrender such cancelled Note to the Company bycourier, registered mail, or other traceable means. Beginning on the first dayof the eighteenth (18th) calendar month following the calendar monthin which the Original Date occurs, the Company may, upon thirty (30) calendardays prior

 

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written notice to Holder and at the soleelection of the Company, prepay this Note in whole or in part for a cashredemption price equal to One Hundred Five Percent (105%) of the the portion ofthe principal amount being redeemed plus all accrued and unpaid interest on theportion of the principal amount being redeemed, provided that following suchnotice the Holder may convert all or any part of the portion of theNote to be redeemed so long as the Company receives a duly executed ConversionNotice pursuant to Section 3 of this Note prior to the date on which prepaymentis actually made.

 

(b)                                 Amortization Payments. Beginning on July 31, 2008 and at theend of each month thereafter (each, an “**Amortization Date**”)until there is no outstanding Principal of this Note, the Company shall redeem$[                  ][*1/36th of the original Principal amount of thisNote*] of this Note (each, an “**Amortization RedemptionAmount**”). If the Company is unable to redeem all Principal andInterest with respect to all Amortization Redemption Amounts on this Note andthe Other Notes, then the Company shall redeem a pro rata amount from eachholder of the Notes (including the Holder) based on the principal amount of theNotes subject to payment of an Amortization Redemption Amount on suchAmortization Date pursuant to this Note and the Other Notes.

 

(c)                                  Payment of Amortization Redemption Amount. The Company shall pay the AmortizationRedemption Amount in cash in accordance with the provisions of Section 12;provided, however, that if the Conditions to Amortization Conversion (as definedbelow) are satisfied or waived in writing by the Holder and the Companyprovides the Amortization Conversion Notice (as defined below), then theCompany shall have the right to require the Holder to convert all or any suchportion of the Amortization Redemption Amount designated in the AmortizationConversion Notice into fully paid, validly issued and nonassessable shares ofCommon Stock in accordance with the applicable provisions of Section 3(c)(i).The Company may exercise its right to require conversion under this Section 1(c) bydelivering at least 20 Trading Days prior to such Amortization Date a writtennotice thereof by facsimile and overnight courier to all, but not less thanall, of the holders of Notes and the Transfer Agent that specifically describesthe portion of the Amortization Redemption Amount for this Note and the OtherNotes that will be paid in Common Stock (the **“AmortizationConversion Notice”**and the date all of the holders received suchnotice is referred to as the “**Amortization ConversionNotice Date**”). The Amortization Conversion Notice shall beirrevocable; provided; that if any of the Conditions to AmortizationConversion is not satisfied on the applicable Amortization Date or waived bythe Holder, the Company will notwithstanding delivery of the AmortizationConversion Notice be required to pay the Amortization Redemption Amount in cash.The conversion price applicable to an Amortization Conversion (the “AmortizationPrice”) that is being paid in Common Stock pursuant to this Section 1(c) shallbe 90% of the Weighted Average Price of the Common Stock for the 20 consecutiveTrading Days immediately preceding the Amortization Date. For purposes of this Section 1(c),“**Conditions to Amortization Conversion**”means****the following conditions: (i) theCommon Stock shall be traded on the Principal Market, the NASDAQ Gobal Marketor NASDAQ Capital Market, or the American Stock Exchange on the applicableAmortization Date, (ii) on the Amortization Date, either (x) theRegistration Statement or Registration Statements contemplated by theRegistration

 

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Rights Agreement shall be effective and available for the sale for allof the Registrable Securities (as defined in the Registration Rights Agreement)then outstanding, together with the Common Stock to be issued on suchAmortization Date, in accordance with the terms of the Registration RightsAgreement or (y) all shares of Common Stock issuable upon conversion of theNotes shall be eligible for sale without restriction and without the need forregistration under any applicable federal or state securities laws, (iii) anAuthorized Share Failure shall not be in effect on the Amortization Date; and (iv) anysuch payment of the Amortization Redemption Amount in Common Stock shall notconsist of more than 20% of the total dollar volume traded in the Common Stockfor the 20 Trading Days prior to the Amortization Date.

 

(2)                                  INTEREST; INTEREST RATE. Interest on this Note shall commenceaccruing on the Issuance Date and shall be computed on the basis of a 365-dayyear and actual days elapsed and shall be payable in arrears on the first dayof each Calendar Quarter and on the Maturity Date during the period beginningon the Issuance Date and ending on, and including, the Maturity Date (each, an **“Interest Date”**) with the first InterestDate being April 1, 2008. Interest shall be payable on each Interest Dateat the option of the Company (i) in cash at the rate of 8.00% per annum(the **“Cash Interest Rate”**) or (ii) atthe rate of 10.00% per annum (the **“NoteInterest Rate”**, and referred to sometimes herein as the **“Interest Rate”**) in the form of anadditional Convertible Subordinated Note in the form of this Note in theprincipal amount of such Interest. Prior to the payment of Interest on anInterest Date, Interest on this Note shall accrue at the Cash Interest Rate andbe payable by way of inclusion of the Interest in the Conversion Amount inaccordance with Section 3(b)(i). From and after the occurrence of an Eventof Default, the Interest Rate shall be increased so that the Cash Interest Rateshall be twelve percent (12.00%) per annum and the Note Interest Rate per annumshall be fifteen percent (15%) per annum. In the event that such Event ofDefault is subsequently cured, the adjustment referred to in the precedingsentence shall cease to be effective as of the date of such cure; provided thatthe Interest as calculated at such increased rate during the continuance ofsuch Event of Default shall continue to apply to the extent relating to thedays after the occurrence of such Event of Default through and including thedate of cure of such Event of Default. Notwithstanding the foregoing, theCompany may not elect to pay interest at the Note Interest Rate and issueadditional Convertible Subordinated Notes in the principal amount of suchInterest unless either (i) the Registration Statement or RegistrationStatements contemplated by the Registration Rights Agreement shall be effectiveand available for the sale of all of the then-outstanding RegistrableSecurities, together with the Common Stock issuable upon conversion of suchadditional Convertible Subordinated Notes in accordance with the terms of theRegistration Rights Agreement or (ii) all shares of Common Stock issuableupon conversion of the Notes shall be eligible for sale without restriction andwithout the need for registration under any applicable federal or statesecurities laws.

 

(3)                                  CONVERSION OF NOTES. This Note shall be convertible into sharesof the Company’s common stock, par value $0.001 per share (the **“Common Stock”**), on the terms andconditions set forth in this Section 3.

 

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(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 beentitled to convert any portion of the outstanding and unpaid Conversion Amount(as defined below) in increments of at least $50,000 of Principal (or suchlesser amount if such amount represents the remaining Principal amount) intofully 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 anyfraction of a share of Common Stock upon any conversion. If the issuance wouldresult in the issuance of a fraction of a share of Common Stock, the Companyshall round such fraction of a share of Common Stock up to the nearest wholeshare. The Company shall pay any and all taxes that may be payable withrespect to the issuance and delivery of Common Stock upon conversion of anyConversion Amount.

 

(b)                                 Conversion Rate. The number of shares of Common Stockissuable upon conversion of any Conversion Amount pursuant to Section 3(a) shallbe determined by dividing (x) such Conversion Amount by (y) the ConversionPrice (as defined below) (the **“ConversionRate”**).

 

(i)                                     **“Conversion Amount”** means the sum of (A) the portion of thePrincipal to be converted, redeemed or otherwise with respect to which thisdetermination is being made, plus (B) accrued and unpaid Interest withrespect to such Principal.

 

(ii)                                  **“Conversion Price”** means, as of any Conversion Date (as definedbelow) or other date of determination, and subject to adjustment as providedherein, $1.10.

 

(c)                                  Mechanics of Conversion.

 

(i)                                     Optional Conversion. To convert any Conversion Amount intoshares of Common Stock on any date (a **“ConversionDate”**), the Holder shall (A) transmit by facsimile (orotherwise deliver), for receipt on or prior to 5:00 p.m., New York Time,on such date, a copy of an executed notice of conversion in the form attachedhereto as Exhibit I (the **“ConversionNotice”**) 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 aspracticable on or following such date (or an indemnification undertaking withrespect to this Note in the case of its loss, theft or destruction). On orbefore the first Business Day following the date of receipt of a ConversionNotice, the Company shall transmit by facsimile a confirmation of receipt ofsuch Conversion Notice to the Holder and the Company’s transfer agent (the “**Transfer Agent**”). On or before the secondBusiness Day following the date of receipt of a Conversion Notice (the **“Share Delivery Date”**), the Company shall(X) credit such aggregate number of shares of Common Stock to which the Holdershall be entitled to the Holder’s or its designee’s balance account withDepository Trust Company (“**DTC**”)through its Deposit Withdrawal At Custodian system or (Y) if the Transfer Agentis not participating in DTC Fast Automated Securities Transfer Program, issueand deliver to the address as specified in the Conversion Notice, acertificate, registered in the name of the Holder or its designee, for thenumber of shares of Common Stock to which the Holder shall be entitled. If thisNote is physically

 

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surrendered for conversionas required by Section 3(c)(iii) and the outstanding Principal ofthis Note is greater than the Principal portion of the Conversion Amount beingconverted, then the Company shall as soon as practicable and in no event laterthan five 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. The Person or Personsentitled to receive the shares of Common Stock issuable upon a conversion ofthis Note shall be treated for all purposes as the record holder or holders ofsuch shares of Common Stock on the Conversion Date.

 

(ii)                                  Company’s Failure to Timely Convert. If the Company shall fail to issue acertificate to the Holder or credit the Holder’s balance account with DTC forthe number of shares of Common Stock to which the Holder is entitled uponconversion of any Conversion Amount on or prior to the date which is fiveBusiness Days after the Conversion Date (a **“ConversionFailure”**), then (A) the Company shall pay liquidated damages tothe Holder for each day of such Conversion Failure in an amount equal to 1.0%****of the product of (I) the sum of thenumber of shares of Common Stock not issued to the Holder on or prior to theShare Delivery Date and to which the Holder is entitled, and (II) the ClosingSale Price of the Common Stock on the Share Delivery Date and (B) theHolder, upon written notice to the Company, may void its Conversion Noticewith respect to, and retain or have returned, as the case may be, anyportion of this Note that has not been converted pursuant to such ConversionNotice; provided that the voiding of a Conversion Notice shall not affect theCompany’s obligations to make any payments which have accrued prior to the dateof such notice pursuant to this Section 3(c)(ii) or otherwise. Inaddition to the foregoing, if within three (3) Trading Days after theCompany’s receipt of the facsimile copy of a Conversion Notice the Companyshall fail to issue and deliver a certificate to the Holder or credit theHolder’s balance account with DTC for the number of shares of Common Stock towhich the Holder is entitled upon such holder’s conversion of any ConversionAmount, and if on or after such Trading Day the Holder purchases (in an openmarket transaction or otherwise) Common Stock to deliver in satisfaction of asale by the Holder of Common Stock issuable upon such conversion that theHolder anticipated receiving from the Company (a “**Buy-In**”), then the Company shall, within five (5) BusinessDays after the Holder’s request and in the Holder’s discretion, either (i) paycash to the Holder in an amount equal to the Holder’s total purchase price(including brokerage commissions and other out-of-pocket expenses, if any) forthe shares of Common Stock so purchased (the **“Buy-InPrice”**), at which point the Company’s obligation to deliver suchcertificate (and to issue such Common Stock) shall terminate, or (ii) promptlyhonor its obligation to deliver to the Holder a certificate or certificatesrepresenting such Common Stock and pay cash to the Holder in an amount equal tothe excess (if any) of the Buy-In Price over the product of (A) suchnumber of shares of Common Stock, times (B) the Closing Bid Price on theConversion Date.

 

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(iii)                               Book-Entry. Notwithstanding anything to the contrary set forth herein, uponconversion of any portion of this Note in accordance with the terms hereof, theHolder shall not be required to physically surrender this Note to the Companyunless (A) the full Conversion Amount represented by this Note is beingconverted or (B) the Holder has provided the Company with prior writtennotice (which notice may be included in a Conversion Notice) requestingphysical surrender and reissue of this Note. The Holder and the Company shallmaintain records showing the Principal and Interest converted and the dates ofsuch conversions or shall use such other method, reasonably satisfactory to theHolder and the Company, so as not to require physical surrender of this Noteupon conversion.

 

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

 

(d)                                 Limitations on Conversions.

 

(i)                                     Beneficial Ownership. Unless waived by the Holder upon no lessthan sixty one (61) days prior written notice to the Company, the Company shallnot effect any conversion of this Note pursuant to Section 3(a) tothe extent that after giving effect to such conversion the Holder (togetherwith the Holder’s affiliates) would beneficially own in excess of 4.99% of thenumber of shares of Common Stock outstanding immediately after giving effect tosuch conversion. Even if the Holder waives the limitation set forth in thepreceding sentence, the Company shall in no event effect any conversion of thisNote, and the Holder of this Note shall not have the right to convert anyportion of this Note pursuant to Section 3(a), to the extent that aftergiving effect to such conversion, the Holder (together with the Holder’saffiliates) would beneficially own in excess of 9.99% of the number of sharesof Common Stock outstanding immediately after giving effect to such conversion.For purposes of the foregoing sentences, the number of shares of Common Stockbeneficially owned by the Holder and its affiliates shall include the number ofshares of Common Stock issuable upon conversion of this Note with respect towhich the determination of such sentence is being made, but shall exclude thenumber of shares of Common Stock which would be issuable upon (A) conversionof the remaining, nonconverted portion of this Note beneficially owned by theHolder or any of its affiliates and (B) exercise or conversion of theunexercised or nonconverted portion of any other securities of the Company(including, without limitation, any Other Notes or warrants) subject to alimitation on conversion or exercise analogous to the limitation contained

 

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herein beneficially owned bythe Holder or any of its affiliates. Except as set forth in the precedingsentence, for purposes of this Section 3(d)(i), beneficial ownership shallbe calculated in accordance with Section 13(d) of the SecuritiesExchange Act of 1934, as amended. For purposes of this Section 3(d)(i), indetermining the number of outstanding shares of Common Stock, the Holder may relyon the number of outstanding shares of Common Stock as reflected in (x) theCompany’s most recent Form 10-Q or Form 10-K, (y) a more recentpublic announcement by the Company or (z) any other notice by the Company orthe Transfer Agent setting forth the number of shares of Common Stockoutstanding. For any reason at any time, upon the written or oral request ofthe Holder, the Company shall within two Business Days confirm orally and inwriting to the Holder the number of shares of Common Stock then outstanding. Inany case, the number of outstanding shares of Common Stock shall be determinedafter 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 whichsuch number of outstanding shares of Common Stock was reported.

 

(ii)                                  Principal Market Regulation. The Company shall not be obligated to issueany shares of Common Stock upon conversion of this Note if the issuance of suchshares of Common Stock would exceed that number of shares of Common Stock thatthe Company may issue upon conversion of the Notes without breaching theCompany’s obligations under the rules or regulations of the PrincipalMarket (the **“Exchange Cap”**),except that such limitation shall not apply in the event that the Company (A) obtainsthe approval of its stockholders as required by the applicable rules ofthe Principal Market for issuances of Common Stock in excess of such amount or (B) obtainsa written opinion from outside counsel to the Company that such approval is notrequired, which opinion shall be reasonably satisfactory to the holders of theNotes representing at least a majority of the principal amounts of the Notesthen outstanding. Until such approval or written opinion is obtained, nopurchaser of the Notes pursuant to the Securities Purchase Agreement (the **“Purchasers”**) shall be issued, uponconversion of Notes, shares of Common Stock in an amount greater than theproduct of the Exchange Cap multiplied by a fraction, the numerator of which isthe principal amount of Notes issued to such Purchaser pursuant to theSecurities Purchase Agreement on the Issuance Date and the denominator of whichis the aggregate principal amount of all Notes issued to the Purchaserspursuant to the Securities Purchase Agreement on the Issuance Date (withrespect to each Purchaser, the **“Exchange CapAllocation”**). In the event that any Purchaser shall sell or otherwisetransfer any of such Purchaser’s Notes, the transferee shall be allocated a prorata portion of such Purchaser’s Exchange Cap Allocation, and the restrictionsof the prior sentence shall apply to such transferee with respect to theportion of the Exchange Cap Allocation allocated to such transferee. In theevent that any holder of Notes shall convert all of such holder’s Notes into anumber of shares of Common Stock which, in the aggregate, is less than suchholder’s Exchange Cap Allocation, then the difference between such holder’sExchange Cap Allocation and the number of shares of Common Stock actuallyissued to such holder shall be allocated to the respective Exchange CapAllocations of the remaining holders of Notes on a pro rata basis in proportionto the aggregate principal amount of the Notes then held by each such holder.

 

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(4)                                  RIGHTS UPON EVENT OF DEFAULT.

 

(a)                                  Event of Default. Each of the following events shallconstitute an **“Event of Default”**:

 

(i)                                     the Company’s failure to pay to the Holderany amount of Principal or Interest when and as due under this Note if suchfailure continues for a period of at least five Business Days;

 

(ii)                                  the Company’s failure to pay to the Holderany amounts other than Principal or Interest when and as due under this Note,the Securities Purchase Agreement, or the Registration Rights Agreement, whichfailure is not cured within five Business Days after notice of such defaultsent by the Holder to the Company;

 

(iii)                               any default under, redemption of oracceleration prior to maturity of any Indebtedness (as defined below) of theCompany or any of its Subsidiaries (as defined in the Securities PurchaseAgreement) other than with respect to any Other Notes and the Senior Indebtedness;provided that in the case of a payment default of such Indebtedness, suchdefault is not cured within applicable cure periods; further provided that inthe case of a non-payment default of such Indebtedness that has not resulted inan acceleration or redemption of such Indebtedness prior to its maturity, onlyupon acceleration or redemption of such Indebtedness;

 

(iv)                              the Company shall fail to observe or perform anyother material covenant or agreement contained in the Securities Purchase Agreement,which failure is not cured within ten Business Days after notice of suchdefault sent by the Holder to the Company;

 

(v)                                 the Company or any of its Subsidiaries,pursuant to or within the meaning of Title 11, U.S. Code, or any similarFederal or state law for the relief of debtors (collectively, **“Bankruptcy Law”**), (A) commences avoluntary case, (B) consents to the entry of an order for relief againstit in an involuntary case, (C) consents to the appointment of a receiver,trustee, assignee, liquidator or similar official (a **“Custodian”**), or (D) makes a general assignment for thebenefit of its creditors;

 

(vi)                              a court of competent jurisdiction enters anorder or decree under any Bankruptcy Law that (A) is for relief againstthe Company or any of its Subsidiaries in an involuntary case that remainsundismissed for a period of 90 days, (B) appoints a Custodian of theCompany or any of its Subsidiaries that remains undischarged or unstayed for aperiod of 90 days, or (C) orders the liquidation of the Company or any ofits Subsidiaries;

 

(vii)                           a final judgment or judgments for the paymentof money aggregating in excess of $500,000 are rendered against the Company orany of its Subsidiaries and which

 

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judgments are not, within 60days after the entry thereof, bonded, discharged or stayed pending appeal, orare not discharged within 60 days after the expiration of such stay; provided,however, that any judgment which is covered by insurance or an indemnity from acredit worthy party shall not be included in calculating the $500,000 amountset forth above;

 

(viii)                        any breach or failure to comply with Section 15of this Note; or

 

(ix)                                any Event of Default (as defined in the OtherNotes) occurs with respect to any Other Notes.

 

(b)                                 Redemption Right. Promptly after the occurrence of an Eventof Default with respect to this Note or any Other Note, the Company shalldeliver written notice thereof via facsimile and overnight courier (an **“Event of Default Notice”**) to the Holder. Atany time after the earlier of the Holder’s receipt of an Event of DefaultNotice and the Holder becoming aware of an Event of Default, the Holder may requirethe Company to redeem all or any portion of this Note by delivering writtennotice thereof (the **“Event of DefaultRedemption Notice”**) to the Company, which Event of DefaultRedemption Notice shall indicate the portion of this Note the Holder iselecting to redeem. Each portion of this Note subject to redemption by theCompany pursuant to this Section 4(b) shall be redeemed by theCompany at a price equal to the greater of (i) the Conversion Amount to beredeemed and (ii) the product of (A) the Conversion Rate with respectto such Conversion Amount in effect at such time as the Holder delivers anEvent of Default Redemption Notice and (B) the Closing Sale Price of theCommon Stock on the date immediately preceding such Event of Default (the **“Event of Default Redemption Price”**). Redemptionsrequired by this Section 4(b) shall be made in accordance with theprovisions of Section 12.

 

(5)                                  RIGHTS UPON CHANGE OF CONTROL.

 

(a)                                  Change of Control. Each of the following events shallconstitute a **“Change of Control”**:

 

(i)                                     the consolidation, merger or other businesscombination (including, without limitation, a reorganization orrecapitalization) of the Company with or into another Person (other than (A) aconsolidation, merger or other business combination (including, withoutlimitation, reorganization or recapitalization) in which holders of the Company’svoting power immediately prior to the transaction continue after thetransaction to hold, directly or indirectly, the voting power of the survivingentity or entities necessary to elect a majority of the members of the board ofdirectors (or their equivalent if other than a corporation) of such entity orentities, or (B) pursuant to a migratory merger effected solely for thepurpose of changing the jurisdiction of incorporation of the Company);

 

(ii)                                  the sale or transfer of all or substantiallyall of the Company’s assets; or

 

(iii)                               a purchase, tender or exchange offer made toand accepted by the holders of more than the 50% of the outstanding shares ofCommon Stock.

 

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No sooner than 15 days nor later than 10 daysprior to the consummation of a Change of Control, but not prior to the publicannouncement of such Change of Control, the Company shall deliver writtennotice thereof via facsimile and overnight courier to the Holder (a **“Change of Control Notice”**).

 

(b)                                 Assumption. Prior to the consummation of any Change of Control, the Company willsecure from any Person purchasing the Company’s assets or Common Stock or anysuccessor resulting from such Change of Control (in each case, an **“Acquiring Entity”**) a written agreement (inform and substance satisfactory to the holders of Notes representing atleast a majority of the aggregate principal amount of the Notes thenoutstanding) to deliver to each holder of Notes in exchange for such Notes, asecurity of the Acquiring Entity evidenced by a written instrumentsubstantially similar in form and substance to the Notes, including,without limitation, having a principal amount and interest rate equal to theprincipal amounts and the interest rates of the Notes held by such holder, andsatisfactory to the holders of Notes representing at least a majority of theprincipal amount of the Notes then outstanding. In the event that an AcquiringEntity is directly or indirectly controlled by a company or entity whose commonstock or similar equity interest is listed, designated or quoted on asecurities exchange or trading market, the holders of Notes representing atleast a majority of the aggregate principal amount of the Notes thenoutstanding may elect to treat such Person as the Acquiring Entity forpurposes of this Section 5(b).

 

(c)                                  Redemption Right. At any time during the period beginningafter the Holder’s receipt of a Change of Control Notice and ending on the dateof the consummation of such Change of Control (or, in the event a Change ofControl Notice is not delivered at least 10 days prior to a Change of Control,at any time on or after the date which is 10 days prior to a Change of Controland ending ten days after the consummation of such Change of Control), the Holdermay require the Company to redeem all or any portion of this Note bydelivering written notice thereof (**“Change ofControl Redemption Notice”**) to the Company, which Change of ControlRedemption Notice shall indicate the Conversion Amount the Holder is electingto redeem; provided, however, that the Company shall not be under anyobligation to redeem all or any portion of this Note or to deliver theapplicable Change of Control Redemption Price unless and until the applicableChange of Control is consummated. The portion of this Note subject toredemption pursuant to this Section 5 shall be redeemed by the Company incash at a price equal to the greater of (i) the sum of (x) the product of (A) theApplicable Percentage (as defined below) and (B) the Conversion Amountbeing redeemed and (y) the amount of any accrued but unpaid Interest on suchConversion Amount being redeemed through the date of such redemption paymentand (ii) the product of (x) the Applicable Percentage and (y) the sum of (1) theproduct of (A) the Conversion Amount being redeemed multiplied by (B) thequotient determined by dividing (I) the aggregate cash consideration and theaggregate cash value of any non-cash consideration per Common Share to be paidto the holders of the

 

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Common Shares upon consummation of the Change of Control (any suchnon-cash consideration in the form of securities to be valued at thehigher of the Closing Sale Price of such securities as of the Trading Day immediatelyprior to the consummation of such Change of Control, the Closing Sale Price onthe Trading Day immediately following the public announcement of such proposedChange of Control and the Closing Sale Price on the Trading Day immediatelyprior to the public announcement of such proposed Change of Control) by (II)the Conversion Price plus (2) the amount of any accrued but unpaidInterest on such Conversion Amount being redeemed through the date of suchredemption payment, (the “**Change of ControlRedemption Price**”). Redemptions required by this Section 5(c) shallbe made in accordance with the provisions of Section 12 and shall havepriority to payments to stockholders in connection with a Change of Control. Forpurposes of this Note, the term “**Applicable Percentage**”means 120% if the Change of Control is consummated on or before the first (1st)anniversary of the Original Date, 115% if the Change of Control is consummatedafter the first (1st) anniversary of the Original Date but on orbefore the second (2nd) anniversary of the Original Date, and 110%if the Change of Control is consummated at any time after the second (2nd)anniversary of the Original Date.

 

(6)                                  RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS ANDOTHER CORPORATE EVENTS.

 

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

 

(b)                                 Other Corporate Events. Prior to the consummation of anyrecapitalization, reorganization, consolidation, merger, spin-off or otherbusiness combination (other than a Change of Control) pursuant to which holdersof Common Stock are entitled to receive securities or other assets with respectto or in exchange for Common Stock (a **“CorporateEvent”**), the Company shall make appropriate provision to insure thatthe Holder will thereafter have the right to receive upon a conversion of thisNote, (i) in addition to the shares of Common Stock receivable upon suchconversion, such securities or other assets to which the Holder would have beenentitled with respect to such shares of Common Stock had such shares of CommonStock been held by the Holder upon the consummation of such Corporate Event or (ii) inlieu of the shares of Common Stock otherwise receivable upon such conversion,such securities or other assets received by the holders of Common Stock inconnection with the consummation of such Corporate Event in such amounts as theHolder

 

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would have been entitled to receive had this Note initially been issuedwith conversion rights for the form of such consideration (as opposed toshares of Common Stock) at a conversion rate for such considerationcommensurate with the Conversion Rate. Provision made pursuant to the precedingsentence shall be in a form and substance satisfactory to the holders ofNotes representing at least a majority of the aggregate principal amount of theNotes then outstanding.

 

(7)                                  RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

 

(a)                                  Adjustment of Conversion Price upon Issuanceof Common Stock. If andwhenever on or after the Issuance Date, the Company issues or sells, or inaccordance 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 CommonStock owned or held by or for the account of the Company, but excluding sharesof Common Stock deemed to have been issued or sold by the Company in connectionwith any Excluded Security) for a consideration per share (the **“New Securities Issuance Price”**) less thana price (the **“Applicable Price”**)equal to the 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 ineffect shall be reduced to an amount (rounded to the nearest cent) equal to theNew Securities Issuance Price. For purposes of determining the adjustedConversion Price under this Section 7(a), the following shall beapplicable:

 

(i)                                     Issuance of Options. If the Company in any manner grants orsells any Options and the lowest price per share for which one share of CommonStock is issuable upon the exercise of any such Option or upon conversion orexchange or exercise of any Convertible Securities issuable upon exercise ofsuch Option is less than the Applicable Price, then such share of Common Stockshall be deemed to be outstanding and to have been issued and sold by theCompany at the time of the granting or sale of such Option for such price pershare. For purposes of this Section 7(a)(i), the “lowest price per sharefor which one share of Common Stock is issuable upon the exercise of any suchOption or upon conversion or exchange or exercise of any Convertible Securitiesissuable upon exercise of such Option” shall be equal to the sum of the lowestamounts of consideration (if any) received or receivable by the Company withrespect to any one share of Common Stock upon granting or sale of the Option,upon exercise of the Option and upon conversion or exchange or exercise of anyConvertible Security issuable upon exercise of such Option. No furtheradjustment of the Conversion Price shall be made upon the actual issuance ofsuch Common Stock or of such Convertible Securities upon the exercise of suchOptions or upon the actual issuance of such Common Stock upon conversion orexchange or exercise of such Convertible Securities.

 

(ii)                                  Issuance of Convertible Securities. If the Company in any manner issues orsells any Convertible Securities and the lowest price per share for which oneshare of Common Stock is issuable upon such conversion or exchange or exercisethereof is less than the Applicable Price, then such share of Common Stockshall be deemed to be outstanding and to have been issued and sold by theCompany at the time of the issuance of sale of

 

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such Convertible Securitiesfor such price per share. For the purposes of this Section 7(a)(ii), the “priceper share for which one share of Common Stock is issuable upon such conversionor exchange or exercise” shall be equal to the sum of the lowest amounts ofconsideration (if any) received or receivable by the Company with respect toany one share of Common Stock upon the issuance or sale of the ConvertibleSecurity and upon the conversion or exchange or exercise of such ConvertibleSecurity. No further adjustment of the Conversion Price shall be made upon theactual issuance of such Common Stock upon conversion or exchange or exercise ofsuch Convertible Securities, and if any such issue or sale of such ConvertibleSecurities is made upon exercise of any Options for which adjustment of theConversion Price had been or are to be made pursuant to other provisions ofthis Section 7(a), no further adjustment of the Conversion Price shall bemade by reason of such issue or sale. Notwithstanding anything in this Note tothe contrary, in the event that the Company agrees to decrease the conversionprice of any of its 7% Convertible Secured Promissory Notes due August 2007in connection with an agreement by the holder of any such notes to convert thesame, such decrease in the conversion price will not result in any adjustmentto the Conversion Price pursuant to this Section 7(a) of this Note.

 

(iii)                               Change in Option Price or Rate of Conversion.If the purchase priceprovided for in any Options, the additional consideration, if any, payable uponthe issue, conversion, exchange or exercise of any Convertible Securities, orthe rate at which any Convertible Securities are convertible into orexchangeable or exercisable for Common Stock changes at any time, theConversion Price in effect at the time of such change shall be adjusted to theConversion Price which would have been in effect at such time had such Optionsor Convertible Securities provided for such changed purchase price, additionalconsideration or changed conversion rate, as the case may be, at the timeinitially granted, issued or sold.

 

(iv)                              Calculation of Consideration Received. In case any Option is issued in connectionwith the issue or sale of other securities of the Company, together comprisingone integrated transaction in which no specific consideration is allocated tosuch Options by the parties thereto, the Options will be deemed to have beenissued for a consideration of $.01. If any Common Stock, Options or ConvertibleSecurities are issued or sold or deemed to have been issued or sold for cash,the consideration received therefor will be deemed to be the net amountreceived by the Company therefor. If any Common Stock, Options or ConvertibleSecurities are issued or sold for a consideration other than cash, the amountof the consideration other than cash received by the Company will be the fairvalue of such consideration, except where such consideration consists ofsecurities, in which case the amount of consideration received by the Companywill be the Closing Sale Price of such securities on the date of receipt. Ifany Common Stock, Options or Convertible Securities are issued to the owners ofthe non-surviving entity in connection with any merger in which the Company isthe surviving entity, the amount of consideration therefor will be deemed to bethe fair value of such portion of the net assets and business of thenon-surviving entity as is attributable to such Common Stock,

 

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Options or ConvertibleSecurities, as the case may be. The fair value of any consideration otherthan cash or securities will be determined jointly by the Company and theholders of Notes representing at least a majority of the principal amounts ofthe Notes then outstanding. If such parties are unable to reach agreementwithin ten days after the occurrence of an event requiring valuation (the **“Valuation Event”**), the fair value of suchconsideration will be determined within five Business Days after the tenth dayfollowing the Valuation Event by an independent, reputable appraiser jointlyselected by the Company and the holders of Notes representing at least amajority of the principal amounts of the Notes then outstanding. Thedetermination of such appraiser shall be deemed binding upon all parties absentmanifest error and the fees and expenses of such appraiser shall be borneequally by the Company, on the hand, and the holders of the Notes, on the otherhand.

 

(v)                                 Record Date. If the Company takes a record of the holders of Common Stock for thepurpose of entitling them (A) to receive a dividend or other distributionpayable in Common Stock, Options or in Convertible Securities or (B) tosubscribe for or purchase Common Stock, Options or Convertible Securities, thensuch record date will be deemed to be the date of the issue or sale of theshares of Common Stock deemed to have been issued or sold upon the declarationof such dividend or the making of such other distribution or the date of thegranting of such right of subscription or purchase, as the case may be.

 

(b)                                 Adjustment of Conversion Price uponSubdivision or Combination of Common Stock. If the Company at any time subdivides (by any stock split, stock dividend,recapitalization or otherwise) one or more classes of its outstanding shares ofCommon Stock into a greater number of shares, the Conversion Price in effectimmediately prior to such subdivision will be proportionately reduced. If theCompany at any time combines (by combination, reverse stock split or otherwise)one or more classes of its outstanding shares of Common Stock into a smallernumber of shares, the Conversion Price in effect immediately prior to suchcombination will be proportionately increased.

 

(c)                                  Other Events. If any event occurs of the typecontemplated by the provisions of this Section 7 but not expresslyprovided for by such provisions (including, without limitation, the granting ofstock appreciation rights, phantom stock rights or other rights with equityfeatures), then the Company’s Board of Directors will make an appropriateadjustment in the Conversion Price so as to protect the rights of the Holderunder this Note; provided that no such adjustment will increase the ConversionPrice as otherwise determined pursuant to this Section 7.

 

(9)                                  COMPANY’S RIGHT OF MANDATORY CONVERSION. (a) Mandatory Conversion. If atany time from and after the Issuance Date, the Weighted Average Price of theCommon Stock exceeds 250% of the Conversion Price as of the Original Date(subject to appropriate adjustments for stock splits, stock dividends, stockcombinations and other similar transactions after the Original Date) for eachof any 20 consecutive Trading Days

 

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(the **“Mandatory Conversion MeasuringPeriod”**) and the Conditions to Mandatory Conversion (as set forth inSection 9(c)) are satisfied or waived in writing by the Holder, theCompany shall have the right to require the Holder to convert all or any suchportion of the Conversion Amount of this Note designated in the MandatoryConversion Notice into fully paid, validly issued and nonassessable shares ofCommon Stock in accordance with Section 3(c) hereof at the ConversionRate as of the Mandatory Conversion Date (as defined below) (a “**Mandatory Conversion**”). The Company may exerciseits right to require conversion under this Section 9(a) by deliveringwithin not more than five Trading Days following the end of such MandatoryConversion Measuring Period a written notice thereof by facsimile and overnightcourier to all, but not less than all, of the holders of Notes and the TransferAgent (the **“Mandatory Conversion Notice”**and the date all of the holders received such notice is referred to as the “**Mandatory Conversion Notice Date**”). TheMandatory Conversion Notice shall be irrevocable.

 

(b)                                 Pro Rata Conversion Requirement. If the Company elects to cause a conversionof all or any portion of the Conversion Amount of this Note pursuant to Section 9(a),then it must simultaneously take the same action with respect to the OtherNotes (except that the Company is not required to take the same action withrespect to the Other Notes to the extent limited by Section 3(d) inthis Note or similar provisions under the Other Notes). If the Company electsto cause the conversion of this Note pursuant to Section 9(a) (orsimilar provisions under the Other Notes) with respect to less than all of theConversion Amounts of the Notes then outstanding, then the Company shallrequire conversion of a Conversion Amount from each of the holders of the Notesequal to the product of (I) the aggregate Conversion Amount of Notes which theCompany has elected to cause to be converted pursuant to Section 9(a),multiplied by (II) the fraction, the numerator of which is the sum of theaggregate principal amount of the Notes purchased by such holder pursuant tothe Securities Purchase Agreement and the denominator of which is the sum ofthe aggregate principal amount of the Notes and purchased by all holderspursuant to the Securities Purchase Agreement (except to the extent limited by Section 3(d) inthis Note or similar provisions under the Other Notes) (such fraction withrespect to each holder is referred to as its “**AllocationPercentage**,” and such amount with respect to each holder is referredto as its “**Pro Rata Conversion Amount**”).In the event that the initial holder of any Notes shall sell or otherwisetransfer any of such holder’s Notes, the transferee shall be allocated a prorata portion of such holder’s Allocation Percentage. The Mandatory ConversionNotice shall state (i) the Trading Day selected for the MandatoryConversion in accordance with Section 9(a), which Trading Day shall be atleast 10 Business Days but not more than 60 Business Days following theMandatory Conversion Notice Date (the “**MandatoryConversion Date**”), (ii) the aggregate Conversion Amount of theNotes which the Company has elected to be subject to mandatory conversion fromall of the holders of the Notes pursuant to this Section 9 (and analogousprovisions under the Other Notes), (iii) each holder’s Pro Rata ConversionAmount of the Conversion Amount of the Notes the Company has elected to causeto be converted pursuant to this Section 9 (and analogous provisions underthe Other Notes) and (iv) the number of shares of Common Stock to beissued to such Holder as of the Mandatory Conversion Date. All ConversionAmounts converted by the Holder after the Mandatory Conversion Notice Dateshall reduce the Conversion Amount of this Note required to

 

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be converted on the Mandatory Conversion Date. If the Company haselected a Mandatory Conversion, the mechanics of conversion set forth in Section 3(c) shallapply, to the extent applicable, as if the Company and the Transfer Agent hadreceived from the Holder on the Mandatory Conversion Date a Conversion Noticewith respect to the Conversion Amount being converted pursuant to the MandatoryConversion.

 

(c)                                  Conditions to Mandatory Conversion. For purposes of this Section 9, “**Conditions to Mandatory Conversion**” means****the following conditions: (i) duringthe period beginning on the date that is six months prior to the MandatoryConversion Date and ending on and including the Mandatory Conversion Date, theCompany shall have delivered shares of Common Stock upon any conversion ofConversion Amounts as set forth in Section 3(c)(i); (ii) on each dayduring the period beginning on the first Trading Day of the Mandatory ConversionMeasuring Period and ending on and including the Mandatory Conversion Date, theCommon Stock shall be traded on the Principal Market, the NASDAQ Global Marketor Global Select Market, the NASDAQ Capital Market, the New York StockExchange, or the American Stock Exchange; (iii) on the MandatoryConversion Date either (x) the Registration Statement or RegistrationStatements contemplated by the Registration Rights Agreement shall be effectiveand available for the sale for all of the Registrable Securities in accordancewith the terms of the Registration Rights Agreement or (y) all shares of CommonStock issuable upon conversion of the Notes shall be eligible for sale withoutrestriction and without the need for registration under any applicable federalor state securities laws; (iv) on the Mandatory Conversion Date, anAuthorized Share Failure shall not be in effect; and (v) any such paymentof the Conversion Amount in Common Stock shall not consist of more than 20% ofthe total dollar volume traded in the Common Stock for the 20 Trading Daysprior to the Mandatory Conversion Date.

 

(10)                            NONCIRCUMVENTION. The Company hereby covenants and agreesthat the Company will not, by amendment of its Certificate of Incorporation orthrough any reorganization, transfer of assets, consolidation, merger,dissolution, issue or sale of securities, or any other voluntary action, avoidor seek to avoid the observance or performance of any of the terms of thisNote, and will at all times in good faith carry out all of the provisions ofthis Note and take all action as may be required to protect the rights ofthe Holder of this Note.

 

(11)                            RESERVATION OF AUTHORIZED SHARES.

 

(a)                                  Reservation. The Company shall initially reserve out of its authorized andunissued Common Stock a number of shares of Common Stock for each of the Notesequal to 100% of the Conversion Rate with respect to the Conversion Amount ofeach such Note as of the Issuance Date. Thereafter, the Company, so long as anyof the Notes are outstanding, shall use commercially reasonable efforts toreserve and keep available out of its authorized and unissued Common Stock,solely for the purpose of effecting the conversion of the Notes, 100% of thenumber of shares of Common Stock as shall from time to time be necessary toeffect the conversion of all of the Notes then outstanding (without regard toany limitations on conversions) (the **“RequiredReserve Amount”**). The number of shares of Common Stock reserved forconversions of the Notes shall be allocated pro rata among the holders of theNotes

 

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based on the principal amount of the Notes held by each holder at thetime of Issuance Date or increase in the number of reserved shares, as the casemay be (the **“Authorized Share Allocation”**).In the event that a holder shall sell or otherwise transfer any of such holder’sNotes, each transferee shall be allocated a pro rata portion of such holder’sAuthorized Share Allocation. Any shares of Common Stock reserved and allocatedto any Person which ceases to hold any Notes shall be allocated to theremaining holders of Notes, pro rata based on the principal amount of the Notesthen held by such holders.

 

(b)                                 Insufficient Authorized Shares. If at any time while any of the Notes remainoutstanding the Company does not have a sufficient number of authorized andunreserved shares of Common Stock to satisfy its obligation to reserve forissuance upon conversion of the Notes at least a number of shares of CommonStock equal to the Required Reserve Amount (an **“Authorized Share Failure”**), then the Company shall as soon aspracticable use commercially reasonable efforts to increase the Company’sauthorized shares of Common Stock to an amount sufficient to allow the Companyto reserve the Required Reserve Amount for the Notes then outstanding.

 

(12)                            HOLDER’S REDEMPTIONS.

 

(a)                                  Mechanics. In the event that the Holder has sent an Event of Default RedemptionNotice or a Change of Control Redemption Notice to the Company pursuant to Section 4(b) orSection 5(c), respectively (each, a **“RedemptionNotice”**), the Holder shall promptly submit this Note to the Company.If the Holder has submitted an Event of Default Redemption Notice in accordancewith Section 4(b), the Company shall deliver the applicable Event ofDefault Redemption Price to the Holder within five Business Days after theCompany’s receipt of the Holder’s Event of Default Redemption Notice. If theHolder has submitted a Change of Control Redemption Notice in accordance with Section 5(c),the Company shall deliver the applicable Change of Control Redemption Price tothe Holder concurrently with the consummation of such Change of Control if suchnotice is received prior to the consummation of such Change of Control andwithin five Business Days after the Company’s receipt of such notice if suchnotice is received after the consummation of such Change of Control. Withrespect to an Amortization Redemption, the Company shall deliver the applicableAmortization Redemption Amount to the Holder within five Business Days afterthe end of the applicable month for such Amortization Redemption. In the eventof a redemption of less than all of the Conversion Amount of this Note, theCompany shall promptly cause to be issued and delivered to the Holder, at theHolder’s request, a new Note (in accordance with Section 19(d))representing the outstanding Principal which has not been redeemed. In theevent that the Company does not pay the Event of Default Redemption Price, theChange of Control Redemption Price, or the Amortization Redemption Amount(each, the **“Redemption Price”**), asapplicable, to the Holder (or deliver any Common Stock to be issued pursuant toa Redemption Notice) within the time period required, at any time thereafterand until the Company pays such unpaid Redemption Price (and issues any CommonStock required pursuant to a Redemption Notice) in full, the Holder shall havethe option, in lieu of redemption, to require the Company to promptly return tothe Holder all or any portion of this Note representing the Conversion

 

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Amount that was submitted for redemption and for which the applicableRedemption Price (or any Common Stock required to be issued pursuant to aRedemption Notice) has not been paid. Upon the Company’s receipt of suchnotice, (x) the Redemption Notice shall be null and void with respect to suchConversion Amount, (y) the Company shall immediately return this Note, or issuea new Note (in accordance with Section 19(d)) to the Holder representingsuch Conversion Amount and (z) the Conversion Price of this Note or such newNotes shall be adjusted to the lesser of (A) the Conversion Price as ineffect on the date on which the Redemption Notice is voided and (B) theClosing Bid Price on the date on which the Redemption Notice is voided.

 

(b)                                 Redemption by Other Holders. Upon the Company’s receipt of notice fromany of the holders of the Other Notes for redemption or repayment as a resultof an event or occurrence substantially similar to the events or occurrencesdescribed in Section 4(b) or Section 5(c) (each, an **“Other Redemption Notice”**), the Companyshall immediately forward to the Holder by facsimile a copy of such notice. Ifthe Company receives a Redemption Notice and one or more Other RedemptionNotices during the seven Business Day period beginning on and including thedate which is three Business Days prior to the Company’s receipt of the Holder’sRedemption Notice and ending on and including the date which is three BusinessDays after the Company’s receipt of the Holder’s Redemption Notice and theCompany is unable to redeem all principal, interest and other amountsdesignated in such Redemption Notice and such Other Redemption Notices receivedduring such seven Business Day period, then the Company shall redeem a pro rataamount from each holder of the Notes (including the Holder) based on theprincipal amount of the Notes submitted for redemption pursuant to suchRedemption Notice and such Other Redemption Notices received by the Companyduring such seven Business Day period.

 

(13)                            SUBORDINATION TO SENIOR INDEBTEDNESS.

 

(a)                                  General. The Company and the Holder covenant and agree that this Note shall besubject to the provisions of this Section 13 and to the extent and in themanner set forth in this Section 13, the indebtedness represented by thisNote and the payment of Principal, Interest, the Redemption Price, and anyredemption amount, liquidated damages, fees, expenses, or any other amounts inrespect of this Note are hereby expressly made subordinate and junior andsubject in right of payment to the prior payment in full in cash of all SeniorIndebtedness of the Company now outstanding or hereinafter incurred.

 

(b)                                 No Payment if Default in other SeniorIndebtedness.

 

(i)                                     [Intentionally left blank]

 

(ii)                                  No cash payment on account of Principal orRedemption Price of, or Interest on, this Note or any other payment payablewith respect to this Note shall be made, and no portion of this Note shall beredeemed or purchased directly or indirectly by the Company, if at the time ofsuch payment or purchase or immediately after giving effect thereto, (A) adefault in the payment of principal, premium, if any, interest or other

 

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obligations in respect ofany Senior Indebtedness having either an outstanding principal balance or acommitment to lend greater than $500,000 (“**Designated Senior Debt**”)occurs and is continuing (or, in the case of Senior Indebtedness for whichthere is a period of grace, in the event of such a default that continuesbeyond the period of grace, if any, specified in the instrument evidencing suchSenior Indebtedness) (a “**Payment Default**”),unless and until such Payment Default shall have been cured or waived or shallhave ceased to exist or (B) the Company shall have received notice (a “**Payment Blockage Notice**”) from the holder or holders ofDesignated Senior Debt that there exists under such Designated Senior Debt adefault, which shall not have been cured or waived, permitting the holder orholders thereof to declare such Designated Senior Debt due and payable, butonly for the period (the “**Payment Blockage Period**”)commencing on the date of receipt of the Payment Blockage Notice and ending onthe earlier of (a) the date such default shall have been cured or waived,or (b) the 180th day immediately following the Company’s receipt of suchPayment Blockage Notice. The Company shall resume payments on and distributionsin respect of this Note, including any past scheduled payments of the principalof (and premium, if any) and interest on this Note to which the Holder wouldhave been entitled but for the provisions of this Section 13(b)(ii) inthe case of a Payment Default, within five (5) Business Days of the dateupon which such Payment Default is cured or waived or ceases to exist (and ifpayment is made within such time period, any Event of Default with respect tosuch nonpayment shall be cured). In addition, notwithstanding clauses (A) and(B) of this subsection (ii), unless the holders of Designated SeniorDebt shall have accelerated the maturity of such Designated Senior Debt orthere is a Payment Default, the Company shall resume payments on this Notewithin (5) Business Days after the end of each Payment Blockage Period. Inany consecutive 365-day period, there shall be (i) no more than threePayment Blockage Notices given in the aggregate on this Note and the OtherNotes, irrespective of the number of defaults with respect to Designated SeniorDebt during such period, and (ii) at least 90 days during which no PaymentBlockage Period shall be in effect.

 

(c)                                  Payment upon Dissolution, Etc. In the event of any bankruptcy, insolvency,reorganization, receivership, composition, assignment for benefit of creditorsor other similar proceeding initiated by or against the Company or anydissolution or winding up or total or partial liquidation or reorganization ofthe Company (being hereinafter referred to as a “**Proceeding**”), the Holder agrees that such Holder shall, uponrequest of a holder of Senior Indebtedness, and at such holder of SeniorIndebtedness’ own expense, take all reasonable actions (including but notlimited to the execution and filing of documents and the giving of testimony inany Proceeding, whether or not such testimony could have been compelled byprocess) necessary to prove the full amount of all its claims in anyProceeding, and the Holder shall not waive any claim in any Proceeding withoutthe written consent of such holder. If the Holder does not file a proper proofof claim or proof of debt in the form required in any Proceeding at leastthirty (30) days before the expiration of the time to file such claim, theholders of any Senior Indebtedness are hereby authorized to file an appropriateclaim for and on behalf of the Holder.

 

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TheHolder shall retain the right to vote and otherwise act with respect to theclaims under this Note (including, without limitation, the right to vote toaccept or reject any plan of partial or complete liquidation, reorganization,arrangement, composition or extension); providedthat the Holder shall not vote with respect to any such plan or take any otheraction in any way so as to (i) contest the validity of any SeniorIndebtedness or any collateral therefor or guaranties thereof, (ii) contestthe relative rights and duties of any of the lenders under the SeniorIndebtedness established in any instruments or agreement creating or evidencingthe Senior Indebtedness with respect to any of such collateral or guaranties,or (iii) contest the Holders’ obligations and agreements set forth in thisSection 13.

 

Uponpayment or distribution to creditors in a Proceeding of assets of the Companyof any kind or character, whether in cash, property or securities, allprincipal and interest due upon any Senior Indebtedness shall first be paid infull before the Holder shall be entitled to receive or, if received, to retainany payment or distribution on account of this Note, and upon any suchProceeding, any payment or distribution of assets of the Company of any kind orcharacter, whether in cash, property or securities, to which the Holder wouldbe entitled except for the provisions of this Section 13 shall be paid bythe Company or by any receiver, trustee in bankruptcy, liquidating trustee,agent or other Person making such payment or distribution, or by the Holder whoshall have received such payment or distribution, directly to the holders ofthe Senior Indebtedness (pro rata to each such holder on the basis of therespective amounts of such Senior Indebtedness held by such holder) or theirrepresentatives to the extent necessary to pay all such Senior Indebtedness infull after giving effect to any concurrent payment or distribution to or forthe holders of such Senior Indebtedness, before any payment or distribution ismade to the Holder or any holders of the Notes.

 

(d)           Payments on Notes.  Subject to Sections 13(b) and 13(c), theCompany may make regularly scheduled payments of the Principal of, or Intereston, this Note or any other payment payable with respect to this Note, if at thetime of payment, and immediately after giving effect thereto, there exists noPayment Default or a Payment Blockage Period.

 

(e)           Certain Rights.  Nothing contained in this Section 13 orelsewhere in this Note is intended to or shall impair, as among the Company,its creditors including the holders of Senior Indebtedness and the Holder, theright, which is absolute and unconditional, of the Holder to convert this Notein accordance herewith.

 

(f)            Subrogation.  Subject to payment in full in cash of allSenior Indebtedness, the rights of the Holder shall be subrogated to the rightsof the holders of Senior Indebtedness to receive payments or distributions ofthe assets of the Company made on such Senior Indebtedness until all principaland interest on this Note shall be paid in full in cash; and for purposes ofsuch subrogation, no payments or distributions to the holders of SeniorIndebtedness of any cash, property or securities to which the Holder would beentitled except for the subordination provisions of this Section 13 shall,as between the Holder and the Company and/or its creditors other than theholders of the Senior Indebtedness, be deemed to be a payment on account of theSenior Indebtedness.

 

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(g)           Rights of Holders Unimpaired.  The provisions of this Section 13 areand are intended solely for the purposes of defining the relative rights of theHolder and the holders of Senior Indebtedness and nothing in this Section 13shall impair, as between the Company and the Holder, the obligation of theCompany, which is unconditional and absolute, to pay to the Holder theprincipal thereof (and premium, if any) and interest thereon, in accordancewith the terms of this Note.

 

(h)           Holders of Senior Indebtedness.  These provisions regarding subordination willconstitute a continuing offer to all Persons who, in reliance upon suchprovisions, become holders of, or continue to hold, Senior Indebtedness; suchprovisions are made for the benefit of the holders of Senior Indebtedness, andsuch holders are hereby made obligees under such provisions to the same extentas if they were named therein, and they or any of them may proceed to enforcesuch subordination and no amendment or modification of the provisions containedherein shall diminish the rights of such holders unless such holders haveagreed in writing thereto.  The holdersof Senior Indebtedness may, at any time and from time to time, without theconsent of or notice to the Holder, without incurring responsibility to theHolder and without impairing or releasing the subordination provisions of this Section 13,(i) subject to the limitations set forth herein, increase the amount of,change the manner, terms or place of payment of, or renew or alter, any SeniorIndebtedness, or otherwise amend, modify, restate or supplement the same(provided that any such modified indebtedness continues to be constitute SeniorIndebedness within the meaning of this Agreement, (ii) sell, exchange orrelease any collateral mortgaged, pledged or otherwise securing the SeniorIndebtedness, (iii) release any Person liable in any manner for the SeniorIndebtedness and (iv) exercise or refrain from exercising any rightsagainst the Company or any other Person.

 

(i)            Proceeds Held in Trust.  In the event that notwithstanding theforegoing, any payment or distribution of assets of the Company of any kind orcharacter, whether in cash, property or securities (including, withoutlimitation, by way of setoff or otherwise) prohibited by the provisions hereofshall be received by the Holder before all Senior Indebtedness if paid in fullin cash, such payment or distribution shall be held in trust for the benefit ofand shall be paid over or delivered to the holders of Senior Indebtedness, astheir respective interests may appear, as calculated by the Company, forapplication to, or to be held as collateral for, the payment of any SeniorIndebtedness remaining unpaid to the extent necessary to pay all SeniorIndebtedness in full in cash after giving effect to any concurrent payment ordistribution to or for the holders of such Senior Indebtedness.

 

(j)            Blockage ofRemedies.  During any Payment Defaultor any Payment Blockage Period, if an Event of Default has occurred and is continuingunder this Note, the Holder will not commence or join with any creditor of theCompany in asserting or commencing any proceedings to collect or enforce itsrights hereunder or take any action to foreclose or realize upon theindebtedness hereunder for a period beginning on the date of such Event ofDefault and ending on the first to occur of (i) the date that is 180 daysfollowing the

 

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datethat the holders of the Senior Indebtedness are notified of such Event ofDefault or (ii) the date such Payment Default is cured, waived or ceasesto exist or the date such Payment Blockage Period ends, as the case may be; provided,however, that until all of the Senior Indebtedness shall have been paidin full in cash, any payments, distributions or proceeds received by the Holderresulting from the exercise of any action to collect or enforce any right orremedy available to the Holder shall be subject to the terms of this Note.

 

(k)           Subsequent Senior IndebtednessRequested Modifications.  Inconnection with the incurrence of any future Senior Indebtedness, the Holderagrees that it shall act reasonably and negotiate in good faith anymodifications to the provisions of this Section 13 reasonably requested bythe holder of such Senior Indebtedness; provided that nothing in this sectionshall restrict the holders of Notes representing at least a majority of theaggregate principal amount of the Notes then outstanding from changing oramending this Section 13 pursuant to Section 17 hereof.

 

(l)            Failure to Make Payment.  In the event that the Company is prohibitedor restricted from making any payment required under under this Note by reasonof the provisions of this Section 13, such prohibition or restrictionshall not preclude the failure to make such payment from being an Event ofDefault under Section 4(a) of this Note.

 

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

 

(15)         RANK; ADDITIONAL INDEBTEDNESS; LIENS.

 

## (a)           Rank.  All payments due under this Note (a) shallrank *pari passu* with all OtherNotes (**“Pari Passu Indebtedness”**),(b) shall be subordinate in right of payment to the prior payment of allexisting and future Senior Indebtedness and (c) shall be senior to allother Indebtedness of the Company and its Subsidiaries, other than SeniorIndebtedness and Pari Passu Indebtedness.

##  

## (b)           Incurrence of Senior Indebtedness.  So long as this Note is outstanding, theCompany shall not, and the Company shall not permit any of its Subsidiaries to,directly or indirectly, incur or guarantee, assume or suffer to exist anyIndebtedness which shall rank senior to the Notes other than SeniorIndebtedness.

##  

## (c)           Existence of Liens.  So long as this Note is outstanding, theCompany 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 orassets (including accounts and contract rights) owned by the Company or any ofits Subsidiaries (collectively, “**Liens**”)other than Permitted Liens.  As used herein,“**Permitted Liens**” means (i) Liensincurred to secure Senior Indebtedness, (ii) Liens on fixed or capitalassets acquired, constructed or improved by the Company or any

##  

## 22

## 

##  

## Subsidiary, to the extent ofIndebtedness incurred within thirty days for such acquisition, construction orimprovement and incurred within thirty days of such acquisition, constructionor improvement, (iii) purchase money Liens, or (iv) carriers’,warehousemen’s, mechanics’, materialmen’s, repairmen’s and other similar Liensimposed by law.

##  

## (d)           Restricted Payments.  The Company shall not, and the Company shallnot 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 orcash equivalents (in whole or in part, whether by way of open market purchases,tender offers, private transactions or otherwise), all or any portion of anyIndebtedness, other than Senior Indebtedness or Pari Passu Indebtedness,whether by way of payment in respect of principal of (or premium, if any) orinterest on, such Indebtedness if at the time such payment is due or isotherwise made or, after giving effect to such payment, an event constitutingan Event of Default has occurred and is continuing.

 

(16)         PARTICIPATION.  The Holder, as the holder of this Note, shallbe entitled to such dividends paid and distributions made to the holders ofCommon Stock (each, a **“Distribution”**),in each such case to the extent of the Distribution as if the Holder hadconverted this Note into Common Stock (without regard to any limitations onconversion herein or elsewhere) and had held such shares of Common Stock on therecord date for such dividends and distributions.  Payments (if any) under the precedingsentence shall be made concurrently with the dividend or distribution to theholders of Common Stock.

 

(17)         VOTE TO ISSUE, OR CHANGE THE TERMSOF, NOTES.  The affirmative vote at ameeting duly called for such purpose or the written consent without a meeting,of the holders of Notes representing not less than a majority of the aggregateprincipal amount of the then outstanding Notes, shall be required for anychange or amendment to this Note or the Other Notes provided such change or amendmentis consented to by the Company, which such consent may be granted or withheldin the sole discretion of the Company.

 

(18)         TRANSFER.  This Note may be offered, sold, assigned ortransferred by the Holder without the consent of the Company, subject only tothe 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 Holdershall surrender this Note to the Company, whereupon the Company will forthwithissue 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 Principalbeing transferred by the Holder and, if less then the entire outstandingPrincipal is being transferred, a new Note (in accordance with Section 19(d))to the Holder representing the outstanding Principal not beingtransferred.  The Holder and anyassignee, by acceptance of this Note, acknowledge and agree that, by reason ofthe provisions of Section 3(c)(iii) and this Section 19(a),following conversion or redemption of any portion of this Note, the outstandingPrincipal represented by this Note may be less than the Principal stated on theface of this Note.

 

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(b)           Lost, Stolen or Mutilated Note.  Upon receipt by the Company of evidencereasonably satisfactory to the Company of the loss, theft, destruction ormutilation of this Note, and, in the case of loss, theft or destruction, of anyindemnification undertaking by the Holder to the Company in customary form and,in the case of mutilation, upon surrender and cancellation of this Note, theCompany shall execute and deliver to the Holder a new Note (in accordance with Section 19(d))representing the outstanding Principal.

 

(c)           Note Exchangeable for DifferentDenominations.  This Note isexchangeable, upon the surrender hereof by the Holder at the principal officeof the Company, for a new Note or Notes (in accordance with Section 19(d) andin principal amounts of at least $100,000) representing in the aggregate theoutstanding Principal of this Note, and each such new Note will represent suchportion of such outstanding Principal as is designated by the Holder at thetime of such surrender.

 

(d)           Issuance of New Notes.  Whenever the Company is required to issue anew Note pursuant to the terms of this Note, such new Note (i) shall be oflike tenor with this Note, (ii) shall represent, as indicated on the faceof such new Note, the Principal remaining outstanding (or in the case of a newNote being issued pursuant to Section 19(a) or Section 19(c),the Principal designated by the Holder which, when added to the principalrepresented by the other new Notes issued in connection with such issuance,does not exceed the Principal remaining outstanding under this Note immediatelyprior 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 IssuanceDate of this Note, (iv) shall have the same rights and conditions as thisNote, and (v) shall represent accrued Interest on the Principal andInterest of this Note, from the Issuance Date.

 

(20)         REMEDIES, CHARACTERIZATIONS, OTHEROBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in this Note shall becumulative and in addition to all other remedies available under this Note, theSecurities Purchase Agreement and the Registration Rights Agreement, at law orin equity (including a decree of specific performance and/or other injunctiverelief), and nothing herein shall limit the Holder’s right to pursue actual andconsequential damages for any failure by the Company to comply with the termsof this Note.  Amounts set forth orprovided for herein with respect to payments, conversion and the like (and thecomputation thereof) shall be the amounts to be received by the Holder andshall not, except as expressly provided herein, be subject to any otherobligation of the Company (or the performance thereof).  The Company acknowledges that a breach by itof its obligations hereunder will cause irreparable harm to the Holder and thatthe remedy at law for any such breach may be inadequate.  The Company therefore agrees that, in theevent of any such breach or threatened breach, the Holder shall be entitled, inaddition to all other available remedies, to an injunction restraining anybreach, without the necessity of showing economic loss and without any bond orother security being required.

 

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(21)         PAYMENT OF COLLECTION, ENFORCEMENTAND OTHER COSTS.  If (a) thisNote is placed in the hands of an attorney for collection or enforcement or iscollected or enforced through any legal proceeding or the Holder otherwisetakes action to collect amounts due under this Note or to enforce theprovisions of this Note or (b) there occurs any bankruptcy,reorganization, receivership of the Company or other proceedings affectingCompany creditors’ rights and involving a claim under this Note, then the Companyshall pay the costs incurred by the Holder for such collection, enforcement oraction or in connection with such bankruptcy, reorganization, receivership orother proceeding, including, but not limited to, attorneys’ fees anddisbursements.

 

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

 

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

 

(24)         DISPUTE RESOLUTION.  In the case of a dispute as to thedetermination of the Redemption Price or the arithmetic calculation of theConversion Rate or the Redemption Price, the Company shall submit the disputeddeterminations or arithmetic calculations via facsimile within one Business Dayof receipt of the Conversion Notice or Redemption Notice or other event givingrise to such dispute, as the case may be, to the Holder.  If the Holder and the Company are unable toagree upon such determination or calculation within one Business Day of suchdisputed determination or arithmetic calculation being submitted to the Holder,then the Company shall, within one Business Day submit via facsimile (a) thedisputed determination of the Closing Bid Price or the Closing Sale Price to anindependent, reputable investment bank selected by the Company and approved bythe Holder or (b) the disputed arithmetic calculation of the ConversionRate or the Redemption Price to the Company’s independent, outsideaccountant.  The Company, at the Company’sexpense, shall cause the investment bank or the accountant, as the case may be,to perform the determinations or calculations and notify the Company and theHolder of the results no later than five Business Days from the time itreceives the disputed determinations or calculations.  Such investment bank’s or accountant’sdetermination or calculation, as the case may be, shall be binding upon allparties absent demonstrable error.

 

(25)         NOTICES; PAYMENTS.

 

(a)           Notices.  Whenever notice is required to be given underthis Note, unless otherwise provided herein, such notice shall be given inaccordance with Section 9(f) of the Securities PurchaseAgreement.  The Company shall provide theHolder with prompt written notice of all actions taken pursuant to this Note,including in reasonable detail a description of

 

25

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suchaction and the reason therefore.  Withoutlimiting the generality of the foregoing, the Company will give written noticeto the Holder (i) immediately upon any adjustment of the Conversion Price,setting forth in reasonable detail, and certifying, the calculation of suchadjustment and (ii) at least twenty days prior to the date on which the Company closes its books or takes arecord (A) with respect to any dividend or distribution upon the CommonStock, (B) with respect to any pro rata subscription offer to holders ofCommon Stock or (C) for determining rights to vote with respect to anyChange of Control, dissolution or liquidation, provided in each case that suchinformation shall be made known to the public prior to or in conjunction withsuch notice being provided to the Holder. Notwithstanding the foregoing, Section 4(i) of the SecuritiesPurchase Agreement shall apply to all notices given pursuant to this Note.

 

(b)           Payments.  Whenever any payment of cash is to be made bythe Company to any Person pursuant to this Note, such payment shall be made inlawful money of the United States of America by a check drawn on the account ofthe Company and sent via overnight courier service to such Person at suchaddress as previously provided to the Company in writing (which address, in thecase of each of the Purchasers, shall initially be as set forth on the Scheduleof Buyers attached to the Securities Purchase Agreement); provided that theHolder may elect to receive a payment of cash via wire transfer of immediatelyavailable funds by providing the Company with prior written notice setting outsuch request and the Holder’s wire transfer instructions.  Whenever any amount expressed to be due bythe terms of this Note is due on any day which is not a Business Day, the sameshall instead be due on the next succeeding day which is a Business Day and, inthe case of any Interest Date which is not the date on which this Note is paidin full, the extension of the due date thereof shall not be taken into accountfor purposes of determining the amount of Interest due on such date.

 

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

 

(27)         WAIVER OF NOTICE.  To the extent permitted by law, the Companyhereby waives demand, notice, protest and all other demands and notices inconnection with the delivery, acceptance, performance, default or enforcementof this Note and the Securities Purchase Agreement.

 

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

 

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

 

(a)           **“ApprovedStock Plan”** means any employee benefit, option or incentive planwhich has been approved by the Board of Directors of the Company, pursuant towhich the Company’s securities may be issued to any employee, consultant,officer or director for services provided to the Company.

 

(b)           “**Bloomberg**”means Bloomberg Financial Markets.

 

(c)           **“BusinessDay”** means any day other than Saturday, Sunday or other day on whichcommercial banks in The City of New York are authorized or required by law toremain closed.

 

(d)           **“CalendarQuarter”** means each of: the period beginning on and including January 1and ending on and including March 31; the period beginning on andincluding April 1 and ending on and including June 30; the periodbeginning on and including July 1 and ending on and including September 30;and the period beginning on and including October 1 and ending on andincluding December 31.

 

(e)           **“ClosingBid Price”** and **“Closing Sale Price”**means, for any security as of any date, the last closing bid price and lastclosing trade price, respectively, for such security on the Principal Market,as reported by Bloomberg, or, if the Principal Market begins to operate on anextended hours basis and does not designate the closing bid price or theclosing trade price, as the case may be, then the last bid price or last tradeprice, respectively, of such security prior to 4:00 p.m., New York Time,as reported by Bloomberg, or, if the Principal Market is not the principalsecurities exchange or trading market for such security, the last closing bidprice or last trade price, respectively, of such security on the principalsecurities exchange or trading market where such security is listed or tradedas reported by Bloomberg, or if the foregoing do not apply, the last closing bidprice or last trade price, respectively, of such security in theover-the-counter market on the electronic bulletin board for such security asreported by Bloomberg, or, if no closing bid price or last trade price,respectively, is reported for such security by Bloomberg, the average of thebid prices, or the ask prices, respectively, of any market makers for suchsecurity as reported in the “pink sheets” by Pink Sheets LLC (formerly theNational Quotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale Price cannot be calculatedfor a security on a particular date on any of the foregoing bases, the ClosingBid Price or the Closing Sale Price, as the case may be, of such security onsuch date shall be the fair market value as mutually determined by the Companyand the Holder.  If the Company and theHolder are unable to agree upon the fair market value of such security, thensuch dispute shall be resolved pursuant to Section 24.  All such determinations to be appropriatelyadjusted for any stock dividend, stock split, stock combination or othersimilar transaction during the applicable calculation period.

 

(f)            [Intentionally left blank]

 

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(g)           **“ContingentObligation”** means, as to any Person, any direct or indirectliability, contingent or otherwise, of that Person with respect to anyindebtedness, lease, dividend or other obligation of another Person if theprimary purpose or intent of the Person incurring such liability, or theprimary effect thereof, is to provide assurance to the obligee of suchliability that such liability will be paid or discharged, or that anyagreements relating thereto will be complied with, or that the holders of suchliability will be protected (in whole or in part) against loss with respectthereto.

 

(h)           “**ConvertibleSecurities**” means any stock or securities (other than Options)directly or indirectly convertible into or exercisable or exchangeable forCommon Stock.

 

(i)            **“ExcludedSecurities”** means any shares of Common Stock issued or issuable: (i) inconnection with any Approved Stock Plan; (ii) upon conversion of theSenior Notes, the Notes, and the Other Notes; (iii) upon conversion of anyOptions or Convertible Securities which are outstanding on the Issuance Date, (iv) pursuantto or in connection with commercial credit arrangements, equipment leasefinancings, acquisitions of other assets or businesses, strategic transactionsnot primarily for financing purposes, or similar transactions into which theCompany may enter with a non-affiliate.

 

(j)            **“Indebtedness”**of any Person means, without duplication (A) all indebtedness for borrowedmoney, (B) all obligations issued, undertaken or assumed as the deferredpurchase price of property or services (other than trade payables entered intoin the ordinary course of business), (C) all reimbursement or paymentobligations with respect to letters of credit, surety bonds and other similarinstruments, (D) all obligations evidenced by notes, bonds, debentures orsimilar instruments, including obligations so evidenced incurred in connectionwith the acquisition of property, assets or businesses, (E) allindebtedness created or arising under any conditional sale or other titleretention agreement, or incurred as financing, in either case with respect toany property or assets acquired with the proceeds of such indebtedness (eventhough the rights and remedies of the seller or bank under such agreement inthe event of default are limited to repossession or sale of such property), (F) allmonetary obligations under any leasing or similar arrangement which, inconnection with generally accepted accounting principles, consistently appliedfor the periods covered thereby, is classified as a capital lease, (G) off-balancesheet liabilities retained in connection with asset securitization programs,synthetic leases, sale and leaseback transactions or other similar obligationsarising with respect to any other transaction which is the functionalequivalent of or takes the place of borrowing but which does not constitute aliability on the consolidated balance sheet of such Person and itssubsidiaries, and (H) all indebtedness referred to in clauses (A) through(G) above secured by (or for which the holder of such Indebtedness has anexisting right, contingent or otherwise, to be secured by) any mortgage, lien,pledge, charge, security interest or other encumbrance upon or in any propertyor assets (including accounts and contract rights) owned by any Person, eventhough the Person which owns such assets or property has not assumed or becomeliable for the payment of such indebtedness, and (I) all ContingentObligations in respect of indebtedness or obligations of others of the kindsreferred to in clauses (A) through (H) above.

 

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(k)           **“IssuanceDate”** means December 28, 2007.

 

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

 

(m)          **“Person”**means an individual, a limited liability company, a partnership, a jointventure, a corporation, a trust, an unincorporated organization, any otherentity  and a government or anydepartment or agency thereof.

 

(n)           “**PrincipalMarket**” means the OTC Bulletin Board.

 

(o)           “**RegistrationRights Agreement”** means that certain Registration Rights Agreement,dated January 3, 2007, between the Company and the initial holders of theNotes relating to the registration of the resale of the shares of Common Stockissuable upon conversion of the Notes and the exercise of the Warrants.

 

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

 

(q)           **“SecuritiesPurchase Agreement”** means that certain Securities PurchaseAgreement, dated January 3, 2007, between the Company and the initialholders of the Notes pursuant to which the Company issued the Notes and theWarrants.

 

(r)            **“SeniorIndebtedness”** means the principal of (and premium, if any), intereston, and all fees and other amounts (including, without limitation, anyreasonable costs, enforcement expenses (including reasonable legal fees anddisbursements, collateral protection expenses and other reimbursement orindemnity obligations relating thereto)), and all other obligations of theCompany under (i) any of the agreements or instruments evidencing anyIndebtedness of the Company and its Subsidiaries arising after the OriginalDate to an unaffiliated, third-party commercial lender (together with anyrenewals, refundings, refinancings or other extensions thereof) for purposes ofpurchasing equipment (which debt shall be secured only by the assets purchasedwith such financing), and (ii) Indebtedness secured by up to a maximum ofeighty five percent (85%) of the Company’s accounts receivable and/or up tosixty percent (60%) of the value of the Company’s inventory.  For the avoidance of doubt, SeniorIndebtedness shall not include the debt which is required to be paid by theCompany pursuant to Section 4(i) of the Securities PurchaseAgreement.

 

(s)           [Intentionally left blank]

 

(t)            **“TradingDay”** means any day on which the Common Stock is traded on thePrincipal Market, or, if the Principal Market is not the principal tradingmarket for the Common Stock, then on the principal securities exchange orsecurities market on which the

 

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CommonStock is then traded; provided that “Trading Day” shall not include any day onwhich the Common Stock is scheduled to trade on such exchange or market forless than 4.5 hours or any day that the Common Stock is suspended from tradingduring the final hour of trading on such exchange or market (or if suchexchange or market does not designate in advance the closing time of trading onsuch exchange or market, then during the hour ending at 4:00:00 p.m., NewYork Time).

 

(u)           **“Warrants”**means the warrants issued under the Securities Purchase Agreement to theinitial holders of the Notes.

 

(v)           **“WeightedAverage Price”** means, for any security as of any date, the dollarvolume-weighted average price for such security on the Principal Market duringthe period beginning at 9:30:01 a.m., New York Time (or such other time asthe Principal Market publicly announces is the official open of trading), andending at 4:00:00 p.m., New York Time (or such other time as the PrincipalMarket publicly announces is the official close of trading) as reported byBloomberg through its “Volume at Price” functions, or, if the foregoing doesnot apply, the dollar volume-weighted average price of such security in theover-the-counter market on the electronic bulletin board for such securityduring the period beginning at 9:30:01 a.m., New York Time (or such othertime as such market publicly announces is the official open of trading), andending at 4:00:00 p.m., New York Time (or such other time as such marketpublicly announces is the official close of trading) as reported by Bloomberg,or, if no dollar volume-weighted average price is reported for such security byBloomberg for such hours, the average of the highest closing bid price and thelowest closing ask price of any of the market makers for such security asreported in the “pink sheets” by Pink Sheets LLC (formerly the NationalQuotation Bureau, Inc.).  If theWeighted Average Price cannot be calculated for a security on a particular dateon any of the foregoing bases, the Weighted Average Price of such security onsuch date shall be the fair market value as mutually determined by the Companyand the Holder.  If the Company and theHolder are unable to agree upon the fair market value of such security, thensuch dispute shall be resolved pursuant to Section 24.  All such determinations to be appropriatelyadjusted for any stock dividend, stock split, stock combination or othersimilar transaction during the applicable calculation period.

 

**[Signature Page Follows]**

 

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

 
| ** ** | **LIQUIDMETAL TECHNOLOGIES, INC.** |
|------------|------------------------------------|
| ** ** |                               |
|       |                               |
|       | By:                                |   |
|       |                               | Name: | John  Kang |
|       |                               | Title: | Chairman |
|            |                                    |  |  |  |

 

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**EXHIBIT I**

 

**LIQUIDMETAL TECHNOLOGIES, INC.**

**CONVERSION NOTICE**

 

Referenceis made to the Convertible Subordinated Note (the **“Note”**) issued to the undersigned by Liquidmetal Technologies, Inc.(the **“Company”**).  In accordance with and pursuant to the Note,the undersigned hereby elects to convert the Conversion Amount (as defined inthe Note) of the Note indicated below into shares of Common Stock, par value$0.001 per share (the **“Common Stock”**),of the Company as of the date specified below.

 
|   | Date  of Conversion:                          |   |
|--------|-----------------------------------------------|--------|
|   |                                          |   |
|   | Aggregate  Conversion Amount to be converted: |   |
|        |                                               |        |  |  |

 

Theundersigned  hereby certifies to theCompany that the undersigned’s conversion of the amount set forth above inaccordance with Section 3(a) of the Note will not directly result inthe undersigned (together with the undersigned’s affiliates) beneficiallyowning in excess of 4.99% of the number of shares of Common Stock outstandingimmediately after giving effect to such conversion, calculated in accordancewith Section 3(d)(i) of the Note; provided that if the undersignedhas previously waived the 4.99% beneficial ownership limitation upon no lessthan sixty one (61) days prior written notice, the undersigned certifies to theCompany that the undersigned’s conversion of the amount set forth above willnot directly result in the undersigned (together with the undersigned’saffiliates) beneficially owning in excess of 9.99% of the number of shares ofCommon Stock outstanding immediately after giving effect to such conversion,calculated in accordance with Section 3(d)(i) of the Note.

 

Pleaseconfirm the following information:

 
|   | Conversion  Price:                              |   |
|--------|-------------------------------------------------|--------|
|   |                                            |   |
|   | Number  of shares of Common Stock to be issued: |   |
|        |                                                 |        |  |  |

 

Pleaseissue the Common Stock into which the Note is being converted in the followingname 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) |   |
|        |                                            |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**ACKNOWLEDGMENT**

 

TheCompany hereby acknowledges this Conversion Notice and hereby directs AmericanStock Transfer & Trust Co. to issue the above indicated number ofshares of Common Stock in accordance with the Transfer Agent Instructions datedJanuary 3, 2007 from the Company.

 
| ** ** | **LIQUIDMETAL TECHNOLOGIES, INC.** |
|------------|------------------------------------|
| ** ** | ** **                         |
|       |                               |
|       | By:                                |   |
|       |                               | Name: |
|       |                               | Title: |
|            |                                    |  |  |

 

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