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Exhibit 4.2  


THIS
SECURITY AND THE COMMON STOCK ISSUABLE UPON ITS CONVERSION HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED
OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES
AND OTHER JURISDICTIONS. 


 
 

RAINING DATA CORPORATION
  5% CONVERTIBLE SUBORDINATED NOTE DUE 2008    
  



	No. A-1	$22,139,705





        RAINING DATA CORPORATION, a Delaware corporation (the "Company"), for value received, hereby promises to pay to
ASTORIA CAPITAL PARTNERS, L.P., or registered assigns, the principal sum of Twenty Two Million One Hundred Thirty-Nine Thousand Seven Hundred Five Dollars ($22,139,705) on May 30,
2008 and to pay interest thereon, from January 30, 2003, or from the most recent interest payment date to which interest has been paid, quarterly on each January 1, April 1,
July 1 and October 1 in each year, commencing April 1, 2003, at the rate of 5% per annum until the principal hereof is due and in the manner set forth below. The Company, at its
option, may pay interest due on each interest payment date either in cash or by issuing a note in substantially the form of this Security (but bearing interest from such interest payment date) (a
"PIK Note") having a principal amount equal to the interest due on such date. The interest so payable on any interest payment date or the PIK Note so
issuable will be paid or issued to the Person in whose name this Security (or one or more predecessor Securities) is registered at 5:00 p.m., California time, on the regular record date for
such interest, which shall be the date Five (5) Business Days immediately prior to the interest payment date. Payment of the principal of this Security shall be made upon the surrender of this
Security to the Company, at its chief executive office (or such other office within the United States as shall be designated by the Company to the holder hereof) (the
"Designated Office"), in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public
and private debts. Payment of interest in cash and all other amounts payable in cash with respect to this Security shall be made by wire transfer to the holder, provided that if the holder shall not
have furnished wire instructions in writing to the Company on or prior to the third Business Day immediately prior to the date on which the Company makes such payment, such payment may be made by U.S.
dollar check mailed to the address of the Person entitled thereto as such address shall appear in the Company security register. PIK Notes issued from time to time shall be mailed via certified mail,
return receipt requested, to the address of the Person entitled thereto as such address shall appear in the Company security register. Capitalized terms used and not otherwise defined herein, shall
have the respective meanings given to those terms in Section 8 hereof. 


        1.    Redemption. This Security is subject to redemption, as a whole or from time to time in part (in any amount that is an
integral multiple of $1,000), upon not less than 30 nor more than 60 days' notice in the manner provided in Section 9(b) (provided that any conditions set forth below in this
Section 1 are satisfied), at the election of the Company, at a redemption price of 100% of the principal amount thereof, together with accrued interest to the redemption date, but interest
installments whose stated maturity is on or prior to such redemption date will be payable to the holder of this Security, or one or more predecessor Securities, of record at the close of business on
the relevant record dates referred to on the face hereof; provided, however, that the Company may not redeem this Security prior to January 30, 2005. 


        2.    Conversion.



        (a)  (1)
The holder of this Security is entitled at any time and from time to time on or after February 28, 2003 and before the close of business on May 29,
2008 (or, in case this Security is called for redemption
or the holder hereof has exercised his right to require the Company to 






 


repurchase this Security or a portion hereof pursuant to Section 3 hereof, then in respect of this Security or such portion hereof, as the case may be, until and including, but (unless the
Company defaults in making the payment due upon redemption or repurchase) not after, 5:00 p.m., California time, on the Business Day prior to the redemption date or the Repurchase Date, as the
case may be), to convert this Security (or any portion of the principal amount hereof that is an integral multiple of $1,000), into fully paid and nonassessable Common Stock (as hereinafter defined)
(calculated as to each conversion to the nearest 1/100 of a share) of the Company at the rate (or at the then current adjusted rate if an adjustment has been made as provided below) of 200 shares of
Common Stock for each $1,000 principal amount of Security (the "Conversion Rate") by surrender of this Security, duly endorsed or assigned to the
Company or in blank to the Company at the Designated Office, accompanied by written notice to the Company that the holder hereof elects to convert this Security (or if less than the entire principal
amount hereof is to be converted, specifying the portion hereof to be converted). Notwithstanding the foregoing, such holder shall be deemed for all purposes to have converted this Security against
delivery of the Common Stock and cash payable for fractional shares upon such conversion (which surrender may take place before or after the date of such deemed conversion, without affecting the
validity thereof), immediately prior to the close of business on the redemption date, if this Security is redeemed pursuant to Section 1 hereof, if the Closing Price of the Common Stock for at
least 20 Trading Days within a period of any 30 consecutive Trading Days ending on the date prior to the date of sending of the notice of redemption exceeds 150% of the Conversion Price. The term
"Conversion Price" on any day shall equal $1,000 divided by the Conversion Rate in effect on such day. 




        (2)  In
the event that the conversion of this Security into shares of Common Stock would require the Company and the holder of this Security to file notification and report
forms with the Federal Trade Commission and Antitrust Division of the Department of Justice (the "FTC") pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), then the holder of this Security and the Company agree (i) to use their best efforts to complete all applicable filings and provide all necessary information as required
pursuant to the HSR Act, and (ii) such conversion of this Security into shares of Common Stock shall not occur until such time as the required filings are made pursuant to the HSR Act and the
required waiting periods have passed or early termination notifications have been granted by the FTC. 


        The
Company shall, if the holder so elects, deliver the Common Stock issuable upon conversion of this Security to any third party designated by the holder, subject to compliance with
Sections 2(f) and 9(c)—(g) hereof. 



        (b)  The
Conversion Rate will be subject to adjustments from time to time as follows: 



        (1)  In
case the Company shall pay or make a dividend or other distribution on Common Stock of the Company payable in Common Stock, the Conversion Rate in effect at the
opening of business on the day following the Determination Date (as hereinafter defined) for such dividend or other distribution shall be increased by dividing such Conversion Rate by a fraction of
which the numerator shall be the number of shares of Common Stock outstanding at the close of business on such Determination Date and the denominator shall be the sum of such number of shares of
Common Stock and the total number of shares of Common Stock constituting such dividend or other distribution, such increase to become effective immediately after the opening of business on the day
following such Determination Date. For the purposes of this paragraph (1), the number of shares of Common Stock at any time outstanding shall not include Common Stock held in the treasury of
the Company but shall include Common Stock issuable in respect of scrip certificates issued in lieu of fractions of Common Stock. The Company will not pay any dividend or make any distribution on
Common Stock held in the treasury of the Company. 




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        (2)  In
case the Company shall issue rights, options or warrants to all holders of its Common Stock entitling them to subscribe for or purchase Common Stock at a price per
share less than the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on the Determination Date for such distribution, the
Conversion Rate in effect at the opening of business on the day following such Determination Date shall be increased by dividing such Conversion Rate by a fraction of which the numerator shall be the
number of shares of Common Stock outstanding at the close of business on such Determination Date plus the number of shares of Common Stock which the aggregate of the offering price of the total number
of shares of Common Stock so offered for subscription or purchase would purchase at such current market price and the denominator shall be the number of shares of Common Stock outstanding at the close
of business on such Determination Date plus the number of shares of Common Stock so offered for subscription or purchase, such increase to become effective immediately after the opening of business on
the day following such Determination Date. The Company will not issue any rights, options or warrants in respect of Common Stock held in the treasury of the Company. Upon the expiration of any right,
option or warrant to purchase Common Stock the issuance of which resulted in an adjustment to the Conversion Rate pursuant to this paragraph (2) of Section 2(b), if any such right,
option or warrant shall expire and shall not have been exercised, the Conversion Rate shall immediately upon such expiration be recomputed to the Conversion Rate which would have been in effect had
the adjustment of the Conversion Rate made upon the issuance of such right, option or warrant been made on the basis of offering for subscription or purchase only that number of shares of Common Stock
actually purchased upon the exercise of such right, option and warrant actually exercised. 


        (3)  In
case outstanding Common Stock shall be subdivided into a greater number of shares of Common Stock, the Conversion Rate in effect at the opening of business on the day
following the day upon which such subdivision becomes effective shall be proportionately increased, and, conversely, in case outstanding Common Stock shall each be combined into a smaller number of
shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately reduced, such
increase or reduction, as the case
may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. 


        (4)  In
case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock evidences of its indebtedness, shares of any class of capital stock,
or other property (including securities, but excluding (i) any rights, options or warrants referred to in paragraph (2) of this Section 2(b), (ii) any dividend or
distribution paid exclusively in cash, (iii) any dividend or distribution referred to in paragraph (1) of this Section 2(b) and (iv) any merger or consolidation to which
Section 2(h) applies (the "Distributed Property")), the Conversion Rate shall be adjusted so that the same shall equal the rate determined by
dividing the Conversion Rate in effect immediately prior to the close of business on the Determination Date for such distribution by a fraction of which the numerator shall be the current market price
per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date less the then fair market value (as determined in good faith by
the Board of Directors of the Company in accordance with the provisions of this paragraph (4) of Section 2(b)) of the portion of the assets, shares or evidences of indebtedness so
distributed applicable to one share of Common Stock and the denominator shall be such current market price per share of the Common Stock, such adjustment to become effective immediately prior to the
opening of business on the day following such Determination Date; provided, however, that if the Distributed Property consists of shares of capital stock of a Subsidiary, the Company may, at its
option and in lieu 




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of the foregoing adjustment to the Conversion Rate, elect to make adequate provision so that the holder of this Security shall have the right to receive upon conversion the amount of such shares of
capital stock that such holder of this Security would have received if such holder of this Security had converted such Security on the record date. If the Board of Directors determines the fair market
value of any distribution for purposes of this paragraph (4) by reference to the actual or when issued trading market for any securities constituting such distribution, it must in doing so
consider the prices in such market over the same period used in computing the current market price per share pursuant to paragraph (8) of this Section 2(b). 





        If
the Company should adopt a shareholder rights plan (a "Rights Plan"), upon conversion of this Security into Common Stock, the holder of
this Security will receive, in addition to the Common Stock, the rights described therein (whether or not the rights have separated from the Common Stock at the time of conversion), subject to the
limitations set forth in the Rights Plan. Any distribution of rights or warrants pursuant to the Rights Plan in compliance with the requirements set forth in the immediately preceding sentence of this
paragraph shall not constitute a distribution of rights or warrants pursuant to this Section 2(b). 


        Rights
or warrants distributed by the Company to all holders of Common Stock entitling the holders thereof to subscribe for or purchase shares of the Company's capital stock (either
initially or under certain circumstances), which rights or warrants, until the occurrence of a specified event or events ("Trigger Event"):
(i) are deemed to be transferred with such shares of Common Stock; (ii) are not exercisable; and (iii) are also issued in respect of future issuances of Common Stock, shall be
deemed not to have been distributed for purposes of this Section 2(b) (and no adjustment to the Conversion Rate under this Section 2(b) will be required) until the occurrence of the
earliest Trigger Event, whereupon such rights and warrants shall be deemed to have been distributed and an appropriate
adjustment (if any is required) to the Conversion Rate shall be made under this Section 2(b). If any such right or warrant, including any such existing rights or warrants distributed prior to
the original issue date of this Security, are subject to events, upon the occurrence of which such rights or warrants become exercisable to purchase different securities, evidences of indebtedness or
other assets, then the date of the occurrence of any and each such event shall be deemed to be the date of distribution and record date with respect to new rights or warrants with such rights (and a
termination or expiration of the existing rights or warrants without exercise by any of the holders thereof). In addition, in the event of any distribution (or deemed distribution) of rights or
warrants, or any Trigger Event or other event (of the type described in the preceding sentence) with respect thereto that was counted for purposes of calculating a distribution amount for which an
adjustment to the Conversion Rate under this Section was made, (x) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any holders
thereof, the Conversion Rate shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Trigger Event, as the case may be, as though it were a cash
distribution, equal to the per share redemption or repurchase price received by a holder or holders of Common Stock with respect to such rights or warrants (assuming such holder had retained such
rights or warrants), made to all holders of Common Stock as of the date of such redemption or repurchase, and (y) in the case of such rights or warrants which shall have expired or been
terminated without exercise by any holders thereof, the Conversion Rate shall be readjusted as if such rights and warrants had not been issued. 




        (5)  In
case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock cash (excluding any cash that is distributed as part of a distribution
referred to in paragraph (4) of Section 2(b)) in aggregate amount that, combined together with (I) the aggregate amount of any other cash distributions to all holders of its
Common Stock made exclusively in cash within the twelve (12) months preceding the date of payment of such distribution and in respect of which no adjustment pursuant to this
paragraph (5) of 




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Section 2(b) has been made and (II) the aggregate of any cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described
in a board resolution) of consideration payable in respect of any tender offer by the Company or any of its subsidiaries for all or any portion of the Common Stock concluded within the twelve
(12) months preceding the date of payment of such distribution and in respect of which no adjustment pursuant to paragraph (6) of Section 2(b) has been made (the "combined cash
and tender amount"), exceeds ten percent (10%) of the product of the current market price per share of the Common Stock (determined as provided in paragraph (7) of this Section 2(b)) on
the date for the determination of holders of shares of Common Stock entitled to receive such distribution times the number of shares of Common Stock outstanding on such date (the "aggregate current
market price"), then, and in each such case, immediately after the close of business on such date for determination, the Conversion Rate shall be adjusted so that the same shall equal the rate
determined by dividing the Conversion Rate in effect immediately prior to the close of business on the date fixed for determination of the stockholders entitled to receive such distribution by a
fraction (i) the numerator of which shall be equal to the current market price per share of the Common Stock on the date fixed for such determination less an amount equal to the quotient of
(x) the excess of such combined cash and tender amount over ten percent (10%) of such aggregate current market price divided by (y) the number of shares of Common Stock outstanding on
such date for determination and (ii) the denominator of which shall be equal to the current market price per share of the Common Stock on such date for determination. 


        (6)  In
case of a tender offer made by the Company or any Subsidiary of the Company for all or any portion of the Common Stock shall expire and such tender offer or exchange
(as amended upon the expiration thereof) shall require the payment to stockholders (based on the acceptance (up to any maximum specified in the terms of the tender offer) of Purchased Shares (as
defined below)) of an aggregate consideration having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a board resolution), that
combined together with (I) the aggregate of the cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a board
resolution), as of the expiration of such tender or exchange offer, of consideration payable in respect of any other tender or exchange offer by the Company or any Subsidiary of the Company for all or
any portion of the Common Stock expiring within the 12 months preceding the expiration of such tender or exchange offer and in respect of which no adjustment pursuant to this
paragraph (6) of Section 2(b) has been made and (II) the aggregate amount of any cash distributions to all holders of the Company's Common Stock within twelve (12) months
preceding the expiration of such tender or exchange offer and in respect of which no adjustment pursuant to paragraph (5) of Section 2(b) has been made (the "combined tender and cash
amount") exceeds ten percent (10%) of the product of the current market price per share of the Common Stock (determined as provided in paragraph (7) of this Section 2(b)) as of the last
time (the "Expiration Time") tenders or exchange could have been made pursuant to such tender or exchange offer (as it may be amended) times the number
of shares of Common Stock outstanding (including any tendered or exchange shares) as of the Expiration Time, then, and in each such case, immediately prior to the opening of business on the day after
the date of the Expiration Time, the Conversion Rate shall be adjusted so that the same shall equal the rate determined by dividing the Conversion Rate immediately prior to close of business on the
date of the Expiration Time by a fraction (i) the numerator of which shall be equal to (A) the product of (I) the current market price per share of Common Stock on the date of the
Expiration Time multiplied by (II) the number of shares of Common Stock outstanding (including any tendered or exchanged shares) on the date of the Expiration Time less (B) the combined
tender and cash 




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amount, and (ii) the denominator of which shall be equal to the product of (A) the current market price per share of the Common Stock as of the Expiration Time multiplied by
(B) the number of shares of Common Stock outstanding (including any tendered or exchanged shares) as of the Expiration Time less the number of all shares validly tendered or exchanged and not
withdrawn as of the Expiration Time (the shares deemed so accepted up to and any such maximum, being referred to as the "Purchased Shares"). 


        (7)  For
the purpose of any computation under paragraphs (2), (4), (5) or (6) of this Section 2(b), the current market price per share of Common Stock on
any date shall be calculated by the Company and be deemed to be the average of the daily Closing Prices for the five (5) consecutive Trading Days commencing ten (10) Trading Days before
the earlier of (i) the day in question and (ii) the day before the "ex" date with respect to the issuance or distribution requiring such computation. For purposes of this paragraph, the
term "ex date", when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way in the applicable securities market or on the applicable
securities exchange without the right to receive such issuance or distribution. 


        (8)  No
adjustment in the Conversion Rate shall be required unless such adjustment (plus any adjustments not previously made by reason of this paragraph (8)) would
require an increase or decrease of at least one percent (1%) in such rate; provided, however, that any adjustments which by reason of this paragraph (8) are not required to be made shall be
carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 1 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. 


        (9)  The
Company may make such increases in the Conversion Rate, for the remaining term of the Securities or any shorter term, in addition to those required by paragraphs
(1), (2), (3), (4), (5) and (6) of this Section 2(b) as it considers to be advisable in order to avoid or diminish any income tax to any holders of Common Stock resulting from any
dividend or distribution of stock or issuance of rights or warrants to purchase or subscribe for stock or from any event treated as such for income tax purposes. 




        (c)  Whenever
the Conversion Rate is adjusted as provided in Section 2(b), the Company shall compute the adjusted Conversion Rate in accordance with
Section 2(b) and shall prepare a certificate signed by the chief financial officer of the Company setting forth the adjusted Conversion Rate and showing in reasonable detail the facts upon
which such adjustment is based, and shall promptly deliver such certificate to the holder of this Security. 


        (d)  In
case: 



        (1)  the
Company shall declare a dividend or other distribution on its Common Stock that would require any adjustment pursuant to Section 2(b); or 


        (2)  the
Company shall authorize the granting to the holders of its Common Stock of rights, options or warrants to subscribe for or purchase any shares of capital stock of
any class or of any other rights; or 


        (3)  of
any reclassification of the Common Stock of the Company, or of any consolidation, merger or share exchange to which the Company is a party and for which approval of
any shareholders of the Company is required, or of the conveyance, sale, transfer or lease of all or substantially all of the assets of the Company; or 


        (4)  of
the voluntary or involuntary dissolution, liquidation or winding up of the Company; or 




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        (5)  the
Company or any Subsidiary shall commence a tender offer for all or a portion of the Company's outstanding Common Stock (or shall amend any such tender offer); 





then
the Company shall cause to be delivered to the holder of this Security, at least twenty (20) days (or ten (10) days in any case specified in clause (1) or (2) above)
prior to the applicable record, expiration or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend,
distribution, rights, options or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights, options
or warrants are to be determined, (y) the date on which the right to make tenders under such tender offer expires or (z) the date on which such reclassification, consolidation, merger,
conveyance, transfer, sale, lease, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, conveyance, transfer, sale, lease, dissolution,
liquidation or winding up. Neither the failure to give such notice nor any defect therein shall affect the legality or validity of the proceedings described in clauses (1) through (5) of
this Section 2(d). 



        (e)  The
Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, for the purpose of effecting the
conversion of the Security, the full number of shares of Common Stock then issuable upon the conversion of this Security. 



        (f)    Except
as provided in the next sentence, the Company will pay any and all taxes and duties that may be payable in respect of the issue or delivery of Common Stock on
conversion of the Security. The Company shall not, however, be required to pay any tax or duty which may be payable in respect of any transfer involved in the issue and delivery of Common Stock in a
name other than that of the holder of this Security, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax or
duty, or has established to the satisfaction of the Company that such tax or duty has been paid. 



        (g)  The
Company agrees that all Common Stock which may be delivered upon conversion of the Security, upon such delivery, will have been duly authorized and validly issued
and will be fully paid and nonassessable (and shall be issued out of the Company's authorized but unissued Common Stock) and, except as provided in Section 2(f), the Company will pay all taxes,
liens and charges with respect to the issue thereof. 


        (h)  In
case of any recapitalization or reclassification of the Common Stock (other than a change in par value, or as a result of a subdivision or combination covered by
paragraph (3) of this Section 2(b)), or any consolidation of the Company with any other Person, any merger of the Company into another Person or of another Person into the Company (other
than a merger which does not result in a reclassification, conversion, exchange or cancellation of the outstanding Common Stock), or any conveyance, sale, transfer or lease of all or substantially all
of the properties and assets of the Company (collectively, a "Capital Reorganization"), the Company or the Person formed by such Capital Reorganization,
as the case may be, shall execute and deliver to the holder of this Security a supplemental agreement providing that such holder has the right thereafter, during the period this Security shall be
convertible as specified in Section 2(a), to convert this Security only into the kind and amount of securities, cash and other property receivable upon such Capital Reorganization by a holder
of the number of shares of Common Stock of the Company into which this Security might have been
converted immediately prior to such Capital Reorganization, assuming such holder of Common Stock of the Company (i) is not a Person with which the Company consolidated, into which the Company
merged or which merged into the Company or to which any conveyance, sale, transfer or lease was made, as the case may 



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be (a "Constituent Person"), or an Affiliate of a Constituent Person and (ii) failed to exercise its rights of election, if any, as to the kind
or amount of securities, cash and other property receivable upon such Capital Reorganization (provided that if the kind or amount of securities, cash and other property receivable upon such Capital
Reorganization is not the same for each share of Common Stock of the Company held immediately prior to such Capital Reorganization by others than a Constituent Person or an Affiliate thereof and in
respect of which such rights of election shall not have been exercised ("Non-electing Share"), then for the purpose of this
Section 2(h) the kind and amount of securities, cash and other property receivable upon such Capital Reorganization by the holders of each Non-electing Share shall be deemed to be
the kind and amount so receivable per share by a plurality of the Non-electing Shares). Such supplemental agreement shall provide for adjustments which, for events subsequent to the
effective date of such supplemental agreement, shall be equivalent to the adjustments provided for in this Section 2. The above provisions of this Section 2(h) shall similarly apply to
successive Capital Reorganizations. If this Section 2(h) applies to any event or occurrence, then the other provisions of Section 2(b) shall not apply. 


        (i)    The
Company (i) will effect all registrations with, and obtain all approvals by, all governmental authorities that may be necessary under any United States
Federal or state law (including the Securities Act, the Exchange Act and state securities and Blue Sky laws) for the Common Stock issuable upon conversion of this Security to be lawfully issued and
delivered as provided herein, and thereafter publicly traded (if permissible under the Securities Act) and qualified or listed as contemplated by clause (ii) (it being understood that the
Company shall not be required to register the offer, sale or resale of Common Stock issuable on conversion hereof under the Securities Act except pursuant to the Registration Rights Agreement between
the Company and the initial holder of this Security); and (ii) if required, will list the Common Stock required to be issued and delivered upon conversion of Securities, prior to such issuance
or delivery, on each national securities exchange on which outstanding Common Stock is listed or quoted at the time of such delivery, or if the Common Stock is not then listed on any securities
exchange, to qualify the Common Stock for quotation on the Nasdaq National Market or such other inter-dealer quotation system, if any, on which the Common Stock is then quoted. 




        3.    Right to Require Repurchase.



        (a)  In
the event that a Change in Control (as hereinafter defined) shall occur, then the holder of this Security shall have the right, at such holder's option, to require
the Company to repurchase, and upon the exercise of such right the Company shall repurchase, this Security, or any portion of the principal amount hereof that is equal to $1,000 or any integral
multiple thereof, on the date (the "Repurchase Date") that is 30 Trading Days (or such longer period as required by applicable law) after the date on which the Company gives notice of such Change of
Control to the holder of this Security, at a purchase price equal to the Repurchase Price (as hereinafter defined). The Company agrees to give the holder of this Security notice, in the manner
provided in Section 9(b), of any Change in Control, promptly and in any event within five (5) Trading Days of the occurrence thereof. 


        (b)  To
exercise a repurchase right, the holder shall deliver to the Company on or before the 5th day prior to the Repurchase Date, together with this Security, written
notice of the holder's exercise of such right, which notice shall set forth the name of the holder, the principal amount of this Security to be repurchased (and, if this Security is to be repurchased
in part, the portion of the principal amount thereof to be repurchased) and a statement that an election to exercise the repurchase right is being made thereby. Such written notice shall be
irrevocable, except that the right of the holder to convert this Security (or the portion hereof with respect to which the repurchase right is being exercised) shall continue until the close of
business on the Trading Day prior to the Repurchase Date. 



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        (c)  In
the event a repurchase right shall be exercised in accordance with the terms hereof, the Company shall pay or cause to be paid to the holder the Repurchase Price in
cash on the Repurchase Date in the manner set forth in the introductory paragraph to this Security. 


        (d)  If
this Security is to be repurchased only in part, it shall be surrendered to the Company at the Designated Office (with, if the Company so requires, due endorsement
by, or a written instrument of transfer in form satisfactory to the Company duly executed by, the holder hereof or his attorney duly authorized in writing), and the Company shall execute and make
available for delivery to the holder without service charge, a new Security or Securities, containing identical terms and conditions, each in an authorized denomination in aggregate principal amount
equal to and in exchange for the unrepurchased portion of the principal of the Security so surrendered. 


        (e)  For
purposes of this Section 3: 



        (1)  the
term "beneficial owner" shall be determined in accordance with Rule 13d-3 promulgated by the Securities and Exchange Commission pursuant to the
Exchange Act; 


        (2)  a
"Change in Control" shall be deemed to have occurred at the time, after the original issuance of this Security, of: 



        (i)    the
acquisition by any Person of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of transactions, of
shares of capital stock of the Company entitling such Person to exercise 50% or more of the total voting power of all shares of capital stock of the Company entitled to vote generally in the elections
of directors (any shares of voting stock of which such Person is the beneficial owner that are not then outstanding being deemed outstanding for purposes of calculating such percentage) other than any
such acquisition by the Company or any employee benefit plan of the Company; or 


        (ii)  any
consolidation or merger of the Company with or into, any other Person, any merger of another Person with or into the Company, or any conveyance, transfer, sale,
lease or other disposition of all or substantially all of the assets of the Company to another Person (other than (a) any such transaction pursuant to which holders of Common Stock immediately
prior to such transaction have the entitlement to exercise, directly or indirectly, 50% or more of the total voting power of all shares of capital stock entitled to vote generally in the election of
directors of the continuing or surviving Person immediately after such transaction and (b) any merger (x) which does not result in any reclassification, conversion, exchange or
cancellation of outstanding Common Stock or (y) which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of
outstanding Common Stock into solely shares of common stock); 





        However,
a Change in Control will not be deemed to have occurred if (i) the Closing Price per share of the Company's Common Stock for any five (5) Trading Days within the
period of ten (10) consecutive Trading Days ending immediately after the later of the Change in Control or the public announcement of the Change in Control, in the case of a Change in Control
relating to an acquisition of capital stock, or the period of ten (10) consecutive Trading Days ending immediately before the Change in Control, in the case of Change in Control relating to a
merger, consolidation or asset sale, equals or exceeds 105% of the Conversion Price of this Security; or (ii) 95% of the consideration (excluding cash payments for fractional shares and cash
payments made pursuant to dissenters' appraisal rights) in a merger or consolidation otherwise constituting the Change of Control described in clause (ii) above consists of shares of common
stock traded or to be traded immediately following such Change of Control on a national securities exchange or quoted on the Nasdaq National Market and as a result of such transaction or transactions
this Security becomes convertible solely into such common stock. 


9





 


        (iii)  the
"current market price" of a share of Common Stock shall be the Closing Price of the Common Stock on the Trading Day immediately preceding the Repurchase Date; and 


        (iv)  "Repurchase
Price" means the sum of (a) 100% of the principal amount of this Security to be repurchased pursuant to this Section 3 and (b) accrued
and unpaid interest on this Security to the date of payment. 





        4.    Certain Covenants.



        (a)  This
Security is entitled to the benefits of the covenants set forth in the Note Agreement. 


        (b)  Whether
or not required by the rules and regulations of the Commission, so long as this Security is outstanding, the Company will furnish to the holders of this Security
(i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-QSB and 10-KSB (or any successor
forms) if the Company were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information
only, a report thereon by the Company's certified independent accountants and (ii) all current reports that would be required to be filed with the Commission on Form 8-K (or
any successor form) if the Company were required to file such reports. In addition, whether or not required by the rules and regulations of the Commission, the Company will file a copy of all
such information and reports with the Commission for public availability (unless the Commission will not accept such a filing) and make such information available to securities analysts and
prospective investors upon request. In addition, the Company has agreed that, for so long as this Security remains outstanding, it will furnish to the holder of this Security and to securities
analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. 



10







   
        5.    Events of Default.



        (a)  "Event
of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): 



        (1)  default
in the payment of any principal on this Security when due or interest upon this Security when it becomes due and payable, and continuance of such default for a
period of 30 days; or 


        (2)  default
by the Company in the performance of its obligations in respect of any conversion of this Security (or any portion hereof) in accordance with Section 2
for a period of 5 days; or 


        (3)  failure
by the Company to give any notice of a Change of Control required to be delivered in accordance with Section 3(a); or 


        (4)  default
in the performance, or breach, of any other covenant of the Company herein (other than a covenant a default in the performance or breach of which is specifically
dealt with elsewhere in this Section 5(a)) and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company
by the holder of this Security a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or 



        (5)  a
default under any bond, debenture, note or other evidence of indebtedness for money borrowed by the Company, or under any agreement, mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company, with a principal amount then outstanding in excess of $10,000,000,
whether such indebtedness now exists or shall hereafter be created, which default shall constitute a failure to pay the principal of such indebtedness (in whole or in any part greater than
$10,000,000) when due and payable or shall have resulted in such indebtedness (in whole or in any part greater than $10,000,000) becoming or being declared due and payable prior to the date on which
it would otherwise have become due and payable, without such indebtedness having been discharged, or such acceleration having been rescinded
or annulled, within a period of 30 days after there shall have been given, by registered or certified mail, to the Company by the holder of this Security a written notice specifying such
default and requiring the Company to cause such indebtedness to be discharged or cause such acceleration to be rescinded or annulled and stating that such notice is a "Notice of Default" hereunder; or 


        (6)  the
entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under
any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order approving as properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar
official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such
other decree or order unstayed and in effect for a period of 60 consecutive days; or 


        (7)  the
commencement by the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of
any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by the Company to the entry of a decree or order for relief in respect of the Company in an 




11





 






involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or
proceeding against either the Company, or the filing by either the Company of a petition or answer or consent seeking reorganization or similar relief under any applicable Federal or State law, or the
consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the
Company or of any substantial part of the property of the Company, or the making by either the Company of an assignment for the benefit of creditors, or the admission by either the Company in writing
of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action. 




        (b)  If
an Event of Default (other than an Event of Default specified in Section 5(a)(6) or 5(a)(7)) occurs and is continuing, then in every such case the holder of
this Security may declare the principal hereof (or, if there is at such time more than one holder, holders of least twenty-five percent (25%) of the outstanding principal amount of all
then outstanding securities of the same series as this Security may declare the principal amount of this Security and all other such securities then outstanding to be due and payable immediately, by a
notice in writing to the Company, and upon any such declaration such principal and all accrued interest thereon shall become immediately due and payable. For purposes of the immediately preceding
sentence, "securities of the same series" shall mean collectively this Security, any PIK Notes and any notes issued upon a Transfer of a portion of this Security. If an Event of Default specified in
Section 5(a)(6) or 5(a)(7) occurs and is continuing with respect to the Company, the principal of, and accrued interest on, this Security shall ipso facto become immediately due and payable
without any declaration or other act of the holders. 


        (c)  The
Company will give the holder of this Security notice, within ten (10) Trading Days of the occurrence thereof, of any Event of Default or any event that, with
the giving of notice or passage of time or both, would become an Event of Default. Such notice shall be given in the manner provided in Section 9(b). 




        6.    Consolidation, Merger, Etc.



        (a)  The
Company shall not consolidate with or merge into any other Person or, directly or indirectly, convey, transfer, sell or lease all or substantially all of its
properties and assets to any Person, and the Company shall not permit any Person to consolidate with or merge into the Company or, directly or indirectly, convey, transfer, sell or lease all or
substantially all of its properties and assets to the Company, unless: 



        (1)  in
case the Company shall consolidate with or merge into another Person or convey, transfer, sell or lease all or substantially all of its properties and assets to any
Person, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance, transfer or sale, or which leases, all or substantially all the
properties and assets of the Company shall be a corporation, limited liability company, partnership or trust, shall be organized and validly existing under the laws of the United States of America,
any State thereof or the District of Columbia, and shall expressly assume, if other than the Company, by an agreement supplemental hereto, executed and delivered to the holder of this Security in form
satisfactory to the holder, the due and punctual payment of the principal of and any interest on this Security and the performance or observance of every covenant of this Security on the part of the
Company to be performed or observed, including the conversion rights provided herein; 




12





 


        (2)  immediately
after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default,
shall have happened and be continuing; and 




        (b)  Upon
any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer, sale or lease of all or substantially all of the
properties and assets of the Company in accordance with Section 6(a), the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance,
transfer, sale or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Security with the same effect as if such successor Person
had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person shall be relieved of all obligations and covenants under this Security. 




        7.    Subordination.



        (a)  The
Company covenants and agrees, and the holder of this Security by its acceptance hereof likewise covenants and agrees, that this Security is subject to the provisions
of this Section 7; and each Person holding this Security, whether upon original issue or upon transfer, assignment or exchange thereof, accepts and agrees to be bound by such provisions. 




        The
payment of the principal of, premium, if any, and interest on this Security (including, but not limited to, the redemption price or repurchase price with respect to this Security)
shall, to the extent and in the manner hereinafter set forth, be subordinated to the prior payment in full, in cash or in such other form of payment as may be acceptable to the holders of Senior
Indebtedness, of all Senior Indebtedness, whether outstanding at the date of original issuance of this Security or thereafter incurred or created. 


        No
provision of this Section 7 shall prevent the occurrence of any default or Event of Default under this Security. 



        (b)  Payments to Holders. No payment (including pursuant to any redemption or repurchase of this Security) shall be made with
respect to the principal of, or premium, if any, or interest on this Security, if: 



        (1)  a
default in the payment of principal, premium, if any, or interest or other payment due on Senior Indebtedness occurs and is continuing beyond any applicable period of
grace (a "Payment Default"); or 


        (2)  a
default, other than a Payment Default, occurs and is continuing with respect to Designated Senior Indebtedness that then permits holders of the Designated Senior
Indebtedness as to which such default related to accelerate its maturity and the holder of this Security and the Company receive a written notice of such default (a "Payment
Blockage Notice") from a representative of Designated Senior Indebtedness or a holder of Designated Senior Indebtedness or the Company (a
"Non-Payment Default"). 





        The
Company may and shall resume payments on this Security (1) in the case of a Payment Default, on the date upon which such default is cured or waived or ceases to exist, and
(2) in the case of a Non-Payment Default with respect to Designated Senior Indebtedness, on the earlier of the date on which the Non-Payment Default is cured or waived
or ceases to exist or 179 days have passed after the date on which the applicable Payment Blockage Notice is received. 



        No
new period of payment blockage may be commenced pursuant to a Payment Blockage Notice unless at least 365 days shall have elapsed since the Company's receipt of the immediately
prior Payment Blockage Notice. No default (whether or not such event of default is on the same issue of Designated Senior Indebtedness) that existed or was continuing on the date of delivery of any
Payment 


13





 




Blockage Notice to the holder of this Security shall be, or be made, the basis for a subsequent Payment Blockage Notice. 



        If
payment of this Security is accelerated because of an Event of Default, the Company shall promptly notify holders of Senior Indebtedness of the acceleration. 


        Notwithstanding
the foregoing, in the event that the holder of this Security receives any payment or distribution of assets of the Company of any kind in contravention of any term of
this Section 7, whether in cash, property or securities, including, without limitation, by way of setoff or otherwise, before all Senior Indebtedness is paid in full, in cash or such other form
of payment as may be acceptable to the holders of Senior Indebtedness, then such payment or distribution shall be held by the recipient or recipients in trust for the benefit of, and shall immediately
be paid over or delivered to, the holders of Senior Indebtedness or their respective representative or representatives, or to the trustee or trustees under any indenture pursuant to which any
instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, for application to the payment of all Senior Indebtedness
remaining unpaid to the extent necessary to make payment in full, in cash or such other form of payment as may be acceptable to the holders of Senior Indebtedness, of all Senior Indebtedness remaining
unpaid, after giving effect to any concurrent payment or distribution, or provision therefor, to or for the holders of such Senior Indebtedness. 


        (c)  Bankruptcy and Dissolution, Etc. Upon any payment by the Company, or distribution of assets of the Company of any kind or
character, whether in cash, property or securities, to creditors upon any dissolution, winding-up, liquidation or reorganization of the Company, whether voluntary or involuntary or in
bankruptcy, insolvency, receivership or other proceedings, all amounts due or to become due upon all Senior Indebtedness shall first be paid in full, in cash or in such other form of payment as may be
acceptable to the holders of Senior Indebtedness, before any payment is made on account of the principal or premium, if any, and interest on this Security; and upon any such dissolution,
winding-up, liquidation or reorganization or bankruptcy, insolvency, receivership or other such proceedings, any payment by the Company, or distribution of assets of the Company of any
kind or character, whether in cash, property or securities, to which the holders of this Security would be entitled, except for the provisions of this Section 7, shall (except as aforesaid) be
paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the holder of this Security if received by it,
directly to the holders of Senior Indebtedness (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, or as otherwise required by law or a court
order) or their respective representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been
issued, as their respective interests may appear, to the extent necessary to pay all Senior Indebtedness in full in cash or in such other form of payment as may be acceptable to the holders of Senior
Indebtedness after giving effect to any
concurrent payment or distribution to or for the holders of Senior Indebtedness, before any payment or distribution is made to the holder of this Security. 


        Notwithstanding
the foregoing, in the event that the holder of this Security receives any payment or distribution of assets of the Company of any kind in contravention of any term of
this Security, whether in cash, property or securities, including, without limitation, by way of setoff or otherwise, before all Senior Indebtedness is paid in full, in cash or such other form of
payment as may be acceptable to the holders of Senior Indebtedness, then such payment or distribution shall be held by the recipient or recipients in trust for the benefit of, and shall immediately be
paid over or delivered to, the holders of Senior Indebtedness or their respective representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments
evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, for application to the payment of all Senior Indebtedness remaining
unpaid to the extent 


14





 




necessary to make payment in full, in cash or such other form of payment as may be acceptable to the holders of Senior Indebtedness, of all Senior Indebtedness remaining unpaid, after giving effect
to any concurrent payment or distribution, or provision therefor, to or for the holders of such Senior Indebtedness. 


        For
purposes of Section 7(b) hereof and this Section 7(c), the words "cash, property or securities" shall not be deemed to include shares of stock of the Company as
reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated (at least to the extent
provided in this Section 7 with respect to this Security) to the payment of all Senior Indebtedness which may at the time be outstanding. The consolidation of the Company with, or the merger of
the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another
corporation upon the terms and conditions provided for in Section 6 shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this
Section 7(c) if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Section 6. 


        (d)  Subrogation. Subject to the payment in full in cash, or in such other form of payment as may be acceptable to the holders
of Senior Indebtedness, of all Senior Indebtedness, the rights of the holder of this Security shall be subrogated to the extent of the payments or distributions made to the holders of such Senior
Indebtedness pursuant to the provisions of this Section 7 (equally and ratably with the holders of all indebtedness of the Company which by its express terms is subordinated to other
indebtedness of the Company to substantially the same extent as this Security is subordinated and is entitled to like rights of subrogation) to the rights of the holders of Senior Indebtedness to
receive payments or distributions of cash, property or securities of the Company applicable to the Senior Indebtedness until the principal of, and premium, if any, and interest on this Security shall
be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of the Senior Indebtedness of any cash, property or securities to which the holder of this
Security would be entitled except for the provisions of this Section 7, and no payment over pursuant to the provisions of this Section 7, to or for the benefit of the holders of Senior
Indebtedness by holders of this Security, shall, as between the Company, its creditors other than holders of Senior Indebtedness, and the holder of this Security, be deemed to be a payment by the
Company to or on account of the Senior
Indebtedness; and no payments or distributions of cash, property or securities to or for the benefit of the holder of this Security pursuant to the subrogation provisions of this Section 7,
which would otherwise have been paid to the holders of Senior Indebtedness shall be deemed to be a payment by the Company to or for the account of this Security. It is understood that the provisions
of this Section 7 are and are intended solely for the purposes of defining the relative rights of the holder of this Security, on the one hand, and the holders of the Senior Indebtedness, on
the other hand. 


        Nothing
contained in this Section 7 or elsewhere in this Security is intended to or shall impair, as among the Company, its creditors other than the holders of Senior
Indebtedness, and the holder of this Security, the obligation of the Company, which is absolute and unconditional, to pay to the holder of this Security the principal of, and premium, if any, and
interest on the Security as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holder of this Security and
creditors of the Company other than the holders of the Senior Indebtedness, nor shall anything herein or therein prevent the holder of this Security from exercising all remedies otherwise permitted by
applicable law upon default under this Security, subject to the rights, if any, under this Section 7 of the holders of Senior Indebtedness in respect of cash, property or securities of the
Company received upon the exercise of any such remedy. 


        Upon
any payment or distribution of assets of the Company referred to in this Section 7, the holder of this Security shall be entitled to rely upon any order or decree made by any
court of competent jurisdiction in which such bankruptcy, dissolution, winding-up, liquidation or reorganization 


15





 




proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, delivered to the holder of this
Security, for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Section 7. 


        (e)  Notice. The Company shall give prompt written notice to the holder of this Security of any fact known to the Company
which would prohibit the making of any payment of monies in respect of this Security pursuant to the provisions of this Section 7. 


        The
holder of this Security shall be entitled to rely on the delivery to it of a written notice by a Person representing itself to be a holder of Senior Indebtedness (or a trustee on
behalf of such holder) to establish that such notice has been given by a holder of Senior Indebtedness or a trustee on behalf of any such holder or holders. In the event that the holder of this
Security determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to
this Section 7, the holder of this Security may request such Person to furnish evidence to the reasonable satisfaction of the holder of this Security as to the amount of Senior Indebtedness
held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Section 7,
and if such evidence is not furnished the holder of this Security may defer any
payment to such Person pending judicial determination as to the right of such Person to receive such payment. 


        (f)    No Impairment of Subordination. No right of any present or future holder of any Senior Indebtedness to enforce
subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any
such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Security, regardless of any knowledge thereof which any such holder may have or otherwise be
charged with. 


        Without
in any way limiting the generality of the foregoing paragraph, the holders of the Senior Indebtedness may, at any time and from time to time, without the consent of or notice to
the holder of this Security, without incurring responsibility to the holder of this Security, and without impairing or releasing the subordination provided in this Security or the obligations of the
holder of this Security to the holders of the Senior Indebtedness, do any one or more of the following: (a) change the manner, place, or terms of payment (including any change in the rate of
interest) or extend the time of payment of, or renew, amend, modify, alter, or grant any waiver or release with respect to, or consent to any departure from, any Senior Indebtedness or any instrument
evidencing the same or any agreement evidencing, governing, creating, guaranteeing or securing any Senior Indebtedness; (b) sell, exchange, release, or otherwise deal with any property pledged,
mortgaged or otherwise securing Senior Indebtedness; (c) release any Person liable under or in respect of the Senior Indebtedness; (d) fail or delay in the perfection of liens securing
the Senior Indebtedness; (e) exercise or refrain from exercising any rights against Company and any other Person; or (f) amend, or grant any waiver or release with respect to, or consent
to any departure from, any guarantee for all or any of the Senior Indebtedness. 


        (g)  Certain Conversions Deemed Payment. For the purposes of this Section 7 only, (1) the issuance and delivery
of junior securities upon conversion of this Security in accordance with Section 2 shall not be deemed to constitute a payment or distribution on account of the principal of (or premium, if
any) or interest on this Security or on account of the purchase or other acquisition of this Security, and (2) the payment, issuance or delivery of cash (including cash paid for fractional
shares upon conversion of this Security in accordance with Section 2), property or securities (other than junior securities) upon conversion of this Security in accordance with Section 2
shall be deemed to constitute payment on 


16





 




account of the principal of this Security. For the purposes of this Section, the term "junior securities" means (a) shares of any stock of any class of the Company and (b) securities of
the Company which are subordinated in right of payment to all Senior Indebtedness which may be outstanding at the time of issuance or delivery of such securities to substantially the same extent as,
or to a greater extent than, this Security is so subordinated as provided in this Section 7. Nothing contained in this Section 7 or elsewhere in this Security is intended to or shall
impair, as among the Company, its creditors other than holders of Senior Indebtedness and the holder of this Security, the right, which is absolute and unconditional, of the holder of this Security to
convert this Security in accordance with Section 2. 


        8.    Definitions. Unless otherwise defined in this Security, the following capitalized terms shall have the following
respective meanings when used herein: 


        "Affiliate"
of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For
the purposes of this definition, "control", when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. 


        "Business
Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which the banking institutions in California are authorized or obligated by law or
executive order to close or be closed. 


        "Cash
Distribution" means the distribution by the Company to all holders of its Common Stock of cash, other than any cash that is distributed upon a merger or consolidation to which
Section 2(h) applies or as part of a distribution referred to in paragraph (4) of Section 2(b). 


        "Closing
Price" means, with respect to the Common Stock of the Company, for any day, the reported last sale price per share on the Nasdaq National Market, or, if the Common Stock is not
admitted to trading on the Nasdaq National Market, on the principal national securities exchange or inter-dealer quotation system on which the Common Stock is listed or admitted to trading, or if not
admitted to trading on the Nasdaq National Market, or listed or admitted to trading on any national securities exchange or inter-dealer quotation system, the closing bid price per share in the
over-the-counter market as furnished by any New York Stock Exchange member firm selected from time to time by the Company for that purpose. 


        "Commission"
means the United States Securities and Exchange Commission, or any other federal agency at the time administering the Exchange Act or the Securities Act, whichever is the
relevant statute for the particular purpose. 


        "Common
Stock" means the Common Stock, par value $0.10 per share, of the Company authorized at the date of this instrument as originally executed. Subject to the provisions of
Section 2, shares issuable on conversion of this Security shall include only Common Stock or shares of any class or classes of common stock resulting from any reclassification or
reclassifications thereof; provided, however, that if at any time there shall be more than one such resulting class, the shares so issuable on
conversion of this Security shall include shares of all such classes, and the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of
such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. 



        "Conversion
Price" has the meaning given to such term in Section 2(a). 


        "Conversion
Rate" has the meaning given to such term in Section 2(a). 


17





 



        "Designated
Senior Indebtedness" means the Company's obligations under any Senior Indebtedness in which the instrument creating or evidencing the same or the assumption or guarantee
thereof (or related agreements or documents to which the Company is a party) expressly provides that such Senior Indebtedness shall be "Designated Senior Indebtedness" for purposes of this Security
(provided that such instrument, agreement or other document may place limitations and conditions on the right of such Senior Indebtedness to exercise the rights of Designated Senior Indebtedness). 


        "Determination
Date" means, in the case of a dividend or other distribution, including the issuance of rights, options or warrants, to shareholders, the date fixed for the determination
of shareholders entitled to receive such dividend or other distribution and, in the case of a tender offer, the last time that tenders could have been made pursuant to such tender offer. 



        "Excess
Purchase Payment" means the product of (A) the excess, if any, of (i) the amount of cash plus the fair market value (as determined in good faith by the Company's
Board of Directors) of any non-cash consideration required to be paid with respect to one share of Common Stock acquired or to be acquired in a tender offer made by the Company or any
Subsidiary of the Company for all or any portion of the Common Stock over (ii) the current market price per share as of the last time that tenders could have been made pursuant to such tender
offer and (B) the number of shares of Common Stock validly tendered and not withdrawn as of the Determination Date in respect of such tender offer. 



        "Exchange
Act" means the Securities Exhange Act of 1934, as amended. 


        "Indebtedness"
means, with respect to any Person: 



        (a)  All
obligations, contingent or otherwise, of such Person (i) for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such
Person or only to a portion thereof), (ii) evidenced by a note, debenture, bond or written instrument (including a purchase money obligation), (iii) in respect of leases of such Person
required, in conformity with generally accepted accounting principles, to be accounted for as capitalized lease obligations on the balance sheet of such Person and all obligations and other
liabilities (contingent or otherwise) under any lease or related
document (including a purchase agreement) in connection with the lease of real property which provides that such Person is contractually obligated to purchase or cause a third party to purchase the
leased property and thereby guarantee a minimum residual value of the leased property to the lessor and the obligations of such Person under such lease or related document to purchase or to cause a
third party to purchase such leased property; or (iv) in respect of letters of credit (including reimbursement obligations with respect thereto), local guarantees or bankers' acceptances; 


        (b)  All
obligations secured by a mortgage, pledge, lien, encumbrance, charge or adverse claim affecting title or resulting in an encumbrance to which the property or assets
of such Person are subject, whether or not the obligations secured thereby shall have been assumed by or shall otherwise be such Person's legal liability; 


        (c)  To
the extent not otherwise included, all obligations of such Person under interest rate and currency swap agreements, cap, floor and collar agreements, spot and forward
contracts and similar agreements and arrangements; 


        (d)  All
obligations of others of the type described in clauses (a), (b), or (c) above assumed by or guaranteed in any manner by such Person or in effect guaranteed by
such Person through an agreement to purchase, contingent or otherwise (and the obligations of such Person under any such assumptions, guarantees or other such arrangements); and 


        (e)  All
obligations, contingent or otherwise, of such Person under or in respect of any and all deferrals, renewals, extensions and refundings of, or amendments,
modifications or supplements to, any liability of the kinds described in any of the preceding clauses (a), (b), (c) or (d). 



18





 





        "Person"
shall mean and include an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, an unincorporated
association, a joint venture or other entity or a governmental authority. 


        "PIK
Note" has the meaning given to such term in the introductory paragraph of this Security. 


        "Registration
Rights Agreement" means the Registration Rights Agreement, dated as of September 27, 2001, between the Company and the initial holder of this Security, as amended,
modified or otherwise supplemented from time to time. 


        "Repurchase
Date" has the meaning given to such term in Section 2(a) hereof. 


        "Securities
Act" means the Securities Act of 1933, as amended. 


        "Senior
Indebtedness" means the principal of, premium, if any, interest on (including any interest accruing after the filing of a petition by or against the Company under any bankruptcy
law, whether or not allowed as a claim after such filing in any proceeding under such bankruptcy law) and any other payment due pursuant to, any Indebtedness, whether outstanding on the date of this
Security or thereafter incurred or created; provided that Senior Indebtedness shall not include (i) any indebtedness of any kind of the Company
to any Subsidiary of the Company, a majority of the voting stock of which is owned, directly or indirectly, by the Company, (ii) indebtedness for trade payables or constituting the deferred
purchase price of assets or services incurred in the ordinary course of business, or (iii) any indebtedness which by its terms is pari passu in
right of payment with or subordinate in right of payment to this Security. 


        "Subsidiary"
shall mean (a) any corporation of which more than 50% of the issued and outstanding equity securities having ordinary voting power to elect a majority of the board of
directors of such corporation is at the time directly or indirectly owned or controlled by the Company, (b) any partnership, joint venture, limited liability company or other association of
which more than 50% of the equity interests having the power to vote, direct or control the management of such partnership, joint venture, limited liability company or other association is at the time
directly or indirectly owned and controlled by the Company, and (c) any other entity included in the financial statements of the Company on a consolidated basis. 


        "Trading
Day" means (i) if the Common Stock is admitted to trading on the Nasdaq National Market or any other system of automated dissemination of quotations of securities prices,
a day on which trades may be effected through such system; (ii) if the Common Stock is listed or admitted for trading on the New York Stock Exchange or any other national securities exchange, a
day on which such exchange is open for business; or (iii) if the Common Stock is not admitted to trading on the Nasdaq National Market or listed or admitted for trading on any national
securities exchange or any other system of automated dissemination of quotation of securities prices, a day on which the Common Stock is traded regular way in the
over-the-counter market and for which a closing bid and a closing asked price for the Common Stock are available. 


        9.    Other.



        (a)  No
provision of this Security shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest, if any, on
this Security at the times, places and rate, and in the coin or currency, herein prescribed or to convert this Security as herein provided. 


        (b)  The
Company will give prompt written notice to the holder of this Security of any change in the location of the Designated Office. Any notice to the Company or to the
holder of this Security shall be given in the manner set forth in the Note Exchange Agreement, dated as of January 30, 2003, among the Company and the initial holder of this Security (the
"Agreement"), 



19





 


provided that the holder of this Security, if not a party to the Agreement, may specify alternative notice instructions to the Company. 


        (c)  The
transfer of this Security is registrable on the register maintained by the Company upon surrender of this Security for registration of transfer at the Designated
Office, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company duly executed by, the holder hereof or such holder's attorney duly authorized in
writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. Such Securities
are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. No service charge shall be made for any such registration of transfer, but the
Company may require payment of a sum sufficient to recover any tax or other governmental charge payable in connection therewith. Prior to due presentation of this Security for registration of
transfer, the Company and any agent of the Company may treat the Person in whose name this Security is registered as the owner thereof for all purposes, whether or not this Security be overdue, and
neither the Company nor any such agent shall be affected by notice to the contrary. 


        (d)  This
Security and the Common Stock issuable upon conversion of this Security have not been registered under the Securities Act, or the securities laws of any state or
other jurisdiction. Neither this Security nor the Common Stock issuable upon conversion of this Security nor any interest or participation herein may be reoffered, sold, assigned, transferred,
pledged, encumbered or otherwise disposed of (a "Transfer") in the absence of such registration or unless such transaction is exempt from, or not subject to, registration. The holder by its acceptance
of this Security or the Common Stock issuable upon conversion of this Security agrees that it shall not offer, sell, assign, transfer, pledge, encumber or otherwise dispose of this Security or any
portion thereof or interest therein other than in a minimum denomination of $5,000,000 principal amount (or any integral multiple of $1,000,000 in excess thereof) and then (other than with respect to
a Transfer pursuant to a registration statement that is effective at the time of such Transfer) only (a) to the Company, (b) pursuant to a person it reasonably believes to be an
institutional "accredited investor" within the meaning of Rule (501(a)(1)(2)(3) or (7) under the Securities Act or a qualified institutional buyer (as defined in Rule 144A under the
Securities Act), and in the case of (b) above in which the transferor furnishes the Company with such certifications, legal opinions or other information as the Company may reasonably request
to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. 


        (e)  Upon
presentation of this Security for registration of transfer at the office of the Company specified herein accompanied by (i) certification by the transferor
that such transfer is in compliance with the terms hereof and (ii) by a written instrument of transfer in a form approved by the Company executed by the registered holder, in person or by such
holder's attorney thereunto duly authorized in writing, and including the name, address and telephone and fax numbers of the transferee and name of the
contact person of the transferee, such Security shall be transferred on the Security register, and a new Security of like tenor and bearing the same legends shall be issued in the name of the
transferee and sent to the transferee at the address and c/o the contact person so indicated. Transfers and exchanges of Securities shall be subject to such additional restrictions as are set forth in
the legends on the Securities and to such additional reasonable regulations as may be prescribed by the Company as specified in Section 6(c)(2) hereof. Successive registrations of transfers as
aforesaid may be made from time to time as desired, and each such registration shall be noted on the Security register. 


        (f)    Upon
receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Security, and in the case of loss, theft or
destruction, receipt of indemnity or security reasonably satisfactory to the Company, and upon reimbursement to the 



20





 





Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Security, if mutilated, the Company will deliver a new Security of like tenor and dated as of such
cancellation, in lieu of such Security. 


        (g)  Such
holder represents that it is an institutional "accredited investor" within the meaning of Rule 501(a)(1)(3)(5) or (7) of the Securities Act or a
qualified institutional buyer (as defined in Rule 144A under the Securities Act). Such holder has been advised that this Security has not been registered under the Securities Act, or any state
securities laws and, therefore, cannot be resold unless it is registered under the Securities Act and applicable state securities laws or unless an exemption from such registration requirements is
available. Such holder is aware that the Company is under no obligation to effect any such registration or to file for or comply with any exemption from registration. Such holder has not been formed
solely for the purpose of making this investment and is acquiring the Security for its own account for investment, and not with a view to, or for resale in connection with, the distribution thereof. 



        (h)  Neither
this Security nor any term hereof may be amended or waived orally or in writing, except that any term of the Securities may be amended and the observance of any
term of the Securities may be waived (either generally or in a particular instance and either retroactively or prospectively), and such amendment or waiver shall be applicable to all of the
Securities, upon the approval of the Company and the holders of fifty percent (50%) or more of the outstanding principal amount of all then outstanding Securities; provided,
however, that any amendment that would (i) reduce the outstanding principal amount or premium (if any) of the Securities, (ii) reduce the rate of interest borne
by the Securities, (iii) change the date of maturity or interest payment dates of the Securities, (iv) reduce any amount payable upon repurchase of the Securities, (v) impair the
right of any holder of this Security to institute suit for the payment thereof, (vi) make the principal, premium (if any) or interest payable on the Securities in a coin or currency other than
as set forth in the Securities, (vii) modify the provisions of the Securities with respect to subordination or seniority of the Securities in a manner adverse to the holders of the Securities
in any material respect, (viii) change in any respect the obligation of the Company to repurchase the Securities, (ix) impair the right of the holders of the Securities to convert the
Securities into Common Stock or (x) modify this Section 7 shall require the approval of the holder of each Security to which such amendment shall apply. The Company will not amend any
provision of any other Security in a manner favorable to any holder thereof unless a similar amendment is made or offered with respect to all of the Securities. Each holder of this Security by its
acceptance hereof acknowledges and agrees that the subordination provisions of this instrument are for
the benefit of the holders of the Senior Indebtedness and that, accordingly, no provision of Section 7 hereof may be amended or otherwise modified without the prior written consent of each
holder of Senior Indebtedness at such time outstanding. 


        (i)    This Security shall be governed by and construed in accordance with the internal laws of the State of California.  



[Remainder of page intentionally left blank.]


21





 

        IN
WITNESS WHEREOF, the Company has caused this Security to be duly executed. 



	Dated: January 30, 2003	 	 	 	 
	

 	
 	

RAINING DATA CORPORATION	

 
	

 	
 	

By:	

/s/  BRIAN C. BEZDEK      
	

 
	 	 	Name: Brian C. Bezdek

Title: Chief Financial Officer	 




22





 

ELECTION OF HOLDER TO REQUIRE REPURCHASE 


        1.    Pursuant
to Section 3(a) of this Security, the undersigned hereby elects to have all or a portion of this Security repurchased by the Company. 


        2.    The
undersigned hereby directs the Company to pay [choose one] (a) it or (b) Name:                        ;
address:                        ; Social
Security or Other Taxpayer Identification Number, if any:                        , an amount in cash equal to the Repurchase Price,
 as provided herein. 






Dated:



[Holder]



       




By:

Name:

Title: 







[Number
of shares of Common Stock

owned by the holder and its affiliates:                        ] 


Principal
amount to be repurchased

(an integral multiple of $1,000): 


Remaining
principal amount following

such repurchase (not less than $1,000): 


NOTICE:
The signature to the foregoing Election must correspond to the name as written upon the face of this Security in every particular, without alteration or any change whatsoever. 


23





 
CONVERSION NOTICE  


        The undersigned holder of this Security hereby irrevocably exercises the option to convert this Security, or any portion of the principal amount hereof (which is
an integral multiple of $1,000) below designated, into Common Stock in accordance with the terms of this Security, and directs that such shares, together with a check in payment for any fractional
share and any Security representing any unconverted principal amount hereof, be delivered to and be registered in the name of the undersigned unless a different name has been indicated below. If
Common Stock or Securities are to be registered in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. 






Dated:



[Holder]



       




By:

Name:

Title: 







If
shares or Securities are to be registered in the name of a Person other than the holder, please print such Person's name and address: 



Name 


      



Address 


      



Social
Security or other Taxpayer Identification Number, if any 


If
only a portion of the Securities is to be converted, please indicate: 


	1.
	Principal
amount to be converted: $                  



	2.
	Principal
amount and denomination of Security representing unconverted principal amount to be issued: 



Amount:
$                  



Denominations:
$                  (any integral multiple of $1,000) 



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RAINING DATA CORPORATION 5% CONVERTIBLE SUBORDINATED NOTE DUE 2008